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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
10-Q
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                               to                              
Commission file number 001-32597
CF INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
 
20-2697511
(State or other jurisdiction of
incorporation or organization)
 
 
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
4 Parkway North, Suite 400
 
 
 
 
60015
Deerfield,
Illinois
 
 
 
 
 (Zip Code)
 (Address of principal executive offices)
 
 
 
 
 
(847) 405-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
common stock, par value $0.01 per share
 
CF
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No
213,797,277 shares of the registrant’s common stock, par value $0.01 per share, were outstanding at May 4, 2020.
 


CF INDUSTRIES HOLDINGS, INC.



TABLE OF CONTENTS




CF INDUSTRIES HOLDINGS, INC.



PART I—FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions, except per share amounts)
Net sales
$
971

 
$
1,001

Cost of sales
767

 
781

Gross margin
204

 
220

Selling, general and administrative expenses
54

 
58

Other operating—net
6

 
4

Total other operating costs and expenses
60

 
62

Equity in earnings of operating affiliate
3

 
7

Operating earnings
147

 
165

Interest expense
44

 
60

Interest income
(1
)
 
(4
)
Other non-operating—net

 
(1
)
Earnings before income taxes
104

 
110

Income tax provision (benefit)
13

 
(8
)
Net earnings
91

 
118

Less: Net earnings attributable to noncontrolling interest
23

 
28

Net earnings attributable to common stockholders
$
68

 
$
90

Net earnings per share attributable to common stockholders:
 

 
 

Basic
$
0.31

 
$
0.40

Diluted
$
0.31

 
$
0.40

Weighted-average common shares outstanding:
 

 
 

Basic
216.0

 
223.4

Diluted
216.6

 
224.6

Dividends declared per common share
$
0.30

 
$
0.30


See accompanying Notes to Unaudited Consolidated Financial Statements.


1

CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Net earnings
$
91

 
$
118

Other comprehensive (loss) income:
 

 
 

Foreign currency translation adjustment—net of taxes
(83
)
 
32

Defined benefit plans—net of taxes
9

 
(2
)
 
(74
)
 
30

Comprehensive income
17

 
148

Less: Comprehensive income attributable to noncontrolling interest
23

 
28

Comprehensive (loss) income attributable to common stockholders
$
(6
)
 
$
120

See accompanying Notes to Unaudited Consolidated Financial Statements.


2

CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
March 31,
2020
 
December 31,
2019
 
(in millions, except share
and per share amounts)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
753

 
$
287

Accounts receivable—net
251

 
242

Inventories
379

 
351

Prepaid income taxes
78

 
71

Other current assets
19

 
23

Total current assets
1,480

 
974

Property, plant and equipment—net
7,938

 
8,170

Investment in affiliate
91

 
88

Goodwill
2,346

 
2,365

Operating lease right-of-use assets
287

 
280

Other assets
299

 
295

Total assets
$
12,441

 
$
12,172

Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Short-term debt
$
500

 
$

Accounts payable and accrued expenses
378

 
437

Income taxes payable
19

 
1

Customer advances
239

 
119

Current operating lease liabilities
94

 
90

Other current liabilities
5

 
18

Total current liabilities
1,235

 
665

Long-term debt
3,958

 
3,957

Deferred income taxes
1,217

 
1,246

Operating lease liabilities
197

 
193

Other liabilities
431

 
474

Equity:
 

 
 

Stockholders’ equity:
 

 
 

Preferred stock—$0.01 par value, 50,000,000 shares authorized

 

Common stock—$0.01 par value, 500,000,000 shares authorized, 2020—216,610,856 shares issued and 2019—216,023,826 shares issued
2

 
2

Paid-in capital
1,313

 
1,303

Retained earnings
1,961

 
1,958

Treasury stock—at cost, 2020—2,813,869 shares and 2019—0 shares
(108
)
 

Accumulated other comprehensive loss
(440
)
 
(366
)
Total stockholders’ equity
2,728

 
2,897

Noncontrolling interest
2,675

 
2,740

Total equity
5,403

 
5,637

Total liabilities and equity
$
12,441

 
$
12,172

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
Common Stockholders
 
 
 
 
 
$0.01 Par
Value
Common
Stock
 
Treasury
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’ Equity
 
Noncontrolling
Interest
 
Total
Equity
 
(in millions, except per share amounts)
Balance as of December 31, 2019
$
2

 
$

 
$
1,303

 
$
1,958

 
$
(366
)
 
$
2,897

 
$
2,740

 
$
5,637

Net earnings

 

 

 
68

 

 
68

 
23

 
91

Other comprehensive loss

 

 

 

 
(74
)
 
(74
)
 

 
(74
)
Purchases of treasury stock

 
(100
)
 

 

 

 
(100
)
 

 
(100
)
Acquisition of treasury stock under employee stock plans

 
(8
)
 

 

 

 
(8
)
 

 
(8
)
Issuance of $0.01 par value common stock under employee stock plans

 

 
3

 

 

 
3

 

 
3

Stock-based compensation expense

 

 
7

 

 

 
7

 

 
7

Cash dividends ($0.30 per share)

 

 

 
(65
)
 

 
(65
)
 

 
(65
)
Distribution declared to noncontrolling interest

 

 

 

 

 

 
(88
)
 
(88
)
Balance as of March 31, 2020
$
2

 
$
(108
)
 
$
1,313

 
$
1,961

 
$
(440
)
 
$
2,728

 
$
2,675

 
$
5,403

Balance as of December 31, 2018
$
2

 
$
(504
)
 
$
1,368

 
$
2,463

 
$
(371
)
 
$
2,958

 
$
2,773

 
$
5,731

Net earnings

 

 

 
90

 

 
90

 
28

 
118

Other comprehensive income

 

 

 

 
30

 
30

 

 
30

Purchases of treasury stock

 
(60
)
 

 

 

 
(60
)
 

 
(60
)
Retirement of treasury stock

 
504

 
(65
)
 
(439
)
 

 

 

 

Acquisition of treasury stock under employee stock plans

 
(4
)
 

 

 

 
(4
)
 

 
(4
)
Issuance of $0.01 par value common stock under employee stock plans

 

 
2

 

 

 
2

 

 
2

Stock-based compensation expense

 

 
6

 

 

 
6

 

 
6

Cash dividends ($0.30 per share)

 

 

 
(67
)
 

 
(67
)
 

 
(67
)
Distribution declared to noncontrolling interest

 

 

 

 

 

 
(86
)
 
(86
)
Balance as of March 31, 2019
$
2

 
$
(64
)
 
$
1,311

 
$
2,047

 
$
(341
)
 
$
2,955

 
$
2,715

 
$
5,670


See accompanying Notes to Unaudited Consolidated Financial Statements.

