| Contingencies and Commitments | M. Contingencies and Commitments Contingencies Environmental Matters Alcoa Corporation participates in environmental assessments and cleanups at several locations. These include currently or previously owned or operated facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites. 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 technology advancements. Alcoa Corporation’s environmental remediation reserve balance reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. The following table details the changes in the carrying value of recorded environmental remediation reserves:
Balance at December 31, 2017
$
294
Cash payments
(25
)
Liabilities incurred
19
Reversals of previously recorded liabilities
(3
)
Foreign currency translation and other
(5
)
Balance at December 31, 2018
280
Cash payments
(3
)
Liabilities incurred
1
Reversals of previously recorded liabilities
(1
)
Foreign currency translation and other
(1
)
Balance at March 31, 2019
$
276
At March 31, 2019 and December 31, 2018, the current portion of Alcoa Corporation’s environmental remediation reserve balance was $33 and $44, respectively. In the first quarter of 2018, the remediation reserve was increased by an immaterial amount. The changes to the remediation reserve were recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations. The estimated timing of cash outflows on the environmental remediation reserve at March 31, 2019 is as follows:
2019
$
30
2020 - 2024
126
Thereafter
120
Total
$
276
Reserve balances at March 31, 2019 and December 31, 2018 associated with significant sites with active remediation underway or for future remediation were $212 and $214, respectively. In management’s judgment, the Company’s reserves are sufficient to satisfy the provisions of the respective action plans. Upon changes in facts or circumstances, a change to the reserve may be required. The Company’s significant sites include: Pocos de Caldas, Brazil— Associated with the 2015 closure of the Alcoa Alumínio S.A. smelter in Pocos de Caldas, Brazil, an environmental remediation reserve was established for remediation of historic spent potlining storage and disposal areas. The final remediation plan is currently under review; such review could require the reserve balance to be adjusted. Fusina and Portovesme, Italy— Alcoa Corporation’s subsidiary Alcoa Trasformazioni S.r.l. (Trasformazioni) has remediation projects underway for its closed smelter sites at Fusina (Italy) and Portovesme (Italy). Cleanup plans at both sites have been approved by the Italian Ministry of Environment and Protection of Land and Sea (MOE). For the Fusina site, Trasformazioni began work on a soil remediation project in October 2017 and expects to complete the project by the end of 2019. Additionally, Trasformazioni agreed to make annual payments to MOE over a 10-year period, ending in 2024, for groundwater emergency containment and natural resource damages related to the Fusina site. For the Portovesme site, Trasformazioni began work on a soil remediation project in mid-2016 and expects it to be complete by the end of 2019. Additionally, Trasformazioni participates in a groundwater remediation project which will not have a final remedial design completed until mid-2019; such design conclusion may result in a change to the existing reserve for Portovesme . Suriname— Associated with the 2017 closure of the Suralco refinery and bauxite mine, an environmental remediation reserve was established for treatment and disposal of refinery waste and soil remediation. The work began in 2017 and is expected to be completed at the end of 2025. Hurricane Creek, Arkansas— The Company, through its subsidiaries, operated two mining areas and refineries near Hurricane Creek, Arkansas, before their closure in 1990. In accordance with regulations, the Company is responsible for ongoing monitoring and maintenance for water quality surrounding the mine areas and residue disposal areas. In instances where the Company has ongoing monitoring and maintenance responsibilities, it is Alcoa’s policy is to maintain a reserve equal to five years of expected costs. Massena, New York— Associated with the closure of the Massena East smelter by the Company’s subsidiary, Reynolds Metals Company, in 2015, an environmental remediation reserve was established for subsurface soil remediation to be performed after demolition of the structures. Remediation work is expected to commence in 2020 and will take four to eight years to complete. Sherwin, Texas —In connection with the 2018 settlement of a dispute related to the previously-owned Sherwin alumina refinery, the Company’s subsidiary, Copano Enterprises LLC, accepted responsibility for the final closure of four bauxite residue waste disposal areas (known as the Copano facility). Work commenced on the first residue bed in 2018 and will take eight to twelve years to complete, depending on the nature of its potential re-use. Work on the next three beds has not commenced but is expected to be completed by 2048, depending on its potential re-use. See Sherwin in the Other section below for a complete description of this matter. Longview, Washington— In connection with a 2018 Consent Decree and Cleanup Action Plan with the State of Washington Department of Ecology, the Company’s subsidiary, Northwest Alloys, accepted certain responsibilities for future remediation of contaminated soil and sediments at the site located near Longview, Washington. Other Sites— The Company is in the process of decommissioning various other plants in several countries. As a result, redeveloping these sites for reuse or returning the land to a natural state requires the