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, 2019 compared toDecember 31, 2018 , you should read Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (SEC) onFebruary 24, 2020 . The following is an outline of the discussion and analysis included herein: •Overview ofCF Holdings •Our Company •Our Commitment to a Clean Energy Economy •Industry Factors •Market Conditions and Current Developments •Financial Executive Summary •Items Affecting Comparability of Results •Consolidated Results of Operations •Operating Results by Business Segment •Liquidity and Capital Resources •Critical Accounting Estimates •Recent Accounting Pronouncements •Subsequent Event Overview ofCF Holdings Our Company We are a leading global manufacturer of hydrogen and nitrogen products for clean energy, fertilizer, emissions abatement, and other industrial applications. We operate nitrogen 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 our unique capabilities to accelerate the world's transition to clean energy. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our core product is anhydrous ammonia (ammonia), which contains 82% nitrogen and 18% hydrogen. Our nitrogen products that are upgraded from ammonia are 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. Our principal assets as ofDecember 31, 2020 include: •fiveU.S. nitrogen manufacturing facilities, located inDonaldsonville, Louisiana (the largest nitrogen complex in the world);Port Neal, Iowa ;Yazoo City, Mississippi ;Verdigris, Oklahoma ; andWoodward, Oklahoma . These facilities are wholly owned directly or indirectly byCF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder. See Note 17-Noncontrolling Interests for additional information on our strategic venture with CHS; •two Canadian nitrogen manufacturing facilities, located inMedicine Hat, Alberta (the largest nitrogen complex inCanada ) andCourtright, Ontario ; •twoUnited Kingdom nitrogen manufacturing facilities, located inBillingham and Ince; 30
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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 inPoint Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in theRepublic of Trinidad and Tobago that we account for under the equity method. Our Commitment to a Clean Energy Economy InOctober 2020 , we announced that we are taking significant steps to support a global hydrogen and clean fuel economy, through the production of green and low-carbon ammonia. Since ammonia is one of the most efficient ways to transport and store hydrogen and is also a fuel in its own right, we believe that the Company, as the world's largest producer of ammonia, with an unparalleled manufacturing and distribution network and deep technical expertise, is uniquely positioned to fulfill anticipated demand for hydrogen and ammonia from green and low-carbon sources. Our strategy is to leverage our unique capabilities to accelerate the world's transition to clean energy. Our approach will focus on green ammonia production, which refers to ammonia produced through a carbon-free process, and low-carbon ammonia, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects. We have announced an initial green ammonia project at our flagshipDonaldsonville nitrogen complex to produce approximately 20,000 tons per year of green ammonia. Additionally, we are developing CCS and other carbon abatement projects across our production facilities that will enable us to produce low-carbon ammonia. 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 asChina ,India ,Russia andBrazil , 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 inNorth 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 inNorth America . Producers of nitrogen-based fertilizers located in theMiddle East , theRepublic of Trinidad and Tobago ,North Africa andRussia have been major exporters toNorth America in recent years. As a result, the North American nitrogen fertilizer market is dependent on imports to balance supply and demand. 31
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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.
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 continued to enact
temporary closures of businesses, to issue shelter in place or quarantine
orders, and to take other restrictive measures in response to the pandemic.
Due to the use of fertilizer products in crop production to support the global
food supply chain, our business operations were 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 issued restrictive orders. As a result, our
manufacturing complexes continued to operate during 2020 and have continued to
operate through the date of this report. Our production of ammonia, the basic
building block for our products, was 10.4 million tons in 2020 compared to
10.2 million tons in 2019. Through the date of this filing, we have continued to
ship products by all modes of transportation to our customers, and we have not
experienced any significant delays in marine, rail or truck transportation
services due to the pandemic.
In 2020, we did not experience a meaningful impact in customer demand as a
result of the COVID-19 pandemic. Our total volume of products shipped in 2020 of
20.3 million tons was 4% higher compared to 19.5 million tons in 2019.
In response to the pandemic, we instituted safety precautions early in 2020 to
protect the health and well-being of all of our employees, including the
manufacturing workforce who operate our nitrogen complexes and distribution
facilities. These safety measures included installing thermal temperature checks
at each of our sites for all personnel, including contractors, 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 on site, restricting visitor
access, and implementing enhanced cleaning protocols and travel restrictions for
employees. We also paid approximately $19 million of bonuses to our operational
workforce under a special COVID-19 bonus program, which concluded in June 2020 .
In addition, since mid-March 2020 , the majority of our non-operational personnel
at our sites who work in administrative and operational support functions have
worked remotely in order to maintain social distancing following governmental
guidelines. These administrative and operational support functions have operated
effectively during this period, meeting our commitments to our customers and
continuing to manage our business without interruption. We have not furloughed
any employees or instituted any reductions in pay or benefits or other
significant cost containment measures due to the pandemic.
We participate in a global market, which includes a global supply chain and
customer base. The long-term effects of the COVID-19 pandemic are unclear and
could adversely affect our business in the future. We have operated our business
in a remote working environment and could continue to do so for an extended
duration, if necessary. However, if the pandemic were to impact a large portion
of our workforce in any one location, we might need to idle that facility
temporarily or transfer other employees from other network sites, 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 may be impacted by the pandemic in the future.
Sales Volume
There was strong demand for fertilizer in 2020 as we shipped 20.3 million tons
of product compared to 19.5 million tons in 2019, which increased net sales by
$199 million . The increase in total sales volume was due primarily to the impact
of increased supply resulting from both higher inventory levels entering 2020
and higher production in 2020. Our sales volumes in 2020 were higher across all
of our major products compared to 2019.
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CF INDUSTRIES HOLDINGS, INC.
Our shipments can shift between quarters due primarily to shifts in weather
patterns that impact fertilizer applications. During the fourth quarter of 2020,
granular urea sales volume was higher as domestic demand strengthened amid
increasing crop prices and overall farm economics improved. Additionally,
ammonia sales volume in the fourth quarter of 2020 exceeded the fourth quarter
of 2019 as a result of increased demand due to an early fall harvest and ideal
weather conditions throughout the Midwestern United States.
Sales volume for our products in 2020, 2019 and 2018 is shown in the table
below.
2020 2019 2018
Sales Volume (tons) Net Sales Sales Volume (tons) Net Sales Sales Volume (tons) Net Sales
(tons in thousands; dollars in millions)
Ammonia 3,767 $ 1,020 3,516 $ 1,113 3,135 $ 1,028
Granular urea 5,148 1,248 4,849 1,342 4,898 1,322
UAN 6,843 1,063 6,807 1,270 7,042 1,234
AN 2,216 455 2,109 506 2,002 460
Other 2,322 338 2,257 359 2,252 385
Total 20,296 $ 4,124 19,538 $ 4,590 19,329 $ 4,429
We expect sales volumes for our products to return to a range of 19-19.5 million
product tons in 2021 due to lower year-end inventory than the year before and
lower expected production due to a higher number of planned turnarounds than in
2020.
Selling Prices
The selling prices for all of our major products were lower in 2020 than 2019 as
global energy prices remained low, driving higher global nitrogen operating
rates and the resulting additional global supply availability. The average
selling price for our products for 2020 and 2019 was $203 per ton and $235 per
ton, respectively. The decrease in average selling prices of 14% in 2020 from
2019 decreased net sales by $665 million .
Natural Gas Prices
Natural gas is the principal raw material used to produce our nitrogen products.
We use natural gas both as a chemical feedstock and as a fuel to produce
nitrogen products. Natural gas is a significant cost component of manufactured
nitrogen products, representing approximately one-third of our production costs.
Most of our nitrogen fertilizer manufacturing facilities are located 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. Natural gas prices during 2020 were
lower on average than 2019, due in part to reduced energy demand as a result of
the COVID-19 pandemic, partially offset by reductions in supply. The daily
market price at the Henry Hub, the most heavily-traded natural gas pricing point
in North America , fluctuated throughout 2020. The average daily market price at
the Henry Hub was $1.99 per MMBtu for 2020 compared to $2.51 per MMBtu for 2019,
a decrease of 21%. The price of natural gas decreased in the first half of 2020
and increased in the second half of 2020 with the average daily market price
rising at the Henry Hub to $2.47 per MMBtu in the fourth quarter of 2020.