4

CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Operating Activities:
 

 
 

Net earnings
$
91

 
$
118

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
211

 
188

Deferred income taxes
(50
)
 
14

Stock-based compensation expense
7

 
6

Unrealized net (gain) loss on natural gas derivatives
(12
)
 
2

Unrealized (gain) loss on embedded derivative
(1
)
 
1

Loss on disposal of property, plant and equipment

 
1

Undistributed earnings of affiliate—net of taxes
(4
)
 
(8
)
Changes in:
 

 
 

Accounts receivable—net
(12
)
 
(28
)
Inventories
(29
)
 
(101
)
Accrued and prepaid income taxes
10

 
24

Accounts payable and accrued expenses
(47
)
 
(65
)
Customer advances
120

 
152

Other—net
8

 
2

Net cash provided by operating activities
292

 
306

Investing Activities:
 

 
 

Additions to property, plant and equipment
(67
)
 
(80
)
Proceeds from sale of property, plant and equipment

 
5

Insurance proceeds for property, plant and equipment
2

 

Net cash used in investing activities
(65
)
 
(75
)
Financing Activities:
 

 
 

Proceeds from short-term borrowings
500

 

Dividends paid on common stock
(65
)
 
(67
)
Distributions to noncontrolling interest
(88
)
 
(86
)
Purchases of treasury stock
(100
)
 
(87
)
Issuances of common stock under employee stock plans
3

 
2

Shares withheld for taxes
(8
)
 
(4
)
Net cash provided by (used in) financing activities
242

 
(242
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 

Increase (decrease) in cash and cash equivalents
466

 
(11
)
Cash and cash equivalents at beginning of period
287

 
682

Cash and cash equivalents at end of period
$
753

 
$
671

See accompanying Notes to Unaudited Consolidated Financial Statements.

5

CF INDUSTRIES HOLDINGS, INC.



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.   Background and Basis of Presentation
We are a leading global manufacturer and distributor of nitrogen products for fertilizer, emissions abatement and other industrial applications. We operate manufacturing complexes in the United States, Canada and the United Kingdom, which are among the most cost-advantaged, efficient and flexible in the world, and an extensive storage, transportation and distribution network in North America. Our 3,000 employees focus on safe and reliable operations, environmental stewardship and disciplined capital and corporate management, driving our strategy to leverage and sustainably grow the world’s most advantaged nitrogen and chemicals platform to serve customers and create long-term shareholder value. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our principal nitrogen fertilizer products are anhydrous ammonia (ammonia), granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium.
All references to “CF Holdings,” “the Company,” “we,” “us” and “our” refer to CF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only to CF Industries Holdings, Inc. itself and not its subsidiaries. All references to “CF Industries” refer to CF Industries, Inc., a 100% owned subsidiary of CF Industries Holdings, Inc.
The accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2019, in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting. In the opinion of management, these statements reflect all adjustments, consisting only of normal and recurring adjustments, that are necessary for the fair representation of the information for the periods presented. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period.
The accompanying unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related disclosures included in our 2019 Annual Report on Form 10-K filed with the SEC on February 24, 2020. The preparation of the unaudited interim consolidated financial statements requires us to make use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, net realizable value of inventories, environmental remediation liabilities, environmental and litigation contingencies, the cost of customer incentives, useful lives of property and identifiable intangible assets, the assumptions used in the evaluation of potential impairments of property, investments, identifiable intangible assets and goodwill, income tax and valuation reserves, allowances for doubtful accounts receivable, the measurement of the fair values of investments for which markets are not active, assumptions used in the determination of the funded status and annual expense of defined benefit pension and other postretirement benefit plans and the assumptions used in the valuation of stock-based compensation awards granted to employees.


6

CF INDUSTRIES HOLDINGS, INC.



2.   New Accounting Standards
On January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU does not affect the accounting for the service element of a hosting arrangement that is a service contract. We adopted this ASU prospectively. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it could have an effect on future financial results if significant new software involving a cloud computing agreement is implemented. In this case, a certain portion of the implementation costs would be deferred and expensed over the term of the cloud computing arrangement.
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU No. 2019-12: Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. This ASU adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of this ASU is permitted. We do not expect the adoption of this ASU will have a material effect on our consolidated financial statements.
3.   Revenue Recognition
We track our revenue by product and by geography. See Note 16—Segment Disclosures for our revenue by reportable segment, which are ammonia, granular urea, UAN, AN and Other. The following table summarizes our revenue by product and by geography (based on destination of our shipment) for the three months ended March 31, 2020 and 2019:
 
Ammonia
 
Granular
Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Three months ended March 31, 2020
 

 
 

 
 

 
 
 
 

 
 

North America
$
154

 
$
331

 
$
230

 
$
46

 
$
59

 
$
820

Europe and other
39

 
6

 
5

 
70

 
31

 
151

Total revenue
$
193

 
$
337

 
$
235

 
$
116

 
$
90

 
$
971

Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 

 
 

North America
$
160

 
$
335

 
$
242

 
$
46

 
$
59

 
$
842

Europe and other
27

 
8

 
14

 
81

 
29

 
159

Total revenue
$
187

 
$
343

 
$
256

 
$
127

 
$
88

 
$
1,001


As of March 31, 2020 and December 31, 2019, we had $239 million and $119 million, respectively, in customer advances on our consolidated balance sheets. The revenue recognized during the three months ended March 31, 2020 and 2019 that was included in our customer advances at the beginning of each respective period amounted to approximately $75 million and $85 million, respectively.
We offer cash incentives to certain customers that do not provide an option to the customer for additional product. The balances of customer incentives accrued at March 31, 2020 and December 31, 2019 were not material.
We have certain customer contracts with performance obligations where if the customer does not take the required amount of product specified in the contract, then the customer is required to make a payment to us, which may vary based upon the terms and conditions of the applicable contract. As of March 31, 2020, excluding contracts with original durations of less than one year, and based on the minimum product tonnage to be sold and current market price estimates, our remaining performance obligations under these contracts are approximately $1.0 billion. We expect to recognize approximately 25% of these performance obligations as revenue in the remainder of 2020, approximately 42% as revenue during 2021 and 2022, and approximately 33% as revenue during 2023 and 2024. Subject to the terms and conditions of the applicable contracts, if these customers do not satisfy their purchase obligations under such contracts, the minimum amount that they would be required to pay to us under these contracts, in the aggregate, is approximately $258 million as of March 31, 2020. We monitor the ability of our customers to meet their purchase obligations, which could be impacted by the ongoing COVID-19 pandemic. Other than the performance obligations described above, any performance obligations with our customers that were unfulfilled or partially filled at December 31, 2019 will be satisfied in 2020.

7

CF INDUSTRIES HOLDINGS, INC.



4.   Net Earnings Per Share
Net earnings per share were computed as follows:
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions, except per share amounts)
Net earnings attributable to common stockholders
$
68

 
$
90

Basic earnings per common share:
 

 
 

Weighted-average common shares outstanding
216.0

 
223.4

Net earnings attributable to common stockholders
$
0.31

 
$
0.40

Diluted earnings per common share:
 

 
 

Weighted-average common shares outstanding
216.0

 
223.4

Dilutive common shares—stock-based awards
0.6

 
1.2

Diluted weighted-average shares outstanding
216.6

 
224.6

Net earnings attributable to common stockholders
$
0.31

 
$
0.40


Diluted earnings per share is calculated using weighted-average common shares outstanding, including the dilutive effect of stock-based awards as determined under the treasury stock method. In the computation of diluted earnings per common share, potentially dilutive stock-based awards are excluded if the effect of their inclusion is anti-dilutive. Shares for anti-dilutive stock-based awards not included in the computation of diluted earnings per common share were 2.1 million and 1.5 million for the three months ended March 31, 2020 and 2019, respectively.
5.   Inventories
Inventories consist of the following:
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Finished goods
$
336

 
$
311

Raw materials, spare parts and supplies
43

 
40

Total inventories
$
379

 
$
351



8

CF INDUSTRIES HOLDINGS, INC.



