Alcoa Corp (AA) FY 2022 MD&A

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in millions, except per-share amounts, average realized prices, and average cost amounts;

dry metric tons in millions (mdmt); metric tons in thousands (kmt))

Forward-Looking Statements

This report contains statements that relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those containing such words as “aims,” “ambition,” “anticipates,” “believes,” “could,” “develop,” “endeavors,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “outlook,” “potential,” “plans,” “projects,” “reach,” “seeks,” “sees,” “should,” “strive,” “targets,” “will,” “working,” “would,” or other words of similar meaning. All statements by Alcoa Corporation that reflect expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts concerning global demand growth for bauxite, alumina, and aluminum, and supply/demand balances; statements, projections or forecasts of future or targeted financial results, or operating or sustainability performance (including our ability to execute on strategies related to environmental, social and governance matters); statements about strategies, outlook, and business and financial prospects; and statements about capital allocation and return of capital. These statements reflect beliefs and assumptions that are based on Alcoa Corporation’s perception of historical trends, current conditions, and expected future developments, as well as other factors that management believes are appropriate in the circumstances.

Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and changes in circumstances that are difficult to predict. Although Alcoa Corporation believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include, but are not limited to: (a) current and potential future impacts to the global economy and our industry, business and financial condition caused by various worldwide or macroeconomic events, such as the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine, and related regulatory developments; (b) material adverse changes in aluminum industry conditions, including global supply and demand conditions and fluctuations in London Metal Exchange-based prices and premiums, as applicable, for primary aluminum and other products, and fluctuations in indexed-based and spot prices for alumina; (c) changes in global economic and financial market conditions generally, such as inflation, recessionary conditions, and interest rate increases, which may also affect Alcoa Corporation’s ability to obtain credit or financing upon acceptable terms or at all; (d) unfavorable changes in the markets served by Alcoa Corporation; (e) the impact of changes in foreign currency exchange and tax rates on costs and results; (f) unfavorable changes in cost, quality, or availability of key inputs, including energy and raw materials, or uncertainty of or disruption to the supply chain including logistics; (g) the inability to execute on strategies related to or achieve improvement in profitability and margins, cost savings, cash generation, revenue growth, fiscal discipline, environmental- and social-related goals and targets (including due to delays in scientific and technological developments), or strengthening of competitiveness and operations anticipated from portfolio actions, operational and productivity improvements, technology advancements, and other initiatives; (h) the inability to realize expected benefits, in each case as planned and by targeted completion dates, from acquisitions, divestitures, restructuring activities, facility closures, curtailments, restarts, expansions, or joint ventures; (i) political, economic, trade, legal, public health and safety, and regulatory risks in the countries in which Alcoa Corporation operates or sells products; (j) labor disputes and/or work stoppages and strikes; (k) the outcome of contingencies, including legal and tax proceedings, government or regulatory investigations, and environmental remediation; (l) the impact of cyberattacks and potential information technology or data security breaches; (m) risks associated with long-term debt obligations; (n) the timing and amount of future cash dividends and share repurchases; (o) declines in the discount rates used to measure pension and other postretirement benefit liabilities or lower-than-expected investment returns on pension assets, or unfavorable changes in laws or regulations that govern pension plan funding; and, (p) the other risk factors discussed in Part 1 Item 1A of this Form 10-K and other reports filed by Alcoa Corporation with the U.S. Securities and Exchange Commission, including those described in this report.

Alcoa Corporation disclaims any obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise, except as required by applicable law. Market projections are subject to the risks described above and other risks in the market.

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Overview

Our Business

Alcoa Corporation (Alcoa or the Company) is a vertically integrated aluminum company comprised of bauxite mining, alumina refining, aluminum production (smelting and casting), and energy generation. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily. Additionally, alumina is subject to market pricing through the Alumina Price Index (API), which is calculated by the Company based on the weighted average of a prior month’s daily spot prices published by the following three indices: CRU Metallurgical Grade Alumina Price, Platts Metals Daily Alumina PAX Price, and FastMarkets Metal Bulletin Non-Ferrous Metals Alumina Index. As a result, the price of both aluminum and alumina is subject to significant volatility and, therefore, influences the operating results of Alcoa Corporation.

Through direct and indirect ownership, Alcoa Corporation has 27 operating locations in nine countries around the world, situated primarily in Australia, Brazil, Canada, Iceland, Norway, Spain, and the United States. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.

Business Update

In 2022, world events, including the on-going conflict between Russia and Ukraine, influenced costs for raw materials and created a global energy crisis, particularly in Europe. The Company saw significant decreases in market pricing for alumina and aluminum between the first and the second half of the year.

Despite the significant change in alumina and aluminum prices during 2022, the alumina and aluminum markets ended 2022 balanced or in a slight volume deficit, respectively, while the cost for raw materials remained high throughout the year. All direct material costs increased since the end of 2021, driven by inflation pressures and multiple supply chain disruptions.

Alcoa worked to offset negative market impacts, including the high costs of energy in Europe. The Company partially curtailed two facilities, adjusting production rates to approximately 50 percent of the 1.6 million metric tons of annual capacity at the San Ciprián alumina refinery in Spain due to high costs of natural gas, and curtailing one of three potlines at the Lista aluminum smelter in Norway due to high electricity costs. Additionally, in July, the Company curtailed one aluminum potline at Warrick Operations in the U.S. due to workforce shortages in the region, and sold the excess power into the market.

The Company also continued its work to support the planned restart of the San Ciprián smelter in Spain. Alcoa signed two power purchase agreements for wind-based electricity for up to approximately 75 percent of the smelter’s power needs.

The Company continued to progress the full restart at the Alumar smelter in Brazil and in the fourth quarter 2022 completed the restart of some modest capacity at the Portland Aluminium joint venture in Australia. Those sites have competitive, multi-year energy agreements; with fully renewable power sources (hydropower) for the Alumar smelter.

Lower bauxite quality in areas where the Company is currently mining in Australia impacted production levels in 2022 at certain of the Australia refineries.

During 2022, the Company maintained a strong balance sheet and further reduced pension liabilities by completing a $1,000 transfer of obligations and related assets for certain U.S. retirees and their beneficiaries.

In 2019, the Company announced a five year strategic portfolio review of smelting and refining capacity to improve cost positioning, including curtailment, closure, or divestiture. Through 2021, Alcoa reached approximately 75 and 58 percent of its target to improve, curtail, close, or divest 1.5 and 4 million metric tons of smelting and refining capacity, respectively. While no actions were taken in 2022 related to these targets, the Company took actions in response to market conditions as noted above, and the strategic portfolio review is continuing.

Although 2022 was an unusual year with global events influencing energy and raw material costs, the Company continues to project strong long-term demand for aluminum, as a key material for a global economy with a growing focus on lower carbon dioxide emissions, including renewable energy infrastructure and transmission, electric and electric-intensive vehicles and packaging markets.

Even in a challenging market, the Company saw continued evidence of the growth of aluminum demand. In 2022, Alcoa saw a significant increase in year-over-year demand for its EcoLum aluminum, which is part of our Sustana brand, through both increased margins and deliveries while still a relatively small portion of the Company’s overall sales volume. The year-over-year volume increase for EcoLum, which is aluminum produced with no more than 4.0 metric tons of carbon dioxide equivalents per metric ton of aluminum produced, grew more than four times over 2021, driven mostly by the European market.

