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, 2021 , filed with theSecurities and Exchange Commission onFebruary 24, 2022 , 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, and references to tonnes refer to metric 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
•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 nitrogen 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 of
•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 14-Noncontrolling Interest for additional information on our strategic venture with CHS;
•two Canadian nitrogen manufacturing facilities located in
•two
•an extensive system of terminals and associated transportation equipment located primarily in the Midwestern United States; and
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CF INDUSTRIES HOLDINGS, INC. •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
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. InOctober 2020 , we announced an initial green ammonia project at ourDonaldsonville complex. 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 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, theDonaldsonville green ammonia project will be the largest of its kind inNorth America . In the third quarter of 2021, we signed a memorandum of understanding with Mitsui & Co., Ltd. (Mitsui) that is guiding us in a joint exploration of the development of blue ammonia projects inthe United States . OnMay 3, 2022 , we and Mitsui announced our intention to jointly develop a greenfield ammonia production facility to produce blue ammonia inthe United States . We anticipate that a front-end engineering design (FEED) study will commence shortly with a final investment decision on constructing the blue ammonia production facility expected in 2023. We have also announced steps to produce blue ammonia from our existing ammonia production network. In the fourth quarter of 2021, our Board of Directors (the Board) authorized projects within our existing network that we believe will enable the permanent sequestration of up to 2.5 million tons of carbon emissions each year and the annual production of approximately 2 million tons of blue ammonia, which is equivalent to 1.25 million tons of net-zero carbon ammonia, starting in 2024. The projects will involve constructing units at ourDonaldsonville andYazoo 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 atDonaldsonville and 500,000 tons atYazoo 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 theDonaldsonville complex is expected to begin in 2022 and to be completed in 2024, with an estimated total cost of$200 million . TheYazoo City project will be timed to coincide with CO2 transport pipeline construction. Once started, theYazoo City 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 fromDonaldsonville .
Market Conditions and Current Developments
Geopolitical Environment
Russia's invasion ofUkraine inFebruary 2022 , and the resulting war betweenRussia andUkraine , has led to disruptions in the global markets for certain crop commodities, natural gas and nitrogen fertilizer. In recent weeks, we have seen effects in particular from export reductions from the region; energy, financial and transportation sanctions byU.S. , Canadian, European and other governments; and shipping and logistical complications. As further described below, natural gas is the principal raw material used to produce our nitrogen products. Natural gas is also a globally traded commodity that experiences price fluctuations based on supply demand balances and has been impacted by the recent geopolitical events. As a result ofEurope's dependence onRussia for a portion of its natural gas supply,Russia's invasion ofUkraine disrupted European energy markets and threatened security of natural gas supply. This led to further increases in natural gas prices and natural gas price volatility, which in turn led to disruptions in manufacturing and distribution activities at other nitrogen manufacturers and suppliers in our industry and to reductions in global fertilizer supply. 23
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CF INDUSTRIES HOLDINGS, INC. These geopolitical developments have also led to supply chain disruptions for Russian producers of fertilizer. Prior to the invasion,Russia had been the largest exporter of nitrogen fertilizer globally, and in recent years had been a significant supplier of nitrogen fertilizer toNorth America andEurope .Russia andUkraine are large exporters of commodity grains such as wheat, corn and soybeans. The direct and indirect impacts of the war inUkraine , and the related uncertainty, have resulted in an expectation that commodity grain supply from this region will be reduced, causing increased prices for grains globally. The increase in commodity grain prices has in turn driven a greater demand for nitrogen fertilizer. These events have further contributed to an already tight global supply demand balance for nitrogen fertilizers and even led to shortages of certain products in some international locations. These factors are causing changes in global trade flows as both manufacturers and customers react to the changing market dynamics. As a result, nitrogen fertilizer prices have significantly increased since the start of 2022. We expect that the recent geopolitical events, including any further government-imposed sanctions, will have an impact on the future supply demand balance and future selling prices for our nitrogen fertilizer products, but the scope and duration of these impacts are unknown at the present time.
