Fair Value Measurements

Overview

The Company applies the fair value hierarchy established by GAAP for the recognition and measurement of assets and liabilities. An asset or liability’s fair value classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counterparty risk in its assessment of fair value.

The fair values of financial assets and liabilities are measured on a recurring basis. The Company has elected not to carry any financial assets and liabilities at fair value, other than as required by GAAP. Financial assets and liabilities that the Company carries at fair value as required by GAAP include: (i) its derivative instruments; (ii) the plan assets of the VEBAs and the Company’s Canadian defined benefit pension plan measured annually at December 31; and (iii) available for sale securities, consisting of debt investment securities and investments related to the Company’s deferred compensation plan (see Note 5). The Company records certain other financial assets and liabilities at carrying value (see the tables below for the fair value disclosure of those assets and liabilities).

The majority of the Company’s non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant, and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of a non-financial asset or liability is required, potentially resulting in an adjustment to the carrying amount of such asset or liability. For the quarters ended March 31, 2014 and March 31, 2013, the Company concluded that none of its non-financial assets and liabilities subject to fair value assessments on a non-recurring basis required a material adjustment to the carrying amount of such assets and liabilities.

Fair Values of Financial Assets and Liabilities

Fair Values of Derivative Assets and Liabilities. The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs.

Commodity, Energy, Electricity and Foreign Currency Hedges - The fair values of a majority of these derivative contracts are based upon trades in liquid markets. Valuation model inputs can generally be verified, and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy. The Company, however, has some derivative contracts that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (e.g., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads. The fair value of these financial instruments are classified as Level 3 in the fair value hierarchy.

Bifurcated Conversion Feature and Call Options - The fair value of the Bifurcated Conversion Feature is measured as the difference in the estimated fair value of the Convertible Notes and the estimated fair value of the Convertible Notes without the cash conversion feature. The Convertible Notes are valued based on the trading price of the Convertible Notes each period-end (see “All Other Financial Assets and Liabilities” below). The fair value of the Convertible Notes without the cash conversion feature is the present value of the series of the remaining fixed income cash flows under the Convertible Notes, with a mandatory redemption on April 1, 2015.

The Company determines the fair value of the Call Options using a binomial lattice valuation model. The inputs to the model at March 31, 2014 were as follows:



The Company’s stock price at March 31, 2014	$	71.42
Quarterly dividend yield (per share) upon purchase of the Call Option¹	$	0.24
Risk-free interest rate²	0.13		%
Credit spread (basis points)³	154
Expected volatility rate⁴	17.0		%

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¹	The quarterly dividend in the first quarter of 2014 was $0.35 per share, but the model assumes a discrete $0.24 per share quarterly dividend as was paid at the inception of the Call Options. Quarterly dividends in excess of $0.24 per share do not affect the Call Options’ value due to anti-dilution adjustments.


²	The risk-free rate was based on the one-year Constant Maturity Treasury rate on March 31, 2014.


³	The credit spread is based on the Company’s long-term credit rating of BB- issued by Standard & Poor’s and a senior unsecured credit rating of Ba3 issued by Moody’s.


⁴	The volatility rate was based on both observed volatility, which is based on the Company’s historical stock price, and implied volatility from the Company’s traded options. Such volatility was further adjusted to take into consideration market participant risk tolerance.

The aggregate fair value of our derivatives, recorded on the Consolidated Balance Sheets at March 31, 2014 and December 31, 2013, was a net liability of $1.4 and $4.3, respectively. The decrease in net liability during the quarter ended March 31, 2014 was primarily due to changes in the underlying commodity prices during such quarter as well as an increase in our stock price which contributed to fluctuations in the values of the derivatives related to the Convertible Notes. Changes in the fair value of our derivative contracts relating to operational hedging activities are reflected in operating income. Such changes in the fair value of these contracts resulted in the recognition of a $2.0 unrealized mark-to-market gain during the quarter ended March 31, 2014.

VEBA and Canadian Pension Plan Assets. The fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan is measured annually on December 31. In determining the fair value of the plan assets at each annual period end, the Company utilizes primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan. See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan.

Available for sale securities. The Company holds debt investment securities. The fair value of the debt investment securities, which consist of commercial paper and corporate bonds, is determined based on valuation models that use observable market data. At March 31, 2014, the remaining maturity period with respect to short-term investments ranged from four months to approximately 12 months. In addition to debt investment securities, the Company also holds assets in various investment funds at certain registered investment companies in connection with its deferred compensation program (see Note 5). Such assets are accounted for as available for sale securities and are measured and recorded at fair value based on the net asset value of the investment funds on a recurring basis. The fair value input of the available for sale securities is considered either a Level 1 or Level 2 input depending on whether the debt security or investment fund is traded on a public exchange. The amortized cost for available for sale securities approximates their fair value.