6.   Property, Plant and Equipment—Net
Property, plant and equipment—net consists of the following:
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Land
$
70

 
$
71

Machinery and equipment
12,243

 
12,338

Buildings and improvements
888

 
890

Construction in progress
242

 
236

Property, plant and equipment(1)
13,443

 
13,535

Less: Accumulated depreciation and amortization
5,505

 
5,365

Property, plant and equipment—net
$
7,938

 
$
8,170

_______________________________________________________________________________
(1) 
As of March 31, 2020 and December 31, 2019, we had property, plant and equipment that was accrued but unpaid of approximately $36 million and $42 million, respectively. As of March 31, 2019 and December 31, 2018, we had property, plant and equipment that was accrued but unpaid of $26 million and $48 million, respectively.

Depreciation and amortization related to property, plant and equipment was $208 million and $183 million for the three months ended March 31, 2020 and 2019, respectively.
Plant turnarounds—Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facilities during a full plant shutdown are referred to as plant turnarounds. The expenditures related to turnarounds are capitalized in property, plant and equipment when incurred. The following is a summary of capitalized plant turnaround costs:
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Net capitalized turnaround costs:
 

 
 

Beginning balance
$
246

 
$
252

Additions
7

 
9

Depreciation
(25
)
 
(30
)
Effect of exchange rate changes
(5
)
 
2

Ending balance
$
223

 
$
233


Scheduled replacements and overhauls of plant machinery and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalysts when a full plant shutdown occurs. Scheduled inspections are also conducted during full plant shutdowns, including required safety inspections which entail the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Internal employee costs and overhead amounts are not considered turnaround costs and are not capitalized.

9

CF INDUSTRIES HOLDINGS, INC.



7.  Goodwill and Other Intangible Assets
The following table shows the carrying amount of goodwill by reportable segment as of March 31, 2020 and December 31, 2019:
 
Ammonia
 
Granular Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Balance as of December 31, 2019
$
587

 
$
828

 
$
576

 
$
302

 
$
72

 
$
2,365

Effect of exchange rate changes
(2
)
 
(1
)
 

 
(14
)
 
(2
)
 
(19
)
Balance as of March 31, 2020
$
585

 
$
827

 
$
576

 
$
288

 
$
70

 
$
2,346


All of our identifiable intangible assets have definite lives and are presented in other assets on our consolidated balance sheets at gross carrying amount, net of accumulated amortization, as follows:
 
March 31, 2020
 
December 31, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
(in millions)
Customer relationships
$
125

 
$
(46
)
 
$
79

 
$
131

 
$
(45
)
 
$
86

Trade names
30

 
(7
)
 
23

 
31

 
(7
)
 
24

Total intangible assets
$
155

 
$
(53
)
 
$
102

 
$
162

 
$
(52
)
 
$
110


Our intangible assets are being amortized over a weighted-average life of approximately 20 years. Amortization expense of our identifiable intangible assets for each of the three-month periods ended March 31, 2020 and 2019 was $2 million. The gross carrying amount and accumulated amortization of our intangible assets are also impacted by the effect of exchange rate changes. Total estimated amortization expense for the remainder of 2020 and each of the five succeeding fiscal years is as follows:
 
Estimated
Amortization
Expense
 
(in millions)
Remainder of 2020
$
6

2021
8

2022
8

2023
8

2024
8

2025
8


8.  Equity Method Investment
We have a 50% ownership interest in Point Lisas Nitrogen Limited (PLNL), which operates an ammonia production facility in the Republic of Trinidad and Tobago. We include our share of the net earnings from this equity method investment as an element of earnings from operations because PLNL provides additional production to our operations and is integrated with our other supply chain and sales activities in the ammonia segment.
As of March 31, 2020, the total carrying value of our equity method investment in PLNL was $91 million, $45 million more than our share of PLNL’s book value. The excess is attributable to the purchase accounting impact of our acquisition of the investment in PLNL and reflects the revaluation of property, plant and equipment. The increased basis for property, plant and equipment is being amortized over a remaining period of approximately 13 years. Our equity in earnings of PLNL is different from our ownership interest in income reported by PLNL due to amortization of this basis difference.
We have transactions in the normal course of business with PLNL reflecting our obligation to purchase 50% of the ammonia produced by PLNL at current market prices. Our ammonia purchases from PLNL totaled $10 million and $22 million for the three months ended March 31, 2020 and 2019, respectively.


10

CF INDUSTRIES HOLDINGS, INC.



9.  Fair Value Measurements
Our cash and cash equivalents and other investments consist of the following:
 
March 31, 2020
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
53

 
$

 
$

 
$
53

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
680

 

 

 
680

Other debt securities
20

 

 

 
20

Total cash and cash equivalents
$
753

 
$

 
$

 
$
753

Nonqualified employee benefit trusts
16

 
2

 

 
18

 
December 31, 2019
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
59

 
$

 
$

 
$
59

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
211

 

 

 
211

Other debt securities
17

 

 

 
17

Total cash and cash equivalents
$
287

 
$

 
$

 
$
287

Nonqualified employee benefit trusts
17

 
2

 

 
19


Under our short-term investment policy, we may invest our cash balances, either directly or through mutual funds, in several types of investment-grade securities, including notes and bonds issued by governmental entities or corporations. Securities issued by governmental entities include those issued directly by the U.S. and Canadian federal governments; those issued by state, local or other governmental entities; and those guaranteed by entities affiliated with governmental entities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities included in our consolidated balance sheets as of March 31, 2020 and December 31, 2019 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
 
March 31, 2020
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Cash equivalents
$
700

 
$
700

 
$

 
$

Nonqualified employee benefit trusts
18

 
18

 

 

Embedded derivative liability
(19
)
 

 
(19
)
 


11

CF INDUSTRIES HOLDINGS, INC.



 
December 31, 2019
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Cash equivalents
$
228

 
$
228

 
$

 
$

Nonqualified employee benefit trusts
19

 
19

 

 

Derivative liabilities
(12
)
 

 
(12
)
 

Embedded derivative liability
(20
)
 

 
(20
)
 


