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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
 
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
 (State or other jurisdiction of
incorporation or organization)
 
20-2697511
 (I.R.S. Employer
Identification No.)
 
 
 
4 Parkway North, Suite 400
Deerfield, Illinois
 (Address of principal executive offices)
 
60015
 (Zip Code)
(847) 405-2400
 (Registrant’s telephone number, including area code)
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 x  No o
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 x    No o
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 x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
230,791,461 shares of the registrant’s common stock, $0.01 par value per share, were outstanding at October 30, 2018.
 


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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 
 September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions, except per share amounts)
Net sales
$
1,040

 
$
870

 
$
3,297

 
$
3,031

Cost of sales
867

 
859

 
2,622

 
2,740

Gross margin
173

 
11

 
675

 
291

Selling, general and administrative expenses
53

 
45

 
163

 
140

Other operating—net
(11
)
 
(2
)
 
(29
)
 
14

Total other operating costs and expenses
42

 
43

 
134

 
154

Equity in earnings (loss) of operating affiliates
5

 
(5
)
 
30

 
(8
)
Operating earnings (loss)
136

 
(37
)
 
571

 
129

Interest expense
59

 
81

 
180

 
241

Interest income
(4
)
 
(5
)
 
(9
)
 
(8
)
Other non-operating—net
(2
)
 
2

 
(6
)
 
4

Earnings (loss) before income taxes
83

 
(115
)
 
406

 
(108
)
Income tax provision (benefit)
12

 
(47
)
 
73

 
(55
)
Net earnings (loss)
71

 
(68
)
 
333

 
(53
)
Less: Net earnings attributable to noncontrolling interests
41

 
19

 
92

 
54

Net earnings (loss) attributable to common stockholders
$
30

 
$
(87
)
 
$
241

 
$
(107
)
Net earnings (loss) per share attributable to common stockholders:
 

 
 

 
 

 
 

Basic
$
0.13

 
$
(0.37
)
 
$
1.03

 
$
(0.46
)
Diluted
$
0.13

 
$
(0.37
)
 
$
1.03

 
$
(0.46
)
Weighted-average common shares outstanding:
 
 
 
 
 

 
 

Basic
233.5

 
233.2

 
233.8

 
233.2

Diluted
235.2

 
233.2

 
234.9

 
233.2

Dividends declared per common share
$
0.30

 
$
0.30

 
$
0.90

 
$
0.90

See accompanying Notes to Unaudited Consolidated Financial Statements.


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CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Net earnings (loss)
$
71

 
$
(68
)
 
$
333

 
$
(53
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment—net of taxes

 
52

 
(50
)
 
124

Unrealized loss on securities—net of taxes

 

 
(1
)
 

Defined benefit plans—net of taxes
1

 
(2
)
 
7

 
(1
)
 
1

 
50

 
(44
)
 
123

Comprehensive income (loss)
72

 
(18
)
 
289

 
70

Less: Comprehensive income attributable to noncontrolling interests
41

 
19

 
92

 
54

Comprehensive income (loss) attributable to common stockholders
$
31

 
$
(37
)
 
$
197

 
$
16

See accompanying Notes to Unaudited Consolidated Financial Statements.


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CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
September 30,
2018
 
December 31,
2017
 
(in millions, except share
and per share amounts)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,022

 
$
835

Accounts receivable—net
273

 
307

Inventories
264

 
275

Prepaid income taxes
17

 
33

Other current assets
21

 
15

Total current assets
1,597

 
1,465

Property, plant and equipment—net
8,772

 
9,175

Investment in affiliate
96

 
108

Goodwill
2,361

 
2,371

Other assets
330

 
344

Total assets
$
13,156

 
$
13,463

Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
467

 
$
472

Income taxes payable

 
2

Customer advances
313

 
89

Other current liabilities
8

 
17

Total current liabilities
788

 
580

Long-term debt
4,697

 
4,692

Deferred income taxes
1,087

 
1,047

Other liabilities
421

 
460

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, 2018—233,666,809 shares issued and 2017—233,287,799 shares issued
2

 
2

Paid-in capital
1,360

 
1,397

Retained earnings
2,474

 
2,443

Treasury stock—at cost, 2018—1,824,835 shares and 2017—710 shares
(92
)
 

Accumulated other comprehensive loss
(308
)
 
(263
)
Total stockholders’ equity
3,436

 
3,579

Noncontrolling interests
2,727

 
3,105

Total equity
6,163

 
6,684

Total liabilities and equity
$
13,156

 
$
13,463

See accompanying Notes to Unaudited Consolidated Financial Statements.

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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
Income (Loss)
 
Total
Stockholders’ Equity
 
Noncontrolling
Interests
 
Total
Equity
 
(in millions, except per share amounts)
Balance as of December 31, 2017
$
2

 
$

 
$
1,397

 
$
2,443

 
$
(263
)
 
$
3,579

 
$
3,105

 
$
6,684

Adoption of ASU No. 2016-01

 

 

 
1

 
(1
)
 

 

 

Adoption of ASU No. 2014-09

 

 

 
(1
)
 

 
(1
)
 

 
(1
)
Net earnings

 

 

 
63

 

 
63

 
25

 
88

Other comprehensive income

 

 

 

 
16

 
16

 

 
16

Acquisition of treasury stock under employee stock plans

 
(1
)
 

 

 

 
(1
)
 

 
(1
)
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)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 
(59
)
 
(59
)
Balance as of March 31, 2018
$
2

 
$
(1
)
 
$
1,405

 
$
2,436

 
$
(248
)
 
$
3,594

 
$
3,071

 
$
6,665

Net earnings

 

 

 
148

 

 
148

 
26

 
174

Other comprehensive loss

 

