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Section 1: 10-Q (10-Q)

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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
10-Q
(Mark One)
 
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                               to                              
Commission file number 001-32597
CF INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 (State or other jurisdiction of
incorporation or organization)
 
20-2697511
 (I.R.S. Employer
Identification No.)
 
 
 
4 Parkway North, Suite 400
Deerfield, Illinois
 (Address of principal executive offices)
 
60015
 (Zip Code)
(847) 405-2400
 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
common stock, par value $0.01 per share
 
CF
 
New York Stock Exchange
221,077,667 shares of the registrant’s common stock, $0.01 par value per share, were outstanding at April 29, 2019.
 


Table of Contents
CF INDUSTRIES HOLDINGS, INC.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents
CF INDUSTRIES HOLDINGS, INC.



PART I—FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended 
 March 31,
 
2019
 
2018
 
(in millions, except per share amounts)
Net sales
$
1,001

 
$
957

Cost of sales
781

 
767

Gross margin
220

 
190

Selling, general and administrative expenses
58

 
57

Other operating—net
4

 
(21
)
Total other operating costs and expenses
62

 
36

Equity in earnings of operating affiliate
7

 
7

Operating earnings
165

 
161

Interest expense
60

 
60

Interest income
(4
)
 
(3
)
Other non-operating—net
(1
)
 
(1
)
Earnings before income taxes
110

 
105

Income tax (benefit) provision
(8
)
 
17

Net earnings
118

 
88

Less: Net earnings attributable to noncontrolling interests
28

 
25

Net earnings attributable to common stockholders
$
90

 
$
63

Net earnings per share attributable to common stockholders:
 

 
 

Basic
$
0.40

 
$
0.27

Diluted
$
0.40

 
$
0.27

Weighted-average common shares outstanding:
 

 
 

Basic
223.4

 
233.9

Diluted
224.6

 
234.8

Dividends declared per common share
$
0.30

 
$
0.30


See accompanying Notes to Unaudited Consolidated Financial Statements.


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three months ended 
 March 31,
 
2019
 
2018
 
(in millions)
Net earnings
$
118

 
$
88

Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustment—net of taxes
32

 
17

Defined benefit plans—net of taxes
(2
)
 
(1
)
 
30

 
16

Comprehensive income
148

 
104

Less: Comprehensive income attributable to noncontrolling interests
28

 
25

Comprehensive income attributable to common stockholders
$
120

 
$
79

See accompanying Notes to Unaudited Consolidated Financial Statements.


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CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
March 31,
2019
 
December 31,
2018
 
(in millions, except share
and per share amounts)
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
671

 
$
682

Accounts receivable—net
264

 
235

Inventories
446

 
309

Prepaid income taxes
1

 
28

Other current assets
30

 
20

Total current assets
1,412

 
1,274

Property, plant and equipment—net
8,471

 
8,623

Investment in affiliate
100

 
93

Goodwill
2,360

 
2,353

Operating lease right-of-use assets
285

 

Other assets
314

 
318

Total assets
$
12,942

 
$
12,661

Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
432

 
$
545

Income taxes payable
3

 
5

Customer advances
301

 
149

Current operating lease liabilities
85

 

Other current liabilities
5

 
6

Total current liabilities
826

 
705

Long-term debt
4,700

 
4,698

Deferred income taxes
1,135

 
1,117

Operating lease liabilities
203

 

Other liabilities
408

 
410

Equity:
 

 
 

Stockholders’ equity:
 

 
 

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

 

Common stock—$0.01 par value, 500,000,000 shares authorized, 2019—223,070,183 shares issued and 2018—233,800,903 shares issued
2

 
2

Paid-in capital
1,311

 
1,368

Retained earnings
2,047

 
2,463

Treasury stock—at cost, 2019—1,546,005 shares and 2018—10,982,408 shares
(64
)
 
(504
)
Accumulated other comprehensive loss
(341
)
 
(371
)
Total stockholders’ equity
2,955

 
2,958

Noncontrolling interests
2,715

 
2,773

Total equity
5,670

 
5,731

Total liabilities and equity
$
12,942

 
$
12,661

See accompanying Notes to Unaudited Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
Common Stockholders
 
 
 
 
 
