filings.toolsItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Data. All references to "CF Holdings," "we," "us," "our" and "the Company" refer 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 consolidated financial statements that are found in the following section: Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements. The following is an outline of the discussion and analysis included herein:
| • | Overview of CF Holdings |
| • | Our Company |
| • | Items Affecting Comparability of Results |
| • | Strategic Initiatives |
| • | Financial Executive Summary |
| • | Key Industry Factors |
| • | Factors Affecting Our Results |
| • | Results of Consolidated Operations |
| • | Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 |
| • | Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 |
| • | Operating Results by Business Segment |
| • | Liquidity and Capital Resources |
| • | Off-Balance Sheet Arrangements |
| • | Critical Accounting Policies and Estimates |
| • | Recent Accounting Pronouncements |
| • | Discussion of Seasonality Impacts on Operations |
Overview of CF Holdings
Our Company
We are one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. Our principal customers are cooperatives, independent fertilizer distributors, farmers and industrial users. Our principal nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus, and potassium. Our core market and distribution facilities are concentrated in the midwestern United States and other major agricultural areas of the United States, Canada and the United Kingdom. We also export nitrogen fertilizer products from our Donaldsonville, Louisiana; Yazoo City, Mississippi; and Billingham, United Kingdom manufacturing facilities.
Prior to March 17, 2014, we also manufactured and distributed phosphate fertilizer products. Our principal phosphate products were diammonium phosphate (DAP) and monoammonium phosphate (MAP). On March 17, 2014, we completed the sale of our phosphate mining and manufacturing business, which was located in Florida, to The Mosaic Company (Mosaic) for approximately $1.4 billion in cash. See the section titled Items Affecting Comparability of Results for further information on this transaction and its impact.
Our principal assets include:
| • | six North American nitrogen fertilizer manufacturing facilities located in: Donaldsonville, Louisiana (the largest nitrogen fertilizer complex in North America); Medicine Hat, Alberta (the largest nitrogen fertilizer complex in Canada); Port Neal, Iowa; Courtright, Ontario; Yazoo City, Mississippi; and Woodward, Oklahoma; |
| • | two United Kingdom nitrogen manufacturing complexes located in Ince and Billingham that produce AN, ammonia and NPKs; |
CF INDUSTRIES HOLDINGS, INC.
| • | a 75.3% interest in Terra Nitrogen Company, L.P. (TNCLP), a publicly-traded limited partnership of which we are the sole general partner and the majority limited partner and which, through its subsidiary Terra Nitrogen, Limited Partnership (TNLP), operates a nitrogen fertilizer manufacturing facility in Verdigris, Oklahoma; |
| • | an extensive system of terminals and associated transportation equipment located primarily in the midwestern United States; and |
| • | a 50% interest in Point Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in the Republic of Trinidad and Tobago that we account for under the equity method. |
In 2015, we entered into a number of strategic agreements and transactions as follows:
| • | We acquired the remaining 50% equity interest in CF Fertilisers UK Group Limited (formerly known as GrowHow UK Group Limited) (CF Fertilisers UK) not previously owned by us on July 31, 2015 for total consideration of $570.4 million, and CF Fertilisers UK became wholly owned by us. This transaction added CF Fertilisers UK's nitrogen manufacturing complexes in Ince, United Kingdom and Billingham, United Kingdom to our consolidated manufacturing capacity. The impact of this acquisition is summarized below in the section titled Items Affecting Comparability of Results. |
| • | We sold our interests in KEYTRADE AG (Keytrade), a global fertilizer trading company headquartered near Zurich, Switzerland, to the other key principals of Keytrade. |
| • | We sold our 50% ownership interest in an ammonia storage joint venture in Houston, Texas. |
| • | We entered into a definitive agreement (as amended, the Combination Agreement) under which we will combine with the European, North American and global distribution businesses (collectively, the ENA Business) of OCI N.V. (OCI). The combination transaction includes OCI’s nitrogen production facility in Geleen, Netherlands; its nitrogen production facility under construction in Wever, Iowa; its approximately 79.88% equity interest in an ammonia and methanol complex in Beaumont, Texas; and its global distribution business and the assumption of approximately $2 billion in net debt. Under the terms of the Combination Agreement, CF Holdings will become a subsidiary of a new holding company (New CF) domiciled in the Netherlands. This transaction is expected to close in mid-2016, subject to the approval of shareholders of both CF Holdings and OCI, the receipt of certain regulatory approvals, and other closing conditions. See Strategic Initiatives—Agreement to Combine with Certain of OCI N.V.’s Businesses below, for further details on this transaction. |
| • | We entered into a strategic venture with CHS Inc. (CHS). The strategic venture commenced on February 1, 2016, at which time CHS purchased a minority equity interest in CF Industries Nitrogen, LLC (CFN), a subsidiary of CF Holdings, for $2.8 billion. CHS also began receiving deliveries from us pursuant to a supply agreement under which CHS has the right to purchase annually from us up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. CHS is entitled to semi-annual profit distributions from CFN as a result of its minority equity interest in CFN. See Strategic Initiatives—Strategic Venture with CHS below, for further details on this strategic venture. |
CF INDUSTRIES HOLDINGS, INC.
Items Affecting Comparability of Results
CF Fertilisers UK Acquisition
On July 31, 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for total consideration of $570.4 million, and CF Fertilisers UK became a wholly-owned subsidiary. CF Fertilisers UK Limited (formerly known as GrowHow UK Limited), a wholly-owned subsidiary of CF Fertilisers UK, operates two nitrogen manufacturing complexes in the United Kingdom, in the cities of Ince and Billingham. We recorded a $94.4 million gain on the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK that is included in equity in earnings of non-operating affiliates—net of taxes for the year ended December 31, 2015. This transaction increased our manufacturing capacity with the acquisition of CF Fertilisers UK nitrogen manufacturing complexes in Ince and Billingham, United Kingdom. The Ince complex is located in northwestern England and consists of an ammonia plant, three nitric acid plants, an AN plant and three NPK plants. The Billingham complex is located in the Teesside chemical area in northeastern England, and consists of an ammonia plant, three nitric acid plants, a carbon dioxide plant and an AN fertilizer plant. See Note 4—Acquisitions and Divestitures to our consolidated financial statements included in Item 8 of this report for additional information on the preliminary allocation of the total purchase price to the assets acquired and liabilities assumed in the CF Fertilisers UK acquisition on July 31, 2015.
The financial results of CF Fertilisers UK have been consolidated within our financial results since July 31, 2015. Prior to July 31, 2015, our initial 50% equity interest in CF Fertilisers UK was accounted for as an equity method investment, and the financial results of this investment were included in our consolidated statements of operations in equity in earnings of non-operating affiliates—net of taxes. The following table presents CF Fertilisers UK results since July 31, 2015, the date it became a consolidated subsidiary, which are included within our 2015 financial results.
| CF Holdings Reportable Segments | |||||||||||||||
| CF Fertilisers UK | Ammonia | AN | Other | Consolidated | |||||||||||
| (in millions, except percentages) | |||||||||||||||
| Five months ended December 31, 2015 | |||||||||||||||
| Net sales | $ | 38.4 | $ | 117.0 | $ | 53.0 | $ | 208.4 | |||||||
| Cost of sales | 30.7 | 108.6 | 45.6 | 184.9 | |||||||||||
| Gross margin | $ | 7.7 | $ | 8.4 | $ | 7.4 | $ | 23.5 | |||||||
| Gross margin percentage | 20.1 | % | 7.2 | % | 14.0 | % | 11.3 | % |
New Segments
In the third quarter of 2015, we changed our reportable segment structure to separate AN from our Other segment as our AN products increased in significance as a result of the CF Fertilisers UK acquisition. Our new reportable segment structure reflects how our chief operating decision maker (CODM), as defined under U.S. generally accepted accounting principles (GAAP), assesses the performance of our reportable segments and makes decisions about resource allocation. Our reportable segments now consist of ammonia, granular urea, UAN, AN, Other, and phosphate. These segments are differentiated by products. Our management uses gross margin to evaluate segment performance and allocate resources. Historical financial results have been restated to reflect the new reportable segment structure on a comparable basis.
A description of our reportable segments is included in the discussion of the operating results by business segment later in this discussion and analysis.
Five-for-One Common Stock Split
On May 15, 2015, we announced that our Board of Directors declared a five-for-one split of our common stock to be effected in the form of a stock dividend. On June 17, 2015, stockholders of record as of the close of business on June 1, 2015 (Record Date) received four additional shares of common stock for each share of common stock held on the Record Date. Shares reserved under the Company's equity and incentive plans were adjusted to reflect the stock split. All share and per share data has been retroactively restated to reflect the stock split, except for the number of authorized shares of common stock. Since the par value of the common stock remained at $0.01 per share, the recorded value for common stock has been retroactively restated to reflect the par value of total outstanding shares with a corresponding decrease to paid-in capital.
CF INDUSTRIES HOLDINGS, INC.
Transaction Costs
As more fully described below in the section titled Strategic Initiatives, in 2015 we incurred $56.9 million of transaction costs attributable to various consulting and legal services associated primarily with executing the strategic agreements and preparing for the proposed combination with the ENA Business of OCI, our strategic venture with CHS and our acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us.
Phosphate Business Disposition
On March 17, 2014, we sold our phosphate mining and manufacturing business and recognized pre-tax and after-tax gains on the sale of the phosphate business of $750.1 million and $462.8 million, respectively. Under the terms of the definitive transaction agreement, the accounts receivable and accounts payable pertaining to the phosphate mining and manufacturing business and certain phosphate inventory held in distribution facilities were not sold to Mosaic in the transaction and were settled in the ordinary course.
Upon selling the phosphate business, we began to supply Mosaic with ammonia produced by our PLNL joint venture. The contract to supply ammonia to Mosaic from our PLNL joint venture represents the continuation of a supply practice that previously existed between our former phosphate mining and manufacturing business and other operations of the Company. Prior to March 17, 2014, PLNL sold ammonia to us for use in the phosphate business and the cost was included in our production costs in our phosphate segment. Subsequent to the sale of the phosphate business, we now sell the PLNL-sourced ammonia to Mosaic. The revenue from these sales to Mosaic and the costs to purchase the ammonia from PLNL are now included in our ammonia segment. Our 50% share of the operating results of our PLNL joint venture continues to be included in our equity in earnings of operating affiliates in our consolidated statements of operations. Because of the significance of this continuing supply practice, in accordance with U.S. GAAP, the phosphate mining and manufacturing business is not reported as discontinued operations in our consolidated statements of operations.
The phosphate segment reflects the reported results of the phosphate business through March 17, 2014, plus the continuing sales of the phosphate inventory in the distribution network after March 17, 2014. The remaining phosphate inventory was sold in the second quarter of 2014; therefore, the phosphate segment does not have operating results subsequent to that quarter. However, the segment will continue to be included until the reporting of comparable period phosphate results ceases.
Impairment of our Investment in PLNL
In 2015, our equity in earnings of operating affiliates includes a $61.9 million impairment of our equity method investment in PLNL. In the fourth quarter of 2015, we determined the carrying value of our equity method investment in PLNL exceeded its fair value. This was primarily due to the ongoing natural gas curtailments impacting the results of operations of PLNL and the expectation that these curtailments will continue into the future. Our PLNL joint venture investment in the Republic of Trinidad and Tobago operates an ammonia plant that relies on natural gas supplied by The National Gas Company of Trinidad and Tobago Limited (NGC). The joint venture has experienced natural gas curtailments in 2015 and 2014 due to major maintenance activities being conducted at upstream natural gas facilities and decreased gas exploration and development activity in the Republic of Trinidad and Tobago. Commitments from NGC regarding the level of future availability and the related cost are not available. The future availability and cost of natural gas represents a significant assumption in the discounted cash flow models utilized for recoverability and impairment testing. No impairment was recognized in 2014 or 2013 related to this investment.
CFL Selling Price Modifications
Prior to April 30, 2013, CF Industries owned 49% of the voting common shares and 66% of the non-voting preferred shares of Canadian Fertilizers Limited (CFL), an Alberta, Canada based nitrogen fertilizer manufacturer and had the right to purchase 66% of the production of CFL. Also prior to April 30, 2013, Viterra, Inc. (Viterra) held 34% of the equity ownership of CFL and had the right to purchase up to the remaining 34% of CFL's production. Both CF Industries and Viterra were entitled to receive distributions of net earnings of CFL based upon their respective purchases from CFL. CFL was a variable interest entity that was consolidated in our financial statements. On April 30, 2013, CF Industries completed the acquisitions of all of the outstanding interests in CFL that it did not already own and CFL became our wholly-owned subsidiary. Once CFL became a wholly-owned subsidiary, CF Industries began purchasing all of the output of CFL for resale and reported those sales in its consolidated financial statements at market prices.
CF Industries' and Viterra's purchases of nitrogen fertilizer products from CFL were made under product purchase agreements, and the selling prices were determined under the provisions of these agreements. Until April 30, 2013, when CFL became a wholly-owned subsidiary in our consolidated financial statements, net sales and accounts receivable attributable to
CF INDUSTRIES HOLDINGS, INC.
CFL were solely generated by transactions with Viterra, as all transactions with CF Industries were eliminated in consolidation in our financial statements.
The following summarizes the selling prices in the product purchase agreements that impacted the Company's results due to sales transactions to Viterra both before and after the effective date of the amendment.
| • | Between the period of January 1, 2013 and April 30, 2013, CFL selling prices were based on production cost plus an agreed-upon margin. |
| • | Starting on April 30, 2013, CFL became a wholly-owned subsidiary of CF Industries. Once CFL became a wholly-owned subsidiary, CF industries began purchasing all of the output of CFL for resale and reported those sales in its consolidated financial statements at market prices. |
As a result, the consolidated financial results for both 2015 and 2014 included a full year of market-based selling prices, while 2013 included four months of selling prices based on production cost plus an agreed-upon margin and eight months of market-based selling prices. These changes affect the year-over-year comparability of net sales, gross margin, operating earnings, earnings before income taxes and net earnings attributable to noncontrolling interest of 2013 as compared to 2014 and 2015, however, these changes do not impact the comparability of our net earnings attributable to common stockholders or net cash flows for the same period.
In order to provide comparable information for the periods presented, certain financial information is being provided for the 2013 comparable period adjusted as if twelve months of market-based selling prices had been used in the 2013 comparable period.
We report our consolidated financial results in accordance with U.S. GAAP. Management believes that the presentation in this report of non-GAAP financial measures of certain adjusted data and the period-to-period percentage changes in such measures, provides investors with additional meaningful information to assess period-to-period changes in our underlying operating performance. This information includes consolidated net sales, gross margin, net earnings attributable to noncontrolling interest, in addition to segment net sales, gross margin, gross margin as a percentage of net sales, and average selling prices per ton of ammonia and granular urea presented on an as adjusted basis as if all CFL sales to the noncontrolling interest had been priced based on market-based selling prices for the twelve months of 2013. These non-GAAP financial measures are provided only for the purpose of facilitating comparisons between the periods' operating performance, and do not purport to represent what our actual consolidated results of operations would have been, nor are they necessarily indicative of our future consolidated results of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with U.S. GAAP.
Net Operating Loss (NOL) Settlement
At the time of our initial public offering (IPO) in 2005, we had accumulated a substantial amount of NOLs. Due to the uncertainty of realizing the tax benefit from the NOLs when we ceased to be a non-exempt cooperative for income tax purposes and became a public company, a full valuation allowance was recorded against the benefit of those NOLs. At that time, we entered into an agreement (NOL Agreement) with the pre-IPO owners under which they would benefit should any of the pre-IPO NOLs be realized in future years by using the NOLs to offset post-IPO taxable income. If this were to occur, we would pay the pre-IPO owners amounts equal to the resulting federal and state income taxes actually saved. As of December 31, 2012, the NOLs had a potential tax benefit of $94.3 million, which had been fully reserved by the valuation allowance.
In January 2013, we and the pre-IPO owners amended the NOL Agreement to provide, among other things, that we would be entitled to retain 26.9% of any settlement realized and 73.1% would be payable to them.
In March 2013, we entered into a closing agreement with the Internal Revenue Service (IRS) to resolve the tax treatment of the pre-IPO NOLs. Pursuant to the closing agreement, we agreed with the IRS that we will be entitled to a tax deduction equal to a portion of the NOLs over five years commencing with the 2012 tax year. The $20.6 million net benefit from this NOL settlement was recognized in the first quarter of 2013 as follows:
| • | NOL tax benefits of $75.8 million were recognized, which reduced income tax expense. |
| • | A charge of $55.2 million was recognized for the 73.1% portion of the NOL benefit that will be paid to the pre-IPO owners as the tax benefits are realized. The $55.2 million charge was recognized in the consolidated statement of operations in other non-operating—net. |
CF INDUSTRIES HOLDINGS, INC.
Strategic Initiatives
Agreement to Combine with Certain of OCI N.V.’s Businesses
On August 6, 2015, we announced that we entered into a definitive agreement (as amended, the Combination Agreement), under which we will combine with the European, North American and global distribution businesses (collectively, the ENA Business) of OCI. OCI is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The combination transaction includes OCI’s nitrogen production facility in Geleen, Netherlands; its nitrogen production facility under construction in Wever, Iowa; its approximately 79.88% equity interest in an ammonia and methanol complex in Beaumont, Texas; and its global distribution business and the assumption of approximately $2 billion in net debt. The combination transaction also includes the purchase by CF Holdings or its designee of a 45% interest plus an option to acquire the remaining interest in OCI’s Natgasoline project in Texas, which upon completion in 2017 will be one of the world’s largest methanol facilities.
Under the terms of the Combination Agreement, CF Holdings will become a subsidiary of a new holding company (New CF) domiciled in the Netherlands. OCI will contribute the entities holding the ENA Business (other than the Natgasoline project) to New CF in exchange for ordinary shares of New CF (base share consideration), plus additional consideration of $700 million (subject to adjustment) to be paid in cash, ordinary shares of New CF or a mixture of cash and ordinary shares of New CF, as determined by CF Holdings in accordance with the terms of the Combination Agreement. The base share consideration will represent 25.6% of the ordinary shares of New CF that, upon consummation of the combination, subject to downward adjustment to account for the assumption by New CF, as contemplated by the Combination Agreement, of any of OCI’s 3.875% convertible bonds due 2018 that remain outstanding as of the closing date of the combination. The consideration for the 45% interest in Natgasoline is $517.5 million in cash. The actual ownership split of New CF upon completion of the combination as between former CF Holdings shareholders, on the one hand, and OCI and its shareholders, on the other hand, will be dependent on our share price at the time of closing, the amount of convertible bonds to be assumed by New CF at closing, the amount of adjustments to the amount of the additional consideration, and the mix of cash and New CF ordinary shares used to pay the additional consideration.
