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CF INDUSTRIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-K)

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02/23/2017 | 07:33 pm


You should read the following discussion and analysis in conjunction with the
consolidated financial statements and related notes included in Item 8.
Financial Statements and Supplementary Data. All references to "CF Holdings,"
"we," "us," "our" and "the Company" refer to CF Industries Holdings, Inc. and
its subsidiaries, except where the context makes clear that the reference is
only to CF Industries Holdings, Inc. itself and not its subsidiaries. All
references to "CF Industries" refer to CF Industries, Inc., a 100% owned
subsidiary of CF Industries Holdings, Inc. References to tons refer to
short-tons. Notes referenced in this discussion and analysis refer to the notes
to consolidated financial statements that are found in Item 8. Financial
Statements and Supplementary Data-Notes to Consolidated Financial Statements.
The following is an outline of the discussion and analysis included herein:
• Overview of CF Holdings


• Our Company



• Industry Factors and Market Conditions



• Items Affecting Comparability of Results



• Financial Executive Summary



• Results of Consolidated Operations



• Year Ended December 31, 2016 Compared to Year Ended December 31, 2015



• Year Ended December 31, 2015 Compared to Year Ended December 31, 2014



• Operating Results by Business Segment



• Liquidity and Capital Resources



• Off-Balance Sheet Arrangements



• Critical Accounting Policies and Estimates



• Recent Accounting Pronouncements





Overview of CF Holdings
Our Company
We are one of the largest manufacturers and distributors of nitrogen fertilizer
and other nitrogen products in the world. 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. Our manufacturing and distribution facilities are concentrated in the
midwestern United States and other major agricultural areas of the United
States
, Canada and the United Kingdom. We also export nitrogen fertilizer
products from our Donaldsonville, Louisiana and Yazoo City, Mississippi
manufacturing facilities, and our United Kingdom manufacturing facilities in
Billingham and Ince.
Our principal assets include:
• four U.S. nitrogen fertilizer manufacturing facilities, located in


Donaldsonville, Louisiana (the largest nitrogen fertilizer complex in



the world); Port Neal, Iowa; Yazoo City, Mississippi; and Woodward,



Oklahoma. These facilities are owned by CF Industries Nitrogen, LLC
(CFN), in which we own a majority equity interest and CHS Inc. (CHS)



owns a minority equity interest. See Note 17-Noncontrolling Interests



to our consolidated financial statements included in Item 8 of this
report for additional information on our strategic venture with CHS;


• an approximately 75.3% interest in Terra Nitrogen Company, L.P.



(TNCLP), a publicly traded limited partnership of which we are the sole



general partner and the majority limited partner and which, through its



subsidiary Terra Nitrogen, Limited Partnership (TNLP), operates a



nitrogen fertilizer manufacturing facility in Verdigris, Oklahoma;


• two Canadian nitrogen fertilizer manufacturing facilities, located in



Medicine Hat, Alberta (the largest nitrogen fertilizer complex in
Canada) and Courtright, Ontario;


• two United Kingdom nitrogen manufacturing complexes, located in Ince
and Billingham;



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CF INDUSTRIES HOLDINGS, INC.

• an extensive system of terminals and associated transportation
equipment located primarily in the midwestern United States; and



• a 50% interest in Point Lisas Nitrogen Limited (PLNL), an ammonia



production joint venture located in the Republic of Trinidad and Tobago



that we account for under the equity method.





Industry Factors and Market Conditions
We operate in a highly competitive, global industry. Our operating results are
influenced by a broad range of factors, including those outlined below.
Global Commodities
Our products are globally traded commodities and are subject to price
competition. The customers for our products make their purchasing decisions
principally on the basis of delivered price and, to a lesser extent, on customer
service and product quality. The selling prices of our products fluctuate in
response to global market conditions and changes in supply and demand.
Global Supply and Demand Factors
Historically, global fertilizer demand has been driven primarily by population
growth, gross domestic product growth, changes in dietary habits and planted
acreage, and application rates, among other things. We expect these key
variables to continue to have major impacts on long-term fertilizer demand for
the foreseeable future. Short-term fertilizer demand depends on global economic
conditions, weather patterns, the level of global grain stocks relative to
consumption, governmental regulations, including requirements mandating
increased use of bio-fuels and farm sector income. Other geopolitical factors
like temporary disruptions in fertilizer trade related to government
intervention or changes in the buying/selling patterns of key
exporting/consuming countries such as China, India, Russia and Brazil, among
others, often play a major role in shaping near-term market fundamentals. The
economics of nitrogen-based fertilizer manufacturing play a key role in
decisions to increase or reduce production capacity. Supply of fertilizers is
generally driven by available capacity and operating rates, raw material costs
and availability, government policies and global trade. Raw materials are
dependent on energy sources such as natural gas or coal; supply costs are
affected by the supply of and demand for these commodities.
Over the last decade, strong demand, high capacity utilization and increasing
operating margins as a result of higher global nitrogen fertilizer prices
stimulated global investment in nitrogen production facilities, which resulted
in an increase in global nitrogen fertilizer production capacity. As a result,
global nitrogen fertilizer supply increased faster than global nitrogen
fertilizer demand, creating the current global oversupply in the market, and
leading to lower nitrogen fertilizer selling prices. In addition, lower global
production costs, driven by lower feedstock costs and foreign exchange rate
changes, and reduced ocean freight costs have further contributed to the lower
priced environment.
Global Trade in Fertilizer
In addition to the relationship between global supply and demand, profitability
within a particular geographic region is determined by the supply/demand balance
within that region. Regional supply and demand can be influenced significantly
by factors affecting trade within regions. Some of these factors include the
relative cost to produce and deliver product, relative currency values, the
availability of credit and governmental trade policies. The development of
additional natural gas reserves in North America over the last decade has
decreased natural gas costs relative to the rest of the world, making North
American nitrogen fertilizer producers more competitive. These lower natural gas
costs contributed to announcements of several nitrogen fertilizer capacity
expansion projects in North America, including our capacity expansion projects
in Donaldsonville, Louisiana and Port Neal, Iowa. Changes in currency values may
also alter our cost competitiveness relative to producers in other regions of
the world.
Imports account for a significant portion of the nitrogen fertilizer consumed in
North America. Producers of nitrogen-based fertilizers located in the Middle
East
, Ukraine, the Republic of Trinidad and Tobago, Venezuela, North Africa,
Russia and China are major exporters to North America.
Farmers' Economics
The demand for fertilizer is affected by the aggregate crop planting decisions
and fertilizer application rate decisions of individual farmers. Individual
farmers make planting decisions based largely on prospective profitability of a
harvest, while the specific varieties and amounts of fertilizer they apply
depend on factors like their current liquidity, soil conditions, weather
patterns, crop prices and the types of crops planted.

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CF INDUSTRIES HOLDINGS, INC.

2016 Market Conditions
Our 2016 results were impacted by excess global nitrogen supply and the
resulting low nitrogen fertilizer selling prices. The U.S. Gulf is a major
global fertilizer pricing point due to the volume of nitrogen fertilizer that
trades there. Through most of 2016, nitrogen pricing at the U.S. Gulf declined,
often trading below parity with other international pricing points due to excess
global nitrogen supply as a result of continued imports from various exporting
regions and decreased buyer interest. Seasonal decreases in agricultural demand
combined with delayed customer purchasing activity resulted in multi-year lows
in nitrogen fertilizer selling prices in the second half of the year. The
average selling price for our products in 2016 was $217 per ton compared to $314
per ton in 2015, a decrease of 31%, resulting in a decrease in both net sales
and gross margin of approximately $1.38 billion between the periods. The decline
in selling prices has impacted each of our reportable segments. In addition,
during periods of declining prices, customers tend to delay purchasing
fertilizer in anticipation of prices in the future being lower than current
prices, which has also negatively impacted our sales volume.
In the fourth quarter of 2016, the following developments impacted the global
nitrogen fertilizer market:
• A decline in Chinese nitrogen fertilizer operating rates due to rising


production costs and lower global selling prices led to reduced Chinese



urea supply availability in China and in international markets.



• Higher global oil prices have resulted in higher effective natural gas



prices in Europe and Russia, and this has contributed to increasing



nitrogen fertilizer manufacturers' production costs in these regions.


• Customers delayed purchasing into the fourth quarter of 2016, which
reduced inventory levels in the supply chain. Increases in demand
caused higher pricing as 2016 ended as customers began taking
deliveries in anticipation of the 2017 spring application season.


These factors have led to an increase in global nitrogen pricing at the end of
2016. A significant amount of new nitrogen production capacity came on line in
2016, and additional production capacity is expected to come on line in 2017,
including a significant increase in production capacity located in North
America
. The new capacity will further increase supply. We expect nitrogen
fertilizer prices to rise going into the 2017 spring application season due to
seasonal demand. However, we expect the lower priced environment to continue
until global supply and demand become more balanced through a combination of
continued demand growth and supply reductions as producers respond to lower
realized margins by taking higher cost production facilities off line.

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CF INDUSTRIES HOLDINGS, INC.

Items Affecting Comparability of Results
During the years ended December 31, 2016, 2015 and 2014, certain significant
items impacted our financial results. The following table and related discussion
outline these significant items and how they impacted the comparability of our
financial results during these periods. For the year ended December 31, 2016, we
reported a net loss attributable to common stockholders of $277 million, while
in the years ended December 31, 2015 and 2014, we reported net earnings
attributable to common stockholders of $700 million and $1.39 billion,
respectively. Positive amounts in the table below are costs or expenses
incurred, while negative amounts are income recognized in the periods presented.
2016 2015 2014
Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax
(in millions)
Capacity Expansion Projects:
Expansion project depreciation (1) $ 116 $ 73 $ 13 $ 8 $ - $ -
Start-up costs - Donaldsonville / Port
Neal expansion plants (1) 52 32 - - - -
Expansion project expenses (2) 73 46 51 32 31 19
Loss on foreign currency derivatives (2) - - 22 13 38 24
Strategic Venture with CHS:
Noncontrolling interest (7) 93 93 - - - -
Loss on embedded derivative liability (2) 23 14 - - - -
Debt Restructuring:
Loss on debt extinguishment 167 105 - - - -
Debt and revolver amendment fees (3) 16 10 - - - -
Private Senior Notes arrangement fees (4) 2 1 - - - -
CF Fertilisers UK Acquisition:
Gain on remeasurement of CF Fertilisers
UK investment (5) - - (94 ) (94 ) - -
Equity Method Investments:
Impairment of equity method investment
in PLNL (6) 134 134 62 62 - -
Loss on sale of equity method
investments (5) - - 43 31 - -
Transaction Costs and Termination of Agreement
with OCI:
Transaction costs 179 96 57 37 - -
Financing costs related to bridge loan
commitment fee (3) 28 18 6 4 - -
Other Items:
Unrealized net mark-to-market (gain)
loss on natural gas derivatives (1) (260 ) (163 ) 176 111 79 50
Loss (gain) on foreign currency
transactions including intercompany
loans (2) 93 93 (8 ) - (15 ) (9 )
Gain on sale of phosphate business - - - - (750 ) (463 )
Retirement benefit settlement charges (1)(4) - - - - 13 8
Total Impact of Significant Items $ 716 $ 552 $


328 $ 204 $ (604 ) $ (371 )



______________________________________________________________________________



(1) Included in cost of sales in our consolidated statement of operations.
(2) Included in other operating-net in our consolidated statement of operations.
(3) Included in interest expense in our consolidated statement of operations.
(4) Included in selling, general and administrative expenses in our consolidated
statement of operations.
(5) Included in equity in earnings of non-operating affiliates in our
consolidated statement of operations.
(6) Included in equity in (losses) earnings of operating affiliates in our
consolidated statement of operations.
(7) Included in net earnings attributable to noncontrolling interests in our
consolidated statement of operations.

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CF INDUSTRIES HOLDINGS, INC.

2016 2015 2014
Subtotals of Amounts Above by Line Item (in


millions)



in the Consolidated Statements of
Operations:
Cost of sales $ (92 ) $ 189 $ 88
Selling, general and administrative
expenses 2 - 4
Transaction costs 179 57 -
Other operating-net 189 65 54
Gain on sale of phosphate business - - (750 )
Equity in (losses) earnings of
operating affiliates 134 62 -
Interest expense 44 6 -
Loss on debt extinguishment 167 - -
Equity in earnings of non-operating
affiliates-net of taxes - (51 ) -
Net earnings attributable to
noncontrolling interests 93 - -
Total Impact of Significant Items $ 716 $ 328


$ (604 )





The following describes the significant items that impacted the comparability of
our financial results in 2016, 2015 and 2014. Descriptions of items below that
refer to amounts in the table above, refer to the pre-tax amounts.
Capacity Expansion Projects
In 2016, we completed capacity expansion projects at Donaldsonville, Louisiana
and Port Neal, Iowa. These projects, originally announced in 2012, included the
construction of new ammonia, urea, and UAN plants at our Donaldsonville,
Louisiana
complex and new ammonia and urea plants at our Port Neal, Iowa
complex. These plants increased our overall production capacity by approximately
25%, improved our product mix flexibility at Donaldsonville, and improved our
ability to serve upper-Midwest urea customers from our Port Neal location. In
combination, these new facilities are able to produce 2.1 million tons of gross
ammonia per year, upgraded products ranging from 2.0 million to 2.7 million tons
of granular urea per year and up to 1.8 million tons of UAN 32% solution per
year, depending on our choice of product mix. These new facilities will allow us
to benefit from the cost advantages of North American natural gas.
At our Donaldsonville complex, the ammonia plant was placed in service in the
fourth quarter of 2016, the UAN plant was placed in service in the first quarter
of 2016 and the granular urea plant was placed in service during fourth quarter
of 2015. At our Port Neal, Iowa complex, both the ammonia and granular urea
plants were placed in service in the fourth quarter of 2016. The total capital
cost of the capacity expansion projects was $5.2 billion. Depreciation expense
pertaining to each of our capacity expansion plants commenced once the
respective plant was placed in service. Total depreciation expense pertaining to
our capacity expansion plants recognized in 2016 and 2015 was $116 million and
$13 million, respectively.
Start-up costs of $52 million, which primarily relate to the cost of commencing
production at the ammonia plants, were incurred in 2016. Expansion project
expenses, consisting primarily of administrative costs and other project costs
that do not qualify for capitalization, totaled $73 million, $51 million and $31
million
in 2016, 2015 and 2014, respectively.
Losses on foreign currency derivatives of $22 million and $38 million in 2015
and 2014, respectively, relate to hedges of European euro denominated equipment
purchased as part of the capacity expansion projects.
Strategic Venture with CHS
We commenced a strategic venture with CHS on February 1, 2016, at which time CHS
purchased a minority equity interest in CFN for $2.8 billion. CHS also began
receiving deliveries pursuant to a supply agreement under which CHS has the
right to purchase annually from CFN up to approximately 1.1 million tons of
granular urea and 580,000 tons of UAN at market prices. As a result of its
minority equity interest in CFN, CHS is entitled to semi-annual cash
distributions from CFN. We are also entitled to semi-annual cash distributions
from CFN. The amounts of distributions from CFN to us and CHS are based
generally on the profitability of CFN and determined based on the volume of
granular urea and UAN sold by CFN to us and CHS pursuant to supply agreements,
less a formula driven amount based primarily on the cost of natural gas used to
produce the granular urea and UAN, and adjusted for the allocation of items such
as operational efficiencies and overhead amounts. We began recognizing the
noncontrolling interest pertaining to CHS' ownership interest in CFN on February
1, 2016
, and during 2016, we recognized $93 million of earnings attributable to
the noncontrolling interest in CFN. See Note 17-Noncontrolling Interests to our
consolidated financial statements included in Item 8 of this report for
additional information regarding our strategic venture with CHS.

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Under the terms of our strategic venture with CHS, if our credit rating is
reduced below certain levels by two of three specified credit rating agencies,
we are required to make a non-refundable yearly payment of $5 million to CHS.
During 2016, our credit rating was reduced and we made the first payment to CHS.
The payments continue on a yearly basis until the earlier of the date that our
credit rating is upgraded to or above certain levels by two of three specified
credit rating agencies or February 1, 2026. We recognized this term of the
strategic venture as an embedded derivative and recorded a charge of $23 million
in 2016 for this item.
Debt Restructuring
Due to the uncertain duration of the prevailing low nitrogen fertilizer selling
price environment and in order to provide liquidity and covenant flexibility for
the future, in the fourth quarter of 2016, we took certain steps with respect to
the Revolving Credit Agreement and our senior notes due 2022, 2025 and 2027 (the
Private Senior Notes). On November 21, 2016, we prepaid the $1.0 billion
aggregate principal amount of the Private Senior Notes, and paid the related
make-whole amount of approximately $170 million. We made the prepayment and
make-whole payment using the proceeds from an offering of $1.25 billion
aggregate principal amount of senior secured notes comprising $500 million
aggregate principal amount of senior secured notes due 2021 and $750 million
aggregate principal amount of senior secured notes due 2026 (collectively
referred to as the "Senior Secured Notes"). We recognized $167 million of the
$170 million cash make-whole payment on the Private Senior Notes as a debt
extinguishment charge, with the $3 million remainder being a debt modification
cost that will be amortized over the term of the Senior Secured Notes.
In connection with the completion of the offering of the Senior Secured Notes
and the prepayment of the Private Senior Notes, certain amendments to the
Revolving Credit Agreement became effective. The amendments included, among
other things, changes in and additions to the financial and other covenants and
a reduction in the size of the facility from $1.5 billion to $750 million.
In conjunction with our debt restructuring, including amendments to the
Revolving Credit Agreement, we recognized $18 million of debt issuance and
amendment fees in 2016. See further discussion below under "Liquidity and
Capital Resources" and Note 12-Financing Agreements to our consolidated
financial statements included in Item 8 of this report for additional
information.
CF Fertilisers UK Acquisition
On July 31, 2015, we acquired the remaining 50% equity interest in CF
Fertilisers UK Group Limited
(formerly known as GrowHow UK Group Limited) (CF
Fertilisers UK) not previously owned by us for total consideration of $570
million
, and CF Fertilisers UK became a wholly owned subsidiary. CF Fertilisers
UK Limited
(formerly known as GrowHow UK Limited), a wholly owned subsidiary of
CF Fertilisers UK, operates two nitrogen manufacturing complexes in the United
Kingdom
, in the cities of Ince and Billingham. This transaction increased our
manufacturing capacity with the acquisition of CF Fertilisers UK's nitrogen
manufacturing complexes. The Ince complex is located in northwestern England and
consists of an ammonia plant, three nitric acid plants, an AN plant and three
NPK plants. The Billingham complex is located in the Teesside chemical area in
northeastern England, and consists of an ammonia plant, three nitric acid
plants, a carbon dioxide plant and an AN fertilizer plant. See Note
4-Acquisitions and Divestitures to our consolidated financial statements
included in Item 8 of this report for additional information regarding the
acquisition.
The financial results of CF Fertilisers UK have been consolidated within our
financial results since July 31, 2015. Prior to July 31, 2015, our initial 50%
equity interest in CF Fertilisers UK was accounted for as an equity method
investment, and the financial results of this investment were included in our
consolidated statements of operations in equity in earnings of non-operating
affiliates-net of taxes. In the third quarter of 2015, upon the acquisition of
the remaining 50% equity interest in CF Fertilisers UK, we recognized a $94
million
gain on the remeasurement to fair value of our initial 50% equity
investment in CF Fertilisers UK.
Our consolidated segment results for 2016 include the results of CF Fertilisers
UK for the full year. Our consolidated segment results for 2015 include five
months of CF Fertilisers UK results (from the July 31, 2015 acquisition date to
December 31, 2015). As a result, the impact of the acquisition on the comparison
of 2016 versus 2015 is the additional seven months of results in 2016 (the seven
months ended July 31, 2016). To quantify and provide comparability of the impact
of the acquisition on 2016 results as compared to 2015, the following table
summarizes the sales volume, net sales, and gross margin of the CF Fertilisers
UK business for the seven months ended July 31, 2016:

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CF INDUSTRIES HOLDINGS, INC.

