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Derivative Financial Instruments and Related Hedging Programs | 3 Months Ended
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Mar. 31, 2016
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 operating officer, chief financial officer, chief accounting officer, treasurer and vice president of 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 March 31, 2016, we had open forward contracts designated as cash flow hedges to purchase euros with maturity dates between two months and 17 months. The notional amounts of these foreign currency forward contracts totaled 4.0 million euros and 4.7 million euros at March 31, 2016 and December 31, 2015, respectively, with an average contract exchange rate of 1.14 euro to US dollar for both periods. The effective portion of the fair value on these instruments is recorded within Other comprehensive income (loss) and is reclassified into the Statements of Consolidated Income (Loss) on the same line item and the same period in which the underlying equipment is depreciated. We had no such reclassifications into Net income (loss) during the quarter ended March 31, 2016 and anticipate no material such reclassifications for the next 12 months. For the quarter ended March 31, 2016, we recorded an unrealized gain of $0.2 million on the effective portions of our designated foreign currency cash flow hedges, resulting in an ending loss in Accumulated other comprehensive loss related to the cash flow hedges of $0.1 million at March 31, 2016. We incurred no ineffectiveness on these hedges during the quarter ended March 31, 2016. There were no forward contracts designated as cash flow hedges during the quarter ended March 31, 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. 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. Additionally, in certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Because we generally purchase primary and secondary aluminum on a floating price basis, the lag in passing through metal price movements to customers on some of our higher value added products sold on a spot basis and the volume that we have committed to sell to our customers under a firm-price arrangement create metal price risk for us. We use third-party hedging instruments to limit exposure to metal price risk related to the metal pass through lag on some of our products and firm-price customer sales contracts. 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 $10.4 million and $14.6 million at March 31, 2016 and December 31, 2015, respectively, and we had no collateral posted as of those dates. 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. 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
| March 31,
| 2016 |  | 2015
Included in Other Comprehensive Income (Loss): |  |  |
Unrealized gain: |  |  |
Foreign Currency | $ | 0.2 |  |  | $ | — |
Included in Statements of Consolidated Income (Loss): |  |  |
Realized loss 1: |  |  |
Aluminum | (2.7 | ) |  | (2.7 | )
Natural Gas | (1.7 | ) |  | (1.3 | )
Electricity | — |  |  | (0.7 | )
Total realized loss | $ | (4.4 | ) |  | $ | (4.7 | )
Unrealized gain (loss)2: |  |  |
Non-designated hedges of operational risk: |  |  |
Aluminum | $ | 3.2 |  |  | $ | (4.2 | )
Natural Gas | 0.8 |  |  | (0.7 | )
Electricity | — |  |  | 0.4 |
Total non-designated hedges of operational risk | 4.0 |  |  | (4.5 | )
Option Assets relating to the Convertible Notes 3 | — |  |  | 10.2 |
Bifurcated Conversion Feature of the Convertible Notes 3 | — |  |  | (10.2 | )
Total unrealized gain (loss) | $ | 4.0 |  |  | $ | (4.5 | )
______________________
1 | Realized loss on hedges of operational risk are recorded within Cost of products sold, excluding depreciation, amortization and other items.
2 | Unrealized gain (loss) on hedges of operational risk are recorded within Unrealized (gain) loss on derivative instruments.
3 | Unrealized gain (loss) on financial derivatives related to our 4.5% unsecured cash convertible senior notes ("Convertible Notes"), which settled in April 2015.
The following table summarizes our material derivative positions at March 31, 2016:
Aluminum | Maturity Period (month/year) |  | Notional Amount of contracts (mmlbs)
Call option purchase contracts | 4/16 through 6/16 |  | 2.0 |
Fixed price purchase contracts | 4/16 through 12/17 |  | 128.4 |
Fixed price sales contracts | 4/16 through 12/17 |  | 2.2 |
Midwest premium swap contracts 1 | 4/16 through 12/17 |  | 92.0 |
Natural Gas 2 | Maturity Period (month/year) |  | Notional Amount of contracts (mmbtu)
Fixed price purchase contracts | 4/16 through 12/18 |  | 7,070,000 |
Euro | Maturity Period (month/year) |  | Notional Amount of contracts (euro)
Fixed price purchase contracts | 5/16 through 8/17 |  | 3,950,374 |
______________________
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 March 31, 2016, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 79%, 73% and 72% of the expected natural gas purchases for the remainder of 2016, 2017 and 2018 respectively.
We have physical delivery commitments at firm prices covering approximately 54% of our expected electricity purchases for the remainder of 2016 and 2017, and 27% for 2018. 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 March 31, 2016 (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) | $ | 1.0 |  |  | $ | — |  |  | $ | 1.0 |  |  | $ | 1.0 |  |  | $ | — |  |  | $ | — |
Counterparty (with partial netting agreements) | 0.6 |  |  | — |  |  | 0.6 |  |  | 0.6 |  |  | $ | — |  |  | $ | — |
Total | $ | 1.6 |  |  | $ | — |  |  | $ | 1.6 |  |  | $ | 1.6 |  |  | $ | — |  |  | $ | — |
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) | $ | (6.3 | ) |  | $ | — |  |  | $ | (6.3 | ) |  | $ | (1.0 | ) |  | $ | — |  |  | $ | (5.3 | )
Counterparty (with partial netting agreements) | (5.7 | ) |  | — |  |  | (5.7 | ) |  | (0.6 | ) |  | — |  |  | (5.1 | )
Total | $ | (12.0 | ) |  | $ | — |  |  | $ | (12.0 | ) |  | $ | (1.6 | ) |  | $ | — |  |  | $ | (10.4 | )
The following tables present offsetting information regarding our derivatives by type of counterparty as of December 31, 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) | $ | 1.3 |  |  | $ | — |  |  | $ | 1.3 |  |  | $ | 1.3 |  |  | $ | — |  |  | $ | — |
Counterparty (with partial netting agreements) | 0.3 |  |  | — |  |  | 0.3 |  |  | 0.3 |  |  | — |  |  | — |
Total | $ | 1.6 |  |  | $ | — |  |  | $ | 1.6 |  |  | $ | 1.6 |  |  | $ | — |  |  | $ | — |
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) | $ | (8.5 | ) |  | $ | — |  |  | $ | (8.5 | ) |  | $ | (1.3 | ) |  | $ | — |  |  | $ | (7.2 | )
Counterparty (with partial netting agreements) | (7.7 | ) |  | — |  |  | (7.7 | ) |  | (0.3 | ) |  | — |  |  | (7.4 | )
Total | $ | (16.2 | ) |  | $ | — |  |  | $ | (16.2 | ) |  | $ | (1.6 | ) |  | $ | — |  |  | $ | (14.6 | )

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