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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2011
Fair Value Disclosures [Abstract] |
Fair Value Measurement | Fair Value Measurements Overview The Company applies the fair value hierarchy established by US GAAP for the recognition and measurement of assets and liabilities. An asset or liability’s fair value classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counterparty risk in its assessment of fair value. The fair values of financial assets and liabilities are measured on a recurring basis. The Company has elected not to carry any financial assets and liabilities at fair value, other than as required by US GAAP. Financial assets and liabilities that the Company carries at fair value, as required by US GAAP include: (i) its derivative instruments, (ii) the plan assets of the VEBAs and the Company’s Canadian defined benefit pension plan, and (iii) available for sale securities, consisting of investments related to the Company’s deferred compensation plan (see Note 8). The majority of the Company’s non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant, and equipment are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of a non-financial asset or liability is required, potentially resulting in an adjustment to the carrying amount of such asset or liability. For the nine month periods ended September 30, 2011 and September 30, 2010, the Company concluded that none of its non-financial assets and liabilities subject to fair value assessments on a non-recurring basis required a material adjustment to the carrying amount of such assets and liabilities. Fair Values of Financial Assets and Liabilities Fair Values of Derivative Assets and Liabilities. The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs. Commodity, Foreign Currency and Energy Hedges — The fair values of a majority of these derivative contracts are based upon trades in liquid markets. Valuation model inputs can generally be verified, and valuation techniques do not involve significant judgment. The Company has some derivative contracts, however, that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (i.e., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads. Bifurcated Conversion Feature and Call Options — The fair value of the Bifurcated Conversion Feature is measured as the difference in the estimated fair value of the Notes and the estimated fair value of the Notes without the cash conversion feature. The Notes are valued based on the trading price of the Notes each period-end (see “Other” below). The fair value of the Notes without the cash conversion feature is the present value of the series of the remaining fixed income cash flows under the Notes, with a mandatory redemption in 2015. The Call Options are valued using a binomial lattice valuation model. Significant inputs to the model are the Company’s stock price, risk-free interest rate, credit spread, dividend yield, expected volatility of the Company’s stock price, and probability of certain corporate events, all of which are observable inputs by market participants. The significant assumptions used in the determining the fair value of the Call Options at September 30, 2011 were as follows:
Stock price at September 30, 2011 1 | $ | 44.28 |
Quarterly dividend yield (per share)2 | $ | 0.24 |
Risk-free interest rate 3 | 0.56 | %
Credit spread (basis points)4 | 700 |
Expected volatility rate 5 | 36 | %
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1 | The Company’s stock price has the most material impact to the fair values of the Call Options and the Notes, which drives the fair value of the Bifurcated Conversion Feature.
2 | The Company used a discrete quarterly dividend payment of $0.24 per share based on historical and expected future quarterly dividend payments.
3 | The risk-free rate was based on the five-year and three-year Constant Maturity Treasury rate on September 30, 2011, compounded semi-annually.
4 | The Company’s credit rating was estimated to be between BB- and B+ based on comparisons of its financial ratios and size to those of other rated companies. Using the Merrill Lynch High Yield index, the Company identified credit spreads for other debt issuances with similar credit ratings and used the median of such credit spreads.
5 | The volatility rate was based on both observed volatility, which is based on the Company’s historical stock price, and implied volatility from the Company’s traded options. Such volatility was further adjusted to take into consideration market participant risk tolerance.
