UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 20162018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-37816
ALCOA CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware | 81-1789115 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
201 Isabella Street, Suite 500, Pittsburgh, Pennsylvania ( | 15212-5858 ( |
390 Park Avenue, New York, New York 10022-4608412-315-2900
(Address of principal executive offices) (Zip code)
212-518-5400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ✓No ✓.__.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes __ No ✓ .
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ✓ No .__.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ✓ No .__.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [✓[✓]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [✓] Accelerated filer [ ] Non-accelerated filer [✓[ ] Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No ✓.
As of June 30, 2016, the registrant’s common stock was not publicly traded.
As of March 10, 2017,February 18, 2019, there were 184,204,763185,498,424 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
The aggregate market value of the Registrant’s voting stock held by non-affiliates at June 29, 2018 was approximately $8.7 billion, based on the closing price per share of Common Stock on June 29, 2018 of $46.88 as reported on the New York Stock Exchange.
Documents incorporated by reference.
Part III of this Form 10-K incorporates by reference certain information from the registrant’s Definitive Proxy Statement for its 20172019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
TABLE OF CONTENTS
Page(s) | |||||||
Item 1. | 1 | ||||||
Item 1A. | 21 | ||||||
Item 1B. | 32 | ||||||
Item 2. | 33 | ||||||
Item 3. | 33 | ||||||
Item 4. | 38 | ||||||
Item 5. | 39 | ||||||
Item 6. | 42 | ||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 43 | |||||
Item 7A. | 73 | ||||||
Item 8. | 74 | ||||||
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 150 | |||||
Item 9A. | 150 | ||||||
Item 9B. | 150 | ||||||
Item 10. | 151 | ||||||
Item 11. | 151 | ||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 151 | |||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 151 | |||||
Item 14. | 151 | ||||||
Item 15. | 152 | ||||||
Item 16. | 155 | ||||||
156 |
Note on Incorporation by Reference
In this Form 10-K, selected items of information and data are incorporated by reference to portions of Alcoa Corporation’s Definitive Proxy Statement for its 20172019 Annual Meeting of Stockholders to be held on May 10, 2017 (the “Proxy(“Proxy Statement”), which will be filed with the Securities and Exchange Commission within 120 days ofafter the end of Alcoa Corporation’s fiscal year ended December 31, 2016.2018. Unless otherwise provided herein, any reference in this Form 10-K to disclosures in the Proxy Statement shall constitute incorporation by reference of only that specific disclosure into this Form 10-K.
Forward-Looking Statements
This report contains (and oral communications made by Alcoa may contain) statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,”goal,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements by Alcoa Corporation that reflect expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts concerning global demand growth for bauxite, alumina and aluminum, and supply/demand balances; statements, projections or forecasts of future financial results or operating performance; and statements about strategies, outlook, business and financial prospects.statements. These statements reflect beliefs and assumptions that are based on Alcoa Corporation’s perception of historical trends, current conditions, and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and changes in circumstances that are difficult to predict. Although Alcoa Corporation believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.
For a discussion of some of the specific factors that may cause Alcoa’s actual results to differ materially from those projected in any forward-looking statements, see the following sections of this report: Part I, Item 1A. (Risk Factors), Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations), including the disclosures under Segment Information and Critical Accounting Policies and Estimates, and the Derivatives Section of Note O to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data). Alcoa Corporation disclaims any obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law. Market projections are subject to the risks discussed above and other risks in the market.
General
Alcoa Corporation, a Delaware corporation, became an independent, publicly traded company on November 1, 2016, as explained belowfollowing its separation from its former parent company, Alcoa Inc. (“ParentCo” or “Arconic”) (described below). “Regular-way” trading of Alcoa Corporation’s common stock began with the opening of the New York Stock Exchange (“NYSE”) on November 1, 2016 under “Separation Transaction.the ticker symbol “AA.” Alcoa Corporation’s common stock has a par value of $0.01 per share. Alcoa Corporation has its principal office in New York, New York.Pittsburgh, Pennsylvania. In this report, unless the context otherwise requires, the terms “Alcoa” or the “Company,” “we,” “us,” and “our” meansrefer to Alcoa Corporation and all subsidiaries consolidated for the purposes of its financial statements.
Alcoa is a global industry leader in the production of bauxite, alumina, and aluminum with a strong portfolio of value-added cast and rolled products, as well as substantial energy assets. Alcoaproducts. The Company is built on a foundation of strong values and operating excellence dating back nearly 130 years to the world-changing discovery that made aluminum an affordable and vital part of modern life. Since inventingdeveloping the aluminum industry, and throughout our history, our talented Alcoans have followed on with breakthrough innovations and best practices that have led to efficiency, safety, sustainability, and stronger communities wherever we operate.
Alcoa is a global company with more than 40 operating locations across 10 countries. The Company’s operations consist of three reportable business segments: Bauxite, Alumina, and Aluminum. The Bauxite and Alumina segments primarily consist of a series of affiliated operating entities held in Alcoa World Alumina and Chemicals, a global, unincorporated joint venture between Alcoa and Alumina Limited (described below). The Aluminum segment consists of the Company’s aluminum smelting, casting, and rolling businesses, along with the majority of the energy business.
Aluminum, as an element, is abundant in the earth’s crust but a multi-step process is required to make aluminum metal. Aluminum metal is produced by refining alumina oxide from bauxite into alumina, which is then smelted into aluminum and can be cast and rolled into many shapes and forms. Aluminum is a commodity traded on the London Metal Exchange (“LME”) and priced daily. Additionally, aluminaAlumina, an intermediary product, is subject to market pricing against the Alumina Price Index (“API”). As a result, the priceprices of both aluminum and alumina isare subject to significant volatility and, therefore, influencesinfluence the operating results of Alcoa Corporation.Alcoa.
Alcoa is a global company with 43 operating locations across 10 countries. Alcoa’s operations consisted of six reportable segments for 2016: Bauxite, Alumina, Aluminum, Cast Products, Energy, and Rolled Products.
The Company’s Internetinternet address ishttp://www.alcoa.com. Alcoa makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”(the “SEC”). The information on the Company’s Internetinternet site is not a part of, or incorporated by reference in, this annual report on Form 10-K. The SEC maintains an Internetinternet site that contains these reports athttp://www.sec.gov.
Separation Transaction in 2016
On September 28, 2015, Alcoa Inc. (“ParentCo”)ParentCo announced its intention to separate ParentCo into two standalone, publicly-tradedpublicly traded companies (the “Separation Transaction”). Alcoa Upstream Corporation was formed in Delaware in March 2016 for the purpose of holding ParentCo’s Alcoa Corporation Business (as defined below) and was renamed Alcoa Corporation in connection with the Separation Transaction.
Alcoa Corporation was formed to hold ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, as well as ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia (the(collectively, the “Alcoa Corporation Business”). Following the Separation Transaction, Alcoa Corporation holds the assets and liabilities of ParentCo relating to those businesses and the direct and indirect subsidiary entities that operated the Alcoa Corporation Business, subject to certain exceptions. Upon completion of the Separation Transaction, ParentCo was renamed Arconic Inc. (“Arconic”) and now holds ParentCo’s Engineered Products and Solutions, Global Rolled Products (other than the rolling mill operations in Warrick, Indiana, and the 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia) and Transportation and Construction Solutions businesses (the “Arconic Business”), including those assets and liabilities of ParentCo and its direct and indirect subsidiary entities that operated the Arconic Business, subject to certain exceptions.
On September 29, 2016, the ParentCo Board of Directors approved the distribution of 80.1% of Alcoa Corporation’s issued and outstanding shares of common stock on the basis of one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as of the close of business on October 20, 2016, the record date for the distribution (the “Distribution”).
The Separation Transaction and the Distribution were subject to a number of conditions, including, but not limited to: final approval by ParentCo’s Board of Directors (see below); the continuing validity of the private letter ruling from the Internal Revenue Service regarding certain U.S. federal income tax matters relating to the transaction; receipt of an opinion of legal counsel regarding the qualification of the Distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes; and the SEC declaring effective a Registration Statement on Form 10, as amended, filed with the SEC on October 11, 2016 (effectiveness was declared by the SEC on October 17, 2016).
On November 1, 2016, the Separation Transaction was completed and became effective at 12:01 a.m. Eastern Standard Time, at which time Alcoa Corporation became an independent, publicly traded company. To effect the Separation Transaction, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of approximately $1.1 billion to ParentCo by Alcoa Corporation using the net proceeds of a debt offering. Also at 12:01 a.m. Eastern Standard Time on November 1, 2016, the Distribution occurred. Immediately following the Distribution, Alcoa Corporation stockholders owned directly 80.1% of the outstanding shares of common stock of Alcoa Corporation, and Arconic retained 19.9% of the outstanding shares of common stock of Alcoa Corporation. 146,159,428 shares of Alcoa Corporation common stock were distributed to ParentCo stockholders, and Arconic retained 36,311,767 shares of Alcoa Corporation common stock representing its 19.9% retained interest (on February 14, 2017, Arconic sold 23,353,000 of these shares). ParentCo stockholders received cash in lieu of any fractional shares of Alcoa Corporation common stock that they would have received after application of the distribution ratio. Upon completion of the Separation Transaction and the Distribution, each ParentCo stockholder as of the record date continued to own shares of ParentCo (which, as a result of ParentCo’s name change to Arconic, are Arconic shares) and owned a proportionate share of the outstanding common stock of Alcoa Corporation that was distributed. ParentCo stockholders were not required to make any payment, surrender or exchange their ParentCo common stock or take any other action to receive their shares of Alcoa Corporation common stock in the Distribution. “Regular-way” trading of Alcoa Corporation’s common stock began with the opening of the New York Stock Exchange (“NYSE”) on November 1, 2016 under the ticker symbol “AA.” Alcoa Corporation’s common stock has a par value of $0.01 per share.
Formation of Alcoa Corporation
Alcoa Upstream Corporation was formed in Delaware on March 10, 2016 for the purpose of holding ParentCo’s Alcoa Corporation Business, and it was renamed Alcoa Corporation in connection with the Separation Transaction and the Distribution.
As part of the Separation Transaction, and prior to the Distribution, ParentCo and its subsidiaries completed an internal reorganization in order to transfer the Alcoa Corporation Business to Alcoa Corporation. Among other things and subject to limited exceptions, the internal reorganization resulted in Alcoa Corporation owning, directly or indirectly, the operations comprising, and the entities that conduct, the Alcoa Corporation Business. The internal reorganization included various restructuring transactions pursuant to which the operations, assets, liabilities and investments of ParentCo and its subsidiaries used to conduct the Alcoa Corporation Business were separated from the operations, assets, liabilities and investments of ParentCo and its subsidiaries used to conduct the Arconic Business. Such restructuring transactions took the form of asset transfers, dividends, contributions and similar transactions, and involved the formation of new subsidiaries in U.S. and non-U.S. jurisdictions to own and operate the Alcoa Corporation Business or the Arconic Business in such jurisdictions.
Following the completion of the internal reorganization and immediately prior to the Distribution, Alcoa Corporation became the parent company of the entities that conduct the Alcoa Corporation Business, and ParentCo (through subsidiaries other than Alcoa Corporation and its subsidiaries) remained the parent company of the entities that conduct the Arconic Business.
In connection with the Separation Transaction, as of October 31, 2016, Alcoa Corporation entered into certain agreements with Arconic to implement the legal and structural separation between the two companies to govern the
relationship between Alcoa Corporation and Arconic after the completion of the Separation Transaction and allocate between Alcoa Corporation and Arconic various assets, liabilities and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and
Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, Stockholder and Registration Rights Agreement, and certain Patent, Know-How, Trade Secret License, and Trademark License Agreements.
Joint Ventures
AWAC
Alcoa World Alumina and Chemicals (“AWAC”) is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited, a company incorporated under the laws of the Commonwealth of Australia and listed on the Australian Securities Exchange. AWAC consists of a number of affiliated entities that own, operate or have an interest in bauxite mines and alumina refineries, as well as certain aluminum smelters, in seven countries. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these entities, directly or indirectly, with such entities being consolidated by Alcoa Corporation for financial reporting purposes.
The scope of AWAC generally includes:
• | Bauxite and Alumina: The mining of bauxite and other aluminous ores as well as the refining and other processing of these ores into alumina and other ancillary operations; |
• | Non-Metallurgical Alumina: The production and sale of non-metallurgical alumina and other alumina-based chemicals; and |
• | Integrated Operations: Ownership and operation of certain primary aluminum smelting and other ancillary facilities. |
Alcoa is the industrial leader of AWAC and provides the operating management for all of the operating entities forming AWAC. The operating management is subject to direction provided by the Strategic Council of AWAC, which is the principal forum for Alcoa and Alumina Limited to provide direction and counsel to the AWAC companies regarding strategic and policy matters. The Strategic Council consists of five members, three of whom are appointed by Alcoa (of which one is the Chairman of the Strategic Council), and two of whom are appointed by Alumina Limited (of which one is the Deputy Chairman of the Strategic Council).
All matters before the Strategic Council are decided by a majority vote of the members, except for certainmembers. Certain matters which require approval by at least 80% of the members, includingincluding: changes to the scope of AWAC; changes in the dividend policy; equity calls in aggregate greater than $1 billion in any year; sales of all or a majority of the AWAC assets; loans from AWAC companies to Alcoa or Alumina Limited; certain acquisitions, divestitures, expansions, curtailments or closures; certain related-party transactions; financial derivatives, hedges or swap transactions; a decision by AWAC companies to file for insolvency; and changes to pricing formula in certain offtake agreements which may be entered into between AWAC companies and Alcoa or Alumina Limited.
AWAC Operations
AWAC entities’ assets include the following interests:
100% of the bauxite mining, alumina refining, and aluminium
• | 100% of the bauxite mining, alumina refining, and aluminum smelting operations of Alcoa’s affiliate, Alcoa of Australia Limited (“AofA”); | ||
• | 100% of the Juruti bauxite deposit and mine in Brazil; | ||
• | 45% interest in Halco (Mining) Inc., a bauxite consortium that owns a 51% interest in Compagnie des Bauxites de Guinée, a bauxite mine in Guinea; | ||
• | 9.62% interest in the bauxite mining operations in Brazil of Mineração Rio Do Norte, an international mining consortium; | ||
• | 100% interest in various mining and refining assets and the hydro-electric facilities in Suriname; | ||
• | 25.1% interest in the mine and refinery in Ras Al Khair, Saudi Arabia; | ||
• | 100% of the refinery and alumina-based chemicals assets at San Ciprián, Spain; | ||
• | 100% of the refinery assets at Point Comfort, Texas, United States; | ||
• | 39% interest in the São Luis refinery in Brazil; | ||
• | 55% interest in the Portland, Australia smelter that AWAC manages on behalf of the joint venture partners; and | ||
• | 100% of Alcoa Steamship Company Inc., a company that procures ocean freight and commercial shipping services for the chartering of aluminum, alumina, bauxite, caustic liquor, carbon products, and support material which may be bought or sold by Alcoa in the ordinary course of business. |
100% of the refinery assets at Point Comfort, Texas, United States (“Point Comfort”);
100% interest in various mining and refining assets and the Hydro-electric facilities in Suriname;
a 39% interest in the São Luis refinery in Brazil;
a 9.62% interest in the bauxite mining operations of Mineraçāo Rio Do Norte, an international mining consortium;
100% of the Juruti bauxite deposit and mine in Brazil;
100% of the refinery and alumina-based chemicals assets at San Ciprián, Spain;
a 45% interest in Halco (Mining) Inc., a bauxite consortium that owns a 51% interest in Compagnie des Bauxites de Guinée, a bauxite mine in Guinea;
100% of Alcoa Steamship Company Inc.;
a 25.1% interest in the mine and refinery in Saudi Arabia; and
a 55% interest in the Portland smelter AWAC manages on behalf of the joint venture partners.
Under the terms of their joint venture agreements, Alcoa and Alumina Limited have agreed that, subject to certain exceptions, AWAC is their exclusive vehicle for their investments, operations or participation in the bauxite and alumina business, and they will not compete with AWAC in those businesses. In the event of a change of control of either Alcoa or Alumina Limited, this exclusivity and non-compete restriction will terminate, and the partners will then have opportunities to unilaterally pursue bauxite or alumina projects outside of or within AWAC, subject to certain conditions provided in the Amended and Restated Charter of the Strategic Council.
Equity Calls
The cash flow of AWAC and borrowings are the preferred sources of funding for the needs of AWAC. Should the aggregate annual capital budget of AWAC require an equity contribution from Alcoa Corporation and Alumina Limited, anAn equity call can be made on 30 days’ notice, subject to certain limitations.limitations, in the event the aggregate annual capital budget of AWAC requires an equity contribution from Alcoa and Alumina Limited.
Dividend Policy
AWAC will generally be required to distribute at least 50% of the prior calendar quarter’s net income of each AWAC company, and certain AWAC companies will also be required to pay a distribution every three months equal to the amount of available cash above specified thresholds and subject to the forecast cash needs of the company. Alcoa will obtain a limited amount of debt funding for the AWAC companies to fund growth projects, subject to certain restrictions.
Leveraging Policy
Debt of AWAC is subject to a limit of 30% of total capital (defined as the sum of debt (net of cash) plus any minority interest plus shareholder equity). The AWAC joint venture will raisehas raised a limited amount of debt to fund growth projects within 12 months of it becoming permissibleas permitted under Alcoa’s revolving credit line, provided thatin accordance with the amount of debt does not trigger a credit rating downgrade for Alcoa.joint venture partnership agreements.
OtherSaudi Arabia Joint Venture
In December 2009, weAlcoa entered into a joint venture with the Saudi Arabian Mining Company (Ma’aden)(“Ma’aden”), which was formed by the government of Saudi Arabia to develop its mineral resources and is listed on the Saudi Stock Exchange (Tadawul), to developcreate a fully integrated aluminum complex in the Kingdom of Saudi Arabia. Ma’aden is listed on the Saudi Stock Exchange (Tadawul). This project is one of the most efficient integrated aluminum production complexcomplexes within the worldwide Alcoa system. In its initial phases, theThe complex includes a bauxite mine with an initiala capacity of 4 million bone dry metric tons per year; an alumina refinery with an initial
a capacity of 1.8 million metric tons per year (mtpy)(“mtpy”); an aluminum smelter with an initiala capacity of ingot, slab and billet of 740,000 mtpy; and a rolling mill with initiala capacity of 380,000 mtpy.
The smelter, refineryjoint venture is comprised of three entities: the Ma’aden Bauxite and mine are fully operational.Alumina Company (“MBAC”), the Ma’aden Aluminum Company (“MAC”), and the Ma’aden Rolling Company (“MRC”) (collectively, the “Ma’aden Joint Venture”). Ma’aden owns a 74.9% interest in the joint venture. Alcoa owns a 25.1% interest in MAC, which holds the smelter, and in MRC, which holds the rolling mill; and AWAC holds a 25.1% interest in MBAC, which holds the mine and refinery. The refinery, smelter and rolling mill are located within the Ras Al Khair industrial zone on the east coast of the Kingdom of Saudi Arabia.
The ABICompany is party to several other joint ventures and consortia. See details within each business segment discussion under “Description of the Business” below.
The Aluminerie de Bécancour Inc. (“ABI”) smelter is a joint venture between Alcoa and Rio Tinto.Tinto Alcan Inc. (“Rio Tinto”) located in Bécancour, Quebec. Alcoa is the operating partner and owns 74.95% of the joint venture.
Compagnie des Bauxites de Guinée (“CBG”) is a joint venture between Boké Investment Company (51%) and the Government of Guinea (49%) for the operation of a bauxite mine in the Boké region of Guinea. Boké Investment Company is owned 100% by Halco (Mining) Inc.; AWA LLC holds a 45% interest in Halco.
Mineração Rio do Norte (“MRN”) is a joint venture between Alcoa Alumínio (8.58%), AWA Brasil (4.62%) and AWA LLC (5%), each a subsidiary of Alcoa, and affiliates of Rio Tinto (12%), Companhia Brasileira de Alumínio (10%), Vale S.A. (“Vale”) (40%), South32 (14.8%), and Norsk Hydro (5%) for the operation of a bauxite mine in Porto Trombetas in the state of Pará in Brazil.
Alumar is a joint venture for the operation of a refinery, smelter, and casthouse in Brazil. The refinery is owned by AWA Brasil (39%), Rio Tinto (10%), Alcoa Alumínio (15%), and South32 (36%). AWA Brasil is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited. With respect to Rio Tinto and South32, the named company or an affiliate thereof holds the interest. The smelter and casthouse are owned by Alcoa Alumínio (60%) and South32 (40%).
Elysis is a joint venture between the wholly-owned subsidiaries of Alcoa (48.235%) and Rio Tinto (48.235%), respectively, and Investissement Québec (3.53%), a company wholly-owned by the Government of Québec. The purpose of Elysis is to advance larger scale development and commercialization of the Company’s patent-protected technology that produces oxygen and eliminates all direct greenhouse gas emissions from the traditional aluminum smelting process.
Strathcona calciner is a joint venture between Alcoa and Rio Tinto. The calciner purchases green coke from the petroleum industry and converts it into calcined coke. The calcined coke is then used as a raw material in an aluminum smelter. Alcoa owns 39% of the joint venture.
Hydropower
Machadinho Hydro Power Plant (HPP): Machadinho HPP(“HPP”) is a consortium between Alcoa AlumĺAlumínio (25.8%), Votorantim Energia (33.1%), Tractebel (19.3%), Vale (8.3%) and other partners (CEEE, InterCement and DME Energetica) located in the Pelotas River, southern Brazil.
Barra Grande Hydro Power Plant (HPP): Barra Grande HPP is a joint venture between Alcoa AlumĺAlumínio (42.2%), CPFL Energia (25%), Votorantim Energia (15%), InterCement (9%) and DME Energetica (8.8%) located in the Pelotas River, southern Brazil.
Estreito Hydro Power Plant (HPP): Estreito HPP is a consortium between Alcoa AlumĺAlumínio (25.5%), Tractebel (40.1%), Vale (30%) and InterCement (4.4%) located in the Tocantins River, northern Brazil.
Serra do Facão Hydro Power Plant (HPP): Serra do Facão HPP is a consortium between Alcoa AlumĺAlumínio (34.9%), Furnas (49.4%), DmeDME Energetica (10%) and Camargo Correa Energia (5.4%) located in the Sao Marcos river, central-Brazil.River, central Brazil.
Manicouagan Power Limited Partnership (Manicouagan)(“Manicouagan”) is a joint venture between Alcoa Corporation and Hydro Quebec.Hydro-Québec. Manicouagan owns and operates the 335 megawatt McCormick hydroelectric project, which is located on the Manicouagan River in the Province of Quebec. Manicouagan supplies approximately 27% of the electricity requirements of Alcoa’s Baie-Comeau, Quebec, smelter. Alcoa owns 40% of the joint venture.
The Strathcona calcinerBauxite
This segment consists of the Company’s global bauxite mining operations. Bauxite is a joint venture between Alcoa and Rio Tinto. The calciner purchases green coke from the petroleum industry and converts it into calcined coke. The calcined coke is then used as aprincipal raw material in an aluminum smelter. Alcoa Corporation owns 39% of the joint venture.
Description of the Business
Information describing Alcoa’s businesses can be found on the indicated pages of this report:
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Aluminum is one of the most abundant elements in the earth’s crust. Aluminum metal is produced by smelting alumina using large amounts of electricity, and can be cast and rolled into many shapes and forms. Alumina is an intermediary product produced primarily from refining bauxite. The following tables and related discussion provide additional description of Alcoa’s businesses all along this value chain. The Company’s business segments in 2016 were Bauxite, Alumina, Aluminum, Cast Products, Energy and Rolled Products. The Bauxite and Alumina segments primarily consist of a series of affiliated operating entities collectively referred to as AWAC. Alcoa ultimately owns 60% and Alumina Limited, an unrelated third party, ultimately owns 40% of these individual entities.
Bauxite
Bauxite is Alcoa Corporation’s basic raw material input for its alumina refining process and is also sold into the third-party market. Bauxite contains various aluminum hydroxide minerals, the most important of which are gibbsite and boehmite. Alcoa Corporation processes mostBauxite is refined using the Bayer process, the principal industrial chemical process for refining bauxite to produce alumina, a compound of aluminum and oxygen that is the bauxite that it mines intoraw material used by smelters to produce aluminum metal. Bauxite is Alcoa’s basic raw material input for its alumina and sells the remainder to third parties.refining process. The Company obtains bauxite from its own resources and from those belonging to the AWAC, enterprise, located in the countries listed in the table below, as well as pursuant to both long-term and short-term contracts and mining leases. Tons of bauxite are reported on a zero-moisture basis as bone dry metric tons (“bdmt”dmt”) unless otherwise stated. See
Alcoa processes most of the glossary of bauxite mining-related terms atthat it mines into alumina and sells the end of this section.
During 2016,remainder to third parties. In 2018, Alcoa-operated mines produced 39.6 million dmt and mines operated by partnerships in which Alcoa Corporation produced 37.7 million bdmt and separately mines operated by third parties (with Alcoa Corporation and AWAC have equity interests)interests produced 7.36.2 million bdmtdmt on a proportional equity basis, for a total Company bauxite production of 45.045.8 million bdmt.dmt.
Based on the terms of its bauxite supply contracts, the amount of bauxite AWAC bauxite purchases from its minority-owned joint ventures Mineração Rio do Norte S.A. (“MRN”) and Compagnie des Bauxites de Guinée (“CBG”) differ from its proportional equity in those mines. Therefore, during 2016, including those purchases,in 2018, AWAC had access to 47.546.9 million bdmtdmt of production from its portfolio of bauxite interests.
During 2016, AWACinterests and sold 6.45.7 million bdmtdmt of bauxite to third parties and purchased 0.3parties; 41.2 million bdmt from third parties. Thedmt of bauxite was delivered to Alcoa Corporation and AWAC refineries amounted to 41.4 million bdmt during 2016.refineries.
The Company is committed to growing its third-party bauxite sales business. For example, inIn December 2016, Alcoa’s affiliate, AofA, received permission from the Government of Western Australia granted permission to Alcoa’s majority-owned subsidiary, Alcoa of Australia, (“AofA”), to export up to 2.5 million bdmtdmt per year of bauxite for five years to third-party customers. In addition, the Company is currently pursuing long-term
contracts with potential customers. Contracts for bauxite have generally been short-term contracts (two years or less in duration) with spot pricing and adjustments for quality and logistics. The primary customer base for third-party bauxite is located in Asia, particularly in China.
Bauxite Resource and Reserve Development Guidelines
The Company has access to large bauxite deposit areas with mining rights that extend in most cases more than 20 years from the date of this report. For purposes of evaluating the amount of bauxite that will be available to supply its refineries, the Company considers both estimates of bauxite resources as well as calculated bauxite reserves. Bauxite resources represent“Bauxite resources” are deposits for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence based(based on the amount of exploration sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. Bauxite reservesholes), such that they are acceptable prospects for economic extraction. “Bauxite reserves” represent the economically mineable part of resource deposits that can be economically mined to supply alumina refineries, and include diluting materials and allowances for losses, which may occur when the material is mined. Appropriate assessments and studies have been carried out to define the reserves, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. Alcoa employs a conventional approach (including additional drilling with successive tightening of the drilling grid) with customized techniques to define and characterize its various bauxite deposit types allowing us to confidently establish the extent of its bauxite resources and their ultimate conversion to reserves.
The following table only includes the amount of proven and probable reserves controlled by the Company. While the level of reserves may appear low in relation to annual production levels, they are consistent with historical levels of reserves for the Company’s mining locations and consistent with the Company reserves strategy. Given the Company’s
extensive bauxite resources, the abundant supply of bauxite globally and the length of the Company’s rights to bauxite, it is not cost-effective to invest the significant funds and efforts necessary to establish bauxite reserves that reflect the total size of the bauxite resources available to the Company. Rather, bauxite resources are upgraded annually to reserves as needed by the location. Detailed assessments are progressively undertaken within a proposed mining area and mine activity is then planned to achieve a uniform quality in the supply of blended feedstock to the relevant refinery. Alcoa Corporation believes its present sources of bauxite on a global basis are sufficient to meet the forecasted requirements of its alumina refining operations for the foreseeable future.
Bauxite Resource Development Guidelines
Alcoa Corporation has adopted best practice guidelines for bauxite reserve and resource classification at its operating bauxite mines. The Alcoa Ore Reserves Committee (“AORC”) is an internal group comprised of geologists and engineers that issues and administers the AORC Guidelines, which are used by all Alcoa-managed mines to classify bauxite reserves and resources. Alcoa’s reserves are declared in accordance with Alcoa Corporation’s internal guidelines as administered by the AlcoaJoint Ore Reserves Committee (“AORC”JORC”). code guidelines. The reported ore reserves set forth in the table below are those that we estimated could be extracted economically with current technology and in current market conditions. We do not use a price for bauxite, alumina or aluminum to determine our bauxite reserves. The primary criteria for determining bauxite reserves are the feed specifications required by the receiving alumina refinery. More specifically, reserves are set based on the chemical composition of the bauxite in order to minimize bauxite processing cost and maximize refinery economics for each individual refinery. The primary specifications that are important to this analysis are the “available alumina” content of the bauxite, which is the amount of alumina extractable from bauxite using the Bayer process, and “reactive silica” content of the bauxite.bauxite, which is the amount of silica that is reactive within the Bayer process. Each alumina refinery will have a target specification for these parameters, but may receive bauxite within a range that allows blending in stockpiles to achieve the receiving refinery’s target.
In addition to these chemical specifications, a number of other ore reserve design factors have been applied to differentiate bauxite reserves from other mineralized material. The contours of the bauxite reserves are designed using parameters such as available alumina content cutoff grade, reactive silica cutoff grade, ore density, overburden thickness, ore thickness and mine access considerations. These parameters are generally determined by using infill drilling or geological modeling.
Further, our mining locations utilize annual in-fill drilling or geological modeling programs designed to progressively upgrade the reserve and resource classification of their bauxite based on the above-described factors.
The following table only includes the amount of proven and probable reserves controlled by the Company. While the level of reserves may appear low in relation to annual production levels, they are consistent with historical levels of reserves for the Company’s mining locations and consistent with the Company reserves strategy. Given the Company’s extensive bauxite resources, the abundant supply of bauxite globally, and the length of the Company’s rights to bauxite, it is not cost-effective to establish bauxite reserves that reflect the total size of the bauxite resources available to the Company. Rather, bauxite resources are upgraded annually to reserves as needed by the location. Detailed assessments are progressively undertaken within a proposed mining area and mine activity is then planned to achieve a uniform quality in the supply of blended feedstock to the relevant refinery. Alcoa Corporation believes its present sources of bauxite on a global basis are sufficient to meet the forecasted requirements of its alumina refining operations for the foreseeable future.
Bauxite Interests, Share of Reserves and Annual Production1
Country | Project | Owners’ Rights | Expiration Date of Mining Rights | Probable Reserves2 (million bdmt) | Proven Reserves2 (million bdmt) | Available Alumina Content (%) AvAl2O3 | Reactive Silica Content (%) RxSiO2 | 2016 Annual Production (million bdmt) | Ore Reserve Design Factors |
| Project |
| Owners’ Rights |
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Australia | Darling Range Mines ML1SA | Alcoa of Australia Limited (AofA)3 (100%) | 2024 | 26.1 | 153.4 | | 32.9 Range: 31.0-34.0 | | 0.9 Max: 1.4 | 32.4 | •AvAl2O3³ 27.5% •RxSiO2£ 3.5% •Minimum mineable thickness 2m •Minimum bench widths of 45m |
| Darling Range Mines ML1SA |
| Alcoa of Australia Limited (“AofA”)3 (100%) |
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| 2024 |
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| 55.6 |
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| 101.1 |
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| 32.7 |
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| 1.0 |
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| 33.5 |
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| • A.Al2O3 ≥ 27.5% • R.SiO2 ≤ 3.5% • Minimum mineable thickness 2m • Minimum bench widths of 45m | |||||||||||||||||||
Brazil | Poços de Caldas | Alcoa Alumínio S.A. (Alumínio)4(100%) | 20205 | 0.7 | 1.1 | | 39.5 Range: 39.5-41.5 | | 4.5 Range: 3.5-4.5 | 0.2 | •AvAl2O3³ 30% •RxSiO2£ 7% |
| Poços de |
| Alcoa Alumínio S.A. (“ Alcoa Alumínio”)4 (100%) |
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| 20285 |
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| 0.2 |
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| 1.7 |
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| 39.5 |
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| 4.3 |
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Juruti5 RN101, RN102, RN103, RN104, #34 | Alcoa World Alumina Brasil Ltda. (AWA Brasil)3 (100%) | 21005 | 8.7 | 21.1 | | 47.4 Range: 46.5-48.5 | | 4.2 Range: 3.3-4.3 | 5.2 | •AvAl2O3³ 35% •RxSiO2£ 10% •Wash Recovery: ³ 30% •Overburden/Ore (m/m) = 10/1 |
| Juruti5 |
| Alcoa World Alumina Brasil Ltda. (“AWA Brasil”)3 (100%) |
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| 21005 |
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| 19 |
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| 46.7 |
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Suriname | Coermotibo and Onverdacht | Suriname Aluminum Company, L.L.C. (Suralco)3 (55%) N.V. Alcoa Minerals of Suriname (AMS)6 (45%) | 20337 | 0.0 | 0.0 | N/A | N/A | — | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity Interests : | Equity Interests : | Equity Interests : |
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Brazil | Trombetas | Mineração Rio do Norte S.A. (MRN)8 (18.2%) | 20465 | 3.2 | 7.8 | | 49.8 Range: 49.0-50.5 |
| | 4.8 Range: 4.0-4.8 |
| 3.0 | •AvAl2O3³ 46% •RxSiO2£ 7% •Wash Recovery:³ 30% |
| Trombetas |
| Mineração Rio do Norte S.A. (“MRN”)6 (18.2%) |
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| 20465 |
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| 2.4 |
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| 6.3 |
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| 48.7 |
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| 5.4 |
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| 2.3 |
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| • A.Al2O3 ≥ 46% • R.SiO2 ≤ 7% • Wash Recovery: ≥ 30% | |||||||||||||||||
Guinea | Boké | Compagnie des Bauxites de Guinée (CBG)9(22.95%) | 203810 | 36.2 | 40.7 | | TAl2O3 48.9 Range: 48.5-52.4 | 11
| | TSiO211 1.7 Range: 1.2-2.1 |
| 3.5 | •AvAl2O3³ 44% •RxSiO2£ 10% •Minimum mineable thickness 2m •Smallest Mining Unit size (SMU) 50m x 50m |
| Boké |
| Compagnie des Bauxites de Guinée (“CBG”)7 (22.95%) |
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| 20388 |
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| 41.7 |
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| 62.0 |
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| TAl2O3 47.3 | 9
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| TSiO29 1.8 |
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| 2.7 |
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| • A.Al2O3 ≥ 44% • R.SiO 2 ≤ 10% • Minimum mineable thickness 2m • Smallest Mining Unit size (SMU) 50m x 50m | |||||||||||||||||
Kingdom of Saudi Arabia | Al Ba’itha | Ma’aden Bauxite & Alumina Company (25.1%)12 | 2037 | 33.8 | 18.8 | | TAA 49.5 | 13
| | TSiO213 8.6 |
| 0.9 | •AvAl2O3³ 40% •Mining dilution modelled as a skin of 12.5cm around the ore •Mining recovery applied as a skin loss of 7.5 cm on each side of the mineralisation •Mineralisation less than 1m thick excluded |
| Al Ba’itha |
| Ma’aden Bauxite & Alumina Company (25.1%)10 |
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| 2037 |
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| 30.9 |
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| 17.3 |
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| TAA11 48.2 |
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| TSiO 211 9.2 |
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| • A.Al2O3 ≥ 40% • Mining dilution modeled as a skin of 12.5cm around the ore • Mining recovery applied as a skin loss of 7.5 cm on each side of the mineralisation • Mineralisation less than 1m thick excluded |
1 | This table shows only the AWAC and/or Alcoa |
2 | Reserves are in place for all mines other than Juruti and Trombetas, where the ore is beneficiated and a wash recovery factor is applied. “Probable reserves” are the portion of a bauxite reserve where the physical and chemical characteristics and limits are known with sufficient confidence for mining and to which various mining modifying factors have been applied. “Proven reserves” are the portion of a bauxite reserve where the physical and chemical characteristics and limits are known with high confidence and to which various mining modifying factors have been applied. |
3 | This entity is part of the AWAC group of companies and is ultimately owned 60% by Alcoa |
4 | Alcoa Alumínio is ultimately owned 100% by |
5 | Brazilian mineral legislation does not |
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Alumínio |
(Mining) Inc. (“Halco”); AWA LLC owns a 45% interest in |
| AWA LLC and |
| Guinea—Boké: CBG prices bauxite and plans the mine based on the total amount of alumina contained in the bauxite |
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| Kingdom of Saudi Arabia—Al Ba’itha: Bauxite reserves and mine plans are based on the bauxite qualities of the total |
12 | Available alumina content is the total amount of alumina extractable from bauxite using the Bayer process. |
13 | Reactive silica (“R.SiO2”) is the amount of silica contained in bauxite that is reactive within the Bayer process. |
Qualifying statements relating to the table above:
Australia—Darling Range Mines: Huntly and Willowdale are the two active AWAC mines in the Darling Range of Western Australia. TheAustralia that supply bauxite to three local AWAC alumina refineries. They operate within ML1SA, the mineral lease issued by the State of Western Australia to Alcoa Corporation’s majority ownedAlcoa’s majority-owned subsidiary, AofA is known asAofA. The ML1SA andlease encompasses a gross area of 712,881 hectares (including private land holdings, state forests, national parks and conservation areas) in the Darling Range and extends from east of Perth to east of Bunbury (the “ML1SA(“ML1SA Area”). The ML1SA lease provides AofA with various rights, including certain exclusivity rights to explore for and mine bauxite, rights to deny third party mining tenements in limited circumstances, rights to mining leases for other minerals in the ML1SA Area, and the right to prevent certain governmental actions from interfering with or prejudicially affecting AofA’s rights.the rights of AofA. The ML1SA lease term extends to 2024 however itand can be renewed for an additional 21 year21-year period to 2045. The above-declared reserves are current as of December 31, 2016.2018. The amount of reserves reflects the total AWAC share. Additional resources are routinely upgraded by additional exploration and development drilling to reserve status. The Huntly and Willowdale mines supply bauxite to three local AWAC alumina refineries.
Brazil—Poços de Caldas: The above-declared reserves are current as of December 31, 2016.2018. Tonnage is total Alcoa share. Additional resources are being upgraded to reserves as needed.
Brazil—Juruti RN101, RN102, RN103, RN104, #34: The above-declared reserves are current as of December 31, 2016.2018. All reserves are on Capiranga Plateau.Plateau in mineral claim areas RN101, RN102, RN103, RN104, #34, within which Alcoa has operating licenses issued by the state. Declared reserves are total AWAC share. Declared reserve tonnages and the annual production tonnage are washed and unwashed product tonnages. The Juruti mine’s operating license islicenses are periodically renewed.
Suriname—Suralco:The AWAC mines in Suriname were curtailed in the fourth quarter of 2015 and in December 2016, the Company determined to close these mines. AWAC has no plans to restart these mines and there are no reserves to declare.
Brazil—Trombetas-MRN: The above-declared reserves are as of December 31, 2016. The CP Report setting forth the December 31, 2016 reserves was issued on February 28, 2017.2018. Declared and annual production tonnages reflect the total for Alumínio and AWAC shares (18.2%). Declared tonnages are washed product tonnages.
Guinea—Boké-CBG:The above-declared reserves are based on export quality bauxite reserves and are current as of December 31, 2016. The CP Report setting forth the December 31, 2016 reserves was issued on February 28, 2017.2018. Declared tonnages reflect only the AWAC share of CBG’s reserves. Annual production tonnage is reported based on AWAC’s 22.95% share. Declared reserves quality is reported based on total alumina (TAlcontent (“TAl 2 O 23O3”) and total silica (TSiO(“TSiO 22”) because CBG export bauxite is sold on this basis. Additional resources are being routinely drilled and modeled to upgrade to reserves as needed.
Kingdom of Saudi Arabia—Al Ba’itha:The Al Ba’itha Mine began production during 2014 and production was increased in 2016. Declared reserves are as of December 31, 2016. The CP Report setting forth the December 31, 2016 reserves was issued on February 28, 2017.November 30, 2018. The declared reserves are located in the South Zone of the Az Zabirah Bauxite Deposit. The reserve tonnage in this declaration is AWAC share only (25.1%).
The following table provides additional information regarding the Company’s bauxite mines:mines, all of which are open-cut mines. Excavation is done at the surface of open-cut mines to extract mineral ore (such as bauxite). Open-cut mines are not underground and the sky is viewable from the mine floor:
Means of Access | Operator | Title, Lease or | History | Type of Mine | Power Source | Facilities, Use & | |||||||||||||||||||||
Australia—Darling Range; Huntly and Willowdale. | Mine locations Ore is transported | Alcoa | Mining lease from | Mining began in | Open-cut mines. Bauxite is derived | Electrical | Infrastructure includes buildings for administration and services; workshops; power distribution; water supply; crushers; long distance conveyors.
Mines and facilities are operating. | ||||||||||||||||||||
Brazil—Poços de Caldas. Closest town is Poços de Caldas, MG, Brazil. | Mine locations Ore transport to | Alcoa | Mining licenses from | Mining began in | Open-cut mines. Bauxite derived | Commercial | Mining offices and services are located at the refinery.
Numerous small deposits are mined by contract miners and the ore is trucked to either the refinery stockpile or intermediate stockpile area.
Mines and facilities are operating.
Mine production has been reduced to align with the reduced production of the Poços refinery which is now producing specialty alumina. | ||||||||||||||||||||
Brazil— | The mine’s port at Ore is transported | Alcoa | Mining licenses from Operating licenses
Operating license for | The Juruti deposit
ParentCo merged | Open-cut mines.
Bauxite derived
The deposits are | Electrical | At the mine site: Fixed plant facilities for crushing and washing the ore; mine services offices and workshops; power generation; water supply; stockpiles; rail sidings.
At the port: Mine and rail administrative offices and services; port control facilities with stockpiles and ship loader.
Mine and port facilities are operating. | ||||||||||||||||||||
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Kingdom of Saudi Arabia Joint Venture
In December 2009, ParentCo and Saudi Arabian Mining Company (Ma’aden), which was formed by the government of Saudi Arabia to develop its mineral resources and is listed on the Saudi Stock Exchange (Tadawul), entered into a joint venture to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. In its initial phases, the complexMBAC includes a bauxite mine with an initial capacity of 4 million bdmtdmt per year; an alumina refinery with an initial capacity of 1.8 million mt per year (mtpy); an aluminum smelter with an initial ingot, slab and billet capacity of 740,000 mtpy; and a rolling mill with initial capacity of 380,000 mtpy. The smelter, refinery and mine are fully operational. Ma’aden owns a 74.9% interest in the joint venture. Alcoa Corporation owns a 25.1% interest in the smelter and in the rolling mill; and AWAC holds a 25.1% interest in the mine and refinery.
The refinery, smelter and rolling mill are located within the Ras Al Khair industrial zone on the east coast of the Kingdom of Saudi Arabia.
year. For additional information regarding the joint venture, see Joint Ventures under the “General” and the Equity Investments section of Note H to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data). Financial results for the Saudi Arabian mine are discussed below in “Alumina”.
GlossaryAlumina
This segment consists of Bauxite Mining Related Termsthe Company’s worldwide refining system, which processes bauxite into alumina. Alcoa’s largest customer for smelter grade alumina is its own aluminum smelters, which in 2018 accounted for approximately 29% of its total alumina sales. A portion of the alumina is sold to third-party customers who process it into industrial chemical products. Remaining sales are made to customers all over the world and are typically priced by reference to published spot market prices.
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Alumina
Alcoa Corporation was the world’s leading producer of alumina in 2016. Alcoa Corporation’s smelter grade alumina shipments to third parties were sold at published spot/index prices.
Alcoa’s alumina refining facilities and its worldwide alumina capacity are shown in the following table:
Country | Facility | Owners (% of Ownership) | Nameplate Capacity1 (000 MTPY) | Alcoa Corporation Consolidated Capacity2 (000 MTPY) | ||||||||
Australia | Kwinana | AofA3 (100%) | 2,190 | 2,190 | ||||||||
Pinjarra | AofA (100%) | 4,234 | 4,234 | |||||||||
Wagerup | AofA (100%) | 2,555 | 2,555 | |||||||||
Brazil | Poços de Caldas | Alumínio4 (100%) | 390 | 5 | 390 | |||||||
São Luís (Alumar) | AWA Brasil3 (39%) Rio Tinto Alcan Inc.6 (10%) Alumínio (15%) BHP Billiton6 (36%) | 3,500 | 1,890 |
Country |
| Facility1 |
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Australia |
| Kwinana4 |
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| Pinjarra4 |
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Country | Facility | Owners (% of Ownership) | Nameplate Capacity1 (000 MTPY) | Alcoa Corporation Consolidated Capacity2 (000 MTPY) | |||||||||||||||||||
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| Wagerup4 |
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| 2,555 |
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Brazil |
| Poços de Caldas |
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| 390 |
| 5 |
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Spain | San Ciprián | Alúmina Española, S.A.3 (100%) | 1,500 | 1,500 |
| San Ciprián |
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United States | Point Comfort, TX | AWA LLC3 (100%) | 2,305 | 7 | 2,305 |
| Point Comfort, TX7 |
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| 8 |
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TOTAL | 16,674 | 15,064 |
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Equity Interests: | |||||||||||||||||||||||
Country | Facility | Owners (% of Ownership) | Nameplate Capacity1 (000 MTPY) | ||||||||||||||||||||
Kingdom of Saudi Arabia | Ras Al Khair | Ma’aden Bauxite & Alumina Company (100%)8 | 1,800 |
Equity Interests: | ||||||
Country | Facility1 | Nameplate Capacity2 (000 MTPY) | ||||
Kingdom of Saudi Arabia | Ras Al Khair9 | 1,800 |
1 | Each facility is 100% owned by Alcoa, unless otherwise noted. |
2 | Nameplate Capacity is an estimate based on design capacity and normal operating efficiencies and does not necessarily represent maximum possible production. |
| The figures in this column reflect Alcoa’s share of production from these facilities. For facilities wholly-owned by AWAC entities, Alcoa |
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5 | As a result of the decision to fully curtail the Poços de Caldas smelter, management initiated a reduction in alumina production at this refinery. The capacity that is operating at this refinery is producing at an approximately 45% output level. |
6 | The Alumar facility is owned by AWA Brasil (39%), Rio Tinto Alcan Inc. (10%), Alcoa Alumínio (15%), and South32 (36%). AWA Brasil is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited. With respect to Rio Tinto Alcan Inc. and South32, the named company or an affiliate thereof holds |
7 | The Point Comfort facility is 100% owned by AWA LLC. This entity is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited. |
8 | The Point Comfort alumina refinery has been fully |
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10 | The Ras Al Khair facility is 100% owned by MBAC, a joint venture company owned by |
As of December 31, 2016,2018, Alcoa Corporation had approximately 2,305,000 mtpy of idle capacity relative to total Alcoa consolidated capacity of 15,064,000 mtpy. As noted above, Alcoa Corporation and Ma’aden developed an alumina refinery in the Kingdom of Saudi Arabia. Initial capacity of the refinery is 1,800,000 mtpy, and it produced approximately 1,425,000 mt1,774,000 metric tons (mt) in 2016.2018. For additional information regarding the joint venture, see Note H to the Consolidated Financial Statements under the caption “Investments—Equity Investments.”
In March 2015, the CompanyParentCo initiated a 12-month review of 2,800,000 mtpy in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review wasdivestiture, as part of Alcoa Corporation’s targetan effort to lower the position of the Company’s refining operations on the global alumina cost curve to the 21st percentile by the end of 2016.curve. The review resulted in the curtailment of the remaining capacity at the Suralco refinery (1,330,000 mtpy) in 2015 and the commencement of the curtailment of the remaining capacity of the Point Comfort, TX refinery (2,010,000 mtpy), which curtailment was completed in the first half of 2016. In the fourth quarter of 2016, Alcoa determined to close the Suralco alumina refinery and bauxite mines in Suriname, which have been fully curtailed since November 2015. For additional information regarding the curtailments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Information—Alumina.”
Aluminum
Alcoa Corporation’s primary aluminum smelters and their respective capacities are shown in the following table:
Country | Facility | Owners (% Of Ownership) | Nameplate Capacity1 (000 MTPY) | Alcoa Corporation Consolidated Capacity2 (000 MTPY) | ||||||||
Australia | Portland | AofA (55%) CITIC3 (22.5%) Marubeni3 (22.5%) | 358 | 197 | 4,5 | |||||||
Brazil | São Luís (Alumar) | Alumínio (60%) BHP Billiton3 (40%) | 447 | 268 | 6 | |||||||
Canada | Baie Comeau, Québec | Alcoa Corporation (100%) | 280 | 280 | ||||||||
Bécancour, Québec | Alcoa Corporation (74.95%) Rio Tinto Alcan Inc.7 (25.05%) | 413 | 310 | |||||||||
Deschambault, Québec | Alcoa Corporation (100%) | 260 | 260 | |||||||||
Iceland | Fjarðaál | Alcoa Corporation (100%) | 344 | 344 | ||||||||
Norway | Lista | Alcoa Corporation (100%) | 94 | 94 | ||||||||
Mosjøen | Alcoa Corporation (100%) | 188 | 188 | |||||||||
Spain | Avilés | Alcoa Corporation (100%) | 93 | 8 | 93 | |||||||
La Coruña | Alcoa Corporation (100%) | 87 | 8 | 87 | ||||||||
San Ciprián | Alcoa Corporation (100%) | 228 | 228 | |||||||||
United States | Massena West, NY | Alcoa Corporation (100%) | 130 | 130 | ||||||||
Rockdale, TX | Alcoa Corporation (100%) | 191 | 9 | 191 | ||||||||
Ferndale, WA (Intalco) | Alcoa Corporation (100%) | 279 | 10 | 279 | ||||||||
Wenatchee, WA | Alcoa Corporation (100%) | 184 | 11 | 184 | ||||||||
TOTAL | 3,576 | 3,133 | ||||||||||
Equity Interests: | ||||||||||||
Country | Facility | Owners (% of Ownership) | Nameplate Capacity1 (000 MTPY) | |||||||||
Kingdom of Saudi Arabia | Ras Al Khair | Alcoa Corporation (25.1%) | 740 |
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As of December 31, 2016, Alcoa Corporation had approximately 778,000 mtpy of idle capacity relative to total Alcoa Corporation consolidated capacity of 3,132,000 mtpy. As noted above, Alcoa and Ma’aden have developed an aluminum smelter in the Kingdom of Saudi Arabia. The smelter has an initial nameplate capacity of 740,000 mtpy. Since mid-2014, the smelter has been operating at full capacity, and it produced 756,840 mt in 2016.
In March 2015, ParentCo initiated a 12-month review of 500,000 mtpy of smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review was part of ParentCo’s target to lower Alcoa Corporation’s smelting operations on the global aluminum cost curve to the 38th percentile by 2016. As a result of this review, the decision was made to curtail the remaining capacity (74,000 mtpy) at the São Luís smelter in Brazil and the Wenatchee, WA smelter (143,000 mtpy); and undertake permanent closures of the capacity at the Warrick, IN smelter (269,000 mtpy) (includes the closure of a related coal mine) and the infrastructure of the Massena East, NY smelter (potlines were previously shut down in both 2013 and 2014). In March 2016, the Warrick smelter was permanently closed.
Separate from the smelting capacity review described above, in June 2015, ParentCo decided to permanently close the Poços de Caldas smelter (96,000 mtpy) in Brazil, which had been temporarily idle since May 2014 due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.
For additional information regarding the curtailments and closures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—2016 Actions.”
Alcoa’s cast products business offers differentiated, value-added aluminum products that are cast into specific shapes to meet customer demand. Alcoa Corporation has 18 casthouses capable of providing value-added products to customers in growing markets, with 15 currently operating, as shown in the following table:
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Energy
Employing the Bayer Process, Alcoa refines alumina from bauxite ore. We then produce aluminum from the alumina by an electrolytic process requiring substantial amounts of electric power. Energy accounts for approximately 19% of the Company’s total alumina refining production costs. Electric power accounts for approximately 24% of the Company’s primary aluminum production costs. In 2016, Alcoa generated approximately 14% of the power used at its smelters worldwide and generally purchased the remainder under long-term arrangements. The sections below provide an overview of our energy facilities and summarize the sources of power and natural gas for our smelters and refineries.
Energy Facilities
The following table sets forth the electricity generation capacity and 2016 generation of facilities in which Alcoa Corporation has an ownership interest:
Country | Facility | Alcoa Corporation Consolidated Capacity (MW)1 | 2016 Generation (MWh) | |||||||
Brazil | Barra Grande | 156 | 1,601,901 | |||||||
Estreito | 157 | 867,033 |
Canada Suriname United States TOTALCountry Facility Alcoa Corporation Consolidated
Capacity (MW)1 2016 Generation (MWh) Machadinho 119 1,616,871 Serra do Facão 60 129,979 Manicouagan 132 1,164,299 Afobaka 189 781,874 Warrick2 657 2,607,661 Yadkin 215 746,953 1,685 9,516,571
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Alumínio owns a 25.74% stake in Consórcio Machadinho, which is the owner of the Machadinho hydroelectric power plant located in southern Brazil. Alumínio also has a 42.18% interest in Energética Barra Grande S.A. (“BAESA”), which built the Barra Grande hydroelectric power plant in southern Brazil. In addition, Alumínio also has a 34.97% share in Serra do Facão Energia S.A., which built the Serra do Facão hydroelectric power plant in the southeast of Brazil. Alumínio is also participating in the Estreito hydropower project in northern Brazil, through Estreito Energia S.A. (an Alumínio wholly owned company) holding a 25.49% stake in Consórcio Estreito Energia, which is the owner of the hydroelectric power plant.
Since May 2015 (after curtailment of the Poços de Caldas and São Luís (Alumar) smelters), the excess generation capacity from the above Brazilian hydroelectric projects, of around 480MW, has been sold into the market.
Power generated from Afobaka is primarily sold to the Government of Suriname under a bilateral contract.
In 2016, Alcoa Corporation’s wholly-owned subsidiary, Alcoa Power Generating Inc. (“APGI”) owned and operated a 215-megawatt Yadkin Hydroelectric Project (“Yadkin”), consisting of four hydroelectric power developments (reservoirs, dams and powerhouses), known as High Rock, Tuckertown, Narrows and Falls, situated along a 38-mile stretch of the Yadkin River through the central part of North Carolina. In July 2016, APGI reached an agreement to sell Yadkin to Cube Hydro Partners LLC. The transaction closed in February 2017. Alcoa Corporation will pay to Arconic the net after-tax proceeds it receives in accordance with the separation and distribution agreement entered into by both companies in conjunction with the Separation Transaction. Prior to the sale, power generated from APGI’s Yadkin system was largely sold to an affiliate, Alcoa Power Marketing LLC, and then to the wholesale market. After the March 2016 closure of the Warrick smelter, approximately 36% of the capacity from the Warrick coal-fired power plant has been sold into the market under its current operating permits. APGI also owns certain FERC-regulated transmission assets in Indiana, Tennessee, New York, and Washington.
Energy Sources
Electricity
North America
The Deschambault, Baie Comeau, and Bécancour smelters in Québec purchase all or a majority of their electricity under contracts with Hydro-Québec that expire on December 31, 2029. Upon expiration, Alcoa Corporation will have the option of extending the term of the Baie Comeau contract to February 23, 2036. The smelter located in Baie Comeau, Québec purchases approximately 73% of its power needs under the Hydro-Québec contract, and the remainder from a 40% owned hydroelectric generating company, Manicouagan Power Limited Partnership.
In the State of Washington, Alcoa Corporation’s Wenatchee smelter is served by a contract with Chelan County Public Utility District No. 1 (“Chelan PUD”) under which Alcoa Corporation receives 26% of the hydropower output of Chelan PUD’s Rocky Reach and Rock Island dams. The Wenatchee smelter was curtailed in 2015.
Starting on January 1, 2013, the Intalco smelter began receiving physical power under a contract with the Bonneville Power Administration (“BPA”), pursuant to which the Company receives physical power at the Northwest Power Act mandated industrial firm power (“IP”) rate through September 30, 2022. In May 2015, the contract was amended to reduce the amount of physical power received from BPA and allow for additional purchases of market power. In February and April 2016, the contract was amended again to reduce the contractual amount through February 2018.
Luminant Generation Company LLC (formerly TXU Generation Company LP) (“Luminant”) supplies all of the Rockdale smelter’s electricity requirements under a long-term power contract that does not expire until at least the end of 2038, with the parties having the right to terminate the contract after 2013 if there has been an unfavorable change in law or after 2025 if the cost of the electricity exceeds the market price. On April 29, 2014, Luminant Generation LLC, Luminant Mining Company LLC, Sandow Power Company LLC and their affiliated debtors filed petitions under Chapter 11 of the U.S. Bankruptcy Code. Subsequently, the Bankruptcy Court confirmed the debtors’ amended plan of reorganization and entered an order approving the debtor’s assumption of the Sandow Unit 4 agreement and certain other related agreements with Alcoa Corporation. In October 2016, Luminant emerged from bankruptcy.
In the Northeast, the Massena West smelter in New York receives physical power from the New York Power Authority (“NYPA”) pursuant to a contract between Alcoa and NYPA that will expire in 2019.
Australia
The Portland smelter purchased electricity from the State Electricity Commission of Victoria (“SECV”) under a contract with Alcoa Portland Aluminium Pty Ltd, a wholly-owned subsidiary of AofA, that extended to October 2016. Upon the expiration of this contract, the Portland smelter commenced to purchase power from the National Electricity Market (“NEM”) variable spot market. In March 2010, AofA and Eastern Aluminium (Portland) Pty Ltd separately entered into fixed for floating swap contracts with Loy Yang (now AGL) in order to manage their exposure to the variable energy rates from the NEM. The fixed for floating swap contract with AGL for the Portland smelter commenced operating from the date of expiration of the contract with the SECV and was terminated in accordance with its terms, effective July 31, 2017. A new fixed for floating swap contract for the Portland smelter was entered into with AGL in January 2017 to commence August 1, 2017.
Europe
Alcoa Corporation’s smelters at San Ciprián, La Coruña and Avilés, Spain purchase electricity under bilateral power contracts that expire December 31, 2017.
A competitive bidding mechanism to allocate interruptibility rights in Spain was settled during 2014 to be applied starting from January 1, 2015 and with several auctions to allocate annual rights taking place since then. The last auction process to allocate rights took place in November 2016, where Alcoa Corporation secured 610MW of interruptibility rights for the 2017 period for the three Spanish smelters and the San Ciprián refinery.
Alcoa Corporation owns two smelters in Norway, Lista and Mosjøen, which have long-term power arrangements in place that continue until the end of 2019. Financial compensation of the indirect carbon emissions costs passed through in the electricity bill is received in accordance with EU Commission Guidelines and Norwegian compensation regime.
Iceland
Landsvirkjun, the Icelandic national power company, supplies competitively priced electricity to Alcoa’s Fjarðaál smelter in eastern Iceland under a 40-year power contract. As a result of the Separation Transaction, Landsvirkjun
agreed to assign the power contract to Alcoa, conditioned upon Alcoa Corporation and Arconic both continuing to guarantee the obligations under the power contract. Alcoa Corporation may request Landsvirkjun to review the appropriateness of the dual guarantee going forward.
Natural Gas
Spain
To facilitate the full conversion of the San Ciprián, Spain alumina refinery from fuel oil to natural gas, in October 2013, Alumina Española SA (AE) and Gas Natural Transporte SDG SL (GN) signed a take or pay gas pipeline utilization agreement. Pursuant to that agreement, the ultimate shareholders of AE, ParentCo and Alumina Limited, agreed to guarantee the payment of AE’s contracted gas pipeline utilization over the four years of the commitment period; in the event AE fails to do so, each shareholder is responsible for its respective proportionate share (i.e., 60/40). Such commitment came into force six months after the gas pipeline was put into operation by GN. The gas pipeline was completed in January 2015 and the refinery has switched to natural gas consumption for 100% of its needs. As a result of the separation, Alcoa Corporation agreed with GN to replace the ParentCo guarantee with an Alcoa Corporation guarantee.
Natural gas is supplied to the San Ciprián, Spain alumina refinery pursuant to two supply contracts with Endesa, expiring in June and December 2017, and one supply contract with Gas Natural Fenosa (GNF), expiring in December 2017. Pursuant to the Endesa agreements, Aluminio Español SL and Alumina Limited guarantee the payment of AE’s obligations, with each shareholder being responsible for its respective proportionate share (i.e., 60/40). Pursuant to the GNF agreement, Alcoa Inespal SL and Alumina Limited guarantee the payment of AE’s obligations, each shareholder being responsible for its respective proportionate share (i.e., 60/40).
North America
In order to supply its refinery and smelters in the U.S. and Canada, Alcoa generally procures natural gas on a competitive bid basis from a variety of sources including producers in the gas production areas and independent gas marketers. Pipeline transportation may be procured directly or via the local distribution companies. Contract pricing for gas is typically based on a published industry index such as the New York Mercantile Exchange (“NYMEX”) price. The Company may choose to reduce its exposure to NYMEX pricing by hedging a portion of required natural gas consumption.
Australia
AofA uses gas to co-generate steam and electricity for its alumina refining processes at the Kwinana, Pinjarra and Wagerup refineries. More than 90% of AofA’s gas requirements for the remainder of the decade are secured under long-term contracts. In 2015, AofA entered into a number of long-term gas supply agreements which secured a significant portion of AofA’s gas supplies to 2032. AofA is actively involved with projects aimed at developing cost-based gas supply opportunities. In April 2016, Alcoa Energy Holdings Australia Pty Ltd (a wholly owned subsidiary of AofA) sold its 20% equity interest in the Dampier-to-Bunbury natural gas pipeline, which transports gas from the northwest gas fields to AofA’s alumina refineries and other users in the Southwest of Western Australia, to DUET Investment Holdings Limited.
