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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
10-Q
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                               to                              
Commission file number 001-32597
CF INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
 
20-2697511
(State or other jurisdiction of
incorporation or organization)
 
 
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
4 Parkway North, Suite 400
 
 
 
 
60015
Deerfield,
Illinois
 
 
 
 
 (Zip Code)
 (Address of principal executive offices)
 
 
 
 
 
(847) 405-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
common stock, par value $0.01 per share
 
CF
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No
213,797,277 shares of the registrant’s common stock, par value $0.01 per share, were outstanding at May 4, 2020.
 


Table of Contents
CF INDUSTRIES HOLDINGS, INC.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 




Table of Contents
CF INDUSTRIES HOLDINGS, INC.



PART I—FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions, except per share amounts)
Net sales
$
971

 
$
1,001

Cost of sales
767

 
781

Gross margin
204

 
220

Selling, general and administrative expenses
54

 
58

Other operating—net
6

 
4

Total other operating costs and expenses
60

 
62

Equity in earnings of operating affiliate
3

 
7

Operating earnings
147

 
165

Interest expense
44

 
60

Interest income
(1
)
 
(4
)
Other non-operating—net

 
(1
)
Earnings before income taxes
104

 
110

Income tax provision (benefit)
13

 
(8
)
Net earnings
91

 
118

Less: Net earnings attributable to noncontrolling interest
23

 
28

Net earnings attributable to common stockholders
$
68

 
$
90

Net earnings per share attributable to common stockholders:
 

 
 

Basic
$
0.31

 
$
0.40

Diluted
$
0.31

 
$
0.40

Weighted-average common shares outstanding:
 

 
 

Basic
216.0

 
223.4

Diluted
216.6

 
224.6

Dividends declared per common share
$
0.30

 
$
0.30


See accompanying Notes to Unaudited Consolidated Financial Statements.


1

Table of Contents
CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Net earnings
$
91

 
$
118

Other comprehensive (loss) income:
 

 
 

Foreign currency translation adjustment—net of taxes
(83
)
 
32

Defined benefit plans—net of taxes
9

 
(2
)
 
(74
)
 
30

Comprehensive income
17

 
148

Less: Comprehensive income attributable to noncontrolling interest
23

 
28

Comprehensive (loss) income attributable to common stockholders
$
(6
)
 
$
120

See accompanying Notes to Unaudited Consolidated Financial Statements.


2

Table of Contents
CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
March 31,
2020
 
December 31,
2019
 
(in millions, except share
and per share amounts)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
753

 
$
287

Accounts receivable—net
251

 
242

Inventories
379

 
351

Prepaid income taxes
78

 
71

Other current assets
19

 
23

Total current assets
1,480

 
974

Property, plant and equipment—net
7,938

 
8,170

Investment in affiliate
91

 
88

Goodwill
2,346

 
2,365

Operating lease right-of-use assets
287

 
280

Other assets
299

 
295

Total assets
$
12,441

 
$
12,172

Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Short-term debt
$
500

 
$

Accounts payable and accrued expenses
378

 
437

Income taxes payable
19

 
1

Customer advances
239

 
119

Current operating lease liabilities
94

 
90

Other current liabilities
5

 
18

Total current liabilities
1,235

 
665

Long-term debt
3,958

 
3,957

Deferred income taxes
1,217

 
1,246

Operating lease liabilities
197

 
193

Other liabilities
431

 
474

Equity:
 

 
 

Stockholders’ equity:
 

 
 

Preferred stock—$0.01 par value, 50,000,000 shares authorized

 

Common stock—$0.01 par value, 500,000,000 shares authorized, 2020—216,610,856 shares issued and 2019—216,023,826 shares issued
2

 
2

Paid-in capital
1,313

 
1,303

Retained earnings
1,961

 
1,958

Treasury stock—at cost, 2020—2,813,869 shares and 2019—0 shares
(108
)
 

Accumulated other comprehensive loss
(440
)
 
(366
)
Total stockholders’ equity
2,728

 
2,897

Noncontrolling interest
2,675

 
2,740

Total equity
5,403

 
5,637

Total liabilities and equity
$
12,441

 
$
12,172

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

Table of Contents
CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
Common Stockholders
 
 
 
 
 