Cash Equivalents
As of March 31, 2020 and December 31, 2019, our cash equivalents consisted primarily of U.S. and Canadian government obligations and money market mutual funds that invest in U.S. government obligations and other investment-grade securities.
Nonqualified Employee Benefit Trusts
We maintain trusts associated with certain nonqualified supplemental pension plans. The fair values of the trust assets are based on daily quoted prices in an active market, which represents the net asset values of the shares held in the trusts, and are included on our consolidated balance sheets in other assets. Debt securities are accounted for as available-for-sale securities. Changes in the fair value of equity securities in the trust assets are recognized through earnings.
Derivative Instruments
The derivative instruments that we may use are primarily natural gas fixed price swaps, basis swaps and options traded in the over-the-counter markets with multi-national commercial banks, other major financial institutions or large energy companies. The natural gas derivative contracts represent anticipated natural gas needs for future periods and settlements are scheduled to coincide with anticipated natural gas purchases during those future periods. The natural gas derivative contracts settle using primarily a NYMEX futures price index. To determine the fair value of these instruments, we use quoted market prices from NYMEX and standard pricing models with inputs derived from or corroborated by observable market data such as forward curves supplied by an industry-recognized independent third party.
Embedded Derivative Liability
Under the terms of our strategic venture with CHS Inc. (CHS), if our credit rating as determined by two of three specified credit rating agencies is below certain levels, we are required to make a non-refundable yearly payment of $5 million to CHS. Since 2016, our credit ratings have been below certain levels and, as a result, we made an annual payment of $5 million to CHS in the fourth quarter of each year. These payments will continue on a yearly basis until the earlier of the date that our credit rating is upgraded to or above certain levels by two of the three specified credit rating agencies or February 1, 2026. This obligation is recognized on our consolidated balance sheets as an embedded derivative. As of March 31, 2020 and December 31, 2019, the embedded derivative liability of $19 million and $20 million, respectively, is included in other current liabilities and other liabilities on our consolidated balance sheets. Included in other operating—net in our consolidated statements of operations for the three months ended March 31, 2020 and 2019 is a net (gain) loss of $(1) million and $1 million, respectively.
The inputs into the fair value measurement include the probability of future upgrades and downgrades of our credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable credit spreads of other public companies at different credit rating levels. Based on these inputs, our fair value measurement is classified as Level 2.
See Note 13—Noncontrolling Interest for additional information regarding our strategic venture with CHS.

12

CF INDUSTRIES HOLDINGS, INC.



Financial Instruments
The carrying amount and estimated fair value of our financial instruments are as follows:
 
March 31, 2020
 
December 31, 2019
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(in millions)
Long-term debt
$
3,958

 
$
3,970

 
$
3,957

 
$
4,295


The fair value of our long-term debt was based on quoted prices for identical or similar liabilities in markets that are not active or valuation models in which all significant inputs and value drivers are observable and, as a result, they are classified as Level 2 inputs.
The carrying amounts of cash and cash equivalents, as well as instruments included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair values because of their short-term maturities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets and liabilities that may be measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment, when there is allocation of purchase price in an acquisition or when a new liability is being established that requires fair value measurement. These include long-lived assets, goodwill and other intangible assets and investments in unconsolidated subsidiaries, such as equity method investments, which may be written down to fair value as a result of impairment. The fair value measurements related to each of these rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets. Since certain of the Company’s assumptions would involve inputs that are not observable, these fair values would reside within Level 3 of the fair value hierarchy.
10.   Income Taxes
For the three months ended March 31, 2020, we recorded an income tax provision of $13 million on pre-tax income of $104 million, or an effective tax rate of 12.3%, compared to an income tax benefit of $8 million on pre-tax income of $110 million, or an effective tax rate of (7.3)%, for the three months ended March 31, 2019.
For the three months ended March 31, 2020, our income tax provision includes a $6 million benefit related to the settlement of certain U.S. and foreign income tax audits.
For the three months ended March 31, 2019, our income tax benefit included an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana complex.
Our effective tax rate is also impacted by earnings attributable to the noncontrolling interest in CF Industries Nitrogen, LLC (CFN), as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interest. Our effective tax rate for the three months ended March 31, 2020 of 12.3%, which is based on pre-tax income of $104 million, would be 15.8% exclusive of the earnings attributable to the noncontrolling interest of $23 million. Our effective tax rate for the three months ended March 31, 2019 of (7.3)%, which is based on pre-tax income of $110 million, would be 27.4% exclusive of the earnings attributable to the noncontrolling interest of $28 million and the incentive tax credit of $30 million. See Note 13—Noncontrolling Interest for additional information.
In March 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act includes, among other things (i) a five-year net operating loss (NOL) carryback (including a related technical correction to the 2017 Tax Cuts and Jobs Act) for tax losses incurred in tax years 2018 through 2020; (ii) a change in interest deduction limitations for tax years 2019 and 2020, increasing the annual interest limitation from 30% to 50% of adjusted taxable income; and (iii) increased refundability of corporate alternative minimum tax (AMT) credits. These provisions have limited applicability to the Company as (i) the Company does not expect to have a NOL in tax year 2020 and did not have a tax loss in 2018 or 2019 which would be eligible for carryback; (ii) the Company was not limited by the interest deduction limitations for tax years 2019 and 2020 prior to changes made by the CARES Act; and (iii) the Company utilized all of its AMT credits in 2019. The Company continues to monitor and assess the impact of the CARES Act and other related governmental actions in response to the coronavirus impacts as more information becomes available.

13

CF INDUSTRIES HOLDINGS, INC.



Terra Amended Tax Returns
The Company completed the acquisition of Terra Industries Inc. (Terra) in April 2010. After the acquisition, the Company determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to its U.S. parent for U.S. and foreign income tax purposes was not appropriate. As a result, in 2012 the Company amended certain tax returns, including Terra’s income and withholding tax returns, back to 1999 (the Amended Tax Returns) to correct these tax returns and paid additional income and withholding taxes, and related interest and penalties. In early 2013, the Internal Revenue Service (IRS) commenced an examination of the U.S. tax aspects of the Amended Tax Returns.
In early 2019, the IRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to the Joint Committee on Taxation of the U.S. Congress (the Joint Committee). For purposes of its review, the Joint Committee separated the IRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter.
In December 2019, we received notification that the Joint Committee had approved the IRS audit reports relating to the income tax related matter. As a result, we expected to receive cash refunds in 2020. In addition, as a result of this settlement and the finalization of carryover impacts of this audit settlement on future tax periods, we reduced our liability for unrecognized tax benefits by $19 million and recorded a corresponding deferred income tax liability in the first quarter of 2020. 
In the second quarter of 2020, we received approximately $61 million of income tax refunds and approximately $7 million of interest related to the settlement of the income tax related matter of the Amended Tax Returns, as described above.
In the second quarter of 2020, we also received notification that the Joint Committee approved the IRS audit report relating to the withholding tax matter. As a result, we expect to receive a tax refund of approximately $29 million, excluding related interest, in 2020. In addition, in the second quarter of 2020, we expect to record a reduction in our liabilities for unrecognized tax benefits of $12 million, with a corresponding reduction in income tax expense.
11.   Interest Expense
Details of interest expense are as follows:
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Interest on borrowings(1)
$
46

 
$
57

Fees on financing agreements(1)
2

 
3

Interest on tax liabilities(2)
(4
)
 

Total interest expense
$
44

 
$
60


_______________________________________________________________________________
(1) 
See Note 12—Financing Agreements for additional information.
(2) 
Interest on tax liabilities for the three months ended March 31, 2020 consists of a reduction in interest accrued on the reserve for unrecognized tax benefits.


14

CF INDUSTRIES HOLDINGS, INC.



