-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LNKRz4gowsfFcXV2BbZ1RNewF/kFFR3Q7EzDrD4SlMkbXw5yYFz5Qo9XNsf/yVoR SdP6nPSdTO/W4ahSzX/D4A== 0001193125-08-243438.txt : 20081125 0001193125-08-243438.hdr.sgml : 20081125 20081125165607 ACCESSION NUMBER: 0001193125-08-243438 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20081125 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20081125 DATE AS OF CHANGE: 20081125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALCOA INC CENTRAL INDEX KEY: 0000004281 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 250317820 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03610 FILM NUMBER: 081214470 BUSINESS ADDRESS: STREET 1: 201 ISABELLA ST STREET 2: ALCOA CORPORATE CTR CITY: PITTSBURGH STATE: PA ZIP: 15212-5858 BUSINESS PHONE: 4125532576 MAIL ADDRESS: STREET 1: 801 ISABELLA ST STREET 2: ALCOA CORPORATE CTR CITY: PITTSBURGH STATE: PA ZIP: 15212-5858 FORMER COMPANY: FORMER CONFORMED NAME: ALUMINUM CO OF AMERICA DATE OF NAME CHANGE: 19920703 8-K 1 d8k.htm FORM 8-K Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): November 25, 2008

 

 

ALCOA INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Pennsylvania   1-3610   25-0317820

(State or Other Jurisdiction

of Incorporation)

   (Commission File Number)  

(I.R.S. Employer

Identification Number)

 

390 Park Avenue, New York, New York   10022-4608
(Address of Principal Executive Offices)   (Zip Code)

Office of Investor Relations 212-836-2674

Office of the Secretary 212-836-2732

(Registrant’s telephone number, including area code)

 

(Former Name or Former Address, if Changed Since Last Report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

Item 8.01. Other Events.

Attached as Exhibit 100 to this Current Report on Form 8-K is the following financial information from Alcoa Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed with the Securities and Exchange Commission (the “SEC”) on October 24, 2008, formatted in XBRL (eXtensible Business Reporting Language): (i) the Statement of Consolidated Income for the three-month and nine-month periods ended September 30, 2008 and 2007, (ii) the Consolidated Balance Sheet at September 30, 2008 and December 31, 2007, (iii) the Statement of Consolidated Cash Flows for the nine-month periods ended September 30, 2008 and 2007, (iv) the Statement of Shareholders’ Equity for the three-month and nine-month periods ended September 30, 2008 and 2007, and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

Users of this data are advised pursuant to Rule 401 of Regulation S-T that the financial information contained in the XBRL-Related Documents is unaudited and these are not the financial statements of Alcoa Inc. as filed with the SEC. The purpose of submitting these XBRL-Related Documents is to test the related format and technology and, as a result, investors should not rely on the information in this Current Report on Form 8-K, including Exhibit 100, in making investment decisions.

In accordance with Rule 402 of Regulation S-T, the information in this Current Report on Form 8-K, including Exhibit 100, shall not be deemed to be “filed” for purposes of Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), or Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of these sections, and is not part of any registration statement to which it may relate, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such filing.

 

Item 9.01. Financial Statements and Exhibits.

 

(d) Exhibits.

The following financial information from Alcoa Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed with the SEC on October 24, 2008, formatted in XBRL: (i) the Statement of Consolidated Income for the three-month and nine-month periods ended September 30, 2008 and 2007, (ii) the Consolidated Balance Sheet at September 30, 2008 and December 31, 2007, (iii) the Statement of Consolidated Cash Flows for the nine-month periods ended September 30, 2008 and 2007, (iv) the Statement of Shareholders’ Equity for the three-month and nine-month periods ended September 30, 2008 and 2007, and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text, are furnished as exhibits to this Current Report on Form 8-K and are collectively referred to as Exhibit 100:

 

100.INS   XBRL Instance Document
100.SCH   XBRL Taxonomy Extension Schema Document
100.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
100.LAB   XBRL Taxonomy Extension Label Linkbase Document
100.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

2

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  ALCOA INC.
  By:  

/s/ Tony R. Thene

    Tony R. Thene
    Vice President and Controller
Dated: November 25, 2008    

 

3

EXHIBIT INDEX

 

Exhibit No.

  

Description

100.INS   XBRL Instance Document
100.SCH   XBRL Taxonomy Extension Schema Document
100.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
100.LAB   XBRL Taxonomy Extension Label Linkbase Document
100.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

