Alcoa 2013 Annual Report Download - page 47

respect to Alcoa’s ratings. Increased debt levels, adverse aluminum market or macroeconomic conditions, a
deterioration in the Company’s debt protection metrics, a contraction in the Company’s liquidity, or other factors could
potentially trigger such actions. A rating agency may lower, suspend or withdraw entirely a rating or place it on
negative outlook or watch if, in that rating agency’s judgment, circumstances so warrant.
As a result of the Moody’s downgrade, certain counterparties have required Alcoa to post letters of credit or cash
collateral, and the cost of issuance of commercial paper has increased. For more information regarding the effects of
the downgrade on the Company’s liquidity, see “Liquidity and Capital Resources—Financing Activities” in Part II,
Item 7. (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this report.
If Standard & Poor’s or Fitch also downgrades Alcoa’s credit rating below investment grade, Alcoa may be subject to
additional requests for letters of credit or other collateral and exclusion from the commercial paper market. For
example, under the project financings for the joint venture project in the Kingdom of Saudi Arabia, a downgrade of
Alcoa’s credit ratings below investment grade by at least two of the three rating agencies (Standard and Poor’s,
Moody’s, and Fitch) 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. For additional information regarding the project financings,
see Note I to the Consolidated Financial Statements. Any additional or further downgrade of Alcoa’s credit ratings by
one or more rating agencies could also adversely impact the market price of Alcoa’s securities, adversely affect
existing financing (for example, a downgrade by Standard and Poor’s or a further downgrade by Moody’s would
subject Alcoa to higher costs under Alcoa’s Five-Year Revolving Credit Agreement and certain of its other revolving
credit facilities), limit access to the capital (including commercial paper) or credit markets or otherwise adversely
affect the availability of other new financing on favorable terms, if at all, result in more restrictive covenants in
agreements governing the terms of any future indebtedness that the Company incurs, increase the cost of borrowing or
fees on undrawn credit facilities, result in vendors or counterparties seeking collateral or letters of credit from Alcoa, or
otherwise impair Alcoa’s business, financial condition and results of operations.
Alcoa may not be able to realize expected benefits from the change to index pricing of alumina.
Alcoa has implemented a move to a pricing mechanism for alumina based on an index of alumina prices rather than a
percentage of the LME-based aluminum price. Alcoa believes that this change more fairly reflects the fundamentals of
alumina including raw materials and other input costs involved. There can be no assurance that such index pricing
ultimately will be accepted for all third-party shipments of alumina or that such index pricing will result in consistently
greater profitability from sales of alumina.
Alcoa’s business and growth prospects may be negatively impacted by reductions in its capital expenditures.
Alcoa requires substantial capital to invest in greenfield and brownfield projects and to maintain and prolong the life
and capacity of its existing facilities. For 2014, generating positive cash flow from operations that will exceed capital
spending continues to be an Alcoa target. Insufficient cash generation may negatively impact Alcoa’s ability to fund as
planned its sustaining and growth capital projects. Over the long term, Alcoa’s ability to take advantage of improved
aluminum or other market conditions may be constrained by earlier capital expenditure restrictions, and the long-term
value of its business could be adversely impacted. The Company’s position in relation to its competitors may also
deteriorate.
Alcoa may also need to address commercial and political issues in relation to its reductions in capital expenditures in
certain of the jurisdictions in which it operates. If Alcoa’s interest in its joint ventures is diluted or it loses key
concessions, its growth could be constrained. Any of the foregoing could have a material adverse effect on the
Company’s business, results of operations, financial condition and prospects.
Alcoa’s global operations are exposed to political and economic risks, commercial instability and events beyond
its control in the countries in which it operates.
Alcoa has operations or activities in numerous countries and regions outside the U.S. that have varying degrees of
political and economic risk, including Brazil, China, Europe, Guinea, Russia, and the Kingdom of Saudi Arabia. Risks
31