CF Industries Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended March 31, 2021 2020 (in millions, except per share amounts) Net sales $ 1,048 $ 971 Cost of sales 759 767 Gross margin 289 204 Selling, general and administrative expenses 55 54 Other operating—net ( 2 ) 6 Total other operating costs and expenses 53 60 Equity in earnings of operating affiliate 11 3 Operating earnings 247 147 Interest expense 48 44 Interest income — ( 1 ) Loss on debt extinguishment 6 — Earnings before income taxes 193 104 Income tax provision 18 13 Net earnings 175 91 Less: Net earnings attributable to noncontrolling interest 24 23 Net earnings attributable to common stockholders $ 151 $ 68 Net earnings per share attributable to common stockholders: Basic $ 0.70 $ 0.31 Diluted $ 0.70 $ 0.31 Weighted-average common shares outstanding: Basic 214.9 216.0 Diluted 216.0 216.6 Dividends declared per common share $ 0.30 $ 0.30 See accompanying Notes to Unaudited Consolidated Financial Statements. 1 Table of Contents CF INDUSTRIES HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three months ended March 31, 2021 2020 (in millions) Net earnings $ 175 $ 91 Other comprehensive income (loss): Foreign currency translation adjustment—net of taxes 14 ( 83 ) Defined benefit plans—net of taxes 1 9 15 ( 74 ) Comprehensive income 190 17 Less: Comprehensive income attributable to noncontrolling interest 24 23 Comprehensive income (loss) attributable to common stockholders $ 166 $ ( 6 ) See accompanying Notes to Unaudited Consolidated Financial Statements. 2 Table of Contents CF INDUSTRIES HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, 2021 December 31, 2020 (in millions, except share and per share amounts) Assets Current assets: Cash and cash equivalents $ 804 $ 683 Accounts receivable—net 271 265 Inventories 379 287 Prepaid income taxes 11 97 Other current assets 24 35 Total current assets 1,489 1,367 Property, plant and equipment—net 7,492 7,632 Investment in affiliate 91 80 Goodwill 2,377 2,374 Operating lease right-of-use assets 249 259 Other assets 313 311 Total assets $ 12,011 $ 12,023 Liabilities and Equity Current liabilities: Accounts payable and accrued expenses $ 451 $ 424 Income taxes payable 5 — Customer advances 341 130 Current operating lease liabilities 88 88 Current maturities of long-term debt — 249 Other current liabilities 6 15 Total current liabilities 891 906 Long-term debt, net of current maturities 3,713 3,712 Deferred income taxes 1,175 1,184 Operating lease liabilities 166 174 Other liabilities 396 444 Equity: Stockholders’ equity: Preferred stock—$ 0.01 par value, 50,000,000 shares authorized — — Common stock—$ 0.01 par value, 500,000,000 shares authorized, 2021— 214,842,250 shares issued and 2020— 214,057,701 shares issued 2 2 Paid-in capital 1,333 1,317 Retained earnings 2,013 1,927 Treasury stock—at cost, 2021— 340,446 shares and 2020— 102,843 shares ( 14 ) ( 4 ) Accumulated other comprehensive loss ( 305 ) ( 320 ) Total stockholders’ equity 3,029 2,922 Noncontrolling interest 2,641 2,681 Total equity 5,670 5,603 Total liabilities and equity $ 12,011 $ 12,023 See accompanying Notes to Unaudited Consolidated Financial Statements. 3 Table of Contents CF INDUSTRIES HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) Common Stockholders $0.01 Par Value Common Stock Treasury Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Noncontrolling Interest Total Equity (in millions, except per share amounts) Balance as of December 31, 2020 $ 2 $ ( 4 ) $ 1,317 $ 1,927 $ ( 320 ) $ 2,922 $ 2,681 $ 5,603 Net earnings — — — 151 — 151 24 175 Other comprehensive income — — — — 15 15 — 15 Acquisition of treasury stock under employee stock plans — ( 10 ) — — — ( 10 ) — ( 10 ) Issuance of $ 0.01 par value common stock under employee stock plans — — 8 — — 8 — 8 Stock-based compensation expense — — 8 — — 8 — 8 Cash dividends ($ 0.30 per share) — — — ( 65 ) — ( 65 ) — ( 65 ) Distribution declared to noncontrolling interest — — — — — — ( 64 ) ( 64 ) Balance as of March 31, 2021 $ 2 $ ( 14 ) $ 1,333 $ 2,013 $ ( 305 ) $ 3,029 $ 2,641 $ 5,670 Balance as of December 31, 2019 $ 2 $ — $ 1,303 $ 1,958 $ ( 366 ) $ 2,897 $ 2,740 $ 5,637 Net earnings — — — 68 — 68 23 91 Other comprehensive loss — — — — ( 74 ) ( 74 ) — ( 74 ) Purchases of treasury stock — ( 100 ) — — — ( 100 ) — ( 100 ) Acquisition of treasury stock under employee stock plans — ( 8 ) — — — ( 8 ) — ( 8 ) Issuance of $ 0.01 par value common stock under employee stock plans — — 3 — — 3 — 3 Stock-based compensation expense — — 7 — — 7 — 7 Cash dividends ($ 0.30 per share) — — — ( 65 ) — ( 65 ) — ( 65 ) Distribution declared to noncontrolling interest — — — — — — ( 88 ) ( 88 ) Balance as of March 31, 2020 $ 2 $ ( 108 ) $ 1,313 $ 1,961 $ ( 440 ) $ 2,728 $ 2,675 $ 5,403 See accompanying Notes to Unaudited Consolidated Financial Statements. 4 Table of Contents CF INDUSTRIES HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended March 31, 2021 2020 (in millions) Operating Activities: Net earnings $ 175 $ 91 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 204 211 Deferred income taxes ( 12 ) ( 50 ) Stock-based compensation expense 8 7 Loss on debt extinguishment 6 — Unrealized net gain on natural gas derivatives ( 6 ) ( 12 ) Unrealized gain on embedded derivative — ( 1 ) Loss on disposal of property, plant and equipment 1 — Undistributed earnings of affiliate—net of taxes ( 12 ) ( 4 ) Changes in: Accounts receivable—net ( 7 ) ( 12 ) Inventories ( 88 ) ( 29 ) Accrued and prepaid income taxes 78 10 Accounts payable and accrued expenses 36 ( 47 ) Customer advances 211 120 Other—net ( 16 ) 8 Net cash provided by operating activities 578 292 Investing Activities: Additions to property, plant and equipment ( 71 ) ( 67 ) Insurance proceeds for property, plant and equipment — 2 Net cash used in investing activities ( 71 ) ( 65 ) Financing Activities: Proceeds from short-term borrowings — 500 Payments of long-term borrowings ( 255 ) — Dividends paid on common stock ( 65 ) ( 65 ) Distributions to noncontrolling interest ( 64 ) ( 88 ) Purchases of treasury stock — ( 100 ) Proceeds from issuances of common stock under employee stock plans 7 3 Cash paid for shares withheld for taxes ( 10 ) ( 8 ) Net cash (used in) provided by financing activities ( 387 ) 242 Effect of exchange rate changes on cash and cash equivalents 1 ( 3 ) Increase in cash and cash equivalents 121 466 Cash and cash equivalents at beginning of period 683 287 Cash and cash equivalents at end of period $ 804 $ 753 See accompanying Notes to Unaudited Consolidated Financial Statements. 