The following table presents the Company’s derivative assets and liabilities, classified under the appropriate level of the fair value hierarchy, as of September 30, 2011:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Derivative assets: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Call option purchase contracts | $ | — |  |  | $ | 0.5 |  |  | $ | — |  |  | $ | 0.5 |
Fixed priced purchase contracts | — |  |  | 1.4 |  |  | — |  |  | 1.4 |
Fixed priced sales contracts | — |  |  | 0.5 |  |  | — |  |  | 0.5 |
Midwest premium swap contracts | — |  |  | — |  |  | 0.7 |  |  | 0.7 |
Natural Gas - |  |  |  |  |  |  |
Put option purchase contracts | — |  |  | 0.9 |  |  | — |  |  | 0.9 |
Hedges Relating to the Notes - |  |  |  |  |  |  |
Call Options | — |  |  | 38.2 |  |  | — |  |  | 38.2 |
Total | $ | — |  |  | $ | 41.5 |  |  | $ | 0.7 |  |  | $ | 42.2 |
Derivative liabilities: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Call option sales contracts | $ | — |  |  | $ | (0.5 | ) |  | $ | — |  |  | $ | (0.5 | )
Fixed priced purchase contracts | — |  |  | (5.7 | ) |  | — |  |  | (5.7 | )
Fixed priced sales contracts | — |  |  | (0.4 | ) |  | — |  |  | (0.4 | )
Natural Gas - |  |  |  |  |  |  |
Call option purchase contracts | — |  |  | (0.1 | ) |  | — |  |  | (0.1 | )
Put option sales contracts | — |  |  | (4.0 | ) |  | — |  |  | (4.0 | )
Fixed priced purchase contracts | — |  |  | (0.9 | ) |  | — |  |  | (0.9 | )
Electricity - |  |  |  |  |  |  |
Fixed priced purchase contracts | — |  |  | (1.2 | ) |  | — |  |  | (1.2 | )
Hedges Relating to the Notes - |  |  |  |  |  |  |
Bifurcated Conversion Feature | — |  |  | (47.6 | ) |  | — |  |  | (47.6 | )
Total | $ | — |  |  | $ | (60.4 | ) |  | $ | — |  |  | $ | (60.4 | )
The following table presents the Company’s derivative assets and liabilities, classified under the appropriate level of the fair value hierarchy, as of December 31, 2010:
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Derivative assets: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Call option purchase contracts | $ | — |  |  | $ | 9.3 |  |  | $ | — |  |  | $ | 9.3 |
Put option purchase contracts | — |  |  | 0.1 |  |  | — |  |  | 0.1 |
Fixed priced purchase contracts | — |  |  | 18.2 |  |  | — |  |  | 18.2 |
Midwest premium swap contracts | — |  |  | — |  |  | 0.2 |  |  | 0.2 |
Natural Gas - |  |  |  |  |  |  |
Call option purchase contracts | — |  |  | 0.3 |  |  | — |  |  | 0.3 |
Put option purchase contracts | — |  |  | 2.5 |  |  | — |  |  | 2.5 |
Fixed priced purchase contracts | — |  |  | 0.1 |  |  | — |  |  | 0.1 |
Hedges Relating to the Notes - |  |  |  |  |  |  |
Call Options | — |  |  | 48.4 |  |  | — |  |  | 48.4 |
Total | $ | — |  |  | $ | 78.9 |  |  | $ | 0.2 |  |  | $ | 79.1 |
Derivative liabilities: |  |  |  |  |  |  |
Aluminum - |  |  |  |  |  |  |
Call option sales contracts | $ | — |  |  | $ | (9.3 | ) |  | $ | — |  |  | $ | (9.3 | )
Put option sales contracts | — |  |  | (0.1 | ) |  | — |  |  | (0.1 | )
Fixed priced purchase contracts | — |  |  | (0.4 | ) |  | — |  |  | (0.4 | )
Fixed priced sales contracts | — |  |  | (3.4 | ) |  | — |  |  | (3.4 | )
Midwest premium swap contracts | — |  |  | — |  |  | (0.1 | ) |  | (0.1 | )
Natural Gas - |  |  |  |  |  |  |
Put option sales contracts | — |  |  | (4.6 | ) |  | — |  |  | (4.6 | )
Fixed priced purchase contracts | — |  |  | (0.5 | ) |  | — |  |  | (0.5 | )
Hedges Relating to the Notes - |  |  |  |  |  |  |
Bifurcated Conversion Feature | — |  |  | (60.0 | ) |  | — |  |  | (60.0 | )
Total | $ | — |  |  | $ | (78.3 | ) |  | $ | (0.1 | ) |  | $ | (78.4 | )
Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for the Midwest premium derivative contracts on a net basis:
| Level 3
Balance at December 31, 2010 | $ | 0.1 |
Total realized/unrealized gains included in: |
Cost of goods sold excluding depreciation expense | 1.5 |
Transactions involving Level 3 derivative contracts: |
Purchases | 0.2 |
Sales | — |
Issuances | — |
Settlements | (1.1 | )
Transactions involving Level 3 derivatives — net | (0.9 | )
Transfers in and (or) out of Level 3 valuation hierarchy | — |
Balance at September 30, 2011 | $ | 0.7 |
Total gains included in earnings attributable to the change in unrealized gains/losses relating to derivative contracts held at September 30, 2011: | $ | 0.5 |
