RAILROAD COMMISSION OF TEXAS David Porter, Chairman Christi Craddick, Commissioner Ryan Sitton, Commissioner Financial Services INTERNAL MEMORANDUM ,7 TO: John E. Caudle, Direc Surface Mining and ation Division (SMRD) THROUGH: Bob Hopper, Financial Reporting Manager% Financial Services Railmad Commission of Texas RECEIVED FROM: Adriaan Kanaar Financial Services MAR 2 1 DATE: March 15, 2016 Surface Mining Division SUBJECT: Alcoa, Inc. (Alcoa) Sandow Mine, Permit No. lF 2015 Financial Information Review (Year Ending December 31, 2015) File Reference No. 1605303 Alcoa. Inc. @15 Fin_ancial Information Review for Permit No. 1F As requested in your memorandum dated February 22, 2016, Financial Services has reviewed the audited annual ?nancial statements for Alcoa, Inc. (Alcoa) for the year ended December 31, 2015, to determine if Alcoa meets the ?nancial requirements for its $27,250,000.00 self-bond for Permit lF. Alcoa?s audited ?nancial statements for the year ended December 31, 2015, show that Alcoa meets the requirements of 16 TEX. ADMIN. CODE as well as meeting the requirements of 16 TEX. ADMIN. CODE Therefore, Alcoa meets the ?nancial requirements for its proposed $27,250,000.00 self-bond for Permit 1F. Attached is a worksheet showing that Alcoa meets the ?nancial requirements of 16 TEX. ADMIN. CODE and To meet the requirements of 16 TEX. ADMIN. CODE an applicant for a self-bond must meet the requirements of one of 16 TEX. ADMIN. CODE or Alcoa?s audited ?nancial statements for the year ended December 31, 2015, Show that Alcoa meets the requirements of 16 TEX. ADMIN. CODE and To meet the requirements of 16 TEX. ADMIN. CODE an applicant?s amount of self-bonds cannot exceed 25% of the applicant?s tangible net worth in the United States. Using Alcoa?s percentage of ?xed assets in America to scale down its international, companywide tangible net worth, Alcoa?s audited ?nancial statements for the year ended December 31, 2015, show that the amount of the replacement self- bond is equal to 0.95% of Alcoa?s tangible net worth in the United States. Therefore, Alcoa submitted documentation showing that it meets the requirements of 16 TEX. ADMIN. CODE and Please contact Adriaan Kanaar at (512) 463-8850 if you have any questions regarding this review. cc: Adam Goodlett, Of?ce of General Counsel Application for Self Bond Permit No. 1F Alcoa Inc. -- Audited Financial Statements 12I31i15 Section 12.3091i?zlici Applicant must meet one or more of the following: Criterion #1 Current rating for its most recent bond issuance of or higher as issued by either Moody's Investor Service or Standard and Poor's Corporation Reference FAILS Current Rating Moody Ba1 p32 Standard and Poor p32 DOES NOT Meet the requirements of 16 TAC Criterion #2 Must meet all of the following requirements: MEETS Requirement 1 Tangible net worth of at least $10 million Owner?s Equity 14.131.000.000 p93 A-B Goodwill (5,401,000,000) p93 Intangible (1,158,000,000) Pg122 total assets - total liabilities=net worth (owner's equity) *Iess intangibles Tangible net worth 7,572,000,000 sum MEETS Requirement 2 Ratio of total liabilities to net worth of 2.5 times or less Total Liabilities 22.397.000.000 p93 Net Worth 14.131.000.000 p93 A-B Ratio LiabilitiesINet Worth 1.58 MEETS Requirement 3 Ratio of current assets to current liabilities of 1.2 times or greater Current Assets 7,953,000,000 p93 Current Liabilities 5,211,000,000 p93 Ratio Current AssetiLiabilities 1.53 DOES Meet the requirements of 16 TAC Criterion #3 Must meet all of the following requirements: MEETS Requirement 1 Fixed assets in US total at least $20 million Fixed Assets 5,758,000,000 pg141 Attachment #1 Page 1 ALCOA 2014 Financial Info Self Bond 1F MEETS MEETS MEETS MEETS DOES NOT Ratio Current AssetiLiabilities 1.53 Current Credit Rating Not Available OR Requirement 3 Must meet all of the following requirements: #1 Tangible net worth of at least $100 million Tangible net worth 7,572,000,000 above #2 Fixed assets in US total at least $20 million Fixed Assets 5,758,000,000 pg141 #3 Has outstanding securities pursuant to the provision of the Securities Act of 1933 and subject to periodic financial reporting requirements established by the Securities Act of 1934 Yes #4 Applicant's present and proposed self-bonds and guaranteed self-bonds for surface mining and reclamations operations not exceed 16.67% of the guarantor's net worth in US. memo Bonds _27,250,000 Net Worth 14.131.000.000 p93 A-B 16.67% Test 0.19% Meet the requirements of 16 TAC Section Self Bond MEETS DOES Attachment #1 Applicant's present and proposed self-bonds and guaranteed self-bonds for surface mining and reclamations operations not exceed 25% of the guarantor's tangible net worth in US. 5,758,000,000 pg141 14.815.000.000 p141 38.866% calc Long-lived Assets in the United States Long-lived Assets Worldwide Percentage of Fixed Assets in United States 7,572,000,000 above above 2,942,934,593 calc Total Tangible Net Worth Percentage of Fixed Assets in United States Tangible Net Worth in the United States Bonds 27,250,000 memo above Tangible Net Worth in the US. 2,942,934,593 25% Test 0.95% *Bond for $27,250,000 for Sandow Mine, Permit No. 1F Meet the requirements of 16 TAC Page 3 ALCOA 2014 Financial Info Self Bond 1F Application for Self Bond Permit No. 1F Alcoa Inc. -- Audited Financial Statements 12I31i15 Section Applicant must meet one or more of the following: Criterion #1 Current rating for its most recent bond issuance of or higher as issued by either Moody's Investor Service or Standard and Poor's Corporation Reference FAILS Current Rating Moody Ba1 p32 Standard and Poor p32 DOES NOT Meet the requirements of 16 TAC Criterion #2 Must meet all of the following requirements: MEETS Requirement 1 Tangible net worth of at least $10 million Owner's Equity 14,131 ,000,000 p93 Goodwill (5,401,000,000) p93 Intangible (1,158,000,000) Pg122 total assets - total liabilities=net worth (owner's equity) *less intangibles Tangible net worth 7,572,000,000 sum MEETS Requirement 2 Ratio of total liabilities to net worth of 2.5 times or less Total Liabilities 22,397,000,000 p93 Net Worth 14,131 ,000,000 p93 Ratio LiabilitiesINet Worth 1.58 MEETS Requirement 3 Ratio of current assets to current liabilities of 1.2 times or greater Current Assets 7,953,000,000 p93 Current Liabilities 5,211,000,000 p93 Ratio Current AssetlLiabilities 1.53 DOES Meet the requirements of 16 TAC Criterion #3 Must meet all of the following requirements: MEETS Requirement 1 Fixed assets in US total at least $20 million Fixed Assets 5,758,000,000 pg141 Attachment #1 Page 1 ALCOA 2014 Financial Info Self Bond 1F MEETS MEETS DOES Requirement 2 Ratio of total liabilities to net worth of 2.5 times or less Total Liabilities 22.397.000.000 Net Worth Ratio LiabilitiesINet Worth Requirement 3 Ratio of current assets to current liabilities of 1.2 times or greater Current Assets 14.131.000.000 1.58 7.953000000 Current Liabilities Ratio Current AssetiLiabilities Meet the requirements of 16 TAC Criterion #4 FAILS MEETS MEETS MEETS NOT AVAILABLE Attachment #1 Must meet first requirement and either two or three: Requirement 1 Has investment-grade rating for its most recent bond issuance of "Baa3" or higher from Moody's Investor Service and or higher from Standard and Poor's Corporation Investment-Grade Rating Moody_ Standard and Poor Requirement 2 Must meet all of the following requirements: #1 Tangible net worth of at least $10 million Tangible net worth #2 Fixed assets in US total at least $20 million Fixed Assets #3 Ratio of total liabilities to net worth of 2.5 times or less OR less than industry median reported by Dun and Bradstreet for applicant's primary SIC code Total Liabilities Net Worth Ratio LiabilitiesINet Worth #4 Ratio of current assets to current liabilities that is equal or greater than industry median reported by Dun and Bradstreet for applicant's primary SIC code OR current