CF INDUSTRIES HOLDINGS, INC. 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 Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 24, 2020 , as well as Item 1. Financial Statements in this Quarterly Report on Form 10-Q. All references to "CF Holdings ," "we," "us," "our" and "the Company" refer toCF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only toCF Industries Holdings, Inc. itself and not its subsidiaries. All references to "CF Industries " refer toCF Industries, Inc. , a 100% owned subsidiary ofCF 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 Quarterly Report on Form 10-Q. The following is an outline of the discussion and analysis included herein: •Overview ofCF Holdings •Our Company •Market Conditions and Current Developments •Items Affecting Comparability of Results •Financial Executive Summary •Consolidated Results of Operations •Second Quarter of 2020 Compared to Second Quarter of 2019 •Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 •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 ofCF 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 inthe United States ,Canada and theUnited Kingdom , which are among the most cost-advantaged, efficient and flexible in the world, and an extensive storage, transportation and distribution network inNorth 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 our 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 ofJune 30, 2020 include: •fiveU.S. nitrogen manufacturing facilities located inDonaldsonville, Louisiana (the largest nitrogen complex in the world);Port Neal, Iowa ;Yazoo City, Mississippi ;Verdigris, Oklahoma ; andWoodward, Oklahoma . These facilities are wholly owned directly or indirectly byCF 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 inMedicine Hat, Alberta (the largest nitrogen complex inCanada ) andCourtright, Ontario ; 22
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CF INDUSTRIES HOLDINGS, INC. •twoUnited Kingdom nitrogen manufacturing facilities located inBillingham and Ince; •an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and •a 50% interest inPoint Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in theRepublic of Trinidad and Tobago that we account for under the equity method. Market Conditions and Current Developments COVID-19 Pandemic InMarch 2020 , theWorld 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 withinthe 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 bythe United States and as essential businesses in theUnited Kingdom andCanada , 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 half of 2020 and have continued to operate through the date of this report. Our production of ammonia, the basic building block for our products, was 5.2 million tons in both the first six months of 2020 and the first six months of 2019. Through the date of this filing, we have continued to ship products by 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 half of 2020, we did not experience a meaningful impact in customer demand as a result of the COVID-19 pandemic. Our total volume of products shipped in the first six months of 2020 of 10.1 million tons was 3% higher compared to 9.8 million tons in the first six months of 2019. In response to the pandemic, we instituted safety precautions to protect the health and well-being of all of our employees, including the manufacturing workforcewho operate our nitrogen complexes and distribution facilities. These safety measures included installing thermal temperature checks at each of our sites for all personnelwho 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 on site, restricting visitor access, and implementing enhanced cleaning protocols and travel restrictions for employees. We also paid approximately$19 million of bonuses to our operational workforce under a special COVID-19 bonus program, which concluded in June. In addition, sincemid-March 2020 , the majority of our non-operational personnel at our siteswho work in administrative and operational support functions have worked 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 due to the pandemic. 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 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 six months of 2020 as we shipped 10.1 million tons of product compared to 9.8 million tons in the first six months of 2019, a 3% increase. Our shipments can shift between quarters due primarily to shifts in weather patterns that impact fertilizer applications. In the second quarter of 2020, our sales volumes were lower across most of our major products compared to the second quarter of 2019 as a result of higher sales volumes in the second quarter of 2019 due to the delayed spring application season as a result of persistent cold and wet weather last year. Additionally, certain shipments of granular urea occurred earlier, in the first quarter of 2020, due to favorable weather conditions. 23
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CF INDUSTRIES HOLDINGS, INC. In the three months endedJune 30, 2020 , sales volume was 5.4 million product tons, a decrease of 6%, compared to sales volume of 5.7 million product tons for three months endedJune 30, 2019 . This decrease in sales volume resulted in a decrease in net sales of approximately$100 million . Sales volumes in our granular urea, ammonia, Other and UAN segments decreased in the second quarter of 2020 compared to the second quarter of 2019, partially offset by an increase in our AN segment sales volumes. In the six months endedJune 30, 2020 , sales volume was 10.1 million product tons, an increase of 3%, compared to sales volume of 9.8 million product tons for the six months endedJune 30, 2019 . This increase in sales volume resulted in an increase in net sales of approximately$73 million . Sales volumes across all products increased in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Selling Prices The selling prices for all products were lower in the second quarter of 2020 than the second quarter of 2019 as global energy prices remained low, driving higher global nitrogen operating rates and the resulting additional global