CF Industries Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion and analysis in conjunction with our annual consolidated financial statements and related notes and our discussion and analysis of financial condition and results of operations, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on February 24, 2020, as well as Item 1. Financial Statements in this Quarterly Report on Form 10-Q. All references to “CF Holdings,” “we,” “us,” “our” and “the Company” refer to CF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only to CF Industries Holdings, Inc. itself and not its subsidiaries. All references to “CF Industries” refer to CF Industries, Inc., a 100% owned subsidiary of CF Industries Holdings, Inc. References to tons refer to short tons. Notes referenced in this discussion and analysis refer to the notes to our unaudited interim consolidated financial statements in Item 1. Financial Statements in this Quarterly Report on Form 10-Q. The following is an outline of the discussion and analysis included herein: • Overview of CF Holdings ◦ Our Company ◦ Market Conditions and Current Developments ◦ Items Affecting Comparability of Results ◦ Financial Executive Summary • Consolidated Results of Operations ◦ Second Quarter of 2020 Compared to Second Quarter of 2019 ◦ Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 • Operating Results by Business Segment • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Critical Accounting Policies and Estimates • Recent Accounting Pronouncements • Forward-Looking Statements Overview of CF Holdings Our Company We are a leading global manufacturer and distributor of nitrogen products for fertilizer, emissions abatement and other industrial applications. We operate manufacturing complexes in the United States, Canada and the United Kingdom, which are among the most cost-advantaged, efficient and flexible in the world, and an extensive storage, transportation and distribution network in North America. Our 3,000 employees focus on safe and reliable operations, environmental stewardship and disciplined capital and corporate management, driving our strategy to leverage and sustainably grow our nitrogen and chemicals platform to serve customers and create long-term shareholder value. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our principal nitrogen fertilizer products are anhydrous ammonia (ammonia), granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium. Our principal assets as of June 30, 2020 include: • five U.S. nitrogen manufacturing facilities located in Donaldsonville, Louisiana (the largest nitrogen complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; Verdigris, Oklahoma; and Woodward, Oklahoma. These facilities are wholly owned directly or indirectly by CF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder. See Note 13—Noncontrolling Interest for additional information on our strategic venture with CHS; • two Canadian nitrogen manufacturing facilities located in Medicine Hat, Alberta (the largest nitrogen complex in Canada) and Courtright, Ontario; 22 Table of Contents CF INDUSTRIES HOLDINGS, INC. • two United Kingdom nitrogen manufacturing facilities located in Billingham and Ince; • an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and • a 50% interest in Point Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in the Republic of Trinidad and Tobago that we account for under the equity method. Market Conditions and Current Developments COVID-19 Pandemic In March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019 (COVID-19) as a pandemic. Since that time, efforts to slow the spread of COVID-19 have intensified. A number of countries, as well as certain states and cities within the United States, have enacted temporary closures of businesses, issued shelter in place or quarantine orders, and taken other restrictive measures in response to the pandemic. Due to the use of fertilizer products in crop production, our business operations have been designated as part of the critical infrastructure by the United States and as essential businesses in the United Kingdom and Canada, with corresponding designations for those states and provinces in which we operate that have issued restrictive orders. As a result, our manufacturing complexes continued to operate during the first half of 2020 and have continued to operate through the date of this report. Our production of ammonia, the basic building block for our products, was 5.2 million tons in both the first six months of 2020 and the first six months of 2019. Through the date of this filing, we have continued to ship products by all modes of transportation to our customers, and we have not experienced any significant delays in marine, rail or truck transportation services due to the pandemic. In the first half of 2020, we did not experience a meaningful impact in customer demand as a result of the COVID-19 pandemic. Our total volume of products shipped in the first six months of 2020 of 10.1 million tons was 3% higher compared to 9.8 million tons in the first six months of 2019. In response to the pandemic, we instituted safety precautions to protect the health and well-being of all of our employees, including the manufacturing 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 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. 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 temporarily idle that facility, which could have an impact on our business operations, profitability and cash flow. The impact of the COVID-19 pandemic is fluid and continues to evolve. As a result, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will be impacted by the pandemic in the future. Sales Volume There was strong demand for fertilizer in the first six months of 2020 as we shipped 10.1 million tons of product compared to 9.8 million tons in the first six months of 2019, a 3% increase. Our shipments can shift between quarters due primarily to shifts in weather patterns that impact fertilizer applications. In the second quarter of 2020, our sales volumes were lower across most of our major products compared to the second quarter of 2019 as a result of higher sales volumes in the second quarter of 2019 due to the delayed spring application season as a result of persistent cold and wet weather last year. Additionally, certain shipments of granular urea occurred earlier, in the first quarter of 2020, due to favorable weather conditions. 23 Table of Contents CF INDUSTRIES HOLDINGS, INC. In the three months ended June 30, 2020, sales volume was 5.4 million product tons, a decrease of 6%, compared to sales volume of 5.7 million product tons for three months ended June 30, 2019. This decrease in sales volume resulted in a decrease in net sales of approximately $100 million. Sales volumes in our granular urea, ammonia, Other and UAN segments decreased in the second quarter of 2020 compared to the second quarter of 2019, partially offset by an increase in our AN segmen t sales volumes. In the six months ended June 30, 2020, sales volume was 10.1 million product tons, an increase of 3%, compared to sales volume of 9.8 million product tons for the six months ended June 30, 2019. This increase in sales volume resulted in an increase in net sales of approximately $73 million. Sales volumes across all products increased in the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Selling Prices The selling prices for all products were lower in the second quarter of 2020 than the second quarter of 2019 as global energy prices remained low, driving higher global nitrogen operating rates and the resulting additional global supply availability. In the second quarter of 2020, the average selling price for our products was $224 per ton, a decrease of 15% compared to $263 per ton in the second quarter of 2019. This resulted in a decrease in net sales of approximately $198 million. In the six months ended June 30, 2020, the average selling price for our products was $216 per ton, or 15% lower compared to $255 per ton for the six months ended June 30, 2019. This resulted in a decrease in net sales of approximately $401 million. Natural Gas Prices Natural gas is the principal raw material used to produce nitrogen fertilizers. We use natural gas both as a chemical feedstock and as a fuel to produce nitrogen products. Natural gas is a significant cost component of manufactured nitrogen products, representing approximately one-third of our production costs. Most of our nitrogen fertilizer manufacturing facilities are located 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 the first half of 2020 were lower on average than in the first half of 2019, due in part to reduced demand related to measures designed to curb the spread of COVID-19, partially offset by reductions in supply. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, for the three months ended June 30, 2020 was $1.65 per MMBtu compared to $2.51 per MMBtu for the three months ended June 30, 2019, a decrease of 34%. The average daily market price at the Henry Hub for the six months ended June 30, 2020 was $1.76 per MMBtu compared to $2.70 per MMBtu for the six months ended June 30, 2019, a decrease of 35%. We also have manufacturing facilities located in the United Kingdom. Production costs for these facilities are subject to fluctuations associated with the price of natural gas in Europe. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). The price of natural gas in the United Kingdom declined throughout the first half of 2020 as a result of increased availability of liquefied natural gas in the global market as well as the global economic downturn related to the COVID-19 pandemic. The average daily market price of natural gas at NBP for the three months ended June 30, 2020 was $1.60 per MMBtu compared to $4.07 per MMBtu for the three months ended June 30, 2019, a decrease of 61%. The average daily market price at NBP for the six months ended June 30, 2020 was $2.40 per MMBtu compared to $5.15 per MMBtu for the six months ended June 30, 2019, a decrease of 53%. Natural gas costs in cost of sales, including the impact of realized natural gas derivatives, decreased 34% to $1.86 per MMBtu in the three months ended June 30, 2020 from $2.81 per MMBtu in the three months ended June 30, 2019, which resulted in an increase in gross margin of approximately $96 million. Natural gas costs in cost of sales, including the impact of realized natural gas derivatives, decreased 30% to $2.20 per MMBtu in the six months ended June 30, 2020 from $3.15 per MMBtu in the six months ended June 30, 2019, which resulted in an increase in gross margin of approximately $183 million. 