Derivative Instruments and Hedging Activities

Our risk management and derivative accounting policies are presented in Notes 1 and 18 of the Notes included in our Annual Report and did not significantly change during the first half of 2012.

Significant Derivative/Hedge Positions

Derivative Activity Related to the Acquisition

In May 2012, in connection with the Acquisition, we issued $1.9 billion of senior notes with portions maturing in 2017, 2022 and 2042. Prior to the issuance of the notes, we systematically removed a portion of our interest rate market risk by entering into standard pre-issuance U.S. Treasury interest rate hedges ("Treasury Locks"). This resulted in an increase in the certainty of our yield to maturity when issuing the notes. Subsequent to entering into the hedges, market interest rates decreased, resulting in more favorable interest rates for the issued notes. Consequently, we recognized a cash loss of $39.2 million on settlement of the Treasury Locks recorded in Interest expense. See Note 13, "Debt" for further discussion.

Additionally, in June 2012, we issued a Convertible Note to the Seller simultaneous with the closing of the Acquisition. The Seller may exercise a put right with respect to put the Convertible Note to us during the conversion period for the greater of the principal amount of the Convertible Note or the aggregate cash value of 12,894,044 shares of our Class B Common Stock, as adjusted for certain corporate events. The Convertible Note's embedded conversion feature was determined to meet the definition of a derivative required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. At issuance, we recorded a liability of €12.1 million (or $15.2 million) related to the conversion feature. See Note 13, "Debt" for further discussion.

Cross Currency Swaps

We historically designated the cross currency swap contracts as cash flow hedges of the variability of cash flows related to British Pound ("GBP") denominated principal and interest payments on intercompany notes of GBP 530 million. In September 2011, we cash settled approximately 25% of our GBP 530 million/$774 million and CAD 1.2 billion/GBP 530 million cross currency swaps. As a result of the settlement, we extinguished $98.7 million of the outstanding liability. Simultaneously with the settlement of the swaps, we paid down an equal portion of the outstanding principal of the intercompany notes in the amount of GBP 132 million.

In October 2011, we simultaneously extended both the terms of approximately half of the original intercompany notes and cross currency swaps, such that the new maturities are March 2014. The remaining approximate 25% was left unadjusted and continued to be due in May 2012. Following this extension, in November 2011, we dedesignated all of the remaining swaps as cash flow hedges and designated the aggregate swaps as a net investment hedge of our Canadian business.

In March 2012, we cash settled the remaining approximate 25% of our original cross currency swaps that was not refinanced in October 2011 as discussed above. As a result of the settlement, we extinguished $110.6 million of the outstanding liability. Our outstanding cross currency swaps were in a net liability position of $208.6 million classified as non-current at June 30, 2012.

Derivative Fair Value Measurements

We utilize market approaches to estimate the fair value of our derivative instruments by discounting anticipated future cash flows derived from the derivative's contractual terms and observable market interest, foreign exchange and commodity rates. The fair values of our derivatives also include credit risk adjustments to account for our counterparties' credit risk, as well as our own non-performance risk. As of June 30, 2012, and December 31, 2011, these adjustments resulted in deferred net gains in AOCI of $1.3 million and $1.1 million, respectively, as the fair value of our derivatives were in net liability positions at both period ends.The table below summarizes our derivative assets and liabilities that were measured at fair value as of June 30, 2012, and December 31, 2011.



				June 30, 2012
	Total at June 30, 2012			Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	(In millions)
Cross currency swaps	$	(208.6	)	$	—	$	(208.6	)	$	—
Foreign currency forwards	3.5			—		3.5			—
Commodity swaps	(3.9		)	—		(3.9		)	—
Equity conversion feature of debt	(20.8		)	—		—			(20.8		)
Total	$	(229.8	)	$	—	$	(209.0	)	$	(20.8	)



				December 31, 2011
	Total at December 31, 2011			Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	(In millions)
Cross currency swaps	$	(311.9	)	$	—	$	(311.9	)	$	—
Foreign currency forwards	2.2			—		2.2			—
Commodity swaps	(6.9		)	—		(6.9		)	—
Total	$	(316.6	)	$	—	$	(316.6	)	$	—

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended June 30, 2012. Both observable and unobservable inputs may be used to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable ( e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The table below summarizes derivative valuation activity using significant unobservable inputs (Level 3) (in millions):



	Rollforward of Level 3 Inputs
Total at December 31, 2011	$	—
Total gains or losses (realized/unrealized)
Included in earnings(1)	(5.6		)
Included in AOCI	—
Purchases	—
Sales	—
Issuances(1)	(15.2		)
Settlements	—
Net transfers In/Out of Level 3	—
Total at June 30, 2012	$	(20.8	)
Unrealized gains or losses for Level 3 assets/liabilities outstanding at June 30, 2012(1)	$	(5.6	)


(1)	At issuance, we recorded a liability of €12.1 million or ($15.2 million) related to the Convertible Note's embedded conversion feature. We recognized a $5.6 million unrealized loss, recorded in Interest expense, related to changes in fair value of this conversion feature for the quarter ended June 30, 2012.

