Item 7.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
(dollars in millions, except
per-share
amounts, average realized prices, and average cost
amounts;
dry metric tons in millions (mdmt); metric tons in thousands (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 through the Alumina Price Index (API), which is calculated by the Company based on spot prices. 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 more than 40 operating locations (through direct and indirect ownership) in 10
countries around the world, situated primarily in Australia, Brazil, Canada, Europe, 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 Managements 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)).
On September 28, 2015, ParentCos Board of Directors preliminarily approved a plan to separate ParentCo into two standalone, publicly-traded companies (the Separation Transaction).
One company, later named Alcoa Corporation, was to include the Alumina and Primary Metals segments, which comprised the bauxite mining, alumina refining, aluminum production, 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 ParentCos Global Rolled Products segment. ParentCo was to continue to own 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 ParentCos 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, ParentCos 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 one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as of the close of business on the Record
Date. ParentCo shareholders were to receive cash in lieu of fractional shares.
53
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, 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, certain Patent,
Know-How,
Trade Secret License and Trademark
License Agreements, and Stockholder and Registration Rights Agreement.
On November 1, 2016 (the Separation Date), the
Separation Transaction was completed 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 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 Alcoa Corporation 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). 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 (Arconic sold all of these shares in 2017).
Regular-way
trading of Alcoa Corporations
common stock began with the opening of the New York Stock Exchange on November 1, 2016 under the ticker symbol AA. Alcoa Corporations common stock has a par value of $0.01 per share.
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 Corporations 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
require management to make certain judgments, estimates, and assumptions. These 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 Corporation did not operate as a separate, standalone entity. Alcoa Corporations operations were included in ParentCos financial results. Accordingly, for
all periods prior to the Separation Date, Alcoa Corporations Consolidated Financial Statements were prepared from ParentCos historical accounting records and were presented on a standalone basis as if Alcoa Corporations operations
had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporations businesses, as well as certain assets and liabilities that were
historically held at ParentCos 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 Corporations
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 on Alcoa Corporations Statement of Consolidated Operations within
Cost of goods sold, Selling, general administrative and other expenses, and Research and development expenses. These expenses
54
were allocated to Alcoa Corporation on the basis of direct usage when identifiable, with the remainder allocated based on Alcoa Corporations segment revenue as a percentage of
ParentCos total segment revenue for both Alcoa Corporation and Arconic.
All external debt not directly attributable to Alcoa
Corporation was excluded from Alcoa Corporations 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 Alcoa Corporations Statement of Consolidated Operations within Interest expense.
The following table reflects the allocations described above:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Cost of goods sold
(1)
|
|
$
|
40
|
|
|
$
|
93
|
|
Selling, general administrative, and other expenses
(2)
|
|
|
150
|
|
|
|
146
|
|
Research and development expenses
|
|
|
2
|
|
|
|
17
|
|
Provision for depreciation, depletion, and amortization
|
|
|
18
|
|
|
|
22
|
|
Restructuring and other charges
(3)
|
|
|
1
|
|
|
|
32
|
|
Interest expense
|
|
|
198
|
|
|
|
245
|
|
Other (income) expenses, net
|
|
$
|
(7
|
)
|
|
$
|
12
|
|
(1)
|
Allocation principally relates to expenses for ParentCos 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).
|
(3)
|
Allocation primarily relates to layoff programs for ParentCo corporate employees.
|
Management believes the assumptions regarding the allocation of ParentCos 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 Corporations 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 on Alcoa Corporations 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 on Alcoa Corporations Statement of Consolidated Cash Flows as a financing activity and on the Companys Consolidated Balance
Sheet as Parent Company net investment.
Results of Operations
Earnings Summary
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 primarily due to a higher average realized price for each of primary aluminum and alumina and the absence of allocated interest expense and costs related to the
Separation Transaction. These positive impacts were partially offset by both a higher income tax provision and net income attributable to a noncontrolling interest partner in certain of Alcoa Corporations operations, increased raw materials,
maintenance, and transportation costs, and net unfavorable foreign currency movements.
Net loss attributable to Alcoa Corporation for 2016
was $400 compared with $863 in 2015. The change of $463 was mostly due 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. These positive impacts were partially offset by lower pricing in most operations and costs associated with the Separation Transaction.
55
Sales
Sales for 2017 were $11,652 compared with sales of $9,318 in 2016, an improvement of
$2,334, or 25%. The increase was primarily due to a higher average realized price for each of primary aluminum and alumina and increased shipments for each of aluminum products, alumina, and bauxite. These positive impacts were 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.
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, aluminum (primary
and rolled), and energy, lower volume for alumina, and the absence of sales related to capacity that was curtailed. These negative impacts were slightly offset by higher bauxite sales.
Cost of Goods Sold
COGS as a percentage of Sales was 77.9% in 2017 compared with 84.8% in 2016. The percentage was positively impacted by a higher average realized price for each of primary
aluminum and alumina, somewhat offset by several factors as follows: higher input costs, particularly for energy (including $21 related to a financial contractsee below) and caustic soda; net unfavorable foreign currency movements due to a
weaker U.S. dollar; increased maintenance and transportation expenses; an unfavorable last in, first out (LIFO) inventory adjustment (difference of $81see Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net Income (Loss)
Attributable to Alcoa Corporation in Segment Information below); and costs related to the partial restart of the Warrick (Indiana) smelter ($46see Aluminum in Segment Information below).
COGS as a percentage of Sales was 84.8% in 2016 compared with 80.7% in 2015. The percentage was negatively impacted by a lower average realized price for
each of alumina, aluminum (primary and rolled), and energy, and an unfavorable LIFO inventory adjustment (difference of $117see Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net Income (Loss) Attributable to Alcoa Corporation
in Segment Information below). These negative impacts were partially offset by net productivity improvements across all segments and lower inventory write-downs related to the decisions to permanently close and/or curtail capacity (difference of
$85see Restructuring and Other Charges below).
Alcoa Corporation has purchased electricity in the spot market for one of its smelters
since the Companys contract with a local energy provider expired in October 2016, as a new energy contract was not able to be negotiated. In order to manage the Companys 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 Companys 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 at 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 Companys variable power price to a fixed power price from August 2017 through July 2021. Additionally,
the effective termination of the 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.
56
Selling, General Administrative, and Other Expenses
SG&A expenses were $284, or 2.4% of
Sales, in 2017 compared with $359, or 3.9% of Sales, in 2016. The decrease of $75 was mostly attributable to the absence of costs related to the Separation Transaction ($73), which includes an allocation of $68 from ParentCo prior to the Separation
Date.
SG&A expenses were $359, or 3.9% of Sales, in 2016 compared with $353, or 3.2% of Sales, in 2015. The increase of $6 was largely
related to higher costs associated with the Separation Transaction ($61), which includes a higher allocation of $56 from ParentCo prior to the Separation Date, mostly offset by a decrease in corporate overhead expenses, the absence of SG&A
related to closed and sold locations ($17), and favorable foreign currency movements due to a stronger U.S. dollar.
Research and
Development Expenses
R&D expenses were $32 in 2017 compared with $33 in 2016 and $69 in 2015. The decrease in 2016 as compared to 2015 was mainly driven by lower spending related to break-through smelting technology, as Alcoa
Corporation worked towards completion of the R&D phase.
Provision for Depreciation, Depletion, and Amortization
The provision
for DD&A was $750 in 2017 compared with $718 in 2016. The increase of $32, or 4%, was mostly due to unfavorable foreign currency movements due to a weaker U.S. dollar, particularly against the Brazilian real and Australian dollar, and
incremental expense due to the capitalization in 2017 of new bauxite residue storage areas.
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 stronger 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 2015 Actions in Restructuring and Other Charges below) and a smelter in the United States that occurred in March 2016 (see
2016 Actions in Restructuring and Other Charges below).
Restructuring and Other Charges
Restructuring and other charges for each
year in the three-year period ended December 31, 2017 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Early termination of a power contract
|
|
$
|
244
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Asset impairments
|
|
|
40
|
|
|
|
155
|
|
|
|
311
|
|
Layoff costs
|
|
|
23
|
|
|
|
32
|
|
|
|
199
|
|
Legal matters in Italy
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
201
|
|
Asset retirement obligations
|
|
|
10
|
|
|
|
97
|
|
|
|
76
|
|
Environmental remediation
|
|
|
8
|
|
|
|
26
|
|
|
|
86
|
|
Net (gain) loss on divestitures of businesses
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
25
|
|
Other
|
|
|
49
|
|
|
|
47
|
|
|
|
92
|
|
Reversals of previously recorded layoff and other costs
|
|
|
(43
|
)
|
|
|
(36
|
)
|
|
|
(7
|
)
|
Restructuring and other charges
|
|
$
|
309
|
|
|
$
|
318
|
|
|
$
|
983
|
|
*
|
In 2016 and 2015, Other includes $1 and $32, respectively, related to the allocation of restructuring charges to Alcoa Corporation from ParentCo (see Cost Allocations
under Separation Transaction above).
|
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.
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 (Washington) and
São Luís (Brazil) smelters; $22 for layoff costs, including the separation
57
of approximately 130 employees (115 in the Aluminum segment), mostly for voluntary separation programs; a reversal of $22 to reduce a reserve previously established at the end of 2015 related to
a legal matter in Italy; a net charge of $18 for other miscellaneous items, including the relocation of the Companys headquarters and principal executive office from New York, New York to Pittsburgh, Pennsylvania; and a reversal of $43
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 Companys 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), 2016, and 2015,
Alcoa Corporation recognized $105, $141, and $147, respectively, in Sales and $148, $210, and $201, 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 will begin 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 (161,400 metric tons of capacity) of the five potlines (268,800 metric tons of capacity) at the Warrick (Indiana) smelter, which is expected to be complete in the second quarter of 2018.
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.
58
As of December 31, 2017, approximately 90 of the 140 employees were separated. The remaining
separations for 2017 restructuring programs are expected to be completed by the end of 2018. In 2017, cash payments of $9 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 the Wenatchee
smelter and Point Comfort (Texas) refinery (see 2015 Actions below); $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; a net charge of $8 for other miscellaneous items; and a 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). Management of ParentCo decided to curtail
the remaining operating capacity of the Suralco refinery during 2015 in an effort to improve the position of ParentCos 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 2021. 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 that was initially entered into in 2007 as a potential source of
low-cost
gas to supply
AofAs 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.
59
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; $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), 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 (see 2017 Actions above).
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
managements 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.
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 Aluminum segment and 1,300 in the
Alumina segment), 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 Cost of goods sold on the accompanying Statement of Combined Operations. 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.
60
As of June 30, 2017, the separations associated with 2015 restructuring programs were essentially
complete. In 2017, 2016, and 2015, cash payments of $18, $65, and $26, respectively, were made against layoff reserves related to 2015 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Bauxite
|
|
$
|
2
|
|
|
$
|
(5
|
)
|
|
$
|
8
|
|
Alumina
|
|
|
3
|
|
|
|
72
|
|
|
|
102
|
|
Aluminum
|
|
|
51
|
|
|
|
75
|
|
|
|
100
|
|
Segment total
|
|
|
56
|
|
|
|
142
|
|
|
|
210
|
|
Corporate
|
|
|
253
|
|
|
|
176
|
|
|
|
773
|
|
Total restructuring and other charges
|
|
$
|
309
|
|
|
$
|
318
|
|
|
$
|
983
|
|
Interest Expense
Interest expense was $104 in 2017 compared with $243 in 2016. The decline of $139, or 57%,
was primarily related to the absence of an allocation ($198) to Alcoa Corporation of ParentCos interest expense related to the Separation Transaction, somewhat offset by higher interest expense ($64) associated with $1,250 of debt issued by
Alcoa Corporation in September 2016 (see Financing Activities in Liquidity and Capital Resources below).
Interest expense was $243 in 2016
compared with $270 in 2015. The decline of $27, or 10%, was primarily related to two less months of allocated interest ($47) from ParentCo in 2016 as a result of the Separation Transaction, partially offset by interest expense ($22) associated with
$1,250 of debt issued by Alcoa Corporation in September 2016 (see Financing Activities in Liquidity and Capital Resources below).
Other
(Income) Expenses, net
Other income, net was $58 in 2017 compared with $89 in 2016. The change of $31 was mostly attributable to the absence of gains on the sales of several assets as follows: wharf property near the Intalco (Washington)
smelter ($118), an equity interest in a natural gas pipeline in Australia ($27), and several parcels of land ($19); a net unfavorable change in
mark-to-market
derivative
instruments ($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 mostly offset by a gain ($122) on the sale of the Yadkin Hydroelectric
Project (Yadkin see Aluminum in Segment Information below) and a smaller equity loss related to Alcoa Corporations share of the aluminum complex joint venture in Saudi Arabia ($42).
Other income, net was $89 in 2016 compared with Other expenses, net of $42 in 2015. The change of $131 was mostly attributable to gains on the sales of
several assets as follows: wharf property near the Intalco smelter ($118), an equity interest in a natural gas pipeline in Australia ($27), and several parcels of land ($19); a lower equity loss related to Alcoa Corporations equity investments
($19); a net favorable change in
mark-to-market
derivative instruments ($17); and a benefit for an arbitration recovery related to a 2010 fire at the Iceland smelter
($14). These items were somewhat 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 facility ($29).
Income Taxes
Alcoa Corporations effective tax rate was 51.8% (provision on income) in 2017 compared with the U.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 Yadkin (see Other (Income) Expenses, net above and Aluminum in Segment Information below).
In mid-2017, AWAB received approval for a tax holiday related to the operation of the Juruti (Brazil) bauxite mine. This tax holiday is effective as of January 1, 2017 (retroactively) and decreases
AWABs 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
61
of this income tax rate change, AWABs 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 AWABs deferred tax assets and a discrete income tax charge of $26 ($15 after noncontrolling interest).
Alcoa
Corporations 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 Corporations 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.
Management anticipates that the effective tax rate
in 2018 will be between 35% and 40%. 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 existing 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; (ii) dividends received from foreign subsidiaries can be deducted in full regardless of ownership interest
(previously such dividends were fully taxable), however, a foreign withholding tax on any foreign earnings not asserted as indefinitely reinvested as of December 31, 2017 must be accrued; (iii) a 10.5% tax (effective in 2018) on a new
category of income, referred to as global intangible low tax income, related to earnings taxed at a low rate of foreign entities without a significant 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 companys 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 the Companys calendar
year-end,
management elected January 17, 2018 as a
cut-off
date for purposes of recognizing any impacts from the TCJA in Alcoa Corporations 2017 Consolidated Financial Statements. This date coincided with the Companys public release of its
preliminary financial results for the fourth quarter and year ended December 31, 2017. Accordingly, the Companys preliminary analysis of the provisions of the TCJA resulted in a charge of $22, which was reflected in the Provision for
income taxes on Alcoa Corporations Statement of Consolidated Operations for 2017, as described below. The Company expects to finalize its analyses of the TCJA provisions in 2018.
The $22 charge relates specifically to managements reasonable estimate of the corporate income tax rate change, which resulted in the remeasurement of the Companys 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 Companys 2017 Consolidated Financial Statements. Specifically, the reasonable estimate for the TCJA provisions described above was based on the
following: for (i), (ii), and (iii) the Companys existing tax
profile, which includes significant current U.S. tax losses that would be
applied against such taxable income, as well as
62
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) the Companys
deferred income tax assets related to U.S. net operating losses are fully reserved as of December 31, 2017.
The Companys
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
.
Noncontrolling Interest
Net income attributable to noncontrolling interest was $342 in 2017 compared with $54
in 2016 and $124 in 2015. These amounts are entirely related to Alumina Limited of Australias (Alumina Limited) 40% ownership interest in several affiliated operating entities, which own, or have an interest in, or operate the bauxite mines
and alumina refineries within Alcoa Corporations 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 the Portland smelter (Aluminum
segment) in Australia. 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), Alcoa World Alumina LLC (AWA), and Alcoa World Alumina Brasil Ltda. (AWAB) Alumina Limiteds 40% interest in the
earnings of such entities is reflected as Noncontrolling interest on Alcoa Corporations Statement of Consolidated Operations. These combined entities generated income in 2017, 2016, and 2015.
In 2017, these combined entities generated higher net income compared to 2016. The favorable change in earnings was principally due to 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 (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 positive impacts were somewhat offset by a higher income tax provision as a result of the improved
operating results, $34 ($10 was noncontrolling interests share) in combined higher energy costs and
mark-to-market
losses (see Cost of Goods Sold above), the
absence of a $27 ($8 was noncontrolling interests share) gain on the sale of an equity interest in a natural gas pipeline in Australia, and a discrete income tax charge of $26 ($15 was noncontrolling interests share) for the
remeasurement of certain deferred tax assets (see Income Taxes above).
In 2016, these combined entities generated lower net income compared
to 2015. The unfavorable change in earnings was primarily related to a decline in operating results (see Bauxite and Alumina in Segment Information below), restructuring charges related to the permanent closure of the Suralco refinery and related
bauxite mines (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 negative impacts were partially
offset by the absence of restructuring charges related to the curtailment 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), the absence
of an $85 ($34 was noncontrolling interests share) discrete income tax charge for a valuation allowance on certain deferred tax assets (see Income Taxes above), and a $27 ($8 was noncontrolling interests share) gain on the sale of an
equity interest in a natural gas pipeline in Australia.
Segment Information
Alcoa Corporation is a producer of bauxite, alumina, and aluminum products (primary and flat-rolled). The Companys operations consist of three worldwide reportable segments. Segment performance
under the Companys 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) (see below) of each
segment.
Effective in the first quarter of 2017, management elected to change the profit and loss measure of Alcoa Corporations
reportable segments from
After-tax
operating income (ATOI) to Adjusted EBITDA for internal reporting and performance measurement purposes. This change was made to enhance the transparency and visibility of the
underlying operating performance of each segment. Alcoa Corporation calculates segment Adjusted EBITDA as Total
63
sales (third-party and intersegment) minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; and Research and development expenses. Previously, Alcoa
Corporation calculated segment ATOI as segment Adjusted EBITDA minus (plus) the following items: Provision for depreciation, depletion, and amortization; Equity loss (income); Loss (gain) on certain asset sales; and Income taxes. Alcoa
Corporations Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Also effective in the first quarter
of 2017, management initiated a realignment of the Companys internal business and organizational structure. This realignment consisted of combining Alcoa Corporations aluminum smelting, casting, and rolling businesses, along with the
majority of the energy business, into a new Aluminum business unit, as well as moving the financial results of previously closed operations, such as the Warrick smelter and Suriname refinery, into Corporate. The realignment was executed to align
strategic, operational, and commercial activities, as well as to take advantage of synergies and reduce costs. The new Aluminum business unit is managed as a single operating segment. Prior to this change, each of these businesses were managed as
individual operating segments and comprised the Aluminum, Cast Products, Energy, and Rolled Products segments. The existing Bauxite and Alumina segments and the new Aluminum segment represent Alcoa Corporations operating and reportable
segments. 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 information for all prior periods presented was revised to reflect the new segment structure, as well as the new measure of profit and loss.
Adjusted EBITDA for all reportable segments totaled $2,680 in 2017, $1,433 in 2016, and $2,179 in 2015. The following information provides
production, shipments, sales, and Adjusted EBITDA data for each reportable segment, as well as certain realized price and average cost data, for each of the three years in the period ended December 31, 2017. See Note E to the Consolidated
Financial Statements in Part II Item 8 of this Form
10-K
for additional information.
Bauxite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Production
(1)
(mdmt)
|
|
|
45.8
|
|
|
|
45.0
|
|
|
|
43.7
|
|
Third-party shipments (mdmt)
|
|
|
6.6
|
|
|
|
6.4
|
|
|
|
2.0
|
|
Average cost per dry metric ton of bauxite
(2)
|
|
$
|
18
|
|
|
$
|
16
|
|
|
$
|
17
|
|
Third-party sales
|
|
$
|
333
|
|
|
$
|
315
|
|
|
$
|
71
|
|
Intersegment sales
|
|
|
875
|
|
|
|
751
|
|
|
|
1,076
|
|
Total sales
|
|
$
|
1,208
|
|
|
$
|
1,066
|
|
|
$
|
1,147
|
|
Adjusted EBITDA
|
|
$
|
427
|
|
|
$
|
375
|
|
|
$
|
454
|
|
(1)
|
The production amounts do not include additional bauxite (approximately 3 million dry metric tons per annum) that Alcoa Corporation 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.
|
This segment represents the Companys global bauxite mining operations. A portion
of this segments production represents the offtake from certain equity method investments in Brazil, Guinea, and 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, 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 and the Brazilian real. Most of
the operations that comprise the Bauxite segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above).
64
In 2017, bauxite production increased by 0.8 mdmt compared to 2016. The improvement was principally due to a
planned increase in production at the Juruti (Brazil) mine and higher production at the Huntly (Australia) mine, somewhat offset by lower production at both the Trombetas (Brazil) mine and the Boké (Guinea) mine. 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 a result of two separate force majeure events (civil unrest) during 2017.
In 2016, bauxite production increased by 1.3 mdmt compared to 2015. The improvement was mostly the result of higher production across the bauxite portfolio as this segment expands its third-party bauxite
business.
Third-party sales for the Bauxite segment increased $18 in 2017 compared with 2016, mainly due to higher volume as this segment
expands its third-party bauxite business.
Third-party sales for this segment improved $244 in 2016 compared with 2015, largely attributable
to significantly higher volume as this segment expands its third-party bauxite business.
Intersegment sales for the Bauxite segment increased
17% in 2017 compared with 2016, principally the result of a higher average realized price. Intersegment sales for this segment declined 30% in 2016 compared with 2015, primarily driven by lower demand from the Alumina segment and a lower average
realized price.
Adjusted EBITDA for the Bauxite segment improved $52 in 2017 compared with 2016, mainly related to the previously mentioned
higher average realized price for intersegment sales and increased third-party 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.
Adjusted EBITDA for this segment declined $79 in 2016
compared with 2015, mainly caused by a lower average realized price for intersegment sales, partially offset by net productivity improvements and the previously mentioned higher third-party volume.
In 2018, higher production at the Huntly and Juruti mines and increased total shipments are anticipated.
Alumina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Production (kmt)
|
|
|
13,096
|
|
|
|
13,251
|
|
|
|
14,940
|
|
Third-party shipments (kmt)
|
|
|
9,220
|
|
|
|
9,071
|
|
|
|
10,755
|
|
Average realized third-party price per metric ton of alumina
|
|
$
|
340
|
|
|
$
|
253
|
|
|
$
|
311
|
|
Average cost per metric ton of alumina*
|
|
$
|
256
|
|
|
$
|
231
|
|
|
$
|
264
|
|
Third-party sales
|
|
$
|
3,133
|
|
|
$
|
2,300
|
|
|
$
|
3,341
|
|
Intersegment sales
|
|
|
1,723
|
|
|
|
1,307
|
|
|
|
1,727
|
|
Total sales
|
|
$
|
4,856
|
|
|
$
|
3,607
|
|
|
$
|
5,068
|
|
Adjusted EBITDA
|
|
$
|
1,289
|
|
|
$
|
378
|
|
|
$
|
958
|
|
*
|
Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and
plant administrative expenses.
|
This segment represents the Companys 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 Aluminas 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 segments 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. Most of the operations that comprise the
Alumina segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above). This segment also includes AWACs 25.1% share of the results of a mining and refining joint venture company in Saudi Arabia.
65
At December 31, 2017, the Alumina segment had 2,305 kmt of idle capacity on a base capacity of 15,064
kmt. Both idle and base capacity were unchanged compared to December 31, 2016.
At December 31, 2016, this segment had 2,305 kmt of
idle capacity on a base capacity of 15,064 kmt. In 2016, idle capacity increased 1,635 kmt compared to 2015, due to the curtailment of the remaining capacity at the Point Comfort (Texas) refinery (2,305
kmt-per-year).
Base capacity was unchanged between December 31, 2016 and 2015.
In 2017, alumina
production declined by 155 kmt compared to 2016, mostly the result of the absence of production from the remaining operating capacity at the Point Comfort refinery, which was fully curtailed by the end of June 2016 (670 kmt was curtailed at the end
of 2015) as described above.
In 2016, alumina production declined by 1,689 kmt compared to 2015, mostly the result of lower production at the
Point Comfort refinery due to the curtailment action described above.
Third-party sales for the Alumina segment improved 36% in 2017 compared
with 2016, largely attributable to a 34% rise in average realized price and a 2% increase in volume. The change in average realized price was mainly driven by a 44% higher average alumina index price (on
30-day
lag). In 2017, 86% of smelter-grade third-party shipments were based on the alumina index/spot price compared with 84% in 2016.
Third-party sales for this segment decreased 31% in 2016 compared with 2015, largely attributable to an 18% drop in average realized price and a 16% decline in volume. The change in average realized price
was mainly driven by a 23% lower average alumina index price.
Intersegment sales for the Alumina segment increased 32% in 2017 compared with
2016, principally caused by a higher average realized price, slightly offset by lower demand from the Aluminum segment, including as a result of a power outage at a smelter in Australia (see Aluminum below).
Intersegment sales for this segment declined 24% in 2016 compared with 2015, principally caused 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.
Adjusted EBITDA for the Alumina segment improved $911 in 2017 compared with 2016, primarily due to the previously mentioned higher average realized price, 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 Australian dollar, and an increase in maintenance expense (including outages in Western Australia).
Adjusted EBITDA for this segment decreased $580 in 2016 compared with 2015, primarily due to the previously mentioned lower average realized alumina
price and higher costs for caustic soda and other inputs, including labor, somewhat offset by net productivity improvements and lower cost for bauxite.
In 2018, higher costs for both caustic soda and bauxite are expected.
Aluminum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Primary aluminum production (kmt)
|
|
|
2,328
|
|
|
|
2,368
|
|
|
|
2,552
|
|
Third-party aluminum shipments
(1)
(kmt)
|
|
|
3,356
|
|
|
|
3,147
|
|
|
|
3,223
|
|
Average realized third-party price per metric ton of primary aluminum
(2)
|
|
$
|
2,224
|
|
|
$
|
1,862
|
|
|
$
|
2,092
|
|
Average cost per metric ton of primary aluminum
(3)
|
|
$
|
2,001
|
|
|
$
|
1,763
|
|
|
$
|
2,060
|
|
Third-party sales
|
|
$
|
8,027
|
|
|
$
|
6,531
|
|
|
$
|
7,557
|
|
Intersegment sales
|
|
|
21
|
|
|
|
42
|
|
|
|
175
|
|
Total sales
|
|
$
|
8,048
|
|
|
$
|
6,573
|
|
|
$
|
7,732
|
|
Adjusted EBITDA
|
|
$
|
964
|
|
|
$
|
680
|
|
|
$
|
767
|
|
66
(1)
|
Third-party aluminum shipments are composed of both primary aluminum and flat-rolled aluminum.
|
(2)
|
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.
|
(3)
|
Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and
amortization; and plant administrative expenses.
|
This segment consists of (i) the Companys worldwide smelting
and casthouse system, (ii) portfolio of energy assets in Brazil and the United States, and (iii) a rolling mill in the United States. This segments combined smelting and casting operations produce primary aluminum products, virtually
all of which is sold to external customers and traders; a small 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, including 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. The energy assets supply power to external
customers in Brazil and to this segments rolling mill in the United States. 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, Alcoa Corporation has a tolling arrangement with Arconic whereby Arconics rolling mill in Tennessee produces can sheet products for certain customers of the Companys rolling operations. 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. Results from the sale of aluminum powder and scrap are also included in this segment, as well as the impacts of embedded aluminum derivatives related to energy supply contracts. Generally, this segments
sales of aluminum 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, Icelandic krona, the Canadian
dollar, the Brazilian real, and the Australian dollar. This segment also includes Alcoa Corporations 25.1% share of the results of both a smelting and rolling mill joint venture company in Saudi Arabia.
In February 2017, Alcoa Corporations wholly-owned subsidiary, Alcoa Power Generating Inc., completed the sale of a
215-megawatt
hydroelectric project, Yadkin, to Cube Hydro Carolinas, LLC (see Other (income) expenses, 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. 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.
On July 11, 2017, Alcoa Corporation announced plans to restart three (161 kmt of capacity) of the five potlines (269 kmt of capacity) at the Warrick (Indiana) smelter, which is expected to be
complete in the second quarter of 2018. This smelter was permanently closed in March 2016. 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. See COGS and Restructuring and other charges in Earnings Summary above.
At December 31, 2017, the Aluminum segment had 856 kmt of idle 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 segments 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 the base capacity at December 31, 2017. Additionally, until the partial restart is completed, the
67
capacity of the Warrick smelter was included in idle capacity at December 31, 2017. Once the partial restart of the Warrick smelter occurs, 161 kmt will be removed from idle capacity.
At December 31, 2016, this segment had 587 kmt of idle capacity on a base capacity of 2,942 kmt. Both idle and base capacity were
unchanged compared to December 31, 2015.
In 2017, aluminum production declined by 40 kmt compared to 2016, mostly the result of lower
production at the Portland (Australia) 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 halting production of one of the potlines
at that time; ramp up to full production was completed in
mid-2017.
In 2016, aluminum production
declined by 184 kmt compared to 2015, mostly the result of the absence of production at both the Wenatchee (Washington) and São Luís (Brazil) smelters due to decisions in 2015 to curtail these facilities.
Third-party sales for the Aluminum segment improved 23% in 2017 compared with 2016, primarily related to a 19% rise in average realized price of primary
aluminum and a 7% increase in 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 driven by a 22% higher average LME price (on
15-day
lag). The higher overall aluminum volume was related to this segments rolling
operations, largely due to a tolling arrangement with Arconic (began on November 1, 2016).
Third-party sales for this segment declined
14% in 2016 compared with 2015, primarily related to an 11% drop in average realized price of primary aluminum, a 2% decrease in overall aluminum volume, and lower energy sales in Brazil due to lower prices. The change in average realized price of
primary aluminum was mainly driven by lower regional premiums, which dropped by an average of 40% in the United States and Canada, 44% in Europe, and 53% in the Pacific region, and a 5% lower average LME price (on
15-day
lag). The lower overall aluminum volume was mostly due to decreased demand for primary aluminum, slightly offset by higher shipments related to this segments rolling operations due to a tolling
arrangement with Arconic (began on November 1, 2016).
Intersegment sales for the Aluminum segment declined 50% in 2017 compared with
2016, mainly due to the absence of energy sales to the Warrick smelter (included in Corporatesee description of segment realignment above), which was permanently closed at the end of March 2016 (see above).
Intersegment sales for this segment declined 76% in 2016 compared with 2015, mainly due to decreased energy sales related to the Warrick smelter and the
Suriname refinery (included in Corporatesee description of segment realignment above), which was fully curtailed in November 2015 (portions of capacity were curtailed throughout 2015).
Adjusted EBITDA for the Aluminum segment improved $284 in 2017 compared with 2016, primarily caused by the previously mentioned higher average realized price of primary aluminum, partially offset by
higher costs for both alumina and energy.
Adjusted EBITDA for this segment decreased $87 in 2016 compared with 2015, primarily caused by the
previously mentioned lower average realized price of primary aluminum and 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 above). These negative impacts were mostly offset by all of the following: lower costs for all major inputs (alumina, energy, and carbon); net productivity improvements; and net favorable foreign currency movements due to a stronger
U.S. dollar, especially against the Icelandic króna and Norwegian krone.
In 2018, higher costs for both alumina and carbon materials
are expected. Also, the partial restart of the Warrick smelter is expected to be complete in the second quarter of 2018.
68
Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net Income (Loss) Attributable to Alcoa
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income (loss) attributable to Alcoa Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted EBITDA
|
|
$
|
2,680
|
|
|
$
|
1,433
|
|
|
$
|
2,179
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of LIFO
|
|
|
(91
|
)
|
|
|
(10
|
)
|
|
|
107
|
|
Metal price lag
(1)
|
|
|
26
|
|
|
|
9
|
|
|
|
(30
|
)
|
Corporate expense
(2)
|
|
|
(136
|
)
|
|
|
(177
|
)
|
|
|
(173
|
)
|
Provision for depreciation, depletion, and amortization
|
|
|
(750
|
)
|
|
|
(718
|
)
|
|
|
(780
|
)
|
Restructuring and other charges
|
|
|
(309
|
)
|
|
|
(318
|
)
|
|
|
(983
|
)
|
Interest expense
|
|
|
(104
|
)
|
|
|
(243
|
)
|
|
|
(270
|
)
|
Other income (expenses), net
|
|
|
58
|
|
|
|
89
|
|
|
|
(42
|
)
|
Other
(3)
|
|
|
(215
|
)
|
|
|
(227
|
)
|
|
|
(345
|
)
|
Consolidated income (loss) before income taxes
|
|
|
1,159
|
|
|
|
(162
|
)
|
|
|
(337
|
)
|
Provision for income taxes
|
|
|
(600
|
)
|
|
|
(184
|
)
|
|
|
(402
|
)
|
Net income attributable to noncontrolling interest
|
|
|
(342
|
)
|
|
|
(54
|
)
|
|
|
(124
|
)
|
Consolidated net income (loss) attributable to Alcoa Corporation
|
|
$
|
217
|
|
|
$
|
(400
|
)
|
|
$
|
(863
|
)
|
(1)
|
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 Corporations rolled aluminum operations. 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.
|
(2)
|
Corporate expense is primarily composed of general administrative and other expenses of operating the corporate headquarters and other global
administrative facilities.
|
(3)
|
Other includes, among other items, the Adjusted EBITDA of previously closed operations as applicable, pension and other postretirement benefit expenses
associated with closed and sold operations, and intersegment profit elimination.
|
The changes in the Impact of LIFO, Metal
price lag, and Corporate expense reconciling items (see Earnings Summary above for significant changes in the remaining reconciling items) for 2017 compared with 2016 consisted of:
|
|
|
a change in the Impact of LIFO, mostly due to 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;
|
|
|
|
a change in Metal price lag, the result of a further increase in the price of aluminum at December 31, 2017 indexed to December 31, 2016
compared to an increase in the price of aluminum at December 31, 2016 indexed to December 31, 2015 (the increase in the price of aluminum in both periods was mostly driven by higher base metal prices (LME)); and
|
|
|
|
a decrease in Corporate expense, largely attributable to the absence of costs related to the Separation Transaction ($73), which includes an allocation
of $68 from ParentCo prior to the Separation Date, mostly offset by a decrease in corporate overhead expenses.
|
The changes
in the Impact of LIFO, Metal price lag, and Corporate expense reconciling items (see Earnings Summary above for significant changes in the remaining reconciling items) for 2016 compared with 2015 consisted of:
|
|
|
a change in the Impact of LIFO, mostly due to an increase in the price of alumina 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);
|
|
|
|
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
|
69
|
premiums) at December 31, 2015 indexed to December 31, 2014 (overall, the price of aluminum in 2016 was lower compared with 2015); and
|
|
|
|
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.
|
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 Corporations primary future cash needs
are centered on operating activities, particularly working capital, as well as sustaining and return-seeking capital expenditures. The Companys ability to fund its cash needs depends on Alcoa Corporations ongoing ability to generate and
raise cash in the future. Although management believes that Alcoa Corporations future cash from operations, together with the Companys access to capital markets, will provide adequate resources to fund Alcoa Corporations operating
and investing needs, the Companys access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) Alcoa Corporations 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 Corporation will continue to have access to capital markets on terms acceptable to the Company.