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 price of natural gas in the United Kingdom
during 2020 was lower on average compared to 2019 as a result of increased
availability of liquefied natural gas in the global market as well as the global
economic downturn related to the COVID-19 pandemic. The average daily market
price at NBP was $3.20 per MMBtu for 2020 compared to $4.44 per MMBtu for 2019,
a decrease of 28%. The daily market price at NBP also fluctuated throughout 2020
as the price decreased in the first half of 2020 and increased in the second
half of 2020 with the average daily market price rising at the NBP to $5.29 per
MMBtu in the fourth quarter of 2020.
Natural gas costs in cost of sales, including the impact of realized natural gas
derivatives, was $2.24 per MMBtu in 2020, an 18% decrease from $2.74 per MMBtu
in 2019, which resulted in an increase in gross margin of approximately
$195 million .
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CF INDUSTRIES HOLDINGS, INC. Financial Executive Summary We reported net earnings attributable to common stockholders of$317 million in 2020 compared to$493 million in 2019, a decline in net earnings of 36%, or$176 million . The decrease in net earnings was due primarily to lower selling prices as lower global energy costs drove higher global operating rates, leading to increased global nitrogen supply availability. The impact of lower selling prices was partially offset by lower realized natural gas costs and higher sales volume, leading to a net decline in gross margin of$373 million in 2020. Gross margin declined from$1,174 million in 2019 to$801 million in 2020. The following describes the significant factors that impacted gross margin: •Average selling prices declined 14% in 2020 to$203 per ton, which decreased gross margin by$665 million , •Realized natural gas costs declined by 18% in 2020 to$2.24 per MMBtu, which increased gross margin by$195 million , •Sales volume increased 4% to 20.3 million product tons, the highest annual sales volume for the Company. The increase in sales volume increased gross margin by$61 million . Additionally, net earnings were impacted by lower selling, general and administrative costs, which declined by$33 million due primarily to the impact of lower corporate project activity and travel during the COVID-19 pandemic, and a decline in our annual tax provision of$95 million , driven by lower pre-tax earnings as well as certain favorable discrete tax items, including the impact of the Terra Amended Tax Returns. See discussion under "Items Affecting Comparability-Terra Amended Tax Returns," below, for further information. Diluted net earnings per share attributable to common stockholders decreased$0.76 per share, to$1.47 per share in 2020 compared to$2.23 per share in 2019. This decrease is due primarily to lower net earnings, partially offset by a 3% reduction in diluted weighted-average common shares outstanding due to repurchases made under our share repurchase program. OnFebruary 13, 2019 , our Board of Directors (the Board) authorized the repurchase of up to$1 billion ofCF Holdings common stock throughDecember 31, 2021 (the 2019 Share Repurchase Program). In 2019, we repurchased approximately 7.6 million shares under the 2019 Share Repurchase Program for$337 million . In 2020, we repurchased approximately 2.6 million shares under the 2019 Share Repurchase Program for$100 million . No shares were repurchased under the 2019 Share Repurchase Program in the second, third or fourth quarter of 2020. See discussion under "Liquidity and Capital Resources-Share Repurchase Programs," below, for further information. 34
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CF INDUSTRIES HOLDINGS, INC.
Items Affecting Comparability of Results
In addition to the impact of market conditions discussed above, certain items
impacted our financial results during the years ended December 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.
Positive amounts in the table below are costs or expenses incurred, while
negative amounts are income recognized in the periods presented. During the
years ended December 31, 2020 and 2019, we reported net earnings attributable to
common stockholders of $317 million and $493 million , respectively.
2020 2019
Pre-Tax After-Tax(1) Pre-Tax After-Tax(1)
(in millions) Unrealized net mark-to-market (gain) loss on natural gas derivatives(2)
$ (6) $ (5)$ 14 $ 10 COVID impacts: Special COVID-19 bonus for operational workforce(2) 19 15 - - Turnaround deferral(2) 7 6 - -
Loss (gain) on foreign currency transactions, including intercompany loans(3)
5 4 (1) (1)
Engineering cost write-off(3) 9 7 - -
Loss on sale of surplus land(3) 2 1 - -
Insurance proceeds(3) (37) (28) (37) (28)
Gain on sale of Pine Bend facility(3) - - (45) (34)
Losses on debt extinguishment - - 21 16
Louisiana incentive tax credit(4) - - - (30)
Terra amended tax returns-interest income and income tax benefit(5)
(26) (44) (5) (14)
PLNL withholding tax charge(6) - - 16 16
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(1) The tax impact is calculated utilizing a marginal effective rate of 23.2% in 2020 and 23.3% in 2019. (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 income tax provision in our consolidated statements of operations. (5) Included in interest expense, interest income and income tax provision in our consolidated statements of operations. (6) Included in equity in earnings (loss) of operating affiliate in our consolidated statements of operations. The following describes the significant items that impacted the comparability of our financial results in 2020 and 2019. 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 (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 is reflected in cost of sales in our consolidated statements of operations. In 2020 and 2019, we recognized an unrealized net mark-to-market (gain) loss on natural gas derivatives of$(6) million and$14 million , respectively. COVID impacts InMarch 2020 , a short-term bonus program was initiated to compensate operational employees for continuing their critical tasks at the beginning of the COVID-19 pandemic. The bonus program concluded inJune 2020 . Approximately$19 million was paid as part of the program and was recognized in cost of sales in our consolidated statement of operations for the year endedDecember 31, 2020 . In addition, certain plant turnaround activities were deferred because of the COVID-19 pandemic. As a result, we incurred$7 million of expense for the year endedDecember 31, 2020 , which was recognized in cost of sales in our consolidated statement of operations. 35
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CF INDUSTRIES HOLDINGS, INC. Loss (gain) on foreign currency transactions, including intercompany loans In 2020 and 2019, we recognized a loss (gain) of$5 million and$(1) million , respectively, which consists of foreign currency exchange rate impacts on foreign currency denominated transactions, including the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. Engineering cost write-off InJune 2020 , a project at one of our nitrogen complexes was cancelled and, as a result,$9 million of previously capitalized engineering costs were expensed in the year endedDecember 31, 2020 . The expense is reflected in other operating-net in our consolidated statement of operations. Loss on sale of surplus land In 2020, we recognized a loss of$2 million on the sale of surplus land, which is reflected in other operating-net in our consolidated statement of operations. Insurance proceeds We recognized income of$37 million in both 2020 and 2019 related to insurance claims at one of our nitrogen complexes. The$37 million of income in 2020 consists of$35 million related to business interruption insurance proceeds and$2 million related to property insurance proceeds. The$37 million of income in 2019 consisted of$22 million related to business interruption insurance proceeds and$15 million related to property insurance proceeds. These proceeds are reflected in other operating-net in our consolidated statements of operations. Gain on sale of Pine Bend facility During the first quarter of 2019, we entered into an agreement to sell our Pine Bend dry bulk storage and logistics facility inMinnesota . 