CF Industries, Inc.

Please see disclaimer at bottom of this document

November 10, 2005 CC                             Notes based on conference with CF

1. Any guesstimates on 2006 minority interest? CF claims the inability to disclose. CF claims that guidance here is not possible because of the commodity price constant changes (fertilizer and NG).

2. What would prevent large customers from buying finished fertilizer directly from lower cost imported companies, just like you do? CF claimed that nothing could stop this.

3. Do you buy finished goods, or are you processing? Are you just a distributor for those imported purchases? CF claims to be finished goods distributor only. This is when purchased rather than manufactured. I think that Agrilliance is part of LOL, and they have imported fertilizer. I need to model some how the performance in a recessionary market. My guess is losses, and recessions are seasonal, hence figure out 4 or 5 years of sub par margins and periods of business distress.

4. If farmers put greater emphasis on wheat and soy and beans, how would that affect CF? Wheat and beans use phosphate. CF claimed that phosphate does not have to be put on as regularly as nitrogen products. Corn was the only application that CF was familiar with as a nitrogen reliant crop. I need to check that, that seems odd, yet I would guess that it is an accurate observation. I have been wondering if wheat and soy could be replaced as necessary type production, as opposed to a variety, just thinking nutritionally. Would it be logical to do such? Can corn be substituted as a staple? Nutritional benefits of either? What has corn intake % been for the world, and what changes have occurred in last decade? Any paradigm shifts expected? Website that might track this? One non-authoritative person responded with this answer, “Soy beans. It is one crop. Beans are a legume and can transfer nitrogen from the atmosphere into the soil for their own consumption. So they need only a little N fertilizer as a starter. Wheat consumes much less N than corn (because it doesn’t yield 200 bushels per acre.) Given the high price of N fertilizers and the low price of corn, farmers are expected to shift acres away from corn to other crops. It will not be a wholesale shift. The best corn ground will likely remain in corn. But I think it is fair to say everybody in the fertz business expects demand to be reduced in 2006.U.S. farmers are already getting over half of their N fertilizer from lower cost off shore producers. CF and Terra and Koch are still making N fertilizers only because prices for these commodities are at all time highs. That is unlikely to last. The U.S. will import its total nitrogen requirement; not next month, but unless natural gas values crash, within the next few years. The only paradigm in corn is that congress has mandated a minimum ethanol content in gasoline. That may marginally reduce corn exports.”

5. How can one model financially, if you haven’t at all guided to what gross margins could possibly be from a hi/lo standpoint? I mentioned how I would be totally cool with CF stating, “we expect, but do not promise, gross margins of somewhere between 5% – 20% for F2006. These expectations are based on production levels at 50% for the first 6 months and XX% for the last 6 months of fiscal 2006.” I think this is answered in item 6 below, but will still bounce it by CF during our discussion. Ultimately, we had a lengthy discussion. The answer is that CF claims they do not have the ability to guess at gross profits. As I type this, I just can’t understand such. Here are the last 4 years of gross margins. One needs to understand that prior to 2002, CF was not operating under a maximized profit incentive environment. CF mentioned to me “it was real bad in 2000 – 2002.” CF says, “Conditions have changed.” I guess in theory I need to model in a range of potentials, using realistic high / low possibilities. I outlined 7% gross margins, and that seems like it might be optimistic. Keep in mind that it is my understanding that certain sell sides are projecting 10% margins going forward.

Gross Margins Historically

F2000  2.8%
F2001 (7.3%)
F2002  2.7%
F2003  2.5%
F2004 13.1%

6. Any expected growth rate or contraction of revenues you would guide for? Hi – Low of revenue expectations for F2006? CF responded as follows, “One point in advance. I understand your concern about guidance, but we have made it clear from Day One of the IPO process that, given the extreme volatility of this industry, we were not going to give earnings guidance. There is no guidance in the Prospectus, and there was no guidance on the road show. I know many companies do provide it, but we have been forthright from Day One in indicating that we were not going to. We’ll provide info on our FPP tons, and we have provided a great deal of information on our cost structure in one-on-one briefings.

But frustrating though it may be to you — and to us, to some extent — we have decided that we did not wish to stumble in our first days as a public company by issuing guidance that ended up discredited.

And if we had issued even the broadest guidance on the road show, it would have been based on $7 natural gas, and with natural gas accounting for 90 percent of our nitrogen costs, we would have been terribly out of line when the hurricanes pushed gas prices to almost double that level.”