performance of certain remediation activities. In aggregate, there are approximately 35 remediation projects planned or underway. These activities will be completed at various times in the future with the latest expected to be in 2026, after which ongoing monitoring and other activities may be required. At March 31, 2019 and December 31, 2018, the reserve balance associated with these activities was $64 and $66, respectively. Tax Spain —In July 2013, following a corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received from Spain’s tax authorities disallowing certain interest deductions claimed by ParentCo’s Spanish consolidated tax group. ParentCo filed an appeal of this assessment and provided financial assurance in the form of both a bank guarantee (Arconic) and a lien secured with the San Ciprian smelter (Alcoa Corporation) to Spain’s tax authorities. In January 2015, Spain’s Central Tax Administrative Court denied ParentCo’s appeal of this assessment. Two months later, ParentCo filed an appeal of the assessment in Spain’s National Court (the National Court). The amount of this assessment, including interest, was $152 (€131) as of June 30, 2018. On July 6, 2018, the National Court denied ParentCo’s appeal of the assessment; however, the decision includes a requirement that Spain’s tax authorities issue a new assessment, which considers available net operating losses of the former Spanish consolidated tax group from prior tax years that can be utilized during the assessed tax years. Spain’s tax authorities will not issue a new assessment until this matter is resolved; however, based on estimated calculations completed by Arconic and Alcoa Corporation (collectively, the Companies), the amount of the new assessment, including applicable interest, is expected to be in the range of $25 to $61 (€21 to €53) after consideration of available net operating losses and tax credits. Under the Tax Matters Agreement related to the Separation Transaction, Arconic and Alcoa Corporation are responsible for 51% and 49%, respectively, of the assessed amount in the event of an unfavorable outcome. On November 8, 2018, the Companies filed a petition for appeal to Spain’s Supreme Court, to which Spain’s tax authorities have filed their opposition. In March 2019, the Spanish Supreme Court accepted the Companies’ petition for appeal which allowed the Companies to prepare and submit an appeal on May 6, 2019. Notwithstanding the appeal process, based on a review of the basis on which the National Court decided this matter, Alcoa Corporation management no longer believed that the Companies were more likely than not (greater than 50%) to prevail in this matter. Accordingly, in the third quarter of 2018, Alcoa Corporation recorded a charge of $30 (€26) in Provision for income taxes to establish a liability for its 49% share of the estimated loss in this matter, representing management’s best estimate at the time. As the appeal progresses or when the Companies receive an updated assessment from Spain’s tax authorities, management may revise its estimated liability. Separately, in January 2017, the National Court issued a decision in favor of the former Spanish consolidated tax group related to a similar assessment for the 2003 through 2005 tax years, effectively making that assessment null and void. Additionally, in August 2017, in lieu of receiving a formal assessment, the Companies reached a settlement with Spain’s tax authorities for the 2010 through 2013 tax years that had been under audit for a similar matter. Alcoa Corporation’s share of this settlement was not material to the Company’s Consolidated Financial Statements. The ultimate outcomes related to the 2003 through 2005 and the 2010 through 2013 tax years are not indicative of the potential ultimate outcome of the assessment for the 2006 through 2009 tax years due to procedural differences. Also, it is possible that the Companies may receive similar assessments for tax years subsequent to 2013; however, management does not expect any such assessment, if received, to be material to Alcoa Corporation’s Consolidated Financial Statements. Brazil (AWAB) —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 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 $27 (R$103), whereby the maximum end of the 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 $30 (R$117), which would increase the net carrying value of AWAB’s fixed assets if ultimately disallowed. It is management’s opinion that the allegations have no basis; however, at this time, the Company is unable to reasonably predict an outcome for this matter. Other Reynolds— In 2000, ParentCo acquired Reynolds Metals Company (Reynolds, a subsidiary of Alcoa Corporation), which included an alumina refinery in Gregory, Texas. As a condition of the Reynolds acquisition, ParentCo was required to divest this alumina refinery. Under the terms of the divestiture, ParentCo agreed to retain responsibility for certain environmental obligations and assigned to the buyer an Energy Services Agreement (ESA) with Gregory Power Partners (Gregory Power) for purchase of steam and electricity by the refinery. In January 2016, Sherwin Alumina Company, LLC (Sherwin), a successor owner of the refinery previously owned by Reynolds, filed for bankruptcy due to its inability to continue its bauxite supply agreement. As a result of Sherwin’s bankruptcy filing, separate legal actions were initiated against Reynolds by Sherwin and Gregory Power. Sherwin : This matter sought to determine responsibility for remediation of environmental conditions at the Sherwin refinery site and related bauxite residue waste disposal areas (known as the Copano facility). In