$0.01 Par
Value
Common
Stock
 
Treasury
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’ Equity
 
Noncontrolling
Interests
 
Total
Equity
 
(in millions, except per share amounts)
Balance as of December 31, 2018
$
2

 
$
(504
)
 
$
1,368

 
$
2,463

 
$
(371
)
 
$
2,958

 
$
2,773

 
$
5,731

Net earnings

 

 

 
90

 

 
90

 
28

 
118

Other comprehensive income

 

 

 

 
30

 
30

 

 
30

Purchases of treasury stock

 
(60
)
 

 

 

 
(60
)
 

 
(60
)
Retirement of treasury stock

 
504

 
(65
)
 
(439
)
 

 

 

 

Acquisition of treasury stock under employee stock plans

 
(4
)
 

 

 

 
(4
)
 

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

 

 
2

 

 

 
2

 

 
2

Stock-based compensation expense

 

 
6

 

 

 
6

 

 
6

Cash dividends ($0.30 per share)

 

 

 
(67
)
 

 
(67
)
 

 
(67
)
Distribution declared to noncontrolling interest

 

 

 

 

 

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

 
$
(64
)
 
$
1,311

 
$
2,047

 
$
(341
)
 
$
2,955

 
$
2,715

 
$
5,670

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
$
2

 
$

 
$
1,397

 
$
2,443

 
$
(263
)
 
$
3,579

 
$
3,105

 
$
6,684

Adoption of ASU No. 2014-09

 

 

 
(1
)
 

 
(1
)
 

 
(1
)
Adoption of ASU No. 2016-01

 

 

 
1

 
(1
)
 

 

 

Net earnings

 

 

 
63

 

 
63

 
25

 
88

Other comprehensive income

 

 

 

 
16

 
16

 

 
16

Acquisition of treasury stock under employee stock plans

 
(1
)
 

 

 

 
(1
)
 

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

 

 
2

 

 

 
2

 

 
2

Stock-based compensation expense

 

 
6

 

 

 
6

 

 
6

Cash dividends ($0.30 per share)

 

 

 
(70
)
 

 
(70
)
 

 
(70
)
Distributions declared to noncontrolling interests

 

 

 

 

 

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

 
$
(1
)
 
$
1,405

 
$
2,436

 
$
(248
)
 
$
3,594

 
$
3,071

 
$
6,665

See accompanying Notes to Unaudited Consolidated Financial Statements.



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended 
 March 31,
 
2019
 
2018
 
(in millions)
Operating Activities:
 

 
 

Net earnings
$
118

 
$
88

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

 
 

Depreciation and amortization
188

 
193

Deferred income taxes
14

 
29

Stock-based compensation expense
6

 
6

Unrealized net loss (gain) on natural gas derivatives
2

 
(3
)
Unrealized loss on embedded derivative
1

 

Loss on disposal of property, plant and equipment
1

 

Undistributed earnings of affiliate—net of taxes
(8
)
 
(3
)
Changes in:
 

 
 

Accounts receivable—net
(28
)
 
61

Inventories
(101
)
 
(97
)
Accrued and prepaid income taxes
24

 
(14
)
Accounts payable and accrued expenses
(65
)
 
(24
)
Customer advances
152

 
65

Other—net
2

 
(19
)
Net cash provided by operating activities
306

 
282

Investing Activities:
 

 
 

Additions to property, plant and equipment
(80
)
 
(68
)
Proceeds from sale of property, plant and equipment
5

 
8

Distributions received from unconsolidated affiliate

 
4

Other—net

 
1

Net cash used in investing activities
(75
)
 
(55
)
Financing Activities:
 

 
 

Financing fees

 
1

Dividends paid on common stock
(67
)
 
(70
)
Distributions to noncontrolling interests
(86
)
 
(59
)
Purchases of treasury stock
(87
)
 

Issuances of common stock under employee stock plans
2

 
2

Shares withheld for taxes
(4
)
 
(1
)
Net cash used in financing activities
(242
)
 
(127
)
Effect of exchange rate changes on cash and cash equivalents

 
1

(Decrease) increase in cash and cash equivalents
(11
)
 