7. This part was confusing for me. Upon discussion with CF, it was mentioned, “the fall looks similar to last year in total tons.” According to CF, what is not so clear is the spring 2006 FPP program. I thought during the conversation, CF mentioned that they were hoping for a strong spring. CF said that farmers were waiting to make their decision on fertilizing. CF mentioned that there is an application in the fall or spring, rarely if ever, both. CF explained that this is fertilizer season. CF witnessed on casual weekend of Wisconsin applications.
8. CF discusses the benefits of corn with ethanol. I asked if “soy diesel” had anything to do with Soy (which is not nitrogen needy). CF was not sure.

9. I sensed that there will be an option vote coming in 2006. I don’t know how that will affect dilution. I received confirmation that the insider buying that occurred this week, were all open market, independent of CF purchases.

10. No fix on SG&A per CF.

11. CF suggested treating the $14M in hedging income in 3Q05 to be unusual. This will not be recurring. They closed a hedge based on forward purchasing requirements. I took this as greater importing and distributing to their customers. CF claimed that the CF infrastructure was not a great benefit for their customers. This needs to be verified.

12. I need to look at Terra Industries, Inc., as CF considers them the most appropriate comparable competitor. Wait a minute, as I write this, I seem to remember that they are perhaps CF’s Trinidad partner.

CC Initial Notes

13. 4Q05 volume expected to be similar to 4Q04.

14. Worldwide supply and demand remains tight.

15. Natural gas still at troubling levels.

16. There is a corn inventory overhang and low pricing.

17. Ethanol driven demand is up to 15% of total corn crop, also up 3 fold from several years ago.

18. Russian Urea unknown.

19. Crop rotation from corn to beans is a concern.

20. 4th quarter production should be at ½ of capacity.

21. Phosphate is at capacity.

November 2, 2005                                           Questions still pending

1. What percentage of CFL revenues are to other than CF and related owners? CF responded that all CFL revenues are from one of the two owners. Are CFL revenues from related companies and former coops eliminated in financials? CF claims yes. CF claims these are eliminated. I did not leave the conversation feeling warm and fuzzy about CF and CFL revenue and cost recognition reportings. CF told me to think of CFL as just another plant. My concerns were mentioned to CF as being if CF buys from CFL, then does the revenue show up on CF’s books. CF did not seem clear and concise with their answer. That is merely an observation on my part, and in no way is the above any type of accusation or claim of impropriety. I asked if this was an item that is looked at by audit team, and was assured it was. I was assured that revenues are being eliminated in the consolidation. I need to keep my eye on this in the future, only because I have some type of internal discomfort on this (right side of my brain).

CFL Revenue Structure is the same as their ownership structure
CF 66% CFL consolidated to CF
Westco 34% No reporting

2. You mentioned that you buy a forward contract on NYMEX the same day that you enter into a FPP contract. Do you have internal controls in place to make sure that actually occurs? CF responded by saying this, “there is a formal, multi-stage sign-off process, including officer-level approvals, to assure that every FPP order is matched to either a natural gas futures purchase, product in inventory, or a purchased finished product. Any daily discrepancy is automatically routed to CFO.”

3. You were going to find out if land was marked to market at IPO, or if there might be hidden value there. Per CF, on a secondary offering balance sheet is brought over at cost. CF would not comment on the land value. CF claimed that any alternate use has not been considered, and that any such value is not material to the valuation of CF.

4. We discussed CFL and you were going to get back to me on US Dollar and Canadian Dollar potential impacts. What happens when USD is Strong? What happens when CND is strong? CF claimed that it adds a level of diversification. I need to further discuss with CF and get clarification here.

5. Are Gross Margins in Canada and US expected to be different? CF explained that lower costs in Canada, hence better margins. I did not get a warm and fuzzy feeling on that item either.

6. Please explain post IPO tax rate. What is effective rate supposed to be?

What are expected breakeven revenues? CF responded as follows, “More complex issue is that of breakeven revenues. This is along the lines of the gas question we answered on the call. I think we discussed the fact that there are so many moving parts in this business. Our labor and other fixed costs are a relatively small part of the cost of goods sold. Natural gas in recent weeks has accounted for nearly 90 percent of the cost of our products on the nitrogen side of the equation.

During the quarter, prices for gas have ranged from the $7 to the $14 range, according to published reports. Similarly, fertilizer prices have varied greatly, on the spot market.

As Steve noted, this is a business where you produce a volatile commodity (fertilizer) using a volatile commodity (natural gas).