Nitrogen Selling Prices
Our nitrogen products are globally traded commodities with selling prices that fluctuate in response to global market conditions, changes in supply and demand, and other cost factors including domestic and local conditions. Intense global competition-reflected in import volumes and prices-strongly influences delivered prices for nitrogen fertilizers around the world, including inthe United States . In general, the prevailing global prices for nitrogen products must be high enough in order for the marginal producers in the world with the highest input costs to at least break even over the long term, or else they would cease production and leave a portion of global demand unsatisfied. In the first quarter of 2022, the average selling price for our products was$620 per ton, an increase of 170%, compared to$230 per ton in the first quarter of 2021, reflecting higher average selling prices across all our segments, which primarily drove the increase in net sales of approximately$1.82 billion , as sales volume in tons in the first quarter of 2022 was essentially unchanged compared to the first quarter of 2021. The increase in our average selling price was caused by a tighter global nitrogen supply and demand balance resulting from strong global demand as well as a decrease in global supply availability as higher global energy costs continued to drive lower global operating rates, and exacerbated by the geopolitical environment described above.
Natural Gas
Natural gas is the principal raw material used to produce our nitrogen products. Natural gas is both a chemical feedstock and a fuel used to produce nitrogen products. Natural gas is a significant cost component of manufactured nitrogen products, representing approximately 50% of our production costs in the first quarter of 2022 and 40% of our production costs in 2021. The following table presents the average daily market price of natural gas at the Henry Hub, the most heavily-traded natural gas pricing point inNorth America , and theNational Balancing Point (NBP), the major trading point for natural gas in theUnited Kingdom :
Three Months Ended
2022 2021 2022 v. 2021
Natural gas supplemental data (per MMBtu)
Average daily market price of natural gas Henry Hub (Louisiana)$ 4.60 $ 3.38 $ 1.22 36 %
Average daily market price of natural gas
$ 30.20 $ 6.90 $ 23.30 338 % Most of our nitrogen manufacturing facilities are located inthe United States andCanada . As a result, the price of natural gas inNorth America directly impacts a substantial portion of our operating expenses. North American natural gas prices during the first three months of 2022 were higher on average than the first three months of 2021 due to tight supply and demand conditions within the market. After a warm start to the winter season at the end of 2021, colder temperatures in the first quarter of 2022 drove higher heating demand. North American supply failed to keep pace and did not sustain production levels achieved in late 2021, due to well freeze-offs and continued producer capital discipline hindering growth. As a result, North American gas withdrawals from storage during the first quarter of 2022 were larger than normal, leading to end-of-quarter levels below both last year and the five-year average. In addition, record high global gas prices and newly commissioned liquefaction facilities inNorth America led to record liquefied natural gas (LNG) exports fromthe United States throughout the first quarter of 2022. 24
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CF INDUSTRIES HOLDINGS, INC. The average daily market price at the Henry Hub for the three months endedMarch 31, 2022 was$4.60 per MMBtu compared to$3.38 per MMBtu for the three months endedMarch 31, 2021 , an increase of 36%. The average daily market price of natural gas at the Henry Hub forApril 2022 was$6.48 per MMBtu. In the first quarter of 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 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 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 three months endedMarch 31, 2021 . Our two nitrogen manufacturing facilities located in theUnited Kingdom are subject to fluctuations associated with the price of natural gas inEurope . The price of natural gas in theUnited Kingdom continued to reach record high prices during the first quarter of 2022.Europe began the year with record low storage levels, but a large increase in LNG import vessels along with milder weather started to ease concerns. However,Russia's invasion ofUkraine onFebruary 24, 2022 disrupted European energy markets and threatened security of supply, driving natural gas prices inEurope upward to unprecedented levels, further exacerbating an energy crisis that has been impacting ourU.K. operations, as further discussed below. Prices subsequently declined in March as Russian supply of natural gas continued to flow, albeit with the possibility of total supply disruption still a concern. The average daily market price of natural gas at the NBP for the three months endedMarch 31, 2022 was$30.20 per MMBtu compared to$6.90 per MMBtu for the three months endedMarch 31, 2021 , an increase of 338%. For the three months endedMarch 31, 2022 , the daily closing price at NBP reached a low of$15.37 per MMBtu onJanuary 3, 2022 and a high of$67.08 per MMBtu onMarch 8, 2022 . The average daily market price of natural gas at the NBP forApril 2022 was$21.75 per MMBtu. In the first quarter of 2022, the cost of natural gas used for production, which includes the impact of realized natural gas derivatives, increased 101% to$6.48 per MMBtu from$3.22 per MMBtu in the three months endedMarch 31, 2021 . This increase in natural gas costs resulted in a decrease in gross margin of approximately$271 million .