 

 

 
(61
)
 
(61
)
 

 
(61
)
Acquisition of treasury stock under employee stock plans

 
1

 
(1
)
 

 

 

 

 

Issuance of $0.01 par value common stock under employee stock plans

 

 
2

 

 

 
2

 

 
2

Stock-based compensation expense

 

 
5

 

 

 
5

 

 
5

Cash dividends ($0.30 per share)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Acquisition of noncontrolling interests in TNCLP

 

 
(62
)
 

 

 
(62
)
 
(331
)
 
(393
)
Balance as of June 30, 2018
$
2

 
$

 
$
1,349

 
$
2,514

 
$
(309
)
 
$
3,556

 
$
2,766

 
$
6,322

Net earnings

 

 

 
30

 

 
30

 
41

 
71

Other comprehensive income

 

 

 

 
1

 
1

 

 
1

Purchases of treasury stock

 
(91
)
 

 

 

 
(91
)
 

 
(91
)
Acquisition of treasury stock under employee stock plans

 
(1
)
 

 

 

 
(1
)
 

 
(1
)
Issuance of $0.01 par value common stock under employee stock plans

 

 
6

 

 

 
6

 

 
6

Stock-based compensation expense

 

 
5

 

 

 
5

 

 
5

Cash dividends ($0.30 per share)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Distributions declared to noncontrolling interest

 

 

 

 

 

 
(80
)
 
(80
)
Balance as of September 30, 2018
$
2

 
$
(92
)
 
$
1,360

 
$
2,474

 
$
(308
)
 
$
3,436

 
$
2,727

 
$
6,163

(Continued)

CONSOLIDATED STATEMENTS OF EQUITY
(Continued) (Unaudited)
 
Common Stockholders
 
 
 
 
 
$0.01 Par
Value
Common
Stock
 
Treasury
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’ Equity
 
Noncontrolling
Interests
 
Total
Equity
 
(in millions, except per share amounts)
Balance as of December 31, 2016
$
2

 
$
(1
)
 
$
1,380

 
$
2,365

 
$
(398
)
 
$
3,348

 
$
3,144

 
$
6,492

Net (loss) earnings

 

 

 
(23
)
 

 
(23
)
 
14

 
(9
)
Other comprehensive income

 

 

 

 
20

 
20

 

 
20

Stock-based compensation expense

 

 
4

 

 

 
4

 

 
4

Cash dividends ($0.30 per share)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 
(54
)
 
(54
)
Balance as of March 31, 2017
$
2

 
$
(1
)
 
$
1,384

 
$
2,272

 
$
(378
)
 
$
3,279

 
$
3,104

 
$
6,383

Net earnings

 

 

 
3

 

 
3

 
21

 
24

Other comprehensive income

 

 

 

 
53

 
53

 

 
53

Issuance of $0.01 par value common stock under employee stock plans

 
1

 
(1
)
 

 

 

 

 

Stock-based compensation expense

 

 
5

 

 

 
5

 

 
5

Cash dividends ($0.30 per share)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 
(5
)
 
(5
)
Balance as of June 30, 2017
$
2

 
$

 
$
1,388

 
$
2,205

 
$
(325
)
 
$
3,270

 
$
3,120

 
$
6,390

Net (loss) earnings

 

 

 
(87
)
 

 
(87
)
 
19

 
(68
)
Other comprehensive income

 

 

 

 
50

 
50

 

 
50

Stock-based compensation expense

 

 
4

 

 

 
4

 

 
4

Cash dividends ($0.30 per share)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 
(66
)
 
(66
)
Balance as of September 30, 2017
$
2

 
$

 
$
1,392

 
$
2,048

 
$
(275
)
 
$
3,167

 
$
3,073

 
$
6,240

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CF INDUSTRIES HOLDINGS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months ended 
 September 30,
 
2018
 
2017
 
(in millions)
Operating Activities:
 

 
 

Net earnings (loss)
$
333

 
$
(53
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
667

 
648

Deferred income taxes
37

 
(54
)
Stock-based compensation expense
17

 
13

Unrealized net (gain) loss on natural gas derivatives
(11
)
 
64

Unrealized loss on embedded derivative
2

 
4

(Gain) loss on disposal of property, plant and equipment
(1
)
 
3

Undistributed (earnings) losses of affiliates—net of taxes
(5
)
 
7

Changes in:
 

 
 

Accounts receivable—net
31

 
(29
)
Inventories
(3
)
 
12

Accrued and prepaid income taxes
13

 
804

Accounts payable and accrued expenses
(26
)
 
5

Customer advances
224

 
51

Other—net
(35
)
 
(74
)
Net cash provided by operating activities
1,243

 
1,401

Investing Activities:
 

 
 

Additions to property, plant and equipment
(278
)
 
(290
)
Proceeds from sale of property, plant and equipment
19

 
13

Distributions received from unconsolidated affiliates
10

 
12

Insurance proceeds
10

 

Proceeds from sale of auction rate securities

 
9

Other—net
1

 

Net cash used in investing activities
(238
)
 
(256
)
Financing Activities:
 

 
 

Financing fees
1

 
(1
)
Dividends paid on common stock
(210
)
 
(210
)
Acquisition of noncontrolling interests in TNCLP
(388
)
 

Distributions to noncontrolling interests
(139
)
 
(125
)
Purchases of treasury stock
(87
)
 

Issuances of common stock under employee stock plans
10

 
1

Shares withheld for taxes
(1
)
 

Net cash used in financing activities
(814
)
 
(335
)
Effect of exchange rate changes on cash and cash equivalents
(4
)
 