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 Companys Consolidated Financial Statements. Transfers of cash, both to and from ParentCos centralized cash management system, were reflected as a component of
Parent Company net investment in Alcoa Corporations Consolidated Financial Statements.
Cash provided from operations and financing
activities is expected to be adequate to cover Alcoa Corporations 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, 2017, cash and cash equivalents of Alcoa
Corporation were $1,358, of which $1,309 was held outside the United States. Alcoa Corporation has a number of commitments and obligations related to the Companys operations in various foreign jurisdictions, resulting in the need for cash
outside the United States. Alcoa Corporation continuously evaluates its local and global cash needs for future business operations, which may influence future repatriation decisions.
Cash from Operations
Cash provided from operations in 2017 was $1,224 compared with cash
used for operations of $311 in 2016. The improvement of $1,535 was due to higher operating results (net income (loss) plus net
add-back
for noncash transactions in earnings), a positive change associated with
working capital of $359, and a favorable change in noncurrent assets of $85. These items were slightly offset by an unfavorable change in noncurrent liabilities of $119 and higher pension plan contributions of $40 (U.S. defined benefit plans were
sponsored by ParentCo through July 31, 2016). The favorable change in noncurrent assets was mainly the result of the absence of a $200 prepayment made under a natural gas supply agreement in Australia (see below).
70
On October 10, 2017, Alcoa Corporation paid $238 to early terminate a power contract related to the
Companys Rockdale smelter (see Restructuring and Other Charges in Earnings Summary above).
Cash used for operations in 2016 was $311
compared with cash provided from operations of $875 in 2015. The decrease of $1,186 was due to lower operating results (net loss plus net
add-back
for noncash transactions in earnings) and a negative change
associated with working capital of $648. These items were slightly offset by a positive change in both noncurrent assets of $172 and noncurrent liabilities of $60, and lower pension contributions of $3. The favorable change in noncurrent assets was
mainly the result of a $100 smaller prepayment made under a natural gas supply agreement in Australia (see below).
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 of a third-party acquisition
of the related energy assets from the then-current owner, which occurred in June 2015. The terms of the gas supply agreement required AofA to make a prepayment of $500 in two installments. The first installment of $300 was made at the time of the
completion of the third-party acquisition in June 2015 and the second installment of $200 was made in April 2016.
Financing Activities
Cash used for financing activities was $506 in 2017 compared with $483 in 2016 and $162 in 2015.
The use of cash in 2017 was largely attributable to 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 use of cash in 2016 was principally the result of $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 2015 was due to net cash paid to Alumina Limited (see Noncontrolling Interest in
Earnings Summary above) of $104, net transfers to ParentCo of $34, and payments on debt of $24.
Credit Facility.
On September 16,
2016, Alcoa Corporation and Alcoa Nederland Holding B.V. (ANHBV), a wholly-owned subsidiary of Alcoa Corporation, entered into a revolving credit agreement with a syndicate of lenders and issuers named therein, as amended, (the Revolving
Credit Agreement). On November 14, 2017, these same parties and two additional lenders entered into an Amendment and Restatement Agreement to revise certain terms and provisions of the Revolving Credit Agreement (the Revolving Credit
Agreement as revised by the Amendment and Restatement Agreement, the Amended Revolving Credit Agreement). Unless noted otherwise, the terms and provisions described below for the Amended Revolving Credit Agreement were applicable to the
Revolving Credit Agreement prior to November 14, 2017.
The Amended Revolving Credit Agreement provides a $1,500 senior secured revolving
credit facility (the Revolving Credit Facility) to be used for working capital and/or other general corporate purposes of Alcoa Corporation and its subsidiaries. Subject to the terms and conditions of the 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 (previously $0).
71
The Revolving Credit Facility is scheduled to mature on November 14, 2022 (previously November 1,
2021), unless extended or earlier terminated in accordance with the provisions of the 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 Amended Revolving Credit Agreement. Under the provisions of the Amended Revolving Credit Agreement, ANHBV will pay a quarterly commitment fee ranging from 0.225% to 0.450% (based on Alcoa Corporations 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 ANHBVs option, either (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the highest of (1) 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. The applicable margin for all
loans will vary based on Alcoa Corporations leverage ratio and will range from 1.75% to 2.50% for LIBOR loans and 0.75% to 1.50% for base rate loans. 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.
The Amended Revolving Credit Agreement includes a number of customary affirmative covenants. Additionally, the
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 (see below); entering into restrictive agreements; restricted payments (see below), including 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 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 2.25 to 1.00 (may be increased to a level not higher than 2.50 to 1.00). As of December 31, 2017 and 2016, Alcoa Corporation was in compliance with all such covenants.
The indebtedness, restricted payments, and investments negative covenants include general exceptions to allow for potential future transactions
incremental to those specifically provided for in the Amended Revolving Credit Agreement. The indebtedness negative covenant provides for an incremental amount not to exceed the greater of $1,000 (previously $500) and 6.0% (previously 3.0%) of Alcoa
Corporations consolidated total assets. Additionally, the restricted payments negative covenant provides for an aggregate amount not to exceed $100 (previously $0) and the investments negative covenant provides for an aggregate amount not to
exceed $400 (previously $250), both of which contain two conditions in which these limits may increase. First, in any fiscal year, the thresholds for the restricted payments and investments negative covenants increase by $250 (previously $0) and
$200 (previously $0), respectively, if the consolidated net leverage ratio is not greater than 1.20 to 1.00 and 1.30 to 1.00, respectively, as of the end of the prior fiscal year. Secondly, in regards to both the $100 and $250 for restricted
payments and the $200 for investments, 50% of any unused amount of these base amounts in any fiscal year may be used in the next succeeding fiscal year.
72
The following describes the specific restricted payment negative covenant for share repurchases and the
application of the 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 Amended Revolving Credit Agreement provides general exceptions to the restricted payments negative
covenant that would allow Alcoa Corporation to exceed this specified threshold for share repurchases 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, the Amended Revolving Credit Agreement rescinded the specific
terms included in the Revolving Credit Agreement related to ordinary dividend payments. Previously, Alcoa Corporation was able to declare and make annual ordinary dividends in an aggregate amount not to exceed $38 in each of the November 1,
2016 through December 31, 2017 time period (no such dividends were made) and annual 2018, $50 in each of annual 2019 and 2020, and $75 in the January 1, 2021 through November 1, 2021 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. Under the Amended Revolving Credit Agreement, 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 the Company could make in a given timeframe if the allowed amount is less than the limits of the restricted payments negative covenant under the Amended Revolving Credit Agreement.
The 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, 2017 and 2016 and no amounts were borrowed during 2017 and 2016 (September
16
th
through December 31
st
) under the Revolving Credit Facility.
144A Debt.
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 is paid semi-annually in March and September, which 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.
73
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 Revolving Credit Agreement (the subsidiary guarantors and, together with Alcoa Corporation, the guarantors). 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 Revolving Credit Agreement.
The Notes indenture contains various restrictive covenants similar to those described above for the 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 in an aggregate amount not to exceed $38 in each of the November 1, 2016 through December 31, 2017
time period (no such dividends were made) and annual 2018, $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 payment not to exceed the greater of $250 and 1.5% of Alcoa
Corporations 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 Amended Revolving Credit Agreement (see Credit Facility above) would govern the amount of ordinary dividend payments the Company could make in a given timeframe if
the allowed amount is less than the limits of the restricted payments negative covenant under the Notes indenture.
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 the amount of $1,228 were not reflected in Alcoa Corporations 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 in preparation for the Separation Transaction. This decrease in restricted
cash was reflected in Alcoa Corporations Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.
Ratings.
Alcoa Corporations 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 Corporations debt by the major credit rating agencies.
On April 24, 2017, Fitch Ratings (Fitch) assigned a BB+ rating for
Alcoa Corporations long-term debt. Additionally, Fitch assigned the current outlook as stable.
On June 20, 2017, Standard and
Poors Global Ratings (S&P) affirmed a
BB-
rating for Alcoa Corporations long-term debt. Additionally, S&P raised the current outlook to positive from stable. On December 5, 2017,
S&P upgraded its ratings for Alcoa Corporations long-term debt to BB from
BB-.
Additionally, S&P affirmed the current outlook as positive.
On September 5, 2017, Moodys Investor Service (Moodys) upgraded its ratings for Alcoa Corporations long-term debt to Ba2 from Ba3
and short-term debt to Speculative Grade Liquidity
Rating-1
from Speculative Grade Liquidity
Rating-2.
Additionally, Moodys affirmed the current outlook as stable.
74
Investing Activities
Cash used for investing activities was $226 in 2017 compared with cash provided from investing activities of $1,077 in 2016 and cash used for investing activities of $384 in 2015.
The use of cash in 2017 was due to $405 in capital expenditures (includes spend related to environmental control of $92) 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 source of cash in 2016 was primarily due to $1,228 of net proceeds from newly issued debt (see Financing Activities above) released from escrow and
$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 spend related to environmental control of $83).
The use of cash in 2015 was due to $391 in capital expenditures (includes spend
related to environmental control 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.
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 Corporations 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 Corporations Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.
75
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. Alcoa Corporation also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. As of December 31, 2017, a
summary of Alcoa Corporations 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
|
|
|
2018
|
|
|
2019-2020
|
|
|
2021-2022
|
|
|
Thereafter
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy-related purchase obligations
|
|
$
|
16,577
|
|
|
$
|
948
|
|
|
$
|
2,242
|
|
|
$
|
2,293
|
|
|
$
|
11,094
|
|
Raw material purchase obligations
|
|
|
5,742
|
|
|
|
1,244
|
|
|
|
1,180
|
|
|
|
554
|
|
|
|
2,764
|
|
Other purchase obligations
|
|
|
1,256
|
|
|
|
280
|
|
|
|
388
|
|
|
|
189
|
|
|
|
399
|
|
Operating leases
|
|
|
308
|
|
|
|
94
|
|
|
|
131
|
|
|
|
62
|
|
|
|
21
|
|
Interest related to total debt
|
|
|
751
|
|
|
|
99
|
|
|
|
194
|
|
|
|
190
|
|
|
|
268
|
|
Estimated minimum required pension funding
|
|
|
1,540
|
|
|
|
290
|
|
|
|
635
|
|
|
|
615
|
|
|
|
-
|
|
Other postretirement benefit payments
|
|
|
1,030
|
|
|
|
125
|
|
|
|
245
|
|
|
|
235
|
|
|
|
425
|
|
Layoff and other restructuring payments
|
|
|
45
|
|
|
|
41
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Deferred revenue arrangements
|
|
|
76
|
|
|
|
8
|
|
|
|
16
|
|
|
|
16
|
|
|
|
36
|
|
Uncertain tax positions
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Liability related to the resolution of a legal matter
|
|
|
74
|
|
|
|
74
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,437
|
|
|
|
16
|
|
|
|
45
|
|
|
|
30
|
|
|
|
1,346
|
|
Dividends to shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Distributions to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital projects
|
|
|
375
|
|
|
|
268
|
|
|
|
51
|
|
|
|
44
|
|
|
|
12
|
|
Equity contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
29,223
|
|
|
$
|
3,487
|
|
|
$
|
5,131
|
|
|
$
|
4,228
|
|
|
$
|
16,377
|
|
Obligations for Operating Activities
Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from 1 year to 30 years. Raw material obligations consist mostly of bauxite
(relates to Alcoa Corporations 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 17 years. Other purchase
obligations consist principally of freight for bauxite and alumina with expiration dates ranging from 1 to 14 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, 2017 and is calculated on debt with maturities that extend to 2029. 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 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, and health
care cost trend rates. The minimum required contributions for pension funding are estimated to be $290 for 2018, $285 for 2019, $350 for 2020, $315 for 2021, and $300 for 2022. The U.S. portion of these expected pension contributions reflect the
impacts of the Pension Protection Act of 2006; the Worker, Retiree, and Employer Recovery Act of 2008; the Moving Ahead for Progress in the 21
st
Century Act of 2012; the Highway and
76
Transportation Funding Act of 2015; and the Bipartisan Budget Act of 2016. Also, the Company expects to make discretionary contributions of approximately $300 combined to the U.S. and Canadian
pension plans in 2018 (see Pension and Other Postretirement Benefits in Critical Accounting Policies and Estimates below), which are not included in the preceding table. Other postretirement benefit payments are expected to approximate $115 to $125
annually for years 2018 through 2022 and $85 annually for years 2023 through 2027. Such payments will be slightly offset by subsidy receipts related to Medicare Part D, which are estimated to approximate $5 to $10 annually for years 2018 through
2027. Alcoa Corporation has determined that it is not practicable to present pension funding and other postretirement benefit payments beyond 2022 and 2027, 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 and severance costs. Amounts scheduled to be paid beyond one year relate to the termination of an office lease contract and are expected to be paid by no later than the end of 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 is included in the preceding table as the Company would have 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, 2017. 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 Alcoas Corporations 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 ParentCos portion of the $148 remaining obligation. The $148 was paid in equal installments of $74 in January 2017
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 that extend to 2029.
As of December 31, 2017, Alcoa Corporation had 185,200,713 issued and outstanding shares of common stock. Dividends on common stock are subject to
authorization by Alcoa Corporations Board of Directors. Alcoa Corporation did not declare or pay any dividends in 2017.
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 entitys net income, if any, based on the previous
quarters 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 entitys 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
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 2017, 2016, and 2015, Alumina Limited received distributions of $342, $233, and $106, respectively, from the entities that comprise AWAC based on the provisions of the respective current or prior agreement applicable to these years.
77
Obligations for Investing Activities
Capital projects in the preceding table only include amounts approved by management as of December 31, 2017. 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 2018, comprised of $300 for
sustaining projects and $150 for return-seeking projects.
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 (estimate of initial investment). As of December 31, 2017, Alcoa
Corporation has made equity contributions of $982. Based on changes to both the projects capital investment and equity and debt structure from the initial plans, the estimated $1,100 equity contribution may be reduced. Alcoa Corporation does
not anticipate making any additional equity contributions under the initial $1,100 plan although a formal determination is yet to be made. 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.
Off-Balance
Sheet Arrangements.
At
December 31, 2017, Alcoa Corporation has maximum potential future payments for guarantees issued on behalf of a third party of $177. These guarantees expire at various times between 2018 and 2024 and relate to project financing for the aluminum
complex in Saudi Arabia. The borrowers are the three companies that comprise the joint venture in which Alcoa Corporation is a participant. In December 2017, the smelting company refinanced and/or amended all of its existing outstanding debt. The
guarantees that were previously required of the Company were effectively terminated. The remaining issued guarantees relate to the existing outstanding debt of both the rolling mill company and the mining and refining company.
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. The total amount committed under these instruments, which automatically renew or expire at various dates between 2018 and 2022, was $543 (includes $112
issued under a
one-year
agreement see below) at December 31, 2017. Additionally, Arconic has outstanding bank guarantees and letters of credit related to Alcoa Corporation in the amount of $29 at
December 31, 2017. 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 Corporation has
outstanding bank guarantees and letters of credit related to Arconic in the amount of $18 at December 31, 2017. In the event Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified
by Arconic in accordance with the Separation and Distribution Agreement.
In August 2017, Alcoa Corporation entered into a
one-year
standby letter of credit agreement with three financial institutions. The agreement provides for a $150 facility, which will be used by Alcoa Corporation for matters in the ordinary course of business.
Alcoa Corporations obligations under this facility will be secured in the same manner as obligations under the Companys 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 Companys Amended Revolving Credit Agreement (see Financing Activities in Liquidity and Capital Resources above). As of
December 31, 2017, letters of credit aggregating $112 were issued under this facility. These letters of credit were previously issued in 2017 on a standalone basis.
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 2018, was $122 at December 31, 2017. Additionally, Arconic has outstanding surety bonds related to Alcoa Corporation in the amount of $14 at
December 31, 2017. In the
78
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.
Critical Accounting Policies and Estimates
The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain 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, 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 Companys Consolidated Financial Statements at any given time. Despite
these inherent limitations, management believes that Managements 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.
A summary of the Companys 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 Company to provide the users of
the Consolidated Financial Statements with useful and reliable information about the Companys operating results and financial condition.
Prior to the Separation Date, Alcoa Corporation did not operate as a separate, standalone entity. Alcoa Corporations operations were included in
ParentCos financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporations Consolidated Financial Statements were prepared from ParentCos historical accounting records and were presented on a
standalone basis as if Alcoa Corporations operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporations businesses,
as well as certain assets and liabilities that were historically held at ParentCos 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 Alcoas 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 investees revenue, earnings, and cash flow
79
trends; adverse market conditions of the investees industry or geographic area; the investees 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 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, 2017, the carrying value of the goodwill for Bauxite and Alumina was $51 and $103, respectively. These amounts include an allocation
of goodwill held at the corporate level ($49 to Bauxite and $99 to Alumina). Prior to 2017, the Company had six reporting units equivalent to its then six operating segments as follows: Bauxite, Alumina, Aluminum, Cast Products, Energy, and Rolled
Products. In early 2017, management initiated a realignment of the Companys internal business and organizational structure resulting in a change to Alcoa Corporations operating segments and reporting units (see Segment Information in
Results of Operations above). Of the previous six reporting units, only Bauxite and Alumina contained goodwill.
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-step
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 Corporations 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 2017 annual review of goodwill, management performed the qualitative assessment for the Bauxite and Alumina reporting units. Management
concluded it was not more likely than not that the respective estimated fair value of these reporting units was less than the respective carrying value. As such, no further analysis was required.
80
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 units 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 such excess would be recognized.
Management last proceeded directly to the
two-step
quantitative impairment test for the Alumina reporting unit in 2016 and will do so for the Bauxite reporting unit
in 2018. In 2016, 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.
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 Corporations 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, 2017 ranges from $3 to $28 per structure (24 structures) in todays 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 monitoring
81
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 managements 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, employees attributable to Alcoa Corporation operations participated in ParentCos 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 ParentCos corporate employees. Beginning on
the Separation Date and forward, Alcoa Corporation recorded stock-based compensation expense for all of the Companys 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 2017, 2016, and 2015, Alcoa Corporation recognized stock-based compensation expense of $24, $28, and $35, respectively. Of the amounts in 2016 and 2015, $16 and $21, respectively, relates to the
allocation of expense for ParentCos corporate employees. As part of both Alcoa Corporations and ParentCos 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 2017, 2016, and 2015, $4, $7, and $6, 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, 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.
82
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, 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.
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 a weighted average duration of 12 years, and the underlying cash flows of the
bonds included in the model exceed the cash flows needed to satisfy the Companys 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 2017 and 2016, the weighted average discount rate used to determine benefit obligations for pension plans was 3.68% and 4.12%, respectively, and for other postretirement benefit plans was 3.54% and 3.93%,
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 $220 and either a charge or credit of approximately $5 to pretax earnings in
the following year.
The decline in the discount rate in 2017 compared to 2016 for both pension and other postretirement benefit plans was due
to a decrease in the effective yields of the bonds with a duration of greater than 10 years included in the model. As the average duration of the plans projected cash flows is greater than 10 years, changes in the discount rate tend to
parallel changes in the effective yields of bonds with a duration of greater than 10 years. As a result, the effective yields of bonds with a duration of 10 years or less included in the model had a minimal impact on the change in the discount rate.
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 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 managements own judgment (see below). For 2017,
2016, and 2015, management used 7.47%, 7.31%, and 6.91% 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
2018, management anticipates that 6.89% 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 pretax earnings
by approximately $15 for 2018.
On January 17, 2018, the Company communicated retirement benefit changes to certain U.S. and Canadian
employees. Effective January 1, 2021, all salaried U.S. and Canadian employees that are participants in the Companys defined
83
benefit pension plans will cease accruing retirement benefits for future service. This change will affect approximately 800 employees, who will be transitioned to country-specific defined
contribution plans, in which the Company will contribute 3% of these participants eligible earnings on an annual basis. Such contributions will be incremental to any employer savings match the employees may receive under existing defined
contribution plans. Participants already collecting benefits under the defined benefit pension plans, as well as those currently covered by collective bargaining agreements, are not affected by these changes. Also, effective January 1, 2021,
Alcoa Corporation will no longer contribute to
pre-Medicare
retiree medical coverage for U.S. salaried employees and retirees. As a result of these changes, Alcoa Corporation expects to record both a
curtailment gain of approximately $20 (pretax) in 2018 and a reduction to the Companys net pension and other postretirement benefits liability of approximately $35.
Separately, Alcoa expects to make discretionary contributions of approximately $300 combined to the U.S. and Canadian defined benefit pension plans in 2018. The Company intends these contributions to be
used to purchase annuity contracts for approximately 9,000 retirees. Such instruments will allow the Company to transfer risk and lower its costs related to these defined benefit pension plans. At such time(s) annuity contracts are purchased, Alcoa
Corporation will record a settlement charge as part of the net periodic benefit cost of these defined benefit pension plans.
Derivatives
and Hedging.
Derivatives are held for purposes other than trading and are part of a formally documented risk management program. 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 (income) expenses, 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) expenses, net.
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 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.
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 as 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 (loss) income and are reclassified to Sales, Cost
of goods sold, or Other (income) expenses, 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.
If no hedging relationship is designated, the derivative is marked to market through
Other (income) expenses, 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 Corporations assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.
84
In all periods prior to the Separation Date, Alcoa Corporations operations were included in the income
tax filings of ParentCo. The provision for income taxes in Alcoa Corporations 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 Corporations 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 managements 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 Corporations net deferred tax asset by jurisdiction as of December 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Deferred tax assets
|
|
$
|
1,164
|
|
|
$
|
1,948
|
|
|
$
|
3,112
|
|
Valuation allowance
|
|
|
(1,050
|
)
|
|
|
(877
|
)
|
|
|
(1,927
|
)
|
Deferred tax liabilities
|
|
|
(108
|
)
|
|
|
(560
|
)
|
|
|
(668
|
)
|
|
|
$
|
6
|
|
|
$
|
511
|
|
|
$
|
517
|
|
The Company has several income tax filers in various foreign countries. The $511 net deferred tax asset included under
the Foreign column in the table above was comprised of the following (by income tax filer): a $252 net deferred tax asset for Alumínio in Brazil; a $153 net deferred tax asset for AWAB in Brazil; a $112 deferred tax asset for
Alúmina Española, S.A. (Española and collectively with Alumínio and AWAB, the Foreign Filers) in Spain; and a combined $6 net deferred tax liability for several other foreign income tax filers.
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, 2017. Management has also forecasted taxable income for each of the Foreign Filers in 2018 and
for the foreseeable future. This forecast is based on macroeconomic indicators and involves assumptions related to, among others: commodity prices; volume levels;
85
and key inputs and raw materials, such as bauxite, caustic soda, alumina, calcined petroleum coke, liquid pitch, energy (fuel oil, natural gas, electricity), labor, and transportation costs.
These are the same assumptions used by management to develop a financial and operating plan, which is used to run 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, 2017.
In 2017, Alcoa Corporation
established a valuation allowance of $94 related to the remaining deferred tax assets in Iceland (see below). This amount was comprised of a $60 discrete income charge recognized in the Provision for income taxes on the Companys Consolidated
Statement of Operations and a $34 charge to Accumulated other comprehensive loss on Alcoa Corporations Consolidated Balance Sheet. These deferred tax assets relate to tax loss carryforwards, which have an expiration period ranging from 2017 to
2026, and deferred losses associated with derivative and hedging activities. After weighing all available positive and negative evidence, management determined that it was no longer more likely than not that Alcoa Corporation will realize the tax
benefit of these deferred tax assets. This conclusion was based on existing cumulative losses and a short expiration period. Such losses were generated as a result of intercompany interest expense under the Companys global treasury and cash
management system and the realization of deferred losses associated with an LME-linked embedded derivative in a power contract. Such interest expense is expected to continue and additional deferred losses associated with the embedded derivative will
be realized in future years. As a result, management estimates that there will not be sufficient taxable income available to utilize the 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.
In 2015, Alcoa Corporation recognized a $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Suriname and Iceland. Of this amount, an $85 valuation allowance was
established on the full value of the deferred tax assets in Suriname. These deferred tax assets relate to tax loss carryforwards and employee benefits have an expiration period ranging from 2016 to 2022. The remaining $56 charge relates to a
valuation allowance established on a portion of the deferred tax assets in Iceland, which were related to tax loss carryforwards that have an expiration period ranging from 2017 to 2019. After weighing all available positive and negative evidence,
management determined that it was no longer more likely than not that Alcoa Corporation will realize the tax benefit of these deferred tax assets. This conclusion was mainly driven by a decline in the outlook of the former Primary Metals business
(refers to the smelting and casting operations included in what is currently the Aluminum segment), combined with prior year cumulative losses and a short 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.
86
Transactions between Alcoa Corporation and Arconic have been presented as related party transactions on the
Companys Consolidated Financial Statements. Sales to Arconic from Alcoa Corporation were $864, $958, and $1,078 in 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, outstanding receivables from Arconic were $84 and
$67, respectively, and were included in Receivables from customers on Alcoa Corporations 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 8.
|
Financial Statements and Supplementary Data.
|
Managements Reports to Alcoa Corporation Stockholders
Managements 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
managements best judgments and estimates. The other financial information included in the Companys Annual Report on Form
10-K
for the year ended December 31, 2017 is consistent with that in
the financial statements.
Management recognizes its responsibility for conducting the Companys 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.
Managements 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 Companys 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 Companys 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 Companys assets that could have a material effect on the financial statements.
87
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 Companys internal control over financial reporting
as of December 31, 2017 using the criteria in
Internal ControlIntegrated 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, 2017.
PricewaterhouseCoopers LLP, an
independent registered public accounting firm, audited the effectiveness of the Companys internal control over financial reporting as of December 31, 2017, 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 23, 2018
88
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Alcoa Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We
have audited the accompanying consolidated balance sheets of Alcoa Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive (loss) income, changes in equity and cash
flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Companys internal control over
financial reporting as of December 31, 2017, based on criteria established in
Internal ControlIntegrated 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, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal ControlIntegrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Companys consolidated
financial
statements and on the Companys 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 in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, 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 regarding the amounts and disclosures in the consolidated financial statements.
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 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 opinions.
Definition and Limitations of Internal Control over Financial Reporting
A companys 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 companys 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
89
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 companys 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
February 23,
2018
|
We have served as the Companys auditor since 2015.
90
Alcoa Corporation and subsidiaries
Statement of Consolidated Operations
(in millions, except
per-share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Sales to unrelated parties
|
|
$
|
10,788
|
|
|
$
|
8,360
|
|
|
$
|
10,121
|
|
Sales to related parties
|
|
|
864
|
|
|
|
958
|
|
|
|
1,078
|
|
Total sales (E)
|
|
|
11,652
|
|
|
|
9,318
|
|
|
|
11,199
|
|
Cost of goods sold (exclusive of expenses below)
|
|
|
9,072
|
|
|
|
7,898
|
|
|
|
9,039
|
|
Selling, general administrative, and other expenses
|
|
|
284
|
|
|
|
359
|
|
|
|
353
|
|
Research and development expenses
|
|
|
32
|
|
|
|
33
|
|
|
|
69
|
|
Provision for depreciation, depletion, and amortization
|
|
|
750
|
|
|
|
718
|
|
|
|
780
|
|
Restructuring and other charges (D)
|
|
|
309
|
|
|
|
318
|
|
|
|
983
|
|
Interest expense (S)
|
|
|
104
|
|
|
|
243
|
|
|
|
270
|
|
Other (income) expenses, net (S)
|
|
|
(58
|
)
|
|
|
(89
|
)
|
|
|
42
|
|
Total costs and expenses
|
|
|
10,493
|
|
|
|
9,480
|
|
|
|
11,536
|
|
Income (Loss) before income taxes
|
|
|
1,159
|
|
|
|
(162
|
)
|
|
|
(337
|
)
|
Provision for income taxes (P)
|
|
|
600
|
|
|
|
184
|
|
|
|
402
|
|
Net income (loss)
|
|
|
559
|
|
|
|
(346
|
)
|
|
|
(739
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
342
|
|
|
|
54
|
|
|
|
124
|
|
Net Income (Loss) Attributable to Alcoa Corporation
|
|
|
217
|
|
|
|
(400
|
)
|
|
$
|
(863
|
)
|
Earnings per Share Attributable to Alcoa Corporation Common Shareholders (F):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
(2.19
|
)
|
|
$
|
(4.73
|
)
|
Diluted
|
|
$
|
1.16
|
|
|
$
|
(2.19
|
)
|
|
$
|
(4.73
|
)
|
The accompanying notes are an
integral part of the consolidated financial statements.
91
Alcoa Corporation and subsidiaries
Statement of Consolidated Comprehensive (Loss) Income
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling
interest
|
|
|
Total
|
|
For the year ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income (loss)
|
|
$
|
217
|
|
|
$
|
(400
|
)
|
|
$
|
(863
|
)
|
|
$
|
342
|
|
|
$
|
54
|
|
|
$
|
124
|
|
|
$
|
559
|
|
|
$
|
(346
|
)
|
|
$
|
(739
|
)
|
Other comprehensive (loss) income, net of tax (G):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and other postretirement
benefits
|
|
|
(456
|
)
|
|
|
(202
|
)
|
|
|
72
|
|
|
|
9
|
|
|
|
-
|
|
|
|
8
|
|
|
|
(447
|
)
|
|
|
(202
|
)
|
|
|
80
|
|
Foreign currency translation adjustments
|
|
|
188
|
|
|
|
213
|
|
|
|
(1,183
|
)
|
|
|
96
|
|
|
|
102
|
|
|
|
(428
|
)
|
|
|
284
|
|
|
|
315
|
|
|
|
(1,611
|
)
|
Net change in unrecognized gains/losses on cash flow hedges
|
|
|
(1,139
|
)
|
|
|
(346
|
)
|
|
|
827
|
|
|
|
50
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(1,089
|
)
|
|
|
(342
|
)
|
|
|
826
|
|
Total Other comprehensive (loss) income, net of tax
|
|
|
(1,407
|
)
|
|
|
(335
|
)
|
|
|
(284
|
)
|
|
|
155
|
|
|
|
106
|
|
|
|
(421
|
)
|
|
|
(1,252
|
)
|
|
|
(229
|
)
|
|
|
(705
|
)
|
Comprehensive (loss) income
|
|
$
|
(1,190
|
)
|
|
$
|
(735
|
)
|
|
$
|
(1,147
|
)
|
|
$
|
497
|
|
|
$
|
160
|
|
|
$
|
(297
|
)
|
|
$
|
(693
|
)
|
|
$
|
(575
|
)
|
|
$
|
(1,444
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
92
Alcoa Corporation and subsidiaries
Consolidated Balance Sheet
(in millions)
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (O)
|
|
$
|
1,358
|
|
|
$
|
853
|
|
Receivables from customers
|
|
|
811
|
|
|
|
668
|
|
Other receivables
|
|
|
232
|
|
|
|
166
|
|
Inventories (I)
|
|
|
1,453
|
|
|
|
1,160
|
|
Fair value of derivative contracts (O)
|
|
|
113
|
|
|
|
51
|
|
Prepaid expenses and other current assets
|
|
|
271
|
|
|
|
283
|
|
Total current assets
|
|
|
4,238
|
|
|
|
3,181
|
|
Properties, plants, and equipment, net (J)
|
|
|
9,138
|
|
|
|
9,325
|
|
Investments (H)
|
|
|
1,410
|
|
|
|
1,358
|
|
Deferred income taxes (P)
|
|
|
814
|
|
|
|
741
|
|
Fair value of derivative contracts (O)
|
|
|
128
|
|
|
|
468
|
|
Other noncurrent assets (S)
|
|
|
1,719
|
|
|
|
1,668
|
|
Total Assets
|
|
$
|
17,447
|
|
|
$
|
16,741
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
1,898
|
|
|
$
|
1,455
|
|
Accrued compensation and retirement costs
|
|
|
459
|
|
|
|
456
|
|
Taxes, including income taxes
|
|
|
282
|
|
|
|
147
|
|
Fair value of derivative contracts (O)
|
|
|
185
|
|
|
|
35
|
|
Other current liabilities (C)
|
|
|
412
|
|
|
|
707
|
|
Long-term debt due within one year (L & O)
|
|
|
16
|
|
|
|
21
|
|
Total current liabilities
|
|
|
3,252
|
|
|
|
2,821
|
|
Long-term debt, less amount due within one year (L & O)
|
|
|
1,388
|
|
|
|
1,424
|
|
Accrued pension benefits (N)
|
|
|
2,341
|
|
|
|
1,851
|
|
Accrued other postretirement benefits (N)
|
|
|
1,100
|
|
|
|
1,166
|
|
Asset retirement obligations (Q)
|
|
|
617
|
|
|
|
604
|
|
Environmental remediation (R)
|
|
|
258
|
|
|
|
264
|
|
Fair value of derivative contracts (O)
|
|
|
1,105
|
|
|
|
234
|
|
Noncurrent income taxes (P)
|
|
|
309
|
|
|
|
310
|
|
Other noncurrent liabilities and deferred credits (S)
|
|
|
279
|
|
|
|
370
|
|
Total liabilities
|
|
|
10,649
|
|
|
|
9,044
|
|
Contingencies and commitments (R)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Alcoa Corporation shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock (M)
|
|
|
2
|
|
|
|
2
|
|
Additional capital
|
|
|
9,590
|
|
|
|
9,531
|
|
Retained earnings (deficit)
|
|
|
113
|
|
|
|
(104
|
)
|
Accumulated other comprehensive loss (G)
|
|
|
(5,182
|
)
|
|
|
(3,775
|
)
|
Total Alcoa Corporation shareholders equity
|
|
|
4,523
|
|
|
|
5,654
|
|
Noncontrolling interest (A)
|
|
|
2,275
|
|
|
|
2,043
|
|
Total equity
|
|
|
6,798
|
|
|
|
7,697
|
|
Total Liabilities and Equity
|
|
$
|
17,447
|
|
|
$
|
16,741
|
|
The accompanying notes are an integral part of the consolidated financial statements.