Rolled ProductsAluminum
This segment represents Alcoa’sconsists of (i) the Company’s worldwide smelting and casthouse system, (ii) a rolling mill in Warrick, Indiana,the United States, and (iii) a portfolio of energy assets in Brazil, Canada, and the United States. The smelting operations produce molten primary aluminum, which is then formed by the casting operations into either common alloy ingot (e.g., t-bar, sow, standard ingot) or into value-add ingot products (e.g., foundry, billet, rod, and slab). The rolling mill produces aluminum sheet primarily sold directly to customers in the packaging end market for the production of aluminum cans (beverage, food,cans. The energy assets supply power to external customers in Brazil, and, pet food). Seasonal increases in can sheet sales are generally experiencedto a lesser extent, in the secondUnited States, and third quarters ofinternal customers within the year.Aluminum segment (Canadian smelters and Warrick (Indiana) smelter and rolling mill) and the Alumina segment (Brazilian refineries). This segment also includes Alcoa Corporation’s investment in aAlcoa’s 25.1% share of MAC and MRC, the smelting and rolling mill joint venture companies in Saudi Arabia through its Ma’aden joint venture; for additional information, see the Equity Investments section of Note H to the Consolidated Financial Statements in Part II, Item 8. (Financial StatementsArabia.
Smelting and Supplementary Data).Casting Operations
The Warrick rolling mill supports our participation in several market segments, including beverage can sheet, food can sheet, lithographic sheet, aluminum bottle sheet, and industrial products. The term “RCS” or Rigid Container Sheet is commonly used for both beverage and food can sheet. This includes the material used to produce the body of beverage containers (bodystock), the lid of beverage containers (endstock and tabstock), the material to produce food can body and lids (food stock) and the material to produce aluminum bottles (bottlestock) and bottle closures (closure sheet). The U.S. aluminum can business comprises approximately 96% beverage can sheet and approximately 4% food can sheet. Alcoa Corporation is one of the largest food can sheet producers. The Warrick rolling mill is expected to be the sole domestic supplier of lithographic sheet, focusing on quality, reduced lead-times and delivery performance.
In 2016, our Warrick facility produced and sold 272 kMT of RCS and industrial products, of which over 90% was sold to customers in North America. The majority of its sales were coated RCS products (food stock, beverage end and tab stock). Following the Separation Transaction, both Warrick and Ma’aden supply body stock material, temporarily supplemented by Arconic’s Tennessee Operations under a transition supply agreement.
Can sheet demand is a function of consumer demand for beverages in aluminum packaging. Aluminum cans have a number of functional advantages for beverage companies, including product shelf life, carbonation retention, and logistics/distribution efficiency. Demand is mostly affected by overall demand for carbonated soft drinks (“CSDs”) and beer. CSDs and beer compose approximately 60% and 40%, respectively, of overall aluminum can demand. In recent years, CSDs sales have been declining 1% to 4% year over year. At the same time, the aluminum can’s share of the beer segment has grown, nearly offsetting the drop in CSDs sales. In 2016, the U.S./Canada aluminum can shipments reached 94.3 billion cans, a growth of 1.2% over 2015. Alcoholic can shipments reached 37.9 billion cans, growing 2.6% year over year, while non-alcoholic can shipments were 56.4 billion, flat year over year.
Sources and Availability of Raw Materials
Generally, materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The Company believes that the raw materials necessary to its business are and will continue to be available.
For each metric ton of alumina produced, Alcoa Corporation consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):
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For each metric ton of aluminum produced, Alcoa Corporation consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):
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Certain aluminum we produce includes alloying materials. Because of the number of different types of elements that can be used to produce our various alloys, providing a range of such elements would not be meaningful. With the exception of a very small number of internally used products, Alcoa produces its alloys in adherence to an Aluminum Association standard. The Aluminum Association, of which Alcoa Corporation is an active member, uses a specific designation system to identify alloy types. In general, each alloy type has a major alloying element other than aluminum but will also have other constituents as well, but of lesser amounts.
Competition
Alcoa is subject to highly competitive conditions in all aspects of the aluminum supply chain in which it competes. Competitors include a variety of both U.S. and non-U.S. companies in all major markets. Brand name recognition and loyalty also play a role. In addition Alcoa’s competitive position depends, in part, on the Company’s access to an economical power supply to sustain its operations in various countries.
Bauxite:
The third-party market for metallurgical grade bauxite is relatively new and growing quickly as global demand for bauxite increases—particularly in China. The majority of bauxite mined globally is converted to alumina for the production of aluminum metal. While Alcoa has historically mined bauxite for internal consumption in our alumina refineries, we are focused on building our third-party bauxite business to meet growing demand. We sold 6.4 million tons of bauxite to a diverse third-party customer base in 2016.
Competitors in the third-party bauxite market include Rio Tinto Alcan, Norsk Hydro and multiple suppliers from Guinea, Malaysia, India and other countries. We compete largely based on bauxite quality, price and proximity to end markets. Alcoa Corporation has a strong competitive position in this market for the following reasons:
Low Cost Production: Alcoa is the world’s largest bauxite miner, holding a strong first quartile global cost curve position, with best practices in efficient mining operations and sustainability.
Reliable, Long-Term Bauxite Resources: Alcoa’s strategic bauxite mine locations include Australia and Brazil as well as Guinea, which is home to the world’s largest reserves of high-quality metallurgical grade bauxite. Alcoa Corporation has a long history of stable operations in these countries and has access to large bauxite deposits with mining rights that extend in most cases more than 20 years from the date of this report.
Access to Markets: Alcoa’s Australian bauxite mines are located in close proximity to the largest third-party customer base in China and our facilities are also accessible to a significant and growing alumina refining base in the Middle East.
Contracts for bauxite have generally been short-term contracts (two years or less in duration) with spot pricing and adjustments for quality and logistics, although we are currently pursuing long-term contracts with potential customers. The primary customer base for third-party bauxite is located in Asia—particularly China.
Alumina:
The alumina market is global and highly competitive, with many active suppliers including producers as well as commodity traders. Alcoa faces competition from a number of companies in all of the regions in which we operate, including Aluminum Corporation of China Limited, China Hongqiao Group Limited, Hindalco Industries Ltd., Hangzhou Jinjiang Group, National Aluminium Company Limited (“NALCO”), Noranda Aluminum Holding Corporation, Norsk Hydro ASA, Rio Tinto Inc., South32 Limited, State Power Investment Corporation, United Company RUSAL Plc, and Chiping Xinfa Alumina Product Co., Ltd. In recent years, there has been significant growth in alumina refining in China and India. The majority of our product is sold in the form of smelter grade alumina, with 5% to 10% of total global alumina production being produced for non-metallurgical applications.
Key factors influencing competition in the alumina market include: cost position, price, reliability of bauxite supply, quality and proximity to customers and end markets. While we face competition from many industry players, we have several competitive advantages:
Proximity to Bauxite: Our refineries are strategically located next to low cost, upstream bauxite mines, and our alumina refineries are tuned to maximize efficiency with the exact bauxite qualities from these internal mines. In addition to refining efficiencies, vertical integration affords a stable and consistent long-term supply of bauxite to our refining portfolio.
Low Cost Production: As the world’s largest alumina producer, Alcoa has competitive, efficient assets across its refining portfolio, with a 2016 average cost position in the first quartile of global alumina production. Contributing to this cost position is our experienced workforce and sophistication in refining technology and process automation.
Access to Markets: Alcoa is a global supplier of alumina with refining operations in the key markets of North America (curtailed), South America, Europe, the Middle East, and Australia, enabling us to meet customer demand in the Atlantic and Pacific basins, including China.
Contracts for smelter grade alumina are often multi-year, although contract structures have evolved from primarily long-term contracts with fixed or LME-based pricing to shorter-term contracts with more frequent pricing adjustment. A significant development occurred in the pricing structure for alumina beginning in 2010. Traditionally, most alumina outside of China had been sold to third party smelters with the price calculated as a percentage of the LME aluminum price.
In 2010, a number of key commodity information service providers began publishing daily and weekly alumina (spot) pricing assessments or indices. Since that time, Alcoa has been systematically moving its third-party alumina sales contracts away from LME aluminum-based pricing to published alumina spot or index pricing, thus de-linking the price for alumina from the aluminum price to better reflect alumina’s distinct fundamentals. In 2016, approximately 85% of Alcoa Corporation’s smelter grade alumina shipments to third parties were sold at published spot/index prices (compared to 54% in 2013 and 37% in 2012). We expect a similar percentage of our third-party alumina shipments to be based on API or spot pricing in 2017 as in 2016.
Alcoa’s largest customer for smelter grade alumina is its own aluminum smelters, which in 2016 accounted for approximately 34% of its total alumina sales. Remaining sales are made to customers all over the world and are typically priced by reference to published spot market prices.
Primary Aluminum / Cast Products
The market for primary aluminum is global, and demand for aluminum varies widely from region to region. We compete with commodity traders and aluminum producers such as Aluminum Corporation of China Limited, China Hongqiao Group Limited, East Hope Group Co. Ltd., Emirates Global Aluminum, Norsk Hydro, Rio Tinto Alcan Inc., Shandong Xinfa Aluminum & Power Group, State Power Investment Co. (“SPIC”), United Company RUSAL Plc as well as with alternative materials such as steel, titanium, copper, carbon fiber, composites, plastic and glass, each of which may be substituted for aluminum in certain applications.
The aluminum industry itself is highly competitive; some of the most critical competitive factors in our industry are product quality, production costs (including source and cost of energy), price, proximity to customers and end markets, timeliness of delivery, customer service (including technical support), and product innovation and breadth of offerings. Where aluminum products compete with other materials, the diverse characteristics of aluminum are also a significant factor, particularly its light weight and recyclability.
In addition, in some end-use markets, competition is also affected by customer requirements that suppliers complete a qualification process to supply their plants. This process can be rigorous and may take many months to complete. However, the ability to obtain and maintain these qualifications can represent a competitive advantage.
In recent years, we have seen increasing trade flows between regions despite shipping costs, import duties and the lack of localized customer support. There is a growing trade in higher value-added products, with recent trade patterns seeing more flow toward the deficit regions. However, suppliers in emerging markets may export lower value-added or even commodity aluminum products to larger, more mature markets, as we have seen recently with China.
The strength of our position in the primary aluminum market is largely attributable to the following factors:
Value-Added Product Portfolio: Alcoa Corporation has 15 casthouses supplying global customers with a diverse product portfolio, both in terms of shapes and alloys. We have steadily grown our cast products business by offering differentiated, value-added aluminum products that are cast into specific shapes to meet customer demand, with 65% of 2016 smelter shipments representing value-added products, compared to 57% in 2010.
Low Cost Production: As the world’s sixth largest aluminum producer in 2016, Alcoa leverages significant economies of scale in order to continuously reduce costs. As a result, Alcoa operates competitive, efficient assets across its aluminum smelting and casting portfolios, with its 2016 average smelting cost position in the second quartile of global aluminum smelters. This cost position is supported by long-term energy arrangements at many locations; Alcoa Corporation has secured approximately 68% of its smelter power needs through 2022.
Access to Markets: Alcoa is a global supplier of aluminum with smelting and casting operations in the key markets of North America, Europe, the Middle East, and Australia, enabling us to access a broad customer base with competitive logistics costs.
Sustainability: As of December 31, 2016, approximately 70% of our aluminum smelting portfolio runs on clean hydroelectric power, lessening our demand for fossil fuels and potentially mitigating the risk to the Company from future carbon tax legislation.
Contracts for primary aluminum vary widely in duration, from multi-year supply contracts to monthly or weekly spot purchases. Pricing for primary aluminum products is typically comprised of three components: (i) the published LME aluminum price for commodity grade P1020 aluminum, (ii) the published regional premium applicable to the delivery locale and (iii) a negotiated product premium which accounts for factors such as shape and alloy. In recent years, the Company has experienced increasing trade flows of commodity and higher value-added products between regions, with surplus regions supplying missing volumes to deficit regions. The flow patterns consider shipping costs, import duties, and premiums in the importing regions.
Alcoa’s primary aluminum facilities and its global smelting capacity are shown in the following table:
Country |
| Facility1 |
| Nameplate Capacity2 (000 MTPY) |
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| Alcoa Corporation Consolidated Capacity3 (000 MTPY) |
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Australia |
| Portland4 |
|
| 358 |
|
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| 197 |
| 5,6 |
Brazil |
| Poços de Caldas7 |
| N/A |
|
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| N/A |
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| São Luís (“Alumar”)8 |
|
| 447 |
|
|
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| 268 |
| 9 |
Canada |
| Baie Comeau, Québec |
|
| 280 |
|
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| 280 |
|
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| Bécancour, Québec10 |
|
| 413 |
|
|
|
| 310 |
| 11 |
|
| Deschambault, Québec |
|
| 260 |
|
|
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| 260 |
|
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Iceland |
| Fjarðaál |
|
| 344 |
|
|
|
| 344 |
|
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Norway |
| Lista |
|
| 94 |
|
|
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| 94 |
|
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| Mosjøen |
|
| 188 |
|
|
|
| 188 |
|
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Spain |
| Avilés |
|
| 93 |
| 12 |
|
| 93 |
|
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| La Coruña |
|
| 87 |
| 12 |
|
| 87 |
|
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| San Ciprián |
|
| 228 |
|
|
|
| 228 |
|
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United States |
| Massena West, NY |
|
| 130 |
|
|
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| 130 |
|
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| Ferndale, WA (“Intalco”) |
|
| 279 |
| 13 |
|
| 279 |
|
|
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| Wenatchee, WA |
|
| 146 |
| 14 |
|
| 146 |
|
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| Evansville, IN (“Warrick”)15 |
|
| 269 |
| 16 |
|
| 269 |
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TOTAL |
|
|
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| 3,616 |
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| 3,173 |
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Equity Interests: | ||||||
Country | Facility | Nameplate Capacity2 (000 MTPY) | ||||
Kingdom of Saudi Arabia | Ras Al Khair17 | 740 |
1 | Each facility is comprised of a smelter and casthouse and is 100% owned by Alcoa, unless otherwise indicated. |
2 | Nameplate Smelting Capacity is an estimate based on design capacity and normal operating efficiencies and does not necessarily represent maximum possible production. |
3 | The figures in this column reflect Alcoa’s share of Nameplate Smelting Capacity based on its ownership interest in the respective smelter. |
4 | The Portland facility is owned by AofA (55%), CITIC (22.5%), and Marubeni (22.5%). |
5 | This figure includes Alumina Limited’s noncontrolling interest in the Portland facility, which is owned by AofA, an AWAC company. From this facility, AWAC takes 100% of the production allocated to AofA. |
7 | The Poços de Caldas facility is a casthouse and does not include a smelter. |
8 | The Alumar facility is owned by Alcoa Alumínio (60%) and South32 (40%). Alcoa Alumínio is ultimately owned 100% by Alcoa. |
9 | The Alumar smelter and casthouse have been fully curtailed since April 2015. |
10 | The Bécancour facility is owned by Alcoa (74.95%) and Rio Tinto (“Rio Tinto”) (25.05%, owned through Rio Tinto’s interest in Pechiney Reynolds Québec, Inc., which is owned by Rio Tinto and Alcoa). |
12 | The Avilés and La Coruña smelters have approximately 56,000 mtpy of idle capacity combined (see below). |
13 | The Intalco smelter has approximately 49,000 mtpy of idle capacity. |
14 | The Wenatchee smelter and casthouse have been fully curtailed since December 2015. In June 2018, one (approximately 38,000 mtpy) of the four potlines was permanently closed, as it had not operated since 2001, and the investments needed to restart that line are cost prohibitive. As a result, Wenatchee’s smelting capacity now stands at approximately 146,000 mtpy. |
15 | The Warrick facility is dedicated to supplying rolling slab to the Warrick rolling mill. |
16 | The Warrick smelter has approximately 108,000 mtpy of idle capacity (see below). |
17 | The Ras Al Khair facility is 100%-owned by the Ma’aden Joint Venture, a minority-owned joint venture between Ma’aden (74.9%) and Alcoa (25.1%). |
As of December 31, 2018, the Company had approximately 916,000 mtpy of idle smelting capacity relative to total Alcoa consolidated capacity of 3,173,000 mtpy.
In July 2017, Alcoa announced plans to restart three (approximately 161,000 mtpy of capacity) of the five potlines (269,000 mtpy of capacity) at the Warrick smelter (previously permanently closed in March 2016 by ParentCo). The capacity identified for restart directly supplies the existing rolling mill at the Warrick location, improves efficiency of the integrated site and provides an additional source of metal to help meet production volumes. Alcoa completed the restart of two potlines (approximately 108,000 mtpy of capacity) in mid-2018 and a third potline in December 2018 (approximately 53,000 mtpy of capacity).
In January 2018, a lockout of the bargained hourly employees commenced at the Bécancour smelter (see Employees below). Accordingly, management initiated a curtailment of two (approximately 207,000 mtpy (Alcoa’s share) of capacity) of the three potlines at the smelter. Additionally, in December 2018, half (approximately 52,000 mtpy (Alcoa’s share) of capacity) of the one operating potline at the Bécancour smelter was curtailed. This additional curtailment was deemed necessary to ensure continued safety and maintenance due to recent retirements and departures among the salaried workforce.
In January 2019, Alcoa reached an agreement with workers’ representatives at the Avilés and La Coruña facilities as part of a collective dismissal process initiated in October 2018 (see Employees below). The plan calls for the curtailment of the remaining smelting capacity (approximately 124,000 mtpy combined) of the two smelters. The casthouse at each plant and the paste plant at La Coruña will remain in operation while the Company participates in a Spanish government-led process for the potential sale of the Avilés and La Coruña facilities. In accordance with the ratified agreement, the Company will maintain the smelters in the restart condition in the event an agreement to sell the plants can be reached by June 30, 2019.
For additional information regarding the curtailments and closures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restructuring and Other Charges.”
Rolling Operations
The Aluminum segment’s rolled products business consists of the Company’s rolling mill in Warrick, Indiana, which produces aluminum sheet primarily sold directly to customers in the packaging end market for the production of aluminum cans (beverage and food) and Alcoa’s investment in a rolling mill in Saudi Arabia through the Ma’aden Rolling Company. For additional information about the Ma’aden Joint Venture, see Joint Ventures under “General” and the Equity Investments section of Note H to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).
Alcoa’s rolled products business has the capability of participating in several market segments, including beverage can sheet, food can sheet, lithographic sheet, and industrial products. The term “RCS” or Rigid Container Sheet is commonly used for both beverage and food can sheet. This includes the material used to produce the body of beverage containers (body stock), the lid of beverage containers (end stock and tab stock), the material to produce food can body and lids (food stock), and the material to produce aluminum bottles (bottle stock) and bottle closures (closure sheet). Alcoa suspended production of lithographic sheet in the second quarter of 2018.
EnergyIn 2018, our Warrick facility produced and sold 334.4 kilo metric tons (kMT) of RCS, lithographic sheet, and industrial products, of which over 99% was sold to customers in North America. The majority of its sales were coated RCS products (food stock, beverage end and tab stock). Following the Separation Transaction, both Warrick and the Ma’aden Rolling Company supply body stock material, temporarily supplemented by Arconic’s Tennessee Operations under a transition supply agreement that expired on December 31, 2018. Seasonal increases in can sheet sales are generally expected in the second and third quarters of the year.
UnlikeCan sheet demand is a function of consumer demand for beverages in aluminum packaging. Aluminum cans have a number of functional advantages for beverage companies, including product shelf life, carbonation retention, and logistics/distribution efficiency. Demand is mostly affected by overall demand for carbonated soft drinks and beer, which comprise approximately 60% and 40%, respectively, of overall aluminum can demand. In 2018, the U.S./Canada aluminum can shipments reached 94.0 billion cans, an increase of 0.6% over 2017. Alcoholic can shipments reached 35.6 billion cans, declining 2.4% year over year, while non-alcoholic can shipments were 58.4 billion, growing 2.5% year over year.
Energy Facilities and Sources
Employing the Bayer process, Alcoa refines alumina from bauxite ore. The Company’s smelters then produce aluminum from the alumina andby an electrolytic process requiring substantial amounts of electric power. Energy accounts for approximately 20% of the Company’s total alumina refining production costs. Electric power accounts for approximately 24% of the Company’s primary aluminum electricityproduction costs.
Electricity markets are regional. They are limited in size by physical and regulatory constraints, including the physical inability to transport electricity efficiently over long distances, the design of the electric grid, including interconnections, and by the regulatory structure imposed by various federal and state entities.
Electricity contracts may be short term (real-time or day ahead) or years in duration, and contracts can be executed for immediate delivery or years in advance. Pricing may be fixed, indexed to an underlying fuel source or other index such as LME, cost-based or based on regional market pricing. Pricing may be all inclusive on a per energy unit delivered basis (e.g., dollars per megawatt hour) or the components may be separated and include a demand or capacity charge, an energy charge, an ancillary services charge and a transmission charge to make the delivered energy conform to customer requirements. In 2018, Alcoa generated approximately 9% of the power used at its smelters worldwide and generally purchased the remainder under long-term arrangements.
The following table sets forth the electricity generation capacity and 2018 generation of facilities in which Alcoa Corporation has an ownership interest:
Country |
| Facility1 |
| Alcoa Corporation Consolidated Capacity (MW)2 |
|
| 2018 Generation (MWh)3 |
| ||
Brazil |
| Barra Grande |
|
| 156 |
|
|
| 1,331,520 |
|
|
| Estreito |
|
| 157 |
|
|
| 1,431,304 |
|
|
| Machadinho |
|
| 119 |
|
|
| 956,682 |
|
|
| Serra do Facão |
|
| 60 |
|
|
| 185,813 |
|
Canada |
| Manicouagan |
|
| 133 |
|
|
| 1,160,854 |
|
Suriname |
| Afobaka |
|
| 189 |
|
|
| 1,004,475 |
|
United States |
| Warrick4 |
|
| 657 |
|
|
| 3,446,084 |
|
TOTAL |
|
|
|
| 1,471 |
|
|
| 9,516,732 |
|
2 | The consolidated capacity of the Brazilian energy facilities represented here in megawatts (“MW”), is the assured energy that is approximately 52% of hydropower plant nominal capacity. |
3 | The figures in this column are presented in megawatt hours (“MWh”). |
4 | Alcoa Alumínio has approximately a 42.2% interest in Energética Barra Grande S.A. (BAESA), which built the Barra Grande hydroelectric power plant in southern Brazil. |
6 | Alcoa Alumínio owns approximately a 25.8% stake in Consórcio Machadinho, the owner of the Machadinho hydroelectric power plant located in southern Brazil. |
7 | Alcoa Alumínio has approximately a 34.9% share in Serra do Facão Energia S.A., which built the Serra do Facão hydroelectric power plant in southeastern Brazil. |
8 | Since May 2015 (after curtailment of the Poços de Caldas and São Luís smelters), the excess generation capacity from the Brazilian hydroelectric facilities described above has been sold into the market. |
9 | Power generated from Afobaka is sold to the Government of Suriname under a bilateral contract. |
The sections below provide an overview of our external energy for our smelters and refineries.
External Energy Source | ||
Electricity | Natural Gas | |
North America | Québec The Deschambault, Baie Comeau, and Bécancour smelters in Québec purchase all or a majority of their electricity under contracts with Hydro-Québec that expire on December 31, 2029. The smelter located in Baie Comeau purchases approximately 73% of its power needs under the Hydro-Québec contract, and the remainder from a 40% owned hydroelectric generating company, Manicouagan Power Limited Partnership. For the Baie Comeau smelter, the Hydro-Québec contract can be extended until February 23, 2036. Wenatchee In the State of Washington, Alcoa’s Wenatchee smelter is served by a contract with Chelan County Public Utility District No. 1 (“Chelan PUD”) under which Alcoa receives 26% of the hydropower output of Chelan PUD’s Rocky Reach and Rock Island dams. In June 2018, the Company announced its decision to permanently close one of four potlines at the Wenatchee smelter, which has a remaining capacity of approximately 146,000 mtpy that has been fully curtailed since 2015. | In order to supply its smelters in the U.S. and Canada, Alcoa generally procures natural gas on a competitive bid basis from a variety of sources, including producers in the gas production areas and independent gas marketers. Pipeline transportation may be procured directly or via the local distribution companies. Contract pricing for gas is typically based on a published industry index such as the New York Mercantile Exchange (“NYMEX”) price. The Company may choose to reduce its exposure to NYMEX pricing by hedging a portion of required natural gas consumption. |
Intalco Starting on January 1, 2013, the Intalco smelter, in the state of Washington, began receiving physical power under a contract with the Bonneville Power Administration (“BPA”) at the Northwest Power Act mandated industrial firm power (“IP”) rate through September 30, 2022. Additional power is purchased from the market as needed. In May 2015, the contract was amended to reduce the amount of physical power received from BPA and allow for additional purchases of market power. In April 2016, the contract was amended again to reduce the contractual amount through February 2018, following which Intalco resumed receiving physical contracted quantities of power at the mandated IP rate. In August 2018, Alcoa issued a notice of termination to BPA that will become effective on August 31, 2019, after which the Intalco smelter will purchase power from the market. | ||
Massena West The Massena West smelter in New York receives power from the New York Power Authority (“NYPA”) pursuant to a contract between Alcoa and NYPA that will expire in March 2019. The Company is currently negotiating a long-term contract with NYPA effective following the termination date. |
Other
The Company has a calciner facility located in Lake Charles, Louisiana. This facility converts green coke into calcined coke, which is used as a raw material for the anode formation process at an aluminum smelter. The Lake Charles facility was curtailed in December 2015 due to an equipment failure and restarted again in July 2017.
The Company’s Gum Springs, Arkansas facility processes spent potlining and other hazardous wastes.
Sources and Availability of Raw Materials
Generally, materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The Company believes that the raw materials necessary to its business are and will continue to be available.
For each metric ton of alumina produced, Alcoa consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):
Raw Material | Units | Consumption per MT of Alumina | ||
Bauxite | mt | 2.2 – 3.6 | ||
Caustic soda | kg | 60 – 115 | ||
Electricity | kWh | 200 to 260 total consumed (0 to 220 imported) | ||
Fuel oil and natural gas | GJ | 6.2 – 12.2 | ||
Lime (CaO) | kg | 6 – 60 |
For each metric ton of aluminum produced, Alcoa consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):
Raw Material | Units | Consumption per MT of Primary Aluminum | ||
Alumina | mt | 1.92 ± 0.02 | ||
Aluminum fluoride | kg | 17.1 ± 5.0 | ||
Calcined petroleum coke | mt | 0.37 ± 0.05 | ||
Cathode blocks | mt | 0.005 ± 0.002 | ||
Electricity | kWh | 12900 –17000 | ||
Liquid pitch | mt | 0.10 ± 0.03 | ||
Natural gas | mcf | 3.0 ± 1.0 |
Certain aluminum we produce includes alloying materials. Because of the number of different types of elements that can be used to produce our various alloys, providing a range of such elements would not be meaningful. With the exception of a very small number of internally used products, Alcoa produces its alloys in adherence to an Aluminum Association (of which Alcoa is an active member) standard, which uses a specific designation system to identify alloy types. In general, each alloy type has a major alloying element other than aluminum but will also have other constituents as well, but of lesser amounts.
Competition
Alcoa is subject to highly competitive conditions in all aspects of the aluminum supply chain in which it competes. Competitors include a variety of both U.S. and non-U.S. companies in all major markets. Brand name recognition and loyalty also play a role. Alcoa’s competitive position depends, in part, on the Company’s access to an economical power supply to sustain its operations in various countries.
In each of our business segments, we enjoy several competitive advantages. We are among the world’s largest bauxite miners, with best practices in efficient mining operations and sustainability. We are the world’s largest alumina producer outside of China and operate competitive, efficient assets across our refining, aluminum smelting, and casting portfolios. Our business segments operate in close proximity to our broad, worldwide customer base, enabling us to meet customer demand in key markets in North America, South America, Europe, the Middle East, Australia, and China. Competitive advantages specific to each business segment are detailed below.
Bauxite:
The third-party market for metallurgical grade bauxite is relatively new and growing quickly as global demand for bauxite increases—particularly in China. The majority of bauxite mined globally is converted to alumina for the production of aluminum. While Alcoa has historically mined bauxite for internal consumption in our alumina refineries, we are committed to expanding our third-party bauxite business to meet growing demand.
Our principal competitors in the third-party bauxite market include Rio Tinto, Norsk Hydro and multiple suppliers from Guinea, India and other countries. We compete largely based on bauxite quality, price and proximity to customers. In addition to the competitive advantages described above, Alcoa has a strong competitive position in this market due to its reliable, long-term bauxite resources in strategic bauxite mine locations, including Australia, Brazil, and Guinea, which is home to the world’s largest reserves of high-quality metallurgical grade bauxite. Alcoa has a long history of stable operations in these countries and has access to large bauxite deposits with mining rights that extend in most cases more than 20 years from the date of this report.
Alumina:
The alumina market is global and highly competitive, with many active suppliers, producers, and commodity traders. Alcoa faces competition from a number of companies, including Aluminum Corporation of China Limited, China Hongqiao Group Limited, Hindalco Industries Ltd., Hangzhou Jinjiang Group, National Aluminium Company Limited (“NALCO”), Noranda Aluminum Holding Corporation, Norsk Hydro ASA, Rio Tinto, South32 Limited, State Power Investment Corporation, United Company RUSAL Plc, and Chiping Xinfa Alumina Product Co., Ltd. In recent years, there has been significant growth in alumina refining in China and India. The majority of our product is sold in the form of smelter grade alumina, with 5% to 10% of total global alumina production being produced for non-metallurgical applications.
Key factors influencing competition in the alumina market include: cost position, price, reliability of bauxite supply, quality and proximity to customers and end markets. While we face competition from many industry players, we had an average cost position in the first quartile of global alumina production in 2018, in part attributable to our experienced workforce and sophistication in refining technology and process automation. Also, our refineries are strategically located next to low cost bauxite mines, and our alumina refineries are tuned to maximize efficiency with the exact bauxite qualities from these internal mines. In addition to these refining efficiencies, vertical integration affords a stable and consistent long-term supply of bauxite to our refining portfolio.
Aluminum:
In our Aluminum segment, competition is dependent upon the type of product we are selling.
The market for primary aluminum is global, and demand for aluminum varies widely from region to region. We compete with commodity traders and aluminum producers such as Aluminum Corporation of China Limited, China Hongqiao Group Limited, East Hope Group Co. Ltd., Emirates Global Aluminum, Norsk Hydro, Rio Tinto, Shandong Xinfa Aluminum & Power Group, State Power Investment Co. (“SPIC”), and United Company RUSAL Plc, as well as with alternative materials such as steel, titanium, copper, carbon fiber, composites, plastic and glass, each of which may be substituted for aluminum in certain applications.
The aluminum industry itself is highly competitive; some of the most critical competitive factors in our industry are product quality, production costs (including source and cost of energy), price, proximity to raw materials, customers and end markets, timeliness of delivery, customer service (including technical support), product innovation, and breadth of offerings. Where aluminum products compete with other materials, the diverse characteristics of aluminum are also a significant factor, particularly its light weight, strength and recyclability.
In addition, in some end-use markets, competition is also affected by customer requirements that suppliers complete a qualification process to supply their plants. This process can be rigorous and may take many months to complete. However, the ability to obtain and maintain these qualifications can represent a competitive advantage.
The strength of our position in the primary aluminum market is largely attributable to the following factors:
• | Low Cost Production: Alcoa leverages significant economies of scale to continuously reduce costs. As a result, Alcoa operates competitive, efficient assets across its aluminum smelting and casting portfolios. The Company’s smelting cost position is supported by long-term energy arrangements at many locations; Alcoa has secured approximately 61% of its smelter power needs through 2023. | ||
• | Value-Added Product Portfolio: Alcoa’s casthouses supply global customers with a diverse product portfolio, both in terms of shapes and alloys. We offer differentiated products that are cast into specific shapes to meet customer demand, with 67% of 2018 smelter shipments representing value-added products. |
• | Sustainability: As of December 31, 2018, approximately 70% of our aluminum smelting portfolio runs on renewable power sources, lessening our demand for fossil fuels. |
Alcoa owns generation and transmission assets that produce and sell electric energy and ancillary services in the United States and Brazilian wholesale energy markets. Our competitors include integrated electric utilities that may be owned by
governments (either fully or partially), cooperatives or investors, independent power producers and energy brokers and traders.
Competition factors in open power markets include fuel supply, production costs, operational reliability, access to the power grid, and environmental attributes (e.g., green power and renewable energy credits). As electricity is difficult and cost prohibitive to store, there are no electricity inventories to cushion the impact of supply and demand factors and the resultant pricing in electricity markets may be volatile. Demand for power varies greatly both seasonally and by time of day. Supply may be impacted in the short term by unplanned generator outages or transmission congestion and longer term by planned generator outages, droughts, high precipitation levels and fuel pricing (coal and/or natural gas).
Electricity contracts may be very short term (real-time), short term (day ahead) or years in duration, and contracts can be executed for immediate delivery or years in advance. Pricing may be fixed, indexed to an underlying fuel source or other index such as LME, cost-based or based on regional market pricing. Pricing may be all inclusive on a per energy
unit delivered basis (e.g., dollars per megawatt hour) or the components may be separated and include a demand or capacity charge, an energy charge, an ancillary services charge and a transmission charge to make the delivered energy conform to customer requirements.
Alcoa’s energy assets enjoy several competitive advantages, when compared to other power suppliers:
Reliability:
• | Reliability: In the United States, we have operated our thermal energy assets for over 50 |
• | Sustainable (“green”) energy sources: A majority of our generating assets use renewable (hydroelectric) sources of fuel for generation. |
Access and proximity to markets: Our U.S. assets are positioned to take advantagerolled products business has the capability of sales into some of the more liquid power markets, including sales of both energy and capacity.
Sustainable (green) energy sources: A majority of our generating assets use renewable (hydroelectric) sources of fuel for generation. In addition, our U.S. assets have been upgraded to allow for sales of renewable energy credits.
Rolled Products
Rolled Products participatesparticipating in various market segments, including beverage can sheet, food can sheet, lithographic sheet, aluminum bottle sheet, and industrial products. The term “RCS” or Rigid Container Sheet is commonly used for both beverageproducts and food can sheet. The Warrick rolling millin the U.S. competes with other North American producers of RCS products, namely Novelis Corp, Tri-Arrows Aluminum, and Constellium NV. The Warrick rolling millThere is expected to be the sole domestic supplier of lithographic sheet, focusing on quality, reduced lead-times and delivery performance.
Buyersalso import supply of RCS products in North America are largefrom China (Nanshan) and concentratedWestern Europe (Hydro and have significant market power. There are essentially five buyers of all the U.S. can sheet sold inEval) mainly for the beverage industry (three can makers and the two beverage companies). In 2016, we estimate the North American (Canada/U.S./Mexico) aluminum can sheet buyers and their share of the industry are: AB-Inbev (>39%), Coke (>21%), Ball (>18%), Crown (>15%), Ardagh (>5%) and others (2%). Buyers traditionally buy RCS in proportions that represent the full aluminum can (80% body stock, 20% end and tab stock). In addition, as the aluminum can sheet represents approximately 60% of their manufacturing costs, there is a heavy focus on cost.
In 2016, our Warrick facility produced and sold 272 kMT of RCS and industrial products, of which over 90% was sold to customers in North America. The majority of its sales were coated RCS products (food stock, beverage end and tab stock). Following the Separation Transaction, both Warrick and Ma’aden supply body stock material, temporarily supplemented by Arconic’s Tennessee Operations under a transition supply agreement.market.
We also compete with competitiveagainst package types made of other materials including PETpolyethylene terephthalate (“PET”) bottles, glass bottles, steel tin plate and other materials. In the U.S., aluminum cans, PET bottles and glass bottles represent approximately 69%, 29% and 2%, respectively, of the CSDs segment. In the beer segment, aluminum cans, glass bottles, and aluminum bottles represent approximately 73-74%, 21-22% and 5%, respectively, of the business. In the food can segment, steel tin plate cans and aluminum food cans represent approximately 83% and 17%, respectively, with aluminum cans representing approximately 52% of the pet food segment.
We compete on cost, quality, and service. Alcoa CorporationThe Company intends to continue to improve our cost position by increasing recycled aluminum content in our metal feedstock as well as continuing to focus on capacity utilization. We believe our team of technical and operational resources provides distinctive quality and customer service.
Patents, Trade Secrets and Trademarks
The Company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The Company’s rights under its patents,intellectual property, as well as the products made and sold under
them, are important to the Company as a whole and, to varying degrees, important to each business segment. Alcoa’s business as a whole is not, however, materially dependent on any single patent, trade secret or trademark. As a result of product development and technological advancement, the Company continues to pursue patent protection in jurisdictions throughout the world. As of December 31, 2016,2018, Alcoa’s worldwide patent portfolio consisted of approximately 600720 granted patents and 285300 pending patent applications.
The Company also has a number of domestic and international registered trademarks that have significant recognition within the markets that are served, including the name “Alcoa” and the Alcoa symbol for aluminum products. Our rights under its trademarks are important to the Company as a whole and, to varying degrees, important to each business segment.symbol.
As part of the Separation Transaction, twoAlcoa Corporation and Arconic businesses,entered into certain intellection property license agreements between them. These agreements, as amended, provide for a license of certain patents, trademarks and know-how from Arconic or Alcoa Wheels and Spectrochemical Standards, have ongoing rightsCorporation, as applicable, to use the Alcoa name. See “Certain Relationships and Related Party Transactions, and Director Independence—Agreements with Arconic—Intellectual Property License Agreements.”other, on a perpetual, royalty-free, non-exclusive basis, subject to certain exceptions.
Research and Development
Expenditures for research and development activities (“R&D”) were $33 million in 2016, $69 million in 2015, and $95 million in 2014.
Environmental Matters
Alcoa Corporation is subject to extensive federal, state and local environmental laws and regulations, including those relating to the release or discharge of materials into the air, water and soil, waste management, pollution prevention measures, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, greenhouse gas emissions, and the health and safety of our employees. We participate in environmental assessments and cleanups at approximately 60 locations. These include owned or operating facilities and adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)) sites. ApprovedIn 2018, capital expenditures for new or expanded facilities for environmental control were approximately $68$145 million for 2016 and are approximately $119$75 million for 2017.is expected in 2019. Additional information relating to environmental matters is included in Note R to the Consolidated Financial Statements under the caption “Contingencies and Commitments—Environmental Matters.”
Alcoa’s total worldwide employment atAt the end of 2016 was2018, Alcoa had approximately 14,000 employees in 15 countries. Approximately 9,75010,700 of these employees are represented by labor unions. The Company believes that relations with its employees and any applicable union representatives generally are good.
In the U.S., approximately 1,9502,400 employees are represented by various labor unions. The largest collective bargaining agreement in the U.S. is the master collective bargaining agreement with the United Steelworkers (“USW”). The USW master agreement, which covers approximately 1,4001,600 employees at sixfive U.S. locations. There are three otheradditional collective bargaining agreements inat three U.S. locations with the U.S.USW, the International Association of Machinists and Aerospace Workers (IAM) and the International Brotherhood of Electric Workers (IBEW), with varying expiration dates. On a regional basis, collective bargaining agreements with varying expiration dates cover approximately 2,1002,200 employees in Europe, 2,0001,600 employees in Canada, 8501,800 employees in Central and South America, and 2,7502,700 employees in Australia.
The Company’s master agreement with the USW is set to expire on May 15, 2019, and Alcoa is currently negotiating a new collective bargaining agreement with the union.
The collective bargaining agreement with CSN (Confédération des Syndicats Nationaux) representing about 600 hourly employees at its Baie Comeau smelter in Canada expires on May 31, 2019. Alcoa is preparing to negotiate a new collective bargaining agreement.
On January 11, 2018, a lockout of the bargained hourly employees commenced at the Bécancour smelter in Québec, impacting approximately 1,000 employees at this facility. The Bécancour facility is owned by Alcoa (74.95%) and Rio Tinto (25.05%). For additional information, see footnote 10 to the table in “Smelting Operations” under the Aluminum segment above.
On August 8, 2018, the Company’s bauxite mines and alumina refineries in Australia experienced a nearly eight-week strike by the unionized labor force who are represented by the Australian Workers’ Union (AUW). These two mines continued to operate during the strike with minimal disruption. The labor force has returned to work while negotiations between the Company and the union continue.
On October 17, 2018, the Company announced its intention to begin a formal consultation process for collective dismissals that would affect all employees at its Avilés and La Coruña smelters in Spain. A total of almost 700 employees will be impacted. In January 2019, Alcoa reached an agreement with workers’ representatives at these facilities ). Under this agreement, the remaining smelting capacity (approximately 124,000 mtpy combined) of the two smelters will be curtailed by the end of February 2019. The casthouse at each plant and the paste plant at La Coruña will remain in operation while the Company participates in a Spanish government-led process for the potential sale of the Avilés and La Coruña facilities. A social plan included in the agreement preserves a portion of the jobs at the two facilities and includes retirement packages and potential relocation to the Company’s San Ciprián facility. In accordance with the ratified agreement, the Company will maintain the smelters in the restart condition in the event an agreement to sell the plants can be reached by June 30, 2019.
Executive Officers of the Registrant
The names, ages, positions and areas of responsibility of the executive officers of the Company as of March 1, 2017February 15, 2019 are listed below.
Roy C. Harvey, 43,45, is thePresident and Chief Executive Officer of Alcoa Corporation. He became Chief Executive Officer in November 2016 and assumed the role of President in May 2017. Mr. Harvey served as Executive Vice President of ParentCo and President of ParentCo’s Global Primary Products (“GPP”) division from October 2015 to November 2016. From June 2014 to October 2015, he was Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability at ParentCo. Prior to that time, Mr. Harvey was Chief Operating Officer for Global Primary ProductsGPP at ParentCo from July 2013 to June 2014 and was Chief Financial Officer for Global Primary ProductsGPP from December 2011 to July 2013. In addition to these roles, Mr. Harvey served as Director of Investor Relations at ParentCo from September 2010 tothrough November 2011 and was Director of Corporate Treasury from January 2010 to September 2010. Mr. Harvey joined ParentCo in 2002 as a business analyst for Global Primary ProductsGPP in Knoxville, Tennessee.
William F. Oplinger, 50, is52, has served as Executive Vice President and Chief Financial Officer of Alcoa Corporation.Corporation since November 2016. Mr. Oplinger served as Executive Vice President and Chief Financial Officer of ParentCo from April 1, 2013 to November 2016. Mr. Oplinger joined ParentCo in 2000, and through 2013 held key corporate positions in financial analysis and planning and also served as Director of Investor Relations. Mr. Oplinger also held keyprincipal positions in the ParentCo’s Global Primary Products business,GPP division, including as Controller, Operational Excellence Director, Chief Financial Officer, and Chief Operating Officer.
Tómas M. Sigurðsson, 49, is Executive Vice President and Chief Operating Officer of Alcoa Corporation. Mr. Sigurðsson served as Chief Operating Officer of ParentCo’s Global Primary Products business from 2014 to November 2016. Mr. Sigurðsson was President of ParentCo’s European Region and Global Primary Products Europe from 2012 to 2014. From 2004 to 2011, Mr. Sigurðsson was Managing Director of Alcoa Iceland.
Leigh Ann Fisher, 50, is52, has served as Executive Vice President and Chief Administrative Officer overseeingsince November 2016. She has responsibility for the Human Resources, Shared Services, Procurement and Information Technology functions of Alcoa Corporation. Ms. Fisher served as Chief Financial Officer of ParentCo’s Global Primary Products businessGPP division from July 2013 to November 2016.
Ms. Fisher was Group Controller for Global Primary ProductsGPP at ParentCo from 2011 to July 2013. From 2008 to 2011, Ms. Fisher was Group Controller for ParentCo’s Engineered Products and Solutions business.division. Ms. Fisher joined ParentCo in 1989.
Jeffrey D. Heeter, 51, is53, has served as Executive Vice President, General Counsel and Secretary of Alcoa Corporation.Corporation since November 2016. Mr. Heeter served as Assistant General Counsel of ParentCo from 2014 to November 2016. Mr. Heeter was Group Counsel for Global Primary ProductsGPP at ParentCo from 2010 to 2014. From 2008 to 2010, Mr. Heeter was General Counsel of Alcoa of Australia in Perth, Australia. Mr. Heeter joined ParentCo in 1998.
John D. SlavenMolly S. Beerman, 53,57, has beenserved as Executive Vice President and ControllerChief Strategy Officer of Alcoa Corporation, responsible for the Strategy, Corporate and Business Development functions and Supply Chain group, since Decemberhe joined Alcoa on February 4, 2019. From 2006 until 2019, Mr. Slaven was Partner and Managing Director at the Boston Consulting Group, where he most recently led the North American Metals and Mining; Infrastructure and Public Transport practices. Prior to this time, from 2002 through early 2006, Mr. Slaven worked for ParentCo, where he implemented its Asia growth strategy, revitalized the Latin America business, and led ParentCo’s sales and marketing growth in Asia before returning to New York to lead the corporate strategy, financial planning, and analysis functions.
Garret J. Dixon, 60, has served as President of Alcoa Corporation’s Bauxite business unit since November 2016 and is responsible for the Company’s global bauxite operations. Mr. Dixon served as President Alcoa Bauxite of ParentCo from February 2013, when he joined ParentCo, to November 2016 and as President of ParentCo’s Mining business from 2015 until November 2016. Ms. Beerman previouslyFrom July 2011 until February 2013, Mr. Dixon served as the Vice President Business Development at Aurizon (previously QR National Ltd), a publicly-listed rail freight company in Australia. Prior to this time, Mr. Dixon served as the Chief Executive Officer and Managing Director Global Shared Services Strategy and Solutions forof Gindalbie Metals Ltd., an Australian resources company based in Perth.
Michael A. Parker, 47, has served as President of Alcoa Corporation, with responsibilityCorporation’s Alumina business unit since November 2016, responsible for the strategy, planningCompany’s global alumina portfolio. He also serves as the Chairman and implementationManaging Director of transformation activitiesAlcoa of Australia. Mr. Parker served as Vice President Commercial for Alcoa Corporation’s shared services organization beginning inParentCo’s global alumina refining business from September 2015 until November 2016. From January 2010 through OctoberAugust 2015, Mr. Parker was Director, Business Development and Marketing for Alcoa of 2016, prior toAustralia, responsible for sales, marketing, business development, and energy strategy for the Company’s Separation Transaction from ParentCo, Ms. Beerman was a consultant to ParentCo’s finance department and provided services in support of the Separation Transaction. From 2012 to 2015, she served as Vice President, Finance and Administration for a non-profit organization focused on community issues. Ms. Beerman firstAustralian operations. Mr. Parker joined ParentCo in 2001,1994.
Timothy D. Reyes, 52, has served as President of Alcoa Corporation’s Aluminum business unit since March 2017. Mr. Reyes was President, Alcoa Cast Products from November 2016 until March 2017, when the aluminum smelting, cast products and rolled products businesses, along with the majority of the energy segment assets, were combined into a new Aluminum business unit. From January 2015 to November 2016, he served as President, Alcoa Cast Products of ParentCo. Prior to this time, Mr. Reyes was President of Alcoa Materials Management, a subsidiary of ParentCo, from September 2009 until December 2014, responsible for the director ofcommercial activities related to primary metals, alumina, and bauxite within ParentCo’s GPP group, and commodity price risk management and global procurement center of excellence from 2008 to 2012.transportation services for ParentCo.
Alcoa’s business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm its business, financial condition or results of operations, including causing Alcoa’s actual results to differ materially from those
projected in any forward-looking statements. The following list of significant risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to Alcoa or that Alcoa currently deems immaterial also may materially adversely affect us in future periods. See the discussion under “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
Risks Related to Our BusinessCompany
The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of factors, including global economic conditions.Global Operational Risks
The aluminum industry generally is highly cyclical, and we are subject to cyclical fluctuations in global economic conditions and aluminum end-use markets. The demand for aluminum is sensitive to, and quickly impacted by, demand for the finished goods manufactured by our customers in industries that are cyclical, such as the commercial construction and transportation, automotive, and aerospace industries, which may change as a result of changes in the global economy, currency exchange rates, energy prices or other factors beyond our control. The demand for aluminum is highly correlated to economic growth. For example, the European sovereign debt crisis that began in late 2009 had an adverse effect on European demand for aluminum and aluminum products. The Chinese market is a significant source of global demand for, and supply of, commodities, including aluminum. A sustained slowdown in China’s economic growth and aluminum demand, or a significant slowdown in other markets, that is not offset by decreases in supply of aluminum or increased aluminum demand in emerging economies, such as India, Brazil, and several South East Asian countries, could have an adverse effect on the global supply and demand for aluminum and aluminum prices.
While we believe the long-term prospects for aluminum and aluminum products are positive, we are unable to predict the future course of industry variables or the strength of the global economy and the effects of government intervention. Negative economic conditions, such as a major economic downturn, a prolonged recovery period, a downturn in the commodity sector, or disruptions in the financial markets, could have a material adverse effect on our business, financial condition or results of operations.
While the aluminum market is often the leading cause of changes in the alumina and bauxite markets, those markets also have industry-specific risks including, but not limited to, global freight markets, energy markets, and regional supply-demand imbalances. The aluminum industry specific risks can have a material effect on profitability for the alumina and bauxite markets.
We could be materially adversely affected by declines in aluminum prices, including global, regional and product-specific prices.
The overall price of primary aluminum consists of several components: (i) the underlying base metal component, which is typically based on quoted prices from the LME; (ii) the regional premium, which comprises the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for metal sold in the United States); and (iii) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., coil, billet, slab, rod, etc.) or alloy. Each of the above three components has its own drivers of variability. The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including expectations for growth and contraction and the level of global inventories), and trading activity of financial investors. An imbalance in global supply and demand of aluminum, such as decreasing demand without corresponding supply declines, could have a negative impact on aluminum pricing. Speculative trading in aluminum and the influence of hedge funds and other financial institutions participating in commodity markets have also increased in recent years, contributing to higher levels of price volatility. In 2016, the cash LME price of aluminum reached a high of $1,777 per metric ton and a low of $1,453 per metric ton. High LME inventories, or the release of substantial inventories into the market, could lead to a reduction in the price of aluminum. Declines in the LME price have had a negative impact on our results of operations. Additionally, our results could be adversely affected by decreases in regional premiums that participants in the physical metal market pay for immediate delivery of aluminum. Regional premiums tend to vary based on the supply of and
demand for metal in a particular region and associated transportation costs. LME warehousing rules and surpluses have caused regional premiums to decrease, which would have a negative impact on our results of operations. Product premiums generally are a function of supply and demand for a given primary aluminum shape and alloy combination in a particular region. Periods of industry overcapacity may also result in a weak aluminum pricing environment. A sustained weak LME aluminum pricing environment, deterioration in LME aluminum prices, or a decrease in regional premiums or product premiums could have a material adverse effect on our business, financial condition, and results of operations or cash flow.
Most of our alumina contracts contain two pricing components: (1) the API price basis and (2) a negotiated adjustment basis that takes into account various factors, including freight, quality, customer location and market conditions. Because the API component can exhibit significant volatility due to market exposure, revenue associated with our alumina operations are exposed to market pricing. Our bauxite-related contracts are typically one to two-year contracts with very little, if any, market exposure; however, we intend to enter into long-term bauxite contracts and therefore, our revenue associated with our bauxite operations may become further exposed to market pricing.
Changes to LME warehousing rules could cause aluminum prices to decrease.
Since 2013, the LME has been engaged in a program aimed at reforming the rules under which registered warehouses in its global network operate. The initial rule changes took effect on February 1, 2015. Additional changes occurred throughout 2015 and 2016, culminating in an increased minimum daily load-out rate and caps on warehouse charges. These rule changes, and any subsequent changes the exchange chooses to make, could impact the supply/demand balance in the primary aluminum physical market and may impact regional delivery premiums and LME aluminum prices. Decreases in regional delivery premiums and/or decreases in LME aluminum prices could have a material adverse effect on our business, financial condition, and results of operations or cash flow.
We may not be able to realize the expected benefits from our strategy of creating a lower cost, competitive commodity business by optimizing our portfolio.
We are continuing to execute a strategy of creating a lower cost, competitive integrated aluminum production business by optimizing our portfolio. We are creating a competitive standalone business by taking decisive actions to lower the cost base of our upstream operations, including closing, selling or curtailing high-cost global smelting capacity, optimizing alumina refining capacity, and pursuing the sale of our interest in certain other operations.
We have made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow or streamline our portfolio. There is no assurance that anticipated benefits of our strategic actions will be realized. With respect to portfolio optimization actions such as divestitures, curtailments and closures, we may face barriers to exit from unprofitable businesses or operations, including high exit costs or objections from various stakeholders. In addition, we may incur unforeseen liabilities for divested entities if a buyer fails to honor all commitments. Our business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including employee Separation Transaction costs, asset impairment charges and other measures. There can be no assurance that divestitures or closures will be undertaken or completed in their entirety as planned at the anticipated cost, or that such actions will be beneficial to the Company.
Market-driven balancing of global aluminum supply and demand may be disrupted by non-market forces or other impediments to production closures.
In response to market-driven factors relating to the global supply and demand of aluminum and alumina, we have curtailed or closed portions of our aluminum and alumina production capacity. Certain other industry producers have independently undertaken to reduce production as well. Reductions in production may be delayed or impaired by the terms of long-term contracts to buy power or raw materials.
The existence of non-market forces on global aluminum industry capacity, such as political pressures in certain countries to keep jobs or to maintain or further develop industry self-sufficiency, may prevent or delay the closure or curtailment of certain producers’ smelters, irrespective of their position on the industry cost curve. For example, Chinese excess capacity and increased exports from China of heavily subsidized aluminum products could materially disrupt world aluminum markets causing pricing deterioration. If industry overcapacity exists due to the disruption by such non-market forces on the market-driven balancing of the global supply and demand of aluminum, a resulting weak pricing environment and margin compression may adversely affect the operating results of the Company.
Our operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.
Our operations consume substantial amounts of energy. Although we generally expect to meet the energy requirements for our alumina refineries and primary aluminum smelters from internal sources or from long-term contracts, certain conditions could negatively affect our results of operations, including the following:
significant increases in electricity costs rendering smelter operations uneconomic;
significant increases in fuel oil or natural gas prices;
unavailability of electrical power or other energy sources due to droughts, hurricanes or other natural causes;
unavailability of energy due to local or regional energy shortages resulting in insufficient supplies to serve consumers;
interruptions in energy supply or unplanned outages due to equipment failure or other causes;
curtailment of one or more refineries or smelters due to the inability to extend energy contracts upon expiration or to negotiate new arrangements on cost-effective terms or due to the unavailability of energy at competitive rates; or
curtailment of one or more smelters due to discontinuation of power supply interruptibility rights granted to us under an interruptibility regime in place under the laws of the country in which the smelter is located, or due to a determination that such arrangements do not comply with applicable laws, thus rendering the smelter operations that had been relying on such country’s interruptibility regime uneconomic.
If events such as those listed above were to occur, the resulting high energy costs or the disruption of an energy source or the requirement to repay all or a portion of the benefit we received under a power supply interruptibility regime could have a material adverse effect on our business and results of operations.
Our global operations expose us to risks that could adversely affect our business, financial condition, operating results or cash flows.
We have operations or activities in numerous countries and regions outside the United States, including Australia, Brazil, Canada, Europe, Guinea, Suriname, and the Kingdom of Saudi Arabia. The risks associated with the Company’s global operations are subject to a number of risks, including:include:
• | economic and commercial instability risks, including those caused by sovereign and private debt default, corruption, and changes in local government laws, regulations and policies, such as those related to tariffs and trade barriers, taxation, exchange controls, employment regulations and repatriation of earnings; |
• | geopolitical risks, such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, changes to import or export regulations and fees, renegotiation or nullification of existing agreements, mining leases and permits; |
• | war or terrorist activities; |
major public health issues, such as an outbreak of a pandemic or epidemic (such as Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 virus, the Ebola virus or the Zika virus), which could cause disruptions in our operations or workforce;
difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and
• | major public health issues, such as an outbreak of a pandemic or epidemic, which could cause disruptions in our operations or workforce; |
• | difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and |
• | unexpected events, accidents, or environmental incidents, including |
While the impact of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect our business, financial condition, operating results or cash flows. Existing insurance arrangements may not provide protection for the costs that may arise from such events.
Our global operations expose us to risks related to economic and political conditions, including the impact of tariffs and sanctions, which may negatively impact our business.
We are subject to risks associated with doing business internationally, including the effects of foreign and domestic laws and regulations, foreign or domestic government fiscal and political crises, and political and economic disputes and sanctions. These factors, among others, bring uncertainty to the markets in which we compete, and may adversely affect our business, financial condition, operating results or cash flows. For example, in April 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) implemented sanctions against several Russian government officials and companies, including United Company RUSAL Plc (“Rusal”). The prospect of sanctions contributed to significant volatility in the market for aluminum and alumina, as companies, including Alcoa, take action in order to comply with the OFAC sanctions. While OFAC has since removed Rusal from the Specially Designated Nationals and Blocked Persons List (SDN), these external events created uncertainty and therefore, volatility in the markets in which we operate. Similarly, government enforcement in Brazil that resulted in disruptions in the alumina supply, as well as the impact of environmental and supply management regulatory reforms in China, could adversely impact our business and results of operations.
In the United States, the current administration has publicly supported, and in some instances has already proposed or taken action with respect to, significant changes to certain trade policies, including import tariffs and quotas, modifications to international trade policy, the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement, and other changes that may affect U.S. trade relations with other countries, any of which may require us to significantly modify our current business practices or may otherwise materially and adversely affect our business. Such changes could also result in retaliatory actions by United States’ trade partners. For example, in 2018, the United States imposed tariffs and proposed quotas on aluminum imports to the United States. These actions and the possibility of trade conflicts stemming from these actions could negatively impact global trade and economic conditions in many of the regions where we do business. For example, certain foreign governments, including China, have proposed the imposition of additional tariffs on certain exports from the United States. This could further exacerbate aluminum and alumina price increases and overall market uncertainty.
Our global operations expose us to various legal and regulatory systems, and changes in conditions beyond our control in foreign countries.
In addition to the business risks inherent in operating outside the United States, legal and regulatory systems may be less developed and predictable and the possibility of various types of adverse governmental action more pronounced. Unexpected or uncontrollable events or circumstances in any of these foreign markets, including actions by foreign governments such as changes in fiscal regimes, termination of our agreements with such foreign governments, or increased government regulation, or forced curtailment of operations could materially and adversely affect our business, financial condition, results of operations or cash flows.
Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, or the cyclical nature of their businesses, could adversely impact our revenues and profitability by reducing demand and margins.
Our results of operations may be materially affected by the conditions in the global economy generally and in global capital markets. There has been extreme volatility in the capital markets and in the end markets and geographic regions in which we or our customers operate, which has negatively affected our revenues. Many of the markets in which our customers participate are also cyclical in nature and experience significant fluctuations in demand for our products based on economic conditions, consumer demand, raw material and energy costs, and government actions. Many of these factors are beyond our control.
Substantial changesA decline in consumer and business confidence and spending, severe reductions in the availability and cost of credit, and volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We are also exposed to fiscal, taxrisks associated with the creditworthiness of our suppliers and trade policiescustomers. If the availability of credit to fund or support the continuation and legislationexpansion of our customers’ business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. These conditions and a disruption of the credit markets could also result in financial condition,instability of some of our suppliers and resultscustomers. The consequences of operations.
Executivesuch adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials we purchase, and legislative actions, including changes in fiscal, tax and trade policies, may adversely affect our business. At this time it is unclear what the new U.S. administration and Congress may do with respect to these policies, regulations, and legislation. The new U.S. administration has called for substantial changes to U.S. trade policy and has raised the possibilitybankruptcy of imposing significant increases in U.S. import tariffs. Changes in international trade agreements, regulations, restrictions, and tariffs may increase our operating costs and make it more difficult for us to compete in the U.S. and overseas markets, and our business, financial condition and results of operations could be adversely impacted.
We face significant competition, which may have an adverse effect on profitability.
We compete with a variety of both U.S. and non-U.S. aluminum industry competitors. Our metals also compete with other materials, such as steel, titanium, plastics, composites, ceramics, and glass, among others. Technological advancementscustomers, suppliers or other developments by or affecting Alcoa’s competitors or customers could affect our results of operations. In addition, our competitive position depends, in part, on its ability to leverage its innovation expertise across its businesses and key end markets and having access to an economical power supply to sustain its operations in various countries. See “Business—Competition.”
Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.
Our business operations are capital intensive, and we devote a significant amount of capital to certain industries. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures. In addition, we may not realize the benefits or expected returns from announced plans, programs, initiatives and capital investments.creditors. Any of these events could adversely affect our profitability, cash flow and financial condition.
Unanticipated changes in tax laws or exposure to additional tax liabilities could affect our future profitability.
We are subject to income taxes in both the United States and various non-U.S. jurisdictions. Unanticipated changes in tax laws or regulations or exposure to additional tax liabilities could affect our future profitability. Our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect the Company’s tax expense and profitability. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions. The assumptions include assessments of future earnings of the Company that could impact the valuation of our deferred tax assets. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and profitability.rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of tax audits and examinations of previously filed tax returns or related litigation and continuing assessments of our tax exposures. Significant changes to tax laws or regulations could have a substantial impact, positive or negative, on our effective tax rate, cash tax expenditures and deferred tax assets and liabilities. For example, the Tax Cuts and Jobs Act, which was enacted in the United States on December 22, 2017, reduces the U.S. corporate statutory tax rate, eliminates or limits tax deductions for several expenses that previously were deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the Company’s financial statements for management’s assessment of the overall impact of the Tax Cuts and Jobs Act on our effective tax rate and balance sheet.
We may be exposed to significant legal proceedings, investigations or changes in foreign and/or U.S. federal, state, or local laws, regulations or policies.
Our results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to the Company. We may become subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees due to changes in laws, regulations or policies. We are also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to health and safety, environmental matters, intellectual property rights, product liability, taxes and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. We could be subject to fines, penalties or damages (in certain cases, treble damages). In addition, if we violate the terms of our agreements with governmental authorities, we may face additional monetary sanctions and such other remedies as a court deems appropriate.
