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Derivative Financial Instruments and Related Hedging Programs | 9 Months Ended
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Sep. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Related Hedging Programs | Derivative Financial Instruments and Related Hedging Programs Overview. In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our economic (i.e. cash) exposure resulting from (i) metal price risk related to our sale of fabricated aluminum products and the purchase of metal used as raw material for our fabrication operations; (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in our production processes; and (iii) foreign currency requirements with respect to our foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency. Our derivative activities are overseen by a hedging committee ("Hedging Committee"), which is composed of our chief executive officer, chief financial officer, chief accounting officer, treasurer and vice president, commodity risk management 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 our Board of Directors on the scope of its activities. Hedges of Operational Risks Designated Foreign Currency Cash Flow Hedges. We are exposed to foreign currency exchange risk related to firm price agreements for equipment purchases from foreign manufacturers. Such agreements require that we make payments in foreign currency to the vendor over time based on milestone achievements. We use foreign currency forward contracts in order to mitigate the exposure to currency exchange rate fluctuations related to these purchases. The timing and amounts of the forward contract settlements are designed to line up with the timing and amounts of scheduled payments to the foreign equipment manufacturers and are therefore expected to be highly effective hedges. As of September 30, 2015, we had open forward contracts designated as cash flow hedges to purchase euros with maturity dates between one and 15 months. The notional amounts of these foreign currency forward contracts totaled 7.3 million euros at September 30, 2015 with an average contract exchange rate of 1.14. The effective portion of the changes in fair value on these instruments is recorded within Other comprehensive income (loss) and is reclassified into the Statements of Consolidated Income on the same line item and the same period in which the underlying equipment is depreciated. We had no such reclassifications into earnings during the quarter ended September 30, 2015 and anticipate no such reclassifications for the next 12 months. For the nine months ended September 30, 2015, we recorded an unrealized loss of $0.2 million on the effective portions of our designated foreign currency cash flow hedges. There were no gains or losses recorded on these hedges during the quarter ended September 30, 2015 and no ineffectiveness was incurred on these hedges during the quarter and nine months ended September 30, 2015. Non-Designated Hedges of Operational Risks. Our 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 our customers. In certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Additionally, for some of our higher value added products sold on a spot basis, the pass through of metal price movements can sometimes lag by as much as several months, with a favorable impact to us when metal prices decline and an adverse impact to us when metal prices increase. Because we generally purchase primary and secondary aluminum on a floating price basis, the volume that we have committed to sell to our customers under a firm-price arrangement and the lag in passing through metal price movements to customers on some of our higher value added products sold on a spot basis create metal price risk for us. We use third-party hedging instruments to limit exposure to metal price risk related to firm-price customer sales contracts and the metal pass through lag on some of our products. See Note 9 for additional information regarding our material derivative positions relating to hedges of operational risk, and their respective fair values. A majority of our derivative contracts relating to hedges of operational risks contain liquidity based thresholds that could require us to provide additional collateral in the event our liquidity were to fall below specified levels. To minimize the exposure to additional collateral requirements related to our liability hedge positions, we allocate hedging transactions among our counterparties, use options as part of our hedging activities, or both. The aggregate fair value of our derivative instruments that were in a net liability position was $18.5 million and $11.4 million at September 30, 2015 and December 31, 2014, respectively. We regularly review the creditworthiness of our derivative counterparties and do not expect to incur significant loss from the failure of any counterparties to perform under any agreements. During the nine months ended September 30, 2015 and September 30, 2014, total Fabricated Products shipments that contained firm-price terms were (in millions of pounds) 148.6 and 109.3, respectively. At September 30, 2015, 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 2015 and 2016, totaling approximately (in millions of pounds) 52.7 and 93.8, respectively. Hedges Relating to the Convertible Notes As described in Note 3, we issued $175.0 million principal amount of Convertible Notes due on April 1, 2015, which could only be settled in cash. The conversion feature of the Convertible Notes was 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, we purchased Option Assets that settled on April 1, 2015. The Option Assets were accounted for as derivative instruments. The cash we received on April 1, 2015 from the settlement of the Option Assets equaled and offset the cash that we paid to the holders of any converted Convertible Notes in excess of the principal amount thereof and interest payable thereon on April 1, 2015. See Note 9 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Option Assets. Realized and Unrealized Gains and Losses. Realized and unrealized (losses) gains associated with all derivative contracts consisted of the following for each period presented (in millions of dollars):
| Quarter Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2015 |  | 2014 |  | 2015 |  | 2014
Included in Other Comprehensive Income (Loss): |  |  |  |  |  |  |
Unrealized (losses): |  |  |  |  |  |  |
Foreign Currency | $ | — |  |  | $ | — |  |  | $ | (0.2 | ) |  | $ | — |
Included in Statements of Consolidated Income (Loss): |  |  |  |  |  |  |
Realized (losses) gains 1: |  |  |  |  |  |  |
Aluminum | (9.0 | ) |  | 3.1 |  |  | (18.8 | ) |  | 5.2 |
Natural Gas | (1.2 | ) |  | (0.1 | ) |  | (3.8 | ) |  | 1.1 |
Electricity | (0.3 | ) |  | 0.1 |  |  | (1.4 | ) |  | 0.1 |
Total realized (losses) gains | $ | (10.5 | ) |  | $ | 3.1 |  |  | $ | (24.0 | ) |  | $ | 6.4 |
Unrealized (losses)2: |  |  |  |  |  |  |
Non-designated hedges of operational risk: |  |  |  |  |  |  |
Aluminum | $ | (0.3 | ) |  | $ | (1.0 | ) |  | $ | (8.8 | ) |  | $ | 1.3 |
Natural Gas | (1.0 | ) |  | (1.6 | ) |  | (0.2 | ) |  | (1.0 | )
Electricity | (0.4 | ) |  | (1.0 | ) |  | 1.3 |  |  | (0.3 | )
Foreign Currency | — |  |  | 0.1 |  |  | — |  |  | — |
Total non-designated hedges of operational risk | (1.7 | ) |  | (3.5 | ) |  | (7.7 | ) |  | — |
Option Assets relating to the Convertible Notes 3 | — |  |  | 12.9 |  |  | 10.2 |  |  | 19.8 |
Bifurcated Conversion Feature of the Convertible Notes 3 | — |  |  | (10.7 | ) |  | (10.2 | ) |  | (16.2 | )
Total unrealized (losses) gains | $ | (1.7 | ) |  | $ | (1.3 | ) |  | $ | (7.7 | ) |  | $ | 3.6 |
______________________
1 | Realized (losses) gains on hedges of operational risk are recorded within Cost of products sold, excluding depreciation, amortization and other items.