13

Increase in cash, cash equivalents and restricted cash
187

 
823

Cash, cash equivalents and restricted cash at beginning of period
835

 
1,169

Cash, cash equivalents and restricted cash at end of period
$
1,022

 
$
1,992

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 fertilizer and chemical company. Our 3,000 employees operate world-class manufacturing complexes in Canada, the United Kingdom and the United States. Our principal customers are cooperatives, independent fertilizer distributors, farmers and industrial users. Our principal nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus, and potassium. We serve our customers in North America through our production, storage, transportation and distribution network. We also reach a global customer base with exports from our Donaldsonville, Louisiana, plant, the world’s largest and most flexible nitrogen complex. Additionally, we move product to international destinations from our Verdigris, Oklahoma, facility, our Yazoo City, Mississippi, facility, and our Billingham and Ince facilities in the United Kingdom, and from a joint venture ammonia facility in the Republic of Trinidad and Tobago in which we own a 50 percent interest.
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, 2017, 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 2017 Annual Report on Form 10-K filed with the SEC on February 22, 2018. 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.
During the first quarter of 2018, we adopted Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. As a result, in our consolidated statements of cash flows for the nine months ended September 30, 2017, we have reclassified $5 million of withdrawals from restricted cash funds, previously classified as cash flows provided by investing activities, to be included in the reconciliation of the beginning and ending balances of cash, cash equivalents and restricted cash. See Note 2—New Accounting Standards for additional information.
During the first quarter of 2018, we adopted ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. As a result, we reclassified certain amounts in our consolidated statements of operations for the three and nine months ended September 30, 2017. See Note 2—New Accounting Standards for additional information.


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CF INDUSTRIES HOLDINGS, INC.



2.   New Accounting Standards
Recently Adopted Pronouncements
On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments. Additionally, the costs to obtain and fulfill a contract, including assets to be recognized, are to be capitalized and such capitalized costs should be disclosed. In 2016, the Financial Accounting Standards Board (FASB) issued additional ASUs that enhanced the operability of the principal versus agent guidance in ASU No. 2014-09 by clarifying that an entity should consider the nature of each good or service promised to a customer at the individual good or service level, clarified that ASU No. 2014-09 should not be applied to immaterial performance obligations, and enhanced the guidance around the treatment of shipping costs incurred to fulfill performance obligations. Our adoption of this ASU, utilizing the modified retrospective approach on contracts that were not completed as of January 1, 2018, resulted in a reduction to opening retained earnings of $1 million related to the cumulative difference between ASC Topic 605 and ASC Topic 606. See Note 3—Revenue Recognition for additional information.
On January 1, 2018, we adopted ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, which changes the income statement impact of equity investments held by an entity. The amendments require the unrealized gains or unrealized losses of equity instruments measured at fair value to be recognized in net income. Our adoption of this ASU resulted in an increase to opening retained earnings of $1 million representing the cumulative effect of unrealized gains from equity securities from accumulated other comprehensive income (loss).
On January 1, 2018, we adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash - a consensus of the FASB Emerging Issues Task Force, which requires that the statement of cash flows include amounts described as restricted cash and restricted cash equivalents as part of cash and cash equivalents when reconciling the beginning and ending period balances. Upon adoption of this ASU, $5 million of withdrawals from restricted cash funds previously reflected as cash provided by investing activities for the nine months ended September 30, 2017, and our restricted cash of $5 million as of December 31, 2016 were reclassified to be included within the reconciliation of beginning and ending cash, cash equivalents and restricted cash balances on our consolidated statement of cash flows for the nine months ended September 30, 2017.
On January 1, 2018, we adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changed the presentation of net benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Only service cost can be included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net benefit cost must be presented separately outside of operating income. Additionally, only service costs may be capitalized on the balance sheet. Our adoption of this ASU was applied retrospectively for the income statement classification requirements and prospectively for the capitalization guidance, which resulted in $2 million and $4 million of net benefit cost previously recognized in cost of sales for the three and nine months ended September 30, 2017, respectively, to be reclassified to other non-operating on our consolidated statements of operations.
On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Our adoption of this ASU had no impact on our consolidated financial statements.
In the third quarter of 2018, we adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Step 2 required entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. Under Step 2, the carrying value in excess of the implied fair value would be recognized as goodwill impairment. Under this new ASU, goodwill impairment is recognized as the carrying value in excess of the reporting unit’s fair value, limited to the total amount of goodwill allocated to the reporting unit. Our adoption of this ASU had no impact on our consolidated financial statements.

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CF INDUSTRIES HOLDINGS, INC.



Recently Issued Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in ASC Topic 840, Leases. This ASU will require lessees to recognize the rights and obligations resulting from virtually all leases (other than leases that meet the definition of a short-term lease) on their balance sheets as right-of-use assets with corresponding lease liabilities. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of income and expense recognized and expected to be recognized from existing contracts. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted, and requires the modified retrospective method of adoption. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides the option to initially apply ASU No. 2016-02 at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, instead of applying the new guidance retrospectively for each prior reporting period presented. While we are continuing to evaluate the impact of the adoption of these ASUs on our consolidated financial statements, we currently believe the most significant change relates to the recognition of the right-of-use assets and lease liabilities on our balance sheet for operating leases for certain property and equipment, including transportation equipment utilized for the distribution of our products. We estimate that the right-of-use asset and lease liability that we will recognize on our consolidated balance sheet upon adoption will be approximately $300 million to $350 million, based on our current lease portfolio. However, the ultimate impact of adopting these ASUs will depend on our lease portfolio as of the adoption date, January 1, 2019.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and should be applied to existing hedging relationships as of the date of adoption. 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.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. 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.
In August 2018, in conjunction with its disclosure framework project, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for annual and interim periods beginning after January 1, 2020 and must be applied retrospectively. We expect that our adoption of this ASU will have a minimal impact on our financial statement disclosures.
In August 2018, the FASB issued 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. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019 and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. We are currently evaluating the impact that our adoption of this ASU will have on our consolidated financial statements.

