| Contingencies and Commitments | R. Contingencies and
Commitments Unless specifically
described to the contrary, all matters within Note R are the full
responsibility of Alcoa Corporation pursuant to the Separation and
Distribution Agreement (see Note A). Additionally, the Separation
and Distribution Agreement provides for cross-indemnities between
the Company and Arconic for claims subject to
indemnification. Contingencies Litigation. Before 2002, ParentCo
purchased power in Italy in the regulated energy market and
received a drawback of a portion of the price of power under a
special tariff in an amount calculated in accordance with a
published resolution of the Italian Energy Authority, Energy
Authority Resolution n. 204/1999 (“204/1999”). In 2001,
the Energy Authority published another resolution, which clarified
that the drawback would be calculated in the same manner, and in
the same amount, in either the regulated or unregulated market. At
the beginning of 2002, ParentCo left the regulated energy market to
purchase energy in the unregulated market. Subsequently, in 2004,
the Energy Authority introduced regulation no. 148/2004, which set
forth a different method for calculating the special tariff that
would result in a different drawback for the regulated and
unregulated markets. ParentCo challenged the new regulation in the
Administrative Court of Milan and received a favorable judgment in
2006. Following this ruling, ParentCo continued to receive the
power price drawback in accordance with the original calculation
method, through 2009, when the European Commission declared all
such special tariffs to be impermissible “state aid.”
In 2010, the Energy Authority appealed the 2006 ruling to the
Consiglio di Stato (final court of appeal). On December 2,
2011, the Consiglio di Stato ruled in favor of the Energy Authority
and against ParentCo, thus presenting the opportunity for the
energy regulators to seek reimbursement from ParentCo of an amount
equal to the difference between the actual drawback amounts
received over the relevant time period, and the drawback as it
would have been calculated in accordance with regulation 148/2004.
On February 23, 2012, ParentCo filed its appeal of the
decision of the Consiglio di Stato (this appeal was subsequently
withdrawn in March 2013). On March 26, 2012, ParentCo received
a letter from the agency (Cassa Conguaglio per il Settore Eletrico
(CCSE)) responsible for making and collecting payments on behalf of
the Energy Authority demanding payment in the amount of
approximately $110 (€85), including interest. By letter dated
April 5, 2012, ParentCo informed CCSE that it disputes the
payment demand of CCSE since (i) CCSE was not authorized by
the Consiglio di Stato decisions to seek payment of any amount,
(ii) the decision of the Consiglio di Stato has been appealed
(see above), and (iii) in any event, no interest should be
payable. On April 29, 2012, Law No. 44 of 2012
(“44/2012”) came into effect, changing the method to
calculate the drawback. On February 21, 2013, ParentCo
received a revised request letter from CSSE demanding
ParentCo’s former subsidiary, Alcoa Trasformazioni S.r.l.
(Trasformazioni is now a subsidiary of Alcoa Corporation), make a
payment in the amount of $97 (€76), including interest, which
reflects a revised calculation methodology by CCSE and represents
the high end of the range of reasonably possible loss associated
with this matter of $0 to $97 (€76). ParentCo rejected that
demand and formally challenged it through an appeal before the
Administrative Court on April 5, 2013. The Administrative
Court scheduled a hearing for December 19, 2013, which was
subsequently postponed until April 17, 2014, and further
postponed until June 19, 2014. On this date, the
Administrative Court listened to ParentCo’s oral argument,
and on September 2, 2014, rendered its decision. The
Administrative Court declared the payment request of CCSE and the
Energy Authority to ParentCo to be unsubstantiated based on the
148/2004 resolution with respect to the January 19, 2007
through November 19, 2009 timeframe. On December 18,
2014, the CCSE and the Energy Authority appealed the Administrative
Court’s September 2, 2014 decision; however, a date for
the hearing has not been scheduled. As a result of the conclusion
of the European Commission Matter on January 26, 2016 (see
below), ParentCo’s management modified its outlook with
respect to a portion of the pending legal proceedings related to
this matter. As such, a charge of $37 (€34) was recorded
in Restructuring and other charges for the year ended
December 31, 2015 on Alcoa Corporation’s accompanying
Statement of Consolidated Operations to establish a partial reserve
for this matter. At this time, Alcoa Corporation is unable to
reasonably predict the ultimate outcome for this matter. European Commission
Matter. On November 19, 2009,
the EC announced a decision in this matter stating that the
extension of the tariff by Italy constituted unlawful state aid, in
part, and, therefore, the Italian Government is to recover a
portion of the benefit ParentCo received since January 2006
(including interest). The amount of this recovery was to be based
on a calculation prepared by the Italian Government (see below). In
late 2009, after discussions with legal counsel and reviewing the
