10-K 1 d502924d10k.htm 10-K 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2017

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-37816

ALCOA CORPORATION

(Exact Name of Registrant as Specified in Charter)

 

Delaware    81-1789115
(State of incorporation)    (I.R.S. Employer Identification No.)

201 Isabella Street, Suite 500, Pittsburgh, Pennsylvania 15212-5858

(Address of principal executive offices)    ( Zip code)

412-315-2900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on which registered

Common Stock, par value $0.01 per share    New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes      No .

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes        No     .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes        No     .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [✓]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [✓]       Accelerated filer [    ]       Non-accelerated filer [    ]       Smaller reporting company [    ]

Emerging growth company [    ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No ✓.

As of February 20, 2018, there were 186,175,616 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

The aggregate market value of the Registrant’s voting stock held by non-affiliates at June 30, 2017 was approximately $6.0 billion, based on the closing price per share of Common Stock on June 30, 2017 of $32.65 as reported on the New York Stock Exchange.

Documents incorporated by reference.

Part III of this Form 10-K incorporates by reference certain information from the registrant’s Definitive Proxy Statement for its 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.


Table of Contents

TABLE OF CONTENTS

 

          Page(s)  

Part I

     

Item 1.

   Business      1  

Item 1A.

   Risk Factors      28  

Item 1B.

   Unresolved Staff Comments      41  

Item 2.

   Properties      41  

Item 3.

   Legal Proceedings      42  

Item 4.

   Mine Safety Disclosures      49  

Part II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
     50  

Item 6.

   Selected Financial Data      52  

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      53  

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      87  

Item 8.

   Financial Statements and Supplementary Data      87  

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      171  

Item 9A.

   Controls and Procedures      171  

Item 9B.

   Other Information      171  

Part III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      172  

Item 11.

   Executive Compensation      172  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      172  

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      173  

Item 14.

   Principal Accounting Fees and Services      181  

Part IV

     

Item 15.

   Exhibits, Financial Statement Schedules      182  

Item 16.

   Form 10-K Summary      186  
   Signatures      187  

Note on Incorporation by Reference

In this Form 10-K, selected items of information and data are incorporated by reference to portions of Alcoa Corporation’s Definitive Proxy Statement for its 2018 Annual Meeting of Stockholders (“Proxy Statement”), which will be filed with the Securities and Exchange Commission within 120 days after the end of Alcoa Corporation’s fiscal year ended December 31, 2017. Unless otherwise provided herein, any reference in this Form 10-K to disclosures in the Proxy Statement shall constitute incorporation by reference of only that specific disclosure into this Form 10-K.

Forward-Looking Statements

This report contains statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect the Company’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and changes in circumstances that are difficult to predict. Although the Company believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.

For a discussion of some of the specific factors that may cause Alcoa’s actual results to differ materially from those projected in any forward-looking statements, see the following sections of this report: Part I, Item 1A. (Risk Factors), Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations), including the disclosures under Segment Information and Critical Accounting Policies and Estimates, and the Derivatives Section of Note O to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data). The Company disclaims any obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law. Market projections are subject to the risks discussed above and other risks in the market.


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PART I

Item 1.  Business.

General

Alcoa Corporation, a Delaware corporation, became an independent, publicly traded company on November 1, 2016, as explained below under “Separation Transaction.” Alcoa Corporation has its principal office in Pittsburgh, Pennsylvania. In this report, unless the context otherwise requires, “Alcoa” or the “Company,” “we,” “us,” and “our” means Alcoa Corporation and all subsidiaries consolidated for the purposes of its financial statements.

Alcoa is a global industry leader in the production of bauxite, alumina, and aluminum. Alcoa is built on a foundation of strong values and operating excellence dating back nearly 130 years to the world-changing discovery that made aluminum an affordable and vital part of modern life. Since inventing the aluminum industry, and throughout our history, our talented Alcoans have followed on with breakthrough innovations and best practices that have led to efficiency, safety, sustainability, and stronger communities wherever we operate.

Aluminum is a commodity traded on the London Metal Exchange (“LME”) and priced daily. Alumina is subject to market pricing against the Alumina Price Index (“API”). As a result, the prices of both aluminum and alumina are subject to significant volatility and, therefore, influence the operating results of Alcoa.

Alcoa is a global company with 40 operating locations across 10 countries. In March 2017, the aluminum smelting, cast products and rolled products businesses, along with the majority of the energy segment assets, were combined into a new Aluminum business unit. As a result, Alcoa’s operations consisted of three reportable segments for 2017: Bauxite, Alumina, and Aluminum. 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 Company’s Internet address is http://www.alcoa.com. Alcoa makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The information on the Company’s Internet site is not a part of, or incorporated by reference in, this annual report on Form 10-K. The SEC maintains an Internet site that contains these reports at http://www.sec.gov.

Separation Transaction in 2016

Alcoa Corporation became an independent, publicly-traded company on November 1, 2016, following its separation from its former parent company, Alcoa Inc. (“ParentCo” or “Arconic”). Alcoa Upstream Corporation was formed for the purpose of holding ParentCo’s Alcoa Corporation Business (as defined below), and was renamed Alcoa Corporation in connection with the Separation Transaction and the Distribution (both of which are defined and described below).

On September 28, 2015, ParentCo announced its intention to separate ParentCo into two standalone, publicly traded companies (“Separation Transaction”). Alcoa Corporation was formed to hold ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, as well as ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia (“Alcoa Corporation Business”). Following the Separation Transaction, Alcoa Corporation holds the assets and liabilities of ParentCo relating to those businesses and the direct and indirect subsidiary entities that operated the Alcoa Corporation Business, subject to certain exceptions. Upon completion of the Separation Transaction, ParentCo was renamed Arconic Inc. (“Arconic”) and now holds ParentCo’s Engineered Products and Solutions, Global Rolled Products (other than the rolling mill operations in Warrick, Indiana, and the 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia) and Transportation and Construction Solutions businesses (“Arconic Business”), including those assets and liabilities of ParentCo and its direct and indirect subsidiary entities that operated the Arconic Business, subject to certain exceptions.

 

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On September 29, 2016, the ParentCo Board of Directors approved the distribution of 80.1% of Alcoa Corporation’s issued and outstanding shares of common stock on the basis of one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as of the close of business on October 20, 2016, the record date for the distribution (“Distribution”).

The Separation Transaction and the Distribution were subject to a number of conditions, including, but not limited to, the SEC declaring effective a Registration Statement on Form 10, as amended, filed with the SEC on October 11, 2016 (effectiveness was declared by the SEC on October 17, 2016).

On November 1, 2016, the Separation Transaction was completed and became effective at 12:01 a.m. Eastern Standard Time, at which time Alcoa Corporation became an independent, publicly traded company. To effect the Separation Transaction, ParentCo undertook a series of transactions to separate the net assets and certain legal entities of ParentCo, resulting in a cash payment of approximately $1.1 billion to ParentCo by Alcoa Corporation using the net proceeds of a debt offering. Also at 12:01 a.m. Eastern Standard Time on November 1, 2016, the Distribution occurred. Immediately following the Distribution, Alcoa Corporation stockholders owned directly 80.1% of the outstanding shares of common stock of Alcoa Corporation, and Arconic retained 19.9% of the outstanding shares of common stock of Alcoa Corporation. 146,159,428 shares of Alcoa Corporation common stock were distributed to ParentCo stockholders, and Arconic retained 36,311,767 shares of Alcoa Corporation common stock representing its 19.9% retained interest (In 2017, ParentCo divested itself of its entire interest in Alcoa Corporation). ParentCo stockholders received cash in lieu of any fractional shares of Alcoa Corporation common stock that they would have received after application of the distribution ratio. Upon completion of the Separation Transaction and the Distribution, each ParentCo stockholder as of the record date continued to own shares of ParentCo (which, as a result of ParentCo’s name change to Arconic, are Arconic shares) and owned a proportionate share of the outstanding common stock of Alcoa Corporation that was distributed. ParentCo stockholders were not required to make any payment, surrender or exchange their ParentCo common stock or take any other action to receive their shares of Alcoa Corporation common stock in the Distribution. “Regular-way” trading of Alcoa Corporation’s common stock began with the opening of the New York Stock Exchange (“NYSE”) on November 1, 2016 under the ticker symbol “AA.” Alcoa Corporation’s common stock has a par value of $0.01 per share.

Formation of Alcoa Corporation

Alcoa Upstream Corporation was formed in Delaware on March 10, 2016 for the purpose of holding ParentCo’s Alcoa Corporation Business, and it was renamed Alcoa Corporation in connection with the Separation Transaction and the Distribution.

As part of the Separation Transaction, and prior to the Distribution, ParentCo and its subsidiaries completed an internal reorganization in order to transfer the Alcoa Corporation Business to Alcoa Corporation. Among other things and subject to limited exceptions, the internal reorganization resulted in Alcoa Corporation owning, directly or indirectly, the operations comprising, and the entities that conduct, the Alcoa Corporation Business. The internal reorganization included various restructuring transactions pursuant to which the operations, assets, liabilities and investments of ParentCo and its subsidiaries used to conduct the Alcoa Corporation Business were separated from the operations, assets, liabilities and investments of ParentCo and its subsidiaries used to conduct the Arconic Business. Such restructuring transactions took the form of asset transfers, dividends, contributions and similar transactions, and involved the formation of new subsidiaries in U.S. and non-U.S. jurisdictions to own and operate the Alcoa Corporation Business or the Arconic Business in such jurisdictions.

Following the completion of the internal reorganization and immediately prior to the Distribution, Alcoa Corporation became the parent company of the entities that conduct the Alcoa Corporation Business, and ParentCo (through subsidiaries other than Alcoa Corporation and its subsidiaries) remained the parent company of the entities that conduct the Arconic Business.

In connection with the Separation Transaction, as of October 31, 2016, Alcoa Corporation entered into certain agreements with Arconic to implement the legal and structural separation between the two companies to govern the

 

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relationship between Alcoa Corporation and Arconic after the completion of the Separation Transaction and allocate between Alcoa Corporation and Arconic various assets, liabilities and obligations, including, among other things, employee benefits, environmental liabilities, intellectual property, and tax-related assets and liabilities. These agreements included a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, Stockholder and Registration Rights Agreement, and certain Patent, Know-How, Trade Secret License, and Trademark License Agreements.

Joint Ventures

AWAC

Alcoa World Alumina and Chemicals (“AWAC”) is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited, a company incorporated under the laws of the Commonwealth of Australia and listed on the Australian Securities Exchange. AWAC consists of a number of affiliated entities that own, operate or have an interest in bauxite mines and alumina refineries, as well as certain aluminum smelters, in seven countries. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these entities, directly or indirectly, with such entities being consolidated by Alcoa Corporation for financial reporting purposes.

The scope of AWAC generally includes:

 

   

Bauxite and Alumina: The mining of bauxite and other aluminous ores as well as the refining and other processing of these ores into alumina and other ancillary operations;

 

   

Non-Metallurgical Alumina: The production and sale of non-metallurgical alumina and other alumina-based chemicals; and

 

   

Integrated Operations: Ownership and operation of certain primary aluminum smelting and other ancillary facilities.

Alcoa is the industrial leader of AWAC and provides the operating management for all of the operating entities forming AWAC. The operating management is subject to direction provided by the Strategic Council of AWAC, which is the principal forum for Alcoa and Alumina Limited to provide direction and counsel to the AWAC companies regarding strategic and policy matters. The Strategic Council consists of five members, three of whom are appointed by Alcoa (of which one is the Chairman of the Strategic Council), and two of whom are appointed by Alumina Limited (of which one is the Deputy Chairman of the Strategic Council).

All matters before the Strategic Council are decided by a majority vote of the members, except for certain matters which require approval by at least 80% of the members, including changes to the scope of AWAC; changes in the dividend policy; equity calls in aggregate greater than $1 billion in any year; sales of all or a majority of the AWAC assets; loans from AWAC companies to Alcoa or Alumina Limited; certain acquisitions, divestitures, expansions, curtailments or closures; certain related-party transactions; financial derivatives, hedges or swap transactions; a decision by AWAC companies to file for insolvency; and changes to pricing formula in certain offtake agreements which may be entered into between AWAC companies and Alcoa or Alumina Limited.

AWAC Operations

AWAC entities’ assets include the following interests:

 

   

100% of the bauxite mining, alumina refining, and aluminium smelting operations of Alcoa’s affiliate, Alcoa of Australia Limited (“AofA”);

 

   

100% of the refinery assets at Point Comfort, Texas, United States (“Point Comfort”);

 

   

100% interest in various mining and refining assets and the hydro-electric facilities in Suriname;

 

   

39% interest in the São Luis refinery in Brazil;

 

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9.62% interest in the bauxite mining operations in Brazil of Mineração Rio Do Norte, an international mining consortium;

 

   

100% of the Juruti bauxite deposit and mine in Brazil;

 

   

100% of the refinery and alumina-based chemicals assets at San Ciprián, Spain;

 

   

45% interest in Halco (Mining) Inc., a bauxite consortium that owns a 51% interest in Compagnie des Bauxites de Guinée, a bauxite mine in Guinea;

 

   

100% of Alcoa Steamship Company Inc.;

 

   

25.1% interest in the mine and refinery in Ras Al Khair, Saudi Arabia; and

 

   

55% interest in the Portland, Australia smelter that AWAC manages on behalf of the joint venture partners.

Exclusivity

Under the terms of their joint venture agreements, Alcoa and Alumina Limited have agreed that, subject to certain exceptions, AWAC is their exclusive vehicle for their investments, operations or participation in the bauxite and alumina business, and they will not compete with AWAC in those businesses. In the event of a change of control of either Alcoa or Alumina Limited, this exclusivity and non-compete restriction will terminate, and the partners will then have opportunities to unilaterally pursue bauxite or alumina projects outside of or within AWAC, subject to certain conditions provided in the Amended and Restated Charter of the Strategic Council.

Equity Calls

The cash flow of AWAC and borrowings are the preferred sources of funding for the needs of AWAC. Should the aggregate annual capital budget of AWAC require an equity contribution from Alcoa and Alumina Limited, an equity call can be made on 30 days’ notice, subject to certain limitations.

Dividend Policy

AWAC will generally be required to distribute at least 50% of the prior calendar quarter’s net income of each AWAC company, and certain AWAC companies will also be required to pay a distribution every three months equal to the amount of available cash above specified thresholds and subject to the forecast cash needs of the company. Alcoa will obtain a limited amount of debt funding for the AWAC companies to fund growth projects, subject to certain restrictions.

Leveraging Policy

Debt of AWAC is subject to a limit of 30% of total capital (defined as the sum of debt (net of cash) plus any minority interest plus shareholder equity). The AWAC joint venture will raise a limited amount of debt to fund growth projects within 12 months of it becoming permissible under Alcoa’s revolving credit line, provided that the amount of debt does not trigger a credit rating downgrade for Alcoa.

Other

In December 2009, we entered into a joint venture with Saudi Arabian Mining Company (“Ma’aden”), which was formed by the government of Saudi Arabia to develop its mineral resources and is listed on the Saudi Stock Exchange (Tadawul), to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. This project is one of the most efficient integrated aluminum production complexes within the worldwide Alcoa system. In its initial phases, the complex includes a bauxite mine with an initial capacity of 4 million bone dry metric tons per year; an alumina refinery with an initial capacity of 1.8 million metric tons per year (“mtpy”); an aluminum smelter with an initial capacity of ingot, slab and billet of 740,000 mtpy; and a rolling mill with initial capacity of 380,000 mtpy. The smelter, refinery and mine are fully operational. Ma’aden owns a 74.9% interest in the joint venture. Alcoa owns a 25.1% interest in the smelter and in the rolling mill; AWAC holds a 25.1% interest in the mine and refinery.

 

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The Aluminerie de Bécancour Inc. (“ABI”) smelter is a joint venture between Alcoa and Rio Tinto located in Bécancour, Quebec. Alcoa is the operating partner and owns 74.95% of the joint venture.

The Machadinho Hydro Power Plant (“HPP”) is a consortium between Alcoa Alumínio (25.8%), Votorantim Energia (33.1%), Tractebel (19.3%), Vale (8.3%) and other partners (CEEE, InterCement and DME Energetica) located in the Pelotas River, southern Brazil.

Barra Grande HPP is a joint venture between Alcoa Alumínio (42.2%), CPFL Energia (25%), Votorantim Energia (15%), InterCement (9%) and DME Energetica (8.8%) located in the Pelotas River, southern Brazil.

Estreito HPP is a consortium between Alcoa Alumínio (25.5%), Tractebel (40.1%), Vale (30%) and InterCement (4.4%) located in the Tocantins River, northern Brazil.

Serra do Facão HPP is a consortium between Alcoa Alumínio (34.9%), Furnas (49.4%), Dme Energetica (10%) and Camargo Correa Energia (5.4%) located in the Sao Marcos River, central Brazil.

Manicouagan Power Limited Partnership (“Manicouagan”) is a joint venture between Alcoa Corporation and Hydro-Québec. Manicouagan owns and operates the 335 megawatt McCormick hydroelectric project, which is located on the Manicouagan River in the Province of Quebec. Manicouagan supplies approximately 27% of the electricity requirements of Alcoa’s Baie-Comeau, Quebec, smelter. Alcoa owns 40% of the joint venture.

Strathcona calciner is a joint venture between Alcoa and Rio Tinto. The calciner purchases green coke from the petroleum industry and converts it into calcined coke. The calcined coke is then used as a raw material in an aluminum smelter. Alcoa owns 39% of the joint venture.

Description of the Business

Information describing Alcoa’s businesses can be found on the indicated pages of this report:

 

Item

   Page(s)  

Discussion of Recent Business Developments:

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations:

  

Overview—Results of Operations (Earnings Summary)

     53  

Notes to Consolidated Financial Statements

     96  

Segment Information:

  

Business Descriptions, Principal Products, Principal Markets, Methods of Distribution, Seasonality and Dependence Upon Customers:

  

Bauxite

     6  

Alumina

     14  

Aluminum

     16  

Financial Information about Segments and Financial Information about Geographic Areas:

  

Note E. Segment and Geographic Area Information

     114  

Aluminum is one of the most abundant elements in the earth’s crust. Aluminum metal is produced by smelting alumina using large amounts of electricity, and can be cast and rolled into many shapes and forms. Alumina is an intermediary product produced primarily from refining bauxite. The following tables and related discussion provide additional description of Alcoa’s businesses along this value chain.

The Company’s business segments in 2017 were Bauxite, Alumina, and Aluminum. In the first quarter of 2017, management initiated a realignment of the Company’s internal business and organizational structure, which consisted of combining the Company’s aluminum smelting, casting, and rolling businesses, along with the majority of the energy business, into a new Aluminum business unit, which now is managed as a single operating segment. Prior to this

 

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change, each of these businesses that now comprise the Aluminum segment were managed as individual operating segments and constituted the Aluminum, Cast Products, Energy, and Rolled Products segments. For more information regarding the segment reorganization, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Information—Aluminum.”

The existing Bauxite and Alumina segments and the new Aluminum segment represent the Company’s operating and reportable segments. The Bauxite and Alumina segments primarily consist of a series of affiliated operating entities in a joint venture collectively referred to as AWAC. Alcoa ultimately owns 60% and Alumina Limited, an unrelated third party, ultimately owns 40% of these individual entities.

Bauxite

This segment represents the Company’s global bauxite mining operations. Bauxite is Alcoa’s basic raw material input for its alumina refining process and is also sold into the third-party market. Bauxite contains various aluminum hydroxide minerals, the most important of which are gibbsite and boehmite. Alcoa processes most of the bauxite that it mines into alumina and sells the remainder to third parties. The Company obtains bauxite from its own resources and from those belonging to the AWAC enterprise, located in the countries listed in the table below, as well as pursuant to both long-term and short-term contracts and mining leases. Tons of bauxite are reported as dry metric tons (“dmt”) unless otherwise stated. See the glossary of bauxite mining-related terms at the end of this section.

During 2017, mines operated by Alcoa produced 39.0 million dmt and separately mines operated by partnerships or consortiums that include Alcoa and AWAC equity interests produced 6.8 million dmt on a proportional equity basis for a total bauxite production of 45.8 million dmt.

Based on the terms of its bauxite supply contracts, AWAC bauxite purchases from Mineração Rio do Norte S.A. (“MRN”) and Compagnie des Bauxites de Guinée (“CBG”) differ from its proportional equity in those mines. Therefore during 2017, including those purchases, AWAC had access to 47.7 million dmt of production from its portfolio of bauxite interests.

During 2017, AWAC sold 6.6 million dmt of bauxite to third parties and purchased 0.1 million dmt from third parties. The bauxite delivered to Alcoa and AWAC refineries amounted to 41.0 million dmt during 2017.

The Company is growing its third-party bauxite sales business. For example, in December 2016, Alcoa’s affiliate, AofA, received permission from the Government of Western Australia to export up to 2.5 million dmt per year of bauxite for five years to third-party customers. Contracts for bauxite have generally been short-term contracts (two years or less in duration) with spot pricing and adjustments for quality and logistics, although the Company is currently pursuing long-term contracts with potential customers. The primary customer base for third-party bauxite is located in Asia—particularly China. The Company has access to large bauxite deposit areas with mining rights that extend in most cases more than 20 years from the date of this report. For purposes of evaluating the amount of bauxite that will be available to supply its refineries, the Company considers both estimates of bauxite resources as well as calculated bauxite reserves. Bauxite resources represent deposits for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence based on the amount of exploration sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. Bauxite reserves represent the economically mineable part of resource deposits, and include diluting materials and allowances for losses, which may occur when the material is mined. Appropriate assessments and studies have been carried out to define the reserves, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. Alcoa employs a conventional approach (including additional drilling with successive tightening of the drilling grid) with customized techniques to define and characterize its various bauxite deposit types allowing us to confidently establish the extent of its bauxite resources and their ultimate conversion to reserves.

