LSB INDUSTRIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our September 30, 2020 condensed consolidated financial statements included elsewhere in this report. A reference to a “Note” relates to a note in the accompanying notes to the condensed consolidated financial statements. This MD&A reflects our operating results, unless otherwise noted. Certain statements contained in this MD&A may be deemed to be forward-looking statements. See “Special Note Regarding Forw ard-Looking Statements.” Overview General LSB is headquartered in Oklahoma City, Oklahoma and through its subsidiaries, manufactures and sells chemical products for the agricultural, mining, and industrial markets. We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma, and operate a facility for Covestro in Baytown, Texas. Our products are sold through distributors and directly to end customers primarily throughout the U.S. Key Operating Initiatives for 2020 We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement the following key initiatives: • Continue Focusing on Becoming a “Best in Class” Chemical Plant Operator with respect to Safe, Reliable Operations that Produce the Highest Quality Product. o We believe that high safety standards are critical and a precursor to improved plant performance. With that in mind, we implemented and are currently managing enhanced safety programs at our facilities that focus on improving our safety culture that will reduce risks and continuously improve our safety performance. o Additionally, over the last several years, our focus has been on upgrading our existing maintenance management system through technology enhancements and work processes to improve our predictive and preventative maintenance programs at our facilities. o We have several initiatives underway that we believe will improve the overall reliability of our plants and allow us to produce more products for sale while lowering our cost of production. Those initiatives are focused on building internal expertise to improve oversight of external contractors, operating behavior and procedure enhancements including operator training, leadership training, shift change enhancements and operating and maintenance procedures and developing systems to advance the use of process data to identify and correct anomalies in the manufacturing processes and asset performance. • Continue Broadening the Distribution of our Products. To further leverage our plants current production capacity, we are continuing to expand the distribution of our industrial and mining products by partnering with customers to take product into different markets within the U.S. as well as markets outside the U.S. In October 2020, we announced a new long- term nitric acid supply contract with a customer. Under the agreement, we will supply between 70,000 to 100,000 tons of nitric acid per year, with sales beginning in the first quarter of 2021. This contract advances our focus to leverage underutilized nitric acid production capacity at our El Dorado Facility. We also executed a new contract to capture and sell carbon dioxide out of our El Dorado Facility, where our customer is building a guest plant. We expect to begin sales under this agreement in the fourth quarter of 2021. Additionally, early in the second quarter, we completed a key storage project that will allow us to further maximize our production of HDAN at our El Dorado Facility, which we expect to enable us to achieve higher production, a lower cost per ton and increased sales of that product during periods of more attractive pricing. • Improve Our Capital Structure and Overall Cost of Capital. We are actively seeking ways to improve our capital structure and reduce our overall cost of capital. We believe that continued improvement in operating performance combined with economic recovery from the COVID-19 pandemic and improved pricing for our products will be a benefit in achieving those efforts. We may not successfully implement any or all of these initiatives. Even if we successfully implement the initiatives, they may not achieve the results that we expect or desire. Recent Business Developments COVID-19 Pandemic All of the facilities we operate have been designated as essential critical infrastructure based on guidelines issued by the United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency. Since we produce fertilizer products used by the agriculture industry, as well as chemical products required in a variety of industrial manufacturing processes, LSB has been determined to be a critical service provider, and therefore, our facilities have remained operational despite the government mandated operational limitations or business closings resulting from the federal, state and local government responses to the evolving global 21 health crisis resulting from the COVID-19 pandemic . Management has taken significant measures to ensure the health and safety of our employees and our business continuity during this challenging situation. For our personnel at our manufacturing facilities and retail agricultural center s , we have develop ed plans and procedures that have allow ed them to operate in a safe manner in order to protect them , their families , our vendors and our customers . These include daily health screenings, including temperature checks and questionnaires, use of proper personal protection equipment, regular disinfection and cleaning of equipment and workspaces, social distancing, working from home where appropriate and quarantining of employees according to specific protocols . O ur efforts have been successful to date as we have had only a small number of employees known to contract COVID-19. We intend to maintain our discipline in this regard for however lo ng the current health risk persists. The nitrogen chemical industry continued to be pressured during the third quarter of 2020. As a result of the COVID-19 global economic downturn and the resultant decline in energy prices, industry operating rates globally have risen, resulting in greater supply and lower fertilizer pricing. Pricing for all major agricultural product categories was impacted by the continued oversupply of ammonia in our primary end markets, along with increased imports of some of our downstream products. Industrial and mining sales volume declined as a result of pandemic-related weakness in demand in several of our end markets. Looking ahead to the fourth quarter of 2020, while much of the U.S. economy has a least partially reopened, substantial uncertainty remains for the balance of the year with respect to our various end markets. On the agricultural side, the fall harvest is currently picking up momentum after some delay resulting from warm weather throughout much of the country in recent weeks . Also, the corn market has recently experienced some positive indicators. The corn acres planted for the 2020 planting season are now expected to be approximately 91 million, which is up from 2019 plantings of 89 million. Also, the U.S. Department of Agriculture (the “USDA”) revised downward its estimates on U.S. ending corn inventory to 55 million metric tons compared to approximately 67 million metric tons