$0.01 Par
Value
Common
Stock
 
Treasury
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’ Equity
 
Noncontrolling
Interest
 
Total
Equity
 
(in millions, except per share amounts)
Balance as of December 31, 2019
$
2

 
$

 
$
1,303

 
$
1,958

 
$
(366
)
 
$
2,897

 
$
2,740

 
$
5,637

Net earnings

 

 

 
68

 

 
68

 
23

 
91

Other comprehensive loss

 

 

 

 
(74
)
 
(74
)
 

 
(74
)
Purchases of treasury stock

 
(100
)
 

 

 

 
(100
)
 

 
(100
)
Acquisition of treasury stock under employee stock plans

 
(8
)
 

 

 

 
(8
)
 

 
(8
)
Issuance of $0.01 par value common stock under employee stock plans

 

 
3

 

 

 
3

 

 
3

Stock-based compensation expense

 

 
7

 

 

 
7

 

 
7

Cash dividends ($0.30 per share)

 

 

 
(65
)
 

 
(65
)
 

 
(65
)
Distribution declared to noncontrolling interest

 

 

 

 

 

 
(88
)
 
(88
)
Balance as of March 31, 2020
$
2

 
$
(108
)
 
$
1,313

 
$
1,961

 
$
(440
)
 
$
2,728

 
$
2,675

 
$
5,403

Balance as of December 31, 2018
$
2

 
$
(504
)
 
$
1,368

 
$
2,463

 
$
(371
)
 
$
2,958

 
$
2,773

 
$
5,731

Net earnings

 

 

 
90

 

 
90

 
28

 
118

Other comprehensive income

 

 

 

 
30

 
30

 

 
30

Purchases of treasury stock

 
(60
)
 

 

 

 
(60
)
 

 
(60
)
Retirement of treasury stock

 
504

 
(65
)
 
(439
)
 

 

 

 

Acquisition of treasury stock under employee stock plans

 
(4
)
 

 

 

 
(4
)
 

 
(4
)
Issuance of $0.01 par value common stock under employee stock plans

 

 
2

 

 

 
2

 

 
2

Stock-based compensation expense

 

 
6

 

 

 
6

 

 
6

Cash dividends ($0.30 per share)

 

 

 
(67
)
 

 
(67
)
 

 
(67
)
Distribution declared to noncontrolling interest

 

 

 

 

 

 
(86
)
 
(86
)
Balance as of March 31, 2019
$
2

 
$
(64
)
 
$
1,311

 
$
2,047

 
$
(341
)
 
$
2,955

 
$
2,715

 
$
5,670


See accompanying Notes to Unaudited Consolidated Financial Statements.

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CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Operating Activities:
 

 
 

Net earnings
$
91

 
$
118

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
211

 
188

Deferred income taxes
(50
)
 
14

Stock-based compensation expense
7

 
6

Unrealized net (gain) loss on natural gas derivatives
(12
)
 
2

Unrealized (gain) loss on embedded derivative
(1
)
 
1

Loss on disposal of property, plant and equipment

 
1

Undistributed earnings of affiliate—net of taxes
(4
)
 
(8
)
Changes in:
 

 
 

Accounts receivable—net
(12
)
 
(28
)
Inventories
(29
)
 
(101
)
Accrued and prepaid income taxes
10

 
24

Accounts payable and accrued expenses
(47
)
 
(65
)
Customer advances
120

 
152

Other—net
8

 
2

Net cash provided by operating activities
292

 
306

Investing Activities:
 

 
 

Additions to property, plant and equipment
(67
)
 
(80
)
Proceeds from sale of property, plant and equipment

 
5

Insurance proceeds for property, plant and equipment
2

 

Net cash used in investing activities
(65
)
 
(75
)
Financing Activities:
 

 
 

Proceeds from short-term borrowings
500

 

Dividends paid on common stock
(65
)
 
(67
)
Distributions to noncontrolling interest
(88
)
 
(86
)
Purchases of treasury stock
(100
)
 
(87
)
Issuances of common stock under employee stock plans
3

 
2

Shares withheld for taxes
(8
)
 
(4
)
Net cash provided by (used in) financing activities
242

 
(242
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 

Increase (decrease) in cash and cash equivalents
466

 
(11
)
Cash and cash equivalents at beginning of period
287

 
682

Cash and cash equivalents at end of period
$
753

 
$
671

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CF INDUSTRIES HOLDINGS, INC.



