Derivatives And Other Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Fair Values of Outstanding Derivative Contracts Recorded as Assets

The fair values and corresponding classifications under the appropriate level of the fair value hierarchy of outstanding derivative contracts recorded as assets in the accompanying Consolidated Balance Sheet were as follows:


Asset Derivatives	Level		September 30, 2012		December 31, 2011
Derivatives designated as hedging instruments:
Prepaid expenses and other current assets:
Aluminum contracts		1	$	38	$	51
Aluminum contracts		3		6		5
Interest rate contracts		2		5		8
Other noncurrent assets:
Aluminum contracts		1		8		6
Energy contracts		3		—		2
Interest rate contracts		2		43		37

Total derivatives designated as hedging instruments			$	100	$	109


Derivatives not designated as hedging instruments*:
Prepaid expenses and other current assets:
Aluminum contracts		2	$	—	$	1
Aluminum contracts		3		208		—
Other noncurrent assets:
Aluminum contracts		3		401		5
Foreign exchange contracts		1		2		1

Total derivatives not designated as hedging instruments			$	611	$	7


Less margin held**:
Prepaid expenses and other current assets:
Aluminum contracts		1	$	4	$	7
Interest rate contracts		2		5		8
Other noncurrent assets:
Interest rate contracts		2		14		7

Sub-total			$	23	$	22


Total Asset Derivatives			$	688	$	94

*	See the “Other” section within Note N for additional information on Alcoa’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

All margin held is in the form of cash and is valued under a Level 1 technique. The levels that correspond to the margin held in the table above reference the level of the corresponding asset for which it is held. Alcoa elected to net the margin held against the fair value amounts recognized for derivative instruments executed with the same counterparties under master netting arrangements.

Schedule of Fair Values of Outstanding Derivative Contracts Recorded as Liabilities

The fair values and corresponding classifications under the appropriate level of the fair value hierarchy of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheet were as follows:


Liability Derivatives	Level		September 30, 2012		December 31, 2011
Derivatives designated as hedging instruments:
Other current liabilities:
Aluminum contracts		1	$	17	$	47
Aluminum contracts		3		37		32
Other noncurrent liabilities and deferred credits:
Aluminum contracts		1		—		4
Aluminum contracts		3		637		570
Energy contracts		3		8		—

Total derivatives designated as hedging instruments			$	699	$	653


Derivatives not designated as hedging instruments*:
Other current liabilities:
Aluminum contracts		1	$	3	$	12
Aluminum contracts		2		21		23
Embedded credit derivative		3		3		—
Other noncurrent liabilities and deferred credits:
Aluminum contracts		1		—		1
Aluminum contracts		2		11		21
Embedded credit derivative		3		32		28

Total derivatives not designated as hedging instruments			$	70	$	85


Less margin posted**:
Other current liabilities:
Aluminum contracts		1	$	—	$	1


Total Liability Derivatives			$	769	$	737

*	See the “Other” section within Note N for additional information on Alcoa’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

All margin posted is in the form of cash and is valued under a Level 1 technique. The levels that correspond to the margin posted in the table above reference the level of the corresponding liability for which it is posted. Alcoa elected to net the margin posted against the fair value amounts recognized for derivative instruments executed with the same counterparties under master netting arrangements.

Schedule of Derivative Contract Assets and Liabilities that are Measured and Recognized at Fair Value on Recurring Basis

The following table presents Alcoa’s derivative contract assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy (there were no transfers in or out of Levels 1 and 2 during the periods presented):


	September 30, 2012			December 31, 2011
Assets:
Level 1	$	48		$	57
Level 2		48			47
Level 3		615			12
Margin held		(23	)		(22	)

Total	$	688		$	94


Liabilities:
Level 1	$	20		$	64
Level 2		32			44
Level 3		717			630
Margin posted		—			(1	)

Total	$	769		$	737

Schedule of Reconciliation of Activity for Derivative Contracts

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 tables present a reconciliation of activity for such derivative contracts:


	Assets					Liabilities
Third quarter ended September 30, 2012	Aluminum contracts			Energy contracts		Aluminum contracts			Embedded credit derivative			Energy contracts
Opening balance – June 30, 2012	$	10		$	—	$	530		$	39		$	10
Total gains or losses (realized and unrealized) included in:
Sales		(2	)		—		(7	)		—			—
Cost of goods sold		(53	)		—		—			(1	)		—
Other income, net		(1	)		—		—			(3	)		—
Other comprehensive income		1			—		151			—			(2	)
Purchases, sales, issuances, and settlements*		639			—		—			—			—
Transfers into and (or) out of Level 3*		—			—		—			—			—
Foreign currency translation		21			—		—			—			—