The following table only includes the amount of proven and probable reserves controlled by the Company. While the level of reserves may appear low in relation to annual production levels, they are consistent with historical levels of

 

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reserves for the Company’s mining locations and consistent with the Company reserves strategy. Given the Company’s extensive bauxite resources, the abundant supply of bauxite globally and the length of the Company’s rights to bauxite, it is not cost-effective to invest the significant funds and efforts necessary to establish bauxite reserves that reflect the total size of the bauxite resources available to the Company. Rather, bauxite resources are upgraded annually to reserves as needed by the location. Detailed assessments are progressively undertaken within a proposed mining area and mine activity is then planned to achieve a uniform quality in the supply of blended feedstock to the relevant refinery. Alcoa believes its present sources of bauxite on a global basis are sufficient to meet the forecasted requirements of its alumina refining operations for the foreseeable future.

Bauxite Resource and Reserve Development Guidelines

Alcoa has adopted best practice guidelines for bauxite reserve and resource classification at its operating bauxite mines. Alcoa’s reserves are declared in accordance with its internal guidelines as administered by the Alcoa Ore Reserves Committee (“AORC”) and certified by Joint Ore Reserves Committee Code (“JORC Code”). The reported ore reserves set forth in the table below are those that we estimated could be extracted economically with current technology and in current market conditions. We do not use a price for bauxite, alumina or aluminum to determine our bauxite reserves. The primary criteria for determining bauxite reserves are the feed specifications required by the receiving alumina refinery. More specifically, reserves are set based on the chemical composition of the bauxite in order to minimize bauxite processing cost and maximize refinery economics for each individual refinery. The primary specifications that are important to this analysis are the “available alumina” and “reactive silica” content of the bauxite. Each alumina refinery will have a target specification for these parameters, but may receive bauxite within a range that allows blending in stockpiles to achieve the receiving refinery’s target.

In addition to these chemical specifications, a number of other ore reserve design factors have been applied to differentiate bauxite reserves from other mineralized material. The contours of the bauxite reserves are designed using parameters such as available alumina content cutoff grade, reactive silica cutoff grade, ore density, overburden thickness, ore thickness and mine access considerations. These parameters are generally determined by using infill drilling or geological modeling.

Further, our mining locations utilize annual in-fill drilling or geological modeling programs designed to progressively upgrade the reserve and resource classification of their bauxite based on the above-described factors.

 

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Bauxite Interests, Share of Reserves and Annual Production1

 

Country   Project  

Owners’
Mining

Rights
(% Entitlement)

  Expiration
Date of
Mining
Rights
    Probable
Reserves2
(million
dmt)
    Proven
Reserves2
(million
dmt)
    Available
Alumina
Content
(%)
AvAl2O3
    Reactive
Silica
Content
(%)
RxSiO2
    2017
Annual
Production
(million
dmt)
    Ore Reserve Design
Factors

Australia

 

Darling

Range

Mines

ML1SA

  Alcoa of Australia Limited (“AofA”)3 (100%)     2024       109.2       70.0       32.8       1.0       33.2    

•   A.Al2O3 ³ 27.5%

•   R.SiO2 £ 3.5%

•   Minimum mineable thickness 2m

•   Minimum bench widths of 45m

Brazil

  Poços de
Caldas
  Alcoa Alumínio S.A. (“Alumínio”)4 (100%)     20205       0.2       1.5       39.3       4.6       0.3    

•   A.Al2O3 ³ 30%

•   R.SiO2 £ 7%

    Juruti5
RN101, RN102, RN103, RN104, #34
  Alcoa World Alumina Brasil Ltda. (“AWA Brasil”)3 (100%)     21005       22       3.8       46.6       4.4       5.6    

•   A.Al2O3 ³ 35%

•   R.SiO2 £ 10%

•   Wash Recovery: ³ 30%

•   Overburden
/Ore (m/m) = 10/1

   

Equity Interests :

                 

Brazil

  Trombetas   Mineração Rio do Norte S.A. (“MRN”)7 (18.2%)     20465       2.7       6.1       49.0       5.1       2.7    

•   A.Al2O3 ³ 46%

•   R.SiO2 £ 7%

•   Wash Recovery: ³ 30%

Guinea

  Boké   Compagnie des Bauxites de Guinée (“CBG”)8 (22.95%)     20389       36.0       37.8      

TAl2O3

48.8

10 

 

   

TSiO210

1.7

 

 

    3.2    

•   A.Al2O3 ³ 44%

•   R.SiO2 £ 10%

•   Minimum mineable thickness 2m

•   Smallest Mining Unit size (SMU) 50m x 50m

Kingdom of Saudi Arabia   Al Ba’itha   Ma’aden Bauxite & Alumina Company (25.1%)11     2037       33.8       18.1      

TAA

49.4

12 

 

   

TSiO212

8.7

 

 

    0.9    

•   A.Al2O3 ³ 40%

•   Mining dilution modeled as a skin of 12.5cm around the ore

•   Mining recovery applied as a skin loss of 7.5 cm on each side of the mineralisation

•   Mineralisation less than 1m thick excluded

1 

This table shows only the AWAC and/or Alcoa share (proportion) of reserve and annual production tonnage.

 

2 

Reserves are in place for all mines other than Juruti and Trombetas, where the ore is beneficiated and a wash recovery factor is applied.

 

3 

This entity is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited.

 

4 

Alumínio is ultimately owned 100% by Alcoa.

 

5 

Brazilian mineral legislation does not establish the duration of mining concessions. The concession remains in force until the exhaustion of the deposit. The company estimates that (i) the concessions at Poços de Caldas will last at least until 2020, (ii) the concessions at Trombetas will last until 2046 and (iii) the concessions at Juruti will last until 2100. Depending, however, on actual and future needs, the rate at which the deposits are exploited and government approval is obtained, the concessions may be extended to (or expire at) a later (or an earlier) date.

 

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Table of Contents
6 

Alcoa World Alumina LLC (“AWA LLC”) owns 100% of N.V. Alcoa Minerals of Suriname (“AMS”). Suralco and AMS are part of the AWAC group of companies which are ultimately owned 60% by Alcoa Corporation and 40% by Alumina Limited.

 

7 

Alumínio holds an 8.58% total interest, AWA Brasil holds a 4.62% total interest and AWA LLC holds a 5% total interest in MRN. MRN is jointly owned with affiliates of Rio Tinto Alcan Inc., Companhia Brasileira de Alumínio, Vale, South32, and Norsk Hydro. Alumínio, AWA Brasil, and AWA LLC purchase bauxite from MRN under long-term supply contracts.

 

8 

AWA LLC owns a 45% interest in Halco (Mining), Inc. (“Halco”). Halco owns 100% of Boké Investment Company, a Delaware company, which owns 51% of CBG. The Guinean Government owns 49% of CBG, which has the exclusive right through 2038 to develop and mine bauxite in certain areas within an approximately 2939 square-kilometer concession in northwestern Guinea.

 

9 

AWA LLC and Alúmina Española, S.A. have bauxite purchase contracts with CBG that expire in 2033. Before that expiration date, AWA LLC and Alumina Española, S.A expect to negotiate extensions of their contracts as CBG will have concession rights until 2038. The CBG concession can be renewed beyond 2038 by agreement of the Government of Guinea and CBG should more time be required to commercialize the remaining economic bauxite within the concession.

 

10 

Guinea—Boké: CBG prices bauxite and plans the mine based on the bauxite content of total alumina (“TAl2O3”) and total silica (“TSiO2”).

 

11 

Ma’aden Bauxite & Alumina Company is a joint venture owned by Saudi Arabian Mining Company (“Ma’aden”) (74.9%) and AWA Saudi Limited (25.1%). AWA Saudi Limited is part of the AWAC group of companies and is ultimately owned 60% by Alcoa Corporation and 40% by Alumina Limited.

 

12 

Kingdom of Saudi Arabia—Al Ba’itha: Bauxite reserves and mine plans are based on the bauxite qualities of total available alumina (“TA.Al2O3”) and total silica (“TSiO2”).

Qualifying statements relating to the table above:

Australia—Darling Range Mines: Huntly and Willowdale are the two active AWAC mines in the Darling Range of Western Australia. The mineral lease issued by the State of Western Australia to Alcoa Corporation’s majority owned subsidiary, AofA is known as ML1SA and encompasses a gross area of 712,881 hectares (including private land holdings, state forests, national parks and conservation areas) in the Darling Range and extends from east of Perth to east of Bunbury (“ML1SA Area”). The ML1SA lease provides AofA with various rights, including certain exclusivity rights to explore for and mine bauxite, rights to deny third party mining tenements in limited circumstances, rights to mining leases for other minerals in the ML1SA Area, and the right to prevent certain governmental actions from interfering with or prejudicially affecting AofA’s rights. The ML1SA lease term extends to 2024; however, it can be renewed for an additional 21-year period to 2045. The above-declared reserves are current as of December 31, 2017. The amount of reserves reflects the total AWAC share. Additional resources are routinely upgraded by additional exploration and development drilling to reserve status. The Huntly and Willowdale mines supply bauxite to three local AWAC alumina refineries.

Brazil—Poços de Caldas: The above-declared reserves are current as of December 31, 2017. Tonnage is total Alcoa share. Additional resources are being upgraded to reserves as needed.

Brazil—Juruti RN101, RN102, RN103, RN104, #34: The above-declared reserves are current as of December 31, 2017. All reserves are on Capiranga Plateau. Declared reserves are total AWAC share. Declared reserve tonnages and the annual production tonnage are washed and unwashed product tonnages. The Juruti mine’s operating license is periodically renewed.

Brazil—Trombetas-MRN: The above-declared reserves are as of December 31, 2017. Declared and annual production tonnages reflect the total for Alumínio and AWAC shares (18.2%). Declared tonnages are washed product tonnages.

 

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Table of Contents

Guinea—Boké-CBG: The above-declared reserves are based on export quality bauxite reserves and are current as of December 31, 2017. Declared tonnages reflect only the AWAC share of CBG’s reserves. Annual production tonnage is reported based on AWAC’s 22.95% share. Declared reserves quality is reported based on total alumina (“TAl2 O3”) and total silica (“TSiO2”) because CBG export bauxite is sold on this basis. Additional resources are being routinely drilled and modeled to upgrade to reserves as needed.

Kingdom of Saudi Arabia—Al Ba’itha: The Al Ba’itha Mine began production during 2014 and production was increased in 2016. Declared reserves are as of November 30, 2017. The declared reserves are located in the South Zone of the Az Zabirah Bauxite Deposit. The reserve tonnage in this declaration is AWAC share only (25.1%).

 

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Table of Contents

The following table provides additional information regarding the Company’s bauxite mines:

 

Mine & Location  

Means of

Access

  Operator  

Title,

Lease or
Options

  History  

Type of

Mine
Mineralization
Style

  Power Source  

Facilities,

Use &
Condition

Australia—Darling Range; Huntly and Willowdale.   Mine locations
accessed by roads.

Ore is transported
to refineries by
long distance
conveyor and rail.

  Alcoa   Mining lease from
the Western Australia
Government.
ML1SA. Expires in
2024, with option to
renew.
  Mining began in
1963.
  Open-cut mines.

 

Bauxite is derived
from the weathering
of Archean granites
and gneisses and
Precambrian
dolerite.

  Electrical
energy from
natural gas is
supplied by the
refinery.
 

Infrastructure includes buildings for administration and services; workshops; power distribution; water supply; crushers; long distance conveyors.

 

Mines and facilities are operating.

Brazil—Poços de Caldas. Closest town is Poços de Caldas, MG, Brazil.   Mine locations
are accessed by
road.

Ore transport to
the refinery is by
road.

  Alcoa   Mining licenses from
the Government of
Brazil and Minas
Gerais. Company
claims and third-
party leases. Expires
in 2020.
  Mining began in
1965.
  Open-cut mines.

Bauxite derived
from the weathering
of nepheline syenite
and phonolite.

  Commercial
grid power.
 

Mining offices and services are located at the refinery.

 

Numerous small deposits are mined by contract miners and the ore is trucked to either the refinery stockpile or intermediate stockpile area.

 

Mines and facilities are operating.

 

Mine production has been reduced to align with the reduced production of the Poços refinery which is now producing specialty alumina.

Brazil—Juruti. Closest town is Juruti located on the Amazon River.   The mine’s port at
Juruti is located
on the Amazon
River and
accessed by ship.

Ore is transported
from the mine site
to the port by
company owned
rail.

  Alcoa   Mining licenses from
the Government of
Brazil and Pará.
Mining rights do not
have a legal
expiration date. See
footnote 5 to the
table above.

 

Operating licenses
for the mine, washing
plant and exploration
are in the process of
being renewed.

 

Operating license for
the port remains
valid until the
government agency
formalizes the
renewal.

  The Juruti
deposit was
systematically
evaluated by
Reynolds
Metals Company
beginning in
1974.

 

ParentCo
merged
Reynolds into
the Company in
2000. ParentCo
then executed a
due diligence
program and
expanded the
exploration
area. Mining
began in 2009.

  Open-cut mines.

 

Bauxite derived
from weathering
during the Tertiary
of Cretaceous fine
to medium grained
feldspathic
sandstones.

 

The deposits are
covered by the
Belterra clays.

  Electrical
energy from
fuel oil is
generated at
the mine site.
Commercial
grid power at
the port.
 

At the mine site: Fixed plant facilities for crushing and washing the ore; mine services offices and workshops; power generation; water supply; stockpiles; rail sidings.

 

At the port: Mine and rail administrative offices and services; port control facilities with stockpiles and ship loader.

 

Mine and port facilities are operating.

 

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Table of Contents
Mine & Location  

Means of

Access

  Operator  

Title,

Lease or
Options

  History  

Type of

Mine
Mineralization
Style

  Power Source  

Facilities,

Use &
Condition

Brazil—MRN Closest town is Trombetas in the State of Pará, Brazil.   The mine and port
areas are
connected by
sealed road and
company owned
rail.

 

Washed ore is
transported to
Porto Trombetas
by rail.

 

Trombetas is
accessed by river
and by air at the
airport.

  MRN   Mining rights and
licenses from the
Government of
Brazil.

 

Concession rights
expire in 2046.

  Mining began in
1979.

 

Major expansion
in 2003.

  Open-cut mines.

Bauxite derived
from weathering
during the Tertiary
of Cretaceous fine
to medium grained
feldspathic
sandstones.

 

The deposits are
covered by the
Belterra clays.

  MRN generates
its own
electricity from
fuel oil.
 

Ore mined from several plateaus is crushed and transported to the washing plant by long-distance conveyors.

 

The washing plant is located in the mining zone.

 

Washed ore is transported to the port area by company-owned and operated rail.

 

At Porto Trombetas the ore is loaded onto customer ships berthed in the Trombetas River. Some ore is dried and the drying facilities are located in the port area.

 

Mine planning and services and mining equipment workshops are located in the mine zone.

The main administrative, rail and port control offices and various workshops are located in the port area.

 

MRN’s main housing facilities, “the city”, are located near the port.

 

The mines, port and all facilities are operating.

Guinea—CBG. Closest town to the mine is Sangaredi.

Closest town to the port is Kamsar. The CBG Lease is located within the Boké, Telimele and Gaoual administrative regions.

  The mine and port
areas are
connected by
sealed road
and company-
operated rail. Ore
is transported to
the port at
Kamsar by
rail. There are air
strips near both
the mine and port.
These are not
operated by the
company.
  CBG   CBG Lease expires
in 2038. The lease is
renewable in 25-year
increments. CBG’s
rights are specified
within the Basic
Agreement and
Amendment 1 to the
Basic Agreement
with the Government
of Guinea.
  Construction
began in 1969.

 

First export ore
shipment was in
1973.

  Open-cut mines.

 

The bauxite
deposits within
the CBG lease are
of two general
types.

 

TYPE 1: In-situ
laterization of
Ordovician and
Devonian plateau
sediments locally
intruded by dolerite
dikes and sills.

 

TYPE 2: Sangaredi
type deposits are
derived from clastic
deposition of
material eroded
from the Type 1
laterite deposits and
possibly some of
the proliths from
the TYPE 1
plateaus deposits.

  The company
generates its
own electricity
from fuel oil at
both Kamsar
and Sangaredi.
 

Mine offices, workshops, power generation and water supply for the mine and company mine city are located at Sangaredi.

 

The main administrative offices, port control, railroad control, workshops, power generation and water supply are located in Kamsar. Ore is crushed, dried and exported from Kamsar. CBG has company cities within both Kamsar and Sangaredi.

 

The mines, railroad, driers, port and other facilities are operating.

Kingdom of Saudi Arabia—Al Ba’itha Mine. Qibah is the closest regional center to the mine, located in the Qassim province.   The mine and
refinery are
connected by road
and rail. Ore is
transported to the
refinery at Ras Al
Khair by rail.
  Ma’aden
Bauxite &
Alumina
Company
  The current mining
lease will expire in
2037.
  The initial
discovery and
delineation of
bauxite
resources was
carried out
between 1979
and 1984.

 

The southern
zone of the Az
Zabirah deposit
was granted to
Ma’aden in
1999.

 

Mine
construction was
completed in the
second quarter
of 2015, and the
mining
operations
continued at
planned levels.

  Open-cut mine.

 

Bauxite occurs as a
paleolaterite profile
developed at an
angular
unconformity
between underlying
late Triassic to
early Cretaceous
sediments (parent
rock sequence
Biyadh Formation)
and the overlying
late Cretaceous
Wasia Formation
(overburden
sequence).

 

  The company
generates
electricity at
the mine site
from fuel oil.
 

The mine includes fixed plants for crushing and train loading; workshops and ancillary services; power plant; and water supply.

 

There is a company village with supporting facilities. Mining operations commenced in 2014.

 

Mine construction was completed in the second quarter of 2015 and the mining operations continued at planned levels.

 

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Table of Contents

Kingdom of Saudi Arabia Joint Venture

In December 2009, ParentCo and Saudi Arabian Mining Company (“Ma’aden”), which was formed by the government of Saudi Arabia to develop its mineral resources and is listed on the Saudi Stock Exchange (Tadawul), entered into a joint venture to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. In its initial phases, the complex includes a bauxite mine with an initial capacity of 4 million dmt per year; an alumina refinery with an initial capacity of 1.8 million mtpy; an aluminum smelter with an initial ingot, slab and billet capacity of 740,000 mtpy; and a rolling mill with initial capacity of 380,000 mtpy. The smelter, refinery and mine are fully operational. Ma’aden owns a 74.9% interest in the joint venture. Alcoa owns a 25.1% interest in the smelter and in the rolling mill; and AWAC holds a 25.1% interest in the mine and refinery.

The refinery, smelter and rolling mill are located within the Ras Al Khair industrial zone on the east coast of the Kingdom of Saudi Arabia.

For additional information regarding the joint venture, see the Equity Investments section of Note H to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).

Glossary of Bauxite Mining Related Terms

 

Term   Abbreviation    Definition

Alcoa Ore Reserves Committee

  AORC    The group within Alcoa, which is comprised of geologists and engineers, that specifies the guidelines by which bauxite reserves and resources are classified. These guidelines are used by Alcoa-managed mines.

Alumina

  Al2O3    A compound of aluminum and oxygen. Alumina is extracted from bauxite using the Bayer process. Alumina is a raw material for smelters to produce aluminum metal.

AORC Guidelines

       The guidelines used by Alcoa-managed mines to classify reserves and resources. These guidelines are issued by the Alcoa Ore Reserves Committee.

Available alumina content

  A.Al2O3    The amount of alumina extractable from bauxite using the Bayer process.

Bauxite

       The principal raw material (mineral) used to produce alumina. Bauxite is refined using the Bayer process to extract alumina.

Bayer process

       The principal industrial chemical process for refining bauxite to produce alumina.

Dry metric ton

  dmt    Tonnage reported on a zero moisture basis.

Competent Persons Report

  CP Report    Joint Ore Reserves Committee (“JORC”) Code compliant Reserves and Resources Report.

Juruti RN101, RN102, RN103,

RN104,#34

       Mineral claim areas in Brazil associated with the Juruti mine, within which Alcoa has mining operating licenses issued by the state.

ML1SA

       The Mineral lease issued by the State of Western Australia to Alcoa’s majority owned subsidiary, Alcoa of Australia (“AofA”). AofA mines located at Huntly and Willowdale operate within ML1SA.

 

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Table of Contents
Term   Abbreviation    Definition

Open-cut mine

       The type of mine in which an excavation is made at the surface to extract mineral ore (bauxite). The mine is not underground and the sky is viewable from the mine floor.

Probable reserve

       That portion of a reserve, i.e. bauxite reserve, where the physical and chemical characteristics and limits are known with sufficient confidence for mining and to which various mining modifying factors have been applied. Probable reserves are at a lower confidence level than proven reserves.

Proven reserve

       That portion of a reserve, i. e. bauxite reserve, where the physical and chemical characteristics and limits are known with high confidence and to which various mining modifying factors have been applied.