estimated in July. In addition, demand from ethanol-related consumption has increased since the second quarter, although overall demand continues to be lower compared to 2019 due to the stay-at-home orders, we experienced in the U.S. Lower expected corn inventory is currently improving crop pricing and may translate into higher fertilizer pricing for the balance of 2020. However, improvements in fertilizer pricing could be tempered from additional imported fertilizers. With respect to industrial and mining sales volume, we are seeing gradual improvement in demand for nitric acid, industrial ammonia and ammonium nitrate as sectors such as automotive manufacturing, home building, and copper mining have increased activity. Also see discussion below concerning a new long-term nitric acid supply contract with a customer . On the liquidity front, as of September 30 , 2020, we had approximately $78.4 million of combined cash and borrowing capacity, which, we believe, provides us with ample liquidity to fund our operations and meet our obligations . As discussed in footnote (G) of Note 4, in August 2020, EDA entered into a $30 million secured financing arrangement with an affiliate of LSB Funding with an interest rate of 8.75%. Beginning in September 2020, principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025. This $30 million financing arrangement is secured by an ammonia storage tank and is guaranteed by LSB. A portion of the proceeds from this secured financing arrangement was used to pay off the Secured Promissory Note that was scheduled to mature in May 2023. Also see discussions below under “Liquidity and Capital Resources.” Long-Term Nitric Acid Supply Contract During October 2020, EDC entered into a new long-term nitric acid supply contract with a customer. Under the agreement, EDC will supply between 70,000 to 100,000 tons of nitric acid annually. The initial contract term extends through 2027 but includes automatic one-year renewal terms unless terminated by either party pursuant to the terms of the contract. Sales are expected to begin in the first quarter of 2021. Key Industry Factors Supply and Demand Agricultural See discussion above concerning the COVID-19 pandemic under “Recent Business Developments.” Sales of our agricultural products were approximately 43% of our total net sales for the third quarter of 2020. The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports. Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics. These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins. From a farmers’ perspective, the demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a 22 harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted. Additionally, changes in corn prices and those of soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year, and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely effecting prices. The USDA estimates the number of acres of corn being planted in the U.S. in 2020 to be approximately 91 million acres. In addition, the USDA estimates corn production for the 2020 harvest at approximately 14.7 billion bushels, up 8 percent from the 2019 harvest. The average yield in the U.S. is estimated at 178.4 bushels per acre, 10.9 bushels above the 2019 harvest yield of 167.5 bushels per acre. The following October estimates are associated with the corn market: 2021 Crop 2020 Crop 2019 Crop (2020 Harvest) (2019 Harvest) Percentage (2018 Harvest) Percentage October Report (1) October Report (1) Change (2) October Report (1) Change (3) U.S. Area Planted (Million acres) 91.0 89.7 1.4 % 88.9 2.4 % U.S. Yield per Acre (Bushels) 178.4 167.5 6.5 % 176.4 1.1 % U.S. Production (Million bushels) 14,722 13,620 8.1 % 14,340 2.7 % U.S. Ending Stocks (Million metric tons) 55.0 50.7 8.5 % 56.4 (2.5 %) World Ending Stocks (Million metric tons) 300.5 304.2 (1.2 %) 319.8 (6.0 %) (1) Information obtained from WASDE reports dated October 9, 2020 (“October Report”) for the 2020/2021 (“2021 Crop”), 2019/2020 (“2020 Crop”) and 2018/2019 (“2019 Crop”) corn marketing years. The marketing year is the twelve-month period during which a crop normally is marketed. For example, the marketing year for the current corn crop is from September 1 of the current year to August 31 of the next year. The year begins at the harvest and continues until just before harvest of the following year. (2) Represents the percentage change between the 2021 Crop amounts compared to the 2020 Crop amounts. (3) Represents the percentage change between the 2021 Crop amounts compared to the 2019 Crop amounts. After a challenging 2019 for U.S. corn farmers, a lower 2019 harvest and a decline in the stock-to-use ratio for corn, the USDA is estimating an increase in planted corn acres for the 2020 planting season representing an approximate 1.4% increase in corn acres year over year. However, with continuing national restrictions and stay at home orders placed on traveling earlier this year, in an attempt to slow the spread of the COVID-19 pandemic, gasoline usage had been significantly curtailed causing a slowdown in production across many U.S. ethanol facilities. With the easing of the pandemic-related restrictions and the onset of summer driving season in the third quarter, demand for ethanol improved after bottoming out in April, however, it is expected to average well below 2019 U.S. ethanol production. Most gasoline has 10% ethanol content. Ethanol is commonly made from corn and ethanol production is the largest user of U.S. corn, representing roughly 40% of total U.S. corn demand. As compared to the USDA July report, the USDA decreased corn demand from ethanol production by 150 million bushels for 2020 as a result of overall lower expected ethanol demand. However, the USDA also lowered expected planted acres by 1 million acres and slight decline in yield per acre. As a result, the USDA significantly decreased the ending corn stocks forecast from the 2020 harvest to 55 million metric tons from approximately 67 million metric tons. This decrease in ending corn stocks has elevated current and projected corn prices, which may positively impact fertilizer demand and prices for the 2020 fall and 2021 spring planting seasons. On the supply side, given the low price of natural gas in North America over the last several years, North American fertilizer producers have become the global low-cost producers for delivered fertilizer products to the Midwest U.S. Several years ago, the market believed that low natural gas prices would continue. That belief, combined with favorable fertilizer pricing, stimulated investment in numerous expansions of existing nitrogen chemical facilities and the construction of new nitrogen chemical facilities. Following the expansions, global nitrogen fertilizer supply outpaced global nitrogen fertilizer demand causing oversupply in the global and North American markets. In addition, the new domestic supply of ammonia and other fertilizer products changed the physical flow of ammonia in North America placing pressure on nitrogen fertilizer selling prices as the new capacity was absorbed by the market. More recently, ammonia pricing has been under pressure as a result of inordinately inclement weather in late 2018 and 2019, which led to limited fertilizer application and resultant elevated ammonia inventory levels in the domestic distribution channel. Additionally, UAN prices have pulled back in part, due to European anti-dumping duties that were imposed on imports from certain countries, including the U.S., which has caused increased imports of UAN into the U.S. primarily from Trinidad and Russia and exports from the U.S. to decrease, resulting in increased overall supply in the U.S market. Also, ammonia prices in the Southern Plains market have been under additional pricing pressure relating to the closure of the Magellan ammonia pipeline discussed below under “Transportation Costs.” 