Item 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 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


•	Industry Factors and Market Conditions


•	Items Affecting Comparability of Results


•	Financial Executive Summary


•	Results of Consolidated Operations


•	Year Ended December 31, 2016 Compared to Year Ended December 31, 2015


•	Year Ended December 31, 2015 Compared to Year Ended December 31, 2014


•	Operating Results by Business Segment


•	Liquidity and Capital Resources


•	Off-Balance Sheet Arrangements


•	Critical Accounting Policies and Estimates


•	Recent Accounting Pronouncements

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 manufacturing 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 and Yazoo City, Mississippi manufacturing facilities, and our United Kingdom manufacturing facilities in Billingham and Ince.

Our principal assets include:


•	four U.S. nitrogen fertilizer manufacturing facilities, located in Donaldsonville, Louisiana (the largest nitrogen fertilizer complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; and Woodward, Oklahoma. These facilities are owned by CF Industries Nitrogen, LLC (CFN), in which we own a majority equity interest and CHS Inc. (CHS) owns a minority equity interest. See Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information on our strategic venture with CHS;

•

four U.S. nitrogen fertilizer manufacturing facilities, located in Donaldsonville, Louisiana (the largest nitrogen fertilizer complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; and Woodward, Oklahoma. These facilities are owned by CF Industries Nitrogen, LLC (CFN), in which we own a majority equity interest and CHS Inc. (CHS) owns a minority equity interest. See Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information on our strategic venture with CHS;


•	an approximately 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;


•	two Canadian nitrogen fertilizer manufacturing facilities, located in Medicine Hat, Alberta (the largest nitrogen fertilizer complex in Canada) and Courtright, Ontario;


•	two United Kingdom nitrogen manufacturing complexes, located in Ince and Billingham;

CF INDUSTRIES HOLDINGS, INC.


•	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.

Industry Factors and Market Conditions

We operate in a highly competitive, global industry. Our operating results are influenced by a broad range of factors, including those outlined below.

Global Commodities

Our products are globally traded commodities and are subject to price competition. The customers for our products make their purchasing decisions principally on the basis of delivered price and, to a lesser extent, on customer service and product quality. The selling prices of our products fluctuate in response to global market conditions and changes in supply and demand.

Global Supply and Demand Factors

Historically, global fertilizer demand has been driven primarily by population growth, gross domestic product 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, Russia and Brazil, among others, often play a major role in shaping near-term market fundamentals. The economics of nitrogen-based 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 of and demand for these commodities.

Over the last decade, strong demand, high capacity utilization and increasing operating margins as a result of higher global nitrogen fertilizer prices stimulated global investment in nitrogen production facilities, which resulted in an increase in global nitrogen fertilizer production capacity. As a result, global nitrogen fertilizer supply increased faster than global nitrogen fertilizer demand, creating the current global oversupply in the market, and leading to lower nitrogen fertilizer selling prices. In addition, lower global production costs, driven by lower feedstock costs and foreign exchange rate changes, and reduced ocean freight costs have further contributed to the lower priced environment.

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 decade 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.

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.

2016 Market Conditions

Our 2016 results were impacted by excess global nitrogen supply and the resulting low nitrogen fertilizer selling prices. The U.S. Gulf is a major global fertilizer pricing point due to the volume of nitrogen fertilizer that trades there. Through most of 2016, nitrogen pricing at the U.S. Gulf declined, often trading below parity with other international pricing points due to excess global nitrogen supply as a result of continued imports from various exporting regions and decreased buyer interest. Seasonal decreases in agricultural demand combined with delayed customer purchasing activity resulted in multi-year lows in nitrogen fertilizer selling prices in the second half of the year. The average selling price for our products in 2016 was $217 per ton compared to $314 per ton in 2015, a decrease of 31%, resulting in a decrease in both net sales and gross margin of approximately $1.38 billion between the periods. The decline in selling prices has impacted each of our reportable segments. In addition, during periods of declining prices, customers tend to delay purchasing fertilizer in anticipation of prices in the future being lower than current prices, which has also negatively impacted our sales volume.

In the fourth quarter of 2016, the following developments impacted the global nitrogen fertilizer market:


•	A decline in Chinese nitrogen fertilizer operating rates due to rising production costs and lower global selling prices led to reduced Chinese urea supply availability in China and in international markets.


•	Higher global oil prices have resulted in higher effective natural gas prices in Europe and Russia, and this has contributed to increasing nitrogen fertilizer manufacturers' production costs in these regions.


•	Customers delayed purchasing into the fourth quarter of 2016, which reduced inventory levels in the supply chain. Increases in demand caused higher pricing as 2016 ended as customers began taking deliveries in anticipation of the 2017 spring application season.

These factors have led to an increase in global nitrogen pricing at the end of 2016. A significant amount of new nitrogen production capacity came on line in 2016, and additional production capacity is expected to come on line in 2017, including a significant increase in production capacity located in North America. The new capacity will further increase supply. We expect nitrogen fertilizer prices to rise going into the 2017 spring application season due to seasonal demand. However, we expect the lower priced environment to continue until global supply and demand become more balanced through a combination of continued demand growth and supply reductions as producers respond to lower realized margins by taking higher cost production facilities off line.

CF INDUSTRIES HOLDINGS, INC.

Items Affecting Comparability of Results

During the years ended December 31, 2016, 2015 and 2014, certain significant items impacted our financial results. The following table and related discussion outline these significant items and how they impacted the comparability of our financial results during these periods. For the year ended December 31, 2016, we reported a net loss attributable to common stockholders of $277 million, while in the years ended December 31, 2015 and 2014, we reported net earnings attributable to common stockholders of $700 million and $1.39 billion, respectively. Positive amounts in the table below are costs or expenses incurred, while negative amounts are income recognized in the periods presented.



		2016						2015						2014
		Pre-Tax			After-Tax			Pre-Tax			After-Tax			Pre-Tax			After-Tax
		(in millions)
Capacity Expansion Projects:
Expansion project depreciation	(1)	$	116		$	73		$	13		$	8		$	—		$	—
Start-up costs - Donaldsonville / Port Neal expansion plants	(1)	52			32			—			—			—			—
Expansion project expenses	(2)	73			46			51			32			31			19
Loss on foreign currency derivatives	(2)	—			—			22			13			38			24
Strategic Venture with CHS:
Noncontrolling interest	(7)	93			93			—			—			—			—
Loss on embedded derivative liability	(2)	23			14			—			—			—			—
Debt Restructuring:
Loss on debt extinguishment		167			105			—			—			—			—
Debt and revolver amendment fees	(3)	16			10			—			—			—			—
Private Senior Notes arrangement fees	(4)	2			1			—			—			—			—
CF Fertilisers UK Acquisition:
Gain on remeasurement of CF Fertilisers UK investment	(5)	—			—			(94		)	(94		)	—			—
Equity Method Investments:
Impairment of equity method investment in PLNL	(6)	134			134			62			62			—			—
Loss on sale of equity method investments	(5)	—			—			43			31			—			—
Transaction Costs and Termination of Agreement with OCI:
Transaction costs		179			96			57			37			—			—
Financing costs related to bridge loan commitment fee	(3)	28			18			6			4			—			—
Other Items:
Unrealized net mark-to-market (gain) loss on natural gas derivatives	(1)	(260		)	(163		)	176			111			79			50
Loss (gain) on foreign currency transactions including intercompany loans	(2)	93			93			(8		)	—			(15		)	(9		)
Gain on sale of phosphate business		—			—			—			—			(750		)	(463		)
Retirement benefit settlement charges	(1)(4)	—			—			—			—			13			8
Total Impact of Significant Items		$	716		$	552		$	328		$	204		$	(604	)	$	(371	)

(1) Included in cost of sales in our consolidated statement of operations.

(2) Included in other operating—net in our consolidated statement of operations.

(3) Included in interest expense in our consolidated statement of operations.

(4) Included in selling, general and administrative expenses in our consolidated statement of operations.

(5) Included in equity in earnings of non-operating affiliates in our consolidated statement of operations.

(6) Included in equity in (losses) earnings of operating affiliates in our consolidated statement of operations.

(7) Included in net earnings attributable to noncontrolling interests in our consolidated statement of operations.

CF INDUSTRIES HOLDINGS, INC.



	2016			2015			2014
Subtotals of Amounts Above by Line Item in the Consolidated Statements of Operations:	(in millions)
Cost of sales	$	(92	)	$	189		$	88
Selling, general and administrative expenses	2			—			4
Transaction costs	179			57			—
Other operating—net	189			65			54
Gain on sale of phosphate business	—			—			(750		)
Equity in (losses) earnings of operating affiliates	134			62			—
Interest expense	44			6			—
Loss on debt extinguishment	167			—			—
Equity in earnings of non-operating affiliates—net of taxes	—			(51		)	—
Net earnings attributable to noncontrolling interests	93			—			—
Total Impact of Significant Items	$	716		$	328		$	(604	)

The following describes the significant items that impacted the comparability of our financial results in 2016, 2015 and 2014. Descriptions of items below that refer to amounts in the table above, refer to the pre-tax amounts.

Capacity Expansion Projects

In 2016, we completed capacity expansion projects at Donaldsonville, Louisiana and Port Neal, Iowa. These projects, originally announced in 2012, included the construction of new ammonia, urea, and UAN plants at our Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port Neal, Iowa complex. These plants increased our overall production capacity by approximately 25%, improved our product mix flexibility at Donaldsonville, and improved our ability to serve upper-Midwest urea customers from our Port Neal location. In combination, these new facilities are 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. These new facilities will allow us to benefit from the cost advantages of North American natural gas.

At our Donaldsonville complex, the ammonia plant was placed in service in the fourth quarter of 2016, the UAN plant was placed in service in the first quarter of 2016 and the granular urea plant was placed in service during fourth quarter of 2015. At our Port Neal, Iowa complex, both the ammonia and granular urea plants were placed in service in the fourth quarter of 2016. The total capital cost of the capacity expansion projects was $5.2 billion. Depreciation expense pertaining to each of our capacity expansion plants commenced once the respective plant was placed in service. Total depreciation expense pertaining to our capacity expansion plants recognized in 2016 and 2015 was $116 million and $13 million, respectively.

Start-up costs of $52 million, which primarily relate to the cost of commencing production at the ammonia plants, were incurred in 2016. Expansion project expenses, consisting primarily of administrative costs and other project costs that do not qualify for capitalization, totaled $73 million, $51 million and $31 million in 2016, 2015 and 2014, respectively.

Losses on foreign currency derivatives of $22 million and $38 million in 2015 and 2014, respectively, relate to hedges of European euro denominated equipment purchased as part of the capacity expansion projects.

Strategic Venture with CHS

We commenced a strategic venture with CHS on February 1, 2016, at which time CHS purchased a minority equity interest in CFN for $2.8 billion. CHS also began receiving deliveries pursuant to a supply agreement under which CHS has the right to purchase annually from CFN up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. As a result of its minority equity interest in CFN, CHS is entitled to semi-annual cash distributions from CFN. We are also entitled to semi-annual cash distributions from CFN. The amounts of distributions from CFN to us and CHS are based generally on the profitability of CFN and determined based on the volume of granular urea and UAN sold by CFN to us and CHS pursuant to supply agreements, less a formula driven amount based primarily on the cost of natural gas used to produce the granular urea and UAN, and adjusted for the allocation of items such as operational efficiencies and overhead amounts. We began recognizing the noncontrolling interest pertaining to CHS’ ownership interest in CFN on February 1, 2016, and during 2016, we recognized $93 million of earnings attributable to the noncontrolling interest in CFN. See Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information regarding our strategic venture with CHS.

CF INDUSTRIES HOLDINGS, INC.

Under the terms of our strategic venture with CHS, if our credit rating is reduced below certain levels by two of three specified credit rating agencies, we are required to make a non-refundable yearly payment of $5 million to CHS. During 2016, our credit rating was reduced and we made the first payment to CHS. The payments continue on a yearly basis until the earlier of the date that our credit rating is upgraded to or above certain levels by two of three specified credit rating agencies or February 1, 2026. We recognized this term of the strategic venture as an embedded derivative and recorded a charge of $23 million in 2016 for this item.

Debt Restructuring

Due to the uncertain duration of the prevailing low nitrogen fertilizer selling price environment and in order to provide liquidity and covenant flexibility for the future, in the fourth quarter of 2016, we took certain steps with respect to the Revolving Credit Agreement and our senior notes due 2022, 2025 and 2027 (the Private Senior Notes). On November 21, 2016, we prepaid the $1.0 billion aggregate principal amount of the Private Senior Notes, and paid the related make-whole amount of approximately $170 million. We made the prepayment and make-whole payment using the proceeds from an offering of $1.25 billion aggregate principal amount of senior secured notes comprising $500 million aggregate principal amount of senior secured notes due 2021 and $750 million aggregate principal amount of senior secured notes due 2026 (collectively referred to as the “Senior Secured Notes”). We recognized $167 million of the $170 million cash make-whole payment on the Private Senior Notes as a debt extinguishment charge, with the $3 million remainder being a debt modification cost that will be amortized over the term of the Senior Secured Notes.

In connection with the completion of the offering of the Senior Secured Notes and the prepayment of the Private Senior Notes, certain amendments to the Revolving Credit Agreement became effective. The amendments included, among other things, changes in and additions to the financial and other covenants and a reduction in the size of the facility from $1.5 billion to $750 million.

In conjunction with our debt restructuring, including amendments to the Revolving Credit Agreement, we recognized $18 million of debt issuance and amendment fees in 2016. See further discussion below under "Liquidity and Capital Resources" and Note 12—Financing Agreements to our consolidated financial statements included in Item 8 of this report for additional information.

CF Fertilisers UK Acquisition

On July 31, 2015, 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 for total consideration of $570 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. This transaction increased our manufacturing capacity with the acquisition of CF Fertilisers UK’s nitrogen manufacturing complexes. 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 regarding the acquisition.