United Kingdom Energy Crisis
During the third quarter of 2021, theUnited Kingdom began experiencing an energy crisis that included a substantial increase in the price of natural gas, which impacted ourU.K. operations. In the first half of 2021, natural gas prices had increased to levels that were considered high compared to historical prices, and prices then more than doubled within the third quarter of 2021. OnSeptember 15, 2021 , we announced the halt of operations at both our Ince andBillingham manufacturing facilities in theUnited Kingdom due to negative profitability driven by the high cost of natural gas. Shortly thereafter, ourBillingham facility resumed operations. As of the filing of this report, production continues at ourBillingham facility and continues to be idled at our Ince facility. During the first quarter of 2022, we concluded that the continued impacts of theU.K. energy crisis, including higher natural gas prices due in part to the geopolitical environment described above, triggered an additional impairment test. The results of our interim long-lived asset impairment test indicated that no long-lived asset impairment should be recorded as the undiscounted estimated future cash flows were in excess of the carrying values for each of theU.K. asset groups. The results of ourU.K. operations are included in our Ammonia, AN and Other segments, and account for a small portion of our consolidated gross margin. For the three months endedMarch 31, 2022 , gross margin generated by ourU.K. operations represented approximately 2% of our consolidated gross margin. For the year endedDecember 31, 2021 , ourU.K. operations generated negative gross margin representing approximately 1% of our consolidated gross margin. 25
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CF INDUSTRIES HOLDINGS, INC.
Financial Executive Summary
We reported net earnings attributable to common stockholders of$883 million for the three months endedMarch 31, 2022 compared to$151 million for the three months endedMarch 31, 2021 , an increase in net earnings of 485%, or$732 million . Diluted net earnings per share attributable to common stockholders increased$3.51 per share, to$4.21 per share, in the first quarter of 2022 compared to$0.70 per share in the first quarter of 2021. These increases were due primarily to an increase in gross margin driven by higher average selling prices, partially offset by higher natural gas prices, and an increase in interest expense and income tax provision related to theCanada Revenue Agency Competent Authority Matter, discussed below under "Items Affecting Comparability of Results." Gross margin increased by$1.41 billion in the first quarter of 2022 to$1.70 billion as compared to$289 million in the first quarter of 2021. Average selling prices increased 170% to$620 per ton in the first quarter of 2022 from$230 per ton in the first quarter of 2021, which increased gross margin by$1.83 billion . The impact of higher average selling prices was partially offset by an increase in natural gas costs. The cost of natural gas used for production increased 101% to$6.48 per MMBtu in the first quarter of 2022 from$3.22 per MMBtu in the first quarter of 2021, which reduced gross margin by$271 million . In the first quarter of 2021, we recognized a gain of$112 million as a result of the net settlement of certain natural gas contracts with our suppliers as a result of Winter Storm Uri.
