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Derivative Financial Instruments and Related Hedging Programs | 9 Months Ended
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Sep. 30, 2014
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 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 and cash commitments for equipment purchases denominated in foreign currency. 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’s derivative activities are overseen by the Hedging Committee, which is composed of the chief executive officer, the chief financial officer, the chief accounting officer, the vice president of metal risk and other officers and employees selected by the chief executive officer. The Hedging Committee meets regularly to review derivative positions and strategy and reports to the Company’s Board of Directors on the scope of its activities. 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 through metal price fluctuations to its customers. However, in certain instances the Company enters into firm-price arrangements with its customers for stipulated volumes to be delivered in the future. Because the Company generally purchases primary and secondary aluminum on a floating price basis, the volume that it has committed to sell to its customers under a firm-price arrangement creates metal price risk for the Company. The Company uses third-party hedging instruments to limit exposure to metal price risk related to firm-price customer sales contracts. See Note 9 for additional information regarding the Company’s material derivative positions relating to hedges of operational risk, and their respective fair values. A majority of the Company’s derivative contracts relating to hedges of operational risks contain liquidity based thresholds that could require the Company to provide additional collateral in the event the Company’s liquidity were to fall below specified levels. To minimize the exposure to additional collateral requirements related to its liability hedge positions, the Company allocates hedging transactions among its counterparties, uses options as part of its hedging activities, or both. The aggregate fair value of the Company’s derivative instruments that were in a net liability position was $1.7 and $1.6 at September 30, 2014 and December 31, 2013, respectively. The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur significant loss from the failure of any counterparties to perform under any agreements. During the nine months ended September 30, 2014 and September 30, 2013, total fabricated products shipments that contained firm-price terms were (in millions of pounds) 109.3 and 87.2, respectively. At September 30, 2014, 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 2014 and 2015, totaling approximately (in millions of pounds) 41.1 and 18.3, respectively. Hedges Relating to the Convertible Notes. As described in Note 3, the Company issued Convertible Notes in the aggregate principal amount of $175.0 in March 2010. The conversion feature of the Convertible Notes can only be settled in cash and must be bifurcated from the Convertible Notes and treated as a separate derivative instrument for financial reporting purposes. 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, if any, from the Call Options will substantially offset the realized loss, if any, of the Bifurcated Conversion Feature upon maturity of the Convertible Notes. However, because assumptions used to determine the fair values of the Call Option and the Bifurcated Conversion Feature are not identical, net unrealized mark-to-market gains and losses on the two derivatives are recorded from quarter to quarter. See Note 9 for additional information regarding the fair values of the Call Options and the Bifurcated Conversion Feature. 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,
| 2014 |  | 2013 |  | 2014 |  | 2013
Realized gains (losses): |  |  |  |  |  |  |
Aluminum | $ | 3.1 |  |  | $ | (2.0 | ) |  | $ | 5.2 |  |  | $ | (3.6 | )
Natural Gas | (0.1 | ) |  | (0.5 | ) |  | 1.1 |  |  | (1.3 | )
Electricity | 0.1 |  |  | 0.3 |  |  | 0.1 |  |  | 0.2 |
Foreign Currency | — |  |  | (0.1 | ) |  | — |  |  | (0.1 | )
Total realized gains (losses) | $ | 3.1 |  |  | $ | (2.3 | ) |  | $ | 6.4 |  |  | $ | (4.8 | )
Unrealized (losses) gains: |  |  |  |  |  |  |
Hedges of operational risk: |  |  |  |  |  |  |
Aluminum | $ | (1.0 | ) |  | $ | 1.7 |  |  | $ | 1.3 |  |  | $ | (4.5 | )
Natural Gas | (1.6 | ) |  | — |  |  | (1.0 | ) |  | 0.8 |
Electricity | (1.0 | ) |  | (0.3 | ) |  | (0.3 | ) |  | 0.3 |
Foreign Currency | 0.1 |  |  | 0.1 |  |  | — |  |  | — |
Total hedges of operational risk | (3.5 | ) |  | 1.5 |  |  | — |  |  | (3.4 | )
Call Options relating to the Convertible Notes | 12.9 |  |  | 31.0 |  |  | 19.8 |  |  | 27.9 |
Bifurcated Conversion Feature of the Convertible Notes | (10.7 | ) |  | (29.4 | ) |  | (16.2 | ) |  | (26.8 | )
Total unrealized (losses) gains | $ | (1.3 | ) |  | $ | 3.1 |  |  | $ | 3.6 |  |  | $ | (2.3 | )
The following table summarizes the Company’s material derivative positions at September 30, 2014:
Aluminum |  | Maturity Period (month/year) | Notional Amount of contracts (mmlbs)
Fixed price purchase contracts |  | 10/14 through 12/15 | 45.5 |
Fixed price sales contracts |  | 10/14 through 12/14 | 0.5 |
Midwest premium swap contracts 1 |  | 10/14 through 12/15 | 44.8 |
Natural Gas 2 |  | Maturity Period (month/year) | Notional Amount of contracts (mmbtu)
Fixed price purchase contracts |  | 10/14 through 12/16 | 6,040,000 |
Electricity 3 |  | Maturity Period (month/year) | Notional Amount of contracts (Mwh)
Fixed price purchase contracts |  | 10/14 through 12/15 | 230,425 |
Hedges Relating to the Convertible Notes |  | Contract Period (month/year) | Notional Amount of contracts (Common Shares)
Bifurcated Conversion Feature 4 |  | 3/10 through 3/15 | 3,655,085 |
Call Options 4 |  | 3/10 through 3/15 | 3,655,085 |
______________________
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, 2014, the Company had Henry Hub NYMEX-based hedge positions in place to cover exposure to fluctuations in prices for approximately 82%, 81% and 47% of the expected natural gas purchases for the remainder of 2014, 2015 and 2016, respectively.