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3.   Revenue Recognition
Prior to the adoption of ASC 606, under ASC 605, the basic criteria necessary for revenue recognition were: (1) evidence that a sales arrangement existed, (2) delivery of goods had occurred, (3) the seller's price to the buyer was fixed or determinable, and (4) collectability was reasonably assured. We recognized revenue when these criteria had been met, and when title and risk of loss transferred to the customer, which could be at the plant gate, a distribution facility, a supplier location or a customer destination.
We adopted ASC 606 on January 1, 2018. The revenue that we recognize, both prior to and after the adoption of ASC 606, arises from contracts we have with our customers. Our performance obligations under a contract correspond to each shipment of product that we make to our customer under the contract; as a result, each contract may have more than one performance obligation based on the number of products ordered, the quantity of product to be shipped and the mode of shipment requested by the customer. Control of our products transfers to our customers when the customer is able to direct the use of, and obtain substantially all of the benefits from, our products, which generally occurs at the later of when the customer obtains title to our product or when the customer assumes risk of loss of our product. The transfer of control generally occurs at a point in time upon loading of our product onto transportation equipment or upon delivery to the customer’s intended destination. Once this occurs, we have satisfied our performance obligation and we recognize revenue.
When we enter into a contract with a customer, we are obligated to provide the product during a mutually agreed upon time period. Depending on the terms of the contract, either we or the customer arranges delivery of the product to the customer’s intended destination. In situations where we have agreed to arrange delivery of the product to the customer’s intended destination and control of the product transfers upon loading of our product onto transportation equipment, we have elected to account for any freight income associated with the delivery of these products as freight revenue, consistent with our treatment of this income prior to the adoption of ASC 606, since this activity fulfills our obligation to transfer the product to the customer. For the three and nine months ended September 30, 2018, the total amount of freight recognized as revenue was not material.
Certain of our contracts require us to supply products on a continuous basis to the customer. We recognize revenue on these contracts based on the quantity of products transferred to the customer during the period. For the three and nine months ended September 30, 2018, the amount of revenue for these types of transactions was $23 million and $64 million, respectively.
From time to time, we will enter the marketplace to purchase product in order to meet our customer contracts. When we purchase product to meet customer contracts, we are the principal in the transaction and recognize revenue on a gross basis. As discussed in Note 8—Equity Method Investments, we have transactions in the normal course of business with Point Lisas Nitrogen Limited (PLNL), reflecting our obligation to purchase 50% of the ammonia produced by PLNL at current market prices. During the nine months ended September 30, 2018, other than products purchased from PLNL, we did not purchase any products in the marketplace in order to meet our customer contracts.
Transaction Price
We agree with our customers on the selling price of each transaction. This transaction price is generally based on the product, market conditions, including supply and demand balances, freight arrangements including where control transfers, and customer incentives. In our contracts with customers, we allocate the entire transaction price to the sale of product to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Returns of our product by our customers are permitted only when the product is not to specification, and were not material for the three and nine months ended September 30, 2018. Any sales tax, value added tax, and other tax we collect concurrently with our revenue-producing activities are excluded from revenue.
We offer cash incentives to certain customers based on the volume of their purchases over a certain period. These incentives do not provide an option to the customer for additional product. Customer incentives are reported as a reduction in net sales. Accrual of these incentives involves the use of estimates, including how much product the customer will purchase and whether the customer will achieve a certain level of purchases within the incentive period. The balances of customer incentives accrued at September 30, 2018, and December 31, 2017 were not material.
If we had continued to apply legacy revenue recognition guidance for the three and nine months ended September 30, 2018, our revenues, gross margin, and net income attributable to common shareholders would not have been materially different. See Note 2—New Accounting Standards for the impact of our adoption of ASU No. 2014-09.

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Revenue Disaggregation
We track our revenue by product and by geography. See Note 17—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 and nine months ended September 30, 2018:
 
Ammonia
 
Granular
Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Three months ended September 30, 2018
 

 
 

 
 

 
 
 
 

 
 

North America
$
148

 
$
292

 
$
214

 
$
45

 
$
61

 
$
760

Europe and other
44

 
61

 
56

 
94

 
25

 
280

Total revenue
$
192

 
$
353

 
$
270

 
$
139

 
$
86

 
$
1,040

Nine months ended September 30, 2018
 

 
 

 
 

 
 
 
 

 
 

