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, 2020, filed with the Securities and Exchange Commission on February 24, 2021, 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 ◦ Our Commitment to a Clean Energy Economy ◦ Market Conditions and Current Developments ◦ Financial Executive Summary ◦ Items Affecting Comparability of Results • Consolidated Results of Operations • Operating Results by Business Segment • Liquidity and Capital Resources • Critical Accounting Estimates • Forward-Looking Statements Overview of CF Holdings Our Company 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. Our principal assets as of March 31, 2021 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; • 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 22 Table of Contents CF INDUSTRIES HOLDINGS, INC. • a 50% interest in Point Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in the Republic of Trinidad and Tobago that we account for under the equity method. Our Commitment to a Clean Energy Economy In October 2020, we announced that we are taking significant steps to support a global hydrogen and clean fuel economy, through the production of green and blue ammonia. Since ammonia is one of the most efficient ways to transport and store hydrogen and is also a fuel in its own right, we believe that the Company, as the world’s largest producer of ammonia with an unparalleled manufacturing and distribution network and deep technical expertise, is uniquely positioned to fulfill anticipated demand for hydrogen and ammonia from green and blue sources. Our approach will focus on green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia, which relates to ammonia produced by conventional processes but with CO 2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects. We have announced an initial green ammonia project at our flagship Donaldsonville nitrogen complex to produce approximately 20,000 tons per year of green ammonia. Additionally, we are developing CCS and other carbon abatement projects across our production facilities that will enable us to produce blue ammonia. Market Conditions and Current Developments Selling Prices and Sales Volume Our average selling price was higher in the first quarter of 2021 than in the first quarter of 2020, driven by the impact of a tighter global nitrogen supply and demand balance as higher global energy costs drove lower global operating rates. In the first quarter of 2021, the average selling price for our products was $230 per ton, an increase of 11%, compared to $207 per ton in the first quarter of 2020. Higher average selling prices drove an increase in net sales of approximately $101 million. We reported higher average selling prices in the first quarter of 2021 as compared to the first quarter of 2020 across most of our segments. Our total sales volume was 3% lower in the first three months of 2021 compared to the first three months of 2020. We shipped 4.6 million tons of product compared to 4.7 million tons in the first three months of 2020. Lower sales volume drove a decrease in net sales of approximately $56 million. The decrease in total sales volume was due primarily to the impact of decreased supply resulting from lower production in the first three months of 2021 in our ammonia, granular urea and AN segments as a result of severe weather conditions, which disrupted natural gas supply at certain of our facilities primarily as a result of Winter Storm Uri, and higher maintenance activity. Lower sales volumes in our AN, ammonia and granular urea segments were partially offset by higher sales volumes in our UAN and Other segments. Due to the lower production, we procured additional granular urea in order to meet obligations to customers and provide additional manufacturing flexibility once production resumed. We purchased 97 thousand tons of granular urea for $33 million to meet customer obligations, which we sold to customers and recognized revenue of $32 million. Natural Gas Natural gas is the principal raw material used to produce our nitrogen products. We use natural gas both as a chemical feedstock and as a fuel to produce nitrogen products. Natural gas is a significant cost component of manufactured nitrogen products, representing approximately one-third of our production costs. 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 cold temperatures. Due to these unprecedented factors, several states declared a state of emergency and natural gas was redirected for residential usage. At certain of our manufacturing locations, we reduced our natural gas consumption and therefore these plants either operated at reduced rates or temporarily suspended operations. We net settled certain natural gas contracts with our suppliers and received prevailing market prices, which were in excess of our cost. As a result, we recognized a gain of $112 million, which is reflected in cost of sales in our consolidated statement of operations for the three months ended March 31, 2021. Most of our nitrogen manufacturing facilities are located in the United States and Canada. As a result, the price of natural gas in North America, which is subject to volatility, directly impacts a substantial portion of our operating expenses. Natural gas prices during the first three months of 2021 were higher than in the first three months of 2020, due primarily to the impact of extreme cold weather in the first quarter of 2021, including Winter Storm Uri in February 2021. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, for the three months ended March 31, 2021 was $3.38 per MMBtu compared to $1.88 per MMBtu for the three months ended March 31, 2020, an increase of 23 Table of Contents CF INDUSTRIES HOLDINGS, INC. 80%. As a result of Winter Storm Uri, the daily closing price at the Henry Hub reached a high of $23.61 per MMBtu on February 18, 2021. We also have manufacturing facilities located in the United Kingdom. These facilities are subject to fluctuations associated with the price of natural gas in Europe. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). The average daily market price of natural gas at NBP for the three months ended March 31, 2021 was $6.90 per MMBtu compared to $3.20 per MMBtu for the three months ended March 31, 2020, an increase of 116%. The price of natural gas in the United Kingdom increased in the first three months of 2021 due primarily to a tighter supply and demand balance in the global liquefied natural gas market as a result of severe cold temperatures in Asia that increased global liquefied natural gas demand and resulted in record Asian prices for liquefied natural gas. The cost of natural gas used for production, which includes the impact of realized natural gas derivatives and excludes the $112 million gain that resulted from returning/selling gas to our suppliers, increased 23% to $3.22 per MMBtu in the three months ended March 31, 2021 from $2.61 per MMBtu in the three months ended March 31, 2020. This increase in natural gas costs resulted in a decrease in gross margin of approximately $48 million. Manufacturing Costs and Granular Urea Purchases In the first quarter of 2021, we experienced lower production levels and higher manufacturing and maintenance costs. In response to these factors, we procured granular urea in order to meet obligations to customers and provide additional manufacturing flexibility once production resumed. The following summarizes the impact from these activities: • Certain of our plants operated at lower operating rates or temporarily suspended operations due to the lack of natural gas due to Winter Storm Uri or due to maintenance activity. As a result, in the first quarter of 2021, we incurred higher costs for manufacturing, maintenance and repair activity for both scheduled and unscheduled downtime. • Due to the lower production, we procured additional granular urea in order to meet obligations to customers. We purchased approximately $33 million of granular urea to meet customer obligations, which we sold to customers and recognized revenue of $32 million. COVID-19 Pandemic In March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019 (COVID-19) as a pandemic. Due to the use of fertilizer products in crop production to support the global food supply chain, our business operations were designated as part of the critical infrastructure by the United States and as essential businesses in the United Kingdom and Canada, with corresponding designations by those states and provinces in which we operate. As a result, our manufacturing complexes continued to operate during 2020 and have continued to operate through the date of this report. In addition, 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 response to the pandemic, we instituted and have continued to enforce 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. Through the date of this report, we have not experienced any meaningful impact in customer demand as a result of the pandemic. 24 Table of Contents CF INDUSTRIES HOLDINGS, INC. Financial Executive Summary We reported net earnings attributable to common stockholders of $151 million for the three months ended March 31, 2021 compared to $68 million for the three months ended March 31, 2020, an increase in net earnings of $83 million, or 122%. The increase in net earnings was due primarily to higher average selling prices and the $112 million gain on the net settlement of certain natural gas contracts with our suppliers in February 2021, partially offset by higher natural gas costs and higher costs related to manufacturing, maintenance and repair activity due primarily to Winter Storm Uri. Gross margin increased by $85 million in the first quarter of 2021 to $289 million as compared to $204 million in the first quarter of 2020. The following table and related discussion describe the significant factors that drove the increase in gross margin. Variance due to the following items: First Quarter of 2020 Higher Average Selling Prices (1) Volume (1) Higher Natural Gas Costs (2) Unrealized MTM on natural gas derivatives Higher Manufacturing, Maintenance, and Other Costs Purchased Urea (1) Gain on Net Settlement of Natural Gas Contracts First Quarter of 2021 (dollars in millions) Net sales $ 971 $ 101 $ (56) $ — $ — $ — $ 32 $ — $ 1,048 Cost of sales 767 — (46) 48 6 63 33 (112) 759 Gross margin $ 204 $ 101 $ (10) $ (48) $ (6) $ (63) $ (1) $ 112 $ 289 Gross margin percentage 21.0 % 27.6 % _______________________________________________________________________________ (1) Selling price and volume impact of granular urea purchased to satisfy customer commitments is reflected in Purchased Urea column. (2) Higher natural gas costs include the impact of realized natural gas derivatives. • Average selling prices increased 11% to $230 per ton in the first quarter of 2021 from $207 per ton in the first quarter of 2020, which increased gross margin by $101 million, • Sales volume declined by 3% to 4.6 million tons in the first quarter of 2021 from 4.7 million tons in the first quarter of 2020, which reduced gross margin by $10 million, • The cost of natural gas used for production increased 23% to $3.22 per MMBtu in the first quarter of 2021 from $2.61 per MMBtu in the first quarter of 2020, which reduced gross margin by $48 million, • We recognized a net unfavorable unrealized mark-to-market impact of $6 million as the first quarter of 2020 included an unrealized net mark-to-market gain of $12 million and the first quarter of 2021 included an unrealized net mark-to-market gain of $6 million, • We incurred higher manufacturing, maintenance and other costs, which reduced gross margin by $63 million, due primarily to higher maintenance and repair activities, including the impact of winter storms, • We purchased 97 thousand tons of granular urea for $33 million to meet obligations to customers, which we sold to customers and recognized revenue of $32 million, and • The gain on the net settlement of certain natural gas contracts with our suppliers as a result of Winter Storm Uri was $112 million. Diluted net earnings per share attributable to common stockholders increased $0.39 per share, to $0.70 per share in the first quarter of 2021 compared to $0.31 per share in the first quarter of 2020. This increase is due primarily to higher net earnings driven by the increase in gross margin, as described above. During the first quarter of 2021, we redeemed in full all of the remaining $250 million outstanding principal amount of the 3.400% senior secured notes due December 2021 and recognized a loss on debt extinguishment of $6 million. 