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CENX > SEC Filings for CENX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for CENTURY ALUMINUM CO


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Developments
Hawesville issues 12-month notice to terminate power contract In August 2012, CAKY issued a 12-month notice to terminate its power contract with Kenergy, a member cooperative of Big Rivers, for Hawesville. During the 12-month notice period, we will be required to pay a demand charge for power, but we are not obligated to continue operating the plant. We believe that the contract price Hawesville pays for electric power under the Big Rivers Agreement is among the highest rates for smelters in the U.S. CAKY is engaged in discussions with Big Rivers, Kenergy and other stakeholders to access the wholesale market for power.
West Virginia PSC issues decision in Century Aluminum rate case In October 2012, the PSC issued an order to establish a new special rate mechanism for CAWV's Ravenswood smelter. While the new special rate mechanism included certain elements that CAWV had requested, it failed to establish a structure that would allow for a restart of the Ravenswood smelter under current conditions. On October 26, 2012, Century filed a motion for reconsideration with the PSC.
West Virginia Coal Severance Tax
In 2012, the West Virginia State Legislature approved a 10-year coal severance tax credit of $20 million per year that will be allocated to power producers and would likely result in reduced power costs to the Ravenswood smelter, if the smelter were to restart.
Grundartangi receives insurance settlement for damaged transformer In September 2012, we received a $7.9 million settlement payment related to insurance claims by Grundartangi for the cost of repairs to a transformer damaged in transit, a related business interruption claim, interest and other fees associated with the claim. We recorded the payment on the consolidated statement of operations in other income - net. Grundartangi expansion program
The Grundartangi expansion program, a $65 million capital expenditure project, is expected to increase production capacity at Grundartangi by 40,000 mtpy over the next four years.
Mt. Holly amends power contract
Effective June 1, 2012, Mt. Holly and South Carolina Public Service Authority ("Santee Cooper") amended the terms of Mt. Holly's power agreement in order to allow Mt. Holly to receive all or a portion of Mt. Holly's Supplemental Power requirements from an off-system natural gas-fired power generation facility (the "off-system facility"). The energy charge for Supplemental Power from the off-system facility is based on the cost of natural gas rather than Santee Cooper's system average fuel costs, which are primarily coal-based. The amendments to the power agreement may provide a benefit to Mt. Holly provided that natural gas costs remain below Santee Cooper's system average fuel costs. The amended power agreement provides that Mt. Holly may continue to receive its Supplemental Power requirements from the off-system facility through July 31, 2013, which may be extended through December 31, 2015 if firm transmission agreements can be obtained.


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Century purchases carbon anode assets in the Netherlands In June 2012, our wholly owned subsidiary, Century Vlissingen, purchased substantially all of the assets of the former Zalco anode production facility located in Vlissingen, the Netherlands for approximately $12.5 million. In connection with the purchase, we also entered into a ground lease with respect to the facility that is renewable at our option. As part of the transaction, Century Vlissingen will not assume, and is indemnified against, historical liabilities of the facility.
In anticipation of a restart of 75,000 metric tons of annual anode production capacity at the Vlissingen facility in the third quarter of 2013, we intend to invest approximately $45 million over the next three years, including capital expenditures, restart expenses and working capital to optimize production for our customers, including Grundartangi and to comply with environmental regulations. Upon restart, the facility will provide a source of anode production for Grundartangi and the planned Helguvik smelter, and replace certain anode supply contracts that will terminate in 2013. Century announces decision to relocate corporate headquarters In October 2012, we informed our headquarters' staff of the decision to relocate the corporate headquarters from Monterey, California to Chicago, Illinois. We expect to complete the process by the end of the first half of 2013.

Results of Operations
The following discussion reflects our historical results of operations.
Century's financial highlights include:
                                                   Three months ended      Nine months ended September 30,
                                                     September 30,
                                                   2012          2011            2012             2011
                                                          (In thousands, except per share data)
Net sales:
Third-party customers                          $  170,023    $  202,598   $       542,884    $    598,001
Related parties                                   134,612       143,048           411,560         440,259
Total                                          $  304,635    $  345,646   $       954,444    $  1,038,260
Gross profit                                   $    3,250    $   11,324   $        29,799    $    103,154
Net income (loss)                              $  (12,023 )  $   (6,600 ) $       (28,701 )  $     42,432
Earnings (loss) per common share:
Basic and Diluted                              $    (0.14 )  $    (0.07 ) $         (0.32 )  $       0.42