12.  Financing Agreements
Revolving Credit Agreement
On December 5, 2019, CF Holdings and CF Industries entered into a senior secured Fourth Amended and Restated Credit Agreement (the Revolving Credit Agreement), which amended and restated our Third Amended and Restated Revolving Credit Agreement, as previously amended (referred to herein, as in effect from time to time, as the Prior Credit Agreement), that was scheduled to mature September 18, 2020. The Revolving Credit Agreement provides for a revolving credit facility of up to $750 million with a maturity of December 5, 2024. The Revolving Credit Agreement includes a letter of credit sub-limit of $125 million. Borrowings under the Revolving Credit Agreement may be used for working capital, capital expenditures, acquisitions, share repurchases and other general corporate purposes.
Borrowings under the Revolving Credit Agreement may be denominated in U.S. dollars, Canadian dollars, euros and British pounds, and bear interest at a per annum rate equal to, at our option, an applicable eurocurrency rate or base rate plus, in either case, a specified margin, and we are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ credit rating at the time.
The guarantors under the Revolving Credit Agreement are currently comprised of CF Holdings and CF Holdings’ wholly owned subsidiaries CF Industries Enterprises, LLC (CFE), CF Industries Sales, LLC (CFS), CF USA Holdings, LLC (CF USA) and CF Industries Distribution Facilities, LLC (CFIDF).
In March 2020, we borrowed $500 million under the Revolving Credit Agreement to ensure we maintained ample financial flexibility in light of the uncertainty in the global markets caused by the COVID-19 pandemic. As of March 31, 2020, we had unused borrowing capacity under the Revolving Credit Agreement of $250 million, as there were outstanding borrowings of $500 million and no outstanding letters of credit under our $750 million revolving credit facility. There were no borrowings outstanding under the Revolving Credit Agreement as of December 31, 2019. Maximum borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020 were $500 million. The weighted-average annual interest rate of borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020 was 2.05%. There were no borrowings under the Prior Credit Agreement during the three months ended March 31, 2019.
In April 2020, we repaid the $500 million of borrowings that were outstanding under the Revolving Credit Agreement as of March 31, 2020, which returned our unused borrowing capacity under the Revolving Credit Agreement to $750 million. See Note 17—Subsequent Events for additional information.
The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants, including financial covenants. As of March 31, 2020, we were in compliance with all covenants under the Revolving Credit Agreement.
Letters of Credit
In addition to the letter of credit capacity under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement providing for up to $145 million of letters of credit. As of March 31, 2020, approximately $124 million of letters of credit were outstanding under this agreement.

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CF INDUSTRIES HOLDINGS, INC.



Senior Notes
Long-term debt presented on our consolidated balance sheets as of March 31, 2020 and December 31, 2019 consisted of the following debt securities issued by CF Industries:
 
Effective Interest Rate
 
March 31, 2020
 
December 31, 2019
 
 
Principal
 
Carrying Amount (1)
 
Principal
 
Carrying Amount (1)
 
 
 
(in millions)
Public Senior Notes:
 
 
 
 
 
 
 
 
 
3.450% due June 2023
3.562%
 
750

 
748

 
750

 
747

5.150% due March 2034
5.279%
 
750

 
740

 
750

 
740

4.950% due June 2043
5.031%
 
750

 
742

 
750

 
742

5.375% due March 2044
5.465%
 
750

 
741

 
750

 
741

Senior Secured Notes:
 
 
 
 
 
 
 
 
 
3.400% due December 2021
3.782%
 
250

 
248

 
250

 
248

4.500% due December 2026
4.759%
 
750

 
739

 
750

 
739

Total long-term debt
 
 
$
4,000

 
$
3,958

 
$
4,000

 
$
3,957

_______________________________________________________________________________
(1) 
Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was $10 million as of both March 31, 2020 and December 31, 2019, and total deferred debt issuance costs were $32 million and $33 million as of March 31, 2020 and December 31, 2019, respectively. 
Under the indentures (including the applicable supplemental indentures) governing the senior notes due 2023, 2034, 2043 and 2044 identified in the table above (the Public Senior Notes), each series of Public Senior Notes is guaranteed by CF Holdings.
Under the indentures governing the 3.400% senior secured notes due December 2021 (the 2021 Notes) and the 4.500% senior secured notes due December 2026 (the 2026 Notes) identified in the table above (together, the Senior Secured Notes), each series of Senior Secured Notes is guaranteed on a senior secured basis, jointly and severally, by CF Holdings and each current and future domestic subsidiary of CF Holdings (other than CF Industries) that from time to time is a borrower, or guarantees indebtedness, under the Revolving Credit Agreement. The subsidiary guarantors of the Senior Secured Notes currently consist of CFE, CFS, CF USA and CFIDF.
On November 13, 2019, we redeemed in full all of the remaining $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance with the optional redemption provisions in the indenture governing the 2020 Notes.
On December 13, 2019, we redeemed $250 million principal amount, representing 50% of the $500 million principal amount outstanding immediately prior to such redemption, of the 2021 Notes in accordance with the optional redemption provisions in the indenture governing the 2021 Notes.
Interest on the Public Senior Notes and the Senior Secured Notes is payable semiannually, and the Public Senior Notes and Senior Secured Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices.

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CF INDUSTRIES HOLDINGS, INC.



13.   Noncontrolling Interest
We have a strategic venture with CHS under which they own an equity interest in CFN, a subsidiary of CF Holdings, which represents approximately 11% of the membership interests of CFN. We own the remaining membership interests. Under the terms of CFN’s limited liability company agreement, each member’s interest will reflect, over time, the impact of the profitability of CFN, any member contributions made to CFN and withdrawals and distributions received from CFN. For financial reporting purposes, the assets, liabilities and earnings of the strategic venture are consolidated into our financial statements. CHS’ interest in the strategic venture is recorded in noncontrolling interest in our consolidated financial statements.
A reconciliation of the beginning and ending balances of noncontrolling interest and distributions payable to noncontrolling interest in our consolidated balance sheets is provided below.
 
2020
 
2019
 
(in millions)
Noncontrolling interest:
 
 
 
Balance as of January 1
$
2,740

 
$
2,773

Earnings attributable to noncontrolling interest
23

 
28

Declaration of distributions payable
(88
)
 
(86
)
Balance as of March 31
$
2,675

 
$
2,715

Distributions payable to noncontrolling interest:
 
 
 
Balance as of January 1
$

 
$

Declaration of distributions payable
88

 
86

Distributions to noncontrolling interest
(88
)
 
(86
)
Balance as of March 31
$

 
$


CHS also receives deliveries pursuant to a supply agreement under which CHS has the right to purchase annually from CFN up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. As a result of its equity interest in CFN, CHS is entitled to semi-annual cash distributions from CFN. We are also entitled to semi-annual cash distributions from CFN. The amounts of distributions from CFN to us and CHS are based generally on the profitability of CFN and determined based on the volume of granular urea and UAN sold by CFN to us and CHS pursuant to supply agreements, less a formula driven amount based primarily on the cost of natural gas used to produce the granular urea and UAN, and adjusted for the allocation of items such as operational efficiencies and overhead amounts. Additionally, under the terms of the strategic venture, we recognized an embedded derivative related to our credit rating. See Note 9—Fair Value Measurements for additional information.

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CF INDUSTRIES HOLDINGS, INC.