24 Table of Contents CF INDUSTRIES HOLDINGS, INC. Items Affecting Comparability of Results In addition to the impact of market conditions discussed above, certain items impacted the comparability of our financial results during the three and six months ended June 30, 2020 and 2019. The following table and related discussion outline these items and how they impacted the comparability of our financial results during these periods. During the three months ended June 30, 2020 and 2019, we reported net earnings attributable to common stockholders of $190 million and $283 million, respectively. During the six months ended June 30, 2020 and 2019, we reported net earnings attributable to common stockholders of $258 million and $373 million, respectively. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax (in millions) Unrealized net mark-to-market (gain) loss on natural gas derivatives (1) $ — $ — $ (1) $ — $ (12) $ (9) $ 1 $ 1 Special COVID-19 bonus for operational workforce (1) 15 12 — — 15 12 — — (Gain) loss on foreign currency transactions, including intercompany loans (2) (5) (4) 5 4 13 10 7 5 Engineering cost write-off (2) 8 6 — — 8 6 — — Insurance proceeds (2) — — — — (10) (8) — — Gain on sale of Pine Bend facility (2) — — (45) (35) — — (45) (35) Louisiana incentive tax credit (3) — — — — — — — (30) Terra amended tax returns—interest income and income tax benefit (4) (16) (32) — — (16) (32) — — ______________________________________________________________________________ (1) Included in cost of sales in our consolidated statements of operations. (2) Included in other operating—net in our consolidated statements of operations. (3) Included in income tax provision in our consolidated statements of operations. (4) Included in interest income and income tax provision in our consolidated statements of operations. Unrealized net mark-to-market (gain) loss on natural gas derivatives Natural gas is the largest and most volatile single component of the manufacturing cost for nitrogen-based products. At certain times, we have managed the risk of changes in natural gas prices through the use of derivative financial instruments. The derivatives that we may use for this purpose are primarily natural gas fixed price swaps, basis swaps and options. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. This can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives, which are reflected in cost of sales in our consolidated statements of operations. In the three months ended June 30, 2019, we recognized an unrealized net mark-to-market gain of $1 million. In the six months ended June 30, 2020 and 2019, we recognized an unrealized net mark-to-market (gain) loss of $(12) million and $1 million, respectively. Special COVID-19 bonus for operational workforce In March 2020, a short-term bonus program was initiated to compensate operational employees for continuing their critical tasks during the COVID-19 pandemic. The bonus program concluded in June 2020. Approximately $19 million was paid as part of the program, of which approximately $15 million was recognized in cost of sales in our consolidated statement of operations for the three months ended June 30, 2020, with the remaining $4 million to be recognized in the third quarter of 2020. (Gain) loss on foreign currency transactions, including intercompany loans In the three and six months ended June 30, 2020, we recognized a (gain) loss of $(5) million and $13 million, respectively, primarily consisting of the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. 25 Table of Contents CF INDUSTRIES HOLDINGS, INC. Engineering cost write-off In June 2020, a project at one of our nitrogen complexes was cancelled and $8 million of previously capitalized engineering costs were expensed in the three months ended June 30, 2020. The expense is recognized in the line titled other operating—net in our consolidated statements of operations. Insurance proceeds In the six months ended June 30, 2020, we recognized income of $10 million related to insurance claims at one of our nitrogen complexes. The $10 million of income consists of $8 million related to business interruption insurance proceeds and $2 million related to property insurance proceeds. These proceeds are reflected in other operating—net in our consolidated statements of operations. Gain on sale of Pine Bend facility During the first quarter of 2019, we entered into an agreement to sell our Pine Bend dry bulk storage and logistics facility in Minnesota. In April 2019, we completed the sale, received proceeds of $55 million and recognized a pre-tax gain of $45 million. The gain is reflected in other operating—net in our consolidated statement of operations for the three and six months ended June 30, 2019. Louisiana incentive tax credit For the six months ended June 30, 2019, our income tax provision included an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana nitrogen complex. Terra amended tax returns We completed the acquisition of Terra Industries Inc. (Terra) in April 2010. After the acquisition, we determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to its U.S. parent for U.S. and foreign income tax purposes was not appropriate. As a result, in 2012 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 the U.S. tax aspects of the Amended Tax Returns. In early 2019, the IRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to the Joint Committee on Taxation of the U.S. Congress (the Joint Committee). For purposes of its review, the Joint Committee separated the IRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter. In December 2019, we received notification that the Joint Committee had approved the IRS audit reports and related income tax refunds relating to the income tax related matter, and in the second quarter of 2020, we received notification that the Joint Committee approved the IRS audit report and related withholding tax refunds relating to the withholding tax matter. See “Liquidity and Capital Resources—Terra Amended Tax Returns,” below, for additional information. As a result of these events, in the second quarter of 2020, we recognized $16 million of interest income and $16 million of income tax benefit, which consisted of the following: • additional interest income of $16 million ($13 million, net of tax) related to both the income tax matter and the withholding tax matter, • a reduction in our liabilities for unrecognized tax benefits of $12 million with a corresponding reduction in income tax expense related to the withholding tax matter, and • an additional income tax benefit of $7 million related to the income tax matter. We received income tax refunds, including interest, of $108 million relating to these matters in the second quarter of 2020. In July 2020, we received an additional $2 million, which finalizes these matters with the IRS. As a result of the finalization of these tax matters, all U.S. federal tax years commencing before January 1, 2012 are now closed. 26 Table of Contents CF INDUSTRIES HOLDINGS, INC. Financial Executive Summary We reported net earnings attributable to common stockholders of $190 million for the three months ended June 30, 2020 compared to $283 million for the three months ended June 30, 2019, a decrease in net earnings of $93 million, or 33%. The decrease in net earnings was due primarily to the following: • Gross margin decreased by $165 million in the second quarter of 2020 to $334 million as compared to $499 million in the second quarter of 2019. The decrease in gross margin was primarily driven by a 15% decrease in average selling prices, which reduced gross margin by $198 million, and a 6% decrease in sales volume, which decreased gross margin by $56 million, partially offset by a 34% decrease in natural gas costs, which increased gross margin by $96 million. • Other operating—net decreased by $43 million in the second quarter of 2020 to $6 million of expense as compared to $37 million of income in the second quarter of 2019. The second quarter of 2019 included a gain on the sale of the Pine Bend facility of $45 million. The second quarter of 2020 includes $8 million of expense related to the cancellation of a project. Both of these items are more fully described above under “Items Affecting Comparability of Results.” • Net interest expense decreased by $23 million in the second quarter of 2020 to $32 million as compared to $55 million in the second quarter of 2019. The decrease was due primarily to $16 million of interest income related to the finalization of the Terra amended tax returns, which is more fully described under “Liquidity and Capital Resources—Terra Amended Tax Returns,” below. In addition, the decrease reflects our redemption of $750 million of aggregate principal amount of long-term debt in the fourth quarter of 2019, which is more fully described under “Liquidity and Capital Resources—Senior Notes,” below. • Our income tax provision decreased by $69 million in the second quarter of 2020 to $33 million as compared to $102 million in the second quarter of 2019 due to lower earnings before income taxes as well as t he impact of the finalization of the T erra amended tax returns, which is more fully described under “ Liquidity and Capital Resources —Terra Amended Tax Returns,” below. Diluted net earnings per share attributable to common stockholders decreased 30%, or $0.39 per share, to $0.89 in the second quarter of 2020 compared to $1.28 in the second quarter of 2019. This decrease is due primarily to lower net earnings, partially offset by a 3% reduction in diluted weighted-average common shares outstanding due to repurchases made under our share repurchase program. On February 13, 2019, our Board of Directors (the Board) authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). In 2019, we repurchased approximately 7.6 million shares of CF Holdings common stock for $337 million, of which approximately 4.2 million shares were repurchased in the first half of 2019 for $178 million. No shares were repurchased in the three months ended June 30, 2020, and for the six months ended June 30, 2020, we repurchased approximately 2.6 million shares for $100 million. See discussion under “Liquidity and Capital Resources—Share Repurchase Program,” below, for further information. 