Alcoa 2004 Annual Report Download - page 54

●a gain of $77 from the settlement of interest rate swaps
that hedged anticipated borrowings between June 2005 and
June 2006. See Note X for additional information.
During 2004, Standard and Poor’s Rating Services (S&P)
maintained its long-term debt rating of Alcoa at A⫺and its
short-term rating at A-2. In January 2005, S&P revised its debt
outlook for Alcoa to negative from stable, citing higher capital
expenditures in 2005 and future years. There was no change to
either Alcoa’s long-term or short-term ratings. Moody’s Investors
Service long-term debt rating of Alcoa and its rated subsidiaries
is A2 and its short-term debt rating of Alcoa is Prime⫺1.
Commercial paper of $630 at December 31, 2004 was
classified as a current liability, based on a revised interpretation
of the existing accounting rules. Commercial paper matures
at various times within one year and has an annual weighted
average interest rate of 2.3%. Alcoa maintains $3,000 of
revolving-credit agreements with varying expiration dates as
backup to its commercial paper program. In April 2004, Alcoa
refinanced its $2,000 revolving-credit agreement that expired in
April 2004 into a $1,000 revolving-credit agreement that will
expire in April 2005, with an option to extend the maturity date
of any borrowings outstanding on the April 2005 expiration
date for one year. Additionally, Alcoa refinanced its $1,000
revolving-credit agreement that was to expire in April 2005 into
a $1,000 revolving-credit agreement that will expire in April
2009. Alcoa also has a $1,000 revolving-credit agreement that
will expire in April 2008. Under these agreements, a certain
ratio of indebtedness to consolidated net worth must be
maintained. There were no amounts outstanding under the
revolving-credit agreements at December 31, 2004. The interest
rate on the 364-day agreement, if drawn upon, is Libor plus
19 basis points, which is subject to adjustment if Alcoa’s credit
rating changes, to a maximum interest rate of Libor plus 86
basis points. The interest rate on the agreements expiring in
2008 and 2009, if drawn upon, is Libor plus 17 basis points,
which is subject to adjustment if Alcoa’s credit rating changes,
to a maximum interest rate of Libor plus 83.5 basis points.
Aluminio’s export notes are collateralized by receivables
due under an export contract. Certain financial ratios must
be maintained, including the maintenance of a minimum debt
serviceratio,aswellasacertainleveloftangiblenetworth
of Aluminio and its subsidiaries. During 2002, the notes were
amended to exclude the effects of foreign currency changes
from the tangible net worth calculation.
The fair value adjustments result from changes in the
carrying amounts of certain fixed-rate borrowings that have
been designated as being hedged. Of the $33 in 2004, $(42)
related to outstanding hedges and $75 related to hedges that
were settled early. Of the $104 in 2003, $(75) related to out-
standing hedges and $179 related to hedges that were settled
early. The adjustments for hedges that were settled early
are being recognized as reductions of interest expense over
the remaining maturity of the related debt (through 2028).
For additional information on interest rate swaps, see Note X.
Short-Term Borrowings. Alcoa participates in computer-
ized payable settlement arrangements with certain vendors and
third-party intermediaries. As of December 31, 2004, short-
term borrowings included $216 of amounts that will be paid
through the third-party intermediaries. The arrangements
provide that, at the vendor’s request, the third-party intermediary
advances the amount of the scheduled payment to the vendor,
less an appropriate discount, before the scheduled payment
date. Alcoa makes payment to the third-party intermediary on
the date stipulated in accordance with the commercial terms
negotiated with its vendors. For the first three quarters of 2004,
these arrangements were classified as accounts payable, trade.
Based on the nature of the arrangements, the company has
concluded that a more appropriate classification is short-term
borrowings. Imputed interest on the borrowings in 2004 was
insignificant for reclassification to interest expense. For the
full year 2004, the change in the amounts outstanding was
reported as cash provided from financing activities. For the first
three quarters of 2004, the changes in the amounts outstanding
under these arrangements were classified in cash provided from
operating activities in the Statement of Consolidated Cash
Flows. Quarterly amounts classified as cash provided from
operating activities were $25, $37, and $64 in the first, second,
and third quarters of 2004, respectively.
L. Other Noncurrent Liabilities
and Deferred Credits
December 31 2004 2003
Deferred alumina sales revenue $ 179 $ 187
Deferred aluminum sales revenue 260 384
Environmental remediation 318 330
Deferred credits 96 108
Asset retirement obligations 204 195
Other noncurrent liabilities 670 616
$1,727 $1,820
In 2003, Alcoa received a partial advance payment of $440
(approximately $70 was classified as current) related to a long-
term aluminum supply contract with a customer. Each month
for a six-year period, the customer will purchase and Alcoa is
required to deliver 7,500 tons of aluminum at market prices.
Alcoa has deposited $7 into a cash collateral account to satisfy
one month’s delivery obligation under the aluminum supply
contract.
M. Minority Interests
The following table summarizes the minority shareholders’
interests in the equity of consolidated subsidiaries.
December 31 2004 2003
Alcoa of Australia $ 798 $ 676
Alcoa World Alumina LLC 200 208
Alcoa Fujikura Ltd. 273 297
Other majority-owned companies 145 159
$1,416 $1,340
N. Commitments and Contingencies
Various lawsuits, claims, and proceedings have been or may be
instituted or asserted against Alcoa, including those pertaining
to environmental, product liability, and safety and health
matters. While the amounts claimed may be substantial, the
ultimate liability cannot now be determined because of the
considerable uncertainties that exist. Therefore, it is possible
52