Alcoa 2009 Annual Report Download - page 71

On February 10, 2009, Standard and Poor’s Ratings Services (S&P) changed its long-term debt rating of Alcoa from
BBB+ to BBB- and its short-term debt rating from A-2 to A-3. S&P’s rating report stated that the changes in Alcoa’s
ratings reflect uncertainties regarding the length and depth of the ongoing economic downturn; expectations of a long,
slow economic recovery; S&P’s belief that Alcoa’s credit metrics will deteriorate significantly during 2009; and S&P’s
concerns regarding Alcoa’s liquidity position. S&P removed all ratings from negative creditwatch; however, the
current outlook remains negative based on expected weak earnings in 2009 and weak credit metrics based on the new
S&P ratings. The report further stated that the ratings reflect Alcoa’s strong business position as one of the largest
integrated aluminum producers in the world, with broad product, business, and geographic diversity and efficient
alumina operations.
On February 13, 2009, Moody’s Investors Service (Moody’s) changed its long-term debt rating of Alcoa from Baa1 to
Baa3 and its short-term debt rating from Prime-2 to Prime-3. Moody’s rating report stated that the changes in Alcoa’s
ratings reflect the relatively weak debt protection measures, increased debt levels and leverage ratios, and negative cash
flow position of Alcoa going into a major economic downturn. Moody’s removed all ratings from negative creditwatch
and the current outlook was changed from negative to stable. The change in the outlook was based on Moody’s view
that Alcoa will be able to materially reduce short-term debt outstanding due to the monetization of Alcoa’s investment
in Shining Prospect, the anticipation that Alcoa will continue to focus on reducing cash consumption, and that liquidity
will remain comfortably above requirements.
On December 21, 2009, Moody’s changed their current outlook from stable to rating under review for both long-term
and short-term debt of Alcoa. Moody’s review reflects Alcoa’s announcement that it signed an agreement to enter into
a joint venture to develop a new industrial complex in Saudi Arabia, comprised of a bauxite mine, alumina refinery,
aluminum smelter, and rolling mill, which will require the Company to spend approximately $900 over a four-year
period. The potential for further delay in balance sheet improvement and debt reduction as a result of this investment,
given Moody’s expectation for only slow recovery in the aluminum industry and in Alcoa’s earnings, was a
consideration prompting this review. The review also results from the slower than anticipated (by Moody’s) recovery
in earnings generation through 2009 by Alcoa despite higher than anticipated aluminum prices together with the more
moderate pace of improvement in debt protection metrics, debt reduction, and balance sheet strength.
On February 13, 2009, Fitch Ratings (Fitch) changed its long-term debt rating of Alcoa from BBB to BBB- and its
short-term debt rating from F2 to F3. Fitch’s rating report stated that the changes in Alcoa’s ratings reflect lower
earnings coupled with higher than expected debt levels resulting in higher financial leverage. Fitch also changed the
current outlook from stable to negative. The report further stated that the ratings reflect Alcoa’s leading position in the
industry, its strength in low-cost alumina production, and the operating flexibility afforded by the scope of the
Company’s operations.
Investing Activities
Cash used for investing activities was $721 in 2009 compared with $2,410 in 2008 and $1,625 in 2007.
The use of cash in 2009 was mainly due to $1,622 in capital expenditures (includes costs related to environmental
control in new and expanded facilities of $59), 68% of which related to growth projects, including the São Luís
refinery expansion, Juruti bauxite mine development, and Estreito hydroelectric power project; $181 in additions to
investments, mostly for $83 in available-for-sale securities held by Alcoa’s captive insurance program and an $80
interest in a new joint venture in the Kingdom of Saudi Arabia; and a net cash outflow of $65 for the divestiture of
assets and businesses, including a cash outflow of $204 for the EES business, cash inflows of $111 for the collection of
a note related to the 2007 sale of the Three Oaks mine and the sale of property in Vancouver, WA, and a cash inflow of
$20 for the sale of the Shanghai (China) foil plant; all of which was partially offset by $1,031 from sales of
investments, mostly related to the receipt of $1,021 for the sale of the Shining Prospect investment; and a net cash
inflow of $112 from acquisitions, mainly due to $97 from the acquisition of a BHP Billiton subsidiary in the Republic
of Suriname and $18 from the Elkem/Sapa AB exchange transaction.
The use of cash in 2008 was principally due to $3,438 in capital expenditures (includes costs related to environmental
control in new and expanded facilities of $241), 58% of which related to growth projects, including the São Luís
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