101

Cash and cash equivalents at beginning of period
682

 
835

Cash and cash equivalents at end of period
$
671

 
$
936

See accompanying Notes to Unaudited Consolidated Financial Statements.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.   Background and Basis of Presentation
We are a leading global fertilizer and chemical company. Our 3,000 employees operate world-class manufacturing complexes in Canada, the United Kingdom and the United States. Our principal customers are cooperatives, independent fertilizer distributors, traders, wholesalers, farmers and industrial users. Our principal nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Our other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to our industrial customers, and compound fertilizer products (NPKs), which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus, and potassium. We serve our customers in North America through our production, storage, transportation and distribution network. We also reach a global customer base with exports from our Donaldsonville, Louisiana, plant, the world’s largest and most flexible nitrogen complex. Additionally, we move product to international destinations from our Verdigris, Oklahoma, facility, our Yazoo City, Mississippi, facility, our Billingham and Ince facilities in the United Kingdom, and from a joint venture ammonia facility in the Republic of Trinidad and Tobago in which we own a 50 percent interest.
All references to “CF Holdings,” “the Company,” “we,” “us” and “our” refer to CF Industries Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only to CF Industries Holdings, Inc. itself and not its subsidiaries. All references to “CF Industries” refer to CF Industries, Inc., a 100% owned subsidiary of CF Industries Holdings, Inc.
The accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2018, in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting. In the opinion of management, these statements reflect all adjustments, consisting only of normal and recurring adjustments, that are necessary for the fair representation of the information for the periods presented. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period.
The accompanying unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related disclosures included in our 2018 Annual Report on Form 10-K filed with the SEC on February 22, 2019. The preparation of the unaudited interim consolidated financial statements requires us to make use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, net realizable value of inventories, environmental remediation liabilities, environmental and litigation contingencies, the cost of customer incentives, useful lives of property and identifiable intangible assets, the assumptions used in the evaluation of potential impairments of property, investments, identifiable intangible assets and goodwill, income tax and valuation reserves, allowances for doubtful accounts receivable, the measurement of the fair values of investments for which markets are not active, assumptions used in the determination of the funded status and annual expense of defined benefit pension and other postretirement benefit plans and the assumptions used in the valuation of stock-based compensation awards granted to employees.


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2.   New Accounting Standards
Recently Adopted Pronouncements
On January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in ASC Topic 840, Leases. This ASU requires lessees to recognize the rights and obligations resulting from virtually all leases (other than leases that meet the definition of a short-term lease) on their balance sheets as right-of-use assets with corresponding lease liabilities. Extensive quantitative and qualitative disclosures, including significant judgments made by management, are required to provide greater insight into the extent of income and expense recognized and expected to be recognized from existing contracts. We elected the optional transition method provided under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides the option to adopt ASU No. 2016-02 as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative effect adjustment we recognized in the opening balance of retained earnings as of January 1, 2019 was not material. In addition, we elected the package of practical expedients permitted under the transition guidance within ASU No. 2016-02, which allows us to carry forward the historical lease determination, lease classification, and assessment of initial direct costs. See Note 13—Leases for additional information.
On January 1, 2019, we adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements. The adoption of this ASU had no effect on our consolidated financial statements.
Recently Issued Pronouncements
In August 2018, the Financial Accounting Standards Board issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU does not affect the accounting for the service element of a hosting arrangement that is a service contract. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019 and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. We plan to adopt this ASU prospectively and are currently evaluating the impact that our adoption of this ASU will have on our consolidated financial statements.

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3.   Revenue Recognition
We track our revenue by product and by geography. See Note 17—Segment Disclosures for our revenue by reportable segment, which are ammonia, granular urea, UAN, AN and Other. The following table summarizes our revenue by product and by geography (based on destination of our shipment) for the three months ended March 31, 2019 and 2018:
 
Ammonia
 
Granular
Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Three months ended March 31, 2019
 

 
 

 
 

 
 
 
 

 
 

North America
$
160

 
$
335

 
$
242

 
$
46

 
$
59

 
$
842

Europe and other
27

 
8

 
14

 
81

 
29

 
159

Total revenue
$
187

 
$
343

 
$
256

 
$
127

 
$
88

 
$
1,001

Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 

 
 

North America
$
168

 
$
264

 
$
246

 
$
45

 
$
59

 
$
782

Europe and other
44

 