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. In the third quarter of 2015, upon the acquisition of the remaining 50% equity interest in CF Fertilisers UK, we recognized a $94 million gain on the remeasurement to fair value of our initial 50% equity investment in CF Fertilisers UK.

Our consolidated segment results for 2016 include the results of CF Fertilisers UK for the full year. Our consolidated segment results for 2015 include five months of CF Fertilisers UK results (from the July 31, 2015 acquisition date to December 31, 2015). As a result, the impact of the acquisition on the comparison of 2016 versus 2015 is the additional seven months of results in 2016 (the seven months ended July 31, 2016). To quantify and provide comparability of the impact of the acquisition on 2016 results as compared to 2015, the following table summarizes the sales volume, net sales, and gross margin of the CF Fertilisers UK business for the seven months ended July 31, 2016:

CF INDUSTRIES HOLDINGS, INC.



	CF Holdings Reportable Segments
CF Fertilisers UK Financial Results	Ammonia			AN			Other			Consolidated
	(dollars in millions)
Seven months ended July 31, 2016
Sales volume by product tons (000s)	100			737			468			1,305
Net sales	$	26		$	164		$	79		$	269
Cost of sales	22			155			74			251
Gross margin	$	4		$	9		$	5		$	18
Gross margin percentage	15.4		%	5.5		%	6.3		%	6.7		%

To quantify and provide comparability of the impact of the acquisition on 2015 results as compared to 2014, the following table summarizes the sales volume, net sales, and gross margin of the CF Fertilisers UK business for the five months ended December 31, 2015:



	CF Holdings Reportable Segments
CF Fertilisers UK Financial Results	Ammonia			AN			Other			Consolidated
	(dollars in millions)
Five months ended December 31, 2015
Sales volume by product tons (000s)	112			436			277			825
Net sales	$	38		$	117		$	53		$	208
Cost of sales	30			109			46			185
Gross margin	$	8		$	8		$	7		$	23
Gross margin percentage	20.1		%	7.2		%	14.0		%	11.3		%

Equity Method Investments

In 2016 and 2015, our equity in (losses) earnings of operating affiliates includes an impairment charge of our equity method investment in Point Lisas Nitrogen Limited (PLNL). PLNL is our joint venture investment in the Republic of Trinidad and Tobago and operates an ammonia plant that relies on natural gas supplied by the National Gas Company of Trinidad and Tobago Limited (NGC) pursuant to a gas sales contract (the NGC Contract). The joint venture has experienced curtailments in the supply of natural gas from NGC, which have reduced the ammonia production at PLNL. In 2016, NGC communicated to PLNL that it does not recognize the joint venture's exercise of its option to renew the NGC Contract for an additional five-year term beyond its current termination date in September 2018, and that any NGC commitment to supply gas beyond 2018 will need to be based on new agreements regarding volume and price. PLNL has initiated arbitration proceedings against NGC and asserted claims in connection with NGC’s failure to supply the contracted quantities of natural gas, and its refusal to recognize the joint venture’s exercise of its option to extend the NGC Contract. As part of our impairment assessment of our equity method investment in PLNL, we determined the carrying value exceeded the fair value and recognized a $134 million impairment charge in 2016. Previously, in 2015, we recognized an impairment charge of $62 million related to our equity method investment in PLNL. See Note 8—Equity Method Investments to our consolidated financial statements included in Item 8 of this report and "Critical Accounting Policies and Estimates" below, for additional information regarding our equity method investment in PLNL.

During 2015, we recognized a loss of $43 million related to the sale of our 50% investment in Keytrade AG and the sale of our 50% investment in an ammonia storage joint venture in Houston, Texas. See Note 8—Equity Method Investments to our consolidated financial statements included in Item 8 of this report for additional information regarding our equity method investments.

Transaction Costs and Termination of Agreement to Combine with Certain of OCI N.V.’s Businesses

On August 6, 2015, we entered into a definitive agreement (as amended, the Combination Agreement) to combine with the European, North American and global distribution businesses of OCI N.V. (OCI). On May 22, 2016, CF Holdings, OCI and the other parties to the Combination Agreement entered into a termination agreement (the Termination Agreement) under which the parties agreed to terminate the Combination Agreement by mutual written consent. Pursuant to the Termination Agreement, CF Holdings paid OCI a termination fee of $150 million. Under the Termination Agreement, the parties to the Combination Agreement also agreed to release each other from any and all claims, actions, obligations, liabilities, expenses and fees in connection with, arising out of or related to the Combination Agreement and all ancillary agreements contemplated thereby (other than the confidentiality agreement between CF Holdings and OCI) or the transactions contemplated therein or thereby.

CF INDUSTRIES HOLDINGS, INC.

In 2016, we incurred $179 million of transaction costs associated with the proposed combination with certain businesses of OCI and our strategic venture with CHS. This includes the $150 million termination fee paid to OCI in the second quarter of 2016, which is described above, and costs for various consulting and legal services. In 2015, we incurred $57 million of transaction costs associated with the proposed combination with certain businesses of OCI, our strategic venture with CHS, and the acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us.

On September 18, 2015, in connection with our proposed combination with OCI, we entered into a senior unsecured 364-day Bridge Credit Agreement (as amended, the Bridge Credit Agreement). Upon the termination of the Combination Agreement on May 22, 2016, the lenders' commitment under the Bridge Credit Agreement terminated automatically and we recognized $28 million in bridge loan commitment fees. In 2015, we recognized $6 million of fees related to the initiation of the bridge loan.

Other items

Unrealized net mark-to-market (gain) loss on natural gas derivatives - Natural gas is typically the largest and most volatile single component of the manufacturing cost for nitrogen-based products. We manage the risk of changes in natural gas prices through the use of derivative financial instruments. The derivatives that we use for this purpose are primarily natural gas fixed price swaps and natural gas options. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. This can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives. In 2016, 2015 and 2014, we recognized unrealized net mark-to-market (gains) losses on natural gas derivatives of $(260) million, $176 million and $79 million, respectively, which is reflected in cost of sales in our consolidated statements of operations.

Loss (gain) on foreign currency transactions including intercompany loans - In 2016 and 2015, we recognized losses (gains) of $93 million and ($8) million, respectively, from the impact of changes in foreign currency exchange rates on primarily British pound and Canadian dollar denominated intercompany loans that are not permanently invested. In 2014, we recognized a $15 million gain from the impact of changes in foreign currency exchange rates on Canadian dollar denominated intercompany loans that were not permanently invested.

Gain on sale of phosphate business - On March 17, 2014, we sold our phosphate mining and manufacturing business to The Mosaic Company (Mosaic) and recognized a pre-tax gain on the sale of the phosphate business of $750 million. 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. generally accepted accounting principles (U.S. GAAP), the phosphate mining and manufacturing business is not reported as discontinued operations in our consolidated statements of operations.

CF INDUSTRIES HOLDINGS, INC.

Financial Executive Summary


•	We reported a net loss attributable to common stockholders of $277 million in 2016, compared to net earnings attributable to common stockholders of $700 million in 2015, or a decline of $977 million.


•	Diluted net loss per share attributable to common stockholders was $1.19 per share in 2016 compared to diluted net earnings per share of $2.96 per share in 2015.


•	In 2016, we experienced lower net earnings attributable to common stockholders compared to 2015 due primarily to a lower gross margin as a result of lower average selling prices resulting from the excess global supply of nitrogen fertilizer, combined with the impact of several significant items which are discussed above under "Items Affecting Comparability of Results."


•	Our total gross margin declined by $707 million, or 46%, to $840 million in 2016 from $1.55 billion in 2015. The impact of the CF Fertilisers UK acquisition increased gross margin by $18 million, or 1%. The remaining decline in our gross margin of $725 million was due primarily to lower average selling prices and higher capacity expansion project related costs, partially offset by the impact of unrealized net mark-to-market gains on natural gas derivatives, increased sales volume, and lower physical natural gas costs and production costs:

•

Our total gross margin declined by $707 million, or 46%, to $840 million in 2016 from $1.55 billion in 2015. The impact of the CF Fertilisers UK acquisition increased gross margin by $18 million, or 1%. The remaining decline in our gross margin of $725 million was due primarily to lower average selling prices and higher capacity expansion project related costs, partially offset by the impact of unrealized net mark-to-market gains on natural gas derivatives, increased sales volume, and lower physical natural gas costs and production costs:


•	Average selling prices declined by 31%, which reduced gross margin by $1.38 billion.


•	Unrealized net mark-to-market gains on natural gas derivatives increased gross margin by $436 million as 2016 included a $260 million gain and 2015 included a $176 million loss.


•	Sales volume, primarily granular urea and UAN, increased by 14%, which increased gross margin by $215 million. Sales volume increased due to the completion of our capacity expansion project upgrading facilities at our Donaldsonville, Louisiana complex for granular urea and UAN.


•	Donaldsonville and Port Neal expansion project depreciation reduced gross margin by approximately$103 million. Start-up costs for the Donaldsonville ammonia and Port Neal ammonia and urea plants reduced gross margin by $52 million.


•	Lower physical natural gas costs in 2016 increased gross margin by $108 million as natural gas prices were lower in 2016, particularly in the first half of the year with high storage levels and strong production in North America. Natural gas prices rose towards the end of 2016.


•	Realized net mark-to-market losses on natural gas derivatives decreased gross margin by $62 million as 2016 included a $132 million loss and 2015 included a $70 million loss.


•	Lower production, distribution and freight costs, increased gross margin by approximately $104 million.


•	Our income tax (benefit) provision declined by $464 million to a net benefit of $68 million in 2016 from an income tax provision of $396 million for 2015 primarily as a result of the loss recognized in 2016. See Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report for additional information on our income tax benefit.


•	Selling, general and administrative expenses increased $4 million to $174 million in 2016 from $170 million in 2015. The increase was due primarily to the impact of the CF Fertilisers UK acquisition, partly offset by lower costs for corporate initiatives and lower intangible asset amortization expense.


•	Transaction costs incurred in 2016 of $179 million are associated primarily with the agreements pertaining to the proposed combination with certain businesses of OCI that was terminated on May 22, 2016 and our strategic venture with CHS. Transaction costs include the $150 million termination fee paid by CF Holdings to OCI in the second quarter of 2016 as a result of the termination of the Combination Agreement and costs for various consulting and legal services.

•

Transaction costs incurred in 2016 of $179 million are associated primarily with the agreements pertaining to the proposed combination with certain businesses of OCI that was terminated on May 22, 2016 and our strategic venture with CHS. Transaction costs include the $150 million termination fee paid by CF Holdings to OCI in the second quarter of 2016 as a result of the termination of the Combination Agreement and costs for various consulting and legal services.


•	Other operating—net increased by $116 million from $92 million in 2015 to $208 million in 2016. The increased expense was due primarily to realized and unrealized losses on foreign currency transactions primarily related to British pound sterling denominated intercompany debt that has not been permanently invested. The increased expense also reflects higher expansion project costs pertaining to our Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects that did not qualify for capitalization and the loss of $23 million representing the net fair value adjustments to an embedded derivative related to our strategic venture with CHS. These increases were partly offset by a decrease in realized and unrealized losses on foreign currency derivatives of $22 million.

•

Other operating—net increased by $116 million from $92 million in 2015 to $208 million in 2016. The increased expense was due primarily to realized and unrealized losses on foreign currency transactions primarily related to British pound sterling denominated intercompany debt that has not been permanently invested. The increased expense also reflects higher expansion project costs pertaining to our Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects that did not qualify for capitalization and the loss of $23 million representing the net fair value adjustments to an embedded derivative related to our strategic venture with CHS. These increases were partly offset by a decrease in realized and unrealized losses on foreign currency derivatives of $22 million.

CF INDUSTRIES HOLDINGS, INC.


•	Net interest expense increased by $64 million to $195 million in 2016 from $131 million in 2015. The $64 million increase in net interest expense was due primarily to the combination of higher debt levels due to the issuance of $1.0 billion of Private Senior Notes in September 2015 and debt amendment fees and accelerated amortization of debt issuance costs due to restructuring of our debt and the Revolving Credit Agreement in 2016. In 2016, we modified the Revolving Credit Agreement by reducing its size from $2.0 billion to $750 million and modifying certain covenants and other terms. As a result of these changes, we recognized $16 million of debt amendment fees and accelerated amortization of loan fees in interest expense. The increase in interest expense—net in 2016 also includes the amortization of capitalized Bridge Credit Agreement fees of $28 million pertaining to the bridge loan for our proposed combination with certain of the OCI businesses. We also recorded capitalized interest of $166 million in 2016 related primarily to our capacity expansion projects compared to $154 million in 2015.

•

Net interest expense increased by $64 million to $195 million in 2016 from $131 million in 2015. The $64 million increase in net interest expense was due primarily to the combination of higher debt levels due to the issuance of $1.0 billion of Private Senior Notes in September 2015 and debt amendment fees and accelerated amortization of debt issuance costs due to restructuring of our debt and the Revolving Credit Agreement in 2016. In 2016, we modified the Revolving Credit Agreement by reducing its size from $2.0 billion to $750 million and modifying certain covenants and other terms. As a result of these changes, we recognized $16 million of debt amendment fees and accelerated amortization of loan fees in interest expense. The increase in interest expense—net in 2016 also includes the amortization of capitalized Bridge Credit Agreement fees of $28 million pertaining to the bridge loan for our proposed combination with certain of the OCI businesses. We also recorded capitalized interest of $166 million in 2016 related primarily to our capacity expansion projects compared to $154 million in 2015.


•	In 2016, we prepaid in full the outstanding $1.0 billion aggregate principal amount of our Private Senior Notes and recognized a loss on debt extinguishment of $167 million. The prepayment of $1.18 billion included the payment of a make-whole amount of approximately $170 million and accrued interest. Loss on debt extinguishment of $167 million on our consolidated statement of operations excludes $3 million of the make-whole payment, which was accounted for as a modification and recognized on our consolidated balance sheet as deferred financing fees, a reduction of long-term debt, and is being amortized using the effective interest rate method over the term of the Senior Secured Notes.

