Derivatives and Other Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2012

Schedule of Fair Values and Corresponding Level of Fair Value Hierarchy 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		December 31, 2012		December 31, 2011
Derivatives designated as hedging instruments:
Prepaid expenses and other current assets:
Aluminum contracts		1	$	23	$	51
Aluminum contracts		3		7		5
Interest rate contracts		2		8		8
Other noncurrent assets:
Aluminum contracts		1		3		6
Energy contracts		3		3		2
Interest rate contracts		2		37		37
Total derivatives designated as hedging instruments			$	81	$	109
Derivatives not designated as hedging instruments*:
Prepaid expenses and other current assets:
Aluminum contracts		2	$	-	$	1
Aluminum contracts		3		211		-
Other noncurrent assets:
Aluminum contracts		3		329		5
Foreign exchange contracts		1		1		1
Total derivatives not designated as hedging instruments			$	541	$	7
Less margin held**:
Prepaid expenses and other current assets:
Aluminum contracts		1	$	9	$	7
Interest rate contracts		2		8		8
Other noncurrent assets:
Interest rate contracts		2		9		7
Sub-total			$	26	$	22
Total Asset Derivatives			$	596	$	94

*	See the “Other” section within Note X 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 and Corresponding Level of Fair Value Hierarchy 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		December 31, 2012		December 31, 2011
Derivatives designated as hedging instruments:
Other current liabilities:
Aluminum contracts		1	$	13	$	47
Aluminum contracts		3		35		32
Other noncurrent liabilities and deferred credits:
Aluminum contracts		1		1		4
Aluminum contracts		3		573		570
Total derivatives designated as hedging instruments			$	622	$	653
Derivatives not designated as hedging instruments*:
Other current liabilities:
Aluminum contracts		1	$	1	$	12
Aluminum contracts		2		21		23
Embedded credit derivative		3		3		-
Other noncurrent liabilities and deferred credits:
Aluminum contracts		1		-		1
Aluminum contracts		2		5		21
Embedded credit derivative		3		27		28
Total derivatives not designated as hedging instruments			$	57	$	85
Less margin posted**:
Other current liabilities:
Aluminum contracts		1	$	-	$	1
Total Liability Derivatives			$	679	$	737

*	See the “Other” section within Note X 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 Net Fair Values of Outstanding Derivative Contracts and Effect of Hypothetical Change (Increase or Decrease of 10%) in Market Prices or Rates

The following table shows the net fair values of outstanding derivative contracts at December 31, 2012 and the effect on these amounts of a hypothetical change (increase or decrease of 10%) in the market prices or rates that existed at December 31, 2012:


	Fair value asset/(liability)			Index change of + / - 10%
Aluminum contracts	$	(85	)	$	111
Embedded credit derivative		(30	)		3
Energy contracts		3			249
Foreign exchange contracts		1			8
Interest rate contracts		28			1

Schedule of Derivative Contract Assets and Liabilities that are Measured and Recognized at Fair Value on 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):


December 31,	2012			2011
Assets:
Level 1	$	27		$	57
Level 2		45			47
Level 3		550			12
Margin held		(26	)		(22	)
Total	$	596		$	94
Liabilities:
Level 1	$	15		$	64
Level 2		26			44
Level 3		638			630
Margin posted		-			(1	)
Total	$	679		$	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
2012	Aluminum contracts			Energy contracts		Aluminum contracts			Embedded credit derivative			Energy contracts
Opening balance—January 1, 2012	$	10		$	2	$	602		$	28		$	-
Total gains or losses (realized and unrealized) included in:
Sales		(8	)		-		(33	)		-			-
Cost of goods sold		(107	)		-		-			(1	)		-
Other income, net		16			-		-			3			-
Other comprehensive loss		10			1		39			-			-
Purchases, sales, issuances, and settlements*		596			-		-			-			-
Transfers into and (or) out of Level 3*		-			-		-			-			-
Foreign currency translation		30			-		-			-			-
Closing balance—December 31, 2012	$	547		$	3	$	608		$	30		$	-
Change in unrealized gains or losses included in earnings for derivative contracts held at December 31, 2012:
Sales	$	-		$	-	$	-		$	-		$	-
Cost of goods sold		-			-		-			-			-
Other income, net		16			-		-			3			-

In July 2012, two embedded derivatives contained within existing power contracts became subject to derivative accounting under GAAP (see below). The amount reflected in this table represents the initial fair value of these embedded derivatives and was classified as an issuance of Level 3 financial instruments. There were no purchases, sales or settlements of Level 3 financial instruments. Additionally, there were no transfers of financial instruments into or out of Level 3.


	Assets					Liabilities
2011	Aluminum contracts		Energy contracts			Aluminum contracts			Embedded credit derivative			Energy contracts
Opening balance—January 1, 2011	$	-	$	9		$	702		$	24		$	62
Total gains or losses (realized and unrealized) included in:
Sales		-		-			(63	)		-			-
Cost of goods sold		-		-			-			(1	)		(14	)
Other income, net		-		-			-			5			(48	)
Other comprehensive loss		5		(7	)		(37	)		-			-
Purchases, sales, issuances, and settlements**		5		-			-			-			-
Transfers into and (or) out of Level 3**		-		-			-			-			-
Foreign currency translation		-		-			-			-			-
Closing balance—December 31, 2011	$	10	$	2		$	602		$	28		$	-
Change in unrealized gains or losses included in earnings for derivative contracts held at December 31, 2011:
Sales	$	-	$	-		$	-		$	-		$	-
Cost of goods sold		-		-			-			-			-
Other income, net		-		-			-			5			-