 
37

 
55

 
39

 
175

Total revenue
$
212

 
$
264

 
$
283

 
$
100

 
$
98

 
$
957


As of March 31, 2019 and December 31, 2018, we had $301 million and $149 million, respectively, in customer advances on our consolidated balance sheets. The revenue recognized during the three months ended March 31, 2019 and 2018 that was included in our customer advances at the beginning of each respective period amounted to approximately $85 million and $65 million, respectively.
We offer cash incentives to certain customers based on the volume of their purchases over a certain period. These incentives do not provide an option to the customer for additional product. The balances of customer incentives accrued at March 31, 2019 and December 31, 2018 were not material.
We have certain customer contracts with performance obligations where if the customer does not take the required amount of product specified in the contract, then the customer is required to make a payment to us, which may vary based upon the terms and conditions of the applicable contract. As of March 31, 2019, excluding contracts with original durations of less than one year, and based on the minimum product tonnage to be sold and current market price estimates, our remaining performance obligations under these contracts are approximately $1.3 billion. We expect to recognize approximately 19% of these performance obligations as revenue in the remainder of 2019, approximately 42% as revenue during 2020 and 2021, approximately 26% as revenue during 2022 and 2023, and the remainder thereafter. If these customers do not fulfill their contractual obligations under such contracts, the legally enforceable minimum amount that they would pay to us under these contracts, in the aggregate, is approximately $285 million as of March 31, 2019. Other than the performance obligations described above, any performance obligations with our customers that were unfulfilled or partially filled at December 31, 2018 will be satisfied in 2019.


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4.   Net Earnings Per Share
Net earnings per share were computed as follows:
 
Three months ended 
 March 31,
 
2019
 
2018
 
(in millions, except per share amounts)
Net earnings attributable to common stockholders
$
90

 
$
63

Basic earnings per common share:
 

 
 

Weighted-average common shares outstanding
223.4

 
233.9

Net earnings attributable to common stockholders
$
0.40

 
$
0.27

Diluted earnings per common share:
 

 
 

Weighted-average common shares outstanding
223.4

 
233.9

Dilutive common shares—stock options
1.2

 
0.9

Diluted weighted-average shares outstanding
224.6

 
234.8

Net earnings attributable to common stockholders
$
0.40

 
$
0.27


In the computation of diluted earnings per common share, potentially dilutive stock options are excluded if the effect of their inclusion is anti-dilutive. Shares for anti-dilutive stock options not included in the computation of diluted earnings per common share were 1.5 million and 2.0 million for the three months ended March 31, 2019 and 2018, respectively.
5.   Inventories
Inventories consist of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Finished goods
$
405

 
$
272

Raw materials, spare parts and supplies
41

 
37

Total inventories
$
446

 
$
309



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6.   Property, Plant and Equipment—Net
Property, plant and equipment—net consists of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Land
$
70

 
$
69

Machinery and equipment
12,162

 
12,127

Buildings and improvements
882

 
886

Construction in progress
210

 
225

Property, plant and equipment(1)
13,324

 
13,307

Less: Accumulated depreciation and amortization
4,853

 
4,684

Property, plant and equipment—net
$
8,471

 
$
8,623

_______________________________________________________________________________
(1) 
As of March 31, 2019 and December 31, 2018, we had property, plant and equipment that was accrued but unpaid of approximately $26 million and $48 million, respectively. As of March 31, 2018 and December 31, 2017, we had property, plant and equipment that was accrued but unpaid of $42 million and $46 million, respectively.

During the first quarter of 2019, we entered into an agreement to sell our Pine Bend dry bulk storage and logistics facility in Minnesota. As of March 31, 2019, the assets met the criteria to be classified as held for sale and, as a result, we reclassified the carrying value of the assets of $10 million from property, plant and equipment—net to other current assets on our consolidated balance sheet. See Note 19—Subsequent Event for additional information.
Depreciation and amortization related to property, plant and equipment was $183 million and $185 million for the three months ended March 31, 2019 and 2018, respectively.
Plant turnarounds—Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facilities during a full plant shutdown are referred to as plant turnarounds. The expenditures related to turnarounds are capitalized in property, plant and equipment when incurred. The following is a summary of capitalized plant turnaround costs:
 
Three months ended 
 March 31,
 
2019
 
2018
 
(in millions)
Net capitalized turnaround costs:
 

 
 