27 Table of Contents CF INDUSTRIES HOLDINGS, INC. Consolidated Results of Operations The following table presents our consolidated results of operations and supplemental data: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 v. 2019 2020 2019 2020 v. 2019 (in millions, except per share and per MMBtu) Net sales $ 1,204 $ 1,502 $ (298) (20) % $ 2,175 $ 2,503 $ (328) (13) % Cost of sales 870 1,003 (133) (13) % 1,637 1,784 (147) (8) % Gross margin 334 499 (165) (33) % 538 719 (181) (25) % Gross margin percentage 27.7 % 33.2 % (5.5) % 24.7 % 28.7 % (4.0) % Selling, general and administrative expenses 51 62 (11) (18) % 105 120 (15) (13) % Other operating—net 6 (37) 43 N/M 12 (33) 45 N/M Total other operating costs and expenses 57 25 32 128 % 117 87 30 34 % Equity in earnings of operating affiliate 3 1 2 200 % 6 8 (2) (25) % Operating earnings 280 475 (195) (41) % 427 640 (213) (33) % Interest expense—net 32 55 (23) (42) % 75 111 (36) (32) % Other non-operating—net (3) (2) (1) (50) % (3) (3) — — % Earnings before income taxes 251 422 (171) (41) % 355 532 (177) (33) % Income tax provision 33 102 (69) (68) % 46 94 (48) (51) % Net earnings 218 320 (102) (32) % 309 438 (129) (29) % Less: Net earnings attributable to noncontrolling interest 28 37 (9) (24) % 51 65 (14) (22) % Net earnings attributable to common stockholders $ 190 $ 283 $ (93) (33) % $ 258 $ 373 $ (115) (31) % Diluted net earnings per share attributable to common stockholders $ 0.89 $ 1.28 $ (0.39) (30) % $ 1.20 $ 1.67 $ (0.47) (28) % Diluted weighted-average common shares outstanding 214.6 222.3 (7.7) (3) % 215.6 223.4 (7.8) (3) % Dividends declared per common share $ 0.30 $ 0.30 $ — — % $ 0.60 $ 0.60 $ — — % Natural gas supplemental data (per MMBtu) Natural gas costs in cost of sales (1) $ 1.86 $ 2.81 $ (0.95) (34) % $ 2.11 $ 3.16 $ (1.05) (33) % Realized derivatives loss (gain) in cost of sales (2) — — — — % 0.09 (0.01) 0.10 N/M Cost of natural gas in cost of sales $ 1.86 $ 2.81 $ (0.95) (34) % $ 2.20 $ 3.15 $ (0.95) (30) % Average daily market price of natural gas Henry Hub (Louisiana) $ 1.65 $ 2.51 $ (0.86) (34) % $ 1.76 $ 2.70 $ (0.94) (35) % Average daily market price of natural gas National Balancing Point (UK) $ 1.60 $ 4.07 $ (2.47) (61) % $ 2.40 $ 5.15 $ (2.75) (53) % Unrealized net mark-to-market (gain) loss on natural gas derivatives $ — $ (1) $ 1 100 % $ (12) $ 1 $ (13) N/M Depreciation and amortization $ 239 $ 252 $ (13) (5) % $ 450 $ 440 $ 10 2 % Capital expenditures $ 52 $ 74 $ (22) (30) % $ 119 $ 154 $ (35) (23) % Sales volume by product tons (000s) 5,386 5,716 (330) (6) % 10,074 9,803 271 3 % Production volume by product tons (000s): Ammonia (3) 2,483 2,661 (178) (7) % 5,153 5,228 (75) (1) % Granular urea 1,206 1,324 (118) (9) % 2,491 2,630 (139) (5) % UAN (32%) 1,708 1,589 119 7 % 3,307 3,226 81 3 % AN 546 551 (5) (1) % 1,061 1,033 28 3 % ___________________________________________________________________________ N/M—Not Meaningful (1) 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. (2) 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. (3) Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN, or AN. 28 Table of Contents CF INDUSTRIES HOLDINGS, INC. Second Quarter of 2020 Compared to Second Quarter of 2019 Net Sales Our total net sales decreased $298 million, or 20%, to $1.20 billion in the second quarter of 2020 compared to $1.50 billion in the second quarter of 2019 due to a 15% decrease in average selling prices, which reduced net sales by $198 million, and a 6% decrease in sales volume, which decreased net sales by $100 million. Average selling prices were $224 per ton in the second quarter of 2020, or 15% lower, compared to $263 per ton in the second quarter of 2019 due 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. Additionally, in the second quarter of 2019, high water levels and flooding impacted shipping and logistics on inland rivers and reduced access to imports, which reduced supply availability and contributed to higher average selling prices in the second quarter of 2019. Our total sales volume was 5.4 million product tons in the second quarter of 2020, or 6% lower, as compared to 5.7 million product tons in the second quarter of 2019 due primarily to lower sales volumes in our granular urea, ammonia, Other and UAN segments, partially offset by higher AN sales volumes. The decrease was due primarily to the delayed spring application season in 2019 as a result of persistent cold and wet weather. Additionally, certain shipments of granular urea occurred earlier, in the first quarter of 2020, due to favorable weather conditions. The decrease in sales volumes in the second quarter of 2020 was also impacted by lower ammonia supply availability as a result of lower production. Cost of Sales Our total cost of sales decreased $133 million, or 13%, to $870 million in the second quarter of 2020 from $1.00 billion in the second quarter of 2019. The decrease in our cost of sales was due primarily to lower realized natural gas costs, including the impact of realized derivatives, and the impact of lower volumes, partially offset by higher costs related to plant turnaround and maintenance activity and the impact of the special COVID-19 bonus, which is more fully described in the section above titled “Items Affecting Comparability of Results—Special COVID-19 bonus for operational workforce.” Cost of sales averaged $162 per ton in the second quarter of 2020, a 7% decrease from $175 per ton in the second quarter of 2019. Natural gas costs, including the impact of realized derivatives, decreased 34% to $1.86 per MMBtu in the second quarter of 2020 from $2.81 per MMBtu in the second quarter of 2019. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $11 million to $51 million in the second quarter of 2020 as compared to $62 million in the second quarter of 2019. The decrease was due primarily to lower incentive compensation and lower corporate project activity as a result of the COVID-19 pandemic. Other Operating—Net Other operating—net was $6 million of expense in the second quarter of 2020 compared to $37 million of income in the second quarter of 2019. The $6 million of expense in the second quarter of 2020 was due primarily to $8 million of expense related to the cancellation of a project, which is more fully described in the section above titled “Items Affecting Comparability of Results—Engineering cost write-off,” partially offset by a gain on foreign currency transactions of $5 million. The gain on foreign currency transactions was due to the impact of changes in foreign currency exchange rates in the second quarter of 2020 on intercompany loans that were not permanently invested. The $37 million of income in the second quarter of 2019 was primarily due to a gain recognized on the sale of the Pine Bend facility of $45 million, partially offset by foreign currency transaction losses. Equity in Earnings of Operating Affiliate Equity in earnings of operating affiliate was $3 million in the second quarter of 2020 compared to $1 million in the second quarter of 2019. The increase was due primarily to an increase in the operating results of PLNL. Interest Expense—Net Net interest expense was $32 million in the second quarter of 2020 compared to $55 million in the second quarter of 2019. The decrease was due primarily to $16 million of interest income related to the finalization of the Terra amended tax returns, which is more fully described under “Liquidity and Capital Resources—Terra Amended Tax Returns,” below. In addition, the decrease reflects our redemption of $750 million 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. 29 Table of Contents CF INDUSTRIES HOLDINGS, INC. Income Taxes For the three months ended June 30, 2020, we recorded an income tax provision of $33 million on pre-tax income of $251 million, or an effective tax rate of 13.4%, compared to an income tax provision of $102 million on pre-tax income of $422 million, or an effective tax rate of 24.2%, for the three months ended June 30, 2019. For the three months ended June 30, 2020, our income tax provision includes a $19 million benefit 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. 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 the three months ended June 30, 2020 of 13.4%, which is based on pre-tax income of $251 million, including $28 million attributable to the noncontrolling interest, would be 1.6 percentage points higher if based on pre-tax income exclusive of the $28 million attributable to the noncontrolling interest. Our effective tax rate for the three months ended June 30, 2019 of 24.2%, which is based on pre-tax income of $422 million, including $37 million attributable to the noncontrolling interest, would be 2.3 percentage points higher if based on pre-tax income exclusive of the $37 million attributable to the noncontrolling interest. See Note 10—Income Taxes and Note 13—Noncontrolling Interest for additional information. Net Earnings Attributable to Noncontrolling Interest Net earnings attributable to noncontrolling interest decreased $9 million to $28 million in the second quarter of 2020 from $37 million in the second quarter of 2019 due to lower earnings from 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 $0.39 to $0.89 per diluted share in the second quarter of 2020 from $1.28 per diluted share in the second quarter of 2019. This decrease reflects 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. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Net Sales Our total net sales decreased $328 million, or 13%, to $2.18 billion in the first six months of 2020 as compared to $2.50 billion in the first six months of 2019 due to a 15% decrease in average selling prices, which reduced net sales by $401 million, partially offset by a 3% increase in sales volume, which increased net sales by $73 million. Average selling prices were $216 per ton in the first six months of 2020, or 15% lower, as compared to $255 per ton in the first six months of 2019 due 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. Additionally, in the first half of 2019, high water levels and flooding impacted shipping and logistics on inland rivers and reduced access to imports, which reduced supply availability and contributed to higher average selling prices in the first half of 2019. Our total sales volume was 10.1 million product tons in the first six months of 2020, or 3% higher, as compared to 9.8 million product tons in the first six months of 2019 due to higher sales volume across all products, primarily driven by higher AN and UAN sales volumes. Higher sales volume reflects the impact of more favorable weather that allowed greater fertilizer application during the spring of 2020 compared to 2019 and an increase in planted corn acres in the United States. Cost of Sales Our total cost of sales decreased $147 million, or 8%, to $1.64 billion in the first six months of 2020 as compared to $1.78 billion in the first six months of 2019. The decrease in our cost of sales was due primarily to lower realized natural gas costs, including the impact of realized derivatives. We recognized an unrealized net mark-to-market gain on natural gas derivatives of $12 million in the first six months of 2020 compared to an unrealized net mark-to-market loss of $1 million in the first six months of 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—Special COVID-19 bonus for operational workforce.” Cost of sales averaged $161 per ton in the first six months of 2020, a 12% decrease from $182 per ton in the first six months of 2019 due primarily to the impact of lower realized natural gas costs. Natural gas costs, including the impact of realized derivatives, 30 Table of Contents CF INDUSTRIES HOLDINGS, INC. decreased 30% to $2.20 per MMBtu in the first six months of 2020 from $3.15 per MMBtu in the first six months of 2019. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $15 million to $105 million in the first six months of 2020 as compared to $120 million in the first six months of 2019. The decrease was due primarily to lower corporate project activity as a result of the COVID-19 pandemic and lower incentive compensation. Other Operating—Net Other operating—net was $12 million of expense in the first six months of 2020 compared to $33 million of income in the first six months of 2019. The expense in the first six months of 2020 includes foreign currency transaction losses of $13 million and $8 million of expense related to the cancellation of a project, which is more fully described in the section above titled “Items Affecting Comparability of Results—Engineering cost write-off.” These factors were partially offset by insurance proceeds of $10 million. See “Items Affecting Comparability of Results—Insurance proceeds,” above, for additional information. The loss on foreign currency transactions was due to the impact of changes in foreign currency exchange rates in the first six months of 2020 on intercompany loans that were not permanently invested. The $33 million of income in the first six months of 2019 was due primarily to the gain recognized on the sale of the Pine Bend facility of $45 million, partially offset by foreign currency transaction losses. Equity in Earnings of Operating Affiliate Equity in earnings of operating affiliate was $6 million in the first six months of 2020 compared to $8 million in the first six months of 2019. The decrease was due primarily to lower operating results of PLNL as a result of lower average selling prices. Interest Expense—Net Net interest expense decreased by $36 million to $75 million in the first six months of 2020 compared to $111 million in the first six months of 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 $16 million of interest 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. Income Taxes For the six months ended June 30, 2020, we recorded an income tax provision of $46 million on pre-tax income of $355 million, or an effective tax rate of 13.1%, compared to an income tax provision of $94 million on pre-tax income of $532 million, or an effective tax rate of 17.7%, for the six months ended June 30, 2019. For the six months ended June 30, 2020, our income tax provision includes a $25 million benefit related to the settlement of certain U.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 the six months ended June 30, 2019, our income tax benefit included an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana nitrogen complex. Our effective tax rate is also 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 the six months ended June 30, 2020 of 13.1%, which is based on pre-tax income of $355 million, including $51 million attributable to the noncontrolling interest, would be 2.1 percentage points higher if based on pre-tax income exclusive of the $51 million attributable to the noncontrolling interest. Our effective tax rate for the six months ended June 30, 2019 of 17.7%, which is based on pre-tax income of $532 million, including $65 million attributable to the noncontrolling interest, would be 2.4 percentage points higher if based on pre-tax income exclusive of the $65 million attributable to the noncontrolling interest. See Note 10—Income Taxes and Note 13—Noncontrolling Interest for additional information. 31 Table of Contents CF INDUSTRIES HOLDINGS, INC. Net Earnings Attributable to Noncontrolling Interest Net earnings attributable to noncontrolling interest decreased $14 million to $51 million in the first six months of 2020 from $65 million in the first six months of 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 $0.47 to $1.20 per diluted share in the first six months of 2020 from $1.67 per diluted share in the first six months of 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 segments consist of ammonia, granular urea, UAN, AN and Other. These segments are differentiated by products. Our management uses gross margin to evaluate segment performance and allocate resources. Total other operating costs and expenses (consisting of selling, general and administrative expenses and other operating—net) and non-operating expenses (interest and income taxes), are centrally managed and are not included in the measurement of segment profitability reviewed by management. The following table presents summary operating results by business segment: Ammonia Granular Urea (1) UAN (1) AN (1) Other (1) Consolidated (dollars in millions) Three months ended June 30, 2020 Net sales $ 364 $ 329 $ 308 $ 118 $ 85 $ 1,204 Cost of sales 262 205 245 91 67 870 Gross margin $ 102 $ 124 $ 63 $ 27 $ 18 $ 334 Gross margin percentage 28.0 % 37.7 % 20.5 % 22.9 % 21.2 % 27.7 % Three months ended June 30, 2019 Net sales $ 473 $ 433 $ 369 $ 126 $ 101 $ 1,502 Cost of sales 300 251 277 94 81 1,003 Gross margin $ 173 $ 182 $ 92 $ 32 $ 20 $ 499 Gross margin percentage 36.6 % 42.0 % 24.9 % 25.4 % 19.8 % 33.2 % Six months ended June 30, 2020 Net sales $ 557 $ 666 $ 543 $ 234 $ 175 $ 2,175 Cost of sales 435 429 438 194 141 1,637 Gross margin $ 122 $ 237 $ 105 $ 40 $ 34 $ 538 Gross margin percentage 21.9 % 35.6 % 19.3 % 17.1 % 19.4 % 24.7 % Six months ended June 30, 2019 Net sales $ 660 $ 776 $ 625 $ 253 $ 189 $ 2,503 Cost of sales 466 479 472 208 159 1,784 Gross margin $ 194 $ 297 $ 153 $ 45 $ 30 $ 719 Gross margin percentage 29.4 % 38.3 % 24.5 % 17.8 % 15.9 % 28.7 % _______________________________________________________________________________ (1) The cost of products that are upgraded into other products is transferred at cost into the upgraded product results. 32 Table of Contents CF INDUSTRIES HOLDINGS, INC. Ammonia Segment Our ammonia segment produces anhydrous ammonia (ammonia), which is our most concentrated nitrogen fertilizer as it contains 82% nitrogen. The results of our ammonia segment consist of sales of ammonia to external customers. In addition, ammonia is the “basic” nitrogen product that we upgrade into other nitrogen products such as granular urea, UAN and AN. We produce ammonia at all of our nitrogen manufacturing complexes. The following table presents summary operating data for our ammonia segment: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 v. 2019 2020 2019 2020 v. 2019 (dollars in millions, except per ton amounts) Net sales $364 $473 $(109) (23) % $557 $660 $(103) (16) % Cost of sales $262 $300 $(38) (13) % 435 466 (31) (7) % Gross margin $102 $173 $(71) (41) % $122 $194 $(72) (37) % Gross margin percentage 28.0% 36.6% (8.6)% 21.9% 29.4% (7.5)% Sales volume by product tons (000s) 1,118 1,222 (104) (9) % 1,880 1,828 52 3 % Sales volume by nutrient tons (000s) (1) 917 1,002 (85) (8) % 1,542 1,499 43 3 % Average selling price per product ton $326 $387 $(61) (16) % $296 $361 $(65) (18) % Average selling price per nutrient ton (1) $397 $472 $(75) (16) % $361 $440 $(79) (18) % Gross margin per product ton $91 $142 $(51) (36) % $65 $106 $(41) (39) % Gross margin per nutrient ton (1) $111 $173 $(62) (36) % $79 $129 $(50) (39) % Depreciation and amortization $60 $53 $7 13 % $99 $82 $17 21 % Unrealized net mark-to-market gain on natural gas derivatives $— $— $— — % $(4) $— $(4) N/M _______________________________________________________________________________ N/M—Not Meaningful (1) Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. Second Quarter of 2020 Compared to Second Quarter of 2019 Net Sales. Net sales in our ammonia segment decreased by $109 million, or 23%, to $364 million in the second quarter of 2020 from $473 million in the second quarter of 2019 due primarily to a 16% decrease in average selling prices and a 9% decrease in sales volume. Average selling prices decreased to $326 per ton in the second quarter of 2020 compared to $387 per ton in the second quarter of 2019 due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. Sales volume was lower due to supply availability resulting from plant turnaround and maintenance activity. Cost of Sales. Cost of sales in our ammonia segment averaged $235 per ton in the second quarter of 2020, a 4% decrease from $245 per ton in the second quarter of 2019. The decrease is due primarily to lower realized natural gas costs, partially offset by higher costs related to plant turnaround and maintenance activity and the impact of higher distribution costs. Gross Margin . Gross margin in our ammonia segment decreased by $71 million to $102 million in the second quarter of 2020 from $173 million in the second quarter of 2019, and our gross margin percentage was 28.0% in the second quarter of 2020 compared to 36.6% in the second quarter of 2019 . The decrease in gross margin was due to a 16% decrease in average selling prices, which reduced gross margin by $67 million, a 9% decrease in sales volume, which decreased gross margin by $27 million, and an $18 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 $41 million. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Net Sales. Net sales in our ammonia segment decreased by $103 million, or 16%, to $557 million in the six months ended June 30, 2020 from $660 million in the six months ended June 30, 2019 due primarily to an 18% decrease in average selling prices, partially offset by a 3% increase in sales volume. 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 due to increased fertilizer applications from favorable weather conditions and higher planted corn acres in the United States in the six months ended June 30, 2020, which resulted in higher shipments. 33 Table of Contents CF INDUSTRIES HOLDINGS, INC. Cost of Sales. Cost of sales in our ammonia segment averaged $231 per ton in the six months ended June 30, 2020, a 9% decrease from $255 per ton in the six months ended June 30, 2019 due primarily to the impact of lower realized natural gas costs, partially offset by higher costs related to plant turnaround and maintenance activity and the impact of higher distribution costs. Gross Margin . Gross margin in our ammonia segment decreased by $72 million to $122 million in the six months ended June 30, 2020 from $194 million in the six months ended June 30, 2019, and our gross margin percentage was 21.9% in the six months ended June 30, 2020 compared to 29.4% in the six months ended June 30, 2019. The decrease in gross margin was due to an 18% decrease in average selling prices, which reduced gross margin by $125 million and a $9 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 $51 million, a 3% increase in sales volume, which increased gross margin by $7 million, and a $4 million unrealized net mark-to-market gain on natural gas derivatives in the six months ended June 30, 2020. 