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.   Background and Basis of Presentation
We are a leading global manufacturer and distributor of nitrogen products for fertilizer, emissions abatement and other industrial applications. We operate manufacturing complexes in the United States, Canada and the United Kingdom, which are among the most cost-advantaged, efficient and flexible in the world, and an extensive storage, transportation and distribution network in North America. Our 3,000 employees focus on safe and reliable operations, environmental stewardship and disciplined capital and corporate management, driving our strategy to leverage and sustainably grow the world’s most advantaged nitrogen and chemicals platform to serve customers and create long-term shareholder value. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers and industrial users. Our principal nitrogen fertilizer products are anhydrous ammonia (ammonia), granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus and potassium.
All references to “CF Holdings,” “the Company,” “we,” “us” and “our” 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.
The accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2019, in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting. In the opinion of management, these statements reflect all adjustments, consisting only of normal and recurring adjustments, that are necessary for the fair representation of the information for the periods presented. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period.
The accompanying unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related disclosures included in our 2019 Annual Report on Form 10-K filed with the SEC on February 24, 2020. The preparation of the unaudited interim consolidated financial statements requires us to make use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, net realizable value of inventories, environmental remediation liabilities, environmental and litigation contingencies, the cost of customer incentives, useful lives of property and identifiable intangible assets, the assumptions used in the evaluation of potential impairments of property, investments, identifiable intangible assets and goodwill, income tax and valuation reserves, allowances for doubtful accounts receivable, the measurement of the fair values of investments for which markets are not active, assumptions used in the determination of the funded status and annual expense of defined benefit pension and other postretirement benefit plans and the assumptions used in the valuation of stock-based compensation awards granted to employees.


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2.   New Accounting Standards
On January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU does not affect the accounting for the service element of a hosting arrangement that is a service contract. We adopted this ASU prospectively. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it could have an effect on future financial results if significant new software involving a cloud computing agreement is implemented. In this case, a certain portion of the implementation costs would be deferred and expensed over the term of the cloud computing arrangement.
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU No. 2019-12: Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. This ASU adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of this ASU is permitted. We do not expect the adoption of this ASU will have a material effect on our consolidated financial statements.
3.   Revenue Recognition
We track our revenue by product and by geography. See Note 16—Segment Disclosures for our revenue by reportable segment, which are ammonia, granular urea, UAN, AN and Other. The following table summarizes our revenue by product and by geography (based on destination of our shipment) for the three months ended March 31, 2020 and 2019:
 
Ammonia
 
Granular
Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Three months ended March 31, 2020
 

 
 

 
 

 
 
 
 

 
 

North America
$
154

 
$
331

 
$
230

 
$
46

 
$
59

 
$
820

Europe and other
39

 
6

 
5

 
70

 
31

 
151

Total revenue
$
193

 
$
337

 
$
235

 
$
116

 
$
90

 
$
971

Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 

 
 

North America
$
160

 
$
335

 
$
242

 
$
46

 
$
59

 
$
842

Europe and other
27

 
8

 
14

 
81

 
29

 
159

Total revenue
$
187

 
$
343

 
$
256

 
$
127

 
$
88

 
$
1,001


As of March 31, 2020 and December 31, 2019, we had $239 million and $119 million, respectively, in customer advances on our consolidated balance sheets. The revenue recognized during the three months ended March 31, 2020 and 2019 that was included in our customer advances at the beginning of each respective period amounted to approximately $75 million and $85 million, respectively.
We offer cash incentives to certain customers that do not provide an option to the customer for additional product. The balances of customer incentives accrued at March 31, 2020 and December 31, 2019 were not material.
We have certain customer contracts with performance obligations where if the customer does not take the required amount of product specified in the contract, then the customer is required to make a payment to us, which may vary based upon the terms and conditions of the applicable contract. As of March 31, 2020, excluding contracts with original durations of less than one year, and based on the minimum product tonnage to be sold and current market price estimates, our remaining performance obligations under these contracts are approximately $1.0 billion. We expect to recognize approximately 25% of these performance obligations as revenue in the remainder of 2020, approximately 42% as revenue during 2021 and 2022, and approximately 33% as revenue during 2023 and 2024. Subject to the terms and conditions of the applicable contracts, if these customers do not satisfy their purchase obligations under such contracts, the minimum amount that they would be required to pay to us under these contracts, in the aggregate, is approximately $258 million as of March 31, 2020. We monitor the ability of our customers to meet their purchase obligations, which could be impacted by the ongoing COVID-19 pandemic. Other than the performance obligations described above, any performance obligations with our customers that were unfulfilled or partially filled at December 31, 2019 will be satisfied in 2020.