•

In 2016, we prepaid in full the outstanding $1.0 billion aggregate principal amount of our Private Senior Notes and recognized a loss on debt extinguishment of $167 million. The prepayment of $1.18 billion included the payment of a make-whole amount of approximately $170 million and accrued interest. Loss on debt extinguishment of $167 million on our consolidated statement of operations excludes $3 million of the make-whole payment, which was accounted for as a modification and recognized on our consolidated balance sheet as deferred financing fees, a reduction of long-term debt, and is being amortized using the effective interest rate method over the term of the Senior Secured Notes.


•	Net cash provided by operating activities in 2016 was $617 million as compared to $1.21 billion in 2015, a decline of $590 million. The decline resulted primarily from lower net earnings during 2016 due to lower average selling prices from excess global nitrogen supply, partially offset by lower amounts of cash used for working capital purposes. Lower working capital levels in accounts receivable and inventory, plus lower amounts paid for income taxes and certain income tax refunds received in 2016, contributed to the reduction in cash used for working capital. Favorable changes in working capital also included a greater proportion of sales was paid in 2016 as compared to the prior year period as we entered 2016 with a lower level of customer advances than in 2015 due to customers’ hesitancy to enter into prepaid contracts in a declining fertilizer price environment.

•

Net cash provided by operating activities in 2016 was $617 million as compared to $1.21 billion in 2015, a decline of $590 million. The decline resulted primarily from lower net earnings during 2016 due to lower average selling prices from excess global nitrogen supply, partially offset by lower amounts of cash used for working capital purposes. Lower working capital levels in accounts receivable and inventory, plus lower amounts paid for income taxes and certain income tax refunds received in 2016, contributed to the reduction in cash used for working capital. Favorable changes in working capital also included a greater proportion of sales was paid in 2016 as compared to the prior year period as we entered 2016 with a lower level of customer advances than in 2015 due to customers’ hesitancy to enter into prepaid contracts in a declining fertilizer price environment.


•	Net cash used in investing activities was $2.18 billion in 2016 compared to $2.98 billion in 2015. This decrease is due primarily to the 2015 acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for a net cash payment of $552 million, which was net of cash acquired of $18 million. This decrease was also attributable in part to a decline in capital expenditures related primarily to the capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa. During 2016, capital expenditures totaled $2.21 billion compared to $2.47 billion in 2015.

•


•	Net cash provided by financing activities was $2.44 billion in 2016 compared to $77 million in 2015. In 2016, CHS purchased a minority equity interest in CFN for $2.8 billion. We distributed $119 million to the noncontrolling interests, including CHS, in 2016, compared to $45 million in 2015. In 2016, we received proceeds of approximately $1.24 billion, net of discounts, from the issuance of the Senior Secured Notes which were used to fund the prepayment of the $1.0 billion of Private Senior Notes and the related make-whole payment of $170 million. No share repurchases were made during 2016 compared to 8.9 million shares repurchased for $556 million in cash in 2015. Dividends paid on common stock were $280 million and $282 million in 2016 and 2015, respectively.

Net cash provided by financing activities was $2.44 billion in 2016 compared to $77 million in 2015. In 2016, CHS purchased a minority equity interest in CFN for $2.8 billion. We distributed $119 million to the noncontrolling interests, including CHS, in 2016, compared to $45 million in 2015. In 2016, we received proceeds of approximately $1.24 billion, net of discounts, from the issuance of the Senior Secured Notes which were used to fund the prepayment of the $1.0 billion of Private Senior Notes and the related make-whole payment of $170 million. No share repurchases were made during 2016 compared to 8.9 million shares repurchased for $556 million in cash in 2015. Dividends paid on common stock were $280 million and $282 million in 2016 and 2015, respectively.

CF INDUSTRIES HOLDINGS, INC.

Results of Consolidated Operations

The following table presents our consolidated results of operations and supplemental data:



	Twelve months ended December 31,
	2016			2015			2014			2016 v. 2015					2015 v. 2014
	(in millions, except as noted)
Net sales	$	3,685		$	4,308		$	4,743		$	(623	)	(14	)%	$	(435	)	(9	)%
Cost of sales (COS)	2,845			2,761			2,965			84			3	%	(204		)	(7	)%
Gross margin	840			1,547			1,778			(707		)	(46	)%	(231		)	(13	)%
Gross margin percentage	22.8		%	35.9		%	37.5		%	(13.1		)%			(1.6		)%
Selling, general and administrative expenses	174			170			152			4			2	%	18			12	%
Transaction costs	179			57			—			122			214	%	57			N/M
Other operating—net	208			92			53			116			126	%	39			74	%
Total other operating costs and expenses	561			319			205			242			76	%	114			56	%
Gain on sale of phosphate business	—			—			750			—			N/M		(750		)	(100	)%
Equity in (losses) earnings of operating affiliates	(145		)	(35		)	43			(110		)	N/M		(78		)	N/M
Operating earnings	134			1,193			2,366			(1,059		)	(89	)%	(1,173		)	(50	)%
Interest expense—net	195			131			177			64			49	%	(46		)	(26	)%
Loss on debt extinguishment	167			—			—			167			N/M		—			N/M
Other non-operating—net	(2		)	4			2			(6		)	N/M		2			100	%
(Loss) earnings before income taxes and equity in earnings of non-operating affiliates	(226		)	1,058			2,187			(1,284		)	N/M		(1,129		)	(52	)%
Income tax (benefit) provision	(68		)	396			773			(464		)	N/M		(377		)	(49	)%
Equity in earnings of non-operating affiliates—net of taxes	—			72			23			(72		)	(100	)%	49			213	%
Net (loss) earnings	(158		)	734			1,437			(892		)	N/M		(703		)	(49	)%
Less: Net earnings attributable to noncontrolling interests	119			34			47			85			250	%	(13		)	(28	)%
Net (loss) earnings attributable to common stockholders	$	(277	)	$	700		$	1,390		$	(977	)	N/M		$	(690	)	(50	)%
Diluted net earnings (loss) per share attributable to common stockholders	$	(1.19	)	$	2.96		$	5.42		$	(4.15	)	N/M		$	(2.46	)	(45	)%
Diluted weighted-average common shares outstanding	233.1			236.1			256.7			(3.0		)	(1	)%	(20.6		)	(8	)%
Dividends declared per common share	$	1.20		$	1.20		$	1.00		$	—				$	0.20
Natural Gas Supplemental Data (per MMBtu)
Natural gas costs in COS(1)	$	2.61		$	3.00		$	4.46		$	(0.39	)	(13	)%	$	(1.46	)	(33	)%
Realized derivatives loss (gain) in COS(2)	0.46			0.28			(0.24		)	0.18			64	%	0.52			N/M
Cost of natural gas in COS	$	3.07		$	3.28		$	4.22		$	(0.21	)	(6	)%	$	(0.94	)	(22	)%
Average daily market price of natural gas Henry Hub (Louisiana)	$	2.48		$	2.61		$	4.32		$	(0.13	)	(5	)%	$	(1.71	)	(40	)%
Average daily market price of natural gas National Balancing Point (UK)(3)	$	4.66		$	6.53		$	—		$	(1.87	)	(29	)%	$	6.53		N/M
Unrealized net mark-to-market (gain) loss on natural gas derivatives	$	(260	)	$	176		$	79		$	(436	)	N/M		$	97		123	%
Capital expenditures	$	2,211		$	2,469		$	1,809		$	(258	)	(10	)%	$	660		36	%
Sales volume by product tons (000s)	16,957			13,718			13,763			3,239			24	%	(45		)	—	%
Production volume by product tons (000s):
Ammonia(4)	8,307			7,673			7,011			634			8	%	662			9	%
Granular urea	3,368			2,520			2,347			848			34	%	173			7	%
UAN (32%)	6,698			5,888			5,939			810			14	%	(51		)	(1	)%
AN	1,845			1,283			950			562			44	%	333			35	%

N/M—Not Meaningful


(1)	Includes the cost of natural gas that is included in cost of sales during the period under the first-in, first-out (FIFO) inventory cost method.

CF INDUSTRIES HOLDINGS, INC.


(2)	Includes realized gains and losses on natural gas derivatives settled during the period. Excludes unrealized mark-to-market gains and losses on natural gas derivatives.


(3)	Amount represents average daily market price for the full year 2015 and 2016.


(4)	Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN, or AN.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Consolidated Operating Results

Our reportable segments consist of ammonia, granular urea, UAN, AN and Other and include the results of CF Fertilisers UK from July 31, 2015, the date we acquired the remaining 50% equity interest in CF Fertilisers UK.

We reported a net loss attributable to common stockholders of $277 million in 2016, compared to net earnings attributable to common stockholders of $700 million in 2015, a decline of $977 million. We experienced lower net earnings attributable to common stockholders in 2016 compared to 2015 due primarily to a lower gross margin as a result of lower average selling prices resulting from excess global nitrogen supply, combined with a number of significant items that are described above under "Overview of CF Holdings—Items Affecting Comparability of Results."


•	Average selling prices declined by 31% in 2016 compared to 2015, which reduced gross margin by $1.38 billion.


•	Unrealized net mark-to-market gains on natural gas derivatives increased gross margin by $436 million as 2016 included a $260 million gain and 2015 included a $176 million loss.


•	Sales volume, primarily granular urea and UAN, increased by 14%, which increased gross margin by $215 million. Sales volume increased due to the completion of our capacity expansion project upgrading facilities at our Donaldsonville, Louisiana complex for granular urea and UAN.


•	Donaldsonville and Port Neal expansion project depreciation reduced gross margin by approximately $103 million. Start-up costs for the Donaldsonville ammonia and Port Neal ammonia and urea plants reduced gross margin by $52 million.


•	Lower physical natural gas costs in 2016 increased gross margin by $108 million as natural gas prices were lower in 2016, particularly in the first half of the year with high storage levels and strong production in North America. Natural gas prices rose towards the end of 2016.


•	Realized net mark-to-market losses on natural gas derivatives decreased gross margin by $62 million as 2016 included a $132 million loss and 2015 included a $70 million loss.


•	Lower production, distribution and freight costs increased gross margin by approximately $104 million.

During 2016, primarily as a result of lower net earnings, our income tax (benefit) provision declined by $464 million to a net benefit of $68 million from an income tax provision of $396 million for 2015. See Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report for additional information on our income tax benefit.

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.

Our total net sales decreased $623 million, or 14%, to $3.69 billion in 2016 compared to $4.31 billion in 2015. The impact of the CF Fertilisers UK acquisition increased our net sales by $269 million, or 6%. The remaining decline in our net sales of $892 million, or 21%, was due to a 31% decline in average selling prices partially offset by a 14% increase in sales volume.

CF INDUSTRIES HOLDINGS, INC.

Average selling prices, excluding the CF Fertilisers UK acquisition impact, were $218 per ton in 2016 compared to $318 per ton in 2015 due primarily to lower selling prices across all products. Selling prices were negatively impacted by excess global nitrogen supply. Pricing for nitrogen fertilizer products in the U.S. Gulf declined during most of 2016, often trading below parity with other international pricing points, as a result of continued imports from various exporting regions and decreased buyer interest. Seasonal decreases in agricultural demand combined with delayed customer purchasing activity resulted in multi-year lows in nitrogen fertilizer selling prices in the second half of the year.

Our total sales volume increased by 24% from 2015 to 2016. The impact of the CF Fertilisers UK acquisition increased our sales volume by 10%. The remaining increase in our sales volume of 14% was due primarily to greater granular urea and UAN volume available for sale due to our completed capacity expansion projects, partly offset by lower ammonia sales volume due to lower demand in North America during the fall application season. In addition, our ammonia sales volumes were lower in 2016 as we upgraded existing ammonia production as a result of our granular urea and UAN capacity expansion projects coming on line at our Donaldsonville, Louisiana complex.

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.

Our cost of sales increased $84 million, or 3%, from 2015 to 2016. The overall increase in cost of sales is due primarily to the impact of the CF Fertilisers UK acquisition, which increased cost of sales by $251 million, or 9%, as 2016 includes a full year of CF Fertilisers UK results and 2015 includes five months of CF Fertilisers UK results. The remaining decrease in our cost of sales of $167 million, or 6%, was due primarily to the combination of unrealized net mark-to-market gains on natural gas derivatives and lower realized natural gas costs, partly offset by higher capacity expansion project related costs. Cost of sales includes a $260 million unrealized net mark-to-market gain in 2016 as compared to a $176 million unrealized net mark-to-market loss in 2015. Realized natural gas costs, including the impact of lower purchased natural gas costs and realized derivatives, declined 6% from $3.28 per MMBtu in 2015 to $3.07 per MMBtu in 2016 as natural gas prices were lower in 2016, particularly in the first half of the year with high storage levels and strong production in North America, although natural gas prices increased towards the end of 2016.

Capacity expansion project costs, including depreciation expense, which commenced once the respective expansion plant was placed in service, and start-up costs, which primarily relate to the cost of commencing production at the new ammonia plants for our Donaldsonville, Louisiana and Port Neal, Iowa plants totaled $116 million and $52 million in 2016, respectively.

Cost of goods sold per ton declined $34 per ton, or 17%, from $201 in 2015 to $167 in 2016, as a result of the factors noted above.

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.

Selling, general and administrative expenses increased $4 million to $174 million in 2016 from $170 million in 2015. The increase was due primarily to the impact of the CF Fertilisers UK acquisition, partly offset by lower costs for corporate office initiatives and lower intangible asset amortization expense.

Transaction Costs

Transaction costs consist of various consulting and legal services associated with the proposed combination with certain businesses of OCI that was terminated on May 22, 2016, our strategic venture with CHS, which began on February 1, 2016, and our July 31, 2015 acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us.

