Available-for-Sale Investments. The fair value of investments is based on readily available market values. Investments in marketable equity securities are classified as ‘‘available for sale’’ and are carried at fair value. Long-Term Debt. The fair value is based on interest rates that are currently available to Alcoa for issuance of debt with similar terms and remaining maturities. Derivatives. Alcoa uses derivatives for purposes other than trading. Fair value gains (losses) of outstanding derivatives contracts were: Aluminum. Customers often require Alcoa to enter into long- term, fixed-price commitments. These commitments expose Alcoa to the risk of higher aluminum prices between the time the order is committed and the time that the order is shipped. Alcoa’s aluminum commodity risk management policy is to manage, principally through the use of futures contracts, the aluminum price risk of its firm commitments. These contracts cover known exposures, generally within three years. Interest Rates. Alcoa uses interest rate swaps to help maintain a strategic balance between fixed- and floating-rate debt and to manage overall financing costs. As of December 31, 2004, the company had pay floating, receive fixed interest rate swaps that were designated as fair value hedges. These hedges effec- tively convert the interest rate from fixed to floating on $2,750 of debt through 2018. For additional information on interest rate swaps and their effect on debt and interest expense, see Note K. Currencies. Alcoa uses cross-currency interest rate swaps that effectively convert its U.S. dollar denominated debt into Brazilian reais debt at local interest rates. Interest Rates. Alcoa previously used interest rate swaps to establish fixed interest rates on anticipated borrowings between June2005andJune2006.Duetoachangeinforecasted borrowing requirements, resulting from the restructuring of debt in June 2004 and a forecasted increase in future operating cash flows resulting from improved market conditions, it is no longer probable that the anticipated borrowings will occur in 2005 and 2006. Therefore, Alcoa recognized $33 of gains that had been deferred on previously settled swaps and $44 of additional gains to terminate the remaining interest rate swaps. These gains were recorded in other income in the second quarter of 2004. For additional information, see Note K. Currencies. Alcoa is subject to exposure from fluctuations in foreign currency exchange rates. Foreign currency exchange contractsmaybeusedfromtimetotimetohedgethe variability in cash flows from the forecasted payment or receipt of currencies other than the functional currency. These contracts cover periods commensurate with known or expected exposures, generally within three years. The U.S. dollar notional amount of all foreign currency contracts was approximately $400 and $200 as of December 31, 2004 and 2003, respectively. Commodities. Alcoa anticipates the continued requirement to purchase aluminum and other commodities such as natural gas, fuel oil, and electricity for its operations. Alcoa enters into futures contracts to reduce volatility in the price of these commodities. Alcoa has also entered into certain derivatives to minimize its price risk related to aluminum purchases. Alcoa has not qualified these contracts for hedge accounting treatment, and therefore, the fair value gains and losses on these contracts are recorded in earnings. In addition, Alcoa has entered into power supply contracts that contain pricing provisions related to the LME aluminum price. The LME linked pricing features are considered embedded derivatives. A majority of these embedded derivatives have been designated as cash flow hedges of future sales of aluminum. Gains and losses on the remainder of these derivatives are recognized in earnings. The net earnings impact of these contracts was a gain of $5 in 2004. Alcoa is exposed to credit loss in the event of nonperform- ance by counterparties on the above instruments, as well as credit or performance risk with respect to its hedged customers’ commitments. Although nonperformance is possible, Alcoa does not anticipate nonperformance by any of these parties. Contracts are with creditworthy counterparties and are further supported by cash, treasury bills, or irrevocable letters of credit issued by carefully chosen banks. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts. For further information on Alcoa’s hedging and derivatives activities, see Notes A and K. Alcoa continues to participate in environmental assessments and cleanups at a number of locations. These include approxi- mately 30 owned or operating facilities and adjoining proper- ties, approximately 39 previously owned or operating facilities and adjoining properties, and approximately 67 waste sites, including Superfund sites. A liability is recorded for environ- mental remediation costs or damages when a cleanup program becomes probable and the costs or damages can be reasonably estimated. See Note A for additional information. As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs and damages. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes. Therefore, it is not possible to determine the outcomes or to estimate with any degree of accuracy the potential costs for certain of these matters. The following discussion provides additional details regard- ing the current status of Alcoa’s significant sites where the final outcome cannot be determined or the potential costs in the future cannot be estimated. 61 Y. Environmental Matters Cash Flow Hedges Fair Value Hedges Other December 31 2004 2003 Aluminum $211 $7 0 Interest rates (42) (74) Other commodities, principally natural gas 53 73 Currencies 38 (6)