credit rating of or higher from industry median Current Assets 5.211.000.000 1.53 Ba1 7.572.000.000 5,758,000,000 22.397.000.000 14.131.000.000 1.58 7.953.000.000 Current Liabilities Page 2 5.211 .000.000 p93 p93 A-B p93 p93 p32 p32 above pg141 p93 p93 A-B p93 p93 ALCOA 2014 Financial Info Self Bond 1F MEETS MEETS MEETS MEETS DOES NOT Ratio Current AssetILiabilities 1.53 Current Credit Rating Not Available OR Requirement 3 Must meet all of the following requirements: #1 Tangible net worth of at least $100 million Tangible net worth 7,572,000,000 above #2 Fixed assets in US total at least $20 million Fixed Assets 5,758,000,000 pgl41 #3 Has outstanding securities pursuant to the provision of the Securities Act of 1933 and subject to periodic financial reporting requirements established by the Securities Act of 1934 Yes #4 Applicant's present and proposed self-bonds and guaranteed self-bonds for surface mining and reclamations operations not exceed 16.67% of the guarantor's net worth in US. memo Bonds I 27g>0000 Net Worth 14,131,000,000 p93 16.67% Test 0.19% Meet the requirements of 16 TAC Section Self Bond MEETS DOES Attachment #1 Applicant's present and proposed self-bonds and guaranteed self-bonds for surface mining and reclamations operations not exceed 25% of the guarantor's tangible net worth in US. Long-lived Assets in the United States Long-lived Assets Worldwide Percentage of Fixed Assets in United States 5,758,000,000 pg141 _14,815,000,000 p141 38.866% calc Total Tangible Net Worth Percentage of Fixed Assets in United States Tangible Net Worth in the United States 7,572,000,000 above 38 860% above 2,942,934,593 calc Bonds 27,250,000 memo Tangible Net Worth in the US. 2,942,934,593 above 25% Test 0.95% *Bond for $27,250,000 for Sandow Mine, Permit No. 1F Meet the requirements of 16 TAC Page 3 ALCOA 2014 Financial Info Self Bond 1F Euro and Norwegian kroner, may affect Alcoa?s profitability as some important inputs are purchased in other currencies, while the Company?s upstream products are generally sold in U.S. dollars. In addition, although a strong U.S. dollar generally has a positive impact on Alcoa?s near?term profitability, over a longer term, a strong U.S. dollar may have an unfavorable impact to Alcoa?s position on the global aluminum cost curve due to Alcoa?s U.S. smelting portfolio. As the U.S. dollar strengthens, the cost curve shifts down for smelters outside the U.S. but costs for Alcoa?s U.S. smelting portfolio may not decline. Alcoa may not be able to successfully realize future targets or goals established for its business segments, at the levels or by the dates targeted. From time to time, Alcoa may announce future targets or goals for its business, which are based on the Company?s then current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which Alcoa operates. Future targets and goals re?ect the Company?s beliefs and assumptions and its perception of historical trends, then current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. As such, targets and goals are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events, including the risks discussed in this report. The actual outcome may be materially different. There can be no assurance that any targets or goals established by the Company will be accomplished at the levels or by the dates targeted, if at all. Failure to achieve the targets or goals by the Company may have a material adverse effect on its business, financial condition, results of operations or the market price of its securities. Alcoa faces significant competition, which may have an adverse effect on profitability. As discussed in Part I, Item 1. (Business?Competitive Conditions) of this report, the markets for Alcoa?s aluminum and non?aluminum products are highly competitive. Alcoa?s competitors include a variety of both U.S. and non?U.S. companies in all major markets, including some that are subsidized. Alcoa?s metals, including aluminum, titanium