North America
$
665

 
$
901

 
$
750

 
$
139

 
$
184

 
$
2,639

Europe and other
113

 
76

 
142

 
224

 
103

 
658

Total revenue
$
778

 
$
977

 
$
892

 
$
363

 
$
287

 
$
3,297

Accounts Receivable and Customer Advances
Our customers purchase our products through sales on credit or forward sales. Products sold to our customers on credit are recorded as accounts receivable when the customer obtains control of the product. Customers that purchase our products on credit are required to pay in accordance with our customary payment terms, which are generally less than 30 days. For the three and nine months ended September 30, 2018, the amount of customer bad debt expense recognized was immaterial.
For forward sales, the customer prepays a portion of the value of the sales contract prior to obtaining control of the product. These prepayments, when received, are recorded as customer advances and are recognized as revenue when the customer obtains control of the product. Forward sales are customarily offered for periods of less than one year in advance of when the customer obtains control of the product.
As of September 30, 2018 and December 31, 2017, we had $313 million and $89 million, respectively, in customer advances on our consolidated balance sheets. The increase in the balance of customer advances primarily resulted from customer forward purchases under our fill programs in the third quarter of 2018. During the nine months ended September 30, 2018, all of our customer advances that were recorded as of December 31, 2017 were recognized as revenue.
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 September 30, 2018, 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 $1.4 billion. We expect to recognize approximately 5% of these performance obligations as revenue during the remainder of 2018, approximately 41% as revenue during 2019 and 2020, approximately 30% as revenue during 2021 and 2022, and the remainder thereafter. If these customers do not fulfill their contractual obligations under such contracts, the legally enforceable minimum amount that they would pay to us under these contracts is approximately $285 million as of September 30, 2018. Other than the performance obligations described above, any performance obligations with our customers that were unfulfilled or partially filled at December 31, 2017 will be satisfied in 2018.
All of our contracts require that the period between the payment for goods and the transfer of those goods to the customer occur within normal contractual terms that do not exceed one year; therefore, we have not adjusted the transaction price of any of our contracts to recognize a significant financing component. We have also expensed any incremental costs associated with obtaining a contract that has a duration of less than one year, and there were no costs capitalized during the nine months ended September 30, 2018.

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4.   Net Earnings (Loss) Per Share
Net earnings (loss) per share were computed as follows:
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions, except per share amounts)
Net earnings (loss) attributable to common stockholders
$
30

 
$
(87
)
 
$
241

 
$
(107
)
Basic earnings per common share:
 

 
 

 
 

 
 

Weighted-average common shares outstanding
233.5

 
233.2

 
233.8

 
233.2

Net earnings (loss) attributable to common stockholders
$
0.13

 
$
(0.37
)
 
$
1.03

 
$
(0.46
)
Diluted earnings per common share:
 

 
 

 
 

 
 

Weighted-average common shares outstanding
233.5

 
233.2

 
233.8

 
233.2

Dilutive common shares—stock options
1.7

 

 
1.1

 

Diluted weighted-average shares outstanding
235.2

 
233.2

 
234.9

 
233.2

Net earnings (loss) attributable to common stockholders
$
0.13

 
$
(0.37
)
 
$
1.03

 
$
(0.46
)
In the computation of diluted earnings per common share, potentially dilutive stock options are excluded if the effect of their inclusion is anti-dilutive. Shares for anti-dilutive stock options not included in the computation of diluted earnings per common share were 1.5 million and 1.8 million for the three and nine months ended September 30, 2018, respectively, and 6.5 million in each of the three and nine months ended September 30, 2017.
5.   Inventories
Inventories consist of the following:
 
September 30,
2018
 
December 31,
2017
 
(in millions)
Finished goods
$
226

 
$
233

Raw materials, spare parts and supplies
38

 
42

Total inventories
$
264

 
$
275


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6.   Property, Plant and Equipment—Net
Property, plant and equipment—net consists of the following:
 
September 30,
2018
 
December 31,
2017
 
(in millions)
Land
$
70

 
$
71

Machinery and equipment
12,172

 
12,070

Buildings and improvements
886

 
882

Construction in progress
225

 
223

Property, plant and equipment(1)
13,353

 
13,246

Less: Accumulated depreciation and amortization
4,581

 
4,071

Property, plant and equipment—net
$
8,772

 
$
9,175

_______________________________________________________________________________
(1) 
As of September 30, 2018 and December 31, 2017, we had property, plant and equipment that was accrued but unpaid of approximately $66 million and $46 million, respectively. As of September 30, 2017 and December 31, 2016, we had property, plant and equipment that was accrued but unpaid of $204 million and $225 million, respectively.

Depreciation and amortization related to property, plant and equipment was $227 million and $648 million for the three and nine months ended September 30, 2018, respectively, and $217 million and $622 million for the three and nine months ended September 30, 2017, 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:
 
Nine months ended 
 September 30,
 
2018
 
2017
 
(in millions)
Net capitalized turnaround costs:
 

 
 

Beginning balance
$
208

 
$
206

Additions
95

 
83

Depreciation
(83
)
 
(75
)
Effect of exchange rate changes
1

 
5

Ending balance
$
221

 
$
219

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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7.  Goodwill and Other Intangible Assets
The following table shows the carrying amount of goodwill by reportable segment as of September 30, 2018 and December 31, 2017:
 
Ammonia
 
Granular Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Balance as of December 31, 2017
$
587

 
$
829

 
$
576

 
$
306

 
$
73

 
$
2,371

Effect of exchange rate changes

 
(1
)
 

 
(8
)
 
(1
)
 
(10
)
Balance as of September 30, 2018
$
587

 
$
828

 
$
576

 
$
298

 
$
72

 
$
2,361

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:
 
September 30, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
(in millions)
Intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Customer relationships
$
129

 
$
(36
)
 
$
93

 
$
132

 
$
(31
)
 
$
101

TerraCair brand
10

 
(10
)
 

 
10

 
(10
)
 

Trade names
31

 
(5
)
 
26

 
32

 
(4
)
 
28

Total intangible assets
$
170

 
$
(51
)
 
$
119

 
$
174

 
$
(45
)
 
$
129

Amortization expense of our identifiable intangible assets was $1 million and $6 million for the three and nine months ended September 30, 2018, respectively, and $2 million and $7 million for the three and nine months ended September 30, 2017, respectively. Our intangible assets are being amortized over a weighted-average life of approximately 20 years. Total estimated amortization expense for the remainder of 2018 and each of the five succeeding fiscal years is as follows:
 
