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Derivative Instruments and Hedging | 6 Months Ended
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Jun. 30, 2011
Notes to Financial Statements [Abstract] |
Derivative instruments and hedging | The following table provides the fair value and balance sheet classification of our derivatives:
Fair Value of Derivative Assets and Liabilities |
| Balance sheet location |  | June 30, 2011 |  |  | December 31, 2010 |
ASSETS: |  |  |  |  |  |  |
Primary aluminum put option contracts – current portion | Due from affiliates |  | $ | 1,704 |  |  | $ | 1,979 |
Primary aluminum put option contracts – current portion | Prepaid and other current assets |  |  | 1,257 |  |  |  | 2,712 |
Natural gas forward financial contracts | Prepaid and other current assets |  |  | 3 |  |  |  | 79 |
Power contract | Prepaid and other current assets |  |  | 111 |  |  |  | 72 |
TOTAL ASSETS |  |  | $ | 3,075 |  |  | $ | 4,842 |
LIABILITIES: |  |  |  |  |  |  |  |  |
Aluminum sales premium contracts – current portion | Accrued and other current liabilities |  | $ | 964 |  |  | $ | 436 |
E.ON contingent obligation | Other liabilities |  |  | 13,256 |  |  |  | 13,091 |
Aluminum sales premium contracts – less current portion | Other liabilities |  |  | 427 |  |  |  | 347 |
TOTAL LIABILITIES: |  |  | $ | 14,647 |  |  | $ | 13,874 |
The following table provides changes in our accumulated other comprehensive loss for our derivatives that qualified for cash flow hedge treatment during the three and six months ended June 30, 2011: Derivatives in cash flow hedging relationships:
| Three months ended June 30, 2011
| Amount of gain recognized in Other comprehensive income (“OCI”) on derivatives (effective portion) |  | Gain reclassified from OCI to income on derivatives (effective portion) |  | Loss recognized in income on derivatives (ineffective portion)
| Amount |  | Location | Amount |  | Location | Amount
Natural gas forward financial contracts | $7 |  | Cost of goods sold | $39 |  | — | $—
| Six months ended June 30, 2011
| Amount of gain recognized in OCI on derivatives (effective portion) |  | Gain reclassified from OCI to income on derivatives (effective portion) |  | Loss recognized in income on derivatives (ineffective portion)
| Amount |  | Location | Amount |  | Location | Amount
Natural gas forward financial contracts | $7 |  | Cost of goods sold | $50 |  | — | $—
| Three months ended June 30, 2010
| Amount of loss recognized in OCI on derivatives, net of tax (effective portion) |  | Loss reclassified from OCI to income on derivatives (effective portion) |  | Loss recognized in income on derivatives (ineffective portion)
| Amount |  | Location | Amount |  | Location | Amount
Natural gas forward financial purchase contracts | $(42) |  | Cost of goods sold | — |  | — | —
| Six months ended June 30, 2010
| Amount of loss recognized in OCI on derivatives, net of tax (effective portion) |  | Loss reclassified from OCI to income on derivatives (effective portion) |  | Loss recognized in income on derivatives (ineffective portion)
| Amount |  | Location | Amount |  | Location | Amount
Natural gas forward financial purchase contracts | $(42) |  | Cost of goods sold | — |  | — | —
Natural gas forward financial contracts To mitigate the volatility of our natural gas cost due to the natural gas markets, we have entered into fixed-price forward financial purchase contracts which settle in cash in the period corresponding to the intended usage of natural gas. These forward contracts, which are designated as cash flow hedges and qualify for hedge accounting under ASC 815, have maturities through October 2011. The critical terms of the contracts essentially match those of the underlying exposure. The effective portion of the natural gas forward financial contracts is reported in accumulated other comprehensive loss, and the ineffective portion is reported currently in earnings. Each month, when we settle the natural gas forward financial contracts, the realized gain or loss is recognized in income as part of our cost of goods sold. We had the following outstanding forward financial contracts to hedge forecasted transactions:
|  | June 30, 2011 |  |  | December 31, 2010 |
Natural gas forward financial contracts (in MMBTU) |  |  | 210,000 |  |  |  | 250,000 |
Foreign currency forward contracts As of June 30, 2011 and December 31, 2010, we had no foreign currency forward contracts outstanding. We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the euro, the Icelandic krona (“ISK”) and the Chinese yuan. The labor costs, maintenance costs and other local services at our facility in Grundartangi, Iceland (“Grundartangi”) are denominated in ISK and a portion of its anode costs are denominated in euros. As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Grundartangi’s operating margins. We manage our foreign currency exposure by entering into foreign currency forward contracts when management deems such transactions appropriate. We had foreign currency forward contracts to manage the currency risk associated with Grundartangi expansion and the Helguvik project capital expenditures. These contracts were designated as cash flow hedges and qualified for hedge accounting under ASC 815. The realized gain or loss for our cash flow hedges for the Grundartangi expansion and Helguvik project capital expenditures were recognized in accumulated other comprehensive loss and are reclassified to earnings as part of the depreciation expense of the capital assets (for the Helguvik project this would occur when Helguvik is put into service). Power contracts We are party to a power supply agreement at our facility in Ravenswood, West Virginia (“Ravenswood”) that contains LME-based pricing provisions that are an embedded derivative. The embedded derivative does not qualify for cash flow hedge treatment and is marked to market quarterly. We estimate the fair value of the embedded derivative based on our expected power usage over the remaining term of the contract which was extended in 2011, gains and losses associated with the embedded derivative are recorded in net loss on forward contracts in the consolidated statements of operations. We have recorded a derivative asset of $111 and $72 for the embedded derivative at June 30, 2011 and December 31, 2010, respectively. Primary aluminum put option contracts We entered into primary aluminum put option contracts that settle monthly through June 2012 based on LME prices. The volume of put option contracts is summarized below. These options were purchased to partially mitigate primary aluminum price risk. Our counterparties include Glencore, a related party, and two non-related third parties. We pay cash premiums to enter into the put option contracts and record an asset on the consolidated balance sheets. At times, we may sell call option contracts and purchase put option contracts of equal value resulting in no initial cash cost to Century. We determined the fair value of the put and call option contracts using a Black-Scholes model with market data provided by an independent vendor and account for the contracts as derivative financial instruments with gains and losses in the fair value of the contracts recorded on the consolidated statements of operations in net gain (loss) on forward contracts.
