The Donaldsonville facility is the world’s largest and most flexible nitrogen complex. It has six ammonia plants, five urea plants, four nitric acid plants, three UAN plants, and one DEF plant. The complex, which is located on the Mississippi River, includes deep-water docking facilities, access to an ammonia pipeline, and truck and railroad loading capabilities. The complex has on-site storage for 140,000 tons of ammonia, 201,000 tons of UAN (measured on a 32% nitrogen content basis) and 130,000 tons of granular urea.
The Medicine Hat facility, located in southeast Alberta, is the largest nitrogen complex in Canada. It has two ammonia plants and one urea plant. The complex has on-site storage for 60,000 tons of ammonia and 60,000 tons of granular urea.
The Port Neal facility is located approximately 12 miles south of Sioux City, Iowa, on the Missouri River. The facility consists of two ammonia plants, three urea plants, two nitric acid plants and one UAN plant. The location has on-site storage for 85,000 tons of ammonia, 130,000 tons of granular urea, and 70,000100,000 tons of 32% UAN.
The Verdigris facility is located northeast of Tulsa, Oklahoma, near the Verdigris River. It is the second largest UAN production facility in North America. The facility comprises two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. We lease the port terminal from the Tulsa-Rogers County Port Authority. The complex has on-site storage for 60,000 tons of ammonia and 100,000 tons of 32% UAN.
The Woodward facility is located in rural northwest Oklahoma and consists of one ammonia plant, two nitric acid plants, two urea plants and two UAN plants. The facility has on-site storage for 36,000 tons of ammonia and 84,000 tons of 32% UAN.
The Yazoo City facility is located in central Mississippi and includes one ammonia plant, four nitric acid plants, one AN plant, two urea plants, one UAN plant and a dinitrogen tetroxide production and storage facility. The site has on-site storage for 50,000 tons of ammonia, 48,000 tons of 32% UAN and 11,000 tons of AN and related products.
The Courtright facility is located south of Sarnia, Ontario near the St. Clair River. The facility consists of an ammonia plant, a UAN plant, a nitric acid plant and a urea plant. The location has on-site storage for 64,000 tons of ammonia and 16,000 tons of 32% UAN.
The Ince facility is located in northwestern England and consists of one ammonia plant, three nitric acid plants, one AN plant and three NPK plants. The location has on-site storage for 11,000 tons of ammonia, 95,000 tons of AN, and 40,000 tons of NPKs.
The Billingham facility, located in the Teesside chemical area in northeastern England, is geographically split among three primary locations: the main site, which contains an ammonia plant, three nitric acid plants and a carbon dioxide plant; the Portrack site, approximately two miles away, which contains an AN fertilizer plant; and the North Tees site, approximately seven miles away, which contains an ammonia storage area. These locations collectively have on-site storage for 40,000 tons of ammonia and 128,000 tons of AN.
The Point Lisas Nitrogen facility in the Republic of Trinidad and Tobago is owned jointly through a 50/50 venture with Koch Fertilizer LLC. This facility has the capacity to produce 720,000 tons of ammonia annually from natural gas supplied under a contract with The National Gas Company of Trinidad and Tobago Limited (NGC).
Natural gas is the principal raw material and primary fuel source used in the ammonia production process at our nitrogen fertilizer manufacturing facilities. In 2019,2021, natural gas accounted for approximately 35%40% of our total production costs for nitrogen fertilizer products. Our nitrogen fertilizer manufacturing facilities have access to abundant, competitively-priced natural gas through a reliable network of pipelines that are connected to major natural gas trading hubs near the facilities.hubs. Our facilities utilize the following natural gas hubs: Henry Hub in Louisiana; SONAT in Louisiana;and TETCO ELA in Louisiana; ONEOK in Oklahoma; AECO in Alberta; Ventura in Iowa; Demarcation in Kansas; Welcome in Minnesota; Dawn in Ontario;and Parkway in Ontario; and the National Balancing Point (NBP) in the United Kingdom.
The safe, efficient and economical distribution of nitrogen products is critical for successful operations. Our nitrogen production facilities have access to multiple transportation modes by which we ship products to terminals, warehouses and customers. Each of our production facilities has a unique distribution pattern based on its production capacity and location.
Our North American nitrogen production facilities can ship products via truck and rail to customers and to our storage facilities in the U.S. and Canada, with access to our leased railcar fleet of approximately 5,000 tank and hopper cars, as well as railcars provided by rail carriers. Our United Kingdom nitrogen production facilities mainly ship products via truck.
The North American waterway system is also used extensively to ship products from our Donaldsonville, Verdigris and Yazoo City facilities. To ship ammonia and UAN, we employ a fleet of eleventen tow boats and thirty-twotwenty-eight river barges, which are primarily leased. We also utilize contract marine services to move urea fertilizer.granular urea. We can also export nitrogen fertilizer products via seagoing vessels from our Donaldsonville, Yazoo City, Billingham and Ince manufacturing facilities.
The Donaldsonville facility is connected to the 2,000-mile long Nustar pipeline through which we have the ability to transport ammonia to ten terminals and shipping points in the midwesternMidwestern U.S. corn belt. Our Verdigris and Port Neal facilities are connected to the 1,100-mile long Magellan ammonia pipeline that also serves the Midwestern United States. On January 31, 2019, Magellan Midstream Partners, L.P. (Magellan) announced its decision to discontinue commercial operations of the ammonia pipeline beginning in late 2019. In September 2019, the portion of the Magellan ammonia pipeline that connects to our Verdigris, Oklahoma complex was permanently shut down, resulting in the loss of future distribution of Verdigris ammonia production through this pipeline. In addition, we expect that the portion of the Magellan ammonia pipeline that connects to our Port Neal, Iowa complex will permanently shut down in March 2020, which will result in the loss of future distribution of Port Neal ammonia production through this pipeline.
Our markets are global and intensely competitive, based primarily on delivered price and, to a lesser extent, on customer service and product quality. During the peak demand periods, product availability and delivery time also play a role in the buying decisions of customers.
Our primary North American-based competitors include Nutrien Ltd., Koch Fertilizer LLC and Iowa Fertilizer Company. There is also significant competition from products sourced from other regions of the world, including some with lower natural gas or other feedstock costs.costs, which may include the benefit of government subsidies. Because ammonia, urea and UAN are widely-traded fertilizer products and there are limited barriers to entry, we experience competition from foreign-sourced products continuously. 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.
Our primary United Kingdom competition comes from imported products supplied by companies including Yara International, Origin Fertilisers, Ameropa, CHS and Helm. Urea and UAN are not produced in the United Kingdom, but along with AN are widely-traded fertilizer products with limited barriers to entry.
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to weather conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring planting season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union and the Republic of Trinidad and Tobago, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the introduction of new chemicals or substances into a market; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act (TSCA), the Occupational Safety and Health Act (OSHA) and various other federal, state provincial,and local and international statutes. Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. In addition, environmental, health and safety laws and regulations may impose joint and several liability, without regard to fault, for cleanup costs on potentially responsible parties who have released or disposed of hazardous substances into the environment. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future.
From time to time, we receive notices from governmental agencies or third parties alleging that we are a potentially responsible party at certain cleanup sites under CERCLA or other environmental cleanup laws. In 2011, we received a notice from the Idaho Department of Environmental Quality (IDEQ) that alleged that we were a potentially responsible party for the cleanup of a former phosphate mine site we owned in the late 1950s and early 1960s located in Georgetown Canyon, Idaho. The current owner of the property and a former mining contractor received similar notices for the site. Based on a Consent Order entered into with IDEQ and the U.S. Forest Service in 2014, we and the current property owner are currently conducting a remedial investigation and feasibility study of the site. In 2015, we and several other parties received a notice that the U.S. Department of the Interior and other trustees intend to undertake a natural resource damage assessment for 1718 former phosphate mines and three former processing facilities in southeast Idaho, one of which isincludes the former Georgetown Canyon mine.former mine and processing facility. See Note 20—21—Contingencies for additional information on the CERCLA/Remediation matters.information.
In the United States, GHG regulation is evolving at state, regional and federal levels, although some of the more significant developments to date, including EPA’s Clean Power Plan (which was rescinded in June 2019 and replaced byefforts of the Affordable Clean Energy Rule),United States Environmental Protection Agency (EPA) to regulate GHG emissions from fossil fuel-fired power plants, do not directly impose obligations on our facilities. The EPA has issued a mandatory GHG reporting rule that required all of our U.S. manufacturing facilities, which are considered large emitters of GHGs, to commence monitoring GHG emissions beginning on January 1, 2010 and reporting the previous year’s emissions annually starting in 2011. In addition, if we seek to modify or expand any of our major facilities and as a result, are required to
obtain a Prevention of Significant Deterioration (PSD) construction permit applicable to such facilities, we could be subject to pollution control requirements applicable to GHGs in addition to requirements applicable to conventional air pollutants. Such requirements may result in increased costs or delays in completing such projects. Other than the states’ implementation of this permitting requirement, none of the states where our U.S. production facilities are located-Iowa, Louisiana, Mississippi and Oklahoma-has proposed control regulations limiting GHG emissions.
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing material permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility. Any future expansion of our existing operations is also predicated upon securing the necessary environmental or other permits or approvals. More stringent environmental standards may impact our ability to obtain such permits.
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31, 2021, our days away, restricted or transferred (DART) incident rate was 0.21 injuries per 200,000 work hours, and our lost time incident rate was 0.11.
Response to COVID-19 Pandemic. During fiscal 2020 and 2021, in response to the COVID-19 pandemic, we instituted and have continued to enforce safety precautions to protect the health and well-being of all of our employees, including the manufacturing workforce who operate our nitrogen manufacturing complexes and distribution facilities. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of CF Holdings—Market Conditions and Current Developments—COVID-19 Pandemic, for a further discussion of the pandemic.
Talent Development. A core aspect of our culture is our commitment to identifying and developing talent to help employees accelerate growth and achieve their career goals. We invest in extensive assessment, training and professional development opportunities for our employees through a robust set of formal and informal programs, including targeted job movements, key experiences, and training, with an emphasis on creating a culture of inclusion. Leadership is the quality that drives our values and sets us apart. To help foster leadership, we have developed a set of leadership competencies that provide a common language for how to demonstrate leadership at every level of the organization. We view training and development programs as being a key part of succession planning, allowing us to grow a stronger company today and in the future.
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ITEM 1A. RISK FACTORS.
In addition to the other information contained in this Annual Report on Form 10-K, you should carefully consider the factors discussed below before deciding to invest in any of our securities. These risks and uncertainties, individually or in combination, could materially and adversely affect our business, financial condition, results of operations and cash flows. References to tons refer to short tons and references to tonnes refer to metric tons.
Market Risks
Our business is cyclical, resulting in periods of industry oversupply during which our business, financial condition, results of operations and cash flows tend to be negatively affected.
Historically, selling prices for our products, which are generally global commodities, have fluctuated in response to periodic changes in supply and demand conditions. Demand for nitrogen is affected by planted acreage, crop selection and fertilizer application rates, driven by population growth, orgross domestic product growth, changes in dietary habits and non-food use of crops, such as production of ethanol and other biofuels among other things. Demand also includes industrial uses of nitrogen, for example chemical manufacturing and emissions reductants such as diesel exhaust fluid (DEF). Supply is affected primarily by available production capacity and operating rates, raw material costs and availability, energy prices, government policies and global trade.
Periods of strong demand, high capacity utilization and increasing operating margins tend to stimulate global investment in production capacity. In the last several years,past, fertilizer producers, including CF Holdings, have built new production facilities or expanded capacity of existing production assets, or announced plans to do so. The construction of new nitrogen fertilizer manufacturing capacity in the industry, plus improvements to increase output from the existing production assets, increase nitrogen supply availability and affect the balance of supply and demand.demand and nitrogen selling prices. In recentcertain years, global nitrogen fertilizer capacity has increased faster than global nitrogen fertilizer demand, creating a surplus of global nitrogen fertilizer capacity, which has led to lower nitrogen fertilizer selling prices in 2016 and 2017.prices. For example, in the two-year period ended December 31, 2017, additional production capacity came on line and, at the same time, the average selling price for our products declined 34%, from $314 per ton in 2015 to $207 per ton in 2017.
Additional production capacity is expected to come on line over the next 12 months outside of North America. We cannot predict the impact of this additional capacity.capacity on nitrogen fertilizer selling prices. Also, global or local economic, political and financial conditions or changes in such conditions, or other factors, may cause acceleration of other announced and/or ongoing projects.
Price fluctuations for our products result from changes Similarly, lower energy prices can spur increases in supply and demand. Significant price fluctuations we experience could be symptoms of an oversupplied market in transition as new capacity ramps up, and production slows down or shuts down in high cost regions. Additionally, trade flows adjust as imports into different regions, of the world also impact the localwhich would result in increased supply and demand balances. Ifpressure on selling prices. Additionally, if imports increase into an oversupplied region, lower prices in that region could result.
During periods of industry oversupply, our financial condition, results of operations and cash flows tend to be affected negatively as the price at which we sell our products typically declines, resulting in possible reduced profit margins, write-downs in the value of our inventory and temporary or permanent curtailments of production. In 2016 and 2017, our financial performance, credit ratings and the trading price for our common stock were negatively impacted by the lower selling prices resulting from the global oversupply of nitrogen fertilizer. While in 2018 and 2019, we experienced increases in the average selling price for our products, has increased 3% in 20192020, the average selling price for our products decreased 14% to $203 per ton compared to $235 per ton in 2019. In 2021, the average selling price for our products increased 74% to $353 per ton compared to $229 per ton in 2018,2020. Due to the cyclical nature of our industry, we cannot predict the timing of oversupply and undersupply conditions, the period of time that these oversupply conditions canwill persist andor the degree to which theyoversupply conditions will impact our business, financial condition, results of operations and cash flows is uncertain.flows.
Our nitrogen products are global commodities, and we face intense global competition from other fertilizer producers.
We are subject to intense price competition from our competitors. Most fertilizers and related nitrogen products that we produce, such as industrial grade ammonium nitrate (AN) and DEF, are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and, to a lesser extent, customer service and product quality. As a consequence, conditions in the international market for nitrogen products significantly influence our operating results.
We compete with many producers, including state-owned and government-subsidized entities. Some of our competitors have greater total resources and are less dependent on earnings from fertilizer sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Furthermore, certain governments, in some cases as owners of some of our competitors, may be willing to accept lower prices and profitability on their products or subsidize production or consumption in order to support domestic employment or other political or social
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goals. Our competitive position could suffer to the extentif we are not able to expand our own resources to a similar extent, either through investments in new or existing operations or through acquisitions or joint ventures or partnerships.ventures.
China, the world’s largest producer and consumer of nitrogen fertilizers, currently has significant capacity surplus and many high-cost plants. As a result, the domestic nitrogen industry in China is operating at less than full capacity. IfA number of factors could encourage China to increase product capacity utilization, including changes in Chinese government policy, devaluation of the Chinese renminbi, the relaxation of Chinese environmental standards or decreases in
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Chinese producers’ underlying costs such as the price of Chinese coal encourage increased production capacity utilization, anycoal. Any resulting increase in export volume could adversely affect the balance between global supply and demand and may put downward pressure on global fertilizer prices, which could materially adversely affect our business, financial condition, results of operations and cash flows.
OurFrom time to time, certain of our competitors in Russia continue to benefitwith significant nitrogen fertilizer export capacity have benefited from non-market pricing of natural gas, allowing continuedwhich has resulted in significant volumes of exports fromto the region, and have significant nitrogen fertilizer export capacity. TheUnited States. For example, the 2016 revocations of U.S. antidumping measures on solid urea and fertilizer grade ammonium nitrate from Russia has allowed for increases inincreased imports from that country into the United States in recent years. In addition, high volumes of urea ammonium nitrate solution (UAN) imports from Russia and Trinidad and Tobago have negatively affected U.S. producers’ UAN profitability.
We also face competition from other fertilizer producers in the Middle East, Europe, Latin America and Africa, who,Africa. These producers, depending on market conditions, fluctuating input prices, geographic location and freight economics, may take actions at times with respect to price or selling volumes that adversely affect our business, financial condition, results of operations and cash flows. Some of these producers also benefit from non-market or government-set rates for natural gas pricing.
In addition, the international market for nitrogen products is influenced by such factors as currency exchange rates, including the relative value of the U.S. dollar and its impact uponon the cost of importing of nitrogen products into the United States, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets and the laws and policies of the markets in which we operate, including the imposition of new duties, tariffs or quotas, that affect foreign trade and investment. For example, the imposition of duties, tariffs or quotas in a region can directly impact product pricing in that region, which can lead to changes in global trade flows and impact the global supply and demand balance and pricing. Market participants customarily move product between regions of the world, or adjust trade flows, in response to these factors. North America, where we manufacture and sell most of our products, is one of the largest and most liquid nitrogen trading regions in the world. As a result, other manufacturers, traders and other market participants can move nitrogen products to North America when there is uncertainty overassociated with the supply and demand balance in other regions or when duties, tariffs or quotas impact prices or trade flows in other regions. As a result,Thus, duties, tariffs and quotas can lead to uncertainty in the global marketplace and impact the supply and demand balance in many regions, which could adversely affect our business, financial condition, results of operations and cash flows. In AprilOn October 9, 2019, the European Commission (the Commission) published a regulation imposing provisionalimposed definitive 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 tontonne (or €26.74 per ton). On October 8, 2019, the Commission confirmed this dutyThe duties will remain in a regulation imposing definitive measures, which became effective beginning October 9, 2019place for an initial five-year period after whichunless the measuresCommission suspends them before the five-year period has expired. After the initial five-year period, the Commission may be renewed byrenew the Commission.measures. The long-term impact of this dutythese duties on the international market for nitrogen products in the near and long term, is uncertain.
A decline in agricultural production or limitations on the use of our products for agricultural purposes could materially adversely affect the demand for our products.
Conditions in the United States, Europe, India, Brazil, China and other global agricultural areas significantly impact our operating results. Agricultural planted areas and production can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, crop disease and/or livestock disease, demand for agricultural products and governmental policies regarding production of or trade in agricultural products. These factors are outside of our control.
Governmental policies, including farm and biofuel subsidies, commodity support programs and tariffs, environmental and greenhouse gas policies, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. Ethanol production in the United States contributes significantly to corn demand, representing approximately 35% of total U.S. corn demand, due in part to federal legislation mandating use of renewable fuels. An increase in ethanol production has led to an increase in the amount of corn grown in the United States and to increased fertilizer usage on both corn and other crops that have also benefited from improved farm economics. While the current Renewable Fuel Standard encourages continued high levels of corn-based ethanol production, various interested parties have called to eliminate or reduce the renewable fuel mandate, or to eliminate or reduce corn-based ethanol as part of the renewable fuel mandate. Other factors that drive the ethanol market include the prices of
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ethanol, gasoline and corn. Lower gasoline prices and fewer aggregate miles, driven by increased automobile fuel efficiency, the continued expansion of electric vehicle use or the impact of decreased travel resulting from the coronavirus disease 2019 (COVID-19) pandemic, may put pressure on ethanol prices that could result in reduced profitability and lower production for the ethanol industry. This could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer demand.
Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, or nitrogen-efficient varieties, or developments in alternatives to traditional animal feed or alternative proteins, could also reduce the use of chemical fertilizers and adversely affect the demand for our products. Widespread adoption of emerging application technologies or alternative farming techniques could disrupt traditional application practices, affecting the volume or types of products used and timing of applications. In addition, from time to time various foreign government and U.S. state
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legislatures have considered limitations on the use and application of chemical fertilizers due to concerns about the negative impact of these products on the environment. For example, the United Kingdom is currently consulting with stakeholders and reviewing proposals to limit emissions from solid urea fertilizers, including a potential ban on urea fertilizers. While CF Fertilisers UK Limited does not sell solid urea fertilizer in the United Kingdom, other jurisdictions may consider limits on fertilizer use, such as the European Union, which announced its Farm to Fork and Biodiversity Strategies, or Canada, which as part of its Healthy Environment, Healthy Economy plan announced plans in late 2020 to introduce a target of reducing emissions from fertilizers by 30% below 2020 levels and has begun informal consultations with industry and other stakeholders on this proposal. These or other more stringent limitations on greenhouse gas emissions applicable to farmers, the end-users of our nitrogen fertilizers, could reduce the demand for our fertilizer products to the extent their use of our products increases farm-level emissions. Any reduction in the demand for chemical fertilizer products, including as a result of technological developments and/or limitations on the use and application of chemical fertilizers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business is dependent on natural gas, the prices of which are subject to volatility.
Nitrogen from the atmosphere and hydrogen from natural gas, coal orand other carbon energy feedstocks, or from the electrolysis of water, are the fundamental building blocks of nitrogen fertilizers.products. Energy feedstock costs comprise a significant portion of the total production cost of nitrogen products and, relative to the industry’s marginal producers that set the global price of nitrogen, generally determine profitability for nitrogen producers. Our manufacturing processes utilize natural gas as the principal raw material used in our production of nitrogen fertilizers.products. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia, granular urea, urea ammonium nitrate solution (UAN), ammonium nitrate (AN)UAN, AN and other nitrogen products.
Most of our nitrogen fertilizer manufacturing facilities are located in the United States and Canada. As a result, North American natural gas comprises a significant portion of the total production cost of our products. In recent years, the cost of North American natural gas for the production of nitrogen fertilizers has been significantly lower than the energy costs of the industry’s marginal nitrogen producers. Changes in the supply of and demand for natural gas can lead to extended periods of higher natural gas prices. In addition, any increases in the volume of liquefied natural gas exported from the U.S. to other regions, particularly regions where nitrogen products are produced, could increase our natural gas costs and/or lower natural gas costs for our competitors. If high natural gas prices were to persist in North America and significantly erode our favorable energy cost differentials relative to the marginal nitrogen producers, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The price of natural gas in North America has been volatile in recent years. During 2019,2021, 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$2.36 per MMBtu on three consecutive days in December 2019April 7, 2021 and a high of $4.12$23.61 per MMBtu on March 5, 2019.February 18, 2021. During the three-year period ended December 31, 2019,2021, the daily closing price at the Henry Hub reached a low of $1.82$1.34 per MMBtu on September 22, 2020 and three consecutive days in December 2019October 2020 and a high of $6.88$23.61 per MMBtu on January 4, 2018.February 18, 2021.
We also have manufacturing facilities located in the United Kingdom. These facilities are subject to fluctuations associated with the price of natural gas in Europe, which has also been volatile in recent years.years and reached unprecedented high levels in 2021. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). During 2019,2021, the daily closing price at NBP reached a low of $2.36$5.58 per MMBtu on September 4, 2019February 23, 2021 and a high of $7.91$60.10 per MMBtu on January 17, 2019.December 22, 2021. During the three-year period ended December 31, 2019,2021, the daily closing price at NBP reached a low of $2.36$1.04 per MMBtu on September 4, 2019May 22, 2020 and a high of $31.74$60.10 per MMBtu on March 2, 2018.
Changes in the supply of and demandDecember 22, 2021. The high price for natural gas can lead to extended periods of higher natural gas prices. If high prices were to persist, especially during a period of low fertilizer selling prices, it could have a material adversein the United Kingdom has had an effect on our business, financial condition, resultslocal operations, resulting in the idling of operations and cash flows.certain of our United Kingdom plants in 2021. Since the third quarter of 2021, the price for natural gas in the United Kingdom has remained high. The average daily market price of natural gas at NBP for January 2022 was $25.91 per MMBtu.
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The price of natural gas in North America and worldwide has been volatile in recent years and has declined on average due in part to the development of significant natural gas reserves, including shale gas, and the rapid improvement in shale gas extraction techniques, such as hydraulic fracturing and horizontal drilling. Future production of natural gas from shale formations could be reduced by regulatory changes that restrict drilling or hydraulic fracturing or increase its cost or by reduction in oil exploration and development prompted by lower oil prices resulting in production of less associated gas.
Certain of our operating facilities are located near natural gas hubs that have experienced increased natural gas development and have favorable basis differences as compared to other North American hubs. Favorable basis differences in certain regions may dissipate over time due to increases in natural gas pipeline or storage capacity in those regions. Additionally, basis differentials may become materially unfavorable due to a lack of inbound gas pipeline or storage capacity in other regions during periods of unusually high demand. Increased demand for natural gas, particularly in the Gulf Coast Region, due to increased industrial demand and increased natural gas exports, could result in increased natural gas prices. If such reduced production, increased demand or changes in basis were to occur, or if other developments adversely impact the supply/supply and demand balance for natural gas in North America or elsewhere, natural gas prices could rise, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Adverse weather conditions may decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations. Adverse weather conditions could become more frequent and/or more severe as a result of climate change.
Weather conditions that delay or disrupt field work during the planting, growing, harvesting or application periods may cause agricultural customers to use different forms of nitrogen fertilizer, which may adversely affect demand for the forms that we sell or may impede farmers from applying our fertilizers until the following application period, resulting in lower seasonal demand for our products.
Adverse weather conditions during or following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which could lower the income of growers and impair their ability to purchase fertilizer from our customers. Adverse weather conditions could also impact transportation of fertilizer, which could disrupt our ability to deliver our products to customers on a timely basis. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in fertilizer applications, planting schedules and purchasing patterns. Over the longer-term, changes in weather patterns may shift the periods of demand for products and even the regions to which our products are distributed, which could require us to evolve our distribution system.
In addition, we use the North American waterway system extensively to ship products from some of our manufacturing facilities to our distribution facilities and our customers. We also export nitrogen fertilizer products via seagoing vessels from deep-water docking facilities at certain of our manufacturing sites. Therefore, persistent significant changes in river or ocean water levels (either up or down, such as a result of flooding, drought or climate change, for example), may require changes to our operating and distribution activities and/or significant capital improvements to our facilities.
Weather conditions or, in certain cases, weather forecasts, also can disrupt our operations and can affect the price of natural gas, the principal raw material used to make our nitrogen products. Colder and/or longer than normal winters and warmer than normal summers increase the demand for natural gas for power generation and for residential and industrial use, which can increase the cost and/or decrease the availability of natural gas. In addition, adverse weather events not only can cause loss of power at our facilities or damage to or delays in logistics capabilities disrupting our operations, but also can impact the supply of natural gas and utilities and cause prices to rise.
All of the adverse weather conditions described above, including those impacting our customers and our operations, such as the physical risk from storms, hurricanes, tornadoes, or floods could become more frequent and/or more severe as a result of climate change. Our Donaldsonville complex is located in an area of the United States that experiences a relatively high level of hurricane or high wind activity and several of our complexes are located in areas that experience severe weather. In the last several years, there has been an increase in the frequency and severity of adverse weather conditions, including in the geographic areas where we have operations. Any significant adverse weather event or combination of adverse weather events could decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations — any of which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Our operating results fluctuate due to seasonality. Our inability to predict future seasonal fertilizer demand accurately could result in our having excess inventory, potentially at costs in excess of market value.
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs
CF INDUSTRIES HOLDINGS, INC.
during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application seasons and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements to build inventory being the highest just prior to the start of the spring planting season.
If seasonal demand is less than we expect, we may be left with excess inventory that will have to be stored (in which case our results of operations would be negatively affected by any related increased storage costs) or liquidated (in which case the selling price could be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are exacerbated by the volatility of nitrogen fertilizer prices, the constraints of our storage capacity, and the relatively brief periods during which farmers can apply nitrogen fertilizers. If prices for our products rapidly decrease, we may be subject to inventory write-downs, adversely affecting our operating results.
A change in the volume of products that our customers purchase on a forward basis, or the percentage of our sales volume that is sold to our customers on a forward basis, could increase our exposure to fluctuations in our profit margins and working capital and materially adversely affect our business, financial condition, results of operations and cash flows.
We offer our customers the opportunity to purchase products from us on a forward basis at prices and delivery dates we propose. Under our forward sales programs, customers generally make an initial cash down payment at the time of order and pay the remaining portion of the contract sales value in advance of the shipment date. Forward sales improve our liquidity by reducing our working capital needs due to the cash payments received from customers in advance of shipment of the product and allow us to improve our production scheduling and planning and the utilization of our manufacturing and distribution assets.
Any cash payments received in advance from customers in connection with forward sales are reflected on our consolidated balance sheets as a current liability until the related orders are shipped, which can take up to several months.
We believe the ability to purchase products on a forward basis is most appealing to our customers during periods of generally increasing prices for nitrogen fertilizers. Our customers may be less willing or even unwilling to purchase products on a forward basis during periods of generally decreasing or stable prices or during periods of relatively high fertilizer prices due to the expectation of lower prices in the future or limited capital resources. Fixing the selling prices of our products, often months in advance of their ultimate delivery to customers, typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment. In periods of rising fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in lower profit margins than if we had not sold fertilizer on a forward basis.
Operational Risks
Our operations are dependent upon raw materials provided by third parties, and any delay or interruption in the delivery of raw materials may adversely affect our business.
We use natural gas and other raw materials in the manufacture of our nitrogen products. We purchase the natural gas and other raw materials from third party suppliers. Our natural gas is transported by pipeline to our facilities by third party transportation providers or through the use of facilities owned by third parties. Delays or interruptions in the delivery of natural gas or other raw materials may be caused by, among other things, severe weather or natural disasters, unscheduled downtime, labor difficulties or shortages, insolvency of our suppliers or their inability to meet existing contractual arrangements, deliberate sabotage and terrorist incidents, or mechanical failures. In addition, the transport of natural gas by pipeline is subject to additional risks, including delays or interruptions caused by capacity constraints, leaks or ruptures. Any delay or interruption in the delivery of natural gas or other raw materials, even for a limited period, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
CF INDUSTRIES HOLDINGS, INC.
Our transportation and distribution activities rely on third party providers and are subject to environmental, safety and regulatory oversight. This exposes us to risks and uncertainties beyond our control that may adversely affect our operations and exposes us to additional liability.
We rely on natural gas pipelines to transport raw materials to our manufacturing facilities. In addition, we rely on railroad, barge, truck, pipeline, bargevessel and vesselpipeline companies to coordinate and deliver finished products to our distribution system and to ship finished products to our customers. We also lease rail cars in order to ship raw materials and finished products. These transportation operations, equipment and services are subject to various hazards, including adverse operating conditions on the
CF INDUSTRIES HOLDINGS, INC.
inland waterway system, extreme weather conditions, system failures, work stoppages, shutdowns, delays, accidents such as spills and derailments, vessel groundings and other accidents and operating hazards. Additionally, due to the aging infrastructure of certain rail lines, bridges, roadways, pipelines, river locks, and equipment that our third party service providers utilize, we may experience delays in both the receipt of raw materials or the shipment of finished product while repairs, maintenance or replacement activities are conducted. Also, certain third party service providers, such as railroads, have experienced periodic service delays or shutdowns due to capacity constraints in their systems, operational and maintenance difficulties, blockades, weather or safety-related embargoes and delays, and other events, which could impact the shipping of our products and cause disruption in our supply chain. For example, in September 2019, the portion of the Magellan Midstream Partners LP (Magellan) ammonia pipeline that connects to our Verdigris, Oklahoma complex was permanently shut down, resulting in the loss of future distribution of Verdigris ammonia production through this pipeline. In addition, we expect that the portion of the Magellan ammonia pipeline that connects to our Port Neal, Iowa complex will permanently shut down in March 2020, which will result in the loss of future distribution of Port Neal ammonia production through this pipeline.
These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to concerns related to accidents, discharges or other releases of hazardous substances, terrorism or the potential use of fertilizers as explosives, governmental entities could implement new or more stringent regulatory requirements affecting the transportation of raw materials or finished products.
If shipping of our products is delayed or we are unable to obtain raw materials as a result of these transportation companies’ failure to operate properly, or if new and more stringent regulatory requirements were implemented affecting transportation operations or equipment, or if there were significant increases in the cost of these services or equipment, our revenues and cost of operations could be adversely affected. In addition, increases in our transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In the United States and Canada, the railroad industry continues various efforts to limit the railroads’ potential liability stemming from the transportation of Toxic Inhalation Hazard materials, such as the anhydrous ammonia we transport to and from our manufacturing and distribution facilities. For example, various railroads shift liability to shippers by contract, purport to shift liability to shippers by tariff, or otherwise seek to require shippers to indemnify and defend the railroads from and against liabilities (including in negligence, strict liability, or statutory liability) that may arise from certain acts or omissions of the railroads, third parties who may have insufficient resources, or the Company, unknown causes or acts of god. These initiatives could materially and adversely affect our operating expenses and potentially our ability to transport anhydrous ammonia and increase our liability for releases of our anhydrous ammonia while in the care, custody and control of the railroads, third parties or us, for which our insurance may be insufficient or unavailable. New or more stringent regulatory requirements also could be implemented affecting the equipment used to ship our raw materials or finished products. Restrictions on service, increases in transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, and any railroad industry initiatives that may impact our ability to transport our products, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are reliant on a limited number of key facilities.
Our operations andnitrogen manufacturing facilities are located at nine separate nitrogen complexes, the production and handlinglargest of which is the Donaldsonville complex, which represented approximately 40% of our products involve significant risks and hazards. We are not fully insured against all potential hazards and risks incident to our business. Therefore, our insurance coverage may not adequately cover our losses.
Our operations are subject to hazards inherent in the manufacture, transportation, storage and distributionammonia production capacity as of chemical products, including ammonia, which is highly toxic and corrosive. These hazards include: explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving storage tanks, pipelines and rail cars; spills, discharges and releases of toxic or hazardous substances or gases; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled plant downtime; labor difficulties and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result inDecember 31, 2021. The suspension of operations for an extended periodat any of time and/or the imposition of civil or criminal penaltiesthese complexes could adversely affect our ability to produce our products and liabilities.
CF INDUSTRIES HOLDINGS, INC.
We maintain property, business interruption, casualtyfulfill our commitments, and liability insurance policies, but we are not fully insured against all potential hazards and risks incident to our business. If we were to incur significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. WeOperational disruptions could occur for many reasons, including natural disasters, weather, unplanned maintenance and other manufacturing problems, disease, strikes or other labor unrest or transportation interruptions. For example, our Donaldsonville complex is located in an area of the United States that experiences severe weather, including a relatively high level of hurricane or high wind activity, and several of our other complexes are also located in areas that experience severe weather. Such storms and severe weather events, depending on their severity and location, have the potential not only to damage our facilities and disrupt our operations, but also to affect adversely the shipping and distribution of our products. Moreover, our facilities may be subject to various self-retentions, deductibles and limits under these insurance policies. The policies also contain exclusions and conditionsfailure of equipment that couldmay be difficult to replace or have long delivery lead times, due in part to a material adverse impact on our ability to receive indemnification thereunder. Our policies are generally renewed annually. As a result of market conditions, our premiums, self-retentions and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. In addition, significantly increased costs could lead us to decide to reduce, or possibly eliminate, coverage. There can be no assurance that we will be able to buy and maintain insurance with adequate limits and reasonable pricing terms and conditions.
In April 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed alimited number of homessuppliers, and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companiescould result in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we do not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident. The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Over two hundred cases have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining cases are in various stages of discovery and pre-trial proceedings. The next group of cases was reset for trial beginning on September 14, 2020. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the pending lawsuits. The increased focus on the risks associated with fertilizers as a result of the incident could impact the regulatory environment and requirements applicable to fertilizer manufacturing and storage facilities.
Our substantial indebtedness could adversely affect our cash flow, prevent us from fulfilling our obligations and impair our ability to pursue or achieve other business objectives.
As of December 31, 2019, we had approximately $4.0 billion of total funded indebtedness, consisting primarily of secured and unsecured senior notes with varying maturity dates between 2021 and 2044, or approximately 41% of our total capitalization, and an additional $750 million of senior secured borrowing availability (reflecting no outstanding borrowings and no outstanding letters of credit) for general corporate purposes under our senior secured revolving credit agreement (as amended, the Revolving Credit Agreement). Our substantial debt service obligations will have an impact on our earnings and cash flow for so long as the indebtedness is outstanding.
Our substantial indebtedness could, as a result of our debt service obligations or through the operation of the financial and other restrictive covenants to which we are subject under the agreements and instruments governing that indebtedness and otherwise, have important consequences. For example, it could:
make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because any related decrease in revenues could cause us not to have sufficient cash flows from operations to make our scheduled debt payments;
cause us to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
cause us to use a portion of our cash flow from operations for debt service, reducing the availability of cash to fund working capital and capital expenditures, and other business activities;
cause us to be more vulnerable to general adverse economic and industry conditions;
expose us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Revolving Credit Agreement, could be at variable rates of interest;
make us more leveraged than some of our competitors, which could place us at a competitive disadvantage;
restrict our ability to dispose of assets or otherwise restrict our use of funds from the disposal of assets;
restrict our ability to pay dividends on our common stock or utilize excess cash to repurchase shares of our common stock;
CF INDUSTRIES HOLDINGS, INC.
limit our ability to borrow additional monies in the future to fund working capital, capital expenditures and other general corporate purposes; and
result in a downgrade in the credit rating of our indebtedness which could increase the cost of further borrowings.
We expect to consider options to refinance our outstanding indebtedness from time to time. Our ability to obtain any financing, whether through the issuance of new debt securities or otherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors, including factors beyond our control. Consequently, in the event that we need to access the credit markets, including to refinance our debt, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable timeframe, if at all. An inability to obtain financing with acceptable terms when needed could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The terms of our existing indebtedness allow us to incur significant additional debt in the future. If we incur additional indebtedness, the risks that we face as a result of our leverage could intensify. If our financial condition or operating results deteriorate, our relations with our creditors, including the holders of our outstanding debt securities, the lenders under our Revolving Credit Agreement and our suppliers, may be materially and adversely affected.
A failure to satisfy the financial maintenance covenants under our Revolving Credit Agreement or a breach of the covenants under any of the agreements governing our indebtedness could limit the borrowing availability under our Revolving Credit Agreement or result in an event of default under such agreements.
Our ability to comply with the covenants in the agreements and instruments governing our indebtedness, including the consolidated interest coverage ratio and consolidated net leverage ratio maintenance covenants contained in our Revolving Credit Agreement, will depend upon our future performance and various other factors, such as market prices for our nitrogen products, natural gas prices and other business, competitive and regulatory factors, many of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we may not be able to access the borrowing availability under our Revolving Credit Agreement and we would need to seek an amendment to our debt agreements or would need to refinance our indebtedness. There can be no assurance that we can obtain future amendments or waivers of our debt agreements and instruments, or refinance our debt, and, even if we were able to do so, such relief might only last for a limited period, potentially necessitating additional amendments, waivers or refinancings. Any noncompliance by us with the covenants under our debt agreements and instruments could result in an event of default under those debt agreements and instruments. An event of default under an agreement or instrument governing any of our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If our lenders or holders of our debt securities accelerate the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of our indebtedness, which could materially and adversely impair our business operations. An event of default under our Revolving Credit Agreement would permit the lenders thereunder to terminate all commitments to extend further credit under our Revolving Credit Agreement. Furthermore, our Revolving Credit Agreement and senior secured notes provide for liens on specified collateral to secure our obligations thereunder, and if we were unable to repay amounts due and payable under our Revolving Credit Agreement or the senior secured notes, our Revolving Credit Agreement lenders or holders of the senior secured notes, as applicable, could proceed against the collateral granted to them, which could have a material adverse effect on our business, financial condition and results of operations. In the event our creditors accelerate the repayment of our indebtedness, we cannot assure that we would have sufficient assets to make such repayment.
Potential future downgrades of our credit ratings could adversely affect our access to capital, cause vendors to change their credit terms for doing business with us, and could otherwise have a material adverse effect on us.
As of February 18, 2020, our corporate credit rating by S&P Global Ratings is BB+ with a positive outlook; our corporate credit rating by Moody’s Investor Services, Inc. is Ba1 with a stable outlook; and our corporate credit rating with Fitch Ratings, Inc. is BB+ with a positive outlook.
These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, as well as the payment terms that vendors are willing to provide us. Negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt, and could cause vendors to shorten our payment terms, require us to pay in advance for materials or services, or provide letters of credit, security, or other credit enhancements in order to do business with us.
CF INDUSTRIES HOLDINGS, INC.
We are subject to risks relating to our information technology systems, and any technology disruption or cybersecurity incident could negatively affect our operations.
We rely on internal and third-party information technology and computer control systems in many aspects of our business, including internal and external communications, the management of our accounting, financial and supply chain functions and plant operations. If we do not allocate and effectively manage the resources necessary to build, implement and sustain the proper technology infrastructure, we could be subject to transaction errors, inaccurate financial reporting, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to our confidential business information due to a security breach. In addition, our information technology systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, business partners, customers or suppliers, and may subject us to legal liability.
As with most large systems, our information technology systems (and the systems of our suppliers) have in the past been, and in the future likely will be, subject to computer viruses, malicious codes, unauthorized access and other cyber attacks, and we expect the sophistication and frequency of such attacks to continue to increase. To date, we are not aware of any significant impact on our operations or financial results from such attempts; however, unauthorized access could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our business, financial condition, or results of operations. Any of the attacks, breaches or other disruptions or damage described above could: interrupt our operations at one or more sites; delay production and shipments; result in the theft of our and our customers’ intellectual property and trade secrets; damage customer and business partner relationships and our reputation; result in legal claims and proceedings, liability and penalties under privacy or other laws, or increased costs for security and remediation; or raise concerns regarding our accounting for transactions. Each of these consequences could adversely affect our business, reputation and our financial statements.
Our business involves the use, storage, and transmission of information about our employees, customers, and suppliers. The protection of such information, as well as our proprietary information, is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. We have established policies and procedures to help protect the security and privacy of this information. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us or our employees, customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception, could expose us or our employees, customers, suppliers or other individuals affected to a risk of loss or misuse of this information, which could ultimately result in litigation and potential legal and financial liability. These events could also damage our reputation or otherwise harm our business.
Adverse weather conditionsActs of terrorism and regulations to combat terrorism could negatively affect our business.
Like other companies with major industrial facilities, we may decrease demand forbe targets of terrorist activities. Many of our fertilizer products, increase the costplants and facilities store significant quantities of natural gasammonia and other materials that can be dangerous if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or materially disruptinjury to employees, who could be direct targets or indirect casualties of an act of terrorism, may affect our operations.
Weather conditions that delay Any disruption of our ability to produce or disrupt field work during the planting, growing, harvestingdistribute our products could result in a significant decrease in revenues and significant additional costs to replace, repair or application periods may cause agricultural customers to use different forms of nitrogen fertilizer,insure our assets, which may adversely affect demand for the forms that we sell or may impede farmers from applying our fertilizers until the following application period, resulting in lower seasonal demand for our products.
Adverse weather conditions during or following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can alsocould have ana material adverse effect on crop yields, whichour business, financial condition, results of operations and cash flows.
Due to concerns related to terrorism or the potential use of certain nitrogen products as explosives, we are subject to various security laws and regulations. In the United States, these security laws include the Maritime Transportation Security Act of 2002 and the Chemical Facilities Anti-Terrorism Standards regulation. In addition, President Obama issued in 2013 Executive Order 13650 Improving Chemical Facility Safety and Security to improve chemical facility safety in coordination with owners and operators. Governmental entities could implement new or impose more stringent regulations affecting the security of our plants, terminals and warehouses or the transportation and use of fertilizers and other nitrogen products. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and reduced profit margins. We manufacture and sell certain nitrogen products that can be used as explosives. It is possible that governmental entities in the incomeUnited States or elsewhere could impose additional limitations on the use, sale or distribution of growers and impair their ability to purchase fertilizer from our customers. Adverse weather conditions could also impact transportation of fertilizer, which could disruptnitrogen products, thereby limiting our ability to delivermanufacture or sell those products, or that illicit use of our products to customers on a timely basis. Our quarterly financial results can vary significantly from one year to the next due to weather-related shiftscould result in fertilizer applications, planting schedules and purchasing patterns. Over the longer-term, changes in weather patterns may shift the periods of demandliability for products and even the regions to which our products are distributed, which could require us to evolve our distribution system.
In addition, we use the North American waterway system extensively to ship products from some of our manufacturing facilities to our distribution facilities and our customers, and we also export nitrogen fertilizer products via seagoing vessels from deep-water docking facilities at certain of our manufacturing sites. Therefore, persistent significant changes in river or ocean water levels (either up or down, such as a result of flooding or drought for example), may require changes to our operating and distribution activities and/or significant capital improvements to our facilities.
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WeatherOur international business operations are subject to numerous risks and uncertainties, including difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations; unexpected changes in regulatory environments; currency fluctuations; tax rates that may exceed those in the United States; earnings that may be subject to withholding requirements; and the imposition of tariffs, exchange controls or other restrictions.
Changes in governmental trade policies can lead to the imposition of new taxes, levies, duties, tariffs or quotas affecting agricultural commodities, fertilizer or industrial products. These can alter costs, trade flows, access to supplies or demand, and regional balances for our products.
Our principal reporting currency is the U.S. dollar and our business operations and investments outside the United States increase our risk related to fluctuations in foreign currency exchange rates. The main currencies to which we are exposed, besides the U.S. dollar, are the Canadian dollar, the British pound and the euro. These exposures may change over time as business practices evolve and economic conditions change. We may selectively reduce some foreign currency exchange rate risk by, among other things, requiring contracted purchases of our products to be settled in, or indexed to, the U.S. dollar or a currency freely convertible into U.S. dollars, or hedging through foreign currency derivatives. These efforts, however, may not be effective and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to anti-corruption laws and regulations and economic sanctions programs in various jurisdictions, including the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act of 2010, the Canadian Corruption of Foreign Public Officials Act, and economic sanctions programs administered by the United Nations, the European Union and the Office of Foreign Assets Control of the U.S. Department of the Treasury, and regulations set forth under the Comprehensive Iran Accountability Divestment Act. As a result of doing business internationally, we are exposed to a risk of violating anti-corruption laws and sanctions regulations applicable in those countries where we, our partners or agents operate. Violations of anti-corruption and sanctions laws and regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. The violation of applicable laws by our employees, consultants, agents or partners could subject us to penalties and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to antitrust and competition laws in various countries throughout the world. We cannot predict how these laws or their interpretation, administration and enforcement will change over time. Changes in antitrust laws globally, or in certain cases, weather forecasts, also can disrupttheir interpretation, administration or enforcement, may limit our existing or future operations and growth.
Financial Risks
Our operations and the production and handling of our products involve significant risks and hazards. We are not fully insured against all potential hazards and risks incident to our business. Therefore, our insurance coverage may not adequately cover our losses.
Our operations are subject to hazards inherent in the manufacture, transportation, storage and distribution of chemical products, including ammonia, which is highly toxic and can be corrosive, and ammonium nitrate, which is explosive. These hazards include: explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving storage tanks, pipelines and rail cars; spills, discharges and releases of toxic or hazardous substances or gases; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled plant downtime; labor difficulties and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations for an extended period of time and/or the imposition of civil or criminal penalties and liabilities.
In April 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits alleging various theories of negligence, strict liability, and breach of warranty under Texas law. Although we did not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident. Nearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining subrogation and statutory indemnification claims total approximately
CF INDUSTRIES HOLDINGS, INC.
$37 million, before prejudgment interest. The increased focus on the risks associated with fertilizers as a result of the incident could impact the regulatory environment and requirements applicable to fertilizer manufacturing and storage facilities.
We maintain property, business interruption, casualty and liability insurance policies, but we are not fully insured against all potential hazards and risks incident to our business. If we were to incur significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are subject to various self-insured retentions, deductibles and limits under these insurance policies. The policies also contain exclusions and conditions that could have a material adverse impact on our ability to receive indemnification thereunder. Our policies are generally renewed annually. As a result of market conditions, our premiums, self-insured retentions and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. In addition, significantly increased costs could lead us to decide to reduce, or possibly eliminate, coverage. There can be no assurance that we will be able to buy and maintain insurance with adequate limits and reasonable pricing terms and conditions.