Due to renewable energy sources and low carbon dioxide intensity in our operations, Alcoa believes that it is well positioned as a supplier of choice, especially in a world that is working to further reduce greenhouse gas emissions. The Company has a global refining system with the industry’s lowest carbon dioxide intensity (per CRU Group’s 2021 results published in third quarter 2022), and 86 percent of the Company’s smelting portfolio was powered by renewable energy sources in 2022.

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San Ciprián Smelter

In January 2022, Alcoa completed the curtailment of the San Ciprián aluminum smelter’s 228 kmt of annual capacity while the casthouse continues to operate. The curtailment is a result of an agreement that was reached with the workers’ representatives in December 2021 to suspend production until January 2024 due to exorbitant energy prices in Spain. In 2022, cash payments of $26 were made to reduce the related reserve for certain employee and contractual obligations that was recorded in December 2021. In connection with the agreement, the Company has restricted cash of $103 to be made available for $68 in capital improvements at the site and $35 in smelter restart costs.

During 2022, Alcoa signed two long-term power purchase agreements for wind-based electricity for up to approximately 75 percent of the San Ciprián smelter’s power needs upon restart, although permitting approvals are required by the regional and national Spanish governments before construction can begin.

On February 3, 2023, the Company reached an updated agreement with the workers’ representatives to commence the restart process in phases beginning in January 2024. Alcoa plans that all pots will be restarted by October 1, 2025, and from October 1, 2025 until the end of 2026, the minimum production will be 75 percent of the annual capacity of 228 kmt. Under the terms of the updated agreement, the Company is responsible for certain employee obligations during the extended curtailment period. As a result, the Company will record charges of approximately $50 (pre- and after-tax) in the first quarter of 2023 in Restructuring and other charges, net on the Statement of Consolidated Operations. Cash outlays related to these obligations are expected in 2024 and 2025. In connection with the updated agreement, the Company made additional commitments of $78 for capital improvements at the site to be spent primarily between 2024 and 2025.

During the second quarter of 2022, the Company repaid carbon dioxide credits related to the San Ciprián smelter. Spain has a compensatory mechanism for the indirect cost of carbon dioxide and provides associated credits. Upon receipt of the credits in each of the applicable years, the Company recorded the cash received as deferred income (liability) due to a three-year clawback provision based on continued operations and employment. In June 2021, the Spanish Ministry of Industry, Trade and Tourism (the Ministry) initiated the process to request repayment of 2018 and 2019 credits due to Alcoa’s decision to implement the collective dismissal process and its potential impact on operations and employment at San Ciprián. Alcoa disagreed with the Ministry’s position as the collective dismissal process was not concluded and qualifying operations and employment at San Ciprián were maintained during the relevant three-year period. The Company requested to suspend the payment of the claimed credits (and interest) in exchange for a bank guarantee. On April 26, 2022, the Spanish National Court rejected the Company’s request and the Company made a repayment of approximately $41 (€37) for the 2018 and 2019 compensation credits and interest.

Alumar Smelter

On September 20, 2021, the Company announced its plan to restart its 268 kmt per year share of capacity at the Alumar smelter in São Luís, Brazil, which had been fully curtailed since 2015. Alcoa incurred restart expenses of $75 during 2022. The first metal sales occurred in the second quarter of 2022 and the Company continues to progress the restart of the smelter.

The restart leverages the site’s integration with an alumina refinery, new long-term contracts for renewable energy and an available skilled workforce, as well as tax efficiencies and a strong U.S. dollar. With the completion of the planned restart, Alcoa will have approximately 76 percent of its 2.97 million metric tons of global aluminum smelting capacity operating.

Other Portfolio Actions

Kwinana—In January 2023, the Company reduced production at the Kwinana (Australia) refinery by approximately 30 percent in response to a domestic natural gas shortage in Western Australia due to production challenges experienced by key gas suppliers.

Portland—In October 2022, the Company completed the restart of 35 kmt (19 kmt Alcoa share) of previously curtailed annual capacity at the Portland aluminum smelter in Australia that was previously announced in November 2021. With the restart complete, the plant is operating at approximately 95 percent of its total capacity and Alcoa has approximately 186 kmt of consolidated annual capacity at Portland.

Lista—On August 30, 2022, the Company announced the curtailment of one third of the production capacity (31 kmt) at the Lista smelter in Norway to mitigate high energy costs for the site. The site was exposed to spot energy pricing, which had increased to above $600 per megawatt hour. In July 2022, the Company entered into a fixed price power agreement effective for the fourth quarter of 2022 through December 31, 2023. In February 2023, the agreement was amended with improved fixed pricing and lower volume commitments.

Warrick—On July 1, 2022, Alcoa curtailed one of the three operating smelting potlines (54 kmt) at its Warrick Operations site due to operational challenges stemming from labor shortages in the region.

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Addy, Washington—In July 2022, Alcoa made the decision to permanently close the previously curtailed magnesium smelter in Addy (Washington). The facility has been fully curtailed since 2001. The Company recorded a charge of $29 to establish reserves for environmental and demolition obligations in Restructuring and other charges, net on the Statement of Consolidated Operations in the third quarter of 2022. Associated cash outlays are expected to be paid over the next three to five years.

MRN—On April 30, 2022, Alcoa completed the sale of its investment in MRN for proceeds of $10. An additional $30 in cash could be paid to the Company in the future if certain post-closing conditions related to future MRN mine development are satisfied. Related to this transaction, the Company recorded an asset impairment of $58 in the first quarter of 2022 in Restructuring and other charges, net on the Statement of Consolidated Operations. In addition, the Company entered into several bauxite offtake agreements with South32 to provide bauxite supply for existing long-term supply contracts.

Capital Returns

On July 20, 2022, Alcoa Corporation announced that its Board of Directors approved a new common stock repurchase program under which the Company may purchase shares of its outstanding common stock up to an aggregate transactional value of $500, depending on the Company’s continuing analysis of market, financial, and other factors (the New Repurchase Program). The Company had $500 available for share repurchases at the end of 2021 from a prior authorization in October 2021. The share repurchase programs may be suspended or discontinued at any time and do not have predetermined expiration dates.

In 2022, the Company repurchased 8,565,200 shares of its common stock for $500 under the previously authorized program; the shares were immediately retired. As of the date of this report, the Company is currently authorized to repurchase up to a total of $500, in the aggregate, of its outstanding shares of common stock under the New Repurchase Program. Refer to Liquidity and Capital, for more information.

In each quarter of 2022, the Board of Directors declared a quarterly cash dividend of $0.10 per share of the Company’s common stock, totaling $72 for the year.

Balance Sheet Actions

In the third quarter of 2022, the Company purchased group annuity contracts to transfer the obligation to pay remaining retirement benefits for approximately 4,400 retirees and beneficiaries from its U.S. defined benefit pension plans. The transfer of approximately $1,000 in both plan obligations and plan assets was completed in August 2022. As a result, Alcoa recognized a non-cash settlement loss of $617 (pre- and after-tax) in Restructuring and other charges, net on the Statement of Consolidated Operations. See Part II Item 2 of this Form 10-K in Note O to the Consolidated Financial Statements for additional information.