The transaction is expected to close in mid-2016, subject to the approval of shareholders of both CF Holdings and OCI, the receipt of certain regulatory approvals and other closing conditions. The consummation of the Natgasoline portion of the transaction is subject to conditions that are in addition to the conditions to which the consummation of the portion of the transaction involving the ENA Business other than the Natgasoline project is subject, and the consummation of the Natgasoline portion of the transaction is not a condition to consummation of the portion of the transaction involving the ENA Business other than the Natgasoline project. New CF will operate under a name to be determined by CF Holdings and be led by our existing management.
In conjunction with entering into the Combination Agreement, on August 6, 2015, CF Industries Holdings, Inc. obtained financing commitments from Morgan Stanley Senior Funding, Inc. and Goldman Sachs Bank USA to finance the transactions contemplated by the Combination Agreement and for general corporate purposes. The proceeds of such committed financing are available under a senior unsecured bridge term loan facility in an aggregate principal amount of up to $3.0 billion, subject to the terms and conditions set forth therein. See Note 12—Financing Agreements—Bridge Credit Agreement to our consolidated financial statements included in Item 8 of this report for additional information.
Strategic Venture with CHS
On August 12, 2015, we announced that we agreed to enter into a strategic venture with CHS. The strategic venture commenced on February 1, 2016, at which time CHS purchased a minority equity interest in CFN for $2.8 billion. CHS also began receiving deliveries from us pursuant to a supply agreement under which CHS has the right to purchase annually from us up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. CHS is entitled to semi-annual profit distributions from CFN as a result of its minority equity interest in CFN based generally on the volume of granular urea and UAN purchased by CHS pursuant to the supply agreement.
Capacity Expansion Projects
In 2012, we announced that we would construct new ammonia and urea/UAN plants at our Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port Neal, Iowa complex. These new plants will increase our product mix flexibility at Donaldsonville, improve our ability to serve upper-Midwest urea customers from our Port Neal location, and allow us to benefit from the cost advantages of North American natural gas. In combination, these new facilities will be able to produce 2.1 million tons of gross ammonia per year, upgraded products ranging from 2.0 million to 2.7 million tons of granular urea per year and up to 1.8 million tons of UAN 32% solution per year, depending on our choice of product mix.
CF INDUSTRIES HOLDINGS, INC.
In November 2015, the new urea plant at the Donaldsonville, Louisiana complex came on line and was the first plant to be commissioned as part of our capacity expansion projects. The new UAN plant at Donaldsonville is expected to be commissioned in the first quarter of 2016. The remaining plants are expected to be commissioned in mid-2016.
Financial Executive Summary
| • | We reported net earnings attributable to common stockholders of $699.9 million in 2015, compared to net earnings of $1.39 billion in 2014, or a decline of $690.4 million or 50%. The 2014 reported results were significantly impacted by the sale of our phosphate business. In the first quarter of 2014, we sold the phosphate business and recognized a pre-tax gain of $750.1 million ($462.8 million after tax) on the sale of this business. |
| • | Diluted earnings per share attributable to common stockholders decreased 45% to $2.96 per share in 2015 from $5.42 per share in 2014. This decrease is due to lower net earnings partly offset by the lower diluted weighted-average shares outstanding in 2015 as compared to the prior year. During 2015, we repurchased 8.9 million shares of our common stock representing 4% of the prior year end outstanding shares, at a cost of $527.2 million. |
| • | In 2015, our total gross margin declined by $231.4 million, or 13%, to $1.55 billion in 2015 from $1.78 billion in 2014. The impact of the CF Fertilisers UK acquisition increased gross margin by $23.5 million. The remaining decline in our gross margin of $254.9 million, or 14%, was due to the $244.8 million decrease in gross margin in the Nitrogen Product Segments and the $10.1 million decline in gross margin in the phosphate segment as the phosphate business was sold in the first quarter of 2014. The remaining decrease in Nitrogen Product Segments gross margin, as more fully described below, was due primarily to lower average selling prices, lower sales volume, and the impact of mark-to-market losses on natural gas derivatives, partially offset by lower physical natural gas costs. |
| ◦ | Average selling prices, primarily UAN and granular urea, decreased by 8%, which reduced gross margin by $348.8 million as international nitrogen fertilizer prices continued to decline due to excess global supply. The combination of falling global production costs, foreign currency devaluation and reduced ocean freight costs allowed many international producers to continue operations and the resulting supply weighed on global prices. |
| ◦ | Sales volume, primarily ammonia, decreased by 3%, which decreased gross margin by $72.3 million due primarily to a poor fall application season and weaker demand as customers were unable to apply ammonia due to poor weather conditions and customers were hesitant to buy in a declining pricing environment. |
| ◦ | Unrealized net mark-to-market losses on natural gas derivatives decreased gross margin by $96.8 million as 2015 included a $176.3 million loss compared to $79.5 million loss in 2014. |
| ◦ | Lower physical natural gas costs in 2015, partially offset by the impact of natural gas derivatives that settled in the period, increased gross margin by $229.8 million compared to 2014. Lower gas costs were primarily driven by increased North American natural gas production, as increased well efficiencies increased supply. Warm weather conditions, especially in the fourth quarter, also contributed to high storage levels and the resulting decline in gas prices. |
| • | Selling, general and administrative expenses increased $17.9 million to $169.8 million in 2015 from $151.9 million in 2014. The increase was due primarily to the impact of the CF Fertilisers UK acquisition, an increase in corporate project activities, and higher intangible amortization costs. |
| • | Transaction costs incurred in 2015 of $56.9 million are attributable to various consulting and legal services associated primarily with executing the strategic agreements and preparing for the proposed combination with the ENA Business of OCI, our strategic venture with CHS and our acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us. |
| • | Other operating—net increased by $39.0 million from $53.3 million of expense in 2014 to expense of $92.3 million in 2015. The increased expense was due primarily to increased expansion project costs pertaining to our Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects that did not qualify for capitalization compared to 2014. |
| • | Net interest expense decreased by $45.7 million to $131.6 million in 2015 from $177.3 million in 2014 due primarily to the higher amounts of capitalized interest related to our capacity expansion projects, partially offset by higher interest expense pertaining to the $1.0 billion and $1.5 billion of senior notes that were issued in September 2015 and |
CF INDUSTRIES HOLDINGS, INC.
in March 2014, respectively. We recorded capitalized interest of $154.5 million in 2015 primarily related to our capacity expansion projects compared to $74.2 million in 2014.
| • | Net cash provided by operating activities in 2015 was $1.20 billion as compared to $1.41 billion in 2014, a decline of $204.9 million. This decline was primarily due to unfavorable working capital changes as customer advances were lower and inventory levels were higher in 2015 as compared to 2014 levels. Due to the declining pricing environment for nitrogen fertilizers in 2015, customers delayed making forward purchase commitments to purchase fertilizer in 2015, which reduced the amount of customer advances that were received, as compared to 2014 when fertilizer pricing was stronger. Inventory levels were also higher in 2015 due to a poor fall ammonia application season, as compared to 2014 when inventory levels declined. |
| • | Net cash used in investing activities was $2.98 billion in 2015 compared to $343.5 million in 2014 when we received proceeds of $1.37 billion from the sale of the phosphate business. During 2015, capital expenditures totaled $2.47 billion compared to $1.81 billion in 2014. The increase in capital expenditures is primarily related to the capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa. We also acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for a net cash payment of $551.6 million, which is net of cash acquired of $18.8 million. |
| • | Net cash provided by financing activities was $79.9 million in 2015 compared to net cash used in financing activities of $775.1 million in 2014. In September 2015, we issued senior notes and received proceeds of $1.0 billion. In March 2014, we issued senior notes and received proceeds of approximately $1.5 billion. In 2015, we repurchased shares of our common stock for $556.3 million in cash; in 2014, we repurchased shares of our common stock for $1.93 billion in cash. Dividends paid on common stock were $282.3 million and $255.7 million in 2015 and 2014, respectively. |
| • | The following is a summary of certain significant items that impacted the consolidated financial results in 2015, 2014 and 2013: |
| ◦ | Net earnings attributable to common stockholders of $699.9 million for 2015 included a $94.4 million gain as a result of the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK ($94.4 million after tax), a $61.9 million impairment of our equity method investment in PLNL ($61.9 million after tax), a $176.3 million unrealized net mark-to-market loss ($110.9 million after tax) on natural gas derivatives, $42.8 million of losses ($30.9 million after tax) as a result of the sale of equity method investments, $56.9 million of transaction costs ($56.9 million after tax), $51.3 million of expenses ($32.3 million after tax) related to our capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa that did not qualify for capitalization, and $21.6 million ($13.6 million after tax) of realized and unrealized net losses on foreign currency derivatives related to our capacity expansion projects. During 2015, we repurchased 8.9 million shares of our common stock at an average price of $59 per share representing 4% of the prior year end's outstanding shares at a cost of $527.2 million. |
| ◦ | In 2014, we reported net earnings attributable to common stockholders of $1.39 billion. Our 2014 results included a $750.1 million gain ($462.8 million after tax) on the sale of the phosphate business, a $79.5 million unrealized net mark-to-market loss ($50.1 million after tax) on natural gas derivatives, $30.7 million of expenses ($19.4 million after tax) related to our capacity expansion projects that did not qualify for capitalization, $38.4 million ($24.2 million after tax) of realized and unrealized net losses on foreign currency derivatives and a $13.1 million ($8.2 million after tax) of retirement benefit settlement charges. During 2014, we repurchased 38.4 million shares of our common stock at an average price of $50 per share representing 14% of the prior year end's outstanding shares at a cost of $1.92 billion. |
| ◦ | In 2013, we reported net earnings attributable to common stockholders of $1.46 billion. Our 2013 results included a $52.9 million unrealized net mark-to-market gain ($33.5 million after tax) on natural gas derivatives, $10.8 million of expenses ($6.8 million after tax) related to our capacity expansion projects that did not qualify for capitalization, $20.8 million ($13.2 million after tax) of realized and unrealized net gains on foreign currency derivatives and a net $20.6 million benefit from a settlement with the IRS concerning certain pre-IPO NOLs. During 2013, we repurchased 36.7 million shares of our common stock at an average price of $39 representing 12% of the prior year end's outstanding shares at a cost of $1.45 billion. |
CF INDUSTRIES HOLDINGS, INC.
Key Industry Factors
We operate in a highly competitive, global industry. Our products are globally-traded commodities and, as a result, we compete principally on the basis of delivered price and to a lesser extent on customer service and product quality. Moreover, our operating results are influenced by a broad range of factors, including those outlined below.
Global Supply & Demand
Historically, global fertilizer demand has been driven primarily by population growth, changes in dietary habits and planted acreage, and application rates, among other things. We expect these key variables to continue to have major impacts on long-term fertilizer demand for the foreseeable future. Short-term fertilizer demand depends on global economic conditions, weather patterns, the level of global grain stocks relative to consumption, governmental regulations, including requirements mandating increased use of bio-fuels and farm sector income. Other geopolitical factors like temporary disruptions in fertilizer trade related to government intervention or changes in the buying/selling patterns of key exporting/consuming countries such as China, India and Brazil, among others, often play a major role in shaping near-term market fundamentals. The economics of fertilizer manufacturing play a key role in decisions to increase or reduce production capacity. Supply of fertilizers is generally driven by available capacity and operating rates, raw material costs and availability, government policies and global trade. Raw materials are dependent on energy sources such as natural gas or coal; supply costs are affected by the supply availability and demand for these commodities.
Natural Gas Prices
Natural gas is the principal raw material used to produce nitrogen fertilizers. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia, granular urea, UAN, AN and other nitrogen products. Because most of our nitrogen fertilizer manufacturing facilities are located in the United States and Canada, the price of natural gas in North America directly impacts a substantial portion of our operating expenses. Due to increases in natural gas production resulting from the rise in production from shale gas formations, natural gas prices in North America declined over the past several years, but are subject to volatility. During the three year period ended December 31, 2015, the daily closing price at the Henry Hub reached a low of $1.54 per MMBtu on four consecutive days in December 2015 and a high of $7.94 per MMBtu on March 5, 2014.
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). During 2015, the daily closing price at NBP reached a low of $4.60 per MMBtu on December 23, 2015 and December 24, 2015 and a high of $8.50 per MMBtu on February 12, 2015. During the three year period ended December 31, 2015, the daily closing price at NBP reached a low of $4.60 per MMBtu on both December 23, 2015 and December 24, 2015 and a high of $16.00 per MMBtu on March 22, 2013.
Natural gas costs, including the impact of realized natural gas derivatives, declined 28% in 2015 from 2014. Expenditures on natural gas represent a significant portion of our production costs. For example, natural gas costs, including realized gains and losses, comprised approximately 45% of our Nitrogen Product Segments total production costs in 2015.
Farmers' Economics
The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors like their current liquidity, soil conditions, weather patterns, crop prices and the types of crops planted.
CF INDUSTRIES HOLDINGS, INC.
Global Trade in Fertilizer
In addition to the relationship between global supply and demand, profitability within a particular geographic region is determined by the supply/demand balance within that region. Regional supply and demand can be influenced significantly by factors affecting trade within regions. Some of these factors include the relative cost to produce and deliver product, relative currency values, the availability of credit and governmental trade policies. The development of additional natural gas reserves in North America over the last few years has decreased natural gas costs relative to the rest of the world, making North American nitrogen fertilizer producers more competitive. These lower natural gas costs contributed to announcements of several nitrogen fertilizer capacity expansion projects in North America, including our capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa. Changes in currency values may also alter our cost competitiveness relative to producers in other regions of the world.
Imports account for a significant portion of the nitrogen fertilizer consumed in North America. Producers of nitrogen-based fertilizers located in the Middle East, Ukraine, the Republic of Trinidad and Tobago, Venezuela, North Africa, Russia and China are major exporters to North America.
Government Policies
The policies of governments around the world can result in restrictions on imports and exports, the subsidization of natural gas prices, and subsidies or quotas applied to domestic producers, farmers, and imported or exported product. Due to the critical role that fertilizers play in food production, the construction and operation of fertilizer plants often are influenced by political and social objectives.
Ethanol Industry and the Renewable Fuel Standard
Corn used to produce ethanol accounts for approximately 38% of total U.S. corn demand. U.S. government policy, as expressed in the Renewable Fuel Standard (RFS), is a major determinant for the ethanol market. The RFS establishes minimum volumes of various types of renewable fuels, including ethanol, that must be included in the United States’ supply of fuel for transportation. In addition, Congress, at various times, has proposed legislation to either reduce or eliminate the RFS. While past legislation proposing changes to the RFS has not passed, there can be no assurance that future legislation will not be passed into law. Other factors that drive the ethanol market include the prices of ethanol, gasoline and corn. Lower gasoline prices may put pressure on ethanol prices that could result in reduced profitability and lower production for the ethanol industry.
Factors Affecting Our Results
Net Sales. Our net sales are derived primarily from the sale of nitrogen fertilizers and are determined by the quantities of fertilizers we sell and the selling prices we realize. The volumes, mix and selling prices we realize are determined to a great extent by a combination of global and regional supply and demand factors. Net sales also include shipping and handling costs that are billed to our customers. Sales incentives are reported as a reduction in net sales.
Cost of Sales. Our cost of sales includes manufacturing costs, purchased product costs, and distribution costs. Manufacturing costs, the most significant element of cost of sales, consist primarily of raw materials, realized and unrealized gains and losses on natural gas derivative instruments, maintenance, direct labor, depreciation and other plant overhead expenses. Purchased product costs primarily include the cost to purchase nitrogen fertilizers to augment or replace production at our facilities. Distribution costs include the cost of freight required to transport finished products from our plants to our distribution facilities and storage costs incurred prior to final shipment to customers.
We offer our customers the opportunity to purchase products from us on a forward basis at prices and on delivery dates we propose. As our customers enter into forward nitrogen fertilizer purchase contracts with us, we often use derivative instruments to reduce our exposure to changes in the cost of natural gas, the largest and most volatile component of our manufacturing costs for nitrogen-based fertilizer. We report our natural gas derivatives on the consolidated balance sheets at their fair value. Changes in the fair value of these derivatives are recorded in cost of sales as the changes occur. See "Forward Sales and Customer Advances" later in this discussion and analysis. As a result of fixing the selling prices of our products, often months in advance of their ultimate delivery to customers, our reported selling prices and margins may differ from market spot prices and margins available at the time of shipment. Volatility in quarterly reported earnings also may arise from the unrealized mark-to-market adjustments in the value of derivatives.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist primarily of corporate office expenses such as salaries and other payroll-related costs for our executive, administrative, legal, financial and marketing functions, as well as certain taxes and insurance and other professional service fees, including those for corporate initiatives.
CF INDUSTRIES HOLDINGS, INC.
Transaction Costs. Transaction costs consist of various consulting and legal services associated primarily with executing the strategic agreements and preparing for the proposed combination with the ENA Business of OCI, our strategic venture with CHS and our acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us.
Other Operating—Net. Other operating—net includes administrative costs associated with our capacity expansion projects and other costs that do not relate directly to our central operations. Costs included in "other costs" can include foreign exchange gains and losses, unrealized gains and losses on foreign currency derivatives, costs associated with our closed facilities, amounts recorded for environmental remediation for other areas of our business, litigation expenses and gains and losses on the disposal of fixed assets.
Equity in Earnings of Operating Affiliates. Equity in earnings of operating affiliates consists of our 50% ownership interest in PLNL. We include our share of the net earnings from our investment in PLNL as an element of earnings from operations because this investment provides additional production and is integrated with our other supply chain and sales activities in the Nitrogen Product Segments. Our share of the net earnings includes the amortization of certain tangible and intangible assets identified as part of the application of purchase accounting at acquisition. In the fourth quarter of 2015, we recognized a $61.9 million impairment of our equity method investment in PLNL.
Interest Expense. Our interest expense includes the interest on our long-term debt, amortization of the related fees required to execute financing agreements and annual fees pursuant to our revolving credit agreement. Capitalized interest relating to the construction of major capital projects reduces interest expense as the interest is capitalized and amortized over the estimated useful lives of the facility along with all other construction costs.
Interest Income. Our interest income represents amounts earned on our cash, cash equivalents, investments and advances to unconsolidated affiliates.
Income Tax Provision. Our income tax provision includes all currently payable and deferred United States and foreign income tax expense applicable to our ongoing operations.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are projected to be recovered or settled. Realization of deferred tax assets is dependent on our ability to generate sufficient taxable income, of an appropriate character, in future periods. A valuation allowance is established if it is determined to be more likely than not that a deferred tax asset will not be realized. Interest and penalties related to unrecognized tax benefits are reported as interest expense and income tax expense, respectively.
Equity in Earnings of Non-Operating Affiliates—Net of Taxes. Equity in earnings of non-operating affiliates—net of taxes represents our share of the net earnings of the entities that we account for using the equity method and exclude from operating earnings. Income taxes related to these investments, if any, are reflected in this line. The amounts recorded as equity in earnings of non-operating affiliates—net of taxes relate to our investments in CF Fertilisers UK and Keytrade. During the second quarter of 2015, we sold our interests in Keytrade. On July 31, 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for total consideration of $570.4 million and recognized a $94.4 million gain on the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK. CF Fertilisers UK became wholly owned by us and beginning July 31, 2015, the operating results of CF Fertilisers UK became part of our consolidated financial results.