As of June 30, 2012, we had no significant transfers between Level 1 and 2. As of December 31, 2011, we did not hold derivatives classified as Level 3 due to valuations based upon significant unobservable inputs. We did not have any significant transfers between Level 1 and Level 2 during fiscal year 2011. New derivative contracts transacted during fiscal year 2011 were all included in Level 2.

Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value, were as follows (in millions):



	Balance at June 30, 2012			Valuation Technique	Significant Unobservable Input(s)/Sensitivity of the Fair Value to Changes in the Unobservable Inputs	Range
Equity conversion feature of debt	$	(20.8	)	Option model	Implied volatility(1)	24-25%

Sensitivity of the fair value to changes in the unobservable inputs


(1)	Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.

Results of Period Derivative Activity

The tables below include the year to date results of our derivative activity in the Condensed Consolidated Balance Sheets as of June 30, 2012, and December 31, 2011, and the Condensed Consolidated Statements of Operations for the second quarters and first halves ended June 30, 2012, and June 25, 2011.

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheet (in millions, except for certain commodity swaps with notional amounts measured in Metric Tonnes, as noted)



	June 30, 2012
			Asset derivatives			Liability derivatives
	Notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
Derivatives designated as hedging instruments:
Cross currency swaps	CAD	601.3	Other current assets	$	—	Current derivative hedging instruments	$	—
			Other assets	—		Long term derivative hedging instruments	(208.6		)
Foreign currency forwards	USD	437.3	Other current assets	2.6		Current derivative hedging instruments	(2.6		)
			Other assets	3.8		Long term derivative hedging instruments	(0.3		)
Commodity swaps	Gigajoules	1.3	Other current assets	0.1		Current derivative hedging instruments	(1.2		)
			Other assets	—		Long term derivative hedging instruments	(0.2		)
Total derivatives designated as hedging instruments				$	6.5		$	(212.9	)
Derivatives not designated as hedging instruments:
Equity conversion feature of debt	EUR	500.0				Current portion of long-term debt and short-term borrowings	$	(20.8	)
Aluminum swaps	Metric tonnes (actual)	5,150.0	Other current assets	$	—	Current derivative hedging instruments	$	(2.6	)
			Other assets	—		Long term derivative hedging instruments	(0.7		)
Diesel swaps	Metric tonnes (actual)	7,518.0	Other current assets	0.4		Current derivative hedging instruments	—
			Other assets	0.3		Long term derivative hedging instruments	—
Total derivatives not designated as hedging instruments				$	0.7		$	(24.1	)



	December 31, 2011
			Asset derivatives			Liability derivatives
	Notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
Derivatives designated as hedging instruments:
Cross currency swaps	CAD	901.3	Other current assets	$	—	Current derivative hedging instruments	$	(103.2	)
			Other assets	—		Long term derivative hedging instruments	(208.7		)
Foreign currency forwards	USD	464.6	Other current assets	—		Current derivative hedging instruments	(1.3		)
			Other assets	3.4		Long term derivative hedging instruments	—
Commodity swaps	Gigajoules	2.2	Other current assets	—		Current derivative hedging instruments	(1.8		)
			Other assets	—		Long term derivative hedging instruments	(0.5		)
Total derivatives designated as hedging instruments				$	3.4		$	(315.5	)
Derivatives not designated as hedging instruments:
Aluminum swaps	Metric tonnes (actual)	8,825.0	Other current assets	$	—	Current derivative hedging instruments	$	(1.3	)
			Other assets	—		Long term derivative hedging instruments	(3.3		)
Diesel swaps	Metric tonnes (actual)	9,668.0	Other current assets	0.1		Current derivative hedging instruments	—
Total derivatives not designated as hedging instruments				$	0.1		$	(4.6	)

MCBC allocates the current and non-current portion of each contract to the corresponding derivative account above.

The following summarizes the change in derivative related Accumulated other comprehensive income within the Condensed Consolidated Balance Sheet for the first half of 2012 (in millions):



Total at December 31, 2011	$	1.7
Unrealized gain (loss) on derivative instruments	(15.3		)
Reclassification adjustment on derivative instruments	4.9
Tax benefit (expense)	3.7
Total at June 30, 2012	$	(5.0	)

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations (in millions)



For the Thirteen Weeks Ended June 30, 2012
Derivatives in cash flow hedge relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)			Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) recognized from AOCI on derivative (effective portion)			Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Forward starting interest rate swaps	—			Interest expense, net	(0.4		)	Interest expense, net	—
Foreign currency forwards	(5.2		)	Other income (expense), net	(0.4		)	Other income (expense), net	—
				Cost of goods sold	(1.3		)	Cost of goods sold	—
Commodity swaps	0.6			Cost of goods sold	(0.4		)	Cost of goods sold	—
Total	$	(4.6	)		$	(2.5	)		$	—



For the Thirteen Weeks Ended June 30, 2012
Derivatives in net investment hedge relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)			Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) recognized from AOCI on derivative (effective portion)		Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Cross currency contracts	$	(7.3	)	Other income (expense), net	$	—	Other income (expense), net	$	—
Total	$	(7.3	)		$	—		$	—

Note: Amounts recognized in AOCI related to cash flow and net investment hedges are presented gross of taxes

During the period we recorded no significant ineffectiveness related to these cash flow and net investment hedges.



