Derivatives and Other Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Schedule Of Fair Values Of Outstanding Derivative Contracts Recorded As Assets

The fair values and corresponding classifications under the appropriate level of the fair value hierarchy of outstanding derivative contracts recorded as assets in the accompanying Consolidated Balance Sheet were as follows:


Asset Derivatives	Level		June 30, 2012		December 31, 2011
Derivatives designated as hedging instruments:
Prepaid expenses and other current assets:
Aluminum contracts		1	$	59	$	51
Aluminum contracts		3		7		5
Interest rate contracts		2		7		8
Other noncurrent assets:
Aluminum contracts		1		1		6
Energy contracts		3		—		2
Interest rate contracts		2		40		37

Total derivatives designated as hedging instruments			$	114	$	109


Derivatives not designated as hedging instruments*:
Prepaid expenses and other current assets:
Aluminum contracts		2	$	1	$	1
Other noncurrent assets:
Aluminum contracts		3		3		5
Foreign exchange contracts		1		—		1

Total derivatives not designated as hedging instruments			$	4	$	7


Less margin held**:
Prepaid expenses and other current assets:
Aluminum contracts		1	$	—	$	7
Interest rate contracts		2		8		8
Other noncurrent assets:
Interest rate contracts		2		16		7

Sub-total			$	24	$	22


Total Asset Derivatives			$	94	$	94

*	See the “Other” section within Note N for additional information on Alcoa’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

All margin held is in the form of cash and is valued under a Level 1 technique. The levels that correspond to the margin held in the table above reference the level of the corresponding asset for which it is held. Alcoa elected to net the margin held against the fair value amounts recognized for derivative instruments executed with the same counterparties under master netting arrangements.

Schedule Of Fair Values Of Outstanding Derivative Contracts Recorded As Liabilities

The fair values and corresponding classifications under the appropriate level of the fair value hierarchy of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheet were as follows:


Liability Derivatives	Level		June 30, 2012		December 31, 2011
Derivatives designated as hedging instruments:
Other current liabilities:
Aluminum contracts		1	$	44	$	47
Aluminum contracts		3		28		32
Other noncurrent liabilities and deferred credits:
Aluminum contracts		1		18		4
Aluminum contracts		3		502		570
Energy contracts		3		10		—

Total derivatives designated as hedging instruments			$	602	$	653


Derivatives not designated as hedging instruments*:
Other current liabilities:
Aluminum contracts		1	$	9	$	12
Aluminum contracts		2		17		23
Embedded credit derivative		3		4		—
Other noncurrent liabilities and deferred credits:
Aluminum contracts		1		1		1
Aluminum contracts		2		13		21
Embedded credit derivative		3		35		28

Total derivatives not designated as hedging instruments			$	79	$	85


Less margin posted**:
Other current liabilities:
Aluminum contracts		1	$	—	$	1


Total Liability Derivatives			$	681	$	737

*	See the “Other” section within Note N for additional information on Alcoa’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

All margin posted is in the form of cash and is valued under a Level 1 technique. The levels that correspond to the margin posted in the table above reference the level of the corresponding liability for which it is posted. Alcoa elected to net the margin posted against the fair value amounts recognized for derivative instruments executed with the same counterparties under master netting arrangements.

Schedule Of Derivative Contract Assets And Liabilities That Are Measured And Recognized At Fair Value On A Recurring Basis

The following table presents Alcoa’s derivative contract assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy (there were no transfers in or out of Levels 1 and 2 during the periods presented):


	June 30, 2012			December 31, 2011
Assets:
Level 1	$	60		$	57
Level 2		48			47
Level 3		10			12
Margin held		(24	)		(22	)

Total	$	94		$	94


Liabilities:
Level 1	$	72		$	64
Level 2		30			44
Level 3		579			630
Margin posted		—			(1	)

Total	$	681		$	737

Schedule Of Reconciliation Of Activity For Derivative Contracts

Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following tables present a reconciliation of activity for such derivative contracts:


	Assets					Liabilities
Second quarter ended June 30, 2012	Aluminum contracts			Energy contracts		Aluminum contracts			Embedded credit derivative		Energy contracts
Opening balance – March 31, 2012	$	8		$	—	$	674		$	28	$	10
Total gains or losses (realized and unrealized) included in:
Sales		(2	)		—		(8	)		—		—
Cost of goods sold		—			—		—			1		—
Other expenses, net		(1	)		—		—			10		—
Other comprehensive loss		5			—		(136	)		—		—
Purchases, sales, issuances, and settlements*		—			—		—			—		—
Transfers into and (or) out of Level 3*		—			—		—			—		—

Closing balance – June 30, 2012	$	10		$	—	$	530		$	39	$	10


Change in unrealized gains or losses included in earnings for derivative contracts held at June 30, 2012:
Sales	$	—		$	—	$	—		$	—	$	—
Cost of goods sold		—			—		—			—		—
Other expenses, net		—			—		—			10		—

*	There were no purchases, sales, issuances or settlements of Level 3 financial instruments. Additionally, there were no transfers of financial instruments into or out of Level 3.


	Assets						Liabilities
Six months ended June 30, 2012	Aluminum contracts			Energy contracts			Aluminum contracts			Embedded credit derivative		Energy contracts
Opening balance – December 31, 2011	$	10		$	2		$	602		$	28	$	—
Total gains or losses (realized and unrealized) included in:
Sales		(5	)		—			(18	)		—		—
Cost of goods sold		—			—			—			1		—
Other expenses, net		(2	)		—			—			10		—
Other comprehensive loss		7			(2	)		(54	)		—		10
Purchases, sales, issuances, and settlements*		—			—			—			—		—
Transfers into and (or) out of Level 3*		—			—			—			—		—

Closing balance – June 30, 2012	$	10		$	—		$	530		$	39	$	10


Change in unrealized gains or losses included in earnings for derivative contracts held at June 30, 2012:
Sales	$	—		$	—		$	—		$	—	$	—
Cost of goods sold		—			—			—			—		—
Other expenses, net		—			—			—			10		—

*	There were no purchases, sales, issuances or settlements of Level 3 financial instruments. Additionally, there were no transfers of financial instruments into or out of Level 3.