On June 27, 2022, the Company successfully amended and restated its Revolving Credit Facility, which includes terms that provide improved flexibility to execute on Alcoa’s long-term strategies. Among other improvements, the Revolving Credit Facility released the collateral package that had previously secured the Revolving Credit Facility, which will continue so long as certain credit ratings are maintained, and provides a debt to capitalization ratio not to exceed .60 to 1.00 to replace the maximum leverage ratio upon a ratings upgrade to investment grade by Moody’s or S&P. On July 26, 2022, Moody’s upgraded the rating of ANHBV’s senior unsecured notes to Baa3 (investment grade) from Ba1 and set the current outlook to stable. Refer to Liquidity and Capital, for more information.

Other Matters

During the fourth quarter of 2022, the Norwegian government approved a 2023 budget proposal that sets a floor for the carbon dioxide compensation to be paid in 2023 based on 2022 power purchased. The Company recorded an adjustment of $25 in the fourth quarter of 2022 to Cost of goods sold to reverse amounts accrued for 2022 credits earned through September 30, 2022 under the prior carbon dioxide compensation program.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which includes a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases after December 31, 2022, and several tax incentives to promote clean energy. This legislation did not have a material impact on the Company’s Consolidated Financial Statements.

In the first quarter of 2022, the Company recorded a charge of $77 in Restructuring and other charges, net to reflect its estimate for the agreement reached with the workers of the divested Avilés and La Coruña facilities (Spain) to settle various legal disputes related to the 2019 divestiture. In April 2022, the Company received unanimous acceptance of the offer from all active workers of the divested Avilés and La Coruña facilities and a Global Settlement Agreement (GSA) was fully executed. The Company recorded a charge of $2 in Restructuring and other charges, net in second quarter of 2022 to reflect an update to its estimated liability for the GSA. The Company expects to make cash payments in 2023 upon completion of certain administrative and judicial approvals (See Note S).

On March 31, 2022, Ma’aden’s put option and the Company’s call option, relating to additional interests in the joint venture, expired with neither party exercising their options. In accordance with the joint venture agreement, the call and put options were exercisable for a period of six months after October 1, 2021.

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In March 2022, in response to the conflict between Russia and Ukraine, Alcoa announced that it would cease the purchase of raw materials from, or the selling of products to, Russian businesses. The Company identified alternate sources for securing the limited number of materials that would have been purchased from Russian suppliers without any supply interruption or material financial impact on the Company.

See the below sections for additional details on the above-described actions.

Basis of Presentation

The Consolidated Financial Statements of Alcoa Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also may affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters.

Results of Operations

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the fiscal years ended December 31, 2022 and 2021. For a comparison of changes for the fiscal years ended December 31, 2021 and 2020, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation in Part II Item 7 of Alcoa Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021 (filed February 24, 2022).

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Earnings Summary

Annual Comparison

Overview

Net (loss) income attributable to Alcoa Corporation decreased $552 primarily as a result of:

Partially offset by:

Sales

Sales increased $299 primarily as a result of:

Partially offset by:

Cost of goods sold

Cost of goods sold as a percentage of sales increased 7% primarily as a result of:

Partially offset by:

Selling, general administrative, and other expenses

Selling, general administrative, and other expenses decreased $23 primarily as a result of:

Provision for depreciation, depletion, and amortization

The Provision for depreciation, depletion, and amortization decreased $47 primarily as a result of:

Interest expense

Interest expense decreased $89 primarily as a result of:

Partially offset by:

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Other income, net

Other income, net decreased $327 primarily as a result of:

Partially offset by:

Restructuring and other charges, net

In 2022, Restructuring and other charges, net of $696, primarily related to:

Partially offset by:

In 2021, Restructuring and other charges, net of $1,128, primarily related to:

Partially offset by:

Provision for income taxes

The Provision for income taxes in 2022 was $664 on income before taxes of $702 or 94.6%. In comparison, the 2021 Provision for income taxes was $629 on income before taxes of $1,199 or 52.5%.

The increase in tax expense is primarily attributable to a charge to record a full valuation allowance of $217 against the deferred tax assets of Alcoa Alumínio (Alumínio), and a charge of $30 primarily to write off the deferred tax assets of Alcoa Norway ANS due to a legal entity restructuring in 2022. This increase was partially offset by a tax benefit of $33 recognized due to changes in the utilization of the tax holiday rate in AWAB, lower income in some of the jurisdictions where the Company records taxes, and a valuation allowance of $103 recorded in 2021 against the net deferred tax assets of Alúmina Española, S.A (Española).

The 2022 full valuation allowance for Alumínio was a result of Alumínio’s three-year cumulative loss position for the period ended December 31, 2022. Although the Company entered into aluminum contracts to manage exposures associated with the restart, these contracts were held by another legal entity, and the associated realized gains are not available to Alumínio to offset the restart losses. While management believes Alumínio will return to profitability in the future with the restart of the Alumar smelter, current volatility in the market does not provide a reliable basis for concluding that it is more likely than not that Alumínio’s net deferred tax assets, which consist primarily of tax loss carryforwards with indefinite life, will be realized. Alumar smelter profitability in future periods could prompt the Company to evaluate the realizability of the deferred tax asset and assess the possibility of a reversal of the valuation allowance, which could have a significant impact on net income in the quarter the valuation allowance is reversed.

In 2021, a valuation allowance of $103 was recorded against the net deferred tax assets of Española. Management concluded that it was more likely than not that Española’s net deferred tax assets, which consist primarily of tax loss carryforwards, would not be realized as the entity’s sole operating asset, the San Ciprián refinery, was in a three-year cumulative loss position for the period ended December 31, 2021.

Noncontrolling interest

Net income attributable to noncontrolling interest was $161 in 2022 compared with $141 in 2021. These amounts are entirely related to Alumina Limited’s 40% ownership interest in several affiliated operating entities.

The increase is primarily a result of higher average realized prices of alumina, lower elimination of intercompany profit in inventory, higher other income primarily related to favorable mark-to-market results on derivative instruments, lower taxes on lower profits before taxes and the absence of the Española valuation allowance, lower restructuring charges primarily due to lower pension actions, and a decrease in equity earnings from the Ma’aden bauxite and alumina joint venture, partially offset by higher raw material costs, energy prices and production costs.

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Segment Information

Alcoa Corporation is a producer of bauxite, alumina, and aluminum products. The Company’s operations consist of three worldwide reportable segments: Bauxite, Alumina, and Aluminum. Segment performance under Alcoa Corporation’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization) of each segment. The Company calculates Segment Adjusted EBITDA as Total sales (third-party and intersegment) minus the following items: Cost of goods sold; Selling, general administrative, and other expenses; and Research and development expenses. Alcoa Corporation believes that the presentation of Adjusted EBITDA is useful to investors because such measure provides both additional information about the operating performance of Alcoa Corporation and insight on the ability of Alcoa Corporation to meet its financial obligations. The presentation of Adjusted EBITDA is not intended to be a substitute for, and should not be considered in isolation from, the financial measures reported in accordance with GAAP. Alcoa Corporation’s Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Segment Adjusted EBITDA totaled $2,275 in 2022, $3,053 in 2021, and $1,317 in 2020. The following information provides production, shipments, sales, and Segment Adjusted EBITDA data for each reportable segment, as well as certain realized price and average cost data, for each of the three years in the period ended December 31, 2022. See Part II Item 8 of this Form 10-K in Note E to the Consolidated Financial Statements for additional information.