25 Table of Contents CF INDUSTRIES HOLDINGS, INC. Items Affecting Comparability of Results In addition to the impact of market conditions, winter storms and manufacturing and maintenance activity discussed above, certain items impacted the comparability of our financial results during the three months ended March 31, 2021 and 2020. The following table and related discussion outline these items and how they impacted the comparability of our financial results during these periods. During the three months ended March 31, 2021 and 2020, we reported net earnings attributable to common stockholders of $151 million and $68 million, respectively. Three Months Ended March 31, 2021 2020 Pre-Tax After-Tax Pre-Tax After-Tax (in millions) Unrealized net mark-to-market gain on natural gas derivatives (1) $ (6) $ (5) $ (12) $ (9) Loss on foreign currency transactions, including intercompany loans (2) — — 18 14 Insurance proceeds (2) — — (10) (8) Loss on debt extinguishment 6 5 — — ______________________________________________________________________________ (1) Included in cost of sales in our consolidated statements of operations. (2) Included in other operating—net in our consolidated statements of operations. Unrealized net mark-to-market gain on natural gas derivatives Natural gas is the largest and most volatile single component of the manufacturing cost for nitrogen-based products. At certain times, we have managed the risk of changes in natural gas prices through the use of derivative financial instruments. The derivatives that we may use for this purpose are primarily natural gas fixed price swaps, basis swaps and options. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. This can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives, which are reflected in cost of sales in our consolidated statements of operations. In the three months ended March 31, 2021 and 2020, we recognized unrealized net mark-to-market gains of $6 million and $12 million, respectively. Loss on foreign currency transactions, including intercompany loans In the three months ended March 31, 2020, we recognized a loss of $18 million, which consists of foreign currency exchange rate impacts on foreign currency denominated transactions, including the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. Insurance proceeds In the three months ended March 31, 2020, we recognized income of $10 million related to insurance claims at one of our nitrogen complexes, which consisted of $8 million related to business interruption proceeds and $2 million related to property insurance proceeds. These proceeds are reflected in other operating—net in our consolidated statement of operations. Loss on debt extinguishment 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. 26 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 March 31, 2021 2020 2021 v. 2020 (in millions, except per share and per MMBtu) Net sales $ 1,048 $ 971 $ 77 8 % Cost of sales 759 767 (8) (1) % Gross margin 289 204 85 42 % Gross margin percentage 27.6 % 21.0 % 6.6 % Selling, general and administrative expenses 55 54 1 2 % Other operating—net (2) 6 (8) N/M Total other operating costs and expenses 53 60 (7) (12) % Equity in earnings of operating affiliate 11 3 8 N/M Operating earnings 247 147 100 68 % Interest expense—net 48 43 5 12 % Loss on debt extinguishment 6 — 6 N/M Earnings before income taxes 193 104 89 86 % Income tax provision 18 13 5 38 % Net earnings 175 91 84 92 % Less: Net earnings attributable to noncontrolling interest 24 23 1 4 % Net earnings attributable to common stockholders $ 151 $ 68 $ 83 122 % Diluted net earnings per share attributable to common stockholders $ 0.70 $ 0.31 $ 0.39 126 % Diluted weighted-average common shares outstanding 216.0 216.6 (0.6) — % Dividends declared per common share $ 0.30 $ 0.30 $ — — % Natural gas supplemental data (per MMBtu) Cost of natural gas used for production in cost of sales (1) $ 3.22 $ 2.61 $ 0.61 23 % Average daily market price of natural gas Henry Hub (Louisiana) $ 3.38 $ 1.88 $ 1.50 80 % Average daily market price of natural gas National Balancing Point (UK) $ 6.90 $ 3.20 $ 3.70 116 % Unrealized net mark-to-market gain on natural gas derivatives $ (6) $ (12) $ 6 50 % Depreciation and amortization $ 204 $ 211 $ (7) (3) % Capital expenditures $ 71 $ 67 $ 4 6 % Sales volume by product tons (000s) 4,564 4,688 (124) (3) % Production volume by product tons (000s): Ammonia (2) 2,479 2,670 (191) (7) % Granular urea 1,184 1,285 (101) (8) % UAN (32%) 1,689 1,599 90 6 % AN 475 515 (40) (8) % ___________________________________________________________________________ N/M—Not Meaningful (1) Includes the cost of natural gas used for production and related transportation that is included in cost of sales during the period under the first-in, first-out inventory cost method. 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. Excludes the $112 million gain on net settlement of certain natural gas contracts with our suppliers due to Winter Storm Uri in February 2021. (2) Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN, or AN. 27 Table of Contents CF INDUSTRIES HOLDINGS, INC. First Quarter of 2021 Compared to First Quarter of 2020 Net Sales Our total net sales increased $77 million, or 8%, to $1,048 million in the first quarter of 2021 compared to $971 million in the first quarter of 2020 due to an increase in average selling prices, partially offset by a decrease in sales volume. Average selling prices increased by 11% due to strong market conditions, which was partially offset by a 3% decline in sales volume. The increase in net sales also reflects the sale of 97 thousand tons of granular urea that we purchased during the first quarter of 2021 to meet obligations to customers. Our average selling price was $230 per ton in the first quarter of 2021, or 11% higher, compared to $207 per ton in the first quarter of 2020 due to higher average selling prices across most of our segments, primarily driven by the impact of a tighter global nitrogen supply and demand balance, partially offset by a lower average selling price for our UAN segment as orders that were fulfilled in the first quarter of 2021 were taken and priced in the later portion of 2020 when selling prices were lower. Our total sales volume of 4.6 million product tons in the first quarter of 2021 was 3% lower compared to 4.7 million tons in the first quarter of 2020 as lower sales volume in our AN, ammonia and granular urea segments was offset by higher sales volume in our UAN and Other segments. Sales volume was lower due to the impact of lower production due to reduced plant operating rates or the temporary idling of certain plants due to Winter Storm Uri and maintenance and repair activity. Cost of