Net Earnings Attributable to Noncontrolling Interest. Net earnings attributable to noncontrolling interest include the net earnings attributable to the 24.7% interest of the publicly-held common units of TNCLP. Net earnings attributable to noncontrolling interest for the first four months of 2013 also included the interest of the 34% holder of CFL's equity ownership. On April 30, 2013, we purchased the noncontrolling interests of CFL.
We own an aggregate 75.3% of TNCLP and outside investors own the remaining 24.7%. The TNCLP Agreement of Limited Partnership allows the General Partner to receive Incentive Distribution Rights once a minimum distribution threshold has been met. Partnership interests in TNCLP are traded on the NYSE and TNCLP is separately registered with the SEC.
CF INDUSTRIES HOLDINGS, INC.
Results of Consolidated Operations
The following table presents our consolidated results of operations:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | 4,308.3 | $ | 4,743.2 | $ | 5,474.7 | $ | (434.9 | ) | (9 | )% | $ | (731.5 | ) | (13 | )% | |||||||||
| Cost of sales | 2,761.2 | 2,964.7 | 2,954.5 | (203.5 | ) | (7 | )% | 10.2 | — | % | |||||||||||||||
| Gross margin | 1,547.1 | 1,778.5 | 2,520.2 | (231.4 | ) | (13 | )% | (741.7 | ) | (29 | )% | ||||||||||||||
| Gross margin percentage | 35.9 | % | 37.5 | % | 46.0 | % | (1.6 | )% | (8.5 | )% | |||||||||||||||
| Selling, general and administrative expenses | 169.8 | 151.9 | 166.0 | 17.9 | 12 | % | (14.1 | ) | (8 | )% | |||||||||||||||
| Transaction costs | 56.9 | — | — | 56.9 | N/M | — | N/M | ||||||||||||||||||
| Other operating—net | 92.3 | 53.3 | (15.8 | ) | 39.0 | 73 | % | 69.1 | N/M | ||||||||||||||||
| Total other operating costs and expenses | 319.0 | 205.2 | 150.2 | 113.8 | 55 | % | 55.0 | 37 | % | ||||||||||||||||
| Gain on sale of phosphate business | — | 750.1 | — | (750.1 | ) | (100 | )% | 750.1 | N/M | ||||||||||||||||
| Equity in earnings of operating affiliates | (35.0 | ) | 43.1 | 41.7 | (78.1 | ) | (181 | )% | 1.4 | 3 | % | ||||||||||||||
| Operating earnings | 1,193.1 | 2,366.5 | 2,411.7 | (1,173.4 | ) | (50 | )% | (45.2 | ) | (2 | )% | ||||||||||||||
| Interest expense—net | 131.6 | 177.3 | 147.5 | (45.7 | ) | (26 | )% | 29.8 | 20 | % | |||||||||||||||
| Other non-operating—net | 3.9 | 1.9 | 54.5 | 2.0 | 105 | % | (52.6 | ) | (97 | )% | |||||||||||||||
| Earnings before income taxes and equity in earnings of non-operating affiliates | 1,057.6 | 2,187.3 | 2,209.7 | (1,129.7 | ) | (52 | )% | (22.4 | ) | (1 | )% | ||||||||||||||
| Income tax provision | 395.8 | 773.0 | 686.5 | (377.2 | ) | (49 | )% | 86.5 | 13 | % | |||||||||||||||
| Equity in earnings of non-operating affiliates—net of taxes | 72.3 | 22.5 | 9.6 | 49.8 | 221 | % | 12.9 | 134 | % | ||||||||||||||||
| Net earnings | 734.1 | 1,436.8 | 1,532.8 | (702.7 | ) | (49 | )% | (96.0 | ) | (6 | )% | ||||||||||||||
| Less: Net earnings attributable to noncontrolling interest | 34.2 | 46.5 | 68.2 | (12.3 | ) | (26 | )% | (21.7 | ) | (32 | )% | ||||||||||||||
| Net earnings attributable to common stockholders | $ | 699.9 | $ | 1,390.3 | $ | 1,464.6 | $ | (690.4 | ) | (50 | )% | $ | (74.3 | ) | (5 | )% | |||||||||
| Diluted net earnings per share attributable to common stockholders(1) | $ | 2.96 | $ | 5.42 | $ | 4.95 | $ | (2.46 | ) | (45 | )% | $ | 0.47 | 9 | % | ||||||||||
| Diluted weighted-average common shares outstanding(1) | 236.1 | 256.7 | 296.0 | (20.6 | ) | (8 | )% | (39.3 | ) | (13 | )% | ||||||||||||||
| Dividends declared per common share(1) | $ | 1.20 | $ | 1.00 | $ | 0.44 | $ | 0.20 | $ | 0.56 | |||||||||||||||
| Supplemental Data: | |||||||||||||||||||||||||
| Purchased natural gas costs (per MMBtu)(2) | $ | 2.81 | $ | 4.49 | $ | 3.64 | $ | (1.68 | ) | $ | 0.85 | ||||||||||||||
| Realized derivatives loss (gain) (per MMBtu)(3) | 0.26 | (0.24 | ) | 0.02 | 0.50 | (0.26 | ) | ||||||||||||||||||
| Cost of natural gas (per MMBtu) | $ | 3.07 | $ | 4.25 | $ | 3.66 | $ | (1.18 | ) | (28 | )% | $ | 0.59 | 16 | % | ||||||||||
| Average daily market price of natural gas (per MMBtu) Henry Hub (Louisiana) | $ | 2.61 | $ | 4.32 | $ | 3.72 | $ | (1.71 | ) | (40 | )% | $ | 0.60 | 16 | % | ||||||||||
| Average daily market price of natural gas (per MMBtu) National Balancing Point (UK)(4) | $ | 6.53 | — | — | $ | 6.53 | N/M | — | N/M | ||||||||||||||||
| Capital expenditures | $ | 2,469.3 | $ | 1,808.5 | $ | 823.8 | $ | 660.8 | 37 | % | $ | 984.7 | 120 | % | |||||||||||
| Production volume by product tons (000s): | |||||||||||||||||||||||||
| Ammonia(5) | 7,673 | 7,011 | 7,105 | 662 | 9 | % | (94 | ) | (1 | )% | |||||||||||||||
| Granular urea | 2,520 | 2,347 | 2,474 | 173 | 7 | % | (127 | ) | (5 | )% | |||||||||||||||
| UAN (32%) | 5,888 | 5,939 | 6,332 | (51 | ) | (1 | )% | (393 | ) | (6 | )% | ||||||||||||||
| AN | 1,283 | 950 | 882 | 333 | 35 | % | 68 | 8 | % |
N/M—Not Meaningful
| (1) | Share and per share amounts have been retroactively restated for all prior periods presented to reflect the five-for-one split of the Company’s common stock effected in the form of a stock dividend that was distributed on June 17, 2015. |
| (2) | Includes the cost of natural gas purchased during the period for use in production. |
| (3) | Includes the impact of gains and losses on natural gas derivatives that were settled and realized during the period. Excludes the unrealized mark-to-market gains and losses on natural gas derivatives. |
| (4) | Amount represents average daily market price for the full year 2015. |
| (5) | Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN, or AN. |
CF INDUSTRIES HOLDINGS, INC.
Impact of CFL Selling Price Modifications
As discussed in the Items Affecting Comparability of Results section of this discussion and analysis, on April 30, 2013, CF Industries acquired the noncontrolling interests in CFL and CFL became a wholly-owned subsidiary of CF Industries. As a result, the consolidated financial results for 2015 and 2014 included twelve months of market-based selling prices, while 2013 included four months of selling prices based on production cost plus an agreed-upon margin and eight months of market-based selling prices. These changes affect the year-over-year comparability of net sales, gross margin, operating earnings, earnings before income taxes and net earnings attributable to noncontrolling interest, but do not impact the comparability of our net earnings attributable to common stockholders or net cash flows for the same period.
The following table adjusts the results for 2013 to market-based selling prices for the full year to be on a comparable basis with 2015 and 2014.
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||
| Net sales | |||||||||||||||||||||||||
| As reported | $ | 4,308.3 | $ | 4,743.2 | $ | 5,474.7 | $ | (434.9 | ) | (9 | )% | $ | (731.5 | ) | (13 | )% | |||||||||
| Impact of selling price adjustment | — | — | 71.1 | — | (71.1 | ) | |||||||||||||||||||
| As adjusted | $ | 4,308.3 | $ | 4,743.2 | $ | 5,545.8 | $ | (434.9 | ) | (9 | )% | $ | (802.6 | ) | (14 | )% | |||||||||
| Gross margin | |||||||||||||||||||||||||
| As reported | $ | 1,547.1 | $ | 1,778.5 | $ | 2,520.2 | $ | (231.4 | ) | (13 | )% | $ | (741.7 | ) | (29 | )% | |||||||||
| Impact of selling price adjustment | — | — | 71.1 | — | (71.1 | ) | |||||||||||||||||||
| As adjusted | $ | 1,547.1 | $ | 1,778.5 | $ | 2,591.3 | $ | (231.4 | ) | (13 | )% | $ | (812.8 | ) | (31 | )% | |||||||||
| Net earnings attributable to noncontrolling interest | |||||||||||||||||||||||||
| As reported | $ | 34.2 | $ | 46.5 | $ | 68.2 | $ | (12.3 | ) | (26 | )% | $ | (21.7 | ) | (32 | )% | |||||||||
| Impact of selling price adjustment | — | — | 71.1 | — | (71.1 | ) | |||||||||||||||||||
| As adjusted | $ | 34.2 | $ | 46.5 | $ | 139.3 | $ | (12.3 | ) | (26 | )% | $ | (92.8 | ) | (67 | )% |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated Operating Results
Our reportable segments consist of ammonia, granular urea, UAN, AN, other, and phosphate and include the results of CF Fertilisers UK as a result of our acquisition that closed on July 31, 2015. The ammonia, granular urea, UAN, AN and Other segments are referred to in this discussion and analysis as the “Nitrogen Product Segments.”
Our total gross margin declined by $231.4 million, or 13%, to $1.55 billion in 2015 from $1.78 billion in 2014. The impact of the CF Fertilisers UK acquisition increased gross margin by $23.5 million. The remaining decline in our gross margin of $254.9 million, or 14%, was due to the $244.8 million decrease in gross margin in the Nitrogen Product Segments and the $10.1 million decline in gross margin in the phosphate segment as the phosphate business was sold in the first quarter of 2014. The remaining decrease in Nitrogen Product Segments gross margin, as more fully described below, was due primarily to lower average selling prices, lower sales volume, and the impact of mark-to-market losses on natural gas derivatives, partially offset by lower physical natural gas costs.
| • | Average selling prices, primarily UAN and granular urea, decreased by 8%, which reduced gross margin by $348.8 million as international nitrogen fertilizer prices continued to decline due to excess global supply. The combination of falling global production costs, foreign currency devaluation and reduced ocean freight costs allowed many international producers to continue operations and the resulting supply weighed on global prices. |
| • | Sales volume, primarily ammonia, decreased by 3%, which decreased gross margin by $72.3 million due primarily to a poor fall application season and weaker demand as customers were unable to apply ammonia due to poor weather conditions and customers were hesitant to buy in a declining pricing environment. |
| • | Unrealized net mark-to-market losses on natural gas derivatives decreased gross margin by $96.8 million as 2015 included a $176.3 million loss compared to a $79.5 million loss in 2014. |
CF INDUSTRIES HOLDINGS, INC.
| • | Lower physical natural gas costs in 2015, partially offset by the impact of natural gas derivatives that settled in the period, increased gross margin by $229.8 million compared to 2014. Lower gas costs were primarily driven by increased North American natural gas production, as increased well efficiencies increased supply. Warm weather conditions, especially in the fourth quarter, also contributed to high storage levels and the resulting decline in gas prices. |
Net earnings attributable to common stockholders of $699.9 million for 2015 included a $94.4 million gain as a result of the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK ($94.4 million after tax), a $61.9 million impairment of our equity method investment in PLNL ($61.9 million after tax), a $176.3 million unrealized net mark-to-market loss ($110.9 million after tax) on natural gas derivatives, $42.8 million of losses ($30.9 million after tax) as a result of the sale of equity method investments, $56.9 million of transaction costs ($56.9 million after tax), $51.3 million of expenses ($32.3 million after tax) related to our capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa that did not qualify for capitalization, and $21.6 million of realized and unrealized losses ($13.6 million after tax) on foreign currency derivatives related to our capacity expansion projects. Net earnings attributable to common stockholders of $1.39 billion in 2014 included a $750.1 million gain ($462.8 million after tax) on sale of the phosphate business, a $79.5 million unrealized net mark-to-market loss ($50.1 million after tax) on natural gas derivatives, $30.7 million of expenses ($19.4 million after tax) related to our capacity expansion projects that did not qualify for capitalization, $38.4 million ($24.2 million after tax) of realized and unrealized net losses on foreign currency derivatives and $13.1 million ($8.2 million after tax) of retirement benefits settlement charges.
Net Sales
Our total net sales decreased $434.9 million, or 9%, to $4.31 billion in 2015 compared to $4.74 billion in 2014. The impact of the CF Fertilisers UK acquisition increased our net sales by $208.4 million. The remaining decline in our net sales of $643.3 million, or 14%, included a $474.9 million decrease attributable to the Nitrogen Product Segments and a $168.4 million decrease due to the sale of the phosphate business in March 2014. The remaining Nitrogen Product Segments net sales decreased due to an 8% decline in average selling prices and a 3% decline in sales volume.
Nitrogen Product Segments average selling prices, excluding the impact of the CF Fertilisers UK acquisition, were $318 per ton in 2015 compared to $345 per ton in 2014 due primarily to lower UAN, granular urea and ammonia selling prices in 2015 as international nitrogen fertilizer prices continued to decline due to excess global supply. The combination of falling global production costs, foreign currency devaluation and reduced ocean freight costs allowed many international producers to continue operations and the resulting supply weighed on global prices. The decline in UAN average selling prices was primarily due to excess global supply. Granular urea exports from China were at a record high in 2015 and Russian exports have increased significantly while global capacity additions in 2015 further contributed to the global supply excess and the decline in average selling prices compared to 2014. The decrease in ammonia average selling prices from prior year levels is due primarily to weaker nitrogen fertilizer market conditions compared to the prior year, as a weak fall application season combined with higher producer inventory levels and slowing demand from phosphate fertilizer producers weighed on prices at the end of 2015.
Our total Nitrogen Product Segments sales volume increased by 3%. The impact of the CF Fertilisers UK acquisition increased our sales volume by 6%. The remaining decline in our Nitrogen Product Segments sales volume of 3% was due primarily to lower ammonia and UAN sales volume. Our ammonia sales volume was lower in 2015 partly due to a poor fall application season in North America as a result of poor weather conditions in the Midwest. The season started late and ended early in November due to snow in the Midwest. In addition, our ammonia and UAN sales volume were lower as customers were hesitant to buy in a declining pricing environment.
Cost of Sales
Total cost of sales decreased $203.5 million, or 7%, from 2014 to 2015 including the impact of the CF Fertilisers UK acquisition which increased cost of sales by $184.9 million, or 6%. The remaining decrease in our cost of sales of $388.4 million, or 13%, was due primarily to lower natural gas costs. The cost of sales per ton in our Nitrogen Product Segments averaged $200 in 2015, a 5% decrease from the $211 per ton in 2014. The realized natural gas costs, including the impact of lower purchased natural gas costs and realized derivative losses during 2015, decreased 28% compared to 2014. Cost of sales in 2015 also included $176.3 million of unrealized net mark-to-market losses on natural gas derivatives compared to losses of $79.5 million in 2014. Lower gas costs were primarily driven by increasing North American natural gas production, as increased well efficiencies increased supply. Warm weather conditions, especially in the fourth quarter, also contributed to the high storage levels and the resulting decline in gas prices.
CF INDUSTRIES HOLDINGS, INC.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $17.9 million to $169.8 million in 2015 from $151.9 million in 2014. The increase was due primarily to the impact of the CF Fertilisers UK acquisition, an increase in corporate project activities, and higher intangible amortization costs.
Transaction Costs
In 2015, we incurred $56.9 million of transaction costs for various consulting and legal services associated primarily with executing the strategic agreements and preparing for the proposed combination with the ENA Business of OCI, our strategic venture with CHS and our acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us.
Other Operating—Net
Other operating—net changed by $39.0 million from $53.3 million of expense in 2014 to expense of $92.3 million in 2015. The increased expense was due primarily to higher expansion project costs pertaining to our Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects that did not qualify for capitalization. This was partially offset by the decrease in realized and unrealized losses on foreign currency derivatives from $38.4 million of losses in 2014 to $21.6 million of losses in 2015.
Equity in Earnings of Operating Affiliates
Equity in earnings of operating affiliates consists of our 50% share of the operating results of PLNL. Equity in earnings of operating affiliates decreased by $78.1 million in 2015 as compared to 2014 due primarily to a $61.9 million impairment of our equity method investment in PLNL that was recognized in the fourth quarter of 2015. The remaining decrease was due primarily to lower operating results from PLNL due to lower average selling prices.
Interest—Net
Net interest expense was $131.6 million in 2015 compared to $177.3 million in 2014. The $45.7 million decrease in net interest expense was due primarily to higher amounts of capitalized interest related to our capacity expansion projects, partially offset by higher interest expense pertaining to the $1.0 billion and $1.5 billion of senior notes issued in September 2015 and in March 2014, respectively. We recorded capitalized interest of $154.5 million in 2015 primarily related to our capacity expansion projects compared to $74.2 million in 2014.
Other Non-Operating—Net
Other non-operating—net was a $3.9 million expense in 2015 compared to expense of $1.9 million in 2014.
Income Taxes
Our income tax provision for 2015 was $395.8 million on pre-tax income of $1.06 billion, or an effective tax rate of 37.4%, compared to an income tax provision of $773.0 million on pre-tax income of $2.19 billion, or an effective tax rate of 35.3% in the prior year. The increase in the effective tax rate in 2015 was due primarily to the impact of certain transactional expenses that are not deductible for tax purposes. The income tax provision in 2014 included $287.3 million of income tax expense relating to the phosphate business sale, which increased the effective tax rate by 1.5%.
During the third quarter of 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us and recognized a $94.4 million gain on the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK. The earnings in CF Fertilisers UK have been permanently reinvested. Therefore, the recognition of the $94.4 million gain on the remeasurement of the historical equity investment does not include the recognition of tax expense on the gain.
In the fourth quarter of 2015, we determined the carrying value of our equity method investment in PLNL exceeded fair value and recognized an impairment of our equity method investment in PLNL of $61.9 million, which is included in the equity in earnings of operating affiliates in 2015. Our income tax provision does not include a tax benefit for the impairment of the equity investment as it does not give rise to a tax deduction.