Bauxite

Production in the above table can vary from Total shipments due primarily to differences between the equity allocation of production, offtake agreements with the respective equity investment, and other supply agreements. Additionally, Total shipments include dry metric tons that were not produced by the Bauxite segment. Such bauxite was purchased to satisfy certain customer commitments. The Bauxite segment bears the risk of loss of the purchased bauxite until control of the product has been transferred to this segment’s customers. Operating costs in the table above includes all production-related costs: conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

Overview. This segment represents the Company’s global bauxite mining operations. A portion of this segment’s production represents the offtake from equity method investments in Brazil (prior to the MRN sale in April 2022) and Guinea, as well as AWAC’s share of production related to the equity investment in Saudi Arabia. The bauxite mined by this segment is sold primarily to internal customers within the Alumina segment; a portion of the bauxite is sold to external customers. Bauxite mined by this segment and used internally is transferred to the Alumina segment at negotiated terms that are intended to approximate market prices; sales to third-parties are conducted on a contract basis. Generally, this segment’s sales are transacted in U.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar and the Brazilian real. Most of the operations that comprise the Bauxite segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above).

Business Update. Total shipments decreased 5.1 million dry metric tons compared to 2021 primarily due to lower demand from certain Alumina segment refineries, the cessation of bauxite sales to Russian aluminum businesses, decreased demand in the Atlantic bauxite market, and the expiration of the Company’s license to export bauxite from Australia.

On April 30, 2022, Alcoa completed the sale of its investment in MRN for proceeds of $10. An additional $30 in cash could be paid to the Company in the future if certain post-closing conditions related to future MRN mine development are satisfied. Related to this transaction, the Company recorded an asset impairment of $58 in the first quarter of 2022 in Restructuring and other charges, net on the Statement of Consolidated Operations. In addition, the Company entered into several bauxite offtake agreements with South32 Minerals S.A. to provide bauxite supply for existing long-term supply contracts.

Mining operations are relocated periodically in support of optimizing the value extracted from bauxite reserves. In 2022, the Company continued the process of moving the Juruti mining operations, which is scheduled to be completed in the first quarter of 2023. During 2022, the Company incurred $41 in capital expenditures related to the Juruti mining operation relocation.

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Annual Comparison

Production

Production decreased 12% primarily as a result of:

Third-party sales

Third-party sales decreased $32 primarily as a result of:

Partially offset by:

Intersegment sales

Intersegment sales decreased $31 primarily as a result of:

Partially offset by:

Segment Adjusted EBITDA

Segment Adjusted EBITDA decreased $90 primarily as a result of:

Partially offset by:

Forward-Look. Beginning in January 2023, financial information for the activities of the bauxite mines and the alumina refineries will be combined and the Company will report its financial results in the following two segments: (i) Alumina, and (ii) Aluminum.  Accordingly, segment information for all prior periods presented will be updated to reflect the new segment structure in future Quarterly Report on Form 10-Q and Annual Report on Form 10-K filings.

In Australia, the Company seeks annual approvals from relevant state government agencies for a rolling five-year mine plan and related forest clearing activities that are needed to sustain bauxite mining. The Company’s annual mine plan approvals process for the Huntly and Willowdale mines is currently taking longer than it has historically. Alcoa will mine bauxite with a lower bauxite grade from April 2023 through December 2023 at the Huntly mine to extend operations permitted under existing approvals, providing more time to work through the approvals process. See Alumina Forward Look below.

Alumina

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In the above table, total shipments include metric tons that were not produced by the Alumina segment. Such alumina was purchased to satisfy certain customer commitments. The Alumina segment bears the risk of loss of the purchased alumina until control of the product has been transferred to this segment’s customers. Additionally, operating costs in the table above includes all production-related costs: raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses.

Overview. This segment represents the Company’s worldwide refining system, which processes bauxite into alumina. The alumina produced by this segment is sold primarily to internal and external aluminum smelter customers; a portion of the alumina is sold to external customers who process it into industrial chemical products. Approximately two-thirds of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Aluminum segment. Alumina produced by this segment and used internally is transferred to the Aluminum segment at prevailing market prices. A portion of this segment’s third-party sales are completed through the use of alumina traders. Generally, this segment’s sales are transacted in U.S. dollars while costs and expenses are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, and the euro. Most of the operations that comprise the Alumina segment are part of AWAC (see Noncontrolling Interest in Earnings Summary above). This segment also includes AWAC’s 25.1% ownership interest in the mining and refining joint venture company in Saudi Arabia.

Business Update. During 2022, the average API of $365 per metric ton trended favorably compared to 2021 reflecting a 13% sequential increase.

Alumina production decreased 5% in 2022 compared to 2021 primarily due to the reduced production at the Australian refineries, and the reduction in the daily production rate at the San Ciprián refinery, partially offset by increased production at the Alumar refinery due to the non-recurrence of the ship unloader outage in 2021. Australian refinery production in 2022 was less than 2021 due to extended and unplanned maintenance periods and lower bauxite quality impacting production levels.

During 2022, the Alumina segment experienced higher raw material costs, higher energy costs predominantly related to the San Ciprián refinery, and higher caustic usage at certain Australian refineries related to lower bauxite quality, due to the location of mining areas.

In the third quarter of 2022, the Company reduced production at the San Ciprián refinery to 50 percent of the 1.6 million metric tons of annual capacity to lessen the financial impact from rising natural gas prices in Spain.

In December 2022, the Company recorded a charge of $25 to Cost of goods sold to increase the AROs at the Alumar refinery when updated estimates became available for improvements required on closed bauxite residue areas.

During the second quarter of 2022, the Company recorded the reversal of a valuation allowance on Brazil state VAT of $46 in Cost of goods sold. In the fourth quarter of 2018, after an assessment of the future realizability of the state VAT credits, Alcoa established an allowance on the accumulated state VAT credit balances and stopped recording any future credit benefits. With the restart of the Alumar smelter in Brazil and the first metal sales in June 2022, the Company has the ability to monetize these credits and reversed the valuation allowance in the second quarter of 2022.

During 2022, the Company recorded a charge of $48 to Cost of goods sold and an increase to the capitalized asset retirement cost of $9 to increase the AROs at the Poços de Caldas refinery for improvements required on both operating and closed bauxite residue areas to comply with updated impoundment regulations in the region.

Capacity. The Alumina segment had a base annual capacity of 13,843 kmt with 1,014 kmt of curtailed refining capacity. In the third quarter of 2022, curtailed capacity increased 800 kmt, due to the partial curtailment of the San Ciprián refinery (see above).

Annual Comparison

Production

Production decreased 5% primarily as a result of:

Partially offset by:

Third-party sales

Third-party sales increased $381 primarily as a result of:

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Partially offset by:

Intersegment sales

Intersegment sales increased $168 primarily as a result of:

Partially offset by:

Segment Adjusted EBITDA

Segment Adjusted EBITDA decreased $301 primarily as a result of:

Partially offset by:

Forward-Look. Beginning in January 2023, financial information for the activities of the bauxite mines and the alumina refineries will be combined and the Company will report its financial results in the following two segments: (i) Alumina, and (ii) Aluminum.  Accordingly, segment information for all prior periods presented will be updated to reflect the new segment structure in future Quarterly Report on Form 10-Q and Annual Report on Form 10-K filings.