Sales Our total cost of sales decreased $8 million, or 1%, to $759 million in the first quarter of 2021 from $767 million in the first quarter of 2020. The decrease in our cost of sales was due primarily to the gain we recognized from the net settlement of certain natural gas contracts with our suppliers due to Winter Storm Uri that reduced cost of sales, which is more fully described above in the section titled “Market Conditions and Current Developments.” This gain was partially offset by higher costs for natural gas, higher costs for purchased products, and higher manufacturing, maintenance and other costs due primarily to higher maintenance and repair activities, including the impact of winter storms. We recognized a $112 million gain on the net settlement of certain natural gas contracts with our suppliers in February 2021 due to Winter Storm Uri, which is included in cost of sales. Additionally, cost of sales declined by $46 million due primarily to a 3% decline in sales volume. These reductions in cost of sales were partially offset by higher realized natural gas costs, including the impact of realized derivatives, which increased cost of sales by $48 million, and higher manufacturing, maintenance and other costs, which increased cost of sales by $63 million. In addition, we purchased $33 million of granular urea during the first quarter of 2021 to meet obligations to customers. Cost of sales averaged $167 per ton in the first quarter of 2021, a 2% increase from $163 per ton in the first quarter of 2020, reflecting the net impact of higher natural gas costs, the impact of higher quantities of purchased products, and higher manufacturing, maintenance and repair costs, partially offset by the $112 million gain on the net settlement of certain natural gas contracts in February 2021. The cost of natural gas used for production, including the impact of realized derivatives, increased 23% to $3.22 per MMBtu in the first quarter of 2021 from $2.61 per MMBtu in the first quarter of 2020. The cost of natural gas used for production of $3.22 per MMBtu in the first quarter of 2021 does not include the $112 million gain from the net settlement of certain natural gas contracts in February 2021. Selling, General and Administrative Expenses Selling, general and administrative expenses were essentially unchanged at $55 million in the first quarter of 2021 as compared to $54 million in the first quarter of 2020. Other Operating—Net Other operating—net was $2 million of income in the first quarter of 2021 compared to $6 million of expense in the first quarter of 2020. The $2 million of income in the first quarter of 2021 was due primarily to the gain recognized on the recovery of certain precious metals from our manufacturing operations. The $6 million of expense in the first quarter of 2020 was due primarily to foreign currency transaction losses of $18 million, which consists of foreign currency exchange rate impacts on foreign currency denominated transactions, including the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. These losses were partially offset by insurance proceeds of $10 million. See “Items Affecting Comparability of Results—Insurance proceeds,” above, for additional information. 28 Table of Contents CF INDUSTRIES HOLDINGS, INC. Equity in Earnings of Operating Affiliate Equity in earnings of operating affiliate was $11 million in the first quarter of 2021 compared to $3 million in the first quarter of 2020. The increase in the first quarter of 2021 was due primarily to an increase in the operating results of PLNL as a result of higher ammonia average selling prices. Interest Expense—Net Net interest expense was $48 million in the first quarter of 2021 compared to $43 million in the first quarter of 2020. The first quarter of 2020 included a $4 million reduction in interest accrued on the reserve for unrecognized tax benefits. Loss on Debt Extinguishment On March 20, 2021, we redeemed in full all of the remaining $250 million outstanding principal amount of the 2021 Notes in accordance with the optional redemption provisions in the indenture governing the 2021 Notes. The total aggregate redemption price 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. 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 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 of earnings attributable to the noncontrolling interest, would be 1.3 percentage points higher, or 10.6%, if based on pre-tax income exclusive of the $24 million of earnings 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, or 15.8%, if based on pre-tax income exclusive of the $23 million attributable to the noncontrolling interest. See Note 9—Income Taxes and Note 13—Noncontrolling Interest for additional information. Net Earnings Attributable to Noncontrolling Interest Net earnings attributable to noncontrolling interest were essentially unchanged at $24 million in the first quarter of 2021 as compared to $23 million in the first quarter of 2020. Diluted Net Earnings Per Share Attributable to Common Stockholders Net earnings per share attributable to common stockholders increased $0.39 to $0.70 per diluted share in the first quarter of 2021 from $0.31 per diluted share in the first quarter of 2020. This increase was due primarily to the increase in net earnings, driven by higher gross margin, as described above. 29 Table of Contents CF INDUSTRIES HOLDINGS, INC. 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 for the first quarter of 2021 and the major drivers of the variance in net sales, cost of sales and gross margin compared to the first quarter of 2020: Variance due to the following items: First Quarter of 2020 Higher (Lower) Average Selling Prices (1) Volume (1) Higher Natural Gas Costs (2) Unrealized MTM on natural gas derivatives Higher Manufacturing, Maintenance and Other Costs Purchased Urea (1) Gain on Net Settlement of Natural Gas Contracts First Quarter of 2021 (dollars in millions) Consolidated Net sales $ 971 $ 101 $ (56) $ — $ — $ — $ 32 $ — $ 1,048 Cost of sales 767 — (46) 48 6 63 33 (112) 759 Gross margin $ 204 $ 101 $ (10) $ (48) $ (6) $ (63) $ (1) $ 112 $ 289 Gross margin percentage 21.0 % 27.6 % Ammonia Net sales $ 193 $ 30 $ (17) $ — $ — $ — $ — $ — $ 206 Cost of sales 173 — (13) 5 2 25 — (112) 80 Gross margin $ 20 $ 30 $ (4) $ (5) $ (2) $ (25) $ — $ 112 $ 126 Gross margin percentage 10.4 % 61.2 % Granular Urea Net sales $ 337 $ 66 $ (36) $ — $ — $ — $ 