Derivative Financial Instruments

12 Months Ended

Dec. 31, 2014

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 sales in the period of change. Cash flows related to natural gas derivatives are reported in 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 8—Fair Value Measurements.

	December 31,
	2014			2013
	(in millions)
Unrealized gains in other current assets	$	0.1		$	7.8
Unrealized losses in other current liabilities	(3.6		)	—
Net unrealized derivative gains (losses)	$	(3.5	)	$	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.

	Year ended December 31,
	2014			2013			2012
	(in millions)
Unrealized mark-to-market gains (losses)	$	(12.6	)	$	9.1		$	10.6
Realized gains (losses)	10.5			(0.8		)	(24.3		)
Net derivative gains (losses)	$	(2.1	)	$	8.3		$	(13.7	)

As of December 31, 2014 and 2013, we had open derivative contracts for 7.6 million MMBtus and 13.2 million MMBtus, respectively, of natural gas. For the year ended December 31, 2014, we used derivatives to cover approximately 89% of our natural gas consumption.

The counterparties to our derivative contracts are multi-national 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. 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 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 set off, 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 the credit ratings of the General Partner affiliate. 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, 2014 and 2013, the aggregate fair values of the derivative instruments with credit-risk-related contingent features in a net liability position were $3.6 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. As of December 31, 2014 and 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 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 December 31, 2014 and 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)
December 31, 2014
Total derivative assets	$	0.1		$	3.6	$	—	$	(3.5	)
Total derivative liabilities	3.6			3.6		—		—
Net assets (liabilities)	$	(3.5	)	$	—	$	—	$	(3.5	)
December 31, 2013
Total derivative assets	$	7.8		$	—	$	—	$	7.8
Total derivative liabilities	—			—		—		—
Net assets (liabilities)	$	7.8		$	—	$	—	$	7.8

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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.