4

EX-100.INS 2 aa-20080930.xml XBRL INSTANCE DOCUMENT 39038000000 1207000000 0 532000000 858000000 2791000000 2700000000 14901000000 9272000000 896000000 5084000000 3844000000 21233000000 39038000000 7043000000 54000000 8370000000 2740000000 1309000000 4014000000 1217000000 1852000000 2577000000 588000000 32877000000 17976000000 498000000 380000000 3000000 2689000000 1000000 831000000 925000000 -1031000000 5842000000 55000000 13600000000 15065000000 4326000000 0.33 0.33 0.17 5944000000 316000000 0 269000000 470000000 0.33 0.33 -1000000 0.00 0.00 117000000 97000000 84000000 -17000000 64000000 43000000 7234000000 283000000 353000000 6764000000 274000000 1000000 268000000 -1171000000 477000000 15000000 0 3000000 3000000 -1000000 348000000 -15000000 8000000 15000000 15000000 30000000 66000000 56000000 -369000000 595000000 16000000 0 73000000 213000000 1101000000 -1387000000 626000000 627000000 -32000000 27000000 1082000000 13000000 420000000 193000000 141000000 276000000 1276000000 2421000000 485000000 351000000 2105000000 429000000 72000000 177000000 8000000 192000000 85000000 4000000 957000000 -4000000 2684000000 -2000000 -76000000 1.37 1.36 0.51 17926000000 956000000 0 1118000000 1892000000 1.37 1.36 -1000000 0.00 0.00 553000000 283000000 221000000 22000000 194000000 83000000 22229000000 917000000 1339000000 20337000000 554000000 2000000 1117000000 -694000000 1082000000 85000000 -17000000 196000000 179000000 925000000 140000000 5827000000 55000000 13607000000 16702000000 3852000000 38803000000 856000000 0 545000000 1098000000 2787000000 2602000000 14722000000 8086000000 943000000 4806000000 3326000000 20327000000 38803000000 7166000000 202000000 6371000000 2460000000 1224000000 4046000000 1165000000 1943000000 2753000000 451000000 31601000000 16879000000 569000000 644000000 2948000000 2038000000 451000000 483000000 925000000 -337000000 5774000000 55000000 13039000000 16016000000 3440000000 1314000000 925000000 -721000000 5760000000 55000000 12405000000 15914000000 2510000000 0.64 0.63 0.17 5910000000 338000000 133000000 558000000 1713000000 0.64 0.64 -3000000 0.00 -0.01 1079000000 151000000 76000000 1731000000 64000000 444000000 7387000000 365000000 634000000 5674000000 295000000 1000000 555000000 -354000000 1295000000 32000000 12000000 428000000 440000000 -1000000 808000000 518000000 25000000 77000000 77000000 1772000000 79000000 28000000 -173000000 -184000000 188000000 -93000000 100000000 -224000000 -979000000 -706000000 2468000000 2469000000 -33000000 -2000000 1548000000 126000000 447000000 310000000 0 15000000 123000000 2615000000 297000000 -1116000000 2049000000 369000000 1981000000 819000000 13000000 848000000 83000000 341000000 959000000 49000000 87000000 -23000000 102000000 2.22 2.20 0.51 18095000000 959000000 133000000 1947000000 4016000000 2.24 2.22 -15000000 -0.02 -0.02 1768000000 320000000 301000000 1835000000 171000000 413000000 23361000000 1089000000 2248000000 19345000000 591000000 2000000 1932000000 512000000 1548000000 83000000 -140000000 1037000000 897000000 925000000 -367000000 5716000000 55000000 12146000000 16832000000 1643000000 506000000 925000000 -1233000000 5817000000 55000000 11066000000 14631000000 1999000000 A. Basis of Presentation - The Consolidated Financial Statements (the "Financial Statements") of Alcoa Inc. and its subsidiaries ("Alcoa" or the "company") are unaudited. The Financial Statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the results of operations, financial position, and cash flows. The results reported in these Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2007 year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. This Form 10-Q report should be read in conjunction with Alcoa's Annual Report on Form 10-K for the year ended December 31, 2007, which includes all disclosures required by accounting principles generally accepted in the United States of America. Certain amounts in the prior period Statement of Consolidated Cash Flows have been reclassified to conform to the current period presentation. B. Properties, Plants, and Equipment - During the first quarter of 2008, Alcoa completed a review of the estimated useful lives of its alumina refining and aluminum smelting facilities. Such a review was performed because considerable engineering data and other information (readily available due to the recent construction of the Iceland smelter as well as various expansions and other growth projects in-process or completed over the past two years) indicated that the useful lives of many of the assets in these businesses were no longer appropriate. As a result of this review, for the majority of its refining and smelting locations, Alcoa extended the useful lives of structures to an average of 26 and 32 years (previously 23 and 29 years), respectively, and machinery and equipment to an average of 27 and 20 years (previously 17 and 19 years), respectively. During the third quarter of 2008, Alcoa completed a review of the estimated useful lives of its flat-rolled products and engineered products and solutions facilities. As a result of the 2008 third quarter review, for a portion of its flat-rolled products locations, Alcoa extended the useful lives of structures to an average of 33 years (previously 29 years) and machinery and equipment to an average of 18 years (previously 16 years). No change was made to the useful lives related to the engineered products and solutions locations as the study determined that the average useful lives of structures (26 years) and machinery and equipment (17 years) were appropriate. The extension of depreciable lives qualifies as a change in accounting estimate and was made on a prospective basis effective January 1, 2008 for the alumina refining and aluminum smelting facilities and July 1, 2008 for the flat-rolled products facilities. In the 2008 third quarter and nine-month period, Depreciation, depletion, and amortization expense was $13 (after-tax and minority interests) and $24 (after-tax and minority interests), respectively, less than it would have been had the depreciable lives not been extended. The effect of this change on both basic and diluted earnings per share for the 2008 third quarter and nine-month period was $0.02 and $0.03, respectively. C. Recently Adopted and Recently Issued Accounting Standards - On January 1, 2008, Alcoa adopted Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115," (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. Alcoa already records marketable securities at fair value in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and derivative contracts and hedging activities at fair value in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS 133). The adoption of SFAS 159 had no impact on the Financial Statements as management did not elect the fair value option for any other financial instruments or certain other assets and liabilities. On January 1, 2008, Alcoa adopted SFAS No. 157, "Fair Value Measurements," (SFAS 157) as it relates to financial assets and financial liabilities. In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-2, "Effective Date of FASB Statement No. 157," which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Also in February 2008, the FASB issued FSP No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13," which states that SFAS No. 13, "Accounting for Leases," (SFAS 13) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13 are excluded from the provisions of SFAS 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under SFAS No. 141, "Business Combinations," (SFAS 141) or SFAS No. 141 (revised 2007), "Business Combinations," (SFAS 141(R)). SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to financial assets, except for pension plan assets in regards to the funded status of pension plans recorded on the Consolidated Balance Sheet, and financial liabilities, had no impact on the Financial Statements. Management has determined that the adoption of SFAS 157, as it relates to pension plan assets, will not have an impact on the 2008 Financial Statements. Management is currently evaluating the potential impact of SFAS 157, as it relates to nonfinancial assets and nonfinancial liabilities, on the Financial Statements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below: * Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. * Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. * Level 3 - Inputs that are both significant to the fair value measurement and unobservable. The following sections describe the valuation methodologies used by Alcoa to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified. Where appropriate the description includes details of the valuation models, the key inputs to those models, and any significant assumptions. Available-for-sale securities. Alcoa uses quoted market prices to determine the fair value of available-for-sale securities. These financial instruments consist of exchange-traded fixed income and equity securities, and are classified in Level 1 of the fair value hierarchy. Derivative contracts. Derivative contracts are valued using quoted market prices and significant other observable and unobservable inputs. Such financial instruments consist of aluminum, interest rate, commodity (principally energy-related), and foreign currency contracts. The fair values for the majority of these derivative contracts are based upon current quoted market prices. These financial instruments are typically exchange-traded and are generally classified within Level 1 or Level 2 of the fair value hierarchy depending on whether the exchange is deemed to be an active market or not. For certain derivative contracts whose fair values are based upon trades in liquid markets, such as aluminum options, valuation model inputs can generally be verified and valuation techniques do not involve significant management judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy. Alcoa has other derivative contracts that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (i.e., information concerning time premiums and volatilities for certain option type embedded derivatives and regional premiums for swaps). For periods beyond the term of quoted market prices for aluminum, Alcoa uses a macroeconomic model that estimates the long-term price of aluminum based on anticipated changes in worldwide supply and demand. Where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on available market evidence (Level 2). In the absence of such evidence, management's best estimate is used (Level 3). The following table presents Alcoa's assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2008: Level 1 Level 2 Level 3 Collateral* Total Assets: Available-for-sale securities $ 28 $ - $ - $ - $ 28 Derivative contracts 5 37 4 (4 ) 42 Total assets $ 33 $ 37 $ 4 $ (4 ) $ 70 Liabilities: Derivative contracts $ 360 $ 139 $ 440 $ (2 ) $ 937 * These amounts represent cash collateral paid ($2) and held ($4) that Alcoa elected to net against the fair value amounts recognized for certain derivative instruments executed with the same counterparties under master netting arrangements. This election was made under the provisions of FSP FIN 39-1, which was adopted by Alcoa on January 1, 2008 (see below). The collateral paid of $2 relates to derivative contracts for aluminum included in Level 1 and the collateral held of $4 relates to derivative contracts for interest rates included in Level 2. Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for such derivative contracts on a net basis: Third quarter ended Nine months ended September 30, 2008 September 30, 2008 Balance at beginning of period $ 392 $ 408 Total realized/unrealized (losses) or gains included in: Sales (18 ) (48 ) Cost of goods sold 1 3 Other comprehensive income 42 54 Purchases, sales, issuances, and settlements 19 19 Transfers in and (or) out of Level 3 - - Balance at end of period $ 436 $ 436 Total (losses) or gains included in earnings attributable to the change in unrealized gains or losses relating to derivative contracts still held at September 30, 2008: Sales $ (18 ) $ (48 ) Cost of goods sold 1 3 As reflected in the table above, the net unrealized loss on derivative contracts using Level 3 valuation techniques was $436 as of September 30, 2008. This loss is mainly attributed to embedded derivatives in a power contract that index the price of power to the LME price of aluminum. These embedded derivatives are primarily valued using observable market prices. However, due to the length of the contract, the valuation model also requires management to estimate the long-term price of aluminum based upon anticipated changes in worldwide supply and demand. The embedded derivatives have been designated as hedges of forward sales of aluminum and their realized gains and losses are included in Sales on the accompanying Statement of Consolidated Income. Also, included within Level 3 measurements are derivative financial instruments that hedge the cost of electricity. Transactions involving on-peak power are observable as there is an active market. However, due to Alcoa's power consumption, there are certain off-peak times when there is not an actively traded market for electricity. Therefore, management utilizes various forecast services, historical relationships, and near term market actual pricing to determine the fair value. Gains and losses realized for the electricity contracts are included in Cost of goods sold on the accompanying Statement of Consolidated Income. Additionally, an embedded derivative in a power contract that indexes the difference between the long-term debt ratings of Alcoa and the counterparty from any of the three major credit rating agencies is included in Level 3. Management uses forecast services, historical relationships, and market prices to determine fair value. None of the Level 3 positions on hand at September 30, 2008 resulted in any unrealized gains in the accompanying Statement of Consolidated Income. Effective September 30, 2008, Alcoa adopted FSP No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" (FSP FAS 157-3), which was issued on October 10, 2008. FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption of FSP FAS 157-3 had no impact on the Financial Statements. On January 1, 2008, Alcoa adopted FSP No. FIN 39-1, "Amendment of FASB Interpretation No. 39," (FSP FIN 39-1). FSP FIN 39-1 amends FIN No. 39, "Offsetting of Amounts Related to Certain Contracts," by permitting entities that enter into master netting arrangements as part of their derivative transactions to offset in their financial statements net derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. As a result, management elected to net cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty when a master netting arrangement exists. As of September 30, 2008, the obligation to return cash collateral in the amount of $4 was netted against the fair value of derivative contracts included in Other assets on the accompanying Consolidated Balance Sheet and the right to receive cash collateral in the amount of $2 was netted against the fair value of derivative contracts included in Other current liabilities on the accompanying Consolidated Balance Sheet. The adoption of FSP FIN 39-1 did not impact the Consolidated Balance Sheet as of December 31, 2007 as no cash collateral was held or posted. On January 1, 2008, Alcoa adopted Emerging Issues Task Force (EITF) Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements," (EITF 06-10). Under the provisions of EITF 06-10, an employer is required to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," or Accounting Principles Board Opinion No. 12, "Omnibus Opinion - - 1967," if the employer has agreed to maintain a life insurance policy during the employee's retirement or provide the employee with a death benefit based on the substantive arrangement with the employee. The provisions of EITF 06-10 also require an employer to recognize and measure the asset in a collateral assignment split-dollar life insurance arrangement based on the nature and substance of the arrangement. The adoption of EITF 06-10 had no impact on the Financial Statements. On January 1, 2008, Alcoa adopted Statement 133 Implementation Issue No. E23, "Hedging-General: Issues Involving the Application of the Shortcut Method under Paragraph 68" (Issue E23). Issue E23 provides guidance on certain practice issues related to the application of the shortcut method by amending paragraph 68 of SFAS 133 with respect to the conditions that must be met in order to apply the shortcut method for assessing hedge effectiveness of interest rate swaps. In addition to applying the provisions of Issue E23 on hedging arrangements designated on or after January 1, 2008, an assessment was required to be made on January 1, 2008 to determine whether preexisting hedging arrangements met the provisions of Issue E23 as of their original inception. Management performed such an assessment and determined that the adoption of Issue E23 had no impact on preexisting hedging arrangements. Alcoa will apply the provisions of Issue E23 on future hedging arrangements so designated. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133," (SFAS 161). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133, and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. This standard becomes effective for Alcoa on January 1, 2009. Earlier adoption of SFAS 161 and, separately, comparative disclosures for earlier periods at initial adoption are encouraged. As SFAS 161 only requires enhanced disclosures, this standard will have no impact on the financial position, results of operations, or cash flows of Alcoa. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51," (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, sometimes called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent's equity; consolidated net income to be reported at amounts inclusive of both the parent's and noncontrolling interest's shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of income; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. SFAS 160 becomes effective for Alcoa on January 1, 2009. Management has determined that the adoption of SFAS 160 will not have an impact on the Financial Statements. In December 2007, the FASB issued SFAS 141(R), which replaces SFAS 141 and retains the fundamental requirements in SFAS 141, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination. This standard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. SFAS 141(R) requires an acquirer in a business combination, including business combinations achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. SFAS 141(R) becomes effective for Alcoa for any business combination with an acquisition date on or after January 1, 2009. Management has determined that the adoption of SFAS 141(R) will not have a material impact on the Financial Statements. In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets," (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets," (SFAS 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 becomes effective for Alcoa on January 1, 2009. Management has determined that the adoption of FSP FAS 142-3 will not have an impact on the Financial Statements. In June 2008, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 becomes effective for Alcoa on January 1, 2009. Management has determined that the adoption of FSP EITF 03-6-1 will not have an impact on the Financial Statements. D. Discontinued Operations and Assets Held for Sale - For the third quarter and nine-month period of 2008 and 2007, there were no active businesses classified as discontinued operations. The following table details selected financial information for the businesses included within discontinued operations: Third quarter ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Sales $ - $ - $ - $ - Loss from operations $ (1 ) $ (1 ) $ (1 ) $ (2 ) Loss on sale of businesses - - - (17 ) Loss from impairment - (3 ) - (3 ) Total pretax loss (1 ) (4 ) (1 ) (22 ) Benefit for income taxes - 1 - 7 Loss from discontinued operations $ (1 ) $ (3 ) $ (1 ) $ (15 ) In the 2008 third quarter and nine-month period, Alcoa recorded a loss of $1 (after-tax) from discontinued operations due to a settlement of litigation related to the telecommunications business prior to its divestiture in 2005. In the third quarter of 2007, Alcoa recorded a loss of $3 (after-tax) from discontinued operations primarily due to the write-off of the carrying value of assets related to the Hawesville, KY automotive casting facility. In the 2007 nine-month period, Alcoa recorded a loss of $15 (after-tax) from discontinued operations primarily related to working capital and other adjustments associated with the 2006 fourth quarter sale of the home exteriors business and the write-off of the carrying value of assets related to the Hawesville, KY automotive casting facility. For both periods presented in the accompanying Consolidated Balance Sheet, the assets and liabilities of operations classified as held for sale include the Hawesville, KY automotive casting facility, the wireless component of the telecommunications business, and a small automotive casting business in the U.K. Additionally, the assets and related liabilities of the businesses within the Packaging and Consumer segment and a soft alloy extrusion facility in the U.S. that was not contributed to the Sapa AB joint venture were also classified as held for sale as of December 31, 2007. In February 2008, Alcoa completed the sale of the businesses within the Packaging and Consumer segment (see Note F for additional information) and all locations were transferred to the buyer as of September 30, 2008. The major classes of assets and liabilities of operations held for sale are as follows: September 30, December 31, 2008 2007 Assets: Receivables, less allowances $ 1 $ 308 Inventories - 377 Properties, plants, and equipment, net 2 738 Goodwill - 1,094 Intangibles - 375 Other assets - 56 Assets held for sale $ 3 $ 2,948 Liabilities: Accounts payable, trade $ - $ 304 Accrued expenses 1 114 Other liabilities - 33 Liabilities of operations held for sale $ 1 $ 451 E. Restructuring and Other Charges - In the third quarter and nine-month period of 2008, Alcoa recorded restructuring and other charges of $43 ($29 after-tax and minority interests) and $83 ($61 after-tax and minority interests), respectively. Restructuring and other charges in both periods include $48 ($31 after-tax) related to the temporary idling of the Rockdale, TX smelter, which consists of $44 ($29 after-tax) for the layoff of approximately 870 employees (terminations are expected to be mostly complete by the end of 2008) and a curtailment of other postretirement benefit plans (see Note O for additional information), and $4 ($2 after-tax) for other exit costs; and a credit of $12 ($8 after-tax) for the reversal of a reserve related to a shutdown facility. Also included in Restructuring and other charges in the 2008 third quarter and nine-month period was $2 ($1 after-tax) and $43 ($32 after-tax), respectively, as a result of the loss recognized on the sale of the Packaging and Consumer businesses (see Note F for additional information), and the remaining amount was for net charges, primarily related to severance costs for the layoff of approximately 1,900 employees at six Electrical and Electronic Solutions locations in Mexico and Honduras through 2009. In the third quarter and nine-month period of 2007, Alcoa recorded charges of $444 ($311 after-tax and minority interests) and $413 ($308 after-tax and minority interests), respectively. The net charge in both periods included $357 ($251 after-tax) in asset impairments related to the Packaging and Consumer businesses, the Electrical and Electronic Solutions business, and the Automotive Castings business; $53 ($36 after-tax) in severance charges associated with the Electrical and Electronic Solutions business; and $34 ($24 after-tax and minority interests) in net charges, primarily for severance charges and asset impairments of various other facilities. The 2007 nine-month period also includes net charges, primarily for accelerated depreciation associated with the shutdown of certain facilities in 2007, of $34 ($24 after-tax and minority interests) related to the restructuring program initiated in the fourth quarter of 2006. All of these amounts were slightly offset in the nine-month period of 2007 by a $65 ($27 after-tax) adjustment to the original impairment charge recorded in the fourth quarter of 2006 related to the estimated fair value of the soft alloy extrusion business, which was contributed to a joint venture effective June 1, 2007. Restructuring and other charges are not included in the segment results. As of September 30, 2008, approximately 1,700 of the 2,800 employees associated with 2008 restructuring programs and 3,900 of the 6,300 employees associated with 2007 restructuring programs were terminated. The remaining terminations for 2007 restructuring programs are expected to be completed by the end of 2008. Also, the terminations associated with the 2006 restructuring program are essentially complete. For further details on the 2007 and 2006 restructuring programs, see Note D to the audited consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2007. In the 2008 