Derivative Financial Instruments

9 Months Ended

Sep. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure

13.   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 products. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. The derivatives that we use to reduce our exposure to changes in prices for natural gas are primarily natural gas fixed price swaps, basis swaps and options traded in the over-the-counter markets. These natural gas derivatives settle using primarily a NYMEX futures price index, which represents the basis for fair value at any given time. We enter into natural gas derivative contracts with respect to natural gas to be consumed by us in the future, and settlements of those derivative contracts are scheduled to coincide with our anticipated purchases of natural gas used to manufacture nitrogen products during those future periods. We use natural gas derivatives as an economic hedge of natural gas price risk, but without the application of hedge accounting. As a result, changes in fair value of these contracts are recognized in earnings. As of September 30, 2024, we had natural gas derivative contracts covering certain periods through March 2025.

As of September 30, 2024, our open natural gas derivative contracts consisted of natural gas basis swaps for 17.5 million MMBtus of natural gas. As of December 31, 2023, we had open natural gas derivative contracts consisting of natural gas fixed price swaps, basis swaps and options for 49.0 million MMBtus of natural gas. For the nine months ended September 30, 2024, we used derivatives to cover approximately 20% of our natural gas consumption.

The effect of derivatives in our consolidated statements of operations is shown in the table below.

	Gain (loss) recognized in income
		Three months ended   September 30,				Nine months ended   September 30,
	Location	2024		2023		2024		2023
		(in millions)
Unrealized net (losses) gains on natural gas derivatives	Cost of sales	$	(1)	$	(7)	$	33	$	65
Realized net losses on natural gas derivatives	Cost of sales	(1)		(1)		(39)		(119)
Net derivative losses		$	(2)	$	(8)	$	(6)	$	(54)

The fair values of derivatives on our consolidated balance sheets are shown below. As of September 30, 2024 and December 31, 2023, none of our derivative instruments were designated as hedging instruments. See Note 9—Fair Value Measurements for additional information on derivative fair values.

	Asset Derivatives					Liability Derivatives
	Balance Sheet  Location	September 30,  2024		December 31,  2023		Balance Sheet Location	September 30,  2024		December 31,  2023
		(in millions)					(in millions)
Natural gas derivatives	Other current assets	$	4	$	1	Other current liabilities	$	(5)	$	(35)

Most of our International Swaps and Derivatives Association (ISDA) agreements contain credit-risk-related contingent features such as cross default provisions. In the event of certain defaults or termination events, our counterparties may request early termination and net settlement of certain derivative trades or, under certain ISDA agreements, may require us to collateralize derivatives in a net liability position. As of September 30, 2024 and December 31, 2023, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was $1 million and $34 million, respectively, which also approximates the fair value of the assets that may be needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. The credit support documents executed in connection with certain of our ISDA agreements generally provide us and our counterparties the right to set off collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event. As of September 30, 2024 and December 31, 2023, we had no cash collateral on deposit with counterparties for derivative contracts.

The following table presents amounts relevant to offsetting of our derivative assets and liabilities as of September 30, 2024 and December 31, 2023:

	Amounts presented in consolidated balance sheets(1)		Gross amounts not offset in consolidated balance sheets
			Financial instruments		Cash collateral received (pledged)		Net amount
	(in millions)
September 30, 2024
Total derivative assets	$	4	$	—	$	—	$	4
Total derivative liabilities	(5)		—		—		(5)
Net derivative liabilities	$	(1)	$	—	$	—	$	(1)
December 31, 2023
Total derivative assets	$	1	$	—	$	—	$	1
Total derivative liabilities	(35)		—		—		(35)
Net derivative liabilities	$	(34)	$	—	$	—	$	(34)

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(1)We report the fair values of our derivative assets and liabilities on a gross basis on our consolidated balance sheets. As a result, the gross amounts recognized and net amounts presented are the same.

We do not believe the contractually allowed netting, close-out netting or setoff of amounts owed to, or due from, the counterparties to our ISDA agreements would have a material effect on our financial position.