CF INDUSTRIES HOLDINGS, INC. You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Data. 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 consolidated financial statements that are found in Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements. For a discussion and analysis of the year endedDecember 31, 2017 , you should read Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (SEC) onFebruary 22, 2019 . The following is an outline of the discussion and analysis included herein: • Overview ofCF Holdings • Our Company • Industry Factors
• 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
Overview ofCF Holdings Our Company We are a leading global fertilizer and chemical company. Our 3,000 employees operate world-class manufacturing complexes inCanada , theUnited Kingdom andthe United States . Our manufacturing network is among the most efficient and cost-advantaged in the world, as our facilities inCanada andthe United States have access to low-cost North American natural gas. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers, farmers 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 solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium. We serve our customers inNorth America through our production, storage, transportation and distribution network. We also reach a global customer base with exports from ourDonaldsonville, Louisiana , facility, the world's largest and most flexible nitrogen complex. Additionally, we move product to international destinations from ourVerdigris, Oklahoma , facility, ourYazoo City, Mississippi , facility, and ourBillingham and Ince facilities in theUnited Kingdom , and from a joint venture ammonia facility in theRepublic of Trinidad and Tobago in which we own a 50 percent interest. Our principal assets as ofDecember 31, 2019 include: • fiveU.S. nitrogen manufacturing facilities, located inDonaldsonville ,
These facilities are wholly owned directly or indirectly by CF
CHS Inc. (CHS) owns the remainder. See Note 17-Noncontrolling Interests
for additional information on our strategic venture with CHS;• two Canadian nitrogen manufacturing facilities, located in Medicine
Hat,
Ontario ; • twoUnited Kingdom nitrogen manufacturing facilities, located inBillingham and Ince; 32
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CF INDUSTRIES HOLDINGS, INC.
• an extensive system of terminals and associated transportation
equipment located primarily in the Midwestern United States; and
• 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.
Our nitrogen manufacturing facility in Verdigris, Oklahoma , is owned and
operated by Terra Nitrogen, Limited Partnership (TNLP). Prior to April 2, 2018 ,
TNLP was a subsidiary of Terra Nitrogen Company, L.P. (TNCLP), which was a
publicly traded limited partnership of which we were the sole general partner
and the majority limited partner, and in which we owned an approximate 75.3%
interest.
On February 7, 2018 , we announced that, in accordance with the terms of TNCLP's
First Amended and Restated Agreement of Limited Partnership (as amended by
Amendment No. 1 to the First Amended and Restated Agreement of Limited
Partnership, the TNCLP Agreement of Limited Partnership), Terra Nitrogen GP Inc.
(TNGP), the sole general partner of TNCLP and an indirect wholly owned
subsidiary of CF Holdings , elected to exercise its right to purchase all of the
4,612,562 publicly traded common units of TNCLP (the TNCLP Public Units). On
April 2, 2018 , TNGP completed its purchase of the TNCLP Public Units (the
Purchase) for an aggregate cash purchase price of $388 million . We funded the
Purchase with cash on hand. Upon completion of the Purchase, CF Holdings owned,
through its subsidiaries, 100 percent of the general and limited partnership
interests of TNCLP.
Industry Factors
We operate in a highly competitive, global industry. Our operating results are
influenced by a broad range of factors, including those outlined below.
Global Supply and Demand Factors
Our products are globally traded commodities and are subject to price
competition. The customers for our products make their purchasing decisions
principally on the basis of delivered price and, to a lesser extent, on customer
service and product quality. The selling prices of our products fluctuate in
response to global market conditions, changes in supply and demand and cost
factors.
Historically, global fertilizer demand has been driven primarily by population
growth, gross domestic product growth, changes in dietary habits, planted
acreage, and application rates, among other things. We expect these key
variables to continue to have major impacts on long-term fertilizer demand for
the foreseeable future. Short-term fertilizer demand growth may depend on global
economic conditions, farm sector income, weather patterns, the level of global
grain stocks relative to consumption, fertilizer application rates, and
governmental regulations, including fertilizer subsidies or requirements
mandating increased use of bio-fuels or industrial nitrogen products. Other
geopolitical factors like temporary disruptions in fertilizer trade related to
government intervention or changes in the buying/selling patterns of key
exporting/consuming countries such as China , India , Russia and Brazil , among
others, often play a major role in shaping near-term market fundamentals. The
economics of nitrogen-based fertilizer manufacturing play a key role in
decisions to increase or reduce production capacity. Supply of fertilizers is
generally driven by available capacity and operating rates, raw material costs
and availability, government policies and global trade. Raw materials are
dependent on energy sources such as natural gas or coal; therefore, supply costs
are affected by the supply of and demand for these commodities.
Global Trade in Fertilizer
In addition to the relationship between global supply and demand, profitability
within a particular geographic region is determined by the supply/demand balance
within that region. Regional supply and demand can be influenced significantly
by factors affecting trade within regions. Some of these factors include the
relative cost to produce and deliver product, relative currency values, the
availability of credit and governmental trade policies, including the imposition
of duties, tariffs or quotas, that affect foreign trade or investment. The
development of additional natural gas reserves in North America over the last
decade has decreased natural gas costs relative to the rest of the world, making
North American nitrogen fertilizer producers more competitive. Changes in
currency values may also alter our cost competitiveness relative to producers in
other regions of the world.
Imports account for a significant portion of the nitrogen fertilizer consumed in
North America . Producers of nitrogen-based fertilizers located in the Middle
East , the Republic of Trinidad and Tobago , North Africa and Russia have been
major exporters to North America in recent years. As a result, the North
American nitrogen fertilizer market is dependent on imports to balance supply
and demand.
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CF INDUSTRIES HOLDINGS, INC.
Farmers' Economics
The demand for fertilizer is affected by the aggregate crop planting decisions
and fertilizer application rate decisions of individual farmers. Individual
farmers make planting decisions based largely on prospective profitability of a
harvest, while the specific varieties and amounts of fertilizer they apply
depend on factors like their current liquidity, soil conditions, weather
patterns, crop prices, fertilizer products used and timing of applications,
expected yields and the types of crops planted.
Items Affecting Comparability of Results
Selling Prices
The U.S. Gulf is a major global fertilizer pricing point due to the volume of
nitrogen fertilizer that trades there. In 2018, higher energy costs in Asia and
Europe , along with continued enforcement of environmental regulations in China ,
resulted in lower nitrogen production in these regions. In addition, plant
outages impacted the global nitrogen supply and demand balance. These factors
collectively drove global nitrogen prices higher in the second half of 2018.
Upon entering the first quarter of 2019, our average selling prices were higher
than the first quarter of 2018, driven by the continued impact of a tighter
global nitrogen supply and demand balance experienced throughout late 2018.
During the first half of 2019, our average selling prices for all fertilizer
products remained strong due to the limited supply of fertilizer as high water
levels and flooding impacted shipping and logistics on the U.S. inland rivers
and limited access for imports. As we entered the third quarter of 2019, the
fertilizer application season extended due to the late planting, resulting in
continued in-season prompt sales, which favorably impacted our third quarter
selling prices. However, as the third quarter continued, lower global energy
prices resulted in higher nitrogen industry operating rates, which increased
global fertilizer supply. This factor, in conjunction with the seasonally slow
third quarter period, led to weakness in selling prices as the third quarter
ended, which continued throughout the fourth quarter of 2019. In addition to low
selling prices, the fourth quarter of 2019 experienced cold and wet weather,
which limited fall ammonia application. These factors collectively led to lower
nitrogen prices in the fourth quarter.
The average selling price for our products for 2019 and 2018 was $235 per ton
and $229 per ton, respectively. The increase in average selling prices of 3% in
2019 from 2018 increased net sales by $62 million .
Sales Volume
Persistent cold and wet weather across most of North America early in 2019
delayed spring planting activity and fertilizer applications. In addition, high
water levels impacted shipping and logistics on the U.S. inland rivers and
delayed certain barge shipments, which caused delays in certain customers taking
delivery of fertilizer and other customers delaying purchases. As a result, the
spring application season extended into the third quarter of 2019 with some
shipments that would typically occur in the second quarter being delayed into
the third quarter. Additionally, planned maintenance activity at our plants
reduced production levels in the third quarter of 2019, reducing inventory
availability. In the fourth quarter, shipping activity increased and full year
sales volume for 2019 was 19.5 million tons, 1% higher than the 19.3 million
tons in 2018.
Sales volume for our products in 2019, 2018 and 2017 is shown in the table
below.
2019 2018 2017
Sales Sales Sales
Volume Volume Volume
(tons) Net Sales (tons) Net Sales (tons) Net Sales
(tons in thousands; dollars in millions)
Ammonia 3,516 $ 1,113 3,135 $ 1,028 4,105 $ 1,209
Granular urea 4,849 1,342 4,898 1,322 4,357 971
UAN 6,807 1,270 7,042 1,234 7,093 1,134
AN 2,109 506 2,002 460 2,353 497
Other 2,257 359 2,252 385 2,044 319
Total 19,538 $ 4,590 19,329 $ 4,429 19,952 $ 4,130
The increase in total sales volume in 2019 from 2018 was due primarily to the
impact of increased supply resulting from both higher inventory levels entering
2019 and higher production in 2019. The increase in sales volume increased net
sales by $99 million in 2019.
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CF INDUSTRIES HOLDINGS, INC.
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. The average daily market price at
the Henry Hub, the most heavily-traded natural gas pricing point in North
America , was $2.51 per MMBtu for 2019 compared to $3.12 per MMBtu for 2018, a
decrease of 20%.
We also have manufacturing facilities located in the United Kingdom . 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 average daily market price at NBP was $4.44
per MMBtu for 2019 compared to $8.07 per MMBtu for 2018, a decrease of 45%. The
price of natural gas in the United Kingdom has declined as a result of increased
production and availability of liquefied natural gas in the global market due to
higher gas exports from exporting nations, including the United States .
Natural gas costs in cost of sales, including the impact of realized natural gas
derivatives, was $2.74 per MMBtu in 2019, a 13% decrease from $3.16 per MMBtu in
2018, which resulted in an increase in gross margin of approximately
$153 million .
Other Items Affecting Comparability of Results
During the years ended December 31, 2019 and 2018, certain items impacted our
financial results. The following table and related discussion outline these
items and how they impacted the comparability of our financial results during
these periods. Positive amounts in the table below are costs or expenses
incurred, while negative amounts are income recognized in the periods presented.
2019 2018
Pre-Tax After-Tax(1) Pre-Tax After-Tax(1)
(in millions)
Unrealized net mark-to-market loss (gain) on
natural gas derivatives(2) $ 14 $ 10 $ (13 ) $ (10 )
Gain on foreign currency transactions including
intercompany loans(3) (1 ) (1 ) (5 ) (4 )
Gain on sale of Pine Bend facility(3) (45 ) (34 ) - -
Insurance proceeds(3) (37 ) (28 ) (10 ) (8 )
Losses on debt extinguishment 21 16 - -
Income taxes:
Settlement of Terra Industries Inc. amended tax
returns(4) (5 ) (14 ) - -
Louisiana incentive tax credit(5) - (30 ) - -
Impact of U.S. Tax Cuts and Jobs Act(5) - - - 16
PLNL withholding tax charge(6) 16 16 - -
PLNL settlement income(6) - - (19 ) (19 )
______________________________________________________________________________
(1) The tax impact is calculated utilizing a marginal effective rate of 23.3% in
2019 and 22.9% in 2018.
(2) Included in cost of sales in our consolidated statements of operations.
(3) Included in other operating-net in our consolidated statements of operations.
(4) Included in interest income and income tax provision (benefit) in our
consolidated statement of operations.
(5) Included in income tax provision (benefit) in our consolidated statement of
operations.
(6) Included in equity in (loss) earnings of operating affiliates in our
consolidated statements of operations.
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CF INDUSTRIES HOLDINGS, INC.
The following describes the significant items that impacted the comparability of
our financial results in 2019 and 2018. Descriptions of items below that refer
to amounts in the table above, refer to the pre-tax amounts, except for the
discussion under Income taxes.
Unrealized net mark-to-market loss (gain) 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 is reflected in cost of sales in
our consolidated statements of operations. In 2019 and 2018, we recognized an
unrealized net mark-to-market loss (gain) on natural gas derivatives of
$14 million and $(13) million , respectively.
Gain on foreign currency transactions including intercompany loans
In 2019 and 2018, we recognized gains of $1 million and $5 million ,
respectively, from the impact of changes in foreign currency exchange rates on
primarily Canadian dollar and British pound denominated intercompany loans that
were not permanently invested.