23 I ndustrial and Mining See discussion above concerning the COVID-19 pandemic under “Recent Business Developments.” Sales of our industrial products were approximately 44% of our total net sales for the third quarter of 2020. Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and paper industries. According to the American Chemistry Council, the U.S. economic indicators are experiencing weakness and contracting in the wake of the COVID-19 pandemic and its impact on the U.S market we serve in addition to weakness in the global economy. Our sales prices generally vary with the market price of ammonia or natural gas, as applicable, in our pricing arrangements with customers. See discussion above concerning a new long-term nitric acid supply contract under “Recent Business Developments.” Sales of our mining products were approximately 13% of our total net sales for the third quarter of 2020. Our mining products are LDAN and AN solution, which are primary used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, for metals mining, and to a lesser extent, for coal. In our mining markets, our sales volumes are typically driven by changes in the overall North American consumption levels of mining products that can be impacted by weather. Additionally, reduction in coal mining activities, due in part, to the shift from coal to natural gas and renewable power sources such as wind and solar in the electrical generation sector, is increasing competition within the other sectors of this market. We believe our plants are well located to support the more stable quarry and construction industries and the metals mining industries. Although our mining sales volumes for the third quarter of 2020 improved compared to the same period of 2019, customer demand for the quarter was impacted due to COVID-19’s impact on our customer base which resulted in mine closures or reductions in mining operating rates. Natural Gas Prices Natural gas is the primary feedstock used to produce nitrogen fertilizers at our manufacturing facilities. In recent years, U.S. natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports. As a result, our competitive position and that of other North American nitrogen fertilizer producers have been positively affected. Over the last several months, the COVID-19 global economic downturn and resultant decline in energy prices has lowered natural gas costs in countries where low natural gas has not been the norm. Although the North American cost advantage has narrowed, North America is still the low-cost producer. While we believe a recovery in global markets and easing of stay-at-home orders combined with a reduction in global natural gas production will lead to a long-term increase in global natural gas prices, in the short term we believe the low-price environment will continue. We historically have purchased natural gas in the spot market, using forward purchase contracts, or through a combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity. As noted in Note 6 , we also have certain forward natural gas contracts. We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems. The following table shows the volume of natural gas we purchased and the average cost per MMBtu: Three Months Ended September 30, 2020 2019 Natural gas volumes (MMBtu in millions) 7.4 6.0 Natural gas average cost per MMBtu $ 1.98 $ 2.35 Transportation Costs Costs for transporting nitrogen-based products can be significant relative to their selling price. For example, ammonia is a hazardous gas at ambient temperatures and must be transported in specialized equipment, which is more expensive than other forms of nitrogen fertilizers. In recent years, a significant amount of the ammonia consumed annually in the U.S. was imported. Therefore, nitrogen fertilizers prices in the U.S. are influenced by the cost to transport product from exporting countries, giving domestic producers who transport shorter distances an advantage. However, we continue to evaluate the recent rising costs of rail and truck freight domestically. Additionally, the Magellan ammonia pipeline, which had an annual capacity to transport approximately 900,000 tons per year, most of which was produced in Oklahoma and Texas and delivered via the pipeline in the Midwest has been permanently shut down. Without the pipeline in place for ammonia transport, producers that relied on the pipeline to transport their ammonia now have to rely on other transportation modes, primarily trucks, but will also include rail and barge transport of ammonia. Due to increases in demand for ammonia trucks during the spring and fall planting seasons, higher transportation costs have and could continue to impact our margins, if we were unable to fully pass through these costs to our customers. As a result, we continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs. 24 Key Operational Factors Facility Reliability Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations. The financial effects of planned downtime at our plants, including Turnarounds, is mitigated through a diligent planning process that considers the availability of resources to perform the needed maintenance and other factors. Unplanned downtime of our plants typically results in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products and increased costs related to repairs and maintenance. All Turnarounds result in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products, and increased costs related to repairs and maintenance, which repair, and maintenance costs are expensed as incurred. Our Pryor Facility is currently on a two-year Turnaround cycle with the next Turnaround planned for the third quarter of 2021. At that time, we will seek to move to a three-year Turnaround cycle. Our El Dorado Facility is currently on a three-year Turnaround cycle with the next Turnaround planned in the third quarter of 2022. Our Cherokee Facility is currently on a three-year Turnaround cycle with t he next Turnaround planned in the third quarter o f 2021. Forward Sales Contracts We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling. These sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon with dates typically occurring within 12 months. We use this program to varying degrees during the year depending on market conditions and our view of changing price environments. Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment. Consolidated Results of the Third Quarter of 2020 Our consolidated net sales for the third quarter of 2020 were $74.0 million compared to $75.5 million for the same period in 2019. Our consolidated operating loss was $9.0 million compared to $19.2 million for the same period in 2019. The items impacting our operating results are discussed in more detail below and under “Results of Operations.” Items Affecting Comparability of Results of the Third Quarter Selling Prices During the third quarter of 2020, average agricultural selling prices for our ammonia, UAN and HDAN decreased 26%, 22% and 18%, respectively, compared to the same period in 2019. As discussed above under “Key Industry Factors ,” the COVID-19 economic downturn and the resultant decline in energy prices has led to lower natural gas prices globally. These factors have led to an increase in operating rates for nitrogen producers around the globe, resulting in greater supply of nitrogen products and lower fertilizer pricing. This, combined with elevated ammonia inventory levels from the inordinately inclement weather throughout the Midwest in 2019 and the closure of the Magellan ammonia pipeline in September 2019, has led to excess ammonia supply in the Southern Plains market. Also pricing pressures were driven by the impact of ammonia producers selling ammonia that would otherwise have been sold into the industrial market but was instead sold into the agricultural market due to the pandemic-related slowdown of the industrial market . UAN prices were negatively impacted by European anti-dumping duties, which resulted in less exports of UAN from the U.S. and more imports of UAN from Russia and Trinidad into the U.S. HDAN prices were impacted by the overall decline in agricultural commodity prices. Our third quarter 2020 average industrial selling prices for our products were lower compared to the same period of 2019 as a result of the aforementioned negative impact on the markets we serve from the COVID-19 pandemic and the elevated ammonia inventory levels. The Tampa Ammonia pricing has declined 6% compared to the same period in 2019, which led to a decrease in industrial selling prices as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price. Our third quarter 2020 average mining selling prices were lower compared to the same period of 2019 primarily as a result of certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly. Legal Fees For the third quarters of 2020 and 2019, legal fees were approximately $1.3 million and $3.6 million, respectively. The change primarily relates to fees incurred as we pursue our claims against Leidos to recover damages and losses associated with the construction of the ammonia plant at the El Dorado Facility as discussed in footnote B of Note 5. Due to the impact from the COVID-19 pandemic, the trial date has been delayed and we are awaiting a new trial date. Once a new trial date is set, we expect these costs will increase as we restart preparations for the trial. 25 Turnaround Expense (2019 only) During the third quarter of 2019, we incurred Turnaround costs totaling approximately $7.2 million relating to a Turnaround at our Pryor Facility of which 24 days occurred during the third quarter of 2019, and an 18-day Turnaround performed at our El Dorado Facility. Turnaround costs are included in cost of sales. These Turnaround costs discussed above do not include the impact on operating results relating to lost absorption of fixed costs or the reduced margins due to the lost production and subsequent sales of product from our plants being shut down during the Turnaround. Results of Operations The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A. We present the following information about our results of operations. Net sales to unaffiliated customers are reported in the condensed consolidated financial statements and gross profit (loss) represents net sales less cost of sales. Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales. Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 The following table contains certain financial information: Three Months Ended September 30, Percentage 2020 2019 Change Change (Dollars In Thousands) Net sales: Agricultural products $ 31,986 $ 35,494 $ (3,508 ) (10 )% Industrial and mining products 41,983 40,001 1,982 5 % Total net sales $ 73,969 $ 75,495 $ (1,526 ) (2 )% Gross profit (loss): Agricultural products (1) $ 2,919 $ 3,158 $ (239 ) (8 )% Industrial and mining products (1) 13,418 11,990 1,428 12 % Adjusted gross profit by market (1) 16,337 15,148 1,189 8 % Depreciation and amortization (2) (17,362 ) (17,649 ) 287 (2 )% Turnaround expense (34 ) (7,232 ) 7,198 Total gross loss (1,059 ) (9,733 ) 8,674 (89 )% Selling, general and administrative expense 7,068 9,115 (2,047 ) (22 )% Other expense, net 875 383 492 Operating loss (9,002 ) (19,231 ) 10,229 (53 )% Interest expense, net 12,554 12,007 547 5 % Non-operating other expense, net 216 39 177 Benefit for income taxes (1,370 ) (483 ) (887 ) Net loss $ (20,402 ) $ (30,794 ) $ 10,392 (34 )% Other information: Gross profit (loss) percentage (3) (1.4 )% (12.9 )% 11.5 % Property, plant and equipment expenditures $ 4,277 $ 7,589 $ (3,312 ) (44 )% (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses. (2) Represents amount classified as cost of sales. (3) As a percentage of the total net sales. 26 The following table provides certain financial information by market (dollars in thousands): Three Months Ended September 30, 2020 2019 Change Agricultural Products Industrial and Mining Products Agricultural Products Industrial and Mining Products Agricultural Products Industrial and Mining Products Net sales $ 31,986 $ 41,983 $ 35,494 $ 40,001 $ (3,508 ) $ 1,982 Adjusted gross profit by market (1) $ 2,919 $ 13,418 $ 3,158 $ 11,990 $ (239 ) $ 1,428 Adjusted gross profit percentage by market (2) 9.1 % 32.0 % 8.9 % 30.0 % 0.2 % 2.0 % (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses. See reconciliation included in the financial information table above. (2) As a percentage of the respective net sales. The following tables provide key operating metrics for the agricultural products: Three Months Ended September 30, Percentage Product (tons sold) 2020 2019 Change Change UAN 140,524 105,847 34,677 33 % HDAN 27,800 32,248 (4,448 ) (14 )% Ammonia 20,181 19,420 761 4 % Other 2,824 3,434 (610 ) (18 )% Total 191,329 160,949 30,380 19 % Three Months Ended September 30, Percentage Gross Average Selling Prices (price per ton) 2020 2019 Change Change UAN $ 138 $ 176 $ (38 ) (22 )% HDAN $ 232 $ 282 $ (50 ) (18 )% Ammonia $ 192 $ 259 $ (67 ) (26 )% With respect to sales of industrial products, the following tables indicate key operating metrics of our major products: Three Months Ended September 30, Percentage Product (tons sold) 2020 2019 Change Change Ammonia 68,366 56,854 11,512 20 % Nitric Acid 20,254 25,304 (5,050 ) (20 )% Other Industrial Products 13,031 8,046 4,985 62 % Total 101,651 90,204 11,447 13 % Tampa Ammonia Benchmark (price per metric ton) $ 207 $ 221 $ (14 ) (6 )% With respect to sales of mining products, the following table indicates the volumes sold of our major products: Three Months Ended September 30, Percentage Product (tons sold) 2020 2019 Change Change LDAN/HDAN/AN