93
Alcoa Corporation and subsidiaries
Statement of Consolidated Cash Flows
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
559
|
|
|
$
|
(346
|
)
|
|
$
|
(739
|
)
|
Adjustments to reconcile net income (loss) to cash from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
|
752
|
|
|
|
718
|
|
|
|
780
|
|
Deferred income taxes (P)
|
|
|
176
|
|
|
|
(46
|
)
|
|
|
86
|
|
Equity earnings, net of dividends (H)
|
|
|
9
|
|
|
|
48
|
|
|
|
158
|
|
Restructuring and other charges (D)
|
|
|
309
|
|
|
|
318
|
|
|
|
983
|
|
Net gain from investing activitiesasset sales (S)
|
|
|
(116
|
)
|
|
|
(164
|
)
|
|
|
(32
|
)
|
Net periodic pension benefit cost (N)
|
|
|
111
|
|
|
|
66
|
|
|
|
67
|
|
Stock-based compensation (M)
|
|
|
24
|
|
|
|
28
|
|
|
|
35
|
|
Other
|
|
|
32
|
|
|
|
(16
|
)
|
|
|
41
|
|
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency translation
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) Decrease in receivables
|
|
|
(118
|
)
|
|
|
(234
|
)
|
|
|
130
|
|
(Increase) Decrease in inventories
|
|
|
(238
|
)
|
|
|
1
|
|
|
|
212
|
|
Decrease (Increase) in prepaid expenses and other current assets
|
|
|
43
|
|
|
|
(52
|
)
|
|
|
58
|
|
Increase (Decrease) in accounts payable, trade
|
|
|
377
|
|
|
|
6
|
|
|
|
(156
|
)
|
(Decrease) in accrued expenses
|
|
|
(563
|
)
|
|
|
(320
|
)
|
|
|
(311
|
)
|
Increase (Decrease) in taxes, including income taxes
|
|
|
111
|
|
|
|
(148
|
)
|
|
|
(32
|
)
|
Pension contributions (N)
|
|
|
(106
|
)
|
|
|
(66
|
)
|
|
|
(69
|
)
|
(Increase) in noncurrent assets (R)
|
|
|
(99
|
)
|
|
|
(184
|
)
|
|
|
(356
|
)
|
(Decrease) Increase in noncurrent liabilities
|
|
|
(39
|
)
|
|
|
80
|
|
|
|
20
|
|
Cash provided from (used for) operations
|
|
|
1,224
|
|
|
|
(311
|
)
|
|
|
875
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from (to) former parent company
|
|
|
-
|
|
|
|
802
|
|
|
|
(34
|
)
|
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)
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
Payments on debt (original maturities greater than three months) (L)
|
|
|
(60
|
)
|
|
|
(34
|
)
|
|
|
(24
|
)
|
Proceeds from the exercise of employee stock options (M)
|
|
|
43
|
|
|
|
10
|
|
|
|
-
|
|
Contributions from noncontrolling interest (A)
|
|
|
80
|
|
|
|
48
|
|
|
|
2
|
|
Distributions to noncontrolling interest
|
|
|
(342
|
)
|
|
|
(233
|
)
|
|
|
(106
|
)
|
Other
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
Cash used for financing activities
|
|
|
(506
|
)
|
|
|
(483
|
)
|
|
|
(162
|
)
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(405
|
)
|
|
|
(404
|
)
|
|
|
(391
|
)
|
Proceeds from the sale of assets and businesses (C)
|
|
|
245
|
|
|
|
112
|
|
|
|
70
|
|
Additions to investments (H)
|
|
|
(66
|
)
|
|
|
(3
|
)
|
|
|
(63
|
)
|
Sales of investments (H)
|
|
|
-
|
|
|
|
146
|
|
|
|
-
|
|
Net change in restricted cash (L)
|
|
|
-
|
|
|
|
1,226
|
|
|
|
-
|
|
Cash (used for) provided from investing activities
|
|
|
(226
|
)
|
|
|
1,077
|
|
|
|
(384
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
13
|
|
|
|
13
|
|
|
|
(38
|
)
|
Net change in cash and cash equivalents
|
|
|
505
|
|
|
|
296
|
|
|
|
291
|
|
Cash and cash equivalents at beginning of year
|
|
|
853
|
|
|
|
557
|
|
|
|
266
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,358
|
|
|
$
|
853
|
|
|
$
|
557
|
|
The accompanying notes are an integral part of the consolidated financial statements.
94
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, 2014
|
|
$
|
11,915
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,316
|
)
|
|
$
|
2,474
|
|
|
$
|
13,073
|
|
Net (loss) income
|
|
|
(863
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124
|
|
|
|
(739
|
)
|
Other comprehensive loss (G)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(284
|
)
|
|
|
(421
|
)
|
|
|
(705
|
)
|
Change in Parent Company net investment
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
Contributions (A)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Distributions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(106
|
)
|
|
|
(106
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
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
|
|
The accompanying notes are an integral part of the consolidated financial statements.
95
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, Europe, 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 September 28, 2015, ParentCos Board of Directors preliminarily approved a plan to
separate ParentCo into two standalone, publicly-traded companies (the Separation Transaction). One company, later named Alcoa Corporation, was to include the Alumina and Primary Metals segments, which comprised the bauxite mining,
alumina refining, aluminum production, 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
ParentCos Global Rolled Products segment. ParentCo was to continue to own 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 ParentCos 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, ParentCos 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 one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as
of the close of business on the Record Date. ParentCo shareholders were to receive cash in lieu of fractional shares.
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, 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, certain
Patent,
Know-How,
Trade Secret License and Trademark License Agreements, and Stockholder and Registration Rights Agreement.
On November 1, 2016 (the Separation Date), the Separation Transaction was completed 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 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 Alcoa Corporation in
2017, including $243 associated
96
with the sale of certain of the Companys energy operations see Note C) with the net proceeds of a previous debt offering (see Note L). 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 (Arconic sold all of these
shares in 2017).
Regular-way
trading of Alcoa Corporations common stock began with the opening of the New York Stock Exchange on November 1, 2016 under the ticker symbol AA.
Alcoa Corporations common stock has a par value of $0.01 per share.
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 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) and require management to make certain judgments, estimates, and assumptions. These 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.
Principles of Consolidation.
The Consolidated Financial Statements of Alcoa Corporation 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 used for investments in affiliates and other joint ventures over which Alcoa Corporation 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 of Australia (Alumina Limited) and consists of several affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporations 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 the Portland smelter in Australia. 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), and Alcoa World Alumina Brasil Ltda. (AWAB). Alumina Limiteds interest in the equity
of such entities is reflected as Noncontrolling interest on the accompanying Consolidated Balance Sheet. In 2017, 2016, and 2015, AWAC received $80, $48, and $2, respectively, in contributions from Alumina Limited.
Management evaluates whether an Alcoa Corporation entity or interest is a variable interest entity and whether Alcoa Corporation 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, Alcoa Corporation did not operate as a separate, standalone entity. Alcoa Corporations operations were included in ParentCos financial results. Accordingly, for
all periods prior to the Separation Date, the accompanying Consolidated Financial Statements were prepared from ParentCos historical accounting records and were presented on a standalone basis as if Alcoa Corporations operations had been
conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporations businesses, as well as certain assets and liabilities that were historically
held at ParentCos corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation. ParentCos 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
97
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. These 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
Corporations segment revenue as a percentage of ParentCos total segment revenue for both Alcoa Corporation and Arconic.
All
external debt not directly attributable to Alcoa Corporation was excluded from Alcoa Corporations 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
|
|
|
2015
|
|
Cost of goods sold
(1)
|
|
$
|
40
|
|
|
$
|
93
|
|
Selling, general administrative, and other expenses
(2)
|
|
|
150
|
|
|
|
146
|
|
Research and development expenses
|
|
|
2
|
|
|
|
17
|
|
Provision for depreciation, depletion, and amortization
|
|
|
18
|
|
|
|
22
|
|
Restructuring and other charges
(3)
|
|
|
1
|
|
|
|
32
|
|
Interest expense
|
|
|
198
|
|
|
|
245
|
|
Other (income) expenses, net
|
|
$
|
(7
|
)
|
|
$
|
12
|
|
(1)
|
Allocation principally relates to expenses for ParentCos 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 Separation Transaction above).
|
(3)
|
Allocation primarily relates to layoff programs for ParentCo corporate employees.
|
Management believes the assumptions regarding the allocation of ParentCos 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 Corporations 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 on the 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 on the accompanying Statement of Consolidated Cash Flows as a financing activity and on Alcoa Corporations 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.
98
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 Companys Consolidated Balance Sheet. Transfers of cash, both to and from ParentCos centralized cash management system, were reflected as a component of Parent Company net investment on Alcoa
Corporations 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 Corporations 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 Corporations Consolidated Balance Sheet.
ParentCo participated in several accounts
payable settlement arrangements with certain vendors and third-party intermediaries. These arrangements provided that, at the vendors 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 Corporations accounts payable were settled, at the vendors request, before the scheduled payment date; these settlements were reflected as a component of Parent Company net investment on Alcoa Corporations
Consolidated Balance Sheet.
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
on the accompanying Consolidated Financial Statements. Sales to Arconic from Alcoa Corporation were $864, $958, and $1,078 in 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, outstanding receivables from Arconic were $84
and $67, respectively, and were included in Receivables from customers on the accompanying Consolidated Balance Sheet.
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.
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, which refer to the 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
99
closure. The following table details the weighted-average useful lives of structures and machinery and equipment by type of operation (numbers in years):
|
|
|
|
|
|
|
|
|
Segment
|
|
Structures
|
|
|
Machinery and equipment
|
|
Bauxite mining
|
|
|
35
|
|
|
|
17
|
|
Alumina refining
|
|
|
30
|
|
|
|
28
|
|
Aluminum smelting and casting
|
|
|
36
|
|
|
|
22
|
|
Energy generation
|
|
|
33
|
|
|
|
25
|
|
Aluminum rolling
|
|
|
31
|
|
|
|
17
|
|
Repairs and maintenance are charged to expense as incurred. Gains or losses from the sale of assets are generally
recorded in Other (income) expenses, 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 investees revenue, earnings, and cash flow trends; adverse market conditions of the investees industry or geographic area; the investees 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.
100
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, 2017, the carrying value of the goodwill for Bauxite and Alumina was $51 and $103, respectively. These
amounts include an allocation of goodwill held at the corporate level (see Note K). Prior to 2017, the Company had six reporting units equivalent to its then six operating segments as follows: Bauxite, Alumina, Aluminum, Cast Products, Energy, and
Rolled Products. In early 2017, management initiated a realignment of the Companys internal business and organizational structure resulting in a change to Alcoa Corporations operating segments and reporting units (see Note E). Of the
previous six reporting units, only Bauxite and Alumina contained goodwill.
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-step
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 Corporations 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 2017 annual review of goodwill, management performed the qualitative assessment for the Bauxite and Alumina reporting units. Management concluded it was not more likely than not that the
respective estimated fair value of these reporting units was less than the 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 units goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair
101
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 such excess would be recognized.
Management last proceeded directly to the
two-step
quantitative impairment test for the Alumina reporting unit in
2016 and will do so for the Bauxite reporting unit in 2018. In 2016, 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):
|
|
|
|
|
|
|
|
|
Segment
|
|
Software
|
|
|
Other intangible assets
|
|
Bauxite mining
|
|
|
9
|
|
|
|
10
|
|
Alumina refining
|
|
|
6
|
|
|
|
20
|
|
Aluminum smelting and casting
|
|
|
5
|
|
|
|
36
|
|
Energy generation
|
|
|
3
|
|
|
|
29
|
|
Aluminum rolling
|
|
|
4
|
|
|
|
20
|
|
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 Corporations 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.
102
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 managements judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.
Revenue Recognition.
Alcoa Corporation recognizes revenue when title, ownership, and risk of loss pass to the customer, all of which occurs upon
shipment or delivery of the product and is based on the applicable shipping terms. The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (truck, train, or vessel). Alcoa
Corporation periodically enters into long-term supply contracts with alumina and aluminum customers and receives advance payments for product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is
recognized as shipments are made and title, ownership, and risk of loss pass to the customer during the term of the contracts. Deferred revenue is included in Other current liabilities and Other noncurrent liabilities and deferred credits on the
accompanying Consolidated Balance Sheet.
Stock-Based Compensation.
For all periods prior to the Separation Date, employees
attributable to Alcoa Corporation operations participated in ParentCos 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 ParentCos corporate employees. Beginning on the Separation Date and forward, Alcoa Corporation recorded stock-based compensation expense for all of the Companys
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 awards, 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
103
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. ParentCos 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. 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 (income) expenses, 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) expenses, net.
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 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.
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 as 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 (loss) income and are
reclassified to Sales, Cost of goods sold, or Other (income) expenses, 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.
If no hedging relationship is designated, the derivative is
marked to market through Other (income) expenses, 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 Corporations 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 Corporations operations were included in the income tax filings of ParentCo. The provision for income taxes in Alcoa Corporations 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
104
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 Corporations 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 Corporations
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 Corporations operations is
made based on the appropriate economic and management indicators.
Recently Adopted Accounting Guidance.
On January 1, 2017, Alcoa
Corporation adopted changes issued by the Financial Accounting Standards Board (FASB) to the subsequent measurement of inventory. Prior to these changes, an entity was required to measure its inventory at the lower of cost or market, whereby market
can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other
two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes do not apply to inventories
measured using LIFO
(last-in,
first-out)
or the retail inventory method. Prior to these changes, Alcoa Corporation already applied the net realizable value market option
to measure
non-LIFO
inventories at the lower of cost or market. The adoption of these changes had no impact on the Consolidated Financial Statements.
On January 1, 2017, Alcoa Corporation adopted changes issued by the FASB to derivative instruments designated as hedging instruments. These changes clarify that a change in the counterparty to a
derivative instrument that has been designated as a hedging instrument does not, in and of itself, require
de-designation
of that hedging relationship provided that all other hedge accounting criteria continue
to be met. The adoption of these changes had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered in the event the existing counterparty to any of Alcoa Corporations derivative
instruments changes to a new counterparty.
105
On January 1, 2017, Alcoa Corporation adopted changes issued by the FASB to equity method investments.
These changes eliminate the requirement for an investor to adjust an equity method investment, results of operations, and retained earnings retroactively on a
step-by-step
basis as if the equity method had been in effect during all previous periods that the investment had been held as a result of an increase in the level of
ownership interest or degree of influence. Additionally, an entity that has an
available-for-sale
equity security that becomes qualified for the equity method of
accounting must recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The adoption of these changes had no immediate impact
on the Consolidated Financial Statements; however, this guidance will need to be considered in the event any of Alcoa Corporations investments undergo a change as previously described.
On January 1, 2017, Alcoa Corporation adopted changes issued by the FASB to employee share-based payment accounting. Prior to these changes, an entity must determine for each share-based payment
award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency. Excess tax benefits are recognized in additional
paid-in
capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits are not recognized until the deduction reduces taxes
payable. The changes require all excess tax benefits and tax deficiencies related to share-based payment awards to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be
treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Additionally, the presentation of excess tax
benefits related to share-based payment awards in the statement of cash flows is changed. Prior to these changes, excess tax benefits must be separated from other income tax cash flows and classified as a financing activity. The changes require
excess tax benefits to be classified along with other income tax cash flows as an operating activity. Also, the changes require cash paid by an employer when directly withholding shares for
tax-withholding
purposes to be classified as a financing activity. Prior to these changes, there was no specific guidance on the classification in the statement of cash flows of cash paid by an employer to the tax authorities when directly withholding shares for
tax-withholding
purposes. Additionally, for a share-based award to qualify for equity classification it cannot partially settle in cash in excess of the employers minimum statutory withholding requirements.
The changes permit equity classification of share-based awards for withholdings up to the maximum statutory tax rates in applicable jurisdictions. The adoption of these changes had an immaterial impact on the Consolidated Financial Statements.
On January 1, 2017, Alcoa Corporation adopted changes issued by the FASB to consolidation accounting. Prior to these changes, an
entity was required to consider indirect economic interests in a variable interest entity held through related parties under common control as direct interests in their entirety in the entitys assessment of whether it is the primary
beneficiary of the variable interest entity. The changes result in an entity considering such indirect economic interests only on a proportionate basis as indirect interests instead of as direct interests in their entirety. The adoption of these
changes had no impact on the Consolidated Financial Statements; however, this guidance will need to be considered in future assessments of whether Alcoa Corporation is the primary beneficiary of a variable interest entity.
Recently Issued Accounting Guidance.
In January 2017, the FASB issued changes to accounting for business combinations. These changes clarify 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. These changes provide 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. These changes also narrow the definition of an output. Currently, an output is 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 would now be defined as the ability to provide goods or services to customers, investment income, or other
106
revenues. These changes become effective for Alcoa Corporation on January 1, 2018. Management has determined that the adoption of these changes will not have an immediate impact on the
Consolidated Financial Statements. This guidance will need to be considered in the event Alcoa Corporation acquires or disposes of an integrated set of assets and activities.
In January 2017, the FASB issued changes to the assessment of goodwill for impairment as it relates to the quantitative test. Currently, there are two steps when performing a quantitative impairment test.
The first step requires an entity to compare the current fair value of a reporting unit to its carrying value. In the event the reporting units estimated fair value is less than its carrying value, an entity performs the second step, which is
to compare the carrying amount of the reporting units 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 exceeds its implied fair value, an
impairment loss equal to such excess would be recognized. These changes eliminate the second step of the quantitative impairment test. Accordingly, an entity would recognize an impairment of goodwill for a reporting unit, if under what is currently
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 units carrying value over its fair value not to exceed the total amount
of goodwill applicable to that reporting unit. These changes become effective for Alcoa Corporation on January 1, 2020. Management has determined that the adoption of these changes will not have an immediate impact on the Consolidated Financial
Statements. This guidance will need to be considered each time Alcoa Corporation performs an assessment of goodwill for impairment under the quantitative test.
In March 2017, the FASB issued changes to the presentation of net periodic benefit cost related to pension and other postretirement benefit plans. These changes require that an entity report the service
cost component of net periodic benefit cost in the same line item(s) on the statement of operations 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 presented 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 included in existing line items on the
statement of operations other than such line items that include the service cost component. Currently, Alcoa Corporation includes all components of net periodic benefit cost, except for certain settlements, curtailments, and special termination
benefits related to severance programs, 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 included in Restructuring and other charges, as applicable. Additionally, these changes only allow the service cost component to be
capitalized as applicable (e.g., as a cost of internally manufactured inventory). These changes become effective for Alcoa Corporation on January 1, 2018. Other than changing the presentation of
non-service
cost components of net periodic benefit cost on the statement of operations and providing additional disclosure, management has determined that the adoption of these changes will not have a
material impact on the Consolidated Financial Statements. Upon adoption of these changes, management intends to classify the
non-service
cost components of net periodic benefit cost, except for certain
settlements, curtailments, and special termination benefits related to severance programs that will continue to be reported in Restructuring and other charges, in Other (income) expenses, net on the Companys Statement of Consolidated
Operations. Had this change been adopted in 2017, Cost of goods sold and Selling, general administrative, and other expenses would be lower by $81 and $4, respectively, and Other income, net of $58 would change to Other expenses, net of $27 on the
accompanying Statement of Consolidated Operations.
In May 2017, the FASB issued changes to the accounting for stock-based compensation when
there has been a modification to the terms or conditions of a share-based payment award. These changes require 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. Currently, an
entity is required to account for any modification in the terms or conditions of a share-based payment award. These changes become effective for Alcoa Corporation on January 1, 2018. Management has determined that the adoption of
107
these changes will not have an immediate impact on the Consolidated Financial Statements. Additionally, the Company will no longer account for any future
non-substantive
change to the terms or conditions of a share-based payment award as a modification.
In August 2017, the FASB issued changes to the accounting for hedging activities. These changes permit hedge accounting for risk components in hedging
relationships involving nonfinancial risk and interest rate risk; reduce current limitations on the designation and measurement of a hedged item in a fair value hedge of interest rate risk; remove the requirement to separately measure and report
hedge ineffectiveness; provide 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 ease the requirements of effectiveness
testing. Additionally, modifications to existing disclosures, as well as additional disclosures, will be required to reflect these changes regarding the measurement and recording of hedging activities. These changes become effective for Alcoa
Corporation on January 1, 2019 (early adoption is permitted). Management is currently evaluating early adopting these changes and the potential impact of these changes on the Consolidated Financial Statements.
In January 2016, the FASB issued changes to the accounting and reporting of certain equity investments. These changes require 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. These changes become effective for Alcoa Corporation on
January 1, 2018. Management has determined that the adoption of these changes will not have an impact on the Consolidated Financial Statements, as all of Alcoa Corporations equity investments are accounted for under the equity method of
accounting.
In February 2016, the FASB issued changes to the accounting and presentation of leases. These changes require lessees to
recognize a right of use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. 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. These changes become effective for Alcoa Corporation on January 1, 2019. The Company has established a cross-functional project team to lead the
implementation effort. This team has determined that the Company requires information systems updates and incremental software to effectively implement these changes. Accordingly, the Company has selected a software vendor and is in the early stages
of implementing lease management software. Upon adoption of these changes, management does expect to record a right of use asset and lease liability on Alcoa Corporations Consolidated Balance Sheet. While the precise amount of this asset and
liability will not be known until closer to the adoption date, management estimates the amount to be less than 5% of both total assets and total liabilities. This estimate is based on Alcoa Corporations Consolidated Balance Sheet and lease
portfolio, both as of December 31, 2017.
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.
In both August and November 2016, the FASB issued changes to the presentation of a number of items in the statement of cash flows. Specifically, the
changes identify nine specific cash flow items and the sections where they must be
108
presented within the statement of cash flows, including distributions received from equity method investees, proceeds from the settlement of insurance claims, and restricted cash. These changes
become effective for Alcoa Corporation on January 1, 2018. Management has determined that the adoption of these changes will not have a material impact on the Consolidated Financial Statements.
In October 2016, the FASB issued changes to the accounting for intra-entity transactions, other than inventory. Currently, no immediate tax impact is
recognized in an entitys financial statements as a result of intra-entity transfers of assets. An entity is 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 has been sold to a third party or otherwise recovered. The buyer of such asset is prohibited from recognizing a deferred tax asset for the temporary difference arising
from the excess of the buyers tax basis over the cost to the seller. The changes require the current and deferred income tax consequences of the intra-entity transfer to be recorded when the transaction occurs. The exception to defer the tax
consequences of inventory transactions is maintained. These changes become effective for Alcoa Corporation on January 1, 2018. Management has determined that the adoption of these changes will not have a material impact on the Consolidated Financial
Statements.
In May 2014, the FASB issued changes to the recognition of revenue from contracts with customers. These changes created a
comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede 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. In August 2015, the FASB deferred the effective date by one year, making these changes effective for Alcoa Corporation on January 1, 2018. Through a
previously established project team, the Company completed a detailed review of the terms and provisions of its customer contracts by
mid-2017.
The project team then evaluated these contracts under the new
guidance throughout the remainder of 2017 and concluded that Alcoa Corporations revenue recognition practices are in compliance with these changes. Alcoa Corporation recognizes revenue when title, ownership, and risk of loss pass to the
customer, all of which occurs upon shipment or delivery of the product and is based on the applicable shipping terms. Additionally, the sale of Alcoa Corporations products to its customers represent single performance obligations. 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. As a result, management has determined that the adoption of these changes will not have a material impact on the Consolidated Financial Statements.
C. Acquisitions and Divestitures
In February 2017, Alcoa Corporations 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 income, 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 accompanying 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,
109
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.
In December 2014, Alcoa Corporations majority-owned subsidiary (60%), Alcoa Minerals of Jamaica, LLC (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. Also 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. Combined, these transactions yielded net cash proceeds of $185 and resulted in a net loss of $240, which was recorded in Restructuring and other charges on the 2014 Statement of Consolidated Operations. In 2015,
Alcoa Corporation had post-closing adjustments, as provided for in the respective purchase agreements, related to these two divestitures. The combined post-closing adjustments resulted in net cash received of $41 and a net loss of $24, which was
recorded in Restructuring and other charges (see Note D) on the accompanying Statement of Consolidated Operations. These two divestitures are no longer subject to post-closing adjustments.
D. Restructuring and Other Charges
Restructuring and other charges for each year in the
three-year period ended December 31, 2017 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Early termination of a power contract
|
|
$
|
244
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Asset impairments
|
|
|
40
|
|
|
|
155
|
|
|
|
311
|
|
Layoff costs
|
|
|
23
|
|
|
|
32
|
|
|
|
199
|
|
Legal matters in Italy (R)
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
201
|
|
Asset retirement obligations (Q)
|
|
|
10
|
|
|
|
97
|
|
|
|
76
|
|
Environmental remediation (R)
|
|
|
8
|
|
|
|
26
|
|
|
|
86
|
|
Net (gain) loss on divestitures of businesses (C)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
25
|
|
Other
|
|
|
49
|
|
|
|
47
|
|
|
|
92
|
|
Reversals of previously recorded layoff and other costs
|
|
|
(43
|
)
|
|
|
(36
|
)
|
|
|
(7
|
)
|
Restructuring and other charges
|
|
$
|
309
|
|
|
$
|
318
|
|
|
$
|
983
|
|
*
|
In 2016 and 2015, Other includes $1 and $32, respectively, related to the allocation of restructuring charges to Alcoa Corporation from ParentCo (see Note A).
|
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.
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 (Washington) 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 reversal of $22 to reduce a reserve previously established at the end of 2015 related to a legal
matter in Italy (see Litigation in Note R); a net charge of $18 for other miscellaneous items, including the relocation of the Companys headquarters and principal executive office from New York, New York to Pittsburgh, Pennsylvania; and a
reversal of $43 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 Companys 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).
110
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), 2016, and 2015, Alcoa Corporation recognized $105, $141, and $147, respectively, in Sales and $148, $210, and $201, 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 will begin 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 (161,400 metric tons of capacity) of the five potlines (268,800 metric tons of capacity)
at the Warrick (Indiana) smelter, which is expected to be complete in the second quarter of 2018. 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, 2017, approximately 90 of the 140 employees were separated. The
remaining separations for 2017 restructuring programs are expected to be completed by the end of 2018. In 2017, cash payments of $9 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 the Wenatchee
smelter and Point Comfort (Texas) refinery (see 2015 Actions below); $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); a net charge of $8 for other miscellaneous items; and a reversal of $12 associated with a number
of small layoff reserves related to prior periods.
111
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). Management of ParentCo decided to curtail the remaining
operating capacity of the Suralco refinery during 2015 in an effort to improve the position of ParentCos 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 2021. 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 that was initially entered into in 2007 as a potential source of
low-cost
gas to supply AofAs 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.
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 (see Litigation and European Commission Matter in Note R); a $24 net loss primarily related to post-closing adjustments associated with two December
2014 divestitures (see Note C); $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 Note A).
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);
112
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), 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 (see 2017 Actions above).
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
managements 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.
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 Aluminum segment and 1,300 in the
Alumina segment), including $30 in pension costs (see Note N); 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 Cost of goods sold on the accompanying Statement of Combined Operations. 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 June 30, 2017, the separations associated with 2015 restructuring programs were essentially complete. In 2017, 2016, and 2015, cash payments
of $18, $65, and $26, respectively, were made against layoff reserves related to 2015 restructuring programs.
113
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Bauxite
|
|
$
|
2
|
|
|
$
|
(5
|
)
|
|
$
|
8
|
|
Alumina
|
|
|
3
|
|
|
|
72
|
|
|
|
102
|
|
Aluminum
|
|
|
51
|
|
|
|
75
|
|
|
|
100
|
|
Segment total
|
|
|
56
|
|
|
|
142
|
|
|
|
210
|
|
Corporate
|
|
|
253
|
|
|
|
176
|
|
|
|
773
|
|
Total restructuring and other charges
|
|
$
|
309
|
|
|
$
|
318
|
|
|
$
|
983
|
|
Activity and reserve balances for restructuring charges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Layoff
costs
|
|
|
Other
costs
|
|
|
Total
|
|
Reserve balances at December 31, 2014
|
|
$
|
50
|
|
|
$
|
13
|
|
|
$
|
63
|
|
2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(65
|
)
|
|
|
(1
|
)
|
|
|
(66
|
)
|
Restructuring charges
|
|
|
199
|
|
|
|
222
|
|
|
|
421
|
|
Other*
|
|
|
(47
|
)
|
|
|
(219
|
)
|
|
|
(266
|
)
|
Reserve balances at December 31, 2015
|
|
|
137
|
|
|
|
15
|
|
|
|
152
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(74
|
)
|
|
|
(35
|
)
|
|
|
(109
|
)
|
Restructuring charges
|
|
|
32
|
|
|
|
168
|
|
|
|
200
|
|
Other*
|
|
|
(57
|
)
|
|
|
(120
|
)
|
|
|
(177
|
)
|
Reserve balances at December 31, 2016
|
|
|
38
|
|
|
|
28
|
|
|
|
66
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(30
|
)
|
|
|
(43
|
)
|
|
|
(73
|
)
|
Restructuring charges
|
|
|
23
|
|
|
|
67
|
|
|
|
90
|
|
Other*
|
|
|
(20
|
)
|
|
|
(18
|
)
|
|
|
(38
|
)
|
Reserve balances at December 31, 2017
|
|
$
|
11
|
|
|
$
|
34
|
|
|
$
|
45
|
|
*
|
Other includes reversals of previously recorded restructuring charges and the effects of foreign currency translation. In 2017, 2016, and 2015, Other for Layoff costs
also included a reclassification of $8, $16, and $35, respectively, in pension and/or other postretirement benefits costs, as these obligations were included in Alcoa Corporations separate liability for pension and other postretirement
benefits obligations (see Note N). Additionally in 2017, 2016, and 2015, Other for Other costs also included a reclassification of the following restructuring charges: $10, $97, and $76, respectively, in asset retirement and $8, $26, and $86,
respectively, in environmental obligations, as these liabilities were included in Alcoa Corporations separate reserves for asset retirement obligations (see Note Q) and environmental remediation (see Note R).
|
The remaining reserves are expected to be paid in cash during 2018, with the exception of $4, which relates to the termination of an office lease
contract and is expected to be paid by no later than the end of 2020.
E. Segment and Geographic Area
Information
Segment Information
Alcoa Corporation is a producer of bauxite, alumina, and aluminum products (primary and flat-rolled). Segment performance under the Companys 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
114
amortization) (see below) of each segment. 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 Corporations consolidated totals for line items not reconciled are in Corporate.