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 in Minnesota . In April of 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.
Insurance proceeds
In 2019 and 2018, we recognized income of $37 million and $10 million ,
respectively, related to insurance claims at one of our nitrogen complexes. The
$37 million of income in 2019 consists of $22 million related to business
interruption insurance proceeds and $15 million related to property insurance
proceeds. The $10 million of income in 2018 is related to property insurance
proceeds. These proceeds are reflected in other operating-net in our
consolidated statements of operations.
Losses on debt extinguishment
On November 13, 2019 , we redeemed all of the $500 million outstanding principal
amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance
with the optional redemption provisions provided in the indenture governing the
2020 Notes. On December 13, 2019 , we redeemed $250 million principal amount,
representing 50% of the $500 million outstanding principal amount, of the 3.400%
senior secured notes due December 2021 (the 2021 Notes), in accordance with the
optional redemption provisions provided in the indenture governing the 2021
Notes. As a result of the early redemption of the 2020 Notes and the 2021 Notes,
we recognized a loss on debt extinguishment of $21 million , of which $12 million
related to the 2020 Notes and $9 million related to the 2021 Notes.
Income taxes
• As more fully described under "Liquidity and Capital Resources-Settlement
of Terra Amended Tax Returns," below, during the fourth quarter of 2019,
the
approved the
refund claim pertaining to certain amended tax returns related to Terra
tax returns to correct the manner in which Terra reported the repatriation
of foreign earnings during years back to 1999. As a result of the approval
by
interest income of
income tax expense of
certain uncertain tax positions. We expect to receive a cash refund of
approximately $57 million in the first half of 2020 related to this
matter.
• For 2019, our income tax provision includes an incentive tax credit from
the
to certain capital projects at our
• On
Act (the "Tax Act" or "Tax Reform") which included a number of changes to
the reduction of the U.S. statutory corporate tax rate from 35% to 21%.
This change necessitated the revaluation of all of
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CF INDUSTRIES HOLDINGS, INC.
our U.S. deferred tax balances, which resulted in an income tax benefit of $552
million that was recorded in 2017. In addition, Tax Reform required us to pay
U.S. tax on our previously untaxed foreign earnings. Foreign earnings held in
the form of cash and cash equivalents are taxed at a 15.5% rate, and the
remaining earnings are taxed at an 8% rate. We elected to pay the transition tax
in installments through 2025. As a result, we recognized a provisional charge
and liability of $57 million in 2017. A $16 million increase to the provisional
amount of the transition tax liability was recorded in 2018.
PLNL withholding tax charge
The Trinidadian tax authority (the Board of Inland Revenue ) issued a proposed
tax assessment against PLNL, our joint venture in the Republic of Trinidad and
Tobago , with respect to tax years 2011 and 2012 in the amount of approximately
$12 million . The proposed assessment asserted that PLNL should have withheld tax
at a higher rate on dividends paid to its Trinidadian owners. The Board of
Inland Revenue also would have assessed statutory interest and penalties on the
amount of tax owed when a final assessment was issued for the tax years 2011 and
2012. As we own a 50% interest in PLNL, our effective share of any assessment
that is determined to be a liability of PLNL would be 50%, which would be
reflected as a reduction in our equity in earnings of PLNL.
During the third quarter of 2019, the Trinidadian government offered a tax
amnesty period that provided taxpayers the opportunity to pay any prior year tax
obligations and avoid accumulated interest or penalties. During the tax amnesty
period, PLNL evaluated the proposed assessment, including considering the
outcome of certain recent legal cases involving other taxpayers. As a result of
this evaluation, PLNL paid withholding tax to the Board of Inland Revenue under
the amnesty program for tax years 2011 to the current period, and recognized a
charge for $32 million in the third quarter of 2019. Our 50% share of PLNL's tax
charge is $16 million , which reduced our equity in earnings of operating
affiliates for 2019.
PLNL settlement income
PLNL operates an ammonia plant that relies on natural gas supplied, under a Gas
Sales Contract (the NGC Contract), by The National Gas Company of Trinidad and
Tobago Limited (NGC). PLNL experienced past curtailments in the supply of
natural gas, which reduced historical ammonia production at PLNL. The NGC
Contract had an initial expiration date of September 2018 and was extended on
the same terms until September 2023 . Any NGC commitment to supply gas beyond
2023 will be based on new agreements. In May 2018 , the NGC and PLNL reached a
settlement of an arbitration proceeding regarding PLNL's claims for damages due
to natural gas supply curtailments. The net after-tax impact of the settlement
reached between NGC and PLNL that is recognized in our consolidated statement of
operations for 2018 was an increase in our equity in earnings of operating
affiliates of approximately $19 million .
Financial Executive Summary
We reported net earnings attributable to common stockholders of $493 million in
2019 compared to $290 million in 2018, an increase in net earnings of 70%, or
$203 million . Diluted net earnings per share attributable to common stockholders
was $2.23 in 2019 compared to $1.24 in 2018, an increase of 80%, or $0.99 per
share. The increase in net earnings of $203 million was due primarily to the
following:
• Gross margin increased by $257 million , or 28%, in 2019 to $1.17 billion as compared to
primarily driven by a 13% decrease in natural gas costs, a 3% increase in
average selling prices and a 1% increase in sales volume. These increases
were partially offset by higher costs related to maintenance activity, the
impact of an unrealized net mark-to-market loss on natural gas derivatives
in 2019 compared to a gain in 2018 and higher shipping and distribution
costs.
• Other operating-net was $73 million of income in 2019 compared to $27
million of income in 2018, or an increase in income of $46 million . The
increase was due primarily to a $45 million gain on the sale of our Pine
Bend dry bulk storage and logistics facility and
proceeds related to an insurance claim at one of our nitrogen complexes.
Both of these items are more fully described above under "Items Affecting
Comparability of Results."
• Equity in earnings of operating affiliate represents the results of our
50% interest in PLNL. Equity in earnings decreased
of
significant events that impacted PLNL's results. The loss in 2019 includes
a
million of income pertaining to a settlement over the supply of natural
gas. These events are more fully described above under "Items Affecting
Comparability of Results."
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CF INDUSTRIES HOLDINGS, INC. • In 2019, we recognized
of debt as we redeemed all of the $500 million outstanding principal
amount of the 2020 Notes in November 2019 and $250 million principal
amount of the $500 million outstanding principal amount of the 2021 Notes
in December 2019 .
• Net interest expense decreased by
income related to the settlement of the Terra amended tax returns, which
is more fully described under "Liquidity and Capital Resources-Settlement
of Terra Amended Tax Returns," below. In addition, the decrease reflects
our redemption in
principal amount of the 2020 Notes and the partial redemption in December
2019 of
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). Under the 2019 Share Repurchase Program, in 2019, we repurchased a total of 7.6 million shares for$337 million . In the second half of 2018, we repurchased 10.9 million shares for$500 million under the previous 2018 Share Repurchase Program. See discussion under "Liquidity and Capital Resources-Share Repurchase Programs," below, for further information. 38
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CF INDUSTRIES HOLDINGS, INC. Results of Consolidated Operations The following table presents our consolidated results of operations and supplemental data:
Year ended December 31,
2019 2018 2017(1) 2019 v. 2018 2018 v. 2017
(in millions, except as noted)
Net sales $ 4,590 $ 4,429 $ 4,130 $ 161 4 % $ 299 7 %
Cost of sales (COS) 3,416 3,512 3,696 (96 ) (3 )% (184 ) (5 )%
Gross margin 1,174 917 434 257 28 % 483 111 %
Gross margin percentage 25.6 % 20.7 % 10.5 % 4.9 % 10.2 %
Selling, general and
administrative expenses 239 214 191 25 12 % 23 12 %
Other operating-net (73 ) (27 ) 18 (46 ) (170 )% (45 ) N/M
Total other operating costs and
expenses 166 187 209 (21 ) (11 )% (22 ) (11 )%
Equity in (loss) earnings of
operating affiliates (5 ) 36 9 (41 ) N/M 27 N/M
Operating earnings 1,003 766 234 237 31 % 532 N/M
Interest expense-net 217 228 303 (11 ) (5 )% (75 ) (25 )%
Loss on debt extinguishment 21 - 53 21 N/M (53 ) (100 )%
Other non-operating-net (7 ) (9 ) 3 2 22 % (12 ) N/M
Earnings (loss) before income
taxes 772 547 (125 ) 225 41 % 672 N/M
Income tax provision (benefit) 126 119 (575 ) 7 6 % 694 N/M
Net earnings 646 428 450 218 51 % (22 ) (5 )%
Less: Net earnings attributable
to noncontrolling interests 153 138 92 15 11 % 46 50 %
Net earnings attributable to
common stockholders $ 493 $ 290 $ 358 $ 203 70 % $ (68 ) (19 )%
Diluted net earnings per share
attributable to common
stockholders $ 2.23 $ 1.24 $ 1.53 $ 0.99 80 % $ (0.29 ) (19 )%
Diluted weighted-average common
shares outstanding 221.6 233.8 233.9 (12.2 ) (5 )% (0.1 ) - %
Dividends declared per common
share $ 1.20 $ 1.20 $ 1.20 $ - - % $ - - %
Natural gas supplemental data
(per MMBtu)
Natural gas costs in COS(2) $ 2.75 $ 3.15 $ 3.33 $ (0.40 ) (13 )% $ (0.18 ) (5 )%
Realized derivatives (gain) loss
in COS(3) (0.01 ) 0.01 0.07 (0.02 ) N/M (0.06 ) (86 )%
Cost of natural gas in COS $ 2.74 $ 3.16 $ 3.40 $ (0.42 ) (13 )% $ (0.24 ) (7 )%
Average daily market price of
natural gas Henry Hub
(Louisiana) $ 2.51 $ 3.12 $ 2.96 $ (0.61 ) (20 )% $ 0.16 5 %
Average daily market price of
natural gas National Balancing
Point (UK) $ 4.44 $ 8.07 $ 5.80 $ (3.63 ) (45 )% $ 2.27 39 %
Unrealized net mark-to-market
loss (gain) on natural gas
derivatives $ 14 $ (13 ) $ 61 $ 27 N/M $ (74 ) N/M
Depreciation and amortization $ 875 $ 888 $ 883 $ (13 ) (1 )% $ 5 1 %
Capital expenditures $ 404 $ 422 $ 473 $ (18 ) (4 )% $ (51 ) (11 )%
Sales volume by product tons
(000s) 19,538 19,329 19,952 209 1 % (623 ) (3 )%
Production volume by product
tons (000s):
Ammonia(4) 10,246 9,805 10,295 441 4 % (490 ) (5 )%
Granular urea 4,941 4,837 4,451 104 2 % 386 9 %
UAN (32%) 6,768 6,903 6,914 (135 ) (2 )% (11 ) - %
AN 2,128 1,731 2,127 397 23 % (396 ) (19 )%
______________________________________________________________________________
N/M-Not Meaningful
(1) For a discussion and analysis of the year ended
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations in our 2018 Annual Report on Form 10-K filed with the
(2) Includes the cost of natural gas and related transportation that is included
in cost of sales during the period under the first-in, first-out inventory
cost method.
(3) Includes realized gains and losses on natural gas derivatives settled during
the period. Excludes unrealized mark-to-market gains and losses on natural
gas derivatives.
(4) Gross ammonia production, including amounts subsequently upgraded on-site
into granular urea, UAN, or AN.
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CF INDUSTRIES HOLDINGS, INC.
The following is a discussion and analysis of our consolidated results of
operations for the year ended December 31, 2019 compared to the year ended
December 31, 2018 . For a discussion and analysis of our consolidated results of
operations for the year ended December 31, 2018 compared to the year ended
December 31, 2017 , see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed
with the SEC on February 22, 2019 .
Net Sales
Our net sales are derived primarily from the sale of nitrogen fertilizers and
are determined by the quantities of fertilizers we sell and the selling prices
we realize. The volumes, mix and selling prices we realize are determined to a
great extent by a combination of global and regional supply and demand factors.
Net sales also include shipping and handling costs that are billed to our
customers. Sales incentives are reported as a reduction in net sales.
Our total net sales increased $161 million , or 4%, to $4.59 billion in 2019
compared to $4.43 billion in 2018 due to a 1% increase in sales volume, which
increased net sales by $99 million , and a 3% increase in average selling prices,
which increased net sales by $62 million .
