You should read the following discussion and analysis in conjunction with our annual consolidated financial statements and related notes and our discussion and analysis of financial condition and results of operations, which were included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 24, 2021 , as well as Item 1. Financial Statements in this Quarterly Report on Form 10-Q. All references to "CF Holdings ," "we," "us," "our" and "the Company" refer toCF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only toCF Industries Holdings, Inc. itself and not its subsidiaries. All references to "CF Industries " refer toCF Industries, Inc. , a 100% owned subsidiary ofCF Industries Holdings, Inc. References to tons refer to short tons. Notes referenced in this discussion and analysis refer to the notes to our unaudited interim consolidated financial statements in Item 1. Financial Statements in this Quarterly Report on Form 10-Q. The following is an outline of the discussion and analysis included herein: •Overview ofCF Holdings •Our Company •Our Commitment to a Clean Energy Economy •Market Conditions and Current Developments •Financial Executive Summary •Items Affecting Comparability of Results •Consolidated Results of Operations •Second Quarter of 2021 Compared to Second Quarter of 2020 •Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 •Operating Results by Business Segment •Liquidity and Capital Resources •Critical Accounting Estimates •Forward-Looking Statements Overview ofCF 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 inthe United States ,Canada and theUnited Kingdom , an extensive storage, transportation and distribution network inNorth 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 ofJune 30, 2021 include: •fiveU.S. nitrogen manufacturing facilities located inDonaldsonville, Louisiana (the largest nitrogen complex in the world);Port Neal, Iowa ;Yazoo City, Mississippi ;Verdigris, Oklahoma ; andWoodward, Oklahoma . These facilities are wholly owned directly or indirectly byCF Industries Nitrogen, LLC (CFN), of which we own approximately 89% and CHS Inc. (CHS) owns the remainder. See Note 13-Noncontrolling Interest for additional information on our strategic venture with CHS; •two Canadian nitrogen manufacturing facilities located inMedicine Hat, Alberta (the largest nitrogen complex inCanada ) andCourtright, Ontario ; •twoUnited Kingdom nitrogen manufacturing facilities located inBillingham and Ince; 24
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CF INDUSTRIES HOLDINGS, INC. •an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and •a 50% interest inPoint Lisas Nitrogen Limited (PLNL), an ammonia production joint venture located in theRepublic of Trinidad and Tobago (Trinidad ) that we account for under the equity method. Our Commitment to a Clean Energy Economy InOctober 2020 , we announced that 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 will focus on green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects. We announced an initial green ammonia project at our flagshipDonaldsonville nitrogen complex to produce approximately 20,000 tons per year of green ammonia. Additionally, we are developing CCS and other carbon abatement projects across our production facilities that will enable us to produce blue ammonia. InApril 2021 , we signed an engineering and procurement contract with thyssenkrupp to supply a 20 MW alkaline water electrolysis plant to produce green hydrogen at ourDonaldsonville nitrogen complex. Construction and installation, which will be managed by us, is expected to begin in the second half of 2021 and to finish in 2023. 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, theDonaldsonville green ammonia project will be the largest of its kind inNorth America . Market Conditions and Current Developments Selling Prices and Sales Volume Our average selling price was higher in the second quarter of 2021 than in the second quarter of 2020, driven by the impact of a tighter global nitrogen supply and demand balance, as a result of strong global demand as well as decreased global supply availability as higher global energy costs continued to drive lower global operating rates. In the second quarter of 2021, the average selling price for our products was$307 per ton, an increase of 37%, compared to$224 per ton in the second quarter of 2020. We reported higher average selling prices in the second quarter of 2021 as compared to the second quarter of 2020 across all our segments, which drove an increase in net sales of approximately$437 million . In the six months endedJune 30, 2021 , the average selling price for our products was$271 per ton, or 25% higher compared to$216 per ton for the six months endedJune 30, 2020 . This resulted in an increase in net sales of approximately$538 million . Our total sales volume was 4% lower in the second quarter of 2021 than in the second quarter of 2020. We shipped 5.2 million tons of product in the second quarter of 2021 compared to 5.4 million tons in last year's second quarter due primarily to the impact of decreased supply resulting from lower production of ammonia and the resulting upgraded