nine-month period, cash payments of $15, $51, and $10 were made against total reserves related to the 2008, 2007, and 2006 restructuring programs, respectively. The remaining reserves are expected to be paid in cash during 2008, with the exception of approximately $50 to $55, which is expected to be paid over the next several years for ongoing site remediation work and special termination benefit payments. Activity and reserve balances for restructuring charges are as follows: Employee termination and Other exit severance costs costs Total Reserve balances at December 31, 2006 $ 153 $ 40 $ 193 2007: Cash payments (101 ) (13 ) (114 ) Restructuring charges 88 22 110 Reversals of previously recorded restructuring charges (25 ) (7 ) (32 ) Reserve balances at December 31, 2007 115 42 157 2008: Cash payments (65 ) (17 ) (82 ) Restructuring charges 53 9 62 Other (7 ) (12 ) (19 ) Reserve balances at September 30, 2008 $ 96 $ 22 $ 118 F. Acquisitions and Divestitures - On February 29, 2008, Alcoa completed the sale of its Packaging and Consumer businesses to Rank Group Limited (Rank). In the 2008 first quarter, Alcoa received $2,490 in cash in exchange for a combination of assets and shares of stock in certain subsidiaries, and recognized a loss in Restructuring and other charges on the accompanying Statement of Consolidated Income (see Note E for additional information) of $36 ($28 after-tax) on the sale mainly as a result of changes in the net book value of the businesses and additional transaction costs. Also, a discrete income tax charge of $28 was recognized in the 2008 first quarter due to the allocation of the sale proceeds to higher tax rate jurisdictions as opposed to the allocation previously contemplated. In the 2008 second quarter, Alcoa received regulatory and other approvals for a small number of locations that did not close in the 2008 first quarter. Following the transfer of these locations to Rank, Alcoa received an additional $196 in cash and recognized an additional loss of $5 ($3 after-tax) in Restructuring and other charges on the accompanying Statement of Consolidated Income (see Note E for additional information). Also, a discrete income tax benefit of $9 was recognized in the 2008 second quarter, mainly as a result of changes in tax assumptions surrounding transaction costs and the divestiture of certain foreign locations that were finalized in the second quarter. Furthermore, in the second quarter of 2008, Alcoa paid Rank $53 as a result of working capital and certain other post-closing adjustments as defined in the sales agreement. In the 2008 third quarter, Alcoa transferred the final remaining location to Rank in exchange for $7 in cash. Additionally, as a result of various post-closing adjustments on the sale of the Packaging and Consumer businesses, Alcoa recognized a loss of $2 ($1 after-tax) in Restructuring and other charges on the accompanying Statement of Consolidated Income (see Note E for additional information) and received $11 from Rank. This transaction is no longer subject to working capital and other post-closing adjustments. Alcoa will sell metal to Rank under a supply agreement that was entered into in conjunction with the sale agreement in December 2007. This metal supply agreement constitutes continuing involvement in the sold businesses by Alcoa, and, therefore, the results of operations of the Packaging and Consumer businesses were not classified as discontinued operations. The Packaging and Consumer segment generated sales of $3,288 in 2007 and had approximately 9,300 employees in 22 countries. The Packaging and Consumer segment no longer contains any operations. The following is a description of the four businesses that were included in this segment: * Flexible Packaging, manufacturers of laminated, printed, and extruded non-rigid packaging materials such as pouch, blister packaging, unitizing films, high quality shrink labels, and foil lidding for the pharmaceutical, food and beverage, tobacco, and industrial markets; * Closure Systems International, a leading global manufacturer of plastic and aluminum packaging closures and capping equipment for beverage, food, and personal care customers; * Consumer Products, a leading manufacturer of branded and private label foil, wraps and bags, and includes the Reynolds(R) and Baco(R) branded products; * Food Packaging, makers of stock and customer products for the foodservice, supermarket, food processor, and agricultural markets, including foil, film, and both plastic and foil food containers. On March 3, 2008, Alcoa acquired the remaining outstanding minority interest of four percent in the Belaya Kalitva fabricating facility in Russia for $15 in cash. Based on the allocation of the purchase price, Alcoa recorded $6 in goodwill, all of which is non-deductible for income tax purposes. On March 12, 2008, Alcoa acquired the stock of Republic Fastener Manufacturing Corporation ("Republic") and Van Petty Manufacturing ("Van Petty") from The Wood Family Trust for $276 in cash. The two aerospace fastener manufacturing businesses are located in Newbury Park, California, and employ a combined 240 people. Republic offers a wide variety of sheet metal and aerospace fasteners and Van Petty produces high performance precision aerospace fasteners, and, combined, the businesses had revenue of $51 in 2007. These businesses are included in the Engineered Products and Solutions segment. Based on the current purchase price allocation, $248 of goodwill was recorded for these transactions, all of which is deductible for income tax purposes. The final allocation of the purchase price will be based upon valuation and other studies, including environmental and other contingent liabilities, which will be completed by the end of 2008. On March 31, 2008, Alcoa received formal approval from regulators in China for the acquisition of the 27% outstanding minority interest in Alcoa Bohai Aluminum Industries Company Limited. In May 2008, Alcoa completed the purchase of such minority interest for $79 in cash. Based on the allocation of the purchase price, Alcoa recorded $24 in goodwill, all of which is non-deductible for income tax purposes. The final allocation of the purchase price will be based upon valuation and other studies, which will be completed by the end of 2008. In connection with the August 2003 acquisition of 40.9% of Alcoa Aluminio S.A. (Aluminio), which was held by Camargo Correa Group (Camargo), the acquisition agreement provided for a contingent payment to Camargo based on the five-year performance of Aluminio limited by the appreciation in the market price of Alcoa's common stock. On July 3, 2008, Alcoa paid Camargo $47 under the contingent payment provisions in the acquisition agreement. This payment resulted in $47 of goodwill, all of which is non-deductible for income tax purposes, representing an increase in the original purchase price. Alcoa is no longer subject to contingent payments related to the Aluminio acquisition. G. Inventories September 30, December 31, 2008 2007 Finished goods $ 967 $ 849 Work-in-process 1,252 1,044 Bauxite and alumina 753 652 Purchased raw materials 625 547 Operating supplies 247 234 $ 3,844 $ 3,326 At September 30, 2008 and December 31, 2007, 42% and 40% of total inventories, respectively, were valued on a LIFO basis. If valued on an average-cost basis, total inventories would have been $1,190 and $1,069 higher at September 30, 2008 and December 31, 2007, respectively. H. Investments - On February 1, 2008, Alcoa joined with the Aluminum Corporation of China to acquire 12% of the U.K. common stock of Rio Tinto plc (RTP) for approximately $14,000. The investment was made through a special purpose vehicle called Shining Prospect Pte. Ltd. (SPPL), which is a private limited liability company, created solely for the purpose of acquiring the RTP shares. The RTP shares were purchased by SPPL in the open market through an investment broker. The following is a description of the transaction structure between Alcoa and SPPL and the related accounting impacts. On February 6, 2008, Alcoa contributed $1,200 of the $14,000 through the purchase of a Convertible Senior Secured Note (the "Note") executed on January 30, 2008 by SPPL which is convertible into approximately 8.5% of the equity shares of SPPL. Under the Note, Alcoa has the right, at any time on or before the close of business on the maturity date of the Note (February 1, 2011), to convert the Note, in whole or in part, for a number of shares of SPPL that will result in Alcoa having a debt to equity ratio in SPPL equal to the debt to equity ratio of all investors, in the aggregate, in SPPL. The unpaid principal amount of the Note will be proportionately reduced to reflect any conversion. The Note further provides that Alcoa is permitted at any time to increase the number of shares of SPPL which Alcoa would acquire on full conversion of the Note up to a maximum of 25% of the outstanding shares of SPPL by increasing the unpaid outstanding principal of the Note or acquiring shares of SPPL directly. Additionally, under the Note, Alcoa has the right, at any time following the period ending six months from the issuance date of the Note or upon the liquidation or winding-up of SPPL, to require SPPL to either (i) distribute, in exchange for cancellation of the Note and any equity interests into which it may have been converted, to Alcoa a specified number of ordinary shares of RTP (the "Ordinary Shares") or (ii) to purchase Alcoa's debt and equity interest in SPPL at a price equal to the then-current market value of such specified number of Ordinary Shares. The Note provides that SPPL will secure the principal, interest, and other obligations of SPPL to Alcoa under the Note with the number of Ordinary Shares it purchases with the proceeds it received from the issuance of the Note. Alcoa's investment in SPPL through the Note is in-substance an investment in common stock of SPPL. Additionally, investments of three to five percent or greater in limited liability companies that are essentially equivalent to partnerships are considered to be more than minor, and, therefore, are accounted for under the equity method. As a result, Alcoa accounted for its $1,200 investment in SPPL as an equity method investment. In the 2008 third quarter and nine-month period, Alcoa recorded $7 and $14 in equity income, respectively, which represents Alcoa's share of the semiannual dividends that SPPL received as a shareholder of RTP. Also, Alcoa recorded an unrealized loss in other comprehensive income of $303 ($467 pretax) and $292 ($450 pretax) in the 2008 third quarter and nine-month period, respectively, representing its share of SPPL's total unrealized loss related to the decrease in fair value of the RTP shares, which are accounted for as available-for-sale securities by SPPL (see Note P for additional information). Lehman Brothers International Europe (LBIE) is the custodian of the RTP shares for SPPL. SPPL is discussing with the administrators of LBIE in London the arrangements for the orderly transfer of the RTP shares out of LBIE. The RTP shares are held in custody only and are not assets of LBIE or any other Lehman Brothers affiliate. Therefore, the shares are not subject to the claims of Lehman Brothers' general creditors. In the 2008 second quarter, Alcoa and Orkla ASA's SAPA Group reached a tentative agreement on the final ownership percentages of the Sapa AB joint venture created in June 2007. Alcoa expects its ultimate ownership percentage to be 45.45%, and, as of September 30, 2008, the carrying value of its investment was $819. Alcoa does not expect any material adjustments to the carrying value as a result of finalizing its ownership percentage. I. Debt - On January 24, 2008, Alcoa entered into a Revolving Credit Agreement (RCA-1) with two financial institutions. RCA-1 provided a $1,000 senior unsecured revolving credit facility (RCF-1), with a stated maturity of March 28, 2008. RCA-1 contained a provision that if there were amounts borrowed under RCF-1 at the time Alcoa received the proceeds from the sale of the Packaging and Consumer businesses, the company must use the net cash proceeds to prepay the amount outstanding under RCF-1. Additionally, upon Alcoa's receipt of such proceeds, the lenders' commitments under RCF-1 would be reduced by a corresponding amount, up to the total commitments then in effect under RCF-1, regardless of whether there was an amount outstanding under RCF-1. On February 12, 2008, Alcoa borrowed $1,000 under RCF-1 and used the proceeds to reduce outstanding commercial paper and for general corporate purposes. As disclosed