Effective in the first quarter of
2017, management elected to change the profit and loss measure of Alcoa Corporations reportable segments from
After-tax
operating income (ATOI) to Adjusted EBITDA for internal reporting and performance
measurement purposes. This change was made to enhance the transparency and visibility of the underlying operating performance of each segment. Alcoa Corporation 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. Previously, Alcoa Corporation calculated segment ATOI as segment Adjusted EBITDA minus (plus) the following items:
Provision for depreciation, depletion, and amortization; Equity loss (income); Loss (gain) on certain asset sales; and Income taxes. Alcoa Corporations Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Also effective in the first quarter of 2017, management initiated a realignment of the Companys internal business and organizational
structure. This realignment consisted of combining Alcoa Corporations aluminum smelting, casting, and rolling businesses, along with the majority of the energy business, into a new Aluminum business unit, as well as moving the financial
results of previously closed operations, such as the Warrick smelter and Suriname refinery, into Corporate. The realignment was executed to align strategic, operational, and commercial activities, as well as to take advantage of synergies and reduce
costs. The new Aluminum business unit is managed as a single operating segment. Prior to this change, each of these businesses were managed as individual operating segments and comprised the Aluminum, Cast Products, Energy, and Rolled Products
segments. The existing Bauxite and Alumina segments and the new Aluminum segment represent Alcoa Corporations operating and reportable segments. 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 information for all prior
periods presented was revised to reflect the new segment structure, as well as the new measure of profit and loss.
The following are detailed
descriptions of Alcoa Corporations reportable segments:
Bauxite.
This segment represents the Companys global bauxite
mining operations. A portion of this segments production represents the offtake from certain equity method investments in Brazil, Guinea, and 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, 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 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 Companys 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 Aluminas 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 segments 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
115
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 AWACs 25.1% share of the
results of a mining and refining joint venture company in Saudi Arabia (see Note H).
Aluminum.
This segment consists of (i) the
Companys worldwide smelting and casthouse system, (ii) portfolio of energy assets in Brazil and the United States, and (iii) a rolling mill in the United States. This segments combined smelting and casting operations produce
primary aluminum products, virtually all of which is sold to external customers and traders; a small 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, including 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. The energy assets supply power to external customers in
Brazil and to this segments rolling mill in the United States. 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,
Alcoa Corporation has a tolling arrangement with Arconic whereby Arconics rolling mill in Tennessee produces can sheet products for certain customers of the Companys rolling operations. 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. 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. Generally, this segments sales of aluminum 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, Icelandic krona, the Canadian dollar, the Brazilian
real, and the Australian dollar. This segment also includes Alcoa Corporations 25.1% share of the results of both a smelting and rolling mill joint venture company in Saudi Arabia (see Note H).
116
The operating results, capital expenditures, and assets of Alcoa Corporations reportable segments were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bauxite
|
|
|
Alumina
|
|
|
Aluminum
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party salesunrelated party
|
|
$
|
333
|
|
|
$
|
3,133
|
|
|
$
|
7,163
|
|
|
$
|
10,629
|
|
Third-party salesrelated party
|
|
|
-
|
|
|
|
-
|
|
|
|
864
|
|
|
|
864
|
|
Intersegment sales
|
|
|
875
|
|
|
|
1,723
|
|
|
|
21
|
|
|
|
2,619
|
|
Total sales
|
|
$
|
1,208
|
|
|
$
|
4,856
|
|
|
$
|
8,048
|
|
|
$
|
14,112
|
|
Adjusted EBITDA
|
|
$
|
427
|
|
|
$
|
1,289
|
|
|
$
|
964
|
|
|
$
|
2,680
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
82
|
|
|
$
|
207
|
|
|
$
|
419
|
|
|
$
|
708
|
|
Equity loss
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(19
|
)
|
|
|
(24
|
)
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party salesunrelated party
|
|
$
|
315
|
|
|
$
|
2,300
|
|
|
$
|
5,573
|
|
|
$
|
8,188
|
|
Third-party salesrelated party
|
|
|
-
|
|
|
|
-
|
|
|
|
958
|
|
|
|
958
|
|
Intersegment sales
|
|
|
751
|
|
|
|
1,307
|
|
|
|
42
|
|
|
|
2,100
|
|
Total sales
|
|
$
|
1,066
|
|
|
$
|
3,607
|
|
|
$
|
6,573
|
|
|
$
|
11,246
|
|
Adjusted EBITDA
|
|
$
|
375
|
|
|
$
|
378
|
|
|
$
|
680
|
|
|
$
|
1,433
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
77
|
|
|
$
|
186
|
|
|
$
|
414
|
|
|
$
|
677
|
|
Equity loss
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
(24
|
)
|
|
|
(64
|
)
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party salesunrelated party
|
|
$
|
71
|
|
|
$
|
3,341
|
|
|
$
|
6,479
|
|
|
$
|
9,891
|
|
Third-party salesrelated party
|
|
|
-
|
|
|
|
-
|
|
|
|
1,078
|
|
|
|
1,078
|
|
Intersegment sales
|
|
|
1,076
|
|
|
|
1,727
|
|
|
|
175
|
|
|
|
2,978
|
|
Total sales
|
|
$
|
1,147
|
|
|
$
|
5,068
|
|
|
$
|
7,732
|
|
|
$
|
13,947
|
|
Adjusted EBITDA
|
|
$
|
454
|
|
|
$
|
958
|
|
|
$
|
767
|
|
|
$
|
2,179
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
93
|
|
|
$
|
192
|
|
|
$
|
424
|
|
|
$
|
709
|
|
Equity loss
|
|
|
-
|
|
|
|
(41
|
)
|
|
|
(44
|
)
|
|
|
(85
|
)
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
53
|
|
|
$
|
144
|
|
|
$
|
178
|
|
|
$
|
375
|
|
Equity investments
|
|
|
191
|
|
|
|
262
|
|
|
|
930
|
|
|
|
1,383
|
|
Total assets
|
|
|
1,609
|
|
|
|
5,129
|
|
|
|
8,060
|
|
|
|
14,798
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
29
|
|
|
$
|
109
|
|
|
$
|
256
|
|
|
$
|
394
|
|
Equity investments
|
|
|
163
|
|
|
|
342
|
|
|
|
859
|
|
|
|
1,364
|
|
Total assets
|
|
|
1,541
|
|
|
|
4,791
|
|
|
|
7,658
|
|
|
|
13,990
|
|
117
The following tables reconcile certain segment information to consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment sales
|
|
$
|
14,112
|
|
|
$
|
11,246
|
|
|
$
|
13,947
|
|
Elimination of intersegment sales
|
|
|
(2,619
|
)
|
|
|
(2,100
|
)
|
|
|
(2,978
|
)
|
Other
|
|
|
159
|
|
|
|
172
|
|
|
|
230
|
|
Consolidated sales
|
|
$
|
11,652
|
|
|
$
|
9,318
|
|
|
$
|
11,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income (loss) attributable to Alcoa Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment Adjusted EBITDA
|
|
$
|
2,680
|
|
|
$
|
1,433
|
|
|
$
|
2,179
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of LIFO (I)
|
|
|
(91
|
)
|
|
|
(10
|
)
|
|
|
107
|
|
Metal price lag
(1)
|
|
|
26
|
|
|
|
9
|
|
|
|
(30
|
)
|
Corporate expense
(2)
|
|
|
(136
|
)
|
|
|
(177
|
)
|
|
|
(173
|
)
|
Provision for depreciation, depletion, and amortization
|
|
|
(750
|
)
|
|
|
(718
|
)
|
|
|
(780
|
)
|
Restructuring and other charges (D)
|
|
|
(309
|
)
|
|
|
(318
|
)
|
|
|
(983
|
)
|
Interest expense (S)
|
|
|
(104
|
)
|
|
|
(243
|
)
|
|
|
(270
|
)
|
Other income (expenses), net (S)
|
|
|
58
|
|
|
|
89
|
|
|
|
(42
|
)
|
Other
(3)
|
|
|
(215
|
)
|
|
|
(227
|
)
|
|
|
(345
|
)
|
Consolidated income (loss) before income taxes
|
|
|
1,159
|
|
|
|
(162
|
)
|
|
|
(337
|
)
|
Provision for income taxes (P)
|
|
|
(600
|
)
|
|
|
(184
|
)
|
|
|
(402
|
)
|
Net income attributable to noncontrolling interest
|
|
|
(342
|
)
|
|
|
(54
|
)
|
|
|
(124
|
)
|
Consolidated net income (loss) attributable to Alcoa Corporation
|
|
$
|
217
|
|
|
$
|
(400
|
)
|
|
$
|
(863
|
)
|
(1)
|
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 Corporations rolled aluminum operations. 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.
|
(2)
|
Corporate expense is primarily composed of general administrative and other expenses of operating the corporate headquarters and other global
administrative facilities.
|
(3)
|
Other includes, among other items, the Adjusted EBITDA of previously closed operations as applicable, pension and other postretirement benefit expenses
associated with closed and sold operations, and intersegment profit elimination.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
14,798
|
|
|
$
|
13,990
|
|
Elimination of intersegment receivables
|
|
|
(299
|
)
|
|
|
(236
|
)
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,358
|
|
|
|
853
|
|
LIFO reserve
|
|
|
(306
|
)
|
|
|
(215
|
)
|
Corporate fixed assets, net
|
|
|
520
|
|
|
|
595
|
|
Corporate goodwill
|
|
|
148
|
|
|
|
149
|
|
Deferred income taxes
|
|
|
814
|
|
|
|
741
|
|
Fair value of derivative contracts
|
|
|
34
|
|
|
|
497
|
|
Other
|
|
|
380
|
|
|
|
367
|
|
Consolidated assets
|
|
$
|
17,447
|
|
|
$
|
16,741
|
|
118
Sales by major product grouping were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary aluminum
|
|
$
|
6,168
|
|
|
$
|
5,204
|
|
|
$
|
6,214
|
|
Alumina
|
|
|
3,121
|
|
|
|
2,280
|
|
|
|
3,325
|
|
Flat-rolled aluminum
|
|
|
1,666
|
|
|
|
1,068
|
|
|
|
989
|
|
Energy
|
|
|
446
|
|
|
|
422
|
|
|
|
588
|
|
Bauxite
|
|
|
333
|
|
|
|
315
|
|
|
|
71
|
|
Other*
|
|
|
(82
|
)
|
|
|
29
|
|
|
|
12
|
|
|
|
$
|
11,652
|
|
|
$
|
9,318
|
|
|
$
|
11,199
|
|
*
|
Other includes realized gains and losses related to embedded derivative instruments designated as cash flow hedges of forward sales of aluminum (see Note O).
|
Geographic Area Information
Geographic information for sales was as follows (based upon the country where the point of sale originated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
(1)
|
|
$
|
5,370
|
|
|
$
|
4,365
|
|
|
$
|
5,386
|
|
Spain
(2)
|
|
|
3,303
|
|
|
|
2,663
|
|
|
|
2,852
|
|
Australia
|
|
|
2,266
|
|
|
|
1,644
|
|
|
|
2,147
|
|
Brazil
|
|
|
569
|
|
|
|
432
|
|
|
|
562
|
|
Canada
|
|
|
93
|
|
|
|
141
|
|
|
|
132
|
|
Other
|
|
|
51
|
|
|
|
73
|
|
|
|
120
|
|
|
|
$11,652
|
|
|
$9,318
|
|
|
$11,199
|
|
(1)
|
Sales of a portion of the alumina from refineries in Australia, Brazil, and Suriname (prior to closure in December 2016) and most of the aluminum from
smelters in Canada occurred in the United States.
|
(2)
|
Sales of the aluminum produced from smelters in Iceland and Norway, as well as the
off-take
related to an
interest in the Saudi Arabia joint venture (see Note H), occurred in Spain.
|
Geographic information for long-lived assets
was as follows (based upon the physical location of the assets):
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
Australia
|
|
$
|
2,220
|
|
|
$
|
2,053
|
|
Brazil
|
|
|
2,111
|
|
|
|
2,228
|
|
United States
|
|
|
1,658
|
|
|
|
1,816
|
|
Iceland
|
|
|
1,276
|
|
|
|
1,341
|
|
Canada
|
|
|
1,116
|
|
|
|
1,161
|
|
Norway
|
|
|
427
|
|
|
|
438
|
|
Spain
|
|
|
316
|
|
|
|
273
|
|
Other
|
|
|
14
|
|
|
|
15
|
|
|
|
$9,138
|
|
|
$9,325
|
|
F. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings by the average number of common shares outstanding. Diluted EPS amounts assume
the issuance of common stock for all potentially dilutive share equivalents outstanding.
119
The information used to compute basic and diluted EPS attributable to Alcoa Corporation common shareholders
was as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income (loss) attributable to Alcoa Corporation
|
|
$
|
217
|
|
|
$
|
(400
|
)
|
|
$
|
(863
|
)
|
Average shares outstandingbasic
|
|
|
184
|
|
|
|
183
|
|
|
|
182
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Stock and performance awards
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Average shares outstandingdiluted
|
|
|
187
|
|
|
|
183
|
|
|
|
182
|
|
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 Corporations common stock. Additionally, 1 million stock awards 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 awards and stock options combined would have been included in diluted
average shares outstanding.
In 2015, the EPS included on the accompanying Statement of Consolidated Operations was calculated based on the
182,471,195 shares of Alcoa Corporation common stock distributed on the Separation Date in conjunction with the completion of the Separation Transaction and is considered pro forma in nature. Prior to November 1, 2016, Alcoa Corporation did not
have any issued and outstanding publicly-traded common stock.
120
G. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss for both Alcoa Corporations shareholders and noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling interest
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Pension and other postretirement benefits (N)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,330
|
)
|
|
$
|
(352
|
)
|
|
$
|
(424
|
)
|
|
$
|
(56
|
)
|
|
$
|
(56
|
)
|
|
$
|
(64
|
)
|
Establishment of additional defined benefit plans
|
|
|
-
|
|
|
|
(2,704
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Separation-related adjustments (A)
|
|
|
-
|
|
|
|
928
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service cost/benefit
|
|
|
(671
|
)
|
|
|
(307
|
)
|
|
|
73
|
|
|
|
9
|
|
|
|
2
|
|
|
|
5
|
|
Tax benefit (expense)
|
|
|
25
|
|
|
|
6
|
|
|
|
(18
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
Total Other comprehensive (loss) income before reclassifications, net of
tax
|
|
|
(646
|
)
|
|
|
(301
|
)
|
|
|
55
|
|
|
|
7
|
|
|
|
(4
|
)
|
|
|
4
|
|
Amortization of net actuarial loss and prior service
cost/benefit
(1)
|
|
|
199
|
|
|
|
107
|
|
|
|
26
|
|
|
|
2
|
|
|
|
5
|
|
|
|
6
|
|
Tax expense
(2)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(7)
|
|
|
190
|
|
|
|
99
|
|
|
|
17
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
Total Other comprehensive (loss) income
|
|
|
(456
|
)
|
|
|
(202
|
)
|
|
|
72
|
|
|
|
9
|
|
|
|
-
|
|
|
|
8
|
|
Balance at end of period
|
|
$
|
(2,786
|
)
|
|
$
|
(2,330
|
)
|
|
$
|
(352
|
)
|
|
$
|
(47
|
)
|
|
$
|
(56
|
)
|
|
$
|
(56
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,655
|
)
|
|
$
|
(1,851
|
)
|
|
$
|
(668
|
)
|
|
$
|
(677
|
)
|
|
$
|
(779
|
)
|
|
$
|
(351
|
)
|
Separation-related adjustments (A)
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income
(loss)
(3)
|
|
|
188
|
|
|
|
213
|
|
|
|
(1,183
|
)
|
|
|
96
|
|
|
|
102
|
|
|
|
(428
|
)
|
Balance at end of period
|
|
$
|
(1,467
|
)
|
|
$
|
(1,655
|
)
|
|
$
|
(1,851
|
)
|
|
$
|
(581
|
)
|
|
$
|
(677
|
)
|
|
$
|
(779
|
)
|
Cash flow hedges (O)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
210
|
|
|
$
|
603
|
|
|
$
|
(224
|
)
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
Separation-related adjustments (A)
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
|
(1,489
|
)
|
|
|
(558
|
)
|
|
|
1,155
|
|
|
|
83
|
|
|
|
38
|
|
|
|
(1
|
)
|
Tax benefit (expense)
|
|
|
251
|
|
|
|
233
|
|
|
|
(344
|
)
|
|
|
(25
|
)
|
|
|
(12
|
)
|
|
|
-
|
|
Total Other comprehensive (loss) income before reclassifications, net of
tax
|
|
|
(1,238
|
)
|
|
|
(325
|
)
|
|
|
811
|
|
|
|
58
|
|
|
|
26
|
|
|
|
(1
|
)
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts
(4)
|
|
|
130
|
|
|
|
7
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Financial contract
(5)
|
|
|
(19
|
)
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(37
|
)
|
|
|
-
|
|
Foreign exchange contracts
(4)
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest rate contract
(6)
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Sub-total
|
|
|
109
|
|
|
|
(40
|
)
|
|
|
21
|
|
|
|
(12
|
)
|
|
|
(32
|
)
|
|
|
-
|
|
Tax (expense) benefit
(2)
|
|
|
(10
|
)
|
|
|
19
|
|
|
|
(5
|
)
|
|
|
4
|
|
|
|
10
|
|
|
|
-
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(7)
|
|
|
99
|
|
|
|
(21
|
)
|
|
|
16
|
|
|
|
(8
|
)
|
|
|
(22
|
)
|
|
|
-
|
|
Total Other comprehensive (loss) income
|
|
|
(1,139
|
)
|
|
|
(346
|
)
|
|
|
827
|
|
|
|
50
|
|
|
|
4
|
|
|
|
(1
|
)
|
Balance at end of period
|
|
$
|
(929
|
)
|
|
$
|
210
|
|
|
$
|
603
|
|
|
$
|
51
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
121
(1)
|
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note N).
|
(2)
|
These amounts were included in Provision for income taxes on the accompanying Statement of Consolidated Operations.
|
(3)
|
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
|
(4)
|
These amounts were included in Sales on the accompanying Statement of Consolidated Operations.
|
(5)
|
The 2017 amounts were included in Cost of goods sold on the accompanying Statement of Consolidated Operations. The 2016 and 2015 amounts were included
in Other (income) expenses, net on the accompanying Statement of Consolidated Operations.
|
(6)
|
These amounts were included in Other (income) expenses, net on the accompanying Statement of Consolidated Operations.
|
(7)
|
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. These amounts were
reflected on the accompanying Statement of Consolidated Operations in the line items indicated in footnotes 1 through 6.
|
H. Investments
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Equity investments
|
|
$
|
1,400
|
|
|
$
|
1,348
|
|
Other investments
|
|
|
10
|
|
|
|
10
|
|
|
|
$1,410
|
|
|
$1,358
|
|
Equity Investments.
The following table
summarizes information of the equity investments as of December 31, 2017 and 2016 (AofA sold its interest in the Dampier to Bunbury Natural Gas Pipeline (DBNGP) Trust in April 2016 (see DBNGP Trust below)):
|
|
|
|
|
|
|
|
|
Investee
|
|
Country
|
|
Nature of investment
(4)
|
|
Ownership
interest
|
|
Maaden Aluminum Company
(1)
|
|
Saudi Arabia
|
|
Aluminum smelter
|
|
|
25.1
|
%
|
Maaden Bauxite and Alumina Company
(1)
|
|
Saudi Arabia
|
|
Bauxite mine and alumina refinery
|
|
|
25.1
|
%
(5)
|
Maaden Rolling Company
(1)
|
|
Saudi Arabia
|
|
Aluminum rolling mill
|
|
|
25.1
|
%
|
Halco Mining, Inc.
(2)
|
|
Guinea
|
|
Bauxite mine
|
|
|
45
|
%
(5)
|
Energetica Barra Grande S.A.
|
|
Brazil
|
|
Hydroelectric generation facility
|
|
|
42.18
|
%
|
Pechiney Reynolds Quebec, Inc.
(3)
|
|
Canada
|
|
Aluminum smelter
|
|
|
50
|
%
|
Consorcio Serra do Facão
|
|
Brazil
|
|
Hydroelectric generation facility
|
|
|
34.97
|
%
|
Mineração Rio do Norte S.A.
|
|
Brazil
|
|
Bauxite mine
|
|
|
18.2
|
%
(5)
|
Manicouagan Power Limited Partnership
|
|
Canada
|
|
Hydroelectric generation facility
|
|
|
40
|
%
|
(1)
|
See Saudi Arabia Joint Venture below for additional information.
|
(2)
|
Halco Mining, Inc. owns 100% of Boké Investment Company, which owns 51% of Compagnie des Bauxites de Guinée.
|
(3)
|
Pechiney Reynolds Quebec, Inc. owns a 50.1% interest in the Bécancour smelter in Quebec, Canada thereby entitling Alcoa Corporation to a 25.05%
interest in the smelter. Through two wholly-owned Canadian subsidiaries, Alcoa Corporation also owns 49.9% of the Bécancour smelter.
|
(4)
|
Each of the investees either owns the facility listed or has an ownership interest in an entity that owns the facility listed.
|
(5)
|
A portion or all of each of these ownership interests are held by majority-owned subsidiaries that are part of AWAC.
|
122
In 2017, 2016, and 2015, Alcoa Corporation received $71, $74, and $152, respectively, in dividends from
these equity investments. Financial information for these equity investments is as follows (amounts represent 100% of the investees financial information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saudi
Arabia
Joint
Venture
(1)
|
|
|
Halco
Mining,
Inc.
|
|
|
Energetica
Barra
Grande
S.A.
|
|
|
Pechiney
Reynolds
Quebec,
Inc.
|
|
|
Consorcio
Serra do
Facão
|
|
|
Mineração
Rio do
Norte S.A.
|
|
|
Manicouagan
Power L.P.
|
|
|
DBNGP
Trust
(2)
|
|
|
Total
|
|
Profit and loss datayear ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,032
|
|
|
$
|
416
|
|
|
$
|
131
|
|
|
$
|
332
|
|
|
$
|
103
|
|
|
$
|
350
|
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
4,469
|
|
Cost of goods sold
|
|
|
2,776
|
|
|
|
266
|
|
|
|
117
|
|
|
|
292
|
|
|
|
48
|
|
|
|
273
|
|
|
|
9
|
|
|
|
-
|
|
|
|
3,781
|
|
(Loss) Income before income taxes
|
|
|
(142
|
)
|
|
|
50
|
|
|
|
13
|
|
|
|
35
|
|
|
|
45
|
|
|
|
35
|
|
|
|
96
|
|
|
|
-
|
|
|
|
132
|
|
Net (loss) income
|
|
|
(157
|
)
|
|
|
47
|
|
|
|
5
|
|
|
|
23
|
|
|
|
46
|
|
|
|
30
|
|
|
|
88
|
|
|
|
-
|
|
|
|
82
|
|
Equity in net (loss) income of affiliated companies, before reconciling adjustments
|
|
|
(39
|
)
|
|
|
21
|
|
|
|
2
|
|
|
|
11
|
|
|
|
16
|
|
|
|
6
|
|
|
|
35
|
|
|
|
-
|
|
|
|
52
|
|
Other
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
10
|
|
Alcoa Corporations equity in net (loss) income of affiliated companies
|
|
|
(30
|
)
|
|
|
20
|
|
|
|
2
|
|
|
|
11
|
|
|
|
16
|
|
|
|
6
|
|
|
|
37
|
|
|
|
-
|
|
|
|
62
|
|
Profit and loss datayear ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,970
|
|
|
$
|
437
|
|
|
$
|
60
|
|
|
$
|
309
|
|
|
$
|
90
|
|
|
$
|
451
|
|
|
$
|
104
|
|
|
$
|
86
|
|
|
$
|
3,507
|
|
Cost of goods sold
|
|
|
1,905
|
|
|
|
242
|
|
|
|
35
|
|
|
|
272
|
|
|
|
65
|
|
|
|
297
|
|
|
|
10
|
|
|
|
18
|
|
|
|
2,844
|
|
(Loss) Income before income taxes
|
|
|
(295
|
)
|
|
|
53
|
|
|
|
16
|
|
|
|
36
|
|
|
|
8
|
|
|
|
152
|
|
|
|
94
|
|
|
|
21
|
|
|
|
85
|
|
Net (loss) income
|
|
|
(295
|
)
|
|
|
50
|
|
|
|
15
|
|
|
|
16
|
|
|
|
5
|
|
|
|
129
|
|
|
|
87
|
|
|
|
14
|
|
|
|
21
|
|
Equity in net (loss) income of affiliated companies, before reconciling adjustments
|
|
|
(75
|
)
|
|
|
23
|
|
|
|
6
|
|
|
|
8
|
|
|
|
2
|
|
|
|
23
|
|
|
|
35
|
|
|
|
3
|
|
|
|
25
|
|
Other
|
|
|
7
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Alcoa Corporations equity in net (loss) income of affiliated companies
|
|
|
(68
|
)
|
|
|
25
|
|
|
|
5
|
|
|
|
4
|
|
|
|
2
|
|
|
|
22
|
|
|
|
35
|
|
|
|
3
|
|
|
|
28
|
|
Profit and loss datayear ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,025
|
|
|
$
|
487
|
|
|
$
|
130
|
|
|
$
|
486
|
|
|
$
|
84
|
|
|
$
|
498
|
|
|
$
|
106
|
|
|
$
|
303
|
|
|
$
|
4,119
|
|
Cost of goods sold
|
|
|
2,070
|
|
|
|
236
|
|
|
|
98
|
|
|
|
288
|
|
|
|
76
|
|
|
|
308
|
|
|
|
16
|
|
|
|
117
|
|
|
|
3,209
|
|
(Loss) Income before income taxes
|
|
|
(362
|
)
|
|
|
86
|
|
|
|
27
|
|
|
|
113
|
|
|
|
6
|
|
|
|
118
|
|
|
|
91
|
|
|
|
46
|
|
|
|
125
|
|
Net (loss) income
|
|
|
(366
|
)
|
|
|
80
|
|
|
|
7
|
|
|
|
104
|
|
|
|
(1
|
)
|
|
|
98
|
|
|
|
90
|
|
|
|
31
|
|
|
|
43
|
|
Equity in net (loss) income of affiliated companies, before reconciling adjustments
|
|
|
(91
|
)
|
|
|
36
|
|
|
|
3
|
|
|
|
52
|
|
|
|
-
|
|
|
|
18
|
|
|
|
36
|
|
|
|
6
|
|
|
|
60
|
|
Other
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(7
|
)
|
Alcoa Corporations equity in net (loss) income of affiliated companies
|
|
|
(93
|
)
|
|
|
34
|
|
|
|
2
|
|
|
|
56
|
|
|
|
(2
|
)
|
|
|
15
|
|
|
|
36
|
|
|
|
5
|
|
|
|
53
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saudi
Arabia
Joint
Venture
(1)
|
|
|
Halco
Mining,
Inc.
|
|
|
Energetica
Barra
Grande
S.A.
|
|
|
Pechiney
Reynolds
Quebec,
Inc.
|
|
|
Consorcio
Serra do
Facão
|
|
|
Mineração
Rio do
Norte S.A.
|
|
|
Manicouagan
Power L.P.
|
|
|
DBNGP
Trust
(2)
|
|
|
Total
|
|
Balance sheet dataas of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,415
|
|
|
$
|
40
|
|
|
$
|
44
|
|
|
$
|
140
|
|
|
$
|
79
|
|
|
$
|
121
|
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
1,862
|
|
Noncurrent assets
|
|
|
9,373
|
|
|
|
174
|
|
|
|
285
|
|
|
|
106
|
|
|
|
261
|
|
|
|
744
|
|
|
|
72
|
|
|
|
-
|
|
|
|
11,015
|
|
Current liabilities
|
|
|
1,331
|
|
|
|
1
|
|
|
|
48
|
|
|
|
65
|
|
|
|
25
|
|
|
|
220
|
|
|
|
9
|
|
|
|
-
|
|
|
|
1,699
|
|
Noncurrent liabilities
|
|
|
6,191
|
|
|
|
12
|
|
|
|
6
|
|
|
|
12
|
|
|
|
117
|
|
|
|
413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,751
|
|
Balance Sheet dataas of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,141
|
|
|
$
|
12
|
|
|
$
|
17
|
|
|
$
|
91
|
|
|
$
|
19
|
|
|
$
|
92
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
1,396
|
|
Noncurrent assets
|
|
|
9,653
|
|
|
|
189
|
|
|
|
302
|
|
|
|
147
|
|
|
|
451
|
|
|
|
644
|
|
|
|
68
|
|
|
|
-
|
|
|
|
11,454
|
|
Current liabilities
|
|
|
1,452
|
|
|
|
4
|
|
|
|
31
|
|
|
|
62
|
|
|
|
37
|
|
|
|
174
|
|
|
|
7
|
|
|
|
-
|
|
|
|
1,767
|
|
Noncurrent liabilities
|
|
|
6,204
|
|
|
|
14
|
|
|
|
23
|
|
|
|
-
|
|
|
|
283
|
|
|
|
253
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,777
|
|
(1)
|
The amounts included in this column represent the combined financial information related to Maaden Aluminum Company, Maaden Bauxite and
Alumina Company, and Maaden Rolling Company.
|
(2)
|
AofA sold its interest in the DBNGP Trust in April 2016.
|
Saudi Arabia Joint Venture
Alcoa Corporation and Saudi Arabian Mining Company (known as Maaden) have a
30-year
(from December 2009)
joint venture shareholders agreement (automatic extension for an additional 20 years, unless the parties agree otherwise or unless earlier terminated) setting forth the terms for the development, construction, ownership, and operation of an
integrated aluminum complex in Saudi Arabia. Specifically, the project developed by the joint venture consists of: (i) a bauxite mine for the extraction of approximately 4,000 kmt of bauxite from the Al Baitha bauxite deposit near Quiba
in the northern part of Saudi Arabia; (ii) an alumina refinery with an initial capacity of 1,800 kmt; (iii) a primary aluminum smelter with an initial capacity of 740 kmt; and (iv) an aluminum rolling mill with an initial capacity of
380 kmt. The refinery, smelter, and rolling mill were constructed in an industrial area at Ras Al Khair on the east coast of Saudi Arabia. The facilities use critical infrastructure, including power generation derived from reserves of natural gas,
as well as port and rail facilities, developed by the government of Saudi Arabia. First production from the smelter, rolling mill, and mine and refinery occurred in December of 2012, 2013, and 2014, respectively.
In 2012, Alcoa Corporation and Maaden agreed to expand the capabilities of the rolling mill to include a capacity of 100 kmt dedicated to supplying
the automotive, building and construction, and foil packaging markets with aluminum sheet. First production related to the expanded capacity occurred in 2014. This expansion did not result in additional equity investment (see below) due to
significant savings from a change in the project execution strategy of the initial 380 kmt capacity of the rolling mill.
The joint venture is
owned 74.9% by Maaden and 25.1% by Alcoa Corporation and consists of three separate companies as follows: one each for the mine and refinery, the smelter, and the rolling mill. The Alcoa Corporation affiliates that hold the Companys
interests in the smelting company and the rolling mill company are wholly-owned by Alcoa Corporation, and the Alcoa Corporation affiliate that holds the Companys interests in the mining and refining company is majority-owned (part of AWAC) by
Alcoa Corporation. Except in limited circumstances, Alcoa Corporation may not sell, transfer or otherwise dispose of or encumber or enter into any agreement in respect of the votes or other rights attached to its interests in the joint venture
without Maadens prior written consent.
Maaden and Alcoa Corporation have put and call options, respectively, whereby
Maaden can require Alcoa Corporation to purchase from Maaden, or Alcoa Corporation can require Maaden to sell to Alcoa Corporation, a 14.9% interest in the joint venture at the then fair market value. These options may only be
exercised in a
six-month
window that opens five years after the last Commercial Production Date (as defined in the joint venture shareholders agreement) of the three joint venture companies and, if
exercised, must be exercised for the full 14.9% interest. The Commercial Production Date was declared on September 1, 2014 for the smelting company and on October 1, 2016 for the mining and refining company. There has not been a similar
declaration yet for the rolling mill company.
124
Maaden and Alcoa Corporation also may not sell, transfer, or otherwise dispose of, pledge, or encumber
any interests in the joint venture until five years after the Commercial Production Date. Under the joint venture shareholders agreement, upon the occurrence of an unremedied event of default by Alcoa Corporation, Maaden may purchase,
or, upon the occurrence of an unremedied event of default by Maaden, Alcoa Corporation may sell, its interest for consideration that varies depending on the time of the default.
A number of Alcoa Corporation employees perform various types of services for the smelting, rolling mill, and mining and refining companies as part of the operation of the fully-integrated aluminum
complex. At December 31, 2017 and 2016, Alcoa Corporation had an outstanding receivable of $13 and $11, respectively, from the smelting, rolling mill, and mining and refining companies for labor and other employee-related expenses.
Capital investment in the project is expected to total approximately $10,800 (SAR 40.5 billion) and has been funded through a combination of equity
contributions by the joint venture partners and project financing obtained by the joint venture companies, which has been partially guaranteed by both partners (see below). Both the equity contributions and the guarantees of the project financing
are based on the joint ventures partners ownership interests. Originally, it was estimated that Alcoa Corporations total equity contribution in the joint venture related to the capital investment in the project would be
approximately $1,100, of which Alcoa Corporation has contributed $982, including $1 in 2016. Based on changes to both the projects capital investment and equity and debt structure from the initial plans, the estimated $1,100 equity
contribution may be reduced. Separate from the capital investment in the project, Alcoa Corporation contributed $66 (Maaden contributed $199) to the joint venture in 2017 for short-term funding purposes in accordance with the terms of the
joint venture companies financing arrangements. Both partners may be required to make such additional contributions in future periods. As of December 31, 2017 and 2016, the carrying value of Alcoa Corporations investment in this
joint venture was $887 and $853, respectively.