5 Table of Contents CF INDUSTRIES HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Background and Basis of Presentation Our mission is to provide clean energy to feed and fuel the world sustainably. With our employees focused on safe and reliable operations, environmental stewardship, and disciplined capital and corporate management, we are on a path to decarbonize our ammonia production network – the world’s largest – to enable green and blue hydrogen and nitrogen products for energy, fertilizer, emissions abatement and other industrial activities. Our nine manufacturing complexes in the United States, Canada and the United Kingdom, an extensive storage, transportation and distribution network in North America, and logistics capabilities enabling a global reach underpin our strategy to leverage our unique capabilities to accelerate the world’s transition to clean energy. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our core product is anhydrous ammonia (ammonia), which contains 82% nitrogen and 18% hydrogen. Our nitrogen products that are upgraded from ammonia are granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium. All references to “CF Holdings,” “the Company,” “we,” “us” and “our” 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. The accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2020, in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting. In the opinion of management, these statements reflect all adjustments, consisting only of normal and recurring adjustments, that are necessary for the fair representation of the information for the periods presented. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period. The accompanying unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related disclosures included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021. The preparation of the unaudited interim consolidated financial statements requires us to make use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, net realizable value of inventories, environmental remediation liabilities, environmental and litigation contingencies, the cost of customer incentives, useful lives of property and identifiable intangible assets, the assumptions used in the evaluation of potential impairments of property, investments, identifiable intangible assets and goodwill, income tax and valuation reserves, allowances for doubtful accounts receivable, the measurement of the fair values of investments for which markets are not active, assumptions used in the determination of the funded status and annual expense of defined benefit pension and other postretirement benefit plans and the assumptions used in the valuation of stock-based compensation awards granted to employees. 6 Table of Contents CF INDUSTRIES HOLDINGS, INC. 2. Revenue Recognition We track our revenue by product and by geography. See Note 16—Segment Disclosures for our revenue by reportable segment, which are ammonia, granular urea, UAN, AN and Other. The following table summarizes our revenue by product and by geography (based on destination of our shipment) for the three months ended March 31, 2021 and 2020: Ammonia Granular Urea UAN AN Other Total (in millions) Three months ended March 31, 2021 North America $ 168 $ 399 $ 222 $ 41 $ 77 $ 907 Europe and other 38 — 10 64 29 141 Total revenue $ 206 $ 399 $ 232 $ 105 $ 106 $ 1,048 Three months ended March 31, 2020 North America $ 154 $ 331 $ 230 $ 46 $ 59 $ 820 Europe and other 39 6 5 70 31 151 Total revenue $ 193 $ 337 $ 235 $ 116 $ 90 $ 971 As of March 31, 2021 and December 31, 2020, we had $ 341 million and $ 130 million, respectively, in customer advances on our consolidated balance sheets. The revenue recognized during the three months ended March 31, 2021 and 2020 that was included in our customer advances at the beginning of each respective period amounted to approximately $ 85 million and $ 75 million, respectively. We offer cash incentives to certain customers that do not provide an option to the customer for additional product. The balances of customer incentives accrued at March 31, 2021 and December 31, 2020 were not material. From time to time, we will enter the marketplace to purchase product in order to satisfy obligations under contracts with our customers. When we purchase product for this purpose, we are the principal in the transaction and recognize revenue on a gross basis. As discussed in Note 7—Equity Method Investment, we have transactions in the normal course of business with PLNL, reflecting our obligation to purchase 50% of the ammonia produced by PLNL at current market prices. During the three months ended March 31, 2021, in addition to products purchased from PLNL, we recognized $ 32 million of revenue from sales of granular urea, which we purchased in order to satisfy obligations under contracts with our customers due to lower production experienced as a result of Winter Storm Uri. For the three months ended March 31, 2020, other than products purchased from PLNL, products purchased in the marketplace in order to satisfy obligations under contracts with our customers were not material. We have certain customer contracts with performance obligations where if the customer does not take the required amount of product specified