Schedule Of Quantitative Information For Level 3 Derivative Contracts

The following table presents quantitative information for Level 3 derivative contracts:


	Fair value at June 30, 2012		Valuation technique	Unobservable input	Range ($ in full amounts)
Assets:
Aluminum contract	$	3	Discounted cash flow	Interrelationship of future aluminum and oil prices	Aluminum: $1,828 - $2,390 per metric ton Oil: $88 - $91 per barrel

Liabilities:
Aluminum contracts		523	Discounted cash flow	Price of aluminum beyond forward curve	$2,658 per metric ton in 2022 to $2,896 per metric ton in 2027

Embedded credit derivative		39	Discounted cash flow	Credit spread between Alcoa and counterparty	2.03% - 2.46% (2.25%) median

Energy contracts		10	Discounted cash flow	Price of electricity beyond forward curve	$77 per megawatt hour in 2012 to $170 per megawatt hour in 2036

Schedule Of Gain Or Loss On Hedged Items And Derivative Contracts

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 any of the periods presented):


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
		Second quarter ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Aluminum contracts	Sales	$	(93	)	$	(27	)	$	(57	)	$	22
Interest rate contracts	Interest expense		2			42			5			53

Total		$	(91	)	$	15		$	(52	)	$	75


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
		Second quarter ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Aluminum contracts	Sales	$	89		$	26		$	41		$	(26	)
Interest rate contracts	Interest expense		(2	)		(9	)		(5	)		(20	)

Total		$	87		$	17		$	36		$	(46	)

Schedule Of Gains And Losses On Derivative Representing Either Hedge Ineffectiveness Or Hedge Components Excluded From Assessment Of Effectiveness Are Recognized In Current Earnings

Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.


Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)												Location of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion)*												Location of Gain or (Loss) Recognized in Earnings on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Earnings on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)**
	Second quarter ended June 30,						Six months ended June 30,							Second quarter ended June 30,						Six months ended June 30,							Second quarter ended June 30,					Six months ended June 30,
	2012			2011			2012			2011				2012			2011			2012			2011				2012		2011			2012		2011

Aluminum contracts	$	145		$	97		$	66		$	(92	)	Sales	$	2		$	(38	)	$	2		$	(76	)	Other expenses (income), net	$	2	$	(1	)	$	9	$	—
Energy contracts		—			8			(5	)		8		Cost of goods sold		—			(3	)		—			(6	)	Other expenses (income), net		—		—			—		—
Foreign exchange contracts		—			1			—			2		Sales		—			1			—			2		Other expenses (income), net		—		—			—		—
Interest rate contracts		(2	)		—			—			—		Interest expense		(1	)		—			(1	)		—		Other expenses (income), net		—		—			—		—
Interest rate contracts		(3	)		(2	)		(3	)		(2	)	Other expenses (income), net		1			(2	)		—			(2	)	Other expenses (income), net		—		—			—		—

Total	$	140		$	104		$	58		$	(84	)		$	2		$	(42	)	$	1		$	(82	)		$	2	$	(1	)	$	9	$	—

*	Assuming market rates remain constant with the rates at June 30, 2012, a gain of $31 is expected to be recognized in earnings over the next 12 months.

For the second quarter and six months ended June 30, 2012, the amount of gain or (loss) recognized in earnings represents $1 and $10, respectively, related to the ineffective portion of the hedging relationships. There was also $1 and $(1) recognized in earnings related to the amount excluded from the assessment of hedge effectiveness for the second quarter and six months ended June 30, 2012, respectively. For the second quarter and six months ended June 30, 2011, the amount of gain or (loss) recognized in earnings related to the ineffective portion of the hedging relationships.

Schedule Of Outstanding Forward Contracts That Were Entered Into Hedge Forecasted Transactions

Alcoa had the following outstanding forward contracts that were entered into to hedge forecasted transactions:


	June 30, 2012		December 31, 2011
Aluminum contracts (kmt)		1,190		1,294
Energy contracts:
Electricity (megawatt hours)		100,578,295		100,578,295
Natural gas (million British thermal units)		17,780,000		—

Schedule Of Fair Value Gains And Losses On Derivatives Contracts Recorded In Earnings

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
		Second quarter ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Aluminum contracts	Sales	$	(6	)	$	(2	)	$	(3	)	$	1
Aluminum contracts	Other expenses (income), net		10			3			3			(11	)
Embedded credit derivative	Other expenses (income), net		(10	)		(6	)		(10	)		3
Energy contract	Other expenses (income), net		—			19			—			31
Foreign exchange contracts	Other expenses (income), net		(2	)		2			(2	)		4

Total		$	(8	)	$	16		$	(12	)	$	28

Schedule Of Carrying Values And Fair Values Of Other Financial Instruments

The carrying values and fair values of Alcoa’s other financial instruments were as follows:


	June 30, 2012				December 31, 2011
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,712	$	1,712	$	1,939	$	1,939
Restricted cash		20		20		25		25
Noncurrent receivables		21		21		30		30
Available-for-sale securities		86		86		92		92
Short-term borrowings		559		559		62		62
Commercial paper		318		318		224		224
Long-term debt due within one year		118		118		445		445
Long-term debt, less amount due within one year		8,547		9,274		8,640		9,274