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4.   Net Earnings Per Share
Net earnings per share were computed as follows:
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions, except per share amounts)
Net earnings attributable to common stockholders
$
68

 
$
90

Basic earnings per common share:
 

 
 

Weighted-average common shares outstanding
216.0

 
223.4

Net earnings attributable to common stockholders
$
0.31

 
$
0.40

Diluted earnings per common share:
 

 
 

Weighted-average common shares outstanding
216.0

 
223.4

Dilutive common shares—stock-based awards
0.6

 
1.2

Diluted weighted-average shares outstanding
216.6

 
224.6

Net earnings attributable to common stockholders
$
0.31

 
$
0.40


Diluted earnings per share is calculated using weighted-average common shares outstanding, including the dilutive effect of stock-based awards as determined under the treasury stock method. In the computation of diluted earnings per common share, potentially dilutive stock-based awards are excluded if the effect of their inclusion is anti-dilutive. Shares for anti-dilutive stock-based awards not included in the computation of diluted earnings per common share were 2.1 million and 1.5 million for the three months ended March 31, 2020 and 2019, respectively.
5.   Inventories
Inventories consist of the following:
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Finished goods
$
336

 
$
311

Raw materials, spare parts and supplies
43

 
40

Total inventories
$
379

 
$
351



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CF INDUSTRIES HOLDINGS, INC.



6.   Property, Plant and Equipment—Net
Property, plant and equipment—net consists of the following:
 
March 31,
2020
 
December 31,
2019
 
(in millions)
Land
$
70

 
$
71

Machinery and equipment
12,243

 
12,338

Buildings and improvements
888

 
890

Construction in progress
242

 
236

Property, plant and equipment(1)
13,443

 
13,535

Less: Accumulated depreciation and amortization
5,505

 
5,365

Property, plant and equipment—net
$
7,938

 
$
8,170

_______________________________________________________________________________
(1) 
As of March 31, 2020 and December 31, 2019, we had property, plant and equipment that was accrued but unpaid of approximately $36 million and $42 million, respectively. As of March 31, 2019 and December 31, 2018, we had property, plant and equipment that was accrued but unpaid of $26 million and $48 million, respectively.

Depreciation and amortization related to property, plant and equipment was $208 million and $183 million for the three months ended March 31, 2020 and 2019, respectively.
Plant turnarounds—Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facilities during a full plant shutdown are referred to as plant turnarounds. The expenditures related to turnarounds are capitalized in property, plant and equipment when incurred. The following is a summary of capitalized plant turnaround costs:
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Net capitalized turnaround costs:
 

 
 

Beginning balance
$
246

 
$
252

Additions
7

 
9

Depreciation
(25
)
 
(30
)
Effect of exchange rate changes
(5
)
 
2

Ending balance
$
223

 
$
233


Scheduled replacements and overhauls of plant machinery and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalysts when a full plant shutdown occurs. Scheduled inspections are also conducted during full plant shutdowns, including required safety inspections which entail the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Internal employee costs and overhead amounts are not considered turnaround costs and are not capitalized.

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7Goodwill and Other Intangible Assets
The following table shows the carrying amount of goodwill by reportable segment as of March 31, 2020 and December 31, 2019:
 
Ammonia
 
Granular Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Balance as of December 31, 2019
$
587

 
$
828

 
$
576

 
$
302

 
$
72

 
$
2,365

Effect of exchange rate changes
(2
)
 
(1
)
 

 
(14
)
 
(2
)
 
(19
)
Balance as of March 31, 2020
$
585

 
$
827

 
$
576

 
$
288

 
$
70

 
$
2,346


All of our identifiable intangible assets have definite lives and are presented in other assets on our consolidated balance sheets at gross carrying amount, net of accumulated amortization, as follows:
 
March 31, 2020
 
December 31, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
(in millions)
Customer relationships
$
125

