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Derivative Financial Instruments and Related Hedging Programs
 12 Months Ended
Dec. 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Related Hedging Programs
Derivative Financial Instruments and Related Hedging Programs
Overview. In conducting its business, the Company enters into derivative transactions, including forward contracts and options, to limit its economic (i.e. cash) exposure resulting from (i) metal price risk related to its sale of fabricated aluminum products and the purchase of metal used as raw material for its fabrication operations; (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in its production processes; and (iii) foreign currency requirements with respect to its foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency. Additionally, in connection with the issuance of the Convertible Notes, the Company purchased Option Assets relating to the Company’s common stock to limit its exposure to the cash conversion feature of the Convertible Notes (see Note 3).
The Company’s derivative activities are overseen by a hedging committee ("Hedging Committee"), which is composed of the Company's chief executive officer, chief financial officer, chief accounting officer, vice president of metal risk 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 the Company’s Board of Directors on the scope of its activities.
Hedges of Operational Risks. The Company’s 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 its customers. In certain instances the Company enters into firm-price arrangements with its customers for stipulated volumes to be delivered in the future. Additionally, for some of its 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 the Company when metal prices decline and an adverse impact to the Company when metal prices increases. Because the Company generally purchases primary and secondary aluminum on a floating price basis, the volume that it has committed to sell to its customers under a firm-price arrangement and the lag in passing through metal price movements to customers on some of its higher value added products sold on a spot basis create metal price risk for the Company. The Company uses third-party hedging instruments to limit exposure to metal price risk related to firm-price customer sales contracts and the metal pass through lag on some of its products. See Note 11 for additional information regarding the Company’s material derivative positions relating to hedges of operational risk and their respective fair values.
A majority of the Company's derivative contracts relating to hedges of operational risks contain liquidity based thresholds that could require the Company to provide additional collateral in the event the Company's liquidity were to fall below specified levels. To minimize the exposure to additional collateral requirements related to its liability hedge positions, the Company allocates hedging transactions among its counterparties, uses options as part of its hedging activities, or both. The aggregate fair value of the Company's derivative instruments that were in a net liability position at December 31, 2014 was $11.4.
The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur significant loss from the failure of any counterparties to perform under any agreements.
Hedges Relating to the Convertible Notes. As described in Note 3, the Company issued $175.0 principal amount of Convertible Notes due on April 1, 2015, which can only be settled in cash. The conversion feature of the Convertible Notes was required to be bifurcated from the Convertible Notes and treated as a separate derivative instrument. In order to offset the cash flow risk associated with the Bifurcated Conversion Feature, the Company purchased Option Assets, which are accounted for as derivative instruments. The Company expects that the cash received from the settlement of the Option Assets will equal and offset the cash that it will be required to pay to the holders of any converted Convertible Notes in excess of the principal amount thereof and interest payable thereon. See Note 11 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Option Assets.
Realized and Unrealized Gains and Losses. Realized and unrealized (losses) gains associated with all derivative contracts consisted of the following for each period presented:
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Realized gains (losses):
 
 
 
 
 
 
Aluminum
 
$
6.9

 
$
(5.5
)
 
$
(9.0
)
Natural Gas
 
1.0

 
(1.8
)
 
(6.7
)
Electricity
 
(0.1
)
 
0.8

 
(3.4
)
Total realized gains (losses):
 
$
7.8

 
$
(6.5
)
 
$
(19.1
)
Unrealized (losses) gains:
 
 
 
 
 
 
Hedges of operational risk:
 
 
 
 
 
 
Aluminum
 
$
(2.6
)
 
$
(3.1
)
 
$
10.1

Natural Gas
 
(6.0
)
 
2.6

 
4.3

Electricity
 
(1.8
)
 
1.1

 
0.8

Foreign Currency
 
—

 
0.1

 
—

Total hedges of operational risk
 
(10.4
)
 
0.7

 
15.2

Option Assets relating to the Convertible Notes
 
5.2

 
24.2

 
9.0

Bifurcated Conversion Feature of the Convertible Notes
 
(1.6
)
 
(21.0
)
 