Average selling prices were $235 per ton in 2019 compared to $229 per ton in
2018, an increase of 3%, due primarily to higher average selling prices in our
UAN, granular urea and AN segments, partially offset by lower average selling
prices in our ammonia and Other segments. The increase in average selling prices
was driven by the impact of a tighter global nitrogen supply and demand balance.
The increase in total sales volume of 1% was due primarily to higher sales
volumes in our ammonia, AN and Other segments, partially offset by lower sales
volumes in our UAN and granular urea segments.
Cost of Sales
Our cost of sales includes manufacturing costs, purchased product costs, and
distribution costs. Manufacturing costs, the most significant element of cost of
sales, consist primarily of raw materials, realized and unrealized gains and
losses on natural gas derivative instruments, maintenance, direct labor,
depreciation and other plant overhead expenses. Purchased product costs
primarily include the cost to purchase nitrogen fertilizers to augment or
replace production at our facilities. Distribution costs include the cost of
freight required to transport finished products from our plants to our
distribution facilities and storage costs incurred prior to final shipment to
customers.
Our cost of sales decreased $96 million , or 3%, in 2019 from 2018. The decrease
in our cost of sales was due primarily to the impact of lower realized natural
gas costs, partially offset by higher costs related to maintenance activity,
higher distribution costs and an unrealized net mark-to-market loss on natural
gas derivatives of $14 million in 2019 compared to an unrealized net
mark-to-market gain of $13 million in 2018. The cost of sales per ton averaged
$175 in 2019, a 4% decrease from $182 per ton in 2018. Realized natural gas
costs, including the impact of realized derivatives, decreased 13% to $2.74 per
MMBtu in 2019 from $3.16 per MMBtu in 2018.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of corporate
office expenses such as salaries and other payroll-related costs for our
executive, administrative, legal, financial and marketing functions, as well as
certain taxes and insurance and other professional service fees, including those
for corporate initiatives.
Selling, general and administrative expenses increased $25 million to $239
million in 2019 from $214 million in 2018. The increase was due primarily to
costs related to certain corporate office initiatives and certain equity award
modifications.
Other Operating-Net
Other operating-net includes administrative costs that do not relate directly to
our central operations. Costs included in "other operating costs" can include
foreign exchange gains and losses, unrealized gains and losses on foreign
currency derivatives, costs associated with our closed facilities, amounts
recorded for environmental remediation for other areas of our business,
litigation expenses and gains and losses on the disposal of fixed assets.
Other operating-net was $73 million of income in 2019 compared to $27 million of
income in 2018. The income in 2019 was due primarily to the $45 million pre-tax
gain recognized on the sale of the Pine Bend facility and insurance proceeds of
$37 million . See "Items Affecting Comparability of Results-Gain on sale of Pine
Bend facility and -Insurance proceeds," above, for additional information. The
income in 2018 was due primarily to the combination of changes in legal
reserves, insurance proceeds of $10 million and a gain of $6 million from the
recovery of certain precious metals used in the manufacturing process.
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CF INDUSTRIES HOLDINGS, INC.
Equity in (Loss) Earnings of Operating Affiliates
Equity in (loss) earnings of operating affiliates primarily consists of our 50%
ownership interest in PLNL. We include our share of the net earnings from our
equity method investment in PLNL as an element of earnings from operations
because this investment provides additional production and is integrated with
our other supply chain and sales activities. Our share of the net earnings
includes the amortization of certain tangible and intangible assets identified
as part of the application of purchase accounting at acquisition.
Equity in (loss) earnings of operating affiliates was $5 million of losses in
2019 compared to $36 million of earnings in 2018. The loss in 2019 includes
approximately $16 million related to a withholding tax charge recognized by PLNL
regarding a multi-year tax dispute. See "Items Affecting Comparability of
Results-PLNL withholding tax charge," above, for additional information.
Earnings in 2018 includes approximately $19 million related to the net after-tax
impact of a settlement reached between NGC and PLNL of an arbitration proceeding
regarding PLNL's claims for damages due to historical natural gas supply
curtailments. See "Items Affecting Comparability of Results-PLNL settlement
income," above, for additional information.
Interest Expense-Net
Our interest expense-net includes the interest expense on our long-term debt,
amortization of the related fees required to execute financing agreements,
annual fees pursuant to our Revolving Credit Agreement and interest on tax
liabilities. Capitalized interest relating to the construction of major capital
projects reduces interest expense as the interest is capitalized and amortized
over the estimated useful lives of the facility along with all other
construction costs. Interest expense-net also includes interest income, which
includes amounts earned on our cash, cash equivalents and investments.
Net interest expense decreased by $11 million to $217 million in 2019 from $228
million in 2018. The decrease was due to $5 million of interest income related
to the settlement of the Terra amended tax returns, which is more fully
described under "Liquidity and Capital Resources-Settlement of Terra Amended Tax
Returns," below. In addition, the decrease reflects our redemption in November
2019 of all of the $500 million outstanding principal amount of the 2020 Notes
and the partial redemption in December 2019 of $250 million principal amount of
the 2021 Notes.
Losses on Debt Extinguishment
On November 13, 2019 , we redeemed all of the $500 million outstanding principal
amount of the 2020 Notes, in accordance with the optional redemption provisions
provided in the indenture governing the 2020 Notes. On December 13, 2019 , we
redeemed $250 million principal amount, representing 50% of the outstanding
principal amount, of the 2021 Notes, in accordance with the optional redemption
provisions provided in the indenture governing the 2021 Notes. As a result of
the early redemption of the 2020 Notes and the 2021 Notes, we recognized a loss
on debt extinguishment of $21 million , of which $12 million related to the 2020
Notes and $9 million related to the 2021 Notes.
Income Tax Provision
Our income tax provision for 2019 was $126 million on pre-tax income of $772
million , or an effective tax rate of 16.3% compared to an income tax provision
of $119 million on pre-tax income of $547 million , or an effective tax rate of
21.7% in 2018.
Our effective tax rate is impacted by earnings attributable to the
noncontrolling interest in CFN, and in the first quarter of 2018 by earnings
attributable to the noncontrolling interests in TNCLP, as our consolidated
income tax provision does not include a tax provision on the earnings
attributable to the noncontrolling interests. Our effective tax rate for 2019 of
16.3%, which is based on pre-tax income of $772 million , would be 20.3%
exclusive of the earnings attributable to the noncontrolling interest of $153
million . Our effective tax rate for 2018 of 21.7%, which is based on pre-tax
income of $547 million , would be 29.1% exclusive of the earnings attributable to
the noncontrolling interests of $138 million .
For 2019, our income tax provision includes 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, and an income tax
benefit of $10 million related to the favorable settlement of certain uncertain
tax positions related to the Terra amended tax returns, which is more fully
described under "Liquidity and Capital Resources-Settlement of Terra Amended Tax
Returns," below.
Our effective tax rate for 2018 was impacted by a $16 million increase to the
provisional amount recorded in 2017 for the transition tax liability as result
of the enactment of the Tax Act.
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On April 2, 2018 , we acquired the TNCLP Public Units. Our effective tax rate in
2018 was impacted by a $16 million reduction to our deferred tax liability due
to the change in our effective state income tax rate resulting from the
implementation of legal entity structure changes related to the acquisition.
Both 2019 and 2018 were impacted by additional discrete tax items. See Note
10-Income Taxes for additional information.
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests includes the net earnings
attributable to the approximately 11% CHS minority equity interest in CFN, a
subsidiary of CF Holdings . Prior to April 2, 2018 , net earnings attributable to
noncontrolling interests also included the net earnings attributable to the
24.7% interest of the publicly held common units of TNCLP. Beginning in the
second quarter of 2018, as a result of the April 2, 2018 acquisition of the
TNCLP Public Units, there are no longer earnings attributable to noncontrolling
interests in TNCLP.
Net earnings attributable to noncontrolling interests increased $15 million in
2019 compared to 2018 due to higher earnings from CFN driven by higher average
selling prices due to the impact of a tighter global nitrogen supply and demand
balance and lower realized natural gas costs, partially offset by the reduction
in noncontrolling interests due to the April 2, 2018 purchase of the
noncontrolling interests in TNCLP. In 2018, earnings attributable to
noncontrolling interests in TNCLP was $8 million .
Diluted Net Earnings Per Share Attributable to Common Stockholders
Diluted net earnings per share attributable to common stockholders increased
$0.99 to $2.23 per share in 2019 from $1.24 per share in 2018. This increase is
due primarily to higher gross margin primarily driven by lower realized natural
gas costs, higher average selling prices due to the impact of a tighter global
nitrogen supply and demand balance, higher sales volume, and a 5% reduction in
diluted weighted-average common shares outstanding due to repurchases made under
our share repurchase programs.
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Operating Results by Business Segment
Our reportable segment structure reflects how our chief operating decision
maker, as defined in the accounting principles generally accepted in the United
States (U.S. GAAP), assesses the performance of our reportable segments and
makes decisions about resource allocation. 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.
The following table presents summary operating results by business segment:
Granular
Ammonia Urea(1) UAN(1) AN(1) Other(1) Consolidated
(in millions)
Year ended December 31, 2019
Net sales $ 1,113 $ 1,342 $ 1,270 $ 506 $ 359 $ 4,590
Cost of sales 878 861 981 399 297 3,416
Gross margin $ 235 $ 481 $ 289 $ 107 $ 62 $ 1,174
Gross margin percentage 21.1 % 35.8 % 22.8 % 21.1 % 17.3 % 25.6 %
Year ended December 31, 2018
Net sales $ 1,028 $ 1,322 $ 1,234 $ 460 $ 385 $ 4,429
Cost of sales 867 889 1,007 414 335 3,512
Gross margin $ 161 $ 433 $ 227 $ 46 $ 50 $ 917
Gross margin percentage 15.7 % 32.8 % 18.4 % 10.0 % 13.0 % 20.7 %
Year ended December 31, 2017
Net sales $ 1,209 $ 971 $ 1,134 $ 497 $ 319 $ 4,130
Cost of sales 1,070 855 1,053 446 272 3,696
Gross margin $ 139 $ 116 $ 81 $ 51 $ 47 $ 434
Gross margin percentage 11.5 % 11.9 % 7.1 % 10.3 % 14.7 % 10.5 %
_______________________________________________________________________________
(1) The cost of ammonia that is upgraded into other products is transferred at
cost into the upgraded product results.
The following is a discussion and analysis of our operating results by business segment for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . For a discussion and analysis of our operating results by business segment for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed with theSEC onFebruary 22, 2019 . 43
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CF INDUSTRIES HOLDINGS, INC.
Ammonia Segment
Our ammonia segment produces anhydrous ammonia (ammonia), which is our most
concentrated nitrogen fertilizer as it contains 82% nitrogen. The results of our
ammonia segment consist of sales of ammonia to external customers. In addition,
ammonia is the "basic" nitrogen product that we upgrade into other nitrogen
products such as granular urea, UAN and AN. We produce ammonia at all of our
nitrogen manufacturing complexes.
The following table presents summary operating data for our ammonia segment:
Year ended December 31,
2019 2018 2017 2019 v. 2018 2018 v. 2017
(in millions, except as noted)
Net sales $ 1,113 $ 1,028 $ 1,209 $ 85 8 % $ (181 ) (15 )%
Cost of sales 878 867 1,070 11 1 % (203 ) (19 )%
Gross margin $ 235 $ 161 $ 139 $ 74 46 % $ 22 16 %
Gross margin percentage 21.1 % 15.7 % 11.5 % 5.4 % 4.2 %
Sales volume by product
tons (000s) 3,516 3,135 4,105 381 12 % (970 ) (24 )%
Sales volume by nutrient
tons (000s)(1) 2,884 2,571 3,367 313 12 % (796 ) (24 )%
Average selling price
per product ton $ 317 $ 328 $ 295 $ (11 ) (3 )% $ 33 11 %
Average selling price
per nutrient ton(1) $ 386 $ 400 $ 359 $ (14 ) (4 )% $ 41 11 %
Gross margin per product
ton $ 67 $ 51 $ 34 $ 16 31 % $ 17 50 %
Gross margin per
nutrient ton(1) $ 81 $ 63 $ 41 $ 18 29 % $ 22 54 %
Depreciation and
amortization $ 167 $ 155 $ 183 $ 12 8 % $ (28 ) (15 )%
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ 4 $ (4 ) $ 20 $ 8 N/M $ (24 ) N/M
_______________________________________________________________________________
N/M-Not Meaningful (1) Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of
nitrogen within the product tons.
Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net Sales . Net sales in the ammonia segment increased by$85 million , or 8%, to$1.11 billion in 2019 from$1.03 billion in 2018 due primarily to a 12% increase in sales volume, partially offset by a 3% decrease in average selling prices. Sales volume was higher in 2019 due to greater supply availability due to increased production. The decrease in average selling prices was due to increased global supply as a result of higher global operating rates driven by lower global energy prices. Cost of Sales. Cost of sales in our ammonia segment averaged$250 per ton in 2019, a 10% decrease from$277 per ton in 2018 due primarily to the impact of lower realized natural gas costs and lower costs associated with plant turnaround and maintenance activity, partially offset by the impact of a$4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a$4 million gain in 2018. Gross Margin. Gross margin in our ammonia segment increased by$74 million to$235 million in 2019 from$161 million in 2018, and our gross margin percentage was 21.1% in 2019 compared to 15.7% in 2018. The increase in gross margin was due to a 12% increase in sales volume, which increased gross margin by$60 million , a decrease in realized natural gas costs, which increased gross margin by$33 million , and a$31 million decrease in other manufacturing and distribution costs. These factors were partially offset by a 3% decrease in average selling prices, which reduced gross margin by$42 million , and the impact of a$4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a$4 million gain in 2018. 44
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CF INDUSTRIES HOLDINGS, INC.
Granular Urea Segment
Our granular urea segment produces granular urea, which contains 46% nitrogen.
Produced from ammonia and carbon dioxide, it has the highest nitrogen content of
any of our solid nitrogen fertilizers. Granular urea is produced at our
Donaldsonville, Louisiana ; Medicine Hat, Alberta ; and Port Neal, Iowa nitrogen
complexes.
The following table presents summary operating data for our granular urea
segment:
Year ended December 31,
2019 2018 2017 2019 v. 2018 2018 v. 2017
(in millions, except as noted)
Net sales $ 1,342 $ 1,322 $ 971 $ 20 2 % $ 351 36 %
Cost of sales 861 889 855 (28 ) (3 )% 34 4 %
Gross margin $ 481 $ 433 $ 116 $ 48 11 % $ 317 N/M
Gross margin percentage 35.8 % 32.8 % 11.9 % 3.0 % 20.9 %
Sales volume by product
tons (000s) 4,849 4,898 4,357 (49 ) (1 )% 541 12 %
Sales volume by nutrient
tons (000s)(1) 2,231 2,253 2,004 (22 ) (1 )% 249 12 %
Average selling price
per product ton $ 277 $ 270 $ 223 $ 7 3 % $ 47 21 %
Average selling price
per nutrient ton(1) $ 602 $ 587 $ 485 $ 15 3 % $ 102 21 %
Gross margin per product
ton $ 99 $ 88 $ 27 $ 11 13 % $ 61 N/M
Gross margin per
nutrient ton(1) $ 216 $ 192 $ 58 $ 24 13 % $ 134 N/M
Depreciation and
amortization $ 264 $ 276 $ 246 $ (12 ) (4 )% $ 30 12 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ 4 $ (4 ) $ 16 $ 8 N/M $ (20 ) N/M
______________________________________________________________________________
N/M-Not Meaningful (1) Granular urea represents 46% nitrogen content. Nutrient tons represent the
tons of nitrogen within the product tons.
Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net Sales . Net sales in the granular urea segment increased$20 million , or 2%, to$1.34 billion in 2019 compared to$1.32 billion in 2018 due primarily to a 3% increase in average selling prices, partially offset by a 1% decrease in sales volume. Average selling prices increased to$277 per ton in 2019 compared to$270 per ton in 2018. The increase was due primarily to the impact of a tighter global nitrogen supply and demand balance and the impact high water levels and flooding had on the shipping and logistics on inland rivers, including limiting access to theU.S. Gulf for imports, during the spring application season. Cost of Sales. Cost of sales in our granular urea segment averaged$178 per ton in 2019, a 2% decrease from$182 per ton in 2018. The decrease was due primarily to lower realized natural gas costs, partially offset by the impact of a$4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a$4 million gain in 2018. Gross Margin. Gross margin in our granular urea segment increased by$48 million to$481 million in 2019 from$433 million in 2018, and our gross margin percentage was 35.8% in 2019 compared to 32.8% in 2018. The increase in gross margin was due to a 3% increase in average selling prices, which increased gross margin by$38 million , a decrease in realized natural gas costs, which increased gross margin by$21 million , and a$12 million decrease in other manufacturing and distribution costs. These factors were partially offset by a 1% decrease in sales volume, which reduced gross margin by$15 million , and the impact of a$4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a$4 million gain in 2018. 45
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CF INDUSTRIES HOLDINGS, INC.
UAN Segment
Our UAN segment produces urea ammonium nitrate solution (UAN). UAN, a liquid
fertilizer product with a nitrogen content that typically ranges from 28% to
32%, is produced by combining urea and ammonium nitrate. UAN is produced at our
nitrogen complexes in Courtright, Ontario ; Donaldsonville, Louisiana ; Port Neal,
Iowa ; Verdigris, Oklahoma ; Woodward, Oklahoma ; and Yazoo City, Mississippi .
The following table presents summary operating data for our UAN segment:
Year ended December 31,
2019 2018 2017 2019 v. 2018 2018 v. 2017
(in millions, except as noted)
Net sales $ 1,270 $ 1,234 $ 1,134 $ 36 3 % $ 100 9 %
Cost of sales 981 1,007 1,053 (26 ) (3 )% (46 ) (4 )%
Gross margin $ 289 $ 227 $ 81 $ 62 27 % $ 146 180 %
Gross margin percentage 22.8 % 18.4 % 7.1 % 4.4 % 11.3 %
Sales volume by product
tons (000s) 6,807 7,042 7,093 (235 ) (3 )% (51 ) (1 )%
Sales volume by nutrient
tons (000s)(1) 2,144 2,225 2,242 (81 ) (4 )% (17 ) (1 )%
Average selling price per
product ton $ 187 $ 175 $ 160 $ 12 7 % $ 15 9 %
Average selling price per
nutrient ton(1) $ 592 $ 555 $ 506 $ 37 7 % $ 49 10 %
Gross margin per product
ton $ 42 $ 32 $ 11 $ 10 31 % $ 21 191 %
Gross margin per nutrient
ton(1) $ 135 $ 102 $ 36 $ 33 32 % $ 66 183 %
Depreciation and
amortization $ 251 $ 270 $ 265 $ (19 ) (7 )% $ 5 2 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ 4 $ (4 ) $ 19 $ 8 N/M $ (23 ) N/M
______________________________________________________________________________
N/M-Not Meaningful (1) UAN represents between 28% and 32% of nitrogen content, depending on the
concentration specified by the customer. Nutrient tons represent the tons of
nitrogen within the product tons.
Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net Sales . Net sales in the UAN segment increased$36 million , or 3%, to$1.27 billion in 2019 compared to$1.23 billion in 2018 due primarily to a 7% increase in average selling prices, partially offset by a 3% decrease in sales volume. Average selling prices increased to$187 per ton in 2019 compared to$175 per ton in 2018, due primarily to the impact of a tighter global nitrogen supply and demand balance, the impact high water levels and flooding had on the shipping and logistics on inland rivers and an extended spring application season. The decrease in sales volume was due primarily to lower production due to higher granular urea production throughout most of 2019 and the impact of lower exports toEurope . InApril 2019 , theEuropean Commission (the Commission) published a regulation imposing provisional anti-dumping duties on imports to theEuropean Union of UAN manufactured inRussia , theRepublic of Trinidad and Tobago andthe United States . The regulation included a rate of 22.6% for the provisional anti-dumping duty applicable to imports of UAN manufactured inthe United States . InJuly 2019 , the Commission announced its intention to impose definitive anti-dumping measures in the form of fixed duty rates. For imports of UAN manufactured inthe United States , the fixed duty rate is €29.48 per metric ton (or €26.74 per ton). OnOctober 8, 2019 , the Commission confirmed this duty in a regulation imposing definitive measures, which became effective beginningOctober 9, 2019 for an initial five-year period, after which the measures may be renewed by the Commission. Cost of Sales. Cost of sales in our UAN segment averaged$145 per ton in 2019, a 1% increase from$143 per ton in 2018. The increase was due primarily to higher costs related to maintenance activity, higher shipping and distribution costs due to the mix of transportation modes and the impact of a$4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a$4 million gain in 2018, mostly offset by lower realized natural gas costs. Gross Margin. Gross margin in our UAN Segment increased by$62 million to$289 million in 2019 from$227 million in 2018, and our gross margin percentage was 22.8% in 2019 compared to 18.4% in 2018. The increase in gross margin was due to a 7% increase in average selling prices, which increased gross margin by$76 million , and a decrease in realized natural gas costs, which increased gross margin by$29 million . These factors were partially offset by a$24 million increase in other manufacturing and distribution costs and a 3% decrease in sales volume, which reduced gross margin by 46
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$11 million , and the impact of a $4 million unrealized net mark-to-market loss
on natural gas derivatives in 2019 compared to a $4 million gain in 2018.
AN Segment
Our AN segment produces ammonium nitrate (AN). AN, which has a nitrogen content
between 29% and 35%, is produced by combining anhydrous ammonia and nitric acid.
AN is used as nitrogen fertilizer and is also used by industrial customers for
commercial explosives and blasting systems. AN is produced at our nitrogen
complexes in Yazoo City, Mississippi and Ince and Billingham, United Kingdom .
The following table presents summary operating data for our AN segment:
Year ended December 31,
2019 2018 2017 2019 v. 2018 2018 v. 2017
(in millions, except as noted)
Net sales $ 506 $ 460 $ 497 $ 46 10 % $ (37 ) (7 )%
Cost of sales 399 414 446 (15 ) (4 )% (32 ) (7 )%
Gross margin $ 107 $ 46 $ 51 $ 61 133 % $ (5 ) (10 )%
Gross margin percentage 21.1 % 10.0 % 10.3 % 11.1 % (0.3 )%
Sales volume by product
tons (000s) 2,109 2,002 2,353 107 5 % (351 ) (15 )%
Sales volume by nutrient
tons (000s)(1) 708 676 793 32 5 % (117 ) (15 )%
Average selling price
per product ton $ 240 $ 230 $ 211 $ 10 4 % $ 19 9 %
Average selling price
per nutrient ton(1) $ 715 $ 680 $ 627 $ 35 5 % $ 53 8 %
Gross margin per product
ton $ 51 $ 23 $ 22 $ 28 122 % $ 1 5 %
Gross margin per
nutrient ton(1) $ 151 $ 68 $ 64 $ 83 122 % $ 4 6 %
Depreciation and
amortization $ 88 $ 85 $ 85 $ 3 4 % $ - - %
Unrealized net
mark-to-market loss on
natural gas derivatives $ 1 $ - $ 2 $ 1 N/M
_______________________________________________________________________________
N/M-Not Meaningful (1) Nutrient tons represent the tons of nitrogen within the product tons. Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net Sales . Net sales in our AN segment increased$46 million , or 10%, to$506 million in 2019 from$460 million in 2018 due primarily to a 5% increase in sales volume and a 4% increase in average selling prices. Sales volume increased due primarily to higher sales inNorth America as a result of strong demand. Average selling prices increased to$240 per ton in 2019 compared to$230 per ton in 2018 due primarily to the impact of a tighter global nitrogen supply and demand balance. Cost of Sales. Cost of sales in our AN segment averaged$189 per ton in 2019, a 9% decrease from$207 per ton in 2018. The decrease was due primarily to lower realized natural gas costs, partially offset by higher costs for turnaround and maintenance activity and the cost to purchase ammonia for upgrading to AN when certain ammonia plants were in turnaround. Gross Margin. Gross margin in our AN segment increased by$61 million to$107 million in 2019 from$46 million in 2018, and our gross margin percentage was 21.1% in 2019 compared to 10.0% in 2018. The increase in gross margin was due to a decrease in realized natural gas costs, which increased gross margin by$50 million , a 4% increase in average selling prices, which increased gross margin by$34 million , and a 5% increase in sales volume, which increased gross margin by$12 million . These factors were partially offset by a$35 million increase in other manufacturing and distribution costs. 47
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CF INDUSTRIES HOLDINGS, INC.
Other Segment
Our Other segment primarily includes the following products:
• Diesel exhaust fluid (DEF) is an aqueous urea solution typically made
with 32.5% or 50% high-purity urea and the remainder deionized water.
• Urea liquor is a liquid product that we sell in concentrations of 40%,
50% and 70% urea as a chemical intermediate.
• Nitric acid is a nitrogen-based industrial product.