In 2016, we incurred $179 million of transaction costs, including the $150 million termination fee paid by CF Holdings to OCI in the second quarter of 2016 as a result of the termination of the Combination Agreement and costs for various consulting and legal services. In 2015, we incurred $57 million of transaction costs associated with the agreements pertaining to the proposed combination with certain businesses of OCI and our strategic venture with CHS.

CF INDUSTRIES HOLDINGS, INC.

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.

Other operating—net was $208 million in 2016 compared to $92 million in 2015. The increased expense was due primarily to $93 million of realized and unrealized losses on foreign currency transactions primarily related to British pound sterling denominated intercompany debt that has not been permanently invested. In addition, the increased expense also reflects higher expansion project costs pertaining to our Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects that did not qualify for capitalization and the loss of $23 million representing the net fair value adjustments to an embedded derivative related to our strategic venture with CHS. See Note 9—Fair Value Measurements to our consolidated financial statements included in Item 8 of this report for additional information. These increases were partly offset by a decrease in realized and unrealized losses on foreign currency derivatives of $22 million.

Equity in (Losses) Earnings of Operating Affiliates

Equity in (losses) earnings of operating affiliates consists of our 50% ownership interest in PLNL. We include our share of the net earnings from our equity method 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. 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 2016 and 2015, equity in (losses) earnings of operating affiliates also includes impairments of our equity method investment in PLNL.

Equity in (losses) earnings of operating affiliates decreased by $110 million in 2016 as compared to 2015 due primarily to a $134 million impairment of our equity method investment in PLNL that was recognized in the fourth quarter of 2016. In the fourth quarter of 2015, we recognized a $62 million impairment of our equity method investment in PLNL. The remaining decrease was due primarily to lower operating results from PLNL, which included costs of $21 million that were incurred during 2016 related to a planned maintenance activity at the PLNL ammonia plant that resulted in the shutdown of the plant for approximately 45 days and the impact of lower ammonia selling prices in 2016 compared to 2015. For additional information regarding the impairment of our equity method investment in PLNL, see Note 8—Equity Method Investments to our consolidated financial statements included in Item 8 of this report and "Critical Accounting Policies and Estimates," below.

Interest Expense—Net

Our interest expense—net includes the interest expense 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. Our interest expense—net also includes interest income, which represents amounts earned on our cash, cash equivalents, investments and advances to unconsolidated affiliates.

Net interest expense increased by $64 million to $195 million in 2016 from $131 million in 2015. The $64 million increase in net interest expense was due primarily to the combination of higher debt levels due to the issuance of $1.0 billion of Private Senior Notes in September 2015 and debt amendment fees and accelerated amortization of debt issuance costs due to the restructuring of our debt and the Revolving Credit Agreement in 2016. Due to the uncertain duration of the prevailing low nitrogen fertilizer selling price environment and in order to provide liquidity and covenant flexibility for the future, we modified the Revolving Credit Agreement in 2016 by reducing its size from $2.0 billion to $750 million and modifying certain covenants and other terms. As a result of these changes, we recognized $16 million of debt amendment fees and accelerated amortization of loan fees in interest expense. The increase in interest expense—net in 2016 also includes the amortization of capitalized Bridge Credit Agreement fees of $28 million pertaining to the bridge loan for our proposed combination with certain of the OCI businesses. We also recorded capitalized interest of $166 million in 2016 related primarily to our capacity expansion projects compared to $154 million in 2015.

CF INDUSTRIES HOLDINGS, INC.

Loss on Debt Extinguishment

Loss on debt extinguishment of $167 million consists of the make-whole payment, which resulted from our November 21, 2016 prepayment of the $1.0 billion aggregate principal amount of Private Senior Notes. This amount excludes $3 million (of the $170 million make-whole payment), which was accounted for as a modification and recognized on our consolidated balance sheet as deferred financing fees, a reduction of long-term debt, and is being amortized using the effective interest rate method over the term of the Senior Secured Notes.

Income Tax (Benefit) Provision

Our income tax benefit for 2016 was $68 million on a pre-tax loss of $226 million, resulting in an effective tax rate of 30.0%, compared to an income tax provision of $396 million on pre-tax income of $1.06 billion, or an effective tax rate of 37.4%, in the prior year.

State income taxes for 2016 were favorably impacted by investment tax credits of $13 million related to capital assets placed in service at our production facilities in Oklahoma that are indefinitely available to offset income taxes in that jurisdiction in future years. Our effective state income tax rate was also reduced as a result of the changes to our legal entity structure effected in the first quarter of 2016 as part of our strategic venture with CHS. See Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information.

State income taxes for 2016 includes a tax benefit of $46 million, net of federal tax effect, for state net operating loss carryforwards. A valuation allowance of $4 million is recorded for certain loss carryforwards for which we do not expect to realize in the future.

The income tax provision for 2016 includes the tax impact of the U.S. manufacturing profits deductions claimed in prior years that will not be deductible as a result of our intention to carryback the tax net operating loss for the year ended December 31, 2016 to those prior tax years.

Non-deductible capital costs for the tax year ended December 31, 2016 include certain transaction costs capitalized in the prior year that are now deductible as a result of the termination of the proposed combination with certain businesses of OCI. See Note 4—Acquisitions and Divestitures to our consolidated financial statements included in Item 8 of this report for additional information.

Foreign subsidiaries of the Company have incurred capital losses of $109 million that are indefinitely available to offset capital gains in those foreign jurisdictions. As the future realization of these carryforwards is not anticipated, a valuation allowance of $28 million was recorded in 2016.

In the fourth quarters of 2016 and 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 $134 million and $62 million, respectively, which is included in the equity in earnings of operating affiliates. Our respective income tax provisions do not include a tax benefit for the impairment of our equity method investment as it will not give rise to a tax deduction.

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 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 million million gain on the remeasurement of the historical equity investment does not include the recognition of tax expense on the gain.

In addition, our effective tax rate is impacted by earnings attributable to noncontrolling interests in CFN and TNCLP, as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interests. Earnings attributable to noncontrolling interests increased in 2016 due to our strategic venture with CHS that commenced on February 1, 2016, at which time CHS purchased a minority equity interest in CFN. See Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information.

See Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report for additional information.

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. Equity in earnings of non-operating affiliates—net of taxes in 2015 included the previously owned 50% equity method earnings of CF Fertilisers UK and also included our share of

CF INDUSTRIES HOLDINGS, INC.

operating losses experienced at 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 million, and CF Fertilisers UK became wholly owned by us and part of our consolidated financial results. We recorded a $94 million gain on the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK in connection with the closing of the acquisition. Equity in earnings of non-operating affiliates—net of taxes on 2015 also included our share of CF Fertilisers UK operating results up to the date of the acquisition. In addition, during the second quarter of 2015, we sold our interests in Keytrade and recorded an after-tax loss of $29 million (pre-tax loss of $40 million).

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests includes the net earnings attributable to the 24.7% interest of the publicly-held common units of TNCLP. We own approximately 75.3% of TNCLP and outside investors own the remaining 24.7%. Net earnings attributable to noncontrolling interests also includes the net earnings attributable to the CHS minority equity interest in CFN, a subsidiary of CF Holdings, purchased for $2.8 billion on February 1, 2016.

Net earnings attributable to noncontrolling interests increased $85 million in 2016 compared to 2015 due primarily to the earnings attributable to the noncontrolling interest in CFN. This increase is partly offset by lower net earnings attributable to the approximately 24.7% interest of the publicly held common units of TNCLP.

Diluted Net Earnings (Loss) Per Share Attributable to Common Stockholders

Diluted net (loss) earnings per share attributable to common stockholders decreased $4.15 to a loss of $1.19 per share in 2016 from diluted net earnings per share attributable to common stockholders of $2.96 per share in 2015. This decrease is due to lower net earnings.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Consolidated Operating Results

The ammonia, granular urea, UAN, AN and Other segments are referred to in this section of the discussion and analysis as the “Nitrogen Product Segments.”

Our total gross margin declined by $231 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 million. The remaining decline in our gross margin of $254 million, or 14%, was due to the $244 million decrease in gross margin in the Nitrogen Product Segments and the $10 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 $349 million as international nitrogen fertilizer prices declined 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 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 $97 million as 2015 included a $176 million loss compared to a $79 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 $230 million compared to 2014. Lower natural 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 of 2015, also contributed to high storage levels and the resulting decline in natural gas prices.

CF INDUSTRIES HOLDINGS, INC.

Net earnings attributable to common stockholders was $700 million and $1.39 billion in the years ended December 31, 2015 and 2014, respectively. The results of operations in 2015 and 2014 were impacted by a number of significant items that are described in further detail above under "Overview of CF Holdings—Items Affecting Comparability of Results."

Net Sales

Our total net sales decreased $435 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 million. The remaining decline in our net sales of $643 million, or 14%, included a $475 million decrease attributable to the Nitrogen Product Segments and a $168 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 declined 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 due primarily to excess global supply. Granular urea exports from China were at a record high in 2015 and Russian exports 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

Our total cost of sales decreased $204 million, or 7%, from 2014 to 2015 including the impact of the CF Fertilisers UK acquisition which increased cost of sales by $185 million, or 6%. The remaining decrease in our cost of sales of $389 million, or 13%, was due primarily to lower natural gas costs. 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 million of unrealized net mark-to-market losses on natural gas derivatives compared to losses of $79 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. 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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $18 million to $170 million in 2015 from $152 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 asset amortization expense.

Transaction Costs

In 2015, we incurred $57 million of transaction costs for various consulting and legal services associated primarily with executing the strategic agreements in connection with, and preparing for the proposed combination with certain businesses 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 million from $53 million of expense in 2014 to expense of $92 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 million of losses in 2014 to $22 million of losses in 2015.

CF INDUSTRIES HOLDINGS, INC.

Equity in (Losses) Earnings of Operating Affiliates

Equity in (losses) earnings of operating affiliates consists of our 50% share of the operating results of PLNL. Equity in (losses) earnings of operating affiliates decreased by $78 million in 2015 as compared to 2014 due primarily to a $62 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 Expense—Net

Interest expense—net was $131 million in 2015 compared to $177 million in 2014. The $46 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 million in 2015 primarily related to our capacity expansion projects compared to $74 million in 2014.

Other Non-Operating—Net

Other non-operating—net was a $4 million expense in 2015 compared to expense of $2 million in 2014.

Income Tax (Benefit) Provision

Our income tax provision for 2015 was $396 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 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 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 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 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 $62 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 our equity method 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. See Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report for additional information on income taxes.

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 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 million in 2015 compared to 2014 due primarily to the $94 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 $13 million in 2015 compared to 2014 due primarily to lower net earnings attributable to the approximately 24.7% interest of the publicly-held common units of TNCLP.

CF INDUSTRIES HOLDINGS, INC.

Diluted Net Earnings (losses) 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 due primarily 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 million, or an average cost of $59 per share. The total shares repurchased during 2015 represented 4% of the shares outstanding as of December 31, 2014.

CF INDUSTRIES HOLDINGS, INC.

Operating Results by Business Segment

Our reportable segment structure reflects how our chief operating decision maker (CODM), as defined under U.S. GAAP, assesses the performance of our reportable segments and makes decisions about resource allocation. These segments are differentiated by products. Our management uses gross margin to evaluate segment performance and allocate resources. Total other operating costs and expenses (consisting of selling, general and administrative expenses and other operating—net) and non-operating expenses (interest and income taxes), are centrally managed and are not included in the measurement of segment profitability reviewed by management.

The 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 and reportable results ceased.

The following table presents summary operating results by business segment:



	Ammonia			Granular Urea(1)			UAN(1)			AN(1)			Other(1)			Phosphate			Consolidated
	(in millions, except percentages)
Year ended December 31, 2016
Net sales	$	981		$	831		$	1,196		$	411		$	266		$	—		$	3,685
Cost of sales	715			584			920			409			217			—			2,845
Gross margin	$	266		$	247		$	276		$	2		$	49		$	—		$	840
Gross margin percentage	27.1		%	29.7		%	23.1		%	0.5		%	18.4		%	—		%	22.8		%
Year ended December 31, 2015
Net sales	$	1,523		$	788		$	1,480		$	294		$	223		$	—		$	4,308
Cost of sales	884			469			955			291			162			—			2,761
Gross margin	$	639		$	319		$	525		$	3		$	61		$	—		$	1,547
Gross margin percentage	42.0		%	40.4		%	35.5		%	1.1		%	27.2		%	—		%	35.9		%
Year ended December 31, 2014
Net sales	$	1,576		$	915		$	1,670		$	243		$	171		$	168		$	4,743
Cost of sales	983			517			998			189			120			158			2,965
Gross margin	$	593		$	398		$	672		$	54		$	51		$	10		$	1,778
Gross margin percentage	37.6		%	43.5		%	40.3		%	22.1		%	30.0		%	6.0		%	37.5		%


(1)	The cost of ammonia that is upgraded into other products is transferred at cost into the upgraded product results.

CF INDUSTRIES HOLDINGS, INC.

Ammonia Segment

Our ammonia segment produces anhydrous ammonia (ammonia), which is our most concentrated nitrogen fertilizer as it contains 82% nitrogen. The results of our ammonia segment consist of sales of ammonia to external customers. In addition, ammonia is the "basic" nitrogen product that we upgrade into other nitrogen products such as granular urea, UAN and AN. We produce ammonia at all of our nitrogen manufacturing complexes.

