Alcoa 2000 Annual Report Download - page 61

Name /alcoa/4500 06/01/2001 02:19PM Plate # 0 com g 59 # 1
S. Financial Instruments
The carrying values and fair values of Alcoa’s financial instruments
at December 31 follow.
2000
Carrying
value
Fair
value
1999
Carrying
value
Fair
value
Cash and cash equivalents $ 315 $ 315 $ 237 $ 237
Short-term investments 56 56 77 77
Noncurrent receivables 118 118 43 43
Short-term debt 3,146 3,146 410 410
Long-term debt 4,987 5,053 2,657 2,526
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. The company enters into foreign
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 36 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. Unrecognized gains (losses) on these
contracts at December 31, 2000 and 1999 were $(139) and $57,
respectively.
The table below reflects the various types of foreign exchange
contracts Alcoa uses to manage its foreign exchange risk.
2000
Notional
amount
Market
value
1999
Notional
amount
Market
value
Forwards $2,342 $(166) $1,499 $60
Purchased options ——28 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.
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
The aggregate benefit obligation and fair value of plan assets for the
pension plans with benefit obligations in excess of plan assets were
$804 and $508, respectively, as of December 31, 2000, and $1,022 and
$696, respectively, as of December 31, 1999. The aggregate pension
accumulated benefit obligation and fair value of plan assets with
accumulated benefit obligations in excess of plan assets were $594
and $338, respectively, as of December 31, 2000, and $337 and $119,
respectively, at December 31, 1999.
Weighted average assumptions used to determine plan liabilities
and expense follow.
December 31 2000 1999 1998
Discount rate 7.75% 7.00% 6.50%
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, an 8.5% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 2001.
The rate was assumed to decrease gradually to 5.5% in 2005 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 these assumed rates would have the following effects:
1%
increase
1%
decrease
Effect on total of service and interest cost
components $ 13 $ (13)
Effect on postretirement benefit obligations 165 (144)
Alcoa also sponsors a number of defined contribution pension plans.
Expenses were $80 in 2000, $64 in 1999 and $57 in 1998.
Q. Lease Expense
Certain equipment, warehousing and office space and oceangoing
vessels are under operating lease agreements. Total expense for all
leases was $152 in 2000, $145 in 1999 and $130 in 1998. Under long-
term operating leases, minimum annual rentals are $125 in 2001,
$100 in 2002, $63 in 2003, $38 in 2004, $27 in 2005 and a total of
$123 for 2006 and thereafter.
R. Interest Cost Components
2000 1999 1998
Amount charged to expense $427 $195 $198
Amount capitalized 20 21 13
$447 $216 $211
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