• Compound fertilizer products (NPKs) are solid granular fertilizer
products for which the nutrient content is a combination of nitrogen,
phosphorus and potassium.
The following table presents summary operating data for our Other segment:
Year ended December 31,
2019 2018 2017 2019 v. 2018 2018 v. 2017
(in millions, except as noted)
Net sales $ 359 $ 385 $ 319 $ (26 ) (7 )% $ 66 21 %
Cost of sales 297 335 272 (38 ) (11 )% 63 23 %
Gross margin $ 62 $ 50 $ 47 $ 12 24 % $ 3 6 %
Gross margin percentage 17.3 % 13.0 % 14.7 % 4.3 % (1.7 )%
Sales volume by product
tons (000s) 2,257 2,252 2,044 5 - % 208 10 %
Sales volume by nutrient
tons (000s)(1) 444 439 397 5 1 % 42 11 %
Average selling price
per product ton $ 159 $ 171 $ 156 $ (12 ) (7 )% $ 15 10 %
Average selling price
per nutrient ton(1) $ 809 $ 877 $ 804 $ (68 ) (8 )% $ 73 9 %
Gross margin per product
ton $ 27 $ 22 $ 23 $ 5 23 % $ (1 ) (4 )%
Gross margin per
nutrient ton(1) $ 140 $ 114 $ 118 $ 26 23 % $ (4 ) (3 )%
Depreciation and
amortization $ 72 $ 67 $ 57 $ 5 7 % $ 10 18 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ 1 $ (1 ) $ 4 $ 2 N/M $ (5 ) N/M
_______________________________________________________________________________
N/M-Not Meaningful (1) Nutrient tons represent the tons of nitrogen within the product tons. Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net Sales . Net sales in our Other segment decreased$26 million , or 7%, to$359 million in 2019 from$385 million in 2018 due to a 7% decrease in average selling prices. The decrease in average selling prices is due primarily to the mix of products sold and increased global supply as a result of higher global operating rates driven by lower global energy prices. Cost of Sales. Cost of sales in our Other segment averaged$132 per ton in 2019, an 11% decrease from$149 per ton in 2018, due primarily to lower realized natural gas costs and lower costs associated with plant turnaround and maintenance activity. Gross Margin. Gross margin in our Other segment increased by$12 million to$62 million in 2019 from$50 million in 2018, and our gross margin percentage was 17.3% in 2019 compared to 13.0% in 2018. The increase in gross margin was due to a decrease in realized natural gas costs, which increased gross margin by$20 million , a$10 million decrease in other manufacturing and distribution costs, and a shift in the mix of products sold within the segment which increased gross margin by$5 million . These factors were partially offset by a 7% decrease in average selling prices, which reduced gross margin by$21 million , and the impact of a$1 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a$1 million gain in 2018. 48
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CF INDUSTRIES HOLDINGS, INC.
Liquidity and Capital Resources
Our primary uses of cash are generally for operating costs, working capital,
capital expenditures, debt service, investments, taxes, share repurchases and
dividends. Our working capital requirements are affected by several factors,
including demand for our products, selling prices, raw material costs, freight
costs and seasonal factors inherent in the business. In addition, we may from
time to time seek to retire or purchase our outstanding debt through cash
purchases, in open market or privately negotiated transactions or otherwise.
Such repurchases, if any, will depend on prevailing market conditions, our
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
Generally, our primary source of cash is cash from operations, which includes
cash generated by customer advances. We may also from time to time access the
capital markets or engage in borrowings under our revolving credit agreement.
We generated net cash from operating activities in 2019 of $1.51 billion . The
primary uses of our cash in 2019 were for the following items:
• On November 13, 2019 , we redeemed all of the $500 million outstanding
principal amount of the 7.125% senior notes due
in accordance with the optional redemption provisions provided in the
indenture governing the 2020 Notes. On
million principal amount, representing 50% of the outstanding principal
amount, of the 3.400% senior secured notes due 2021 (the 2021 Notes), in
accordance with the optional redemption provisions provided in the
indenture governing the 2021 Notes. The total amount paid for the
redemption of the 2020 Notes and the partial redemption of the 2021 Notes
was $769 million . See discussion under "Debt," below, for further
information.
• In 2019, we repurchased approximately 7.6 million shares of
common stock for
Programs," below, for further information.
• Capital expenditures were
stockholders were
interest were
AtDecember 31, 2019 , we were in compliance with all applicable covenant requirements under our revolving credit agreement, senior notes and senior secured notes. There were no borrowings outstanding under our revolving credit agreement as ofDecember 31, 2019 orDecember 31, 2018 , or during 2019 or 2018. See discussion under "Debt," below, for further information. Our cash and cash equivalents balance was$287 million atDecember 31, 2019 , a decrease of$395 million from$682 million atDecember 31, 2018 . Total long-term debt was$3,957 million as ofDecember 31, 2019 , a decrease of$741 million from$4,698 million atDecember 31, 2018 . Cash Equivalents Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less. 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 theU.S. and Canadian federal governments; those issued by state, local or other governmental entities; and those guaranteed by entities affiliated with governmental entities. Share Repurchase Programs OnAugust 1, 2018 , the Board authorized the repurchase of up to$500 million ofCF Holdings common stock throughJune 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 as ofDecember 31, 2018 and paid inJanuary 2019 . InFebruary 2019 , we retired all 10.9 million shares that were repurchased under the 2018 Share Repurchase Program. OnFebruary 13, 2019 , the Board authorized the repurchase of up to$1 billion ofCF Holdings common stock throughDecember 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. During the year endedDecember 31, 2019 , we repurchased approximately 7.6 million shares ofCF Holdings common stock for$337 million . In June and December of 2019, we retired approximately 4.2 million and 3.4 million shares, respectively, that were repurchased under the 2019 Share Repurchase Program. 49
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CF INDUSTRIES HOLDINGS, INC.
Capital Spending
We make capital expenditures to sustain our asset base, increase our capacity,
improve plant efficiency and comply with various environmental, health and
safety requirements. Capital expenditures were $404 million in 2019 compared to
$422 million in 2018.
Capital expenditures in 2020 are estimated to be in the range of $400 to $450
million . Planned capital expenditures are subject to change due to delays in
regulatory approvals or permitting, unanticipated increases in cost, changes in
scope and completion time, performance of third parties, delay in the receipt of
equipment, adverse weather, defects in materials and workmanship, labor or
material shortages, transportation constraints, acceleration or delays in the
timing of the work and other unforeseen difficulties.
Government Policies
The policies or laws of governments around the world can result in the
imposition of taxes, duties, tariffs or other restrictions or regulatory
requirements on imports and exports of raw materials, finished goods or services
from a particular country or region of the world. The policies and laws of
governments can also impact the subsidization of natural gas prices, and
subsidies or quotas applied to domestic producers or farmers. Due to the
critical role that fertilizers play in food production, the construction and
operation of fertilizer plants often are influenced by economic, political and
social objectives. Additionally, the import or export of fertilizer can be
subject to local taxes imposed by governments which can have the effect of
either encouraging or discouraging import and export activity. The impact of
changes in governmental policies or laws or the political or social objectives
of a country could have a material impact on fertilizer demand and selling
prices and therefore could impact our liquidity.
Ethanol Industry and the Renewable Fuel Standard
Corn used to produce ethanol accounts for approximately 38% of total U.S. corn
demand. U.S. government policy, as expressed in the Renewable Fuel Standard
(RFS), is a major determinant for the ethanol market. The RFS establishes
minimum volumes of various types of renewable fuels, including ethanol, that
must be included in the United States' supply of fuel for transportation. In
addition, the U.S. Congress , at various times, has proposed legislation to
either modify or eliminate the RFS. While past legislation proposing changes to
the RFS has not been enacted into law, there can be no assurance that future
legislation will not be enacted into law. Other factors that drive the ethanol
market include the prices of ethanol, gasoline and corn. Lower gasoline prices
and fewer aggregate miles, driven by increased automobile fuel efficiency, may
put pressure on ethanol prices that could result in reduced profitability and
lower production for the ethanol industry, which could impact the demand for
corn and nitrogen fertilizer and therefore could impact our liquidity.
Settlement of Terra Amended Tax Returns
The Company completed the acquisition of 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 IRS commenced an examination of the U.S. tax
aspects of the Amended Tax Returns. In 2017, the Company also made a Voluntary
Disclosure Filing with the Canadian Revenue Agency (CRA) with respect to the
Canadian tax aspects of this matter and paid additional Canadian taxes due.
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 .
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
expect to receive a cash refund in the first half of 2020 of approximately $57
million , including interest. As a result of the approval by the Joint Committee ,
the Company recognized in the fourth quarter of 2019 interest income of
$5 million ($4 million , net of tax) and a reduction in income tax expense of $10
million as a result of the favorable settlement of certain uncertain tax
positions.
The Joint Committee has not yet approved the IRS audit report relating to the
withholding tax matter. If this approval is received, we expect to receive an
additional tax refund of approximately $29 million , excluding related interest,
and record a reduction in income tax expense of approximately $12 million .
The Company previously recorded a tax receivable of CAD $27 million (or $21
million ) related to the Canadian tax aspects of this matter, which continues to
be under review by the CRA.
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As a result of the Joint Committee approval of the Amended Tax Returns, the IRS
has now completed their examination of the Company's U.S. income tax returns,
including all U.S. predecessor company returns, through 2011.
Repatriation of Foreign Earnings and Income Taxes
We have operations in Canada , the United Kingdom and a 50% interest in a joint
venture in the Republic of Trinidad and Tobago . Historically, the estimated
additional U.S. and foreign income taxes due upon repatriation of the earnings
of these foreign operations to the U.S. were recognized in our consolidated
financial statements as the earnings were recognized, unless the earnings were
considered to be permanently reinvested based upon our then current plans.
However, the cash payment of the income tax liabilities associated with
repatriation of earnings from foreign operations occurred at the time of the
repatriation. As a result, the recognition of income tax expense related to
foreign earnings, as applicable, and the payment of taxes resulting from
repatriation of those earnings could occur in different periods.
In light of changes made by the Tax Act, commencing with the 2018 tax year, the
United States no longer taxes earnings of foreign subsidiaries even when such
earnings are earned or repatriated to the United States , unless such earnings
are subject to U.S. rules on passive income or certain anti-abuse provisions.
Foreign subsidiary earnings may still be subject to withholding taxes when
repatriated to the United States .
Cash balances held by our joint venture are maintained at sufficient levels to
fund local operations as accumulated earnings are repatriated from the joint
venture on a periodic basis.
As of December 31, 2019 , approximately $42 million of our consolidated cash and
cash equivalents balance of $287 million was held by our Canadian and United
Kingdom subsidiaries. Historically, the cash balance held by the Canadian
subsidiaries represented accumulated earnings of our foreign operations that
were not considered to be permanently reinvested. As of December 31, 2019 , as a
result of the amounts accrued in the transition tax liability recorded in 2017
and 2018 as a result of the Tax Act, we would not expect any additional cash tax
cost to repatriate the Canadian and United Kingdom cash balances if we were to
repatriate this cash in the future, other than foreign withholding tax.
Net Operating Loss and Capital Loss Carryforwards
As of December 31, 2018 , we had net operating loss and capital loss
carryforwards (collectively, the Tax Loss Carryforwards) of $271 million . These
Tax Loss Carryforwards are available to reduce taxable income and thereby,
reduce cash taxes in the United States and other tax jurisdictions in which they
can be applied. As a result of the effective usage of certain of these Tax Loss
Carryforwards to offset current cash taxes payable, there are no U.S. federal
Tax Loss Carryforwards remaining as of December 31, 2019 . As a result, we expect
an increase in cash taxes in 2020, before taking into account income tax refunds
related to the settlement of the Terra Amended Tax Returns.
Debt
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. CF Industries , the lead borrower under the Revolving Credit
Agreement, may designate as additional borrowers one or more of its wholly owned
subsidiaries that are organized in the United States or any state thereof, or
the District of Columbia , England and Wales or any other jurisdiction as
mutually agreed to by all of the lenders party to the Revolving Credit
Agreement, the administrative agent under the Revolving Credit Agreement and CF
Industries .
Borrowings under the Revolving Credit Agreement may be denominated in U.S.
dollars, Canadian dollars, euro and British pounds, and bear interest at a per
annum rate equal to an applicable eurocurrency rate or base rate plus, in either
case, a specified margin, and the borrowers 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.