in the contract, then the customer is required to make a payment to us, which may vary based upon the terms and conditions of the applicable contract. As of March 31, 2021, excluding contracts with original durations of less than one year, and based on the minimum product tonnage to be sold and current market price estimates, our remaining performance obligations under these contracts are approximately $ 805 million. We expect to recognize approximately 25 % of these performance obligations as revenue in the remainder of 2021, approximately 47 % as revenue during 2022 and 2023, approximately 25 % as revenue during 2024 and 2025, and the remainder thereafter. Subject to the terms and conditions of the applicable contracts, if these customers do not satisfy their purchase obligations under such contracts, the minimum amount that they would be required to pay to us under these contracts, in the aggregate, is approximately $ 187 million as of March 31, 2021. We monitor the ability of our customers to meet their purchase obligations, which could be impacted by the ongoing coronavirus disease 2019 (COVID-19) pandemic. Other than the performance obligations described above, any performance obligations with our customers that were unfulfilled or partially filled at December 31, 2020 will be satisfied in 2021. 7 Table of Contents CF INDUSTRIES HOLDINGS, INC. 3. Net Earnings Per Share Net earnings per share were computed as follows: Three months ended March 31, 2021 2020 (in millions, except per share amounts) Net earnings attributable to common stockholders $ 151 $ 68 Basic earnings per common share: Weighted-average common shares outstanding 214.9 216.0 Net earnings attributable to common stockholders $ 0.70 $ 0.31 Diluted earnings per common share: Weighted-average common shares outstanding 214.9 216.0 Dilutive common shares—stock-based awards 1.1 0.6 Diluted weighted-average shares outstanding 216.0 216.6 Net earnings attributable to common stockholders $ 0.70 $ 0.31 Diluted earnings per share is calculated using weighted-average common shares outstanding, including the dilutive effect of stock-based awards as determined under the treasury stock method. In the computation of diluted earnings per common share, potentially dilutive stock-based awards are excluded if the effect of their inclusion is anti-dilutive. Shares for anti-dilutive stock-based awards not included in the computation of diluted earnings per common share were 1.2 million and 2.1 million in the three months ended March 31, 2021 and 2020, respectively. 4. Inventories Inventories consist of the following: March 31, 2021 December 31, 2020 (in millions) Finished goods $ 338 $ 246 Raw materials, spare parts and supplies 41 41 Total inventories $ 379 $ 287 8 Table of Contents CF INDUSTRIES HOLDINGS, INC. 5. Property, Plant and Equipment—Net Property, plant and equipment—net consists of the following: March 31, 2021 December 31, 2020 (in millions) Land $ 68 $ 68 Machinery and equipment 12,597 12,539 Buildings and improvements 898 895 Construction in progress 294 275 Property, plant and equipment (1) 13,857 13,777 Less: Accumulated depreciation and amortization 6,365 6,145 Property, plant and equipment—net $ 7,492 $ 7,632 _______________________________________________________________________________ (1) As of March 31, 2021 and December 31, 2020, we had property, plant and equipment that was accrued but unpaid of approximately $ 33 million and $ 43 million, respectively. As of March 31, 2020 and December 31, 2019, we had property, plant and equipment that was accrued but unpaid of approximately $ 36 million and $ 42 million, respectively. Depreciation and amortization related to property, plant and equipment was $ 200 million and $ 208 million for the three months ended March 31, 2021 and 2020, respectively. Plant turnarounds —Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facilities during a full plant shutdown are referred to as plant turnarounds. The expenditures related to turnarounds are capitalized in property, plant and equipment when incurred. The following is a summary of capitalized plant turnaround costs: Three months ended March 31, 2021 2020 (in millions) Net capitalized turnaround costs: Beginning balance $ 226 $ 246 Additions 10 7 Depreciation ( 25 ) ( 25 ) Effect of exchange rate changes — ( 5 ) Ending balance $ 211 $ 223 Scheduled replacements and overhauls of plant machinery and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalysts when a full plant shutdown occurs. Scheduled inspections are also conducted during full plant shutdowns, including required safety inspections which entail the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Internal employee costs and overhead amounts are not considered turnaround costs and are not capitalized. 9 Table of Contents CF INDUSTRIES HOLDINGS, INC. 6. Goodwill and Other Intangible Assets The following table shows the carrying amount of goodwill by reportable segment as of March 31, 2021 and December 31, 2020: Ammonia Granular Urea UAN AN Other Total (in millions) Balance as of December 31, 2020 $ 587 $ 828 $ 576 $ 310 $ 73 $ 2,374 Effect of exchange rate changes 1 — — 2 — 3 Balance as of March 31, 2021 $ 588 $ 828 $ 576 $ 312 $ 73 $ 2,377 All of our identifiable intangible assets have definite lives and are presented in other assets on our consolidated balance sheets at gross carrying amount, net of accumulated amortization, as follows: March 31, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net (in millions) Customer relationships $ 134 $ ( 55 ) $ 79 $ 133 $ ( 52 ) $ 81 Trade names 32 ( 9 ) 23 32 ( 9 ) 23 Total intangible assets $ 166 $ ( 64 ) $ 102 $ 165 $ ( 61 ) $ 104 Our intangible assets are being amortized over a weighted-average life of approximately 20 years. Amortization expense of our identifiable intangible assets for each of the three-month periods ended March 31, 2021 and 2020 was $ 2 million. The