in Note F, Alcoa completed the sale of its Packaging and Consumer businesses on February 29, 2008 for $2,490 in cash. As a result, on February 29, 2008, Alcoa repaid the $1,000 under RCF-1, and the lenders' commitments under RCF-1 were reduced to zero effectively terminating RCA-1. On January 31, 2008, Alcoa entered into a Revolving Credit Agreement (RCA-2) with Lehman Commercial Paper Inc. (LCPI), as administrative agent, and Lehman Brothers Commercial Bank (LBCB), as lender. RCA-2 provides a $1,000 senior unsecured revolving credit facility (RCF-2), which matures on January 31, 2009. Loans will bear interest at (i) a base rate or (ii) a rate equal to LIBOR plus an applicable margin based on the credit ratings of Alcoa's outstanding senior unsecured long-term debt. Based on Alcoa's current long-term debt ratings, the applicable margin on LIBOR loans will be 0.93% per annum. Loans may be prepaid without premium or penalty, subject to customary breakage costs. Amounts payable under RCF-2 will rank pari passu with all other unsecured, unsubordinated indebtedness of Alcoa. RCA-2 includes the following covenants, among others, (a) a leverage ratio, (b) limitations on Alcoa's ability to incur liens securing indebtedness for borrowed money, (c) limitations on Alcoa's ability to consummate a merger, consolidation, or sale of all or substantially all of its assets, and (d) limitations on Alcoa's ability to change the nature of its business. The obligation of Alcoa to pay amounts outstanding under RCF-2 may be accelerated upon the occurrence of an "Event of Default" as defined in RCA-2. Such Events of Default include, among others, (a) Alcoa's failure to pay the principal of, or interest on, borrowings under RCF-2, (b) any representation or warranty of Alcoa in RCA-2 proving to be materially false or misleading, (c) Alcoa's breach of any of its covenants contained in RCA-2, and (d) the bankruptcy or insolvency of Alcoa. As of September 30, 2008, there was no amount outstanding under RCF-2. On October 5, 2008, LCPI filed for bankruptcy protection under section 11 of the United States Bankruptcy Code. To Alcoa's knowledge, LBCB has not filed for bankruptcy protection. On October 16, 2008, Alcoa gave notice in accordance with the provisions of RCA-2 to permanently terminate in whole LBCB's total commitments under RCF-2 effective October 30, 2008. On March 10, 2008, Alcoa filed an automatic shelf registration statement with the Securities and Exchange Commission for an indeterminate amount of securities for future issuance. This shelf registration statement replaced Alcoa's existing shelf registration statement. As of September 30, 2008, $1,500 in senior debt securities were issued under the new shelf registration statement (see below). In March 2008, Aluminio entered into two separate loan agreements (the "Loans") with BNDES (Brazil's National Bank for Economic and Social Development). It is important to note that the interest rates presented below are based on amounts that will be borrowed in Brazil and are not equivalent to the interest rates Alcoa would pay if such amounts were borrowed in the U.S. The first loan provides for a commitment of $256 (R$500), which is divided into five subloans, and will be used to pay for certain expenditures of the Juruti bauxite mine development. Interest on four of the subloans (R$470) is equal to BNDES' long-term interest rate, currently 6.25%, plus a weighted-average margin of 2.13%. Interest on the fifth subloan (R$30) is equal to the average cost incurred by BNDES in raising capital outside of Brazil, currently 5.23%, plus a margin of 2.40%. Principal and interest are payable monthly beginning in September 2009 and ending in November 2014 for the four subloans totaling R$470 and beginning in November 2009 and ending in January 2015 for the subloan totaling R$30. Prior to these beginning payment dates, interest is payable quarterly on borrowed amounts. The second loan provides for a commitment of $332 (R$650), which is divided into three subloans, and will be used to pay for certain expenditures of the Sao Luis refinery expansion. Interest on two of the subloans (R$589) is equal to BNDES' long-term interest rate plus a weighted-average margin of 1.99%. Interest on the third subloan (R$61) is equal to the average cost incurred by BNDES in raising capital outside of Brazil plus a margin of 2.02%. Principal and interest are payable monthly beginning in December 2009 and ending in February 2015 for the two subloans totaling R$589 and beginning in February 2010 and ending in April 2015 for the subloan totaling R$61. Prior to these beginning payment dates, interest is payable quarterly on borrowed amounts. The Loans may be repaid early without penalty with the approval of BNDES. Also, the Loans include a financial covenant that states that Alcoa must maintain a debt-to-equity ratio of 1.5 or lower. As of September 30, 2008, Aluminio borrowed $206 (R$403) and $254 (R$498) under the loans associated with the Juruti and Sao Luis growth projects, respectively. In June 2008, Aluminio finalized certain documents related to another loan agreement with BNDES. This loan provides for a commitment of $351 (R$687), which is divided into three subloans, and will be used to pay for certain expenditures of the Estreito hydroelectric power project. Interest on the three subloans is equal to BNDES' long-term interest rate plus a weighted-average margin of 1.48%. Principal and interest are payable monthly beginning in October 2011 and ending in September 2029 for the two subloans totaling R$667 and beginning in January 2011 and ending in December 2016 for the subloan totaling R$20. Prior to these beginning payment dates, interest is payable quarterly on borrowed amounts. This loan may be repaid early without penalty with the approval of BNDES. As of September 30, 2008, $75 (R$147) was borrowed under this loan. On July 15, 2008, Alcoa completed a public debt offering under its existing shelf registration statement (filed on March 10, 2008) for $1,500 in new notes. The $1,500 is comprised of $750 of 6.00% Notes due 2013 (the "2013 Notes") and $750 of 6.75% Notes due 2018 (the "2018 Notes" and, collectively with the 2013 Notes, the "Notes"). Alcoa received $1,489 in net proceeds from the public debt offering reflecting original issue discounts and the payment of financing costs. The net proceeds were used for general corporate purposes, including the reduction of outstanding commercial paper, purchases of outstanding common stock under the current stock repurchase program, working capital requirements, and capital expenditures. The original issue discounts and financing costs were deferred and will be amortized to interest expense using the effective interest method over the respective terms of the Notes. Interest on the Notes is paid semi-annually in January and July, commencing January 2009. Alcoa has the option to redeem the Notes, as a whole or in part, at any time or from time to time, on at least 30 days, but not more than 60 days, prior notice to the holders of the Notes at a redemption price specified in the Notes. The Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the Notes) at a repurchase price in cash equal to 101% of the aggregate principal amount of the Notes repurchased, plus any accrued and unpaid interest on the Notes repurchased. The Notes rank pari passu with Alcoa's other unsecured senior unsubordinated indebtedness. Also in July 2008, Alcoa entered into $800 of forward starting swaps to hedge interest rates in anticipation of the Notes issuances. The swaps hedged equal amounts of the 2013 Notes and the 2018 Notes ($400 each). These swaps were terminated in conjunction with the issuances of the Notes at a loss of $11. This loss will be amortized over the life of the Notes as additional interest expense. On July 28, 2008, Alcoa increased the capacity of its senior unsecured revolving credit facility by $175 as provided for under the related Five-Year Revolving Credit Agreement, dated as of October 2, 2007 (the "Credit Agreement"). As of September 30, 2008, there was no amount outstanding under the Credit Agreement. On October 5, 2008, LCPI, a lender under the Credit Agreement with $150 in commitments, filed for bankruptcy protection under section 11 of the United States Bankruptcy Code. It is not certain if LCPI will honor its obligations under the Credit Agreement. The total capacity of the credit facility, excluding LCPI's commitment, is $3,275. J. Commitments and Contingencies Litigation On February 27, 2008, Alcoa Inc. received notice that Aluminium Bahrain B.S.C. ("Alba") had filed suit against Alcoa Inc. and Alcoa World Alumina LLC (collectively, "Alcoa"), and others, in the U.S. District Court for the Western District of Pennsylvania (the "Court"), Civil Action number 08-299, styled Aluminium Bahrain B.S.C. v. Alcoa Inc., Alcoa World Alumina LLC, William Rice, and Victor Dahdaleh. The complaint alleges that certain Alcoa entities and their agents, including Victor Phillip Dahdaleh, have engaged in a conspiracy over a period of 15 years to defraud Alba. The complaint further alleges that Alcoa and its employees or agents (1) illegally bribed officials of the government of Bahrain and (or) officers of Alba in order to force Alba to purchase alumina at excessively high prices, (2) illegally bribed officials of the government of Bahrain and (or) officers of Alba and issued threats in order to pressure Alba to enter into an agreement by which Alcoa would purchase an equity interest in Alba, and (3) assigned portions of existing supply contracts between Alcoa and Alba for the sole purpose of facilitating alleged bribes and unlawful commissions. The complaint alleges that Alcoa and the other defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and committed fraud. Alba's complaint seeks compensatory, consequential, exemplary, and punitive damages, rescission of the 2005 alumina supply contract, and attorneys' fees and costs. Alba seeks treble damages with respect to its RICO claims. On February 26, 2008, Alcoa Inc. had advised the U.S. Department of Justice (the "DOJ") and the Securities and Exchange Commission (the "SEC") that it had recently become aware of these claims, had already begun an internal investigation, and intended to cooperate fully in any investigation that the DOJ or the SEC may commence. On March 17, 2008, the DOJ notified Alcoa that it had opened a formal investigation and Alcoa has been cooperating with the government. In response to a motion filed by the DOJ on March 27, 2008, the Court ordered the suit filed by Alba to be administratively closed and that all discovery be stayed to allow the DOJ to fully conduct an investigation without the interference and distraction of ongoing civil litigation. The Court further ordered that the case will be reopened at the close of the DOJ's investigation. The DOJ investigation is continuing and the company is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss. In November 2006, in Curtis v. Alcoa Inc., Civil Action No. 3:06cv448 (E.D. Tenn.), a class action was filed by plaintiffs representing approximately 13,000 retired former employees of Alcoa or Reynolds Metals Company and spouses and dependents of such retirees alleging violation of the Employee Retirement Income Security Act (ERISA) and the Labor-Management Relations Act by requiring plaintiffs, beginning January 1, 2007, to pay health insurance premiums and increased co-payments and co-insurance for certain medical procedures and prescription drugs. Plaintiffs allege these changes to their retiree health care plans violate their rights to vested health care benefits. Plaintiffs additionally allege that Alcoa has breached its fiduciary duty to plaintiffs under ERISA by misrepresenting to them that their health benefits would never change. Plaintiffs seek injunctive and declaratory relief, back payment of benefits and attorneys' fees. Alcoa has consented to treatment of plaintiffs' claims as a class action. During the fourth quarter of 2007, following briefing and argument, the court ordered consolidation of the plaintiffs' motion for preliminary injunction with trial, certified a plaintiff class, bifurcated and stayed the plaintiffs' breach of fiduciary duty claims, struck the plaintiffs' jury demand, but indicated it would use an advisory jury, and set a trial date of September 17, 2008. In August 2008, the court set a new trial date of March 24, 2009. Alcoa estimates that, in the event of an unfavorable outcome, the maximum exposure would be an additional postretirement benefit liability of approximately $300 and approximately $40 of