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The borrowers and guarantors under the Revolving Credit Agreement, which are
currently comprised of CF Holdings , CF Industries 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), are referred to together herein as the Loan Parties. Subject to
specified exceptions, the Revolving Credit Agreement requires that each direct
or indirect domestic subsidiary of CF Holdings that guarantees debt for borrowed
money of any Loan Party in excess of $150 million become a guarantor under the
Revolving Credit Agreement. Subject to specified exceptions, the Revolving
Credit Agreement requires a grant of a first priority security interest in
substantially all of the assets of the Loan Parties, including a pledge by CF
USA of its equity interests in CFN and mortgages over certain material fee-owned
domestic real properties, to secure the obligations of the Loan Parties
thereunder.
In addition to the obligations under the Revolving Credit Agreement, the Loan
Parties also guarantee the obligations under any (i) letter of credit
facilities, letter of credit reimbursement agreements, letters of credit,
letters of guaranty, surety bonds or similar arrangements, (ii) interest rate or
other hedging arrangements and (iii) agreements to provide Automated Clearing
House transactions, cash management services or foreign exchange facilities or
other cash management arrangements in the ordinary course of business, in each
case between CF Holdings or certain of its subsidiaries, on the one hand, and
any person that is a lender or the administrative agent under the Revolving
Credit Agreement or an affiliate of such person, on the other hand, that are
designated by CF Industries as Secured Bilateral LC Facilities, Secured Swap
Agreements or Secured Cash Management Agreements (each as defined in the
Revolving Credit Agreement), as applicable, pursuant to the terms of the
Revolving Credit Agreement. Obligations under Secured Bilateral LC Facilities,
Secured Swap Agreements and Secured Cash Management Agreements are secured by
the same security interest that secures the obligations under the Revolving
Credit Agreement.
At any time that (i) no default or event of default exists under the Revolving
Credit Agreement and related documentation and (ii) (a) CF Holdings attains an
investment-grade rating as set forth in the Revolving Credit Agreement; (b) CF
Industries' senior secured notes due 2021 and senior secured notes due 2026,
including all fees, expenses and other amounts due and payable thereunder, have
been paid or defeased or (c) CF Industries' senior secured notes due 2021 and
senior secured notes due 2026 cease to be secured by the assets of the Loan
Parties that secure obligations under the Revolving Credit Agreement, CF
Industries will have the right to require that (a) the security interest
securing obligations under the Revolving Credit Agreement be terminated and
released and (b) each guarantor under the Revolving Credit Agreement other than
CF Holdings be released from its obligations under the Revolving Credit
Agreement and related documentation.
The Revolving Credit Agreement contains representations and warranties and
affirmative and negative covenants customary for a financing of this type. The
financial covenants applicable to CF Holdings and its subsidiaries in the
Revolving Credit Agreement:
(i) require that the interest coverage ratio (as defined in the Revolving
Credit Agreement) be not less than 2.75:1.00 as of the last day of each
fiscal quarter and
(ii) require that the total net leverage ratio (as defined in the Revolving
Credit Agreement) be not greater than 3.75:1.00 (the Maximum Total Net
Leverage Ratio) as of the last day of each fiscal quarter, provided that,
if any borrower or subsidiary consummates a material acquisition during
any fiscal quarter,
Net Leverage Ratio to 4.25:1.00 for the period of four consecutive fiscal
quarters commencing with such fiscal quarter (and no further such election
may be made unless and until the Maximum Total Net Leverage Ratio is less
than or equal to 3.75:1.00 as of the end of two consecutive fiscal
quarters after the end of such period).
As ofDecember 31, 2019 , we were in compliance with all covenants under the Revolving Credit Agreement. The Revolving Credit Agreement contains events of default (with notice requirements and cure periods, as applicable) customary for a financing of this type, including, but not limited to, non-payment of principal, interest or fees; inaccuracy of representations and warranties in any material respect; and failure to comply with specified covenants. Upon the occurrence and during the continuance of an event of default under the Revolving Credit Agreement and after any applicable cure period, subject to specified exceptions, the administrative agent may, and at the request of the requisite lenders is required to, accelerate the loans under the Revolving Credit Agreement or terminate the lenders' commitments under the Revolving Credit Agreement. As ofDecember 31, 2019 , we had excess borrowing capacity under the Revolving Credit Agreement of$750 million and no outstanding letters of credit. In addition, there were no borrowings outstanding under the Revolving Credit Agreement as ofDecember 31, 2019 or during 2019, and there were no borrowings outstanding under the Prior Credit Agreement as ofDecember 31, 2018 or during 2019 or 2018. 52
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Letters of Credit
In addition to the letters of credit that may be issued under the Revolving
Credit Agreement, as described above, we have also entered into a bilateral
agreement with capacity to issue letters of credit up to $145 million
(reflecting an increase of $20 million in January 2019 ). As of December 31,
2019 , approximately $129 million of letters of credit were outstanding under
this agreement.
Senior Notes
Long-term debt presented on our consolidated balance sheets as of December 31,
2019 and 2018 consisted of the following debt securities issued by CF
Industries :
Effective December 31, 2019 December 31, 2018
Interest Principal Carrying Principal Carrying Amount
Rate Outstanding Amount (1) Outstanding (1)
(inmillions)
Public Senior Notes: 7.125% due May 2020 7.529% - - 500 497 3.450% due June 2023 3.562% 750 747 750 747 5.150% due March 2034 5.279% 750 740 750 740 4.950% due June 2043 5.031% 750 742 750 741 5.375% due March 2044 5.465% 750 741 750 741 Senior Secured Notes: 3.400% due December 2021 3.782% 250 248 500 495 4.500% due December 2026 4.759% 750 739 750 737 Total long-term debt $ 4,000 $ 3,957 $ 4,750 $ 4,698
_______________________________________________________________________________
(1) Carrying amount is net of unamortized debt discount and deferred debt
issuance costs. Total unamortized debt discount was $10 million and
$11 million as of December 31, 2019 and 2018, respectively, and total
deferred debt issuance costs were $33 million and $41 million as of
December 31, 2019 and 2018, respectively.
Public Senior Notes
On November 13, 2019 , we redeemed in full all of the $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. The total aggregate redemption price, excluding accrued interest
paid on the 2020 Notes in connection with the redemption, was approximately $512
million . As a result, we recognized a loss on debt extinguishment of $12
million , primarily consisting of premiums paid for the early retirement of debt
for the 2020 Notes.
Under the indentures (including the applicable supplemental indentures)
governing our 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 . From November 21, 2016 to November 13, 2019 , the
Public Senior Notes were guaranteed not only by CF Holdings , but also by certain
100% owned subsidiaries of CF Holdings . The guarantee of the Public Senior Notes
in the case of each of those subsidiaries was subject to automatic release upon
specified events, including the release of such subsidiary's guarantee of the
2020 Notes. On November 13, 2019 , as a result of the release of all subsidiary
guarantees of the 2020 Notes upon the retirement of, and satisfaction and
discharge of the indenture governing, the 2020 Notes, all subsidiary guarantees
of the Public Senior Notes were automatically released.
Interest on the Public Senior Notes is payable semiannually, and the Public
Senior 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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The indentures governing the Public Senior Notes contain covenants that limit,
among other things, the ability of CF Holdings and its subsidiaries, including
CF Industries , to incur liens on certain assets to secure debt, to engage in
sale and leaseback transactions, to merge or consolidate with other entities and
to sell, lease or transfer all or substantially all of the assets of CF Holdings
and its subsidiaries to another entity. Each of the indentures governing the
Public Senior Notes provides for customary events of default, which include
(subject in certain cases to customary grace and cure periods), among others,
nonpayment of principal or interest on the applicable Public Senior Notes;
failure to comply with other covenants or agreements under the indenture;
certain defaults on other indebtedness; the failure of CF Holdings' guarantee of
the applicable Public Senior Notes to be enforceable; and specified events of
bankruptcy or insolvency. Under each indenture governing the Public Senior
Notes, in the case of an event of default arising from one of the specified
events of bankruptcy or insolvency, the applicable Public Senior Notes would
become due and payable immediately, and, in the case of any other event of
default (other than an event of default related to CF Industries' and CF
Holdings' reporting obligations), the trustee or the holders of at least 25% in
aggregate principal amount of the applicable Public Senior Notes then
outstanding may declare all of such Public Senior Notes to be due and payable
immediately.
Under each of the indentures governing the Public Senior Notes, specified
changes of control involving CF Holdings or CF Industries , when accompanied by a
ratings downgrade, as defined with respect to the applicable series of Public
Senior Notes, constitute change of control repurchase events. Upon the
occurrence of a change of control repurchase event with respect to a series of
Public Senior Notes, unless CF Industries has exercised its option to redeem
such Public Senior Notes, CF Industries will be required to offer to repurchase
them at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to, but not including, the date of repurchase.
Senior Secured Notes
On November 21, 2016 , CF Industries issued $500 million aggregate principal
amount of 3.400% senior secured notes due 2021 (the 2021 Notes) and $750 million
aggregate principal amount of 4.500% senior secured notes due 2026 (the 2026
Notes, and together with the 2021 Notes, the Senior Secured Notes). On December
13, 2019 , we redeemed $250 million principal amount of the 2021 Notes in
accordance with the optional redemption provisions in the indenture governing
the 2021 Notes. The total aggregate redemption price, excluding accrued interest
paid on the 2021 Notes redeemed in connection with the redemption, was
approximately $257 million . As a result, we recognized a loss on debt
extinguishment of $9 million , primarily consisting of premiums paid for the
early retirement of debt for the 2021 Notes.
Interest on the Senior Secured Notes is payable semiannually, and the 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.
Under the terms of the applicable indenture, the Senior Secured Notes of each
series are 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 requirement for any
subsidiary of CF Holdings to guarantee the Senior Secured Notes of a series will
apply only until, and the subsidiary guarantees of the Senior Secured Notes of a
series will be automatically released upon, CF Holdings having an investment
grade corporate rating, with a stable or better outlook, from two of three
selected ratings agencies and there being no default or event of default under
the applicable indenture. The subsidiary guarantors of the Senior Secured Notes
currently consist of CFE, CFS, CF USA and CFIDF.
Subject to certain exceptions, the obligations under each series of Senior
Secured Notes and each guarantor's related guarantee are secured by a first
priority security interest in substantially all of the assets of CF Industries ,
CF Holdings and the subsidiary guarantors, including a pledge by CF USA of its
equity interests in CFN and mortgages over certain material fee-owned domestic
real properties (the Collateral). The obligations under the Revolving Credit
Agreement, together with certain letter of credit, cash management, hedging and
similar obligations and future pari passu secured indebtedness, are secured by
the Collateral on a pari passu basis with the Senior Secured Notes. The liens on
the Collateral securing the obligations under the Senior Secured Notes of a
series and the related guarantees will be automatically released and the
covenant under the applicable indenture limiting dispositions of Collateral will
no longer apply if CF Holdings has an investment grade corporate rating, with a
stable or better outlook, from two of three selected ratings agencies and there
is no default or event of default under the applicable indenture.
Under each of the indentures governing the Senior Secured Notes, specified
changes of control involving CF Holdings or CF Industries , when accompanied by a
ratings downgrade, as defined with respect to the applicable series of Senior
Secured Notes, constitute change of control repurchase events. Upon the
occurrence of a change of control repurchase event with respect to the 2021
Notes or the 2026 Notes, as applicable, unless CF Industries has exercised its
option to redeem such Senior Secured Notes, CF Industries will be required to
offer to repurchase them at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to, but not including, the
date of repurchase.
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The indentures governing the Senior Secured Notes contain covenants that limit,
among other things, the ability of CF Holdings and its subsidiaries, including
CF Industries , to incur liens on certain assets to secure debt, to engage in
sale and leaseback transactions, to sell or transfer Collateral, to merge or
consolidate with other entities and to sell, lease or transfer all or
substantially all of the assets of CF Holdings and its subsidiaries to another
entity. Each of the indentures governing the Senior Secured Notes provides for
customary events of default, which include (subject in certain cases to
customary grace and cure periods), among others, nonpayment of principal or
interest on the applicable Senior Secured Notes; failure to comply with other
covenants or agreements under the indenture; certain defaults on other
indebtedness; the failure of CF Holdings' or certain subsidiaries' guarantees of
the applicable Senior Secured Notes to be enforceable; lack of validity or
perfection of any lien securing the obligations under the Senior Secured Notes
and the guarantees with respect to Collateral having an aggregate fair market
value equal to or greater than a specified amount; and specified events of
bankruptcy or insolvency. Under each indenture governing the Senior Secured
Notes, in the case of an event of default arising from one of the specified
events of bankruptcy or insolvency, the applicable Senior Secured Notes would
become due and payable immediately, and, in the case of any other event of
default (other than an event of default related to CF Industries' and CF
Holdings' reporting obligations), the trustee or the holders of at least 25% in
aggregate principal amount of the applicable Senior Secured Notes then
outstanding may declare all of such Senior Secured Notes to be due and payable
immediately.