In January 2023, the Company reduced production at the Kwinana (Australia) refinery by approximately 30 percent in response to a domestic natural gas shortage in Western Australia due to production challenges experienced by key gas suppliers.

Alcoa will mine bauxite with a lower bauxite grade from April 2023 through December 2023 to provide additional time for an extended mining approvals process. This change is isolated to the Huntly mine that supplies the Pinjarra and Kwinana refineries. Operating those refineries with lower quality bauxite decreases alumina output and increases caustic usage.

The Company projects total alumina shipments to range between 12.7 and 12.9 million metric tons in 2023, down from 2022 primarily due to the full year impact of the partial curtailment of the San Ciprián refinery and the reduction of bauxite grade at the Huntly mine.

As discussed above, in the third quarter of 2022, the Company reduced production at the San Ciprián refinery to 50 percent of the 1.6 million tons of annual capacity in an effort to reduce the refinery’s losses related to natural gas prices. The Company is actively reviewing the refinery’s operating levels, commercial options, and other support, given the ongoing volatility in European energy markets. Commercial actions taken in late 2022 to mitigate the impact of energy and raw material costs at the San Ciprián refinery are expected to improve segment profitability in 2023.

Aluminum

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In the above table, total aluminum third-party shipments and total primary aluminum shipments include metric tons that were not produced by the Aluminum segment. Such aluminum was purchased by this segment to satisfy certain customer commitments. The Aluminum segment bears the risk of loss of the purchased aluminum until control of the product has been transferred to this segment’s customer. Until the sale of the Warrick Rolling Mill on March 31, 2021, total aluminum information includes flat-rolled aluminum while primary aluminum information does not. Primary aluminum third-party sales exclude realized gains and losses related to embedded derivative instruments designated as cash flow hedges of forward sales of aluminum. Operating costs includes all production-related costs: raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses.

The average realized third-party price per metric ton of primary aluminum includes three elements: a) the underlying base metal component, based on quoted prices from the LME; b) the regional premium, which represents the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for metal sold in the United States); and c) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., billet, slab, rod, etc.) or alloy.

Overview. This segment consists of the Company’s (i) worldwide smelting and casthouse system, which processes alumina into primary aluminum, and the (ii) portfolio of energy assets in Brazil, Canada, and the United States.

Aluminum’s combined smelting and casting operations produce primary aluminum products, virtually all of which are sold to external customers and traders. The smelting operations produce molten primary aluminum, which is then formed by the casting operations into either common alloy ingot (e.g., t-bar, sow, standard ingot) or into value add ingot products (e.g., foundry, billet, rod, and slab). A variety of external customers purchase the primary aluminum products for use in fabrication operations, which produce products primarily for the transportation, building and construction, packaging, wire, and other industrial markets. Results from the sale of aluminum powder and scrap are also included in this segment, as well as the impacts of embedded aluminum derivatives related to energy supply contracts.

The energy assets supply power to external customers in Brazil and, to a lesser extent, in the United States, as well as internal customers in the Aluminum (Canadian smelters and Warrick (Indiana) smelter) and Alumina segments (Brazilian refineries).

Generally, this segment’s aluminum sales are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar, the euro, the Norwegian krone, the Icelandic króna, the Canadian dollar, the Brazilian real, and the Australian dollar.

This segment also includes Alcoa Corporation’s 25.1% ownership interest in the smelting joint venture company in Saudi Arabia.

Business Update. During 2022, third-party sales were flat compared to 2021 on higher LME and regional premiums, partially offset by lower trading activities, as well as lower shipments. Metal prices increased with LME prices on a 15-day lag averaging $2,726 per metric ton. The Aluminum segment also experienced higher raw material and energy costs during 2022.

During the fourth quarter of 2022, the Norwegian government approved a 2023 budget proposal that sets a floor for the carbon dioxide compensation to be paid in 2023 based on 2022 power purchased. The Company recorded an adjustment of $25 in the fourth quarter of 2022 to Cost of goods sold to reverse amounts accrued for 2022 credits earned through September 30, 2022 under the prior carbon dioxide compensation program.

On December 29, 2021, the Company and workers’ representatives at the San Ciprián, Spain aluminum facility reached an agreement for the two-year curtailment of the smelter’s 228 kmt of annual capacity due to exorbitant energy prices in Spain. The curtailment was completed in January 2022 while the casthouse continues to operate. During 2022, $26 of payments were made to reduce the employee leave compensation and take or pay contractual obligations of $62 recorded in the fourth quarter of 2021. The Company incurred $5 of capital investment expenditures against the commitments for capital investments of $68 and restart costs of $35. In October 2022, the Company signed an agreement with a renewable energy provider for approximately 30 percent of the smelter’s power needs upon restart and continues to negotiate with other generators to secure the remaining power supply needs for the smelter. When combined with the 45 percent of the smelter’s power needs secured in the second quarter of 2022, up to approximately 75 percent of the smelter’s power needs have been secured under long-term agreements with renewable energy providers to date. On February 3, 2023, the Company reached an updated agreement with the workers’ representatives to commence the restart process in phases beginning in January 2024. Alcoa plans that all pots will be restarted by October 1, 2025, and from October 1, 2025 until the end of 2026, the minimum production will be 75 percent of the annual capacity of 228 kmt. See Part II Item 8 of this Form 10-K in Note V to the Consolidated Financial Statements.

In conjunction with the previously announced restart of the Alumar smelter in São Luís, Brazil, Alcoa incurred restart expenses of $75 during 2022. The first metal sales occurred in the second quarter of 2022 and the Company continues to progress the restart of the Alumar smelter.

In October 2022, the Company completed the previously announced restart of 19 kmt (Alcoa share) of previously curtailed capacity at the Portland (Australia) smelter. Alcoa incurred restart expenses of $12 during 2022.

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On August 30, 2022, the Company announced the curtailment of one third of the production capacity (31 kmt) at the Lista (Norway) smelter to mitigate high energy costs for the site. The site was exposed to spot energy pricing, which had increased to above $600 per megawatt hour. In July 2022, the Company entered into a fixed price power agreement effective for the fourth quarter 2022 through December 31, 2023.

On July 1, 2022, Alcoa curtailed one of the three operating smelting potlines (54 kmt) at the Warrick Operations site due to operational challenges stemming from labor shortages in the region.

Capacity. At December 31, 2022, the Aluminum segment had 868 kmt of idle smelting capacity on a base capacity of 2,968 kmt, an increase from 2021 of 183 kmt in idle capacity due to the San Ciprián smelter curtailment and partial curtailment of the Warrick and Lista smelters, partially offset by the Alumar and Portland smelter restarts in 2022.

Annual Comparison

Production

Production decreased 8% primarily as a result of:

Partially offset by:

Third-party sales

Third-party sales decreased $31 primarily as a result of:

Partially offset by:

Segment Adjusted EBITDA

Segment Adjusted EBITDA decreased $387 primarily as a result of:

Partially offset by:

Forward-Look. The Company projects total aluminum shipments to range between 2.5 and 2.6 million metric tons in 2023, consistent with 2022 as the restarts at the Alumar and Portland smelters offset the partial curtailments at the Warrick and Lista smelters. Additionally, the Company engages in trading activity when favorable market conditions allow. Availability of trading opportunities in 2023 may impact the Company’s shipment projection.

