Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

2.     Summary of Significant Accounting Policies

Consolidation

        The consolidated financial statements of TNCLP and the accompanying notes include the accounts of the Partnership. All intercompany transactions and balances have been eliminated. Income is allocated to the General Partner and the limited partners in accordance with the provisions of the TNCLP agreement of limited partnership that provides for allocations of income between the limited partners and the General Partner in the same proportion as cash distributions declared during the year.

Revenue Recognition

        The basic criteria necessary for revenue recognition are: 1) evidence that a sales arrangement exists, 2) delivery of goods has occurred, 3) the seller's price to the buyer is fixed or determinable, and 4) collectability is reasonably assured. We recognize revenue when these criteria have been met and when title and risk of loss have been transferred to the customer.

Cash and Cash Equivalents

        Cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less. The carrying value of cash and cash equivalents approximates fair value.

Demand Deposits with Affiliate

        Our cash receipts are received by CF Industries. Cash receipts, net of cash payments made by CF Industries, are transferred to us from CF Industries weekly. As a result of this cash collection and distribution arrangement, CF Industries can be either a debtor or a creditor to us.

Accounts Receivable and Allowance for Doubtful Accounts

        Accounts receivable are recorded at face amounts less an allowance for doubtful accounts. The allowance is an estimate based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts receivable. A receivable is past due if payments have not been received within the agreed upon invoice terms. Account balances are charged-off against the allowance when management determines that it is probable the receivable will not be recovered.

Inventories

        Fertilizer inventories are reported at the lower of cost or net realizable value and are determined on a first-in, first-out or average cost basis. Inventories include the cost of materials, production labor and production overhead. Net realizable value is reviewed monthly. Fixed production costs related to idle capacity are not included in the cost of inventories but are charged directly to cost of sales.

Property, Plant and Equipment

        Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method. Depreciable lives range from 10 to 45 years for buildings and 10 to 30 years for production facilities and related assets. We periodically review the depreciable lives assigned to production facilities and related assets and we change the estimates to reflect the results of those reviews.

Plant Turnaround Costs

        Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facility are referred to as plant turnarounds. Plant turnarounds are accounted for 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 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 5 years. If the direct expense method were used, all turnaround costs would be expensed as incurred. 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. For additional information, see Note 10—Plant Turnarounds, Net.

Recoverability of Long-Lived Assets

        We review property, plant and equipment and other long-lived assets in order to assess recoverability based on expected future undiscounted cash flows whenever events or circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future net cash flows is less than the carrying value, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset.

Leases

        Leases are classified as either operating leases or capital leases. Assets acquired under capital leases are depreciated on the same basis as property, plant and equipment. We currently do not have any capital leases. Rental payments, including rent holidays, leasehold incentives, and scheduled rent increases are expensed on a straight-line basis. Leasehold improvements are amortized over the shorter of the depreciable lives of the corresponding fixed assets or the lease term including any applicable renewals.

Income Taxes

        As a partnership, we are not subject to income taxes. The income tax liability of the individual partners is not reflected in our consolidated financial statements.

Derivative Financial Instruments

        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 and UAN. We manage the risk of changes in natural gas prices through the use of physical gas supply contracts and derivative financial instruments. The derivative instruments currently used are swaps. These contracts reference NYMEX futures contract prices, which represent fair value at any given time. The contracts are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. We do not use derivatives for trading purposes and are not a party to any leveraged derivatives.

        Prior to the second quarter of 2010, we classified our natural gas derivatives as cash flow hedges if the item to be hedged exposed us to currency, interest or price risk; if it was probable that the results of the hedge position substantially offset the effects of the risk; and if the hedge designation occurred at the inception of the hedge. If the derivative was designated as a cash flow hedge, and to the extent such hedge was determined to be effective, changes in fair value were reported as a component of accumulated other comprehensive income (AOCI) in the period of change, and subsequently recognized in earnings in the period the offsetting hedged transaction occurred.

        In the second quarter of 2010, we discontinued hedge accounting in order to align our accounting policy with CF Industries'. At that time, all open cash flow hedges were de-designated, resulting in changes in fair value thereafter being recognized in cost of sales. The remaining balance in AOCI relating to derivatives that were originally designated as cash flow hedges was reclassified into earnings as derivatives settled during the second quarter of 2010.

        Derivatives are recognized in the consolidated balance sheet at fair value. Cash flows related to natural gas derivatives are reported as operating activities. For additional information, see Note 7—Derivative Financial Instruments.

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 liabilities as incurred when sufficient information exists to estimate fair value. When initially recognized, the fair value based on discounted future cash flows is recorded both as a liability and an increase in the carrying amount of the related long-lived asset. In subsequent periods, depreciation of the asset and accretion of the liability are recorded. For additional information on AROs, see Note 11—Asset Retirement Obligations.

Environmental

        Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations are expensed. Expenditures that increase the capacity or extend the useful life of an asset, improve the safety or efficiency of the operations, or mitigate or prevent future environmental contamination are capitalized. Liabilities are recorded when it is probable that a liability has been incurred and the costs can be reasonably estimated. Environmental liabilities are not discounted.

Litigation

        From time to time, the Partnership is subject to ordinary, routine legal proceedings related to the usual conduct of its business. The Partnership also is involved in legal proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of its plant and facilities. Accruals for such contingencies are recorded to the extent management concludes their occurrence is probable and the financial impact of an adverse outcome is reasonably estimable. Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, many factors are considered. These factors include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. If the assessment of various factors changes, the estimates may change. Predicting the outcome of claims and litigation, and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.