products. Lower sales volume drove a decrease in net sales of approximately$82 million . We shipped 9.7 million tons of product in the first six months of 2021 compared to 10.1 million tons in the first six months of 2020, or a decline of 3%. Lower sales volume drove a decrease in net sales of approximately$138 million . The decrease in total sales volume was due primarily to the impact of decreased supply resulting from lower production in our ammonia, granular urea and AN segments in the first six months of 2021 as a result of severe weather conditions in the first quarter of 2021 due to Winter Storm Uri, which disrupted natural gas supply at certain of our facilities, and higher maintenance activity. Due to the lower production, we procured additional granular urea in order to meet customer obligations and provide additional manufacturing flexibility once production resumed. During the six months endedJune 30, 2021 , to meet customer obligations, we purchased 201,000 tons of granular urea for$71 million , which we sold to customers for$68 million . We currently expect sales volumes for our products in 2021 will be approximately 19 million product tons as a result of the increase in maintenance activity due to maintenance deferred from 2020, activity previously planned to occur in 2022 and the severe weather conditions in the first quarter of 2021. 25
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CF INDUSTRIES HOLDINGS, INC. Natural Gas Natural gas is the principal raw material used to produce our nitrogen 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 one-third of our production costs. InFebruary 2021 , the central portion ofthe 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 usage. At certain of our manufacturing locations, we reduced our natural gas consumption and therefore these plants either operated at reduced rates or temporarily suspended operations. We net 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 six months endedJune 30, 2021 . Most of our nitrogen manufacturing facilities are located inthe United States andCanada . As a result, the price of natural gas inNorth America , which is subject to volatility, directly impacts a substantial portion of our operating expenses. Natural gas prices during the first six months of 2021 were higher than in the first six months of 2020, due primarily to the impact of extreme cold weather in the first quarter of 2021, including Winter Storm Uri inFebruary 2021 , followed by above normal temperatures in the second quarter of 2021 and increased energy demand as the economy emerged from the COVID-19 pandemic. The average daily market price at the Henry Hub, the most heavily-traded natural gas pricing point inNorth America , for the three months endedJune 30, 2021 was$2.88 per MMBtu compared to$1.65 per MMBtu for the three months endedJune 30, 2020 , an increase of 75%. The average daily market price at the Henry Hub for the six months endedJune 30, 2021 was$3.13 per MMBtu compared to$1.76 per MMBtu for the six months endedJune 30, 2020 , an increase of 78%. As a result of Winter Storm Uri, the daily closing price at the Henry Hub reached a high of$23.61 per MMBtu onFebruary 18, 2021 . We also have manufacturing facilities located in theUnited Kingdom . These facilities are subject to fluctuations associated with the price of natural gas inEurope . The major natural gas trading point for theUnited Kingdom is theNational Balancing Point (NBP). The average daily market price of natural gas at NBP for the three months endedJune 30, 2021 was$8.90 per MMBtu compared to$1.60 per MMBtu for the three months endedJune 30, 2020 . The price of natural gas in theUnited Kingdom increased in the first six months of 2021 due primarily to a tighter supply and demand balance in the global liquefied natural gas market as a result of severe cold temperatures inAsia that increased global liquefied natural gas demand and resulted in record Asian prices for liquefied natural gas, raising European market prices to compete for limited supply. The average daily market price at the NBP for the six months endedJune 30, 2021 was$7.90 per MMBtu compared to$2.40 per MMBtu for the six months endedJune 30, 2020 , an increase of 229%. Subsequent toJune 30, 2021 , the average daily market price of natural gas at NBP forJuly 2021 was$12.37 per MMBtu. In the second quarter of 2021, the cost of natural gas used for production, which includes the impact of realized natural gas derivatives, increased 75% to$3.25 per MMBtu in the three months endedJune 30, 2021 from$1.86 per MMBtu in the three months endedJune 30, 2020 . This increase in natural gas costs resulted in a decrease in gross margin of approximately$131 million . In the first half of 2021, the cost of natural gas used for production, which includes the impact of realized natural gas derivatives and excludes the$112 million gain that resulted from the net settlement of certain natural gas contracts with our suppliers, increased 47% to$3.24 per MMBtu in the six months endedJune 30, 2021 from$2.20 per MMBtu in the six months endedJune 30, 2020 . This increase in natural gas costs resulted in a decrease