Reactive silica

  R.SiO2    The amount of silica contained in the bauxite that is reactive within the Bayer process.

Reserve

       That portion of mineralized material, i.e. bauxite, that Alcoa has determined to be economically feasible to mine and supply to an alumina refinery.

Resources

       Bauxite occurrences and/or concentrations of economic interest that are in such form, quality and quantity that are reasonable prospects for economic extraction.

Silica

  SiO2    A compound of silicon and oxygen.

Total alumina content

  TAl2O3    The total amount of alumina in bauxite. Not all of this alumina is extractable or available in the Bayer process.

Total available alumina

  TA.Al2O3    The total amount of alumina extractable from bauxite by the Bayer process. This term is commonly used when there is a hybrid or variant Bayer process that will refine the bauxite.

Total silica

  TSiO2    The total amount of silica contained in the bauxite.

Alumina

This segment represents the Company’s worldwide refining system, which processes bauxite into alumina. Alcoa’s largest customer for smelter grade alumina is its own aluminum smelters, which in 2017 accounted for approximately 35% of its total alumina sales. A portion of the alumina is sold to external customers who process it into industrial chemical products. Remaining sales are made to customers all over the world and are typically priced by reference to published spot market prices.

This segment also includes AWAC’s 25.1% share of the results of a mining and re-fining joint venture company in Saudi Arabia.

In 2010, a number of key commodity information service providers began publishing daily and weekly alumina (spot) pricing assessments or indices rather than calculating alumina price as a percentage of the LME aluminum price, as had been done traditionally. Since that time, Alcoa has been systematically moving its third-party alumina sales contracts away from LME aluminum-based pricing to published alumina spot or index pricing, thus de-linking the price for alumina from the aluminum price to better reflect alumina’s distinct fundamentals. Contracts for smelter grade alumina are often multi-year, although contract structures have evolved from primarily long-term contracts with fixed or LME-based pricing to shorter-term contracts with more frequent pricing adjustment to reflect this change in pricing structure. In 2017, approximately 86% of Alcoa Corporation’s smelter grade alumina shipments to third parties were sold at published spot/index prices.

 

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Table of Contents

Alcoa’s alumina refining facilities and its worldwide alumina capacity are shown in the following table:

 

Country   Facility1   Nameplate
Capacity2
(000 MTPY)
    Alcoa
Corporation
Consolidated
Capacity3
(000 MTPY)
 

Australia

  Kwinana4     2,190       2,190  
   

Pinjarra4

    4,234       4,234  
   

Wagerup4

    2,555       2,555  

Brazil

 

Poços de Caldas

    390 5       390  
   

São Luís (“Alumar”)6

    3,500       1,890  

Spain

 

San Ciprián

    1,500       1,500  

United States

  Point Comfort, TX7     2,305 8       2,305  

TOTAL

        16,674       15,064  
Equity Interests:                
Country   Facility1   Nameplate
Capacity2
(000 MTPY)
       

Kingdom of Saudi Arabia

  Ras Al Khair9     1,800    

 

1 

Each facility is 100% owned by Alcoa, unless otherwise noted.

 

2 

Nameplate Capacity is an estimate based on design capacity and normal operating efficiencies and does not necessarily represent maximum possible production.

 

3 

The figures in this column reflect Alcoa’s share of production from these facilities. For facilities wholly-owned by AWAC entities, Alcoa takes 100% of the production.

 

4 

These facilities are wholly-owned by Alcoa of Australia Limited, which is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited.

 

5

As a result of the decision to fully curtail the Poços de Caldas smelter, management initiated a reduction in alumina production at this refinery. The capacity that is operating at this refinery is producing at an approximately 45% output level.

 

6 

The Alumar facility is owned by AWA Brasil (39%), Rio Tinto Alcan Inc. (10%), Alumínio (15%), and South32 (36%). AWA Brasil is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited. With respect to Rio Tinto Alcan Inc. and South32, the named company or an affiliate thereof holds the interest.

 

7 

The Point Comfort facility is 100% owned by AWA LLC. This entity is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited.

 

8 

The Point Comfort alumina refinery has been fully curtailed (see below).

 

9 

The Ras Al Khair facility is 100% owned by Ma’aden Bauxite & Alumina Company, a joint venture owned by Ma’aden (74.9%) and AWA Saudi Limited (25.1%). AWA Saudi Limited is part of the AWAC group of companies and is ultimately owned 60% by Alcoa and 40% by Alumina Limited.

As of December 31, 2017, Alcoa had approximately 2,305,000 mtpy of idle capacity relative to total Alcoa consolidated capacity of 15,064,000 mtpy. As noted above, Alcoa and Ma’aden developed an alumina refinery in the Kingdom of Saudi Arabia. Initial capacity of the refinery is 1,800,000 mtpy, and it produced approximately 1,474,000 metric tons (mt) in 2017. For additional information regarding the joint venture, see Note H to the Consolidated Financial Statements under the caption “Investments—Equity Investments.”

 

15


Table of Contents

In March 2015, ParentCo initiated a 12-month review of 2,800,000 mtpy in refining capacity for possible curtailment (partial or full), permanent closure or divestiture, as part of an effort to lower the position of the Company’s refining operations on the global alumina cost curve. The review resulted in the curtailment of the remaining capacity at the Suralco refinery (1,330,000 mtpy) in 2015 and the commencement of the curtailment of the remaining capacity of the Point Comfort, TX refinery (2,010,000 mtpy), which curtailment was completed in the first half of 2016. In the fourth quarter of 2016, Alcoa determined to close the Suralco alumina refinery and bauxite mines in Suriname, which have been fully curtailed since November 2015. For additional information regarding the curtailments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Information—Alumina.”

Aluminum

In the first quarter of 2017, Alcoa Corporation realigned the Company’s internal business and organizational structure. This realignment consisted of combining Alcoa Corporation’s aluminum smelting, casting, and rolling businesses, along with the majority of the energy business, into a new Aluminum business unit.

This segment’s combined smelting and casting operations produce primary aluminum. The smelting operations produce molten primary aluminum, which is then formed by the casting operations into either foundry ingot or into value-add ingot products, including billet, rod, and slab. The primary purpose of the energy assets is to supply power to certain of this segment’s smelting operations, as well as to the rolling mill. However, these energy assets provide operational flexibility to maximize operating results during market cyclicality through the sale of excess energy. The rolling mill produces aluminum sheet primarily sold directly to customers in the packaging end market for the production of aluminum cans. This segment also includes Alcoa’s 25.1% share of the results of a both a smelting and rolling mill joint venture company in Saudi Arabia.

Smelting Operations

Alcoa’s primary aluminum smelting and casting facilities are shown in the following table:

 

Country   Facility1   Nameplate
Capacity2
(000 MTPY)
    Alcoa
Corporation
Consolidated
Capacity3
(000 MTPY)
 

Australia

  Portland4     358       197 5,6 

Brazil

 

Poços de Caldas7

    N/A       N/A  
   

São Luís (“Alumar”)8

    447       268 9 

Canada

 

Baie Comeau, Québec

    280       280  
   

Bécancour, Québec10

    413       310 11 
   

Deschambault, Québec

    260       260  

Iceland

 

Fjarðaál

    344       344  

Norway

 

Lista

    94       94  
   

Mosjøen

    188       188  

Spain

 

Avilés

    93 12       93  
   

La Coruña

    87 12       87  
   

San Ciprián

    228       228  

 

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Country   Facility1   Nameplate
Capacity2
(000 MTPY)
    Alcoa
Corporation
Consolidated
Capacity3
(000 MTPY)
 

United States

 

Massena West, NY

    130       130  
   

Ferndale, WA (“Intalco”)

    279 13       279  
   

Wenatchee, WA

    184 14       184  
   

Evansville, IN (“Warrick”)15

    269 16       269  

TOTAL

        3,654       3,211  
Equity Interests:                
Country   Facility  

Nameplate

Capacity2

(000 MTPY)

       
Kingdom of Saudi Arabia   Ras Al Khair17     740    

 

1

Facilities include casthouse and smelters, unless otherwise indicated. Each facility is 100% owned by Alcoa, unless otherwise noted.

 

2 

Nameplate Capacity is shown for Alcoa’s primary smelters. Nameplate Capacity is an estimate based on design capacity and normal operating efficiencies and does not necessarily represent maximum possible production.

 

3 

The figures in this column reflect Alcoa’s share of production based on Nameplate Capacity from the smelter facilities.

 

4

The Portland facility is owned by AofA (55%), CITC (22.5%), and Marubeni (25%).

 

5 

This figure includes the minority interest of Alumina Limited in the Portland facility, which is owned by AofA, an AWAC company. From this facility, AWAC takes 100% of the production allocated to AofA.

 

6 

The Portland smelter has approximately 30,000 mtpy of idle capacity.

 

7 

The Poços de Caldos facility is a casthouse and does not include a smelter.

 

8

The Alumar facility is owned by Alumínio (60%) and South32 (40%).

 

9 

The Alumar smelter and casthouse have been fully curtailed since April 2015.

 

10 

The Bécancour facility is owned by Alcoa (74.95%) and Rio Tinto Alcan Inc. (“Rio Tinto”) (25.05%) (owned through Rio Tinto’s interest in Pechiney Reynolds Québec, Inc. (“PRQ”); PRQ is owned by Rio Tinto and Alcoa).

 

11

On January 11, 2018, a lockout of the bargained hourly employees commenced at the Bécancour smelter (see Employees below). As a result, only one of the three potlines at this smelter is operating. The idle capacity described below does not include any capacity related to the Bécancour smelter.

 

12 

The Avilés and La Coruña smelters have approximately 56,000 mtpy of idle capacity combined.

 

13 

The Intalco smelter has approximately 49,000 mtpy of idle capacity.

 

14 

The curtailment of remaining capacity at Wenatchee was completed by the end of 2015. The casthouse has been fully curtailed since the end of December 2015.

 

15

The Warrick casthouse is dedicated to supplying rolling slab to the Warrick rolling mill.

 

16

In July 2017, the Company announced that it would restart three of five potlines at the Warrick smelter by the end of the second quarter of 2018. The Warrick smelter had been fully curtailed since the end of 2015.

 

17 

The Ras Al Khair facility includes a rolling mill.

As of December 31, 2017, Alcoa Corporation had approximately 856,000 mtpy of idle capacity relative to total Alcoa consolidated capacity of 3,211,000 mtpy.

 

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In July 2017, Alcoa announced plans to restart three (approximately 161,000 mtpy of capacity) of the five potlines (269,000 mtpy of capacity) at the Warrick smelter, which is expected to be complete in the second quarter of 2018. This smelter was previously 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. Because the smelter will be partially restarted, the capacity of the Warrick smelter was included in the Alcoa’s consolidated capacity at December 31, 2017. Additionally, until the partial restart is completed, the capacity of the Warrick smelter was included in idle capacity at December 31, 2017. Once the partial restart of the Warrick smelter occurs, approximately 161,000 mtpy will be removed from idle capacity.

In October 2017, Alcoa and Luminant Generation Company LLC (Luminant) executed an early termination agreement of a power contract (see Energy Sources—Electricity—North America below), as well as other related fuel and lease agreements, effective October 1, 2017, related to the Company’s Rockdale smelter, which had been fully curtailed since the end of 2008. 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 approximately 191,000 mtpy) and related operations effective immediately. Accordingly, the Rockdale smelter has been removed from the preceding table.

Contracts for primary aluminum vary widely in duration, from multi-year supply contracts to monthly or weekly spot purchases. Pricing for primary aluminum products is typically comprised of three components: (i) the published LME aluminum price for commodity grade P1020 aluminum, (ii) the published regional premium applicable to the delivery locale and (iii) a negotiated product premium which accounts for factors such as shape and alloy. In recent years, we have seen increasing trade flows of commodity and higher value-added products between regions, with surplus regions supplying missing volumes to deficit regions. The flow patterns consider shipping costs, import duties, and premiums in the importing regions.

For additional information regarding the curtailments and closures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restructuring and Other Charges.”

Rolled Products

The Aluminum segment’s rolled products business consists of the Company’s rolling mill in Warrick, Indiana, which produces aluminum sheet primarily sold directly to customers in the packaging end market for the production of aluminum cans (beverage and food) and Alcoa’s investment in a rolling mill in Saudi Arabia through its Ma’aden joint venture. For additional information about the Ma’aden joint venture, see the Equity Investments section of Note H to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).

Alcoa’s rolled products business participates in several market segments, including beverage can sheet, food can sheet, lithographic sheet, and industrial products. The term “RCS” or Rigid Container Sheet is commonly used for both beverage and food can sheet. This includes the material used to produce the body of beverage containers (body stock), the lid of beverage containers (end stock and tab stock), the material to produce food can body and lids (food stock), and the material to produce aluminum bottles (bottle stock) and bottle closures (closure sheet). The U.S. aluminum can business consists of approximately 96% beverage can sheet and approximately 4% food can sheet. Alcoa is one of the largest food can sheet producers in North America. Alcoa intends to suspend supply of lithographic sheet in the second quarter of 2018.

Buyers of RCS products in North America are large and concentrated and have significant market power. There are essentially five buyers of all the U.S. beverage can sheet sold in the beverage industry (three can makers and the two

 

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beverage companies). In 2017, we estimate the North American aluminum can sheet buyers and their respective shares of the industry are: AB-Inbev (>39%), Coca-Cola (>21%), Ball Corporation (>18%), Crown Cork & Seal Company (>15%), Ardagh Group (>5%) and others (2%). Buyers traditionally buy RCS in proportions that represent the full aluminum can (80% body stock, 20% end and tab stock). In addition, as the aluminum can sheet represents approximately 60% of their manufacturing costs, there is a heavy focus on cost.

The market for aluminum food can sheet in North America is also very concentrated. In 2017, we estimate the following market shares of aluminum food can producers in North America: Silgan (>85%), Crown (>12%), Ardagh (>2%) and others (1%).

In 2017, our Warrick facility produced and sold 317 kilo metric tons (“kMT”) of RCS, lithographic sheet, and industrial products, of which over 98% was sold to customers in North America. The majority of its sales were coated RCS products (food stock, beverage end and tab stock). Following the Separation Transaction, both Warrick and Ma’aden supply body stock material, temporarily supplemented by Arconic’s Tennessee Operations under a transition supply agreement. Seasonal increases in can sheet sales are generally expected in the second and third quarters of the year.

Can sheet demand is a function of consumer demand for beverages in aluminum packaging. Aluminum cans have a number of functional advantages for beverage companies, including product shelf life, carbonation retention, and logistics/distribution efficiency. Demand is mostly affected by overall demand for carbonated soft drinks (“CSDs”) and beer. CSDs and beer compose approximately 60% and 40%, respectively, of overall aluminum can demand. In 2017, the U.S./Canada aluminum can shipments reached 93.5 billion cans, a decline of 0.9% over 2016. Alcoholic can shipments reached 36.5 billion cans, declining 3.8% year over year, while non-alcoholic can shipments were 57.0 billion, growing 1.0% year over year.

Energy Facilities and Sources

Employing the Bayer process, Alcoa refines alumina from bauxite ore. We then produce aluminum from the alumina by an electrolytic process requiring substantial amounts of electric power. Energy accounts for approximately 20% of the Company’s total alumina refining production costs. Electric power accounts for approximately 24% of the Company’s primary aluminum production costs.

Electricity markets are regional. They are limited in size by physical and regulatory constraints, including the physical inability to transport electricity efficiently over long distances, the design of the electric grid, including interconnections, and by the regulatory structure imposed by various federal and state entities.

Electricity contracts may be very short term (real-time), short term (day ahead) or years in duration, and contracts can be executed for immediate delivery or years in advance. Pricing may be fixed, indexed to an underlying fuel source or other index such as LME, cost-based or based on regional market pricing. Pricing may be all inclusive on a per energy unit delivered basis (e.g., dollars per megawatt hour) or the components may be separated and include a demand or capacity charge, an energy charge, an ancillary services charge and a transmission charge to make the delivered energy conform to customer requirements. In 2017, Alcoa generated approximately 3% of the power used at its smelters worldwide and generally purchased the remainder under long-term arrangements.

The sections below provide an overview of our energy facilities and summarize the sources of energy for our smelters and refineries.

 

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The following table sets forth the electricity generation capacity and 2017 generation of facilities in which Alcoa Corporation has an ownership interest:

 

Country   Facility1   Alcoa Corporation Consolidated
Capacity (MW)2
    2017 Generation (MWh)3  

Brazil

  Barra Grande     156       1,131,394  
    Estreito     157       858,604  
    Machadinho     119       1,068,977  
    Serra do Facão     60       77,205  

Canada

  Manicouagan     132       1,160,504  

Suriname

  Afobaka     189       919,085  

United States

  Warrick4     657       1,895,681  

TOTAL

        1,470       7,111,450  

 

1

Each listed facility generates hydroelectric power except the Warrick facility, which generates substantially all of the power used at the Warrick facility using nearby coal reserves (see below).

 

2 

The consolidated capacity of the Brazilian energy facilities represented here in megawatts (“MW”), is the assured energy that is approximately 55% of hydropower plant nominal capacity.

 

3 

The figures in this column are presented in megawatt hours (“MWh”).

 

4

The Warrick smelter had been permanently closed since March 2016. In July 2017, the Company announced that it would restart three of five potlines at the Warrick smelter by the end of the second quarter of 2018.

Alumínio owns a 25.74% stake in Consórcio Machadinho, which is the owner of the Machadinho hydroelectric power plant located in southern Brazil. Alumínio also has a 42.18% interest in Energética Barra Grande S.A. (“BAESA”), which built the Barra Grande hydroelectric power plant in southern Brazil. In addition, Alumínio also has a 34.97% share in Serra do Facão Energia S.A., which built the Serra do Facão hydroelectric power plant in the southeast of Brazil. Alumínio is also participating in the Estreito hydropower project in northern Brazil, through Estreito Energia S.A. (an Alumínio wholly owned company) holding a 25.49% stake in Consórcio Estreito Energia, which is the owner of the hydroelectric power plant.

Since May 2015 (after curtailment of the Poços de Caldas and São Luís smelters), the excess generation capacity from the above Brazilian hydroelectric projects, of around 480MW annually, has been sold into the market.

Power generated from Afobaka is sold to the Government of Suriname under a bilateral contract.

In February 2017, Alcoa Corporation’s wholly-owned subsidiary, Alcoa Power Generating Inc. (“APGI”), completed the sale of its 215-megawatt Yadkin Hydroelectric Project (“Yadkin”) to Cube Hydro Carolinas, LLC. In accordance with the Separation and Distribution Agreement (see Note A), Alcoa Corporation remitted a portion of the proceeds to Arconic. 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. Accordingly, the Yadkin energy facilities have been removed from the preceding table.

APGI’s Warrick power plant generates substantially all of the power used at the Warrick smelter and rolling mill using nearby coal reserves. Alcoa owns the nearby Liberty Mine, which is operated by Vigo Coal Company, Inc. at a level of approximately 1.2 million tons per year. Liberty Mine supplies all of the power plant’s coal needs. A public process is currently underway before the Indiana Department of Natural Resources to permit an additional 3,500 acres south of the existing Liberty Mine permit. The expansion will secure a continued source of fuel for the Warrick power plant. During 2017, approximately 26% of the capacity from the Warrick power plant was sold into the market under its current operating permits. APGI also owns certain Federal Energy Regulatory Commission (“FERC”)-regulated transmission assets in Indiana, Tennessee, New York, and Washington.

 

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Electricity

North America

The Deschambault, Baie Comeau, and Bécancour smelters in Québec purchase all or a majority of their electricity under contracts with Hydro-Québec that expire on December 31, 2029. The smelter located in Baie Comeau, Québec purchases approximately 73% of its power needs under the Hydro-Québec contract, and the remainder from a 40% owned hydroelectric generating company, Manicouagan Power Limited Partnership. For the Baie Comeau smelter, the Hydro-Québec contract can be extended until February 23, 2036.

In the State of Washington, Alcoa’s Wenatchee smelter is served by a contract with Chelan County Public Utility District No. 1 (“Chelan PUD”) under which Alcoa receives 26% of the hydropower output of Chelan PUD’s Rocky Reach and Rock Island dams. The Wenatchee smelter was curtailed in 2015.

Starting on January 1, 2013, the Intalco smelter began receiving physical power under a contract with the Bonneville Power Administration (“BPA”) at the Northwest Power Act mandated industrial firm power (“IP”) rate through September 30, 2022. Additional power is purchased from the market as needed. In May 2015, the contract was amended to reduce the amount of physical power received from BPA and allow for additional purchases of market power. In February and April 2016, the contract was amended again to reduce the contractual amount through February 2018, following which Intalco will resume receiving physical contracted quantities of power at the mandated IP rate.

Luminant supplied all of the Rockdale smelter’s electricity requirements under a long-term power contract that was not set to expire before the end of 2038, except for limited circumstances in which one or both parties could elect to early terminate without penalty for which conditions had not been met. As discussed above, in October 2017, Alcoa Corporation and Luminant reached agreement on restructuring their relationship at Rockdale, including agreeing upon the terms for termination of the electricity contract between the parties. On December 21, 2017 Alcoa announced the permanent closure of the Rockdale smelter and related operations, which has been curtailed since 2008.