 
$
(46
)
 
$
79

 
$
131

 
$
(45
)
 
$
86

Trade names
30

 
(7
)
 
23

 
31

 
(7
)
 
24

Total intangible assets
$
155

 
$
(53
)
 
$
102

 
$
162

 
$
(52
)
 
$
110


Our intangible assets are being amortized over a weighted-average life of approximately 20 years. Amortization expense of our identifiable intangible assets for each of the three-month periods ended March 31, 2020 and 2019 was $2 million. The gross carrying amount and accumulated amortization of our intangible assets are also impacted by the effect of exchange rate changes. Total estimated amortization expense for the remainder of 2020 and each of the five succeeding fiscal years is as follows:
 
Estimated
Amortization
Expense
 
(in millions)
Remainder of 2020
$
6

2021
8

2022
8

2023
8

2024
8

2025
8


8.  Equity Method Investment
We have a 50% ownership interest in Point Lisas Nitrogen Limited (PLNL), which operates an ammonia production facility in the Republic of Trinidad and Tobago. We include our share of the net earnings from this equity method investment as an element of earnings from operations because PLNL provides additional production to our operations and is integrated with our other supply chain and sales activities in the ammonia segment.
As of March 31, 2020, the total carrying value of our equity method investment in PLNL was $91 million, $45 million more than our share of PLNL’s book value. The excess is attributable to the purchase accounting impact of our acquisition of the investment in PLNL and reflects the revaluation of property, plant and equipment. The increased basis for property, plant and equipment is being amortized over a remaining period of approximately 13 years. Our equity in earnings of PLNL is different from our ownership interest in income reported by PLNL due to amortization of this basis difference.
We have transactions in the normal course of business with PLNL reflecting our obligation to purchase 50% of the ammonia produced by PLNL at current market prices. Our ammonia purchases from PLNL totaled $10 million and $22 million for the three months ended March 31, 2020 and 2019, respectively.


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9.  Fair Value Measurements
Our cash and cash equivalents and other investments consist of the following:
 
March 31, 2020
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
53

 
$

 
$

 
$
53

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
680

 

 

 
680

Other debt securities
20

 

 

 
20

Total cash and cash equivalents
$
753

 
$

 
$

 
$
753

Nonqualified employee benefit trusts
16

 
2

 

 
18

 
December 31, 2019
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
59

 
$

 
$

 
$
59

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
211

 

 

 
211

Other debt securities
17

 

 

 
17

Total cash and cash equivalents
$
287

 
$

 
$

 
$
287

Nonqualified employee benefit trusts
17

 
2

 

 
19


Under our short-term investment policy, we may invest our cash balances, either directly or through mutual funds, in several types of investment-grade securities, including notes and bonds issued by governmental entities or corporations. Securities issued by governmental entities include those issued directly by the U.S. and Canadian federal governments; those issued by state, local or other governmental entities; and those guaranteed by entities affiliated with governmental entities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities included in our consolidated balance sheets as of March 31, 2020 and December 31, 2019 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
 
March 31, 2020
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Cash equivalents
$
700

 
$
700

 
$

 
$

Nonqualified employee benefit trusts
18

 
18

 

 

Embedded derivative liability
(19
)
 

 
(19
)
 


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December 31, 2019
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Cash equivalents
$
228

 
$
228

 
$

 
$

Nonqualified employee benefit trusts
19

 
19

 

 

Derivative liabilities
(12
)
 

 
(12
)
 

Embedded derivative liability
(20
)
 

 
(20
)
 


