Alcoa 1998 Annual Report Download - page 53

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The aggregate benefit obligation and fair value of plan assets for the
pension plans with benefit obligations in excess of plan assets were
$754.3 and $445.0, respectively, as of December 31, 1998, and $383.3
and $179.3, respectively, as of December 31, 1997. The aggregate
pension accumulated benefit obligation and fair value of plan assets
with accumulated benefit obligations in excess of plan assets were
$500.8 and $287.1, respectively, as of December 31, 1998, and $179.0
and $26.3, respectively, at December 31, 1997.
Weighted average assumptions used to determine plan liabilities
and expense follow.
December 31 1998 1997 1996
Discount rate 6.50% 6.75% 7.00%
Expected long-term return on
plan assets 9.00 9.00 9.00
Rate of compensation increase 5.00 5.00 5.00
For measurement purposes, a 6.75% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
1999. The rate was assumed to decrease gradually to 5.0% in 2004
and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A one percentage
point change in assumed health care cost trend rates would have
the following effects:
1%
increase
1%
decrease
Effect on total of service and interest cost
components $ 10.7 $ (9.1)
Effect on postretirement benefit obligations 139.8 (120.8)
Alcoa also sponsors a number of defined contribution pension plans.
Expenses were $57.3 in 1998, $47.2 in 1997 and $44.4 in 1996.
R. Lease Expense
Certain equipment, warehousing and office space and oceangoing
vessels are under operating lease agreements. Total expense for
all leases was $129.6 in 1998, $110.9 in 1997 and $95.4 in 1996. Under
long-term operating leases, minimum annual rentals are $81.5 in
1999, $60.3 in 2000, $47.7 in 2001, $30.1 in 2002, $16.5 in 2003 and
a total of $40.4 for 2004 and thereafter.
S. Interest Cost Components
1998 1997 1996
Amount charged to expense $197.9 $140.9 $133.7
Amount capitalized 13.2 9.0 5.3
$211.1 $149.9 $139.0
T. Financial Instruments
The carrying values and fair values of Alcoa’s financial instruments
at December 31 follow.
1998
Carrying
value
Fair
value
1997
Carrying
value
Fair
value
Cash and cash equivalents $ 342.2 $ 342.2 $ 800.8 $ 800.8
Short-term investments 39.4 39.4 105.6 105.6
Noncurrent receivables 66.8 66.8 83.9 83.9
Short-term debt 612.1 612.1 494.9 494.9
Long-term debt 2,877.0 2,902.1 1,457.2 1,456.3
The methods used to estimate the fair values of certain financial
instruments follow.
Cash and Cash Equivalents, Short-Term Investments and
Short-Term Debt. The carrying amounts approximate fair value
because of the short maturity of the instruments. All investments
purchased with a maturity of three months or less are considered
cash equivalents.
Noncurrent Receivables. The fair value of noncurrent receivables
is based on anticipated cash flows and approximates carrying value.
Long-Term Debt. The fair value is based on interest rates that are
currently available to Alcoa for issuance of debt with similar terms
and remaining maturities.
Alcoa holds or purchases derivative financial instruments for
purposes other than trading. Details of the significant instruments
follow.
Foreign Exchange Contracts. Thecompanyentersintoforeign
exchange contracts to hedge its significant firm and anticipated
purchase and sale commitments denominated in foreign currencies.
These contracts cover periods commensurate with known or
expected exposures, generally within 24 months, and are principally
unsecured foreign exchange contracts with carefully selected banks.
The market risk exposure is essentially limited to risk related to
currency rate movements. Unrealized losses on these contracts at
December 31, 1998 and 1997 were $36.0 and $84.9, respectively.
The table below reflects the various types of foreign exchange
contracts Alcoa uses to manage its foreign exchange risk.
1998
Notional
amount
Market
value
1997
Notional
amount
Market
value
Forwards $2,845.3 $(57.8) $2,235.8 $(102.7)
Purchased options 51.8 1.2 232.5 (42.1)
Written options 27.1 (.1) 202.1 40.3
The notional values summarized above provide an indication of the
extent of the company’s involvement in such instruments but do not
represent its exposure to market risk. Alcoa utilizes written options
mainly to offset or close out purchased options.
The following table summarizes by major currency the contractual
amounts of Alcoa’s forward exchange and option contracts translated
to U.S. dollars at December 31 rates. The ‘‘buy’’ amounts represent