This is not, for example, like steel or autos, where you know that, once production or sales exceed a certain level, you will be profitable.

The breakeven point at $7 gas is one thing, $8 gas another. As Steve said on the road show, we have made money at $6 gas (because of high fertilizer prices in relation) and lost money at $3 gas (because of low fertilizer prices.)

Long-winded way of saying that there is no breakeven sales point.

The volatility of the cost of sales and revenues sides of the equation make this an industry where that sort of analysis just does not work.”

7. Please guide me to text, or review with me the asset retirement program.

Please verify that Wilson and other insiders do not own portions of former Coop owners. CF response was, “None of the company’s officers are owners of our former co-op owners.

Broadening the group to insiders, keep in mind those three directors are/were executives of those former owners. The organizations they represented are all co-ops, so the only way they could have an equity stake in those co-ops would be by being a farmer who joined that co-op. In that case, their ownership stake — taken to secure co-op benefits as a farmer — would be so tiny as to be immaterial.

I believe that at least one of the co-ops, Land O’Lakes, does have public debt outstanding. I do not know if Mr. Gherty owns a share of that debt. I would suggest that you would need to examine LoL’s filings to determine that.”

8. Has Refco had any effect on CF? Per CF, no connection whatsoever.

9. In prospectus you mentioned the following, “Note payable of $4M is to CFL (a minority interest holder). Due 12/31/09 (they say CFL can prepay, I wonder if they mean, “CF can prepay?” CF was rushed, we chose not to discuss and was told it was immaterial

October 26, 2005                                                  more notes and conference with IR

1. Thinks LNG will grow in the USA, and that will give access to lower cost Natural Gas.

2. Trinidad decision will be made towards end of year.

3. Looking of converting feedstock in Donaldson to alternative fuel. Petroleum Coke would be produced. This would be costly and capital intensive. Speculatively, someone else could build the plant. Half of Donaldson could be converted to this. This would be used by CF and replace NG component.

4. No guidance so far.

5. CFL is used by CF for Northern Tier of Corn Belt. Westco sells it share of the product to Western Canadian Markets.

6. FPP walk through….CF sales department looks at all parameters, then they give a memo on how much they will sell for, and based on a specific margin. Customer needs to accept price on next day. CF then buys forward on NYMEX the same day futures contracts and margin is locked in. If CF tried to outsmart the gas market, they could theoretically get hurt. An aggressive policy could hurt business. Typical FPP is 2 to 4 months. Some go as far out as far as 15 months. None go beyond that.

7. Former owners have a “sticky” relationship. CF built infrastructure around the former owners sites. All owners signed agreements for 3 – 5 years of purchase commitments at market rates.

8. Existing headquarters building in Illinois. The possibility of selling that and moving to less costly space is an option. This was called “million dollar properties.” I asked if there is any hidden value in this land? Was it marked up at IPO? 60 – 70 acres at headquarters, Long Grove. Considered to be residential potential.

9. Soy and Wheat are not nitrogen sensitive. Corn is nitrogen sensitive. Corn was mentioned as being an alternative energy source. The energy source is Ethanol.

10. Steve Wilson drives a modest car, likes sports, non-smoker and collects wine. It is my understanding that he is health conscious and works out. Joined the company in 1991.

11. Ernie Thomas, likes fast cars, drives a bit of a nicer car than Steve, but doesn’t seem extravagant, not as fitness minded as Steve and is a non-smoker.

12. Expected tax rate is 39%.

13. I asked if credit line was expected to be tapped. Not expected to be tapped unless Trinidad plant goes online. They would need $50M to $70M the entire project is expected to be $500M to $700M, with 3 partners (mentioned below). The extra money would be gathered via letters of credit, all non-recourse.

14. I asked about capex plans. I noticed that capex was high from 95-99. I asked about plant conditions. It was mentioned to me that 95-99 was a major phosphate expansion. Capex is not expected to rise. Plant conditions are fine, no major upgrades or unusual repairs needed or expected.

15. Mentioned, “Normal ebitda is $190M, +/- $100M.

October 25, 2005

Some theoretical modeling is below. This is a back of the envelope analysis. I used fairly conservative numbers for the “high” side, and I think (hope) I used aggressively pessimistic numbers for the “lo” side.