32 $ — $ 399 Cost of sales 224 — (22) 16 2 11 33 — 264 Gross margin $ 113 $ 66 $ (14) $ (16) $ (2) $ (11) $ (1) $ — $ 135 Gross margin percentage 33.5 % 33.8 % UAN Net sales $ 235 $ (23) $ 20 $ — $ — $ — $ — $ — $ 232 Cost of sales 193 — 12 14 1 10 — — 230 Gross margin $ 42 $ (23) $ 8 $ (14) $ (1) $ (10) $ — $ — $ 2 Gross margin percentage 17.9 % 0.9 % AN Net sales $ 116 $ 12 $ (23) $ — $ — $ — $ — $ — $ 105 Cost of sales 103 — (20) 8 1 3 — — 95 Gross margin $ 13 $ 12 $ (3) $ (8) $ (1) $ (3) $ — $ — $ 10 Gross margin percentage 11.2 % 9.5 % Other Net sales $ 90 $ 16 $ — $ — $ — $ — $ — $ — $ 106 Cost of sales 74 — (3) 5 — 14 — — 90 Gross margin $ 16 $ 16 $ 3 $ (5) $ — $ (14) $ — $ — $ 16 Gross margin percentage 17.8 % 15.1 % _______________________________________________________________________________ (1) Selling price and volume impact of granular urea purchased to satisfy customer commitments is reflected in Purchased Urea column. (2) Higher natural gas costs include the impact of realized natural gas derivatives. 30 Table of Contents CF INDUSTRIES HOLDINGS, INC. Ammonia Segment Our ammonia segment produces anhydrous ammonia (ammonia), which is our most concentrated nitrogen product. Ammonia contains 82% nitrogen and 18% hydrogen. The results of our ammonia segment consist of sales of ammonia to external customers. In addition, ammonia is the base 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 March 31, 2021 2020 2021 v. 2020 (dollars in millions, except per ton amounts) Net sales $ 206 $ 193 $ 13 7 % Cost of sales 80 173 (93) (54) % Gross margin $ 126 $ 20 $ 106 N/M Gross margin percentage 61.2 % 10.4 % 50.8 % Sales volume by product tons (000s) 683 762 (79) (10) % Sales volume by nutrient tons (000s) (1) 560 625 (65) (10) % Average selling price per product ton $ 302 $ 253 $ 49 19 % Average selling price per nutrient ton (1) $ 368 $ 309 $ 59 19 % Gross margin per product ton $ 184 $ 26 $ 158 N/M Gross margin per nutrient ton (1) $ 225 $ 32 $ 193 N/M Depreciation and amortization $ 36 $ 39 $ (3) (8) % Unrealized net mark-to-market gain on natural gas derivatives $ (2) $ (4) $ 2 50 % _______________________________________________________________________________ N/M—Not Meaningful (1) Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. First Quarter of 2021 Compared to First Quarter of 2020 Net Sales. Net sales in our ammonia segment increased by $13 million, or 7%, to $206 million in the first quarter of 2021 from $193 million in the first quarter of 2020 due primarily to a 19% increase in average selling prices, partially offset by a 10% decrease in sales volume. Average selling prices increased to $302 per ton in the first quarter of 2021 compared to $253 per ton in the first quarter of 2020 due primarily to the impact of a tighter global nitrogen supply and demand balance. Sales volume was lower due primarily to lower supply availability resulting from reduced production. Cost of Sales. Cost of sales in our ammonia segment averaged $118 per ton in the first quarter of 2021, a 48% decrease from $227 per ton in the first quarter of 2020. The decrease is due primarily to the impact of the $112 million gain on the net settlement of certain natural gas contracts with our suppliers in February 2021. See “Market Conditions and Current Developments” above, for additional information on the operational impacts of Winter Storm Uri. The $112 million gain on the net settlement of certain natural gas contracts reduced cost of sales by $164 per ton. Cost of sales per ton, exclusive of the gain, is $282 per ton, a 24% increase compared to the first quarter of 2020. The increase reflects higher maintenance and repair activity due primarily to Winter Storm Uri and higher realized natural gas costs. Gross Margin . Gross margin in our ammonia segment increased by $106 million to $126 million in the first quarter of 2021 from $20 million in the first quarter of 2020, and our gross margin percentage was 61.2% in the first quarter of 2021 compared to 10.4% in the first quarter of 2020 . The increase in gross margin was due primarily to the $112 million gain on the net settlement of certain natural gas contracts in February 2021 and a 19% increase in average selling prices, which increased gross margin by $30 million. These factors were partially offset by the impact of a $25 million net increase in manufacturing, maintenance and other costs, including the impact of Winter Storm Uri, an increase in realized natural gas costs, which reduced gross margin by $5 million, a 10% decrease in sales volume, which decreased gross margin by $4 million, and the impact of a $2 million unrealized net mark-to-market gain on natural gas derivatives in the first quarter of 2021 compared to a $4 million gain in the first quarter of 2020 . 31 Table of Contents CF INDUSTRIES HOLDINGS, INC. Granular Urea Segment Our granular urea segment produces granular urea, which contains 46% nitrogen. Produced from ammonia and carbon dioxide, it has the highest nitrogen content of any of our solid nitrogen fertilizers. Granular urea is produced at our Donaldsonville, Louisiana; Medicine Hat, Alberta; and Port Neal, Iowa, nitrogen complexes. The following table presents summary operating data for our granular urea segment: Three Months Ended March 31, 2021 2020 2021 v. 2020 (dollars in millions, except per ton amounts) Net sales $ 399 $ 337 $ 62 18 % Cost of sales 264 224 40 18 % Gross margin $ 135 $ 113 $ 22 19 % Gross margin percentage 33.8 % 33.5 % 0.3 % Sales volume by product tons (000s) 1,320 1,381 (61) (4) % Sales volume by nutrient tons (000s) (1) 607 635 (28) (4) % Average selling price per product ton $ 302 $ 244 $ 58 24 % Average selling price per nutrient ton (1) $ 657 $ 531 $ 126 24 % Gross margin per product ton $ 102 $ 82 $ 20 24 % Gross margin per nutrient ton (1) $ 222 $ 178 $ 44 25 % Depreciation and amortization $ 66 $ 72 $ (6) (8) % Unrealized net mark-to-market gain on natural gas derivatives $ (2) $ (4) $ 2 50 % _______________________________________________________________________________ (1) Granular urea represents 46% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. First Quarter of 2021 Compared to First Quarter of 2020 Net Sales. Net sales in our granular urea segment increased $62 million, or 18%, to $399 million in the first quarter of 2021 from $337 million in the first quarter of 2020 due primarily to a 24% increase in average selling prices, partially offset