In the Northeast, the Massena West smelter in New York receives power from the New York Power Authority (“NYPA”) pursuant to a contract between Alcoa and NYPA that will expire in 2019.

Australia

The Portland smelter purchased electricity from the State Electricity Commission of Victoria (“SECV”) under a contract with Alcoa Portland Aluminium Pty Ltd, a wholly-owned subsidiary of AofA, that extended to October 2016. Upon the expiration of this contract, the Portland smelter commenced to purchase power from the National Electricity Market (“NEM”) variable spot market. In March 2010, AofA and Eastern Aluminium (Portland) Pty Ltd separately entered into fixed for floating swap contracts with Loy Yang (now AGL Energy Ltd) in order to manage their exposure to the variable energy rates from the NEM. The fixed for floating swap contract with AGL for the Portland smelter commenced operating from the date of expiration of the contract with the SECV and was terminated in accordance with its terms, effective July 31, 2017. A new fixed for floating swap contract for the Portland smelter was entered into with AGL in January 2017 that commenced on August 1, 2017 and will expire on July 31, 2021.

Europe

Alcoa’s smelters at San Ciprián, La Coruña and Avilés, Spain purchase electricity under bilateral power contracts that expire December 31, 2018.

As a large consumer of electricity, Alcoa participates in a demand response program in Spain, agreeing to reduce usage of electricity for a specific period of time, in return for compensation, which allows the utility or grid operator to divert electricity during times of peak demand. A competitive bidding mechanism to allocate these “interruptibility rights” in

 

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Spain was settled during 2014 to be applied starting from January 1, 2015 and with several auctions to allocate annual rights taking place since then. The last auction process to allocate rights took place in December 2017, where Alcoa secured 595MW of interruptibility rights for the period of January to May 2018 for the three Spanish smelters.

Alcoa owns two smelters in Norway, Lista and Mosjøen, which have long-term power arrangements in place that continue until the end of 2019. During 2017, Alcoa entered into several power purchase agreements, securing approximately 75% and 25% of the necessary power for the Norway smelters in 2020 and for 2021 through 2034, respectively. The Company continues to seek and negotiate additional power contracts for years subsequent to 2019. In addition, for Alcoa’s smelters in Norway, the financial compensation of the indirect carbon emissions costs passed through in the electricity bill is received in accordance with EU Commission Guidelines and Norwegian compensation regime.

Iceland

Landsvirkjun, the Icelandic national power company, supplies competitively priced electricity to Alcoa’s Fjarðaál smelter in eastern Iceland under a 40-year power contract, which will expire in 2047.

Natural Gas

Spain

To facilitate the full conversion of the San Ciprián, Spain alumina refinery from fuel oil to natural gas, in October 2013, Alúmina Española S.A. (“AE”) and Gas Natural Transporte SDG SL (“GN”) signed a take-or-pay gas pipeline utilization agreement. Pursuant to that agreement, the ultimate shareholders of AE, ParentCo and Alumina Limited, agreed to guarantee the payment of AE’s contracted gas pipeline utilization over the four years of the commitment period; in the event AE fails to do so, each shareholder is responsible for its respective proportionate share (i.e., 60/40). Such commitment came into force six months after the gas pipeline was put into operation by GN. The gas pipeline was completed in January 2015 and the refinery has switched to natural gas consumption for 100% of its needs. The ParentCo guarantee has been replaced with an Alcoa Corporation guarantee.

In 2017, natural gas was supplied to the San Ciprián, Spain alumina refinery pursuant to two supply contracts with Endesa, expiring in June and December 2017, and one supply contract with Gas Natural Fenosa (“GNF”), expiring in December 2017. Following expiration of those contracts, natural gas is now supplied pursuant to two supply contracts with Endesa, expiring in June and December 2018, a supply contract with BP expiring in June 2018 and an additional supply contract with Axpo expiring in December 2018.

North America

In order to supply its refinery and smelters in the U.S. and Canada, Alcoa generally procures natural gas on a competitive bid basis from a variety of sources including producers in the gas production areas and independent gas marketers. Pipeline transportation may be procured directly or via the local distribution companies. Contract pricing for gas is typically based on a published industry index such as the New York Mercantile Exchange (“NYMEX”) price. The Company may choose to reduce its exposure to NYMEX pricing by hedging a portion of required natural gas consumption.

Australia

AofA uses gas to co-generate steam and electricity for its alumina refining processes at the Kwinana, Pinjarra and Wagerup refineries. More than 90% of AofA’s gas requirements for the remainder of the decade are secured under long-term contracts. In 2015, AofA secured a significant portion of its gas supplies to 2032.

 

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Other

The Company has a calciner facility located in Lake Charles, Louisiana. This facility converts green coke into calcined coke, which is used as a raw material for the anode formation process at an aluminum smelter. The Lake Charles facility was curtailed in December 2015 due to an equipment failure and restarted again in July 2017. In addition, the Company’s Gum Springs facility processes spent potlining and is located in Arkansas.

Sources and Availability of Raw Materials

Generally, materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The Company believes that the raw materials necessary to its business are and will continue to be available.

For each metric ton (mt) of alumina produced, Alcoa Corporation consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):

 

Raw Material   Units   Consumption per MT of Alumina

Bauxite

  mt   2.2 – 3.7

Caustic soda

  kg   60 – 100

Electricity

  kWh   0 to 210 imported

Fuel oil and natural gas

  GJ   6.2 – 12.2

Lime (CaO)

  kg   6 – 60

For each metric ton of aluminum produced, Alcoa Corporation consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):

 

Raw Material   Units   Consumption per MT of Primary Aluminum

Alumina

  mt   1.92 ± 0.02

Aluminum fluoride

  kg   17.1 ± 5.0

Calcined petroleum coke

  mt   0.37 ± 0.05

Cathode blocks

  mt   0.005 ± 0.002

Electricity

  kWh   12900 –17000

Liquid pitch

  mt   0.10 ± 0.03

Natural gas

  mcf   3.0 ± 1.0

Certain aluminum we produce includes alloying materials. Because of the number of different types of elements that can be used to produce our various alloys, providing a range of such elements would not be meaningful. With the exception of a very small number of internally used products, Alcoa produces its alloys in adherence to an Aluminum Association standard. The Aluminum Association, of which Alcoa Corporation is an active member, uses a specific designation system to identify alloy types. In general, each alloy type has a major alloying element other than aluminum but will also have other constituents as well, but of lesser amounts.

Competition

Alcoa is subject to highly competitive conditions in all aspects of the aluminum supply chain in which it competes. Competitors include a variety of both U.S. and non-U.S. companies in all major markets. Brand name recognition and loyalty also play a role. In addition, Alcoa’s competitive position depends, in part, on the Company’s access to an economical power supply to sustain its operations in various countries.

 

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Bauxite:

The third-party market for metallurgical grade bauxite is relatively new and growing quickly as global demand for bauxite increases—particularly in China. The majority of bauxite mined globally is converted to alumina for the production of aluminum metal. While Alcoa has historically mined bauxite for internal consumption in our alumina refineries, we are focused on building our third-party bauxite business to meet growing demand.

Our principal competitors in the third-party bauxite market include Rio Tinto, Norsk Hydro and multiple suppliers from Guinea, Malaysia, India and other countries. We compete largely based on bauxite quality, price and proximity to customers and end markets. Alcoa has a strong competitive position in this market for the following reasons:

 

   

Low cost production: Alcoa is among the world’s largest bauxite miners, holding a strong global cost curve position, with best practices in efficient mining operations and sustainability.

 

   

Reliable, long-term bauxite resources: Alcoa’s strategic bauxite mine locations include Australia and Brazil as well as Guinea, which is home to the world’s largest reserves of high-quality metallurgical grade bauxite. Alcoa has a long history of stable operations in these countries and has access to large bauxite deposits with mining rights that extend in most cases more than 20 years from the date of this report.

 

   

Access to markets: Alcoa’s Australian bauxite mines are located in close proximity to the largest third-party customer base in China and our facilities are also accessible to a significant and growing alumina refining base in the Middle East.

Alumina:

The alumina market is global and highly competitive, with many active suppliers including producers as well as commodity traders. Alcoa faces competition from a number of companies in all of the regions in which we operate, including Aluminum Corporation of China Limited, China Hongqiao Group Limited, Hindalco Industries Ltd., Hangzhou Jinjiang Group, National Aluminium Company Limited (“NALCO”), Noranda Aluminum Holding Corporation, Norsk Hydro ASA, Rio Tinto, South32 Limited, State Power Investment Corporation, United Company RUSAL Plc, and Chiping Xinfa Alumina Product Co., Ltd. In recent years, there has been significant growth in alumina refining in China and India. The majority of our product is sold in the form of smelter grade alumina, with 5% to 10% of total global alumina production being produced for non-metallurgical applications.

Key factors influencing competition in the alumina market include: cost position, price, reliability of bauxite supply, quality and proximity to customers and end markets. While we face competition from many industry players, we have several competitive advantages:

 

   

Proximity to bauxite: Our refineries are strategically located next to low cost bauxite mines, and our alumina refineries are tuned to maximize efficiency with the exact bauxite qualities from these internal mines. In addition to refining efficiencies, vertical integration affords a stable and consistent long-term supply of bauxite to our refining portfolio.

 

   

Low cost production: As the world’s largest alumina producer outside of China, Alcoa has competitive, efficient assets across its refining portfolio, with a 2017 average cost position in the first quartile of global alumina production. Contributing to this cost position is our experienced workforce and sophistication in refining technology and process automation.

 

   

Access to markets: Alcoa is a global supplier of alumina with refining operations in the key markets of North America (curtailed), South America, Europe, the Middle East, and Australia, enabling us to meet customer demand in the Atlantic and Pacific basins, including China.

Aluminum

In our Aluminum segment, competition is dependent upon the type of product we are selling.

 

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The market for primary aluminum is global, and demand for aluminum varies widely from region to region. We compete with commodity traders and aluminum producers such as Aluminum Corporation of China Limited, China Hongqiao Group Limited, East Hope Group Co. Ltd., Emirates Global Aluminum, Norsk Hydro, Rio Tinto, Shandong Xinfa Aluminum & Power Group, State Power Investment Co. (“SPIC”), and United Company RUSAL Plc, as well as with alternative materials such as steel, titanium, copper, carbon fiber, composites, plastic and glass, each of which may be substituted for aluminum in certain applications.

The aluminum industry itself is highly competitive; some of the most critical competitive factors in our industry are product quality, production costs (including source and cost of energy), price, proximity to raw materials, customers and end markets, timeliness of delivery, customer service (including technical support), and product innovation and breadth of offerings. Where aluminum products compete with other materials, the diverse characteristics of aluminum are also a significant factor, particularly its light weight, strength and recyclability.

In addition, in some end-use markets, competition is also affected by customer requirements that suppliers complete a qualification process to supply their plants. This process can be rigorous and may take many months to complete. However, the ability to obtain and maintain these qualifications can represent a competitive advantage.

The strength of our position in the primary aluminum market is largely attributable to the following factors:

 

   

Value-added product portfolio: Alcoa’s casthouses supply global customers with a diverse product portfolio, both in terms of shapes and alloys. We offer differentiated products that are cast into specific shapes to meet customer demand, with 65% of 2017 smelter shipments representing value-added products.

 

   

Low cost production: Alcoa leverages significant economies of scale to continuously reduce costs. As a result, Alcoa operates competitive, efficient assets across its aluminum smelting and casting portfolios, with its 2017 average smelting cost position in the second quartile of global aluminum smelters. This cost position is supported by long-term energy arrangements at many locations; Alcoa has secured approximately 57% of its smelter power needs through 2022.

 

   

Access to markets: Alcoa is a global supplier of aluminum with smelting and casting operations in the key markets of North America, Europe, the Middle East, and Australia, enabling us to access a broad customer base with competitive logistics costs.

 

   

Sustainability: As of December 31, 2017, approximately 70% of our aluminum smelting portfolio runs on clean hydroelectric power, lessening our demand for fossil fuels and potentially mitigating the risk to the Company from future carbon tax legislation.

Alcoa owns generation and transmission assets that produce and sell electric energy and ancillary services in the United States and Brazilian wholesale energy markets. Our competitors include integrated electric utilities that may be owned by governments (either fully or partially), cooperatives or investors, independent power producers and energy brokers and traders.

Competition factors in open power markets include fuel supply, production costs, operational reliability, access to the power grid, and environmental attributes (e.g., green power and renewable energy credits). As electricity is difficult and cost prohibitive to store, there are no electricity inventories to cushion the impact of supply and demand factors and the resultant pricing in electricity markets may be volatile. Demand for power varies greatly both seasonally and by time of day. Supply may be impacted in the short term by unplanned generator outages or transmission congestion and longer term by planned generator outages, droughts, high precipitation levels and fuel pricing (coal and/or natural gas).

 

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Alcoa’s energy assets enjoy several competitive advantages, when compared to other power suppliers:

 

   

Reliability: In the United States, we have operated our thermal energy assets for over 50 years with a high degree of reliability and expect to continue this level of performance. In Brazil, our ownership provides for assured energy from hydroelectric operations through 2032 to 2037.

 

   

Access and proximity to markets: Our U.S. assets are positioned to take advantage of sales into some of the more liquid power markets, including sales of both energy and capacity.

 

   

Sustainable (“green”) energy sources: A majority of our generating assets use renewable (hydroelectric) sources of fuel for generation.

Our rolled products business participates in various market segments, including beverage can sheet, food can sheet, lithographic sheet, aluminum bottle sheet, and industrial products and in the U.S. competes with other North American producers of RCS products, namely Novelis Corp, Tri-Arrows Aluminum, and Constellium NV. There is also import supply of RCS from China (Nanshan) and Western Europe (Hydro and Eval) mainly for the beverage market.

We also compete against package types made of other materials including polyethylene terephthalate (“PET”) bottles, glass bottles, steel tin plate and other materials. In the U.S., aluminum cans, PET bottles and glass bottles represent approximately 69%, 29% and 2%, respectively, of the CSDs segment. In the beer segment, aluminum cans, glass bottles, and aluminum bottles represent approximately 74%, 22% and 5%, respectively, of the business. In the food can segment, steel tin plate cans and aluminum food cans represent approximately 83% and 17%, respectively, with aluminum cans representing approximately 52% of the pet food segment.

We compete on cost, quality, and service. The Company intends to continue to improve our cost position by increasing recycled aluminum content in our metal feedstock as well as continuing to focus on capacity utilization. We believe our team of technical and operational resources provides distinctive quality and customer service.

Patents, Trade Secrets and Trademarks

The Company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The Company’s rights under its intellectual property, as well as the products made and sold under them, are important to the Company as a whole and, to varying degrees, important to each business segment. Alcoa’s business as a whole is not, however, materially dependent on any single patent, trade secret or trademark. As a result of product development and technological advancement, the Company continues to pursue patent protection in jurisdictions throughout the world. As of December 31, 2017, Alcoa’s worldwide patent portfolio consisted of approximately 675 granted patents and 300 pending patent applications. The Company also has a number of domestic and international registered trademarks that have significant recognition within the markets that are served, including the name “Alcoa” and the Alcoa symbol for aluminum products.

As part of the Separation Transaction, Alcoa Corporation and Arconic entered into certain intellection property license agreements between them. These agreements provide for a license of certain patents, trademarks and know-how from Arconic to Alcoa Corporation, as applicable, to the other on a perpetual, royalty-free, non-exclusive basis, subject to certain exceptions. In June 2017, Alcoa entered into an Amended and Restated Trademark License Agreement with Arconic. See “Certain Relationships and Related Party Transactions, and Director Independence—Agreements with Arconic—Intellectual Property License Agreements.”

Research and Development

Expenditures for research and development activities (“R&D”) were $32 million in 2017, $33 million in 2016, and $69 million in 2015.

 

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Environmental Matters

Alcoa is subject to extensive federal, state and local environmental laws and regulations, including those relating to the release or discharge of materials into the air, water and soil, waste management, pollution prevention measures, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, greenhouse gas emissions, and the health and safety of our employees. We participate in environmental assessments and cleanups at approximately 60 locations. These include owned or operating facilities and adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)) sites. Approved capital expenditures for new or expanded facilities for environmental control were approximately $92 million for 2017 and are approximately $150 million for 2018. Additional information relating to environmental matters is included in Note R to the Consolidated Financial Statements under the caption “Contingencies and Commitments—Environmental Matters.”

Employees

At the end of 2017, Alcoa had approximately 14,600 employees in 15 countries. Approximately 9,600 of these employees are represented by labor unions. In the U.S., approximately 2,300 employees are represented by various labor unions. The largest collective bargaining agreement is the master collective bargaining agreement with the United Steelworkers (“USW”). The USW master agreement covers approximately 1,600 employees at six U.S. locations. There are three other collective bargaining agreements in the U.S. with varying expiration dates. On a regional basis, collective bargaining agreements with varying expiration dates cover approximately 2,100 employees in Europe, 1,600 employees in Canada, 900 employees in Central and South America, and 2,600 employees in Australia.

On January 11, 2018, a lockout of the bargained hourly employees commenced at the Bécancour smelter, impacting approximately 1,000 employees at this facility. The Bécancour facility is owned by Alcoa (74.95%) and Rio Tinto (25.05%). For additional information, see footnote 10 to the table in “Smelting Operations” under the Aluminum segment above.

Executive Officers of the Registrant

The names, ages, positions and areas of responsibility of the executive officers of the Company as of March 1, 2018 are listed below.

Roy C. Harvey, 44, is President and Chief Executive Officer of Alcoa Corporation. He became Chief Executive Officer in November 2016 and assumed the role of President in May 2017. Mr. Harvey served as Executive Vice President of ParentCo and President of ParentCo’s Global Primary Products from October 2015 to November 2016. From June 2014 to October 2015, he was Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability at ParentCo. Prior to that, Mr. Harvey was Chief Operating Officer for Global Primary Products at ParentCo from July 2013 to June 2014, and was Chief Financial Officer for Global Primary Products from December 2011 to July 2013. In addition to these roles, Mr. Harvey served as Director of Investor Relations at ParentCo from September 2010 to November 2011 and was Director of Corporate Treasury from January 2010 to September 2010. Mr. Harvey joined ParentCo in 2002 as a business analyst for Global Primary Products in Knoxville, Tennessee.

William F. Oplinger, 51, is Executive Vice President and Chief Financial Officer of Alcoa Corporation. Mr. Oplinger served as Executive Vice President and Chief Financial Officer of ParentCo from April 1, 2013 to November 2016. Mr. Oplinger joined ParentCo in 2000 and held key corporate positions in financial analysis and planning and as Director of Investor Relations. Mr. Oplinger also held key positions in the ParentCo’s Global Primary Products business, including as Controller, Operational Excellence Director, Chief Financial Officer, and Chief Operating Officer.

Tómas M. Sigurðsson, 50, is Executive Vice President and Chief Operating Officer of Alcoa Corporation. Mr. Sigurðsson served as Chief Operating Officer of ParentCo’s Global Primary Products business from 2014 to

 

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November 2016. Mr. Sigurðsson was President of ParentCo’s European Region and Global Primary Products Europe from 2012 to 2014. From 2004 to 2011, Mr. Sigurðsson was Managing Director of ParentCo’s Iceland operations.

Leigh Ann Fisher, 52, has served as Executive Vice President and Chief Administrative Officer since November 2016. She has responsibility for the Human Resources, Shared Services, Procurement and Information Technology functions of Alcoa Corporation. Ms. Fisher served as Chief Financial Officer of ParentCo’s Global Primary Products business from July 2013 to November 2016. Ms. Fisher was Group Controller for Global Primary Products at ParentCo from 2011 to 2013. From 2008 to 2011, Ms. Fisher was Group Controller for ParentCo’s Engineered Products and Solutions business.

Jeffrey D. Heeter, 52, is Executive Vice President, General Counsel and Secretary of Alcoa Corporation. Mr. Heeter served as Assistant General Counsel of ParentCo from 2014 to November 2016. Mr. Heeter was Group Counsel for Global Primary Products at ParentCo from 2010 to 2014. From 2008 to 2010, Mr. Heeter was General Counsel of Alcoa of Australia in Perth, Australia.

Molly S. Beerman, 54, has been Vice President and Controller of Alcoa Corporation since December 2016. Ms. Beerman previously served as the Director, Global Shared Services Strategy and Solutions for Alcoa Corporation from November to December 2016. From January through October of 2016, prior to the Company’s Separation Transaction from ParentCo, Ms. Beerman was a consultant to ParentCo’s finance department and provided services in support of the Separation Transaction. From 2012 to 2015, she served as Vice President, Finance and Administration for a non-profit organization focused on community issues. Ms. Beerman first joined ParentCo in 2001, and was the director of ParentCo’s global procurement center of excellence from 2008 to 2012.

Item 1A. Risk Factors.

Alcoa’s business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm its business, financial condition or results of operations, including causing Alcoa’s actual results to differ materially from those projected in any forward-looking statements. The following list of significant risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to Alcoa or that Alcoa currently deems immaterial also may materially adversely affect us in future periods. See the discussion under “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.

Risks Related to Our Business

The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of factors, including global economic conditions.