May 2018, Reynolds and Sherwin concluded a settlement agreement, which was accepted by the bankruptcy court in June 2018, that assigned to Reynolds all environmental liabilities associated with the Copano facility and assigned to Sherwin all environmental liabilities associated with the Sherwin refinery site. At March 31, 2019, the Company had a reserve of $38 for its share of environmental-related matters at Copano facility. (See Sherwin, Texas in Environmental Matters above.) Gregory Power : In January 2016, Gregory Power delivered notice to Reynolds that Sherwin’s bankruptcy filing constitutes a breach of the ESA. Since that time, various responses, complaints and motions have been actioned, including the addition of Allied Alumina LLC (Allied) to an amended complaint. (Sherwin operated as a subsidiary of Allied.) In May 2019, a settlement agreement was reached between Gregory Power, Allied and Reynolds in which all claims pending against the parties will be voluntarily dismissed. The settlement is conditioned on the execution of various commercial agreements, which are being finalized at this time. The settlement does not have an impact on the Consolidated Financial Statements. General In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa Corporation, including those pertaining to environmental, safety and health, commercial, tax, product liability, intellectual property infringement, employment, and employee and retiree benefit matters, and other actions and claims arising out of the normal course of business. While the amounts claimed in these other matters may be substantial, the ultimate liability is not readily determinable because of the considerable uncertainties that exist. Accordingly, it is possible that the Company’s liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company. Commitments Investments Alcoa Corporation has an investment in a joint venture related to the ownership and operation of an integrated aluminum complex (bauxite mine, alumina refinery, aluminum smelter, and rolling mill) in Saudi Arabia. The joint venture is owned 74.9% by the Saudi Arabian Mining Company (known as Ma’aden) and 25.1% by Alcoa Corporation, and consists of three separate companies as follows: one each for the mine and refinery, the smelter, and the rolling mill. Alcoa Corporation accounts for its investment in the joint venture under the equity method. As of March 31, 2019 and December 31, 2018, the carrying value of Alcoa Corporation’s investment in this joint venture was $863 and $874, respectively. Capital investment in the project is expected to total approximately $10,800 (SAR 40.5 billion) and has been funded through a combination of equity contributions by the joint venture partners and project financing obtained by the joint venture companies, which has been partially guaranteed by both partners (see below). Both the equity contributions and the guarantees of the project financing are based on the joint venture’s partners’ ownership interests. Originally, it was estimated that Alcoa Corporation’s total equity contribution in the joint venture related to the capital investment in the project would be approximately $1,100, of which Alcoa Corporation has contributed $982. Based on changes to both the project’s capital investment and equity and debt structure from the initial plans, the estimated $1,100 equity contribution may be reduced. Separate from the capital investment in the project, Alcoa Corporation contributed $66 (Ma’aden contributed $199) to the joint venture in 2017 for short-term funding purposes in accordance with the terms of the joint venture companies’ financing arrangements. Both partners may be required to make such additional contributions in future periods. The rolling mill company has project financing totaling $1,179 (reflects principal repayments made through March 31, 2019), of which $296 represents Alcoa Corporation’s 25.1% interest in the rolling mill company. Alcoa Corporation has issued guarantees (see below) to the lenders in the event of default on the debt service requirements by the rolling mill company through 2018 and 2021 (Ma’aden issued similar guarantees related to its 74.9% interest). Alcoa Corporation’s guarantees for the rolling mill cover total remaining debt service requirements of $50 in principal and up to a maximum of approximately $10 in interest per year (based on projected interest rates). Previously, Alcoa Corporation issued similar guarantees related to the project financing of both the smelting company and the mining and refining company. In December 2017 and July 2018, the smelting company and the mining and refining company, respectively, refinanced and/or amended all of their existing outstanding debt. The guarantees that were previously required of the Company related to both the smelting company and the mining and refining company were effectively terminated. At both March 31, 2019 and December 31, 2018, the combined fair value of the guarantees was $1, which was included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. As a result of the Separation Transaction, the various lenders to the joint venture companies required Arconic to maintain joint and several guarantees with Alcoa Corporation. In the event of default by any of the joint venture companies, the lenders would make a claim against both Alcoa Corporation and Arconic. Accordingly, Alcoa Corporation would perform under its guarantee; however, if the Company failed to perform, Arconic would be required to perform under its own guarantee. Arconic would then subsequently seek indemnification from Alcoa Corporation under the terms of the Separation and Distribution Agreement. |
