XML 27 R16.htm IDEA: XBRL DOCUMENT v3.5.0.2
Derivative Financial Instruments and Related Hedging Programs
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Related Hedging Programs
Derivative Financial Instruments and Related Hedging Programs
Overview. In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our economic (i.e. cash) exposure resulting from: (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 our foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency.
Our derivative activities are overseen by a hedging committee ("Hedging Committee"), which is composed of our chief executive officer, chief operating officer, chief financial officer, chief accounting officer, treasurer and vice president of commodity risk management 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 our Board of Directors on the scope of its activities.
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 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 $1.7 million and $14.6 million at September 30, 2016 and December 31, 2015, respectively, and we had no collateral posted as of those dates.
Hedges of Operational Risks
Designated Foreign Currency Cash Flow Hedges. We are exposed to foreign currency exchange risk related to firm-price agreements for equipment purchases from foreign manufacturers. Such agreements require that we make payments in foreign currency to the vendor over time based on milestone achievements. We use foreign currency forward contracts in order to mitigate the exposure to currency exchange rate fluctuations related to these purchases. The timing and amounts of the forward contract settlements are designed to line up with the timing and amounts of scheduled payments to the foreign equipment manufacturers and are therefore expected to be highly effective hedges. As of September 30, 2016, we had open forward contracts designated as cash flow hedges to purchase euros with maturity dates between three months and 11 months. The notional amounts of these foreign currency forward contracts totaled 1.6 million euros and 4.7 million euros at September 30, 2016 and December 31, 2015, respectively, with a weighted average contract exchange rate of 1.13 and 1.15 euro to US dollar, respectively. The effective portion of the fair value on these instruments is recorded within Other comprehensive income (loss) and is reclassified into the Statements of Consolidated Income (Loss) on the same line item and the same period in which the underlying equipment is depreciated. We had no such reclassifications into Net income (loss) during the quarters and nine months ended September 30, 2016 and September 30, 2015 and anticipate no material such reclassifications for the next 12 months. We incurred no ineffectiveness on these hedges during the quarters and nine months ended September 30, 2016 and September 30, 2015. As of September 30, 2016, the loss reported in Accumulated other comprehensive loss related to the cash flow hedges was $0.1 million.
Non-Designated Hedges of Operational Risks. 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 limit our exposure to this metal price risk through our use of third-party hedging instruments. See Note 9 for additional information regarding our material derivative positions relating to hedges of operational risk and their respective fair values.
Realized and Unrealized Gain and Loss. Realized and unrealized gain (loss) associated with all derivative contracts consisted of the following for each period presented (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Included in Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Unrealized gain (loss):
 
 
 
 
 
 
 
Foreign currency cash flow hedge
$
0.1

 
$
—

 
$
0.2

 
$
(0.2
)
Included in Statements of Consolidated Income (Loss):
 
 
 
 
 
 
 
Realized loss:
 

 
 
 
 
 
 
Aluminum
(0.4
)
 
(9.0
)
 
(4.1
)
 
(18.8
)
Natural gas
(0.9
)
 
(1.2
)
 
(4.2
)
 
(3.8
)
Electricity
—

 
(0.3
)
 
—

 
(1.4
)
Total realized loss1
$
(1.3
)
 
$
(10.5
)
 
$
(8.3
)
 
$
(24.0
)
Unrealized gain (loss):
 
 
 
 
 
 
 
Aluminum
$
1.7

 
$
(0.3
)
 
$
11.7

 
$
(8.8
)
Natural gas
0.3

 
(1.0
)
 
5.2

 
(0.2
)
Electricity
—

 
(0.4
)
 
—

 
1.3

Subtotal2
2.0

 
(1.7
)
 
16.9

 
(7.7
)
Hedges related to the Convertible Notes:
 
 
 
 
 
 
 
Option assets
—

 
—

 
—

 
10.2

Bifurcated conversion feature
—

 
—

 
—

 
(10.2
)
Subtotal3
$
—


$
—

 
$
—

 
$
—

Total unrealized gain (loss)
$
2.0

 
$
(1.7
)
 
$
16.9

 
$
(7.7
)

______________________
1 
Recorded within Cost of products sold, excluding depreciation, amortization and other items.
2 
Recorded within Unrealized (gain) loss on derivative instruments.
3 
Recorded within Other expense, net and relates to our 4.5% unsecured cash convertible senior notes ("Convertible Notes"), which settled in April 2015.
The following table summarizes our material derivative positions at September 30, 2016:
Aluminum
Maturity Period (month/year)
 
Notional Amount of contracts (mmlbs)
Fixed price purchase contracts
10/16 through 6/18
 
158.8

Fixed price sales contracts
10/16 through 12/16
 
0.4

Midwest premium swap contracts1
10/16 through 6/18
 
147.2

Natural Gas2
Maturity Period (month/year)
 
Notional Amount of contracts (mmbtu)
Fixed price purchase contracts
10/16 through 12/19
 
5,650,000

Euro
Maturity Period (month/year)
 
Notional Amount of contracts (euro)
Fixed price purchase contracts
12/16 through 8/17
 
1,593,700

______________________
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, 2016, we had derivative and/or physical delivery commitments with energy companies in place to cover exposure to fluctuations in prices for approximately 80%, 74%, 73% and 33% of the expected natural gas purchases for the remainder of 2016, 2017, 2018 and 2019 respectively.
We have physical delivery commitments at firm prices covering approximately 55%, 54%, 54% and 18% of our expected electricity purchases for the remainder of 2016, 2017, 2018 and 2019 respectively.
We enter into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. We reflect the fair value of our derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2).
The following tables present offsetting information regarding our derivatives by type of counterparty as of September 30, 2016 (in millions of dollars):
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)
$
2.9

 
$
—

 
$
2.9

 
$
1.0

 
$
—

 
$
1.9

Counterparty
(with partial netting agreements)
2.7

 
—

 
2.7

 
0.6

 
$
—

 
$
2.1

Total
$
5.6

 
$
—

 
$
5.6

 
$
1.6

 
$
—

 
$
4.0


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)
$
(1.9
)
 
$
—

 
$
(1.9
)
 
$
(1.0
)
 
$
—

 
$
(0.9
)
Counterparty
(with partial netting agreements)
(1.3
)
 
—

 
(1.3
)
 
(0.6
)
 
—

 
(0.7
)
Total
$
(3.2
)
 
$
—

 
$
(3.2
)
 
$
(1.6
)
 
$
—

 
$
(1.6
)

The following tables present offsetting information regarding our derivatives by type of counterparty as of December 31, 2015 (in millions of dollars):
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)
$
1.3

 
$
—

 
$
1.3

 
$
1.3

 
$
—

 
$
—

Counterparty
(with partial netting agreements)
0.3

 
—

 
0.3

 
0.3

 
—

 
—

Total
$
1.6

 
$
—

 
$
1.6

 
$
1.6

 
$
—

 
$
—


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)
$
(8.5
)
 
$
—

 
$
(8.5
)
 
$
(1.3
)
 
$
—

 
$
(7.2
)
Counterparty
(with partial netting agreements)
(7.7
)
 
—

 
(7.7
)
 
(0.3
)
 
—

 
(7.4
)
Total
$
(16.2
)
 
$
—

 
$
(16.2
)
 
$
(1.6
)
 
$
—

 
$
(14.6
)