(8.2
)
Total unrealized (losses) gains
 
$
(6.8
)
 
$
3.9

 
$
16.0


The following table summarizes the Company's material derivative positions at December 31, 2014:
Aluminum
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (mmlbs)
Fixed price purchase contracts
 
1/15 through 1/16
 
67.3

Midwest premium swap contracts1
 
1/15 through 12/15
 
67.1

Natural Gas2
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (mmbtu)
Fixed price purchase contracts
 
1/15 through 12/17
 
6,720,000

Electricity3
 
Maturity Period
(month/year)
 
Notional Amount of Contracts (Mwh)
Fixed price purchase contracts
 
1/15 through 12/15
 
175,200

Hedges Relating to the Convertible Notes
 
Contract Period
(month/year)
 
Notional Amount of Contracts (Common Shares)
Bifurcated Conversion Feature4
 
3/10 through 4/15
 
3,660,738

Option Assets4
 
3/10 through 4/15
 
3,660,738

_________________________
1 
Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on the Company's purchases of primary aluminum.
2 
As of December 31, 2014, the Company had Henry Hub NYMEX-based hedge positions in place to cover exposure to fluctuations in prices for approximately 81%, 73% and 12% of the expected natural gas purchases for 2015, 2016 and 2017, respectively.
3 
As of December 31, 2014, the Company had Mid-C International Commodity Exchange-based hedge positions in place to cover exposure to fluctuations in prices for approximately 44% of the expected electricity purchases for 2015.
4 
The Bifurcated Conversion Feature represents the cash conversion feature of the Convertible Notes. The Option Assets expire on the maturity or earlier conversion of the Convertible Notes and have an exercise price equal to the conversion price of the Convertible Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Convertible Notes. Although the fair value of the Option Assets is derived from a notional number of shares of the Company's common stock, the Option Assets may only be settled in cash.
The Company enters into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. The Company reflects the fair value of its derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2).
The following tables present offsetting information regarding the Company's derivatives by type of counterparty as of December 31, 2014:
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)
$
0.9

 
$
—

 
$
0.9

 
$
0.8

 
$
—

 
$
0.1

Counterparty (without netting agreements)1
84.8

 
—

 
84.8

 
—

 
—

 
84.8

Total
$
85.7

 
$
—

 
$
85.7

 
$
0.8

 
$
—

 
$
84.9

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)
$
(8.0
)
 
$
—

 
$
(8.0
)
 
$
(0.8
)
 
$
—

 
$
(7.2
)
Counterparty (without netting agreements)1
(85.0
)
 
—

 
(85.0
)
 
—

 
—

 
(85.0
)
Counterparty (with partial netting agreements)
(3.8
)
 
—

 
(3.8
)
 
—

 
—

 
(3.8
)
Total
$
(96.8
)
 
$
—

 
$
(96.8
)
 
$
(0.8
)
 
$
—

 
$
(96.0
)
_________________
1 
Such amounts include the fair value of the Bifurcated Conversion Feature and Option Assets at December 31, 2014 (see Note 11).

The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of December 31, 2013:
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

 
$
0.8

 
$
—

 
$
0.2

Counterparty (without netting agreements)1
80.4

 
—

 
80.4

 
—

 
—

 
80.4

Counterparty (with partial netting agreements)
0.4

 
—

 
0.4

 
0.4

 
—

 
—

Total
$
81.8

 
$
—

 
$
81.8

 
$
1.2

 
$
—

 
$
80.6

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)
$
(1.6
)
 
$
—

 
$
(1.6
)
 
$
(0.8
)
 
$
—

 
$
(0.8
)
Counterparty (without netting agreements)1
(83.2
)
 
—

 
(83.2
)
 
—

 
—

 
(83.2
)
Counterparty (with partial netting agreements)
(1.3
)
 
—

 
(1.3
)
 
(0.4
)
 
—

 
(0.9
)
Total
$
(86.1
)
 
$
—

 
$
(86.1
)
 
$
(1.2
)
 
$
—

 
$
(84.9
)
_________________
1 
Such amounts include the fair value of the Bifurcated Conversion Feature and Option Assets at December 31, 2013 (see Note 11).