expense (includes an interest cost component) annually, on average, for the next 11 years. Alcoa believes that it has valid defenses and intends to defend this matter vigorously. However, as this litigation is in its preliminary stages, the company is unable to reasonably predict the outcome. In addition to the litigation discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa, including those pertaining to environmental, product liability, and safety and health matters. While the amounts claimed may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that the company's financial position, liquidity, or results of operations in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position, liquidity, or the results of operations of the company. Environmental Matters Alcoa continues to participate in environmental assessments and cleanups at a number of locations. These include 31 owned or operating facilities and adjoining properties, 33 previously owned or operating facilities and adjoining properties, and 70 waste sites, including Superfund sites. A liability is recorded for environmental remediation costs or damages when a cleanup program becomes probable and the costs or damages 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 and damages. The liability can change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes. Therefore, it is not possible to determine the outcomes or to estimate with any degree of accuracy the potential costs for certain of these matters. The following discussion provides additional details regarding the current status of Alcoa's significant sites where the final outcome cannot be determined or the potential costs in the future cannot be estimated. Massena, NY. Alcoa has been conducting investigations and studies of the Grasse River, adjacent to Alcoa's Massena plant site, under order from the U.S. Environmental Protection Agency (EPA) issued under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund. Sediments and fish in the river contain varying levels of polychlorinated biphenyls (PCBs). In 2002, Alcoa submitted an Analysis of Alternatives Report that detailed a variety of remedial alternatives with estimated costs ranging from $2 to $525. Because the selection of the $2 alternative (natural recovery) was considered remote, Alcoa adjusted the reserve for the Grasse River in 2002 to $30 representing the low end of the range of possible alternatives, as no single alternative could be identified as more probable than the others. In June of 2003, based on river observations during the spring of 2003, the EPA requested that Alcoa gather additional field data to assess the potential for sediment erosion from winter river ice formation and breakup. The results of these additional studies, submitted in a report to the EPA in April of 2004, suggest that this phenomenon has the potential to occur approximately every 10 years and may impact sediments in certain portions of the river under all remedial scenarios. The EPA informed Alcoa that a final remedial decision for the river could not be made without substantially more information, including river pilot studies on the effects of ice formation and breakup on each of the remedial techniques. Alcoa submitted to the EPA, and the EPA approved, a Remedial Options Pilot Study (ROPS) to gather this information. The scope of this study includes sediment removal and capping, the installation of an ice control structure, and significant monitoring. In May of 2004, Alcoa agreed to perform the study at an estimated cost of $35. Most of the construction work was completed in 2005 with monitoring work proposed through 2008. The findings will be incorporated into a revised Analysis of Alternatives Report, which is expected to be submitted in the first quarter of 2009. This information will be used by the EPA to propose a remedy for the entire river. Alcoa adjusted the reserves in the second quarter of 2004 to include the $35 for the ROPS. This was in addition to the $30 previously reserved. The reserves for the Grasse River were re-evaluated in the fourth quarter of 2006 and an adjustment of $4 was made. This adjustment is to cover commitments made to the EPA for additional investigation work, for the on-going monitoring program, including that associated with the ROPS program, to prepare a revised Analysis of Alternatives Report, and for an interim measure that involves, annually, the mechanical ice breaking of the river to prevent the formation of ice jams until a permanent remedy is selected. This reserve adjustment is intended to cover these commitments through the first quarter of 2009 when the revised Analysis of Alternatives report will be submitted. With the exception of the natural recovery remedy, none of the existing alternatives in the 2002 Analysis of Alternatives Report is more probable than the others and the results of the ROPS are necessary to revise the scope and estimated cost of many of the current alternatives. The EPA's ultimate selection of a remedy could result in additional liability. Alcoa may be required to record a subsequent reserve adjustment at the time the EPA's Record of Decision is issued, which is expected in 2009 or later. Sherwin, TX. In connection with the sale of the Sherwin alumina refinery, which was required to be divested as part of the Reynolds merger in 2000, Alcoa has agreed to retain responsibility for the remediation of the then existing environmental conditions, as well as a pro rata share of the final closure of the active waste disposal areas, which remain in use. Alcoa's share of the closure costs is proportional to the total period of operation of the active waste disposal areas. Alcoa estimated its liability for the active disposal areas by making certain assumptions about the period of operation, the amount of material placed in the area prior to closure, and the appropriate technology, engineering, and regulatory status applicable to final closure. The most probable cost for remediation has been reserved. It is reasonably possible that an additional liability, not expected to exceed $75, may be incurred if actual experience varies from the original assumptions used. East St. Louis, IL. In response to questions regarding environmental conditions at the former East St. Louis operations, Alcoa entered into an administrative order with the EPA in December 2002 to perform a remedial investigation and feasibility study of an area used for the disposal of bauxite residue from historic alumina refining operations. A draft feasibility study was submitted to the EPA in April 2005. The feasibility study includes remedial alternatives that range from no further action at $0 to significant grading, stabilization, and water management of the bauxite residue disposal areas at $75. Because the selection of the $0 alternative was considered remote, Alcoa increased the environmental reserve for this location by $15 in the second quarter of 2005, representing the low end of the range of possible alternatives, which met the remedy selection criteria, as no alternative could be identified as more probable than the others. In 2007, the EPA temporarily suspended its final review of the feasibility study based on Alcoa's request for additional time to fully explore site redevelopment and material use options. Ultimately, the EPA's selection of a remedy could result in additional liability, and Alcoa may be required to record a subsequent reserve adjustment at the time the EPA's Record of Decision is issued, which is expected late in 2008 or later. Vancouver, WA. In 1987, Alcoa sold its Vancouver smelter to a company that is now known as Evergreen Aluminum (Evergreen). The purchase and sale agreement contained a provision that Alcoa retain liability for any environmental issues that arise subsequent to the sale that pre-date 1987. As a result of this obligation, Alcoa recorded a reserve for the Vancouver location at that time. Evergreen is currently decommissioning the smelter and cleaning up the approximately 100 acres under a consent order with the Washington Department of Ecology (WDE). In February 2008, Evergreen notified Alcoa that it had identified numerous areas containing contamination that predated 1987. In response to this notification, Alcoa increased the existing reserve by $3 to reimburse Evergreen for its costs to cleanup this contamination. In August 2008, Evergreen presented additional information for contaminated areas discovered since February 2008. Separately, in September 2008, Alcoa completed a Remedial Investigation/Feasibility Study (RI/FS) under the Washington State Model Toxics Control Act and negotiated a consent decree with WDE, which requires Alcoa to complete cleanup of PCB contaminated sediments in the Columbia River as well as remediate soil contamination in upland portions of the Vancouver property. Alcoa is in the process of obtaining final permit approval for this work and dredging work will take place between November 1, 2008 and February 28, 2009. As a result of the above items related to the Vancouver site, Alcoa increased the environmental reserve by $11 in the 2008 third quarter. As cleanup work progresses and final remedies are negotiated with WDE, a subsequent reserve adjustment may be necessary. Based on the foregoing, it is possible that Alcoa's financial position, liquidity, or results of operations, in a particular period, could be materially affected by matters relating to these sites. However, based on facts currently available, management believes that adequate reserves have been provided and that the disposition of these matters will not have a materially adverse effect on the financial position, liquidity, or the results of operations of the company. Alcoa's remediation reserve balance was $280 and $279 at September 30, 2008 and December 31, 2007 (of which $50 and $51 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 the 2008 third quarter and nine-month period, the remediation reserve was increased by $15 and $20, respectively, mostly due to the increase in the reserve related to the Vancouver property discussed above. The increase to the remediation reserve was charged to Cost of goods sold on the accompanying Statement of Consolidated Income for both periods. Payments related to remediation expenses applied against the reserve were $9 and $19 in the 2008 third quarter and nine-month period, respectively. These amounts include expenditures currently mandated, as well as those not required by any regulatory authority or third party. 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. Other Aluminio is a participant in several hydroelectric power construction projects in Brazil for purposes of increasing its energy self-sufficiency and providing a long-term, low-cost source of power for its facilities. Two of these projects, Machadinho and Barra Grande, were completed in 2002 and 2006, respectively. Aluminio committed to taking a share of the output of the Machadinho and Barra Grande projects each for 30 years at cost (including cost of financing the project). In the event that other participants in either one of these projects fail to fulfill their financial responsibilities, Aluminio may be required to fund a portion of the deficiency. In accordance with the respective agreements, if Aluminio funds any such deficiency, its participation and share of the output from the respective project will increase proportionately. With Machadinho and Barra Grande, Aluminio's current power self-sufficiency is approximately 40%, to meet a total energy demand of approximately 690 megawatts from Brazilian primary plants. Aluminio accounts for the Machadinho and Barra Grande hydroelectric projects as equity method investments. Aluminio's investment participation in these projects is 30.99% for Machadinho and 42.18% for Barra Grande. Its total investment in these projects was $224 (R$438) and $241 (R$426) at September 30, 2008 and December 31, 2007, respectively. Alcoa's maximum exposure to loss on these completed projects is approximately $500 (R$990), which represents Alcoa's investment and guarantees of debt as of September 30, 2008. In the first quarter of 2006, Aluminio acquired an additional 6.41% share in the Estreito hydroelectric power project, reaching 25.49% of total participation in the consortium. This additional share entitles Aluminio to 38 megawatts of assured energy. Aluminio's share of the project is estimated to have installed capacity of approximately 280 megawatts and assured power of approximately 150 megawatts. In December 2006, the consortium obtained the environmental installation license, after completion of certain socioeconomic and cultural impact studies as required by a governmental agency. Construction began in the first quarter of 2007 and is expected to be completed in 2011. Total estimated project costs are approximately $1,760 (R$3,360) and Aluminio's share is approximately $450 (R$850). As of September 30, 2008, Aluminio has contributed $130 (R$220) towards the $450 commitment. In the first quarter of 2007, construction began on the Serra do Facao hydroelectric power project. Construction of this facility is expected to be completed in 2010. The implementation of construction activities had been temporarily suspended in 2004 due to the temporary suspension of the project's installation permit by legal injunction issued by the Brazilian Judicial Department (Public Ministry). Since 2004, this project was placed on hold due to unattractive market conditions. In mid-2006, market conditions became favorable and Aluminio proceeded with plans to begin construction. In September of 2006, the national environmental agency renewed the installation permit allowing construction to commence. Aluminio's share of the Serra do Facao project is 34.97% and entitles Aluminio to approximately 65 megawatts of assured power. Total estimated project costs are approximately $420 (R$770) and Aluminio's share is approximately $150 (R$270). As of September 30, 2008, Aluminio has contributed $90 (R$160) towards the $150 commitment. In 2004, Alcoa acquired a 20% interest in a consortium, which subsequently purchased the Dampier to Bunbury Natural Gas Pipeline (DBNGP) in Western Australia, in exchange for an initial cash investment of $17 (A$24). 