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Derivative and hedging instruments | 12 Months Ended
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Dec. 31, 2011
Derivative and hedging instruments [Abstract] |
Derivative Instruments and Hedging |
5. | Derivative and hedging instruments
Derivatives. Our derivative contracts have included natural gas forward financial purchase contracts, foreign currency contracts, primary aluminum forward physical delivery sales contracts, the E.ON contingent obligation, the Ravenswood power contract and primary aluminum put option contracts. We measure the fair value of these contracts based on the quoted future market prices (if available) at the reporting date in their respective principal markets for all available periods. In some cases, we use discounted cash flows from these contracts using a risk-adjusted discount rate. See Note 4 Fair value measurements for the additional information about the fair value measurement of our derivative instruments.
Fair Value of Derivative Assets and Liabilities |
| Balance sheet location |  | December 31, 2011 |  |  | December 31, 2010 |
DERIVATIVE ASSETS: |  |  |  |  |  |  |
Primary aluminum put option contracts | Due from affiliates |  | $ | 5,439 |  |  | $ | 1,979 |
Primary aluminum put option contracts | Prepaid and other current assets |  |  | 3,892 |  |  |  | 2,712 |
Power contract | Prepaid and other current assets |  |  | 106 |  |  |  | 72 |
Natural gas forward financial contracts | Prepaid and other current assets |  |  | - |  |  |  | 79 |
TOTAL |  |  | $ | 9,437 |  |  | $ | 4,842 |
DERIVATIVE LIABILITIES: |  |  |  |  |  |  |  |  |
E.ON contingent obligation | Other liabilities |  | $ | 13,958 |  |  | $ | 13,091 |
Aluminum sales premium contracts – current portion | Accrued and other current liabilities |  |  | 607 |  |  |  | 436 |
Aluminum sales premium contracts – less current portion | Other liabilities |  |  | 301 |  |  |  | 347 |
Natural gas forward financial contracts | Accrued and other current liabilities |  |  | 281 |  |  |  | - |
TOTAL |  |  | $ | 15,147 |  |  | $ | 13,874 |
The natural gas forward financial contracts are derivatives that qualified for cash flow hedge treatment. During 2011 and 2010, the changes in our accumulated other comprehensive loss resulting from realized and unrealized gains and losses on these derivatives were not significant to our financial statements. There were no losses recognized for ineffective portions of these derivatives during the periods. As of December 31, 2011, an accumulated other comprehensive loss of $196 is expected to be reclassified to earnings over the next 12-month period. 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 are designated as cash flow hedges and qualify for hedge accounting under ASC 815. 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 purchase contracts to hedge forecasted transactions:
|  | December 31, 2011 | December 31, 2010
| Natural gas forward financial purchase contracts (in MMBTU) | 350,000 | 250,000
Foreign currency forward contracts As of December 31, 2011, 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 ISK and the Chinese yuan. The labor costs, maintenance costs and other local services at 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. During 2008 and 2009, we had foreign currency forward contracts to manage the currency risk associated with Grundartangi operating costs, Grundartangi expansion and the Helguvik project capital expenditures. These contracts were designated as cash flow hedges and qualified for hedge accounting under ASC 815 and had maturities through September 2009. The realized gains or losses for our cash flow hedges for the Grundartangi expansion and Helguvik project capital expenditures were recognized in accumulated other comprehensive income and will be reclassified to earnings as part of the depreciation expense of the capital assets (for the Helguvik project this will occur when Helguvik is put into service). We recognized losses of approximately $1,701 for the year ended December 31, 2009 on the ineffective portions of the forward contracts for the forecasted Helguvik project capital expenditures. These losses are recorded in net gain (loss) on forward contracts in our consolidated statements of operations. The ineffective portion of these forward contracts represents forward contract positions in excess of the revised forecast schedule of Helguvik project capital expenditures. Power contracts We are party to a power supply agreement at 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, gains and losses associated with the embedded derivative are recorded in net gain (loss) on forward contracts in the Consolidated Statements of Operations. Primary aluminum put option contracts We have entered into primary aluminum put option contracts that settle monthly based on LME prices through June 2012. The option contract volumes account for a portion of our domestic production, with a strike price around our domestic facilities' average cash basis break-even price. These options were purchased to partially mitigate the risk of a future decline in aluminum prices. Our counterparties include two non-related third parties and Glencore, a related party. We paid cash premiums to enter into the put option contracts and recorded an asset on the consolidated balance sheets. We determined the fair value of the put 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. Aluminum sales premium contracts The Glencore Metal Agreement is a physical delivery contract for 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 |
| Location |  | December 31, 2011 |  |  | December 31, 2010 |
Primary aluminum put option contracts | Net gain (loss) on forward contracts |  | $ | 1,645 |  |  | $ | (10,053 | )
E.ON contingent obligation | Interest expense – third party |  |  | 1,429 |  |  |  | - |
Aluminum sales premium contracts | Related party sales |  |  | 888 |  |  |  | 465 |
Power contract | Net gain (loss) on forward contracts |  |  | 172 |  |  |  | 92 |
Aluminum sales premium contracts | Net gain (loss) on forward contracts |  |  | (1,013 | ) |  |  | (534 | )
We had the following outstanding forward contracts that were entered into that were not designated as hedging instruments:
|  | December 31, 2011 |  |  | December 31, 2010 |
Power contracts (in megawatt hours (“MWH”)) (1) |  |  | 3,772 |  |  |  | 4,379 |
Primary aluminum sales contract premium (metric tons) (2) |  |  | 40,870 |  |  |  | 62,252 |
Primary aluminum put option contracts (metric tons) |  |  | 15,000 |  |  |  | 61,800 |
Primary aluminum put option contracts (metric tons) – related party |  |  | 18,000 |  |  |  | 46,800 |
(1) | Represents our expected usage during the remaining term of the Ravenswood power contract. In June 2011, the West Virginia PSC extended the term of this contract for an additional year.
(2) | Represents the remaining physical deliveries under our 2013 Glencore Metal Agreement.
Counterparty credit risk. The primary aluminum put option 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

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, 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 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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