Alcoa 2011 Annual Report Download - page 158

normal purchase normal sale exception under derivative accounting in late 2009. Unrealized gains and losses for this
physical power contract were included in Other (income) expenses, net on the accompanying Statement of
Consolidated Operations, while realized gains and losses were included in Cost of goods sold on the accompanying
Statement of Consolidated Operations. Additionally, a financial contract related to the same U.S. smelter utilized by
management to hedge the price of electricity of the aforementioned power contract no longer qualified for cash flow
hedge accounting near the end of 2009. Realized gains and losses of this financial contract were included in Cost of
goods sold on the accompanying Statement of Consolidated Operations. In periods prior to January 1, 2010, unrealized
gains and losses were included in Other comprehensive (loss) income; in periods subsequent to December 31, 2009,
such changes were included in Other (income) expenses, net on the accompanying Statement of Consolidated
Operations. Both the physical power contract and the financial contract related to this U.S. smelter expired in
September 2011.
In 2010, Alcoa entered into contracts to hedge the anticipated power requirements at two smelters in Australia. These
derivatives hedge forecasted power purchases through December 2036. Beyond the term where market information is
available, management has developed a forward curve, for valuation purposes, based on independent consultant market
research. The effective portion of gains and losses on these contracts were recorded in Other comprehensive (loss)
income on the accompanying Consolidated Balance Sheet until the designated hedge periods begin in 2014 and 2016.
Once the hedge periods begin, realized gains and losses will be recorded in Cost of goods sold.
Additionally, an embedded derivative in a power contract that indexes the difference between the long-term debt
ratings of Alcoa and the counterparty from any of the three major credit rating agencies is included in Level 3.
Management uses market prices, historical relationships, and forecast services to determine fair value. Realized gains
and losses for this embedded derivative were included in Other (income) expenses, net on the accompanying Statement
of Consolidated Operations.
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 2011, 2010, or 2009):
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
2011 2010 2009
Aluminum contracts Sales $(126) $ 38 $ 214
Interest rate contracts Interest expense 64 90 61
Total $ (62) $ 128 $ 275
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
2011 2010 2009
Aluminum contracts Sales $ 133 $ (41) $(227)
Interest rate contracts Interest expense (31) (62) (61)
Total $ 102 $(103) $(288)
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
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