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Derivatives, Hedging Programs and Other Financial Instruments | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives, Hedging Programs and Other Financial Instruments | 4. 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, including primary and scrap, or recycled, aluminum, our main raw material, and certain alloys 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 and/or other agreements 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 treasury, risk and procurement 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, allocating our hedging positions among multiple counterparties to limit exposure to any single entity and using options as part of the hedging strategy. Our counterparties are major investment grade financial institutions or trading companies and our hedged transactions are governed by negotiated reciprocal credit lines, which generally require collateral to be posted above specified credit thresholds which may adjust up or down, depending on our liquidity. As a result, we believe the risk of loss is remote and contained. The aggregate fair value of our derivative instruments that were in a net liability position was $14.8 million and zero at September 30, 2022 and December 31, 2021, 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. We had $1.1 million and zero cash collateral posted from our customers at September 30, 2022 and December 31, 2021, respectively. Cash Flow Hedges We designate as cash flow hedges forward swap contracts for aluminum, energy and, from time-to-time, zinc and copper (“Alloying Metals”) used in our fabrication operations and foreign currency forward contracts for equipment and services for which payments are due in foreign currency. 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 or when it is probable that the original forecasted transactions will not occur by the end of the originally specified time period. See Note 7 for the total amount of gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments that was reported in Accumulated other comprehensive (loss) income (“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) and to pass through aluminum price fluctuations to our customers. For some of our higher value added products sold on a spot basis, the pass through of aluminum price movements can sometimes lag by as much as several months, with a favorable impact to us when aluminum prices decline and an adverse impact to us when aluminum 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 aluminum 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 aluminum price risk for us. We use third-party hedging instruments to limit exposure to aluminum price risk related to the aluminum 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, enter into hedging transactions and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in alloying metals prices that are not passed through completely or at the time of sale pursuant to the terms of certain customer contracts. 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 that are not passed through completely or at the time of sale pursuant to the terms of certain customer contracts. The following table summarizes the percentages as of September 30, 2022 of our expected variable priced purchases of metal alloys and energy for which we have executed derivative and/or physical delivery commitments to reduce price fluctuations for each of the following years:
|  | Remainder of 2022 |  | 2023 |  | 2024 |  | 2025 |  | 2026
Zinc |  | 66% |  | 3% |  | — |  | — |  | —
Copper |  | 58% |  | — |  | — |  | — |  | —
Magnesium |  | 100% |  | 100% |  | 40% |  | — |  | —
Silicon |  | 100% |  | — |  | — |  | — |  | —
Natural Gas |  | 49% |  | 50% |  | 47% |  | 26% |  | 21%
Electricity |  | 71% |  | 43% |  | — |  | — |  | —
Foreign Currency Hedges. We are exposed to foreign currency exchange risk related to certain equipment and service agreements with vendors for which payments are due in foreign currency. We, from time-to-time, in the ordinary course of business, use foreign currency forward contracts in order to mitigate the exposure to currency exchange rate fluctuations related to these purchases. Non-Designated Hedges of Operational Risks From time-to-time, we enter into commodity contracts that are not designated as hedging instruments to mitigate certain short‑term commodity impacts, as identified. The gain or loss on these derivatives is recognized within COGS. Notional Amount of Derivative Contracts The following table summarizes our derivative positions at September 30, 2022:
Aluminum |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmlbs) |
Fixed price purchase contracts |  | October 2022 through December 2023 |  |  | 87.9 |
Fixed price sales contracts |  | October 2022 through December 2022 |  |  | 15.0 |
Midwest premium swap contracts 1 |  | October 2022 through December 2023 |  |  | 52.3 |
Alloying Metals |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmlbs) |
Fixed price purchase contracts |  | October 2022 through November 2023 |  |  | 2.0 |
