Derivative Financial Instruments

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Derivative financial instruments are executed on our behalf by an affiliate of the General Partner to reduce our exposure to changes in commodity prices for natural gas. Natural gas is the largest and most volatile component of the manufacturing cost for nitrogen-based fertilizers.

The derivatives that we use are primarily natural gas fixed price swaps and natural gas options traded in the over-the-counter (OTC) markets. The derivative contract prices are based on NYMEX future prices based on physical delivery of natural gas at the Henry Hub in Louisiana, the most common and financially liquid location of reference for derivative financial instruments related to natural gas. However, we purchase natural gas for our manufacturing facility from suppliers whose prices are based primarily on the ONEOK index (based on physical delivery of natural gas in Oklahoma, rather than at the Henry Hub). This creates a location basis differential between the derivative contract price and the price we pay for physical delivery of natural gas. Accordingly, the prices underlying the derivative financial instruments we use may not exactly match the prices of natural gas we purchase and consume. We enter into natural gas derivative contracts with respect to gas to be consumed by us in the future, and settlement 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 gas price risk, but without the application of hedge accounting.

We report derivatives on our consolidated balance sheets at fair value. Changes in fair value are recognized in cost of goods sold in the period of change. Cash flows related to natural gas derivatives are reported as operating activities.

The gross fair values of derivatives on our consolidated balance sheets are shown below. All balance sheet amounts from derivatives arise from natural gas derivatives that are not designated as hedging instruments. For additional information on derivative fair values, see Note 7—Fair Value Measurements.

	June 30, 2016			December 31, 2015
	(in millions)
Derivative Assets
Unrealized gains in other current assets	$	1.7		$	—
Unrealized gains in other assets	0.4			—
Total derivative assets	2.1			—
Derivative Liabilities
Unrealized losses in other current liabilities	(1.8		)	(15.9		)
Unrealized losses in other liabilities	(3.2		)	(12.0		)
Total derivative liabilities	(5.0		)	(27.9		)
Net derivative liabilities	$	(2.9	)	$	(27.9	)

The effect of derivatives in our consolidated statements of operations is shown below. All amounts arise from natural gas derivatives that are not designated as hedging instruments and are recorded in cost of goods sold.

	Three months ended   June 30,						Six months ended   June 30,
	2016			2015			2016			2015
	(in millions)
Unrealized net mark-to-market gains	$	27.3		$	2.6		$	25.0		$	6.5
Realized net losses	(7.6		)	(0.8		)	(15.0		)	(5.4		)
Net derivative gains	$	19.7		$	1.8		$	10.0		$	1.1

As of June 30, 2016 and December 31, 2015, we had open derivative contracts for 44.4 million MMBtus (millions of British thermal units) and 59.6 million MMBtus, respectively, of natural gas. The derivative portfolio at June 30, 2016 includes natural gas derivatives that hedge a portion of the remainder of 2016, and a portion of 2017 and 2018 anticipated natural gas purchases. For the six months ended June 30, 2016, we used derivatives to cover approximately 79% of our natural gas consumption.

As of June 30, 2016 and December 31, 2015, the aggregate fair values of the derivative instruments with credit-risk-related contingent features in a net liability position were $2.9 million and $27.9 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 June 30, 2016 and December 31, 2015, we had no cash collateral on deposit with counterparties for derivative contracts. The credit support documents executed in connection with International Swaps and Derivatives Association (ISDA) agreements generally provide the right to set off collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event.

The following table presents amounts relevant to offsetting of our derivative assets and liabilities as of June 30, 2016 and December 31, 2015:

	Gross and net 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)
June 30, 2016
Total derivative assets	$	2.1		$	2.1		$	—	$	—
Total derivative liabilities	(5.0		)	(2.1		)	—		(2.9		)
Net derivative liabilities	$	(2.9	)	$	—		$	—	$	(2.9	)
December 31, 2015
Total derivative assets	$	—		$	—		$	—	$	—
Total derivative liabilities	(27.9		)	—			—		(27.9		)
Net derivative liabilities	$	(27.9	)	$	—		$	—	$	(27.9	)

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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, amounts recognized and net amounts presented are the same.