Alcoa 2013 Annual Report Download - page 173
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Furthermore, 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. Significant
increases or decreases in any of these inputs would result in a lower or higher fair value measurement. A wider credit
spread between Alcoa and the counterparty would result in an increase of the future liability and a higher cost of
power. Realized gains and losses for this embedded derivative were included in Cost of goods sold on the
accompanying Statement of Consolidated Operations and unrealized gains and losses were included in Other income,
net on the accompanying Statement of Consolidated Operations.
The following table presents quantitative information for Level 3 derivative contracts:
Fair value at
December 31, 2013
Valuation
technique
Unobservable
input
Range
($ in full amounts)
Assets:
Aluminum contract $ - Discounted cash flow Interrelationship of
future aluminum and
oil prices
Aluminum: $1,774 per
metric ton in 2014 to
$2,221 per metric ton
in 2018
Oil: $112 per barrel in
2014 to $89 per barrel
in 2018
Aluminum contract 324 Discounted cash flow Interrelationship of
future aluminum
prices, foreign
currency exchange
rates, and the U.S.
consumer price index
(CPI)
Aluminum: $1,784 per
metric ton in 2014 to
$2,064 per metric ton
in 2016
Foreign currency:
A$1 = $0.89 in 2014 to
$0.83 in 2016
CPI: 1982 base year of
100 and 231 in 2014 to
246 in 2016
Aluminum contract 25 Discounted cash flow Interrelationship of
LME price to overall
energy price
Aluminum: $1,839 per
metric ton in 2014 to
$2,239 per metric ton
in 2019
Energy contracts 6 Discounted cash flow Price of electricity
beyond forward curve
$82 per megawatt hour
in 2014 to $154 per
megawatt hour in 2036
Liabilities:
Aluminum contracts 410 Discounted cash flow Price of aluminum
beyond forward curve
$2,485 per metric ton
in 2023 to $2,647 per
metric ton in 2027
Embedded credit
derivative
21 Discounted cash flow Credit spread between
Alcoa and counterparty
0.98% to 1.66%
(1.32% median)
157