The following table presents summary operating data for our ammonia segment, including the impact of our acquisition of the remaining 50% equity interest in CF Fertilisers UK:



	Twelve months ended December 31,
	2016			2015			2014			2016 v. 2015					2015 v. 2014
	(in millions, except as noted)
Net sales	$	981		$	1,523		$	1,576		$	(542	)	(36	)%	$	(53	)	(3	)%
Cost of sales	715			884			983			(169		)	(19	)%	(99		)	(10	)%
Gross margin	$	266		$	639		$	593		$	(373	)	(58	)%	$	46		8	%
Gross margin percentage	27.1		%	42.0		%	37.6		%	(14.9		)%			4.4		%
Sales volume by product tons (000s)	2,874			2,995			2,969			(121		)	(4	)%	26			1	%
Sales volume by nutrient tons (000s)(1)	2,358			2,456			2,434			(98		)	(4	)%	22			1	%
Average selling price per product ton	$	341		$	509		$	531		$	(168	)	(33	)%	$	(22	)	(4	)%
Average selling price per nutrient ton(1)	$	416		$	620		$	648		$	(204	)	(33	)%	$	(28	)	(4	)%
Gross margin per product ton	$	93		$	213		$	200		$	(120	)	(56	)%	$	13		7	%
Gross margin per nutrient ton(1)	$	113		$	260		$	244		$	(147	)	(57	)%	$	16		7	%
Depreciation and amortization	$	96		$	95		$	69		$	1		1	%	$	26		38	%
Unrealized net mark-to-market loss (gain) on natural gas derivatives	$	(85	)	$	40		$	25		$	(125	)	N/M		$	15		60	%


(1)	Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Sales. Total net sales in the ammonia segment decreased by $542 million, or 36%, to $981 million in 2016 from $1.52 billion in 2015 due primarily to a 33% decrease in average selling prices and a 4% decrease in sales volume. These results include the impact of the CF Fertilisers UK acquisition, which increased net sales by $26 million, or 2%. The remaining decrease in our ammonia net sales of $568 million, or 37%, was due primarily to lower average selling prices and sales volume. Selling prices declined due to excess global nitrogen supply. In addition, our selling prices reflect the impact of a higher proportion of export sales, the volumes of which increased as a result of the weak fall application season attributable to the combined impact of weather conditions and low crop prices on our customers' decisions related to applying fertilizer in the fall. Sales volume in 2016 declined due to combination of the weak fall application season and the impact of upgrading additional ammonia production at our Donaldsonville facility into granular urea and UAN as a result of our capacity expansion projects coming on line at our Donaldsonville, Louisiana complex.

Cost of Sales. Cost of sales per ton in our ammonia segment averaged $248 per ton in 2016, including the impact of the CF Fertilisers UK acquisition, which averaged $220 per ton. The remaining cost of sales per ton was $250 in 2016, a 16% decrease from the $296 per ton in 2015. The decrease was due primarily to the impact of unrealized net mark-to-market gains on natural gas derivatives in 2016 compared to losses in 2015 and to the impact of lower realized natural gas costs in 2016. This was partly offset by capacity expansion project start-up costs of $50 million and an increase in expansion project depreciation as a result of the new ammonia plants at our Donaldsonville and Port Neal facilities.

CF INDUSTRIES HOLDINGS, INC.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Sales. Net sales in the ammonia segment decreased by $53 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 million, or 2%. The remaining decrease in our ammonia net sales of $91 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 was 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 volume was 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 in 2015, a 11% decrease over the $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.

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; Medicine Hat, Alberta; and Port Neal, Iowa nitrogen complexes.

The following table presents summary operating data for our granular urea segment:



	Twelve months ended December 31,
	2016			2015			2014			2016 v. 2015					2015 v. 2014
	(in millions, except as noted)
Net sales	$	831		$	788		$	915		$	43		5	%	$	(127	)	(14	)%
Cost of sales	584			469			517			115			25	%	(48		)	(9	)%
Gross margin	$	247		$	319		$	398		$	(72	)	(23	)%	$	(79	)	(20	)%
Gross margin percentage	29.7		%	40.4		%	43.5		%	(10.7		)%			(3.1		)%
Sales volume by product tons (000s)	3,597			2,460			2,459			1,137			46	%	1			—	%
Sales volume by nutrient tons (000s)(1)	1,654			1,132			1,131			522			46	%	1			—	%
Average selling price per product ton	$	231		$	320		$	372		$	(89	)	(28	)%	$	(52	)	(14	)%
Average selling price per nutrient ton(1)	$	502		$	696		$	809		$	(194	)	(28	)%	$	(113	)	(14	)%
Gross margin per product ton	$	69		$	129		$	162		$	(60	)	(47	)%	$	(33	)	(20	)%
Gross margin per nutrient ton(1)	$	149		$	281		$	352		$	(132	)	(47	)%	$	(71	)	(20	)%
Depreciation and amortization	$	112		$	51		$	37		$	61		120	%	$	14		38	%
Unrealized net mark-to-market loss (gain) on natural gas derivatives	$	(67	)	$	47		$	17		$	(114	)	N/M		$	30		176	%


(1)	Granular urea represents 46% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Sales. Net sales in the granular urea segment increased by $43 million, or 5%, in 2016 compared to 2015 due primarily to a 46% increase in sales volume partially offset by a 28% decrease in average selling prices. Sales volume was higher due to increased production available as a result of our expanded urea capacity at our Donaldsonville, Louisiana complex that came on line in November of 2015. Average selling prices decreased to $231 per ton in 2016 compared to $320 per ton in 2015 due primarily to excess global nitrogen supply weighing on global nitrogen fertilizer selling prices.

Cost of Sales. Cost of sales per ton in our granular urea segment averaged $162 in 2016, a 15% decrease from the $191 per ton in 2015. The decrease was due primarily to the impact of unrealized net mark-to-market gains on natural gas derivatives in 2016 compared to losses in 2015. This was partly offset by increased depreciation expense related to our expanded urea production at our Donaldsonville, Louisiana complex and $2 million of start-up costs at our Port Neal, Iowa complex that came on line in December 2016.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Sales. Net sales in the granular urea segment decreased by $127 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 due primarily to excess global nitrogen supply weighing on global nitrogen fertilizer selling prices. Granular urea exports from China were at a record high in 2015 and Russian exports had increased significantly while global capacity additions in 2015 further contributed to the excess global nitrogen supply. Our sales volume in 2015 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 2015.

Cost of Sales. Cost of sales per ton in our granular urea segment averaged $191 in 2015, a 9% decrease over 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.

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,
	2016			2015			2014			2016 v. 2015					2015 v. 2014
	(in millions, except as noted)
Net sales	$	1,196		$	1,480		$	1,670		$	(284	)	(19	)%	$	(190	)	(11	)%
Cost of sales	920			955			998			(35		)	(4	)%	(43		)	(4	)%
Gross margin	$	276		$	525		$	672		$	(249	)	(47	)%	$	(147	)	(22	)%
Gross margin percentage	23.1		%	35.5		%	40.3		%	(12.4		)%			(4.8		)%
Sales volume by product tons (000s)	6,681			5,865			6,092			816			14	%	(227		)	(4	)%
Sales volume by nutrient tons (000s)(1)	2,109			1,854			1,925			255			14	%	(71		)	(4	)%
Average selling price per product ton	$	179		$	252		$	274		$	(73	)	(29	)%	$	(22	)	(8	)%
Average selling price per nutrient ton(1)	$	567		$	798		$	867		$	(231	)	(29	)%	$	(69	)	(8	)%
Gross margin per product ton	$	41		$	90		$	110		$	(49	)	(54	)%	$	(20	)	(18	)%
Gross margin per nutrient ton(1)	$	131		$	283		$	349		$	(152	)	(54	)%	$	(66	)	(19	)%
Depreciation and amortization	$	247		$	192		$	179		$	55		29	%	$	13		7	%
Unrealized net mark-to-market loss (gain) on natural gas derivatives	$	(81	)	$	73		$	30		$	(154	)	N/M		$	43		143	%


(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, 2016 Compared to Year Ended December 31, 2015

Net Sales. Net sales in the UAN segment decreased $284 million, or 19%, in 2016 due primarily to a 29% decrease in average selling prices partially offset by a 14% increase in sales volume. Average selling prices decreased to $179 per ton in 2016 compared to $252 in 2015. UAN selling prices were lower due to excess global nitrogen supply weighing on global nitrogen fertilizer selling prices. Increases in UAN exports at lower selling prices also negatively impacted our average selling price. Sales volume was higher due to increased production as a result of expanded UAN capacity at our Donaldsonville, Louisiana complex that came on line in the first quarter of 2016.

Cost of Sales. Cost of sales per ton in our UAN segment averaged $138 in 2016, a 15% decrease from the average of $162 per ton in 2015. The decrease was due primarily to the impact of unrealized net mark-to-market gains on natural gas derivatives in 2016 compared to losses in 2015 and the impact of lower realized natural gas cost in 2016. This was partly offset by increased depreciation expense related to the expanded UAN capacity at our Donaldsonville, Louisiana complex that came on line in the first quarter of 2016.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Sales. Net sales in the UAN segment decreased by $190 million, or 11%, due to a 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 per ton in 2014. The decline in UAN average selling prices was due to excess global nitrogen supply 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 over the $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.

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 our acquisition of the remaining 50% equity interest in CF Fertilisers UK:



	Twelve months ended December 31,
	2016			2015			2014			2016 v. 2015					2015 v. 2014
	(in millions, except as noted)
Net sales	$	411		$	294		$	243		$	117		40	%	$	51		21	%
Cost of sales	409			291			189			118			41	%	102			54	%
Gross margin	$	2		$	3		$	54		$	(1	)	(33	)%	$	(51	)	(94	)%
Gross margin percentage	0.5		%	1.1		%	22.1		%	(0.6		)%			(21.0		)%
Sales volume by product tons (000s)	2,151			1,290			958			861			67	%	332			35	%
Sales volume by nutrient tons (000s)(1)	726			437			329			289			66	%	108			33	%
Average selling price per product ton	$	191		$	228		$	253		$	(37	)	(16	)%	$	(25	)	(10	)%
Average selling price per nutrient ton(1)	$	566		$	673		$	738		$	(107	)	(16	)%	$	(65	)	(9	)%
Gross margin per product ton	$	1		$	2		$	56		$	(1	)	(50	)%	$	(54	)	(96	)%
Gross margin per nutrient ton(1)	$	3		$	7		$	163		$	(4	)	(57	)%	$	(156	)	(96	)%
Depreciation and amortization	$	93		$	66		$	47		$	27		41	%	$	19		40	%
Unrealized net mark-to-market loss (gain) on natural gas derivatives	$	(10	)	$	16		$	7		$	(26	)	N/M		$	9		129	%


(1)	Nutrient tons represent the tons of nitrogen within the product tons.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Sales. Total net sales in our AN segment increased $117 million, or 40%, in 2016 from 2015 due primarily to a 67% increase in sales volume partially offset by a 16% decrease in average selling prices. These results include the impact of the CF Fertilisers UK acquisition, which increased net sales by $164 million, or 56%. The remaining decrease in our AN net sales of $47 million, or 16%, was due primarily to lower average selling prices from excess global nitrogen supply weighing on global nitrogen fertilizer selling prices.

Cost of Sales. Total cost of sales per ton in our AN segment averaged $190 in 2016 including the impact of the CF Fertilisers UK acquisition, which averaged $211 per ton. The remaining cost of sales per ton averaged $180 in 2016, a 20% decrease from 2015 due primarily to unrealized net mark-to-market gains on natural gas derivatives in 2016 compared to losses in 2015 and the impact of lower realized natural gas costs. This decrease also includes the impact of the purchase accounting inventory valuation step-up in 2015 arising out of the CF Fertilisers UK acquisition.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Sales. Net sales in our AN segment increased $51 million, or 21%, to $294 million in 2015 from $243 million in 2014 due primarily to a 35% increase in sales volume partially offset by a 10% decrease in average selling prices. This total includes the impact of the CF Fertilisers UK acquisition completed on July 31, 2015, which increased net sales by $117 million, or 48%. The remaining decrease in our AN net sales of $66 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. This total cost of sales per ton includes 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 $7 million in the second half of 2015. The remaining cost of sales per ton averaged $213 in 2015, 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.

CF INDUSTRIES HOLDINGS, INC.

Other Segment

Our Other segment primarily includes the following products:


•	Diesel exhaust fluid (DEF) is an aqueous urea solution typically made with 32.5% 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 our acquisition of the remaining 50% equity interest in CF Fertilisers UK:



	Twelve months ended December 31,
	2016			2015			2014			2016 v. 2015					2015 v. 2014
	(in millions, except as noted)
Net sales	$	266		$	223		$	171		$	43		19	%	$	52		30	%
Cost of sales	217			162			120			55			34	%	42			35	%
Gross margin	$	49		$	61		$	51		$	(12	)	(20	)%	$	10		20	%
Gross margin percentage	18.4		%	27.2		%	30.0		%	(8.8		)%			(2.8		)%
Sales volume by product tons (000s)	1,654			1,108			798			546			49	%	310			39	%
Sales volume by nutrient tons (000s)(1)	317			215			155			102			47	%	60			39	%
Average selling price per product ton	$	161		$	202		$	215		$	(41	)	(20	)%	$	(13	)	(6	)%
Average selling price per nutrient ton(1)	$	839		$	1,040		$	1,106		$	(201	)	(19	)%	$	(66	)	(6	)%
Gross margin per product ton	$	30		$	55		$	64		$	(25	)	(45	)%	$	(9	)	(14	)%
Gross margin per nutrient ton(1)	$	155		$	283		$	332		$	(128	)	(45	)%	$	(49	)	(15	)%
Depreciation and amortization	$	46		$	35		$	20		$	11		31	%	$	15		75	%
Unrealized net mark-to-market loss (gain) on natural gas derivatives	$	(17	)	$	—		$	—		$	(17	)	N/M		$	—		—	%


(1)	Nutrient tons represent the tons of nitrogen within the product tons.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Sales. Total net sales in our Other segment increased $43 million, or 19%, in 2016 from 2015 due to a 49% increase in sales volume partially offset by a 20% decrease in average selling prices. These results include the impact of the CF Fertilisers UK acquisition, which increased net sales by $79 million, or 35%. The remaining decrease in our Other segment net sales of $36 million, or 16%, was due primarily to lower average selling prices due to excess global nitrogen supply weighing on global nitrogen fertilizer selling prices.