Items Affecting Comparability of Results
For the three months endedMarch 31, 2022 and 2021, we reported net earnings attributable to common stockholders of$883 million and$151 million , respectively. In addition to the impact of market conditions discussed above, certain items impacted the comparability of our financial results for the three months endedMarch 31, 2022 and 2021. The following table and related discussion outline these items and how they impacted the comparability of our financial results for these periods. Three Months Ended March 31, 2022 2021 Pre-Tax After-Tax Pre-Tax After-Tax (in millions) Unrealized net mark-to-market gain on natural gas derivatives(1)
Loss on foreign currency transactions, including intercompany loans(2) 6 5 - - Canada Revenue Agency Competent Authority Matter and Transfer pricing reserves: Interest expense 198 196 - - Interest income (36) (28) Income tax provision(3) - 72 - - Loss on debt extinguishment - - 6 5
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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)The after-tax income tax provision amount of$72 million for the three months endedMarch 31, 2022 reflects an income tax provision of$78 million , consisting of the$76 million income tax provision referenced below under "Canada Revenue Agency Competent Authority Matter" and the$2 million income tax provision referenced below under "Transfer pricing reserves," net of$6 million of income tax provision that is reflected in the after-tax interest expense and interest income amounts shown in this table for the three months endedMarch 31, 2022 .
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 three months endedMarch 31, 2022 and 2021, we recognized unrealized net mark-to-market gains of$33 million and$6 million , respectively. 26
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CF INDUSTRIES HOLDINGS, INC.
Loss on foreign currency transactions, including intercompany loans
In the three months endedMarch 31, 2022 , we recognized a loss of$6 million , which consists 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.
Canada Revenue Agency Competent Authority Matter
In 2016, theCanada Revenue Agency (CRA) andAlberta Tax andRevenue Administration (Alberta TRA) issued Notices of Reassessment for tax years 2006 through 2009 to one of our Canadian affiliates asserting a disallowance of certain patronage deductions. We filed Notices of Objection with respect to the Notices of Reassessment with the CRA and Alberta TRA and posted letters of credit in lieu of paying the additional tax liability assessed. The letters of credit serve as security until the matter is resolved. In 2018, the matter, including the related transfer pricing topic regarding the allocation of profits betweenCanada andthe United States , was accepted for consideration under the bilateral settlement provisions of theU.S. -Canada tax treaty (the Treaty) bythe United States and Canadian competent authorities, and included tax years 2006 through 2011. In the second quarter of 2021, the Company submitted the transfer pricing aspect of the matter into the arbitration process under the terms of the Treaty. InFebruary 2022 , we were informed that a decision was reached by the arbitration panel for tax years 2006 through 2011. InMarch 2022 , we received further details of the results of the arbitration proceedings and the settlement provisions betweenthe United States and Canadian competent authorities, and we accepted the decision of the arbitration panel. Under the terms of the arbitration decision, additional income for tax years 2006 through 2011 will be subject to tax inCanada , resulting in our having additional Canadian tax liability for those tax years of approximately$127 million , based on current estimates. We expect this resulting Canadian tax liability, plus interest of approximately$98 million , will be assessed in the second quarter of 2022 and that payment of those amounts, aggregating to approximately$225 million , based on current estimates, will be due in the third quarter of 2022. The letters of credit we had posted in lieu of paying the additional tax liability assessed by the Notices of Reassessment will be cancelled upon payment of the additional tax and interest toCanada . Due primarily to the availability of additional foreign tax credits to offset in part the increased Canadian tax referenced above, the Company will file amended tax returns inthe United States to request a refund of tax overpaid. In the three months endedMarch 31, 2022 , as a result of the impact of these events on our Canadian andU.S. federal and state income taxes, we recognized an income tax provision of$76 million , reflecting the net impact of$127 million of accrued income taxes payable toCanada for tax years 2006 to 2011, partially offset by net income tax receivables of approximately$51 million inthe United States , and we accrued net interest of$99 million , primarily reflecting the impact of estimated interest payable toCanada .
Transfer pricing reserves
As a result of the outcome of the arbitration decision discussed above, we have also evaluated our transfer pricing positions betweenCanada andthe United States for open years 2012 and after. Based on this evaluation, for the three months endedMarch 31, 2022 , we recorded the following:
•liabilities for unrecognized tax benefits of
•noncurrent income tax receivables of
In the three months ended
Loss on debt extinguishment
OnMarch 20, 2021 , we redeemed in full all of the$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 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. 27
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