Derivative Financial Instruments

12 Months Ended

Dec. 31, 2013

Derivative Financial Instruments

Derivative Financial Instruments

7.     Derivative Financial Instruments

        We purchase natural gas at market prices to meet production requirements at our manufacturing facility. Natural gas market prices are volatile, and we hedge a portion of our natural gas requirements through the use of financial derivative contracts that reference physical natural gas prices or approximate NYMEX futures contract prices. The derivatives that we currently use are natural gas swaps and options. The contract prices are based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, we purchase natural gas for our manufacturing facility at locations other than Henry Hub, which creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset changes in the market price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods.

        We report derivatives on our consolidated balance sheet at fair value. The gross fair values at December 31, 2013 and 2012 are shown below. All balance sheet amounts from derivatives arose from commodity derivatives that are not designated as hedging instruments. For additional information on derivative fair values, see Note 8—Fair Value Measurements.

	December 31,
	2013		2012
	(in millions)
Unrealized gains in other current assets	$	7.8	$	0.2
Unrealized losses in other current liabilities		—		(1.0	)
Net unrealized derivative gains (losses)	$	7.8	$	(0.8	)

        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.

	Year ended December 31,
	2013			2012			2011
	(in millions)
Unrealized mark-to-market gains (losses)	$	9.1		$	10.6		$	(11.9	)
Realized losses		(0.8	)		(24.3	)		(11.2	)
Net derivative gains (losses)	$	8.3		$	(13.7	)	$	(23.1	)

        As of December 31, 2013 and 2012, we had open derivative contracts for 13.2 million MMBtus and 9.9 million MMBtus, respectively, of natural gas. For the year ended December 31, 2013, we used derivatives to cover approximately 91% of our natural gas consumption.

        The counterparties to our derivatives are large financial institutions and large oil and gas companies. The derivatives are executed with several counterparties, generally under International Swaps and Derivatives Association (ISDA) agreements. The ISDA agreements are master netting arrangements commonly used for over-the-counter (OTC) derivatives that mitigate exposure to counterparty credit risk, in part, by creating contractual rights of netting and setoff, the specifics of which vary from agreement to agreement. These rights are described further below:

• •

  Settlement netting generally allows the parties to net, into a single net payable or receivable, ordinary settlement obligations arising under the ISDA agreement on the same day, in the same currency, for the same types of derivative instruments, and through the same pairing of offices.

  •

  Close-out netting rights are provided in the event of a default or other termination event (as defined in the ISDA agreements), including bankruptcy. Depending on the cause of early termination, the non-defaulting party may elect to accelerate and terminate all or some transactions outstanding under the ISDA agreement. The values of all terminated transactions and certain other payments under the ISDA agreement are netted, resulting in a single net close-out amount payable to or by the non-defaulting party. Termination values may be determined using a mark-to-market approach or based on a party's good faith estimate of its loss. If the final net close-out amount is payable by the non-defaulting party, that party's obligation to make the payment may be conditioned on factors such as the termination of all derivative transactions between the parties or payment in full of all of the defaulting party's obligations to the non-defaulting party, in each case regardless of whether arising under the ISDA agreement or otherwise.

  •

  Setoff rights are provided by certain of the ISDA agreements and generally allow a non-defaulting party to elect to setoff, against the final net close-out payment, other matured and contingent amounts payable between the parties under the ISDA agreement or otherwise. Typically, these setoff rights arise upon the early termination of all transactions outstanding under an ISDA agreement following a default or specified termination event.

        Most of the ISDA agreements contain credit risk related contingent features with sliding-scale credit support thresholds that are dependent upon credit ratings assigned to certain debt of the General Partner affiliate by certain credit rating agencies. Downgrades in the credit ratings would cause the applicable threshold levels to decrease and improvements in those ratings could cause the threshold levels to increase. If our net liability positions exceed the threshold amounts, the counterparties could require cash collateral, some other form of credit support or daily cash settlement of unrealized losses. As of December 31, 2013 and 2012, the aggregate fair values of the derivative instruments with credit-risk-related contingent features in a net liability position were zero and $0.8 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. At December 31, 2013 and 2012, we had no cash collateral on deposit for derivative contracts. The credit support documents executed in connection with ISDA agreements generally provide the right to setoff 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 December 31, 2013 and 2012.

				Gross amounts not offset in consolidated balance sheet
	Gross and net amounts presented in consolidated balance sheet(1)
				Financial instruments		Cash collateral received (pledged)		Net amount
December 31, 2013
Total derivative assets	$	7.8		$	—	$	—	$	7.8
Total derivative liabilities		—			—		—		—
Net assets (liabilities)	$	7.8		$	—	$	—	$	7.8
December 31, 2012
Total derivative assets	$	0.2		$	0.2	$	—	$	—
Total derivative liabilities		1.0			0.2		—		0.8
Net assets (liabilities)	$	(0.8	)	$	—	$	—	$	(0.8	)

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