Solution 41,469 39,305 2,164 6 % 27 Net Sales • Agricultural product sales decreased driven by lower selling prices for all of our agricultural products as discussed above under “Items Affecting Comparability of Results of the Third Quarter.” Additionally, hot and very dry weather across the Southern Plains delayed the shipment of HDAN fill tons during the quarter resulting in lower overall sales volumes during the 2020 third quarter. The impact from the decline in selling prices and lower HDAN volume was partially offset by an increase in sales volume of UAN from higher production from our Pryor Facility as a result of a new Urea reactor, which was installed in the fourth quarter of 2019 and the resultant improvement in production rates. • Industrial acids and other industrial product sales increased primarily from higher sales volumes of ammonia and other industrial products despite the affect from the COVID-19 pandemic on the end markets we serve. Offsetting this volume increase were lower selling prices due primarily to lower Tampa Ammonia benchmark pricing. The average Tampa ammonia pricing was approximately $14 per ton lower compared to the same period in 2019. Additionally, nitric acid sales volumes continue to be impacted by pandemic related market weakness in polyurethane end markets. • Mining products sales improved slightly driven by increased sales volumes partially offset by lower selling prices. Certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly. Gross Profit (Loss) As noted in the tables above, we recognized a gross loss of $1.1 million for the third quarter of 2020 compared to $9.7 million for the same period in 2019, or an $8.7 million improvement. Overall, our gross loss percentage was (1.4)% compared to (12.9)% for the same period in 2019. Our agricultural products adjusted gross profit percentage increased slightly to 9.1% for the third quarter of 2020 from 8.9% for the third quarter of 2019 due primarily to higher sales volumes of UAN and lower production costs partially offset by declines in selling prices for all of our agricultural products, as discussed above. Industrial and mining products adjusted gross profit percentage increased to 32% for the third quarter of 2020 from 30% for the same period in 2019 primarily driven by a shift of product mix, higher sales volumes of ammonia, and lower production costs partially offset by lower selling prices as discussed above. In addition to the items discussed above, the decline in our gross loss was also impacted by approximately $2.7 million in lower natural gas costs per MMBtu. Also, during the third quarter of 2019, we incurred Turnaround costs totaling approximately $7.2 million (no Turnarounds were performed during the same period of 2020). Selling, General and Administrative Our SG&A expenses were $7.1 million for the third quarter of 2020, a decrease of $2.0 million compared to the same period in 2019. The decrease was primarily driven by lower professional fees including legal fees associated with the legal matter discussed above under “Items Affecting Comparability of Results of the Third Quarter.” Benefit for Income Taxes The benefit for income taxes for the third quarter of 2020 was $1.4 million compared to $0.5 million for the same period in 2019. For the third quarter of 2020, the effective tax rate was impacted by adjustments made to our valuation allowances. For the third quarter of 2019, the effective tax rate was impacted by adjustments made to our valuation allowances and enacted state tax law changes. The resulting effective tax rate for the third quarters of 2020 and 2019 was 7% and 2% (benefit on pre-tax loss ), respectively. Also see discussion in Note 7. 28 Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table contains certain financial information: Nine Months Ended September 30, Percentage 2020 2019 Change Change (Dollars In Thousands) Net sales: Agricultural products $ 138,441 $ 154,790 $ (16,349 ) (11 )% Industrial and mining products 123,972 136,384 (12,412 ) (9 )% Total net sales $ 262,413 $ 291,174 $ (28,761 ) (10 )% Gross profit: Agricultural products (1) $ 20,750 $ 28,934 $ (8,184 ) (28 )% Industrial and mining products (1) 46,043 47,693 (1,650 ) (3 )% Adjusted gross profit by market (1) 66,793 76,627 (9,834 ) (13 )% Depreciation and amortization (2) (51,899 ) (51,529 ) (370 ) 1 % Turnaround expense (45 ) (7,836 ) 7,791 Recovery from settlements with certain vendors (3) 5,664 — 5,664 Total gross profit 20,513 17,262 3,251 19 % Selling, general and administrative expense 25,578 24,705 873 4 % Other expense, net 240 372 (132 ) Operating loss (5,305 ) (7,815 ) 2,510 (32 )% Interest expense, net (4) 38,509 34,309 4,200 12 % Non-operating other income, net (587 ) (605 ) 18 Benefit for income taxes (3,008 ) (5,816 ) 2,808 Net loss $ (40,219 ) $ (35,703 ) $ (4,516 ) (13 )% Other information: Gross profit percentage (5) 7.8 % 5.9 % 1.9 % Property, plant and equipment expenditures $ 22,230 $ 20,455 $ 1,775 9 % (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses and a recovery from settlements. (2) Represents amount classified as cost of sales. (3) See discussion in “Contingencies” of Note 1. (4) Includes interest expense of $1.5 million associated with a litigation judgment issued during the first nine months of 2020 as discussed in footnote (B) of Note 5. (5) As a percentage of the total net sales. The following table provides certain financial information by market (dollars in thousands): Nine Months Ended September 30, 2020 2019 Change Agricultural Products Industrial and Mining Products Agricultural Products Industrial and Mining Products Agricultural Products Industrial and Mining Products Net sales $ 138,441 $ 123,972 $ 154,790 $ 136,384 $ (16,349 ) $ (12,412 ) Adjusted gross profit by market (1) $ 20,750 $ 46,043 $ 28,934 $ 47,693 $ (8,184 ) $ (1,650 ) Adjusted gross profit percentage by market (2) 15.0 % 37.1 % 18.7 % 35.0 % (3.7 )% 2.1 % (1) Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization, Turnaround expenses and a recovery from settlements. See reconciliation included in the financial information table above. (2) As a percentage of the respective net sales. 