Forward Sales and Customer Advances
We offer our customers the opportunity to purchase products from us on a forward
basis at prices and on delivery dates we propose. Therefore, our reported
fertilizer selling prices and margins may differ from market spot prices and
margins available at the time of shipment.
Customer advances, which typically represent a portion of the contract's value,
are received shortly after the contract is executed, with any remaining unpaid
amount generally being collected by the time control transfers to the customer,
thereby reducing or eliminating the accounts receivable related to such sales.
Any cash payments received in advance from customers in connection with forward
sales contracts are reflected on our consolidated balance sheets as a current
liability until control transfers and revenue is recognized. As of December 31,
2019 and 2018, we had $119 million and $149 million , respectively, in customer
advances on our consolidated balance sheets.
While customer advances are generally a significant source of liquidity, the
level of forward sales contracts is affected by many factors including current
market conditions and our customers' outlook of future market fundamentals.
During periods of declining prices, customers tend to delay purchasing
fertilizer in anticipation that prices in the future will be lower than the
current prices. If the level of sales under our forward sales programs were to
decrease in the future, our cash received from customer advances would likely
decrease and our accounts receivable balances would likely increase.
Additionally, borrowing under the Revolving Credit Agreement could become
necessary. Due to the volatility inherent in our business and changing customer
expectations, we cannot estimate the amount of future forward sales activity.
Under our forward sales programs, a customer may delay delivery of an order due
to weather conditions or other factors. These delays generally subject the
customer to potential charges for storage or may be grounds for termination of
the contract by us. Such a delay in scheduled shipment or termination of a
forward sales contract due to a customer's inability or unwillingness to perform
may negatively impact our reported sales.
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
ammonia, granular urea, UAN, AN and other nitrogen products. Expenditures on
natural gas represent a significant portion of our production costs. For
example, natural gas costs, including realized gains and losses, comprised
approximately 35% of our total production costs in 2019. As a result, natural
gas prices have a significant impact on our operating expenses and can thus
affect our liquidity.
Because most of our nitrogen fertilizer manufacturing facilities are located in
the United States and Canada , 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 in the last
decade, but are subject to volatility. During 2019, the daily closing price at
the Henry Hub, the most heavily-traded natural gas pricing point in North
America , reached a low of $1.82 per MMBtu on three consecutive days in December
2019 and a high of $4.12 per MMBtu on March 5, 2019 . During the three-year
period ended December 31, 2019 , the daily closing price at the Henry Hub reached
a low of $1.82 per MMBtu on three consecutive days in December 2019 and a high
of $6.88 per MMBtu on January 4, 2018 .
We also have manufacturing facilities located in the United Kingdom . 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
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Balancing Point (NBP). During 2019, the daily closing price at NBP reached a low
of $2.36 per MMBtu on September 4, 2019 and a high of $7.91 per MMBtu on
January 17, 2019 . During the three-year period ended December 31, 2019 , the
daily closing price at NBP reached a low of $2.36 per MMBtu on September 4,
2019 , and a high of $31.74 per MMBtu on March 2, 2018 .
Natural gas costs in our cost of sales, including the impact of realized natural
gas derivatives, decreased 13% per MMBtu in 2019 from 2018.
Derivative Financial Instruments
We may use derivative financial instruments to reduce our exposure to changes in
prices for natural gas that will be purchased in the future. Natural gas is the
largest and most volatile component of our manufacturing cost for nitrogen-based
fertilizers. From time to time, we may also use derivative financial instruments
to reduce our exposure to changes in foreign currency exchange rates. Volatility
in reported quarterly earnings can result from the unrealized mark-to-market
adjustments in the value of the derivatives. In 2019 and 2018, we recognized an
unrealized net mark-to-market loss (gain) on natural gas derivatives of
$14 million and $(13) million , respectively, which is reflected in cost of sales
in our consolidated statements of operations.
Derivatives expose us to counterparties and the risks associated with their
ability to meet the terms of the contracts. For derivatives that are in net
asset positions, we are exposed to credit loss from nonperformance by the
counterparties. We control our credit risk through the use of multiple
counterparties that are multinational commercial banks, other major financial
institutions or large energy companies, and the use of International Swaps and
Derivatives Association (ISDA) master netting arrangements. The ISDA agreements
are master netting arrangements commonly used for over-the-counter derivatives
that mitigate exposure to counterparty credit risk, in part, by creating
contractual rights of netting and setoff, the specifics of which vary from
agreement to agreement.
The ISDA agreements for most of our derivative instruments contain
credit-risk-related contingent features, such as cross default provisions and
credit support thresholds. In the event of certain defaults or a credit ratings
downgrade, our counterparty may request early termination and net settlement of
certain derivative trades or may require us to collateralize derivatives in a
net liability position. The Revolving Credit Agreement, at any time when it is
secured, provides a cross collateral feature for those of our derivatives that
are with counterparties that are party to, or affiliates of parties to, the
Revolving Credit Agreement so that no separate collateral would be required for
those counterparties in connection with such derivatives. In the event the
Revolving Credit Agreement becomes unsecured, separate collateral could be
required in connection with such derivatives.
As of December 31, 2019 and 2018, the aggregate fair value of the derivative
instruments with credit-risk-related contingent features in net liability
positions was $12 million and zero, respectively, which also approximates the
fair value of the maximum amount of additional collateral that would need to be
posted or assets needed to settle the obligations if the credit-risk-related
contingent features were triggered at the reporting dates. As of December 31,
2019 , our open natural gas derivative contracts consisted of natural gas fixed
price swaps, basis swaps and options for 41.1 million MMBtus. As of December 31,
2018 , we had open natural gas derivative contracts for 6.6 million MMBtus of
natural gas basis swaps. At both December 31, 2019 and 2018, we had no cash
collateral on deposit with counterparties for derivative contracts. The credit
support documents executed in connection with certain of our ISDA agreements
generally provide us and our counterparties the right to set off collateral
against amounts owing under the ISDA agreements upon the occurrence of a default
or a specified termination event.
Embedded Derivative Liability
Under the terms of our strategic venture with 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
three specified credit rating agencies or February 1, 2026 .
This obligation is recognized on our consolidated balance sheet as an embedded
derivative and its value is included in other liabilities. See Note 9-Fair Value
Measurements for additional information.
Defined Benefit Pension Plans
We contributed $61 million to our pension plans in 2019. We expect to contribute
approximately $42 million to our pension plans in 2020.
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Distributions on Noncontrolling Interest in CFN
The CFN Board of Managers approved semi-annual distribution payments for the
years ended December 31, 2019 , 2018 and 2017, in accordance with CFN's limited
liability company agreement, as follows:
Distribution Amount
Approved and paid Distribution Period (in millions)
First quarter of 2020 Six months ended December 31, 2019 $ 88
Third quarter of 2019 Six months ended June 30, 2019 100
First quarter of 2019 Six months ended December 31, 2018 86
Third quarter of 2018 Six months ended June 30, 2018 79
First quarter of 2018 Six months ended December 31, 2017 49
Third quarter of 2017 Six months ended June 30, 2017 59
Cash Flows
Operating Activities
Net cash provided by operating activities in 2019 was $1,505 million as compared
to $1,497 million in 2018, an increase of $8 million . The increase was due
primarily to an increase in cash earnings generated by the business, partially
offset by changes in working capital. The increase in cash earnings is due
primarily to the increase in net earnings of $218 million to $646 million in
2019 from $428 million in 2018. The increase in net earnings was due primarily
to lower realized natural gas costs, higher average selling prices and higher
sales volume. The amounts of cash used to fund working capital changed between
2019 and 2018. Cash used for working capital purposes increased in 2019 as $112
million of cash was used primarily to fund an increase in inventory and accounts
receivable, and to fund a decrease in accounts payable, accrued liabilities and
customer advances. In 2018, $127 million of cash was provided due to lower
working capital levels such as declines in accounts receivable and increases in
customer advances, accounts payable and accrued liabilities. In addition, we
contributed $61 million to our pension plans in 2019 compared to $39 million in
2018, an increase of $22 million .
Investing Activities
Net cash used in investing activities was $319 million in 2019 compared to
$375 million in 2018. During 2019, capital expenditures totaled $404 million
compared to $422 million in 2018. Net cash used in investing activities in 2019
included proceeds of $55 million related to the sale of our Pine Bend facility
and $15 million related to property insurance proceeds received. Net cash used
in investing activities in 2018 included $10 million related to property
insurance proceeds received.
Financing Activities
Net cash used in financing activities was $1,583 million in 2019 compared to
$1,270 million in 2018. In 2019, we paid $769 million in connection with the
redemption of the 2020 Notes and the partial redemption of the 2021 Notes.
Dividends paid on common stock in 2019 and 2018 were $265 million and
$280 million , respectively. The decrease in dividends was due to lower shares
outstanding as a result of shares repurchased under our share repurchase
programs in 2018 and 2019. In 2019, we spent $370 million to repurchase shares
of common stock, which included approximately $33 million related to shares
repurchased in late 2018 that were paid for in 2019. In 2019 and 2018, we
distributed $186 million and $139 million , respectively, to the noncontrolling
interests.
Net cash used in financing activities in 2018 included $388 million related to
our acquisition of all of the outstanding publicly traded common units of TNCLP.
In addition, we repurchased 10.9 million shares for $500 million under the 2018
Share Repurchase Program in the second half of 2018, of which $33 million was
accrued and unpaid as of December 31, 2018 .
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Contractual Obligations
The following is a summary of our contractual obligations as of December 31,
2019 :
2020 2021 2022 2023 2024 After 2024 Total
(in millions)
Debt
Long-term debt(1) $ - $ 250 $ - $ 750 $ - $ 3,000 $ 4,000
Interest payments on
long-term debt(1) 186 186 177 164 151 1,908 2,772
Other Obligations
Operating leases 92 73 50 37 30 36 318
Equipment purchases and
plant improvements 120 3 3 - - - 126
Transportation(2) 6 3 - - - - 9
Purchase
obligations(3)(4) 759 177 40 36 35 26 1,073
Contributions to pension
plans(5) 42 25 25 26 13 - 131
Total(6)(7)(8) $ 1,205 $ 717 $ 295 $ 1,013 $ 229 $ 4,970 $ 8,429 _______________________________________________________________________________
(1) Based on debt balances before discounts, offering expenses and interest
rates as of December 31, 2019 . Interest payments also include undrawn
commitment fees for our revolving credit facility and fees on letters of
credit.
(2) Includes anticipated expenditures under certain contracts to transport
finished product to and from our facilities. The majority of thesearrangements allow for reductions in usage based on our actual operating
rates. Amounts set forth in this table are based on projected normal
operating rates and contracted or current spot prices, where applicable, as
of
(3) Includes minimum commitments to purchase and transport natural gas based on
prevailing market-based forward prices as of
reductions for plant maintenance and turnaround activities. Purchase
obligations do not include any amounts related to our natural gas
derivatives. See Note 15-Derivative Financial Instruments for additional
information.
(4) Includes a commitment to purchase ammonia from PLNL at market-based prices
under an agreement that expires in
is
agreement includes automatic consecutive one-year renewals, unless otherwise
terminated by either party in advance. Assuming the agreement is not
terminated by either party and based on market prices as of December 31,
2019 , the annual commitment would be $71 million .
(5) Represents, for 2020, the contributions we expect to make to our North
America and
our
policy is to contribute amounts sufficient to meet minimum legal funding
requirements plus discretionary amounts that we may deem to be appropriate.
(6) Excludes
in the timing of potential tax payments, and the remaining transition tax
liability of
Note 10-Income Taxes for additional information.
(7) Excludes
uncertainty in the timing of payments.
(8) Excludes
derivative due to uncertainty of future credit ratings, as this is only
applicable until the earlier of the date that our credit rating is upgraded
to or above certain levels by two of three specified credit rating agencies
or February 1, 2026 . See Note 9-Fair Value Measurements or Note
17-Noncontrolling Interests for additional information.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a material current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources. See "Recent Accounting
Pronouncements," below, for a discussion of our January 1, 2019 adoption of
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results of operations,
liquidity and capital resources is based upon our consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. U.S. GAAP
requires that we select policies and make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates. We base our estimates on historical experience,
technological assessment, opinions of appropriate outside experts, and the most
recent information available to us. Actual results may differ from these
estimates. Changes in estimates that may have a material impact on our results
are discussed in the context of the underlying financial statements to which
they relate. The following discussion presents information about our most
critical accounting policies and estimates.