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. This investment was classified as an equity investment. Alcoa has made additional contributions of $79 (A$101), including $3 (A$4) in the 2008 third quarter, and committed to invest an additional $66 (A$82) to be paid as the pipeline expands through 2011. In March 2008, additional equity contributions of $38 (A$40) were approved to support further expansion of the gas transmission capacity. 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 $400 (A$490) as of September 30, 2008. 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 (EU) 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 EU 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 $21 pretax (C15) per month in higher power costs at its Italian smelters. 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. In January 2007, the EC announced that it has opened an investigation to establish whether the regulated electricity tariffs granted by Spain comply with EU 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. 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 $12 pretax (C8). 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 EU courts. K. Other (Expenses) Income, Net Third quarter ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Equity income $ 10 $ 7 $ 60 $ 58 Interest income 15 15 47 46 Foreign currency losses, net (60 ) (69 ) (40 ) (47 ) Gains from asset sales 21 1,771 30 1,772 Other, net (3 ) 7 (75 ) 6 $ (17 ) $ 1,731 $ 22 $ 1,835 In the 2008 nine-month period, Other, net includes significant losses related to the deterioration of the cash surrender value of life insurance due to the decline in the investment markets. In the 2007 third quarter and nine-month period, Gains from asset sales include the $1,754 gain from the sale of Alcoa's investment in the Aluminum Corporation of China Limited. L. Segment Information - In the first quarter of 2008, management approved a realignment of Alcoa's reportable segments to better reflect the core businesses in which Alcoa operates and how it is managed. This realignment consisted of eliminating the Extruded and End Products segment and realigning its component businesses as follows: the building and construction systems business is reported in the Engineered Products and Solutions segment; the hard alloy extrusions business and the Russian extrusions business are reported in the Flat-Rolled Products segment; and the remaining segment components, consisting primarily of the equity investment/income of Alcoa's interest in the Sapa AB joint venture, and the Latin American extrusions business, are reported in Corporate. Additionally, the Russian forgings business was moved from the Engineered Products and Solutions segment to the Flat-Rolled Products segment, where all Russian operations are now reported. Prior period amounts were reclassified to reflect the new segment structure. Also, the Engineered Solutions segment was renamed the Engineered Products and Solutions segment. Alcoa's reportable segments, reclassified to exclude assets held for sale, are as follows (differences between segment totals and consolidated totals are in Corporate): Engineered Flat- Products Packaging Primary Rolled and and Third quarter ended September 30, 2008 Alumina Metals Products Solutions Consumer Total Sales: Third-party sales $ 805 $ 2,127 $ 2,488 $ 1,716 $ - $ 7,136 Intersegment sales 730 1,078 58 - - 1,866 Total sales $ 1,535 $ 3,205 $ 2,546 $ 1,716 $ - $ 9,002 Profit and loss: Equity income $ 2 $ 1 $ - $ - $ - $ 3 Depreciation, depletion, and amortization 68 131 54 42 - 295 Income taxes 91 29 21 42 - 183 After-tax operating income (ATOI) 206 297 29 101 - 633 Third quarter ended September 30, 2007 Sales: Third-party sales $ 664 $ 1,600 $ 2,494 $ 1,662 $ 828 $ 7,248 Intersegment sales 631 1,171 70 - - 1,872 Total sales $ 1,295 $ 2,771 $ 2,564 $ 1,662 $ 828 $ 9,120 Profit and loss: Equity (loss) income $ (1 ) $ 11 $ - $ - $ - $ 10 Depreciation, depletion, and amortization 76 102 64 44 29 315 Income taxes 89 80 32 46 17 264 ATOI 215 283 62 82 36 678 Engineered Flat- Products Packaging Primary Rolled and and Nine months ended September 30, 2008 Alumina Metals Products Solutions Consumer Total Sales: Third-party sales $ 2,202 $ 6,441 $ 7,505 $ 5,361 $ 516 $ 22,025 Intersegment sales 2,163 3,291 212 - - 5,666 Total sales $ 4,365 $ 9,732 $ 7,717 $ 5,361 $ 516 $ 27,691 Profit and loss: Equity income $ 6 $ 20 $ - $ - $ - $ 26 Depreciation, depletion, and amortization 209 383 177 126 - 895 Income taxes 215 276 66 168 10 735 ATOI 565 1,032 125 396 11 2,129 Nine months ended September 30, 2007 Sales: Third-party sales $ 2,021 $ 4,979 $ 7,496 $ 5,053 $ 2,401 $ 21,950 Intersegment sales 1,797 3,931 212 - - 5,940 Total sales $ 3,818 $ 8,910 $ 7,708 $ 5,053 $ 2,401 $ 27,890 Profit and loss: Equity income $ - $ 51 $ - $ - $ - $ 51 Depreciation, depletion, and amortization 194 299 185 126 89 893 Income taxes 291 490 100 147 41 1,069 ATOI 751 1,249 219 306 92 2,617 The following table reconciles total segment ATOI to consolidated net income: Third quarter ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Total segment ATOI $ 633 $ 678 $ 2,129 $ 2,617 Unallocated amounts (net of tax): Impact of LIFO (5 ) 10 (80 ) (33 ) Interest income 10 10 31 30 Interest expense (63 ) (98 ) (184 ) (208 ) Minority interests (84 ) (76 ) (221 ) (301 ) Corporate expense (77 ) (101 ) (250 ) (288 ) Restructuring and other charges (29 ) (311 ) (61 ) (308 ) Discontinued operations (1 ) (3 ) (1 ) (15 ) Other (116 ) 446 (246 ) 438 Consolidated net income $ 268 $ 555 $ 1,117 $ 1,932 Items required to reconcile segment ATOI to consolidated net income include: the impact of LIFO inventory accounting; interest income and expense; minority interests; corporate expense, comprised of general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets; restructuring and other charges; discontinued operations; and other, which includes intersegment profit eliminations and other metal adjustments, differences between estimated tax rates used in the segments and the corporate effective tax rate, and other nonoperating items such as foreign currency translation gains/losses. The following table details segment assets: September 30, December 31, 2008 2007 Alumina $ 7,910 $ 6,875 Primary Metals 12,394 11,858 Flat-Rolled Products 6,510 6,048 Engineered Products and Solutions 6,212 5,859 Total segment assets $ 33,026 $ 30,640 M. Earnings Per Share - The information used to compute basic and diluted EPS on income from continuing operations is as follows (shares in millions): Third quarter ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Income from continuing operations $ 269 $ 558 $ 1,118 $ 1,947 Less: preferred stock dividends 1 - 2 1 Income from continuing operations available to common shareholders $ 268 $ 558 $ 1,116 $ 1,946 Average shares outstanding - basic 808 868 814 869 Effect of dilutive securities: Potential shares of common stock, attributable to stock options, stock awards, and performance awards 7 10 7 9 Average shares outstanding - diluted 815 878 821 878 Options to purchase 43 million and 17 million shares of common stock at a weighted average exercise price of $36.71 and $42.42 per share were outstanding as of September 30, 2008 and 2007, respectively, but were not included in the computation of diluted EPS because they were anti-dilutive, as the exercise prices of the options were greater than the average market price of Alcoa's common stock. N. Income Taxes - The effective tax rate for the third quarter of 2008 and 2007 was 24.9% and 63.0%, respectively. The rate for the 2008 third quarter differs from the U.S. federal statutory rate of 35% primarily due to foreign income being taxed in lower rate jurisdictions. Additionally, the 2008 third quarter included a $23 discrete income tax benefit for the filing of the 2007 U.S. income tax return and an income tax benefit for a lower than anticipated tax rate for 2008, both of which were mostly offset by a $28 discrete income tax charge due to a decrease in deferred tax assets related to the Iceland operations as a result of an applicable tax rate change. The rate for the 2007 third quarter differs from the U.S. federal statutory rate of 35% primarily due to a $464 discrete income tax charge related to goodwill associated with the sale of the Packaging and Consumer businesses that would have been non-deductible for tax purposes under the transaction structure contemplated in the 2007 third quarter. The effective tax rate for the 2008 and 2007 nine-month periods was 29.2% and 44.0%, respectively. The rate for the 2008 nine-month period differs from the U.S. federal statutory rate of 35% primarily due to all of the same items mentioned above for the 2008 third quarter with an additional offset of a net $19 discrete income tax charge associated with the sale of the Packaging and Consumer businesses, mainly as a result of the allocation of the proceeds from the sale to higher tax rate jurisdictions as opposed to the allocation previously contemplated somewhat offset by changes in tax assumptions surrounding transaction costs and the divestiture of certain foreign locations that were finalized in the 2008 second quarter (see Note F for additional information). The rate for the 2007 nine-month period differs from the U.S. federal statutory rate of 35% primarily due to the aforementioned $464 discrete income tax charge, partially offset by foreign income being taxed in lower rate jurisdictions. O. Pension Plans and Other Postretirement Benefits - The components of net periodic benefit cost are as follows: Third quarter ended Nine months ended September 30, September 30, Pension benefits 2008 2007 2008 2007 Service cost $ 42 $ 49 $ 129 $ 149 Interest cost 169 165 512 495 Expected return on plan assets (200 ) (196 ) (609 ) (588 ) Amortization of prior service cost 4 4 13 11 Recognized actuarial loss 26 32 75 96 Curtailment - - 2 2 Settlement - - 14 - Net periodic benefit cost $ 41 $ 54 $ 136 $ 165 Third quarter ended Nine months ended September 30, September 30, Postretirement benefits 2008 2007 2008 2007 Service cost $ 6 $ 8 $ 19 $ 22 Interest cost 48 49 144 147 Expected return on plan assets (5 ) (5 ) (14 ) (13 ) Amortization of prior service benefit (3 ) (1 ) (8 ) (3 ) Recognized actuarial loss 12 14 35 42 Curtailment 6 (7 ) 9 (3 ) Net periodic benefit cost $ 64 $ 58 $ 185 $ 192 As disclosed in Note F, Alcoa completed the sale of its Packaging and Consumer businesses to Rank on February 29, 2008. As a result, certain U.S. and non-U.S. pension and postretirement benefit plans were remeasured and Alcoa recognized curtailment losses as prescribed under SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," (SFAS 88) and SFAS 106 due to the significant reduction in the expected aggregate years of future service of the employees of the Packaging and Consumer businesses. In the first quarter of 2008, Alcoa recorded net curtailment losses of $2 and $3 related to these pension plans and postretirement benefit