Aluminum producer Alcoa Corp. made discretionary contributions of $500 million to its US pension plans using the gross proceeds of a recently closed debt offering.
“This discretionary funding is in complete alignment with our strategic priority to strengthen the balance sheet, as it reduces near-term pension funding risk using a fixed-rate, 10-year maturity instrument,” Alcoa Chief Financial Officer William Oplinger said in a release. “Further, because the debt increase is offset by a lower net pension liability, it is leverage-neutral and does not impact our 2018 capital allocation strategy.”
The company funded the contribution from a debt offering that closed last week that consisted of $500 million aggregate principal amount of 6.125% senior notes due in 2028. The notes were sold through wholly owned subsidiary Alcoa Nederland Holding B.V. in a private placement to qualified institutional buyers, and to certain non-US investors in offshore transactions.
During its May investor presentation, Alcoa said it would provide $300 million of additional funding into its pension plans during the year, on top of the estimated $450 million in required minimum contributions for fiscal year 2018. That would indicate that the company still plans to contribute another $250 million to its pension funds before the year is out. According to Alcoa, as of the end of 2017, its US pension plans had a funding status of approximately 83%.
Alcoa said it shed approximately one-third of its targeted $300 million in liabilities when the company purchased group annuity contracts and transferred approximately $555 million in obligations, and related assets, of defined benefit pension plans in Canada. As part of the annuity agreements, Alcoa contributed approximately $95 million to facilitate the annuity transaction and maintain the funding level of the remaining plan obligations.
For the rest of the year, Alcoa said it expects to achieve further liability optimization of approximately $200 million, either through discretionary contributions to its pension plans, reducing funded debt in Brazil, or a combination of the two.
In its investor presentation, the company said its 2018 capital allocation framework is to maintain liquidity with a cash balance greater than $1 billion; spend approximately $300 million in sustaining capital expenditures; drive value creation through approximately $150 million in return-seeking capital expenditures; and reduce debt and pension and other post-retirement employee benefits liabilities by a total of $300 million.