bases on which the EC decided, including the different
considerations cited in the EC decision regarding ParentCo’s
two smelters in Italy, ParentCo recorded a charge of $250
(€173), which included $20 (€14) to write off a
receivable from the Italian Government for amounts due under the
now expired tariff structure and $230 (€159) to
establish a reserve. On April 19, 2010, ParentCo filed an
appeal of this decision with the General Court of the EU (see
below). Prior to 2012, ParentCo was involved in other legal
proceedings related to this matter that separately sought the
annulment of the EC’s July 2006 decision to open an
investigation alleging that such decision did not follow the
applicable procedural rules and requested injunctive relief to
suspend the effectiveness of the EC’s November 19, 2009
decision. However, the decisions by the General Court, and
subsequent appeals to the European Court of Justice, resulted in
the denial of these remedies. In June 2012, ParentCo
received formal notification from the Italian Government with a
calculated recovery amount of $375 (€303); this amount was
reduced by $65 (€53) for amounts owed by the Italian
Government to ParentCo, resulting in a net payment request of $310
(€250). In a notice published in the Official Journal of the
European Union on September 22, 2012, the EC announced that it
had filed an action against the Italian Government on July 18,
2012 to compel it to collect the recovery amount (on
October 17, 2013, the European Court of Justice ordered Italy
to so collect). On September 27, 2012, ParentCo received a
request for payment in full of the $310 (€250) by
October 31, 2012. Following discussions with the Italian
Government regarding the timing of such payment, ParentCo paid the
requested amount in five quarterly installments of $69
(€50) beginning in October 2012 through December
2013. On October 16, 2014,
ParentCo received notice from the General Court of the EU that its
April 19, 2010 appeal of the EC’s November 19, 2009
decision was denied. On December 27, 2014, ParentCo filed an
appeal of the General Court’s October 16, 2014 ruling to
the European Court of Justice (ECJ). Following submission of the
EC’s response to the appeal, on June 10, 2015, ParentCo
filed a request for an oral hearing before the ECJ; no decision on
that request was received. On January 26, 2016, ParentCo was
informed that the ECJ had dismissed ParentCo’s
December 27, 2014 appeal of the General Court’s
October 16, 2014 ruling. The dismissal of ParentCo’s
appeal represents the conclusion of the legal proceedings in this
matter. Prior to this dismissal, ParentCo had a noncurrent asset of
$100 (€91) reflecting the excess of the total of the
five payments made to the Italian Government over the reserve
recorded in 2009. As a result, this noncurrent asset, along with
the $58 (€53) for amounts owed by the Italian Government
to ParentCo mentioned above plus $6 (€6) for interest
previously paid, was written-off. A charge of $164
(€150) was recorded in Restructuring and other charges
for the year ended December 31, 2015 on Alcoa
Corporation’s accompanying Statement of Consolidated
Operations (see Note D). As a result of the
EC’s November 19, 2009 decision, ParentCo’s
management had contemplated ceasing operations at its Italian
smelters due to uneconomical power costs. In February 2010,
ParentCo’s management agreed to continue to operate its
smelters in Italy for up to six months while a long-term solution
to address increased power costs could be negotiated. Over a
portion of this time, a long-term solution was not able to be
reached related to the Fusina smelter, therefore, in May 2010,
ParentCo and the Italian Government agreed to a temporary idling of
the Fusina smelter. As of September 30, 2010, the Fusina
smelter was fully curtailed (44,000 metric-tons-per-year). For the
Portovesme smelter, ParentCo executed a new power agreement
effective September 1, 2010 through December 31, 2012,
replacing the short-term, market-based power contract that was in
effect since early 2010. This new agreement along with
interruptibility rights (i.e. compensation for power interruptions
when grids are overloaded) granted to ParentCo for the Portovesme
smelter provided additional time to negotiate a long-term solution
(the EC had previously determined that the interruptibility rights
were not considered state aid). At the end of 2011, as part
of a restructuring of ParentCo’s global smelting system,
ParentCo’s management decided to curtail operations at the
Portovesme smelter during 2012 due to the uncertain prospects for
viable, long-term power, along with rising raw materials costs and
falling global aluminum prices (mid-2011 to late 2011). As of
December 31, 2012, the Portovesme smelter was fully curtailed
(150,000 metric-tons-per-year). In June 2013 and August
2014, ParentCo decided to permanently shut down and demolish the
Fusina and Portovesme smelters, respectively, due to persistent
uneconomical conditions (see Note D). Environmental
Matters. A liability is recorded for
environmental remediation when a cleanup program becomes probable
and the costs can be reasonably estimated. As assessments and
cleanups proceed, the liability is adjusted based on progress made
in determining the extent of remedial actions and related costs.
