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Derivatives, Hedging Programs and Other Financial Instruments | 3 Months Ended
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Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives, Hedging Programs and Other Financial Instruments | Derivatives, Hedging Programs and Other Financial Instruments Overview. In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our exposure to: (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 cash commitments for equipment purchases denominated in foreign currency. We do not use derivative financial instruments for trading or other speculative purposes. Hedging transactions are executed centrally on behalf of all of our operations to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors. Our derivative activities are overseen by a committee ("Hedging Committee"), which is composed of our chief executive officer, chief operating officer, chief financial officer, chief accounting officer, vice president of metal management, treasurer and other officers and employees selected by the chief executive officer. The Hedging Committee meets regularly to review commodity price exposure, derivative positions and strategy. Management reviews the scope of the Hedging Committee's activities with our Board of Directors. We are exposed to counterparty credit risk on all of our derivative instruments, which we manage by monitoring the credit quality of our counterparties and allocating our hedging positions among multiple counterparties to limit exposure to any single entity. Our counterparties are major, investment grade financial institutions or trading companies. Hedging transactions are governed by negotiated reciprocal credit lines, which generally require collateral to be posted above specified credit thresholds. We believe the risk of loss is remote and contained due to counterparty credit quality, our diversification practice and collateral requirements. In a majority of our hedging counterparty agreements, our counterparty offers us a credit line that adjusts up or down, depending on our liquidity. Below specified liquidity thresholds, we may have to post collateral if the fair value of our net liability with such counterparty exceeds our reduced credit line. We manage this risk by allocating hedging transactions among multiple counterparties, using 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 $29.2 million and $7.2 million at March 31, 2020 and December 31, 2019, respectively, and we had no collateral posted as of those dates. Additionally, our firm-price customer sales commitments create incremental customer credit risk related to metal price movements. Under certain circumstances, we mitigate this risk by periodically requiring cash collateral from them, which we classify as deferred revenue and include as a component of Other accrued liabilities. Cash collateral posted from our customers was $2.1 million at March 31, 2020 and $0.2 million at December 31, 2019. Cash Flow Hedges We designate our aluminum and energy derivatives and our forward swap contracts for zinc and copper ("Alloying Metals") used in our fabrication operations as cash flow hedges. Unrealized gains and losses associated with our cash flow hedges are deferred in Other comprehensive (loss) income, net of tax, and reclassified to COGS when such hedges settle. See Note 8 for the total amount of gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments and fair value hedging instruments that was reported in Accumulated other comprehensive loss ("AOCI"), as well as the related reclassifications into earnings and tax effects. Cumulative gains and losses related to cash flow hedges are reclassified out of AOCI and recorded within COGS when the associated hedged commodity purchases impact earnings. Aluminum Hedges. 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. Alloying Metals Hedges. We are exposed to risk of fluctuating prices for Alloying Metals used as raw materials in our fabrication operations. We, from time to time, in the ordinary course of business, use third-party hedging instruments to mitigate our risk from price fluctuations in Alloying Metals. Energy Hedges. We are exposed to risk of fluctuating prices for natural gas and electricity. We, from time to time, in the ordinary course of business, enter into hedging transactions and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in natural gas and electricity prices. Fair Value Hedges We are exposed to foreign currency exchange risk related to firm-price commitments for equipment purchases from foreign manufacturers. We, from time to time, in the ordinary course of business, use third-party hedging instruments to mitigate our exposure to currency exchange rate fluctuations on these purchases, and designate such hedging instruments as fair value hedges. Gain or loss related to components excluded from the assessment of effectiveness from these fair value hedges is first recognized in AOCI and subsequently reclassified to Depreciation and amortization on a straight-line basis over the term of the hedge. Gain or loss on the hedged item (e.g., equipment purchase firm commitments) and the remaining gain or loss on the fair value hedge is recorded within Depreciation and amortization in the period that the gain or loss occurs. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. Notional Amount of Derivative Contracts The following table summarizes our derivative positions at March 31, 2020:
Aluminum |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts |  | 4/20 through 12/22 |  | 115.3 |
Fixed price sales contracts |  | 4/20 through 11/21 |  | 0.8 |
Midwest premium swap contracts 1 |  | 4/20 through 12/22 |  | 110.4 |
Alloying Metals |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts |  | 4/20 through 12/21 |  | 16.9 |
Natural Gas 2 |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmbtu)
Fixed price purchase contracts |  | 4/20 through 12/24 |  | 7,970,000 |
Electricity 3 |  | Maturity Period (month/year) |  | Notional Amount of Contracts (Mwh)
Fixed price purchase contracts |  | 4/20 through 12/22 |  | 613,820 |
Euro |  | Maturity Period (month/year) |  | Notional Amount of Contracts (euro)
Fixed price forward contracts |  | 2/21 through 5/22 |  | 34,323,380 |
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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, 2020, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 75% of the expected natural gas purchases for the remainder of 2020, 76% of the expected natural gas purchases for 2021, 80% of the expected natural gas purchases for both 2022 and 2023 and 75% of the expected natural gas purchases for 2024.