Cost of Sales. Cost of sales per ton in our Other segment averaged $131 in 2016, including the impact of the CF Fertilisers UK acquisition, which averaged $158 per ton. The remaining cost of sales per ton averaged $121 in 2016, an 18% decrease from the $147 per ton in 2015 due to the unrealized net mark-to-market gains on natural gas derivatives in 2016 and the impact of the purchase accounting inventory valuation step-up in 2015 arising out of the CF Fertilisers UK acquisition.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Sales. Total net sales in our Other segment increased $52 million, or 30%, in 2015 from 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 million, or 31%. The remaining decrease in our Other net sales of $1 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.

CF INDUSTRIES HOLDINGS, INC.

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.

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 CF Industries Holdings, Inc., 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 and reportable results ceased.

The following table presents summary operating data for our phosphate segment for the year ended December 31, 2014:



		2014
	(in millions, except as noted)
Net sales		$	168
Cost of sales		158
Gross margin		$	10
Gross margin percentage		6.0		%
Sales volume by product tons (000s)(1)		487
Average selling price per product ton		$	346
Gross margin per product ton		$	21
Depreciation, depletion and amortization(2)		$	—

(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.

CF INDUSTRIES HOLDINGS, INC.

Liquidity and Capital Resources

Our primary uses of cash are generally for operating costs, working capital, capital expenditures, debt service, investments, taxes, share repurchases and dividends. Our working capital requirements are affected by several factors, including demand for our products, selling prices, raw material costs, freight costs and seasonal factors inherent in the business. 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.

Lower selling prices resulting from excess global nitrogen supply affected our financial performance in 2016. Global nitrogen fertilizer supply increased faster than global nitrogen fertilizer demand, creating the current global oversupply of nitrogen fertilizer and the resulting low nitrogen fertilizer selling prices. See discussion under "Overview of CF Holdings—Industry Factors and Market Conditions—2016 Market Conditions," above, for further information.

In response to the prevailing market circumstances, in July 2016, we entered into an amendment to the Revolving Credit Agreement, and, in September 2016, we entered into an amendment to the note purchase agreement governing the Private Senior Notes (the Note Purchase Agreement). The amendments increased, through the end of 2017, the maximum total leverage ratio permitted under the Revolving Credit Agreement and the Note Purchase Agreement and reduced the size of our revolving credit facility under the Revolving Credit Agreement.

Due to the uncertainty of the duration of the prevailing low price environment and in order to provide liquidity and covenant flexibility for the future, in the fourth quarter of 2016, we took certain additional steps with respect to the Revolving Credit Agreement and the Private Senior Notes. The steps we took included entering into the November 2016 Credit Agreement Amendment described under "—Debt—Revolving Credit Agreement," below, and the prepayment in full of the $1.0 billion principal amount of Private Senior Notes on November 21, 2016. We funded that prepayment and the related make-whole amount of approximately $170 million with the issuance of new long-term secured debt, as described in further detail below under “—Debt—Senior Secured Notes.”

In 2016, we completed capacity expansion projects at Donaldsonville, Louisiana and Port Neal, Iowa that were originally announced in 2012. These projects provided us with an increase of approximately 25% in production capacity and had a total capital cost of $5.2 billion. The completion of our capacity expansion projects will reduce what had been a substantial use of liquidity in recent years. See “—Capacity Expansion Projects and Restricted Cash,” below, for further information on these projects.

A significant portion of the capital assets that were constructed as part of the capacity expansion projects is expected to qualify for bonus depreciation under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). Under the provisions of the PATH Act, eligible capital additions will be subject to 50% bonus depreciation. We intend to file a claim to carry back the 2016 federal tax loss to prior periods and receive a refund of federal taxes paid in those prior years. As of December 31, 2016, we have prepaid income taxes of $841 million, which includes approximately $816 million for the carryback of certain U.S. tax losses from 2016 to prior tax periods. See “—Realization of Current Year Tax Assets Resulting From Bonus Depreciation,” below, and Note 10—Income Taxes to our consolidated financial statements included in Item 8 of this report for additional information.

In October 2016 each of the three credit rating agencies reviewed our corporate credit rating as follows. S&P Global Ratings reduced our corporate credit rating to BB+ from BBB- and indicated the outlook was negative; Moody’s Investors Service, Inc. reduced our corporate credit rating to Baa3 from Baa2 and indicated the rating was under further review; and Fitch Ratings, Inc. reduced our corporate credit rating to BB+ from BBB and indicated the outlook was stable. In November 2016, Moody’s Investors Service, Inc. further reduced our corporate credit rating to Ba2 from Baa3 and updated the outlook to stable.

At December 31, 2016, our balance of cash and cash equivalents was $1.16 billion and we were in compliance with all applicable covenant requirements under the Revolving Credit Agreement and our senior notes.

Cash and Cash Equivalents

We had cash and cash equivalents of $1.16 billion and $286 million as of December 31, 2016 and 2015, 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.

Capacity Expansion Projects and Restricted Cash

In 2016, we completed our capacity expansion projects at Donaldsonville, Louisiana and Port Neal, Iowa. These projects, originally announced in 2012, included the construction of new ammonia, urea, and UAN plants at our Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port Neal, Iowa complex. These plants increased our overall production capacity by approximately 25%, improved our product mix flexibility at Donaldsonville, and improved our ability to serve upper-Midwest urea customers from our Port Neal location. In combination, these new facilities are 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. These new facilities will allow us to benefit from the cost advantages of North American natural gas. Further details regarding our production capacity and production flexibility are included in Part I, Item 1. Business.

At our Donaldsonville complex, the ammonia plant was placed in service in the fourth quarter of 2016, the UAN plant was placed in service in the first quarter of 2016 and the granular urea plant was placed in service in the fourth quarter of 2015. At our Port Neal, Iowa complex, both the ammonia and granular urea plants were placed in service in the fourth quarter of 2016. Depreciation expense pertaining to each of our capacity expansion plants commenced once the applicable plant was placed in service, and the total depreciation expense pertaining to our capacity expansion plants recognized in 2016 and 2015 was $116 million and $13 million, respectively.

The total cash spent on capital expenditures for the capacity expansion projects through December 31, 2016 was $5.1 billion. We estimate that the final payments on the capital component of the capacity expansion projects will occur in early 2017 and will bring the total capital cash spending for the capacity expansion projects to approximately $5.2 billion.

We retained an affiliate of ThyssenKrupp Industrial Solutions (ThyssenKrupp) to provide engineering and procurement services for both capacity expansion projects. Under the terms of the engineering and procurement services contract, we 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 changes over time based on procurement costs. As of December 31, 2016, there was $5 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, increase our capacity, improve plant efficiency and comply with various environmental, health and safety requirements. Capital expenditures totaled $2.21 billion in 2016 compared to $2.47 billion in 2015. The decrease in capital expenditures is primarily the result of the decrease in cash spent on the capacity expansion projects in 2016 compared to 2015.

Projected Capital Spending

New capital expenditures for 2017 are estimated to be in the range of approximately $400 to $450 million for sustaining and other capital expenditures. Actual cash expenditures will also reflect amounts accrued but not paid in 2016. At December 31, 2016, approximately $225 million was accrued related to activities in 2016. 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.

Realization of Current Year Tax Assets Resulting From Bonus Depreciation

The PATH Act permits bonus depreciation on certain eligible capital additions in the year the assets are placed in service. Under the provisions of the PATH Act, eligible capital additions will be subject to 50% bonus depreciation in the year the asset is placed in service. A significant portion of the capital assets constructed as part of the Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects is expected to qualify for 50% bonus depreciation. Given the size of the bonus depreciation tax deduction, we estimate that we generated a substantial federal tax loss in 2016. We intend to file a claim to carry back the 2016 federal tax loss to prior income tax years and receive a refund of federal taxes paid in those prior years. We currently estimate that the amount of this refund will be approximately $816 million and expect to receive it in the third quarter of 2017. As of December 31, 2016, we have prepaid income taxes in the amount of $841 million.

CF INDUSTRIES HOLDINGS, INC.

Government Policies

The policies or laws of governments around the world can result in the imposition of taxes, duties, tariffs or other restrictions or regulatory requirements on imports and exports of raw materials, finished goods or services from a particular country or region of the world. The policies and laws of governments can also impact the subsidization of natural gas prices, and subsidies or quotas applied to domestic producers, or farmers. Due to the critical role that fertilizers play in food production, the construction and operation of fertilizer plants often are influenced by economic, political and social objectives. Additionally, the import or export of fertilizer can be subject to local taxes imposed by governments which can have the effect of either encouraging or discouraging import and export activity. The impact of changes in governmental policies or laws or the political or social objectives of a country could have a material impact on fertilizer demand, selling prices and therefore could impact our liquidity.

Ethanol Industry and the Renewable Fuel Standard

Corn used to produce ethanol accounts for approximately 37% 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, the U.S. Congress, at various times, has proposed legislation to either reduce or eliminate the RFS. While past legislation proposing changes to the RFS has not been enacted into law, there can be no assurance that future legislation will not be enacted 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, which could impact the demand for corn and nitrogen fertilizer and therefore could impact our liquidity.

Repatriation of Foreign Earnings and Income Taxes

We have operations in Canada, the United Kingdom and an 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 permanently 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, 2016, approximately $127 million of our consolidated cash and cash equivalents balance of $1.16 billion was held primarily by our Canadian and United Kingdom subsidiaries. The cash balance held by the Canadian subsidiaries represents accumulated earnings of our foreign operations that are 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, 2016, the estimated cash tax cost to repatriate the Canadian and United Kingdom cash balances would be approximately $6 million.

Share Repurchase Programs and Retirements

Our Board of Directors (the Board) has authorized certain programs to repurchase shares of our common stock. Each of these programs has permitted repurchases to be made from time to time in the open market, through privately-negotiated transactions, through block transactions or otherwise. Our management has determined the manner, timing and amount of repurchases based on the evaluation of market conditions, stock price and other factors.

In the third quarter of 2012, the Board authorized a program to repurchase up to $3 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, the Board authorized a program to repurchase up to $1 billion of the common stock of CF Holdings through December 31, 2016 (the 2014 Program). As of December 31, 2015, 15.9 million shares had been repurchased for an aggregate expenditure of $900 million. The remaining $100 million of share repurchase authorization under the 2014 Program expired on December 31, 2016.

The retirement of the repurchased shares of our common stock was recognized as follows:


•	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 $1.69 billion and $220 million, respectively.

CF INDUSTRIES HOLDINGS, INC.


•	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 million and $62 million, respectively.


•	In 2016, we retired 2.4 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 $136 million and $14 million, respectively.

Debt

Revolving Credit Agreement

We have a senior secured revolving credit agreement (as amended, including by an amendment effective July 29, 2016 (the July 2016 Credit Agreement Amendment) and an amendment entered into on October 31, 2016 and effective November 21, 2016 (the November 2016 Credit Agreement Amendment), the Revolving Credit Agreement) providing for a revolving credit facility of up to $750 million (reflecting a reduction from $1.5 billion as effected by the November 2016 Credit Agreement Amendment) with a maturity of September 18, 2020. The Revolving Credit Agreement includes a letter of credit sub-limit of $125 million. Borrowings under the Revolving Credit Agreement may be used for working capital and general corporate purposes. CF Industries may designate as borrowers one or more wholly owned subsidiaries that are organized in the United States or any state thereof or the District of Columbia.

Borrowings under the Revolving Credit Agreement may be denominated in dollars, Canadian dollars, euro and British pounds, and bear interest at a per annum rate equal to an applicable eurocurrency rate or base rate plus, in either case, a specified margin, and the borrowers are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ credit rating at the time.

The borrowers and guarantors under the Revolving Credit Agreement, which are currently comprised of CF Holdings, CF Industries and CF Holdings’ wholly owned subsidiaries CF Industries Enterprises, Inc. (CFE) and CF Industries Sales, LLC (CFS), are referred to together herein as the Loan Parties. CF Holdings and CF Industries guaranteed the obligations of the Loan Parties under the Revolving Credit Agreement prior to the effectiveness of the November 2016 Credit Agreement Amendment, and, upon the effectiveness of the November 2016 Credit Agreement Amendment, CFE and CFS also became guarantors of the obligations of the Loan Parties under the Revolving Credit Agreement. Subject to specified exceptions, the Revolving Credit Agreement requires that each direct or indirect domestic subsidiary of CF Holdings that guarantees debt for borrowed money of any Loan Party in excess of $150 million become a guarantor under the Revolving Credit Agreement. Subject to specified exceptions, the Revolving Credit Agreement requires a grant of a first priority security interest in substantially all of the assets of the Loan Parties, including a pledge by CFS of its equity interests in CF Industries Nitrogen, LLC (CFN) and mortgages over certain material fee-owned domestic real properties, to secure the obligations of the Loan Parties thereunder.

In addition to the obligations under the Revolving Credit Agreement, the Loan Parties also guarantee the obligations under any (i) letter of credit facilities, letter of credit reimbursement agreements, letters of credit, letters of guaranty, surety bonds or similar arrangements in an aggregate amount up to $300 million and (ii) interest rate or other hedging arrangements, in each case between CF Holdings or certain of its subsidiaries, on the one hand, and any person that is a lender or the administrative agent under the Revolving Credit Agreement or an affiliate of such person, on the other hand, that are designated by CF Industries as Secured Bilateral LC Facilities or Secured Swap Agreements (each as defined in the Revolving Credit Agreement), as applicable, pursuant to the terms of the Revolving Credit Agreement (such additional obligations, the Additional Guaranteed Obligations). Obligations under Secured Bilateral LC Facilities in an aggregate amount up to $300 million and obligations under Secured Swap Agreements are secured by the same security interest that secures the obligations under the Revolving Credit Agreement.