25-Oct-05 Low scenario High scenario
Fiscal Fiscal
2,006 2,006
Revenues $1,900,000,000 100.00% $2,200,000,000 100.00%
Cost of Revenues $1,767,000,000 93.00% $2,046,000,000 93.00%
Gross Profit $133,000,000 7.00% $154,000,000 7.00%
G&A expenses $60,000,000 3.16% $60,000,000 2.73%
Minority Interest -$15,000,000 -0.79% -$15,000,000 -0.68%
Net Income BT $58,000,000 3.05% $79,000,000 3.59%
Tax $23,200,000 1.22% $31,600,000 1.44%
Net Income after Tax $34,800,000 1.83% $47,400,000 2.15%
Shares Outstanding 55,072,000 2.90% 55,072,000 2.50%
Net Income Per share $0.6319 $0.8607
Quality of Earnings scenario
Net Income After Tax $34,800,000 1.83% $47,400,000 2.15%
Add: Depreciation $104,000,000 5.47% $104,000,000 4.73%
Less:  Capex -$100,000,000 -5.26% -$100,000,000 -4.55%
Net Quality of Earnings (QOE) $38,800,000 2.04% $51,400,000 2.34%
QOE EPS $0.7045 $0.9333
Enterprise Value
Shares Outstanding 55,072,000 55,072,000
Market Price $13 $13
Market Capitalization $715,936,000 $715,936,000
Less: projected cash ($260,000,000) ($260,000,000)
Add: customer advances $130,000,000 $130,000,000
Add: debt $4,000,000 $4,000,000
Net (cash) or Debt ($126,000,000) ($126,000,000)
Enterprise Value $589,936,000 $589,936,000
Enterprise Value Per Share $11 $11
Investment scenario
Net Income Per Share $0.6319 $0.8607
Earnings multiple 10 15
Price per share on earnings $6.32 $12.91
Net (cash) or Debt $2.29 $2.29
Theoretical Price per share adjusted $8.61 $15.20
Free Cash Flow back of envelope
Net Income from Operations $77,000,000
Depreciation, depletion and amortization $106,000,000
Capex ($80,000,000)
Free Cash Flow $103,000,000
Shares outstanding 55,072,000
Free Cash Flow per Share $1.87

October 24, 2005                                                          Just some notes

1. Table of competitors, or companies to follow in the industry.

Agrium Inc. Leading supplier of agricultural nutrients, only a little nitro per CF
Potash Corp Fertilizer producer
Terra Industries, Inc. Production and marketing of Nitrogen (per CF follow this)
Conagra Foods Largest non-affiliated customer
Mosaic Co. Production and distribution of fertilizer
Koch Nitrogen Mentioned by CF
Mississippi Phosphates Mentioned by CF, major in phosphates per CF
Simplot Mentioned by CF

2. Competitors

Constituents (Top 20 by Market Cap)

Company MCap USD (m) Country
Sasol Ltd 20,947.21 South Africa
Monsanto Company 15,884.45 United States
Syngenta AG (ADR) 11,060.00 Switzerland
Syngenta AG 11,048.91 Switzerland
Potash Corp./Saskatchewan 9,359.38 Canada
Potash Corp./Saskatchewan (USA) 9,333.55 Canada
The Mosaic Company 5,145.73 United States
Yara International ASA 5,101.05 Norway
Israel Chemicals Limited 4,590.82 Israel
Sociedad Quimica y Minera de Chile S.A. 3,121.39 Chile
The Scotts Miracle-Gro Co. 2,876.39 United States
K+S AG 2,679.42 Germany
Agrium Inc. 2,636.32 Canada
Agrium Inc. (USA) 2,609.64 Canada
Makhteshim-Agan Industries Ltd. 2,104.41 Israel
Zeltia S.A. 1,467.90 Spain
Fertilizantes Fosfatados S.A.-Fosfertil 1,292.20 Brazil
Nufarm Limited 1,260.66 Australia
Abu Qir Fertilizers and Chemical Indust. 1,157.06 Egypt
Qinghai Salt Lake Potash Company Limited 1,091.28 China

Competitors, Customers and Suppliers (non inclusive)

