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Derivative Financial Instruments and Related Hedging Programs
 12 Months Ended
Dec. 31, 2012
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, from time to time, 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, investment and cash commitments for equipment purchases. Additionally, in connection with the issuance of the Convertible Notes, the Company purchased cash-settled Call Options 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 may modify the terms of its derivative contracts based on operational needs or financing objectives. As the Company’s operational hedging activities are generally designed to lock in a specified price or range of prices, realized gains or losses on the derivative contracts utilized in the hedging activities generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged at the time the transactions occur. However, due to mark-to-market accounting, during the term of the derivative contracts, significant unrealized, non-cash gains and losses may be recorded in the income statement.
     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 metal price fluctuations to its customers. However, in certain instances the Company enters into firm-price arrangements with its customers and incurs price risk on its anticipated aluminum purchases in respect of such customer orders. The Company uses third-party hedging instruments to limit exposure to metal price risks related to firm-price customer sales contracts. See Note 13 for additional information regarding the Company’s material derivative positions relating to hedges of operational risks, and their respective fair values).
During 2012, 2011 and 2010, total fabricated products shipments that contained firm-price terms were (in millions of pounds) 178.8, 157.0 and 97.0, respectively. At December 31, 2012, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of aluminum for 2013, 2014, and 2015 totaling approximately (in millions of pounds) 56.9, 0.8, and 0.8 , respectively.
A majority of the Company's derivative contracts relating to hedges of operational risks contain credit risk-related contingencies, which the Company tries to minimize or offset through the management of counterparty credit lines, the utilization of options as part of the hedging activities, or both. The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur a 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 Convertible Notes in the aggregate principal amount of $175.0 on March 29, 2010. The conversion feature of the Convertible Notes can only be settled in cash and is 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 Call Options, which are accounted for as derivative instruments. The Company expects that the realized gain or loss from the Call Options will substantially offset the realized loss or gain of the Bifurcated Conversion Feature upon maturity of the Convertible Notes. However, because valuation assumptions for the Bifurcated Conversion Feature and the Call Option are not identical, over time the Company expects to record net unrealized gains and losses due to mark-to-market adjustments to the fair values of the two derivatives. See Note 13 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Call Options.
The following table summarizes the Company's material derivative positions at December 31, 2012:

 
 
 
 
Notional
Amount of
Contracts
Commodity
 
Maturity Period
 
(mmlbs)
Aluminum —
 
 
 
 
Fixed priced purchase contracts
 
1/13 through 12/15
 
59.5

Fixed priced sales contracts
 
4/13 through 11/13
 
1.0

Midwest premium swap contracts1
 
1/13 through 12/13
 
54.5


 
 
 
 
Notional
Amount
of Contracts
Energy
 
Maturity Period
 
(mmbtu)
Natural gas —2
 
 
 
 
Call option purchase contracts
 
1/13 through 12/13
 
930,000

Put option sales contracts
 
1/13 through 12/13
 
930,000

Fixed priced purchase contracts
 
1/13 through 12/15
 
7,550,000


 
 
 
 
Notional
Amount
of Contracts
Electricity
 
Maturity Period
 
(Mwh)
Fixed priced purchase contracts
 
1/13 through 12/14
 
394,200


 
 
 
 
Notional Amount of contracts
Currency
 
Maturity Period
 
 (as shown)
Canadian Dollar —
 
 
 
 
Fixed priced purchase contracts
 
1/13 through 1/13
 
C$
604,839

Swiss Franc —
 
 
 
 
Fixed priced purchase contracts
 
1/13 through 1/13
 
Fr.
172,123


 
 
 
 
Notional
Amount
of Contracts
Hedges Relating to the Convertible Notes
 
Contract Period
 
(Common Shares)
Bifurcated Conversion Feature3
 
3/10 through 3/15
 
3,624,449

Call Options3
 
3/10 through 3/15
 
3,624,449

_________________________
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, 2012, the Company's exposure to fluctuations in natural gas prices had been substantially reduced for approximately 82%, 75% and 46% of the expected natural gas purchases for 2013, 2014 and 2015, respectively.
3 
The Bifurcated Conversion Feature represents the cash conversion feature of the Convertible Notes. To hedge against the potential cash outflows associated with the Bifurcated Conversion Feature, the Company purchased cash-settled Call Options. The Call Options have an exercise price equal to the conversion price of the Convertible Notes, subject to anti-dilution adjustment provisions substantially similar to the Convertible Notes, which may cause the exercise price to decrease and the notional amount of shares relating thereto to increase. The Call Options will expire upon the maturity of the Convertible Notes. Although the fair value of the Call Options is derived from a notional number of shares of the Company's common stock, the Call Options may only be settled in cash.
  The Company reflects the fair value of its derivative contracts on a gross basis in the Consolidated Balance Sheets (see Note 2).

Realized and Unrealized Gains and Losses. Realized and unrealized gains (losses) associated with all derivative contracts consisted of the following, for each period presented:

 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Realized (losses) gains:
 
 
 
 
 
 
Aluminum
 
$
(9.0
)
 
$
9.6

 
$
(0.6
)
Natural Gas
 
(6.7
)
 
(5.2
)
 
(1.3
)
Electricity
 
(3.4
)
 
—

 
—

Total realized (losses) gains:
 
$
(19.1
)
 
$
4.4

 
$
(1.9
)
Unrealized gains (losses):
 
 
 
 
 
 
Aluminum
 
$
10.1

 
$
(26.5
)
 
$
3.6

Natural Gas
 
4.3

 
(1.6
)
 
(4.4
)
Electricity
 
0.8

 
(1.8
)
 
—

Foreign Currency
 
—

 
—

 
0.1

Call Options
 
9.0

 
(2.1
)
 
17.0

Bifurcated Conversion Feature
 
(8.2
)
 
6.1

 
(21.9
)
Total unrealized gains (losses)
 
$
16.0

 
$
(25.9
)
 
$
(5.6
)