The rolling mill and mining and refining companies have project financing totaling $3,334
(reflects principal repayments made through December 31, 2017), of which a combined $837 represents Alcoa Corporations and AWACs respective 25.1% interest in the rolling mill company and the mining and refining company. Alcoa
Corporation, itself and on behalf of AWAC, has issued guarantees (see below) to the lenders in the event of default on the debt service requirements by the rolling mill company through 2018 and 2021 and by the mining and refining company through
2019 and 2024 (Maaden issued similar guarantees related to its 74.9% interest). Alcoa Corporations guarantees for the rolling mill and mining and refining companies cover total debt service requirements of $132 in principal and up to a
maximum of approximately $25 in interest per year (based on projected interest rates). Previously, Alcoa Corporation issued similar guarantees related to the project financing of the smelting company. In December 2017, the smelting company
refinanced and/or amended all of its existing outstanding debt. The guarantees that were previously required of the Company were effectively terminated. At December 31, 2017 and 2016, the combined fair value of the guarantees was $3 and $6,
respectively, which was included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. In the event Alcoa Corporation would be required to make payments under the guarantees related to the mining and
refining company, 40% of such amount would be contributed to Alcoa Corporation by Alumina Limited, consistent with its ownership interest in AWAC.
As a result of the Separation Transaction, the various lenders to the joint venture companies required Arconic to maintain joint and several guarantees with Alcoa Corporation. In the event of default by
any of the joint venture companies, the lenders would make a claim against both Alcoa Corporation and Arconic. Accordingly, Alcoa Corporation would perform under its guarantee; however, if the Company failed to perform, Arconic would be required to
perform under its own guarantee. Arconic would then subsequently seek indemnification from Alcoa Corporation under the terms of the Separation and Distribution Agreement.
DBNGP Trust
In 2004, AofA acquired a 20% interest in a consortium, which subsequently purchased the DBNGP in Western Australia. The investment in the DBNGP was made to secure a
competitively-priced long-term supply of natural gas to AofAs refineries in Western Australia. Since 2004, AofA made several contributions for its share of a pipeline capacity expansion and other operational purposes of the consortium, as well
as equity call plans to improve the consortiums capitalization structure, including a plan initiated in December 2014. This plan required AofA to
125
contribute $30 (A$36) through
mid-2016,
of which $20 (A$27) was made through March 31, 2016, including $3 (A$5) and $16 (A$21) in 2016 and 2015,
respectively.
In April 2016, AofA sold its 20% interest in the consortium, effectively terminating its remaining obligation to make
contributions under the most recent equity call plan, to the only other member of the consortium, DUET Group. AofA received $145 (A$192) in cash, which was included in Sales of investments on the accompanying Statement of Consolidated Cash Flows,
and recorded a gain of $27 (A$35) ($11 (A$15)
after-tax
and noncontrolling interest) in Other income, net on the accompanying Statement of Consolidated Operations. As part of the sale transaction, AofA will
maintain its current access to approximately 30% of the DBNGP transmission capacity for gas supply to its three alumina refineries in Western Australia under an existing agreement to purchase gas transmission services from the DBNGP. At
December 31, 2017 and 2016, AofA has an asset of $300 (A$385) and $270 (A$375), respectively, representing prepayments made under the agreement for future gas transmission services.
I. Inventories
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
296
|
|
|
$
|
226
|
|
Work-in-process
|
|
|
258
|
|
|
|
220
|
|
Bauxite and alumina
|
|
|
585
|
|
|
|
429
|
|
Purchased raw materials
|
|
|
473
|
|
|
|
363
|
|
Operating supplies
|
|
|
147
|
|
|
|
137
|
|
LIFO reserve
|
|
|
(306
|
)
|
|
|
(215
|
)
|
|
|
$
|
1,453
|
|
|
$
|
1,160
|
|
At December 31, 2017 and 2016, the total amount of inventories valued on a LIFO basis was $516, or 29%, and $393, or
29%, respectively, of total inventories before LIFO adjustments. The inventory values, prior to the application of LIFO, are generally determined under the average cost method, which approximates current cost.
J. Properties, Plants, and Equipment, Net
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Land and land rights, including mines
|
|
$
|
346
|
|
|
$
|
346
|
|
Structures (by type of operation):
|
|
|
|
|
|
|
|
|
Bauxite mining
|
|
|
1,250
|
|
|
|
1,194
|
|
Alumina refining
|
|
|
2,664
|
|
|
|
2,500
|
|
Aluminum smelting and casting
|
|
|
3,575
|
|
|
|
3,544
|
|
Energy generation
|
|
|
552
|
|
|
|
610
|
|
Aluminum rolling
|
|
|
298
|
|
|
|
287
|
|
Other
|
|
|
417
|
|
|
|
405
|
|
|
|
|
8,756
|
|
|
|
8,540
|
|
Machinery and equipment (by type of operation):
|
|
|
|
|
|
|
|
|
Bauxite mining
|
|
|
508
|
|
|
|
465
|
|
Alumina refining
|
|
|
4,009
|
|
|
|
3,773
|
|
Aluminum smelting and casting
|
|
|
6,827
|
|
|
|
6,655
|
|
Energy generation
|
|
|
905
|
|
|
|
1,080
|
|
Aluminum rolling
|
|
|
1,020
|
|
|
|
884
|
|
Other
|
|
|
288
|
|
|
|
309
|
|
|
|
|
13,557
|
|
|
|
13,166
|
|
|
|
|
22,659
|
|
|
|
22,052
|
|
Less: accumulated depreciation, depletion, and amortization
|
|
|
13,908
|
|
|
|
13,225
|
|
|
|
|
8,751
|
|
|
|
8,827
|
|
Construction
work-in-progress
|
|
|
387
|
|
|
|
498
|
|
|
|
$
|
9,138
|
|
|
$
|
9,325
|
|
126
As of December 31, 2017 and 2016, the net carrying value of temporarily idled refining assets was $141
and $158, respectively, representing 2,305 kmt of idle capacity in both periods. Also, as of December 31, 2017 and 2016, the net carrying value of temporarily idled smelting assets was $248 and $314, respectively, representing 856 kmt and 778
kmt, respectively, of idle capacity. In July 2017, Alcoa Corporation, recategorized 269 kmt of smelting capacity to idle capacity due to the decision to partially restart (161 kmt) a previously permanently closed smelter (carrying value is zero
see 2017 Actions in Note D), which is expected to be completed in the second quarter of 2018. Additionally, in December 2017, Alcoa Corporation permanently closed 191 kmt of smelting capacity, which was included in the 778 kmt of idle capacity
as of December 31, 2016.
K. Goodwill and Other Intangible Assets
Goodwill, which is included in Other noncurrent assets on the accompanying Consolidated Balance Sheet, was as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Bauxite
|
|
$
|
2
|
|
|
$
|
2
|
|
Alumina
|
|
|
4
|
|
|
|
4
|
|
Aluminum
(1)
|
|
|
-
|
|
|
|
-
|
|
Corporate
(2)
|
|
|
148
|
|
|
|
149
|
|
|
|
$
|
154
|
|
|
$
|
155
|
|
(1)
|
The carrying value of Aluminums goodwill is zero, comprised of goodwill of $989 and accumulated impairment losses of $989 as of both
December 31, 2017 and 2016. Additionally, the carrying value of Corporates goodwill is net of accumulated impairment losses of $742 as of both December 31, 2017 and 2016.
|
(2)
|
As of December 31, 2017, the $148 of goodwill reflected in Corporate is allocated to two of Alcoa Corporations three reportable segments
($49 to Bauxite and $99 to Alumina) for purposes of impairment testing (see Note B). This goodwill is reflected in Corporate for segment reporting purposes because it is not included in managements assessment of performance by the two
reportable segments.
|
Other intangible assets, which are included in Other noncurrent assets on the accompanying
Consolidated Balance Sheet, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
December 31,
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
Computer software
|
|
$
|
241
|
|
|
$
|
(212
|
)
|
|
$
|
252
|
|
|
$
|
(196
|
)
|
Patents and licenses*
|
|
|
25
|
|
|
|
(6
|
)
|
|
|
70
|
|
|
|
(6
|
)
|
Other intangibles
|
|
|
21
|
|
|
|
(7
|
)
|
|
|
21
|
|
|
|
(6
|
)
|
Total other intangible assets
|
|
$
|
287
|
|
|
$
|
(225
|
)
|
|
$
|
343
|
|
|
$
|
(208
|
)
|
*
|
As of December 31, 2016, Patents and licenses include amounts related to the capitalization of costs associated with the renewal of Alcoa Corporations FERC
(Federal Energy Regulatory Commission) license at its Yadkin Hydroelectric Project, which was divested in February 2017 (see Note C).
|
Computer software consists primarily of software costs associated with an enterprise business solution within Alcoa Corporation to drive common systems among all businesses.
Amortization expense related to the intangible assets in the tables above for the years ended December 31, 2017, 2016, and 2015 was $12, $7, and
$10, respectively, and is expected to be approximately $10 annually from 2018 to 2022.
127
L. Debt
Long-Term Debt.
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
6.75% Notes, due 2024
|
|
$
|
750
|
|
|
$
|
750
|
|
7.00% Notes, due 2026
|
|
|
500
|
|
|
|
500
|
|
BNDES Loans, due 2018-2029 (see below for weighted average rates)
|
|
|
137
|
|
|
|
192
|
|
Other
|
|
|
50
|
|
|
|
38
|
|
Unamortized discounts and deferred financing costs
|
|
|
(33
|
)
|
|
|
(35
|
)
|
|
|
|
1,404
|
|
|
|
1,445
|
|
Less: amount due within one year
|
|
|
16
|
|
|
|
21
|
|
|
|
$
|
1,388
|
|
|
$
|
1,424
|
|
The principal amount of long-term debt maturing in each of the next five years is $16 in 2018, $30 in 2019, and $15 in
each of 2020, 2021, and 2022.
144A Debt
In September 2016, Alcoa Nederland Holding B.V. (ANHBV), a wholly-owned subsidiary of
Alcoa Corporation, 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 is paid semi-annually in March and September, which 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 Revolving Credit Agreement described below (the subsidiary guarantors and, together with Alcoa Corporation, the guarantors). 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 Revolving Credit Agreement.
The Notes indenture contains various restrictive covenants similar to those described below for the 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 in an aggregate amount not to exceed $38 in each of the
November 1, 2016 through December 31, 2017 time period (no such dividends were made) and annual 2018, $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
128
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 payment not to exceed the greater of $250 and 1.5% of Alcoa Corporations 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 Amended Revolving Credit Agreement (see Credit Facility below) would govern the amount of ordinary
dividend payments the Company could make in a given timeframe if the allowed amount is less than the limits of the restricted payments negative covenant under the Notes indenture.
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 the amount
of $1,228 were not reflected in the accompanying 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 in
preparation for the Separation Transaction. This decrease in restricted cash was reflected in the accompanying Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.
BNDES Loans
Prior to July 5, 2016, Alcoa Alumínio (Alumínio), an indirect wholly-owned subsidiary of Alcoa Corporation,
had a loan agreement with Brazils National Bank for Economic and Social Development (BNDES) that provided for a financing commitment of $397 (R$687), which was divided into three subloans and was used to pay for certain expenditures of the
Estreito hydroelectric power project. On July 5, 2016, this loan agreement was amended to change the borrower from Alumínio to a wholly-owned subsidiary of Alumínio. Interest on the three subloans is a Brazil real rate of interest
equal to BNDES long-term interest rate, 7.00% and 7.50% as of December 31, 2017 and 2016, respectively, plus a weighted-average margin of 2.74%. Principal and interest are payable monthly, which began in October 2011 and end in September
2029 for two of the subloans totaling R$667 and began in July 2012 and end in June 2018 for the subloan of R$20. This loan may be repaid early without penalty with the approval of BNDES. As of December 31, 2017 and 2016, outstanding borrowings
were $137 (R$454) and $150 (R$490), respectively, and the weighted-average interest rate was 9.74% and 10.22%, respectively. During 2017 and 2016, Alumínios subsidiary and/or Alumínio repaid $15 (R$49) and $14 (R$48),
respectively, of outstanding borrowings.
Additionally, Alumínio had a loan agreement with BNDES that provided for a financing
commitment of $85 (R$177), which also was used to pay for certain expenditures of the Estreito hydroelectric power project. Interest on the loan was a Brazil real rate of interest equal to BNDES long-term interest rate plus a margin of 1.55%.
Principal and interest were payable monthly, which began in January 2013 and were originally scheduled to end in September 2029. During 2017 and 2016, Alumínio repaid $44 (R$138) and $3 (R$11), respectively, of outstanding borrowings. The
repayments in 2017 include an early repayment of $41 (R$131) made in August, representing the remaining outstanding loan balance. This early repayment was made without penalty under the approval of BNDES. With the full repayment of this loan, the
commitment was effectively terminated. As of December 31, 2016, Alumínios outstanding borrowings were $42 (R$137) and the interest rate was 9.05%.
Credit Facility.
On September 16, 2016, Alcoa Corporation and ANHBV entered into a revolving credit agreement with a syndicate of lenders and issuers named therein, as amended, (the
Revolving Credit Agreement). On November 14, 2017, these same parties and two additional lenders entered into an Amendment and Restatement Agreement to revise certain terms and provisions of the Revolving Credit Agreement (the
Revolving Credit Agreement as revised by the Amendment and Restatement Agreement, the Amended Revolving Credit Agreement). Unless noted otherwise, the terms and provisions described below for the Amended Revolving Credit Agreement were
applicable to the Revolving Credit Agreement prior to November 14, 2017.
129
The Amended Revolving Credit Agreement provides a $1,500 senior secured revolving credit facility (the
Revolving Credit Facility) to be used for working capital and/or other general corporate purposes of Alcoa Corporation and its subsidiaries. Subject to the terms and conditions of the 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
(previously $0).
The Revolving Credit Facility is scheduled to mature on November 14, 2022 (previously November 1, 2021), unless
extended or earlier terminated in accordance with the provisions of the 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 Amended Revolving Credit Agreement. Under the provisions of the Amended Revolving Credit Agreement, ANHBV will pay a quarterly commitment fee ranging from 0.225% to 0.450% (based on Alcoa Corporations 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 ANHBVs option, either (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the highest of (1) 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. The applicable margin for all loans will vary
based on Alcoa Corporations leverage ratio and will range from 1.75% to 2.50% for LIBOR loans and 0.75% to 1.50% for base rate loans. 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.
The Amended Revolving Credit Agreement includes a number of customary affirmative covenants. Additionally, the 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 (see below); entering into restrictive agreements; restricted payments (see below), including 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 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 2.25 to 1.00 (may be increased to a level not higher than 2.50 to 1.00). As of December 31, 2017 and 2016, Alcoa Corporation was in compliance with all such covenants.
The indebtedness, restricted payments, and investments negative covenants include general exceptions to allow for potential future transactions
incremental to those specifically provided for in the Amended Revolving Credit
130
Agreement. The indebtedness negative covenant provides for an incremental amount not to exceed the greater of $1,000 (previously $500) and 6.0% (previously 3.0%) of Alcoa Corporations
consolidated total assets. Additionally, the restricted payments negative covenant provides for an aggregate amount not to exceed $100 (previously $0) and the investments negative covenant provides for an aggregate amount not to exceed $400
(previously $250), both of which contain two conditions in which these limits may increase. First, in any fiscal year, the thresholds for the restricted payments and investments negative covenants increase by $250 (previously $0) and $200
(previously $0), respectively, if the consolidated net leverage ratio is not greater than 1.20 to 1.00 and 1.30 to 1.00, respectively, as of the end of the prior fiscal year. Secondly, in regards to both the $100 and $250 for restricted payments and
the $200 for investments, 50% of any unused amount of these base amounts in any fiscal year may be used in the next succeeding fiscal year.
The following describes the specific restricted payment negative covenant for share repurchases and the application of the 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 Amended Revolving Credit Agreement provides general exceptions to the restricted payments negative covenant that would allow Alcoa Corporation to exceed
this specified threshold for share repurchases 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, the Amended Revolving Credit Agreement rescinded the specific terms included in the Revolving Credit Agreement related
to ordinary dividend payments. Previously, Alcoa Corporation was able to declare and make annual ordinary dividends in an aggregate amount not to exceed $38 in each of the November 1, 2016 through December 31, 2017 time period (no such
dividends were made) and annual 2018, $50 in each of annual 2019 and 2020, and $75 in the January 1, 2021 through November 1, 2021 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. Under the Amended Revolving Credit Agreement, 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 above) would govern the amount of ordinary dividend payments the Company could
make in a given timeframe if the allowed amount is less than the limits of the restricted payments negative covenant under the Amended Revolving Credit Agreement.
The 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, 2017 and
2016 and no amounts were borrowed during 2017 and 2016 (September 16
th
through December 31
st
) under the Revolving Credit Facility.
M. Preferred and Common Stock
Preferred Stock.
Alcoa Corporation is authorized to issue 100,000,000 shares of preferred stock at a par value of $0.01 per share. At
December 31, 2017 and 2016, Alcoa Corporation had no issued preferred stock.
Common Stock.
Alcoa Corporation is authorized to
issue 750,000,000 shares of common stock at a par value of $0.01 per share. On November 1, 2016, in conjunction with the Separation Transaction, Alcoa Corporation distributed 182,471,195 shares of its common stock. Of this amount, 146,159,428
shares were distributed to ParentCos shareholders and 36,311,767 shares were retained by ParentCo (Arconic sold all of these shares in 2017). As of
131
December 31, 2017 and 2016, Alcoa Corporation had 185,200,713 and 182,930,995, respectively, issued and outstanding shares of common stock. In 2017 and from November 1, 2016 through
December 31, 2016, Alcoa Corporation issued 2,269,718 and 459,800, respectively, shares under the Companys employee stock-based compensation plan. Dividends on common stock are subject to authorization by Alcoa Corporations Board of
Directors. Alcoa Corporation did not declare any dividends in 2017 and from November 1, 2016 through December 31, 2016.
As of
December 31, 2017, 27,270,482 shares of common stock were available for issuance under Alcoa Corporations employee stock-based compensation plan. Alcoa Corporation issues new shares to satisfy the exercise of stock options and the
conversion of stock awards.
Stock-based Compensation
For all periods prior to the Separation Date, Alcoa Corporations employees participated in ParentCos stock-based compensation plan. The stock-based compensation expense recorded by Alcoa
Corporation in the referenced periods includes expense associated with employees historically attributable to Alcoa Corporations operations and an allocation of expense (see Note A) related to ParentCos corporate employees. For 2017 and
the last two months of 2016, Alcoa Corporation employees participated in the Companys stock-based compensation plan.
Effective
November 1, 2016, all outstanding stock options (vested and
non-vested)
and
non-vested
stock awards originally granted under ParentCos stock-based
compensation plan related to Alcoa Corporation employees were replaced with similar stock options and stock awards under Alcoa Corporations stock-based compensation plan. In order to preserve the intrinsic value of the stock options and stock
awards originally granted under ParentCos stock-based compensation plan, the number of stock options and stock awards issued under Alcoa Corporations stock-based compensation plan were increased by a ratio of 1.34 developed by dividing
the October 31, 2016 closing market price of ParentCos common stock ($28.72) by the October 31, 2016 closing market price of Alcoa Corporations when issued common stock ($21.44). This resulted in a beginning balance
of outstanding stock options and stock awards under Alcoa Corporations stock-based compensation plan of 4,673,829 and 2,605,423, respectively, as of November 1, 2016.
The following description of Alcoa Corporations stock-based compensation plan is not materially different from the description of ParentCos stock-based compensation plan prior to the
Separation Transaction.
Alcoa Corporation has a stock-based compensation plan under which stock options and stock awards generally will be
granted in either January or February each year to eligible employees (the Companys Board of Directors also receive certain stock awards; however, these amounts are not material). Most plan participants can choose whether to receive their
award in the form of stock options, stock awards, or a combination of both. This choice is made before the grant is issued and is irrevocable. Stock options are granted at the closing market price of Alcoa Corporations common stock on the date
of grant and vest over a three-year service period (1/3 each year) with a
ten-year
contractual term. Stock awards vest over a three-year service period from the date of grant and certain of these awards also
include either a market (2017) or performance (2017, 2016, and 2015) condition.
The final number of market-based and performance-based stock
awards earned is based on Alcoa Corporations achievement of certain targets over a three-year measurement period. For market-based stock awards granted in 2017, the award will be earned at the end of the vesting period based on the
Companys total shareholder return measured against the total shareholder return of the Standard & Poors 500® Index from January 1, 2017 through December 31, 2019. For performance-based stock awards granted in 2017, the award will
be earned at the end of the vesting period based on the Companys performance against a pre-established return-on-capital target measured from January 1, 2017 through December 31, 2019. For performance-based stock awards granted in 2016 and
2015, one-third of the award was to be earned each year during the vesting period based on the Companys performance against a pre-established return-on-capital target for that year measured from January 1st through December 31st (the second
tranche of the 2016 performance awards and the third tranche of the 2015 performance awards were not earned in 2017). All market-based
132
and performance-based stock awards earned over the three-year service period vest on the third anniversary of the award grant date.
In 2017, 2016, and 2015, Alcoa Corporation recognized stock-based compensation expense of $24, $28, and $35, respectively, of which between 80% and 90% related to stock awards in each period (there was no
stock-based compensation expense capitalized in 2017, 2016, or 2015). Of the total pretax stock-based compensation expense recognized in 2016 and 2015, $16 and $21, respectively, relates to the allocation of expense for ParentCos corporate
employees. As part of both Alcoa Corporations and ParentCos 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 was recognized in the first half of each year for these retirement-eligible employees. Of the total pretax stock-based compensation expense recognized in 2017, 2016, and
2015, $4, $7, and $6, respectively, pertains to the acceleration of expense related to retirement-eligible employees.
Stock-based compensation expense is based on the grant date fair value of the applicable equity grant. For stock awards with no
performance or market condition and for stock awards with a performance condition, the fair value was equivalent to the closing market price of either Alcoa Corporations or ParentCos common stock on the date of grant in the respective
periods. For stock awards with a market condition, the fair value was estimated on the date of grant using a Monte Carlo simulation model, which generated a result of $52.01 per award in 2017. The Monte Carlo simulation model uses certain
assumptions to estimate the fair value of a market-based stock award, including volatility (36.98% for Alcoa Corporation and 11.44% for the Standard & Poors 500
®
Index) and a risk-free interest rate (1.44%). For stock options, the fair value was estimated on the date of grant using a lattice-pricing model, which generated a
result of $12.45, $2.12, and $4.47 per option in 2017, 2016, and 2015, respectively (see below for updated fair value amounts for 2016 and 2015 grants). The lattice-pricing model uses several assumptions to estimate the fair value of a stock option,
including an average risk-free interest rate, dividend yield, volatility, annual forfeiture rate, exercise behavior, and contractual life.
The following describes in detail the assumptions used by Alcoa Corporation to estimate the fair value of stock options granted in 2017 (the assumptions
used to estimate the fair value of stock options granted by ParentCo in 2016 and 2015 were not materially different). As the Company was a standalone publicly-traded company only for a
two-month
period in
2016, the assumptions used to estimate the fair value of stock options granted in February 2017 were largely based on historical ParentCo information, where applicable (Alcoa Corporation did not grant any stock options from November 1, 2016
through December 31, 2016). The risk-free interest rate (2.48%) was based on a yield curve of interest rates at the time of the grant over the contractual life of the option. The dividend yield (0.0%) was based on the fact that the
Company did not pay any dividends in the months of November and December 2016 and did not have any immediate plans to pay dividends in 2017. Volatility (40.68%) was based on historical and implied volatilities over the term of the option. Alcoa
Corporation utilized historical option forfeiture data to estimate annual
pre-
and post-vesting forfeitures (6%). Exercise behavior (59%) was based on a weighted average exercise ratio (exercise patterns
for grants issued over the number of years in the contractual option term) of an options intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the
life of an option (5.7 years) was an output of the lattice-pricing model.
For stock options outstanding as of October 31, 2016 that were
originally granted under ParentCos stock-based compensation plan to Alcoa Corporation employees, the previously-mentioned fair values were adjusted to reflect both the impact of ParentCos
1-for-3
reverse stock split that occurred on October 5, 2016 and to maintain the intrinsic value of the stock options as a result of the Separation Transaction. Accordingly, the fair value of the stock
options originally granted in 2016 and 2015 was adjusted to $4.75 and $10.01, respectively. Alcoa Corporation did not recognize any incremental stock-based compensation expense as a result of this adjustment.
133
The activity for stock options and stock awards during 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
Stock awards
|
|
|
|
Number of
options
|
|
|
Weighted
average
exercise price
|
|
|
Number of
awards
|
|
|
Weighted
average FMV
per award
|
|
Outstanding, January 1, 2017
|
|
|
4,108,535
|
|
|
$
|
24.69
|
|
|
|
2,557,842
|
|
|
$
|
22.65
|
|
Granted
|
|
|
331,681
|
|
|
|
37.68
|
|
|
|
796,330
|
|
|
|
37.39
|
|
Exercised
|
|
|
(1,679,148
|
)
|
|
|
25.80
|
|
|
|
-
|
|
|
|
-
|
|
Converted
|
|
|
-
|
|
|
|
-
|
|
|
|
(764,064
|
)
|
|
|
24.98
|
|
Expired or forfeited
|
|
|
(73,961
|
)
|
|
|
28.99
|
|
|
|
(145,756
|
)
|
|
|
24.90
|
|
Performance share adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(143,020
|
)
|
|
|
21.03
|
|
Outstanding, December 31, 2017
|
|
|
2,687,107
|
|
|
|
25.48
|
|
|
|
2,301,332
|
|
|
|
26.93
|
|
As of December 31, 2017, the number of stock options outstanding had a weighted average remaining contractual life
of 5.82 years and a total intrinsic value of $76. Additionally, 1,704,299 of the stock options outstanding were fully vested and exercisable and had a weighted average remaining contractual life of 4.47 years, a weighted average exercise price of
$26.19, and a total intrinsic value of $47 as of December 31, 2017. Cash received from stock option exercises was $43 and $10 in 2017 and 2016, respectively, and the total intrinsic value of stock options exercised during 2017 and 2016 was $24
and $4, respectively.
At December 31, 2017, there was $24 (pretax) of unrecognized compensation expense related to
non-vested
stock option grants and
non-vested
stock award grants. This expense is expected to be recognized over a weighted average period of 1.75 years.
N. Pension and Other Postretirement Benefits
Alcoa Corporation maintains pension plans covering most U.S. employees and certain employees in foreign locations (see Note T). Pension benefits generally depend on length of service, job grade, and
remuneration. Substantially all benefits are paid through pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most salaried and
non-bargaining
hourly U.S. employees hired after March 1, 2006 participate in a defined contribution plan instead of a defined benefit plan.
The
Company also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired employees and certain retirees from foreign locations (see Note T). Generally, the medical plans are unfunded and pay a percentage of
medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance contracts. Alcoa Corporation retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried and
certain
non-bargaining
hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S. employees hired after July 1, 2010 are not eligible for postretirement health care
benefits. All salaried and certain hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits.
The above descriptions of retirement benefits for Alcoa Corporation participants also describe the retirement benefits provided by ParentCo to its employees and retirees prior to the Separation Date.
For all periods prior to August 1, 2016 (see below), eligible employees attributable to Alcoa Corporation operations participated in the
U.S. defined benefit pension and other postretirement benefit plans sponsored by ParentCo (the Shared Plans), which included Arconic and ParentCo corporate participants. Alcoa Corporation accounted for its portion of the 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. The multiemployer contribution expense attributable to employees of Alcoa Corporation-related
operations was based primarily on pensionable compensation of such employees for the pension plans and estimated interest costs for the other postretirement benefit plans. Additionally,
134
for all periods prior to August 1, 2016, Alcoa Corporation recorded an allocation of expenses for the Shared Plans attributable to ParentCo corporate participants, as well as to closed and
sold operations (see Cost Allocations in Note A).
Also, certain of the ParentCo plans described above were specific to employees
attributable to Alcoa Corporation operations
(non-U.S.)
in their entirety (the Direct Plans). Alcoa Corporation accounted for the Direct Plans as defined benefit pension and other postretirement
benefit plans. Accordingly, the funded status of each of the Direct Plans was recorded in Alcoa Corporations Consolidated Balance Sheet. Actuarial gains and losses that had not yet been recognized in earnings were recorded in Accumulated other
comprehensive loss until they were amortized as a component of net periodic benefit cost. The determination of benefit obligations and recognition of expenses related to Direct Plans are 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. Management develops each assumption using relevant company experience in conjunction with market-related data for each of the
plans.
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 Arconic. Accordingly, the New Direct Plans for Alcoa Corporation were measured as of August 1, 2016. One of the primary assumptions used to measure the New
Direct Plans was a weighted average discount rate of 3.48%. This measurement yielded a combined net unfunded status of $2,348. Additionally, certain other Shared Plans were assumed by Alcoa Corporation (the Additional New Direct Plans,
and collectively with the Direct Plans and New Direct Plans, the Cumulative Direct Plans) that did not require to be separated and/or to be remeasured. The Additional New Direct Plans had a combined net unfunded status of $180. The
aggregate combined net unfunded status of the New Direct Plans and the Additional New Direct Plans was recognized in Alcoa Corporations Consolidated Balance Sheet at that time, consisting of a current liability of $136 and a noncurrent
liability of $2,392. Additionally, Alcoa Corporation recognized $2,704 in Accumulated other comprehensive loss.
The following table
summarizes the total expenses recognized by Alcoa Corporation related to all pension and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Other postretirement benefits
|
|
Type of Plan
|
|
Type of Expense
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cumulative Direct Plans
|
|
Net periodic benefit cost
|
|
$
|
119
|
|
|
$
|
83
|
|
|
$
|
106
|
|
|
$
|
50
|
|
|
$
|
21
|
|
|
$
|
(12
|
)
|
Shared Plans
|
|
Multiemployer contribution expense
|
|
|
-
|
|
|
|
28
|
|
|
|
64
|
|
|
|
-
|
|
|
|
12
|
|
|
|
32
|
|
Shared Plans
|
|
Cost allocation
|
|
|
-
|
|
|
|
25
|
|
|
|
84
|
|
|
|
-
|
|
|
|
8
|
|
|
|
11
|
|
|
|
|
|
$
|
119
|
|
|
$
|
136
|
|
|
$
|
254
|
|
|
$
|
50
|
|
|
$
|
41
|
|
|
$
|
31
|
|
The funded status of Alcoa Corporations Cumulative Direct Plans is measured as of December 31 each calendar
year. All of the information that follows for pension and other postretirement benefit plans is only applicable to the Cumulative Direct Plans, as appropriate.
135
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Other
postretirement benefits
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
7,269
|
|
|
$
|
2,246
|
|
|
$
|
1,286
|
|
|
$
|
82
|
|
Benefit obligation assumed on August 1, 2016
|
|
|
-
|
|
|
|
5,316
|
|
|
|
-
|
|
|
|
1,277
|
|
Service cost
|
|
|
84
|
|
|
|
74
|
|
|
|
5
|
|
|
|
2
|
|
Interest cost
|
|
|
250
|
|
|
|
142
|
|
|
|
38
|
|
|
|
16
|
|
Amendments
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Actuarial losses (gains)
|
|
|
388
|
|
|
|
(244
|
)
|
|
|
(1
|
)
|
|
|
(33
|
)
|
Settlements
|
|
|
(64
|
)
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
-
|
|
Benefits paid, net of participants contributions
|
|
|
(437
|
)
|
|
|
(218
|
)
|
|
|
(116
|
)
|
|
|
(61
|
)
|
Medicare Part D subsidy receipts
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
3
|
|
Foreign currency translation impact
|
|
|
147
|
|
|
|
32
|
|
|
|
1
|
|
|
|
-
|
|
Benefit obligation at end of year*
|
|
$
|
7,639
|
|
|
$
|
7,269
|
|
|
$
|
1,218
|
|
|
$
|
1,286
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
5,421
|
|
|
$
|
1,891
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value of plan assets assumed on August 1, 2016
|
|
|
-
|
|
|
|
4,065
|
|
|
|
-
|
|
|
|
-
|
|
Actual return on plan assets
|
|
|
187
|
|
|
|
(332
|
)
|
|
|
-
|
|
|
|
-
|
|
Employer contributions
|
|
|
111
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
Participant contributions
|
|
|
15
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
Benefits paid
|
|
|
(432
|
)
|
|
|
(224
|
)
|
|
|
-
|
|
|
|
-
|
|
Administrative expenses
|
|
|
(41
|
)
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
-
|
|
Settlements
|
|
|
(62
|
)
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation impact
|
|
|
123
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Fair value of plan assets at end of year*
|
|
$
|
5,322
|
|
|
$
|
5,421
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Funded status*
|
|
$
|
(2,317
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
(1,218
|
)
|
|
$
|
(1,286
|
)
|
Less: Amounts attributed to joint venture partners
|
|
|
(37
|
)
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
-
|
|
Net funded status
|
|
$
|
(2,280
|
)
|
|
$
|
(1,818
|
)
|
|
$
|
(1,218
|
)
|
|
$
|
(1,286
|
)
|
Amounts recognized in the Consolidated Balance Sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
72
|
|
|
$
|
43
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Current liabilities
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
(118
|
)
|
|
|
(120
|
)
|
Noncurrent liabilities
|
|
|
(2,341
|
)
|
|
|
(1,851
|
)
|
|
|
(1,100
|
)
|
|
|
(1,166
|
)
|
Net amount recognized
|
|
$
|
(2,280
|
)
|
|
$
|
(1,818
|
)
|
|
$
|
(1,218
|
)
|
|
$
|
(1,286
|
)
|
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
3,743
|
|
|
$
|
3,254
|
|
|
$
|
281
|
|
|
$
|
295
|
|
Prior service cost (benefit)
|
|
|
35
|
|
|
|
42
|
|
|
|
(30
|
)
|
|
|
(36
|
)
|
Total, before tax effect
|
|
|
3,778
|
|
|
|
3,296
|
|
|
|
251
|
|
|
|
259
|
|
Less: Amounts attributed to joint venture partners
|
|
|
45
|
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
Net amount recognized, before tax effect
|
|
$
|
3,733
|
|
|
$
|
3,260
|
|
|
$
|
251
|
|
|
$
|
259
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (benefit)
|
|
$
|
676
|
|
|
$
|
337
|
|
|
$
|
(1
|
)
|
|
$
|
(33
|
)
|
Amortization of accumulated net actuarial loss
|
|
|
(187
|
)
|
|
|
(105
|
)
|
|
|
(13
|
)
|
|
|
(8
|
)
|
Prior service cost (benefit)
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
(1
|
)
|
Amortization of prior service (cost) benefit
|
|
|
(9
|
)
|
|
|
(7
|
)
|
|
|
6
|
|
|
|
5
|
|
Total, before tax effect
|
|
|
482
|
|
|
|
227
|
|
|
|
(8
|
)
|
|
|
(37
|
)
|
Less: Amounts attributed to joint venture partners
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Net amount recognized, before tax effect
|
|
$
|
473
|
|
|
$
|
230
|
|
|
$
|
(8
|
)
|
|
$
|
(37
|
)
|
136
*
|
At December 31, 2017, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $5,093, $3,195, and $(1,898), respectively.