gross carrying amount and accumulated amortization of our intangible assets are also impacted by the effect of exchange rate changes. Total estimated amortization expense for the remainder of 2021 and each of the five succeeding fiscal years is as follows: Estimated Amortization Expense (in millions) Remainder of 2021 $ 6 2022 9 2023 9 2024 9 2025 9 2026 9 10 Table of Contents CF INDUSTRIES HOLDINGS, INC. 7. Equity Method Investment We have a 50 % ownership interest in Point Lisas Nitrogen Limited (PLNL), which operates an ammonia production facility in the Republic of Trinidad and Tobago. We include our share of the net earnings from this equity method investment as an element of earnings from operations because PLNL provides additional production to our operations and is integrated with our other supply chain and sales activities in the ammonia segment. As of March 31, 2021, the total carrying value of our equity method investment in PLNL was $ 91 million, $ 41 million more than our share of PLNL’s book value. The excess is attributable to the purchase accounting impact of our acquisition of the investment in PLNL and reflects the revaluation of property, plant and equipment. The increased basis for property, plant and equipment is being amortized over a remaining period of approximately 12 years. Our equity in earnings of PLNL is different from our ownership interest in income reported by PLNL due to amortization of this basis difference. We have transactions in the normal course of business with PLNL reflecting our obligation to purchase 50 % of the ammonia produced by PLNL at current market prices. Our ammonia purchases from PLNL totaled $ 26 million and $ 10 million for the three months ended March 31, 2021 and 2020, respectively. 8. Fair Value Measurements Our cash and cash equivalents and other investments consist of the following: March 31, 2021 Cost Basis Unrealized Gains Unrealized Losses Fair Value (in millions) Cash $ 69 $ — $ — $ 69 Cash equivalents: U.S. and Canadian government obligations 715 — — 715 Other debt securities 20 — — 20 Total cash and cash equivalents $ 804 $ — $ — $ 804 Nonqualified employee benefit trusts 17 3 — 20 December 31, 2020 Cost Basis Unrealized Gains Unrealized Losses Fair Value (in millions) Cash $ 108 $ — $ — $ 108 Cash equivalents: U.S. and Canadian government obligations 552 — — 552 Other debt securities 23 — — 23 Total cash and cash equivalents $ 683 $ — $ — $ 683 Nonqualified employee benefit trusts 16 3 — 19 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. 11 Table of Contents CF INDUSTRIES HOLDINGS, INC. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present assets and liabilities included in our consolidated balance sheets as of March 31, 2021 and December 31, 2020 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value: March 31, 2021 Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in millions) Cash equivalents $ 735 $ 735 $ — $ — Nonqualified employee benefit trusts 20 20 — — Embedded derivative liability ( 18 ) — ( 18 ) — December 31, 2020 Total Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in millions) Cash equivalents $ 575 $ 575 $ — $ — Nonqualified employee benefit trusts 19 19 — — Derivative assets 1 — 1 — Derivative liabilities ( 7 ) — ( 7 ) — Embedded derivative liability ( 18 ) — ( 18 ) — Cash Equivalents As of March 31, 2021 and December 31, 2020, our cash equivalents consisted primarily of U.S. and Canadian government obligations and money market mutual funds that invest in U.S. government obligations and other investment-grade securities. Nonqualified Employee Benefit Trusts We maintain trusts associated with certain nonqualified supplemental pension plans. The fair values of the trust assets are based on daily quoted prices in an active market, which represents the net asset values of the shares held in the trusts, and are included on our consolidated balance sheets in other assets. Debt securities are accounted for as available-for-sale securities, and changes in fair value are reported in other comprehensive income. Changes in the fair value of available-for-sale equity securities in the trust assets are recognized through earnings. Derivative Instruments The derivative instruments that we may use are primarily natural gas fixed price swaps, basis swaps and options traded in the over-the-counter markets with multi-national commercial banks, other major financial institutions or large energy companies. The natural gas derivative contracts represent anticipated natural gas needs for future periods and settlements are scheduled to coincide with anticipated natural gas purchases during those future periods. The natural gas derivative contracts settle using primarily a NYMEX futures price index. To determine the fair value of these instruments, we use quoted market prices from NYMEX and standard pricing models with inputs derived from or corroborated by observable market data such as forward curves supplied by an industry-recognized independent third party. See Note 12—Derivative Financial Instruments for additional information. 