Symbol Name Prev Cls 52-wk Range
AGU AGRIUM INC. 20.76 14.36 – 24.53
CAG CONAGRA FOOD INC 23.42 22.05 – 30.24
CF CF IND HLDGS INC 13.13 11.19 – 18.00
CHIM.TA ISRAEL CHEMICALS 1,792.00 803.10 – 1,882.00
MON MONSANTO COMPANY 60.08 38.79 – 69.23
MOS MOSAIC COMPANY (T 13.44 12.36 – 18.58
NUFMF.PK NUFARM LTD 8.20 1.70 – 8.65
POT POTASH CP SASKATC 87.45 63.38 – 115.15
SDF.F K & S AG 54.19 32.20 – 59.27
SMG SCOTTS MIRACLE-GR 86.53 62.00 – 88.42
SQM SOCIEDAD DE CHILE 121.05 49.69 – 135.80
SSL SASOL LTD ADR 32.21 18.70 – 39.37
SYT SYNGENTA AG ADS 21.05 18.87 – 23.26
SYT SYNGENTA AG ADS 21.05 18.87 – 23.26
TNH TERRA NITR CO COM 20.89 15.03 – 38.73
TRA TERRA INDS INC 5.66 4.87 – 9.38
YAR.OL YARA INTERNATIONA 104.25 65.50 – 121.00
ZEL.MC ZELTIA 5.91 5.15 – 7.18

  eps projections:

2005e 2006e 2007e
Morgan Stanley 1.70 0.88 0.73
JP Morgan 1.40 1.25 N/a

  Some quick calculations:

Shares outstanding 55,072,000
Market Price 13.00
Market Cap $715,936,000
Less:  Net Cash (130,000,000)
Add:  debt (CFL)       4,000,000
Total Enterprise Value at 13 per share 589,936,000

Here is a definition of “enterprise value” – A measure of what the market believes a company’s ongoing operations are worth. Enterprise value is equal to (company’s market capitalization – cash and cash equivalents + preferred stock + debt). The number is of importance both to individual investors and potential acquirers considering a takeover attempt.

To interpret that one could argue that the market is willing to pay $10.71 per share in market cap for CF operations. That would be a p/e of 7.65X using JP Morgan estimate of 1.40 per share. Of course earnings might be decelerating, hence a forward p/e might be more telling. Price to cash flows are also lower than typical. Don’t forget, much unknown is in this stock.

Working a few more numbers:

Assume that $0.73 is eps in 2007E. use a no growth rate on that. Hence, one could argue a p/e of 8X. PE of 8X would be 5.84 per share. You currently have $2.29 in net cash. In theory, assuming business doesn’t deteriorate terribly, you could theoretically have a floor of $8.13 in share price.

By the same token, cash flow is supposedly much higher than eps. Hence, even the $8.13 floor might be ridiculously conservative.

With all that said, we really need to see a history of future earnings releases. There are so many unanswered questions here.

5. Quick investment thesis:

a. Ratios are in line, and indicate potential bargains. Ratios are based on data that can change quickly, and unlike typical investments, there is no real history to work off of here.
b. Insider ownership is 13% when using full dilution of currently anti-dilutive 8,250,000 shares.
c. Buying into an organization that appears to have quality, but is in current market price distress.
d. The following is a back of the envelope cash flow analysis I threw together. Please see notes 22. below, for quality of earnings concerns. With that said, until more data is released, these seem to be the best I got information.

Net Income from Operations $77,000,000
Depreciation, depletion and amortization $106,000,000
subtract :
capex ($80,000,000)
Free Cash Flow $103,000,000
shares outstanding 55,072,000
Free Cash Flow per Share $1.87

October 24, 2005                                                          Prospectus Notes

1.Largest nitrogen fertilizer complex in North America.

2.66% interest in Canada’s largest nitrogen fertilizer complex. This is Canadian Fertilizers Limited (CFL).

a. CF purchases approximately 66% of CFL’s ammonia and urea production.
b. CF owns 66% economic interest.
c. Claims that CFL operations improved in 2004. Why was that? How does Canadian dollar and US dollar affect CFL. CF will get back to me on that
d. Asset retirement program exits here. Work with the numbers to see if these are inclusive in tables I worked with below. I would have to believe that tables below would include CFL Asset retirement program costs. CF will get back to me on this.
e. What is expected production. What % of revenues are generated from CFL? I would expect this is eliminated, verify this. According to IR, both CF and CFL have reduced production.
f. Is CFL more efficient than CF? Per IR, not an issue.

3.Starting in 2003 (actually during 2002, but I will generalize for ease), they started working for financial performance, rather than a co-operative supplier.

4.Has entered into market based, multi year supply contracts with previous cooperatives that previously owned them. These cooperatives accounted for approximately 53% of F2004 sales volume. See notes later that detail this. Potential, but not expected accounting area that could be manipulated.

5.Distribution system consists of 48 facilities, including 20 ammonia terminals and 21 UAN terminals and 7 dry product warehouses.