Our substantial indebtedness could adversely affect our cash flow, prevent us from fulfilling our obligations and impair our ability to pursue or achieve other business objectives.
As of December 31, 2021, we had approximately $3.5 billion of total funded indebtedness, consisting primarily of unsecured senior notes with varying maturity dates between 2023 and 2044, or approximately 36% of our total capitalization (total debt plus total stockholders’ equity), and an additional $750 million of unsecured senior borrowing availability (reflecting no outstanding borrowings and no outstanding letters of credit) for general corporate purposes under our revolving credit agreement (the Revolving Credit Agreement). Our substantial debt service obligations will have an impact on our earnings and cash flow for so long as the priceindebtedness is outstanding.
Our indebtedness could, as a result of natural gas,our debt service obligations or through the principal raw material usedoperation of the financial and other restrictive covenants to which we are subject under the agreements and instruments governing that indebtedness and otherwise, have important consequences. For example, it could:
•make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because any related decrease in revenues could cause us not to have sufficient cash flows from operations to make our nitrogen fertilizer products. Colder and/scheduled debt payments;
•cause us to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or longerindustry conditions;
•cause us to use a portion of our cash flow from operations for debt service, reducing the availability of cash to fund working capital and capital expenditures, and other business activities;
•cause us to be more vulnerable to general adverse economic and industry conditions;
•expose us to the risk of increased interest rates because certain of our borrowings, including borrowings under the Revolving Credit Agreement, could be at variable rates of interest;
•make us more leveraged than normal winterssome of our competitors, which could place us at a competitive disadvantage;
•restrict our ability to pay dividends on our common stock or utilize excess cash to repurchase shares of our common stock;
•limit our ability to borrow additional amounts to fund working capital, capital expenditures and warmer than normal summers increase the demand for natural gas for power generationother general corporate purposes; and for residential and industrial use,
•result in our credit ratings being downgraded, which cancould increase the cost and/of further borrowings.
We expect to consider options to refinance our outstanding indebtedness from time to time. Our ability to obtain any financing, whether through the issuance of new debt securities or decreaseotherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors, including factors beyond our control. Consequently, in the event that we need to access the credit markets, including to refinance our debt, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable timeframe, if at all. An inability to obtain financing with acceptable terms when needed could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The terms of our existing indebtedness allow us to incur significant additional debt. If we incur additional indebtedness, the risks that we face as a result of our leverage could intensify. If our financial condition or operating results deteriorate, our relations with our creditors, including the holders of our outstanding debt securities, the lenders under the Revolving Credit Agreement and our suppliers, may be materially and adversely affected.
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A failure to satisfy the financial maintenance covenants under the Revolving Credit Agreement or a breach of the covenants under any of the agreements governing our indebtedness could limit the borrowing availability under the Revolving Credit Agreement or result in an event of natural gas. In addition, adverse weather events can not only cause loss of power atdefault under such agreements.
Our ability to comply with the covenants in the agreements and instruments governing our facilities disruptingindebtedness, including the consolidated interest coverage ratio and consolidated net leverage ratio maintenance covenants contained in the Revolving Credit Agreement, will depend upon our operations, but also can impact the supply offuture performance and various other factors, such as market prices for our nitrogen products, natural gas prices and utilitiesother business, competitive and regulatory factors, many of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we may not be able to access the borrowing availability under the Revolving Credit Agreement and we would need to seek an amendment to our debt agreements or would need to refinance our indebtedness. There can be no assurance that we can obtain future amendments or waivers of our debt agreements and instruments, or refinance our debt, and, even if we were able to do so, such relief might only last for a limited period, potentially necessitating additional amendments, waivers or refinancings. Any noncompliance by us with the covenants under our debt agreements and instruments could result in an event of default under those debt agreements and instruments. An event of default under an agreement or instrument governing any of our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If our lenders or holders of our debt securities accelerate the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of our indebtedness, which could materially and adversely impair our business operations. An event of default under the Revolving Credit Agreement would permit the lenders thereunder to terminate all commitments to extend further credit under the Revolving Credit Agreement. In the event our creditors accelerate the repayment of our indebtedness, we cannot assure that we would have sufficient assets to make such repayment.
Potential future downgrades of our credit ratings could adversely affect our access to capital, cause pricesvendors to rise.change their credit terms for doing business with us, and could otherwise have a material adverse effect on us.
As of February 14, 2022, our corporate credit rating by S&P Global Ratings is BBB- with a stable outlook; our corporate credit rating by Moody’s Investor Services, Inc. is Ba1 with a positive outlook; and our corporate credit rating with Fitch Ratings, Inc. is BBB- with a stable outlook. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, as well as the payment terms that vendors are willing to provide us. Negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt, and could cause vendors to shorten our payment terms, require us to pay in advance for materials or services, or provide letters of credit, security, or other credit enhancements in order to do business with us.
Tax matters, including changes in tax laws or rates, adverse determinations by taxing authorities and imposition of new taxes could adversely affect our results of operations and financial condition.
We are subject to taxes in (i) the United States, where most of our operations are located, and (ii) numerousseveral foreign jurisdictions where our subsidiaries are organized or conduct business. Tax laws or rates in the various jurisdictions in which we operate may be subject to significant change. Our future effective tax rate could also be affected by changes in our mix of earnings from countriesjurisdictions with differing statutory tax rates and tax systems, changes in valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation. We have certain net operating loss and capital loss carryforwards (collectively, the Tax Loss Carryforwards) that are available to reduce taxable income and thereby, reduce cash taxes. 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 Industries Inc. amended tax returns.
We are also subject to regular reviews, examinations and audits by the Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where we conduct business. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liabilities, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our financial condition, results of operations and financial condition.cash flows.
We have used the cash we generate outside the United States primarily to fund development of our business in non-U.S. jurisdictions. If the funds generated by our U.S. business are not sufficient to meet our need for cash in the United States, we may need to repatriate a portion of our future international earnings to the United States. Under the tax laws of the foreign countries in which we operate, those international earnings could be subject to withholding taxes when repatriated; therefore, the repatriation of those earnings could result in an increase in our worldwide effective tax rate and an increase in our use of cash to pay these taxes.
We also need to comply with other new, evolving or revised tax laws and regulations. The enactment of, or increases in, carbon taxes, tariffs or value added taxes, or other changes in the application of existing taxes, in markets in which we are currently active, or may be active in the future, or on specific products that we sell or with which our products compete, could have an adverse effect on our results of operations and financial condition.
On December 22, 2017, the President of the United States signed into law the Tax Cut and Jobs Act of 2017 (the “Tax Act” or “Tax Reform”). The Tax Act significantly changes how the U.S. taxes corporations. The Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act, significant estimates in these calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies are in the process of issuing guidance on how the provisions of the Tax Act will be applied or otherwise administered that could be different from the interpretation currently reflected in our financial statements or tax returns. Some of this guidance could be retroactive back to the effective date of the Tax Act. As new or amended guidance is issued with respect to the Tax Act, we may need to record adjustments to amounts previously recorded for taxes and such adjustments could have a material impact on our provision for income taxes in the period in which such adjustments are made.
In addition, foreign governments may enact tax laws in response to the Tax Act that could result in further changes to global taxation and materially affect our financial positioncondition and results of operations.
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The United States and other countries in which we operate are in the process of implementing the Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting Project (BEPS). BEPS, which is intended to improve tax disclosure and transparency and eliminate structures and activities that could be perceived by a particular country as resulting in tax avoidance. The OECD is currently developinghas partially developed and continues with development of a framework in order to assist member countries in adopting BEPS related legislation. Each country is permitted to introduce its own legislation to implement BEPS legislation. As a number of our business operations do business across country lines, we are subject to BEPS. The implementation of BEPS could result in tax changes and may adversely affect our provision for income taxes, results of operations and cash flows. In
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some cases, BEPS legislation could result in double taxation inon a portion of our profits without an appropriate mechanism to recover the incremental tax amount in another jurisdiction.
We are reliant on a limited number of key facilities.
Our nitrogen fertilizer operations are located at nine separate nitrogen complexes, the largest of which is the Donaldsonville complex, which represented approximately 40% of our ammonia production capacity as of December 31, 2019. The suspension of operations at any of these complexes could adversely affect our ability to produce our products and fulfill our commitments, and could have a material adverse effect on our business, financial condition, results of operations and cash flows. Operational disruptions could occur for many reasons, including natural disasters, weather, unplanned maintenance and other manufacturing problems, disease, strikes or other labor unrest or transportation interruptions. For example, our Donaldsonville complex is located in an area of the United States that experiences a relatively high level of hurricane or high wind activity and several of our complexes are located in areas that experience severe weather. Such storms, depending on their severity and location, have the potential not only to damage our facilities and disrupt our operations, but also to affect adversely the shipping and distribution of our products. Moreover, our facilities may be subject to failure of equipment that may be difficult to replace or have long delivery lead times and could result in operational disruptions.
We are subject to numerous environmental, health and safety laws, regulations and permitting requirements, as well as potential environmental liabilities, which may require us to make substantial expenditures.
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union, the Republic of Trinidad and Tobago and other locations, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act and various other federal, state, provincial, local and international laws.
As a producer of nitrogen fertilizer products working with hazardous substances, our business faces risks of spills, discharges or other releases of those substances into the environment. Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are incurring currently, and are likely to incur periodically in the future, liabilities under CERCLA and other environmental cleanup laws at our current facilities or facilities previously owned by us or other acquired businesses, adjacent or nearby third-party facilities or offsite disposal locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental, health and safety laws change regularly and have tended to become more stringent over time. As a result, we have not always been and may not always be in compliance with all environmental, health and safety laws and regulations. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future. Additionally, future environmental, health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
From time to time, our production, distribution or storage of anhydrous ammonia has resulted in accidental releases that have temporarily disrupted our operations and/or resulted in liability for administrative penalties and/or claims for personal injury. To date, our costs to resolve these liabilities have not been material. However, we could incur significant costs if our liability coverage is not sufficient to pay for all or a large part of any judgments against us, or if our insurance carrier refuses coverage for these losses.
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. Expansion or modification of our operations is predicated upon securing necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing permit or approval, or a determination that we have violated a law or permit as a result of a governmental inspection of our facilities could have a material adverse effect on our ability to continue operations at our facilities and on our business, financial condition, results of operations and cash flows.
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Future regulatory or legislative restrictions on greenhouse gas (GHG) emissions in the jurisdictions in which we operate could materially adversely affect our business, financial condition, results of operations and cash flows.
We are subject to GHG regulations in the United Kingdom, Canada and the United States. In the United States, our existing facilities currently are only subject to GHG emissions reporting obligations, although new facilities that we build, or existing facilities that we modify in the future, could be subject to GHG emissions standards included in their air permits. Our facilities in the United Kingdom are subject to the European Union Emissions Trading System (EU ETS), which generally require us to hold or obtain emissions allowances to offset GHG emissions from those aspects of our operations that are subject to regulation under this program. The European Union has announced changes to the EU ETS to increase the pace of emissions cuts beginning in 2021. Notwithstanding the exit of the United Kingdom from the European Union (Brexit) on January 31, 2020, facilities in the United Kingdom will remain subject to the EU ETS at least through the end of 2020. Although there is uncertainty about the GHG regulations that will apply thereafter, a framework similar to the EU ETS is a likely outcome.
Beginning in 2018, the Medicine Hat Nitrogen Complex, which had been subject to Alberta’s Specified Gas Emitters Regulation, became subject to Alberta’s new Carbon Competitiveness Incentive Regulation (CCIR). This regulation established product-specific benchmarks based on the most efficient GHG emitting facilities in a sector. A facility with emissions that exceed the applicable benchmark was required to take action to reduce its GHG emissions intensity, purchase emissions offsets or performance credits, or make contributions to Alberta’s climate fund. In 2019, the new Alberta government passed the Technology Innovation and Emission Reduction Implementation Act (TIER), which replaced the CCIR and went into effect on January 1, 2020. The TIER requires large emitting facilities (other than electricity producers, who are subject to a different standard) to comply with the least stringent of a “facility-specific” benchmark of 90% of historical GHG emissions intensity from a three-year baseline, which intensity limit will be reduced by 1% a year beginning in 2021, or a benchmark reflecting the emissions intensity of the top 10% of facilities for a given sector. The compliance options under the TIER are similar to the compliance options under CCIR. The federal government had formally determined that Alberta’s CCIR meets its stringency requirements and did not impose the Output-Based Performance System (OBPS), also called the “federal backstop,” which is being implemented by Environment and Climate Change Canada (ECCC) pursuant to the federal Greenhouse Pollution Pricing Act (GPPA) that came into effect in June 2018. In December 2019, the federal government announced that the TIER meets federal stringency benchmarking criteria for 2020, so the OBPS will not be imposed in Alberta. In addition, the TIER set the price for payments into its carbon fund at $30 per ton (the same effective price as set in the CCIR). This could also result in regulated facilities in Alberta being subject to the OBPS beginning in 2021, when the effective price of carbon pursuant to the OBPS rises to $40 per ton of excess CO2e.
The Courtright Nitrogen Complex had been subject to Ontario’s GHG cap-and-trade program beginning in January 2017, but the Conservative government elected in June 2018 rescinded that program in one of its first acts. Because Ontario no longer had a GHG regulatory regime, the federal government imposed the OBPS in the province beginning in 2019. In July 2019, the new Ontario government enacted a new GHG regulation, called the Emissions Performance Standards program (EPS), which sets CO2e emissions limits for nitrogen products based on a production-weighted sectoral average. For facilities whose carbon emissions exceed the applicable limits, compliance options include the purchase of emissions performance units for a fee of $20 per ton of excess CO2e for calendar year 2020, which fee will rise by $10 per ton each year through 2023. Except for registration and recordkeeping provisions, the EPS will not go into effect until the federal government determines that the regulation satisfies the federal stringency requirements, at which time the EPS would replace the OPBS in Ontario.
With respect to the OBPS, in June 2019 the ECCC finalized the emissions limits for CO2e emissions from nitrogen fertilizer products. These emission limits are based on 95% of the average emissions intensity for the production of such products from all Canadian nitrogen fertilizer plants, reflecting that such products are deemed to be energy-intensive and trade-exposed and thus subject to a less stringent emissions reduction requirement. A facility whose carbon emissions exceed the applicable limits will be required to offset excess emissions by obtaining and retiring surplus emission credits; obtaining qualifying emission offsets; or paying a fee of $20 per ton of excess CO2e for calendar year 2019, which fee will rise by $10 per ton each year through 2022. Ontario and Saskatchewan are challenging whether the federal government has jurisdiction to impose a federal carbon price on the provinces and territories. The Saskatchewan Court of Appeal (in May 2019) and the Ontario Court of Appeal (in June 2019) each held that the GPPA was validly enacted under the Canadian constitution. Ontario and Saskatchewan both appealed these decisions to the Supreme Court of Canada and oral arguments are scheduled for March 2020. In June 2019, Alberta filed a legal challenge to the constitutionality of the GPPA, notwithstanding that the question will be resolved by the pending Supreme Court appeals.
There are substantial uncertainties as to the nature, stringency and timing of any future GHG regulations in other jurisdiction, including the United States. On December 12, 2015, 195 countries adopted by consensus a new international agreement known as the Paris Agreement. The Paris Agreement, which was accepted by the United States and ratified by Canada and the United Kingdom, went into effect in November 2016. In June 2017, the United States announced its intention to
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withdraw from the Paris Agreement, subject to renegotiation of the Paris Agreement on terms more favorable to the United States. On November 4, 2019, the United States submitted formal notice of its withdrawal from the Paris Agreement, which will become effective on November 4, 2020. To date, the United States is the only signatory to withdraw from the Paris Agreement. If the Paris Agreement remains in effect, it could result in more aggressive efforts to reduce GHG emissions in the jurisdictions in which we operate.
More stringent GHG regulations, if they are enacted, are likely to have a significant impact on us, because our production facilities emit GHGs such as carbon dioxide and nitrous oxide and because natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our business, financial condition, results of operations and cash flows. In addition, to the extent that GHG restrictions are not imposed in countries where our competitors operate or are less stringent than regulations that may be imposed in the United States, Canada or the United Kingdom, our competitors may have cost or other competitive advantages over us.
We may not be successful in the expansion of our business.
We routinely consider possible expansions of our business, both within the United States and elsewhere. Major investments in our business, including as a result of acquisitions, partnerships, joint ventures, business combination transactions or other major investments require significant managerial resources, the diversion of which from our other activities may impair the operation of our business. We may be unable to identify or successfully compete for certain acquisition targets, which may hinder or prevent us from acquiring a target or completing other transactions. The risks of any expansion of our business through investments, acquisitions, partnerships, joint ventures or business combination transactions are increased due to the significant capital and other resources that we may have to commit to any such expansion, which may not be recoverable if the expansion initiative to which they were devoted is ultimately not implemented. As a result of these and other factors, including general economic risk, we may not be able to realize our projected returns from any future acquisitions, partnerships, joint ventures, business combination transactions or other major investments. Among the risks associated with the pursuit and consummation of acquisitions, partnerships, joint ventures or other major investments or business combinations are those involving:
difficulties in integrating the parties’ operations, systems, technologies, products and personnel;
incurrence of significant transaction-related expenses;
potential integration or restructuring costs;
potential impairment charges related to the goodwill, intangible assets or other assets to which any such transaction relates, in the event that the economic benefits of such transaction prove to be less than anticipated;
other unanticipated costs associated with such transactions;
our ability to achieve operating and financial efficiencies, synergies and cost savings;
our ability to obtain the desired financial or strategic benefits from any such transaction;
the parties’ ability to retain key business relationships, including relationships with employees, customers, partners and suppliers;
potential loss of key personnel;
entry into markets or involvement with products with which we have limited current or prior experience or in which competitors may have stronger positions;
assumption of contingent liabilities, including litigation;
exposure to unanticipated liabilities;
differences in the parties’ internal control environments, which may require significant time and resources to resolve in conformity with applicable legal and accounting standards;
increased scope, geographic diversity and complexity of our operations;
the tax effects of any such transaction; and
the potential for costly and time-consuming litigation, including stockholder lawsuits.
International acquisitions, partnerships, joint ventures, investments or business combinations and other international expansions of our business involve additional risks and uncertainties, including, but not limited to:
the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries;
challenges caused by distance and by language and cultural differences;
difficulties and costs of complying with a wide variety of complex laws, treaties and regulations;
unexpected changes in regulatory environments;
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political and economic instability, including the possibility for civil unrest;
nationalization of properties by foreign governments;
tax rates that may exceed those in the United States, and earnings that may be subject to withholding requirements;
the imposition of tariffs, exchange controls or other restrictions; and
the impact of currency exchange rate fluctuations.
If we finance acquisitions, partnerships, joint ventures, business combination transactions or other major investments by issuing equity or convertible or other debt securities or loans, our existing stockholders may be diluted or we could face constraints under the terms of, and as a result of the repayment and debt-service obligations under, the additional indebtedness. A business combination transaction between us and another company could result in our stockholders receiving cash or shares of another entity on terms that such stockholders may not consider desirable. Moreover, the regulatory approvals associated with a business combination may result in divestitures or other changes to our business, the effects of which are difficult to predict.
Our operating results fluctuate due to seasonality. Our inability to predict future seasonal fertilizer demand accurately could result in our having excess inventory, potentially at costs in excess of market value, or product shortages.
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application seasons and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring planting season.
If seasonal demand is less than we expect, we may be left with excess inventory that will have to be stored (in which case our results of operations would be negatively affected by any related increased storage costs) or liquidated (in which case the selling price could be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are exacerbated by the volatility of nitrogen fertilizer prices and the relatively brief periods during which farmers can apply nitrogen fertilizers. If prices for our products rapidly decrease, we may be subject to inventory write-downs, adversely affecting our operating results. If seasonal demand is greater than we expect, we may experience product shortages, and customers of ours may turn to our competitors for products that they would otherwise have purchased from us.
A change in the volume of products that our customers purchase on a forward basis, or the percentage of our sales volume that is sold to our customers on a forward basis, could increase our exposure to fluctuations in our profit margins and materially adversely affect our business, financial condition, results of operations and cash flows.
We offer our customers the opportunity to purchase products from us on a forward basis at prices and delivery dates we propose. Under our forward sales programs, customers generally make an initial cash down payment at the time of order and pay the remaining portion of the contract sales value in advance of the shipment date. Forward sales improve our liquidity due to the cash payments received from customers in advance of shipment of the product and allow us to improve our production scheduling and planning and the utilization of our manufacturing and distribution assets.
Any cash payments received in advance from customers in connection with forward sales are reflected on our consolidated balance sheets as a current liability until the related orders are shipped, which can take up to several months.
We believe the ability to purchase products on a forward basis is most appealing to our customers during periods of generally increasing prices for nitrogen fertilizers. Our customers may be less willing or even unwilling to purchase products on a forward basis during periods of generally decreasing or stable prices or during periods of relatively high fertilizer prices due to the expectation of lower prices in the future or limited capital resources. In periods of rising fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in lower profit margins than if we had not sold fertilizer on a forward basis. Conversely, in periods of declining fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in higher profit margins than if we had not sold fertilizer on a forward basis. In addition, fixing the selling prices of our products, often months in advance of their ultimate delivery to customers, typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.
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Our business is subject to risks involving derivatives and the risk that our hedging activities might not prevent losses.
We may utilize natural gas derivatives to hedge our financial exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen-based products. We have used natural gas futures, swaps and option contracts traded in over-the-counter markets or on exchanges. We have also used fixed-price, physical purchase and sales contracts to hedge our exposure to natural gas price volatility. In order to manage our exposure to changes in foreign currency exchange rates, we may from time to time use foreign currency derivatives (primarily forward exchange contracts).
Our use of derivatives 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 that do not qualify for, or to which we do not apply, hedge accounting. To the extent that our derivative positions lose value, we may be required to post collateral with our counterparties, adversely affecting our liquidity.
Hedging arrangements are imperfect and unhedged risks will always exist. In addition, our hedging activities may themselves give rise to various risks that could adversely affect us. For example, we are exposed to counterparty credit risk when our derivatives are in a net asset position. The counterparties to our derivatives are multi-national commercial banks, major financial institutions or large energy companies.
Our liquidity could be negatively impacted by a counterparty default on settlement of one or more of our derivative financial instruments or by the triggering of any cross default provisions or credit support requirements against us. Additionally, the International Swaps and Derivative Association master netting arrangements for most of our derivative instruments contain credit-risk-related contingent features, such as cross default provisions and credit support requirements. In the event of certain defaults or a credit ratings downgrade, our counterparty may request early termination and net settlement of certain derivative trades or may require us to collateralize derivatives in a net liability position.
At other times we may not utilize derivatives or derivative strategies to hedge certain risks or to reduce the financial exposure of price volatility. As a result, we may not prevent certain material adverse impacts that could have been mitigated through the use of derivative strategies.
Environmental and Regulatory Risks
We are subject to numerous environmental, health and safety laws, regulations and permitting requirements, as well as potential environmental liabilities, which may require us to make substantial expenditures.
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union, the Republic of Trinidad and Tobago and other locations, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the introduction of new chemicals or substances into a market; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition and cleanup of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act and various other federal, state, provincial, local and international laws. In November 2021, the Infrastructure Investment and Jobs Act reinstated and doubled the Superfund tax on chemicals, including ammonia and nitric acid. These taxes will be in place from July 1, 2022 through December 31, 2031 and apply to all domestic and imported products not used as fertilizer.
As a producer of nitrogen fertilizer products working with hazardous substances, our business faces risks of spills, discharges or other releases of those substances into the environment. Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are incurring currently, and are likely to incur periodically in the future, liabilities under CERCLA and other environmental cleanup laws at our current facilities or facilities previously owned by us or other acquired businesses, adjacent or nearby third-party facilities or offsite disposal
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locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental, health and safety laws change regularly and have tended to become more stringent over time. As a result, we have not always been and may not always be in compliance with all environmental, health and safety laws and regulations. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future. Additionally, future environmental, health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
From time to time, our production, distribution or storage of anhydrous ammonia and other hazardous or regulated substances has resulted in accidental releases that have temporarily disrupted our operations and/or resulted in liability for administrative penalties and/or claims for personal injury. To date, our costs to resolve these liabilities have not been material. However, we could incur significant costs if our liability coverage is not sufficient to pay for all or a large part of any judgments against us, or if our insurance carrier refuses coverage for these losses.
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. Expansion or modification of our operations is predicated upon securing necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing permit or approval, or a determination that we have violated a law or permit as a result of a governmental inspection of our facilities could have a material adverse effect on our ability to continue operations at our facilities and on our business, financial condition, results of operations and cash flows.
Future regulatory or legislative restrictions on greenhouse gas (GHG) emissions in the jurisdictions in which we operate could materially adversely affect our business, financial condition, results of operations and cash flows.
Our production facilities emit GHGs, such as carbon dioxide and nitrous oxide, and natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Because conventional ammonia production generates CO2 as an unavoidable chemical byproduct, ammonia production globally is considered an emissions- and energy-intensive industry. We are subject to GHG regulations in the United Kingdom, Canada and the United States. In the United States, our existing facilities, which are considered large emitters of GHGs, currently are only subject to GHG emissions reporting obligations. New facilities that we build, or existing facilities that we modify in the future, could also be subject to GHG emissions standards included in their air permits.
Beginning on January 1, 2021, our U.K. manufacturing plants became subject to the UK Emissions Trading Scheme (UK ETS), which generally requires us to hold or obtain emissions allowances to offset GHG emissions from those aspects of our operations that are subject to regulation under this program. Given the recent development of the UK ETS, there is substantial uncertainty as to the liquidity in the market for, and the stability of the price of, emission allowances that will be necessary for compliance with the regulations. Our manufacturing plants in the Alberta and Ontario provinces of Canada are subject to provincial or federal laws that impose a price on excess GHG emissions. Each of these laws establishes carbon dioxide equivalent (CO2e) emissions standards applicable to our facilities in terms of emissions per unit of production, with the provincial laws and the federal law using different formulas for establishing these intensity limits and changes in these limits over time. If CO2e emissions exceed the applicable limits, the excess emissions must be offset, either through obtaining qualifying emission credits or offsets or by making a payment for each ton of excess emissions.
Increasing concern over the impacts of climate change is driving countries to establish ever more ambitious GHG reduction targets. Approximately 200 countries, including the United States, Canada, the United Kingdom and the members of the European Union (EU), have joined the Paris Agreement, an international agreement intended to provide a framework pursuant to which the parties to the agreement will attempt to hold the increase in global average temperatures to below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5ºC above pre-industrial levels. Each signatory is required to develop its own national plan to attain this objective. In December 2020, the United Kingdom announced a target to reduce GHG emissions 68% from 1990 levels by 2030. Canada has increased its emissions reduction target under the Paris Agreement to 40-45% (up from 30%) below 2005 levels by 2030. In April 2021, the United States increased its goal to reduce emissions to 50-52% below 2005 levels by 2030. The Biden administration has also issued several executive orders focused on climate change to promote more active management of these issues across the executive branch, including by the EPA and the Departments of Agriculture, Interior, Transportation and Treasury.
CF INDUSTRIES HOLDINGS, INC.
In July 2021, the EU proposed a new carbon border adjustment mechanism that would require importers of certain products, including nitrogen fertilizers, to pay an import tax approximately equal to the costs incurred by EU producers of the products starting in 2026. Other governments are also considering border adjustment mechanisms for carbon intensive products. The imposition of any carbon border adjustment taxes may distort investment and trade flows, which could adversely impact our business.
More stringent GHG regulations, if they are enacted, are likely to have a significant impact on us, because our production facilities emit GHGs such as carbon dioxide and nitrous oxide and because natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our business, financial condition, results of operations and cash flows. Changes could also be made to tax policies related to decarbonization and clean energy that could impact our business and investment decisions. In addition, to the extent that GHG restrictions are not imposed in countries where our competitors operate or are less stringent than regulations that may be imposed in the United States, Canada or the United Kingdom, our competitors may have cost or other competitive advantages over us.
Strategic Risks
The market for green and blue (low-carbon) ammonia may be slow to develop, may not develop to the size expected or may not develop at all. Moreover, we may not be successful in the development and implementation of our green and blue ammonia projects in a timely or economic manner, or at all, due to a number of factors, many of which are beyond our control.
The market for green and blue (low-carbon) ammonia is developing and evolving, may not develop to the size or at the rate we expect, and is dependent in part on the developing market for green and blue (low-carbon) hydrogen, for which ammonia can serve as a transport and storage mechanism. These markets are heavily influenced by demand for clean energy, technology evolution and federal, state and local government laws, regulations and policies concerning carbon emissions, clean energy, and corporate accountability in the United States and abroad.
We believe the demand for green and blue ammonia could take several years to materialize and then ten or more years to fully develop and mature, and we cannot be certain that this market or the market for green and blue hydrogen will grow to the size or at the rate we expect. Hydrogen currently accounts for less than 1% of the world’s energy needs.
The recognition and acceptance of green and blue ammonia as a transport and storage mechanism for green and blue hydrogen, the use of green and blue ammonia as a fuel in its own right, the use of green and blue ammonia as a fertilizer, and the development and growth of end market demand and applications for green and blue hydrogen and green and blue ammonia are uncertain and dependent on a number of factors outside of our control. These factors include, among others, the extent to which and rate at which cost competitive global renewable energy capacity increases, the pricing of traditional and alternative sources of energy, the realization of technological improvements required to increase the efficiency and lower the costs of production of green and blue ammonia, the regulatory environment, the rate and extent of infrastructure investment and development, which may be affected by the relevant parties’ ability to obtain permits for these investments, the availability of tax benefits and other incentives and our ability to provide green and blue ammonia offerings cost-effectively. In addition, further development of alternative decarbonization technologies may result in viable alternatives to the use of blue ammonia for many potential decarbonization applications, resulting in lower than expected market demand growth relative to our current expectations. If a sustainable market for green or blue ammonia or hydrogen fails to develop, develops more slowly than we anticipate, or develops in a way that is not viable to serve with our assets and capabilities, we may decide not to implement, or may not be successful in implementing, one or more elements of our multi-year strategic plan.
Our clean energy strategy also depends on the realization of certain technical improvements required to increase the efficiency and lower the costs of production of green and blue ammonia. Over time, as we seek to convert additional existing facilities to green and blue production and further expand our green and blue ammonia production capacity, we may face operational difficulties and execution risks related to the design, development and construction. If our assumptions about the engineering and processing characteristics necessary to successfully build the facility capacity that we are contemplating and to scale up to larger production quantities prove to be incorrect, we may be unable to produce substantial quantities of green or blue ammonia, and the cost to construct or convert such green and blue ammonia facilities, or the production costs associated with the operation of such facilities, may be higher than we project. The production of blue ammonia depends to a large extent upon development by third parties of carbon capture and storage wells, which are not well-established technologies and are subject to a permitting process and operational risks, which may result in delays, impact viability in some or all situations, or create long-term liabilities.
CF INDUSTRIES HOLDINGS, INC.
We may not be successful in the expansion of our business.
We routinely consider possible expansions of our business, both within the United States and elsewhere. Major investments in our business, including acquisitions, partnerships, joint ventures, business combination transactions or other major investments, such as our green and blue ammonia projects, require significant managerial resources, the diversion of which from our other activities or opportunities may negatively affect the existing operations of our business. We may be unable to identify or successfully compete for certain acquisition targets, which may hinder or prevent us from acquiring a target or completing other transactions. The risks of any expansion of our business through investments, acquisitions, partnerships, joint ventures or business combination transactions may increase due to the significant capital and other resources that we may have to commit to any such expansion, which may not be recoverable if the expansion initiative to which they were devoted is ultimately not implemented. In addition, these efforts may require capital resources that could otherwise be used for the improvement and expansion of our existing business. As a result of these and other factors, including general economic risk, we may not be able to realize our projected returns from any future acquisitions, partnerships, joint ventures, business combination transactions or other major investments. Among the risks associated with the pursuit and consummation of acquisitions, partnerships, joint ventures or other major investments or business combinations are those involving:
•difficulties in integrating the parties’ operations, systems, technologies, products, cultures, and personnel;
•incurrence of significant transaction-related expenses;
•potential integration or restructuring costs;
•potential impairment charges related to the goodwill, intangible assets or other assets to which any such transaction relates, in the event that the economic benefits of such transaction prove to be less than anticipated;
•other unanticipated costs associated with such transactions;
•our ability to achieve operating and financial efficiencies, synergies and cost savings;
•our ability to obtain the desired financial or strategic benefits from any such transaction;
•the parties’ ability to retain key business relationships, including relationships with employees, customers, partners and suppliers;
•potential loss of key personnel;
•entry into markets or involvement with products with which we have limited current or prior experience or in which competitors may have stronger positions;
•assumption of contingent liabilities, including litigation;
•exposure to unanticipated liabilities, including litigation;
•differences in the parties’ internal control environments, which may require significant time and resources to resolve in conformity with applicable legal and accounting standards;
•increased scope, geographic diversity and complexity of our operations;
•the tax effects of any such transaction; and
•the potential for costly and time-consuming litigation, including stockholder lawsuits.
Moreover, legal proceedings or other risks from acquisitions and other business combinations may arise years after a transaction has been completed and may involve matters unrelated to the business acquired. For example, we were recently named along with other parties in certain product liability actions relating to a product containing the herbicide paraquat, which was allegedly sold, manufactured, distributed and/or marketed by Terra Industries Inc. (Terra) before it exited such lines of business, which exit occurred more than ten years before CF Holdings acquired Terra in April 2010.
In addition, major capital projects may be dependent on the availability and performance of engineering firms, construction firms, equipment and material suppliers, transportation providers and other vendors necessary to design and implement those projects on a timely basis and on acceptable terms. Major investments such as capital improvements at our facilities are subject to a number of risks, any of which could prevent us from completing capital projects in a timely or economic manner or at all, including, without limitation, cost overruns, non-performance of third parties, the inability to obtain necessary permits or other permitting matters, adverse weather, defects in materials and workmanship, labor and raw material shortages, transportation constraints, engineering and construction change orders, errors in design, construction or start-up, and other unforeseen difficulties.
International acquisitions, partnerships, joint ventures, investments or business combinations and other international expansions of our business involve additional risks and uncertainties, including, but not limited to:
•the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries;
•challenges caused by distance and by language and cultural differences;
•difficulties and costs of complying with a wide variety of complex laws, treaties and regulations;
•unexpected changes in regulatory environments;
CF INDUSTRIES HOLDINGS, INC.
•political and economic instability, including the possibility for civil unrest;
•nationalization of properties by foreign governments;
•tax rates that may exceed those in the United States, and earnings that may be subject to withholding requirements;
•the imposition of tariffs, exchange controls or other restrictions; and
•the impact of currency exchange rate fluctuations.
If we finance acquisitions, partnerships, joint ventures, business combination transactions or other major investments by issuing equity or convertible or other debt securities or loans, our existing stockholders may be diluted or we could face constraints under the terms of, and as a result of the repayment and debt-service obligations under, the additional indebtedness. A business combination transaction between us and another company could result in our stockholders receiving cash or shares of another entity on terms that such stockholders may not consider desirable. Moreover, the regulatory approvals associated with a business combination may result in divestitures or other changes to our business, the effects of which are difficult to predict.
We are subject to risk associated with our strategic venture with CHS Inc. (CHS).
We may not realize the full benefits from our strategic venture with CHS that are expected. The realization of the expected benefits of the CHS strategic venture depends on our ability to operate and manage the strategic venture successfully, and on the market prices of the nitrogen fertilizer products that are the subject of our supply agreement with CHS over the life of the agreement, among other factors. Additionally, any challenges related to the CHS strategic venture could harm our relationships with CHS or our other customers.
We are exposed to risks associated with our joint venture in Point Lisas Nitrogen Limited (PLNL).COVID-19 Pandemic Risk
We have a 50% ownership interest in PLNL, which owns and operates an ammonia production facility in the Republic of Trinidad and Tobago. Our joint venture partner shares a measure of control over the operations of our PLNL joint venture. As a result, our investment in our PLNL joint venture involves risks that are different from the risks involved in owning facilitiesbusiness and operations independently. These risks include the possibility that our PLNL joint venture or our partner: have economic or business interests or goals that are or become inconsistent with our economic or business interests or goals; are in a position to take action contrary to (or have veto rights over) our instructions, requests, policies or objectives; subject our PLNL joint venture to liabilities exceeding those contemplated; take actions that reduce our return on investment; or take actions that harm our reputation or restrict our ability to run our business.
In addition, we may become involved in disputes with our PLNL joint venture partner, which could lead to impasses or situations that could harm the joint venture, which could reduce our revenues or increase our costs.
PLNL’s ammonia plant relies on natural gas supplied, under a Gas Sales Contract (the NGC Contract),be adversely affected by the National Gas Company of Trinidad and Tobago Limited (NGC). COVID-19 pandemic.
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. Failure to secure a long-term gas supply from NGC after 2023 on a cost effective basis could adversely affect our ability to produce ammonia at the joint venture and could result in further impairment to the value of the joint venture, such as ceasing operations and writing off the remaining investment in PLNL, whichcoronavirus disease 2019 (COVID-19) pandemic could have a material and adverse effect on our business, financial position andcondition, results of operations.
CF INDUSTRIES HOLDINGS, INC.
In 2016COVID-19 has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and 2015, we recognized impairment charges of $134 millionrestrictions, quarantines, shelter in place orders and $62 million, respectively, related to PLNL as partshutdowns. If significant portions of our impairment assessmentsworkforce are unable to work effectively, including because of our equity method investment in PLNL. The carrying value of our equity method investment in PLNL at December 31, 2019 is $88 million.
Acts of terrorism and regulations to combat terrorism could negatively affect our business.
Likeillness, quarantines, government actions, facility closures or other companies with major industrial facilities,restrictions, we may be targets of terrorist activities. Many ofunable to meet customer demand or perform fully under our plants and facilities store significant quantities of ammonia and other materials that can be dangerous if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or injury to employees, whocontracts. The COVID-19 pandemic could be direct targets or indirect casualties of an act of terrorism, mayalso affect our operations. Any disruptioncustomers, suppliers and third party service providers, including transportation providers, and result in restrictions on or disruptions of transportation, port closures or increased border controls or closures, or other impacts on domestic and global supply chains or distribution channels, which could increase our costs and/or limit our ability to produce or distributemeet customer demand.
In addition, the COVID-19 pandemic could reduce, and has in the past reduced, the demand for energy, including crude oil, as well as natural gas and coal, which are nitrogen feedstocks. Reduced demand for nitrogen feedstocks could reduce the cost of nitrogen production outside of North America, which could increase global nitrogen supply and reduce the market prices of our productsproducts. Lower demand for crude oil could resultalso reduce the supply and therefore increase the cost of natural gas, which is the principal raw material used in our production of nitrogen products. The pandemic has also disrupted traditional food supply chains, which may have a significant decrease in revenuesmaterial impact on livestock and significant additional costs to replace, repair or insure our assets, whichfood demand, including the demand for corn. Each of these consequences could have a material adverse effect on our business, financial condition, results of operations andor cash flows.
Due to concerns related to terrorism or the potential use of certain fertilizers as explosives, we are subject to various security laws and regulations. In the United States, these security laws include the Maritime Transportation Security Act of 2002 and the Chemical Facilities Anti-Terrorism Standards regulation. In addition, President Obama issued in 2013 Executive Order 13650 Improving Chemical Facility Safety and Security to improve chemical facility safety in coordination with owners and operators. Governmental entities could implement new or impose more stringent regulations affecting the security of our plants, terminals and warehouses or the transportation and use of fertilizers. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and reduced profit margins. We manufacture and sell certain nitrogen products that can be used as explosives. It is possible that governmental entities in the United States or elsewhere could impose additional limitations on the use, sale or distribution of nitrogen products, thereby limiting our ability to manufacture or sell those products, or that illicit use of our products could result in liability for us.
In October 2016, the Department of Homeland Security (DHS) released its new Chemical Security Assessment Tool (CSAT 2.0) surveys and enhanced risk tiering methodology. Facilities that had previously submitted a survey response to the DHS were notified to resubmit responses to online questionnaires to be evaluated through the revised and enhanced risk tiering methodology. In April 2017, the DHS began sending tiering determination letters to chemical facilities based on the new methodology. We have submitted security plans to DHS for certain of our plants and terminals that have been identified as enhanced risks as a result of this process and anticipate based on comments received by DHS that we may be required to implement additional measures related to chemical security, beyond what we have implemented, at one or more of our facilities.
We are subjectunable to risks associated with international operations.
Our international business operations are subject to numerous risks and uncertainties, including difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations; unexpected changes in regulatory environments; currency fluctuations; tax rates thatpredict the ultimate impact the COVID-19 pandemic may exceed those in the United States; earnings that may be subject to withholding requirements; and the imposition of tariffs, exchange controls or other restrictions.
Changes in governmental trade policies can lead to the imposition of new duties, tariffs or quotas affecting agricultural commodities, fertilizer or industrial products. These can alter trade flows, access to supplies or demand, and regional balances for our products.
Our principal reporting currency is the U.S. dollar and our business operations and investments outside the United States increase our risk related to fluctuations in foreign currency exchange rates. The main currencies to which we are exposed, besides the U.S. dollar, are the Canadian dollar, the British pound and the euro. These exposures may change over time as business practices evolve and economic conditions change, including, for example, in response to sudden global economic conditions resulting from measures like the referendum in the United Kingdom in June 2016, which resulted in a vote in favor of exiting the European Union (Brexit), which is further discussed below. We may selectively reduce some foreign currency exchange rate risk by, among other things, requiring contracted purchases of our products to be settled in, or indexed to, the U.S. dollar or a currency freely convertible into U.S. dollars, or hedging through foreign currency derivatives. These efforts, however, may not be effective and could have a material adverse effect on our business, financial condition, results of operations andor cash flows.
With regard The extent to Brexit, on January 31, 2020, the United Kingdom left the European Union (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
CF INDUSTRIES HOLDINGS, INC.
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, couldour operations may 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,COVID-19 will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the movement of production to alternative locations, or the curtailment of certain production at certain sites. It could also lead to changes in the regulatory environment in which we operate, including, as discussed above, the risk of more stringent restrictions on GHG emissions. 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 impacts our operations as discussed above. As a resultfurther spread of the uncertaintyvirus, the rise of Brexit, including its indirect effects, changes innew variants of COVID-19, the future profitability, asset utilization, or business valuationduration 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 were $708 million, and goodwill was $275 million.
We are subject to anti-corruption laws and regulations and economic sanctions programs in various jurisdictions, including the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act of 2010, the Canadian Corruption of Foreign Public Officials Act, and economic sanctions programs administered by the United Nations, the European Unionpandemic and the Officetype and duration of Foreign Assets Control ofactions that may be taken by various governmental authorities in response to these developments. In 2020, the U.S. Department of the Treasury, and regulations set forth under the Comprehensive Iran Accountability Divestment Act. As a result of doing business internationally, we are exposed to a risk of violating anti-corruption laws and sanctions regulations applicable in those countries where we, our partners or agents operate. Violations of anti-corruption and sanctions laws and regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. The violation of applicable laws by our employees, consultants, agents or partners could subject us to penalties and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to antitrust and competition laws in various countries throughout the world. We cannot predict how these laws or their interpretation, administration and enforcement will change over time. Changes in antitrust laws globally, or in their interpretation, administration or enforcement, may limit our existing or future operations and growth.
Deterioration ofpandemic significantly increased global market uncertainty and caused an economic conditions could haveslowdown, which resulted in a material adverse effect on our business, financial condition, results of operations and cash flows.
A slowdown of, or persistentglobal recession. Persistent weakness in economic activity caused by a deterioration of global market and economic conditions could materially adversely affect our business, in the following ways, among others: conditions in the credit markets could affect the abilityfinancial condition, results of our customers and their customers to obtain sufficient credit to support their operations; the failure of our customers to fulfill their purchase obligations could result in increases in bad debts and impact our working capital; and the failure of certain key suppliers could increase our exposure to disruptions in supplyoperations or to financial losses. We also may experience declining demand and falling prices for some of our products due to our customers’ reluctance to replenish inventories. Changes in global economic conditions can arise suddenly and the full impact of such changes can be difficult to ascertain, resulting in anxiety among market participants that can persist for protracted periods. For example, concern and uncertainty over the impact of Brexit on the global economy has resulted in increased volatility in global financial markets. The overall impact of changes in global economic conditions on us is difficult to predict, and our business could be materially adversely impacted.
CF INDUSTRIES HOLDINGS, INC.
FORWARD LOOKING STATEMENTS
From time to time, in this Annual Report on Form 10-K as well as in other written reports and oral statements, we make forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our prospects, future developments and business strategies. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or “would” and similar terms and phrases, including references to assumptions, to identify forward-looking statements in this document. These forward-looking statements are made based on currently available competitive, financial and economic data, our current expectations, estimates, forecasts and projections about the industries and markets in which we operate and management’s beliefs and assumptions concerning future events affecting us. These statements are not guarantees of future performance and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, our actual results may differ materially from what is expressed in or implied by any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this document. Additionally, we do not undertake any responsibility to provide updates regarding the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this document.
Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Such factors include, among others:
•the cyclical nature of our business and the impact of global supply and demand on our selling prices;
•the global commodity nature of our fertilizernitrogen products, the conditions in the international market for nitrogen products, and the intense global competition from other fertilizer producers;
•conditions in the United States, Europe and other agricultural areas;areas, including the influence of governmental policies and technological developments on the demand for agricultural products;
•the volatility of natural gas prices in North America and Europe;the United Kingdom;
•weather conditions and the impact of severe adverse weather events;
•the seasonality of the fertilizer business;
•the impact of changing market conditions on our forward sales programs;
•difficulties in securing the supply and delivery of raw materials, increases in their costs or delays or interruptions in their delivery;
•reliance on third party providers of transportation services and equipment;
•our reliance on a limited number of key facilities;
•risks associated with cyber security;
•acts of terrorism and regulations to combat terrorism;
•risks associated with international operations;
•the significant risks and hazards involved in producing and handling our products against which we may not be fully insured;
•our ability to manage our indebtedness and any additional indebtedness that may be incurred;
•our ability to maintain compliance with covenants under our revolving credit agreement and the agreements governing our indebtedness;
•downgrades of our credit ratings;
risks associated with cyber security;
weather conditions;
•risks associated with changes in tax laws and disagreements with taxing authorities;
•risks involving derivatives and the effectiveness of our reliance on a limited number of key facilities;risk measurement and hedging activities;
•potential liabilities and expenditures related to environmental, health and safety laws and regulations and permitting requirements;
future •regulatory restrictions and requirements related to greenhouse gas emissions;
•the development and growth of the market for green and blue (low-carbon) ammonia and the risks and uncertainties relating to the development and implementation of our green and blue ammonia projects;
•risks associated with expansions of our business, including unanticipated adverse consequences and the significant resources that could be required;
the seasonality of the fertilizer business;
the impact of changing market conditions on our forward sales programs;
risks involving derivatives and the effectiveness of our risk measurement and hedging activities;
•risks associated with the operation or management of the CHS strategic venture, risks and uncertainties relating to the market prices of the fertilizer products that are the subject of our supply agreement with CHS over the life of the supply agreement, and the risk that any challenges related to the CHS strategic venture will harm our other business relationships; and
risks associated with•the impact of the novel coronavirus disease 2019 (COVID-19) pandemic on our PLNL joint venture;
acts of terrorismbusiness and regulations to combat terrorism;
risks associated with international operations; and
deterioration of global market and economic conditions.