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. Losses on debt extinguishment OnNovember 13, 2019 , we redeemed in full all of the$500 million outstanding principal amount of the 7.125% senior notes dueMay 2020 (the 2020 Notes), in accordance with the optional redemption provisions provided in the indenture governing the 2020 Notes. OnDecember 13, 2019 , we redeemed$250 million principal amount, representing 50% of the$500 million outstanding principal amount immediately prior to such redemption, of the 3.400% senior secured notes dueDecember 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.Louisiana incentive tax credit For 2019, our income tax provision included an incentive tax credit from theState of Louisiana of$30 million , net of federal income tax, related to certain capital projects at ourDonaldsonville, Louisiana complex. Terra amended tax returns We completed the acquisition ofTerra Industries Inc. (Terra) inApril 2010 . After the acquisition, we determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to itsU.S. parent forU.S. and foreign income tax purposes was not appropriate. As a result, in 2012 we amended certain tax returns, including Terra's income and withholding tax returns, back to 1999 (the Amended Tax Returns) and paid additional income and withholding taxes, and related interest and penalties. In early 2013, the Internal Revenue Service (IRS) commenced an examination of theU.S. tax aspects of the Amended Tax Returns. In 2017, we also made a Voluntary Disclosure Filing with theCanadian Revenue Agency (CRA) with respect to the Canadian tax aspects of this matter and paid additional Canadian taxes due. In early 2019, theIRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to theJoint Committee on Taxation of theU.S. Congress (the Joint Committee ). For purposes of its review,the Joint Committee separated theIRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter. In late 2019, we received notification thatthe Joint Committee had approved theIRS audit reports and related income tax refunds relating to the income tax related matter. As a result of the approval bythe Joint Committee , we recognized in the fourth quarter of 2019 interest income of$5 million ($4 million after tax) and a reduction in income tax 36
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CF INDUSTRIES HOLDINGS, INC. expense of$10 million related to the favorable settlement of certain uncertain tax positions. No income tax refunds were received in 2019 related to the Amended Tax Returns. In 2020, we received notification thatthe Joint Committee approved theIRS audit report and related withholding tax refunds relating to the withholding tax matter and we receivedIRS Notices indicating the amount of tax and interest to be refunded and received with respect to the withholding tax matter and the income tax matter. In addition, the CRA settled with us the Voluntary Disclosure matter. In 2020, as a result of these events, we recognized$26 million of interest-related income and$18 million of income tax benefit, which consisted of the following: •additional income of$26 million ($23 million , net of tax) representing$16 million of interest income related to theU.S. Federal income tax matter and withholding tax matter and a$10 million reversal of previously accrued interest related to the Canadian tax aspects of this matter, •a reduction in our liabilities for unrecognized tax benefits of$12 million with a corresponding reduction in income tax expense related to theU.S. Federal withholding tax matter, and •additional income tax benefit of$9 million related to theU.S. Federal income tax matter and related state amended returns. In 2020, we receivedU.S. federal income tax refunds, including interest, of$110 million relating to the Amended Tax Returns, consisting of$68 million related to the income tax matter and$42 million related to the withholding tax matter, which finalized these matters with theIRS . As a result of the finalization of the income tax matter and the withholding tax matter, allU.S. federal tax years commencing beforeJanuary 1, 2012 are now closed. In the first quarter of 2021, we received approximately$20 million of withholding tax refunds, including interest, from the CRA, related to the Voluntary Disclosure Filing. These amounts were previously recorded in our consolidated balance sheet as ofDecember 31, 2020 . PLNL withholding tax charge The Trinidadian tax authority (theBoard of Inland Revenue ) issued a proposed tax assessment against PLNL, our joint venture in theRepublic 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. 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, in the third quarter of 2019, PLNL paid withholding tax to theBoard of Inland Revenue under the amnesty program for tax years back to 2011, and recognized a charge for$32 million . Our 50% share of PLNL's tax charge is$16 million , which reduced our equity in earnings of operating affiliate for 2019. 37
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CF INDUSTRIES HOLDINGS, INC.
Consolidated Results of Operations The following table presents our consolidated results of operations and supplemental data:
Year ended December 31,
2020 2019 2018(1) 2020 v. 2019 2019 v. 2018
(in millions, except as noted)Net sales$ 4,124 $ 4,590 $ 4,429 $ (466) (10) %$ 161 4 % Cost of sales (COS) 3,323 3,416 3,512 (93) (3) % (96) (3) % Gross margin 801 1,174 917 (373) (32) % 257 28 % Gross margin percentage 19.4 % 25.6 % 20.7 % (6.2) % 4.9 % Selling, general and administrative expenses 206 239 214 (33) (14) % 25 12 % Other operating-net (17) (73) (27) 56 77 % (46) (170) % Total other operating costs and expenses 189 166 187 23 14 % (21)
(11) %
Equity in earnings (loss) of operating affiliate 11 (5) 36 16 N/M (41) N/M Operating earnings 623 1,003 766 (380) (38) % 237 31 % Interest expense-net 161 217 228 (56) (26) % (11) (5) % Loss on debt extinguishment - 21 - (21) (100) % 21 N/M Other non-operating-net (1) (7) (9) 6 86 % 2 22 % Earnings before income taxes 463 772
547 (309) (40) % 225 41 %
Income tax provision 31 126 119 (95) (75) % 7 6 %
Net earnings 432 646 428 (214) (33) % 218 51 %
Less: Net earnings attributable to
noncontrolling interests 115 153 138 (38) (25) % 15 11 %
Net earnings attributable to common
stockholders $ 317 $ 493 $ 290 $ (176) (36) % $ 203 70 %
Diluted net earnings per share attributable to
common stockholders $ 1.47 $ 2.23 $ 1.24 $ (0.76) (34) % $ 0.99 80 %
Diluted weighted-average common shares
outstanding 215.2 221.6 233.8 (6.4) (3) % (12.2) (5) %
Dividends declared per common share $ 1.20 $ 1.20 $ 1.20 $ - - % $ - - %
Natural gas supplemental data (per MMBtu)
Natural gas costs in COS(2) $ 2.21 $ 2.75 $ 3.15 $ (0.54) (20) % $ (0.40) (13) %
Realized derivatives loss (gain) in COS(3) 0.03 (0.01) 0.01 0.04 N/M (0.02) N/M
Cost of natural gas in COS$ 2.24 $ 2.74 $ 3.16 $ (0.50) (18) %$ (0.42) (13) % Average daily market price of natural gas Henry Hub (Louisiana)$ 1.99 $ 2.51 $ 3.12 $ (0.52) (21) %$ (0.61) (20) % Average daily market price of natural gas National Balancing Point (UK)$ 3.20 $ 4.44 $ 8.07 $ (1.24) (28) %$ (3.63) (45) % Unrealized net mark-to-market (gain) loss on natural gas derivatives$ (6) $ 14 $ (13) $ (20) N/M$ 27
N/M
Depreciation and amortization$ 892 $ 875 $ 888 $ 17 2 %$ (13) (1) % Capital expenditures$ 309 $ 404 $ 422 $ (95) (24) %$ (18) (4) % Sales volume by product tons (000s) 20,296 19,538 19,329 758 4 % 209 1 % Production volume by product tons (000s): Ammonia(4) 10,353 10,246 9,805 107 1 % 441 4 % Granular urea 5,001 4,941 4,837 60 1 % 104 2 % UAN (32%) 6,677 6,768 6,903 (91) (1) % (135) (2) % AN 2,115 2,128 1,731 (13) (1) % 397 23 %
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N/M-Not Meaningful (1)For a discussion and analysis of the year endedDecember 31, 2018 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K filed with theSEC onFebruary 24, 2020 . (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. 38