While we believe we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. In addition, various factors or developments can lead the Company to change current estimates of liabilities or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the company cannot predict with certainty could have a material adverse effect on our results of operations or cash flows in a particular period. See “Item 3, Legal Proceedings” and Note R under the caption “Contingencies and Commitments—Contingencies—Litigation” to the Consolidated Financial Statements.
We are exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which we operate.
Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which we operate, and continued volatility or deterioration in the global economic and financial
environment could affect our revenues, expenses and results of operations. Changes in the valuation of the U.S. dollar against other currencies, particularly the Australian dollar, Brazilian real, Canadian dollar, Euro, and Norwegian kroner, may affect our profitability as some important inputs are purchased in other currencies, while our products are generally sold in U.S. dollars. In addition, although a strong U.S. dollar generally has a positive impact on our near-term profitability, over a longer term, a strong U.S. dollar may have an unfavorable impact on our position on the global aluminum cost curve due to the company’s U.S. smelting portfolio. As the U.S. dollar strengthens, the cost curve shifts down for smelters outside the United States but costs for our U.S. smelting portfolio may not decline.
We are subject to a broad range of health, safety and environmental laws, regulations and other requirements in the jurisdictions in which we operate that expose us to substantial costs and liabilities.
Our operations worldwide are subject to numerous complex and increasingly stringent federal, state, local and foreign laws, regulations, policies, and other requirements, including those related to health, safety, environmental, and waste management and disposal matters, and may expose us to substantial costs and liabilities associated with such laws, regulations, policies, and other requirements. These laws, regulations, policies, and other requirements could change or be applied or interpreted in ways that could (i) require us to enjoin, curtail, close or otherwise modify our operations, including the implementation of corrective measures, the installation of additional equipment, or the undertaking of other remedial actions, or (ii) subject us to enforcement risk or impose on or require us to incur additional capital expenditures, compliance or other costs, fines, or penalties, any of which could adversely affect our results of operations, cash flows and financial condition, and the trading price of our common stock.
The costs of complying with such laws, regulations, policies and other requirements, including participation in assessments, remediation activities, and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that caused the contamination was lawful at the time it was conducted. Environmental matters for which we may be liable may arise in the future at our present sites, where no problem is currently known, at previously owned sites, at sites previously operated by the Company, at sites owned by our predecessors or at sites that we may acquire in the future.
In addition, because environmental laws, regulations, policies and other requirements are constantly evolving, we will continue to incur costs to maintain compliance and such costs could increase materially. Evolving standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on our earnings and cash flows. Future compliance with environmental, health and safety legislation and other regulatory requirements may prove to be more limiting and costly than we anticipate, and may disrupt our business operations and require significant expenditures. Our results of operations or liquidity in a particular period could be materially affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites.
Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have environmental contamination or other damage, which could result in material liabilities to us.
We could be subject to claims for environmental contamination and associated liability, including fines and penalties under federal and state statutes and/or common law toxic tort doctrines and other damages, such as natural resource damages and the costs associated with the investigation and cleanup of soil, surface water, groundwater, and other media under laws such as the U.S. Comprehensive Environmental Response, Compensation and Liabilities Act (“CERCLA”, commonly known as “Superfund”) or similar foreign regulations. Such claims may arise, for example, out of current or former conditions at sites that we own or operate currently, as well as at sites that we and companies we acquired owned or operated in the past, and at contaminated sites that have always been owned or operated by third parties. Liability may be without regard to fault and may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.
In addition, our operations generate hazardous waste. Some of the hazardous waste and other byproducts from our operations we contain in tailing facilities, residue storage areas, and other structural impoundments that are subject to extensive regulation. Overtopping of storage areas caused by extreme weather events or unanticipated structural failure of impoundments could result in damage to the environment, natural resources, or property, or personal injury. These and other similar impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in civil or criminal fines or penalties and enforcement actions issued by regulatory or judicial authorities enjoining, curtailing or closing operations or requiring corrective measures, any of which could materially and adversely affect us.
Climate change, climate change legislation or regulations, extreme weather conditions, and greenhouse effects may adversely impact our operations and markets.
Energy is a significant input in a number of our operations. There is growing recognition that consumption of energy derived from fossil fuels is a contributor to global warming.
A number of governments or governmental bodies in areas of the world where we operate have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. We will likely see changes in the margins of greenhouse gas-intensive assets and energy-intensive assets as a result of regulatory impacts in the countries in which we operate. These regulatory mechanisms may be either voluntary or legislated and may impact our operations directly or indirectly through customers or our supply chain. Inconsistency of regulations may also change the attractiveness of the locations of some of the Company’s assets. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate. We may realize increased capital expenditures resulting from required compliance with revised or new legislation or regulations, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by the Company and, indirectly, from changes in costs of goods sold.
The potential physical impacts of climate change or extreme weather conditions on the Company’s operations are highly uncertain, and will be particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other natural resources, changing sea levels, changing storm patterns, increased frequency and intensities of storms, and changing temperature levels. For example, in 2017, our Trombetas mine experienced disruption to its normal operations due to separate weather events that impacted the tailing ponds (bauxite waste storage areas) and the washing plant in the first half (heavy rain) and the second half (drought conditions) of the year, respectively. Effects such as these may adversely impact the cost, production and financial performance of our operations.
Available Capital and Credit-Related Risks
Our business and growth prospects may be negatively impacted by limits in our ability to fund capital expenditures.
We require substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of our existing facilities. Insufficient cash generation or capital project overruns may negatively impact our ability to fund as planned our sustaining and return-seeking capital projects.projects, and such postponement in funding capital expenditures or inadequate funding to complete projects could result in operational issues. We may also need to address commercial and political
issues in relation to reductions in capital expenditures in certain of the jurisdictions in which we operate. If our interest in our joint ventures is diluted or we lose key concessions, our growth could be constrained. Any of the foregoing could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our capital resources may not be adequate to provide for all of our cash requirements, and we are exposed to risks associated with financial, credit, capital, and banking markets.
In the ordinary course of business, we expect to seek to access competitive financial, credit, capital and/or banking markets. Currently, we believe we have adequate access to these markets to meet our reasonably anticipated business needs based on our historic financial performance as well as our expected continuedand strong financial position. To the extent our access to competitive financial, credit, capital and/or banking markets was to be impaired, our operations, financial results and cash flows could be adversely impacted.
Deterioration in our credit profile or increases in interest rates could increase our costs of borrowing money and limit our access to the capital markets and commercial credit.
The major credit rating agencies evaluate our creditworthiness and give us specified credit ratings. These ratings are based on a number of factors, including our financial strength and financial policies as well as our strategies, operations and execution. These credit ratings are limited in scope, and do not address all material risks related to investment in us, but rather reflect only the view of each rating agency at the time the rating is issued. Nonetheless, the credit ratings we receive impact our borrowing costs as well as our access to sources of capital on terms that will be advantageous to our business. Failure to obtain sufficiently high credit ratings could adversely affect the interest rate in future financings, our liquidity or our competitive position and could also restrict our access to capital markets. In addition, our credit ratings could be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating, our borrowing costs would increase, and our funding sources could decrease. As a result of these factors, a downgrade of our credit ratings could have a materially adverse impact on our future operations and financial position.
In addition, our variable rate indebtedness may use London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for
reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness.
Our indebtedness restricts our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.
On September 16, 2016, Alcoa and Alcoa Nederland Holding B.V. (“ANHBV”), a wholly-owned subsidiary of Alcoa, entered intoare party to a revolving credit agreement with a syndicate of lenders and issuers named therein as(as subsequently amended, (thethe “Revolving Credit Agreement”). The terms of the Revolving Credit Agreement and the indentureindentures governing our notes include a number of restrictivecontain covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:
• | make investments, loans, advances, |
• | amend certain material documents; | ||
• | dispose of assets; |
• | incur or guarantee additional debt and issue certain disqualified equity interests and preferred stock; |
make certain restricted payments, including a limit on dividends on equity securities or
• | make certain restricted payments, including by limiting the amount of dividends on equity securities and payments to redeem, repurchase or retire equity securities or other indebtedness; |
• | engage in transactions with affiliates; |
• | materially alter the business we conduct; |
• | enter into certain restrictive agreements; |
• | create liens on assets to secure debt; |
consolidate, merge, sell or otherwise dispose of all or substantially all of Alcoa’s, ANHBV’s or a subsidiary guarantor’s assets; and
take any actions that would reduce our ownership of AWAC entities below an agreed level.
• | consolidate, merge, sell or otherwise dispose of all or substantially all of Alcoa’s, ANHBV’s or a subsidiary guarantor’s assets; and |
In addition, the
• | take any actions that would reduce our ownership of AWAC entities below an agreed level. |
The Revolving Credit Agreement requires us to comply with financial covenants. The Revolving Credit Agreement requires that weWe must maintain a leverage ratio no greater than 2.25 to 1.00 and an interest expense coverage ratio noof not less than 5.00 to 1.00, in each case,and a leverage ratio for any period of four consecutive fiscal quarters that is not greater than 2.50 to 1.00.
In addition, all obligations of Alcoa.
For more information on the restrictive covenants inAlcoa Corporation or a domestic entity under the Revolving Credit Agreement see Item 7 “Management’s Discussionare secured by, subject to certain exceptions, a first priority lien on substantially all assets of Alcoa Corporation and Analysisthe material domestic wholly-owned subsidiaries of Financial ConditionAlcoa Corporation and Resultscertain equity interests of Operations—Liquidityspecified non-U.S. subsidiaries. All other obligations under the Revolving Credit Facility are secured by, subject to certain exceptions, a first priority security interest in substantially all assets of Alcoa Corporation, ANHBV, the material domestic wholly-owned subsidiaries of Alcoa Corporation, and Capital Resources—Financing Activities.”
the material foreign wholly-owned subsidiaries of Alcoa Corporation located in Australia, Brazil, Canada, Luxembourg, the Netherlands, and Norway, including equity interests of certain subsidiaries that directly hold equity interests in AWAC entities. Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other opportunities. The breach of any of these covenants or restrictions could result in a default under the Revolving Credit Agreement or the indenture governing our notes.
For more information on the restrictive covenants in the Revolving Credit Agreement, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”
Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our business, financial condition, results of operations or cash flows.
If there were an event of default under any of the agreements relating to our outstanding indebtedness, including the Revolving Credit Agreement and the indenture governing our notes, we may not be able to incur additional indebtedness under the Revolving Credit Agreement and the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, which could have a material
adverse effect on our ability to continue to operate as a going concern. Further, if we are unable to repay, refinance or restructure our secured indebtedness, the holders of such indebtedness could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument also could result in an event of default under one or more of our other debt instruments.
We may not realize expected benefits from our productivity and cost-reduction initiatives.Cybersecurity Risks
We have undertaken, and may continue to undertake, productivity and cost-reduction initiatives to improve performance and conserve cash, including procurement strategies for raw materials, labor productivity, improving operating performance, deployment of Company-wide business process models, such as our degrees of implementation process in which ideas are executed in a disciplined manner to generate savings, and overhead cost reductions. There is no assurance that these initiatives will be successful or beneficial to us or that estimated cost savings from such activities will be realized.
Cyber attacksCyber-attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information, disrupt our business operations, expose us to potential liability, and result in reputational harm and other negative consequences that could have a material adverse effect on our financial condition and results of operations.
We face global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures, known as advanced persistent threats, directed at the Company. Cyber attacksCyber-attacks and other cyber incidents are occurring more frequently, are constantly evolving in nature, are becoming more sophisticated, and are being made by groups and individuals with a wide range of expertise and motives. Cyber-attacks and security breaches may include, but are not limited to, attempts to access information or digital infrastructure, computer viruses, denial of service and other electronic security breaches.
We believe that we face a heightened threat of cyber attackscyber-attacks due to the industries we serve and the locations of our operations. We have experienced cybersecurity attacks in the past, including breaches of our information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date, past attacks have not had a material impact on our financial condition
or results of operations. However, dueDue to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While the Company continually works to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attackscyber-attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition and results of operations. Such security breaches could also result in a violation of applicable U.S. and international privacy and other laws, and subject us to private consumer, business partner, or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, the General Data Protection Regulation (GDPR) became effective in the European Union in May 2018 and subjects companies to a range of new compliance obligations regarding the handling of personal data. In the event our operations are found to be in violation of the GDPR’s requirements, we may be subject to significant civil penalties, business disruption and reputational harm, any of which could have a material adverse effect on our business.
In addition, such attackscyber-attacks or breaches could require significant management attention and resources, and result in the diminution of the value of our investment in research and development.
Our profitability could Furthermore, while we have disaster recovery and business continuity plans in place, if our information technology systems are damaged, breached or cease to function properly for any reason, including the poor performance of, failure of or cyber-attack on third-party service providers, catastrophic events, power outages, cyber-security breaches, network outages, failed upgrades or other similar events and, if the disaster recovery and business continuity plans do not effectively resolve such issues on a timely basis, we may suffer interruptions in our ability to manage or conduct business as well as reputational harm, and may be subject to governmental investigations and litigation, any of which may adversely affected by increases in the cost of raw materials, by significant lag effects of decreases in commodity or LME-linked costs or by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts.
Ourimpact our business, results of operations, are affected by changes incash flows and financial condition.
Employee- and Pension-Related Risks
Loss of key personnel may adversely affect our business.
Our success greatly depends on the costperformance of raw materials, including energy, carbon products, caustic soda andour executive management team. The loss of the services of any member of our executive management team or other key inputs, as well as freight costs associated with transportation of raw materials to refining and smelting locations. We may not be able to fully offset the effects of higher raw material costs or energy costs through price increases, productivity improvements or cost reduction programs. Similarly, our operating results are affected by significant lag effects of declines in key costs of production that are commodity or LME-linked. For example, declines in the costs of alumina and power during a particular period may not be adequate to offset sharp declines in metal price in that period. We could also be adversely affected by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts. Increases in the cost of raw materials or decreases in input costs that are disproportionate to concurrent sharper decreases in the price of aluminum, or shifts in global inventory of aluminum that result in changes to market prices,persons could have a material adverse effect on our operatingbusiness, results of operations and financial condition.
Union disputes and other employee relations issues could adversely affect our financial results.
Joint venturesA significant portion of our employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. See “Business—Employees.” Union disputes and other strategic alliancesemployee relations issues could adversely affect our financial results. We may not be successful.
We participate in joint ventures and have formed strategic alliances andable to satisfactorily renegotiate collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may enter into other similar arrangementsnot prevent a strike or work stoppage at our facilities in the future. For example, AWAC is an unincorporated global joint venture between Alcoa and Alumina Limited. AWAC consists of a number of affiliated entities, which own, operateWe may also be subject to general country strikes or have an interest in, bauxite mines and alumina refineries, as well as an aluminum smelter, in seven countries. In addition, Alcoa Corporation is party to a joint venture with Ma’aden, the Saudi Arabian Mining Company, to develop a fully integrated aluminum complex (including a bauxite mine, alumina refinery, aluminum smelter and rolling mill) in the Kingdom of Saudi Arabia. Although the Company has, in connection with these and our other existing joint ventures and strategic alliances, sought to protect our interests, joint ventures and strategic alliances inherently involve special risks. Whether or not the Company holds majority interests or maintains operational control in such arrangements, our partners may:
have economic or business interests or goals that are inconsistent with or opposed to those of the Company;
exercise veto rights so as to block actions that we believe to be in our or the joint venture’s or strategic alliance’s best interests;
take action contrarywork stoppages unrelated to our policies or objectives with respect to our investments; or
as a result of financial or other difficulties, be unable or unwilling to fulfill their obligations under the joint venture, strategic alliance or other agreements, such as contributing capital to expansion or maintenance projects.
There can be no assurance that our joint ventures or strategic alliances will be beneficial to us, whether due to the above-described risks, unfavorable global economic conditions, increases in construction costs, currency fluctuations, political risks, or other factors.
We could be adversely affected by changes in the business or financial conditioncollective bargaining agreements. A labor dispute or work stoppage of employees covered by collective bargaining agreements could have a significant customermaterial adverse effect on production at one or joint venture partner.
A significant downturn or deterioration inmore of our facilities, and depending on the business or financial conditionlength of a key customer or joint venture partner could affect our results of operations in a particular period. Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products or other difficulties in their businesses. If we are not successful in replacing business lost from such customers, profitability may be adversely affected. Our joint venture partners could be rendered unable to contribute their share of operating or capital costs, having an adverse impactwork stoppage, on our business.financial results.
Customer concentration and supplier capacity in the Rolled Products segment could adversely impact margins.
Our Rolled Products segment primarily serves the North American aluminum food and beverage can and bottle markets. Four aluminum can and bottle manufacturers comprise over 90% of the aluminum beverage can and bottle market; Rolled Products competes with both domestic and foreign sheet rolling mills to supply these manufacturers. In this segment, customers tend to sign multiple year supply contracts for the vast majority of their requirements. Our customer mix reflects industry concentrations and norms; loss of existing customers or renegotiated pricing on new contracts could adversely affect both operating levels and profitability.
An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and other factors could affect our results of operations or amount of pension funding contributions in future periods.
Our results of operations may be negatively affected by the amount of expense we record for our pension and other post-retirement benefit plans, reductions in the fair value of plan assets, and other factors. We calculate income or expense for our plans using actuarial valuations in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions used by the Company to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, the Company is required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to stockholders’ equity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” and Note N to the Consolidated Financial Statements under the caption “Pension and Other Postretirement Benefits.” Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the amount of cash or securities we would contribute to the pension plans.
Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve the plans’ funded status. The Moving Ahead for Progress in the 21st Century Act(“MAP-21”), enacted in 2012, provided temporary relief for employers like the Company who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a 25-year average discount rate within an upper and lower range for purposes of determining minimum funding obligations. In 2014, the Highway and Transportation Funding Act (“HATFA”) was signed into law. HATFA extended the relief provided by MAP-21 and modified the interest rates that had been set by MAP-21. In 2015, the Bipartisan Budget Act of 2015 (“BBA 2015”) was enacted, which extends the relief period provided by HAFTA. We believe that the relief provided by BBA 2015 will moderately reduce the cash flow sensitivity of the Company’s U.S. pension plans’ funded status to potential declines in discount rates over the next several years. However, higherHigher than expected pension contributions due to a decline in the plans’ funded status as a result of declines in the discount rate or lower-than-expected investment returns on plan assets could have a material negative effect on our cash flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase our liabilities related to such plans, adversely affecting our liquidity and results of operations.
We are exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which we operate.Limited Operating History Risks
Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which we operate, and continued volatility or deterioration in the global economic and financial environment could affect our revenues, expenses and results of operations. Changes in the valuation of the U.S. dollar against other currencies, particularly the Australian dollar, Brazilian real, Canadian dollar, Euro and Norwegian kroner, may affect our profitability as some important inputs are purchased in other currencies, while our products are generally sold in U.S. dollars. In addition, although a strong U.S. dollar generally has a positive impact on our near-term profitability, over a longer term, a strong U.S. dollar may have an unfavorable impact on our position on the global aluminum cost curve due to the company’s U.S. smelting portfolio. As the U.S. dollar strengthens, the cost curve shifts down for smelters outside the United States but costs for our U.S. smelting portfolio may not decline.
Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers’ businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.
Our results of operations may be materially affected by the conditions in the global economy generally and in global capital markets. There has been extreme volatility in the capital markets and in the end markets and geographic regions in which we or our customers operate, which has negatively affected our revenues. Many of the markets in which our customers participate are also cyclical in nature and experience significant fluctuations in demand for our products based on economic conditions, consumer demand, raw material and energy costs, and government actions. Many of these factors are beyond our control.
A decline in consumer and business confidence and spending, together with severe reductions in the availability and cost of credit, as well as volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We are also exposed to risks associated with the creditworthiness of our suppliers and customers. If the availability of credit to fund or support the continuation and expansion of our customers’ business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. These conditions and a disruption of the credit markets could also result in financial instability of some of our suppliers and customers. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials we purchase, and bankruptcy of customers, suppliers or other creditors. Any of these events could adversely affect our profitability, cash flow and financial condition.
Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our future profitability.
We are subject to income taxes in both the United States and various non-U.S. jurisdictions. Our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect the company’s tax expense and profitability. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions. The assumptions include assessments of future earnings of the company that could impact the valuation of our deferred tax assets. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of tax audits and examinations of previously filed tax returns or related litigation and continuing assessments of our tax exposures. Corporate tax reform and tax law changes
continue to be analyzed in the United States and in many other jurisdictions. Significant changes to the U.S. corporate tax system in particular could have a substantial impact, positive or negative, on our effective tax rate, cash tax expenditures and deferred tax assets and liabilities.
We may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.
Our results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to the Company. We may become subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees due to changes in laws, regulations or policies. We are also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to product liability, health and safety, environmental matters, intellectual property rights, government contracts, taxes and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. We could be subject to fines, penalties, damages (in certain cases, treble damages), or suspension or debarment from government contracts. In addition, if we violate the terms of our agreements with governmental authorities, we may face additional monetary sanctions and such other remedies as a court deems appropriate.
While we believe we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. In addition, various factors or developments can lead the Company to change current estimates of liabilities or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the company cannot predict with certainty could have a material adverse effect on our results of operations or cash flows in a particular period. See “Item 3, Legal Proceedings” and Note R under the caption “Contingencies and Commitments—Contingencies—Litigation” to the Consolidated Financial Statements.
We are subject to a broad range of health, safety and environmental laws and regulations in the jurisdictions in which we operate and may be exposed to substantial costs and liabilities associated with such laws and regulations.
Our operations worldwide are subject to numerous complex and increasingly stringent health, safety and environmental laws and regulations. The costs of complying with such laws and regulations, including participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that caused the contamination was lawful at the time it was conducted. Environmental matters for which we may be liable may arise in the future at our present sites, where no problem is currently known, at previously owned sites, at sites previously operated by the Company, at sites owned by our predecessors or at sites that we may acquire in the future. Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. Our results of operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.
Climate change, climate change legislation or regulations and greenhouse effects may adversely impact our operations and markets.
Energy is a significant input in a number of our operations. There is growing recognition that consumption of energy derived from fossil fuels is a contributor to global warming.
A number of governments or governmental bodies in areas of the world where we operate have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. We will likely see changes in the margins of greenhouse gas-intensive assets and energy-intensive assets as a result of regulatory impacts in the countries in which we operate. These regulatory mechanisms may be either voluntary or legislated and may impact our operations directly or indirectly through customers or our supply chain. Inconsistency of regulations may also change the attractiveness of the locations of some of the Company’s assets. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate. We may realize increased capital expenditures resulting from required compliance with revised or new legislation or regulations, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by the Company and, indirectly, from changes in costs of goods sold.
The potential physical impacts of climate change on the Company’s operations are highly uncertain, and will be particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other natural resources, changing sea levels, changing storm patterns and intensities, and changing temperature levels. These effects may adversely impact the cost, production and financial performance of our operations.
Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have environmental contamination, which could result in material liabilities to us.
We may be subject to claims under federal and state statutes and/or common law doctrines for toxic torts and other damages as well as for natural resource damages and the investigation and clean-up of soil, surface water, groundwater, and other media under laws such as the federal Comprehensive Environmental Response, Compensation and Liabilities Act (CERCLA, commonly known as Superfund). Such claims may arise, for example, out of current or former conditions at sites that we own or operate currently, as well as at sites that we and companies we acquired owned or operated in the past, and at contaminated sites that have always been owned or operated by third parties. Liability may be without regard to fault and may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.
These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect us.
Loss of key personnel may adversely affect our business.
Our success greatly depends on the performance of our executive management team. The loss of the services of any member of our executive management team or other key persons could have a material adverse effect on our business, results of operations and financial condition.
Union disputes and other employee relations issues could adversely affect our financial results.
A significant portion of our employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. See “Business—Employees.” We may not be able to satisfactorily renegotiate collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future. We may also be subject to general country strikes or work stoppages unrelated to our business or collective bargaining agreements. Any such work stoppages (or potential work stoppages) could have a material adverse effect on our financial results.
Risks Related to the Separation Transaction
We have only operated as an independent company since November 1, 2016, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company during the time periods represented and may not be a reliable indicator of our future results.
The historical information about Alcoa Corporation in this report refers to Alcoa Corporation’s businesses as operated by and integrated with ParentCo prior to November 1, 2016. OurSome of the historical financial information included in this report is derived from the consolidated financial statements and accounting records of ParentCo. Accordingly, the historical financial information relating to 2016 and fourth quarter and fiscal year financial informationearlier years included in this report does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during thethose particular periods presented or those that we will achieve in the future primarily as a result of the factors described below:
Generally, our working capital requirements and capital for our general corporate purposes, including capital expenditures and acquisitions, have historically been satisfied as part of the corporate-wide cash management policies of ParentCo. Following the completion of the Separation Transaction, our results of operations and cash flows are likely to be more volatile and we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly.
Prior to the Separation Transaction, our business was operated by ParentCo as part of its broader corporate organization, rather than as an independent company. ParentCo or one of its affiliates performed various corporate functions for us, such as legal, treasury, accounting, auditing, human resources, investor relations, and finance. Our historical financial results reflect allocations of corporate expenses from ParentCo for such functions, which are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.
Historically, we shared economies of scope and scale in costs, employees, vendor relationships and customer relationships with the other businesses of ParentCo. While we have sought to separate these arrangements with minimal impact on Alcoa, there is no guarantee these arrangements will continue to capture these benefits in the future.
Prior to the Separation Transaction, as a part of ParentCo, we took advantage of ParentCo’s overall size and scope to procure more advantageous distribution arrangements, including shipping costs and arrangements. As now a standalone company, we may be unable to obtain similar arrangements to the same extent as ParentCo did, or on terms as favorable as those ParentCo obtained, prior to completion of the Separation Transaction.
The cost of capital for our business may be higher than ParentCo’s cost of capital prior to the Separation Transaction.
Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from ParentCo. For additional information about the past financial performance of our business and the basis of presentation of the historical consolidated financial statements, see “Selected Financial Data of Alcoa Corporation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this report.
We may not achieve some or all of the expected benefits of the Separation Transaction, and failure to realize such benefits in a timely manner may materially adversely affect our business.
We may not be able to achieve the full strategic and financial benefits expected to result from the Separation Transaction, or such benefits may be delayed or not occur at all. The Separation Transaction was expected to provide various benefits, including enabling each company to more effectively pursue its own distinct operating priorities and
strategies, to focus on its core business, and to pursue distinct and targeted opportunities for long-term growth and profitability, including capital structures and capital allocation strategies. We may not achieve these and other anticipated benefits for a variety of reasons, including that we may be more susceptible to market fluctuations, including fluctuations in commodities prices than if we were still a part of ParentCo because our business is less diversified than ParentCo’s business prior to the Separation Transaction, we may be unable to obtain certain goods, services and technologies at prices or on terms as favorable as those ParentCo obtained prior to the Separation Transaction, and the Separation Transaction required and may continue to require Alcoa to pay costs that could be substantial and material to our financial resources. If we fail to achieve some or all of the benefits expected to result from the Separation Transaction, or if such benefits are delayed, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
The costs incurred with respect to the Separation Transaction may not yield the expected benefits, which could disrupt or adversely affect our business.
The process of completing the Separation Transaction was time-consuming and involved significant costs and expenses. For example, for the first ten months of 2016, ParentCo recorded nonrecurring Separation Transaction costs of $152 million, of which $68 million was allocated to the Company, which costs were primarily related to third-party consulting, contractor fees and other incremental costs directly associated with the Separation Transaction process. The Separation Transaction costs may not yield a discernible benefit if the expected benefits of the Separation Transaction are not realized. Executing the Separation Transaction also required significant amounts of management’s time and effort, which diverted management’s attention from operating and growing our business. Other challenges associated with effectively executing and implementing the Separation Transaction include attracting, retaining and motivating employees; addressing disruptions to our supply chain, manufacturing and other operations resulting from separating ParentCo into two large but independent companies; separating ParentCo’s information systems; and establishing a new brand identity in the marketplace. We have incurred, as a result of the Separation Transaction, both one-time and ongoing costs and expenses. These increased costs and expenses arose and may continue to arise from various factors, including financial reporting, costs associated with complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”), tax administration, and legal and human resources related functions), and it is possible that these costs will be material to our business.
Challenges in the commercial and credit environment may adversely affect our future access to capital.
Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or other significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets. These conditions may adversely affect our ability to obtain and maintain investment grade credit ratings.
Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we are and will be subject as a standalone publicly traded company.
Our financial results previously were included within the consolidated results of ParentCo, and we believe that our reporting and control systems were appropriate for those of subsidiaries of a public company. However, we were not directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a standalone, publicly traded company, we are directly subject to reporting and other obligations under the Exchange Act, and will be subject to the requirements of Section 404 of Sarbanes-Oxley, which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing these assessments, beginning with our Annual Report on Form 10-K for the year ended December 31, 2017. These reporting and other obligations will place significant demands on our management and administrative and operational resources, including accounting resources.
Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, require the hiring of additional finance, accounting and other personnel, entail
substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, adequate internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could cause the market value of our common stock to decline.
Arconic may fail to perform under various transaction agreements that were executed as part of the Separation Transaction or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.
In connection with the Separation Transaction, Alcoa Corporation and Arconic entered into the separation and distribution agreement and also entered into various other agreements, including a transition services agreement, a tax matters agreement, an employee matters agreement, a stockholder and registration rights agreement with respect to Arconic’s continuing ownership of Alcoa common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement relating to the North American packaging business. The separation and distribution agreement, the tax matters agreement and the employee matters agreement, together with the documents and agreements by which the internal reorganization was effected, determined the allocation of assets and liabilities between the companies following the Separation Transaction for those respective areas and included any necessary indemnifications related to liabilities and obligations. The separation and distribution agreement also provides that Alcoa will pay over to Arconic the proceeds in respect of the sale of Alcoa’s Yadkin hydroelectric project. The transition services agreement provides for the performance of certain services by each company for the benefit of the other for a period of time after the Separation Transaction. Alcoa will rely on Arconic to satisfy its performance and payment obligations under these agreements. If Arconic is unable or unwilling to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties and/or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once certain transaction agreements expire, we may not be able to operate our business effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that ParentCo provided to us. However, we may not be successful in implementing these systems and services, we may incur additional costs in connection with, or following, the implementation of these systems and services, and we may not be successful in transitioning data from ParentCo’s systems to ours.
In connection with our Separation Transaction from ParentCo, Arconic has agreed to indemnify us for certain liabilities and we have agreed to indemnify Arconic for certain liabilities. If we are required to pay under these indemnities to Arconic, ourliabilities which could negatively impact financial results could be negatively impacted. The Arconicif indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which Arconic will be allocated responsibility, and Arconic may not be able to satisfy its indemnification obligationsarise in the future.
Pursuant toIn connection with the separation and distribution agreement and certain other agreements with ParentCo,Separation Transaction, Arconic has agreed to indemnify us for certain liabilities, and we have agreed to indemnify Arconic for certain liabilities, in each case for uncapped amounts, as discussed further in “Certain Relationships and Related Party Transactions.”amounts. Indemnities that we may be required to provide Arconic are not subject to any cap, may be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any of the liabilities that Arconic has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operating business. Further, the indemnity from Arconic may not be sufficient to protect us against the full amount of such liabilities, and Arconic may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Arconic any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.
Business Strategy Risks
We may be held liable to Arconic if we fail to perform certain services under the transition services agreement, and the performance of such services may negatively impact our business and operations.
Alcoa Corporation and Arconic entered into a transition services agreement in connection with the Separation Transaction pursuant to which Alcoa and Arconic provide each other, on an interim, transitional basis, various services, including, but not limited to, employee benefits administration, specialized technical and training services and access to certain industrial equipment, information technology services, regulatory services, continued industrial site remediation and closure services on discrete projects, project management services for certain equipment installation and decommissioning projects, general administrative services and other support services. If we do not satisfactorily perform our obligations under the agreement, we may be held liable for any resulting losses suffered by Arconic, subject to certain limits. In addition, during the transition services periods, our management and employees may be required to divert their attention away from our business in order to provide services to Arconic, which could adversely affect our business.
We may not be able to engage in desirable capital-raisingrealize the expected benefits from our strategy of creating a lower cost, competitive commodity business by optimizing our portfolio.
We are continuing to execute a strategy of creating a lower cost, competitive integrated aluminum production business by implementing productivity and cost-reduction initiatives, and optimizing our portfolio of assets. We are taking decisive
actions to lower the cost base of our operations, including through procurement strategies for raw materials, labor productivity, improving operating performance, deploying Company-wide business process models, reducing overhead costs, closing, selling or strategic transactions followingcurtailing high-cost global smelting capacity, optimizing alumina refining capacity, and pursuing the Separation Transaction.
Under current U.S. federal income tax law, a spin-off that otherwise qualifies for tax-free treatment can be rendered taxable to the parent corporation and its stockholders as a resultsale of certain post-spin-off transactions, including certain acquisitions of shares or assets of the spun-off corporation. To preserve the tax-free treatment of the Separation Transaction and the Distribution, and in addition to Alcoa’s indemnity obligation described above, the tax matters agreement restricts Alcoa Corporation, for the two-year period following the Distribution, except in specific circumstances, from: (i) entering into any transaction pursuant to which all or a portion of Alcoa stock would be acquired, whether by merger or otherwise, (ii) issuing equity securities beyond certain thresholds, (iii) repurchasing shares of Alcoa stock other thanour interest in certain open-market transactions, (iv) ceasingother operations. We may not be able to actively conduct certainrealize the expected benefits or cost savings from this strategy.
We have made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow or streamline our portfolio. There is no assurance that anticipated benefits of itsour strategic actions will be realized. With respect to portfolio optimization actions such as divestitures, curtailments and closures, we may face barriers to exit from unprofitable businesses or (v) takingoperations, including high exit costs or failing to take any other action that prevents the Distribution and certain related transactionsobjections from qualifying as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. These restrictions may limit our ability to pursue certain equity issuances, strategic transactions or other transactions that may maximize the value of our business. For more information, see “Certain Relationships and Related Party Transactions, and Director Independence—Tax Matters Agreement.”
The terms we will receive in our agreements with Arconic could be less beneficial than the termsvarious stakeholders. In addition, we may have otherwise received from unaffiliated third parties.
The agreements we entered into with Arconic in connection with the Separation Transaction,incur unforeseen liabilities for divested entities if a buyer fails to honor all commitments. Our business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, a stockholder and registration rights agreement with respect to Arconic’s continuing ownership of Alcoa common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement relating to the North American packaging business were prepared in the context of the Separation Transaction while Alcoa Corporation was still a wholly owned subsidiary of ParentCo. Accordingly, during the period in which the terms of those agreements were prepared, we did not have an independent Board of Directors or a management team that was independent of ParentCo. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. See “Certain Relationships and Related Party Transactions.”
If the Distribution, together with certain related transactions, does not continue to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, Arconic, Alcoa Corporation, and Arconic stockholders could be subject to significant tax liabilities and, in certain circumstances, Alcoa Corporation could be required to indemnify Arconic for material taxesasset impairment charges and other related amounts pursuant to indemnification obligations under the tax matters agreement.
It was a condition to the Distribution that (i) the private letter ruling from the Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax matters relating to the Separation Transaction and the Distribution received
by ParentCo remain valid and be satisfactory to the ParentCo Board of Directors and (ii) ParentCo receive an opinion of its outside counsel, satisfactory to the ParentCo Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). The IRS private letter ruling and the opinion of counsel were based upon and rely on, among other things, various facts and assumptions, as well as certain representations, statements and undertakings of ParentCo and Alcoa Corporation, including those relating to the past and future conduct of Arconic and Alcoa Corporation. If any of these representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if Arconic or Alcoa breaches any of its representations or covenants contained in any of the Separation Transaction–related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding receipt of the IRS private letter ruling and the opinion of counsel, the IRS could determine that the Distribution and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings upon which the IRS private letter ruling or the opinion of counsel was based are false or have been violated. In addition, the IRS private letter ruling does not address all of the issues that are relevant to determining whether the distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, and the opinion of counsel will represent the judgment of such counsel and will not be binding on the IRS or any court and the IRS or a court may disagree with the conclusions in the opinion of counsel. Accordingly, notwithstanding receipt by ParentCo of the IRS private letter ruling and the opinion of counsel, theremeasures. There can be no assurance that divestitures or closures will be undertaken or completed in their entirety as planned at the IRS will not assert that the distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposesanticipated cost, or that such actions will be beneficial to the Company.
Joint ventures and other strategic alliances may not be successful.
We participate in joint ventures and have formed strategic alliances and may enter into other similar arrangements in the future. For example, AWAC is an unincorporated global joint venture between Alcoa and Alumina Limited. AWAC consists of a court wouldnumber of affiliated entities, which own, operate or have an interest in, bauxite mines and alumina refineries, as well as an aluminum smelter, in seven countries. In addition, Alcoa is party to a joint venture with Ma’aden, the Saudi Arabian Mining Company, to develop a fully integrated aluminum complex (including a bauxite mine, alumina refinery, aluminum smelter and rolling mill) in the Kingdom of Saudi Arabia. Although the Company has, in connection with these and our other existing joint ventures and strategic alliances, sought to protect our interests, joint ventures and strategic alliances inherently involve special risks. Whether or not sustainthe Company holds majority interests or maintains operational control in such a challenge. Inarrangements, our partners may:
• | have economic, political or business interests or goals that are inconsistent with, or opposed to those of, the Company; |
• | exercise veto rights so as to block actions that we believe to be in our or the joint venture’s or strategic alliance’s best interests; |
• | take action contrary to our policies or objectives with respect to our investments; or |
• | as a result of financial or other difficulties, be unable or unwilling to fulfill their obligations under the joint venture, strategic alliance or other agreements, such as contributing capital to expansion or maintenance projects. |
There can be no assurance that our joint ventures or strategic alliances will be beneficial to us, whether due to the event the IRS were to prevail with such challenge, Arconic, Alcoa Corporation and Arconic stockholdersabove-described risks, unfavorable global economic conditions, increases in construction costs, currency fluctuations, political risks, or other factors.
We could be adversely affected by changes in the business or financial condition of a significant customer or joint venture partner.
A significant downturn or deterioration in the business or financial condition of a key customer or joint venture partner could affect our results of operations in a particular period. Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, or other difficulties in their businesses. If we are not successful in replacing business lost from such customers, profitability may be adversely affected. Our joint venture partners could be rendered unable to contribute their share of operating or capital costs, having an adverse impact on our business.
Risks Related to Our Industry
Competition Risks
We face significant competition, which may have an adverse effect on profitability.
We compete with a variety of both U.S. and non-U.S. aluminum industry competitors as well as with producers of other materials, such as steel, titanium, plastics, composites, ceramics, and glass, among others. Technological advancements or other developments by or affecting Alcoa’s competitors or customers could affect our results of operations. In addition, our competitive position depends, in part, on our ability to leverage innovation expertise across businesses and key end markets and us having access to an economical power supply to sustain our operations in various countries. See “Business—Competition.”
Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.
Our business operations are capital intensive. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures. In addition, we may not realize the benefits or expected returns from announced plans, programs, initiatives and capital investments. Any of these events could adversely affect our results of operations and profitability.
Commodity Risks
The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of factors, including global economic conditions.
The nature of the industries in which our customers operate causes demand for our products to be cyclical, creating potential uncertainty regarding future profitability. The demand for aluminum is sensitive to, and quickly impacted by, demand for the finished goods manufactured by our customers in industries, such as the commercial construction, transportation, and automotive industries, which may change as a result of changes in the global economy, currency exchange rates, energy prices or other factors beyond our control. Various changes in general economic conditions may affect the industries in which our customers operate. The demand for aluminum is highly correlated to economic growth. The Chinese market is a significant source of global demand for, and supply of, commodities, including aluminum. A sustained slowdown in Chinese aluminum demand due to slower economic growth or change in government policies, or a significant slowdown in other markets, that is not offset by decreases in supply of aluminum or increased aluminum demand in emerging economies, such as India, Brazil, and several Southeast Asian countries, could have an adverse effect on the global supply and demand for aluminum and aluminum prices. As a result of these factors, our profitability is subject to significant U.S. federal income tax liability.fluctuation.
IfWhile we believe the Distribution, together with certain related transactions, failslong-term prospects for aluminum and aluminum products are positive, we are unable to qualifypredict the future course of industry variables or the strength of the global economy and the effects of government intervention. Negative economic conditions, such as a transactionmajor economic downturn, a prolonged recovery period, a downturn in the commodity sector, or disruptions in the financial markets, could have a material adverse effect on our business, financial condition or results of operations.
While the aluminum market is often the leading cause of changes in the alumina and bauxite markets, those markets also have industry-specific risks including, but not limited to, global freight markets, energy markets, and regional supply-demand imbalances. Aluminum industry specific risks can have a material effect on profitability for the alumina and bauxite markets.
We could be materially adversely affected by declines in aluminum and alumina prices, including global, regional and product-specific prices.
The overall price of primary aluminum consists of several components: (i) the underlying base metal component, which is typically based on quoted prices from the LME; (ii) the regional premium, which comprises the incremental price over the base LME component that is generally tax-free,associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for U.S. federal income tax purposes, under Sections 355metal sold in the United States); and 368(a)(1)(D)(iii) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., coil, billet, slab, rod, etc.) or alloy. Each of the Code,above three components has its own drivers of variability.
The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including expectations for growth and contraction and the level of global inventories), and trading activity of financial investors. Furthermore, an imbalance in general,global supply and demand of aluminum, such as decreasing demand without corresponding supply declines, could have a negative impact on aluminum pricing. In 2018, cash LME pricing for U.S. federal income tax purposes, Arconic would recognize taxable gain as if italuminum experienced a significant amount of volatility, reaching a high of $2,602 per metric ton in April and a low of $1,869 per metric ton in December. High LME inventories could lead to a reduction in the price of aluminum and declines in the LME price have had solda negative impact on our results of operations. Further, in recent years, LME policies have undergone rule changes that resulted in an increased minimum daily load-out rate and caps on warehouse charges. These rule changes, and any subsequent changes the Alcoa common stockexchange chooses to make, could impact the supply/demand balance in the primary aluminum physical market and may impact regional delivery premiums and LME aluminum prices. Product premiums generally are a function of supply and demand for a given primary aluminum shape and alloy combination in a taxable saleparticular region. Periods of industry overcapacity may also result in a weak aluminum pricing environment. Regional premiums tend to vary based on the supply of and demand for its fairmetal in a particular region and associated transportation costs.
A sustained weak LME aluminum pricing environment, deterioration in LME aluminum prices, or a decrease in regional premiums or product premiums could have a material adverse effect on our business, financial condition, and results of operations or cash flow. Most of our alumina contracts contain two pricing components: (1) the API price basis, and (2) a
negotiated adjustment basis that takes into account various factors, including freight, quality, customer location and market valueconditions. Because the API component can exhibit significant volatility due to market exposure, revenue associated with our alumina operations are exposed to market pricing. Our bauxite-related contracts are typically one to two-year contracts with very little, if any, market exposure; however, we intend to enter into long-term bauxite contracts and Arconic stockholders who receive Alcoa sharestherefore, our revenue associated with our bauxite operations may become further exposed to market pricing.
Our profitability could be adversely affected by increases in the Distribution wouldcost of raw materials, by significant lag effects of decreases in commodity or LME-linked costs or by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts.
Our results of operations are affected by changes in the cost of raw materials, including energy, carbon products, caustic soda and other key inputs, as well as freight costs associated with transportation of raw materials to refining and smelting locations. We may not be subjectable to tax as if they had receivedfully offset the effects of higher raw material costs or energy costs through price increases, productivity improvements or cost reduction programs. Similarly, our operating results are affected by significant lag effects of declines in key costs of production that are commodity or LME-linked. For example, declines in the costs of alumina and power during a taxable distribution equalparticular period may not be adequate to offset sharp declines in metal price in that period. We could also be adversely affected by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts. Increases in the cost of raw materials or decreases in input costs that are disproportionate to concurrent sharper decreases in the price of aluminum, or shifts in global inventory of aluminum that result in changes to market prices, could have a material adverse effect on our operating results.
Market-driven balancing of global aluminum supply and demand may be disrupted by non-market forces.
In response to market-driven factors relating to the fair market valueglobal supply and demand of such shares.
Under the tax matters agreement that Arconic entered into with Alcoa,aluminum and alumina, we have curtailed or closed portions of our aluminum and alumina production capacity. Certain other industry producers have independently undertaken to reduce production as well. Reductions in production may be requireddelayed or impaired by the terms of long-term contracts to indemnify Arconic against any additional taxesbuy power or raw materials.
The existence of non-market forces on global aluminum industry capacity, such as political pressures in certain countries to keep jobs or to maintain or further develop industry self-sufficiency, may prevent or delay the closure or curtailment of certain producers’ smelters, irrespective of their position on the industry cost curve. For example, Chinese excess capacity and relatedincreased exports from China of heavily subsidized aluminum products could materially disrupt world aluminum markets causing pricing deterioration. If industry overcapacity exists due to the disruption by such non-market forces on the market-driven balancing of the global supply and demand of aluminum, a resulting weak pricing environment and margin compression may adversely affect the operating results of the Company.
Our operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.
Although we generally expect to meet the energy requirements for our alumina refineries and primary aluminum smelters from internal sources or from long-term contracts, certain conditions could negatively affect our results of operations, including the following:
• | significant increases in electricity costs rendering smelter operations uneconomic; |
• | significant increases in fuel oil or natural gas prices; |
• | unavailability of electrical power or other energy sources due to droughts, hurricanes or other natural causes; |
• | unavailability of energy due to local or regional energy shortages resulting in insufficient supplies to serve consumers; |
• | interruptions in energy supply or unplanned outages due to equipment failure or other causes; |
• | curtailment of one or more refineries or smelters due to the inability to extend energy contracts upon expiration or to negotiate new arrangements on cost-effective terms or due to the unavailability of energy at competitive rates; or |
• | curtailment of one or more facilities due to discontinuation of power supply interruptibility rights granted to us under an interruptibility regime in place under the laws of the country in which the facility is located, or due to a determination that energy arrangements do not comply with applicable laws, thus rendering the operations that had been relying on such country’s interruptibility regime or energy framework uneconomic. |
If events such as those listed above were to occur, the resulting from (i)high energy costs, the disruption of an acquisition ofenergy source, the requirement to repay all or a portion of the equity securities or assets of Alcoa Corporation, whether by merger or otherwise (and regardless of whether Alcoa Corporation participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by Alcoa or (iii) any of Alcoa’s representations, covenants or undertakings contained in any of the Separation Transaction-related agreements and documents or in any documents relating to the IRS private letter ruling and/benefit we received under a power supply interruptibility regime, or the opinionrequirement to remedy any non-compliance of counsel being incorrect or violated. Any such indemnity obligationsan energy framework to comply with applicable laws, could be material. Forhave a more detailed discussion, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement.” In addition, Arconic, Alcoa, and their respective subsidiaries may incur certain tax costs in connection with the Separation Transaction, including non-U.S. tax costs resulting from Separation Transactions in non-U.S. jurisdictions, which may be material.
Certain contingent liabilities allocated to Alcoa Corporation following the Separation Transaction may mature, resulting in material adverse impacts to our business.
There are several significant areas where the liabilities of ParentCo may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the ParentCo consolidated U.S. federal income tax return group during a taxable period or portion of a taxable period endingeffect on or before the effective date of the Distribution is severally liable for the entire U.S. federal income tax liability of the ParentCo consolidated U.S. federal income tax return group for that taxable period. Consequently, if Arconic is unable to pay the consolidated U.S. federal income tax liability for a pre-Separation Transaction period, we could be required to pay the amount of such tax, which could be substantial and in excess of the amount allocated to us under the tax matters agreement. For a
discussion of the tax matters agreement, see “Certain Relationships and Related Party Transactions, and Director Independence—Tax Matters Agreement.” Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.
The transfer to us of certain contracts, permits and other assets and rights may still require the consents or approvals of, or provide other rights to, third parties and governmental authorities. If such consents or approvals are not obtained, we may not be entitled to the benefit of such contracts, permits and other assets and rights, which could increase our expenses or otherwise harm our business and financial performance.results of operations.
The separationRisks Related to Stock Ownership in the Company
Actions of activist stockholders of Alcoa could be disruptive and distribution agreement providedpotentially costly, and the possibility that certain contracts, permitsactivist stockholders may contest, or seek changes that conflict with, our strategic direction could cause uncertainty about the strategic direction of our business
Activist stockholders may from time to time attempt to effect changes in our strategic direction and, other assetsin furtherance thereof, may seek changes in how Alcoa is governed. While our Board of Directors and rights aremanagement team strive to be transferred from Arconic or its subsidiaries tomaintain constructive, ongoing communications with Alcoa or its subsidiaries in connectionstockholders, including activist stockholders, and welcome their views and opinions with the Separation Transaction. The transfergoal of certainworking together constructively to enhance value for all stockholders, activist campaigns that contest, or conflict with, our strategic direction could have an adverse effect on us because: (i) responding to actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of these contracts, permitsour Board and other assets and rights may still require consents or approvalssenior management from the pursuit of third parties or governmental authorities or provide other rights to third parties. In addition, in some circumstances, we and Arconic are joint beneficiaries of contracts, and we and Arconic may need the consents of third parties in order to split or bifurcate the existing contracts or the relevant portion of the existing contracts to us or Arconic. Some parties may use consent requirements or other rights to seek to terminate contracts or obtain more favorable contractual terms from us. The termination or modification of these contracts or permits or the failure to timely complete the transfer or bifurcation of these contracts or permitsbusiness strategies, which could negatively impactadversely affect our business, financial condition, results of operations and cash flows.
Risks Relatedfinancial condition; (ii) perceived uncertainties as to Our Common Stock
Arconic owns 12,958,767 shares of our common stock. We have registered on a registration statement on Form S-1 such shares underfuture direction may cause stock price decline and lead to the termsperception of a stockholderchange in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, may result in the loss of potential business opportunities and registration rights agreement between usmake it more difficult to attract and Arconic. The saleretain qualified personnel and business partners; and (iii) these types of such sharesactions could cause significant fluctuations in one or more offerings may cause our stock price to decline.
Any sales of substantial amountsbased on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our common stock in the public market or the perception that such sales might occur, in connection with an offering by Arconic or otherwise, may cause the market price of our common stock to decline. Upon completion of an offering by Arconic of its shares, we will continue to have an aggregate of approximately 184 million shares of our common stock issued and outstanding. Shares will generally be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), except for shares owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.business.
Following the Distribution, Arconic retained approximately 19.9% of outstanding shares of our common stock, and as of March 1, 2017, it owns approximately 7.0% of outstanding shares of our common stock. Pursuant to the IRS private letter ruling, Arconic is required to dispose of such shares of our common stock that it owns as soon as practicable and consistent with its reasons for retaining such shares, but in no event later than five years after the Distribution. See “Certain Relationships and Related Party Transactions, and Director Independence—Stockholder and Registration Rights Agreement.” We have registered on a registration statement on Form S-1 such shares under the terms of a stockholder and registration rights agreement between us and Arconic. Any disposition by Arconic, or any significant stockholder, of our common stock in the public market in one or more offerings, or the perception that such dispositions could occur, could adversely affect prevailing market prices for our common stock.
Anti-takeover provisions could enable our management to resist a takeover attempt by a third party and limit the power of our stockholders, which could decrease the trading price of our common stock.
Alcoa’s amended and restated certificate of incorporation and amended bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Alcoa’s Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:
• | the inability of our stockholders to act by written consent unless |
the ability of our remaining directors to fill vacancies on our Board of Directors;
limitations on stockholders’ ability to call a special stockholder meeting;
• | the ability of our remaining directors to fill vacancies on our Board of Directors; |
• | procedural rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; and |
• | the right of our Board of Directors to issue preferred stock without stockholder approval. |
In addition, we are subject to Section 203 of the Delaware General Corporation Law (“DGCL”), which provides that, subject to limited exceptions, persons that acquire, or are affiliated with persons that acquire, more than 15% of the outstanding voting stock of a Delaware corporation may not engage in a business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or any of its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock.
We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make Alcoa immune from takeovers; however, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of Alcoa and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors. These provisions of our certificate of incorporation and bylaws, and Delaware law, that have the effect of delaying or deterring a change in control of the Company could limit the opportunity for our stockholders to receive a premium for their shares and could affect the price that some investors are willing to pay for Alcoa stock.
In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. Under the tax matters agreement, Alcoa is required to indemnify Arconic for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that our stockholders may consider favorable.
Our amended and restated certificate of incorporation designates the state courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits againstAlcoa and our directors and officers.
Our amended and restated certificate of incorporation provides that unless the Board of Directors otherwise determines, a state court located within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Alcoa, any action asserting a claim for or based on a breach of a fiduciary duty owed by any current or former director or officer of Alcoa to Alcoa or to Alcoa stockholders, any action asserting a claim against Alcoa or any current or former director or officer of Alcoa arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or bylaws, any action asserting a claim relating to or involving Alcoa governed by the internal affairs doctrine, or any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. However, if a Delaware state court dismisses any such action for lack of subject matter jurisdiction, the action may be brought in the federal court for the District of Delaware. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Alcoa or our directors or officers, which may discourage such lawsuits against Alcoa and our directors and officers. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could negatively affect our business, results of operations and financial condition.
Your percentage of ownership in Alcoa may be diluted in the future.
In the future, your percentage ownership in Alcoa may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including any equity awards that we will grant to our directors, officers and
employees. Our employees have stock-based awards that correspond to shares of our common stock as a result of conversion of their ParentCo stock-based awards. Our compensation committee has granted stock-based awards to our employees, and we anticipate that the committee will grant additional stock-based awards to our employees in the future. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.
We cannot guarantee the existence, timing, amount or payment of dividends on our common stock.
The existence, timing, declaration, amount and payment of future dividends to our stockholders falls within the discretion of our Board of Directors. The Board of Directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of our debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant. For more information, see Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividend if we commence paying dividends.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.Properties.
Alcoa Corporation’s principal executive office is located at 390 Park Avenue, New York, New York 10022-4608. Alcoa Corporation’s corporate center isoffices, located at 201 Isabella Street, Suite 500, Pittsburgh, Pennsylvania 15212-5858.15212-5858, are leased.
In addition, Alcoa leases some of its facilities; however, it is the opinion of management that the leases do not materially affect the continued use of the properties or the properties’ values.
Although our facilities vary in terms of age and condition, Alcoa believes that its facilities are suitable and adequate for its operations. Although no title examination of properties owned by Alcoa has been made for the purpose of this report, the Company knows of no material defects in title to any such properties. See Notes B and J to the financial statements for information on properties, plants and equipment.
Alcoa has active plants and holdings under the following segmentsBauxite, Alumina, and in the following geographic areas:
Bauxite—SeeAluminum segments. Please see the tables and related text in the Bauxitesection on pages 6-14 relevant sections of this report.
Alumina—See the table and related text in the Alumina section on pages 14-15 of this report.
Aluminum—See the table and related text in the Aluminumsection on pages 16-17 of this report.
Cast Products—See the table and related text in the Cast Productssection on pages 17-18 of this report.
Energy—See the table and related text in the Energy section on pages 18-21 of this report.
Rolled Products—See the text in the Rolled Productssection on pages 21-22 of this report.
In the ordinary course of its business, Alcoa is involved in a number of lawsuits and claims, both actual and potential.
Litigation
Italy 148Litigation
. Beginning in 2006, ParentCo and the Italian Energy Matter
Before 2002, ParentCo purchased powerAuthority (Autorità di Regolazione per Energia Reti e Ambiente, formerly l’Autorità per l’Energia Elettrica, il Gas e il Sistema Idrico, the “Energy Authority”) had been in Italy ina dispute regarding the regulated energy market and receivedcalculation of a drawback ofapplied to a portion of the price of power under a special tariff received by Alcoa Trasformazioni S.r.l. (“Trasformazioni,” previously a subsidiary of ParentCo; now a subsidiary of Alcoa Corporation). This dispute arose as a result of a resolution (148/2004) issued in an amount calculated in accordance with a published resolution of the Italian Energy Authority, Energy Authority Resolution n. 204/1999 (“204/1999”). In 2001,2004 by the Energy Authority published another resolution, which clarified that changed the drawback would be calculated in the same manner, and in the same amount, in either the regulated or unregulated market. At the beginning of 2002, ParentCo left the regulated energy market to purchase energy in the unregulated market. Subsequently, in 2004, the Energy Authority introduced regulation no. 148/2004 which set forth a different method for calculating the special tariff that would result in a different drawback for the regulated and unregulated markets. ParentCo challenged the new regulation in the Administrative Court of Milan and received a favorable judgment in 2006. Following this ruling, ParentCodrawback. Through 2009, Trasformazioni continued to receive the power price drawback for its Portovesme and Fusina smelters in accordance with the original calculation method, through 2009, whenresolution (204/1999), at which time the European Commission declared all such special tariffs to be impermissible “state aid.” In 2010,Between 2006 and 2014, several judicial hearings occurred related to continuous appeals filed by both ParentCo and the Energy Authority appealedregarding the 2006 ruling todispute on the Consiglio di Stato (final court of appeal). On December 2, 2011, the Consiglio di Stato ruled in favorcalculation of the Energy Authority and against ParentCo, thus presentingdrawback; a hearing on the opportunity for the energy regulators to seek reimbursement from ParentCo of an amount equal to the difference between the actual drawback amounts received over the relevant time period, and the drawback as it would have been calculated in accordance with regulation 148/2004. On February 23, 2012, ParentCo filed its appeal of the decision of the Consiglio di Stato (thislatest appeal was subsequently withdrawn in March 2013)scheduled for May 2018 (see below). On March 26,Additionally, between 2012 ParentCoand 2013, Trasformazioni received a lettermultiple letters from the agency (Cassa Conguaglio per il Settore Eletrico (CCSE)) responsible for making and collecting payments on behalf of the Energy Authority demanding payment for the difference in the amount of approximately $110 million (€85 million), including interest. By letter dated April 5, 2012, ParentCo informed CCSE that it disputesdrawback calculation between the paymenttwo resolutions. The latest such demand of CCSE since (i) CCSE was not authorized by the Consiglio di Stato decisions to seek payment of any amount, (ii) the decision of the Consiglio di Stato has been appealed (see above), and (iii) in any event, no interest should be payable. On April 29, 2012, Law No. 44 of 2012 (“44/2012”) came into effect, changing the method to calculate the drawback. On February 21, 2013, ParentCo received a revised request letter from CCSE demanding ParentCo’s subsidiary, Alcoa Trasformazioni S.r.l. (Trasformazioni is now a subsidiary of Alcoa Corporation), make a payment in the amount offor $97 million (€76 million), including interest, which reflectsand allegedly included consideration of a revisedthird resolution (44/2012) issued in 2012 on the calculation methodology by CCSE and represents the high end of the rangedrawback; Trasformazioni rejected this demand.
In the meantime, as a result of reasonably possible loss associated with this matterthe conclusion of $0 to $97 million (€76 million). ParentCo rejected that demand and formally challenged it through an appeal before the Administrative Court on April 5, 2013. The Administrative Court scheduled a hearing for December 19, 2013, which was subsequently postponed until April 17, 2014, and further postponed until June 19, 2014. On this date, the Administrative Court heard ParentCo’s oral argument, and on September 2, 2014, rendered its decision. The Administrative Court declared the payment request of CCSE and the Energy Authority to ParentCo to be unsubstantiated based on the 148/2004 resolution with respectEuropean Commission Matter in January 2016 (see Note R to the January 19, 2007 through November 19, 2009 timeframe. On December 18, 2014, the CCSE and the Energy Authority appealed the Administrative Court’s September 2, 2014 decision; however, a dateConsolidated Financial Statements in Part II Item 8 of Alcoa Corporation’s Annual Report on Form 10-K for the hearing has not been scheduled.year ended December 31, 2017), ParentCo’s management modified its outlook with respect to a portion of the pendingthen-pending legal proceedings related to this matter.the drawback dispute. As such, a charge of $37 million (€34 million) was recorded atin Restructuring and other charges on the endCompany’s Statement of Consolidated Operations for the year ended December 31, 2015 to establish a partial reserve for this matter. At this time,
In December 2017, through an agreement with the Energy Authority, Alcoa Corporation settled this matter for $18 million (€15 million) (paid in January 2018). Accordingly, the Company recorded a reduction of $22 million (€19 million) (the U.S. dollar amount reflects the effects of foreign currency movements since 2015) to its previously established reserve in Restructuring and other charges on Alcoa Corporation’s Statement of Consolidated Operations. In January 2018, subsequent to making the previously referenced payment, Alcoa Corporation and the respective state attorney in Italy filed a joint request with the Regional Administrative Court for Lombardy to have this matter formally dismissed. On October 9, 2018, the court formally dismissed the case and this matter is unable to reasonably predict the ultimate outcome for this matter.now closed.
Alcoa is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund (CERCLA) orand analogous state provisions regarding the usage, disposal, storage or treatment of hazardous substances at a number of sites in the U.S. The Company has committed to participate, or is engaged in negotiations with, federal or state authorities relative to its alleged liability for participation, in clean-up efforts at several such sites. The most significant of these matters are discussed in Note R to the Consolidated Financial Statements under the caption “Contingencies and Commitments—Environmental Matters.”
The Separation and Distribution Agreement (see Note A)between Alcoa Corporation and Arconic includes provisions for the assignment or allocation of environmental liabilities between Alcoa Corporation and Arconic, including certain remediation obligations associated with environmental matters. In general, the respective parties will be responsible for the environmental matters associated with their operations, and with the properties and other assets assigned to each. Additionally, the Separation and Distribution Agreement lists environmental matters with a shared responsibility between the two companies with an
allocation of responsibility and the lead party responsible for management of each matter. For matters assigned to Alcoa Corporation under the Separation and Distribution Agreement, Alcoa Corporation has agreed to indemnify Arconic in whole or in part for environmental liabilities arising from operations prior to the Separation Date. The following discussion provides details regarding the current status of certain matters related to current or former Alcoa Corporation sites. With the exception of the Fusina, Italy matter, Alcoa Corporation assumed full responsibility of the matters described below.
