Alcoa 2010 Annual Report Download - page 54

In the first half of 2011, Alcoa plans to restart certain idled potlines at three smelters located in the U.S.: Massena East,
NY (three potlines or 125 kmt-per-year); Wenatchee, WA (one potline or 43 kmt-per-year); and Ferndale, WA
(Intalco: 36 kmt-per-year). These restarts are expected to increase Alcoa’s aluminum production by 137 kmt during
2011 and by 204 kmt on an annual basis thereafter and are occurring to help meet anticipated growth in aluminum
demand and to meet obligations outlined in power agreements with energy providers.
In June 2008, Alcoa temporarily idled half of the aluminum production (three of six operating potlines or 120 kmt) at
its Rockdale smelter due to ongoing power supply issues with Rockdale’s onsite supplier and the uneconomical power
that Alcoa was forced to purchase in the open market as a result of such issues. In September 2008, Alcoa announced it
was temporarily idling the remaining three potlines, or 147 kmt, as a result of the cumulative effect of operating only
half of the smelter, well-known issues regarding the cost and long-term reliability of the power supply, and overall
market conditions. In 2008, the earnings impact of the idled potlines was $55 ($90 pretax). Alcoa sought damages and
other relief from its power supplier through litigation (in 2010, a trial was held and the verdict resulted in no award of
monetary damages to Alcoa although the Company may submit certain disputed amounts (up to $4) to accounting
arbitration and may audit the books and record of its power supplier). Additionally, in conjunction with the idling of all
six potlines, Alcoa recorded restructuring charges in 2008 of $31 ($48 pretax) mostly for the layoff of approximately
870 employees (see Restructuring and Other Charges below for additional information).
Also in June 2008, a major gas supplier to Alcoa’s Western Australia refining operations (part of Alcoa of Australia)
suffered a pipeline rupture and fire, which resulted in a complete shutdown of the supplier’s gas production operations
at a certain hub and a declaration of force majeure by the supplier to all customers. The disruption in gas supply caused
an immediate reduction in Alcoa of Australia’s production capacity and required the purchase of alternative fuel at a
much higher cost than the natural gas displaced resulting in a significant negative impact on operations. As a result,
shortly thereafter, Alcoa of Australia notified its own customers that it was declaring force majeure under its alumina
supply contracts. During the second half of 2008, the supplier partially restored the gas supply to Alcoa of Australia
(full restoration occurred in the first half of 2009). In addition, insurance recoveries of $52 were received in the second
half of 2008. Net of insurance benefits, Alcoa’s earnings impact of the disruption in gas supply was $49 ($102 before
tax and noncontrolling interest) in 2008. The Alumina segment was impacted by $33 ($47 before tax) and the
remaining impact of $29 ($55 before tax) was reflected in Corporate due to Alcoa’s captive insurance program. In
2009, additional insurance recoveries of $24 were received, which benefited the results of Alcoa by $10 ($24 before
tax and noncontrolling interest) and the Alumina segment by $17 ($24 before tax). Alcoa of Australia is part of
AWAC, which is 60% owned by Alcoa and 40% owned by Alumina Limited.
Sales—Sales for 2010 were $21,013 compared with sales of $18,439 in 2009, an improvement of $2,574, or 14%. The
increase was mainly driven by a continued rise in realized prices for alumina and aluminum, as a result of significantly
higher London Metal Exchange (LME) prices, favorable pricing in the midstream operations, and sales from the
smelters in Norway (acquired on March 31, 2009: increase of $332), slightly offset by the absence of sales from
divested businesses (Transportation Products Europe and most of Global Foil: decrease of $175) and unfavorable mix
in the downstream operations.
Sales for 2009 were $18,439 compared with sales of $26,901 in 2008, a decline of $8,462, or 31%. The decrease was
primarily due to a drop in realized prices for alumina and aluminum, driven by significantly lower LME prices; volume
declines in the midstream and downstream operations due to continued weak end markets; unfavorable foreign
currency movements, mostly the result of a weaker euro and Australian dollar; and the absence of sales from the
businesses within the former Packaging and Consumer segment ($516 in 2008); all of which was slightly offset by
sales from the acquired smelters in Norway (increase of $452).
Cost of Goods Sold—COGS as a percentage of Sales was 81.7% in 2010 compared with 91.7% in 2009. The
percentage was positively impacted by the continued significant rise in realized prices for alumina and aluminum; net
cost savings and productivity improvements across all segments; and the absence of a charge related to a European
Commission’s decision on electricity pricing for smelters in Italy ($250); somewhat offset by net unfavorable foreign
currency movements due to a weaker U.S. dollar; unfavorable LIFO adjustments, as a result of the considerable rise in
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