12 Table of Contents CF INDUSTRIES HOLDINGS, INC. Embedded Derivative Liability Under the terms of our strategic venture with CHS Inc. (CHS), if our credit rating as determined by two of three specified credit rating agencies is below certain levels, we are required to make a non-refundable yearly payment of $ 5 million to CHS. Since 2016, our credit ratings have been below certain levels and, as a result, we made an annual payment of $ 5 million to CHS in the fourth quarter of each year. These payments will continue on a yearly basis until the earlier of the date that our credit rating is upgraded to or above certain levels by two of the three specified credit rating agencies or February 1, 2026. This obligation is recognized on our consolidated balance sheets as an embedded derivative and is included within other current liabilities and other liabilities. As of both March 31, 2021 and December 31, 2020, the embedded derivative liability was $ 18 million. Included in other operating—net in our consolidated statement of operations for the three months ended March 31, 2020 is a net gain of $ 1 million. The inputs into the fair value measurement include the probability of future upgrades and downgrades of our credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable credit spreads of other public companies at different credit rating levels. Based on these inputs, our fair value measurement is classified as Level 2. See Note 13—Noncontrolling Interest for additional information regarding our strategic venture with CHS. Financial Instruments The carrying amount and estimated fair value of our financial instruments are as follows: March 31, 2021 December 31, 2020 Carrying Amount Fair Value Carrying Amount Fair Value (in millions) Long-term debt, including current maturities $ 3,713 $ 4,224 $ 3,961 $ 4,731 The fair value of our long-term debt was based on quoted prices for identical or similar liabilities in markets that are not active or valuation models in which all significant inputs and value drivers are observable and, as a result, they are classified as Level 2 inputs. The carrying amounts of cash and cash equivalents, as well as instruments included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair values because of their short-term maturities. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We also have assets and liabilities that may be measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment, when there is allocation of purchase price in an acquisition or when a new liability is being established that requires fair value measurement. These include long-lived assets, goodwill and other intangible assets and investments in unconsolidated subsidiaries, such as equity method investments, which may be written down to fair value as a result of impairment. The fair value measurements related to each of these rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets. Since certain of the Company’s assumptions would involve inputs that are not observable, these fair values would reside within Level 3 of the fair value hierarchy. 13 Table of Contents CF INDUSTRIES HOLDINGS, INC. 9. Income Taxes For the three months ended March 31, 2021, we recorded an income tax provision of $ 18 million on pre-tax income of $ 193 million or an effective tax rate of 9.3 %, compared to an income tax provision of $ 13 million on pre-tax income of $ 104 million, or an effective tax rate of 12.3 %, for the three months ended March 31, 2020. For the three months ended March 31, 2021, our income tax provision includes a $ 22 million benefit reflecting the impact of agreement on certain issues related to U.S. federal income tax audits. For the three months ended March 31, 2020, our income tax provision included a $ 6 million benefit related to the settlement of certain U.S. and foreign income tax audits. Our effective tax rate is also impacted by earnings attributable to the noncontrolling interest in CF Industries Nitrogen, LLC (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 March 31, 2021 of 9.3 %, which is based on pre-tax income of $ 193 million, including $ 24 million attributable to the noncontrolling interest, would be 1.3 percentage points higher if based on pre-tax income exclusive of the $ 24 million attributable to the noncontrolling interest. Our effective tax rate for the three months ended March 31, 2020 of 12.3 %, which is based on pre-tax income of $ 104 million, including $ 23 million attributable to the noncontrolling interest, would be 3.5 percentage points higher if based on pre-tax income exclusive of the $ 23 million attributable to the noncontrolling interest. See Note 13—Noncontrolling Interest for additional information. 10. Interest Expense Details of interest expense are as follows: Three months ended March 31, 2021 2020 (in millions) Interest on borrowings (1) $ 46 $ 46 Fees on financing agreements (1) 2 2 Interest on tax liabilities (2) — ( 4 ) Total interest expense $ 48 $ 44 _______________________________________________________________________________ (1) See Note 11—Financing Agreements for additional information. (2) Interest on tax liabilities for the three months ended March 31, 2020 consists of a reduction in interest accrued on the reserve for unrecognized tax benefits. 14 Table of Contents CF INDUSTRIES HOLDINGS, INC. 11. Financing Agreements Revolving Credit Agreement We have a senior secured revolving credit agreement (the Revolving Credit Agreement), which 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. 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, at our option, an applicable eurocurrency rate or base rate plus, in either case, a specified margin. We are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend 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). As of March 31, 2021, 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 March 31, 2021 or December 31, 2020, or during the three months ended March 31, 2021. Maximum borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020 were $ 500 million. The weighted-average annual interest rate of borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020 was 2.05 %. Borrowings under the Revolving Credit Agreement as of March 31, 2020 were repaid in full in April 2020. The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants, including financial covenants. As of March 31, 2021, we were in compliance with all covenants under the Revolving Credit Agreement. Letters of Credit In addition to the letters of credit that may be issued under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement with capacity to issue up to $ 250 million of letters of credit. As of March 31, 2021, approximately $ 220 million of letters of credit were outstanding