Commodity Price Risks — Alcoa is a leading global producer of primary aluminum products and aluminum fabricated products. As a condition of sale, 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 uses futures contracts, totaling approximately 1,000,000 mt at December 31, 2004, to reduce the aluminum price risk of these fixed-price firm commitments. The effects of this hedging activity will be recognized in earnings over the designated hedge periods, generally within three years. Alcoa has also entered into futures contracts 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. These contracts totaled 67,000 mt at December 31, 2004. 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 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 purchases natural gas, fuel oil, and electricity to meet its production requirements and believes it is highly likely that such purchases will continue in the future. These purchases expose the company to the risk of higher prices. To hedge a portion of these risks, Alcoa uses futures and forward contracts. 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. For a portion of its fixed-rate debt, the company has entered into pay floating, receive fixed interest rate swaps to effectively change the fixed interest rates to floating interest rates. Alcoa previously used interest rate swaps to establish fixed interest rates on anticipated borrowings between June 2005 and June 2006. Due to a change in forecasted borrowing require- ments, resulting from the early retirement of debt in June 2004 and a forecasted increase in future operating cash flows result- ing 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 amounts were included in the $58 gain on the restructuring of debt that was recorded in other income in the second quarter of 2004. 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 consistent with known or expected exposures, generally within three years. 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. 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. 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 properties, 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. For additional information, see Notes A and Y to the Consolidated Financial Statements. For additional information on derivative instruments, see NotesA,K,andXtotheConsolidatedFinancialStatements. 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. Futures 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. Material Limitations — The disclosures with respect to commodity prices, interest rates, and foreign exchange risk do not take into account the underlying commitments or antici- pated 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. Environmental Matters Financial Risk 33 Fair Values and Sensitivity Analysis — The following table shows the fair values of outstanding derivatives contracts at December 31, 2004 and the effect on fair value of a hypothetical change (increase or decrease of 10%) in the market prices or ratesthatexistedatDecember31,2004. Fair value gain/(loss) Price change of + / ‒ 10% Aluminum $211 $145 Interest rates (42) 74 Other commodities, principally natural gas 53 56 Currencies 38 16