VEBA and Canadian Pension Plan Assets. The VEBA assets are managed by various investment advisors selected by the trustees of each of the VEBAs. The VEBA assets are outside of the Company’s control, and the Company does not have insight into the investment strategies. The assets of the Company’s Canadian pension plan are managed by advisors selected by the Company, with the investment portfolio subject to periodic review and evaluation by the Company’s investment committee. The investment of assets in the Canadian pension plan is based upon the objective of maintaining a diversified portfolio of investments in order to minimize concentration of credit and market risks (such as interest rate, currency, equity price and liquidity risks). The degree of risk and risk tolerance take into account the obligation structure of the plan, the anticipated demand for funds and the maturity profiles required from the investment portfolio in light of these demands. The fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan are reflected in the Company’s Consolidated Balance Sheets at fair value. In determining the fair value of the plan assets at each annual period end, the Company utilizes primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan. Certain assets are valued based upon unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets (e.g., liquid securities listed on an exchange). Such assets are classified within Level 1 of the fair value hierarchy. Valuation of other invested assets is based on significant observable inputs (e.g., net asset values of registered investment companies, valuations derived from actual market transactions, broker-dealer supplied valuations, or correlations between a given U.S. market and a non-U.S. security). Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are classified within Level 2 of the fair value hierarchy. The Company’s Canadian pension plan assets and the plan assets of the VEBAs are measured annually on December 31. See Note 11 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for additional information regarding fair value of plan assets. Available for Sale Securities. The Company holds assets in various investment funds at certain registered investment companies in connection with its deferred compensation program (see Note 1 and Note 8). Such assets are accounted for as available for sale securities and are measured and recorded at fair value based on the net asset value of the investment funds on a recurring basis. Such fair value input is considered a Level 2 input. At both September 30, 2011 and December 31, 2010, the amortized costs of the Company’s available for sale securities were $4.6 . Other. The Company believes that the fair value of its cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and income tax receivables / payables approximate their respective carrying values due to their short maturities and nominal credit risk. Further, the trading price of the Notes is considered a Level 1 input in the fair value hierarchy. The fair value of the Notes was $199.7 and $214.7 at September 30, 2011 and December 31, 2010, respectively. The Company believes that the fair value of its Nichols Promissory Note materially approximates its carrying amount in light of the Company’s credit profile, the interest rate applicable to the note, and its remaining duration. The foregoing fair value assessment is considered to be a Level 2 valuation within the fair value hierarchy. Fair Values of Non-financial Assets and Liabilities Idled Assets. Included within Property, plant and equipment - net as of December 31, 2010 was $5.5 of idled assets. Of the carrying amount of idled assets as of December 31, 2010, $1.1 represented equipment used by the Company’s Tulsa, Oklahoma facility prior to the closure of that facility in 2008, and $4.4 represented assets that were acquired by the Company but had not yet been placed into service. During the nine months ended September 30, 2011, $0.1 of such assets was subsequently placed into service. Idled assets included within Property, plant and equipment - net was $5.4 as of September 30, 2011. The value of such assets was estimated using a combination of the cost approach and market approach. The cost approach uses replacement cost, and the market approach uses prices, for similar assets to determine the value of assets, and both approaches use Level 3 fair value inputs. See Note 5 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for additional information relating to idled assets. CAROs. The inputs in estimating the fair value of conditional asset retirement obligations (“CAROs”) include: (i) the timing of when any such CAROs may be incurred, (ii) incremental costs associated with special handling or treatment of CARO materials and (iii) the credit adjusted risk free rate, all of which are considered Level 3 inputs as they involve significant judgment of the Company. There were no material adjustments to the estimated fair values of CAROs for either of the nine month periods ended September 30, 2011 or September 30, 2010. The estimated fair value of CARO liabilities at September 30, 2011 and December 31, 2010 was $4.0 and $3.8, respectively, based upon the application of a weighted-average credit-adjusted risk free rate of 9.1%. CAROs are included in Other accrued liabilities or Long-term liabilities, as appropriate (see Note 2).

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -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. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13433-108611 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -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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