and nickel, compete with other materials, such as steel, plastics, composites, ceramics, and glass, among others, for various applications in Alcoa?s key markets. New product offerings or new technologies in the marketplace may compete with or replace Alcoa products. The willingness of customers to accept substitutes for the products sold by Alcoa, the ability of large customers to exert leverage in the marketplace to affect the pricing for fabricated aluminum products, and technological advancements or other developments by or affecting Alcoa?s competitors or customers could affect Alcoa?s results of operations. In addition, Alcoa?s competitive position depends, in part, on the Company?s ability to leverage its innovation expertise across its businesses and key end markets and, in the case of its upstream businesses, having access to an economical power supply to sustain its operations in various countries. A downgrade of Alcoa?s credit ratings could limit Alcoa?s ability to obtain future financing, increase its borrowing costs, increase the pricing of its credit facilities, adversely affect the market price of its securities, trigger letter of credit or other collateral postings, or otherwise impair its business, financial condition, and results of operations. Standard and Poor?s Ratings Services currently rates Alcoa?s long-term debt the lowest level of investment grade rating, with a stable ratings outlook (ratings and outlook were affirmed on March 9, 2015). On September 28, 2015, issued a statement that these ratings and outlook for Alcoa were not affected by Alcoa?s plan to separate into two publicly-traded companies. On May 29, 2013, Moody?s Investors Service downgraded Alcoa?s long?term debt rating from Baa3 to Ba], which is below investment grade, and changed the outlook from rating under review to stable. On April 30, 2015, Moody?s changed the outlook from stable to positive. On September 28, 2015, Moody?s affirmed these ratings and changed the current outlook from positive to developing based on Alcoa?s plan to separate into two publicly?traded companies. On January 21, 2016, Moody?s placed Alcoa?s long-term debt rating under review and changed the current outlook from developing to rating under review, while leaving Alcoa?s short?term debt rating unchanged. On April 11, 2014, Fitch Ratings downgraded Alcoa?s rating from to a below investment grade rating, and changed the outlook from negative to stable. On April 16, 2015, Fitch Ratings affirmed Alcoa?s rating of 32 Alcoa and subsidiaries Consolidated Balance Sheet (in millions) December 31, 2015 2014 Assets Current assets: Cash and cash equivalents (X) 55 1,919 1,877 Receivables from customers, less allowances of $13 in 2015 and $14 in 2014 (U) 1,340 1,395 Other receivables (U) 522 733 Inventories (G) 3,442 3,082 Prepaid expenses and other current assets 4, 730 761 Total current assets 7,953 7,848 Properties, plants, and equipment, net (H) 14,815 16,426 Goodwill (A E) 5.40] 5,247 Investments (I) 1,685 1,944 Deferred income taxes (T) 2,668 3,139 Other noncurrent assets 1) 4.006 1,759 Total Assets $36,528 $3733.61 Liabilities Current liabilities: Short-term borrowings (K X) 38 54 Accounts payable, trade 2,889 3,152 Accrued compensation and retirement costs 850 937 Taxes, including income taxes 239 265 Other current liabilities 1,174 1,021 Long?term debt due within one year (K 21 29 Total current liabilities 3" 5,21 1 5,458 Long?term debt, less amount due within one year (K X) 9,044 8,769 Accrued pension bene?ts (W) 3,298 3,291 Accrued other postretirement benefits (W) 2,106 2,155 Other noncurrent liabilities and deferred credits (L) 2.738 2,896 Total liabilities 22.397 22,569 Contingencies and commitments (N) Equity Alcoa shareholders? equity: Preferred stock (R) 55 55 Mandatory convertible preferred stock (R) 3 3 Common stock (R) 1,391 1,304 Additional capital 10,019 9,284 Retained earnings 8,834 9,379 Treasury stock, at cost (2,825) (3,042) Accumulated other comprehensive loss (B) (5,431) (4,677) Total Alcoa shareholders? equity 12,046 12,306 l?mcontrollin interests (M) 2,085 2,488 T_9t_a1 equity 14.131 14,794 Total Liabilities and Equity $36,528 $37,363 The accompanying notes are an integral part of the consolidated financial statements. 