Derivative Financial Instruments

3 Months Ended

Mar. 31, 2017

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 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 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 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.

	March 31, 2017			December 31, 2016
	(in millions)
Derivative Assets
Unrealized gains in other current assets	$	1.9		$	7.9
Unrealized gains in other assets	—			1.1
Total derivative assets	1.9			9.0
Derivative Liabilities
Unrealized losses in other current liabilities	(0.5		)	—
Unrealized losses in other liabilities	(2.0		)	(1.6		)
Total derivative liabilities	(2.5		)	(1.6		)
Net derivative (liabilities) assets	$	(0.6	)	$	7.4

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   March 31,
	2017			2016
	(in millions)
Unrealized net mark-to-market losses	$	(7.9	)	$	(2.3	)
Realized net gains (losses)	0.3			(7.4		)
Net derivative losses	$	(7.6	)	$	(9.7	)

As of March 31, 2017 and December 31, 2016, we had open natural gas derivative contracts for 24.2 million MMBtus (millions of British thermal units) and 29.4 million MMBtus of natural gas, respectively. The derivative portfolio at March 31, 2017 includes natural gas derivatives that economically hedge a portion of anticipated natural gas purchases through December 2018. For the three months ended March 31, 2017, we used derivatives to cover approximately 46% of our natural gas consumption.

The counterparties to our derivative contracts are multinational commercial banks, major financial institutions and large energy companies. The derivatives are executed with several counterparties generally under International Swaps and Derivatives Association (ISDA) agreements. Most of the ISDA agreements contain credit-risk-related contingent features such as cross-default provisions and credit support thresholds that are dependent upon the credit ratings of the General Partner affiliate. In the event of certain defaults or a credit ratings downgrade of the General Partner affiliate, the counterparty may request early termination and net settlement of certain derivative trades or may require the General Partner affiliate to collateralize derivatives in a net liability position. The General Partner affiliate’s revolving credit agreement, at any time when it is secured, provides a cross collateral feature for those 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 General Partner affiliate's revolving credit agreement becomes unsecured, the General Partner affiliate could be required to post separate collateral in connection with such derivatives. As of March 31, 2017 and December 31, 2016, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in a net liability position was $2.5 million and $1.6 million, respectively, which also approximates the fair value of the maximum amount of assets needed to settle the obligations if the credit-risk-related contingent features were triggered and the General Partner affiliate was unable to post collateral at the reporting dates. As of March 31, 2017 and December 31, 2016, we and the General Partner affiliate had no cash collateral on deposit for derivative contracts. The credit support documents executed in connection with certain ISDA agreements generally provide the General Partner affiliate and the 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.

The following table presents amounts relevant to offsetting our derivative assets and liabilities as of March 31, 2017 and December 31, 2016:

	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)
March 31, 2017
Total derivative assets	$	1.9		$	1.9		$	—	$	—
Total derivative liabilities	(2.5		)	(1.9		)	—		(0.6		)
Net derivative liabilities	$	(0.6	)	$	—		$	—	$	(0.6	)
December 31, 2016
Total derivative assets	$	9.0		$	1.6		$	—	$	7.4
Total derivative liabilities	(1.6		)	(1.6		)	—		—
Net derivative assets	$	7.4		$	—		$	—	$	7.4

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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 herein are the same.