under this agreement. Senior Notes Long-term debt presented on our consolidated balance sheets as of March 31, 2021 and December 31, 2020 consisted of the following debt securities issued by CF Industries: Effective Interest Rate March 31, 2021 December 31, 2020 Principal Carrying Amount (1) Principal Carrying Amount (1) (in millions) Public Senior Notes: 3.450 % due June 2023 3.562 % $ 750 $ 748 $ 750 $ 748 5.150 % due March 2034 5.279 % 750 741 750 741 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 4.500 % due December 2026 4.759 % 750 741 750 740 Total long-term debt $ 3,750 $ 3,713 $ 4,000 $ 3,961 Less: Current maturities of long-term debt — — 250 249 Long-term debt, net of current maturities $ 3,750 $ 3,713 $ 3,750 $ 3,712 _______________________________________________________________________________ (1) Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was $ 9 million as of both March 31, 2021 and December 31, 2020, and total deferred debt issuance costs were $ 28 million and $ 30 million as of March 31, 2021 and December 31, 2020, respectively. 15 Table of Contents CF INDUSTRIES HOLDINGS, INC. Under the indentures (including the applicable supplemental indentures) governing the 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. Under the terms of the indenture governing the 4.500 % senior secured notes due December 2026 (the 2026 Notes) identified in the table above, the 2026 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 2026 Notes currently consist of CFE, CFS, CF USA and CFIDF. On March 20, 2021, we redeemed in full all of the remaining $ 250 million outstanding principal amount 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 paid on the 2021 Notes in connection with the redemption was $ 258 million, including accrued interest. As a result, we recognized a loss on debt extinguishment of $ 6 million, primarily consisting of a premium paid on the early redemption of the notes. Interest on the Public Senior Notes and the 2026 Notes is payable semiannually, and the Public Senior Notes and the 2026 Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices. 12. 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 products. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. The derivatives that we may use to reduce our exposure to changes in prices for natural gas are primarily natural gas fixed price swaps, basis swaps and options traded in the over-the-counter markets. These natural gas derivatives settle using primarily a NYMEX futures price index, which represents the basis for fair value at any given time. We enter into natural gas derivative contracts with respect to natural gas to be consumed by us in the future, and settlements of those derivative contracts are scheduled to coincide with our anticipated purchases of natural gas used to manufacture nitrogen products during those future periods. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. As a result, changes in fair value of these contracts are recognized in earnings. As of March 31, 2021, we had natural gas derivative contracts covering certain periods through March 2022. As of March 31, 2021, our open natural gas derivative contracts consisted of natural gas basis swaps for 0.5 million MMBtus. As of December 31, 2020, we had open natural gas derivative contracts consisting of natural gas fixed price swaps and basis swaps for 34.1 million MMBtus of natural gas. For the three months ended March 31, 2021, we used derivatives to cover approximately 26 % of our natural gas consumption. The effect of derivatives in our consolidated statements of operations is shown in the table below. Gain (loss) recognized in income Three months ended March 31, Location 2021 2020 (in millions) Unrealized net gains on natural gas derivatives Cost of sales $ 6 $ 12 Realized net losses on natural gas derivatives Cost of sales ( 3 ) ( 16 ) Gain on net settlement of natural gas derivatives due to Winter Storm Uri Cost of sales 112 — Net derivative gains (losses) $ 115 $ ( 4 ) 16 Table of Contents CF INDUSTRIES HOLDINGS, INC. Gain on net settlement of natural gas derivatives due to Winter Storm Uri We also enter into supply agreements to facilitate the availability of natural gas to operate our plants. When we purchase natural gas under these agreements, we intend to take physical delivery for use in our plants. Certain of these supply agreements allow us to fix the price of the deliveries for the following month using an agreed upon first of month price. We utilize the Normal Purchase Normal Sales (NPNS) derivative scope exception for these fixed price contracts and therefore, we do not account for them as derivatives. In February 2021, the central portion of the United States experienced extreme and unprecedented cold weather due to the impact of Winter Storm Uri. Certain natural gas suppliers and natural gas pipelines declared force majeure events due to natural gas well freeze-offs or frozen equipment. This occurred at the same time as large increases in natural gas demand were occurring due to the extreme cold temperatures. Due to these unprecedented factors, several states declared a state of emergency and natural gas was redirected for residential usage. We net settled certain natural gas contracts with our suppliers and received prevailing market prices, which were in excess of our cost. We no longer qualified for the NPNS derivative scope exception for the natural gas that was net settled with our suppliers due to the impact of Winter Storm Uri. As a result, we recognized a gain of $ 112 million from the net settlement of the natural gas contracts, which is reflected in cost of sales in our consolidated statement of operations for the three months ended March 31, 2021. The fair values of derivatives on our consolidated balance sheets are shown below. As of March 31, 2021 and December 31, 2020, none of our derivative instruments were designated as hedging