In August 2005, Dany Lavoie, a resident of Baie Comeau in the Canadian Province of Québec, filed a Motion for Authorization to Institute a Class Action and for Designation of a Class Representative against Alcoa Canada Ltd., Alcoa Limitée, SocieteSociété Canadienne de Metaux Reynolds Limitée and Canadian British Aluminum in the Superior Court of Québec in the District of Baie Comeau. Plaintiff seeks to institute the class action on behalf of a putative class consisting of all past, present and future owners, tenants and residents of Baie Comeau’s St. Georges neighborhood. He allegesComeau, alleging that defendants, as the present and past owners and operators of an aluminum smelter in Baie Comeau, havehad negligently allowed the emission of certain contaminants from the smelter specifically Polycyclic Aromatic Hydrocarbons or “PAHs,” that have been deposited on the lands and houses of the St. Georges neighborhood and its environs causing property damage to the property of the putative class and causing health concerns for those who inhabit that neighborhood. Plaintiff originally moved to certify a class action, sought to compel additional remediation to be conducted by the defendants beyond that already undertaken by them voluntarily, sought an injunction against further emissions in excess of a limit to be determined by the court in consultation with an independent expert, and sought money damages on behalf of all class members.concerns. In May 2007, the court authorized a class action suit to include onlyon behalf of all people who suffered property damage or personal injury damages caused by the emission of PAHsPolycyclic Aromatic Hydrocarbons, or “PAHs” from the smelter.Company’s aluminum smelter in Baie Comeau. In September 2007, plaintiffs filed the claim against the original defendants, which the court had authorized in May. ParentCo filed its Statement of Defense and plaintiffs filed an Answer to that Statement. ParentCo also filed a Motion for Particulars with respect to certain paragraphs of plaintiffs’ Answer and a Motion to Strike with respect to certain paragraphs of plaintiffs’ Answer. In late 2010, the court denied these motions.defendants. The Soderberg smelting process that plaintiffs allege to be the source of emissions of concern has ceased operations and has been dismantled. Plaintiffs filed a motion seeking appointment of an expert to advise the court on matters of sampling of homes and standards for interior home remediation. ParentCo opposed the motion. After a March 25, 2016 hearing on the motion, the court granted, in a ruling dated April 8, 2016, the motion and directed the parties to confer on potential experts and protocols for sampling of residences. The court has identified a sampling expert. Theexpert and the parties are advising the expert on their respective views on the appropriate protocol for sampling.sampling protocol. Further proceedings in the case will await the independent expert’s report. At this stage of the proceeding, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.
In October 2006, in Barnett, et al. v. Alcoa and Alcoa Fuels, Inc., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-PL-499, forty-one plaintiffs sued ParentCo and one of its subsidiary, asserting claims similar to those asserted in Musgrave v. Alcoa, et al., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-CT-006. In November 2007, ParentCo and its subsidiary filed a motion to dismiss the Barnett cases. In October 2008, the Warrick County Circuit Court granted ParentCo’s motions to dismiss, dismissing all claims arising out of alleged occupational exposure to wastes at the Squaw Creek Mine, but in November 2008, the trial court clarified its ruling, indicating that the order does not dispose of plaintiffs’ personal injury claims based upon alleged “recreational” or non-occupational exposure. Plaintiffs also filed a “second amended complaint” in response to the court’s orders granting ParentCo’s motion to dismiss. On July 7, 2010, the court granted the parties’ joint motions for a general continuance of trial settings. Discovery in this matter remains stayed. On January 24, 2017 the court set a hearing for March 23, 2017, under local rules concerning non-prosecution of cases. Since that time, the parties have agreed to file a motion to dismiss the remaining claims.
In 1996, ParentCo acquired the Fusina, Italy smelter and rolling operations and the Portovesme, Italy smelter (both of which are owned by Alcoa’s subsidiary, Alcoa Trasformazioni S.r.l. (“Trasformazioni”)) from Alumix, an entity owned by the Italian Government. ParentCo also acquired the extrusion plants located in Feltre and Bolzano, Italy. At the time of the acquisition, Alumix indemnified ParentCo for pre-existing environmental contamination at the sites. In 2004, the Italian Ministry of Environment (MOE) issued orders to Alcoa Trasformazioni S.r.l. and Alumix for the development of a clean-up plan related to soil contamination in excess of allowable limits under legislative decree and to institute emergency actions and pay natural resource damages. OnIn April 5, 2006, Alcoa Trasformazioni S.r.l.’sTrasformazioni’s Fusina site was also sued by the MOE and Minister of Public Works (MOPW) in the Civil Court of Venice for an alleged liability for environmental damages, in parallel with the orders already issued by the MOE. Alcoa Trasformazioni S.r.l. appealed the orders, defended the civil case for environmental damages and filed suit against Alumix, as discussed below. Similar issues also existed with respect to the Bolzano and Feltre plants, based on orders issued by local authorities in 2006. Most, if not all, of the underlying activities occurred during the ownership of Alumix, the governmental entity that sold the Italian plants to ParentCo.
As noted above, in response to the 2006 civil suit by the MOEIn January 2014, Trasformazioni and MOPW, Alcoa Trasformazioni S.r.l. filed suit against Alumix claiming indemnification under the original acquisition agreement, but brought that suit in the Court of Rome due to jurisdictional rules. In June 2008, the parties (ParentCo and subsequently Ligestra S.r.l. (Ligestra)(“Ligestra”), the successor to Alumix) signed a preliminary agreement by which they have committed to pursue a settlement. The Court of Rome accepted the request, and postponed the Court’s expert technical assessment, reserving its ability to fix the deadline depending on the development of negotiations. ParentCo and Ligestra agreed to a settlement in December 2008 with respect to the Feltre site. Ligestra paid the sum of 1.08 million Euros and ParentCo committed to clean up the site. Further postponements were granted by the Court of Rome, and the next hearing is fixed for December 20, 2016. In the meantime, Alcoa Trasformazioni S.r.l. and Ligestra reached a preliminary agreement for settlement of the liabilities related to Fusina, allocating 80% and 20% of the remediation costs to Ligestra and ParentCo, respectively. In January 2014, a final agreement with Ligestra was signed, and on February 5, 2014, ParentCoAlumix, signed a final settlement agreement with the MOE and MOPW settlingrespect to all environmental issues at the Fusina site. As set out in the agreement between ParentCo and Ligestra,site, whereby the parties will share theall remediation costs and environmental damages claimed by the MOE and MOPW.the MOPW; Ligestra assumed 50% to 80% of all payments and remediation costs. The remediation project filed by ParentCo and Ligestra has been approved by the MOE. See Note R to the Consolidated Financial Statements under the caption “Fusina and Portovesme, Italy.” To provide time for settlement with Ligestra, the MOE and ParentCo jointly requested and the Civil Court of Venice has granted a series of postponements of hearings in the Venice trial, assuming that the case will be closed. Following the settlement, the parties caused the Court to dismiss the proceedings. The proceedings were, however, restarted in April 2015 by the MOE and MOPW because the Ministers had not ratified the settlement of February 5, 2014. In April 2016, the settlement was ratified by the Ministers and the court case has been finally dismissed.
ParentCo and Ligestra have signed a similar agreement relating to the Portovesme site. However,site that agreement is contingent upon final acceptance of the proposed soil remediation project for Portovesme that was rejected by the MOE in the fourth quarter of 2013. ParentCo submitted a revised proposal in May 2014 and a further revised proposal in February 2015, in agreement with Ligestra.Portovesme. The MOE issued a Ministerial Decree approving the final project in October 2015. Work onIn December 2017, a framework for the soil remediation project will commence in 2016 and is expected to be completed in 2019. After further discussions with the MOE regardingfuture settlement of the groundwater remediation project Alcoa Corporation and Ligestra are now workingwas included within an agreement to find a common remedial solution. Whiletransfer the issuanceownership of the decree forPortovesme smelter to an Italian government agency. The MOE has confirmed its acceptance of the soil remediation project has provided reasonable certainty regarding liability forproposal set out in the soil remediation, with respect toframework; however, the total cost of the groundwater remediation project we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss beyond what is described in Note R to the Consolidated Financial Statements for several reasons. First, certain costs relating to the groundwater remediation arewill not yet fixed. In connection with any proposed groundwater remediation plan for Portovesme, we understand that the MOE has substantial discretion in defining what must be managed under Italian law, as well as the extent and duration of that remediation program. As a result, the scope and cost ofdetermined until the final groundwater remediation plan remain uncertain for Portovesme; we and Ligestra are still negotiating a final settlement for groundwater remediation at Portovesme, for an allocation of the cost based on the new remediation project approved by the MOE. In addition, once a groundwater remediation projectremedial design is submitted, should a final settlement with Ligestra not be reached, we should be held responsible only for ParentCo’s share of pollution.
However, the area is impacted by many sources of pollution, as well as historical pollution. Consequently, the allocation of liabilities would need a very complex technical evaluation by the authorities that has not yet been performed.
On November 30, 2010, Alcoa World Alumina Brasil Ltda. (“AWAB”) received notice of a lawsuit that had been filed by the public prosecutors of the State of Pará in Brazil in November 2009. The suit names2009 regarding the impact of the new bauxite mine in Juruti, alleging that certain conditions of the original installation license were not met by AWAB, a subsidiary of Alcoa, andAlcoa. The suit additionally names the State of Pará, which, through its Environmental Agency, had issued the operating license for ParentCo’s new bauxite mine in Juruti. The suit concerns the impact of the project on the region’s water system and alleges that certain conditions of the original installation license were not met by AWAB. In the lawsuit, plaintiffs requested a preliminary injunction suspending the operating license and ordering payment of compensation. On April 14, 2010, the court denied plaintiffs’ request. AWAB presented its defense in March 2011, on grounds that it was in compliance with the terms and conditions of its operating license, which included plans to mitigate the impact of the project on the region’s water system. In April 2011, the State of Pará defended itself in the case asserting that the operating license contains the necessary plans to mitigate such impact, that the State monitors the performance of AWAB’s obligations arising out of such license, that the licensing process is valid and legal, and that the suit is meritless. Our position is that any impact from the project had been fully repaired when the suit was filed. We believe that Jará Lake has not been affected by any project activity and any evidence of pollution from the project would be unreliable. Following the preliminary injunction request, the plaintiffs took no further action until October 2014, when in response to the court’s request and as required by statute, they restated the original allegations in the lawsuit. We are not certain whether or when the action will proceed. Given that this proceeding is in its preliminary stage and the current uncertainty in this case, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.
Other Matters
St. Croix Proceedings
- Abednego and Abraham cases. On January 14, 2010, ParentCo was served with a multi-plaintiff action complaint involving several thousand individual persons claiming to be residents of St. Croix who are alleged to have sufferedalleging personal injury or property damage from Hurricane Georges or winds blowing material from the St. Croix Alumina, L.L.C. (“SCA”) facility on the island of St. Croix (U.S. Virgin Islands) since the time of the hurricane. This complaint, Abednego, et al. v. Alcoa, et al. was filed in the Superior Court of the Virgin Islands, St. Croix Division. Following an unsuccessful attempt by ParentCo and SCA to remove the case to federal court, the case has been lodged in the Superior Court. The complaint names as defendants the same entities that were sued in a February 1999 action arising out of the impact of Hurricane Georges on the island and added as a defendant the current owner of the alumina facility property.
On March 1, 2012, ParentCo was served with a separate multi-plaintiff action complaint involving approximately 200 individual persons alleging claims essentially identical to those set forth in the Abednego v. Alcoa complaint. This complaint, Abraham, et al. v. Alcoa, et al., was filed on behalf of plaintiffs previously dismissed in the federal court proceeding involving the original litigation over Hurricane Georges impacts. The matter was originally filed in the Superior Court of the Virgin Islands, St. Croix Division, on March 30, 2011.
ParentCo and other defendants in the Abraham and Abednego cases filed or renewed motions to dismiss each case in March 2012 and August 2012 following service of the Abraham complaint on ParentCo and remand of the Abednego complaint to Superior Court, respectively. By order dated August 10, 2015, the Superior Court dismissed plaintiffs’ complaints without prejudice to re-file the complaints individually, rather than as a multi-plaintiff filing. The order also preserves the defendants’ grounds for dismissal if new, individual complaints are filed. As of June 10, 2016, approximately 100 separateIn July 2017, the court issued an order that accepted as timely all complaints that had already been filed inor would be filed by the end of the month and consolidated all such complaints into the Red Dust Claims docket (Master Case No.: SX-15-CV-620). Following this order, a total of 430 complaints were filed and accepted by the court by the deadline, which included claims of approximately 1,360 individuals. On November 15, 2018, the Red Dust Claims docket was transferred to the Complex Litigation Division within the Superior Court which alleged claims by about 400 individuals. On June 1, 2016, counsel representing plaintiffs filed a motion seeking additional time to file new complaints. The court has not ruled on that request. No further proceedings have been scheduled, and weof the Virgin Islands. We are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.
Glencore Contractual Indemnity Claim. On June 5, 2015, Alcoa World Alumina LLC (“AWA”) and St. Croix Alumina, L.L.C. (“SCA”) filed a complaint in Delaware Chancery Court for a declaratory judgment and injunctive relief to resolve a dispute between ParentCo and Glencore Ltd. (“Glencore”) with respect to claimed obligations under
a 1995 asset purchase agreement between ParentCo and Glencore. The dispute arose from Glencore’s demand that ParentCo indemnify it for liabilities it may have to pay to Lockheed Martin (“Lockheed”) related to the St. Croix alumina refinery. Lockheed had earlier filed suit against Glencore in federal court in New York seeking indemnity for liabilities it had incurred and would incur to the U.S. Virgin Islands to remediate certain properties at the refinery property and claimed that Glencore was required by an earlier, 1989 purchase agreement to indemnify it. Glencore had demanded that ParentCo indemnify and defend it in the Lockheed case and threatened to claim against ParentCo in the New York action despite exclusive jurisdiction for resolution of disputes under the 1995 purchase agreement being in Delaware. After Glencore conceded that it was not seeking to add ParentCo to the New York action, AWA and SCA dismissed their complaint in the Chancery Court case and on August 6, 2015 filed a complaint for declaratory judgment in Delaware Superior Court. AWA and SCA filed a motion for judgment on the pleadings on September 16, 2015. Glencore answered AWA’s and SCA’s complaint and asserted counterclaims on August 27, 2015, and on October 2, 2015 filed its own motion for judgment on the pleadings. Argument on the parties’ motions was held by the court on December 7, 2015, and by order dated February 8, 2016, the court granted ParentCo’s motion and denied Glencore’s motion, resulting in ParentCo not being liable to indemnify Glencore for the Lockheed action. The decision also leaves for pretrial discovery and possible summary judgment or trial Glencore’s claims for costs and fees it incurred in defending and settling an earlier Superfund action brought against Glencore by the Government of the Virgin Islands. On February 17, 2016, Glencore filed notice of its application for interlocutory appeal of the February 8 ruling. AWA and SCA filed an opposition to that application on February 29, 2016. On March 10, 2016, the court denied Glencore’s motion for interlocutory appeal and on the same day entered judgment on claims other than Glencore’s claims for costs and fees it incurred in defending and settling the earlier Superfund action brought against Glencore by the Government of the Virgin Islands. On March 29, 2016, Glencore filed a withdrawal of its notice of interlocutory appeal and on April 6, 2016, Glencore filed an appeal of the court’s March 10, 2016 judgment to the Delaware Supreme Court, which set the appeal for argument for November 2, 2016. On November 4, 2016, the Delaware Supreme Court affirmed the judgment of the Delaware Superior Court granting our motion. Remaining in the case were Glencore’s claims for costs and fees it incurred related to the previously described Superfund action. On March 7, 2017, Alcoa and Glencore agreed to settle these claims and expect to ask the court to dismiss the case prior to the court’s March 21, 2017 scheduled conference. The amount of the settlement is not material.Asbestos Litigation
Some of our subsidiaries as premises owners are defendants in active lawsuits filed on behalf of persons alleging injury as a result of occupational exposure to asbestos at various facilities. A former affiliate of a subsidiary has been named, along with a large common group of industrial companies, in a pattern complaint where our involvement is not evident. Since 1999, several thousand such complaints have been filed. To date, the former affiliate has been dismissed from almost every case that was actually placed in line for trial. Our subsidiaries and acquired companies all have had numerous insurance policies over the years that provide coverage for asbestos based claims. Many of these policies provide layers of coverage for varying periods of time and for varying locations. We have significant insurance coverage and believesbelieve that itsour reserves are adequate for its known asbestos exposure related liabilities. The costs of defense and settlement have not been and are not expected to be material to the results of operations, cash flows, and financial position of Alcoa Corporation.
Tax
SpainYadkin. In July 2013, following a corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received as a result of Spain’s tax authorities disallowing certain interest deductions claimed by a former Spanish consolidated tax group previously owned by ParentCo. The following month, ParentCo filed an appeal of this assessment in Spain’s Central Tax Administrative Court. In conjunction with this appeal, as required under Spanish tax law, ParentCo provided financial assurance in this matter in the form of both a bank guarantee (Arconic) and a lien secured with the San Ciprian smelter (Alcoa Corporation) to Spain’s tax authorities. In January 2015, Spain’s Central Tax Administrative Court denied ParentCo’s appeal of this assessment. Two months later, ParentCo filed an appeal of the assessment in Spain’s National Court (the “National Court”). The amount of this assessment, including interest, was $152 million (€131 million) as of June 30, 2018.
On August 2, 2013,July 6, 2018, the State of North Carolina, by and through its agency, the North Carolina Department of Administration, filed a lawsuit against Alcoa Power Generating Inc. (“APGI”) in SuperiorNational Court Wake County, North Carolina (Docket No. 13-CVS-10477). The lawsuit asserts ownership of certain submerged lands and hydropower generating structures situated atdenied ParentCo’s Yadkin Hydroelectric Project (the “Yadkin Project”), including the submerged riverbedappeal of the Yadkin River throughoutassessment; however, the Yadkin Projectdecision includes a requirement that Spain’s tax authorities issue a new assessment, which considers available net operating losses of the former Spanish consolidated tax group from prior tax years that can be utilized during the assessed tax years. Spain’s tax authorities will not issue a new assessment until this matter is resolved; however, based on estimated calculations completed by Arconic and Alcoa Corporation (collectively, the “Companies”), the amount of the new assessment, including applicable interest, is expected to be in the range of $25 million to $61 million (€21 million to €53 million) after consideration of available net operating losses and tax credits. Under the Tax Matters Agreement related to the Separation Transaction, Arconic and Alcoa Corporation are responsible for 51% and 49%, respectively, of the assessed amount in the event of an unfavorable outcome. On July 12, 2018, the Companies sent a letter to the National Court seeking clarification on one part of the decision. A response was received from the National Court on October 1, 2018, resulting in no change to its July 6, 2018 decision. On November 8, 2018, Arconic, with Alcoa Corporation’s participation and consent, petitioned for an appeal to the Supreme Court of Spain.
Notwithstanding the petition for appeal, based on a review of the bases on which the National Court decided this matter, Alcoa Corporation management no longer believes that the Companies are more likely than not (greater than 50%) to prevail in this matter. Accordingly, Alcoa Corporation recorded a charge of $30 million (€26 million) in Provision for income taxes on the Company’s Statement of Consolidated Operations to establish a liability for its 49% share of the estimated loss in this matter, representing management’s best estimate at this time. As indicated above, at a future point in time, the Companies will receive an updated assessment from Spain’s tax authorities, which may result in a change to management’s estimate following further analysis.
Separately, in January 2017, the National Court issued a decision in favor of the former Spanish consolidated tax group related to a similar assessment for the 2003 through 2005 tax years, effectively making that assessment null and void. Additionally, in August 2017, in lieu of receiving a formal assessment, the Companies reached a settlement with Spain’s tax
authorities for the 2010 through 2013 tax years that had been under audit for a similar matter. Alcoa Corporation’s share of this settlement was not material to the Company’s Consolidated Financial Statements. The ultimate outcomes related to the 2003 through 2005 and the 2010 through 2013 tax years are not indicative of the potential ultimate outcome of the assessment for the 2006 through 2009 tax years due to procedural differences. Also, it is possible that the Companies may receive similar assessments for tax years subsequent to 2013; however, management does not expect any such assessment, if received, to be material to Alcoa Corporation’s Consolidated Financial Statements.
Brazil (AWAB). In March 2013, AWAB was notified by the Brazilian Federal Revenue Office (RFB) that approximately $110 (R$220) of value added tax credits previously claimed are being disallowed and a penalty of 50% assessed. Of this amount, AWAB received $41 (R$82) in cash in May 2012. The value added tax credits were claimed by AWAB for both fixed assets and export sales related to the Juruti bauxite mine and São Luís refinery expansion. The RFB has disallowed credits they allege belong to the consortium in which AWAB owns an interest and should not have been claimed by AWAB. Credits have also been disallowed as a result of challenges to apportionment methods used, questions about the use of the credits, and an alleged lack of documented proof. AWAB presented defense of its claim to the RFB on April 8, 2013. If AWAB is successful in this administrative process, the RFB would have no further recourse. If unsuccessful in this process, AWAB has the option to litigate at a judicial level. Separately from AWAB’s administrative appeal, in June 2015, a new tax law was enacted repealing the provisions in the tax code that were the basis for the RFB assessing a 50% penalty in this matter. As such, the estimated range of reasonably possible loss is $0 to $26 (R$103), whereby the maximum end of the range represents the portion of the hydroelectric dams that APGI owns and operates pursuant to a license from the Federal Energy Regulatory Commission. The suit seeks declaratory relief regarding North Carolina’s alleged ownership interests in the riverbed and the dams and further declaration that APGI has no right, license or permission from North Carolina to operate the Yadkin Project. By notice filed on September 3, 2013, APGI removed the matterdisallowed credits applicable to the U.S. District Court forexport sales and excludes the Eastern District50% penalty. Additionally, the estimated range of North Carolina (Docket No. Civil Action No. 5: 13-cv-633). By motion filed September 3, 2013,disallowed credits related to AWAB’s fixed assets is $0 to $29 (R$117), which would increase the Yadkin Riverkeeper sought permission to intervene in the case. On September 25, 2013, APGI filed its answer in the case and also filed its
opposition to the motion to intervene by the Yadkin Riverkeeper. The Court denied the State’s Motion to Remand and initially permitted the Riverkeeper to intervene although the Riverkeeper has now voluntarily withdrawn as an intervening party and will participate as amicus.
On July 21, 2014, the parties each filed a motion for summary judgment. On November 20, 2014, the Court denied APGI’s motion for summary judgment and denied in part and granted in part the Statenet carrying value of North Carolina’s motions for summary judgment. The Court held that under North Carolina law, the burden of proof as to title to propertyAWAB’s fixed assets if ultimately disallowed. It is shifted to a private party opposing a state claim of property ownership. The court conducted a trial on navigability on April 21-22, 2015, and, after ruling orally from the bench on April 22, 2015, on May 5, 2015, entered Findings of Fact and Conclusions of Law as to Navigability, ruling in APGI’s favormanagement’s opinion that the state “failedallegations have no basis; however, at this time, the Company is unable to meet its burden to prove that the Relevant Segment, as stipulated by the parties, was navigablereasonably predict an outcome for commerce at statehood.” Subsequently, APGI filed a motion for summary judgment as to title; the state filed opposition papers. On September 28, 2015, the Court granted summary judgment in APGI’s favor and found that the evidence demonstrates that APGI holds title to the riverbed. The Court further directed judgment to be entered in APGI’s favor and closed the case. The court heard argument on October 27, 2016, but has yet to render a decision. On February 2, 2017, APGI completed the sale of its Yadkin Project to a subsidiary of Cube Hydro. On February, 2, 2017, APGI asked the court to substitute the buyer as the real party in interest in the case as APGI had transferred all of its interest in the disputed property to the buyer as of that date. The State of North Carolina opposed that substitution on February 9, 2017. The court had not ruled on APGI’s request.this matter.
Other
On October 19, 2015, a subsidiary of Alcoa, Alúmina Española S.A., received a request by the Court of Vivero, Spain to provide the names of the “manager,” as well as those of the “environmental managers,” of the San Ciprián alumina refinery from 2009 to the present date. Upon reviewing the documents filed with the Court, ParentCo learned for the first time that the request is the result of a criminal proceeding that began in 2010 after the filing of a claim by two San Ciprián neighbors alleging that the plant’s activities had adverse effects on vegetation, crops and human health. In 2011 and 2012, some neighbors claimed individually in the criminal court for caustic spill damages to vehicles, and the judge decided to administer all issues in the court proceeding (865/2011). Currently, thatOn March 23, 2017, the criminal court proceeding isprovisionally dismissed the case in its first phase (preliminary investigation phase) ledlight of the conclusions of a technical report submitted by the judge. The purpose of that investigation is to determine whether there has been a criminal offense for actions against natural resourcesan expert and the environment. The Spanishposition of the public prosecutor, is also involvedneither of whom found any criminal liability in the case, having requested technical reports. To date, only “Alcoa-AlúAlúmina Española S.A.” has activity. In April 2017, Alúmina Española S.A. received confirmation that the criminal court matter had been identified as a potential defendant and no Alcoa representative has yet been required to appear beforedefinitively closed.
Other Contingencies
Reynolds. On January 11, 2016, Sherwin Alumina Company, LLC (“Sherwin”), the judge. Monetary sanctions for an offense in the formcurrent owner of a fine could range from 30 to 5,000 euros per day, for a maximum period of three years. The environmental experts appointedrefinery previously owned by the public prosecutor have submitted their report to the court,ParentCo (see below), and while favorable to the Company, the court has not rendered a ruling in that respect.
Tax
Between 2000 and 2002, Alcoa Alumínio (“Alumínio”) sold approximately 2,000 metric tons of metal per month from its Poços de Caldas facility, located in the State of Minas Gerais (the “State”), to Alfio, a customer also located in the State. Sales in the State were exempted from value-added tax (“VAT”) requirements. Alfio subsequently sold metal to customers outside of the State, but did not pay the required VAT on those transactions. In July 2002, Alumínio received an assessment from State auditors on the theory that Alumínio should be jointly and severally liable with Alfio for the unpaid VAT. In June 2003, the administrative tribunal found Alumínio liable, and Alumínio filed a judicial case in the State in February 2004 contesting the finding. In May 2005, the Court of First Instance found Alumínio solely liable, and a panel of a State appeals court confirmed this finding in April 2006. Alumínio filed a special appeal to the Superior Tribunal of Justice (“STJ”) in Brasilia (the federal capital of Brazil) later in 2006. In 2011, the STJ (through one of its judges) reversed the judgmentaffiliate entities, filed bankruptcy petitions in Corpus Christi, Texas for reorganization under Chapter 11 of the lower courts, findingU.S. Bankruptcy Code. Sherwin informed the bankruptcy court that Alumínio should neither be solely nor jointly and severally liable with Alfioit intends to cease operations because it is not able to continue its bauxite supply agreement. On November 23, 2016, the bankruptcy court approved Sherwin’s plans for the VAT, which ruling was then appealed by the State. In August 2012, the STJ agreed to have the case reheard before a five-judge panel.cessation of its operations. On February 21,16, 2017, Sherwin filed a bankruptcy Chapter 11 Plan (the “Plan”) and on February 17, 2017 the lead judge of the STJ issued a ruling confirmingcourt approved that Alumínio should be held liable in this matter. Alumínio is in the process of filing an appeal to have its case reheard before the five-judge panel as originally agreed to by the STJ in August 2012. At December 31, 2016, the assessment totaled $43 million (R$142 million), including penalties and interest. While Alcoa believes it has meritorious defenses, we are unable to reasonably predict the ultimate outcome for this matter.
In September 2010, following a corporate income tax audit covering the 2003 through 2005 tax years, an assessment was received as a result of Spain’s tax authorities disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by ParentCo. An appeal of this assessment in Spain’s Central Tax Administrative Court by the ParentCo was denied in October 2013. In December 2013, ParentCo filed an appeal of the assessment in Spain’s National Court.
Additionally, following a corporate income tax audit of the same Spanish tax group for the 2006 through 2009 tax years, Spain’s tax authorities issued an assessment in July 2013 similarly disallowing certain interest deductions. In August 2013, ParentCo filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. ParentCo filed an appeal of this second assessment in Spain’s National Court in March 2015.
At December 31, 2016, the combined assessments, including interest, total $258 million (€246 million). On January 16, 2017, Spain’s National Court issued a decision in favor of the Company related to the assessment received in September 2010. On March 6, 2017, the Company was notified that Spain’s tax authorities did not file an appeal, for which the deadline has passed. As a result, the assessment related to the 2003 through 2005 tax years is null and void. Spain’s National Court has not yet rendered a decision related to the assessment received in July 2013 for the 2006 through 2009 tax years. The amount of this assessment on a standalone basis, including interest, was $136 million (€130 million) as of December 31, 2016.
The Company believes it has meritorious arguments to support its tax position and intends to vigorously litigate the remaining assessment through Spain’s court system. However, in the event the Company is unsuccessful, a portion of the remaining assessment may be offset with existing net operating losses available to the Spanish consolidated tax group, which would be shared between the Company and Arconic as provided for in the Tax Matters Agreement related to the Separation Transaction. Additionally, it is possible that the Company may receive similar assessments for tax years subsequent to 2009. Despite the favorable decision received on the first assessment, at this time, the Company is unable to reasonably predict the ultimate outcome for this matter.
Alumina Limited Litigation
On May 27, 2016, ParentCo filed a complaint in the Delaware Court of Chancery seeking a declaratory judgment on an expedited basis to forestall what the complaint alleges are continuing threats by Alumina Limited and certain related parties to attempt to interfere with the Separation Transaction and distribution. Alumina Limited claimed that it has certain consent and other rights under certain agreements governing AWAC in connection with the Separation Transaction and distribution.
On September 1, 2016, ParentCo, Alumina Limited, Alcoa Corporation and certain of their respective subsidiaries entered into a settlement and release agreement (the “settlement agreement”) providing for a full settlement and release by each party of claims arising from or relating to the Delaware litigation. The settlement agreement also provides for certain changes to the governance and financial policies of the AWAC joint venture effective upon the completion of the Separation Transaction, as well as certain additional changes to their AWAC agreements that become effective only in the event of a change in control of Alumina Limited or Alcoa Corporation. The settlement agreement is not expected to have a material effect, adverse or otherwise, on the future operating results of Alcoa Corporation.
Other ContingenciesPlan.
In connection with ParentCo’s sale in 2001 of2000, ParentCo acquired Reynolds Metals Company’sCompany (“Reynolds,” a subsidiary of Alcoa Corporation), which included an alumina refinery in Gregory, Texas,Texas. As a condition of the Reynolds acquisition, ParentCo was required to divest this alumina refinery. In accordance with the terms of the divestiture in 2000, ParentCo agreed to retain responsibility for certain environmental obligations (see Environmental Matters above) and assigned to the buyer an Energy Services Agreement (“ESA”) with Gregory Power Partners (“Gregory Power”) for purchase of steam and electricity by the refinery. On January 11, 2016, Sherwin Alumina Company, LLC (“Sherwin”),
Through the currentbankruptcy proceedings, the owner of Sherwin exercised its right under the refinery,U.S. Bankruptcy Code to reject the agreement from 2000 containing the previously mentioned retained responsibility, which had the effect of terminating all rights and one of its affiliate entities, filed bankruptcy petitions in Corpus Christi, Texas for reorganization under Chapter 11responsibilities of the Bankruptcy Code.parties to the agreement.
As a result of Sherwin’s initial bankruptcy filing, separate legal actions were initiated against Reynolds by Gregory Power and Sherwin as described below.
Gregory Power. On January 26, 2016, Gregory Power delivered notice to Reynolds that Sherwin’s bankruptcy filing constitutes a breach of the ESA; on January 29, 2016, Reynolds responded that the filing does not constitute a breach. Sherwin informed the
bankruptcy court that it intends to cease operations because it is not able to continue its bauxite supply agreement, and, thereafter,On September 16, 2016, Gregory Power filed a complaint in the bankruptcy case against Reynolds alleging breach of the ESA. This matter is neither estimable nor probable; therefore, atIn response to this complaint, on November 10, 2016, Reynolds filed both a motion to dismiss, including a jury demand, and
a motion to withdraw the reference to the bankruptcy court based on the jury demand. On July 18, 2017, the district court ordered that any trial would be held to a jury in district court, but that the bankruptcy court would retain jurisdiction on all pre-trial matters. Since that time, Gregory Power filed an amended complaint to include Allied Alumina LLC (“Allied”), the successor to the original purchaser of the refinery from Reynolds. In September 2018, Reynolds and Allied filed their respective answers to the amended complaint, and Allied filed a cross complaint against Reynolds, which was answered by Reynolds on October 15, 2018. The court has yet to rule on several pending pretrial matters. At this time, we areAlcoa Corporation is unable to reasonably predict the ultimate outcome.outcome of this matter.
Sherwin.On October 4, 2016, the state of Texas Commission on Environmental Quality (TCEQ) filed suit against Sherwin in the bankruptcy proceeding seeking to hold Sherwin responsible for remediation of alleged environmental conditions at the facility.Sherwin refinery site and related bauxite residue waste disposal areas (known as the Copano facility). On October 11, 2016, Sherwin filed a similar suit against Reynolds in the case. On November 10, 2016, Reynolds filed motions to dismiss the Gregory Power complaint and to withdraw the case from bankruptcy court. On November 23, 2016, the bankruptcy court approved Sherwin’s plans for cessation of its operations. On February 16, 2017, Sherwin filed a bankruptcy Chapter 11 Plan and on February 17, 2017 the court approved that plan. As provided in the plan,Plan, Sherwin, including certain affiliated companies, and Reynolds arehad been negotiating a settlementan allocation among them as to allocate among themthe ownership of and responsibility for certain areas of the refinery.refinery and the Copano facility. In March 2018, Reynolds and Sherwin reached a settlement agreement that assigns to Reynolds all environmental liabilities associated with the Copano facility and assigns to Sherwin all environmental liabilities associated with the Sherwin refinery site. Additionally, Reynolds and the TCEQ reached an agreement that defines the operating and environmental steps required for the Copano facility, which Reynolds intends to operate for the purpose of managing materials other than bauxite residue waste, including third-party dredge material. The effectiveness and enforceability of each of these two agreements are pre-conditioned on the other being accepted by the bankruptcy court. A definitivepublic notice and comment period on these agreements expired on April 26, 2018 without material affect to the documents. On June 5, 2018, the bankruptcy court accepted and entered the agreements into the judicial record as submitted. May 21, 2018 serves as the “effective date” for both agreements.
On June 5, 2018, the transaction between Sherwin and Reynolds was completed. Under the agreement with Sherwin, in exchange for assuming full responsibility for the environmental-related liabilities (see below related to the Company’s existing reserve) associated with the Copano facility, Reynolds assumed ownership of the land that comprises the Copano facility, as well as land that serves as a buffer around the Copano facility and other related assets. A third-party appraisal estimated the fair value of the land and other assets to be $16 million. Under the agreement with TCEQ, a portion of the Copano facility must be closed within 10 years and the remaining portion must be closed within 30 years, both timeframes began on the effective date. Also, Reynolds is anticipated priorrequired to April 30, 2017install upgrades to certain dust control systems and repair certain structures and drainage systems at the Copano facility, and prepare and submit to TCEQ a preliminary groundwater assessment report and a drinking water survey report related to the Copano facility within 180 days of the effective date. Accordingly, the Company recognized $16 million in properties, plants, and equipment, $9 million in environmental remediation liabilities, and $7 million in other related liabilities. Additionally, the Company paid $12 million into a trust managed by the state of Texas as financial assurance of the Company’s performance in completing the required obligations. This amount will be returned to the Company upon satisfactory completion of the future closure of the Copano facility in accordance with all applicable laws and regulations. On June 7, 2018, Sherwin filed a notice of dismissal in the suit against Reynolds; the dismissal was immediately effective as no court order was required.
At the time the agreements were signed by all parties, the Company had a reserve of $29 million for its proportionate share of environmental-related matters at both the Sherwin refinery site and the Copano facility based on the terms of the divestiture of the Sherwin refinery in 2000 (see Note R to the Consolidated Financial Statements under the caption “Sherwin, TX”). While Reynolds no longer has any responsibility for environmental-related matters at the Sherwin refinery site, it assumed additional responsibility for environmental-related matters at the Copano facility ($9 million – see above). In management’s judgment, the $38 million reserve as of December 31, 2018 is sufficient to satisfy the Company’s revised responsibilities and obligations under the settlement agreements. Upon changes in facts or circumstances, a change to the reserve may be required.
Suralco. On December 16, 2016, Boskalis International B.V. (Boskalis) initiated a binding arbitration proceeding against Suriname Aluminum Company, LLC (Suralco), an AWAC company, seeking $47 million plus prejudgment interest and associated taxes in connection with a dispute arising under a contract for mining services in Suriname between Boskalis and Suralco. Boskalis asserted four separate claims under the contract.
In February 2018, the arbitration hearing was held before a three-person panel under the rules of the International Chamber of Commerce. The panel issued its decision on May 29, 2018, finding in favor of Boskalis on two claims and against Boskalis on two claims. For the two claims on which Boskalis prevailed, the panel awarded Boskalis $29 million, including prejudgment interest of $3 million. The award is final and cannot be appealed. Accordingly, Alcoa Corporation recorded a charge of $29 million ($17 million after noncontrolling interest), including $26 million in Cost of goods sold and $3 million in Interest expense on the Company’s Statement of Consolidated Operations. On June 6, 2018, the Company made the $29 million cash payment to Boskalis closing this matter.
The claim that represented the majority of the arbitration award centered around a contract provision requiring Suralco to make a “true up” payment at the end of the contract in the event that Suralco was unable to receive delivery of the full
contract quantity, thus allowing Boskalis to recover its fixed production costs and a suitable return on its investment. While Suralco argued that all required deliveries had been made during the amended contract term and that no “true up” payment was required because a “true up” would resolve outstandingamount to a double payment for bauxite deliveries after the initial contract term, Boskalis argued that the deliveries were not made within the original contract term and thus, a “true up” payment was required. On the basis of its analysis of the facts and applicable law, management concluded that the likelihood of an unfavorable decision on Boskalis’ claims made by Sherwin against Reynolds.was remote (25% or less). Throughout the course of the proceeding, and even after the conclusion of the hearing, management’s judgment of the likelihood of an unfavorable outcome remained the same.
General
In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa Corporation, including those pertaining to environmental, product liability, safety and health, commercial, tax, product liability, intellectual property infringement, employment, and tax matters.employee and retiree benefit matters, and other actions and claims arising out of the normal course of business. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot now be determinedis not readily determinable because of the considerable uncertainties that exist. Therefore,Accordingly, it is possible that the Company’s liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company.
Item 4. Mine Safety Disclosures.
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 9595.1 of this report, which is incorporated herein by reference.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Shares of the Company’s common stock are listed on the NYSENew York Stock Exchange and trade under the symbol “AA” in “regular-way” trading, which began on November 1, 2016 immediately following the Separation Transaction. The Company’s high and low trading stock prices for the reporting periods since that time are shown below.
High | Low | |||||||
Fiscal year ended December 31, 2016 | ||||||||
4th Quarter (beginning November 1, 2016) | $ | 32.35 | $ | 21.78 | ||||
Fiscal year ended December 31, 2017 | ||||||||
1st Quarter (up to March 1, 2017) | $ | 39.78 | $ | 28.17 |
Alcoa Corporation did not pay dividends in 2016.2018, 2017, or in 2016 (beginning November 1, 2016). Dividends on Alcoa Corporation common stock are subject to authorization by the Company’s Board of Directors. The payment and amount of dividends, if any, depends upon matters deemed relevant by the Company’s Board of Directors, such as ourAlcoa Corporation’s results of operations, financial condition, cash requirements, future prospects, any limitations imposed by law, credit agreements or senior securities, and other factors deemed relevant and appropriate. OurThe Company’s senior secured revolving credit facility and the indenture governing our senior unsecured notes restrict our ability to pay dividends in certain circumstances. For more information, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financing Activities.”
As of March 1, 2017,February 20, 2019, there were approximately 11,45912,000 holders of record of shares of the Company’s common stock. Because many of Alcoa Corporation’s shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these recordholders.
The following graph compares Alcoa Corporation’s cumulative two-month26-month total shareholder return with (1) the Standard & Poor’s (S&P) 500® Index and (2) the Standard & Poor’sS&P 500® Metals & Mining Index. Such information shall not be deemed to be “filed.”
The graph above tracksGICS Level 3 Index, a group of companies categorized by S&P as active in the performance of“Metals and Mining” industry within the “Materials” market sector. This comparison was based on an initial investment of $100, in Alcoa Corporation’s common stock and each of the Standard & Poor’s 500® Index and the Standard & Poor’s 500® Metals & Mining Index, including the reinvestment of any dividends from November 1, 2016 (beginning of “regular way” trading)trading for Alcoa Corporation) through December 31, 2016.2018. Such information shall not be deemed to be “filed.”
November 1, 2016 | November 2016 | December 2016 | ||||||||||
Alcoa Corporation | $ | 100 | $ | 126 | $ | 122 | ||||||
S&P 500® Index | 100 | 104 | 106 | |||||||||
S&P 500® Metals & Mining Index | 100 | 115 | 109 |
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| 2018 |
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Alcoa Corporation |
| $ | 100 |
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| $ | 127 |
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| $ | 156 |
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| $ | 148 |
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| $ | 211 |
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| $ | 244 |
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| $ | 203 |
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| $ | 212 |
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| $ | 183 |
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| $ | 120 |
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S&P 500® Index |
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| 100 |
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| 106 |
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| 113 |
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| 116 |
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| 122 |
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| 130 |
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| 129 |
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| 133 |
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| 143 |
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| 124 |
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S&P 500® Metals & Mining GICS Level 3 Index |
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| 100 |
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| 109 |
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| 108 |
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| 103 |
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| 113 |
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| 131 |
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| 128 |
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| 127 |
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| 111 |
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| 99 |
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Copyright© 20172019 Standard & Poor’s, a division of S&P Global. All rights reserved.
Source: Research Data Group, Inc. (www.researchdatagroup.com/S&P.htm)
Unregistered Sales of Equity Securities
On March 14, 2016, Alcoa Corporation issued 1,000 shares of its common stock to ParentCo pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. WeThe Company did not register the issuance of the issuedthese shares under the Securities Act of 1933, as amended, because such issuance did not constitute a public offering.
Issuer Purchases of Equity Securities
Item 6.Selected Financial Data.
(dollars in millions, except per-share amounts and average realized prices; shipmentsmetric tons in thousands of metric tons [kmt](kmt))
For the year ended December 31, | 2016 | 2015 | 2014 | 2013(1) | 2012 |
| 2018 |
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| 2017 |
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| 2016 |
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| 2015 |
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| 2014 |
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Sales | $ | 9,318 | $ | 11,199 | $ | 13,147 | $ | 12,573 | $ | 13,060 |
| $ | 13,403 |
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| $ | 11,652 |
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| $ | 9,318 |
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| $ | 11,199 |
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| $ | 13,147 |
| ||||||||||
Restructuring and other charges | 318 | 983 | 863 | 712 | 105 |
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| 527 |
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| 309 |
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| 318 |
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| 983 |
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| 863 |
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Net loss | (346 | ) | (739 | ) | (347 | ) | (2,870 | ) | (250 | ) | ||||||||||||||||||||||||||||||
Net loss attributable to Alcoa Corporation | (400 | ) | (863 | ) | (256 | ) | (2,909 | ) | (219 | ) | ||||||||||||||||||||||||||||||
Earnings per share attributable to Alcoa Corporation common shareholders(2): | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) |
|
| 871 |
|
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| 559 |
|
|
| (346 | ) |
|
| (739 | ) |
|
| (347 | ) | ||||||||||||||||||||
Net income (loss) attributable to Alcoa Corporation |
|
| 227 |
|
|
| 217 |
|
|
| (400 | ) |
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| (863 | ) |
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| (256 | ) | ||||||||||||||||||||
Earnings per share attributable to Alcoa Corporation common shareholders(1): |
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Basic | $ | (2.19 | ) | $ | (4.73 | ) | $ | (1.40 | ) | $ | (15.94 | ) | $ | (1.20 | ) |
| $ | 1.22 |
|
| $ | 1.18 |
|
| $ | (2.19 | ) |
| $ | (4.73 | ) |
| $ | (1.40 | ) | |||||
Diluted | (2.19 | ) | (4.73 | ) | (1.40 | ) | (15.94 | ) | (1.20 | ) |
|
| 1.20 |
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| 1.16 |
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| (2.19 | ) |
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| (4.73 | ) |
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| (1.40 | ) | ||||||||||
Shipments of alumina (kmt) | 9,071 | 10,755 | 10,652 | 9,966 | 9,295 |
|
| 9,259 |
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| 9,220 |
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| 9,071 |
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| 10,755 |
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|
| 10,652 |
| |||||||||||||||
Shipments of aluminum products (kmt) | 3,147 | 3,227 | 3,518 | 3,742 | 3,933 |
|
| 3,268 |
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|
| 3,356 |
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|
| 3,147 |
|
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| 3,227 |
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|
| 3,518 |
| |||||||||||||||
Alcoa Corporation’s average realized price per metric ton of primary aluminum | $ | 1,862 | $ | 2,092 | $ | 2,396 | $ | 2,280 | $ | 2,353 | ||||||||||||||||||||||||||||||
Average realized price per metric ton of alumina |
| $ | 455 |
|
| $ | 340 |
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| $ | 253 |
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| $ | 311 |
|
| $ | 320 |
| ||||||||||||||||||||
Average realized price per metric ton of primary aluminum |
|
| 2,484 |
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|
| 2,224 |
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|
| 1,862 |
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|
| 2,092 |
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|
| 2,396 |
| ||||||||||||||||||||
Cash dividends declared per common share | $ | - | $ | * | $ | * | $ | * | $ | * |
| $ | — |
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| $ | — |
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| $ | — |
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| $ | * |
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| $ | * |
| ||||||||||
Total assets | 16,741 | 16,413 | 18,680 | 21,126 | 24,777 |
|
| 15,938 |
|
|
| 17,447 |
|
|
| 16,741 |
|
|
| 16,413 |
|
|
| 18,680 |
| |||||||||||||||
Total debt | 1,445 | 225 | 342 | 420 | 507 |
|
| 1,802 |
|
|
| 1,412 |
|
|
| 1,445 |
|
|
| 225 |
|
|
| 342 |
| |||||||||||||||
Cash provided from operations | (311 | ) | 875 | 842 | 452 | ** | ||||||||||||||||||||||||||||||||||
Cash provided from (used for) operations |
|
| 448 |
|
|
| 1,224 |
|
|
| (311 | ) |
|
| 875 |
|
|
| 842 |
| ||||||||||||||||||||
Capital expenditures | (404 | ) | (391 | ) | (444 | ) | (567 | ) | ** |
|
| (399 | ) |
|
| (405 | ) |
|
| (404 | ) |
|
| (391 | ) |
|
| (444 | ) |
(1) |
|
For all periods presented prior to 2016, earnings per share was calculated based on the 182,471,195 shares of Alcoa Corporation common stock distributed on November 1, 2016 in conjunction with the completion of the Separation Transaction and is considered pro forma in nature. |
| Dividends on common stock are subject to authorization by Alcoa Corporation’s Board of Directors. Alcoa Corporation did not declare any dividends in 2018, 2017, and from November 1, 2016 through December 31, 2016. |
* | Prior to November 1, 2016, Alcoa Corporation was not a standalone publicly-traded company with issued and outstanding common stock. |
Prior to the Separation Date, Alcoa Corporation did not operate as a separate, standalone entity. Alcoa Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporation’s Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation.
The selected Statement of Consolidated Operations and Consolidated Balance Sheet information in the table above for all periods except 2012 was derived from Alcoa Corporation’s audited Consolidated Financial Statements. The information for 2012 was derived from Alcoa Corporation’s unaudited underlying financial records, which were derived from ParentCo’s financial records.
The data presented in the Selected Financial Data table should be read in conjunction with the information provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 and the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except per-share amounts, average realized prices, and average cost amounts; bauxite production and shipments in millions of bone
dry metric tons [mbdmt]in millions (mdmt); alumina and aluminum production and shipmentsmetric tons in thousands of metric tons [kmt](kmt))
Overview
Our Business
Alcoa Corporation (or the “Company”) is a vertically integrated aluminum company comprised of bauxite mining, alumina refining, aluminum production (smelting, casting, and rolling), and energy generation. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily. Additionally, alumina is subject to market pricing againstthrough the Alumina Price Index (API)., which is calculated by the Company based on the weighted average of a prior month’s daily spot prices published by the following three indices: CRU Metallurgical Grade Alumina Price; Platts Metals Daily Alumina PAX Price; and Metal Bulletin Non-Ferrous Metals Alumina Index. As a result, the price of both aluminum and alumina is subject to significant volatility and, therefore, influences the operating results of Alcoa Corporation.
The Company has 43more than 40 operating locations (through direct and indirect ownership) in 10 countries around the world, situated primarily in Australia, Brazil, Canada, Europe,Iceland, Norway, Spain, and the United States. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.
Separation Transaction
References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “ParentCo” refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries (through October 31, 2016, at which time was renamed Arconic Inc. (Arconic)).
Separation Transaction
On September 28, 2015, ParentCo’s Board of Directors preliminarily approved a plan to separateNovember 1, 2016 (the “Separation Date”), ParentCo separated into two standalone, publicly-traded companies, Alcoa Corporation and Arconic, effective at 12:01 a.m. Eastern Standard Time (the “Separation Transaction”). One company, later named Alcoa Corporation was to includeincludes the Alumina and Primary Metals segments, which comprised the bauxite mining, alumina refining, aluminum production,smelting and casting, and energy operations of ParentCo, as well as the Warrick, Indiana rolling operations and the 25.1% equity interest in the rolling mill at the joint venture in Saudi Arabia, both of which were part of ParentCo’s Global Rolled Products segment. ParentCo, later changed its name to Arconic Inc., was to continue to ownincludes the operations that comprise the Global Rolled Products (except for the aforementioned rolling operations that were to be included in Alcoa Corporation), Engineered Products and Solutions, and Transportation and Construction Solutions segments.
The Separation Transaction was subject to a number of conditions, including, but not limited to: final approval by ParentCo’s Board of Directors (see below); the continuing validity of the private letter ruling from the Internal Revenue Service regarding certain U.S. federal income tax matters relating to the transaction; receipt of an opinion of legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes; and the U.S. Securities and Exchange Commission (the “SEC”) declaring effective a Registration Statement on Form 10, as amended, filed with the SEC on October 11, 2016 (effectiveness was declared by the SEC on October 17, 2016).
On September 29, 2016, ParentCo’s Board of Directors approved the completion of the Separation Transaction by means of a pro rata distribution by ParentCo of 80.1% of the outstanding common stock of Alcoa Corporation to ParentCo shareholders of record as of the close of business on October 20, 2016 (the “Record Date”). Arconic was to retain the remaining 19.9% of Alcoa Corporation common stock. At the time of the Separation Transaction, ParentCo shareholders were to receive received one share of Alcoa Corporation common stock, representing in aggregate 80.1% of the common stock of the Company, for every three shares of ParentCo common stock held as of the close of business on the Record Date.Date (cash was paid by ParentCo shareholders were to receive cashits’ shareholders in lieu of fractional shares.
To effect the Separation Transaction, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of $1,072 to ParentCo by Alcoa Corporation (an additional $247 was paid to Arconic by the Company in 2017 – see Financing Activities in Liquidity and Capital Resources below) with the net proceeds of a previous debt offering (see Financing Activities in Liquidity and Capital Resources below). Additionally, 146,159,428 shares and 36,311,767 shares of the Company’s common stock were distributed to ParentCo shareholders and retained by Arconic, respectively. “Regular-way” trading of Alcoa Corporation’s common stock began with the opening of the New York Stock Exchange on November 1, 2016 under the ticker symbol “AA.” The Company’s common stock has a par value of $0.01 per share.
In connection with the Separation Transaction, as of October 31, 2016, Alcoa Corporation and Arconic entered into certain agreements with Arconic to implement the legal and structural separation between the two companies, govern the relationship between Alcoa Corporationthe Company and Arconic after the completion of the Separation Transaction, and allocate between Alcoa Corporation and Arconic various assets, liabilities, and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, and certain Patent, Know-How, Trade Secret License and Trademark License Agreements.
On November 1, 2016 (the “Separation Date”), the Separation Transaction was completedAgreements, and became effective at 12:01 a.m. Eastern Standard Time. To effect the Separation Transaction, ParentCo undertook a series of transactions to separate the net assetsStockholder and certain legal entities of ParentCo, resulting in a cash payment of $1,072 to ParentCo by Alcoa Corporation with the net proceeds of a previous debt offering (see Financing Activities in Liquidity and Capital Resources below). In conjunction with the Separation Transaction, 146,159,428 shares of Alcoa Corporation common stock were distributed to ParentCo shareholders. Additionally, Arconic retained 36,311,767 shares of Alcoa Corporation common stock representing its 19.9% retained interest (on February 14, 2017, Arconic sold 23,353,000 of these shares). “Regular-way” trading of Alcoa Corporation’s common stock began with the opening of the New York Stock Exchange on November 1, 2016 under the ticker symbol “AA.” Alcoa Corporation’s common stock has a par value of $0.01 per share.Registration Rights Agreement.
ParentCo incurred costs to evaluate, plan, and execute the Separation Transaction, and Alcoa Corporation was allocated a pro rata portion of those costs based on segment revenue (see Cost Allocations below). ParentCo recognized $152 from January 2016 through October 2016 and $24 in 2015 for costs related to the Separation Transaction, of which $68 and $12, respectively, was allocated to Alcoa Corporation. The allocated amounts were included in Selling, general administrative, and other expenses on Alcoa Corporation’sthe Company’s Statement of Consolidated Operations.
Basis of Presentation. The Consolidated Financial Statements of Alcoa Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and. In accordance with GAAP, certain situations require management to make certainestimates based on judgments estimates, and assumptions. Theseassumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters.
Prior to the Separation Date, Alcoa Corporationthe Company did not operate as a separate, standalone entity. Alcoa Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporation’s Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation.
Cost Allocations. The description and information on cost allocations is applicable for all periods included in Alcoa Corporation’s Consolidated Financial Statements prior to the Separation Date.
The Consolidated Financial Statements of Alcoa Corporation include general corporate expenses of ParentCo that were not historically charged to Alcoa Corporation for certain support functions that were provided on a centralized basis, such as expenses related to finance, audit, legal, information technology, human resources, communications, compliance, facilities, employee benefits and compensation, and research and development activities. These general corporate expenses were included in Alcoa Corporation’son the Company’s Statement of Consolidated Operations within Cost of goods sold, Selling, general administrative and other expenses, and Research and development expenses. These expenses were allocated to Alcoa Corporation on the basis of direct usage when identifiable, with the remainder allocated based on Alcoa Corporation’s segment revenue as a percentage of ParentCo’s total segment revenue for both Alcoa Corporation and Arconic.
All external debt not directly attributable to Alcoa Corporation was excluded from Alcoa Corporation’sthe Company’s Consolidated Balance Sheet. Financing costs related to these debt obligations were allocated to Alcoa Corporation based on the ratio of capital invested in Alcoa Corporation to the total capital invested by ParentCo in both Alcoa Corporation and Arconic, and were included inon the Alcoa Corporation’sCompany’s Statement of Consolidated Operations within Interest expense.
The following table reflects the allocations described above:
2016 | 2015 | 2014 | ||||||||||
Cost of goods sold(1) | $ | 40 | $ | 93 | $ | 76 | ||||||
Selling, general administrative, and other expenses(2) | 150 | 146 | 158 | |||||||||
Research and development expenses | 2 | 17 | 21 | |||||||||
Provision for depreciation, depletion, and amortization | 18 | 22 | 37 | |||||||||
Restructuring and other charges(3) | 1 | 32 | 23 | |||||||||
Interest expense | 198 | 245 | 278 | |||||||||
Other (income) expenses, net | $ | (7 | ) | $ | 12 | $ | 5 |
|
| 2016 |
| |
Cost of goods sold(1) |
| $ | 40 |
|
Selling, general administrative, and other expenses(2) |
|
| 150 |
|
Research and development expenses |
|
| 2 |
|
Provision for depreciation, depletion, and amortization |
|
| 18 |
|
Restructuring and other charges |
|
| 1 |
|
Interest expense |
|
| 198 |
|
Other income, net |
|
| (7 | ) |
(1) | Allocation principally relates to expenses for ParentCo’s retained pension and other postretirement benefits associated with closed and sold operations. |
(2) | Allocation includes costs incurred by ParentCo associated with the Separation Transaction (see above). |
|
Management believes the assumptions regarding the allocation of ParentCo’s general corporate expenses and financing costs were reasonable.
Nevertheless, the Consolidated Financial Statements of Alcoa Corporation may not include all of the actual expenses that would have been incurred and may not reflect Alcoa Corporation’s consolidated results of operations, financial position, and cash flows had it been a standalone company during the periods prior to the Separation Date. Actual costs that would have been incurred if Alcoa Corporation had been a standalone company would depend on multiple factors, including organizational structure, capital structure, and strategic decisions made in various areas, including information technology and infrastructure. Transactions between Alcoa Corporation and ParentCo including sales to Arconic, were included as related party transactions in Alcoa Corporation’s Consolidated Financial Statements and are considered to be effectively settled for cash at the time the transaction was recorded. The total net effect of the settlement of these transactions is reflected inon Alcoa Corporation’s Statement of Consolidated Cash Flows as a financing activity and inon the Company’s Consolidated Balance Sheet as Parent Company net investment.
Earnings Summary
Net income attributable to Alcoa Corporation for 2018 was $227 compared with $217 in 2017. The change of $10 was primarily due to improved pricing for both aluminum products and alumina, mostly offset by several factors as follows: increased input costs and other operational expenses, a net charge for several actions associated with employee retirement benefit plans, a higher income tax provision, higher net income attributable to a noncontrolling interest partner in certain of Alcoa Corporation’s operations, and a charge to establish an allowance on certain value-added tax credits.
Net income attributable to Alcoa Corporation for 2017 was $217 compared with Net loss attributable to Alcoa Corporation of $400 in 2016. The change of $617 was mainly the result of a higher average realized price for 2016 was $400 compared with $863 in 2015. The smaller losseach of $463 was mostly dueprimary aluminum and alumina and the absence of allocated interest expense and costs related to lower restructuring-related charges, net productivity improvements, a smaller income tax provision, gains on the sales of multiple assets, and decreases in ongoing overhead and research and development expenses.Separation Transaction. These positive impacts were partially offset by lower pricing in most operations and costs associated with the Separation Transaction.
Net lossa higher income tax provision; higher net income attributable to a noncontrolling interest partner in certain of Alcoa CorporationCorporation’s operations; increased raw materials, maintenance, and transportation costs; and net unfavorable foreign currency movements.
Sales—Sales for 2015 was $8632018 were $13,403 compared with $256$11,652 in 2014.2017, an improvement of $1,751, or 15%. The increased loss of $607increase was primarily duelargely attributable to a lower average realized price for both aluminum and alumina, a charge for legal matters in Italy, a discrete income tax charge for valuation allowances on certain deferred tax assets and nondeductible items, lower energy sales, and higher costs. These negative impacts were partially offset by net favorable foreign currency movements, net productivity improvements, and lower charges and expenses related to a number of portfolio actions (such as capacity reductions and divestitures).
Sales—Sales for 2016 were $9,318 compared with sales of $11,199 in 2015, a decline of $1,881, or 17%. The decrease was mainly the result of a lower average realized price for each of alumina, primary aluminum, (primary and rolled),flat-rolled aluminum. This positive impact was slightly offset by decreased shipments for both aluminum products and
energy, lower volume for alumina, bauxite and the absence of surplus energy sales ($105) related to capacity that wasthe closed or curtailed (see Aluminum and Cast ProductsRockdale (Texas) smelter due to the early termination of a power contract in Segment Information below). These negative impacts were slightly offset by higher bauxite sales.October 2017.
Sales for 20152017 were $11,199$11,652 compared with sales$9,318 in 2016, an improvement of $13,147 in 2014, a reduction of $1,948,$2,334, or 15%25%. The decreaseincrease was primarily due to the absence of sales related to capacity that was closed, sold or curtailed (see Primary Metals (Segments Prior to 2015) in Segment Information below),principally driven by a lowerhigher average realized price for each of primary aluminum and alumina and lower energy sales (as a resultincreased shipments for each of lower pricingaluminum products, alumina, and unfavorable foreign currency movements).bauxite. These negativepositive impacts were partiallyslightly offset by higher volumesrealized losses from embedded derivatives (designated as cash flow hedges of alumina and rolled products.forward aluminum sales) in energy supply contracts due to the rise in LME aluminum prices.
Cost of Goods Sold—COGS as a percentage of Sales was 84.8%75.2% in 20162018 compared with 80.7%77.2% in 2015.2017. The percentage was negativelypositively impacted by a lowerhigher average realized price for each ofboth alumina and aluminum (primary and rolled), and energy, and an unfavorableproducts, a favorable last in, first out (LIFO) inventory adjustment (difference of $117—$91—see Reconciliation of ATOITotal Segment Adjusted EBITDA to Consolidated Net LossIncome (Loss) Attributable to Alcoa Corporation in Segment Information below)., and net favorable foreign currency movements due to a stronger U.S. dollar. These negativepositive impacts were partially offset by net productivity improvements across all segmentshigher input costs for carbon materials, energy, and lower inventory write-downs related to the decisions to permanently close and/or curtail capacity (difference of $85—caustic soda; increased maintenance and transportation expenses; and tariffs on aluminum imports ($84—see Restructuring and Other ChargesAluminum in Segment Information below).
COGS as a percentage of Sales was 80.7%77.2% in 20152017 compared with 80.2%84.5% in 2014.2016. The percentage was negativelypositively impacted by a lowerhigher average realized price for botheach of primary aluminum and alumina, lowersomewhat offset by several factors as follows: higher input costs, particularly for energy sales, higher(including $21 related to a financial contract—see below) and caustic soda; net unfavorable foreign currency movements due to a weaker U.S. dollar; increased maintenance and transportation expenses; an unfavorable LIFO inventory write-downsadjustment (difference of $81—see Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net Income (Loss) Attributable to Alcoa Corporation in Segment Information below); and costs related to the decisionspartial restart of the Warrick (Indiana) smelter ($46—see Aluminum in Segment Information below).