Closing balance – September 30, 2012	$	615		$	—	$	674		$	35		$	8


Change in unrealized gains or losses included in earnings for derivative contracts held at September 30, 2012:
Sales	$	—		$	—	$	—		$	—		$	—
Cost of goods sold		—			—		—			—			—
Other income, net		(1	)		—		—			(3	)		—

In July 2012, two embedded derivatives contained within existing power contracts became subject to derivative accounting under GAAP (see below). The amount reflected in this table represents the initial fair value of these embedded derivatives and was classified as an issuance of Level 3 financial instruments. There were no purchases, sales or settlements of Level 3 financial instruments. Additionally, there were no transfers of financial instruments into or out of Level 3.


	Assets						Liabilities
Nine months ended September 30, 2012	Aluminum contracts			Energy contracts			Aluminum contracts			Embedded credit derivative			Energy contracts
Opening balance – December 31, 2011	$	10		$	2		$	602		$	28		$	—
Total gains or losses (realized and unrealized) included in:
Sales		(7	)		—			(25	)		—			—
Cost of goods sold		(53	)		—			—			(3	)		—
Other expenses, net		(3	)		—			—			10			—
Other comprehensive loss		8			(2	)		97			—			8
Purchases, sales, issuances, and settlements*		639			—			—			—			—
Transfers into and (or) out of Level 3*		—			—			—			—			—
Foreign currency translation		21			—			—			—			—

Closing balance – September 30, 2012	$	615		$	—		$	674		$	35		$	8


Change in unrealized gains or losses included in earnings for derivative contracts held at September 30, 2012:
Sales	$	—		$	—		$	—		$	—		$	—
Cost of goods sold		—			—			—			—			—
Other expenses, net		(3	)		—			—			10			—

Schedule of Quantitative Information for Level 3 Derivative Contracts

The following table presents quantitative information for Level 3 derivative contracts:


	Fair value at September 30, 2012		Valuation technique	Unobservable input	Range ($ in full amounts)
Assets:
Aluminum contract	$	2	Discounted cash flow	Interrelationship of future aluminum and oil prices	Aluminum: $2,084 in 2012 to $2,600 in 2018 per metric ton Oil: $91 to $112 per barrel
Aluminum contract	$	607	Discounted cash flow	Interrelationship of future aluminum prices, foreign currency exchange rates, and the U.S. consumer price index (CPI)	Aluminum: $2,090 in 2012 to $2,602 in 2018 per metric ton Foreign currency: A$1 = $1.03 in 2012 to $0.89 in 2016 CPI: 1982 base year of 100 and 227 in 2012 to 250 in 2016
Liabilities:
Aluminum contracts		668	Discounted cash flow	Price of aluminum beyond forward curve	$2,828 per metric ton in 2023 to $3,048 per metric ton in 2027
Embedded credit derivative		35	Discounted cash flow	Credit spread between Alcoa and counterparty	1.45% to 2.49% (1.97%) median
Energy contracts		8	Discounted cash flow	Price of electricity beyond forward curve	$77 per megawatt hour in 2012 to $170 per megawatt hour in 2036

Schedule of Gain or Loss on Hedged Items and Derivative Contracts

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The gain or loss on the hedged items are included in the same line items as the loss or gain on the related derivative contracts as follows (there were no contracts that ceased to qualify as a fair value hedge in any of the periods presented):


Derivatives in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Third quarter ended September 30,					Nine months ended September 30,
		2012		2011			2012		2011
Aluminum contracts	Sales	$	66	$	(100	)	$	9	$	(78	)
Interest rate contracts	Interest expense		3		5			8		58

Total		$	69	$	(95	)	$	17	$	(20	)


Hedged Items in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in Earnings on Hedged Items	Amount of Gain or (Loss) Recognized in Earnings on Hedged Items
		Third quarter ended September 30,						Nine months ended September 30,
		2012			2011			2012			2011
Aluminum contracts	Sales	$	(71	)	$	102		$	(30	)	$	76
Interest rate contracts	Interest expense		(3	)		(5	)		(8	)		(25	)

Total		$	(74	)	$	97		$	(38	)	$	51

Schedule of Gains and Losses on Derivative Representing Either Hedge Ineffectiveness or Hedge Components Excluded from Assessment of Effectiveness are Recognized in Current Earnings

Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.


Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)												Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)*											Location of Gain or (Loss) Recognized in Earnings on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Earnings on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)**
	Third quarter ended September 30,						Nine months ended September 30,							Third quarter ended September 30,					Nine months ended September 30,							Third quarter ended September 30,					Nine months ended September 30,
	2012			2011			2012			2011				2012		2011			2012			2011				2012			2011		2012		2011
Aluminum contracts	$	(138	)	$	145		$	(72	)	$	53		Sales	$	18	$	(30	)	$	20		$	(106	)	Other (income) expenses, net	$	(3	)	$	4	$	6	$	4
Energy contracts		2			6			(3	)		14		Cost of goods sold		—		(2	)		—			(8	)	Other (income) expenses, net		—			—		—		—
Foreign exchange contracts		—			2			—			4		Sales		—		2			—			4		Other (income) expenses, net		—			—		—		—
Interest rate contracts		—			(2	)		—			(2	)	Interest expense		—		(2	)		(1	)		(2	)	Other (income) expenses, net		—			—		—		—
Interest rate contracts		1			(2	)		(2	)		(4	)	Other (income) expenses, net		—		—			—			(2	)	Other (income) expenses, net		—			—		—		—

Total	$	(135	)	$	149		$	(77	)	$	65			$	18	$	(32	)	$	19		$	(114	)		$	(3	)	$	4	$	6	$	4

*	Assuming market rates remain constant with the rates at September 30, 2012, a loss of $14 is expected to be recognized in earnings over the next 12 months.

For the third quarter and nine months ended September 30, 2012, the amount of gain or (loss) recognized in earnings represents $(5) and $5, respectively, related to the ineffective portion of the hedging relationships. There was also $2 and $1 recognized in earnings related to the amount excluded from the assessment of hedge effectiveness for the third quarter and nine months ended September 30, 2012, respectively. For both the third quarter and nine months ended September 30, 2011, the amount of gain or (loss) recognized in earnings represents $(1) related to the ineffective portion of the hedging relationships. There was also $5 recognized in earnings related to the amount excluded from the assessment of hedge effectiveness for both the third quarter and nine months ended September 30, 2011.

Schedule of Outstanding Forward Contracts that were Entered into Hedge Forecasted Transactions

Alcoa had the following outstanding forward contracts that were entered into to hedge forecasted transactions:


	September 30, 2012		December 31, 2011
Aluminum contracts (kmt)		1,343		1,294
Energy contracts:
Electricity (megawatt hours)		100,578,295		100,578,295
Natural gas (million British thermal units)		18,320,000		—

Schedule of Fair Value Gains and Losses on Derivatives Contracts Recorded in Earnings

Alcoa has certain derivative contracts that do not qualify for hedge accounting treatment and, therefore, the fair value gains and losses on these contracts are recorded in earnings as follows:


Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Earnings on Derivatives	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
		Third quarter ended September 30,						Nine months ended September 30,
		2012			2011			2012			2011
Aluminum contracts	Sales	$	3		$	(10	)	$	—		$	(9	)
Aluminum contracts	Other (income) expenses, net		(9	)		18			(6	)		7
Embedded credit derivative	Other (income) expenses, net		2			(13	)		(8	)		(10	)
Energy contract	Other (income) expenses, net		—			16			—			47
Foreign exchange contracts	Other (income) expenses, net		3			(7	)		1			(3	)

Total		$	(1	)	$	4		$	(13	)	$	32

Schedule of Carrying Values and Fair Values of Other Financial Instruments

The carrying values and fair values of Alcoa’s other financial instruments were as follows:


	September 30, 2012				December 31, 2011
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,432	$	1,432	$	1,939	$	1,939
Restricted cash		224		224		25		25
Noncurrent receivables		21		21		30		30
Available-for-sale securities		89		89		92		92
Short-term borrowings		591		591		62		62
Commercial paper		43		43		224		224
Long-term debt due within one year		540		540		445		445
Long-term debt, less amount due within one year		8,350		9,253		8,640		9,274