Further, in 2023, the Aluminum segment expects to benefit from lower energy costs in Europe.

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Reconciliations of Certain Segment Information

Reconciliation of Total Segment Third-Party Sales to Consolidated Sales

Reconciliation of Total Segment Operating Costs to Consolidated Cost of Goods Sold

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Reconciliation of Total Segment Adjusted EBITDA to Consolidated Net (Loss) Income Attributable to Alcoa Corporation

Environmental Matters

See Part II Item 8 of this Form 10-K in Note S to the Consolidated Financial Statements under caption Contingencies—Environmental Matters.

Liquidity and Capital Resources

Alcoa Corporation’s primary future cash flows are centered on operating activities, particularly working capital, as well as capital expenditures and capital returns. Alcoa’s ability to fund its cash needs depends on the Company’s ongoing ability to generate and raise cash in the future.

In 2022, the Company generated lower profitability due to higher raw material, energy and production costs, partially offset by higher prices for aluminum and alumina and lower restructuring charges. Despite the challenging year, the Company maintained a strong cash position and successfully completed the following actions:

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On January 31, 2023, a wholly-owned subsidiary of the Company entered into a one-year Receivables Purchase Agreement to sell up to $150 of certain customer receivables without recourse on a revolving basis. The unsold portion of the specified receivable pool is pledged as collateral to the purchasing bank to secure the sold receivables. Alcoa Corporation will guarantee the performance obligations of the wholly-owned subsidiary under the facility; however no assets (other than the receivables) will be pledged as collateral.

Management believes that the Company’s cash on hand, future operating cash flows, and liquidity options, combined with its strategic actions, are adequate to fund its short term and long term operating and investing needs for at least twelve months and the foreseeable future thereafter. Further, the Company has flexibility related to its use of cash; the Company has no significant debt maturities until 2027 and no significant cash contribution requirements related to its U.S. pension plan obligations for the foreseeable future (refer to Material Cash Requirements, below, for more information).

Although management believes that Alcoa’s future cash from operations and other liquidity options will provide adequate resources to fund operating and investing needs, the Company’s access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) Alcoa Corporation’s credit rating; (ii) the liquidity of the overall capital markets; (iii) the current state of the economy and commodity markets, and (iv) short- and long-term debt ratings. There can be no assurances that the Company will continue to have access to capital markets on terms acceptable to Alcoa Corporation.

Changes in market conditions caused by global or macroeconomic events, such as the ongoing conflict between Russia and Ukraine, high inflation, and changing global monetary policies could have adverse effects on Alcoa’s ability to obtain additional financing and cost of borrowing. Inability to generate sufficient earnings could impact the Company’s ability to meet the financial covenants in our outstanding debt and revolving credit facility agreements and limit our ability to access these sources of liquidity or refinance or renegotiate our outstanding debt or credit agreements on terms acceptable to the Company. Additionally, the impact on market conditions from such events could adversely affect the liquidity of Alcoa’s customers, suppliers, and joint venture partners and equity method investments, which could negatively impact the collectability of outstanding receivables and our cash flows.

At December 31, 2022, the Company’s cash and cash equivalents were $1,363, of which $1,280 was held outside the United States. Alcoa Corporation has a number of commitments and obligations related to the Company’s operations in various foreign jurisdictions, resulting in the need for cash outside the United States. Alcoa Corporation continuously evaluates its local and global cash needs for future business operations, which may influence future repatriation decisions. See Part II Item 8 of this Form 10-K in Note Q to the Consolidated Financial Statements for additional information related to undistributed net earnings.

Cash from Operations

Cash provided from operations was $822 in 2022 compared with $920 in 2021. Notable changes to the sources and (uses) of cash include:

In the third quarter of 2020, AofA paid approximately $74 (A$107) to the ATO related to the tax dispute described in Note S to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K. Upon payment, AofA recorded a noncurrent prepaid tax asset, as the Company continues to believe it is more likely than not that AofA’s tax position will be sustained and therefore is not recognizing any tax expense in relation to this matter. In accordance with Australian tax laws, the initial interest assessment and additional interest are deductible against AofA’s taxable income resulting in approximately $169 (A$219) in 2020, $14 (A$19) in 2021, and $15 (A$22) in 2022 in lower cash tax payments. If AofA is ultimately successful, the interest deduction would become taxable as income in the year the dispute is resolved. In addition, should the ATO decide in the interim to reduce any interest already assessed, the reduction would be taxable as income at that point in time. During 2022, AofA continued to record its tax provision and tax liability without effect of the ATO assessment, since it expects to prevail. The tax payable will remain on AofA’s balance sheet as a noncurrent liability, increased by the tax effect of subsequent periods’ interest deductions, until dispute resolution, which is expected to take several years. At December 31, 2022, the noncurrent liability resulting from the cumulative interest deductions was approximately $174 (A$260).

Financing Activities

Cash used for financing activities was $768 in 2022 compared with $1,158 in 2021.

The use of cash in 2022 was primarily $165 of net cash paid to Alumina Limited (see Noncontrolling interest in Results of Operations above), $500 for the repurchase of common stock, and $72 of dividends paid.

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The use of cash in 2021 was primarily $775 for the full, early repayment of $750 aggregate principal amount of 2024 Notes (including $25 redemption premium) in April 2021, $518 for the full, early repayment of $500 aggregate principal amount of 2026 Notes (including $18 redemption premium) in September 2021, $194 in net cash paid to Alumina Limited, $150 for the repurchase of common stock, $19 for dividends paid on common stock, and $17 in financial contributions primarily related to the divested Spanish facilities. The uses of cash were partially offset by the issuance of $500 aggregate principal amount 2029 Notes by ANHBV in March 2021 with net proceeds of approximately $493.

Credit Facilities. On June 27, 2022, Alcoa Corporation and ANHBV, a wholly owned subsidiary of Alcoa Corporation and the borrower, entered into an amendment and restatement agreement (the Third Amendment and Restatement) (as amended and restated, the Revolving Credit Facility) that provides additional flexibility to the Company and ANHBV by (i) extending the maturity date of the Revolving Credit Facility from November 2023 to June 2027, (ii) reducing the aggregate commitments under the facility from $1,500 to $1,250, (iii) releasing the collateral package that had previously secured the Revolving Credit Facility, which will continue so long as certain credit ratings are maintained, (iv) increasing the maximum leverage ratio from 2.75 to 1.00 to 3.25 to 1.00, which increases following material acquisitions for four consecutive fiscal quarters following an acquisition, (v) providing a debt to capitalization ratio not to exceed .60 to 1.00 to replace the maximum leverage ratio upon a ratings upgrade to investment grade by Moody’s or S&P, and (vi) providing flexibility for dividends and other restricted payments, to make investments, and to incur additional indebtedness. The Revolving Credit Facility implements a sustainability adjustment to the applicable margin and commitment fee that may result in a positive or negative adjustment based on two of the Company’s existing sustainability metrics.

If Alcoa Corporation or ANHBV, as applicable, fails to have a rating of at least Ba1 from Moody’s and BB+ from S&P, then the Company would be required to execute all security documents to re-secure collateral under the Revolving Credit Facility.

As of December 31, 2022, the Company was in compliance with all covenants. There were no borrowings outstanding at December 31, 2022 and 2021, and no amounts were borrowed during 2022 and 2021 under the Revolving Credit Facility.