The effective tax rate does not reflect a tax provision on the earnings attributable to noncontrolling interest in TNCLP (a partnership), which is not a taxable entity. For additional information on income taxes, see Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report.
CF INDUSTRIES HOLDINGS, INC.
Equity in Earnings of Non-Operating Affiliates—Net of Taxes
Equity in earnings of non-operating affiliates—net of taxes consists of our share of the financial results of unconsolidated joint venture interests in CF Fertilisers UK and Keytrade. During the second quarter of 2015, we sold our interests in Keytrade. On July 31, 2015, we completed the CF Fertilisers UK acquisition for total consideration of $570.4 million, and CF Fertilisers UK became wholly owned by us and became part of our consolidated financial results.
Equity in earnings of non-operating affiliates—net of taxes increased by $49.8 million in 2015 compared to 2014 due primarily to the $94.4 million gain on the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK that was recorded in connection with the closing of the transaction. This was partially offset by the combination of operating losses experienced at Keytrade and from the loss on sale of our investments in Keytrade during the second quarter of 2015.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest decreased $12.3 million in 2015 compared to 2014 due primarily to lower net earnings attributable to the 24.7% interest of the publicly-held common units of TNCLP.
Diluted Net Earnings Per Share Attributable to Common Stockholders
Diluted net earnings per share attributable to common stockholders decreased $2.46, or 45%, to $2.96 per share in 2015 from $5.42 per share in 2014. This decrease is primarily due to the $1.80 per share gain from the sale of the phosphate business in 2014, partially offset by the impact of lower diluted weighted-average shares outstanding in 2015 as compared to 2014 due to the impact of our share repurchase programs. We repurchased 8.9 million shares in 2015 for $527.2 million, or an average cost of $59 per share. The total shares repurchased during 2015 represent 4% of the shares outstanding as of December 31, 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Consolidated Operating Results
Our total gross margin declined by $741.7 million, or 29%, to $1.78 billion in 2014 from $2.52 billion in 2013. The sale of the phosphate business reduced gross margin between the periods by $64.8 million as the business was sold in the first quarter of 2014, but had reported results in both the first half of 2014 and the entire year in 2013. Gross margin for the Nitrogen Product Segments declined by $676.9 million, or 28%. This decline in gross margin is due primarily to the following factors:
| • | Average selling prices in the Nitrogen Product Segments declined by 4%, which reduced gross margin by $358.9 million. |
| • | Sales volume in the Nitrogen Product Segments increased by 3%, which increased gross margin by $73.5 million. |
| • | Higher natural gas costs reduced gross margin by $122.3 million. |
| • | Unrealized net mark-to-market losses on natural gas derivatives decreased gross margin by $132.4 million as 2014 included a $79.5 million loss and 2013 included a $52.9 million gain. |
| • | Other production costs, including production outage related expenses, and distribution and storage expenses increased compared to 2013. |
Net earnings attributable to common stockholders of $1.39 billion for 2014 included a $750.1 million pre-tax gain ($462.8 million after tax) on the sale of the phosphate business, a $79.5 million of pre-tax unrealized mark-to-market loss ($50.1 million after tax) on natural gas derivatives, $30.7 million of expenses ($19.4 million after tax) related to our capacity expansion projects in Donaldsonville, Louisiana, and Port Neal, Iowa, $38.4 million ($24.2 million after tax) of realized and unrealized net losses on foreign currency derivatives and $13.1 million ($8.2 million after tax) of retirement benefits settlement charges. Net earnings in 2013 of $1.46 billion included $52.9 million of unrealized net mark-to-market gain ($33.5 million after tax) on natural gas derivatives, $10.8 million of expenses ($6.8 million after tax) related to our capacity expansion projects, $20.8 million ($13.2 million after tax) of realized and unrealized net gains on foreign currency derivatives and a net $20.6 million benefit from a settlement with the IRS concerning certain pre-IPO NOLs.
CF INDUSTRIES HOLDINGS, INC.
Net Sales
Net sales decreased $731.5 million, or 13%, to $4.74 billion in 2014 compared to $5.47 billion in 2013. These results were impacted by the CFL selling price modifications in 2013. On an as adjusted basis, the 2014 net sales decreased 14% compared to 2013. The $731.5 million decrease in net sales is attributable to a $103.0 million decrease in the Nitrogen Product Segments and a $628.5 million decrease in the phosphate segment due to the sale of the phosphate business in March 2014.
Nitrogen Product Segments net sales decreased $103.0 million, or 2%, due primarily to a 4% decrease in average selling prices, partially offset by a 3% increase in sales volume. Nitrogen Product Segments average selling prices declined due primarily to lower ammonia and UAN selling prices compared to the prior year period. Ammonia prices were lower due primarily to the higher producer inventory levels that carried over from the end of 2013 as compared to the previous year as a result of the shortened 2013 fall ammonia application season caused by cold weather conditions. The decline in UAN prices was due primarily to customer preferences for attractively priced ammonia during the extended spring ammonia application season in 2014.
Nitrogen Product Segments sales volume increased due primarily to increased sales of ammonia and AN along with the increased sales in the Other segment, mainly DEF. Ammonia volume benefited in 2014 from a combination of attractive pricing compared to other forms of nitrogen fertilizer, favorable weather conditions that resulted in an extended spring application season, and effective utilization of our terminal and logistics system to resupply in advance of periods of high demand. In addition, sales to Mosaic under our ammonia supply contract from our PLNL joint venture also increased volume compared to 2013. AN segment sales volume increased due to higher AN exports and increased late season AN fertilizer demand compared to 2013. DEF volume increased along with the growing North American DEF market.
Cost of Sales
Total cost of sales increased $10.2 million from 2013 to 2014 due primarily to higher Nitrogen Product Segments cost of sales partially offset by the sale of the phosphate business in March 2014. Total cost of sales per ton in our Nitrogen Product Segments averaged $211 in 2014 compared to $172 in 2013. This 23% increase was due primarily to higher natural gas costs and higher other production costs. Total realized gas costs increased 16%. Natural gas costs for 2014 also included a $79.5 million unrealized net mark-to-market loss on natural gas derivatives and 2013 included a $52.9 million gain. Additionally, we incurred higher other production costs, including production outage related expenses, and distribution and storage expenses compared to 2013.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $14.1 million to $151.9 million in 2014 from $166.0 million in 2013. The decrease was due primarily to lower incentive compensation costs and lower corporate office costs for certain corporate activities such as information technology projects.
Other Operating—Net
Other operating—net changed by $69.1 million from $15.8 million net income in 2013 to expense of $53.3 million in 2014. The increased expense was due primarily to $38.4 million of realized and unrealized losses on foreign currency derivatives in 2014 compared to $20.8 million of gains in 2013. Additionally, expenses related to the capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa that did not qualify for capitalization increased by $19.9 million between the years.
Phosphate Business Disposition
In March 2014, we completed the sale of the Company’s phosphate mining and manufacturing business to Mosaic pursuant to the terms of the definitive transaction agreement executed in October 2013, among the Company, CF Industries and Mosaic for approximately $1.4 billion in cash. In 2014, we recognized pre-tax and after-tax gains on the sale of the phosphate business of $750.1 million and $462.8 million, respectively.
Equity in Earnings of Operating Affiliates
Equity in earnings of operating affiliates consists of our 50% share of the operating results of PLNL and our 50% interest in an ammonia storage joint venture located in Houston, Texas. Equity in earnings of operating affiliates was $43.1 million in 2014 as compared to $41.7 million in 2013. The increase was due primarily to improved operating results from PLNL.
CF INDUSTRIES HOLDINGS, INC.
Interest—Net
Net interest expense was $177.3 million in 2014 compared to $147.5 million in 2013. The $29.8 million increase in net interest expense was due primarily to the interest expense on the $1.5 billion of senior notes we issued during the first quarter of 2014 and the $1.5 billion of senior notes issued during the second quarter of 2013. This increase was partially offset by capitalized interest of $74.2 million in 2014 primarily related to our capacity expansion projects compared to $26.7 million in 2013.
Other Non‑Operating—Net
Other non‑operating—net was a $1.9 million expense in 2014 compared to expense of $54.5 million in 2013. As discussed under Items Affecting Comparability of Results—NOL Settlement, in 2013, a charge of $55.2 million was recognized for the 73.1% portion of the NOLs we had accumulated prior to our 2005 public offering that are being paid to pre‑IPO owners as NOL tax benefits are realized.
Income Taxes
Our income tax provision for 2014 was $773.0 million on pre-tax income of $2.19 billion, or an effective tax rate of 35.3%, compared to an income tax provision of $686.5 million on pre-tax income of $2.21 billion, or an effective tax rate of 31.1% in 2013. The primary increase in the effective tax rate in 2014 was due to the fact that we recognized a tax benefit in 2013 for the impact of our closing agreement with the IRS (2.2%), enabling us to utilize a portion of our pre-IPO NOLs. The 2014 effective tax rate is also impacted by reduced tax benefits from depletion (1.1%) related to our disposed phosphate business. The income tax provision in 2014 includes $287.3 million of income tax expense relating to the phosphate business sale, which increased the effective tax rate by 1.5%.
The effective tax rate does not reflect a tax provision on the earnings attributable to noncontrolling interest in TNCLP (a partnership), which is not a taxable entity. For additional information on income taxes, see Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report.
Equity in Earnings of Non-Operating Affiliates—Net of Taxes
Equity in earnings of non-operating affiliates—net of taxes consists of our share of the operating results of unconsolidated joint venture interests in CF Fertilisers UK and Keytrade. The $12.9 million increase in 2014 compared to 2013 was due primarily to increased earnings from CF Fertilisers UK reflecting lower natural gas costs in the United Kingdom and improved trading performance at Keytrade.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest decreased $21.7 million in 2014 compared to 2013 due primarily to lower net earnings attributable to the 24.7% interest of the publicly-held common units of TNCLP.
Diluted Net Earnings Per Share Attributable to Common Stockholders
Diluted net earnings per share attributable to common stockholders increased to $5.42 in 2014 from $4.95 in 2013 due primarily to the gain on the phosphate business sale and lower weighted-average number of shares outstanding due to the impact of our share repurchase programs. We repurchased 38.4 million shares of our common stock in 2014 for $1.92 billion, or an average cost of $50 per share. The total shares repurchased during 2014 represent 14% of the shares outstanding as of December 31, 2013.
CF INDUSTRIES HOLDINGS, INC.
Operating Results by Business Segment
On July 31, 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us. CF Fertilisers UK is now wholly owned by us and its results are included in our results as of the date of acquisition. See Note 8—Equity Method Investments to our consolidated financial statements included in Item 8 of this report for additional information. CF Fertilisers UK has nitrogen manufacturing complexes located in Ince, United Kingdom, and Billingham, United Kingdom. The Ince complex produces AN, ammonia and NPKs while the Billingham complex produces AN and ammonia. In the third quarter of 2015, we changed our reportable segment structure to separate AN from our Other segment as our AN products increased in significance as a result of the CF Fertilisers UK acquisition. Our new reportable segment structure reflects how our CODM assesses the performance of our reportable segments and makes decisions about resource allocation. Our reportable segments now consist of ammonia, granular urea, UAN, AN, other, and phosphate. These segments are differentiated by products. Historical financial results have been restated to reflect the new reportable segment structure on a comparable basis.
The phosphate segment reflects the reported results of the phosphate business through March 17, 2014, plus the continuing sales of the phosphate inventory in the distribution network after March 17, 2014. The remaining phosphate inventory was sold in the second quarter of 2014; therefore, the phosphate segment does not have operating results subsequent to that quarter. However, the segment will continue to be included until the reporting of comparable period phosphate results ceases. We use 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, including the impact of the CF Fertilisers UK acquisition:
| Ammonia | Granular Urea(1) | UAN(1) | AN(1) | Other(1) | Phosphate | Consolidated | |||||||||||||||||||||
| (in million, except percentages) | |||||||||||||||||||||||||||
| Year ended December 31, 2015 | |||||||||||||||||||||||||||
| Net sales | $ | 1,523.1 | $ | 788.0 | $ | 1,479.7 | $ | 294.0 | $ | 223.5 | $ | — | $ | 4,308.3 | |||||||||||||
| Cost of sales | 883.7 | 469.5 | 954.5 | 290.8 | 162.7 | — | 2,761.2 | ||||||||||||||||||||
| Gross margin | $ | 639.4 | $ | 318.5 | $ | 525.2 | $ | 3.2 | $ | 60.8 | $ | — | $ | 1,547.1 | |||||||||||||
| Gross margin percentage | 42.0 | % | 40.4 | % | 35.5 | % | 1.1 | % | 27.2 | % | — | % | 35.9 | % | |||||||||||||
| Year ended December 31, 2014 | |||||||||||||||||||||||||||
| Net sales | $ | 1,576.3 | $ | 914.5 | $ | 1,669.8 | $ | 242.7 | $ | 171.5 | $ | 168.4 | $ | 4,743.2 | |||||||||||||
| Cost of sales | 983.2 | 516.6 | 997.4 | 189.1 | 120.1 | 158.3 | 2,964.7 | ||||||||||||||||||||
| Gross margin | $ | 593.1 | $ | 397.9 | $ | 672.4 | $ | 53.6 | $ | 51.4 | $ | 10.1 | $ | 1,778.5 | |||||||||||||
| Gross margin percentage | 37.6 | % | 43.5 | % | 40.3 | % | 22.1 | % | 30.0 | % | 6.0 | % | 37.5 | % | |||||||||||||
| Year ended December 31, 2013 | |||||||||||||||||||||||||||
| Net sales | $ | 1,437.9 | $ | 924.6 | $ | 1,935.1 | $ | 215.1 | $ | 165.1 | $ | 796.9 | $ | 5,474.7 | |||||||||||||
| Cost of sales | 656.5 | 410.1 | 895.6 | 155.9 | 114.4 | 722.0 | 2,954.5 | ||||||||||||||||||||
| Gross margin | $ | 781.4 | $ | 514.5 | $ | 1,039.5 | $ | 59.2 | $ | 50.7 | $ | 74.9 | $ | 2,520.2 | |||||||||||||
| Gross margin percentage | 54.3 | % | 55.6 | % | 53.7 | % | 27.5 | % | 30.7 | % | 9.4 | % | 46.0 | % |
| (1) | The cost of ammonia that is upgraded into other products is transferred at cost into the upgraded product results. |
CF INDUSTRIES HOLDINGS, INC.
Impact of CFL Selling Price Modifications
As discussed in the Items Affecting Comparability of Results section of this discussion and analysis, on April 30, 2013, CF Industries acquired the noncontrolling interests in CFL and CFL became a wholly-owned subsidiary of CF Industries. As a result, the consolidated financial results for 2015 and 2014 included twelve months of market-based selling prices, while 2013 included four months of selling prices based on production cost plus an agreed-upon margin and eight months of market-based selling prices. These changes affect the year-over-year comparability of net sales, gross margin, operating earnings, earnings before income taxes and net earnings attributable to noncontrolling interest, but do not impact the comparability of our net earnings attributable to common stockholders or net cash flows for the same period.
The following table adjusts the results for 2013 to market-based selling prices for the full year to be on a comparable basis with 2015 and 2014.
| Year Ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||
| Ammonia Segment | |||||||||||||||||||||||||
| Net sales | |||||||||||||||||||||||||
| As reported | $ | 1,523.1 | $ | 1,576.3 | $ | 1,437.9 | $ | (53.2 | ) | (3 | )% | $ | 138.4 | 10 | % | ||||||||||
| Impact of selling price adjustment | — | — | 44.8 | — | (44.8 | ) | |||||||||||||||||||
| As adjusted | $ | 1,523.1 | $ | 1,576.3 | $ | 1,482.7 | $ | (53.2 | ) | (3 | )% | $ | 93.6 | 6 | % | ||||||||||
| Gross margin | |||||||||||||||||||||||||
| As reported | $ | 639.4 | $ | 593.1 | $ | 781.4 | $ | 46.3 | 8 | % | $ | (188.3 | ) | (24 | )% | ||||||||||
| Impact of selling price adjustment | — | — | 44.8 | — | (44.8 | ) | |||||||||||||||||||
| As adjusted | $ | 639.4 | $ | 593.1 | $ | 826.2 | $ | 46.3 | 8 | % | $ | (233.1 | ) | (28 | )% | ||||||||||
| Gross margin percentage | |||||||||||||||||||||||||
| As reported | 42.0 | % | 37.6 | % | 54.3 | % | |||||||||||||||||||
| Impact of selling price adjustment | — | — | 1.4 | ||||||||||||||||||||||
| As adjusted | 42.0 | % | 37.6 | % | 55.7 | % | |||||||||||||||||||
| Average selling price per product ton | |||||||||||||||||||||||||
| As reported | $ | 509 | $ | 531 | $ | 592 | $ | (22 | ) | (4 | )% | $ | (61 | ) | (10 | )% | |||||||||
| Impact of selling price adjustment | — | — | 19 | — | (19 | ) | |||||||||||||||||||
| As adjusted | $ | 509 | $ | 531 | $ | 611 | $ | (22 | ) | (4 | )% | $ | (80 | ) | (13 | )% | |||||||||
| Granular Urea Segment | |||||||||||||||||||||||||
| Net sales | |||||||||||||||||||||||||
| As reported | $ | 788.0 | $ | 914.5 | $ | 924.6 | $ | (126.5 | ) | (14 | )% | $ | (10.1 | ) | (1 | )% | |||||||||
| Impact of selling price adjustment | — | — | 26.3 | — | (26.3 | ) | |||||||||||||||||||
| As adjusted | $ | 788.0 | $ | 914.5 | $ | 950.9 | $ | (126.5 | ) | (14 | )% | $ | (36.4 | ) | (4 | )% | |||||||||
| Gross margin | |||||||||||||||||||||||||
| As reported | $ | 318.5 | $ | 397.9 | $ | 514.5 | $ | (79.4 | ) | (20 | )% | $ | (116.6 | ) | (23 | )% | |||||||||
| Impact of selling price adjustment | — | — | 26.3 | — | (26.3 | ) | |||||||||||||||||||
| As adjusted | $ | 318.5 | $ | 397.9 | $ | 540.8 | $ | (79.4 | ) | (20 | )% | $ | (142.9 | ) | (26 | )% | |||||||||
| Gross margin percentage | |||||||||||||||||||||||||
| As reported | 40.4 | % | 43.5 | % | 55.6 | % | |||||||||||||||||||
| Impact of selling price adjustment | — | — | 1.3 | ||||||||||||||||||||||
| As adjusted | 40.4 | % | 43.5 | % | 56.9 | % | |||||||||||||||||||
| Average selling price per product ton | |||||||||||||||||||||||||
| As reported | $ | 320 | $ | 372 | $ | 369 | $ | (52 | ) | (14 | )% | $ | 3 | 1 | % | ||||||||||
| Impact of selling price adjustment | — | — | 10 | — | (10 | ) | |||||||||||||||||||
| As adjusted | $ | 320 | $ | 372 | $ | 379 | $ | (52 | ) | (14 | )% | $ | (7 | ) | (2 | )% |
CF INDUSTRIES HOLDINGS, INC.
