Alcoa 2012 Annual Report Download - page 165

Fair Value Hedges
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
2012 2011 2010
Aluminum contracts* Sales $ (9) $(126) $ 38
Interest rate contracts Interest expense 10 64 90
Total $ 1 $ (62) $ 128
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
2012 2011 2010
Aluminum contracts Sales $ (9) $ 133 $ (41)
Interest rate contracts Interest expense (10) (31) (62)
Total $(19) $ 102 $(103)
* In 2012, 2011, and 2010, the amount of gain or (loss) recognized in earnings represents $(18), $7, and $(3),
respectively, related to the ineffective portion of the hedging relationships.
Aluminum. Alcoa is a leading global producer of primary aluminum and fabricated aluminum products. As a
condition of sale, customers often require Alcoa to enter into long-term, fixed-price commitments. These commitments
expose Alcoa to the risk of fluctuating aluminum prices between the time the order is committed and the time that the
order is shipped. Alcoa’s aluminum commodity risk management policy is to manage, principally through the use of
futures and contracts, the aluminum price risk associated with a portion of its firm commitments. These contracts cover
known exposures, generally within three years. As of December 31, 2012, Alcoa had 386 kmt of aluminum futures
designated as fair value hedges. The effects of this hedging activity will be recognized over the designated hedge
periods in 2013 to 2016.
Interest Rates. Alcoa uses interest rate swaps to help maintain a strategic balance between fixed- and floating-rate
debt and to manage overall financing costs. As of December 31, 2012, the Company had pay floating, receive fixed
interest rate swaps that were designated as fair value hedges. These hedges effectively convert the interest rate from
fixed to floating on $200 of debt through 2018. In January 2012, interest rate swaps with a notional amount of $315
expired in conjunction with the repayment of 6% Notes, due 2012 (see Note K).
In 2011, Alcoa terminated interest rate swaps with a notional amount of $550 in conjunction with the early retirement
of the related debt (see Note K). At the time of termination, the swaps were “in-the-money” resulting in a gain of $33,
which was recorded in Interest expense on the accompanying Statement of Consolidated Operations. In 2010, Alcoa
terminated all or a portion of various interest rate swaps with a notional amount of $825 in conjunction with the early
retirement of the related debt. At the time of termination, the swaps were “in-the-money” resulting in a gain of $28,
which was recorded in Interest expense on the accompanying Statement of Consolidated Operations.
154