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. For a discussion and analysis of the year ended December 31, 2017, you should read Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 22, 2019. The following is an outline of the discussion and analysis included herein:

•Overview of CF Holdings
•Our Company
•Industry Factors
•Items Affecting Comparability of Results
•Financial Executive Summary
•Results of Consolidated Operations
•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 a leading global fertilizer and chemical company. Our 3,000 employees operate world-class manufacturing complexes in Canada, the United Kingdom and the United States. Our manufacturing network is among the most efficient and cost-advantaged in the world, as our facilities in Canada and the United States have access to low-cost North American natural gas. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers, farmers and industrial users. Our principal nitrogen fertilizer products are anhydrous ammonia (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. We serve our customers in North America through our production, storage, transportation and distribution network. We also reach a global customer base with exports from our Donaldsonville, Louisiana, facility, the world’s largest and most flexible nitrogen complex. Additionally, we move product to international destinations from our Verdigris, Oklahoma, facility, our Yazoo City, Mississippi, facility, and our Billingham and Ince facilities in the United Kingdom, and from a joint venture ammonia facility in the Republic of Trinidad and Tobago in which we own a 50 percent interest.

Our principal assets as of December 31, 2019 include:

•five U.S. nitrogen manufacturing facilities, located in Donaldsonville, Louisiana (the largest nitrogen complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; Verdigris, Oklahoma; and Woodward, Oklahoma. These facilities are wholly owned directly or indirectly by CF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder. See Note 17—Noncontrolling Interests for additional information on our strategic venture with CHS;
•two Canadian nitrogen manufacturing facilities, located in Medicine Hat, Alberta (the largest nitrogen complex in Canada) and Courtright, Ontario;
•two United Kingdom nitrogen manufacturing facilities, located in Billingham and Ince;

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.

Our nitrogen manufacturing facility in Verdigris, Oklahoma, is owned and operated by Terra Nitrogen, Limited Partnership (TNLP). Prior to April 2, 2018, TNLP was a subsidiary of Terra Nitrogen Company, L.P. (TNCLP), which was a publicly traded limited partnership of which we were the sole general partner and the majority limited partner, and in which we owned an approximate 75.3% interest.

On February 7, 2018, we announced that, in accordance with the terms of TNCLP’s First Amended and Restated Agreement of Limited Partnership (as amended by Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership, the TNCLP Agreement of Limited Partnership), Terra Nitrogen GP Inc. (TNGP), the sole general partner of TNCLP and an indirect wholly owned subsidiary of CF Holdings, elected to exercise its right to purchase all of the 4,612,562 publicly traded common units of TNCLP (the TNCLP Public Units). On April 2, 2018, TNGP completed its purchase of the TNCLP Public Units (the Purchase) for an aggregate cash purchase price of $388 million. We funded the Purchase with cash on hand. Upon completion of the Purchase, CF Holdings owned, through its subsidiaries, 100 percent of the general and limited partnership interests of TNCLP.

Industry Factors

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

Global Supply and Demand Factors

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, changes in supply and demand and cost factors.

Historically, global fertilizer demand has been driven primarily by population growth, gross domestic product growth, changes in dietary habits, 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 growth may depend on global economic conditions, farm sector income, weather patterns, the level of global grain stocks relative to consumption, fertilizer application rates, and governmental regulations, including fertilizer subsidies or requirements mandating increased use of bio-fuels or industrial nitrogen products. 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; therefore, supply costs are affected by the supply of and demand for these commodities.

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, including the imposition of duties, tariffs or quotas, that affect foreign trade or investment. 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. 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, the Republic of Trinidad and Tobago, North Africa and Russia have been major exporters to North America in recent years. As a result, the North American nitrogen fertilizer market is dependent on imports to balance supply and demand.

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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, fertilizer products used and timing of applications, expected yields and the types of crops planted.

Items Affecting Comparability of Results

Selling Prices

The U.S. Gulf is a major global fertilizer pricing point due to the volume of nitrogen fertilizer that trades there. In 2018, higher energy costs in Asia and Europe, along with continued enforcement of environmental regulations in China, resulted in lower nitrogen production in these regions. In addition, plant outages impacted the global nitrogen supply and demand balance. These factors collectively drove global nitrogen prices higher in the second half of 2018.

Upon entering the first quarter of 2019, our average selling prices were higher than the first quarter of 2018, driven by the continued impact of a tighter global nitrogen supply and demand balance experienced throughout late 2018. During the first half of 2019, our average selling prices for all fertilizer products remained strong due to the limited supply of fertilizer as high water levels and flooding impacted shipping and logistics on the U.S. inland rivers and limited access for imports. As we entered the third quarter of 2019, the fertilizer application season extended due to the late planting, resulting in continued in-season prompt sales, which favorably impacted our third quarter selling prices. However, as the third quarter continued, lower global energy prices resulted in higher nitrogen industry operating rates, which increased global fertilizer supply. This factor, in conjunction with the seasonally slow third quarter period, led to weakness in selling prices as the third quarter ended, which continued throughout the fourth quarter of 2019. In addition to low selling prices, the fourth quarter of 2019 experienced cold and wet weather, which limited fall ammonia application. These factors collectively led to lower nitrogen prices in the fourth quarter.

The average selling price for our products for 2019 and 2018 was $235 per ton and $229 per ton, respectively. The increase in average selling prices of 3% in 2019 from 2018 increased net sales by $62 million.

Sales Volume

Persistent cold and wet weather across most of North America early in 2019 delayed spring planting activity and fertilizer applications. In addition, high water levels impacted shipping and logistics on the U.S. inland rivers and delayed certain barge shipments, which caused delays in certain customers taking delivery of fertilizer and other customers delaying purchases. As a result, the spring application season extended into the third quarter of 2019 with some shipments that would typically occur in the second quarter being delayed into the third quarter. Additionally, planned maintenance activity at our plants reduced production levels in the third quarter of 2019, reducing inventory availability. In the fourth quarter, shipping activity increased and full year sales volume for 2019 was 19.5 million tons, 1% higher than the 19.3 million tons in 2018.

Sales volume for our products in 2019, 2018 and 2017 is shown in the table below.

201920182017
Sales Volume (tons)Net SalesSales Volume (tons)Net SalesSales Volume (tons)Net Sales
(tons in thousands; dollars in millions)
Ammonia3,516$1,1133,135$1,0284,105$1,209
Granular urea4,8491,3424,8981,3224,357971
UAN6,8071,2707,0421,2347,0931,134
AN2,1095062,0024602,353497
Other2,2573592,2523852,044319
Total19,538$4,59019,329$4,42919,952$4,130

The increase in total sales volume in 2019 from 2018 was due primarily to the impact of increased supply resulting from both higher inventory levels entering 2019 and higher production in 2019. The increase in sales volume increased net sales by $99 million in 2019.

CF INDUSTRIES HOLDINGS, INC.

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 nitrogen products. Natural gas is a significant cost component of manufactured nitrogen products, representing approximately 35% of our production costs.

Most of our nitrogen fertilizer manufacturing facilities are located in the United States and Canada. As a result, 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 over the last decade, but are subject to volatility. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, was $2.51 per MMBtu for 2019 compared to $3.12 per MMBtu for 2018, a decrease of 20%.

We also have manufacturing facilities located in the United Kingdom. These facilities are subject to fluctuations associated with the price of natural gas in Europe. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). The average daily market price at NBP was $4.44 per MMBtu for 2019 compared to $8.07 per MMBtu for 2018, a decrease of 45%. The price of natural gas in the United Kingdom has declined as a result of increased production and availability of liquefied natural gas in the global market due to higher gas exports from exporting nations, including the United States.

Natural gas costs in cost of sales, including the impact of realized natural gas derivatives, was $2.74 per MMBtu in 2019, a 13% decrease from $3.16 per MMBtu in 2018, which resulted in an increase in gross margin of approximately $153 million.

Other Items Affecting Comparability of Results

During the years ended December 31, 2019 and 2018, certain items impacted our financial results. The following table and related discussion outline these items and how they impacted the comparability of our financial results during these periods. Positive amounts in the table below are costs or expenses incurred, while negative amounts are income recognized in the periods presented.

20192018
Pre-TaxAfter-Tax**(1)**Pre-TaxAfter-Tax**(1)**
(in millions)
Unrealized net mark-to-market loss (gain) on natural gas derivatives(2)$14$10$(13)$(10)
Gain on foreign currency transactions including intercompany loans(3)(1)(1)(5)(4)
Gain on sale of Pine Bend facility(3)(45)(34)——
Insurance proceeds(3)(37)(28)(10)(8)
Losses on debt extinguishment2116——
Income taxes:
Settlement of Terra Industries Inc. amended tax returns(4)(5)(14)——
Louisiana incentive tax credit(5)—(30)——
Impact of U.S. Tax Cuts and Jobs Act(5)———16
PLNL withholding tax charge(6)1616——
PLNL settlement income(6)——(19)(19)
(1)The tax impact is calculated utilizing a marginal effective rate of 23.3% in 2019 and 22.9% in 2018.
(2)Included in cost of sales in our consolidated statements of operations.
(3)Included in other operating—net in our consolidated statements of operations.
(4)Included in interest income and income tax provision (benefit) in our consolidated statement of operations.
(5)Included in income tax provision (benefit) in our consolidated statement of operations.
(6)Included in equity in (loss) earnings of operating affiliates in our consolidated statements of operations.

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The following describes the significant items that impacted the comparability of our financial results in 2019 and 2018. Descriptions of items below that refer to amounts in the table above, refer to the pre-tax amounts, except for the discussion under Income taxes.

Unrealized net mark-to-market loss (gain) on natural gas derivatives

Natural gas is the largest and most volatile single component of the manufacturing cost for nitrogen-based products. At certain times, we have managed the risk of changes in natural gas prices through the use of derivative financial instruments. The derivatives that we may use for this purpose are primarily natural gas fixed price swaps, basis swaps and options. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. This can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives, which is reflected in cost of sales in our consolidated statements of operations. In 2019 and 2018, we recognized an unrealized net mark-to-market loss (gain) on natural gas derivatives of $14 million and $(13) million, respectively.

Gain on foreign currency transactions including intercompany loans

In 2019 and 2018, we recognized gains of $1 million and $5 million, respectively, from the impact of changes in foreign currency exchange rates on primarily Canadian dollar and British pound denominated intercompany loans that were not permanently invested.

Gain on sale of Pine Bend facility

During the first quarter of 2019, we entered into an agreement to sell our Pine Bend dry bulk storage and logistics facility in Minnesota. In April of 2019, we completed the sale, received proceeds of $55 million and recognized a pre-tax gain of $45 million. The gain is reflected in other operating—net in our consolidated statement of operations.

Insurance proceeds

In 2019 and 2018, we recognized income of $37 million and $10 million, respectively, related to insurance claims at one of our nitrogen complexes. The $37 million of income in 2019 consists of $22 million related to business interruption insurance proceeds and $15 million related to property insurance proceeds. The $10 million of income in 2018 is related to property insurance proceeds. These proceeds are reflected in other operating—net in our consolidated statements of operations.

Losses on debt extinguishment

On November 13, 2019, we redeemed all of the $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance with the optional redemption provisions provided in the indenture governing the 2020 Notes. On December 13, 2019, we redeemed $250 million principal amount, representing 50% of the $500 million outstanding principal amount, of the 3.400% senior secured notes due December 2021 (the 2021 Notes), in accordance with the optional redemption provisions provided in the indenture governing the 2021 Notes. As a result of the early redemption of the 2020 Notes and the 2021 Notes, we recognized a loss on debt extinguishment of $21 million, of which $12 million related to the 2020 Notes and $9 million related to the 2021 Notes.

Income taxes

•As more fully described under “Liquidity and Capital Resources—Settlement of Terra Amended Tax Returns,” below, during the fourth quarter of 2019, the Joint Committee on Taxation of the U.S. Congress (the Joint Committee) approved the United States Internal Revenue Service (IRS) report and refund claim pertaining to certain amended tax returns related to Terra Industries Inc. (Terra). We acquired Terra in April 2010 and filed amended tax returns to correct the manner in which Terra reported the repatriation of foreign earnings during years back to 1999. As a result of the approval by the Joint Committee, we recognized in the fourth quarter of 2019 interest income of $5 million ($4 million after tax) and a reduction in income tax expense of $10 million related to the favorable settlement of certain uncertain tax positions. We expect to receive a cash refund of approximately $57 million in the first half of 2020 related to this matter.
•For 2019, our income tax provision includes an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana complex.
•On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act” or “Tax Reform”) which included a number of changes to U.S. tax law that affect us. The most significant impact of Tax Reform was the reduction of the U.S. statutory corporate tax rate from 35% to 21%. This change necessitated the revaluation of all of

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our U.S. deferred tax balances, which resulted in an income tax benefit of $552 million that was recorded in 2017. In addition, Tax Reform required us to pay U.S. tax on our previously untaxed foreign earnings. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate, and the remaining earnings are taxed at an 8% rate. We elected to pay the transition tax in installments through 2025. As a result, we recognized a provisional charge and liability of $57 million in 2017. A $16 million increase to the provisional amount of the transition tax liability was recorded in 2018.

PLNL withholding tax charge

The Trinidadian tax authority (the Board of Inland Revenue) issued a proposed tax assessment against PLNL, our joint venture in the Republic of Trinidad and Tobago, with respect to tax years 2011 and 2012 in the amount of approximately $12 million. The proposed assessment asserted that PLNL should have withheld tax at a higher rate on dividends paid to its Trinidadian owners. The Board of Inland Revenue also would have assessed statutory interest and penalties on the amount of tax owed when a final assessment was issued for the tax years 2011 and 2012. As we own a 50% interest in PLNL, our effective share of any assessment that is determined to be a liability of PLNL would be 50%, which would be reflected as a reduction in our equity in earnings of PLNL.

During the third quarter of 2019, the Trinidadian government offered a tax amnesty period that provided taxpayers the opportunity to pay any prior year tax obligations and avoid accumulated interest or penalties. During the tax amnesty period, PLNL evaluated the proposed assessment, including considering the outcome of certain recent legal cases involving other taxpayers. As a result of this evaluation, PLNL paid withholding tax to the Board of Inland Revenue under the amnesty program for tax years 2011 to the current period, and recognized a charge for $32 million in the third quarter of 2019. Our 50% share of PLNL’s tax charge is $16 million, which reduced our equity in earnings of operating affiliates for 2019.

PLNL settlement income

PLNL operates an ammonia plant that relies on natural gas supplied, under a Gas Sales Contract (the NGC Contract), by The National Gas Company of Trinidad and Tobago Limited (NGC). PLNL experienced past curtailments in the supply of natural gas, which reduced historical ammonia production at PLNL. The NGC Contract had an initial expiration date of September 2018 and was extended on the same terms until September 2023. Any NGC commitment to supply gas beyond 2023 will be based on new agreements. In May 2018, the NGC and PLNL reached a settlement of an arbitration proceeding regarding PLNL’s claims for damages due to natural gas supply curtailments. The net after-tax impact of the settlement reached between NGC and PLNL that is recognized in our consolidated statement of operations for 2018 was an increase in our equity in earnings of operating affiliates of approximately $19 million.

Financial Executive Summary

We reported net earnings attributable to common stockholders of $493 million in 2019 compared to $290 million in 2018, an increase in net earnings of 70%, or $203 million. Diluted net earnings per share attributable to common stockholders was $2.23 in 2019 compared to $1.24 in 2018, an increase of 80%, or $0.99 per share. The increase in net earnings of $203 million was due primarily to the following:

•Gross margin increased by $257 million, or 28%, in 2019 to $1.17 billion as compared to $917 million in 2018. The increase in gross margin was primarily driven by a 13% decrease in natural gas costs, a 3% increase in average selling prices and a 1% increase in sales volume. These increases were partially offset by higher costs related to maintenance activity, the impact of an unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a gain in 2018 and higher shipping and distribution costs.
•Other operating—net was $73 million of income in 2019 compared to $27 million of income in 2018, or an increase in income of $46 million. The increase was due primarily to a $45 million gain on the sale of our Pine Bend dry bulk storage and logistics facility and $37 million of insurance proceeds related to an insurance claim at one of our nitrogen complexes. Both of these items are more fully described above under “Items Affecting Comparability of Results.”
•Equity in earnings of operating affiliate represents the results of our 50% interest in PLNL. Equity in earnings decreased $41 million to a loss of $5 million in 2019 from $36 million of income in 2018 due to two significant events that impacted PLNL’s results. The loss in 2019 includes a $16 million withholding tax charge and the 2018 period includes $19 million of income pertaining to a settlement over the supply of natural gas. These events are more fully described above under “Items Affecting Comparability of Results.”

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•In 2019, we recognized $21 million of losses on the early extinguishment of debt as we redeemed all of the $500 million outstanding principal amount of the 2020 Notes in November 2019 and $250 million principal amount of the $500 million outstanding principal amount of the 2021 Notes in December 2019.
•Net interest expense decreased by $11 million to $217 million in 2019 from $228 million in 2018. The decrease was due to $5 million of interest income related to the settlement of the Terra amended tax returns, which is more fully described under “Liquidity and Capital Resources—Settlement of Terra Amended Tax Returns,” below. In addition, the decrease reflects our redemption in November 2019 of all of the $500 million outstanding principal amount of the 2020 Notes and the partial redemption in December 2019 of $250 million principal amount of the 2021 Notes.

On February 13, 2019, our Board of Directors (the Board) authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). Under the 2019 Share Repurchase Program, in 2019, we repurchased a total of 7.6 million shares for $337 million. In the second half of 2018, we repurchased 10.9 million shares for $500 million under the previous 2018 Share Repurchase Program. See discussion under “Liquidity and Capital Resources—Share Repurchase Programs,” below, for further information.

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Results of Consolidated Operations

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

Year ended December 31,
201920182017**(1)**2019 v. 20182018 v. 2017
(in millions, except as noted)
Net sales$4,590$4,429$4,130$1614%$2997%
Cost of sales (COS)3,4163,5123,696(96)(3)%(184)(5)%
Gross margin1,17491743425728%483111%
Gross margin percentage25.6%20.7%10.5%4.9%10.2%
Selling, general and administrative expenses2392141912512%2312%
Other operating—net(73)(27)18(46)(170)%(45)N/M
Total other operating costs and expenses166187209(21)(11)%(22)(11)%
Equity in (loss) earnings of operating affiliates(5)369(41)N/M27N/M
Operating earnings1,00376623423731%532N/M
Interest expense—net217228303(11)(5)%(75)(25)%
Loss on debt extinguishment21—5321N/M(53)(100)%
Other non-operating—net(7)(9)3222%(12)N/M
Earnings (loss) before income taxes772547(125)22541%672N/M
Income tax provision (benefit)126119(575)76%694N/M
Net earnings64642845021851%(22)(5)%
Less: Net earnings attributable to noncontrolling interests153138921511%4650%
Net earnings attributable to common stockholders$493$290$358$20370%$(68)(19)%
Diluted net earnings per share attributable to common stockholders$2.23$1.24$1.53$0.9980%$(0.29)(19)%
Diluted weighted-average common shares outstanding221.6233.8233.9(12.2)(5)%(0.1)—%
Dividends declared per common share$1.20$1.20$1.20$——%$——%
Natural gas supplemental data (per MMBtu)
Natural gas costs in COS(2)$2.75$3.15$3.33$(0.40)(13)%$(0.18)(5)%
Realized derivatives (gain) loss in COS(3)(0.01)0.010.07(0.02)N/M(0.06)(86)%
Cost of natural gas in COS$2.74$3.16$3.40$(0.42)(13)%$(0.24)(7)%
Average daily market price of natural gas Henry Hub (Louisiana)$2.51$3.12$2.96$(0.61)(20)%$0.165%
Average daily market price of natural gas National Balancing Point (UK)$4.44$8.07$5.80$(3.63)(45)%$2.2739%
Unrealized net mark-to-market loss (gain) on natural gas derivatives$14$(13)$61$27N/M$(74)N/M
Depreciation and amortization$875$888$883$(13)(1)%$51%
Capital expenditures$404$422$473$(18)(4)%$(51)(11)%
Sales volume by product tons (000s)19,53819,32919,9522091%(623)(3)%
Production volume by product tons (000s):
Ammonia(4)10,2469,80510,2954414%(490)(5)%
Granular urea4,9414,8374,4511042%3869%
UAN (32%)6,7686,9036,914(135)(2)%(11)—%
AN2,1281,7312,12739723%(396)(19)%

N/M—Not Meaningful

(1)For a discussion and analysis of the year ended December 31, 2017, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed with the SEC on February 22, 2019.
(2)Includes the cost of natural gas and related transportation that is included in cost of sales during the period under the first-in, first-out inventory cost method.
(3)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.
(4)Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN, or AN.

CF INDUSTRIES HOLDINGS, INC.

The following is a discussion and analysis of our consolidated results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018. For a discussion and analysis of our consolidated results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed with the SEC on February 22, 2019.

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 increased $161 million, or 4%, to $4.59 billion in 2019 compared to $4.43 billion in 2018 due to a 1% increase in sales volume, which increased net sales by $99 million, and a 3% increase in average selling prices, which increased net sales by $62 million.

Average selling prices were $235 per ton in 2019 compared to $229 per ton in 2018, an increase of 3%, due primarily to higher average selling prices in our UAN, granular urea and AN segments, partially offset by lower average selling prices in our ammonia and Other segments. The increase in average selling prices was driven by the impact of a tighter global nitrogen supply and demand balance. The increase in total sales volume of 1% was due primarily to higher sales volumes in our ammonia, AN and Other segments, partially offset by lower sales volumes in our UAN and granular urea segments.

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 decreased $96 million, or 3%, in 2019 from 2018. The decrease in our cost of sales was due primarily to the impact of lower realized natural gas costs, partially offset by higher costs related to maintenance activity, higher distribution costs and an unrealized net mark-to-market loss on natural gas derivatives of $14 million in 2019 compared to an unrealized net mark-to-market gain of $13 million in 2018. The cost of sales per ton averaged $175 in 2019, a 4% decrease from $182 per ton in 2018. Realized natural gas costs, including the impact of realized derivatives, decreased 13% to $2.74 per MMBtu in 2019 from $3.16 per MMBtu in 2018.

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 $25 million to $239 million in 2019 from $214 million in 2018. The increase was due primarily to costs related to certain corporate office initiatives and certain equity award modifications.

Other Operating—Net

Other operating—net includes administrative costs that do not relate directly to our central operations. Costs included in “other operating 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 $73 million of income in 2019 compared to $27 million of income in 2018. The income in 2019 was due primarily to the $45 million pre-tax gain recognized on the sale of the Pine Bend facility and insurance proceeds of $37 million. See “Items Affecting Comparability of Results—Gain on sale of Pine Bend facility and —Insurance proceeds,” above, for additional information. The income in 2018 was due primarily to the combination of changes in legal reserves, insurance proceeds of $10 million and a gain of $6 million from the recovery of certain precious metals used in the manufacturing process.

CF INDUSTRIES HOLDINGS, INC.

Equity in (Loss) Earnings of Operating Affiliates

Equity in (loss) earnings of operating affiliates primarily 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.

Equity in (loss) earnings of operating affiliates was $5 million of losses in 2019 compared to $36 million of earnings in 2018. The loss in 2019 includes approximately $16 million related to a withholding tax charge recognized by PLNL regarding a multi-year tax dispute. See “Items Affecting Comparability of Results—PLNL withholding tax charge,” above, for additional information.

Earnings in 2018 includes approximately $19 million related to the net after-tax impact of a settlement reached between NGC and PLNL of an arbitration proceeding regarding PLNL’s claims for damages due to historical natural gas supply curtailments. See “Items Affecting Comparability of Results—PLNL settlement income,” above, for additional information.

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, annual fees pursuant to our Revolving Credit Agreement and interest on tax liabilities. Capitalized interest relating to the construction of major capital projects reduces interest expense as the interest is capitalized and amortized over the estimated useful lives of the facility along with all other construction costs. Interest expense—net also includes interest income, which includes amounts earned on our cash, cash equivalents and investments.

Net interest expense decreased by $11 million to $217 million in 2019 from $228 million in 2018. The decrease was due to $5 million of interest income related to the settlement of the Terra amended tax returns, which is more fully described under “Liquidity and Capital Resources—Settlement of Terra Amended Tax Returns,” below. In addition, the decrease reflects our redemption in November 2019 of all of the $500 million outstanding principal amount of the 2020 Notes and the partial redemption in December 2019 of $250 million principal amount of the 2021 Notes.

Losses on Debt Extinguishment

On November 13, 2019, we redeemed all of the $500 million outstanding principal amount of the 2020 Notes, in accordance with the optional redemption provisions provided in the indenture governing the 2020 Notes. On December 13, 2019, we redeemed $250 million principal amount, representing 50% of the outstanding principal amount, of the 2021 Notes, in accordance with the optional redemption provisions provided in the indenture governing the 2021 Notes. As a result of the early redemption of the 2020 Notes and the 2021 Notes, we recognized a loss on debt extinguishment of $21 million, of which $12 million related to the 2020 Notes and $9 million related to the 2021 Notes.

Income Tax Provision

Our income tax provision for 2019 was $126 million on pre-tax income of $772 million, or an effective tax rate of 16.3% compared to an income tax provision of $119 million on pre-tax income of $547 million, or an effective tax rate of 21.7% in 2018.

Our effective tax rate is impacted by earnings attributable to the noncontrolling interest in CFN, and in the first quarter of 2018 by earnings attributable to the noncontrolling interests in TNCLP, as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interests. Our effective tax rate for 2019 of 16.3%, which is based on pre-tax income of $772 million, would be 20.3% exclusive of the earnings attributable to the noncontrolling interest of $153 million. Our effective tax rate for 2018 of 21.7%, which is based on pre-tax income of $547 million, would be 29.1% exclusive of the earnings attributable to the noncontrolling interests of $138 million.

For 2019, our income tax provision includes an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana complex, and an income tax benefit of $10 million related to the favorable settlement of certain uncertain tax positions related to the Terra amended tax returns, which is more fully described under “Liquidity and Capital Resources—Settlement of Terra Amended Tax Returns,” below.

Our effective tax rate for 2018 was impacted by a $16 million increase to the provisional amount recorded in 2017 for the transition tax liability as result of the enactment of the Tax Act.

CF INDUSTRIES HOLDINGS, INC.

On April 2, 2018, we acquired the TNCLP Public Units. Our effective tax rate in 2018 was impacted by a $16 million reduction to our deferred tax liability due to the change in our effective state income tax rate resulting from the implementation of legal entity structure changes related to the acquisition.

Both 2019 and 2018 were impacted by additional discrete tax items. See Note 10—Income Taxes for additional information.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests includes the net earnings attributable to the approximately 11% CHS minority equity interest in CFN, a subsidiary of CF Holdings. Prior to April 2, 2018, net earnings attributable to noncontrolling interests also included the net earnings attributable to the 24.7% interest of the publicly held common units of TNCLP. Beginning in the second quarter of 2018, as a result of the April 2, 2018 acquisition of the TNCLP Public Units, there are no longer earnings attributable to noncontrolling interests in TNCLP.

Net earnings attributable to noncontrolling interests increased $15 million in 2019 compared to 2018 due to higher earnings from CFN driven by higher average selling prices due to the impact of a tighter global nitrogen supply and demand balance and lower realized natural gas costs, partially offset by the reduction in noncontrolling interests due to the April 2, 2018 purchase of the noncontrolling interests in TNCLP. In 2018, earnings attributable to noncontrolling interests in TNCLP was $8 million.

Diluted Net Earnings Per Share Attributable to Common Stockholders

Diluted net earnings per share attributable to common stockholders increased $0.99 to $2.23 per share in 2019 from $1.24 per share in 2018. This increase is due primarily to higher gross margin primarily driven by lower realized natural gas costs, higher average selling prices due to the impact of a tighter global nitrogen supply and demand balance, higher sales volume, and a 5% reduction in diluted weighted-average common shares outstanding due to repurchases made under our share repurchase programs.

CF INDUSTRIES HOLDINGS, INC.

Operating Results by Business Segment

Our reportable segment structure reflects how our chief operating decision maker, as defined in the accounting principles generally accepted in the United States (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 following table presents summary operating results by business segment:

AmmoniaGranular Urea**(1)**UAN**(1)**AN**(1)**Other**(1)**Consolidated
(in millions)
Year ended December 31, 2019
Net sales$1,113$1,342$1,270$506$359$4,590
Cost of sales8788619813992973,416
Gross margin$235$481$289$107$62$1,174
Gross margin percentage21.1%35.8%22.8%21.1%17.3%25.6%
Year ended December 31, 2018
Net sales$1,028$1,322$1,234$460$385$4,429
Cost of sales8678891,0074143353,512
Gross margin$161$433$227$46$50$917
Gross margin percentage15.7%32.8%18.4%10.0%13.0%20.7%
Year ended December 31, 2017
Net sales$1,209$971$1,134$497$319$4,130
Cost of sales1,0708551,0534462723,696
Gross margin$139$116$81$51$47$434
Gross margin percentage11.5%11.9%7.1%10.3%14.7%10.5%
(1)The cost of ammonia that is upgraded into other products is transferred at cost into the upgraded product results.

The following is a discussion and analysis of our operating results by business segment for the year ended December 31, 2019 compared to the year ended December 31, 2018. For a discussion and analysis of our operating results by business segment for the year ended December 31, 2018 compared to the year ended December 31, 2017, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K filed with the SEC on February 22, 2019.

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:

Year ended December 31,
2019201820172019 v. 20182018 v. 2017
(in millions, except as noted)
Net sales$1,113$1,028$1,209$858%$(181)(15)%
Cost of sales8788671,070111%(203)(19)%
Gross margin$235$161$139$7446%$2216%
Gross margin percentage21.1%15.7%11.5%5.4%4.2%
Sales volume by product tons (000s)3,5163,1354,10538112%(970)(24)%
Sales volume by nutrient tons (000s)(1)2,8842,5713,36731312%(796)(24)%
Average selling price per product ton$317$328$295$(11)(3)%$3311%
Average selling price per nutrient ton(1)$386$400$359$(14)(4)%$4111%
Gross margin per product ton$67$51$34$1631%$1750%
Gross margin per nutrient ton(1)$81$63$41$1829%$2254%
Depreciation and amortization$167$155$183$128%$(28)(15)%
Unrealized net mark-to-market loss (gain) on natural gas derivatives$4$(4)$20$8N/M$(24)N/M

N/M—Not Meaningful

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

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net Sales. Net sales in the ammonia segment increased by $85 million, or 8%, to $1.11 billion in 2019 from $1.03 billion in 2018 due primarily to a 12% increase in sales volume, partially offset by a 3% decrease in average selling prices. Sales volume was higher in 2019 due to greater supply availability due to increased production. The decrease in average selling prices was due to increased global supply as a result of higher global operating rates driven by lower global energy prices.

Cost of Sales. Cost of sales in our ammonia segment averaged $250 per ton in 2019, a 10% decrease from $277 per ton in 2018 due primarily to the impact of lower realized natural gas costs and lower costs associated with plant turnaround and maintenance activity, partially offset by the impact of a $4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $4 million gain in 2018.

Gross Margin. Gross margin in our ammonia segment increased by $74 million to $235 million in 2019 from $161 million in 2018, and our gross margin percentage was 21.1% in 2019 compared to 15.7% in 2018. The increase in gross margin was due to a 12% increase in sales volume, which increased gross margin by $60 million, a decrease in realized natural gas costs, which increased gross margin by $33 million, and a $31 million decrease in other manufacturing and distribution costs. These factors were partially offset by a 3% decrease in average selling prices, which reduced gross margin by $42 million, and the impact of a $4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $4 million gain in 2018.

CF INDUSTRIES HOLDINGS, INC.

Granular Urea Segment

Our granular urea segment produces granular urea, which contains 46% nitrogen. Produced from ammonia and carbon dioxide, it has the highest nitrogen content of any of our solid nitrogen fertilizers. Granular urea is produced at our Donaldsonville, Louisiana; Medicine Hat, Alberta; and Port Neal, Iowa nitrogen complexes.

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

Year ended December 31,
2019201820172019 v. 20182018 v. 2017
(in millions, except as noted)
Net sales$1,342$1,322$971$202%$35136%
Cost of sales861889855(28)(3)%344%
Gross margin$481$433$116$4811%$317N/M
Gross margin percentage35.8%32.8%11.9%3.0%20.9%
Sales volume by product tons (000s)4,8494,8984,357(49)(1)%54112%
Sales volume by nutrient tons (000s)(1)2,2312,2532,004(22)(1)%24912%
Average selling price per product ton$277$270$223$73%$4721%
Average selling price per nutrient ton(1)$602$587$485$153%$10221%
Gross margin per product ton$99$88$27$1113%$61N/M
Gross margin per nutrient ton(1)$216$192$58$2413%$134N/M
Depreciation and amortization$264$276$246$(12)(4)%$3012%
Unrealized net mark-to-market loss (gain) on natural gas derivatives$4$(4)$16$8N/M$(20)N/M

N/M—Not Meaningful

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

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net Sales. Net sales in the granular urea segment increased $20 million, or 2%, to $1.34 billion in 2019 compared to $1.32 billion in 2018 due primarily to a 3% increase in average selling prices, partially offset by a 1% decrease in sales volume. Average selling prices increased to $277 per ton in 2019 compared to $270 per ton in 2018. The increase was due primarily to the impact of a tighter global nitrogen supply and demand balance and the impact high water levels and flooding had on the shipping and logistics on inland rivers, including limiting access to the U.S. Gulf for imports, during the spring application season.

Cost of Sales. Cost of sales in our granular urea segment averaged $178 per ton in 2019, a 2% decrease from $182 per ton in 2018. The decrease was due primarily to lower realized natural gas costs, partially offset by the impact of a $4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $4 million gain in 2018.

Gross Margin. Gross margin in our granular urea segment increased by $48 million to $481 million in 2019 from $433 million in 2018, and our gross margin percentage was 35.8% in 2019 compared to 32.8% in 2018. The increase in gross margin was due to a 3% increase in average selling prices, which increased gross margin by $38 million, a decrease in realized natural gas costs, which increased gross margin by $21 million, and a $12 million decrease in other manufacturing and distribution costs. These factors were partially offset by a 1% decrease in sales volume, which reduced gross margin by $15 million, and the impact of a $4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $4 million gain in 2018.

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:

Year ended December 31,
2019201820172019 v. 20182018 v. 2017
(in millions, except as noted)
Net sales$1,270$1,234$1,134$363%$1009%
Cost of sales9811,0071,053(26)(3)%(46)(4)%
Gross margin$289$227$81$6227%$146180%
Gross margin percentage22.8%18.4%7.1%4.4%11.3%
Sales volume by product tons (000s)6,8077,0427,093(235)(3)%(51)(1)%
Sales volume by nutrient tons (000s)(1)2,1442,2252,242(81)(4)%(17)(1)%
Average selling price per product ton$187$175$160$127%$159%
Average selling price per nutrient ton(1)$592$555$506$377%$4910%
Gross margin per product ton$42$32$11$1031%$21191%
Gross margin per nutrient ton(1)$135$102$36$3332%$66183%
Depreciation and amortization$251$270$265$(19)(7)%$52%
Unrealized net mark-to-market loss (gain) on natural gas derivatives$4$(4)$19$8N/M$(23)N/M

N/M—Not Meaningful

(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, 2019 Compared to Year Ended December 31, 2018

Net Sales. Net sales in the UAN segment increased $36 million, or 3%, to $1.27 billion in 2019 compared to $1.23 billion in 2018 due primarily to a 7% increase in average selling prices, partially offset by a 3% decrease in sales volume. Average selling prices increased to $187 per ton in 2019 compared to $175 per ton in 2018, due primarily to the impact of a tighter global nitrogen supply and demand balance, the impact high water levels and flooding had on the shipping and logistics on inland rivers and an extended spring application season. The decrease in sales volume was due primarily to lower production due to higher granular urea production throughout most of 2019 and the impact of lower exports to Europe.

In April 2019, the European Commission (the Commission) published a regulation imposing provisional anti-dumping duties on imports to the European Union of UAN manufactured in Russia, the Republic of Trinidad and Tobago and the United States. The regulation included a rate of 22.6% for the provisional anti-dumping duty applicable to imports of UAN manufactured in the United States. In July 2019, the Commission announced its intention to impose definitive anti-dumping measures in the form of fixed duty rates. For imports of UAN manufactured in the United States, the fixed duty rate is €29.48 per metric ton (or €26.74 per ton). On October 8, 2019, the Commission confirmed this duty in a regulation imposing definitive measures, which became effective beginning October 9, 2019 for an initial five-year period, after which the measures may be renewed by the Commission.

Cost of Sales. Cost of sales in our UAN segment averaged $145 per ton in 2019, a 1% increase from $143 per ton in 2018. The increase was due primarily to higher costs related to maintenance activity, higher shipping and distribution costs due to the mix of transportation modes and the impact of a $4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $4 million gain in 2018, mostly offset by lower realized natural gas costs.

Gross Margin. Gross margin in our UAN Segment increased by $62 million to $289 million in 2019 from $227 million in 2018, and our gross margin percentage was 22.8% in 2019 compared to 18.4% in 2018. The increase in gross margin was due to a 7% increase in average selling prices, which increased gross margin by $76 million, and a decrease in realized natural gas costs, which increased gross margin by $29 million. These factors were partially offset by a $24 million increase in other manufacturing and distribution costs and a 3% decrease in sales volume, which reduced gross margin by

CF INDUSTRIES HOLDINGS, INC.

$11 million, and the impact of a $4 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $4 million gain in 2018.

AN Segment

Our AN segment produces ammonium nitrate (AN). AN, which has a nitrogen content between 29% and 35%, is produced by combining anhydrous ammonia and nitric acid. AN is used as nitrogen fertilizer and is also used by industrial customers for commercial explosives and blasting systems. AN is produced at our nitrogen complexes in Yazoo City, Mississippi and Ince and Billingham, United Kingdom.

The following table presents summary operating data for our AN segment:

Year ended December 31,
2019201820172019 v. 20182018 v. 2017
(in millions, except as noted)
Net sales$506$460$497$4610%$(37)(7)%
Cost of sales399414446(15)(4)%(32)(7)%
Gross margin$107$46$51$61133%$(5)(10)%
Gross margin percentage21.1%10.0%10.3%11.1%(0.3)%
Sales volume by product tons (000s)2,1092,0022,3531075%(351)(15)%
Sales volume by nutrient tons (000s)(1)708676793325%(117)(15)%
Average selling price per product ton$240$230$211$104%$199%
Average selling price per nutrient ton(1)$715$680$627$355%$538%
Gross margin per product ton$51$23$22$28122%$15%
Gross margin per nutrient ton(1)$151$68$64$83122%$46%
Depreciation and amortization$88$85$85$34%$——%
Unrealized net mark-to-market loss on natural gas derivatives$1$—$2$1N/M$(2)(100)%

N/M—Not Meaningful

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

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net Sales. Net sales in our AN segment increased $46 million, or 10%, to $506 million in 2019 from $460 million in 2018 due primarily to a 5% increase in sales volume and a 4% increase in average selling prices. Sales volume increased due primarily to higher sales in North America as a result of strong demand. Average selling prices increased to $240 per ton in 2019 compared to $230 per ton in 2018 due primarily to the impact of a tighter global nitrogen supply and demand balance.

Cost of Sales. Cost of sales in our AN segment averaged $189 per ton in 2019, a 9% decrease from $207 per ton in 2018. The decrease was due primarily to lower realized natural gas costs, partially offset by higher costs for turnaround and maintenance activity and the cost to purchase ammonia for upgrading to AN when certain ammonia plants were in turnaround.

Gross Margin. Gross margin in our AN segment increased by $61 million to $107 million in 2019 from $46 million in 2018, and our gross margin percentage was 21.1% in 2019 compared to 10.0% in 2018. The increase in gross margin was due to a decrease in realized natural gas costs, which increased gross margin by $50 million, a 4% increase in average selling prices, which increased gross margin by $34 million, and a 5% increase in sales volume, which increased gross margin by $12 million. These factors were partially offset by a $35 million increase in other manufacturing and distribution costs.

CF INDUSTRIES HOLDINGS, INC.

Other Segment

Our Other segment primarily includes the following products:

•Diesel exhaust fluid (DEF) is an aqueous urea solution typically made with 32.5% or 50% high-purity urea and the remainder deionized water.
•Urea liquor is a liquid product that we sell in concentrations of 40%, 50% and 70% urea as a chemical intermediate.
•Nitric acid is a nitrogen-based industrial product.
•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:

Year ended December 31,
2019201820172019 v. 20182018 v. 2017
(in millions, except as noted)
Net sales$359$385$319$(26)(7)%$6621%
Cost of sales297335272(38)(11)%6323%
Gross margin$62$50$47$1224%$36%
Gross margin percentage17.3%13.0%14.7%4.3%(1.7)%
Sales volume by product tons (000s)2,2572,2522,0445—%20810%
Sales volume by nutrient tons (000s)(1)44443939751%4211%
Average selling price per product ton$159$171$156$(12)(7)%$1510%
Average selling price per nutrient ton(1)$809$877$804$(68)(8)%$739%
Gross margin per product ton$27$22$23$523%$(1)(4)%
Gross margin per nutrient ton(1)$140$114$118$2623%$(4)(3)%
Depreciation and amortization$72$67$57$57%$1018%
Unrealized net mark-to-market loss (gain) on natural gas derivatives$1$(1)$4$2N/M$(5)N/M

N/M—Not Meaningful

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

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net Sales. Net sales in our Other segment decreased $26 million, or 7%, to $359 million in 2019 from $385 million in 2018 due to a 7% decrease in average selling prices. The decrease in average selling prices is due primarily to the mix of products sold and increased global supply as a result of higher global operating rates driven by lower global energy prices.

Cost of Sales. Cost of sales in our Other segment averaged $132 per ton in 2019, an 11% decrease from $149 per ton in 2018, due primarily to lower realized natural gas costs and lower costs associated with plant turnaround and maintenance activity.

Gross Margin. Gross margin in our Other segment increased by $12 million to $62 million in 2019 from $50 million in 2018, and our gross margin percentage was 17.3% in 2019 compared to 13.0% in 2018. The increase in gross margin was due to a decrease in realized natural gas costs, which increased gross margin by $20 million, a $10 million decrease in other manufacturing and distribution costs, and a shift in the mix of products sold within the segment which increased gross margin by $5 million. These factors were partially offset by a 7% decrease in average selling prices, which reduced gross margin by $21 million, and the impact of a $1 million unrealized net mark-to-market loss on natural gas derivatives in 2019 compared to a $1 million gain in 2018.

CF INDUSTRIES HOLDINGS, INC.

Liquidity and Capital Resources

Our primary uses of cash are generally for operating costs, working capital, capital expenditures, debt service, investments, taxes, share repurchases and dividends. Our working capital requirements are affected by several factors, including demand for our products, selling prices, raw material costs, freight costs and seasonal factors inherent in the business. In addition, we may from time to time seek to retire or purchase our outstanding debt through cash purchases, in open market or privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Generally, our primary source of cash is cash from operations, which includes cash generated by customer advances. We may also from time to time access the capital markets or engage in borrowings under our revolving credit agreement.

We generated net cash from operating activities in 2019 of $1.51 billion. The primary uses of our cash in 2019 were for the following items:

•On November 13, 2019, we redeemed all of the $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance with the optional redemption provisions provided in the indenture governing the 2020 Notes. On December 13, 2019, we redeemed $250 million principal amount, representing 50% of the outstanding principal amount, of the 3.400% senior secured notes due 2021 (the 2021 Notes), in accordance with the optional redemption provisions provided in the indenture governing the 2021 Notes. The total amount paid for the redemption of the 2020 Notes and the partial redemption of the 2021 Notes was $769 million. See discussion under “Debt,” below, for further information.
•In 2019, we repurchased approximately 7.6 million shares of CF Holdings common stock for $337 million. See discussion under “Share Repurchase Programs,” below, for further information.
•Capital expenditures were $404 million in 2019, dividends paid to common stockholders were $265 million and distributions to the noncontrolling interest were $186 million.

At December 31, 2019, we were in compliance with all applicable covenant requirements under our revolving credit agreement, senior notes and senior secured notes. There were no borrowings outstanding under our revolving credit agreement as of December 31, 2019 or December 31, 2018, or during 2019 or 2018. See discussion under “Debt,” below, for further information.

Our cash and cash equivalents balance was $287 million at December 31, 2019, a decrease of $395 million from $682 million at December 31, 2018. Total long-term debt was $3,957 million as of December 31, 2019, a decrease of $741 million from $4,698 million at December 31, 2018.

Cash Equivalents

Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less. Under our short-term investment policy, we may invest our cash balances, either directly or through mutual funds, in several types of investment-grade securities, including notes and bonds issued by governmental entities or corporations. Securities issued by governmental entities include those issued directly by the U.S. and Canadian federal governments; those issued by state, local or other governmental entities; and those guaranteed by entities affiliated with governmental entities.

Share Repurchase Programs

On August 1, 2018, the Board authorized the repurchase of up to $500 million of CF Holdings common stock through June 30, 2020 (the 2018 Share Repurchase Program). In 2018, we completed the 2018 Share Repurchase Program with the repurchase of 10.9 million shares for $500 million, of which $33 million was accrued as of December 31, 2018 and paid in January 2019. In February 2019, we retired all 10.9 million shares that were repurchased under the 2018 Share Repurchase Program.

On February 13, 2019, the Board authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). Repurchases under the 2019 Share Repurchase Program may be made from time to time in the open market, through privately negotiated transactions, block transactions or otherwise. The manner, timing and amount of repurchases will be determined by our management based on the evaluation of market conditions, stock price, and other factors. During the year ended December 31, 2019, we repurchased approximately 7.6 million shares of CF Holdings common stock for $337 million. In June and December of 2019, we retired approximately 4.2 million and 3.4 million shares, respectively, that were repurchased under the 2019 Share Repurchase Program.

CF INDUSTRIES HOLDINGS, INC.

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 were $404 million in 2019 compared to $422 million in 2018.

Capital expenditures in 2020 are estimated to be in the range of $400 to $450 million. 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, delay in the receipt of equipment, adverse weather, defects in materials and workmanship, labor or material shortages, transportation constraints, acceleration or delays in the timing of the work and other unforeseen difficulties.

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 and selling prices and therefore could impact our liquidity.

Ethanol Industry and the Renewable Fuel Standard

Corn used to produce ethanol accounts for approximately 38% of total U.S. corn demand. U.S. government policy, as expressed in the Renewable Fuel Standard (RFS), is a major determinant for the ethanol market. The RFS establishes minimum volumes of various types of renewable fuels, including ethanol, that must be included in the United States’ supply of fuel for transportation. In addition, the U.S. Congress, at various times, has proposed legislation to either modify 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 and fewer aggregate miles, driven by increased automobile fuel efficiency, 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.

Settlement of Terra Amended Tax Returns

The Company completed the acquisition of Terra in April 2010. After the acquisition, the Company determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to its U.S. parent for U.S. and foreign income tax purposes was not appropriate. As a result, in 2012 the Company amended certain tax returns, including Terra’s income and withholding tax returns, back to 1999 (the Amended Tax Returns) to correct these tax returns and paid additional income and withholding taxes, and related interest and penalties. In early 2013, the IRS commenced an examination of the U.S. tax aspects of the Amended Tax Returns. In 2017, the Company also made a Voluntary Disclosure Filing with the Canadian Revenue Agency (CRA) with respect to the Canadian tax aspects of this matter and paid additional Canadian taxes due.

In early 2019, the IRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to the Joint Committee. For purposes of its review, the Joint Committee separated the IRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter.

In December 2019, we received notification that the Joint Committee had approved the IRS audit reports relating to the income tax related matter. As a result, we expect to receive a cash refund in the first half of 2020 of approximately $57 million, including interest. As a result of the approval by the Joint Committee, the Company recognized in the fourth quarter of 2019 interest income of $5 million ($4 million, net of tax) and a reduction in income tax expense of $10 million as a result of the favorable settlement of certain uncertain tax positions.

The Joint Committee has not yet approved the IRS audit report relating to the withholding tax matter. If this approval is received, we expect to receive an additional tax refund of approximately $29 million, excluding related interest, and record a reduction in income tax expense of approximately $12 million.

The Company previously recorded a tax receivable of CAD $27 million (or $21 million) related to the Canadian tax aspects of this matter, which continues to be under review by the CRA.

CF INDUSTRIES HOLDINGS, INC.

As a result of the Joint Committee approval of the Amended Tax Returns, the IRS has now completed their examination of the Company’s U.S. income tax returns, including all U.S. predecessor company returns, through 2011.

Repatriation of Foreign Earnings and Income Taxes

We have operations in Canada, the United Kingdom and a 50% interest in a joint venture in the Republic of Trinidad and Tobago. Historically, the estimated additional U.S. and foreign income taxes due upon repatriation of the earnings of these foreign operations to the U.S. were recognized in our consolidated financial statements as the earnings were recognized, unless the earnings were considered to be permanently reinvested based upon our then current plans. However, the cash payment of the income tax liabilities associated with repatriation of earnings from foreign operations occurred 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 could occur in different periods.

In light of changes made by the Tax Act, commencing with the 2018 tax year, the United States no longer taxes earnings of foreign subsidiaries even when such earnings are earned or repatriated to the United States, unless such earnings are subject to U.S. rules on passive income or certain anti-abuse provisions. Foreign subsidiary earnings may still be subject to withholding taxes when repatriated to the United States.

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, 2019, approximately $42 million of our consolidated cash and cash equivalents balance of $287 million was held by our Canadian and United Kingdom subsidiaries. Historically, the cash balance held by the Canadian subsidiaries represented accumulated earnings of our foreign operations that were not considered to be permanently reinvested. As of December 31, 2019, as a result of the amounts accrued in the transition tax liability recorded in 2017 and 2018 as a result of the Tax Act, we would not expect any additional cash tax cost to repatriate the Canadian and United Kingdom cash balances if we were to repatriate this cash in the future, other than foreign withholding tax.

Net Operating Loss and Capital Loss Carryforwards

As of December 31, 2018, we had net operating loss and capital loss carryforwards (collectively, the Tax Loss Carryforwards) of $271 million. These Tax Loss Carryforwards are available to reduce taxable income and thereby, reduce cash taxes in the United States and other tax jurisdictions in which they can be applied. As a result of the effective usage of certain of these Tax Loss Carryforwards to offset current cash taxes payable, there are no U.S. federal Tax Loss Carryforwards remaining as of December 31, 2019. As a result, we expect an increase in cash taxes in 2020, before taking into account income tax refunds related to the settlement of the Terra Amended Tax Returns.

Debt

Revolving Credit Agreement

On December 5, 2019, CF Holdings and CF Industries entered into a senior secured Fourth Amended and Restated Credit Agreement (the Revolving Credit Agreement), which amended and restated our Third Amended and Restated Revolving Credit Agreement, as previously amended (referred to herein, as in effect from time to time, as the Prior Credit Agreement), that was scheduled to mature September 18, 2020. The Revolving Credit Agreement provides for a revolving credit facility of up to $750 million with a maturity of December 5, 2024. The Revolving Credit Agreement includes a letter of credit sub-limit of $125 million.

Borrowings under the Revolving Credit Agreement may be used for working capital, capital expenditures, acquisitions, share repurchases and other general corporate purposes. CF Industries, the lead borrower under the Revolving Credit Agreement, may designate as additional borrowers one or more of its wholly owned subsidiaries that are organized in the United States or any state thereof, or the District of Columbia, England and Wales or any other jurisdiction as mutually agreed to by all of the lenders party to the Revolving Credit Agreement, the administrative agent under the Revolving Credit Agreement and CF Industries.

Borrowings under the Revolving Credit Agreement may be denominated in U.S. 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.

CF INDUSTRIES HOLDINGS, INC.

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, LLC (CFE), CF Industries Sales, LLC (CFS), CF USA Holdings, LLC (CF USA), and CF Industries Distribution Facilities, LLC (CFIDF), are referred to together herein as the Loan Parties. 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 CF USA of its equity interests in 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, (ii) interest rate or other hedging arrangements and (iii) agreements to provide Automated Clearing House transactions, cash management services or foreign exchange facilities or other cash management arrangements in the ordinary course of business, 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, Secured Swap Agreements or Secured Cash Management Agreements (each as defined in the Revolving Credit Agreement), as applicable, pursuant to the terms of the Revolving Credit Agreement. Obligations under Secured Bilateral LC Facilities, Secured Swap Agreements and Secured Cash Management Agreements are secured by the same security interest that secures the obligations under the Revolving Credit Agreement.

At any time that (i) no default or event of default exists under the Revolving Credit Agreement and related documentation and (ii) (a) CF Holdings attains an investment-grade rating as set forth in the Revolving Credit Agreement; (b) CF Industries’ senior secured notes due 2021 and senior secured notes due 2026, including all fees, expenses and other amounts due and payable thereunder, have been paid or defeased or (c) CF Industries’ senior secured notes due 2021 and senior secured notes due 2026 cease to be secured by the assets of the Loan Parties that secure obligations under the Revolving Credit Agreement, CF Industries will have the right to require that (a) the security interest securing obligations under the Revolving Credit Agreement be terminated and released and (b) each guarantor under the Revolving Credit Agreement other than CF Holdings be released from its obligations under the Revolving Credit Agreement and related documentation.

The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants customary for a financing of this type. The financial covenants applicable to CF Holdings and its subsidiaries in the Revolving Credit Agreement:

(i)require that the interest coverage ratio (as defined in the Revolving Credit Agreement) be not less than 2.75:1.00 as of the last day of each fiscal quarter and
(ii)require that the total net leverage ratio (as defined in the Revolving Credit Agreement) be not greater than 3.75:1.00 (the Maximum Total Net Leverage Ratio) as of the last day of each fiscal quarter, provided that, if any borrower or subsidiary consummates a material acquisition during any fiscal quarter, CF Industries may elect to increase the Maximum Total Net Leverage Ratio to 4.25:1.00 for the period of four consecutive fiscal quarters commencing with such fiscal quarter (and no further such election may be made unless and until the Maximum Total Net Leverage Ratio is less than or equal to 3.75:1.00 as of the end of two consecutive fiscal quarters after the end of such period).

As of December 31, 2019, we were in compliance with all covenants under the Revolving Credit Agreement.

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, 2019, we had excess borrowing capacity under the Revolving Credit Agreement of $750 million and no outstanding letters of credit. In addition, there were no borrowings outstanding under the Revolving Credit Agreement as of December 31, 2019 or during 2019, and there were no borrowings outstanding under the Prior Credit Agreement as of December 31, 2018 or during 2019 or 2018.

CF INDUSTRIES HOLDINGS, INC.

Letters of Credit

In addition to the letters of credit that may be issued under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement with capacity to issue letters of credit up to $145 million (reflecting an increase of $20 million in January 2019). As of December 31, 2019, approximately $129 million of letters of credit were outstanding under this agreement.

Senior Notes

Long-term debt presented on our consolidated balance sheets as of December 31, 2019 and 2018 consisted of the following debt securities issued by CF Industries:

Effective Interest RateDecember 31, 2019December 31, 2018
Principal OutstandingCarrying Amount (1)Principal OutstandingCarrying Amount (1)
(in millions)
Public Senior Notes:
7.125% due May 20207.529%——500497
3.450% due June 20233.562%750747750747
5.150% due March 20345.279%750740750740
4.950% due June 20435.031%750742750741
5.375% due March 20445.465%750741750741
Senior Secured Notes:
3.400% due December 20213.782%250248500495
4.500% due December 20264.759%750739750737
Total long-term debt$4,000$3,957$4,750$4,698
(1)Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was $10 million and $11 million as of December 31, 2019 and 2018, respectively, and total deferred debt issuance costs were $33 million and $41 million as of December 31, 2019 and 2018, respectively.

Public Senior Notes

On November 13, 2019, we redeemed in full all of the $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance with the optional redemption provisions in the indenture governing the 2020 Notes. The total aggregate redemption price, excluding accrued interest paid on the 2020 Notes in connection with the redemption, was approximately $512 million. As a result, we recognized a loss on debt extinguishment of $12 million, primarily consisting of premiums paid for the early retirement of debt for the 2020 Notes.

Under the indentures (including the applicable supplemental indentures) governing our senior notes due 2023, 2034, 2043 and 2044 identified in the table above (the Public Senior Notes), each series of Public Senior Notes is guaranteed by CF Holdings. From November 21, 2016 to November 13, 2019, the Public Senior Notes were guaranteed not only by CF Holdings, but also by certain 100% owned subsidiaries of CF Holdings. The guarantee of the Public Senior Notes in the case of each of those subsidiaries was subject to automatic release upon specified events, including the release of such subsidiary’s guarantee of the 2020 Notes. On November 13, 2019, as a result of the release of all subsidiary guarantees of the 2020 Notes upon the retirement of, and satisfaction and discharge of the indenture governing, the 2020 Notes, all subsidiary guarantees of the Public Senior Notes were automatically released.

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.

CF INDUSTRIES HOLDINGS, INC.

The indentures governing the Public Senior 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 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 Public Senior 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 Public Senior Notes; failure to comply with other covenants or agreements under the indenture; certain defaults on other indebtedness; the failure of CF Holdings’ guarantee of the applicable Public Senior Notes to be enforceable; and specified events of bankruptcy or insolvency. Under each indenture governing the Public Senior Notes, in the case of an event of default arising from one of the specified events of bankruptcy or insolvency, the applicable Public Senior 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 Public Senior Notes then outstanding may declare all of such Public Senior Notes to be due and payable immediately.

Under each of the indentures governing the Public Senior 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 Public Senior Notes, constitute change of control repurchase events. Upon the occurrence of a change of control repurchase event with respect to a series of Public Senior Notes, unless CF Industries has exercised its option to redeem such Public Senior 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.

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). On December 13, 2019, we redeemed $250 million principal amount of the 2021 Notes in accordance with the optional redemption provisions in the indenture governing the 2021 Notes. The total aggregate redemption price, excluding accrued interest paid on the 2021 Notes redeemed in connection with the redemption, was approximately $257 million. As a result, we recognized a loss on debt extinguishment of $9 million, primarily consisting of premiums paid for the early retirement of debt for the 2021 Notes.

Interest on the Senior Secured Notes is payable semiannually, 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 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, 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. The subsidiary guarantors of the Senior Secured Notes currently consist of CFE, CFS, CF USA and CFIDF.

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 CF USA of its equity interests in CFN and mortgages over certain material fee-owned domestic real properties (the Collateral). The obligations under the Revolving Credit Agreement, together with certain letter of credit, cash management, hedging and similar obligations and future pari passu secured indebtedness, are secured by the Collateral on a pari passu basis with the 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 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.

CF INDUSTRIES HOLDINGS, INC.

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 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.

Forward Sales and Customer Advances

We offer our customers the opportunity to purchase products from us on a forward basis at prices and on delivery dates we propose. Therefore, our reported fertilizer selling prices and margins may differ from market spot prices and margins available at the time of shipment.

Customer advances, which typically represent a portion of the contract’s value, are received shortly after the contract is executed, with any remaining unpaid amount generally being collected by the time control transfers to the customer, thereby reducing or eliminating the accounts receivable related to such sales. Any cash payments received in advance from customers in connection with forward sales contracts are reflected on our consolidated balance sheets as a current liability until control transfers and revenue is recognized. As of December 31, 2019 and 2018, we had $119 million and $149 million, respectively, in customer advances on our consolidated balance sheets.

While customer advances are generally a significant source of liquidity, the level of forward sales contracts is affected by many factors including current market conditions and our customers’ outlook of future market fundamentals. During periods of declining prices, customers tend to delay purchasing fertilizer in anticipation that prices in the future will be lower than the current prices. If the level of sales under our forward sales programs were to decrease in the future, our cash received from customer advances would likely decrease and our accounts receivable balances would likely increase. Additionally, 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 35% of our total production costs in 2019. As a result, natural gas prices have a significant impact on our operating expenses and can thus affect our liquidity.

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 in the last decade, but are subject to volatility. During 2019, the daily closing price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, reached a low of $1.82 per MMBtu on three consecutive days in December 2019 and a high of $4.12 per MMBtu on March 5, 2019. During the three-year period ended December 31, 2019, the daily closing price at the Henry Hub reached a low of $1.82 per MMBtu on three consecutive days in December 2019 and a high of $6.88 per MMBtu on January 4, 2018.

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

CF INDUSTRIES HOLDINGS, INC.

Balancing Point (NBP). During 2019, the daily closing price at NBP reached a low of $2.36 per MMBtu on September 4, 2019 and a high of $7.91 per MMBtu on January 17, 2019. During the three-year period ended December 31, 2019, the daily closing price at NBP reached a low of $2.36 per MMBtu on September 4, 2019, and a high of $31.74 per MMBtu on March 2, 2018.

Natural gas costs in our cost of sales, including the impact of realized natural gas derivatives, decreased 13% per MMBtu in 2019 from 2018.

Derivative Financial Instruments

We may use derivative financial instruments to reduce our exposure to changes in prices for natural gas that will be purchased in the future. Natural gas is the largest and most volatile component of our manufacturing cost for nitrogen-based fertilizers. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. Volatility in reported quarterly earnings can result from the unrealized mark-to-market adjustments in the value of the derivatives. In 2019 and 2018, we recognized an unrealized net mark-to-market loss (gain) on natural gas derivatives of $14 million and $(13) 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 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 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 agreements for 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, 2019 and 2018, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was $12 million and zero, 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, 2019, our open natural gas derivative contracts consisted of natural gas fixed price swaps, basis swaps and options for 41.1 million MMBtus. As of December 31, 2018, we had open natural gas derivative contracts for 6.6 million MMBtus of natural gas basis swaps. At both December 31, 2019 and 2018, we had no cash collateral on deposit with counterparties for derivative contracts. The credit support documents executed in connection with certain of our ISDA agreements generally provide us and our counterparties the right to set off collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event.

Embedded Derivative Liability

Under the terms of our strategic venture with CHS, if our credit rating as determined by two of three specified credit rating agencies is below certain levels, we are required to make a non-refundable yearly payment of $5 million to CHS. Since 2016, our credit ratings have been below certain levels and, as a result, we made an annual payment of $5 million to CHS in the fourth quarter of each year. These payments will continue on a yearly basis until the earlier of the date that our credit rating is upgraded to or above certain levels by two of three specified credit rating agencies or February 1, 2026.

This obligation is recognized on our consolidated balance sheet as an embedded derivative and its value is included in other liabilities. See Note 9—Fair Value Measurements for additional information.

Defined Benefit Pension Plans

We contributed $61 million to our pension plans in 2019. We expect to contribute approximately $42 million to our pension plans in 2020.

CF INDUSTRIES HOLDINGS, INC.

Distributions on Noncontrolling Interest in CFN

The CFN Board of Managers approved semi-annual distribution payments for the years ended December 31, 2019, 2018 and 2017, in accordance with CFN’s limited liability company agreement, as follows:

Approved and paidDistribution PeriodDistribution Amount (in millions)
First quarter of 2020Six months ended December 31, 2019$88
Third quarter of 2019Six months ended June 30, 2019100
First quarter of 2019Six months ended December 31, 201886
Third quarter of 2018Six months ended June 30, 201879
First quarter of 2018Six months ended December 31, 201749
Third quarter of 2017Six months ended June 30, 201759

Cash Flows

Operating Activities

Net cash provided by operating activities in 2019 was $1,505 million as compared to $1,497 million in 2018, an increase of $8 million. The increase was due primarily to an increase in cash earnings generated by the business, partially offset by changes in working capital. The increase in cash earnings is due primarily to the increase in net earnings of $218 million to $646 million in 2019 from $428 million in 2018. The increase in net earnings was due primarily to lower realized natural gas costs, higher average selling prices and higher sales volume. The amounts of cash used to fund working capital changed between 2019 and 2018. Cash used for working capital purposes increased in 2019 as $112 million of cash was used primarily to fund an increase in inventory and accounts receivable, and to fund a decrease in accounts payable, accrued liabilities and customer advances. In 2018, $127 million of cash was provided due to lower working capital levels such as declines in accounts receivable and increases in customer advances, accounts payable and accrued liabilities. In addition, we contributed $61 million to our pension plans in 2019 compared to $39 million in 2018, an increase of $22 million.

Investing Activities

Net cash used in investing activities was $319 million in 2019 compared to $375 million in 2018. During 2019, capital expenditures totaled $404 million compared to $422 million in 2018. Net cash used in investing activities in 2019 included proceeds of $55 million related to the sale of our Pine Bend facility and $15 million related to property insurance proceeds received. Net cash used in investing activities in 2018 included $10 million related to property insurance proceeds received.

Financing Activities

Net cash used in financing activities was $1,583 million in 2019 compared to $1,270 million in 2018. In 2019, we paid $769 million in connection with the redemption of the 2020 Notes and the partial redemption of the 2021 Notes. Dividends paid on common stock in 2019 and 2018 were $265 million and $280 million, respectively. The decrease in dividends was due to lower shares outstanding as a result of shares repurchased under our share repurchase programs in 2018 and 2019. In 2019, we spent $370 million to repurchase shares of common stock, which included approximately $33 million related to shares repurchased in late 2018 that were paid for in 2019. In 2019 and 2018, we distributed $186 million and $139 million, respectively, to the noncontrolling interests.

Net cash used in financing activities in 2018 included $388 million related to our acquisition of all of the outstanding publicly traded common units of TNCLP. In addition, we repurchased 10.9 million shares for $500 million under the 2018 Share Repurchase Program in the second half of 2018, of which $33 million was accrued and unpaid as of December 31, 2018.

CF INDUSTRIES HOLDINGS, INC.

Contractual Obligations

The following is a summary of our contractual obligations as of December 31, 2019:

20202021202220232024After 2024Total
(in millions)
Debt
Long-term debt(1)$—$250$—$750$—$3,000$4,000
Interest payments on long-term debt(1)1861861771641511,9082,772
Other Obligations
Operating leases927350373036318
Equipment purchases and plant improvements12033———126
Transportation(2)63————9
Purchase obligations(3)(4)759177403635261,073
Contributions to pension plans(5)4225252613—131
Total(6)(7)(8)$1,205$717$295$1,013$229$4,970$8,429
(1)Based on debt balances before discounts, offering expenses and interest rates as of December 31, 2019. Interest payments also include undrawn commitment fees for our revolving credit facility and fees on letters of credit.
(2)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, 2019 and actual operating rates and prices may differ.
(3)Includes minimum commitments to purchase and transport natural gas based on prevailing market-based forward prices as of December 31, 2019 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 for additional information.
(4)Includes a commitment to purchase ammonia from PLNL at market-based prices under an agreement that expires in September 2020. The purchase commitment is $53 million based on market prices as of December 31, 2019. This agreement includes automatic consecutive one-year renewals, unless otherwise terminated by either party in advance. Assuming the agreement is not terminated by either party and based on market prices as of December 31, 2019, the annual commitment would be $71 million.
(5)Represents, for 2020, the contributions we expect to make to our North America and U.K. pension plans and, for 2021 through 2024, contributions to our U.K. plans as agreed with the plans’ trustees. 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.
(6)Excludes $137 million of unrecognized tax benefits, due to the uncertainty in the timing of potential tax payments, and the remaining transition tax liability of $42 million resulting from the enactment of the Tax Act. See Note 10—Income Taxes for additional information.
(7)Excludes $8 million of environmental remediation liabilities due to the uncertainty in the timing of payments.
(8)Excludes $5 million annual payments to CHS related to our embedded derivative due to uncertainty of future credit ratings, as this is only applicable 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. See Note 9—Fair Value Measurements or Note 17—Noncontrolling Interests for additional information.

CF INDUSTRIES HOLDINGS, INC.

Off-Balance Sheet Arrangements

We do not have any 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. See “Recent Accounting Pronouncements,” below, for a discussion of our January 1, 2019 adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).

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.

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.

Historically, a deferred income tax liability was 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 were considered to not be permanently reinvested. No deferred income tax liability was recorded for the remainder of our investment in non-U.S. subsidiaries and joint venture, which we believed to be permanently reinvested. In light of changes made by the Tax Act, the Company continues to evaluate whether it will continue to treat foreign subsidiary earnings as being 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 in the countries in which we operate, 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 foreign joint venture that could be subjected to U.S. taxation. 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 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, 2019, we have recorded a reserve for unrecognized tax benefits, including penalties and interest, of $137 million, which includes certain potential tax exposures involving cross border transactions. This amount represents our best estimate of the potential amounts due based on our interpretations of the rules and the facts and circumstances of the transactions. Differences in

CF INDUSTRIES HOLDINGS, INC.

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.

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, under the NGC Contract, by NGC. The joint venture is accounted for under the equity method. The joint venture experienced past curtailments in the supply of natural gas from NGC, which reduced the ammonia production at PLNL. The NGC Contract had an initial expiration date of September 2018 and was extended on the same terms until September 2023. Any NGC commitment to supply gas beyond 2023 will be based on new agreements. 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.

In 2016 and 2015, we recognized impairment charges of $134 million and $62 million, respectively, related to PLNL as part of our impairment assessments of our equity method investment in PLNL. The carrying value of our equity method investment in PLNL at December 31, 2019 is $88 million.

The U.K. Government held a referendum on the U.K.’s membership in the European Union (EU) in June 2016, which resulted in the electorate voting in favor of the U.K. exit from the EU (Brexit). On January 31, 2020, the United Kingdom left the EU. While the United Kingdom will no longer be a member of the EU, it will still be subject to EU rules and remain a member of the Customs Union for a period of time as it negotiates the rules to be applied to future trading, taxes, and other relationships. We operate two nitrogen manufacturing facilities in the United Kingdom, which utilize foreign-sourced materials and equipment, and which also export products in addition to serving customers in the United Kingdom. Brexit, including its indirect effects, could impact us in the future. For example, the cost and availability of natural gas or other raw materials or equipment that we purchase and the demand or selling prices for the nitrogen products that we sell, could be impacted by additions, deletions or changes to tariffs, duties, trade restrictions or other factors. Brexit could lead to changes in trade flows, trading relationships, the movement of production to alternative locations, or the curtailment of certain production at certain sites. Brexit could also impact foreign exchange rates or U.K. interest rates, which could impact our operations or the valuation of our assets and liabilities. Since the U.K. referendum in June 2016, the United Kingdom has experienced increases in the volatility of foreign exchange rates, which impacted our operations. As a result of the uncertainty of Brexit, including its indirect effects, changes in the future profitability, asset utilization, or business valuation of our U.K. operations could negatively impact us and may result in an impairment of our long-lived assets or goodwill. As of December 31, 2019, long-lived assets, including property, plant and equipment and intangible assets, related to the United Kingdom was $708 million, and goodwill, primarily included in our AN segment, was $275 million.

We evaluate goodwill for impairment in the fourth quarter at the reporting unit level. 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 analysis is necessary. However, if it is unclear based on the results of the qualitative test, we perform a quantitative test, which involves comparing 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

CF INDUSTRIES HOLDINGS, INC.

the reporting unit is considered not impaired, and no further testing is necessary. If the fair value of the reporting unit is less than its carrying amount, goodwill impairment would be recognized equal to the amount of the carrying value in excess of the reporting unit’s fair value, limited to the total amount of goodwill allocated to the reporting unit. We identified no goodwill impairment in 2019, 2018 or 2017. As of December 31, 2019 and 2018, the carrying value of our goodwill was $2.37 billion and $2.35 billion, respectively.

Intangible assets identified in connection with our 2010 acquisition of Terra 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 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 for additional information regarding our goodwill and other intangible assets.

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, 2019 PBO was computed based on a weighted-average discount rate of 3.1% for our North America plans and 2.0% 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 2019 was 4.1% for North America plans and 2.9% 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 4.6% weighted-average EROA used to calculate pension expense in 2019 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 4.4% weighted-average EROA used to calculate pension expense in 2019 for our United Kingdom plans is based on expected long-term performance of underlying investments. The EROA for both North America and United Kingdom plans are adjusted for expenses and diversification bonuses. For our United Kingdom plans, the 3.0% RPI used to calculate our PBO and the 3.3% RPI used to calculate 2019 pension expense are 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 $839 million as of December 31, 2019, which was $49 million higher than pension plan assets. For our United Kingdom pension plans, our PBO was $597 million as of December 31, 2019 which was $179 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, 2019 PBO and 2019 pension expense:

North America Plans
Increase/(Decrease) inIncrease/(Decrease) in
December 31, 2019 PBO2019 Pension Expense
Assumption+50 bps-50 bps+50 bps-50 bps
(in millions)
Discount Rate$(48)$54$—$1
EROAN/AN/A(3)3
United Kingdom Plans
Increase/(Decrease) inIncrease/(Decrease) in
December 31, 2019 PBO2019 Pension Expense
Assumption+50 bps-50 bps+50 bps-50 bps
(in millions)
Discount Rate$(47)$55$1$—
EROAN/AN/A(2)2
RPI32(29)1(1)

See Note 11—Pension and Other Postretirement Benefits for further discussion of our pension plans.

CF INDUSTRIES HOLDINGS, INC.

Recent Accounting Pronouncements

See Note 3—New Accounting Standards for a discussion of recent accounting pronouncements, including our January 1, 2019 adoption of ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize the rights and obligations resulting from virtually all leases (other than leases that meet the definition of a short-term lease) on their balance sheets as right-of-use assets with corresponding lease liabilities.

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