plans, respectively. The curtailment losses include recognition of the change in the projected benefit obligation (PBO) or accumulated postretirement benefit obligation (APBO) and a portion of the previously unrecognized prior service cost reflecting the reduction in expected future service. The remeasurement of these pension and postretirement benefit plans generated an increase in 2008 annual net periodic benefit cost for pension plans of $23, of which $7 and $16 was recognized in the 2008 third quarter and nine-month period, respectively, and a decrease in 2008 annual net periodic benefit cost for postretirement benefit plans of $8, of which $2 and $5 was recognized in the 2008 third quarter and nine-month period, respectively. The remaining cost increase for pension plans of $7 and the remaining cost decrease for postretirement benefit plans of $3 will be recognized in the fourth quarter of 2008. Also, the pension plans' PBO and plan assets decreased by $26 and $248, respectively, and the postretirement benefit plans' APBO and plan assets decreased by $39 and $10, respectively, due to the remeasurement. Also in the first quarter of 2008 as part of the sale of the Packaging and Consumer businesses, Rank assumed the obligations of certain other U.S. and non-U.S. pension plans with PBOs of $59 and plan assets of $37. Rank's assumption of these obligations resulted in a settlement of the pension plan obligations for Alcoa. The settlement of these obligations was accounted for under the provisions of SFAS 88 resulting in the recognition of previously deferred actuarial losses in the amount of $11 in the 2008 first quarter. Additionally, Alcoa will record less 2008 annual net periodic benefit cost in the fourth quarter of 2008 due to the settlement of these pension plans by an immaterial amount (the decrease in the 2008 third quarter was less than $1 and was $2 in the 2008 nine-month period). Furthermore in the first quarter of 2008, Alcoa recorded a charge of $219 ($143 after-tax) for pension plans and a credit of $20 ($13 after-tax) for postretirement benefit plans to accumulated other comprehensive loss in accordance with the provisions of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R)," (SFAS 158) due to the remeasurement of the curtailed and settled plans. In addition, a charge of $16 was recorded in accumulated other comprehensive loss due to the reclassification of deferred taxes related to the Medicare Part D Prescription Drug Subsidy. In the second quarter of 2008, Rank assumed the obligation of another non-U.S. pension plan with a PBO of $12 and plan assets of $9 in conjunction with the transfer of a location that did not close in the first quarter of 2008. Rank's assumption of this obligation resulted in a settlement of the pension plan obligation for Alcoa and was accounted for under the provisions of SFAS 88. The settlement resulted in the recognition of previously deferred actuarial losses in the amount of $3 in the 2008 second quarter. Also, Alcoa will record less 2008 annual net periodic benefit cost in the fourth quarter of 2008 due to the settlement of this pension plan by an immaterial amount (the decrease in both the 2008 third quarter and nine-month period was less than $1). Also in the second quarter of 2008, Alcoa recorded a charge of $1 ($1 after-tax) to accumulated other comprehensive loss in accordance with the provisions of SFAS 158 due to the remeasurement of this settled plan. On September 30, 2008, Alcoa announced that it was temporarily idling the remaining production at its smelter in Rockdale (see Note D for additional information). As a result, a certain U.S. postretirement benefit plan was remeasured and Alcoa recognized a curtailment loss as prescribed under SFAS 106 due to the significant reduction in the expected aggregate years of future service of the employees of the Rockdale smelter. In the third quarter of 2008, Alcoa recorded a net curtailment loss of $6 related to this postretirement benefit plan. The curtailment loss includes recognition of the change in the APBO and a portion of the previously unrecognized prior service cost reflecting the reduction in expected future service. The remeasurement of this postretirement benefit plan generated a decrease in 2008 annual net periodic benefit cost of $2, which will be recognized in the 2008 fourth quarter. Also, the postretirement benefit plan's APBO decreased by $92 due to the remeasurement. Additionally, Alcoa recorded a credit of $87 ($56 after-tax) for this postretirement benefit plan to accumulated other comprehensive loss in accordance with the provisions of SFAS 158 due to the remeasurement of the curtailed plan. Furthermore, a charge of $14 was recorded in accumulated other comprehensive loss due to the reclassification of deferred taxes related to the Medicare Part D Prescription Drug Subsidy. In the 2008 third quarter and nine-month period, Alcoa made discretionary contributions of $400 and $433, respectively, and required contributions of $18 and $52, respectively, to its pension plans. Alcoa made discretionary contributions of $135 and $158 and required contributions of $71 and $139 in the 2007 third quarter and nine-month period, respectively, to its pension plans. P. Comprehensive Income Third quarter ended Nine months ended September 30, September 30, 2008 2007 2008 2007 Net income $ 268 $ 555 $ 1,117 $ 1,932 Other comprehensive income (loss), net of tax and minority interests: Change in unrecognized losses and prior service cost related to pension and postretirement benefit plans 72 55 (17 ) 132 Foreign currency translation adjustments (1,202 ) 459 (428 ) 860 Unrealized (losses) gains on available-for-sale securities: Unrealized holding (losses) gains* (303 ) 305 (294 ) 748 Net amount reclassified to income (1 ) (1,160 ) (1 ) (1,160 ) Net change in unrealized (losses) gains on available-for-sale securities (304 ) (855 ) (295 ) (412 ) Unrecognized (losses) gains on derivatives: Net change from periodic revaluations 209 (3 ) (87 ) (63 ) Net amount reclassified to income 54 (10 ) 133 (5 ) Net unrecognized gains (losses) on derivatives 263 (13 ) 46 (68 ) Comprehensive (loss) income $ (903 ) $ 201 $ 423 $ 2,444 * Alcoa recognized unrealized losses of $303 ($467 pretax) and $292 ($450 pretax) in the third quarter and nine-month period of 2008, respectively, related to its investment in SPPL, which is included in Investments on the accompanying Consolidated Balance Sheet (see Note H for additional information). Q. Accounts Receivable Securitizations - Effective August 31, 2008, Alcoa terminated its accounts receivable securitization program that was conducted through a qualifying special purpose entity (QSPE). As of September 30, 2008, there was still $108 of accounts receivable yet to be collected by the QSPE. In conjunction with the decision to terminate the foregoing program, Alcoa increased the capacity of its other accounts receivable securitization program, which originally began in November 2007, from $100 to $250. As of September 30, 2008, Alcoa received $224 in cash proceeds, which reduced Receivables from customers on the accompanying Consolidated Balance Sheet. R. Subsequent Events - On October 6, 2008, Aluminio borrowed $70 with a weighted-average interest rate of 9.25% and a weighted-average maturity of 141 days from three financial institutions. These borrowings are collateralized with a portion of Aluminio's future exports. The purpose of the borrowings is to provide Aluminio with additional liquidity for its short-term obligations. On October 9, 2008, Standard and Poor's Ratings Services (S&P) affirmed both Alcoa's long-term debt rating of BBB+ and short-term debt rating of A-2. S&P did revise the current outlook for Alcoa from stable to negative because of weaker than expected third quarter earnings, the result of falling aluminum prices, and weak end markets coupled with large capital spending and share repurchases (the existing share repurchase program has been temporarily suspended). On October 13, 2008, Moody's Investors Service (Moody's) affirmed both Alcoa's long-term debt rating of Baa1 and short-term debt rating of Prime-2. Moody's did revise the current outlook for Alcoa from stable to negative because of weak aluminum end markets. On October 14, 2008, Fitch Ratings (Fitch) changed its long-term debt rating of Alcoa from BBB+ to BBB as a result of higher than expected debt levels and financial leverage. Fitch's current outlook for Alcoa remains at stable. On October 14, 2008, Alcoa entered into a Revolving Credit Agreement (RCA-3) with a syndicate of lenders. RCA-3 provides a $1,150 senior unsecured revolving credit facility (RCF-3), which matures on October 12, 2009. Loans will bear interest at (i) a base rate or (ii) a rate equal to LIBOR, plus an applicable margin based on the credit ratings of Alcoa's outstanding senior unsecured long-term debt. Based on Alcoa's current long-term debt ratings, the applicable margin on base rate and LIBOR loans will be 1.375% and 1.875%, respectively, per annum. Alcoa will also pay a facility fee, currently 0.375%, on the aggregate commitments, whether used or unused, based on its long-term debt ratings. Additionally, if there is an amount outstanding under RCF-3 on the last calendar day of any of the next three quarterly periods, Alcoa will pay a duration fee to the lenders. The duration fee is equal to 0.5% of such outstanding amount on the respective day starting on December 31, 2008 and increases by 0.5% each quarter thereafter. Loans may be prepaid without premium or penalty, subject to customary breakage costs. RCA-3 also provides for a mandatory prepayment, not to exceed the amount outstanding under RCF-3 at such time, equal to 100% of the net proceeds Alcoa receives from certain future debt or equity issuances in capital markets transactions or 50% of the net proceeds Alcoa receives from asset sales (other than those in the ordinary course of business), if the proceeds from all asset sales exceed $50. Any prepayments made related to the net proceeds from assets sales or that would have been made if amounts were outstanding under RCF-3 also reduce the lenders' commitments by a corresponding amount. Amounts payable under RCF-3 will rank pari passu with all other unsecured, unsubordinated indebtedness of Alcoa. RCA-3 includes the following covenants, among others, (a) a leverage ratio, (b) limitations on Alcoa's ability to incur liens securing indebtedness for borrowed money, (c) limitations on Alcoa's ability to consummate a merger, consolidation, or sale of all or substantially all of its assets, and (d) limitations on Alcoa's ability to change the nature of its business. The obligation of Alcoa to pay amounts outstanding under RCF-3 may be accelerated upon the occurrence of an "Event of Default" as defined in RCA-3. Such Events of Default include, among others, (a) Alcoa's failure to pay the principal of, or interest on, borrowings under RCF-3, (b) any representation or warranty of Alcoa in RCA-3 proving to be materially false or misleading, (c) Alcoa's breach of any of its covenants contained in RCA-3, and (d) the bankruptcy or insolvency of Alcoa. Alcoa paid $30 in financing costs, which were deferred and will be amortized to interest expense over the term of the facility. On October 16, 2008, Alcoa gave notice in accordance with the provisions of RCA-2 to permanently terminate in whole LBCB's total commitments under RCF-2 effective October 30, 2008 (see Note I for additional information). 0000004281 2008-01-01 2008-09-30 0000004281 2006-12-31 0000004281 2006-12-31 0000004281 2007-06-30 0000004281 2007-01-01 2007-09-30 0000004281 2007-01-01 2007-09-30 0000004281 2007-01-01 2007-09-30 0000004281 2007-07-01 2007-09-30 0000004281 2007-07-01 2007-09-30 0000004281 2007-09-30 0000004281 2007-09-30 0000004281 2007-12-31 0000004281 2007-12-31 0000004281 2007-12-31 0000004281 2008-06-30 0000004281 2008-01-01 2008-09-30 0000004281 2008-01-01 2008-09-30 0000004281 2008-01-01 2008-09-30 0000004281 2008-07-01 2008-09-30 0000004281 2008-07-01 2008-09-30 0000004281 2008-09-30 0000004281 2008-09-30 0000004281 2008-09-30 iso4217:USD iso4217:USD shares EX-100.SCH 3 aa-20080930.xsd XBRL TAXONOMY EXTENSION SCHEMA Notes to Financial Statements link:calculationLink link:presentationLink Statement of Stockholders' Equity link:calculationLink link:presentationLink EX-100.CAL 4 aa-20080930_cal.xml XBRL TAXONOMY EXTENSION CALCULATION LINKBASE EX-100.LAB 5 aa-20080930_lab.xml XBRL TAXONOMY EXTENSION LABEL LINKBASE EX-100.PRE 6 aa-20080930_pre.xml XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE -----END PRIVACY-ENHANCED MESSAGE-----