The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants customary for a financing of this type. Prior to the effectiveness of the November 2016 Credit Agreement Amendment, the Revolving Credit Agreement limited the ability of non-guarantor subsidiaries of CF Holdings to incur indebtedness and limited the ability of CF Holdings and its subsidiaries to grant liens, merge or consolidate with other entities and sell, lease or transfer all or substantially all of the assets of CF Holdings and its subsidiaries to another entity, in each case, subject to specified exceptions. The November 2016 Credit Agreement Amendment modified the negative covenants in the Revolving Credit Agreement to limit further the ability of CF Holdings and its subsidiaries to grant liens and add limitations on the ability of CF Holdings and its subsidiaries to incur debt, pay dividends, voluntarily prepay certain debt, make investments and dispose of

CF INDUSTRIES HOLDINGS, INC.

assets, in each case, subject to specified exceptions (such further and additional limitations, the Additional Negative Covenants).

The financial covenants applicable to CF Holdings and its subsidiaries in the Revolving Credit Agreement (the New Financial Covenants):


(i)	restrict the ratio of total secured debt to EBITDA (as defined in the Revolving Credit Agreement) for the period of four consecutive fiscal quarters most recently ended to a maximum of 3.75:1.00,


(ii)	require the ratio of EBITDA for the period of four consecutive fiscal quarters most recently ended to consolidated interest expense (as defined in the Revolving Credit Agreement) for the period of four consecutive fiscal quarters most recently ended to be a minimum of 1.20:1.00 for the fiscal quarters ending on or prior to December 31, 2018, and 1.50:1.00 thereafter, and


(iii)	require the ratio of total debt to total capitalization as of the last day of any fiscal quarter to be less than or equal to 0.60:1.00.

As of December 31, 2016, we were in compliance with all covenants under the Revolving Credit Agreement.

Under the Revolving Credit Agreement, if on any date certain conditions were met, including (i) an absence of an event of default under the Revolving Credit Agreement, (ii) the receipt of an investment grade corporate rating for CF Holdings from two of three selected ratings agencies and (iii) the ratio of CF Holdings’ total net debt to EBITDA for the period of four consecutive fiscal quarters most recently ended being less than 3.75:1.00, CF Industries would be able to, at its option, choose to (w) suspend the Additional Negative Covenants, (x) replace the New Financial Covenants with covenants requiring the ratio of total net debt to EBITDA for the period of four fiscal consecutive quarters most recently ended to be less than or equal to 3.75:1.00 and the ratio of EBITDA for the period of four consecutive fiscal quarters most recently ended to consolidated interest expense for the period of four consecutive fiscal quarters most recently ended to be not less than 2.75:1.00, (y) release the collateral securing the obligations under the Revolving Credit Agreement and (z) release the guarantees supporting, and the collateral securing, the Secured Bilateral LC Facilities and the Secured Swap Agreements. Such a choice by CF Industries would commence a "Covenant Suspension Period" that would expire upon the Company's no longer having an investment grade corporate rating from two of three selected rating agencies. Upon the expiration of a Covenant Suspension Period, the Additional Negative Covenants and the New Financial Covenants would be reinstated, and the Loan Parties party to the Revolving Credit Agreement would be required to guarantee the Additional Guaranteed Obligations and grant a first priority security interest in substantially all of each Loan Party’s assets, including a pledge by CFS of its equity interests in CFN and mortgages over certain material fee-owned domestic real properties, subject to certain exceptions, to secure the obligations under the Revolving Credit Agreement, the Secured Bilateral LC Facilities and the Secured Swap Agreements.

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, 2016, we had excess borrowing capacity under the Revolving Credit Agreement of $695 million (net of outstanding letters of credit of $55 million). There were no borrowings outstanding under the Revolving Credit Agreement as of December 31, 2016 or December 31, 2015. Maximum borrowings outstanding under the Revolving Credit Agreement during the twelve months ended December 31, 2016 were $150 million. The weighted-average annual interest rate of borrowings under the Revolving Credit Agreement during the twelve months ended December 31, 2016 was 1.85%. Maximum borrowings under the Revolving Credit Agreement during the twelve months ended December 31, 2015, were $367 million with a weighted-average annual interest rate of 1.47%.

CF INDUSTRIES HOLDINGS, INC.

Senior Notes

Long-term debt presented on our consolidated balance sheets as of December 31, 2016 and December 31, 2015 consisted of the following Public Senior Notes (unsecured), Senior Secured Notes and Private Senior Notes (unsecured):



	Effective Interest Rate		December 31, 2016						December 31, 2015
		Principal Outstanding			Carrying Amount (1)			Principal Outstanding			Carrying Amount (1)
			(in millions)
Public Senior Notes:
6.875% due 2018	7.344%		$	800		$	795		$	800		$	792
7.125% due 2020	7.529%		800			791			800			788
3.450% due 2023	3.562%		750			745			750			745
5.150% due 2034	5.279%		750			739			750			739
4.950% due 2043	5.031%		750			741			750			741
5.375% due 2044	5.465%		750			741			750			740
Senior Secured Notes:
3.400% due 2021	3.784%		500			491			—			—
4.500% due 2026	4.760%		750			735			—			—
Private Senior Notes:
4.490% due 2022	4.664%		—			—			250			248
4.930% due 2025	5.061%		—			—			500			496
5.030% due 2027	5.145%		—			—			250			248
Total long-term debt			$	5,850		$	5,778		$	5,600		$	5,537


(1)	Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was $12 million and $7 million as of December 31, 2016 and December 31, 2015, respectively, and total deferred debt issuance costs were $60 million and $56 million as of December 31, 2016 and December 31, 2015, respectively.

Public Senior Notes

Under the indentures (including the applicable supplemental indentures) governing the senior notes due 2018, 2020, 2023, 2034, 2043 and 2044 identified in the table above (the Public Senior Notes), each series of Public Senior Notes is guaranteed by CF Holdings. Interest on the Public Senior Notes is payable semiannually, and the Public Senior Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices. The indentures governing the Public Senior Notes contain customary events of default (including cross-default triggered by acceleration of, or a principal payment default that is not cured within an applicable grace period under, other debt having a principal amount of $150 million or more) 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.

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 CF Holdings, 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 Public Senior Notes due 2023, 2034, 2043 and 2044 following the repayment of the Public Senior Notes due 2018 and 2020 or the subsidiaries of ours, other than CF Industries, otherwise becoming no longer subject to such a requirement to guarantee the Public Senior Notes due 2018 and 2020.

On November 21, 2016, in connection with the effectiveness of the November 2016 Credit Agreement Amendment, CFE and CFS became subsidiary guarantors of the Public Senior Notes.

CF INDUSTRIES HOLDINGS, INC.

Senior Secured Notes

On November 21, 2016, CF Industries issued $500 million aggregate principal amount of 3.400% senior secured notes due 2021 (the 2021 Notes) and $750 million aggregate principal amount of 4.500% senior secured notes due 2026 (the 2026 Notes, and together with the 2021 Notes, the Senior Secured Notes). The net proceeds, after deducting discounts and offering expenses, from the issuance and sale of the Notes were approximately $1.23 billion. CF Industries used approximately $1.18 billion of the net proceeds for the prepayment (including payment of a make-whole amount of approximately $170 million and accrued interest) in full of the outstanding $1.0 billion aggregate principal amount of the Private Senior Notes. See "—Private Senior Notes," below. The Company intends that the remainder of the net proceeds be used for general corporate purposes.

Interest on the Senior Secured Notes is payable semiannually on December 1 and June 1 beginning on June 1, 2017, and the Senior Secured Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices.

Under the terms of the applicable indenture, the Senior Secured Notes of each series are fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by CF Holdings and each current and future domestic subsidiary of CF Holdings (other than CF Industries) that from time to time is a borrower, or guarantees indebtedness, under the Revolving Credit Agreement. The requirement for any subsidiary of CF Holdings to guarantee the Senior Secured Notes of a series will apply only until, and the subsidiary guarantees of the Senior Secured Notes of a series will be automatically released upon, the latest to occur of (a) CF Holdings having an investment grade corporate rating, with a stable or better outlook, from two of three selected ratings agencies and there being no default or event of default under the applicable Indenture, (b) the retirement, discharge or legal or covenant defeasance of, or satisfaction and discharge of the supplemental indenture governing, the Public Senior Notes due 2018 or the subsidiaries of CF Holdings (other than CF Industries) otherwise becoming no longer subject to the requirement, described in the second paragraph under "—Public Senior Notes," above, to guarantee the Public Senior Notes due 2018 and (c) the retirement, discharge or legal or covenant defeasance of, or satisfaction and discharge of the supplemental indenture governing, the Public Senior Notes due 2020 or the subsidiaries of CF Holdings (other than CF Industries) otherwise becoming no longer subject to the requirement, described in the second paragraph under "—Public Senior Notes," above, to guarantee the Public Senior Notes due 2020. In accordance with the applicable indenture, CFE and CFS, in addition to CF Holdings, guaranteed the Senior Secured Notes of each series upon the initial issuance of the Senior Secured Notes.

Subject to certain exceptions, the obligations under each series of Senior Secured Notes and each guarantor’s related guarantee are secured by a first priority security interest in substantially all of the assets of CF Industries, CF Holdings and the subsidiary guarantors, including a pledge by CFS of its equity interests in CFN and mortgages over certain material fee-owned domestic real properties (the Collateral). The obligations under the Revolving Credit Agreement, together with certain letter of credit, hedging and similar obligations and future pari passu secured indebtedness, will be secured by the Collateral on a pari passu basis with the Senior Secured Notes. The liens on the Collateral securing the obligations under the Senior Secured Notes of a series and the related guarantees will be automatically released and the covenant under the applicable indenture limiting dispositions of Collateral will no longer apply if on any date after the initial issuance of the Senior Secured Notes CF Holdings has an investment grade corporate rating, with a stable or better outlook, from two of three selected ratings agencies and there is no default or event of default under the applicable indenture.

Under each of the indentures governing the Senior Secured Notes, specified changes of control involving CF Holdings or CF Industries, when accompanied by a ratings downgrade, as defined with respect to the applicable series of Senior Secured Notes, constitute change of control repurchase events. Upon the occurrence of a change of control repurchase event with respect to the 2021 Notes or the 2026 Notes, as applicable, unless CF Industries has exercised its option to redeem such Senior Secured Notes, CF Industries will be required to offer to repurchase them at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

The indentures governing the Senior Secured Notes contain covenants that limit, among other things, the ability of CF Holdings and its subsidiaries, including CF Industries, to incur liens on certain assets to secure debt, to engage in sale and leaseback transactions, to sell or transfer Collateral, to merge or consolidate with other entities and to sell, lease or transfer all or substantially all of the assets of CF Holdings and its subsidiaries to another entity. Each of the indentures governing the Senior Secured Notes provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest on the applicable Senior Secured Notes; failure to comply with other covenants or agreements under the indenture; certain defaults on other indebtedness; the failure of CF Holdings' or certain subsidiaries’ guarantees of the applicable Senior Secured Notes to be enforceable; lack of validity or perfection of any lien securing the obligations under the Senior Secured Notes and the guarantees with respect to Collateral having an aggregate fair market value equal to or greater than a specified amount; and specified events of bankruptcy or insolvency. Under each indenture governing the Senior Secured Notes, in the case of an event of default arising from one of the specified events of

CF INDUSTRIES HOLDINGS, INC.

bankruptcy or insolvency, the applicable Senior Secured Notes would become due and payable immediately, and, in the case of any other event of default (other than an event of default related to CF Industries' and CF Holdings' reporting obligations), the trustee or the holders of at least 25% in aggregate principal amount of the applicable Senior Secured Notes then outstanding may declare all of such Senior Secured Notes to be due and payable immediately.

Private Senior Notes

The senior notes due 2022, 2025 and 2027 (the Private Senior Notes), issued by CF Industries on September 24, 2015, were governed by the terms of a note purchase agreement (as amended, including by an amendment effective September 7, 2016, the Note Purchase Agreement). The Private Senior Notes were guaranteed by CF Holdings. All obligations under the Note Purchase Agreement were unsecured.

On November 21, 2016, we prepaid in full the outstanding $1.0 billion aggregate principal amount of our Private Senior Notes. The prepayment of $1.18 billion included the payment of a make-whole amount of approximately $170 million and accrued interest. Loss on debt extinguishment of $167 million on our consolidated statement of operations excludes $3 million of the make-whole payment, which was accounted for as a modification and recognized on our consolidated balance sheet as deferred financing fees, a reduction of long-term debt, and is being amortized using the effective interest rate method over the term of the Senior Secured Notes.

Bridge Credit Agreement

On September 18, 2015, in connection with our proposed combination with certain businesses of OCI, CF Holdings and CF Industries entered into a senior unsecured 364-Day Bridge Credit Agreement (as amended, the Bridge Credit Agreement). Upon the termination of the Combination Agreement on May 22, 2016, the lenders’ commitments under the Bridge Credit Agreement terminated automatically. There were no borrowings under the Bridge Credit Agreement. See Note 4—Acquisitions and Divestitures and Note 13—Interest Expense to our consolidated financial statements included in Item 8 of this report for additional information.

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 related orders are shipped and revenue is recognized. As of December 31, 2016 and 2015, we had $42 million and $162 million, respectively, in customer advances on our consolidated balance sheets.

While customer advances are generally a significant source of liquidity, the level of forward sales contracts is affected by many factors including current market conditions and our customers' outlook of future market fundamentals. During periods of declining prices, such as the current environment, customers tend to delay purchasing fertilizer in anticipation that prices in the future will be lower than the current prices. If the level of sales under our forward sales programs were to decrease in the future, our cash received from customer advances would likely decrease and our accounts receivable balances would likely increase. Additionally, 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.

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. Expenditures on natural gas represent a significant portion of our production costs. For example, natural gas costs, including realized gains and losses, comprised approximately 47% of our total production costs in 2016. As a result, natural gas prices have a significant impact on our operating expenses and can thus affect our liquidity.

CF INDUSTRIES HOLDINGS, INC.