Ammonia Segment
Our ammonia segment produces anhydrous ammonia (ammonia), which is our most concentrated nitrogen fertilizer product as it contains 82% nitrogen. The results of our ammonia segment consist of sales of ammonia to external customers. In addition, ammonia is the “basic” nitrogen product that we upgrade into other nitrogen products such as granular urea, UAN and AN. We produce ammonia at all of our nitrogen manufacturing complexes.
The following table presents summary operating data for our ammonia segment including the impact of the CF Fertilisers UK acquisition:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | 1,523.1 | $ | 1,576.3 | $ | 1,437.9 | $ | (53.2 | ) | (3 | )% | $ | 138.4 | 10 | % | ||||||||||
| Cost of sales | 883.7 | 983.2 | 656.5 | (99.5 | ) | (10 | )% | 326.7 | 50 | % | |||||||||||||||
| Gross margin | $ | 639.4 | $ | 593.1 | $ | 781.4 | $ | 46.3 | 8 | % | $ | (188.3 | ) | (24 | )% | ||||||||||
| Gross margin percentage(1) | 42.0 | % | 37.6 | % | 54.3 | % | 4.4 | % | (16.7 | )% | |||||||||||||||
| Sales volume by product tons (000s) | 2,995 | 2,969 | 2,427 | 26 | 1 | % | 542 | 22 | % | ||||||||||||||||
| Sales volume by nutrient tons (000s)(2) | 2,456 | 2,434 | 1,990 | 22 | 1 | % | 444 | 22 | % | ||||||||||||||||
| Average selling price per product ton | $ | 509 | $ | 531 | $ | 592 | $ | (22 | ) | (4 | )% | $ | (61 | ) | (10 | )% | |||||||||
| Average selling price per nutrient ton(2) | $ | 620 | $ | 648 | $ | 723 | $ | (28 | ) | (4 | )% | $ | (75 | ) | (10 | )% | |||||||||
| Gross margin per product ton | $ | 213 | $ | 200 | $ | 322 | $ | 13 | 7 | % | $ | (122 | ) | (38 | )% | ||||||||||
| Gross margin per nutrient ton(2) | $ | 260 | $ | 244 | $ | 393 | $ | 16 | 7 | % | $ | (149 | ) | (38 | )% | ||||||||||
| Depreciation and amortization | $ | 95.4 | $ | 69.0 | $ | 58.2 | $ | 26.4 | 38 | % | $ | 10.8 | 19 | % |
| (1) | Includes the impact of tons purchased from PLNL at market-based prices and sold to Mosaic, which began in the first quarter of 2014. |
| (2) | Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Total net sales in the ammonia segment decreased by $53.2 million, or 3%, to $1.52 billion in 2015 from $1.58 billion in 2014 due primarily to a 4% decrease in average selling prices partially offset by a 1% increase in sales volume. These results include the impact of the CF Fertilisers UK acquisition completed on July 31, 2015 which increased net sales by $38.4 million, or 2%. The remaining decrease in our ammonia net sales of $91.6 million, or 6%, was due to lower average selling prices and lower sales volume compared to 2014. The decrease in average ammonia selling prices from prior year levels is due primarily to weaker nitrogen fertilizer market conditions compared to the prior year as a weak fall application season combined with higher producer inventory levels and slowing demand from phosphate fertilizer producers weighed on prices at the end of 2015. At the end of 2014, the pricing environment was stronger due to a tighter supply after the strong North American 2014 spring season and a higher level of global production outages in 2014. Sales volumes are lower in 2015 due to the weak fall application season in North America as a result of poor weather conditions in the Midwest. The fall application season started late and then ended early in November due to snow in the Midwest.
Cost of Sales. Cost of sales per ton in our ammonia segment averaged $296 per ton in 2015, an 11% decrease over the average of $331 per ton in 2014. The decrease was due primarily to lower realized natural gas costs during 2015 partly offset by increased unrealized net mark-to-market losses on natural gas derivatives in 2015 compared to 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales. Net sales in the ammonia segment increased by $138.4 million, or 10%, to $1.58 billion in 2014 from $1.44 billion in 2013 due primarily to a 22% increase in sales volume, partially offset by a 10% decrease in average selling prices. The comparability of the ammonia segment net sales was impacted by the CFL selling price modifications in 2013. On an as adjusted basis, net sales in the ammonia segment increased by $93.6 million, or 6%, and average selling prices decreased 13%. The increased volume is due to a combination of attractive pricing compared to other forms of nitrogen, favorable weather conditions that resulted in an extended spring application season, and effective utilization of our terminal and logistics system to resupply in advance of periods of high demand. In addition, sales to Mosaic under our contract to supply ammonia
CF INDUSTRIES HOLDINGS, INC.
from our PLNL joint venture also increased sales volume compared to 2013. The decrease in average selling prices from 2013 levels is due primarily to the North American inventory levels that were higher entering 2014 as a result of the shortened 2013 fall ammonia application season caused by cold weather conditions. This was partially offset by a stronger pricing environment at the end of 2014 due to tighter supply after the strong 2014 spring season and a high level of global production outages in 2014.
Cost of Sales. Cost of sales in our ammonia segment averaged $331 per ton in 2014, a 23% increase over the $270 per ton in 2013 due primarily to higher natural gas costs and higher other production cost. Total gas costs for 2014 increased 16%, plus the impact of mark-to-market on natural gas derivatives increased ammonia segment gas costs by $42.9 million compared to 2013.
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 Courtright, Ontario; Donaldsonville, Louisiana; and Medicine Hat, Alberta nitrogen complexes.
The following table presents summary operating data for our granular urea segment:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | 788.0 | $ | 914.5 | $ | 924.6 | $ | (126.5 | ) | (14 | )% | $ | (10.1 | ) | (1 | )% | |||||||||
| Cost of sales | 469.5 | 516.6 | 410.1 | (47.1 | ) | (9 | )% | 106.5 | 26 | % | |||||||||||||||
| Gross margin | $ | 318.5 | $ | 397.9 | $ | 514.5 | $ | (79.4 | ) | (20 | )% | $ | (116.6 | ) | (23 | )% | |||||||||
| Gross margin percentage | 40.4 | % | 43.5 | % | 55.6 | % | (3.1 | )% | (12.1 | )% | |||||||||||||||
| Sales volume by product tons (000s) | 2,460 | 2,459 | 2,506 | 1 | — | % | (47 | ) | (2 | )% | |||||||||||||||
| Sales volume by nutrient tons (000s)(1) | 1,132 | 1,131 | 1,153 | 1 | — | % | (22 | ) | (2 | )% | |||||||||||||||
| Average selling price per product ton | $ | 320 | $ | 372 | $ | 369 | $ | (52 | ) | (14 | )% | $ | 3 | 1 | % | ||||||||||
| Average selling price per nutrient ton(1) | $ | 696 | $ | 809 | $ | 802 | $ | (113 | ) | (14 | )% | $ | 7 | 1 | % | ||||||||||
| Gross margin per product ton | $ | 129 | $ | 162 | $ | 205 | $ | (33 | ) | (20 | )% | $ | (43 | ) | (21 | )% | |||||||||
| Gross margin per nutrient ton(1) | $ | 281 | $ | 352 | $ | 446 | $ | (71 | ) | (20 | )% | $ | (94 | ) | (21 | )% | |||||||||
| Depreciation and amortization | $ | 50.5 | $ | 37.5 | $ | 37.4 | $ | 13.0 | 35 | % | $ | 0.1 | — | % |
| (1) | Granular urea represents 46% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Net sales in the granular urea segment decreased by $126.5 million, or 14%, for 2015 compared to 2014 due primarily to a 14% decrease in average selling prices. Average selling prices decreased to $320 per ton in 2015 compared to $372 per ton in 2014 primarily due to the excess global supply availability weighing on global nitrogen fertilizer selling prices. Granular urea exports from China were at a record high in 2015 and Russian exports have increased significantly while global capacity additions in 2015 further contributed to the excess global supply. Our sales volume was flat compared to the prior year as we offset weaker domestic demand with sales out of our new urea production at our Donaldsonville, Louisiana complex that came on line in November of 2015.
Cost of Sales. Cost of sales per ton in our granular urea segment averaged $191 per ton in 2015, a 9% decrease from the $210 per ton in 2014. The decrease was due primarily to lower realized natural gas costs partly offset by the impact of increased unrealized net mark-to-market losses on natural gas derivatives in 2015 compared to 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales. Net sales in the granular urea segment decreased by $10.1 million, or 1%, for 2014 compared to 2013 due primarily to a 2% decrease in sales volume, partially offset by a 1% increase in average selling prices. The comparability of the granular urea segment net sales was impacted by the CFL selling price modifications in 2013. On an as adjusted basis, net sales decreased by $36.4 million, or 4%, and average selling prices decreased 2%. Volumes were lower mainly due to our decision to reduce export volume as compared to 2013 due to anticipated robust domestic demand. The poor fall 2014 ammonia season combined with a tight ammonia supply contributed to increased demand at the end of 2014 and expectations for a strong 2015 spring season.
Cost of Sales. Cost of sales per ton in our granular urea segment averaged $210 per ton in 2014, a 28% increase over the $164 per ton in 2013 due primarily to increased natural gas costs which increased 16%, plus the impact of mark-to-market on natural gas derivatives which increased granular urea segment gas costs by $33.0 million compared to 2013.
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:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | 1,479.7 | $ | 1,669.8 | $ | 1,935.1 | $ | (190.1 | ) | (11 | )% | $ | (265.3 | ) | (14 | )% | |||||||||
| Cost of sales | 954.5 | 997.4 | 895.6 | (42.9 | ) | (4 | )% | 101.8 | 11 | % | |||||||||||||||
| Gross margin | $ | 525.2 | $ | 672.4 | $ | 1,039.5 | $ | (147.2 | ) | (22 | )% | $ | (367.1 | ) | (35 | )% | |||||||||
| Gross margin percentage | 35.5 | % | 40.3 | % | 53.7 | % | (4.8 | )% | (13.4 | )% | |||||||||||||||
| Sales volume by product tons (000s) | 5,865 | 6,092 | 6,383 | (227 | ) | (4 | )% | (291 | ) | (5 | )% | ||||||||||||||
| Sales volume by nutrient tons (000s)(1) | 1,854 | 1,925 | 2,015 | (71 | ) | (4 | )% | (90 | ) | (4 | )% | ||||||||||||||
| Average selling price per product ton | $ | 252 | $ | 274 | $ | 303 | $ | (22 | ) | (8 | )% | $ | (29 | ) | (10 | )% | |||||||||
| Average selling price per nutrient ton(1) | $ | 798 | $ | 867 | $ | 960 | $ | (69 | ) | (8 | )% | $ | (93 | ) | (10 | )% | |||||||||
| Gross margin per product ton | $ | 90 | $ | 110 | $ | 163 | $ | (20 | ) | (18 | )% | $ | (53 | ) | (33 | )% | |||||||||
| Gross margin per nutrient ton(1) | $ | 283 | $ | 349 | $ | 516 | $ | (66 | ) | (19 | )% | $ | (167 | ) | (32 | )% | |||||||||
| Depreciation and amortization | $ | 191.6 | $ | 179.3 | $ | 172.6 | $ | 12.3 | 7 | % | $ | 6.7 | 4 | % |
| (1) | UAN represents between 28% and 32% of nitrogen content, depending on the concentration specified by the customer. Nutrient tons represent the tons of nitrogen within the product tons. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Net sales in the UAN segment decreased $190.1 million, or 11%, in 2015 due primarily to an 8% decrease in average selling prices and a 4% decrease in sales volume. Average selling prices decreased to $252 per ton in 2015 compared to $274 in 2014. The decline in UAN average selling prices was due to excess global supply availability weighing on global nitrogen fertilizer selling prices. Sales volume was lower as customers delayed purchases in the declining pricing environment.
Cost of Sales. Cost of sales per ton in our UAN segment averaged $162 in 2015, a 1% decrease from the average of $164 per ton in 2014. The decrease was due primarily to lower realized natural gas costs partly offset by the impact of higher unrealized net mark-to-market losses on natural gas derivatives in 2015 compared to 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales. Net sales in the UAN segment decreased by $265.3 million, or 14%, due to a 10% decrease in average selling prices and a 5% decrease in sales volume. The decrease in UAN prices and volume was due primarily to the combination of customer preferences for attractively priced ammonia during the extended spring ammonia application season and lower production. Sales volume was negatively impacted by unplanned outages at the Woodward, Oklahoma nitrogen complex for maintenance and repairs of certain critical equipment.
Cost of Sales. Cost of sales per ton in our UAN segment averaged $164 in 2014, a 17% increase over the $140 per ton in 2013 due primarily to increased natural gas costs which increased 16%, plus the impact of mark-to-market on natural gas derivatives which increased UAN segment gas costs by $49.3 million compared to 2013.
CF INDUSTRIES HOLDINGS, INC.
AN Segment
Our AN segment produces ammonium nitrate (AN). AN is a nitrogen-based product with a nitrogen content between 29% and 35%. 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 including the impact of the CF Fertilisers UK acquisition:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | 294.0 | $ | 242.7 | $ | 215.1 | $ | 51.3 | 21 | % | $ | 27.6 | 13 | % | |||||||||||
| Cost of sales | 290.8 | 189.1 | 155.9 | 101.7 | 54 | % | 33.2 | 21 | % | ||||||||||||||||
| Gross margin | $ | 3.2 | $ | 53.6 | $ | 59.2 | $ | (50.4 | ) | (94 | )% | $ | (5.6 | ) | (9 | )% | |||||||||
| Gross margin percentage | 1.1 | % | 22.1 | % | 27.5 | % | (21.0 | )% | (5.4 | )% | |||||||||||||||
| Sales volume by product tons (000s) | 1,290 | 958 | 859 | 332 | 35 | % | 99 | 12 | % | ||||||||||||||||
| Sales volume by nutrient tons (000s)(1) | 437 | 329 | 295 | 108 | 33 | % | 34 | 12 | % | ||||||||||||||||
| Average selling price per product ton | $ | 228 | $ | 253 | $ | 250 | $ | (25 | ) | (10 | )% | $ | 3 | 1 | % | ||||||||||
| Average selling price per nutrient ton(1) | $ | 673 | $ | 738 | $ | 729 | $ | (65 | ) | (9 | )% | $ | 9 | 1 | % | ||||||||||
| Gross margin per product ton | $ | 2 | $ | 56 | $ | 69 | $ | (54 | ) | (96 | )% | $ | (13 | ) | (19 | )% | |||||||||
| Gross margin per nutrient ton(1) | $ | 7 | $ | 163 | $ | 201 | $ | (156 | ) | (96 | )% | $ | (38 | ) | (19 | )% | |||||||||
| Depreciation and amortization | $ | 65.6 | $ | 46.5 | $ | 41.0 | $ | 19.1 | 41 | % | $ | 5.5 | 13 | % |
| (1) | Nutrient tons represent the tons of nitrogen within the product tons. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Total net sales in our AN segment increased $51.3 million, or 21%, in 2015 from 2014 due primarily to a 35% increase in sales volume partially offset by a 10% decrease in average selling prices. These results include the impact of the CF Fertilisers UK acquisition completed on July 31, 2015, which increased net sales by $117.0 million, or 48%. The remaining decrease in our AN net sales of $65.7 million, or 27%, was due primarily to 18% lower average selling prices and 11% lower sales volume as a result of weak North American domestic demand.
Cost of Sales. Total cost of sales per ton in our AN segment averaged $226 in 2015. These results include the impact of the CF Fertilisers UK acquisition, which averaged $249 per ton and includes the revaluation of the CF Fertilisers UK inventory in acquisition accounting of $6.6 million in the second half of 2015. The remaining cost of sales per ton averaged $213 per ton, an 8% increase from the average of $197 per ton in 2014, due primarily to the impact of higher unrealized net mark-to-market losses on natural gas derivatives in 2015 compared to 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales. Net sales in our AN segment increased $27.6 million, or 13%, to $242.7 million in 2014 from $215.1 million in 2013 due primarily to a 12% increase in sales volume. AN sales volume increased due to higher agricultural grade sales, both domestic and exports.
Cost of Sales. Cost of sales per ton in our AN segment averaged $197 in 2014, a 9% increase over the $181 per ton in 2013 due primarily to increased natural gas costs.
CF INDUSTRIES HOLDINGS, INC.
Other Segment
This segment primarily includes the following products:
| • | Diesel exhaust fluid (DEF) is an aqueous urea solution typically made with 32.5% high-purity urea and 67.5% 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 product with a nitrogen content of 22.2%. |
| • | Compound fertilizer products (NPKs) are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium. |
The following table presents summary operating data for our Other segment, including the impact of the CF Fertilisers UK acquisition:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | 223.5 | $ | 171.5 | $ | 165.1 | $ | 52.0 | 30 | % | $ | 6.4 | 4 | % | |||||||||||
| Cost of sales | 162.7 | 120.1 | 114.4 | 42.6 | 35 | % | 5.7 | 5 | % | ||||||||||||||||
| Gross margin | $ | 60.8 | $ | 51.4 | $ | 50.7 | $ | 9.4 | 18 | % | $ | 0.7 | 1 | % | |||||||||||
| Gross margin percentage | 27.2 | % | 30.0 | % | 30.7 | % | (2.8 | )% | (0.7 | )% | |||||||||||||||
| Sales volume by product tons (000s) | 1,108 | 798 | 770 | 310 | 39 | % | 28 | 4 | % | ||||||||||||||||
| Sales volume by nutrient tons (000s)(1) | 215 | 155 | 151 | 60 | 39 | % | 4 | 3 | % | ||||||||||||||||
| Average selling price per product ton | $ | 202 | $ | 215 | $ | 214 | $ | (13 | ) | (6 | )% | $ | 1 | — | % | ||||||||||
| Average selling price per nutrient ton(1) | $ | 1,040 | $ | 1,106 | $ | 1,093 | $ | (66 | ) | (6 | )% | $ | 13 | 1 | % | ||||||||||
| Gross margin per product ton | $ | 55 | $ | 64 | $ | 66 | $ | (9 | ) | (14 | )% | $ | (2 | ) | (3 | )% | |||||||||
| Gross margin per nutrient ton(1) | $ | 283 | $ | 332 | $ | 336 | $ | (49 | ) | (15 | )% | $ | (4 | ) | (1 | )% | |||||||||
| Depreciation and amortization | $ | 35.2 | $ | 20.4 | $ | 19.2 | $ | 14.8 | 73 | % | $ | 1.2 | 6 | % |
| (1) | Nutrient tons represent the tons of nitrogen within the product tons. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Total net sales in our Other segment increased $52.0 million, or 30%, for 2014 due to a 39% increase in sales volume. These results include the impact of the CF Fertilisers UK acquisition completed on July 31, 2015, which increased net sales by $53.0 million, or 31%. The remaining decrease in our Other net sales of $1.0 million, or 1%, was due primarily to lower average selling prices, primarily urea liquor, due to overall weaker pricing conditions. This decrease was partially offset by an increase in our DEF average selling prices and sales volume as the North American DEF market continued to grow in response to stricter diesel engine emission requirements.