The liability can change substantially due to factors such as,
among others, the nature and extent of contamination, changes in
remedial requirements, and technological changes. Alcoa Corporation’s
remediation reserve balance was $324 and $235 at December 31,
2016 and 2015 (of which $60 and $28 was classified as a current
liability), respectively, and reflects the most probable costs to
remediate identified environmental conditions for which costs can
be reasonably estimated. In 2016, the remediation
reserve was increased by $39 due to a charge of $26 related to the
planned demolition of the Suriname refinery and permanent closure
of the related bauxite mines (see Note D) and a net charge of $13
associated with a number of other sites. In 2015, the remediation
reserve was increased by $107 due to a charge of $52 related to the
planned demolition of the remaining structures at the Massena East
smelter location (see Note D), a charge of $29 related to the
planned demolition of the Poços de Caldas smelter and the
Anglesea power station (see Note D), a charge of $12 related to the
Mosjøen location (see below), a charge of $7 related to the
Portovesme location (see below), and a net charge of $7 associated
with a number of other sites. Of the changes to the remediation
reserve in 2016 and 2015, $26 and $86, respectively, was recorded
in Restructuring and other charges, while the remainder was
recorded in Cost of goods sold on the accompanying Statement of
Consolidated Operations.
Payments related to
remediation expenses applied against the reserve were $32 and $24
in 2016 and 2015, respectively. These amounts include expenditures
currently mandated, as well as those not required by any regulatory
authority or third party. In 2016, the change in the reserve also
reflects an increase for each of the following: $60 of obligations
transferred from ParentCo in connection with the Separation
Transaction (see Note A) on November 1, 2016, including
Sherwin and East St. Louis described below; $17 for the
reclassification of amounts included in other reserves within Other
noncurrent liabilities and deferred credits on Alcoa
Corporation’s Consolidated Balance Sheet as of
December 31, 2015; and $5 due to the effects of foreign
currency translation. In 2015, the change in the reserve also
reflects a decrease of $13 due to the effects of foreign currency
translation. Included in annual
operating expenses are the recurring costs of managing hazardous
substances and environmental programs. These costs are estimated to
be approximately 2% of cost of goods sold. The Separation and
Distribution Agreement (see Note A) includes provisions for the
assignment or allocation of environmental liabilities between Alcoa
Corporation and Arconic, including certain remediation obligations
associated with environmental matters. In general, the respective
parties will be responsible for the environmental matters
associated with their operations, and with the properties and other
assets assigned to each. Additionally, the Separation and
Distribution Agreement lists environmental matters with a shared
responsibility between the two companies with an allocation of
responsibility and the lead party responsible for management of
each matter. For matters assigned to Alcoa Corporation under the
Separation and Distribution Agreement, Alcoa Corporation has agreed
to indemnify Arconic in whole or in part for environmental
liabilities arising from operations prior to the Separation Date.