At December 31, 2016, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $4,977, $3,504, and $(1,473), respectively.
|
Pension Plan Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
|
2017
|
|
|
2016
|
|
The aggregate projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans was as
follows:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
7,639
|
|
|
$
|
7,269
|
|
Accumulated benefit obligation
|
|
|
7,426
|
|
|
|
7,075
|
|
|
|
|
The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in
excess of plan assets was as follows:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
|
7,061
|
|
|
|
6,699
|
|
Fair value of plan assets
|
|
|
4,671
|
|
|
|
4,807
|
|
|
|
|
The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations
in excess of plan assets was as follows:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
|
6,885
|
|
|
|
6,531
|
|
Fair value of plan assets
|
|
|
4,671
|
|
|
|
4,807
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
(1)
|
|
|
Other postretirement benefits
(2)
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
71
|
|
|
$
|
61
|
|
|
$
|
51
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
-
|
|
Interest cost
|
|
|
244
|
|
|
|
138
|
|
|
|
89
|
|
|
|
38
|
|
|
|
16
|
|
|
|
4
|
|
Expected return on plan assets
|
|
|
(398
|
)
|
|
|
(242
|
)
|
|
|
(121
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recognized net actuarial loss
|
|
|
185
|
|
|
|
102
|
|
|
|
42
|
|
|
|
13
|
|
|
|
8
|
|
|
|
(3
|
)
|
Amortization of prior service cost (benefit)
|
|
|
9
|
|
|
|
7
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
Settlements
(3)
|
|
|
5
|
|
|
|
16
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Curtailments
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
Special termination benefits
(5)
|
|
|
3
|
|
|
|
1
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net periodic benefit cost
(6)
|
|
$
|
119
|
|
|
$
|
83
|
|
|
$
|
106
|
|
|
$
|
50
|
|
|
$
|
21
|
|
|
$
|
(12
|
)
|
(1)
|
In 2017 and 2016, net periodic benefit cost for U.S pension plans was $74 and $21, respectively.
|
(2)
|
In 2017 and 2016, net periodic benefit cost for other postretirement benefits reflects a reduction of $8 and $6, respectively, related to the
recognition of the federal subsidy awarded under Medicare Part D.
|
(3)
|
In 2017 and 2016, settlements were due to workforce reductions (see Note D). In 2015, settlements were due to workforce reductions (see Note D) and the
payment of lump sum benefits.
|
(4)
|
In 2015, curtailments were due to elimination of benefits or workforce reductions (see Note D).
|
(5)
|
In 2017, 2016, and 2015, special termination benefits were due to workforce reductions (see Note D).
|
(6)
|
Amounts attributed to joint venture partners are not included.
|
Amounts Expected to be Recognized in Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Other postretirement benefits
|
|
|
|
2018
|
|
|
2018
|
|
Net actuarial loss recognition
|
|
$
|
223
|
|
|
$
|
15
|
|
Prior service cost (benefit) recognition
|
|
|
9
|
|
|
|
(6
|
)
|
137
Assumptions
Weighted average assumptions used to determine benefit obligations for pension and other postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Discount ratepension plans
|
|
|
3.68
|
%
|
|
|
4.12
|
%
|
Discount rateother postretirement benefit plans
|
|
|
3.54
|
|
|
|
3.93
|
|
Rate of compensation increasepension plans
|
|
|
3.28
|
|
|
|
3.61
|
|
The discount rate 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 a weighted average duration of 12 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the
Companys 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.
The rate of compensation increase is based upon anticipated compensation increases and estimated inflation. For 2018, the rate of compensation increase
will be 3.28%.
Weighted average assumptions used to determine net periodic benefit cost for pension and other postretirement benefit plans
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount ratepension plans*
|
|
|
3.61
|
%
|
|
|
3.45
|
%
|
|
|
4.09
|
%
|
Discount rateother postretirement benefit plans*
|
|
|
3.30
|
|
|
|
2.90
|
|
|
|
4.15
|
|
Expected long-term rate of return on plan assetspension plans
|
|
|
7.47
|
|
|
|
7.31
|
|
|
|
6.91
|
|
Rate of compensation increasepension plans
|
|
|
3.61
|
|
|
|
3.65
|
|
|
|
3.74
|
|
*
|
In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most plans for the full annual period. However, the
discount rates for a limited number of plans were updated during 2017, 2016, and 2015 to reflect the remeasurement of these plans due to settlements and/or curtailments. The updated discount rates used were not significantly different from the
discount rates presented.
|
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 managements own judgment (see Plan Assets below). For 2017, 2016, and 2015, the expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future
returns by asset class. For 2018, management anticipates that 6.89% will be the weighted-average expected long-term rate of return.
Assumed
health care cost trend rates for U.S. other postretirement benefit plans were as follows
(non-U.S.
plans are not material):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Health care cost trend rate assumed for next year
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
Rate to which the cost trend rate gradually declines
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Year that the rate reaches the rate at which it is assumed to remain
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2019
|
|
138
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges
covered by Alcoa Corporations other postretirement benefit plans. For 2018, a 5.5% trend rate will be used, reflecting managements best estimate of the change in future health care costs covered by the plans. The plans actual
annual health care cost trend experience (based on ParentCos plans that previously included the Alcoa Corporation participants) over the past three years has ranged from (0.8)% to 9.0% Management does not believe this three-year range is
indicative of expected increases for future health care costs over the long-term.
Assumed health care cost trend rates have an effect on the
amounts reported for a health care plan. A
one-percentage
point change in these assumed rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1%
increase
|
|
|
1%
decrease
|
|
Effect on other postretirement benefit obligations
|
|
$
|
79
|
|
|
$
|
(70
|
)
|
Effect on total of service and interest cost components
|
|
|
3
|
|
|
|
(2
|
)
|
Plan Assets
Alcoa Corporations pension plan investment policy and weighted average asset allocations at December 31, 2017 and 2016, by asset class, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets
at
December 31,
|
|
Asset class
|
|
Policy range
|
|
|
2017
|
|
|
2016
|
|
Equities
|
|
|
2055
|
%
|
|
|
40
|
%
|
|
|
37
|
%
|
Fixed income
|
|
|
2555
|
%
|
|
|
35
|
|
|
|
36
|
|
Other investments
|
|
|
1535
|
%
|
|
|
25
|
|
|
|
27
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The principal objectives underlying the investment of the pension plans assets are to ensure that Alcoa Corporation
can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify
investments across and within various asset classes to protect asset values against adverse movements.
Through 2017, specific objectives for
long-term investment strategy included reducing the volatility of pension assets relative to pension liabilities and achieving risk factor diversification across the balance of the asset portfolio. A portion of the assets were matched to the
interest rate profile of the benefit obligation through long duration fixed income investments and fixed income derivative instruments. Exposure to broad equity risk was decreased and diversified through investments in discretionary and systematic
macro hedge funds, long/short equity hedge funds, and global and emerging market equities. Investments were further diversified by strategy, asset class, geography, and sector in an effort to enhance returns and mitigate downside risk. Several
external investment managers were used to gain broad exposure to the financial markets and to mitigate manager-concentration risk. This investment strategy was defined prior to the Separation Date by ParentCo management and maintained by Alcoa
Corporation management; however, this strategy resulted in investment returns less than those expected since the Separation Date.
Accordingly, in 2018, management plans to implement a less-complex, peer-like investment strategy and, as a result, restructure the asset portfolio. This
new strategy will result in investing a higher percentage of the portfolio in assets that will match the interest rate and credit risk profiles of the benefit obligations, as well as investing in assets with returns expected to exceed the actual
returns of the previous asset mix. To achieve this new strategy, the portfolio will no longer include investments in discretionary and systematic macro hedge funds and long/short equity hedge funds.
139
Instead, the portfolio will include a larger concentration of investments in long duration government debt, long-duration corporate credit, and real estate, as well as new investments in high
yield and emerging sovereign debt and global-listed infrastructure. As a result, the expected asset class mix will be approximately 30% in equities, approximately 50% in fixed income, and approximately 20% in other investments. Additionally, the
number of asset managers will be changed. The Company expects the new strategy to be fully implemented by the end of 2018.
Investment
practices comply with the requirements of applicable laws and regulations in the respective jurisdictions, including the Employee Retirement Income Security Act of 1974 (ERISA) in the United States. The use of derivative instruments by external
investment managers is permitted where appropriate and necessary for achieving overall investment policy objectives and for mitigating interest rate and other asset class risks.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension plan assets, including, if applicable, an indication of the level in the fair value
hierarchy in which each type of asset is generally classified (see Note O for the definition of fair value and a description of the fair value hierarchy).
Equities.
These securities consist of: (i) direct investments in the stock of publicly traded U.S. and
non-U.S.
companies and are valued based on the
closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans share of commingled funds that are invested in the stock of publicly traded companies and are
valued at net asset value; and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) and are valued at net asset value.
Fixed income.
These securities consist of: (i) U.S. government debt and are generally valued using quoted prices (included in Level 1);
(ii) cash and cash equivalents invested in publicly-traded funds and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (iii) publicly
traded U.S. and
non-U.S.
fixed interest obligations (principally corporate bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices
and other observable market data (included in Level 2); (iv) fixed income derivatives and are generally valued using industry standard models with market-based observable inputs (included in Level 2); and (v) cash and cash
equivalents invested in institutional funds and are valued at net asset value.
Other investments.
These investments include, among
others: (i) exchange traded funds, such as real estate investment trusts and gold, and are valued based on the closing price reported in an active market on which the investments are traded (included in Level 1); (ii) the plans
share of commingled funds that are invested in real estate investment trusts and are valued at net asset value; (iii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships)
and are valued at net asset value; and (iv) absolute return hedge funds and are valued at net asset value.
The fair value methods
described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Alcoa Corporation believes the valuation methods used by the plans trustees are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
140
The following table presents the fair value of pension plan assets classified under either the appropriate
level of the fair value hierarchy or net asset value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Net Asset
Value
|
|
|
Total
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
906
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
869
|
|
|
$
|
1,775
|
|
Long/short equity hedge funds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152
|
|
|
|
152
|
|
Private equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
226
|
|
|
|
226
|
|
|
|
$
|
906
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,247
|
|
|
$
|
2,153
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate and long duration government/credit
|
|
$
|
95
|
|
|
$
|
378
|
|
|
$
|
-
|
|
|
$
|
264
|
|
|
$
|
737
|
|
Cash and cash equivalent funds
|
|
|
313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
742
|
|
|
|
1,055
|
|
Other
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
$
|
408
|
|
|
$
|
434
|
|
|
$
|
-
|
|
|
$
|
1,006
|
|
|
$
|
1,848
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
241
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
365
|
|
|
$
|
606
|
|
Discretionary and systematic macro hedge funds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
581
|
|
|
|
581
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
132
|
|
|
|
$
|
241
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,078
|
|
|
$
|
1,319
|
|
Total
(1)
|
|
$
|
1,555
|
|
|
$
|
434
|
|
|
$
|
-
|
|
|
$
|
3,331
|
|
|
$
|
5,320
|
|
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Net Asset
Value
|
|
|
Total
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
520
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
772
|
|
|
$
|
1,292
|
|
Long/short equity hedge funds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
449
|
|
|
|
449
|
|
Private equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
246
|
|
|
|
246
|
|
|
|
$
|
520
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,467
|
|
|
$
|
1,987
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate and long duration government/credit
|
|
$
|
78
|
|
|
$
|
283
|
|
|
$
|
-
|
|
|
$
|
167
|
|
|
$
|
528
|
|
Cash and cash equivalent funds
|
|
|
897
|
|
|
|
-
|
|
|
|
-
|
|
|
|
468
|
|
|
|
1,365
|
|
Other
|
|
|
-
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
|
|
$
|
975
|
|
|
$
|
344
|
|
|
$
|
-
|
|
|
$
|
635
|
|
|
$
|
1,954
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
88
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
331
|
|
|
$
|
419
|
|
Discretionary and systematic macro hedge funds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
866
|
|
|
|
866
|
|
Other
|
|
|
71
|
|
|
|
-
|
|
|
|
-
|
|
|
|
139
|
|
|
|
210
|
|
|
|
$
|
159
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,336
|
|
|
$
|
1,495
|
|
Total
(2)
|
|
$
|
1,654
|
|
|
$
|
344
|
|
|
$
|
-
|
|
|
$
|
3,438
|
|
|
$
|
5,436
|
|
(1)
|
As of December 31, 2017, the total fair value of pension plan assets excludes a net receivable of $2, which represents securities not yet settled
plus interest and dividends earned on various investments, less an amount due to Arconic pension plans from Alcoa Corporation pension plans related to the separation of certain plans between the two companies.
|
(2)
|
As of December 31, 2016, the total fair value of pension plan assets excludes a net payable of $15, which represents an amount due to Arconic
pension plans from Alcoa Corporation pension plans related to the separation of certain plans between the two companies.
|
141
Funding and Cash Flows
It is Alcoa Corporations policy to fund amounts for defined benefit pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws, including
the Pension Protection Act of 2006; the Worker, Retiree, and Employer Recovery Act of 2008; the Moving Ahead for Progress in the 21
st
Century Act of 2012; the Highway and Transportation Funding Act of 2015; and the Bipartisan Budget Act of 2016 for
U.S. plans. From time to time, Alcoa Corporation contributes additional amounts as deemed appropriate. In 2017, 2016, and 2015, cash contributions to Alcoa Corporations defined benefit pension plans were $106, $66, and $69. The minimum
required contribution to defined benefit pension plans in 2018 is estimated to be $290, of which $250 is for U.S. plans. Additionally, the Company expects to make discretionary contributions of approximately $300 combined to the U.S. and Canadian
defined benefit pension plans in 2018 (see Note T).
Benefit payments expected to be paid to pension and other postretirement benefit plan
participants and expected Medicare Part D subsidy receipts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Pension
benefits
|
|
|
|
|
|
Gross Other
postretirement
benefits
|
|
|
Medicare Part D
subsidy receipts
|
|
|
Net Other
postretirement
benefits
|
|
2018
|
|
$
|
490
|
|
|
|
|
|
|
$
|
125
|
|
|
$
|
10
|
|
|
$
|
115
|
|
2019
|
|
|
485
|
|
|
|
|
|
|
|
125
|
|
|
|
10
|
|
|
|
115
|
|
2020
|
|
|
490
|
|
|
|
|
|
|
|
120
|
|
|
|
5
|
|
|
|
115
|
|
2021
|
|
|
490
|
|
|
|
|
|
|
|
120
|
|
|
|
5
|
|
|
|
115
|
|
2022
|
|
|
490
|
|
|
|
|
|
|
|
115
|
|
|
|
5
|
|
|
|
110
|
|
2023 through 2027
|
|
|
2,400
|
|
|
|
|
|
|
|
425
|
|
|
|
25
|
|
|
|
400
|
|
|
|
$
|
4,845
|
|
|
|
|
|
|
$
|
1,030
|
|
|
$
|
60
|
|
|
$
|
970
|
|
Defined Contribution Plans
Alcoa Corporation sponsors savings and investment plans in several countries, including Australia and the United States. Prior to the Separation Date, employees attributable to Alcoa Corporation
operations participated in ParentCo-sponsored plans. In the United States, employees may contribute a portion of their compensation to the plans, and Alcoa Corporation (ParentCo prior to Separation Date) matches a specified percentage of these
contributions in equivalent form of the investments elected by the employee. Also, the Company makes contributions to a retirement savings account based on a percentage of eligible compensation for certain U.S. employees hired after March 1,
2006 that are not able to participate in Alcoa Corporations defined benefit pension plans (see Note T). Alcoa Corporations expenses related to all defined contribution plans were $65 in 2017, $57 in 2016, and $59 in 2015.
O. Derivatives and Other Financial Instruments
Fair Value.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entitys own assumptions about market participant
assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
|
|
|
Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted
|
142
|
prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
Level 3Inputs that are both significant to the fair value measurement and unobservable.
|
Derivatives.
Alcoa Corporation is exposed to certain risks relating to its ongoing business operations, including financial, market, political,
and economic risks. The following discussion provides information regarding Alcoa Corporations exposure to the risks of changing commodity prices and foreign currency exchange rates.
Alcoa Corporations commodity and derivative activities are subject to the management, direction, and control of the Strategic Risk Management Committee (SRMC), which consists of at least three
members, including the chief executive officer and the chief financial officer. The remaining member(s) are other officers and/or employees of the Company as the chief executive officer may designate from time to time. Currently, the only other
member of the SRMC is Alcoa Corporations treasurer. The SRMC meets on a periodic basis to review derivative positions and strategy and reports to the Audit Committee of Alcoa Corporations Board of Directors on the scope of its
activities.
Alcoa Corporations aluminum, energy, and foreign exchange contracts are held for purposes other than trading. They are used
primarily to mitigate uncertainty and volatility, and to cover underlying exposures. Alcoa Corporation is not involved in trading activities for energy, weather derivatives, or other nonexchange commodity trading activities.
Several of Alcoa Corporations aluminum, energy, and foreign exchange contracts are classified as Level 1 or Level 2 under the fair value
hierarchy. The total fair value of these derivative contracts recorded as assets and liabilities was $44 and $117, respectively, at December 31, 2017 and $5 and $2, respectively, at December 31, 2016. Certain of these contracts are
designated as either fair value or cash flow hedging instruments. Combined, in 2017, 2016, and 2015, Alcoa Corporation recognized a loss of $22, a loss of less than $1, and a gain of $4, respectively, in Other (income) expenses, net on the
accompanying Statement of Consolidated Operations related to these contracts. Additionally, for the contracts designated as cash flow hedges, Alcoa Corporation recognized an unrealized loss of $92, an unrealized gain of $2, and an unrealized loss of
$13 in Other comprehensive loss in 2017, 2016, and 2015, respectively.
In addition to the Level 1 and 2 derivative instruments described
above, Alcoa Corporation has derivative instruments classified as Level 3 under the fair value hierarchy. These instruments are composed of (i) both embedded aluminum derivatives and an embedded credit derivative related to energy supply
contracts and (ii) freestanding financial contracts related to energy purchases in the spot market, all of which are associated with nine smelters and three refineries. Certain of the embedded aluminum derivatives and financial contracts were
designated as cash flow hedging instruments. All of these Level 3 derivative instruments are described below in detail and are enumerated as D1 through D11.
The following section describes the valuation methodologies used by Alcoa Corporation to measure its Level 3 derivative instruments at fair value. Derivative instruments classified as Level 3 in
the fair value hierarchy represent those in which management has used at least one significant unobservable input in the valuation model. Alcoa Corporation uses a discounted cash flow model to fair value all Level 3 derivative instruments.
Where appropriate, the description below includes the key inputs to those models and any significant assumptions. These valuation models are reviewed and tested at least on an annual basis.
Inputs in the valuation models for Level 3 derivative instruments are composed of the following: (i) quoted market prices (e.g., aluminum prices on the
10-year
London Metal Exchange (LME) forward curve and energy prices), (ii) significant other observable inputs (e.g., information concerning time premiums and volatilities for certain option type embedded
derivatives and regional premiums for aluminum contracts), and (iii) unobservable inputs (e.g., aluminum and energy prices beyond those quoted in the market). For periods beyond the term of quoted market prices for aluminum, Alcoa Corporation
estimates the price of aluminum by extrapolating the
10-year
LME forward curve. Additionally, for periods beyond the term of quoted market prices for energy, management has developed a forward curve based on
independent consultant market research. Where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on available market evidence (Level 2). In
the absence of such evidence, managements best estimate is used (Level 3). If a significant input that is unobservable in one period becomes observable in a subsequent period, the related asset or
143
liability would be transferred to the appropriate classification (Level 1 or 2) in the period of such change (there were no such transfers in the periods presented).
D1 through D5
Alcoa Corporation has two power contracts (D1 and D2), each of which contain an embedded derivative that indexes the price of
power to the LME price of aluminum. Additionally, Alcoa Corporation has three power contracts (D3 through D5), each of which contain an embedded derivative that indexes the price of power to the LME price of aluminum plus the Midwest premium. The
embedded derivatives in these five power contracts are primarily valued using observable market prices; however, due to the length of the contracts, the valuation models also require management to estimate the long-term price of aluminum based upon
an extrapolation of the
10-year
LME forward curve (one of the contracts no longer requires the use of prices beyond this curve). Additionally, for three of the contracts, management also estimates the Midwest
premium, generally, for the next twelve months based on recent transactions and then holds the premium estimated in that twelfth month constant for the remaining duration of the contract. Significant increases or decreases in the actual LME price
beyond 10 years would result in a higher or lower fair value measurement. An increase in actual LME price and/or the Midwest premium over the inputs used in the valuation models will result in a higher cost of power and a corresponding decrease to
the derivative asset or increase to the derivative liability. The embedded derivatives have been designated as cash flow hedges of forward sales of aluminum. Unrealized gains and losses were included in Other comprehensive loss on the accompanying
Consolidated Balance Sheet while realized gains and losses were included in Sales on the accompanying Statement of Consolidated Operations.
D6
Alcoa Corporation had a power contract (expired in October 2016 see D10 below) separate from above that contains an
LME-linked
embedded derivative. Prior to its expiration, the embedded derivative was valued using the probability and interrelationship of future LME prices, Australian dollar to U.S. dollar exchange rates, and the
U.S. consumer price index. Significant increases or decreases in the LME price would result in a higher or lower fair value measurement. An increase in actual LME price over the inputs used in the valuation model will result in a higher cost of
power and a corresponding decrease to the derivative asset. This embedded derivative did not qualify for hedge accounting treatment. Unrealized gains and losses from the embedded derivative were included in Other (income) expenses, net on the
accompanying Statement of Consolidated Operations while realized gains and losses were included in Cost of goods sold on the accompanying Statement of Consolidated Operations as electricity purchases were made under the contract. At the time this
derivative asset was recognized, an equivalent amount was recognized as a deferred credit in Other noncurrent liabilities and deferred credits on the Consolidated Balance Sheet. The amortization of this deferred credit was recognized in Other
(income) expenses, net on the accompanying Statement of Consolidated Operations as power was received over the life of the contract.
D7
Additionally, Alcoa Corporation has a natural gas supply contract, which has an
LME-linked
ceiling. This embedded derivative is valued using probabilities of future LME aluminum prices and the price of Brent crude oil (priced on Platts), including the interrelationships between the two commodities subject to the ceiling. Any change in the
interrelationship would result in a higher or lower fair value measurement. An LME ceiling was embedded into the contract price to protect against an increase in the price of oil without a corresponding increase in the price of LME. An increase in
oil prices with no similar increase in the LME price would limit the increase of the price paid for natural gas. This embedded derivative did not qualify for hedge accounting treatment. Unrealized gains and losses from the embedded derivative were
included in Other (income) expenses, net on the accompanying Statement of Consolidated Operations while realized gains and losses were included in Cost of goods sold on the accompanying Statement of Consolidated Operations as gas purchases were made
under the contract.
D8
In
mid-2016,
Alcoa Corporation and the related counterparty
elected to modify the pricing of an existing power contract for a smelter in the United States. This amendment contains an embedded derivative that indexes the price of power to the LME price of aluminum plus the Midwest premium. The embedded
derivative is valued using the interrelationship of future metal prices (LME base plus Midwest premium) and the amount of megawatt hours of energy needed to produce the forecasted metric tons of aluminum at the smelter. Significant increases or
decreases in the metal price would result in a higher or lower fair value measurement. An increase in actual metal price over the inputs used in the valuation model will result in a higher cost of power and a corresponding increase to the derivative
liability. Management elected not to qualify the embedded derivative for hedge accounting treatment. Unrealized gains
144
and losses from the embedded derivative were included in Other (income) expenses, net on the accompanying Statement of Consolidated Operations while realized gains and losses were included in
Cost of goods sold on the accompanying Statement of Consolidated Operations as electricity purchases were made under the contract. At the time this derivative liability was recognized, an equivalent amount was recognized as a deferred charge in
Other noncurrent assets on the accompanying Consolidated Balance Sheet. The amortization of this deferred charge is recognized in Other (income) expenses, net on the accompanying Statement of Consolidated Operations as power is received over the
life of the contract.
D9
Alcoa Corporation has a power contract, which contains an embedded derivative that indexes the
difference in the respective credit spread of Alcoa Corporation and the counterparty to the
10-year
U.S. treasury rate. This difference is then increased twice by a negotiated multiplier, which is currently
based on the sum of Arconics credit spread to both the
10-year
and
20-year
U.S. treasury rates. In accordance with the terms of the power contract, this
calculation may be changed in January of each calendar year. Management uses market prices, historical relationships, and forecast services to determine fair value. Significant increases or decreases in any of these inputs would result in a lower or
higher fair value measurement. A wider credit spread between Alcoa Corporation and the counterparty would result in a higher cost of power and a corresponding increase in the derivative liability. This embedded derivative did not qualify for hedge
accounting treatment. Unrealized gains and losses were included in Other (income) expenses, net on the accompanying Statement of Consolidated Operations while realized gains and losses were included in Cost of goods sold on the accompanying
Statement of Consolidated Operations as electricity purchases were made under the contract.
D10 and D11
Alcoa Corporation had a
financial contract (D10) that hedged the anticipated power requirements at one of its smelters that began in November 2016. At that time, the energy supply contract related to this smelter had expired (see D6 above) and Alcoa Corporation began
purchasing electricity directly from the spot market. Beyond the term where market information is available, management developed a forward curve, for valuation purposes, based on independent consultant market research. Significant increases or
decreases in the power market may result in a higher or lower fair value measurement of the financial contract. Lower prices in the power market would cause a decrease in the derivative asset. The financial contract had been designated as a cash
flow hedge of future purchases of electricity (this designation ceased in December 2016 see below). Through November 2016, unrealized gains and losses on this contract were recorded in Other comprehensive loss on the accompanying Consolidated
Balance Sheet, while realized gains and losses were recorded in Cost of goods sold as electricity purchases were made from the spot market. In August 2016, Alcoa Corporation gave the required notice to terminate this financial contract one year from
the date of notification. As a result, Alcoa Corporation decreased both the related derivative asset recorded in Other noncurrent assets and the unrealized gain recorded in Accumulated other comprehensive loss by $84, which related to the August
2017 through 2036 timeframe, resulting in no impact to Alcoa Corporations earnings. In December 2016, the smelter experienced an unplanned outage, resulting in a portion of the financial contract no longer qualifying for hedge accounting, at
which point management elected to discontinue hedge accounting for all of the remainder of the contract (through August 2017). As a result, Alcoa Corporation reclassified an unrealized gain of $7 from Accumulated other comprehensive loss to Other
income, net related to the portion of the contract that no longer qualified for hedge accounting. The remaining $6 unrealized gain in Accumulated other comprehensive loss related to the portion management elected to discontinue hedge accounting was
reclassified to Cost of goods sold as electricity purchases were made from the spot market through the termination date of the financial contract. Additionally, from December 2016 through August 2017, unrealized gains and losses on this contract
were recorded in Other (income) expenses, net, and realized gains and losses were recorded in Other (income) expenses, net as electricity purchases were made from the spot market.
In January 2017, Alcoa Corporation and the counterparty entered into a new financial contract (D11) to hedge the anticipated power requirements at this smelter for the period from August 2017 through July
2021 and amended the existing financial contract to both reduce the hedged amount of anticipated power requirements and to move up the effective termination date to July 31, 2017. The new financial contract has been designated as a cash flow
hedge of future purchases of electricity. Unrealized gains and losses on the new financial contract were recorded in Other comprehensive loss on the accompanying Consolidated Balance Sheet while realized gains and losses were recorded (began in
August 2017) in Cost of goods sold as electricity purchases were made from the spot market.
145
The following table presents quantitative information related to the significant unobservable inputs
described above for Level 3 derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
Fair value at
December 31, 2017
|
|
|
Unobservable input
|
|
Range
($ in full amounts)
|
Assets:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative (D7)
|
|
$
|
-
|
|
|
Interrelationship of future aluminum and oil prices
|
|
Aluminum: $2,258 per metric ton in January 2018 to $2,299 per metric ton in October
2018
Oil: $67 per barrel in January 2018 to $64 per barrel in October 2018
|
Financial contract (D11)
|
|
|
197
|
|
|
Interrelationship of forward energy price and the Consumer Price Index and price of electricity beyond forward
curve
|
|
Electricity: $83.69 per megawatt hour in 2018 to $53.60 per megawatt hour in 2021
|
Liabilities:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative (D1)
|
|
|
403
|
|
|
Interrelationship of LME price to the amount of megawatt hours of energy needed to produce the forecasted metric tons of
aluminum
|
|
Aluminum: $2,258 per metric ton in 2018 to $2,651 per metric ton in 2027
Electricity: rate of 4 million megawatt hours per year
|
Embedded aluminum derivatives (D3 through D5)
|
|
|
685
|
|
|
Price of aluminum beyond forward curve
|
|
Aluminum: $2,679 per metric ton in 2028 to $2,759 per metric ton in 2029 (two contracts)
and $3,055 per metric ton in 2036 (one contract)
Midwest premium: $0.0950 per pound in 2018 to $0.1150
per pound in 2029 (two contracts) and 2036 (one contract)
|
Embedded aluminum derivative (D8)
|
|
|
34
|
|
|
Interrelationship of LME price to the amount of megawatt hours of energy needed to produce the forecasted metric tons of
aluminum
|
|
Aluminum: $2,258 per metric ton in 2018 to $2,317 per metric ton in 2019
Midwest premium: $0.0950 per pound in 2018 to $0.1150 per pound in 2019
Electricity: rate of 2 million megawatt hours per year
|
Embedded aluminum derivative (D2)
|
|
|
24
|
|
|
Interrelationship of LME price to overall energy price
|
|
Aluminum: $2,110 per metric ton in 2018 to $2,342 per metric ton in 2019
|
Embedded credit derivative (D9)
|
|
|
27
|
|
|
Estimated difference in credit spread of each of Alcoa Corporation and counterparty, and
negotiated multiplier
|
|
3.38% (credit spreads: Alcoa Corporation2.48% and counterparty1.51%;
multiplier: 3.49% (1.87%
2
)
|
146
The fair values of Level 3 derivative instruments recorded as assets and liabilities in the
accompanying Consolidated Balance Sheet were as follows:
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative contractscurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
$
|
-
|
|
|
$
|
29
|
|
Financial contract
|
|
|
96
|
|
|
|
-
|
|
Fair value of derivative contractsnoncurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
|
-
|
|
|
|
468
|
|
Financial contract
|
|
|
101
|
|
|
|
-
|
|
Total derivatives designated as hedging instruments
|
|
$
|
197
|
|
|
$
|
497
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative contractscurrent:
|
|
|
|
|
|
|
|
|
Financial contract
|
|
$
|
-
|
|
|
$
|
17
|
|
Total derivatives not designated as hedging instruments
|
|
$
|
-
|
|
|
$
|
17
|
|
Total Asset Derivatives
|
|
$
|
197
|
|
|
$
|
514
|
|
Liability Derivatives
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative contractscurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
$
|
120
|
|
|
$
|
17
|
|
Fair value of derivative contractsnoncurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
|
992
|
|
|
|
187
|
|
Total derivatives designated as hedging instruments
|
|
$
|
1,112
|
|
|
$
|
204
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative contractscurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
$
|
28
|
|
|
$
|
10
|
|
Embedded credit derivative
|
|
|
4
|
|
|
|
5
|
|
Fair value of derivative contractsnoncurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
|
6
|
|
|
|
18
|
|
Embedded credit derivative
|
|
|
23
|
|
|
|
30
|
|
Total derivatives not designated as hedging instruments
|
|
$
|
61
|
|
|
$
|
63
|
|
Total Liability Derivatives
|
|
$
|
1,173
|
|
|
$
|
267
|
|
The following table shows the net fair values of the Level 3 derivative instruments at December 31, 2017 and
the effect on these amounts of a hypothetical change (increase or decrease of 10%) in the market prices or rates that existed as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Fair value
asset/(liability)
|
|
|
Index change
of + /
-10%
|
|
Embedded aluminum derivatives
|
|
$
|
(1,146
|
)
|
|
$
|
489
|
|
Embedded credit derivative
|
|
|
(27
|
)
|
|
|
3
|
|
Financial contract
|
|
|
197
|
|
|
|
55
|
|
147
The following tables present a reconciliation of activity for Level 3 derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
2017
|
|
Embedded
aluminum
derivatives
|
|
|
Financial
contracts
|
|
|
Embedded
aluminum
derivatives
|
|
|
Embedded
credit
derivative
|
|
Opening balanceJanuary 1, 2017
|
|
$
|
497
|
|
|
$
|
17
|
|
|
$
|
232
|
|
|
$
|
35
|
|
Total gains or losses (realized and unrealized) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
3
|
|
|
|
-
|
|
|
|
(110
|
)
|
|
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
Other income, net
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
18
|
|
|
|
(3
|
)
|
Other comprehensive loss
|
|
|
(499
|
)
|
|
|
88
|
|
|
|
1,022
|
|
|
|
-
|
|
Purchases, sales, issuances, and settlements*
|
|
|
-
|
|
|
|
119
|
|
|
|
-
|
|
|
|
-
|
|
Transfers into and/or out of Level 3*
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
(2
|
)
|
|
|
11
|
|
|
|
(16
|
)
|
|
|
-
|
|
Closing balanceDecember 31, 2017
|
|
$
|
-
|
|
|
$
|
197
|
|
|
$
|
1,146
|
|
|
$
|
27
|
|
Change in unrealized gains or losses included in earnings for derivative contracts held at December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income, net
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
18
|
|
|
|
(3
|
)
|
*
|
In January 2017, there was an issuance of a new financial contract (see D11 above). There were no purchases, sales or settlements of Level 3 derivative
instruments. Additionally, there were no transfers of derivative instruments into or out of Level 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
2016
|
|
Embedded
aluminum
derivatives
|
|
|
Financial
contract
|
|
|
Embedded
aluminum
derivatives
|
|
|
Embedded
credit
derivative
|
|
|
Financial
contract
|
|
Opening balanceJanuary 1, 2016
|
|
$
|
1,135
|
|
|
$
|
2
|
|
|
$
|
169
|
|
|
$
|
35
|
|
|
$
|
4
|
|
Total gains or losses (realized and unrealized) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
Cost of goods sold
|
|
|
(92
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
Other income, net*
|
|
|
(13
|
)
|
|
|
(80
|
)
|
|
|
2
|
|
|
|
5
|
|
|
|
(2
|
)
|
Other comprehensive loss
|
|
|
(568
|
)
|
|
|
95
|
|
|
|
47
|
|
|
|
-
|
|
|
|
(1
|
)
|
Purchases, sales, issuances, and settlements**
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
Transfers into and/or out of Level 3**
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
40
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Closing balanceDecember 31, 2016
|
|
$
|
497
|
|
|
$
|
17
|
|
|
$
|
232
|
|
|
$
|
35
|
|
|
$
|
-
|
|
Change in unrealized gains or losses included in earnings for derivative contracts held at December 31,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income, net*
|
|
|
(13
|
)
|
|
|
(80
|
)
|
|
|
2
|
|
|
|
5
|
|
|
|
(2
|
)
|
*
|
In August 2016, Alcoa Corporation elected to terminate the energy contract in accordance with the provisions of the agreement (see D10 above). As a
result, Alcoa Corporation decreased the derivative asset and recorded a charge in Other income, net of $84, which is reflected in the table above. Additionally, Alcoa Corporation also decreased the related unrealized gain included in Accumulated
other comprehensive loss and recorded a benefit in
|
148
|
Other income, net of $84. As such, the termination of the specified term of this derivative contract described above did not have an impact on Alcoa Corporations earnings.
|
**
|
In 2016, there was an issuance of a new embedded derivative contained in an amendment to an existing power contract (see D8 above). There were no purchases, sales or
settlements of Level 3 derivative instruments. Additionally, there were no transfers of derivative instruments into or out of Level 3.
|
Derivatives Designated As Hedging InstrumentsCash Flow Hedges
For derivative
instruments that are designated and qualify as cash flow hedges, the effective portion of unrealized gains or losses on the derivative is reported as a component of other comprehensive income. Realized gains or losses on the derivative are
reclassified from other comprehensive income into earnings in the same period or periods during which the hedged transaction impacts earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded
from the assessment of effectiveness are recognized directly in earnings immediately.