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CF INDUSTRIES HOLDINGS, INC. The following is a discussion and analysis of our consolidated results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . For a discussion and analysis of our consolidated results of operations for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K filed with theSEC onFebruary 24, 2020 .Net Sales Our net sales are derived primarily from the sale of nitrogen products and are determined by the quantities of nitrogen products 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 decreased$466 million , or 10%, to$4.12 billion in 2020 compared to$4.59 billion in 2019 due to a 14% decrease in average selling prices, which decreased net sales by$665 million , partially offset by a 4% increase in sales volume, which increased net sales by$199 million . Average selling prices were$203 per ton in 2020 compared to$235 per ton in 2019, a decrease of 14%, due primarily to lower average selling prices across all products, primarily driven by increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. The increase in total sales volume of 4% was due to higher sales volume across all our products as greater supply availability resulting from both higher inventory levels entering 2020 and higher production in 2020. 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 derivatives, 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 consist of the cost of freight required to transport finished products from our plants to our distribution facilities, which are recognized in cost of sales when the product is sold to our customers, and storage costs incurred prior to final shipment to customers. Our cost of sales decreased$93 million , or 3%, to$3.32 billion in 2020 as compared to$3.42 billion in 2019. The decrease in our cost of sales was due primarily to the impact of lower realized natural gas costs, including the impact of realized derivatives, and lower costs related to plant maintenance activity. We recognized an unrealized net mark-to-market gain on natural gas derivatives of$6 million in 2020 compared to an unrealized net mark-to-market loss of$14 million in 2019. These factors were partially offset by an increase in cost of sales due to higher sales volumes, higher distribution costs, and costs related to the special COVID-19 bonus. The special COVID-19 bonus is more fully described in the section above titled "Items Affecting Comparability of Results-COVID impacts." The cost of sales per ton averaged$164 in 2020, a 6% decrease from$175 per ton in 2019. Realized natural gas costs, including the impact of realized derivatives, decreased 18% to$2.24 per MMBtu in 2020 from$2.74 per MMBtu in 2019. 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, IT, and sales functions, as well as certain taxes and insurance and other professional service fees, including those for corporate initiatives. Selling, general and administrative expenses decreased$33 million , or 14%, to$206 million in 2020 from$239 million in 2019. The decrease was due primarily to lower corporate project activity and travel as a result of the COVID-19 pandemic. 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$17 million of income in 2020 compared to$73 million of income in 2019. The income in 2020 includes insurance proceeds of$37 million . The insurance proceeds were partially offset by$9 million of expense related to the cancellation of a project, and foreign currency transaction losses of$5 million , which includes the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. The income in 2019 was due 39
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CF INDUSTRIES HOLDINGS, INC. primarily to the gain recognized on the sale of the Pine Bend facility of$45 million and insurance proceeds of$37 million , partially offset by foreign currency transaction losses. Each of these items is more fully described in the section above titled "Items Affecting Comparability of Results." Equity in Earnings (Loss) of Operating Affiliate Equity in earnings (loss) of operating affiliate 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 earnings of operating affiliate was$11 million in 2020 compared to a loss of$5 million in 2019. The loss in 2019 included 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. 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 related assets. Interest expense-net also includes interest income, which includes amounts earned on our cash, cash equivalents, and investments and any interest earned related to income tax refunds. Net interest expense decreased by$56 million to$161 million in 2020 from$217 million in 2019. The decrease was due primarily to our redemption of$750 million aggregate principal amount of long-term debt in the fourth quarter of 2019, which is more fully described under "Liquidity and Capital Resources-Senior Notes," below. In addition, the decrease reflects$26 million of income in 2020 related to the finalization of the Terra amended tax returns, which is more fully described under "Liquidity and Capital Resources-Terra Amended Tax Returns," below. Losses on Debt Extinguishment OnNovember 13, 2019 , we redeemed in full 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. OnDecember 13, 2019 , we redeemed$250 million principal amount, representing 50% of the$500 million outstanding principal amount immediately prior to such redemption, 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 2020 was$31 million on pre-tax income of$463 million , or an effective tax rate of 6.7% compared to an income tax provision of$126 million on pre-tax income of$772 million , or an effective tax rate of 16.3% in 2019. For 2020, our income tax provision includes a$27 million benefit related to the settlement of certainU.S. and foreign income tax audits, which primarily related to the settlement of the audit of the Terra amended tax returns, which is more fully described under "Liquidity and Capital Resources-Terra Amended Tax Returns," below. For 2019, our income tax provision includes an incentive tax credit from theState of Louisiana of$30 million , net of federal income tax, related to certain capital projects at ourDonaldsonville, 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. Our effective tax rate is impacted by earnings attributable to the noncontrolling interest in CFN, as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interest. Our effective tax rate for 2020 of 6.7%, which is based on pre-tax income of$463 million , would be 2.2 percentage points higher, or 8.9%, if based on pre-tax income exclusive of the earnings attributable to the noncontrolling interest of$115 million . Our effective tax rate for 2019 of 16.3%, which is based on pre-tax income of$772 million , would be 4.0 percentage points higher, or 20.3%, if based on pre-tax income exclusive of the earnings attributable to the noncontrolling interest of$153 million . 40
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CF INDUSTRIES HOLDINGS, INC.
Both 2020 and 2019 were impacted by additional discrete tax items. See Note
10-Income Taxes for additional information.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest includes the net earnings
attributable to the approximately 11% CHS minority equity interest in CFN, a
subsidiary of CF Holdings .
Net earnings attributable to noncontrolling interest decreased $38 million , or
25%, to $115 million in 2020 compared to $153 million in 2019 due to lower
earnings of CFN driven by lower average selling prices due primarily to
increased global nitrogen supply availability.
Diluted Net Earnings Per Share Attributable to Common Stockholders
Net earnings per share attributable to common stockholders decreased $0.76 to
$1.47 per diluted share in 2020 from $2.23 per diluted share in 2019. This
decrease is due primarily to lower net earnings, partially offset by the impact
of a 3% reduction in diluted weighted-average common shares outstanding due to
repurchases made under our share repurchase program. See discussion under
"Liquidity and Capital Resources-Share Repurchase Program," below, for further
information.
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, 2020
Net sales $ 1,020 $ 1,248 $ 1,063 $ 455 $ 338 $ 4,124
Cost of sales 850 847 949 390 287 3,323
Gross margin $ 170 $ 401 $ 114 $ 65 $ 51 $ 801
Gross margin percentage 16.7 % 32.1 % 10.7 % 14.3 % 15.1 % 19.4 %
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 %
_______________________________________________________________________________ (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, 2020 compared to the year endedDecember 31, 2019 . For a discussion and analysis of our operating results by business segment for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K filed with theSEC onFebruary 24, 2020 . 41
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CF INDUSTRIES HOLDINGS, INC.
Ammonia Segment
Our ammonia segment produces anhydrous ammonia (ammonia), which is our most
concentrated nitrogen product. Ammonia contains 82% nitrogen and 18% hydrogen.