3 | As of March 31, 2020, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 55% of our expected electricity purchases for both the remainder of 2020 and 2021 and 46% of our expected electricity purchases for 2022.
Loss (Gain) The amount of loss (gain) included on our Statements of Consolidated Income associated with all derivative contracts consisted of the following for the periods presented (in millions of dollars):
| Quarter Ended March 31,
| 2020 |  | 2019
Total of income and expense line items presented in our Statements of Consolidated Income in which the effects of cash flow hedges are recorded | $ | 286.6 |  |  | $ | 315.1 |
Loss (gain) recognized in income related to cash flow hedges: |  |  |
Aluminum | 5.7 |  |  | 4.2 |
Alloying metals | 0.6 |  |  | 0.1 |
Natural gas | 0.5 |  |  | (0.1 | )
Electricity | 0.2 |  |  | — |
Total loss recognized in income related to cash flow hedges | $ | 7.0 |  |  | $ | 4.2 |
Total of income and expense line items presented in our Statements of Consolidated Income in which the effects of fair value hedges are recorded | $ | 13.2 |  |  | $ | 11.9 |
Loss (gain) recognized in income related to fair value hedges: |  |  |
Foreign exchange contracts | 0.2 |  |  | — |
Hedged item | (0.2 | ) |  | — |
Excluded component amortized from AOCI to income | 0.2 |  |  | — |
Total loss recognized in income related to fair value hedges | $ | 0.2 |  |  | $ | — |
Fair Values of Derivative Contracts The fair values of our derivative contracts are based upon trades in liquid markets. Valuation model inputs can 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. All of our derivative contracts with counterparties are subject to enforceable master netting arrangements. We reflect the fair value of our derivative contracts on a gross basis on our Consolidated Balance Sheets. The following table presents the fair value of our derivative financial instruments as of the periods presented (in millions of dollars):
| March 31, 2020 |  | December 31, 2019
| Derivative Assets |  | Derivative Liabilities |  | Net Amount |  | Derivative Assets |  | Derivative Liabilities |  | Net Amount
Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |  |
Aluminum – |  |  |  |  |  |  |  |  |  |  |
Fixed price purchase contracts | $ | — |  |  | $ | (14.2 | ) |  | $ | (14.2 | ) |  | $ | 1.0 |  |  | $ | (4.1 | ) |  | $ | (3.1 | )
Fixed price sales contracts | 0.1 |  |  | — |  |  | 0.1 |  |  | — |  |  | — |  |  | — |
Midwest premium swap contracts | — |  |  | (4.3 | ) |  | (4.3 | ) |  | — |  |  | (1.2 | ) |  | (1.2 | )
Alloying Metals – Fixed price purchase contracts | — |  |  | (5.5 | ) |  | (5.5 | ) |  | 0.4 |  |  | (1.5 | ) |  | (1.1 | )
Natural gas – Fixed price purchase contracts | 0.1 |  |  | (3.0 | ) |  | (2.9 | ) |  | — |  |  | (2.8 | ) |  | (2.8 | )
Electricity – Fixed price purchase contracts | 1.6 |  |  | (2.8 | ) |  | (1.2 | ) |  | 2.6 |  |  | (1.6 | ) |  | 1.0 |
| March 31, 2020 |  | December 31, 2019
| Derivative Assets |  | Derivative Liabilities |  | Net Amount |  | Derivative Assets |  | Derivative Liabilities |  | Net Amount
Fair Value Hedges: |  |  |  |  |  |  |  |  |  |  |
Foreign currency – Fixed price forward contracts | — |  |  | (1.0 | ) |  | (1.0 | ) |  | — |  |  | — |  |  | — |
