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Derivative and hedging instruments | 9 Months Ended
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Sep. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative and hedging instruments | Derivative and hedging instruments The following table provides the fair value and balance sheet classification of our derivatives:
Fair Value of Derivatives
| Balance sheet location | September 30, 2013 | December 31, 2012
DERIVATIVE ASSETS: |  |  |
Midwest premium contracts (1) | Prepaid and other current assets | $ | 363 |  | $ | — |
TOTAL |  | $ | 363 |  | $ | — |
DERIVATIVE LIABILITIES: |  |  |
Aluminum sales premium contracts | Accrued and other current liabilities | $ | 771 |  | $ | 1,170 |
E.ON contingent obligation – net (2) | Other liabilities | — |  | 15,369 |
TOTAL |  | $ | 771 |  | $ | 16,539 |
(1) | We entered into a fixed-price forward contract that settles monthly from January 2014 to March 2014 based on the Midwest Premium price published in the Platts Metals Week for the applicable period.
(2) | Based on the LME forward market prices for primary aluminum at September 30, 2013 and management's estimate of the LME forward market for periods beyond the quoted periods, we believe that we will not have any payment obligations for the E.ON contingent obligation through the term of the agreement which expires in 2028. See Note 10 Debt for additional information about the E.ON contingent obligation fair value.
Primary aluminum put option contracts In the past, we have entered into primary aluminum put option contracts that settled monthly based on LME prices. The option contract volumes accounted for a portion of our domestic production, with a strike price around our domestic facilities’ average cash basis break-even price at the time. Our counterparties included two non-related third parties and an affiliate of Glencore Xstrata plc (together with its subsidiaries, "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 option contracts using a Black-Scholes model with market data provided by an independent vendor. 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 and derivative contracts on the consolidated statements of operations.
Derivatives not designated as hedging instruments: |  |
| Gain (loss) recognized in income from derivatives
|  | Three months ended September 30, | Nine months ended September 30,
| Location | 2013 | 2012 | 2013 | 2012
E.ON contingent obligation – net | Net gain (loss) on forward and derivative contracts | $ | 353 |  | $ | — |  | $ | 16,428 |  | $ | — |
Midwest premium contracts | Net gain (loss) on forward and derivative contracts | 363 |  | — |  | 363 |  | — |
Primary aluminum put option contracts | Net gain (loss) on forward and derivative contracts | — |  | — |  | — |  | (2,725 | )
Aluminum sales premium contracts | Related party sales | 278 |  | 386 |  | 1,039 |  | 917 |
Aluminum sales premium contracts | Net gain (loss) on forward and derivative contracts | (276 | ) | (404 | ) | (640 | ) | (1,389 | )
E.ON contingent obligation – net | Interest expense - third party | (353 | ) | (353 | ) | (1,059 | ) | (1,059 | )
We had the following outstanding forward contracts that were entered into that were not designated as hedging instruments:
| September 30, 2013 | December 31, 2012
Primary aluminum sales contract premium (metric tons) (1) | 5,993 |  | 20,400 |
Midwest premium contracts (metric tons) | 6,000 |  | — |
(1) | Represents the remaining physical deliveries under the Glencore Metal Agreement.
Counterparty credit risk. 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 September 30, 2013, income of $153 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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