93 J. Other Noncurrent Assets December 3 l, 2015 _201_4__ Intangibles, net (E) $1,158 737 Fair value of derivative contracts (X) 1,008 163 Cash surrender value of life insurance 492 506 Gas supply prepayment (N) 288 Prepaid gas transmission contract (N) 268 295 Value-added tax receivable 233 294 Deferred mining costs, net 203 209 Unamortized debt expense 58 65 Prepaid pension benefit (W) 44 53 Advance related to European Commission Matter in Italy (N) - 1 Other 254 326 - ?996313.29 K. Debt Long-Term Debt. December 31, 2015 2014 5.55% Notes, due 2017 750 750 6.50% Bonds, due 2018 250 250 6.75% Notes, due 2018 750 750 5.72% Notes, due 2019 750 750 1.63% Convertible Notes, due 2019* 403 - 6.150% Notes, due 2020 1,000 1,000 5.40% Notes, due 2021 1,250 1,250 5.87% Notes, due 2022 627 627 5.125% Notes, due 2024 1,250 1,250 5.90% Notes, due 2027 625 625 6.75% Bonds, due 2028 300 300 5.95% Notes due 2037 625 625 BNDES Loans, due 2015-2029 (see below for weighted average rates) 174 267 Iowa Finance Authority Loan, due 2042 250 250 OtherM _61 104 9,065 8,798 Less: amount due within one year 21 29 $3,944 $8.769 Amount was assumed in conjunction with the acquisition of RTI (see Note F). **Other includes various financing airangements related to subsidiaries, unamortized debt discounts related to the outstanding notes and bonds listed in the table above, an equity option related to the convertible notes due in 2019 (see Note F), and adjustments to the carrying value of long-term debt related to an interest swap contract accounted for as a fair value hedge (see Derivatives in Note X). The principal amount of long-term debt maturing in each of the next five years is $21 in 2016, $771 in 2017, $1,039 in 2018, $1,140 in 2019, and $1,018 in 2020. 122 Geographic information for sales was as follows (based upon the country where the point of sale occurred): 2015 2014 2013 Sales: United States?) $12,425 $12,103 $11,766 Spainm (3) 2,853 3,359 2,282 Australia 2,196 3,028 3,240 Brazil 854 1,398 1,221 France 802 915 862 United Kingdom 698 464 475 Hungary 622 630 555 China 565 415 259 Russia 455 642 683 Canada 308 143 123 Germany 264 229 230 Italy 139 150 157 Netherlands?) 34 36 524 Norwaym 30 31 283 Other 289 363 372 $22,534 Human $23,032 0? Sales of a portion of the alumina from Alcoa?s refineries in Suriname, Brazil, Australia, and Jamaica (prior to divestiture?see Note F) and most of the aluminum from Alcoa?s smelters in Canada occurred in the United States. (2) In 2015, 2014, and 2013, Sales of the aluminum from Alcoa?s smelters in Norway occurred in Spain. (3) aluminum from Alcoa?s smelter in Iceland occurred in both Spain and the Netherlands. Geographic information for long?lived assets was as follows (based upon the physical location of the assets): In 2015 and 2014, Sales of the aluminum from Alcoa?s smelter in Iceland occurred in Spain. In 2013, Sales of the December 31, 2015 2014 Long-lived assets: United States 5,758 5,403 Australia 2,159 2,538 Brazil 2,046 3,137 Iceland 1,397 1,460 Canada 1,238 1,216 Norway 463 588 China 352 389 United Kingdom 312 333 Russia 303 443 Spain 294 339 Hungary 190 210 Other 303 370 R. Preferred and Common Stock Preferred Stock. Alcoa has two classes of preferred stock: Class A Preferred Stock and Class Serial Preferred Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75 5514.815 $16,426 cumulative dividend preference per share. There were 546,024 of such shares outstanding at December 31, 2015 and 2014. Class Serial Preferred Stock has 10 million shares authorized at a par value of $1 per share. There were 2.5 million of such shares outstanding at December 31, 2015 and 2014 (see below). 141