Income Taxes
We recognize expenses, assets and liabilities for income taxes based on
estimates of amounts that ultimately will be determined to be taxable or
deductible in tax returns filed in various jurisdictions. U.S. income taxes are
provided on that portion of the earnings of foreign subsidiaries that is
expected to be remitted to the U.S. and be taxable. The final taxes paid are
dependent upon many factors and judgments, including negotiations with taxing
authorities in various jurisdictions and resolution of disputes arising from
federal, state and international tax audits. The judgments made at any point in
time may change from previous conclusions based on the outcome of tax audits, as
well as changes to, or further interpretations of, tax laws and regulations. We
adjust income tax expense in the period in which these changes occur.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those differences are projected to
be recovered or settled. Realization of deferred tax assets is dependent on our
ability to generate sufficient taxable income of an appropriate character in
future periods. A valuation allowance is established if it is determined to be
more likely than not that a deferred tax asset will not be realized. Significant
judgment is applied in evaluating the need for and the magnitude of appropriate
valuation allowances against deferred tax assets. Interest and penalties related
to unrecognized tax benefits are reported as interest expense and income tax
expense, respectively.
Historically, a deferred income tax liability was recorded for income taxes that
would result from the repatriation of the portion of the investment in our
non-U.S. subsidiaries and joint venture that were considered to not be
permanently reinvested. No deferred income tax liability was recorded for the
remainder of our investment in non-U.S. subsidiaries and joint venture, which we
believed to be permanently reinvested. In light of changes made by the Tax Act,
the Company continues to evaluate whether it will continue to treat foreign
subsidiary earnings as being permanently reinvested.
As a large commercial enterprise with international operations, our income tax
expense and our effective tax rate may change from period to period due to many
factors. The most significant of these factors are changes in tax legislation in
the countries in which we operate, changes in the geographic mix of earnings,
the tax characteristics of our income, the ability to realize certain foreign
tax credits and net operating losses, and the portion of the income of our
foreign subsidiaries and foreign joint venture that could be subjected to U.S.
taxation. It is reasonably likely that these items will impact income tax
expense, net income and liquidity in future periods.
We operate in a number of countries and as a result have a significant amount of
cross border transactions. The taxability of cross border transactions has
received an increasing level of scrutiny among regulators in countries across
the globe, including the countries in which we operate. The tax rules and
regulations within the various countries in which we operate are complex and in
many cases there is not symmetry between the rules of the various countries. As
a result, there are instances where regulators within the countries involved in
a cross border transaction may reach different conclusions regarding the
taxability of the transaction in their respective jurisdictions based on the
same set of facts and circumstances. We work closely with regulators to reach a
common understanding and conclusion regarding the taxability of cross border
transactions. However, there are instances where reaching a common
understanding is not possible or practical. As of December 31, 2019 , we have
recorded a reserve for unrecognized tax benefits, including penalties and
interest, of $137 million , which includes certain potential tax exposures
involving cross border transactions. This amount represents our best estimate of
the potential amounts due based on our interpretations of the rules and the
facts and circumstances of the transactions. Differences in
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interpretation of the tax laws, including agreements between governments
surrounding our cross border transactions, can result in differences in taxes
paid which may be higher or lower than our estimates.
Recoverability of Long-Lived Assets, Goodwill and Investments in Unconsolidated
Subsidiaries
We review the carrying values of our property, plant and equipment and other
long-lived assets, including our finite-lived intangible assets, goodwill and
investments in affiliates including joint ventures in accordance with U.S. GAAP
in order to assess recoverability. Factors that we must estimate when performing
impairment tests include sales volume, selling prices, raw material costs,
operating rates, operating expenses, inflation, discount rates, exchange rates,
tax rates and capital spending. Significant judgment is involved in estimating
each of these factors, which include inherent uncertainties. The factors we use
are consistent with those used in our internal planning process. The
recoverability of the values associated with our goodwill, long-lived assets and
investments in unconsolidated affiliates is dependent upon future operating
performance of the specific businesses to which they are attributed. Certain of
the operating assumptions are particularly sensitive to the cyclical nature of
the fertilizer business. Adverse changes in demand for our products, increases
in supply and the availability and costs of key raw materials could
significantly affect the results of our review.
The recoverability and impairment tests of long-lived assets are required only
when conditions exist that indicate the carrying value may not be recoverable.
For goodwill, impairment tests are required at least annually, or more
frequently if events or circumstances indicate that it may be impaired. Our
investments in unconsolidated affiliates are reviewed for impairment whenever
events or circumstances indicate that the carrying value may not be recoverable.
When circumstances indicate that the fair value of our investment in any such
affiliate is less than its carrying value, and the reduction in value is other
than temporary, the reduction in value is recognized immediately in earnings.
PLNL is our joint venture investment in the Republic of Trinidad and Tobago and
operates an ammonia plant that relies on natural gas supplied, under the NGC
Contract, by NGC. The joint venture is accounted for under the equity method.
The joint venture experienced past curtailments in the supply of natural gas
from NGC, which reduced the ammonia production at PLNL. The NGC Contract had an
initial expiration date of September 2018 and was extended on the same terms
until September 2023 . Any NGC commitment to supply gas beyond 2023 will be based
on new agreements. If NGC does not make sufficient quantities of natural gas
available to PLNL at prices that permit profitable operations, PLNL may cease
operating its facility and we would write off the remaining investment in PLNL.
In 2016 and 2015, we recognized impairment charges of $134 million and $62
million , respectively, related to PLNL as part of our impairment assessments of
our equity method investment in PLNL. The carrying value of our equity method
investment in PLNL at December 31, 2019 is $88 million .
The U.K. Government held a referendum on the U.K.'s membership in the European
Union (EU) in June 2016 , which resulted in the electorate voting in favor of the
U.K. exit from the EU (Brexit). On January 31, 2020 , the United Kingdom left the
EU. While the United Kingdom will no longer be a member of the EU, it will still
be subject to EU rules and remain a member of the Customs Union for a period of
time as it negotiates the rules to be applied to future trading, taxes, and
other relationships. We operate two nitrogen manufacturing facilities in the
United Kingdom , which utilize foreign-sourced materials and equipment, and which
also export products in addition to serving customers in the United Kingdom .
Brexit, including its indirect effects, could impact us in the future. For
example, the cost and availability of natural gas or other raw materials or
equipment that we purchase and the demand or selling prices for the nitrogen
products that we sell, could be impacted by additions, deletions or changes to
tariffs, duties, trade restrictions or other factors. Brexit could lead to
changes in trade flows, trading relationships, the movement of production to
alternative locations, or the curtailment of certain production at certain
sites. Brexit could also impact foreign exchange rates or U.K. interest rates,
which could impact our operations or the valuation of our assets and
liabilities. Since the U.K. referendum in June 2016 , the United Kingdom has
experienced increases in the volatility of foreign exchange rates, which
impacted our operations. As a result of the uncertainty of Brexit, including its
indirect effects, changes in the future profitability, asset utilization, or
business valuation of our U.K. operations could negatively impact us and may
result in an impairment of our long-lived assets or goodwill. As of December 31,
2019 , long-lived assets, including property, plant and equipment and intangible
assets, related to the United Kingdom was $708 million , and goodwill, primarily
included in our AN segment, was $275 million .
We evaluate goodwill for impairment in the fourth quarter at the reporting unit
level. Our evaluation can begin with a qualitative assessment of the factors
that could impact the significant inputs used to estimate fair value. If after
performing the qualitative assessment, we determine that it is not more likely
than not that the fair value of a reporting unit is less than its carrying
amount, including goodwill, then no further analysis is necessary. However, if
it is unclear based on the results of the qualitative test, we perform a
quantitative test, which involves comparing the fair value of a reporting unit
with its carrying amount, including goodwill. We use an income-based valuation
method, determining the present value of future cash flows, to estimate the fair
value of a reporting unit. If the fair value of a reporting unit exceeds its
positive carrying amount, goodwill of
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the reporting unit is considered not impaired, and no further testing is
necessary. If the fair value of the reporting unit is less than its carrying
amount, goodwill impairment would be recognized equal to the amount of the
carrying value in excess of the reporting unit's fair value, limited to the
total amount of goodwill allocated to the reporting unit. We identified no
goodwill impairment in 2019, 2018 or 2017. As of December 31, 2019 and 2018, the
carrying value of our goodwill was $2.37 billion and $2.35 billion ,
respectively.
Intangible assets identified in connection with our 2010 acquisition of Terra
consist of customer relationships, which are being amortized over a period of
18 years. The intangible assets identified in connection with our 2015
acquisition of CF Fertilisers UK consist of customer relationships and trade
names which are being amortized over a period of approximately 20 years. Our
intangible assets are presented in other assets on our consolidated balance
sheets. See Note 7-Goodwill and Other Intangible Assets for additional
information regarding our goodwill and other intangible assets.
Pension Assets and Liabilities
Pension assets and liabilities are affected by the fair value of plan assets,
estimates of the expected return on plan assets, plan design, actuarial
estimates and discount rates. Actual changes in the fair value of plan assets
and differences between the actual return on plan assets and the expected return
on plan assets affect the amount of pension expense ultimately recognized. Key
assumptions that affect our projected benefit obligation (PBO) are discount
rates and, in addition for our United Kingdom plans, an adjusted retail price
index (RPI). Key assumptions affecting pension expense include discount rates,
the expected long-term rate of return on assets (EROA) and, in addition for our
United Kingdom plans, RPI.
The December 31, 2019 PBO was computed based on a weighted-average discount rate
of 3.1% for our North America plans and 2.0% for our United Kingdom plans, which
were based on yields for high-quality (AA rated or better) fixed income debt
securities that match the timing and amounts of expected benefit payments as of
the measurement date of December 31 . Declines in comparable bond yields would
increase our PBO. The weighted-average discount rate used to calculate pension
expense in 2019 was 4.1% for North America plans and 2.9% for United Kingdom
plans. Our net benefit obligation, after deduction of plan assets, could
increase or decrease depending on the extent to which returns on pension plan
assets are lower or higher than the discount rate. The 4.6% weighted-average
EROA used to calculate pension expense in 2019 for our North America plans is
based on studies of actual rates of return achieved by equity and non-equity
investments, both separately and in combination over historical holding periods.
The 4.4% weighted-average EROA used to calculate pension expense in 2019 for our
United Kingdom plans is based on expected long-term performance of underlying
investments. The EROA for both North America and United Kingdom plans are
adjusted for expenses and diversification bonuses. For our United Kingdom plans,
the 3.0% RPI used to calculate our PBO and the 3.3% RPI used to calculate 2019
pension expense are developed using the Bank of England implied retail price
inflation curve, which is based on the difference between yields on fixed
interest government bonds and index-linked government bonds.
For North America qualified pension plans, our PBO was $839 million as of
December 31, 2019 , which was $49 million higher than pension plan assets. For
our United Kingdom pension plans, our PBO was $597 million as of December 31,
2019 which was $179 million higher than pension plan assets. The tables below
estimate the impact of a 50 basis point increase or decrease in the key
assumptions on our December 31, 2019 PBO and 2019 pension expense:
North America Plans
Increase/(Decrease) in Increase/(Decrease) in
December 31, 2019 PBO 2019 Pension Expense
Assumption +50 bps -50 bps +50 bps -50 bps
(in millions)
Discount Rate $ (48 ) $ 54 $ - $ 1
EROA N/A N/A (3 ) 3
United Kingdom Plans
Increase/(Decrease) in Increase/(Decrease) in
December 31, 2019 PBO 2019 Pension Expense
Assumption +50 bps -50 bps +50 bps -50 bps
(in millions)
Discount Rate $ (47 ) $ 55 $ 1 $ -
EROA N/A N/A (2 ) 2
RPI 32 (29 ) 1 (1 )
See Note 11-Pension and Other Postretirement Benefits for further discussion of our pension plans.
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Recent Accounting Pronouncements
See Note 3-New Accounting Standards for a discussion of recent accounting
pronouncements, including our January 1, 2019 adoption of ASU No. 2016-02,
Leases (Topic 842), which requires lessees to recognize the rights and
obligations resulting from virtually all leases (other than leases that meet the
definition of a short-term lease) on their balance sheets as right-of-use assets
with corresponding lease liabilities.
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