**	In 2011, there was an issuance of a Level 3 financial instrument related to a natural gas supply contract (see below). There were no purchases, sales, 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 December 31, 2012*		Valuation technique	Unobservable input	Range ($ in full amounts)
Assets:
Aluminum contract	$	2	Discounted cash flow	Interrelationship of future aluminum and oil prices	Aluminum: $2,037 per metric ton in 2013 to $2,542 per metric ton in 2018 Oil: $90 to $111 per barrel
Aluminum contract		537	Discounted cash flow	Interrelationship of future aluminum prices, foreign currency exchange rates, and the U.S. consumer price index (CPI)	Aluminum: $2,046 per metric ton in 2013 to $2,400 per metric ton in 2016 Foreign currency: A$1 = $1.03 in 2013 to $0.94 in 2016 CPI: 1982 base year of 100 and 232 in 2013 to 254 in 2016
Energy contracts		3	Discounted cash flow	Price of electricity beyond forward curve	$78 per megawatt hour in 2013 to $170 per megawatt hour in 2036
Liabilities:
Aluminum contracts		600	Discounted cash flow	Price of aluminum beyond forward curve	$2,790 per metric ton in 2023 to $3,002 per metric ton in 2027
Embedded credit derivative		30	Discounted cash flow	Credit spread between Alcoa and counterparty	1.63% to 1.91% (1.77% median)

The fair value of aluminum contracts reflected as assets and liabilities in this table are both lower by $8 compared to the respective amounts reflected in the Level 3 reconciliation presented above. This is due to the fact that Alcoa has a contract that is in an asset position for the current portion but is in a liability position for the long-term portion, and is reflected as such on the accompanying Consolidated Balance Sheet. However, this contract is reflected as a net liability in this table for purposes of presenting the fair value technique and assumptions utilized to measure the contract as a whole.

Schedule of Gain or Loss on Hedged Items and Derivative Contracts

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
Derivatives in Fair Value Hedging Relationships			2012			2011			2010
Aluminum contracts*		Sales	$	(9	)	$	(126	)	$	38
Interest rate contracts		Interest expense		10			64			90
Total			$	1		$	(62	)	$	128

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
Hedged Items in Fair Value Hedging Relationships			2012			2011			2010
Aluminum contracts		Sales	$	(9	)	$	133		$	(41	)
Interest rate contracts		Interest expense		(10	)		(31	)		(62	)
Total			$	(19	)	$	102		$	(103	)

*	In 2012, 2011, and 2010, the amount of gain or (loss) recognized in earnings represents $(18), $7, and $(3), respectively, related to the ineffective portion of the hedging relationships.

Schedule of Gains and Losses on Derivative Excluded from Assessment of Effectiveness 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)**
	2012			2011			2010				2012			2011			2010				2012			2011		2010
Aluminum contracts	$	(10	)	$	72		$	(6	)	Sales	$	36		$	(114	)	$	(106	)	Other (income) expenses, net	$	(1	)	$	2	$	-
Energy contracts		-			(3	)		(10	)	Cost of goods sold		-			(8	)		(25	)	Other (income) expenses, net		-			-		-
Foreign exchange contracts		-			1			(3	)	Sales		-			4			(6	)	Other (income) expenses, net		-			-		-
Interest rate contracts		-			(2	)		(1	)	Interest expense		(2	)		-			(1	)	Other (income) expenses, net		-			-		-
Interest rate contracts		(2	)		(5	)		(1	)	Other (income) expenses, net		-			(3	)		-		Other (income) expenses, net		-			-		-
Total	$	(12	)	$	63		$	(21	)		$	34		$	(121	)	$	(138	)		$	(1	)	$	2	$	-

*	Assuming market rates remain constant with the rates at December 31, 2012, a loss of $23 is expected to be recognized in earnings over the next 12 months.

In 2012 and 2011, the amount of gain or (loss) recognized in earnings represents $(1) and $3, respectively, related to the amount excluded from the assessment of hedge effectiveness. There was also $(1) and less than $1 recognized in earnings related to the ineffective portion of the hedging relationships in 2011 and 2010, respectively.

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:


December 31,	2012		2011
Aluminum contracts (kmt)		1,120		1,294
Energy contracts:
Electricity (megawatt hours)		100,578,295		100,578,295
Natural gas (million British thermal units)		19,160,000		-
Foreign exchange contracts	$	71	$	-

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
Derivatives Not Designated as Hedging Instruments		2012			2011			2010
Aluminum contracts	Sales	$	-		$	(13	)	$	5
Aluminum contracts	Other (income) expenses, net		16			13			(18	)
Embedded credit derivative	Other (income) expenses, net		(3	)		(5	)		(2	)
Energy contract	Other (income) expenses, net		-			47			(23	)
Foreign exchange contracts	Other (income) expenses, net		-			(3	)		6
Total		$	13		$	39		$	(32	)

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:


December 31,	2012				2011
December 31,	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,861	$	1,861	$	1,939	$	1,939
Restricted cash		189		189		25		25
Noncurrent receivables		20		20		30		30
Available-for-sale securities		67		67		92		92
Short-term borrowings		53		53		62		62
Commercial paper		-		-		224		224
Long-term debt due within one year		465		465		445		445
Long-term debt, less amount due within one year		8,311		9,028		8,640		9,274