supply availability. In the second quarter of 2020, the average selling price for our products was$224 per ton, a decrease of 15% compared to$263 per ton in the second quarter of 2019. This resulted in a decrease in net sales of approximately$198 million . In the six months endedJune 30, 2020 , the average selling price for our products was$216 per ton, or 15% lower compared to$255 per ton for the six months endedJune 30, 2019 . This resulted in a decrease in net sales of approximately$401 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 one-third of our production costs. Most of our nitrogen fertilizer manufacturing facilities are located inthe United States andCanada . As a result, the price of natural gas inNorth 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 inNorth America have declined over the last decade, but are subject to volatility. Natural gas prices during the first half of 2020 were lower on average than in the first half of 2019, due in part to reduced demand related to measures designed to curb the spread of COVID-19, partially offset by reductions in supply. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point inNorth America , for the three months endedJune 30, 2020 was$1.65 per MMBtu compared to$2.51 per MMBtu for the three months endedJune 30, 2019 , a decrease of 34%. The average daily market price at the Henry Hub for the six months endedJune 30, 2020 was$1.76 per MMBtu compared to$2.70 per MMBtu for the six months endedJune 30, 2019 , a decrease of 35%. We also have manufacturing facilities located in theUnited Kingdom . Production costs for these facilities are subject to fluctuations associated with the price of natural gas inEurope . The major natural gas trading point for theUnited Kingdom is theNational Balancing Point (NBP). The price of natural gas in theUnited Kingdom declined throughout the first half of 2020 as a result of increased availability of liquefied natural gas in the global market as well as the global economic downturn related to the COVID-19 pandemic. The average daily market price of natural gas at NBP for the three months endedJune 30, 2020 was$1.60 per MMBtu compared to$4.07 per MMBtu for the three months endedJune 30, 2019 , a decrease of 61%. The average daily market price at NBP for the six months endedJune 30, 2020 was$2.40 per MMBtu compared to$5.15 per MMBtu for the six months endedJune 30, 2019 , a decrease of 53%. Natural gas costs in cost of sales, including the impact of realized natural gas derivatives, decreased 34% to$1.86 per MMBtu in the three months endedJune 30, 2020 from$2.81 per MMBtu in the three months endedJune 30, 2019 , which resulted in an increase in gross margin of approximately$96 million . Natural gas costs in cost of sales, including the impact of realized natural gas derivatives, decreased 30% to$2.20 per MMBtu in the six months endedJune 30, 2020 from$3.15 per MMBtu in the six months endedJune 30, 2019 , which resulted in an increase in gross margin of approximately$183 million . 24
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CF INDUSTRIES HOLDINGS, INC.
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 and six
months ended June 30, 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 June 30, 2020 and
2019, we reported net earnings attributable to common stockholders of
$190 million and $283 million , respectively. During the six months ended June
30, 2020 and 2019, we reported net earnings attributable to common stockholders
of $258 million and $373 million , respectively.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax
(in millions)
Unrealized net mark-to-market (gain)
loss on natural gas derivatives(1) $ - $ - $
(1) $ -
Special COVID-19 bonus for operational workforce(1) 15 12 - - 15 12 - - (Gain) loss on foreign currency transactions, including intercompany loans(2) (5) (4) 5 4 13 10 7 5 Engineering cost write-off(2) 8 6 - - 8 6 - - Insurance proceeds(2) - - - - (10) (8) - - Gain on sale of Pine Bend facility(2) - - (45) (35) - - (45)
(35)
Louisiana incentive tax credit(3) - - - - - - - (30) Terra amended tax returns-interest income and income tax benefit(4) (16) (32) - - (16) (32) - -
______________________________________________________________________________
(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 in our consolidated statements of operations. (4)Included in interest income and income tax provision in our consolidated statements of operations. 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 endedJune 30, 2019 , we recognized an unrealized net mark-to-market gain of$1 million . In the six months endedJune 30, 2020 and 2019, we recognized an unrealized net mark-to-market (gain) loss of$(12) million and$1 million , respectively. Special COVID-19 bonus for operational workforce InMarch 2020 , a short-term bonus program was initiated to compensate operational employees for continuing their critical tasks during the COVID-19 pandemic. The bonus program concluded inJune 2020 . Approximately$19 million was paid as part of the program, of which approximately$15 million was recognized in cost of sales in our consolidated statement of operations for the three months endedJune 30, 2020 , with the remaining$4 million to be recognized in the third quarter of 2020. (Gain) loss on foreign currency transactions, including intercompany loans In the three and six months endedJune 30, 2020 , we recognized a (gain) loss of$(5) million and$13 million , respectively, primarily consisting of the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. 25