The following discussion provides details regarding the current
status of certain significant reserves related to current or former
Alcoa Corporation sites. With the exception of the Fusina, Italy
matter, Alcoa Corporation assumed full responsibility of the
matters described below. Sherwin, TX Baie Comeau, Quebec,
Canada Fusina and Portovesme,
Italy— In December 2009,
Trasformazioni and Ligestra reached an initial agreement for
settlement of the liabilities related to the Fusina operations
while negotiations continued related to Portovesme (see below). The
agreement outlined an allocation of payments to the MOE for
emergency action and natural resource damages and the scope and
costs for a proposed soil remediation project, which was formally
presented to the MOE in mid-2010. The agreement was contingent upon
final acceptance of the remediation project by the MOE. As a result
of entering into this agreement, ParentCo increased the reserve by
$12 in 2009 for Fusina. Based on comments received from the MOE and
local and regional environmental authorities, Trasformazioni
submitted a revised remediation plan in the first half of 2012;
however, such revisions did not require any change to the existing
reserve. In October 2013, the MOE approved the project submitted by
ParentCo, resulting in no adjustment to the reserve. In January 2014, in
anticipation of ParentCo reaching a final administrative agreement
with the MOE, ParentCo and Ligestra entered into a final agreement
related to Fusina for allocation of payments to the MOE for
emergency action and natural resource damages and the costs for the
approved soil remediation project. The agreement resulted in
Ligestra assuming 50% to 80% of all payments and remediation costs.
On February 27, 2014, ParentCo and the MOE reached a final
administrative agreement for conduct of work. The agreement
includes both a soil and groundwater remediation project estimated
to cost $33 (€24) and requires payments of $25
(€18) to the MOE for emergency action and natural
resource damages. Based on the final agreement with Ligestra,
ParentCo’s share of all costs and payments was $17
(€12), of which $9 (€6) related to the damages
will be paid annually over a 10-year period, which began in April
2014, and was previously fully reserved. The soil remediation
project will begin once authorization to dispose of excavated waste
into a third-party landfill is received from the MOE, which is
expected at some point in the remainder of 2017. The responsibility
for the execution of groundwater remediation project/emergency
containment has been transferred to the MOE in accordance with the
February 2014 settlement agreement and remediation is slated to
begin in late 2017 or in 2018. Effective with the
Separation Transaction (see Note A), Arconic retained the portion
of this obligation related to the Fusina rolling operations.
Specifically, under the Separation and Distribution Agreement,
Trasformazioni, and with it the Fusina properties, were assigned to
Alcoa Corporation. Fusina Rolling S.r.l., entered into a lease
agreement for the portion of property that included the rolling
operation. Pursuant to the Separation and Distribution Agreement,
the liabilities at Fusina described above were allocated between
Alcoa Corporation (Trasformazioni) and Arconic (Fusina Rolling
S.r.l.). Arconic will pay $7 (€7) for the portion of
remediation expenses associated with the section of property that
includes the rolling operation. Separately, in 2009, due to
additional information derived from the site investigations
conducted at Portovesme, ParentCo increased the reserve by $3. In
November 2011, Trasformazioni and Ligestra reached an agreement for
settlement of the liabilities related to Portovesme, similar to the
one for Fusina. A proposed soil remediation project for Portovesme
was formally presented to the MOE in June 2012. Neither the
agreement with Ligestra nor the proposal to the MOE resulted in a
change to the reserve for Portovesme. In November 2013, the MOE
rejected the proposed soil remediation project and requested a
revised project be submitted. In May 2014, Trasformazioni and
Ligestra submitted a revised soil remediation project that
addressed certain stakeholders’ concerns. ParentCo increased
the reserve by $3 in 2014 to reflect the estimated higher costs
associated with the revised soil remediation project, as well as
current operating and maintenance costs of the Portovesme
site. In October 2014, the MOE
required a further revised project be submitted to reflect the
removal of a larger volume of contaminated soil than what had been
proposed, as well as design changes for the cap related to the
remaining contaminated soil left in place and the expansion of an
emergency containment groundwater pump and treatment system that
was previously installed. Trasformazioni and Ligestra submitted the
further revised soil remediation project in February 2015. As a
result, ParentCo increased the reserve by $7 in March 2015 to
reflect the increase in the estimated costs of the project. In
October 2015, ParentCo received a final ministerial decree
approving the February 2015 revised soil remediation project. Work
on the soil remediation project commenced in mid-2016 and is
expected to be completed in 2019. After further discussions with
the MOE regarding the groundwater remediation project, Alcoa
Corporation and Ligestra are working to find a common remediation
solution. The ultimate outcome of this matter may result in a
change to the existing reserve for Portovesme. Mosjøen,
Norway In April 2015, the NEA
notified ParentCo that the revised project was approved and
required submission of the final project design before issuing a
final order. ParentCo completed and submitted the final project
design, which identified a need to stabilize the related wharf
structure to allow for the sediment dredging in the harbor. As a
result, ParentCo increased the reserve for Mosjøen by $11 in
June 2015 to reflect the estimated cost of the wharf stabilization.
