Derivatives and Other Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2013

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	March 31, 2013		December 31, 2012
Derivatives designated as hedging instruments:
Prepaid expenses and other current assets:
Aluminum contracts	1	$	4	$	23
Aluminum contracts	3		8		7
Interest rate contracts	2		5		8
Other noncurrent assets:
Aluminum contracts	1		1		3
Aluminum contracts	3		4		—
Energy contracts	3		8		3
Interest rate contracts	2		37		37

Total derivatives designated as hedging instruments		$	67	$	81


Derivatives not designated as hedging instruments*:
Prepaid expenses and other current assets:
Aluminum contracts	3	$	216	$	211
Other noncurrent assets:
Aluminum contracts	3		294		329
Foreign exchange contracts	1		—		1

Total derivatives not designated as hedging instruments		$	510	$	541


Less margin held**:
Prepaid expenses and other current assets:
Aluminum contracts	1	$	—	$	9
Interest rate contracts	2		5		8
Other noncurrent assets:
Interest rate contracts	2		9		9

Sub-total		$	14	$	26


Total Asset Derivatives		$	563	$	596

*	See the “Other” section within Note M 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	March 31, 2013		December 31, 2012
Derivatives designated as hedging instruments:
Other current liabilities:
Aluminum contracts	1	$	49	$	13
Aluminum contracts	3		27		35
Other noncurrent liabilities and deferred credits:
Aluminum contracts	1		15		1
Aluminum contracts	3		451		573

Total derivatives designated as hedging instruments		$	542	$	622


Derivatives not designated as hedging instruments*:
Other current liabilities:
Aluminum contracts	1	$	3	$	1
Aluminum contracts	2		16		21
Embedded credit derivative	3		3		3
Other noncurrent liabilities and deferred credits:
Aluminum contracts	1		1		—
Aluminum contracts	2		—		5
Embedded credit derivative	3		29		27

Total derivatives not designated as hedging instruments		$	52	$	57


Total Liability Derivatives		$	594	$	679

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

Gross Amounts of Recognized Derivative Assets and Liabilities and Gross Amounts Offset in Accompanying Consolidated Balance Sheet

The gross amounts of recognized derivative assets and liabilities and gross amounts offset in the accompanying Consolidated Balance Sheet were as follows:


	Assets						Liabilities
	March 31, 2013			December 31, 2012			March 31, 2013			December 31, 2012
Gross amounts recognized:
Aluminum contracts	$	69		$	72		$	132		$	69
Interest rate contracts		42			45			14			17

	$	111		$	117		$	146		$	86

Gross amounts offset:
Aluminum contracts*	$	(64	)	$	(55	)	$	(64	)	$	(55	)
Interest rate contracts**		(14	)		(17	)		(14	)		(17	)

	$	(78	)	$	(72	)	$	(78	)	$	(72	)

Net amounts presented in the Consolidated Balance Sheet:
Aluminum contracts	$	5		$	17		$	68		$	14
Interest rate contracts		28			28			—			—

	$	33		$	45		$	68		$	14

*	The asset and liability amounts as of December 31, 2012 include $9 of margin held from counterparties.

**	The asset and liability amounts as of March 31, 2013 and December 31, 2012 represent margin held from the counterparty.

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):


	March 31, 2013			December 31, 2012
Assets:
Level 1	$	5		$	27
Level 2		42			45
Level 3		530			550
Margin held		(14	)		(26	)

Total	$	563		$	596


Liabilities:
Level 1	$	68		$	15
Level 2		16			26
Level 3		510			638

Total	$	594		$	679

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
First quarter ended March 31, 2013	Aluminum contracts			Energy contracts		Aluminum contracts			Embedded credit derivative
Opening balance – January 1, 2013	$	547		$	3	$	608		$	30
Total gains or losses (realized and unrealized) included in:
Sales		(2	)		—		(8	)		—
Cost of goods sold		(52	)		—		—			—
Other income, net		17			—		—			2
Other comprehensive income		7			5		(122	)		—
Purchases, sales, issuances, and settlements*		—			—		—			—
Transfers into and (or) out of Level 3*		—			—		—			—
Foreign currency translation		5			—		—			—

Closing balance – March 31, 2013	$	522		$	8	$	478		$	32


Change in unrealized gains or losses included in earnings for derivative contracts held at March 31, 2013:
Sales	$	—		$	—	$	—		$	—
Cost of goods sold		—			—		—			—
Other income, net		17			—		—			2