2 | Unrealized (losses) on hedges of operational risk are recorded within Unrealized losses on derivative instruments.
3 | Unrealized (losses) gains on financial derivatives are recorded within Other income, net.
The following table summarizes our material derivative positions at September 30, 2015:
Aluminum | Maturity Period (month/year) |  | Notional Amount of contracts (mmlbs)
Fixed price purchase contracts | 10/15 through 12/16 |  | 148.9 |
Fixed price sales contracts | 10/15 through 10/16 |  | 2.4 |
Midwest premium swap contracts 1 | 10/15 through 12/16 |  | 87.8 |
Natural Gas 2 | Maturity Period (month/year) |  | Notional Amount of contracts (mmbtu)
Fixed price purchase contracts | 10/15 through 12/18 |  | 6,820,000 |
Electricity 3 | Maturity Period (month/year) |  | Notional Amount of contracts (Mwh)
Fixed price purchase contracts | 10/15 through 12/15 |  | 44,180 |
Euro | Maturity Period (month/year) |  | Notional Amount of contracts (euro)
Fixed price purchase contracts | 11/15 through 12/16 |  | 7,315,000 |
______________________
1 | Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on our purchases of primary aluminum.
2 | As of September 30, 2015, we had Henry Hub NYMEX-based hedge positions in place to cover exposure to fluctuations in prices for approximately 76%, 75%, 57% and 11% of the expected natural gas purchases for the remainder of 2015, 2016, 2017 and 2018, respectively.
3 | As of September 30, 2015, we had Mid-C International Commodity Exchange-based hedge positions, as well as physical delivery commitments with energy companies, in place to cover our exposure to fluctuations in electricity prices for approximately 54% of the expected electricity purchases for the remainder of 2015 and each of 2016 and 2017.
We enter into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. We reflect the fair value of our derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2). The following tables present offsetting information regarding our derivatives by type of counterparty as of September 30, 2015 (in millions of dollars):
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) | $ | 0.3 |  |  | $ | — |  |  | $ | 0.3 |  |  | $ | 0.3 |  |  | $ | — |  |  | $ | — |
Total | $ | 0.3 |  |  | $ | — |  |  | $ | 0.3 |  |  | $ | 0.3 |  |  | $ | — |  |  | $ | — |
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) | $ | (10.9 | ) |  | $ | — |  |  | $ | (10.9 | ) |  | $ | (0.3 | ) |  | $ | — |  |  | $ | (10.6 | )
Counterparty (without netting agreements) | (0.5 | ) |  | — |  |  | (0.5 | ) |  | — |  |  | — |  |  | (0.5 | )
Counterparty (with partial netting agreements) | (7.9 | ) |  | — |  |  | (7.9 | ) |  | — |  |  | — |  |  | (7.9 | )
Total | $ | (19.3 | ) |  | $ | — |  |  | $ | (19.3 | ) |  | $ | (0.3 | ) |  | $ | — |  |  | $ | (19.0 | )
The following tables present offsetting information regarding our derivatives by type of counterparty as of December 31, 2014 (in millions of dollars):
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) | $ | 0.9 |  |  | $ | — |  |  | $ | 0.9 |  |  | $ | 0.8 |  |  | $ | — |  |  | $ | 0.1 |
Counterparty (without netting agreements)1 | 84.8 |  |  | — |  |  | 84.8 |  |  | — |  |  | — |  |  | 84.8 |
Total | $ | 85.7 |  |  | $ | — |  |  | $ | 85.7 |  |  | $ | 0.8 |  |  | $ | — |  |  | $ | 84.9 |
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) | $ | (8.0 | ) |  | $ | — |  |  | $ | (8.0 | ) |  | $ | (0.8 | ) |  | $ | — |  |  | $ | (7.2 | )
Counterparty (without netting agreements)1 | (85.0 | ) |  | — |  |  | (85.0 | ) |  | — |  |  | — |  |  | (85.0 | )
Counterparty (with partial netting agreements) | (3.8 | ) |  | — |  |  | (3.8 | ) |  | — |  |  | — |  |  | (3.8 | )
Total | $ | (96.8 | ) |  | $ | — |  |  | $ | (96.8 | ) |  | $ | (0.8 | ) |  | $ | — |  |  | $ | (96.0 | )
_________________
1 | Such amounts include the fair value of the Bifurcated Conversion Feature and Option Assets at December 31, 2014 (see Note 9).

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