Derivative Financial Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure

14. Derivative Financial Instruments

We use derivative financial instruments to reduce our exposure to changes in prices for natural gas that will be purchased in the future. Natural gas is the largest and most volatile component of our manufacturing cost for nitrogen-based products. From time to time, we may also use derivative financial instruments to reduce our exposure to changes in foreign currency exchange rates. The derivatives that we use to reduce our exposure to changes in prices for natural gas are primarily natural gas fixed price swaps, basis swaps and options traded in the over-the-counter markets. These natural gas derivatives settle using primarily a NYMEX futures price index, which represents the basis for fair value at any given time. We enter into natural gas derivative contracts with respect to natural 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 natural gas price risk, but without the application of hedge accounting. As a result, changes in fair value of these contracts are recognized in earnings. As of September 30, 2022, we had natural gas derivative contracts covering certain periods through March 2023.

As of September 30, 2022, our open natural gas derivative contracts consisted of natural gas fixed price swaps, basis swaps and options for 48.2 million MMBtus of natural gas. As of December 31, 2021, we had open natural gas derivative contracts consisting of natural gas fixed price swaps, basis swaps and options for 60.0 million MMBtus of natural gas. For the nine months ended September 30, 2022, we used derivatives to cover approximately 16% of our natural gas consumption.

The effect of derivatives in our consolidated statements of operations is shown in the table below.


	Gain (loss) recognized in income
		Three months ended September 30,				Nine months ended September 30,
	Location	2022		2021		2022		2021
		(in millions)


Unrealized net (losses) gains on natural gas derivatives	Cost of sales	$	(11)	$	12	$	39	$	18
Realized net gains (losses) on natural gas derivatives	Cost of sales	12		—		20		(3)
Gain on net settlement of natural gas derivatives due to Winter Storm Uri	Cost of sales	—		—		—		112
Net derivative gains		$	1	$	12	$	59	$	127

Gain on net settlement of natural gas derivatives due to Winter Storm Uri

We also enter into supply agreements to facilitate the availability of natural gas to operate our plants. When we purchase natural gas under these agreements, we intend to take physical delivery for use in our plants. Certain of these supply agreements allow us to fix the price of the deliveries for the following month using an agreed upon first of month price. We utilize the Normal Purchase Normal Sales (NPNS) derivative scope exception for these fixed price contracts and therefore, we do not account for them as derivatives.

In the first quarter of 2021, the central portion of the United States experienced extreme and unprecedented cold weather due to the impact of Winter Storm Uri. Certain natural gas suppliers and natural gas pipelines declared force majeure events due to frozen equipment. This occurred at the same time as large increases in natural gas demand were occurring due to the extreme cold temperatures. Due to these unprecedented factors, several states declared a state of emergency and natural gas was redirected for residential usage. We net settled certain natural gas contracts with our suppliers and received prevailing market prices, which were in excess of our cost. We no longer qualified for the NPNS derivative scope exception for the natural gas that was net settled with our suppliers due to the impact of Winter Storm Uri. As a result, we recognized a gain of $112 million from the net settlement of these natural gas contracts, which is reflected in cost of sales in our consolidated statement of operations for the nine months ended September 30, 2021.

The fair values of derivatives on our consolidated balance sheets are shown below. As of September 30, 2022 and December 31, 2021, none of our derivative instruments were designated as hedging instruments. See Note 9—Fair Value Measurements for additional information on derivative fair values.

Asset Derivatives

Liability Derivatives

Balance Sheet Location

September 30,
2022

December 31, 2021

Balance Sheet
Location

September 30,
2022

December 31, 2021

(in millions)

Natural gas derivatives

Other current assets

Other current liabilities

(20)

(47)

Most of our International Swaps and Derivatives Association (ISDA) agreements contain credit-risk-related contingent features such as cross default provisions. In the event of certain defaults or termination events, our counterparties may request early termination and net settlement of certain derivative trades, or under certain ISDA agreements, may require us to collateralize derivatives in a net liability position. As of September 30, 2022 and December 31, 2021, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in net liability positions was zero and $31 million, respectively, which also approximates the fair value of the assets that may be needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. The credit support documents executed in connection with certain of our ISDA agreements generally provide us and our 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. As of September 30, 2022 and December 31, 2021, we had no cash collateral on deposit with counterparties for derivative contracts.

The following table presents amounts relevant to offsetting of our derivative assets and liabilities as of September 30, 2022 and December 31, 2021:


	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)
September 30, 2022
Total derivative assets	$	26	$	—	$	—	$	26
Total derivative liabilities	(20)		—		—		(20)
Net derivative assets	$	6	$	—	$	—	$	6
December 31, 2021
Total derivative assets	$	16	$	—	$	—	$	16
Total derivative liabilities	(47)		—		—		(47)
Net derivative liabilities	$	(31)	$	—	$	—	$	(31)

_______________________________________________________________________________

(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 are the same.

We do not believe the contractually allowed netting, close-out netting or setoff of amounts owed to, or due from, the counterparties to our ISDA agreements would have a material effect on our financial position.