CF INDUSTRIES HOLDINGS, INC. You should read the following discussion and analysis in conjunction with our annual consolidated financial statements and related notes and our discussion and analysis of financial condition and results of operations, which were included in our 2019 Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 24, 2020 , as well as Item 1. Financial Statements in this Form 10-Q. All references to "CF Holdings ," "we," "us," "our" and "the Company" refer toCF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only toCF Industries Holdings, Inc. itself and not its subsidiaries. All references to "CF Industries " refer toCF Industries, Inc. , a 100% owned subsidiary ofCF Industries Holdings, Inc. References to tons refer to short tons. Notes referenced in this discussion and analysis refer to the notes to our unaudited interim consolidated financial statements in Item 1. Financial Statements in this Form 10-Q. The following is an outline of the discussion and analysis included herein: • Overview ofCF Holdings • Our Company
• Market Conditions and Current Developments
• Items Affecting Comparability of Results
• Financial Executive Summary
• Results of Consolidated Operations
• Operating Results by Business Segment
• Liquidity and Capital Resources
• Off-Balance Sheet Arrangements
• Critical Accounting Policies and Estimates
• Recent Accounting Pronouncements
• Forward-Looking Statements
Overview ofCF Holdings Our Company We are a leading global manufacturer and distributor of nitrogen products for fertilizer, emissions abatement and other industrial applications. We operate manufacturing complexes inthe United States ,Canada and theUnited Kingdom , which are among the most cost-advantaged, efficient and flexible in the world, and an extensive storage, transportation and distribution network inNorth America . Our 3,000 employees focus on safe and reliable operations, environmental stewardship and disciplined capital and corporate management, driving our strategy to leverage and sustainably grow the world's most advantaged nitrogen and chemicals platform to serve customers and create long-term shareholder value. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our principal nitrogen fertilizer products are anhydrous ammonia (ammonia), granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium. Our principal assets as ofMarch 31, 2020 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 13-Noncontrolling Interest
for additional information on our strategic venture with CHS;
• two Canadian nitrogen manufacturing facilities located in
Alberta (the largest nitrogen complex inCanada ) andCourtright, Ontario ; • twoUnited Kingdom nitrogen manufacturing facilities located inBillingham and Ince; • an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and 21
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CF INDUSTRIES HOLDINGS, INC.
• a 50% interest in Point Lisas Nitrogen Limited (PLNL), an ammonia
production joint venture located in the Republic of Trinidad and Tobago
that we account for under the equity method.
Market Conditions and Current Developments
COVID-19 Pandemic
In March 2020 , the World Health Organization characterized the outbreak of
coronavirus disease 2019 (COVID-19) as a pandemic. Since that time, efforts to
slow the spread of COVID-19 have intensified. A number of countries, as well as
certain states and cities within the United States , have enacted temporary
closures of businesses, issued shelter in place or quarantine orders, and taken
other restrictive measures in response to the pandemic.
Due to the use of fertilizer products in crop production, our business
operations have been designated as part of the critical infrastructure by the
United States and as essential businesses in the United Kingdom and Canada , with
corresponding designations for those states and provinces in which we operate
that have issued restrictive orders. As a result, our manufacturing complexes
continued to operate during the first quarter and have continued to operate
through the date of this report. Our production of ammonia, the basic building
block for our products, totaled 2.7 million tons in the first quarter of 2020 as
compared to 2.6 million tons in the first quarter of 2019. Through the date of
this filing, we have continued to ship products through all modes of
transportation to our customers, and we have not experienced any significant
delays in marine, rail or truck transportation services due to the pandemic.
In the first quarter of 2020, we did not experience a meaningful impact in
customer demand as a result of the COVID-19 pandemic. Spring weather conditions
in the first quarter of this year have been substantially better than the
weather conditions experienced in the first quarter of 2019, when cold, wet and
snowy conditions prevented first quarter planting activities across much of
North America and Europe . In the first quarter of 2020, spring planting began in
certain locations and our total volume of products shipped in the first quarter
of 2020 of 4.7 million tons was 15% higher than the prior year first quarter.
We have instituted safety precautions to protect the health and well-being of
all of our employees, including our essential manufacturing workforce who
operate our nitrogen complexes and distribution facilities. These safety
measures include installing thermal temperature checks at each of our sites for
all personnel who arrive at our sites, adjusting schedules to support social
distancing, including changes to loading and shipping procedures, maintaining a
close contact log for employees, self-quarantine logs, requiring face coverings
onsite, restricting visitor access, enhanced cleaning protocols and travel
restrictions for employees. We have also offered pay enhancements to the
operational workforce for the March to June time period of approximately $19
million . In addition, since mid-March 2020 , the non-operational personnel at our
sites who work in administrative and operational support functions have been
working remotely in order to maintain social distancing following governmental
guidelines. These administrative and operational support functions have operated
effectively during this period, meeting our commitments to our customers and
continuing to manage our business without interruption. We have not furloughed
any employees or instituted any reductions in pay or benefits or other
significant cost containment measures.