*	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 March 31, 2013		Valuation technique	Unobservable input	Range ($ in full amounts)
Assets:
Aluminum contract	$	1	Discounted cash flow	Interrelationship of future aluminum and oil prices	Aluminum: $1,894 per metric ton in 2013 to $2,335 per metric ton in 2018 Oil: $110 per barrel in 2013 to $91 per barrel in 2018
Aluminum contract	$	509	Discounted cash flow	Interrelationship of future aluminum prices, foreign currency exchange rates, and the U.S. consumer price index (CPI)	Aluminum: $1,883 per metric ton in 2013 to $2,172 per metric ton in 2016 Foreign currency: A$1 = $1.04 in 2013 to $0.94 in 2016 CPI: 1982 base year of 100 and 233 in 2013 to 253 in 2016
Aluminum contract		12	Discounted cash flow	Interrelationship of LME price to overall energy price	Aluminum: $1,928 per metric ton in 2013 to $2,359 per metric ton in 2019
Energy contracts		8	Discounted cash flow	Price of electricity beyond forward curve	$78 per megawatt hour in 2023 to $170 per megawatt hour in 2036
Liabilities:
Aluminum contracts		478	Discounted cash flow	Price of aluminum beyond forward curve	$2,569 per metric ton in 2023 to $2,766 per metric ton in 2027
Embedded credit derivative		32	Discounted cash flow	Credit spread between Alcoa and counterparty	1.71% to 2.06% (1.88% median)

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):


	Location of Gain or (Loss)	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
	Recognized in Earnings on	First quarter ended March 31,
Derivatives in Fair Value Hedging Relationships	Derivatives	2013			2012
Aluminum contracts*	Sales	$	(71	)	$	36
Interest rate contracts	Interest expense		3			3

Total		$	(68	)	$	39


	Location of Gain or (Loss)	Amount of Gain or (Loss) Recognized in Earnings on Hedged Items
	Recognized in Earnings on	First quarter ended March 31,
Hedged Items in Fair Value Hedging Relationships	Hedged Items	2013			2012
Aluminum contracts	Sales	$	71		$	(48	)
Interest rate contracts	Interest expense		(3	)		(3	)

Total		$	68		$	(51	)

*	In the first quarter ended March 31, 2012, the gain recognized in earnings includes a loss of $12 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.


	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into	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	Amount of Gain or (Loss) Recognized in Earnings on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)**
	First quarter ended March 31,					Earnings (Effective	First quarter ended March 31,						Excluded from Effectiveness	First quarter ended March 31,
Derivatives in Cash Flow Hedging Relationships	2013		2012			Portion)	2013			2012			Testing)	2013		2012

Aluminum contracts	$	104	$	(79	)	Sales	$	(6	)	$	—		Other income, net	$	—	$	7
Energy contracts		2		(5	)	Cost of goods sold		—			—		Other income, net		—		—
Foreign exchange contracts		—		—		Sales		—			—		Other income, net		—		—
Interest rate contracts		—		2		Interest expense		—			—		Other income, net		—		—
Interest rate contracts		1		—		Other income, net		—			(1	)	Other income, net		—		—

Total	$	107	$	(82	)		$	(6	)	$	(1	)		$	—	$	7

*	Assuming market rates remain constant with the rates at March 31, 2013, a loss of $16 is expected to be recognized in earnings over the next 12 months.

For the first quarter ended March 31, 2013 and 2012, the amount of gain or (loss) recognized in earnings represents less than $1 and $9, respectively, related to the ineffective portion of the hedging relationships. There was also $(2) recognized in earnings related to the amount excluded from the assessment of hedge effectiveness for the first quarter ended March 31, 2012.

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:


	March 31, 2013		December 31, 2012
Aluminum contracts (kmt)		1,085		1,120
Energy contracts:
Electricity (megawatt hours)		59,409,328		100,578,295
Natural gas (million British thermal units)		19,250,000		19,160,000
Foreign exchange contracts	$	86	$	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
		First quarter ended March 31,
		2013			2012
Aluminum contracts	Sales	$	(4	)	$	3
Aluminum contracts	Other income, net		22			(7	)
Embedded credit derivative	Other income, net		(2	)		—
Foreign exchange contracts	Other income, net		(3	)		1

Total		$	13		$	(3	)

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:


	March 31, 2013				December 31, 2012
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,555	$	1,555	$	1,861	$	1,861
Restricted cash		130		130		189		189
Noncurrent receivables		20		20		20		20
Available-for-sale securities		79		79		67		67
Short-term borrowings		51		51		53		53
Commercial paper		104		104		—		—
Long-term debt due within one year		1,025		1,266		465		477
Long-term debt, less amount due within one year		7,745		8,302		8,311		9,028