Cost of Sales. Cost of sales per ton in our Other segment averaged $147 in 2015, a 3% decrease from the $151 per ton in 2014 due primarily to lower realized natural gas costs in 2015 compared to 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales. Total net sales in our Other segment increased $6.4 million, or 4%, to $171.5 million in 2014 from $165.1 million in 2013 due to a 4% increase in sales volume, primarily DEF. DEF sales increased along with the growing North American DEF market in response to stricter engine emission requirements.
Cost of Sales. Cost of sales per ton in our Other segment averaged $151 in 2014, a 2% increase over the average of $148 per ton in 2013 due primarily to increased natural gas costs.
CF INDUSTRIES HOLDINGS, INC.
Phosphate Segment
On March 17, 2014, we sold our phosphate mining and manufacturing business to Mosaic pursuant to the terms of the definitive transaction agreement executed in October 2013, among the Company, CF Industries and Mosaic. The phosphate segment reflects the reported results of the phosphate business through March 17, 2014, plus the continuing sales of the phosphate inventory in the distribution network after March 17, 2014. The remaining phosphate inventory was sold in the second quarter of 2014; therefore, the phosphate segment does not have operating results subsequent to that quarter although the segment will continue to be included until the reporting of comparable period phosphate results ceases.
The following table presents summary operating data for our phosphate segment:
| Twelve months ended December 31, | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 v. 2014 | 2014 v. 2013 | |||||||||||||||||||||
| (in millions, except as noted) | |||||||||||||||||||||||||
| Net sales | $ | — | $ | 168.4 | $ | 796.9 | $ | (168.4 | ) | (100 | )% | $ | (628.5 | ) | (79 | )% | |||||||||
| Cost of sales | — | 158.3 | 722.0 | (158.3 | ) | (100 | )% | (563.7 | ) | (78 | )% | ||||||||||||||
| Gross margin | $ | — | $ | 10.1 | $ | 74.9 | $ | (10.1 | ) | (100 | )% | $ | (64.8 | ) | (87 | )% | |||||||||
| Gross margin percentage | — | % | 6.0 | % | 9.4 | % | (6.0 | )% | (3.4 | )% | |||||||||||||||
| Sales volume by product tons (000s)(1) | — | 487 | 1,857 | (487 | ) | (100 | )% | (1,370 | ) | (74 | )% | ||||||||||||||
| Average selling price per product ton | $ | — | $ | 346 | $ | 429 | $ | (346 | ) | (100 | )% | $ | (83 | ) | (19 | )% | |||||||||
| Gross margin per product ton | $ | — | $ | 21 | $ | 40 | $ | (21 | ) | (100 | )% | $ | (19 | ) | (48 | )% | |||||||||
| Depreciation, depletion and amortization(2) | $ | — | $ | — | $ | 42.3 | $ | — | N/M | $ | (42.3 | ) | (100 | )% |
| (1) | Represents DAP and MAP product sales. |
| (2) | On March 17, 2014, we sold our phosphate mining and manufacturing business. The assets and liabilities sold were classified as held for sale as of December 31, 2013; therefore, no depreciation, depletion or amortization was recorded in 2014 for the related property, plant and equipment. |
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales. Net sales in the phosphate segment decreased due to the sale of the phosphate business in March 2014.
Cost of Sales. Cost of sales per ton in the phosphate segment averaged $325 in 2014, a 16% decrease over the average of $389 per ton in 2013 due primarily to lower raw material costs.
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 and seasonal factors inherent in the business. 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 agreements.
During 2015, the following significant events have had or will have an impact on our cash and liquidity position.
| • | On July 31, 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for total consideration of $570.4 million. |
| • | On August 12, 2015, we announced that we agreed to enter into a strategic venture with CHS. The strategic venture commenced on February 1, 2016, at which time CHS purchased a minority equity interest in our subsidiary CFN for $2.8 billion in cash. |
| • | In September 2015, we issued $1.0 billion in senior notes with $250 million due in 2022, $500 million due in 2025 and $250 million due in 2027. |
| • | In 2015, we spent $1.7 billion on capital expenditures related to our capacity expansion projects. In November 2015, the new urea plant at the Donaldsonville, Louisiana complex came on line and is the first plant to be commissioned as part of our capacity expansion projects in North America. The UAN plant at Donaldsonville is expected to be commissioned in the first quarter of 2016. The remaining projects are expected to be on line in mid-2016. |
| • | In 2015, we repurchased 8.9 million shares for $527.2 million under the $1.0 billion share repurchase program authorized by our Board of Directors in August 2014. |
Further details regarding these events are provided below.
Cash and Cash Equivalents
We had cash and cash equivalents of $286.0 million and $2.0 billion as of December 31, 2015 and 2014, respectively. 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.
CF INDUSTRIES HOLDINGS, INC.
Share Repurchase Programs and Retirements
Our Board of Directors has authorized certain programs to repurchase shares of our common stock. Each of these programs is consistent in that repurchases may be made from time to time in the open market, through privately-negotiated transactions, through block transactions or otherwise. The manner, timing and amount of repurchases are determined by our management based on the evaluation of market conditions, stock price and other factors.
In the third quarter of 2012, our Board of Directors authorized a program to repurchase up to $3.0 billion of the common stock of CF Holdings through December 31, 2016 (the 2012 Program). The repurchases under the 2012 Program were completed in the second quarter of 2014. On August 6, 2014, our Board of Directors authorized a program to repurchase up to $1.0 billion of the common stock of CF Holdings through December 31, 2016 (the 2014 Program). As of December 31, 2015, there were approximately $100 million remaining repurchases under the 2014 Program.
The following table summarizes the share repurchases under the 2014 Program and the 2012 Program. The number of shares has been retroactively restated for all prior periods presented to reflect the five-for-one split of the Company’s common stock effected in the form of a stock dividend that was distributed on June 17, 2015.
| 2014 Program | 2012 Program | ||||||||||||||||||||
| Shares | Amounts | Average Price Per Share | Shares | Amounts | Average Price Per Share | ||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||
| Shares repurchased in 2013 | — | $ | — | $ | — | 36.7 | $ | 1,449.3 | $ | 39 | |||||||||||
| Shares repurchased in 2014: | |||||||||||||||||||||
| First quarter | — | $ | — | $ | — | 16.0 | $ | 793.9 | $ | 50 | |||||||||||
| Second quarter | — | — | — | 15.4 | 756.8 | 49 | |||||||||||||||
| Third quarter | — | — | — | — | — | — | |||||||||||||||
| Fourth quarter | 7.0 | 372.8 | 53 | — | — | — | |||||||||||||||
| Total shares repurchased in 2014 | 7.0 | 372.8 | 53 | 31.4 | 1,550.7 | 49 | |||||||||||||||
| Shares repurchased as of December 31, 2014 | 7.0 | $ | 372.8 | $ | 53 | 68.1 | $ | 3,000.0 | $ | 44 | |||||||||||
| Shares repurchased in 2015: | |||||||||||||||||||||
| First quarter | 4.1 | $ | 236.6 | $ | 58 | ||||||||||||||||
| Second quarter | 4.5 | 268.1 | 60 | ||||||||||||||||||
| Third quarter | 0.3 | 22.5 | 63 | ||||||||||||||||||
| Fourth quarter | — | — | — | ||||||||||||||||||
| Total shares repurchased in 2015 | 8.9 | 527.2 | 59 | ||||||||||||||||||
| Shares repurchased as of December 31, 2015 | 15.9 | $ | 900.0 | $ | 57 |
The retirement of the repurchased shares of our common stock was recognized as follows:
| • | In 2015, we retired 10.7 million shares of our common stock that had been repurchased. In our consolidated balance sheet, the retirement of these shares eliminated the recorded treasury stock and reduced retained earnings and paid-in-capital by $535.0 million and $62.0 million, respectively. |
| • | In 2014, we retired 38.6 million shares of our common stock that had been repurchased. In our consolidated balance sheet, the retirement of these shares eliminated the recorded treasury stock and reduced retained earnings and paid-in-capital by $1.68 billion and $220.3 million, respectively. |
| • | In 2013, we retired 32.3 million shares of our common stock that had been repurchased. In our consolidated balance sheet, the retirement of these shares eliminated the recorded treasury stock and reduced retained earnings and paid-in-capital by $1.07 billion and $180.1 million, respectively. |
CF INDUSTRIES HOLDINGS, INC.
Capacity Expansion Projects and Restricted Cash
In 2012, we announced that we would construct new ammonia and urea/UAN plants at our Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port Neal, Iowa complex. These new plants will increase our product mix flexibility at Donaldsonville, improve our ability to serve upper-Midwest urea customers from our Port Neal location, and allow us to benefit from the cost advantages of North American natural gas. In combination, these new facilities will be able to produce 2.1 million tons of gross ammonia per year, upgraded products ranging from 2.0 million to 2.7 million tons of granular urea per year and up to 1.8 million tons of UAN 32% solution per year, depending on our choice of product mix.
In November 2015, the new urea plant at the Donaldsonville, Louisiana complex came on line and was the first plant to be commissioned as part of our capacity expansion projects. The UAN plant at Donaldsonville is expected to be commissioned in the first quarter of 2016. The remaining plants are expected to be commissioned in mid-2016.
The estimated aggregate capital expenditures for both projects remains at approximately $4.6 billion and total cash spent to date on capital expenditures for the capacity expansion projects was $3.5 billion, including $1.7 billion in 2015. We have financed expenditures for the capacity expansion projects through available cash and cash equivalents, cash generated from operations and borrowings. In addition, $471.1 million was invested in the capacity expansion projects and not paid as of December 31, 2015 and recognized as liabilities in the consolidated balance sheets.
We have retained engineering and procurement services from an affiliate of ThyssenKrupp Industrial Solutions (ThyssenKrupp) for both capacity expansion projects. Under the terms of the engineering and procurement services contract, we have granted ThyssenKrupp a security interest in a restricted cash account and maintain a cash balance in that account equal to the cancellation fees for procurement services and equipment that would arise if we were to cancel the projects. The amount in the account will change over time based on procurement costs. As of December 31, 2015, there was $22.8 million held in this account. This restricted cash is excluded from our cash and cash equivalents and reported separately on our consolidated balance sheets and statements of cash flows.
Capital Spending
We make capital expenditures to sustain our asset base, to increase our capacity, to improve plant efficiency and to comply with various environmental, health and safety requirements. Capital expenditures totaled $2.47 billion in 2015 as compared to $1.81 billion in 2014. The increase in capital expenditures is primarily the result of the $422.4 million increase in cash spent on the two capacity expansion projects and increased capital expenditures on sustaining projects in 2015 compared to 2014.
Projected Capital Spending
We expect capital expenditures in 2016 to be approximately $1.8 billion, including $1.2 billion for the capacity expansion projects and $0.6 billion of sustaining and other capital expenditures. Planned capital expenditures are 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, 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.
CF Fertilisers UK Acquisition
On July 31, 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for total consideration of $570.4 million. The purchase price was funded with cash on hand. Beginning July 31, 2015, the operating results of CF Fertilisers UK became part of our consolidated financial results. See Note 4—Acquisitions and Divestitures to our consolidated financial statements included in Item 8 of this report for additional information.
Disposition of Phosphate Business and Ammonia Supply Agreements
In October 2013, we entered into a definitive transaction agreement with Mosaic to sell our entire phosphate mining and manufacturing business, which was located in Florida, for a purchase price of approximately $1.4 billion in cash and entered into two agreements to supply ammonia to Mosaic. The first agreement provides for us to supply between 600,000 and 800,000 tons of ammonia per year from our Donaldsonville, Louisiana complex beginning no later than 2017. The second agreement provides for us to supply approximately 300,000 tons of ammonia per year sourced from our PLNL joint venture, which began at the closing of the phosphate business sale transaction.
CF INDUSTRIES HOLDINGS, INC.
In 2014, we completed the sale of our phosphate mining and manufacturing business and recognized pre-tax and after-tax gains on the sale of the phosphate business of $750.1 million and $462.8 million, respectively. Under the terms of the definitive transaction agreement, the accounts receivable and accounts payable pertaining to the phosphate mining and manufacturing business and certain phosphate inventory held in distribution facilities were not sold to Mosaic in the transaction and were settled in the ordinary course.
The phosphate mining and manufacturing business assets we sold in the transaction included the Hardee County Phosphate Rock Mine; the Plant City Phosphate Complex; an ammonia terminal, phosphate warehouse and dock at the Port of Tampa; and the site of the former Bartow Phosphate Complex. In addition, Mosaic assumed certain liabilities related to the phosphate mining and manufacturing business, including responsibility for closure, water treatment and long-term maintenance and monitoring of the phosphogypsum stacks at the Plant City and Bartow complexes. Mosaic also received the value of the phosphate mining and manufacturing business asset retirement obligation trust and escrow funds totaling approximately $200 million. The assets and liabilities sold to Mosaic were classified as held for sale as of December 31, 2013; therefore, no depreciation, depletion or amortization was recorded in 2014 for the related property, plant and equipment.
See further discussion of this transaction in the section titled Items Affecting Comparability of Results.
Acquisitions of the Noncontrolling Interests in CFL
In 2012, we entered into agreements to acquire the 34% of CFL's common and preferred shares owned by Viterra, the product purchase agreement between CFL and Viterra, and the CFL common shares held by GROWMARK and La Coop fédérée for a total purchase price of approximately C$0.9 billion. In April 2013, we completed the acquisitions. Since CFL was previously a consolidated variable interest entity, the purchase price was recognized as follows: a $0.8 billion reduction in paid-in capital; a $0.1 billion deferred tax asset; and the removal of the CFL noncontrolling interest. CFL is now a wholly-owned subsidiary and we are entitled to purchase 100% of CFL's ammonia and granular urea production. For additional information, see Note 15—Noncontrolling Interest to our consolidated financial statements included in Item 8 of this report.
Repatriation of Foreign Earnings and Income Taxes
We have operations in Canada, the United Kingdom and interest in a joint venture in the Republic of Trinidad and Tobago. The estimated additional U.S. and foreign income taxes due upon repatriation of the earnings of these foreign operations to the U.S. are recognized in our consolidated financial statements as the earnings are recognized, unless the earnings are considered to be indefinitely reinvested based upon our current plans. However, the cash payment of the income tax liabilities associated with repatriation of earnings from foreign operations occurs at the time of the repatriation. As a result, the recognition of income tax expense related to foreign earnings, as applicable, and the payment of taxes resulting from repatriation of those earnings can occur in different periods. Cash balances held by our joint venture are maintained at sufficient levels to fund local operations as accumulated earnings are repatriated from the joint venture on a periodic basis.
As of December 31, 2015, approximately $44.7 million of our consolidated cash and cash equivalents balance of $286.0 million was held by our Canadian and United Kingdom subsidiaries. The cash balance held by the Canadian subsidiaries represents accumulated earnings of our foreign operations, which is not considered to be permanently reinvested. We have recognized deferred income taxes on these earnings for the foreign and domestic taxes that would be due upon their repatriation to the United States. As of December 31, 2015, the cash tax cost to repatriate the Canadian and United Kingdom cash balances would be approximately $3.2 million.
Impact of the Protecting Americans from Tax Hikes (PATH) Act of 2015
On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law and applies to tax years 2015 through 2019. One of the provisions of the PATH Act permits companies to deduct 50% of their capital expenditures for federal income tax purposes in the year qualifying assets were placed into service. As a result of this provision, for the year ended December 31, 2015, we recorded a federal tax receivable of approximately $120 million that is expected to result in a tax refund. This receivable is primarily associated with the new urea plant and related offsites that were placed into service at our Donaldsonville, Louisiana complex during November of 2015.
In 2016, we expect to place into service (i) the new UAN and ammonia plants at our Donaldsonville, Louisiana complex and (ii) the new urea and ammonia plants at our Port Neal, Iowa complex. Most of these assets will also qualify for 50% bonus depreciation for fiscal year 2016. As a result of these additional assets being placed into service in 2016, we expect to have significantly reduced cash tax payments in 2016.
CF INDUSTRIES HOLDINGS, INC.
Debt
Revolving Credit Agreement
We have a senior unsecured revolving credit agreement (as amended, the Revolving Credit Agreement) providing for a revolving credit facility of up to $2.0 billion with a maturity of September 18, 2020. Borrowings under the Revolving Credit Agreement may be used for working capital and general corporate purposes. CF Industries is a borrower, and CF Industries and CF Holdings are guarantors, under the Revolving Credit Agreement. Following the date of the closing of the transactions contemplated by the Combination Agreement (the Combination Agreement Closing Date), New CF would be required to be a borrower and a guarantor under the Revolving Credit Agreement, at which time CF Industries would cease to be a borrower under the Revolving Credit Agreement. CF Industries or, following the Combination Agreement Closing Date, New CF, may designate as borrowers one or more wholly-owned subsidiaries that are organized in the United States or any state thereof, the District of Columbia, England and Wales or the Netherlands.
Borrowings under the Revolving Credit Agreement may be denominated in dollars, Canadian dollars, Euro and Sterling, and bear interest at a per annum rate equal to an applicable eurocurrency rate or base rate plus, in either case, a specified margin, and the borrowers are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ (or, after the consummation of the transactions contemplated by the Combination Agreement on the Combination Agreement Closing Date, New CF’s) credit rating at the time.
Certain of CF Holdings’ U.S. subsidiaries, and, on and after the Combination Agreement Closing Date, certain of New CF’s and CF Holdings’ material wholly-owned U.S. and foreign subsidiaries, will be required to become guarantors of the obligations under the Revolving Credit Agreement if (i) such subsidiaries guarantee other debt for borrowed money (subject to specified exceptions) of CF Holdings, CF Industries or New CF in an aggregate principal amount in excess of $500 million or (ii) such subsidiaries are borrowers under, issuers of, or guarantors of specified debt obligations of CF Holdings, CF Industries or New CF, including debt under the Bridge Credit Agreement (as defined below).
The Revolving Credit Agreement contains customary representations and warranties and covenants for a financing of this type, including two financial maintenance covenants: (i) a requirement that the interest coverage ratio, as defined in the Revolving Credit Agreement, be maintained at a level of not less than 2.75 to 1.00 and (ii) a requirement that the total leverage ratio, as defined in the Revolving Credit Agreement, be maintained at a level of not greater than 3.75 to 1.00.