29 The following tables provide key operating metrics for the agricultural products: Nine Months Ended September 30, Percentage Product (tons sold) 2020 2019 Change Change UAN 367,073 295,607 71,466 24 % HDAN 221,692 219,217 2,475 1 % Ammonia 69,074 66,853 2,221 3 % Other 15,027 17,139 (2,112 ) (12 )% Total 672,866 598,816 74,050 12 % Nine Months Ended September 30, Percentage Gross Average Selling Prices (price per ton) 2020 2019 Change Change UAN $ 153 $ 203 $ (50 ) (25 )% HDAN $ 250 $ 273 $ (23 ) (8 )% Ammonia $ 233 $ 341 $ (108 ) (32 )% With respect to sales of industrial products, the following tables indicate key operating metrics of our major products: Nine Months Ended September 30, Percentage Product (tons sold) 2020 2019 Change Change Ammonia 201,002 210,385 (9,383 ) (4 )% Nitric Acid 65,125 69,950 (4,825 ) (7 )% Other Industrial Products 33,506 25,268 8,238 33 % Total 299,633 305,603 (5,970 ) (2 )% Tampa Ammonia Benchmark (price per metric ton) $ 231 $ 245 $ (14 ) (6 )% With respect to sales of mining products, the following table indicates the volumes sold of our major products: Nine Months Ended September 30, Percentage Product (tons sold) 2020 2019 Change Change LDAN/HDAN/AN Solution 116,546 122,920 (6,374 ) (5 )% Net Sales • Agricultural product sales decreased driven by lower selling prices for all of our agricultural products. The impact from the decline in selling prices was partially offset by an increase in sales volume of UAN as a result of higher production from the Pryor facility as a result of the new Urea reactor which was installed in the fourth quarter of 2019. • Industrial acids and other industrial product sales decreased primarily from lower selling prices due primarily to lower Tampa Ammonia benchmark pricing. The average Tampa ammonia pricing was approximately $14 per ton lower compared to the same period in 2019. Additionally, overall sales volumes were slightly lower into markets we serve due to the COVID-19 pandemic. • Mining products sales decreased primarily as the result of overall lower sales volume and selling prices for our mining products. Sales volumes were impacted by reduced production or complete closures of gold, copper, iron ore and vanadium ore mines which impacted overall demand for mining products. Certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly. 30 Gross Profit As noted in the tables above, we recognized a gross profit $20.5 million in the first nine months of 2020 compared to $17.3 million for the same period of 2019, or an increase of approximately $3.2 million. Overall, our gross profit percentage was 7.8% compared to 5.9% for the same period in 2019. Our agricultural products adjusted gross profit percentage decreased to 15% during the first nine months of 2020 from 18.7% for the first nine months of 2019 due primarily to lower selling prices for all of our agricultural products, partially offset by increased sales volumes for all of our major products as discussed above. Industrial and mining products adjusted gross profit percentage increased in the first nine months of 2020 to 37.1% from 35% in first nine months of 2019 primarily driven by a shift of product mix and lower production costs partially offset by lower overall Tampa Ammonia pricing, which averaged approximately $231 per metric ton during 2020 compared to approximately $245 per metric ton for the same period in 2019 and from the lower sales volumes for all of our major products as discussed above. The net negative effect on gross profit from activity discussed above was partially offset by approximately $13.7 million in lower natural gas costs per MMBtu and the result of settlements with certain vendors resulting in a recovery of approximately $5.7 million as discussed in Note 1. Also, during the third quarter of 2019, we incurred Turnaround costs totaling approximately $7.2 million (no Turnarounds were performed during the same period of 2020). Selling, General and Administrative Our SG&A expenses were $25.6 million for the first nine months of 2020, an increase of $0.9 million compared to the same period in 2019. This net increase was primarily driven by an increase in compensation-related costs and marketing fees partially offset by lower legal fees. Interest Expense, net Interest expense for the first nine months of 2020 was $38.5 million compared to $34.3 million for the same period in 2019. The net increase relates primarily to interest expense incurred associated with the issuance of the New Notes in 2019, the Secured Financing due 2023 and the Secured Financing Agreement due 2025 as discussed in Note 4 in addition to a litigation judgment discussed in footnote (B) of Note 5. Benefit for Income Taxes The benefit for income taxes for the first nine months of 2020 was $3.0 million compared to $5.8 million for the same period in 2019. For the first nine months of 2020, the effective tax rate was impacted by adjustments made to our valuation allowances. For the first nine months of 2019, the effective tax rate was impacted by adjustments made to our valuation allowances and enacted state tax law changes. The resulting effective tax rate for the first nine months of 2020 and 2019 was 7% and 14% (benefit on pre-tax loss), respectively. 31 LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our cash flow activities for the nine months ended September 30: 2020 2019 Change (In Thousands) Net cash flows from operating activities $ 24,715 $ 40,972 $ (16,257 ) Net cash flows from investing activities $ (20,219 ) $ (20,358 ) $ 139 Net cash flows from financing activities $ 14,807 $ 20,121 $ (5,314 ) Net Cash Flow from Operating Activities Net cash provided by operating activities was $24.7 million for the nine months of 2020 compared to $41.0 million for the same period of 2019, a change of $16.3 million. For the first nine months of 2020, the net cash provided is the result of a net loss of $40.2 million plus adjustments of $52 million for depreciation and amortization of PP&E and other adjustments of $6.2 million less an adjustment of $3.1 million for deferred taxes and net cash provided of $9.8 million primarily from our working capital. For the first nine months of 2019, the net cash provided is the result of a net loss of $35.7 million plus adjustments of $51.6 million for depreciation and amortization of PP&E and other adjustments of $5.7 million less an adjustment of $5.8 million for deferred taxes and net cash provided of approximately $25.2 million primarily from our working capital. Net Cash Flow from Investing Activities Net cash used by investing activities was $20.2 million for the nine months of 2020 compared to $20.4 million for the same period of 2019, a change of approximately $0.2 million. For the first nine months of 2020 and 2019, the net cash used relates primarily to expenditures for PP&E. Net Cash Flow from Financing Activities Net cash provided by financing activities was $14.8 million for the nine months of 2020 compared to $20.1 million for the same period of 2019, a change of $5.3 million. For the first nine months of 2020, the net cash provided primarily consists of proceeds of $42.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $27.6 million and payments of $0.2 million for other financing activities. For the first nine months of 2019, the net cash provided primarily consists of net proceeds of $35.1 million from the New Notes, proceeds of $16.8 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $20.0 million, net payments of $10 million on the Working Capital Revolver Loan, and payments of $1.8 million for other financing activities. 