Alcoa 2009 Annual Report Download - page 25

Alcoa had a contract through September 2011 with the Bonneville Power Administration (BPA) under which Alcoa
was receiving financial benefits to reduce the cost of power purchased from the market to partially operate the Intalco
smelter. In December 2008, the 9th Circuit Court of Appeals issued its opinion in the Pacific Northwest Generating
Cooperative v. BPA case which invalidated the financial benefits portion of that arrangement. In January 2009, Alcoa
and BPA executed a short-term agreement running through September 2009 that transformed that arrangement into one
consistent with the Court’s opinion, which interim contract was also invalidated by the same panel of the 9th Circuit
Court of Appeals. These two panel decisions are being appealed. Subsequently, Alcoa and BPA signed a new contract
providing for the sale of physical power at the Northwest Power Act-mandated industrial firm power (IP) rate, for the
period from December 22, 2009 – May 26, 2011 (17 months), with provision for a 5-year extension if certain financial
tests can be met.
Power for the Rockdale smelter in Texas was historically supplied from company-owned generating units and units
owned by TXU Generation Company LP (now Luminant Generation Company LLC) (Luminant), both of which used
lignite supplied by the company’s Sandow 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 (Units 1, 2 and 3) in late 2006, and transitioned to an arrangement under which Luminant
was 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 if the cost of the electricity exceeds the market price). In June 2008,
Alcoa temporarily idled half of the capacity at the Rockdale smelter due to electricity supply issues with Luminant, and
in November 2008 curtailed the remainder of Rockdale’s smelting capacity due to an unreliable power supply and
overall market conditions. In August 2008, Alcoa filed suit in District Court in Cameron, Texas against Luminant and
certain of its parents and affiliates seeking damages for Luminant’s alleged wrongful conduct that resulted in the
electricity supply issues to the smelter. Trial is scheduled for May 2010. In August 2007, Luminant and Alcoa closed
on the definitive agreements under which Luminant will construct, own and operate a new circulating fluidized bed
power plant adjacent to the existing Sandow Unit Four Power Plant, and in September 2007, on the sale of the Three
Oaks Mine to Luminant.
In the northeast, the purchased power contracts for both the Massena East and Massena West smelters in New York
expire not earlier than June 30, 2013, following their extension in 2003 for 10 years upon New York Power Authority
(NYPA) having relicensed its St. Lawrence-FDR Hydro Project. In December 2007, Alcoa and NYPA reached
agreement in principle on a new energy contract to supply the Massena East and Massena West smelters for 30 years,
beginning on July 1, 2013. The definitive agreement implementing this arrangement became effective February 24,
2009. A subsequent amendment, providing Alcoa additional time to complete the design and engineering work for its
Massena East modernization plan, and providing for the return of 256 megawatts of power to NYPA while Massena
East is idled, was entered into effective April 16, 2009. Implementation of the Massena East modernization plan is
subject to further approval of the Alcoa Board.
The Mt. Holly smelter in South Carolina purchases electricity from Santee Cooper under a contract that expires
December 31, 2015, subject to certain extension provisions.
At the end of 2005, all production was temporarily curtailed at the Eastalco smelter located in Frederick, Maryland.
The curtailment coincided with the expiration of the smelter’s power contract on December 31, 2005, as a
competitively-priced replacement power supply could not be obtained. Alcoa continues efforts to find an alternative
power source for Eastalco.
Australia – Electricity
Power is generated from extensive brown coal deposits covered by a long-term mineral lease held by Alcoa of
Australia Limited (AofA), and that power currently provides approximately 40% of the electricity for the company’s
smelter in Point Henry, Victoria. The State Electricity Commission of Victoria provides the remaining power for this
smelter and all power for the Portland smelter, under contracts with AofA that extend to 2014 and 2016, respectively.
Work continues on new power arrangements that would begin upon the expiration of these power contracts.
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