Alcoa 2012 Annual Report Download - page 72

This segment represents a portion of Alcoa’s upstream operations and consists of the Company’s worldwide smelter
system. Primary Metals receives alumina, mostly from the Alumina segment, and produces primary aluminum used by
Alcoa’s fabricating businesses, as well as sold to external customers, aluminum traders, and commodity markets.
Results from the sale of aluminum powder, scrap, and excess power 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 more
than 90% of this segment’s third-party sales. Buy/resell activity refers to when this segment purchases metal from
external or internal sources and resells such metal to external customers or the midstream and downstream segments in
order to maximize smelting system efficiency and to meet customer requirements.
In November 2012, Alcoa completed the sale of its 351-megawatt Tapoco Hydroelectric Project (“Tapoco”) to
Brookfield Renewable Energy Partners for $597 in cash. Alcoa recognized a gain of $320 ($173 after-tax) in Other
income, net on the accompanying Statement of Consolidated Operations, of which a gain of $426 ($275 after-tax) was
reflected in the Primary Metals segment and a loss of $106 ($102 after-tax) was reflected in Corporate. The amount in
Corporate represents the write-off of goodwill and capitalized interest related to Tapoco that were not included in the
assets of the Primary Metals segment. Tapoco is a four-station hydroelectric project located on the Little Tennessee and
Cheoah Rivers in eastern Tennessee and western North Carolina. The transaction included four generating stations and
dams, 86 miles of transmission lines, and approximately 14,500 acres of land associated with and surrounding Tapoco.
The power generated by Tapoco was primarily consumed by Alcoa’s smelter in Tennessee, which was temporarily
idled in 2009 and permanently shut down in 2011. Since 2009, the power generated from Tapoco was sold into the
open market.
At December 31, 2012, Alcoa had 591 kmt of idle capacity on a base capacity of 4,227 kmt. In 2012, idle capacity
decreased 53 kmt compared to 2011 due to the permanent shutdown of the smelter in Tennessee (215 kmt-per-year)
and two potlines at the smelter located in Rockdale, TX (76 kmt-per-year), mostly offset by the curtailment of the
Portovesme smelter in Italy (150 kmt-per-year) and the temporarily curtailment of a portion of the smelters in Spain:
Avilés (46 kmt out of 93 kmt-per-year) and La Coruña (44 kmt out of 87 kmt-per-year). Additionally, base capacity
declined 291 kmt between December 31, 2012 and 2011 due to the previously mentioned permanent shutdowns.
In late 2011, management approved the permanent shutdown and demolition of the Tennessee smelter and two potlines
at the Rockdale smelter (remaining capacity of 191 kmt-per-year composed of four potlines), each of which was
previously temporarily idled for various reasons. This decision was made after a comprehensive strategic analysis was
performed to determine the best course of action for each facility. Factors leading to this decision were in general
focused on achieving sustained competitiveness and included, among others: lack of an economically viable, long-term
power solution; changed market fundamentals; cost competitiveness; required future capital investment; and restart
costs.
Also, at the end of 2011, management approved a full curtailment of the Portovesme smelter and a partial curtailment
at the Avilés and La Coruña smelters. The curtailment of the Portovesme smelter may lead to the permanent closure of
the facility, while the curtailments at the two smelters in Spain are planned to be temporary. These actions were the
result of uncompetitive energy positions, combined with rising material costs and falling aluminum prices (mid-2011 to
late 2011).
At December 31, 2011, Alcoa had 644 kmt of idle capacity on a base capacity of 4,518 kmt. In 2011, idle capacity
decreased 234 kmt compared to 2010 due to the full restart of previously curtailed production capacity in the U.S.:
Massena East, NY (125 kmt-per-year); Wenatchee, WA (43 kmt-per-year); and Ferndale, WA (Intalco: 47 kmt-per-
year (11 kmt more than previously planned)). These restarts occurred to help meet anticipated growth in aluminum
demand and to meet obligations outlined in power agreements with energy providers. As a result of these restarts,
aluminum production increased by approximately 150 kmt during 2011 and by 215 kmt in 2012.
In 2012, aluminum production decreased by 33 kmt, mostly due to the previously mentioned curtailments at the
Portovesme, Avilés, and La Coruña smelters, partially offset by the benefit of a full year of production related to the
capacity restarted in 2011 at the Massena East, Wenatchee, and Ferndale smelters. In 2011, aluminum production
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