                                                 Three months ended   Nine months ended
                                                   September 30,        September 30,
                                                  2012       2011      2012      2011
Shipments - primary aluminum (metric tons):
Direct                                           95,747     82,236   283,665   247,224
Toll                                             67,684     68,596   200,561   199,269
Total                                           163,431    150,832   484,226   446,493


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Net sales (in millions)            2012      2011     $ Difference   % Difference
Three months ended September 30, $ 304.6  $   345.6  $      (41.0 )     (11.9 )%
Nine months ended September 30,  $ 954.4  $ 1,038.3  $      (83.9 )      (8.1 )%

Lower price realizations for our primary aluminum shipments in the three months ended September 30, 2012 were due to lower LME prices for primary aluminum, which were partially offset by increased premiums. The lower price realizations resulted in a $74.8 million decrease in sales. Higher shipment volumes had a $33.8 million positive impact on net sales. Direct shipments from our three operating smelters increased 13,511 metric tons in the three months ended September 30, 2012 compared to the same period in 2011, due to the restart of idled capacity at our Hawesville facility. Toll shipments decreased 912 metric tons relative to the same period last year, but were replaced with direct shipments.
Lower price realizations for our primary aluminum shipments in the nine months ended September 30, 2012 were due to lower LME prices for primary aluminum, which were partially offset by increased premiums. The lower price realizations resulted in a $182.7 million sales decrease. Higher shipment volumes had a $98.8 million positive impact on net sales. Direct shipments from our three operating smelters increased 36,441 metric tons in the nine months ended September 30, 2012 compared to the same period in 2011, due to the restart of idled capacity at our Hawesville facility. Toll shipments increased 1,292 metric tons relative to the same period last year.

Gross profit (in millions)        2012     2011    $ Difference   % Difference
Three months ended September 30, $  3.3  $  11.3  $       (8.0 )     (70.8 )%
Nine months ended September 30,  $ 29.8  $ 103.2  $      (73.4 )     (71.1 )%

During the three months ended September 30, 2012, lower price realizations, net of LME-based alumina cost and LME-based power cost, decreased gross profit by $55.5 million, with volume and mix reducing gross profit by $0.7 million. In addition, we experienced $26.5 million in net cost decreases, relative to the same period in 2011, comprised of: lower power and natural gas costs at our U.S. smelters, $7.1 million; lower costs for materials, supplies and maintenance, $14.1 million; other cost reductions, $5.5 million; offset by increased depreciation, $0.2 million.
During the nine months ended September 30, 2012, lower price realizations, net of LME-based alumina cost and LME-based power cost, decreased gross profit by $142.0 million, with volume and mix increasing gross profit by $4.6 million. In addition, we experienced $30.7 million in net cost decreases, relative to the same period in 2011, comprised of: decreased power and natural gas costs at our U.S. smelters, $5.2 million; decreased costs for materials, supplies and maintenance, $12.0 million; other cost reductions, $11.1 million; offset by increased depreciation, $0.5 million. In addition, we recorded a charge of $2.9 million in September 2011 related to an insurance recovery that went into litigation.
Our operating costs in 2011 were negatively impacted by the costs to restart idled capacity at the Hawesville facility. The absence of those costs in 2012 had a favorable impact on gross profit and their impact is included in the amounts reported above.
Increases in LME prices at the end of the third quarter of 2012, compared to the prior period-ending price levels, resulted in an increase in the market value of our inventory relative to its cost basis, resulting in credits to cost of goods sold for the three months ended September 30, 2012 of $8.2 million. At the end of the third quarter of 2011, the opposite situation occurred. Decreases in LME prices, compared to the prior period-ending price levels, resulted in a decrease in the market value of our inventory relative to its cost basis, resulting in a charge to cost of goods sold for the three months ended September 30, 2011 of $13.5 million. This resulted in a quarter to quarter improvement in gross profit of $21.7 million.
During the nine months ended September 30, 2012, increases in the market value of our inventory relative to its cost basis, resulted in credits to cost of goods sold of $19.8 million. During the nine months ended September 30, 2011, decreases in the market value of our inventory relative to its cost basis, resulted in charges to cost of goods sold of $13.5 million. This resulted in a period to period improvement in gross profit of $33.3 million.


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Other operating expenses (income) -
net (in millions)                          2012         2011       $ Difference   % Difference
Three months ended September 30,       $      7.4   $      2.7   $          4.7       174.1  %
Nine months ended September 30,        $     14.9   $     (8.4 ) $         23.3      (277.4 )%

Other operating expenses (income) - net is primarily related to items associated with Ravenswood. During the three months ended September 30, 2012, we increased our estimate of accrued litigation liabilities. During the nine months ended September 30, 2011, we recorded net benefits of $18.1 million resulting from the elimination of medical benefits for retirees of the Ravenswood facility.