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,
2020 2019 2018 2020 v. 2019 2019 v. 2018
(in millions, except as noted)
Net sales $ 1,020 $ 1,113 $ 1,028 $ (93) (8) % $ 85 8 %
Cost of sales 850 878 867 (28) (3) % 11 1 %
Gross margin $ 170 $ 235 $ 161 $ (65) (28) % $ 74 46 %
Gross margin percentage 16.7 % 21.1 % 15.7 % (4.4) % 5.4 %
Sales volume by product tons (000s) 3,767 3,516 3,135 251 7 % 381 12 %
Sales volume by nutrient tons
(000s)(1) 3,090 2,884 2,571 206 7 % 313 12 %
Average selling price per product ton
(15) % $ (11) (3) %
Average selling price per nutrient
ton(1) $ 330 $ 386 $ 400 $ (56) (15) % $ (14) (4) %
Gross margin per product ton $ 45 $ 67 $ 51 $ (22) (33) % $ 16 31 %
Gross margin per nutrient ton(1)
63$ (26) (32) %$ 18 29 %
Depreciation and amortization
5 % $ 12 8 %
Unrealized net mark-to-market (gain)
loss on natural gas derivatives $ (2) $ 4 $ (4) $ (6) N/M $ 8 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, 2020 Compared to Year EndedDecember 31, 2019 Net Sales . Net sales in our ammonia segment decreased by$93 million , or 8%, to$1.02 billion in 2020 from$1.11 billion in 2019 due primarily to a 15% decrease in average selling prices, partially offset by a 7% increase in sales volume. Average selling prices decreased to$271 per ton in 2020 compared to$317 per ton in 2019. The decrease in average selling prices was due to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. Sales volume was higher in 2020 due to greater supply availability resulting from increased production and higher inventory levels entering 2020. Cost of Sales. Cost of sales in our ammonia segment averaged$226 per ton in 2020, a 10% decrease from$250 per ton in 2019, due primarily to the impact of lower realized natural gas costs and lower costs related to plant maintenance activity, partially offset by higher distribution costs. Gross Margin. Gross margin in our ammonia segment decreased by$65 million to$170 million in 2020 from$235 million in 2019, and our gross margin percentage was 16.7% in 2020 compared to 21.1% in 2019. The decrease in gross margin was due to a 15% decrease in average selling prices, which reduced gross margin by$170 million . This factor was partially offset by a decrease in realized natural gas costs, which increased gross margin by$57 million , a 7% increase in sales volume, which increased gross margin by$29 million , a$13 million net decrease in other manufacturing and distribution costs, and the impact of a$2 million unrealized net mark-to-market gain on natural gas derivatives in 2020 compared to a$4 million loss in 2019. 42
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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,
2020 2019 2018 2020 v. 2019 2019 v. 2018
(in millions, except as noted)
Net sales $ 1,248 $ 1,342 $ 1,322 $ (94) (7) % $ 20 2 %
Cost of sales 847 861 889 (14) (2) % (28) (3) %
Gross margin $ 401 $ 481 $ 433 $ (80) (17) % $ 48 11 %
Gross margin percentage 32.1 % 35.8 % 32.8 % (3.7) % 3.0 %
Sales volume by product tons (000s) 5,148 4,849 4,898 299 6 % (49) (1) %
Sales volume by nutrient tons
(000s)(1) 2,368 2,231 2,253 137 6 % (22)
(1) %
Average selling price per product ton
(13) % $ 7 3 %
Average selling price per nutrient
ton(1) $ 527 $ 602 $ 587 $ (75) (12) % $ 15 3 %
Gross margin per product ton $ 78 $ 99 $ 88 $ (21) (21) % $ 11 13 %
Gross margin per nutrient ton(1)
(22) % $ 24 13 %
Depreciation and amortization
2 % $ (12) (4) %
Unrealized net mark-to-market (gain)
loss on natural gas derivatives $ (2) $ 4 $ (4) $ (6) N/M $ 8 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, 2020 Compared to Year EndedDecember 31, 2019 Net Sales . Net sales in our granular urea segment decreased$94 million , or 7%, to$1.25 billion in 2020 compared to$1.34 billion in 2019 due primarily to a 13% decrease in average selling prices, partially offset by a 6% increase in sales volume. Average selling prices decreased to$242 per ton in 2020 compared to$277 per ton in 2019. The decrease was due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. Sales volume was higher due primarily to greater supply availability resulting from higher inventory levels entering 2020 and increased production. In addition, North American demand strengthened in the fourth quarter of 2020 amid increasing crop prices and overall improved farm economics. Cost of Sales. Cost of sales in our granular urea segment averaged$164 per ton in 2020, an 8% decrease from$178 per ton in 2019, due primarily to the impact of lower realized natural gas costs and lower costs related to plant maintenance activity. Gross Margin. Gross margin in our granular urea segment decreased by$80 million to$401 million in 2020 from$481 million in 2019, and our gross margin percentage was 32.1% in 2020 compared to 35.8% in 2019. The decrease in gross margin was due to a 13% decrease in average selling prices, which decreased gross margin by$166 million . This factor was partially offset by a decrease in realized natural gas costs, which increased gross margin by$40 million , a$23 million net decrease in other manufacturing and distribution costs, a 6% increase in sales volume, which increased gross margin by$17 million , and the impact of a$2 million unrealized net mark-to-market gain on natural gas derivatives in 2020 compared to a$4 million loss in 2019. 43
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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,
2020 2019 2018 2020 v. 2019 2019 v. 2018
(in millions, except as noted)
Net sales $ 1,063 $ 1,270 $ 1,234 $ (207) (16) % $ 36 3 %
Cost of sales 949 981 1,007 (32) (3) % (26) (3) %
Gross margin $ 114 $ 289 $ 227 $ (175) (61) % $ 62 27 %
Gross margin percentage 10.7 % 22.8 % 18.4 % (12.1) % 4.4 %
Sales volume by product tons (000s) 6,843 6,807 7,042 36 1 % (235) (3) %
Sales volume by nutrient tons
(000s)(1) 2,155 2,144 2,225 11 1 % (81) (4) %
Average selling price per product ton $ 155 $ 187 $ 175 $ (32) (17) % $ 12 7 %
Average selling price per nutrient
ton(1) $ 493 $ 592 $ 555 $ (99) (17) % $ 37 7 %
Gross margin per product ton $ 17 $ 42 $ 32 $ (25) (60) % $ 10 31 %
Gross margin per nutrient ton(1)
102$ (82) (61) %$ 33 32 %
Depreciation and amortization
270$ 5 2 %$ (19) (7) % Unrealized net mark-to-market (gain) loss on natural gas derivatives$ (2) $ 4 $ (4) $ (6) N/M$ 8
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, 2020 Compared to Year EndedDecember 31, 2019 Net Sales . Net sales in our UAN segment decreased$207 million , or 16%, to$1.06 billion in 2020 compared to$1.27 billion in 2019 due primarily to a 17% decrease in average selling prices, partially offset by a 1% increase in sales volume. Average selling prices decreased to$155 per ton in 2020 compared to$187 per ton in 2019 due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates and increased imports intothe United States as trade flows adjusted in response to theEuropean Union anti-dumping duties. Sales volume in our UAN segment was approximately 6.8 million tons in both 2020 and 2019. Cost of Sales. Cost of sales in our UAN segment averaged$138 per ton in 2020, a 5% decrease from$145 per ton in 2019, due primarily to the impact of lower realized natural gas costs. Gross Margin. Gross margin in our UAN segment decreased by$175 million to$114 million in 2020 from$289 million in 2019, and our gross margin percentage was 10.7% in 2020 compared to 22.8% in 2019. The decrease in gross margin was due to a 17% decrease in average selling prices, which decreased gross margin by$222 million , and a$27 million net increase in other manufacturing and distribution costs. These factors were partially offset by a decrease in realized natural gas costs, which increased gross margin by$58 million , a 1% increase in sales volume, which increased gross margin by$10 million , and the impact of a$2 million unrealized net mark-to-market gain on natural gas derivatives in 2020 compared to a$4 million loss in 2019. 44
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CF INDUSTRIES HOLDINGS, INC.
AN Segment
Our AN segment produces ammonium nitrate (AN). AN, which has a nitrogen content
between 29% and 35%, is produced by combining anhydrous ammonia and nitric acid.
AN is used as nitrogen fertilizer and is also used by industrial customers for
commercial explosives and blasting systems. AN is produced at our nitrogen
complexes in Yazoo City, Mississippi and Ince and Billingham, United Kingdom .
The following table presents summary operating data for our AN segment:
Year ended December 31,
2020 2019 2018 2020 v. 2019 2019 v. 2018
(in millions, except as noted)Net sales$ 455 $ 506 $ 460 $ (51) (10) %$ 46 10 % Cost of sales 390 399 414 (9) (2) % (15) (4) % Gross margin$ 65 $ 107 $ 46 $ (42) (39) %$ 61 133 % Gross margin percentage 14.3 % 21.1 % 10.0 % (6.8) % 11.1 % Sales volume by product tons (000s) 2,216 2,109 2,002 107 5 % 107 5 % Sales volume by nutrient tons (000s)(1) 747 708 676 39 6 % 32
5 %
Average selling price per product ton
(15) % $ 10 4 %
Average selling price per nutrient
ton(1) $ 609 $ 715 $ 680 $ (106) (15) % $ 35 5 %
Gross margin per product ton $ 29 $ 51 $ 23 $ (22) (43) % $ 28 122 %
Gross margin per nutrient ton(1) $ 87 $ 151 $ 68 $ (64) (42) % $ 83 122 %
Depreciation and amortization $ 100 $ 88 $ 85 $ 12 14 % $ 3 4 %
Unrealized net mark-to-market loss on
natural gas derivatives $ - $ 1 $ - $ (1) (100) % $ 1 N/M
_______________________________________________________________________________
N/M-Not Meaningful (1)AN represents between 29% and 35% of nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net Sales . Net sales in our AN segment decreased$51 million , or 10%, to$455 million in 2020 from$506 million in 2019 due primarily to a 15% decrease in average selling prices, partially offset by a 5% increase in sales volume. Average selling prices decreased to$205 per ton in 2020 compared to$240 per ton in 2019 due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. Sales volume increased due primarily to greater supply availability as a result of higher inventory levels entering 2020. Cost of Sales. Cost of sales in our AN segment averaged$176 per ton in 2020, a 7% decrease from$189 per ton in 2019, due primarily to the impact of lower realized natural gas costs and lower costs related to plant maintenance activity. Gross Margin. Gross margin in our AN segment decreased by$42 million to$65 million in 2020 from$107 million in 2019, and our gross margin percentage was 14.3% in 2020 compared to 21.1% in 2019. The decrease in gross margin was due to a 15% decrease in average selling prices, which decreased gross margin by$77 million . This factor was partially offset by a decrease in realized natural gas costs, which increased gross margin by$26 million , and a 5% increase in sales volume, which increased gross margin by$4 million , a$4 million net decrease in other manufacturing and distribution costs, and the impact of a$1 million unrealized net mark-to-market loss on natural gas derivatives in 2019. 45
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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 mineral acid that is used in the production of
nitrate-based fertilizers, nylon precursors and other specialty chemicals.