6.At June 30, 2005 they had $510.M of cash, and $250.3M of debt. This nets to $259.7. Company claimed on 10/14/05 to have $315M. Keep in mind that customer advances included in those numbers were $130M on June 30, 2005 and $185M on September 30, 2005. Net, net they have about the same cash position now as they did on June 30, 2005.

7.Business strategy identified on page 4. Interesting that they want to reduce their dependence on North American Natural Gas. They mentioned working with Terra Industries and ANSA McAL in constructing a major ammonia and UAN manufacturing facility in Trinidad and Tobago.

8.ConAgra was their largest unaffiliated customer, with 41% of total sales volume.

9.Ownership table I have constructed, this could be materially incorrect. The former cooperative owners below own 13,750,000 shares, which is 25% of the outstanding common stock. The former cooperative owners below, also received $622.1M. I have not yet constructed anything for possible over-allotment. For some reason I don’t think that ever happened, but I could be incorrect.

Shares available to Public 41,250,000
CHS Inc.   2,304,035
GROWMARK, Inc.   5,412,104
Land O’Lakes, Inc.   4,205,829
Others (see prospectus for details)   1,828,032
Total 55,000,000

10.Other share over hangs:

Key employee option under 2005 plan, exercise price is $16 per share 2,750,900
Restricted stock grants to non-employee directors      16,252
Future grant or issuance under 2005 Equity and Incentive Plan 5,482,848
Total 8,250,000

If you take these overhangs of 8,250M and add to the 55M already outstanding, you have the following table (this is very much back of the envelope, and certainly subject to material error.)

Common stock 41,250,000  65.22%
Former Coop Owners 13,750,000  21.74%
Potential Dilution shares   8,250,000  13.04%
Total Shares 63,250,000 100.00%

Notice how the common shareholders went from 75% ownership to a diluted 65.22% ownership (if fully diluted, and if dilutive). To be fair, 2.8M shares are under water at this time.

11. Net Operating Loss – Prospectus is quite clear that if NOL even exists (which they don’t expect), they will not benefit from it. Any NOL’s recouped will be passed off to old owners.

12. Forward Pricing Programs (FPP) are mentioned on pages 13/14. Prospectus explanation was consistent with CC and 8K during 10/05.

13. Customer advances seem to come from FPP’s FPP total revenue volume accounted for 68% nitrogen fertilizer sales and 28% phosphate fertilizer sales. FPP for 2004 and 2005 were expected to be shipped within 150 days. Find out the parameters of FPP. Ask IR how a deceitful organization could use this aggressively. Liken this to an example with global crossing swaps, and Enron’s revenue recognition with long term commitments. In Enron’s case, they could not meet the long-term commitments. Find out how to calculate some type of ratio. What is difference between sales volume and Net revenues?

6 months 6 months
F2004 F2004 2005 2005
Tons Total Volume Tons Total Volume
Nitrogen Fertilizer Sales Volume 3,600,000 $6,666,667 2,600,000 $3,823,529
Phosphate Fertilizer Sales Volume 273,000 $1,950,000 312,000 $1,114,286

14. Preferred stock no longer exists. See page 14.

15. Land’O Lakes (LOL) mentions the following in their recent 10Q (6/30/05). Upon first review, it looks like LOL considers CF an appropriate, and perhaps important investment. They refer to CF as a cooperative.
A summary of investments is as follows:

JUNE 30,                         DECEMBER 31,
2005                                   2004
———-                                ————
CF Industries, Inc………………………….. $ 213,002                          $ 213,002
Agriliance LLC………………………………… 153,093                           101,263
Ag Processing Inc……………………………… 37,559                           37,461
Advanced Food Products LLC………….. … 30,313                          31,322
CoBank, ACB…………………………………… 13,246                            15,467
Agronomy Company of Canada Ltd……….. 10,842                        10,549
Melrose Dairy Proteins, LLC…………………. 8,005                          7,293
Universal Cooperatives…………………………. 7,629                         7,629
Prairie Farms Dairy, Inc……………………….. 5,009                          4,795
Other — principally cooperatives + joint ventures 41,845              41,769
———- ————
Total investments……………………………… $ 520,543                    $ 470,550
==========               ============

“As of June 30, 2005, the Company held a 38% minority interest in CF Industries, Inc., a domestic manufacturer of crop nutrients, (“CF Industries”) and carried a $213 million investment balance on its consolidated balance sheet. On May 16, 2005 CF Industries filed a registration statement with the Securities and Exchange Commission with respect to an Initial Public Offering of its common stock (the “CF IPO”). On August 10, 2005, the per share price was set, and the Company expects to receive approximately $250 million in cash, based on the estimated number of shares it intends to sell as part of the CF IPO. As a result of the CF IPO, the Company’s remaining ownership percentage in CF Industries will decline from 38% to approximately 7.5%.”