Primary Aluminum option contracts outstanding as of June 30, 2011 (in metric tons): |
|  | Glencore |  |  | Other counterparties |
Put option contracts, settle monthly in 2011 |  |  | 22,500 |  |  |  | 31,500 |
Put option contracts, settle monthly in 2012 |  |  | 18,000 |  |  |  | 15,000 |
Primary Aluminum option contracts outstanding as of December 31, 2010 (in metric tons): |
|  | Glencore |  |  | Other counterparties |
Put option contracts, settle monthly in 2011 |  |  | 46,800 |  |  |  | 61,800 |
Aluminum sales premium contracts The Glencore Metal Agreement is a physical delivery contract for 20,400 metric tons per year (“mtpy”) of primary aluminum through December 31, 2013 with variable, LME-based pricing. Under the Glencore Metal Agreement, pricing is based on market prices, adjusted by a negotiated U.S. Midwest premium with a cap and a floor as applied to the current U.S. Midwest premium. We account for the Glencore Metal Agreement as a derivative instrument under ASC 815. Gains and losses on the derivative are based on the difference between the contracted U.S. Midwest premium and actual and forecasted U.S. Midwest premiums. Settlements are recorded in related party sales. Unrealized gains (losses) based on forecasted U.S. Midwest premiums are recorded in net gain (loss) on forward contracts on the consolidated statements of operations.
Derivatives not designated as hedging instruments: |
| Gain (loss) recognized in income from derivatives |
|  |  | Three months ended June 30, |  |  | Six months ended June 30, |
| Location |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Power contract | Net gain (loss) on forward contracts |  | $ | 111 |  |  | $ | 6 |  |  | $ | 106 |  |  | $ | (21 | )
Primary aluminum put option and collar contracts | Net gain (loss) on forward contracts |  |  | (1,060 | ) |  |  | 9,475 |  |  |  | (5,666 | ) |  |  | 7,747 |
Aluminum sales premium contracts | Related party sales |  |  | 162 |  |  |  | 127 |  |  |  | 256 |  |  |  | 246 |
Aluminum sales premium contracts | Net gain (loss) on forward contracts |  |  | (668 | ) |  |  | (186 | ) |  |  | (866 | ) |  |  | (404 | )
We had the following outstanding forward contracts that were entered into that were not designated as hedging instruments:
|  | June 30, 2011 |  |  | December 31, 2010 |
Power contracts (in megawatt hours) (1) |  |  | 7,841 |  |  |  | 4,379 |
Primary aluminum sales contract premium (in metric tons) (2) |  |  | 54,400 |  |  |  | 62,252 |
Primary aluminum put option contracts (in metric tons) |  |  | 87,000 |  |  |  | 108,600 |
(1) | We mark the Ravenswood power contract to market based on our expected usage during the remaining term of the contract. In June 2011, the West Virginia Public Service Commission (the “PSC”) extended the term of this contract through June 2012.
(2) | Represents the remaining physical deliveries under our Glencore Metal Agreement.
Counterparty credit risk. The primary aluminum put option and natural gas forward financial contracts are subject to counterparty credit risk. However, we only enter into forward financial contracts with counterparties we determine to be creditworthy at the time of entering into the contract. If any counterparty failed to perform according to the terms of the contract, the impact would be limited to the difference between the contract price and the market price applied to the contract volume on the date of settlement. As of June 30, 2011, income of $159 is expected to be reclassified out of accumulated other comprehensive loss into earnings over the next 12-month period for derivative instruments that have been designated and have qualified as cash flow hedging instruments and for the related hedged transactions.

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- Definition This element can be used to disclose the entity's entire derivative instruments and hedging activities disclosure as a single block of text. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 45 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 + Details
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