CF INDUSTRIES HOLDINGS, INC.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Information regarding our facilities and properties is included in Item 1. Business—Reportable SegmentsNitrogen Manufacturing Facilities and Item 1. Business—Storage Facilities and Other Properties.
Certain of our distribution and storage facilities in the United States are subject to mortgages securing obligations under the Revolving Credit Agreement and our senior secured notes. For additional information, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.
ITEM 3. LEGAL PROCEEDINGS.
Litigation
West Fertilizer Co.
On April 17, 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we dodid not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident.
The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Over two hundredNearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining casessubrogation and statutory indemnification claims total approximately $37 million, before prejudgment interest, and are in various stages of discovery and pre-trial proceedings. The next group of cases was resetremaining claims are expected to be set for trial beginning on September 14, 2020.in 2022. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the pendingremaining lawsuits. The Company cannot provide a range of reasonably possible loss due to the lack of damages discovery for many of the remaining claims and the uncertain nature of this litigation, including uncertainties around the potential allocation of responsibility by a jury to other defendants or responsible third parties. The recognition of a potential loss in the future in the West Fertilizer Co. litigation could negatively affect our results in the period of recognition. However, based upon currently available information, including availablewe expect any potential loss to be fully indemnified by insurance coverage, weand do not believe that this litigation will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental
Florida Environmental Matter
On March 17, 2014, we completed the sale of our phosphate mining and manufacturing business, which was located in Florida, to The Mosaic Company (Mosaic). Pursuant to the terms of the definitive agreement executed in October 2013 among CF Industries Holdings, Inc., CF Industries and Mosaic, Mosaic assumed the following environmental matter and we agreed to indemnify Mosaic with respect to losses arising out of the matter below, subject to a maximum indemnification cap and the other terms of the definitive agreement.
Clean Air Act Notice of Violation
We received a Notice of Violation (NOV) from the EPA by letter dated June 16, 2010, alleging that we violated the Prevention of Significant Deterioration Clean Air Act regulations relating to certain projects undertaken at the former Plant City, Florida facility’s sulfuric acid plants. This NOV further alleges that the actions that are the basis for the alleged PSD violations also resulted in violations of Title V air operating permit regulations. Finally, the NOV alleges that we failed to comply with certain compliance dates established by hazardous air pollutant regulations for phosphoric acid manufacturing plants and phosphate fertilizer production plants. We had several meetings with the EPA with respect to this matter prior to our
CF INDUSTRIES HOLDINGS, INC.
sale of the phosphate mining and manufacturing business in March 2014. We and Mosaic have separately had continued discussions with the EPA subsequent to our sale of the phosphate mining and manufacturing business with respect to this matter.
We have reached a settlement in principle with the EPA to resolve the Plant City Clean Air Act matter, pending the final execution and filing of a stipulation of settlement. The settlement will require us to pay civil penalties to the United States, but will not include any required injunctive relief or other corrective actions. The settlement will not have a material impact on our consolidated financial position, results of operations or cash flows.
Other Environmental Matters
For information on pending proceedings relating to environmental remediation matters, see Item 1. Business—Environmental, Health and SafetySafety—CERCLA/Remediation Matters and Note 20—21—Contingencies to our consolidated financial statements included in Item 8 of this report.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
CF INDUSTRIES HOLDINGS, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the New York Stock Exchange under the symbol “CF.” As of February 18, 2020, there were 689 stockholders of record.Company
The following table sets forth stock repurchases for each of the three months of the quarter ended December 31, 2019:
|
| | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
| Period | Total
number
of shares
(or units)
purchased | | Average
price paid
per share
(or unit)(1) | | Total number of
shares (or units)
purchased as part of
publicly announced
plans or programs(2) | | Maximum number (or
approximate dollar
value) of shares (or
units) that may yet be
purchased under the
plans or programs
(in thousands)(2) |
| October 1, 2019 - October 31, 2019 | 485,819 |
| (3) | $ | 47.82 |
| | 480,926 |
| | $ | 727,407 |
|
| November 1, 2019 - November 30, 2019 | 1,389,798 |
| | 46.05 |
| | 1,389,798 |
| | 663,407 |
|
| December 1, 2019 - December 31, 2019 | — |
| | — |
| | — |
| | 663,407 |
|
| Total | 1,875,617 |
| | $ | 46.51 |
| | 1,870,724 |
| | |
|
__________________________________________________________________________ | |
(1)
| Average price paid per share of CF Industries Holdings, Inc. (CF Holdings) common stock repurchased under the 2019 Share Repurchase Program, as defined below, is the execution price, excluding commissions paid to brokers. |
| |
(2)
| On February 13, 2019, our Board of Directors authorized management to repurchase CF Holdings common stock for a total expenditure of up to $1 billion through December 31, 2021 (the 2019 Share Repurchase Program). The 2019 Share Repurchase Program was announced on February 13, 2019 and is discussed in Note 18—Stockholders’ Equity, in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. |
| |
(3)
| Includes 4,893 shares withheld to pay employee tax obligations upon the exercise of nonqualified stock options. |
CF INDUSTRIES HOLDINGS, INC.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical financial data as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 have been derived from our audited consolidated financial statements and related notes included elsewhere in this document. The following selected historical financial data as of December 31, 2017, 2016 and 2015 and for the years ended December 31, 2016 and 2015 have been derived from our consolidated financial statements that are not included in this document. The selected historical financial data should be read in conjunction with the information contained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015(1) |
| | (in millions, except per share amounts) |
| Statement of Operations Data: | |
| | |
| | |
| | |
| | |
|
| Net sales | $ | 4,590 |
| | $ | 4,429 |
| | $ | 4,130 |
| | $ | 3,685 |
| | $ | 4,308 |
|
| Cost of sales | 3,416 |
| | 3,512 |
| | 3,696 |
| | 2,842 |
| | 2,752 |
|
| Gross margin | 1,174 |
| | 917 |
| | 434 |
| | 843 |
| | 1,556 |
|
| Selling, general and administrative expenses | 239 |
| | 214 |
| | 191 |
| | 173 |
| | 169 |
|
| Transaction costs | — |
| | — |
| | — |
| | 179 |
| | 57 |
|
| Other operating—net | (73 | ) | | (27 | ) | | 18 |
| | 208 |
| | 92 |
|
| Total other operating costs and expenses | 166 |
| | 187 |
| | 209 |
| | 560 |
| | 318 |
|
| Equity in (losses) earnings of operating affiliates | (5 | ) | | 36 |
| | 9 |
| | (145 | ) | | (35 | ) |
| Operating earnings | 1,003 |
| | 766 |
| | 234 |
| | 138 |
| | 1,203 |
|
| Interest expense—net | 217 |
| | 228 |
| | 303 |
| | 195 |
| | 131 |
|
| Loss on debt extinguishment | 21 |
| | — |
| | 53 |
| | 167 |
| | — |
|
| Other non-operating—net | (7 | ) | | (9 | ) | | 3 |
| | 2 |
| | 14 |
|
| Earnings (loss) before income taxes and equity in earnings of non-operating affiliates | 772 |
| | 547 |
| | (125 | ) | | (226 | ) | | 1,058 |
|
| Income tax provision (benefit) | 126 |
| | 119 |
| | (575 | ) | | (68 | ) | | 396 |
|
| Equity in earnings of non-operating affiliates—net of taxes | — |
| | — |
| | — |
| | — |
| | 72 |
|
| Net earnings (loss) | 646 |
| | 428 |
| | 450 |
| | (158 | ) | | 734 |
|
| Less: Net earnings attributable to noncontrolling interests | 153 |
| | 138 |
| | 92 |
| | 119 |
| | 34 |
|
| Net earnings (loss) attributable to common stockholders | $ | 493 |
| | $ | 290 |
| | $ | 358 |
| | $ | (277 | ) | | $ | 700 |
|
| Cash dividends declared per common share | $ | 1.20 |
| | $ | 1.20 |
| | $ | 1.20 |
| | $ | 1.20 |
| | $ | 1.20 |
|
| Share and per share data: | |
| | |
| | |
| | |
| | |
|
| Net earnings (loss) per share attributable to common stockholders: | |
| | |
| | |
| | |
| | |
|
| Basic | $ | 2.24 |
| | $ | 1.25 |
| | $ | 1.53 |
| | $ | (1.19 | ) | | $ | 2.97 |
|
| Diluted | 2.23 |
| | 1.24 |
| | 1.53 |
| | (1.19 | ) | | 2.96 |
|
| Weighted-average common shares outstanding: | |
| | |
| | |
| | |
| | |
|
| Basic | 220.2 |
| | 232.6 |
| | 233.5 |
| | 233.1 |
| | 235.3 |
|
| Diluted | 221.6 |
| | 233.8 |
| | 233.9 |
| | 233.1 |
| | 236.1 |
|
| Other Financial Data: | |
| | |
| | |
| | |
| | |
|
| Depreciation and amortization | $ | 875 |
| | $ | 888 |
| | $ | 883 |
| | $ | 678 |
| | $ | 480 |
|
| Capital expenditures | 404 |
| | 422 |
| | 473 |
| | 2,211 |
| | 2,469 |
|
CF INDUSTRIES HOLDINGS, INC.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015(1) |
| | (in millions) |
| Balance Sheet Data: | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | 287 |
| | $ | 682 |
| | $ | 835 |
| | $ | 1,164 |
| | $ | 286 |
|
| Total assets | 12,172 |
| | 12,661 |
| | 13,463 |
| | 15,131 |
| | 12,683 |
|
| Customer advances | 119 |
| | 149 |
| | 89 |
| | 42 |
| | 162 |
|
| Total debt | 3,957 |
| | 4,698 |
| | 4,692 |
| | 5,778 |
| | 5,537 |
|
| Total equity | 5,637 |
| | 5,731 |
| | 6,684 |
| | 6,492 |
| | 4,387 |
|
_______________________________________________________________________________ | |
(1)
| On July 31, 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us. The financial results of CF Fertilisers UK have been consolidated within our financial results since July 31, 2015. Prior to July 31, 2015, our initial 50% equity interest in CF Fertilisers UK was accounted for as an equity method investment and the financial results of this investment were included in equity in earnings of non-operating affiliates—net of taxes. |
CF INDUSTRIES HOLDINGS, INC.
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”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 and references to tonnes refer to metric tons. Notes referenced inthroughout this discussion and analysisdocument refer to the notes to consolidated financial statementsstatement note disclosures that are found in Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements. For
Our mission is to provide clean energy to feed and fuel the world sustainably. With our employees focused on safe and reliable operations, environmental stewardship, and disciplined capital and corporate management, we are on a discussionpath to decarbonize our ammonia production network – the world’s largest – to enable green and analysisblue hydrogen and nitrogen products for energy, fertilizer, emissions abatement and other industrial activities. Our nine manufacturing complexes in the United States, Canada and the United Kingdom, an extensive storage, transportation and distribution network in North America, and logistics capabilities enabling a global reach underpin our strategy to leverage our unique capabilities to accelerate the world’s transition to clean energy. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our core product is anhydrous ammonia (ammonia), which contains 82% nitrogen and 18% hydrogen. Our nitrogen products that are upgraded from ammonia are granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium.
Our principal assets as of December 31, 2021 include:
•five U.S. nitrogen manufacturing facilities, located in Donaldsonville, Louisiana (the largest nitrogen complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; Verdigris, Oklahoma; and Woodward, Oklahoma. These facilities are wholly owned directly or indirectly by CF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder;
•two Canadian nitrogen manufacturing facilities, located in Medicine Hat, Alberta (the largest nitrogen complex in Canada) and Courtright, Ontario;
•two United Kingdom nitrogen manufacturing facilities, located in Billingham and Ince;
•an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and
•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.
We have a strategic venture with CHS under which CHS owns an equity interest in CFN, a subsidiary of CF Holdings, which represents approximately 11% of the yearmembership interests of CFN. We own the remaining membership interests. CHS also receives deliveries pursuant to a supply agreement under which CHS has the right to purchase annually from CFN up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. As a result of its minority equity interest in CFN, CHS is entitled to semi-annual cash distributions from CFN. We are also entitled to semi-annual cash distributions from CFN. See Note 18—Noncontrolling Interest for additional information on our strategic venture with CHS.
For the years ended December 31, 2017, you should read2021, 2020 and 2019, we sold 18.5 million, 20.3 million and 19.5 million product tons generating net sales of $6.54 billion, $4.12 billion and $4.59 billion, respectively.
Our principal executive offices are located outside of Chicago, Illinois, at 4 Parkway North, Suite 400, Deerfield, Illinois 60015, and our telephone number is 847-405-2400. Our Internet website address is www.cfindustries.com. Information made available on our website does not constitute part of this Annual Report on Form 10-K.
We make available free of charge on or through our Internet website, www.cfindustries.com, all of our reports on Forms 10-K, 10-Q and 8-K and all amendments to those reports as soon as reasonably practicable after such material is filed electronically with, or furnished to, the Securities and Exchange Commission (SEC). Copies of our Corporate Governance Guidelines, Code of Corporate Conduct and charters for the Audit Committee, Compensation and Management Development
CF INDUSTRIES HOLDINGS, INC.
Committee, Corporate Governance and Nominating Committee, and Environmental Sustainability and Community Committee of our Board of Directors (the Board) are also available on our Internet website. We will provide electronic or paper copies of these documents free of charge upon request. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Our Commitment to a Clean Energy Economy
We are taking significant steps to support a global hydrogen and clean fuel economy, through the production of green and blue ammonia. Since ammonia is one of the most efficient ways to transport and store hydrogen and is also a fuel in its own right, we believe that the Company, as the world’s largest producer of ammonia, with an unparalleled manufacturing and distribution network and deep technical expertise, is uniquely positioned to fulfill anticipated demand for hydrogen and ammonia from green and blue sources. Our approach includes green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia production, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects.
In October 2020, we announced an initial green ammonia project at our Donaldsonville complex. In April 2021, we signed an engineering and procurement contract with thyssenkrupp to supply a 20 MW alkaline water electrolysis plant to produce green hydrogen at our Donaldsonville complex. Construction and installation, which is being managed by us, began in the fourth quarter of 2021 and is expected to finish in 2023, with an estimated total cost of approximately $100 million. The cost of the project is expected to fit within our annual capital expenditure budgets. We will integrate the green hydrogen generated by the electrolysis plant into existing ammonia synthesis loops to enable the production of approximately 20,000 tons per year of green ammonia. We believe that, when completed in 2023, the Donaldsonville green ammonia project will be the largest of its kind in North America.
In the third quarter of 2021, we signed a memorandum of understanding with Mitsui & Co., Inc. (Mitsui) that will guide us in a joint exploration of the development of blue ammonia projects in the United States. The preliminary studies we are conducting with Mitsui cover areas such as blue ammonia supply and supply chain infrastructure, CO2 transportation and storage, expected environmental impacts, and blue ammonia economics and marketing opportunities in Japan and in other countries.
We have also announced steps to produce blue ammonia from our ammonia production network. In the fourth quarter of 2021, our Board of Directors authorized projects that will enable the annual production of up to 1.25 million tons of blue ammonia from our existing network starting in 2024. The projects will involve constructing units at our Donaldsonville and Yazoo City complexes that dehydrate and compress CO2, a process essential for CO2 transport via pipeline to sequestration sites. Management expects that, once the units are in service and sequestration is initiated, we could sequester up to 2.5 million tons of CO2 per year (2 million tons at Donaldsonville and 500,000 tons at Yazoo City). Under current regulations, the projects would be expected to qualify for tax credits under Section 45Q of the Internal Revenue Code, which provides a credit per tonne of CO2 sequestered.
Construction of the units at the Donaldsonville complex is expected to begin in 2022 and to be completed in 2024, with an estimated total cost of $200 million. The Yazoo City project will be timed to coincide with CO2 transport pipeline construction. Once started, the project is expected to be completed in three years with an estimated total cost of $85 million. In addition, we are currently in advanced discussions with several parties regarding transportation and sequestration of CO2 from Donaldsonville.
Company History
We were founded in 1946 as Central Farmers Fertilizer Company, and were owned by a group of regional agriculture cooperatives for the first 59 years of our existence. Central Farmers became CF Industries in 1970.
Originally established as a fertilizer brokerage company, we expanded owning and operating fertilizer manufacturing and distribution facilities in the early 1950s with a principal objective of assured supply for our owners. At various times in our history, we manufactured and/or distributed nitrogen, phosphate and potash fertilizers.
We operated as a traditional manufacturing and supply cooperative until 2002, when we adopted a new business model that established financial performance as our principal objective, rather than assured supply for our owners. A critical aspect of the new business model was to establish a more economically driven approach to the marketplace.
In August 2005, we completed our initial public offering (IPO) of common stock, which is listed on the New York Stock Exchange. In connection with the IPO, we consummated a reorganization transaction whereby we ceased to be a cooperative and our pre-IPO owners’ equity interests in CF Industries were canceled in exchange for all of the proceeds of the offering and shares of our common stock. At the time of the IPO, our assets consisted of one wholly owned nitrogen manufacturing facility
CF INDUSTRIES HOLDINGS, INC.
in Louisiana, United States; a joint venture nitrogen manufacturing facility in Alberta, Canada, of which we owned 66 percent; a phosphate mining and manufacturing operation in Florida, United States; and distribution facilities throughout North America.
In April 2010, we acquired Terra Industries Inc. (Terra), a leading North American producer and marketer of nitrogen fertilizer products for a purchase price of $4.6 billion, which was paid in cash and shares of our common stock. As a result of the Terra acquisition, we acquired five nitrogen fertilizer manufacturing facilities, an approximately 75.3% interest in Terra Nitrogen Company, L.P. (TNCLP) and certain joint venture interests.
In March 2014, we exited our phosphate mining and manufacturing business, which was located in Florida, through a sale to The Mosaic Company for approximately $1.4 billion in cash. As a result, our company became focused solely on nitrogen manufacturing and distribution.
In July 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK Group Limited (formerly known as GrowHow UK Group Limited) (CF Fertilisers UK) not previously owned by us for total consideration of $570 million, and CF Fertilisers UK became wholly owned by us. This transaction added CF Fertilisers UK’s nitrogen manufacturing complexes in Ince, United Kingdom and Billingham, United Kingdom to our consolidated manufacturing capacity.
In February 2016, our strategic venture with CHS commenced, at which time CHS made a capital contribution of $2.8 billion to CFN in exchange for membership interests in CFN, which represented approximately 11% of the total membership interests of CFN.
In late 2015 and 2016, we completed certain capacity expansion projects at Donaldsonville, Louisiana and Port Neal, Iowa. These projects, originally announced in 2012, included the construction of new ammonia, urea, and UAN plants at our Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port Neal, Iowa complex. These plants increased our overall production capacity by approximately 25%, improved our product mix flexibility at Donaldsonville, and improved our ability to serve upper-Midwest urea customers from our Port Neal location. The total capital cost of the capacity expansion projects was $5.2 billion.
Prior to April 2, 2018, Terra Nitrogen, Limited Partnership, which owns and operates our nitrogen manufacturing facility in Verdigris, Oklahoma, was a subsidiary of TNCLP. TNCLP 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.
In 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.
Product Tons and Nutrient Tons
Unless otherwise stated, we measure our production and sales volume in this Annual Report on Form 10-K in product tons, which represents the weight of the product measured in short tons (one short ton is equal to 2,000 pounds). References to UAN product tons assume a 32% nitrogen content basis for production volume.
We also provide certain supplementary volume information measured in nutrient tons. Nutrient tons represent the weight of the product’s nitrogen content, which varies by product. Ammonia represents 82% nitrogen content, granular urea represents 46% nitrogen content, UAN represents between 28% and 32% nitrogen content and AN represents between 29% and 35% nitrogen content.
Reportable Segments
Our reportable segments consist of the following segments: ammonia, granular urea, UAN, AN and Other. These segments are differentiated by products. We use gross margin to evaluate segment performance and allocate resources. Total other operating costs and expenses (consisting primarily of selling, general and administrative expenses and other operating—net) and non-operating expenses (consisting primarily of interest and income taxes), are centrally managed and are not included in the measurement of segment profitability reviewed by management. See Note 22—Segment Disclosures for additional information.
CF INDUSTRIES HOLDINGS, INC.
Our Products
Our primary nitrogen products are ammonia, granular urea, UAN and AN. Our historical sales of nitrogen products are shown in the following table. Net sales do not reflect amounts used internally, such as ammonia, in the manufacture of other products.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales |
| | (tons in thousands; dollars in millions) |
| Products | | | | | | | | | | | |
| Ammonia | 3,589 | | | $ | 1,787 | | | 3,767 | | | $ | 1,020 | | | 3,516 | | | $ | 1,113 | |
| Granular urea | 4,290 | | | 1,880 | | | 5,148 | | | 1,248 | | | 4,849 | | | 1,342 | |
| UAN | 6,584 | | | 1,788 | | | 6,843 | | | 1,063 | | | 6,807 | | | 1,270 | |
| AN | 1,720 | | | 510 | | | 2,216 | | | 455 | | | 2,109 | | | 506 | |
Other(1) | 2,318 | | | 573 | | | 2,322 | | | 338 | | | 2,257 | | | 359 | |
| Total | 18,501 | | | $ | 6,538 | | | 20,296 | | | $ | 4,124 | | | 19,538 | | | $ | 4,590 | |
(1)Other segment products include DEF, urea liquor, nitric acid, aqua ammonia and NPKs.
Gross margin was $2.39 billion, $801 million and $1.17 billion for the years ended December 31, 2021, 2020 and 2019, respectively.
We own and operate seven nitrogen manufacturing facilities in North America, including five nitrogen manufacturing facilities in the United States, and two in Canada. As of December 31, 2021, the combined production capacity of these seven facilities represented approximately 37%, 42%, 44% and 19% of North American ammonia, granular urea, UAN and AN production capacity, respectively. Each of our nitrogen manufacturing facilities in North America has on-site storage to provide flexibility to manage the flow of outbound shipments without impacting production. Our two United Kingdom nitrogen manufacturing facilities produce ammonia, AN and NPKs and serve primarily the British agricultural and industrial markets.
The following table shows the production capacities as of December 31, 2021 at each of our nitrogen manufacturing facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average Annual Capacity(1) |
| | Gross Ammonia(2) | | Net Ammonia(2) | | UAN(3) | | Urea(4) | | AN(5) | | Other(6) |
| | (tons in thousands) |
Donaldsonville, Louisiana(7) | 4,335 | | | 1,390 | | | 3,255 | | | 2,635 | | | — | | | 445 | |
| Medicine Hat, Alberta | 1,230 | | | 770 | | | — | | | 810 | | | — | | | — | |
| Port Neal, Iowa | 1,230 | | | 65 | | | 800 | | | 1,350 | | | — | | | 290 | |
Verdigris, Oklahoma(8) | 1,210 | | | 430 | | | 1,955 | | | — | | | — | | | — | |
| Woodward, Oklahoma | 480 | | | 130 | | | 810 | | | — | | | — | | | 115 | |
Yazoo City, Mississippi(8)(9) | 570 | | | — | | | 160 | | | — | | | 1,035 | | | 125 | |
Courtright, Ontario(8)(10) | 500 | | | 265 | | | 345 | | | — | | | — | | | 400 | |
Ince, U.K.(11) | 380 | | | 15 | | | — | | | — | | | 575 | | | 415 | |
Billingham, U.K.(8) | 595 | | | 230 | | | — | | | — | | | 625 | | | 410 | |
| 10,530 | | | 3,295 | | | 7,325 | | | 4,795 | | | 2,235 | | | 2,200 | |
| Unconsolidated Affiliate | | | | | | | | | | | |
Point Lisas, Trinidad(12) | 360 | | | 360 | | | — | | | — | | | — | | | — | |
| Total | 10,890 | | | 3,655 | | | 7,325 | | | 4,795 | | | 2,235 | | | 2,200 | |
(1)Average annual capacity includes allowance for normal outages and planned maintenance shutdowns.
(2)Gross ammonia capacity includes ammonia used to produce upgraded products. Net ammonia capacity is gross ammonia capacity less ammonia used to produce upgraded products based on the product mix shown in the table.
(3)Measured in tons of UAN containing 32% nitrogen by weight.
CF INDUSTRIES HOLDINGS, INC.
(4)Reflects granular urea capacity from the Donaldsonville, Medicine Hat, and Port Neal facilities. Urea liquor and DEF production capacities are included in Other.
(5)AN includes prilled products (Amtrate and industrial-grade AN, or IGAN) and AN solution produced for sale.
(6)Includes product tons of: urea liquor and DEF from the Donaldsonville, Port Neal, Woodward, Yazoo City, and Courtright facilities; nitric acid from the Courtright, Yazoo City, Billingham, and Ince facilities; and NPKs from the Ince facility. Production of DEF can be increased by reducing urea and/or UAN production.
(7)The Donaldsonville facility capacities present an estimated production mix. This facility is capable of producing between 2.4 million and 3.3 million tons of granular urea and between 1.2 million and 4.3 million tons of UAN annually. The facility is also capable of producing up to 1.2 million product tons of 32.5% DEF.
(8)Reduction of UAN or AN production at the Yazoo City, Courtright, Verdigris, and Billingham facilities can allow more merchant nitric acid to be made available for sale.
(9)The Yazoo City facility’s production capacity depends on product mix. With the facility maximizing the production of AN products, 160,000 tons of UAN can be produced. UAN production can be increased to 450,000 tons by reducing the production of AN to 900,000 tons.
(10)Production of urea liquor and DEF at the Courtright facility can be increased by reducing UAN production.
(11)The Ince facility can increase production of NPKs and nitric acid by reducing AN production. Production at the Ince facility is currently idled as of the date of this report.
(12)Represents our 50% interest in the capacity of PLNL.
The following table summarizes our production volume for the last three years:
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | (tons in thousands) |
Ammonia(1) | 9,349 | | | 10,353 | | | 10,246 | |
| Granular urea | 4,123 | | | 5,001 | | | 4,941 | |
| UAN (32%) | 6,763 | | | 6,677 | | | 6,768 | |
| AN | 1,646 | | | 2,115 | | | 2,128 | |
(1)Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN or AN.
Nitrogen Manufacturing Facilities
Donaldsonville, Louisiana
The Donaldsonville facility is the world’s largest and most flexible nitrogen complex. It has six ammonia plants, five urea plants, four nitric acid plants, three UAN plants, and one DEF plant. The complex, which is located on the Mississippi River, includes deep-water docking facilities, access to an ammonia pipeline, and truck and railroad loading capabilities. The complex has on-site storage for 140,000 tons of ammonia, 201,000 tons of UAN (measured on a 32% nitrogen content basis) and 130,000 tons of granular urea.
Medicine Hat, Alberta, Canada
The Medicine Hat facility, located in southeast Alberta, is the largest nitrogen complex in Canada. It has two ammonia plants and one urea plant. The complex has on-site storage for 60,000 tons of ammonia and 60,000 tons of granular urea.
Port Neal, Iowa
The Port Neal facility is located approximately 12 miles south of Sioux City, Iowa, on the Missouri River. The facility consists of two ammonia plants, three urea plants, two nitric acid plants and one UAN plant. The location has on-site storage for 85,000 tons of ammonia, 130,000 tons of granular urea, and 100,000 tons of 32% UAN.
Verdigris, Oklahoma
The Verdigris facility is located northeast of Tulsa, Oklahoma, near the Verdigris River. It is the second largest UAN production facility in North America. The facility comprises two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. We lease the port terminal from the Tulsa-Rogers County Port Authority. The complex has on-site storage for 60,000 tons of ammonia and 100,000 tons of 32% UAN.
CF INDUSTRIES HOLDINGS, INC.
Woodward, Oklahoma
The Woodward facility is located in rural northwest Oklahoma and consists of one ammonia plant, two nitric acid plants, two urea plants and two UAN plants. The facility has on-site storage for 36,000 tons of ammonia and 84,000 tons of 32% UAN.
Yazoo City, Mississippi
The Yazoo City facility is located in central Mississippi and includes one ammonia plant, four nitric acid plants, one AN plant, two urea plants, one UAN plant and a dinitrogen tetroxide production and storage facility. The site has on-site storage for 50,000 tons of ammonia, 48,000 tons of 32% UAN and 11,000 tons of AN and related products.
Courtright, Ontario, Canada
The Courtright facility is located south of Sarnia, Ontario near the St. Clair River. The facility consists of an ammonia plant, a UAN plant, a nitric acid plant and a urea plant. The location has on-site storage for 64,000 tons of ammonia and 16,000 tons of 32% UAN.
Ince, United Kingdom
The Ince facility is located in northwestern England and consists of one ammonia plant, three nitric acid plants, one AN plant and three NPK plants. The location has on-site storage for 11,000 tons of ammonia, 95,000 tons of AN, and 40,000 tons of NPKs. Production at the Ince facility is currently idled as of the date of this report due to the impact of the current energy crisis in the United Kingdom that is more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations—Overview of CF Holdings—Market Conditions and Current Developments—United Kingdom Energy Crisis.
Billingham, United Kingdom
The Billingham facility, located in the Teesside chemical area in northeastern England, is geographically split among three primary locations: the main site, which contains an ammonia plant, three nitric acid plants and a carbon dioxide plant; the Portrack site, approximately two miles away, which contains an AN fertilizer plant; and the North Tees site, approximately seven miles away, which contains an ammonia storage area. These locations collectively have on-site storage for 40,000 tons of ammonia and 128,000 tons of AN.
Point Lisas, Trinidad
The Point Lisas Nitrogen facility in the Republic of Trinidad and Tobago is owned jointly through a 50/50 venture with Koch Fertilizer LLC. This facility has the capacity to produce 720,000 tons of ammonia annually from natural gas supplied under a contract with The National Gas Company of Trinidad and Tobago Limited (NGC).
Nitrogen Product Raw Materials
Natural gas is the principal raw material and primary fuel source used in the ammonia production process at our nitrogen manufacturing facilities. In 2021, natural gas accounted for approximately 40% of our total production costs for nitrogen products. Our nitrogen manufacturing facilities have access to abundant, competitively-priced natural gas through a reliable network of pipelines that are connected to major natural gas trading hubs. Our facilities utilize the following natural gas hubs: Henry Hub in Louisiana; SONAT and TETCO ELA in Louisiana; ONEOK in Oklahoma; AECO in Alberta; Ventura in Iowa; Demarcation in Kansas; Welcome in Minnesota; Dawn and Parkway in Ontario; and the National Balancing Point (NBP) in the United Kingdom.
In 2021, our nitrogen manufacturing facilities consumed, in the aggregate, approximately 335 million MMBtus of natural gas. We employ a combination of daily spot and term purchases from a variety of quality suppliers to maintain a reliable, competitively-priced supply of natural gas. We also use certain financial instruments to hedge natural gas prices. See Note 16—Derivative Financial Instruments for additional information about our natural gas hedging activities.
Nitrogen Product Distribution
The safe, efficient and economical distribution of nitrogen products is critical for successful operations. Our nitrogen production facilities have access to multiple transportation modes by which we ship products to terminals, warehouses and customers. Each of our production facilities has a unique distribution pattern based on its production capacity and location.
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Our North American nitrogen production facilities can ship products via truck and rail to customers and to our storage facilities in the U.S. and Canada, with access to our leased railcar fleet of approximately 5,000 tank and hopper cars, as well as railcars provided by rail carriers. Our United Kingdom nitrogen production facilities mainly ship products via truck.
The North American waterway system is also used extensively to ship products from our Donaldsonville, Verdigris and Yazoo City facilities. To ship ammonia and UAN, we employ a fleet of ten tow boats and twenty-eight river barges, which are primarily leased. We also utilize contract marine services to move granular urea. We can also export nitrogen products via seagoing vessels from our Donaldsonville, Yazoo City, Billingham and Ince manufacturing facilities.
The Donaldsonville facility is connected to the 2,000-mile long Nustar pipeline through which we have the ability to transport ammonia to ten terminals and shipping points in the Midwestern U.S. corn belt.
Storage Facilities and Other Properties
As of December 31, 2021, we owned or leased space at 51 in-market storage terminals and warehouses located in a 21-state region of the United States, Canada and the United Kingdom. Including storage at our production facilities, we have an aggregate storage capacity for approximately 3.0 million tons of product. Our storage capabilities are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ammonia | | Granular Urea | | UAN(1) | | AN |
| | Number of
Facilities | | Capacity
(000 Tons) | | Number of
Facilities | | Capacity
(000 Tons) | | Number of
Facilities | | Capacity
(000 Tons) | | Number of
Facilities | | Capacity
(000 Tons) |
| Plants | 9 | | | 546 | | | 3 | | | 320 | | | 6 | | | 549 | | | 3 | | | 234 | |
| Terminal and Warehouse Locations | | | | | | | | | | | | | | | |
Owned(2) | 22 | | | 780 | | | — | | | — | | | 8 | | | 209 | | | — | | | — | |
Leased(3) | 6 | | | 89 | | | 2 | | | 32 | | | 21 | | | 276 | | | — | | | — | |
| Total In-Market | 28 | | | 869 | | | 2 | | | 32 | | | 29 | | | 485 | | | — | | | — | |
| Total Storage Capacity | | | 1,415 | | | | | 352 | | | | | 1,034 | | | | | 234 | |
(1)Capacity is expressed as the equivalent volume of UAN measured on a 32% nitrogen content basis.
(2)The owned facilities that store UAN also can store ammonia.
(3)Our lease agreements are typically for periods of one to five years.
Customers
The principal customers for our nitrogen products are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Sales are generated by our internal marketing and sales force. CHS was our largest customer in 2021 and accounted for approximately 14% of our consolidated net sales. We have a strategic venture with CHS under which CHS has a minority equity interest in CFN. See Note 18—Noncontrolling Interest for additional information on our strategic venture with CHS.
Competition
Our markets are global and intensely competitive, based primarily on delivered price and, to a lesser extent, on customer service and product quality. During the peak demand periods, product availability and delivery time also play a role in the buying decisions of customers.
Our primary North American-based competitors include Nutrien Ltd., Koch Fertilizer LLC and Iowa Fertilizer Company. There is also significant competition from products sourced from other regions of the world, including some with lower natural gas or other feedstock costs, which may include the benefit of government subsidies. Because ammonia, urea and UAN are widely-traded fertilizer products and there are limited barriers to entry, we experience competition from foreign-sourced products continuously. 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.
Our primary United Kingdom competition comes from imported products supplied by companies including Yara International, Origin Fertilisers, Ameropa, CHS and Helm. Urea and UAN are not produced in the United Kingdom, but along with AN are widely-traded fertilizer products with limited barriers to entry.
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Seasonality
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to weather conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring planting season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
Environmental, Health and Safety
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union and the Republic of Trinidad and Tobago, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the introduction of new chemicals or substances into a market; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act (TSCA), the Occupational Safety and Health Act (OSHA) and various other federal, state and local statutes. Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. In addition, environmental, health and safety laws and regulations may impose joint and several liability, without regard to fault, for cleanup costs on potentially responsible parties who have released or disposed of hazardous substances into the environment. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future.
Environmental, Health and Safety Expenditures
Our environmental, health and safety capital expenditures in 2021 totaled approximately $31 million. We estimate that we will have approximately $63 million of capital expenditures for environmental, health and safety in 2022. In addition, to support safe and reliable operations at our continuous process manufacturing facilities, we conduct scheduled inspections, replacements and overhauls of our plant machinery and equipment, which are referred to as turnarounds. A further description of turnaround activities is included in Note 7—Property, Plant and Equipment—Net to our consolidated financial statements included in Item 8 of this report. Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent over time. We expect that continued government and public emphasis on environmental issues will result in increased future expenditures for environmental controls at our manufacturing and distribution facilities. Such expenditures could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, future environmental, health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
CERCLA/Remediation Matters
From time to time, we receive notices from governmental agencies or third parties alleging that we are a potentially responsible party at certain cleanup sites under CERCLA or other environmental cleanup laws. In 2011, we received a notice from the Idaho Department of Environmental Quality (IDEQ) that alleged that we were a potentially responsible party for the cleanup of a former phosphate mine site we owned in the late 1950s and early 1960s located in Georgetown Canyon, Idaho. The current owner of the property and a former mining contractor received similar notices for the site. Based on a Consent Order entered into with IDEQ and the U.S. Forest Service in 2014, we and the current property owner are currently conducting a remedial investigation and feasibility study of the site. In 2015, we and several other parties received a notice that the U.S. Department of the Interior and other trustees intend to undertake a natural resource damage assessment for 18 former phosphate mines and three former processing facilities in southeast Idaho, which includes the Georgetown Canyon former mine and processing facility. See Note 21—Contingencies for additional information.
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Regulation of Greenhouse Gases
Our production facilities emit greenhouse gases (GHGs), such as carbon dioxide and nitrous oxide. Natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. We are subject to GHG regulations in the United Kingdom, Canada and the United States.
Our U.K. manufacturing plants are required to report GHG emissions annually to the United Kingdom Environment Agency pursuant to their site Environmental Permits and Climate Change Agreement, which specify energy efficiency targets. Failure to meet efficiency targets may require these plants to purchase CO2 emissions allowances. Our facilities were previously subject to the European Union Greenhouse Gas Emission Trading System (EU ETS), which generally required us to hold or obtain emission allowances to offset GHG emissions from those aspects of our operations that were subject to regulation under this program. Beginning on January 1, 2021, our U.K. manufacturing plants became subject to the UK Emissions Trading Scheme (UK ETS). The UK ETS is similar to the EU ETS, although the U.K. ETS regulations established a lower emission cap than was established under the EU ETS. No agreement has been reached as to whether the UK ETS will establish a linkage with the EU ETS or other national emission trading systems.
In Canada, we are required to conduct an annual review of our operations with respect to compliance with Environment Canada’s National Pollutant Release Inventory and Ontario’s Mandatory Monitoring and Reporting Regulation and the GHG Reporting Regulation. In 2018, the federal Greenhouse Gas Pollution Pricing Act came into effect, pursuant to which Environment and Climate Change Canada (ECCC) implemented the Output-Based Performance Standard (OBPS), which was intended to function as a backstop to provincial greenhouse gas emissions regulations. In June 2019, the ECCC finalized the emission limits for carbon dioxide equivalent (CO2e) emissions from nitrogen fertilizer products. These emission limits are based on 95% of the average emissions intensity for the production of such products from all Canadian nitrogen fertilizer plants, reflecting that such products are deemed to be energy-intensive and trade-exposed and thus subject to a less stringent emissions reduction requirement. In the provinces and territories where the OBPS applies, a facility whose carbon emissions exceed the applicable limits is required to offset emissions by obtaining and retiring surplus emission credits, obtaining qualifying emissions offsets, or paying a fee. The fee under the OBPS for calendar year 2021 was CAD $40 per tonne of excess carbon dioxide equivalent emissions, and will be CAD $50 per tonne in 2022. Under the current program, the excess emission fee will increase by CAD $15 per year after 2022, reaching CAD $170 per tonne by 2030. Ontario, Saskatchewan and Alberta filed suit challenging whether the federal government had jurisdiction to impose a federal carbon price on the provinces and territories, but in March 2021, the Supreme Court of Canada upheld the constitutionality of the Greenhouse Gas Pollution Pricing Act.
In July 2019, the Ontario government enacted a new GHG regulation, called the Emissions-Performance Standards program (EPS), that sets CO2e emissions limits for nitrogen products based on a production weighted sectoral average. For facilities whose carbon emissions exceed the applicable limit, compliance options include the purchase of excess emission units, for a fee of CAD $40 per unit purchased in 2022 (which can be used to offset excess emissions in the 2021 calendar period) and CAD $50 per unit purchased in 2023 (to offset excess emissions in calendar year 2022). In September 2020, ECCC announced that the Ontario EPS met the federal government’s minimum stringency benchmark requirements, and in September 2021, the ECCC announced that the federal OBPS would no longer apply in Ontario beginning in January 2022. Accordingly, the Ontario EPS became applicable on January 1, 2022.
In 2019, the Alberta government passed the Technology Innovation and Emission Reduction Implementation Act (TIER), which went into effect on January 1, 2020. The TIER requires large emitting facilities (other than electricity producers, which are subject to a different standard) to comply with the least stringent of a “facility-specific” benchmark of 90% of historical GHG emissions intensity from a three-year baseline, which intensity limit will be reduced by 1% a year beginning in 2021, or a benchmark reflecting the emissions intensity of the top 10% of facilities for a given sector. The compliance options under the TIER initially established the price for payments into its carbon fund at CAD $30 per excess tonne of emissions. In December 2019, the federal government determined that the TIER met the stringency requirements of the OBPS with respect to its regulation of large industrial emitters for 2020. The levy for excess emissions of CO2e in Alberta for 2021 was CAD $40 per tonne and it is anticipated that the Alberta government will increase the levy for excess emissions of CO2e for calendar year 2022 to CAD $50 per tonne, to match the price of carbon established in the OBPS.
In the United States, GHG regulation is evolving at state, regional and federal levels, although some of the more significant developments to date, including efforts of the United States Environmental Protection Agency (EPA) to regulate GHG emissions from fossil fuel-fired power plants, do not directly impose obligations on our facilities. The EPA issued a mandatory GHG reporting rule that required all of our U.S. manufacturing facilities, which are considered large emitters of GHGs, to commence monitoring GHG emissions beginning on January 1, 2010 and reporting the previous year’s emissions annually starting in 2011. In addition, if we seek to modify or expand any of our major facilities and as a result, are required to
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obtain a Prevention of Significant Deterioration (PSD) construction permit applicable to such facilities, we could be subject to pollution control requirements applicable to GHGs in addition to requirements applicable to conventional air pollutants. Such requirements may result in increased costs or delays in completing such projects. Other than the states’ implementation of this permitting requirement, none of the states where our U.S. production facilities are located-Iowa, Louisiana, Mississippi and Oklahoma-has proposed control regulations limiting GHG emissions.
Increasing concern over the impacts of climate change is driving countries to establish ever more ambitious GHG reduction targets. Approximately 200 countries, including the United States, Canada, the United Kingdom and the European Union (EU) have joined the Paris Agreement, an international agreement intended to provide a framework pursuant to which the parties to the agreement will attempt to hold the increase in global average temperatures to below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. Each signatory is required to develop its own national plan to attain this objective. In December 2020, the United Kingdom announced a target to reduce GHG emission 68% from 1990 levels by 2030. Canada has increased its emissions reduction target under the Paris Agreement to 40-45% below 2005 levels by 2030, up from 30%. In April 2021, the United States increased its goal to reduce GHG emissions to 50-52% below 2005 levels by 2030. Executive orders issued by the Biden administration, including in particular an executive order issued on January 27, 2021 focusing on climate change, evidence the administration’s intent to undertake numerous initiatives in an effort to reduce GHG emissions, including promoting renewable energy development, limiting or prohibiting new oil and gas leases on federal lands, and in general, making climate change considerations a critical component of federal policy.
Regulatory Permits and Approvals
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing material permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility. Any future expansion of our existing operations is also predicated upon securing the necessary environmental or other permits or approvals. More stringent environmental standards may impact our ability to obtain such permits.
Human Capital Resources
Our long-term success depends on our people. We are dedicated to creating a workplace where employees are proud to work and grow and where everyone feels empowered to do their best work. We do this by investing in extensive recruitment, training and professional development opportunities for our employees and fostering diversity and inclusion in our culture.
Employee Population. We employed approximately 3,000 employees at December 31, 2021, of which 67% were located in the United States, 19% in the United Kingdom, and 14% in Canada. As of December 31, 2021, 14% of our employees have worked for the Company more than 20 years, 17% of our employees have worked for the Company between 11 and 20 years, 29% of our employees have worked for the Company between 6 and 10 years, and 40% of our employees have worked at the Company for less than 6 years. Full-time employees represented approximately 99% of our workforce as of December 31, 2021 and approximately 15% were covered by a collective bargaining agreement. We supplement our workforce with contractors with specialized skill sets during periods of peak activity, such as during turnarounds and maintenance events.
Culture, Inclusion and Diversity. Our core values and their underlying principles reflect our commitment to a diverse and inclusive culture, treating one another with respect. Across the Company, all employees completed training to learn to recognize and address the effects of unconscious bias by challenging assumptions; encouraging diversity of experience, opinion, and expression; and supporting a workplace culture that actively strives to be more inclusive. As of December 31, 2021, approximately 14% of our global workforce was female and 16% of the Company’s employees in frontline managerial roles were female. Minorities represented approximately 14% of the Company’s U.S. workforce and 13% of our U.S. employees in managerial roles. In order to continue to improve the inclusiveness and diversity of our company and culture, our comprehensive ESG goals announced in 2020 include goals to increase the representation of females and persons of color in senior leadership roles and to implement a program designed to increase the hiring and promotion of minority and female candidates. As of December 31, 2021, we had exceeded our representation goal with approximately 38% of senior leadership roles held by females and persons of color.
Workforce Health and Safety. Operating in a safe and responsible manner is a core value and an integral part of what sets the Company apart. We believe that focusing on leading indicators - such as the behavioral safety practices we have incorporated into our annual incentive plan - to drive and measure activities that prevent and control safety incidents, results in our industry-leading safety record. As of December 31, 2021, our employee 12-month rolling average recordable incident rate (RIR) was 0.32 incidents per 200,000 work hours, and our total recordable injury count was nine. For the year ended December
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31, 2021, our days away, restricted or transferred (DART) incident rate was 0.21 injuries per 200,000 work hours, and our lost time incident rate was 0.11.
Response to COVID-19 Pandemic. During fiscal 2020 and 2021, in response to the COVID-19 pandemic, we instituted and have continued to enforce safety precautions to protect the health and well-being of all of our employees, including the manufacturing workforce who operate our nitrogen manufacturing complexes and distribution facilities. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of CF Holdings—Market Conditions and Current Developments—COVID-19 Pandemic, for a further discussion of the pandemic.
Talent Development. A core aspect of our culture is our commitment to identifying and developing talent to help employees accelerate growth and achieve their career goals. We invest in extensive assessment, training and professional development opportunities for our employees through a robust set of formal and informal programs, including targeted job movements, key experiences, and training, with an emphasis on creating a culture of inclusion. Leadership is the quality that drives our values and sets us apart. To help foster leadership, we have developed a set of leadership competencies that provide a common language for how to demonstrate leadership at every level of the organization. We view training and development programs as being a key part of succession planning, allowing us to grow a stronger company today and in the future.
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ITEM 1A. RISK FACTORS.
In addition to the other information contained in this Annual Report on Form 10-K, filedyou should carefully consider the factors discussed below before deciding to invest in any of our securities. These risks and uncertainties, individually or in combination, could materially and adversely affect our business, financial condition, results of operations and cash flows. References to tons refer to short tons and references to tonnes refer to metric tons.
Market Risks
Our business is cyclical, resulting in periods of industry oversupply during which our business, financial condition, results of operations and cash flows tend to be negatively affected.
Historically, selling prices for our products, which are generally global commodities, have fluctuated in response to periodic changes in supply and demand conditions. Demand for nitrogen is affected by planted acreage, crop selection and fertilizer application rates, driven by population growth, gross domestic product growth, changes in dietary habits and non-food use of crops, such as production of ethanol and other biofuels among other things. Demand also includes industrial uses of nitrogen, for example chemical manufacturing and emissions reductants such as diesel exhaust fluid (DEF). Supply is affected primarily by available production capacity and operating rates, raw material costs and availability, energy prices, government policies and global trade.