Alcoa Corporation has five Level 3 embedded
aluminum derivatives and one Level 3 financial contract (through November 2016 see D10 above) that have been designated as cash flow hedges as described below. Additionally, in January 2017, Alcoa Corporation entered into a new financial
contract, which was designated as a cash flow hedging instrument and was classified as Level 3 under the fair value hierarchy (see D11 above), that replaced the existing financial contract in August 2017.
Embedded aluminum derivatives (D1 through D5).
Alcoa Corporation has entered into energy supply contracts that contain pricing provisions related
to the LME aluminum price. The
LME-linked
pricing features are considered embedded derivatives. Five of these embedded derivatives have been designated as cash flow hedges of forward sales of aluminum. At
December 31, 2017 and 2016, these embedded aluminum derivatives hedge forecasted aluminum sales of 2,859 kmt and 3,127 kmt, respectively.
In 2017, 2016, and 2015, Alcoa Corporation recognized a net unrealized loss of $1,521, a net unrealized loss of $615, and a net unrealized gain of
$1,155, respectively, in Other comprehensive loss related to these five derivative instruments. Additionally, Alcoa Corporation reclassified a realized loss of $113, $7, and $21 from Accumulated other comprehensive loss to Sales in 2017, 2016, and
2015, respectively. Assuming market rates remain constant with the rates at December 31, 2017, a realized loss of $120 is expected to be recognized in Sales over the next 12 months.
There was no ineffectiveness related to these five derivative instruments in 2017, 2016, and 2015.
Financial contracts (D10 and D11).
Alcoa Corporation has a financial contract that hedges the anticipated power requirements at one of its
smelters that became effective when the existing power contract expired in October 2016. In August 2016, Alcoa Corporation elected to terminate most of the remaining term of this financial contract (see D10 above). Additionally, in December 2016,
management elected to discontinue hedge accounting for this contract (see D10 above). This financial contract hedged forecasted electricity purchases of 1,969,544 megawatt hours prior to December 2016. In 2017, Alcoa Corporation reclassified a
realized gain of $6 from Accumulated other comprehensive loss to Cost of goods sold. In 2016 and 2015, Alcoa Corporation recognized an unrealized gain of $96 and an unrealized loss of $2, respectively, in Other comprehensive loss. Additionally,
Alcoa Corporation recognized a gain of $3 and a loss of $3 in Other (income) expenses, net related to hedge ineffectiveness in 2016 and 2015, respectively.
In addition, in January 2017, Alcoa Corporation entered into a new financial contract that hedges the anticipated power requirements at this smelter for the period from August 2017 through July 2021 (see
D11 above). At December 31, 2017, this financial contract hedges forecasted electricity purchases of 8,805,456 megawatt hours. In 2017, Alcoa Corporation recognized an unrealized gain of $88 in Other comprehensive loss. Additionally, Alcoa
Corporation reclassified a realized gain of $25 in 2017 from Accumulated other comprehensive loss to Cost of goods sold. Assuming market rates remain consistent with the rates at December 31, 2017, a realized gain of $96 is expected to be
recognized in Cost of goods sold over the next 12 months. Additionally, Alcoa Corporation recognized a loss of less than $1 in Other income, net related to hedge ineffectiveness in 2017.
149
Derivatives Not Designated As Hedging Instruments
Alcoa Corporation has two (three prior to October 2016) Level 3 embedded aluminum derivatives (D6 through D8) and one Level 3 embedded credit
derivative (D9) that do not qualify for hedge accounting treatment and one Level 3 financial contract that management elected to discontinue hedge accounting treatment (see D10 above). As such, gains and losses related to the changes in fair
value of these instruments are recorded directly in earnings. In 2017, 2016, and 2015, Alcoa Corporation recognized a loss of $22, $17, and $25, respectively, in Other (income) expenses, net, of which a loss of $18, $15, and $8, respectively,
related to the embedded aluminum derivatives, a gain of $3, a loss of $5, and a loss of $17, respectively, related to the embedded credit derivative, and, a loss of $7 and a gain of $3 (no amount for 2015), respectively, related to the financial
contract.
Material Limitations
The disclosures with respect to commodity prices and foreign currency exchange risk do not consider the underlying commitments or anticipated transactions. If the underlying items were included in the
analysis, the gains or losses on the futures contracts may be offset. Actual results will be determined by several factors that are not under Alcoa Corporations control and could vary significantly from those factors disclosed.
Alcoa Corporation is exposed to credit loss in the event of nonperformance by counterparties on the above instruments, as well as credit or performance
risk with respect to its hedged customers commitments. Although nonperformance is possible, Alcoa Corporation does not anticipate nonperformance by any of these parties. Contracts are with creditworthy counterparties and are further supported
by cash, treasury bills, or irrevocable letters of credit issued by carefully chosen banks. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.
Other Financial Instruments.
The carrying values and fair values of Alcoa Corporations other financial instruments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
Cash and cash equivalents
|
|
$
|
1,358
|
|
|
$
|
1,358
|
|
|
$
|
853
|
|
|
$
|
853
|
|
Restricted cash
|
|
|
7
|
|
|
|
7
|
|
|
|
6
|
|
|
|
6
|
|
Long-term debt due within one year
|
|
|
16
|
|
|
|
16
|
|
|
|
21
|
|
|
|
21
|
|
Long-term debt, less amount due within one year
|
|
|
1,388
|
|
|
|
1,555
|
|
|
|
1,424
|
|
|
|
1,573
|
|
The following methods were used to estimate the fair values of other financial instruments:
Cash and cash equivalents and Restricted cash.
The carrying amounts approximate fair value because of the short maturity of the instruments. The
fair value amounts for Cash and cash equivalents and Restricted cash were classified in Level 1.
Long-term debt due within one year
and Long-term debt, less amount due within one year.
The fair value was based on quoted market prices for public debt and on interest rates that are currently available to Alcoa Corporation for issuance of debt with similar terms and maturities
for
non-public
debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
150
P. Income Taxes
Provision for income taxes.
The components of income (loss) before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(712
|
)
|
|
$
|
(688
|
)
|
|
$
|
(1,053
|
)
|
Foreign
|
|
|
1,871
|
|
|
|
526
|
|
|
|
716
|
|
|
|
$
|
1,159
|
|
|
$
|
(162
|
)
|
|
$
|
(337
|
)
|
Provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal*
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
3
|
|
Foreign
|
|
|
421
|
|
|
|
221
|
|
|
|
313
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
424
|
|
|
|
230
|
|
|
|
316
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal*
|
|
|
24
|
|
|
|
-
|
|
|
|
(85
|
)
|
Foreign
|
|
|
152
|
|
|
|
(46
|
)
|
|
|
171
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
176
|
|
|
|
(46
|
)
|
|
|
86
|
|
Total
|
|
$
|
600
|
|
|
$
|
184
|
|
|
$
|
402
|
|
*
|
Includes U.S. income taxes related to foreign income
|
A reconciliation of the U.S. federal statutory rate to Alcoa Corporations effective tax rate was as follows (the effective tax rate was a provision on income in 2017 and a provision on a loss in
2016 and 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Changes in valuation allowances
|
|
|
25.8
|
|
|
|
(1.9
|
)
|
|
|
(62.6
|
)
|
Taxes on foreign operationsrate differential
|
|
|
(10.8
|
)
|
|
|
44.3
|
|
|
|
14.2
|
|
Impact of U.S. Tax Cuts and Jobs Act of 2017
|
|
|
1.9
|
|
|
|
-
|
|
|
|
-
|
|
Noncontrolling interest
|
|
|
1.4
|
|
|
|
(7.3
|
)
|
|
|
(8.5
|
)
|
Other taxes related to foreign operations
|
|
|
1.3
|
|
|
|
(19.5
|
)
|
|
|
(20.9
|
)
|
Tax holidays
(1)
|
|
|
0.4
|
|
|
|
11.2
|
|
|
|
6.2
|
|
Losses and credits with no tax benefit
(2)
|
|
|
(0.2
|
)
|
|
|
(163.2
|
)
|
|
|
(82.0
|
)
|
Statutory tax rate and law changes
|
|
|
0.1
|
|
|
|
(0.6
|
)
|
|
|
(0.3
|
)
|
Nondeductible costs related to the Separation Transaction
|
|
|
-
|
|
|
|
(9.6
|
)
|
|
|
-
|
|
Impact of capitalization of intercompany debt
|
|
|
-
|
|
|
|
-
|
|
|
|
3.3
|
|
Other
|
|
|
(3.1
|
)
|
|
|
(2.0
|
)
|
|
|
(3.7
|
)
|
Effective tax rate
|
|
|
51.8
|
%
|
|
|
(113.6
|
)%
|
|
|
(119.3
|
)%
|
(1)
|
As of December 31, 2017, the income of certain operations of several of the Companys subsidiaries in Brazil are taxed at a lower rate as a
result of approved tax holidays. The difference between the respective holiday rates and the statutory rates resulted in a benefit of $20, or $0.11 per diluted share, in 2017. The majority of these tax holidays expire at the end of 2022 and one tax
holiday expires at the end of 2026 (see below). In 2017, this line item also includes a charge of $26 for the remeasurement of certain deferred tax assets at the holiday rate (see below).
|
151
(2)
|
In 2016 and 2015, hypothetical net operating losses and tax credits determined on a separate return basis for which it is more likely than not that a
tax benefit will not be realized. The related deferred tax asset and offsetting valuation allowance have been adjusted to Parent Company net investment and, as such, are not reflected in subsequent deferred tax and valuation allowance tables.
|
In mid-2017, AWAB received approval for a tax holiday related to the operation of the Juruti (Brazil) bauxite mine. This
tax holiday is effective as of January 1, 2017 (retroactively) and decreases AWABs 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, AWABs 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 AWABs deferred tax assets and a
discrete income tax charge of $26 ($15 after noncontrolling interest).
Deferred income taxes.
The components of deferred tax assets
and liabilities based on the underlying attribute without regard to jurisdiction were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
December 31,
|
|
Deferred
tax
assets
|
|
|
Deferred
tax
liabilities
|
|
|
Deferred
tax
assets
|
|
|
Deferred
tax
liabilities
|
|
Tax loss carryforwards
|
|
$
|
1,185
|
|
|
$
|
-
|
|
|
$
|
1,064
|
|
|
$
|
-
|
|
Employee benefits
|
|
|
949
|
|
|
|
-
|
|
|
|
1,240
|
|
|
|
-
|
|
Derivatives and hedging activities
|
|
|
287
|
|
|
|
70
|
|
|
|
-
|
|
|
|
124
|
|
Loss provisions
|
|
|
246
|
|
|
|
-
|
|
|
|
313
|
|
|
|
-
|
|
Tax credit carryforwards
|
|
|
193
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
Depreciation
|
|
|
141
|
|
|
|
432
|
|
|
|
187
|
|
|
|
499
|
|
Deferred income/expense
|
|
|
11
|
|
|
|
109
|
|
|
|
28
|
|
|
|
136
|
|
Other
|
|
|
100
|
|
|
|
57
|
|
|
|
233
|
|
|
|
125
|
|
|
|
|
3,112
|
|
|
|
668
|
|
|
|
3,088
|
|
|
|
884
|
|
Valuation allowance
|
|
|
(1,927
|
)
|
|
|
-
|
|
|
|
(1,755
|
)
|
|
|
-
|
|
|
|
$
|
1,185
|
|
|
$
|
668
|
|
|
$
|
1,333
|
|
|
$
|
884
|
|
The following table details the expiration periods of the deferred tax assets presented above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Expires
within
10 years
|
|
|
Expires
within
11-20 years
|
|
|
No
expiration*
|
|
|
Other*
|
|
|
Total
|
|
Tax loss carryforwards
|
|
$
|
330
|
|
|
$
|
250
|
|
|
$
|
605
|
|
|
$
|
-
|
|
|
$
|
1,185
|
|
Tax credit carryforwards
|
|
|
193
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
193
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
297
|
|
|
|
1,437
|
|
|
|
1,734
|
|
Valuation allowance
|
|
|
(523
|
)
|
|
|
(152
|
)
|
|
|
(315
|
)
|
|
|
(937
|
)
|
|
|
(1,927
|
)
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
587
|
|
|
$
|
500
|
|
|
$
|
1,185
|
|
*
|
Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax assets whose expiration is dependent upon the
reversal of the underlying temporary difference.
|
152
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable
income exclusive of reversing temporary differences and taxable temporary differences that reverse within the carryforward period. The composition of Alcoa Corporations net deferred tax asset by jurisdiction as of December 31, 2017 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
Deferred tax assets
|
|
$
|
1,164
|
|
|
$
|
1,948
|
|
|
$
|
3,112
|
|
Valuation allowance
|
|
|
(1,050
|
)
|
|
|
(877
|
)
|
|
|
(1,927
|
)
|
Deferred tax liabilities
|
|
|
(108
|
)
|
|
|
(560
|
)
|
|
|
(668
|
)
|
|
|
$
|
6
|
|
|
$
|
511
|
|
|
$
|
517
|
|
The Company has several income tax filers in various foreign countries. The $511 net deferred tax asset included under
the Foreign column in the table above was comprised of the following (by income tax filer): a $252 net deferred tax asset for Alumínio in Brazil; a $153 net deferred tax asset for AWAB in Brazil; a $112 deferred tax asset for
Alúmina Española, S.A. (Española and collectively with Alumínio and AWAB, the Foreign Filers) in Spain; and a combined $6 net deferred tax liability for several other foreign income tax filers.
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, 2017. Management has also forecasted taxable income for each of the Foreign Filers in 2018 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, alumina, calcined
petroleum coke, liquid pitch, energy (fuel oil, natural gas, electricity), labor, and transportation costs. These are the same assumptions used by management to develop a financial and operating plan, which is used to run 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, 2017.
The following table details the changes in the valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
(1,755
|
)
|
|
$
|
(712
|
)
|
|
$
|
(486
|
)
|
Establishment of new allowances
(1)
|
|
|
(94
|
)
|
|
|
-
|
|
|
|
(141
|
)
|
Net change to existing allowances
(2)
|
|
|
(33
|
)
|
|
|
(1,056
|
)
|
|
|
(148
|
)
|
U.S. state tax apportionment and tax rate changes
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Foreign currency translation
|
|
|
(45
|
)
|
|
|
13
|
|
|
|
33
|
|
Balance at end of year
|
|
$
|
(1,927
|
)
|
|
$
|
(1,755
|
)
|
|
$
|
(712
|
)
|
(1)
|
This line item reflects valuation allowances initially established as a result of a change in managements judgment regarding the realizability of
deferred tax assets.
|
(2)
|
This line item reflects movements in previously established valuation allowances, which increase or decrease as the related deferred tax assets
increase or decrease. Such movements occur as a result of remeasurement due to a tax rate change and changes in the underlying attributes of the deferred tax assets, including expiration of the attribute and reversal of the temporary difference that
gave rise to the deferred tax asset.
|
153
In 2017, Alcoa Corporation established a valuation allowance of $94 related to the remaining deferred tax
assets in Iceland (see below). This amount was comprised of a $60 discrete income charge recognized in the Provision for income taxes on the accompanying Consolidated Statement of Operations and a $34 charge to Accumulated other comprehensive loss
on the accompanying Consolidated Balance Sheet. These deferred tax assets relate to tax loss carryforwards, which have an expiration period ranging from 2017 to 2026, and deferred losses associated with derivative and hedging activities. After
weighing all available positive and negative evidence, management determined that it was no longer more likely than not that Alcoa Corporation will realize the tax benefit of these deferred tax assets. This conclusion was based on existing
cumulative losses and a short expiration period. Such losses were generated as a result of intercompany interest expense under the Companys global treasury and cash management system and the realization of deferred losses associated with an
LME-linked embedded derivative in a power contract (see Note O). Such interest expense is expected to continue and additional deferred losses associated with the embedded derivative will be realized in future years. As a result, management estimates
that there will not be sufficient taxable income available to utilize the 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.
In 2015, Alcoa Corporation recognized a $141 discrete
income tax charge for valuation allowances on certain deferred tax assets in Suriname and Iceland. Of this amount, an $85 valuation allowance was established on the full value of the deferred tax assets in Suriname. These deferred tax assets relate
to tax loss carryforwards and employee benefits have an expiration period ranging from 2016 to 2022. The remaining $56 charge relates to a valuation allowance established on a portion of the deferred tax assets in Iceland, which were related to
tax loss carryforwards that have an expiration period ranging from 2017 to 2019. After weighing all available positive and negative evidence, management determined that it was no longer more likely than not that Alcoa Corporation will realize the
tax benefit of these deferred tax assets. This conclusion was mainly driven by a decline in the outlook of the former Primary Metals business (refers to the smelting and casting operations included in what is currently the Aluminum segment),
combined with prior year cumulative losses and a short 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.
Undistributed net earnings.
The cumulative amount of Alcoa Corporations foreign
undistributed net earnings deemed to be permanently reinvested was approximately $940 as of December 31, 2017. This amount relates to foreign undistributed net earnings generated prior to the Separation Date, as well as approximately $150 of
certain earnings generated during 2017. Alcoa Corporation has several commitments and obligations related to the Companys operations in various foreign jurisdictions; therefore, management has no plans to distribute such earnings in the
foreseeable future. The Company continuously evaluates its local and global cash needs for future business operations and anticipated debt facilities, which may influence future repatriation decisions. As described below (see U.S. Tax Cuts and Jobs
Act of 2017), beginning on January 1, 2018, dividends received from foreign subsidiaries will no longer be subject to U.S. federal income tax; however, there is a mandatory one-time deemed repatriation of existing foreign undistributed net
earnings during 2017 subject to either an 8% or 15.5% tax rate as appropriate. Based on a preliminary analysis, management has estimated that the Company has sufficient U.S. tax losses and foreign tax credits to apply against such tax, resulting in
no impact to Alcoa Corporations Consolidated Financial Statements. Accordingly, with the exception of potential foreign currency exchange rate differences, the earnings described above will not be subject to residual U.S. income tax if
repatriated in the future.
Unrecognized tax benefits.
Alcoa Corporation and its subsidiaries file income tax returns in the U.S.
federal jurisdiction and various foreign and U.S. state jurisdictions. With few exceptions, the Company is not subject to income tax examinations by tax authorities for years prior to 2013. For U.S. federal income tax purposes, most of the
Companys U.S. operations were included in the income tax filings of ParentCos U.S. consolidated tax group prior to the Separation Date. Since that time, the Companys U.S. consolidated tax group, comprised of the referenced U.S.
operations, has filed a two-month U.S. federal income tax return, which has not been examined by the Internal Revenue Service. The U.S. federal income tax filings of ParentCos U.S. consolidated tax group have been examined for all prior years
through the Separation Date. Foreign jurisdiction tax authorities are in the process of examining
154
income tax returns of several of the Companys subsidiaries for various tax years between and including 2006 through 2015. For U.S. state income tax purposes, Alcoa Corporation and its
subsidiaries remain subject to income tax examinations for the 2013 tax year and forward (as of December 31, 2017, there are no active examinations).
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
23
|
|
|
$
|
22
|
|
|
$
|
25
|
|
Additions for tax positions of the current year
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
Additions for tax positions of prior years
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Reductions for tax positions of prior years
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
Settlements with tax authorities
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Expiration of the statute of limitations
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
1
|
|
|
|
(4
|
)
|
Balance at end of year
|
|
$
|
10
|
|
|
$
|
23
|
|
|
$
|
22
|
|
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented
before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2017, 2016, and 2015 would be 1%, 10%, and 4%, respectively, of pretax book income (loss). Alcoa
Corporation does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2018 (see Tax (Spain) in Note R for a matter for which no reserve has been recognized).
It is Alcoa Corporations policy to recognize interest and penalties related to income taxes as a component of the Provision for income
taxes on the accompanying Statement of Consolidated Operations. In 2017, 2016, and 2015, Alcoa Corporation recognized $1, $1, and $7, respectively, in interest and penalties. Due to the expiration of the statute of limitations, settlements with tax
authorities, and refunded overpayments, Alcoa Corporation also recognized interest income of $6, $2, and $1 in 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, the amount accrued for the payment of interest and penalties
was $2 and $6, respectively.
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 existing 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 (see Undistributed
net earnings above) at either an 8% or 15.5% tax rate; (ii) dividends received from foreign subsidiaries can be deducted in full regardless of ownership interest (previously such dividends were fully taxable), however, a foreign withholding tax
on any foreign earnings not asserted as indefinitely reinvested as of December 31, 2017 must be accrued; (iii) a 10.5% tax (effective in 2018) on a new category of income, referred to as global intangible low tax income, related to
earnings taxed at a low rate of foreign entities without a significant 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 companys
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 the
Companys calendar year-end, management elected January 17, 2018 as a cut-off date for purposes of recognizing any impacts from the TCJA in Alcoa Corporations 2017 Consolidated Financial Statements. This date coincided with the
Companys public release of its preliminary financial results for the fourth quarter and year ended December 31, 2017. Accordingly, the Companys preliminary analysis of the provisions of the TCJA resulted in a charge of $22, which
was reflected in the Provision for income taxes on the accompanying Statement of Consolidated Operations for 2017, as described below. The Company expects to finalize its analyses of the TCJA provisions in 2018.
155
The $22 charge relates specifically to managements reasonable estimate of the corporate income tax
rate change, which resulted in the remeasurement of the Companys 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 Companys 2017 Consolidated Financial Statements. Specifically, the reasonable estimate for the TCJA provisions
described above was based on the following: for (i), (ii), and (iii), the Companys 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) the Companys deferred income tax assets related to U.S. net operating losses are fully
reserved as of December 31, 2017.
The Companys 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
.
Q. Asset Retirement Obligations
Alcoa Corporation has recorded 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.
In addition to AROs, certain 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. 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, PCBs, various process residuals, solid wastes, electronic equipment waste, and various other materials. If Alcoa Corporation was required to demolish all such
structures immediately, the estimated CARO as of December 31, 2017 ranges from $3 to $28 per structure (24 structures) in todays dollars.
The following table details the carrying value of recorded AROs by major category (of which $108 and $104 was classified as a current liability as of December 31, 2017 and 2016, respectively):
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Mine reclamation
|
|
$
|
221
|
|
|
$
|
199
|
|
Closure of bauxite residue areas
|
|
|
238
|
|
|
|
219
|
|
Spent pot lining disposal
|
|
|
125
|
|
|
|
135
|
|
Demolition*
|
|
|
113
|
|
|
|
121
|
|
Landfill closure
|
|
|
27
|
|
|
|
30
|
|
Other
|
|
|
1
|
|
|
|
4
|
|
|
|
$
|
725
|
|
|
$
|
708
|
|
*
|
In 2017, 2016, and 2015, AROs were recorded as a result of managements decision to permanently close and demolish certain structures (see Note D).
|
156
The following table details the changes in the total carrying value of recorded AROs:
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
708
|
|
|
$
|
635
|
|
Accretion expense
|
|
|
17
|
|
|
|
19
|
|
Payments
|
|
|
(69
|
)
|
|
|
(47
|
)
|
Liabilities incurred
|
|
|
43
|
|
|
|
117
|
|
Foreign currency translation and other
|
|
|
26
|
|
|
|
(16
|
)
|
Balance at end of year
|
|
$
|
725
|
|
|
$
|
708
|
|
R. Contingencies and Commitments
Unless specifically described to the contrary, all matters within Note R are the full responsibility of Alcoa Corporation pursuant to the Separation and Distribution Agreement. Additionally, the
Separation and Distribution Agreement provides for cross-indemnities between the Company and Arconic for claims subject to indemnification.
Contingencies
Litigation.
Glencore
On June 5, 2015, 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 Glencores 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 AWAs and SCAs 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 ParentCos motion and
denied Glencores 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 Glencores 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,
2016 ruling. AWA and SCA filed an opposition to that application on February 29, 2016. On March 10, 2016, the court denied Glencores motion for interlocutory appeal and on the same day entered judgment on claims other than
Glencores 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 courts 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 ParentCos motion. Remaining in the case were Glencores claims for costs and fees it incurred related to the previously described Superfund action. On
March 7, 2017, Alcoa Corporation and Glencore agreed in principle to settle these claims and on March 17, 2017 requested and were granted an adjournment of the courts scheduled March 21, 2017 conference. On April 5, 2017,
Alcoa and Glencore entered into a settlement agreement to resolve these remaining claims. Accordingly, on April 24, 2017, the court dismissed the case at the request of the parties. The amount of the settlement was not material. This matter is
now closed.
157
Italy 148
Before 2002, ParentCo purchased power in Italy in the regulated energy market and
received a drawback of a portion of the price of power under a special tariff 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,
the Energy Authority published another resolution, which clarified that 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, ParentCo continued to receive the power price drawback
in accordance with the original calculation method, through 2009, when the European Commission declared all such special tariffs to be impermissible state aid. In 2010, the Energy Authority appealed the 2006 ruling to the Consiglio di
Stato (final court of appeal). On December 2, 2011, the Consiglio di Stato ruled in favor of the Energy Authority and against ParentCo, thus presenting 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 (this appeal was subsequently withdrawn in March 2013). On March 26, 2012, ParentCo received a letter from the agency (Cassa Conguaglio per il Settore Eletrico (CCSE)) responsible for making and collecting
payments on behalf of the Energy Authority demanding payment in the amount of approximately $110 (85), including interest. By letter dated April 5, 2012, ParentCo informed CCSE that it disputes the payment 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 CSSE demanding ParentCos former
subsidiary, Alcoa Trasformazioni S.r.l. (Trasformazioni is now a subsidiary of Alcoa Corporation), make a payment in the amount of $97 (76), including interest, which reflects a revised calculation methodology by CCSE and represents the high
end of the range of reasonably possible loss associated with this matter of $0 to $97 (76). 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 that date, the Administrative Court listened to ParentCos 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 respect to the January 19, 2007
through November 19, 2009 timeframe. On December 18, 2014, the CCSE and the Energy Authority appealed the Administrative Courts September 2, 2014 decision; a date for the hearing has been scheduled for May 2018. As a result of
the conclusion of the European Commission Matter on January 26, 2016 (see below), ParentCos management modified its outlook with respect to a portion of the pending legal proceedings related to this matter. As such, a charge of $37
(34) was recorded in Restructuring and other charges for the year ended December 31, 2015 on Alcoa Corporations accompanying Statement of Consolidated Operations to establish a partial reserve for this matter.
In December 2017, through an agreement with Invitalia, which is an Italian government agency responsible for managing economic development, Alcoa
Corporation settled this matter with CCSE and the Energy Authority for $18 (15) (paid in January 2018). Accordingly, the Company recorded a reduction of $22 (19) (the U.S. dollar amount reflects the effects of foreign currency movements
since 2015) to its previously established reserve in Restructuring and other charges (see Note D) on the accompanying 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 Administrative Court to have this matter formally dismissed, for which the parties are awaiting notice. Additional terms of the agreement include the transfer of ownership of
the Portovesme smelter (permanently closed in 2014) from the Company to Invitalia and the settlement of a groundwater remediation project (see Fusina and Portovesme, Italy in Environmental Matters below). Also, Alcoa will retain previously accrued
asset retirement obligations related to ParentCos previous decision to demolish the Portovesme smelter; however, such liabilities may be reduced upon Invitalia achieving certain milestones related to the future of the smelter. The carrying
158
value of the assets related to the Portovesme site were previously written down to zero as a result of ParentCos decision in 2014 to permanently close the smelter.
European Commission Matter.
In July 2006, the European Commission (EC) announced that it had opened an investigation to establish whether an
extension of the regulated electricity tariff granted by Italy to some energy-intensive industries complied with European Union (EU) state aid rules. The Italian power tariff extended the tariff that was in force until December 31, 2005 through
November 19, 2009 (ParentCo had been incurring higher power costs at its smelters in Italy subsequent to the tariff end date through the end of 2012). The extension was originally through 2010, but the date was changed by legislation adopted by
the Italian Parliament effective on August 15, 2009. Prior to expiration of the tariff in 2005, ParentCo had been operating in Italy for more than 10 years under a power supply structure approved by the EC in 1996. That measure provided a
competitive power supply to the primary aluminum industry and was not considered state aid from the Italian Government. The ECs announcement expressed concerns about whether Italys extension of the tariff beyond 2005 was compatible with
EU legislation and potentially distorted competition in the European market of primary aluminum, where energy is an important part of the production costs.
On November 19, 2009, the EC announced a decision in this matter stating that the extension of the tariff by Italy constituted unlawful state aid, in part, and, therefore, the Italian Government is
to recover a portion of the benefit ParentCo received since January 2006 (including interest). The amount of this recovery was to be based on a calculation prepared by the Italian Government (see below). In late 2009, after discussions with legal
counsel and reviewing the bases on which the EC decided, including the different considerations cited in the EC decision regarding ParentCos two smelters in Italy, ParentCo recorded a charge of $250 (173), which included $20
(14) to write off a receivable from the Italian Government for amounts due under the now expired tariff structure and $230 (159) to establish a reserve. On April 19, 2010, ParentCo filed an appeal of this decision with the
General Court of the EU (see below). Prior to 2012, ParentCo was involved in other legal proceedings related to this matter that separately sought the annulment of the ECs July 2006 decision to open an investigation alleging that such decision
did not follow the applicable procedural rules and requested injunctive relief to suspend the effectiveness of the ECs November 19, 2009 decision. However, the decisions by the General Court, and subsequent appeals to the European Court
of Justice, resulted in the denial of these remedies.