in gross margin of approximately$179 million . Manufacturing Costs and Granular Urea Purchases In the first half of 2021, we experienced lower production levels and higher manufacturing and maintenance costs. In response to the lower production levels, we procured granular urea in order to meet customer obligations and provide additional manufacturing flexibility. The following summarizes the impact from these activities: •Certain of our plants operated at lower operating rates or temporarily suspended operations due to the lack of natural gas due to Winter Storm Uri or due to maintenance activity in 2021 that was deferred from 2020 as a result of the COVID-19 pandemic. Because of these factors, in the first half of 2021, we incurred higher costs for manufacturing, maintenance and repair activity for both scheduled and unscheduled downtime. •Due to the lower production, we procured additional granular urea in order to meet customer obligations. In the first half of 2021, we purchased approximately$71 million of granular urea, which we sold to customers for$68 million . 26
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CF INDUSTRIES HOLDINGS, INC. COVID-19 Pandemic InMarch 2020 , theWorld Health Organization characterized the outbreak of coronavirus disease 2019 (COVID-19) as a pandemic. Due to the use of fertilizer products in crop production to support the global food supply chain, our business operations were designated as part of the critical infrastructure bythe United States and as essential businesses in theUnited Kingdom andCanada , with corresponding designations by those states and provinces in which we operate. As a result, our manufacturing complexes continued to operate during 2020 and have continued to operate through the date of this report. In addition, we have continued to ship products by all modes of transportation to our customers, and we have not experienced any significant delays in marine, rail or truck transportation services due to the pandemic. Through the date of this report, we have not experienced any meaningful impact in customer demand as a result of the pandemic. In response to the 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 workforcewho operate our nitrogen complexes and distribution facilities. We will continue to monitor safety guidelines related to COVID-19 as issued by governmental authorities and adjust our safety protocols, as needed. Financial Executive Summary We reported net earnings attributable to common stockholders of$246 million for the three months endedJune 30, 2021 compared to$190 million for the three months endedJune 30, 2020 , an increase in net earnings of$56 million , or 29%. The increase in net earnings was due primarily to higher average selling prices, partially offset by higher natural gas costs and higher costs related to manufacturing, maintenance and repair activity. Gross margin increased by$169 million in the second quarter of 2021 to$503 million as compared to$334 million in the second quarter of 2020. The following table and related discussion describe the significant factors that drove the increase in gross margin.
Variance due to the following items:
Higher Higher Average Manufacturing, Second Quarter Selling Higher Natural Maintenance, and Increase in Second Quarter of 2020 Prices(1) Volume(1) Gas Costs(2) Other Costs Purchased Urea(3) of 2021 (dollars in millions) Net sales$ 1,204 $ 437$ (82) $ - $ - $ 29$ 1,588 Cost of sales 870 - (52) 131 105 31 1,085 Gross margin$ 334 $ 437$ (30) $ (131) $ (105) $ (2)$ 503 Gross margin percentage 27.7 % 31.7 %
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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 include the impact, if any, of realized natural gas derivatives. (3)Represents the impact of the incremental tons compared to the prior year period. •Average selling prices increased 37% to$307 per ton in the second quarter of 2021 from$224 per ton in the second quarter of 2020, which increased gross margin by$437 million , •Sales volume declined by 4% to 5.2 million tons in the second quarter of 2021 from 5.4 million tons in the second quarter of 2020, which reduced gross margin by$30 million , •The cost of natural gas used for production increased 75% to$3.25 per MMBtu in the second quarter of 2021 from$1.86 per MMBtu in the second quarter of 2020, which reduced gross margin by$131 million , •We incurred higher manufacturing, maintenance and other costs, which reduced gross margin by$105 million , due primarily to higher plant turnaround, maintenance and repair activities, and •During the second quarter of 2021, to meet customer obligations, we purchased 104,000 tons of granular urea, an increase of 80,000 tons compared to the second quarter of 2020. Diluted net earnings per share attributable to common stockholders increased$0.25 per share, to$1.14 per share, in the second quarter of 2021 compared to$0.89 per share in the second quarter of 2020. This increase was due primarily to higher net earnings driven by the increase in average selling prices described above. 27
