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Derivatives, Hedging Programs and Other Financial Instruments | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivatives, Hedging Programs and Other Financial Instruments | 5. 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 financial officer, chief accounting officer, vice president of metal management, vice president of economic analysis and strategic planning 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 $4.3 million and $7.2 million at September 30, 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. There was no cash collateral posted from our customers as of September 30, 2020, compared to $0.2 million as of December 31, 2019. Cash Flow Hedges We designate forward swap contracts for aluminum, energy and, from time-to-time, 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 income (loss), net of tax, and reclassified to COGS when such hedges settle or when it is probable that the original forecasted transactions will not occur by the end of the originally specified time period. 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 on a straight-line basis over the term of the hedge is recognized in AOCI. Non-Designated Hedges of Operational Risks From time-to-time, we enter into commodity and foreign currency exchange contracts that are not designated as hedging instruments to mitigate certain short-term commodity and currency impacts, as identified. For derivative instruments that are not designated as hedging instruments, the gain or loss on these derivatives is recognized within COGS or Other expense, net, depending on whether it relates to commodity risk or foreign currency risk, respectively. During the quarter ended September 30, 2020, we declassified all outstanding Alloying Metals hedges from their initial designation as cash flow hedges. As such, all unrealized gain or loss on these derivatives subsequent to declassification was recognized within COGS. Notional Amount of Derivative Contracts The following table summarizes our derivative positions at September 30, 2020:
Aluminum |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmlbs) |
Fixed price purchase contracts |  | 10/20 through 12/22 |  |  | 80.1 |
Fixed price sales contracts |  | 10/20 through 11/21 |  |  | 1.0 |
Midwest premium swap contracts1 |  | 10/20 through 12/22 |  |  | 79.1 |
Alloying Metals |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmlbs) |
Fixed price purchase contracts |  | 10/20 through 12/21 |  |  | 12.0 |
Fixed price sales contracts |  | 10/20 through 12/21 |  |  | 5.0 |
Natural Gas2 |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmbtu) |
Fixed price purchase contracts |  | 10/20 through 12/24 |  |  | 7,070,000 |
Electricity3 |  | Maturity Period (month/year) |  | Notional Amount of Contracts (Mwh) |
Fixed price purchase contracts |  | 10/20 through 12/22 |  |  | 525,980 |
Euro |  | Maturity Period (month/year) |  | Notional Amount of Contracts (euro) |
Fixed price forward contracts |  | 12/20 through 1/21 |  |  | 355,662 |
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, 2020, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 81% of the expected natural gas purchases for the remainder of 2020, 91% of the expected natural gas purchases for 2021, 94% of the expected natural gas purchases for 2022, 93% of the expected natural gas purchases for 2023, 84% of the expected natural gas purchases for 2024 and 25% of the expected natural gas purchases for both 2025 and 2026.
3 | As of September 30, 2020, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 57% of our expected electricity purchases for the remainder of 2020, 60% of our expected electricity purchases for 2021 and 50% 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 September 30, |  |  | Nine Months Ended September 30, |  |  | Statements of Consolidated
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  |  | Income Classification
Total of income and expense line items presented in our Statements of Consolidated Income in which the effects of hedges are recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash flow hedges |  | $ | 208.4 |  |  | $ | 298.6 |  |  | $ | 719.5 |  |  | $ | 917.2 |  |  | COGS
Fair value hedges |  | $ | 12.9 |  |  | $ | 12.3 |  |  | $ | 39.1 |  |  | $ | 36.3 |  |  | Depreciation and amortization
Fair value hedges |  | $ | (0.5 | ) |  | $ | (0.8 | ) |  | $ | (0.8 | ) |  | $ | (0.4 | ) |  | Other expense, net
Loss recognized in our Statements of Consolidated Income related to cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aluminum |  | $ | 1.2 |  |  | $ | 4.8 |  |  | $ | 14.5 |  |  | $ | 13.5 |  |  | COGS
Alloying metals (effective hedges) |  |  | — |  |  |  | 0.5 |  |  |  | 2.1 |  |  |  | 0.7 |  |  | COGS
Alloying metals (reclassification from AOCI due to forecasted transactions no longer probable of occurring) |  |  | 0.1 |  |  |  | — |  |  |  | 0.8 |  |  |  | — |  |  | COGS
Natural gas |  |  | 0.3 |  |  |  | 0.1 |  |  |  | 1.2 |  |  |  | 0.1 |  |  | COGS
Electricity |  |  | — |  |  |  | — |  |  |  | 0.6 |  |  |  | — |  |  | COGS