Total | $ | 1.8 |  |  | $ | (30.8 | ) |  | $ | (29.0 | ) |  | $ | 4.0 |  |  | $ | (11.2 | ) |  | $ | (7.2 | )
The following table presents the total amounts of derivative assets and liabilities on our Consolidated Balance Sheets as of the periods presented (in millions of dollars):
| March 31, 2020 |  | December 31, 2019
Derivative assets: |  |  |
Prepaid expenses and other current assets | $ | 0.6 |  |  | $ | 2.1 |
Other assets | 1.2 |  |  | 1.9 |
Total derivative assets | $ | 1.8 |  |  | $ | 4.0 |
Derivative liabilities: |  |  |
Other accrued liabilities | $ | (19.0 | ) |  | $ | (7.6 | )
Long-term liabilities | (11.8 | ) |  | (3.6 | )
Total derivative liabilities | $ | (30.8 | ) |  | $ | (11.2 | )
Fair Value of Other Financial Instruments Cash and Cash Equivalents. See Note 2 for components of cash and cash equivalents. Available for Sale Securities. We hold debt investment securities that are accounted for as available for sale securities and are presented as cash equivalents and short-term investments on our Consolidated Balance Sheets. The fair value of the debt investment securities, which consist of commercial paper, is determined based on valuation models that use observable market data. All of our short-term investments generally have maturity dates under 12 months, however, due to market conditions existing as of March 31, 2020, all short-term investments had maturity dates of less than 90 days. We review our debt investment portfolio for credit loss at least quarterly or when there are changes in credit risk or other potential valuation concerns. At March 31, 2020 and December 31, 2019, the total unrealized loss, net of tax, included in AOCI was immaterial. We believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized loss on these securities was due to normal market fluctuations, and not due to increased credit risk or other valuation concerns. The fair value input of our available for sale securities, which are classified within Level 2 of the fair value hierarchy, is calculated based on broker quotes. The amortized cost for available for sale securities approximates their fair value. The following table classifies our other financial assets under the appropriate level of the fair value hierarchy as of March 31, 2020 (in millions of dollars):
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash and cash equivalents | $ | 199.6 |  |  | $ | 107.6 |  |  | $ | — |  |  | $ | 307.2 |
Short-term investments | — |  |  | 39.3 |  |  | — |  |  | 39.3 |
Total | $ | 199.6 |  |  | $ | 146.9 |  |  | $ | — |  |  | $ | 346.5 |
The following table classifies our other financial assets under the appropriate level of the fair value hierarchy as of December 31, 2019 (in millions of dollars):
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Cash and cash equivalents | $ | 28.2 |  |  | $ | 236.1 |  |  | $ | — |  |  | $ | 264.3 |
Short-term investments | — |  |  | 78.7 |  |  | — |  |  | 78.7 |
Total | $ | 28.2 |  |  | $ | 314.8 |  |  | $ | — |  |  | $ | 343.0 |
All Other Financial Assets and Liabilities. We believe that the fair values of our accounts receivable, contract assets, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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