The cyclical nature of the industries in which our customers operate causes demand for our products to be cyclical, creating potential uncertainty regarding future profitability. The demand for aluminum is sensitive to, and quickly impacted by, demand for the finished goods manufactured by our customers in industries that are cyclical, such as the commercial construction, transportation, and automotive industries, which may change as a result of changes in the global economy, currency exchange rates, energy prices or other factors beyond our control. Various changes in general economic conditions may affect the industries in which our customers operate. The demand for aluminum is highly correlated to economic growth. The Chinese market is a significant source of global demand for, and supply of, commodities, including aluminum. A sustained slowdown in Chinese aluminum demand due to slower economic growth or change in government policies, or a significant slowdown in other markets, that is not offset by decreases in supply of aluminum or increased aluminum demand in emerging economies, such as India, Brazil, and several Southeast Asian countries, could have an adverse effect on the global supply and demand for aluminum and aluminum prices. As a result of these factors, our profitability is subject to significant fluctuation.

 

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While we believe the long-term prospects for aluminum and aluminum products are positive, we are unable to predict the future course of industry variables or the strength of the global economy and the effects of government intervention. Negative economic conditions, such as a major economic downturn, a prolonged recovery period, a downturn in the commodity sector, or disruptions in the financial markets, could have a material adverse effect on our business, financial condition or results of operations.

While the aluminum market is often the leading cause of changes in the alumina and bauxite markets, those markets also have industry-specific risks including, but not limited to, global freight markets, energy markets, and regional supply-demand imbalances. The aluminum industry specific risks can have a material effect on profitability for the alumina and bauxite markets.

We could be materially adversely affected by declines in aluminum and alumina prices, including global, regional and product-specific prices.

The overall price of primary aluminum consists of several components: (i) the underlying base metal component, which is typically based on quoted prices from the LME; (ii) the regional premium, which comprises the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for metal sold in the United States); and (iii) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., coil, billet, slab, rod, etc.) or alloy. Each of the above three components has its own drivers of variability. The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including expectations for growth and contraction and the level of global inventories), and trading activity of financial investors. An imbalance in global supply and demand of aluminum, such as decreasing demand without corresponding supply declines, could have a negative impact on aluminum pricing. In 2017, the cash LME price of aluminum reached a high of $2,246 per metric ton and a low of $1,701 per metric ton. High LME inventories, or the release of substantial inventories into the market, could lead to a reduction in the price of aluminum. Declines in the LME price have had a negative impact on our results of operations. Additionally, our results could be adversely affected by decreases in regional premiums that participants in the physical metal market pay for immediate delivery of aluminum. Regional premiums tend to vary based on the supply of and demand for metal in a particular region and associated transportation costs. LME warehousing rules and surpluses have caused regional premiums to decrease, which would have a negative impact on our results of operations. Product premiums generally are a function of supply and demand for a given primary aluminum shape and alloy combination in a particular region. Periods of industry overcapacity may also result in a weak aluminum pricing environment. A sustained weak LME aluminum pricing environment, deterioration in LME aluminum prices, or a decrease in regional premiums or product premiums could have a material adverse effect on our business, financial condition, and results of operations or cash flow.

Most of our alumina contracts contain two pricing components: (1) the API price basis, and (2) a negotiated adjustment basis that takes into account various factors, including freight, quality, customer location and market conditions. Because the API component can exhibit significant volatility due to market exposure, revenue associated with our alumina operations are exposed to market pricing. Our bauxite-related contracts are typically one to two-year contracts with very little, if any, market exposure; however, we intend to enter into long-term bauxite contracts and therefore, our revenue associated with our bauxite operations may become further exposed to market pricing.

Changes to LME policies could cause aluminum prices to decrease.

In 2013, the LME undertook a program aimed at reforming the rules under which registered warehouses in its global network operate. The initial rule changes took effect on February 1, 2015. Additional changes occurred throughout 2015 and 2016, culminating in an increased minimum daily load-out rate and caps on warehouse charges. These rule changes, and any subsequent changes the exchange chooses to make, could impact the supply/demand balance in the primary aluminum physical market and may impact regional delivery premiums and LME aluminum prices. Decreases in regional delivery premiums and/or decreases in LME aluminum prices could have a material adverse effect on our business, financial condition, and results of operations or cash flow.

 

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We may not be able to realize the expected benefits from our strategy of creating a lower cost, competitive commodity business by optimizing our portfolio.

We are continuing to execute a strategy of creating a lower cost, competitive integrated aluminum production business by optimizing our portfolio of assets. We are taking decisive actions to lower the cost base of our operations, including closing, selling or curtailing high-cost global smelting capacity, optimizing alumina refining capacity, and pursuing the sale of our interest in certain other operations. We may not be able to realize the expected benefits from this strategy.

We have made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow or streamline our portfolio. There is no assurance that anticipated benefits of our strategic actions will be realized. With respect to portfolio optimization actions such as divestitures, curtailments and closures, we may face barriers to exit from unprofitable businesses or operations, including high exit costs or objections from various stakeholders. In addition, we may incur unforeseen liabilities for divested entities if a buyer fails to honor all commitments. Our business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including asset impairment charges and other measures. There can be no assurance that divestitures or closures will be undertaken or completed in their entirety as planned at the anticipated cost, or that such actions will be beneficial to the Company.

Market-driven balancing of global aluminum supply and demand may be disrupted by non-market forces.

In response to market-driven factors relating to the global supply and demand of aluminum and alumina, we have curtailed or closed portions of our aluminum and alumina production capacity. Certain other industry producers have independently undertaken to reduce production as well. Reductions in production may be delayed or impaired by the terms of long-term contracts to buy power or raw materials.

The existence of non-market forces on global aluminum industry capacity, such as political pressures in certain countries to keep jobs or to maintain or further develop industry self-sufficiency, may prevent or delay the closure or curtailment of certain producers’ smelters, irrespective of their position on the industry cost curve. For example, Chinese excess capacity and increased exports from China of heavily subsidized aluminum products could materially disrupt world aluminum markets causing pricing deterioration. If industry overcapacity exists due to the disruption by such non-market forces on the market-driven balancing of the global supply and demand of aluminum, a resulting weak pricing environment and margin compression may adversely affect the operating results of the Company.

Our operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.

Although we generally expect to meet the energy requirements for our alumina refineries and primary aluminum smelters from internal sources or from long-term contracts, certain conditions could negatively affect our results of operations, including the following:

 

   

significant increases in electricity costs rendering smelter operations uneconomic;

 

   

significant increases in fuel oil or natural gas prices;

 

   

unavailability of electrical power or other energy sources due to droughts, hurricanes or other natural causes;

 

   

unavailability of energy due to local or regional energy shortages resulting in insufficient supplies to serve consumers;

 

   

interruptions in energy supply or unplanned outages due to equipment failure or other causes;

 

   

curtailment of one or more refineries or smelters due to the inability to extend energy contracts upon expiration or to negotiate new arrangements on cost-effective terms or due to the unavailability of energy at competitive rates; or

 

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curtailment of one or more smelters due to discontinuation of power supply interruptibility rights granted to us under an interruptibility regime in place under the laws of the country in which the smelter is located, or due to a determination that such arrangements do not comply with applicable laws, thus rendering the smelter operations that had been relying on such country’s interruptibility regime uneconomic.

If events such as those listed above were to occur, the resulting high energy costs or the disruption of an energy source or the requirement to repay all or a portion of the benefit we received under a power supply interruptibility regime could have a material adverse effect on our business and results of operations.

Our global operations expose us to risks that could adversely affect our business, financial condition, operating results or cash flows.

We have operations or activities in numerous countries and regions outside the United States, including Australia, Brazil, Canada, Europe, Guinea, Suriname, and the Kingdom of Saudi Arabia. The risks associated with the Company’s global operations include:

 

   

economic and commercial instability risks, including those caused by sovereign and private debt default, corruption, and changes in local government laws, regulations and policies, such as those related to tariffs and trade barriers, taxation, exchange controls, employment regulations and repatriation of earnings;

 

   

geopolitical risks, such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, changes to import or export regulations and fees, renegotiation or nullification of existing agreements, mining leases and permits;

 

   

war or terrorist activities;

 

   

major public health issues, such as an outbreak of a pandemic or epidemic, which could cause disruptions in our operations or workforce;

 

   

difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and

 

   

unexpected events, including fires or explosions at facilities, and natural disasters.

While the impact of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect our business, financial condition, operating results or cash flows. Existing insurance arrangements may not provide protection for the costs that may arise from such events.

Our global operations expose us to various legal and regulatory systems, and changes in conditions beyond our control in foreign countries.

In addition to the business risks inherent in operating outside the United States, legal and regulatory systems may be less developed and predictable and the possibility of various types of adverse governmental action more pronounced. Unexpected or uncontrollable events or circumstances in any of these foreign markets, including actions by foreign governments such as changes in fiscal regimes, termination of our agreements with such foreign governments or increased government regulation could materially and adversely affect our business, financial condition, results of operations or cash flows.

Substantial changes to fiscal, tax and trade policies and executive and legislative actions could adversely affect our business, financial condition, and results of operations.

The U.S. presidential administration has called for substantial changes to U.S. trade policy and proposed imposing significant increases in U.S. import tariffs. Changes in international trade agreements, regulations, restrictions, and tariffs may increase our operating costs and make it more difficult for us to compete in the U.S. and overseas markets, and our business, financial condition and results of operations could be adversely impacted.

 

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We face significant competition, which may have an adverse effect on profitability.

We compete with a variety of both U.S. and non-U.S. aluminum industry competitors as well as with producers of other materials, such as steel, titanium, plastics, composites, ceramics, and glass, among others. Technological advancements or other developments by or affecting Alcoa’s competitors or customers could affect our results of operations. In addition, our competitive position depends, in part, on our ability to leverage innovation expertise across businesses and key end markets and us having access to an economical power supply to sustain our operations in various countries. See “Business—Competition.”

Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.

Our business operations are capital intensive. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures. In addition, we may not realize the benefits or expected returns from announced plans, programs, initiatives and capital investments. Any of these events could adversely affect our results of operations and profitability.

Our business and growth prospects may be negatively impacted by limits in our capital expenditures.

We require substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of our existing facilities. Insufficient cash generation or capital project overruns may negatively impact our ability to fund as planned our sustaining and return-seeking capital projects. We may also need to address commercial and political issues in relation to reductions in capital expenditures in certain of the jurisdictions in which we operate. If our interest in our joint ventures is diluted or we lose key concessions, our growth could be constrained. Any of the foregoing could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our capital resources may not be adequate to provide for all of our cash requirements, and we are exposed to risks associated with financial, credit, capital, and banking markets.

In the ordinary course of business, we expect to seek to access competitive financial, credit, capital and/or banking markets. Currently, we believe we have adequate access to these markets to meet our reasonably anticipated business needs based on our historic financial performance and strong financial position. To the extent our access to competitive financial, credit, capital and/or banking markets was to be impaired, our operations, financial results and cash flows could be adversely impacted.

Deterioration in our credit profile could increase our costs of borrowing money and limit our access to the capital markets and commercial credit.

The major credit rating agencies evaluate our creditworthiness and give us specified credit ratings. These ratings are based on a number of factors, including our financial strength and financial policies as well as our strategies, operations and execution. These credit ratings are limited in scope, and do not address all material risks related to investment in us, but rather reflect only the view of each rating agency at the time the rating is issued. Nonetheless, the credit ratings we receive impact our borrowing costs as well as our access to sources of capital on terms that will be advantageous to our business. Failure to obtain sufficiently high credit ratings could adversely affect the interest rate in future financings, our liquidity or our competitive position and could also restrict our access to capital markets. In addition, our credit ratings could be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating, our borrowing costs would increase, and our funding sources could decrease. As a result of these factors, a downgrade of our credit ratings could have a materially adverse impact on our future operations and financial position.

 

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Our indebtedness restricts our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

In 2016, Alcoa and Alcoa Nederland Holding B.V. (“ANHBV”), a wholly-owned subsidiary of Alcoa, entered into a revolving credit agreement with a syndicate of lenders and issuers named therein, (as subsequently amended, the “Revolving Credit Agreement”). The terms of the Revolving Credit Agreement and the indenture governing our notes contain covenants that impose significant operating and financial restrictions on us, including on our ability to, among other things:

 

   

make investments, loans, advances, and acquisitions;

 

   

dispose of assets;

 

   

incur or guarantee additional debt and issue certain disqualified equity interests and preferred stock;

 

   

make certain restricted payments, including by limiting the amount of dividends on equity securities and payments to redeem, repurchase or retire equity securities or other indebtedness;

 

   

engage in transactions with affiliates;

 

   

materially alter the business we conduct;

 

   

enter into certain restrictive agreements;

 

   

create liens on assets to secure debt;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of Alcoa’s, ANHBV’s or a subsidiary guarantor’s assets; and

 

   

take any actions that would reduce our ownership of AWAC entities below an agreed level.

The Revolving Credit Agreement requires us to comply with financial covenants. The Revolving Credit Agreement requires that we maintain an 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, although, under the Revolving Credit Agreement, such leverage ratio may be increased to a level not higher than 2.50 to 1.00 in certain circumstances.

In addition, all obligations of Alcoa Corporation or a domestic entity under the Revolving Credit Facility are secured by, subject to certain exceptions, 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. Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other opportunities. The breach of any of these covenants or restrictions could result in a default under the Revolving Credit Agreement or the indenture governing our notes.

For more information on the restrictive covenants in the Revolving Credit Agreement, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.”

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our business, financial condition, results of operations or cash flows.

If there were an event of default under any of the agreements relating to our outstanding indebtedness, including the Revolving Credit Agreement and the indenture governing our notes, we may not be able to incur additional indebtedness under the Revolving Credit Agreement and the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure that our assets or cash flow

 

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would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, which could have a material adverse effect on our ability to continue to operate as a going concern. Further, if we are unable to repay, refinance or restructure our secured indebtedness, the holders of such indebtedness could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument also could result in an event of default under one or more of our other debt instruments.

We may not realize expected benefits from our productivity and cost-reduction initiatives.

We have undertaken, and may continue to undertake, productivity and cost-reduction initiatives to improve performance and conserve cash, including procurement strategies for raw materials, labor productivity, improving operating performance, deployment of Company-wide business process models, such as our degrees of implementation process in which ideas are executed in a disciplined manner to generate savings, and overhead cost reductions. There is no assurance that these initiatives will be successful or beneficial to us or that estimated cost savings from such activities will be realized.

Cyber-attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information, disrupt our business operations, and result in reputational harm and other negative consequences that could have a material adverse effect on our financial condition and results of operations.

We face global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures, known as advanced persistent threats, directed at the Company. Cyber-attacks and other cyber incidents are occurring more frequently, constantly evolving in nature, becoming more sophisticated, and being made by groups and individuals with a wide range of expertise and motives. Cyber-attacks and security breaches may include, but are not limited to, attempts to access information or digital infrastructure, computer viruses, denial of service and other electronic security breaches.

We believe that we face a heightened threat of cyber-attacks due to the industries we serve and the locations of our operations. Due to the evolving nature of cybersecurity threats, the scope and impact of any incident cannot be predicted. While the Company continually works to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition and results of operations. In addition, such attacks or breaches could require significant management attention and resources, and result in the diminution of the value of our investment in research and development. Furthermore, while we have disaster recovery and business continuity plans in place, if our information technology systems are damaged, breached or cease to function properly for any reason, including the poor performance of, failure of or cyber-attack on third-party service providers, catastrophic events, power outages, cyber-security breaches, network outages, failed upgrades or other similar events and, if the disaster recovery and business continuity plans do not effectively resolve such issues on a timely basis, we may suffer interruptions in our ability to manage or conduct business as well as reputational harm, and may be subject to governmental investigations and litigation, any of which may adversely impact our business, results of operations, cash flows and financial condition.

Our profitability could be adversely affected by increases in the cost of raw materials, by significant lag effects of decreases in commodity or LME-linked costs or by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts.

Our results of operations are affected by changes in the cost of raw materials, including energy, carbon products, caustic soda and other key inputs, as well as freight costs associated with transportation of raw materials to refining and smelting locations. We may not be able to fully offset the effects of higher raw material costs or energy costs through price increases, productivity improvements or cost reduction programs. Similarly, our operating results are affected by significant lag effects of declines in key costs of production that are commodity or LME-linked. For example, declines

 

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in the costs of alumina and power during a particular period may not be adequate to offset sharp declines in metal price in that period. We could also be adversely affected by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts. Increases in the cost of raw materials or decreases in input costs that are disproportionate to concurrent sharper decreases in the price of aluminum, or shifts in global inventory of aluminum that result in changes to market prices, could have a material adverse effect on our operating results.

Joint ventures and other strategic alliances may not be successful.

We participate in joint ventures and have formed strategic alliances and may enter into other similar arrangements in the future. For example, AWAC is an unincorporated global joint venture between Alcoa and Alumina Limited. AWAC consists of a number of affiliated entities, which own, operate or have an interest in, bauxite mines and alumina refineries, as well as an aluminum smelter, in seven countries. In addition, Alcoa is party to a joint venture with Ma’aden, the Saudi Arabian Mining Company, to develop a fully integrated aluminum complex (including a bauxite mine, alumina refinery, aluminum smelter and rolling mill) in the Kingdom of Saudi Arabia. Although the Company has, in connection with these and our other existing joint ventures and strategic alliances, sought to protect our interests, joint ventures and strategic alliances inherently involve special risks. Whether or not the Company holds majority interests or maintains operational control in such arrangements, our partners may:

 

   

have economic or business interests or goals that are inconsistent with or opposed to those of the Company;

 

   

exercise veto rights so as to block actions that we believe to be in our or the joint venture’s or strategic alliance’s best interests;

 

   

take action contrary to our policies or objectives with respect to our investments; or

 

   

as a result of financial or other difficulties, be unable or unwilling to fulfill their obligations under the joint venture, strategic alliance or other agreements, such as contributing capital to expansion or maintenance projects.

There can be no assurance that our joint ventures or strategic alliances will be beneficial to us, whether due to the above-described risks, unfavorable global economic conditions, increases in construction costs, currency fluctuations, political risks, or other factors.

We could be adversely affected by changes in the business or financial condition of a significant customer or joint venture partner.

A significant downturn or deterioration in the business or financial condition of a key customer or joint venture partner could affect our results of operations in a particular period. Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, or other difficulties in their businesses. If we are not successful in replacing business lost from such customers, profitability may be adversely affected. Our joint venture partners could be rendered unable to contribute their share of operating or capital costs, having an adverse impact on our business.

An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and other factors could affect our results of operations or amount of pension funding contributions in future periods.

Our results of operations may be negatively affected by the amount of expense we record for our pension and other post-retirement benefit plans, reductions in the fair value of plan assets, and other factors. We calculate income or expense for our plans using actuarial valuations in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions used by the Company to estimate

 

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pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, the Company is required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to stockholders’ equity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” and Note N to the Consolidated Financial Statements under the caption “Pension and Other Postretirement Benefits.” Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the amount of cash or securities we would contribute to the pension plans.

Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve the plans’ funded status. Higher than expected pension contributions due to a decline in the plans’ funded status as a result of declines in the discount rate or lower-than-expected investment returns on plan assets could have a material negative effect on our cash flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase our liabilities related to such plans, adversely affecting our liquidity and results of operations.

We are exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which we operate.

Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which we operate, and continued volatility or deterioration in the global economic and financial environment could affect our revenues, expenses and results of operations. Changes in the valuation of the U.S. dollar against other currencies, particularly the Australian dollar, Brazilian real, Canadian dollar, Euro, and Norwegian kroner, may affect our profitability as some important inputs are purchased in other currencies, while our products are generally sold in U.S. dollars. In addition, although a strong U.S. dollar generally has a positive impact on our near-term profitability, over a longer term, a strong U.S. dollar may have an unfavorable impact on our position on the global aluminum cost curve due to the company’s U.S. smelting portfolio. As the U.S. dollar strengthens, the cost curve shifts down for smelters outside the United States but costs for our U.S. smelting portfolio may not decline.

Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers’ businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.

Our results of operations may be materially affected by the conditions in the global economy generally and in global capital markets. There has been extreme volatility in the capital markets and in the end markets and geographic regions in which we or our customers operate, which has negatively affected our revenues. Many of the markets in which our customers participate are also cyclical in nature and experience significant fluctuations in demand for our products based on economic conditions, consumer demand, raw material and energy costs, and government actions. Many of these factors are beyond our control.

A decline in consumer and business confidence and spending, severe reductions in the availability and cost of credit, and volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We are also exposed to risks associated with the creditworthiness of our suppliers and customers. If the availability of credit to fund or support the continuation and expansion of our customers’ business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. These conditions and a disruption of the credit markets could also result in financial instability of some of our suppliers and customers. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials we purchase, and bankruptcy of customers, suppliers or other creditors. Any of these events could adversely affect our profitability, cash flow and financial condition.

 

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Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our future profitability.

We are subject to income taxes in both the United States and various non-U.S. jurisdictions. Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our future profitability. Our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect the Company’s tax expense and profitability. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions. The assumptions include assessments of future earnings of the Company that could impact the valuation of our deferred tax assets. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of tax audits and examinations of previously filed tax returns or related litigation and continuing assessments of our tax exposures. Significant changes to the U.S. corporate tax system in particular could have a substantial impact, positive or negative, on our effective tax rate, cash tax expenditures and deferred tax assets and liabilities. For example, the Tax Cuts and Jobs Act, which was enacted in the United States on December 22, 2017, reduces the U.S. corporate statutory tax rate, eliminates or limits tax deductions for several expenses that previously were deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. As discussed further in the Management Discussion and Analysis and the Company’s financial statement, we continue to evaluate the overall impact of the Tax Cuts and Jobs Act on our effective tax rate and balance sheet.