14.   Stockholders’ Equity
Treasury Stock
On August 1, 2018, our Board of Directors (the Board) authorized the repurchase of up to $500 million of CF Holdings common stock through June 30, 2020 (the 2018 Share Repurchase Program). In 2018, we completed the 2018 Share Repurchase Program with the repurchase of 10.9 million shares for $500 million, of which $33 million was accrued and unpaid at December 31, 2018 and was paid in the first quarter of 2019. In February 2019, we retired all 10.9 million shares that were repurchased under the 2018 Share Repurchase Program.
On February 13, 2019, the Board authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). Repurchases under the 2019 Share Repurchase Program may be made from time to time in the open market, through privately negotiated transactions, block transactions or otherwise. The manner, timing and amount of repurchases will be determined by our management based on the evaluation of market conditions, stock price, and other factors. In the first quarter of 2019, we repurchased approximately 1.5 million shares for $60 million, of which $6 million was accrued and unpaid at March 31, 2019. In the first quarter of 2020, we repurchased approximately 2.6 million shares for $100 million. At March 31, 2020, we held 2,813,869 shares of treasury stock.
The following table summarizes the share repurchases under the 2019 Share Repurchase Program.
 
Shares
 
Amounts
 
(in millions)
Shares repurchased in 2019:
 
 
 
First quarter
1.5

 
$
60

Second quarter
2.7

 
118

Third quarter
1.5

 
72

Fourth quarter
1.9

 
87

Shares repurchased in 2019
7.6

 
337

Shares repurchased in 2020:
 
 
 
First quarter
2.6

 
100

Shares repurchased as of March 31, 2020
10.2

 
$
437


Accumulated Other Comprehensive Income (Loss)
Changes to accumulated other comprehensive income (loss) are as follows:
 
Foreign
Currency
Translation
Adjustment
 
Unrealized
Gain on
Derivatives
 
Defined
Benefit
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
 
(in millions)
Balance as of December 31, 2018
$
(250
)
 
$
5

 
$
(126
)
 
$
(371
)
Effect of exchange rate changes and deferred taxes
32

 

 
(2
)
 
30

Balance as of March 31, 2019
$
(218
)
 
$
5

 
$
(128
)
 
$
(341
)
 
 
 
 
 
 
 
 
Balance as of December 31, 2019
$
(188
)
 
$
5

 
$
(183
)
 
$
(366
)
Reclassification to earnings(1)

 

 
1

 
1

Effect of exchange rate changes and deferred taxes
(83
)
 

 
8

 
(75
)
Balance as of March 31, 2020
$
(271
)
 
$
5

 
$
(174
)
 
$
(440
)
____________________________________________________________________________
(1) 
Reclassifications out of accumulated other comprehensive income (loss) to earnings during the three months ended March 31, 2020 and 2019 were not material.


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CF INDUSTRIES HOLDINGS, INC.



15.  Contingencies
Litigation
West Fertilizer Co.
On April 17, 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we do not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident.
The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Over two hundred cases have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining cases are in various stages of discovery and pre-trial proceedings. The next group of cases is expected to be reset for trial later this year. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the pending lawsuits. The Company cannot provide a range of reasonably possible loss due to the lack of damages discovery for many of the remaining claims and the uncertain nature of this litigation, including uncertainties around the potential allocation of responsibility by a jury to other defendants or responsible third parties. The recognition of a potential loss in the future in the West Fertilizer Co. litigation could negatively affect our results in the period of recognition. However, based upon currently available information, including available insurance coverage, we do not believe that this litigation will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Other Litigation
From time to time, we are subject to ordinary, routine legal proceedings related to the usual conduct of our business, including proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of our various plants and facilities. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these routine matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental
From time to time, we receive notices from governmental agencies or third parties alleging that we are a potentially responsible party at certain cleanup sites under the Comprehensive Environmental Response, Compensation, and Liability Act or other environmental cleanup laws. In 2011, we received a notice from the Idaho Department of Environmental Quality (IDEQ) that alleged that we were a potentially responsible party for the cleanup of a former phosphate mine site we owned in the late 1950s and early 1960s located in Georgetown Canyon, Idaho. The current owner of the property and a former mining contractor received similar notices for the site. In 2014, we and the current property owner entered into a Consent Order with IDEQ and the U.S. Forest Service to conduct a remedial investigation and feasibility study of the site. In 2015, we and several other parties received a notice that the U.S. Department of the Interior and other trustees intend to undertake a natural resource damage assessment for 17 former phosphate mines in southeast Idaho, one of which is the former Georgetown Canyon mine. Because the former mine site is still in the remedial investigation and feasibility study stage, we are not able to estimate at this time our potential liability, if any, with respect to the cleanup of the site or a possible claim for natural resource damages. However, based on the results of the site investigation conducted to date, we do not expect the remedial or financial obligations to which we may be subject involving this or other cleanup sites will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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CF INDUSTRIES HOLDINGS, INC.



16.  Segment Disclosures
Our reportable segments consist of ammonia, granular urea, UAN, AN and Other. These segments are differentiated by products. Our management uses gross margin to evaluate segment performance and allocate resources. Total other operating costs and expenses (consisting of selling, general and administrative expenses and other operating—net) and non-operating expenses (interest and income taxes) are centrally managed and are not included in the measurement of segment profitability reviewed by management.
Our assets, with the exception of goodwill, are not monitored by or reported to our chief operating decision maker by segment; therefore, we do not present total assets by segment. Goodwill by segment is presented in Note 7—Goodwill and Other Intangible Assets.
Segment data for sales, cost of sales and gross margin for the three months ended March 31, 2020 and 2019 are presented in the tables below.
 
Ammonia
 
Granular
Urea(1)
 
UAN(1)
 
AN(1)
 
Other(1)
 
Consolidated
 
(in millions)
Three months ended March 31, 2020
 

 
 

 
 

 
 
 
 

 
 

Net sales
$
193

 
$
337

 
$
235

 
$
116

 
$
90

 
$
971

Cost of sales
173

 
224

 
193

 
103

 
74

 
767

Gross margin
$
20

 
$
113

 
$
42

 
$
13

 
$
16

 
204

Total other operating costs and expenses
 

 
 

 
 

 
 
 
 

 
60

Equity in earnings of operating affiliate
 

 
 

 
 

 
 
 
 

 
3

Operating earnings
 

 
 

 
 

 
 
 
 

 
$
147

 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
 

 
 

 
 

 
 
 
 

 
 

Net sales
$
187

 
$
343

 
$
256

 
$
127

 
$
88

 
$
1,001

Cost of sales
166

 
228

 
195

 
114

 
78

 
781

Gross margin
$
21

 
$
115

 
$
61

 
$
13

 
$
10

 
220

Total other operating costs and expenses
 

 
 

 
 

 
 
 
 

 
62

Equity in earnings of operating affiliate
 

 
 

 
 

 
 
 
 

 
7

Operating earnings
 

 
 

 
 

 
 
 
 

 
$
165

_______________________________________________________________________________
(1) 
The cost of the products that are upgraded into other products is transferred at cost into the upgraded product results.

17.   Subsequent Events
In April 2020, due to confidence in the functioning of the credit markets and strong nitrogen fertilizer business conditions, we repaid the $500 million of borrowings that were outstanding under the Revolving Credit Agreement as of March 31, 2020. See Note 12—Financing Agreements for additional information.
In the second quarter of 2020, we received income tax refunds of $68 million, including interest, related to the income tax matter of the Terra Amended Tax Returns. In addition, we received notification that the Joint Committee approved the IRS audit report relating to the withholding tax matter of the Terra Amended Tax Returns. See Note 10—Income Taxes for additional information.