instruments. See Note 8—Fair Value Measurements for additional information on derivative fair values. Asset Derivatives Liability Derivatives Balance Sheet Location March 31, 2021 December 31, 2020 Balance Sheet Location March 31, 2021 December 31, 2020 (in millions) (in millions) Natural gas derivatives Other current assets $ — $ 1 Other current liabilities $ — $ ( 7 ) Most of our International Swaps and Derivatives Association (ISDA) agreements contain credit-risk-related contingent features such as cross default provisions. In the event of certain defaults or termination events, our counterparties may request early termination and net settlement of certain derivative trades or, under certain ISDA agreements, may require us to collateralize derivatives in a net liability position. The Revolving Credit Agreement, at any time when it is secured, provides a cross collateral feature for those of our derivatives that are with counterparties that are party to, or affiliates of parties to, the Revolving Credit Agreement so that no separate collateral would be required for those counterparties in connection with such derivatives. In the event the Revolving Credit Agreement becomes unsecured, separate collateral could be required in connection with such derivatives. As of March 31, 2021 and December 31, 2020, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was zero and $ 6 million, respectively, which also approximates the fair value of the maximum amount of additional collateral that may need to be posted or assets that may be needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. As of March 31, 2021 and December 31, 2020, we had no cash collateral on deposit with counterparties for derivative contracts. The credit support documents executed in connection with certain of our ISDA agreements generally provide us and our counterparties the right to set off collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event. 17 Table of Contents CF INDUSTRIES HOLDINGS, INC. The following table presents amounts relevant to offsetting of our derivative assets and liabilities as of December 31, 2020: Amounts presented in consolidated balance sheets (1) Gross amounts not offset in consolidated balance sheets Financial instruments Cash collateral received (pledged) Net amount (in millions) December 31, 2020 Total derivative assets $ 1 $ — $ — $ 1 Total derivative liabilities ( 7 ) — — ( 7 ) Net derivative liabilities $ ( 6 ) $ — $ — $ ( 6 ) _______________________________________________________________________________ (1) We report the fair values of our derivative assets and liabilities on a gross basis on our consolidated balance sheets. As a result, the gross amounts recognized and net amounts presented are the same. We do not believe the contractually allowed netting, close-out netting or setoff of amounts owed to, or due from, the counterparties to our ISDA agreements would have a material effect on our financial position. 13. Noncontrolling Interest We have a strategic venture with CHS under which they own an equity interest in CFN, a subsidiary of CF Holdings, which represents approximately 11 % of the membership interests of CFN. We own the remaining membership interests. Under the terms of CFN’s limited liability company agreement, each member’s interest will reflect, over time, the impact of the profitability of CFN, any member contributions made to CFN and withdrawals and distributions received from CFN. For financial reporting purposes, the assets, liabilities and earnings of the strategic venture are consolidated into our financial statements. CHS’ interest in the strategic venture is recorded in noncontrolling interest in our consolidated financial statements. A reconciliation of the beginning and ending balances of noncontrolling interest and distributions payable to noncontrolling interest in our consolidated balance sheets is provided below. 2021 2020 (in millions) Noncontrolling interest: Balance as of January 1 $ 2,681 $ 2,740 Earnings attributable to noncontrolling interest 24 23 Declaration of distributions payable ( 64 ) ( 88 ) Balance as of March 31 $ 2,641 $ 2,675 Distributions payable to noncontrolling interest: Balance as of January 1 $ — $ — Declaration of distributions payable 64 88 Distributions to noncontrolling interest ( 64 ) ( 88 ) Balance as of March 31 $ — $ — CHS also receives deliveries pursuant to a supply agreement under which CHS has the right to purchase annually from CFN up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. As a result of its equity interest in CFN, CHS is entitled to semi-annual cash distributions from CFN. We are also entitled to semi-annual cash distributions from CFN. The amounts of distributions from CFN to us and CHS are based generally on the profitability of CFN and determined based on the volume of granular urea and UAN sold by CFN to us and CHS pursuant to supply agreements, less a formula driven amount based primarily on the cost of natural gas used to produce the granular urea and UAN, and adjusted for the allocation of items such as operational efficiencies and overhead amounts. Additionally, under the terms of the strategic venture, we recognized an embedded derivative related to our credit rating. See Note 8—Fair Value Measurements for additional information. 