Cash Equivalents
As of March 31, 2020 and December 31, 2019, our cash equivalents consisted primarily of U.S. and Canadian government obligations and money market mutual funds that invest in U.S. government obligations and other investment-grade securities.
Nonqualified Employee Benefit Trusts
We maintain trusts associated with certain nonqualified supplemental pension plans. The fair values of the trust assets are based on daily quoted prices in an active market, which represents the net asset values of the shares held in the trusts, and are included on our consolidated balance sheets in other assets. Debt securities are accounted for as available-for-sale securities. Changes in the fair value of equity securities in the trust assets are recognized through earnings.
Derivative Instruments
The derivative instruments that we may use are primarily natural gas fixed price swaps, basis swaps and options traded in the over-the-counter markets with multi-national commercial banks, other major financial institutions or large energy companies. The natural gas derivative contracts represent anticipated natural gas needs for future periods and settlements are scheduled to coincide with anticipated natural gas purchases during those future periods. The natural gas derivative contracts settle using primarily a NYMEX futures price index. To determine the fair value of these instruments, we use quoted market prices from NYMEX and standard pricing models with inputs derived from or corroborated by observable market data such as forward curves supplied by an industry-recognized independent third party.
Embedded Derivative Liability
Under the terms of our strategic venture with CHS Inc. (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 the three specified credit rating agencies or February 1, 2026. This obligation is recognized on our consolidated balance sheets as an embedded derivative. As of March 31, 2020 and December 31, 2019, the embedded derivative liability of $19 million and $20 million, respectively, is included in other current liabilities and other liabilities on our consolidated balance sheets. Included in other operating—net in our consolidated statements of operations for the three months ended March 31, 2020 and 2019 is a net (gain) loss of $(1) million and $1 million, respectively.
The inputs into the fair value measurement include the probability of future upgrades and downgrades of our credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable credit spreads of other public companies at different credit rating levels. Based on these inputs, our fair value measurement is classified as Level 2.
See Note 13—Noncontrolling Interest for additional information regarding our strategic venture with CHS.

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Financial Instruments
The carrying amount and estimated fair value of our financial instruments are as follows:
 
March 31, 2020
 
December 31, 2019
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(in millions)
Long-term debt
$
3,958

 
$
3,970

 
$
3,957

 
$
4,295


The fair value of our long-term debt was based on quoted prices for identical or similar liabilities in markets that are not active or valuation models in which all significant inputs and value drivers are observable and, as a result, they are classified as Level 2 inputs.
The carrying amounts of cash and cash equivalents, as well as instruments included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair values because of their short-term maturities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets and liabilities that may be measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment, when there is allocation of purchase price in an acquisition or when a new liability is being established that requires fair value measurement. These include long-lived assets, goodwill and other intangible assets and investments in unconsolidated subsidiaries, such as equity method investments, which may be written down to fair value as a result of impairment. The fair value measurements related to each of these rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets. Since certain of the Company’s assumptions would involve inputs that are not observable, these fair values would reside within Level 3 of the fair value hierarchy.
10.   Income Taxes
For the three months ended March 31, 2020, we recorded an income tax provision of $13 million on pre-tax income of $104 million, or an effective tax rate of 12.3%, compared to an income tax benefit of $8 million on pre-tax income of $110 million, or an effective tax rate of (7.3)%, for the three months ended March 31, 2019.
For the three months ended March 31, 2020, our income tax provision includes a $6 million benefit related to the settlement of certain U.S. and foreign income tax audits.
For the three months ended March 31, 2019, our income tax benefit included 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.
Our effective tax rate is also impacted by earnings attributable to the noncontrolling interest in CF Industries Nitrogen, LLC (CFN), as our consolidated income tax provision does not include a tax provision on the earnings attributable to the noncontrolling interest. Our effective tax rate for the three months ended March 31, 2020 of 12.3%, which is based on pre-tax income of $104 million, would be 15.8% exclusive of the earnings attributable to the noncontrolling interest of $23 million. Our effective tax rate for the three months ended March 31, 2019 of (7.3)%, which is based on pre-tax income of $110 million, would be 27.4% exclusive of the earnings attributable to the noncontrolling interest of $28 million and the incentive tax credit of $30 million. See Note 13—Noncontrolling Interest for additional information.
In March 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act includes, among other things (i) a five-year net operating loss (NOL) carryback (including a related technical correction to the 2017 Tax Cuts and Jobs Act) for tax losses incurred in tax years 2018 through 2020; (ii) a change in interest deduction limitations for tax years 2019 and 2020, increasing the annual interest limitation from 30% to 50% of adjusted taxable income; and (iii) increased refundability of corporate alternative minimum tax (AMT) credits. These provisions have limited applicability to the Company as (i) the Company does not expect to have a NOL in tax year 2020 and did not have a tax loss in 2018 or 2019 which would be eligible for carryback; (ii) the Company was not limited by the interest deduction limitations for tax years 2019 and 2020 prior to changes made by the CARES Act; and (iii) the Company utilized all of its AMT credits in 2019. The Company continues to monitor and assess the impact of the CARES Act and other related governmental actions in response to the coronavirus impacts as more information becomes available.