All Other Financial Assets and Liabilities. The Company believes that the fair value of its cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.

The fair value of the Convertible Notes and Senior Notes is based on their trading prices and is considered a Level 1 input in the fair value hierarchy (see Note 3 for the carrying values of the Convertible Notes and the Senior Notes).

The following table presents the Company’s financial instruments, classified under the appropriate level of the fair value hierarchy, as of March 31, 2014:



	Level 1			Level 2			Level 3		Total
FINANCIAL ASSETS:
Derivative instruments:
Aluminum -
Fixed priced purchase contracts	$	—		$	0.2		$	—	$	0.2
Fixed priced sales contracts	—			0.1			—		0.1
Midwest premium swap contracts	—			—			2.6		2.6
Natural Gas -
Fixed priced purchase contracts	—			1.1			—		1.1
Electricity -
Fixed priced purchase contracts	—			0.4			—		0.4
Hedges Relating to the Convertible Notes -
Call Options	—			83.9			—		83.9

All Other Financial Assets:
Cash and cash equivalents	68.5			117.1			—		185.6
Short-term investments	—			104.5			—		104.5
Deferred compensation plan asset	—			6.6			—		6.6
Total Assets	$	68.5		$	313.9		$	2.6	$	385.0

FINANCIAL LIABILITIES:
Derivative instruments:
Aluminum -
Fixed priced purchase contracts	$	—		$	(1.7	)	$	—	$	(1.7	)
Natural Gas -
Fixed priced purchase contracts	—			(0.5		)	—		(0.5		)
Electricity -
Fixed priced purchase contracts	—			(0.9		)	—		(0.9		)
Hedges Relating to the Convertible Notes -
Bifurcated Conversion Feature	—			(86.6		)	—		(86.6		)

All Other Financial Liabilities:
Senior Notes	(255.4		)	—			—		(255.4		)
Convertible Notes	(266.2		)	—			—		(266.2		)
Total Liabilities	$	(521.6	)	$	(89.7	)	$	—	$	(611.3	)

The following table presents the Company’s financial instruments, classified under the appropriate level of the fair value hierarchy, as of December 31, 2013:



	Level 1			Level 2			Level 3		Total
FINANCIAL ASSETS:
Derivative instruments:
Aluminum -
Fixed priced purchase contracts	$	—		$	0.1		$	—	$	0.1
Midwest premium swap contracts	—			—			1.1		1.1
Natural Gas -
Fixed priced purchase contracts	—			0.5			—		0.5
Electricity -
Fixed priced purchase contracts	—			0.5			—		0.5
Foreign Currency -
Euro	—			0.1			—		0.1
Hedges Relating to the Convertible Notes -
Call Options	—			79.5			—		79.5

All Other Financial Assets:
Cash and cash equivalents	57.7			111.8			—		169.5
Short-term investments	—			129.5			—		129.5
Deferred compensation plan asset	—			6.5			—		6.5
Total Assets	$	57.7		$	328.5		$	1.1	$	387.3

FINANCIAL LIABILITIES:
Derivative instruments:
Aluminum -
Fixed priced purchase contracts	$	—		$	(1.8	)	$	—	$	(1.8	)
Natural Gas -
Fixed priced purchase contracts	—			(0.8		)	—		(0.8		)
Electricity -
Fixed priced purchase contracts	—			(0.4		)	—		(0.4		)
Hedges Relating to the Convertible Notes -
Bifurcated Conversion Feature	—			(83.1		)	—		(83.1		)

All Other Financial Liabilities:
Senior Notes	(255.4		)	—			—		(255.4		)
Convertible Notes	(260.0		)	—			—		(260.0		)
Total Liabilities	$	(515.4	)	$	(86.1	)	$	—	$	(601.5	)

Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for the Midwest premium derivative contracts on a net basis:



	Level 3
Balance at December 31, 2013	$	1.1
Total realized/unrealized gains included in:
Cost of goods sold excluding depreciation and amortization and other items and Unrealized losses (gains) on derivative instruments	1.8
Transactions involving Level 3 derivative contracts:
Purchases	0.4
Sales	—
Issuances	—
Settlements	(0.7		)
Transactions involving Level 3 derivatives — net	(0.3		)
Transfers in and (or) out of Level 3 valuation hierarchy	—
Balance at March 31, 2014	$	2.6

Total gains included in Unrealized losses (gains) on derivative instruments, attributable to the change in unrealized gains/losses relating to derivative contracts held at March 31, 2014:	$	2.1

Fair Values of Non-financial Assets and Liabilities

See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information on the fair value of the Company’s non-financial assets and liabilities.