In June 2012, ParentCo received formal notification from the Italian Government with a
calculated recovery amount of $375 (303); this amount was reduced by $65 (53) for amounts owed by the Italian Government to ParentCo, resulting in a net payment request of $310 (250). In a notice published in the Official
Journal of the European Union on September 22, 2012, the EC announced that it had filed an action against the Italian Government on July 18, 2012 to compel it to collect the recovery amount (on October 17, 2013, the European Court of
Justice ordered Italy to so collect). On September 27, 2012, ParentCo received a request for payment in full of the $310 (250) by October 31, 2012. Following discussions with the Italian Government regarding the timing of such
payment, ParentCo paid the requested amount in five quarterly installments of $69 (50) beginning in October 2012 through December 2013.
On October 16, 2014, ParentCo received notice from the General Court of the EU that its April 19, 2010 appeal of the ECs November 19, 2009 decision was denied. On December 27,
2014, ParentCo filed an appeal of the General Courts October 16, 2014 ruling to the European Court of Justice (ECJ). Following submission of the ECs response to the appeal, on June 10, 2015, ParentCo filed a request for an oral
hearing before the ECJ; no decision on that request was received. On January 26, 2016, ParentCo was informed that the ECJ had dismissed ParentCos December 27, 2014 appeal of the General Courts October 16, 2014 ruling. The
dismissal of ParentCos appeal represents the conclusion of the legal proceedings in this matter. Prior to this dismissal, ParentCo had a noncurrent asset of $100 (91) reflecting the excess of the total of the five payments made to
the Italian Government over the reserve recorded in 2009. As a result, this noncurrent asset, along with the $58 (53) for amounts owed by the Italian Government to ParentCo mentioned above plus $6 (6) for interest previously
paid, was
written-off.
A charge of $164 (150) was recorded in Restructuring and other charges for the year ended December 31, 2015 on Alcoa Corporations accompanying Statement of
Consolidated Operations (see Note D).
As a result of the ECs November 19, 2009 decision, ParentCos management had
contemplated ceasing operations at its Italian smelters due to uneconomical power costs. In February 2010, ParentCos management agreed to continue to
159
operate its smelters in Italy for up to six months while a long-term solution to address increased power costs could be negotiated. Over a portion of this time, a long-term solution was not able
to be reached related to the Fusina smelter, therefore, in May 2010, ParentCo and the Italian Government agreed to a temporary idling of the Fusina smelter. As of September 30, 2010, the Fusina smelter was fully curtailed (44,000
metric-tons-per-year).
For the Portovesme smelter, ParentCo executed a new power agreement effective September 1, 2010 through December 31, 2012, replacing the
short-term, market-based power contract that was in effect since early 2010. This new agreement along with interruptibility rights (i.e. compensation for power interruptions when grids are overloaded) granted to ParentCo for the Portovesme smelter
provided additional time to negotiate a long-term solution (the EC had previously determined that the interruptibility rights were not considered state aid).
At the end of 2011, as part of a restructuring of ParentCos global smelting system, ParentCos management decided to curtail operations at the Portovesme smelter during 2012 due to the
uncertain prospects for viable, long-term power, along with rising raw materials costs and falling global aluminum prices
(mid-2011
to late 2011). As of December 31, 2012, the Portovesme smelter was fully
curtailed (150,000
metric-tons-per-year).
In June 2013 and
August 2014, ParentCo decided to permanently shut down and demolish the Fusina and Portovesme smelters, respectively, due to persistent uneconomical conditions.
Environmental Matters.
Alcoa Corporation participates in environmental assessments and cleanups at several 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.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As assessments and cleanups proceed, the liability is adjusted
based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as, among others, the nature and extent of contamination, changes in remedial requirements, and
technological changes.
Alcoa Corporations remediation reserve balance was $294 and $324 at December 31, 2017 and 2016 (of which
$36 and $60 was classified as a current liability), respectively, and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated.
In 2017, the remediation reserve was increased by $1 due to a charge of $8 related to the planned demolition of the Rockdale smelter (see Note D), a
combined reduction of $6 related to the Baie Comeau and Mosjøen locations (see below), a reversal of $4 related to the restart of the Warrick smelter (see Note D), and a net charge of $3 associated with several other sites. In 2016, the
remediation reserve was increased by $39 due to a charge of $26 related to the planned demolition of the Suriname refinery and permanent closure of the related bauxite mines (see Note D) and a net charge of $13 associated with several other sites.
In 2015, the remediation reserve was increased by $107 due to a charge of $52 related to the planned demolition of the remaining structures at the Massena East smelter location (see Note D), a charge of $29 related to the planned demolition of the
Poços de Caldas smelter and the Anglesea power station (see Note D), a charge of $12 related to the Mosjøen location (see below), a charge of $7 related to the Portovesme location (see below), and a net charge of $7 associated with
several other sites. Of the changes to the remediation reserve in 2017, 2016, and 2015, $4, $26, and $86, respectively, was recorded in Restructuring and other charges, while the remainder was recorded in Cost of goods sold on the accompanying
Statement of Consolidated Operations.
Payments related to remediation expenses applied against the reserve were $48, $32, and $24 in 2017,
2016, and 2015, respectively. These amounts include expenditures currently mandated, as well as those not required by any regulatory authority or third party. In 2017, the change in the reserve also reflects an increase of $17, including $11 due to
the effects of foreign currency translation and $5 for the reclassification of an amount previously included in Asset retirement obligations on Alcoa Corporations Consolidated Balance Sheet as of December 31, 2016. In 2016, the
160
change in the reserve also reflects an increase for each of the following: $60 of obligations transferred from ParentCo in connection with the Separation Transaction on November 1, 2016,
including Sherwin and East St. Louis described below; $17 for the reclassification of amounts included in other reserves within Other noncurrent liabilities and deferred credits on Alcoa Corporations Consolidated Balance Sheet as of
December 31, 2015; and $5 due to the effects of foreign currency translation. In 2015, the change in the reserve also reflects a decrease of $13 due to the effects of foreign currency translation.
The Separation and Distribution Agreement 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 are 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 and Arconic under the Separation and Distribution Agreement, Alcoa Corporation and Arconic have agreed to indemnify Arconic and Alcoa Corporation in whole or in part for environmental liabilities
arising from operations prior to the Separation Date.
The following description provides details regarding the current status of certain
significant reserves 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.
General
The Company is in the process of decommissioning various plants in several countries. As a result, redeveloping these sites for reuse
or returning the land to a natural state requires the performance of certain remediation activities. In aggregate, the majority of these activities will be completed at various times in the future with the latest expected to be in 2026, afterwhich
ongoing monitoring and other activities will be required. At December 31, 2017 and 2016, the reserve balance associated with these activities was $150 and $141, respectively.
Sherwin, TX
In connection with ParentCos sale of the Sherwin alumina refinery, which was required to be divested as part of ParentCos acquisition of Reynolds Metals Company in
2000, ParentCo agreed to retain responsibility for the remediation of the then existing environmental conditions, as well as a pro rata share of the final closure of the active bauxite residue waste disposal areas (known as the Copano facility). All
ParentCo obligations regarding the Sherwin refinery and Copano facility were transferred from ParentCo to Alcoa Corporation as part of the Separation Transaction on November 1, 2016. In February 2017, the current owner of the Sherwin alumina
refinery and Copano facility received court approval for reorganization under Chapter 11 of the U.S. Bankruptcy Code (see Other below). Through the bankruptcy proceedings, the owner of Sherwin exercised its right under the 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 responsibilities of the parties to the agreement. The Company continues to be involved in a legal dispute
with the owner of Sherwin related to the allocation of responsibility for the environmental obligations at this site. At this time, it is unclear if the ultimate outcome of this matter will result in a change to Alcoa Corporations reserve. At
December 31, 2017 and 2016, the reserve balance associated with Sherwin was $29 and $30, respectively.
Baie Comeau, Quebec,
Canada
In August 2012, ParentCo presented an analysis of remediation alternatives to the Quebec Ministry of Sustainable Development, Environment, Wildlife and Parks (MDDEP), in response to a previous request, related to known
polychlorinated biphenyls (PCBs) and polycyclic aromatic hydrocarbons (PAHs) contained in sediments of the Anse du Moulin bay. As such, ParentCo increased the reserve for Baie Comeau by $25 in 2012 to reflect the estimated cost of ParentCos
recommended alternative, consisting of both dredging and capping of the contaminated sediments. In July 2013, ParentCo submitted the Environmental Impact Assessment for the project to the MDDEP. The MDDEP notified ParentCo that the project as it was
submitted was approved and a final ministerial decree was issued in July 2015. As a result, no further adjustment to the reserve was required in 2015. The decree provided final approval for the project and ParentCo began work on the final project
design at that time; Alcoa Corporation began construction on the project in April 2017 and completed such work in December 2017. At the end of 2017, the Company decreased the reserve for Baie Comeau by $4 to reflect the final cost estimate of the
remaining project work. At December 31, 2017 and 2016, the reserve balance associated with this matter was $5 and $24, respectively.
161
Fusina and Portovesme, Italy
In 1996, ParentCo acquired the Fusina smelter and rolling
operations and the Portovesme smelter, both of which were owned by ParentCos former subsidiary Alcoa Trasformazioni S.r.l. (Trasformazioni) (Trasformazioni is now a subsidiary of Alcoa Corporation and owns the Fusina smelter and
Portovesme smelter sites, and Fusina Rolling S.r.l., a new ParentCo subsidiary, owns the Fusina rolling operations), from Alumix, an entity owned by the Italian Government. At the time of the acquisition, Alumix indemnified ParentCo for
pre-existing
environmental contamination at the sites. In 2004, the Italian Ministry of Environment and Protection of Land and Sea (MOE) issued orders to Trasformazioni 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. Trasformazioni appealed the orders and filed
suit against Alumix, among others, seeking indemnification for these liabilities under the provisions of the acquisition agreement. In 2009, Ligestra S.r.l. (Ligestra), Alumixs successor, and Trasformazioni agreed to a stay of the
court proceedings while investigations were conducted and negotiations advanced towards a possible settlement.
In December 2009,
Trasformazioni and Ligestra reached an initial agreement for settlement of the liabilities related to the Fusina operations while negotiations continued related to Portovesme (see below). The agreement outlined an allocation of payments to the MOE
for emergency action and natural resource damages and the scope and costs for a proposed soil remediation project, which was formally presented to the MOE in
mid-2010.
The agreement was contingent upon final
acceptance of the remediation project by the MOE. As a result of entering into this agreement, ParentCo increased the reserve by $12 in 2009 for Fusina. Based on comments received from the MOE and local and regional environmental authorities,
Trasformazioni submitted a revised remediation plan in the first half of 2012; however, such revisions did not require any change to the existing reserve. In October 2013, the MOE approved the project submitted by ParentCo, resulting in no
adjustment to the reserve.
In January 2014, in anticipation of ParentCo reaching a final administrative agreement with the MOE, ParentCo and
Ligestra entered into a final agreement related to Fusina for allocation of payments to the MOE for emergency action and natural resource damages and the costs for the approved soil remediation project. The agreement resulted in Ligestra assuming
50% to 80% of all payments and remediation costs. On February 27, 2014, ParentCo and the MOE reached a final administrative agreement for conduct of work. The agreement includes both a soil and groundwater remediation project estimated to cost
$33 (24) and requires payments of $25 (18) to the MOE for emergency action and natural resource damages. Based on the final agreement with Ligestra, ParentCos share of all costs and payments was $17 (12), of which
$9 (6) related to the damages will be paid annually over a
10-year
period, which began in April 2014, and was previously fully reserved. On March 30, 2017, the MOE provided authorization to
Trasformazioni to dispose of excavated waste into a third-party landfill; this work began on October 25, 2017. The responsibility for the execution of groundwater remediation project/emergency containment has been transferred to the MOE in
accordance with the February 2014 settlement agreement and remediation is slated to begin in 2019. At December 31, 2017 and 2016, the reserve balance associated with these matters was $8 and $7, respectively.
Effective with the Separation Transaction, Arconic retained the portion of this obligation related to the Fusina rolling operations. Specifically, under
the Separation and Distribution Agreement, Trasformazioni, and with it the Fusina properties, were assigned to Alcoa Corporation. Fusina Rolling S.r.l., entered into a lease agreement for the portion of property that included the rolling operation.
Pursuant to the Separation and Distribution Agreement, the liabilities at Fusina described above were allocated between Alcoa Corporation (Trasformazioni) and Arconic (Fusina Rolling S.r.l.). Arconic will pay $7 (7) for the portion of
remediation expenses associated with the section of property that includes the rolling operation as the project is completed.
Separately, in
2009, due to additional information derived from the site investigations conducted at Portovesme, ParentCo increased the reserve by $3. In November 2011, Trasformazioni and Ligestra reached an agreement for settlement of the liabilities related to
Portovesme, similar to the one for Fusina. A proposed soil remediation project for Portovesme was formally presented to the MOE in June 2012. Neither the agreement with Ligestra nor the proposal to the MOE resulted in a change to the reserve for
Portovesme. In November 2013, the MOE rejected the proposed soil remediation project and requested a revised project be submitted. In May 2014, Trasformazioni and Ligestra submitted a revised soil remediation project that addressed certain
stakeholders concerns. ParentCo increased the reserve by $3 in 2014 to reflect the estimated higher costs associated with the revised soil remediation project, as well as current operating and maintenance costs of the Portovesme site.
162
In October 2014, the MOE required a further revised project be submitted to reflect the removal of a larger
volume of contaminated soil than what had been proposed, as well as design changes for the cap related to the remaining contaminated soil left in place and the expansion of an emergency containment groundwater pump and treatment system that was
previously installed. Trasformazioni and Ligestra submitted the further revised soil remediation project in February 2015. As a result, ParentCo increased the reserve by $7 in March 2015 to reflect the increase in the estimated costs of the project.
In October 2015, ParentCo received a final ministerial decree approving the February 2015 revised soil remediation project. Work on the soil remediation project commenced in
mid-2016
and is expected to be
completed in 2019. For the groundwater remediation project, which was part of a recent settlement of outstanding matters in Italy (see Italy 148 in Litigation above), the MOE has confirmed the percentage of project costs among the responsible
parties, including Alcoa Corporation, although the total cost will not be determined until the final remedial design is completed in late 2018. The ultimate outcome of this matter may result in a change to the existing reserve for Portovesme.
Mosjøen, Norway
In September 2012, ParentCo presented an analysis of remediation alternatives to the Norwegian
Environmental Agency (NEA) (formerly the Norwegian Climate and Pollution Agency, or Klif), in response to a previous request, related to known PAHs in the sediments located in the harbor and extending out into the fjord. As such,
ParentCo increased the reserve for Mosjøen by $20 in 2012 to reflect the estimated cost of the baseline alternative for dredging of the contaminated sediments. A proposed project reflecting this alternative was formally presented to the NEA
in June 2014, and was resubmitted in late 2014 to reflect changes by the NEA. The revised proposal did not result in a change to the reserve for Mosjøen.
In April 2015, the NEA notified ParentCo that the revised project was approved and required submission of the final project design before issuing a final order. ParentCo completed and submitted the final
project design, which identified a need to stabilize the related wharf structure to allow for the sediment dredging in the harbor. As a result, ParentCo increased the reserve for Mosjøen by $11 in June 2015 to reflect the estimated cost of
the wharf stabilization. Also in June 2015, the NEA issued a final order approving the project as well as the final project design. In September 2015, ParentCo increased the reserve by $1 to reflect the potential need (based on prior experience with
similar projects) to perform additional dredging if the results of sampling, which is required by the order, dont achieve the required cleanup levels. Project construction commenced in early 2016 and is expected to be completed in 2018. In the
second half of 2017, Alcoa Corporation reduced the reserve associated with this matter by $2 based on a revised cost estimate of the remaining project work. At December 31, 2017 and 2016, the reserve balance associated with this matter was $2
and $8, respectively.
East St. Louis, IL
ParentCo had an ongoing remediation project related to an area used for the disposal of
bauxite residue from former alumina refining operations. The project, which was selected by the EPA in a Record of Decision (ROD) issued in July 2012, is aimed at implementing a soil cover over the affected area. On November 1, 2013, the U.S.
Department of Justice lodged a consent decree on behalf of the U.S. Environmental Protection Agency (EPA) for ParentCo to conduct the work outlined in the ROD. This consent decree was entered as final in February 2014 by the U.S. Department of
Justice. As a result, ParentCo began construction in March 2014; the fieldwork on a majority of this project was completed by the end of June 2016. A completion report was approved by the EPA in September 2016 and this matter, for the completed
portion of the project, transitioned into a long-term (approximately 30 years) inspection, maintenance, and monitoring program. Fieldwork for the remaining portion of the project is expected to be completed in 2019, at which time it would also
transition into a long-term inspection, maintenance, and monitoring program. This obligation was transferred from ParentCo to Alcoa Corporation as part of the Separation Transaction on November 1, 2016. At both December 31, 2017 and 2016,
the reserve balance associated with this matter was $4.
Tax.
Spain
In September 2010, following a corporate income tax audit covering the 2003 through 2005 tax years, an assessment was received as a result of Spains tax authorities disallowing
certain interest deductions claimed by a Spanish consolidated tax group owned by ParentCo. An appeal of this assessment in Spains Central Tax Administrative Court by ParentCo was denied in October 2013. In December 2013, ParentCo filed an
appeal of the assessment in Spains National Court.
163
Additionally, following a corporate income tax audit of the same Spanish tax group for the 2006 through 2009
tax years, Spains 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 Spains Central Tax Administrative Court, which
was denied in January 2015. ParentCo filed an appeal of this second assessment in Spains National Court in March 2015.
On
January 16, 2017, Spains 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 Spains 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. Spains 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 $155 (130) as of December 31, 2017.
The Company believes it has meritorious arguments to support its tax position and intends to vigorously litigate the remaining assessment through Spains court system. However, in the event the
Company is unsuccessful, a portion of the remaining assessment may be offset with existing tax loss carryforwards 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 (see below). 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.
This Spanish consolidated tax group had been
under audit (began in September 2015) for the 2010 through 2013 tax years. As Spains tax authorities neared the end of the audit, they informed both Alcoa Corporation and Arconic of their intent to issue an assessment similarly disallowing
certain interest deductions as the two assessments described above. On August 3, 2017, in lieu of receiving a formal assessment, all parties agreed to a settlement related to the 2010 through 2013 tax years. For Alcoa Corporation, this
settlement is not material to the Companys Consolidated Financial Statements. Given the stage of the appeal of the assessment for the 2006 through 2009 tax years in Spains National Court, the settlement of the 2010 through 2013 tax years
will not impact the ultimate outcome of that proceeding.
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 the AWABs administrative
appeal, in June 2015, 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 $31 (R$103), whereby the
maximum end of this range represents the portion of the disallowed credits applicable to the export sales and excludes the 50% penalty. Additionally, the estimated range of disallowed credits related to AWABs fixed assets is $0 to $35 (R$117),
which would increase the net carrying value of AWABs fixed assets if ultimately disallowed. It is managements opinion that the allegations have no basis; however, at this time, the Company is unable to reasonably predict the ultimate
outcome for this matter.
Brazil (Alumínio)
Between 2000 and 2002, 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), Brazil, 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
164
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 judgment of the lower courts, finding that Alumínio should neither be solely nor jointly and severally liable with Alfio 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. On February 21, 2017, the lead judge of the STJ issued a ruling confirming that Alumínio should be held
liable in this matter. On March 16, 2017, Alumínio filed an appeal to have its case reheard before the five-judge panel as originally agreed to by the STJ in August 2012. Separately, in June 2017, the State opened a tax amnesty program.
At the end of August 2017, Alumínio elected to submit this matter for consideration into the amnesty program, which the State approved. As a result, under the terms of the amnesty program, this matter was settled for $8 (R$25). In 2017, a
charge for the settlement amount was recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. Prior to submitting this matter for consideration into the amnesty program, the assessment, including penalties and
interest, totaled $46 (R$145). This matter is now closed.
Other.
On January 11, 2016, Sherwin Alumina Company, LLC
(Sherwin), the current owner of a refinery previously owned by ParentCo (see below), and one of its affiliate entities, filed bankruptcy petitions in Corpus Christi, Texas for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. Sherwin informed the bankruptcy court that it intends to cease operations because it is not able to continue its bauxite supply agreement. On November 23, 2016, the bankruptcy court approved Sherwins plans for cessation of its
operations. On February 16, 2017, Sherwin filed a bankruptcy Chapter 11 Plan (the Plan) and on February 17, 2017 the court approved that Plan.
In 2000, ParentCo acquired Reynolds Metals Company (Reynolds, a subsidiary of Alcoa Corporation), which included an alumina refinery in Gregory, 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.
As a result of Sherwins initial bankruptcy filing, separate legal actions were initiated against Reynolds by Gregory Power and Sherwin as follows.
Gregory Power
On January 26, 2016, Gregory Power delivered notice to Reynolds that Sherwins bankruptcy filing constitutes a breach
of the ESA; on January 29, 2016, Reynolds responded that the filing does not constitute a breach. On September 16, 2016, Gregory Power filed a complaint in the bankruptcy case against Reynolds alleging breach of the ESA. In 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. At this time, Alcoa Corporation is unable to reasonably
predict the ultimate outcome of this matter.
Sherwin
On October 4, 2016, the state of Texas filed suit against Sherwin in
the bankruptcy proceeding seeking to hold Sherwin responsible for remediation of alleged environmental conditions at the facility. On October 11, 2016, Sherwin filed a similar suit against Reynolds in the case. As provided in the Plan,
Sherwin, including certain affiliated companies, and Reynolds are negotiating an allocation among them as to the ownership of and responsibility for certain areas of the refinery and related bauxite residue waste disposal areas. Upon agreed
stipulations filed by the parties, the bankruptcy court has extended the deadline to negotiate and file a settlement several times and is currently scheduled for March 12, 2018. At this time, Alcoa Corporation is unable to reasonably predict
the ultimate outcome of this matter.
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,
165
safety and health, contract dispute, and tax 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 determined because of the considerable uncertainties that exist. Therefore, it is possible that the Companys 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.
Commitments
Purchase Obligations.
Alcoa Corporation is party to unconditional purchase obligations for energy that expire between 2028 and 2037. Commitments related to these contracts total $176 in 2018, $180
in 2019, $186 in 2020, $192 in 2021, $199 in 2022, and $2,824 thereafter. Expenditures under these contracts totaled $199 in 2017, $181 in 2016, and $125 in 2015. Additionally, Alcoa Corporation has entered into other purchase commitments for
energy, raw materials, and other goods and services, which total $2,296 in 2018, $1,946 in 2019, $1,498 in 2020, $1,343 in 2021, $1,302 in 2022, and $11,433 thereafter.
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 of a third-party acquisition of the related energy assets from the then-current owner, which occurred in June 2015. The terms of the gas supply agreement required AofA to make a prepayment of $500 in
two installments. The first installment of $300 was made at the time of the completion of the third-party acquisition in June 2015 and the second installment of $200 was made in April 2016. Both of these amounts were included in (Increase) in
noncurrent assets on the accompanying Statement of Consolidated Cash Flows in the respective periods. At December 31, 2017 and 2016, Alcoa Corporation has an asset of $510 (A$654) and $471 (A$654), respectively, which was included in Other
noncurrent assets (see Note S) on the accompanying Consolidated Balance Sheet.
Operating Leases.
Certain land and buildings, alumina
refinery process control technology, plant equipment, vehicles, and computer equipment are under operating lease agreements. Total expense for all leases was $101 in 2017, $90 in 2016, and $98 in 2015. Under long-term operating leases, minimum
annual rentals are $94 in 2018, $73 in 2019, $58 in 2020, $47 in 2021, $15 in 2022, and $21 thereafter.
Guarantees of Third Parties.
At December 31, 2017, Alcoa Corporation has maximum potential future payments for guarantees issued on behalf of a third party of $177. These guarantees expire at various times between 2018 and 2024 and relate to project financing for the
aluminum complex in Saudi Arabia (see Note H).
Bank Guarantees and Letters of Credit.
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. The total amount committed under these
instruments, which automatically renew or expire at various dates between 2018 and 2022, was $543 (includes $112 issued under a
one-year
agreement see below) at December 31, 2017. Additionally,
Arconic has outstanding bank guarantees and letters of credit related to Alcoa Corporation in the amount of $29 at December 31, 2017. 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 Corporation has outstanding bank guarantees and letters of credit related to Arconic in the amount of $18 at December 31, 2017. In the event
Alcoa Corporation would be required to perform under any of these instruments, Alcoa Corporation would be indemnified by Arconic in accordance with the Separation and Distribution Agreement.
In August 2017, Alcoa Corporation entered into a
one-year
standby letter of credit agreement with three financial institutions. The agreement provides for a $150
facility, which will be used by Alcoa Corporation for matters in the ordinary course of business. Alcoa Corporations obligations under this facility will be secured in the same manner as obligations under the Companys Amended Revolving
Credit Agreement (see Note L). Additionally, this facility
166
contains similar representations and warranties and affirmative, negative, and financial covenants as the Companys Amended Revolving Credit Agreement (see Note L). As of December 31,
2017, letters of credit aggregating $112 were issued under this facility. These letters of credit were previously issued in 2017 on a standalone basis.
Surety Bonds.
Alcoa Corporation 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 2018, was $122 at December 31, 2017. Additionally, Arconic has outstanding surety bonds related to Alcoa Corporation in the amount of $14
at December 31, 2017. 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.
S. Other Financial Information
Interest Cost Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Amount charged to expense
|
|
$
|
104
|
|
|
$
|
243
|
|
|
$
|
270
|
|
Amount capitalized
|
|
|
17
|
|
|
|
23
|
|
|
|
30
|
|
|
|
$
|
121
|
|
|
$
|
266
|
|
|
$
|
300
|
|
Other (Income) Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Equity loss
|
|
$
|
28
|
|
|
$
|
70
|
|
|
$
|
89
|
|
Foreign currency losses (gains), net
|
|
|
8
|
|
|
|
8
|
|
|
|
(39
|
)
|
Net gain from asset sales
|
|
|
(116
|
)
|
|
|
(164
|
)
|
|
|
(32
|
)
|
Net loss on
mark-to-market
derivative instruments
(O)
|
|
|
24
|
|
|
|
9
|
|
|
|
26
|
|
Other, net
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
$
|
(58
|
)
|
|
$
|
(89
|
)
|
|
$
|
42
|
|
In 2017, Net gain from asset sales included a $122 gain related to the sale of Yadkin (see Note C). In 2016, Net gain
from asset sales included a $118 gain related to the sale of wharf property near the Intalco (Washington) smelter and a $27 gain related to the sale of an equity interest in a natural gas pipeline in Australia (see Note H). In 2015, Net gain from
asset sales included a $29 gain related to the sale of land around the Lake Charles, Louisiana anode facility.
Other Noncurrent Assets
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Gas supply prepayment (R)
|
|
$
|
510
|
|
|
$
|
471
|
|
Value-added tax credits
(1)
|
|
|
340
|
|
|
|
287
|
|
Prepaid gas transmission contract (H)
|
|
|
300
|
|
|
|
270
|
|
Goodwill (K)
|
|
|
154
|
|
|
|
155
|
|
Deferred mining costs, net
(2)
|
|
|
139
|
|
|
|
127
|
|
Prepaid pension benefit (N)
|
|
|
72
|
|
|
|
43
|
|
Intangibles, net (K)
|
|
|
62
|
|
|
|
135
|
|
Other
|
|
|
142
|
|
|
|
180
|
|
|
|
$
|
1,719
|
|
|
$
|
1,668
|
|
(1)
|
The Value-added tax credits relate to two of the Companys subsidiaries in Brazil, AWAB and Alumínio.
|
(2)
|
As of December 31, 2016, this amount reflects an asset impairment of $72 (see Note D).
|
167
Other Noncurrent Liabilities and Deferred Credits
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
|
2016
|
|
Accrued compensation and retirement costs
|
|
$
|
127
|
|
|
$
|
122
|
|
Deferred alumina sales revenue
|
|
|
68
|
|
|
|
76
|
|
Liability related to the resolution of a legal matter*
|
|
|
-
|
|
|
|
74
|
|
Other
|
|
|
84
|
|
|
|
98
|
|
|
|
$
|
279
|
|
|
$
|
370
|
|
*
|
In early 2014, ParentCo and one of Alcoas Corporations 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 ParentCos portion of the $148 remaining obligation. The $148 was paid in equal installments of $74 in January 2017 and January 2018.
|
Cash Flow Information
Cash paid for interest and income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest, net of amount capitalized
|
|
$
|
100
|
|
|
$
|
226
|
|
|
$
|
270
|
|
Income taxes, net of amount refunded
|
|
|
363
|
|
|
|
265
|
|
|
|
265
|
|
Noncash Financing and Investing Activities.
In September 2016, ANHBV issued $1,250 in new senior notes (see Note
L) 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 the accompanying 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 the accompanying Statement of Consolidated Cash Flows as a cash inflow in the Net change
in restricted cash line item.
T. Subsequent Events
Management evaluated all activity of Alcoa Corporation and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the
Notes to the Consolidated Financial Statements, except as described below.
On January 17, 2018, the Company communicated retirement
benefit changes to certain U.S. and Canadian employees. Effective January 1, 2021, all salaried U.S. and Canadian employees that are participants in the Companys defined benefit pension plans will cease accruing retirement benefits for
future service. This change will affect approximately 800 employees, who will be transitioned to country-specific defined contribution plans, in which the Company will contribute 3% of these participants eligible earnings on an annual basis.
Such contributions will be incremental to any employer savings match the employees may receive under existing defined contribution plans. Participants already collecting benefits under the defined benefit pension plans, as well as those currently
covered by collective bargaining agreements, are not affected by these changes. Also, effective January 1, 2021, Alcoa Corporation will no longer contribute to
pre-Medicare
retiree medical coverage for
U.S. salaried employees and retirees. As a result of these changes, Alcoa Corporation expects to record both a curtailment gain of approximately $20 (pretax) in 2018 and a reduction to the Companys net pension and other postretirement benefits
liability of approximately $35.
168
Separately, Alcoa expects to make discretionary contributions of approximately $300 combined to the U.S. and
Canadian defined benefit pension plans in 2018. The Company intends these contributions to be used to purchase annuity contracts for approximately 9,000 retirees. Such instruments will allow the Company to transfer risk and lower its costs related
to these defined benefit pension plans. At such time(s) annuity contracts are purchased, Alcoa Corporation will record a settlement charge as part of the net periodic benefit cost of these defined benefit pension plans.
169
Supplemental Financial Information (unaudited)
Quarterly Data
(in millions, except
per-share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
(2)
|
|
|
Year
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,655
|
|
|
$
|
2,859
|
|
|
$
|
2,964
|
|
|
$
|
3,174
|
|
|
$
|
11,652
|
|
Net income (loss)
|
|
$
|
308
|
|
|
$
|
138
|
|
|
$
|
169
|
|
|
$
|
(56
|
)
|
|
$
|
559
|
|
Net income (loss) attributable to Alcoa Corporation
|
|
$
|
225
|
|
|
$
|
75
|
|
|
$
|
113
|
|
|
$
|
(196
|
)
|
|
$
|
217
|
|
|
|
|
|
|
|
Earnings per share attributable to Alcoa Corporation common
shareholders
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.23
|
|
|
$
|
0.41
|
|
|
$
|
0.61
|
|
|
$
|
(1.06
|
)
|
|
$
|
1.18
|
|
Diluted
|
|
$
|
1.21
|
|
|
$
|
0.40
|
|
|
$
|
0.60
|
|
|
$
|
(1.06
|
)
|
|
$
|
1.16
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,129
|
|
|
$
|
2,323
|
|
|
$
|
2,329
|
|
|
$
|
2,537
|
|
|
$
|
9,318
|
|
Net (loss) income
|
|
$
|
(215
|
)
|
|
$
|
(12
|
)
|
|
$
|
10
|
|
|
$
|
(129
|
)
|
|
$
|
(346
|
)
|
Net loss attributable to Alcoa Corporation
|
|
$
|
(210
|
)
|
|
$
|
(55
|
)
|
|
$
|
(10
|
)
|
|
$
|
(125
|
)
|
|
$
|
(400
|
)
|
|
|
|
|
|
|
Earnings per share attributable to Alcoa Corporation common
shareholders
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.16
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(2.19
|
)
|
Diluted
|
|
$
|
(1.16
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(2.19
|
)
|
(1)
|
Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per share amounts may not equal the per
share amounts for the year.
|
(2)
|
In the fourth quarter of 2017, Alcoa Corporation recorded restructuring and other charges of $297 (pretax), which were primarily related to both the
termination of a power contract associated with and the permanent closure of the Rockdale (Texas) smelter (see Note D), and discrete income tax charges of $98 for a valuation allowance on certain
non-U.S.
deferred tax assets, the remeasurement of certain
non-U.S.
deferred tax assets due to a tax rate change, and the remeasurement of U.S. deferred tax assets and liabilities at the new corporate income tax rate
of 21% under the 2017 Tax Cuts and Jobs Act signed into law on December 22, 2017 (see Note P). In the fourth quarter of 2016, Alcoa Corporation recorded restructuring and other charges of $209 (pretax), which were primarily related to the
closure of the Suriname refinery and related bauxite mines and the impairment of an interest in a gas exploration field in Australia (see Note D).
|
170