18 Table of Contents CF INDUSTRIES HOLDINGS, INC. 14. Stockholders’ Equity Treasury Stock 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. Since the 2019 Share Repurchase Program was announced in February 2019, we have repurchased approximately 10.2 million shares for $ 437 million, including 2.6 million shares repurchased during the first quarter of 2020 for $ 100 million. No shares have been repurchased since the first quarter of 2020 under the 2019 Share Repurchase Program. At March 31, 2021, we held 340,446 shares of treasury stock. Accumulated Other Comprehensive Loss Changes to accumulated other comprehensive loss and the impact on other comprehensive income (loss) are as follows: Foreign Currency Translation Adjustment Unrealized Gain on Derivatives Defined Benefit Plans Accumulated Other Comprehensive Income (Loss) (in millions) Balance as of December 31, 2019 $ ( 188 ) $ 5 $ ( 183 ) $ ( 366 ) Reclassification to earnings (1) — — 1 1 Effect of exchange rate changes and deferred taxes ( 83 ) — 8 ( 75 ) Balance as of March 31, 2020 $ ( 271 ) $ 5 $ ( 174 ) $ ( 440 ) Balance as of December 31, 2020 $ ( 144 ) $ 4 $ ( 180 ) $ ( 320 ) Reclassification to earnings (1) — — 2 2 Effect of exchange rate changes and deferred taxes 14 — ( 1 ) 13 Balance as of March 31, 2021 $ ( 130 ) $ 4 $ ( 179 ) $ ( 305 ) ____________________________________________________________________________ (1) Reclassifications out of accumulated other comprehensive loss to earnings during the three months ended March 31, 2021 and 2020 were not material. 15. Contingencies Litigation West Fertilizer Co. On April 17, 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we do not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident. 19 Table of Contents CF INDUSTRIES HOLDINGS, INC. The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Over three hundred cases have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining cases are in various stages of discovery and pre-trial proceedings. The next group of cases is expected to be set for trial after the Court resumes scheduling civil jury trials currently on hold because of the COVID-19 pandemic. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the pending lawsuits. The Company cannot provide a range of reasonably possible loss due to the uncertain nature of this litigation, including uncertainties around the potential allocation of responsibility by a jury to other defendants or responsible third parties. The recognition of a potential loss in the future in the West Fertilizer Co. litigation could negatively affect our results in the period of recognition. However, based upon currently available information, including available insurance coverage, we do not believe that this litigation will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Other Litigation From time to time, we are subject to ordinary, routine legal proceedings related to the usual conduct of our business, including proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of our various plants and facilities. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these routine matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Environmental From time to time, we receive notices from governmental agencies or third parties alleging that we are a potentially responsible party at certain cleanup sites under the Comprehensive Environmental Response, Compensation, and Liability Act or other environmental cleanup laws. In 2011, we received a notice from the Idaho Department of Environmental Quality (IDEQ) that alleged that we were a potentially responsible party for the cleanup of a former phosphate mine site we owned in the late 1950s and early 1960s located in Georgetown Canyon, Idaho. The current owner of the property and a former mining contractor received similar notices for the site. In 2014, we and the current property owner entered into a Consent Order with IDEQ and the U.S. Forest Service to conduct a remedial investigation and feasibility study of the site. In 2015, we and several other parties received a notice that the U.S. Department of the Interior and other trustees intend to undertake a natural resource damage assessment for 17 former phosphate mines in southeast Idaho, one of which is the former Georgetown Canyon mine. Because the former mine site is still in the remedial investigation and feasibility study stage, we are not able to estimate at this time our potential liability, if any, with respect to the cleanup of the site or a possible claim for natural resource damages. However, based on the results of the site investigation conducted to date, we do not expect the remedial or financial obligations to which we may be subject involving this or other cleanup sites will have a material adverse effect on our consolidated financial position, results of operations or cash flows. 20 Table of Contents CF INDUSTRIES HOLDINGS, INC. 16. Segment Disclosures 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. Our assets, with the exception of goodwill, are not monitored by or reported to our chief operating decision maker by segment; therefore, we do not present total assets by segment. Goodwill by segment is presented in Note 6—Goodwill and Other Intangible Assets. Segment data for sales, cost of sales and gross margin for the three months ended March 31, 2021 and 2020 are presented in the tables below. Ammonia (1) Granular Urea (2) UAN (2) AN (2) Other (2) Consolidated (in millions) Three months ended March 31, 2021 Net sales $ 206 $ 399 $ 232 $ 105 $ 106 $ 1,048 Cost of sales 80 264 230 95 90 759 Gross margin $ 126 $ 135 $ 2 $ 10 $ 16 289 Total other operating costs and expenses 53 Equity in earnings of operating affiliate 11 Operating earnings $ 247 Three months ended March 31, 2020 Net sales $ 193 $ 337 $ 235 $ 116 $ 90 $ 971 Cost of sales 173 224 193 103 74 767 Gross margin $ 20 $ 113 $ 42 $ 13 $ 16 204 Total other operating costs and expenses 60 Equity in earnings of operating affiliate 3 Operating earnings $ 147 _______________________________________________________________________________ (1) Cost of sales and gross margin for the ammonia segment in the three months ended March 31, 2021, include the $ 112 million gain on the net settlement of certain natural gas contracts with our suppliers. See Note 12—Derivative Financial Instruments for additional information. (2) The cost of the products that are upgraded into other products is transferred at cost into the upgraded product results. 21 Table of Contents CF INDUSTRIES HOLDINGS, INC.