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CF INDUSTRIES HOLDINGS, INC. Items Affecting Comparability of Results In addition to the impact of market conditions, winter storms and manufacturing and maintenance activity discussed above, certain items impacted the comparability of our financial results during the three and six months endedJune 30, 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 three months endedJune 30, 2021 and 2020, we reported net earnings attributable to common stockholders of$246 million and$190 million , respectively. During the six months endedJune 30, 2021 and 2020, we reported net earnings attributable to common stockholders of$397 million and$258 million , respectively. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax (in millions) Unrealized net mark-to-market gain on natural gas derivatives(1) $ - $ - $
- $ -
(9)
Special COVID-19 bonus for operational workforce(1) - - 15 12 - - 15
12
Loss (gain) on foreign currency transactions, including intercompany loans(2) 3 3 (5) (4) 3 3 13 10 Engineering cost write-off(2) - - 8 6 - - 8 6 Insurance proceeds(2) - - - - - - (10) (8) Loss on debt extinguishment - - - - 6 5 - - Terra amended tax returns-interest income and income tax benefit(3) - - (16) (32) - - (16)
(32)
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(1)Included in cost of sales in our consolidated statements of operations. (2)Included in other operating-net in our consolidated statements of operations. (3)Included in interest income and income tax provision in our consolidated statements of operations. Unrealized net mark-to-market 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 the six months endedJune 30, 2021 and 2020, we recognized unrealized net mark-to-market gains of$6 million and$12 million , respectively. Special COVID-19 bonus for operational workforce InMarch 2020 , a short-term bonus program was initiated to compensate operational employees for continuing their critical tasks during the COVID-19 pandemic. The bonus program concluded inJune 2020 . Approximately$19 million was paid as part of the program, of which approximately$15 million was recognized in cost of sales in our consolidated statement of operations for the three months endedJune 30, 2020 , and the remaining$4 million was recognized in the third quarter of 2020. Loss (gain) on foreign currency transactions, including intercompany loans In the six months endedJune 30, 2021 and 2020, we recognized losses of$3 million and$13 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 InJune 2020 , a project at one of our nitrogen complexes was cancelled and, as a result,$8 million of previously capitalized engineering costs were expensed in the three months endedJune 30, 2020 . The expense is reflected in other operating-net in our consolidated statements of operations. 28
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CF INDUSTRIES HOLDINGS, INC. Insurance proceeds In the six months endedJune 30, 2020 , we recognized income of$10 million related to insurance claims at one of our nitrogen complexes, which consisted of$8 million related to business interruption 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 OnMarch 20, 2021 , we redeemed in full all of the remaining$250 million outstanding principal amount of the 3.400% senior secured notes dueDecember 2021 (the 2021 Notes) in accordance with the optional redemption provisions in the indenture governing the 2021 Notes. The total aggregate redemption price paid on the 2021 Notes in connection with the redemption was$258 million , including accrued interest. As a result, we recognized a loss on debt extinguishment of$6 million , primarily consisting of a premium paid on the early redemption of the notes. Terra amended tax returns We completed the acquisition ofTerra Industries Inc. (Terra) inApril 2010 . After the acquisition, we determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to itsU.S. parent forU.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 theU.S. tax aspects of the Amended Tax Returns. In the second quarter of 2020, we receivedIRS notices indicating the amount of tax and interest to be refunded and received with respect to the income tax and withholding tax returns. See "Liquidity and Capital Resources-Terra Amended Tax Returns," below, for additional information. As a result, we recognized$16 million of interest income ($13 million , net of tax) and$19 million of additional income tax benefit. In addition, in the second quarter of 2020, we receivedU.S. Federal income tax refunds, including interest, of$108 million relating to these matters. InJuly 2020 , we received an additional$2 million , which finalized these matters with theIRS . In 2017, we made a Voluntary Disclosures Program filing with theCanada Revenue Agency (CRA) with respect to the Canadian tax aspects of this matter and paid additional Canadian taxes due. In late 2020, the CRA settled with us the voluntary disclosure matter, and, in the first quarter of 2021, we received approximately$20 million of withholding tax refunds, including interest, from the CRA. These amounts were previously recorded in our consolidated balance sheet as ofDecember 31, 2020 . 29
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