Also in June 2015, the NEA issued a final order approving the
project as well as the final project design. In September 2015,
ParentCo increased the reserve by $1 to reflect the potential need
(based on prior experience with similar projects) to perform
additional dredging if the results of sampling, which is required
by the order, don’t achieve the required cleanup levels.
Project construction commenced in early 2016 and is expected to be
completed by the end of 2017. At December 31, 2016 and 2015,
the reserve balance associated with this matter was $8 and $20,
respectively. East St. Louis,
IL Tax. Additionally, following a
corporate income tax audit of the same Spanish tax group for the
2006 through 2009 tax years, Spain’s tax authorities issued
an assessment in July 2013 similarly disallowing certain interest
deductions. In August 2013, ParentCo filed an appeal of this second
assessment in Spain’s Central Tax Administrative Court, which
was denied in January 2015. ParentCo filed an appeal of this second
assessment in Spain’s National Court in March
2015. At December 31, 2016,
the combined assessments, including interest, total $258
(€246). On January 16, 2017, Spain’s National
Court issued a decision in favor of the Company related to the
assessment received in September 2010. On March 6, 2017, the
Company was notified that Spain’s tax authorities did not
file an appeal, for which the deadline has passed. As a result, the
assessment related to the 2003 through 2005 tax years is null and
void. Spain’s National Court has not yet rendered a decision
related to the assessment received in July 2013 for the 2006
through 2009 tax years. The amount of this assessment on a
standalone basis, including interest, was $136 (€130) as
of December 31, 2016.
The Company believes it has
meritorious arguments to support its tax position and intends to
vigorously litigate the remaining assessment through Spain’s
court system. However, in the event the Company is unsuccessful, a
portion of the remaining assessment may be offset with existing net
operating losses available to the Spanish consolidated tax group,
which would be shared between the Company and Arconic as provided
for in the Tax Matters Agreement related to the Separation
Transaction. Additionally, it is possible that the Company may
receive similar assessments for tax years subsequent to 2009.
Despite the favorable decision received on the first assessment, at
this time, the Company is unable to reasonably predict the ultimate
outcome for this matter. In March 2013, AWAB was
notified by the Brazilian Federal Revenue Office (RFB) that
approximately $110 (R$220) of value added tax credits previously
claimed are being disallowed and a penalty of 50% assessed. Of this
amount, AWAB received $41 (R$82) in cash in May 2012. The value
added tax credits were claimed by AWAB for both fixed assets and
export sales related to the Juruti bauxite mine and São
Luís refinery expansion. The RFB has disallowed credits they
allege belong to the consortium in which AWAB owns an interest and
should not have been claimed by AWAB. Credits have also been
disallowed as a result of challenges to apportionment methods used,
questions about the use of the credits, and an alleged lack of
documented proof. AWAB presented defense of its claim to the RFB on
April 8, 2013. If AWAB is successful in this administrative
process, the RFB would have no further recourse. If unsuccessful in
this process, AWAB has the option to litigate at a judicial level.