by a 4% decrease in sales volume. Average selling prices increased to $302 per ton in the first quarter of 2021 compared to $244 per ton in the first quarter of 2020 due primarily to a tighter global nitrogen supply and demand balance. Sales volume was lower due primarily to lower supply availability resulting from reduced production due to the impact of Winter Storm Uri and maintenance and repair activity. See “Market Conditions and Current Developments” above for further information on the operational impacts of Winter Storm Uri. Due to the reduced production, we purchased additional granular urea to meet obligations to customers, which we sold for $32 million. Cost of Sales. Cost of sales in our granular urea segment averaged $200 per ton in the first quarter of 2021, a 23% increase from $162 per ton in the first quarter of 2020, due primarily to the impact of purchasing $33 million of granular urea to meet obligations to customers. In addition, the increase in cost of sales per ton resulted from higher realized natural gas costs and higher costs related to maintenance and repair activity due primarily to Winter Storm Uri. Gross Margin . Gross margin in our granular urea segment increased by $22 million to $135 million in the first quarter of 2021 from $113 million in the first quarter of 2020, and our gross margin percentage was 33.8% in the first quarter of 2021 compared to 33.5% in the first quarter of 2020. The increase in gross margin was due to higher average selling prices, which increased gross margin by $66 million. Partially offsetting the increase in average selling prices was the impact of an increase in realized natural gas costs, which decreased gross margin by $16 million, higher manufacturing, maintenance and other costs, including the impact of Winter Storm Uri, reduced gross margin by $11 million, a decrease in sales volume, which decreased gross margin by $14 million, the impact of a $2 million unrealized net mark-to-market gain on natural gas derivatives in the first quarter of 2021 compared to a $4 million gain in the first quarter of 2020, and a $1 million loss on the sale of purchased urea. In addition, due to the impact of Winter Storm Uri, we experienced lower production during the first quarter of 2021 and purchased 97 thousand tons of granular urea for $33 million to meet obligations to customers, which was sold for $32 million, which had the impact of reducing our gross margin percentage in our granular urea segment by 3.3 percentage points. 32 Table of Contents CF INDUSTRIES HOLDINGS, INC. UAN Segment Our UAN segment produces urea ammonium nitrate solution (UAN). UAN, a liquid fertilizer product with a nitrogen content that typically ranges from 28% to 32%, is produced by combining urea and ammonium nitrate. UAN is produced at our nitrogen complexes in Courtright, Ontario; Donaldsonville, Louisiana; Port Neal, Iowa; Verdigris, Oklahoma; Woodward, Oklahoma; and Yazoo City, Mississippi. The following table presents summary operating data for our UAN segment: Three Months Ended March 31, 2021 2020 2021 v. 2020 (dollars in millions, except per ton amounts) Net sales $ 232 $ 235 $ (3) (1) % Cost of sales 230 193 37 19 % Gross margin $ 2 $ 42 $ (40) (95) % Gross margin percentage 0.9 % 17.9 % (17.0) % Sales volume by product tons (000s) 1,514 1,390 124 9 % Sales volume by nutrient tons (000s) (1) 476 436 40 9 % Average selling price per product ton $ 153 $ 169 $ (16) (9) % Average selling price per nutrient ton (1) $ 487 $ 539 $ (52) (10) % Gross margin per product ton $ 1 $ 30 $ (29) (97) % Gross margin per nutrient ton (1) $ 4 $ 96 $ (92) (96) % Depreciation and amortization $ 56 $ 52 $ 4 8 % Unrealized net mark-to-market gain on natural gas derivatives $ (2) $ (3) $ 1 33 % _______________________________________________________________________________ (1) UAN represents between 28% and 32% of nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. First Quarter of 2021 Compared to First Quarter of 2020 Net Sales. Net sales in our UAN segment decreased $3 million, or 1%, to $232 million in the first quarter of 2021 from $235 million in the first quarter of 2020 due primarily to a 9% decrease in average selling prices, partially offset by a 9% increase in sales volume. Average selling prices decreased to $153 per ton in the first quarter of 2021 compared to $169 per ton in the first quarter of 2020 as orders that were fulfilled in the first quarter of 2021 were taken and priced in the later portion of 2020 when selling prices were lower. Sales volume was higher due primarily to increased production and higher demand from fall 2020 forward commitments. Cost of Sales. Cost of sales in our UAN segment averaged $152 per ton in the first quarter of 2021, a 9% increase from $139 per ton in the first quarter of 2020, due primarily to the impact of higher realized natural gas costs. Gross Margin . Gross margin in our UAN segment decreased by $40 million to $2 million in the first quarter of 2021 from $42 million in the first quarter of 2020, and our gross margin percentage was 0.9% in the first quarter of 2021 compared to 17.9% in the first quarter of 2020. The decrease in gross margin was due to a 9% decrease in average selling prices, which decreased gross margin by $23 million, higher realized natural gas costs, which decreased gross margin by $14 million, a $10 million net increase in manufacturing, maintenance and other costs, and the impact of a $2 million unrealized net mark-to-market gain on natural gas derivatives in the first quarter of 2021 compared to a $3 million gain in the first quarter of 2020 . These factors were partially offset by a 9% increase in sales volume, which increased gross margin by $8 million. 