Alcoa 2009 Annual Report Download - page 54

necessary resulting in the decision to fully curtail the Massena East, NY smelter (125 kmt-per-year) and partially
curtail the Suralco (Suriname) refinery (480 kmt-per-year – represented AWAC’s previous 55% ownership interest at
the time of curtailment – total curtailed is approximately 870 kmt).
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 is seeking damages
and other relief from its power supplier through ongoing litigation. 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 Alcoa
World Alumina and Chemicals (AWAC), which is 60% owned by Alcoa and 40% owned by Alumina Limited.
Sales—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
London Metal Exchange (LME) prices; volume declines in the downstream segments 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.
Sales for 2008 were $26,901 compared with sales of $29,280 in 2007, a decline of $2,379, or 8%. The decrease was
driven mainly by the absence of 10 months of sales ($2,781) from the businesses within the Packaging and Consumer
segment, the absence of sales from the soft alloy extrusion business ($1,115 in 2007), and volume declines for most
downstream businesses, especially related to the automotive and commercial transportation markets in North America
and Europe. These negative impacts were principally offset by significantly higher primary aluminum volumes, mostly
as a result of sales related to the production of the Iceland smelter for a full year, and favorable foreign currency
movements, primarily due to a stronger euro and Australian dollar.
Cost of Goods Sold—COGS as a percentage of Sales was 91.7% in 2009 compared with 82.4% in 2008. The
percentage was negatively impacted by significant declines in realized prices for alumina and aluminum, lower demand
in the downstream segments, and a charge related to a recent European Commission’s decision on electricity pricing
for smelters in Italy ($250). These items were somewhat offset by procurement and overhead cost savings across all
businesses, net favorable foreign currency movements due to a stronger U.S. dollar, and positive LIFO adjustments. In
2009, Alcoa recognized $361 ($235 after-tax) in income due to the reductions in LIFO inventory quantities and the
considerable drop in LME prices. Of this amount, 71% occurred in the second half of the year. During 2010,
46