Periods of strong demand, high capacity utilization and increasing operating margins tend to stimulate global investment in production capacity. In the past, fertilizer producers, including CF Holdings, have built new production facilities or expanded capacity of existing production assets, or announced plans to do so. The construction of new nitrogen fertilizer manufacturing capacity in the industry, plus improvements to increase output from the existing production assets, increase nitrogen supply availability and affect the balance of supply and demand and nitrogen selling prices. In certain years, global nitrogen fertilizer capacity has increased faster than global nitrogen fertilizer demand, creating a surplus of global nitrogen fertilizer capacity, which has led to lower nitrogen fertilizer selling prices. For example, in the two-year period ended December 31, 2017, additional production capacity came on line and, at the same time, the average selling price for our products declined 34%, from $314 per ton in 2015 to $207 per ton in 2017.
Additional production capacity is expected to come on line over the next 12 months outside of North America. We cannot predict the impact of this additional capacity on nitrogen fertilizer selling prices. Also, global or local economic, political and financial conditions or changes in such conditions, or other factors, may cause acceleration of announced and/or ongoing projects. Similarly, lower energy prices can spur increases in production in high cost regions, which would result in increased supply and pressure on selling prices. Additionally, if imports increase into an oversupplied region, lower prices in that region could result.
During periods of industry oversupply, our financial condition, results of operations and cash flows tend to be affected negatively as the price at which we sell our products typically declines, resulting in possible reduced profit margins, write-downs in the value of our inventory and temporary or permanent curtailments of production. In 2016 and 2017, our financial performance, credit ratings and the trading price for our common stock were negatively impacted by the lower selling prices resulting from the global oversupply of nitrogen fertilizer. While in 2018 and 2019, we experienced increases in the average selling price for our products, in 2020, the average selling price for our products decreased 14% to $203 per ton compared to $235 per ton in 2019. In 2021, the average selling price for our products increased 74% to $353 per ton compared to 2020. Due to the cyclical nature of our industry, we cannot predict the timing of oversupply and undersupply conditions, the period of time that these conditions will persist or the degree to which oversupply conditions will impact our business, financial condition, results of operations and cash flows.
Our nitrogen products are global commodities, and we face intense global competition from other producers.
We are subject to intense price competition from our competitors. Most fertilizers and related nitrogen products that we produce, such as industrial grade ammonium nitrate (AN) and DEF, are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and, to a lesser extent, customer service and product quality. As a consequence, conditions in the international market for nitrogen products significantly influence our operating results.
We compete with many producers, including state-owned and government-subsidized entities. Some of our competitors have greater total resources and are less dependent on earnings from fertilizer sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Furthermore, certain governments, in some cases as owners of some of our competitors, may be willing to accept lower prices and profitability on their products or subsidize production or consumption in order to support domestic employment or other political or social
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goals. Our competitive position could suffer if we are not able to expand our own resources to a similar extent, either through investments in new or existing operations or through acquisitions or joint ventures.
China, the world’s largest producer and consumer of nitrogen fertilizers, currently has capacity surplus and many high-cost plants. As a result, the domestic nitrogen industry in China is operating at less than full capacity. A number of factors could encourage China to increase product capacity utilization, including changes in Chinese government policy, devaluation of the Chinese renminbi, the relaxation of Chinese environmental standards or decreases in Chinese producers’ underlying costs such as the price of Chinese coal. Any resulting increase in export volume could adversely affect the balance between global supply and demand and may put downward pressure on global fertilizer prices, which could materially adversely affect our business, financial condition, results of operations and cash flows.
From time to time, certain of our competitors with significant nitrogen fertilizer export capacity have benefited from non-market pricing of natural gas, which has resulted in significant volumes of exports to the United States. For example, the 2016 revocations of U.S. antidumping measures on solid urea and fertilizer grade ammonium nitrate from Russia allowed for increased imports from that country into the United States in recent years. In addition, high volumes of urea ammonium nitrate solution (UAN) imports from Russia and Trinidad and Tobago have negatively affected U.S. producers’ UAN profitability.
We also face competition from other fertilizer producers in the Middle East, Europe, Latin America and Africa. These producers, depending on market conditions, fluctuating input prices, geographic location and freight economics, may take actions at times with respect to price or selling volumes that adversely affect our business, financial condition, results of operations and cash flows. Some of these producers also benefit from non-market or government-set rates for natural gas pricing.
In addition, the international market for nitrogen products is influenced by such factors as currency exchange rates, including the relative value of the U.S. dollar and its impact on the cost of importing nitrogen products into the United States, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets and the laws and policies of the markets in which we operate, including the imposition of new duties, tariffs or quotas, that affect foreign trade and investment. For example, the imposition of duties, tariffs or quotas in a region can directly impact product pricing in that region, which can lead to changes in global trade flows and impact the global supply and demand balance and pricing. Market participants customarily move product between regions of the world, or adjust trade flows, in response to these factors. North America, where we manufacture and sell most of our products, is one of the largest and most liquid nitrogen trading regions in the world. As a result, other manufacturers, traders and other market participants can move nitrogen products to North America when there is uncertainty associated with the Securitiessupply and Exchangedemand balance in other regions or when duties, tariffs or quotas impact prices or trade flows in other regions. Thus, duties, tariffs and quotas can lead to uncertainty in the global marketplace and impact the supply and demand balance in many regions, which could adversely affect our business, financial condition, results of operations and cash flows. On October 9, 2019, the European Commission (SEC)(the Commission) imposed definitive anti-dumping duties on imports to the European Union of UAN manufactured in Russia, the Republic of Trinidad and Tobago and the United States. For imports of UAN manufactured in the United States, the fixed duty rate is €29.48 per tonne (or €26.74 per ton). The duties will remain in place for an initial five-year period unless the Commission suspends them before the five-year period has expired. After the initial five-year period, the Commission may renew the measures. The long-term impact of these duties on the international market for nitrogen products is uncertain.
A decline in agricultural production or limitations on the use of our products for agricultural purposes could materially adversely affect the demand for our products.
Conditions in the United States, Europe, India, Brazil, China and other global agricultural areas significantly impact our operating results. Agricultural planted areas and production can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, crop disease and/or livestock disease, demand for agricultural products and governmental policies regarding production of or trade in agricultural products. These factors are outside of our control.
Governmental policies, including farm and biofuel subsidies, commodity support programs and tariffs, environmental and greenhouse gas policies, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. Ethanol production in the United States contributes significantly to corn demand, representing approximately 35% of total U.S. corn demand, due in part to federal legislation mandating use of renewable fuels. An increase in ethanol production has led to an increase in the amount of corn grown in the United States and to increased fertilizer usage on both corn and other crops that have also benefited from improved farm economics. While the current Renewable Fuel Standard encourages continued high levels of corn-based ethanol production, various interested parties have called to eliminate or reduce the renewable fuel mandate, or to eliminate or reduce corn-based ethanol as part of the renewable fuel mandate. Other factors that drive the ethanol market include the prices of
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ethanol, gasoline and corn. Lower gasoline prices and fewer aggregate miles, driven by increased automobile fuel efficiency, the continued expansion of electric vehicle use or the impact of decreased travel resulting from the coronavirus disease 2019 (COVID-19) pandemic, may put pressure on ethanol prices that could result in reduced profitability and lower production for the ethanol industry. This could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer demand.
Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, or nitrogen-efficient varieties, or developments in alternatives to traditional animal feed or alternative proteins, could also reduce the use of chemical fertilizers and adversely affect the demand for our products. Widespread adoption of emerging application technologies or alternative farming techniques could disrupt traditional application practices, affecting the volume or types of products used and timing of applications. In addition, from time to time various foreign government and U.S. state legislatures have considered limitations on the use and application of chemical fertilizers due to concerns about the negative impact of these products on the environment. For example, the United Kingdom is currently consulting with stakeholders and reviewing proposals to limit emissions from solid urea fertilizers, including a potential ban on urea fertilizers. While CF Fertilisers UK Limited does not sell solid urea fertilizer in the United Kingdom, other jurisdictions may consider limits on fertilizer use, such as the European Union, which announced its Farm to Fork and Biodiversity Strategies, or Canada, which as part of its Healthy Environment, Healthy Economy plan announced plans in late 2020 to introduce a target of reducing emissions from fertilizers by 30% below 2020 levels and has begun informal consultations with industry and other stakeholders on this proposal. These or other more stringent limitations on greenhouse gas emissions applicable to farmers, the end-users of our nitrogen fertilizers, could reduce the demand for our fertilizer products to the extent their use of our products increases farm-level emissions. Any reduction in the demand for chemical fertilizer products, including as a result of technological developments and/or limitations on the use and application of chemical fertilizers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business is dependent on natural gas, the prices of which are subject to volatility.
Nitrogen from the atmosphere and hydrogen from natural gas, coal and other carbon energy feedstocks, or from the electrolysis of water, are the fundamental building blocks of nitrogen products. Energy feedstock costs comprise a significant portion of the total production cost of nitrogen products and, relative to the industry’s marginal producers that set the global price of nitrogen, generally determine profitability for nitrogen producers. Our manufacturing processes utilize natural gas as the principal raw material used in our production of nitrogen products. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia, granular urea, UAN, AN and other nitrogen products.
Most of our nitrogen manufacturing facilities are located in the United States and Canada. As a result, North American natural gas comprises a significant portion of the total production cost of our products. In recent years, the cost of North American natural gas for the production of nitrogen fertilizers has been significantly lower than the energy costs of the industry’s marginal nitrogen producers. Changes in the supply of and demand for natural gas can lead to extended periods of higher natural gas prices. In addition, any increases in the volume of liquefied natural gas exported from the U.S. to other regions, particularly regions where nitrogen products are produced, could increase our natural gas costs and/or lower natural gas costs for our competitors. If high natural gas prices were to persist in North America and significantly erode our favorable energy cost differentials relative to the marginal nitrogen producers, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The price of natural gas in North America has been volatile in recent years. During 2021, the daily closing price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, reached a low of $2.36 per MMBtu on April 7, 2021 and a high of $23.61 per MMBtu on February 18, 2021. During the three-year period ended December 31, 2021, the daily closing price at the Henry Hub reached a low of $1.34 per MMBtu on September 22, 2019.2020 and three consecutive days in October 2020 and a high of $23.61 per MMBtu on February 18, 2021.
We also have manufacturing facilities located in the United Kingdom. These facilities are subject to fluctuations associated with the price of natural gas in Europe, which has also been volatile in recent years and reached unprecedented high levels in 2021. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). During 2021, the daily closing price at NBP reached a low of $5.58 per MMBtu on February 23, 2021 and a high of $60.10 per MMBtu on December 22, 2021. During the three-year period ended December 31, 2021, the daily closing price at NBP reached a low of $1.04 per MMBtu on May 22, 2020 and a high of $60.10 per MMBtu on December 22, 2021. The high price for natural gas in the United Kingdom has had an effect on our local operations, resulting in the idling of certain of our United Kingdom plants in 2021. Since the third quarter of 2021, the price for natural gas in the United Kingdom has remained high. The average daily market price of natural gas at NBP for January 2022 was $25.91 per MMBtu.
CF INDUSTRIES HOLDINGS, INC.
The price of natural gas in North America and worldwide has been volatile in recent years and has declined on average due in part to the development of significant natural gas reserves, including shale gas, and the rapid improvement in shale gas extraction techniques, such as hydraulic fracturing and horizontal drilling. Future production of natural gas from shale formations could be reduced by regulatory changes that restrict drilling or hydraulic fracturing or increase its cost or by reduction in oil exploration and development prompted by lower oil prices resulting in production of less associated gas.
Certain of our operating facilities are located near natural gas hubs that have experienced increased natural gas development and have favorable basis differences as compared to other North American hubs. Favorable basis differences in certain regions may dissipate over time due to increases in natural gas pipeline or storage capacity in those regions. Additionally, basis differentials may become materially unfavorable due to a lack of inbound gas pipeline or storage capacity in other regions during periods of unusually high demand. Increased demand for natural gas, particularly in the Gulf Coast Region, due to increased industrial demand and increased natural gas exports, could result in increased natural gas prices. If reduced production, increased demand or changes in basis were to occur, or if other developments adversely impact the supply and demand balance for natural gas in North America or elsewhere, natural gas prices could rise, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Adverse weather conditions may decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations. Adverse weather conditions could become more frequent and/or more severe as a result of climate change.
Weather conditions that delay or disrupt field work during the planting, growing, harvesting or application periods may cause agricultural customers to use different forms of nitrogen fertilizer, which may adversely affect demand for the forms that we sell or may impede farmers from applying our fertilizers until the following isapplication period, resulting in lower seasonal demand for our products.
Adverse weather conditions during or following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an outlineadverse effect on crop yields, which could lower the income of growers and impair their ability to purchase fertilizer from our customers. Adverse weather conditions could also impact transportation of fertilizer, which could disrupt our ability to deliver our products to customers on a timely basis. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in fertilizer applications, planting schedules and purchasing patterns. Over the longer-term, changes in weather patterns may shift the periods of demand for products and even the regions to which our products are distributed, which could require us to evolve our distribution system.
In addition, we use the North American waterway system extensively to ship products from some of our manufacturing facilities to our distribution facilities and our customers. We also export nitrogen fertilizer products via seagoing vessels from deep-water docking facilities at certain of our manufacturing sites. Therefore, persistent significant changes in river or ocean water levels (either up or down, such as a result of flooding, drought or climate change, for example), may require changes to our operating and distribution activities and/or significant capital improvements to our facilities.
Weather conditions or, in certain cases, weather forecasts, also can disrupt our operations and can affect the price of natural gas, the principal raw material used to make our nitrogen products. Colder and/or longer than normal winters and warmer than normal summers increase the demand for natural gas for power generation and for residential and industrial use, which can increase the cost and/or decrease the availability of natural gas. In addition, adverse weather events not only can cause loss of power at our facilities or damage to or delays in logistics capabilities disrupting our operations, but also can impact the supply of natural gas and utilities and cause prices to rise.
All of the discussionadverse weather conditions described above, including those impacting our customers and analysis included herein:our operations, such as the physical risk from storms, hurricanes, tornadoes, or floods could become more frequent and/or more severe as a result of climate change. Our Donaldsonville complex is located in an area of the United States that experiences a relatively high level of hurricane or high wind activity and several of our complexes are located in areas that experience severe weather. In the last several years, there has been an increase in the frequency and severity of adverse weather conditions, including in the geographic areas where we have operations. Any significant adverse weather event or combination of adverse weather events could decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations — any of which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
OverviewOur operating results fluctuate due to seasonality. Our inability to predict future seasonal fertilizer demand accurately could result in our having excess inventory, potentially at costs in excess of market value.
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs
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during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application seasons and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements to build inventory being the highest just prior to the start of the spring planting season.
If seasonal demand is less than we expect, we may be left with excess inventory that will have to be stored (in which case our results of operations would be negatively affected by any related increased storage costs) or liquidated (in which case the selling price could be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are exacerbated by the volatility of nitrogen fertilizer prices, the constraints of our storage capacity, and the relatively brief periods during which farmers can apply nitrogen fertilizers. If prices for our products rapidly decrease, we may be subject to inventory write-downs, adversely affecting our operating results.
A change in the volume of products that our customers purchase on a forward basis, or the percentage of our sales volume that is sold to our customers on a forward basis, could increase our exposure to fluctuations in our profit margins and working capital and materially adversely affect our business, financial condition, results of operations and cash flows.
We offer our customers the opportunity to purchase products from us on a forward basis at prices and delivery dates we propose. Under our forward sales programs, customers generally make an initial cash down payment at the time of order and pay the remaining portion of the contract sales value in advance of the shipment date. Forward sales improve our liquidity by reducing our working capital needs due to the cash payments received from customers in advance of shipment of the product and allow us to improve our production scheduling and planning and the utilization of our manufacturing and distribution assets.
Any cash payments received in advance from customers in connection with forward sales are reflected on our consolidated balance sheets as a current liability until the related orders are shipped, which can take up to several months.
We believe the ability to purchase products on a forward basis is most appealing to our customers during periods of generally increasing prices for nitrogen fertilizers. Our customers may be less willing or even unwilling to purchase products on a forward basis during periods of generally decreasing or stable prices or during periods of relatively high fertilizer prices due to the expectation of lower prices in the future or limited capital resources. Fixing the selling prices of our products, often months in advance of their ultimate delivery to customers, typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment. In periods of rising fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in lower profit margins than if we had not sold fertilizer on a forward basis.
Operational Risks
Our operations are dependent upon raw materials provided by third parties, and any delay or interruption in the delivery of raw materials may adversely affect our business.
We use natural gas and other raw materials in the manufacture of our nitrogen products. We purchase the natural gas and other raw materials from third party suppliers. Our natural gas is transported by pipeline to our facilities by third party transportation providers or through the use of facilities owned by third parties. Delays or interruptions in the delivery of natural gas or other raw materials may be caused by, among other things, severe weather or natural disasters, unscheduled downtime, labor difficulties or shortages, insolvency of our suppliers or their inability to meet existing contractual arrangements, deliberate sabotage and terrorist incidents, or mechanical failures. In addition, the transport of natural gas by pipeline is subject to additional risks, including delays or interruptions caused by capacity constraints, leaks or ruptures. Any delay or interruption in the delivery of natural gas or other raw materials, even for a limited period, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our transportation and distribution activities rely on third party providers and are subject to environmental, safety and regulatory oversight. This exposes us to risks and uncertainties beyond our control that may adversely affect our operations and exposes us to additional liability.
We rely on natural gas pipelines to transport raw materials to our manufacturing facilities. In addition, we rely on railroad, barge, truck, vessel and pipeline companies to coordinate and deliver finished products to our distribution system and to ship finished products to our customers. We also lease rail cars in order to ship raw materials and finished products. These transportation operations, equipment and services are subject to various hazards, including adverse operating conditions on the
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inland waterway system, extreme weather conditions, system failures, work stoppages, shutdowns, delays, accidents such as spills and derailments, vessel groundings and other accidents and operating hazards. Additionally, due to the aging infrastructure of certain rail lines, bridges, roadways, pipelines, river locks, and equipment that our third party service providers utilize, we may experience delays in both the receipt of raw materials or the shipment of finished product while repairs, maintenance or replacement activities are conducted. Also, certain third party service providers, such as railroads, have experienced periodic service delays or shutdowns due to capacity constraints in their systems, operational and maintenance difficulties, blockades, weather or safety-related embargoes and delays, and other events, which could impact the shipping of our products and cause disruption in our supply chain.
These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to concerns related to accidents, discharges or other releases of hazardous substances, terrorism or the potential use of fertilizers as explosives, governmental entities could implement new or more stringent regulatory requirements affecting the transportation of raw materials or finished products.
If shipping of our products is delayed or we are unable to obtain raw materials as a result of these transportation companies’ failure to operate properly, or if new and more stringent regulatory requirements were implemented affecting transportation operations or equipment, or if there were significant increases in the cost of these services or equipment, our revenues and cost of operations could be adversely affected. In addition, increases in our transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In the United States and Canada, the railroad industry continues various efforts to limit the railroads’ potential liability stemming from the transportation of Toxic Inhalation Hazard materials, such as the anhydrous ammonia we transport to and from our manufacturing and distribution facilities. For example, various railroads shift liability to shippers by contract, purport to shift liability to shippers by tariff, or otherwise seek to require shippers to indemnify and defend the railroads from and against liabilities (including in negligence, strict liability, or statutory liability) that may arise from certain acts or omissions of the railroads, third parties who may have insufficient resources, or the Company, unknown causes or acts of god. These initiatives could materially and adversely affect our operating expenses and potentially our ability to transport anhydrous ammonia and increase our liability for releases of our anhydrous ammonia while in the care, custody and control of the railroads, third parties or us, for which our insurance may be insufficient or unavailable. New or more stringent regulatory requirements also could be implemented affecting the equipment used to ship our raw materials or finished products. Restrictions on service, increases in transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, and any railroad industry initiatives that may impact our ability to transport our products, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are reliant on a limited number of key facilities.
Our nitrogen manufacturing facilities are located at nine separate nitrogen complexes, the largest of which is the Donaldsonville complex, which represented approximately 40% of our ammonia production capacity as of December 31, 2021. The suspension of operations at any of these complexes could adversely affect our ability to produce our products and fulfill our commitments, and could have a material adverse effect on our business, financial condition, results of operations and cash flows. Operational disruptions could occur for many reasons, including natural disasters, weather, unplanned maintenance and other manufacturing problems, disease, strikes or other labor unrest or transportation interruptions. For example, our Donaldsonville complex is located in an area of the United States that experiences severe weather, including a relatively high level of hurricane or high wind activity, and several of our other complexes are also located in areas that experience severe weather. Such storms and severe weather events, depending on their severity and location, have the potential not only to damage our facilities and disrupt our operations, but also to affect adversely the shipping and distribution of our products. Moreover, our facilities may be subject to failure of equipment that may be difficult to replace or have long delivery lead times, due in part to a limited number of suppliers, and could result in operational disruptions.
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We are subject to risks relating to our information technology systems, and any technology disruption or cybersecurity incident could negatively affect our operations.
We rely on internal and third-party information technology and computer control systems in many aspects of our business, including internal and external communications, the management of our accounting, financial and supply chain functions and plant operations. If we do not allocate and effectively manage the resources necessary to build, implement and sustain the proper technology infrastructure, we could be subject to transaction errors, inaccurate financial reporting, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to our confidential business information due to a security breach. In addition, our information technology systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, business partners, customers or suppliers, and may subject us to legal liability.
As with most large systems, our information technology systems (and the systems of our suppliers) have in the past been, and in the future likely will be, subject to computer viruses, malicious codes, unauthorized access and other cyber attacks, and we expect the sophistication and frequency of such attacks to continue to increase. To date, we are not aware of any significant impact on our operations or financial results from such attempts; however, unauthorized access could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our business, financial condition, or results of operations. Any of the attacks, breaches or other disruptions or damage described above could: interrupt our operations at one or more sites; delay production and shipments; result in the theft of our and our customers’ intellectual property and trade secrets; damage customer and business partner relationships and our reputation; result in legal claims and proceedings, liability and penalties under privacy or other laws, or increased costs for security and remediation; or raise concerns regarding our accounting for transactions. Each of these consequences could adversely affect our business, reputation and our financial statements.
Our business involves the use, storage, and transmission of information about our employees, customers, and suppliers. The protection of such information, as well as our proprietary information, is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us or our employees, customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception, could expose us or our employees, customers, suppliers or other individuals affected to a risk of loss or misuse of this information, which could ultimately result in litigation and potential legal and financial liability. These events could also damage our reputation or otherwise harm our business.
Acts of terrorism and regulations to combat terrorism could negatively affect our business.
Like other companies with major industrial facilities, we may be targets of terrorist activities. Many of our plants and facilities store significant quantities of ammonia and other materials that can be dangerous if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or injury to employees, who could be direct targets or indirect casualties of an act of terrorism, may affect our operations. Any disruption of our ability to produce or distribute our products could result in a significant decrease in revenues and significant additional costs to replace, repair or insure our assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Due to concerns related to terrorism or the potential use of certain nitrogen products as explosives, we are subject to various security laws and regulations. In the United States, these security laws include the Maritime Transportation Security Act of 2002 and the Chemical Facilities Anti-Terrorism Standards regulation. In addition, President Obama issued in 2013 Executive Order 13650 Improving Chemical Facility Safety and Security to improve chemical facility safety in coordination with owners and operators. Governmental entities could implement new or impose more stringent regulations affecting the security of our plants, terminals and warehouses or the transportation and use of fertilizers and other nitrogen products. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and reduced profit margins. We manufacture and sell certain nitrogen products that can be used as explosives. It is possible that governmental entities in the United States or elsewhere could impose additional limitations on the use, sale or distribution of nitrogen products, thereby limiting our ability to manufacture or sell those products, or that illicit use of our products could result in liability for us.
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We are subject to risks associated with international operations.
Our international business operations are subject to numerous risks and uncertainties, including difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations; unexpected changes in regulatory environments; currency fluctuations; tax rates that may exceed those in the United States; earnings that may be subject to withholding requirements; and the imposition of tariffs, exchange controls or other restrictions.
Changes in governmental trade policies can lead to the imposition of new taxes, levies, duties, tariffs or quotas affecting agricultural commodities, fertilizer or industrial products. These can alter costs, trade flows, access to supplies or demand, and regional balances for our products.
Our principal reporting currency is the U.S. dollar and our business operations and investments outside the United States increase our risk related to fluctuations in foreign currency exchange rates. The main currencies to which we are exposed, besides the U.S. dollar, are the Canadian dollar, the British pound and the euro. These exposures may change over time as business practices evolve and economic conditions change. We may selectively reduce some foreign currency exchange rate risk by, among other things, requiring contracted purchases of our products to be settled in, or indexed to, the U.S. dollar or a currency freely convertible into U.S. dollars, or hedging through foreign currency derivatives. These efforts, however, may not be effective and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to anti-corruption laws and regulations and economic sanctions programs in various jurisdictions, including the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act of 2010, the Canadian Corruption of Foreign Public Officials Act, and economic sanctions programs administered by the United Nations, the European Union and the Office of Foreign Assets Control of the U.S. Department of the Treasury, and regulations set forth under the Comprehensive Iran Accountability Divestment Act. As a result of doing business internationally, we are exposed to a risk of violating anti-corruption laws and sanctions regulations applicable in those countries where we, our partners or agents operate. Violations of anti-corruption and sanctions laws and regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. The violation of applicable laws by our employees, consultants, agents or partners could subject us to penalties and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to antitrust and competition laws in various countries throughout the world. We cannot predict how these laws or their interpretation, administration and enforcement will change over time. Changes in antitrust laws globally, or in their interpretation, administration or enforcement, may limit our existing or future operations and growth.
Financial Risks
Our operations and the production and handling of our products involve significant risks and hazards. We are not fully insured against all potential hazards and risks incident to our business. Therefore, our insurance coverage may not adequately cover our losses.
Our operations are subject to hazards inherent in the manufacture, transportation, storage and distribution of chemical products, including ammonia, which is highly toxic and can be corrosive, and ammonium nitrate, which is explosive. These hazards include: explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving storage tanks, pipelines and rail cars; spills, discharges and releases of toxic or hazardous substances or gases; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled plant downtime; labor difficulties and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations for an extended period of time and/or the imposition of civil or criminal penalties and liabilities.
In April 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits alleging various theories of negligence, strict liability, and breach of warranty under Texas law. Although we did not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident. Nearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining subrogation and statutory indemnification claims total approximately
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$37 million, before prejudgment interest. The increased focus on the risks associated with fertilizers as a result of the incident could impact the regulatory environment and requirements applicable to fertilizer manufacturing and storage facilities.
We maintain property, business interruption, casualty and liability insurance policies, but we are not fully insured against all potential hazards and risks incident to our business. If we were to incur significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are subject to various self-insured retentions, deductibles and limits under these insurance policies. The policies also contain exclusions and conditions that could have a material adverse impact on our ability to receive indemnification thereunder. Our policies are generally renewed annually. As a result of market conditions, our premiums, self-insured retentions and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. In addition, significantly increased costs could lead us to decide to reduce, or possibly eliminate, coverage. There can be no assurance that we will be able to buy and maintain insurance with adequate limits and reasonable pricing terms and conditions.
Our substantial indebtedness could adversely affect our cash flow, prevent us from fulfilling our obligations and impair our ability to pursue or achieve other business objectives.
As of December 31, 2021, we had approximately $3.5 billion of total funded indebtedness, consisting primarily of unsecured senior notes with varying maturity dates between 2023 and 2044, or approximately 36% of our total capitalization (total debt plus total stockholders’ equity), and an additional $750 million of unsecured senior borrowing availability (reflecting no outstanding borrowings and no outstanding letters of credit) for general corporate purposes under our revolving credit agreement (the Revolving Credit Agreement). Our substantial debt service obligations will have an impact on our earnings and cash flow for so long as the indebtedness is outstanding.
Our indebtedness could, as a result of our debt service obligations or through the operation of the financial and other restrictive covenants to which we are subject under the agreements and instruments governing that indebtedness and otherwise, have important consequences. For example, it could:
•make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because any related decrease in revenues could cause us not to have sufficient cash flows from operations to make our scheduled debt payments;
•cause us to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
•cause us to use a portion of our cash flow from operations for debt service, reducing the availability of cash to fund working capital and capital expenditures, and other business activities;
•cause us to be more vulnerable to general adverse economic and industry conditions;
•expose us to the risk of increased interest rates because certain of our borrowings, including borrowings under the Revolving Credit Agreement, could be at variable rates of interest;
•make us more leveraged than some of our competitors, which could place us at a competitive disadvantage;
•restrict our ability to pay dividends on our common stock or utilize excess cash to repurchase shares of our common stock;
•limit our ability to borrow additional amounts to fund working capital, capital expenditures and other general corporate purposes; and
•result in our credit ratings being downgraded, which could increase the cost of further borrowings.
We expect to consider options to refinance our outstanding indebtedness from time to time. Our ability to obtain any financing, whether through the issuance of new debt securities or otherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors, including factors beyond our control. Consequently, in the event that we need to access the credit markets, including to refinance our debt, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable timeframe, if at all. An inability to obtain financing with acceptable terms when needed could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The terms of our existing indebtedness allow us to incur significant additional debt. If we incur additional indebtedness, the risks that we face as a result of our leverage could intensify. If our financial condition or operating results deteriorate, our relations with our creditors, including the holders of our outstanding debt securities, the lenders under the Revolving Credit Agreement and our suppliers, may be materially and adversely affected.
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A failure to satisfy the financial maintenance covenants under the Revolving Credit Agreement or a breach of the covenants under any of the agreements governing our indebtedness could limit the borrowing availability under the Revolving Credit Agreement or result in an event of default under such agreements.
Our ability to comply with the covenants in the agreements and instruments governing our indebtedness, including the consolidated interest coverage ratio and consolidated net leverage ratio maintenance covenants contained in the Revolving Credit Agreement, will depend upon our future performance and various other factors, such as market prices for our nitrogen products, natural gas prices and other business, competitive and regulatory factors, many of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we may not be able to access the borrowing availability under the Revolving Credit Agreement and we would need to seek an amendment to our debt agreements or would need to refinance our indebtedness. There can be no assurance that we can obtain future amendments or waivers of our debt agreements and instruments, or refinance our debt, and, even if we were able to do so, such relief might only last for a limited period, potentially necessitating additional amendments, waivers or refinancings. Any noncompliance by us with the covenants under our debt agreements and instruments could result in an event of default under those debt agreements and instruments. An event of default under an agreement or instrument governing any of our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If our lenders or holders of our debt securities accelerate the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of our indebtedness, which could materially and adversely impair our business operations. An event of default under the Revolving Credit Agreement would permit the lenders thereunder to terminate all commitments to extend further credit under the Revolving Credit Agreement. In the event our creditors accelerate the repayment of our indebtedness, we cannot assure that we would have sufficient assets to make such repayment.
Potential future downgrades of our credit ratings could adversely affect our access to capital, cause vendors to change their credit terms for doing business with us, and could otherwise have a material adverse effect on us.
As of February 14, 2022, our corporate credit rating by S&P Global Ratings is BBB- with a stable outlook; our corporate credit rating by Moody’s Investor Services, Inc. is Ba1 with a positive outlook; and our corporate credit rating with Fitch Ratings, Inc. is BBB- with a stable outlook. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, as well as the payment terms that vendors are willing to provide us. Negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt, and could cause vendors to shorten our payment terms, require us to pay in advance for materials or services, or provide letters of credit, security, or other credit enhancements in order to do business with us.
Tax matters, including changes in tax laws or rates, adverse determinations by taxing authorities and imposition of new taxes could adversely affect our results of operations and financial condition.
We are subject to taxes in (i) the United States, where most of our operations are located, and (ii) several foreign jurisdictions where our subsidiaries are organized or conduct business. Tax laws or rates in the various jurisdictions in which we operate may be subject to significant change. Our future effective tax rate could also be affected by changes in our mix of earnings from jurisdictions with differing statutory tax rates and tax systems, changes in valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation.
We are also subject to regular reviews, examinations and audits by the Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where we conduct business. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liabilities, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our financial condition, results of operations and cash flows.
We have used the cash we generate outside the United States primarily to fund development of our business in non-U.S. jurisdictions. If the funds generated by our U.S. business are not sufficient to meet our need for cash in the United States, we may need to repatriate a portion of our future international earnings to the United States. Under the tax laws of the foreign countries in which we operate, those international earnings could be subject to withholding taxes when repatriated; therefore, the repatriation of those earnings could result in an increase in our worldwide effective tax rate and an increase in our use of cash to pay these taxes.
We also need to comply with other new, evolving or revised tax laws and regulations. The enactment of, or increases in, carbon taxes, tariffs or value added taxes, or other changes in the application of existing taxes, in markets in which we are currently active, or may be active in the future, or on specific products that we sell or with which our products compete, could have an adverse effect on our financial condition and results of operations.
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The United States and other countries in which we operate are in the process of implementing the Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting Project (BEPS), which is intended to improve tax disclosure and transparency and eliminate structures and activities that could be perceived by a particular country as resulting in tax avoidance. The OECD has partially developed and continues with development of a framework to assist member countries in adopting BEPS related legislation. Each country is permitted to introduce its own legislation to implement BEPS legislation. As a number of our business operations do business across country lines, we are subject to BEPS. The implementation of BEPS could result in tax changes and may adversely affect our provision for income taxes, results of operations and cash flows. In some cases, BEPS legislation could result in double taxation on a portion of our profits without an appropriate mechanism to recover the incremental tax amount in another jurisdiction.
Our business is subject to risks involving derivatives and the risk that our hedging activities might not prevent losses.
We may utilize natural gas derivatives to hedge our financial exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen-based products. We have used natural gas futures, swaps and option contracts traded in over-the-counter markets or on exchanges. We have also used fixed-price, physical purchase and sales contracts to hedge our exposure to natural gas price volatility. In order to manage our exposure to changes in foreign currency exchange rates, we may from time to time use foreign currency derivatives (primarily forward exchange contracts).
Our use of derivatives 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 that do not qualify for, or to which we do not apply, hedge accounting. To the extent that our derivative positions lose value, we may be required to post collateral with our counterparties, adversely affecting our liquidity.
Hedging arrangements are imperfect and unhedged risks will always exist. In addition, our hedging activities may themselves give rise to various risks that could adversely affect us. For example, we are exposed to counterparty credit risk when our derivatives are in a net asset position. The counterparties to our derivatives are multi-national commercial banks, major financial institutions or large energy companies.
Our liquidity could be negatively impacted by a counterparty default on settlement of one or more of our derivative financial instruments or by the triggering of any cross default provisions or credit support requirements against us. Additionally, the International Swaps and Derivative Association master netting arrangements for most of our derivative instruments contain credit-risk-related contingent features, such as cross default provisions and credit support requirements. In the event of certain defaults or a credit ratings downgrade, our counterparty may request early termination and net settlement of certain derivative trades or may require us to collateralize derivatives in a net liability position.
At other times we may not utilize derivatives or derivative strategies to hedge certain risks or to reduce the financial exposure of price volatility. As a result, we may not prevent certain material adverse impacts that could have been mitigated through the use of derivative strategies.
Environmental and Regulatory Risks
We are subject to numerous environmental, health and safety laws, regulations and permitting requirements, as well as potential environmental liabilities, which may require us to make substantial expenditures.
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union, the Republic of Trinidad and Tobago and other locations, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the introduction of new chemicals or substances into a market; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition and cleanup of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act and various other federal, state, provincial, local and international laws. In November 2021, the Infrastructure Investment and Jobs Act reinstated and doubled the Superfund tax on chemicals, including ammonia and nitric acid. These taxes will be in place from July 1, 2022 through December 31, 2031 and apply to all domestic and imported products not used as fertilizer.
As a producer of nitrogen fertilizer products working with hazardous substances, our business faces risks of spills, discharges or other releases of those substances into the environment. Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are incurring currently, and are likely to incur periodically in the future, liabilities under CERCLA and other environmental cleanup laws at our current facilities or facilities previously owned by us or other acquired businesses, adjacent or nearby third-party facilities or offsite disposal
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locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental, health and safety laws change regularly and have tended to become more stringent over time. As a result, we have not always been and may not always be in compliance with all environmental, health and safety laws and regulations. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future. Additionally, future environmental, health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
From time to time, our production, distribution or storage of anhydrous ammonia and other hazardous or regulated substances has resulted in accidental releases that have temporarily disrupted our operations and/or resulted in liability for administrative penalties and/or claims for personal injury. To date, our costs to resolve these liabilities have not been material. However, we could incur significant costs if our liability coverage is not sufficient to pay for all or a large part of any judgments against us, or if our insurance carrier refuses coverage for these losses.
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. Expansion or modification of our operations is predicated upon securing necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing permit or approval, or a determination that we have violated a law or permit as a result of a governmental inspection of our facilities could have a material adverse effect on our ability to continue operations at our facilities and on our business, financial condition, results of operations and cash flows.
Future regulatory or legislative restrictions on greenhouse gas (GHG) emissions in the jurisdictions in which we operate could materially adversely affect our business, financial condition, results of operations and cash flows.
Our production facilities emit GHGs, such as carbon dioxide and nitrous oxide, and natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Because conventional ammonia production generates CO2 as an unavoidable chemical byproduct, ammonia production globally is considered an emissions- and energy-intensive industry. We are subject to GHG regulations in the United Kingdom, Canada and the United States. In the United States, our existing facilities, which are considered large emitters of GHGs, currently are only subject to GHG emissions reporting obligations. New facilities that we build, or existing facilities that we modify in the future, could also be subject to GHG emissions standards included in their air permits.
Beginning on January 1, 2021, our U.K. manufacturing plants became subject to the UK Emissions Trading Scheme (UK ETS), which generally requires us to hold or obtain emissions allowances to offset GHG emissions from those aspects of our operations that are subject to regulation under this program. Given the recent development of the UK ETS, there is substantial uncertainty as to the liquidity in the market for, and the stability of the price of, emission allowances that will be necessary for compliance with the regulations. Our manufacturing plants in the Alberta and Ontario provinces of Canada are subject to provincial or federal laws that impose a price on excess GHG emissions. Each of these laws establishes carbon dioxide equivalent (CO2e) emissions standards applicable to our facilities in terms of emissions per unit of production, with the provincial laws and the federal law using different formulas for establishing these intensity limits and changes in these limits over time. If CO2e emissions exceed the applicable limits, the excess emissions must be offset, either through obtaining qualifying emission credits or offsets or by making a payment for each ton of excess emissions.
Increasing concern over the impacts of climate change is driving countries to establish ever more ambitious GHG reduction targets. Approximately 200 countries, including the United States, Canada, the United Kingdom and the members of the European Union (EU), have joined the Paris Agreement, an international agreement intended to provide a framework pursuant to which the parties to the agreement will attempt to hold the increase in global average temperatures to below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5ºC above pre-industrial levels. Each signatory is required to develop its own national plan to attain this objective. In December 2020, the United Kingdom announced a target to reduce GHG emissions 68% from 1990 levels by 2030. Canada has increased its emissions reduction target under the Paris Agreement to 40-45% (up from 30%) below 2005 levels by 2030. In April 2021, the United States increased its goal to reduce emissions to 50-52% below 2005 levels by 2030. The Biden administration has also issued several executive orders focused on climate change to promote more active management of these issues across the executive branch, including by the EPA and the Departments of Agriculture, Interior, Transportation and Treasury.
CF INDUSTRIES HOLDINGS, INC.
In July 2021, the EU proposed a new carbon border adjustment mechanism that would require importers of certain products, including nitrogen fertilizers, to pay an import tax approximately equal to the costs incurred by EU producers of the products starting in 2026. Other governments are also considering border adjustment mechanisms for carbon intensive products. The imposition of any carbon border adjustment taxes may distort investment and trade flows, which could adversely impact our business.
More stringent GHG regulations, if they are enacted, are likely to have a significant impact on us, because our production facilities emit GHGs such as carbon dioxide and nitrous oxide and because natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our business, financial condition, results of operations and cash flows. Changes could also be made to tax policies related to decarbonization and clean energy that could impact our business and investment decisions. In addition, to the extent that GHG restrictions are not imposed in countries where our competitors operate or are less stringent than regulations that may be imposed in the United States, Canada or the United Kingdom, our competitors may have cost or other competitive advantages over us.
Strategic Risks
The market for green and blue (low-carbon) ammonia may be slow to develop, may not develop to the size expected or may not develop at all. Moreover, we may not be successful in the development and implementation of our green and blue ammonia projects in a timely or economic manner, or at all, due to a number of factors, many of which are beyond our control.
The market for green and blue (low-carbon) ammonia is developing and evolving, may not develop to the size or at the rate we expect, and is dependent in part on the developing market for green and blue (low-carbon) hydrogen, for which ammonia can serve as a transport and storage mechanism. These markets are heavily influenced by demand for clean energy, technology evolution and federal, state and local government laws, regulations and policies concerning carbon emissions, clean energy, and corporate accountability in the United States and abroad.
We believe the demand for green and blue ammonia could take several years to materialize and then ten or more years to fully develop and mature, and we cannot be certain that this market or the market for green and blue hydrogen will grow to the size or at the rate we expect. Hydrogen currently accounts for less than 1% of the world’s energy needs.
The recognition and acceptance of green and blue ammonia as a transport and storage mechanism for green and blue hydrogen, the use of green and blue ammonia as a fuel in its own right, the use of green and blue ammonia as a fertilizer, and the development and growth of end market demand and applications for green and blue hydrogen and green and blue ammonia are uncertain and dependent on a number of factors outside of our control. These factors include, among others, the extent to which and rate at which cost competitive global renewable energy capacity increases, the pricing of traditional and alternative sources of energy, the realization of technological improvements required to increase the efficiency and lower the costs of production of green and blue ammonia, the regulatory environment, the rate and extent of infrastructure investment and development, which may be affected by the relevant parties’ ability to obtain permits for these investments, the availability of tax benefits and other incentives and our ability to provide green and blue ammonia offerings cost-effectively. In addition, further development of alternative decarbonization technologies may result in viable alternatives to the use of blue ammonia for many potential decarbonization applications, resulting in lower than expected market demand growth relative to our current expectations. If a sustainable market for green or blue ammonia or hydrogen fails to develop, develops more slowly than we anticipate, or develops in a way that is not viable to serve with our assets and capabilities, we may decide not to implement, or may not be successful in implementing, one or more elements of our multi-year strategic plan.
Our clean energy strategy also depends on the realization of certain technical improvements required to increase the efficiency and lower the costs of production of green and blue ammonia. Over time, as we seek to convert additional existing facilities to green and blue production and further expand our green and blue ammonia production capacity, we may face operational difficulties and execution risks related to the design, development and construction. If our assumptions about the engineering and processing characteristics necessary to successfully build the facility capacity that we are contemplating and to scale up to larger production quantities prove to be incorrect, we may be unable to produce substantial quantities of green or blue ammonia, and the cost to construct or convert such green and blue ammonia facilities, or the production costs associated with the operation of such facilities, may be higher than we project. The production of blue ammonia depends to a large extent upon development by third parties of carbon capture and storage wells, which are not well-established technologies and are subject to a permitting process and operational risks, which may result in delays, impact viability in some or all situations, or create long-term liabilities.
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We may not be successful in the expansion of our business.
We routinely consider possible expansions of our business, both within the United States and elsewhere. Major investments in our business, including acquisitions, partnerships, joint ventures, business combination transactions or other major investments, such as our green and blue ammonia projects, require significant managerial resources, the diversion of which from our other activities or opportunities may negatively affect the existing operations of our business. We may be unable to identify or successfully compete for certain acquisition targets, which may hinder or prevent us from acquiring a target or completing other transactions. The risks of any expansion of our business through investments, acquisitions, partnerships, joint ventures or business combination transactions may increase due to the significant capital and other resources that we may have to commit to any such expansion, which may not be recoverable if the expansion initiative to which they were devoted is ultimately not implemented. In addition, these efforts may require capital resources that could otherwise be used for the improvement and expansion of our existing business. As a result of these and other factors, including general economic risk, we may not be able to realize our projected returns from any future acquisitions, partnerships, joint ventures, business combination transactions or other major investments. Among the risks associated with the pursuit and consummation of acquisitions, partnerships, joint ventures or other major investments or business combinations are those involving:
•difficulties in integrating the parties’ operations, systems, technologies, products, cultures, and personnel;
•incurrence of significant transaction-related expenses;
•potential integration or restructuring costs;
•potential impairment charges related to the goodwill, intangible assets or other assets to which any such transaction relates, in the event that the economic benefits of such transaction prove to be less than anticipated;
•other unanticipated costs associated with such transactions;
•our ability to achieve operating and financial efficiencies, synergies and cost savings;
•our ability to obtain the desired financial or strategic benefits from any such transaction;
•the parties’ ability to retain key business relationships, including relationships with employees, customers, partners and suppliers;
•potential loss of key personnel;
•entry into markets or involvement with products with which we have limited current or prior experience or in which competitors may have stronger positions;
•assumption of contingent liabilities, including litigation;
•exposure to unanticipated liabilities, including litigation;
•differences in the parties’ internal control environments, which may require significant time and resources to resolve in conformity with applicable legal and accounting standards;
•increased scope, geographic diversity and complexity of our operations;
•the tax effects of any such transaction; and
•the potential for costly and time-consuming litigation, including stockholder lawsuits.
Moreover, legal proceedings or other risks from acquisitions and other business combinations may arise years after a transaction has been completed and may involve matters unrelated to the business acquired. For example, we were recently named along with other parties in certain product liability actions relating to a product containing the herbicide paraquat, which was allegedly sold, manufactured, distributed and/or marketed by Terra Industries Inc. (Terra) before it exited such lines of business, which exit occurred more than ten years before CF Holdings acquired Terra in April 2010.
In addition, major capital projects may be dependent on the availability and performance of engineering firms, construction firms, equipment and material suppliers, transportation providers and other vendors necessary to design and implement those projects on a timely basis and on acceptable terms. Major investments such as capital improvements at our facilities are subject to a number of risks, any of which could prevent us from completing capital projects in a timely or economic manner or at all, including, without limitation, cost overruns, non-performance of third parties, the inability to obtain necessary permits or other permitting matters, adverse weather, defects in materials and workmanship, labor and raw material shortages, transportation constraints, engineering and construction change orders, errors in design, construction or start-up, and other unforeseen difficulties.
International acquisitions, partnerships, joint ventures, investments or business combinations and other international expansions of our business involve additional risks and uncertainties, including, but not limited to:
•the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries;
•challenges caused by distance and by language and cultural differences;
•difficulties and costs of complying with a wide variety of complex laws, treaties and regulations;
•unexpected changes in regulatory environments;
CF INDUSTRIES HOLDINGS, INC.
•political and economic instability, including the possibility for civil unrest;
•nationalization of properties by foreign governments;
•tax rates that may exceed those in the United States, and earnings that may be subject to withholding requirements;
•the imposition of tariffs, exchange controls or other restrictions; and
•the impact of currency exchange rate fluctuations.
If we finance acquisitions, partnerships, joint ventures, business combination transactions or other major investments by issuing equity or convertible or other debt securities or loans, our existing stockholders may be diluted or we could face constraints under the terms of, and as a result of the repayment and debt-service obligations under, the additional indebtedness. A business combination transaction between us and another company could result in our stockholders receiving cash or shares of another entity on terms that such stockholders may not consider desirable. Moreover, the regulatory approvals associated with a business combination may result in divestitures or other changes to our business, the effects of which are difficult to predict.
We are subject to risk associated with our strategic venture with CHS Inc. (CHS).