20

CF INDUSTRIES HOLDINGS, INC.



ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
        You should read the following discussion and analysis in conjunction with our annual consolidated financial statements and related notes and our discussion and analysis of financial condition and results of operations, which were included in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2020, as well as Item 1. Financial Statements in this Form 10-Q. All references to “CF Holdings,” “we,” “us,” “our” and “the Company” refer to CF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only to CF Industries Holdings, Inc. itself and not its subsidiaries. All references to “CF Industries” refer to CF Industries, Inc., a 100% owned subsidiary of CF Industries Holdings, Inc. References to tons refer to short tons. Notes referenced in this discussion and analysis refer to the notes to our unaudited interim consolidated financial statements in Item 1. Financial Statements in this Form 10-Q. The following is an outline of the discussion and analysis included herein:
Overview of CF Holdings
Our Company
Market Conditions and Current Developments
Items Affecting Comparability of Results
Financial Executive Summary
Results of Consolidated Operations
Operating Results by Business Segment
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Critical Accounting Policies and Estimates
Recent Accounting Pronouncements
Forward-Looking Statements
Overview of CF Holdings
Our Company
We are a leading global manufacturer and distributor of nitrogen products for fertilizer, emissions abatement and other industrial applications. We operate manufacturing complexes in the United States, Canada and the United Kingdom, which are among the most cost-advantaged, efficient and flexible in the world, and an extensive storage, transportation and distribution network in North America. Our 3,000 employees focus on safe and reliable operations, environmental stewardship and disciplined capital and corporate management, driving our strategy to leverage and sustainably grow the world’s most advantaged nitrogen and chemicals platform to serve customers and create long-term shareholder value. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our principal nitrogen fertilizer products are anhydrous ammonia (ammonia), granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium.
Our principal assets as of March 31, 2020 include:
five U.S. nitrogen manufacturing facilities located in Donaldsonville, Louisiana (the largest nitrogen complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; Verdigris, Oklahoma; and Woodward, Oklahoma. These facilities are wholly owned directly or indirectly by CF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder. See Note 13—Noncontrolling Interest for additional information on our strategic venture with CHS;
two Canadian nitrogen manufacturing facilities located in Medicine Hat, Alberta (the largest nitrogen complex in Canada) and Courtright, Ontario;
two United Kingdom nitrogen manufacturing facilities located in Billingham and Ince;
an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and

21

CF INDUSTRIES HOLDINGS, INC.



a 50% interest in Point Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in the Republic of Trinidad and Tobago that we account for under the equity method.
Market Conditions and Current Developments
COVID-19 Pandemic
In March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019 (COVID-19) as a pandemic. Since that time, efforts to slow the spread of COVID-19 have intensified. A number of countries, as well as certain states and cities within the United States, have enacted temporary closures of businesses, issued shelter in place or quarantine orders, and taken other restrictive measures in response to the pandemic.
Due to the use of fertilizer products in crop production, our business operations have been designated as part of the critical infrastructure by the United States and as essential businesses in the United Kingdom and Canada, with corresponding designations for those states and provinces in which we operate that have issued restrictive orders. As a result, our manufacturing complexes continued to operate during the first quarter and have continued to operate through the date of this report. Our production of ammonia, the basic building block for our products, totaled 2.7 million tons in the first quarter of 2020 as compared to 2.6 million tons in the first quarter of 2019. Through the date of this filing, we have continued to ship products through all modes of transportation to our customers, and we have not experienced any significant delays in marine, rail or truck transportation services due to the pandemic.
In the first quarter of 2020, we did not experience a meaningful impact in customer demand as a result of the COVID-19 pandemic. Spring weather conditions in the first quarter of this year have been substantially better than the weather conditions experienced in the first quarter of 2019, when cold, wet and snowy conditions prevented first quarter planting activities across much of North America and Europe. In the first quarter of 2020, spring planting began in certain locations and our total volume of products shipped in the first quarter of 2020 of 4.7 million tons was 15% higher than the prior year first quarter.
We have instituted safety precautions to protect the health and well-being of all of our employees, including our essential manufacturing workforce who operate our nitrogen complexes and distribution facilities. These safety measures include installing thermal temperature checks at each of our sites for all personnel who arrive at our sites, adjusting schedules to support social distancing, including changes to loading and shipping procedures, maintaining a close contact log for employees, self-quarantine logs, requiring face coverings onsite, restricting visitor access, enhanced cleaning protocols and travel restrictions for employees. We have also offered pay enhancements to the operational workforce for the March to June time period of approximately $19 million. In addition, since mid-March 2020, the non-operational personnel at our sites who work in administrative and operational support functions have been working remotely in order to maintain social distancing following governmental guidelines. These administrative and operational support functions have operated effectively during this period, meeting our commitments to our customers and continuing to manage our business without interruption. We have not furloughed any employees or instituted any reductions in pay or benefits or other significant cost containment measures.
We participate in a global market, which includes a global supply chain and customer base. The long-term effects of the COVID-19 pandemic are unclear and could adversely affect our business in the future. We have operated our business in a remote working environment under shelter in place orders and could continue to do so for an extended duration, if necessary. However, if the pandemic were to impact a large portion of our workforce in any one location, we might need to temporarily idle that facility, which could have an impact on our business operations, profitability and cash flow. The impact of the COVID-19 pandemic is fluid and continues to evolve. As a result, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will be impacted by the pandemic in the future.
Sales Volume
There was strong demand for fertilizer in the first quarter of 2020 compared to the first quarter of 2019, when demand was lower because of delayed spring planting activity and fertilizer applications as a result of persistent cold and wet weather. Sales volume for the three months ended March 31, 2020 was 4.7 million product tons, an increase of 15% compared to sales volume of 4.1 million product tons for the three months ended March 31, 2019, which resulted in an increase in net sales of approximately $173 million. Sales volumes across all of our products increased in the first quarter of 2020 compared to the first quarter of 2019 as a result of improved weather conditions for the 2020 spring fertilizer application season.
Selling Prices
Selling prices for our products strengthened as the first quarter of 2020 progressed. Early in the first quarter of 2020, average selling prices for our products were lower than in first quarter of 2019 due to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates in the fourth quarter of 2019 and the first quarter of

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CF INDUSTRIES HOLDINGS, INC.