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Terra Amended Tax Returns
The Company completed the acquisition of Terra Industries Inc. (Terra) in April 2010. After the acquisition, the Company determined that the manner in which Terra reported the repatriation of cash from foreign affiliates to its U.S. parent for U.S. and foreign income tax purposes was not appropriate. As a result, in 2012 the Company amended certain tax returns, including Terra’s income and withholding tax returns, back to 1999 (the Amended Tax Returns) to correct these tax returns and paid additional income and withholding taxes, and related interest and penalties. In early 2013, the Internal Revenue Service (IRS) commenced an examination of the U.S. tax aspects of the Amended Tax Returns.
In early 2019, the IRS completed its examination of the Amended Tax Returns and submitted its audit reports and related refund claims to the Joint Committee on Taxation of the U.S. Congress (the Joint Committee). For purposes of its review, the Joint Committee separated the IRS audit reports into two separate matters: (i) an income tax related matter and (ii) a withholding tax matter.
In December 2019, we received notification that the Joint Committee had approved the IRS audit reports relating to the income tax related matter. As a result, we expected to receive cash refunds in 2020. In addition, as a result of this settlement and the finalization of carryover impacts of this audit settlement on future tax periods, we reduced our liability for unrecognized tax benefits by $19 million and recorded a corresponding deferred income tax liability in the first quarter of 2020. 
In the second quarter of 2020, we received approximately $61 million of income tax refunds and approximately $7 million of interest related to the settlement of the income tax related matter of the Amended Tax Returns, as described above.
In the second quarter of 2020, we also received notification that the Joint Committee approved the IRS audit report relating to the withholding tax matter. As a result, we expect to receive a tax refund of approximately $29 million, excluding related interest, in 2020. In addition, in the second quarter of 2020, we expect to record a reduction in our liabilities for unrecognized tax benefits of $12 million, with a corresponding reduction in income tax expense.
11.   Interest Expense
Details of interest expense are as follows:
 
Three months ended 
 March 31,
 
2020
 
2019
 
(in millions)
Interest on borrowings(1)
$
46

 
$
57

Fees on financing agreements(1)
2

 
3

Interest on tax liabilities(2)
(4
)
 

Total interest expense
$
44

 
$
60


_______________________________________________________________________________
(1) 
See Note 12—Financing Agreements for additional information.
(2) 
Interest on tax liabilities for the three months ended March 31, 2020 consists of a reduction in interest accrued on the reserve for unrecognized tax benefits.


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12.  Financing Agreements
Revolving Credit Agreement
On December 5, 2019, CF Holdings and CF Industries entered into a senior secured Fourth Amended and Restated Credit Agreement (the Revolving Credit Agreement), which amended and restated our Third Amended and Restated Revolving Credit Agreement, as previously amended (referred to herein, as in effect from time to time, as the Prior Credit Agreement), that was scheduled to mature September 18, 2020. The Revolving Credit Agreement provides for a revolving credit facility of up to $750 million with a maturity of December 5, 2024. The Revolving Credit Agreement includes a letter of credit sub-limit of $125 million. Borrowings under the Revolving Credit Agreement may be used for working capital, capital expenditures, acquisitions, share repurchases and other general corporate purposes.
Borrowings under the Revolving Credit Agreement may be denominated in U.S. dollars, Canadian dollars, euros and British pounds, and bear interest at a per annum rate equal to, at our option, an applicable eurocurrency rate or base rate plus, in either case, a specified margin, and we are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ credit rating at the time.
The guarantors under the Revolving Credit Agreement are currently comprised of CF Holdings and CF Holdings’ wholly owned subsidiaries CF Industries Enterprises, LLC (CFE), CF Industries Sales, LLC (CFS), CF USA Holdings, LLC (CF USA) and CF Industries Distribution Facilities, LLC (CFIDF).
In March 2020, we borrowed $500 million under the Revolving Credit Agreement to ensure we maintained ample financial flexibility in light of the uncertainty in the global markets caused by the COVID-19 pandemic. As of March 31, 2020, we had unused borrowing capacity under the Revolving Credit Agreement of $250 million, as there were outstanding borrowings of $500 million and no outstanding letters of credit under our $750 million revolving credit facility. There were no borrowings outstanding under the Revolving Credit Agreement as of December 31, 2019. Maximum borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020 were $500 million. The weighted-average annual interest rate of borrowings under the Revolving Credit Agreement during the three months ended March 31, 2020 was 2.05%. There were no borrowings under the Prior Credit Agreement during the three months ended March 31, 2019.
In April 2020, we repaid the $500 million of borrowings that were outstanding under the Revolving Credit Agreement as of March 31, 2020, which returned our unused borrowing capacity under the Revolving Credit Agreement to $750 million. See Note 17—Subsequent Events for additional information.
The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants, including financial covenants. As of March 31, 2020, we were in compliance with all covenants under the Revolving Credit Agreement.
Letters of Credit
In addition to the letter of credit capacity under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement providing for up to $145 million of letters of credit. As of March 31, 2020, approximately $124 million of letters of credit were outstanding under this agreement.