33 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 March 31, 2021 2020 2021 v. 2020 (dollars in millions, except per ton amounts) Net sales $ 105 $ 116 $ (11) (9) % Cost of sales 95 103 (8) (8) % Gross margin $ 10 $ 13 $ (3) (23) % Gross margin percentage 9.5 % 11.2 % (1.7) % Sales volume by product tons (000s) 438 547 (109) (20) % Sales volume by nutrient tons (000s) (1) 147 184 (37) (20) % Average selling price per product ton $ 240 $ 212 $ 28 13 % Average selling price per nutrient ton (1) $ 714 $ 630 $ 84 13 % Gross margin per product ton $ 23 $ 24 $ (1) (4) % Gross margin per nutrient ton (1) $ 68 $ 71 $ (3) (4) % Depreciation and amortization $ 19 $ 26 $ (7) (27) % Unrealized net mark-to-market gain on natural gas derivatives $ — $ (1) $ 1 100 % _______________________________________________________________________________ (1) AN represents between 29% and 35% of nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. First Quarter of 2021 Compared to First Quarter of 2020 Net Sales. Net sales in our AN segment decreased $11 million, or 9%, to $105 million in the first quarter of 2021 from $116 million in the first quarter of 2020 due primarily to a 20% decrease in sales volume, partially offset by a 13% increase in average selling prices. Sales volume declined due primarily to lower supply availability resulting from lower inventory levels entering 2021 and reduced production. Average selling prices increased to $240 per ton in the first quarter of 2021 compared to $212 per ton in the first quarter of 2020 due primarily to a tighter global nitrogen supply and demand balance. Cost of Sales. Cost of sales in our AN segment averaged $217 per ton in the first quarter of 2021, a 15% increase from $188 per ton in the first quarter of 2020. The increase was due primarily to higher realized natural gas costs. Gross Margin . Gross margin in our AN segment decreased $3 million, or 23%, to $10 million in the first quarter of 2021 from $13 million in the first quarter of 2020, and our gross margin percentage was 9.5% in the first quarter of 2021 compared to 11.2% in the first quarter of 2020. The decrease in gross margin was due to an increase in realized natural gas costs, which decreased gross margin by $8 million, a 20% decrease in sales volume, which decreased gross margin by $3 million, a net increase of $3 million in manufacturing, maintenance and other costs, and the impact of a $1 million unrealized net mark-to-market gain on natural gas derivatives in the first quarter of 2020. These factors were partially offset by a 13% increase in average selling prices, which increased gross margin by $12 million. 34 Table of Contents CF INDUSTRIES HOLDINGS, INC. Other Segment Our Other segment primarily includes the following products: • Diesel exhaust fluid (DEF) is an aqueous urea solution typically made with 32.5% or 50% high-purity urea and the remainder deionized water. • Urea liquor is a liquid product that we sell in concentrations of 40%, 50% and 70% urea as a chemical intermediate. • Nitric acid is a nitrogen-based mineral acid that is used in the production of nitrate-based fertilizers, nylon precursors and other specialty chemicals. • Compound fertilizer products (NPKs) are 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 March 31, 2021 2020 2021 v. 2020 (dollars in millions, except per ton amounts) Net sales $ 106 $ 90 $ 16 18 % Cost of sales 90 74 16 22 % Gross margin $ 16 $ 16 $ — — % Gross margin percentage 15.1 % 17.8 % (2.7) % Sales volume by product tons (000s) 609 608 1 — % Sales volume by nutrient tons (000s) (1) 122 120 2 2 % Average selling price per product ton $ 174 $ 148 $ 26 18 % Average selling price per nutrient ton (1) $ 869 $ 750 $ 119 16 % Gross margin per product ton $ 26 $ 26 $ — — % Gross margin per nutrient ton (1) $ 131 $ 133 $ (2) (2) % Depreciation and amortization $ 22 $ 17 $ 5 29 % Unrealized net mark-to-market (gain) loss on natural gas derivatives $ — $ — $ — — % _______________________________________________________________________________ (1) Nutrient tons represent the tons of nitrogen within the product tons. First Quarter of 2021 Compared to First Quarter of 2020 Net Sales. Net sales in our Other segment increased by $16 million, or 18%, to $106 million in the first quarter of 2021 from $90 million in the first quarter of 2020 due primarily to an 18% increase in average selling prices. The increase in average selling prices was due primarily to a tighter global nitrogen supply and demand balance. Cost of Sales. Cost of sales in our Other segment averaged $148 per ton in the first quarter of 2021, a 21% increase from $122 per ton in the first quarter of 2020, due primarily to higher costs related to manufacturing and maintenance activity and higher realized natural gas costs. Gross Margin . Gross margin in our Other segment was $16 million in both the first quarter of 2021 and the first quarter of 2020, and our gross margin percentage was 15.1% in the first quarter of 2021 compared to 17.8% in the first quarter of 2020. Gross margin was impacted by an 18% increase in average selling prices, which increased gross margin by $16 million and an increase of $3 million due to product mix. Offsetting these factors was a $14 million net increase in manufacturing, maintenance and other costs and an increase in realized natural gas costs, which decreased gross margin by $5 million. 35 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. On March 20, 2021, we redeemed in full all of the remaining $250 million outstanding principal amount of the 2021 Notes, in accordance with the optional redemption provisions in the indenture governing the 2021 Notes. The total aggregate redemption price 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. As of March 31, 2021, our cash and cash equivalents balance was $804 million, an increase of $121 million from $683 million at December 31, 2020. At March 31, 2021, 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. 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. 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 $71 million in the first three months of 2021 compared to $67 million in the first three months of 2020. We currently anticipate that capital expenditures for the full year of 2021 will be in the range of $450 million, which reflects a return to a normal spending level and includes expenditures for the green ammonia project at our Donaldsonville manufacturing complex. Planned capital expenditures are generally subject to change due to delays in regulatory approvals or permitting, unanticipated increases in cost, changes in scope and completion time, performance of third parties, delays in the receipt of equipment, adverse weather, defects in materials and workmanship, labor or material shortages, transportation constraints, acceleration or delays in the timing of the work and other unforeseen difficulties. 36 Table of Contents CF INDUSTRIES HOLDINGS, INC. Debt 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 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. CF Industries is the lead borrower under the Revolving Credit Agreement. 