Derivative Financial Instruments

6 Months Ended

Jun. 30, 2014

Derivative Financial Instruments

Derivative Financial Instruments

7. Derivative Financial Instruments

        Derivative financial instruments are executed on our behalf by an affiliate of the General Partner to manage the volatility in our natural gas prices. We report derivatives on our consolidated balance sheets at fair value. Changes in fair value are recognized in cost of sales in the period of change. Cash flows related to natural gas derivatives are reported in operating activities.

        The derivatives 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 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 from suppliers whose prices are based primarily on the OneOK index rather than Henry Hub. This creates a location basis differential between the derivative contract price and the physical price of natural gas. Accordingly, the prices underlying the financial derivatives we use may not exactly match the prices of physical gas we consume. The contracts are traded in months forward and settlement dates are scheduled to coincide with anticipated gas purchases during those future periods.

        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 8—Fair Value Measurements.

	June 30, 2014			December 31, 2013
	(in millions)
Unrealized gains in other current assets	$	0.7		$	7.8
Unrealized losses in other current liabilities		(0.5	)		—
Net unrealized derivative gains	$	0.2		$	7.8

        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.

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in millions)
Unrealized mark-to-market (losses) gains	$	(4.9	)	$	(2.9	)	$	(8.9	)	$	0.8
Realized gains (losses)		4.9			2.7			14.8			1.1
Net derivative gains (losses)	$	—		$	(0.2	)	$	5.9		$	1.9

        As of June 30, 2014 and December 31, 2013, we had open derivative contracts for 9.5 million MMBtus and 13.2 million MMBtus, respectively, of natural gas. For the six months ended June 30, 2014, we used derivatives to cover approximately 84% of our natural gas consumption.

        The counterparties to our derivatives are large financial institutions and large energy 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 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.

  •

  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 June 30, 2014 and December 31, 2013, the aggregate fair values of the derivative instruments with credit-risk-related contingent features in a net liability position were $0.5 million and zero, 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 both June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013.

			Gross amounts not offset in consolidated balance sheets
	Gross and net amounts presented in consolidated balance sheets(1)
			Financial instruments		Cash collateral received (pledged)		Net amount
	(in millions)
June 30, 2014
Total derivative assets	$	0.7	$	0.5	$	—	$	0.2
Total derivative liabilities		0.5		0.5		—		—
Net assets	$	0.2	$	—	$	—	$	0.2
December 31, 2013
Total derivative assets	$	7.8	$	—	$	—	$	7.8
Total derivative liabilities		—		—		—		—
Net assets	$	7.8	$	—	$	—	$	7.8

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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.