We may not realize the full benefits from our strategic venture with CHS that are expected. The realization of the expected benefits of the CHS strategic venture depends on our ability to operate and manage the strategic venture successfully, and on the market prices of the nitrogen fertilizer products that are the subject of our supply agreement with CHS over the life of the agreement, among other factors. Additionally, any challenges related to the CHS strategic venture could harm our relationships with CHS or our other customers.
COVID-19 Pandemic Risk
Our business and operations may be adversely affected by the COVID-19 pandemic.
The coronavirus disease 2019 (COVID-19) pandemic could have a material and adverse effect on our business, financial condition, results of operations or cash flows. The rapid spread of COVID-19 has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions, we may be unable to meet customer demand or perform fully under our contracts. The COVID-19 pandemic could also affect our customers, suppliers and third party service providers, including transportation providers, and result in restrictions on or disruptions of transportation, port closures or increased border controls or closures, or other impacts on domestic and global supply chains or distribution channels, which could increase our costs and/or limit our ability to meet customer demand.
In addition, the COVID-19 pandemic could reduce, and has in the past reduced, the demand for energy, including crude oil, as well as natural gas and coal, which are nitrogen feedstocks. Reduced demand for nitrogen feedstocks could reduce the cost of nitrogen production outside of North America, which could increase global nitrogen supply and reduce the market prices of our products. Lower demand for crude oil could also reduce the supply and therefore increase the cost of natural gas, which is the principal raw material used in our production of nitrogen products. The pandemic has also disrupted traditional food supply chains, which may have a material impact on livestock and food demand, including the demand for corn. Each of these consequences could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are unable to predict the ultimate impact the COVID-19 pandemic may have on our business, financial condition, results of operations or cash flows. The extent to which our operations may be impacted by COVID-19 will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the further spread of the virus, the rise of new variants of COVID-19, the duration of the pandemic and the type and duration of actions that may be taken by various governmental authorities in response to these developments. In 2020, the pandemic significantly increased global market uncertainty and caused an economic slowdown, which resulted in a global recession. Persistent weakness in economic activity caused by a deterioration of global market and economic conditions could materially adversely affect our business, financial condition, results of operations or cash flows.
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FORWARD LOOKING STATEMENTS
From time to time, in this Annual Report on Form 10-K as well as in other written reports and oral statements, we make forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our prospects, future developments and business strategies. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or “would” and similar terms and phrases, including references to assumptions, to identify forward-looking statements in this document. These forward-looking statements are made based on currently available competitive, financial and economic data, our current expectations, estimates, forecasts and projections about the industries and markets in which we operate and management’s beliefs and assumptions concerning future events affecting us. These statements are not guarantees of future performance and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, our actual results may differ materially from what is expressed in or implied by any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this document. Additionally, we do not undertake any responsibility to provide updates regarding the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this document.
Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Such factors include, among others:
•the cyclical nature of our business and the impact of global supply and demand on our selling prices;
•the global commodity nature of our nitrogen products, the conditions in the international market for nitrogen products, and the intense global competition from other producers;
•conditions in the United States, Europe and other agricultural areas, including the influence of governmental policies and technological developments on the demand for agricultural products;
•the volatility of natural gas prices in North America and the United Kingdom;
•weather conditions and the impact of severe adverse weather events;
•the seasonality of the fertilizer business;
•the impact of changing market conditions on our forward sales programs;
•difficulties in securing the supply and delivery of raw materials, increases in their costs or delays or interruptions in their delivery;
•reliance on third party providers of transportation services and equipment;
•our reliance on a limited number of key facilities;
•risks associated with cyber security;
•acts of terrorism and regulations to combat terrorism;
•risks associated with international operations;
•the significant risks and hazards involved in producing and handling our products against which we may not be fully insured;
•our ability to manage our indebtedness and any additional indebtedness that may be incurred;
•our ability to maintain compliance with covenants under our revolving credit agreement and the agreements governing our indebtedness;
•downgrades of our credit ratings;
•risks associated with changes in tax laws and disagreements with taxing authorities;
•risks involving derivatives and the effectiveness of our risk measurement and hedging activities;
•potential liabilities and expenditures related to environmental, health and safety laws and regulations and permitting requirements;
•regulatory restrictions and requirements related to greenhouse gas emissions;
•the development and growth of the market for green and blue (low-carbon) ammonia and the risks and uncertainties relating to the development and implementation of our green and blue ammonia projects;
•risks associated with expansions of our business, including unanticipated adverse consequences and the significant resources that could be required;
•risks associated with the operation or management of the CHS strategic venture, risks and uncertainties relating to the market prices of the fertilizer products that are the subject of our supply agreement with CHS over the life of the supply agreement, and the risk that any challenges related to the CHS strategic venture will harm our other business relationships; and
•the impact of the novel coronavirus disease 2019 (COVID-19) pandemic on our business and operations.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Information regarding our facilities and properties is included in Item 1. Business—Nitrogen Manufacturing Facilities and Item 1. Business—Storage Facilities and Other Properties.
ITEM 3. LEGAL PROCEEDINGS.
Litigation
West Fertilizer Co.
On April 17, 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we did not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident.
The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Nearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining subrogation and statutory indemnification claims total approximately $37 million, before prejudgment interest, and are in various stages of discovery and pre-trial proceedings. The remaining claims are expected to be set for trial in 2022. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the remaining lawsuits. The Company cannot provide a range of reasonably possible loss due to the uncertain nature of this litigation, including uncertainties around the potential allocation of responsibility by a jury to other defendants or responsible third parties. The recognition of a potential loss in the future in the West Fertilizer Co. litigation could negatively affect our results in the period of recognition. However, based upon currently available information, we expect any potential loss to be fully indemnified by insurance and do not believe that this litigation will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental
For information on pending proceedings relating to environmental remediation matters, see Item 1. Business—Environmental, Health and Safety—CERCLA/Remediation Matters and Note 21—Contingencies to our consolidated financial statements included in Item 8 of this report.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
CF INDUSTRIES HOLDINGS, INC.
Our Company
Industry Factors
Items Affecting Comparability of Results
Financial Executive Summary
Results of Consolidated Operations
Operating Results by Business Segment
LiquidityAll references to “CF Holdings,” “we,” “us,” “our” and Capital Resources
Off-Balance Sheet Arrangements
Critical Accounting Policies“the Company,” refer to CF Industries Holdings, Inc. and Estimates
Recent Accounting Pronouncements
Overviewits 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 and references to tonnes refer to metric tons. Notes referenced throughout this document refer to consolidated financial statement note disclosures that are found in Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements.
Our Company
Wemission is to provide clean energy to feed and fuel the world sustainably. With our employees focused on safe and reliable operations, environmental stewardship, and disciplined capital and corporate management, we are on a leading globalpath to decarbonize our ammonia production network – the world’s largest – to enable green and blue hydrogen and nitrogen products for energy, fertilizer, emissions abatement and chemical company.other industrial activities. Our 3,000 employees operate world-classnine 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 inStates, Canada and the United States have accessKingdom, an extensive storage, transportation and distribution network in North America, and logistics capabilities enabling a global reach underpin our strategy to low-cost North American natural gas.leverage our unique capabilities to accelerate the world’s transition to clean energy. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers farmers and industrial users. Our principal nitrogen fertilizer products arecore product is anhydrous ammonia (ammonia), which contains 82% nitrogen and 18% hydrogen. Our nitrogen products that are upgraded from ammonia are granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium. 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, 20192021 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;remainder;
•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.
We have a strategic venture with CHS under which CHS owns an equity interest in CFN, a subsidiary of CF Holdings, which represents approximately 11% of the membership interests of CFN. We own the remaining membership interests. CHS also receives deliveries pursuant to a supply agreement under which CHS has the right to purchase annually from CFN up to approximately 1.1 million tons of granular urea and 580,000 tons of UAN at market prices. As a result of its minority equity interest in CFN, CHS is entitled to semi-annual cash distributions from CFN. We are also entitled to semi-annual cash distributions from CFN. See Note 18—Noncontrolling Interest for additional information on our strategic venture with CHS.
For the years ended December 31, 2021, 2020 and 2019, we sold 18.5 million, 20.3 million and 19.5 million product tons generating net sales of $6.54 billion, $4.12 billion and $4.59 billion, respectively.
Our principal executive offices are located outside of Chicago, Illinois, at 4 Parkway North, Suite 400, Deerfield, Illinois 60015, and our telephone number is 847-405-2400. Our Internet website address is www.cfindustries.com. Information made available on our website does not constitute part of this Annual Report on Form 10-K.
We make available free of charge on or through our Internet website, www.cfindustries.com, all of our reports on Forms 10-K, 10-Q and 8-K and all amendments to those reports as soon as reasonably practicable after such material is filed electronically with, or furnished to, the Securities and Exchange Commission (SEC). Copies of our Corporate Governance Guidelines, Code of Corporate Conduct and charters for the Audit Committee, Compensation and Management Development
CF INDUSTRIES HOLDINGS, INC.
Committee, Corporate Governance and Nominating Committee, and Environmental Sustainability and Community Committee of our Board of Directors (the Board) are also available on our Internet website. We will provide electronic or paper copies of these documents free of charge upon request. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Our Commitment to a Clean Energy Economy
We are taking significant steps to support a global hydrogen and clean fuel economy, through the production of green and blue ammonia. Since ammonia is one of the most efficient ways to transport and store hydrogen and is also a fuel in its own right, we believe that the Company, as the world’s largest producer of ammonia, with an unparalleled manufacturing and distribution network and deep technical expertise, is uniquely positioned to fulfill anticipated demand for hydrogen and ammonia from green and blue sources. Our approach includes green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia production, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects.
In October 2020, we announced an initial green ammonia project at our Donaldsonville complex. In April 2021, we signed an engineering and procurement contract with thyssenkrupp to supply a 20 MW alkaline water electrolysis plant to produce green hydrogen at our Donaldsonville complex. Construction and installation, which is being managed by us, began in the fourth quarter of 2021 and is expected to finish in 2023, with an estimated total cost of approximately $100 million. The cost of the project is expected to fit within our annual capital expenditure budgets. We will integrate the green hydrogen generated by the electrolysis plant into existing ammonia synthesis loops to enable the production of approximately 20,000 tons per year of green ammonia. We believe that, when completed in 2023, the Donaldsonville green ammonia project will be the largest of its kind in North America.
In the third quarter of 2021, we signed a memorandum of understanding with Mitsui & Co., Inc. (Mitsui) that will guide us in a joint exploration of the development of blue ammonia projects in the United States. The preliminary studies we are conducting with Mitsui cover areas such as blue ammonia supply and supply chain infrastructure, CO2 transportation and storage, expected environmental impacts, and blue ammonia economics and marketing opportunities in Japan and in other countries.
We have also announced steps to produce blue ammonia from our ammonia production network. In the fourth quarter of 2021, our Board of Directors authorized projects that will enable the annual production of up to 1.25 million tons of blue ammonia from our existing network starting in 2024. The projects will involve constructing units at our Donaldsonville and Yazoo City complexes that dehydrate and compress CO2, a process essential for CO2 transport via pipeline to sequestration sites. Management expects that, once the units are in service and sequestration is initiated, we could sequester up to 2.5 million tons of CO2 per year (2 million tons at Donaldsonville and 500,000 tons at Yazoo City). Under current regulations, the projects would be expected to qualify for tax credits under Section 45Q of the Internal Revenue Code, which provides a credit per tonne of CO2 sequestered.
Construction of the units at the Donaldsonville complex is expected to begin in 2022 and to be completed in 2024, with an estimated total cost of $200 million. The Yazoo City project will be timed to coincide with CO2 transport pipeline construction. Once started, the project is expected to be completed in three years with an estimated total cost of $85 million. In addition, we are currently in advanced discussions with several parties regarding transportation and sequestration of CO2 from Donaldsonville.
Company History
We were founded in 1946 as Central Farmers Fertilizer Company, and were owned by a group of regional agriculture cooperatives for the first 59 years of our existence. Central Farmers became CF Industries in 1970.
Originally established as a fertilizer brokerage company, we expanded owning and operating fertilizer manufacturing and distribution facilities in the early 1950s with a principal objective of assured supply for our owners. At various times in our history, we manufactured and/or distributed nitrogen, phosphate and potash fertilizers.
We operated as a traditional manufacturing and supply cooperative until 2002, when we adopted a new business model that established financial performance as our principal objective, rather than assured supply for our owners. A critical aspect of the new business model was to establish a more economically driven approach to the marketplace.
In August 2005, we completed our initial public offering (IPO) of common stock, which is listed on the New York Stock Exchange. In connection with the IPO, we consummated a reorganization transaction whereby we ceased to be a cooperative and our pre-IPO owners’ equity interests in CF Industries were canceled in exchange for all of the proceeds of the offering and shares of our common stock. At the time of the IPO, our assets consisted of one wholly owned nitrogen manufacturing facility
CF INDUSTRIES HOLDINGS, INC.
in Louisiana, United States; a joint venture nitrogen manufacturing facility in Alberta, Canada, of which we owned 66 percent; a phosphate mining and manufacturing operation in Florida, United States; and distribution facilities throughout North America.
In April 2010, we acquired Terra Industries Inc. (Terra), a leading North American producer and marketer of nitrogen fertilizer products for a purchase price of $4.6 billion, which was paid in cash and shares of our common stock. As a result of the Terra acquisition, we acquired five nitrogen fertilizer manufacturing facilities, an approximately 75.3% interest in Terra Nitrogen Company, L.P. (TNCLP) and certain joint venture interests.
In March 2014, we exited our phosphate mining and manufacturing business, which was located in Florida, through a sale to The Mosaic Company for approximately $1.4 billion in cash. As a result, our company became focused solely on nitrogen manufacturing and distribution.
In July 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK Group Limited (formerly known as GrowHow UK Group Limited) (CF Fertilisers UK) not previously owned by us for total consideration of $570 million, and CF Fertilisers UK became wholly owned by us. This transaction added CF Fertilisers UK’s nitrogen manufacturing complexes in Ince, United Kingdom and Billingham, United Kingdom to our consolidated manufacturing capacity.
In February 2016, our strategic venture with CHS commenced, at which time CHS made a capital contribution of $2.8 billion to CFN in exchange for membership interests in CFN, which represented approximately 11% of the total membership interests of CFN.
In late 2015 and 2016, we completed certain capacity expansion projects at Donaldsonville, Louisiana and Port Neal, Iowa. These projects, originally announced in 2012, included the construction of new ammonia, urea, and UAN plants at our Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port Neal, Iowa complex. These plants increased our overall production capacity by approximately 25%, improved our product mix flexibility at Donaldsonville, and improved our ability to serve upper-Midwest urea customers from our Port Neal location. The total capital cost of the capacity expansion projects was $5.2 billion.
Prior to April 2, 2018, Terra Nitrogen, Limited Partnership, which owns and operates 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), whichTNCLP. TNCLP 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,In 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.
Product Tons and Nutrient Tons
Unless otherwise stated, we measure our production and sales volume in this Annual Report on Form 10-K in product tons, which represents the weight of the product measured in short tons (one short ton is equal to 2,000 pounds). References to UAN product tons assume a 32% nitrogen content basis for production volume.
We also provide certain supplementary volume information measured in nutrient tons. Nutrient tons represent the weight of the product’s nitrogen content, which varies by product. Ammonia represents 82% nitrogen content, granular urea represents 46% nitrogen content, UAN represents between 28% and 32% nitrogen content and AN represents between 29% and 35% nitrogen content.
Reportable Segments
Our reportable segments consist of the following segments: ammonia, granular urea, UAN, AN and Other. These segments are differentiated by products. We use gross margin to evaluate segment performance and allocate resources. Total other operating costs and expenses (consisting primarily of selling, general and administrative expenses and other operating—net) and non-operating expenses (consisting primarily of interest and income taxes), are centrally managed and are not included in the measurement of segment profitability reviewed by management. See Note 22—Segment Disclosures for additional information.
CF INDUSTRIES HOLDINGS, INC.
Our Products
Our primary nitrogen products are ammonia, granular urea, UAN and AN. Our historical sales of nitrogen products are shown in the following table. Net sales do not reflect amounts used internally, such as ammonia, in the manufacture of other products.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales |
| | (tons in thousands; dollars in millions) |
| Products | | | | | | | | | | | |
| Ammonia | 3,589 | | | $ | 1,787 | | | 3,767 | | | $ | 1,020 | | | 3,516 | | | $ | 1,113 | |
| Granular urea | 4,290 | | | 1,880 | | | 5,148 | | | 1,248 | | | 4,849 | | | 1,342 | |
| UAN | 6,584 | | | 1,788 | | | 6,843 | | | 1,063 | | | 6,807 | | | 1,270 | |
| AN | 1,720 | | | 510 | | | 2,216 | | | 455 | | | 2,109 | | | 506 | |
Other(1) | 2,318 | | | 573 | | | 2,322 | | | 338 | | | 2,257 | | | 359 | |
| Total | 18,501 | | | $ | 6,538 | | | 20,296 | | | $ | 4,124 | | | 19,538 | | | $ | 4,590 | |
(1)Other segment products include DEF, urea liquor, nitric acid, aqua ammonia and NPKs.
Gross margin was $2.39 billion, $801 million and $1.17 billion for the years ended December 31, 2021, 2020 and 2019, respectively.
We own and operate seven nitrogen manufacturing facilities in North America, including five nitrogen manufacturing facilities in the United States, and two in Canada. As of December 31, 2021, the combined production capacity of these seven facilities represented approximately 37%, 42%, 44% and 19% of North American ammonia, granular urea, UAN and AN production capacity, respectively. Each of our nitrogen manufacturing facilities in North America has on-site storage to provide flexibility to manage the flow of outbound shipments without impacting production. Our two United Kingdom nitrogen manufacturing facilities produce ammonia, AN and NPKs and serve primarily the British agricultural and industrial markets.
The following table shows the production capacities as of December 31, 2021 at each of our nitrogen manufacturing facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average Annual Capacity(1) |
| | Gross Ammonia(2) | | Net Ammonia(2) | | UAN(3) | | Urea(4) | | AN(5) | | Other(6) |
| | (tons in thousands) |
Donaldsonville, Louisiana(7) | 4,335 | | | 1,390 | | | 3,255 | | | 2,635 | | | — | | | 445 | |
| Medicine Hat, Alberta | 1,230 | | | 770 | | | — | | | 810 | | | — | | | — | |
| Port Neal, Iowa | 1,230 | | | 65 | | | 800 | | | 1,350 | | | — | | | 290 | |
Verdigris, Oklahoma(8) | 1,210 | | | 430 | | | 1,955 | | | — | | | — | | | — | |
| Woodward, Oklahoma | 480 | | | 130 | | | 810 | | | — | | | — | | | 115 | |
Yazoo City, Mississippi(8)(9) | 570 | | | — | | | 160 | | | — | | | 1,035 | | | 125 | |
Courtright, Ontario(8)(10) | 500 | | | 265 | | | 345 | | | — | | | — | | | 400 | |
Ince, U.K.(11) | 380 | | | 15 | | | — | | | — | | | 575 | | | 415 | |
Billingham, U.K.(8) | 595 | | | 230 | | | — | | | — | | | 625 | | | 410 | |
| 10,530 | | | 3,295 | | | 7,325 | | | 4,795 | | | 2,235 | | | 2,200 | |
| Unconsolidated Affiliate | | | | | | | | | | | |
Point Lisas, Trinidad(12) | 360 | | | 360 | | | — | | | — | | | — | | | — | |
| Total | 10,890 | | | 3,655 | | | 7,325 | | | 4,795 | | | 2,235 | | | 2,200 | |
(1)Average annual capacity includes allowance for normal outages and planned maintenance shutdowns.
(2)Gross ammonia capacity includes ammonia used to produce upgraded products. Net ammonia capacity is gross ammonia capacity less ammonia used to produce upgraded products based on the product mix shown in the table.
(3)Measured in tons of UAN containing 32% nitrogen by weight.
CF INDUSTRIES HOLDINGS, INC.
(4)Reflects granular urea capacity from the Donaldsonville, Medicine Hat, and Port Neal facilities. Urea liquor and DEF production capacities are included in Other.
(5)AN includes prilled products (Amtrate and industrial-grade AN, or IGAN) and AN solution produced for sale.
(6)Includes product tons of: urea liquor and DEF from the Donaldsonville, Port Neal, Woodward, Yazoo City, and Courtright facilities; nitric acid from the Courtright, Yazoo City, Billingham, and Ince facilities; and NPKs from the Ince facility. Production of DEF can be increased by reducing urea and/or UAN production.
(7)The Donaldsonville facility capacities present an estimated production mix. This facility is capable of producing between 2.4 million and 3.3 million tons of granular urea and between 1.2 million and 4.3 million tons of UAN annually. The facility is also capable of producing up to 1.2 million product tons of 32.5% DEF.
(8)Reduction of UAN or AN production at the Yazoo City, Courtright, Verdigris, and Billingham facilities can allow more merchant nitric acid to be made available for sale.
(9)The Yazoo City facility’s production capacity depends on product mix. With the facility maximizing the production of AN products, 160,000 tons of UAN can be produced. UAN production can be increased to 450,000 tons by reducing the production of AN to 900,000 tons.
(10)Production of urea liquor and DEF at the Courtright facility can be increased by reducing UAN production.
(11)The Ince facility can increase production of NPKs and nitric acid by reducing AN production. Production at the Ince facility is currently idled as of the date of this report.
(12)Represents our 50% interest in the capacity of PLNL.
The following table summarizes our production volume for the last three years:
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | (tons in thousands) |
Ammonia(1) | 9,349 | | | 10,353 | | | 10,246 | |
| Granular urea | 4,123 | | | 5,001 | | | 4,941 | |
| UAN (32%) | 6,763 | | | 6,677 | | | 6,768 | |
| AN | 1,646 | | | 2,115 | | | 2,128 | |
(1)Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN or AN.
Nitrogen Manufacturing Facilities
Donaldsonville, Louisiana
The Donaldsonville facility is the world’s largest and most flexible nitrogen complex. It has six ammonia plants, five urea plants, four nitric acid plants, three UAN plants, and one DEF plant. The complex, which is located on the Mississippi River, includes deep-water docking facilities, access to an ammonia pipeline, and truck and railroad loading capabilities. The complex has on-site storage for 140,000 tons of ammonia, 201,000 tons of UAN (measured on a 32% nitrogen content basis) and 130,000 tons of granular urea.
Medicine Hat, Alberta, Canada
The Medicine Hat facility, located in southeast Alberta, is the largest nitrogen complex in Canada. It has two ammonia plants and one urea plant. The complex has on-site storage for 60,000 tons of ammonia and 60,000 tons of granular urea.
Port Neal, Iowa
The Port Neal facility is located approximately 12 miles south of Sioux City, Iowa, on the Missouri River. The facility consists of two ammonia plants, three urea plants, two nitric acid plants and one UAN plant. The location has on-site storage for 85,000 tons of ammonia, 130,000 tons of granular urea, and 100,000 tons of 32% UAN.
Verdigris, Oklahoma
The Verdigris facility is located northeast of Tulsa, Oklahoma, near the Verdigris River. It is the second largest UAN production facility in North America. The facility comprises two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. We lease the port terminal from the Tulsa-Rogers County Port Authority. The complex has on-site storage for 60,000 tons of ammonia and 100,000 tons of 32% UAN.
CF INDUSTRIES HOLDINGS, INC.
Woodward, Oklahoma
The Woodward facility is located in rural northwest Oklahoma and consists of one ammonia plant, two nitric acid plants, two urea plants and two UAN plants. The facility has on-site storage for 36,000 tons of ammonia and 84,000 tons of 32% UAN.
Yazoo City, Mississippi
The Yazoo City facility is located in central Mississippi and includes one ammonia plant, four nitric acid plants, one AN plant, two urea plants, one UAN plant and a dinitrogen tetroxide production and storage facility. The site has on-site storage for 50,000 tons of ammonia, 48,000 tons of 32% UAN and 11,000 tons of AN and related products.
Courtright, Ontario, Canada
The Courtright facility is located south of Sarnia, Ontario near the St. Clair River. The facility consists of an ammonia plant, a UAN plant, a nitric acid plant and a urea plant. The location has on-site storage for 64,000 tons of ammonia and 16,000 tons of 32% UAN.
Ince, United Kingdom
The Ince facility is located in northwestern England and consists of one ammonia plant, three nitric acid plants, one AN plant and three NPK plants. The location has on-site storage for 11,000 tons of ammonia, 95,000 tons of AN, and 40,000 tons of NPKs. Production at the Ince facility is currently idled as of the date of this report due to the impact of the current energy crisis in the United Kingdom that is more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of CF Holdings—Market Conditions and Current Developments—United Kingdom Energy Crisis.
Billingham, United Kingdom
The Billingham facility, located in the Teesside chemical area in northeastern England, is geographically split among three primary locations: the main site, which contains an ammonia plant, three nitric acid plants and a carbon dioxide plant; the Portrack site, approximately two miles away, which contains an AN fertilizer plant; and the North Tees site, approximately seven miles away, which contains an ammonia storage area. These locations collectively have on-site storage for 40,000 tons of ammonia and 128,000 tons of AN.
Point Lisas, Trinidad
The Point Lisas Nitrogen facility in the Republic of Trinidad and Tobago is owned jointly through a 50/50 venture with Koch Fertilizer LLC. This facility has the capacity to produce 720,000 tons of ammonia annually from natural gas supplied under a contract with The National Gas Company of Trinidad and Tobago Limited (NGC).
Nitrogen Product Raw Materials
Natural gas is the principal raw material and primary fuel source used in the ammonia production process at our nitrogen manufacturing facilities. In 2021, natural gas accounted for approximately 40% of our total production costs for nitrogen products. Our nitrogen manufacturing facilities have access to abundant, competitively-priced natural gas through a reliable network of pipelines that are connected to major natural gas trading hubs. Our facilities utilize the following natural gas hubs: Henry Hub in Louisiana; SONAT and TETCO ELA in Louisiana; ONEOK in Oklahoma; AECO in Alberta; Ventura in Iowa; Demarcation in Kansas; Welcome in Minnesota; Dawn and Parkway in Ontario; and the National Balancing Point (NBP) in the United Kingdom.
In 2021, our nitrogen manufacturing facilities consumed, in the aggregate, approximately 335 million MMBtus of natural gas. We employ a combination of daily spot and term purchases from a variety of quality suppliers to maintain a reliable, competitively-priced supply of natural gas. We also use certain financial instruments to hedge natural gas prices. See Note 16—Derivative Financial Instruments for additional information about our natural gas hedging activities.
Nitrogen Product Distribution
The safe, efficient and economical distribution of nitrogen products is critical for successful operations. Our nitrogen production facilities have access to multiple transportation modes by which we ship products to terminals, warehouses and customers. Each of our production facilities has a unique distribution pattern based on its production capacity and location.
CF INDUSTRIES HOLDINGS, INC.
Our North American nitrogen production facilities can ship products via truck and rail to customers and to our storage facilities in the U.S. and Canada, with access to our leased railcar fleet of approximately 5,000 tank and hopper cars, as well as railcars provided by rail carriers. Our United Kingdom nitrogen production facilities mainly ship products via truck.
The North American waterway system is also used extensively to ship products from our Donaldsonville, Verdigris and Yazoo City facilities. To ship ammonia and UAN, we employ a fleet of ten tow boats and twenty-eight river barges, which are primarily leased. We also utilize contract marine services to move granular urea. We can also export nitrogen products via seagoing vessels from our Donaldsonville, Yazoo City, Billingham and Ince manufacturing facilities.
The Donaldsonville facility is connected to the 2,000-mile long Nustar pipeline through which we have the ability to transport ammonia to ten terminals and shipping points in the Midwestern U.S. corn belt.
Storage Facilities and Other Properties
As of December 31, 2021, we owned or leased space at 51 in-market storage terminals and warehouses located in a 21-state region of the United States, Canada and the United Kingdom. Including storage at our production facilities, we have an aggregate storage capacity for approximately 3.0 million tons of product. Our storage capabilities are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ammonia | | Granular Urea | | UAN(1) | | AN |
| | Number of
Facilities | | Capacity
(000 Tons) | | Number of
Facilities | | Capacity
(000 Tons) | | Number of
Facilities | | Capacity
(000 Tons) | | Number of
Facilities | | Capacity
(000 Tons) |
| Plants | 9 | | | 546 | | | 3 | | | 320 | | | 6 | | | 549 | | | 3 | | | 234 | |
| Terminal and Warehouse Locations | | | | | | | | | | | | | | | |
Owned(2) | 22 | | | 780 | | | — | | | — | | | 8 | | | 209 | | | — | | | — | |
Leased(3) | 6 | | | 89 | | | 2 | | | 32 | | | 21 | | | 276 | | | — | | | — | |
| Total In-Market | 28 | | | 869 | | | 2 | | | 32 | | | 29 | | | 485 | | | — | | | — | |
| Total Storage Capacity | | | 1,415 | | | | | 352 | | | | | 1,034 | | | | | 234 | |
(1)Capacity is expressed as the equivalent volume of UAN measured on a 32% nitrogen content basis.
(2)The owned facilities that store UAN also can store ammonia.
(3)Our lease agreements are typically for periods of one to five years.
Customers
The principal customers for our nitrogen products are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Sales are generated by our internal marketing and sales force. CHS was our largest customer in 2021 and accounted for approximately 14% of our consolidated net sales. We have a strategic venture with CHS under which CHS has a minority equity interest in CFN. See Note 18—Noncontrolling Interest for additional information on our strategic venture with CHS.
Competition
Our markets are global and intensely competitive, based primarily on delivered price and, to a lesser extent, on customer service and product quality. During the peak demand periods, product availability and delivery time also play a role in the buying decisions of customers.
Our primary North American-based competitors include Nutrien Ltd., Koch Fertilizer LLC and Iowa Fertilizer Company. There is also significant competition from products sourced from other regions of the world, including some with lower natural gas or other feedstock costs, which may include the benefit of government subsidies. Because ammonia, urea and UAN are widely-traded fertilizer products and there are limited barriers to entry, we experience competition from foreign-sourced products continuously. 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.
Our primary United Kingdom competition comes from imported products supplied by companies including Yara International, Origin Fertilisers, Ameropa, CHS and Helm. Urea and UAN are not produced in the United Kingdom, but along with AN are widely-traded fertilizer products with limited barriers to entry.
CF INDUSTRIES HOLDINGS, INC.
Seasonality
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to weather conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring planting season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
Environmental, Health and Safety
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union and the Republic of Trinidad and Tobago, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the introduction of new chemicals or substances into a market; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act (TSCA), the Occupational Safety and Health Act (OSHA) and various other federal, state and local statutes. Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. In addition, environmental, health and safety laws and regulations may impose joint and several liability, without regard to fault, for cleanup costs on potentially responsible parties who have released or disposed of hazardous substances into the environment. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future.
Environmental, Health and Safety Expenditures
Our environmental, health and safety capital expenditures in 2021 totaled approximately $31 million. We estimate that we will have approximately $63 million of capital expenditures for environmental, health and safety in 2022. In addition, to support safe and reliable operations at our continuous process manufacturing facilities, we conduct scheduled inspections, replacements and overhauls of our plant machinery and equipment, which are referred to as turnarounds. A further description of turnaround activities is included in Note 7—Property, Plant and Equipment—Net to our consolidated financial statements included in Item 8 of this report. Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent over time. We expect that continued government and public emphasis on environmental issues will result in increased future expenditures for environmental controls at our manufacturing and distribution facilities. Such expenditures could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, future environmental, health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
CERCLA/Remediation Matters
From time to time, we receive notices from governmental agencies or third parties alleging that we are a potentially responsible party at certain cleanup sites under CERCLA or other environmental cleanup laws. In 2011, we received a notice from the Idaho Department of Environmental Quality (IDEQ) that alleged that we were a potentially responsible party for the cleanup of a former phosphate mine site we owned in the late 1950s and early 1960s located in Georgetown Canyon, Idaho. The current owner of the property and a former mining contractor received similar notices for the site. Based on a Consent Order entered into with IDEQ and the U.S. Forest Service in 2014, we and the current property owner are currently conducting a remedial investigation and feasibility study of the site. In 2015, we and several other parties received a notice that the U.S. Department of the Interior and other trustees intend to undertake a natural resource damage assessment for 18 former phosphate mines and three former processing facilities in southeast Idaho, which includes the Georgetown Canyon former mine and processing facility. See Note 21—Contingencies for additional information.
CF INDUSTRIES HOLDINGS, INC.
Regulation of Greenhouse Gases
Our production facilities emit greenhouse gases (GHGs), such as carbon dioxide and nitrous oxide. Natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. We are subject to GHG regulations in the United Kingdom, Canada and the United States.
Our U.K. manufacturing plants are required to report GHG emissions annually to the United Kingdom Environment Agency pursuant to their site Environmental Permits and Climate Change Agreement, which specify energy efficiency targets. Failure to meet efficiency targets may require these plants to purchase CO2 emissions allowances. Our facilities were previously subject to the European Union Greenhouse Gas Emission Trading System (EU ETS), which generally required us to hold or obtain emission allowances to offset GHG emissions from those aspects of our operations that were subject to regulation under this program. Beginning on January 1, 2021, our U.K. manufacturing plants became subject to the UK Emissions Trading Scheme (UK ETS). The UK ETS is similar to the EU ETS, although the U.K. ETS regulations established a lower emission cap than was established under the EU ETS. No agreement has been reached as to whether the UK ETS will establish a linkage with the EU ETS or other national emission trading systems.
In Canada, we are required to conduct an annual review of our operations with respect to compliance with Environment Canada’s National Pollutant Release Inventory and Ontario’s Mandatory Monitoring and Reporting Regulation and the GHG Reporting Regulation. In 2018, the federal Greenhouse Gas Pollution Pricing Act came into effect, pursuant to which Environment and Climate Change Canada (ECCC) implemented the Output-Based Performance Standard (OBPS), which was intended to function as a backstop to provincial greenhouse gas emissions regulations. In June 2019, the ECCC finalized the emission limits for carbon dioxide equivalent (CO2e) emissions from nitrogen fertilizer products. These emission limits are based on 95% of the average emissions intensity for the production of such products from all Canadian nitrogen fertilizer plants, reflecting that such products are deemed to be energy-intensive and trade-exposed and thus subject to a less stringent emissions reduction requirement. In the provinces and territories where the OBPS applies, a facility whose carbon emissions exceed the applicable limits is required to offset emissions by obtaining and retiring surplus emission credits, obtaining qualifying emissions offsets, or paying a fee. The fee under the OBPS for calendar year 2021 was CAD $40 per tonne of excess carbon dioxide equivalent emissions, and will be CAD $50 per tonne in 2022. Under the current program, the excess emission fee will increase by CAD $15 per year after 2022, reaching CAD $170 per tonne by 2030. Ontario, Saskatchewan and Alberta filed suit challenging whether the federal government had jurisdiction to impose a federal carbon price on the provinces and territories, but in March 2021, the Supreme Court of Canada upheld the constitutionality of the Greenhouse Gas Pollution Pricing Act.
In July 2019, the Ontario government enacted a new GHG regulation, called the Emissions-Performance Standards program (EPS), that sets CO2e emissions limits for nitrogen products based on a production weighted sectoral average. For facilities whose carbon emissions exceed the applicable limit, compliance options include the purchase of excess emission units, for a fee of CAD $40 per unit purchased in 2022 (which can be used to offset excess emissions in the 2021 calendar period) and CAD $50 per unit purchased in 2023 (to offset excess emissions in calendar year 2022). In September 2020, ECCC announced that the Ontario EPS met the federal government’s minimum stringency benchmark requirements, and in September 2021, the ECCC announced that the federal OBPS would no longer apply in Ontario beginning in January 2022. Accordingly, the Ontario EPS became applicable on January 1, 2022.
In 2019, the Alberta government passed the Technology Innovation and Emission Reduction Implementation Act (TIER), which went into effect on January 1, 2020. The TIER requires large emitting facilities (other than electricity producers, which are subject to a different standard) to comply with the least stringent of a “facility-specific” benchmark of 90% of historical GHG emissions intensity from a three-year baseline, which intensity limit will be reduced by 1% a year beginning in 2021, or a benchmark reflecting the emissions intensity of the top 10% of facilities for a given sector. The compliance options under the TIER initially established the price for payments into its carbon fund at CAD $30 per excess tonne of emissions. In December 2019, the federal government determined that the TIER met the stringency requirements of the OBPS with respect to its regulation of large industrial emitters for 2020. The levy for excess emissions of CO2e in Alberta for 2021 was CAD $40 per tonne and it is anticipated that the Alberta government will increase the levy for excess emissions of CO2e for calendar year 2022 to CAD $50 per tonne, to match the price of carbon established in the OBPS.
In the United States, GHG regulation is evolving at state, regional and federal levels, although some of the more significant developments to date, including efforts of the United States Environmental Protection Agency (EPA) to regulate GHG emissions from fossil fuel-fired power plants, do not directly impose obligations on our facilities. The EPA issued a mandatory GHG reporting rule that required all of our U.S. manufacturing facilities, which are considered large emitters of GHGs, to commence monitoring GHG emissions beginning on January 1, 2010 and reporting the previous year’s emissions annually starting in 2011. In addition, if we seek to modify or expand any of our major facilities and as a result, are required to
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obtain a Prevention of Significant Deterioration (PSD) construction permit applicable to such facilities, we could be subject to pollution control requirements applicable to GHGs in addition to requirements applicable to conventional air pollutants. Such requirements may result in increased costs or delays in completing such projects. Other than the states’ implementation of this permitting requirement, none of the states where our U.S. production facilities are located-Iowa, Louisiana, Mississippi and Oklahoma-has proposed control regulations limiting GHG emissions.
Increasing concern over the impacts of climate change is driving countries to establish ever more ambitious GHG reduction targets. Approximately 200 countries, including the United States, Canada, the United Kingdom and the European Union (EU) have joined the Paris Agreement, an international agreement intended to provide a framework pursuant to which the parties to the agreement will attempt to hold the increase in global average temperatures to below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. Each signatory is required to develop its own national plan to attain this objective. In December 2020, the United Kingdom announced a target to reduce GHG emission 68% from 1990 levels by 2030. Canada has increased its emissions reduction target under the Paris Agreement to 40-45% below 2005 levels by 2030, up from 30%. In April 2021, the United States increased its goal to reduce GHG emissions to 50-52% below 2005 levels by 2030. Executive orders issued by the Biden administration, including in particular an executive order issued on January 27, 2021 focusing on climate change, evidence the administration’s intent to undertake numerous initiatives in an effort to reduce GHG emissions, including promoting renewable energy development, limiting or prohibiting new oil and gas leases on federal lands, and in general, making climate change considerations a critical component of federal policy.
Regulatory Permits and Approvals
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing material permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility. Any future expansion of our existing operations is also predicated upon securing the necessary environmental or other permits or approvals. More stringent environmental standards may impact our ability to obtain such permits.
Human Capital Resources
Our long-term success depends on our people. We are dedicated to creating a workplace where employees are proud to work and grow and where everyone feels empowered to do their best work. We do this by investing in extensive recruitment, training and professional development opportunities for our employees and fostering diversity and inclusion in our culture.
Employee Population. We employed approximately 3,000 employees at December 31, 2021, of which 67% were located in the United States, 19% in the United Kingdom, and 14% in Canada. As of December 31, 2021, 14% of our employees have worked for the Company more than 20 years, 17% of our employees have worked for the Company between 11 and 20 years, 29% of our employees have worked for the Company between 6 and 10 years, and 40% of our employees have worked at the Company for less than 6 years. Full-time employees represented approximately 99% of our workforce as of December 31, 2021 and approximately 15% were covered by a collective bargaining agreement. We supplement our workforce with contractors with specialized skill sets during periods of peak activity, such as during turnarounds and maintenance events.
Culture, Inclusion and Diversity. Our core values and their underlying principles reflect our commitment to a diverse and inclusive culture, treating one another with respect. Across the Company, all employees completed training to learn to recognize and address the effects of unconscious bias by challenging assumptions; encouraging diversity of experience, opinion, and expression; and supporting a workplace culture that actively strives to be more inclusive. As of December 31, 2021, approximately 14% of our global workforce was female and 16% of the Company’s employees in frontline managerial roles were female. Minorities represented approximately 14% of the Company’s U.S. workforce and 13% of our U.S. employees in managerial roles. In order to continue to improve the inclusiveness and diversity of our company and culture, our comprehensive ESG goals announced in 2020 include goals to increase the representation of females and persons of color in senior leadership roles and to implement a program designed to increase the hiring and promotion of minority and female candidates. As of December 31, 2021, we had exceeded our representation goal with approximately 38% of senior leadership roles held by females and persons of color.
Workforce Health and Safety. Operating in a safe and responsible manner is a core value and an integral part of what sets the Company apart. We believe that focusing on leading indicators - such as the behavioral safety practices we have incorporated into our annual incentive plan - to drive and measure activities that prevent and control safety incidents, results in our industry-leading safety record. As of December 31, 2021, our employee 12-month rolling average recordable incident rate (RIR) was 0.32 incidents per 200,000 work hours, and our total recordable injury count was nine. For the year ended December
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31, 2021, our days away, restricted or transferred (DART) incident rate was 0.21 injuries per 200,000 work hours, and our lost time incident rate was 0.11.
Response to COVID-19 Pandemic. During fiscal 2020 and 2021, in response to the COVID-19 pandemic, we instituted and have continued to enforce safety precautions to protect the health and well-being of all of our employees, including the manufacturing workforce who operate our nitrogen manufacturing complexes and distribution facilities. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of CF Holdings—Market Conditions and Current Developments—COVID-19 Pandemic, for a further discussion of the pandemic.
Talent Development. A core aspect of our culture is our commitment to identifying and developing talent to help employees accelerate growth and achieve their career goals. We invest in extensive assessment, training and professional development opportunities for our employees through a robust set of formal and informal programs, including targeted job movements, key experiences, and training, with an emphasis on creating a culture of inclusion. Leadership is the quality that drives our values and sets us apart. To help foster leadership, we have developed a set of leadership competencies that provide a common language for how to demonstrate leadership at every level of the organization. We view training and development programs as being a key part of succession planning, allowing us to grow a stronger company today and in the future.
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ITEM 1A. RISK FACTORS.
In addition to the other information contained in this Annual Report on Form 10-K, you should carefully consider the factors discussed below before deciding to invest in any of our securities. These risks and uncertainties, individually or in combination, could materially and adversely affect our business, financial condition, results of operations and cash flows. References to tons refer to short tons and references to tonnes refer to metric tons.
Market Risks
Our business is cyclical, resulting in periods of industry oversupply during which our business, financial condition, results of operations and cash flows tend to be negatively affected.
Historically, selling prices for our products, which are generally global commodities, have fluctuated in response to periodic changes in supply and demand conditions. Demand for nitrogen is affected by planted acreage, crop selection and fertilizer application rates, driven by population growth, gross domestic product growth, changes in dietary habits and non-food use of crops, such as production of ethanol and other biofuels among other things. Demand also includes industrial uses of nitrogen, for example chemical manufacturing and emissions reductants such as diesel exhaust fluid (DEF). Supply is affected primarily by available production capacity and operating rates, raw material costs and availability, energy prices, government policies and global trade.
Periods of strong demand, high capacity utilization and increasing operating margins tend to stimulate global investment in production capacity. In the past, fertilizer producers, including CF Holdings, have built new production facilities or expanded capacity of existing production assets, or announced plans to do so. The construction of new nitrogen fertilizer manufacturing capacity in the industry, plus improvements to increase output from the existing production assets, increase nitrogen supply availability and affect the balance of supply and demand and nitrogen selling prices. In certain years, global nitrogen fertilizer capacity has increased faster than global nitrogen fertilizer demand, creating a surplus of global nitrogen fertilizer capacity, which has led to lower nitrogen fertilizer selling prices. For example, in the two-year period ended December 31, 2017, additional production capacity came on line and, at the same time, the average selling price for our products declined 34%, from $314 per ton in 2015 to $207 per ton in 2017.
Additional production capacity is expected to come on line over the next 12 months outside of North America. We cannot predict the impact of this additional capacity on nitrogen fertilizer selling prices. Also, global or local economic, political and financial conditions or changes in such conditions, or other factors, may cause acceleration of announced and/or ongoing projects. Similarly, lower energy prices can spur increases in production in high cost regions, which would result in increased supply and pressure on selling prices. Additionally, if imports increase into an oversupplied region, lower prices in that region could result.
During periods of industry oversupply, our financial condition, results of operations and cash flows tend to be affected negatively as the price at which we sell our products typically declines, resulting in possible reduced profit margins, write-downs in the value of our inventory and temporary or permanent curtailments of production. In 2016 and 2017, our financial performance, credit ratings and the trading price for our common stock were negatively impacted by the lower selling prices resulting from the global oversupply of nitrogen fertilizer. While in 2018 and 2019, we experienced increases in the average selling price for our products, in 2020, the average selling price for our products decreased 14% to $203 per ton compared to $235 per ton in 2019. In 2021, the average selling price for our products increased 74% to $353 per ton compared to 2020. Due to the cyclical nature of our industry, we cannot predict the timing of oversupply and undersupply conditions, the period of time that these conditions will persist or the degree to which oversupply conditions will impact our business, financial condition, results of operations and cash flows.
Our nitrogen products are global commodities, and we face intense global competition from other producers.
We are subject to intense price competition from our competitors. Most fertilizers and related nitrogen products that we produce, such as industrial grade ammonium nitrate (AN) and DEF, are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and, to a lesser extent, customer service and product quality. As a consequence, conditions in the international market for nitrogen products significantly influence our operating results.
We compete with many producers, including state-owned and government-subsidized entities. Some of our competitors have greater total resources and are less dependent on earnings from fertilizer sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Furthermore, certain governments, in some cases as owners of some of our competitors, may be willing to accept lower prices and profitability on their products or subsidize production or consumption in order to support domestic employment or other political or social
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goals. Our competitive position could suffer if we are not able to expand our own resources to a similar extent, either through investments in new or existing operations or through acquisitions or joint ventures.
China, the world’s largest producer and consumer of nitrogen fertilizers, currently has capacity surplus and many high-cost plants. As a result, the domestic nitrogen industry in China is operating at less than full capacity. A number of factors could encourage China to increase product capacity utilization, including changes in Chinese government policy, devaluation of the Chinese renminbi, the relaxation of Chinese environmental standards or decreases in Chinese producers’ underlying costs such as the price of Chinese coal. Any resulting increase in export volume could adversely affect the balance between global supply and demand and may put downward pressure on global fertilizer prices, which could materially adversely affect our business, financial condition, results of operations and cash flows.
From time to time, certain of our competitors with significant nitrogen fertilizer export capacity have benefited from non-market pricing of natural gas, which has resulted in significant volumes of exports to the United States. For example, the 2016 revocations of U.S. antidumping measures on solid urea and fertilizer grade ammonium nitrate from Russia allowed for increased imports from that country into the United States in recent years. In addition, high volumes of urea ammonium nitrate solution (UAN) imports from Russia and Trinidad and Tobago have negatively affected U.S. producers’ UAN profitability.
We also face competition from other fertilizer producers in the Middle East, Europe, Latin America and Africa. These producers, depending on market conditions, fluctuating input prices, geographic location and freight economics, may take actions at times with respect to price or selling volumes that adversely affect our business, financial condition, results of operations and cash flows. Some of these producers also benefit from non-market or government-set rates for natural gas pricing.