•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,
2020 2019 2018 2020 v. 2019 2019 v. 2018
(in millions, except as noted)
Net sales $ 338 $ 359 $ 385 $ (21) (6) % $ (26) (7) %
Cost of sales 287 297 335 (10) (3) % (38) (11) %
Gross margin $ 51 $ 62 $ 50 $ (11) (18) % $ 12 24 %
Gross margin percentage 15.1 % 17.3 % 13.0 % (2.2) % 4.3 %
Sales volume by product tons (000s) 2,322 2,257 2,252 65 3 % 5 - %
Sales volume by nutrient tons
(000s)(1) 457 444 439 13 3 % 5 1 %
Average selling price per product ton
(8) % $ (12) (7) %
Average selling price per nutrient
ton(1) $ 740 $ 809 $ 877 $ (69) (9) % $ (68) (8) %
Gross margin per product ton $ 22 $ 27 $ 22 $ (5) (19) % $ 5 23 %
Gross margin per nutrient ton(1)
(20) % $ 26 23 %
Depreciation and amortization
67$ (4) (6) %$ 5 7 % Unrealized net mark-to-market loss (gain) on natural gas derivatives $ -$ 1 $ (1) $ (1) (100) %$ 2
N/M
_______________________________________________________________________________
N/M-Not Meaningful (1)Nutrient tons represent the tons of nitrogen within the product tons. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net Sales . Net sales in our Other segment decreased$21 million , or 6%, to$338 million in 2020 from$359 million in 2019 due to an 8% decrease in average selling prices, partially offset by a 3% increase in sales volume. Average selling prices decreased to$146 per ton in 2020 compared to$159 per ton in 2019. The decrease in average selling prices was due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. The increase in sales volume was due primarily to higher DEF and NPK sales volumes, partially offset by lower nitric acid sales volume. Cost of Sales. Cost of sales in our Other segment averaged$124 per ton in 2020, a 6% decrease from$132 per ton in 2019, due primarily to the impact of lower realized natural gas costs. Gross Margin. Gross margin in our Other segment decreased by$11 million to$51 million in 2020 from$62 million in 2019, and our gross margin percentage was 15.1% in 2020 compared to 17.3% in 2019. The decrease in gross margin was due to an 8% decrease in average selling prices, which reduced gross margin by$30 million . This factor was partially offset by a decrease in realized natural gas costs, which increased gross margin by$14 million , a$3 million net decrease in other manufacturing and distribution costs, a 3% increase in sales volume including a shift in the mix of products sold within the segment, which increased gross margin by$1 million , and the impact of a$1 million unrealized net mark-to-market loss on natural gas derivatives in 2019. 46
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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. Our cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic. InMarch 2020 , as the impact of the COVID-19 pandemic unfolded in many locations around the world, credit markets began to function less efficiently, causing concern about liquidity in credit markets generally. In response to this and out of an abundance of caution, we borrowed$500 million under our$750 million revolving credit agreement to ensure we maintained ample financial flexibility in light of the uncertainty in the global markets, including the financial credit markets. InApril 2020 , due to confidence in the functioning of the credit markets and strong nitrogen fertilizer business conditions, we repaid the$500 million of borrowings. Our cash and cash equivalents balance was$683 million atDecember 31, 2020 , an increase of$396 million from$287 million atDecember 31, 2019 . AtDecember 31, 2020 , we were in compliance with all applicable covenant requirements under our revolving credit agreement, senior notes and senior secured notes, and unused borrowing capacity under our revolving credit agreement was$750 million . OnFebruary 17, 2021 , we announced that our wholly owned subsidiaryCF Industries elected to redeem in full the entire outstanding$250 million principal amount of 3.400% Senior Secured Notes dueDecember 2021 (the 2021 Notes) onMarch 20, 2021 , in accordance with the optional redemption provisions provided in the indenture governing the 2021 Notes. Based on market interest rates onFebruary 12, 2021 , we estimate that the total amount for the redemption of the 2021 Notes will be approximately$258 million , including accrued interest. 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 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 under the 2019 Share Repurchase Program 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 in 2019. During the first quarter of 2020, we repurchased approximately 2.6 million shares ofCF Holdings common stock under the 2019 Share Repurchase Program for$100 million and retired those shares in the second quarter of 2020. No shares were repurchased in the second, third or fourth quarter of 2020 under the 2019 Share Repurchase Program. AtDecember 31, 2020 , we held 102,843 shares of treasury stock. 47
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CF INDUSTRIES HOLDINGS, INC.
The following table summarizes the share repurchases under the 2019 Share
Repurchase Program.
Shares Amounts
(in millions)
Shares repurchased in 2019:
First quarter 1.5 $ 60
Second quarter 2.7 118
Third quarter 1.5 72
Fourth quarter 1.9 87
Shares repurchased as of December 31, 2019 7.6 337
Shares repurchased in 2020:
First quarter 2.6 100
Shares repurchased as of
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 totaled$309 million in 2020 compared to$404 million in 2019. The decrease in capital expenditures in 2020 was due primarily to actions take to defer certain non-essential capital project activity as a result of the COVID-19 pandemic. Capital expenditures in 2021 are estimated to be in the range of$450 million , which reflects a return to a normal spending level and includes expenditures for our initial green ammonia project at ourDonaldsonville complex. Planned capital expenditures are generally 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, delays 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. All of these factors may also be influenced or exacerbated by the direct or indirect impacts of the COVID-19 pandemic. 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 35% of totalU.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 inthe United States' supply of fuel for transportation. In addition, theU.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 or the continued expansion of electric vehicles, may put pressure on ethanol prices that could result in reduced profitability and lower production for the ethanol industry. This could impact the demand for corn and nitrogen fertilizer and, therefore, could impact our liquidity. 48
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CF INDUSTRIES HOLDINGS, INC. Terra Amended Tax Returns In 2020, we received income tax refunds, including interest, of$110 million relating to the settlement ofIRS audits of amended tax returns that we had filed in 2012 related to prior tax years. See discussion under "Items Affecting Comparability-Terra Amended Tax Returns," above, for further information. Repatriation of Foreign Earnings and Income Taxes We have operations inCanada , theUnited Kingdom and a 50% interest in a joint venture in theRepublic of Trinidad and Tobago . Historically, the estimated additionalU.S. and foreign income taxes due upon repatriation of the earnings of these foreign operations to theU.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 tothe United States , unless such earnings are subject toU.S. rules on passive income or certain anti-abuse provisions. Foreign subsidiary earnings may still be subject to withholding taxes when repatriated tothe 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 ofDecember 31, 2020 , approximately$122 million of our consolidated cash and cash equivalents balance of$683 million was held by our Canadian andUnited Kingdom subsidiaries. Historically, and for the current year, the cash balance held by the Canadian subsidiaries represented accumulated earnings of our foreign operations that were not considered to be permanently reinvested. As ofDecember 31, 2020 , we would not expect any additional cash tax cost to repatriate the Canadian andUnited 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 ofDecember 31, 2018 , we had net operating loss and capital loss carryforwards (collectively, the Tax Loss Carryforwards) of$271 million . These Tax Loss Carryforwards were available to reduce taxable income and thereby, reduce cash taxes inthe United States and other tax jurisdictions in which they could be applied. As a result of the effective usage of certain of these Tax Loss Carryforwards to offset current cash taxes payable, there were noU.S. Federal Tax Loss Carryforwards remaining as ofDecember 31, 2019 . As a result, we paid income taxes of approximately$111 million in 2020, net of income tax refunds of approximately$90 million primarily related to the Terra Amended Tax Returns, which are more fully described above under "Items Affecting Comparability-Terra Amended Tax Returns." Debt Revolving Credit Agreement OnDecember 5, 2019 ,CF Holdings andCF 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 matureSeptember 18, 2020 . The Revolving Credit Agreement provides for a revolving credit facility of up to$750 million with a maturity ofDecember 5, 2024 . The Revolving Credit Agreement includes a letter of credit sub-limit of$125 million . Borrowings under the Revolving Credit Agreement may be used for working capital, capital expenditures, acquisitions, share repurchases and other general corporate purposes. Borrowings under the Revolving Credit Agreement may be denominated inU.S. dollars, Canadian dollars, euros 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. We are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend onCF Holdings' credit rating at the time.CF Industries is the lead borrower under the Revolving Credit Agreement. The borrowers and guarantors under the Revolving Credit Agreement, which are currently comprised ofCF Holdings ,CF Industries andCF Holdings' wholly owned subsidiariesCF Industries Enterprises, LLC (CFE),CF Industries Sales, LLC (CFS),CF USA Holdings, LLC (CF USA ), andCF Industries Distribution Facilities, LLC (CFIDF), are referred to together herein as the Loan Parties. Subject to specified 49