Estimated
Amortization
Expense
 
(in millions)
Remainder of 2018
$
2

2019
9

2020
9

2021
9

2022
9

2023
9


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8.  Equity Method Investments
We have a 50% ownership interest in 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 September 30, 2018, the total carrying value of our equity method investment in PLNL was $96 million, $50 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 15 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 $21 million and $59 million for the three and nine months ended September 30, 2018, respectively, and $9 million and $53 million for the three and nine months ended September 30, 2017, respectively.
The Trinidadian tax authority (the Board of Inland Revenue) previously issued a tax assessment against PLNL related to a dispute over whether tax depreciation must be claimed during a tax holiday period that was granted to PLNL under the Trinidadian Fiscal Incentives Act. The tax holiday was granted as an incentive to construct PLNL’s ammonia plant. Based on the facts and circumstances of this matter, PLNL recorded a tax contingency accrual in the second quarter of 2017, which reduced our equity in earnings of PLNL for the nine months ended September 30, 2017 by approximately $7 million reflecting our 50% ownership interest. In early 2018, PLNL settled this matter with the Board of Inland Revenue for the amounts accrued.
PLNL operates an ammonia plant that relies on natural gas supplied, under a Gas Sales Contract (the NGC Contract), by The National Gas Company of Trinidad and Tobago Limited (NGC). PLNL experienced past curtailments in the supply of natural gas from NGC, which reduced historical ammonia production at PLNL. The NGC Contract had an initial expiration date of September 2018 and was extended on the same terms until September 2023. Any NGC commitment to supply gas beyond 2023 will be based on new agreements. In May 2018, the NGC and PLNL reached a settlement of an arbitration proceeding regarding PLNL’s claims for damages due to natural gas supply curtailments. The net after-tax impact of the settlement reached between NGC and PLNL that is recognized in our consolidated statements of operations for the nine months ended September 30, 2018 was an increase in our equity in earnings of operating affiliates of approximately $19 million.
9.  Fair Value Measurements
Our cash and cash equivalents and other investments consist of the following:
 
September 30, 2018
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
54

 
$

 
$

 
$
54

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
963

 

 

 
963

Other debt securities
5

 

 

 
5

Total cash and cash equivalents
$
1,022

 
$

 
$

 
$
1,022

Nonqualified employee benefit trusts
18

 
2

 

 
20


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December 31, 2017
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
120

 
$

 
$

 
$
120

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
710

 

 

 
710

Other debt securities
5

 

 

 
5

Total cash and cash equivalents
$
835

 
$

 
$

 
$
835

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 September 30, 2018 and December 31, 2017 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
 
September 30, 2018
 
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
$
968

 
$
968

 
$

 
$

Nonqualified employee benefit trusts
20

 
20

 

 

Derivative assets
1

 

 
1

 

Derivative liabilities
(1
)
 

 
(1
)
 

Embedded derivative liability
(27
)
 

 
(27
)
 

 
December 31, 2017
 
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
$
715

 
$
715

 
$

 
$

Nonqualified employee benefit trusts
19

 
19

 

 

Derivative assets
1

 

 
1

 

Derivative liabilities
(12
)
 

 
(12
)
 

Embedded derivative liability
(25
)
 

 
(25
)
 

Cash Equivalents
As of September 30, 2018 and December 31, 2017, 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.

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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 represent 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. In 2018, as a result of our adoption of ASU 2016-01 on January 1, 2018, changes in the fair value of equity securities in the trust assets are recognized through earnings. See Note 2—New Accounting Standards for additional information.
Derivative Instruments
The derivative instruments that we use are primarily natural gas fixed price swaps, natural gas basis swaps and natural gas options traded in the over-the-counter (OTC) markets with multinational 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 NYMEX futures prices. 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. See Note 13—Derivative Financial Instruments for additional information.
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 our credit ratings were below certain levels in 2016 and 2017, we made a payment of $5 million to CHS in 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 September 30, 2018 and December 31, 2017, the embedded derivative liability of $27 million and $25 million, respectively, is included in other current liabilities and other liabilities on our consolidated balance sheets. 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. For the nine months ended September 30, 2018 and 2017, we recognized charges of $2 million and $4 million, respectively, related to the embedded derivative, which are included in other operating—net in our consolidated statements of operations.
See Note 14—Noncontrolling Interests for additional information regarding our strategic venture with CHS.
Financial Instruments
The carrying amount and estimated fair value of our financial instruments are as follows:
 
September 30, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(in millions)
Long-term debt
$
4,697

 
$
4,570

 
$
4,692

 
$
4,800

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.