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: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 v. 2019 2020 2019 2020 v. 2019 (dollars in millions, except per ton amounts) Net sales $ 329 $ 433 $ (104) (24) % $ 666 $ 776 $ (110) (14) % Cost of sales 205 251 (46) (18) % 429 479 (50) (10) % Gross margin $ 124 $ 182 $ (58) (32) % $ 237 $ 297 $ (60) (20) % Gross margin percentage 37.7 % 42.0 % (4.3) % 35.6 % 38.3 % (2.7) % Sales volume by product tons (000s) 1,314 1,496 (182) (12) % 2,695 2,680 15 1 % Sales volume by nutrient tons (000s) (1) 604 688 (84) (12) % 1,239 1,233 6 — % Average selling price per product ton $ 250 $ 289 $ (39) (13) % $ 247 $ 290 $ (43) (15) % Average selling price per nutrient ton (1) $ 545 $ 629 $ (84) (13) % $ 538 $ 629 $ (91) (14) % Gross margin per product ton $ 94 $ 122 $ (28) (23) % $ 88 $ 111 $ (23) (21) % Gross margin per nutrient ton (1) $ 205 $ 265 $ (60) (23) % $ 191 $ 241 $ (50) (21) % Depreciation and amortization $ 66 $ 79 $ (13) (16) % $ 138 $ 145 $ (7) (5) % Unrealized net mark-to-market (gain) loss on natural gas derivatives $ — $ — $ — — % $ (4) $ 1 $ (5) N/M _______________________________________________________________________________ N/M—Not Meaningful (1) Granular urea represents 46% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. Second Quarter of 2020 Compared to Second Quarter of 2019 Net Sales. Net sales in our granular urea segment decreased $104 million, or 24%, to $329 million in the second quarter of 2020 from $433 million in the second quarter of 2019 due primarily to a 13% decrease in average selling prices and a 12% decrease in sales volume. Average selling prices decreased to $250 per ton in the second quarter of 2020 compared to $289 per ton in the second quarter of 2019 due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. Additionally, high water levels and flooding in the second quarter of 2019 impacted shipping and logistics on inland rivers and reduced access to imports, which contributed to higher average selling prices in the second quarter of 2019. Sales volume was lower due primarily to more favorable weather conditions in the first quarter of 2020, which accelerated requests for early deliveries. In addition, the delayed spring application season in the first quarter of 2019 shifted demand into the second quarter of 2019, which contributed to higher sales volumes in the second quarter of 2019. Cost of Sales. Cost of sales in our granular urea segment averaged $156 per ton in the second quarter of 2020, a 7% decrease from $167 per ton in the second quarter of 2019, primarily driven by lower realized natural gas costs. 34 Table of Contents CF INDUSTRIES HOLDINGS, INC. Gross Margin . Gross margin in our granular urea segment decreased by $58 million to $124 million in the second quarter of 2020 from $182 million in the second quarter of 2019, and our gross margin percentage was 37.7% in the second quarter of 2020 compared to 42.0% in the second quarter of 2019. The decrease in gross margin was due to a 13% decrease in average selling prices, which decreased gross margin by $50 million, and a 12% decrease in sales volume, which decreased gross margin by $25 million. These factors were partially offset by lower realized natural gas costs, which increased gross margin by $15 million and a $2 million net decrease in other manufacturing and distribution costs. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Net Sales. Net sales in our granular urea segment decreased $110 million, or 14%, to $666 million in the six months ended June 30, 2020 from $776 million in the six months ended June 30, 2019 due primarily to a 15% decrease in average selling prices. Average selling prices decreased to $247 per ton in the six months ended June 30, 2020 compared to $290 per ton in the six months ended June 30, 2019. The decrease was due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. Additionally, high water levels and flooding in the first half of 2019 impacted shipping and logistics on inland rivers and reduced access to imports, which contributed to higher average selling prices in the first half of 2019. Sales volume in our granular urea segment was 2.7 million tons in the first six months of each of 2020 and 2019. Cost of Sales. Cost of sales in our granular urea segment averaged $159 per ton in the six months ended June 30, 2020, an 11% decrease from $179 per ton in the six months ended June 30, 2019. The decrease was due primarily to lower realized natural gas costs. Gross Margin . Gross margin in our granular urea segment decreased by $60 million to $237 million in the six months ended June 30, 2020 from $297 million in the six months ended June 30, 2019, and our gross margin percentage was 35.6% in the six months ended June 30, 2020 compared to 38.3% in the six months ended June 30, 2019. The decrease in gross margin was due to a 15% decrease in average selling prices, which decreased gross margin by $114 million. This factor was partially offset by lower realized natural gas costs, which increased gross margin by $41 million, an $8 million net decrease in other manufacturing and distribution costs and the impact of a $4 million unrealized net mark-to-market gain on natural gas derivatives in the six months ended June 30, 2020 compared to a $1 million loss in the six months ended June 30, 2019. 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: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 v. 2019 2020 2019 2020 v. 2019 (dollars in millions, except per ton amounts) Net sales $ 308 $ 369 $ (61) (17) % $ 543 $ 625 $ (82) (13) % Cost of sales 245 277 (32) (12) % 438 472 (34) (7) % Gross margin $ 63 $ 92 $ (29) (32) % $ 105 $ 153 $ (48) (31) % Gross margin percentage 20.5 % 24.9 % (4.4) % 19.3 % 24.5 % (5.2) % Sales volume by product tons (000s) 1,840 1,871 (31) (2) % 3,230 3,139 91 3 % Sales volume by nutrient tons (000s) (1) 580 591 (11) (2) % 1,016 987 29 3 % Average selling price per product ton $ 167 $ 197 $ (30) (15) % $ 168 $ 199 $ (31) (16) % Average selling price per nutrient ton (1) $ 531 $ 624 $ (93) (15) % $ 534 $ 633 $ (99) (16) % Gross margin per product ton $ 34 $ 49 $ (15) (31) % $ 33 $ 49 $ (16) (33) % Gross margin per nutrient ton (1) $ 109 $ 156 $ (47) (30) % $ 103 $ 155 $ (52) (34) % Depreciation and amortization $ 65 $ 71 $ (6) (8) % $ 117 $ 117 $ — — % Unrealized net mark-to-market gain on natural gas derivatives $ (1) $ (1) $ — — % $ (4) $ — $ (4) N/M _______________________________________________________________________________ N/M—Not Meaningful 35 Table of Contents CF INDUSTRIES HOLDINGS, INC. (1) UAN represents between 28% and 32% of nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. Second Quarter of 2020 Compared to Second Quarter of 2019 Net Sales. Net sales in our UAN segment decreased $61 million, or 17%, to $308 million in the second quarter of 2020 from $369 million in the second quarter of 2019 due primarily to a 15% decrease in average selling prices and a 2% decrease in sales volume. Average selling prices decreased to $167 per ton in the second quarter of 2020 compared to $197 per ton in the second quarter of 2019 due primarily to increased imports into the United States as trade flows adjust in response to the European Union anti-dumping duties. Additionally, high water levels and flooding in the second quarter of 2019 impacted shipping and logistics on inland rivers, which contributed to higher average selling prices in the second quarter of 2019. The decrease in sales volume was due primarily to more favorable weather conditions in the first quarter of 2020, which accelerated requests for early deliveries. In addition, the delayed spring application season in the first quarter of 2019 shifted demand into the second quarter of 2019, which contributed to higher sales volumes in the second quarter of 2019. Cost of Sales. Cost of sales in our UAN segment averaged $133 per ton in the second quarter of 2020, a 10% decrease from $148 per ton in the second quarter of 2019, primarily driven by lower realized natural gas costs. Gross Margin . Gross margin in our UAN segment decreased by $29 million to $63 million in the second quarter of 2020 from $92 million in the second quarter of 2019, and our gross margin percentage was 20.5% in the second quarter of 2020 compared to 24.9% in the second quarter of 2019. The decrease in gross margin was due to a 15% decrease in average selling prices, which decreased gross margin by $53 million, and a 2% decrease in sales volume, which decreased gross margin by $3 million. These factors were partially offset by lower realized natural gas costs, which increased gross margin by $24 million, and a $3 million net decrease in other manufacturing and distribution costs. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Net Sales. Net sales in our UAN segment decreased $82 million, or 13%, to $543 million in the six months ended June 30, 2020 from $625 million in the six months ended June 30, 2019 due to a 16% decrease in average selling prices, partially offset by a 3% increase in sales volume. Average selling prices decreased to $168 per ton in the six months ended June 30, 2020 compared to $199 per ton in the six months ended June 30, 2019, due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates and increased imports into the United States as trade flows adjust in response to the European Union anti-dumping duties. Additionally, high water levels and flooding in the first half of 2019 impacted shipping and logistics on inland rivers and reduced access to imports, which contributed to higher average selling prices in the first half of 2019. The increase in sales volume was due primarily to favorable weather that allowed greater fertilizer application during the spring of 2020 compared to 2019 and an increase in planted corn acres in the United States. Cost of Sales. Cost of sales in our UAN segment averaged $135 per ton in the six months ended June 30, 2020, a 10% decrease from $150 per ton in the six months ended June 30, 2019. The decrease was due primarily to lower realized natural gas costs. Gross Margin . Gross margin in our UAN segment decreased by $48 million to $105 million in the six months ended June 30, 2020 from $153 million in the six months ended June 30, 2019, and our gross margin percentage was 19.3% in the six months ended June 30, 2020 compared to 24.5% in the six months ended June 30, 2019. The decrease in gross margin was due to a 16% decrease in average selling prices, which decreased gross margin by $100 million and a $16 million net increase in other manufacturing and distribution costs. These factors were partially offset by lower realized natural gas costs, which increased gross margin by $56 million, a 3% increase in sales volume, which increased gross margin by $8 million, and the impact of a $4 million unrealized net mark-to-market gain on natural gas derivatives in the six months ended June 30, 2020. 