Separately from the AWAB’s administrative appeal, in June
2015, new tax law was enacted repealing the provisions in the tax
code that were the basis for the RFB assessing a 50% penalty in
this matter. As such, the estimated range of reasonably possible
loss is $0 to $32 (R$103), whereby the maximum end of this range
represents the portion of the disallowed credits applicable to the
export sales and excludes the 50% penalty. Additionally, the
estimated range of disallowed credits related to AWAB’s fixed
assets is $0 to $36 (R$117), which would increase the net carrying
value of AWAB’s fixed assets if ultimately disallowed. It is
Alcoa Corporation’s management’s opinion that the
allegations have no basis; however, at this time, management is
unable to reasonably predict the ultimate outcome for this
matter. Between 2000 and 2002,
Alumínio sold approximately 2,000 metric tons of metal per
month from its Poços de Caldas facility, located in the State
of Minas Gerais (the “State”), to Alfio, a customer
also located in the State. Sales in the State were exempted from
value-added tax (VAT) requirements. Alfio subsequently sold metal
to customers outside of the State, but did not pay the required VAT
on those transactions. In July 2002, Alumínio received an
assessment from State auditors on the theory that Alumínio
should be jointly and severally liable with Alfio for the unpaid
VAT. In June 2003, the administrative tribunal found Alumínio
liable, and Alumínio filed a judicial case in the State in
February 2004 contesting the finding. In May 2005, the Court of
First Instance found Alumínio solely liable, and a panel of a
State appeals court confirmed this finding in April 2006.
Alumínio filed a special appeal to the Superior Tribunal of
Justice (STJ) in Brasilia (the federal capital of Brazil) later in
2006. In 2011, the STJ (through one of its judges) reversed the
judgment of the lower courts, finding that Alumínio should
neither be solely nor jointly and severally liable with Alfio for
the VAT, which ruling was then appealed by the State. In August
2012, the STJ agreed to have the case reheard before a five-judge
panel. On February 21, 2017, the lead judge of the STJ issued
a ruling confirming that Alumínio should be held liable in
this matter. Alumínio is in the process of filing an appeal to
have its case reheard before the five-judge panel as originally
agreed to by the STJ in August 2012. At December 31, 2016, the
assessment totaled $43 (R$142), including penalties and interest.
While Alcoa Corporation believes it has meritorious defenses, the
Company is unable to reasonably predict the ultimate outcome for
this matter. Other.
On October 4, 2016,
the state of Texas filed suit against Sherwin in the bankruptcy
proceeding seeking to hold Sherwin responsible for remediation of
alleged environmental conditions at the facility. On
October 11, 2016, Sherwin filed a similar suit against
Reynolds in the case. On November 10, 2016, Reynolds filed
motions to dismiss the Gregory Power complaint and to withdraw the
case from bankruptcy court. On November 23, 2016, the
bankruptcy court approved Sherwin’s plans for cessation of
its operations. On February 16, 2017, Sherwin filed a bankruptcy
Chapter 11 Plan and on February 17, 2017 the court approved that
Plan. As provided in the Plan, Sherwin, including certain
affiliated companies, and Reynolds are negotiating a settlement to
allocate among them ownership of and responsibility for certain
areas of the refinery. A definitive agreement is anticipated
prior to April 30, 2017 and would resolve outstanding claims made
by Sherwin against Reynolds. General. Commitments Purchase
Obligations. On April 8, 2015, AofA
secured a new 12-year gas supply agreement to power its three
alumina refineries in Western Australia beginning in July
2020. This agreement was conditional on the completion of a
third-party acquisition of the related energy assets from the
then-current owner, which occurred in June 2015. The terms of
the gas supply agreement required AofA to make a prepayment of $500
in two installments. The first installment of $300 was made at
the time of the completion of the third-party acquisition in June
2015 and the second installment of $200 was made in April 2016.
Both of these amounts were included in (Increase) in noncurrent
assets on the accompanying Statement of Consolidated Cash Flows in
the respective periods. At December 31, 2016 and 2015, Alcoa
Corporation has an asset of $471 (A$654) and $288 (A$395),
respectively, representing the respective prepayments made under
this agreement, which was included in Other noncurrent assets (see
Note S) on the accompanying Consolidated Balance Sheet. Operating Leases. Guarantees of Third
Parties. Bank Guarantees and
Letters of Credit. Surety Bonds. |