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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 September 30, 2018, we recorded an income tax provision of $12 million on pre-tax income of $83 million, or an effective tax rate of 15.3%, compared to an income tax benefit of $47 million on pre-tax loss of $115 million, or an effective tax rate of 40.9%, for the three months ended September 30, 2017.
Our effective tax rate in 2018 is based on the U.S. federal tax rate of 21% as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, as compared to the U.S. federal tax rate of 35% that was applicable in 2017.
Our effective tax rate is impacted by earnings attributable to noncontrolling interests in CF Industries Nitrogen, LLC (CFN) and in the third quarter of 2017 by earnings attributable to the noncontrolling interests in Terra Nitrogen Company, L.P. (TNCLP), as our consolidated income tax provision (benefit) does not include a tax provision on the earnings attributable to the noncontrolling interests. Our effective tax rate for the three months ended September 30, 2018 of 15.3%, which is based on pre-tax income of $83 million, would be 29.4% exclusive of the earnings attributable to the noncontrolling interests of $41 million. Our effective tax rate for the three months ended September 30, 2017 of 40.9%, which is based on pre-tax loss of $115 million, would be 35.2% exclusive of the earnings attributable to the noncontrolling interests of $19 million. See Note 14—Noncontrolling Interests for additional information.
During the fourth quarter of 2017, we recorded the impact of the Tax Cuts and Jobs Act that was enacted on December 22, 2017, including a provisional amount for the impact of the transition tax liability based on amounts reasonably estimable. A $12 million increase to the transition tax liability was recorded in the third quarter of 2018 to reflect changes in the computation of the allowable foreign tax credit against the transition tax liability, as well as the allocation of certain gains and losses among various foreign tax credit baskets. The adjustment to the provisional amount represents an approximate 15% increase to our effective tax rate for the period. Our effective tax rate for the period was also impacted by a decrease in the annualized effective tax rate. The provisional amount may be adjusted as more information becomes available prior to the end of the one-year measurement period in December 2018.
The income tax benefit of $47 million in the third quarter of 2017 was impacted by a $5 million increase to our deferred tax liability resulting from the enactment of a tax rate increase by the State of Illinois.
During the third quarter of 2016, one of our Canadian subsidiaries received a Notice of Reassessment from the Canada Revenue Agency (CRA) for tax years 2006 through 2009 asserting a disallowance of certain patronage allocations. The tax assessment of CAD $174 million (or approximately $135 million), including provincial taxes but excluding any interest or penalties, is the result of an audit that was initiated by the CRA in January 2010 and involves the sole issue of whether certain patronage allocations meet the requirements for deductibility under the Income Tax Act of Canada. The reassessment has been appealed and a letter of credit in the amount of CAD $87 million (or approximately $67 million) has been posted. We believe that it is more likely than not that the patronage allocation deduction will ultimately be sustained. In the event that we do not prevail in the appeal, we should be entitled to a U.S. foreign tax credit against any incremental Canadian tax paid. This issue is currently under review by the competent authorities of Canada and the United States.

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11.   Interest Expense
Details of interest expense are as follows:
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Interest on borrowings(1)
$
57

 
$
76

 
$
171

 
$
228

Fees on financing agreements(1)
3

 
5

 
10

 
13

Interest on tax liabilities
(1
)
 
1

 

 
2

Interest capitalized

 
(1
)
 
(1
)
 
(2
)
Total interest expense
$
59

 
$
81

 
$
180

 
$
241

_______________________________________________________________________________
(1) 
See Note 12—Financing Agreements for additional information.
12.  Financing Agreements
Revolving Credit Agreement
We have a senior secured revolving credit agreement (the Revolving Credit Agreement) providing for a revolving credit facility of up to $750 million with a maturity of September 18, 2020. 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 and general corporate purposes. CF Industries, the borrower under the Revolving Credit Agreement, may also designate as borrowers one or more wholly owned subsidiaries that are organized in the United States or any state thereof or the District of Columbia.
Borrowings under the Revolving Credit Agreement may be denominated in dollars, Canadian dollars, euros and British pounds, and bear interest at a per annum rate equal to an applicable eurocurrency rate or base rate plus, in either case, a specified margin, and the borrowers are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ credit rating at the time.
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) and CF USA Holdings, LLC (CF USA).
As of September 30, 2018, we had excess borrowing capacity under the Revolving Credit Agreement of $745 million (net of outstanding letters of credit of $5 million). There were no borrowings outstanding under the Revolving Credit Agreement as of September 30, 2018 or December 31, 2017, or during the nine months ended September 30, 2018.
The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants, including financial covenants. As of September 30, 2018, we were in compliance with all covenants under the Revolving Credit Agreement.
Letters of Credit
In addition to the letters of credit outstanding under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement with capacity to issue letters of credit up to $125 million (reflecting an increase of $50 million in March 2018). As of September 30, 2018, approximately $120 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 September 30, 2018 and December 31, 2017 consisted of the following Public Senior Notes (unsecured) and Senior Secured Notes issued by CF Industries:
 
Effective Interest Rate
 
September 30,
2018
 
December 31,
2017
 
 
Principal
 
Carrying Amount (1)
 
Principal
 
Carrying Amount (1)
 
 
 
(in millions)
Public Senior Notes:
 
 
 
 
 
 
 
 
 
7.125% due May 2020
7.529%
 
$
500

 
$
497

 
$
500

 
$
496

3.450% due June 2023
3.562%
 
750

 
746

 
750

 
746

5.150% due March 2034
5.279%
 
750

 
740

 
750

 
739

4.950% due June 2043
5.031%
 
750

 
742

 
750

 
741

5.375% due March 2044
5.465%
 
750

 
741

 
750

 
741

Senior Secured Notes:
 
 
 
 
 
 
 
 
 