2020. For granular urea and UAN, a combination of lower than expected imports into North America and earlier demand in the Southern Plains for spring applications due to favorable weather conditions compared to the prior year drove an increase in selling prices as the first quarter of 2020 concluded.
The average selling price for our products for the first quarter of 2020 was $207 per ton, a decrease of 16% compared to $245 per ton in the first quarter of 2019, which resulted in a decrease in net sales of approximately $203 million.
Natural Gas Prices
Natural gas is the principal raw material used to produce nitrogen fertilizers. We use natural gas both as a chemical feedstock and as a fuel to produce nitrogen products. Natural gas is a significant cost component of manufactured nitrogen products, representing approximately 35% of our production costs.
Most of our nitrogen fertilizer manufacturing facilities are located in the United States and Canada. As a result, the price of natural gas in North America directly impacts a substantial portion of our operating expenses. Due to increases in natural gas production resulting from the rise in production from shale gas formations, natural gas prices in North America have declined over the last decade, but are subject to volatility. In addition, in the first quarter of 2020, natural gas prices were lower than in the first quarter of 2019 as a result of robust supply and lower overall demand as a result of warmer than normal weather in the first quarter of 2020. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, for the three months ended March 31, 2020 was $1.88 per MMBtu compared to $2.89 per MMBtu for the three months ended March 31, 2019, a decrease of 35%.
We also have manufacturing facilities located in the United Kingdom. Production costs for these facilities are subject to fluctuations associated with the price of natural gas in Europe. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). The price of natural gas in the United Kingdom has declined as a result of increased availability of liquefied natural gas in the global market. The average daily market price of natural gas at NBP for the three months ended March 31, 2020 was $3.20 per MMBtu compared to $6.56 per MMBtu for the three months ended March 31, 2019, a decrease of 51%.
Natural gas costs in cost of sales, including the impact of realized natural gas derivatives, decreased 29% to $2.61 per MMBtu in the three months ended March 31, 2020 from $3.68 per MMBtu in the three months ended March 31, 2019, which resulted in an increase in gross margin of approximately $87 million.
More recently, North America and the United Kingdom have experienced reduced demand for energy, including natural gas, due to the impact of the COVID-19 pandemic.
Items Affecting Comparability of Results
In addition to the impact of market conditions discussed above, certain items impacted the comparability of our financial results during the three months ended March 31, 2020 and 2019. The following table and related discussion outline these items and how they impacted the comparability of our financial results during these periods. During the three months ended March 31, 2020 and 2019, we reported net earnings attributable to common stockholders of $68 million and $90 million, respectively.
 
Three Months Ended March 31,
 
2020
 
2019
 
Pre-Tax
 
After-Tax
 
Pre-Tax
 
After-Tax
 
(in millions)
Unrealized net mark-to-market (gain) loss on natural gas derivatives(1)
$
(12
)
 
$
(9
)
 
$
2

 
$
1

Loss on foreign currency transactions, including intercompany loans(2)
18

 
14

 
2

 
1

Insurance proceeds(2)
(10
)
 
(8
)
 

 

Louisiana incentive tax credit(3)

 

 

 
(30
)
______________________________________________________________________________
(1) 
Included in cost of sales in our consolidated statements of operations.
(2) 
Included in other operating—net in our consolidated statements of operations.
(3) 
Included in income tax provision (benefit) in our consolidated statement of operations.


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CF INDUSTRIES HOLDINGS, INC.



Unrealized net mark-to-market (gain) loss on natural gas derivatives
Natural gas is the largest and most volatile single component of the manufacturing cost for nitrogen-based products. At certain times, we have managed the risk of changes in natural gas prices through the use of derivative financial instruments. The derivatives that we may use for this purpose are primarily natural gas fixed price swaps, basis swaps and options. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. This can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives, which are reflected in cost of sales in our consolidated statements of operations. In the three months ended March 31, 2020 and 2019, we recognized an unrealized net mark-to-market (gain) loss of $(12) million and $2 million, respectively.
Loss on foreign currency transactions, including intercompany loans
In the three months ended March 31, 2020 and 2019, we recognized losses of $18 million and $2 million, respectively, primarily consisting of the impact of changes in foreign currency exchange rates on primarily U.S. dollar and British pound denominated intercompany loans that were not permanently invested.
Insurance proceeds
In the three months ended March 31, 2020, we recognized income of $10 million related to insurance claims at one of our nitrogen complexes. The $10 million of income consists of $8 million related to business interruption insurance proceeds and $2 million related to property insurance proceeds. These proceeds are reflected in other operating—net in our consolidated statement of operations.
Louisiana incentive tax credit
For the three months ended March 31, 2019, our income tax benefit included an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana nitrogen complex.
Financial Executive Summary
We reported net earnings attributable to common stockholders of $68 million for the three months ended March 31, 2020 compared to $90 million for the three months ended March 31, 2019, a decrease in net earnings of 24%, or $22 million. The decrease in net earnings of $22 million was due primarily to the following:
Gross margin decreased by $16 million in the first quarter of 2020 to $204 million as compared to $220 million in the first quarter of 2019. The decrease in gross margin was primarily driven by a 16% decrease in average selling prices, which reduced gross margin by $203 million, partially offset by a 29% decrease in natural gas costs, which increased gross margin by $87 million, and a 15% increase in sales volume, which increased gross margin by $74 million.
Net interest expense decreased by $13 million in the first quarter of 2020 to $43 million as compared to $56 million in the first quarter of 2019. The decrease was due primarily to our redemption in November 2019 of all of the remaining $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes) and the redemption in December 2019 of $250 million principal amount, representing 50% of the $500 million principal amount outstanding immediately prior to such redemption, of the 3.400% senior secured notes due December 2021 (the 2021 Notes).
Income tax provision increased by $21 million in the first quarter of 2020 to $13 million as compared to an income tax benefit of $8 million in the first quarter of 2019. The primary driver of the increase relates to an incentive tax credit of $30 million recognized in the first quarter of 2019, which is more fully described in the section above titled “Items Affecting Comparability of Results.”
Diluted net earnings per share attributable to common stockholders decreased 23%, or $0.09 per share, to $0.31 in the first quarter of 2020 compared to $0.40 in the first quarter of 2019. This decrease is due primarily to the $30 million incentive tax credit recognized in the first quarter of 2019 and lower gross margin, partially offset by a 4% reduction in diluted weighted-average common shares outstanding due to repurchases made under our share repurchase program. On February 13, 2019, our Board of Directors (the Board) authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). In 2019, we repurchased a total of 7.6 million shares for $337 million, of which approximately 1.5 million shares were repurchased in the first quarter of 2019 for $60 million. In the first quarter of 2020, we repurchased approximately 2.6 million shares for $100 million. See discussion under “Liquidity and Capital Resources—Share Repurchase Program,” below, for further information.

24

CF INDUSTRIES HOLDINGS, INC.



Results of Consolidated Operations
The following table presents our consolidated results of operations and supplemental data:
 
Three Months Ended March 31,
 
2020
 
2019
 
2020 v. 2019
 
(in millions, except per share and per MMBtu)
Net sales
$
971

 
$
1,001

 
$
(30
)
 
(3
)%
Cost of sales
767

 
781

 
(14
)
 
(2
)%
Gross margin
204

 
220

 
(16
)
 
(7
)%
Gross margin percentage
21.0
%
 
22.0
%
 
(1.0
)%
 
 
Selling, general and administrative expenses
54

 
58

 
(4
)
 
(7
)%
Other operating—net
6

 
4

 
2

 
50
 %
Total other operating costs and expenses
60

 
62

 
(2
)
 
(3
)%
Equity in earnings of operating affiliate
3

 
7

 
(4
)
 
(57
)%
Operating earnings
147

 
165

 
(18
)
 
(11
)%
Interest expense—net
43

 
56

 
(13
)
 
(23
)%
Other non-operating—net

 
(1
)
 
1

 
100
 %
Earnings before income taxes
104

 
110

 
(6
)
 
(5
)%
Income tax provision (benefit)
13

 
(8
)
 
21

 
N/M

Net earnings