32 Capitalization The following is our total current cash, long-term debt, redeemable preferred stock and stockholders’ equity: September 30, December 31, 2020 2019 (In Millions) Cash and cash equivalents $ 42.1 $ 22.8 Long-term debt: Working Capital Revolver Loan $ — $ — Senior Secured Notes due 2023 435.0 435.0 Secured Promissory Note due 2021 2.1 4.7 Unsecured Loan Agreement due 2022 10.0 — Secured Financing due 2023 11.4 13.5 Secured Loan Agreement due 2025 7.2 5.2 Secured Loan Agreement due 2025 29.6 — Secured Promissory Note due 2023 — 12.7 Other 0.2 0.2 Unamortized discount and debt issuance costs (9.6 ) (12.3 ) Total long-term debt, including current portion, net $ 485.9 $ 459.0 Series E and F redeemable preferred stock (1) $ 262.3 $ 234.9 Total stockholders' equity $ 181.3 $ 247.3 (1) Liquidation preference of $268.7 million as of September 30, 2020 . See discussion above concerning the COVID-19 pandemic under “Recent Business Developments.” As discussed in footnote (G) of Note 4, in August 2020, EDA entered into a $30 million secured financing arrangement with an affiliate of LSB Funding that matures in August 2025. A portion of the proceeds from this secured financing arrangement was used to pay off the Secured Promissory Note that was scheduled to mature in May 2023. As of September 30, 2020, we have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million. As of September 30, 2020 , our Working Capital Revolver Loan was undrawn and had approximately $36.3 million of availability. For the full year of 2020, we expect capital expenditures to be approximately $25 million to $30 million, which includes approximately $5 million to $10 million for margin enhancement projects. The remaining capital spending is planned for reliability and maintenance capital projects. We believe that the combination of our cash on hand, the availability on our revolving credit facility, and our cash flow from operations will be sufficient to fund our anticipated liquidity needs for the next twelve months. Compliance with Long - Term Debt Covenants As discussed below in Note 4, the Working Capital Revolver Loan requires, among other things, that we meet certain financial covenants. The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing. As of September 30, 2020, no trigger event had occurred. Loan Agreements and Redeemable Preferred Stock Senior Secured Notes due 2023 – LSB has $435 million aggregate principal amount of the 9.625% Senior Secured Notes currently outstanding, as discussed in footnote (B) of Note 4. Interest is to be paid semiannually on May 1 st and November 1 st , maturing May 1, 2023. Secured Promissory Note due 2021 – EDC is party to a secured promissory note due in March 2021. This promissory note bears interest at the annual rate of 5.25%. Principal and interest are payable in monthly installments. Unsecured Loan Agreement due 2022 – As discussed in footnote (D) of Note 4, LSB is a party to an unsecured PPP loan with a lender pursuant to a new loan program through the SBA as the result of the PPP established by the CARES Act and amended by the Paycheck Protection Program Flexibility Act of 2020. We have used all or substantially all of the proceeds from the PPP loan for payroll, rent, utilities, and other specified costs that qualify for loan forgiveness. Under the current terms of the PPP loan, loan forgiveness applications are due within 10 months after the end of the loan forgiveness covered period, which period began on the date the PPP loan was disbursed and ends either 8-weeks or 24-weeks after disbursement of the loan. Once the SBA notifies the lender the 33 amount of the loan that is approved for forgiveness, the lender will determine the date that the equal monthly principal and interest payments will begin for the remaining loan balance, if any. Currently the loan matures in April 2022 , which term may be extended to April 2025 if mutually agreed to by the parties. As for the potential loan forgiveness, once the PPP loan is , wholly or partially , forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. Secured Financing due 2023 – EDC is party to a secured financing arrangement with an affiliate of LSB Funding. Principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $3 million due in June 2023. Secured Loan Agreement due 2025 - EDC is party to a secured loan agreement with an affiliate of LSB Funding, which provided for available borrowings (the “Interim Loan”) during the construction of certain equipment (the “Interim Loan Period”), subject to certain conditions. During the Interim Loan Period, interest only was payable in monthly installments. Effective February 28, 2020, the Interim Loan Period ended, and the Interim Loan was replaced by a secured promissory note due in March 2025. Under the terms of the note, principal and interest are payable in 60 equal monthly installments. Secured Financing due 2025 – As discussed in footnote (G) of Note 4 , EDA is party to a $30 million secured financing arrangement with an affiliate of LSB Funding. Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025. Working Capital Revolver Loan – At September 30, 2020 , our Working Capital Revolver Loan was undrawn and had approximately $36.3 million of availability , based on our eligible collateral, less outstanding letters of credit as of that date. Also see discussion above under “Compliance with Long-Term Debt Covenants .” Redemption of Series E Redeemable Preferred – At September 30, 2020 , there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $268.7 million. A t any time on or after October 25, 2023 , each Series E holder has the right to elect to have such holder’s shares redeemed by us at a redemption price per share equal to the liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the participation rights value (the “Liquidation Preference”). Additionally, at our option, we may redeem the Series E Redeemable Preferred at any time at a redemption price per share equal to the Liquidation Preference of such share as of the redemption date. Lastly, with receipt of (i) prior consent of the electing Series E holder or a majority of shares of Series E Redeemable Preferred and (ii) all other required approvals, including under any principal U.S. securities exchange on which our common stock is then listed for trading, we can redeem the Series E Redeemable Preferred by the issuance of shares of common stock having an aggregate common stock price equal to the amount of the aggregate Liquidation Preference of such shares being redeemed in shares of common stock in lieu of cash at the redemption date. In the event of liquidation, the Series E Redeemable Preferred is entitled to receive its Liquidation Preference before any such distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other junior stock. In the event of a change of control, we must make an offer to purchase all of the shares of Series E Redeemable Preferred outstanding at the Liquidation Preference. Since carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder, this accretion has and will continue to affect income (loss) per common share. However, this accretion will change if the expected redemption date changes. Capital Expenditures – First Nine Months of 2020 For the first nine months of 2020, capital expenditures relating to PP&E were $22.2 million. The capital expenditures were funded primarily from cash and working capital. See discussion above under “Capitalization” for our expected capital expenditures. Expenses Associated with Environmental Regulatory Compliance We are subject to specific federal and state environmental compliance laws, regulations and guidelines. As a result, we incurred expenses of $2.9 million during the first nine months of 2020 in connection with environmental