We may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.

Our results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to the Company. We may become subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees due to changes in laws, regulations or policies. We are also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to health and safety, environmental matters, intellectual property rights, product liability, taxes and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. We could be subject to fines, penalties or damages (in certain cases, treble damages). In addition, if we violate the terms of our agreements with governmental authorities, we may face additional monetary sanctions and such other remedies as a court deems appropriate.

While we believe we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. In addition, various factors or developments can lead the Company to change current estimates of liabilities or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the company cannot predict with certainty could have a material adverse effect on our results of operations or cash flows in a particular period. See “Item 3, Legal Proceedings” and Note R under the caption “Contingencies and Commitments—Contingencies—Litigation” to the Consolidated Financial Statements.

We are subject to a broad range of health, safety and environmental laws and regulations in the jurisdictions in which we operate and may be exposed to substantial costs and liabilities associated with such laws and regulations.

Our operations worldwide are subject to numerous complex and increasingly stringent health, safety and environmental laws and regulations and may be exposed to substantial costs and liabilities associated with such laws and

 

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regulations. The costs of complying with such laws and regulations, including participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that caused the contamination was lawful at the time it was conducted. Environmental matters for which we may be liable may arise in the future at our present sites, where no problem is currently known, at previously owned sites, at sites previously operated by the Company, at sites owned by our predecessors or at sites that we may acquire in the future. Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. Our results of operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.

Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have environmental contamination, which could result in material liabilities to us. We may be subject to claims under federal and state statutes and/or common law doctrines for toxic torts and other damages as well as for natural resource damages and the investigation and clean-up of soil, surface water, groundwater, and other media under laws such as the federal Comprehensive Environmental Response, Compensation and Liabilities Act (“CERCLA”, commonly known as “Superfund”). Such claims may arise, for example, out of current or former conditions at sites that we own or operate currently, as well as at sites that we and companies we acquired owned or operated in the past, and at contaminated sites that have always been owned or operated by third parties. Liability may be without regard to fault and may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.

These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect us.

Climate change, climate change legislation or regulations, extreme weather conditions, and greenhouse effects may adversely impact our operations and markets.

Energy is a significant input in a number of our operations. There is growing recognition that consumption of energy derived from fossil fuels is a contributor to global warming.

A number of governments or governmental bodies in areas of the world where we operate have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. We will likely see changes in the margins of greenhouse gas-intensive assets and energy-intensive assets as a result of regulatory impacts in the countries in which we operate. These regulatory mechanisms may be either voluntary or legislated and may impact our operations directly or indirectly through customers or our supply chain. Inconsistency of regulations may also change the attractiveness of the locations of some of the Company’s assets. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate. We may realize increased capital expenditures resulting from required compliance with revised or new legislation or regulations, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by the Company and, indirectly, from changes in costs of goods sold.

The potential physical impacts of climate change or extreme weather conditions on the Company’s operations are highly uncertain, and will be particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other natural resources, changing sea levels, changing storm patterns, increased frequency and intensities of storms, and changing temperature levels. For example, our Trombetas mine experienced

 

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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. Effects such as these may adversely impact the cost, production and financial performance of our operations.

Loss of key personnel may adversely affect our business.

Our success greatly depends on the performance of our executive management team. The loss of the services of any member of our executive management team or other key persons could have a material adverse effect on our business, results of operations and financial condition.

Union disputes and other employee relations issues could adversely affect our financial results.

A significant portion of our employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. See “Business—Employees.” Union disputes and other employee relations issues could adversely affect our financial results. We may not be able to satisfactorily renegotiate collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future. We may also be subject to general country strikes or work stoppages unrelated to our business or collective bargaining agreements. A labor dispute or work stoppage by employees covered by collective bargaining agreements could have a material adverse effect on production at one or more of our facilities, and depending on the length of work stoppage, on our financial results.

We have only operated as an independent company since November 1, 2016, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company during the time periods represented and may not be a reliable indicator of our future results.

The historical information about Alcoa Corporation in this report refers to Alcoa Corporation’s businesses as operated by and integrated with ParentCo prior to November 1, 2016. Some of the historical financial information included in this report is derived from the consolidated financial statements and accounting records of ParentCo. Accordingly, the historical financial information relating to 2016 and earlier years included in this report does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during those particular periods presented or those that we will achieve in the future primarily as a result of significant changes in our cost structure, management, financing and business operations as a result of operating as a company separate from ParentCo. For additional information about the past financial performance of our business and the basis of presentation of the historical consolidated financial statements, see “Selected Financial Data of Alcoa Corporation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this report.

In connection with our Separation Transaction from ParentCo, Arconic agreed to indemnify us for certain liabilities and we agreed to indemnify Arconic for certain liabilities. If we are required to pay under these indemnities to Arconic, our financial results could be negatively impacted. The Arconic indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which Arconic may be allocated responsibility, and Arconic may not be able to satisfy its indemnification obligations in the future.

In connection with the Separation Transaction, Arconic agreed to indemnify us for certain liabilities, and we agreed to indemnify Arconic for certain liabilities, in each case for uncapped amounts, as discussed further in “Certain Relationships and Related Party Transactions.” Indemnities that we may be required to provide Arconic are not subject to any cap, may be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any of the liabilities that Arconic has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operating business. Further, the indemnity from Arconic may not be sufficient to protect us against the full amount of such liabilities, and Arconic may not be able to fully satisfy its indemnification obligations.

 

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Moreover, even if we ultimately succeed in recovering from Arconic any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.

Risks Related to Our Common Stock

Anti-takeover provisions could enable our management to resist a takeover attempt by a third party and limit the power of our stockholders, which could decrease the trading price of our common stock.

Alcoa’s amended and restated certificate of incorporation and amended bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Alcoa’s Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:

 

   

the inability of our stockholders to act by written consent unless such written consent is unanimous;

 

   

the ability of our remaining directors to fill vacancies on our Board of Directors;

 

   

limitations on stockholders’ ability to call a special stockholder meeting;

 

   

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; and

 

   

the right of our Board of Directors to issue preferred stock without stockholder approval.

In addition, we are subject to Section 203 of the Delaware General Corporation Law (“DGCL”), which provides that, subject to limited exceptions, persons that acquire, or are affiliated with persons that acquire, more than 15% of the outstanding voting stock of a Delaware corporation may not engage in a business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or any of its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock.

We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make Alcoa immune from takeovers; however, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of Alcoa and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors. These provisions of our certificate of incorporation and bylaws, and Delaware law, that have the effect of delaying or deterring a change in control of the Company could limit the opportunity for our stockholders to receive a premium for their shares and could affect the price that some investors are willing to pay for Alcoa stock.

In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. Under the tax matters agreement, Alcoa is required to indemnify Arconic for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that our stockholders may consider favorable.

Our amended and restated certificate of incorporation designates the state courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against Alcoa and our directors and officers.

Our amended and restated certificate of incorporation provides that unless the Board of Directors otherwise determines, a state court located within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Alcoa, any action asserting a claim for or based on a breach of a fiduciary duty owed by any current or former director or officer of Alcoa to Alcoa or to Alcoa stockholders, any action asserting a claim

 

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against Alcoa or any current or former director or officer of Alcoa arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or bylaws, any action asserting a claim relating to or involving Alcoa governed by the internal affairs doctrine, or any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. However, if a Delaware state court dismisses any such action for lack of subject matter jurisdiction, the action may be brought in the federal court for the District of Delaware. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Alcoa or our directors or officers, which may discourage such lawsuits against Alcoa and our directors and officers. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could negatively affect our business, results of operations and financial condition.

Your percentage of ownership in Alcoa may be diluted in the future.

In the future, your percentage ownership in Alcoa may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including any equity awards that we will grant to our directors, officers and employees. Our employees have stock-based awards that correspond to shares of our common stock as a result of conversion of their ParentCo stock-based awards. The Compensation and Benefits Committee of the Board of Directors has granted stock-based awards to our employees, and we anticipate that it will grant additional stock-based awards to our employees in the future. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

We cannot guarantee the existence, timing, amount or payment of dividends on our common stock.

The existence, timing, declaration, amount and payment of future dividends to our stockholders falls within the discretion of our Board of Directors. The Board of Directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of our debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant. For more information, see Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividend if we commence paying dividends.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Alcoa Corporation’s principal executive offices, located at 201 Isabella Street, Suite 500, Pittsburgh, Pennsylvania 15212-5858, are leased.

In addition, Alcoa leases some of its facilities; however, it is the opinion of management that the leases do not materially affect the continued use of the properties or the properties’ values.

Although our facilities vary in terms of age and condition, Alcoa believes that its facilities are suitable and adequate for its operations. See Notes B and J to the financial statements for information on properties, plants and equipment.

Alcoa has active plants and holdings under the following segments:

Bauxite—See the tables and related text in the Bauxite section on pages 6-14 of this report.

 

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Alumina—See the table and related text in the Alumina section on pages 14-15 of this report.

Aluminum— See the table and related text in the Aluminum section on pages 16-17 of this report.

Item 3. Legal Proceedings.

In the ordinary course of its business, Alcoa is involved in a number of lawsuits and claims, both actual and potential.

Litigation

Italian Energy Matter

In 2002, for its operations in Italy, ParentCo left the regulated energy market to purchase energy in the unregulated energy market following the Italian Energy Authority’s publication of an Energy Authority Resolution in 2001. This Resolution stated that a drawback of a portion of the price of power under a special tariff would be calculated in the same manner, and in the same amount, in either the regulated or unregulated market. 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. In 2006, ParentCo challenged the new regulation in the Administrative Court of Milan and received a favorable judgment. 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 favorable 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, which presented 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 million (€85 million), including interest. By letter dated April 5, 2012, ParentCo informed CCSE that it disputed the payment demand of CCSE. On April 29, 2012, Law No. 44 of 2012 (“44/2012”) came into effect, changing the method to calculate the drawback. On February 21, 2013, ParentCo received a revised request letter from CCSE demanding ParentCo’s subsidiary, Alcoa Trasformazioni S.r.l. (Trasformazioni is now a subsidiary of Alcoa Corporation), make a payment in the amount of $97 million (€76 million), including interest, which reflected a revised calculation methodology by CCSE and represented the high end of the range of reasonably possible loss associated with this matter of $0 to $97 million (€76 million). ParentCo rejected that demand and formally challenged it through an appeal before the Administrative Court on April 5, 2013. On June 19, 2014, the Administrative Court heard ParentCo’s oral argument, and on September 2, 2014, rendered its decision, declaring the payment request of CCSE and the Energy Authority to ParentCo to be unsubstantiated. On December 18, 2014, the CCSE and the Energy Authority appealed the Administrative Court’s September 2, 2014 decision; a hearing date has been scheduled for May 2018. ParentCo’s management modified its outlook with respect to a portion of the pending legal proceedings related to this matter. As such a charge of $37 million (€34 million) was recorded at the end of 2015 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 million) (paid in January 2018). Accordingly, the Company recorded a reduction of $22 million (€19 million) (the U.S. dollar amount reflects the effects of foreign currency movements since 2015) to its previously established reserve in Restructuring and other charges (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

 

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project (see Fusina and Portovesme, Italy in Environmental Matters below). Also, Alcoa will retain previously accrued asset retirement obligations related to ParentCo’s 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 value of the assets related to the Portovesme site were previously written down to zero as a result of ParentCo’s decision in 2014 to permanently close the smelter.

Environmental Matters

Alcoa is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund (CERCLA) or analogous state provisions regarding the usage, disposal, storage or treatment of hazardous substances at a number of sites in the U.S. The Company has committed to participate, or is engaged in negotiations with federal or state authorities relative to its alleged liability for participation, in clean-up efforts at several such sites. The most significant of these matters are discussed in Note R to the Consolidated Financial Statements under the caption “Contingencies and Commitments—Environmental Matters.”

The Separation and Distribution Agreement (see Note A) includes provisions for the assignment or allocation of environmental liabilities between Alcoa Corporation and Arconic, including certain remediation obligations associated with environmental matters. In general, the respective parties will be responsible for the environmental matters associated with their operations, and with the properties and other assets assigned to each. Additionally, the Separation and Distribution Agreement lists environmental matters with a shared responsibility between the two companies with an allocation of responsibility and the lead party responsible for management of each matter. For matters assigned to Alcoa Corporation under the Separation and Distribution Agreement, Alcoa Corporation has agreed to indemnify Arconic in whole or in part for environmental liabilities arising from operations prior to the Separation Date. The following discussion provides details regarding the current status of certain matters related to current or former Alcoa Corporation sites. With the exception of the Fusina, Italy matter, Alcoa Corporation assumed full responsibility of the matters described below.

In August 2005, Dany Lavoie, a resident of Baie Comeau in the Canadian Province of Québec, filed a Motion for Authorization to Institute a Class Action and for Designation of a Class Representative against Alcoa Canada Ltd., Alcoa Limitée, Société Canadienne de Metaux Reynolds Limitée and Canadian British Aluminum in the Superior Court of Québec in the District of Baie Comeau. Plaintiff sought to institute the class action on behalf of a putative class consisting of all past, present and future owners, tenants and residents of Baie Comeau’s St. Georges neighborhood, alleging that defendants, as the present and past owners and operators of an aluminum smelter in Baie Comeau, had negligently allowed the emission of certain contaminants from the smelter on the lands and houses of the St. Georges neighborhood and its environs causing property damage and health concerns. In May 2007, the court authorized a class action suit to include only people who suffered property damage or personal injury damages caused by the emission of Polycyclic Aromatic Hydrocarbons, or “PAHs” from the smelter. In September 2007, plaintiffs filed the claim against the original defendants. ParentCo filed its Statement of Defense and plaintiffs filed an Answer to that Statement. In response, ParentCo filed a Motion for Particulars and a Motion to Strike, each with respect to certain paragraphs of the Answer. In late 2010, the court denied these motions. The Soderberg smelting process that plaintiffs allege to be the source of emissions of concern has ceased operations and has been dismantled. Plaintiffs filed a motion seeking appointment of an expert to advise the court on matters of sampling of homes and standards for interior home remediation. After a March 25, 2016 hearing on the motion, which ParentCo opposed, the court granted the motion in a ruling dated April 8, 2016 and directed the parties to confer on potential experts and protocols for residential sampling. The court has identified a sampling expert and the parties are advising the expert on their respective views on the appropriate sampling protocol. Further proceedings in the case will await the independent expert’s report. At this stage of the proceeding, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

In 1996, ParentCo acquired the Fusina, Italy smelter and rolling operations and the Portovesme, Italy smelter (both of which are owned by Alcoa’s subsidiary, Alcoa Trasformazioni S.r.l.) from Alumix, an entity owned by the Italian Government. ParentCo also acquired the extrusion plants located in Feltre and Bolzano, Italy. At the time of the acquisition, Alumix indemnified ParentCo for pre-existing environmental contamination at the sites. In 2004, the

 

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Italian Ministry of Environment (MOE) issued orders to Alcoa Trasformazioni S.r.l. and Alumix for the development of a clean-up plan related to soil contamination in excess of allowable limits under legislative decree and to institute emergency actions and pay natural resource damages. On April 5, 2006, Alcoa Trasformazioni S.r.l.’s Fusina site was also sued by the MOE and Minister of Public Works (MOPW) in the Civil Court of Venice for an alleged liability for environmental damages, in parallel with the orders already issued by the MOE. Alcoa Trasformazioni S.r.l. appealed the orders, defended the civil case for environmental damages and filed suit against Alumix, as discussed below. Similar issues also existed with respect to the Bolzano and Feltre plants, based on orders issued by local authorities in 2006. Most, if not all, of the underlying activities occurred during the ownership of Alumix, the governmental entity that sold the Italian plants to ParentCo.

As noted above, in response to the 2006 civil suit by the MOE and MOPW, Alcoa Trasformazioni S.r.l. filed suit against Alumix claiming indemnification under the original acquisition agreement, but brought that suit in the Court of Rome due to jurisdictional rules. In June 2008, the parties (ParentCo and subsequently Ligestra S.r.l. (“Ligestra”), the successor to Alumix) signed a preliminary agreement by which they have committed to pursue a settlement. The Court of Rome accepted the request, and postponed the Court’s expert technical assessment, reserving its ability to fix the deadline depending on the development of negotiations. ParentCo and Ligestra agreed to a settlement in December 2008 with respect to the Feltre site. Ligestra paid the sum of 1.08 million Euros and ParentCo committed to clean up the site. Further postponements were granted by the Court of Rome, and the next hearing was fixed for December 20, 2016. In the meantime, Alcoa Trasformazioni S.r.l. and Ligestra reached a preliminary agreement for settlement of the liabilities related to Fusina, allocating 80% and 20% of the remediation costs to Ligestra and ParentCo, respectively. In January 2014, a final agreement with Ligestra was signed, and on February 5, 2014, ParentCo signed a final agreement with the MOE and MOPW settling all environmental issues at the Fusina site. As set out in the agreement between ParentCo and Ligestra, the parties will share the remediation costs and environmental damages claimed by the MOE and MOPW. The remediation project filed by ParentCo and Ligestra has been approved by the MOE. See Note R to the Consolidated Financial Statements under the caption “Fusina and Portovesme, Italy.” To provide time for settlement with Ligestra, the MOE and ParentCo jointly requested and the Civil Court of Venice has granted a series of postponements of hearings in the Venice trial, assuming that the case will be closed. Following the settlement, the parties caused the Court to dismiss the proceedings. The proceedings were, however, restarted in April 2015 by the MOE and MOPW because the Ministers had not ratified the settlement of February 5, 2014. In April 2016, the settlement was ratified by the Ministers and the court case has been finally dismissed.

ParentCo and Ligestra have signed a similar agreement relating to the Portovesme site. However, that agreement is contingent upon final acceptance of the proposed soil remediation project for Portovesme. In agreement with Ligestra, ParentCo submitted proposals in May 2014 and February 2015. The MOE issued a Ministerial Decree approving the final project in October 2015. Work on the soil remediation project is expected to commence in 2018. After further discussions with the MOE regarding the groundwater component of the remediation project, Alcoa Corporation and Ligestra are now working to find a common remedial solution, based on a shared project involving all the industries of the area. The extent and duration of a groundwater remedy as well as the allocation of costs among the responsible local industries remains undetermined. As a result, Alcoa Corporation’s costs remain uncertain and not capable of estimation.

On November 30, 2010, Alcoa World Alumina Brasil Ltda. (“AWAB”) received notice of a lawsuit that had been filed by the public prosecutors of the State of Pará in Brazil in November 2009 regarding the impact of the new bauxite mine in Juruti, alleging that certain conditions of the original installation license were not met by AWAB, a subsidiary of Alcoa. The suit additionally names the State of Pará, which, through its Environmental Agency, had issued the operating license for ParentCo’s new bauxite mine in Juruti. On April 14, 2010, the court denied plaintiffs’ request for a preliminary injunction suspending the operating license and ordering payment of compensation. In March 2011, AWAB defended itself on grounds that it was in compliance with the terms and conditions of its operating license. In April 2011, the State of Pará defended itself in the case asserting that the operating license contains the necessary plans to mitigate such impact, that the State monitors the performance of AWAB’s obligations arising out of such license, that the licensing process is valid and legal, and that the suit is meritless. Our position is that any impact from the project had been fully repaired when the suit was filed. We believe that Jará Lake has not been affected by any project

 

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activity and any evidence of pollution from the project would be unreliable. Following the preliminary injunction request, the plaintiffs took no further action until October 2014, when in response to the court’s request and as required by statute, they restated the original allegations in the lawsuit. We are not certain whether or when the action will proceed. Given that this proceeding is in its preliminary stage and the current uncertainty in this case, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

Other Matters

St. Croix Proceedings

Abednego and Abraham cases. On January 14, 2010, ParentCo was served with a multi-plaintiff action complaint involving several thousand individual persons claiming to be residents of St. Croix alleging personal injury or property damage from Hurricane Georges or winds blowing material from the St. Croix Alumina, L.L.C. (“SCA”) facility on the island of St. Croix (U.S. Virgin Islands) since the time of the hurricane. This complaint, Abednego, et al. v. Alcoa, et al. was filed in the Superior Court of the Virgin Islands, St. Croix Division. Following an unsuccessful attempt by ParentCo and SCA to remove the case to federal court, the case has been lodged in the Superior Court. The complaint names as defendants the same entities that were sued in a February 1999 action arising out of the impact of Hurricane Georges on the island and added as a defendant the current owner of the alumina facility property.

On March 1, 2012, ParentCo was served with a separate multi-plaintiff action complaint involving approximately 200 individual persons alleging claims essentially identical to those set forth in the Abednego v. Alcoa complaint. This complaint, Abraham, et al. v. Alcoa, et al., was filed on behalf of plaintiffs previously dismissed in the federal court proceeding involving the original litigation over Hurricane Georges impacts. The matter was originally filed in the Superior Court of the Virgin Islands, St. Croix Division, on March 30, 2011.