CF Holdings Reportable Segments
CF Fertilisers UK Financial Results Ammonia AN


Other Consolidated



(dollars in millions)
Seven months ended July 31, 2016
Sales volume by product tons (000s) 100 737 468 1,305
Net sales $ 26 $ 164 $ 79 $ 269
Cost of sales 22 155 74 251
Gross margin $ 4 $ 9 $ 5 $ 18
Gross margin percentage 15.4 % 5.5 % 6.3 % 6.7 %


To quantify and provide comparability of the impact of the acquisition on 2015
results as compared to 2014, the following table summarizes the sales volume,
net sales, and gross margin of the CF Fertilisers UK business for the five
months ended December 31, 2015:
CF Holdings Reportable


Segments



CF Fertilisers UK Financial Results Ammonia AN


Other Consolidated



(dollars in millions)
Five months ended December 31, 2015
Sales volume by product tons (000s) 112 436 277 825
Net sales $ 38 $ 117 $ 53 $ 208
Cost of sales 30 109 46 185
Gross margin $ 8 $ 8 $ 7 $ 23
Gross margin percentage 20.1 % 7.2 % 14.0 % 11.3 %


Equity Method Investments
In 2016 and 2015, our equity in (losses) earnings of operating affiliates
includes an impairment charge of our equity method investment in Point Lisas
Nitrogen Limited
(PLNL). PLNL is our joint venture investment in the Republic of
Trinidad and Tobago
and operates an ammonia plant that relies on natural gas
supplied by the National Gas Company of Trinidad and Tobago Limited (NGC)
pursuant to a gas sales contract (the NGC Contract). The joint venture has
experienced curtailments in the supply of natural gas from NGC, which have
reduced the ammonia production at PLNL. In 2016, NGC communicated to PLNL that
it does not recognize the joint venture's exercise of its option to renew the
NGC Contract for an additional five-year term beyond its current termination
date in September 2018, and that any NGC commitment to supply gas beyond 2018
will need to be based on new agreements regarding volume and price. PLNL has
initiated arbitration proceedings against NGC and asserted claims in connection
with NGC's failure to supply the contracted quantities of natural gas, and its
refusal to recognize the joint venture's exercise of its option to extend the
NGC Contract. As part of our impairment assessment of our equity method
investment in PLNL, we determined the carrying value exceeded the fair value and
recognized a $134 million impairment charge in 2016. Previously, in 2015, we
recognized an impairment charge of $62 million related to our equity method
investment in PLNL. See Note 8-Equity Method Investments to our consolidated
financial statements included in Item 8 of this report and "Critical Accounting
Policies and Estimates" below, for additional information regarding our equity
method investment in PLNL.
During 2015, we recognized a loss of $43 million related to the sale of our 50%
investment in Keytrade AG and the sale of our 50% investment in an ammonia
storage joint venture in Houston, Texas. See Note 8-Equity Method Investments to
our consolidated financial statements included in Item 8 of this report for
additional information regarding our equity method investments.
Transaction Costs and Termination of Agreement to Combine with Certain of OCI
N.V.'s Businesses
On August 6, 2015, we entered into a definitive agreement (as amended, the
Combination Agreement) to combine with the European, North American and global
distribution businesses of OCI N.V. (OCI). On May 22, 2016, CF Holdings, OCI and
the other parties to the Combination Agreement entered into a termination
agreement (the Termination Agreement) under which the parties agreed to
terminate the Combination Agreement by mutual written consent. Pursuant to the
Termination Agreement, CF Holdings paid OCI a termination fee of $150 million.
Under the Termination Agreement, the parties to the Combination Agreement also
agreed to release each other from any and all claims, actions, obligations,
liabilities, expenses and fees in connection with, arising out of or related to
the Combination Agreement and all ancillary agreements contemplated thereby
(other than the confidentiality agreement between CF Holdings and OCI) or the
transactions contemplated therein or thereby.

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In 2016, we incurred $179 million of transaction costs associated with the
proposed combination with certain businesses of OCI and our strategic venture
with CHS. This includes the $150 million termination fee paid to OCI in the
second quarter of 2016, which is described above, and costs for various
consulting and legal services. In 2015, we incurred $57 million of transaction
costs associated with the proposed combination with certain businesses of OCI,
our strategic venture with CHS, and the acquisition of the remaining 50% equity
interest in CF Fertilisers UK not previously owned by us.
On September 18, 2015, in connection with our proposed combination with OCI, we
entered into a senior unsecured 364-day Bridge Credit Agreement (as amended, the
Bridge Credit Agreement). Upon the termination of the Combination Agreement on
May 22, 2016, the lenders' commitment under the Bridge Credit Agreement
terminated automatically and we recognized $28 million in bridge loan commitment
fees. In 2015, we recognized $6 million of fees related to the initiation of the
bridge loan.
Other items
Unrealized net mark-to-market (gain) loss on natural gas derivatives - Natural
gas is typically the largest and most volatile single component of the
manufacturing cost for nitrogen-based products. We manage the risk of changes in
natural gas prices through the use of derivative financial instruments. The
derivatives that we use for this purpose are primarily natural gas fixed price
swaps and natural gas options. We use natural gas derivatives as an economic
hedge of natural gas price risk, but without the application of hedge
accounting. This can result in volatility in reported earnings due to the
unrealized mark-to-market adjustments that occur from changes in the value of
the derivatives. In 2016, 2015 and 2014, we recognized unrealized net
mark-to-market (gains) losses on natural gas derivatives of $(260) million, $176
million
and $79 million, respectively, which is reflected in cost of sales in
our consolidated statements of operations.
Loss (gain) on foreign currency transactions including intercompany loans - In
2016 and 2015, we recognized losses (gains) of $93 million and ($8) million,
respectively, from the impact of changes in foreign currency exchange rates on
primarily British pound and Canadian dollar denominated intercompany loans that
are not permanently invested. In 2014, we recognized a $15 million gain from the
impact of changes in foreign currency exchange rates on Canadian dollar
denominated intercompany loans that were not permanently invested.
Gain on sale of phosphate business - On March 17, 2014, we sold our phosphate
mining and manufacturing business to The Mosaic Company (Mosaic) and recognized
a pre-tax gain on the sale of the phosphate business of $750 million. Under the
terms of the definitive transaction agreement, the accounts receivable and
accounts payable pertaining to the phosphate mining and manufacturing business
and certain phosphate inventory held in distribution facilities were not sold to
Mosaic in the transaction and were settled in the ordinary course.
Upon selling the phosphate business, we began to supply Mosaic with ammonia
produced by our PLNL joint venture. The contract to supply ammonia to Mosaic
from our PLNL joint venture represents the continuation of a supply practice
that previously existed between our former phosphate mining and manufacturing
business and other operations of the Company. Prior to March 17, 2014, PLNL sold
ammonia to us for use in the phosphate business and the cost was included in our
production costs in our phosphate segment. Subsequent to the sale of the
phosphate business, we now sell the PLNL-sourced ammonia to Mosaic. The revenue
from these sales to Mosaic and the costs to purchase the ammonia from PLNL are
now included in our ammonia segment. Our 50% share of the operating results of
our PLNL joint venture continues to be included in our equity in earnings of
operating affiliates in our consolidated statements of operations. Because of
the significance of this continuing supply practice, in accordance with
U.S. generally accepted accounting principles (U.S. GAAP), the phosphate mining
and manufacturing business is not reported as discontinued operations in our
consolidated statements of operations.


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CF INDUSTRIES HOLDINGS, INC.



Financial Executive Summary
• We reported a net loss attributable to common stockholders of $277 million



in 2016, compared to net earnings attributable to common stockholders of



$700 million in 2015, or a decline of $977 million.



• Diluted net loss per share attributable to common stockholders was $1.19



per share in 2016 compared to diluted net earnings per share of $2.96 per



share in 2015.



• In 2016, we experienced lower net earnings attributable to common



stockholders compared to 2015 due primarily to a lower gross margin as a



result of lower average selling prices resulting from the excess global



supply of nitrogen fertilizer, combined with the impact of several
significant items which are discussed above under "Items Affecting
Comparability of Results."



• Our total gross margin declined by $707 million, or 46%, to $840 million



in 2016 from $1.55 billion in 2015. The impact of the CF Fertilisers UK



acquisition increased gross margin by $18 million, or 1%. The remaining



decline in our gross margin of $725 million was due primarily to lower



average selling prices and higher capacity expansion project related



costs, partially offset by the impact of unrealized net mark-to-market



gains on natural gas derivatives, increased sales volume, and lower
physical natural gas costs and production costs:


• Average selling prices declined by 31%, which reduced gross
margin by $1.38 billion.


• Unrealized net mark-to-market gains on natural gas derivatives
increased gross margin by $436 million as 2016 included a $260
million gain and 2015 included a $176 million loss.


• Sales volume, primarily granular urea and UAN, increased by 14%,
which increased gross margin by $215 million. Sales volume
increased due to the completion of our capacity expansion project
upgrading facilities at our Donaldsonville, Louisiana complex for
granular urea and UAN.


Donaldsonville and Port Neal expansion project depreciation
reduced gross margin by approximately$103 million. Start-up costs
for the Donaldsonville ammonia and Port Neal ammonia and urea
plants reduced gross margin by $52 million.


• Lower physical natural gas costs in 2016 increased gross margin
by $108 million as natural gas prices were lower in 2016,
particularly in the first half of the year with high storage
levels and strong production in North America. Natural gas prices
rose towards the end of 2016.


• Realized net mark-to-market losses on natural gas derivatives
decreased gross margin by $62 million as 2016 included a $132
million loss and 2015 included a $70 million loss.


• Lower production, distribution and freight costs,



increased gross



margin by approximately $104 million.


• Our income tax (benefit) provision declined by $464 million to a net
benefit of $68 million in 2016 from an income tax provision of $396



million for 2015 primarily as a result of the loss recognized in 2016. See



Note 10-Income Taxes to our consolidated financial statements included in



Item 8 of this report for additional information on our income tax
benefit.



• Selling, general and administrative expenses increased $4 million to $174



million in 2016 from $170 million in 2015. The increase was due primarily



to the impact of the CF Fertilisers UK acquisition, partly offset by lower



costs for corporate initiatives and lower intangible asset amortization



expense.


• Transaction costs incurred in 2016 of $179 million are associated
primarily with the agreements pertaining to the proposed combination with
certain businesses of OCI that was terminated on May 22, 2016 and our



strategic venture with CHS. Transaction costs include the $150 million



termination fee paid by CF Holdings to OCI in the second quarter of 2016



as a result of the termination of the Combination Agreement and costs for



various consulting and legal services.



• Other operating-net increased by $116 million from $92 million in 2015 to



$208 million in 2016. The increased expense was due primarily to realized



and unrealized losses on foreign currency transactions primarily related



to British pound sterling denominated intercompany debt that has not been



permanently invested. The increased expense also reflects higher expansion



project costs pertaining to our Donaldsonville, Louisiana and Port Neal,



Iowa capacity expansion projects that did not qualify for capitalization



and the loss of $23 million representing the net fair value adjustments to



an embedded derivative related to our strategic venture with CHS. These



increases were partly offset by a decrease in realized and unrealized



losses on foreign currency derivatives of $22 million.



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CF INDUSTRIES HOLDINGS, INC.



• Net interest expense increased by $64 million to $195 million in 2016 from



$131 million in 2015. The $64 million increase in net interest expense was



due primarily to the combination of higher debt levels due to the issuance



of $1.0 billion of Private Senior Notes in September 2015 and debt



amendment fees and accelerated amortization of debt issuance costs due to



restructuring of our debt and the Revolving Credit Agreement in 2016. In



2016, we modified the Revolving Credit Agreement by reducing its size from



$2.0 billion to $750 million and modifying certain covenants and other
terms. As a result of these changes, we recognized $16 million of debt
amendment fees and accelerated amortization of loan fees in interest
expense. The increase in interest expense-net in 2016 also includes the



amortization of capitalized Bridge Credit Agreement fees of $28 million



pertaining to the bridge loan for our proposed combination with certain of



the OCI businesses. We also recorded capitalized interest of $166 million



in 2016 related primarily to our capacity expansion projects compared to



$154 million in 2015.


• In 2016, we prepaid in full the outstanding $1.0 billion aggregate



principal amount of our Private Senior Notes and recognized a loss on debt



extinguishment of $167 million. The prepayment of $1.18 billion included



the payment of a make-whole amount of approximately $170 million and



accrued interest. Loss on debt extinguishment of $167 million on our



consolidated statement of operations excludes $3 million of the make-whole



payment, which was accounted for as a modification and recognized on our
consolidated balance sheet as deferred financing fees, a reduction of
long-term debt, and is being amortized using the effective interest rate
method over the term of the Senior Secured Notes.


• Net cash provided by operating activities in 2016 was $617 million as



compared to $1.21 billion in 2015, a decline of $590 million. The decline



resulted primarily from lower net earnings during 2016 due to lower
average selling prices from excess global nitrogen supply, partially
offset by lower amounts of cash used for working capital purposes. Lower
working capital levels in accounts receivable and inventory, plus lower



amounts paid for income taxes and certain income tax refunds received in



2016, contributed to the reduction in cash used for working capital.



Favorable changes in working capital also included a greater proportion of



sales was paid in 2016 as compared to the prior year period as we entered



2016 with a lower level of customer advances than in 2015 due to
customers' hesitancy to enter into prepaid contracts in a declining
fertilizer price environment.



• Net cash used in investing activities was $2.18 billion in 2016 compared



to $2.98 billion in 2015. This decrease is due primarily to the 2015



acquisition of the remaining 50% equity interest in CF Fertilisers UK not



previously owned by us for a net cash payment of $552 million, which was



net of cash acquired of $18 million. This decrease was also attributable



in part to a decline in capital expenditures related primarily to the
capacity expansion projects in Donaldsonville, Louisiana and Port Neal,



Iowa. During 2016, capital expenditures totaled $2.21 billion compared to



$2.47 billion in 2015.


• Net cash provided by financing activities was $2.44 billion in 2016



compared to $77 million in 2015. In 2016, CHS purchased a minority equity



interest in CFN for $2.8 billion. We distributed $119 million to the



noncontrolling interests, including CHS, in 2016, compared to $45 million



in 2015. In 2016, we received proceeds of approximately $1.24 billion, net



of discounts, from the issuance of the Senior Secured Notes which were
used to fund the prepayment of the $1.0 billion of Private Senior Notes



and the related make-whole payment of $170 million. No share repurchases



were made during 2016 compared to 8.9 million shares repurchased for
$556 million in cash in 2015. Dividends paid on common stock were $280
million
and $282 million in 2016 and 2015, respectively.



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CF INDUSTRIES HOLDINGS, INC.



Results of Consolidated Operations
The following table presents our consolidated results of operations and
supplemental data:



Twelve months ended December 31,
2016 2015 2014 2016 v. 2015 2015 v. 2014
(in millions, except as noted)
Net sales $ 3,685 $ 4,308 $ 4,743 $ (623 ) (14 )% $ (435 ) (9 )%
Cost of sales (COS) 2,845 2,761 2,965 84 3 % (204 ) (7 )%
Gross margin 840 1,547 1,778 (707 )


(46 )% (231 ) (13 )%
Gross margin percentage 22.8 % 35.9 % 37.5 % (13.1 )%


(1.6 )%
Selling, general and
administrative expenses 174 170 152 4 2 % 18 12 %
Transaction costs 179 57 - 122 214 % 57 N/M
Other operating-net 208 92 53 116 126 % 39 74 %
Total other operating costs
and expenses 561 319 205 242 76 % 114 56 %
Gain on sale of phosphate
business - - 750 - N/M (750 ) (100 )%
Equity in (losses) earnings
of operating affiliates (145 ) (35 ) 43 (110 ) N/M (78 ) N/M
Operating earnings 134 1,193 2,366 (1,059 ) (89 )% (1,173 ) (50 )%
Interest expense-net 195 131 177 64 49 % (46 ) (26 )%
Loss on debt extinguishment 167 - - 167 N/M - N/M
Other non-operating-net (2 ) 4 2 (6 ) N/M 2 100 %
(Loss) earnings before income
taxes and equity in earnings
of non-operating affiliates (226 ) 1,058 2,187 (1,284 ) N/M (1,129 ) (52 )%
Income tax (benefit)
provision (68 ) 396 773 (464 ) N/M (377 ) (49 )%
Equity in earnings of
non-operating affiliates-net
of taxes - 72 23 (72 ) (100 )% 49 213 %
Net (loss) earnings (158 ) 734 1,437 (892 ) N/M (703 ) (49 )%
Less: Net earnings
attributable to
noncontrolling interests 119 34 47 85 250 % (13 ) (28 )%
Net (loss) earnings
attributable to common
stockholders $ (277 ) $ 700 $ 1,390 $ (977 ) N/M $ (690 ) (50 )%
Diluted net earnings (loss)
per share attributable to
common stockholders $ (1.19 ) $ 2.96 $ 5.42 $ (4.15 ) N/M $ (2.46 ) (45 )%
Diluted weighted-average
common shares
outstanding 233.1 236.1 256.7 (3.0 ) (1 )% (20.6 ) (8 )%
Dividends declared per common
share $ 1.20 $ 1.20 $ 1.00 $ - $ 0.20
Natural Gas Supplemental Data
(per MMBtu)
Natural gas costs in COS(1) $ 2.61 $ 3.00 $ 4.46 $ (0.39 ) (13 )% $ (1.46 ) (33 )%
Realized derivatives loss
(gain) in COS(2) 0.46 0.28 (0.24 ) 0.18 64 % 0.52 N/M
Cost of natural gas in COS $ 3.07 $ 3.28 $ 4.22 $ (0.21 ) (6 )% $ (0.94 ) (22 )%
Average daily market price of
natural gas Henry Hub
(Louisiana) $ 2.48 $ 2.61 $ 4.32 $ (0.13 ) (5 )% $ (1.71 ) (40 )%
Average daily market price of
natural gas National
Balancing Point (UK)(3) $ 4.66 $ 6.53 $ - $ (1.87 ) (29 )% $ 6.53 N/M
Unrealized net mark-to-market
(gain) loss on natural gas
derivatives $ (260 ) $ 176 $ 79 $ (436 ) N/M $ 97 123 %
Capital expenditures $ 2,211 $ 2,469 $ 1,809 $ (258 ) (10 )% $ 660 36 %
Sales volume by product tons
(000s) 16,957 13,718 13,763 3,239 24 % (45 ) - %
Production volume by product
tons (000s):
Ammonia(4) 8,307 7,673 7,011 634 8 % 662 9 %
Granular urea 3,368 2,520 2,347 848 34 % 173 7 %
UAN (32%) 6,698 5,888 5,939 810 14 % (51 ) (1 )%
AN 1,845 1,283 950 562 44 % 333 35 %



______________________________________________________________________________



N/M-Not Meaningful
(1) Includes the cost of natural gas that is included in cost of sales during



the period under the first-in, first-out (FIFO) inventory cost method.



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CF INDUSTRIES HOLDINGS, INC.



(2) Includes realized gains and losses on natural gas derivatives settled during



the period. Excludes unrealized mark-to-market gains and losses on natural



gas derivatives.


(3) Amount represents average daily market price for the full year 2015 and
2016.



(4) Gross ammonia production, including amounts subsequently upgraded on-site



into granular urea, UAN, or AN.





Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated Operating Results
Our reportable segments consist of ammonia, granular urea, UAN, AN and Other and
include the results of CF Fertilisers UK from July 31, 2015, the date we
acquired the remaining 50% equity interest in CF Fertilisers UK.
We reported a net loss attributable to common stockholders of $277 million in
2016, compared to net earnings attributable to common stockholders of $700
million
in 2015, a decline of $977 million. We experienced lower net earnings
attributable to common stockholders in 2016 compared to 2015 due primarily to a
lower gross margin as a result of lower average selling prices resulting from
excess global nitrogen supply, combined with a number of significant items that
are described above under "Overview of CF Holdings-Items Affecting Comparability
of Results."
Our total gross margin declined by $707 million, or 46%, to $840 million in 2016
from $1.55 billion in 2015. The impact of the CF Fertilisers UK acquisition
increased gross margin by $18 million, or 1%. The remaining decline in our gross
margin of $725 million was due primarily to lower average selling prices and
higher capacity expansion project related costs, partially offset by the impact
of unrealized net mark-to-market gains on natural gas derivatives, increased
sales volume, and lower physical natural gas costs and production costs:
• Average selling prices declined by 31% in 2016 compared to 2015, which
reduced gross margin by $1.38 billion.


• Unrealized net mark-to-market gains on natural gas derivatives
increased gross margin by $436 million as 2016 included a $260 million
gain and 2015 included a $176 million loss.



• Sales volume, primarily granular urea and UAN, increased by 14%, which



increased gross margin by $215 million. Sales volume increased due to



the completion of our capacity expansion project upgrading facilities



at our Donaldsonville, Louisiana complex for granular urea and UAN.


Donaldsonville and Port Neal expansion project depreciation reduced
gross margin by approximately $103 million. Start-up costs for the
Donaldsonville ammonia and Port Neal ammonia and urea plants reduced
gross margin by $52 million.


• Lower physical natural gas costs in 2016 increased gross margin by $108
million
as natural gas prices were lower in 2016, particularly in the



first half of the year with high storage levels and strong production



in North America. Natural gas prices rose towards the end of 2016.


• Realized net mark-to-market losses on natural gas derivatives decreased



gross margin by $62 million as 2016 included a $132 million loss and
2015 included a $70 million loss.



• Lower production, distribution and freight costs increased gross margin



by approximately $104 million.





During 2016, primarily as a result of lower net earnings, our income tax
(benefit) provision declined by $464 million to a net benefit of $68 million
from an income tax provision of $396 million for 2015. See Note 10-Income Taxes
to our consolidated financial statements included in Item 8 of this report for
additional information on our income tax benefit.
Net Sales
Our net sales are derived primarily from the sale of nitrogen fertilizers and
are determined by the quantities of fertilizers we sell and the selling prices
we realize. The volumes, mix and selling prices we realize are determined to a
great extent by a combination of global and regional supply and demand factors.
Net sales also include shipping and handling costs that are billed to our
customers. Sales incentives are reported as a reduction in net sales.
Our total net sales decreased $623 million, or 14%, to $3.69 billion in 2016
compared to $4.31 billion in 2015. The impact of the CF Fertilisers UK
acquisition increased our net sales by $269 million, or 6%. The remaining
decline in our net sales of $892 million, or 21%, was due to a 31% decline in
average selling prices partially offset by a 14% increase in sales volume.

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CF INDUSTRIES HOLDINGS, INC.

Average selling prices, excluding the CF Fertilisers UK acquisition impact, were
$218 per ton in 2016 compared to $318 per ton in 2015 due primarily to lower
selling prices across all products. Selling prices were negatively impacted by
excess global nitrogen supply. Pricing for nitrogen fertilizer products in the
U.S. Gulf declined during most of 2016, often trading below parity with other
international pricing points, as a result of continued imports from various
exporting regions and decreased buyer interest. Seasonal decreases in
agricultural demand combined with delayed customer purchasing activity resulted
in multi-year lows in nitrogen fertilizer selling prices in the second half of
the year.
Our total sales volume increased by 24% from 2015 to 2016. The impact of the CF
Fertilisers UK acquisition increased our sales volume by 10%. The remaining
increase in our sales volume of 14% was due primarily to greater granular urea
and UAN volume available for sale due to our completed capacity expansion
projects, partly offset by lower ammonia sales volume due to lower demand in
North America during the fall application season. In addition, our ammonia sales
volumes were lower in 2016 as we upgraded existing ammonia production as a
result of our granular urea and UAN capacity expansion projects coming on line
at our Donaldsonville, Louisiana complex.
Cost of Sales
Our cost of sales includes manufacturing costs, purchased product costs, and
distribution costs. Manufacturing costs, the most significant element of cost of
sales, consist primarily of raw materials, realized and unrealized gains and
losses on natural gas derivative instruments, maintenance, direct labor,
depreciation and other plant overhead expenses. Purchased product costs
primarily include the cost to purchase nitrogen fertilizers to augment or
replace production at our facilities. Distribution costs include the cost of
freight required to transport finished products from our plants to our
distribution facilities and storage costs incurred prior to final shipment to
customers.
Our cost of sales increased $84 million, or 3%, from 2015 to 2016. The overall
increase in cost of sales is due primarily to the impact of the CF Fertilisers
UK acquisition, which increased cost of sales by $251 million, or 9%, as 2016
includes a full year of CF Fertilisers UK results and 2015 includes five months
of CF Fertilisers UK results. The remaining decrease in our cost of sales of
$167 million, or 6%, was due primarily to the combination of unrealized net
mark-to-market gains on natural gas derivatives and lower realized natural gas
costs, partly offset by higher capacity expansion project related costs. Cost of
sales includes a $260 million unrealized net mark-to-market gain in 2016 as
compared to a $176 million unrealized net mark-to-market loss in 2015. Realized
natural gas costs, including the impact of lower purchased natural gas costs and
realized derivatives, declined 6% from $3.28 per MMBtu in 2015 to $3.07 per
MMBtu in 2016 as natural gas prices were lower in 2016, particularly in the
first half of the year with high storage levels and strong production in North
America
, although natural gas prices increased towards the end of 2016.
Capacity expansion project costs, including depreciation expense, which
commenced once the respective expansion plant was placed in service, and
start-up costs, which primarily relate to the cost of commencing production at
the new ammonia plants for our Donaldsonville, Louisiana and Port Neal, Iowa
plants totaled $116 million and $52 million in 2016, respectively.
Cost of goods sold per ton declined $34 per ton, or 17%, from $201 in 2015 to
$167 in 2016, as a result of the factors noted above.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of corporate
office expenses such as salaries and other payroll-related costs for our
executive, administrative, legal, financial and marketing functions, as well as
certain taxes and insurance and other professional service fees, including those
for corporate initiatives.
Selling, general and administrative expenses increased $4 million to $174
million
in 2016 from $170 million in 2015. The increase was due primarily to the
impact of the CF Fertilisers UK acquisition, partly offset by lower costs for
corporate office initiatives and lower intangible asset amortization expense.
Transaction Costs
Transaction costs consist of various consulting and legal services associated
with the proposed combination with certain businesses of OCI that was terminated
on May 22, 2016, our strategic venture with CHS, which began on February 1,
2016
, and our July 31, 2015 acquisition of the remaining 50% equity interest in
CF Fertilisers UK not previously owned by us.
In 2016, we incurred $179 million of transaction costs, including the
$150 million termination fee paid by CF Holdings to OCI in the second quarter of
2016 as a result of the termination of the Combination Agreement and costs for
various consulting and legal services. In 2015, we incurred $57 million of
transaction costs associated with the agreements pertaining to the proposed
combination with certain businesses of OCI and our strategic venture with CHS.

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CF INDUSTRIES HOLDINGS, INC.

Other Operating-Net
Other operating-net includes administrative costs associated with our capacity
expansion projects and other costs that do not relate directly to our central
operations. Costs included in "other costs" can include foreign exchange gains
and losses, unrealized gains and losses on foreign currency derivatives, costs
associated with our closed facilities, amounts recorded for environmental
remediation for other areas of our business, litigation expenses and gains and
losses on the disposal of fixed assets.
Other operating-net was $208 million in 2016 compared to $92 million in 2015.
The increased expense was due primarily to $93 million of realized and
unrealized losses on foreign currency transactions primarily related to British
pound sterling denominated intercompany debt that has not been permanently
invested. In addition, the increased expense also reflects higher expansion
project costs pertaining to our Donaldsonville, Louisiana and Port Neal, Iowa
capacity expansion projects that did not qualify for capitalization and the loss
of $23 million representing the net fair value adjustments to an embedded
derivative related to our strategic venture with CHS. See Note 9-Fair Value
Measurements to our consolidated financial statements included in Item 8 of this
report for additional information. These increases were partly offset by a
decrease in realized and unrealized losses on foreign currency derivatives of
$22 million.
Equity in (Losses) Earnings of Operating Affiliates
Equity in (losses) earnings of operating affiliates consists of our 50%
ownership interest in PLNL. We include our share of the net earnings from our
equity method investment in PLNL as an element of earnings from operations
because this investment provides additional production and is integrated with
our other supply chain and sales activities. Our share of the net earnings
includes the amortization of certain tangible and intangible assets identified
as part of the application of purchase accounting at acquisition. In 2016 and
2015, equity in (losses) earnings of operating affiliates also includes
impairments of our equity method investment in PLNL.
Equity in (losses) earnings of operating affiliates decreased by $110 million in
2016 as compared to 2015 due primarily to a $134 million impairment of our
equity method investment in PLNL that was recognized in the fourth quarter of
2016. In the fourth quarter of 2015, we recognized a $62 million impairment of
our equity method investment in PLNL. The remaining decrease was due primarily
to lower operating results from PLNL, which included costs of $21 million that
were incurred during 2016 related to a planned maintenance activity at the PLNL
ammonia plant that resulted in the shutdown of the plant for approximately 45
days and the impact of lower ammonia selling prices in 2016 compared to 2015.
For additional information regarding the impairment of our equity method
investment in PLNL, see Note 8-Equity Method Investments to our consolidated
financial statements included in Item 8 of this report and "Critical Accounting
Policies and Estimates," below.
Interest Expense-Net
Our interest expense-net includes the interest expense on our long-term debt,
amortization of the related fees required to execute financing agreements and
annual fees pursuant to our Revolving Credit Agreement. Capitalized interest
relating to the construction of major capital projects reduces interest expense
as the interest is capitalized and amortized over the estimated useful lives of
the facility along with all other construction costs. Our interest expense-net
also includes interest income, which represents amounts earned on our cash, cash
equivalents, investments and advances to unconsolidated affiliates.
Net interest expense increased by $64 million to $195 million in 2016 from $131
million
in 2015. The $64 million increase in net interest expense was due
primarily to the combination of higher debt levels due to the issuance of $1.0
billion
of Private Senior Notes in September 2015 and debt amendment fees and
accelerated amortization of debt issuance costs due to the restructuring of our
debt and the Revolving Credit Agreement in 2016. Due to the uncertain duration
of the prevailing low nitrogen fertilizer selling price environment and in order
to provide liquidity and covenant flexibility for the future, we modified the
Revolving Credit Agreement in 2016 by reducing its size from $2.0 billion to
$750 million and modifying certain covenants and other terms. As a result of
these changes, we recognized $16 million of debt amendment fees and accelerated
amortization of loan fees in interest expense. The increase in interest
expense-net in 2016 also includes the amortization of capitalized Bridge Credit
Agreement fees of $28 million pertaining to the bridge loan for our proposed
combination with certain of the OCI businesses. We also recorded capitalized
interest of $166 million in 2016 related primarily to our capacity expansion
projects compared to $154 million in 2015.

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CF INDUSTRIES HOLDINGS, INC.

Loss on Debt Extinguishment
Loss on debt extinguishment of $167 million consists of the make-whole payment,
which resulted from our November 21, 2016 prepayment of the $1.0 billion
aggregate principal amount of Private Senior Notes. This amount excludes $3
million
(of the $170 million make-whole payment), which was accounted for as a
modification and recognized on our consolidated balance sheet as deferred
financing fees, a reduction of long-term debt, and is being amortized using the
effective interest rate method over the term of the Senior Secured Notes.
Income Tax (Benefit) Provision
Our income tax benefit for 2016 was $68 million on a pre-tax loss of $226
million
, resulting in an effective tax rate of 30.0%, compared to an income tax
provision of $396 million on pre-tax income of $1.06 billion, or an effective
tax rate of 37.4%, in the prior year.
State income taxes for 2016 were favorably impacted by investment tax credits of
$13 million related to capital assets placed in service at our production
facilities in Oklahoma that are indefinitely available to offset income taxes in
that jurisdiction in future years. Our effective state income tax rate was also
reduced as a result of the changes to our legal entity structure effected in the
first quarter of 2016 as part of our strategic venture with CHS. See Note
17-Noncontrolling Interests to our consolidated financial statements included in
Item 8 of this report for additional information.
State income taxes for 2016 includes a tax benefit of $46 million, net of
federal tax effect, for state net operating loss carryforwards. A valuation
allowance of $4 million is recorded for certain loss carryforwards for which we
do not expect to realize in the future.
The income tax provision for 2016 includes the tax impact of the U.S.
manufacturing profits deductions claimed in prior years that will not be
deductible as a result of our intention to carryback the tax net operating loss
for the year ended December 31, 2016 to those prior tax years.
Non-deductible capital costs for the tax year ended December 31, 2016 include
certain transaction costs capitalized in the prior year that are now deductible
as a result of the termination of the proposed combination with certain
businesses of OCI. See Note 4-Acquisitions and Divestitures to our consolidated
financial statements included in Item 8 of this report for additional
information.
Foreign subsidiaries of the Company have incurred capital losses of $109 million
that are indefinitely available to offset capital gains in those foreign
jurisdictions. As the future realization of these carryforwards is not
anticipated, a valuation allowance of $28 million was recorded in 2016.
In the fourth quarters of 2016 and 2015, we determined the carrying value of our
equity method investment in PLNL exceeded fair value and recognized an
impairment of our equity method investment in PLNL of $134 million and $62
million
, respectively, which is included in the equity in earnings of operating
affiliates. Our respective income tax provisions do not include a tax benefit
for the impairment of our equity method investment as it will not give rise to a
tax deduction.
During the third quarter of 2015, we acquired the remaining 50% equity interest
in CF Fertilisers UK not previously owned by us and recognized a $94 million
gain on the remeasurement to fair value of our initial 50% equity interest in CF
Fertilisers UK. The earnings in CF Fertilisers UK have been permanently
reinvested. Therefore, the recognition of the $94 million million gain on the
remeasurement of the historical equity investment does not include the
recognition of tax expense on the gain.
In addition, our effective tax rate is impacted by earnings attributable to
noncontrolling interests in CFN and TNCLP, as our consolidated income tax
provision does not include a tax provision on the earnings attributable to the
noncontrolling interests. Earnings attributable to noncontrolling interests
increased in 2016 due to our strategic venture with CHS that commenced on
February 1, 2016, at which time CHS purchased a minority equity interest in CFN.
See Note 17-Noncontrolling Interests to our consolidated financial statements
included in Item 8 of this report for additional information.
See Note 10-Income Taxes to our consolidated financial statements included in
Item 8 of this report for additional information.
Equity in Earnings of Non-Operating Affiliates-Net of Taxes
Equity in earnings of non-operating affiliates-net of taxes represents our share
of the net earnings of the entities that we account for using the equity method
and exclude from operating earnings. Equity in earnings of non-operating
affiliates-net of taxes in 2015 included the previously owned 50% equity method
earnings of CF Fertilisers UK and also included our share of

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CF INDUSTRIES HOLDINGS, INC.

operating losses experienced at Keytrade. On July 31, 2015, we acquired the
remaining 50% equity interest in CF Fertilisers UK not previously owned by us
for total consideration of $570 million, and CF Fertilisers UK became wholly
owned by us and part of our consolidated financial results. We recorded a $94
million
gain on the remeasurement to fair value of our initial 50% equity
interest in CF Fertilisers UK in connection with the closing of the acquisition.
Equity in earnings of non-operating affiliates-net of taxes on 2015 also
included our share of CF Fertilisers UK operating results up to the date of the
acquisition. In addition, during the second quarter of 2015, we sold our
interests in Keytrade and recorded an after-tax loss of $29 million (pre-tax
loss of $40 million).
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests includes the net earnings
attributable to the 24.7% interest of the publicly-held common units of TNCLP.
We own approximately 75.3% of TNCLP and outside investors own the remaining
24.7%. Net earnings attributable to noncontrolling interests also includes the
net earnings attributable to the CHS minority equity interest in CFN, a
subsidiary of CF Holdings, purchased for $2.8 billion on February 1, 2016.
Net earnings attributable to noncontrolling interests increased $85 million in
2016 compared to 2015 due primarily to the earnings attributable to the
noncontrolling interest in CFN. This increase is partly offset by lower net
earnings attributable to the approximately 24.7% interest of the publicly held
common units of TNCLP.
Diluted Net Earnings (Loss) Per Share Attributable to Common Stockholders
Diluted net (loss) earnings per share attributable to common stockholders
decreased $4.15 to a loss of $1.19 per share in 2016 from diluted net earnings
per share attributable to common stockholders of $2.96 per share in 2015. This
decrease is due to lower net earnings.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated Operating Results
The ammonia, granular urea, UAN, AN and Other segments are referred to in this
section of the discussion and analysis as the "Nitrogen Product Segments."
Our total gross margin declined by $231 million, or 13%, to $1.55 billion in
2015 from $1.78 billion in 2014. The impact of the CF Fertilisers UK acquisition
increased gross margin by $23 million. The remaining decline in our gross margin
of $254 million, or 14%, was due to the $244 million decrease in gross margin in
the Nitrogen Product Segments and the $10 million decline in gross margin in the
phosphate segment as the phosphate business was sold in the first quarter of
2014. The remaining decrease in Nitrogen Product Segments gross margin, as more
fully described below, was due primarily to lower average selling prices, lower
sales volume, and the impact of mark-to-market losses on natural gas
derivatives, partially offset by lower physical natural gas costs.
• Average selling prices, primarily UAN and granular urea, decreased by
8%, which reduced gross margin by $349 million as international
nitrogen fertilizer prices declined due to excess global supply. The
combination of falling global production costs, foreign currency



devaluation and reduced ocean freight costs allowed many international



producers to continue operations and the resulting supply weighed on
global prices.



• Sales volume, primarily ammonia, decreased by 3%, which decreased gross



margin by $72 million due primarily to a poor fall application season
and weaker demand as customers were unable to apply ammonia due to poor



weather conditions and customers were hesitant to buy in a declining



pricing environment.


• Unrealized net mark-to-market losses on natural gas derivatives
decreased gross margin by $97 million as 2015 included a $176 million
loss compared to a $79 million loss in 2014.


• Lower physical natural gas costs in 2015, partially offset by the



impact of natural gas derivatives that settled in the period, increased



gross margin by $230 million compared to 2014. Lower natural gas costs
were primarily driven by increased North American natural gas
production, as increased well efficiencies increased supply. Warm
weather conditions, especially in the fourth quarter of 2015, also
contributed to high storage levels and the resulting decline in natural
gas prices.



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Net earnings attributable to common stockholders was $700 million and
$1.39 billion in the years ended December 31, 2015 and 2014, respectively. The
results of operations in 2015 and 2014 were impacted by a number of significant
items that are described in further detail above under "Overview of CF
Holdings-Items Affecting Comparability of Results."
Net Sales
Our total net sales decreased $435 million, or 9%, to $4.31 billion in 2015
compared to $4.74 billion in 2014. The impact of the CF Fertilisers UK
acquisition increased our net sales by $208 million. The remaining decline in
our net sales of $643 million, or 14%, included a $475 million decrease
attributable to the Nitrogen Product Segments and a $168 million decrease due to
the sale of the phosphate business in March 2014. The remaining Nitrogen Product
Segments net sales decreased due to an 8% decline in average selling prices and
a 3% decline in sales volume.
Nitrogen Product Segments average selling prices, excluding the impact of the CF
Fertilisers UK acquisition, were $318 per ton in 2015 compared to $345 per ton
in 2014 due primarily to lower UAN, granular urea and ammonia selling prices in
2015 as international nitrogen fertilizer prices declined due to excess global
supply. The combination of falling global production costs, foreign currency
devaluation and reduced ocean freight costs allowed many international producers
to continue operations and the resulting supply weighed on global prices. The
decline in UAN average selling prices was due primarily to excess global supply.
Granular urea exports from China were at a record high in 2015 and Russian
exports increased significantly while global capacity additions in 2015 further
contributed to the global supply excess and the decline in average selling
prices compared to 2014. The decrease in ammonia average selling prices from
prior year levels is due primarily to weaker nitrogen fertilizer market
conditions compared to the prior year, as a weak fall application season
combined with higher producer inventory levels and slowing demand from phosphate
fertilizer producers weighed on prices at the end of 2015.
Our total Nitrogen Product Segments sales volume increased by 3%. The impact of
the CF Fertilisers UK acquisition increased our sales volume by 6%. The
remaining decline in our Nitrogen Product Segments sales volume of 3% was due
primarily to lower ammonia and UAN sales volume. Our ammonia sales volume was
lower in 2015 partly due to a poor fall application season in North America as a
result of poor weather conditions in the Midwest. The season started late and
ended early in November due to snow in the Midwest. In addition, our ammonia and
UAN sales volume were lower as customers were hesitant to buy in a declining
pricing environment.
Cost of Sales
Our total cost of sales decreased $204 million, or 7%, from 2014 to 2015
including the impact of the CF Fertilisers UK acquisition which increased cost
of sales by $185 million, or 6%. The remaining decrease in our cost of sales of
$389 million, or 13%, was due primarily to lower natural gas costs. The realized
natural gas costs, including the impact of lower purchased natural gas costs and
realized derivative losses during 2015, decreased 28% compared to 2014. Cost of
sales in 2015 also included $176 million of unrealized net mark-to-market losses
on natural gas derivatives compared to losses of $79 million in 2014. Lower gas
costs were primarily driven by increasing North American natural gas production,
as increased well efficiencies increased supply. Warm weather conditions,
especially in the fourth quarter, also contributed to the high storage levels
and the resulting decline in gas prices. The cost of sales per ton in our
Nitrogen Product Segments averaged $200 in 2015, a 5% decrease from the $211 per
ton in 2014.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $18 million to
$170 million in 2015 from $152 million in 2014. The increase was due primarily
to the impact of the CF Fertilisers UK acquisition, an increase in corporate
project activities, and higher intangible asset amortization expense.
Transaction Costs
In 2015, we incurred $57 million of transaction costs for various consulting and
legal services associated primarily with executing the strategic agreements in
connection with, and preparing for the proposed combination with certain
businesses of OCI, our strategic venture with CHS and our acquisition of the
remaining 50% equity interest in CF Fertilisers UK not previously owned by us.
Other Operating-Net
Other operating-net changed by $39 million from $53 million of expense in 2014
to expense of $92 million in 2015. The increased expense was due primarily to
higher expansion project costs pertaining to our Donaldsonville, Louisiana and
Port Neal, Iowa capacity expansion projects that did not qualify for
capitalization. This was partially offset by the decrease in realized and
unrealized losses on foreign currency derivatives from $38 million of losses in
2014 to $22 million of losses in 2015.

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CF INDUSTRIES HOLDINGS, INC.

Equity in (Losses) Earnings of Operating Affiliates
Equity in (losses) earnings of operating affiliates consists of our 50% share of
the operating results of PLNL. Equity in (losses) earnings of operating
affiliates decreased by $78 million in 2015 as compared to 2014 due primarily to
a $62 million impairment of our equity method investment in PLNL that was
recognized in the fourth quarter of 2015. The remaining decrease was due
primarily to lower operating results from PLNL due to lower average selling
prices.
Interest Expense-Net
Interest expense-net was $131 million in 2015 compared to $177 million in 2014.
The $46 million decrease in net interest expense was due primarily to higher
amounts of capitalized interest related to our capacity expansion projects,
partially offset by higher interest expense pertaining to the $1.0 billion and
$1.5 billion of senior notes issued in September 2015 and in March 2014,
respectively. We recorded capitalized interest of $154 million in 2015 primarily
related to our capacity expansion projects compared to $74 million in 2014.
Other Non-Operating-Net
Other non-operating-net was a $4 million expense in 2015 compared to expense of
$2 million in 2014.
Income Tax (Benefit) Provision
Our income tax provision for 2015 was $396 million on pre-tax income of $1.06
billion
, or an effective tax rate of 37.4%, compared to an income tax provision
of $773 million on pre-tax income of $2.19 billion, or an effective tax rate of
35.3% in the prior year. The increase in the effective tax rate in 2015 was due
primarily to the impact of certain transactional expenses that are not
deductible for tax purposes. The income tax provision in 2014 included
$287 million of income tax expense relating to the phosphate business sale,
which increased the effective tax rate by 1.5%.
During the third quarter of 2015, we acquired the remaining 50% equity interest
in CF Fertilisers UK not previously owned by us and recognized a $94 million
gain on the remeasurement to fair value of our initial 50% equity interest in CF
Fertilisers UK. The earnings in CF Fertilisers UK have been permanently
reinvested. Therefore, the recognition of the $94 million gain on the
remeasurement of the historical equity investment does not include the
recognition of tax expense on the gain.
In the fourth quarter of 2015, we determined the carrying value of our equity
method investment in PLNL exceeded fair value and recognized an impairment of
our equity method investment in PLNL of $62 million, which is included in the
equity in earnings of operating affiliates in 2015. Our income tax provision
does not include a tax benefit for the impairment of our equity method
investment as it does not give rise to a tax deduction.
The effective tax rate does not reflect a tax provision on the earnings
attributable to noncontrolling interest in TNCLP (a partnership), which is not a
taxable entity. See Note 10-Income Taxes to our consolidated financial
statements included in Item 8 of this report for additional information on
income taxes.
Equity in Earnings of Non-Operating Affiliates-Net of Taxes
Equity in earnings of non-operating affiliates-net of taxes consists of our
share of the financial results of unconsolidated joint venture interests in CF
Fertilisers UK and Keytrade. During the second quarter of 2015, we sold our
interests in Keytrade. On July 31, 2015, we completed the CF Fertilisers UK
acquisition for total consideration of $570 million, and CF Fertilisers UK
became wholly owned by us and became part of our consolidated financial results.
Equity in earnings of non-operating affiliates-net of taxes increased by
$49 million in 2015 compared to 2014 due primarily to the $94 million gain on
the remeasurement to fair value of our initial 50% equity interest in CF
Fertilisers UK that was recorded in connection with the closing of the
transaction. This was partially offset by the combination of operating losses
experienced at Keytrade and from the loss on sale of our investments in Keytrade
during the second quarter of 2015.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest decreased $13 million in
2015 compared to 2014 due primarily to lower net earnings attributable to the
approximately 24.7% interest of the publicly-held common units of TNCLP.

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CF INDUSTRIES HOLDINGS, INC.

Diluted Net Earnings (losses) Per Share Attributable to Common Stockholders
Diluted net earnings per share attributable to common stockholders decreased
$2.46, or 45%, to $2.96 per share in 2015 from $5.42 per share in 2014. This
decrease is due primarily to the $1.80 per share gain from the sale of the
phosphate business in 2014, partially offset by the impact of lower diluted
weighted-average shares outstanding in 2015 as compared to 2014 due to the
impact of our share repurchase programs. We repurchased 8.9 million shares in
2015 for $527 million, or an average cost of $59 per share. The total shares
repurchased during 2015 represented 4% of the shares outstanding as of
December 31, 2014.


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CF INDUSTRIES HOLDINGS, INC.

Operating Results by Business Segment
Our reportable segment structure reflects how our chief operating decision maker
(CODM), as defined under U.S. GAAP, assesses the performance of our reportable
segments and makes decisions about resource allocation. These segments are
differentiated by products. Our management uses gross margin to evaluate segment
performance and allocate resources. Total other operating costs and expenses
(consisting of selling, general and administrative expenses and other
operating-net) and non-operating expenses (interest and income taxes), are
centrally managed and are not included in the measurement of segment
profitability reviewed by management.
The phosphate segment reflects the reported results of the phosphate business
through March 17, 2014, plus the continuing sales of the phosphate inventory in
the distribution network after March 17, 2014. The remaining phosphate inventory
was sold in the second quarter of 2014 and reportable results ceased.
The following table presents summary operating results by business segment:
Ammonia Granular Urea(1) UAN(1) AN(1) Other(1) Phosphate Consolidated
(in millions, except percentages)
Year ended
December 31, 2016
Net sales $ 981 $ 831 $ 1,196 $ 411 $ 266 $ - $ 3,685
Cost of sales 715 584 920 409 217 - 2,845
Gross margin $ 266 $ 247 $ 276 $ 2 $ 49 $ - $ 840
Gross margin
percentage 27.1 % 29.7 % 23.1 % 0.5 % 18.4 % - % 22.8 %
Year ended
December 31, 2015
Net sales $ 1,523 $ 788 $ 1,480 $ 294 $ 223 $ - $ 4,308
Cost of sales 884 469 955 291 162 - 2,761
Gross margin $ 639 $ 319 $ 525 $ 3 $ 61 $ - $ 1,547
Gross margin
percentage 42.0 % 40.4 % 35.5 % 1.1 % 27.2 % - % 35.9 %
Year ended
December 31, 2014
Net sales $ 1,576 $ 915 $ 1,670 $ 243 $ 171 $ 168 $ 4,743
Cost of sales 983 517 998 189 120 158 2,965
Gross margin $ 593 $ 398 $ 672 $ 54 $ 51 $ 10 $ 1,778
Gross margin
percentage 37.6 % 43.5 % 40.3 % 22.1 % 30.0 % 6.0 % 37.5 %


_______________________________________________________________________________



(1) The cost of ammonia that is upgraded into other products is transferred at



cost into the upgraded product results.



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CF INDUSTRIES HOLDINGS, INC.

Ammonia Segment
Our ammonia segment produces anhydrous ammonia (ammonia), which is our most
concentrated nitrogen fertilizer as it contains 82% nitrogen. The results of our
ammonia segment consist of sales of ammonia to external customers. In addition,
ammonia is the "basic" nitrogen product that we upgrade into other nitrogen
products such as granular urea, UAN and AN. We produce ammonia at all of our
nitrogen manufacturing complexes.
The following table presents summary operating data for our ammonia segment,
including the impact of our acquisition of the remaining 50% equity interest in
CF Fertilisers UK:
Twelve months ended December 31,
2016 2015 2014 2016 v. 2015 2015 v. 2014
(in millions, except as noted)
Net sales $ 981 $ 1,523 $ 1,576 $ (542 ) (36 )% $ (53 ) (3 )%
Cost of sales 715 884 983 (169 ) (19 )% (99 ) (10 )%
Gross margin $ 266 $ 639 $ 593 $ (373 ) (58 )% $ 46 8 %
Gross margin percentage 27.1 % 42.0 % 37.6 % (14.9 )% 4.4 %
Sales volume by product
tons (000s) 2,874 2,995 2,969 (121 ) (4 )% 26 1 %
Sales volume by nutrient
tons (000s)(1) 2,358 2,456 2,434 (98 ) (4 )% 22 1 %
Average selling price
per product ton $ 341 $ 509 $ 531 $ (168 ) (33 )% $ (22 ) (4 )%
Average selling price
per nutrient ton(1) $ 416 $ 620 $ 648 $ (204 ) (33 )% $ (28 ) (4 )%
Gross margin per product
ton $ 93 $ 213 $ 200 $ (120 ) (56 )% $ 13 7 %
Gross margin per
nutrient ton(1) $ 113 $ 260 $ 244 $ (147 ) (57 )% $ 16 7 %
Depreciation and
amortization $ 96 $ 95 $ 69 $ 1 1 % $ 26 38 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ (85 ) $ 40 $ 25 $ (125 ) N/M $ 15 60 %



_______________________________________________________________________________



(1) Ammonia represents 82% nitrogen content. Nutrient tons represent the tons of



nitrogen within the product tons.





Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Sales. Total net sales in the ammonia segment decreased by $542 million, or
36%, to $981 million in 2016 from $1.52 billion in 2015 due primarily to a 33%
decrease in average selling prices and a 4% decrease in sales volume. These
results include the impact of the CF Fertilisers UK acquisition, which increased
net sales by $26 million, or 2%. The remaining decrease in our ammonia net sales
of $568 million, or 37%, was due primarily to lower average selling prices and
sales volume. Selling prices declined due to excess global nitrogen supply. In
addition, our selling prices reflect the impact of a higher proportion of export
sales, the volumes of which increased as a result of the weak fall application
season attributable to the combined impact of weather conditions and low crop
prices on our customers' decisions related to applying fertilizer in the fall.
Sales volume in 2016 declined due to combination of the weak fall application
season and the impact of upgrading additional ammonia production at our
Donaldsonville facility into granular urea and UAN as a result of our capacity
expansion projects coming on line at our Donaldsonville, Louisiana complex.
Cost of Sales. Cost of sales per ton in our ammonia segment averaged $248 per
ton in 2016, including the impact of the CF Fertilisers UK acquisition, which
averaged $220 per ton. The remaining cost of sales per ton was $250 in 2016, a
16% decrease from the $296 per ton in 2015. The decrease was due primarily to
the impact of unrealized net mark-to-market gains on natural gas derivatives in
2016 compared to losses in 2015 and to the impact of lower realized natural gas
costs in 2016. This was partly offset by capacity expansion project start-up
costs of $50 million and an increase in expansion project depreciation as a
result of the new ammonia plants at our Donaldsonville and Port Neal facilities.

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Net sales in the ammonia segment decreased by $53 million, or 3%, to
$1.52 billion in 2015 from $1.58 billion in 2014 due primarily to a 4% decrease
in average selling prices, partially offset by a 1% increase in sales volume.
These results include the impact of the CF Fertilisers UK acquisition completed
on July 31, 2015 which increased net sales by $38 million, or 2%. The remaining
decrease in our ammonia net sales of $91 million, or 6%, was due to lower
average selling prices and lower sales volume compared to 2014. The decrease in
average ammonia selling prices from prior year levels was due primarily to
weaker nitrogen fertilizer market conditions compared to the prior year as a
weak fall application season combined with higher producer inventory levels and
slowing demand from phosphate fertilizer producers weighed on prices at the end
of 2015. At the end of 2014, the pricing environment was stronger due to a
tighter supply after the strong North American 2014 spring season and a higher
level of global production outages in 2014. Sales volume was lower in 2015 due
to the weak fall application season in North America as a result of poor weather
conditions in the Midwest. The fall application season started late and then
ended early in November due to snow in the Midwest.
Cost of Sales. Cost of sales per ton in our ammonia segment averaged $296 in
2015, a 11% decrease over the $331 per ton in 2014. The decrease was due
primarily to lower realized natural gas costs during 2015 partly offset by
increased unrealized net mark-to-market losses on natural gas derivatives in
2015 compared to 2014.

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CF INDUSTRIES HOLDINGS, INC.

Granular Urea Segment
Our granular urea segment produces granular urea, which contains 46% nitrogen.
Produced from ammonia and carbon dioxide, it has the highest nitrogen content of
any of our solid nitrogen fertilizers. Granular urea is produced at our
Courtright, Ontario; Donaldsonville, Louisiana; Medicine Hat, Alberta; and Port
Neal, Iowa
nitrogen complexes.
The following table presents summary operating data for our granular urea
segment:
Twelve months ended December 31,
2016 2015 2014 2016 v. 2015 2015 v. 2014
(in millions, except as noted)
Net sales $ 831 $ 788 $ 915 $ 43 5 % $ (127 ) (14 )%
Cost of sales 584 469 517 115 25 % (48 ) (9 )%
Gross margin $ 247 $ 319 $ 398 $ (72 ) (23 )% $ (79 ) (20 )%
Gross margin percentage 29.7 % 40.4 % 43.5 % (10.7 )% (3.1 )%
Sales volume by product
tons (000s) 3,597 2,460 2,459 1,137 46 % 1 - %
Sales volume by nutrient
tons (000s)(1) 1,654 1,132 1,131 522 46 % 1 - %
Average selling price
per product ton $ 231 $ 320 $ 372 $ (89 ) (28 )% $ (52 ) (14 )%
Average selling price
per nutrient ton(1) $ 502 $ 696 $ 809 $ (194 ) (28 )% $ (113 ) (14 )%
Gross margin per product
ton $ 69 $ 129 $ 162 $ (60 ) (47 )% $ (33 ) (20 )%
Gross margin per
nutrient ton(1) $ 149 $ 281 $ 352 $ (132 ) (47 )% $ (71 ) (20 )%
Depreciation and
amortization $ 112 $ 51 $ 37 $ 61 120 % $ 14 38 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ (67 ) $ 47 $ 17 $ (114 ) N/M $ 30 176 %



______________________________________________________________________________



(1) Granular urea represents 46% nitrogen content. Nutrient tons represent the



tons of nitrogen within the product tons.






Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Sales. Net sales in the granular urea segment increased by $43 million, or
5%, in 2016 compared to 2015 due primarily to a 46% increase in sales volume
partially offset by a 28% decrease in average selling prices. Sales volume was
higher due to increased production available as a result of our expanded urea
capacity at our Donaldsonville, Louisiana complex that came on line in November
of 2015. Average selling prices decreased to $231 per ton in 2016 compared to
$320 per ton in 2015 due primarily to excess global nitrogen supply weighing on
global nitrogen fertilizer selling prices.
Cost of Sales. Cost of sales per ton in our granular urea segment averaged $162
in 2016, a 15% decrease from the $191 per ton in 2015. The decrease was due
primarily to the impact of unrealized net mark-to-market gains on natural gas
derivatives in 2016 compared to losses in 2015. This was partly offset by
increased depreciation expense related to our expanded urea production at our
Donaldsonville, Louisiana complex and $2 million of start-up costs at our Port
Neal, Iowa
complex that came on line in December 2016.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Net sales in the granular urea segment decreased by $127 million, or
14%, for 2015 compared to 2014 due primarily to a 14% decrease in average
selling prices. Average selling prices decreased to $320 per ton in 2015
compared to $372 per ton in 2014 due primarily to excess global nitrogen supply
weighing on global nitrogen fertilizer selling prices. Granular urea exports
from China were at a record high in 2015 and Russian exports had increased
significantly while global capacity additions in 2015 further contributed to the
excess global nitrogen supply. Our sales volume in 2015 was flat compared to the
prior year as we offset weaker domestic demand with sales out of our new urea
production at our Donaldsonville, Louisiana complex that came on line in
November 2015.
Cost of Sales. Cost of sales per ton in our granular urea segment averaged $191
in 2015, a 9% decrease over the $210 per ton in 2014. The decrease was due
primarily to lower realized natural gas costs partly offset by the impact of
increased unrealized net mark-to-market losses on natural gas derivatives in
2015 compared to 2014.

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CF INDUSTRIES HOLDINGS, INC.

UAN Segment
Our UAN segment produces urea ammonium nitrate solution (UAN). UAN, a liquid
fertilizer product with a nitrogen content that typically ranges from 28% to
32%, is produced by combining urea and ammonium nitrate. UAN is produced at our
nitrogen complexes in Courtright, Ontario; Donaldsonville, Louisiana; Port Neal,
Iowa
; Verdigris, Oklahoma; Woodward, Oklahoma; and Yazoo City, Mississippi.
The following table presents summary operating data for our UAN segment:
Twelve months ended December 31,
2016 2015 2014 2016 v. 2015 2015 v. 2014
(in millions, except as noted)
Net sales $ 1,196 $ 1,480 $ 1,670 $ (284 ) (19 )% $ (190 ) (11 )%
Cost of sales 920 955 998 (35 ) (4 )% (43 ) (4 )%
Gross margin $ 276 $ 525 $ 672 $ (249 ) (47 )% $ (147 ) (22 )%
Gross margin percentage 23.1 % 35.5 % 40.3 % (12.4 )% (4.8 )%
Sales volume by product
tons (000s) 6,681 5,865 6,092 816 14 % (227 ) (4 )%
Sales volume by nutrient
tons (000s)(1) 2,109 1,854 1,925 255 14 % (71 ) (4 )%
Average selling price per
product ton $ 179 $ 252 $ 274 $ (73 ) (29 )% $ (22 ) (8 )%
Average selling price per
nutrient ton(1) $ 567 $ 798 $ 867 $ (231 ) (29 )% $ (69 ) (8 )%
Gross margin per product
ton $ 41 $ 90 $ 110 $ (49 ) (54 )% $ (20 ) (18 )%
Gross margin per nutrient
ton(1) $ 131 $ 283 $ 349 $ (152 ) (54 )% $ (66 ) (19 )%
Depreciation and
amortization $ 247 $ 192 $ 179 $ 55 29 % $ 13 7 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ (81 ) $ 73 $ 30 $ (154 ) N/M $ 43 143 %



_______________________________________________________________________________



(1) UAN represents between 28% and 32% of nitrogen content, depending on the



concentration specified by the customer. Nutrient tons represent the tons of



nitrogen within the product tons.





Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Sales. Net sales in the UAN segment decreased $284 million, or 19%, in 2016
due primarily to a 29% decrease in average selling prices partially offset by a
14% increase in sales volume. Average selling prices decreased to $179 per ton
in 2016 compared to $252 in 2015. UAN selling prices were lower due to excess
global nitrogen supply weighing on global nitrogen fertilizer selling prices.
Increases in UAN exports at lower selling prices also negatively impacted our
average selling price. Sales volume was higher due to increased production as a
result of expanded UAN capacity at our Donaldsonville, Louisiana complex that
came on line in the first quarter of 2016.
Cost of Sales. Cost of sales per ton in our UAN segment averaged $138 in 2016, a
15% decrease from the average of $162 per ton in 2015. The decrease was due
primarily to the impact of unrealized net mark-to-market gains on natural gas
derivatives in 2016 compared to losses in 2015 and the impact of lower realized
natural gas cost in 2016. This was partly offset by increased depreciation
expense related to the expanded UAN capacity at our Donaldsonville, Louisiana
complex that came on line in the first quarter of 2016.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Net sales in the UAN segment decreased by $190 million, or 11%, due
to a 8% decrease in average selling prices and a 4% decrease in sales volume.
Average selling prices decreased to $252 per ton in 2015 compared to $274 per
ton in 2014. The decline in UAN average selling prices was due to excess global
nitrogen supply weighing on global nitrogen fertilizer selling prices. Sales
volume was lower as customers delayed purchases in the declining pricing
environment.
Cost of Sales. Cost of sales per ton in our UAN segment averaged $162 in 2015, a
1% decrease over the $164 per ton in 2014. The decrease was due primarily to
lower realized natural gas costs partly offset by the impact of higher
unrealized net mark-to-market losses on natural gas derivatives in 2015 compared
to 2014.

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AN Segment
Our AN segment produces ammonium nitrate (AN). AN is a nitrogen-based product
with a nitrogen content between 29% and 35%. AN is used as nitrogen fertilizer
and is also used by industrial customers for commercial explosives and blasting
systems. AN is produced at our nitrogen complexes in Yazoo City, Mississippi and
Ince and Billingham, United Kingdom.
The following table presents summary operating data for our AN segment,
including the impact of our acquisition of the remaining 50% equity interest in
CF Fertilisers UK:
Twelve months ended December 31,
2016 2015 2014 2016 v. 2015 2015 v. 2014
(in millions, except as noted)
Net sales $ 411 $ 294 $ 243 $ 117 40 % $ 51 21 %
Cost of sales 409 291 189 118 41 % 102 54 %
Gross margin $ 2 $ 3 $ 54 $ (1 ) (33 )% $ (51 ) (94 )%
Gross margin percentage 0.5 % 1.1 % 22.1 % (0.6 )% (21.0 )%
Sales volume by product
tons (000s) 2,151 1,290 958 861 67 % 332 35 %
Sales volume by nutrient
tons (000s)(1) 726 437 329 289 66 % 108 33 %
Average selling price
per product ton $ 191 $ 228 $ 253 $ (37 ) (16 )% $ (25 ) (10 )%
Average selling price
per nutrient ton(1) $ 566 $ 673 $ 738 $ (107 ) (16 )% $ (65 ) (9 )%
Gross margin per product
ton $ 1 $ 2 $ 56 $ (1 ) (50 )% $ (54 ) (96 )%
Gross margin per
nutrient ton(1) $ 3 $ 7 $ 163 $ (4 ) (57 )% $ (156 ) (96 )%
Depreciation and
amortization $ 93 $ 66 $ 47 $ 27 41 % $ 19 40 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ (10 ) $ 16 $ 7 $ (26 ) N/M $ 9 129 %



_______________________________________________________________________________



(1) Nutrient tons represent the tons of nitrogen within the product tons.





Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Sales. Total net sales in our AN segment increased $117 million, or 40%, in
2016 from 2015 due primarily to a 67% increase in sales volume partially offset
by a 16% decrease in average selling prices. These results include the impact of
the CF Fertilisers UK acquisition, which increased net sales by $164 million, or
56%. The remaining decrease in our AN net sales of $47 million, or 16%, was due
primarily to lower average selling prices from excess global nitrogen supply
weighing on global nitrogen fertilizer selling prices.
Cost of Sales. Total cost of sales per ton in our AN segment averaged $190 in
2016 including the impact of the CF Fertilisers UK acquisition, which averaged
$211 per ton. The remaining cost of sales per ton averaged $180 in 2016, a 20%
decrease from 2015 due primarily to unrealized net mark-to-market gains on
natural gas derivatives in 2016 compared to losses in 2015 and the impact of
lower realized natural gas costs. This decrease also includes the impact of the
purchase accounting inventory valuation step-up in 2015 arising out of the CF
Fertilisers UK acquisition.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Net sales in our AN segment increased $51 million, or 21%, to
$294 million in 2015 from $243 million in 2014 due primarily to a 35% increase
in sales volume partially offset by a 10% decrease in average selling prices.
This total includes the impact of the CF Fertilisers UK acquisition completed on
July 31, 2015, which increased net sales by $117 million, or 48%. The remaining
decrease in our AN net sales of $66 million, or 27%, was due primarily to 18%
lower average selling prices and 11% lower sales volume as a result of weak
North American domestic demand.
Cost of Sales. Total cost of sales per ton in our AN segment averaged $226 in
2015. This total cost of sales per ton includes the impact of the CF Fertilisers
UK acquisition, which averaged $249 per ton and includes the revaluation of the
CF Fertilisers UK inventory in acquisition accounting of $7 million in the
second half of 2015. The remaining cost of sales per ton averaged $213 in 2015,
an 8% increase from the average of $197 per ton in 2014, due primarily to the
impact of higher unrealized net mark-to-market losses on natural gas derivatives
in 2015 compared to 2014.

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CF INDUSTRIES HOLDINGS, INC.

Other Segment
Our Other segment primarily includes the following products:
• Diesel exhaust fluid (DEF) is an aqueous urea solution typically made
with 32.5% high-purity urea and 67.5% deionized water.


• Urea liquor is a liquid product that we sell in concentrations of 40%,
50% and 70% urea as a chemical intermediate.


• Nitric acid is a nitrogen-based product with a nitrogen content of 22.2%.


• Compound fertilizer products (NPKs) are solid granular fertilizer



products for which the nutrient content is a combination of nitrogen,



phosphorus and potassium.





The following table presents summary operating data for our Other segment,
including the impact of our acquisition of the remaining 50% equity interest in
CF Fertilisers UK:
Twelve months ended December 31,
2016 2015 2014 2016 v. 2015 2015 v. 2014
(in millions, except as noted)
Net sales $ 266 $ 223 $ 171 $ 43 19 % $ 52 30 %
Cost of sales 217 162 120 55 34 % 42 35 %
Gross margin $ 49 $ 61 $ 51 $ (12 ) (20 )% $ 10 20 %
Gross margin percentage 18.4 % 27.2 % 30.0 % (8.8 )% (2.8 )%
Sales volume by product
tons (000s) 1,654 1,108 798 546 49 % 310 39 %
Sales volume by nutrient
tons (000s)(1) 317 215 155 102 47 % 60 39 %
Average selling price
per product ton $ 161 $ 202 $ 215 $ (41 ) (20 )% $ (13 ) (6 )%
Average selling price
per nutrient ton(1) $ 839 $ 1,040 $ 1,106 $ (201 ) (19 )% $ (66 ) (6 )%
Gross margin per product
ton $ 30 $ 55 $ 64 $ (25 ) (45 )% $ (9 ) (14 )%
Gross margin per
nutrient ton(1) $ 155 $ 283 $ 332 $ (128 ) (45 )% $ (49 ) (15 )%
Depreciation and
amortization $ 46 $ 35 $ 20 $ 11 31 % $ 15 75 %
Unrealized net
mark-to-market loss
(gain) on natural gas
derivatives $ (17 ) $ - $ - $ (17 ) N/M $ - - %



_______________________________________________________________________________



(1) Nutrient tons represent the tons of nitrogen within the product tons.





Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net Sales. Total net sales in our Other segment increased $43 million, or 19%,
in 2016 from 2015 due to a 49% increase in sales volume partially offset by a
20% decrease in average selling prices. These results include the impact of the
CF Fertilisers UK acquisition, which increased net sales by $79 million, or 35%.
The remaining decrease in our Other segment net sales of $36 million, or 16%,
was due primarily to lower average selling prices due to excess global nitrogen
supply weighing on global nitrogen fertilizer selling prices.
Cost of Sales. Cost of sales per ton in our Other segment averaged $131 in 2016,
including the impact of the CF Fertilisers UK acquisition, which averaged $158
per ton. The remaining cost of sales per ton averaged $121 in 2016, an 18%
decrease from the $147 per ton in 2015 due to the unrealized net mark-to-market
gains on natural gas derivatives in 2016 and the impact of the purchase
accounting inventory valuation step-up in 2015 arising out of the CF Fertilisers
UK acquisition.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net Sales. Total net sales in our Other segment increased $52 million, or 30%,
in 2015 from 2014 due to a 39% increase in sales volume. These results include
the impact of the CF Fertilisers UK acquisition completed on July 31, 2015,
which increased net sales by $53 million, or 31%. The remaining decrease in our
Other net sales of $1 million, or 1%, was due primarily to lower average selling
prices, primarily urea liquor, due to overall weaker pricing conditions. This
decrease was partially offset by an increase in our DEF average selling prices
and sales volume as the North American DEF market continued to grow in response
to stricter diesel engine emission requirements.

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Cost of Sales. Cost of sales per ton in our Other segment averaged $147 in 2015,
a 3% decrease from the $151 per ton in 2014 due primarily to lower realized
natural gas costs in 2015 compared to 2014.
Phosphate Segment
On March 17, 2014, we sold our phosphate mining and manufacturing business to
Mosaic pursuant to the terms of the definitive transaction agreement executed in
October 2013, among CF Industries Holdings, Inc., CF Industries and Mosaic. The
phosphate segment reflects the reported results of the phosphate business
through March 17, 2014, plus the continuing sales of the phosphate inventory in
the distribution network after March 17, 2014. The remaining phosphate inventory
was sold in the second quarter of 2014 and reportable results ceased.
The following table presents summary operating data for our phosphate segment
for the year ended December 31, 2014:
2014
(in millions, except as noted)
Net sales $ 168
Cost of sales 158
Gross margin $ 10
Gross margin percentage 6.0 %
Sales volume by product tons (000s)(1) 487
Average selling price per product ton $ 346
Gross margin per product ton $ 21
Depreciation, depletion and amortization(2) $ -


_______________________________________________________________________________

(1) Represents DAP and MAP product sales.
(2) On March 17, 2014, we sold our phosphate mining and manufacturing business.
The assets and liabilities sold were classified as held for sale as of
December 31, 2013; therefore, no depreciation, depletion or amortization was
recorded in 2014 for the related property, plant and equipment.


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Liquidity and Capital Resources
Our primary uses of cash are generally for operating costs, working capital,
capital expenditures, debt service, investments, taxes, share repurchases and
dividends. Our working capital requirements are affected by several factors,
including demand for our products, selling prices, raw material costs, freight
costs and seasonal factors inherent in the business. Generally, our primary
source of cash is cash from operations, which includes cash generated by
customer advances. We may also from time to time access the capital markets or
engage in borrowings under our credit agreements.
Lower selling prices resulting from excess global nitrogen supply affected our
financial performance in 2016. Global nitrogen fertilizer supply increased
faster than global nitrogen fertilizer demand, creating the current global
oversupply of nitrogen fertilizer and the resulting low nitrogen fertilizer
selling prices. See discussion under "Overview of CF Holdings-Industry Factors
and Market Conditions-2016 Market Conditions," above, for further information.
In response to the prevailing market circumstances, in July 2016, we entered
into an amendment to the Revolving Credit Agreement, and, in September 2016, we
entered into an amendment to the note purchase agreement governing the Private
Senior Notes (the Note Purchase Agreement). The amendments increased, through
the end of 2017, the maximum total leverage ratio permitted under the Revolving
Credit Agreement and the Note Purchase Agreement and reduced the size of our
revolving credit facility under the Revolving Credit Agreement.
Due to the uncertainty of the duration of the prevailing low price environment
and in order to provide liquidity and covenant flexibility for the future, in
the fourth quarter of 2016, we took certain additional steps with respect to the
Revolving Credit Agreement and the Private Senior Notes. The steps we took
included entering into the November 2016 Credit Agreement Amendment described
under "-Debt-Revolving Credit Agreement," below, and the prepayment in full of
the $1.0 billion principal amount of Private Senior Notes on November 21, 2016.
We funded that prepayment and the related make-whole amount of approximately
$170 million with the issuance of new long-term secured debt, as described in
further detail below under "-Debt-Senior Secured Notes."
In 2016, we completed capacity expansion projects at Donaldsonville, Louisiana
and Port Neal, Iowa that were originally announced in 2012. These projects
provided us with an increase of approximately 25% in production capacity and had
a total capital cost of $5.2 billion. The completion of our capacity expansion
projects will reduce what had been a substantial use of liquidity in recent
years. See "-Capacity Expansion Projects and Restricted Cash," below, for
further information on these projects.
A significant portion of the capital assets that were constructed as part of the
capacity expansion projects is expected to qualify for bonus depreciation under
the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). Under the
provisions of the PATH Act, eligible capital additions will be subject to 50%
bonus depreciation. We intend to file a claim to carry back the 2016 federal tax
loss to prior periods and receive a refund of federal taxes paid in those prior
years. As of December 31, 2016, we have prepaid income taxes of $841 million,
which includes approximately $816 million for the carryback of certain U.S. tax
losses from 2016 to prior tax periods. See "-Realization of Current Year Tax
Assets Resulting From Bonus Depreciation," below, and Note 10-Income Taxes to
our consolidated financial statements included in Item 8 of this report for
additional information.
In October 2016 each of the three credit rating agencies reviewed our corporate
credit rating as follows. S&P Global Ratings reduced our corporate credit rating
to BB+ from BBB- and indicated the outlook was negative; Moody's Investors
Service, Inc. reduced our corporate credit rating to Baa3 from Baa2 and
indicated the rating was under further review; and Fitch Ratings, Inc. reduced
our corporate credit rating to BB+ from BBB and indicated the outlook was
stable. In November 2016, Moody's Investors Service, Inc. further reduced our
corporate credit rating to Ba2 from Baa3 and updated the outlook to stable.
At December 31, 2016, our balance of cash and cash equivalents was $1.16 billion
and we were in compliance with all applicable covenant requirements under the
Revolving Credit Agreement and our senior notes.
Cash and Cash Equivalents
We had cash and cash equivalents of $1.16 billion and $286 million as of
December 31, 2016 and 2015, respectively. Cash equivalents include highly liquid
investments that are readily convertible to known amounts of cash with original
maturities of three months or less. 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.

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Capacity Expansion Projects and Restricted Cash
In 2016, we completed our capacity expansion projects at Donaldsonville,
Louisiana
and Port Neal, Iowa. These projects, originally announced in 2012,
included the construction of new ammonia, urea, and UAN plants at our
Donaldsonville, Louisiana complex and new ammonia and urea plants at our Port
Neal, Iowa
complex. These plants increased our overall production capacity by
approximately 25%, improved our product mix flexibility at Donaldsonville, and
improved our ability to serve upper-Midwest urea customers from our Port Neal
location. In combination, these new facilities are able to produce 2.1 million
tons of gross ammonia per year, upgraded products ranging from 2.0 million to
2.7 million tons of granular urea per year and up to 1.8 million tons of UAN 32%
solution per year, depending on our choice of product mix. These new facilities
will allow us to benefit from the cost advantages of North American natural gas.
Further details regarding our production capacity and production flexibility are
included in Part I, Item 1. Business.
At our Donaldsonville complex, the ammonia plant was placed in service in the
fourth quarter of 2016, the UAN plant was placed in service in the first quarter
of 2016 and the granular urea plant was placed in service in the fourth quarter
of 2015. At our Port Neal, Iowa complex, both the ammonia and granular urea
plants were placed in service in the fourth quarter of 2016. Depreciation
expense pertaining to each of our capacity expansion plants commenced once the
applicable plant was placed in service, and the total depreciation expense
pertaining to our capacity expansion plants recognized in 2016 and 2015 was $116
million
and $13 million, respectively.
Start-up costs of $52 million, which primarily relate to the cost of commencing
production at the ammonia plants, were incurred in 2016. Expansion project
expenses, consisting primarily of administrative costs and other project costs
that do not qualify for capitalization, totaled $73 million, $51 million and $31
million
in 2016, 2015 and 2014, respectively.
The total cash spent on capital expenditures for the capacity expansion projects
through December 31, 2016 was $5.1 billion. We estimate that the final payments
on the capital component of the capacity expansion projects will occur in early
2017 and will bring the total capital cash spending for the capacity expansion
projects to approximately $5.2 billion.
We retained an affiliate of ThyssenKrupp Industrial Solutions (ThyssenKrupp) to
provide engineering and procurement services for both capacity expansion
projects. Under the terms of the engineering and procurement services contract,
we granted ThyssenKrupp a security interest in a restricted cash account and
maintain a cash balance in that account equal to the cancellation fees for
procurement services and equipment that would arise if we were to cancel the
projects. The amount in the account changes over time based on procurement
costs. As of December 31, 2016, there was $5 million held in this account. This
restricted cash is excluded from our cash and cash equivalents and reported
separately on our consolidated balance sheets and statements of cash flows.
Capital Spending
We make capital expenditures to sustain our asset base, increase our capacity,
improve plant efficiency and comply with various environmental, health and
safety requirements. Capital expenditures totaled $2.21 billion in 2016 compared
to $2.47 billion in 2015. The decrease in capital expenditures is primarily the
result of the decrease in cash spent on the capacity expansion projects in 2016
compared to 2015.
Projected Capital Spending
New capital expenditures for 2017 are estimated to be in the range of
approximately $400 to $450 million for sustaining and other capital
expenditures. Actual cash expenditures will also reflect amounts accrued but not
paid in 2016. At December 31, 2016, approximately $225 million was accrued
related to activities in 2016. Planned capital expenditures are subject to
change due to delays in regulatory approvals or permitting, unanticipated
increases in cost, changes in scope and completion time, performance of third
parties, adverse weather, defects in materials and workmanship, labor or
material shortages, transportation constraints, acceleration or delays in the
timing of the work and other unforeseen difficulties.
Realization of Current Year Tax Assets Resulting From Bonus Depreciation
The PATH Act permits bonus depreciation on certain eligible capital additions in
the year the assets are placed in service. Under the provisions of the PATH Act,
eligible capital additions will be subject to 50% bonus depreciation in the year
the asset is placed in service. A significant portion of the capital assets
constructed as part of the Donaldsonville, Louisiana and Port Neal, Iowa
capacity expansion projects is expected to qualify for 50% bonus depreciation.
Given the size of the bonus depreciation tax deduction, we estimate that we
generated a substantial federal tax loss in 2016. We intend to file a claim to
carry back the 2016 federal tax loss to prior income tax years and receive a
refund of federal taxes paid in those prior years. We currently estimate that
the amount of this refund will be approximately $816 million and expect to
receive it in the third quarter of 2017. As of December 31, 2016, we have
prepaid income taxes in the amount of $841 million.

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Government Policies
The policies or laws of governments around the world can result in the
imposition of taxes, duties, tariffs or other restrictions or regulatory
requirements on imports and exports of raw materials, finished goods or services
from a particular country or region of the world. The policies and laws of
governments can also impact the subsidization of natural gas prices, and
subsidies or quotas applied to domestic producers, or farmers. Due to the
critical role that fertilizers play in food production, the construction and
operation of fertilizer plants often are influenced by economic, political and
social objectives. Additionally, the import or export of fertilizer can be
subject to local taxes imposed by governments which can have the effect of
either encouraging or discouraging import and export activity. The impact of
changes in governmental policies or laws or the political or social objectives
of a country could have a material impact on fertilizer demand, selling prices
and therefore could impact our liquidity.
Ethanol Industry and the Renewable Fuel Standard
Corn used to produce ethanol accounts for approximately 37% of total U.S. corn
demand. U.S. government policy, as expressed in the Renewable Fuel Standard
(RFS), is a major determinant for the ethanol market. The RFS establishes
minimum volumes of various types of renewable fuels, including ethanol, that
must be included in the United States' supply of fuel for transportation. In
addition, the U.S. Congress, at various times, has proposed legislation to
either reduce or eliminate the RFS. While past legislation proposing changes to
the RFS has not been enacted into law, there can be no assurance that future
legislation will not be enacted into law. Other factors that drive the ethanol
market include the prices of ethanol, gasoline and corn. Lower gasoline prices
may put pressure on ethanol prices that could result in reduced profitability
and lower production for the ethanol industry, which could impact the demand for
corn and nitrogen fertilizer and therefore could impact our liquidity.
Repatriation of Foreign Earnings and Income Taxes
We have operations in Canada, the United Kingdom and an interest in a joint
venture in the Republic of Trinidad and Tobago. The estimated additional U.S.
and foreign income taxes due upon repatriation of the earnings of these foreign
operations to the U.S. are recognized in our consolidated financial statements
as the earnings are recognized, unless the earnings are considered to be
permanently reinvested based upon our current plans. However, the cash payment
of the income tax liabilities associated with repatriation of earnings from
foreign operations occurs at the time of the repatriation. As a result, the
recognition of income tax expense related to foreign earnings, as applicable,
and the payment of taxes resulting from repatriation of those earnings can occur
in different periods. Cash balances held by our joint venture are maintained at
sufficient levels to fund local operations as accumulated earnings are
repatriated from the joint venture on a periodic basis.
As of December 31, 2016, approximately $127 million of our consolidated cash and
cash equivalents balance of $1.16 billion was held primarily by our Canadian and
United Kingdom subsidiaries. The cash balance held by the Canadian subsidiaries
represents accumulated earnings of our foreign operations that are not
considered to be permanently reinvested. We have recognized deferred income
taxes on these earnings for the foreign and domestic taxes that would be due
upon their repatriation to the United States. As of December 31, 2016, the
estimated cash tax cost to repatriate the Canadian and United Kingdom cash
balances would be approximately $6 million.
Share Repurchase Programs and Retirements
Our Board of Directors (the Board) has authorized certain programs to repurchase
shares of our common stock. Each of these programs has permitted repurchases to
be made from time to time in the open market, through privately-negotiated
transactions, through block transactions or otherwise. Our management has
determined the manner, timing and amount of repurchases based on the evaluation
of market conditions, stock price and other factors.
In the third quarter of 2012, the Board authorized a program to repurchase up to
$3 billion of the common stock of CF Holdings through December 31, 2016 (the
2012 Program). The repurchases under the 2012 Program were completed in the
second quarter of 2014. On August 6, 2014, the Board authorized a program to
repurchase up to $1 billion of the common stock of CF Holdings through December
31, 2016
(the 2014 Program). As of December 31, 2015, 15.9 million shares had
been repurchased for an aggregate expenditure of $900 million. The remaining
$100 million of share repurchase authorization under the 2014 Program expired on
December 31, 2016.
The retirement of the repurchased shares of our common stock was recognized as
follows:
• In 2014, we retired 38.6 million shares of our common stock that had



been repurchased. In our consolidated balance sheet, the retirement of



these shares eliminated the recorded treasury stock and reduced
retained earnings and paid-in capital by $1.69 billion and $220
million
, respectively.



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• In 2015, we retired 10.7 million shares of our common stock that had



been repurchased. In our consolidated balance sheet, the retirement of



these shares eliminated the recorded treasury stock and reduced
retained earnings and paid-in capital by $535 million and $62 million,
respectively.


• In 2016, we retired 2.4 million shares of our common stock that had



been repurchased. In our consolidated balance sheet, the retirement of



these shares eliminated the recorded treasury stock and reduced



retained earnings and paid-in capital by $136 million and $14 million,



respectively.


Debt
Revolving Credit Agreement
We have a senior secured revolving credit agreement (as amended, including by an
amendment effective July 29, 2016 (the July 2016 Credit Agreement Amendment) and
an amendment entered into on October 31, 2016 and effective November 21, 2016
(the November 2016 Credit Agreement Amendment), the Revolving Credit Agreement)
providing for a revolving credit facility of up to $750 million (reflecting a
reduction from $1.5 billion as effected by the November 2016 Credit Agreement
Amendment) 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 may 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, euro 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 borrowers and guarantors under the Revolving Credit Agreement, which are
currently comprised of CF Holdings, CF Industries and CF Holdings' wholly owned
subsidiaries CF Industries Enterprises, Inc. (CFE) and CF Industries Sales, LLC
(CFS), are referred to together herein as the Loan Parties. CF Holdings and CF
Industries
guaranteed the obligations of the Loan Parties under the Revolving
Credit Agreement prior to the effectiveness of the November 2016 Credit
Agreement Amendment, and, upon the effectiveness of the November 2016 Credit
Agreement Amendment, CFE and CFS also became guarantors of the obligations of
the Loan Parties under the Revolving Credit Agreement. Subject to specified
exceptions, the Revolving Credit Agreement requires that each direct or indirect
domestic subsidiary of CF Holdings that guarantees debt for borrowed money of
any Loan Party in excess of $150 million become a guarantor under the Revolving
Credit Agreement. Subject to specified exceptions, the Revolving Credit
Agreement requires a grant of a first priority security interest in
substantially all of the assets of the Loan Parties, including a pledge by CFS
of its equity interests in CF Industries Nitrogen, LLC (CFN) and mortgages over
certain material fee-owned domestic real properties, to secure the obligations
of the Loan Parties thereunder.
In addition to the obligations under the Revolving Credit Agreement, the Loan
Parties also guarantee the obligations under any (i) letter of credit
facilities, letter of credit reimbursement agreements, letters of credit,
letters of guaranty, surety bonds or similar arrangements in an aggregate amount
up to $300 million and (ii) interest rate or other hedging arrangements, in each
case between CF Holdings or certain of its subsidiaries, on the one hand, and
any person that is a lender or the administrative agent under the Revolving
Credit Agreement or an affiliate of such person, on the other hand, that are
designated by CF Industries as Secured Bilateral LC Facilities or Secured Swap
Agreements (each as defined in the Revolving Credit Agreement), as applicable,
pursuant to the terms of the Revolving Credit Agreement (such additional
obligations, the Additional Guaranteed Obligations). Obligations under Secured
Bilateral LC Facilities in an aggregate amount up to $300 million and
obligations under Secured Swap Agreements are secured by the same security
interest that secures the obligations under the Revolving Credit Agreement.
The Revolving Credit Agreement contains representations and warranties and
affirmative and negative covenants customary for a financing of this type. Prior
to the effectiveness of the November 2016 Credit Agreement Amendment, the
Revolving Credit Agreement limited the ability of non-guarantor subsidiaries of
CF Holdings to incur indebtedness and limited the ability of CF Holdings and its
subsidiaries to grant liens, merge or consolidate with other entities and sell,
lease or transfer all or substantially all of the assets of CF Holdings and its
subsidiaries to another entity, in each case, subject to specified exceptions.
The November 2016 Credit Agreement Amendment modified the negative covenants in
the Revolving Credit Agreement to limit further the ability of CF Holdings and
its subsidiaries to grant liens and add limitations on the ability of CF
Holdings
and its subsidiaries to incur debt, pay dividends, voluntarily prepay
certain debt, make investments and dispose of

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assets, in each case, subject to specified exceptions (such further and
additional limitations, the Additional Negative Covenants).
The financial covenants applicable to CF Holdings and its subsidiaries in the
Revolving Credit Agreement (the New Financial Covenants):
(i) restrict the ratio of total secured debt to EBITDA (as defined in the



Revolving Credit Agreement) for the period of four consecutive fiscal



quarters most recently ended to a maximum of 3.75:1.00,



(ii) require the ratio of EBITDA for the period of four consecutive fiscal



quarters most recently ended to consolidated interest expense (as defined



in the Revolving Credit Agreement) for the period of four consecutive



fiscal quarters most recently ended to be a minimum of 1.20:1.00 for the



fiscal quarters ending on or prior to December 31, 2018, and 1.50:1.00



thereafter, and



(iii) require the ratio of total debt to total capitalization as of the last day



of any fiscal quarter to be less than or equal to 0.60:1.00.





As of December 31, 2016, we were in compliance with all covenants under the
Revolving Credit Agreement.
Under the Revolving Credit Agreement, if on any date certain conditions were
met, including (i) an absence of an event of default under the Revolving Credit
Agreement, (ii) the receipt of an investment grade corporate rating for CF
Holdings
from two of three selected ratings agencies and (iii) the ratio of CF
Holdings'
total net debt to EBITDA for the period of four consecutive fiscal
quarters most recently ended being less than 3.75:1.00, CF Industries would be
able to, at its option, choose to (w) suspend the Additional Negative Covenants,
(x) replace the New Financial Covenants with covenants requiring the ratio of
total net debt to EBITDA for the period of four fiscal consecutive quarters most
recently ended to be less than or equal to 3.75:1.00 and the ratio of EBITDA for
the period of four consecutive fiscal quarters most recently ended to
consolidated interest expense for the period of four consecutive fiscal quarters
most recently ended to be not less than 2.75:1.00, (y) release the collateral
securing the obligations under the Revolving Credit Agreement and (z) release
the guarantees supporting, and the collateral securing, the Secured Bilateral LC
Facilities and the Secured Swap Agreements. Such a choice by CF Industries would
commence a "Covenant Suspension Period" that would expire upon the Company's no
longer having an investment grade corporate rating from two of three selected
rating agencies. Upon the expiration of a Covenant Suspension Period, the
Additional Negative Covenants and the New Financial Covenants would be
reinstated, and the Loan Parties party to the Revolving Credit Agreement would
be required to guarantee the Additional Guaranteed Obligations and grant a first
priority security interest in substantially all of each Loan Party's assets,
including a pledge by CFS of its equity interests in CFN and mortgages over
certain material fee-owned domestic real properties, subject to certain
exceptions, to secure the obligations under the Revolving Credit Agreement, the
Secured Bilateral LC Facilities and the Secured Swap Agreements.
The Revolving Credit Agreement contains events of default (with notice
requirements and cure periods, as applicable) customary for a financing of this
type, including, but not limited to, non-payment of principal, interest or fees;
inaccuracy of representations and warranties in any material respect; and
failure to comply with specified covenants. Upon the occurrence and during the
continuance of an event of default under the Revolving Credit Agreement and
after any applicable cure period, subject to specified exceptions, the
administrative agent may, and at the request of the requisite lenders is
required to, accelerate the loans under the Revolving Credit Agreement or
terminate the lenders' commitments under the Revolving Credit Agreement.
As of December 31, 2016, we had excess borrowing capacity under the Revolving
Credit Agreement of $695 million (net of outstanding letters of credit of $55
million
). There were no borrowings outstanding under the Revolving Credit
Agreement as of December 31, 2016 or December 31, 2015. Maximum borrowings
outstanding under the Revolving Credit Agreement during the twelve months ended
December 31, 2016 were $150 million. The weighted-average annual interest rate
of borrowings under the Revolving Credit Agreement during the twelve months
ended December 31, 2016 was 1.85%. Maximum borrowings under the Revolving Credit
Agreement during the twelve months ended December 31, 2015, were $367 million
with a weighted-average annual interest rate of 1.47%.

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Senior Notes
Long-term debt presented on our consolidated balance sheets as of December 31,
2016
and December 31, 2015 consisted of the following Public Senior Notes
(unsecured), Senior Secured Notes and Private Senior Notes (unsecured):

December 31, December 31,
Effective 2016 2015
Interest Principal Carrying Principal Carrying
Rate Outstanding Amount (1) Outstanding Amount (1)
(in millions)
Public Senior Notes:
6.875% due 2018 7.344% $ 800 $ 795 $ 800 $ 792
7.125% due 2020 7.529% 800 791 800 788
3.450% due 2023 3.562% 750 745 750 745
5.150% due 2034 5.279% 750 739 750 739
4.950% due 2043 5.031% 750 741 750 741
5.375% due 2044 5.465% 750 741 750 740
Senior Secured Notes:
3.400% due 2021 3.784% 500 491 - -
4.500% due 2026 4.760% 750 735 - -
Private Senior Notes:
4.490% due 2022 4.664% - - 250 248
4.930% due 2025 5.061% - - 500 496
5.030% due 2027 5.145% - - 250 248
Total long-term debt $ 5,850 $ 5,778 $ 5,600 $ 5,537



_______________________________________________________________________________



(1) Carrying amount is net of unamortized debt discount and deferred debt



issuance costs. Total unamortized debt discount was $12 million and



$7 million as of December 31, 2016 and December 31, 2015, respectively, and



total deferred debt issuance costs were $60 million and $56 million as of
December 31, 2016 and December 31, 2015, respectively.


Public Senior Notes
Under the indentures (including the applicable supplemental indentures)
governing the senior notes due 2018, 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. Interest on the Public Senior Notes is payable
semiannually, and the Public Senior Notes are redeemable at our option, in whole
at any time or in part from time to time, at specified make-whole redemption
prices. The indentures governing the Public Senior Notes contain customary
events of default (including cross-default triggered by acceleration of, or a
principal payment default that is not cured within an applicable grace period
under, other debt having a principal amount of $150 million or more) and
covenants that limit, among other things, the ability of CF Holdings and its
subsidiaries, including CF Industries, to incur liens on certain properties to
secure debt.
If a Change of Control occurs together with a Ratings Downgrade (as both terms
are defined under the indentures governing the Public Senior Notes), CF
Industries
would be required to offer to repurchase each series of Public Senior
Notes at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest. In addition, in the event that a subsidiary of CF Holdings,
other than CF Industries, becomes a borrower or a guarantor under the Revolving
Credit Agreement (or any renewal, replacement or refinancing thereof), such
subsidiary would be required to become a guarantor of the Public Senior Notes,
provided that such requirement will no longer apply with respect to the Public
Senior Notes due 2023, 2034, 2043 and 2044 following the repayment of the Public
Senior Notes due 2018 and 2020 or the subsidiaries of ours, other than CF
Industries
, otherwise becoming no longer subject to such a requirement to
guarantee the Public Senior Notes due 2018 and 2020.
On November 21, 2016, in connection with the effectiveness of the November 2016
Credit Agreement Amendment, CFE and CFS became subsidiary guarantors of the
Public Senior Notes.

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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). The net
proceeds, after deducting discounts and offering expenses, from the issuance and
sale of the Notes were approximately $1.23 billion. CF Industries used
approximately $1.18 billion of the net proceeds for the prepayment (including
payment of a make-whole amount of approximately $170 million and accrued
interest) in full of the outstanding $1.0 billion aggregate principal amount of
the Private Senior Notes. See "-Private Senior Notes," below. The Company
intends that the remainder of the net proceeds be used for general corporate
purposes.
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.
Under the terms of the applicable indenture, the Senior Secured Notes of each
series are fully and unconditionally 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
requirement for any subsidiary of CF Holdings to guarantee the Senior Secured
Notes of a series will apply only until, and the subsidiary guarantees of the
Senior Secured Notes of a series will be automatically released upon, the latest
to occur of (a) CF Holdings having an investment grade corporate rating, with a
stable or better outlook, from two of three selected ratings agencies and there
being no default or event of default under the applicable Indenture, (b) the
retirement, discharge or legal or covenant defeasance of, or satisfaction and
discharge of the supplemental indenture governing, the Public Senior Notes due
2018 or the subsidiaries of CF Holdings (other than CF Industries) otherwise
becoming no longer subject to the requirement, described in the second paragraph
under "-Public Senior Notes," above, to guarantee the Public Senior Notes due
2018 and (c) the retirement, discharge or legal or covenant defeasance of, or
satisfaction and discharge of the supplemental indenture governing, the Public
Senior Notes due 2020 or the subsidiaries of CF Holdings (other than CF
Industries
) otherwise becoming no longer subject to the requirement, described
in the second paragraph under "-Public Senior Notes," above, to guarantee the
Public Senior Notes due 2020. In accordance with the applicable indenture, CFE
and CFS, in addition to CF Holdings, guaranteed the Senior Secured Notes of each
series upon the initial issuance of the Senior Secured Notes.
Subject to certain exceptions, the obligations under each series of Senior
Secured Notes and each guarantor's related guarantee are secured by a first
priority security interest in substantially all of the assets of CF Industries,
CF Holdings and the subsidiary guarantors, including a pledge by CFS of its
equity interests in CFN and mortgages over certain material fee-owned domestic
real properties (the Collateral). The obligations under the Revolving Credit
Agreement, together with certain letter of credit, hedging and similar
obligations and future pari passu secured indebtedness, will be secured by the
Collateral on a pari passu basis with the Senior Secured Notes. The liens on the
Collateral securing the obligations under the Senior Secured Notes of a series
and the related guarantees will be automatically released and the covenant under
the applicable indenture limiting dispositions of Collateral will no longer
apply if on any date after the initial issuance of the Senior Secured Notes CF
Holdings
has an investment grade corporate rating, with a stable or better
outlook, from two of three selected ratings agencies and there is no default or
event of default under the applicable indenture.
Under each of the indentures governing the Senior Secured Notes, specified
changes of control involving CF Holdings or CF Industries, when accompanied by a
ratings downgrade, as defined with respect to the applicable series of Senior
Secured Notes, constitute change of control repurchase events. Upon the
occurrence of a change of control repurchase event with respect to the 2021
Notes or the 2026 Notes, as applicable, unless CF Industries has exercised its
option to redeem such Senior Secured Notes, CF Industries will be required to
offer to repurchase them at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to, but not including, the
date of repurchase.
The indentures governing the Senior Secured Notes contain covenants that limit,
among other things, the ability of CF Holdings and its subsidiaries, including
CF Industries, to incur liens on certain assets to secure debt, to engage in
sale and leaseback transactions, to sell or transfer Collateral, to merge or
consolidate with other entities and to sell, lease or transfer all or
substantially all of the assets of CF Holdings and its subsidiaries to another
entity. Each of the indentures governing the Senior Secured Notes provides for
customary events of default, which include (subject in certain cases to
customary grace and cure periods), among others, nonpayment of principal or
interest on the applicable Senior Secured Notes; failure to comply with other
covenants or agreements under the indenture; certain defaults on other
indebtedness; the failure of CF Holdings' or certain subsidiaries' guarantees of
the applicable Senior Secured Notes to be enforceable; lack of validity or
perfection of any lien securing the obligations under the Senior Secured Notes
and the guarantees with respect to Collateral having an aggregate fair market
value equal to or greater than a specified amount; and specified events of
bankruptcy or insolvency. Under each indenture governing the Senior Secured
Notes, in the case of an event of default arising from one of the specified
events of

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bankruptcy or insolvency, the applicable Senior Secured Notes would become due
and payable immediately, and, in the case of any other event of default (other
than an event of default related to CF Industries' and CF Holdings' reporting
obligations), the trustee or the holders of at least 25% in aggregate principal
amount of the applicable Senior Secured Notes then outstanding may declare all
of such Senior Secured Notes to be due and payable immediately.
Private Senior Notes
The senior notes due 2022, 2025 and 2027 (the Private Senior Notes), issued by
CF Industries on September 24, 2015, were governed by the terms of a note
purchase agreement (as amended, including by an amendment effective September 7,
2016
, the Note Purchase Agreement). The Private Senior Notes were guaranteed by
CF Holdings. All obligations under the Note Purchase Agreement were unsecured.
On November 21, 2016, we prepaid in full the outstanding $1.0 billion aggregate
principal amount of our Private Senior Notes. The prepayment of $1.18 billion
included the payment of a make-whole amount of approximately $170 million and
accrued interest. Loss on debt extinguishment of $167 million on our
consolidated statement of operations excludes $3 million of the make-whole
payment, which was accounted for as a modification and recognized on our
consolidated balance sheet as deferred financing fees, a reduction of long-term
debt, and is being amortized using the effective interest rate method over the
term of the Senior Secured Notes.
Bridge Credit Agreement
On September 18, 2015, in connection with our proposed combination with certain
businesses of OCI, CF Holdings and CF Industries entered into a senior unsecured
364-Day Bridge Credit Agreement (as amended, the Bridge Credit Agreement). Upon
the termination of the Combination Agreement on May 22, 2016, the lenders'
commitments under the Bridge Credit Agreement terminated automatically. There
were no borrowings under the Bridge Credit Agreement. See Note 4-Acquisitions
and Divestitures and Note 13-Interest Expense to our consolidated financial
statements included in Item 8 of this report for additional information.
Forward Sales and Customer Advances
We offer our customers the opportunity to purchase products from us on a forward
basis at prices and on delivery dates we propose. Therefore, our reported
fertilizer selling prices and margins may differ from market spot prices and
margins available at the time of shipment.
Customer advances, which typically represent a portion of the contract's sales
value, are received shortly after the contract is executed, with any remaining
unpaid amount generally being collected by the time the product is shipped,
thereby reducing or eliminating the accounts receivable related to such sales.
Any cash payments received in advance from customers in connection with forward
sales contracts are reflected on our consolidated balance sheets as a current
liability until related orders are shipped and revenue is recognized. As of
December 31, 2016 and 2015, we had $42 million and $162 million, respectively,
in customer advances on our consolidated balance sheets.
While customer advances are generally a significant source of liquidity, the
level of forward sales contracts is affected by many factors including current
market conditions and our customers' outlook of future market fundamentals.
During periods of declining prices, such as the current environment, customers
tend to delay purchasing fertilizer in anticipation that prices in the future
will be lower than the current prices. If the level of sales under our forward
sales programs were to decrease in the future, our cash received from customer
advances would likely decrease and our accounts receivable balances would likely
increase. Additionally, borrowing under the Revolving Credit Agreement could
become necessary. Due to the volatility inherent in our business and changing
customer expectations, we cannot estimate the amount of future forward sales
activity.
Under our forward sales programs, a customer may delay delivery of an order due
to weather conditions or other factors. These delays generally subject the
customer to potential charges for storage or may be grounds for termination of
the contract by us. Such a delay in scheduled shipment or termination of a
forward sales contract due to a customer's inability or unwillingness to perform
may negatively impact our reported sales.
Natural Gas Prices
Natural gas is the principal raw material used to produce nitrogen fertilizers.
We use natural gas both as a chemical feedstock and as a fuel to produce
ammonia, granular urea, UAN, AN and other nitrogen products. Expenditures on
natural gas represent a significant portion of our production costs. For
example, natural gas costs, including realized gains and losses, comprised
approximately 47% of our total production costs in 2016. As a result, natural
gas prices have a significant impact on our operating expenses and can thus
affect our liquidity.

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Because most of our nitrogen fertilizer manufacturing facilities are located in
the United States and Canada, the price of natural gas in North America directly
impacts a substantial portion of our operating expenses. Due to increases in
natural gas production resulting from the rise in production from shale gas
formations, natural gas prices in North America have declined since 2008, but
are subject to volatility. During 2016, the daily closing price at the Henry
Hub, the most heavily-traded natural gas pricing point in North America, reached
a low of $1.49 per MMBtu on three consecutive days in March 2016 and a high of
$3.77 per MMBtu on December 8, 2016. During the three-year period ended
December 31, 2016, the daily closing price at the Henry Hub reached a low of
$1.49 per MMBtu on three consecutive days in March 2016 and a high of $7.94 per
MMBtu on March 5, 2014.
We also have manufacturing facilities located in the United Kingdom. These
facilities are subject to fluctuations associated with the price of natural gas
in Europe. The major natural gas trading point for the United Kingdom is the
National Balancing Point (NBP). During 2016, the daily closing price at NBP
reached a low of $2.80 per MMBtu on September 1, September 12 and September 14,
2016
and a high of $6.60 per MMBtu on December 30, 2016. During the three-year
period ended December 31, 2016, the daily closing price at NBP reached a low of
$2.80 per MMBtu on September 1, September 12 and September 14, 2016, and a high
of $11.10 per MMBtu on January 8, 2014.
Natural gas costs in our cost of sales, including the impact of realized natural
gas derivatives, decreased 6% in 2016 from 2015.
Derivative Financial Instruments
We use derivative financial instruments to reduce our exposure to changes in
prices for natural gas that will be purchased in the future. Natural gas is the
largest and most volatile component of our manufacturing cost for nitrogen-based
fertilizers. We also use derivative financial instruments to reduce our exposure
to changes in foreign currency exchange rates. Because we use derivative
instruments, volatility in reported quarterly earnings can result from the
unrealized mark-to-market adjustments in the value of the derivatives. In 2016,
2015 and 2014, we recognized unrealized net mark-to-market (gains) losses on
natural gas derivatives of $(260) million, $176 million and $79 million,
respectively, which is reflected in cost of sales in our consolidated statements
of operations.
Derivatives expose us to counterparties and the risks associated with their
ability to meet the terms of the contracts. For derivatives that are in net
asset positions, we are exposed to credit loss from nonperformance by the
counterparties. We control our credit risk through the use of multiple
counterparties that are multinational commercial banks, other major financial
institutions or large energy companies, and, in most cases, the use of
International Swaps and Derivatives Association (ISDA) master netting
arrangements. The ISDA agreements are master netting arrangements commonly used
for over-the-counter (OTC) derivatives that mitigate exposure to counterparty
credit risk, in part, by creating contractual rights of netting and setoff, the
specifics of which vary from agreement to agreement.
The ISDA master netting arrangements to most of our derivative instruments
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 December 31, 2016 and 2015, the aggregate fair value of the derivative
instruments with credit-risk-related contingent features in net liability
positions was zero and $211 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 December 31,
2016
and 2015, we had open natural gas derivative contracts for 183.0
million MMBtus and 431.5 million MMBtus, respectively. At both December 31, 2016
and 2015, we had no cash collateral on deposit with counterparties for
derivative contracts.
As of December 31, 2015, the notional amount of our open foreign currency
derivatives was €89 million. None of these open foreign currency derivatives
were designated as hedging instruments for accounting purposes. All of these
foreign currency derivatives were settled in 2016.

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CF INDUSTRIES HOLDINGS, INC.

Embedded Derivative Liability
Under the terms of our strategic venture with CHS, if our credit rating is
reduced below certain levels by two of three specified credit rating agencies,
we are required to make a non-refundable yearly payment of $5 million to
CHS. The payment would continue on a yearly basis until the earlier of the date
that our credit rating is upgraded to or above certain levels by two of three
specified credit rating agencies or February 1, 2026. On February 1, 2016, we
recognized this term of the strategic venture as an embedded derivative and its
value of $8 million was included in other liabilities on our consolidated
balance sheet. See Note 17-Noncontrolling Interests to our consolidated
financial statements included in Item 8 of this report for additional
information.
During 2016, we recorded adjustments to increase the value of the embedded
derivative liability by $23 million to reflect our credit evaluations. 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. Additionally, as a result of the
reduction in our credit rating in the fourth quarter of 2016, we made a $5
million
payment to CHS. The fair value of the embedded derivative liability as
of December 31, 2016, is $26 million, which is included in other liabilities and
other current liabilities on our consolidated balance sheet. Included in other
operating-net in our consolidated statement of operations is a net loss of
$23 million.
Defined Benefit Pension Plans
We contributed $23 million to our pension plans in 2016. We expect to contribute
approximately $22 million to our pension plans in 2017.
Distributions on Noncontrolling Interest in CFN
In the third quarter of 2016, the CFN Board of Managers approved semi-annual
distribution payments in accordance with the Second Amended and Restated Limited
Liability Company Agreement of CFN (the CFN LLC Agreement) for the distribution
period ended June 30, 2016. In August 2016, CFN distributed a total of $79
million
to CHS for the distribution period ended June 30, 2016.
In the first quarter of 2017, the CFN Board of Managers approved semi-annual
distribution payments in accordance with the CFN LLC Agreement for the
distribution period ended December 31, 2016. On January 31, 2017, CFN
distributed $48 million to CHS for the distribution period ended December 31,
2016
.

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Cash Flows
Operating Activities
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net cash provided by operating activities in 2016 was $617 million as compared
to $1.21 billion in 2015, a decline of $590 million. The decline resulted
primarily from lower net earnings during 2016 due to lower selling prices from
excess global nitrogen supply, partially offset by lower amounts of cash used
for working capital purposes. Lower working capital levels in accounts
receivable and inventory, plus lower amounts paid for income taxes and certain
income tax refunds received in 2016, contributed to the reduction in cash used
for working capital. Favorable changes in working capital also included a
greater proportion of sales was paid in 2016 as compared to the prior year
period as we entered 2016 with a lower level of customer advances than in 2015
due to customers' hesitancy to enter into prepaid contracts in a declining
fertilizer price environment.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net cash provided by operating activities in 2015 was $1.21 billion as compared
to $1.42 billion in 2014. The $214 million decrease was primarily due to
unfavorable working capital changes as customer advances were lower and
inventory levels were higher in 2015 as compared to 2014 levels. Due to the
declining pricing environment for nitrogen fertilizers in 2015, customers
delayed making forward purchase commitments to purchase fertilizer in 2015,
which reduced the amount of customer advances that were received, as compared to
2014 when fertilizer pricing was stronger. A poor fall ammonia application
season contributed to higher inventory levels in 2015 as compared to 2014 when
inventory levels declined.
Investing Activities
Years Ended December 31, 2016, 2015 and 2014
Net cash used in investing activities was $2.18 billion in 2016 compared to
$2.98 billion in 2015. This decrease is due primarily to the 2015 acquisition of
the remaining 50% equity interest in CF Fertilisers UK not previously owned by
us for a net cash payment of $552 million, which was net of cash acquired of $18
million
. This decrease was also attributable in part to a decline in capital
expenditures related primarily to the capacity expansion projects in
Donaldsonville, Louisiana and Port Neal, Iowa. During 2016, capital expenditures
totaled $2.21 billion compared to $2.47 billion in 2015. The $344 million net
cash used in investing activities in 2014 included $1.81 billion in capital
expenditures and $505 million transferred to a restricted cash account in
support of the capacity expansion projects partially offset by cash proceeds of
$1.37 billion from the sale of the phosphate business.
Financing Activities
Years Ended December 31, 2016, 2015 and 2014
Net cash provided by financing activities was $2.44 billion in 2016 compared to
$77 million in 2015 and net cash used in financing activities of $787 million in
2014. In 2016, CHS purchased a minority equity interest in CFN for $2.8 billion.
We distributed $119 million to the noncontrolling interests, including CHS, in
2016, compared to $45 million and $46 million in 2015 and 2014, respectively.
The increase in distributions to noncontrolling interests in 2016 compared to
2015 and 2014 was due to the CHS strategic venture, which increased the
distributions by $79 million, representing the distributions paid to CHS in the
third quarter of 2016 for the distribution period ended June 30, 2016.
In 2016, we received proceeds of approximately $1.24 billion, net of discounts,
from the issuance of the Senior Secured Notes which were used to fund the
prepayment of the $1.0 billion of Private Senior Notes and the related
make-whole payment of $170 million. In both 2015 and 2014, we issued senior
notes and received proceeds of approximately $1.0 billion and $1.5 billion,
respectively. No share repurchases were made during 2016 compared to cash used
for share repurchases in 2015 and 2014 of $556 million and $1.94 billion,
respectively.



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Contractual Obligations
The following is a summary of our contractual obligations as of December 31,
2016
:
2017 2018 2019 2020 2021 After 2021 Total
(in millions)
Contractual Obligations
Debt
Long-term debt(1) $ - $ 800 $ - $ 800 $ 500 $ 3,750 $ 5,850
Interest payments on
long-term debt(1) 308 278 251 222 191 2,393 3,643
Other Obligations
Operating leases 89 83 65 51 41 92 421
Equipment purchases and
plant improvements (2) 236 3 2 - - - 241
Transportation(3) 11 8 7 3 - - 29
Purchase
obligations(4)(5) 656 103 44 42 37 114 996
Contributions to pension
plans(6) 22 - - - - - 22
Net operating loss
settlement(7) 11 - - - - - 11
Total(8)(9)(10) $ 1,333 $ 1,275 $ 369 $ 1,118 $ 769 $ 6,349 $ 11,213



_______________________________________________________________________________



(1) Based on debt balances before discounts, offering expenses and interest



rates as of December 31, 2016.