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 have declined since 2008, but are subject to volatility. During 2016, the daily closing price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, reached a low of $1.49 per MMBtu on three consecutive days in March 2016 and a high of $3.77 per MMBtu on December 8, 2016. During the three-year period ended December 31, 2016, the daily closing price at the Henry Hub reached a low of $1.49 per MMBtu on three consecutive days in March 2016 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 2016, the daily closing price at NBP reached a low of $2.80 per MMBtu on September 1, September 12 and September 14, 2016 and a high of $6.60 per MMBtu on December 30, 2016. During the three-year period ended December 31, 2016, the daily closing price at NBP reached a low of $2.80 per MMBtu on September 1, September 12 and September 14, 2016, and a high of $11.10 per MMBtu on January 8, 2014.

Natural gas costs in our cost of sales, including the impact of realized natural gas derivatives, decreased 6% in 2016 from 2015.

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. In 2016, 2015 and 2014, we recognized unrealized net mark-to-market (gains) losses on natural gas derivatives of $(260) million, $176 million and $79 million, respectively, which is reflected in cost of sales in our consolidated statements of operations.

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, other 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 agreements are master netting arrangements commonly used for over-the-counter (OTC) derivatives that mitigate exposure to counterparty credit risk, in part, by creating contractual rights of netting and setoff, the specifics of which vary from agreement to agreement.

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 thresholds. 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. The Revolving Credit Agreement, at any time when it is secured, provides a cross collateral feature for those of our derivatives that are with counterparties that are party to, or affiliates of parties to, the Revolving Credit Agreement so that no separate collateral would be required for those counterparties in connection with such derivatives. In the event the Revolving Credit Agreement becomes unsecured, separate collateral could be required in connection with such derivatives.

As of December 31, 2016 and 2015, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was zero and $211 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, 2016 and 2015, we had open natural gas derivative contracts for 183.0 million MMBtus and 431.5 million MMBtus, respectively. At both December 31, 2016 and 2015, we had no cash collateral on deposit with counterparties for derivative contracts.

As of December 31, 2015, the notional amount of our open foreign currency derivatives was €89 million. None of these open foreign currency derivatives were designated as hedging instruments for accounting purposes. All of these foreign currency derivatives were settled in 2016.

CF INDUSTRIES HOLDINGS, INC.

Embedded Derivative Liability

Under the terms of our strategic venture with CHS, if our credit rating is reduced below certain levels by two of three specified credit rating agencies, we are required to make a non-refundable yearly payment of $5 million to CHS. The payment would continue on a yearly basis until the earlier of the date that our credit rating is upgraded to or above certain levels by two of three specified credit rating agencies or February 1, 2026. On February 1, 2016, we recognized this term of the strategic venture as an embedded derivative and its value of $8 million was included in other liabilities on our consolidated balance sheet. See Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information.

During 2016, we recorded adjustments to increase the value of the embedded derivative liability by $23 million to reflect our credit evaluations. The inputs into the fair value measurement include the probability of future upgrades and downgrades of our credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable credit spreads of other public companies at different credit rating levels. Based on these inputs, our fair value measurement is classified as Level 2. Additionally, as a result of the reduction in our credit rating in the fourth quarter of 2016, we made a $5 million payment to CHS. The fair value of the embedded derivative liability as of December 31, 2016, is $26 million, which is included in other liabilities and other current liabilities on our consolidated balance sheet. Included in other operating—net in our consolidated statement of operations is a net loss of $23 million.

Defined Benefit Pension Plans

We contributed $23 million to our pension plans in 2016. We expect to contribute approximately $22 million to our pension plans in 2017.

Distributions on Noncontrolling Interest in CFN

In the third quarter of 2016, the CFN Board of Managers approved semi-annual distribution payments in accordance with the Second Amended and Restated Limited Liability Company Agreement of CFN (the CFN LLC Agreement) for the distribution period ended June 30, 2016. In August 2016, CFN distributed a total of $79 million to CHS for the distribution period ended June 30, 2016.

In the first quarter of 2017, the CFN Board of Managers approved semi-annual distribution payments in accordance with the CFN LLC Agreement for the distribution period ended December 31, 2016. On January 31, 2017, CFN distributed $48 million to CHS for the distribution period ended December 31, 2016.

CF INDUSTRIES HOLDINGS, INC.

Cash Flows

Operating Activities

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net cash provided by operating activities in 2016 was $617 million as compared to $1.21 billion in 2015, a decline of $590 million. The decline resulted primarily from lower net earnings during 2016 due to lower selling prices from excess global nitrogen supply, partially offset by lower amounts of cash used for working capital purposes. Lower working capital levels in accounts receivable and inventory, plus lower amounts paid for income taxes and certain income tax refunds received in 2016, contributed to the reduction in cash used for working capital. Favorable changes in working capital also included a greater proportion of sales was paid in 2016 as compared to the prior year period as we entered 2016 with a lower level of customer advances than in 2015 due to customers’ hesitancy to enter into prepaid contracts in a declining fertilizer price environment.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net cash provided by operating activities in 2015 was $1.21 billion as compared to $1.42 billion in 2014. The $214 million decrease 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.

Investing Activities

Years Ended December 31, 2016, 2015 and 2014

Net cash used in investing activities was $2.18 billion in 2016 compared to $2.98 billion in 2015. This decrease is due primarily to the 2015 acquisition of the remaining 50% equity interest in CF Fertilisers UK not previously owned by us for a net cash payment of $552 million, which was net of cash acquired of $18 million. This decrease was also attributable in part to a decline in capital expenditures related primarily to the capacity expansion projects in Donaldsonville, Louisiana and Port Neal, Iowa. During 2016, capital expenditures totaled $2.21 billion compared to $2.47 billion in 2015. The $344 million net cash used in investing activities in 2014 included $1.81 billion in capital expenditures and $505 million transferred to a restricted cash account in support of the capacity expansion projects partially offset by cash proceeds of $1.37 billion from the sale of the phosphate business.

Financing Activities

Years Ended December 31, 2016, 2015 and 2014

Net cash provided by financing activities was $2.44 billion in 2016 compared to $77 million in 2015 and net cash used in financing activities of $787 million in 2014. In 2016, CHS purchased a minority equity interest in CFN for $2.8 billion. We distributed $119 million to the noncontrolling interests, including CHS, in 2016, compared to $45 million and $46 million in 2015 and 2014, respectively. The increase in distributions to noncontrolling interests in 2016 compared to 2015 and 2014 was due to the CHS strategic venture, which increased the distributions by $79 million, representing the distributions paid to CHS in the third quarter of 2016 for the distribution period ended June 30, 2016.

In 2016, we received proceeds of approximately $1.24 billion, net of discounts, from the issuance of the Senior Secured Notes which were used to fund the prepayment of the $1.0 billion of Private Senior Notes and the related make-whole payment of $170 million. In both 2015 and 2014, we issued senior notes and received proceeds of approximately $1.0 billion and $1.5 billion, respectively. No share repurchases were made during 2016 compared to cash used for share repurchases in 2015 and 2014 of $556 million and $1.94 billion, respectively.

CF INDUSTRIES HOLDINGS, INC.

Contractual Obligations

The following is a summary of our contractual obligations as of December 31, 2016:



	2017		2018		2019		2020		2021		After 2021		Total
	(in millions)
Contractual Obligations
Debt
Long-term debt(1)	$	—	$	800	$	—	$	800	$	500	$	3,750	$	5,850
Interest payments on long-term debt(1)	308		278		251		222		191		2,393		3,643
Other Obligations
Operating leases	89		83		65		51		41		92		421
Equipment purchases and plant improvements (2)	236		3		2		—		—		—		241
Transportation(3)	11		8		7		3		—		—		29
Purchase obligations(4)(5)	656		103		44		42		37		114		996
Contributions to pension plans(6)	22		—		—		—		—		—		22
Net operating loss settlement(7)	11		—		—		—		—		—		11
Total(8)(9)(10)	$	1,333	$	1,275	$	369	$	1,118	$	769	$	6,349	$	11,213


(1)	Based on debt balances before discounts, offering expenses and interest rates as of December 31, 2016.


(2)	Includes obligations to finalize the capital component of the Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects that were completed in 2016. For further information, see discussion under "Liquidity and Capital Resources—Capacity Expansion Projects and Restricted Cash."

(3)

Includes anticipated expenditures under certain contracts to transport 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 in this table are based on projected normal operating rates and contracted or current spot prices, where applicable, as of December 31, 2016 and actual operating rates and prices may differ.

(4)

Includes minimum commitments to purchase and transport natural gas based on prevailing market-based forward prices as of December 31, 2016 excluding reductions for plant maintenance and turnaround activities. Purchase obligations do not include any amounts related to our natural gas derivatives. See Note 15—Derivative Financial Instruments to our consolidated financial statements included in Item 8 of this report for additional information.


(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, 2016 is $57 million with a total remaining commitment of $100 million.


(6)	Represents the contributions we expect to make to our pension plans during 2017. 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.


(8)	Excludes $162 million of unrecognized tax benefits due to the uncertainty in the timing of potential tax payments.


(9)	Excludes $14 million of environmental remediation liabilities due to the uncertainty in the timing of payments.

(10)

Excludes $5 million annual payments to CHS related to our embedded derivative through 2026 due to uncertainty of future credit ratings, as this is only applicable if our credit rating stays below certain levels from two of three specified credit rating agencies. See Note 9—Fair Value Measurements or Note 17—Noncontrolling Interests to our consolidated financial statements included in Item 8 of this report for additional information.

CF INDUSTRIES HOLDINGS, INC.

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 one 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 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 five 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, 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."

CF INDUSTRIES HOLDINGS, INC.

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.

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. The most recent estimate of the aggregate cost of these AROs expressed in 2016 dollars is $72 million. We have not recorded a liability for these conditional AROs as of December 31, 2016 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.

PLNL is our joint venture investment in the Republic of Trinidad and Tobago and operates an ammonia plant that relies on natural gas supplied by the NGC pursuant to the NGC Contract. The joint venture is accounted for under the equity method. The joint venture has experienced curtailments in the supply of natural gas from NGC, which have reduced the ammonia production at PLNL. In 2016, NGC communicated to PLNL that it does not recognize the joint venture’s exercise of its option to renew the NGC Contract for an additional five-year term beyond its current termination date in September 2018, and that any NGC commitment to supply gas beyond 2018 will need to be based on new agreements regarding volume and price. PLNL has initiated arbitration proceedings against NGC and asserted claims in connection with NGC’s failure to supply the contracted quantities of natural gas, and its refusal to recognize the joint venture’s exercise of its option to extend the NGC Contract. PLNL is seeking declaratory and injunctive relief, as well as damages for past and ongoing curtailments. Although the joint venture believes its claims against NGC to be meritorious, it is not possible to predict the outcome of the arbitration. There are significant assumptions in the future operations of the joint venture that are uncertain at this time, including the quantities of gas NGC will make available, the cost of such gas, the estimates that are used to determine the useful lives of fixed assets and the assumptions in the discounted cash flow models utilized for recoverability and impairment testing. As part of our impairment assessment of our equity method investment in PLNL, we determined the carrying value exceeded the fair value and recognized

CF INDUSTRIES HOLDINGS, INC.

a $134 million impairment charge in 2016. Previously, in 2015, we recognized an impairment charge of $62 million related to our equity method investment in PLNL. The carrying value of our equity method investment in PLNL at December 31, 2016 is approximately $139 million. If NGC does not make sufficient quantities of natural gas available to PLNL at prices that permit profitable operations, PLNL may cease operating its facility and we would write off the remaining investment in PLNL.

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 2016, 2015 or 2014 reviews. As of December 31, 2016 and 2015, the carrying value of our goodwill was $2.35 billion and $2.39 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 our consolidated balance sheets. See Note 7—Goodwill and Other Intangible Assets to our consolidated financial statements included in Item 8 of this report for additional information regarding our 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 permanently 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.

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

CF INDUSTRIES HOLDINGS, INC.

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, 2016, we have recorded a reserve for unrecognized tax benefits, including penalties and interest, of $162 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 (EROA) and, in addition for our United Kingdom plans, RPI.

The December 31, 2016 PBO was computed based on a weighted-average discount rate of 4.0% for our North America plans and 2.8% 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 2016 was 4.3% for North America plans and 3.8% 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 4.9% weighted-average EROA used to calculate pension expense in 2016 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 5.2% weighted-average EROA used to calculate pension expense in 2016 for our United Kingdom plans is based on expected long-term performance of underlying investments, adjusted for investment managers' fees. The 3.3% RPI used to calculate our United Kingdom plan PBO and the 3.1% RPI used to calculate 2016 pension expense is developed using the Bank of England implied retail price inflation curve, which is based on the difference between yields on fixed interest government bonds and index-linked government bonds.

For North America qualified pension plans, our PBO was $759 million as of December 31, 2016, which was $123 million higher than pension plan assets. For our United Kingdom pension plans, our PBO was $559 million as of December 31, 2016 which was $193 million higher than pension plan assets. The tables below estimate the impact of a 50 basis point increase or decrease in the key assumptions on our December 31, 2016 PBO and 2016 pension expense:



	North America Plans
	Increase/(Decrease) in					Increase/(Decrease) in
	December 31, 2016 PBO					2016 Pension Expense
Assumption	+50 bps			-50 bps		+50 bps			-50 bps
	( in millions)
Discount Rate	$	(43	)	$	47	$	(1	)	$	3
EROA	N/A			N/A		(3		)	3



	United Kingdom Plans
	Increase/(Decrease) in						Increase/(Decrease) in
	December 31, 2016 PBO						2016 Pension Expense
Assumption	+50 bps			-50 bps			+50 bps			-50 bps
	( in millions)
Discount Rate	$	(45	)	$	50		$	—		$	(1	)
EROA	N/A			N/A			(2		)	2
RPI	29			(28		)	1			(1		)

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.

CF INDUSTRIES HOLDINGS, INC.

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, 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.

CF INDUSTRIES HOLDINGS, INC.

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