Alcoa Corporation has purchased electricity in the spot market for one of its smelters since the Company’s contract with a local energy provider expired in October 2016, as a new energy contract was not able to permanently close and/or curtailbe negotiated. In order to manage the Company’s exposure against the variable energy rates that occur in the spot market, Alcoa Corporation had previously entered into a financial contract with a counterparty to effectively convert the Company’s variable power price to a fixed power price. At the beginning of 2017, Alcoa Corporation held a favorable position in the financial contract, which was scheduled to early terminate in August 2017, as a result of a decision made by management in August 2016.
In January 2017, Alcoa Corporation began the process of restarting capacity (differenceat this smelter, which was halted due to an unexpected power outage that occurred in December 2016. As a result, Alcoa Corporation and the same counterparty to the existing financial contract entered into a new financial contract to effectively convert the Company’s variable power price to a fixed power price from August 2017 through July 2021. Additionally, the effective termination of $35—see Restructuringthe existing financial contract was moved up to July 31, 2017. In order to obtain the most favorable terms under the new financial contract that could be negotiated, Alcoa Corporation conceded a portion of the existing financial contract that was favorable to the Company for the April through July 2017 period.
As a result of this concession, Alcoa Corporation sought an additional financial contract to cover the exposure to variable power rates for the April through July 2017 period. In March 2017, Alcoa Corporation secured such a contract with a different counterparty; however, the price of power in the spot market rose significantly between January and March 2017. Consequently, the fixed power price secured by this additional financial contract was significantly higher than the fixed
power price previously secured by the existing financial contract described above. Accordingly, Alcoa Corporation realized higher energy costs (included in COGS) of $21 and mark-to-market losses (included in Other income, net) related to the financial contracts of $13 in 2017.
Selling, General Administrative, and Other Charges below),Expenses—SG&A expenses were $248, or 1.9% of Sales, in 2018 compared with $280, or 2.4% of Sales, in 2017. The decline of $32 was primarily related to decreases in various expenses, including employee transfer and higher costs.relocation costs and legal and consulting fees, and net favorable foreign currency movements, largely due to a stronger U.S. dollar against the Brazilian real. These negativepositive impacts were partially offset by higher stock-based compensation expense related to corporate employees ($10).
SG&A expenses were $280, or 2.4% of Sales, in 2017 compared with $356, or 3.8% of Sales, in 2016. The decrease of $76 was mostly offsetattributable to the absence of costs related to the Separation Transaction ($73), which includes an allocation of $68 from ParentCo prior to the Separation Date.
Provision for Depreciation, Depletion, and Amortization—The provision for DD&A was $733 in 2018 compared with $750 in 2017. The decline of $17, or 2%, was principally caused by net favorable foreign currency movements, largely due to a stronger U.S. dollar net productivity improvements, a favorable LIFO adjustment (difference of $103—see Reconciliation of ATOI to Consolidated Net Loss Attributable to Alcoa Corporation (Segments Prior to 2015) in Segment Information below),against the Brazilian real, and the absence of costslower expense related to a new labor agreement that covers employees at seven locationsgroup of assets from ParentCo’s 1998 acquisition of Alumax reaching the end of their depreciable lives. These positive impacts were partially offset by higher amortization of deferred mining costs ($23) and an increase in the United States (see below)write-offs of previously capitalized costs for projects no longer being pursued ($4).
On June 6, 2014, the United Steelworkers ratified a new five-year labor agreement covering approximately 6,100 employees at 10 U.S. locations of ParentCo (of which seven are part of Alcoa Corporation); the previous labor agreement expired on May 15, 2014. In 2014, as a result of the preparationThe provision for and ratification of the new agreement, Alcoa Corporation recognized $7DD&A was $750 in COGS for, among other items, business contingency costs and a one-time signing bonus for employees.
Selling, General Administrative, and Other Expenses—SG&A expenses were $359, or 3.9% of Sales, in 20162017 compared with $353, or 3.2% of Sales,$718 in 2015.2016. The increase of $6$32, or 4%, was largely related to higher costs associated with the Separation Transaction (difference of $61), which includes a higher allocation of $56 from ParentCo prior to the Separation Date, mostly offsetmainly caused by a decrease in corporate overhead expenses, the absence of SG&A related to closed and sold locations ($17), and favorableunfavorable foreign currency movements due to a stronger U.S. dollar.
SG&A expenses were $353, or 3.2% of Sales, in 2015 compared with $383, or 2.9% of Sales, in 2014. The decline of $30 was principally the result of favorable foreign currency movements due to a stronger U.S. dollar and the absence of SG&A ($15) related to closed and sold locations, partially offset by costs related to the Separation Transaction ($12).
Research and Development Expenses—R&D expenses were $33 in 2016 compared with $69 in 2015 and $95 in 2014. The respective decrease in 2016 as compared to 2015 and in 2015 as compared to 2014 was mainly driven by lower spending related to break-through smelting technology, which decreased each of the last two years as Alcoa Corporation worked towards completion of the R&D phase.
Provision for Depreciation, Depletion, and Amortization—The provision for DD&A was $718 in 2016 compared with $780 in 2015. The decline of $62, or 8%, was principally caused by favorable foreign currency movements due to a strongerweaker U.S. dollar, particularly against the Brazilian real and Australian dollar, and the absence of DD&A ($23) related to capacity reductions at a refinery and smelter in South America that occurred at different points during 2015
(see Alumina in Segment Information below) and a smelter in the United States that occurred in March 2016 (see Aluminum in Segment Information below).
The provision for DD&A was $780 in 2015 compared with $954 in 2014. The decrease of $174, or 18%, was mostlyincremental expense due to favorable foreign currency movements due to a stronger U.S. dollar, particularly against the Australian dollar and Brazilian real, and the absencecapitalization in 2017 of DD&A ($55) related to the divestiture and/or permanent closure of five smelters, one refinery, and one rod mill (see Alumina and Primary Metals (Segments Prior to 2015) in Segment Information below), all of which occurred from March 2014 through June 2015.new bauxite residue storage areas.
Restructuring and Other Charges—Restructuring and other charges for each year in the three-year period ended December 31, 20162018 were comprised of the following:
2016 | 2015 | 2014 | ||||||||||
Asset impairments | $ | 155 | $ | 311 | $ | 328 | ||||||
Asset retirement obligations | 97 | 76 | 87 | |||||||||
Layoff costs | 32 | 199 | 157 | |||||||||
Environmental remediation | 26 | 86 | 28 | |||||||||
Legal matters in Italy | - | 201 | - | |||||||||
Net (gain) loss on divestitures of businesses | (3 | ) | 25 | 214 | ||||||||
Other | 47 | 92 | 66 | |||||||||
Reversals of previously recorded layoff and other exit costs | (36 | ) | (7 | ) | (17 | ) | ||||||
Restructuring and other charges | $ | 318 | $ | 983 | $ | 863 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Settlements and/or curtailments related to retirement benefits (N) |
| $ | 331 |
|
| $ | 8 |
|
| $ | 17 |
|
Allowance on value-added tax credits (S) |
|
| 107 |
|
|
| — |
|
|
| — |
|
Power contract payments – non-recurring |
|
| 62 |
|
|
| 244 |
|
|
| — |
|
Asset impairments |
|
| 18 |
|
|
| 40 |
|
|
| 155 |
|
Asset retirement obligations (Q) |
|
| 5 |
|
|
| 10 |
|
|
| 97 |
|
Environmental remediation (R) |
|
| 2 |
|
|
| 8 |
|
|
| 26 |
|
Layoff costs |
|
| 2 |
|
|
| 15 |
|
|
| 15 |
|
Legal matter in Italy (R) |
|
| — |
|
|
| (22 | ) |
|
| — |
|
Other |
|
| 48 |
|
|
| 49 |
|
|
| 44 |
|
Reversals of previously recorded layoff and other costs |
|
| (48 | ) |
|
| (43 | ) |
|
| (36 | ) |
Restructuring and other charges |
| $ | 527 |
|
| $ | 309 |
|
| $ | 318 |
|
* | In 2016, |
Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.
2018 Actions. In 2018, Alcoa Corporation recorded Restructuring and other charges of $527, which were comprised of the following components: $331 (net) related to settlements and curtailments of certain pension and other postretirement employee benefits (see Pension and Other Postretirement Benefits in Critical Accounting Policies and Estimates below); $107 to establish an allowance on state value-added tax credits related to the Company’s operations in Brazil; $86 for additional costs related to the curtailed Wenatchee (Washington) smelter, including $73 associated with 2018 management decisions (see below); a $15 net benefit related to the Portovesme (Italy) smelter, composed of a $38 reversal and a $23 charge; and an $18 net charge for other items.
In June 2018, management decided not to restart the fully curtailed Wenatchee smelter within the term provided in the related electricity supply agreement. Alcoa Corporation was therefore required to make a $62 payment to the energy supplier under the provisions of the agreement. Additionally, management decided to permanently close one (38 kmt) of the four potlines at this smelter. This potline has not operated since 2001 and the investments needed to restart this line are cost prohibitive. The remaining three curtailed potlines have a capacity of 146 kmt. In connection with these decisions, the Company recognized a charge of $73, composed of the $62 payment, $10 for asset impairments, and $1 for asset retirement obligations triggered by the decision to decommission the potline.
2017 Actions. In 2017, Alcoa Corporation recorded Restructuring and other charges of $309, which were comprised of the following components: $244 related to the early termination of a power contract (see below); $49 for exit costs related to a decision to permanently close and demolish a smelter (see below); $41 for additional contract costs related to the curtailed Wenatchee and São Luís (Brazil) smelters; $22 for layoff costs, including the separation of approximately 130 employees (115 in the Aluminum segment), mostly for voluntary separation programs; a $22 reversal to reduce a reserve previously established at the end of 2015 related to a legal matter in Italy; an $18 net charge for other items, including the relocation of the Company’s headquarters and principal executive office from New York, New York to Pittsburgh, Pennsylvania; and a $43 reversal associated with several reserves related to prior periods (see below).
In October 2017, Alcoa Corporation and Luminant Generation Company LLC (Luminant) executed an early termination agreement of a power contract, as well as other related fuel and lease agreements, effective October 1, 2017, related to the Company’s Rockdale (Texas) smelter, which has been fully curtailed since the end of 2008. In accordance with the terms of the early termination agreement, Alcoa made a cash payment of $238 and transferred approximately 2,200 acres of related land and other assets and liabilities to Luminant (net asset carrying value of $6).
Since the curtailment of the Rockdale smelter, the Company had been selling surplus electricity into the energy market. The power contract was set to expire no earlier than 2038, except for limited circumstances in which one or both parties could elect to early terminate without penalty for which conditions had never been met. In 2017 (through September 30) and 2016, Alcoa Corporation recognized $105 and $141, respectively, in Sales and $148 and $210, respectively, in Cost of goods sold on the Company’s Statement of Consolidated Operations related to the sale of the surplus electricity and the cost of the Luminant power contract.
As a result of the early termination of the power contract, Alcoa initiated a strategic review of the remaining buildings and equipment associated with the smelter, casthouse, and the aluminum powder plant at the Rockdale location. ParentCo previously decided to curtail the operating capacity of the Rockdale smelter in 2008 as a result of an uncompetitive power supply and then-overall unfavorable market conditions. Under this review, which was completed in December 2017, management determined that the Rockdale operations have limited economic prospects. Consequently, management approved the permanent closure and demolition of the Rockdale smelter (capacity of 191 kmt-per-year) and related operations effective immediately. Demolition and remediation activities related to this action began in 2018 and are expected to be completed by the end of 2022. Separately, the Company continues to own more than 30,000 acres of land surrounding the Rockdale operations.
In 2017, costs related to this decision included asset impairments of $32, representing the write-off of the remaining book value of all related properties, plants, and equipment; $1 for the layoff of approximately 10 employees (Corporate); and $16 in other costs. Additionally in 2017, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $6, which was recorded in Cost of goods sold on the Company’s Statement of Consolidated Operations. The other costs of $16 represent $8 in asset retirement obligations and $8 in environmental remediation, both of which were triggered by the decisions to permanently close and demolish the Rockdale facilities.
In July 2017, Alcoa Corporation announced plans to restart three (capacity of 161 kmt-per-year) of the five potlines (capacity of 269 kmt-per-year) at the Warrick (Indiana) smelter. This smelter was previously permanently closed in March 2016 by ParentCo (see 2016 Actions below). The capacity identified for restart will directly supply the existing rolling mill at the Warrick location to improve efficiency of the integrated site and provide an additional source of metal to help meet an anticipated increase in production volumes. As a result of the decision to reopen this smelter, in 2017, Alcoa Corporation reversed $33 in remaining liabilities related to the original closure decision. These liabilities consisted of $20 in asset retirement obligations and $4 in environmental remediation obligations, which were necessary due to the previous decision to demolish the smelter, and $9 in severance and contract termination costs. Additionally, the carrying value of the smelter and related assets was reduced to zero as the smelter ramped down between the permanent closure decision date (end of 2015) and the end of March 2016. Once these assets are placed back into service in conjunction with the restart, their carrying value will remain zero. As such, only newly acquired or constructed assets related to the Warrick smelter will be depreciated.
As of December 31, 2018, the separations associated with 2017 restructuring programs were essentially complete. In 2018 and 2017, cash payments of $3 and $9, respectively, were made against layoff reserves related to 2017 restructuring programs.
2016 Actions. In 2016, Alcoa Corporation recorded Restructuring and other charges of $318, which were comprised of the following components: $131 for exit costs related to a decision to permanently close and demolish a refinery (see below); $87 for additional net costs related to decisions made in late 2015 to permanently close and demolish the Warrick (Indiana) smelter and to curtail both the Wenatchee (Washington) smelter and Point Comfort (Texas) refinery (see 2015 Actions below);refinery; $72 for the impairment of an interest in gas exploration assets in Western Australia (see below); $32 for layoff costs related to cost reduction initiatives, including the separation of approximately 75 employees (60 in the Aluminum segment and 15 in the Bauxite segment) and related pension
settlement costs; aan $8 net charge of $8 for other miscellaneous items; and a $12 reversal of $12 associated with a number of small layoff reserves related to prior periods.
In December 2016, management approved the permanent closure of the Suralco refinery (capacity of 2,207 kmt-per-year) in Suriname. The Suralco refinery had been fully curtailed since November 2015 (see 2015 Actions below).2015. Management of ParentCo decided to curtail the remaining operating capacity of the Suralco refinery during 2015 in an effort to improve the position of ParentCo’s refining operations on the global alumina cost curve. Since that time, management of ParentCo (through October 31, 2016) and then separately management of Alcoa Corporation (from November 1, 2016 through the end of 2016) had been in discussions with the Government of the Republic of Suriname to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative. The decision to permanently close the Suralco refinery was based on the ultimate conclusion of those discussions. Demolition and remediation activities related to this action will beginbegan in mid-20172017 and are expected to be completed by the end of 2021.2022. The related bauxite mines in Suriname will also be permanently closed while the hydroelectric facility that supplied power to the Suralco refinery, known as Afobaka, will continue to operate and supply power to the Government of the Republic of Suriname.
In 2016, costs related to the closure and curtailment actions included accelerated depreciation of $70 related to the Warrick smelter as it continued to operate through March 2016; asset impairments of $16, representing the write-off of the remaining book value of various assets; a reversal of $24 associated with severance costs initially recorded in late 2015; and $156 in other costs. Additionally in 2016, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $5, which was recorded in COGS.Cost of goods sold on the Company’s Statement of Consolidated Operations. The other exit costs of $156 represent $94 in asset retirement obligations and $26 in environmental remediation, both of which were triggered by the decisions to permanently close and demolish the Suralco refinery (includes the rehabilitation of related bauxite mines) and the rehabilitation of a coal mine related to the Warrick smelter, $32 for contractioncontract terminations, and $4 in other related costs.
Also in December 2016, management of Alcoa Corporation concluded that an interest in certain gas exploration assets in Western Australia has been impaired. Alcoa of Australia (AofA), a majority-owned subsidiary of Alcoa Corporation that is part of Alcoa World Alumina and Chemicals (see(AofA – see Noncontrolling Interest below), owns an interest in a gas exploration project (relinquished in June 2018) that was initially entered into in 2007 as a potential source of low-cost gas to supply AofA’s refineries in Western Australia. This interest, now at 43% (as of December 31, 2016), relates to four separate gas wells. In late 2016, AofA received the results of a technical analysis performed earlier in the year for two of the wells and an updated analysis for a third well that concluded that the cost of gas recovery would be significantly higher than the market price of gas. For the fourth well, the results of a technical analysis performed prior to 2016 indicated that the cost of gas recovery would be lower than the market price of gas and, therefore, would require additional investment to move to the next phase of commercial evaluation, which management previously supported. In late 2016, management re-evaluated its options related to the fourth well and decided it is not economical to make such a commitment for the foreseeable future. As a result, AofA fully impaired its $72 interest.
As of December 31, 2016, approximately 55 ofJune 30, 2017, the 75 employees were separated. The remaining separations forassociated with 2016 restructuring programs are expected to be completed by the end of 2017.were essentially complete. In 2017 and 2016, cash payments of $2 and $7, respectively, were made against layoff reserves related to 2016 restructuring programs.
2015 Actions. In 2015, Alcoa Corporation recorded Restructuring and other charges of $983, which were comprised of the following components: $418 for exit costs related to decisions to permanently close and demolish three smelters and a power station (see below); $238 for the curtailment of two refineries and two smelters (see below); $201 related to legal matters in Italy; a $24 net loss primarily related to post-closing adjustments associated with two December 2014 divestitures (see Alumina and Primary Metals (Segments Prior to 2015) in Segment Information below); $45 for layoff costs, including the separation of approximately 465 employees; $33 for asset impairments related to prior capitalized costs for an expansion project at a refinery in Australia that is no longer being pursued; a net credit of $1 for other miscellaneous items; a reversal of $7 associated with a number of small layoff reserves related to prior periods; and $32 related to Corporate restructuring allocated to Alcoa Corporation (see Cost Allocations under Separation Transaction above).
During 2015, management initiated various alumina refining and aluminum smelting capacity curtailments and/or closures. The curtailments were composed of the remaining capacity at all of the following: the São Luís smelter in Brazil (74 kmt-per-year); the Suriname refinery (1,330 kmt-per-year); the Point Comfort refinery (2,010 kmt-per-year); and the Wenatchee smelter (143 kmt-per-year). All of the curtailments were completed in 2015 except for 1,635 kmt-per-year at the Point Comfort refinery, which was completed by the end of June 2016. The permanent closures were composed of the capacity at the Warrick smelter (269 kmt-per-year) (includes the closure of a related coal mine) and the infrastructure of the Massena East (New York) smelter (potlines were previously shut down in both 2013 and 2014—see 2014 Actions below), as the modernization of this smelter is no longer being pursued. The closure of the Warrick smelter was completed by the end of March 2016.
The decisions on the above actions were part of a separate 12-month review in refining (2,800 kmt-per-year) and smelting (500 kmt-per-year) capacity initiated by management in March 2015 for possible curtailment (partial or full), permanent closure or divestiture. While many factors contributed to each decision, in general, these actions were initiated to maintain competitiveness amid prevailing market conditions for both alumina and aluminum.
Separate from the actions initiated under the reviews described above, in mid-2015, management approved the permanent closure and demolition of the Poços de Caldas smelter (capacity of 96 kmt-per-year) in Brazil and the Anglesea power station (includes the closure of a related coal mine) in Australia. The entire capacity at Poços de Caldas had been temporarily idled since May 2014 and the Anglesea power station was shut down at the end of August 2015. Demolition and remediation activities related to the Poços de Caldas smelter and the Anglesea power station began in late 2015 and are expected to be completed by the end of 2026 and 2020, respectively.
The decision on the Poços de Caldas smelter was due to management’s conclusion that the smelter was no longer competitive as a result of challenging global market conditions for primary aluminum, which led to the initial curtailment, that have not dissipated and higher costs. For the Anglesea power station, the decision was made because a sale process did not result in a sale and there would have been imminent operating costs and financial constraints related to this site in the remainder of 2015 and beyond, including significant costs to source coal from available resources, necessary maintenance costs, and a depressed outlook for forward electricity prices. The Anglesea power station previously supplied approximately 40 percent of the power needs for the Point Henry smelter, which was closed in August 2014 (see 2014 Actions below).
In 2015, costs related to the closure and curtailment actions included asset impairments of $226, representing the write-off of the remaining book value of all related properties, plants, and equipment; $154 for the layoff of approximately 3,100 employees (1,800 in the former Primary Metals segment and 1,300 in the former Alumina segment—see Segment Information below), including $30 in pension costs; accelerated depreciation of $85 related to certain facilities as they continued to operate during 2015; and $222 in other exit costs. Additionally in 2015, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $90, which was recorded in COGS. The other exit costs of $222 represent $72 in asset retirement obligations and $85 in environmental remediation, both of which were triggered by the decisions to permanently close and demolish the aforementioned structures in the United States, Brazil, and Australia (includes the rehabilitation of a related coal mine in each of Australia and the United States), and $65 in supplier and customer contract-related costs.
As of December 31, 2016, approximately 3,200 of the 3,400 (previously 3,600) employees were separated. The total number of employees associated with 2015 restructuring programs was updated to reflect employees, who were initially identified for separation, accepting other positions within ParentCo and natural attrition. The remaining separations for 2015 restructuring programs are expected to be completed by mid-2017. In 2016 and 2015, cash payments of $65 and $26, respectively, were made against layoff reserves related to 2015 restructuring programs.
2014 Actions. In 2014, Alcoa Corporation recorded Restructuring and other charges of $863, which were comprised of the following components: $526 for exit costs related to decisions to permanently shut down and demolish three smelters (see below); a $216 net loss for the divestitures of three operations (see Alumina and Primary Metals (Segments Prior to 2015) in Segment Information below); $61 for the temporary curtailment of two smelters and a related production slowdown at one refinery (see below); $33 for asset impairments related to prior capitalized costs for a modernization project at a smelter in Canada that is no longer being pursued; $9 for layoff costs, including the separation of approximately 60 employees; a net charge of $4 for an environmental charge at a previously shut down refinery; $9 primarily for the reversal of a number of layoff reserves related to prior periods; and $23 related to Corporate restructuring allocated to Alcoa Corporation (see Cost Allocations under Separation Transaction above).
In early 2014, management approved the permanent closure and demolition of the remaining capacity (84 kmt-per-year) at the Massena East smelter and the full capacity (190 kmt-per-year) at the Point Henry smelter in Australia. The capacity at Massena East was fully shut down by the end of March 2014 and the Point Henry smelter was fully shut down in August 2014. Demolition and remediation activities related to both the Massena East and Point Henry smelters began in late 2014 and are expected to be completed by the end of 2020 and 2018, respectively.
The decisions on the Massena East and Point Henry smelters were part of a 15-month review of 460,000 metric tons of smelting capacity initiated by management in May 2013 for possible curtailment. Through this review, management determined that the remaining capacity of the Massena East smelter was no longer competitive and the Point Henry smelter had no prospect of becoming financially viable.
Management also initiated the temporary curtailment of the remaining capacity (62 kmt-per-year) at the Poços de Caldas smelter and additional capacity (85 kmt-per-year) at the São Luís smelter. These curtailments were completed by the end of May 2014. As a result of these curtailments, 200 kmt-per-year of production at the Poços de Caldas refinery was reduced by the end of June 2014.
Additionally, in August 2014, management approved the permanent closure and demolition of the capacity (150 kmt-per-year) at the Portovesme smelter in Italy, which had been idle since November 2012. This decision was made because the fundamental reasons that made the Portovesme smelter uncompetitive remained unchanged, including the lack of a viable long-term power solution. Demolition and remediation activities related to the Portovesme smelter began in 2016 and are expected to be completed by the end of 2022 (delayed due to discussions with the Italian government and other stakeholders).
In 2014, costs related to the closure and curtailment actions included $149 for the layoff of approximately 1,290 employees, including $24 in pension costs; accelerated depreciation of $146 related to the Point Henry smelter in Australia as they continued to operate during 2014; asset impairments of $150 representing the write-off of the remaining book value of all related properties, plants, and equipment; and $152 in other exit costs. Additionally in 2014, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $55, which was recorded in COGS. The other exit costs of $152 represent $87 in asset retirement obligations and $24 in environmental remediation, both of which were triggered by the decisions to permanently close and demolish the aforementioned structures in Australia, Italy, and the United States, and $41 in other related costs, including supplier and customer contract-related costs.
As of March 31, 2016, the separations associated with 2014 restructuring programs were essentially complete. In 2016 and 2015, cash payments of $1 and $34, respectively, were made against layoff reserves related to 2014 restructuring programs.
Alcoa Corporation does not include Restructuring and other charges in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
2016 | 2015 | 2014 |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||||||||||
Bauxite | $ | 18 | $ | 16 | $ | - |
| $ | 1 |
|
| $ | 2 |
|
| $ | (5 | ) | ||||||
Alumina | 182 | 212 | 283 |
|
| 112 |
|
|
| 3 |
|
|
| 72 |
| |||||||||
Aluminum | 96 | 610 | 559 |
|
| 102 |
|
|
| 51 |
|
|
| 75 |
| |||||||||
Cast Products | (1 | ) | 2 | (2 | ) | |||||||||||||||||||
Energy | 23 | 84 | - | |||||||||||||||||||||
Rolled Products | - | 9 | - | |||||||||||||||||||||
Segment total | 318 | 933 | 840 |
|
| 215 |
|
|
| 56 |
|
|
| 142 |
| |||||||||
Corporate | - | 50 | 23 |
|
| 312 |
|
|
| 253 |
|
|
| 176 |
| |||||||||
Total restructuring and other charges | $ | 318 | $ | 983 | $ | 863 |
| $ | 527 |
|
| $ | 309 |
|
| $ | 318 |
|
Interest Expense—Interest expense was $243$122 in 20162018 compared with $270$104 in 2015.2017. The declineincrease of $27,$18, or 10%17%, was primarily related to two less months of allocated interest ($47) from ParentCo in 2016 as a result of the Separation Transaction, partially offsetdriven by interest expense ($19) associated with newly issueda $500 debt ($22 – seeissuance in May 2018 (see Financing Activities in Liquidity and Capital Resources below).
Interest expense was $270$104 in 20152017 compared with $309$243 in 2014.2016. The decreasedecline of $39,$139, or 13%57%, was largely duerelated to a lowerthe absence of an allocation ($198) to Alcoa Corporation of ParentCo’s interest expense which was primarily a function of the lower ratio
in 2015 (as compared to 2014) of capital invested by ParentCo in the operations related to the then-future Alcoa Corporation company to the total capital invested by ParentCo in the operations of both the then-future Alcoa Corporation and Arconic companies, partiallySeparation Transaction, somewhat offset by higher interest expense at ParentCo subject($64) associated with a $1,250 debt issuance in September 2016 (see Financing Activities in Liquidity and Capital Resources below).
Other Expenses (Income), net—Other expenses, net was $64 in 2018 compared with $27 in 2017. The change of $37 was mostly due to allocation.the absence of a gain ($122) on the sale of the Yadkin Hydroelectric Project (Yadkin —see Aluminum in Segment Information below) and higher non-service costs related to pension and other postretirement employee benefit plans
($54). These items were partially offset by a net favorable change in each of the following: foreign currency movements ($65), mark-to-market derivative instruments ($49), and Alcoa Corporation’s share of the earnings of the aluminum complex joint venture in Saudi Arabia ($11).
Other (Income) Expenses,expenses, net— was $27 in 2017 compared with Other income, net was $89of $65 in 2016 compared with Other expenses, net of $42 in 2015.2016. The change of $131$92 was mostly attributable toprincipally caused by the absence of gains on the sales of several assets as follows: wharf property near the Intalco Washington(Washington) smelter ($118), an equity interest in a natural gas pipeline in Australia ($27), and several parcels of land ($19); a lower equity losshigher non-service costs related to Alcoa Corporation’s equity investmentspension and other postretirement employee benefit plans ($19)61); a net favorableunfavorable change in mark-to-market derivative contractsinstruments ($17)15) (see Cost of Goods Sold above); and the absence of a benefit for an arbitration recovery related to a 2010 fire at the Iceland smelter ($14). These items were somewhatpartially offset by net unfavorable foreign currency movements ($47) and the absence of a gain on the sale of land around the Lake Charles, Louisiana anode facilityYadkin ($29).
Other expenses, net was $42 in 2015 compared with $58 in 2014. The decrease of $16 was mainly the result of a gain on the sale of land around the Lake Charles, Louisiana anode facility ($29), net favorable foreign currency movements ($23),122) and a lowersmaller equity loss related to Alcoa Corporation’s equity investmentsshare of the earnings of the aluminum complex joint venture in Saudi Arabia ($5), partially offset42).
Income Taxes—Alcoa Corporation’s effective tax rate was 45.5% (provision on income) in 2018 compared with the U.S. federal statutory rate of 21% (see U.S. Tax Cuts and Jobs Act below). The effective tax rate differs (by 24.5 percentage points) from the U.S. federal statutory rate principally driven by foreign income taxed in higher rate jurisdictions and domestic losses not tax benefitted, including a net settlement/curtailment charge associated with several changes to U.S. retirement benefit plans (see Pension and Other Postretirement Benefits in Critical Accounting Policies and Estimates below).
Alcoa Corporation’s effective tax rate was 51.8% (provision on income) in 2017 compared with the absenceU.S. federal statutory rate of 35%. The effective tax rate differs (by 16.8 percentage points) from the U.S. federal statutory rate mainly due to domestic losses not tax benefitted, including a $244 charge for the early termination of a power contract (see Restructuring and Other Charges above), a $60 discrete income tax charge for a valuation allowance on the remaining deferred tax assets in Iceland (see Income Taxes in Critical Accounting Policies and Estimates below), a $26 discrete income charge for the remeasurement of certain deferred tax assets in Brazil due to a tax rate change (see below), and a $22 discrete income charge associated with U.S. tax legislation enacted in December 2017 (see U.S. Tax Cuts and Jobs Act below). The domestic losses not tax benefitted are net of a $122 gain on the sale of a mining interestYadkin (see Other Expenses (Income), net above and Aluminum in Suriname ($28) and an unfavorable change in mark-to-market derivative contracts ($13)Segment Information below).
Income Taxes—In mid-2017, AWAB received approval for a tax holiday related to the operation of the Juruti (Brazil) bauxite mine. This tax holiday was made effective as of January 1, 2017 (retroactively) and decreases AWAB’s tax rate on income generated by the Juruti mine from 34% to 15.25%, which will result in future cash tax savings over a 10-year period. As a result of this income tax rate change, AWAB’s existing deferred tax assets that are expected to reverse during the holiday period were remeasured at the lower tax rate. This remeasurement resulted in both a decrease to AWAB’s deferred tax assets and a discrete income tax charge of $26 ($15 after noncontrolling interest).
Alcoa Corporation’s effective tax rate was 113.6% (provision on a loss) in 2016 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs (by (148.6) percentage points) from the U.S. federal statutory rate primarily related to U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation.
Alcoa Corporation’s effective tax rate was 119.3% (provision on a loss) in 2015 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs (by (154.3) percentage points) from the U.S. federal statutory rate principally driven by U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation, a $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Suriname ($85, $51 after noncontrolling interest) and Iceland ($56) (see Income Taxes in Critical Accounting Policies and Estimates below), a $201 charge for legal matters in Italy (see Restructuring and Other Charges above) that is nondeductible for income tax purposes, and restructuring charges related to the curtailment of a refinery in Suriname (see Restructuring and Other Charges above), a portion for which no tax benefit was recognized.
Alcoa Corporation’s effective tax rate was 450.8% (provision on a loss) in 2014 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs (by (485.8) percentage points) from the U.S. federal statutory rate mainly due to U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation, restructuring charges related to operations in Italy (no tax benefit) and Australia (benefit at a lower tax rate) (see Restructuring and Other Charges above), a $52 ($31 after noncontrolling interest) discrete income tax charge related to a tax rate change in Brazil (see below), and a $27 ($16 after noncontrolling interest) discrete income tax charge for the remeasurement of certain deferred tax assets of a subsidiary in Spain due to a November 2014 enacted tax rate change (from 30% in 2014 to 28% in 2015 to 25% in 2016). These items were somewhat offset by foreign income taxed in lower-rate jurisdictions
In December 2011, one of ParentCo’s subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. During 2013, the application was amended and re-filed and, separately, a similar application was filed for another one of ParentCo’s subsidiaries in Brazil that had significant operations related to Alcoa Corporation. The deadline for the Brazilian government to deny the application was July 11, 2014. Since ParentCo did not receive notice that its applications were denied, the tax holiday took effect automatically on July 12, 2014. As a result, the tax rate applicable to qualified holiday income for these entities decreased significantly (from 34% to 15.25%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1, 2013). Additionally, a portion of one of the entities net deferred tax asset that reverses within the holiday period was remeasured at the new tax rate (the net deferred tax asset of the other entity was not remeasured since it could still be utilized against the entity’s future earnings not subject to the tax holiday). This remeasurement resulted in a decrease to that entity’s net deferred tax asset and a noncash charge to earnings of $52 ($31 after noncontrolling interest).
Management anticipates that the effective tax rate in 20172019 will be between 30%65% and 40%70%. However, business portfolio actions, changes in the current economic environment, tax legislation or rate changes, currency fluctuations,
ability to realize deferred tax assets, and the results of operations in certain taxing jurisdictions may cause this estimated rate to fluctuate.
U.S. Tax Cuts and Jobs Act of 2017. On December 22, 2017, U.S. tax legislation known as the U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) was enacted. For corporations, the TCJA amends the U.S. Internal Revenue Code by reducing the corporate income tax rate and modifying several business deduction and international tax provisions. Specifically, the corporate income tax rate was reduced to 21% from 35%. Other significant changes, in general, include the following, among others: (i) a mandatory one-time deemed repatriation of accumulated foreign earnings at either an 8% or 15.5% tax rate, depending on circumstances; (ii) dividends received from foreign subsidiaries can be deducted in full regardless of ownership interest (previously such dividends were fully taxable); (iii) a 21% or 10.5% tax (effective in 2018), depending on circumstances, on a new category of income, referred to as global intangible low tax income (GILTI), related to earnings of foreign entities above a prescribed return on the associated fixed asset base; (iv) a 5% to 10% tax (effective in 2018) on base erosion payments (deductible cross-border payments to related parties) that exceed 3% of a company’s deductible expenses; and (v) net operating losses have an unlimited carryforward period (previously 20 years) and no carryback period (previously 2 years), but deductions for such losses are limited to 80% of taxable income (previously 100% of taxable income) beginning with the 2018 tax year.
As a result of the close proximity of the enactment date of the TCJA in relation to Alcoa Corporation’s 2017 calendar year-end, management elected January 17, 2018 as a cut-off date for purposes of recognizing any impacts from the TCJA in the Company’s 2017 Consolidated Financial Statements. This date coincided with Alcoa Corporation’s public release of its preliminary financial results for the fourth quarter and year ended December 31, 2017. Accordingly, the Company’s preliminary analysis of the provisions of the TCJA resulted in a discrete income tax charge of $22, which was reflected in Provision for income taxes on the accompanying Statement of Consolidated Operations for 2017, as described below.
The $22 charge relates specifically to management’s reasonable estimate of the corporate income tax rate change, which resulted in the remeasurement of Alcoa Corporation’s deferred income tax accounts. On a gross basis, the Company reduced its deferred tax assets, valuation allowance, and deferred tax liabilities by $506, $433, and $51, respectively.
Management also completed a preliminary analysis of the remaining provisions of the TCJA, including those specifically described above, in order to make a reasonable estimate as of the cut-off date, which resulted in no additional impact to the Company’s 2017 Consolidated Financial Statements. Specifically, the reasonable estimate for the TCJA provisions described above was based on the following: for (i), (ii), and (iii), Alcoa Corporation’s existing tax profile, which includes significant current U.S. tax losses that would be applied against such taxable income, as well as significant foreign tax credits that can be applied against these taxes; for (iv) management estimates that the Company will be under the 3% threshold; and for (v) Alcoa Corporation’s deferred income tax assets related to U.S. net operating losses were fully reserved as of December 31, 2017.
The Company’s preliminary analyses and provisional estimates of the financial statement impacts of the TCJA were completed in accordance with guidance issued by the SEC under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
Throughout the majority of 2018, management continued to gather information and perform additional analysis of the TCJA provisions related to Alcoa Corporation’s 2017 Consolidated Financial Statements. Upon completion of this analysis, management concluded that there was no material impact to the Company’s 2017 Consolidated Financial Statements related to both the reduced corporate income tax rate and the other applicable provisions of the TCJA.
Also in 2018, management completed its analysis of the impact of the tax law changes, including GILTI, that became effective January 1, 2018 under the TCJA related to Alcoa Corporation’s 2018 Consolidated Financial Statements. The Company made an accounting policy election to include as a period cost the tax impact generated by including GILTI in U.S. taxable income. The inclusion of GILTI in 2018 U.S. taxable income was fully offset by current U.S. tax losses and net operating loss carryforwards as expected. None of the remaining provisions of the TCJA had a material impact on Alcoa Corporation’s 2018 Consolidated Financial Statements.
Noncontrolling Interest—Net income attributable to noncontrolling interest was $644 in 2018 compared with $342 in 2017 and $54 in 2016 compared with Net income attributable to noncontrolling interest of $124 in 2015 and Net loss attributable to noncontrolling interest of $91 in 2014.2016. These amounts are entirely related to Alumina Limited of Australia’s (Alumina Limited)Limited’s 40% ownership interest in a number ofseveral affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporation’s Bauxite and Alumina segments (except for the Poços de Caldas mine and refinery and a portion of the São Luís refinery, all in Brazil) and a portion (55%) of the Portland smelter in Australia.(Australia) within the Company’s Aluminum segment. These individual entities comprise an unincorporated global joint venture between Alcoa Corporation and Alumina Limited known as Alcoa World Alumina and Chemicals (AWAC). Alcoa Corporation owns 60% of these individual entities, which are consolidated by the Company for financial reporting purposes and include Alcoa of Australia Limited (AofA),AofA, Alcoa World Alumina LLC (AWA), and Alcoa World Alumina Brasil Ltda. (AWAB), and Alúmina Española, S.A. (Española). Alumina Limited’s 40% interest in the earnings of such entities is reflected as Noncontrolling interest on Alcoa Corporation’s Statement of Consolidated Operations. These combined entities generated income in both 2016 and 2015 and a loss in 2014.
In 2016,2018, these combined entities generated lowerhigher net income compared to 2015.2017. The unfavorablefavorable change in earnings was mainly attributable to an improvement in operating results (see Alumina in Segment Information below), increased earnings in the mining and refining company of the Saudi Arabia joint venture, and the absence of both $34 ($10 was noncontrolling interest’s share) in combined higher energy costs and mark-to-market losses (see Cost of Goods Sold above) and $26 ($15 was noncontrolling interest’s share) for the remeasurement of certain deferred tax assets (see Income Taxes above). These positive impacts were somewhat offset by a higher income tax provision as a result of the improved operating results and a $77 ($31 was noncontrolling interest’s share) charge (AWAB’s share) to establish an allowance on state value-added tax credits in Brazil (see Restructuring and Other Charges above).
In 2017, these combined entities generated higher net income compared to 2016. The favorable change in earnings was primarily related to a declinethe result of an improvement in operating results (see Bauxite and Alumina in Segment Information below), and the absence of both restructuring charges related to the permanent closure of the Suralco refinery and related bauxite mines in Suriname (see Restructuring and Other Charges above), and a charge for the impairment of an interest in certain gas exploration assets in Western Australia (see Restructuring and Other Charges above). These negativepositive impacts were partiallysomewhat offset by the absence of restructuring charges related to the curtailment of both the Suralco and Point Comfort, Texas refineries and the permanent closurea higher income tax provision as a result of the Anglesea power stationimproved operating results, $34 ($10 was noncontrolling interest’s share) in combined
higher energy costs and coal mine in Australiamark-to-market losses (see Restructuring and Other ChargesCost of Goods Sold above), the absence of an $85 ($34 was noncontrolling interest’s share) discrete income tax charge for a valuation allowance on certain deferred tax assets (see Income Taxes above), and a $27 ($8 was noncontrolling interest’s share) gain on the sale of an equity interest in a natural gas pipeline in Australia. The decrease in these combined entities’ operating results was mostly caused byAustralia, and a lower average realized alumina price, somewhat offset by net productivity improvements and an increase in third-party bauxite shipments (see Bauxite and Alumina in Segment Information below).
In 2015, these combined entities generated netdiscrete income compared to a net loss in 2014. The favorable change in earnings was principally due to improved operating results (see below), the absencetax charge of restructuring and other charges related to both the permanent closure of the Point Henry smelter in Australia (see Restructuring and Other Charges above) and the divestiture of an ownership interest in a mining and refining joint venture in Jamaica (see Alumina (Segments Prior to 2015) in Segment Information below), and the absence of a combined $79$26 ($3215 was noncontrolling interest’s share) discrete income tax charge related to a respective tax rate change in both Brazil and Spain (see Income Taxes above). These positive impacts were somewhat offset by restructuring charges related tofor the curtailmentremeasurement of both the Suralco and Point Comfort refineries and the permanent closure of the Anglesea power station and coal mine (see Restructuring and Other Charges above), an $85 ($34 was noncontrolling interest’s share) discrete income tax charge for a valuation allowance on certain deferred tax assets (see Income Taxes above), and the absence of a $28 ($11 was noncontrolling interest’s share) gain on the sale of a mining interest in Suriname. The improvement in these combined entities’ operating results was largely attributable to net favorable foreign currency movements, net productivity improvements, and lower input costs, slightly offset by a lower average realized alumina price (see Alumina (Segments Prior to 2015) in .
Segment Information
Alcoa Corporation is a producer of bauxite, alumina, primary aluminum, and aluminum sheetproducts (primary and theflat-rolled). The Company’s segments are organized by product on aoperations consist of three worldwide basis.reportable segments: Bauxite, Alumina, and Aluminum. Segment performance under Alcoa Corporation’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the after-tax operating income (ATOI)Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) of each segment. Certain items suchThe Company calculates segment Adjusted EBITDA as Total sales (third-party and intersegment) minus the impactfollowing items: Cost of LIFO inventory accounting; metal price lag; interest expense; noncontrolling interest; corporate expense (generalgoods sold; Selling, general administrative, and selling expenses of operating the corporate headquartersother expenses; and other global administrative facilities,
along with depreciationResearch and amortization on corporate-owned assets); restructuring and other charges; income taxes, including the impact of any discrete tax items, deferred tax valuation allowance adjustments, and other differences between tax rates applicable to the segments and the consolidated effective tax rate; and intersegment profit elimination and other nonoperating items such as foreign currency transaction gains/losses, gains/losses on certain asset sales, and interest income are excluded from segment ATOI.
Effective January 1, 2015, Alcoa Corporation redefined its segments concurrent with an internal reorganization for certain of its businesses. Following this reorganization,development expenses. Alcoa Corporation’s operations consist of six reportable segments: Bauxite, Alumina, Aluminum, Cast Products, Energy, and Rolled Products. Under the applicable reporting guidance, when a Company changes its organizational structure, it should generally prepare its segment information based on the new segments and provide comparative information for related periods. However, in certain instances, changes to the structure of an internal organization could change the composition of its reportable segments and itAdjusted EBITDA may not be practicalcomparable to retrospectively revise prior periods. In connection with the January 1, 2015 reorganization, Alcoa Corporation fundamentally altered the commercial naturesimilarly titled measures of how certain internal businesses transact with each other moving from a cost-based transfer pricing model to one based on estimated market pricing. As a result, certain operations (e.g., bauxite mining, smelting and casting) that had previously been measured and evaluated primarily based on costs incurred were transformed into separate businesses with full profit and loss information. In addition, this reorganization involved converting regional-based management responsibility to global responsibility for each business, which had a further impact on overall cost structures of the segments.companies.
As a result of the significant changes associated with the reorganization (including substantial information system modifications), which were implemented on a prospective basis only, Alcoa Corporation does not have all of the information that would be necessary to present certain segment data, specifically ATOI, income taxes and total assets, for periods prior to 2015. This information is not available to Alcoa Corporation management for its own internal use, and it is impracticable to obtain or generate this information, as underlying commercial transactions between the segments, which are necessary to determine these income-based and asset-based segment measures, did not take place prior to 2015.
The following discussion provides comparative information for 2016 and 2015 related to Alcoa Corporation’s six reportable segments. In addition, comparative information for 2015 and 2014 is provided on a supplemental basis for the reportable segments that were in effect for periods prior to 2015: Alumina, Primary Metals, and Rolled Products.
ATOIAdjusted EBITDA for all reportable segments under the current segment structure totaled $506$3,203 in 20162018, $2,725 in 2017, and $1,010$1,453 in 2015.2016. The following information provides production, shipments, sales, and ATOIAdjusted EBITDA data for each reportable segment, as well as certain production, shipments, realized price and average cost data, for each of the twothree years in the period ended December 31, 2016.2018. See Note E to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
2016 | 2015 | |||||||
Bauxite production (mbdmt) | 45.0 | 45.3 | ||||||
Third-party bauxite shipments (mbdmt) | 6.4 | 2.0 | ||||||
Alcoa Corporation’s average cost per mbdmt of bauxite* | $ | 16 | $ | 19 | ||||
Third-party sales | $ | 315 | $ | 71 | ||||
Intersegment sales | 751 | 1,160 | ||||||
Total sales | $ | 1,066 | $ | 1,231 | ||||
ATOI | $ | 212 | $ | 258 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Production(1) (mdmt) |
|
| 45.8 |
|
|
| 45.8 |
|
|
| 45.0 |
|
Third-party shipments (mdmt) |
|
| 5.7 |
|
|
| 6.6 |
|
|
| 6.4 |
|
Intersegment shipments (mdmt) |
|
| 41.2 |
|
|
| 41.1 |
|
|
| 40.5 |
|
Total shipments (mdmt) |
|
| 46.9 |
|
|
| 47.7 |
|
|
| 46.9 |
|
Third-party sales |
| $ | 271 |
|
| $ | 333 |
|
| $ | 315 |
|
Intersegment sales |
|
| 944 |
|
|
| 875 |
|
|
| 751 |
|
Total sales |
| $ | 1,215 |
|
| $ | 1,208 |
|
| $ | 1,066 |
|
Adjusted EBITDA |
| $ | 426 |
|
| $ | 424 |
|
| $ | 374 |
|
Operating costs(2) |
| $ | 869 |
|
| $ | 839 |
|
| $ | 743 |
|
Average cost per dry metric ton of bauxite |
| $ | 19 |
|
| $ | 18 |
|
| $ | 16 |
|
(1) | The production amounts do not include additional bauxite (approximately 3 mdmt per annum) that AWAC is entitled to receive (i.e. an amount in excess of its equity ownership interest) from certain other partners at the mine in Guinea. |
(2) | Includes all production-related costs, including conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses. |
Overview. This segment represents Alcoa Corporation’sthe Company’s global portfolio of bauxite mining assets. Bauxiteoperations. A portion of this segment’s production represents the offtake from equity method investments in Brazil and Guinea, as well as AWAC’s share of production related to an equity investment in Saudi Arabia. The bauxite mined by this segment is mined and sold primarily to internal customers within the Alumina segment, who then process it into alumina. Asegment; a portion of this segment’s productionthe bauxite is also sold to third parties.external customers. Bauxite mined by this segment and used internally is transferred to the Alumina segment at negotiated terms that are intended to approximate market prices; sales to third partiesthird-parties are conducted on a contract basis. Generally, this segment’s sales are transacted in U.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar and the Brazilian real. Most of the operations that comprise the Bauxite segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above).
Business Update. In 2016,August 2018, the Bauxite segment’s two mines in Australia experienced a nearly eight-week strike by the unionized labor force. These two mines continued to operate during the strike with minimal disruption, resulting in an immaterial impact to this segment’s production and financial results. The labor force has returned to work while negotiations between the Company and the union continue.
Production. In 2018, bauxite production decreased by 0.3 mbdmtwas flat compared to 2015.2017, as higher production at four of this segment’s seven mine operations was completely offset by lower production at the Trombetas (Brazil) and Boke (Guinea) mines. The declinehigher production was mostlylargely the result of planned increases at the Huntly (Australia), Al Ba’itha (Saudi Arabia), and Juruti (Brazil) mines. The lower production at the Trombetas mine was due to the consortium’s decision to reduce production in response to a partial curtailment and subsequent closure, of a third-party alumina refinery in Brazil.
In 2017, bauxite production increased by 0.8 mdmt compared to 2016. The improvement was principally related to a planned increase in production at the Juruti mine and refinery in Suriname (see Alumina below), mostlyhigher production at the Huntly mine, somewhat offset by higherlower production acrossat both the remaining bauxite portfolioTrombetas and Boké mines. The Trombetas mine experienced disruption to its normal operations due to separate
weather events that impacted the tailing ponds (bauxite waste storage areas) and the washing plant in the first half (heavy rain) and the second half (drought conditions) of 2017, respectively. The Boké mine experienced disruption to its normal operations as this segment expands its third-party bauxite business.a result of two separate force majeure events (civil unrest) during 2017.
Sales. Third-party sales for the Bauxite segment improved $244decreased 19% in 20162018 compared with 2015,2017, largely attributable to significantly highera 14% decline in volume.
Third-party sales for this segment increased 6% in 2017 compared with 2016, mainly due to a 3% improvement in volume as this segment expands its third-party bauxite business.
Intersegment sales for thisthe Bauxite segment declined 35%increased 8% in 20162018 compared with 2015,2017 and 17% in 2017 compared with 2016, both of which were primarily driven by lower demand from the Alumina segment and a lowerhigher average realized price.
ATOIAdjusted EBITDA. Adjusted EBITDA for the Bauxite segment decreased $46increased $2 in 20162018 compared with 2015, mainly caused by a lower2017, principally the result of the previously mentioned higher average realized price for intersegment sales partiallyand net favorable foreign currency movements due to a stronger U.S. dollar against the Brazilian real and Australian dollar. These positive impacts were mostly offset by net productivity improvementshigher operating costs, including maintenance, fuel oil (price), and transportation.
Adjusted EBITDA for this segment improved $50 in 2017 compared with 2016, mainly related to the previously mentioned higher average realized price for intersegment sales and increased third-party volume.shipments. These positive impacts were partially offset by higher costs for energy (including the absence of a one-time tax credit), transportation (exports from Western Australia to third-party customers), and royalties (higher third-party sales); unfavorable impacts from the previously mentioned disruptions in Brazil and Guinea; and net unfavorable foreign currency movements due to a weaker U.S. dollar against the Australian dollar and Brazilian real.
Forward-Look. In 2017,2019, higher production at the Huntly mine and increased total bauxite shipments are expected to be between 47.5 and 48.5 mbdmt, driven by incremental volumes from the Juruti (Brazil) and Huntly (Australia) mines. In December 2016, Alcoa secured its first major third-party contract to supply bauxite from its Huntly mine. The Western Australia State Government has also granted approval for Alcoa to export up to 2,500 kmt per annum of bauxite for five years to third-party customers.anticipated.
2016 | 2015 | |||||||
Alumina production (kmt) | 13,251 | 15,720 | ||||||
Third-party alumina shipments (kmt) | 9,071 | 10,755 | ||||||
Alcoa Corporation’s average realized price per metric ton of alumina | $ | 254 | $ | 311 | ||||
Alcoa Corporation’s average cost per metric ton of alumina* | $ | 246 | $ | 266 | ||||
Third-party sales | $ | 2,300 | $ | 3,343 | ||||
Intersegment sales | 1,307 | 1,687 | ||||||
Total sales | $ | 3,607 | $ | 5,030 | ||||
ATOI | $ | 102 | $ | 476 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Production (kmt) |
|
| 12,857 |
|
|
| 13,096 |
|
|
| 13,251 |
|
Third-party shipments (kmt) |
|
| 9,259 |
|
|
| 9,220 |
|
|
| 9,071 |
|
Intersegment shipments (kmt) |
|
| 4,326 |
|
|
| 4,475 |
|
|
| 4,703 |
|
Total shipments(1) (kmt) |
|
| 13,585 |
|
|
| 13,695 |
|
|
| 13,774 |
|
Third-party sales |
| $ | 4,215 |
|
| $ | 3,133 |
|
| $ | 2,300 |
|
Intersegment sales |
|
| 2,101 |
|
|
| 1,723 |
|
|
| 1,307 |
|
Total sales |
| $ | 6,316 |
|
| $ | 4,856 |
|
| $ | 3,607 |
|
Adjusted EBITDA |
| $ | 2,373 |
|
| $ | 1,289 |
|
| $ | 376 |
|
Average realized third-party price per metric ton of alumina |
| $ | 455 |
|
| $ | 340 |
|
| $ | 253 |
|
Operating costs(2) |
| $ | 3,892 |
|
| $ | 3,506 |
|
| $ | 3,178 |
|
Average cost per metric ton of alumina |
| $ | 286 |
|
| $ | 256 |
|
| $ | 231 |
|
(1) | Total shipments include metric tons that were not produced by the Alumina segment. Such alumina was purchased by this segment to satisfy certain customer commitments. The Alumina segment bears the risk of loss of the purchased alumina until control of the product has been transferred to this segment’s customer. |
(2) | Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses. |
Overview. This segment represents Alcoa Corporation’sthe Company’s worldwide refining system, which processes bauxite into alumina. The alumina whichproduced by this segment is mainly sold directlyprimarily to internal and external aluminum smelter customers worldwide, orcustomers; a portion of the alumina is sold to external customers who process it into industrial chemical products. More than halfApproximately two-thirds of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Aluminum segment. Alumina produced by this segment and used internally is transferred to the Aluminum segment at prevailing market prices. A portion of this segment’sthird-party sales are completed through the use of agents, alumina traders, and distributors. Generally, this segment’s sales are transacted in U.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, the U.S. dollar, and the euro. Most of the operations that comprise the Alumina segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above). This segment also includes AWAC’s 25.1% ownership interest in a mining and refining joint venture company in Saudi Arabia.
Business Update. In August 2018, the Alumina segment’s three refineries in Australia experienced a nearly eight-week strike by the unionized labor force. These three plants continued to operate during the strike with minimal disruption,
resulting in an immaterial impact to this segment’s production and financial results. The labor force has returned to work while negotiations between the Company and the union continue.
Capacity. At December 31, 2016, Alcoa Corporation2018 and 2017, the Alumina segment had 2,3052,519 kmt of idlecurtailed refining capacity (idle assets and process slowdowns) on a base capacity of 15,064 kmt. Both curtailed and base capacity were unchanged compared to December 31, 2016.
Production. In 2016, idle capacity2018, alumina production decreased 572by 239 kmt compared to 2015, due2017, principally caused by equipment and process issues at the three refineries in Australia and the São Luís (Brazil) refinery.
In 2017, alumina production declined by 155 kmt compared to 2016, primarily related to the permanent closureabsence of the Suralco refinery in Suriname (2,207 kmt-per-year), partially offset by the curtailment of 1,635 kmt at the Point Comfort, Texas refinery. Base capacity declined 2,207 kmt between December 31, 2016 and 2015 due to the previously mentioned permanent closure of the Suralco refinery.
In March 2015, management initiated a 12-month review of 2,800 kmt in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review was part of management’s target to lower Alcoa Corporation’s refining operations on the global alumina cost curve to the 21st percentile (currently 17th) by the end of 2016. As part of this review, in 2015, management decided to curtailproduction from the remaining operating capacity at both the
Suralco (1,330 kmt-per-year) and Point Comfort (2,010 kmt-per-year) refineries. The curtailment of the capacity at Suralco and Point Comfort(Texas) refinery, which was completedfully curtailed by the end of November 2015 and June 2016 (375 kmt-per-year(670 kmt was completed bycurtailed at the end of December 2015), respectively. Point Comfort has nameplate capacity of 2,305 kmt-per-year, of which 295 kmt was curtailed prior to the review. While management has completed this specific review of Alcoa Corporation’s refining capacity, analysis of portfolio optimization in light of changes in the marketplace that may occur at any given time is ongoing..
In December 2016, management approved the permanent closure of the Suralco refinery effective immediately. As previously mentioned, the Suralco refinery had been fully curtailed since November 2015. Since that time, management of ParentCo (through October 31, 2016) and then separately management of Alcoa Corporation (from November 1, 2016 through the end of 2016) had been in discussions with the Government of the Republic of Suriname to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative. The decision to permanently close the Suralco refinery was based on the ultimate conclusion of those discussions. The related bauxite mines in Suriname will also be permanently closed while the hydroelectric facility that supplied power to the Suralco refinery, known as Afobaka, will continue to operate and supply power to the Government of the Republic of Suriname.
See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to all of the above actions in 2016 and 2015.
In 2016, alumina production declined by 2,469 kmt compared to 2015, mostly the result of lower production at the Point Comfort refinery and the absence of production at the Suralco refinery due to the actions described above.
Sales. Third-party sales for the Alumina segment decreased 31%rose 35% in 20162018 compared with 2015,2017, largely attributable to an 18% dropa 34% improvement in average realized price and a 16% decline in volume.price. The change in average realized price was mainly driven by a 23% lower36% higher average alumina index price (on 30-day lag). In 2018, 96% of smelter-grade third-party shipments were based on the alumina index/spot price compared with 86% in 2017.
Third-party sales for this segment improved 36% in 2017 compared with 2016, mostly the result of a 34% rise in average realized price and a 2% increase in volume. The change in average realized price was principally related to a 44% higher average alumina index price (on 30-day lag). In 2017, 86% of smelter-grade third-party shipments were based on the decreasealumina index/spot price compared with 84% in volume was primarily due to lower demand.2016.
Intersegment sales for thisthe Alumina segment declined 23%increased 22% in 20162018 compared with 2015, principally caused2017 and 32% in 2017 compared with 2016, both of which were primarily driven by a higher average realized price, slightly offset by lower demand from the Aluminum segment as a result of the closure or curtailment of three smelters (see Aluminum below) that occurred at different points in 2016 and 2015, and a lower average realized price..
ATOIAdjusted EBITDA. Adjusted EBITDA for the Alumina segment decreased $374rose $1,084 in 20162018 compared with 2015, primarily due2017, largely attributable to the previously mentioned lowerhigher average realized alumina price and higher costs for caustic and other inputs, including labor, somewhat offset by net productivity improvements and lower cost for bauxite.
In 2017, alumina production will reflect the absence of approximately 200 kmt dueprices. Other positive contributions to the curtailment of the Point Comfort refinery. Additionally, net productivity improvements are anticipated.
Aluminum
2016 | 2015 | |||||||
Aluminum production (kmt) | 2,423 | 2,811 | ||||||
Alcoa Corporation’s average cost per metric ton of aluminum* | $ | 1,581 | $ | 1,828 | ||||
Third-party sales | $ | 9 | $ | 14 | ||||
Intersegment sales | 3,754 | 5,092 | ||||||
Total sales | $ | 3,763 | $ | 5,106 | ||||
ATOI | $ | (19 | ) | $ | 1 |
This segment represents Alcoa Corporation’s worldwide smelter system. Aluminum receives alumina, mostly from the Alumina segment, and produces molten primary aluminum. Virtually all of Aluminum’s production is sold internally to the Cast Products or Rolled Products segment, and is transferred at prevailing market prices.
At December 31, 2016, Alcoa Corporation had 778 kmt of idle capacity on a base capacity of 3,132 kmt. Idle capacity was unchanged compared to 2015. Base capacity declined 269 kmt between December 31, 2016 and 2015 due to the permanent closure of the Warrick, Indiana smelter.
In March 2015, management initiated a 12-month review of 500 kmt in smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review was part of management’s target to lower Alcoa Corporation’s smelting operations on the global aluminum cost curve to the 38th percentile (currently 38th) by the end of 2016. In summary, under this review, management approved the curtailment of 447 kmt-per-year and the closure of 269 kmt-per-year. The following is a description of each action.
At the same time this review was initiated, management decided to curtail the remaining capacity (74 kmt-per-year) at the São Luís smelter in Brazil; this action was completed in April 2015. In 2013 and 2014 combined, Alcoa Corporation curtailed capacity of 194 kmt-per-year at the São Luís smelter under a prior management review.
Additionally, in November 2015, management decided to curtail the remaining capacity at the Intalco (230 kmt-per-year) and Wenatchee (143 kmt-per-year) smelters, both in Washington. These two smelters previously had curtailed capacity of 90 kmt-per-year combined. The curtailment of the remaining capacity at Wenatchee was completed by the end of December 2015 and the curtailment of the remaining capacity at Intalco was expected to be completed by the end of June 2016; however, in May 2016, Alcoa Corporation reached agreement on a new power contract that will help improve the competitiveness of the smelter, resulting in the termination of the planned curtailment.
Furthermore, in December 2015, management approved the permanent closure of the Warrick smelter (269 kmt-per-year). This decision was made as this smelter was no longer competitive in light of prevailing market conditions for the price of aluminum at that time. The closure of the Warrick smelter was completed by the end of March 2016.
While management has completed this specific review of Alcoa Corporation’s smelting capacity, analysis of portfolio optimization in light of changes in the marketplace that may occur at any given time is ongoing.
Separate from the 2015 smelting capacity review described above, in June 2015, management approved the permanent closure of the Poços de Caldas smelter in Brazil effective immediately. The Poços de Caldas smelter had been temporarily idle since May 2014 due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.
See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to all of the above actions in 2016 and 2015.
In 2016, aluminum production declined by 388 kmt compared to 2015, mostly the result of the absence of production at the combined three smelters (Warrick, Wenatchee, and São Luís) impacted by the 2015 capacity review described above.
Intersegment sales for the Primary Metals segment declined 26% in 2016 compared with 2015, mainly due to a decrease in average realized price, lower sales (approximately $415) from the Warrick smelter that was closed in early 2016, and the absence of sales (approximately $300) from the Wenatchee and São Luís smelters in 2015.
ATOI for the Primary Metals segment decreased $20 in 2016 compared with 2015, primarily caused by the previously mentioned lower average realized aluminum price, mostly offset by all of the following: lower costs for all major inputs (alumina, energy, and carbon); net productivity improvements;improvement were favorable mix and net favorable foreign currency movements due to a stronger U.S. dollar, particularly against the Australian dollar and Brazilian real. These positive impacts were somewhat offset by higher costs for direct materials, including caustic soda, bauxite, and energy; lower total volume; and increased maintenance expenses, partly due to the previously mentioned operational issues.