3 | As of September 30, 2014, the Company had Mid-C International Commodity Exchange-based hedge positions in place to cover exposure to fluctuations in prices for approximately 46% and 45% of the expected electricity purchases for the remainder of 2014 and 2015, respectively.
4 | The Bifurcated Conversion Feature represents the cash conversion feature of the Convertible Notes. The Call Options expire on the maturity or earlier conversion of the Convertible Notes and 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. 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 enters into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. The Company reflects the fair value of its derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2). The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of September 30, 2014:
Derivative Assets and Collateral Held by Counterparty
|  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
| Gross Amounts of Recognized Assets |  | Gross Amounts Offset in the Consolidated Balance Sheets |  | Net Amounts of Assets Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Received |  | Net Amount
Counterparty (with Netting Agreements) | $ | 1.6 |  |  | $ | — |  |  | $ | 1.6 |  |  | $ | 0.9 |  |  | $ | — |  |  | $ | 0.7 |
Counterparty (without Netting Agreements)1 | 99.8 |  |  | — |  |  | 99.8 |  |  | — |  |  | — |  |  | 99.8 |
Counterparty (with partial Netting Agreements) | 0.4 |  |  | — |  |  | 0.4 |  |  | 0.4 |  |  | — |  |  | — |
Total | $ | 101.8 |  |  | $ | — |  |  | $ | 101.8 |  |  | $ | 1.3 |  |  | $ | — |  |  | $ | 100.5 |
Derivative Liabilities and Collateral Held by Counterparty
|  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
| Gross Amounts of Recognized Liabilities |  | Gross Amounts Offset in the Consolidated Balance Sheets |  | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Pledged |  | Net Amount
Counterparty (with Netting Agreements) | $ | (2.3 | ) |  | $ | — |  |  | $ | (2.3 | ) |  | $ | (0.9 | ) |  | $ | — |  |  | $ | (1.4 | )
Counterparty (without Netting Agreements)1 | (99.5 | ) |  | — |  |  | (99.5 | ) |  | — |  |  | — |  |  | (99.5 | )
Counterparty (with partial Netting Agreements) | (0.7 | ) |  | — |  |  | (0.7 | ) |  | (0.4 | ) |  | — |  |  | (0.3 | )
Total | $ | (102.5 | ) |  | $ | — |  |  | $ | (102.5 | ) |  | $ | (1.3 | ) |  | $ | — |  |  | $ | (101.2 | )
_________________
1 | Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at September 30, 2014 (see Note 9).
The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of December 31, 2013:
Derivative Assets and Collateral Held by Counterparty
|  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
| Gross Amounts of Recognized Assets |  | Gross Amounts Offset in the Consolidated Balance Sheets |  | Net Amounts of Assets Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Received |  | Net Amount
Counterparty (with Netting Agreements) | $ | 1.0 |  |  | $ | — |  |  | $ | 1.0 |  |  | $ | 0.8 |  |  | $ | — |  |  | $ | 0.2 |
Counterparty (without Netting Agreements)1 | 80.4 |  |  | — |  |  | 80.4 |  |  | — |  |  | — |  |  | 80.4 |
Counterparty (with partial Netting Agreements) | 0.4 |  |  | — |  |  | 0.4 |  |  | 0.4 |  |  | — |  |  | — |
Total | $ | 81.8 |  |  | $ | — |  |  | $ | 81.8 |  |  | $ | 1.2 |  |  | $ | — |  |  | $ | 80.6 |
Derivative Liabilities and Collateral Held by Counterparty
|  |  |  |  |  |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
| Gross Amounts of Recognized Liabilities |  | Gross Amounts Offset in the Consolidated Balance Sheets |  | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets |  | Financial Instruments |  | Cash Collateral Pledged |  | Net Amount
Counterparty (with Netting Agreements) | $ | (1.6 | ) |  | $ | — |  |  | $ | (1.6 | ) |  | $ | (0.8 | ) |  | $ | — |  |  | $ | (0.8 | )
Counterparty (without Netting Agreements)1 | (83.2 | ) |  | — |  |  | (83.2 | ) |  | — |  |  | — |  |  | (83.2 | )
Counterparty (with partial Netting Agreements) | (1.3 | ) |  | — |  |  | (1.3 | ) |  | (0.4 | ) |  | — |  |  | (0.9 | )
Total | $ | (86.1 | ) |  | $ | — |  |  | $ | (86.1 | ) |  | $ | (1.2 | ) |  | $ | — |  |  | $ | (84.9 | )
_________________
1 | Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at December 31, 2013 (see Note 9).

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5618551-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624258-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624163-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708773-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624177-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5580258-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 20: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 + Details
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