We participate in a global market, which includes a global supply chain and
customer base. The long-term effects of the COVID-19 pandemic are unclear and
could adversely affect our business in the future. We have operated our business
in a remote working environment under shelter in place orders and could continue
to do so for an extended duration, if necessary. However, if the pandemic were
to impact a large portion of our workforce in any one location, we might need to
temporarily idle that facility, which could have an impact on our business
operations, profitability and cash flow. The impact of the COVID-19 pandemic is
fluid and continues to evolve. As a result, we cannot predict the extent to
which our business, results of operations, financial condition or liquidity will
be impacted by the pandemic in the future.
Sales Volume
There was strong demand for fertilizer in the first quarter of 2020 compared to
the first quarter of 2019, when demand was lower because of delayed spring
planting activity and fertilizer applications as a result of persistent cold and
wet weather. Sales volume for the three months ended March 31, 2020 was 4.7
million product tons, an increase of 15% compared to sales volume of 4.1 million
product tons for the three months ended March 31, 2019 , which resulted in an
increase in net sales of approximately $173 million . Sales volumes across all of
our products increased in the first quarter of 2020 compared to the first
quarter of 2019 as a result of improved weather conditions for the 2020 spring
fertilizer application season.
Selling Prices
Selling prices for our products strengthened as the first quarter of 2020
progressed. Early in the first quarter of 2020, average selling prices for our
products were lower than in first quarter of 2019 due to increased global
nitrogen supply availability as lower global energy costs drove higher global
operating rates in the fourth quarter of 2019 and the first quarter of
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CF INDUSTRIES HOLDINGS, INC.
2020. For granular urea and UAN, a combination of lower than expected imports
into North America and earlier demand in the Southern Plains for spring
applications due to favorable weather conditions compared to the prior year
drove an increase in selling prices as the first quarter of 2020 concluded.
The average selling price for our products for the first quarter of 2020 was
$207 per ton, a decrease of 16% compared to $245 per ton in the first quarter of
2019, which resulted in a decrease in net sales of approximately $203 million .
Natural Gas Prices
Natural gas is the principal raw material used to produce nitrogen fertilizers.
We use natural gas both as a chemical feedstock and as a fuel to produce
nitrogen products. Natural gas is a significant cost component of manufactured
nitrogen products, representing approximately 35% of our production costs.
Most of our nitrogen fertilizer manufacturing facilities are located in the
United States and Canada . As a result, the price of natural gas in North America
directly impacts a substantial portion of our operating expenses. Due to
increases in natural gas production resulting from the rise in production from
shale gas formations, natural gas prices in North America have declined over the
last decade, but are subject to volatility. In addition, in the first quarter of
2020, natural gas prices were lower than in the first quarter of 2019 as a
result of robust supply and lower overall demand as a result of warmer than
normal weather in the first quarter of 2020. The average daily market price at
the Henry Hub, the most heavily-traded natural gas pricing point in North
America , for the three months ended March 31, 2020 was $1.88 per MMBtu compared
to $2.89 per MMBtu for the three months ended March 31, 2019 , a decrease of 35%.
We also have manufacturing facilities located in the United Kingdom . Production
costs for these facilities are subject to fluctuations associated with the price
of natural gas in Europe . The major natural gas trading point for the United
Kingdom is the National Balancing Point (NBP). The price of natural gas in the
United Kingdom has declined as a result of increased availability of liquefied
natural gas in the global market. The average daily market price of natural gas
at NBP for the three months ended March 31, 2020 was $3.20 per MMBtu compared to
$6.56 per MMBtu for the three months ended March 31, 2019 , a decrease of 51%.
Natural gas costs in cost of sales, including the impact of realized natural gas
derivatives, decreased 29% to $2.61 per MMBtu in the three months ended March
31, 2020 from $3.68 per MMBtu in the three months ended March 31, 2019 , which
resulted in an increase in gross margin of approximately $87 million .
More recently, North America and the United Kingdom have experienced reduced
demand for energy, including natural gas, due to the impact of the COVID-19
pandemic.
Items Affecting Comparability of Results
In addition to the impact of market conditions discussed above, certain items
impacted the comparability of our financial results during the three months
ended March 31, 2020 and 2019. The following table and related discussion
outline these items and how they impacted the comparability of our financial
results during these periods. During the three months ended March 31, 2020 and
2019, we reported net earnings attributable to common stockholders of
$68 million and $90 million , respectively.
Three Months Ended March 31,
2020 2019
Pre-Tax After-Tax Pre-Tax After-Tax
(in millions) Unrealized net mark-to-market (gain) loss on natural gas derivatives(1)
$ (12 ) $ (9 ) $ 2 $ 1 Loss on foreign currency transactions, including intercompany loans(2) 18 14 2 1 Insurance proceeds(2) (10 ) (8 ) - - Louisiana incentive tax credit(3) - - - (30 )
______________________________________________________________________________
(1) Included in cost of sales in our consolidated statements of operations.
(2) Included in other operating-net in our consolidated statements of
operations.
(3) Included in income tax provision (benefit) in our consolidated statement of
operations.
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Unrealized net mark-to-market (gain) loss on natural gas derivatives
Natural gas is the largest and most volatile single component of the
manufacturing cost for nitrogen-based products. At certain times, we have
managed the risk of changes in natural gas prices through the use of derivative
financial instruments. The derivatives that we may use for this purpose are
primarily natural gas fixed price swaps, basis swaps and options. We use natural
gas derivatives as an economic hedge of natural gas price risk, but without the
application of hedge accounting. This can result in volatility in reported
earnings due to the unrealized mark-to-market adjustments that occur from
changes in the value of the derivatives, which are reflected in cost of sales in
our consolidated statements of operations. In the three months ended March 31,
2020 and 2019, we recognized an unrealized net mark-to-market (gain) loss of
$(12) million and $2 million , respectively.
Loss on foreign currency transactions, including intercompany loans
In the three months ended March 31, 2020 and 2019, we recognized losses of $18
million and $2 million , respectively, primarily consisting of the impact of
changes in foreign currency exchange rates on primarily U.S. dollar and British
pound denominated intercompany loans that were not permanently invested.
Insurance proceeds
In the three months ended March 31, 2020 , we recognized income of $10 million
related to insurance claims at one of our nitrogen complexes. The $10 million of
income consists of $8 million related to business interruption insurance
proceeds and $2 million related to property insurance proceeds. These proceeds
are reflected in other operating-net in our consolidated statement of
operations.
Louisiana incentive tax credit
For the three months ended March 31, 2019 , our income tax benefit included an
incentive tax credit from the State of Louisiana of $30 million , net of federal
income tax, related to certain capital projects at our Donaldsonville, Louisiana
nitrogen complex.
Financial Executive Summary
We reported net earnings attributable to common stockholders of $68 million for
the three months ended March 31, 2020 compared to $90 million for the three
months ended March 31, 2019 , a decrease in net earnings of 24%, or $22 million .
The decrease in net earnings of $22 million was due primarily to the following:
• Gross margin decreased by $16 million in the first quarter of 2020 to
decrease in gross margin was primarily driven by a 16% decrease in average
selling prices, which reduced gross margin by
offset by a 29% decrease in natural gas costs, which increased gross
margin by
gross margin by
• Net interest expense decreased by
to
The decrease was due primarily to our redemption in
of the remaining
senior notes due
2019 of
million principal amount outstanding immediately prior to such redemption,
of the 3.400% senior secured notes due December 2021 (the 2021 Notes).
• Income tax provision increased by $21 million in the first quarter of 2020
to
the first quarter of 2019. The primary driver of the increase relates to
an incentive tax credit of
2019, which is more fully described in the section above titled "Items
Affecting Comparability of Results."
Diluted net earnings per share attributable to common stockholders decreased 23%, or$0.09 per share, to$0.31 in the first quarter of 2020 compared to$0.40 in the first quarter of 2019. This decrease is due primarily to the$30 million incentive tax credit recognized in the first quarter of 2019 and lower gross margin, partially offset by a 4% reduction in diluted weighted-average common shares outstanding due to repurchases made under our share repurchase program. OnFebruary 13, 2019 , our Board of Directors (the Board) authorized the repurchase of up to$1 billion ofCF Holdings common stock throughDecember 31, 2021 (the 2019 Share Repurchase Program). In 2019, we repurchased a total of 7.6 million shares for$337 million , of which approximately 1.5 million shares were repurchased in the first quarter of 2019 for$60 million . In the first quarter of 2020, we repurchased approximately 2.6 million shares for$100 million . See discussion under "Liquidity and Capital Resources-Share Repurchase Program," below, for further information. 24
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