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 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. 37 Table of Contents CF INDUSTRIES HOLDINGS, INC. 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. Public Senior 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 March 20, 2021, we redeemed in full all of the remaining $250 million outstanding principal amount of the 2021 Notes in accordance with the optional redemption provisions in the indenture governing the 2021 Notes. The total aggregate redemption price 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. Under the terms of the indenture governing the 4.500% senior secured notes due 2026 (the 2026 Notes), 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. Subject to certain exceptions, the obligations under the 2026 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 2026 Notes. The liens on the Collateral securing the obligations under the 2026 Notes and the related guarantees will be automatically released and the covenant under the 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 indenture. Interest on the 2026 Notes is payable semiannually, 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. 38 Table of Contents CF INDUSTRIES HOLDINGS, INC. 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 March 31, 2021 and December 31, 2020, we had $341 million and $130 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 products. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. Volatility in reported quarterly earnings can result from the unrealized mark-to-market adjustments in the value of the derivatives. 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, our open natural gas derivative contracts consisted of natural gas fixed price swaps and basis swaps for 34.1 million MMBtus. Defined Benefit Pension Plans We contributed $7 million to our pension plans during the three months ended March 31, 2021. Over the remainder of 2021, we expect to contribute an additional $25 million to our pension plans, or a total of approximately $32 million for the full year 2021. Distribution to Noncontrolling Interest in CFN On January 31, 2021, the CFN Board of Managers approved semi-annual distribution payments for the distribution period ended December 31, 2020 in accordance with CFN’s limited liability company agreement. On February 1, 2021, CFN distributed $64 million to CHS for the distribution period ended December 31, 2020. The estimate of the partnership distribution earned by CHS, but not yet declared, for the first quarter of 2021 is approximately $50 million. Cash Flows Operating Activities Net cash provided by operating activities during the first three months of 2021 was $578 million, an increase of $286 million compared to $292 million in the first three months of 2020. The increase in cash flow from operations was due primarily to favorable changes in net working capital and higher net earnings. During the first three months of 2021, net changes in working capital contributed $230 million to cash flow from operations, while in the first three months of 2020 net changes in working capital contributed $42 million to cash flow from operations. The increased cash flow from working capital changes was primarily driven by customer advances and accounts payable and accrued expenses. The increase in net earnings was due primarily to higher average selling prices and the $112 million gain on the net settlement of certain natural gas contracts with our suppliers in February 2021, partially offset by higher costs related to manufacturing, maintenance and repair activity due primarily to Winter Storm Uri. 39 Table of Contents CF INDUSTRIES HOLDINGS, INC. Investing Activities Net cash used in investing activities was $71 million in the first three months of 2021 as compared to $65 million in the first three months of 2020. During the first three months of 2021, capital expenditures totaled $71 million compared to $67 million in the first three months of 2020. Financing Activities Net cash used in financing activities was $387 million in the first three months of 2021 compared to $242 million in the first three months of 2020. In the first three months of 2021, we paid $255 million in connection with the redemption of the 2021 Notes. The first three months of 2020 included $500 million of borrowings under the Revolving Credit Agreement. In the first three months of 2021, no shares of common stock were repurchased compared to $100 million in the first three months of 2020. Dividends paid on common stock for each of the three-month periods ended March 31, 2021 and 2020 was $65 million. Distributions to noncontrolling interest totaled $64 million in the first three months of 2021 as compared to $88 million in the first three months of 2020. Critical Accounting Estimates There were no changes to our significant accounting estimates during the first three months of 2021. 40 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, 2020, filed with the SEC on February 24, 2021. Such factors include, among others: • 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; • weather conditions; • the seasonality of the fertilizer business; • the impact of changing market conditions on our forward sales programs; • 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; • risks associated with cyber security; • our reliance on a limited number of key facilities; • acts of terrorism and regulations to combat terrorism; • risks associated with international operations; • 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 changes in tax laws and disagreements with taxing authorities; • risks involving derivatives and the effectiveness of our risk measurement and hedging activities; • potential liabilities and expenditures related to environmental, health and safety laws and regulations and permitting requirements; • regulatory restrictions and requirements related to greenhouse gas emissions; • the development and growth of the market for green and blue (low-carbon) ammonia and the risks and uncertainties relating to the development and implementation of our green and blue (low-carbon) ammonia projects; • risks associated with expansions of our business, including unanticipated adverse consequences and the significant resources that could be required; • 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; and • 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. 41 Table of Contents CF INDUSTRIES HOLDINGS, INC.