“Due to the strength of the crop nutrient markets, CF Industries was profitable for the six month period ended June 30, 2005. Since CF Industries is a cooperative, we only receive earnings from our investment when the cooperative allocates and distributes patronage to us. No patronage was allocated or distributed to us in the six months ended June 30, 2005, nor has any patronage been allocated to us in the last five years because CF Industries realized losses from 1998 to 2003.”

“As of June 30, 2005, the Company held a 38% minority interest in CF Industries, Inc., a domestic manufacturer of crop nutrients, (“CF Industries”) and carried a $213 million investment balance on its consolidated balance sheet. On May 16, 2005 CF Industries filed a registration statement with the Securities and Exchange Commission with respect to an Initial Public Offering of its common stock (the “CF IPO”). On August 10, 2005, the per share price was set, and based on the number of shares we are selling as part of the CF IPO, we expect to receive approximately $250 million in cash (the “Net Proceeds”). As a result of the CF IPO, our remaining ownership percentage in CF Industries will decline from 38% to approximately 7.5%.”

16. CHS Inc, in their most recent 10Q (7/31/05) said the following:

CHS Inc.
Investments > $5,000,000
Balance Eliminations Consolidated
03/31/05 3/31/05
Ag Processing 24,993,463 24,993,463
CF Industries 117,995,500   117,995,500
CoBank 15,424,470 15,424,470
Land O’ Lakes, Inc. 31,054,505 31,054,505
Universal Cooperatives, Inc. 6,912,229 6,912,229

“Our agronomy business is depressed and could continue to underperform in the future. Demand for agronomy products in general has been adversely affected in recent years by drought and poor weather conditions, idle acreage and development of insect and disease-resistant crops. These factors could cause Agriliance, LLC, an agronomy marketing and distribution venture in which we have a 50% interest, to be unable to operate at profitable margins. In addition, these and other factors, including fluctuations in the price of natural gas and other raw materials, an increase in recent years in domestic and foreign production of fertilizer, and intense competition within the industry, in particular from lower-cost foreign producers, have created particular pressure on producers of fertilizers. As a result, CF Industries, Inc., a fertilizer manufacturer in which we hold a minority cooperative interest, has suffered significant losses in recent years as it has incurred increased prices for raw materials and manufacturing costs for those materials, but has been unable to pass those increased costs on to its customers. ”

17. GROWMARK, does not file with SEC. They do list CF as the first as one of their partners. I would assume for now, that all is cool between the two.

18. Common theme of the former owners and now investors, seems to be that CF is in a terribly distressed stage, because of high US natural gas prices.

19. I have a note to myself to search the following in SEC database: a. Fertilizer – find trends, read competitors (after i finish reading cf of course) b. make sure Wilson and other CF biggies don’t have material holdings in any of the new prior owner shareholders (i.e. land o lakes, CHS and Growmark).

20. capex expected to be $70 – $80M in F2005 and 2006. This includes $14M and $21M respectively for CFL Medicine Hat.

21. need to budget for $2 – $5m annually for an expected $37M trust fund in 10 years. This is for a long-term maintenance program in Florida. This is for the long-term maintenance costs for their phosphogypsum stacks, manage wastewater and others. I need to monitor this over time. Florida has some type of financial assurance program. CF not required, but starting the funding now. They are assuming a rate of return of 4% and trust fund is expected to have $92M at end of 26 years.

22. Study the use of working capital. There seems to be a drain. Inventories decreasing, accounts receivables decreasing. How is future supply? With inventories down, how will they successfully fulfill commitments? Work with this. Quality of earnings needs to be investigated.

Cash flow has to be studied extensively. Look at PPE and maintenance expense. Consider being more aggressive and calling much an expense for cash flow uses. Will have to filter through that. Earnings manipulation is not suspected, but opportunities within business structure seem to make accrual based accounting to be less telling than in other industries. Areas I see so far for scrutiny are:

a. former cooperative owners. Look for arms length, etc, etc.
b. Customer advances
c. Inventories
d. PP&E (primarily plant turnaround, mining dam costs.
e. Cash usage
f. Look for new office space
g. How many employees. How long employees been there. Per CF 1450 employees.