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Senior Notes
Long-term debt presented on our consolidated balance sheets as of March 31, 2020 and December 31, 2019 consisted of the following debt securities issued by CF Industries:
 
Effective Interest Rate
 
March 31, 2020
 
December 31, 2019
 
 
Principal
 
Carrying Amount (1)
 
Principal
 
Carrying Amount (1)
 
 
 
(in millions)
Public Senior Notes:
 
 
 
 
 
 
 
 
 
3.450% due June 2023
3.562%
 
750

 
748

 
750

 
747

5.150% due March 2034
5.279%
 
750

 
740

 
750

 
740

4.950% due June 2043
5.031%
 
750

 
742

 
750

 
742

5.375% due March 2044
5.465%
 
750

 
741

 
750

 
741

Senior Secured Notes:
 
 
 
 
 
 
 
 
 
3.400% due December 2021
3.782%
 
250

 
248

 
250

 
248

4.500% due December 2026
4.759%
 
750

 
739

 
750

 
739

Total long-term debt
 
 
$
4,000

 
$
3,958

 
$
4,000

 
$
3,957

_______________________________________________________________________________
(1) 
Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was $10 million as of both March 31, 2020 and December 31, 2019, and total deferred debt issuance costs were $32 million and $33 million as of March 31, 2020 and December 31, 2019, respectively. 
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.
Under the indentures governing the 3.400% senior secured notes due December 2021 (the 2021 Notes) and the 4.500% senior secured notes due December 2026 (the 2026 Notes) identified in the table above (together, the Senior Secured Notes), each series of Senior Secured Notes is guaranteed on a senior secured basis, jointly and severally, by CF Holdings and each current and future domestic subsidiary of CF Holdings (other than CF Industries) that from time to time is a borrower, or guarantees indebtedness, under the Revolving Credit Agreement. The subsidiary guarantors of the Senior Secured Notes currently consist of CFE, CFS, CF USA and CFIDF.
On November 13, 2019, we redeemed in full all of the remaining $500 million outstanding principal amount of the 7.125% senior notes due May 2020 (the 2020 Notes), in accordance with the optional redemption provisions in the indenture governing the 2020 Notes.
On December 13, 2019, we redeemed $250 million principal amount, representing 50% of the $500 million principal amount outstanding immediately prior to such redemption, of the 2021 Notes in accordance with the optional redemption provisions in the indenture governing the 2021 Notes.
Interest on the Public Senior Notes and the Senior Secured Notes is payable semiannually, and the Public Senior Notes and Senior Secured Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices.

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13.   Noncontrolling Interest
We have a strategic venture with CHS under which they own 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. Under the terms of CFN’s limited liability company agreement, each member’s interest will reflect, over time, the impact of the profitability of CFN, any member contributions made to CFN and withdrawals and distributions received from CFN. For financial reporting purposes, the assets, liabilities and earnings of the strategic venture are consolidated into our financial statements. CHS’ interest in the strategic venture is recorded in noncontrolling interest in our consolidated financial statements.
A reconciliation of the beginning and ending balances of noncontrolling interest and distributions payable to noncontrolling interest in our consolidated balance sheets is provided below.
 
2020
 
2019
 
(in millions)
Noncontrolling interest:
 
 
 
Balance as of January 1
$
2,740