projects. For the fourth quarter of 2020, we expect to incur expenses ranging from $0.9 million to $1.1 million in connection with additional environmental projects. However, it is possible that the actual costs could be significantly different than our estimates. Dividends We have not paid cash dividends on our outstanding common stock in many years, and we do not currently anticipate paying cash dividends on our outstanding common stock in the near future. Dividends on the Series E Redeemable Preferred are cumulative and payable semi-annually (May 1 and November 1) in arrears at the current annual rate of 14% of the liquidation value of $1,000 per share, but such annual rate will increase beginning on April 25, 2021 as discussed in Note 8. Each share of Series E Redeemable Preferred is entitled to receive a semi-annual dividend, only when declared 34 by our Board . In addition, dividends in arrears at the dividend date, until paid, shall compound additional dividends at the current annual rate of 14%, but such annual rate will increase beginning on April 25, 2021 . The current semi-annual compounded dividend is approximately $1 27.20 per share for the current aggregate semi-annual dividend of $ 1 7 . 8 million . We also must declare a dividend on the Series E Redeemable Preferred on a pro rata basis with our common stock . As long as the Purchaser holds at least 10% of the Series E Redeemable Preferred, we may not declare dividends on our common stock and other preferred stocks unless and until dividends have been declared and paid on the Series E Redeemable Preferred for the then current dividend period in cash. As of September 30, 2020 , the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $ 1 2 8.9 million. Dividends on the Series D 6% cumulative convertible Class C preferred stock (the “Series D Preferred”) and Series B 12% cumulative convertible Class C Preferred Stock (the “Series B Preferred”) are payable annually, only when declared by our Board, as follows: • $0.06 per share on our outstanding non-redeemable Series D Preferred for an aggregate dividend of $60,000, and • $12.00 per share on our outstanding non-redeemable Series B Preferred for an aggregate dividend of $240,000. As of September 30, 2020, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.5 million. All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Holders. There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred. Seasonality We believe fertilizer products sold to the agricultural industry are seasonal while sales into the industrial and mining sectors generally are less susceptible. The selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets we distribute the majority of our agricultural products. As a result, we typically increase our inventory of fertilizer products prior to the beginning of each planting season in order to meet the demand for our products. In addition, the amount and timing of sales to the agricultural markets depend upon weather conditions and other circumstances beyond our control. Performance and Payment Bonds We are contingently liable to sureties in respect of insurance bonds issued by the sureties in connection with certain contracts entered into by subsidiaries in the normal course of business. These insurance bonds primarily represent guarantees of future performance of our subsidiaries. As of September 30, 2020, we have agreed to indemnify the sureties for payments , up to $9.7 million , made by them in respect of such bonds. These insurance bonds are expected to expire or be renewed later in 2020. New Accounting Pronouncements Refer to Note 1 for recently issued accounting standards. Critical Accounting Policies and Estimates See “Critical Accounting Policies and Estimates,” Item 7 of our 2019 Form 10-K. In addition, the preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values, including, but not limited to, various environmental and legal matters , including a remedy of annual monitoring and the implementation of an EUC selected by the KDHE discussed under footnote 2 – Other Environmental Matters of Note 5 and the lawsuits styled City of West, Texas vs. CF Industries, Inc., et al., discussed under “Other Pending, Threatened or Settled Litigation” of Note 5. Also, we recognize contingent gains when such gains are realized or when the contingencies have been resolved (generally at the time a settlement has been reached). As a result, a recovery from settlements with certain vendors was recognized during the first nine month s of 2020 dis cussed under Contingencies of Note 1. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. We establish valuation allowances if we believe it is more-likely-than-not that some or all of deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets. The carrying values of the redeemable preferred stocks discussed in Note 8 are being increased by periodic accretions (recorded to retained earnings and included in determining income or loss per share) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder. It is also reasonably possible that the estimates and assumptions utilized as of September 30, 2020 could change in the near term. Actual results could differ materially from these estimates and judgments, as additional information becomes known. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act. 35 Item 3 . Quantitative and Qualitat ive Disclosures about Market Risk General Our results of operations and operating cash flows are impacted by changes in market prices of ammonia and natural gas and changes in market interest rates. Forward Sales Commitments Risk Periodically, we enter into forward firm sales commitments for products to be delivered in future periods. As a result, we could be exposed to embedded losses should our product costs exceed the firm sales prices as of September 30, 2020. At September 30, 2020, we had no embedded losses associated with sales commitments with firm sales prices. Commodity Price Risk A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. S ince we are exposed to commodity price risk, we periodically enter into contracts to purchase natural gas for anticipated production needs to manage risk related to changes in prices of natural gas commodities. Generally, these contracts are considered normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business, these contracts are exempt from the accounting and reporting requirements relating to derivatives. As discussed in Note 6, during the first nine months of 2020, we entered into certain natural gas contracts, which are accounted for on a mark-to-market basis. At September 30, 2020, these natural gas contracts included 1.0 million MMBtus of natural gas and therefore a $0.10 change in natural gas price would impact pre-tax operating results by approximately $0.1 million. Interest Rate Risk Generally, we are exposed to variable interest rate risk with respect to our revolving credit facility . As of September 30, 2020, we had no outstanding borrowings on this credit facility. We do not have any variable rate borrowings a s of September 30, 2020. We currently do not hedge our interest rate risk associated with these variable interest loans.