ParentCo and other defendants in the Abraham and Abednego cases filed or renewed motions to dismiss each case in March 2012 and August 2012 following service of the Abraham complaint on ParentCo and remand of the Abednego complaint to Superior Court, respectively. By order dated August 10, 2015, the Superior Court dismissed plaintiffs’ complaints without prejudice to re-file the complaints individually, rather than as a multi-plaintiff filing. The order also preserves the defendants’ grounds for dismissal if new, individual complaints are filed. As of June 10, 2016, approximately 100 separate complaints had been filed in Superior Court, which alleged claims by about 400 individuals. On June 1, 2016, counsel representing plaintiffs filed a motion seeking additional time to file new complaints. On July 7, 2017, the Virgin Islands Superior Court issued an Order that accepted as timely Complaints that had already been filed or would be filed by the end of July 2017. The Court also consolidated all such complaints into the Red Dust Claims docket (Master Case No.: SX-15-CV-620). Following the court’s July 7, 2017 order, a total of 430 complaints were filed and accepted by the court by the deadline. These complaints include claims of about 1,360 individuals. Alcoa filed its answers to the complaints on January 2, 2018 as directed by the court’s most recent scheduling order. At a status conference on January 18, the court directed the parties to meet and confer on a partial discovery plan and set the next status conference for July 26, 2018. On February 5, 2018, the parties advised the court of their progress in resolving discovery issues and reported on remaining disagreements. We are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

Glencore Contractual Indemnity Claim. On June 5, 2015, Alcoa World Alumina LLC (“AWA”) and St. Croix Alumina, L.L.C. (“SCA”) filed a complaint in Delaware Chancery Court for a declaratory judgment and injunctive relief to resolve a dispute between ParentCo and Glencore Ltd. (“Glencore”) with respect to claimed obligations under a 1995 asset purchase agreement between ParentCo and Glencore. The dispute arose from Glencore’s demand that ParentCo indemnify it for liabilities it may have to pay to Lockheed Martin (“Lockheed”) related to the St. Croix alumina refinery. Lockheed had earlier filed suit against Glencore in federal court in New York seeking indemnity for liabilities it had incurred and would incur to the U.S. Virgin Islands to remediate certain properties at the refinery property and claimed that Glencore was required 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

 

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that it was not seeking to add ParentCo to the New York action, AWA and SCA dismissed their complaint in the Chancery Court case and on August 6, 2015 filed a complaint for declaratory judgment in Delaware Superior Court. AWA and SCA filed a motion for judgment on the pleadings on September 16, 2015. Glencore answered AWA’s and SCA’s complaint and asserted counterclaims on August 27, 2015, and on October 2, 2015 filed its own motion for judgment on the pleadings. Argument on the parties’ motions was held by the court on December 7, 2015, and by order dated February 8, 2016, the court granted ParentCo’s motion and denied Glencore’s motion, resulting in ParentCo not being liable to indemnify Glencore for the Lockheed action. The decision also leaves for pretrial discovery and possible summary judgment or trial Glencore’s claims for costs and fees it incurred in defending and settling an earlier Superfund action brought against Glencore by the Government of the Virgin Islands. On February 17, 2016, Glencore filed notice of its application for interlocutory appeal of the February 8 ruling. AWA and SCA filed an opposition to that application on February 29, 2016. On March 10, 2016, the court denied Glencore’s motion for interlocutory appeal and on the same day entered judgment on claims other than Glencore’s claims for costs and fees it incurred in defending and settling the earlier Superfund action brought against Glencore by the Government of the Virgin Islands. On March 29, 2016, Glencore filed a withdrawal of its notice of interlocutory appeal and on April 6, 2016, Glencore filed an appeal of the court’s March 10, 2016 judgment to the Delaware Supreme Court, which set the appeal for argument for November 2, 2016. On November 4, 2016, the Delaware Supreme Court affirmed the judgment of the Delaware Superior Court granting our motion. Remaining in the case were Glencore’s claims for costs and fees it incurred related to the previously described Superfund action. On March 7, 2017, Alcoa and Glencore agreed to settle these claims and expect to ask the court to dismiss the case prior to the court’s March 21, 2017 scheduled conference. 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 proposed settlement was not material. This matter is now closed.

Some of our subsidiaries as premises owners are defendants in active lawsuits filed on behalf of persons alleging injury as a result of occupational exposure to asbestos at various facilities. A former affiliate of a subsidiary has been named, along with a large common group of industrial companies, in a pattern complaint where our involvement is not evident. Since 1999, several thousand such complaints have been filed. To date, the former affiliate has been dismissed from almost every case that was actually placed in line for trial. Our subsidiaries and acquired companies, all have had numerous insurance policies over the years that provide coverage for asbestos based claims. Many of these policies provide layers of coverage for varying periods of time and for varying locations. We have significant insurance coverage and believes that its reserves are adequate for its known asbestos exposure related liabilities. The costs of defense and settlement have not been and are not expected to be material to the results of operations, cash flows, and financial position of Alcoa Corporation.

Yadkin

On August 2, 2013, the State of North Carolina, through its agency, the North Carolina Department of Administration, filed a lawsuit against Alcoa Power Generating Inc. (“APGI”) in Superior Court, Wake County, North Carolina (Docket No. 13-CVS-10477) asserting ownership of certain submerged lands and hydropower generating structures situated at ParentCo’s Yadkin Hydroelectric Project (“Yadkin Project”). The suit seeks declaratory relief regarding North Carolina’s alleged ownership interests in the submerged riverbed of the Yadkin River and the hydroelectric dams and further declaration that APGI has no right to operate the Yadkin Project. APGI removed the matter to the U.S. District Court for the Eastern District of North Carolina (Docket No. Civil Action No. 5: 13-cv-633) on September 3, 2013. On that same date, the Yadkin Riverkeeper sought permission to intervene. On September 25, 2013, APGI filed its answer and its opposition to the Yadkin Riverkeeper’s intervention. The Court denied the State’s Motion to Remand and permitted the Riverkeeper to intervene. The Riverkeeper has since voluntarily withdrawn.

On November 20, 2014, in response to both parties’ motions for summary judgment, the Court denied APGI’s motion for summary judgment and denied in part and granted in part the State of North Carolina’s motions. Following a trial on navigability on April 21-22, 2015, the court ruled in APGI’s favor that the state “failed to meet its burden to prove that the Relevant Segment…was navigable for commerce at statehood.” Subsequently, APGI filed a motion for summary judgment as to title and the state opposed. On September 28, 2015, the Court granted summary judgment in

 

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APGI’s favor, findingthat APGI holds title to the riverbed. The Court further directed judgment to be entered in APGI’s favor and closed the case.

On February 2, 2017, APGI completed the sale of its Yadkin Project to a subsidiary of Cube Hydro in a transaction that transferred to the buyer all responsibility and liability for the Project, including any arising out of the case brought by the State of North Carolina. Upon the closing of the sale, APGI asked the court to substitute the buyer in the case because APGI had transferred all of its interest in the disputed property to the buyer. The State of North Carolina opposed that substitution on February 9, 2017. On April 3, 2017, in a split decision (2-1), the United States Court of Appeals for the Fourth Circuit affirmed the district court’s conclusion that APGI had proved its title to the relevant river bed segment. The court’s decision also denied Alcoa’s request that Cube Hydro be substituted in the case in place of Alcoa. On June 15, 2017, Alcoa filed a motion, consented to by the State, to add Cube Hydro as a party. The motion was granted on June 19, 2017. The State has sought review by the U.S. Supreme Court in a petition for certiorari filed November 7, 2017. Cube Hydro filed an opposition to the petition on January 8, 2018. On the same date, Alcoa filed a letter with the Court informing the Court that it no longer has any interest in the outcome of the proceedings because it sold the property at issue to respondent Cube Yadkin Generation LLC (“Cube”) effective February 1, 2017 and that Alcoa would not file a response to North Carolina’s petition for a writ of certiorari. On February 20, 2018, the Court denied the State’s petition. This matter is now closed.

Tax

Between 2000 and 2002, Alcoa Alumínio (Alumínio), an indirect wholly-owned subsidiary of Alcoa Corporation, 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 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 the 2017 second quarter, 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, this matter was settled for an immaterial amount during the 2017 third quarter. The matter is now closed.

In September 2010, following a corporate income tax audit covering the 2003 through 2005 tax years, an assessment was received as a result of Spain’s tax authorities disallowing certain interest deductions claimed by a Spanish consolidated tax group owned by ParentCo. An appeal of this assessment in Spain’s Central Tax Administrative Court by the ParentCo was denied in October 2013. In December 2013, ParentCo filed an appeal of the assessment in Spain’s National Court.

Additionally, following a corporate income tax audit of the same Spanish tax group for the 2006 through 2009 tax years, Spain’s tax authorities issued an assessment in July 2013 similarly disallowing certain interest deductions. In August 2013, ParentCo filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. ParentCo filed an appeal of this second assessment in Spain’s National Court in March 2015.

At December 31, 2016, the combined assessments, including interest, total $258 million (€246 million). On January 16, 2017, Spain’s National Court issued a decision in favor of the Company related to the assessment received in

 

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September 2010. On March 6, 2017, the Company was notified that Spain’s tax authorities did not file an appeal, for which the deadline has passed. As a result, the assessment related to the 2003 through 2005 tax years is null and void. Spain’s National Court has not yet rendered a decision related to the assessment received in July 2013 for the 2006 through 2009 tax years. The amount of this assessment on a standalone basis, including interest, was $136 million (€130 million) as of December 31, 2016.

The Company believes it has meritorious arguments to support its tax position and intends to vigorously litigate the remaining assessment through Spain’s court system. However, in the event the Company is unsuccessful, a portion of the remaining assessment may be offset with existing net operating losses available to the Spanish consolidated tax group, which would be shared between the Company and Arconic as provided for in the Tax Matters Agreement related to the Separation Transaction. Additionally, it is possible that the Company may receive similar assessments for tax years subsequent to 2009. Despite the favorable decision received on the first assessment, at this time, the Company is unable to reasonably predict the ultimate outcome for this matter.

This Spanish consolidated tax group had been under audit (began in September 2015) for the 2010 through 2013 tax years. As Spain’s 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 Company’s Consolidated Financial Statements. Given the stage of the appeal of the assessment for the 2006 through 2009 tax years in Spain’s National Court, the settlement of the 2010 through 2013 tax years will not impact the ultimate outcome of that proceeding.

Other

On October 19, 2015, a subsidiary of Alcoa, Alúmina Española S.A., received a request by the Court of Vivero, Spain to provide the names of the “manager,” as well as those of the “environmental managers,” of the San Ciprián alumina refinery from 2009 to the present date. Upon reviewing the documents filed with the Court, ParentCo learned for the first time that the request is the result of a criminal proceeding that began in 2010 after the filing of a claim by two San Ciprián neighbors alleging that the plant’s activities had adverse effects on vegetation, crops and human health. In 2011 and 2012, some neighbors claimed individually in the criminal court for caustic spill damages to vehicles, and the judge decided to administer all issues in the court proceeding (865/2011). Currently, that court proceeding is in its first phase (preliminary investigation phase) led by the judge. The purpose of that investigation is to determine whether there has been a criminal offense for actions against natural resources and the environment. The Spanish public prosecutor is also involved in the case, having requested technical reports. To date, only “Alcoa-Alúmina Española S.A.” has been identified as a potential defendant and no Alcoa representative has yet been required to appear before the judge. Monetary sanctions for an offense in the form of a fine could range from 30 to 5,000 euros per day, for a maximum period of three years. The environmental experts appointed by the public prosecutor have submitted their report to the court, and while favorable to the Company, the court has not rendered a ruling in that respect.

Other Contingencies

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 Sherwin’s 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

 

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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 Sherwin’s 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 Sherwin’s 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, safety and health, and tax matters. 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 Company’s liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company.

Item 4. Mine Safety Disclosures.

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 of this report, which is incorporated herein by reference.

 

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Shares of the Company’s common stock are listed on the New York Stock Exchange and trade under the symbol “AA” in “regular-way” trading, which began on November 1, 2016 immediately following the Separation Transaction. The Company’s high and low trading stock prices for the reporting periods since that time are shown below.

 

      High      Low  

2017

       

First Quarter

   $ 39.78      $ 28.17  

Second Quarter

     37.20        29.55  

Third Quarter

     47.95        32.92  

Fourth Quarter

     54.61        40.22  

Year

     54.61        28.17  

2016

       

Fourth Quarter (beginning November 1, 2016)

   $ 32.35      $ 21.78  

Alcoa Corporation did not pay dividends in 2017 or in 2016 (beginning November 1, 2016). Dividends on Alcoa Corporation common stock are subject to authorization by the Company’s Board of Directors. The payment and amount of dividends, if any, depends upon matters deemed relevant by the Company’s Board of Directors, such as Alcoa Corporation’s results of operations, financial condition, cash requirements, future prospects, any limitations imposed by law, credit agreements or senior securities, and other factors deemed relevant and appropriate. The Company’s senior secured revolving credit facility and the indenture governing our senior unsecured notes restrict our ability to pay dividends in certain circumstances. For more information, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financing Activities.”

As of February 20, 2018, there were approximately 11,800 holders of record of shares of the Company’s common stock. Because many of Alcoa Corporation’s shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these recordholders.

 

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Stock Performance Graph

The following graph compares Alcoa Corporation’s cumulative 14-month total shareholder return with (1) the Standard & Poor’s (S&P) 500® Index and (2) the S&P 500® Metals & Mining GICS Level 3 Index, a group of companies categorized by S&P as active in the “Metals and Mining” industry within the “Materials” market sector. This comparison was based on an initial investment of $100, including the reinvestment of any dividends from November 1, 2016 (beginning of “regular way” trading for Alcoa Corporation) through December 31, 2017. Such information shall not be deemed to be “filed.”

 

 

LOGO

 

    

November 1,

2016

   

December 31,

2016

   

March 31,

2017

   

June 30,

2017

   

September 30,

2017

   

December 31,

2017

 

Alcoa Corporation

  $ 100     $ 122     $ 150     $ 142     $ 203     $ 234  

S&P 500® Index

    100       106       112       116       121       129  

S&P 500® Metals &

Mining GICS Level 3 Index

    100       109       109       104       114       133  

Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.

Source: Research Data Group, Inc. (www.researchdatagroup.com/S&P.htm)

Unregistered Sales of Equity Securities

On March 14, 2016, Alcoa Corporation issued 1,000 shares of its common stock to ParentCo pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The Company did not register the issuance of these shares under the Securities Act of 1933, as amended, because such issuance did not constitute a public offering.

 

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Item 6. Selected Financial Data.

(dollars in millions, except per-share amounts and average realized prices; metric tons in thousands (kmt))

 

For the year ended December 31,   2017     2016     2015     2014     2013(3)  

Sales

  $ 11,652     $ 9,318     $ 11,199     $ 13,147     $ 12,573  

Restructuring and other charges

    309       318       983       863       712  

Net income (loss)

    559       (346     (739     (347     (2,870

Net income (loss) attributable to Alcoa Corporation

    217       (400     (863     (256     (2,909

Earnings per share attributable to Alcoa Corporation common shareholders(1):

         

Basic

  $ 1.18     $ (2.19   $ (4.73   $ (1.40   $ (15.94

Diluted

    1.16       (2.19     (4.73     (1.40     (15.94

Shipments of alumina (kmt)

    9,220       9,071       10,755       10,652       9,966  

Shipments of aluminum products (kmt)

    3,356       3,147       3,227       3,518       3,742  

Alcoa Corporation’s average realized price per metric ton of alumina

  $ 340     $ 253     $ 311     $ 320     $ 319  

Alcoa Corporation’s average realized price per metric ton of primary aluminum

    2,224       1,862       2,092       2,396       2,280  

Cash dividends declared per common share(2)

  $ -     $ -     $ *     $ *     $ *  

Total assets

    17,447       16,741       16,413       18,680       21,126  

Total debt

    1,412       1,445       225       342       420  

Cash provided from operations

    1,224       (311     875       842       452  

Capital expenditures

    (405     (404     (391     (444     (567

 

(1) 

For all periods presented prior to 2016, earnings per share was calculated based on the 182,471,195 shares of Alcoa Corporation common stock distributed on November 1, 2016 in conjunction with the completion of the Separation Transaction and is considered pro forma in nature.

(2) 

Dividends on common stock are subject to authorization by Alcoa Corporation’s Board of Directors. Alcoa Corporation did not declare any dividends in 2017 and from November 1, 2016 through December 31, 2016.

(3) 

In 2013, Alcoa Corporation recognized an impairment of goodwill in the amount of $1,731 ($1,719 after noncontrolling interest) related to the annual impairment review of its former Primary Metals reporting unit (comprised of both the primary aluminum and the majority of energy operations).

* Prior to November 1, 2016, Alcoa Corporation was not a standalone publicly-traded company with issued and outstanding common stock.

Prior to the Separation Date, Alcoa Corporation did not operate as a separate, standalone entity. Alcoa Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporation’s Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation.

The selected Statement of Consolidated Operations and Consolidated Balance Sheet information in the table above for all periods was derived from Alcoa Corporation’s audited Consolidated Financial Statements.

The data presented in the Selected Financial Data table should be read in conjunction with the information provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 and the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in millions, except per-share amounts, average realized prices, and average cost amounts;

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations to “ParentCo” refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries (through October 31, 2016, at which time was renamed Arconic Inc. (Arconic)).

On September 28, 2015, ParentCo’s 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 ParentCo’s 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 ParentCo’s Board of Directors (see below); the continuing validity of the private letter ruling from the Internal Revenue Service regarding certain U.S. federal income tax matters relating to the transaction; receipt of an opinion of legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes; and the U.S. Securities and Exchange Commission (the “SEC”) declaring effective a Registration Statement on Form 10, as amended, filed with the SEC on October 11, 2016 (effectiveness was declared by the SEC on October 17, 2016).

On September 29, 2016, ParentCo’s Board of Directors approved the completion of the Separation Transaction by means of a pro rata distribution by ParentCo of 80.1% of the outstanding common stock of Alcoa Corporation to ParentCo shareholders of record as of the close of business on October 20, 2016 (the “Record Date”). Arconic was to retain the remaining 19.9% of Alcoa Corporation common stock. At the time of the Separation Transaction, ParentCo shareholders were to receive 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.

 

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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 Corporation’s common stock began with the opening of the New York Stock Exchange on November 1, 2016 under the ticker symbol “AA.” Alcoa Corporation’s common stock has a par value of $0.01 per share.

ParentCo incurred costs to evaluate, plan, and execute the Separation Transaction, and Alcoa Corporation was allocated a pro rata portion of those costs based on segment revenue (see Cost Allocations below). ParentCo recognized $152 from January 2016 through October 2016 and $24 in 2015 for costs related to the Separation Transaction, of which $68 and $12, respectively, was allocated to Alcoa Corporation. The allocated amounts were included in Selling, general administrative, and other expenses on Alcoa Corporation’s Statement of Consolidated Operations.

Basis of Presentation. The Consolidated Financial Statements of Alcoa Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and 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 Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporation’s Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation.

Cost Allocations. The description and information on cost allocations is applicable for all periods included in Alcoa Corporation’s Consolidated Financial Statements prior to the Separation Date.

The Consolidated Financial Statements of Alcoa Corporation include general corporate expenses of ParentCo that were not historically charged to Alcoa Corporation for certain support functions that were provided on a centralized basis, such as expenses related to finance, audit, legal, information technology, human resources, communications, compliance, facilities, employee benefits and compensation, and research and development activities. These general corporate expenses were included on Alcoa Corporation’s Statement of Consolidated Operations within Cost of goods sold, Selling, general administrative and other expenses, and Research and development expenses. These expenses

 

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were allocated to Alcoa Corporation on the basis of direct usage when identifiable, with the remainder allocated based on Alcoa Corporation’s segment revenue as a percentage of ParentCo’s total segment revenue for both Alcoa Corporation and Arconic.

All external debt not directly attributable to Alcoa Corporation was excluded from Alcoa Corporation’s Consolidated Balance Sheet. Financing costs related to these debt obligations were allocated to Alcoa Corporation based on the ratio of capital invested in Alcoa Corporation to the total capital invested by ParentCo in both Alcoa Corporation and Arconic, and were included on Alcoa Corporation’s 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 ParentCo’s retained pension and other postretirement benefits associated with closed and sold operations.

(2) 

Allocation includes costs incurred by ParentCo associated with the Separation Transaction (see above).

(3) 

Allocation primarily relates to layoff programs for ParentCo corporate employees.

Management believes the assumptions regarding the allocation of ParentCo’s general corporate expenses and financing costs were reasonable.

Nevertheless, the Consolidated Financial Statements of Alcoa Corporation may not include all of the actual expenses that would have been incurred and may not reflect Alcoa Corporation’s consolidated results of operations, financial position, and cash flows had it been a standalone company during the periods prior to the Separation Date. Actual costs that would have been incurred if Alcoa Corporation had been a standalone company would depend on multiple factors, including organizational structure, capital structure, and strategic decisions made in various areas, including information technology and infrastructure. Transactions between Alcoa Corporation and ParentCo, including sales to Arconic, were included as related party transactions on Alcoa Corporation’s Consolidated Financial Statements and are considered to be effectively settled for cash at the time the transaction was recorded. The total net effect of the settlement of these transactions is reflected on Alcoa Corporation’s Statement of Consolidated Cash Flows as a financing activity and on the Company’s 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 Corporation’s 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.

 

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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 contract—see below) and caustic soda; net unfavorable foreign currency movements due to a weaker U.S. dollar; increased maintenance and transportation expenses; an unfavorable last in, first out (LIFO) inventory adjustment (difference of $81—see Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net Income (Loss) Attributable to Alcoa Corporation in Segment Information below); and costs related to the partial restart of the Warrick (Indiana) smelter ($46—see 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 $117—see 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 $85—see Restructuring and Other Charges below).

