Alcoa 2007 Annual Report Download - page 67

are transacted in Australian dollars, and a decrease of $5 based on
a revision in the consortium’s forecast of equity requirements
related to the future expansion of the DBNGP. The investment in
the DBNGP was made in order to secure a competitively priced
long-term supply of natural gas to Alcoa’s refineries in Western
Australia. In addition to its equity ownership, Alcoa has an
agreement to purchase gas transmission services from the DBNGP.
Alcoa’s maximum exposure to loss on the investment and the
related contract is approximately $385 as of December 31, 2007.
Purchase Obligations. Alcoa is party to unconditional pur-
chase obligations for energy that expire between 2012 and 2028.
Commitments related to these contracts total $115 in 2008, $115
in 2009, $111 in 2010, $107 in 2011, $103 in 2012, and $1,146
thereafter. Expenditures under these contracts totaled $110 in
2007, $86 in 2006, and $26 in 2005. Additionally, Alcoa has
entered into other purchase commitments for energy, raw materials
and other goods and services which total $3,354 in 2008, $2,061
in 2009, $1,395 in 2010, $1,216 in 2011, $1,041 in 2012, and
$10,874 thereafter.
Operating Leases. Certain computer equipment, plant equip-
ment, vehicles, and buildings are under operating lease
agreements. Total expense from continuing operations for all
leases was $315 in 2007, $286 in 2006, and $261 in 2005. Under
long-term operating leases, minimum annual rentals are $304 in
2008, $249 in 2009, $213 in 2010, $155 in 2011, $99 in 2012,
and a total of $240 for 2013 and thereafter.
Letters of Credit. Alcoa has standby letters of credit related to
environmental, insurance, and other activities. The total amount
committed under these letters of credit, which expire at various
dates in 2008 through 2014, was $485 at December 31, 2007.
Guarantees. Alcoa has issued guarantees, primarily related to
project financing for hydroelectric power projects in Brazil. The total
amount committed under these guarantees, which expire at various
dates in 2008 through 2018, was $513 at December 31, 2007.
Other. In July 2006, the European Commission (EC) announced
that it has opened an investigation to establish whether an
extension of the regulated preferential electricity tariff granted by
Italy to some energy-intensive industries complies with European
Union state aid rules. The new Italian power tariff modifies the
preferential tariff that was in force until December 31, 2005 and
extends it through 2010. Alcoa has been operating in Italy for more
than 10 years under a power supply structure approved by the EC
in 1996. That measure, like the new one, was based on Italian state
legislation that provides a competitive power supply to the primary
aluminum industry and is not considered state aid by the Italian
Government. The EC’s announcement states that it has doubts
about the measure’s compatibility with European Union legislation
and concerns about distortion of competition in the European
market of primary aluminum, where energy is an important part of
the production costs. The opening of an in-depth investigation gives
interested parties the opportunity to comment on the proposed
measures; it does not prejudge the outcome of the procedure. It is
Alcoa’s understanding that the Italian Government’s continuation of
the electricity tariff was done in conformity with all applicable laws
and regulations. Alcoa believes that the total potential impact from
a loss of the tariff would be approximately $20 (pretax) per month
in higher power costs at its Italian smelters. The estimated total
potential impact has increased since 2006 due predominately to the
weakening of the U.S. dollar, as the liability would be payable in
Euros in the event of a negative outcome. While Alcoa believes that
any additional cost would only be assessed prospectively from the
date of the EC’s decision on this matter, it is possible that the EC
could rule that the assessment must be retroactively applied to
January 2006. A decision by the EC is not expected until late in
2008. On November 29, 2006, Alcoa filed an appeal before the
European Court of First Instance seeking the annulment of the
decision of the EC to open the investigation alleging that such
decision did not follow the applicable procedural rules. This
appeal, which may be withdrawn by Alcoa at any time, is expected
to be resolved late in 2008 as well.
In January 2007, the EC announced that it has opened an inves-
tigation to establish whether the regulated electricity tariffs granted
by Spain comply with European Union state aid rules. Alcoa has
been operating in Spain for more than nine years under a power
supply structure approved by the Spanish Government in 1986, an
equivalent tariff having been granted in 1983. The investigation is
limited to the year 2005 and it is focused both on the energy-
intensive consumers and the distribution companies. The
investigation provided 30 days to any interested party to submit
observations and comments to the EC. With respect to the energy-
intensive consumers, the EC is opening the investigation on the
assumption that prices paid under the tariff in 2005 were lower than
the pool price mechanism, therefore being, in principle, artificially
below market conditions. Alcoa has submitted comments in which
the company has provided evidence that prices paid by energy-
intensive consumers were in line with the market, in addition to
various legal arguments defending the legality of the Spanish tariff
system. Therefore, it is Alcoa's understanding that the Spanish tariff
system for electricity is in conformity with all applicable laws and
regulations, and therefore no state aid is present in that tariff system.
Alcoa believes that the total potential impact from an unfavorable
decision would be approximately $11 (pretax). While Alcoa believes
that any additional cost would only be assessed for the year 2005, it
is possible that the EC could extend its investigation to later years. A
decision by the EC is not expected until late in 2008. If the EC’s
investigation concludes that the regulated electricity tariffs for
industries are unlawful, Alcoa will have an opportunity to challenge
the decision in the European Union courts.
O. Other Income, Net
2007 2006 2005
Equity income $71 $72 $26
Interest income 62 89 65
Dividend income 31 45 19
Foreign currency losses, net (28) (48) (27)
Gains from asset sales 1,800 25 406
Other income (expense), net (23) 10 (9)
$1,913 $193 $480
In 2007, equity income included $14 related to the newly-formed
soft alloy extrusion joint venture (see Notes F and I for additional
information) and gains from asset sales included a $1,754 gain on
the sale of Alcoa’s investment in Chalco (see Notes F and I for
additional information).
In 2006, interest income included $15 of interest earned
related to a Brazilian court settlement.
In 2005, equity income included an impairment charge of $90
related to the closure of the Hamburger Aluminium-Werk facility
in Hamburg, Germany. The charge was comprised of $65 for asset
impairments and $25 for employee layoff costs and other shutdown
costs. Also in 2005, gains from asset sales included a $345 gain
on the sale of Alcoa’s stake in Elkem and a $67 gain on the sale of
railroad assets (see Note F for additional information).
The dividend income in 2007, 2006 and 2005 is virtually all
related to Alcoa’s former stake in Chalco.
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