The Revolving Credit Agreement contains events of default (with notice requirements and cure periods, as applicable) customary for a financing of this type, including, but not limited to, non-payment of principal, interest or fees; inaccuracy of representations and warranties in any material respect; and failure to comply with specified covenants. Upon the occurrence and during the continuance of an event of default under the Revolving Credit Agreement and after any applicable cure period, subject to specified exceptions, the administrative agent may, and at the request of the requisite lenders is required to, accelerate the loans under the Revolving Credit Agreement or terminate the lenders’ commitments under the Revolving Credit Agreement.
As of December 31, 2015, we had excess borrowing capacity under the Revolving Credit Agreement of $1,995.1 million (net of outstanding letters of credit $4.9 million), and there were no borrowings outstanding as of December 31, 2015 or 2014. Maximum borrowings during the year ended December 31, 2015 were $367.0 million with a weighted-average annual interest rate of 1.47%. There were no borrowings during the years ended December 31, 2014 and 2013.
CF Fertilisers UK Credit Agreement
CF Fertilisers UK Group Limited as borrower and CF Fertilisers UK Limited as guarantor entered into a £40.0 million senior unsecured credit agreement, dated October 1, 2012 (the CF Fertilisers UK Credit Agreement), which provided for a revolving credit facility of up to £40.0 million with a maturity of five years.
On December 8, 2015, the CF Fertilisers UK Credit Agreement was canceled. There were no borrowings outstanding under the CF Fertilisers UK Credit Agreement as of its cancellation or any time during the year ended December 31, 2015.
CF INDUSTRIES HOLDINGS, INC.
Senior Notes
Long-term debt presented on our consolidated balance sheets as of December 31, 2015 and December 31, 2014 consisted of the following unsecured senior notes:
| December 31, 2015 | December 31, 2014 | |||||||
| (in millions) | ||||||||
| Public Senior Notes: | ||||||||
| 6.875% due 2018 | $ | 800.0 | $ | 800.0 | ||||
| 7.125% due 2020 | 800.0 | 800.0 | ||||||
| 3.450% due 2023 | 749.4 | 749.4 | ||||||
| 5.150% due 2034 | 746.3 | 746.2 | ||||||
| 4.950% due 2043 | 748.8 | 748.8 | ||||||
| 5.375% due 2044 | 748.2 | 748.1 | ||||||
| Private Senior Notes: | ||||||||
| 4.490% due 2022 | 250.0 | — | ||||||
| 4.930% due 2025 | 500.0 | — | ||||||
| 5.030% due 2027 | 250.0 | — | ||||||
| 5,592.7 | 4,592.5 | |||||||
| Less: Current portion | — | — | ||||||
| Net long-term debt | $ | 5,592.7 | $ | 4,592.5 |
Public Senior Notes
On April 23, 2010, CF Industries issued $800 million aggregate principal amount of 6.875% senior notes due May 1, 2018 and $800 million aggregate principal amount of 7.125% senior notes due May 1, 2020 (the 2018/2020 Public Senior Notes). Interest on the 2018/2020 Public Senior Notes is paid semiannually on May 1 and November 1 and the 2018/2020 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. As of December 31, 2015, the carrying value of the 2018/2020 Public Senior Notes was $1.60 billion and the fair value was approximately $1.78 billion.
On May 23, 2013, CF Industries issued $750 million aggregate principal amount of 3.450% senior notes due June 1, 2023 and $750 million aggregate principal amount of 4.950% senior notes due June 1, 2043 (the 2023/2043 Public Senior Notes). Interest on the 2023/2043 Public Senior Notes is paid semiannually on June 1 and December 1 and the 2023/2043 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. We received net proceeds from the issuance and sale of the 2023/2043 Public Senior Notes, after deducting underwriting discounts and offering expenses, of approximately $1.48 billion. As of December 31, 2015, the carrying value of the 2023/2043 Public Senior Notes was approximately $1.50 billion and the fair value was approximately $1.34 billion.
On March 11, 2014, CF Industries issued $750 million aggregate principal amount of 5.150% senior notes due March 15, 2034 and $750 million aggregate principal amount of 5.375% senior notes due March 15, 2044 (the 2034/2044 Public Senior Notes). Interest on the 2034/2044 Public Senior Notes is paid semiannually on March 15 and September 15 and the 2034/2044 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. We received net proceeds of $1.48 billion from the issuance and sale of the 2034/2044 Public Senior Notes, after deducting underwriting discounts and offering expenses. As of December 31, 2015, the carrying value of the 2034/2044 Public Senior Notes was approximately $1.49 billion and the fair value was approximately $1.35 billion.
Under the indentures (including the applicable supplemental indentures) governing the 2018/2020 Public Senior Notes, the 2023/2043 Public Senior Notes and the 2034/2044 Public Senior Notes (collectively, the Public Senior Notes), each series of the Public Senior Notes is guaranteed by CF Holdings. The indentures governing the Public Senior Notes contain customary events of default and covenants that limit, among other things, the ability of CF Holdings and its subsidiaries, including CF Industries, to incur liens on certain properties to secure debt.
CF INDUSTRIES HOLDINGS, INC.
If a Change of Control occurs together with a Ratings Downgrade (as both terms are defined under the indentures governing the Public Senior Notes), CF Industries would be required to offer to repurchase each series of Public Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. In addition, in the event that a subsidiary of ours, other than CF Industries, becomes a borrower or a guarantor under the Revolving Credit Agreement (or any renewal, replacement or refinancing thereof), such subsidiary would be required to become a guarantor of the Public Senior Notes, provided that such requirement will no longer apply with respect to the 2023/2043 Public Senior Notes and 2034/2044 Public Senior Notes following the repayment of the 2018/2020 Public Senior Notes or the subsidiaries of ours, other than CF Industries, otherwise becoming no longer subject to such a requirement to guarantee the 2018/2020 Public Senior Notes.
Private Senior Notes
On September 24, 2015, CF Industries issued in a private placement $250 million aggregate principal amount of 4.49% senior notes due October 15, 2022, $500.0 million aggregate principal amount of 4.93% senior notes due October 15, 2025 and $250 million aggregate principal amount of 5.03% senior notes due October 15, 2027 (the Private Senior Notes). CF Industries received proceeds of $1.0 billion from the issuance and sale of the Private Senior Notes. The Private Senior Notes are governed by the terms of a note purchase agreement (as amended, the Note Purchase Agreement) and are guaranteed by the Company. Interest on the Private Senior Notes is payable semiannually on April 15 and October 15.
CF Industries may prepay at any time all, or from time to time any part of, any series of the Private Senior Notes, in an amount not less than 5% of the aggregate principal amount of such series of the Private Senior Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a make-whole amount determined as specified in the Note Purchase Agreement. In the event of a Change in Control (as defined in the Note Purchase Agreement), each holder of the Private Senior Notes may require CF Industries to prepay the entire unpaid principal amount of the Private Senior Notes held by such holder at a price equal to 100% of the principal amount of such Private Senior Notes together with accrued and unpaid interest thereon, but without any make-whole amount or other premium.
All obligations under the Note Purchase Agreement are unsecured. On and after the Combination Agreement Closing Date, New CF would be required to guarantee the obligations under the Note Purchase Agreement. In addition, certain of the Company’s U.S. subsidiaries, and, on and after the Combination Agreement Closing Date, certain of New CF’s and the Company’s material wholly-owned U.S. and foreign subsidiaries, will be required to become guarantors of the obligations under the Note Purchase Agreement if (i) such subsidiaries guarantee other debt for borrowed money (subject to specified exceptions) of the Company, CF Industries or New CF in an aggregate principal amount in excess of $500 million or (ii) such subsidiaries are borrowers under, issuers of, or guarantors of specified debt obligations of the Company, CF Industries or New CF.
The Note Purchase Agreement contains customary representations and warranties and covenants for a financing of this type, including two financial maintenance covenants: (i) a requirement that the interest coverage ratio (as defined in the Note Purchase Agreement) be maintained at a level of not less than 2.75 to 1.00 and (ii) a requirement that the total leverage ratio (as defined in the Note Purchase Agreement) be maintained at a level of not greater than 3.75 to 1.00.
The Note Purchase Agreement contains events of default (with notice requirements and cure periods, as applicable) customary for a financing of this type, including, but not limited to, non-payment of principal, make-whole amounts, or interest; inaccuracy of representations and warranties in any material respect; and failure to comply with specified covenants. Upon the occurrence and during the continuance of an event of default under the Note Purchase Agreement and after any applicable cure period, subject to specified exceptions, the holder or holders of more than 50% in principal amount of the Private Senior Notes outstanding may declare all the Private Senior Notes then outstanding due and payable.
As of December 31, 2015, the carrying value of the Private Senior Notes was $1.0 billion and the fair value was approximately $0.99 billion.
Bridge Credit Agreement
On September 18, 2015, in connection with CF Holdings' proposed combination with the ENA Business of OCI (see Note 4—Acquisitions and Divestitures for additional information). CF Holdings, as a guarantor, and CF Industries, as the tranche A borrower, entered into a senior unsecured 364-Day Bridge Credit Agreement (as amended, the Bridge Credit Agreement). On the tranche B closing date, as defined in the Bridge Credit Agreement, New CF would become a party to the Bridge Credit Agreement as the tranche B borrower. The tranche B closing date would occur upon the satisfaction of specified conditions, including the occurrence of the closing under the Combination Agreement.
CF INDUSTRIES HOLDINGS, INC.
The Bridge Credit Agreement (1) provided for a single borrowing of a tranche A bridge loan of up to $1.0 billion that would have been used by CF Industries first to reduce amounts outstanding, if any, under the Revolving Credit Agreement and then for general corporate purposes; and (2) provides for a single borrowing of a tranche B bridge loan of up to $3.0 billion that may be used by New CF to pay the cash portion, if any, of the purchase price for specified equity interests to be acquired pursuant to the Combination Agreement; to consummate the refinancing of specified debt in connection with the transactions contemplated by the Combination Agreement; to pay fees and expenses in connection with the transactions contemplated by the Bridge Credit Agreement and the Combination Agreement; and in an amount of up to $1.3 billion for general corporate purposes.
The obligations of the lenders to fund the tranche A bridge loan under the Bridge Credit Agreement automatically terminated on September 24, 2015 in connection with the issuance of the Private Senior Notes. The obligations of the lenders to fund the tranche B bridge loan under the Bridge Credit Agreement are subject to customary limited conditionality and expire on August 6, 2016 (or no later than November 6, 2016, if extended pursuant to the terms thereof), or earlier as provided in the Bridge Credit Agreement. The tranche B bridge loan would mature on the date that is 364 days after the initial funding of such loan.
The Bridge Credit Agreement is voluntarily prepayable from time to time without premium or penalty and is mandatorily prepayable with, and the commitments thereunder will automatically be reduced by, the net cash proceeds from specified issuances of equity interests of CF Holdings and its subsidiaries and, on and after the Combination Agreement Closing Date, New CF and its subsidiaries, specified issuances or incurrences of debt by such persons and the net cash proceeds (including casualty insurance proceeds and condemnation awards) from specified dispositions of assets of such persons, with specified exceptions, including a right to reinvest such proceeds or awards in assets used or useful in the business of such persons and their subsidiaries. Commitments under the Bridge Credit Agreement will also be reduced by the amount of commitments under certain designated term loan facilities and by the amount of any specified debt as to which, on or prior to the tranche B closing date, arrangements have been made to permit such debt to remain outstanding in accordance with its terms or permanent repayment or termination has been effected by OCI and its affiliates.
Borrowings under the Bridge Credit Agreement will be denominated in dollars and bear interest at a per annum rate equal to an applicable LIBOR rate or base rate plus, in either case, a specified margin that depends on CF Holdings’ (or, after the consummation of the transactions contemplated by the Combination Agreement on the Combination Agreement Closing Date, New CF’s) credit rating at the time and that will increase by a specified amount every 90 days commencing with the 90th day after the date of the initial funding of the tranche B bridge loan through the date that is 270 days after the date of such initial funding. CF Industries is required to pay an undrawn commitment fee equal to 0.15% of the undrawn portion of the commitments under the Bridge Credit Agreement. CF Industries and New CF will also be required to pay duration fees ranging from 0.50% to 1.00% at specified intervals following the funding of the tranche B bridge loan.
Currently, CF Holdings and CF Industries are the only guarantors of the obligations under the Bridge Credit Agreement. Certain of CF Holdings’ U.S. subsidiaries, and, on and after the Combination Agreement Closing Date, certain of New CF’s and CF Holdings’ material wholly-owned U.S. and foreign subsidiaries, will be required to become guarantors of the obligations under the Bridge Credit Agreement if (i) such subsidiaries guarantee other debt for borrowed money (subject to specified exceptions) of CF Holdings, CF Industries or New CF in an aggregate principal amount in excess of $500 million or (ii) such subsidiaries are borrowers under, issuers of, or guarantors of specified debt obligations of CF Holdings, CF Industries or New CF, including debt under the Revolving Credit Agreement.
The representations, warranties, events of default and covenants contained in the Bridge Credit Agreement are substantially similar to those contained in the Revolving Credit Agreement.
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 sales value, are received shortly after the contract is executed, with any remaining unpaid amount generally being collected by the time the product is shipped, 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 the related orders are shipped and revenue is recognized. As of December 31, 2015 and 2014, we had $161.5 million and $325.4 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. If the level of sales under our forward sales programs were to decrease in the future, our cash received from customer advances could likely decrease and our accounts receivable balances would likely increase. Additionally, borrowing under the Revolving Credit Agreement could become necessary. Due to the volatility inherent in our business and changing customer expectations, we cannot estimate the amount of future forward sales activity.
Under our forward sales programs, a customer may delay delivery of an order due to weather conditions or other factors. These delays generally subject the customer to potential charges for storage or may be grounds for termination of the contract by us. Such a delay in scheduled shipment or termination of a forward sales contract due to a customer's inability or unwillingness to perform may negatively impact our reported sales.
Derivative Financial Instruments
We use derivative financial instruments to reduce our exposure to changes in prices for natural gas that will be purchased in the future. Natural gas is the largest and most volatile component of our manufacturing cost for nitrogen-based fertilizers. We also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. Because we use derivative instruments, volatility in reported quarterly earnings can result from the unrealized mark-to-market adjustments in the value of the derivatives.
Derivatives expose us to counterparties and the risks associated with their ability to meet the terms of the contracts. For derivatives that are in net asset positions, we are exposed to credit loss from nonperformance by the counterparties. We control our credit risk through the use of multiple counterparties that are multinational commercial banks, major financial institutions or large energy companies, and, in most cases, the use of International Swaps and Derivatives Association (ISDA) master netting arrangements.
The ISDA master netting arrangements to most of our derivative instruments contain credit-risk-related contingent features, such as cross default provisions and credit support requirements. In the event of certain defaults or a credit ratings downgrade, our counterparty may request early termination and net settlement of certain derivative trades or may require us to collateralize derivatives in a net liability position.
As of December 31, 2015 and 2014, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was $211.3 million and $47.1 million, respectively, which also approximates the fair value of the maximum amount of additional collateral that would need to be posted or assets needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. As of December 31, 2015 and 2014, we had open natural gas derivative contracts for 431.5 million MMBtus and 58.7 million MMBtus, respectively. At both December 31, 2015 and 2014, we had no cash collateral on deposit with counterparties for derivative contracts.
As of December 31, 2015 and 2014, the notional amount of our open foreign currency derivatives was €89.0 million and €209.0 million, respectively. None of these open foreign currency derivatives were designated as hedging instruments for accounting purposes.
Pension and Other Postretirement Benefits
We contributed $27.7 million to our pension plans in 2015. We expect to contribute approximately $39.8 million to our pension plans in 2016.
CF INDUSTRIES HOLDINGS, INC.
Cash Flows
Operating Activities
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net cash provided by operating activities in 2015 was $1.20 billion as compared to $1.41 billion in 2014, a decline of $204.9 million. This decline was primarily due to unfavorable working capital changes as customer advances were lower and inventory levels were higher in 2015 as compared to 2014 levels. Due to the declining pricing environment for nitrogen fertilizers in 2015, customers delayed making forward purchase commitments to purchase fertilizer in 2015, which reduced the amount of customer advances that were received, as compared to 2014 when fertilizer pricing was stronger. A poor fall ammonia application season contributed to higher inventory levels in 2015 as compared to 2014 when inventory levels declined.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net cash provided by operating activities in 2014 was $1.41 billion as compared to $1.47 billion in 2013. The $58.2 million decrease in net cash provided by operating activities resulted from lower earnings from core operating activities partially offset by favorable working capital changes in 2014 as compared to 2013. The lower earnings from core operating activities were primarily a result of the $741.7 million decline in gross margin. Partially offsetting the decline in gross margin, $638.6 million less was invested in net working capital than in 2013. Improvements in working capital during 2014 were due to a combination of higher customer advances, lower inventory levels and lower amounts paid for income taxes in 2014 as compared in 2013. Customer advances were higher in anticipation of a busy spring 2015 application season combined with tighter North American nitrogen fertilizer supply compared to 2013.
Investing Activities
Years Ended December 31, 2015, 2014 and 2013
Net cash used in investing activities was $2.98 billion in 2015 compared to $343.5 million in 2014 when we received proceeds of $1.37 billion from the sale of the phosphate business. During 2015, capital expenditures totaled $2.47 billion compared to $1.81 billion in 2014. The increase in capital expenditures is primarily related to the capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa. We also acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for a net cash payment of $551.6 million, which was net of cash acquired of $18.8 million. The $1.02 billion net cash used in investing activities in 2013 included $823.8 million in capital expenditures and $154.0 million transferred to a restricted cash account in support of the capacity expansion projects.
Financing Activities
Years Ended December 31, 2015, 2014 and 2013
Net cash provided by financing activities was $79.9 million in 2015 compared to net cash used in financing activities of $775.1 million and $980.3 million in 2014 and 2013, respectively. In 2015, we issued senior notes and received proceeds of $1.0 billion. In both 2014 and 2013, we issued senior notes and received proceeds of approximately $1.5 billion. Net cash used in financing activities in 2013 included $918.7 million to acquire the noncontrolling interests in CFL. Cash used for share repurchases in 2015, 2014 and 2013 was $556.3 million, $1.93 billion and $1.41 billion, respectively. We distributed $45.0 million to the noncontrolling interests in 2015, compared to $46.0 million in 2014 and $73.7 million in 2013. The decrease in distributions to noncontrolling interests in 2015 and 2014 as compared to 2013 was due to the acquisition of the noncontrolling interests in CFL in April 2013, which impacted the payments made in the first four months of 2013.
CF INDUSTRIES HOLDINGS, INC.
Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2015:
| 2016 | 2017 | 2018 | 2019 | 2020 | After 2020 | Total | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||
| Contractual Obligations | |||||||||||||||||||||||||||
| Debt | |||||||||||||||||||||||||||
| Long-term debt(1) | $ | — | $ | — | $ | 800.0 | $ | — | $ | 800.0 | $ | 4,000.0 | $ | 5,600.0 | |||||||||||||
| Interest payments on long-term debt(1) | 312.9 | 305.4 | 277.9 | 250.4 | 221.1 | 2,602.5 | 3,970.2 | ||||||||||||||||||||
| Other Obligations | |||||||||||||||||||||||||||
| Operating leases | 82.2 | 87.9 | 70.8 | 58.3 | 46.3 | 115.6 | 461.1 | ||||||||||||||||||||
| Equipment purchases and plant improvements | 142.5 | 23.6 | 1.5 | — | — | — | 167.6 | ||||||||||||||||||||
| Capacity expansion projects(2) | 953.2 | — | — | — | — | — | 953.2 | ||||||||||||||||||||
| Transportation(3) | 62.6 | 11.1 | 8.4 | 7.6 | 3.3 | — | 93.0 | ||||||||||||||||||||
| Purchase obligations(4)(5) | 641.6 | 335.5 | 109.5 | 38.1 | 37.2 | 148.3 | 1,310.2 | ||||||||||||||||||||
| Contributions to pension plans(6) | 39.8 | — | — | — | — | — | 39.8 | ||||||||||||||||||||
| Net operating loss settlement(7) | 10.8 | 10.6 | — | — | — | — | 21.4 | ||||||||||||||||||||
| Total(8)(9) | $ | 2,245.6 | $ | 774.1 | $ | 1,268.1 | $ | 354.4 | $ | 1,107.9 | $ | 6,866.4 | $ | 12,616.5 |
| (1) | Based on debt balances before discounts, offering expenses and interest rates as of December 31, 2015. |
| (2) | We expect to spend approximately $1.2 billion during 2016 related to the Donaldsonville and Port Neal capacity expansion projects expected to be completed in mid-2016. Contractual commitments do not include any amounts related to our foreign currency derivatives. For further information, see our previous discussion under Capacity Expansion Projects and Restricted Cash in the Liquidity and Capital Resources section of this discussion and analysis. |
| (3) | Includes anticipated expenditures under certain contracts to transport raw materials and finished product to and from our facilities. The majority of these arrangements allow for reductions in usage based on our actual operating rates. Amounts set forth above are based on projected normal operating rates and contracted or current spot prices, where applicable, as of December 31, 2015 and actual operating rates and prices may differ. |
| (4) | Includes minimum commitments to purchase natural gas based on prevailing market-based forward prices as of December 31, 2015. Purchase obligations do not include any amounts related to our natural gas derivatives. |
| (5) | Includes a commitment to purchase ammonia from PLNL at market-based prices under an agreement that expires in 2018. The annual commitment based on market prices as of December 31, 2015 is $87.1 million with a total remaining commitment of $239.6 million. |
| (6) | Represents the contributions we expect to make to our pension plans during 2016. Our pension funding policy is to contribute amounts sufficient to meet minimum legal funding requirements plus discretionary amounts that we may deem to be appropriate. |
| (7) | Represents the amounts we expect to pay to our pre-IPO owners in conjunction with the amended NOL Agreement and the 2013 settlement with the IRS. See Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report for further discussion of this matter. |
| (8) | Excludes $182.6 million of unrecognized tax benefits due to the uncertainty in the timing of potential tax payments. |
| (9) | Excludes $10.6 million of environmental remediation liabilities. |
CF INDUSTRIES HOLDINGS, INC.
Subsequent Event
On August 12, 2015, we announced that we agreed to enter into a strategic venture with CHS Inc. (CHS). The strategic venture commenced on February 1, 2016, at which time CHS purchased a minority equity interest in CF Industries Nitrogen, LLC (CFN), a subsidiary of CF Holdings, for $2.8 billion. CHS also began receiving deliveries from us pursuant to a supply agreement under which CHS has the right to purchase annually from us up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. CHS is entitled to semi-annual profit distributions from CFN as a result of its minority equity interest in CFN based generally on the volume of granular urea and UAN purchased by CHS pursuant to the supply agreement.
Off-Balance Sheet Arrangements
We have operating leases for certain property and equipment under various noncancelable agreements, the most significant of which are rail car leases and barge tow charters for the transportation of fertilizer. The rail car leases currently have minimum terms ranging from one to eleven years and the barge charter commitments range from two to seven years. We also have terminal and warehouse storage agreements for our distribution system, some of which contain minimum throughput requirements. The storage agreements contain minimum terms generally ranging from one to five years and commonly contain automatic annual renewal provisions thereafter unless canceled by either party. See Note 24—Leases in the notes to our consolidated financial statements included in Item 8 of this report for additional information concerning leases.
We do not have any other off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. U.S. GAAP requires that we select policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience, technological assessment, opinions of appropriate outside experts, and the most recent information available to us. Actual results may differ from these estimates. Changes in estimates that may have a material impact on our results are discussed in the context of the underlying financial statements to which they relate. The following discussion presents information about our most critical accounting policies and estimates.
Revenue Recognition
We recognize revenue when title and risk of loss are transferred to the customer, which can be at the plant gate, a distribution facility, a supplier location or a customer destination. In some cases, application of this policy requires that we make certain assumptions or estimates regarding a component of revenue, discounts and allowances, rebates, or creditworthiness of some of our customers. We base our estimates on historical experience, and the most recent information available to us, which can change as market conditions change. Amounts related to shipping and handling that are billed to our customers in sales transactions are classified as sales in our consolidated statements of operations. Sales incentives are reported as a reduction in net sales.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost and depreciation and amortization are computed using either the straight-line method or the units-of-production method over the lives of the assets. The lives used in computing depreciation and amortization expense are based on estimates of the period over which the assets will be of economic benefit to us. Estimated lives are based on historical experience, manufacturers' or engineering estimates, valuation or appraisal estimates and future business plans. We review the depreciable lives assigned to our property, plant and equipment on a periodic basis, and change our estimates to reflect the results of those reviews.
Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facilities during a full plant shutdown are referred to as plant turnarounds. We account for plant turnarounds under the deferral method, as opposed to the direct expense or built-in overhaul methods. Under the deferral method, expenditures related to turnarounds are capitalized in property, plant and equipment when incurred and amortized to production costs on a straight-line basis over the period benefited, which is until the next scheduled turnaround in up to 5 years. Should the estimated period between turnarounds change, we may be required to amortize the remaining cost of the turnaround over a shorter period, which would lead to higher depreciation and amortization costs. If we used the direct expense method,
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turnaround costs would be expensed as incurred. Scheduled replacements and overhauls of plant machinery and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalyst when a full plant shutdown occurs. Scheduled inspections are also conducted during a full plant shut down including required safety inspections, which entails the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Capitalized turnaround costs have been applied consistently in the periods presented. Internal employee costs and overhead amounts are not considered turnaround costs and are not capitalized. Turnaround costs are classified as investing activities in the consolidated statements of cash flows in the line entitled, "Additions to property, plant and equipment."
Inventory Valuation
We review our inventory account balances at least quarterly, and more frequently if required by market conditions, to determine whether the carrying amount of inventories exceeds their market value. This review process incorporates current industry and customer-specific trends, current operating plans, historical price activity, and selling prices expected to be realized. If the carrying amount of our inventory exceeds its estimated market value, we immediately adjust our carrying values accordingly. Upon inventory liquidation, if the actual sales prices are less than our most recent estimate of market value, additional losses would be recorded in the period of liquidation. Fixed production costs related to idle capacity are not included in the cost of inventory but are charged directly to cost of sales.
Asset Retirement Obligations
Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. AROs are initially recognized as incurred when sufficient information exists to estimate fair value. We have AROs at our nitrogen fertilizer manufacturing complexes and at our distribution and storage facilities that are conditional upon cessation of operations. These AROs include certain decommissioning activities as well as the removal and disposal of certain chemicals, waste materials, structures, equipment, vessels, piping and storage tanks. Also included are reclamation of land and the closure of certain effluent ponds. A liability has not been recorded for these conditional AROs. The most recent estimate of the aggregate cost of these AROs expressed in 2015 dollars is $66.4 million. We have not recorded a liability for these conditional AROs as of December 31, 2015 because we do not believe there is currently a reasonable basis for estimating a date or range of dates of cessation of operations at our nitrogen fertilizer manufacturing facilities or our distribution and storage facilities, which is necessary in order to estimate fair value. In reaching this conclusion, we considered the historical performance of each complex or facility and have taken into account factors such as planned maintenance, asset replacements and upgrades of plant and equipment, which if conducted as in the past, can extend the physical lives of our nitrogen manufacturing facilities and our distribution and storage facilities indefinitely. We also considered the possibility of changes in technology, risk of obsolescence, and availability of raw materials in arriving at our conclusion.
Recoverability of Long-Lived Assets, Goodwill and Investments in Unconsolidated Subsidiaries
We review the carrying values of our property, plant and equipment and other long-lived assets, including our finite-lived intangible assets, goodwill and investments in affiliates including joint ventures in accordance with U.S. GAAP in order to assess recoverability. Factors that we must estimate when performing impairment tests include sales volume, selling prices, raw material costs, operating rates, operating expenses, inflation, discount rates, exchange rates, tax rates and capital spending. Significant judgment is involved in estimating each of these factors, which include inherent uncertainties. The factors we use are consistent with those used in our internal planning process. The recoverability of the values associated with our goodwill, long-lived assets and investments in unconsolidated affiliates is dependent upon future operating performance of the specific businesses to which they are attributed. Certain of the operating assumptions are particularly sensitive to the cyclical nature of the fertilizer business. Adverse changes in demand for our products, increases in supply and the availability and costs of key raw materials could significantly affect the results of our review.
The recoverability and impairment tests of long-lived assets are required only when conditions exist that indicate the carrying value may not be recoverable. For goodwill, impairment tests are required at least annually, or more frequently if events or circumstances indicate that it may be impaired. Our investments in unconsolidated affiliates are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of our investment in any such affiliate is less than its carrying value, and the reduction in value is other than temporary, the reduction in value is recognized immediately in earnings.
Our joint venture investment in the Republic of Trinidad and Tobago operates an ammonia plant that relies on natural gas supplied by The National Gas Company of Trinidad and Tobago Limited (NGC). The joint venture is accounted for under the equity method and continues to generate positive income and cash flow. The financial results are included in the information in
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Note 8—Equity Method Investments to the consolidated financial statements. The joint venture has experienced natural gas curtailments in 2015 and 2014 due to major maintenance activities being conducted at upstream natural gas facilities and decreased gas exploration and development activity in the Republic of Trinidad and Tobago. These curtailments are expected to continue into the future. Commitments from NGC regarding the level of future availability and the related cost are not available. The future availability and cost of natural gas represents a significant assumption in the discounted cash flow models utilized for recoverability and impairment testing. In 2015, our equity in earnings of operating affiliates includes a $61.9 million impairment of our equity method investment in PLNL. No impairment was recognized in 2014 or 2013 related to this investment.
We evaluate goodwill for impairment in the fourth quarter at the reporting unit level, which in our case, are the ammonia, granular urea, UAN, AN and Other segments. Our evaluation can begin with a qualitative assessment of the factors that could impact the significant inputs used to estimate fair value. If after performing the qualitative assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, then no further testing is performed. However, if it is unclear based on the results of the qualitative test, we perform a quantitative test involving potentially two steps. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. We use an income-based valuation method, determining the present value of future cash flows, to estimate the fair value of a reporting unit. If the fair value of a reporting unit exceeds its positive carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is unnecessary. The second step of the goodwill impairment test, if needed, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. We recognize an impairment loss immediately to the extent the carrying value exceeds its implied fair value. We identified no goodwill impairment in our 2015, 2014 or 2013 reviews. As of December 31, 2015 and 2014, the carrying value of our goodwill was $2.39 billion and $2.09 billion, respectively.
Intangible assets identified in connection with our 2010 acquisition of Terra Industries Inc. consist of customer relationships, which are being amortized over a period of 18 years. The intangible assets identified in connection with our 2015 acquisition of CF Fertilisers UK consist of customer relationships and trade names which are being amortized over a remaining period of approximately 20 years. Our intangible assets are presented in other assets on the consolidated balance sheets. For additional information regarding our goodwill and other intangible assets, see Note 7—Goodwill and Other Intangible Assets.
Income Taxes
We recognize expenses, assets and liabilities for income taxes based on estimates of amounts that ultimately will be determined to be taxable or deductible in tax returns filed in various jurisdictions. U.S. income taxes are provided on that portion of the earnings of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. The final taxes paid are dependent upon many factors and judgments, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state and international tax audits. The judgments made at any point in time may change from previous conclusions based on the outcome of tax audits, as well as changes to, or further interpretations of, tax laws and regulations. We adjust income tax expense in the period in which these changes occur.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are projected to be recovered or settled. Realization of deferred tax assets is dependent on our ability to generate sufficient taxable income of an appropriate character in future periods. A valuation allowance is established if it is determined to be more likely than not that a deferred tax asset will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets. Interest and penalties related to unrecognized tax benefits are reported as interest expense and income tax expense, respectively.
A deferred income tax liability is recorded for income taxes that would result from the repatriation of the portion of the investment in our non-U.S. subsidiaries and joint venture that are considered to not be permanently reinvested. No deferred income tax liability is recorded for the remainder of our investment in non-U.S. subsidiaries and joint venture, which we believe to be indefinitely reinvested.
As a large commercial enterprise with international operations, our income tax expense and our effective tax rate may change from period to period due to many factors. The most significant of these factors are changes in tax legislation, changes in the geographic mix of earnings, the tax characteristics of our income, the ability to realize certain foreign tax credits and net operating losses, and the portion of the income of our foreign subsidiaries and joint venture that is expected to be remitted to the U.S. and be taxable. It is reasonably likely that these items will impact income tax expense, net income and liquidity in future periods.
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We operate in a number of countries and as a result have a significant amount of cross border transactions. The taxability of cross border transactions has received an increasing level of scrutiny among regulators in countries across the globe, including the countries in which we operate. The tax rules and regulations within the various countries in which we operate are complex and in many cases there is not symmetry between the rules of the various countries. As a result, there are instances where regulators within the countries involved in a cross border transaction may reach different conclusions regarding the taxability of the transaction in their respective jurisdictions based on the same set of facts and circumstances. We work closely with regulators to reach a common understanding and conclusion regarding the taxability of cross border transactions. However, there are instances where reaching a common understanding is not possible or practical. As of December 31, 2015, we have recorded a reserve for unrecognized tax benefits, including penalties and interest, of $182.6 million, which is related predominantly to certain potential tax exposures involving cross border transactions. This amount represents our best estimate of the amounts due based on our interpretations of the rules and the facts and circumstances of the transactions. Differences in interpretation of the tax laws, including agreements between governments surrounding our cross border transactions, can result in differences in taxes paid which may be higher or lower than our estimates.
Pension Assets and Liabilities
Pension assets and liabilities are affected by the fair value of plan assets, estimates of the expected return on plan assets, plan design, actuarial estimates and discount rates. Actual changes in the fair value of plan assets and differences between the actual return on plan assets and the expected return on plan assets affect the amount of pension expense ultimately recognized. Key assumptions that affect our projected benefit obligation (PBO) are discount rates and, in addition for our United Kingdom plans, an adjusted retail price index (RPI). Key assumptions affecting pension expense include discount rates, the expected long-term rate of return on assets and, in addition for our United Kingdom plans, RPI.
The December 31, 2015 PBO was computed based on a weighted-average discount rates of 4.3% for our North America plans and 3.8% for our United Kingdom plans, which were based on yields for high-quality (AA rated or better) fixed income debt securities that match the timing and amounts of expected benefit payments as of the measurement date of December 31. Declines in comparable bond yields would increase our PBO. The weighted-average discount rate used to calculate pension expense in 2015 was 4.0% for North America plans and 3.7% for United Kingdom plans. Our net benefit obligation, after deduction of plan assets, could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate. The 4.8% weighted-average expected long-term rate of return on assets used to calculate pension expense in 2015 for our North America plans is based on studies of actual rates of return achieved by equity and non-equity investments, both separately and in combination over historical holding periods. The 5.4% weighted-average expected long-term rate of return on assets used to calculate pension expense in 2015 for our United Kingdom plans is based on expected long-term performance of underlying investments, net of investment managers' fees. The 3.1% RPI used to calculate our United Kingdom plan PBO and pension expense is developed using the Bank of England implied retail price inflation curve based on the difference between yields on fixed interest and index-linked gilts adjusted for inflation risk.
For North America qualified pension plans, our PBO was $735.8 million as of December 31, 2015, which was $109.2 million higher than pension plan assets. If the discount rate used to compute the PBO for North America plans was lower or higher by 50 basis points, our PBO would have been $46.1 million higher or $41.8 million lower, respectively, than the amount previously discussed. If the discount rate used to compute the 2015 pension expense for North America plans decreased or increased by 50 basis points, the expense would have been approximately $3.5 million higher or $2.8 million lower, respectively, than the amount calculated. If the expected long-term rate of return on assets for North America plans was higher or lower by 50 basis points, pension expense for 2015 would have been $3.0 million lower or higher, respectively.
For our United Kingdom pension plans, our PBO was $562.7 million as of December 31, 2015 which was $148.7 million higher than pension plan assets. If the discount rate used to compute the United Kingdom PBO was lower or higher by 50 basis points, our PBO would have been $47.0 million higher or $42.9 million lower, respectively, than the amount previously discussed. If the discount rate used to compute the 2015 United Kingdom pension expense decreased or increased by 50 basis points, the expense would have been $0.5 million lower or higher, respectively. If the expected long-term rate of return on assets for our United Kingdom plans was higher or lower by 50 basis points, pension expense for 2015 would have been $0.8 million lower or higher, respectively. If RPI was higher or lower by 50 basis points, our PBO for United Kingdom plans would have been $28.3 million higher or $26.7 million lower, respectively and pension expense for 2015 would have been $0.5 million higher or lower, respectively.
See Note 11—Pension and Other Postretirement Benefits to our consolidated financial statements included in Item 8 of this report for further discussion of our pension plans.
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Consolidation
We consolidate all entities that we control by ownership of a majority interest and use the equity method to account for investments in affiliates that we do not consolidate, but for which we have the ability to exercise significant influence over operating and financial policies. Our consolidated net earnings include our share of the net earnings of these companies plus the amortization expense of certain tangible and intangible assets identified as part of purchase accounting. Our judgment regarding the level of influence over our equity method investments includes considering key factors such as ownership interest, representation on the Board of Directors, participation in policy decisions and material intercompany transactions. We regularly review for potential changes in the consolidation of variable interest entities.
We eliminate from our consolidated financial results all significant intercompany transactions.
Recent Accounting Pronouncements
See Note 3—New Accounting Standards to our consolidated financial statements included in Item 8 of this report for a discussion of recent accounting pronouncements.
Discussion of Seasonality Impacts on Operations
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. The strongest demand for our products occurs during the spring planting season, with a second period of strong demand following the fall harvest. We and our customers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring planting season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
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