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CF INDUSTRIES HOLDINGS, INC. Engineering cost write-off InJune 2020 , a project at one of our nitrogen complexes was cancelled and$8 million of previously capitalized engineering costs were expensed in the three months endedJune 30, 2020 . The expense is recognized in the line titled other operating-net in our consolidated statements of operations. Insurance proceeds In the six months endedJune 30, 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 statements of operations. Gain on sale of Pine Bend facility During the first quarter of 2019, we entered into an agreement to sell our Pine Bend dry bulk storage and logistics facility inMinnesota . InApril 2019 , we completed the sale, received proceeds of$55 million and recognized a pre-tax gain of$45 million . The gain is reflected in other operating-net in our consolidated statement of operations for the three and six months endedJune 30, 2019 .Louisiana incentive tax credit For the six months endedJune 30, 2019 , our income tax provision included an incentive tax credit from theState of Louisiana of$30 million , net of federal income tax, related to certain capital projects at ourDonaldsonville, Louisiana nitrogen complex. Terra amended tax returns We completed the acquisition ofTerra Industries Inc. (Terra) inApril 2010 . After the acquisition, we determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to itsU.S. parent forU.S. and foreign income tax purposes was not appropriate. As a result, in 2012 we amended certain tax returns, including Terra's income and withholding tax returns, back to 1999 (the Amended 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 theU.S. tax aspects of the Amended Tax Returns. In early 2019, theIRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to theJoint Committee on Taxation of theU.S. Congress (the Joint Committee ). For purposes of its review,the Joint Committee separated theIRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter. InDecember 2019 , we received notification thatthe Joint Committee had approved theIRS audit reports and related income tax refunds relating to the income tax related matter, and in the second quarter of 2020, we received notification thatthe Joint Committee approved theIRS audit report and related withholding tax refunds relating to the withholding tax matter. See "Liquidity and Capital Resources-Terra Amended Tax Returns," below, for additional information. As a result of these events, in the second quarter of 2020, we recognized$16 million of interest income and$16 million of income tax benefit, which consisted of the following: •additional interest income of$16 million ($13 million , net of tax) related to both the income tax matter and the withholding tax matter, •a reduction in our liabilities for unrecognized tax benefits of$12 million with a corresponding reduction in income tax expense related to the withholding tax matter, and •an additional income tax benefit of$7 million related to the income tax matter. We received income tax refunds, including interest, of$108 million relating to these matters in the second quarter of 2020. InJuly 2020 , we received an additional$2 million , which finalizes these matters with theIRS . As a result of the finalization of these tax matters, allU.S. federal tax years commencing beforeJanuary 1, 2012 are now closed. 26
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CF INDUSTRIES HOLDINGS, INC. Financial Executive Summary We reported net earnings attributable to common stockholders of$190 million for the three months endedJune 30, 2020 compared to$283 million for the three months endedJune 30, 2019 , a decrease in net earnings of$93 million , or 33%. The decrease in net earnings was due primarily to the following: •Gross margin decreased by$165 million in the second quarter of 2020 to$334 million as compared to$499 million in the second quarter of 2019. The decrease in gross margin was primarily driven by a 15% decrease in average selling prices, which reduced gross margin by$198 million , and a 6% decrease in sales volume, which decreased gross margin by$56 million , partially offset by a 34% decrease in natural gas costs, which increased gross margin by$96 million . •Other operating-net decreased by$43 million in the second quarter of 2020 to$6 million of expense as compared to$37 million of income in the second quarter of 2019. The second quarter of 2019 included a gain on the sale of the Pine Bend facility of$45 million . The second quarter of 2020 includes$8 million of expense related to the cancellation of a project. Both of these items are more fully described above under "Items Affecting Comparability of Results." •Net interest expense decreased by$23 million in the second quarter of 2020 to$32 million as compared to$55 million in the second quarter of 2019. The decrease was due primarily to$16 million of interest income related to the finalization of the Terra amended tax returns, which is more fully described under "Liquidity and Capital Resources-Terra Amended Tax Returns," below. In addition, the decrease reflects our redemption of$750 million of aggregate principal amount of long-term debt in the fourth quarter of 2019, which is more fully described under "Liquidity and Capital Resources-Senior Notes," below. •Our income tax provision decreased by$69 million in the second quarter of 2020 to$33 million as compared to$102 million in the second quarter of 2019 due to lower earnings before income taxes as well as the impact of the finalization of the Terra amended tax returns, which is more fully described under "Liquidity and Capital Resources-Terra Amended Tax Returns," below. Diluted net earnings per share attributable to common stockholders decreased 30%, or$0.39 per share, to$0.89 in the second quarter of 2020 compared to$1.28 in the second quarter of 2019. This decrease is due primarily to lower net earnings, partially offset by a 3% reduction in diluted weighted-average common shares outstanding due to repurchases made under our share repurchase program. OnFebruary 13, 2019 , our Board of Directors (the Board) authorized the repurchase of up to$1 billion ofCF Holdings common stock throughDecember 31, 2021 (the 2019 Share Repurchase Program). In 2019, we repurchased approximately 7.6 million shares ofCF Holdings common stock for$337 million , of which approximately 4.2 million shares were repurchased in the first half of 2019 for$178 million . No shares were repurchased in the three months endedJune 30, 2020 , and for the six months endedJune 30, 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. 27
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