Derivative Instruments and Hedging Activities (Notes)

3 Months Ended

Mar. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Exchange rate fluctuations affect a portion of intercompany receivables that are denominated in foreign currencies, and we use forward currency contracts to reduce our exposure to certain of these currency price fluctuations. These contracts have not been designated as hedges for accounting purposes and gains or losses are reported in earnings on a current basis in other income (expense).

We are exposed to fluctuations in market prices of raw materials and energy sources. We may use cash-settled commodity price swaps and options (including collars) to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. For input commodities, these derivatives are typically used for a portion of our natural gas, nickel, iron ore, zinc and electricity requirements. Our hedging strategy is to reduce the effect on earnings from the price volatility of these various commodity exposures. Independent of any hedging activities, price changes in any of these commodity markets could negatively affect operating costs.

All commodity derivatives are recognized as an asset or liability at fair value. We record the effective gains and losses for commodity derivatives designated as cash flow hedges of forecasted purchases of raw materials and energy sources in accumulated other comprehensive income (loss) and reclassify them into cost of products sold in the same period we recognize earnings for the associated underlying transaction. We recognize gains and losses on these designated derivatives arising from either hedge ineffectiveness or from components excluded from the assessment of effectiveness in current earnings under cost of products sold. We record all gains or losses from derivatives for which hedge accounting treatment has not been elected to earnings on a current basis in cost of products sold. We have provided no collateral to counterparties under collateral funding arrangements as of March 31, 2017.

Outstanding commodity price swaps and options and forward foreign exchange contracts are presented below:

Commodity	March 31, 2017		December 31, 2016
Natural gas (in MMBTUs)	40,198,000		43,865,000
Zinc (in lbs)	53,000,000		58,750,000
Iron ore (in metric tons)	2,300,000		2,555,000
Electricity (in MWHs)	1,356,000		1,578,821
Foreign exchange contracts (in euros)	€	17,300,000	€	5,000,000

The fair value of derivative instruments in the condensed consolidated balance sheets is presented below:

Asset (liability)	March 31, 2017			December 31, 2016
Derivatives designated as hedging instruments:
Other current assets—commodity contracts	$	13.3		$	18.5
Other non-current assets—commodity contracts	0.8			5.2
Accrued liabilities—commodity contracts	(1.5		)	(1.8		)
Other non-current liabilities—commodity contracts	(0.9		)	(0.1		)
Derivatives not designated as hedging instruments:
Other current assets:
Foreign exchange contracts	0.1			0.1
Commodity contracts	30.3			28.5
Other non-current assets—commodity contracts	7.9			10.1
Other non-current liabilities—commodity contracts	(0.6		)	(0.5		)

Gains (losses) on derivative instruments included in the condensed consolidated statements of operations are presented below:

	Three Months Ended March 31,
Gain (loss)	2017			2016
Derivatives designated as cash flow hedges—
Commodity contracts:
Reclassified from accumulated other comprehensive income into cost of products sold (effective portion)	$	3.2		$	(13.2	)
Recognized in cost of products sold (ineffective portion and amount excluded from effectiveness testing)	(0.2		)	4.4
Derivatives not designated as hedging instruments:
Foreign exchange contracts—recognized in other income (expense)	(0.1		)	(1.8		)
Commodity contracts—recognized in cost of products sold	15.3			(0.5		)

We routinely use iron ore derivatives to minimize the volatility in the cost of our iron ore purchases. Historically, these economic hedges qualified for hedge accounting—meaning that gains and losses on the derivatives were reflected in the company’s financial results in the same period that the hedged iron ore purchases affected earnings. Beginning in the third quarter of 2016, our iron ore derivatives no longer qualify for hedge accounting treatment. Therefore, adjustments to mark these derivatives to fair value each period are recognized currently in our financial results versus being recognized in the period that iron ore purchases affect earnings. Gains and losses recognized in cost of products sold shown in the table above includes $16.3 for the three months ended March 31, 2017, for unrealized mark-to-market gains on iron ore derivatives that are not designated as cash flow hedges for accounting purposes. However, $11.4 of settled iron ore derivative gains were not included in the income statement for the first quarter of 2017 but instead were recognized in our financial results in prior periods. This would have partially offset our increased iron ore costs reported in our first quarter 2017 financial results related to sales during the quarter.

Gains (losses) before tax expected to be reclassified into cost of products sold within the next twelve months for our existing commodity contracts that qualify for hedge accounting, as well as the period over which we are hedging our exposure to the volatility in future cash flows, are presented below:

Commodity Hedge	Settlement Dates	Gains (losses)
Natural gas	April 2017 to March 2019	$	15.3
Zinc	April 2017 to December 2018	7.2
Electricity	April 2017 to December 2018	0.2