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CF INDUSTRIES HOLDINGS, INC. exceptions, the Revolving Credit Agreement requires that each direct or indirect domestic subsidiary ofCF Holdings that guarantees debt for borrowed money of anyLoan 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 byCF 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 betweenCF 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 byCF 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 thanCF 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 toCF 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,CF Industries may elect to increase the Maximum Total 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, 2020 , 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. InMarch 2020 , we borrowed$500 million under the Revolving Credit Agreement to ensure we maintained ample financial flexibility in light of the uncertainty in the global markets, including the financial credit markets, caused by the COVID-19 pandemic. InApril 2020 , due to confidence in the functioning of the credit markets and strong nitrogen fertilizer business conditions, we repaid the$500 million of borrowings, which returned our unused borrowing capacity under the Revolving Credit Agreement to$750 million . As ofDecember 31, 2020 , we had unused 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, 2020 or 2019. Maximum borrowings under the Revolving Credit Agreement during 2020 were$500 million . The 50
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CF INDUSTRIES HOLDINGS, INC.
weighted-average annual interest rate of borrowings under the Revolving Credit
Agreement during 2020 was 2.05%. There were no borrowings under the Prior Credit
Agreement or the Revolving Credit Agreement during 2019.
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 $250 million
(reflecting an increase of $105 million in December 2020 ). As of December 31,
2020 , approximately $125 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,
2020 and 2019 consisted of the following debt securities issued by CF
Industries :
December 31, 2020 December 31, 2019
Principal Carrying Principal Carrying
Effective Interest Rate Outstanding Amount (1) Outstanding Amount (1)
(in millions)
Public Senior Notes:
3.450% due June 2023 3.562% $ 750 $ 748 $ 750 $ 747
5.150% due March 2034 5.279% 750 741 750 740
4.950% due June 2043 5.031% 750 742 750 742
5.375% due March 2044 5.465% 750 741 750 741
Senior Secured Notes:
3.400% due December 2021 3.782% 250 249 250 248
4.500% due December 2026 4.759% 750 740 750 739
Total long-term debt $ 4,000 $ 3,961 $ 4,000 $ 3,957
Less: Current maturities of long-term
debt 250 249 - -
Long-term debt, net of current
maturities $ 3,750 $ 3,712 $ 4,000 $ 3,957 _______________________________________________________________________________
(1)Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was$9 million and$10 million as ofDecember 31, 2020 and 2019, respectively, and total deferred debt issuance costs were$30 million and$33 million as ofDecember 31, 2020 and 2019, respectively. Public Senior Notes OnNovember 13, 2019 , we redeemed in full all of the$500 million outstanding principal amount of the 7.125% senior notes dueMay 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 byCF Holdings . FromNovember 21, 2016 toNovember 13, 2019 , the Public Senior Notes were guaranteed not only byCF Holdings , but also by certain 100% owned subsidiaries ofCF 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. OnNovember 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. 51
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CF INDUSTRIES HOLDINGS, INC. The indentures governing the Public Senior Notes contain covenants that limit, among other things, the ability ofCF Holdings and its subsidiaries, includingCF 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 ofCF 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 ofCF 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 toCF Industries' andCF 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 involvingCF Holdings orCF 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, unlessCF 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 OnNovember 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). OnDecember 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. OnFebruary 17, 2021 , we announced thatCF Industries elected to redeem in full the entire outstanding$250 million principal amount of the 2021 Notes onMarch 20, 2021 , in accordance with the optional redemption provisions provided in the indenture governing 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, byCF Holdings and each current and future domestic subsidiary ofCF Holdings (other thanCF Industries ) that from time to time is a borrower, or guarantees indebtedness, under the Revolving Credit Agreement. The requirement for any subsidiary ofCF 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 ofCF Industries ,CF Holdings and the subsidiary guarantors, including a pledge byCF 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 ifCF 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 involvingCF Holdings orCF 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 52
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CF INDUSTRIES HOLDINGS, INC. to the 2021 Notes or the 2026 Notes, as applicable, unlessCF 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. The indentures governing the Senior Secured Notes contain covenants that limit, among other things, the ability ofCF Holdings and its subsidiaries, includingCF 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 ofCF 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 ofCF 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 toCF Industries' andCF 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 nitrogen 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 ofDecember 31, 2020 and 2019, we had$130 million and$119 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 Natural gas is the principal raw material used to produce nitrogen products. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia, granular urea, UAN, AN and other products. Expenditures on natural gas are a significant portion of our production costs, representing approximately one-third of our total production costs in 2020. As a result of these factors, natural gas prices have a significant impact on our operating expenses and can thus affect our liquidity. We enter into agreements for a portion of our future natural gas supply and related transportation. As ofDecember 31, 2020 , our natural gas purchase agreements have terms that range from one to five years and a total minimum commitment of approximately$430 million , and our natural gas transportation agreements have terms that range from one to ten years and a total minimum commitment of approximately$180 million . Our minimum commitments to purchase and transport natural gas are based on prevailing market-based forward prices excluding reductions for plant maintenance and turnaround activities. 53
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CF INDUSTRIES HOLDINGS, INC. Because most of our nitrogen manufacturing facilities are located inthe United States andCanada , the price of natural gas inNorth America directly impacts a substantial portion of our operating expenses. Due to increases in natural gas production resulting from the rise in production from shale gas formations, natural gas prices inNorth America have declined in the last decade, but are subject to volatility. During 2020, the daily closing price at the Henry Hub, the most heavily-traded natural gas pricing point inNorth America , reached a low of$1.34 per MMBtu onSeptember 22, 2020 and three consecutive days in October and a high of$3.08 per MMBtu onOctober 27, 2020 . During the three-year period endedDecember 31, 2020 , the daily closing price at the Henry Hub reached a low of$1.34 per MMBtu onSeptember 22, 2020 and three consecutive days inOctober 2020 and a high of$6.88 per MMBtu onJanuary 4, 2018 . We also have manufacturing facilities located in theUnited Kingdom . These facilities are subject to fluctuations associated with the price of natural gas inEurope . The major natural gas trading point for theUnited Kingdom is theNational Balancing Point (NBP). During 2020, the daily closing price at NBP reached a low of$1.04 per MMBtu onMay 22, 2020 and a high of$7.71 per MMBtu onDecember 30, 2020 . During the three-year period endedDecember 31, 2020 , the daily closing price at NBP reached a low of$1.04 per MMBtu onMay 22, 2020 , and a high of$31.74 per MMBtu onMarch 2, 2018 . Natural gas costs in our cost of sales, including the impact of realized natural gas derivatives, decreased 18% to$2.24 per MMBtu in 2020 from$2.74 per MMBtu in 2019. Derivative Financial Instruments We may use derivative financial instruments to reduce our exposure to changes in prices for natural gas that will be purchased in the future. Natural gas is the largest and most volatile component of our manufacturing cost for our nitrogen products. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. Volatility in reported quarterly earnings can result from the unrealized mark-to-market adjustments in the value of the derivatives. In 2020 and 2019, we recognized an unrealized net mark-to-market (gain) loss on natural gas derivatives of$(6) million and$14 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 ofInternational 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 ofDecember 31, 2020 and 2019, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was$6 million and$12 million , 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 ofDecember 31, 2020 , our open natural gas derivative contracts consisted of natural gas fixed price swaps and basis swaps for 34.1 million MMBtus. As ofDecember 31, 2019 , contracts consisted of natural gas fixed price swaps, basis swaps and options for 41.1 million MMBtus. At bothDecember 31, 2020 and 2019, 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. 54
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CF INDUSTRIES HOLDINGS, INC.