Total loss recognized in our Statements of Consolidated Income related to cash flow hedges |  | $ | 1.6 |  |  | $ | 5.4 |  |  | $ | 19.2 |  |  | $ | 14.3 |  |  |
(Gain) loss recognized in our Statements of Consolidated Income related to fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | $ | — |  |  | $ | — |  |  | $ | (0.1 | ) |  | $ | — |  |  | Depreciation and amortization
Hedged item |  |  | — |  |  |  | — |  |  |  | 0.1 |  |  |  | — |  |  | Depreciation and amortization
Excluded component amortized from AOCI |  |  | — |  |  |  | — |  |  |  | 0.4 |  |  |  | — |  |  | Depreciation and amortization
Reclassification from AOCI related to early termination of firm commitment |  |  | — |  |  |  | — |  |  |  | (0.4 | ) |  |  | — |  |  | Other expense, net
Net settlement related to early termination of forward contracts |  |  | — |  |  |  | — |  |  |  | 0.3 |  |  |  | — |  |  | Other expense, net
Total loss recognized in our Statements of Consolidated Income related to fair value hedges |  | $ | — |  |  | $ | — |  |  | $ | 0.3 |  |  | $ | — |  |  |
Loss (gain) recognized in our Statements of Consolidated Income related to non-designated hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Alloying metals – Realized loss |  | $ | 0.3 |  |  | $ | — |  |  | $ | 1.7 |  |  | $ | — |  |  | COGS
Alloying metals – Unrealized gain |  |  | (1.8 | ) |  |  | — |  |  |  | (1.8 | ) |  |  | — |  |  | COGS
Total (gain) loss recognized in our Statements of Consolidated Income related to non-designated hedges: |  | $ | (1.5 | ) |  | $ | — |  |  | $ | (0.1 | ) |  | $ | — |  |  |
Fair Values of D erivative 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):
|  | September 30, 2020 |  |  | December 31, 2019 |
|  | Assets |  |  | Liabilities |  |  | Net Amount |  |  | Assets |  |  | Liabilities |  |  | Net Amount |
Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aluminum – |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed price purchase contracts |  | $ | 1.0 |  |  | $ | (1.6 | ) |  | $ | (0.6 | ) |  | $ | 1.0 |  |  | $ | (4.1 | ) |  | $ | (3.1 | )
Midwest premium swap contracts |  |  | 0.1 |  |  |  | (2.3 | ) |  |  | (2.2 | ) |  |  | — |  |  |  | (1.2 | ) |  |  | (1.2 | )
Alloying Metals – |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed price purchase contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 0.4 |  |  |  | (1.5 | ) |  |  | (1.1 | )
Natural gas – Fixed price purchase contracts |  |  | 0.8 |  |  |  | (1.5 | ) |  |  | (0.7 | ) |  |  | — |  |  |  | (2.8 | ) |  |  | (2.8 | )
Electricity – Fixed price purchase contracts |  |  | 2.1 |  |  |  | (2.2 | ) |  |  | (0.1 | ) |  |  | 2.6 |  |  |  | (1.6 | ) |  |  | 1.0 |
Total cash flow hedges |  |  | 4.0 |  |  |  | (7.6 | ) |  |  | (3.6 | ) |  |  | 4.0 |  |  |  | (11.2 | ) |  |  | (7.2 | )
Non-Designated Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Alloying Metals – |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed price purchase contracts |  |  | 1.5 |  |  |  | (0.2 | ) |  |  | 1.3 |  |  |  | — |  |  |  | — |  |  |  | — |
Fixed price sales contracts |  |  | — |  |  |  | (0.8 | ) |  |  | (0.8 | ) |  |  | — |  |  |  | — |  |  |  | — |
Total non-designated hedges |  |  | 1.5 |  |  |  | (1.0 | ) |  |  | 0.5 |  |  |  | — |  |  |  | — |  |  |  | — |
Total |  | $ | 5.5 |  |  | $ | (8.6 | ) |  | $ | (3.1 | ) |  | $ | 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):
|  | September 30, 2020 |  |  | December 31, 2019 |
Derivative assets: |  |  |  |  |  |  |  |
Prepaid expenses and other current assets |  | $ | 3.9 |  |  | $ | 2.1 |
Other assets |  |  | 1.6 |  |  |  | 1.9 |
Total derivative assets |  | $ | 5.5 |  |  | $ | 4.0 |
Derivative liabilities: |  |  |  |  |  |  |  |
Other accrued liabilities |  | $ | (4.7 | ) |  | $ | (7.6 | )
Long-term liabilities |  |  | (3.9 | ) |  |  | (3.6 | )
Total derivative liabilities |  | $ | (8.6 | ) |  | $ | (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. Prior to June 30, 2020, we held commercial paper debt securities that were accounted for as available for sale securities and presented as either cash equivalents or short-term investments on our Consolidated Balance Sheets depending on their time-to-maturity upon initial investment. At December 31, 2019, the fair value input of our available for sale securities, which were classified within Level 2 of the fair value hierarchy, was calculated based on broker quotes. The amortized cost of available for sale securities approximated their fair value. When applicable, 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. B ased on market conditions during the nine months ended September 30, 2020, we settled all remaining outstanding available for sale securities upon maturity. The following table classifies our other financial assets under the appropriate level of the fair value hierarchy as of September 30, 2020 (in millions of dollars):
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Cash and cash equivalents |  | $ | 750.1 |  |  | $ | — |  |  | $ | — |  |  | $ | 750.1 |
Total |  | $ | 750.1 |  |  | $ | — |  |  | $ | — |  |  | $ | 750.1 |
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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