Beginning balance
$
252

 
$
208

Additions
9

 
20

Depreciation
(30
)
 
(28
)
Effect of exchange rate changes
2

 
1

Ending balance
$
233

 
$
201


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

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7Goodwill and Other Intangible Assets
The following table shows the carrying amount of goodwill by reportable segment as of March 31, 2019 and December 31, 2018:
 
Ammonia
 
Granular Urea
 
UAN
 
AN
 
Other
 
Total
 
(in millions)
Balance as of December 31, 2018
$
586

 
$
828

 
$
576

 
$
292

 
$
71

 
$
2,353

Effect of exchange rate changes

 

 

 
6

 
1

 
7

Balance as of March 31, 2019
$
586

 
$
828

 
$
576

 
$
298

 
$
72

 
$
2,360


All of our identifiable intangible assets have definite lives and are presented in other assets on our consolidated balance sheets at gross carrying amount, net of accumulated amortization, as follows:
 
March 31, 2019
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
(in millions)
Customer relationships
$
129

 
$
(40
)
 
$
89

 
$
127

 
$
(37
)
 
$
90

TerraCair brand

 

 

 
10

 
(10
)
 

Trade names
32

 
(6
)
 
26

 
30

 
(5
)
 
25

Total intangible assets
$
161

 
$
(46
)
 
$
115

 
$
167

 
$
(52
)
 
$
115


Our intangible assets are being amortized over a weighted-average life of approximately 20 years. Amortization expense of our identifiable intangible assets for each of the three-month periods ended March 31, 2019 and 2018 was $2 million. The gross carrying amount and accumulated amortization of our intangible assets are also impacted by the effect of exchange rate changes. Total estimated amortization expense for the remainder of 2019 and each of the five succeeding fiscal years is as follows:
 
Estimated
Amortization
Expense
 
(in millions)
Remainder of 2019
$
6

2020
8

2021
8

2022
8

2023
8

2024
8


8.  Equity Method Investment
We have a 50% ownership interest in Point Lisas Nitrogen Limited (PLNL), which operates an ammonia production facility in the Republic of Trinidad and Tobago. We include our share of the net earnings from this equity method investment as an element of earnings from operations because PLNL provides additional production to our operations and is integrated with our other supply chain and sales activities in the ammonia segment.
As of March 31, 2019, the total carrying value of our equity method investment in PLNL was $100 million, $48 million more than our share of PLNL’s book value. The excess is attributable to the purchase accounting impact of our acquisition of the investment in PLNL and reflects the revaluation of property, plant and equipment. The increased basis for property, plant and equipment is being amortized over a remaining period of approximately 14 years. Our equity in earnings of PLNL is different from our ownership interest in income reported by PLNL due to amortization of this basis difference.
We have transactions in the normal course of business with PLNL reflecting our obligation to purchase 50% of the ammonia produced by PLNL at current market prices. Our ammonia purchases from PLNL totaled $22 million and $29 million for the three months ended March 31, 2019 and 2018, respectively.

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The Trinidadian tax authority (the Board of Inland Revenue) has issued PLNL a tax assessment with respect to tax years 2011 and 2012 in the aggregate amount of approximately $12 million, in addition to interest and penalties with respect to tax years 2011 and 2012 in the aggregate amount of approximately $22 million, for alleged underpayment of withholding taxes on distributions made by PLNL to its owners. Since we own a 50% interest in PLNL, our effective share of any assessment that is determined to be a liability of PLNL would be 50%, which would be reflected as a reduction in our equity in earnings of PLNL. The Board of Inland Revenue has not provided PLNL with the legal or factual basis for the assessment. As a result, PLNL cannot assess the likelihood of the outcome of this matter and we cannot assess the potential foreign tax credit we may be eligible for, if the withholding tax amount was determined to be a liability of PLNL.
9.  Fair Value Measurements
Our cash and cash equivalents and other investments consist of the following:
 
March 31, 2019
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
73

 
$

 
$

 
$
73

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
562

 

 

 
562

Other debt securities
36

 

 

 
36

Total cash and cash equivalents
$
671

 
$

 
$

 
$
671

Nonqualified employee benefit trusts
17

 
2

 

 
19

 
December 31, 2018
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
(in millions)
Cash
$
34