For the Thirteen Weeks Ended June 25, 2011
Derivatives in cash flow hedge relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)			Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) recognized from AOCI on derivative (effective portion)			Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Cross currency swaps(1)	$	1.3		Other income (expense), net	$	6.6		Other income (expense), net	$	—
				Interest expense, net	(3.6		)	Interest expense, net	—
Forward starting interest rate swaps	0.3			Interest expense, net	(0.3		)	Interest expense, net	—
Foreign currency forwards	8.8			Other income (expense), net	(2.9		)	Other income (expense), net	—
				Cost of goods sold	(4.0		)	Cost of goods sold	—
Commodity swaps	(1.3		)	Cost of goods sold	—			Cost of goods sold	—
Total	$	9.1			$	(4.2	)		$	—

Note: Amounts recognized in AOCI are presented gross of taxes


(1)	The foreign exchange gain (loss) component of these cross currency swaps is offset by the corresponding gain (loss) on the hedged forecasted transactions in Other income (expense), net and Interest expense, net.

During the period we recorded no significant ineffectiveness related to these cash flow hedges.



For the Twenty-Six Weeks Ended June 30, 2012
Derivatives in cash flow hedge relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)			Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) recognized from AOCI on derivative (effective portion)			Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Forward starting interest rate swaps	—			Interest expense, net	(0.8		)	Interest expense, net	—
Foreign currency forwards	2.8			Other income (expense), net	(1.0		)	Other income (expense), net	—
				Cost of goods sold	(2.4		)	Cost of goods sold	—
Commodity swaps	(0.7		)	Cost of goods sold	(0.7		)	Cost of goods sold	—
Total	$	2.1			$	(4.9	)		$	—



For the Twenty-Six Weeks Ended June 30, 2012
Derivatives in net investment hedge relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)		Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) recognized from AOCI on derivative (effective portion)		Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Cross currency contracts	$	13.2	Other income (expense), net	$	—	Other income (expense), net	$	—
Total	$	13.2		$	—		$	—

Note: Amounts recognized in AOCI related to cash flow and net investment hedges are presented gross of taxes

During the period we recorded no significant ineffectiveness related to these cash flow and net investment hedges.



For the Twenty-Six Weeks Ended June 25, 2011
Derivatives in cash flow hedge relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)			Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) recognized from AOCI on derivative (effective portion)			Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
Cross currency swaps(1)	$	(1.8	)	Other income (expense), net	$	(16.9	)	Other income (expense), net	$	—
				Interest expense, net	(7.0		)	Interest expense, net	—
Forward starting interest rate swaps	0.6			Interest expense, net	(0.6		)	Interest expense, net	—
Foreign currency forwards	0.1			Other income (expense), net	(4.6		)	Other income (expense), net	—
				Cost of goods sold	(6.4		)	Cost of goods sold	—
Commodity swaps	2.6			Cost of goods sold	0.2			Cost of goods sold	—
Total	$	1.5			$	(35.3	)		$	—

Note: Amounts recognized in AOCI are presented gross of taxes


(1)	The foreign exchange gain (loss) component of these cross currency swaps is offset by the corresponding gain (loss) on the hedged forecasted transactions in Other income (expense), net and Interest expense, net.

During the period we recorded no significant ineffectiveness related to these cash flow hedges.

We expect net losses of approximately $2.1 million (pre-tax) recorded in AOCI at June 30, 2012 will be reclassified into earnings within the next 12 months. The maximum length of time over which forecasted transactions are hedged is three years, and such transactions relate to foreign exchange, interest rate and commodity exposures.

Other Derivatives (in millions)

There was no activity for the thirteen weeks ended June 25, 2011 related to derivatives not in hedging relationships.



For the Thirteen Weeks Ended June 30, 2012
Derivatives Not In Hedging Relationship	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
Equity conversion feature of debt	Interest expense, net	$	(5.6	)
Commodity swaps	Cost of goods sold	$	0.5
		$	(5.1	)



For the Twenty-Six Weeks Ended June 30, 2012
Derivatives Not In Hedging Relationship	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
Equity conversion feature of debt	Interest expense, net	$	(5.6	)
Commodity swaps	Cost of goods sold	$	0.6
		$	(5.0	)



For the Twenty-Six Weeks Ended June 25, 2011
Derivatives Not In Hedging Relationship	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
Cash settled total return swaps	Other income (expense), net	$	(0.6	)
Option contracts	Other income (expense), net	1.5
Foreign currency forwards	Other income (expense), net	(0.1		)
		$	0.8