The Company may draw on the facility periodically to ensure working capital needs are met. See Part II Item 8 of this Form 10-K in Note M to the Consolidated Financial Statements for additional information related to the Revolving Credit Facility.

Guarantees of Third Parties. As of December 31, 2022 and 2021, the Company had no outstanding potential future payments for guarantees issued on behalf of a third-party.

Bank Guarantees and Letters of Credit. Alcoa Corporation has outstanding bank guarantees and letters of credit related to, among others, energy contracts, environmental obligations, legal and tax matters, leasing obligations, workers compensation, and customs duties. The total amount committed under these instruments, which automatically renew or expire at various dates between 2023 and 2024, was $293 (includes $131 issued under a standby letter of credit agreement —see below) at December 31, 2022. Additionally, ParentCo has outstanding bank guarantees and letters of credit related to the Company of $14 at December 31, 2022. In the event ParentCo would be required to perform under any of these instruments, ParentCo would be indemnified by Alcoa Corporation in accordance with the Separation and Distribution Agreement. Likewise, the Company has outstanding bank guarantees and letters of credit related to ParentCo of $8 at December 31, 2022. In the event Alcoa Corporation would be required to perform under any of these instruments, the Company would be indemnified by ParentCo in accordance with the Separation and Distribution Agreement.

In August 2017, Alcoa Corporation entered into a standby letter of credit agreement, which expires on June 27, 2024 (extended in August 2018, May 2019, May 2021, and June 2022), with three financial institutions. The agreement provides for a $200 facility used by the Company for matters in the ordinary course of business. Alcoa Corporation’s obligations under this facility are secured in the same manner as obligations under the Company’s revolving credit facility. Additionally, this facility contains similar representations and warranties and affirmative, negative, and financial covenants as the Company’s revolving credit facility. See Part II Item 8 of this Form 10-K in Note M to the Consolidated Financial Statements for additional information related to the Company’s debt. As of December 31, 2022, letters of credit aggregating $131 were issued under this facility.

Surety Bonds. Alcoa Corporation has outstanding surety bonds primarily related to tax matters, contract performance, workers compensation, environmental-related matters, and customs duties. The total amount committed under these bonds, which automatically renew or expire at various dates between 2023 and 2027, was $174 at December 31, 2022. Additionally, ParentCo has outstanding surety bonds related to the Company of $11 at December 31, 2022. In the event ParentCo would be required to perform under any of these instruments, ParentCo would be indemnified by Alcoa Corporation in accordance with the Separation and Distribution Agreement. Likewise, the Company has outstanding surety bonds related to ParentCo of $3 at December 31, 2022. In the event Alcoa Corporation would be required to perform under any of these instruments, the Company would be indemnified by ParentCo in accordance with the Separation and Distribution Agreement.

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Debt. As of December 31, 2022, Alcoa Corporation had three outstanding Notes maturing at varying times. A summary of the Notes and other long-term debt is shown below. See Part II Item 8 of this Form 10-K in Note M to the Consolidated Financial Statements for additional information related to the Company’s debt.

Ratings. Alcoa Corporation’s cost of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short- and long-term debt ratings assigned to Alcoa Corporation’s debt by the major credit rating agencies.

On July 26, 2022, Moody’s upgraded the rating of ANHBV’s senior unsecured notes to Baa3 (investment grade) from Ba1 and set the current outlook to stable.

Dividend. In each quarter of 2022, the Board of Directors declared and paid a quarterly cash dividend of $0.10 per share of the Company’s common stock, totaling $72 for the year.

The details of any future cash dividend declaration, including the amount of such dividend and the timing and establishment of the record and payment dates, will be determined by the Board of Directors. The decision of whether to pay future cash dividends and the amount of any such dividends will be based on the Company's financial position, results of operations, cash flows, capital requirements, business conditions, the requirements of applicable law, and any other factors the Board of Directors may deem relevant.

Common Stock Repurchase Program.

In October 2021, Alcoa Corporation’s Board of Directors approved a common stock repurchase program under which the Company may purchase shares of its outstanding common stock up to an aggregate transactional value of $500, depending on cash availability, market conditions, and other factors.

On July 20, 2022, Alcoa Corporation announced that its Board of Directors approved an additional common stock repurchase program under which the Company may purchase shares of its outstanding common stock up to an aggregate transactional value of $500, depending on the Company’s continuing analysis of market, financial, and other factors (the New Repurchase Program). Prior to this authorization, $150 remained available for share repurchases at the end of the second quarter of 2022 from a prior authorization in October 2021 of $500 which was fully exhausted in 2022 with the Company’s repurchase activity (see below).

In 2022, the Company repurchased 8,565,200 shares of its common stock for $500, under the previously authorized program; the shares were immediately retired. As of the date of this report, the Company is currently authorized to repurchase up to a total of $500, in the aggregate, of its outstanding shares of common stock under the New Repurchase Program. Repurchases under this program may be made using a variety of methods, which may include open market purchases, privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. This program may be suspended or discontinued at any time and does not have a predetermined expiration date. Alcoa Corporation intends to retire repurchased shares of common stock.

In 2021, the Company repurchased 3,184,300 shares of its common stock for $150; the shares were immediately retired.

Investing Activities

Cash used for investing activities was $495 in 2022 compared with cash provided from investing activities of $565 in 2021.

In 2022, the use of cash was primarily attributable to $480 of capital expenditures and $32 of cash contributions to the ELYSIS joint venture, partially offset by the sale of the Company’s interest in the MRN mine of $10.

In 2021, the source of cash was primarily attributable to proceeds from the sale of assets of $966, primarily the Warrick Rolling Mill, Rockdale, and Eastalco site sales, partially offset by $390 in capital expenditures.

In 2023, Alcoa expects capital expenditures of approximately $600 related to sustaining capital projects and growth projects. The timing and amount of capital expenditures may fluctuate as a result of the Company’s normal operations.

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Material Cash Requirements

As discussed above, the Company relies primarily on operating cash flows to fund its cash commitments and management believes its operating cash flows, cash on hand, and liquidity options will be adequate to fund its cash needs for at least 12 months and the foreseeable future thereafter. We have committed cash outflows related to pension and postretirement benefit obligations and operating lease agreements. See Part II Item 8 of this Form 10-K in Notes O and T, respectively, to the Consolidated Financial Statements for additional information. As of December 31, 2022, a summary of Alcoa Corporation’s outstanding material cash requirements are as follows:

Purchase obligations—Energy-related purchase obligations consist primarily of electricity and natural gas contracts with expiration dates ranging from 1 year to 25 years. Raw material obligations consist mostly of bauxite (relates to AWAC’s bauxite mine interests in Guinea and Brazil), caustic soda, lime, alumina, aluminum fluoride, calcined petroleum coke, anodes and cathode blocks with expiration dates ranging from less than 1 year to 13 years. Other purchase obligations consist principally of freight for bauxite and alumina with expiration dates ranging from 1 to 10 years. Many of these purchase obligations contain variable pricing components, and, as a result, actual cash payments may differ from the estimates provided in the preceding table. In accordance with the terms of several of these supply contracts, obligations may be reduced as a result of an interruption to operations, such as a plant curtailment or a force majeure event.

Interest related to total debt—Interest is based on interest rates in effect as of December 31, 2022 and is calculated on debt with maturities that extend to 2029.