 
$

 
$

 
$
34

Cash equivalents:
 
 
 
 
 
 
 
U.S. and Canadian government obligations
623

 

 

 
623

Other debt securities
25

 

 

 
25

Total cash and cash equivalents
$
682

 
$

 
$

 
$
682

Nonqualified employee benefit trusts
17

 
2

 

 
19


Under our short-term investment policy, we may invest our cash balances, either directly or through mutual funds, in several types of investment-grade securities, including notes and bonds issued by governmental entities or corporations. Securities issued by governmental entities include those issued directly by the U.S. and Canadian federal governments; those issued by state, local or other governmental entities; and those guaranteed by entities affiliated with governmental entities.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present assets and liabilities included in our consolidated balance sheets as of March 31, 2019 and December 31, 2018 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
 
March 31, 2019
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Cash equivalents
$
598

 
$
598

 
$

 
$

Nonqualified employee benefit trusts
19

 
19

 

 

Embedded derivative liability
(22
)
 

 
(22
)
 

 
December 31, 2018
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Cash equivalents
$
648

 
$
648

 
$

 
$

Nonqualified employee benefit trusts
19

 
19

 

 

Embedded derivative liability
(21
)
 

 
(21
)
 


Cash Equivalents
As of March 31, 2019 and December 31, 2018, our cash equivalents consisted primarily of U.S. and Canadian government obligations and money market mutual funds that invest in U.S. government obligations and other investment-grade securities.
Nonqualified Employee Benefit Trusts
We maintain trusts associated with certain nonqualified supplemental pension plans. The fair values of the trust assets are based on daily quoted prices in an active market, which represents the net asset values of the shares held in the trusts, and are included on our consolidated balance sheets in other assets. Debt securities are accounted for as available-for-sale securities. Changes in the fair value of equity securities in the trust assets are recognized through earnings.
Embedded Derivative Liability
Under the terms of our strategic venture with CHS Inc. (CHS), if our credit rating as determined by two of three specified credit rating agencies is below certain levels, we are required to make a non-refundable yearly payment of $5 million to CHS. Since our credit ratings were below certain levels in 2016, 2017 and 2018, we made a payment of $5 million to CHS in the fourth quarter of each year. These payments will continue on a yearly basis until the earlier of the date that our credit rating is upgraded to or above certain levels by two of the three specified credit rating agencies or February 1, 2026. This obligation is recognized on our consolidated balance sheets as an embedded derivative. As of March 31, 2019 and December 31, 2018, the embedded derivative liability of $22 million and $21 million, respectively, is included in other current liabilities and other liabilities on our consolidated balance sheets. Included in other operating—net in our consolidated statement of operations for the three months ended March 31, 2019 is a net loss of $1 million. For the three months ended March 31, 2018, no loss was recognized.
The inputs into the fair value measurement include the probability of future upgrades and downgrades of our credit rating based on historical credit rating movements of other public companies and the discount rates to be applied to potential annual payments based on applicable credit spreads of other public companies at different credit rating levels. Based on these inputs, our fair value measurement is classified as Level 2.
See Note 14—Noncontrolling Interests for additional information regarding our strategic venture with CHS.

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Financial Instruments
The carrying amount and estimated fair value of our financial instruments are as follows:
 
March 31, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(in millions)
Long-term debt
$
4,700