36 Table of Contents 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: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 v. 2019 2020 2019 2020 v. 2019 (dollars in millions, except per ton amounts) Net sales $ 118 $ 126 $ (8) (6) % $ 234 $ 253 $ (19) (8) % Cost of sales 91 94 (3) (3) % 194 208 (14) (7) % Gross margin $ 27 $ 32 $ (5) (16) % $ 40 $ 45 $ (5) (11) % Gross margin percentage 22.9 % 25.4 % (2.5) % 17.1 % 17.8 % (0.7) % Sales volume by product tons (000s) 576 528 48 9 % 1,123 1,029 94 9 % Sales volume by nutrient tons (000s) (1) 195 179 16 9 % 379 345 34 10 % Average selling price per product ton $ 205 $ 239 $ (34) (14) % $ 208 $ 246 $ (38) (15) % Average selling price per nutrient ton (1) $ 605 $ 704 $ (99) (14) % $ 617 $ 733 $ (116) (16) % Gross margin per product ton $ 47 $ 61 $ (14) (23) % $ 36 $ 44 $ (8) (18) % Gross margin per nutrient ton (1) $ 138 $ 179 $ (41) (23) % $ 106 $ 130 $ (24) (18) % Depreciation and amortization $ 25 $ 21 $ 4 19 % $ 51 $ 43 $ 8 19 % Unrealized net mark-to-market loss on natural gas derivatives $ 1 $ — $ 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. Second Quarter of 2020 Compared to Second Quarter of 2019 Net Sales. Net sales in our AN segment decreased $8 million, or 6%, to $118 million in the second quarter of 2020 from $126 million in the second quarter of 2019 due to a 14% decrease in average selling prices, partially offset by a 9% increase in sales volume. Average selling prices decreased to $205 per ton in the second quarter of 2020 compared to $239 per ton in the second quarter of 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 higher demand in Europe for agricultural applications and greater supply availability as a result of higher inventory levels entering the second quarter of 2020. Cost of Sales. Cost of sales in our AN segment averaged $158 per ton in the second quarter of 2020, an 11% decrease from $178 per ton in the second quarter of 2019. The decrease was due primarily to lower realized natural gas costs. Gross Margin . Gross margin in our AN segment decreased $5 million, or 16%, to $27 million in the second quarter of 2020 from $32 million in the second quarter of 2019, and our gross margin percentage was 22.9% in the second quarter of 2020 compared to 25.4% in the second quarter of 2019. The decrease in gross margin was due to a 14% decrease in average selling prices, which decreased gross margin by $22 million and the impact of a $1 million unrealized net mark-to-market loss on natural gas derivatives in the second quarter of 2020. These factors were partially offset by a decrease in realized natural gas costs, which increased gross margin by $11 million, a net decrease of $4 million in other manufacturing and distribution costs, and a 9% increase in sales volume, which increased gross margin by $3 million. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Net Sales. Net sales in our AN segment decreased $19 million, or 8%, to $234 million in the six months ended June 30, 2020 from $253 million in the six months ended June 30, 2019 due primarily to a 15% decrease in average selling prices, partially offset by a 9% increase in sales volume. Average selling prices decreased to $208 per ton in the six months ended June 30, 2020 compared to $246 per ton in the six months ended June 30, 2019 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 demand in Europe for agricultural applications and greater supply availability as a result of higher inventory levels entering the first quarter of 2020. 37 Table of Contents CF INDUSTRIES HOLDINGS, INC. Cost of Sales. Cost of sales in our AN segment averaged $172 per ton in the six months ended June 30, 2020, a 15% decrease from $202 per ton in the six months ended June 30, 2019. The decrease was due primarily to lower realized natural gas costs and lower costs related to plant maintenance activity. Gross Margin . Gross margin in our AN segment decreased by $5 million, or 11%, to $40 million in the six months ended June 30, 2020 from $45 million in the six months ended June 30, 2019, and our gross margin percentage was 17.1% in the six months ended June 30, 2020 compared to 17.8% in the six months ended June 30, 2019. The decrease in gross margin was due to a 15% decrease in average selling prices, which decreased gross margin by $45 million. This factor was partially offset by a decrease in realized natural gas costs, which increased gross margin by $23 million, a net decrease of $11 million in other manufacturing and distribution costs, and a 9% increase in sales volume, which increased gross margin by $6 million. Other Segment Our Other segment primarily includes the following products: • Diesel exhaust fluid (DEF) is an aqueous urea solution typically made with 32.5% or 50% high-purity urea and the remainder deionized water. • Urea liquor is a liquid product that we sell in concentrations of 40%, 50% and 70% urea as a chemical intermediate. • Nitric acid is a nitrogen-based industrial product. • Compound fertilizer products (NPKs) are 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: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 v. 2019 2020 2019 2020 v. 2019 (dollars in millions, except per ton amounts) Net sales $ 85 $ 101 $ (16) (16) % $ 175 $ 189 $ (14) (7) % Cost of sales 67 81 (14) (17) % 141 159 (18) (11) % Gross margin $ 18 $ 20 $ (2) (10) % $ 34 $ 30 $ 4 13 % Gross margin percentage 21.2 % 19.8 % 1.4 % 19.4 % 15.9 % 3.5 % Sales volume by product tons (000s) 538 599 (61) (10) % 1,146 1,127 19 2 % Sales volume by nutrient tons (000s) (1) 108 121 (13) (11) % 228 224 4 2 % Average selling price per product ton $ 158 $ 169 $ (11) (7) % $ 153 $ 168 $ (15) (9) % Average selling price per nutrient ton (1) $ 787 $ 835 $ (48) (6) % $ 768 $ 844 $ (76) (9) % Gross margin per product ton $ 33 $ 33 $ — — % $ 30 $ 27 $ 3 11 % Gross margin per nutrient ton (1) $ 167 $ 165 $ 2 1 % $ 149 $ 134 $ 15 11 % Depreciation and amortization $ 17 $ 19 $ (2) (11) % $ 34 $ 36 $ (2) (6) % Unrealized net mark-to-market gain (loss) on natural gas derivatives $ — $ — $ — — % $ — $ — $ — — % _______________________________________________________________________________ (1) Nutrient tons represent the tons of nitrogen within the product tons. Second Quarter of 2020 Compared to Second Quarter of 2019 Net Sales. Net sales in our Other segment decreased by $16 million, or 16%, to $85 million in the second quarter of 2020 from $101 million in the second quarter of 2019 due to a 7% decrease in average selling prices and a 10% decrease in sales volume. The decrease in average selling prices is due primarily to increased global nitrogen supply availability as lower global energy costs drove higher global operating rates. The decrease in sales volume is due primarily to a decrease in demand for urea liquor, DEF and nitric acid as a result of the COVID-19 pandemic. Cost of Sales. Cost of sales in our Other segment averaged $125 per ton in the second quarter of 2020, an 8% decrease from $136 per ton in the second quarter of 2019, due primarily to lower realized natural gas costs. Gross Margin . Gross margin in our Other segment decreased by $2 million, or 10%, to $18 million in the second quarter of 2020 from $20 million in the second quarter of 2019, and our gross margin percentage was 21.2% in the second quarter of 2020 compared to 19.8% in the second quarter of 2019. The decrease in gross margin was due to a 7% decrease in average selling prices, which reduced gross margin by $6 million, and a 10% decrease in sales volume, which decreased gross 38 Table of Contents CF INDUSTRIES HOLDINGS, INC. margin by $4 million. These factors were partially offset by a decrease in realized natural gas costs, which increased gross margin by $5 million, and a $3 million net decrease in other manufacturing and distribution costs. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Net Sales. Net sales in our Other segment decreased by $14 million, or 7%, to $175 million in the six months ended June 30, 2020 from $189 million in the six months ended June 30, 2019 due to a 9% decrease in average selling prices, partially offset by a 2% increase in sales volume. The decrease in average selling prices is 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 NPK and DEF sales volumes, partially offset by lower nitric acid sales volume. Cost of Sales. Cost of sales in our Other segment averaged $123 per ton in the six months ended June 30, 2020, a 13% decrease from $141 per ton in the six months ended June 30, 2019 due primarily to lower realized natural gas costs. Gross Margin . Gross margin in our Other segment increased by $4 million, or 13%, to $34 million in the six months ended June 30, 2020 from $30 million in the six months ended June 30, 2019, and our gross margin percentage was 19.4% in the six months ended June 30, 2020 compared to 15.9% in the six months ended June 30, 2019. The increase in gross margin was due to a decrease in realized natural gas costs, which increased gross margin by $12 million, and a $9 million net decrease in other manufacturing and distribution costs. These factors were partially offset by a 9% decrease in average selling prices, which reduced gross margin by $17 million. 39 Table of Contents 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 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. In March 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, caused by the pandemic. In response to these market factors, the U.S. Federal Reserve took steps to ensure ample liquidity in the market. These actions by the Federal Reserve, together with other measures taken by the U.S. government, including enactment of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), helped the financial markets return to more normal activity. In April 2020, due to confidence in the functioning of the credit markets and strong nitrogen fertilizer business conditions, we repaid the $500 million of borrowings that were outstanding under our revolving credit agreement as of March 31, 2020. As of June 30, 2020, our cash and cash equivalents balance was $563 million, an increase of $276 million from $287 million at December 31, 2019. At June 30, 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. 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 the U.S. and Canadian federal governments; those issued by state, local or other governmental entities; and those guaranteed by entities affiliated with governmental entities. Share Repurchase Program On February 13, 2019, the Board authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). Repurchases under the 2019 Share Repurchase Program may be made from time to time in the open market, through privately negotiated transactions, block transactions or otherwise. The manner, timing and amount of repurchases will be determined by our management based on the evaluation of market conditions, stock price, and other factors. During the first quarter of 2020, we repurchased approximately 2.6 million shares of CF Holdings common stock for $100 million. No shares were repurchased in the three months ended June 30, 2020. In the second quarter of 2020, we retired the approximately 2.6 million shares that were repurchased during the first quarter of 2020 under the 2019 Share Repurchase Program. 40 Table of Contents 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 in 2019 7.6 337 Shares repurchased in 2020: First quarter 2.6 100 Second quarter — — Total shares repurchased in 2020 2.6 100 Shares repurchased as of June 30, 2020 10.2 $ 437 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 $119 million in the first six months of 2020 compared to $154 million in the first six months of 2019. In light of the uncertainty caused by the COVID-19 pandemic, including uncertainty regarding the duration of government actions implemented to slow the spread of the virus and the safety precautions we have implemented to protect the health and well-being of all our employees, we continue to plan for a range of scenarios and have taken actions to defer certain non-essential capital activity. As a result, we currently anticipate that capital expenditures for the full year of 2020 will be approximately $350 million. 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. Terra Amended Tax Returns The Company completed the acquisition of Terra Industries Inc. (Terra) in April 2010. After the acquisition, the Company determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to its U.S. parent for U.S. and foreign income tax purposes was not appropriate. As a result, in 2012 the Company amended certain tax returns, including Terra’s income and withholding tax returns, back to 1999 (the Amended Tax Returns) and paid additional income and withholding taxes, and related interest and penalties. In early 2013, the Internal Revenue Service (IRS) commenced an examination of the U.S. tax aspects of the Amended Tax Returns. In early 2019, the IRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to the Joint Committee on Taxation of the U.S. Congress (the Joint Committee). For purposes of its review, the Joint Committee separated the IRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter. In December 2019, we received notification that the Joint Committee had approved the IRS audit reports and related income tax refunds relating to the income tax related matter. Therefore, we expected to receive cash refunds in 2020. In the second quarter of 2020, we received notification that the Joint Committee approved the IRS audit report and related withholding tax refunds relating to the withholding tax matter and we received IRS 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. As a result of these events, in the second quarter of 2020, we recognized $16 million of interest income and $16 million of income tax benefit, which consisted of the following: • additional interest income of $16 million ($13 million, net of tax) related to both the income tax matter and the withholding tax matter, 41 Table of Contents CF INDUSTRIES HOLDINGS, INC. • a reduction in our liabilities for unrecognized tax benefits of $12 million with a corresponding reduction in income tax expense related to the withholding tax matter, and • an additional income tax benefit of $7 million related to the income tax matter. We received income tax refunds, including interest, of $108 million relating to these matters in the second quarter of 2020, consisting of $68 million related to the income tax matter and $40 million related to the withholding tax matter. In July 2020, we received an additional $2 million related to the withholding tax matter, which finalizes these matters with the IRS. As a result of the finalization of the income tax matter and the withholding tax matter, all U.S. federal tax years commencing before January 1, 2012 are now closed. Debt Revolving Credit Agreement On December 5, 2019, CF Holdings and CF Industries entered into a senior secured Fourth Amended and Restated Credit Agreement (the Revolving Credit Agreement), which amended and restated our Third Amended and Restated Revolving Credit Agreement, as previously amended (referred to herein, as in effect from time to time, as the Prior Credit Agreement), that was scheduled to mature September 18, 2020. The Revolving Credit Agreement provides for a revolving credit facility of up to $750 million with a maturity of December 5, 2024. The Revolving Credit Agreement includes a letter of credit sub-limit of $125 million. Borrowings under the Revolving Credit Agreement may be used for working capital, capital expenditures, acquisitions, share repurchases and other general corporate purposes. CF Industries, the lead borrower under the Revolving Credit Agreement, may designate as additional borrowers one or more of its wholly owned subsidiaries that are organized in the United States or any state thereof, or the District of Columbia, England and Wales or any other jurisdiction as mutually agreed to by all of the lenders party to the Revolving Credit Agreement, the administrative agent under the Revolving Credit Agreement and CF Industries. Borrowings under the Revolving Credit Agreement may be denominated in U.S. dollars, Canadian dollars, 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, and the borrowers are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ credit rating at the time. The guarantors under the Revolving Credit Agreement are currently comprised of CF Holdings and CF Holdings’ wholly owned subsidiaries CF Industries Enterprises, LLC (CFE), CF Industries Sales, LLC (CFS), CF USA Holdings, LLC (CF USA) and CF Industries Distribution Facilities, LLC (CFIDF). In March 2020, we borrowed $500 million under the Revolving Credit Agreement to ensure we maintained ample financial flexibility in light of the uncertainty in the global markets, including the financial credit markets, caused by the COVID-19 pandemic. In April 2020, due to confidence in the functioning of the credit markets and strong nitrogen fertilizer business conditions, we repaid the $500 million of borrowings that were outstanding under the Revolving Credit Agreement as of March 31, 2020, which returned our unused borrowing capacity under the Revolving Credit Agreement to $750 million. As of June 30, 2020, we had unused borrowing capacity under the Revolving Credit Agreement of $750 million and no outstanding letters of credit. There were no borrowings outstanding under the Revolving Credit Agreement as of June 30, 2020 or December 31, 2019. Maximum borrowings under the Revolving Credit Agreement during the six months ended June 30, 2020 were $500 million. The weighted-average annual interest rate of borrowings under the Revolving Credit Agreement during the six months ended June 30, 2020 was 2.05%. There were no borrowings under the Prior Credit Agreement during the six months ended June 30, 2019. The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants, including financial covenants. As of June 30, 2020, we were in compliance with all covenants under the Revolving Credit Agreement. Letters of Credit In addition to the letter of credit capacity under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement providing for up to $145 million of letters of credit. As of June 30, 2020, approximately $126 million of letters of credit were outstanding under this agreement. 42 Table of Contents CF INDUSTRIES HOLDINGS, INC. Senior Notes Long-term debt presented on our consolidated balance sheets as of June 30, 2020 and December 31, 2019 consisted of the following debt securities issued by CF Industries: Effective Interest Rate June 30, 2020 December 31, 2019 Principal Carrying Amount (1) Principal Carrying Amount (1) (in millions) Public Senior Notes: 3.450% due June 2023 3.562% $ 750 $ 748 $ 750 $ 747 5.150% due March 2034 5.279% 750 740 750 740 4.950% due June 2043 5.031% 750 742 750 742 5.375% due March 2044 5.465% 750 741 750 741 Senior Secured Notes: 3.400% due December 2021 3.782% 250 249 250 248 4.500% due December 2026 4.759% 750 739 750 739 Total long-term debt $ 4,000 $ 3,959 $ 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 of June 30, 2020 and December 31, 2019, respectively, and total deferred debt issuance costs were $32 million and $33 million as of June 30, 2020 and December 31, 2019, respectively. Public Senior Notes On November 13, 2019, we redeemed in full all of the remaining $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance with the optional redemption provisions in the indenture governing the 2020 Notes. The total aggregate redemption price, excluding accrued interest paid on the 2020 Notes in connection with the redemption, was approximately $512 million. As a result, we recognized a loss on debt extinguishment of $12 million, primarily consisting of premiums paid for the early retirement of debt for the 2020 Notes. Under the indentures (including the applicable supplemental indentures) governing our senior notes due 2023, 2034, 2043 and 2044 identified in the table above (the Public Senior Notes), each series of Public Senior Notes is guaranteed by CF Holdings. 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. Senior Secured Notes On December 13, 2019, we redeemed $250 million principal amount, representing 50% of the $500 million principal amount outstanding immediately prior to such redemption, of the 3.400% senior secured notes due December 2021 (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. Under the terms of the applicable indenture, the 2021 Notes and the 4.500% senior secured notes due 2026 (the 2026 Notes, and together with the 2021 Notes, the Senior Secured Notes) are guaranteed on a senior secured basis, jointly and severally, by CF Holdings and each current and future domestic subsidiary of CF Holdings (other than CF Industries) that from time to time is a borrower, or guarantees indebtedness, under the Revolving Credit Agreement. The subsidiary guarantors of the Senior Secured Notes currently consist of CFE, CFS, CF USA and CFIDF. Subject to certain exceptions, the obligations under the Senior Secured Notes and each guarantor’s related guarantee are secured by a first priority security interest in substantially all of the assets of CF Industries, CF Holdings and the subsidiary guarantors, including a pledge by CF USA of its equity interests in CFN and mortgages over certain material fee-owned domestic real properties (the Collateral). The obligations under the Revolving Credit Agreement, together with certain letter of credit, cash management, hedging and similar obligations and future pari passu secured indebtedness, are secured by the Collateral on a pari passu basis with the Senior Secured Notes. The liens on the Collateral securing the obligations under the 43 Table of Contents CF INDUSTRIES HOLDINGS, INC. Senior Secured Notes of a series and the related guarantees will be automatically released and the covenant under the applicable indenture limiting dispositions of Collateral will no longer apply if CF Holdings has an investment grade corporate rating, with a stable or better outlook, from two of three selected ratings agencies and there is no default or event of default under the applicable indenture. 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. Forward Sales and Customer Advances We offer our customers the opportunity to purchase products from us on a forward basis at prices and on delivery dates we propose. Therefore, our reported fertilizer selling prices and margins may differ from market spot prices and margins available at the time of shipment. Customer advances, which typically represent a portion of the contract’s value, are received shortly after the contract is executed, with any remaining unpaid amount generally being collected by the time control transfers to the customer, thereby reducing or eliminating the accounts receivable related to such sales. Any cash payments received in advance from customers in connection with forward sales contracts are reflected on our consolidated balance sheets as a current liability until control transfers and revenue is recognized. As of June 30, 2020 and December 31, 2019, we had $8 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, further 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. Derivative Financial Instruments We may use derivative financial instruments to reduce our exposure to changes in prices for natural gas that will be purchased in the future. Natural gas is the largest and most volatile component of our manufacturing cost for nitrogen-based fertilizers. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. Volatility in reported quarterly earnings can result from the unrealized mark-to-market adjustments in the value of the derivatives. As of June 30, 2020, our open natural gas derivative contracts consisted of natural gas fixed price swaps and basis swaps for 8.9 million MMBtus. As of December 31, 2019, our open natural gas derivative contracts consisted of natural gas fixed price swaps, basis swaps and options for 41.1 million MMBtus. Defined Benefit Pension Plans We contributed $13 million to our pension plans during the six months ended June 30, 2020. Over the remainder of 2020, we expect to contribute an additional $28 million to our pension plans, or a total of approximately $41 million for the full year 2020. Distribution to Noncontrolling Interest in CFN On July 31, 2020, the CFN Board of Managers approved semi-annual distribution payments for the distribution period ended June 30, 2020 in accordance with CFN’s limited liability company agreement. On July 31, 2020, CFN distributed $86 million to CHS for the distribution period ended June 30, 2020. Cash Flows Operating Activities Net cash provided by operating activities during the first six months of 2020 was $718 million, an increase of $25 million compared to $693 million in the first six months of 2019. The increase in cash flow from operations was impacted by favorable changes in net working capital, with increases across all major categories of working capital, partially offset by lower net 44 Table of Contents CF INDUSTRIES HOLDINGS, INC. earnings. During the first six months of 2020, net changes in working capital contributed $77 million to cash flow from operations, while in the first six months of 2019 net changes in working capital reduced net cash flow from operations by $244 million. As further described under Terra Amended Tax Returns above, we received income tax refunds, including interest, of $108 million in the first six months of 2020 related to the finalization of the amended U.S. tax returns related to Terra. These refunds offset cash tax payments and contributed to the net increase in working capital in the first six months of 2020. We expect to be a domestic net cash tax payer going forward. Investing Activities Net cash used in investing activities was $117 million in the first six months of 2020 as compared to $91 million in the first six months of 2019. Net cash used in investing activities in the first six months of 2019 included proceeds of $55 million related to the sale of our Pine Bend facility. During the first six months of 2020, capital expenditures totaled $119 million compared to $154 million in the first six months of 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 and an increase in maintenance activity. Financing Activities Net cash used in financing activities was $323 million in the first six months of 2020 compared to net cash used in financing activities of $426 million in the same period of 2019. Dividends paid on common stock during the six months ended June 30, 2020 and 2019 were $129 million and $133 million, respectively. In the first six months of 2020, we spent $100 million to repurchase shares of common stock compared to $209 million in the first six months of 2019, which included approximately $33 million related to shares repurchased in late 2018 that were paid for in 2019. Distributions to noncontrolling interest totaled $88 million in the first six months of 2020 as compared to $86 million in the first six months of 2019. Contractual Obligations During the six months ended June 30, 2020, except for the borrowing and repayment of $500 million under the Revolving Credit Agreement, there were no material changes outside the ordinary course of business to our contractual obligations described under the heading “Contractual Obligations” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 24, 2020. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies and Estimates There were no changes to our significant accounting policies or estimates during the first six months of 2020. Recent Accounting Pronouncements See Note 2—New Accounting Standards for a discussion of recent accounting pronouncements. 45 Table of Contents CF INDUSTRIES HOLDINGS, INC. FORWARD-LOOKING STATEMENTS From time to time, in this Quarterly Report on Form 10-Q as well as in other written reports and oral statements, we make forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our prospects, future developments and business strategies. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” or “would” and similar terms and phrases, including references to assumptions, to identify forward-looking statements in this document. These forward-looking statements are made based on currently available competitive, financial and economic data, our current expectations, estimates, forecasts and projections about the industries and markets in which we operate and management’s beliefs and assumptions concerning future events affecting us. These statements are not guarantees of future performance and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, our actual results may differ materially from what is expressed in or implied by any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this document. Additionally, we do not undertake any responsibility to provide updates regarding the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this document. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 24, 2020, and Part II, Item 1A of this Quarterly Report on Form 10-Q. Such factors include, among others: • the impact of the novel coronavirus disease 2019 (COVID-19) pandemic, including measures taken by governmental authorities to slow the spread of the virus, on our business and operations; • the cyclical nature of our business and the impact of global supply and demand on our selling prices; • the global commodity nature of our fertilizer products, the conditions in the international market for nitrogen products, and the intense global competition from other fertilizer producers; • conditions in the United States, Europe and other agricultural areas; • the volatility of natural gas prices in North America and Europe; • difficulties in securing the supply and delivery of raw materials, increases in their costs or delays or interruptions in their delivery; • reliance on third party providers of transportation services and equipment; • the significant risks and hazards involved in producing and handling our products against which we may not be fully insured; • our ability to manage our indebtedness and any additional indebtedness that may be incurred; • our ability to maintain compliance with covenants under our revolving credit agreement and the agreements governing our indebtedness; • downgrades of our credit ratings; • risks associated with cyber security; • weather conditions; • risks associated with changes in tax laws and disagreements with taxing authorities; • our reliance on a limited number of key facilities; • potential liabilities and expenditures related to environmental, health and safety laws and regulations and permitting requirements; • future regulatory restrictions and requirements related to greenhouse gas emissions; • risks associated with expansions of our business, including unanticipated adverse consequences and the significant resources that could be required; • the seasonality of the fertilizer business; • the impact of changing market conditions on our forward sales programs; • risks involving derivatives and the effectiveness of our risk measurement and hedging activities; • risks associated with the operation or management of the CHS strategic venture, risks and uncertainties relating to the market prices of the fertilizer products that are the subject of our supply agreement with CHS over the life of the supply agreement, and the risk that any challenges related to the CHS strategic venture will harm our other business relationships; • risks associated with our PLNL joint venture; • acts of terrorism and regulations to combat terrorism; • risks associated with international operations; and • deterioration of global market and economic conditions. 46 Table of Contents CF INDUSTRIES HOLDINGS, INC.