Adjusted EBITDA for this segment improved $913 in 2017 compared with 2016, mostly due to the previously mentioned higher average realized prices, somewhat offset by higher costs for bauxite and caustic soda, net unfavorable foreign currency movements due to a weaker U.S. dollar, especially against the Icelandic krónaAustralian dollar, and Norwegian krone.an increase in maintenance expense (including outages in Western Australia).
Forward-Look. In 2017, aluminum production will reflect the absence of approximately 50 kmt due to the closure of the Warrick smelter. Additionally, net productivity improvements2019, higher costs for both bauxite and energy are expected while lower costs for caustic soda are anticipated. As described in the Segments Subsequent to 2016 section below, this segment will be combined with the Cast Products and Rolled Products segments, along with a majority of the Energy segment, into one operating segment for 2017.
2016 | 2015 | |||||||
Third-party aluminum shipments (kmt) | 2,793 | 2,957 | ||||||
Alcoa Corporation’s average realized price per metric ton of aluminum* | $ | 1,862 | $ | 2,092 | ||||
Alcoa Corporation’s average cost per metric ton of aluminum** | $ | 1,735 | $ | 2,019 | ||||
Third-party sales | $ | 5,201 | $ | 6,186 | ||||
Intersegment sales | 316 | 46 | ||||||
Total sales | $ | 5,517 | $ | 6,232 | ||||
ATOI | $ | 176 | $ | 110 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Third-party aluminum shipments(1) (kmt) |
|
| 3,268 |
|
|
| 3,356 |
|
|
| 3,147 |
|
Third-party sales |
| $ | 8,829 |
|
| $ | 8,027 |
|
| $ | 6,531 |
|
Intersegment sales |
|
| 18 |
|
|
| 21 |
|
|
| 42 |
|
Total sales |
| $ | 8,847 |
|
| $ | 8,048 |
|
| $ | 6,573 |
|
Adjusted EBITDA |
| $ | 404 |
|
| $ | 1,012 |
|
| $ | 703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary aluminum information(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Production (kmt) |
|
| 2,259 |
|
|
| 2,328 |
|
|
| 2,368 |
|
Third-party shipments(3) (kmt) |
|
| 2,732 |
|
|
| 2,773 |
|
|
| 2,793 |
|
Third-party sales |
| $ | 6,787 |
|
| $ | 6,168 |
|
| $ | 5,201 |
|
Average realized third-party price per metric ton(4) |
| $ | 2,484 |
|
| $ | 2,224 |
|
| $ | 1,862 |
|
Total shipments(3) (kmt) |
|
| 2,844 |
|
|
| 2,952 |
|
|
| 2,953 |
|
Operating costs(5) |
| $ | 7,022 |
|
| $ | 5,882 |
|
| $ | 5,193 |
|
Average cost per metric ton |
| $ | 2,469 |
|
| $ | 1,992 |
|
| $ | 1,758 |
|
(1) | Third-party aluminum shipments are composed of both primary aluminum and flat-rolled aluminum. |
(2) | The primary aluminum information presented does not include flat-rolled aluminum. |
(4) | Average realized price per metric ton of primary aluminum includes three elements: a) the underlying base metal component, based on quoted prices from the LME; b) the regional premium, which represents the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for metal sold in the United States); and c) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., billet, slab, rod, etc.) or alloy. |
(5) | Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses. |
Overview. This segment represents Alcoa Corporation’sconsists of the Company’s (i) worldwide cast house system. Castsmelting and casthouse system, which processes alumina into primary aluminum, (ii) portfolio of energy assets in Brazil, Canada, and the United States, and (iii) rolling mill in the United States.
Aluminum’s combined smelting and casting operations produce primary aluminum products, are made fromvirtually all of which is sold to external customers and traders; a portion of this primary aluminum is consumed by the rolling mill. The smelting operations produce molten primary aluminum, purchased primarily from Alcoa Corporation’s Aluminum segment, which is then formed by the casting operations into variouseither common alloy ingot (e.g., t-bar, sow, standard ingot) or into value-add ingot products including(e.g., foundry, billet, rod, and slab,slab). A variety of external customers purchase the primary aluminum products for use in fabrication operations, in a variety of industries.which produce products primarily for the transportation, building and construction, packaging, wire, and other industrial markets. Results from the sale of aluminum powder and scrap are also included in this segment. The majoritysegment, as well as the impacts of this segment’s products are sold to third parties, including to Arconic’sembedded aluminum fabrication businesses; the remaining portion is sold to the Rolled Products segment at prevailing market prices.
Third-party sales for the Cast Products segment declined 16% in 2016 compared with 2015, primarilyderivatives related to an 11% dropenergy supply contracts.
The energy assets supply power to external customers in average realized priceBrazil and, to a 6% decrease in volume. The change in average realized price was mainly driven by lower regional premiums, which dropped by an average of 40%lesser extent, in the United States, and Canada, 44% in Europe, and 53%internal customers in the Pacific region,Aluminum (Canadian smelters and a 5% lower average LME price (on 15-day lag)Warrick (Indiana) smelter and rolling mill) and Alumina segments (Brazilian refineries).
IntersegmentThe rolling mill produces aluminum sheet primarily sold directly to customers in the packaging market for the production of aluminum cans (beverage and food). Additionally, from the Separation Date through the end of 2018, Alcoa Corporation had a tolling arrangement (contractually ended on December 31, 2018) with Arconic whereby Arconic’s rolling mill in Tennessee produced can sheet products for certain customers of the Company’s rolling operations. Alcoa Corporation supplied all of the raw materials to the Tennessee facility and paid Arconic for the tolling service. Seasonal increases in can sheet sales forare generally experienced in the second and third quarters of the calendar year.
Generally, this segment’s aluminum sales are transacted in U.S. dollars while costs and expenses of this segment increased $270are transacted in 2016 compared with 2015, largely attributable to higher demand from the Rolled Productslocal currency of the respective operations, which are the U.S. dollar, the euro, the Norwegian krone, the Icelandic krona, the Canadian dollar, the Brazilian real, and the Australian dollar.
This segment as the Warrickalso includes Alcoa Corporation’s 25.1% ownership interest in both a smelting and rolling mill converted fromjoint venture company in Saudi Arabia.
Business Update. In January 2018, a hot metal plantlockout of the bargained hourly employees commenced at the Bécancour (Canada) smelter, as labor negotiations reached an impasse. Accordingly, management initiated a curtailment of two (207 kmt (Alcoa’s share)) of the three potlines at the smelter. Additionally, in December 2018, half (52 kmt (Alcoa’s share)) of the one operating potline at the Bécancour smelter was curtailed. This additional curtailment was deemed necessary to a cold metal plant (see Rolled Products below)ensure continued safety and maintenance due to recent retirements and departures among the salaried workforce.
In June 2018, management approved the permanent closure of one (38 kmt) of the Warrickfour potlines at the Wenatchee (Washington) smelter. This potline has not operated since 2001, and the investments needed to restart that line are cost prohibitive. The other three potlines (146 kmt) at this smelter remain curtailed. See Restructuring and other charges in March 2016 (see Aluminum above).Earnings Summary above for a description of charges associated with this closure.
ATOIIn October 2018, Alcoa Corporation initiated a formal 30-day consultation process for the Cast Products segment improved $66collective dismissal of all of the employees at two smelters in 2016 comparedSpain, Avilés (317 employees) and La Coruña (369 employees), with 2015, principallythe workers’ representatives. This action was the result of an internal analysis that determined that organizational improvements could be achieved if the Company ceased aluminum production at these two smelters and reorganized production at Alcoa Corporation’s San Ciprian plant in Spain. On January 22, 2019, the workforce at the Avilés and La Coruña decreasealuminum plants ratified an agreement previously reached on January 16, 2019 between the Company and the workers’ representatives related to this process. As a result, Alcoa Corporation curtailed the two smelters’ remaining, combined operating capacity of 124 kmt (completed on February 14, 2019). The casthouse at each plant and the paste facility at La Coruña will remain in operation. In accordance with the ratified agreement, the Company will maintain the smelters in restart condition in the cost of molten aluminum, net productivity improvements, and a smaller equity loss relatedevent an
agreement to sell the casthouse portionplants can be reached by June 30, 2019. Depending on the ultimate outcome of the investmentsale process, Alcoa Corporation may record restructuring-related charges in Saudi Arabia, partially offset by the previously mentioned decrease in average realized aluminum price, including product premiums.first half of 2019 for the employee severance actions and the closure of the two smelters.
In February 2017, third-party sales will reflect the impact of restarting capacity at the Portland aluminum smelter following the December 2016 power outage. Additionally, net productivity improvements are anticipated while the impact of long markets, despite strong demand, is expected to pressure value-added product pricing. As described in the Segments Subsequent to 2016 section below, this segment will be combined with the Aluminum and Rolled Products segments, along with a majority of the Energy segment, into one operating segment for 2017.
Energy
2016 | 2015 | |||||||
Third-party sales (GWh) | 7,101 | 6,604 | ||||||
Third-party sales | $ | 280 | $ | 426 | ||||
Intersegment sales | 168 | 297 | ||||||
Total sales | $ | 448 | $ | 723 | ||||
ATOI | $ | 76 | $ | 145 |
This segment represents Alcoa Corporation’s portfolio of energy assets, with power production capacity of approximately 1,685 megawatts. This power is sold to both internal customers within the Aluminum segment and external customers, and provides operational flexibility to maximize operating results during market cyclicality.
In July 2016, Alcoa Corporation’s wholly-owned subsidiary, Alcoa Power Generating Inc., reached an agreement to sell itscompleted the sale of a 215-megawatt hydroelectric project, Yadkin, Hydroelectric Project (Yadkin) to Cube Hydro Carolinas, LLC.LLC (see Other expenses (income), net in Earnings Summary above). Yadkin encompasses four hydroelectric power developments (reservoirs, dams, and powerhouses), known as High Rock, Tuckertown, Narrows, and Falls, situated along a 38-mile stretch of the Yadkin River through the central part of North Carolina. This transaction closed in February 2017. ThePrior to the divestiture, the power generated by Yadkin was primarily sold into the open market. Yadkin generated sales of $29 in 2016, and had approximately 30 employees as of December 31, 2016.
Third-party sales for the Energy segment decreased 34% in 2016 compared with 2015, primarily driven by lower energy prices in Brazil. A significant portionIn July 2017, Alcoa Corporation announced plans to restart three (161 kmt of capacity) of the sales in Brazil relate to energyfive potlines (269 kmt of capacity) at the Warrick (Indiana) smelter, which was previously consumed by Alcoa’s two smelters in Brazil, São Luís (fully curtailed since early 2015) and Poços de Caldas (fully curtailed since mid-2014 and permanently closed in mid-2015).
Intersegment salesMarch 2016 by ParentCo. The capacity identified for this segment declined 43% in 2016 compared with 2015, principallyrestart will directly supply the result of lower demand fromexisting rolling mill at the Aluminum and Alumina segments dueWarrick location, to the permanent closureimprove efficiency of the Warrick smelterintegrated site and provide an additional source of metal to help meet an anticipated increase in March 2016production volumes. See COGS and the full curtailment (portions of capacity were curtailed throughout 2015) of the Suralco refinery in November 2015, respectively.
ATOI for the Energy segment decreased $69 in 2016 compared with 2015, mainly due to both the previously mentioned lower energy prices in Brazil and the lower demand from internal consumers.
In 2017, energy prices in Brazil are expected to remain depressed and third-party sales will reflect the absence of sales related to Yadkin. As described in the Segments Subsequent to 2016 section below, the majority of this segment will be combined with the Aluminum, Cast Products, and Rolled Products segments into one operating segment for 2017.
Rolled Products
2016 | 2015 | |||||||
Third-party aluminum shipments (kmt) | 354 | 266 | ||||||
Alcoa Corporation’s average realized price per metric ton of aluminum* | $ | 3,022 | $ | 3,728 | ||||
Third-party sales | $ | 1,069 | $ | 993 | ||||
ATOI | $ | (41 | ) | $ | 20 |
This segment represents Alcoa Corporation’s rolling mill in Warrick, Indiana, which produces aluminum sheet primarily sold directly to customers in the packaging end market for the production of aluminum cans (beverage, food, and pet food). Additionally, Alcoa Corporation has a tolling arrangement with Arconic whereby Arconic’s rolling mill in Tennessee produces can sheet products for certain of this segment’s customers. Alcoa Corporation supplies all of the raw materials to the Tennessee facility and pays Arconic for the tolling service. Depending on certain factors, this arrangement concludes at the end of 2018. Seasonal increases in can sheet sales are generally experienced in the second and third quarters of the year. This segment also includes Alcoa Corporation’s investment in a rolling mill in Saudi Arabia.
Third-party sales for the Rolled Products segment increased 8% in 2016 compared with 2015, primarily driven by higher volume as a result of the tolling arrangement with Arconic, partially offset by lower pricing and an unfavorable product mix (i.e. higher ratio of body stock sold compared to end and tab stock).
ATOI for this segment declined $61 in 2016 compared with 2015, primarily attributable to higher costs ($53) from operating the Warrick rolling mill as a cold metal plant (previously was a hot metal plant), due to the permanent closure of the Warrick smelter in March 2016 (see Aluminum above), and the previously mentioned unfavorable product mix.
In 2017, third-party sales are expected to increase as a result of operating for a full year under the tolling arrangement with Arconic. Additionally, net productivity improvements are anticipated. As described in the Segments Subsequent to 2016 section below, this segment will be combined with the Aluminum and Cast Products segments, along with a majority of the Energy segment, into one operating segment for 2017.
Reconciliation of ATOI to Consolidated Net Loss Attributable to Alcoa Corporation
Items required to reconcile total segment ATOI to consolidated net loss attributable to Alcoa Corporation include: the impact of LIFO inventory accounting; metal price lag; interest expense; noncontrolling interest; corporate expense (general administrative and selling expenses of operating the corporate headquartersRestructuring and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; income taxes, including the impact of any discrete tax items, deferred tax valuation allowance adjustments, and other differences between tax rates applicable to the segments and the consolidated effective tax rate; and intersegment profit elimination and other nonoperating items such as foreign currency transaction gains/losses, gains/losses on certain asset sales, and interest income.
The following table reconciles total segment ATOI to consolidated net loss attributable to Alcoa Corporation:
2016 | 2015 | |||||||
Total segment ATOI | $ | 506 | $ | 1,010 | ||||
Unallocated amounts: | ||||||||
Impact of LIFO | (10 | ) | 107 | |||||
Metal price lag | 9 | (30 | ) | |||||
Interest expense | (243 | ) | (270 | ) | ||||
Noncontrolling interest (net of tax) | (54 | ) | (124 | ) | ||||
Corporate expense | (182 | ) | (180 | ) | ||||
Restructuring and other charges | (318 | ) | (983 | ) | ||||
Income taxes | (51 | ) | (41 | ) | ||||
Other | (57 | ) | (352 | ) | ||||
Consolidated net loss attributable to Alcoa Corporation | $ | (400 | ) | $ | (863 | ) |
See Restructuring and Other Charges, Interest Expense, and Noncontrolling Interestcharges in Earnings Summary above for a description of the changesfinancial impacts of this decision. Alcoa completed the restart of two potlines (108 kmt) in June 2018 and a third potline in December 2018 (53 kmt). The restart of the Restructuring and other charges, Interest expense, and Noncontrolling interest reconciling items, respectively,third potline had been previously delayed in the table above. The changes in the remaining reconciling items between total segment ATOI and consolidated net loss attributable to Alcoa Corporation for 2016 compared with 2015 consisted of:
a change in the Impact of LIFO, mostlyMay 2018 due to anpot instability, which in turn caused a temporary power outage.
Capacity. At December 31, 2018, the Aluminum segment had 916 kmt of idle smelting capacity on a base capacity of 3,173 kmt. In 2018, idle capacity increased 60 kmt and base capacity decreased 38 kmt compared to 2017. The increase in idle capacity was due to the pricecurtailment of alumina259 kmt at the Bécancour smelter, partially offset by the restart of 161 kmt at the Warrick smelter and the permanent closure of 38 kmt at the Wenatchee smelter. The decrease in base capacity during 2018 was due to the permanent closure of 38 kmt at the Wenatchee smelter.
At December 31, 2017, this segment had 856 kmt of idle smelting capacity on a base capacity of 3,211 kmt. In 2017, both idle and base capacity increased 269 kmt compared to 2016 related to the Warrick smelter. At the end of March 2016, the capacity of the Warrick smelter was removed from this segment’s base capacity due to the permanent closure of the facility at that time. As a result of the decision to partially restart the smelter, the capacity of the Warrick smelter was included in both the idle and base capacity at December 31, 2016 indexed to December 31, 2015 compared to a decrease in the price of alumina at December 31, 2015 indexed to December 31, 2014 (overall, the price of alumina in 2016 was lower compared with 2015);2017.
a change in Metal price lag, the result of an increase in the price of aluminum (driven by higher base metal prices (LME), partially offset by lower regional premiums) at December 31, 2016 indexed to December 31, 2015 compared to a decrease in the price of aluminum (both lower base metal prices (LME) and regional premiums) at December 31, 2015 indexed to December 31, 2014 (overall, the price of aluminum in 2016 was lower compared with 2015) (Metal price lag describes the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by Alcoa Corporation’s Rolled Products segment. Production. In general, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable.);
an increase in Corporate expense, largely attributable to higher costs associated with the Separation Transaction ($61), which includes an allocation of $56 from ParentCo prior to the Separation Date, mostly offset by a decrease in corporate overhead expenses;
an increase in Income taxes, principally caused by U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation; and
a change in Other, primarily related to a gain on the sale of wharf property near the Intalco, Washington smelter ($118), lower inventory write-downs related to the decisions to permanently close and/or curtail capacity (difference of $85—see Restructuring and Other Charges in Earnings Summary above), and a gain on the sale of an equity interest in a natural gas pipeline in Australia ($27).
Segments Prior to 2015
As described above, the following information regarding Alcoa Corporation’s segments in effect prior to January 2015 (Alumina, Primary Metals, and Rolled Products) is being provided on a supplemental basis.
ATOI for all reportable segments under the current segment structure totaled $902 in 2015 and $1,018 in 2014. The following information provides sales and ATOI data for each reportable segment, as well as certain production, shipments, realized price, and average cost data, for each of the two years in the period ended December 31, 2015. See Note E to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.
Alumina
2015 | 2014 | |||||||
Alumina production (kmt) | 15,720 | 16,606 | ||||||
Third-party alumina shipments (kmt) | 10,755 | 10,652 | ||||||
Alcoa Corporation’s average realized price per metric ton of alumina | $ | 317 | $ | 324 | ||||
Alcoa Corporation’s average cost per metric ton of alumina* | $ | 237 | $ | 282 | ||||
Third-party sales | $ | 3,455 | $ | 3,509 | ||||
Intersegment sales | 1,687 | 1,941 | ||||||
Total sales | $ | 5,142 | $ | 5,450 | ||||
ATOI | $ | 746 | $ | 370 |
This segment represents a portion of Alcoa Corporation’s upstream operations and consists of the Company’s worldwide refining system. Alumina mines bauxite, from which alumina is produced and then sold directly to external smelter customers, as well as to the Primary Metals segment (see Primary Metals below), or to customers who process it into industrial chemical products. More than half of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Primary Metals segment. Alumina produced by this segment and used internally is transferred to the Primary Metals segment at prevailing market prices. A portion of this segment’s third-party sales are completed through the use of agents, alumina traders, and distributors. Generally, the sales of this segment are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, the U.S. dollar, and the euro.
In December 2014, Alcoa Corporation’s majority-owned subsidiary (60%), Alcoa Minerals of Jamaica, LLC (AMJ, part of AWAC), completed the sale of its 55% ownership stake in a bauxite mine and alumina refinery joint venture in Jamaica to Noble Group Ltd. While owned by AMJ, 55% of both the operating results and assets and liabilities of this joint venture were included in the former Alumina segment (see Note E). As it relates to AMJ’s previous 55% ownership stake, the refinery (AMJ’s share of the capacity was 779 kmt-per-year) generated sales (third-party and intersegment) of approximately $200 in 2013, and the refinery and mine combined, at the time of divestiture, had approximately 500 employees. See Restructuring and Other Charges in Results of Operations above.
In 2015, alumina2018, primary aluminum production decreased by 88669 kmt compared to 2014. The decline was mostly the result of the absence of production at the Jamalco refinery (see above) and2017, primarily due to lower production at the Suralco (Suriname—see below) and Poços de Caldas (Brazil—see below) refineries, slightlyBécancour smelter as a result of the previously mentioned curtailment, partially offset by new production at the Warrick smelter due to the previously mentioned restart of capacity and higher production at the San Ciprian (Spain) and Point Comfort (Texas) refineries.Portland (Australia) smelter as a result of the completed restart in mid-2017 of capacity that was curtailed in December 2016 (see below).
In March 2015,2017, primary aluminum production declined by 40 kmt compared to 2016, mainly the result of lower production at the Portland smelter due to an unexpected power outage that occurred in December 2016 as a result of a fault in the Victorian transmission network. This event resulted in management initiated a 12-month reviewhalting production of 2,800 kmt in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review was part of management’s target to lower Alcoa Corporation’s refining operations on the global alumina cost curve to the 21st percentile by the end of 2016. As part of this review, in 2015, management decided to curtail the remaining operating capacity at both the Suralco (1,330 kmt-per-year) and Point Comfort (2,010 kmt-per-year) refineries. The curtailmentone of the capacitypotlines at Suralco and Point Comfortthat time; ramp up to full production was completed by the end of November 2015 and June 2016 (375 kmt-per-year was completed by the end of December 2015), respectively. Point Comfort has nameplate capacity of 2,305 kmt-per-year, of which 295 kmt was curtailed prior to the review. See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to these actions. While management has completed this specific review of Alcoa Corporation’s refining capacity, analysis of portfolio optimization in light of changes in the marketplace that may occur at any given time is ongoing.mid-2017.
Sales. Third-party sales for the AluminaAluminum segment decreased 2%increased 10% in 20152018 compared with 2014, largely attributable2017, principally related to a 2% decline12% rise in average realized price somewhatof primary aluminum and higher pricing for flat-rolled aluminum, slightly offset by a 1% increase3% decrease in overall aluminum volume. The change in average realized price was mostly driven by a decrease in both the average alumina index/spot price and average LME-based price, somewhat offset by a higher percentage (75% compared to 68%) of smelter-grade alumina shipments linked to an alumina index/spot price instead of an LME-based price.
Intersegment sales for this segment declined 13% in 2015 compared with 2014. The decrease was mostly the result of lower demand from the Primary Metals segment, as a result of the closure, curtailment or divestiture of a number of smelters (see Primary Metals below), and a lower average realized price.
ATOI for the Alumina segment increased $376 in 2015 compared with 2014, mainly caused by net favorable foreign currency movements due to a stronger U.S. dollar, especially against the Australian dollar and Brazilian real; net productivity improvements; and lower input costs, including natural gas, fuel oil, and transportation, all of which were slightly offset by higher labor and maintenance costs. These positive impacts were slightly offset by the previously mentioned lower average realized price and the absence of a gain on the sale of a mining interest in Suriname ($18).
Primary Metals
2015 | 2014 | |||||||
Aluminum production (kmt) | 2,811 | 3,125 | ||||||
Third-party aluminum shipments (kmt) | 2,961 | 3,261 | ||||||
Alcoa Corporation’s average realized price per metric ton of aluminum* | $ | 2,092 | $ | 2,396 | ||||
Alcoa Corporation’s average cost per metric ton of aluminum** | $ | 2,064 | $ | 2,252 | ||||
Third-party sales | $ | 6,737 | $ | 8,601 | ||||
Intersegment sales | 532 | 614 | ||||||
Total sales | $ | 7,269 | $ | 9,215 | ||||
ATOI | $ | 136 | $ | 627 |
This segment represents a portion of Alcoa Corporation’s upstream operations and consists of its worldwide smelting system. Primary Metals purchases alumina, mostly from the Alumina segment (see Alumina above), from which primary aluminum is produced and then sold directly to external customers and traders, as well as to Arconic. Results from the sale of aluminum powder, scrap, and excess energy are also included in this segment. Primary aluminum produced by Alcoa Corporation and sold to Arconic is sold at prevailing market prices. The sale of primary aluminum represents approximately 90% of this segment’s third-party sales. Generally, the sales of this segment are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar, the euro, the Norwegian kroner, Icelandic krona, the Canadian dollar, the Brazilian real, and the Australian dollar.
In November 2014, Alcoa Corporation completed the sale of an aluminum rod plant located in Bécancour, Québec, Canada to Sural Laminated Products. This facility takes molten aluminum and shapes it into the form of a rod, which is used by customers primarily for the transportation of electricity. While owned by Alcoa Corporation, the operating results and assets and liabilities of this plant were included in the Primary Metals segment. In conjunction with this transaction, Alcoa Corporation entered into a multi-year agreement with Sural Laminated Products to supply molten aluminum for the rod plant. The aluminum rod plant generated sales of approximately $200 in 2013 and, at the time of divestiture, had approximately 60 employees. See Restructuring and Other Charges in Results of Operations above.
In December 2014, Alcoa Corporation completed the sale of its 50.33% ownership stake in the Mt. Holly smelter located in Goose Creek, South Carolina to Century Aluminum Company. While owned by Alcoa Corporation, 50.33% of both the operating results and assets and liabilities related to the smelter were included in the Primary Metals segment. As it relates to Alcoa Corporation’s previous 50.33% ownership stake, the smelter (Alcoa Corporation’s share of the capacity was 115 kmt-per-year) generated sales of approximately $280 in 2013 and, at the time of divestiture, had approximately 250 employees. See Restructuring and Other Charges in Results of Operations above.
At December 31, 2015, Alcoa Corporation had 778 kmt of idle capacity on a base capacity of 3,401 kmt. In 2015, idle capacity increased 113 kmt compared to 2014, mostly due to the curtailment of 217 kmt combined at a smelter in each the United States and Brazil, partially offset by the permanent closure of the Poços de Caldas smelter in Brazil (96 kmt-per-year). Base capacity declined 96 kmt between December 31, 2015 and 2014 due to the previously mentioned permanent closure of the Poços de Caldas smelter. A detailed description of each of these actions follows below.
In March 2015, management initiated a 12-month review of 500 kmt in smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review was part of management’s target to lower Alcoa Corporation’s smelting operations on the global aluminum cost curve to the 38th percentile by the end of 2016. In summary, under this review, management approved the curtailment of 447 kmt-per-year and the closure of 269 kmt-per-year. The following is a description of each action.
At the same time this review was initiated, management decided to curtail the remaining capacity (74 kmt-per-year) at the São Luís smelter in Brazil; this action was completed in April 2015. In 2013 and 2014 combined, Alcoa Corporation curtailed capacity of 194 kmt-per-year at the São Luís smelter under a prior management review.
Additionally, in November 2015, management decided to curtail the remaining capacity at the Intalco (230 kmt-per-year) and Wenatchee (143 kmt-per-year) smelters, both in Washington. These two smelters previously had curtailed capacity of 90 kmt-per-year combined. The curtailment of the remaining capacity at Wenatchee was completed by the end of December 2015 and the curtailment of the remaining capacity at Intalco was expected to be completed by the end of June 2016; however, in May 2016, Alcoa Corporation reached agreement on a new power contract that will help improve the competitiveness of the smelter, resulting in the termination of the planned curtailment.
Furthermore, in December 2015, management approved the permanent closure of the Warrick, Indiana smelter (269 kmt-per-year). This decision was made as this smelter was no longer competitive in light of prevailing market conditions for the price of aluminum. The closure of the Warrick smelter was completed by the end of March 2016.
Separate from the 2015 smelting capacity review described above, in June 2015, management approved the permanent closure of the Poços de Caldas smelter effective immediately. The Poços de Caldas smelter had been temporarily idle since May 2014 due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.
See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to all of the above actions in 2015 and 2014.
In 2015, aluminum production declined by 314 kmt, mainly the result of the absence of and/or lower production at the combined four smelters (Point Henry, São Luís, Massena East, and Poços de Caldas) impacted by the 2014 and 2015 capacity reviews and at the smelter divested in 2014 (Mt. Holly).
Third-party sales for the Primary Metals segment declined 22% in 2015 compared with 2014, primarily due to a 13% drop in average realized price; lower sales to Arconic locations (approximately $700) following the divestiture or closure of several rolling mills in December 2014; the absence of sales (approximately $585) from five smelters and a rod mill that were closed, curtailed or divested in 2014; and lower energy sales in Brazil, due to both a decrease in energy prices and a weaker Brazilian real. These negative impacts were slightly offset by higher volume in the remaining smelter portfolio. The change in average realized price was largely attributable to a 10% lower9% higher average LME price (on 15-day lag) and lowerincreased regional premiums, particularly the Midwest premium (United States and Canada), which droppedrose by an average of 39%111%. Since March 2018, the Midwest premium has significantly increased as a result of the imposition of a 10% tariff on aluminum imports under the U.S. government’s Section 232 action. The lower overall aluminum volume was mostly caused by a decline in flat-rolled aluminum shipments in accordance with the targeted volumes defined in the United Statestolling arrangement with Arconic and Canadadecreased primary aluminum shipments.
Third-party sales for this segment improved 23% in 2017 compared with 2016, primarily driven by a 19% rise in average realized price of primary aluminum and 44%a 7% increase in Europe.overall aluminum volume, slightly offset by realized losses from embedded derivatives (designated as cash flow hedges of forward aluminum sales) in energy supply contracts due to the rise in LME aluminum prices. The change in average realized price of primary aluminum was mainly attributable to a 22% higher average LME price (on 15-day lag). The higher overall aluminum volume was related to this segment’s rolling operations, largely due to a tolling arrangement with Arconic.
ATOIAdjusted EBITDA. Adjusted EBITDA for the Primary MetalsAluminum segment decreased $491$608 in 20152018 compared with 2014, primarily2017, principally caused by both the previously mentionedhigher costs for alumina, carbon materials, and energy; tariffs on imports from this segment’s foreign operations, primarily from Canada, which was subjected to U.S. Section 232 tariffs effective June 1, 2018; increased transportation and maintenance expenses; lower averageoverall aluminum volume; realized aluminum price and lowerlosses from embedded derivatives in energy sales, higher energy costs (mostly in Spain as the 2014 interruptibility rights were more favorable than the 2015 structure), and an unfavorable impact relatedsupply contracts due to the curtailment ofrise in LME aluminum prices; and net unfavorable foreign currency movements due to a weaker U.S. dollar, particularly against the São Luís smelter.euro. These negative impacts were somewhat offset by net favorable foreign currency movements due to the previously mentioned higher pricing for both primary aluminum and flat-rolled aluminum.
Adjusted EBITDA for this segment improved $309 in 2017 compared with 2016, mostly the result of the previously mentioned higher average realized price of primary aluminum, partially offset by higher costs for both alumina and energy.
Forward-Look. In 2019, higher production at the Warrick smelter will be offset by lower production at the Avilés, La Coruña, stronger U.S. dollar against most major currencies, net productivity improvements, the absence of a write-off of inventoryand Bécancour smelters. Also, lower costs for alumina are anticipated while higher costs for energy are expected. Additionally, increased direct costs related to the permanent closurepayment of Section 232 tariffs on U.S. aluminum imports are expected (first half of the Portovesme, Point Henry, and Massena East smelters ($44), and a lower equity loss relatedyear).
Reconciliations of Certain Segment Information
Reconciliation of Total Segment Third-Party Sales to the joint venture in Saudi Arabia, including the absence of restart costs for one of the potlines that was previously shut down due to a period of instability.
Rolled ProductsConsolidated Sales
2015 | 2014 | |||||||
Third-party aluminum shipments (kmt) | 266 | 257 | ||||||
Alcoa Corporation’s average realized price per metric ton of aluminum* | $ | 3,728 | $ | 4,012 | ||||
Third-party sales | $ | 993 | $ | 1,033 | ||||
ATOI | $ | 20 | $ | 21 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Bauxite |
| $ | 271 |
|
| $ | 333 |
|
| $ | 315 |
|
Alumina |
|
| 4,215 |
|
|
| 3,133 |
|
|
| 2,300 |
|
Aluminum: |
|
|
|
|
|
|
|
|
|
|
|
|
Primary aluminum |
|
| 6,787 |
|
|
| 6,168 |
|
|
| 5,201 |
|
Other(1) |
|
| 2,042 |
|
|
| 1,859 |
|
|
| 1,330 |
|
Total segment third-party sales |
|
| 13,315 |
|
|
| 11,493 |
|
|
| 9,146 |
|
Other |
|
| 88 |
|
|
| 159 |
|
|
| 172 |
|
Consolidated sales |
| $ | 13,403 |
|
| $ | 11,652 |
|
| $ | 9,318 |
|
(1) | Other includes third-party sales of flat-rolled aluminum and energy, as well as realized |
Reconciliation of Total Segment Operating Costs to Consolidated Cost of Goods Sold
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Bauxite |
| $ | 869 |
|
| $ | 839 |
|
| $ | 743 |
|
Alumina |
|
| 3,892 |
|
|
| 3,506 |
|
|
| 3,178 |
|
Primary aluminum |
|
| 7,022 |
|
|
| 5,882 |
|
|
| 5,193 |
|
Other(1) |
|
| 1,914 |
|
|
| 1,689 |
|
|
| 1,227 |
|
Total segment operating costs |
|
| 13,697 |
|
|
| 11,916 |
|
|
| 10,341 |
|
Eliminations(2) |
|
| (3,051 | ) |
|
| (2,577 | ) |
|
| (2,085 | ) |
Provision for depreciation, depletion, amortization(3) |
|
| (699 | ) |
|
| (704 | ) |
|
| (676 | ) |
Other(4) |
|
| 134 |
|
|
| 356 |
|
|
| 297 |
|
Consolidated cost of goods sold |
| $ | 10,081 |
|
| $ | 8,991 |
|
| $ | 7,877 |
|
(1) | Other largely relates to the |
(2) | This line item represents the |
(3) | Depreciation, depletion, and amortization is included in the operating costs used to calculate average cost for each of the bauxite, alumina, and primary aluminum product divisions (see Bauxite, Alumina, and Aluminum above). However, for financial reporting purposes, depreciation, depletion, and amortization is presented as a separate line item on Alcoa Corporation’s Statement of Consolidated Operations. |
(4) | Other includes costs related to Transformation, the impacts of LIFO inventory accounting and metal price |
This segment represents Alcoa Corporation’s rolling mill in Warrick, Indiana, which produces aluminum sheet primarily sold directly to customers in the packaging end market for the production of aluminum cans (beverage, food, and pet food). Seasonal increases in can sheet sales are generally experienced in the second and third quarters of the year. This segment also includes Alcoa Corporation’s investment in a rolling mill in Saudi Arabia.
Third-party sales for the Rolled Products segment declined 4% in 2015 compared with 2014, primarily driven by unfavorable pricing, mostly due to a decrease in metal prices (both LME and regional premium components).
ATOI for this segment decreased $1 in 2015 compared with 2014, primarily attributable to unfavorable price/product mix, largely the result of overall pricing pressure in the global can sheet packaging end market.
Segments Subsequent to 2016
On March 2, 2017, Alcoa Corporation announced that it is consolidating certain of its business units to reduce complexity. The aluminum smelting, cast products, and rolled products businesses, along with the majority of the energy business, will be combined into a new Aluminum business unit. This new business unit will be managed as a single operating segment. As a result, beginning with the first quarter of 2017, the Company’s operating and reportable segments will both be Bauxite, Alumina, and Aluminum. The segments will use Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) to measure and report segment profitability. Alcoa Corporation’s definition of Adjusted EBITDA is net margin plus an add-back for depreciation, depletion, and amortization. Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation, depletion, and amortization. Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Reconciliation of ATOITotal Segment Adjusted EBITDA to Consolidated Net LossIncome (Loss) Attributable to Alcoa Corporation
Items required to reconcile total segment ATOI to consolidated net loss attributable to Alcoa Corporation include: the impact of LIFO inventory accounting; metal price lag; interest expense; noncontrolling interest; corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; income taxes, including the impact of any discrete tax items, deferred tax valuation allowance adjustments, and other differences between tax rates applicable to the segments and the consolidated effective tax rate; and intersegment profit elimination and other nonoperating items such as foreign currency transaction gains/losses, gains/losses on certain asset sales, and interest income.
The following table reconciles total segment ATOI to consolidated net loss attributable to Alcoa Corporation:
2015 | 2014 | |||||||
Total segment ATOI | $ | 902 | $ | 1,018 | ||||
Unallocated amounts: | ||||||||
Impact of LIFO | 107 | 4 | ||||||
Metal price lag | (30 | ) | 15 | |||||
Interest expense | (270 | ) | (309 | ) | ||||
Noncontrolling interest (net of tax) | (124 | ) | 91 | |||||
Corporate expense | (180 | ) | (208 | ) | ||||
Restructuring and other charges | (983 | ) | (863 | ) | ||||
Income taxes | (96 | ) | 110 | |||||
Other | (189 | ) | (114 | ) | ||||
Consolidated net loss attributable to Alcoa Corporation | $ | (863 | ) | $ | (256 | ) |
See Restructuring and Other Charges, Interest Expense, and Noncontrolling Interest in Earnings Summary above for a description of the changes in the Restructuring and other charges, Interest expense, and Noncontrolling interest reconciling items, respectively, in the table above. The changes in the remaining reconciling items between total segment ATOI and consolidated net loss attributable to Alcoa Corporation for 2015 compared with 2014 consisted of:
a change in the Impact of LIFO, mostly due to lower prices for both aluminum, driven by both lower base metal prices (LME) and regional premiums, and alumina (decrease in price at December 31, 2015 indexed to December 31, 2014 compared to an increase in price at December 31, 2014 indexed to December 31, 2013);
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Net income (loss) attributable to Alcoa Corporation: |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted EBITDA |
| $ | 3,203 |
|
| $ | 2,725 |
|
| $ | 1,453 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Transformation(1),(2) |
|
| (3 | ) |
|
| (49 | ) |
|
| (168 | ) |
Corporate inventory accounting(1),(3) |
|
| 11 |
|
|
| (107 | ) |
|
| (14 | ) |
Corporate expenses(4) |
|
| (96 | ) |
|
| (131 | ) |
|
| (171 | ) |
Provision for depreciation, depletion, and amortization(6) |
|
| (733 | ) |
|
| (750 | ) |
|
| (718 | ) |
Restructuring and other charges(6) |
|
| (527 | ) |
|
| (309 | ) |
|
| (318 | ) |
Interest expense(6) |
|
| (122 | ) |
|
| (104 | ) |
|
| (243 | ) |
Other (expenses) income, net(6) |
|
| (64 | ) |
|
| (27 | ) |
|
| 65 |
|
Other(1),(5) |
|
| (72 | ) |
|
| (89 | ) |
|
| (48 | ) |
Consolidated income (loss) before income taxes |
|
| 1,597 |
|
|
| 1,159 |
|
|
| (162 | ) |
Provision for income taxes(6) |
|
| (726 | ) |
|
| (600 | ) |
|
| (184 | ) |
Net income attributable to noncontrolling interest(6) |
|
| (644 | ) |
|
| (342 | ) |
|
| (54 | ) |
Consolidated net income (loss) attributable to Alcoa Corporation |
| $ | 227 |
|
| $ | 217 |
|
| $ | (400 | ) |
a change in Metal price lag, the result of a decrease in the price of aluminum (driven by both lower base metal prices (LME) and regional premiums) at December 31, 2015 indexed to December 31, 2014 compared to an increase in the price of aluminum (both lower base metal prices (LME) and regional premiums) at December 31, 2014 indexed to December 31, 2013 (Metal price lag describes the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by Alcoa
(1) | Effective in the first quarter of 2018, management elected to change the presentation of certain line items in the reconciliation of total segment Adjusted EBITDA to consolidated net income (loss) attributable to Alcoa Corporation to provide additional transparency to the nature of these reconciling items. Accordingly, Transformation (see footnote 2), which was previously reported within Other, is presented as a separate line item. Additionally, Impact of LIFO and Metal price lag, which were previously reported as separate line items, are now combined and reported in a new line item labeled Corporate inventory accounting (see footnote 3). Also, the impact of intersegment profit eliminations, which was previously reported within Other, is reported in the new Corporate inventory accounting line item. The applicable information for all prior periods presented was recast to reflect these changes. |
(2) | Transformation includes, among other items, the Adjusted EBITDA of previously closed operations. |
(3) | Corporate inventory accounting is composed of the impacts of LIFO inventory accounting, metal price lag, and intersegment profit eliminations. Metal price lag describes the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by Alcoa Corporation’s |
(4) | Corporate expenses are composed of general administrative and other expenses of operating the corporate headquarters and other global administrative facilities, as well as research and development expenses of the corporate technical center. |
(5) | Other includes certain items that impact Cost of goods sold and Selling, general administrative, and other expenses on Alcoa Corporation’s Statement of Consolidated Operations that are not included in the Adjusted EBITDA of the reportable segments. |
(6) | Notable changes in these reconciling items are described in Results of Operations above. |
The notable changes in the reconciling items other than those described in Results of Operations above (see footnote 6 in the table directly above) for 2018 compared with 2017 consisted of:
a change in Transformation, largely attributable to the absence of a loss on a power contract (terminated in October 2017) associated with the closed Rockdale (Texas) smelter (i.e. the cost of power under the contract exceeded the price of the surplus electricity sold into the energy market);
a change in Corporate inventory accounting, principally driven by a favorable LIFO inventory adjustment ($91) as a result of a decrease in the price of alumina at December 31, 2018 indexed to December 31, 2017 compared to an increase in the price of alumina at December 31, 2017 indexed to December 31, 2016; and
a decline in Corporate expense,expenses, primarily due to decreases across several corporate overhead costs.
The notable changes in the reconciling items other than those described in Results of Operations above (see footnote 6 in the table directly above) for 2017 compared with 2016 consisted of:
a change in Transformation, mainly the result of a smaller loss associated with each of the following: the then-closed Warrick smelter (holding costs), the sale of energy at the then-curtailed Rockdale smelter (i.e. the cost of power under the contract exceeded the price of the surplus electricity sold into the energy market), and the closed refinery in Suriname (holding costs), as well as higher energy sales in Suriname;
a change in Corporate inventory accounting, mostly caused by an unfavorable LIFO inventory adjustment ($81) as a result of a further increase in the price of alumina at December 31, 2017 indexed to December 31, 2016 compared to an increase in the price of alumina at December 31, 2016 indexed to December 31, 2015; and
a decline in Corporate expenses, largely attributable to decreases in various expenses, partially offset by expensesthe absence of costs related to the Separation Transaction ($12);
73), which includes an increase in Income taxes, mostly the resultallocation of the reversal in 2015 of the income tax benefit on U.S. operating losses reflected in ATOI (as compared$68 from ParentCo prior to the reversalSeparation Date, mostly offset by a decrease in 2014 of the income tax cost on U.S. operating income reflected in ATOI) and higher discrete tax charges ($62) as compared to 2014, primarily associated with valuation allowance adjustments on certain deferred tax assets in Suriname and Iceland that were higher than 2014’s discrete tax charges associated with tax rate changes in Brazil and Spain; andcorporate overhead expenses.
a change in Other, primarily due to write-downs of inventories related to various shutdown and curtailment actions ($90).
Environmental Matters
See the Environmental Matters section of Note R to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Liquidity and Capital Resources
Alcoa Corporation’s primary future cash needs are centered on operating activities, includingparticularly working capital, as well as recurringsustaining and strategicreturn-seeking capital expenditures. The Company’s ability to fund its cash needs depends on Alcoa Corporation’sthe Company’s ongoing ability to generate and raise cash in the future. Although management believes that Alcoa Corporation’s future cash from operations, together with the Company’s access to capital markets, will provide adequate resources to fund Alcoa Corporation’s operating and investing needs, the Company’s access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) Alcoa Corporation’s credit rating; (ii) the liquidity of the overall capital markets; and (iii) the current state of the economy and commodity markets. There can be no assurances that Alcoa Corporationthe Company will continue to have access to capital markets on terms acceptable to the Company.Alcoa Corporation.
For all periods prior to the Separation Date, ParentCo provided capital, cash management, and other treasury services to Alcoa Corporation. Only cash amounts specifically attributable to Alcoa Corporation were reflected in the Company’s Consolidated Financial Statements. Transfers of cash, both to and from ParentCo’s centralized cash management system, were reflected as a component of Parent Company net investment in Alcoa Corporation’s Consolidated Financial Statements.
Cash provided from operations and financing activities is expected to be adequate to cover Alcoa Corporation’s operational and business needs over the next 12 months. For an analysis of long-term liquidity, see Contractual Obligations and Off-Balance Sheet Arrangements below.
At December 31, 2016,2018, the Company’s cash and cash equivalents of Alcoa Corporation were $853,$1,113, of which $818$1,056 was held outside the United States. Alcoa Corporation has a number of commitments and obligations related to the Company’s operations in various foreign jurisdictions, resulting in the need for cash outside the United States. Alcoa Corporation is currently evaluatingcontinuously evaluates its local and global cash needs for future business operations, and anticipated debt facilities, which may influence future repatriation decisions.
Cash from Operations
Cash used forprovided from operations was $448 in 2016 was $3112018 compared with cash provided from operations of $875$1,224 in 2015. The decrease2017 and cash used for operations of $1,186$311 in 2016.
In 2018, cash provided from operations was due to lower operating results (net loss plus netcomprised of a positive add-back for noncashnon-cash transactions in earnings)earnings of $1,363 and a negativenet income of $871, mostly offset by pension contributions of $992, an unfavorable change associated within working capital of $648. These items were slightly offset by$596, and a positivecombined negative change in
both noncurrent assets of $172 and noncurrent liabilities of $60,$198.
The pension contributions reflect $725 of unscheduled payments made in 2018, including a combined $620 to three of the Company’s U.S. defined benefit pension plans and lowera combined $105 to two of the Company’s Canadian defined benefit pension plans. The additional payments to the U.S. plans were discretionary in nature and were funded with $492 in net proceeds from a May 2018 debt issuance (see Financing Activities below) and $128 of available cash on hand. The primary purpose for issuing debt to fund a portion of the discretionary contributions to the U.S. plans was to reduce near-term pension funding risk with a fixed-rate, 10-year maturity instrument. Of the additional payments to the Canadian plans, $89 was made in April 2018 to facilitate the annuitization of a portion of the future obligations under these plans and maintain the funding level of the remaining plan obligations.
The components of the unfavorable change in working capital were as follows:
• | a negative change of $43 in receivables, primarily due to higher pricing for alumina and aluminum product shipments; |
an unfavorable change of $278 in inventories, mainly caused by increased costs for raw materials;
a negative change of $32 in prepaid expenses and other current assets;
an unfavorable change of $165 in accounts payable, trade, largely attributable to a reduction in restart costs related to the Warrick smelter (see Aluminum in Segment Information above) and fewer purchases of raw materials;
a negative change of $319 in accrued expenses, principally driven by payments for the following: $133 under other postretirement employee benefit plans, $105 related to asset retirement obligations and environmental remediation, $102 for restructuring-related actions (includes $62 under the provisions of an electricity supply agreement for the Wenatchee (Washington) smelter – see Restructuring and Other Charges in Earnings Summary above), $101 for interest related to the Company’s outstanding notes due in 2024, 2026, and 2028 (see 144A Debt in Financing Activities below), $74 (final payment) related to a legacy legal matter with the U.S. government assumed by the Company in the Separation Transaction, and $18 for the settlement of a legal matter in Italy; and
a favorable change of $241 in taxes, including income taxes, mostly related to an increase in the income tax provision for operations in Australia.
In 2017, cash provided from operations was comprised of a positive add-back for non-cash transactions in earnings of $1,297 and net income of $559, somewhat offset by an unfavorable change in working capital of $388, pension contributions of $3. The favorable$106, and a combined negative change in noncurrent assets wasand noncurrent liabilities of $138.
The components of the unfavorable change in working capital were as follows:
a negative change of $118 in receivables, mostly related to higher sales;
an unfavorable change of $238 in inventories, primarily due to increased costs for raw materials;
a positive change of $43 in prepaid expenses and other current assets, principally driven by a decline in prepayments for aluminum inventory from the joint venture in Saudi Arabia;
a favorable change of $377 in accounts payable, trade, mainly the result of increased costs for raw materials and timing of payments;
a $100 smaller prepayment madenegative change of $563 in accrued expenses, largely attributable to payments for the following: $238 to early terminate a power supply contract related to the Rockdale (Texas) smelter (see Restructuring and Other Charges in Earnings Summary above), $117 related to asset retirement obligations and environmental remediation, $116 under other postretirement employee benefit plans, $86 for interest related to the Company’s outstanding notes due in 2024 and 2026 (see 144A Debt in Financing Activities below), $74 related to a natural gas supply agreementlegacy legal matter with the U.S. government assumed by the Company in Australia (see below).the Separation Transaction, and $73 for restructuring-related actions; and
Cash provided from operations in 2015 was $875 compared with $842 in 2014. The increase of $33 was due to a positive change associated withof $111 in taxes, including income taxes, primarily related to an increase in the income tax provision as a result of improved results.
In 2016, cash used for operations was comprised of an unfavorable change in working capital of $500, lower pension contributions$747, a net loss of $85, and a positive change in noncurrent liabilities of $7, mostly offset by$346, a negative change in noncurrent assets of $324$184 (see below), and lower operating results (net loss plus netpension contributions of $66. These negative impacts were partially offset by a positive add-back for noncashnon-cash transactions in earnings). The unfavorableearnings of $952 and a favorable change in noncurrent assets was mostly related toliabilities of $80.
AofA has a $300 prepayment made under a natural gas supply agreement in Australia (see below). The lower pension contributions were due to the absence of special termination benefits paid in 2014 for employees affected by the 2013 shutdown of capacity at a smelter in Canada.
On April 8, 2015, AofA secured a new 12-year gas supply agreement to power its three alumina refineries in Western Australia beginning in July 2020. This agreement was conditional on the completion of2020 for a third-party acquisition of the related energy assets from the then-current owner, which occurred in June 2015.12-year period. The terms of the gas supplythis agreement required AofA to make a prepayment of $500 in two installments. Theinstallments, the first installment of $300which was made at the time of the completion of the third-party acquisition in June 2015 and thefor $300. The second installment of $200 was made in April 2016.
Financing Activities
Cash used for financing activities was $483$288 in 20162018 compared with $162cash used for financing activities of $506 in 20152017 and $444cash provided from financing activities of $749 in 2014.2016.
The use of cash in 2018 was primarily caused by $678 in net cash paid to Alumina Limited (see Noncontrolling interest in Earnings Summary above), $135 in payments on debt, mostly related to the early repayment ($122) of the remaining outstanding loans from Brazil’s National Bank for Economic and Social Development associated with the construction of the Estreito hydroelectric power project, and $50 for the repurchase of shares of the Company’s common stock (see Common Stock Repurchase Program below). These items were partially offset by $560 in additions to debt, virtually all of which was related to $492 in net proceeds from the issuance of new senior debt securities (see 144A Debt below) and $68 in borrowings under an existing term loan by AofA.
The use of cash in 2017 was mainly driven by a cash payment of $247 to Arconic related to the Separation Transaction, mostly representing $243 of the net proceeds (see Investing Activities below) from the sale of Yadkin (see Aluminum in Segment Information above) in accordance with the Separation and Distribution Agreement, and $262 in net cash paid to Alumina Limited (see Noncontrolling Interest in Earnings Summary above).
The source of cash in 2016 was principally the result of $1,228 in additions to debt, representing the net proceeds from the issuance of new senior debt securities (see 144A Debt below) and $806 in net transfers from ParentCo prior to the Separation Date. These items were partially offset by $1,072 in cash provided to ParentCo in conjunction with the completion of the Separation Transaction, $185 in net cash paid to Alumina Limited (see Noncontrolling Interest in Earnings Summary above), and $34 in payments on debt. These items were partially offset by $802 in net transfers from ParentCo prior to the Separation Date.
The use of cash in both 2015 and 2014 was due to net transfers to ParentCo of $34 and $332, respectively, net cash paid to Alumina Limited (see Noncontrolling Interest in Earnings Summary above) of $104 and $77, respectively, and payments on debt of $24 and $36, respectively.
Credit Facility. On September 16, 2016,November 21, 2018, Alcoa Corporation and Alcoa Nederland Holding B.V. (ANHBV), a wholly-owned subsidiary of Alcoa Corporation,the Company, entered into a revolving credit agreementSecond Amendment and Restatement Agreement to the Revolving Credit Agreement dated September 16, 2016 and the Amendment and Restatement Agreement dated November 14, 2017 (the Revolving Credit Agreement as revised by the Amendment and Restatement Agreement, the “Amended Revolving Credit Agreement”), in each case, with a syndicate of lenders and issuers named therein to revise certain terms and provisions of the Amended Revolving Credit Agreement (the Amended Revolving Credit Agreement as amended, (the “Revolvingrevised by the Second Amendment and Restatement Agreement, the “Second Amended Revolving Credit Agreement”). Unless noted otherwise, the terms and provisions described below for the Second Amended Revolving Credit Agreement were applicable to the Amended Revolving Credit Agreement from November 14, 2017 to November 20, 2018. See “Financing Activities” under Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for the notable terms and provisions under the Revolving Credit Agreement from September 16, 2016 to November 13, 2017.
The Second Amended Revolving Credit Agreement provides a $1,500 senior secured revolving credit facility (the “Revolving Credit Facility”), the proceeds of which may to be used for transaction costs related to the Separation Transaction, to provide working capital and/or for other general corporate purposes of Alcoa Corporation and its subsidiaries. Subject to the terms and conditions of the Second Amended Revolving Credit Agreement, ANHBV may from time to time request the issuance of letters of credit up to $750 under the Revolving Credit Facility, subject to a sublimit of $400 for any letters of credit issued for the account of Alcoa Corporation or any of its domestic subsidiaries. Additionally, ANHBV may from time to time request that each of the lenders provide one or more additional tranches of term loans and/or increase the aggregate amount of revolving commitments, together in an aggregate principal amount of up to $500.
The Revolving Credit Facility is scheduled to mature on November 1, 2021,21, 2023 (previously November 14, 2022), unless extended or earlier terminated in accordance with the provisions of the Second Amended Revolving Credit Agreement. ANHBV may make extension requests during the term of the Revolving Credit Facility, subject to the lender consent requirements set forth in the Second Amended Revolving Credit Agreement. Under the provisions of the Second Amended Revolving Credit Agreement, ANHBV will pay a quarterly commitment fee ranging from 0.200% to 0.425% (previously 0.225% to 0.450%) (based on Alcoa Corporation’s leverage ratio) on the unused portion of the Revolving Credit Facility.
A maximum of $750 in outstanding borrowings under the Revolving Credit Facility may be denominated in euros. Loans will bear interest at a rate per annum equal to an applicable margin plus, at ANHBV’s option, either (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the highest of (1) the U.S. prime rate as published in the Wall Street Journal (previously the prime rate of JPMorgan Chase Bank, N.A.), (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5%, and (3) the one month adjusted LIBOR rate plus 1% per annum, plus, in each case, an applicable margin.annum. The applicable margin for all loans will vary based on Alcoa
Corporation’s leverage ratio and will range from 1.50% to 2.25% (previously 1.75% to 2.50%) for LIBOR loans and 0.50% to 1.25% (previously 0.75% to 1.50%) for base rate loans.loans, subject in each case to a reduction of 25 basis points if Alcoa Corporation attains at least a Baa3 rating from either Moody’s Investor Service or BBB- rating from Standard and Poor’s Global Ratings. Outstanding borrowings may be prepaid without premium or penalty, subject to customary breakage costs.
All obligations of Alcoa Corporation or a domestic entity under the Revolving Credit Facility are secured by, subject to certain exceptions (including a limitation of pledges of equity interests in certain foreign subsidiaries to 65%, and certain thresholds with respect to real property), a first priority lien on substantially all assets of Alcoa Corporation and the material domestic wholly-owned subsidiaries of Alcoa Corporation and certain equity interests of specified non-U.S. subsidiaries. All other obligations under the Revolving Credit Facility are secured by, subject to certain exceptions (including certain
thresholds with respect to real property), a first priority security interest in substantially all assets of Alcoa Corporation, ANHBV, the material domestic wholly-owned subsidiaries of Alcoa Corporation, and the material foreign wholly-owned subsidiaries of Alcoa Corporation located in Australia, Brazil, Canada, Luxembourg, the Netherlands, and Norway, including equity interests of certain subsidiaries that directly hold equity interests in AWAC entities. However, no AWAC entity is a guarantor of any obligation under the Revolving Credit Facility and no asset of any AWAC entity, or equity interests in any AWAC entity, will be pledged to secure the obligations under the Revolving Credit Facility. Under the Second Amended Revolving Credit Agreement, each of the mentioned companies shall be released from all obligations under the first priority lien and/or first priority security interest upon (i) Alcoa Corporation attaining at least a Baa3 rating from either Moody’s Investor Service or BBB- rating from Standard and Poor’s Global Ratings, in each case with a stable outlook or better, (ii) ANHBV delivering the required written notice, and (iii) no default or event of default, as defined in the Second Amended Revolving Credit Agreement, has occurred or is continuing (the date on which such conditions are met, the “Collateral Release Date”).
The Second Amended Revolving Credit Agreement includes a number of customary affirmative covenants. Additionally, the Second Amended Revolving Credit Agreement contains a number of negative covenants (applicable to Alcoa Corporation and certain subsidiaries described as restricted), that, subject to certain exceptions, include limitations on (among other things): liens; fundamental changes; sales of assets; indebtedness;indebtedness (see below); entering into restrictive agreements; restricted payments (see below), including shareholder dividends and repurchases of common stock and shareholder dividends (see below); investments (see below), loans, advances, guarantees, and acquisitions; transactions with affiliates; amendment of certain material documents; and a covenant prohibiting reductions in the ownership of AWAC entities, and certain other specified restricted subsidiaries of Alcoa Corporation, below an agreed level. The Second Amended Revolving Credit Agreement also includes financial covenants requiring the maintenance of a specified interest expense coverage ratio of not less than 5.00 to 1.00, and a leverage ratio for any period of four consecutive fiscal quarters that is not greater than 2.50 to 1.00 (2.00 to 1.00 beginning on and subsequent to the Collateral Release Date, may be increased to a level not higher than 2.25 to 1.00.1.00 under certain circumstances). As of December 31, 2016,2018 and 2017, Alcoa Corporation was in compliance with all such covenants.
In referenceThe indebtedness, restricted payments, and investments negative covenants include general exceptions to allow for potential future transactions incremental to those specifically provided for in the Second Amended Revolving Credit Agreement. The indebtedness negative covenant provides for an incremental amount not to exceed the greater of $1,000 and 6.0% of Alcoa Corporation’s consolidated total assets. Additionally, the restricted payments negative covenant mentioned above, Alcoa Corporation may declare and make annual ordinary dividends inprovides for an aggregate amount not to exceed $38$100 and the investments negative covenant provides for an aggregate amount not to exceed $400, both of which contain two conditions in eachwhich these limits may increase. First, in any fiscal year, the thresholds for the restricted payments and investments negative covenants increase by $250 and $200, respectively, if the consolidated net leverage ratio is not greater than 1.50 (previously 1.20) to 1.00 and 1.50 (previously1.30) to 1.00, respectively, as of the November 1, 2016 through December 31, 2017 time periodend of the prior fiscal year. Secondly, in regards to both the $100 and annual 2018, $50 in each of annual 2019$250 for restricted payments and 2020, and $75 in the January 1, 2021 through November 1, 2021 time period (see below), except that$200 for investments, 50% of any unused amount of thethese base amountamounts in any of the specified time periodsfiscal year may be used in the next succeeding periodfiscal year.
The following describes the usespecific restricted payment negative covenant for share repurchases and the application of the base amount in said time period. Also, restricted payments general exception (described above) to both share repurchases and ordinary dividend payments.
Alcoa Corporation may repurchase shares of its common stock pursuant to stock option exercises and benefit plans in an aggregate amount not to exceed $25 during any fiscal year, except that 50% of any unused amount of the base amount in any fiscal year may be used in the next succeeding fiscal year following the use of the base amount in said fiscal year. Additionally, as described above, the Second Amended Revolving Credit Agreement provides general exceptions to the restricted payments negative covenant that would allow Alcoa Corporation to execute share repurchases for any purpose in any fiscal year by an aggregate amount of up to $100 (see above for conditions that provide for this limit to increase), assuming no other restricted payments have reduced, in part or whole, the available limit.
Also, any ordinary dividend payments made by Alcoa Corporation are only subject to the general exception for restricted payments described above. Accordingly, Alcoa Corporation may make annual ordinary dividends in any fiscal year by an aggregate amount of up to $100 (see above for conditions that provide for this limit to increase), assuming no other restricted payments have reduced, in part or whole, the available limit. The limits of the restricted payments negative covenant under the Notes indenture (see 144A Debt below) would govern the amount of ordinary dividend payments Alcoa Corporation could make in a given timeframe if the allowed amount is less than the limits of the restricted payments negative covenant under the Second Amended Revolving Credit Agreement.
The Second Amended Revolving Credit Agreement contains customary events of default, including with respect to a failure to make payments under the Revolving Credit Facility, cross-default and cross-judgment default, and certain bankruptcy and insolvency events.
There were no amounts outstanding at December 31, 20162018 and 2017 and no amounts were borrowed during 2016 (September 16th through December 31st)2018 and 2017 under the Revolving Credit Facility.
144A Debt. In May 2018, ANHBV completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for $500 of 6.125% Senior Notes due 2028 (the “2028 Notes”). ANHBV received $492 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2028 Notes. The net proceeds, along with available cash on hand, were used to make discretionary contributions to certain U.S. defined benefit pension plans (see Cash from Operations above). The discount to the initial purchasers, as well as costs to complete the financing, was deferred and is being amortized to interest expense over the term of the 2028 Notes. Interest on the 2028 Notes will be paid semi-annually in November and May, which commenced November 15, 2018.
144A Debt.ANHBV has the option to redeem the 2028 Notes on at least 30 days, but not more than 60 days, prior notice to the holders of the 2028 Notes under multiple scenarios, including, in whole or in part, at any time or from time to time after May 2023 at a redemption price specified in the indenture (up to 103.063% of the principal amount plus any accrued and unpaid interest in each case). Also, the 2028 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2028 Notes repurchased, plus any accrued and unpaid interest on the 2028 Notes repurchased.