Natural Gas |  | Maturity Period (month/year) |  | Notional Amount of Contracts (mmbtu) |
Fixed price purchase contracts |  | October 2022 through December 2025 |  |  | 3,900,000 |
Electricity |  | Maturity Period (month/year) |  | Notional Amount of Contracts (Mwh) |
Fixed price purchase contracts |  | October 2022 through December 2022 |  |  | 55,225 |
Euro |  | Maturity Period (month/year) |  | Notional Amount of Contracts (euro) |
Fixed price forward contracts |  | December 2022 through February 2024 |  |  | 1,126,066 |
1 Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on our purchases of primary aluminum. Loss (Gain) The following table summarizes the amount of loss (gain) included on our Statements of Consolidated Income (Loss) associated with all derivative contracts (in millions of dollars):
|  | Quarter Ended September 30, |  |  | Nine Months Ended September 30, |  |  | Statements of Consolidated
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |  |  | Income (Loss) Classification
Total of income and expense line items presented in our Statements of Consolidated Income (Loss) in which the effects of hedges are recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash flow hedges |  | $ | 694.9 |  |  | $ | 677.8 |  |  | $ | 2,459.2 |  |  | $ | 1,613.6 |  |  | Cost of products sold
Loss (gain) recognized in our Statements of Consolidated Income (Loss) related to cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aluminum |  | $ | 14.2 |  |  | $ | (13.3 | ) |  | $ | 1.4 |  |  | $ | (24.3 | ) |  | Cost of products sold
Alloying Metals |  |  | — |  |  |  | (0.2 | ) |  |  | — |  |  |  | 0.2 |  |  | Cost of products sold
Natural gas |  |  | (2.3 | ) |  |  | (0.6 | ) |  |  | (5.1 | ) |  |  | (0.7 | ) |  | Cost of products sold
Electricity |  |  | (3.8 | ) |  |  | (2.6 | ) |  |  | (5.2 | ) |  |  | (3.3 | ) |  | Cost of products sold
Total loss (gain) recognized in our Statements of Consolidated Income (Loss) related to cash flow hedges |  | $ | 8.1 |  |  | $ | (16.7 | ) |  | $ | (8.9 | ) |  | $ | (28.1 | ) |  |
Loss (gain) recognized in our Statements of Consolidated Income (Loss) related to non-designated hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Alloying Metals – Realized loss (gain) |  | $ | 0.3 |  |  | $ | (1.2 | ) |  | $ | (0.8 | ) |  | $ | (3.8 | ) |  | Cost of products sold
Alloying Metals – Unrealized loss |  |  | — |  |  |  | 1.9 |  |  |  | 1.9 |  |  |  | 2.0 |  |  | Cost of products sold
Total loss (gain) recognized in our Statements of Consolidated Income (Loss) related to non-designated hedges |  | $ | 0.3 |  |  | $ | 0.7 |  |  | $ | 1.1 |  |  | $ | (1.8 | ) |  |
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 (in millions of dollars):
|  | As of September 30, 2022 |  |  | As of December 31, 2021 |
|  | Assets |  |  | Liabilities |  |  | Net Amount |  |  | Assets |  |  | Liabilities |  |  | Net Amount |
Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aluminum – |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed price purchase contracts |  | $ | 0.6 |  |  | $ | (15.5 | ) |  | $ | (14.9 | ) |  | $ | 12.2 |  |  | $ | (1.1 | ) |  | $ | 11.1 |
Fixed price sales contracts |  |  | 1.7 |  |  |  | — |  |  |  | 1.7 |  |  |  | — |  |  |  | — |  |  |  | — |
Midwest premium swap contracts |  |  | 1.4 |  |  |  | (3.7 | ) |  |  | (2.3 | ) |  |  | 5.5 |  |  |  | (0.1 | ) |  |  | 5.4 |
Natural gas – Fixed price purchase contracts |  |  | 9.1 |  |  |  | — |  |  |  | 9.1 |  |  |  | 3.0 |  |  |  | (0.1 | ) |  |  | 2.9 |
Electricity – Fixed price purchase contracts |  |  | 2.6 |  |  |  | — |  |  |  | 2.6 |  |  |  | 4.4 |  |  |  | (0.6 | ) |  |  | 3.8 |
Foreign currency – Fixed price forward contracts |  |  | — |  |  |  | (0.1 | ) |  |  | (0.1 | ) |  |  | — |  |  |  | — |  |  |  | — |
Total cash flow hedges |  |  | 15.4 |  |  |  | (19.3 | ) |  |  | (3.9 | ) |  |  | 25.1 |  |  |  | (1.9 | ) |  |  | 23.2 |
Non-Designated Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Alloying Metals – Fixed price purchase contracts |  |  | — |  |  |  | (0.5 | ) |  |  | (0.5 | ) |  |  | 1.6 |  |  |  | (0.1 | ) |  |  | 1.5 |
Total non-designated hedges |  |  | — |  |  |  | (0.5 | ) |  |  | (0.5 | ) |  |  | 1.6 |  |  |  | (0.1 | ) |  |  | 1.5 |
Total |  | $ | 15.4 |  |  | $ | (19.8 | ) |  | $ | (4.4 | ) |  | $ | 26.7 |  |  | $ | (2.0 | ) |  | $ | 24.7 |
The following table presents the total amounts of derivative assets and liabilities on our Consolidated Balance Sheets (in millions of dollars):
|  | As of September 30, 2022 |  |  | As of December 31, 2021 |
Derivative assets: |  |  |  |  |  |
Prepaid expenses and other current assets |  | $ | 11.3 |  |  | $ | 25.0 |
Other assets |  |  | 4.1 |  |  |  | 1.7 |
Total derivative assets |  | $ | 15.4 |  |  | $ | 26.7 |
Derivative liabilities: |  |  |  |  |  |
Other accrued liabilities |  | $ | (19.5 | ) |  | $ | (1.9 | )
Long-term liabilities |  |  | (0.3 | ) |  |  | (0.1 | )
Total derivative liabilities |  | $ | (19.8 | ) |  | $ | (2.0 | )
Fair Value of Other Financial Instruments 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 https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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