3.400% due December 2021
3.782%
 
500

 
494

 
500

 
493

4.500% due December 2026
4.759%
 
750

 
737

 
750

 
736

Total long-term debt
 
 
$
4,750

 
$
4,697

 
$
4,750

 
$
4,692

_______________________________________________________________________________
(1) 
Carrying amount is net of unamortized debt discount and deferred debt issuance costs. Total unamortized debt discount was $11 million and $12 million as of September 30, 2018 and December 31, 2017, respectively, and total deferred debt issuance costs were $42 million and $46 million as of September 30, 2018 and December 31, 2017, respectively. 
Public Senior Notes
Under the indentures (including the applicable supplemental indentures) governing the senior notes due 2020, 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 and CF Holdings’ wholly owned subsidiaries CFE, CFS and CF USA. CFE, CFS and CF USA became subsidiary guarantors of the Public Senior Notes as a result of their becoming guarantors under the Revolving Credit Agreement. Interest on the Public Senior Notes is payable semiannually, and the Public Senior Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices.
Senior Secured Notes
On November 21, 2016, CF Industries issued $500 million aggregate principal amount of 3.400% senior secured notes due 2021 (the 2021 Notes) and $750 million aggregate principal amount of 4.500% senior secured notes due 2026 (the 2026 Notes, and together with the 2021 Notes, the Senior Secured Notes). CF Holdings and the subsidiary guarantors of the Public Senior Notes are also guarantors of the Senior Secured Notes. Interest on the Senior Secured Notes is payable semiannually on December 1 and June 1 beginning on June 1, 2017, and the Senior Secured Notes are redeemable at our option, in whole at any time or in part from time to time, at specified make-whole redemption prices.
13.   Derivative Financial Instruments
We use derivative financial instruments primarily to reduce our exposure to changes in commodity prices.
Natural gas is the largest and most volatile component of the manufacturing cost for nitrogen-based products. We manage the risk of changes in natural gas prices primarily through the use of derivative financial instruments. The derivatives that we use for this purpose are primarily natural gas fixed price swaps, natural gas basis swaps and natural gas options traded in the OTC markets. These natural gas derivatives settle using primarily a NYMEX futures price index, which represents the basis for fair value at any given time. We enter into natural gas derivative contracts with respect to natural gas to be consumed by us in the future, and settlements of those derivative contracts are scheduled to coincide with our anticipated purchases of natural gas used to manufacture nitrogen products during those future periods. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. As a result, changes in fair value of these contracts are recognized in earnings. As of September 30, 2018, we had natural gas NYMEX fixed price swaps covering periods through December 2018 and natural gas basis swaps covering certain periods through March 2019.

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As of September 30, 2018 and December 31, 2017, we had open natural gas derivative contracts, including natural gas fixed price swaps and natural gas basis swaps, for 16.0 million MMBtus (millions of British thermal units) and 35.9 million MMBtus, respectively. For the nine months ended September 30, 2018, we used natural gas NYMEX fixed price swaps to cover approximately 9% of our natural gas consumption.
The effect of derivatives in our consolidated statements of operations is shown in the table below.
 
Gain (loss) recognized in income
 
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
Location
 
2018
 
2017
 
2018
 
2017
 
 
 
(in millions)
Natural gas derivatives
 
 
 
 
 
 
 
 
 
Unrealized net gains (losses)
Cost of sales
 
$
3

 
$
7

 
$
11

 
$
(64
)
Realized net losses
Cost of sales
 
(3
)
 
(11
)
 
(7
)
 
(13
)
Net derivative (losses) gains
 
 
$

 
$
(4
)
 
$
4

 
$
(77
)
The fair values of derivatives on our consolidated balance sheets are shown below. As of September 30, 2018 and December 31, 2017, none of our derivative instruments were designated as hedging instruments. See Note 9—Fair Value Measurements for additional information on derivative fair values.
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
September 30,
2018
 
December 31,
2017
 
Balance Sheet
Location
 
September 30,
2018
 
December 31,
2017
 
 
 
(in millions)
 
 
 
(in millions)
Natural gas derivatives
Other current assets
 
$
1

 
$
1

 
Other current liabilities
 
$
(1
)
 
$
(12
)
Most of our International Swaps and Derivatives Association (ISDA) agreements contain credit-risk-related contingent features such as cross default provisions and credit support thresholds. In the event of certain defaults or a credit ratings downgrade, our counterparty may request early termination and net settlement of certain derivative trades or may require us to collateralize derivatives in a net liability position. The Revolving Credit Agreement, at any time when it is secured, provides a cross collateral feature for those of our derivatives that are with counterparties that are party to, or affiliates of parties to, the Revolving Credit Agreement so that no separate collateral would be required for those counterparties in connection with such derivatives. In the event the Revolving Credit Agreement becomes unsecured, separate collateral could be required in connection with such derivatives. As of September 30, 2018 and December 31, 2017, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was $1 million and $12 million, respectively, which also approximates the fair value of the maximum amount of additional collateral that would need to be posted or assets needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. As of September 30, 2018 and December 31, 2017, we had no cash collateral on deposit with counterparties for derivative contracts. The credit support documents executed in connection with certain of our ISDA agreements generally provide us and our counterparties the right to set off collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event.

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The following table presents amounts relevant to offsetting of our derivative assets and liabilities as of September 30, 2018 and December 31, 2017:
 
Amounts
presented in
consolidated
balance
sheets(1)
 
Gross amounts not offset in consolidated balance sheets
 
 
 
 
Financial
instruments
 
Cash
collateral
received
(pledged)
 
Net
amount
 
(in millions)
September 30, 2018
 

 
 

 
 

 
 

Total derivative assets
$
1

 
$
1

 
$

 
$

Total derivative liabilities
(1
)
 
(1
)
 

 

Net derivative liabilities
$

 
$

 
$

 
$

December 31, 2017
 

 
 

 
 

 
 

Total derivative assets
$
1

 
$
1

 
$

 
$

Total derivative liabilities
(12
)
 
(1
)
 

 
(11
)
Net derivative liabilities
$
(11
)
 
$

 
$

 
$
(11
)
_______________________________________________________________________________
(1) 
We report the fair values of our derivative assets and liabilities on a gross basis on our consolidated balance sheets. As a result, the gross amounts recognized and net amounts presented in the table above are the same.
We do not believe the contractually allowed netting, close-out netting or setoff of amounts owed to, or due from, the counterparties to our ISDA agreements would have a material effect on our financial position.

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14.   Noncontrolling Interests
A reconciliation of the beginning and ending balances of noncontrolling interests and distributions payable to noncontrolling interests in our consolidated balance sheets is provided below.
 
Nine months ended 
 September 30,
 
2018
 
2017
 
CFN
 
TNCLP
 
Total
 
CFN
 
TNCLP
 
Total
 
(in millions)
Noncontrolling interests:
 
 
 

 
 
 
 
 
 

 
 
Beginning balance
$
2,772

 
$
333

 
$
3,105

 
$
2,806

 
$
338

 
$
3,144

Earnings attributable to noncontrolling interests
84