Long-term debt—Total debt amounts in the preceding table represent the principal amounts of all outstanding long-term debt, which have maturities that extend to 2029.

Critical Accounting Policies and Estimates

The preparation of the Company’s Consolidated Financial Statements in accordance with GAAP requires management to make certain estimates based on judgments and assumptions regarding uncertainties that affect the amounts reported in the Consolidated Financial Statements and disclosed in the Notes to the Consolidated Financial Statements. Areas that require such estimates include the review of properties, plants, and equipment and goodwill for impairment, and accounting for each of the following: asset retirement and environmental obligations; litigation matters; pension plans and other postretirement benefits obligations; derivatives and hedging activities; and income taxes.

Management uses historical experience and all available information to make these estimates; actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that the amounts recorded in the financial statements related to these items are based on its best estimates and judgments using all relevant information available at the time.

A summary of the Company’s significant accounting policies is included in Part II Item 8 of this Form 10-K in Note B to the Consolidated Financial Statements.

Properties, Plants, and Equipment. Properties, plants, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (asset group) may not be recoverable, including in the period when assets have met the criteria to be classified as held for sale. The model used to determine recoverability of an asset or asset group would leverage the model that management uses for planning and strategic review of the entire business, including related inputs and assumptions. Management’s impairment assessment process is described in Part II Item 8 of this Form 10-K in Note B to the Consolidated Financial Statements. Refer to Part II Item 8 of this Form 10-K in Note K to the Consolidated Financial Statements for more information regarding properties, plants, and equipment.

Goodwill. Goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods. The fair value that could be realized in an actual transaction may differ from that used to evaluate goodwill for impairment.

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Under the qualitative impairment test, management considers a number of factors in its assessment, such as: general economic conditions, equity and credit markets, industry and market conditions, and earnings and cash flow trends.

Under the quantitative impairment test, management uses a discounted cash flow (DCF) model to estimate the current fair value of its reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, production costs, production capability, tax rates, capital spending, discount rate, and working capital changes. The model used for the goodwill impairment test leverages the model, including related inputs and assumptions, that management uses for planning and strategic review of the entire business.

Management will test goodwill on a qualitative or quantitative basis. Refer to Part II Item 8 of this Form 10-K in Note B to the Consolidated Financial Statements for more information regarding management’s impairment assessment process.

Management performed a quantitative assessment for the Bauxite and Alumina reporting units in 2022. As a result of the assessments, the estimated fair values of the Bauxite and Alumina reporting units were substantially in excess of their carrying values, resulting in no impairment. The impact on the estimated fair values of an increase in the discount rate of 1% would not result in a change in the conclusions reached, the estimated fair values would remain in excess of carrying values.

Further, in all years presented, there have been no triggering events that necessitated an impairment test for either the Bauxite or Alumina reporting units. Refer to Part II Item 8 of this Form 10-K in Note L to the Consolidated Financial Statements for more information regarding goodwill.

Asset Retirement and Environmental Obligations. Estimates are used to record environmental remediation and asset retirement obligation (ARO) reserves based on the best available information at the time of recognition. Several assumptions are used to estimate the costs required to demolish, environmentally remediate, or reclaim the site, including:

As the site is demolished, remediated, or reclaimed, the assumptions and estimates used to record the reserve may change to account for:

Changes to the estimates may result in material changes to the reserve that may require an increase to or a reversal of a previously recorded reserve. Historically, the Company has not had material changes in established reserves. Refer to Part II Item 8 of this Form 10-K in Note R and Note S to the Consolidated Financial Statements for more information regarding current reserves.

Litigation Matters. For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as, among others, the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, then the matter is disclosed, and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss. Refer to Part II Item 8 of this Form 10-K in Note B to the Consolidated Financial Statements for more information regarding management’s litigation matters policy.

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Pension and Other Postretirement Benefits. Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the interest rate used to discount the future estimated liability, the expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, health care cost trend rates, retirement age, and mortality).

The yield curve model used to develop the discount rate parallels the plans’ projected cash flows and has a weighted average duration of 11 years. The underlying cash flows of the high-quality corporate bonds included in the model exceed the cash flows needed to satisfy the Company’s plan obligations multiple times. If a deep market of high-quality corporate bonds does not exist in a country, then the yield on government bonds plus a corporate bond yield spread is used. The impact on the combined pension and other postretirement liabilities of a change in the weighted average discount rate of ¼ of 1% would be approximately $75 and either a charge or credit of approximately $1 to pretax earnings in the following year.

The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on forward-looking investment returns by asset class. Management incorporates expected future investment returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment. A change in the assumption for the weighted average expected long-term rate of return on plan assets of ¼ of 1% would impact pretax earnings by approximately $7 for 2023.

Mortality rate assumptions are based on mortality tables and future improvement scales published by third parties, such as the Society of Actuaries, and consider other available information including historical data as well as studies and publications from reputable sources.

Refer to Part II Item 8 of this Form 10-K in Note O to the Consolidated Financial Statements for more information regarding pension and other postretirement benefits including accounting impacts of current year actions.

Derivatives and Hedging. To calculate the fair value of certain derivatives, management uses discounted cash flow (DCF) and other simulation models that consider the following inputs and assumptions: quoted market prices (e.g., aluminum prices on the 10-year London Metal Exchange (LME) forward curve and energy prices), information concerning time premiums and volatilities for certain option type embedded derivatives and regional premiums for aluminum contracts, aluminum and energy prices beyond those quoted in the market, and the estimated credit spread between Alcoa and the counterparty. The quoted market prices used in the valuation models are dependent on market fundamentals, the relationship between supply and demand at any point in time, seasonal conditions, inventories, and interest rates. For periods beyond the term of quoted market prices, management estimates the price of aluminum by extrapolating the 10-year LME forward curve and estimates the Midwest premium based on recent transactions.

Changes in estimates can have a material impact on the derivative valuations. Refer to Part II Item 8 of this Form 10-K in Note P to the Consolidated Financial Statements for more information regarding derivatives and hedging and related activity during the period.

Income Taxes. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management applies judgment in assessing all available positive and negative evidence and considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa Corporation’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to cumulative losses may exist without a valuation allowance where in management’s judgment the weight of the positive evidence more than offsets the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Financial information utilized in this analysis leverages the same financial information, including related inputs and assumptions, that management uses for planning and strategic review of the entire business.

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitations has expired, or the appropriate taxing authority has completed their examination even though the statute of limitations remains open.

Changes in estimates can have a material impact on the deferred taxes and uncertain tax positions. Refer to Part II Item 8 of this Form 10-K in Note Q to the Consolidated Financial Statements for more information regarding income taxes and deferred tax assets and related activity during the period.

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Related Party Transactions

Alcoa Corporation buys products from and sells products to various related companies, consisting of entities in which Alcoa Corporation retains a 50% or less equity interest, at negotiated prices between the two parties. These transactions were not material to the financial position or results of operations of Alcoa Corporation for all periods presented.

Recently Adopted Accounting Guidance

See Part II Item 8 of this Form 10-K in Note B to the Consolidated Financial Statements under caption Recently Adopted Accounting Guidance.

Recently Issued Accounting Guidance

See Part II Item 8 of this Form 10-K in Note B to the Consolidated Financial Statements under caption Recently Issued Accounting Guidance.