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 . As of December 31,
2020 and 2019, the embedded derivative liability was $18 million and
$20 million , respectively. See Note 9-Fair Value Measurements for additional
information.
Defined Benefit Pension Plans
We contributed $45 million to our pension plans in 2020. We expect to contribute
approximately $33 million to our pension plans in 2021. In addition, we expect
to contribute a total of approximately $66 million to our U.K. plans in the
three-year period ending 2024, as agreed with the plans' trustees.
Distributions on Noncontrolling Interest in CFN
The CFN Board of Managers approved semi-annual distribution payments for the
years ended December 31, 2020 , 2019 and 2018, in accordance with CFN's limited
liability company agreement, as follows:
Distribution Amount
Approved and paid Distribution Period (in millions)
First quarter of 2021 Six months ended December 31, 2020 $ 64
Third quarter of 2020 Six months ended June 30, 2020 86
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
Cash Flows
Operating Activities
Net cash provided by operating activities in 2020 was $1,231 million as compared
to $1,505 million in 2019, a decrease of $274 million . The decrease in cash flow
from operations was due primarily to lower net earnings and higher cash taxes
paid, partially offset by favorable changes in net working capital. Cash paid
for taxes, net of refunds, was $111 million in 2020, compared to a net refund of
$41 million in 2019. In 2020, we received income tax refunds, including
interest, of $110 million related to the finalization of amended U.S. tax
returns, which is further described above under Terra Amended Tax Returns.
During 2020, net changes in working capital contributed $12 million to cash flow
from operations, while in 2019 net changes in working capital reduced cash flow
from operations by $112 million . The increased cash flow from working capital
changes was primarily driven by inventories and accounts payable and accrued
expenses.
Investing Activities
Net cash used in investing activities was $299 million in 2020 compared to
$319 million in 2019. During 2020, capital expenditures totaled $309 million
compared to $404 million in 2019. The decrease in capital expenditures in 2020
was due primarily to actions taken to defer certain non-essential capital
project activity as a result of the COVID-19 pandemic. 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.
Financing Activities
Net cash used in financing activities was $542 million in 2020 compared to
$1,583 million in 2019. The decline in cash used in financing activities was due
to cash used to redeem certain senior notes in 2019 and higher share repurchase
activity in 2019. In 2019, we paid $769 million in connection with the
redemption of the 2020 Notes and the partial redemption of the 2021 Notes. In
2020, we spent $100 million to repurchase shares of common stock compared to
$370 million in 2019, which included approximately $33 million related to shares
repurchased in late 2018 that were paid for in 2019. Dividends paid on common
stock in 2020 and 2019 were $258 million and $265 million , respectively.
Distributions to noncontrolling interest totaled $174 million in 2020 as
compared to $186 million in 2019.
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CF INDUSTRIES HOLDINGS, INC. Critical Accounting 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 withU.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 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 theU.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. 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 toU.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. We recognize the effect of income tax positions only if sustaining those positions is more likely than not. Tax positions that meet the more likely than not recognition threshold but are not highly certain are measured based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement with the taxing authority. As ofDecember 31, 2020 , we have recorded a reserve for unrecognized tax benefits, including penalties and interest, of$85 million . 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 interpretation of the tax laws 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 withU.S. GAAP in order to assess recoverability. Factors that we must estimate when performing impairment tests include production and sales volumes, 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 56
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CF INDUSTRIES HOLDINGS, INC. 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 investment in an unconsolidated affiliate is reviewed for impairment whenever events or circumstances indicate that its 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 would be recognized immediately in earnings. PLNL is our joint venture investment in theRepublic of Trinidad and Tobago and operates an ammonia plant that relies on natural gas supplied, under a Gas Sales Contract (the NGC Contract), by theNational Gas Company ofTrinidad and Tobago Limited (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 ofSeptember 2018 and was extended on the same terms untilSeptember 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. The carrying value of our equity method investment in PLNL atDecember 31, 2020 is$80 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 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 2020, 2019 or 2018. As ofDecember 31, 2020 and 2019, the carrying value of our goodwill was$2.37 billion . 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 FertilisersUK 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 ourUnited 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 ourUnited Kingdom plans, RPI. TheDecember 31, 2020 PBO was computed based on a weighted-average discount rate of 2.4% for ourNorth America plans and 1.5% for ourUnited 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 ofDecember 31, 2020 . Declines in comparable bond yields would increase our PBO. The weighted-average discount rate used to calculate pension expense in 2020 was 3.1% forNorth America plans and 2.0% forUnited 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 4.1% weighted-average EROA used to calculate pension expense in 2020 for ourNorth 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 3.4% weighted-average EROA used to calculate pension expense in 2020 for ourUnited Kingdom plans is based on expected long-term performance of underlying investments. The EROA for bothNorth America andUnited Kingdom plans are adjusted for expenses and diversification bonuses, if applicable. For ourUnited Kingdom plans, the 3.0% RPI used to calculate our PBO and the 3.0% RPI used to calculate 2020 pension 57
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CF INDUSTRIES HOLDINGS, INC.
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 $884 million as of
December 31, 2020 , which was $38 million higher than pension plan assets. For
our United Kingdom pension plans, our PBO was $643 million as of December 31,
2020 , which was $152 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, 2020 PBO and 2020 pension expense:
North America Plans
Increase/(Decrease) in Increase/(Decrease) in
December 31, 2020 PBO 2020 Pension Expense
Assumption +50 bps -50 bps +50 bps -50 bps
(in millions)
Discount Rate $ (52) $ 58 $ (2) $ 2
EROA N/A N/A (4) 4
United Kingdom Plans
Increase/(Decrease) in Increase/(Decrease) in
December 31, 2020 PBO 2020 Pension Expense
Assumption +50 bps -50 bps +50 bps -50 bps
(in millions)
Discount Rate $ (49) $ 53 $ - $ -
EROA N/A N/A (2) -
RPI 28 (30) 2 (2)
See Note 11-Pension and Other Postretirement Benefits for further discussion of
our pension plans.
Recent Accounting Pronouncements
See Note 3-New Accounting Standards for a discussion of recent accounting
pronouncements.
Subsequent Event
In February 2021 , the central portion of the United States experienced extreme
and unprecedented cold weather. Certain natural gas suppliers declared force
majeure events due to natural gas well freeze offs or frozen equipment. This
occurred at the same time as large increases in natural gas demand were
occurring due to the cold temperatures. Due to these unprecedented factors,
several states declared a state of emergency and natural gas was redirected for
residential usage. At certain of our manufacturing locations, we were asked to
reduce our natural gas consumption and therefore these plants either operated at
reduced rates or temporarily suspended operations. We returned excess natural
gas to our suppliers and received prevailing market prices, which were in excess
of our cost. During this period of time, we have experienced lower production,
but have procured product in order to meet customer obligations. Higher
maintenance and repair activity may be necessary as the plants are restarted. At
the present time, we do not know the net positive or negative impact of these
events on our operations; however, we do not expect it to result in a material
impact to our business.
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