In addition, the international market for nitrogen products is influenced by such factors as currency exchange rates, including the relative value of the U.S. dollar and its impact on the cost of importing nitrogen products into the United States, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets and the laws and policies of the markets in which we operate, including the imposition of new duties, tariffs or quotas, that affect foreign trade and investment. For example, the imposition of duties, tariffs or quotas in a region can directly impact product pricing in that region, which can lead to changes in global trade flows and impact the global supply and demand balance and pricing. Market participants customarily move product between regions of the world, or adjust trade flows, in response to these factors. North America, where we manufacture and sell most of our products, is one of the largest and most liquid nitrogen trading regions in the world. As a result, other manufacturers, traders and other market participants can move nitrogen products to North America when there is uncertainty associated with the supply and demand balance in other regions or when duties, tariffs or quotas impact prices or trade flows in other regions. Thus, duties, tariffs and quotas can lead to uncertainty in the global marketplace and impact the supply and demand balance in many regions, which could adversely affect our business, financial condition, results of operations and cash flows. On October 9, 2019, the European Commission (the Commission) imposed definitive anti-dumping duties on imports to the European Union of UAN manufactured in Russia, the Republic of Trinidad and Tobago and the United States. For imports of UAN manufactured in the United States, the fixed duty rate is €29.48 per tonne (or €26.74 per ton). The duties will remain in place for an initial five-year period unless the Commission suspends them before the five-year period has expired. After the initial five-year period, the Commission may renew the measures. The long-term impact of these duties on the international market for nitrogen products is uncertain.
A decline in agricultural production or limitations on the use of our products for agricultural purposes could materially adversely affect the demand for our products.
Conditions in the United States, Europe, India, Brazil, China and other global agricultural areas significantly impact our operating results. Agricultural planted areas and production can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, crop disease and/or livestock disease, demand for agricultural products and governmental policies regarding production of or trade in agricultural products. These factors are outside of our control.
Governmental policies, including farm and biofuel subsidies, commodity support programs and tariffs, environmental and greenhouse gas policies, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. Ethanol production in the United States contributes significantly to corn demand, representing approximately 35% of total U.S. corn demand, due in part to federal legislation mandating use of renewable fuels. An increase in ethanol production has led to an increase in the amount of corn grown in the United States and to increased fertilizer usage on both corn and other crops that have also benefited from improved farm economics. While the current Renewable Fuel Standard encourages continued high levels of corn-based ethanol production, various interested parties have called to eliminate or reduce the renewable fuel mandate, or to eliminate or reduce corn-based ethanol as part of the renewable fuel mandate. Other factors that drive the ethanol market include the prices of
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ethanol, gasoline and corn. Lower gasoline prices and fewer aggregate miles, driven by increased automobile fuel efficiency, the continued expansion of electric vehicle use or the impact of decreased travel resulting from the coronavirus disease 2019 (COVID-19) pandemic, may put pressure on ethanol prices that could result in reduced profitability and lower production for the ethanol industry. This could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer demand.
Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, or nitrogen-efficient varieties, or developments in alternatives to traditional animal feed or alternative proteins, could also reduce the use of chemical fertilizers and adversely affect the demand for our products. Widespread adoption of emerging application technologies or alternative farming techniques could disrupt traditional application practices, affecting the volume or types of products used and timing of applications. In addition, from time to time various foreign government and U.S. state legislatures have considered limitations on the use and application of chemical fertilizers due to concerns about the negative impact of these products on the environment. For example, the United Kingdom is currently consulting with stakeholders and reviewing proposals to limit emissions from solid urea fertilizers, including a potential ban on urea fertilizers. While CF Fertilisers UK Limited does not sell solid urea fertilizer in the United Kingdom, other jurisdictions may consider limits on fertilizer use, such as the European Union, which announced its Farm to Fork and Biodiversity Strategies, or Canada, which as part of its Healthy Environment, Healthy Economy plan announced plans in late 2020 to introduce a target of reducing emissions from fertilizers by 30% below 2020 levels and has begun informal consultations with industry and other stakeholders on this proposal. These or other more stringent limitations on greenhouse gas emissions applicable to farmers, the end-users of our nitrogen fertilizers, could reduce the demand for our fertilizer products to the extent their use of our products increases farm-level emissions. Any reduction in the demand for chemical fertilizer products, including as a result of technological developments and/or limitations on the use and application of chemical fertilizers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business is dependent on natural gas, the prices of which are subject to volatility.
Nitrogen from the atmosphere and hydrogen from natural gas, coal and other carbon energy feedstocks, or from the electrolysis of water, are the fundamental building blocks of nitrogen products. Energy feedstock costs comprise a significant portion of the total production cost of nitrogen products and, relative to the industry’s marginal producers that set the global price of nitrogen, generally determine profitability for nitrogen producers. Our manufacturing processes utilize natural gas as the principal raw material used in our production of nitrogen products. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia, granular urea, UAN, AN and other nitrogen products.
Most of our nitrogen manufacturing facilities are located in the United States and Canada. As a result, North American natural gas comprises a significant portion of the total production cost of our products. In recent years, the cost of North American natural gas for the production of nitrogen fertilizers has been significantly lower than the energy costs of the industry’s marginal nitrogen producers. Changes in the supply of and demand for natural gas can lead to extended periods of higher natural gas prices. In addition, any increases in the volume of liquefied natural gas exported from the U.S. to other regions, particularly regions where nitrogen products are produced, could increase our natural gas costs and/or lower natural gas costs for our competitors. If high natural gas prices were to persist in North America and significantly erode our favorable energy cost differentials relative to the marginal nitrogen producers, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The price of natural gas in North America has been volatile in recent years. During 2021, the daily closing price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, reached a low of $2.36 per MMBtu on April 7, 2021 and a high of $23.61 per MMBtu on February 18, 2021. During the three-year period ended December 31, 2021, the daily closing price at the Henry Hub reached a low of $1.34 per MMBtu on September 22, 2020 and three consecutive days in October 2020 and a high of $23.61 per MMBtu on February 18, 2021.
We also have manufacturing facilities located in the United Kingdom. These facilities are subject to fluctuations associated with the price of natural gas in Europe, which has also been volatile in recent years and reached unprecedented high levels in 2021. The major natural gas trading point for the United Kingdom is the National Balancing Point (NBP). During 2021, the daily closing price at NBP reached a low of $5.58 per MMBtu on February 23, 2021 and a high of $60.10 per MMBtu on December 22, 2021. During the three-year period ended December 31, 2021, the daily closing price at NBP reached a low of $1.04 per MMBtu on May 22, 2020 and a high of $60.10 per MMBtu on December 22, 2021. The high price for natural gas in the United Kingdom has had an effect on our local operations, resulting in the idling of certain of our United Kingdom plants in 2021. Since the third quarter of 2021, the price for natural gas in the United Kingdom has remained high. The average daily market price of natural gas at NBP for January 2022 was $25.91 per MMBtu.
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The price of natural gas in North America and worldwide has been volatile in recent years and has declined on average due in part to the development of significant natural gas reserves, including shale gas, and the rapid improvement in shale gas extraction techniques, such as hydraulic fracturing and horizontal drilling. Future production of natural gas from shale formations could be reduced by regulatory changes that restrict drilling or hydraulic fracturing or increase its cost or by reduction in oil exploration and development prompted by lower oil prices resulting in production of less associated gas.
Certain of our operating facilities are located near natural gas hubs that have experienced increased natural gas development and have favorable basis differences as compared to other North American hubs. Favorable basis differences in certain regions may dissipate over time due to increases in natural gas pipeline or storage capacity in those regions. Additionally, basis differentials may become materially unfavorable due to a lack of inbound gas pipeline or storage capacity in other regions during periods of unusually high demand. Increased demand for natural gas, particularly in the Gulf Coast Region, due to increased industrial demand and increased natural gas exports, could result in increased natural gas prices. If reduced production, increased demand or changes in basis were to occur, or if other developments adversely impact the supply and demand balance for natural gas in North America or elsewhere, natural gas prices could rise, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Adverse weather conditions may decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations. Adverse weather conditions could become more frequent and/or more severe as a result of climate change.
Weather conditions that delay or disrupt field work during the planting, growing, harvesting or application periods may cause agricultural customers to use different forms of nitrogen fertilizer, which may adversely affect demand for the forms that we sell or may impede farmers from applying our fertilizers until the following application period, resulting in lower seasonal demand for our products.
Adverse weather conditions during or following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which could lower the income of growers and impair their ability to purchase fertilizer from our customers. Adverse weather conditions could also impact transportation of fertilizer, which could disrupt our ability to deliver our products to customers on a timely basis. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in fertilizer applications, planting schedules and purchasing patterns. Over the longer-term, changes in weather patterns may shift the periods of demand for products and even the regions to which our products are distributed, which could require us to evolve our distribution system.
In addition, we use the North American waterway system extensively to ship products from some of our manufacturing facilities to our distribution facilities and our customers. We also export nitrogen fertilizer products via seagoing vessels from deep-water docking facilities at certain of our manufacturing sites. Therefore, persistent significant changes in river or ocean water levels (either up or down, such as a result of flooding, drought or climate change, for example), may require changes to our operating and distribution activities and/or significant capital improvements to our facilities.
Weather conditions or, in certain cases, weather forecasts, also can disrupt our operations and can affect the price of natural gas, the principal raw material used to make our nitrogen products. Colder and/or longer than normal winters and warmer than normal summers increase the demand for natural gas for power generation and for residential and industrial use, which can increase the cost and/or decrease the availability of natural gas. In addition, adverse weather events not only can cause loss of power at our facilities or damage to or delays in logistics capabilities disrupting our operations, but also can impact the supply of natural gas and utilities and cause prices to rise.
All of the adverse weather conditions described above, including those impacting our customers and our operations, such as the physical risk from storms, hurricanes, tornadoes, or floods could become more frequent and/or more severe as a result of climate change. Our Donaldsonville complex is located in an area of the United States that experiences a relatively high level of hurricane or high wind activity and several of our complexes are located in areas that experience severe weather. In the last several years, there has been an increase in the frequency and severity of adverse weather conditions, including in the geographic areas where we have operations. Any significant adverse weather event or combination of adverse weather events could decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations — any of which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Our operating results fluctuate due to seasonality. Our inability to predict future seasonal fertilizer demand accurately could result in our having excess inventory, potentially at costs in excess of market value.
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. The strongest demand for our products in North America occurs
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during the spring planting season, with a second period of strong demand following the fall harvest. In contrast, we and other fertilizer producers generally manufacture and distribute products throughout the year. As a result, we and/or our customers generally build inventories during the low demand periods of the year to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application seasons and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in our sales volumes and net sales being the highest during the spring and our working capital requirements to build inventory being the highest just prior to the start of the spring planting season.
If seasonal demand is less than we expect, we may be left with excess inventory that will have to be stored (in which case our results of operations would be negatively affected by any related increased storage costs) or liquidated (in which case the selling price could be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are exacerbated by the volatility of nitrogen fertilizer prices, the constraints of our storage capacity, and the relatively brief periods during which farmers can apply nitrogen fertilizers. If prices for our products rapidly decrease, we may be subject to inventory write-downs, adversely affecting our operating results.
A change in the volume of products that our customers purchase on a forward basis, or the percentage of our sales volume that is sold to our customers on a forward basis, could increase our exposure to fluctuations in our profit margins and working capital and materially adversely affect our business, financial condition, results of operations and cash flows.
We offer our customers the opportunity to purchase products from us on a forward basis at prices and delivery dates we propose. Under our forward sales programs, customers generally make an initial cash down payment at the time of order and pay the remaining portion of the contract sales value in advance of the shipment date. Forward sales improve our liquidity by reducing our working capital needs due to the cash payments received from customers in advance of shipment of the product and allow us to improve our production scheduling and planning and the utilization of our manufacturing and distribution assets.
Any cash payments received in advance from customers in connection with forward sales are reflected on our consolidated balance sheets as a current liability until the related orders are shipped, which can take up to several months.
We believe the ability to purchase products on a forward basis is most appealing to our customers during periods of generally increasing prices for nitrogen fertilizers. Our customers may be less willing or even unwilling to purchase products on a forward basis during periods of generally decreasing or stable prices or during periods of relatively high fertilizer prices due to the expectation of lower prices in the future or limited capital resources. Fixing the selling prices of our products, often months in advance of their ultimate delivery to customers, typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment. In periods of rising fertilizer prices, selling our nitrogen fertilizers on a forward basis may result in lower profit margins than if we had not sold fertilizer on a forward basis.
Operational Risks
Our operations are dependent upon raw materials provided by third parties, and any delay or interruption in the delivery of raw materials may adversely affect our business.
We use natural gas and other raw materials in the manufacture of our nitrogen products. We purchase the natural gas and other raw materials from third party suppliers. Our natural gas is transported by pipeline to our facilities by third party transportation providers or through the use of facilities owned by third parties. Delays or interruptions in the delivery of natural gas or other raw materials may be caused by, among other things, severe weather or natural disasters, unscheduled downtime, labor difficulties or shortages, insolvency of our suppliers or their inability to meet existing contractual arrangements, deliberate sabotage and terrorist incidents, or mechanical failures. In addition, the transport of natural gas by pipeline is subject to additional risks, including delays or interruptions caused by capacity constraints, leaks or ruptures. Any delay or interruption in the delivery of natural gas or other raw materials, even for a limited period, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our transportation and distribution activities rely on third party providers and are subject to environmental, safety and regulatory oversight. This exposes us to risks and uncertainties beyond our control that may adversely affect our operations and exposes us to additional liability.
We rely on natural gas pipelines to transport raw materials to our manufacturing facilities. In addition, we rely on railroad, barge, truck, vessel and pipeline companies to coordinate and deliver finished products to our distribution system and to ship finished products to our customers. We also lease rail cars in order to ship raw materials and finished products. These transportation operations, equipment and services are subject to various hazards, including adverse operating conditions on the
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inland waterway system, extreme weather conditions, system failures, work stoppages, shutdowns, delays, accidents such as spills and derailments, vessel groundings and other accidents and operating hazards. Additionally, due to the aging infrastructure of certain rail lines, bridges, roadways, pipelines, river locks, and equipment that our third party service providers utilize, we may experience delays in both the receipt of raw materials or the shipment of finished product while repairs, maintenance or replacement activities are conducted. Also, certain third party service providers, such as railroads, have experienced periodic service delays or shutdowns due to capacity constraints in their systems, operational and maintenance difficulties, blockades, weather or safety-related embargoes and delays, and other events, which could impact the shipping of our products and cause disruption in our supply chain.
These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to concerns related to accidents, discharges or other releases of hazardous substances, terrorism or the potential use of fertilizers as explosives, governmental entities could implement new or more stringent regulatory requirements affecting the transportation of raw materials or finished products.
If shipping of our products is delayed or we are unable to obtain raw materials as a result of these transportation companies’ failure to operate properly, or if new and more stringent regulatory requirements were implemented affecting transportation operations or equipment, or if there were significant increases in the cost of these services or equipment, our revenues and cost of operations could be adversely affected. In addition, increases in our transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In the United States and Canada, the railroad industry continues various efforts to limit the railroads’ potential liability stemming from the transportation of Toxic Inhalation Hazard materials, such as the anhydrous ammonia we transport to and from our manufacturing and distribution facilities. For example, various railroads shift liability to shippers by contract, purport to shift liability to shippers by tariff, or otherwise seek to require shippers to indemnify and defend the railroads from and against liabilities (including in negligence, strict liability, or statutory liability) that may arise from certain acts or omissions of the railroads, third parties who may have insufficient resources, or the Company, unknown causes or acts of god. These initiatives could materially and adversely affect our operating expenses and potentially our ability to transport anhydrous ammonia and increase our liability for releases of our anhydrous ammonia while in the care, custody and control of the railroads, third parties or us, for which our insurance may be insufficient or unavailable. New or more stringent regulatory requirements also could be implemented affecting the equipment used to ship our raw materials or finished products. Restrictions on service, increases in transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, and any railroad industry initiatives that may impact our ability to transport our products, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are reliant on a limited number of key facilities.
Our nitrogen manufacturing facilities are located at nine separate nitrogen complexes, the largest of which is the Donaldsonville complex, which represented approximately 40% of our ammonia production capacity as of December 31, 2021. The suspension of operations at any of these complexes could adversely affect our ability to produce our products and fulfill our commitments, and could have a material adverse effect on our business, financial condition, results of operations and cash flows. Operational disruptions could occur for many reasons, including natural disasters, weather, unplanned maintenance and other manufacturing problems, disease, strikes or other labor unrest or transportation interruptions. For example, our Donaldsonville complex is located in an area of the United States that experiences severe weather, including a relatively high level of hurricane or high wind activity, and several of our other complexes are also located in areas that experience severe weather. Such storms and severe weather events, depending on their severity and location, have the potential not only to damage our facilities and disrupt our operations, but also to affect adversely the shipping and distribution of our products. Moreover, our facilities may be subject to failure of equipment that may be difficult to replace or have long delivery lead times, due in part to a limited number of suppliers, and could result in operational disruptions.
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We are subject to risks relating to our information technology systems, and any technology disruption or cybersecurity incident could negatively affect our operations.
We rely on internal and third-party information technology and computer control systems in many aspects of our business, including internal and external communications, the management of our accounting, financial and supply chain functions and plant operations. If we do not allocate and effectively manage the resources necessary to build, implement and sustain the proper technology infrastructure, we could be subject to transaction errors, inaccurate financial reporting, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to our confidential business information due to a security breach. In addition, our information technology systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, business partners, customers or suppliers, and may subject us to legal liability.
As with most large systems, our information technology systems (and the systems of our suppliers) have in the past been, and in the future likely will be, subject to computer viruses, malicious codes, unauthorized access and other cyber attacks, and we expect the sophistication and frequency of such attacks to continue to increase. To date, we are not aware of any significant impact on our operations or financial results from such attempts; however, unauthorized access could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our business, financial condition, or results of operations. Any of the attacks, breaches or other disruptions or damage described above could: interrupt our operations at one or more sites; delay production and shipments; result in the theft of our and our customers’ intellectual property and trade secrets; damage customer and business partner relationships and our reputation; result in legal claims and proceedings, liability and penalties under privacy or other laws, or increased costs for security and remediation; or raise concerns regarding our accounting for transactions. Each of these consequences could adversely affect our business, reputation and our financial statements.
Our business involves the use, storage, and transmission of information about our employees, customers, and suppliers. The protection of such information, as well as our proprietary information, is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us or our employees, customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception, could expose us or our employees, customers, suppliers or other individuals affected to a risk of loss or misuse of this information, which could ultimately result in litigation and potential legal and financial liability. These events could also damage our reputation or otherwise harm our business.
Acts of terrorism and regulations to combat terrorism could negatively affect our business.
Like other companies with major industrial facilities, we may be targets of terrorist activities. Many of our plants and facilities store significant quantities of ammonia and other materials that can be dangerous if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or injury to employees, who could be direct targets or indirect casualties of an act of terrorism, may affect our operations. Any disruption of our ability to produce or distribute our products could result in a significant decrease in revenues and significant additional costs to replace, repair or insure our assets, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Due to concerns related to terrorism or the potential use of certain nitrogen products as explosives, we are subject to various security laws and regulations. In the United States, these security laws include the Maritime Transportation Security Act of 2002 and the Chemical Facilities Anti-Terrorism Standards regulation. In addition, President Obama issued in 2013 Executive Order 13650 Improving Chemical Facility Safety and Security to improve chemical facility safety in coordination with owners and operators. Governmental entities could implement new or impose more stringent regulations affecting the security of our plants, terminals and warehouses or the transportation and use of fertilizers and other nitrogen products. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and reduced profit margins. We manufacture and sell certain nitrogen products that can be used as explosives. It is possible that governmental entities in the United States or elsewhere could impose additional limitations on the use, sale or distribution of nitrogen products, thereby limiting our ability to manufacture or sell those products, or that illicit use of our products could result in liability for us.
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We are subject to risks associated with international operations.
Our international business operations are subject to numerous risks and uncertainties, including difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations; unexpected changes in regulatory environments; currency fluctuations; tax rates that may exceed those in the United States; earnings that may be subject to withholding requirements; and the imposition of tariffs, exchange controls or other restrictions.
Changes in governmental trade policies can lead to the imposition of new taxes, levies, duties, tariffs or quotas affecting agricultural commodities, fertilizer or industrial products. These can alter costs, trade flows, access to supplies or demand, and regional balances for our products.
Our principal reporting currency is the U.S. dollar and our business operations and investments outside the United States increase our risk related to fluctuations in foreign currency exchange rates. The main currencies to which we are exposed, besides the U.S. dollar, are the Canadian dollar, the British pound and the euro. These exposures may change over time as business practices evolve and economic conditions change. We may selectively reduce some foreign currency exchange rate risk by, among other things, requiring contracted purchases of our products to be settled in, or indexed to, the U.S. dollar or a currency freely convertible into U.S. dollars, or hedging through foreign currency derivatives. These efforts, however, may not be effective and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to anti-corruption laws and regulations and economic sanctions programs in various jurisdictions, including the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act of 2010, the Canadian Corruption of Foreign Public Officials Act, and economic sanctions programs administered by the United Nations, the European Union and the Office of Foreign Assets Control of the U.S. Department of the Treasury, and regulations set forth under the Comprehensive Iran Accountability Divestment Act. As a result of doing business internationally, we are exposed to a risk of violating anti-corruption laws and sanctions regulations applicable in those countries where we, our partners or agents operate. Violations of anti-corruption and sanctions laws and regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. The violation of applicable laws by our employees, consultants, agents or partners could subject us to penalties and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to antitrust and competition laws in various countries throughout the world. We cannot predict how these laws or their interpretation, administration and enforcement will change over time. Changes in antitrust laws globally, or in their interpretation, administration or enforcement, may limit our existing or future operations and growth.
Financial Risks
Our operations and the production and handling of our products involve significant risks and hazards. We are not fully insured against all potential hazards and risks incident to our business. Therefore, our insurance coverage may not adequately cover our losses.
Our operations are subject to hazards inherent in the manufacture, transportation, storage and distribution of chemical products, including ammonia, which is highly toxic and can be corrosive, and ammonium nitrate, which is explosive. These hazards include: explosions; fires; severe weather and natural disasters; train derailments, collisions, vessel groundings and other transportation and maritime incidents; leaks and ruptures involving storage tanks, pipelines and rail cars; spills, discharges and releases of toxic or hazardous substances or gases; deliberate sabotage and terrorist incidents; mechanical failures; unscheduled plant downtime; labor difficulties and other risks. Some of these hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations for an extended period of time and/or the imposition of civil or criminal penalties and liabilities.
In April 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits alleging various theories of negligence, strict liability, and breach of warranty under Texas law. Although we did not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident. Nearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining subrogation and statutory indemnification claims total approximately
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$37 million, before prejudgment interest. The increased focus on the risks associated with fertilizers as a result of the incident could impact the regulatory environment and requirements applicable to fertilizer manufacturing and storage facilities.
We maintain property, business interruption, casualty and liability insurance policies, but we are not fully insured against all potential hazards and risks incident to our business. If we were to incur significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are subject to various self-insured retentions, deductibles and limits under these insurance policies. The policies also contain exclusions and conditions that could have a material adverse impact on our ability to receive indemnification thereunder. Our policies are generally renewed annually. As a result of market conditions, our premiums, self-insured retentions and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. In addition, significantly increased costs could lead us to decide to reduce, or possibly eliminate, coverage. There can be no assurance that we will be able to buy and maintain insurance with adequate limits and reasonable pricing terms and conditions.
Our substantial indebtedness could adversely affect our cash flow, prevent us from fulfilling our obligations and impair our ability to pursue or achieve other business objectives.
As of December 31, 2021, we had approximately $3.5 billion of total funded indebtedness, consisting primarily of unsecured senior notes with varying maturity dates between 2023 and 2044, or approximately 36% of our total capitalization (total debt plus total stockholders’ equity), and an additional $750 million of unsecured senior borrowing availability (reflecting no outstanding borrowings and no outstanding letters of credit) for general corporate purposes under our revolving credit agreement (the Revolving Credit Agreement). Our substantial debt service obligations will have an impact on our earnings and cash flow for so long as the indebtedness is outstanding.
Our indebtedness could, as a result of our debt service obligations or through the operation of the financial and other restrictive covenants to which we are subject under the agreements and instruments governing that indebtedness and otherwise, have important consequences. For example, it could:
•make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because any related decrease in revenues could cause us not to have sufficient cash flows from operations to make our scheduled debt payments;
•cause us to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
•cause us to use a portion of our cash flow from operations for debt service, reducing the availability of cash to fund working capital and capital expenditures, and other business activities;
•cause us to be more vulnerable to general adverse economic and industry conditions;
•expose us to the risk of increased interest rates because certain of our borrowings, including borrowings under the Revolving Credit Agreement, could be at variable rates of interest;
•make us more leveraged than some of our competitors, which could place us at a competitive disadvantage;
•restrict our ability to pay dividends on our common stock or utilize excess cash to repurchase shares of our common stock;
•limit our ability to borrow additional amounts to fund working capital, capital expenditures and other general corporate purposes; and
•result in our credit ratings being downgraded, which could increase the cost of further borrowings.
We expect to consider options to refinance our outstanding indebtedness from time to time. Our ability to obtain any financing, whether through the issuance of new debt securities or otherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors, including factors beyond our control. Consequently, in the event that we need to access the credit markets, including to refinance our debt, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable timeframe, if at all. An inability to obtain financing with acceptable terms when needed could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The terms of our existing indebtedness allow us to incur significant additional debt. If we incur additional indebtedness, the risks that we face as a result of our leverage could intensify. If our financial condition or operating results deteriorate, our relations with our creditors, including the holders of our outstanding debt securities, the lenders under the Revolving Credit Agreement and our suppliers, may be materially and adversely affected.
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A failure to satisfy the financial maintenance covenants under the Revolving Credit Agreement or a breach of the covenants under any of the agreements governing our indebtedness could limit the borrowing availability under the Revolving Credit Agreement or result in an event of default under such agreements.
Our ability to comply with the covenants in the agreements and instruments governing our indebtedness, including the consolidated interest coverage ratio and consolidated net leverage ratio maintenance covenants contained in the Revolving Credit Agreement, will depend upon our future performance and various other factors, such as market prices for our nitrogen products, natural gas prices and other business, competitive and regulatory factors, many of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we may not be able to access the borrowing availability under the Revolving Credit Agreement and we would need to seek an amendment to our debt agreements or would need to refinance our indebtedness. There can be no assurance that we can obtain future amendments or waivers of our debt agreements and instruments, or refinance our debt, and, even if we were able to do so, such relief might only last for a limited period, potentially necessitating additional amendments, waivers or refinancings. Any noncompliance by us with the covenants under our debt agreements and instruments could result in an event of default under those debt agreements and instruments. An event of default under an agreement or instrument governing any of our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. If our lenders or holders of our debt securities accelerate the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of our indebtedness, which could materially and adversely impair our business operations. An event of default under the Revolving Credit Agreement would permit the lenders thereunder to terminate all commitments to extend further credit under the Revolving Credit Agreement. In the event our creditors accelerate the repayment of our indebtedness, we cannot assure that we would have sufficient assets to make such repayment.
Potential future downgrades of our credit ratings could adversely affect our access to capital, cause vendors to change their credit terms for doing business with us, and could otherwise have a material adverse effect on us.
As of February 14, 2022, our corporate credit rating by S&P Global Ratings is BBB- with a stable outlook; our corporate credit rating by Moody’s Investor Services, Inc. is Ba1 with a positive outlook; and our corporate credit rating with Fitch Ratings, Inc. is BBB- with a stable outlook. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, as well as the payment terms that vendors are willing to provide us. Negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt, and could cause vendors to shorten our payment terms, require us to pay in advance for materials or services, or provide letters of credit, security, or other credit enhancements in order to do business with us.
Tax matters, including changes in tax laws or rates, adverse determinations by taxing authorities and imposition of new taxes could adversely affect our results of operations and financial condition.
We are subject to taxes in (i) the United States, where most of our operations are located, and (ii) several foreign jurisdictions where our subsidiaries are organized or conduct business. Tax laws or rates in the various jurisdictions in which we operate may be subject to significant change. Our future effective tax rate could also be affected by changes in our mix of earnings from jurisdictions with differing statutory tax rates and tax systems, changes in valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation.
We are also subject to regular reviews, examinations and audits by the Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where we conduct business. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liabilities, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our financial condition, results of operations and cash flows.
We have used the cash we generate outside the United States primarily to fund development of our business in non-U.S. jurisdictions. If the funds generated by our U.S. business are not sufficient to meet our need for cash in the United States, we may need to repatriate a portion of our future international earnings to the United States. Under the tax laws of the foreign countries in which we operate, those international earnings could be subject to withholding taxes when repatriated; therefore, the repatriation of those earnings could result in an increase in our worldwide effective tax rate and an increase in our use of cash to pay these taxes.
We also need to comply with other new, evolving or revised tax laws and regulations. The enactment of, or increases in, carbon taxes, tariffs or value added taxes, or other changes in the application of existing taxes, in markets in which we are currently active, or may be active in the future, or on specific products that we sell or with which our products compete, could have an adverse effect on our financial condition and results of operations.
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The United States and other countries in which we operate are in the process of implementing the Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting Project (BEPS), which is intended to improve tax disclosure and transparency and eliminate structures and activities that could be perceived by a particular country as resulting in tax avoidance. The OECD has partially developed and continues with development of a framework to assist member countries in adopting BEPS related legislation. Each country is permitted to introduce its own legislation to implement BEPS legislation. As a number of our business operations do business across country lines, we are subject to BEPS. The implementation of BEPS could result in tax changes and may adversely affect our provision for income taxes, results of operations and cash flows. In some cases, BEPS legislation could result in double taxation on a portion of our profits without an appropriate mechanism to recover the incremental tax amount in another jurisdiction.
Our business is subject to risks involving derivatives and the risk that our hedging activities might not prevent losses.
We may utilize natural gas derivatives to hedge our financial exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen-based products. We have used natural gas futures, swaps and option contracts traded in over-the-counter markets or on exchanges. We have also used fixed-price, physical purchase and sales contracts to hedge our exposure to natural gas price volatility. In order to manage our exposure to changes in foreign currency exchange rates, we may from time to time use foreign currency derivatives (primarily forward exchange contracts).
Our use of derivatives 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 that do not qualify for, or to which we do not apply, hedge accounting. To the extent that our derivative positions lose value, we may be required to post collateral with our counterparties, adversely affecting our liquidity.
Hedging arrangements are imperfect and unhedged risks will always exist. In addition, our hedging activities may themselves give rise to various risks that could adversely affect us. For example, we are exposed to counterparty credit risk when our derivatives are in a net asset position. The counterparties to our derivatives are multi-national commercial banks, major financial institutions or large energy companies.
Our liquidity could be negatively impacted by a counterparty default on settlement of one or more of our derivative financial instruments or by the triggering of any cross default provisions or credit support requirements against us. Additionally, the International Swaps and Derivative Association master netting arrangements for most of our derivative instruments contain credit-risk-related contingent features, such as cross default provisions and credit support requirements. In the event of certain defaults or a credit ratings downgrade, our counterparty may request early termination and net settlement of certain derivative trades or may require us to collateralize derivatives in a net liability position.
At other times we may not utilize derivatives or derivative strategies to hedge certain risks or to reduce the financial exposure of price volatility. As a result, we may not prevent certain material adverse impacts that could have been mitigated through the use of derivative strategies.
Environmental and Regulatory Risks
We are subject to numerous environmental, health and safety laws, regulations and permitting requirements, as well as potential environmental liabilities, which may require us to make substantial expenditures.
We are subject to numerous environmental, health and safety laws and regulations in the United States, Canada, the United Kingdom, the European Union, the Republic of Trinidad and Tobago and other locations, including laws and regulations relating to the generation and handling of hazardous substances and wastes; the introduction of new chemicals or substances into a market; the cleanup of hazardous substance releases; the discharge of regulated substances to air or water; and the demolition and cleanup of existing plant sites upon permanent closure. In the United States, these laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act and various other federal, state, provincial, local and international laws. In November 2021, the Infrastructure Investment and Jobs Act reinstated and doubled the Superfund tax on chemicals, including ammonia and nitric acid. These taxes will be in place from July 1, 2022 through December 31, 2031 and apply to all domestic and imported products not used as fertilizer.
As a producer of nitrogen fertilizer products working with hazardous substances, our business faces risks of spills, discharges or other releases of those substances into the environment. Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are incurring currently, and are likely to incur periodically in the future, liabilities under CERCLA and other environmental cleanup laws at our current facilities or facilities previously owned by us or other acquired businesses, adjacent or nearby third-party facilities or offsite disposal
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locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Violations of environmental, health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental, health and safety laws change regularly and have tended to become more stringent over time. As a result, we have not always been and may not always be in compliance with all environmental, health and safety laws and regulations. We may be subject to more stringent enforcement of existing or new environmental, health and safety laws in the future. Additionally, future environmental, health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
From time to time, our production, distribution or storage of anhydrous ammonia and other hazardous or regulated substances has resulted in accidental releases that have temporarily disrupted our operations and/or resulted in liability for administrative penalties and/or claims for personal injury. To date, our costs to resolve these liabilities have not been material. However, we could incur significant costs if our liability coverage is not sufficient to pay for all or a large part of any judgments against us, or if our insurance carrier refuses coverage for these losses.
We hold numerous environmental and other governmental permits and approvals authorizing operations at each of our facilities. Expansion or modification of our operations is predicated upon securing necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed regulatory material permit or approval, or to revoke or substantially modify an existing permit or approval, or a determination that we have violated a law or permit as a result of a governmental inspection of our facilities could have a material adverse effect on our ability to continue operations at our facilities and on our business, financial condition, results of operations and cash flows.
Future regulatory or legislative restrictions on greenhouse gas (GHG) emissions in the jurisdictions in which we operate could materially adversely affect our business, financial condition, results of operations and cash flows.
Our production facilities emit GHGs, such as carbon dioxide and nitrous oxide, and natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Because conventional ammonia production generates CO2 as an unavoidable chemical byproduct, ammonia production globally is considered an emissions- and energy-intensive industry. We are subject to GHG regulations in the United Kingdom, Canada and the United States. In the United States, our existing facilities, which are considered large emitters of GHGs, currently are only subject to GHG emissions reporting obligations. New facilities that we build, or existing facilities that we modify in the future, could also be subject to GHG emissions standards included in their air permits.
Beginning on January 1, 2021, our U.K. manufacturing plants became subject to the UK Emissions Trading Scheme (UK ETS), which generally requires us to hold or obtain emissions allowances to offset GHG emissions from those aspects of our operations that are subject to regulation under this program. Given the recent development of the UK ETS, there is substantial uncertainty as to the liquidity in the market for, and the stability of the price of, emission allowances that will be necessary for compliance with the regulations. Our manufacturing plants in the Alberta and Ontario provinces of Canada are subject to provincial or federal laws that impose a price on excess GHG emissions. Each of these laws establishes carbon dioxide equivalent (CO2e) emissions standards applicable to our facilities in terms of emissions per unit of production, with the provincial laws and the federal law using different formulas for establishing these intensity limits and changes in these limits over time. If CO2e emissions exceed the applicable limits, the excess emissions must be offset, either through obtaining qualifying emission credits or offsets or by making a payment for each ton of excess emissions.
Increasing concern over the impacts of climate change is driving countries to establish ever more ambitious GHG reduction targets. Approximately 200 countries, including the United States, Canada, the United Kingdom and the members of the European Union (EU), have joined the Paris Agreement, an international agreement intended to provide a framework pursuant to which the parties to the agreement will attempt to hold the increase in global average temperatures to below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5ºC above pre-industrial levels. Each signatory is required to develop its own national plan to attain this objective. In December 2020, the United Kingdom announced a target to reduce GHG emissions 68% from 1990 levels by 2030. Canada has increased its emissions reduction target under the Paris Agreement to 40-45% (up from 30%) below 2005 levels by 2030. In April 2021, the United States increased its goal to reduce emissions to 50-52% below 2005 levels by 2030. The Biden administration has also issued several executive orders focused on climate change to promote more active management of these issues across the executive branch, including by the EPA and the Departments of Agriculture, Interior, Transportation and Treasury.
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In July 2021, the EU proposed a new carbon border adjustment mechanism that would require importers of certain products, including nitrogen fertilizers, to pay an import tax approximately equal to the costs incurred by EU producers of the products starting in 2026. Other governments are also considering border adjustment mechanisms for carbon intensive products. The imposition of any carbon border adjustment taxes may distort investment and trade flows, which could adversely impact our business.
More stringent GHG regulations, if they are enacted, are likely to have a significant impact on us, because our production facilities emit GHGs such as carbon dioxide and nitrous oxide and because natural gas, a fossil fuel, is a primary raw material used in our nitrogen production process. Regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our business, financial condition, results of operations and cash flows. Changes could also be made to tax policies related to decarbonization and clean energy that could impact our business and investment decisions. In addition, to the extent that GHG restrictions are not imposed in countries where our competitors operate or are less stringent than regulations that may be imposed in the United States, Canada or the United Kingdom, our competitors may have cost or other competitive advantages over us.
Strategic Risks
The market for green and blue (low-carbon) ammonia may be slow to develop, may not develop to the size expected or may not develop at all. Moreover, we may not be successful in the development and implementation of our green and blue ammonia projects in a timely or economic manner, or at all, due to a number of factors, many of which are beyond our control.
The market for green and blue (low-carbon) ammonia is developing and evolving, may not develop to the size or at the rate we expect, and is dependent in part on the developing market for green and blue (low-carbon) hydrogen, for which ammonia can serve as a transport and storage mechanism. These markets are heavily influenced by demand for clean energy, technology evolution and federal, state and local government laws, regulations and policies concerning carbon emissions, clean energy, and corporate accountability in the United States and abroad.
We believe the demand for green and blue ammonia could take several years to materialize and then ten or more years to fully develop and mature, and we cannot be certain that this market or the market for green and blue hydrogen will grow to the size or at the rate we expect. Hydrogen currently accounts for less than 1% of the world’s energy needs.
The recognition and acceptance of green and blue ammonia as a transport and storage mechanism for green and blue hydrogen, the use of green and blue ammonia as a fuel in its own right, the use of green and blue ammonia as a fertilizer, and the development and growth of end market demand and applications for green and blue hydrogen and green and blue ammonia are uncertain and dependent on a number of factors outside of our control. These factors include, among others, the extent to which and rate at which cost competitive global renewable energy capacity increases, the pricing of traditional and alternative sources of energy, the realization of technological improvements required to increase the efficiency and lower the costs of production of green and blue ammonia, the regulatory environment, the rate and extent of infrastructure investment and development, which may be affected by the relevant parties’ ability to obtain permits for these investments, the availability of tax benefits and other incentives and our ability to provide green and blue ammonia offerings cost-effectively. In addition, further development of alternative decarbonization technologies may result in viable alternatives to the use of blue ammonia for many potential decarbonization applications, resulting in lower than expected market demand growth relative to our current expectations. If a sustainable market for green or blue ammonia or hydrogen fails to develop, develops more slowly than we anticipate, or develops in a way that is not viable to serve with our assets and capabilities, we may decide not to implement, or may not be successful in implementing, one or more elements of our multi-year strategic plan.
Our clean energy strategy also depends on the realization of certain technical improvements required to increase the efficiency and lower the costs of production of green and blue ammonia. Over time, as we seek to convert additional existing facilities to green and blue production and further expand our green and blue ammonia production capacity, we may face operational difficulties and execution risks related to the design, development and construction. If our assumptions about the engineering and processing characteristics necessary to successfully build the facility capacity that we are contemplating and to scale up to larger production quantities prove to be incorrect, we may be unable to produce substantial quantities of green or blue ammonia, and the cost to construct or convert such green and blue ammonia facilities, or the production costs associated with the operation of such facilities, may be higher than we project. The production of blue ammonia depends to a large extent upon development by third parties of carbon capture and storage wells, which are not well-established technologies and are subject to a permitting process and operational risks, which may result in delays, impact viability in some or all situations, or create long-term liabilities.
CF INDUSTRIES HOLDINGS, INC.
We may not be successful in the expansion of our business.
We routinely consider possible expansions of our business, both within the United States and elsewhere. Major investments in our business, including acquisitions, partnerships, joint ventures, business combination transactions or other major investments, such as our green and blue ammonia projects, require significant managerial resources, the diversion of which from our other activities or opportunities may negatively affect the existing operations of our business. We may be unable to identify or successfully compete for certain acquisition targets, which may hinder or prevent us from acquiring a target or completing other transactions. The risks of any expansion of our business through investments, acquisitions, partnerships, joint ventures or business combination transactions may increase due to the significant capital and other resources that we may have to commit to any such expansion, which may not be recoverable if the expansion initiative to which they were devoted is ultimately not implemented. In addition, these efforts may require capital resources that could otherwise be used for the improvement and expansion of our existing business. As a result of these and other factors, including general economic risk, we may not be able to realize our projected returns from any future acquisitions, partnerships, joint ventures, business combination transactions or other major investments. Among the risks associated with the pursuit and consummation of acquisitions, partnerships, joint ventures or other major investments or business combinations are those involving:
•difficulties in integrating the parties’ operations, systems, technologies, products, cultures, and personnel;
•incurrence of significant transaction-related expenses;
•potential integration or restructuring costs;
•potential impairment charges related to the goodwill, intangible assets or other assets to which any such transaction relates, in the event that the economic benefits of such transaction prove to be less than anticipated;
•other unanticipated costs associated with such transactions;
•our ability to achieve operating and financial efficiencies, synergies and cost savings;
•our ability to obtain the desired financial or strategic benefits from any such transaction;
•the parties’ ability to retain key business relationships, including relationships with employees, customers, partners and suppliers;
•potential loss of key personnel;
•entry into markets or involvement with products with which we have limited current or prior experience or in which competitors may have stronger positions;
•assumption of contingent liabilities, including litigation;
•exposure to unanticipated liabilities, including litigation;
•differences in the parties’ internal control environments, which may require significant time and resources to resolve in conformity with applicable legal and accounting standards;
•increased scope, geographic diversity and complexity of our operations;
•the tax effects of any such transaction; and
•the potential for costly and time-consuming litigation, including stockholder lawsuits.
Moreover, legal proceedings or other risks from acquisitions and other business combinations may arise years after a transaction has been completed and may involve matters unrelated to the business acquired. For example, we were recently named along with other parties in certain product liability actions relating to a product containing the herbicide paraquat, which was allegedly sold, manufactured, distributed and/or marketed by Terra Industries Inc. (Terra) before it exited such lines of business, which exit occurred more than ten years before CF Holdings acquired Terra in April 2010.
In addition, major capital projects may be dependent on the availability and performance of engineering firms, construction firms, equipment and material suppliers, transportation providers and other vendors necessary to design and implement those projects on a timely basis and on acceptable terms. Major investments such as capital improvements at our facilities are subject to a number of risks, any of which could prevent us from completing capital projects in a timely or economic manner or at all, including, without limitation, cost overruns, non-performance of third parties, the inability to obtain necessary permits or other permitting matters, adverse weather, defects in materials and workmanship, labor and raw material shortages, transportation constraints, engineering and construction change orders, errors in design, construction or start-up, and other unforeseen difficulties.
International acquisitions, partnerships, joint ventures, investments or business combinations and other international expansions of our business involve additional risks and uncertainties, including, but not limited to:
•the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries;
•challenges caused by distance and by language and cultural differences;
•difficulties and costs of complying with a wide variety of complex laws, treaties and regulations;
•unexpected changes in regulatory environments;
CF INDUSTRIES HOLDINGS, INC.
•political and economic instability, including the possibility for civil unrest;
•nationalization of properties by foreign governments;
•tax rates that may exceed those in the United States, and earnings that may be subject to withholding requirements;
•the imposition of tariffs, exchange controls or other restrictions; and
•the impact of currency exchange rate fluctuations.
If we finance acquisitions, partnerships, joint ventures, business combination transactions or other major investments by issuing equity or convertible or other debt securities or loans, our existing stockholders may be diluted or we could face constraints under the terms of, and as a result of the repayment and debt-service obligations under, the additional indebtedness. A business combination transaction between us and another company could result in our stockholders receiving cash or shares of another entity on terms that such stockholders may not consider desirable. Moreover, the regulatory approvals associated with a business combination may result in divestitures or other changes to our business, the effects of which are difficult to predict.
We are subject to risk associated with our strategic venture with CHS Inc. (CHS).
We may not realize the full benefits from our strategic venture with CHS that are expected. The realization of the expected benefits of the CHS strategic venture depends on our ability to operate and manage the strategic venture successfully, and on the market prices of the nitrogen fertilizer products that are the subject of our supply agreement with CHS over the life of the agreement, among other factors. Additionally, any challenges related to the CHS strategic venture could harm our relationships with CHS or our other customers.
COVID-19 Pandemic Risk
Our business and operations may be adversely affected by the COVID-19 pandemic.
The coronavirus disease 2019 (COVID-19) pandemic could have a material and adverse effect on our business, financial condition, results of operations or cash flows. The rapid spread of COVID-19 has resulted in governmental authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions, we may be unable to meet customer demand or perform fully under our contracts. The COVID-19 pandemic could also affect our customers, suppliers and third party service providers, including transportation providers, and result in restrictions on or disruptions of transportation, port closures or increased border controls or closures, or other impacts on domestic and global supply chains or distribution channels, which could increase our costs and/or limit our ability to meet customer demand.
In addition, the COVID-19 pandemic could reduce, and has in the past reduced, the demand for energy, including crude oil, as well as natural gas and coal, which are nitrogen feedstocks. Reduced demand for nitrogen feedstocks could reduce the cost of nitrogen production outside of North America, which could increase global nitrogen supply and reduce the market prices of our products. Lower demand for crude oil could also reduce the supply and therefore increase the cost of natural gas, which is the principal raw material used in our production of nitrogen products. The pandemic has also disrupted traditional food supply chains, which may have a material impact on livestock and food demand, including the demand for corn. Each of these consequences could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are unable to predict the ultimate impact the COVID-19 pandemic may have on our business, financial condition, results of operations or cash flows. The extent to which our operations may be impacted by COVID-19 will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the further spread of the virus, the rise of new variants of COVID-19, the duration of the pandemic and the type and duration of actions that may be taken by various governmental authorities in response to these developments. In 2020, the pandemic significantly increased global market uncertainty and caused an economic slowdown, which resulted in a global recession. Persistent weakness in economic activity caused by a deterioration of global market and economic conditions could materially adversely affect our business, financial condition, results of operations or cash flows.
CF INDUSTRIES HOLDINGS, INC.
FORWARD LOOKING STATEMENTS
From time to time, in this Annual Report on Form 10-K as well as in other written reports and oral statements, we make forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our prospects, future developments and business strategies. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” or “would” and similar terms and phrases, including references to assumptions, to identify forward-looking statements in this document. These forward-looking statements are made based on currently available competitive, financial and economic data, our current expectations, estimates, forecasts and projections about the industries and markets in which we operate and management’s beliefs and assumptions concerning future events affecting us. These statements are not guarantees of future performance and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, our actual results may differ materially from what is expressed in or implied by any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this document. Additionally, we do not undertake any responsibility to provide updates regarding the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this document.
Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Such factors include, among others:
•the cyclical nature of our business and the impact of global supply and demand on our selling prices;
•the global commodity nature of our nitrogen products, the conditions in the international market for nitrogen products, and the intense global competition from other producers;
•conditions in the United States, Europe and other agricultural areas, including the influence of governmental policies and technological developments on the demand for agricultural products;
•the volatility of natural gas prices in North America and the United Kingdom;
•weather conditions and the impact of severe adverse weather events;
•the seasonality of the fertilizer business;
•the impact of changing market conditions on our forward sales programs;
•difficulties in securing the supply and delivery of raw materials, increases in their costs or delays or interruptions in their delivery;
•reliance on third party providers of transportation services and equipment;
•our reliance on a limited number of key facilities;
•risks associated with cyber security;
•acts of terrorism and regulations to combat terrorism;
•risks associated with international operations;
•the significant risks and hazards involved in producing and handling our products against which we may not be fully insured;
•our ability to manage our indebtedness and any additional indebtedness that may be incurred;
•our ability to maintain compliance with covenants under our revolving credit agreement and the agreements governing our indebtedness;
•downgrades of our credit ratings;
•risks associated with changes in tax laws and disagreements with taxing authorities;
•risks involving derivatives and the effectiveness of our risk measurement and hedging activities;
•potential liabilities and expenditures related to environmental, health and safety laws and regulations and permitting requirements;
•regulatory restrictions and requirements related to greenhouse gas emissions;
•the development and growth of the market for green and blue (low-carbon) ammonia and the risks and uncertainties relating to the development and implementation of our green and blue ammonia projects;
•risks associated with expansions of our business, including unanticipated adverse consequences and the significant resources that could be required;
•risks associated with the operation or management of the CHS strategic venture, risks and uncertainties relating to the market prices of the fertilizer products that are the subject of our supply agreement with CHS over the life of the supply agreement, and the risk that any challenges related to the CHS strategic venture will harm our other business relationships; and
•the impact of the novel coronavirus disease 2019 (COVID-19) pandemic on our business and operations.
CF INDUSTRIES HOLDINGS, INC.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Information regarding our facilities and properties is included in Item 1. Business—Nitrogen Manufacturing Facilities and Item 1. Business—Storage Facilities and Other Properties.
ITEM 3. LEGAL PROCEEDINGS.
Litigation
West Fertilizer Co.
On April 17, 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we did not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident.
The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Nearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining subrogation and statutory indemnification claims total approximately $37 million, before prejudgment interest, and are in various stages of discovery and pre-trial proceedings. The remaining claims are expected to be set for trial in 2022. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the remaining lawsuits. The Company cannot provide a range of reasonably possible loss due to the uncertain nature of this litigation, including uncertainties around the potential allocation of responsibility by a jury to other defendants or responsible third parties. The recognition of a potential loss in the future in the West Fertilizer Co. litigation could negatively affect our results in the period of recognition. However, based upon currently available information, we expect any potential loss to be fully indemnified by insurance and do not believe that this litigation will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental
For information on pending proceedings relating to environmental remediation matters, see Item 1. Business—Environmental, Health and Safety—CERCLA/Remediation Matters and Note 21—Contingencies to our consolidated financial statements included in Item 8 of this report.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
CF INDUSTRIES HOLDINGS, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the New York Stock Exchange under the symbol “CF.” As of February 14, 2022, there were 677 stockholders of record.
The following table sets forth share repurchases, on a trade date basis, for each of the three months of the quarter ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
| Period | Total number of shares (or units) purchased | | Average
price paid
per share
(or unit)(1) | | Total number of
shares (or units)
purchased as part of
publicly announced
plans or programs(2) | | Maximum number (or
approximate dollar
value) of shares (or
units) that may yet be
purchased under the
plans or programs
(in thousands)(2) |
| October 1, 2021 - October 31, 2021 | 7,717 | | (3) | $ | 60.56 | | | — | | | $ | 513,429 | |
| November 1, 2021 - November 30, 2021 | 656,695 | | (4) | 64.32 | | | 652,352 | | | 471,441 | |
| December 1, 2021 - December 31, 2021 | 6,816,628 | | (5) | 65.85 | | | 6,816,416 | | | 22,577 | |
| Total | 7,481,040 | | | $ | 65.71 | | | 7,468,768 | | | |
(1)Average price paid per share of CF Industries Holdings, Inc. (CF Holdings) common stock repurchased under the 2019 Stock Repurchase Program, as defined below, is the execution price, excluding commissions paid to brokers.
(2)On February 13, 2019, we announced that our Board of Directors authorized the repurchase of up to $1 billion of CF Holdings common stock through December 31, 2021 (the 2019 Share Repurchase Program). On November 3, 2021, we announced that our Board of Directors authorized the repurchase of up to $1.5 billion of CF Holdings common stock from January 1, 2022 through December 31, 2024 (the 2021 Share Repurchase Program). These share repurchase programs are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Share Repurchase Programs and in Note 19—Stockholders’ Equity, in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.
(3)Represents shares withheld to pay employee tax obligations upon the lapse of restrictions on restricted stock units and upon the exercise of nonqualified stock options, and shares withheld to cover the price of shares issued upon the exercise of nonqualified stock options.
(4)Includes 4,343 shares withheld to pay employee tax obligations upon the lapse of restrictions on restricted stock units and performance restricted stock units.
(5)Includes 212 shares withheld to pay employee tax obligations upon the lapse of restrictions on restricted stock units.
ITEM 6. [RESERVED]
CF INDUSTRIES HOLDINGS, INC.
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 and references to tonnes refer to metric 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, 2020 compared to December 31, 2019, you should read Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 24, 2021. The following is an outline of the discussion and analysis included herein:
•Overview of CF Holdings
•Our Company
•Our Commitment to a Clean Energy Economy
•Industry Factors
•Market Conditions and Current Developments
•Financial Executive Summary
•Items Affecting Comparability of Results
•Consolidated Results of Operations
•Operating Results by Business Segment
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Recent Accounting Pronouncements
Overview of CF Holdings
Our Company
Our mission is to provide clean energy to feed and fuel the world sustainably. With our employees focused on safe and reliable operations, environmental stewardship, and disciplined capital and corporate management, we are on a path to decarbonize our ammonia production network – the world’s largest – to enable green and blue hydrogen and nitrogen products for energy, fertilizer, emissions abatement, and other industrial activities. Our nine manufacturing complexes in the United States, Canada and the United Kingdom, an extensive storage, transportation and distribution network in North America, and logistics capabilities enabling a global reach underpin our strategy to leverage our unique capabilities to accelerate the world’s transition to clean energy. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our core product is anhydrous ammonia (ammonia), which contains 82% nitrogen and 18% hydrogen. Our nitrogen products that are upgraded from ammonia are granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium.
Our principal assets as of December 31, 2021 include:
•five U.S. nitrogen manufacturing facilities, located in Donaldsonville, Louisiana (the largest nitrogen complex in the world); Port Neal, Iowa; Yazoo City, Mississippi; Verdigris, Oklahoma; and Woodward, Oklahoma. These facilities are wholly owned directly or indirectly by CF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder. See Note 18—Noncontrolling Interest for additional information on our strategic venture with CHS;
•two Canadian nitrogen manufacturing facilities, located in Medicine Hat, Alberta (the largest nitrogen complex in Canada) and Courtright, Ontario;
•two United Kingdom nitrogen manufacturing facilities, located in Billingham and Ince;
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 Commitment to a Clean Energy Economy
We are taking significant steps to support a global hydrogen and clean fuel economy, through the production of green and blue ammonia. Since ammonia is one of the most efficient ways to transport and store hydrogen and is also a fuel in its own right, we believe that the Company, as the world’s largest producer of ammonia, with an unparalleled manufacturing and distribution network and deep technical expertise, is uniquely positioned to fulfill anticipated demand for hydrogen and ammonia from green and blue sources. Our approach includes green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia production, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects.
In October 2020, we announced an initial green ammonia project at our Donaldsonville complex. In April 2021, we signed an engineering and procurement contract with thyssenkrupp to supply a 20 MW alkaline water electrolysis plant to produce green hydrogen at our Donaldsonville complex. Construction and installation, which is being managed by us, began in the fourth quarter of 2021 and is expected to finish in 2023, with an estimated total cost of approximately $100 million. The cost of the project is expected to fit within our annual capital expenditure budgets. We will integrate the green hydrogen generated by the electrolysis plant into existing ammonia synthesis loops to enable the production of approximately 20,000 tons per year of green ammonia. We believe that, when completed in 2023, the Donaldsonville green ammonia project will be the largest of its kind in North America.
In the third quarter of 2021, we signed a memorandum of understanding with Mitsui & Co., Inc. (Mitsui) that will guide us in a joint exploration of the development of blue ammonia projects in the United States. The preliminary studies we are conducting with Mitsui cover areas such as blue ammonia supply and supply chain infrastructure, CO2 transportation and storage, expected environmental impacts, and blue ammonia economics and marketing opportunities in Japan and in other countries.
We have also announced steps to produce blue ammonia from our ammonia production network. In the fourth quarter of 2021, our Board of Directors authorized projects that we believe will enable the annual production of up to 1.25 million tons of blue ammonia from our existing network starting in 2024. The projects will involve constructing units at our Donaldsonville and Yazoo City complexes that dehydrate and compress CO2, a process essential for CO2 transport via pipeline to sequestration sites. Management expects that, once the units are in service and sequestration is initiated, we could sequester up to 2.5 million tons of CO2 per year (2 million tons at Donaldsonville and 500,000 tons at Yazoo City). Under current regulations, the projects would be expected to qualify for tax credits under Section 45Q of the Internal Revenue Code, which provides a credit per tonne of CO2 sequestered.
Construction of the units at the Donaldsonville complex is expected to begin in 2022 and to be completed in 2024, with an estimated total cost of $200 million. The Yazoo City project will be timed to coincide with CO2 transport pipeline construction. Once started, the project is expected to be completed in three years with an estimated total cost of $85 million. In addition, we are currently in advanced discussions with several parties regarding transportation and sequestration of CO2 from Donaldsonville.
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
CF INDUSTRIES HOLDINGS, INC.
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, agricultural supply and demand, industrial product demand and policies such as emissions abatement and governmental nitrogen product 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 for certain nitrogen products is dependent on imports to balance supply and demand.
CF INDUSTRIES HOLDINGS, INC.
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 and fertilizer prices, fertilizer products used and timing of applications, expected yields and the types of crops planted.
Items Affecting Comparability of ResultsMarket Conditions and Current Developments
Selling Prices and Sales Volume
The U.S. Gulf is aselling prices for all of our 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 pricesproducts were higher in the second half of 2018.
Upon entering the first quarter of 2019, our average selling prices were higher2021 than the first quarter of 2018,2020, driven by the continued impact of a tighter global nitrogen supply and demand balance, experienced throughout late 2018. During the first halfas a result of 2019, our average selling prices for all fertilizer products remained strong due to the limitedglobal demand as well as decreased global supply of fertilizeravailability 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,higher global energy costs drove 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.
rates. The average selling price for our products for 20192021 and 20182020 was $235$353 per ton and $229$203 per ton, respectively. The increase in average selling prices of 3%74% in 20192021 from 2018 increased2020 resulted in an increase in net sales by $62 million.of approximately $2.76 billion.
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 yearOur total sales volume for 2019 was 19.59% lower in 2021 than in 2020 with lower sales volume reported in all segments. We shipped 18.5 million tons 1% higher than the 19.3of product in 2021 compared to 20.3 million tons in 2018.2020 due primarily to lower supply from the impact of both planned and unplanned maintenance activity and the impact of weather-related outages. The lower sales volumes also reflect the idling of certain portions of our U.K. operations in September due to the United Kingdom energy crisis, which is further discussed below. Lower sales volume resulted in a decrease in net sales of approximately $404 million.
CF INDUSTRIES HOLDINGS, INC.
Sales volume for our products in
2019, 20182021, 2020 and
20172019 is shown in the table below.
| | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 |
| | 2019 | | 2018 | | 2017 | | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales |
| | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales | | Sales Volume (tons) | | Net Sales | | (tons in thousands; dollars in millions) |
| | (tons in thousands; dollars in millions) | |
| Ammonia | 3,516 |
| | $ | 1,113 |
| | 3,135 |
| | $ | 1,028 |
| | 4,105 |
| | $ | 1,209 |
| Ammonia | 3,589 | | | $ | 1,787 | | | 3,767 | | | $ | 1,020 | | | 3,516 | | | $ | 1,113 | |
| Granular urea | 4,849 |
| | 1,342 |
| | 4,898 |
| | 1,322 |
| | 4,357 |
| | 971 |
| Granular urea | 4,290 | | | 1,880 | | | 5,148 | | | 1,248 | | | 4,849 | | | 1,342 | |
| UAN | 6,807 |
| | 1,270 |
| | 7,042 |
| | 1,234 |
| | 7,093 |
| | 1,134 |
| UAN | 6,584 | | | 1,788 | | | 6,843 | | | 1,063 | | | 6,807 | | | 1,270 | |
| AN | 2,109 |
| | 506 |
| | 2,002 |
| | 460 |
| | 2,353 |
| | 497 |
| AN | 1,720 | | | 510 | | | 2,216 | | | 455 | | | 2,109 | | | 506 | |
| Other | 2,257 |
| | 359 |
| | 2,252 |
| | 385 |
| | 2,044 |
| | 319 |
| Other | 2,318 | | | 573 | | | 2,322 | | | 338 | | | 2,257 | | | 359 | |
| Total | 19,538 |
| | $ | 4,590 |
| | 19,329 |
| | $ | 4,429 |
| | 19,952 |
| | $ | 4,130 |
| Total | 18,501 | | | $ | 6,538 | | | 20,296 | | | $ | 4,124 | | | 19,538 | | | $ | 4,590 | |
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 our nitrogen fertilizers.products. We use natural gas both as a chemical feedstock and as a fuel to produce nitrogen products. Natural gas is a significant cost component of manufactured nitrogen products, representing approximately 35%40% of our production costs.costs in 2021. The following table presents the average daily market price of natural gas at the Henry Hub, the most heavily-traded natural gas pricing point in North America, and the National Balancing Point, the major trading point for natural gas in the United Kingdom:
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| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2021 v. 2020 | | 2020 v. 2019 |
| Natural gas supplemental data (per MMBtu) | | | | | | | | | | | | | |
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| Average daily market price of natural gas Henry Hub (Louisiana) | $ | 3.82 | | | $ | 1.99 | | | $ | 2.51 | | | $ | 1.83 | | | 92 | % | | $ | (0.52) | | | (21) | % |
| Average daily market price of natural gas National Balancing Point (United Kingdom) | $ | 15.50 | | | $ | 3.20 | | | $ | 4.44 | | | $ | 12.30 | | | 384 | % | | $ | (1.24) | | | (28) | % |
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,North American natural gas prices during 2021 were higher on average than during 2020 due to tight supply and demand conditions within the market. Demand for natural gas was strong throughout 2021 as cold weather early in the year, including the impact of Winter Storm Uri in February, contributed to strength in demand. Warmer weather in the summer of 2021 contributed to higher natural gas usage for electrical generation, and the economy emerging from COVID-19 pandemic conditions added to the strong summer demand. The supply response from natural gas producers during 2021 was insufficient to offset these demand factors, leading to higher prices throughout the year. In addition, liquefied natural gas (LNG) exports increased significantly in 2021 compared to 2020 as favorable pricing differentials between North America have declined overand global natural gas prices led LNG facilities in the last decade, but are subjectUnited States to volatility.run at near maximum levels. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point in North America, was $2.51$3.82 per MMBtu for 20192021 compared to $3.12$1.99 per MMBtu for 2018,2020, an increase of 92%. During 2021, the daily closing price at the Henry Hub reached a decreaselow of 20%.$2.36 per MMBtu on April 7, 2021 and a high of $23.61 per MMBtu on February 18, 2021 as a result of Winter Storm Uri.
In February 2021, the central portion of the United States experienced extreme and unprecedented cold weather due to the impact of Winter Storm Uri. Certain natural gas suppliers and natural gas pipelines declared force majeure events due to natural gas well freeze-offs or frozen equipment. This occurred at the same time as large increases in natural gas demand were occurring due to the cold temperatures. Due to these unprecedented factors, several states declared a state of emergency, and natural gas was redirected for residential use. At certain of our manufacturing locations, we reduced our natural gas consumption, and, as a consequence, our plants at these locations either operated at reduced rates or temporarily suspended operations. We also havenet settled certain natural gas contracts with our suppliers and received prevailing market prices, which were in excess of our cost. As a result, we recognized a gain of $112 million, which is reflected in cost of sales in our consolidated statement of operations for the year ended December 31, 2021.
CF INDUSTRIES HOLDINGS, INC.
Our two nitrogen manufacturing facilities located in the United Kingdom. These facilitiesKingdom are subject to fluctuations associated with the price of natural gas in Europe. The price of natural gas in the United Kingdom increased throughout 2021 and reached unprecedented high levels in the third quarter, and even higher levels in the fourth quarter. The increase in natural gas prices was due to the combination of low storage levels in Europe, reduced supply from Russia, and a tight global supply and demand balance in the LNG market as a result of strong demand in both Europe and Asia to fill storage locations in anticipation of winter. Due to the high price levels for natural gas, we halted certain of our U.K. manufacturing operations in September 2021. See the discussion under “United Kingdom Energy Crisis,” below, for further information.
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$15.50 per MMBtu for 20192021 compared to $8.07$3.20 per MMBtu for 2018,2020, an increase of 384%. During 2021, the daily closing price at NBP reached a decreaselow of 45%.$5.58 per MMBtu on February 23, 2021 and a high of $60.10 per MMBtu on December 22, 2021. The average daily market price of natural gas inat NBP for January 2022 was $25.91 per MMBtu.
In 2021, the United Kingdom has declined as a resulttotal cost 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 costused for production at all of sales, includingour locations, which includes the impact of realized natural gas derivatives was $2.74and excludes the $112 million gain that resulted from the net settlement of certain natural gas contracts with our suppliers, increased 88% to $4.21 from $2.24 per MMBtu in 2019, a 13% decrease from $3.16 per MMBtu2020. This increase in 2018, whichnatural gas costs resulted in an increasea decrease in gross margin of approximately $153$663 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. |
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| | 2019 | | 2018 |
| | Pre-Tax | After-Tax(1) | | Pre-Tax | After-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 extinguishment | 21 |
| 16 |
| | — |
| — |
|
| 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) | 16 |
| 16 |
| | — |
| — |
|
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. |
CF INDUSTRIES HOLDINGS, INC.
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
CF INDUSTRIES HOLDINGS, INC.
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.Kingdom Energy Crisis
During the third quarter of 2019,2021, the Trinidadian government offeredUnited Kingdom began experiencing an energy crisis that included a tax amnesty periodsubstantial increase in the price of natural gas. In the first half of 2021, natural gas prices had increased to levels that provided taxpayers the opportunitywere considered high compared to pay any prior year tax obligationshistorical prices, 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 millionprices then more than doubled in the third quarter of 2019. Our 50% share2021.
On September 15, 2021, we announced the halt of PLNL’s tax chargeoperations at both our Ince and Billingham manufacturing facilities in the United Kingdom due to negative profitability driven by the high cost of natural gas. The halt of operations at our U.K. plants impacted the availability of certain products in the United Kingdom, including carbon dioxide, which is $16 million, which reduced our equitya byproduct of ammonia production. Due to the critical nature of carbon dioxide to certain industries in earningsthe United Kingdom, on September 21, 2021, we entered into an interim agreement with the U.K. government. Under the terms of operating affiliates for 2019.
PLNL settlement income
PLNL operates anthe agreement, the U.K. government agreed to cover the costs to restart the ammonia plant at Billingham and to offset losses incurred from production for a 21-day period. As a result, we resumed production of ammonia at the Billingham facility in order to produce carbon dioxide for the United Kingdom. While the interim agreement was in place, we entered into new carbon dioxide pricing and offtake agreements with our customers, which had an initial term through January 31, 2022. The amount of financial support provided by the U.K. government under the terms of the interim agreement was not material. As of the filing of this report, production continues at our Billingham facility and continues to be idled at our Ince facility.
During the third quarter of 2021, the U.K. energy crisis necessitated an evaluation of the long-lived assets, including the definite-lived intangible assets, and goodwill of our U.K. operations to determine if their fair value had declined to below their carrying value. We concluded that relies on natural gas supplied, under a Gas Sales Contract (the NGC Contract), bydecline in fair value had occurred, and we recorded long-lived asset and goodwill impairment charges of $495 million. The National Gas Companycontinued impacts of Trinidad and Tobago Limited (NGC). PLNL experienced past curtailmentsthe U.K. energy crisis in the supplyfourth quarter of 2021 triggered an additional impairment test, and we recognized an additional goodwill impairment charge of $26 million. We recognized total impairment charges of $521 million in 2021, consisting of long-lived and intangible asset impairment charges of $236 million and goodwill impairment charges of $285 million. See “Items Affecting Comparability of Results—U.K. energy crisis impacts,” and “Liquidity and Capital Resources—United Kingdom Energy Crisis,” below, Note 6—United Kingdom Energy Crisis and Impairment Charges, Note 7—Property, Plant and Equipment—Net and Note 8—Goodwill and Other Intangible Assets for further information. As of December 31, 2021, after the recognition of the $521 million of impairment charges noted above, we have no remaining goodwill related to our U.K. operations, and the remaining long-lived assets related to our U.K. operations were approximately $425 million, consisting primarily of property, plant and equipment.
The results of our U.K. operations are included in our Ammonia, AN and Other segments, and account for a small portion of our consolidated gross margin. For the year ended December 31, 2021, our U.K. operations generated negative gross margin representing approximately 1% of our consolidated gross margin. For the year ended December 31, 2020, gross margin generated by our U.K. operations accounted for 2% of our consolidated gross margin.
CF INDUSTRIES HOLDINGS, INC.
Manufacturing Costs and Granular Urea Purchases
In 2021, we experienced lower production levels and higher manufacturing and maintenance costs than in 2020. Certain of our plants operated at lower operating rates or temporarily suspended operations during 2021 due to the lack of natural gas due to Winter Storm Uri or the impact of Hurricane Ida, or due to maintenance activity, including activity that was deferred from 2020 as a result of the COVID-19 pandemic. In 2021, we had the highest level of maintenance activity in our history, including turnarounds at seven of our 17 ammonia plants. Because of these factors, including the halt of operations in the United Kingdom, we incurred higher costs for manufacturing, maintenance and repair activity for both scheduled and unscheduled downtime in 2021.
In response to the lower production in 2021 as a result of weather conditions and maintenance activity, we procured additional granular urea in order to meet customer obligations and provide additional manufacturing flexibility. In the year ended December 31, 2021, we purchased approximately $71 million of granular urea, which reduced historical ammoniawe sold to customers for $68 million.
COVID-19 Pandemic
In March 2020, the World Health Organization characterized the outbreak of coronavirus disease 2019 (COVID-19) as a pandemic. Due to the use of fertilizer products in crop production at PLNL. The NGC Contract had an initial expirationto support the global food supply chain, our business operations were designated as part of the critical infrastructure by the United States and as essential businesses in the United Kingdom and Canada, with corresponding designations by those states and provinces in which we operate. As a result, our manufacturing complexes were permitted to continue to operate and, through the date of September 2018this report, we have not suspended or shutdown operations as a result of the pandemic. In addition, we have continued to ship products by all modes of transportation to our customers, 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 damageswe have not experienced any significant delays in marine, rail or truck transportation services due to natural gas supply curtailments. The net after-taxthe pandemic. Through the date of this report, we have not experienced any meaningful impact in customer demand as a result of the settlement reached between NGCpandemic.
In response to the pandemic along with the rise of new variants of COVID-19, we instituted and PLNL that is recognizedhave continued to enforce safety precautions and encourage safe behavior in order to protect the health and well-being of all of our consolidated statementemployees. We will continue to monitor safety guidelines related to COVID-19 as issued by governmental authorities and adjust our safety protocols, as needed.
CF INDUSTRIES HOLDINGS, INC.
Financial Executive Summary
We reported net earnings attributable to common stockholders of $493$917 million in 20192021 compared to $290$317 million in 2018,2020, an increase in net earnings of 70%189%, or $203$600 million. Diluted net earnings per share attributable to common stockholders was $2.23increased $2.77 per share, to $4.24 per share in 20192021 compared to $1.24$1.47 per share in 2018, an increase of 80%, or $0.99 per share. The increase in net earnings of $203 million was2020. These increases were due primarily to the following:higher operating results driven by an increase in gross margin, partially offset by impairment charges related to our U.K. operations.
Impact of higher gross margin
Gross margin increased by $257 million, or 28%,$1.59 billion in 20192021 to $1.17$2.39 billion as compared to $917$801 million in 2018.2020. The following table and related discussion describe the significant factors that drove the increase in gross margin was primarily driven by a 13% decreasemargin.
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| | | Variance due to the following items: | | | | |
| | Year Ended December 31, 2020 | | Higher Average Selling Prices(1) | Volume(1) | Higher Natural Gas Costs(2) | Unrealized MTM on natural gas derivatives(3) | Higher Manufacturing, Maintenance and Other Costs | Increase in Purchased Urea(4) | Gain on Net Settlement of Natural Gas Contracts | | | | Year Ended December 31, 2021 |
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| Consolidated | | | | | | | | | | | | | |
| Net sales | $ | 4,124 | | | $ | 2,757 | | $ | (404) | | $ | — | | $ | — | | $ | — | | $ | 61 | | $ | — | | | | | $ | 6,538 | |
| Cost of sales | 3,323 | | | — | | (312) | | 663 | | 31 | | 494 | | 64 | | (112) | | | | | 4,151 | |
| Gross margin | $ | 801 | | | $ | 2,757 | | $ | (92) | | $ | (663) | | $ | (31) | | $ | (494) | | $ | (3) | | $ | 112 | | | | | $ | 2,387 | |
| Gross margin % | 19.4 | % | | | | | | | | | | | | 36.5 | % |
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_______________________________________________________________________________(1)Selling price and volume impact of granular urea purchased to satisfy customer commitments is reflected in the Increase in Purchased Urea column.
(2)Higher 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,include the impact, if any, of anrealized natural gas derivatives.
(3)Represents the variance in the net unrealized net mark-to-market lossgains and losses on natural gas derivatives in 2019 compared to a gain in 2018 and higher shipping and distribution costs.the prior year period.
Other operating—net was $73 million(4)Represents the impact of income in 2019the incremental tons compared to $27the prior year period.
•Average selling prices increased 74% in 2021 to $353 per ton from $203 per ton in 2020, which increased gross margin by approximately $2.76 billion,
•Sales volume decreased 9% to 18.5 million product tons in 2021 from 20.3 million product tons in 2020, which reduced gross margin by approximately $92 million,
•The cost of incomenatural gas used for production increased 88% to $4.21 per MMBtu in 2018, or an increase2021 from $2.24 per MMBtu in income of $46 million. The increase was2020, which reduced gross margin by $663 million,
•We incurred higher manufacturing, maintenance and other costs, which reduced gross margin by $494 million, due primarily to a $45higher plant turnaround and maintenance activity,
•We purchased 201,000 tons of granular urea for $71 million to meet customer obligations, which we sold to customers for $68 million, and
•The gain on the salenet settlement of certain natural gas contracts with our Pine Bend dry bulk storagesuppliers as a result of Winter Storm Uri was $112 million.
Impact of impairment charges
Net earnings and logistics facility and $37 million of insurance proceedsdiluted net earnings per share in 2021 were impacted by impairment charges related to an insurance claim at oneour U.K. operations of our nitrogen complexes. Both$521 million, consisting of these items are more fully describedlong-lived and intangible asset impairment charges of $236 million and goodwill impairment charges of $285 million. The after-tax impact of the impairment charges to net earnings attributable to common stockholders and diluted net earnings per share attributable to common stockholders was $463 million and $2.14, respectively. See “Market Conditions and Current Developments—United Kingdom Energy Crisis,” 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 chargeNote 6—United Kingdom Energy Crisis 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.”
CF INDUSTRIES HOLDINGS, INC.
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
| As reported | | Impact of impairment charges | | As adjusted(1) |
| (dollars in millions, except per share) |
| Gross margin | $ | 2,387 | | | $ | — | | | $ | 2,387 | |
| Operating earnings | 1,729 | | | 521 | | | 2,250 | |
| Earnings before income taxes | 1,543 | | | 521 | | | 2,064 | |
| Net earnings attributable to common stockholders | 917 | | | 463 | | | 1,380 | |
| Diluted net earnings per share attributable to common stockholders | 4.24 | | | 2.14 | | | 6.38 | |
(1)The “as adjusted” financial measures presented above are non-GAAP financial measures that should be viewed in addition to, and not as an alternative for, our reported results calculated and presented in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Items Affecting Comparability of Results
In 2019,addition to the impact of market conditions discussed above, certain items impacted the comparability of our financial results during the years ended December 31, 2021 and 2020. The following table and related discussion outline these items and how they impacted the comparability of our financial results during these periods. During the years ended December 31, 2021 and 2020, we reported net earnings attributable to common stockholders of $917 million and $317 million, respectively.
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| 2021 | | 2020 | | | | | |
| Pre-Tax | After-Tax(1) | | Pre-Tax | After-Tax(1) | | | | | | |
| (in millions) | | | |
Unrealized net mark-to-market loss (gain) on natural gas derivatives(2) | $ | 25 | | $ | 19 | | | $ | (6) | | $ | (5) | | | | | | | |
| COVID impacts: | | | | | | | | | | | |
Special COVID-19 bonus for operational workforce(2) | — | | — | | | 19 | | 15 | | | | | | | |
Turnaround deferral(2) | — | | — | | | 7 | | 6 | | | | | | | |
| Asset impairments | 521 | | 463 | | | — | | — | | | | | | | |
Loss on foreign currency transactions, including intercompany loans(3) | 6 | | 5 | | | 5 | | 4 | | | | | | | |
Engineering cost write-off(3) | — | | — | | | 9 | | 7 | | | | | | | |
Loss on sale of surplus land(3) | — | | — | | | 2 | | 1 | | | | | | | |
Insurance proceeds(3) | — | | — | | | (37) | | (28) | | | | | | | |
| Loss on debt extinguishment | 19 | | 15 | | | — | | — | | | | | | | |
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Terra amended tax returns—interest income and income tax benefit(4) | — | | — | | | (26) | | (44) | | | | | | | |
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(1)The tax impact is calculated utilizing a marginal effective rate of 23.6% and 23.2% in 2021 and 2020, respectively, except for asset impairments, which reflects the amount of income tax benefit recognized on the long-lived and intangible asset impairment charges.
(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 expense, interest income and income tax provision in our consolidated statements of operations.
CF INDUSTRIES HOLDINGS, INC.
The following describes the significant items that impacted the comparability of our financial results in 2021 and 2020. Descriptions of items below that refer to amounts in the table above, refer to the pre-tax amounts, except for the discussion under Terra amended tax returns.
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 use for this purpose are primarily natural gas fixed price swaps, basis swaps and options. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. This can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives, which are reflected in cost of sales in our consolidated statements of operations. In 2021 and 2020, we recognized $21an unrealized net mark-to-market loss (gain) on natural gas derivatives of $25 million and $(6) million, respectively.
COVID impacts
In March 2020, a short-term bonus program was initiated to compensate operational employees for continuing their critical tasks at the beginning of the COVID-19 pandemic. The bonus program concluded in June 2020. Approximately $19 million was paid as part of the program and was recognized in cost of sales in our consolidated statement of operations for the year ended December 31, 2020.
In addition, certain plant turnaround activities were deferred because of the COVID-19 pandemic. As a result, we incurred $7 million of expense for the year ended December 31, 2020, which was recognized in cost of sales in our consolidated statement of operations.
Asset impairments
As a result of the U.K. energy crisis and the events described under “Market Conditions and Current Developments—United Kingdom Energy Crisis,” above, we recognized impairment charges of $521 million in 2021, including long-lived and intangible asset impairment charges of $236 million and goodwill impairment charges of $285 million. See Note 6—United Kingdom Energy Crisis and Impairment Charges, Note 7—Property, Plant and Equipment—Net and Note 8—Goodwill and Other Intangible Assets, for further information.
Loss on foreign currency transactions, including intercompany loans
In 2021 and 2020, we recognized losses of $6 million and $5 million, respectively, which consist of foreign currency exchange rate impacts on foreign currency denominated transactions, including the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested.
Engineering cost write-off
In 2020, a project at one of our nitrogen complexes was cancelled and, as a result, $9 million of previously capitalized engineering costs were expensed in the year ended December 31, 2020. The expense is reflected in other operating—net in our consolidated statement of operations.
Loss on sale of surplus land
In 2020, we recognized a loss of $2 million on the earlysale of surplus land, which is reflected in other operating—net in our consolidated statement of operations.
Insurance proceeds
We recognized income of $37 million in 2020 related to insurance claims at one of our nitrogen complexes, which consisted of $35 million related to business interruption insurance proceeds and $2 million related to property insurance proceeds. These proceeds are reflected in other operating—net in our consolidated statement of operations.
Loss on debt extinguishment of debt as
On March 20, 2021, we redeemed in full all of the $500remaining $250 million outstanding principal amount of the 20203.400% senior secured notes due December 2021 (the 2021 Notes) in accordance with the optional redemption provisions in the indenture governing the 2021 Notes. The total aggregate redemption price paid in connection with the redemption of the 2021 Notes was $258 million, including accrued interest. As a result, we recognized a loss on debt extinguishment of $6 million, consisting primarily of the premium paid on the redemption of the 2021 Notes prior to their scheduled maturity.
CF INDUSTRIES HOLDINGS, INC.
On September 10, 2021, we redeemed $250 million principal amount, representing one-third of the $750 million principal amount outstanding immediately prior to such redemption, of the 3.450% senior notes due 2023 (the 2023 Notes), in November 2019 andaccordance with the optional redemption provisions in the indenture governing the 2023 Notes. The total aggregate redemption price paid in connection with the redemption of the 2023 Notes was approximately $265 million, including accrued interest. As a result, we recognized a loss on debt extinguishment of $13 million, consisting primarily of the premium paid on the redemption of the $250 million principal amount of the $500 million outstanding principal amount of the 20212023 Notes in December 2019.prior to their scheduled maturity.
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
We completed the acquisition of Terra Industries Inc. (Terra) in April 2010. After the acquisition, we determined that the manner in which is more fully described underTerra 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 we amended certain tax returns, including Terra’s income and withholding tax returns, back to 1999 (the Amended Tax Returns) and paid additional income and withholding taxes, and related interest and penalties. In 2013, the Internal Revenue Service (IRS) commenced an examination of the U.S. tax aspects of the Amended Tax Returns.
In 2020, we received IRS Notices indicating the amount of tax and interest to be refunded and received with respect to the income tax and withholding tax returns. As a result, we recognized $26 million ($23 million, net of tax) of interest-related income and $18 million of additional income tax benefit. See “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 furtheradditional information.
CF INDUSTRIES HOLDINGS, INC.
Consolidated Results of Consolidated Operations
The following table presents our consolidated results of operations and supplemental data:
| | | | Year ended December 31, | | Year ended December 31, |
| | 2019 | | 2018 | | 2017(1) | | 2019 v. 2018 | | 2018 v. 2017 | | 2021 | | 2020 | | 2019(1) | | 2021 v. 2020 | | 2020 v. 2019 |
| | (in millions, except as noted) | | (in millions, except as noted) |
| Net sales | $ | 4,590 |
| | $ | 4,429 |
| | $ | 4,130 |
| | $ | 161 |
| | 4 | % | | $ | 299 |
| | 7 | % | Net sales | $ | 6,538 | | | $ | 4,124 | | | $ | 4,590 | | | $ | 2,414 | | | 59 | % | | $ | (466) | | | (10) | % |
| Cost of sales (COS) | 3,416 |
| | 3,512 |
| | 3,696 |
| | (96 | ) | | (3 | )% | | (184 | ) | | (5 | )% | Cost of sales (COS) | 4,151 | | | 3,323 | | | 3,416 | | | 828 | | | 25 | % | | (93) | | | (3) | % |
| Gross margin | 1,174 |
| | 917 |
| | 434 |
| | 257 |
| | 28 | % | | 483 |
| | 111 | % | Gross margin | 2,387 | | | 801 | | | 1,174 | | | 1,586 | | | 198 | % | | (373) | | | (32) | % |
| Gross margin percentage | 25.6 | % | | 20.7 | % | | 10.5 | % | | 4.9 | % | | | | 10.2 | % | | | Gross margin percentage | 36.5 | % | | 19.4 | % | | 25.6 | % | | 17.1 | % | | (6.2) | % | |
| Selling, general and administrative expenses | 239 |
| | 214 |
| | 191 |
| | 25 |
| | 12 | % | | 23 |
| | 12 | % | Selling, general and administrative expenses | 223 | | | 206 | | | 239 | | | 17 | | | 8 | % | | (33) | | | (14) | % |
| Goodwill impairment | | Goodwill impairment | 285 | | | — | | | — | | | 285 | | | N/M | | — | | | — | % |
| Long-lived and intangible asset impairment | | Long-lived and intangible asset impairment | 236 | | | — | | | — | | | 236 | | | N/M | | — | | | — | % |
| Other operating—net | (73 | ) | | (27 | ) | | 18 |
| | (46 | ) | | (170 | )% | | (45 | ) | | N/M |
| Other operating—net | (39) | | | (17) | | | (73) | | | (22) | | | (129) | % | | 56 | | | 77 | % |
| Total other operating costs and expenses | 166 |
| | 187 |
| | 209 |
| | (21 | ) | | (11 | )% | | (22 | ) | | (11 | )% | Total other operating costs and expenses | 705 | | | 189 | | | 166 | | | 516 | | | 273 | % | | 23 | | | 14 | % |
| Equity in (loss) earnings of operating affiliates | (5 | ) | | 36 |
| | 9 |
| | (41 | ) | | N/M |
| | 27 |
| | N/M |
| |
| | Equity in earnings (loss) of operating affiliate | | Equity in earnings (loss) of operating affiliate | 47 | | | 11 | | | (5) | | | 36 | | | 327 | % | | 16 | | | N/M |
| Operating earnings | 1,003 |
| | 766 |
| | 234 |
| | 237 |
| | 31 | % | | 532 |
| | N/M |
| Operating earnings | 1,729 | | | 623 | | | 1,003 | | | 1,106 | | | 178 | % | | (380) | | | (38) | % |
| Interest expense—net | 217 |
| | 228 |
| | 303 |
| | (11 | ) | | (5 | )% | | (75 | ) | | (25 | )% | Interest expense—net | 183 | | | 161 | | | 217 | | | 22 | | | 14 | % | | (56) | | | (26) | % |
| Loss on debt extinguishment | 21 |
| | — |
| | 53 |
| | 21 |
| | N/M |
| | (53 | ) | | (100 | )% | Loss on debt extinguishment | 19 | | | — | | | 21 | | | 19 | | | N/M | | (21) | | | (100) | % |
| Other non-operating—net | (7 | ) | | (9 | ) | | 3 |
| | 2 |
| | 22 | % | | (12 | ) | | N/M |
| Other non-operating—net | (16) | | | (1) | | | (7) | | | (15) | | | N/M | | 6 | | | 86 | % |
| Earnings (loss) before income taxes | 772 |
| | 547 |
| | (125 | ) | | 225 |
| | 41 | % | | 672 |
| | N/M |
| |
| Income tax provision (benefit) | 126 |
| | 119 |
| | (575 | ) | | 7 |
| | 6 | % | | 694 |
| | N/M |
| |
| Earnings before income taxes | | Earnings before income taxes | 1,543 | | | 463 | | | 772 | | | 1,080 | | | 233 | % | | (309) | | | (40) | % |
| Income tax provision | | Income tax provision | 283 | | | 31 | | | 126 | | | 252 | | | N/M | | (95) | | | (75) | % |
| | Net earnings | 646 |
| | 428 |
| | 450 |
| | 218 |
| | 51 | % | | (22 | ) | | (5 | )% | Net earnings | 1,260 | | | 432 | | | 646 | | | 828 | | | 192 | % | | (214) | | | (33) | % |
| Less: Net earnings attributable to noncontrolling interests | 153 |
| | 138 |
| | 92 |
| | 15 |
| | 11 | % | | 46 |
| | 50 | % | |
| Less: Net earnings attributable to noncontrolling interest | | Less: Net earnings attributable to noncontrolling interest | 343 | | | 115 | | | 153 | | | 228 | | | 198 | % | | (38) | | | (25) | % |
| Net earnings attributable to common stockholders | $ | 493 |
| | $ | 290 |
| | $ | 358 |
| | $ | 203 |
| | 70 | % | | $ | (68 | ) | | (19 | )% | Net earnings attributable to common stockholders | $ | 917 | | | $ | 317 | | | $ | 493 | | | $ | 600 | | | 189 | % | | $ | (176) | | | (36) | % |
| Diluted net earnings per share attributable to common stockholders | $ | 2.23 |
| | $ | 1.24 |
| | $ | 1.53 |
| | $ | 0.99 |
| | 80 | % | | $ | (0.29 | ) | | (19 | )% | Diluted net earnings per share attributable to common stockholders | $ | 4.24 | | | $ | 1.47 | | | $ | 2.23 | | | $ | 2.77 | | | 188 | % | | $ | (0.76) | | | (34) | % |
| Diluted weighted-average common shares outstanding | 221.6 |
| | 233.8 |
| | 233.9 |
| | (12.2 | ) | | (5 | )% | | (0.1 | ) | | — | % | Diluted weighted-average common shares outstanding | 216.2 | | | 215.2 | | | 221.6 | | | 1.0 | | | — | % | | (6.4) | | | (3) | % |
| Dividends declared per common share | $ | 1.20 |
| | $ | 1.20 |
| | $ | 1.20 |
| | $ | — |
| | — | % | | $ | — |
| | — | % | Dividends declared per common share | $ | 1.20 | | | $ | 1.20 | | | $ | 1.20 | | | $ | — | | | — | % | | $ | — | | | — | % |
| Natural gas supplemental data (per MMBtu) | | | | | | | | | | | | | | 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 | ) | | 0.01 |
| | 0.07 |
| | (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 | )% | |
| Cost of natural gas used for production in COS(2) | | Cost of natural gas used for production in COS(2) | $ | 4.21 | | | $ | 2.24 | | | $ | 2.74 | | | $ | 1.97 | | | 88 | % | | $ | (0.50) | | | (18) | % |
| Average daily market price of natural gas Henry Hub (Louisiana) | $ | 2.51 |
| | $ | 3.12 |
| | $ | 2.96 |
| | $ | (0.61 | ) | | (20 | )% | | $ | 0.16 |
| | 5 | % | Average daily market price of natural gas Henry Hub (Louisiana) | $ | 3.82 | | | $ | 1.99 | | | $ | 2.51 | | | $ | 1.83 | | | 92 | % | | $ | (0.52) | | | (21) | % |
| Average daily market price of natural gas National Balancing Point (UK) | $ | 4.44 |
| | $ | 8.07 |
| | $ | 5.80 |
| | $ | (3.63 | ) | | (45 | )% | | $ | 2.27 |
| | 39 | % | |
| Average daily market price of natural gas National Balancing Point (United Kingdom) | | Average daily market price of natural gas National Balancing Point (United Kingdom) | $ | 15.50 | | | $ | 3.20 | | | $ | 4.44 | | | $ | 12.30 | | | 384 | % | | $ | (1.24) | | | (28) | % |
| Unrealized net mark-to-market loss (gain) on natural gas derivatives | $ | 14 |
| | $ | (13 | ) | | $ | 61 |
| | $ | 27 |
| | N/M |
| | $ | (74 | ) | | N/M |
| Unrealized net mark-to-market loss (gain) on natural gas derivatives | $ | 25 | | | $ | (6) | | | $ | 14 | | | $ | 31 | | | N/M | | $ | (20) | | | N/M |
| Depreciation and amortization | $ | 875 |
| | $ | 888 |
| | $ | 883 |
| | $ | (13 | ) | | (1 | )% | | $ | 5 |
| | 1 | % | Depreciation and amortization | $ | 888 | | | $ | 892 | | | $ | 875 | | | $ | (4) | | | — | % | | $ | 17 | | | 2 | % |
| Capital expenditures | $ | 404 |
| | $ | 422 |
| | $ | 473 |
| | $ | (18 | ) | | (4 | )% | | $ | (51 | ) | | (11 | )% | Capital expenditures | $ | 514 | | | $ | 309 | | | $ | 404 | | | $ | 205 | | | 66 | % | | $ | (95) | | | (24) | % |
| Sales volume by product tons (000s) | 19,538 |
| | 19,329 |
| | 19,952 |
| | 209 |
| | 1 | % | | (623 | ) | | (3 | )% | Sales volume by product tons (000s) | 18,501 | | | 20,296 | | | 19,538 | | | (1,795) | | | (9) | % | | 758 | | | 4 | % |
| Production volume by product tons (000s): | | | | | | | | | | | | | | Production volume by product tons (000s): | |
Ammonia(4) | 10,246 |
| | 9,805 |
| | 10,295 |
| | 441 |
| | 4 | % | | (490 | ) | | (5 | )% | |
Ammonia(3) | | Ammonia(3) | 9,349 | | | 10,353 | | | 10,246 | | | (1,004) | | | (10) | % | | 107 | | | 1 | % |
| Granular urea | 4,941 |
| | 4,837 |
| | 4,451 |
| | 104 |
| | 2 | % | | 386 |
| | 9 | % | Granular urea | 4,123 | | | 5,001 | | | 4,941 | | | (878) | | | (18) | % | | 60 | | | 1 | % |
| UAN (32%) | 6,768 |
| | 6,903 |
| | 6,914 |
| | (135 | ) | | (2 | )% | | (11 | ) | | — | % | UAN (32%) | 6,763 | | | 6,677 | | | 6,768 | | | 86 | | | 1 | % | | (91) | | | (1) | % |
| AN | 2,128 |
| | 1,731 |
| | 2,127 |
| | 397 |
| | 23 | % | | (396 | ) | | (19 | )% | AN | 1,646 | | | 2,115 | | | 2,128 | | | (469) | | | (22) | % | | (13) | | | (1) | % |
______________________________________________________________________________N/M—Not Meaningful
| |
(1)(1)For a discussion and analysis of the year ended December 31, 2019, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K filed with the SEC on February 24, 2021. (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. Includes realized gains and losses on natural gas derivatives settled during the period. Excludes unrealized mark-to-market gains and losses on natural gas derivatives. (3)Gross ammonia production, including amounts subsequently upgraded on-site into granular urea, UAN, or AN. | 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. |
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(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. |
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(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, 20192021 compared to the year ended December 31, 2018.2020. For a discussion and analysis of our consolidated results of operations for the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20182020 Annual Report on Form 10-K filed with the SEC on February 22, 2019.24, 2021.
Net Sales
Our net sales are derived primarily from the sale of nitrogen fertilizersproducts and are determined by the quantities of fertilizersnitrogen products 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,$2.41 billion, or 4%59%, to $4.59$6.54 billion in 20192021 compared to $4.43$4.12 billion in 20182020 due to a 1% increase in sales volume, which increased net sales by $99 million, and a 3%74% increase in average selling prices, which increased netpartially offset by a 9% decrease in sales by $62 million.volume.
Average selling prices were $235$353 per ton in 20192021 compared to $229$203 per ton in 2018,2020, an increase of 3%74%, due primarily to higher average selling prices inacross all of 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 wasprimarily driven by the impact of a tighter global nitrogen supply and demand balance. The increase inbalance, as a result of strong global demand and decreased global supply availability as higher global energy costs drove lower global operating rates. Our total sales volume of 1%18.5 million product tons in 2021 was 9% lower compared to 20.3 million product tons in 2020 as a result of decreased supply due to lower production due primarily to higher sales volumesa high level of plant turnaround and maintenance activity and downtime resulting from the impacts of Winter Storm Uri and Hurricane Ida.
Gross ammonia production for 2021 was approximately 9.3 million tons compared to 10.4 million tons in our2020. Management expects gross ammonia ANproduction for 2022 will return to historical levels (9.5 to 10.0 million tons) based on normal operating conditions and Other segments, partially offset by lower sales volumes in our UAN and granular urea segments.a return to a typical level of planned maintenance activities.
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,derivatives, 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 includeconsist of the cost of freight required to transport finished products from our plants to our distribution facilities, which are recognized in cost of sales when the product is sold to our customers, and storage costs incurred prior to final shipment to customers.
Our cost of sales decreased $96increased $828 million, or 3%25%, to $4.15 billion in 2019 from 2018.2021 as compared to $3.32 billion in 2020. The decreaseincrease in our cost of sales was due primarily to higher costs for natural gas, including the impact of lower realized natural gasderivatives, which increased cost of sales by $663 million; higher manufacturing, maintenance and other costs, partially offsetwhich increased cost of sales by $494 million; and higher costs relatedfor purchased products as we purchased $71 million of granular urea in 2021 to maintenance activity, higher distribution costs and anmeet customer obligations. Cost of sales also includes the impact of a $25 million unrealized net mark-to-market loss on natural gas derivatives of $14 million in 20192021 compared to an unrealizeda $6 million gain in 2020.
These items increasing our cost of sales were partially offset by the $112 million gain we recognized from the net mark-to-marketsettlement of certain natural gas contracts with our suppliers in February 2021 due to Winter Storm Uri as described above under the heading “Natural Gas Prices” in the section titled “Market Conditions and Current Developments.” The $112 million gain on the net settlement of $13certain natural gas contracts in February 2021 is reflected in, and had the effect of reducing, our cost of sales in 2021. In addition, there was a $312 million decline in 2018.cost of sales in 2021, as compared to 2020, due primarily to a 9% decline in sales volume.
Cost of sales averaged $224 per ton in 2021, a 37% increase from $164 per ton in 2020. The cost of sales per ton averaged $175 in 2019, a 4% decrease from $182 per ton in 2018. Realized natural gas costs,used for production, including the impact of realized derivatives, decreased 13%increased 88% to $2.74$4.21 per MMBtu in 20192021 from $3.16$2.24 per MMBtu in 2018.2020. The cost of natural gas used for production of $4.21 per MMBtu in 2021 does not include the $112 million gain from the net settlement of certain natural gas contracts in February 2021.
Selling, General and Administrative Expenses
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, IT, and marketingsales functions, as well as certain taxes and insurance and other professional service fees, including those for corporate initiatives.
CF INDUSTRIES HOLDINGS, INC.
Selling, general and administrative expenses increased $25$17 million, or 8%, to $239$223 million in 20192021 from $214$206 million in 2018.2020. The increase was due primarily to costs relatedhigher incentive compensation, due to certain corporate office initiativesstrong operating performance.
Long-lived and certain equity award modifications.Intangible Asset Impairment and Goodwill Impairment
In 2021, we recognized total impairment charges of $521 million, consisting of long-lived and intangible asset impairment charges of $236 million and goodwill impairment charges of $285 million. See “United Kingdom Energy Crisis” under “Market Conditions and Current Developments,” above for further information.
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 exchangecurrency transaction 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$39 million of income in 20192021 compared to $27$17 million of income in 2018.2020. The income in 2019 was due2021 primarily toincludes a gain of $29 million on sales of carbon credits. In addition, other operating—net includes the $45 million pre-tax gain recognized onamount received under the saleterms of the Pine Bendagreement with the U.K. government associated with the restart of our Billingham facility, andpartially offset by a loss on foreign currency transactions of $6 million, which includes the impact of changes in foreign currency exchange rates on intercompany loans that were not permanently invested. The income in 2020 primarily includes insurance proceeds of $37 million. Seemillion, partially offset by $9 million of expense related to the cancellation of a project, which is described in the section above titled “Items Affecting Comparability of Results—Gain on sale of Pine Bend facility and —Insurance proceeds,Engineering cost write-off,” 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 gainloss on foreign currency transactions 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 AffiliatesAffiliate
Equity in (loss) earnings of operating affiliates primarilyaffiliate 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 affiliatesaffiliate was $5$47 million of losses in 20192021 compared to $36$11 million in 2020. The increase was due primarily to an increase in the operating results of earnings in 2018. The loss in 2019 includes approximately $16 million related toPLNL as a withholding tax charge recognizedresult of higher ammonia selling prices partially offset 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 historicalhigher natural gas supply curtailments. See “Items Affecting Comparability of Results—PLNL settlement income,” above, for additional information.costs.
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 Agreementrevolving 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.related assets. Interest expense—net also includes interest income, which includes amounts earned on our cash, cash equivalents, and investments.investments and any interest earned related to income tax refunds.
Net interest expense decreasedincreased by $11$22 million to $217$183 million in 20192021 from $228$161 million in 2018.2020. The decreaseincrease was due primarily to $5$26 million of interest income in 2020 related to the settlementfinalization of the Terra amended tax returns, which is more fully described under “Liquidity and Capital Resources—Settlement“Items Affecting Comparability of Results—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.above.
LossesLoss on Debt Extinguishment
On November 13, 2019,March 20, 2021, we redeemed in full 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 redeemedremaining $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. The total aggregate redemption price paid in connection with the redemption on the 2021 Notes was $258 million, including accrued interest. As a result, of the early redemption of the 2020 Notes and the 2021 Notes, we recognized a loss on debt extinguishment of $21$6 million, consisting primarily of the premium paid on the redemption of the 2021 Notes prior to their scheduled maturity.
On September 10, 2021, we redeemed $250 million principal amount, representing one-third of the $750 million principal amount outstanding immediately prior to such redemption, of the 2023 Notes, in accordance with the optional redemption provisions in the indenture governing the 2023 Notes. The total aggregate redemption price paid in connection with the redemption of the 2023 Notes was approximately $265 million, including accrued interest. As a result, we recognized a loss on debt extinguishment of $13 million, consisting primarily of the premium paid on the redemption of the $250 million principal amount of the 2023 Notes prior to their scheduled maturity.
CF INDUSTRIES HOLDINGS, INC.
Other Non-Operating—Net
Other non-operating—net was $16 million of which $12income in 2021 compared to $1 million relatedof income in 2020. The $16 million of income in 2021 was due primarily to a gain of $20 million on the 2020 Notes and $9 million relatedsale of EU carbon credits that, due to Brexit, could no longer be utilized by our U.K. plants for carbon emission obligations in the 2021 Notes.United Kingdom.
Income Tax Provision
Our income tax provision for 20192021 was $126$283 million on pre-tax income of $772$1,543 million, or an effective tax rate of 16.3%18.3%, compared to an income tax provision of $119$31 million on pre-tax income of $547$463 million, or an effective tax rate of 21.7%6.7%, in 2018.2020.
For 2021, we did not record an income tax benefit related to the goodwill impairment charges described in Note 6—United Kingdom Energy Crisis and Impairment Charges as the goodwill impairment charges are non-deductible for income tax purposes. Our income tax provision for 2021 includes a $26 million benefit reflecting the impact of agreement on certain issues related to U.S. federal income tax audits, including a discrete income tax benefit of approximately $15 million due to the reversal of an accrual for unrecognized tax benefits as a result of the effective settlement of the U.S. federal income tax audit for the 2012-2016 tax years.
For 2020, our income tax provision includes a $27 million benefit related to the settlement of certain U.S. and foreign income tax audits, which primarily related to the settlement of the audit of the Terra amended tax returns, which is more fully described under “Items Affecting Comparability of Results—Terra Amended Tax Returns,” above.
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.interest. Our effective tax rate for 20192021 of 16.3%18.3%, which is based on pre-tax income of $772$1,543 million, would be 20.3%5.3 percentage points higher, or 23.6%, if based on pre-tax income exclusive of the earnings attributable to the noncontrolling interest of $153$343 million. Our effective tax rate for 20182020 of 21.7%6.7%, which is based on pre-tax income of $547$463 million, would be 29.1%2.2 percentage points higher, or 8.9%, if based on pre-tax income exclusive of the earnings attributable to the noncontrolling interestsinterest of $138$115 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 20192021 and 20182020 were impacted by additional discrete tax items. See Note 10—11—Income Taxes for additional information.
Net Earnings Attributable to Noncontrolling InterestsInterest
Net earnings attributable to noncontrolling interestsinterest 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 interestsinterest increased $15$228 million, or 198%, to $343 million in 20192021 compared to 2018$115 million in 2020 due to higher earnings fromof CFN driven by higher average selling prices due primarily to the impact of a tighter global nitrogen supply and demand balance andas higher global energy costs drove 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.global operating rates.
Diluted Net Earnings Per Share Attributable to Common Stockholders
Diluted netNet earnings per share attributable to common stockholders increased $0.99188% to $2.23$4.24 per diluted share in 20192021 from $1.24$1.47 per diluted share in 2018.2020. This increase is due primarily to higher operating results driven by an increase in gross margin, primarily drivenpartially offset by lower realized natural gas costs, higher average selling prices dueimpairment charges related 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.U.K. operations.
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),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 primarily of selling, general and administrative expenses and other operating—net) and non-operating expenses (interest(consisting primarily of 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:segment and the major drivers of the variance in net sales, cost of sales and gross margin: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Variance due to the following items: | | | | |
| | Year Ended December 31, 2020 | | Higher Average Selling Prices(1) | Volume(1) | Higher Natural Gas Costs(2) | Unrealized MTM on natural gas derivatives(3) | Higher Manufacturing, Maintenance and Other Costs | Increase in Purchased Urea(4) | Gain on Net Settlement of Natural Gas Contracts | | | | Year Ended December 31, 2021 |
| | (dollars in millions) |
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| Consolidated | | | | | | | | | | | | | |
| Net sales | $ | 4,124 | | | $ | 2,757 | | $ | (404) | | $ | — | | $ | — | | $ | — | | $ | 61 | | $ | — | | | | | $ | 6,538 | |
| Cost of sales | 3,323 | | | — | | (312) | | 663 | | 31 | | 494 | | 64 | | (112) | | | | | 4,151 | |
| Gross margin | $ | 801 | | | $ | 2,757 | | $ | (92) | | $ | (663) | | $ | (31) | | $ | (494) | | $ | (3) | | $ | 112 | | | | | $ | 2,387 | |
| Gross margin % | 19.4 | % | | | | | | | | | | | | 36.5 | % |
| Ammonia | | | | | | | | | | | | | |
| Net sales | $ | 1,020 | | | $ | 792 | | $ | (25) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | $ | 1,787 | |
| Cost of sales | 850 | | | — | | (33) | | 194 | | 9 | | 254 | | — | | (112) | | | | | 1,162 | |
| Gross margin | $ | 170 | | | $ | 792 | | $ | 8 | | $ | (194) | | $ | (9) | | $ | (254) | | $ | — | | $ | 112 | | | | | $ | 625 | |
| Gross margin % | 16.7 | % | | | | | | | | | | | | 35.0 | % |
| Granular Urea | | | | | | | | | | | | | |
| Net sales | $ | 1,248 | | | $ | 814 | | $ | (243) | | $ | — | | $ | — | | $ | — | | $ | 61 | | $ | — | | | | | $ | 1,880 | |
| Cost of sales | 847 | | | — | | (155) | | 144 | | 8 | | 84 | | 64 | | — | | | | | 992 | |
| Gross margin | $ | 401 | | | $ | 814 | | $ | (88) | | $ | (144) | | $ | (8) | | $ | (84) | | $ | (3) | | $ | — | | | | | $ | 888 | |
| Gross margin % | 32.1 | % | | | | | | | | | | | | 47.2 | % |
| UAN | | | | | | | | | | | | | |
| Net sales | $ | 1,063 | | | $ | 756 | | $ | (31) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | $ | 1,788 | |
| Cost of sales | 949 | | | — | | (27) | | 168 | | 7 | | 22 | | — | | — | | | | | 1,119 | |
| Gross margin | $ | 114 | | | $ | 756 | | $ | (4) | | $ | (168) | | $ | (7) | | $ | (22) | | $ | — | | $ | — | | | | | $ | 669 | |
| Gross margin % | 10.7 | % | | | | | | | | | | | | 37.4 | % |
| AN | | | | | | | | | | | | | |
| Net sales | $ | 455 | | | $ | 159 | | $ | (104) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | $ | 510 | |
| Cost of sales | 390 | | | — | | (83) | | 97 | | 4 | | 67 | | — | | — | | | | | 475 | |
| Gross margin | $ | 65 | | | $ | 159 | | $ | (21) | | $ | (97) | | $ | (4) | | $ | (67) | | $ | — | | $ | — | | | | | $ | 35 | |
| Gross margin % | 14.3 | % | | | | | | | | | | | | 6.9 | % |
| Other | | | | | | | | | | | | | |
| Net sales | $ | 338 | | | $ | 236 | | $ | (1) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | $ | 573 | |
| Cost of sales | 287 | | | — | | (14) | | 60 | | 3 | | 67 | | — | | — | | | | | 403 | |
| Gross margin | $ | 51 | | | $ | 236 | | $ | 13 | | $ | (60) | | $ | (3) | | $ | (67) | | $ | — | | $ | — | | | | | $ | 170 | |
| Gross margin % | 15.1 | % | | | | | | | | | | | | 29.7 | % |
_______________________________________________________________________________(1)Selling price and volume impact of granular urea purchased to satisfy customer commitments is reflected in the Increase in Purchased Urea column.
(2)Higher natural gas costs include the impact, if any, of realized natural gas derivatives.
(3)Represents the variance in the net unrealized mark-to-market gains and losses on natural gas derivatives compared to the prior year period.
(4)Represents the impact of the incremental tons compared to the prior year period.
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| | Ammonia | | Granular Urea(1) | | UAN(1) | | AN(1) | | Other(1) | | Consolidated |
| | (in millions) |
| Year ended December 31, 2019 | | | | | | | | |
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| | |
| Net sales | $ | 1,113 |
| | $ | 1,342 |
| | $ | 1,270 |
| | $ | 506 |
| | $ | 359 |
| | $ | 4,590 |
|
| Cost of sales | 878 |
| | 861 |
| | 981 |
| | 399 |
| | 297 |
| | 3,416 |
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| Gross margin | $ | 235 |
| | $ | 481 |
| | $ | 289 |
| | $ | 107 |
| | $ | 62 |
| | $ | 1,174 |
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| Gross margin percentage | 21.1 | % | | 35.8 | % | | 22.8 | % | | 21.1 | % | | 17.3 | % | | 25.6 | % |
| Year ended December 31, 2018 | |
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| Net sales | $ | 1,028 |
| | $ | 1,322 |
| | $ | 1,234 |
| | $ | 460 |
| | $ | 385 |
| | $ | 4,429 |
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| Cost of sales | 867 |
| | 889 |
| | 1,007 |
| | 414 |
| | 335 |
| | 3,512 |
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| Gross margin | $ | 161 |
| | $ | 433 |
| | $ | 227 |
| | $ | 46 |
| | $ | 50 |
| | $ | 917 |
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| Gross margin percentage | 15.7 | % | | 32.8 | % | | 18.4 | % | | 10.0 | % | | 13.0 | % | | 20.7 | % |
| Year ended December 31, 2017 | |
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| Net sales | $ | 1,209 |
| | $ | 971 |
| | $ | 1,134 |
| | $ | 497 |
| | $ | 319 |
| | $ | 4,130 |
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| Cost of sales | 1,070 |
| | 855 |
| | 1,053 |
| | 446 |
| | 272 |
| | 3,696 |
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| Gross margin | $ | 139 |
| | $ | 116 |
| | $ | 81 |
| | $ | 51 |
| | $ | 47 |
| | $ | 434 |
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| Gross margin percentage | 11.5 | % | | 11.9 | % | | 7.1 | % | | 10.3 | % | | 14.7 | % | | 10.5 | % |
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(1)CF INDUSTRIES HOLDINGS, INC.
| 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, 20192021 compared to the year ended December 31, 2018.2020. For a discussion and analysis of our operating results by business segment for the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20182020 Annual Report on Form 10-K filed with the SEC on February 22, 2019.24, 2021.
CF INDUSTRIES HOLDINGS, INC.
Ammonia Segment
Our ammonia segment produces anhydrous ammonia (ammonia), which is our most concentrated nitrogen fertilizer as itproduct. Ammonia contains 82% nitrogen.nitrogen and 18% hydrogen. The results of our ammonia segment consist of sales of ammonia to external customers. In addition, ammonia is the “basic”base nitrogen product that we upgrade into other nitrogen products such as granular urea, UAN and AN. We produce ammonia at all of our nitrogen manufacturing complexes.
The following table presents summary operating data for our ammonia segment:
| | | | Year ended December 31, | | Year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2019 v. 2018 | | 2018 v. 2017 | | 2021 | | 2020 | | 2019 | | 2021 v. 2020 | | 2020 v. 2019 |
| | (in millions, except as noted) | | (in millions, except as noted) |
| Net sales | $ | 1,113 |
| | $ | 1,028 |
| | $ | 1,209 |
| | $ | 85 |
| | 8 | % | | $ | (181 | ) | | (15 | )% | Net sales | $ | 1,787 | | | $ | 1,020 | | | $ | 1,113 | | | $ | 767 | | | 75 | % | | $ | (93) | | | (8) | % |
| Cost of sales | 878 |
| | 867 |
| | 1,070 |
| | 11 |
| | 1 | % | | (203 | ) | | (19 | )% | Cost of sales | 1,162 | | | 850 | | | 878 | | | 312 | | | 37 | % | | (28) | | | (3) | % |
| Gross margin | $ | 235 |
| | $ | 161 |
| | $ | 139 |
| | $ | 74 |
| | 46 | % | | $ | 22 |
| | 16 | % | Gross margin | $ | 625 | | | $ | 170 | | | $ | 235 | | | $ | 455 | | | 268 | % | | $ | (65) | | | (28) | % |
| Gross margin percentage | 21.1 | % | | 15.7 | % | | 11.5 | % | | 5.4 | % | | | | 4.2 | % | | | Gross margin percentage | 35.0 | % | | 16.7 | % | | 21.1 | % | | 18.3 | % | | (4.4) | % | |
| Sales volume by product tons (000s) | 3,516 |
| | 3,135 |
| | 4,105 |
| | 381 |
| | 12 | % | | (970 | ) | | (24 | )% | Sales volume by product tons (000s) | 3,589 | | | 3,767 | | | 3,516 | | | (178) | | | (5) | % | | 251 | | | 7 | % |
Sales volume by nutrient tons (000s)(1) | 2,884 |
| | 2,571 |
| | 3,367 |
| | 313 |
| | 12 | % | | (796 | ) | | (24 | )% | Sales volume by nutrient tons (000s)(1) | 2,944 | | | 3,090 | | | 2,884 | | | (146) | | | (5) | % | | 206 | | | 7 | % |
| Average selling price per product ton | $ | 317 |
| | $ | 328 |
| | $ | 295 |
| | $ | (11 | ) | | (3 | )% | | $ | 33 |
| | 11 | % | Average selling price per product ton | $ | 498 | | | $ | 271 | | | $ | 317 | | | $ | 227 | | | 84 | % | | $ | (46) | | | (15) | % |
Average selling price per nutrient ton(1) | $ | 386 |
| | $ | 400 |
| | $ | 359 |
| | $ | (14 | ) | | (4 | )% | | $ | 41 |
| | 11 | % | Average selling price per nutrient ton(1) | $ | 607 | | | $ | 330 | | | $ | 386 | | | $ | 277 | | | 84 | % | | $ | (56) | | | (15) | % |
| Gross margin per product ton | $ | 67 |
| | $ | 51 |
| | $ | 34 |
| | $ | 16 |
| | 31 | % | | $ | 17 |
| | 50 | % | Gross margin per product ton | $ | 174 | | | $ | 45 | | | $ | 67 | | | $ | 129 | | | 287 | % | | $ | (22) | | | (33) | % |
Gross margin per nutrient ton(1) | $ | 81 |
| | $ | 63 |
| | $ | 41 |
| | $ | 18 |
| | 29 | % | | $ | 22 |
| | 54 | % | Gross margin per nutrient ton(1) | $ | 212 | | | $ | 55 | | | $ | 81 | | | $ | 157 | | | 285 | % | | $ | (26) | | | (32) | % |
| Depreciation and amortization | $ | 167 |
| | $ | 155 |
| | $ | 183 |
| | $ | 12 |
| | 8 | % | | $ | (28 | ) | | (15 | )% | Depreciation and amortization | $ | 209 | | | $ | 176 | | | $ | 167 | | | $ | 33 | | | 19 | % | | $ | 9 | | | 5 | % |
| Unrealized net mark-to-market loss (gain) on natural gas derivatives | $ | 4 |
| | $ | (4 | ) | | $ | 20 |
| | $ | 8 |
| | N/M |
| | $ | (24 | ) | | N/M |
| Unrealized net mark-to-market loss (gain) on natural gas derivatives | $ | 7 | | | $ | (2) | | | $ | 4 | | | $ | 9 | | | N/M | | $ | (6) | | | N/M |
N/M—Not Meaningful
| |
(1)
| Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons. |
(1)Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of nitrogen within the product tons.
Year Ended December 31, 20192021 Compared to Year Ended December 31, 20182020
Net Sales. Net sales in theour ammonia segment increased by $85$767 million, or 8%75%, to $1.11$1.79 billion in 20192021 from $1.03$1.02 billion in 20182020 due primarily to a 12%an 84% increase in sales volume,average selling prices, partially offset by a 3%5% decrease in averagesales volume. Average selling prices. Sales volume was higherprices increased to $498 per ton in 2019 due2021 compared to greater supply availability due to increased production.$271 per ton in 2020. The decreaseincrease in average selling prices was due primarily to increasedthe impact of a tighter global nitrogen supply as a resultand demand balance. Sales volume was lower in 2021 due primarily to lower supply availability resulting from reduced inventory and production due to plant turnaround and maintenance activity and from weather-related outages, including the impact of higher global operating rates driven by lower global energy prices.Winter Storm Uri and Hurricane Ida.
Cost of Sales. Cost of sales in our ammonia segment averaged $250$324 per ton in 2019,2021, a 10% decrease43% increase from $277$226 per ton in 20182020. The increase is due primarily to the impact of lowerhigher realized natural gas costs, and lowerhigher costs associated withrelated to plant turnaround, maintenance and maintenancerepair activity, and higher costs for ammonia purchased from our joint venture in Trinidad, partially offset by the impact of a $4the $112 million unrealizedgain on the net mark-to-market loss onsettlement of certain natural gas derivativescontracts in 2019 compared to a $4 million gain in 2018.February 2021. See “Market Conditions and Current Developments” above, for additional information on the operational impact of Winter Storm Uri.
Gross Margin. Gross margin in our ammonia segment increased by $74$455 million to $235$625 million in 20192021 from $161$170 million in 2018,2020, and our gross margin percentage was 21.1%35.0% in 20192021 compared to 15.7%16.7% in 2018.2020. The increase in gross margin was due primarily to a 12%an 84% increase in sales volume,average selling prices, which increased gross margin by $60$792 million, a decrease in realizedand the $112 million gain on the net settlement of certain natural gas costs, which increased gross margin by $33 million, and a $31 million decreasecontracts in other manufacturing and distribution costs.February 2021. These factors were partially offset by a 3% decrease$254 million net increase in average selling prices,manufacturing, maintenance and other costs, an increase in realized natural gas costs, which reduceddecreased gross margin by $42$194 million, and a 5% decrease in sales volume, which decreased gross margin by $8 million. Gross margin also includes the impact of a $4$7 million unrealized net mark-to-market loss on natural gas derivatives in 20192021 compared to a $4$2 million gain in 2018.2020.
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, | | Year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2019 v. 2018 | | 2018 v. 2017 | | 2021 | | 2020 | | 2019 | | 2021 v. 2020 | | 2020 v. 2019 |
| | (in millions, except as noted) | | (in millions, except as noted) |
| Net sales | $ | 1,342 |
| | $ | 1,322 |
| | $ | 971 |
| | $ | 20 |
| | 2 | % | | $ | 351 |
| | 36 | % | Net sales | $ | 1,880 | | | $ | 1,248 | | | $ | 1,342 | | | $ | 632 | | | 51 | % | | $ | (94) | | | (7) | % |
| Cost of sales | 861 |
| | 889 |
| | 855 |
| | (28 | ) | | (3 | )% | | 34 |
| | 4 | % | Cost of sales | 992 | | | 847 | | | 861 | | | 145 | | | 17 | % | | (14) | | | (2) | % |
| Gross margin | $ | 481 |
| | $ | 433 |
| | $ | 116 |
| | $ | 48 |
| | 11 | % | | $ | 317 |
| | N/M |
| Gross margin | $ | 888 | | | $ | 401 | | | $ | 481 | | | $ | 487 | | | 121 | % | | $ | (80) | | | (17) | % |
| Gross margin percentage | 35.8 | % | | 32.8 | % | | 11.9 | % | | 3.0 | % | | | | 20.9 | % | | | Gross margin percentage | 47.2 | % | | 32.1 | % | | 35.8 | % | | 15.1 | % | | (3.7) | % | |
| Sales volume by product tons (000s) | 4,849 |
| | 4,898 |
| | 4,357 |
| | (49 | ) | | (1 | )% | | 541 |
| | 12 | % | Sales volume by product tons (000s) | 4,290 | | | 5,148 | | | 4,849 | | | (858) | | | (17) | % | | 299 | | | 6 | % |
Sales volume by nutrient tons (000s)(1) | 2,231 |
| | 2,253 |
| | 2,004 |
| | (22 | ) | | (1 | )% | | 249 |
| | 12 | % | Sales volume by nutrient tons (000s)(1) | 1,973 | | | 2,368 | | | 2,231 | | | (395) | | | (17) | % | | 137 | | | 6 | % |
| Average selling price per product ton | $ | 277 |
| | $ | 270 |
| | $ | 223 |
| | $ | 7 |
| | 3 | % | | $ | 47 |
| | 21 | % | Average selling price per product ton | $ | 438 | | | $ | 242 | | | $ | 277 | | | $ | 196 | | | 81 | % | | $ | (35) | | | (13) | % |
Average selling price per nutrient ton(1) | $ | 602 |
| | $ | 587 |
| | $ | 485 |
| | $ | 15 |
| | 3 | % | | $ | 102 |
| | 21 | % | Average selling price per nutrient ton(1) | $ | 953 | | | $ | 527 | | | $ | 602 | | | $ | 426 | | | 81 | % | | $ | (75) | | | (12) | % |
| Gross margin per product ton | $ | 99 |
| | $ | 88 |
| | $ | 27 |
| | $ | 11 |
| | 13 | % | | $ | 61 |
| | N/M |
| Gross margin per product ton | $ | 207 | | | $ | 78 | | | $ | 99 | | | $ | 129 | | | 165 | % | | $ | (21) | | | (21) | % |
Gross margin per nutrient ton(1) | $ | 216 |
| | $ | 192 |
| | $ | 58 |
| | $ | 24 |
| | 13 | % | | $ | 134 |
| | N/M |
| Gross margin per nutrient ton(1) | $ | 450 | | | $ | 169 | | | $ | 216 | | | $ | 281 | | | 166 | % | | $ | (47) | | | (22) | % |
| Depreciation and amortization | $ | 264 |
| | $ | 276 |
| | $ | 246 |
| | $ | (12 | ) | | (4 | )% | | $ | 30 |
| | 12 | % | Depreciation and amortization | $ | 235 | | | $ | 270 | | | $ | 264 | | | $ | (35) | | | (13) | % | | $ | 6 | | | 2 | % |
| Unrealized net mark-to-market loss (gain) on natural gas derivatives | $ | 4 |
| | $ | (4 | ) | | $ | 16 |
| | $ | 8 |
| | N/M |
| | $ | (20 | ) | | N/M |
| Unrealized net mark-to-market loss (gain) on natural gas derivatives | $ | 6 | | | $ | (2) | | | $ | 4 | | | $ | 8 | | | N/M | | $ | (6) | | | N/M |
______________________________________________________________________________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.
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.
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.
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.
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 nitrogen 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, 20192021 and 2018,2020, we had $119$700 million and $149$130 million, respectively, in customer advances on our consolidated balance sheets.
While customer advances are generally a significant source of liquidity, the level of forward sales contracts is affected by many factors including current market conditions and our customers’ outlook of future market fundamentals. During periods of declining prices, customers tend to delay purchasing fertilizer in anticipation that prices in the future will be lower than the
current prices. If the level of sales under our forward sales programs were to decrease in the future, our cash received from customer advances would likely decrease and our accounts receivable balances would likely increase. Additionally, 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.
We also have manufacturing facilities located in the United Kingdom. These facilities are subject to fluctuations associated with the price of natural gas in Europe. The major natural gas trading point for the United Kingdom is the National
Balancing Point (NBP). During 2019,2021, the daily closing price at NBP reached a low of $2.36$5.58 per MMBtu on September 4, 2019February 23, 2021 and a high of $7.91$60.10 per MMBtu on January 17, 2019.December 22, 2021. During the three-year period ended December 31, 2019,2021, the daily closing price at NBP reached a low of $2.36$1.04 per MMBtu on September 4, 2019,May 22, 2020, and a high of $31.74$60.10 per MMBtu on March 2, 2018.December 22, 2021.
Natural gas costs in our cost of sales, including the impact of realized natural gas derivatives, decreased 13%increased 88% to $4.21 per MMBtu in 20192021 from 2018.$2.24 per MMBtu in 2020.
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.provisions. In the event of certain defaults or a credit ratings downgrade,termination events, our counterpartycounterparties 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.
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.
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.
We review the carrying values of our property, plant and equipment and other long-lived assets, including our finite-lived intangible assets, goodwill and investmentsour investment in affiliates including joint venturesan unconsolidated affiliate in accordance with U.S. GAAP in order to assess recoverability. Factors that we must estimate when performing impairment tests include production and sales volume,volumes, selling prices, raw material costs, operating rates, operating expenses, inflation, discount rates, exchange rates, tax rates and capital spending. Significant judgmentJudgment 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 investmentsour investment in an unconsolidated affiliatesaffiliate 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 ifwhenever events or circumstances indicate that itthe carrying value may not be impaired.recoverable. Our investmentsinvestment in an unconsolidated affiliates areaffiliate is reviewed for impairment whenever events or circumstances indicate that theits 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 iswould be recognized immediately in earnings.
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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of changes in commodity prices, interest rates and foreign currency exchange rates.
Our net sales, cash flows and estimates of future cash flows related to nitrogen-based fertilizersproducts are sensitive to changes in fertilizerselling prices as well as changes in the prices of natural gas and other raw materials unless these costs have been fixed or hedged. A $1.00 per MMBtu change in the price of natural gas would change the cost to produce a ton of ammonia, granular urea, UAN (32%) and AN by approximately $33, $21, $15$22, $14 and $15,$16, respectively.
Natural gas is the largest and most volatile component of the manufacturing cost for nitrogen-based fertilizers. We manageproducts. At certain times, we have managed the risk of changes in natural gas prices primarily withthrough the use of derivative financial instruments. The derivative instruments that we may use for this purpose are primarily natural gas fixed price swaps, basis swaps and options. These derivatives settle using primarily a NYMEX futures price index, which represents the basis for fair value at any given time. The contracts represent anticipated natural gas needs for future periods and settlements are scheduled to coincide with anticipated natural gas purchases during those future periods. As of December 31, 2019,2021, we had natural gas fixed price swaps, basis swaps and optionsderivative contracts covering certain periods through March 2020.2022.
From time to time we may purchase nitrogen products on the open market to augment or replace production at our facilities.
We are directly exposed to changes in the value of the Canadian dollar, the British pound and the euro. We generally do not maintain any exchange rate derivatives or hedges related to these currencies.
We identified the evaluation of the Company’s measurement of the PBO to be a critical audit matter. Specialized skills and knowledge were needed to evaluate the assumptions regarding the discount rates utilized in the measurement of the PBO for botheach of the North American and United Kingdom plans and the adjusted RPI utilized in the measurement of the PBO in regards tofor the Company’s United Kingdom plans. In addition, a high degree of auditor judgment was required regarding the evaluation of these discount rates and the adjusted RPI, as minor changes to these assumptions could have a significant impact on the PBO.
We have served as the Company’s auditor since 1983.
In the table above, the line titled “Prior service cost (credit)” in 2019 relates to plan amendments for updates to certain mortality tables for the U.S. plan and a conversion option for pensions in payment for the U.K. plan; and for 2018, a U.K. plan amendment due to the guaranteed minimum pension equalization.plans.
The accumulated benefit obligation (ABO) in aggregate for the defined benefit pension plans in North America was approximately $793$797 million and $703$834 million as of December 31, 20192021 and December 31, 2018,2020, respectively. The ABO in aggregate for the defined benefit pension plans in the United Kingdom was approximately $597$590 million and $524$643 million as of December 31, 20192021 and December 31, 2018,2020, respectively.
Our pension funding policy in North America is to contribute amounts sufficient to meet minimum legal funding requirements plus discretionary amounts that we may deem to be appropriate. Actual contributions may vary from estimated amounts depending on changes in assumptions, actual returns on plan assets, changes in regulatory requirements and funding decisions.
In accordance with United Kingdom pension legislation, our United Kingdom pension funding policy is to contribute amounts sufficient to meet the funding level target agreed between the employer and the trustees of the United Kingdom plans. Actual contributions are usually agreed with the plan trustees in connection with each triennial valuation and may vary following each such review depending on changes in assumptions, actual returns on plan assets, changes in regulatory requirements and funding decisions.
The discount rates for all plans are developed by plan using spot rates derived from a hypothetical yield curve of high quality (AA rated or better) fixed income debt securities as of the year-end measurement date to calculate discounted cash flows (the projected benefit obligation) and solving for a single equivalent discount rate that produces the same projected benefit obligation. In determining our benefit obligation, we use the actuarial present value of the vested benefits to which each eligible employee is currently entitled, based on the employee’s expected date of separation or retirement.
The cash balance interest crediting rate for the U.S. plan is based on the greater of 10-year Treasuries or 3.0%.
For our North America plans, the expected long-term rate of return on assets is based on analysis of historical rates of return achieved by equity and non-equity investments and current market characteristics, adjusted for estimated plan expenses and weighted by target asset allocation percentages. As of January 1, 2020,2022, our weighted-average expected long-term rate of return on assets is 4.1%3.6%, which will be used in determining expense for 2020.2022.
For our United Kingdom plans, the expected long-term rate of return on assets is based on the expected long-term performance of the underlying investments, adjusted for investment managers’ fees.fees and estimated plan expenses. As of January 1, 2020,2022, our weighted-average expected long-term rate of return on assets is 3.4%, which will be used in determining expense for 2020.2022.
The retail price index for the United Kingdom plans is developed using the Bank of England implied retail price inflation curve, which is based on the difference between yields on fixed interest government bonds and index-linked government bonds.
The objectives of the investment policies governing the pension plans are to administer the assets of the plans for the benefit of the participants in compliance with all laws and regulations, and to establish an asset mix that provides for diversification and considers the risk of various different asset classes with the purpose of generating favorable investment returns. The investment policies consider circumstances such as participant demographics, time horizon to retirement and liquidity needs, and provide guidelines for asset allocation, planning horizon, general portfolio issues and investment manager evaluation criteria. The investment strategies for the plans, including target asset allocations and investment vehicles, are subject to change within the guidelines of the policies.
The target asset allocation for our U.S. pension plan is 80% non-equity and 20% equity, which has been determined based on analysis of actual historical rates of return and plan needs and circumstances. The equity investments are tailored to exceed
the growth of the benefit obligation and are a combination of U.S. and non-U.S. total stock market index mutual funds. The non-equity investments consist primarily of investments in debt securities and money market instruments that are selected based on investment quality and duration to mitigate volatility of the funded status and annual required contributions. The non-equity investments have a duration profile that is similar to the benefit obligation in order to mitigate the impact of interest rate changes on the funded status. This investment strategy is achieved through the use of mutual funds and individual securities.
The pension assets in the United Kingdom plans are each administered by a Board of Trustees consisting of employer nominatedemployer-nominated trustees, member nominatedmember-nominated trustees and an independent trustee. Trustees may be appointed or removed by CF Fertilisers UK Group Limited (formerly known as GrowHow UK Group Limited) (CF Fertilisers UK), provided CF Fertilisers UK fulfills its obligation to havetrustee, with a requirement that member-nominated trustees represent at least one thirdone-third of theeach Board of Trustees as member nominated.Trustees. It is the responsibility of the trustees to ensure prudent management and investment of the assets in the plans. The trustees meet on a quarterly basis to review and discuss fund performance and other administrative matters.
The trustees’ investment objectives are to hold assets that generate returns sufficient to cover prudently each plan’s liability without exposing the plans to unacceptable risk. This is accomplished through the asset allocation strategy of each plan. For both plans, if the asset allocation moves more than plus or minus 5% from the benchmark allocation, the trustees may decide to amend the asset allocation. At a minimum, the trustees review the investment strategy at every triennial actuarial valuation to ensure that the strategy remains consistent with its funding principles. The trustees may review the strategy more frequently if opportunities arise to reduce risk within the investments without jeopardizing the funding position.
Assets of the United Kingdom plans are invested in externally managed pooled funds. The assets are allocated between a growth portfolio and a matching portfolio. The growth portfolio seeks a return premium on investments across multiple asset classes. Growth portfolio funds may include, among others, traditional equities and bonds, growth fixed income, hedged funds, and may use derivatives. The matching portfolio seeks to align asset changes with changes in liabilities due to interest rates and inflation expectations. Matching portfolio funds are composed of corporate bonds, U.K. gilts and liability-driven investment funds and generally invest in fixed income debt securities including government bonds, gilts, gilt repurchase agreements, swaps and investment grade corporate bonds and may use derivatives. The target asset allocation for one of the United Kingdom plans is 55% actively managed target return funds, 10% activelyin the growth portfolio and passively managed bond45% in the matching portfolio and gilt funds, 20% liability-driven investment funds, and 15% actively managed property funds. The target asset allocation for the other United Kingdom plan is 50% actively managed target return funds, 20% actively and passively managed bond and gilt funds, 25% liability-driven investment funds, and 5%60% in the growth portfolio (including a legacy holding in an actively managed property fund. The target return funds diversify assets across multiple asset classes (which may include, among others, traditional equitiesfund) and bonds) and may use derivatives. The bond and gilt funds generally invest40% in fixed income debt securities including government bonds, gilts, high yield and emerging market bonds, and investment grade corporate bonds and may use derivatives. The liability-driven investment funds generally invest in government gilts, gilt repurchase agreements, and derivatives. The property funds are invested predominately in freehold and leasehold property.the matching portfolio.
We have defined contribution plans covering substantially all employees in North America and the United Kingdom. Depending on the specific provisions of each plan, qualified employees receive company contributions based on a percentage of base salary, matching of employee contributions up to specified limits, or a combination of both. In 2019, 2018,2021, 2020 and 2017,2019, we recognized expense related to our contributions to the defined contribution plans of $20$25 million, $18$22 million and $18$20 million, respectively.
In addition to our qualified defined benefit pension plans, we also maintain certain nonqualified supplemental pension plans for highly compensated employees as defined under federal law. The amounts recognized in accrued expenses and other liabilities in our consolidated balance sheets for these plans were $2$1 million and $14 million, respectively, as of December 31, 2021, and $4 million and $16 million, respectively, as of December 31, 2019 and $2 million and $15 million as of December 31, 2018, respectively.2020. We recognized expense for these plans of $2 million, $2 million and $1 million $1 million,in 2021, 2020 and $2 million in 2019, 2018, and 2017, respectively. The expense recognized in 2017 includes a settlement charge of $1 million.
Under the indentures (including the applicable supplemental indentures) governing the 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 fair values of derivatives on our consolidated balance sheets are shown below. As of December 31, 20192021 and 2018,2020, none of our derivative instruments were designated as hedging instruments. See Note 9—10—Fair Value Measurements for additional information on derivative fair values.
The counterparties to our derivative contracts are multinational commercial banks, major financial institutions and large energy companies. Our derivative contracts are executed with several counterparties under International Swaps and Derivatives Association (ISDA) agreements. The ISDA agreements are master netting arrangements commonly used for OTC derivatives that mitigate exposure to counterparty credit risk, in part, by creating contractual rights of netting and setoff, the specifics of which vary from agreement to agreement. These rights are described further below:
counterparties under the ISDA agreement or otherwise. Typically, these setoff rights arise upon the early termination of all transactions outstanding under an ISDA agreement following a default or specified termination event.
Most of our ISDA agreements contain credit-risk-related contingent features such as cross default provisions. In the event of certain defaults or termination events, our counterparties may request early termination and net settlement of certain derivative trades or, under certain ISDA agreements, 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, 20192021 and 2018,2020, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was $12$31 million and 0,$6 million, respectively, which also approximates the fair value of the maximum amount of additional collateral that may need to be posted or assets that may be needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. As of December 31, 2019 and 2018, we had 0 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. As of December 31, 2021 and 2020, we had no cash collateral on deposit with counterparties for derivative contracts.
We do not believe the contractually allowed netting, close-out netting or setoff of amounts owed to, or due from, the counterparties to our ISDA agreements would have a material effect on our financial position.
Accrued interest includes interest payable on our outstanding senior notes. See Note 12—13—Financing Agreements and Note 13—14—Interest Expense for additional information.
Benefit plans and deferred compensation include liabilities for pensions, retiree medical benefits, and the noncurrent portion of incentive plans. See Note 11—12—Pension and Other Postretirement Benefits for additional information.
CF Holdings is authorized to issue 50 million shares of $0.01 par value preferred stock. Our Second Amended and Restated Certificate of Incorporation, as amended, authorizes the Board, without any further stockholder action or approval, to issue these shares in one or more classes or series, and (except in the case of our Series A Junior Participating Preferred Stock, 500,000 shares of which are authorized and the terms of which were specified in the original certificate of incorporation of CF Holdings) to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any of its qualifications, limitations or restrictions. The Series A Junior Participating Preferred Stock had been established in CF Holdings’ original certificate of incorporation in connection with our former stockholder rights plan that expired in 2015. No shares of preferred stock have been issued.
Excess tax benefits realized from the vesting of restricted stock or stock option exercises are recognized as an income tax benefit in our consolidated statements of operations and are required to be reported as an operating cash inflow rather than a reduction of taxes paid. The excess tax benefits realized in 2021, 2020 and 2019 2018were $22 million, $3 million and 2017 were $7 million, $6 million, and $1 million, respectively.
West Fertilizer Co.
On April 17, 2013, there was a fire and explosion at the West Fertilizer Co. fertilizer storage and distribution facility in West, Texas. According to published reports, 15 people were killed and approximately 200 people were injured in the incident, and the fire and explosion damaged or destroyed a number of homes and buildings around the facility. Various subsidiaries of CF Industries Holdings, Inc. (the CF Entities) were named as defendants along with other companies in lawsuits filed in 2013, 2014 and 2015 in the District Court of McLennan County, Texas by the City of West, individual residents of the County and other parties seeking recovery for damages allegedly sustained as a result of the explosion. The cases were consolidated for discovery and pretrial proceedings in the District Court of McLennan County under the caption “In re: West Explosion Cases.” The two-year statute of limitations expired on April 17, 2015. As of that date, over 400 plaintiffs had filed claims, including at least 9 entities, 325 individuals, and 80 insurance companies. Plaintiffs allege various theories of negligence, strict liability, and breach of warranty under Texas law. Although we dodid not own or operate the facility or directly sell our products to West Fertilizer Co., products that the CF Entities manufactured and sold to others were delivered to the facility and may have been stored at the West facility at the time of the incident.
The Court granted in part and denied in part the CF Entities’ Motions for Summary Judgment in August 2015. Over 200Nearly all of the cases, including all wrongful death and personal injury claims, have been resolved pursuant to confidential settlements that have been or we expect will be fully funded by insurance. The remaining casessubrogation and statutory indemnification claims total approximately $37 million, before prejudgment interest, and are in various stages of discovery and pre-trial proceedings. The next group of cases was resetremaining claims are expected to be set for trial beginning on September 14, 2020.in 2022. We believe we have strong legal and factual defenses and intend to continue defending the CF Entities vigorously in the pendingremaining lawsuits. The Company cannot provide a range of reasonably possible loss due to the lack of damages discovery for many of the remaining claims and the uncertain nature of this litigation, including uncertainties around the potential allocation of responsibility by a jury to other defendants or responsible third parties. The recognition of a potential loss in the future in the West Fertilizer Co. litigation could negatively affect our results in the period of recognition. However, based upon currently available information, including availablewe expect any potential loss to be fully indemnified by insurance coverage, weand do not believe that this litigation will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
From time to time, we are subject to ordinary, routine legal proceedings related to the usual conduct of our business, including proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of our various plants and facilities. Based on the information available as of the date of this filing, we believe that the ultimate outcome of these routine matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
From time to time, we receive notices from governmental agencies or third parties alleging that we are a potentially responsible party at certain cleanup sites under CERCLAthe Comprehensive Environmental Response, Compensation, and Liability Act or other environmental cleanup laws. In 2011, we received a notice from the Idaho Department of Environmental Quality (IDEQ) that alleged that we were a potentially responsible party for the cleanup of a former phosphate mine site we owned in the late 1950s and early 1960s located in Georgetown Canyon, Idaho. The current owner of the property and a former mining contractor received similar notices for the site. In 2014, we and the current property owner entered into a Consent Order with IDEQ and the U.S. Forest Service to conduct a remedial investigation and feasibility study of the site. In 2015, we and several other parties received a notice that the U.S. Department of the Interior and other trustees intendintended to undertake a natural resource damage assessment for 1718 former phosphate mines and 3 former processing facilities in southeast Idaho, one of which isincludes the former Georgetown Canyon mine.former mine and processing facility. In June 2021, we received another notice from the U.S. Department of the Interior that the natural resource damage trustees were commencing a ‘subsequent’ phase of the natural resource damage assessment, but no further details were provided with respect to said assessment. Because the former mine site is still in the remedial investigation/investigation and feasibility study stage, and because a schedule for a natural resource injury assessment has yet to be determined, we are not able to estimate at this time our potential liability, if any, with respect to the cleanup of the site or a possible claim for natural resource damages. However, based on the results of the site investigation conducted to date, we do not expect the remedial or financial obligations to which we may be subject involving this or other cleanup sites will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. In 2019, 20182021, 2020 and 2017,2019, CHS accounted for approximately 15%14%, 14%13% and 11%15% of our consolidated net sales, respectively. See Note 17—18—Noncontrolling InterestsInterest for additional information.
Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. AROs are initially recognized as incurred when sufficient information exists to estimate fair value. We have AROs at our nitrogen manufacturing complexes and at our distribution and storage facilities that are conditional upon cessation of operations. These AROs include certain decommissioning activities as well as the removal and disposal of certain chemicals, waste materials, structures, equipment, vessels, piping and storage tanks. Also included are reclamation of land and the closure of certain effluent ponds.ponds and/or waste storage areas. The most recent estimate of the aggregate cost of these AROs expressed in 20192021 dollars is $81approximately $116 million. We have not recorded a liability for these conditional AROs as of December 31, 20192021 because we do not believe there is currently a reasonable basis for estimating a date or range of dates of cessation of operations at our nitrogen manufacturing facilities or our distribution and storage facilities, which is necessary in order to estimate fair value. In reaching this conclusion, we considered the historical performance of each complex or facility and have taken into account factors such as planned maintenance, asset replacements and upgrades of plant and equipment, which if conducted as in the past, can extend the physical lives of our nitrogen manufacturing facilities and our distribution and storage facilities indefinitely. We also considered the possibility of changes in technology, risk of obsolescence, and availability of raw materials in arriving at our conclusion.