Alcoa 2013 Annual Report Download - page 176

Alcoa had the following outstanding forward contracts that were entered into to hedge forecasted transactions:
December 31, 2013 2012
Aluminum contracts (000 metric tons) 841 1,120
Energy contracts:
Electricity (megawatt hours) 59,409,328 100,578,295
Natural gas (million British thermal units) 19,980,000 19,160,000
Foreign exchange contracts $ 335 $ 71
Other
Alcoa has certain derivative contracts that do not qualify for hedge accounting treatment and, therefore, the fair value
gains and losses on these contracts are recorded in earnings as follows:
Derivatives Not Designated as Hedging
Instruments
Location of Gain or (Loss)
Recognized in Earnings on Derivatives
Amount of Gain or (Loss)
Recognized in Earnings
on Derivatives
2013 2012 2011
Aluminum contracts Sales $ (9) $ - $(13)
Aluminum contracts Other income, net 27 16 13
Embedded credit derivative Other income, net 8 (3) (5)
Energy contract Other income, net - - 47
Foreign exchange contracts Other income, net (6) - (3)
Total $20 $13 $ 39
The aluminum contracts relate to derivatives (recognized in Sales) and embedded derivatives (recognized in Other
income, net) entered into to minimize Alcoa’s price risk related to other customer sales and certain pricing
arrangements.
The embedded credit derivative relates to 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. If the counterparty’s lowest
credit rating is greater than one rating category above Alcoa’s credit ratings, an independent investment banker would
be consulted to determine a hypothetical interest rate for both parties. The two interest rates would be netted and the
resulting difference would be multiplied by Alcoa’s equivalent percentage of the outstanding principal of the
counterparty’s debt obligation as of December 31 of the year preceding the calculation date. This differential would be
added to the cost of power in the period following the calculation date.
The energy contract is associated with a smelter in the U.S. for a power contract that no longer qualified for the normal
purchase normal sale exception and a financial contract that no longer qualified as a hedge under derivative accounting
in late 2009. Alcoa’s obligations under the contracts expired in September 2011.
Alcoa has a forward contract to purchase $54 (C$58) to mitigate the foreign currency risk related to a Canadian-
denominated loan due in 2014. Also, in December 2013, Alcoa entered into a forward contract (matures on March 31,
2014) to purchase $231 (R$543) to mitigate the foreign currency risk associated with a potential future transaction
denominated in Brazilian reais. All other foreign exchange contracts were entered into and settled within each of the
periods presented.
Material Limitations
The disclosures with respect to commodity prices, interest rates, and foreign currency exchange risk do not take into
account the underlying commitments or anticipated transactions. If the underlying items were included in the analysis,
the gains or losses on the futures contracts may be offset. Actual results will be determined by a number of factors that
are not under Alcoa’s control and could vary significantly from those factors disclosed.
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