 
$
4,555

 
$
4,698

 
$
4,265


The fair value of our long-term debt was based on quoted prices for identical or similar liabilities in markets that are not active or valuation models in which all significant inputs and value drivers are observable and, as a result, they are classified as Level 2 inputs.
The carrying amounts of cash and cash equivalents, as well as instruments included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair values because of their short-term maturities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have assets and liabilities that may be measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment, when there is allocation of purchase price in an acquisition or when a new liability is being established that requires fair value measurement. These include long-lived assets, goodwill and other intangible assets and investments in unconsolidated subsidiaries, such as equity method investments, which may be written down to fair value as a result of impairment. The fair value measurements related to each of these rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets. Since certain of the Company’s assumptions would involve inputs that are not observable, these fair values would reside within Level 3 of the fair value hierarchy.
10.   Income Taxes
For the three months ended March 31, 2019, we recorded an income tax benefit of $8 million on pre-tax income of $110 million, or an effective tax rate of (7.3)%, compared to an income tax provision of $17 million on pre-tax income of $105 million, or an effective tax rate of 15.8%, for the three months ended March 31, 2018.
For the three months ended March 31, 2019, our income tax benefit includes an incentive tax credit from the State of Louisiana of $30 million, net of federal income tax, related to certain capital projects at our Donaldsonville, Louisiana complex.
Our effective tax rate is also impacted by earnings attributable to noncontrolling interests in CF Industries Nitrogen, LLC (CFN) and in the first quarter of 2018 by earnings attributable to the noncontrolling interests in Terra Nitrogen Company, L.P. (TNCLP), as our consolidated income tax provision (benefit) does not include a tax provision on the earnings attributable to the noncontrolling interests. Our effective tax rate for the three months ended March 31, 2019 of (7.3)%, which is based on pre-tax income of $110 million, would be 27.4% exclusive of the earnings attributable to the noncontrolling interests of $28 million and the incentive tax credit of $30 million. Our effective tax rate for the three months ended March 31, 2018 of 15.8%, which is based on pre-tax income of $105 million, would be 20.8% exclusive of the earnings attributable to the noncontrolling interests of $25 million. See Note 14—Noncontrolling Interests for additional information.

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11.   Interest Expense
Details of interest expense are as follows:
 
Three months ended 
 March 31,
 
2019
 
2018
 
(in millions)
Interest on borrowings(1)
$
57

 
$
57

Fees on financing agreements(1)
3

 
3

Interest on tax liabilities

 
1

Interest capitalized

 
(1
)
Total interest expense
$
60

 
$
60


_______________________________________________________________________________
(1) 
See Note 12—Financing Agreements for additional information.
12.  Financing Agreements
Revolving Credit Agreement
We have a senior secured revolving credit agreement (the Revolving Credit Agreement) providing for a revolving credit facility of up to $750 million with a maturity of September 18, 2020. The Revolving Credit Agreement includes a letter of credit sub-limit of $125 million. Borrowings under the Revolving Credit Agreement may be used for working capital and general corporate purposes. CF Industries, the borrower under the Revolving Credit Agreement, may also designate as borrowers one or more wholly owned subsidiaries that are organized in the United States or any state thereof or the District of Columbia.
Borrowings under the Revolving Credit Agreement may be denominated in dollars, Canadian dollars, euros and British pounds, and bear interest at a per annum rate equal to an applicable eurocurrency rate or base rate plus, in either case, a specified margin, and the borrowers are required to pay an undrawn commitment fee on the undrawn portion of the commitments under the Revolving Credit Agreement and customary letter of credit fees. The specified margin and the amount of the commitment fee depend on CF Holdings’ credit rating at the time.
The guarantors under the Revolving Credit Agreement are currently comprised of CF Holdings and CF Holdings’ wholly owned subsidiaries CF Industries Enterprises, LLC (CFE), CF Industries Sales, LLC (CFS), CF USA Holdings, LLC (CF USA) and CF Industries Distribution Facilities, LLC (CFIDF).
As of March 31, 2019, we had excess borrowing capacity under the Revolving Credit Agreement of $750 million and no outstanding letters of credit. There were no borrowings outstanding under the Revolving Credit Agreement as of March 31, 2019 or December 31, 2018, or during the three months ended March 31, 2019.
The Revolving Credit Agreement contains representations and warranties and affirmative and negative covenants, including financial covenants. As of March 31, 2019, we were in compliance with all covenants under the Revolving Credit Agreement.
Letters of Credit
In addition to the letter of credit capacity under the Revolving Credit Agreement, as described above, we have also entered into a bilateral agreement with capacity to issue letters of credit up to $145 million (reflecting an increase of $20 million in January 2019). As of March 31, 2019, approximately $127 million of letters of credit were outstanding under this agreement.

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Senior Notes
Long-term debt presented on our consolidated balance sheets as of March 31, 2019 and December 31, 2018 consisted of the following Public Senior Notes (unsecured) and Senior Secured Notes issued by CF Industries:
 
Effective Interest Rate
 
March 31, 2019
 
December 31, 2018
 
 
Principal
 
Carrying Amount (1)
 
Principal
 
Carrying Amount (1)
 
 
 
(in millions)
Public Senior Notes: