Form 10-K
Table of Contents

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, 2015

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3610

ALCOA INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania    25-0317820
(State of incorporation)    (I.R.S. Employer Identification No.)

390 Park Avenue, New York, New York 10022-4608

(Address of principal executive offices)     (Zip code)

Registrant’s telephone numbers:

Investor Relations------------— (212) 836-2674

Office of the Secretary-------—(212) 836-2732

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 $1.00 per share    New York Stock Exchange

Depositary Shares, each representing a 1/10th ownership

interest in a share of 5.375% Class B Mandatory Convertible

Preferred Stock, Series 1, par value $1.00 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 ü.

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 ü .

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 ü  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 ü  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. [ü]

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

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

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

The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $14 billion. As of February 11, 2016, there were 1,314,845,888 shares of common stock, par value $1.00 per share, of the registrant outstanding.

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 2016 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (Proxy Statement).


Table of Contents

TABLE OF CONTENTS

 

          Page(s)  

Part I

     

Item 1.

   Business      1   

Item 1A.

   Risk Factors      28   

Item 1B.

   Unresolved Staff Comments      39   

Item 2.

   Properties      39   

Item 3.

   Legal Proceedings      39   

Item 4.

   Mine Safety Disclosures      47   

Part II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      48   

Item 6.

   Selected Financial Data      50   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      50   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      88   

Item 8.

   Financial Statements and Supplementary Data      89   

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      169   

Item 9A.

   Controls and Procedures      169   

Item 9B.

   Other Information      169   

Part III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      170   

Item 11.

   Executive Compensation      170   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      170   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      170   

Item 14.

   Principal Accounting Fees and Services      170   

Part IV

     

Item 15.

   Exhibits, Financial Statement Schedules      171   
  

Signatures

     182   

Note on Incorporation by Reference

In this Form 10-K, selected items of information and data are incorporated by reference to portions of the Proxy Statement. Unless otherwise provided herein, any reference in this report to disclosures in the Proxy Statement shall constitute incorporation by reference of only that specific disclosure into this Form 10-K.


Table of Contents

PART I

Item 1.  Business.

General

Formed in 1888, Alcoa Inc. is a Pennsylvania corporation with its principal office in New York, New York. In this report, unless the context otherwise requires, “Alcoa” or the “Company” means Alcoa Inc. and all subsidiaries consolidated for the purposes of its financial statements.

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 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.

Forward-Looking Statements

This report contains (and oral communications made by Alcoa may contain) statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “will likely result,” “would,” or other words of similar meaning. All statements that reflect Alcoa’s expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements, including, without limitation, forecasts concerning global demand growth for aluminum, supply/demand balances, growth of the aerospace, automotive and other end markets, or other trend projections, anticipated financial results or operating performance, statements about Alcoa’s strategies, objectives, goals, targets, outlook, and business and financial prospects, including statements regarding the separation transaction; the future performance of Value-Add Company and Upstream Company if the separation is completed; the expected benefits of the separation; projections of improved profitability, enhanced shareholder value, competitive position, market share, growth opportunities, credit ratings, revenues, cash flow or other financial items of the separated companies; the expected timing of completion of the separation; and the expected qualification of the separation as a tax-free transaction.

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors and are not guarantees of future performance. Actual results, performance or outcomes may differ materially from those expressed in or implied by those forward-looking statements. 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 Note N and the Derivatives Section of Note X to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data). Market projections are subject to the risks discussed above and other risks in the market. Alcoa disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law.

Overview

Alcoa is a global leader in lightweight metals engineering and manufacturing. Alcoa’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.

 

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Alcoa is also the world leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined, through its active participation in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily. Sales of primary aluminum and alumina represent approximately 40% of Alcoa’s revenues. The price of aluminum influences the operating results of Alcoa.

Alcoa is a global company operating in 30 countries. Based upon the country where the point of sale occurred, the United States and Europe generated 55% and 26%, respectively, of Alcoa’s sales in 2015. In addition, Alcoa has investments and operating activities in, among others, Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi Arabia. 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.

Alcoa’s operations consist of five worldwide reportable segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions.

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:

  

Note D. Restructuring and Other Charges

     108   

Note F. Acquisitions and Divestitures

     114   

Note N. Contingencies and Commitments

     125   

Segment Information:

  

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

  

Alumina

     63   

Primary Metals

     65   

Global Rolled Products

     68   

Engineered Products and Solutions

     70   

Transportation and Construction Solutions

     71   

Financial Information about Segments and Financial Information about Geographic Areas:

  

Note Q. Segment and Geographic Area Information

     137   

The following tables and related discussion of the Company’s Bauxite Interests, Alumina Refining and Primary Aluminum Facilities and Capacities, Global Rolled Products, Engineered Products and Solutions and Transportation and Construction Solutions provide additional description of Alcoa’s businesses. The Alumina segment primarily consists of a series of affiliated operating entities referred to as Alcoa World Alumina and Chemicals (AWAC). Alcoa owns 60% and Alumina Limited owns 40% of these individual entities. For more information on AWAC, see Exhibit Nos. 10(a) through 10(f)(1) to this report.

Proposed Separation Transaction

On September 28, 2015, Alcoa announced that its Board of Directors approved a plan to separate into two independent, publicly-traded companies. One company will comprise the Alumina and Primary Metals segments and the other company will comprise the Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions segments. Alcoa is targeting to complete the separation in the second half of 2016. The

 

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transaction is subject to a number of conditions, including, but not limited to, final approval by Alcoa’s Board of Directors, receipt of a favorable opinion of legal counsel with respect to the tax-free nature of the transaction for U.S. federal income tax purposes, completed financing, and the effectiveness of a Form 10 registration statement to be filed with the U.S. Securities and Exchange Commission. Upon completion of the separation, Alcoa shareholders will own all of the outstanding shares of both companies. Alcoa may, at any time and for any reason until the proposed transaction is complete, abandon the separation plan or modify or change its terms.

Bauxite Interests

This Bauxite Interests section explains the Company’s interests in various bauxite mines throughout the world. Bauxite is one of the Company’s basic raw materials and is also a product sold into the third-party marketplace. This section provides mine description and reserve and annual production figures in respect of the Company’s interests.

Aluminum is one of the most abundant elements in the earth’s crust. Aluminum metal is produced by smelting alumina. Alumina is produced primarily from refining bauxite. 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. 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 bone dry metric tons (bdmt) unless otherwise stated. See the glossary of bauxite mining related terms at the end of this section.

During 2015, mines operated by Alcoa (owned by Alcoa and AWAC) produced 38.3 million bdmt and separately mines operated by third parties (with Alcoa and AWAC equity interests) produced 7.0 million bdmt on a proportional equity basis for a total bauxite production of 45.3 million bdmt.

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 2015, AWAC had access to 47.8 million bdmt of production from its portfolio of mines.

During 2015, AWAC sold 2.0 million bdmt of bauxite to third parties and purchased 1.1 million bdmt from third parties. The bauxite delivered to Alcoa and AWAC refineries amounted to 46.8 million bdmt during 2015.

The Company is growing its third-party bauxite sales business. During the third quarter of 2015, Alcoa received permission from the Government of Western Australia to export trial shipments from its Western Australia mines.

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 as feedstock to 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 drill grid) with customized techniques to define and characterize its various bauxite deposit types allowing Alcoa to confidently establish the extent of its bauxite resources and their ultimate conversion to reserves.

The table below only includes the amount of proven and probable reserves controlled by the Company. While the level of reserves may appear low in relation to annual production levels, they are consistent with historical levels of reserves for the Company’s mining locations. Given the Company’s extensive bauxite resources, the abundant supply of bauxite

 

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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 Development Guidelines

Alcoa has developed best practice guidelines for bauxite reserve and resource classification at its operating bauxite mines. Alcoa’s reserves are declared in accordance with Alcoa’s internal guidelines as administered by the Alcoa Ore Reserves Committee (AORC). The reported ore reserves set forth in the table below are those that Alcoa estimates could be extracted economically with current technology and in current market conditions. Alcoa does not use a price for bauxite, alumina, or aluminum to determine its bauxite reserves. The primary criteria for determining bauxite reserves are the feed specifications required by the customer alumina refinery. In addition to these specifications, a number of modifying factors have been applied to differentiate bauxite reserves from other mineralized material. Alcoa mining locations have annual in-fill drilling programs designed to progressively upgrade the reserve and resource classification of their bauxite.

Alcoa Bauxite Interests, Share of Reserves and Annual Production1

 

Country   Project   Owners’
Mining
Rights (%
Entitlement)
  Expiration
Date of
Mining
Rights
  Probable
Reserves
(million
bdmt)
    Proven
Reserves
(million
(bdmt)
    Available
Alumina
Content
(%)
AvAl2O3
    Reactive
Silica
Content
(%)
RxSiO2
    2015
Annual
Production
(million
bdmt)
 

Australia

  Darling Range Mines ML1SA   Alcoa of Australia Limited (AofA)2 (100%)   2024     28.5        150.0        33.0        0.9        31.7   

Brazil

  Poços de Caldas   Alcoa Alumínio
S.A. (Alumínio)
3 (100%)
  20204     0.9        1.3        39.6        4.4        0.3   
 

Juruti4

RN101, RN102,

RN103, RN104,

#34

  Alcoa World
Alumina Brasil
Ltda. (AWA
Brasil)
2 (100%)
  21004     8.7        26.5        47.7        4.1        4.7   

Suriname

 

Coermotibo and

Onverdacht

  Suriname
Aluminum
Company, L.L.C. (Suralco)
2 (55%)
N.V. Alcoa
Minerals of
Suriname (AMS)
5 (45%)
  20336     0.0        0.0        N/A        N/A        1.6   
   

Equity interests:

               

Brazil

  Trombetas   Mineração Rio do Norte S.A. (MRN)7 (18.2%)   20464     3.7        10.4        49.5        4.5        3.0   

Guinea

  Boké  

Compagnie des Bauxites de

Guinée (CBG)8

(22.95%)

  20389     59.5        23.2       
 
TAl2O3  10
48.5
  
  
   

 

TSiO210

1.7

  

  

    3.4   
Kingdom of Saudi Arabia    Al Ba’itha   Ma’aden Bauxite
& Alumina Company
(25.1%)
11
  2037     33.8        19.3       

 

TAA12

49.4

  

  

   

 

TSiO2  12

8.6

  

  

    0.6   

 

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1 

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

 

2 

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

 

3 

Alumínio is owned 100% by Alcoa.

 

4 

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.

 

5 

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

 

6 

At the end of 2015, AWAC’s bauxite mineral and mining rights remained valid until 2033. The AWAC mines in Suriname were curtailed in the fourth quarter of 2015. There are no plans for AWAC to restart these mines and there are no reserves to declare.

 

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, Companhia Vale do Rio Doce, BHP Billiton Plc (BHP Billiton) 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 Alũmina Española, S.A. have bauxite purchase contracts with CBG that expire in 2033. Before that expiration date, AWA LLC and Alũmina 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 qualities 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 owned 60% by Alcoa 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 (TAA) and total silica (TSiO2).

Qualifying statements relating to the table above:

Australia—Darling Range Mines: Huntly and Willowdale are the two AWAC active mines in the Darling Range of Western Australia. The mineral lease issued by the State of Western Australia to AofA is known as ML1SA and its term extends to 2024. The lease can be renewed for an additional twenty-one year period to 2045. The declared reserves are as for December 31, 2015. 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: Declared reserves are as for December 31, 2015. Tonnage is total Alcoa share. Additional resources are being upgraded to reserves as needed.

Brazil—Juruti RN101, RN102, RN103, RN104, #34: Declared reserves are as for December 31, 2015. All reserves are on Capiranga Plateau. Declared reserves are total AWAC share. Declared reserve tonnages and the annual production tonnage are washed product tonnages. The Juruti mine’s operating license is periodically renewed.

 

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Suriname—Suralco: The AWAC mines in Suriname were curtailed in the fourth quarter of 2015. AWAC has no plans to restart these mines and there are no reserves to declare.

Brazil—Trombetas-MRN: Declared reserves have been estimated by MRN as for December 31, 2015. The CP Report for December 31, 2015 reserves is expected to be issued on or about February 29, 2016. Declared and annual production tonnages reflect the total for Alumínio and AWAC shares (18.2%). Declared tonnages are washed product tonnages.

Guinea—Boké-CBG: Declared reserves are based on export quality bauxite and have been estimated by CBG as for December 31, 2015. The CP Report for December 31, 2015 reserves is expected to be issued in March 2016. 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 2015. Declared reserves are as for December 31, 2015. The proven reserves have been decremented for 2015 mine production. 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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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.
  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 4 to the table
above.

 

Operating licenses
for the mine, washing
plant and RR have
been renewed with
validity until 2018.

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.

Alcoa merged
Reynolds into the
Company in 2000.

Alcoa 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.

Suriname— Coermotibo and Onverdacht. Mines are located in the districts of Para and Marowijne.   The mines are
accessed by road.
Ore is delivered to
the refinery by
road from the
Onverdacht area
and by river barge
from the
Coermotibo area.
  Alcoa   Brokopondo
Concession from the
Government of
Suriname.
Concessions formerly
owned by a BHP
Billiton (BHP)
subsidiary that was a
45% joint venture
partner in the
Surinamese bauxite
mining and alumina
refining joint
ventures. AWA LLC
acquired that
subsidiary in 2009.
After the acquisition
of the subsidiary, its
name was changed to
N.V. Alcoa Minerals
of Suriname.

 

Expires in 2033.

  Alcoa became
active in Suriname
in 1916 with the
founding of the
Suriname Bauxite
Company.

Bauxite was first
exported in 1922.
The Brokopondo
Agreement was
signed in 1958.

As noted, Suralco
bought the bauxite
and alumina
interests of a BHP
subsidiary from
BHP in 2009.

  Open-cut mines.

At one of the
mines, the
overburden is
dredged and
mining progresses
with conventional
open-cut methods.
The protoliths of
the bauxite have
been completely
weathered. The
bauxite deposits
are mostly derived
from the
weathering of
Tertiary
Paleogene arkosic
sediments. In
some places, the
bauxite overlies
Precambrian
granitic and
gneissic rocks
which have been
deeply weathered
to saprolite.
Bauxitization
likely occurred
during the middle
to late Eocene
Epoch.

  Commercial
grid power.
 

In the Onverdacht mining areas, the bauxite is mined and transported to the refinery by truck. In the Coermotibo mining areas, the bauxite is mined, stockpiled and then transported to the refinery by barge. Some of the ore is washed in a small beneficiation plant located in the Coermotibo area. The main mining administrative offices, services, workshops and laboratory are located at the refinery in Paranam. The ore is crushed at Paranam and fed into the refining process.

 

The Suralco mines were curtailed in the fourth quarter of 2015. There are no plans for AWAC to restart these mines.

 

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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

centre 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, Alcoa and Saudi Arabian Mining Company (Ma’aden) 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 bdmt per year; an alumina refinery with an initial capacity of 1.8 million mt 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 mill will produce a variety of sheet products.

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

The smelter and refinery are fully operational. The mine construction was completed in the second quarter of 2015 and ramp up of operations is proceeding as planned.

Total capital investment is expected to be approximately $10.8 billion (SAR 40.5 billion). Ma’aden owns a 74.9% interest in the joint venture. Alcoa owns a 25.1% interest in the smelter and rolling mill, with AWAC holding a 25.1% interest in the mine and refinery. For additional information regarding the joint venture, see the Equity Investments section of Note I 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 Alcoa 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 Alcoa guidelines used by Alcoa managed mines to classify reserves and resources. These guidelines are issued by the Alcoa Ore Reserves Committee.

Available alumina content

  AvAl2O3   The amount of alumina extractable from bauxite using the Bayer Process.

Bauxite

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

Bayer Process

      The principal industrial means of refining bauxite to produce alumina.

Bone dry metric ton

  Bdmt   Tonnage reported on a zero moisture basis.

Coermotibo

      The mining area in Suriname containing the deposits of Bushman Hill, CBO Explo, Lost Hill and Remnant. These mines have been curtailed.

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. Alcoa mines located at Huntly and Willowdale operate within ML1SA.

Onverdacht

      The mining area in Suriname containing the deposits of Kaaimangrasi, Klaverblad, Lelydorp1 and Sumau 1. These mines have been curtailed.

 

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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

  RxSiO2   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

      Resources are 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

  TAA   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 Refining Facilities and Capacity

Alcoa is the world’s leading producer of alumina. Alcoa’s alumina refining facilities and its worldwide alumina capacity are shown in the following table:

Alcoa Worldwide Alumina Refining Capacity

 

Country   Facility  

Owners

(% of Ownership)

  Nameplate
Capacity1
(000 MTPY)
   

Alcoa

Consolidated
Capacity2

(000 MTPY)

 

Australia

  Kwinana   AofA3 (100%)     2,190        2,190   
   

Pinjarra

  AofA (100%)     4,234        4,234   
   

Wagerup

  AofA (100%)     2,555        2,555   

Brazil

  Poços de Caldas   Alumínio4 (100%)     390 5       390   
    São Luís (Alumar)  

AWA Brasil3 (39%)

Rio Tinto Alcan Inc.6 (10%)

Alumínio (15%)

BHP Billiton6 (36%)

    3,500        1,890   

 

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Table of Contents
Country   Facility  

Owners

(% of Ownership)

  Nameplate
Capacity1
(000 MTPY)
   

Alcoa

Consolidated
Capacity2

(000 MTPY)

 

Spain

  San Ciprián   Alúmina Española, S.A.3 (100%)     1,500 7       1,500   

Suriname

  Suralco   Suralco3 (55%) AMS8 (45%)     2,207 9       2,207   

United States

  Point Comfort, TX   AWA LLC3 (100%)     2,305 10       2,305   

TOTAL

            18,881        17,271   

 

1 

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

 

2 

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.

 

3 

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

 

4 

This entity is owned 100% by Alcoa.

 

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 named company or an affiliate holds this interest.

 

7 

The capacity that is operating at this refinery is producing at an approximately 95% output level.

 

8 

AWA LLC owns 100% of N.V. Alcoa Minerals of Suriname (AMS). AWA LLC is part of the AWAC group of companies and is owned 60% by Alcoa and 40% by Alumina Limited.

 

9 

The Suralco alumina refinery now has been fully curtailed (see below).

 

10 

The Point Comfort alumina refinery will be fully curtailed (see below).

As of December 31, 2015, Alcoa had approximately 2,801,000 mtpy of idle capacity against total Alcoa Consolidated Capacity of 17,271,000 mtpy.

In March 2015, the Company initiated a 12-month review of 2,800,000 mtpy in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of the Company’s target to lower Alcoa’s refining operations on the global alumina cost curve to the 21st percentile (currently 23rd) by the end of 2016. As part of this review, in March 2015, the Company decided to curtail 443,000 mtpy (one digester) of capacity at the Suralco refinery; this action was completed by the end of April 2015.

Additionally, in September, the Company decided to curtail the remaining capacity (887,000 mtpy—two digesters) at Suralco; the Company completed it by the end of November 2015 (877,000 mtpy of capacity at Suralco had previously been curtailed). The Company is currently in discussions with the Suriname government to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative.

During 2015, Alcoa undertook curtailment of the remaining 2,010,000 mtpy of capacity at the Point Comfort, Texas refinery (295,000 mtpy had previously been curtailed). This action is expected to be completed by the end of June 2016 (375,000 mtpy was completed by the end of December 2015).

As noted above, Alcoa and Ma’aden have developed an alumina refinery in the Kingdom of Saudi Arabia. Initial capacity of the refinery is 1.8 million mtpy. The refinery produced approximately 1.0 million mt in 2015. For additional information regarding the joint venture, see the Equity Investments section of Note I to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).

In November 2005, AWA LLC and Rio Tinto Alcan Inc. (RTA) signed a Basic Agreement with the Government of Guinea that sets forth the framework for development of a 1.5 million mtpy alumina refinery in Guinea. In 2006, the

 

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Table of Contents

Basic Agreement was approved by the Guinean National Assembly and was promulgated into law. The Basic Agreement was originally set to expire in November 2008, but was extended several times, most recently to November 2015. Alcoa completed a pre-feasibility study in 2008, further pre-feasibility work in 2012, and concluded its evaluation of the project in 2015. AWA LLC and RTA agreed that current market conditions are unable to support the development of the project as originally conceived and the Basic Agreement expired in November 2015.

In September 2006, Alcoa received environmental approval from the Government of Western Australia for expansion of the Wagerup alumina refinery to a maximum capacity of 4.7 million mtpy, a potential increase of over 2 million mtpy. This approval had a term of five years and included environmental conditions that must be satisfied before Alcoa could seek construction approval for the project. The project was suspended in November 2008 due to global economic conditions and the unavailability of a secure long-term energy supply in Western Australia. These constraints continue and as such the project remains under suspension. In May 2012, the Government of Western Australia granted Alcoa a 5 year extension of the original environmental approval. In 2015, Alcoa applied for a further five year extension. The extension has not yet been granted and there has been no additional work done on the project.

In 2015, Alcoa and Vietnam National Coal-Minerals Industries Group began discussions regarding potential cooperation to improve the operational and technical performance of the Tan Rai Refinery which started up in 2014. In January 2016, the parties entered into a non-disclosure agreement to support and further the development of this potential cooperation. The parties continue to discuss a Memorandum of Understanding (MOU).

Primary Aluminum Facilities and Capacity

The Company’s primary aluminum smelters and their respective capacities are shown in the following table:

Alcoa Worldwide Smelting Capacity

 

Country   Facility  

Owners

(% Of Ownership)

  Nameplate
Capacity1
(000 MTPY)
   

Alcoa

Consolidated

Capacity2

(000 MTPY)

 
Australia   Portland  

AofA (55%)

CITIC3 (22.5%)

Marubeni3 (22.5%)

    358        197 4,5 
Brazil   São Luís (Alumar)  

Alumínio (60%)

BHP Billiton3 (40%)

    447        268 6 
Canada   Baie Comeau, Québec   Alcoa (100%)     280        280   
    Bécancour, Québec  

Alcoa (74.95%)

Rio Tinto Alcan Inc. 7 (25.05%)

    413        310   
    Deschambault, Québec   Alcoa (100%)     260        260   
Iceland   Fjarðaál   Alcoa (100%)     344        344   
Norway   Lista   Alcoa (100%)     94        94   
    Mosjøen   Alcoa (100%)     188        188   
Spain   Avilés   Alcoa (100%)     93 8      93   
    La Coruña   Alcoa (100%)     87 8      87   
    San Ciprián   Alcoa (100%)     228        228   
United States   Evansville, IN (Warrick)   Alcoa (100%)     269 9      269   
    Massena West, NY   Alcoa (100%)     130        130   
    Rockdale, TX   Alcoa (100%)     191 10      191   
    Ferndale, WA (Intalco)   Alcoa (100%)     279 11      279   
    Wenatchee, WA   Alcoa (100%)     184 12      184   
TOTAL             3,845        3,401   

 

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Table of Contents
1 

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

 

2 

The figures in this column reflect Alcoa’s share of production from these facilities.

 

3 

The named company or an affiliate holds this interest.

 

4 

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

 

5 

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

 

6 

The Alumar smelter has been fully curtailed since April 2015 (see below).

 

7 

Owned through Rio Tinto Alcan Inc.’s interest in Pechiney Reynolds Québec, Inc., which is owned by Rio Tinto Alcan Inc. and Alcoa.

 

8 

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

 

9 

In January 2016, Alcoa announced that it will permanently close the Warrick smelter by the end of the first quarter of 2016 (see below).

 

10 

The Rockdale smelter has been fully curtailed since the end of 2008.

 

11 

The Intalco smelter has had approximately 49,000 mtpy of idle capacity. In November 2015, the Company announced that it would idle the remaining 230,000 mtpy capacity by the end of the first quarter of 2016. In January 2016, Alcoa announced that it will delay this further curtailment of the smelter until the end of the second quarter of 2016 (see below).

 

12 

The Wenatchee smelter has had approximately 41,000 mtpy of idle capacity. The Company idled the remaining 143,000 mtpy of capacity by the end of December 2015.

As of December 31, 2015, Alcoa had approximately 778,000 mtpy of idle capacity against total Alcoa Consolidated Capacity of 3,401,000 mtpy.

In March 2015, the Company initiated a 12-month review of 500,000 mtpy of smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of the Company’s target to lower Alcoa’s smelting operations on the global aluminum cost curve to the 38th percentile (currently 43rd) by 2016. As part of this review, in March 2015, Alcoa decided to curtail the remaining capacity (74,000 mtpy) at the Alumar smelter; this action was completed in April 2015.

Separate from the smelting capacity review described above, in June 2015, Alcoa decided to permanently close the Poços de Caldas smelter (96,000 mtpy) in Brazil effective immediately. The Poços de Caldas smelter had been temporarily idle since May 2014 due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved. As a result, the Poços de Caldas smelter was removed from the table above.

In November 2015, Alcoa announced that it would curtail 503,000 mtpy of aluminum smelting capacity amid prevailing market conditions by idling capacity at the Massena West (130,000 mtpy), Intalco (230,000 mtpy) and Wenatchee (143,000 mtpy) smelters. The curtailment of the remaining capacity at Wenatchee was completed by the end of December 2015 and the curtailment of the remaining capacity at Intalco was expected to be completed by the end of March 2016. The casthouses at Massena West and Intalco will continue to operate. Later in November 2015, the Company announced that it had entered into a three-and-a-half year agreement with New York State to increase the competitiveness of the Massena West smelter. As a result, the Massena West smelter will continue to operate.

In January 2016, the Company announced it will delay the curtailment (230,000 mtpy) of its Intalco smelter in Ferndale, Washington until the end of the second quarter of 2016. Recent decreases in energy and raw material costs have made it more cost effective in the near term to keep the smelter operating.

 

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Table of Contents

In January 2016, Alcoa announced that it will permanently close its 269,000 mtpy Warrick Operations smelter in Evansville, Indiana by the end of the first quarter of 2016. The rolling mill and power plant at Warrick Operations will continue to operate.

As noted above, Alcoa and Ma’aden have developed an aluminum smelter in the Kingdom of Saudi Arabia. The smelter has an initial nameplate capacity of 740,000 mtpy. Since mid-2014, the smelter has been operating at full capacity and it produced 757,833 mt in 2015.

In 2014, Alcoa and the Brunei Economic Development Board agreed to extend for four years an existing MOU to enable more detailed studies into the feasibility of establishing a modern, gas-powered aluminum smelter in Brunei Darussalam to follow a period of strategic assessment of global market conditions.

In 2007, Alcoa and the Greenland Government entered into an MOU regarding cooperation on a feasibility study for an aluminum smelter with a 360,000 mtpy capacity in Greenland. The MOU also encompasses a hydroelectric power system and related infrastructure improvements, including a port. Due to unfavorable global market conditions for primary aluminum, Alcoa and the Greenland Government entered into negotiations in 2015 to address, among other subjects, formalizing an extension of estimated dates for Alcoa to achieve certain of its undertakings under the MOU, and providing the Greenland Government latitude to develop hydro resources throughout Greenland. Negotiations between the parties are anticipated to complete in 2016.

Global Rolled Products

The Company’s Global Rolled Products segment represents Alcoa’s midstream operations. For a discussion of this segment’s business, see “Results of Operations—Segment Information” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note Q to the Consolidated Financial Statements—Segment and Geographic Area Information in Part II, Item 8. (Financial Statements and Supplementary Data).

In March 2015, Alcoa sold its Russia-based aluminum mill in Belaya Kalitva, Alcoa Metallurg Rus, to a subsidiary of Stupino Titanium Co.

In September 2015, Alcoa announced the completion of an expansion at its Tennessee facility dedicated to supplying aluminum sheet to the automotive industry. The Tennessee plant will provide aluminum sheet to automakers such as Ford Motor Company, Fiat Chrysler Automobiles and General Motors. The expansion created approximately 200 full-time jobs.

In 2014, Alcoa announced a $190 million investment at its Davenport Works facility to expand its product offerings in the aerospace and industrial markets through the installation of technology that will enhance the performance of thick aluminum and aluminum-lithium plate for use in various applications such as wing ribs and fuselage frames for the aerospace market. Construction on this project began in 2015, with first customer production expected in 2017.

In October 2015, Alcoa entered into an agreement with the Danieli Group, a global supplier of plants and equipment to the metals industry, to license and commercialize its Micromill technology. Under the agreement, Alcoa licenses the patented technology to Danieli that will manufacture and sell Micromill equipment to mill operators that will also be licensed by Alcoa. The Alcoa-patented Micromill process produces metal with a microstructure that is distinct from the microstructure obtained from conventional rolling, allowing the production of an aluminum alloy for automotive applications that has 40 percent greater formability and 30 percent greater strength than the incumbent aluminum used today while meeting stringent automotive surface quality requirements. Additionally, automotive parts made with Micromill material will be twice as formable and at least 30 percent lighter than parts made from high strength steel. The Micromill will enable the next generation of automotive aluminum products, and equip Alcoa to capture growing automotive demand.

 

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Table of Contents

Also in 2014, Alcoa announced a $40 million investment in its Itapissuma, Brazil rolling mill to increase production of specialty foils for aseptic and flexible packages. Initial work for the expansion is underway and commissioning is expected to begin in 2016.

As noted above, Alcoa and Saudi Arabian Mining Company (Ma’aden) entered into a joint venture to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. It includes among other things the Ma’aden Rolling Company, which owns the rolling mill that has capacity to produce 380,000 mtpy and is 74 acres under roof.

Global Rolled Products Principal Facilities

 

Country   Location  

Owners1

(% Of Ownership)

  Products

Brazil

  Itapissuma   Alcoa (100%)   Specialty Foil

China

  Kunshan   Alcoa (100%)   Sheet and Plate
    Qinhuangdao2   Alcoa (100%)   Sheet and Plate

Hungary

  Székesfehérvár   Alcoa (100%)   Sheet and Plate/Slabs and Billets

Italy

  Fusina   Alcoa (100%)   Sheet and Plate

Russia

  Samara   Alcoa (100%)   Sheet and Plate

United Kingdom

  Birmingham   Alcoa (100%)   Plate

United States

  Davenport, IA   Alcoa (100%)   Sheet and Plate
    Danville, IL   Alcoa (100%)   Sheet and Plate
    Newburgh, IN   Alcoa (100%)   Sheet
    Hutchinson, KS   Alcoa (100%)   Sheet and Plate
    Lancaster, PA   Alcoa (100%)   Sheet and Plate
    Alcoa, TN   Alcoa (100%)   Sheet
    Texarkana, TX   Alcoa (100%)   Sheet and Plate3
    San Antonio, TX   Alcoa (100%)   Micromill

 

1 

Facilities with ownership described as “Alcoa (100%)” are either leased or owned directly or indirectly by the Company.

 

2 

Leased property or partially leased property.

 

3 

The Texarkana rolling mill facility has been idle since September 2009 due to a continued weak outlook in common alloy markets. In September 2015, the Company announced that it is restarting its Texarkana casthouse to meet demand for aluminum slab for the automotive industry. The aluminum slab that will be cast at Texarkana will be turned into aluminum sheet at Alcoa’s recently expanded automotive facility in Davenport, Iowa and its rolling mill in Lancaster, Pennsylvania.

Engineered Products and Solutions

This segment represents a portion of Alcoa’s downstream operations. For a discussion of this segment’s business, see “Results of Operations—Segment Information” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note Q to the Consolidated Financial Statements—Segment and Geographic Area Information in Part II, Item 8. (Financial Statements and Supplementary Data). In the third quarter 2015, Alcoa realigned its downstream portfolio into two segments (Engineered Products and Solutions and Transportation and Construction Solutions). Following the realignment, Engineered Products and Solutions consists of: Alcoa Titanium & Engineered Products; Alcoa Fastening Systems & Rings; Alcoa Forgings and Extrusions; and Alcoa Power and Propulsion.

 

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On March 3, 2015, Alcoa completed its acquisition of TITAL, a privately held company based in Germany. TITAL is a leader in titanium and aluminum structural castings for aircraft engines and airframes. In addition, TITAL is a leader in process technology.

In June 2015, Alcoa announced that it is investing $22 million in Hot Isotopic Pressing technology at its facility in Whitehall, Michigan. The investment will enable Alcoa to capture growing demand for advanced titanium, nickel and additive manufactured parts for the world’s bestselling engines. Alcoa expects that the new technology will be ready for product qualification in 2016.

On July 23, 2015, Alcoa completed the acquisition of RTI International Metals, Inc. (RTI), a global supplier of titanium and specialty metal products and services for commercial aerospace, defense, energy and medical device markets. Following the acquisition, RTI was renamed Alcoa Titanium & Engineered Products.

Also in October 2015, Alcoa officially opened its expanded jet engines part facility in La Porte, Indiana. The $100 million expansion of the Indiana facility enables Alcoa to manufacture single piece structural parts that are 60 percent larger than those already produced in La Porte.

In 2014, Alcoa commenced an expansion of its Hampton, Virginia facility to create the capability to employ a new process technology that improves jet engine blades. The expansion was completed in fourth quarter 2015. The Hampton facility includes technology that cuts the weight of the Company’s highest-volume jet engine blades by 20 percent and significantly improves aerodynamic performance.

Alcoa and VSMPO-AVISMA Corporation signed a cooperation agreement in October 2013, which allowed the companies to meet growing demand for high-end titanium and aluminum products for aircraft manufacturers worldwide. The new joint venture will focus on manufacturing high-end aerospace products, such as landing gear and forged wing components, at Alcoa’s plant in Samara, Russia. The definitive Shareholders’ Agreement was executed by the parties on July 16, 2014, and the deal is expected to close in the second quarter of 2016. The facility is now operational.

Engineered Products and Solutions Principal Facilities

 

Country   Facility  

Owners1

(% Of Ownership)

  Products
Australia   Oakleigh   Alcoa (100%)   Fasteners
Canada   Georgetown, Ontario2   Alcoa (100%)   Aerospace Castings
    Laval, Québec   Alcoa (100%)   Aerospace Casting and Machining
China   Nantong   Alcoa (100%)   Aerospace Castings
    Suzhou2   Alcoa (100%)   Fasteners and Rings
France   Dives-sur-Mer   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings
    Evron   Alcoa (100%)   Aerospace and Specialty Castings
    Gennevilliers   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings
    Montbrison   Alcoa (100%)   Fasteners
    St. Cosme-en-Vairais2   Alcoa (100%)   Fasteners
    Toulouse   Alcoa (100%)   Fasteners
    Us-par-Vigny   Alcoa (100%)   Fasteners
Germany   Bestwig   Alcoa (100%)   Aerospace Castings
    Erwitte   Alcoa (100%)   Aerospace Castings
    Hannover2   Alcoa (100%)   Extrusions
    Hildesheim-Bavenstedt2   Alcoa (100%)   Fasteners
    Kelkheim2   Alcoa (100%)   Fasteners

 

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Country   Facility  

Owners1

(% Of Ownership)

  Products
Hungary   Eger   Alcoa (100%)   Forgings
    Nemesvámos   Alcoa (100%)   Fasteners
    Székesfehérvár   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings and Forgings
Japan   Nomi   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings
Mexico   Ciudad Acuña2   Alcoa (100%)   Aerospace Castings/Fasteners
Morocco   Casablanca2   Alcoa (100%)   Fasteners
Russia   Samara3   Alcoa (100%)   Extrusions and Forgings
South Korea   Kyoungnam   Alcoa (100%)   Extrusions
United Kingdom   Darley Dale   Alcoa (100%)   Forgings
    Ecclesfield   Alcoa (100%)   Ingot Castings
    Exeter2   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings and Alloy
    Glossop   Alcoa (100%)   Ingot Castings
    Ickles   Alcoa (100%)   Ingot Castings
    Leicester2   Alcoa (100%)   Fasteners
    Low Moor   Alcoa (100%)   Extrusions
    Meadowhall   Alcoa (100%)   Forgings
    Provincial Park   Alcoa (100%)   Forgings
    Redditch2   Alcoa (100%)   Fasteners
    River Don   Alcoa (100%)   Forgings
    Telford   Alcoa (100%)   Fasteners
    Welwyn Garden City   Alcoa (100%)   Aerospace Formed Parts
United States   Chandler, AZ   Alcoa (100%)   Extrusions
    Tucson, AZ2   Alcoa (100%)   Fasteners
    Carson, CA2   Alcoa (100%)   Fasteners
    City of Industry, CA2   Alcoa (100%)   Fasteners
    Fontana, CA   Alcoa (100%)   Rings
    Fullerton, CA2   Alcoa (100%)   Fasteners
    Newbury Park, CA   Alcoa (100%)   Fasteners
    Rancho Cucamonga, CA   Alcoa (100%)   Rings
    Sylmar, CA   Alcoa (100%)   Fasteners
    Torrance, CA   Alcoa (100%)   Fasteners
    Branford, CT   Alcoa (100%)   Aerospace Coatings
    Winsted, CT   Alcoa (100%)   Aerospace Machining
    Savannah, GA   Alcoa (100%)   Forgings
    Lafayette, IN   Alcoa (100%)   Extrusions
    La Porte, IN   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings
    Burlington, MA   Alcoa (100%   Powdered Metal Parts
    Baltimore, MD2   Alcoa (100%)   Extrusions
    Whitehall, MI   Alcoa (100%)   Aerospace/Industrial Gas Turbine Castings Coatings/Ti Alloy and Specialty Products

 

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Country   Facility  

Owners1

(% Of Ownership)

  Products
    Washington, MO   Alcoa (100%)   Aerospace Formed Parts
    Big Lake, MN   Alcoa (100%)   Aerospace and Medical Device Machining
    Coon Rapids, MN   Alcoa (100%)   Medical Device Machining
    New Brighton, MN   Alcoa (100%)   Aerospace Machining
    Roseville, MN²   Alcoa (100%)   Aerospace Machining
    Dover, NJ   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings and Alloy
    Verdi, NV   Alcoa (100%)   Rings
    Kingston, NY2   Alcoa (100%)   Fasteners
    Massena, NY   Alcoa (100%)   Extrusions
    Rochester, NY   Alcoa (100%)   Rings
    Canton, OH   Alcoa (100%)   Ferro-Titanium Alloys and Titanium Mill Products
    Cleveland, OH   Alcoa (100%)   Aerospace Castings
    Niles, OH   Alcoa (100%)   Titanium Mill Products
    Alcoa Center, PA   Alcoa (100%)   Ingot Castings
    Morristown, TN2   Alcoa (100%)   Aerospace and Industrial Gas Turbine Ceramic Products
    Austin, TX   Alcoa (100%)   Additively Manufactured Parts
    Houston, TX   Alcoa (100%)   Extrusions
    Spring, TX   Alcoa (100%)   Deep Water Drilling Machining
    Waco, TX2   Alcoa (100%)   Fasteners
    Wichita Falls, TX   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings
    Hampton, VA2   Alcoa (100%)   Aerospace and Industrial Gas Turbine Castings
    Martinsville, VA   Alcoa (100%)   Titanium Mill Products

 

1 

Unless otherwise noted, facilities with ownership described as “Alcoa (100%)” are owned by the Company.

 

2 

Leased property or partially leased property.

 

3 

The operating results of this facility are reported in the Global Rolled Products segment.

Transportation and Construction Solutions

The Company’s Transportation and Construction Solutions segment represents a portion of Alcoa’s downstream operations. For a discussion of this segment’s business, see “Results of Operations—Segment Information” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note Q to the Consolidated Financial Statements—Segment and Geographic Area Information in Part II, Item 8. (Financial Statements and Supplementary Data). As part of its realignment of the value-add portfolio and creation of this new segment, the Company also moved the Latin American soft alloy extrusions business to Transportation and Construction Solutions.

In January 2015, Alcoa opened its expanded wheels manufacturing plant in Hungary, doubling Alcoa’s capacity to produce its Dura-Bright® EVO surface-treated wheels compared with 2014 production levels. The $13 million expansion is expected to create 35 new jobs in Hungary once the facility reaches full capacity.

Alcoa Wheel and Transportation Products has vertically integrated by building a new aluminum casthouse in Mexico for a total cost of $22 million to convert the scrap generated throughout the Mexico wheels flowpaths into ingot. While the first ingot was cast in November 2014, the run rate production was achieved in March 2015.

 

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Transportation and Construction Solutions Principal Facilities

 

Country   Facility  

Owners1

(% Of Ownership)

   Products

Brazil

  Itapissuma   Alcoa (100%)    Extrusions
    Tubarão   Alcoa (100%)    Extrusions
    Utinga   Alcoa (100%)    Extrusions

Canada

  Lethbridge, Alberta   Alcoa (100%)    Architectural Products
    Pointe Claire, Quebec   Alcoa (100%)    Architectural Products
    Vaughan, Ontario   Alcoa (100%)    Architectural Products

France

  Guerande   Alcoa (100%)    Architectural Products
    Lézat-sur-Lèze2   Alcoa (100%)    Architectural Products
    Merxheim2   Alcoa (100%)    Architectural Products
    Vendarques   Alcoa (100%)    Architectural Products

Germany

  Iserlohn   Alcoa (100%)    Architectural Products

Hungary

  Székesfehérvár   Alcoa (100%)    Forgings
Japan   Jōetsu City2   Alcoa (100%)    Forgings

Mexico

  Monterrey   Alcoa (100%)    Forgings

Morocco

  Casablanca2   Alcoa (67%)
Ahmed Hattabi (33%)
   Architectural Products

Netherlands

  Harderwijk   Alcoa (100%)    Architectural Products

Spain

  Irutzun   Alcoa (100%)    Architectural Products

United Kingdom

  Runcorn   Alcoa (100%)    Architectural Products

United States

  Springdale, AZ   Alcoa (100%)    Architectural Products
    Visalia, CA   Alcoa (100%)    Architectural Products
    Eastman, GA   Alcoa (100%)    Architectural Products
    Barberton, OH   Alcoa (100%)    Forgings
    Chillicothe, OH   Alcoa (100%)    Forgings
    Cleveland, OH   Alcoa (100%)    Forgings
    Bloomsburg, PA   Alcoa (100%)    Architectural Products
    Cranberry, PA   Alcoa (100%)    Architectural Products
    Denton, TX2   Alcoa (100%)    Forgings

 

1 

Facilities with ownership described as “Alcoa (100%)” are owned by the Company.

 

2

Leased property or partially leased property.

 

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Sources and Availability of Raw Materials

The major raw materials purchased in 2015 for each of the Company’s reportable segments are listed below.

 

Alumina

 

Primary Metals

Bauxite

 

Alloying materials

Caustic soda

 

Alumina

Electricity

 

Aluminum fluoride

Fuel oil

 

Calcined petroleum coke

Lime (CaO)

 

Cathode blocks

Natural gas

 

Electricity

 

Liquid pitch

 

Natural gas

Global Rolled Products

 

Engineered Products and Solutions

Alloying materials   Alloying materials
Aluminum scrap   Electricity
Coatings   Natural gas
Electricity   Nickel alloys
Lube oil   Primary aluminum (ingot, billet, P1020, high purity)
Natural gas   Resin
Packaging materials   Stainless steel
Primary aluminum (ingot, slab, billet, P1020, high purity)   Steel

Steam

  Titanium alloys
 

Titanium sponge

 
 

Transportation and Construction Solutions

   
Aluminum coil  
Electricity  
Natural gas  
Paint/Coating  
Primary aluminum (ingot, billet, P1020, high purity)  
Resin  
Scrap aluminum  

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

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

 

Raw Material   Units   Consumption per MT of Alumina

Bauxite

  mt   2.2 – 3.7

Caustic soda

  kg   60 – 150

Electricity

  kWh   200 – 260 total consumed (0 to 210 imported)

Fuel oil and natural gas

  GJ   6.3 – 11.9

Lime (CaO)

  kg   6 – 58

 

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

 

Raw Material   Units   Consumption per MT of Aluminum

Alumina

  mt   1.92 ±0.02

Aluminum fluoride

  kg   16.5 ±6.5

Calcined petroleum coke

  mt   0.37 ±0.02

Cathode blocks

  mt   0.006 ±0.002

Electricity

  kWh   12900 – 17000

Liquid pitch

  mt   0.10 ±0.03

Natural gas

  mcf   3.5 ±1.5

Explanatory Note: Certain aluminum produced by Alcoa also includes alloying materials. Because of the number of different types of elements that can be used to produce Alcoa’s 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 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.

Energy

Employing the Bayer Process, Alcoa refines alumina from bauxite ore. Alcoa then produces aluminum from the alumina by an electrolytic process requiring substantial amounts of electric power. Energy accounts for approximately 19% of the Company’s total alumina refining production costs. Electric power accounts for approximately 23% of the Company’s primary aluminum production costs. Alcoa generates approximately 14% of the power used at its smelters worldwide and generally purchases the remainder under long-term arrangements. The paragraphs below summarize the sources of power and natural gas for Alcoa’s smelters and refineries.

North America – Electricity

The Deschambault, Baie Comeau, and Bécancour smelters in Québec purchase electricity under long-term contracts with Hydro-Québec executed in 2014, which will expire on December 31, 2029. Upon expiration, Alcoa will have the option of extending the term of the Baie Comeau contract to February 23, 2036. The smelter located in Baie Comeau, Québec purchases approximately 73% of its power needs under the Hydro-Québec contract, and the remainder from a 40% owned hydroelectric generating company, Manicouagan Power Limited Partnership.

The Company’s wholly-owned subsidiary, Alcoa Power Generating Inc. (APGI) owns and operates the Yadkin hydroelectric project, consisting of four dams in North Carolina, and the Warrick coal-fired power plant located in Indiana.

For several years, APGI has been pursuing a new long-term license for the Yadkin hydroelectric project from the Federal Energy Regulatory Commission (FERC). In 2007, APGI filed with FERC a Relicensing Settlement Agreement signed by a majority of interested stakeholders that broadly resolved open issues. The National Environmental Policy Act process was complete, and a final environmental impact statement was issued in April 2008. The remaining requirement for relicensing was the issuance by North Carolina of the required water quality certification under Section 401 of the Clean Water Act (401 WQC). North Carolina’s Department of Environment Quality ((DEQ), formally known as Department of Environment and Natural Resources (DENR)) issued a 401 WQC to APGI on October 23, 2015. The period for appeals has passed with no aggrieved party filing an appeal. FERC has been notified of the final 401 WQC, completing all necessary items required for FERC to process the application.

 

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On August 2, 2013, the State of North Carolina filed suit in state court seeking a declaratory ruling that it, not APGI, owns the Yadkin riverbed beneath the hydroelectric project as well as a portion of the project dams. APGI removed the riverbed lawsuit to federal court in 2013. On May 6, 2015, U.S. Federal Judge Terrance Boyle declared that the relevant segment of the Yadkin River was not navigable at the time of North Carolina statehood and issued a ruling on September 28, 2015 that APGI owns the riverbed for the 37-mile relevant segment. The State of North Carolina has filed an appeal with the Fourth Circuit Court of Appeals.

Pending completion of the relicensing process, APGI received year-to-year license renewals from FERC starting in May 2008, and will continue to operate under annual licenses until FERC issues a new license. Since the permanent closure of the Badin, North Carolina smelter, power generated from APGI’s Yadkin system is largely being sold to an affiliate, Alcoa Power Marketing LLC, and then into the wholesale market.

APGI generates substantially all of the power used at the Company’s Warrick, Indiana smelter using nearby coal reserves. Since May 2005, Alcoa has owned the nearby Friendsville, Illinois coal reserves, with the Friendsville Mine being operated by Vigo Coal Company, Inc. (Vigo Coal). The Friendsville Mine is producing approximately 900,000 tons of coal per year and is scheduled to cease production at the end of March 2016. Liberty Mine, also owned by Alcoa and operated by Vigo Coal, produces coal and is operating at a level of approximately 1.4 million tons per year. Friendsville and Liberty Mines together supply 99% of the power plant’s needs. The balance of the coal used is royalty coal.

In the State of Washington, Alcoa’s Wenatchee smelter is served by a contract with Chelan County Public Utility District (Chelan PUD) under which Alcoa receives approximately 26% of the hydropower output of Chelan PUD’s Rocky Reach and Rock Island dams. In November 2015, Alcoa announced the curtailment of the Wenatchee smelter which was completed by the end of December 2015.

Starting on January 1, 2013, the Intalco smelter began receiving physical power from the Bonneville Power Administration (BPA) pursuant to a contract executed between Alcoa and BPA, under which Alcoa receives physical power at the Northwest Power Act mandated industrial firm power (IP) rate through September 30, 2022. In May 2015, the contract was amended to reduce the amount of physical power received from BPA and allow for additional purchases of market power.

Prior to 2007, power for the Rockdale smelter in Texas was historically supplied from Company-owned generating units and Sandow Unit 4 owned by Luminant Generation Company LLC (formerly TXU Generation Company LP) (Luminant), both of which used lignite supplied by the Company’s Sandow Mine and Three Oaks Mine. Upon completion of lignite mining in the Sandow Mine in 2005, lignite supply transitioned to the formerly Alcoa-owned Three Oaks Mine. The Company retired its three wholly-owned generating units at Rockdale (Sandow Units 1, 2 and 3) in late 2006, and transitioned to an arrangement under which Luminant is to supply all of the Rockdale smelter’s electricity requirements under a long-term power contract that does not expire until at least the end of 2038, with the parties having the right to terminate the contract after 2013 if there has been an unfavorable change in law or after 2025 (by Luminant only) if the cost of the electricity exceeds the market price. In August 2007, Luminant and Alcoa closed on the definitive agreements under which Luminant has constructed and operates a new circulating fluidized bed power plant (Sandow Unit 5) adjacent to the existing Sandow Unit 4 and, in September 2007, on the sale of Three Oaks Mine to Luminant. Concurrent with entering into the agreements under which Luminant constructed and operates Sandow Unit 5, Alcoa and Luminant entered into a power purchase agreement whereby Alcoa purchased power from Luminant. That Sandow Unit 5 power purchase agreement was terminated by Alcoa, effective December 1, 2010. In June 2008, Alcoa temporarily idled half of the capacity at the Rockdale smelter and in November 2008 curtailed the remainder of Rockdale’s smelting capacity. In late 2011, Alcoa announced that it would permanently close two of the six idled potlines at the smelter. Demolition and remediation activities related to these actions were completed in 2013. On April 29, 2014, Luminant Generation LLC, Luminant Mining Company LLC, Sandow Power Company LLC and their affiliated debtors filed petitions under Chapter 11 of the U.S. Bankruptcy Code with the U.S Bankruptcy Court for the District of Delaware. The Bankruptcy Court has confirmed the debtors’ amended plan of reorganization and has

 

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entered an order approving the debtors’ assumption of the Sandow Unit 4 agreement and certain other related agreements with the Company.

In the Northeast, the Massena West smelter in New York receives physical power from the New York Power Authority (NYPA) pursuant to a contract between Alcoa and NYPA, which expires in 2045. In December 2015, Alcoa and NYPA agreed upon a new power contract that will expire in 2019. Upon final approval of the contract by New York State, which is expected in the first half of 2016, the new power contract for physical power will replace the prior contract.

Australia – Electricity

In 2015 Alcoa permanently closed the Anglesea power station and associated coal mine in Victoria. The power station had previously provided electricity to the Point Henry smelter which closed in 2014. Since the Port Henry smelter closure, electricity was sold into the National Electricity Market (NEM); however a combination of low electricity prices and significant future capital expenditure meant the facility was no longer viable.

The Portland smelter continues to purchase 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 extends to October 2016. Upon the expiration of this contract, the Portland smelter will purchase power from the NEM variable spot market. In March 2010, AofA and Eastern Aluminium (Portland) Pty Ltd separately entered into fixed for floating swap contracts with Loy Yang (now AGL) in order to manage their exposure to the variable energy rates from the NEM. The fixed for floating swap contract with AGL for the Point Henry smelter was terminated in 2013. The fixed for floating swap contract with AGL for the Portland smelter operates from the date of expiration of the current contract with the SECV and continues until December 2036.

Brazil – Electricity Alumínio owns a 25.74% stake in Consórcio Machadinho, which is the owner of the Machadinho hydroelectric power plant located in southern Brazil.

Alumínio has a 42.18% interest in Energética Barra Grande S.A., which built the Barra Grande hydroelectric power plant in southern Brazil.

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.

A consortium in which Alumínio participates and that had received concessions for the Pai Querê hydropower project in southern Brazil (Alumínio’s share is 35%) decided not to pursue the development of this concession which will be returned to the Federal Government.

Since May 2015 (after full curtailment of Poços de Caldas and Alumar smelters), the excess generation capacity of around 460MW has been sold into the market.

Europe – Electricity

Alcoa’s smelters at San Ciprián, La Coruña and Avilés, Spain purchase electricity under bilateral power contracts that commenced on January 1, 2013. The contracts for San Ciprián and Avilés smelters each have a four-year term (expiring December 31, 2016). The contract for the La Coruña smelter, which expired on December 31, 2015, has been extended for an additional year (expiring December 31, 2016).

 

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A competitive bidding mechanism to allocate interruptibility rights in Spain was settled during 2014 to be applied starting from January 1, 2015. The first auction process to allocate rights took place in November 2014, where Alcoa secured 275MW of interruptibility rights for the 2015 period for the San Ciprián smelter. A second auction process took place in December 2014, where Alcoa secured an additional 100MW of interruptibility rights for the 2015 period for the San Ciprián smelter (20x5MW), 120MW for the La Coruña smelter (24x5MW) and 110MW for the Avilés smelter (22x5MW). The auction process to allocate the rights for the following period took place in the first week of September 2015, where Alcoa secured interruptibility rights for 2016 in the amount of 375MW for San Ciprián Smelter (3x90MW + 21x5MW), 115MW for Avilés Smelter (23x5MW) and 120MW for La Coruña smelter (24x5MW).

Alcoa owns two smelters in Norway, Lista and Mosjøen, which have long-term power arrangements in place that continue until the end of 2019. Financial compensation of the indirect carbon emissions costs passed through in the electricity bill is received in accordance with EU Commission Guidelines and Norwegian compensation regime.

Iceland – Electricity

Alcoa’s Fjarðaál smelter in eastern Iceland began operation in 2007. Central to those operations is a forty-year power contract under which Landsvirkjun, the Icelandic national power company, built the Kárahnjúkar dam and hydropower project, and supplies competitively priced electricity to the smelter. In late 2009, Iceland imposed two new taxes on power intensive industries, both for a period of three years, from 2010 through 2012. One tax is based on energy consumption; the other is a pre-payment of certain other charges that was recoverable partly in 2014 and will be fully recovered by end of 2018. In 2012, Iceland extended the energy consumption tax through 2015.

Spain – Natural Gas

In order to facilitate the full conversion of the San Ciprian, Spain alumina refinery from fuel oil to natural gas, in October 2013, Alumina Española SA (AE) and Gas Natural Transporte SDG SL (GN) signed a take or pay gas pipeline utilization agreement. Pursuant to that agreement, the ultimate shareholders of AE, Alcoa Inc. 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 being 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.

Three supply contracts were signed in 2014 for the supply of natural gas to the San Ciprián, Spain alumina refinery during the 2015 period with Endesa, Union Fenosa Gas and BP, expiring by April 2016, December 2015 and December 2015, respectively. In 2015, the Endesa supply contract expiring in April 2016 was extended until June 2017, the BP supply contract expiring in December 2015 was extended until December 2016 and a new contract with Gas Natural Fenosa was signed expiring by December 2016. Pursuant to those agreements, Alcoa Inversiones España, S.L. and Alumina Limited agreed to guarantee the payment of AE’s obligations under the Endesa contract that expires in April 2016, each shareholder being responsible for its respective proportionate share (i.e., 60/40). In the same way, Alcoa Inespal S.A. and Alumina Limited have agreed to guarantee the payment of AE’s obligations under the Gas Natural Fenosa contract over its respective length, with each entity being responsible for its proportionate share (i.e., 60/40).

North America – Natural Gas

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. For Alcoa’s larger consuming locations in Canada and the U.S., the gas commodity and the interstate pipeline transportation are procured (directly or via the local distribution companies) to provide increased flexibility and reliability. Contract pricing for gas is typically based on a published industry index or 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.

 

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Australia – Natural Gas

AofA holds a 20% equity interest in the Dampier-to-Bunbury natural gas pipeline (this interest was purchased in October 2004). This pipeline transports gas from the northwest gas fields to Alcoa’s alumina refineries and other users in the Southwest of Western Australia. Alcoa uses gas to co-generate steam and electricity for its alumina refining processes at the Kwinana, Pinjarra and Wagerup refineries. More than 90% of Alcoa’s gas requirements for the remainder of the decade are secured under long-term contracts. In 2015, AofA entered into a number of long-term gas supply agreements which now means a significant portion of Alcoa’s gas supplies are secured to 2030. Alcoa has remained actively involved with projects aimed at developing cost-based gas supply opportunities.

Energy Facilities

The following table sets forth the electricity generation capacity and 2015 generation of facilities in which the Company has an ownership interest:

 

Country   Facility  

Alcoa Consolidated Capacity

(MW)1

     2015 Generation (MWh)  

Australia

  Anglesea2     150         798,542   

Brazil

  Barra Grande     156         1,562,663   
    Estreito     157         1,088,018   
    Machadinho     119         1,780,924   
    Serra do Facão     60         171,294   

Canada

  Manicouagan     132         1,161,994   

Suriname

  Afobaka     189         673,950   

United States

  Warrick     657         4,538,257   
    Yadkin     215         661,214   

TOTAL

        1,835         12,436,856   

 

1 

The Consolidated Capacity of the Brazilian energy facilities is the assured energy that is approximately 55% of hydropower plant nominal capacity.

 

2 

The Anglesea facility was permanently closed on August 31, 2015.

Patents, Trade Secrets and Trademarks

The Company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The Company’s rights under its patents, 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. The patents owned by Alcoa generally concern particular products or manufacturing equipment or techniques. 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. At the end of 2015, the Company’s worldwide patent portfolio consisted of approximately 986 pending patent applications and 1,923 granted patents.

The Company has a number of trade secrets, mostly regarding manufacturing processes and material compositions that give many of its businesses important advantages in their markets. The Company continues to strive to improve those processes and generate new material compositions that provide additional benefits.

The Company also has a number of domestic and international registered trademarks that have significant recognition within the markets that are served. Examples include the name “Alcoa” and the Alcoa symbol for aluminum products, Howmet metal castings, Huck® fasteners, Kawneer® building panels and Dura-Bright® wheels with easy-clean surface treatments. The Company’s rights under its trademarks are important to the Company as a whole and, to varying degrees, important to each business segment.

 

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Competitive Conditions

Alcoa is subject to highly competitive conditions in all aspects of its aluminum and non-aluminum businesses. Competitors include a variety of both U.S. and non-U.S. companies in all major markets. Innovation, price, quality, and service are the principal competitive factors in Alcoa’s markets. Where aluminum, titanium and nickel products compete with other materials—such as steel and plastics for automotive and building applications; magnesium, composites, and plastics for aerospace and defense applications—aluminum, titanium and nickel’s diverse characteristics, particularly the strength, light weight, recyclability, and flexibility are also significant factors. Alcoa’s customer intimacy, advanced manufacturing capability, technology, technical expertise, and innovation in multi-materials and in specialized alloys provide Alcoa a competitive advantage in certain markets and/or for certain products. For Alcoa’s segments that market products under Alcoa’s brand names, brand recognition, and brand 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.

Research and Development

Alcoa, a light metals technology leader, engages in research and development programs that include process and product development, and basic and applied research. Expenditures for research and development (R&D) activities were $238 million in 2015, $218 million in 2014, and $192 million in 2013.

The Company continued to work on new developments in all business segments in 2015. With a focus on multi-materials, the Company integrated acquisitions of TITAL, Firth Rixson and RTI which expanded its reach into aerospace by adding advanced technologies and materials capabilities, particularly in titanium—the world’s fastest-growing aerospace metal.

The Company continued leveraging new technologies in 2015. Among them, the Company entered into a Joint Development Agreement with Ford to collaborate on next-generation aluminum alloys for automotive parts using Micromill technology. Working with Phinergy on advancing an aluminum air battery technology, the Company will make an equity investment of up to $10 million and will be the exclusive anode provider for applications with auto OEMs and energy utilities. Additionally, the Company completed its jet engine expansion in Hampton, Virginia. This facility includes technology that cuts the weight of the Company’s highest-volume jet engine blades by 20 percent and significantly improves aerodynamic performance.

The Company has invested $60 million in the expansion of its R&D center designed to accelerate the development of additive manufacturing, with a focus on producing metal powder materials tailored for a range of additive process technologies. Alcoa will further its development of advanced 3D-printing design and manufacturing techniques—such as Alcoa’s Ampliforge™ process—to improve production speeds, reduce costs, and achieve geometries not possible through traditional methods. The investment also leverages the Company’s testing and process control expertise to overcome challenges with qualifying new 3D-printed parts, starting with aerospace applications.

In 2015 several products spanning various industries were brought to market. Notably, Ford began use of Micromill® material, and Alcoa and Danieli Group agreed to license intellectual property associated with advanced Micromill® alloys and process technology. Samsung unveiled its Galaxy S6 Smartphone using 6013 Alcoa Power Plate™ product for 70 percent greater strength than standard aluminum. The Company launched four foundry alloys that offer strength, thermal performance, corrosion resistance, and at least 20% better fatigue resistance in automotive applications. In addition, Dura-Bright® EVO, Alcoa’s most durable, easy-to-maintain commercial truck wheel, was brought to the North American market.

Environmental Matters

Information relating to environmental matters is included in Note N to the Consolidated Financial Statements under the caption “Environmental Matters” on pages 130-134. Approved capital expenditures for new or expanded facilities for environmental control are approximately $60 million for 2016 and $70 million for 2017.

 

 

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Employees

Total worldwide employment at the end of 2015 was approximately 60,000 employees in 26 countries. About 37,000 of these employees are represented by labor unions. The Company believes that relations with its employees and any applicable union representatives generally are good.

In the U.S., approximately 10,000 employees are represented by various labor unions. The largest collective bargaining agreement is the master collective bargaining agreement between Alcoa and the United Steelworkers (USW). The USW master agreement covers approximately 6,100 employees at 11 U.S. locations; the current labor agreement expires on May 15, 2019. There are 18 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 14,650 employees in Europe and Russia, 13,710 employees in North America, 4,350 employees in Central and South America, 3,100 employees in Australia, and 925 employees in China.

Executive Officers of the Registrant

The names, ages, positions and areas of responsibility of the executive officers of the Company as of February 19, 2016 are listed below.

Robert S. Collins, 49, Vice President and Controller. Mr. Collins was elected to his current position in October 2013. He served as Assistant Controller from May 2009 to October 2013. Prior to his role as Assistant Controller, Mr. Collins was Director of Financial Transactions and Policy, providing financial accounting support for Alcoa’s transactions in global mergers, acquisitions and divestitures. Before joining Alcoa in 2005, Mr. Collins worked in the audit and mergers and acquisitions practices at PricewaterhouseCoopers LLP for 14 years.

Roy C. Harvey, 41, Executive Vice President, President of Global Primary Products. Mr. Harvey was elected to his current position effective October 2015. From June 2014 to October 2015, he was Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability. Prior to that, Mr. Harvey was Chief Operating Officer for Global Primary Products from July 2013 to June 2014, where he focused on the day-to-day operations of Alcoa’s aluminum smelters, alumina refineries and bauxite mines worldwide. Prior to that, Mr. Harvey 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, interfacing with securities analysts and investors globally on Alcoa’s performance and strategic direction, from September 2010 to November 2011 and was Director of Corporate Treasury from January 2010 to September 2010. Mr. Harvey joined Alcoa in 2002 as a business analyst for Global Primary Products in Knoxville, Tennessee. In 2005, he moved to the São Luis Plant in Brazil, as casthouse manager in the smelter and then as the plant controller. In 2007, he became plant manager for the San Ciprián, Spain, smelter and a year later was named Director of Finance and Business Integration for Global Primary Products Europe.

Olivier M. Jarrault, 54, Executive Vice President—Alcoa and Group President, Engineered Products and Solutions. Mr. Jarrault was elected an Alcoa Executive Vice President effective January 21, 2011 and was named Group President of Engineered Products and Solutions effective January 1, 2011. He served as Chief Operating Officer of Engineered Products and Solutions from February 2010 to January 1, 2011. Mr. Jarrault joined Alcoa in 2002 when Alcoa acquired Fairchild Fasteners from The Fairchild Corporation. He served as President of Alcoa Fastening Systems from 2002 to February 2010. He was elected a Vice President of Alcoa in November 2006.

Klaus Kleinfeld, 58, Director, Chairman of the Board and Chief Executive Officer. Mr. Kleinfeld was elected to Alcoa’s Board of Directors in November 2003 and became Chairman on April 23, 2010. He has been Chief Executive Officer of Alcoa since May 8, 2008. He was President and Chief Executive Officer from May 8, 2008 to April 23, 2010. He was President and Chief Operating Officer of Alcoa from October 1, 2007 to May 8, 2008. Mr. Kleinfeld was President and Chief Executive Officer of Siemens AG, the global electronics and industrial conglomerate, from January 2005 to June 2007. He served as Deputy Chairman of the Managing Board and Executive Vice President of Siemens AG from 2004 to January 2005. He was President and Chief Executive Officer of Siemens Corporation, the U.S. arm of Siemens AG, from 2002 to 2004.

 

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Christoph Kollatz, 55, Executive Vice President, Corporate Development, Strategy and New Ventures. Mr. Kollatz joined Alcoa in 2015 and was elected an Executive Vice President of Alcoa in September 2015. Before joining Alcoa, Mr. Kollatz was Chief Information and Process Officer at Lufthansa from 2012 to 2015, overseeing the IT technology infrastructure, as well as IT applications, supporting financial and customer operations. Prior to Lufthansa, from 2011 to 2012, Mr. Kollatz created and led a start-up business within SAP, introducing a new database technology to the market. Mr. Kollatz held a series of leadership, strategy and technology positions at Siemens from 1989 to 2011, including as CEO of Siemens IT Solutions and Services.

Kay H. Meggers, 51, Executive Vice President—Alcoa and Group President, Global Rolled Products. Mr. Meggers was elected an Alcoa Executive Vice President in December 2011. He was named Group President, Global Rolled Products effective November 14, 2011. Before his most recent appointment, he led Alcoa’s Business Excellence/ Corporate Strategy resource unit and was also responsible for overseeing Alcoa’s Asia-Pacific region. He joined Alcoa in February 2010 as Vice President, Corporate Initiatives, a position responsible for planning and coordinating major strategic initiatives from enhancing technology and innovation as part of the Alcoa Technology Advantage program to spearheading growth strategies for China and Brazil. He was elected a Vice President of Alcoa in June 2011. Before joining Alcoa, Mr. Meggers was Senior Vice President at Siemens U.S. Building Technologies Division and served for three years as Business Unit Head of Building Automation. In 2006, he served for nine months as Division Head of Fire Safety, also part of Siemens U.S. Building Technologies Division. Between 2002 and 2005, he served as Vice President of Strategic Planning at Siemens U.S.

Vas Nair, 50, Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability. Ms. Nair was appointed Executive Vice President, Human Resources and Environment, Health, Safety and Sustainability in November 2015. Prior to being appointed to her current role, Ms. Nair was Chief Talent and Diversity Officer, with global responsibility for diversity and inclusion from February 2015 to October 2015. Prior to joining Alcoa, Ms. Nair was VP of Global Learning and Talent Development at Estee Lauder from November 2010 to January 2015. Ms. Nair was Vice President and Chief Learning Officer at Schering-Plough from November 2003 to October 2009.

William F. Oplinger, 49, Executive Vice President and Chief Financial Officer. Mr. Oplinger was elected to his current position effective April 1, 2013. Since joining Alcoa in 2000, Mr. Oplinger has held key corporate positions in financial analysis and planning and as Director of Investor Relations. He also has held key positions in the Global Primary Products business, including as Controller, Operational Excellence Director, Chief Financial Officer and Chief Operating Officer. As Chief Operating Officer of Alcoa’s Global Primary Products business from December 2011 to March 2013, Mr. Oplinger was responsible for the day-to-day operations of the business’ global network of aluminum smelters, refineries and mines.

Audrey Strauss, 68, Executive Vice President, Chief Legal Officer and Secretary. Ms. Strauss was elected to her current position upon joining Alcoa in May 2012. Prior to joining Alcoa, she was a senior litigation partner from 1990 to 2012 at Fried Frank Harris Shriver and Jacobson LLP (Fried Frank), a law firm based in New York. Prior to her practice at Fried Frank, Ms. Strauss served in the U.S. Attorney’s office for the Southern District of New York from 1975 to 1982, where she was Chief Appellate Attorney and Chief of the Fraud Unit.

The Company’s executive officers are elected or appointed to serve until the next annual meeting of the Board of Directors (held in conjunction with the annual meeting of shareholders) except in the case of earlier death, retirement, resignation or removal.

 

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.

 

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

The aluminum industry generally is highly cyclical, and Alcoa is subject to cyclical fluctuations in global economic conditions and aluminum end-use markets. Alcoa sells many products to industries that are cyclical, such as the commercial construction and transportation, automotive, and aerospace industries, and the demand for its products is sensitive to, and quickly impacted by, demand for the finished goods manufactured by its customers in these industries, which may change as a result of changes in the general U.S. or worldwide economy, currency exchange rates, energy prices or other factors beyond its control.

The demand for aluminum is highly correlated to economic growth. For example, the European sovereign debt crisis that began in late 2009 had an adverse effect on European demand for aluminum and aluminum products. The Chinese market is a significant source of global demand for, and supply of, commodities, including aluminum. A sustained slowdown in China’s economic growth and aluminum demand, or a significant slowdown in other markets, that is not offset by decreases in supply or by increased aluminum demand in emerging economies, such as India, Brazil, and several South East Asian countries, could have an adverse effect on the global supply and demand for aluminum and aluminum prices.

While Alcoa believes that the long-term prospects for aluminum and aluminum products are positive, the Company is 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 Alcoa’s business, financial condition or results of operations.

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

The overall price of primary aluminum consists of several components: 1) the underlying base metal component, which is typically based on quoted prices from the London Metal Exchange (LME); 2) 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 3) 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 financial investors. An imbalance in global supply and demand of aluminum, such as decreasing demand without corresponding supply declines, could have a negative impact on aluminum pricing. Speculative trading in aluminum and the influence of hedge funds and other financial institutions participating in commodity markets have also increased in recent years, potentially contributing to higher levels of price volatility. In 2015, the cash LME price of aluminum reached a high of $1,919 per metric ton and a low of $1,424 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 Alcoa’s results of operations.

Additionally, Alcoa’s 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 could cause aluminum prices to decrease and surpluses have caused regional premiums to decrease, which would have a negative impact on the Company’s 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. 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 Alcoa’s business, financial condition, and results of operations or cash flow.

 

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LME warehousing rules could cause aluminum prices to decrease.

Since 2013, the LME has been engaged in a program aimed at reforming the rules under which registered warehouses in its global network operate. The initial rule changes took effect on February 1, 2015, and the LME has announced additional changes that will be implemented in 2016. These rule changes, and any subsequent changes that 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 Alcoa’s business, financial condition, and results of operations or cash flow.

Alcoa may not be able to realize the expected benefits from its strategy of transforming its portfolio by growing its value-add business and by creating a lower cost, competitive commodity business by optimizing its portfolio.

Alcoa is continuing to execute on its strategy of transforming its portfolio by growing its value-add business to capture profitable growth as a lightweight metals innovation leader and by creating a lower cost, competitive commodity business by optimizing its portfolio. It is investing in its value-add manufacturing and engineering businesses to capture growth opportunities in strong end markets like automotive and aerospace. Alcoa is building out its value-add businesses, including by introducing innovative new products and technology solutions, and investing in expansions of value-add capacity. Alcoa’s growth projects include the joint venture with Ma’aden in Saudi Arabia; the automotive expansions in Davenport, Iowa and Alcoa, Tennessee; the aluminum lithium capacity expansion in Lafayette, Indiana, at the Alcoa Technical Center in Pennsylvania and at the Kitts Green plant in the United Kingdom; and the expansion in aerospace capabilities in La Porte, Indiana, Hampton, Virginia and Davenport, Iowa. From time to time, Alcoa also pursues growth opportunities that are strategically aligned with its objectives, such as the acquisition of the Firth Rixson business (completed in November 2014), the acquisition of TITAL (completed in March 2015) and the acquisition of RTI International Metals (completed in July 2015). In addition, Alcoa is optimizing its rolling mill portfolio as part of its strategy for profitable growth in the midstream business. At the same time, the Company is creating a competitive commodity business by taking decisive actions to lower the cost base of its upstream operations, including closing, selling or curtailing high-cost global smelting capacity, optimizing alumina refining capacity, and pursuing the sale of its interest in certain other operations.

Alcoa has made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow or streamline its portfolio. Although management believes that its strategic actions are beneficial to Alcoa, there is no assurance that anticipated benefits will be realized. Adverse factors may prevent Alcoa from realizing the benefits of its growth projects, including unfavorable global economic conditions, currency fluctuations, or unexpected delays in target timelines. Acquisitions present significant challenges and risks, including the effective integration of the business into the Company, unanticipated costs and liabilities, and the ability to realize anticipated benefits, such as growth in market share, revenue or margins, at the levels or in the timeframe expected. The Company may be unable to manage acquisitions successfully.

With respect to portfolio optimization actions such as divestitures, curtailments and closures, Alcoa may face barriers to exit from unprofitable businesses or operations, including high exit costs or objections from various stakeholders. In addition, Alcoa may retain unforeseen liabilities for divested entities if a buyer fails to honor all commitments. Alcoa’s business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including employee separation costs, asset impairment charges and other measures.

There can be no assurance that acquisitions, growth investments, divestitures or closures will be undertaken or completed in their entirety as planned or that they will be beneficial to Alcoa.

Market-driven balancing of global aluminum supply and demand may be disrupted by non-market forces or other impediments to production closures.

In response to market-driven factors relating to the global supply and demand of aluminum, Alcoa has curtailed or closed portions of its aluminum production. Certain other aluminum producers have independently undertaken to make cuts in production as well. However, 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

 

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prevent or delay the closure or curtailment of certain producers’ smelters, irrespective of their position on the industry cost curve. Other production cuts may be impeded by long-term contracts to buy power or raw materials. If industry overcapacity persists due to the disruption by such non-market forces on the market-driven balancing of the global supply and demand of aluminum, the resulting weak pricing environment and margin compression may adversely affect the operating results of aluminum producers, including Alcoa.

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

Alcoa’s operations consume substantial amounts of energy. Although Alcoa generally expects to meet the energy requirements for its alumina refineries and primary aluminum smelters from internal sources or from long-term contracts, certain conditions could negatively affect Alcoa’s 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 energy shortages resulting in insufficient supplies to serve consumers;

 

   

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

 

   

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

 

   

curtailment of one or more smelters due to a regulatory authority’s determination that power supply interruptibility rights granted to Alcoa under an interruptibility regime in place under the laws of the country in which the smelter is located do not comply with the regulatory authority’s state aid rules, 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 Alcoa received under a power supply interruptibility regime could have a material adverse effect on Alcoa’s business and results of operations.

Alcoa’s profitability could be adversely affected by increases in the cost of raw materials or by significant lag effects of decreases in commodity or LME-linked costs.

Alcoa’s 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. Alcoa 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, Alcoa’s operating results are affected by significant lag effects of declines in key costs of production that are commodity or LME-linked. For example, declines in the LME-linked costs of alumina and power during a particular period may not be adequate to offset sharp declines in metal price in that period. Increases in the cost of raw materials or decreases in input costs that are disproportionate to concurrent sharper decreases in the price of aluminum could have a material adverse effect on Alcoa’s operating results.

Alcoa is exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which it operates.

Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which Alcoa operates, and continued volatility or deterioration in the global economic and financial environment could affect Alcoa’s 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,

 

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Euro and Norwegian kroner, may affect Alcoa’s profitability as some important inputs are purchased in other currencies, while the Company’s upstream products are generally sold in U.S. dollars. In addition, although a strong U.S. dollar generally has a positive impact on Alcoa’s near-term profitability, over a longer term, a strong U.S. dollar may have an unfavorable impact to Alcoa’s position on the global aluminum cost curve due to Alcoa’s U.S. smelting portfolio. As the U.S. dollar strengthens, the cost curve shifts down for smelters outside the U.S. but costs for Alcoa’s U.S. smelting portfolio may not decline.

Alcoa may not be able to successfully realize future targets or goals established for its business segments, at the levels or by the dates targeted.

From time to time, Alcoa may announce future targets or goals for its business, which are based on the Company’s then current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which Alcoa operates. Future targets and goals reflect the Company’s beliefs and assumptions and its perception of historical trends, then current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. As such, targets and goals are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events, including the risks discussed in this report. The actual outcome may be materially different. There can be no assurance that any targets or goals established by the Company will be accomplished at the levels or by the dates targeted, if at all. Failure to achieve the targets or goals by the Company may have a material adverse effect on its business, financial condition, results of operations or the market price of its securities.

Alcoa faces significant competition, which may have an adverse effect on profitability.

As discussed in Part I, Item 1. (Business—Competitive Conditions) of this report, the markets for Alcoa’s aluminum and non-aluminum products are highly competitive. Alcoa’s competitors include a variety of both U.S. and non-U.S. companies in all major markets, including some that are subsidized. Alcoa’s metals, including aluminum, titanium and nickel, compete with other materials, such as steel, plastics, composites, ceramics, and glass, among others, for various applications in Alcoa’s key markets. New product offerings or new technologies in the marketplace may compete with or replace Alcoa products. The willingness of customers to accept substitutes for the products sold by Alcoa, the ability of large customers to exert leverage in the marketplace to affect the pricing for fabricated aluminum products, and technological advancements or other developments by or affecting Alcoa’s competitors or customers could affect Alcoa’s results of operations. In addition, Alcoa’s competitive position depends, in part, on the Company’s ability to leverage its innovation expertise across its businesses and key end markets and, in the case of its upstream businesses, having access to an economical power supply to sustain its operations in various countries.

A downgrade of Alcoa’s credit ratings could limit Alcoa’s ability to obtain future financing, increase its borrowing costs, increase the pricing of its credit facilities, adversely affect the market price of its securities, trigger letter of credit or other collateral postings, or otherwise impair its business, financial condition, and results of operations.

Standard and Poor’s Ratings Services currently rates Alcoa’s long-term debt BBB-, the lowest level of investment grade rating, with a stable ratings outlook (ratings and outlook were affirmed on March 9, 2015). On September 28, 2015, S&P issued a statement that these ratings and outlook for Alcoa were not affected by Alcoa’s plan to separate into two publicly-traded companies. On May 29, 2013, Moody’s Investors Service downgraded Alcoa’s long-term debt rating from Baa3 to Ba1, which is below investment grade, and changed the outlook from rating under review to stable. On April 30, 2015, Moody’s changed the outlook from stable to positive. On September 28, 2015, Moody’s affirmed these ratings and changed the current outlook from positive to developing based on Alcoa’s plan to separate into two publicly-traded companies. On January 21, 2016, Moody’s placed Alcoa’s long-term debt rating under review and changed the current outlook from developing to rating under review, while leaving Alcoa’s short-term debt rating unchanged. On April 11, 2014, Fitch Ratings downgraded Alcoa’s rating from BBB- to BB+, a below investment grade rating, and changed the outlook from negative to stable. On April 16, 2015, Fitch Ratings affirmed Alcoa’s rating of

 

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BB+ but revised Alcoa’s outlook to positive. On September 30, 2015, Fitch placed these ratings on “ratings watch positive” based on Alcoa’s plan to separate into two publicly-traded companies.

There can be no assurance that one or more of these or other rating agencies will not take negative actions with respect to Alcoa’s ratings. Increased debt levels, adverse aluminum market or macroeconomic conditions, a deterioration in the Company’s debt protection metrics, a contraction in the Company’s liquidity, or other factors could potentially trigger such actions. A rating agency may lower, suspend or withdraw entirely a rating or place it on negative outlook or watch if, in that rating agency’s judgment, circumstances so warrant.

A downgrade of Alcoa’s credit ratings by one or more rating agencies could adversely impact the market price of Alcoa’s securities; adversely affect existing financing (for example, a downgrade by Standard and Poor’s or a further downgrade by Moody’s would subject Alcoa to higher costs under Alcoa’s Five-Year Revolving Credit Agreement and certain of its other revolving credit facilities); limit access to the capital (including commercial paper) or credit markets or otherwise adversely affect the availability of other new financing on favorable terms, if at all; result in more restrictive covenants in agreements governing the terms of any future indebtedness that the Company incurs; increase the cost of borrowing or fees on undrawn credit facilities; result in vendors or counterparties seeking collateral or letters of credit from Alcoa; or otherwise impair Alcoa’s business, financial condition and results of operations.

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

Alcoa faces 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 security breaches may include, but are not limited to, attempts to access information, computer viruses, denial of service and other electronic security breaches.

The Company believes that it faces a heightened threat of cyber attacks due to the industries it serves, the locations of its operations and its technological innovations. The Company has experienced cybersecurity attacks in the past, including breaches of its information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date, past attacks have not had a material impact on Alcoa’s financial condition or results of operations. However, due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While the Company continually works to safeguard its 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 its systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt its operations. The occurrence of such events could negatively impact Alcoa’s reputation and its 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 its 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 the Company’s investment in research and development.

Joint ventures and other strategic alliances may not be successful.

Alcoa participates in joint ventures and has formed strategic alliances and may enter into other similar arrangements in the future. For example, in December 2009, Alcoa formed 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 the Saudi Arabia joint venture and its other existing joint ventures and strategic alliances, sought to protect its interests, joint ventures and strategic alliances inherently involve special risks. Whether or not Alcoa holds majority interests or maintains operational control in such arrangements, its partners may:

 

   

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

 

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exercise veto rights so as to block actions that Alcoa believes to be in its or the joint venture’s or strategic alliance’s best interests;

 

   

take action contrary to Alcoa’s policies or objectives with respect to its 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 Alcoa’s joint ventures or strategic alliances will be beneficial to Alcoa, whether due to the above-described risks, unfavorable global economic conditions, increases in construction costs, currency fluctuations, political risks, or other factors.

Alcoa’s business and growth prospects may be negatively impacted by limits in its capital expenditures.

Alcoa requires substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of its existing facilities. For 2016, generating positive cash flow from operations that will exceed capital expenditures continues to be an Alcoa target. Insufficient cash generation or capital project overruns may negatively impact Alcoa’s ability to fund as planned its sustaining and return-seeking capital projects. Over the long term, Alcoa’s ability to take advantage of improved aluminum or other market conditions or growth opportunities in its midstream and downstream businesses may be constrained by earlier capital expenditure restrictions, which could adversely affect the long-term value of its business and the Company’s position in relation to its competitors.

Alcoa may also need to address commercial and political issues in relation to its reductions in capital expenditures in certain of the jurisdictions in which it operates. If Alcoa’s interest in its joint ventures is diluted or it loses key concessions, its growth could be constrained. Any of the foregoing could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects.

Alcoa’s global operations expose the Company to risks that could adversely affect Alcoa’s business, financial condition, operating results or cash flows.

Alcoa has operations or activities in numerous countries and regions outside the United States, including Brazil, China, Europe, Guinea, Russia, and the Kingdom of Saudi Arabia. The Company’s global operations are subject to a number of risks, including:

 

   

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, renegotiation or nullification of existing agreements, mining leases and permits;

 

   

war or terrorist activities;

 

   

major public health issues such as an outbreak of a pandemic or epidemic (such as Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 virus, or the Ebola virus), which could cause disruptions in Alcoa’s 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 Alcoa’s business, financial condition, operating results or cash flows. Existing insurance arrangements may not provide protection for the costs that may arise from such events.

 

 

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

Alcoa’s results of operations may be negatively affected by the amount of expense Alcoa records for its pension and other postretirement benefit plans, reductions in the fair value of plan assets and other factors. U.S. generally accepted accounting principles (GAAP) require that Alcoa calculate income or expense for the plans using actuarial valuations.

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 Alcoa to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, Alcoa is required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to shareholders’ equity. For a discussion regarding how Alcoa’s financial statements can be affected by pension and other postretirement benefits accounting policies, see “Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” in Part II, Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Note W to the Consolidated Financial Statements—Pension and Other Postretirement Benefits in Part II, Item 8. (Financial Statements and Supplementary Data). 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 Alcoa would contribute to the pension plans.

Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve the plans’ funded status. The Moving Ahead for Progress in the 21st Century Act (“MAP-21”), enacted in 2012, provided temporary relief for employers like Alcoa who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a 25-year average discount rate within an upper and lower range for purposes of determining minimum funding obligations. In 2014, the Highway and Transportation Funding Act (HATFA) was signed into law. HATFA extended the relief provided by MAP-21 and modified the interest rates that had been set by MAP-21. In 2015, the Bipartisan Budget Act of 2015 (BBA 2015) was signed into law. BBA 2015 extends the relief period provided by HAFTA. Alcoa believes that the relief provided by BBA 2015 will moderately reduce the cash flow sensitivity of the Company’s U.S. pension plans’ funded status to potential declines in discount rates over the next several years. However, 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 the Company’s cash flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase the Company’s liabilities related to such plans, adversely affecting Alcoa’s liquidity and results of operations.

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

Alcoa is subject to income taxes in both the United States and various non-U.S. jurisdictions. Its 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. Alcoa’s 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 its deferred tax assets. The Company’s 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 its tax exposures. Corporate tax reform and tax law changes continue to be analyzed in the United States and in many other jurisdictions. Significant changes to the U.S. corporate tax system in particular could have a substantial impact, positive or negative, on Alcoa’s effective tax rate, cash tax expenditures, and deferred tax assets and liabilities.

 

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Union disputes and other employee relations issues could adversely affect Alcoa’s financial results.

A significant portion of Alcoa’s employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. For more information, see “Employees” in Part I, Item 1. (Business) of this report. While Alcoa was previously successful in renegotiating the master collective bargaining agreement with the United Steelworkers (the most recent renegotiation having taken place in June 2014), Alcoa may not be able to satisfactorily renegotiate that agreement or other collective bargaining agreements in the U.S. and other countries when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at Alcoa’s facilities in the future. Alcoa may also be subject to general country strikes or work stoppages unrelated to its business or collective bargaining agreements. Any such work stoppages (or potential work stoppages) could have a material adverse effect on Alcoa’s financial results.

Alcoa could be adversely affected by changes in the business or financial condition of a significant customer or customers.

A significant downturn or deterioration in the business or financial condition of a key customer or customers supplied by Alcoa could affect Alcoa’s results of operations in a particular period. Alcoa’s 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 Alcoa is not successful in replacing business lost from such customers, profitability may be adversely affected.

Alcoa may not be able to successfully develop and implement technology initiatives.

Alcoa is working on new developments for a number of strategic projects in all business segments, including additive manufacturing, alloy development, engineered finishes and product design, high speed continuous casting and rolling technology, and other advanced manufacturing technologies. For more information on Alcoa’s research and development programs, see “Research and Development” in Part I, Item 1. (Business) of this report. There can be no assurance that such developments or technologies will be commercially feasible or beneficial to Alcoa.

Alcoa’s human resource talent pool may not be adequate to support the Company’s growth.

Alcoa’s existing operations and development projects require highly skilled executives and staff with relevant industry and technical experience. The inability of the Company or the industry to attract and retain such people may adversely impact Alcoa’s ability to adequately meet project demands and fill roles in existing operations. Skills shortages in engineering, technical service, construction and maintenance contractors and other labor market inadequacies may also impact activities. These shortages may adversely impact the cost and schedule of development projects and the cost and efficiency of existing operations.

Alcoa may not realize expected benefits from its productivity and cost-reduction initiatives.

Alcoa has undertaken, and may continue to undertake, productivity and cost-reduction initiatives to improve performance and conserve cash, including new procurement strategies for raw materials, such as backward integration and non-traditional sourcing from numerous geographies, deployment of company-wide business process models, such as Alcoa’s 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 Alcoa or that estimated cost savings from such activities will be realized.

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

Alcoa’s 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

 

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Alcoa. The Company may experience a change in effective tax rates or 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. The Company is also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to product liability, health and safety, environmental matters, intellectual property rights, government contracts, taxes, and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. Alcoa could be subject to fines, penalties, damages (in certain cases, treble damages), or suspension or debarment from government contracts.

While Alcoa believes it has adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of its 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 the Company’s results of operations or cash flows in a particular period. For additional information regarding the legal proceedings involving the Company, see the discussion in Part I, Item 3. (Legal Proceedings) of this report and in Note N to the Consolidated Financial Statements in Part II, Item 8. (Financial Statements and Supplementary Data).

Alcoa is subject to a broad range of health, safety and environmental laws and regulations in the jurisdictions in which it operates and may be exposed to substantial costs and liabilities associated with such laws and regulations.

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

Climate change, climate change legislation or regulations and greenhouse effects may adversely impact Alcoa’s operations and markets.

Energy is a significant input in a number of Alcoa’s 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 have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. There is also current and emerging regulation, such as the mandatory renewable energy target in Australia, Québec’s transition to a “cap and trade” system with compliance required beginning 2013, the European Union Emissions Trading Scheme and the United States’ Clean Power Plan, which became effective on December 22, 2015. Alcoa 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 the Company operates. These regulatory mechanisms may be either voluntary or legislated and may impact Alcoa’s operations

 

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directly or indirectly through customers or Alcoa’s 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 Alcoa operates. The Company may realize increased capital expenditures resulting from required compliance with revised or new legislation or regulations, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by the Company and indirectly, from changes in costs of goods sold.

The potential physical impacts of climate change on the Company’s operations are highly uncertain, and will be particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other natural resources, changing sea levels, changing storm patterns and intensities, and changing temperature levels. These effects may adversely impact the cost, production and financial performance of Alcoa’s operations.

Alcoa’s plan to separate into two independent publicly-traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect Alcoa’s business.

On September 28, 2015, Alcoa announced plans to separate into two independent publicly-traded companies: a Value-Add company comprising the Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions segments, and an Upstream company comprising the Alumina and Primary Metals segments. The separation, which is currently targeted to be completed in the second half of 2016, is subject to approval by Alcoa’s Board of Directors of the final terms of the separation and market, regulatory and certain other conditions. Unanticipated developments, including, among others, failure of the separation to qualify for the expected tax treatment, the possibility that any third-party consents required in connection with the separation will not be received, material adverse changes in aluminum industry conditions and changes in global economic and financial market conditions generally, could delay or prevent the completion of the proposed separation, or cause the proposed separation to occur on terms or conditions that are different or less favorable than expected.

Alcoa expects that the process of completing the proposed separation will be time-consuming and involve significant costs and expenses, which may be significantly higher than what it currently anticipates and may not yield a benefit if the separation is not completed. Executing the proposed separation will require significant time and attention from Alcoa’s senior management and employees, which could disrupt the Company’s ongoing business and adversely affect the financial results and results of operations. Alcoa may also experience increased difficulties in attracting, retaining and motivating employees during the pendency of the separation and following its completion, which could harm the Company’s businesses.

The separation may not achieve some or all of the anticipated benefits.

Alcoa may not realize some or all of the anticipated strategic, financial, operational or other benefits from the separation. As independent publicly-traded companies, the Value-Add and Upstream companies will be smaller, less diversified companies with a narrower business focus and may be more vulnerable to changing market conditions, such as changes in aluminum industry conditions, which could result in increased volatility in their cash flows, working capital and financing requirements and could materially and adversely affect the respective business, financial condition and results of operations. Further, there can be no assurance that the combined value of the common stock of the two publicly-traded companies will be equal to or greater than what the value of Alcoa’s common stock would have been had the proposed separation not occurred.

The proposed separation may result in disruptions to, and negatively impact Alcoa’s relationships with, the Company’s suppliers, customers and other business partners.

Uncertainty related to the proposed separation may lead suppliers, customers and other parties with which Alcoa currently does business or may do business in the future to terminate or attempt to negotiate changes in existing

 

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business relationships, or to consider entering into business relationships with parties other than Alcoa. These disruptions could have a material and adverse effect on Alcoa’s businesses, financial condition, results of operations and prospects, or the businesses, financial condition, results of operations and prospects of the independent companies resulting from the separation. The effect of such disruptions could be exacerbated by any delays in the completion of the separation.

 

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

Alcoa’s principal office is located at 390 Park Avenue, New York, New York 10022-4608. Alcoa’s corporate center is located at 201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858. The Alcoa Technical Center for research and development is located at 100 Technical Drive, Alcoa Center, Pennsylvania 15069-0001.

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.

Alcoa believes that its facilities are suitable and adequate for its operations. Although no title examination of properties owned by Alcoa has been made for the purpose of this report, the Company knows of no material defects in title to any such properties. See Notes A and H to the financial statements for information on properties, plants and equipment.

Alcoa has active plants and holdings under the following segments and in the following geographic areas:

ALUMINA

Bauxite: See the tables and related text in the Bauxite Interests section on pages 3-10 of this report.

Alumina: See the table and related text in the Alumina Refining Facilities and Capacity section on pages 10-12 of this report.

PRIMARY METALS

See the table and related text in the Primary Aluminum Facilities and Capacity section on pages 12-14 of this report.

GLOBAL ROLLED PRODUCTS

See the table and related text in the Global Rolled Products Facilities section on page 14-15 of this report.

ENGINEERED PRODUCTS AND SOLUTIONS

See the table and related text in the Engineered Products and Solutions Facilities section on pages 15-18 of this report.

TRANSPORTATION AND CONSTRUCTION SOLUTIONS

See the table and related text in the Transportation and Construction Solutions section on pages 18-19 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

As previously reported, before 2002, Alcoa purchased power in Italy in the regulated energy market and received a drawback of a portion of the price of power under a special tariff in an amount calculated in accordance with a

 

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published resolution of the Italian Energy Authority, Energy Authority Resolution n. 204/1999 (“204/1999”). In 2001, the Energy Authority published another resolution, which clarified that the drawback would be calculated in the same manner, and in the same amount, in either the regulated or unregulated market. At the beginning of 2002, Alcoa left the regulated energy market to purchase energy in the unregulated market. Subsequently, in 2004, the Energy Authority introduced regulation no. 148/2004 which set forth a different method for calculating the special tariff that would result in a different drawback for the regulated and unregulated markets. Alcoa challenged the new regulation in the Administrative Court of Milan and received a favorable judgment in 2006. Following this ruling, Alcoa continued to receive the power price drawback in accordance with the original calculation method, through 2009, when the European Commission declared all such special tariffs to be impermissible “state aid.” In 2010, the Energy Authority appealed the 2006 ruling to the Consiglio di Stato (final court of appeal). On December 2, 2011, the Consiglio di Stato ruled in favor of the Energy Authority and against Alcoa, thus presenting the opportunity for the energy regulators to seek reimbursement from Alcoa 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, Alcoa filed its appeal of the decision of the Consiglio di Stato (this appeal was subsequently withdrawn in March 2013). On March 26, 2012, Alcoa 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, Alcoa informed CCSE that it disputes the payment demand of CCSE since (i) CCSE was not authorized by the Consiglio di Stato decisions to seek payment of any amount, (ii) the decision of the Consiglio di Stato has been appealed (see above), and (iii) in any event, no interest should be payable. On April 29, 2012, Law No. 44 of 2012 (“44/2012”) came into effect, changing the method to calculate the drawback. On February 21, 2013, Alcoa received a revised request letter from CCSE demanding Alcoa’s subsidiary, Alcoa Trasformazioni S.r.l., make a payment in the amount of $97 million (€76 million), including interest, which reflects a revised calculation methodology by CCSE and represents the high end of the range of reasonably possible loss associated with this matter of $0 to $97 million (€76 million). Alcoa has rejected that demand and has formally challenged it through an appeal before the Administrative Court on April 5, 2013. The Administrative Court scheduled a hearing for December 19, 2013, which was subsequently postponed until April 17, 2014, and further postponed until June 19, 2014. On this date the Administrative Court listened to Alcoa’s oral argument, and on September 2, 2014, rendered its decision. The Administrative Court declared the payment request of CCSE and the Energy Authority to Alcoa to be unsubstantiated based on the 148/2004 resolution with respect to the January 19, 2007 through November 19, 2009 timeframe. On December 18, 2014, the CCSE and the Energy Authority appealed the Administrative Court’s September 2, 2014 decision; however, a date for the hearing has not been scheduled. As a result of the conclusion of the European Commission Matter on January 26, 2016 described below, the Company has modified its outlook with respect to a portion of the pending legal proceedings related to this matter. At this time, the Company is unable to reasonably predict the ultimate outcome for this matter.

European Commission Matter

As previously reported, in July 2006, the European Commission (EC) announced that it had opened an investigation to establish whether an extension of the regulated electricity tariff granted by Italy to some energy-intensive industries complied with European Union (EU) state aid rules. The Italian power tariff extended the tariff that was in force until December 31, 2005 through November 19, 2009 (Alcoa had been incurring higher power costs at its smelters in Italy subsequent to the tariff end date through the end of 2012). The extension was originally through 2010, but the date was changed by legislation adopted by the Italian Parliament effective on August 15, 2009. Prior to expiration of the tariff in 2005, Alcoa had been operating in Italy for more than 10 years under a power supply structure approved by the EC in 1996. That measure provided a competitive power supply to the primary aluminum industry and was not considered state aid from the Italian Government. The EC’s announcement expressed concerns about whether Italy’s extension of the tariff beyond 2005 was compatible with EU legislation and potentially distorted competition in the European market of primary aluminum, where energy is an important part of the production costs.

 

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On November 19, 2009, the EC announced a decision in this matter stating that the extension of the tariff by Italy constituted unlawful state aid, in part, and, therefore, the Italian Government is to recover a portion of the benefit Alcoa received since January 2006 (including interest). The amount of this recovery was to be based on a calculation prepared by the Italian Government (see below). In late 2009, after discussions with legal counsel and reviewing the bases on which the EC decided, including the different considerations cited in the EC decision regarding Alcoa’s two smelters in Italy, Alcoa recorded a charge of $250 million (€173 million), which included $20 million (€14 million) to write off a receivable from the Italian Government for amounts due under the now expired tariff structure and $230 million (€159 million) to establish a reserve. On April 19, 2010, Alcoa filed an appeal of this decision with the General Court of the EU (see below). Prior to 2012, Alcoa was involved in other legal proceedings related to this matter that separately sought the annulment of the EC’s July 2006 decision to open an investigation alleging that such decision did not follow the applicable procedural rules and requested injunctive relief to suspend the effectiveness of the EC’s November 19, 2009 decision. However, the decisions by the General Court, and subsequent appeals to the European Court of Justice, resulted in the denial of these remedies.

In June 2012, Alcoa received formal notification from the Italian Government with a calculated recovery amount of $375 million (€303 million); this amount was reduced by $65 million (€53 million) for amounts owed by the Italian Government to Alcoa, resulting in a net payment request of $310 million (€250 million). In a notice published in the Official Journal of the European Union on September 22, 2012, the EC announced that it had filed an action against the Italian Government on July 18, 2012 to compel it to collect the recovery amount (on October 17, 2013, the European Court of Justice ordered Italy to so collect). On September 27, 2012, Alcoa received a request for payment in full of the $310 million (€250 million) by October 31, 2012. Following discussions with the Italian Government regarding the timing of such payment, Alcoa paid the requested amount in five quarterly installments of $69 million (€50 million) beginning in October 2012 through December 2013. Notwithstanding the payments made, Alcoa’s estimate of the most probable loss of the ultimate outcome of this matter and the low end of the range of reasonably possible loss, which is $174 million (€159 million) to $332 million (€303 million), remains the $174 million (€159 million) recorded in 2009 (the U.S. dollar amount reflects the effects of foreign currency movements since 2009). Alcoa no longer has a reserve for this matter; instead, Alcoa has a noncurrent asset reflecting the excess of the total of the five payments made to the Italian Government over the reserve recorded in 2009. At December 31, 2015, the noncurrent asset was $100 million (€91 million) (this does not include the $58 million (€53 million) for amounts owed by the Italian Government to Alcoa mentioned above).

On October 16, 2014, Alcoa received notice from the General Court of the EU that its April 19, 2010 appeal of the EC’s November 19, 2009 decision was denied. On December 27, 2014, Alcoa filed an appeal of the General Court’s October 16, 2014 ruling to the European Court of Justice (ECJ). Following submission of the EC’s response to the appeal, on June 10, 2015, Alcoa filed a request for an oral hearing before the ECJ; no decision on that request was received. On January 26, 2016, Alcoa was informed that the ECJ had dismissed Alcoa’s December 27, 2014 appeal of the General Court’s October 16, 2014 ruling. The dismissal of Alcoa’s appeal represents the conclusion of the legal proceedings in this matter. There will be no further reporting of this matter.

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, including the remediation of the Grasse River in Massena, NY, are discussed in the Environmental Matters section of Note N to the Consolidated Financial Statements under the caption “Environmental Matters” on pages 130-134.

As previously reported, 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, Societe Canadienne de Metaux Reynolds Limitée and Canadian British Aluminum in the

 

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Superior Court of Québec in the District of Baie Comeau. Plaintiff seeks to institute the class action on behalf of a putative class consisting of all past, present and future owners, tenants and residents of Baie Comeau’s St. Georges neighborhood. He alleges that defendants, as the present and past owners and operators of an aluminum smelter in Baie Comeau, have negligently allowed the emission of certain contaminants from the smelter, specifically Polycyclic Aromatic Hydrocarbons or “PAHs,” that have been deposited on the lands and houses of the St. Georges neighborhood and its environs causing damage to the property of the putative class and causing health concerns for those who inhabit that neighborhood. Plaintiff originally moved to certify a class action, sought to compel additional remediation to be conducted by the defendants beyond that already undertaken by them voluntarily, sought an injunction against further emissions in excess of a limit to be determined by the court in consultation with an independent expert, and sought money damages on behalf of all class members. 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 PAHs from the smelter. In September 2007, plaintiffs filed the claim against the original defendants, which the court had authorized in May. Alcoa has filed its Statement of Defense and plaintiffs filed an Answer to that Statement. Alcoa also filed a Motion for Particulars with respect to certain paragraphs of plaintiffs’ Answer and a Motion to Strike with respect to certain paragraphs of plaintiffs’ Answer. In late 2010, the court denied these motions. The Soderberg smelting process that plaintiffs allege to be the source of emissions of concern has ceased operations and has been dismantled. No further formal court proceedings or discovery has occurred, while technical advisors nominated by agreement of the parties confer on potential health impacts of prior emissions. This protocol has been agreed to by the parties who have also advised the court regarding the process. Plaintiffs have filed a motion seeking appointment of an expert to advise the court on matters of sampling of homes and standards for interior home remediation. Alcoa has announced its opposition to that motion. Although initially setting a schedule for briefing, during January 2016, the court notified the parties that it was suspending that schedule until further notice. No further schedule has been set. Further proceedings in the case will await resolution of the motion. At this stage of the proceeding, the Company is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

As previously reported, in October 2006, in Barnett, et al. v. Alcoa and Alcoa Fuels, Inc., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-PL-499, forty-one plaintiffs sued Alcoa Inc. and a subsidiary, asserting claims similar to those asserted in Musgrave v. Alcoa, et al., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-CT-006. In November 2007, Alcoa Inc. and its subsidiary filed a motion to dismiss the Barnett cases. In October 2008, the Warrick County Circuit Court granted Alcoa’s motions to dismiss, dismissing all claims arising out of alleged occupational exposure to wastes at the Squaw Creek Mine, but in November 2008, the trial court clarified its ruling, indicating that the order does not dispose of plaintiffs’ personal injury claims based upon alleged “recreational” or non-occupational exposure. Plaintiffs also filed a “second amended complaint” in response to the court’s orders granting Alcoa’s motion to dismiss. On July 7, 2010, the court granted the parties’ joint motions for a general continuance of trial settings. Discovery in this matter remains stayed . The Company is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss because plaintiffs have merely alleged that their medical condition is attributable to exposure to materials at the Squaw Creek Mine but no further information is available due to the discovery stay.

As previously reported, in 1996, Alcoa 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. Alcoa also acquired the extrusion plants located in Feltre and Bolzano, Italy. At the time of the acquisition, Alumix indemnified Alcoa for pre-existing environmental contamination at the sites. In 2004, the Italian Ministry of Environment (MOE) issued orders to Alcoa Trasformazioni S.r.l. and Alumix for the development of a clean-up plan related to soil contamination in excess of allowable limits under legislative decree and to institute emergency actions and pay natural resource damages. 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

 

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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 Alcoa.

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 (Alcoa and now 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. Alcoa 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 Alcoa committed to clean up the site. Further postponements were granted by the Court of Rome, and the next hearing is fixed for December 20, 2016. In the meantime, Alcoa Trasformazioni S.r.l. and Ligestra reached a preliminary agreement for settlement of the liabilities related to Fusina, allocating 80% and 20% of the remediation costs to Ligestra and Alcoa, respectively. In January 2014, a final agreement with Ligestra was signed, and on February 5, 2014, Alcoa signed a final agreement with the MOE and MOPW settling all environmental issues at the Fusina site. As set out in the agreement between Alcoa and Ligestra, those two parties will share the remediation costs and environmental damages claimed by the MOE and MOPW. The remediation project filed by Alcoa and Ligestra has been approved by the MOE. See Note N to the Consolidated Financial Statements under the caption “Fusina and Portovesme, Italy” on page 131. To provide time for settlement with Ligestra, the MOE and Alcoa 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. The Ministers announced in December 2015 that they will ratify the settlement in the following months.

Alcoa 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 that was rejected by the MOE in the fourth quarter of 2013. Alcoa submitted a revised proposal in May 2014 and a further revised proposal in February 2015, in agreement with Ligestra. The MOE issued a Ministerial Decree approving the final project in October 2015. Work on the soil remediation project will commence in 2016 and is expected to be completed in 2019. Alcoa and Ligestra are now working on a final groundwater remediation project which is expected to be submitted to the MOE for review during 2016. While the issuance of the decree for the soil remediation project has provided reasonable certainty regarding liability for the soil remediation, with respect to the groundwater remediation project Alcoa is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss beyond what is described in Footnote N to the Consolidated Financial Statements for several reasons. First, certain costs relating to the groundwater remediation are not yet fixed. In connection with any proposed groundwater remediation plan for Portovesme, the Company understands that the MOE has substantial discretion in defining what must be managed under Italian law, as well as the extent and duration of that remediation program. As a result, the scope and cost of the final groundwater remediation plan remain uncertain for Portovesme; Alcoa and Ligestra are still negotiating a final settlement for groundwater remediation at Portovesme, for an allocation of the cost based on the new remediation project approved by the MOE. In addition, once a groundwater remediation project is submitted, should a final settlement with Ligestra not be reached, Alcoa should be held responsible only for its share of pollution. However, the area is impacted by many sources of pollution, as well as historical pollution. Consequently, the allocation of liabilities would need a very complex technical evaluation by the authorities that has not yet been performed.

As previously reported, on November 30, 2010, Alcoa World Alumina Brasil Ltda. (AWAB) received notice of a lawsuit that had been filed by the public prosecutors of the State of Pará in Brazil in November 2009. The suit names AWAB and the State of Pará, which, through its Environmental Agency, had issued the operating license for the Company’s new bauxite mine in Juruti. The suit concerns the impact of the project on the region’s water system and alleges that certain conditions of the original installation license were not met by AWAB. In the lawsuit, plaintiffs requested a preliminary injunction suspending the operating license and ordering payment of compensation. On April 14, 2010, the court denied plaintiffs’ request. AWAB presented its defense in March 2011, on grounds that it was in compliance with the terms and conditions of its operating license, which included plans to mitigate the impact of the

 

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project on the region’s water system. In April 2011, the State of Pará defended itself in the case asserting that the operating license contains the necessary plans to mitigate such impact, that the State monitors the performance of AWAB’s obligations arising out of such license, that the licensing process is valid and legal, and that the suit is meritless. The Company’s position is that any impact from the project had been fully repaired when the suit was filed. The Company also believes that Jará Lake has not been affected by any project activity and any evidence of pollution from the project would be unreliable. Following the preliminary injunction request, the plaintiffs took no further action until October 2014, when in response to the court’s request and as required by statute, they restated the original allegations in the lawsuit. The Company is 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, the Company is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

As previously reported, by an amended complaint filed April 21, 2005, Alcoa Global Fasteners, Inc. was added as a defendant in Orange County Water District (OCWD) v. Northrop Corporation, et al., civil action 04cc00715 (Superior Court of California, County of Orange). OCWD alleges contamination or threatened contamination of a drinking water aquifer by Alcoa, certain of the entities that preceded Alcoa at the same locations as property owners and/or operators, and other current and former industrial and manufacturing businesses that operated in Orange County in past decades. OCWD seeks to recover the cost of aquifer remediation and attorney’s fees. Trial on statutory, non-jury claims commenced on February 10, 2012, and continued through September 2012 when the case was submitted to the court for decision. On December 11, 2012, the court issued its tentative ruling in the matter dismissing plaintiff OCWD’s remaining statutory claims against all defendants. The court’s tentative ruling also invited further briefing on the decision and it is subject to modification. On January 21, 2013, defendants filed a joint brief responding to ten specific questions posed by the court’s tentative ruling. The joint brief argued that the court should make further findings of fact and law in favor of the defendants in response to the ten questions. Alcoa Global Fasteners, Inc. also filed a separate brief on two of the questions arguing that the court should determine that it is neither a cause of ground water contamination nor a cause of plaintiff’s incurred costs. Remaining in the case at this time are common law trespass and nuisance claims for a Phase II trial which has not been scheduled. OCWD has asserted a total remedy cost of at least $150 million plus attorneys’ fees; however, the amount in controversy at this stage is limited to sums already expended by the OCWD, approximately $4 million. The court has indicated that it is not likely to grant the OCWD’s request for declaratory relief as to future sums the OCWD expends. On February 28, 2013, the court held a hearing on its tentative Statement of Decision finding that OCWD had not met its burden on the element of causation and, following that hearing, on May 10, 2013, issued a supplemental tentative decision, finding that plaintiff had not met its burden of proof. On that date, the court ordered defendants to submit a proposed statement of decision, followed by filing of objections and counter-proposed statement of decision by the plaintiff and responses by the defendants. All filings were completed by September 23, 2013 at which time the matter was submitted to the court for final decision. On October 29, 2013, the court issued its final Statement of Decision (“SOD”) which resolved the statutory law liability claims of the Phase I trial favorably to Alcoa and the other Phase I trial defendants. The plaintiff and the trial defendants disagree on the consequences of the SOD and the Phase I trial on the remaining two tort claims of nuisance and trespass. On December 19, 2013, the court held a Case Management Conference and approved the parties’ proposed briefing schedule regarding remaining issues. On June 20, 2014, following the full briefing by the parties, the trial court entered final judgment in favor of Alcoa and the other trial defendants on the remaining tort claims. On August 18, 2014, the OCWD filed a notice of appeal of the judgment with the Superior Court of the County of Orange. On October 14, 2015, the OCWD submitted its opening brief. Defendants’ response brief is due March 14, 2016.

St. Croix Proceedings

Abednego and Abraham cases. As previously reported, on January 14, 2010, Alcoa was served with a multi-plaintiff action complaint involving several thousand individual persons claiming to be residents of St. Croix who are alleged to have suffered 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 Alcoa 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

 

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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.

Also as previously reported, on March 1, 2012, Alcoa 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.

Alcoa 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 Alcoa 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.

Glencore Contractual Indemnity Claim. As previously reported, on June 5, 2015, Alcoa World Alumina LLC (“AWA”) and SCA filed a complaint in Delaware Chancery Court for a declaratory judgment and injunctive relief to resolve a dispute between Alcoa and Glencore Ltd. (“Glencore”) with respect to claimed obligations under a 1995 asset purchase agreement between Alcoa and Glencore. The dispute arose from Glencore’s demand that Alcoa indemnify it for liabilities it may have to pay to Lockheed Martin (“Lockheed”) related to the St. Croix alumina refinery. Lockheed had earlier filed suit against Glencore in federal court in New York seeking indemnity for liabilities it had incurred and would incur to the U.S. Virgin Islands to remediate certain properties at the refinery property and claimed that Glencore was required by an earlier, 1989 purchase agreement to indemnify it. Glencore had demanded that Alcoa indemnify and defend it in the Lockheed case and threatened to claim over against Alcoa in the New York action despite exclusive jurisdiction for resolution of disputes under the 1995 purchase agreement being in Delaware. After Glencore conceded that it was not seeking to add Alcoa 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 Alcoa’s motion and denied Glencore’s motion resulting in Alcoa 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 have 10 days to respond. The Company is unable to reasonably predict an outcome for the remaining claims.

Other Matters

As previously reported, along with various asbestos manufacturers and distributors, Alcoa and its subsidiaries as premises owners are defendants in several hundred active lawsuits filed on behalf of persons alleging injury predominantly as a result of occupational exposure to asbestos at various Company facilities. In addition, an Alcoa subsidiary company has been named, along with a large common group of industrial companies, in a pattern complaint where the Company’s involvement is not evident. Since 1999, several thousand such complaints have been filed. To date, the subsidiary has been dismissed from almost every case that was actually placed in line for trial. Alcoa, its 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. Alcoa has 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 the Company.

As previously reported, on August 2, 2013, the State of North Carolina, by and through its agency, the North Carolina Department of Administration, filed a lawsuit against Alcoa Power Generating Inc. (APGI) in Superior Court, Wake County, North Carolina (Docket No. 13-CVS-10477). The lawsuit asserts ownership of certain submerged lands and

 

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hydropower generating structures situated at Alcoa’s Yadkin Hydroelectric Project (the “Yadkin Project”), including the submerged riverbed of the Yadkin River throughout the Yadkin Project and a portion of the hydroelectric dams that Alcoa owns and operates pursuant to a license from the Federal Energy Regulatory Commission. The suit seeks declaratory relief regarding North Carolina’s alleged ownership interests in the riverbed and the dams and further declaration that Alcoa has no right, license or permission from North Carolina to operate the Yadkin Project. By notice filed on September 3, 2013, Alcoa 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). By motion filed September 3, 2013, the Yadkin Riverkeeper sought permission to intervene in the case. On September 25, 2013, Alcoa filed its answer in the case and also filed its opposition to the motion to intervene by the Yadkin Riverkeeper. The Court denied the State’s Motion to Remand and initially permitted the Riverkeeper to intervene although the Riverkeeper has now voluntarily withdrawn as an intervening party and will participate as amicus.

On July 21, 2014, the parties each filed a motion for summary judgment. On November 20, 2014, the Court denied Alcoa’s motion for summary judgment and denied in part and granted in part the State of North Carolina’s motions for summary judgment. The Court held that under North Carolina law, the burden of proof as to title to property is shifted to a private party opposing a state claim of property ownership. The court conducted a trial on navigability on April 21-22, 2015, and, after ruling orally from the bench on April 22, 2015, on May 5, 2015, entered Findings of Fact and Conclusions of Law as to Navigability, ruling in APGI’s favor that the state “failed to meet its burden to prove that the Relevant Segment, as stipulated by the parties, was navigable for commerce at statehood.” Subsequently, APGI filed a motion for summary judgment as to title; the state filed opposition papers. On September 28, 2015, the Court granted summary judgment in APGI’s favor and found that the evidence demonstrates that APGI holds title to the riverbed. The Court further directed judgment to be entered in APGI’s favor and closed the case. On October 13, 2015, the State of North Carolina filed notice of its appeal to the United States Court of Appeals for the Fourth Circuit.

Tax

As previously reported, 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 the Company. An appeal of this assessment in Spain’s Central Tax Administrative Court by the Company was denied in October 2013. In December 2013, the Company 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, the Company filed an appeal of this second assessment in Spain’s Central Tax Administrative Court, which was denied in January 2015. The Company filed an appeal of this second assessment in Spain’s National Court in March 2015.

The combined assessments (remeasured for a tax rate change enacted in November 2014) total $263 million (€241 million). The Company believes it has meritorious arguments to support its tax position and intends to vigorously litigate the assessments through Spain’s court system. However, in the event the Company is unsuccessful, a portion of the assessments may be offset with existing net operating losses available to the Spanish consolidated tax group. Additionally, it is possible that the Company may receive similar assessments for tax years subsequent to 2009. At this time, the Company is unable to reasonably predict an outcome for this matter.

As previously reported, between 2000 and 2002, Alcoa Alumínio (Alumínio) sold approximately 2,000 metric tons of metal per month from its Poços de Caldas facility, located in the State of Minas Gerais (the “State”), to Alfio, a customer also located in the State. Sales in the State were exempted from value-added tax (VAT) requirements. Alfio subsequently sold metal to customers outside of the State, but did not pay the required VAT on those transactions. In July 2002, Alumínio received an assessment from State auditors on the theory that Alumínio should be jointly and severally liable with Alfio for the unpaid VAT. In June 2003, the administrative tribunal found Alumínio liable, and Alumínio filed a judicial case in the State in February 2004 contesting the finding. In May 2005, the Court of First Instance found Alumínio solely liable, and a panel of a State appeals court confirmed this finding in April 2006.

 

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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. A decision from this panel is pending, but additional appeals are likely. At December 31, 2015, the assessment totaled $35 million (R$135 million), including penalties and interest. While the Company believes it has meritorious defenses, the Company is unable to reasonably predict an outcome.

Other Contingencies

In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa, 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 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.

The Company’s common stock is listed on the New York Stock Exchange where it trades under the symbol AA. The Company’s quarterly high and low trading stock prices and dividends per common share for 2015 and 2014 are shown below.

 

      2015      2014  
Quarter    High      Low      Dividend      High      Low      Dividend  

First

   $ 17.10       $ 12.65       $ 0.03       $ 12.97       $ 9.82       $ 0.03   

Second

     14.29         11.15         0.03         15.18         12.34         0.03   

Third

     11.23         7.97         0.03         17.36         14.56         0.03   

Fourth

     11.18         7.81         0.03         17.75         13.71         0.03   

Year

     17.10         7.81       $ 0.12         17.75         9.82       $ 0.12   

The number of holders of record of common stock was approximately 10,101 as of February 11, 2016.

 

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Stock Performance Graph

The following graph compares the most recent five-year performance of Alcoa’s common stock with (1) the Standard & Poor’s 500® Index and (2) the Standard & Poor’s 500® Materials Index, a group of 27 companies categorized by Standard & Poor’s as active in the “materials” market sector. Such information shall not be deemed to be “filed.”

 

 

LOGO

 

As of December 31,    2010      2011      2012      2013      2014      2015  

Alcoa Inc.

   $ 100       $ 57       $ 58       $ 72       $ 107       $ 68   

S&P 500® Index

     100         102         118         157         178         181   

S&P 500® Materials Index

     100         90         104         130         139         128   

Copyright© 2016 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights reserved.

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

 

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Item 6. Selected Financial Data.

(dollars in millions, except per-share amounts and realized prices; shipments in thousands of metric tons [kmt])

 

For the year ended December 31,    2015     2014      2013     2012      2011  

Sales

   $ 22,534      $ 23,906       $ 23,032      $ 23,700       $ 24,951   

Amounts attributable to Alcoa:

            

(Loss) income from continuing operations

   $ (322   $ 268       $ (2,285   $ 191       $ 614   

Loss from discontinued operations

     -        -         -        -         (3

Net (loss) income

   $ (322   $ 268       $ (2,285   $ 191       $ 611   

Earnings per share attributable to Alcoa common shareholders:

            

Basic:

            

(Loss) income from continuing operations

   $ (0.31   $ 0.21       $ (2.14   $ 0.18       $ 0.58   

Loss from discontinued operations

     -        -         -        -         (0.01

Net (loss) income

   $ (0.31   $ 0.21       $ (2.14   $ 0.18       $ 0.57   

Diluted:

            

(Loss) income from continuing operations

   $ (0.31   $ 0.21       $ (2.14   $ 0.18       $ 0.55   

Loss from discontinued operations

     -        -         -        -         -   

Net (loss) income

   $ (0.31   $ 0.21       $ (2.14   $ 0.18       $ 0.55   

Shipments of alumina (kmt)

     10,755        10,652         9,966        9,295         9,218   

Shipments of aluminum products (kmt)

     4,537        4,794         4,994        5,197         5,037   

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

   $ 2,069      $ 2,405       $ 2,243      $ 2,327       $ 2,636   

Cash dividends declared per common share

   $ 0.12      $ 0.12       $ 0.12      $ 0.12       $ 0.12   

Total assets*

     36,528        37,363         35,696        40,129         40,083   

Total debt

     9,103        8,852         8,319        8,829         9,371   

Cash provided from operations

     1,582        1,674         1,578        1,497         2,193   

Capital expenditures

     1,180        1,219         1,193        1,261         1,287   

 

* In November 2015, Alcoa adopted changes issued by the Financial Accounting Standards Board to the balance sheet classification of deferred income taxes (see the Recently Adopted Accounting Guidance section of Note A to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K). Additionally, for comparative purposes, management elected to retrospectively apply these changes to all periods presented.

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

 

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

(dollars in millions, except per-share amounts and ingot prices; production and shipments in thousands of metric tons [kmt])

Overview

Our Business

Alcoa is a global leader in lightweight metals engineering and manufacturing. Alcoa’s innovative, multi-material products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.

 

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Alcoa is also the world leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined, through its active participation in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily. Sales of primary aluminum and alumina represent approximately 40% of Alcoa’s revenues. The price of aluminum influences the operating results of Alcoa.

Alcoa is a global company operating in 30 countries. Based upon the country where the point of sale occurred, the United States and Europe generated 55% and 26%, respectively, of Alcoa’s sales in 2015. In addition, Alcoa has investments and operating activities in, among others, Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi Arabia. 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.

Management Review of 2015 and Outlook for the Future

In 2015, growth in global aluminum demand reached 6%, which was slightly less than management’s projection (7%) at the end of 2014. However, significant market headwinds negatively impacted the smelting portion of Alcoa’s upstream operations as the average LME price (on 15-day lag) of aluminum declined 10% and regional premiums decreased substantially (39% in the United States and Canada and 44% in Europe) compared to 2014. The refining portion of the upstream operations continued to make progress in shifting customer pricing away from the LME aluminum price to a mixture of alumina index/spot pricing; however, this was overshadowed by a decrease in the average alumina index/spot price. Conversely, Alcoa’s upstream operations realized the benefit of a stronger U.S. dollar in 2015 compared to 2014. In the midstream operations, after-tax operating income was stable in 2015 from 2014 despite generating $1,052 less revenue due to the closure and divestiture of six rolling mills, while the downstream operations received the benefit of $1,310 in combined revenue combined from three acquisitions. Across all operations, cost headwinds continued to be a challenge; however, management was able to more than offset these with net productivity improvements.

Separate from the 2015 operational results, management initiated a number of portfolio actions during the year. In the upstream operations, following similar actions taken in both 2014 and 2013, smelting capacity of 217 kmt was curtailed (another 230 kmt will be curtailed by the end of June 2016) and 96 kmt (all of which was previously curtailed) was permanently closed (another 269 kmt will be closed by the end of March 2016). Additionally, refining capacity of 1,705 kmt was curtailed (another 1,635 kmt will be curtailed by the end of June 2016). Management also completed the divestiture of another rolling mill (three rolling mills were previously divested in December 2014) in the midstream operations that was no longer part of the strategic direction of Alcoa. From a growth perspective, Alcoa completed the acquisition of two businesses, mostly aerospace-related, both of which will enhance the portfolio of Alcoa’s downstream operations.

As a result of the previously mentioned capacity reductions, Alcoa’s 2015 results were negatively impacted by significant restructuring charges related to these actions. Additionally, developments in legal matters in Italy, an assessment of the realizability of certain deferred tax assets, and an impairment of goodwill caused unfavorable impacts in Alcoa’s 2015 results.

Management continued its focus on liquidity and cash flows, generating incremental improvements in procurement efficiencies, overhead rationalization, and disciplined capital spending. This focus and the related results enabled Alcoa to end 2015 with a solid financial position, consistent with the end of 2014.

The following financial information reflects certain key measures of Alcoa’s 2015 results:

 

   

Sales of $22,534 and Net loss of $322, or $0.31 per diluted share;

 

   

Total segment after-tax operating income of $1,906, a decrease of 3% from 2014;

 

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Cash from operations of $1,582, reduced by $470 in pension plan contributions and a $300 prepayment to secure a future supply of gas in Australia;

 

   

Capital expenditures of $1,180, under $1,500 for the sixth consecutive year;

 

   

Cash on hand at the end of the year of $1,919, in excess of $1,400 for the seventh consecutive year;

 

   

Increase in total debt of $251, but a decline of $1,475 since 2008; and

 

   

Total debt of $9,103, Net margin of $1,968, and Depreciation, depletion, and amortization of $1,280 (Net margin is equivalent to Sales minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; Research and development expenses; and Provision for depreciation, depletion, and amortization).

In 2016, management is projecting continued growth (increase of 6%) in the global consumption of primary aluminum, a slight change from that of the last four years, led by China at an estimated 8%. All other regions in the world, except for Brazil and Russia (both are projected to be flat with 2015), are expected to have positive growth in aluminum demand over 2015, including North America at an estimated 5%. After considering forecasted added production, along with expected industry-wide capacity reductions, both of which are mainly driven by China, management anticipates a deficit in the aluminum market. For alumina, growth in global consumption is estimated to be 6%, and demand is expected to slightly exceed supply due to capacity reductions in China, as well as other parts of the world.

Management also anticipates improved market conditions for value-add products in the aerospace, building and construction, packaging, automotive, and industrial gas turbine global end markets, despite declines in certain regions, while the commercial transportation global end market is expected to decrease. Many of the conditions that drove these markets in 2015 will continue throughout 2016.

Aerospace is expected to be driven by large commercial aircraft due to a greater than nine-year order backlog. For building and construction, awarded nonresidential contracts are projected to be up once again in North America while a slight decline in Europe is expected. In packaging, growth in China and Europe, mainly driven by the penetration of aluminum in the growing beer segment and the conversion from steel cans to aluminum cans, respectively, is expected to more than offset a slight decrease in North America. For automotive, growth is anticipated in the United States (due to the replacement of older vehicles, low borrowing rates, and the decline in gasoline prices) and China (due to evolving emissions policies based on new clean air legislation enacted in 2014 and a continued increase in the percentage of the population driving automobiles), as well as Europe. Industrial gas turbines are expected to see growth as a result of new demand for high technology turbines and upgrades of existing turbines. In commercial transportation, improving conditions in both Europe and China are expected to be more than offset by weakness in North America, due to high inventory levels as a result of one of the highest production years ever in 2015 and projected lower orders.

Looking ahead over the next year, management will continue to focus on lowering Alcoa’s refining and smelting operations on the respective global cost curves to the 21st and 38th percentiles, respectively. At December 31, 2015, Alcoa’s refining operations were at the 23rd percentile, a two-percentage point improvement from 2014, and its smelting operations remained at the 43rd percentile on the respective global cost curves. Actions taken to improve Alcoa’s position on the global alumina cost curve included, in late 2014, the sale of an ownership interest in a mining and refining joint venture in Jamaica and the conversion of the fuel source from fuel oil to natural gas at a refinery in Spain, and, in 2015, the curtailment of 1,330 kmt of high-cost capacity in Suriname. Actions taken in the smelting operations included, in late 2014, the sale of an ownership interest in a smelter in the United States and the renewal of a power contract at each of the three smelters in Canada, and, in 2015, the curtailment and closure of 170 kmt combined of high-cost capacity in Brazil. Also, both the refining and smelting operations benefitted from productivity improvements, new initiatives as well as the full realization of those implemented in 2014. While the benefits of the actions in the refining operations can be seen in Alcoa’s improved position on the global alumina cost curve at the end of 2015, the benefits from the actions in the smelting operations were offset by a downward shift in the global aluminum cost curve, primarily due to the strong U.S. dollar and curtailments/closures of capacity from other smelting industry participants.

 

 

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Other actions taken in 2015 to help drive a lower position on the respective global cost curves include additional curtailments and/or closures of 2,100 kmt of refining capacity and 499 kmt of smelting capacity, all within the United States. The initiation of these actions occurred late in 2015 and will be completed during the first half of 2016; therefore, management expects to realize the benefits of curtailing/closing this high-cost capacity during 2016. Additionally, Alcoa has initiatives to drive further productivity improvements during 2016, including from procurement and overhead programs. Furthermore, the smelter and the refinery at the joint venture in Saudi Arabia are expected to provide a two-percentage point reduction on each of the respective global cost curves by the end of 2016 (from 2013).

Management will also continue to focus on revenue growth for both the midstream and downstream operations, which is expected from multiple sources. The midstream operations anticipate positive contributions from both the Davenport, IA rolling mill facility and Tennessee rolling mill facility (expansion completed in September 2015), both of which serve the growing demand for aluminum sheet in the U.S. automotive and market as a result of changing emission regulations. Likewise, the downstream operations expect favorable results from projects completed in late 2014 and throughout 2015 to meet growing demand in both the aerospace and commercial transportation end markets. These projects include an expansion of aluminum lithium capabilities in Lafayette, IN, expansions in LaPorte, IN and Hampton, VA to provide nickel-based super alloy structural components and airfoil blades for jet engines, and an expansion at a facility in Hungary to double production of aluminum wheels. Additionally, the downstream operations completed three acquisitions (mostly aerospace-related) in November 2014 through July 2015 (see Engineered Products and Solutions in Segment Information under Results of Operations below) that will incrementally increase revenue. Furthermore, in 2014 and 2015, Alcoa entered into a number of multi-year supply agreements related to the aerospace end market valued at approximately $13,500, including six contracts valued at more than $6,700 combined with four major customers in the aerospace end market. Under one of these six contracts, the midstream operations will supply aluminum sheet and plate, and under the other five contracts, the downstream operations will supply jet engine components (including aluminum and aluminum-lithium fan blades), multi-material fastening systems, titanium plate and billet, and titanium seat track assemblies.

In addition to focusing on the above-mentioned operational improvements, management has committed to executing the following transaction. On September 28, 2015, Alcoa announced that its Board of Directors approved a plan to separate into two independent, publicly-traded companies. One company will comprise the Alumina and Primary Metals segments and the other company will comprise the Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions segments. Alcoa is targeting to complete the separation in the second half of 2016. The transaction is subject to a number of conditions, including, but not limited to, final approval by Alcoa’s Board of Directors, receipt of a favorable opinion of legal counsel with respect to the tax-free nature of the transaction for U.S. federal income tax purposes, and the effectiveness of a Form 10 registration statement to be filed with the U.S. Securities and Exchange Commission. Upon completion of the separation, Alcoa shareholders will own all of the outstanding shares of both companies. Alcoa may, at any time and for any reason until the proposed transaction is complete, abandon the separation plan or modify or change its terms.

Results of Operations

Earnings Summary

Net loss attributable to Alcoa for 2015 was $322, or $0.31 per diluted share, compared with Net income attributable to Alcoa of $268, or $0.21 per share, in 2014. The decrease in results of $590 was mostly due to a lower average realized price for both aluminum and alumina, a charge for legal matters in Italy, unfavorable price/product mix in the midstream and downstream operations, an unfavorable change in income taxes due to a higher amount of discrete income tax charges and nondeductible items, lower energy sales, and higher costs. These negative impacts were partially offset by net favorable foreign currency movements, net productivity improvements, higher volume in the midstream and downstream operations, and lower charges and expenses related to a number of portfolio actions (e.g., capacity reductions, divestitures, acquisitions).

 

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Net income attributable to Alcoa for 2014 was $268, or $0.21 per share, compared with Net loss attributable to Alcoa of $2,285, or $2.14 per share, in 2013. The improvement in results of $2,553 was primarily due to the absence of all of the following: an impairment of goodwill, a discrete income tax charge for valuation allowances on certain deferred tax assets, and charges for the resolution of a legal matter. Other significant changes in results included the following: higher energy sales, a higher average realized price for primary aluminum, net productivity improvements, and net favorable foreign currency movements. These other changes were mostly offset by higher charges and expenses related to a number of portfolio actions (e.g., capacity reductions, divestitures, acquisitions), higher overall input costs, and an unfavorable change in income taxes due to higher operating results.

Sales—Sales for 2015 were $22,534 compared with sales of $23,906 in 2014, a decline of $1,372, or 6%. The decrease was primarily due to the absence of sales related to capacity that was closed, sold or curtailed in the midstream and upstream operations (see Global Rolled Products and Primary Metals in Segment Information below), a lower average realized price for aluminum in both the upstream and midstream operations and for alumina in the upstream operations, unfavorable foreign currency movements in the midstream and downstream operations, and lower energy sales (both as a result of lower pricing and unfavorable foreign currency movements). These negative impacts were partially offset by the addition of sales from three recently acquired businesses (see Engineered Products and Solutions in Segment Information below), higher volume across all segments, favorable product mix in the midstream operations, and higher buy/resell activity for primary aluminum.

Sales for 2014 were $23,906 compared with sales of $23,032 in 2013, an improvement of $874, or 4%. The increase was mainly the result of higher volumes in the midstream, downstream, and alumina portion of the upstream operations, higher energy sales resulting from excess power due to curtailed smelter capacity, increased buy/resell activity for primary aluminum, and a higher average realized price for primary aluminum. These positive impacts were partially offset by lower primary aluminum volumes, including those related to curtailed and shutdown smelter capacity, and unfavorable price/product mix in the midstream operations.

Cost of Goods Sold—COGS as a percentage of Sales was 80.2% in 2015 compared with 80.1% in 2014. The percentage was negatively impacted by a lower average realized price for both aluminum and alumina in the upstream operations, unfavorable price/product mix in the midstream and downstream operations, lower energy sales, and higher costs. These negative impacts were mostly offset by net favorable foreign currency movements due to a stronger U.S. dollar, net productivity improvements across all segments, higher volume in the midstream and downstream operations, a favorable LIFO (last in, first out) adjustment due to lower prices for aluminum and alumina ($208), lower inventory write-downs related to the decisions to permanently shut down and/or curtail capacity in the upstream and midstream operations (difference of $23—see Restructuring and Other Charges below), and the absence of costs related to a new labor agreement that covers employees at 10 locations in the United States (see below).

COGS as a percentage of Sales was 80.1% in 2014 compared with 83.7% in 2013. The percentage was positively impacted by net productivity improvements across all segments, both the previously mentioned higher energy sales and higher average realized price for primary aluminum, net favorable foreign currency movements due to a stronger U.S. dollar, lower costs for caustic and carbon, and the absence of costs related to a planned maintenance outage in 2013 at a power plant in Australia. These positive impacts were partially offset by higher costs for bauxite, energy, and labor, higher inventory write-downs related to the decisions to permanently shut down certain smelter and rolling mill capacity (difference of $58—see Restructuring and Other Charges below), and costs related to a new labor agreement that covers employees at 10 locations in the United States (see below).

On June 6, 2014, the United Steelworkers ratified a new five-year labor agreement covering approximately 6,100 employees at 10 U.S. locations; the previous labor agreement expired on May 15, 2014. In 2014, as a result of the preparation for and ratification of the new agreement, Alcoa recognized $18 ($12 after-tax) in COGS for, among other items, business contingency costs and a one-time signing bonus for employees. Additionally, as a result of the provisions of the new labor agreement, a significant plan amendment was adopted by one of Alcoa’s U.S. pension plans. Accordingly, this plan was required to be remeasured, which resulted in a $13 decrease to 2014 net periodic benefit cost.

 

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Selling, General Administrative, and Other Expenses—SG&A expenses were $979, or 4.3% of Sales, in 2015 compared with $995, or 4.2% of Sales, in 2014. The decrease of $16 was principally the result of favorable foreign currency movements due to a stronger U.S. dollar, the absence of SG&A related to closed and sold locations, and lower acquisition costs ($15), partially offset by expenses for professional and consulting services related to the planned separation of Alcoa ($24—see Management Review of 2015 and Outlook for the Future above) and new SG&A related to inorganic growth in the Engineered Products and Solutions segment.

SG&A expenses were $995, or 4.2% of Sales, in 2014 compared with $1,008, or 4.4% of Sales, in 2013. The decline of $13 was due to decreases in various expenses, including legal and consulting fees and contract services, mostly offset by costs associated with the acquisition of Firth Rixson ($42—see Engineered Products and Solutions in Segment Information below) and higher stock-based compensation expense.

Research and Development Expenses—R&D expenses were $238 in 2015 compared with $218 in 2014 and $192 in 2013. The increase in 2015 as compared to 2014 was mainly driven by additional spending related to the upgrade of a Micromill™ in San Antonio, TX, which was completed during 2015 and began production of automotive sheet on a limited basis, for the Global Rolled Products segment and additive manufacturing for 3-D printing, partially offset by lower spending related to inert anode and carbothermic technology for the Primary Metals segment. The increase in 2014 as compared to 2013 was primarily caused by spending related to an upgrade of a Micromill™ in San Antonio, TX for the Global Rolled Products segment and additional spending related to inert anode and carbothermic technology for the Primary Metals segment.

Provision for Depreciation, Depletion, and Amortization—The provision for DD&A was $1,280 in 2015 compared with $1,371 in 2014. The decrease of $91, or 7%, was mostly due to favorable foreign currency movements due to a stronger U.S. dollar, particularly against the Australian dollar and Brazilian real, and the absence of DD&A ($71) related to the divestiture and/or permanent closure of five smelters, six rolling mills, one refinery, and one rod mill (see Alumina, Primary Metals, and Global Rolled Products in Segment Information below), all of which occurred from March 2014 through June 2015. These positive impacts were partially offset by new DD&A ($93) associated with three acquisitions that occurred from November 2014 through July 2015 (see Engineered Products and Solutions in Segment Information below).

The provision for DD&A was $1,371 in 2014 compared with $1,421 in 2013. The decrease of $50, or 4%, was principally the result of favorable foreign currency movements due to a stronger U.S. dollar, particularly against the Australian dollar and Brazilian real, and a reduction in expense related to the permanent shutdown of smelter capacity in Australia, Canada, the United States, and Italy that occurred at different points during both 2013 and 2014 (see Primary Metals in Segment Information below). These items were somewhat offset by new DD&A associated with both the acquisition of Firth Rixson in November 2014 (see Engineered Products and Solutions in Segment Information below) and assets placed into service in January 2014 related to the completed automotive expansion at the Davenport, IA plant.

Impairment of Goodwill—In 2015 and 2013, Alcoa recognized an impairment of goodwill in the amount of $25 and $1,731 ($1,719 after noncontrolling interest), respectively, related to the annual impairment review of the soft alloy extrusion business in Brazil and the Primary Metals segment, respectively, (see Goodwill in Critical Accounting Policies and estimates below).

 

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Restructuring and Other Charges—Restructuring and other charges for each year in the three-year period ended December 31, 2015 were comprised of the following:

 

      2015     2014     2013  

Asset impairments

   $ 335      $ 406      $ 116   

Layoff costs

     299        259        201   

Legal matters in Italy

     201        -        -   

Net loss on divestitures of businesses

     161        332        -   

Resolution of a legal matter

     -        -        391   

Other

     213        199        82   

Reversals of previously recorded layoff and other exit costs

     (14     (28     (8

Restructuring and other charges

   $ 1,195      $ 1,168      $ 782   

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.

2015 Actions. In 2015, Alcoa recorded Restructuring and other charges of $1,195 ($836 after-tax and noncontrolling interest), which were comprised of the following components: $438 ($281 after-tax and noncontrolling interest) for exit costs related to decisions to permanently shut down and demolish three smelters and a power station (see below); $246 ($118 after-tax and noncontrolling interest) for the curtailment of two refineries and two smelters (see below); $201 (pre- and after-tax) related to legal matters in Italy; a $161 ($151 after-tax and noncontrolling interest) net loss related to the March 2015 divestiture of a rolling mill in Russia (see Global Rolled Products in Segment Information below) and post-closing adjustments associated with three December 2014 divestitures; $143 ($102 after-tax and noncontrolling interest) for layoff costs, including the separation of approximately 2,100 employees (425 in the Transportation and Construction Solutions segment, 645 in the Engineered Products and Solutions segment, 380 in the Primary Metals segment, 90 in the Global Rolled Products segment, 85 in the Alumina segment, and 475 in Corporate); $34 ($14 after-tax and noncontrolling interest) for asset impairments, virtually all of which was related to prior capitalized costs for an expansion project at a refinery in Australia that is no longer being pursued; an $18 ($13 after-tax) gain on the sale of land related to one of the rolling mills in Australia that was permanently closed in December 2014 (see 2014 Actions below); a net charge of $4 (a net credit of $7 after-tax and noncontrolling interest) for other miscellaneous items; and $14 ($11 after-tax and noncontrolling interest) for the reversal of a number of small layoff reserves related to prior periods.

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, TX refinery (2,010 kmt-per-year); and the Wenatchee, WA 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 is expected to be completed by the end of June 2016. The permanent closures were composed of the capacity at the Warrick, IN smelter (269 kmt-per-year) (includes the closure of a related coal mine) and the infrastructure of the Massena East, NY smelter (potlines were previously shut down in both 2013 and 2014—see 2013 Actions and 2014 Actions below), as the modernization of this smelter is no longer being pursued. The shutdown of the Warrick smelter is expected to be completed by the end of March 2016.

The decisions on the above actions were part of a separate 12-month review in refining (2,800 kmt-per-year) and smelting (500 kmt-per-year) capacity initiated by management in March 2015 for possible curtailment (partial or full), permanent closure or divestiture. While many factors contributed to each decision, in general, these actions were initiated to maintain competitiveness amid prevailing market conditions for both alumina and aluminum. Demolition and remediation activities related to the Warrick smelter and the Massena East location will begin in 2016 and are expected to be completed by the end of 2020.

Separate from the actions initiated under the reviews described above, in mid-2015, management approved the permanent shutdown and demolition of the Poços de Caldas smelter (capacity of 96 kmt-per-year) in Brazil and the

 

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Anglesea power station (includes the closure of a related coal mine) in Australia. The entire capacity at Poços de Caldas had been temporarily idled since May 2014 and the Anglesea power station was shut down at the end of August 2015. Demolition and remediation activities related to the Poços de Caldas smelter and the Anglesea power station began in late 2015 and are expected to be completed by the end of 2026 and 2020, respectively.

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

In 2015, costs related to the shutdown and curtailment actions included asset impairments of $217, representing the write-off of the remaining book value of all related properties, plants, and equipment; $156 for the layoff of approximately 3,100 employees (1,800 in the Primary Metals segment and 1,300 in the Alumina segment), including $30 in pension costs; accelerated depreciation of $84 related to certain facilities as they continued to operate during 2015; and $227 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 ($43 after-tax and noncontrolling interest), which was recorded in COGS. The other exit costs of $227 represent $76 in asset retirement obligations and $86 in environmental remediation, both of which were triggered by the decisions to permanently shut down and demolish the aforementioned structures in the United States, Brazil, and Australia (includes the rehabilitation of a related coal mine in each of Australia and the United States), and $65 in supplier and customer contract-related costs.

As of December 31, 2015, approximately 1,500 of the 5,200 employees were separated. The remaining separations for 2015 restructuring programs are expected to be completed by the end of 2016. In 2015, cash payments of $42 were made against layoff reserves related to 2015 restructuring programs.

2014 Actions. In 2014, Alcoa recorded Restructuring and other charges of $1,168 ($703 after-tax and noncontrolling interest), which were comprised of the following components: $693 ($443 after-tax and noncontrolling interest) for exit costs related to decisions to permanently shut down and demolish three smelters and two rolling mills (see below); a $332 ($163 after-tax and noncontrolling interest) net loss for the divestitures of four operations (see Alumina, Primary Metals, and Global Rolled Products in Segment Information below); $68 ($45 after-tax and noncontrolling interest) for the temporary curtailment of two smelters and a related production slowdown at one refinery (see below); $51 ($36 after-tax and noncontrolling interest) for layoff costs, including the separation of approximately 1,120 employees (470 in the Engineered Products and Solutions segment, 360 in the Transportation and Construction Solutions segment, 45 in the Global Rolled Products segment, 60 in the Alumina and Primary Metals segments combined, and 185 in Corporate); $34 ($26 after-tax) for asset impairments related to prior capitalized costs for a modernization project at a smelter in Canada that is no longer being pursued; a net charge of $18 ($11 after-tax and noncontrolling interest) for other miscellaneous items, including $2 ($2 after-tax) for asset impairments and accelerated depreciation; and $28 ($21 after-tax and noncontrolling interest) for the reversal of a number of layoff reserves related to prior periods, including those associated with a smelter in Italy due to changes in facts and circumstances (see below).

In early 2014, management approved the permanent shutdown and demolition of the remaining capacity (84 kmt-per-year) at the Massena East, NY smelter and the full capacity (190 kmt-per-year) at the Point Henry smelter in Australia. The capacity at Massena East was fully shut down by the end of March 2014 and the Point Henry smelter was fully shut down in August 2014. Demolition and remediation activities related to both the Massena East and Point Henry smelters began in late 2014 and are expected to be completed by the end of 2020 and 2018, respectively.

The decisions on the Massena East and Point Henry smelters were part of a 15-month review of 460 kmt of smelting capacity initiated by management in May 2013 (see 2013 Actions below) for possible curtailment. Through this review,

 

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management determined that the remaining capacity of the Massena East smelter was no longer competitive and the Point Henry smelter had no prospect of becoming financially viable. Management also initiated the temporary curtailment of the remaining capacity (62 kmt-per-year) at the Poços de Caldas smelter and additional capacity (85 kmt-per-year) at the São Luís smelter, both in Brazil. These curtailments were completed by the end of May 2014. As a result of these curtailments, 200 kmt-per-year of production at the Poços de Caldas refinery was reduced by the end of June 2014.

Also in early 2014, management approved the permanent shutdown of Alcoa’s two rolling mills in Australia, Point Henry and Yennora. This decision was made due to the significant impact of excess can sheet capacity in both Australia and Asia. The two rolling mills had a combined can sheet capacity of 200 kmt-per-year and were closed by the end of 2014. Demolition and remediation activities related to the two rolling mills began in mid-2015 and are expected to be completed by the end of 2018.

Additionally, in August 2014, management approved the permanent shutdown and demolition of the capacity (150 kmt-per-year) at the Portovesme smelter in Italy, which had been idle since November 2012. This decision was made because the fundamental reasons that made the Portovesme smelter uncompetitive remained unchanged, including the lack of a viable long-term power solution. Demolition and remediation activities related to the Portovesme smelter will begin in 2016 and are expected to be completed by the end of 2020 (delayed due to discussions with the Italian government and other stakeholders).

In 2014, costs related to the shutdown and curtailment actions included $208 for the layoff of approximately 1,790 employees (1,210 in the Primary Metals segment, 470 in the Global Rolled Products segment, 80 in the Alumina segment, and 30 in Corporate), including $26 in pension costs; accelerated depreciation of $204 related to the three facilities in Australia as they continued to operate during 2014; asset impairments of $166 representing the write-off of the remaining book value of all related properties, plants, and equipment; and $183 in other exit costs. Additionally in 2014, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $67 ($47 after-tax and noncontrolling interest), which was recorded in COGS. The other exit costs of $183 represent $95 in asset retirement obligations and $42 in environmental remediation, both of which were triggered by the decisions to permanently shut down and demolish the aforementioned structures in Australia, Italy, and the United States, and $46 in other related costs, including supplier and customer contract-related costs.

As of December 31, 2015, approximately 2,500 of the 2,870 employees (previously 2,910) were separated. The total number of employees associated with 2014 restructuring programs was updated to reflect employees, who were initially identified for separation, accepting other positions within Alcoa and natural attrition. The remaining separations for 2014 restructuring programs are expected to be completed by the end of 2016. In 2015 and 2014, cash payments of $62 and $141, respectively, were made against layoff reserves related to 2014 restructuring programs.

2013 Actions. In 2013, Alcoa recorded Restructuring and other charges of $782 ($585 after-tax and noncontrolling interests), which were comprised of the following components: $391 ($305 after-tax and noncontrolling interest) related to the resolution of a legal matter; $245 ($183 after-tax) for exit costs related to the permanent shutdown and demolition of certain structures at three smelter locations (see below); $87 ($61 after-tax and noncontrolling interests) for layoff costs, including the separation of approximately 1,110 employees (340 in the Primary Metals segment, 250 in the Global Rolled Products segment, 220 in the Engineered Products and Solutions segment, 85 in the Alumina segment, 75 in the Transportation and Construction Solutions segment and 140 in Corporate), of which 590 relates to a global overhead reduction program, and $9 in pension plan settlement charges related to previously separated employees; $25 ($17 after-tax) in net charges, including $12 ($8 after-tax) for asset impairments, related to retirements and/or the sale of previously idled structures; $25 ($13 after-tax and noncontrolling interests) for asset impairments related to the write-off of capitalized costs for projects no longer being pursued due to the market environment; a net charge of $17 ($12 after-tax and noncontrolling interests) for other miscellaneous items, including $3 ($2 after-tax) for asset impairments; and $8 ($6 after-tax and noncontrolling interests) for the reversal of a number of small layoff reserves related to prior periods.

In May 2013, management approved the permanent shutdown and demolition of two potlines (capacity of 105 kmt-per-year) that utilize Soderberg technology at the Baie Comeau smelter in Québec, Canada (remaining capacity of 280

 

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kmt-per-year composed of two prebake potlines) and the full capacity (44 kmt-per-year) at the Fusina smelter in Italy. Additionally, in August 2013, management approved the permanent shutdown and demolition of one potline (capacity of 41 kmt-per-year) that utilizes Soderberg technology at the Massena East, NY smelter (remaining capacity of 84 kmt-per-year composed of two Soderberg potlines). The aforementioned Soderberg lines at Baie Comeau and Massena East were fully shut down by the end of September 2013 while the Fusina smelter was previously temporarily idled in 2010. Demolition and remediation activities related to all three facilities began in late 2013 and are expected to be completed by the end of 2016 for Massena East and by the end of 2017 for both Baie Comeau and Fusina.

The decisions on the Soderberg lines for Baie Comeau and Massena East were part of a 15-month review of 460 kmt of smelting capacity initiated by management in May 2013 for possible curtailment, while the decision on the Fusina smelter was in addition to the capacity being reviewed. Factors leading to all three decisions were in general focused on achieving sustained competitiveness and included, among others: lack of an economically viable, long-term power solution (Italy); changed market fundamentals; other existing idle capacity; and restart costs.

In 2013, exit costs related to the shutdown actions included $114 for the layoff of approximately 550 employees (Primary Metals segment), including $83 in pension costs; accelerated depreciation of $58 (Baie Comeau) and asset impairments of $18 (Fusina and Massena East) representing the write-off of the remaining book value of all related properties, plants, and equipment; and $55 in other exit costs. Additionally in 2013, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value resulting in a charge of $9 ($6 after-tax), which was recorded in COGS. The other exit costs of $55 represent $48 in asset retirement obligations and $5 in environmental remediation, both of which were triggered by the decisions to permanently shut down and demolish these structures, and $2 in other related costs.

As of December 31, 2015, the separations associated with 2013 restructuring programs were essentially complete. In 2015, 2014, and 2013, cash payments of $7, $39, and $33, respectively, were made against layoff reserves related to 2013 restructuring programs.

Alcoa does not include Restructuring and other charges in the results of its reportable segments. The pretax impact of allocating such charges to segment results would have been as follows:

 

      2015      2014      2013  

Alumina

   $ 233       $ 287       $ 11   

Primary Metals

     691         553         295   

Global Rolled Products

     131         266         15   

Engineered Products and Solutions

     49         13         12   

Transportation and Construction Solutions

     8         10         16   

Segment total

     1,112         1,129         349   

Corporate

     83         39         433   

Total restructuring and other charges

   $ 1,195       $ 1,168       $ 782   

Interest Expense—Interest expense was $498 in 2015 compared with $473 in 2014. The increase of $25, or 5%, was primarily due to an 8% higher average debt level, somewhat offset by the absence of fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson ($13—see Engineered Products and Solutions in Segment Information below). The higher average debt level was mostly attributable to higher outstanding long-term debt due to the September 2014 issuance of $1,250 in 5.125% Notes, the proceeds of which were used to pay a portion of the purchase price of the Firth Rixson acquisition.

Interest expense was $473 in 2014 compared with $453 in 2013. The increase of $20, or 4%, was principally caused by lower capitalized interest ($43), largely due to the progress completed at the aluminum complex in Saudi Arabia, and fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson ($13—see Engineered Products and Solutions in Segment Information below). These items were partially offset by a 3% lower average debt level and lower amortization of debt-related costs

 

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due to the conversion of convertible notes. The lower average debt level was mostly attributable to lower outstanding long-term debt due to the March 2014 conversion of $575 in 5.25% Convertible Notes and the June 2013 repayment of $422 in 6.00% Notes, partially offset by the September 2014 issuance of $1,250 in 5.125% Notes.

Other Expenses (Income), net—Other expenses, net was $2 in 2015 compared with $47 in 2014. The decrease of $45 was mainly the result of a gain on the sale of land both around the Lake Charles, LA anode facility and at Alcoa’s former Sherwin, TX refinery site ($49) and the remaining equity investment in a China rolling mill ($19) and a favorable change in deferred compensation. These items were somewhat offset by the absence of a gain on the sale of a mining interest in Suriname ($28) and a portion of an equity investment in a China rolling mill ($14), an unfavorable change in the cash surrender value of company-owned life insurance, and a net unfavorable change in mark-to-market derivative contracts.

Other expenses, net was $47 in 2014 compared with Other income, net of $25 in 2013. The change of $72 was mostly due to an unfavorable change in mark-to-market derivative aluminum contracts ($42), net unfavorable foreign currency movements ($34), a higher equity loss related to Alcoa’s share of the joint venture in Saudi Arabia due to start-up costs of the entire complex, including restart costs for one of the smelter potlines that was previously shut down due to a period of instability, and a smaller improvement in the cash surrender value of company-owned life insurance. These items were somewhat offset by a gain on the sale of a mining interest in Suriname ($28) and a portion of an equity investment in a China rolling mill ($14).

Income Taxes—Alcoa’s effective tax rate was 179.4% (provision on income) in 2015 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate principally due to a $190 discrete income tax charge for valuation allowances on certain deferred tax assets in the United States and Iceland (see Income Taxes in Critical Accounting Policies and Estimates below), a $201 charge for legal matters in Italy (see Restructuring and Other Charges above) and a $25 impairment of goodwill (see Impairment of Goodwill above) that are nondeductible for income tax purposes, a loss on the sale of a rolling mill in Russia (see Global Rolled Products in Segment Information below) for which no tax benefit was recognized, a $34 net discrete income tax charge as described below, 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.

In 2015, Alcoa World Alumina and Chemicals (AWAC), a joint venture owned 60% by Alcoa and 40% by Alumina Limited (Alcoa consolidates AWAC for financial reporting purposes), recognized an $85 discrete income tax charge for a valuation allowance on certain deferred tax assets in Suriname (see Income Taxes in Critical Accounting Policies and Estimates below), which were related mostly to employee benefits and tax loss carryforwards. Alcoa also had a $51 deferred tax liability related to its 60%-share of these deferred tax assets that was written off as a result of the valuation allowance recognized by AWAC.

Alcoa’s effective tax rate was 64.4% (provision on income) in 2014 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate mainly due to restructuring charges related to operations in Italy (no tax benefit) and Australia (benefit at a lower tax rate) (see Restructuring and Other Charges above), a $52 ($31 after noncontrolling interest) discrete income tax charge related to a tax rate change in Brazil (see below), a loss on the sale of three rolling mills in Europe (no tax benefit) (see Global Rolled Products in Segment Information below), and a $27 ($16 after noncontrolling interest) discrete income tax charge for the remeasurement of certain deferred tax assets of a subsidiary in Spain due to a November 2014 enacted tax rate change (from 30% in 2014 to 28% in 2015 to 25% in 2016). These items were somewhat offset by foreign income taxed in lower rate jurisdictions and a $9 discrete income tax benefit for the release of a valuation allowance related to operations in Germany due to the initiation of a tax planning strategy.

In December 2011, one of Alcoa’s subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. During 2013, the application was amended and re-filed and, separately, a similar application was filed for another one of the Company’s subsidiaries in Brazil. The deadline for the Brazilian government to deny the application was July 11, 2014. Since Alcoa did not receive notice that its applications were denied, the tax holiday took effect automatically on July 12, 2014. As a result, the tax rate applicable to qualified holiday income for these

 

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subsidiaries decreased significantly (from 34% to 15.25%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1, 2013). Additionally, a portion of one of the subsidiaries net deferred tax asset that reverses within the holiday period was remeasured at the new tax rate (the net deferred tax asset of the other subsidiary was not remeasured since it could still be utilized against the subsidiary’s future earnings not subject to the tax holiday). This remeasurement resulted in a decrease to that subsidiary’s net deferred tax asset and a noncash charge to earnings of $52 ($31 after noncontrolling interest).

Alcoa’s effective tax rate was 23.6% in 2013 (provision on a loss) compared with the U.S. federal statutory rate of 35%. The effective tax rate differs (by (58.6)% points) from the U.S. federal statutory rate primarily due to a $1,731 impairment of goodwill (see Impairment of Goodwill above) and a $209 charge for a legal matter (see Restructuring and Other Charges above) that are nondeductible for income tax purposes, a $372 discrete income tax charge for valuation allowances on certain deferred tax assets in Spain and the United States (see Income Taxes in Critical Accounting Policies and Estimates below), restructuring charges related to operations in Canada (benefit at a lower tax rate) and Italy (no tax benefit) (see Restructuring and Other Charges above), and a $9 discrete income tax charge related to prior year taxes in Spain and Australia. These items were slightly offset by an $18 discrete income tax benefit related to new U.S. tax legislation (see below).

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law and reinstated various expired or expiring temporary business tax provisions through 2013. Two specific temporary business tax provisions that expired in 2011 and impacted Alcoa are the look-through rule for payments between related controlled foreign corporations and the research and experimentation credit. The expiration of these two provisions resulted in Alcoa recognizing a higher income tax provision of $18 in 2012. As tax law changes are accounted for in the period of enactment, Alcoa recognized an $18 discrete income tax benefit in 2013 related to the 2012 tax year to reflect the extension of these provisions. Beginning on January 1, 2014, these two provisions once again expired. On December 19, 2014, the Tax Increase Prevention Act of 2014 was signed into law, which retroactively extended for one year (i.e. calendar year 2014) a number of the tax provisions that expired at the end of 2013, including the two specific aforementioned provisions. Beginning on January 1, 2015, these two provisions once again expired. On December 18, 2015, the Consolidated Appropriations Act, 2016 was signed into law, which retroactively (as of January 1, 2015) extended for two or five years or made permanent a number of the tax provisions that expired at the end of 2014, including the two specific aforementioned provisions. The look-through rule for payments between related controlled foreign corporations was renewed for five years (through 2019) and the research and experimentation credit was made permanent.

Management anticipates that the effective tax rate in 2016 will be between 30% and 35%. 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.

Noncontrolling Interests—Net income attributable to noncontrolling interests was $125 in 2015 compared with Net loss attributable to noncontrolling interests of $91 in 2014 and Net income attributable to noncontrolling interests of $41 in 2013. These amounts were virtually all related to Alumina Limited’s 40% ownership interest in AWAC. In 2015, AWAC generated income compared to a loss in both 2014 and 2013.

In 2015, the change in AWAC’s results was principally due to improved operating results, the absence of restructuring and other charges related to both the permanent shutdown of the Point Henry smelter in Australia (see Restructuring and Other Charges above) and the divestiture of an ownership interest in a mining and refining joint venture in Jamaica (see Alumina in Segment Information below), and the absence of a combined $79 ($32 was noncontrolling interest’s share) discrete income tax charge related to a respective tax rate change in both Brazil and Spain (see Income Taxes above). These positive impacts were somewhat offset by restructuring charges related to the curtailment of both the refinery in Suriname and in Point Comfort, TX and the permanent closure of the Anglesea power station and coal mine (see Restructuring and Other Charges above), an $85 ($34 was noncontrolling interest’s share) discrete income tax charge for a valuation allowance on certain deferred tax assets (see Income Taxes above), and the absence of a $28 gain ($11 was noncontrolling interest’s share) on the sale of a mining interest in Suriname. The improvement in

 

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AWAC’s operating results was largely attributable to net favorable foreign currency movements, net productivity improvements, and lower input costs, slightly offset by a lower average realized alumina price (see Alumina in Segment Information below).

In 2014, AWAC generated a smaller loss compared to 2013 mainly driven by the absence of a $384 charge for a legal matter (see below), improved operating results, and a $28 gain ($11 was noncontrolling interest’s share) on the sale of a mining interest in Suriname. These positive impacts were mostly offset by restructuring and other charges associated with both the permanent shutdown of the Point Henry smelter in Australia (see Restructuring and Other Charges above) and the divestiture of an ownership interest in a mining and refining joint venture in Jamaica (see Alumina in Segment Information below) and a combined $79 ($32 was noncontrolling interest’s share) discrete income tax charge related to a respective tax rate change in both Brazil and Spain (see Income Taxes above). The improvement in AWAC’s operating results was principally due to net favorable foreign currency movements and net productivity improvements, partially offset by an increase in input costs (see Alumina in Segment Information below). Even though AWAC generated an overall loss in both 2014 and 2013, the noncontrolling interest’s share resulted in income in 2013 due to the manner in which the charges and costs related to a legal matter were allocated. A description of how these charges and costs for this legal matter impacted Noncontrolling interests follows.

The noncontrolling interest’s share of AWAC’s charge for a legal matter in 2013 and 2012 was $58 (related to the aforementioned $384) and $34 (an $85 charge related to the civil portion of the same legal matter), respectively. In 2012, the $34 was based on the 40% ownership interest of Alumina Limited, while, in 2013, the $58 was based on 15%. The application of a different percentage was due to the criteria in a 2012 allocation agreement between Alcoa and Alumina Limited related to this legal matter being met. Additionally, the $34 charge, as well as costs related to this legal matter, was retroactively adjusted to reflect the terms of the allocation agreement, resulting in a credit to Noncontrolling interests of $41 in 2013. In summary, Noncontrolling interests included a charge of $17 and $34 related to this legal matter in 2013 and 2012, respectively.

Segment Information

Alcoa’s operations consist of five worldwide reportable segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions (see below). Segment performance under Alcoa’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the after-tax operating income (ATOI) of each segment. Certain items such as the impact of LIFO inventory accounting; metal price lag (see below); interest expense; noncontrolling interests; corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; and other items, including intersegment profit eliminations, differences between tax rates applicable to the segments and the consolidated effective tax rate, and other nonoperating items such as foreign currency transaction gains/losses and interest income are excluded from segment ATOI.

Effective in the second quarter of 2015, management removed the impact of metal price lag from the results of the Global Rolled Products and Engineered Products and Solutions (now Engineered Products and Solutions and Transportation and Construction Solutions—see below) segments in order to enhance the visibility of the underlying operating performance of these businesses. 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 the respective segment. 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. The impact of metal price lag is now reported as a separate line item in Alcoa’s reconciliation of total segment ATOI to consolidated net (loss) income attributable to Alcoa. As a result, this change does not impact the consolidated results of Alcoa. Segment information for all prior periods presented was updated to reflect this change.

In the third quarter of 2015, management approved a realignment of Alcoa’s Engineered Products and Solutions segment due to the expansion of this part of Alcoa’s business portfolio through both organic and inorganic growth. This realignment consisted of moving both the Alcoa Wheel and Transportation Products and Building and Construction Systems business units to a new reportable segment named Transportation and Construction Solutions.

 

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Additionally, the Latin American soft alloy extrusions business previously included in Corporate was moved into the new Transportation and Construction Solutions segment. The remaining Engineered Products and Solutions segment consists of the Alcoa Fastening Systems and Rings (renamed to include portions of the Firth Rixson business acquired in November 2014), Alcoa Power and Propulsion (includes the TITAL business acquired in March 2015), Alcoa Forgings and Extrusions (includes the other portions of Firth Rixson), and Alcoa Titanium and Engineered Products (a new business unit that consists solely of the RTI International Metals business acquired in July 2015) business units. Segment information for all prior periods presented was updated to reflect the new segment structure.

ATOI for all reportable segments totaled $1,906 in 2015, $1,968 in 2014, and $1,267 in 2013. The following information provides shipments, sales, and ATOI data for each reportable segment, as well as certain production, realized price, and average cost data, for each of the three years in the period ended December 31, 2015. See Note Q to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K for additional information.

Alumina

 

      2015      2014      2013  

Alumina production (kmt)

     15,720         16,606         16,618   

Third-party alumina shipments (kmt)

     10,755         10,652         9,966   

Alcoa’s average realized price per metric ton of alumina

   $ 317       $ 324       $ 328   

Alcoa’s average cost per metric ton of alumina*

   $ 237       $ 282       $ 295   

Third-party sales

   $ 3,455       $ 3,509       $ 3,326   

Intersegment sales

     1,687         1,941         2,235   

Total sales

   $ 5,142       $ 5,450       $ 5,561   

ATOI

   $ 746       $ 370       $ 259   
* Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

This segment represents a portion of Alcoa’s upstream operations and consists of the Company’s worldwide refining system. Alumina mines bauxite, from which alumina is produced and then sold directly to external smelter customers, as well as to the Primary Metals segment (see Primary Metals below), or to customers who process it into industrial chemical products. More than half of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Primary Metals segment. Alumina produced by this segment and used internally is transferred to the Primary Metals segment at prevailing market prices. A portion of this segment’s third-party sales are completed through the use of agents, alumina traders, and distributors. Generally, the sales of this segment are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, the U.S. dollar, and the euro.

AWAC is an unincorporated global joint venture between Alcoa and Alumina Limited and consists of a number of affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within the Alumina segment (except for the Poços de Caldas refinery in Brazil and a portion of the São Luĺs refinery in Brazil). Alcoa owns 60% and Alumina Limited owns 40% of these individual entities, which are consolidated by the Company for financial reporting purposes. As such, the results and analysis presented for the Alumina segment are inclusive of Alumina Limited’s 40% interest.

In December 2014, AWAC completed the sale of its ownership stake in Jamalco, a bauxite mine and alumina refinery joint venture in Jamaica, to Noble Group Ltd. Jamalco was 55% owned by a subsidiary of AWAC, and, while owned by AWAC, 55% of both the operating results and assets and liabilities of this joint venture were included in the Alumina segment. As it relates to AWAC’s previous 55% ownership stake, the refinery (AWAC’s share of the capacity was 779 kmt-per-year) generated sales (third-party and intersegment) of approximately $200 in 2013, and the refinery and mine combined, at the time of divestiture, had approximately 500 employees. See Restructuring and Other Charges in Results of Operations above.

 

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In 2015, alumina production decreased by 886 kmt compared to 2014. The decline was mostly the result of the absence of production at the Jamalco refinery (see above) and lower production at the Suralco (Suriname—see below) and Poços de Caldas (Brazil—see below) refineries, slightly offset by higher production at the San Ciprian (Spain) and Point Comfort (Texas) refineries.

In March 2015, management initiated a 12-month review of 2,800 kmt in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of management’s target to lower Alcoa’s refining operations on the global alumina cost curve to the 21st percentile (currently 23rd) by the end of 2016. As part of this review, in 2015, management decided to curtail all of the operating capacity at both the Suralco (1,330 kmt-per-year) and Point Comfort (2,010 kmt-per-year) refineries. The curtailment of the capacity at Suralco was completed by the end of November 2015. Management is currently in discussions with the Suriname government to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative. The curtailment of the capacity at Point Comfort is expected to be completed by the end of June 2016 (375 kmt-per-year was completed by the end of December 2015). Suralco and Point Comfort have nameplate capacity of 2,207 kmt-per-year and 2,305 kmt-per-year, respectively, of which 877 kmt and 295 kmt, respectively was curtailed prior to the review. See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to these actions.

In 2014, alumina production decreased by 12 kmt compared to 2013. The decline was mainly driven by lower production at the Poços de Caldas, Jamalco, and San Ciprian refineries, mostly offset by higher production at every other refinery in the global system. The Poços de Caldas refinery started to reduce production in early 2014 in response to management’s decision to fully curtail the Poços de Caldas smelter by the end of May 2014 (see Primary Metals below). As a result, management reduced the alumina production at the Poços de Caldas refinery by approximately 200 kmt-per-year by mid-2014. This reduction was replaced by an increase in production at lower cost refineries within Alcoa’s global system. Additionally, the decrease at the refinery in Jamaica was due to the absence of production for one month as a result of the sale of the ownership stake in Jamalco (see above).

Third-party sales for the Alumina segment decreased 2% in 2015 compared with 2014, largely attributable to a 2% decline in average realized price, somewhat offset by a 1% increase in volume. The change in average realized price was mostly driven by a decrease in both the average alumina index/spot price and average LME-based price, somewhat offset by a higher percentage (75% compared to 68%) of smelter-grade alumina shipments linked to an alumina index/spot price instead of an LME-based price.

Third-party sales for this segment improved 6% in 2014 compared with 2013, primarily related to a 7% improvement in volume.

Intersegment sales for the Alumina segment declined 13% in both 2015 compared with 2014 and 2014 compared with 2013. The decrease in both periods was mostly the result of lower demand from the Primary Metals segment, as a result of the closure, curtailment or divestiture of a number of smelters (see Primary Metals below), and a lower average realized price.

ATOI for the Alumina segment increased $376 in 2015 compared with 2014, mainly caused by net favorable foreign currency movements due to a stronger U.S. dollar, especially against the Australian dollar and Brazilian real; net productivity improvements; and lower input costs, including natural gas, fuel oil, and transportation, all of which were slightly offset by higher labor and maintenance costs. These positive impacts were slightly offset by the previously mentioned lower average realized price and the absence of a gain on the sale of a mining interest in Suriname ($18).

ATOI for this segment improved $111 in 2014 compared with 2013, mostly due to net favorable foreign currency movements due to a stronger U.S. dollar, especially against the Australian dollar, net productivity improvements, and a gain on the sale of a mining interest in Suriname ($18). These positive impacts were partially offset by higher input costs, including natural gas (particularly higher prices in Australia), bauxite (mainly due to a new mining site in Suriname), and labor and maintenance, all of which were somewhat offset by lower costs for caustic; and a higher equity loss due to start-up costs of the bauxite mine and refinery in Saudi Arabia.

 

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In 2016, alumina production will be approximately 2,500 kmt lower, mostly due to the curtailment of the Point Comfort and Suralco refineries. Also, the continued shift towards alumina index and spot pricing is expected to average 85% of third-party smelter-grade alumina shipments. Additionally, net productivity improvements are anticipated.

Primary Metals

 

      2015      2014      2013  

Aluminum production (kmt)

     2,811         3,125         3,550   

Third-party aluminum shipments (kmt)

     2,478         2,534         2,801   

Alcoa’s average realized price per metric ton of aluminum*

   $ 2,069       $ 2,405       $ 2,243   

Alcoa’s average cost per metric ton of aluminum**

   $ 2,064       $ 2,252       $ 2,201   

Third-party sales

   $ 5,591       $ 6,800       $ 6,596   

Intersegment sales

     2,170         2,931         2,621   

Total sales

   $ 7,761       $ 9,731       $ 9,217   

ATOI

   $ 155       $ 594       $ (20
* Average realized price per metric ton of 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.

 

** 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 a portion of Alcoa’s upstream operations and consists of the Company’s worldwide smelting system. Primary Metals purchases alumina, mostly from the Alumina segment (see Alumina above), from which primary aluminum is produced and then sold directly to external customers and traders, as well as to Alcoa’s midstream operations and, to a lesser extent, downstream operations. Results from the sale of aluminum powder, scrap, and excess energy are also included in this segment, as well as the results of aluminum derivative contracts and buy/resell activity. Primary aluminum produced by Alcoa and used internally is transferred to other segments at prevailing market prices. The sale of primary aluminum represents approximately 90% of this segment’s third-party sales. Buy/resell activity occurs when this segment purchases metal and resells such metal to external customers or the midstream and downstream operations in order to maximize smelting system efficiency and to meet customer requirements. Generally, the sales of this segment are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar, the euro, the Norwegian kroner, Icelandic krona, the Canadian dollar, the Brazilian real, and the Australian dollar.

In November 2014, Alcoa completed the sale of an aluminum rod plant located in Bécancour, Québec, Canada to Sural Laminated Products. This facility takes molten aluminum and shapes it into the form of a rod, which is used by customers primarily for the transportation of electricity. While owned by Alcoa, the operating results and assets and liabilities of this plant were included in the Primary Metals segment. In conjunction with this transaction, Alcoa entered into a multi-year agreement with Sural Laminated Products to supply molten aluminum for the rod plant. The aluminum rod plant generated sales of approximately $200 in 2013 and, at the time of divestiture, had approximately 60 employees. See Restructuring and Other Charges in Results of Operations above.

In December 2014, Alcoa completed the sale of its 50.33% ownership stake in the Mt. Holly smelter located in Goose Creek, South Carolina to Century Aluminum Company. While owned by Alcoa, 50.33% of both the operating results and assets and liabilities related to the smelter were included in the Primary Metals segment. As it relates to Alcoa’s previous 50.33% ownership stake, the smelter (Alcoa’s share of the capacity was 115 kmt-per-year) generated sales of approximately $280 in 2013 and, at the time of divestiture, had approximately 250 employees. See Restructuring and Other Charges in Results of Operations above.

At December 31, 2015, Alcoa had 778 kmt of idle capacity on a base capacity of 3,401 kmt. In 2015, idle capacity increased 113 kmt compared to 2014, mostly due to the curtailment of 217 kmt combined at a smelter in each the

 

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United States and Brazil, partially offset by the permanent closure of the Poços de Caldas smelter in Brazil (96 kmt-per-year). Base capacity declined 96 kmt between December 31, 2015 and 2014 due to the previously mentioned permanent closure of the Poços de Caldas smelter. A detailed description of each of these actions follows below.

At December 31, 2014, Alcoa had 665 kmt of idle capacity on a base capacity of 3,497 kmt. In 2014, idle capacity increased 10 kmt compared to 2013 due to the curtailment of 159 kmt combined at two smelters in Brazil, mostly offset by the permanent closure of the Portovesme smelter in Italy (150 kmt-per-year). Base capacity declined 540 kmt between December 31, 2014 and 2013 due to the permanent closure of both a smelter in Australia and two remaining potlines at a smelter in the United States (274 kmt combined), the previously mentioned permanent closure of the Portovesme smelter, and the sale of Alcoa’s ownership stake in the Mt. Holly smelter (see above). A detailed description of each of these actions follows below.

In March 2015, management initiated a 12-month review of 500 kmt in smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of management’s target to lower Alcoa’s smelting operations on the global aluminum cost curve to the 38th percentile (currently 43rd) by 2016. In summary, under this review, management approved the curtailment of 447 kmt-per-year and the closure of 269 kmt-per-year. The following is a description of each action.

Also in March 2015, management decided to curtail the remaining capacity (74 kmt-per-year) at the São Luís smelter in Brazil; this action was completed in April 2015. In 2013 and 2014 combined, Alcoa curtailed capacity of 194 kmt-per-year at the São Luís smelter under a prior management review (see below).

Additionally, in November 2015, management decided to curtail the remaining capacity at the Intalco (230 kmt-per-year) and Wenatchee (143 kmt-per-year) smelters, both in Washington. These two smelters previously had curtailed capacity of 90 kmt-per-year combined. The curtailment of the remaining capacity at Wenatchee was completed by the end of December 2015 and the curtailment of the remaining capacity at Intalco is expected to be completed by the end of June 2016.

Furthermore, in December 2015, management approved the permanent closure of the Warrick, IN smelter (269 kmt-per-year). This decision was made as this smelter is no longer competitive in light of prevailing market conditions for the price of aluminum. The shutdown of the Warrick smelter is expected to be completed by the end of March 2016.

Separate from the 2015 smelting capacity review described above, in June 2015, management approved the permanent closure of the Poços de Caldas smelter effective immediately. The Poços de Caldas smelter had been temporarily idle since May 2014 (see below) due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.

In May 2013, management initiated a 15-month review of 460 kmt in smelting capacity for possible curtailment. This review was aimed at maintaining Alcoa’s competitiveness despite falling aluminum prices and focused on the highest-cost smelting capacity and those plants that have long-term risk due to factors such as energy costs or regulatory uncertainty. In 2014, an additional 250 kmt of smelting capacity was included in the review. In summary, under this review, management approved the closure of 146 kmt-per-year and 274 kmt-per-year and the curtailment of 131 kmt-per-year and 159 kmt-per-year in 2013 and 2014, respectively. The following is a description of each action.

Also in May 2013, management approved the permanent closure of two potlines (105 kmt-per-year) that utilize Soderberg technology at the Baie Comeau smelter in Quebec, Canada. Additionally, in August 2013, management approved the permanent closure of one potline (41 kmt-per-year) that utilizes Soderberg technology at the Massena East, NY smelter. The shutdown of these three lines was completed by the end of September 2013. The Baie Comeau smelter has a remaining capacity of 280 kmt-per-year composed of two prebake potlines and the Massena East smelter had a remaining capacity of 84 kmt-per-year composed of two Soderberg potlines (see below).

 

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Additionally, in August 2013, management decided to curtail 97 kmt-per-year at the São Luís smelter and 31 kmt-per-year at the Poços de Caldas smelter. This action was also completed by the end of September 2013. An additional 3 kmt-per-year was curtailed at the Poços de Caldas smelter by the end of 2013.

In January 2014, management approved the permanent closure of the remaining capacity (84 kmt-per-year) at the Massena East smelter, which represented two Soderberg potlines that were no longer competitive. This shutdown was completed by the end of March 2014. In February 2014, management approved the permanent closure of the Point Henry smelter (190 kmt-per-year) in Australia. This decision was made as management determined that the smelter had no prospect of becoming financially viable. The shutdown of the Point Henry smelter was completed in August 2014.

Also, in March 2014, management decided to curtail the remaining capacity (62 kmt-per-year) at the Poços de Caldas smelter and additional capacity (85 kmt-per-year) at the São Luís smelter. The curtailment of this capacity was completed by the end of May 2014. An additional 12 kmt-per-year was curtailed at the São Luís smelter during the remainder of 2014.

Separate from the 2013-2014 smelting capacity review described above, in June 2013, management approved the permanent closure of the Fusina smelter (44 kmt-per-year) in Italy as the underlying conditions that led to the idling of the smelter in 2010 had not fundamentally changed, including low aluminum prices and the lack of an economically viable, long-term power solution. In August 2014, management approved the permanent closure of the Portovesme smelter, which had been idle since November 2012. This decision was made because the fundamental reasons that made the Portovesme smelter uncompetitive remained unchanged, including the lack of a viable long-term power solution.

See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to all of the above actions in 2015, 2014, and 2013.

In 2015, aluminum production declined by 314 kmt, mainly the result of the absence of and/or lower production at the combined four smelters (Point Henry, São Luís, Massena East, and Poços de Caldas) impacted by the 2014 and 2015 capacity reviews and at the smelter divested in 2014 (Mt. Holly), all of which is described above.

In 2014, aluminum production decreased by 425 kmt, mostly due to lower production at the five smelters (São Luís, Massena East, Point Henry, Baie Comeau, and Poços de Caldas) impacted by the 2013-2014 capacity review described above.

Third-party sales for the Primary Metals segment declined 18% in 2015 compared with 2014, primarily due to a 14% drop in average realized price, the absence of sales (approximately $585) from five smelters and a rod mill that were closed, curtailed or divested in 2014, and lower energy sales in Brazil, due to both a decrease in energy prices and a weaker Brazilian real. These negative impacts were slightly offset by higher volume in the remaining smelter portfolio and higher buy/resell activity. The change in average realized price was largely attributable to a 10% lower average LME price (on 15-day lag) and lower regional premiums, which dropped by an average of 39% in the United States and Canada and 44% in Europe. The higher buy/resell activity was primarily related to the fulfillment of customer orders with aluminum purchased from the smelter at the Saudi Arabia joint venture.

Third-party sales for the Primary Metals segment increased 3% in 2014 compared with 2013, mainly due to higher energy sales in Brazil resulting from excess power due to curtailed smelter capacity, higher buy/resell activity, and a 7% increase in average realized price, mostly offset by lower volumes, including from the five smelters impacted by the 2013 and 2014 capacity reductions. The change in average realized price was driven by higher regional premiums, which increased by an average of 84% in the United States and Canada and 56% in Europe.

Intersegment sales for the Primary Metals segment declined 26% in 2015 compared with 2014, mainly the result of lower demand from the midstream and downstream businesses and a decrease in average realized price. The decline related to the midstream business was driven by the absence of shipments to four of the five rolling mills (the fifth mill

 

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purchased scrap metal from third-parties) that were either divested or permanently closed in December 2014 (see Global Rolled Products below). Intersegment sales for this segment improved 12% in 2014 compared with 2013, principally due to an increase in average realized price, driven by higher regional premiums, and higher demand from the midstream and downstream businesses.

ATOI for the Primary Metals segment decreased $439 in 2015 compared with 2014, primarily caused by both the previously mentioned lower average realized aluminum price and lower energy sales, higher energy costs (mostly in Spain as the 2014 interruptibility rights were more favorable than the 2015 structure), and an unfavorable impact related to the curtailment of the São Luís smelter. These negative impacts were somewhat offset by net favorable foreign currency movements due to a stronger U.S. dollar against most major currencies, net productivity improvements, the absence of a write-off of inventory related to the permanent closure of the Portovesme, Point Henry, and Massena East smelters ($44), and a lower equity loss related to the joint venture in Saudi Arabia, including the absence of restart costs for one of the potlines that was previously shut down due to a period of instability.

ATOI for this segment climbed $614 in 2014 compared with 2013, principally related to a higher average realized aluminum price; the previously mentioned energy sales in Brazil; net productivity improvements; net favorable foreign currency movements due to a stronger U.S. dollar against all major currencies; lower costs for carbon and alumina; and the absence of costs related to a planned maintenance outage in 2013 at a power plant in Australia. These positive impacts were slightly offset by an unfavorable impact associated with the 2013 and 2014 capacity reductions described above, including a write-off of inventory related to the permanent closure of the Portovesme, Point Henry, and Massena East smelters ($44), and higher energy costs (particularly in Spain), labor, and maintenance.

In 2016, aluminum production will be approximately 450 kmt lower and third-party sales will reflect the absence of approximately $400 both as a result of the 2015 curtailment and closure actions. Also, energy sales in Brazil will be negatively impacted by a decline in energy prices, while net productivity improvements are anticipated.

Global Rolled Products

 

      2015      2014      2013  

Third-party aluminum shipments (kmt)

     1,775         1,964         1,905   

Alcoa’s average realized price per metric ton of aluminum*

   $ 3,514       $ 3,743       $ 3,730   

Third-party sales

   $ 6,238       $ 7,351       $ 7,106   

Intersegment sales

     125         185         178   

Total sales

   $ 6,363       $ 7,536       $ 7,284   

ATOI

   $ 244       $ 245       $ 292   

 

* Generally, average realized price per metric ton of aluminum includes two elements: a) the price of metal (the underlying base metal component plus a regional premium – see the footnote to the table in Primary Metals above for a description of these two components), and b) the conversion price, which represents the incremental price over the metal price component that is associated with converting primary aluminum into sheet and plate. In this circumstance, the metal price component is a pass-through to this segment’s customers with limited exception (e.g., fixed-priced contracts, certain regional premiums).

This segment represents Alcoa’s midstream operations and produces aluminum sheet and plate for a variety of end markets. Approximately one-half of the third-party shipments in this segment consist of sheet sold directly to customers in the packaging end market for the production of aluminum cans (beverage, food, and pet food). Seasonal increases in can sheet sales are generally experienced in the second and third quarters of the year. This segment also includes sheet and plate sold directly to customers and through distributors related to the aerospace, automotive, commercial transportation, building and construction, and industrial products (mainly used in the production of machinery and equipment and consumer durables) end markets. A small portion of this segment also produces aseptic foil for the packaging end market. While the customer base for flat-rolled products is large, a significant amount of sales of sheet and plate is to a relatively small number of customers. In this circumstance, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, the euro, the Russian ruble, the Brazilian real, and the British pound.

 

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In March 2015, Alcoa completed the sale of a rolling mill located in Belaya Kalitva, Russia to a wholly-owned subsidiary of Stupino Titanium Company. While owned by Alcoa, the operating results and assets and liabilities of the rolling mill were included in the Global Rolled Products segment. The rolling mill generated sales of approximately $130 in 2014 and, at the time of divestiture, had approximately 1,870 employees. See Restructuring and Other Charges in Results of Operations above.

In February 2014, management approved the permanent shutdown of Alcoa’s two rolling mills in Australia, Point Henry and Yennora. This decision was made due to the significant impact of excess can sheet capacity in both Australia and Asia. The two rolling mills had a combined can sheet capacity of 200 kmt-per-year and were closed by the end of 2014. See Restructuring and Other Charges in Results of Operations above for a description of the associated charges.

In December 2014, Alcoa completed the sale of three rolling mills located in Spain (Alicante and Amorebieta) and France (Castelsarrasin) to a subsidiary of Atlas Holdings LLC. While owned by Alcoa, the operating results and assets and liabilities of the rolling mills were included in the Global Rolled Products segment. In conjunction with this transaction, Alcoa entered into a multi-year agreement with the buyer to supply aluminum for the rolling mills. The rolling mills combined generated sales of approximately $500 in 2013 and, at the time of divestiture, had approximately 750 employees. See Restructuring and Other Charges in Results of Operations above.

Third-party sales for the Global Rolled Products segment declined 15% in 2015 compared with 2014, primarily driven by the absence of sales ($1,052) from six rolling mills in Australia, Spain, Russia, and France (see above), unfavorable pricing, mostly due to a decrease in metal prices (both LME and regional premium components), and unfavorable foreign currency movements, mainly the result of a weaker euro, Russian ruble, and Brazilian real. These negative impacts were somewhat offset by increased demand of the remaining rolling portfolio and favorable product mix (automotive and aerospace versus industrial products). The volume improvement of the remaining portfolio was largely attributable to the automotive (North America) and can sheet packaging (China) end markets, slightly offset by lower demand in the industrial products end market.

Third-party sales for this segment improved 3% in 2014 compared with 2013, principally caused by increased demand, somewhat offset by unfavorable price/product mix related to the packaging, aerospace, and industrial products end markets. Volume improvements were mostly driven by the automotive and commercial transportation end markets.

ATOI for the Global Rolled Products segment decreased $1 in 2015 compared with 2014, primarily attributable to unfavorable price/product mix, largely the result of overall pricing pressure in the global can sheet packaging end market, and higher costs related to growth projects, including research and development as Alcoa develops and qualifies products from a new Micromill™ production process and the ramp-up of the Tennessee automotive expansion. These negative impacts were virtually offset by net productivity improvements across most businesses and higher volumes of the remaining rolling portfolio, principally driven by higher demand in the automotive end market.

ATOI for this segment declined $47 in 2014 compared with 2013, mainly the result of unfavorable price/product mix related to the packaging, aerospace, and industrial products end markets; higher input costs, including energy, labor, maintenance, and transportation; a larger equity loss due to start-up costs related to the rolling mill at the joint venture in Saudi Arabia; a write-off of inventory related to the decision to permanently shut down the Point Henry and Yennora rolling mills ($9); and costs (business continuity and contract specific) related to a new labor agreement that covers employees at three rolling mills in the United States ($4) (see COGS in Results of Operations above). These negative impacts were partially offset by net productivity improvements across most businesses and overall higher volumes.

In 2016, demand in the automotive end market is expected to remain strong and the automotive expansion at the Davenport, IA facility will operate at full capacity for the entire year while the automotive expansion at the Tennessee facility will continue to ramp-up, both of which will serve the growing demand for aluminum-intensive vehicles. Also, costs related to the ramp-up of the Tennessee facility and the previously-idled casthouse in Texarkana, TX, as well as for preparations to run the Warrick, IN rolling facility on cold metal as a result of the planned closure of the Warrick smelter (see Primary Metals above), are expected. Additionally, net productivity improvements are anticipated.

 

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Engineered Products and Solutions

 

      2015      2014      2013  

Third-party sales

   $ 5,342       $ 4,217       $ 4,054   

ATOI

   $ 595       $ 579       $ 569   

This segment represents a portion of Alcoa’s downstream operations and produces products that are used mostly in the aerospace (commercial and defense), commercial transportation, and power generation end markets. Such products include fastening systems (titanium, steel, and nickel alloys) and seamless rolled rings (mostly nickel alloys); and investment castings (nickel super alloys, titanium, and aluminum), including airfoils and forged jet engine components (e.g., jet engine disks), all of which are sold directly to customers and through distributors. More than 70% of the third-party sales in this segment are from the aerospace end market. A small part of this segment also produces various forging and extrusion metal products for the oil and gas, industrial products, automotive, and land and sea defense end markets. Seasonal decreases in sales are generally experienced in the third quarter of the year due to the European summer slowdown across all end markets. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar and the euro.

In March 2015, Alcoa completed the acquisition of an aerospace castings company, TITAL, a privately held company with approximately 650 employees based in Germany. TITAL produces aluminum and titanium investment casting products for the aerospace and defense end markets. In 2014, TITAL generated sales of approximately $100. The purpose of this acquisition is to capture increasing demand for advanced jet engine components made of titanium, establish titanium-casting capabilities in Europe, and expand existing aluminum casting capacity. The operating results and assets and liabilities of TITAL were included within the Engineered Products and Solutions segment since the date of acquisition.

Also in March 2015, Alcoa signed a definitive agreement to acquire RTI International Metals, Inc. (RTI), a global supplier of titanium and specialty metal products and services for the commercial aerospace, defense, energy, and medical device end markets. On July 23, 2015, after satisfying all customary closing conditions and receiving the required regulatory and RTI shareholder approvals, Alcoa completed the acquisition of RTI. The purpose of this acquisition is to expand Alcoa’s range of titanium offerings and add advanced technologies and materials, primarily related to the aerospace end market. In 2014, RTI generated net sales of $794 and had approximately 2,600 employees. Alcoa estimates that RTI will generate approximately $1,200 in Third-party sales by 2019. In executing its integration plan for RTI, Alcoa expects to realize annual cost savings of approximately $100 by 2019 due to synergies derived from procurement and productivity improvements, leveraging Alcoa’s global shared services, and driving profitable growth. The operating results and assets and liabilities of RTI were included within the Engineered Products and Solutions segment since the date of acquisition.

On November 19, 2014, after satisfying all customary closing conditions and receiving the required regulatory approvals, Alcoa completed the acquisition of Firth Rixson, a global leader in aerospace jet engine components. Firth Rixson manufactures rings, forgings, and metal products for the aerospace end market, as well as other markets requiring highly engineered material applications. The purpose of this acquisition is to strengthen Alcoa’s aerospace business and position the Company to capture additional aerospace growth with a broader range of high-growth, value-add jet engine components. This business generated sales of approximately $970 in 2014 and has 13 operating facilities in the United States, United Kingdom, Europe, and Asia employing approximately 2,400 people combined. In executing its integration plan for Firth Rixson, Alcoa expects to realize annual cost savings of more than $100 by 2019 due to synergies derived from procurement and productivity improvements, optimizing internal metal supply, and leveraging Alcoa’s global shared services. The operating results and assets and liabilities of Firth Rixson were included within the Engineered Products and Solutions segment since the date of acquisition.

Third-party sales for the Engineered Products and Solutions segment improved 27% in 2015 compared with 2014, largely attributable to the third-party sales ($1,310) of three acquired businesses (see above), primarily aerospace-related, and higher volumes in this segment’s organic businesses, mostly related to the aerospace end market. These positive impacts were slightly offset by unfavorable foreign currency movements, principally driven by a weaker euro.

 

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Third-party sales for this segment increased 4% in 2014 compared with 2013, primarily due to higher volumes and the acquisition of Firth Rixson ($81—see above). The higher volumes were mostly related to the aerospace (commercial) and commercial transportation end markets, somewhat offset by lower volumes in the industrial gas turbine end market.

ATOI for the Engineered Products and Solutions segment increased $16 in 2015 compared with 2014, principally the result of net productivity improvements across most businesses, a positive contribution from inorganic growth, and overall higher volumes in this segment’s organic businesses. These positive impacts were partially offset by unfavorable price/product mix, higher costs related to growth projects, and net unfavorable foreign currency movements, primarily related to a weaker euro.

ATOI for this segment climbed $10 in 2014 compared with 2013, mainly due to net productivity improvements across all businesses and overall higher volumes, partially offset by higher costs, primarily labor, and unfavorable product mix.

In 2016, demand in the commercial aerospace end market is expected to remain strong, driven by significant order backlog. Also, third-party sales will include a positive impact due to a full year of sales related to the acquisitions of RTI and TITAL. Additionally, net productivity improvements are anticipated while pricing pressure across all markets is expected.

Transportation and Construction Solutions

 

      2015      2014      2013  

Third-party sales

   $ 1,882       $ 2,021       $ 1,951   

ATOI

   $ 166       $ 180       $ 167   

This segment represents a portion of Alcoa’s downstream operations and produces products that are used mostly in the nonresidential building and construction and commercial transportation end markets. Such products include integrated aluminum structural systems, architectural extrusions, and forged aluminum commercial vehicle wheels, which are sold directly to customers and through distributors. A small part of this segment also produces aluminum products for the industrial products end market. Generally, the sales and costs and expenses of this segment are transacted in the local currency of the respective operations, which are mostly the U.S. dollar, the euro, and the Brazilian real.

Third-party sales for the Transportation and Construction Solutions segment decreased 7% in 2015 compared with 2014, primarily driven by unfavorable foreign currency movements, principally caused by a weaker euro and Brazilian real, and lower volume related to the building and construction end market, somewhat offset by higher volume related to the commercial transportation end market.

Third-party sales for this segment increased 4% in 2014 compared with 2013, mostly the result of higher volume related to the commercial transportation and building and construction end markets, somewhat offset by lower volume in the industrial products and market.

ATOI for the Transportation and Construction Solutions segment declined $14 in 2015 compared with 2014, mainly due to higher costs, net unfavorable foreign currency movements, primarily related to a weaker euro and Brazilian real, and unfavorable price/product mix. These negative impacts were mostly offset by net productivity improvements across all businesses.

ATOI for this segment improved $13 in 2014 compared with 2013, principally attributable to net productivity improvements across all businesses and overall higher volumes, partially offset by unfavorable product mix and higher costs, primarily labor.

In 2016, the non-residential building and construction end market is expected to improve through growth in North America but will be slightly offset by overall weakness in Europe. Also, North America build rates in the commercial

 

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transportation end market are expected to decline while improvements in Europe are anticipated. Additionally, net productivity improvements are anticipated.

Reconciliation of ATOI to Consolidated Net (Loss) Income Attributable to Alcoa

Items required to reconcile total segment ATOI to consolidated net (loss) income attributable to Alcoa include: the impact of LIFO inventory accounting; metal price lag; interest expense; noncontrolling interests; corporate expense (general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; and other items, including intersegment profit eliminations, differences between tax rates applicable to the segments and the consolidated effective tax rate, and other nonoperating items such as foreign currency transaction gains/losses and interest income.

The following table reconciles total segment ATOI to consolidated net (loss) income attributable to Alcoa:

 

      2015     2014     2013  

Total segment ATOI

   $ 1,906      $ 1,968      $ 1,267   

Unallocated amounts (net of tax):

      

Impact of LIFO

     136        (54     52   

Metal price lag

     (133     78        (45

Interest expense

     (324     (308     (294

Noncontrolling interests

     (125     91        (41

Corporate expense

     (266     (284     (274

Impairment of goodwill

     (25     -        (1,731

Restructuring and other charges

     (943     (894     (607

Other

     (548     (329     (612

Consolidated net (loss) income attributable to Alcoa

   $ (322   $ 268      $ (2,285

The significant changes in the reconciling items between total segment ATOI and consolidated net (loss) income attributable to Alcoa for 2015 compared with 2014 consisted of:

 

   

a change in the Impact of LIFO, mostly due to lower prices for both aluminum, driven by both lower base metal prices (LME) and regional premiums, and alumina (decrease in price at December 31, 2015 indexed to December 31, 2014 compared to an increase in price at December 31, 2014 indexed to December 31, 2013);

 

   

a change in Metal price lag, the result of lower prices for aluminum;

 

   

an increase in Interest expense, principally caused by an 8% higher average debt level, which was largely attributable to higher outstanding long-term debt due to the September 2014 issuance of $1,250 in 5.125% Notes, somewhat offset by the absence of fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson ($8);

 

   

a change in Noncontrolling interests, due to the change in results of AWAC, primarily driven by improved operating results and lower restructuring and other charges related to a number of portfolio actions (e.g. capacity reductions and a divestiture), slightly offset by the absence of a gain on the sale of a mining interest in Suriname ($11 was noncontrolling interest’s share);

 

   

a decline in Corporate expense, largely attributable to decreases in various expenses, including lower acquisition costs ($13), partially offset by expenses related to the planned separation of Alcoa ($24);

 

   

an increase in Restructuring and other charges, mostly the result of a charge for legal matters in Italy, partially offset by lower restructuring and other charges associated with a number of portfolio actions (e.g. capacity reductions and divestitures); and

 

   

a change in Other, primarily due to a discrete income tax charge for valuation allowances on certain deferred tax assets in the United States and Iceland ($190), write-downs of inventories related to various shutdown and curtailment actions ($75), a net discrete income tax charge for a valuation allowance on certain deferred

 

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tax assets ($34), and charges for separate environmental matters in both Norway and Italy ($15), somewhat offset by a discrete income tax charge related to a tax rate change in both Brazil and Spain ($79) and higher gains on various asset sales ($35).

The significant changes in the reconciling items between total segment ATOI and consolidated net income (loss) attributable to Alcoa for 2014 compared with 2013 consisted of:

 

   

a change in the Impact of LIFO, mostly due to higher prices for aluminum, driven by both higher base metal prices (LME) and regional premiums (increase in price at December 31, 2014 indexed to December 31, 2013 compared to a decrease in price at December 31, 2013 indexed to December 31, 2012), and the absence of significant reductions in LIFO inventory quantities, which caused a partial liquidation of the lower cost LIFO inventory base in 2013 (income of $17 in 2013);

 

   

a change in Metal price lag, the result of higher prices for aluminum;

 

   

an increase in Interest expense, primarily the result of lower capitalized interest ($28) and fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson ($8), partially offset by a 3% lower average debt level and lower amortization of debt-related costs due to the conversion of convertible notes;

 

   

a change in Noncontrolling interests, due to the change in the results of AWAC, mainly driven by restructuring and other charges associated with both the permanent shutdown of the Point Henry smelter in Australia and the divestiture of an ownership interest in a mining and refining joint venture in Jamaica and a discrete income tax charge related to a tax rate change in both Brazil and Spain ($32 combined was noncontrolling interest’s share), partially offset by improved operating results, the absence of a charge for a legal matter ($17 was noncontrolling interest’s share), and a gain on the sale of a mining interest in Suriname ($11 was noncontrolling interest’s share);

 

   

an increase in Corporate expense, mostly related to costs associated with the acquisition of Firth Rixson ($34), partially offset by decreases in various expenses;

 

   

an increase in Restructuring and other charges, principally caused by higher costs related to decisions to permanently shut down and/or temporarily curtail refinery, smelter and/or rolling mill capacity and a net loss on the divestiture of four operations, partially offset by the absence of a charge for a legal matter ($322); and

 

   

a change in Other, largely attributable to the absence of a discrete income tax charge for valuation allowances on certain deferred tax assets in Spain and the United States ($372), slightly offset by a discrete income tax charge related to a tax rate change in both Brazil and Spain ($79).

Environmental Matters

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

Liquidity and Capital Resources

Alcoa maintains a disciplined approach to cash management and strengthening of its balance sheet. In 2015, as has been the focus since 2008, management initiated actions to significantly improve Alcoa’s cost structure and liquidity, providing the Company with the ability to operate effectively. Such actions include procurement efficiencies and overhead rationalization to reduce costs, working capital initiatives to yield significant cash improvements, and maintaining a sustainable level of capital expenditures. In 2016, this approach will continue with the ultimate goal of generating cash from operations that exceeds capital expenditures.

Along with the foregoing actions, cash provided from operations and financing activities is expected to be adequate to cover Alcoa’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.

 

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At December 31, 2015, cash and cash equivalents of Alcoa were $1,919, of which $1,107 was held outside the United States. Alcoa has a number of commitments and obligations related to the Company’s growth strategy in foreign jurisdictions, resulting in the need for cash outside the United States. As such, management does not have a current expectation of repatriating cash held in foreign jurisdictions.

Cash from Operations

Cash provided from operations in 2015 was $1,582 compared with $1,674 in 2014. The decrease of $92, or 5%, was due to a negative change in noncurrent assets of $328, lower operating results (net (loss) income plus net add-back for noncash transactions in earnings) and a negative change in noncurrent liabilities of $18, mostly offset by a positive change associated with working capital of $572 and lower pension contributions of $31.

The components of the positive change in working capital were as follows:

 

   

a favorable change of $524 in receivables, mostly driven by lower customer sales as a result of closed, divested, and curtailed locations and lower metal prices;

 

   

a positive change of $291 in inventories, largely attributable to the absence of inventory build related to the ramp-up of automotive production at the Davenport, IA plant and customer requirements related to smelters that have been curtailed or shut down;

 

   

a favorable change of $71 in prepaid expenses and other current assets;

 

   

a negative change of $346 in accounts payable, trade, principally the result of timing of payments;

 

   

a positive change of $14 in accrued expenses, mainly caused by a smaller payment to the United States government due to the resolution of a legal matter (see below); and

 

   

a favorable change of $18 in taxes, including income taxes.

The unfavorable change in noncurrent assets was mostly related to a $300 prepayment made under a natural gas supply agreement in Australia (see below).

On April 8, 2015, Alcoa’s majority-owned subsidiary, Alcoa of Australia Limited (AofA), which is part of AWAC, 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 AofA’s gas supply agreement require a prepayment of $500 to be made in two installments. The first installment of $300 was made at the time of the completion of the third-party acquisition and the second installment of $200 will be made in April 2016 (previously was scheduled in January 2016).

Cash provided from operations in 2014 was $1,674 compared with $1,578 in 2013. The increase of $96, or 6%, was due to higher operating results (net income plus net add-back for noncash transactions in earnings) and a positive change in noncurrent assets of $114, mostly offset by a negative change associated with working capital of $620, a negative change in noncurrent liabilities of $138, and higher pension contributions of $39.

The components of the negative change in working capital were as follows:

 

   

an unfavorable change of $171 in receivables, primarily related to higher customer sales;

 

   

a negative change of $380 in inventories, largely attributable to inventory build for the ramp-up of automotive production at the Davenport, IA plant and customer requirements related to smelters that were curtailed or shut down in 2014;

 

   

an unfavorable change of $16 in prepaid expenses and other current assets;

 

   

a negative change of $70 in accounts payable, trade, principally the result of timing of payments;

 

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an unfavorable change of $33 in accrued expenses, mainly caused by $139 in higher payments for layoff and other exit costs associated with restructuring actions and an $88 payment to the United States government due to the resolution of a legal matter (see below), partially offset by the absence of $148 (€109) in payments to the Italian government related to a November 2009 European Commission decision on electricity pricing for certain energy-intensive industries; and

 

   

a positive change of $50 in taxes, including income taxes, mostly driven by higher pretax income.

The higher pension contributions of $39 were principally driven by special termination benefits of $86 for employees affected by the 2013 shutdown of capacity at a smelter in Canada.

On August 8, 2014, the Highway and Transportation Funding Act (HATFA) was signed into law by the United States government. HATFA, in part, provides temporary relief for employers who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974. Specifically, HATFA modifies the interest rates that had been set in 2012 by the Moving Ahead for Progress in the 21st Century Act. This relief had an immediate impact on the calculation of the then remaining funding contributions in 2014, resulting in a reduction of $100 in minimum required pension funding.

In 2014, Alcoa World Alumina LLC, a majority-owned subsidiary of Alcoa, and Alcoa Inc. paid a combined $88 to the United States government due to the resolution of a legal matter. Additionally, another $74 was paid in 2015 and will be paid in each of the three subsequent years, 2016 (paid in January 2016) through 2018.

Financing Activities

Cash used for financing activities was $441 in 2015 compared with cash provided from financing activities of $2,250 in 2014 and cash used for financing activities of $679 in 2013.

The use of cash in 2015 was principally the result of $2,030 in payments on debt, mostly related to the repayment of borrowings under certain revolving credit facilities (see below) and the repayment of convertible notes assumed in conjunction with the acquisition of RTI (see below); $223 in dividends paid to shareholders; and $104 in net cash paid to the noncontrolling interest in AWAC, Alumina Limited. These items were mostly offset by $1,901 in additions to debt, virtually all of which was the result of borrowings under certain revolving credit facilities (see below).

The source of cash in 2014 was mostly driven by $2,878 in additions to debt, virtually all of which was the result of $1,238 in net proceeds from the issuance of new senior debt securities used for the acquisition of Firth Rixson (see below) and $1,640 in borrowings under certain revolving credit facilities (see below); net proceeds of $1,211 from the issuance of mandatory convertible preferred stock related to the aforementioned acquisition; and $150 in proceeds from employee exercises of 17.3 million stock options at a weighted average exercise price of $8.70 (not in millions). These items were somewhat offset by $1,723 in payments on debt, mostly related to $1,640 for the repayment of borrowings under certain revolving credit facilities (see below), and $161 in dividends paid to shareholders.

The use of cash in 2013 was primarily due to $2,317 in payments on debt, mainly related to $1,850 for the repayment of borrowings under certain credit facilities (see below), a $422 early repayment of 6.00% Notes due July 2013, and $27 for previous borrowings on the loans supporting the Estreito hydroelectric power project in Brazil; $132 in dividends paid to shareholders; and net cash paid to noncontrolling interests of $97, most of which relates to Alumina Limited’s share of AWAC. These items were partially offset by $1,852 in additions to debt, virtually all of which was the result of borrowings under certain credit facilities (see below).

In July 2015, through the acquisition of RTI (see Engineered Products and Solutions in Segment Information above), Alcoa assumed the obligation to repay two tranches of convertible debt; one tranche was due and settled in cash on December 1, 2015 (principal amount of $115) and the other tranche is due October 15, 2019 (principal amount of $403), unless earlier converted or purchased by Alcoa at the holder’s option upon a fundamental change. Upon conversion of the 2019 convertible notes in accordance with their terms, holders will receive, at Alcoa’s election, cash,

 

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shares of common stock (up to 27,990,966 shares), or a combination of cash and shares. On the maturity date, each holder of outstanding notes will be entitled to receive on such date $1,000 (not in millions) in cash for each $1,000 (not in millions) in principal amount of notes, together with accrued and unpaid interest to, but not including, the maturity date.

On July 25, 2014, Alcoa entered into a Five-Year Revolving Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and issuers named therein. The Credit Agreement provides a $4,000 senior unsecured revolving credit facility (the “Credit Facility”), the proceeds of which are to be used to provide working capital or for other general corporate purposes of Alcoa. Subject to the terms and conditions of the Credit Agreement, Alcoa may from time to time request increases in lender commitments under the Credit Facility, not to exceed $500 in aggregate principal amount, and may also request the issuance of letters of credit, subject to a letter of credit sublimit of $1,000 under the Credit Facility.

The Credit Facility was scheduled to mature on July 25, 2019; however, on July 7, 2015, Alcoa received approval for a one-year extension of the maturity date by the lenders and issuers that support the Credit Facility. As such, the Credit Facility now matures on July 25, 2020, unless extended or earlier terminated in accordance with the provisions of the Credit Agreement. Alcoa may make one additional one-year extension request during the remaining term of the Credit Facility, subject to the lender consent requirements set forth in the Credit Agreement. Under the provisions of the Credit Agreement, Alcoa will pay a fee of 0.25% (based on Alcoa’s long-term debt ratings as of December 31, 2015) of the total commitment per annum to maintain the Credit Facility.

The Credit Facility is unsecured and amounts payable under it will rank pari passu with all other unsecured, unsubordinated indebtedness of Alcoa. Borrowings under the Credit Facility may be denominated in U.S. dollars or euros. Loans will bear interest at a base rate or a rate equal to LIBOR, plus, in each case, an applicable margin based on the credit ratings of Alcoa’s outstanding senior unsecured long-term debt. The applicable margin on base rate loans and LIBOR loans will be 0.50% and 1.50% per annum, respectively, based on Alcoa’s long-term debt ratings as of December 31, 2015. Loans may be prepaid without premium or penalty, subject to customary breakage costs.

The Credit Agreement replaces Alcoa’s Five-Year Revolving Credit Agreement, dated as of July 25, 2011 (the “Former Credit Agreement”), which was scheduled to mature on July 25, 2017. The Former Credit Agreement, which had a total capacity of $3,750 and was undrawn, was terminated effective July 25, 2014.

The Credit Agreement includes covenants substantially similar to those in the Former Credit Agreement, including, among others, (a) a leverage ratio, (b) limitations on Alcoa’s ability to incur liens securing indebtedness for borrowed money, (c) limitations on Alcoa’s ability to consummate a merger, consolidation or sale of all or substantially all of its assets, and (d) limitations on Alcoa’s ability to change the nature of its business. As of December 31, 2015, Alcoa was in compliance with all such covenants.

The obligation of Alcoa to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an “Event of Default” as defined in the Credit Agreement. Such Events of Default include, among others, (a) Alcoa’s failure to pay the principal of, or interest on, borrowings under the Credit Facility, (b) any representation or warranty of Alcoa in the Credit Agreement proving to be materially false or misleading, (c) Alcoa’s breach of any of its covenants contained in the Credit Agreement, and (d) the bankruptcy or insolvency of Alcoa.

There were no amounts outstanding at December 31, 2015 and no amounts were borrowed during 2015 and 2014 under the Credit Facility. Also, there were no amounts borrowed during 2014 related to the Former Credit Agreement.

In addition to the Credit Agreement above, Alcoa has a number of other credit agreements that provide a combined borrowing capacity of $990, as of December 31, 2015, of which $890 is due to expire in 2016 and $100 is due to expire in 2017. The purpose of any borrowings under these credit arrangements is to provide for working capital requirements and for other general corporate purposes. The covenants contained in all these arrangements are the same as the Credit Agreement (see above).

 

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In 2015, 2014, and 2013, Alcoa borrowed and repaid $1,890, $1,640, and $1,850, respectively, under the respective credit arrangements. The weighted-average interest rate and weighted-average days outstanding of the respective borrowings during 2015, 2014, and 2013 were 1.61%, 1.54%, and 1.57%, respectively, and 69 days, 67 days, and 213 days, respectively.

In February 2014, Alcoa’s automatic shelf registration statement filed with the Securities and Exchange Commission expired. On July 11, 2014, Alcoa filed a new shelf registration statement, which was amended on July 25, 2014 and became effective on July 30, 2014, for up to $5,000 of securities on an unallocated basis for future issuance. As of December 31, 2015, $2,500 in securities were issued under the new shelf registration statement.

In September 2014, Alcoa completed two public securities offerings under its shelf registration statement for (i) $1,250 of 25 million depositary shares, each representing a 1/10th interest in a share of Alcoa’s 5.375% Class B Mandatory Convertible Preferred Stock, Series 1, par value $1 per share, liquidation preference $500 per share, and (ii) $1,250 of 5.125% Notes due 2024. The net proceeds of the offerings were used to finance the cash portion of the acquisition of Firth Rixson (see Engineered Products and Solutions in Segment Information above).

Alcoa’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’s debt by the major credit rating agencies.

On March 9, 2015, Standard and Poor’s Ratings Services (S&P) affirmed the following ratings for Alcoa: long-term debt at BBB- and short-term debt at A-3. Additionally, S&P changed the current outlook from negative to stable. On September 28, 2015 S&P issued a statement that these ratings and outlook for Alcoa were not affected by Alcoa’s plan to separate into two publicly-traded companies.

On April 16, 2015 Fitch affirmed the following ratings for Alcoa: long-term debt at BB+ and short-term debt at B. Additionally, Fitch changed the current outlook from stable to positive. On September 30, 2015, Fitch placed these ratings on “ratings watch positive” based on Alcoa’s plan to separate into two publicly-traded companies.

On April 30, 2015, Moody’s Investor Service (Moody’s) affirmed the following ratings for Alcoa; long-term debt at Ba1 and short-term debt at Speculative Grade Liquidity Rating-1. Additionally, Moody’s changed the current outlook from stable to positive. On September 28, 2015, Moody’s affirmed these ratings and changed the current outlook from positive to developing based on Alcoa’s plan to separate into two publicly-traded companies. On January 21, 2016, Moody’s placed Alcoa’s long-term debt rating under review and changed the current outlook from developing to rating under review, while leaving Alcoa’s short-term debt rating unchanged.

Investing Activities

Cash used for investing activities was $1,060 in 2015 compared with $3,460 in 2014 and $1,290 in 2013.

The use of cash in 2015 was mainly due to $1,180 in capital expenditures (includes costs related to environmental control in new and expanded facilities of $141), 38% of which related to growth projects, including the aerospace expansion at the La Porte, IN plant, the automotive expansion at the Alcoa, TN plant, the aerospace expansion (thick plate stretcher) at the Davenport, IA plant, the aerospace expansion (isothermal press) at the Savannah, GA plant (Firth Rixson), and the specialty foil expansion at the Itapissuma plant in Brazil; $205 (net of cash acquired) for the acquisition of TITAL (see Engineered Products and Solutions in Segment Information above); and $134 in additions to investments, including the purchase of $70 in equities and fixed income securities held by Alcoa’s captive insurance company and equity contributions of $29 related to the aluminum complex joint venture in Saudi Arabia. These items were somewhat offset by $302 in cash acquired with RTI International Metals (see Engineered Products and Solutions in Segment Information above); $112 in proceeds from the sale of assets and businesses, composed of three land sales in Australia and the United States combined and post-closing adjustments related to an ownership stake in a smelter, four rolling mills, and an ownership stake in a bauxite mine/alumina refinery divested from December 2014 through March 2015; and $40 in sales of investments, related to the sale of $21 in equities and fixed income securities held by Alcoa’s captive insurance company and $19 in proceeds from the sale of the remaining portion of an equity investment in a China rolling mill.

 

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The use of cash in 2014 was principally due to $2,385 (net of cash acquired) for the acquisition of Firth Rixson (see Engineered Products and Solutions in Segment Information above); $1,219 in capital expenditures (includes costs related to environmental control in new and expanded facilities of $129), 40% of which related to growth projects, including the automotive expansions at the Alcoa, TN and Davenport, IA fabrication plants, the aerospace expansion at the La Porte, IN plant, the aluminum-lithium capacity expansion at the Lafayette, IN plant, and the specialty foil expansion at the Itapissuma plant in Brazil; and $195 in additions to investments, including equity contributions of $120 related to the aluminum complex joint venture in Saudi Arabia and the purchase of $49 in equities and fixed income securities held by Alcoa’s captive insurance company. These items were slightly offset by $253 in proceeds from the sale of assets and businesses, largely attributable to the sale of an ownership stake in a bauxite mine and refinery in Jamaica (see Alumina in Segment Information above), an ownership stake in a smelter in the United States (see Primary Metals in Segment Information above), three rolling mills in Spain and France combined (see Global Rolled Products in Segment Information above), and a rod plant in Canada (see Primary Metals in Segment Information above); and $57 in sales of investments, mostly related to $42 in combined proceeds from the sale of a mining interest in Suriname and a portion of an equity investment in a China rolling mill.

The use of cash in 2013 was primarily due to $1,193 in capital expenditures (includes costs related to environmental control in new and expanded facilities of $143), 34% of which related to growth projects, including the automotive expansion at the Davenport, IA fabrication plant, the aluminum-lithium capacity expansion at the Lafayette, IN plant, and the automotive sheet expansion at the Alcoa, TN plant; and $293 in additions to investments, including equity contributions of $171 related to the aluminum complex joint venture in Saudi Arabia and the purchase of $54 in equities and fixed income securities held by Alcoa’s captive insurance company. These items were slightly offset by a net change in restricted cash of $170, mostly related to the release of funds to be used for capital expenditures of the automotive expansion at the Davenport, IA fabrication plant (see Noncash Financing and Investing Activities below).

Noncash Financing and Investing Activities

In July 2015, Alcoa purchased all outstanding shares of RTI common stock in a stock-for-stock transaction valued at $870. As a result, Alcoa issued 87 million shares of its common stock to consummate this transaction, which was not reflected in Alcoa’s Statement of Consolidated Cash Flows as it represents a noncash financing activity.

In early 2014, holders of $575 principal amount of Alcoa’s 5.25% Convertible Notes due March 15, 2014 (the “2014 Notes”) exercised their option to convert the 2014 Notes into 89 million shares of Alcoa common stock. The conversion rate for the 2014 Notes was 155.4908 shares of Alcoa’s common stock per $1,000 (in full dollars) principal amount of notes, equivalent to a conversion price of $6.43 per share. The difference between the $575 principal amount of the 2014 Notes and the $89 par value of the issued shares increased Additional capital on Alcoa’s Consolidated Balance Sheet. This transaction was not reflected in Alcoa’s Statement of Consolidated Cash Flows as it represents a noncash financing activity.

In late 2014, Alcoa paid $2,995 (net of cash acquired) to acquire Firth Rixson (see Engineered Products and Solutions in Segment Information above). A portion of this consideration was paid through the issuance of 37 million shares in Alcoa common stock valued at $610. The issuance of common stock was not reflected in Alcoa’s Statement of Consolidated Cash Flows as it represents a noncash investing activity.

In August 2012, Alcoa received a loan of $250 for the purpose of financing all or part of the cost of acquiring, constructing, reconstructing, and renovating certain facilities at Alcoa’s rolling mill plant in Davenport, IA. Because this loan can only be used for this purpose, the net proceeds of $248 were classified as restricted cash. Since restricted cash is not part of cash and cash equivalents, this transaction was not reflected in Alcoa’s Statement of Consolidated Cash Flows as it represents a noncash activity. As funds were expended for the project, the release of the cash was reflected as both an inflow on the Net change in restricted cash line and an outflow on the Capital expenditures line in the Investing Activities section of the Statement of Consolidated Cash Flows. At December 31, 2013 and 2012, Alcoa had $13 and $171, respectively, of restricted cash remaining related to this transaction. In 2014, the remaining funds were expended on the project.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations. Alcoa is required to make future payments under various contracts, including long-term purchase obligations, financing arrangements, and lease agreements. Alcoa also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. As of December 31, 2015, a summary of Alcoa’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      2016      2017-2018      2019-2020      Thereafter  

Operating activities:

              

Energy-related purchase obligations

   $ 16,555       $ 1,311       $ 2,128       $ 2,009       $ 11,107   

Raw material purchase obligations

     6,970         1,612         1,183         815         3,360   

Other purchase obligations

     1,317         166         328         328         495   

Operating leases

     853         243         298         174         138   

Interest related to total debt

     3,817         500         933         723         1,661   

Estimated minimum required pension funding

     2,150         300         850         1,000         -   

Other postretirement benefit payments

     2,095         230         450         440         975   

Layoff and other restructuring payments

     250         235         15         -         -   

Deferred revenue arrangements

     147         20         41         34         52   

Uncertain tax positions

     52         -         -         -         52   

Financing activities:

              

Total debt

     9,102         59         1,810         2,158         5,075   

Dividends to shareholders

     -         -         -         -         -   

Investing activities:

              

Capital projects

     861         586         223         52         -   

Equity contributions

     10         10         -         -         -   

Payments related to acquisitions

     150         -         -         150         -   

Totals

   $ 44,329       $ 5,272       $ 8,259       $ 7,883       $ 22,915   

Obligations for Operating Activities

Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from 1 year to 32 years. Raw material obligations consist mostly of bauxite (relates to Alcoa’s bauxite mine interests in Guinea and Brazil), caustic soda, alumina, aluminum fluoride, calcined petroleum coke, cathode blocks, and various metals with expiration dates ranging from less than 1 year to 18 years. Other purchase obligations consist principally of freight for bauxite and alumina with expiration dates ranging from 1 to 16 years. Many of these