Alcoa Corporation has purchased electricity in the spot market for one of its smelters since the Company’s contract with a local energy provider expired in October 2016, as a new energy contract was not able to be negotiated. In order to manage the Company’s exposure against the variable energy rates that occur in the spot market, Alcoa Corporation had previously entered into a financial contract with a counterparty to effectively convert the Company’s variable power price to a fixed power price. At the beginning of 2017, Alcoa Corporation held a favorable position in the financial contract, which was scheduled to early terminate in August 2017, as a result of a decision made by management in August 2016.

In January 2017, Alcoa Corporation began the process of restarting capacity 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 Company’s 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.

 

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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

 

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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 Company’s 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 Company’s Rockdale (Texas) smelter, which has been fully curtailed since the end of 2008. In accordance with the terms of the early termination agreement, Alcoa made a cash payment of $238 and transferred approximately 2,200 acres of related land and other assets and liabilities to Luminant (net asset carrying value of $6).

Since the curtailment of the Rockdale smelter, the Company had been selling surplus electricity into the energy market. The power contract was set to expire no earlier than 2038, except for limited circumstances in which one or both parties could elect to early terminate without penalty for which conditions had never been met. In 2017 (through September 30), 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.

 

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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 ParentCo’s refining operations on the global alumina cost curve. Since that time, management of ParentCo (through October 31, 2016) and then separately management of Alcoa Corporation (from November 1, 2016 through the end of 2016) had been in discussions with the Government of the Republic of Suriname to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative. The decision to permanently close the Suralco refinery was based on the ultimate conclusion of those discussions. Demolition and remediation activities related to this action began in 2017 and are expected to be completed by the end of 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 AofA’s refineries in Western Australia. This interest, now at 43% (as of December 31, 2016), relates to four separate gas wells. In late 2016, AofA received the results of a technical analysis performed earlier in the year for two of the wells and an updated analysis for a third well that concluded that the cost of gas recovery would be significantly higher than the market price of gas. For the fourth well, the results of a technical analysis performed prior to 2016 indicated that the cost of gas recovery would be lower than the market price of gas and, therefore, would require additional investment to move to the next phase of commercial evaluation, which management previously supported. In late 2016, management re-evaluated its options related to the fourth well and decided it is not economical to make such a commitment for the foreseeable future. As a result, AofA fully impaired its $72 interest.

As of June 30, 2017, the separations associated with 2016 restructuring programs were essentially complete. In 2017 and 2016, cash payments of $2 and $7, respectively, were made against layoff reserves related to 2016 restructuring programs.

 

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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 management’s conclusion that the smelter was no longer competitive as a result of challenging global market conditions for primary aluminum, which led to the initial curtailment, that have not dissipated and higher costs. For the Anglesea power station, the decision was made because a sale process did not result in a sale and there would have been imminent operating costs and financial constraints related to this site in the remainder of 2015 and beyond, including significant costs to source coal from available resources, necessary maintenance costs, and a depressed outlook for forward electricity prices. The Anglesea power station previously supplied approximately 40 percent of the power needs for the Point Henry smelter, which was closed in August 2014.

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.

 

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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 ParentCo’s 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 Corporation’s 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 Corporation’s 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 Corporation’s 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 AWAB’s tax rate on income generated by the Juruti mine from 34% to 15.25%, which will result in future cash tax savings over a 10-year period. As a result

 

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of this income tax rate change, AWAB’s existing deferred tax assets that are expected to reverse during the holiday period were remeasured at the lower tax rate. This remeasurement resulted in both a decrease to AWAB’s deferred tax assets and a discrete income tax charge of $26 ($15 after noncontrolling interest).

Alcoa Corporation’s effective tax rate was 113.6% (provision on a loss) in 2016 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs (by (148.6) percentage points) from the U.S. federal statutory rate primarily related to U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation.

Alcoa Corporation’s effective tax rate was 119.3% (provision on a loss) in 2015 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs (by (154.3) percentage points) from the U.S. federal statutory rate principally driven by U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation, a $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Suriname ($85, $51 after noncontrolling interest) and Iceland ($56) (see Income Taxes in Critical Accounting Policies and Estimates below), a $201 charge for legal matters in Italy (see Restructuring and Other Charges above) that is nondeductible for income tax purposes, and restructuring charges related to the curtailment of a refinery in Suriname (see Restructuring and Other Charges above), a portion for which no tax benefit was recognized.

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 company’s deductible expenses; and (v) net operating losses have an unlimited carryforward period (previously 20 years) and no carryback period (previously 2 years), but deductions for such losses are limited to 80% of taxable income (previously 100% of taxable income) beginning with the 2018 tax year.

As a result of the close proximity of the enactment date of the TCJA in relation to the Company’s calendar year-end, management elected January 17, 2018 as a cut-off date for purposes of recognizing any impacts from the TCJA in Alcoa Corporation’s 2017 Consolidated Financial Statements. This date coincided with the Company’s public release of its preliminary financial results for the fourth quarter and year ended December 31, 2017. Accordingly, the Company’s preliminary analysis of the provisions of the TCJA resulted in a charge of $22, which was reflected in the Provision for income taxes on Alcoa Corporation’s 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 management’s reasonable estimate of the corporate income tax rate change, which resulted in the remeasurement of the Company’s deferred income tax accounts. On a gross basis, the Company reduced its deferred tax assets, valuation allowance, and deferred tax liabilities by $506, $433, and $51, respectively.

Management also completed a preliminary analysis of the remaining provisions of the TCJA, including those specifically described above, in order to make a reasonable estimate as of the cut-off date, which resulted in no additional impact to the Company’s 2017 Consolidated Financial Statements. Specifically, the reasonable estimate for the TCJA provisions described above was based on the following: for (i), (ii), and (iii) the Company’s existing tax

profile, which includes significant current U.S. tax losses that would be applied against such taxable income, as well as

 

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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 Company’s deferred income tax assets related to U.S. net operating losses are fully reserved as of December 31, 2017.

The Company’s preliminary analyses and provisional estimates of the financial statement impacts of the TCJA were completed in accordance with guidance issued by the SEC under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

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 Australia’s (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 Corporation’s Bauxite and Alumina segments (except for the Poços de Caldas mine and refinery and a portion of the São Luís refinery, all in Brazil) and 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 Limited’s 40% interest in the earnings of such entities is reflected as Noncontrolling interest on Alcoa Corporation’s Statement of Consolidated Operations. These combined entities generated income in 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 interest’s 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 interest’s 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 interest’s 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 interest’s share) discrete income tax charge for a valuation allowance on certain deferred tax assets (see Income Taxes above), and a $27 ($8 was noncontrolling interest’s share) gain on the sale of an equity interest in a natural gas pipeline in Australia.

Segment Information

Alcoa Corporation is a producer of bauxite, alumina, and aluminum products (primary and flat-rolled). The Company’s operations consist of three worldwide reportable segments. Segment performance under the Company’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) (see below) of each segment.

Effective in the first quarter of 2017, management elected to change the profit and loss measure of Alcoa Corporation’s 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

 

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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 Corporation’s 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 Company’s internal business and organizational structure. This realignment consisted of combining Alcoa Corporation’s 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 Corporation’s 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 Company’s global bauxite mining operations. A portion of this segment’s 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).

 

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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 Company’s worldwide refining system, which processes bauxite into alumina. The alumina produced by this segment is sold primarily to internal and external aluminum smelter customers; a portion of the alumina is sold to external customers who process it into industrial chemical products. Approximately two-thirds of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Aluminum segment. Alumina produced by this segment and used internally is transferred to the Aluminum segment at prevailing market prices. A portion of this segment’s third-party sales are completed through the use of agents, alumina traders, and distributors. Generally, 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 AWAC’s 25.1% share of the results of a mining and refining joint venture company in Saudi Arabia.

 

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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  

 

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(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 Company’s 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 segment’s 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 segment’s 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 Arconic’s rolling mill in Tennessee produces can sheet products for certain customers of the Company’s 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 segment’s 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 Corporation’s 25.1% share of the results of both a smelting and rolling mill joint venture company in Saudi Arabia.

In February 2017, Alcoa Corporation’s 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 segment’s base capacity due to the permanent closure of the facility at that time. As a result of the decision to partially restart the smelter, the capacity of the Warrick smelter was included in the base capacity at December 31, 2017. Additionally, until the partial restart is completed, the

 

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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 segment’s 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 segment’s 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 Corporate—see 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 Corporate—see 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.

 

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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 Corporation’s 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

 

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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 Corporation’s primary future cash needs are centered on operating activities, particularly working capital, as well as sustaining and return-seeking capital expenditures. The Company’s ability to fund its cash needs depends on Alcoa Corporation’s ongoing ability to generate and raise cash in the future. Although management believes that Alcoa Corporation’s future cash from operations, together with the Company’s access to capital markets, will provide adequate resources to fund Alcoa Corporation’s operating and investing needs, the Company’s access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) Alcoa Corporation’s credit rating; (ii) the liquidity of the overall capital markets; and (iii) the current state of the economy and commodity markets. There can be no assurances that Alcoa 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 Company’s Consolidated Financial Statements. Transfers of cash, both to and from ParentCo’s centralized cash management system, were reflected as a component of Parent Company net investment in Alcoa Corporation’s Consolidated Financial Statements.

Cash provided from operations and financing activities is expected to be adequate to cover Alcoa Corporation’s operational and business needs over the next 12 months. For an analysis of long-term liquidity, see Contractual Obligations and Off-Balance Sheet Arrangements below.

At December 31, 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 Company’s 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).

 

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On October 10, 2017, Alcoa Corporation paid $238 to early terminate a power contract related to the Company’s 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).

 

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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 Corporation’s leverage ratio) on the unused portion of the Revolving Credit Facility.

A maximum of $750 in outstanding borrowings under the Revolving Credit Facility may be denominated in euros. Loans will bear interest at a rate per annum equal to an applicable margin plus, at ANHBV’s option, either (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the highest of (1) the 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 Corporation’s 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 Corporation’s 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.

 

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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 16th through December 31st) 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.

 

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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 Corporation’s consolidated total assets. Accordingly, Alcoa Corporation may make annual ordinary dividends in any fiscal year by an aggregate amount of up to $250, assuming no other restricted payments have reduced, in part or whole, the available limit. The limits of the restricted payments negative covenant under the 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 Corporation’s Statement of Consolidated Cash Flows as these represent noncash financing and investing activities, respectively. The subsequent release of the $1,228 from escrow occurred on October 31, 2016 in preparation for the Separation Transaction. This decrease in restricted cash was reflected in Alcoa Corporation’s Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.

Ratings. Alcoa Corporation’s cost of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short- and long-term debt ratings assigned to Alcoa Corporation’s debt by the major credit rating agencies.

On April 24, 2017, Fitch Ratings (Fitch) assigned a BB+ rating for Alcoa Corporation’s long-term debt. Additionally, Fitch assigned the current outlook as stable.

On June 20, 2017, Standard and Poor’s Global Ratings (S&P) affirmed a BB- rating for Alcoa Corporation’s 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 Corporation’s long-term debt to BB from BB-. Additionally, S&P affirmed the current outlook as positive.

On September 5, 2017, Moody’s Investor Service (Moody’s) upgraded its ratings for Alcoa Corporation’s long-term debt to Ba2 from Ba3 and short-term debt to Speculative Grade Liquidity Rating-1 from Speculative Grade Liquidity Rating-2. Additionally, Moody’s affirmed the current outlook as stable.

 

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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 Corporation’s Statement of Consolidated Cash Flows as these represent noncash financing and investing activities, respectively. The subsequent release of the $1,228 from escrow occurred on October 31, 2016. This decrease in restricted cash was reflected in Alcoa Corporation’s Statement of Consolidated Cash Flows as a cash inflow in the Net change in restricted cash line item.

 

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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 Corporation’s outstanding contractual obligations is as follows (these contractual obligations are grouped in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information):

 

      Total      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 Corporation’s bauxite mine interests in Guinea and Brazil), caustic soda, alumina, aluminum fluoride, calcined petroleum coke, and cathode blocks with expiration dates ranging from less than 1 year to 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 21st Century Act of 2012; the Highway and

 

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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 Alcoa’s Corporation’s current subsidiaries, AWA, resolved violations of certain provisions of the Foreign Corrupt Practices Act of 1977 with the U.S. Department of Justice and U.S. Securities and Exchange Commission. Under the resolution, ParentCo and AWA agreed to pay a combined $384 over a four-year timeframe. Prior to the Separation Transaction, ParentCo and AWA paid $236 of the total amount. As part of the Separation and Distribution Agreement, Alcoa Corporation assumed ParentCo’s portion of the $148 remaining obligation. The $148 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 Corporation’s 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 entity’s net income, if any, based on the previous quarter’s results, and (ii) the available cash, if any, of each entity, subject to certain thresholds that the entities must maintain a minimum cash on hand that ranges from $5 to $85 depending on the entity. Available cash is defined as an entity’s cash and cash equivalents less any projected negative free cash flow of the entity for the upcoming quarter. Free cash flow is defined as cash flow from operating activities less sustaining capital expenditures. Estimates of 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.

 

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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 project’s 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 Corporation’s obligations under this facility will be secured in the same manner as obligations under the Company’s Amended Revolving Credit Agreement (see Financing Activities in Liquidity and Capital Resources above). Additionally, this facility contains similar representations and warranties and affirmative, negative, and financial covenants as the Company’s 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

 

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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 Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, provide a meaningful and fair perspective of the Company.

A summary of the Company’s significant accounting policies is included in Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the Consolidated Financial Statements with useful and reliable information about the Company’s operating results and financial condition.

Prior to the Separation Date, Alcoa Corporation did not operate as a separate, standalone entity. Alcoa Corporation’s operations were included in ParentCo’s financial results. Accordingly, for all periods prior to the Separation Date, Alcoa Corporation’s Consolidated Financial Statements were prepared from ParentCo’s historical accounting records and were presented on a standalone basis as if Alcoa Corporation’s operations had been conducted independently from ParentCo. Such Consolidated Financial Statements include the historical operations that were considered to comprise Alcoa Corporation’s businesses, as well as certain assets and liabilities that were historically held at ParentCo’s corporate level but were specifically identifiable or otherwise attributable to Alcoa Corporation. The Critical Accounting Policies described below reflect any incremental judgments, estimates, and assumptions made by management in the preparation of Alcoa’s Consolidated Financial Statements prior to the Separation Date (see Separation Transaction in Overview above for additional information).

Properties, Plants, and Equipment. Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets (asset group) exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets (asset group) over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow (DCF) model. The determination of what constitutes an asset group, the associated estimated undiscounted net cash flows, and the estimated useful lives of assets also require significant judgments.

Equity Investments. Alcoa Corporation invests in a number of privately-held companies, primarily through joint ventures and consortia, which are accounted for using the equity method. The equity method is applied in situations where Alcoa Corporation has the ability to exercise significant influence, but not control, over the investee. Management reviews equity investments for impairment whenever certain indicators are present suggesting that the carrying value of an investment is not recoverable. This analysis requires a significant amount of judgment from management to identify events or circumstances indicating that an equity investment is impaired. The following items are examples of impairment indicators: significant, sustained declines in an investee’s revenue, earnings, and cash flow

 

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trends; adverse market conditions of the investee’s industry or geographic area; the investee’s ability to continue operations measured by several items, including liquidity; and other factors. Once an impairment indicator is identified, management uses considerable judgment to determine if the impairment is other than temporary, in which case the equity investment is written down to its estimated fair value. An impairment that is other than temporary could significantly and adversely impact reported results of operations.

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 Company’s internal business and organizational structure resulting in a change to Alcoa Corporation’s 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 Corporation’s policy for its annual review of goodwill is to perform the qualitative assessment for all reporting units not subjected directly to the two-step quantitative impairment test. Generally, management will proceed directly to the two-step quantitative impairment test for each of its two reporting units that contain goodwill at least once during every three-year period, as part of its annual review of goodwill.

Under the qualitative assessment, various events and circumstances (or factors) that would affect the estimated fair value of a reporting unit are identified (similar to impairment indicators above). These factors are then classified by the type of impact they would have on the estimated fair value using positive, neutral, and adverse categories based on current business conditions. Additionally, an assessment of the level of impact that a particular factor would have on the estimated fair value is determined using high, medium, and low weighting. Furthermore, management considers the results of the most recent two-step quantitative impairment test completed for a reporting unit and compares the weighted average cost of capital (WACC) between the current and prior years for each reporting unit.

During the 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.

 

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Under the two-step quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. Alcoa Corporation uses a DCF model to estimate the current fair value of its reporting units when testing for impairment, as management believes forecasted cash flows are the best indicator of such fair value. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Certain of these assumptions can vary significantly among the reporting units. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The betas used in calculating the individual reporting units’ WACC rate are estimated for each business with the assistance of valuation experts.

In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to 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 Corporation’s control. Such uncertainties exist as a result of the perpetual nature of the structures, maintenance and upgrade programs, and other factors. At the date a reasonable estimate of the ultimate settlement date can be made (e.g., planned demolition), Alcoa Corporation would record an ARO for the removal, treatment, transportation, storage, and/or disposal of various regulated assets and hazardous materials such as asbestos, underground and aboveground storage tanks, polychlorinated biphenyls, various process residuals, solid wastes, electronic equipment waste, and various other materials. Such amounts may be material to the Consolidated Financial Statements in the period in which they are recorded. If Alcoa Corporation was required to demolish all such structures immediately, the estimated CARO as of December 31, 2017 ranges from $3 to $28 per structure (24 structures) in today’s dollars.

Environmental Matters. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating to existing conditions caused by past operations, which will not contribute to future revenues, are expensed. Liabilities are recorded when remediation costs are probable and can be reasonably estimated. The liability may include costs such as site investigations, consultant fees, feasibility studies, outside contractors, and monitoring

 

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expenses. Estimates are generally not discounted or reduced by potential claims for recovery, which are recognized as agreements are reached with third parties. The estimates also include costs related to other potentially responsible parties to the extent that Alcoa Corporation has reason to believe such parties will not fully pay their proportionate share. The liability is continuously reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.

Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.

Stock-based Compensation. For all periods prior to the Separation Date, employees attributable to Alcoa Corporation operations participated in ParentCo’s stock-based compensation plans. The compensation expense recorded by Alcoa Corporation included the expense associated with these employees, as well as the expense associated with the allocation of stock-based compensation expense for ParentCo’s corporate employees. Beginning on the Separation Date and forward, Alcoa Corporation recorded stock-based compensation expense for all of the Company’s 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 ParentCo’s corporate employees. As part of both Alcoa Corporation’s and ParentCo’s stock-based compensation plan design in the respective periods, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half of each year for these retirement-eligible employees. Of the total pretax stock-based compensation expense recognized in 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.

 

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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 Company’s plans’ obligations multiple times. If a deep market of high quality corporate bonds does not exist in a country, then the yield on government bonds plus a corporate bond yield spread is used. In 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 management’s 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 Company’s defined

 

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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 Company’s 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 Corporation’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.

 

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In all periods prior to the Separation Date, Alcoa Corporation’s operations were included in the income tax filings of ParentCo. The provision for income taxes in Alcoa Corporation’s Statement of Consolidated Operations was determined in the same manner described above, but on a separate return methodology as if the Company was a standalone taxpayer filing hypothetical income tax returns where applicable. Any additional accrued tax liability or refund arising as a result of this approach was assumed to be immediately settled with ParentCo as a component of Parent Company net investment. Deferred tax assets were also determined in the same manner described above and were reflected in the Consolidated Balance Sheet for net operating losses, credits or other attributes to the extent that such attributes were expected to transfer to Alcoa Corporation upon the Separation Transaction. Any difference from attributes generated in a hypothetical return on a separate return basis was adjusted as a component of Parent Company net investment.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa Corporation’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to cumulative losses exist without a valuation allowance where in management’s judgment the weight of the positive evidence more than offsets the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.

The composition of Alcoa Corporation’s net deferred tax asset by jurisdiction as of December 31, 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;

 

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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 Company’s Consolidated Statement of Operations and a $34 charge to Accumulated other comprehensive loss on Alcoa Corporation’s 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 Company’s 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.

 

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Transactions between Alcoa Corporation and Arconic have been presented as related party transactions on the Company’s 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 Corporation’s Consolidated Balance Sheet.

Recently Adopted Accounting Guidance

See the Recently Adopted Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

Recently Issued Accounting Guidance

See the Recently Issued Accounting Guidance section of Note B to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See the Derivatives section of Note O to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

 

Item 8. Financial Statements and Supplementary Data.

Management’s Reports to Alcoa Corporation Stockholders

Management’s Report on Financial Statements and Practices

The accompanying Consolidated Financial Statements of Alcoa Corporation and its subsidiaries (the “Company”) were prepared by management, which is responsible for their integrity and objectivity, in accordance with accounting principles generally accepted in the United States of America (GAAP) and include amounts that are based on management’s best judgments and estimates. The other financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 is consistent with that in the financial statements.

Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the U.S. Securities Exchange Act of 1934 (as amended), for the Company. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an assessment to evaluate the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 using the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2017.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s 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

 

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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 Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 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 Control—Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s 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 Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits 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 company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

 

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transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP                                
 

PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania

February 23, 2018

We have served as the Company’s auditor since 2015.

 

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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.

 

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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