23. Operating lease schedule is winding down. Need to make sure they can profit from new commitments, could be a good question. Here is operating lease schedule:

2005 9,576
2006 6,691
2007 3,840
2008 2,141
2009    783

24. CF did indicate contractual obligations on page 52 for equipment purchases and plant improvements of $2.7M

25. Get a better handle on Asset retirement obligations. The total through 2048 is expected to be $222,391,000. Make sure that is the correct number. Get greater clarity.

26. Pension assumptions seemed a touch aggressive for me. Discount rate used is 5.75% and 8.50% expected rate of return. Contributions are planned for $8 – $9M for 2005 and 2006. Page F-13 shows that pension assets are 64% Equity, 33 % debt securities and 3% other.

27. Credit agreement with JPMC for $250M. Terms of the agreement are in the prospectus if ever needed. Typical interest will be prime rate, or some others mentioned in prospectus. For simplicity, I will focus on prime rate.

28. Lock up period for coop owners and officers and directors are one year. Figure August 10, 2006. Underwriters can unload after 180 days. I may have erred on the interpretation here. This date would be around February 10, 2006.

29. Company has a thrift savings plan. Spent $5.9M and $5.6M in 2003 and 2004 respectively.

October 21, 2005                                                 Conference Call Notes 10/14/05

30. Discussed how their FL and LA facilities were designed for “Gulf weather conditions”

31. Steve Wilson, CEO called the natural gas pricing and Katrina as the perfect storm.

32. Claims to have the ability and flexibility to make “make versus buy decisions.” Wilson claims this is based on CF’s ability because of the access to international shipping ports and their extensive distribution system.

33. CF took advantage of two planned turnarounds in FL, as refineries were shut, and CF was curtailed anyway. Hence, should be ready to go for spring season.

34. Phosphate markets are strong and phosphate operations add diversification. I think JPM calculates Phosphate to be in the 32% of Revenue range.

35. Claims that country is now forced to focus on NG energy supply. Claims that Wilson is involved in Wash DC etc, promoting policy initiatives.

36. Buying production is not new and has been done before. Buys ammonia on a totally regular basis, to feed phosphate operation.

37. Wilson mentioned to read the prospectus, under “product production capabilities by product”. He said, “add them all up, basically we are running at half that product capability.

38. Wilson was asked about split of buy versus make, and August versus September. He answered by saying he did not know split and that “we are comfortable with the margins when we book them.”

39. Wilson claims that there is “no alternative to using nitrogen fertilizer.” The possibility does exist that there could be a shift from fertilizer intensive crops. Wilson did not mention this. I merely read it in a MS report.

40. Wilson claims that there is a chess game going on between farmers and if prices of fertilizer can stay up where they are. It is known that inventory levels are low. This means that farmers do not have a lot of time to make their decision. Because of low inventory levels, farmers need to make a quicker decision than they have in the past. “There is anxiety across the market.”

41. Wilson would not discuss long term contracts, but did refer a questioner to read the prospectus again under “long term contracts and former co-operative owners and try to gauge it.”

42. Share count per Ernie Thomas, CFO is 55,072.

43. Thomas claims the following in regards to preferred shares, “There’s a misunderstanding regarding the former preferred shares of the member owners. Those shares no longer exist. They were exchanged for common shares in CF Industries, Inc. as part of the transaction, the IPO transaction. And those shares were exchanged for cash and for shares in CF Industries Holdings. So, the preferred shares no longer exist. That’s a mistake on Bloomberg. We’re trying to correct that.”

October 21, 2005                                              Review of Investors update on Natural Gas Increase

1. NG is largest cost component of CF’s nitrogen fertilizer business segment. According to JPM report, Nitrogen is about 78% of total revenues.

2. FPP = Forward Pricing Program.

3. Claims that initiatives to increase purchases of fertilizer products, and reducing operating rates (“when appropriate”) in Donaldson, LA complex, along with rescheduling turnarounds at phosphate fertilizer operations in Central, FL and the FPP program, have helped CF mitigate the near-term impact of NG price escalation.

4. “ Approximately 1 million tons, or 63 percent, 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 percent, of fertilizer sales in the third quarter of 2004.”

5. Noted that these initiatives are only good for short term pricing, as 2006 pricing and revenue stream remains cloudy.

6. expects Donaldson, LA to operate at 50% for remainder of 2005. Alberta plant operating as planned. Expects to be able to meet all commitments on shipping, etc.

7. Gross cash and ST Investments are at $315M. $250M credit facility remains undrawn.

8. Customer advances were $185M.

Long-Term debt at $4.2M.



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