Alcoa 2010 Annual Report Download - page 110

Alcoa and 40% by Alumina Limited. Except in limited circumstances, Alcoa may not sell, transfer or otherwise
dispose of or encumber or enter into any agreement in respect of the votes or other rights attached to its interests in the
joint venture without Ma’aden’s prior written consent.
Capital investment in the project is expected to total approximately $10,800 (SAR 40.5 billion). As a result of the
changes in the ownership structure described above, Alcoa’s equity investment in the joint venture will be
approximately $1,100 over a four-year period, and Alcoa will be responsible for its pro rata share of the joint venture’s
project financing. During 2010, Alcoa contributed $160 towards the $1,100 commitment. As of December 31, 2010,
the carrying value of Alcoa’s investment in this project was $285 (includes the previously mentioned $80 and $34). In
late 2010, the smelting and rolling mill companies entered into project financing totaling $4,000. Alcoa issued
guarantees on behalf of the smelting and rolling mill companies to the lenders for $1,004 (the equivalent of Alcoa’s
25.1% interest in the smelting and rolling mill companies) of the financed amount in the event that such companies
default on their debt service requirements over a defined period of time (Ma’aden issued similar guarantees for their
74.9% ownership). The guarantees for the smelting and rolling mill companies expire in 2017 and 2018, respectively,
and will cover total debt service requirements of $108 in principal and up to a maximum of approximately $50 in
interest per year (based on projected interest rates). At December 31, 2010, the fair value of the guarantees was $8 and
was included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet.
Under the project financing, a downgrade of Alcoa’s credit ratings below investment grade by at least two agencies
would require Alcoa to provide a letter of credit or fund an escrow account for a portion or all of Alcoa’s remaining
equity commitment to the joint venture project in Saudi Arabia.
Power for the refinery, smelter, and rolling mill will be supplied under a gas allocation from Saudi Aramco, based on
authorization of the Ministry of Petroleum and Mineral Resources of Saudi Arabia (the “Ministry of Petroleum”). The
letter authorizing the gas allocation provides for gas to be tolled and power to be supplied to the refinery, smelter, and
rolling mill from an adjacent power and water desalination plant being constructed by a company ultimately owned by
the government of Saudi Arabia, with the major tolling elements fixed at cost. The gas allocation is contingent on the
finalization of implementing contractual arrangements and on the achievement of certain milestones, as defined in the
joint venture shareholders’ agreement, and includes possible penalties if the milestones are not met, including the
following: (i) potential forfeiture of a $350 letter of credit required to be provided to the Ministry of Petroleum by
Ma’aden (with Alcoa responsible for its pro rata share) to ensure completion of the refinery, (ii) potential forfeiture of
the gas allocation if the smelter is not completed, (iii) a potential requirement for the smelter to allocate 275 kmt of
aluminum to other entities determined by the Ministry of Petroleum if the rolling mill is not constructed, and (iv) under
a new version of the gas allocation (expected to be issued in early 2011), forfeiture of a $60 letter of credit if certain
auxiliary rolling facilities are not completed.
The parties subject to the joint venture shareholders’ agreement and the SPV agreement may not sell, transfer, or
otherwise dispose of, pledge, or encumber any interests in the joint venture or SPV until certain milestones have been
met as defined in both agreements. Under the joint venture shareholders’ agreement, upon the occurrence of an
unremedied event of default by Alcoa, Ma’aden may purchase, or, upon the occurrence of an unremedied event of
default by Ma’aden, Alcoa may sell, its interest for consideration that varies depending on the time of the default.
Under the SPV agreement, upon the occurrence of an unremedied event of default by Alcoa, Alcoa’s right to receive
distributions will be suspended.
On February 1, 2008, Alcoa joined with the Aluminum Corporation of China (Chinalco) to acquire 12% of the U.K.
common stock of Rio Tinto plc (RTP) for approximately $14,000. The investment was made through a special purpose
vehicle called SPPL, which is a private limited liability company, created solely for the purpose of acquiring the RTP
shares. The RTP shares were purchased by SPPL in the open market through an investment broker. On February 6,
2008, Alcoa contributed $1,200 of the $14,000 through the purchase of a Convertible Senior Secured Note (the “Note”)
executed on January 30, 2008 by SPPL which was convertible into approximately 8.5% of the equity shares of SPPL.
Alcoa’s investment in SPPL through the Note was in-substance an investment in common stock of SPPL. Additionally,
investments of three to five percent or greater in limited liability companies that are essentially equivalent to
partnerships are considered to be more than minor, and, therefore, are accounted for under the equity method. As a
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