Alcoa 2003 Annual Report Download - page 37

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Financial Risk
Currencies —Alcoa is subject to exposure from fluctuations in
foreign currencies. Foreign currency exchange contracts may be
used from time to time to hedge thevariability in cash flows from
the forecasted payment or receipt ofcurrencies other than the
functional currency. These contracts cover periods commensurate
with knownorexpected exposures, generally within three years.
The fair value of these contracts and relative sensitivity were not
material at December 31, 2003. During 2003, Alcoa did not enter
into any material foreign currency exchange contracts.
Interest Rates —Alcoa uses interest rate swaps to help maintain
astrategic balance between fixed- and floating-rate debt and to
manage overall financing costs. The company has entered into pay
floating, receive fixed interest rate swaps to change the interest rate
risk exposure of its outstanding debt. The fair value of these swaps
was a loss of approximately $74 ($48 after tax) at December 31,
2003.
Alcoa also uses interest rate swaps to establish fixed interest
rates on anticipated borrowings between June 2005 and June 2006.
Theanticipated borrowings have a high probability of occurrence
because the proceeds will be usedtofunddebtmaturitiesand
anticipated capital expenditures. Alcoa has $1,000 of interest rate
swaps outstanding that will establish fixed interest rates on antici-
pated borrowings of $500 of debtthrough2016 a n d $ 50 0 o f d e b t
through 2036. The fair value of these swaps was not material at
December 31, 2003.
At December 31, 2003and2002,Alcoahad$7,271and $8,488
of debt outstanding at effective interest rates of 3.6% for 2003 and
4.4% for 2002, after the impact of settled and outstanding interest
rate swaps is taken into account. A hypothetical change of 10%
in Alcoa’s effective interest rate from year-end 2003 levels would
increase or decrease interest expense by $26 per year.
Material Limitations —Thedisclosures with respect tocommodity
prices, interest rates, and foreign exchange risk do not take into
account the underlying commitments or anticipated transactions.
If theunderlyingitems were included in the analysis, the gains
or losses on the futures contracts may be offset. Actual results will
be determined by a number of factors that are not under Alcoa’s
controland couldvarysignificantlyfromthose factors disclosed.
Alcoa is exposed to credit loss in the event of nonperformance
by counterparties on the above instruments, as well as credit or
performance risk with respect to its hedged customers’ commitments.
Although nonperformance is possible, Alcoa does not anticipate
nonperformance by any of these parties. Futures contracts are with
creditworthy counterparties and are further supported by cash,
treasury bills, or irrevocable letters of credit issued by carefully
chosen banks. In addition, various master netting arrangements are
in place with counterparties to facilitate settlement of gains and
losses on these contracts.
For additional information on derivative instruments, see Notes
A, K, and W to the ConsolidatedFinancial Statements.
Environmental Matters
Alcoa continues to participate in environmental assessments and
cleanups at a number of locations. These include approximately
30 owned or operating facilities and adjoining properties, approxi-
mately 39 previously owned or operatedfacilities and adjoining
properties, and approximately 67 Superfund and other waste sites.
Aliability is recorded for environmental remediation costs or
damages when a cleanup program becomes probable and the costs
or damages can be reasonably estimated. For additional information,
see Notes A and X totheConsolidated Financial Statements.
As assessmentsand cleanups proceed, the liability is adjusted
based on progress in determining the extent of remedial actions and
relatedcosts anddamages. Theliability can change substantially due
to factors such as the nature and extent of contamination, changes
in remedial requirements, and technological changes. Therefore,
it is not possible to determine the outcomes or to estimate with any
degree of accuracy the potential costs for certain of these matters.
The following discussion provides additional details regarding
the current status of Alcoa’s significant sites where the final outcome
cannot be determined or the potential costs in the future cannot
be estimated.
In June 2002, Alcoa submitted a final Analysis of Alternatives
Report to the
EPA related to PCB contamination of the Grasse River,
adjacent to Alcoa’s Massena, NY plant site. The range of costs
associated with the remedial alternatives evaluated in the 2002
report is between $2 and $525. Alcoa believes that rational, scientific
analysis supports a remedy involving the containment of sediments
in place via natural or man-made processes. Based on an assessment
of the
EPA decision-making process at the end of 2002, Alcoa
concluded that the selection of the $2 alternative, based on natural
recovery only,wasremote.InJune2003,basedonriver observations
during the spring of 2003, the
EPA requested that Alcoa gather
additional field data to assess the potential for sediment erosion
from winter river ice formation and breakup. Alcoa has collected
asignificantportion of the additional data and is in the process
of data analysis and determining how this phenomenon should be
factored into the range of remedial alternatives being considered.
It is anticipated that a report of findings will be issued to the
EPA
in the second quarter of 2004. Subsequent to this submittal, a
revised Analysis of Alternatives Report will be submitted at a date
to be determined.
Alcoa continues to believe that alternatives involving the largest
amounts of sediment removal should not be selected for the Grasse
River remedy. Therefore, Alcoa believes that the alternatives that
should reasonably be considered for selection range from engineered
capping and natural recovery of $30 to acombination of moderate
dredging, capping, and natural recovery of $90. Accordingly, Alcoa
adjusted the reserve for the Grasse River to $30 at the end of 2002,
representing the low end of the range of possible alternatives, as no
one of the alternatives is more likely to be selected than any other.