The 2028 Notes are senior unsecured obligations of ANHBV and do not entitle the holders to any registration rights pursuant to a registration rights agreement. ANHBV does not intend to file a registration statement with respect to resales of or an exchange offer for the 2028 Notes. The 2028 Notes are guaranteed on a senior unsecured basis by Alcoa Corporation and its subsidiaries that are guarantors under the Second Amended Revolving Credit Agreement (the “subsidiary guarantors” and, together with Alcoa Corporation, the “guarantors”) (see Credit Facility above). Each of the subsidiary guarantors will be released from their 2028 Notes guarantees upon the occurrence of certain events, including the release of such guarantor from its obligations as a guarantor under the Second Amended Revolving Credit Agreement.
The 2028 Notes indenture includes several customary affirmative covenants. Additionally, the 2028 Notes indenture contains several negative covenants, that, subject to certain exceptions, include limitations on liens, limitations on sale and leaseback transactions, and a prohibition on a reduction in the ownership of AWAC entities below an agreed level. The negative covenants in the 2028 Notes indenture are less extensive than those in the 2024 Notes and 2026 Notes (see below) indenture and the Second Amended Revolving Credit Agreement. For example, the 2028 Notes indenture does not include a limitation on restricted payments, such as repurchases of common stock and shareholder dividends.
The 2028 Notes rank equally in right of payment with all of ANHBV’s existing and future senior indebtedness, including the 2024 Notes and 2026 Notes; rank senior in right of payment to any future subordinated obligations of ANHBV; and are effectively subordinated to ANHBV’s existing and future secured indebtedness, including under the Second Amended Revolving Credit Agreement, to the extent of the value of property and assets securing such indebtedness.
In September 2016, ANHBV completed a Rule 144A (U.S. Securities Act of 1933, as amended) debt offering for $750 of 6.75% Senior Notes due 2024 (the “2024 Notes”) and $500 of 7.00% Senior Notes due 2026 (the “2026 Notes” and, collectively with the 2024 Notes, the “Notes”). ANHBV received $1,228 in net proceeds (see below) from the debt offering reflecting a discount to the initial purchasers of the Notes. The net proceeds were used to make a payment to ParentCo to fund the transfer of certain assets from ParentCo to Alcoa Corporation in connection with the Separation Transaction, and the remaining net proceeds were used for general corporate purposes. The discount to the initial purchasers, as well as costs to complete the financing, was deferred and is being amortized to interest expense over the respective terms of the Notes. Interest on the Notes will beis paid semi-annually in March and September, commencingwhich commenced March 31, 2017.
ANBHV has the option to redeem the Notes on at least 30 days, but not more than 60 days, prior notice to the holders of the Notes under multiple scenarios, including, in whole or in part, at any time or from time to time after September 2019, in the case of the 2024 Notes, or after September 2021, in the case of the 2026 Notes, at a redemption price specified in the indenture (up to 105.063% of the principal amount for the 2024 Notes and up to 103.500% of the principal amount of the 2026 Notes, plus any accrued and unpaid interest in each case). Also, the Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the Notes repurchased, plus any accrued and unpaid interest on the Notes repurchased.
The Notes are senior unsecured obligations of ANHBV and do not entitle the holders to any registration rights pursuant to a registration rights agreement. ANHBV does not intend to file a registration statement with respect to resales of or an exchange offer for the Notes. The Notes are guaranteed on a senior unsecured basis by Alcoa Corporation and its subsidiaries that are guarantors under the Second Amended Revolving Credit Agreement (the “subsidiary guarantors” and, together with Alcoa Corporation, the “guarantors”) (see Credit Facility above). Each of the subsidiary guarantors will be released from their Notes guarantees upon the occurrence of certain events, including the release of such guarantor from its obligations as a guarantor under the Second Amended Revolving Credit Agreement.
The Notes indenture contains various restrictive covenants similar to those described above for the Second Amended Revolving Credit Agreement, including a limitation on restricted payments, with, among other exceptions, capacity to pay annual ordinary dividends. Under the indenture, Alcoa Corporation may declare and make annual ordinary dividends generally consistent within an
aggregate amount not to exceed $38 in each of the November 1, 2016 through December 31, 2017 time period and annual 2018 (no such dividends were made), $50 in each of annual 2019 and 2020, and $75 in the January 1, 2021 through September 30, 2026 (maturity date of the 2026 Notes) time period, except that 50% of any unused amount of the base amount in any of the specified time periods may be used in the next succeeding period following the use of the base amount in said time period. Additionally, the restricted payments negative covenant includes a general exception to allow for potential future transactions incremental to those specifically provided for in the Notes indenture. This general exception provides for an aggregate amount of restricted payments not to exceed the greater of $250 and 1.5% of Alcoa Corporation’s consolidated total assets. Accordingly, Alcoa Corporation may make annual ordinary dividends in any fiscal year by an aggregate amount of up to $250, assuming no other restricted payments have reduced, in part or whole, the available limit. The limits of the restricted payments negative covenant under the Second Amended Revolving Credit Agreement with annual capacity to pay $75 in each year within the 2021 through 2024 timeframe.
In conjunction with this debt offering, the net proceeds of $1,228, plus an additional $81 of ParentCo cash on hand, were required to be placed in escrow contingent on completion of the Separation Transaction. The $81 represented the necessary cash to fund the redemption of the Notes, pay all regularly scheduled interest on the Notes through a specified date as defined in the indenture, and a premium on the principal of the Notes if the Separation Transaction had not been completed by a certain time as defined in the indenture. As a result, the $1,228 of escrowed cash was recorded as restricted cash. The issuance of the Notes and the increase in restricted cash both in(see Credit Facility above) would govern the amount of $1,228 were not reflectedordinary dividend payments Alcoa Corporation could make in Alcoa Corporation’s Statement of Consolidated Cash Flows as these represent noncash financing and investing activities, respectively. The subsequent releasea given timeframe if the allowed amount is less than the limits of the $1,228 from escrow occurred on October 31, 2016 in preparation forrestricted payments negative covenant under the Separation Transaction. This decrease in restricted cash was reflected in Alcoa Corporation’s Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.Notes indenture.
Ratings.Ratings.Alcoa Corporation’s cost of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short- and long-term debt ratings assigned to Alcoa Corporation’s debt by the major credit rating agencies.
On September 20, 2016,May 2, 2018, Fitch Ratings (Fitch) affirmed a BB+ rating for Alcoa Corporation’s long-term debt. Additionally, Fitch raised the current outlook to positive from stable.
On May 14, 2018, Moody’s Investor Service (Moody’s) assigned the following ratingsupgraded its rating for Alcoa Corporation:Corporation’s long-term debt at Ba3 and short-term debt at Speculative Grade Liquidity Rating-2.to Ba1 from Ba2. Additionally, Moody’s assignedaffirmed the current outlook as stable.
Also on September 20, 2016,On May 14, 2018, Standard and Poor’s Global Ratings (S&P) assigned a BB-upgraded its rating for Alcoa Corporation’s long-term debt.debt to BB+ from BB. Additionally, S&P assigned the current outlook as stable.
Common Stock Repurchase Program. In October 2018, Alcoa Corporation’s Board of Directors authorized a common stock repurchase program under which the Company may purchase shares of its outstanding common stock up to an aggregate transactional value of $200, depending on cash availability, market conditions, and other factors. Repurchases under the program may be made using a variety of methods, which may include open market purchases, privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. This program does not have a predetermined expiration date. Alcoa Corporation intends to retire the repurchased shares of common stock. In December 2018, the Company repurchased 1,723,800 shares of its common stock for $50; these shares were immediately retired.
Investing Activities
Cash provided from investing activities was $1,077 in 2016 compared with cash used for investing activities was $405 in both 20152018 compared with $226 in 2017 and 2014 of $384 and $338, respectively.$149 in 2016.
The sourceuse of cash in 2018 was largely attributable to $399 in capital expenditures (includes spend related to environmental control of $145), composed of $307 in sustaining and $92 in return-seeking.
The use of cash in 2017 was due to $405 in capital expenditures (includes spend related to environmental control of $92), composed of $287 in sustaining and $118 in return-seeking, and $66 in contributions related to the aluminum complex joint venture in Saudi Arabia. These items were partially offset by $245 in net proceeds received (see Financing Activities above) from the sale of Yadkin (see Aluminum in Segment Information above).
The use of cash in 2016 was primarily due to $1,228$404 in capital expenditures (includes spend related to environmental control of net proceeds from newly issued debt (see Financing Activities above) released from escrow$83), composed of $322 in sustaining and $82 in return-seeking. This item was partially offset by $265 in combined proceeds from the sale of an equity interest in a natural gas pipeline in Australia ($145) and the sale of wharf property near the Intalco, Washington smelter ($120). These items were somewhat offset by $404 in capital expenditures (includes costs related to environmental control in new and expanded facilities of $83).
The use of cash in 2015 was due to $391 in capital expenditures (includes costs related to environmental control in new and expanded facilities of $122) and $63 in additions to investments, including equity contributions of $29 related to the aluminum complex joint venture in Saudi Arabia. These items were slightly offset by $70 in proceeds from the sale of assets and businesses, including the sale of land around the Lake Charles, Louisiana anode facility and post-closing adjustments related to both an ownership stake in a smelter and an ownership stake in a bauxite mine/alumina refinery divested in 2014.
The use of cash in 2014 was due to $444 in capital expenditures (includes costs related to environmental control in new and expanded facilities of $120) and $145 in additions to investments, including equity contributions of $120 related to the aluminum complex joint venture in Saudi Arabia. These items were somewhat offset by $223 in proceeds from the sale of assets and businesses, largely attributable to the sale of an ownership stake in a bauxite mine and refinery in Jamaica (see Alumina (Segments Prior to 2015) in Segment Information above), an ownership stake in a smelter in the United States (see Primary Metals (Segments Prior to 2015) in Segment Information above), and a rod plant in Canada (see Primary Metals (Segments Prior to 2015) in Segment Information above); and $28 in sales of investments related to the sale of a mining interest in Suriname.
Noncash Financing and Investing Activities
In September 2016, ANHBV issued $1,250 in new senior notes (see Financing Activities above) in preparation for the Separation Transaction. The net proceeds of $1,228 from the debt issuance were required to be placed in escrow contingent on completion of the Separation Transaction. As a result, the $1,228 of escrowed cash was recorded as restricted cash. The issuance of the new senior notes and the increase in restricted cash both in the amount of $1,228 were not reflected in Alcoa Corporation’s Statement of Consolidated Cash Flows as these represent noncash financing and investing activities, respectively. The subsequent release of the $1,228 from escrow occurred on October 31, 2016. This decrease in restricted cash was reflected in Alcoa Corporation’s Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations. Alcoa Corporation is required to make future payments under various contracts, including long-term purchase obligations, lease agreements, and financing arrangements, and lease agreements. Alcoa Corporationarrangements. The Company also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. As of December 31, 2016,2018, a summary of Alcoa Corporation’s outstanding contractual obligations is as follows (these contractual obligations are grouped in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information):
Total | 2017 | 2018-2019 | 2020-2021 | Thereafter |
| Total |
|
| 2019 |
|
| 2020-2021 |
|
| 2022-2023 |
|
| Thereafter |
| |||||||||||||||||||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Energy-related purchase obligations | $ | 15,298 | $ | 1,045 | $ | 2,271 | $ | 2,177 | $ | 9,805 |
| $ | 15,989 |
|
| $ | 922 |
|
| $ | 1,961 |
|
| $ | 2,299 |
|
| $ | 10,807 |
| ||||||||||
Raw material purchase obligations | 4,129 | 715 | 870 | 556 | 1,988 |
|
| 5,012 |
|
|
| 812 |
|
|
| 671 |
|
|
| 555 |
|
|
| 2,974 |
| |||||||||||||||
Other purchase obligations | 1,493 | 343 | 401 | 295 | 454 |
|
| 1,087 |
|
|
| 303 |
|
|
| 331 |
|
|
| 214 |
|
|
| 239 |
| |||||||||||||||
Operating leases | 359 | 98 | 140 | 86 | 35 |
|
| 209 |
|
|
| 74 |
|
|
| 98 |
|
|
| 16 |
|
|
| 21 |
| |||||||||||||||
Interest related to total debt | 873 | 104 | 202 | 197 | 370 |
|
| 880 |
|
|
| 119 |
|
|
| 235 |
|
|
| 233 |
|
|
| 293 |
| |||||||||||||||
Estimated minimum required pension funding | 1,190 | 115 | 550 | 525 | - |
|
| 1,700 |
|
|
| 310 |
|
|
| 810 |
|
|
| 580 |
|
|
| — |
| |||||||||||||||
Other postretirement benefit payments | 1,090 | 130 | 235 | 230 | 495 |
|
| 880 |
|
|
| 110 |
|
|
| 220 |
|
|
| 210 |
|
|
| 340 |
| |||||||||||||||
Layoff and other restructuring payments | 66 | 63 | 3 | - | - |
|
| 47 |
|
|
| 38 |
|
|
| 8 |
|
|
| — |
|
|
| 1 |
| |||||||||||||||
Deferred revenue arrangements | 84 | 8 | 16 | 16 | 44 |
|
| 69 |
|
|
| 8 |
|
|
| 16 |
|
|
| 16 |
|
|
| 29 |
| |||||||||||||||
Uncertain tax positions | 29 | - | - | - | 29 |
|
| 42 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42 |
| |||||||||||||||
Liability related to the resolution of a legal matter | 148 | 74 | 74 | - | - | |||||||||||||||||||||||||||||||||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total debt | 1,480 | 21 | 37 | 37 | 1,385 |
|
| 1,841 |
|
|
| 1 |
|
|
| 85 |
|
|
| 2 |
|
|
| 1,753 |
| |||||||||||||||
Dividends to shareholders | - | - | - | - | - |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||
Repurchase of common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Distributions to noncontrolling interest | - | - | - | - | - |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Capital projects | 385 | 205 | 38 | 58 | 84 |
|
| 172 |
|
|
| 144 |
|
|
| 21 |
|
|
| 5 |
|
|
| 2 |
| |||||||||||||||
Equity contributions | - | - | - | - | - |
|
| 16 |
|
|
| — |
|
|
| 16 |
|
|
| — |
|
|
| — |
| |||||||||||||||
Totals | $ | 26,624 | $ | 2,921 | $ | 4,837 | $ | 4,177 | $ | 14,689 |
| $ | 27,944 |
|
| $ | 2,841 |
|
| $ | 4,472 |
|
| $ | 4,130 |
|
| $ | 16,501 |
|
Obligations for Operating Activities
Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from 1 year to 3129 years. Raw material obligations consist mostly of bauxite (relates to Alcoa Corporation’sAWAC’s bauxite mine interests in Guinea and Brazil), caustic soda, alumina, aluminum fluoride, calcined petroleum coke, and cathode blocks with expiration dates ranging from less than 1 year to 16 years. Other purchase obligations consist principally of freight for bauxite and alumina with expiration dates ranging from 1 to 1514 years. Many of these purchase obligations contain variable pricing components, and, as a result, actual cash payments may differ from the estimates provided in the preceding table. In accordance with the terms of several of these supply contracts, obligations may be reduced as a result of an interruption to operations, such as a plant curtailment or a force majeure event. Operating leases represent multi-year obligations for certain land and buildings, alumina refinery process control technology, plant equipment, vehicles, and computer equipment.
Interest related to total debt is based on interest rates in effect as of December 31, 20162018 and is calculated on debt with maturities that extend to 2029.2028. As the contractual interest rates for certain debt are variable, actual cash payments may differ from the estimates provided in the preceding table.
Estimated minimum required pension funding and other postretirement benefit payments are based on actuarial estimates using current assumptions for, among others, discount rates, long-term rate of return on plan assets, rate of compensation increases, andand/or health care cost trend rates, among others.rates. The minimum required contributions for pension funding are estimated to be $115$310 for 2017,2019, $455 for 2020, $355 for 2021, $300 for 2018, $2502022, and $280 for 2019, $275 for 2020, and $250 for 2021. The2023. Under ERISA (Employee Retirement Income Security Act of 1974) regulations, a plan sponsor that establishes a pre-funding balance by making discretionary contributions to a U.S. defined benefit pension plan may elect to apply all or a portion of these expected pension contributions reflectthis balance toward its minimum required contribution obligations to the impacts ofrelated plan in future years. In 2019, management will consider making such election related to the Pension Protection Act of 2006; the Worker, Retiree, and Employer Recovery Act of 2008; the Moving Ahead for Progress in the 21st Century Act of 2012; the Highway and
Transportation Funding Act of 2015; and the Bipartisan Budget Act of 2016.Company’s U.S. plans. Other postretirement benefit payments are expected to approximate $115$105 to $130$110 annually for years 20172019 through 20212023 and $99$68 annually for years 20222024 through 2026.2028. Such payments will be slightly offset by subsidy receipts related to Medicare Part D, which are estimated to be approximatelyapproximate $5 to $10 annually for years 20172019 through 2026.2028. Alcoa Corporation has determined that it is not practicable to present pension funding and other postretirement benefit payments beyond 20212023 and 2026,2028, respectively.
Layoff and other restructuring payments expected to be paid within one year primarily relate to take-or-pay provisions of supply contracts associated with curtailed facilities, a contractual commitment to an Italian government agency related to the transfer of the Portovesme smelter, severance costs.costs, and the termination of an office lease contract. Amounts scheduled to be paid beyond one year are relatedlargely relate to contract termination and special layoff benefit payments.the previously mentioned commitment in Italy, which is expected to be paid in 2020.
Deferred revenue arrangements require Alcoa Corporation to deliver alumina to a certain customer over the specified contract period (through 2027). While this obligation is not expected to result in cash payments, it represents a contractual obligation for whichis included in the preceding table as the Company would be obligatedhave such an obligation if the specified product deliveries could not be made.
Uncertain tax positions taken or expected to be taken on an income tax return may result in additional payments to tax authorities. The amount in the preceding table includes interest and penalties accrued related to such positions as of December 31, 2016.2018. The total amount of uncertain tax positions is included in the “Thereafter” column as the Company is not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
In early 2014, ParentCo and one of Alcoa’s Corporation’s current subsidiaries, AWA, resolved violations of certain provisions of the Foreign Corrupt Practices Act of 1977 with the U.S. Department of Justice and U.S. Securities and Exchange Commission. Under the resolution, ParentCo and AWA agreed to pay a combined $384 over a four-year timeframe. Prior to the Separation Transaction, ParentCo and AWA paid $236 of the total amount. As part of the Separation and Distribution Agreement, Alcoa Corporation assumed ParentCo’s portion of the $148 remaining obligation. The $148 is to be paid in equal installments of $74 in each of January 2017 (paid on January 9th) and January 2018.
Obligations for Financing Activities
Total debt amounts in the preceding table represent the principal amounts of all outstanding long-term debt, which have maturities for that extend to 2029.2028.
As of December 31, 2016,2018, Alcoa Corporation had 182,930,995184,770,249 issued and outstanding shares of common stock. Dividends on common stock are subject to authorization by Alcoa Corporation’sthe Company’s Board of Directors. Alcoa Corporation did not declare or pay any dividends from November 1, 2016 throughin 2018.
In October 2018, Alcoa Corporation’s Board of Directors authorized a common stock repurchase program under which the Company may purchase shares of its outstanding common stock up to an aggregate transactional value of $200, depending on cash availability, market conditions, and other factors. Additionally, this program does not have a predetermined expiration date. Accordingly, amounts have not been included in the preceding table. In December 31, 2016.2018, the Company repurchased 1,723,800 shares of its common stock for $50.
Effective on November 1, 2016, certain documents that govern the AWAC joint venture relationship between Alcoa Corporation and Alumina Limited were revised. One of the provisions of the revised documents relates to required cash distributions from the entities that comprise the joint venture to the two partners. On a quarterly basis, each of certain identified entities that comprise the AWAC joint venture must distribute (i) 50% of the entity’s net income, if any, based on the previous quarter’s results, and (ii) the available cash, if any, of each entity, subject to certain thresholds that the entities must maintain a minimum cash on hand that ranges from $5 to $85 depending on the entity. Available cash is defined as an entity’s cash and cash equivalents less any projected negative free cash flow of the entity for the upcoming quarter. Free cash flow is defined as cash flow from operating activities less sustaining capital expenditures. Estimates of the potential cash distributions to Alumina Limited have not been included in the preceding table since this would require Alcoa Corporation to provide proprietary information related to forecasted results of the entities that comprise the AWAC joint venture. In 2016, 2015,2018, 2017, and 2014,2016, Alumina Limited received distributions of $233, $106,$827, $342, and $120,$233, respectively, from the entities that comprise AWAC based on the provisions of the respective current or prior agreements’ provisions.
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by management as of December 31, 2016.2018. Funding levels may vary in future years based on anticipated construction schedules of the projects. It is expected that significant expansion projects will be funded through various sources, including cash provided from operations. Total capital expenditures are anticipated to be approximately $450 in 2017.2019, comprised of $300 for sustaining projects and $150 for return-seeking projects.
Equity contributions represent Alcoa Corporation’s committed investment related to a joint venture in Saudi Arabia. Alcoa Corporation is a participant in a joint venture related to an integrated aluminum complex in Saudi Arabia, comprised of a bauxite mine, alumina refinery, aluminum smelter, and rolling mill, which requires the Company to contribute approximately $1,100.$1,100 (estimate of initial investment). As of December 31, 2016,2018, Alcoa Corporation has made equity contributions of $982. Based on changes to both the project’s capital investment and equity and debt structure from the initial plans, the estimated $1,100 equity contribution may be reduced. Alcoa CorporationThe Company does not anticipate making any additional equity contributions under the initial $1,100 plan although a formal determination is yet to be made. As such,Accordingly, further contribution amounts have not been included in the preceding table. Separate from the capital investment in the project, Alcoa Corporation contributed $66 to the joint venture in 2017 for short-term funding purposes in accordance with the terms of the joint venture companies’ financing arrangements. The Company may be required to make such additional contributions in future periods.
In June 2018, Alcoa Corporation, Rio Tinto plc, and the provincial government of Quebec, Canada launched a new joint venture, Elysis Limited Partnership (Elysis). The purpose of this partnership is to advance larger scale development and
commercialization of the Company’s patent-protected technology that produces oxygen and eliminates all direct greenhouse gas emissions from the traditional aluminum smelting process. This joint venture requires Alcoa Corporation to invest $21 (C$28) over the next three years. In 2018, the Company contributed $5 (C$6) toward is initial investment commitment in Elysis.
Off-Balance Sheet Arrangements. At December 31, 2016, Alcoa Corporation2018, the Company has maximum potential future payments for guarantees issued on behalf of a third party of $354.$60. These guarantees expire at various times between 20172018 and 20242021 and relate to project financing for the aluminum complex in Saudi Arabia. The borrower is the rolling mill company that is part of the joint venture in which Alcoa Corporation is a participant. In December 2017 and July 2018, the smelting company and the mining and refining company, respectively, refinanced and/or amended all of their existing outstanding debt. The guarantees that were previously required of the Company related to both the smelting company and the mining and refining company were effectively terminated.
Alcoa Corporation has outstanding bank guarantees and letters of credit related to, among others, energy contracts, environmental obligations, legal and tax matters, outstanding debt, leasing obligations, workers compensation, and customs duties, among others.duties. The total amount committed under these instruments, which automatically renew or expire at various dates between 20172019 and 2021,2022, was $444$373 (includes $136 issued under a standby letter of credit agreement—see below) at December 31, 2016.2018. Additionally, Arconic has outstanding bank guarantees and letters of credit related to Alcoa Corporationthe Company in the amount of $115$29 at December 31, 2016.2018. In the event Arconic would be required to perform under any of these instruments, Arconic would be indemnified by Alcoa Corporation in accordance with the Separation and Distribution Agreement. Likewise, Alcoa Corporationthe Company has outstanding bank guarantees and letters of credit related to Arconic in the amount of $26$15 at December 31, 2016.2018. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporationthe Company would be indemnified by Arconic in accordance with the Separation and Distribution Agreement.
In August 2017, Alcoa Corporation entered into a standby letter of credit agreement, which expires on August 17, 2019 (extended in August 2018), with three financial institutions. The agreement provides for a $150 facility, which will be used by the Company for matters in the ordinary course of business. Alcoa Corporation’s obligations under this facility will be secured in the same manner as obligations under the Company’s Second Amended Revolving Credit Agreement (see Financing Activities in Liquidity and Capital Resources above). Additionally, this facility contains similar representations and warranties and affirmative, negative, and financial covenants as the Company’s Second Amended Revolving Credit Agreement (see Financing Activities in Liquidity and Capital Resources above). As of December 31, 2018, letters of credit aggregating $136 were issued under this facility.
Alcoa Corporation also has outstanding surety bonds primarily related to tax matters, contract performance, workers compensation, environmental-related matters, and customs duties. The total amount committed under these bonds, which automatically renew or expire at various dates, mostly in 2017,2019, was $159$40 at December 31, 2016.2018. Additionally, Arconic has outstanding surety bonds related to Alcoa Corporationthe Company in the amount of $22$16 at December 31, 2016.2018. In the event Arconic would be required to perform under any of these instruments, Arconic would be indemnified by Alcoa Corporation in accordance with the Separation and Distribution Agreement. Likewise, the Company has outstanding surety bonds related to Arconic in the amount of $2 at December 31, 2018. In the event Alcoa Corporation would be required to perform under any of these instruments, the Company would be indemnified by Arconic in accordance with the Separation and Distribution Agreement.
Critical Accounting Policies and Estimates
The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates based on judgments estimates, and assumptions regarding uncertainties that affect the amounts reported in the Consolidated Financial Statements and disclosed in the Notes to the Consolidated Financial Statements. Areas that require significant judgments,such estimates and assumptions include the review of properties, plants, and equipment, equity investments, and goodwill for impairment, and accounting for each of the following: asset retirement obligations; environmental and litigation matters; stock-based compensation; pension plans and other postretirement benefits obligations; derivatives and hedging activities; and income taxes.
Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, provide a meaningful and fair perspective of the Company.Alcoa Corporation.
A summary of the Company’s significant accounting policies is included in Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Management believes that the application of these policies on a consistent basis enables the CompanyAlcoa Corporation to provide the users of the Consolidated Financial Statements with useful and reliable information about the Company’s operating results and financial condition.
Prior to the Separation Date, Alcoa Corporationthe Company did not operate as a separate, standalone entity. Alcoa Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporation’sthe Company’s Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation. The Critical Accounting Policies described below reflect any incremental judgments estimates, and assumptions made by management in the preparation of Alcoa’sthe Company’s Consolidated Financial Statements prior to the Separation Date (see Separation Transaction in Overview above for additional information).
Properties, Plants, and Equipment. Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments.
Equity Investments. Alcoa Corporation invests in a number of privately-held companies, primarily through joint ventures and consortia, which are accounted for using the equity method. The equity method is applied in situations where Alcoa Corporation has the ability to exercise significant influence, but not control, over the investee. Management reviews equity investments for impairment whenever certain indicators are present suggesting that the carrying value of an investment is not recoverable. This analysis requires a significant amount of judgment from management to identify events or circumstances indicating that an equity investment is impaired. The following items are examples of impairment indicators: significant, sustained declines in an investee’s revenue, earnings, and cash flowtrends; adverse market conditions of the investee’s industry or geographic area; the investee’s ability to continue operations measured by several items, including liquidity; and other factors. Once an impairment indicator is identified, management uses considerable judgment to determine if the impairment is other than temporary, in which case the equity investment is written down to its estimated fair value. An impairment that is other than temporary could significantly and adversely impact reported results of operations.
Goodwill.Goodwill. Goodwill is not amortized; instead, it is instead reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others.periods. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.goodwill for impairment.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Alcoa Corporation has sixfive reporting units as follows:of which three are included in the Aluminum segment (smelting/casting, energy generation, and rolling operations). The remaining two reporting units are the Bauxite and Alumina Aluminum, Cast Products, Energy, and Rolled Products.segments. Of these sixfive reporting units, only Bauxite and Alumina contain goodwill. As of December 31, 2016,2018, the carrying value of the goodwill for Bauxite and Alumina was $52$51 and $103,$100, respectively. These amounts include an allocation of goodwill held at the corporate level.level ($49 to Bauxite and $97 to Alumina).
In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-stepa quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.
Alcoa Corporation’s policy for its annual review of goodwill is to perform the qualitative assessment for all reporting units not subjected directly to the two-step quantitative impairment test. Generally, management will proceed directly to the two-step quantitative impairment test for each of its two reporting units that contain goodwill at least once during every three-year period, as part of its annual review of goodwill.
Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact
they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent two-step quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.
During the 20162018 annual review of goodwill, management performed the qualitative assessment for the BauxiteAlumina reporting unit. Management concluded it was not more likely than not that the respective estimated fair value of this reporting unit was less than itsthe respective carrying value. As such, no further analysis was required.
Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Alcoa Corporation uses a DCF model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Certain of these assumptions can vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The betas used in calculating the individual reporting units’ WACC rate are estimated for each business with the assistance of valuation experts.
In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to suchthe excess of the reporting unit's carrying value over its fair value not to exceed the total amount of goodwill applicable to that reporting unit would be recognized.
During the 20162018 annual review of goodwill, management proceeded directly to the two-step quantitative impairment test for the AluminaBauxite reporting unit. The estimated fair value of this reporting unit was substantially in excess of its carrying value, resulting in no impairment.
GoodwillManagement last proceeded directly to the quantitative impairment teststest for the Alumina reporting unit in 2016. At that time, the estimated fair value of the Alumina reporting unit was substantially in excess of its carrying value, resulting in no impairment. Additionally, in all prior years presented, indicated that goodwill was not impaired for any of Alcoa Corporation’s reporting units, and there werehave been no triggering events since that time that necessitated an impairment test.
Asset Retirement Obligations. Alcoa Corporation recognizes asset retirement obligations (AROs) related to legal obligations associated with the normalstandard operation of bauxite mines, alumina refineries, and aluminum smelters. These AROs consist primarily of costs associated with mine reclamation, closure of bauxite residue areas, spent pot lining disposal, and landfill closure. Alcoa Corporation also recognizes AROs for any significant lease restoration obligation, if required by a lease agreement, and for the disposal of regulated waste materials related to the demolition of certain power facilities. The fair values of these AROs are recorded on a discounted basis, at the time the obligation is incurred, and accreted over time for the change in present value. Additionally, Alcoa Corporation capitalizes asset retirement costs by increasing the carrying amount of the related long-lived assets and depreciating these assets over their remaining useful life.
Certain conditional asset retirement obligations (CAROs) related to alumina refineries, aluminum smelters, rolling mills, and energy generation facilities have not been recorded in the Consolidated Financial Statements due to uncertainties surrounding the ultimate settlement date. A CARO is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within Alcoa Corporation’s control. Such uncertainties exist as a result of the perpetual nature of the structures, maintenance and upgrade programs, and other factors. At the date a reasonable estimate of the ultimate settlement date can be made (e.g., planned demolition), Alcoa Corporation would record an ARO for the removal, treatment, transportation, storage, and/or disposal of various regulated assets and hazardous materials such as asbestos, underground and aboveground storage tanks, polychlorinated biphenyls, various process residuals, solid wastes, electronic equipment waste, and various other materials. Such amounts may be material to the Consolidated Financial Statements in the period in which they are recorded. If Alcoa Corporation was required to demolish all such structures immediately, the estimated CARO as of December 31, 20162018 ranges from $3 to $29$28 per structure (24 structures) in today’s dollars.
Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoringexpenses. Estimates are generally not discounted or reduced by potential claims for recovery. Claims for recovery, which are recognized as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that Alcoa Corporation has reason to believe such parties will not fully pay their proportionate share. The liability is continuously
reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Stock-based Compensation. For all periods prior to the Separation Date, eligible employees attributable to Alcoa Corporation operations participated in ParentCo’s stock-based compensation plans. The compensation expense recorded by Alcoa Corporation included the expense associated with these employees, as well as the expense associated with the allocation of stock-based compensation expense for ParentCo’s corporate employees. FromBeginning on the Separation Date
through December 31, 2016, and forward, Alcoa Corporation recorded stock-based compensation expense for all of the Company’seligible Company employees. The following accounting policy describes how stock-based compensation expense is initially determined for both Alcoa Corporation and ParentCo.
Compensation expense for employee equity grants is recognized using the non-substantive vesting period approach, in which the expense (net of estimated forfeitures) is recognized ratably over the requisite service period based on the grant date fair value. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, annual forfeiture rate, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
In 2016, 2015,2018, 2017, and 2014,2016, Alcoa Corporation recognized stock-based compensation expense of $35, $24, and $28 $35, and $39, respectively. Of these amounts, $16, $21, and $21($16 relates to the allocation of expense for ParentCo’s corporate employees in 2016, 2015, and 2014,employees), respectively. As part of both Alcoa Corporation’s and ParentCo’s stock-based compensation plan design in the respective periods, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half of each year for these retirement-eligible employees. Of the total pretax stock-based compensation expense recognized in 2018, 2017, and 2016, 2015,$5, $4, and 2014, $7, $6, and $8, respectively, pertains to the acceleration of expense related to retirement-eligible employees.
Most plan participants can choose whether to receive their award in the form of stock options, stock awards,units, or a combination of both. This choice is made before the grant is issued and is irrevocable.
Pension and Other Postretirement Benefits. For all periods prior to August 1, 2016 (see below), certain employees attributable to Alcoa Corporation operations participated in defined benefit pension and other postretirement benefit plans (the “Shared Plans”) sponsored by ParentCo, which also included participants attributable to non-Alcoa Corporation operations. Alcoa Corporation accounted for these Shared Plans as multiemployer benefit plans. Accordingly, Alcoa Corporation did not record an asset or liability to recognize the funded status of the Shared Plans. However, the related expense recorded by Alcoa Corporation was based primarily on pensionable compensation and estimated interest costs related to employees attributable to Alcoa Corporation operations.
Prior to the Separation Date, certain other plans that were entirely attributable to employees of Alcoa Corporation-related operations (the “Direct Plans”) were accounted for as defined benefit pension and other postretirement benefit plans. Accordingly, the funded and unfunded position of each Direct Plan was recorded in the Consolidated Balance Sheet. Actuarial gains and losses that had not yet been recognized through earnings were recorded in accumulated other comprehensive income, net of taxes, until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to the Direct Plans is dependent on various assumptions (see below).
In preparation for the Separation Transaction, effective August 1, 2016, certain of the Shared Plans were separated into standalone plans for both Alcoa Corporation (the “New Direct Plans”) and ParentCo. Additionally, certain of the other remaining Shared Plans were assumed by Alcoa Corporation (the “Additional New Direct Plans”). Accordingly, frombeginning on August 1, 2016 through December 31, 2016,and forward, the standalone plans and assumed plans were accounted for as defined benefit pension and other postretirement plans. Additionally, the Direct Plans continued to be accounted for as defined benefit pension and other postretirement plans through December 31, 2016.plans.
Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age, and mortality).
The interest rate used to discount future estimated liabilities is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit
obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors. The yield curve model parallels the plans’ projected cash flows, which have ana weighted average duration ranging fromof 11 to 15 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. If a deep market of high quality corporate bonds does not exist in a country, then the yield on government bonds plus a corporate bond yield spread is used. In 20162018 and 2015,2017, the weighted average discount rate used to determine benefit obligations for pension plans was 4.12%4.21% and 4.03%3.68%, respectively, and for other postretirement benefit plans was 3.93%4.25% and 4.07%3.54%, respectively. The impact on the combined pension and other postretirement liabilities of a change in the weighted average discount rate of 1/4 of 1% would be approximately $200$160 and either a charge or credit of approximately $5 to after-taxpretax earnings in the following year.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on forward-looking investment returns by asset class. Management incorporates expected future investment returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment. For 2016, 2015,2018, 2017, and 2014,2016, management used 7.31%6.89%, 6.91%7.47%, and 6.91%7.31%, respectively, as its weighted-average expected long-term rate of return, which was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. For 2017,2019, management anticipates that 7.47%6.59% will be the weighted-average expected long-term rate of return. A change in the assumption for the weighted average expected long-term rate of return on plan assets of 1/4 of 1% would impact after-taxpretax earnings by approximately $8$15 for 2017.2019.
At December 31, 2015, Alcoa Corporation had a net liability for the Direct Plans of $407. As described above, on August 1, 2016,Plan Actions—In 2018, management initiated several actions to certain of the Shared Plans were either separated into standalonepension and other postretirement benefit plans as follows:
Action# 1—In January 2018, AlcoaCorporation notified all U.S. and Canadian salaried employees, who are participants in three of the Company’s defined benefit pension plans, that they will cease accruing retirement benefits for future service, effective January 1, 2021. This change will affect approximately 800 employees, who will be transitioned to country-specific defined contribution plans, in preparation for the Separation Transaction or fully assumed by Alcoa Corporation. Accordingly,which Alcoa Corporation began accounting forwill contribute 3% of these participants’ eligible earnings on an annual basis. Such contributions will be incremental to any employer savings match the New Direct Plans and Additional New Direct Plans asemployees may receive under existing defined contribution plans. Participants already collecting benefits under these defined benefit pension plans are not affected by these changes.
Action# 2—In January 2018, the Company notified U.S. salaried employees and therefore, recordedretirees that it will no longer contribute to pre-Medicare retiree medical coverage, effective January 1, 2021. This change affects approximately 700 participants in one plan.
Action# 3—In April 2018, the Alcoa Corporation signed group annuity contracts to transfer the obligation to pay the remaining retirement benefits of approximately 2,100 retirees from two Canadian defined benefit pension plans to three insurance companies. The transfer of $560 in both plan obligations and plan assets, as well as a net liabilitytransaction fee of $2,528 at that time. In accordance with Alcoa Corporation’s policy each$23, was completed on April 13, 2018. The Company contributed $89 between the two plans to facilitate the transaction and maintain the funding level of the Direct Plans, New Direct Plans,remaining plan obligations. Prior to these transactions, these two Canadian pension plans combined had approximately 3,500 participants.
Action# 4—In August 2018, Alcoa Corporation signed a group annuity contract to transfer the obligation to pay the remaining retirement benefits of approximately 10,500 retirees from three U.S. defined benefit pension plans to one insurance company. The transfer of $287 in both plan obligations and Additional New Direct Plans were remeasuredplan assets, as well as a transaction fee of $10, was completed on August 7, 2018. Additionally, approximately 1,000 plan participants elected to receive lump sum settlements, representing $75 in plan obligations and $85 in plan assets. Prior to these two transactions, these three U.S. pension plans combined had approximately 43,400 participants.
Action# 5—In August 2018, the Company notified certain U.S. salaried retirees that life insurance will no longer be provided, effective September 1, 2018. This change affects approximately 5,500 participants in one plan. As part of this change, Alcoa Corporation made a one-time transition payment to the affected retirees totaling $23 in September 2018.
These actions resulted in the curtailment or settlement of benefits thereby requiring remeasurement, including an update to the discount rates used to determine benefit obligations, of the affected plans. The following table presents certain information and the financial impacts of these actions on the Company’s Consolidated Financial Statements:
Action # |
| Number of plans |
| Number of affected plan participants |
| Weighted average discount rate as of December 31, 2017 |
|
| Plan remeasurement date |
| Weighted average discount rate as of plan remeasurement date |
|
| (Decrease) increase to accrued pension benefits liability(1) |
|
| Decrease to accrued other postretirement benefits liability(1) |
|
| Curtailment charge (gain)(2) |
|
| Settlement charge(2) |
| ||||||
1 |
| 3 |
| ~800 |
| 3.65% |
|
| January 31, 2018 |
| 3.80% |
|
| $ | (57 | ) |
| $ | — |
|
| $ | 5 |
|
| $ | — |
| ||
2 |
| 1 |
| ~700 |
| 3.29% |
|
| January 31, 2018 |
| 3.43% |
|
|
| — |
|
|
| (7 | ) |
|
| (28 | ) |
|
| — |
| ||
3 |
| 2 |
| ~2,100 |
| 3.43% |
|
| March 31, 2018 |
| 3.60% |
|
|
| 24 |
|
|
| — |
|
|
| — |
|
|
| 167 |
| ||
4 |
| 3 |
| ~11,500 |
| 3.70% |
|
| July 31, 2018 |
| 4.39% |
|
|
| (110 | ) |
|
| — |
|
|
| — |
|
|
| 230 |
| ||
5 |
| 1 |
| ~5,500 |
| 3.61% |
|
| July 31, 2018 |
| 4.35% |
|
|
| — |
|
|
| (86 | ) |
| — |
|
|
| (56 | ) | |||
|
|
|
| ~20,600 |
|
|
|
|
|
|
|
|
|
|
| $ | (143 | ) |
| $ | (93 | ) |
| $ | (23 | ) |
| $ | 341 |
|
(1) | A negative amount indicates a corresponding decrease to Accumulated other comprehensive loss and a positive amount indicates a corresponding increase to Accumulated other comprehensive loss. |
(2) | These amounts represent the accelerated amortization of a portion of the existing prior service cost or benefit for curtailments and net actuarial loss for settlements and were reclassified from Accumulated other comprehensive loss to Restructuring and other charges (see this caption in Earnings Summary above) on the Company’s Statement of Consolidated Operations. |
The eight plans affected by the curtailment and settlement actions described above represented 65% of the combined net unfunded status of the Company’s pension and other postretirement benefit plans as of December 31, 2016. As a result of the remeasurement, which reflects updated assumptions as well as actual performance of the plan assets, Alcoa Corporation had a net liability of $3,104 as of December 31, 2016. The increase in the net liability was largely the result of unfavorable performance of the plan assets.2017.
Derivatives and Hedging. Derivatives are held for purposes other than trading and are part of a formally documented risk management program.
Alcoa Corporation accounts for hedges of firm customer commitments for aluminum as fair value hedges. The fair values of the derivatives and changes in the fair values of the underlying hedged items are reported as assets and liabilities in the Consolidated Balance Sheet. Changes in the fair values of these derivatives and underlying hedged items generally offset and are recorded each period in Sales, consistent with the underlying hedged item.
The Company accounts for hedges of foreign currency exposures and certain forecasted transactions as cash flow hedges. The fair values of the derivatives are recorded as assets and liabilities in the Consolidated Balance Sheet. The changes in the fair values of these derivatives are recorded in Other comprehensive income (loss) and are reclassified to Sales, Cost of goods sold, or Other expenses (income), net in the period in which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash flow hedge. These contracts cover the same periods as known or expected exposures, generally not exceeding five years.
On April 1, 2018, Alcoa Corporation adopted new accounting guidance for hedging activities (see Recently Adopted Accounting Guidance below), which included the elimination of the concept of ineffectiveness, effective on January 1, 2018. Accordingly, there is no longer a requirement to separately measure and report ineffectiveness. Therefore, the following policy description of effectiveness was applicable to periods prior to January 1, 2018. For derivatives designated as fair value hedges, Alcoa Corporation measures hedge effectiveness by formally assessing, at inception and at least quarterly, the historical high correlation of changes in the fair value of the hedged item and the derivative hedging instrument. For derivatives designated as cash flow hedges, Alcoa Corporation measures hedge effectiveness by formally assessing, at inception and at least quarterly, the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The ineffective portions of both types of hedges are recorded in salesSales or other income or expenseOther expenses (income), net in the current period. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future gains or losses on the derivative instrument are recorded in other income or expense.
Alcoa Corporation accounts for hedges of firm customer commitments for aluminum as fair value hedges. As a result, the fair values of the derivatives and changes in the fair values of the underlying hedged items are reported in other current and noncurrent assets and liabilities in the Consolidated Balance Sheet. Changes in the fair values of these derivatives and underlying hedged items generally offset and are recorded each period in sales, consistent with the underlying hedged item.
Alcoa Corporation accounts for hedges of foreign currency exposures and certain forecasted transactions as cash flow hedges. The fair values of the derivatives are recorded in other current and noncurrent assets and liabilities in the Consolidated Balance Sheet. The effective portions of the changes in the fair values of these derivatives are recorded in other comprehensive income and are reclassified to sales, cost of goods sold, or other income or expense in the period in which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash
flow hedge. These contracts cover the same periods as known or expected exposures, generally not exceeding five years.Other expenses (income), net.
If no hedging relationship is designated, the derivative is marked to market through earnings.Other expenses (income), net.
Cash flows from derivatives are recognized in the Statement of Consolidated Cash Flows in a manner consistent with the underlying transactions.
Income Taxes. From Beginning on the Separation Date through December 31, 2016,and forward, the provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Alcoa Corporation’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
In all periods prior to the Separation Date, Alcoa Corporation’s operations were included in the income tax filings of ParentCo. The provision for income taxes in Alcoa Corporation’s Statement of Consolidated Operations was determined in the same manner described above, but on a separate return methodology as if the Company was a standalone taxpayer filing hypothetical income tax returns where applicable. Any additional accrued tax liability or refund arising as a result of this approach was assumed to be immediately settled with ParentCo as a component of Parent Company net investment. Deferred tax assets were also determined in the same manner described above and were reflected in the Consolidated Balance Sheet for net operating losses, credits or other attributes to the extent that such attributes were expected to transfer to Alcoa Corporation upon the Separation Transaction. Any difference from attributes generated in a hypothetical return on a separate return basis was adjusted as a component of Parent Company net investment.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa Corporation’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to cumulative losses exist without a valuation allowance where in management’s judgment the weight of the positive evidence more than offsets the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.
The composition of Alcoa Corporation’s net deferred tax asset by jurisdiction as of December 31, 2018 was as follows:
|
| Domestic |
|
| Foreign |
|
| Total |
| |||
Deferred tax assets |
| $ | 895 |
|
| $ | 1,665 |
|
| $ | 2,560 |
|
Valuation allowance |
|
| (783 | ) |
|
| (905 | ) |
|
| (1,688 | ) |
Deferred tax liabilities |
|
| (102 | ) |
|
| (469 | ) |
|
| (571 | ) |
|
| $ | 10 |
|
| $ | 291 |
|
| $ | 301 |
|
The Company has several income tax filers in various foreign countries. Of the $291 net deferred tax asset included under the “Foreign” column in the table above, approximately 80% relates to four of Alcoa Corporation’s income tax filers as follows: a $209 deferred tax asset for Alumínio in Brazil; a $140 net deferred tax asset for AWAB in Brazil; a $94 deferred tax asset for Española (collectively with Alumínio and AWAB, the “Foreign Filers”) in Spain; and a $220 net deferred tax liability for AofA.
The future realization of the net deferred tax asset for each of the Foreign Filers was based on projections of the respective future taxable income (defined as the sum of pretax income, other comprehensive income, and permanent tax differences), exclusive of reversing temporary differences and carryforwards. The realization of the net deferred tax assets of the Foreign Filers is not dependent on any tax planning strategies. The Foreign Filers each generated taxable income in the three-year cumulative period ending December 31, 2018. Management has also forecasted taxable income for each of the Foreign Filers in 2019 and for the foreseeable future. This forecast is based on macroeconomic indicators and involves assumptions related to, among others: commodity prices; volume levels; and key inputs and raw materials, such as bauxite, caustic soda, energy, labor, and transportation costs. These are the same assumptions utilized by management to develop the financial and operating plan that is used to manage the Company and measure performance against actual results.
The majority of the Foreign Filers’ net deferred tax assets relate to tax loss carryforwards. The Foreign Filers do not have a history of tax loss carryforwards expiring unused. Additionally, tax loss carryforwards have an infinite life under the respective income tax codes in Brazil and Spain. That said, utilization of an existing tax loss carryforward is limited to 30% and 25% of taxable income in a particular year in Brazil and Spain, respectively.
Accordingly, management concluded that the net deferred tax assets of the Foreign Filers will more likely than not be realized in future periods, resulting in no need for a partial or full valuation allowance as of December 31, 2018.
In 2013,2018, Alcoa Corporation recognizedimmediately established a $128 discrete income tax charge for afull valuation allowance onof $86 related to an initial deferred tax asset associated with the fullCompany’s equity interest in Elysis Limited Partnership (“Elysis”). In June 2018, Alcoa Corporation contributed certain intellectual property and patents and made an initial cash investment of $5 to Elysis. This deferred tax
asset relates to an outside basis difference created by the excess of the tax basis (i.e. fair value) of these assets over the carrying value of the deferred tax assets relatedinvestment in Elysis recorded by the Company. The initial purpose of Elysis is to a Spanish consolidated tax group. These deferred tax assets have an expiration period ranging from 2017 (for certain credits) to an unlimited life (for operating losses).advance development of aluminum smelter technology with the ultimate goal of commercialization. After weighing all available positive and negative evidence, as described above, management determined that it was no longeris not more likely than not that Alcoa Corporation will realize the tax benefit of thesethis deferred tax assets.asset. This conclusion was mainly driven by a decline in the outlook of the former Primary Metals business (2013 realized prices were the lowest since 2009) combined with prior
year cumulative losses of the Spanish consolidated tax group. During 2014, the underlying value of the deferred tax assets decreased due to a remeasurement as a result of the enactment of new tax rates in Spain beginning in 2016 and a change in foreign currency exchange rates. As a result, the valuation allowance decreased by the same amount. At December 31, 2016 and 2015, the amount of the valuation allowance was $76 and $91, respectively. This valuation allowance was reevaluated as of December 31, 2016, and no change to the allowance was deemed necessary based on all available evidence.the fact that Elysis is expected to generate losses for the foreseeable future as Elysis incurs expenses during the development stage without a committed future revenue stream. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.
In 2015, Alcoa Corporation recognized an additional $141 discrete income tax charge for2017, the Company established a valuation allowances on certainallowance of $94 related to the remaining deferred tax assets in Iceland and Suriname. Of this amount, an $85 valuation(an initial allowance was previously established in 2015). This amount was comprised of a $60 discrete income charge recognized in the Provision for income taxes on the full valueaccompanying Consolidated Statement of Operations and a $34 charge to Accumulated other comprehensive loss on the accompanying Consolidated Balance Sheet. These deferred tax assets in Suriname, which were related mostlyrelate to employee benefits and tax loss carryforwards. These deferred tax assetscarryforwards, which have an expiration period ranging from 2017 to 2022. The remaining $56 charge relates to a valuation allowance established on a portion of the2026, and deferred tax assets recorded in Iceland. These deferred tax assets have an expiration period ranging from 2017 to 2023.losses associated with derivative and hedging activities. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Alcoa Corporation will realize the tax benefit of either of these deferred tax assets. This conclusion was mainly driven by a decline in the outlook of the former Primary Metals business, combined with prior yearbased on existing cumulative losses and a short expiration period. At December 31, 2016Such losses were generated as a result of intercompany interest expense under the Company’s global treasury and 2015,cash management system and the amountrealization of deferred losses associated with an LME-linked embedded derivative in a power contract. This interest expense is expected to continue and additional deferred losses associated with the combined valuation allowance remained $141. This valuation allowance was reevaluated as of December 31, 2016, and no changeembedded derivative will be realized in future years. As a result, management estimates that there will not be sufficient taxable income available to utilize the allowance was deemed necessary based on all available evidence.operating losses during the expiration period. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Related Party Transactions
Alcoa Corporation buys products from and sells products to various related companies, consisting of entities in which Alcoa Corporation retains a 50% or less equity interest, at negotiated prices between the two parties. These transactions were not material to the financial position or results of operations of Alcoa Corporation for all periods presented.
Transactions between Alcoa Corporation and Arconic have been presented as related party transactions in the accompanying Consolidated Financial Statements. Sales to Arconic from Alcoa Corporation were $958, $1,078, and $1,783 in 2016, 2015, and 2014, respectively. As of December 31, 2016, outstanding receivables from Arconic were not material to Alcoa Corporation’s Consolidated Balance Sheet.
Recently Adopted Accounting Guidance
See the Recently Adopted Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Recently Issued Accounting Guidance
See the Recently Issued Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See the Derivatives section of Note O to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Management’s Reports to Alcoa Corporation Stockholders
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Alcoa Corporation and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity, in accordance with accounting principles generally accepted in the United States of America (GAAP) and include amounts that are based on management’s best judgments and estimates. The other financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 is consistent with that in the financial statements.
Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the U.S. Securities Exchange Act of 1934 (as amended), for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment to evaluate the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 using the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, as stated in their report, which is included herein.
/s/ Roy C. Harvey |
Roy C. Harvey President and Chief Executive Officer |
/s/ William F. Oplinger |
William F. Oplinger Executive Vice President and Chief Financial Officer |
February 25, 2019
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Alcoa Corporation:
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets and the related statements of consolidated operations, consolidated comprehensive (loss) income, changes in consolidated equity, and consolidated cash flows present fairly, in all material respects, the financial position of Alcoa Corporation and its subsidiaries (the “Company”) as of December 31, 20162018 and 2015,2017, and the resultsrelated consolidated statements of their operations, comprehensive income (loss), changes in equity and their cash flows for each of the three years in the period ended December 31, 20162018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note B under the heading “Recently Adopted Accounting Guidance,” the Company changed the manner in which it presents restricted cash in the statement of consolidated cash flows in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionopinions on thesethe Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the overall financial statement presentation.design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania
|
We have served as the Company’s auditor since 2015.
Alcoa Corporation and subsidiaries
Statement of Consolidated Operations
(in millions, except per-share amounts)
For the year ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Sales (E) |
| $ | 13,403 |
|
| $ | 11,652 |
|
| $ | 9,318 |
|
Cost of goods sold (exclusive of expenses below) |
|
| 10,081 |
|
|
| 8,991 |
|
|
| 7,877 |
|
Selling, general administrative, and other expenses |
|
| 248 |
|
|
| 280 |
|
|
| 356 |
|
Research and development expenses |
|
| 31 |
|
|
| 32 |
|
|
| 33 |
|
Provision for depreciation, depletion, and amortization |
|
| 733 |
|
|
| 750 |
|
|
| 718 |
|
Restructuring and other charges (D) |
|
| 527 |
|
|
| 309 |
|
|
| 318 |
|
Interest expense (S) |
|
| 122 |
|
|
| 104 |
|
|
| 243 |
|
Other expenses (income), net (S) |
|
| 64 |
|
|
| 27 |
|
|
| (65 | ) |
Total costs and expenses |
|
| 11,806 |
|
|
| 10,493 |
|
|
| 9,480 |
|
Income (Loss) before income taxes |
|
| 1,597 |
|
|
| 1,159 |
|
|
| (162 | ) |
Provision for income taxes (P) |
|
| 726 |
|
|
| 600 |
|
|
| 184 |
|
Net income (loss) |
|
| 871 |
|
|
| 559 |
|
|
| (346 | ) |
Less: Net income attributable to noncontrolling interest |
|
| 644 |
|
|
| 342 |
|
|
| 54 |
|
Net Income (Loss) Attributable to Alcoa Corporation |
|
| 227 |
|
|
| 217 |
|
|
| (400 | ) |
Earnings per Share Attributable to Alcoa Corporation Common Shareholders (F): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.22 |
|
| $ | 1.18 |
|
| $ | (2.19 | ) |
Diluted |
| $ | 1.20 |
|
| $ | 1.16 |
|
| $ | (2.19 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
Alcoa Corporation and subsidiaries
Statement of Consolidated Comprehensive Income (Loss)
(in millions)
|
| Alcoa Corporation |
|
| Noncontrolling interest |
|
| Total |
| |||||||||||||||||||||||||||
For the year ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||||||
Net income (loss) |
| $ | 227 |
|
| $ | 217 |
|
| $ | (400 | ) |
| $ | 644 |
|
| $ | 342 |
|
| $ | 54 |
|
| $ | 871 |
|
| $ | 559 |
|
| $ | (346 | ) |
Other comprehensive income (loss) income, net of tax (G): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement benefits |
|
| 503 |
|
|
| (456 | ) |
|
| (202 | ) |
|
| 1 |
|
|
| 9 |
|
|
| — |
|
|
| 504 |
|
|
| (447 | ) |
|
| (202 | ) |
Foreign currency translation adjustments |
|
| (604 | ) |
|
| 188 |
|
|
| 213 |
|
|
| (229 | ) |
|
| 96 |
|
|
| 102 |
|
|
| (833 | ) |
|
| 284 |
|
|
| 315 |
|
Net change in unrecognized gains/losses on cash flow hedges |
|
| 718 |
|
|
| (1,139 | ) |
|
| (346 | ) |
|
| (20 | ) |
|
| 50 |
|
|
| 4 |
|
|
| 698 |
|
|
| (1,089 | ) |
|
| (342 | ) |
Total Other comprehensive income (loss), net of tax |
|
| 617 |
|
|
| (1,407 | ) |
|
| (335 | ) |
|
| (248 | ) |
|
| 155 |
|
|
| 106 |
|
|
| 369 |
|
|
| (1,252 | ) |
|
| (229 | ) |
Comprehensive income (loss) |
| $ | 844 |
|
| $ | (1,190 | ) |
| $ | (735 | ) |
| $ | 396 |
|
| $ | 497 |
|
| $ | 160 |
|
| $ | 1,240 |
|
| $ | (693 | ) |
| $ | (575 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
Alcoa Corporation and subsidiaries
(in millions)
December 31, |
| 2018 |
|
| 2017 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents (O) |
| $ | 1,113 |
|
| $ | 1,358 |
|
Receivables from customers |
|
| 830 |
|
|
| 811 |
|
Other receivables |
|
| 173 |
|
|
| 232 |
|
Inventories (I) |
|
| 1,644 |
|
|
| 1,453 |
|
Fair value of derivative instruments (O) |
|
| 73 |
|
|
| 113 |
|
Prepaid expenses and other current assets |
|
| 301 |
|
|
| 271 |
|
Total current assets |
|
| 4,134 |
|
|
| 4,238 |
|
Properties, plants, and equipment, net (J) |
|
| 8,327 |
|
|
| 9,138 |
|
Investments (H) |
|
| 1,360 |
|
|
| 1,410 |
|
Deferred income taxes (P) |
|
| 560 |
|
|
| 814 |
|
Fair value of derivative instruments (O) |
|
| 82 |
|
|
| 128 |
|
Other noncurrent assets (S) |
|
| 1,475 |
|
|
| 1,719 |
|
Total Assets |
| $ | 15,938 |
|
| $ | 17,447 |
|
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable, trade |
| $ | 1,663 |
|
| $ | 1,898 |
|
Accrued compensation and retirement costs |
|
| 400 |
|
|
| 459 |
|
Taxes, including income taxes |
|
| 426 |
|
|
| 282 |
|
Fair value of derivative instruments (O) |
|
| 82 |
|
|
| 185 |
|
Other current liabilities (C) |
|
| 347 |
|
|
| 412 |
|
Long-term debt due within one year (L & O) |
|
| 1 |
|
|
| 16 |
|
Total current liabilities |
|
| 2,919 |
|
|
| 3,252 |
|
Long-term debt, less amount due within one year (L & O) |
|
| 1,801 |
|
|
| 1,388 |
|
Accrued pension benefits (N) |
|
| 1,407 |
|
|
| 2,341 |
|
Accrued other postretirement benefits (N) |
|
| 868 |
|
|
| 1,100 |
|
Asset retirement obligations (Q) |
|
| 529 |
|
|
| 617 |
|
Environmental remediation (R) |
|
| 236 |
|
|
| 258 |
|
Fair value of derivative instruments (O) |
|
| 261 |
|
|
| 1,105 |
|
Noncurrent income taxes (P) |
|
| 301 |
|
|
| 309 |
|
Other noncurrent liabilities and deferred credits (S) |
|
| 222 |
|
|
| 279 |
|
Total liabilities |
|
| 8,544 |
|
|
| 10,649 |
|
Contingencies and commitments (R) |
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
Alcoa Corporation shareholders’ equity: |
|
|
|
|
|
|
|
|
Common stock (M) |
|
| 2 |
|
|
| 2 |
|
Additional capital |
|
| 9,611 |
|
|
| 9,590 |
|
Retained earnings |
|
| 341 |
|
|
| 113 |
|
Accumulated other comprehensive loss (G) |
|
| (4,565 | ) |
|
| (5,182 | ) |
Total Alcoa Corporation shareholders’ equity |
|
| 5,389 |
|
|
| 4,523 |
|
Noncontrolling interest (A) |
|
| 2,005 |
|
|
| 2,275 |
|
Total equity |
|
| 7,394 |
|
|
| 6,798 |
|
Total Liabilities and Equity |
| $ | 15,938 |
|
| $ | 17,447 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Alcoa Corporation and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
For the year ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Cash from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 871 |
|
| $ | 559 |
|
| $ | (346 | ) |
Adjustments to reconcile net income (loss) to cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization |
|
| 733 |
|
|
| 752 |
|
|
| 718 |
|
Deferred income taxes (P) |
|
| (36 | ) |
|
| 176 |
|
|
| (46 | ) |
Equity earnings, net of dividends (H) |
|
| 17 |
|
|
| 9 |
|
|
| 48 |
|
Restructuring and other charges (D) |
|
| 527 |
|
|
| 309 |
|
|
| 318 |
|
Net gain from investing activities—asset sales (S) |
|
| — |
|
|
| (116 | ) |
|
| (164 | ) |
Net periodic pension benefit cost (N) |
|
| 146 |
|
|
| 111 |
|
|
| 66 |
|
Stock-based compensation (M) |
|
| 35 |
|
|
| 24 |
|
|
| 28 |
|
Other |
|
| (59 | ) |
|
| 32 |
|
|
| (16 | ) |
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in receivables |
|
| (43 | ) |
|
| (118 | ) |
|
| (234 | ) |
(Increase) Decrease in inventories |
|
| (278 | ) |
|
| (238 | ) |
|
| 1 |
|
(Increase) Decrease in prepaid expenses and other current assets |
|
| (32 | ) |
|
| 43 |
|
|
| (52 | ) |
(Decrease) Increase in accounts payable, trade |
|
| (165 | ) |
|
| 377 |
|
|
| 6 |
|
(Decrease) in accrued expenses |
|
| (319 | ) |
|
| (563 | ) |
|
| (320 | ) |
Increase (Decrease) in taxes, including income taxes |
|
| 241 |
|
|
| 111 |
|
|
| (148 | ) |
Pension contributions (N) |
|
| (992 | ) |
|
| (106 | ) |
|
| (66 | ) |
(Increase) in noncurrent assets |
|
| (101 | ) |
|
| (99 | ) |
|
| (184 | ) |
(Decrease) Increase in noncurrent liabilities |
|
| (97 | ) |
|
| (39 | ) |
|
| 80 |
|
Cash provided from (used for) operations |
|
| 448 |
|
|
| 1,224 |
|
|
| (311 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from former parent company |
|
| — |
|
|
| — |
|
|
| 806 |
|
Cash paid to former parent company related to separation (A) |
|
| — |
|
|
| (247 | ) |
|
| (1,072 | ) |
Net change in short-term borrowings (original maturities of three months or less) |
|
| — |
|
|
| 7 |
|
|
| (4 | ) |
Additions to debt (original maturities greater than three months) (L) |
|
| 560 |
|
|
| 21 |
|
|
| 1,228 |
|
Payments on debt (original maturities greater than three months) (L) |
|
| (135 | ) |
|
| (60 | ) |
|
| (34 | ) |
Proceeds from the exercise of employee stock options (M) |
|
| 23 |
|
|
| 43 |
|
|
| 10 |
|
Repurchase of common stock (M) |
|
| (50 | ) |
|
| — |
|
|
| — |
|
Contributions from noncontrolling interest (A) |
|
| 149 |
|
|
| 80 |
|
|
| 48 |
|
Distributions to noncontrolling interest |
|
| (827 | ) |
|
| (342 | ) |
|
| (233 | ) |
Other |
|
| (8 | ) |
|
| (8 | ) |
|
| — |
|
Cash (used for) provided from financing activities |
|
| (288 | ) |
|
| (506 | ) |
|
| 749 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (399 | ) |
|
| (405 | ) |
|
| (404 | ) |
Proceeds from the sale of assets and businesses (C) |
|
| 1 |
|
|
| 245 |
|
|
| 112 |
|
Additions to investments (H) |
|
| (7 | ) |
|
| (66 | ) |
|
| (3 | ) |
Sales of investments (H) |
|
| — |
|
|
| — |
|
|
| 146 |
|
Cash used for investing activities |
|
| (405 | ) |
|
| (226 | ) |
|
| (149 | ) |
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
|
| (4 | ) |
|
| 14 |
|
|
| 13 |
|
Net change in cash and cash equivalents and restricted cash |
|
| (249 | ) |
|
| 506 |
|
|
| 302 |
|
Cash and cash equivalents and restricted cash at beginning of year |
|
| 1,365 |
|
|
| 859 |
|
|
| 557 |
|
Cash and cash equivalents and restricted cash at end of year |
| $ | 1,116 |
|
| $ | 1,365 |
|
| $ | 859 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Alcoa Corporation and subsidiaries
Statement of Changes in Consolidated Equity
(in millions)
|
| Alcoa Corporation shareholders |
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Parent Company net investment |
|
| Common stock |
|
| Additional capital |
|
| Retained (deficit) earnings |
|
| Accumulated other compre- hensive loss |
|
| Noncontrolling interest |
|
| Total equity |
| |||||||
Balance at December 31, 2015 |
| $ | 11,042 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | (1,600 | ) |
| $ | 2,071 |
|
| $ | 11,513 |
|
Net (loss) income |
|
| (296 | ) |
|
| — |
|
|
| — |
|
|
| (104 | ) |
|
| — |
|
|
| 54 |
|
|
| (346 | ) |
Other comprehensive (loss) income (G) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (335 | ) |
|
| 106 |
|
|
| (229 | ) |
Establishment of additional defined benefit plans (N) |
|
| 176 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,704 | ) |
|
| — |
|
|
| (2,528 | ) |
Change in Parent Company net investment |
|
| (603 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (603 | ) |
Cash provided at separation to Parent Company (A) |
|
| (1,072 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,072 | ) |
Separation-related adjustments (A) |
|
| (9,247 | ) |
|
| — |
|
|
| 9,521 |
|
|
| — |
|
|
| 864 |
|
|
| — |
|
|
| 1,138 |
|
Issuance of common stock (M) |
|
| — |
|
|
| 2 |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation (M) |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
Common stock issued: compensation plans (M) |
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
Contributions (A) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 48 |
|
|
| 48 |
|
Distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (233 | ) |
|
| (233 | ) |
Other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| (3 | ) |
Balance at December 31, 2016 |
|
| — |
|
|
| 2 |
|
|
| 9,531 |
|
|
| (104 | ) |
|
| (3,775 | ) |
|
| 2,043 |
|
|
| 7,697 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 217 |
|
|
| — |
|
|
| 342 |
|
|
| 559 |
|
Other comprehensive (loss) income (G) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,407 | ) |
|
| 155 |
|
|
| (1,252 | ) |
Stock-based compensation (M) |
|
| — |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24 |
|
Common stock issued: compensation plans (M) |
|
| — |
|
|
| — |
|
|
| 43 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 43 |
|
Contributions (A) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 80 |
|
|
| 80 |
|
Distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (342 | ) |
|
| (342 | ) |
Other |
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| (11 | ) |
Balance at December 31, 2017 |
|
| — |
|
|
| 2 |
|
|
| 9,590 |
|
|
| 113 |
|
|
| (5,182 | ) |
|
| 2,275 |
|
|
| 6,798 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 227 |
|
|
| — |
|
|
| 644 |
|
|
| 871 |
|
Other comprehensive income (loss) (G) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 617 |
|
|
| (248 | ) |
|
| 369 |
|
Stock-based compensation (M) |
|
| — |
|
|
| — |
|
|
| 35 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 35 |
|
Common stock issued: compensation plans (M) |
|
| — |
|
|
| — |
|
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23 |
|
Repurchase of common stock (M) |
|
| — |
|
|
| — |
|
|
| (50 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50 | ) |
Contributions (A) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 149 |
|
|
| 149 |
|
Distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (827 | ) |
|
| (827 | ) |
Other |
|
| — |
|
|
| — |
|
|
| 13 |
|
|
| 1 |
|
|
| — |
|
|
| 12 |
|
|
| 26 |
|
Balance at December 31, 2018 |
| $ | — |
|
| $ | 2 |
|
| $ | 9,611 |
|
| $ | 341 |
|
| $ | (4,565 | ) |
| $ | 2,005 |
|
| $ | 7,394 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Alcoa Corporation and subsidiaries
Notes to the Consolidated Financial Statements
(dollars in millions, except per-share amounts; metric tons in thousands (kmt))
A. Basis of Presentation
Alcoa Corporation (or the “Company”) is a vertically integrated aluminum company comprised of bauxite mining, alumina refining, aluminum production (smelting, casting, and rolling), and energy generation. The Company has more than 40 operating locations (through direct and indirect ownership) in 10 countries around the world, situated primarily in Australia, Brazil, Canada, Iceland, Norway, Spain, and the United States.
