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Derivative Financial Instruments and Related Hedging Programs | 9 Months Ended
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Sep. 30, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Related Hedging Programs | Derivative Financial Instruments and Related Hedging Programs Overview. In conducting its business, the Company, from time to time, enters into derivative transactions, including forward contracts and options, to limit its economic (i.e., cash) exposure resulting from (i) metal price risk related to its sale of fabricated aluminum products and the purchase of metal used as raw material for its fabrication operations, (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in its production processes, and (iii) foreign currency requirements with respect to its foreign subsidiaries, investment and cash commitments for equipment purchases. Additionally, in connection with the issuance of the Convertible Notes, the Company purchased cash-settled Call Options relating to the Company’s common stock to limit its exposure to the cash conversion feature of the Convertible Notes (see Note 3). The Company may modify the terms of its derivative contracts based on operational needs or financing objectives. As the Company’s operational hedging activities are generally designed to lock in a specified price or range of prices, realized gains or losses on the derivative contracts utilized in the hedging activities generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged at the time the transactions occur. However, due to mark-to-market accounting, during the term of the derivative contracts, significant unrealized, non-cash gains and losses may be recorded in the income statement. Hedges of Operational Risks. The Company’s pricing of fabricated aluminum products is generally intended to lock in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price fluctuations to its customers. However, in certain instances the Company enters into firm-price arrangements with its customers and incurs price risk on its anticipated aluminum purchases in respect of such customer orders. The Company uses third-party hedging instruments to limit exposure to metal price risks related to firm-price customer sales contracts. See Note 11 for additional information regarding the Company’s material derivative positions relating to hedges of operational risks, and their respective fair values. During the nine months ended September 30, 2012 and September 30, 2011, total fabricated products shipments that contained fixed price terms were (in millions of pounds) 139.0 and 112.1, respectively. At September 30, 2012, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that had the effect of creating price risk on anticipated purchases of aluminum for the remainder of 2012, 2013 and 2014 and thereafter, totaling approximately (in millions of pounds) 48.1, 20.5 and 1.6, respectively. A majority of the Company’s derivative contracts relating to hedges of operational risks contain credit-risk related contingencies, which the Company tries to minimize or offset through the management of counterparty credit lines, the utilization of options as part of the hedging activities, or both. The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur a significant loss from the failure of any counterparties to perform under any agreements. Hedges Relating to the Convertible Notes. As described in Note 3, the Company issued Convertible Notes in the aggregate principal amount of $175.0. The conversion feature of the Convertible Notes can only be settled in cash and is required to be bifurcated from the Convertible Notes and treated as a separate derivative instrument. In order to offset the cash flow risk associated with the Bifurcated Conversion Feature, the Company purchased Call Options, which are accounted for as derivative instruments. The Company expects that the realized gain or loss from the Call Options will substantially offset the realized loss or gain of the Bifurcated Conversion Feature upon maturity of the Convertible Notes. However, because valuation assumptions for the Bifurcated Conversion Feature and the Call Option are not identical, over time the Company expects to record net unrealized gains and losses due to mark-to-market adjustments to the fair values of the two derivatives. (see Note 11 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Call Options). The following table summarizes the Company’s material derivative positions at September 30, 2012:
Commodity |  | Maturity Period | Notional Amount of contracts (mmlbs)
Aluminum — |  |  |
Fixed priced purchase contracts |  | 10/12 through 12/15 | 57.0
Fixed priced sales contracts |  | 11/12 through 12/12 | 1.8
Midwest premium swap contracts 1 |  | 10/12 through 12/13 | 50.2
Energy |  | Maturity Period | Notional Amount of contracts (mmbtu)
Natural gas —2 |  |  |
Call option purchase contracts |  | 10/12 through 12/13 | 1,710,000 |
Put option sales contracts |  | 10/12 through 12/13 | 1,710,000 |
Fixed priced purchase contracts |  | 10/12 through 12/14 | 3,920,000 |
Electricity |  | Maturity Period | Notional Amount of contracts (Mwh)
Fixed priced purchase contracts |  | 10/12 through 12/13 | 274,225 |
Hedges Relating to the Convertible Notes |  | Contract Period | Notional Amount of contracts (Common Shares)
Bifurcated Conversion Feature 3 |  | 3/10 through 3/15 | 3,623,830 |
Call Options 3 |  | 3/10 through 3/15 | 3,623,830 |
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1 | Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on the Company’s purchases of primary aluminum.
2 | As of September 30, 2012, the Company’s exposure to fluctuations in natural gas prices had been substantially reduced for approximately 91%, 74% and 42% of the expected natural gas purchases for the remainder of 2012, 2013 and 2014, respectively.
3 | The Bifurcated Conversion Feature represents the cash conversion feature of the Convertible Notes. To hedge against the potential cash outflows associated with the Bifurcated Conversion Feature, the Company purchased cash-settled Call Options. The Call Options have an exercise price equal to the conversion price of the Convertible Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Convertible Notes. The Call Options will expire upon the maturity of the Convertible Notes. Although the fair value of the Call Options is derived from a notional number of shares of the Company’s common stock, the Call Options may only be settled in cash.
The Company reflects the fair value of its derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2). Realized and Unrealized Gains and Losses. Realized and unrealized gains (losses) associated with all derivative contracts consisted of the following, for each period presented:
| Quarter Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Realized (losses) gains: |  |  |  |  |  |  |
Aluminum | $ | (3.3 | ) |  | $ | 1.6 |  |  | $ | (7.7 | ) |  | $ | 11.9 |
Natural Gas | (1.6 | ) |  | (1.1 | ) |  | (5.5 | ) |  | (3.5 | )
Electricity | (0.8 | ) |  | — |  |  | (3.0 | ) |  | — |
Total realized (losses) gains: | $ | (5.7 | ) |  | $ | 0.5 |  |  | $ | (16.2 | ) |  | $ | 8.4 |
Unrealized gains (losses): |  |  |  |  |  |  |
Aluminum | $ | 8.3 |  |  | $ | (14.8 | ) |  | $ | 8.8 |  |  | $ | (21.4 | )
Natural Gas | 3.0 |  |  | (0.9 | ) |  | 4.7 |  |  | 0.6 |
Electricity | 1.0 |  |  | (1.1 | ) |  | 1.8 |  |  | (1.2 | )
Call Options relating to the Convertible Notes | 10.2 |  |  | (16.6 | ) |  | 5.8 |  |  | (10.2 | )
Cash conversion feature of the Convertible Notes | (10.3 | ) |  | 20.7 |  |  | (4.7 | ) |  | 12.4 |
Total unrealized gains (losses) | $ | 12.2 |  |  | $ | (12.7 | ) |  | $ | 16.4 |  |  | $ | (19.8 | )

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. 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