(2) Includes obligations to finalize the capital component of the



Donaldsonville, Louisiana and Port Neal, Iowa capacity expansion projects



that were completed in 2016. For further information, see discussion under



"Liquidity and Capital Resources-Capacity Expansion Projects and Restricted



Cash."


(3) Includes anticipated expenditures under certain contracts to transport
finished product to and from our facilities. The majority of these



arrangements allow for reductions in usage based on our actual operating



rates. Amounts set forth in this table are based on projected normal



operating rates and contracted or current spot prices, where applicable, as



of December 31, 2016 and actual operating rates and prices may differ.



(4) Includes minimum commitments to purchase and transport natural gas based on



prevailing market-based forward prices as of December 31, 2016 excluding



reductions for plant maintenance and turnaround activities. Purchase
obligations do not include any amounts related to our natural gas
derivatives. See Note 15-Derivative Financial Instruments to our
consolidated financial statements included in Item 8 of this report for
additional information.



(5) Includes a commitment to purchase ammonia from PLNL at market-based prices



under an agreement that expires in 2018. The annual commitment based on



market prices as of December 31, 2016 is $57 million with a total remaining



commitment of $100 million.



(6) Represents the contributions we expect to make to our pension plans during



2017. Our pension funding policy is to contribute amounts sufficient to meet



minimum legal funding requirements plus discretionary amounts that we may
deem to be appropriate.



(7) Represents the amounts we expect to pay to our pre-IPO owners in conjunction



with the amended NOL Agreement and the 2013 settlement with the IRS.



(8) Excludes $162 million of unrecognized tax benefits due to the uncertainty in



the timing of potential tax payments.



(9) Excludes $14 million of environmental remediation liabilities due to the



uncertainty in the timing of payments.



(10) Excludes $5 million annual payments to CHS related to our embedded



derivative through 2026 due to uncertainty of future credit ratings, as



this is only applicable if our credit rating stays below certain levels



from two of three specified credit rating agencies. See Note 9-Fair Value



Measurements or Note 17-Noncontrolling Interests to our consolidated
financial statements included in Item 8 of this report for additional
information.



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Off-Balance Sheet Arrangements
We have operating leases for certain property and equipment under various
noncancelable agreements, the most significant of which are rail car leases and
barge tow charters for the transportation of fertilizer. The rail car leases
currently have minimum terms ranging from one to eleven years and the barge
charter commitments range from one to seven years. We also have terminal and
warehouse storage agreements for our distribution system, some of which contain
minimum throughput requirements. The storage agreements contain minimum terms
generally ranging from one to five years and commonly contain automatic annual
renewal provisions thereafter unless canceled by either party. See
Note 24-Leases to our consolidated financial statements included in Item 8 of
this report for additional information concerning leases.
We do not have any other off-balance sheet arrangements that have or are
reasonably likely to have a material current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results of operations,
liquidity and capital resources is based upon our consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. U.S. GAAP
requires that we select policies and make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates. We base our estimates on historical experience,
technological assessment, opinions of appropriate outside experts, and the most
recent information available to us. Actual results may differ from these
estimates. Changes in estimates that may have a material impact on our results
are discussed in the context of the underlying financial statements to which
they relate. The following discussion presents information about our most
critical accounting policies and estimates.
Revenue Recognition
We recognize revenue when title and risk of loss are transferred to the
customer, which can be at the plant gate, a distribution facility, a supplier
location or a customer destination. In some cases, application of this policy
requires that we make certain assumptions or estimates regarding a component of
revenue, discounts and allowances, rebates, or creditworthiness of some of our
customers. We base our estimates on historical experience, and the most recent
information available to us, which can change as market conditions change.
Amounts related to shipping and handling that are billed to our customers in
sales transactions are classified as sales in our consolidated statements of
operations. Sales incentives are reported as a reduction in net sales.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost and depreciation and
amortization are computed using either the straight-line method or the
units-of-production method over the lives of the assets. The lives used in
computing depreciation and amortization expense are based on estimates of the
period over which the assets will be of economic benefit to us. Estimated lives
are based on historical experience, manufacturers' or engineering estimates,
valuation or appraisal estimates and future business plans. We review the
depreciable lives assigned to our property, plant and equipment on a periodic
basis, and change our estimates to reflect the results of those reviews.
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. We account for plant turnarounds
under the deferral method, as opposed to the direct expense or built-in overhaul
methods. Under the deferral method, expenditures related to turnarounds are
capitalized in property, plant and equipment when incurred and amortized to
production costs on a straight-line basis over the period benefited, which is
until the next scheduled turnaround in up to five years. Should the estimated
period between turnarounds change, we may be required to amortize the remaining
cost of the turnaround over a shorter period, which would lead to higher
depreciation and amortization costs. If we used the direct expense method,
turnaround costs would be expensed as incurred. 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
catalyst when a full plant shutdown occurs. Scheduled inspections are also
conducted during a full plant shut down including required safety inspections,
which entails the disassembly of various components such as steam boilers,
pressure vessels and other equipment requiring safety certifications.
Capitalized turnaround costs have been applied consistently in the periods
presented. Internal employee costs and overhead amounts are not considered
turnaround costs and are not capitalized. Turnaround costs are classified as
investing activities in the consolidated statements of cash flows in the line
entitled, "Additions to property, plant and equipment."

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CF INDUSTRIES HOLDINGS, INC.

Inventory Valuation
We review our inventory account balances at least quarterly, and more frequently
if required by market conditions, to determine whether the carrying amount of
inventories exceeds their market value. This review process incorporates current
industry and customer-specific trends, current operating plans, historical price
activity, and selling prices expected to be realized. If the carrying amount of
our inventory exceeds its estimated market value, we immediately adjust our
carrying values accordingly. Upon inventory liquidation, if the actual sales
prices are less than our most recent estimate of market value, additional losses
would be recorded in the period of liquidation.
Asset Retirement Obligations
Asset retirement obligations (AROs) are legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development or normal operation of such assets. AROs are initially recognized as
incurred when sufficient information exists to estimate fair value. We have AROs
at our nitrogen fertilizer manufacturing complexes and at our distribution and
storage facilities that are conditional upon cessation of operations. These AROs
include certain decommissioning activities as well as the removal and disposal
of certain chemicals, waste materials, structures, equipment, vessels, piping
and storage tanks. Also included are reclamation of land and the closure of
certain effluent ponds. The most recent estimate of the aggregate cost of these
AROs expressed in 2016 dollars is $72 million. We have not recorded a liability
for these conditional AROs as of December 31, 2016 because we do not believe
there is currently a reasonable basis for estimating a date or range of dates of
cessation of operations at our nitrogen fertilizer manufacturing facilities or
our distribution and storage facilities, which is necessary in order to estimate
fair value. In reaching this conclusion, we considered the historical
performance of each complex or facility and have taken into account factors such
as planned maintenance, asset replacements and upgrades of plant and equipment,
which if conducted as in the past, can extend the physical lives of our nitrogen
manufacturing facilities and our distribution and storage facilities
indefinitely. We also considered the possibility of changes in technology, risk
of obsolescence, and availability of raw materials in arriving at our
conclusion.
Recoverability of Long-Lived Assets, Goodwill and Investments in Unconsolidated
Subsidiaries
We review the carrying values of our property, plant and equipment and other
long-lived assets, including our finite-lived intangible assets, goodwill and
investments in affiliates including joint ventures in accordance with U.S. GAAP
in order to assess recoverability. Factors that we must estimate when performing
impairment tests include sales volume, selling prices, raw material costs,
operating rates, operating expenses, inflation, discount rates, exchange rates,
tax rates and capital spending. Significant judgment is involved in estimating
each of these factors, which include inherent uncertainties. The factors we use
are consistent with those used in our internal planning process. The
recoverability of the values associated with our goodwill, long-lived assets and
investments in unconsolidated affiliates is dependent upon future operating
performance of the specific businesses to which they are attributed. Certain of
the operating assumptions are particularly sensitive to the cyclical nature of
the fertilizer business. Adverse changes in demand for our products, increases
in supply and the availability and costs of key raw materials could
significantly affect the results of our review.
The recoverability and impairment tests of long-lived assets are required only
when conditions exist that indicate the carrying value may not be recoverable.
For goodwill, impairment tests are required at least annually, or more
frequently if events or circumstances indicate that it may be impaired. Our
investments in unconsolidated affiliates are reviewed for impairment whenever
events or circumstances indicate that the carrying value may not be recoverable.
When circumstances indicate that the fair value of our investment in any such
affiliate is less than its carrying value, and the reduction in value is other
than temporary, the reduction in value is recognized immediately in earnings.
PLNL is our joint venture investment in the Republic of Trinidad and Tobago and
operates an ammonia plant that relies on natural gas supplied by the NGC
pursuant to the NGC Contract. The joint venture is accounted for under the
equity method. The joint venture has experienced curtailments in the supply of
natural gas from NGC, which have reduced the ammonia production at PLNL. In
2016, NGC communicated to PLNL that it does not recognize the joint venture's
exercise of its option to renew the NGC Contract for an additional five-year
term beyond its current termination date in September 2018, and that any NGC
commitment to supply gas beyond 2018 will need to be based on new agreements
regarding volume and price. PLNL has initiated arbitration proceedings against
NGC and asserted claims in connection with NGC's failure to supply the
contracted quantities of natural gas, and its refusal to recognize the joint
venture's exercise of its option to extend the NGC Contract. PLNL is seeking
declaratory and injunctive relief, as well as damages for past and ongoing
curtailments. Although the joint venture believes its claims against NGC to be
meritorious, it is not possible to predict the outcome of the arbitration. There
are significant assumptions in the future operations of the joint venture that
are uncertain at this time, including the quantities of gas NGC will make
available, the cost of such gas, the estimates that are used to determine the
useful lives of fixed assets and the assumptions in the discounted cash flow
models utilized for recoverability and impairment testing. As part of our
impairment assessment of our equity method investment in PLNL, we determined the
carrying value exceeded the fair value and recognized

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a $134 million impairment charge in 2016. Previously, in 2015, we recognized an
impairment charge of $62 million related to our equity method investment in
PLNL. The carrying value of our equity method investment in PLNL at December 31,
2016
is approximately $139 million. If NGC does not make sufficient quantities
of natural gas available to PLNL at prices that permit profitable operations,
PLNL may cease operating its facility and we would write off the remaining
investment in PLNL.
We evaluate goodwill for impairment in the fourth quarter at the reporting unit
level, which in our case, are the ammonia, granular urea, UAN, AN and Other
segments. Our evaluation can begin with a qualitative assessment of the factors
that could impact the significant inputs used to estimate fair value. If after
performing the qualitative assessment, we determine that it is not more likely
than not that the fair value of a reporting unit is less than its carrying
amount, including goodwill, then no further testing is performed. However, if it
is unclear based on the results of the qualitative test, we perform a
quantitative test involving potentially two steps. The first step compares the
fair value of a reporting unit with its carrying amount, including goodwill. We
use an income-based valuation method, determining the present value of future
cash flows, to estimate the fair value of a reporting unit. If the fair value of
a reporting unit exceeds its positive carrying amount, goodwill of the reporting
unit is considered not impaired, and the second step of the impairment test is
unnecessary. The second step of the goodwill impairment test, if needed,
compares the implied fair value of the reporting unit goodwill with the carrying
amount of that goodwill. We recognize an impairment loss immediately to the
extent the carrying value exceeds its implied fair value. We identified no
goodwill impairment in our 2016, 2015 or 2014 reviews. As of December 31, 2016
and 2015, the carrying value of our goodwill was $2.35 billion and $2.39
billion
, respectively.
Intangible assets identified in connection with our 2010 acquisition of Terra
Industries Inc.
consist of customer relationships, which are being amortized
over a period of 18 years. The intangible assets identified in connection with
our 2015 acquisition of CF Fertilisers UK consist of customer relationships and
trade names which are being amortized over a remaining period of approximately
20 years. Our intangible assets are presented in other assets on our
consolidated balance sheets. See Note 7-Goodwill and Other Intangible Assets to
our consolidated financial statements included in Item 8 of this report for
additional information regarding our goodwill and other intangible assets.
Income Taxes
We recognize expenses, assets and liabilities for income taxes based on
estimates of amounts that ultimately will be determined to be taxable or
deductible in tax returns filed in various jurisdictions. U.S. income taxes are
provided on that portion of the earnings of foreign subsidiaries that is
expected to be remitted to the U.S. and be taxable. The final taxes paid are
dependent upon many factors and judgments, including negotiations with taxing
authorities in various jurisdictions and resolution of disputes arising from
federal, state and international tax audits. The judgments made at any point in
time may change from previous conclusions based on the outcome of tax audits, as
well as changes to, or further interpretations of, tax laws and regulations. We
adjust income tax expense in the period in which these changes occur.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those differences are projected to
be recovered or settled. Realization of deferred tax assets is dependent on our
ability to generate sufficient taxable income of an appropriate character in
future periods. A valuation allowance is established if it is determined to be
more likely than not that a deferred tax asset will not be realized. Significant
judgment is applied in evaluating the need for and the magnitude of appropriate
valuation allowances against deferred tax assets. Interest and penalties related
to unrecognized tax benefits are reported as interest expense and income tax
expense, respectively.
A deferred income tax liability is recorded for income taxes that would result
from the repatriation of the portion of the investment in our non-U.S.
subsidiaries and joint venture that are considered to not be permanently
reinvested. No deferred income tax liability is recorded for the remainder of
our investment in non-U.S. subsidiaries and joint venture, which we believe to
be permanently reinvested.
As a large commercial enterprise with international operations, our income tax
expense and our effective tax rate may change from period to period due to many
factors. The most significant of these factors are changes in tax legislation,
changes in the geographic mix of earnings, the tax characteristics of our
income, the ability to realize certain foreign tax credits and net operating
losses, and the portion of the income of our foreign subsidiaries and joint
venture that is expected to be remitted to the U.S. and be taxable. It is
reasonably likely that these items will impact income tax expense, net income
and liquidity in future periods.
We operate in a number of countries and as a result have a significant amount of
cross border transactions. The taxability of cross border transactions has
received an increasing level of scrutiny among regulators in countries across
the globe, including the countries in which we operate. The tax rules and
regulations within the various countries in which we operate are complex and in
many cases there is not symmetry between the rules of the various countries. As
a result, there are instances

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where regulators within the countries involved in a cross border transaction may
reach different conclusions regarding the taxability of the transaction in their
respective jurisdictions based on the same set of facts and circumstances. We
work closely with regulators to reach a common understanding and conclusion
regarding the taxability of cross border transactions. However, there are
instances where reaching a common understanding is not possible or practical. As
of December 31, 2016, we have recorded a reserve for unrecognized tax benefits,
including penalties and interest, of $162 million, which is related
predominantly to certain potential tax exposures involving cross border
transactions. This amount represents our best estimate of the amounts due based
on our interpretations of the rules and the facts and circumstances of the
transactions. Differences in interpretation of the tax laws, including
agreements between governments surrounding our cross border transactions, can
result in differences in taxes paid which may be higher or lower than our
estimates.
Pension Assets and Liabilities
Pension assets and liabilities are affected by the fair value of plan assets,
estimates of the expected return on plan assets, plan design, actuarial
estimates and discount rates. Actual changes in the fair value of plan assets
and differences between the actual return on plan assets and the expected return
on plan assets affect the amount of pension expense ultimately recognized. Key
assumptions that affect our projected benefit obligation (PBO) are discount
rates and, in addition for our United Kingdom plans, an adjusted retail price
index (RPI). Key assumptions affecting pension expense include discount rates,
the expected long-term rate of return on assets (EROA) and, in addition for our
United Kingdom plans, RPI.
The December 31, 2016 PBO was computed based on a weighted-average discount rate
of 4.0% for our North America plans and 2.8% for our United Kingdom plans, which
were based on yields for high-quality (AA rated or better) fixed income debt
securities that match the timing and amounts of expected benefit payments as of
the measurement date of December 31. Declines in comparable bond yields would
increase our PBO. The weighted-average discount rate used to calculate pension
expense in 2016 was 4.3% for North America plans and 3.8% for United Kingdom
plans. Our net benefit obligation, after deduction of plan assets, could
increase or decrease depending on the extent to which returns on pension plan
assets are lower or higher than the discount rate. The 4.9% weighted-average
EROA used to calculate pension expense in 2016 for our North America plans is
based on studies of actual rates of return achieved by equity and non-equity
investments, both separately and in combination over historical holding periods.
The 5.2% weighted-average EROA used to calculate pension expense in 2016 for our
United Kingdom plans is based on expected long-term performance of underlying
investments, adjusted for investment managers' fees. The 3.3% RPI used to
calculate our United Kingdom plan PBO and the 3.1% RPI used to calculate 2016
pension expense is developed using the Bank of England implied retail price
inflation curve, which is based on the difference between yields on fixed
interest government bonds and index-linked government bonds.
For North America qualified pension plans, our PBO was $759 million as of
December 31, 2016, which was $123 million higher than pension plan assets. For
our United Kingdom pension plans, our PBO was $559 million as of December 31,
2016
which was $193 million higher than pension plan assets. The tables below
estimate the impact of a 50 basis point increase or decrease in the key
assumptions on our December 31, 2016 PBO and 2016 pension expense:
North America Plans
Increase/(Decrease) in Increase/(Decrease) in
December 31, 2016 PBO 2016 Pension Expense
Assumption +50 bps -50 bps +50 bps -50 bps
( in millions)
Discount Rate $ (43 ) $ 47 $ (1 ) $ 3
EROA N/A N/A (3 ) 3


United Kingdom Plans
Increase/(Decrease) in Increase/(Decrease) in
December 31, 2016 PBO 2016 Pension Expense
Assumption +50 bps -50 bps +50 bps -50 bps
( in millions)
Discount Rate $ (45 ) $ 50 $ - $ (1 )
EROA N/A N/A (2 ) 2
RPI 29 (28 ) 1 (1 )



See Note 11-Pension and Other Postretirement Benefits to our consolidated
financial statements included in Item 8 of this report for further discussion of
our pension plans.



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Consolidation



We consolidate all entities that we control by ownership of a majority interest
and use the equity method to account for investments in affiliates that we do
not consolidate, but for which we have the ability to exercise significant
influence over operating and financial policies. Our consolidated net earnings
include our share of the net earnings of these companies plus the amortization
expense of certain tangible and intangible assets identified as part of purchase
accounting. Our judgment regarding the level of influence over our equity method
investments includes considering key factors such as ownership interest,
representation on the Board, participation in policy decisions and material
intercompany transactions. We regularly review for potential changes in the
consolidation of variable interest entities.
We eliminate from our consolidated financial results all significant
intercompany transactions.
Recent Accounting Pronouncements
See Note 3-New Accounting Standards to our consolidated financial statements
included in Item 8 of this report for a discussion of recent accounting
pronouncements.

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