References in these Notes to “ParentCo” refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries (through October 31, 2016, at which time was renamed Arconic Inc. (Arconic)).
Separation Transaction. On November 1, 2016 (the “Separation Date”), ParentCo separated into two standalone, publicly-traded companies, Alcoa Corporation and Arconic, effective at 12:01 a.m. Eastern Standard Time (the “Separation Transaction”). Alcoa Corporation includes the Alumina and Primary Metals segments, which comprised the bauxite mining, alumina refining, aluminum smelting and casting, and energy operations of ParentCo, as well as the Warrick, Indiana rolling operations and the 25.1% equity interest in the rolling mill at the joint venture in Saudi Arabia, both of which were part of ParentCo’s Global Rolled Products segment. Arconic includes the operations that comprise the Global Rolled Products (except for the aforementioned rolling operations that were included in Alcoa Corporation), Engineered Products and Solutions, and Transportation and Construction Solutions segments. ParentCo shareholders of record as of the close of business on October 20, 2016 (the “Record Date”) received one share of Alcoa Corporation common stock, representing in aggregate 80.1% of the common stock of the Company, for every three shares of ParentCo common stock held as of the close of business on the Record Date (cash was paid by ParentCo to its’ shareholders in lieu of fractional shares). Arconic retained the remaining 19.9% of Alcoa Corporation common stock (Arconic sold this retained interest in 2017).
To effect the Separation Transaction, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of $1,072 to ParentCo by Alcoa Corporation (an additional $247 was paid to Arconic by the Company in 2017, including $243 associated with the sale of certain of the Alcoa Corporation’s energy operations – see Note C) with the net proceeds of a previous debt offering (see Note L). Additionally, 146,159,428 shares and 36,311,767 shares of the Company’s common stock were distributed to ParentCo shareholders and retained by Arconic, respectively. “Regular-way” trading of Alcoa Corporation’s common stock began with the opening of the New York Stock Exchange on November 1, 2016 under the ticker symbol “AA.” The Company’s common stock has a par value of $0.01 per share.
In connection with the Separation Transaction, Alcoa Corporation and Arconic entered into certain agreements to implement the legal and structural separation between the two companies, govern the relationship between the Company and Arconic after the completion of the Separation Transaction, and allocate between Alcoa Corporation and Arconic various assets, liabilities, and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, certain Patent, Know-How, Trade Secret License and Trademark License Agreements, and Stockholder and Registration Rights Agreement.
ParentCo incurred costs to evaluate, plan, and execute the Separation Transaction, and Alcoa Corporation was allocated a pro rata portion of those costs based on segment revenue (see Cost Allocations below). ParentCo recognized $152 from January 2016 through October 2016 for costs related to the Separation Transaction, of which $68 was allocated to Alcoa Corporation. The allocated amounts were included in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations.
Basis of Presentation. The Consolidated Financial Statements of Alcoa Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see Recently Adopted Accounting Guidance in Note B).
Principles of Consolidation. The Consolidated Financial Statements of the Company include the accounts of Alcoa Corporation and companies in which Alcoa Corporation has a controlling interest, including those that comprise the Alcoa World Alumina & Chemicals (AWAC) joint venture (see below). Intercompany transactions have been eliminated. The equity method of accounting is applied to investments in affiliates and other joint ventures over which the Company has
significant influence but does not have effective control. Investments in affiliates in which Alcoa Corporation cannot exercise significant influence are accounted for on the cost method.
AWAC is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited and consists of several affiliated operating entities, which own, have an interest in, or operate the bauxite mines and alumina refineries within the Company’s Bauxite and Alumina segments (except for the Poços de Caldas mine and refinery and a portion of the São Luís refinery, all in Brazil) and a portion (55%) of the Portland smelter (Australia) within the Company’s Aluminum segment. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these individual entities, which are consolidated by the Company for financial reporting purposes and include Alcoa of Australia Limited (AofA), Alcoa World Alumina LLC (AWA), Alcoa World Alumina Brasil Ltda. (AWAB), and Alúmina Española, S.A. (Española). Alumina Limited’s interest in the equity of such entities is reflected as Noncontrolling interest on the accompanying Consolidated Balance Sheet. In 2018, 2017, and 2016, AWAC received $149, $80, and $48, respectively, in contributions from Alumina Limited.
Management evaluates whether an Alcoa Corporation entity or interest is a variable interest entity and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met. Alcoa Corporation does not have any variable interest entities requiring consolidation.
Prior to the Separation Date, the Company did not operate as a separate, standalone entity. Alcoa Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, the accompanying Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation. ParentCo’s net investment in these operations is reflected as Parent Company net investment on the accompanying Consolidated Financial Statements. All significant transactions and accounts within Alcoa Corporation have been eliminated. All significant intercompany transactions between ParentCo and Alcoa Corporation were included within Parent Company net investment on the accompanying Consolidated Financial Statements.
Cost Allocations. The description and information on cost allocations is applicable for all periods included in the accompanying Consolidated Financial Statements prior to the Separation Date.
The Consolidated Financial Statements of Alcoa Corporation include general corporate expenses of ParentCo that were not historically charged to Alcoa Corporation for certain support functions that were provided on a centralized basis, such as expenses related to finance, audit, legal, information technology, human resources, communications, compliance, facilities, employee benefits and compensation, and research and development activities. Such general corporate expenses were included on the accompanying Statement of Consolidated Operations within Cost of goods sold, Selling, general administrative and other expenses, and Research and development expenses. These expenses were allocated to Alcoa Corporation on the basis of direct usage when identifiable, with the remainder allocated based on Alcoa Corporation’s segment revenue as a percentage of ParentCo’s total segment revenue for both Alcoa Corporation and Arconic.
All external debt not directly attributable to Alcoa Corporation was excluded from the Company’s Consolidated Balance Sheet. Financing costs related to these debt obligations were allocated to Alcoa Corporation based on the ratio of capital invested in Alcoa Corporation to the total capital invested by ParentCo in both Alcoa Corporation and Arconic, and were included on the accompanying Statement of Consolidated Operations within Interest expense.
The following table reflects the allocations described above:
|
| 2016 |
| |
Cost of goods sold(1) |
| $ | 40 |
|
Selling, general administrative, and other expenses(2) |
|
| 150 |
|
Research and development expenses |
|
| 2 |
|
Provision for depreciation, depletion, and amortization |
|
| 18 |
|
Restructuring and other charges |
|
| 1 |
|
Interest expense |
|
| 198 |
|
Other income, net |
|
| (7 | ) |
Nevertheless, the Consolidated Financial Statements of Alcoa Corporation may not include all of the actual expenses that would have been incurred and may not reflect the Company’s consolidated results of operations, financial position, and cash flows had it been a standalone company during the periods prior to the Separation Date. Actual costs that would have been incurred if Alcoa Corporation had been a standalone company would depend on multiple factors, including organizational structure, capital structure, and strategic decisions made in various areas, including information technology and infrastructure. Transactions between Alcoa Corporation and ParentCo were considered to be effectively settled for cash at the time the transaction was recorded. The total net effect of the settlement of these transactions is reflected on the accompanying Statement of Consolidated Cash Flows as a financing activity and on Alcoa Corporation’s Consolidated Balance Sheet as Parent Company net investment. Cash Management. The description and information on cash management is applicable for all periods included in the Consolidated Financial Statements prior to the Separation Date. Cash was managed centrally with certain net earnings reinvested locally and working capital requirements met from existing liquid funds. Accordingly, the cash and cash equivalents held by ParentCo at the corporate level were not attributed to Alcoa Corporation for any of the periods prior to the Separation Date. Only cash amounts specifically attributable to Alcoa Corporation were reflected in the Company’s Consolidated Balance Sheet. Transfers of cash, both to and from ParentCo’s centralized cash management system, were reflected as a component of Parent Company net investment on Alcoa Corporation’s Consolidated Balance Sheet and as a financing activity on the accompanying Consolidated Statement of Cash Flows. ParentCo had an arrangement with several financial institutions to sell certain customer receivables without recourse on a revolving basis. The sale of such receivables was completed through the use of a bankruptcy-remote special-purpose entity, which was a consolidated subsidiary of ParentCo. In connection with this arrangement, certain of Alcoa Corporation’s customer receivables were sold on a revolving basis to this bankruptcy-remote subsidiary of ParentCo; these sales were reflected as a component of Parent Company net investment on Alcoa Corporation’s Consolidated Balance Sheet. ParentCo participated in several accounts payable settlement arrangements with certain vendors and third-party intermediaries. These arrangements provided that, at the vendor’s request, the third-party intermediary advance the amount of the scheduled payment to the vendor, less an appropriate discount, before the scheduled payment date and ParentCo made payment to the third-party intermediary on the date stipulated in accordance with the commercial terms negotiated with its vendors. In connection with these arrangements, certain of Alcoa Corporation’s accounts payable were settled, at the vendor’s request, before the scheduled payment date; these settlements were reflected as a component of Parent Company net investment on Alcoa Corporation’s Consolidated Balance Sheet. Related Party Transactions. Alcoa Corporation buys products from and sells products to various related companies, consisting of entities in which the Company retains a 50% or less equity interest, at negotiated prices between the two parties. These transactions were not material to the financial position or results of operations of Alcoa Corporation for all periods presented. B. Summary of Significant Accounting Policies Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. Inventory Valuation. Inventories are carried at the lower of cost or market, with cost for a substantial portion of U.S. inventories and a small portion of Canadian inventories determined under the last-in, first-out (LIFO) method. The cost of other inventories is principally determined under the average-cost method. Effective January 1, 2019, Alcoa Corporation will discontinue the use of the LIFO method for the referenced inventories. The cost of these inventories will now be determined on the average-cost method. In accordance with GAAP, all prior periods presented in the Company’s Consolidated Financial Statements will be recast to retroactively apply this inventory costing change. Alcoa Corporation is still finalizing this change in accounting principle; however, management does not expect the inventory costing change to have a material impact on the Company’s Statement of Consolidated Operations for the year ended December 31, 2018. Properties, Plants, and Equipment. Properties, plants, and equipment are recorded at cost. Also, interest related to the construction of qualifying assets is capitalized as part of the construction costs. Depreciation is recorded principally on the straight-line method at rates based on the estimated useful lives of the assets. For greenfield assets (i.e. construction of new assets on undeveloped land) the units of production method is used to record depreciation. These assets require a significant period (generally greater than one-year) to ramp-up to full production capacity. As a result, the units of production method is deemed a more systematic and rational method for recognizing depreciation on these assets. Depreciation is recorded on temporarily idled facilities until such time management approves a permanent closure. The following table details the weighted-average useful lives of structures and machinery and equipment by type of operation (numbers in years):
Repairs and maintenance are charged to expense as incurred. Gains or losses from the sale of assets are generally recorded in Other expenses (income), net. Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments. Equity Investments. Alcoa Corporation invests in a number of privately-held companies, primarily through joint ventures and consortia, which are accounted for using the equity method. The equity method is applied in situations where Alcoa Corporation has the ability to exercise significant influence, but not control, over the investee. Management reviews equity investments for impairment whenever certain indicators are present suggesting that the carrying value of an investment is not recoverable. This analysis requires a significant amount of judgment from management to identify events or circumstances indicating that an equity investment is impaired. The following items are examples of impairment indicators: significant, sustained declines in an investee’s revenue, earnings, and cash flow trends; adverse market conditions of the investee’s industry or geographic area; the investee’s ability to continue operations measured by several items, including liquidity; and other factors. Once an impairment indicator is identified, management uses considerable judgment to determine if the impairment is other than temporary, in which case the equity investment is written down to its estimated fair value. An impairment that is other than temporary could significantly and adversely impact reported results of operations. Deferred Mining Costs. Alcoa Corporation recognizes deferred mining costs during the development stage of a mine life cycle. Such costs include the construction of access and haul roads, detailed drilling and geological analysis to further define the grade and quality of the known bauxite, and overburden removal costs. These costs relate to sections of the related mines where Alcoa Corporation is either currently extracting bauxite or is preparing for production in the near term. These sections are outlined and planned incrementally and generally are mined over periods ranging from one to five years, depending on mine specifics. The amount of geological drilling and testing necessary to determine the economic viability of the bauxite deposit being mined is such that the reserves are considered to be proven, and the mining costs are amortized based on this level of reserves. Deferred mining costs are included in Other noncurrent assets on the accompanying Consolidated Balance Sheet. Goodwill and Other Intangible Assets. Goodwill is not amortized; it is instead reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods. The fair value that could be realized in an actual transaction may differ from that used to evaluate goodwill for impairment. Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Alcoa Corporation has five reporting units, of which three are included in the Aluminum segment (smelting/casting, energy generation, and rolling operations). The remaining two reporting units are the Bauxite and Alumina segments. Of these five reporting units, only Bauxite and Alumina contain goodwill. As of December 31, 2018, the carrying value of the goodwill for Bauxite and Alumina was $51 and $100, respectively. These amounts include an allocation of goodwill held at the corporate level (see Note K). In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the quantitative impairment test. Alcoa Corporation’s policy for its annual review of goodwill is to perform the qualitative assessment for all reporting units not subjected directly to the quantitative impairment test. Generally, management will proceed directly to the quantitative impairment test for each of its two reporting units that contain goodwill at least once during every three-year period, as part of its annual review of goodwill. Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit. During the 2018 annual review of goodwill, management performed the qualitative assessment for the Alumina reporting unit. Management concluded it was not more likely than not that the respective estimated fair value of this reporting unit was less than the respective carrying value. As such, no further analysis was required. Under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Alcoa Corporation uses a DCF model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Certain of these assumptions can vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The betas used in calculating the individual reporting units’ WACC rate are estimated for each business with the assistance of valuation experts. In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, an impairment loss equal to the excess of the reporting unit's carrying value over its fair value not to exceed the total amount of goodwill applicable to that reporting unit would be recognized. During the 2018 annual review of goodwill, management proceeded directly to the quantitative impairment test for the Bauxite reporting unit. The estimated fair value of this reporting unit was substantially in excess of its carrying value, resulting in no impairment. Management last proceeded directly to the quantitative impairment test for the Alumina reporting unit in 2016. At that time, the estimated fair value of the Alumina reporting unit was substantially in excess of its carrying value, resulting in no impairment. Additionally, in all prior years presented, there have been no triggering events that necessitated an impairment test for either the Bauxite or Alumina reporting units. Intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited. The following table details the weighted-average useful lives of software and other intangible assets by type of operation (numbers in years):
Asset Retirement Obligations. Alcoa Corporation recognizes asset retirement obligations (AROs) related to legal obligations associated with the standard operation of bauxite mines, alumina refineries, and aluminum smelters. These AROs consist primarily of costs associated with mine reclamation, closure of bauxite residue areas, spent pot lining disposal, and landfill closure. Alcoa Corporation also recognizes AROs for any significant lease restoration obligation, if required by a lease agreement, and for the disposal of regulated waste materials related to the demolition of certain power facilities. The fair values of these AROs are recorded on a discounted basis, at the time the obligation is incurred, and accreted over time for the change in present value. Additionally, Alcoa Corporation capitalizes asset retirement costs by increasing the carrying amount of the related long-lived assets and depreciating these assets over their remaining useful life. Certain conditional asset retirement obligations (CAROs) related to alumina refineries, aluminum smelters, rolling mills, and energy generation facilities have not been recorded in the Consolidated Financial Statements due to uncertainties surrounding the ultimate settlement date. A CARO is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within Alcoa Corporation’s control. Such uncertainties exist as a result of the perpetual nature of the structures, maintenance and upgrade programs, and other factors. At the date a reasonable estimate of the ultimate settlement date can be made (e.g., planned demolition), Alcoa Corporation would record an ARO for the removal, treatment, transportation, storage, and/or disposal of various regulated assets and hazardous materials such as asbestos, underground and aboveground storage tanks, polychlorinated biphenyls (PCBs), various process residuals, solid wastes, electronic equipment waste, and various other materials. Such amounts may be material to the Consolidated Financial Statements in the period in which they are recorded. Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring expenses. Estimates are generally not discounted or reduced by potential claims for recovery, which are recognized as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that Alcoa Corporation has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations. Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss. Revenue Recognition. The Company recognizes revenue when it satisfies a performance obligation(s) in accordance with the provisions of a customer order or contract. This is achieved when control of the product has been transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (commercial delivery truck, train, or vessel). Accordingly, except for the sale of electricity, the sale of Alcoa Corporation’s products to its customers represent single performance obligations for which revenue is recognized at a point in time. Based on the foregoing, no significant judgment is required to determine when control of a product has been transferred to a customer. The Company measures revenue based on the consideration it expects to be entitled to receive in exchange for its products. The standard terms and conditions of customer orders and contracts include general rights of return and product warranty provisions related to nonconforming or “out-of-spec” product. Depending on the circumstances, the product is either replaced or a quality adjustment is issued. Historically, such returns and adjustments have not been material to Alcoa Corporation’s Consolidated Financial Statements. The Company considers shipping and handling activities as costs to fulfill the promise to transfer the related products. As a result, customer payments of shipping and handling costs are recorded as a component of revenue. Also, Alcoa Corporation may collect various taxes (e.g., sales, use, value-added, excise) from its customers related to the sale of its products and remit such amounts to governmental authorities. As such, amounts paid to the Company for these types of taxes are excluded from the transaction price used to determine the proper measurement of revenue. Stock-Based Compensation. For all periods prior to the Separation Date, eligible employees attributable to Alcoa Corporation operations participated in ParentCo’s stock-based compensation plans. The compensation expense recorded by Alcoa Corporation included the expense associated with these employees, as well as the expense associated with the allocation of stock-based compensation expense for ParentCo’s corporate employees. Beginning on the Separation Date and forward, Alcoa Corporation recorded stock-based compensation expense for all eligible Company employees. The following accounting policy describes how stock-based compensation expense is initially determined for both Alcoa Corporation and ParentCo. Compensation expense for employee equity grants is recognized using the non-substantive vesting period approach, in which the expense (net of estimated forfeitures) is recognized ratably over the requisite service period based on the grant date fair value. The fair value of new stock options is estimated on the date of grant using a lattice-pricing model. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility, annual forfeiture rate, and exercise behavior. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time. Most plan participants can choose whether to receive their award in the form of stock options, stock units, or a combination of both. This choice is made before the grant is issued and is irrevocable. Pension and Other Postretirement Benefit Plans. For all periods prior to August 1, 2016 (see below), certain employees attributable to Alcoa Corporation operations participated in defined benefit pension and other postretirement benefit plans (the “Shared Plans”) sponsored by ParentCo, which also included participants attributable to non-Alcoa Corporation operations. Alcoa Corporation accounted for these Shared Plans as multiemployer benefit plans. Accordingly, Alcoa Corporation did not record an asset or liability to recognize the funded status of the Shared Plans. However, the related expense recorded by Alcoa Corporation was based primarily on pensionable compensation and estimated interest costs related to employees attributable to Alcoa Corporation operations. Prior to the Separation Date, certain other plans that were entirely attributable to employees of Alcoa Corporation-related operations (the “Direct Plans”) were accounted for as defined benefit pension and other postretirement benefit plans. Accordingly, the funded and unfunded position of each Direct Plan was recorded in the Consolidated Balance Sheet. Actuarial gains and losses that had not yet been recognized through earnings were recorded in accumulated other comprehensive income, net of taxes, until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to the Direct Plans is dependent on various assumptions. The major assumptions primarily relate to discount rates, long-term expected rates of return on plan assets, and future compensation increases. ParentCo’s management developed each assumption using relevant company experience in conjunction with market-related data for each individual location in which such plans exist. In preparation for the Separation Transaction, effective August 1, 2016, certain of the Shared Plans were separated into standalone plans for both Alcoa Corporation and ParentCo (see Note N). Additionally, certain of the other remaining Shared Plans were assumed by Alcoa Corporation (See Note N). Accordingly, beginning on August 1, 2016 and forward, the standalone plans and assumed plans were accounted for as defined benefit pension and other postretirement plans. Additionally, the Direct Plans continued to be accounted for as defined benefit pension and other postretirement plans. Derivatives and Hedging. Derivatives are held for purposes other than trading and are part of a formally documented risk management program. Alcoa Corporation accounts for hedges of firm customer commitments for aluminum as fair value hedges. The fair values of the derivatives and changes in the fair values of the underlying hedged items are reported as assets and liabilities in the Consolidated Balance Sheet. Changes in the fair values of these derivatives and underlying hedged items generally offset and are recorded each period in Sales, consistent with the underlying hedged item. The Company accounts for hedges of foreign currency exposures and certain forecasted transactions as cash flow hedges. The fair values of the derivatives are recorded as assets and liabilities in the Consolidated Balance Sheet. The changes in the fair values of these derivatives are recorded in Other comprehensive income (loss) and are reclassified to Sales, Cost of goods sold, or Other expenses (income), net in the period in which earnings are impacted by the hedged items or in the period that the transaction no longer qualifies as a cash flow hedge. These contracts cover the same periods as known or expected exposures, generally not exceeding five years. On April 1, 2018, Alcoa Corporation adopted new accounting guidance for hedging activities (see Recently Adopted Accounting Guidance below), which included the elimination of the concept of ineffectiveness, effective on January 1, 2018. Accordingly, there is no longer a requirement to separately measure and report ineffectiveness. Therefore, the following policy description of effectiveness was applicable to periods prior to January 1, 2018. For derivatives designated as fair value hedges, Alcoa Corporation measures hedge effectiveness by formally assessing, at inception and at least quarterly, the historical high correlation of changes in the fair value of the hedged item and the derivative hedging instrument. For derivatives designated as cash flow hedges, Alcoa Corporation measures hedge effectiveness by formally assessing, at inception and at least quarterly, the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The ineffective portions of both types of hedges are recorded in Sales or Other expenses (income), net in the current period. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future gains or losses on the derivative instrument are recorded in Other expenses (income), net. If no hedging relationship is designated, the derivative is marked to market through Other expenses (income), net. Cash flows from derivatives are recognized in the Statement of Consolidated Cash Flows in a manner consistent with the underlying transactions. Income Taxes. Beginning on the Separation Date and forward, the provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of Alcoa Corporation’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. In all periods prior to the Separation Date, Alcoa Corporation’s operations were included in the income tax filings of ParentCo. The provision for income taxes in Alcoa Corporation’s Statement of Consolidated Operations was determined in the same manner described above, but on a separate return methodology as if the Company was a standalone taxpayer filing hypothetical income tax returns where applicable. Any additional accrued tax liability or refund arising as a result of this approach was assumed to be immediately settled with ParentCo as a component of Parent Company net investment. Deferred tax assets were also determined in the same manner described above and were reflected in the Consolidated Balance Sheet for net operating losses, credits or other attributes to the extent that such attributes were expected to transfer to Alcoa Corporation upon the Separation Transaction. Any difference from attributes generated in a hypothetical return on a separate return basis was adjusted as a component of Parent Company net investment. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa Corporation’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays. Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized. Foreign Currency. The local currency is the functional currency for Alcoa Corporation’s significant operations outside the United States, except for certain operations in Canada and Iceland, where the U.S. dollar is used as the functional currency. The determination of the functional currency for Alcoa Corporation’s operations is made based on the appropriate economic and management indicators. Recently Adopted Accounting Guidance. On January 1, 2018, Alcoa Corporation adopted changes issued by the Financial Accounting Standards Board (FASB) to the recognition of revenue from contracts with customers. This guidance created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. Management’s assessment of this guidance was applied only to those customer contracts that were open on the date of adoption under the modified retrospective method. Through a previously established project team, the Company completed a detailed review of the terms and provisions of its customer contracts, as well as evaluated these contracts under the new guidance, throughout 2017 and concluded that Alcoa Corporation’s revenue recognition practices were in compliance with this framework. That said, the Company did make some minor modifications to its internal accounting policies and internal control structure to ensure that any future customer contracts that may have different terms and conditions of those that the Company has today are properly evaluated under the new guidance. Other than providing additional disclosure (see Revenue Recognition above and the Product Information section in Note E), the adoption of this guidance had no impact on the Consolidated Financial Statements. On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting and reporting of certain equity investments. This guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Additionally, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. The adoption of this guidance had no impact on the Consolidated Financial Statements, as all of Alcoa Corporation’s equity investments are accounted for under the equity method of accounting. On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the presentation of several items in the statement of cash flows. Specifically, the guidance identifies nine cash flow items and the sections where they must be presented within the statement of cash flows, including distributions received from equity method investees, proceeds from the settlement of insurance claims, and restricted cash. Other than as it relates to restricted cash, the adoption of this guidance had no impact on the Consolidated Financial Statements. This guidance requires that restricted cash be aggregated with cash and cash equivalents in both the beginning-of-period and end-of-period line items at the bottom of the statement of cash flows. Previously, the change in restricted cash between the beginning-of-period and end-of period was reflected as either an investing, financing, operating, or non-cash activity based on the underlying nature of the transaction. Accordingly, for the accompanying Statement of Consolidated Cash Flows for the year ended December 31, 2018, the Cash and cash equivalents and restricted cash at beginning of year and Cash and cash equivalents and restricted cash at end of year line items include restricted cash of $7 and $3, respectively. Additionally, the Company’s Statement of Consolidated Cash Flows for the years ended December 31, 2017 and 2016 were recast to reflect this change in presentation as follows (only line items impacted are reflected in the table):
See Note S for a reconciliation of Cash and cash equivalents and Restricted cash reported in the accompanying Consolidated Balance Sheet that sum to the Cash and cash equivalents and restricted cash at both the beginning of year and end of year presented on the accompanying Statement of Consolidated Cash Flows for the year ended December 31, 2018. On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for intra-entity transactions, other than inventory. The guidance requires the current and deferred income tax consequences of an intra-entity transfer to be recorded immediately when the transaction occurs; the exception to defer the tax consequences of inventory transactions is maintained. Prior to this guidance, no immediate tax impact was permitted to be recognized in an entity’s financial statements as a result of intra-entity transfers of assets. An entity was precluded from reflecting a tax benefit or expense from an intra-entity asset transfer between entities that file separate tax returns, whether or not such entities are in different tax jurisdictions, until the asset had been sold to a third party or otherwise recovered. The buyer of such asset was prohibited from recognizing a deferred tax asset for the temporary difference arising from the excess of the buyer’s tax basis over the cost to the seller. The adoption of this guidance had an immaterial impact on the Consolidated Financial Statements. On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to accounting for business combinations. This guidance clarifies the definition of a business for the purposes of evaluating whether a particular transaction should be accounted for as an acquisition or disposal of a business or an asset. Generally, a business is an integrated set of assets and activities that contain inputs, processes, and outputs, although outputs are not required. This guidance provides a “screen” to determine whether an integrated set of assets and activities qualifies as a business. If substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets, the definition of a business has not been met and the transaction should be accounted for as an acquisition or disposal of an asset. Otherwise, an entity is required to evaluate whether the integrated set of assets and activities include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and are no longer to consider whether a market participant could replace any missing elements. This guidance also narrows the definition of an output. Previously, an output was defined as the ability to provide a return in the form of dividends, lower costs, or other economic benefits directly to investors, owners, members, or participants. An output is now defined as the ability to provide goods or services to customers, investment income, or other revenues. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered in the event Alcoa Corporation acquires or disposes of an integrated set of assets and activities. On January 1, 2018, Alcoa Corporation early adopted guidance issued by the FASB to the assessment of goodwill for impairment as it relates to the quantitative test. Prior to this guidance, there were two steps when performing a quantitative impairment test. The first step required an entity to compare the current fair value of a reporting unit to its carrying value. In the event the reporting unit’s estimated fair value was less than its carrying value, an entity performed the second step, which was to compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeded its implied fair value, an impairment loss equal to such excess was recognized. This guidance eliminates the second step of the quantitative impairment test. Accordingly, an entity would recognize an impairment of goodwill for a reporting unit, if under what was previously referred to as the first step, the estimated fair value of the reporting unit is less than the carrying value. The impairment would be equal to the excess of the reporting unit’s carrying value over its fair value not to exceed the total amount of goodwill applicable to that reporting unit. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered each time the Company performs an assessment of goodwill for impairment under the quantitative test (see Goodwill and Other Intangible Assets above). On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the presentation of net periodic benefit cost related to pension and other postretirement benefit plans. This guidance requires that an entity report the service cost component of net periodic benefit cost in the same line item(s) on its income statement as other compensation costs arising from services rendered by the pertinent employees during a reporting period. The other components of net periodic benefit cost (see Note N) are required to be reported separately from the service cost component. In other words, these other components may be aggregated and presented as a separate line item or they may be reported in existing line items on the income statement other than such line items that include the service cost component. Previously, Alcoa Corporation reported all components of net periodic benefit cost, except for certain settlements, curtailments, and special termination benefits, in Cost of goods sold (business employees) and Selling, general administrative, and other expenses (corporate employees) consistent with the location of other compensation costs related to the respective employees. The non-service cost components noted as exceptions are reported in Restructuring and other charges, as applicable. Additionally, this guidance only permits the service cost component to be capitalized as applicable (e.g., as a cost of internally manufactured inventory). Upon adoption of this guidance, management began reporting the non-service cost components of net periodic benefit cost, except for certain settlements, curtailments, and special termination benefits that will continue to be reported in Restructuring and other charges, in Other expenses (income), net on the accompanying Statement of Consolidated Operations (see Note N). For the year ended December 31, 2018, the non-service cost components reported in Other expenses, net was $139. Additionally, the Statement of Consolidated Operations for the years ended December 31, 2017 and 2016 was recast to reflect the reclassification of the non-service cost components of net periodic benefit cost to Other expense (income), net from both Cost of goods sold and Selling, general administrative, and other expenses as follows:
Under the practical expedient option provided for in the guidance, the Company used previously disclosed amounts for non-service cost components to recast these line items for the years ended December 31, 2017 and 2016. Furthermore, Alcoa Corporation no longer capitalizes any non-service cost components as part of the cost of inventory prospectively beginning January 1, 2018. On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for stock-based compensation when there has been a modification to the terms or conditions of a share-based payment award. This guidance requires an entity to account for the modification only when there has been a substantive change to the terms or conditions of a share-based payment award. A substantive change occurs when the fair value, vesting conditions or balance sheet classification (liability or equity) of a share-based payment award is/are different immediately before and after the modification. Previously, an entity was required to account for any modification in the terms or conditions of a share-based payment award. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered if the Company initiates a modification that is determined to be a substantive change to an outstanding share-based award. Additionally, the Company will no longer account for any future non-substantive change to the terms or conditions of a share-based payment awards as a modification. On April 1, 2018, Alcoa Corporation early adopted guidance issued by the FASB to the accounting for hedging activities retroactive to January 1, 2018. This guidance permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk; reduces current limitations on the designation and measurement of a hedged item in a fair value hedge of interest rate risk; removes the requirement to separately measure and report hedge ineffectiveness; provides an election to systematically and rationally recognize in earnings the initial value of any amount excluded from the assessment of hedge effectiveness for all types of hedges; and eases the requirements of effectiveness testing. Additionally, modifications to existing disclosures, as well as additional disclosures, are required, as applicable, to reflect these changes regarding the measurement and recognition of hedging activities. This guidance is to be initially applied only to hedging instruments that exist as of the adoption date using the modified retrospective method. In other words, any financial statement impact from application of these changes to open hedging instruments as of the adoption date related to periods prior to the adoption year is to be recognized through a cumulative effect adjustment in beginning retained earnings of the adoption year. Accordingly, upon adoption of this guidance, Alcoa Corporation recognized an immaterial cumulative effect adjustment within equity effective January 1, 2018 related to open Level 1 hedging instruments as of the adoption date. The Company had no open Level 2 hedging instruments as of the adoption date and there was no financial statement impact from Alcoa Corporation’s open Level 3 hedging instruments as of the adoption date. This guidance will also be applied prospectively upon the Company entering into any new hedging instruments. See the Derivatives section of Note O for additional information. Recently Issued Accounting Guidance. In January 2018, the FASB issued guidance regarding the assessment of land easements (or rights of way) under the pending lease accounting requirements to be adopted on January 1, 2019 (see below). This guidance provides an entity an option to not evaluate existing or expired land easements as leases in preparation for the adoption of the new lease accounting requirements, as long as such land easements were recorded as something other than leases under current accounting requirements. That said, any new land easement acquired or existing land easement modified on January 1, 2019 or later must be assessed for lease accounting under the new requirements. This guidance becomes effective for Alcoa Corporation on January 1, 2019. Management plans to elect the option to not evaluate existing or expired land easements that are currently accounted for as something other than leases under the new lease accounting requirements. The Company’s land easements are currently accounted for as fixed assets and are immaterial to Alcoa Corporation’s Consolidated Financial Statements. Accordingly, management has determined that the adoption of this guidance will not have an immediate impact on the Company’s Consolidated Financial Statements. The new lease accounting requirements will need to be considered if the Company acquires a new land easement or modifies an existing land easement on January 1, 2019 or later. In February 2018, the FASB issued guidance regarding the reclassification of certain income tax effects reported in accumulated comprehensive income (loss) in response to U.S. tax legislation enacted on December 22, 2017 known as the U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”). For corporations, one of the main provisions of the TCJA was the reduction in the corporate income tax rate to 21% from 35%. Under current income tax accounting requirements, an entity was required to remeasure applicable U.S. deferred tax assets and deferred tax liabilities at the 21% tax rate effective on the TCJA enactment date. This remeasurement was required to be recognized in an entity’s income tax provision in its income statement. However, certain of these deferred tax assets and deferred tax liabilities relate to income tax effects initially recognized at the 35% tax rate through other comprehensive income (loss) on items reported within accumulated other comprehensive income (loss) on an entity’s balance sheet. Consequently, an entity’s financial statements will reflect an inconsistency between the deferred tax assets and deferred tax liabilities measured at 21% and the related income tax effects in accumulated other comprehensive income (loss) recorded at 35%. Accordingly, this guidance provides a one-time option to remeasure the income tax effects within accumulated other comprehensive income (loss) at the 21% income tax rate. The impact from this remeasurement is to be recorded directly in retained earnings on an entity’s balance sheet. This guidance becomes effective for Alcoa Corporation on January 1, 2019, with early adoption permitted. Management has concluded its analysis and decided not to elect this option as permitted in the new guidance. In June 2018, the FASB issued guidance regarding the accounting for nonemployee share-based payment transactions. This guidance effectively changes the accounting for such transactions to be consistent with the accounting for employee share-based payment transactions. The nonemployee share-based payment transactions subject to this guidance are those in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is not to be applied to other nonemployee share-based payment transactions, such as those used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under revenue recognition principles. This guidance becomes effective for Alcoa Corporation on January 1, 2019, with early adoption permitted. The only nonemployees to receive share-based payments from Alcoa Corporation are the members of the Company’s Board of Directors. Accordingly, management does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements. In August 2018, the FASB issued separate guidance regarding the respective disclosure requirements associated with fair value measurements and defined benefit plans. This guidance makes changes to the disclosures of fair value measurements and defined benefit plans through several removals, modifications, additions, and/or clarifications of the existing requirements. The following are the changes that will have an immediate disclosure impact for Alcoa Corporation upon adoption of the guidance for fair value measurements: (i) disclosure of the valuation processes for Level 3 fair value measurements is no longer required, (ii) changes in unrealized gains and losses for the reporting period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period is a new disclosure requirement, and (iii) the range and weighted average (or other reasonable and rational method) of significant unobservable inputs used to develop Level 3 fair value measurements is a new disclosure requirement. The following are the changes that will have an immediate disclosure impact for Alcoa Corporation upon adoption of the guidance for defined benefit plans: (i) disclosure of the amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year is no longer required, (ii) disclosure of the effects of a one-percentage-point change in assumed health care cost trend rates on both the aggregate of the service and interest cost components of net periodic benefit costs and the benefit obligation for postretirement health care benefits is no longer required, and (iii) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the reporting period is a new disclosure requirement. The guidance for fair value measurements and defined benefit plans becomes effective for Alcoa Corporation on January 1, 2020 and December 31, 2020, respectively, with early adoption permitted. Other than updating the applicable disclosures, the adoption of this guidance will not have an impact on the Company’s Consolidated Financial Statements. In August 2018, the FASB issued guidance regarding the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract (in other words, does not contain a software license). This guidance aligns the accounting for cloud computing implementation costs with that of costs to develop or obtain internal-use software, meaning such costs that are part of the application development stage are capitalized as an asset and amortized over the term of the arrangement, otherwise, such costs are expensed as incurred. Additionally, this guidance requires applying existing impairment guidance for long-lived assets to the capitalized implementation costs. Furthermore, this guidance requires the following presentation in an entity’s financial statements: (i) payments for the capitalized implementation costs should be classified on the cash flows statement in the same manner as payments for the service fees associated with the arrangement, (ii) the capitalized implementation costs should be presented in the same asset line item on the balance sheet as any prepayment for the service fees associated with the arrangement, and (iii) the amortization of the capitalized implementation costs should be reflected in the same expense line item on the income statement as the service fees associated with the arrangement. This guidance becomes effective for Alcoa Corporation on January 1, 2020, with early adoption permitted. Management is currently evaluating the potential impact of this guidance on the Consolidated Financial Statements. In February 2016, the FASB issued guidance regarding the accounting for leases. This guidance requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for leases classified as operating leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. A right-of-use asset represents an entity’s right to use the underlying asset for the lease term, and a lease liability represents an entity’s obligation to make lease payments. Currently, an asset and liability only are recorded for leases classified as capital leases (financing leases). The measurement, recognition, and presentation of expenses and cash flows arising from leases by a lessee remains the same. This guidance becomes effective for Alcoa Corporation on January 1, 2019. Through a previously established cross-functional project team, the Company has completed the accumulation of all leases into a lease management system and has validated the information for accuracy and completeness. Additionally, the project team has finished the system implementation. This system will be the primary source for the Company’s lease information and the related accounting. Upon adoption of the new lease guidance, management expects to record a right-of-use asset and lease liability, each in the amount of $181, on Alcoa Corporation’s Consolidated Balance Sheet for several types of operating leases, including land and buildings, alumina refinery process control technology, plant equipment, vehicles, and computer equipment. This amount is equivalent to the aggregate future minimum lease payments on a discounted basis. Additionally, in July 2018, the FASB issued guidance to provide for an alternative transition method to the new lease guidance, whereby an entity can choose to not reflect the impact of the new lease guidance in the prior periods included in its financial statements. The Company intends to elect this alternative transition method on the January 1, 2019 adoption date. In June 2016, the FASB added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for Alcoa Corporation on January 1, 2020. Management is currently evaluating the potential impact of these changes on the Consolidated Financial Statements. C. Acquisitions and Divestitures In February 2017, Alcoa Corporation’s wholly-owned subsidiary, Alcoa Power Generating Inc., completed the sale of its 215-megawatt Yadkin Hydroelectric Project (Yadkin) to Cube Hydro Carolinas, LLC for $249 in cash ($8 of which was received in June and November 2017 combined as post-closing adjustments). In 2017, Alcoa Corporation recognized a gain of $122 (pre- and after-tax) in Other expenses, net on the accompanying Statement of Consolidated Operations. In accordance with the Separation and Distribution Agreement (see Note A), Alcoa Corporation remitted $243 of the proceeds to Arconic. At December 31, 2016, Alcoa Corporation had a liability of $243, which was included in Other current liabilities on the Company’s Consolidated Balance Sheet. The sale of Yadkin is subject to further post-closing adjustments related to potential earnouts through January 31, 2027, unless the provisions of the earnouts are met earlier. Any such adjustment would result in Alcoa Corporation receiving additional cash (none of which would be remitted to Arconic) and recognizing nonoperating income. Yadkin encompasses four hydroelectric power developments (reservoirs, dams, and powerhouses), known as High Rock, Tuckertown, Narrows, and Falls, situated along a 38-mile stretch of the Yadkin River through the central part of North Carolina. Prior to the divestiture, the power generated by Yadkin was primarily sold into the open market. Yadkin generated sales of $29 in 2016, and had approximately 30 employees as of December 31, 2016. D. Restructuring and Other Charges Restructuring and other charges for each year in the three-year period ended December 31, 2018 were comprised of the following:
Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans. 2018 Actions. In 2018, Alcoa Corporation recorded Restructuring and other charges of $527, which were comprised of the following components: $331 (net) related to settlements and curtailments of certain pension and other postretirement employee benefits (see Note N); $107 to establish an allowance on certain value-added tax credits related to the Company’s operations in Brazil (see Note S); $86 for additional costs related to the curtailed Wenatchee (Washington) smelter, including $73 associated with 2018 management decisions (see below); a $15 net benefit related to the Portovesme (Italy) smelter, composed of a $38 reversal and a $23 charge (see “Italy 148” in the Litigation section of Note R); and an $18 net charge for other items. In June 2018, management decided not to restart the fully curtailed Wenatchee smelter within the term provided in the related electricity supply agreement. Alcoa Corporation was therefore required to make a $62 payment to the energy supplier under the provisions of the agreement. Additionally, management decided to permanently close one (38 kmt) of the four potlines at this smelter. This potline has not operated since 2001 and the investments needed to restart this line are cost prohibitive. The remaining three curtailed potlines have a capacity of 146 kmt. In connection with these decisions, the Company recognized a charge of $73, composed of the $62 payment, $10 for asset impairments, and $1 for asset retirement obligations triggered by the decision to decommission the potline. 2017 Actions. In 2017, Alcoa Corporation recorded Restructuring and other charges of $309, which were comprised of the following components: $244 related to the early termination of a power contract (see below); $49 for exit costs related to a decision to permanently close and demolish a smelter (see below); $41 for additional contract costs related to the curtailed Wenatchee and São Luís (Brazil) smelters; $22 for layoff costs, including the separation of approximately 130 employees (115 in the Aluminum segment), mostly for voluntary separation programs; a $22 reversal to reduce a reserve previously established at the end of 2015 related to a legal matter in Italy (see “Italy 148” in the Litigation section of Note R); an $18 net charge for other items, including the relocation of the Company’s headquarters and principal executive office from New York, New York to Pittsburgh, Pennsylvania; and a $43 reversal associated with several reserves related to prior periods (see below). In October 2017, Alcoa Corporation and Luminant Generation Company LLC (Luminant) executed an early termination agreement of a power contract, as well as other related fuel and lease agreements, effective October 1, 2017, related to the Company’s Rockdale (Texas) smelter, which has been fully curtailed since the end of 2008. In accordance with the terms of the early termination agreement, Alcoa made a cash payment of $238 and transferred approximately 2,200 acres of related land and other assets and liabilities to Luminant (net asset carrying value of $6). Since the curtailment of the Rockdale smelter, the Company had been selling surplus electricity into the energy market. The power contract was set to expire no earlier than 2038, except for limited circumstances in which one or both parties could elect to early terminate without penalty for which conditions had never been met. In 2017 (through September 30) and 2016, Alcoa Corporation recognized $105 and $141, respectively, in Sales and $148 and $210, respectively, in Cost of goods sold on the accompanying Statement of Consolidated Operations related to the sale of the surplus electricity and the cost of the Luminant power contract. As a result of the early termination of the power contract, Alcoa initiated a strategic review of the remaining buildings and equipment associated with the smelter, casthouse, and the aluminum powder plant at the Rockdale location. ParentCo previously decided to curtail the operating capacity of the Rockdale smelter in 2008 as a result of an uncompetitive power supply and then-overall unfavorable market conditions. Under this review, which was completed in December 2017, management determined that the Rockdale operations have limited economic prospects. Consequently, management approved the permanent closure and demolition of the Rockdale smelter (capacity of 191 kmt-per-year) and related operations effective immediately. Demolition and remediation activities related to this action began in 2018 and are expected to be completed by the end of 2022. Separately, the Company continues to own more than 30,000 acres of land surrounding the Rockdale operations. In 2017, costs related to this decision included asset impairments of $32, representing the write-off of the remaining book value of all related properties, plants, and equipment; $1 for the layoff of approximately 10 employees (Corporate); and $16 in other costs. Additionally in 2017, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $6, which was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. The other costs of $16 represent $8 in asset retirement obligations and $8 in environmental remediation, both of which were triggered by the decisions to permanently close and demolish the Rockdale facilities. In July 2017, Alcoa Corporation announced plans to restart three (capacity of 161 kmt-per-year) of the five potlines (capacity of 269 kmt-per-year) at the Warrick (Indiana) smelter. This smelter was previously permanently closed in March 2016 by ParentCo (see 2016 Actions below). The capacity identified for restart will directly supply the existing rolling mill at the Warrick location to improve efficiency of the integrated site and provide an additional source of metal to help meet an anticipated increase in production volumes. As a result of the decision to reopen this smelter, in 2017, Alcoa Corporation reversed $33 in remaining liabilities related to the original closure decision. These liabilities consisted of $20 in asset retirement obligations and $4 in environmental remediation obligations, which were necessary due to the previous decision to demolish the smelter, and $9 in severance and contract termination costs. Additionally, the carrying value of the smelter and related assets was reduced to zero as the smelter ramped down between the permanent closure decision date (end of 2015) and the end of March 2016. Once these assets are placed back into service in conjunction with the restart, their carrying value will remain zero. As such, only newly acquired or constructed assets related to the Warrick smelter will be depreciated. As of December 31, 2018, the separations associated with 2017 restructuring programs were essentially complete. In 2018 and 2017, cash payments of $3 and $9, respectively, were made against layoff reserves related to 2017 restructuring programs. 2016 Actions. In 2016, Alcoa Corporation recorded Restructuring and other charges of $318, which were comprised of the following components: $131 for exit costs related to a decision to permanently close and demolish a refinery (see below); $87 for additional net costs related to decisions made in late 2015 to permanently close and demolish the Warrick smelter and to curtail both the Wenatchee smelter and Point Comfort (Texas) refinery; $72 for the impairment of an interest in gas exploration assets in Western Australia (see below); $32 for layoff costs related to cost reduction initiatives, including the separation of approximately 75 employees (60 in the Aluminum segment and 15 in the Bauxite segment) and related pension settlement costs (see Note N); an $8 net charge for other items; and a $12 reversal associated with a number of small layoff reserves related to prior periods. In December 2016, management approved the permanent closure of the Suralco refinery (capacity of 2,207 kmt-per-year) in Suriname. The Suralco refinery had been fully curtailed since November 2015. Management of ParentCo decided to curtail the remaining operating capacity of the Suralco refinery during 2015 in an effort to improve the position of ParentCo’s refining operations on the global alumina cost curve. Since that time, management of ParentCo (through October 31, 2016) and then separately management of Alcoa Corporation (from November 1, 2016 through the end of 2016) had been in discussions with the Government of the Republic of Suriname to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative. The decision to permanently close the Suralco refinery was based on the ultimate conclusion of those discussions. Demolition and remediation activities related to this action began in 2017 and are expected to be completed by the end of 2022. The related bauxite mines in Suriname will also be permanently closed while the hydroelectric facility that supplied power to the Suralco refinery, known as Afobaka, will continue to operate and supply power to the Government of the Republic of Suriname. In 2016, costs related to the closure and curtailment actions included accelerated depreciation of $70 related to the Warrick smelter as it continued to operate through March 2016; asset impairments of $16, representing the write-off of the remaining book value of various assets; a reversal of $24 associated with severance costs initially recorded in late 2015; and $156 in other costs. Additionally in 2016, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $5, which was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. The other costs of $156 represent $94 in asset retirement obligations and $26 in environmental remediation, both of which were triggered by the decisions to permanently close and demolish the Suralco refinery (includes the rehabilitation of related bauxite mines) and the rehabilitation of a coal mine related to the Warrick smelter, $32 for contract terminations, and $4 in other related costs. Also in December 2016, management of Alcoa Corporation concluded that an interest in certain gas exploration assets in Western Australia has been impaired. AofA owns an interest in a gas exploration project (relinquished in June 2018) that was initially entered into in 2007 as a potential source of low-cost gas to supply AofA’s refineries in Western Australia. This interest, now at 43% (as of December 31, 2016), relates to four separate gas wells. In late 2016, AofA received the results of a technical analysis performed earlier in the year for two of the wells and an updated analysis for a third well that concluded that the cost of gas recovery would be significantly higher than the market price of gas. For the fourth well, the results of a technical analysis performed prior to 2016 indicated that the cost of gas recovery would be lower than the market price of gas and, therefore, would require additional investment to move to the next phase of commercial evaluation, which management previously supported. In late 2016, management re-evaluated its options related to the fourth well and decided it is not economical to make such a commitment for the foreseeable future. As a result, AofA fully impaired its $72 interest. As of June 30, 2017, the separations associated with 2016 restructuring programs were essentially complete. In 2017 and 2016, cash payments of $2 and $7, respectively, were made against layoff reserves related to 2016 restructuring programs. Alcoa Corporation does not include Restructuring and other charges in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
Activity and reserve balances for restructuring charges were as follows:
The remaining reserves are expected to be paid in cash during 2019, with the exception of $9, of which $8 is expected to be paid in 2020 related to the Portovesme smelter (see “Italy 148” in the Litigation section of Note R). E. Segment and Related Information Segment Information Alcoa Corporation is a producer of bauxite, alumina, and aluminum products (primary and flat-rolled). The Company has three operating and reportable segments, which are organized by product on a global basis: Bauxite, Alumina, and Aluminum. Segment performance under Alcoa Corporation’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) of each segment. The Company calculates segment Adjusted EBITDA as Total sales (third-party and intersegment) minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; and Research and development expenses. Alcoa Corporation’s Adjusted EBITDA may not be comparable to similarly titled measures of other companies. The chief operating decision maker function regularly reviews the financial information, including Sales and Adjusted EBITDA, of these three operating segments to assess performance and allocate resources. Segment assets include, among others, customer receivables (third-party and intersegment), inventories (excluding LIFO adjustments), properties, plants, and equipment, and equity investments. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note B). Transactions among segments are established based on negotiation among the parties. Differences between segment totals and Alcoa Corporation’s consolidated totals for line items not reconciled are in Corporate. The following are detailed descriptions of Alcoa Corporation’s reportable segments: Bauxite. This segment represents the Company’s global bauxite mining operations. A portion of this segment’s production represents the offtake from equity method investments in Brazil and Guinea, as well as AWAC’s share of production related to an equity investment in Saudi Arabia. The bauxite mined by this segment is sold primarily to internal customers within the Alumina segment; a portion of the bauxite is sold to external customers. Bauxite mined by this segment and used internally is transferred to the Alumina segment at negotiated terms that are intended to approximate market prices; sales to third-parties are conducted on a contract basis. Generally, this segment’s sales are transacted in U.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar and the Brazilian real. Most of the operations that comprise the Bauxite segment are part of AWAC (see Principles of Consolidation in Note A). Alumina. This segment represents the Company’s worldwide refining system, which processes bauxite into alumina. The alumina produced by this segment is sold primarily to internal and external aluminum smelter customers; a portion of the alumina is sold to external customers who process it into industrial chemical products. Approximately two-thirds of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Aluminum segment. Alumina produced by this segment and used internally is transferred to the Aluminum segment at prevailing market prices. A portion of this segment’s third-party sales are completed through the use of agents, alumina traders, and distributors. Generally, this segment’s sales are transacted in U.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, the U.S. dollar, and the euro. Most of the operations that comprise the Alumina segment are part of AWAC (see Principles of Consolidation in Note A). This segment also includes AWAC’s 25.1% ownership interest in a mining and refining joint venture company in Saudi Arabia (see Note H). Aluminum. This segment consists of the Company’s (i) worldwide smelting and casthouse system, which processes alumina into primary aluminum, (ii) portfolio of energy assets in Brazil, Canada, and the United States, and (iii) rolling mill in the United States. Aluminum’s combined smelting and casting operations produce primary aluminum products, virtually all of which is sold to external customers and traders; a portion of this primary aluminum is consumed by the rolling mill. The smelting operations produce molten primary aluminum, which is then formed by the casting operations into either common alloy ingot (e.g., t-bar, sow, standard ingot) or into value-add ingot products (e.g., foundry, billet, rod, and slab). A variety of external customers purchase the primary aluminum products for use in fabrication operations, which produce products primarily for the transportation, building and construction, packaging, wire, and other industrial markets. Results from the sale of aluminum powder and scrap are also included in this segment, as well as the impacts of embedded aluminum derivatives (see Note O) related to energy supply contracts. The energy assets supply power to external customers in Brazil and, to a lesser extent, in the United States, and internal customers in the Aluminum (Canadian smelters and Warrick (Indiana) smelter and rolling mill) and Alumina segments (Brazilian refineries). The rolling mill produces aluminum sheet primarily sold directly to customers in the packaging market for the production of aluminum cans (beverage and food). Additionally, from the Separation Date through the end of 2018, Alcoa Corporation had a tolling arrangement (contractually ended on December 31, 2018) with Arconic whereby Arconic’s rolling mill in Tennessee produced can sheet products for certain customers of the Company’s rolling operations. Alcoa Corporation supplied all of the raw materials to the Tennessee facility and paid Arconic for the tolling service. Seasonal increases in can sheet sales are generally experienced in the second and third quarters of the calendar year. Generally, this segment’s aluminum sales are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar, the euro, the Norwegian krone, the Icelandic krona, the Canadian dollar, the Brazilian real, and the Australian dollar. This segment also includes Alcoa Corporation’s 25.1% ownership interest in both a smelting and rolling mill joint venture company in Saudi Arabia (see Note H). The operating results, capital expenditures, and assets of Alcoa Corporation’s reportable segments were as follows:
The following tables reconcile certain segment information to consolidated totals:
Product Information Alcoa Corporation has five product divisions as follows: Bauxite—Bauxite is a reddish clay rock that is mined from the surface of the earth’s terrain. This ore is the basic raw material used to produce alumina and is the primary source of aluminum. Alumina—Alumina is an oxide that is extracted from bauxite and is the basic raw material used to produce primary aluminum. This product can also be consumed for non-metallurgical purposes, such as industrial chemical products. Primary aluminum—Primary aluminum is metal in the form of a common alloy ingot (e.g., t-bar, sow, standard ingot) or a value-add ingot (e.g., billet, rod, and slab). These products are sold primarily to customers that produce products for the transportation, building and construction, packaging, wire, and other industrial markets. Flat-rolled aluminum—Flat-rolled aluminum is metal in the form of sheet, which is sold primarily to customers that produce beverage and food cans, including body, tab, and end stock. Energy—Energy is the generation of electricity, which is sold in the wholesale market to traders, large industrial consumers, distribution companies, and other generation companies. The following table represents the general commercial profile of the Company’s Bauxite, Alumina, Primary aluminum, and Flat-rolled aluminum product divisions (see text below table for Energy):
For the Company’s Energy product division, sales of electricity are based on current market prices. Electricity is provided to customers on demand through a national or regional power grid; the customer simultaneously receives and consumes the electricity. Payment terms are generally within 10 days related to the previous 30 days of electricity consumption. The following table details Alcoa Corporation’s Sales by product division:
Geographic Area Information Geographic information for Sales was as follows (based upon the country where the point of sale originated):
Geographic information for long-lived assets was as follows (based upon the physical location of the assets):
F. Earnings Per Share Basic earnings per share (EPS) amounts are computed by dividing Net income (loss) attributable to Alcoa Corporation by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding. The share information used to compute basic and diluted EPS attributable to Alcoa Corporation common shareholders was as follows (in millions):
Options to purchase 1 million shares of common stock outstanding as of December 31, 2018 at a weighted average exercise price of $38.67 per share were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of Alcoa Corporation’s common stock. In 2016, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive. Options to purchase 1 million shares of common stock outstanding as of December 31, 2016 at a weighted average exercise price of $33.05 per share were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of Alcoa Corporation’s common stock. Additionally, 1 million stock units and stock options combined were not included in the computation of diluted EPS because Alcoa Corporation generated a net loss. Had Alcoa Corporation generated net income in 2016, 1 million potential shares of common stock related to stock units and stock options combined would have been included in diluted average shares outstanding. G. Accumulated Other Comprehensive Loss The following table details the activity of the three components that comprise Accumulated other comprehensive loss for both Alcoa Corporation’s shareholders and noncontrolling interest:
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