Selling, general and administrative
expenses (in millions)                     2012         2011      $ Difference   % Difference
Three months ended September 30,       $      9.2   $      8.0   $        1.2        15.0  %
Nine months ended September 30,        $     24.8   $     37.1   $      (12.3 )     (33.2 )%

During the three months ended September 30, 2012, we began to incur general and administrative expenses related to the integration of the Century Vlissingen anode facility into our business. During 2012, our expenditures related to the Helguvik power arbitration were lower than in 2011. In addition, as part of the Helguvik arbitration decision, we were reimbursed for a portion of those expenditures in the second quarter of 2012. During the nine months ended September 30, 2011, we recorded selling, general and administrative charges of $7.7 million related to the contractual impact of changes in our Board of Directors and executive management team; these charges did not repeat in 2012.

Net gain (loss) on forward contracts
(in millions)                              2012         2011      $ Difference  % Difference
Three months ended September 30,       $     (0.3 ) $      4.2   $      (4.5 )     (107.1 )%
Nine months ended September 30,        $     (4.0 ) $     (2.3 ) $      (1.7 )       73.9  %

The net gain (loss) on forward contracts for the three and nine months ended September 30, 2012 and 2011 related primarily to marking-to-market and recording settlements of option contracts that were put in place to provide partial downside price protection for our domestic facilities. As of June 30, 2012, all of these option contracts had been settled.

Other income (expense) - net (in millions)  2012    2011    $ Difference  % Difference
Three months ended September 30,           $ 7.6  $ (1.1 ) $         8.7     (790.9 )%
Nine months ended September 30,            $ 8.1  $ (1.6 ) $         9.7     (606.3 )%

During the three months ended September 30, 2012, Grundartangi received a $7.9 million settlement payment for the costs to repair a transformer damaged in transit, a related business interruption claim, interest and other fees associated with the claim.

Income tax expense (in millions)   2012     2011     $ Difference   % Difference
Three months ended September 30, $ (1.2 ) $  (5.4 ) $         4.2      (77.8 )%
Nine months ended September 30,  $ (7.4 ) $ (12.1 ) $         4.7      (38.8 )%

Our 2012 and 2011 income tax expense was primarily driven by our earnings in Iceland. In addition, during the first half of 2011, we had a partial offset to income tax expense due to a discrete tax benefit arising from the elimination of medical benefits for retirees of the Ravenswood facility.

Equity in the earnings of joint
ventures (in millions)                     2012         2011      $ Difference   % Difference
Three months ended September 30,       $      1.1   $      0.9   $       0.2         22.2  %
Nine months ended September 30,        $      2.1   $      2.6   $      (0.5 )      (19.2 )%

The amounts reported in both periods primarily reflect Century's equity in the earnings of its joint venture, BHH.


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Liquidity and Capital Resources
Liquidity
Our principal sources of liquidity are available cash, cash flow from operations and available borrowings under our revolving credit facility. We have also raised capital in the past through the public equity and debt markets. We regularly explore various other financing alternatives. Our principal uses of cash are the funding of operating costs (including postemployment benefits), maintenance of curtailed production facilities, payments of principal and interest on our outstanding debt, the funding of capital expenditures, investments in our growth activities and in related businesses, repurchases of common stock, working capital and other general corporate requirements. Our consolidated cash and cash equivalents balance at September 30, 2012 was approximately $173 million compared to $183 million at December 31, 2011. Century's revolving credit facility matures in July 2014. As of September 30, 2012, our credit facility had no loan amounts outstanding and approximately $42 million of net availability. We have approximately $46 million of letters of credit outstanding under our credit facility. Future curtailments of domestic production capacity would reduce domestic accounts receivable and inventory, which comprise the borrowing base of our credit facility, and would result in a corresponding reduction in availability under the credit facility.
We have $249.6 million in 8.0% senior secured notes payable that will mature on May 15, 2014.
We may be required to make installment payments for the E.ON contingent obligation. These payments are contingent based on the LME price of primary aluminum and the level of Hawesville's operations. Based on the LME forward market at September 30, 2012 and management's estimate, we do not expect to make any payments for the E.ON contingent obligation until 2018.
In August 2011, our Board of Directors approved a $60 million stock repurchase program. Through September 30, 2012, we have expended approximately $50 million under the program. At September 30, 2012, we had approximately $10 million remaining under the repurchase program authorization. The repurchase program may be suspended or discontinued at any time.
In September 2012, we received a $7.9 million settlement payment related to insurance claims by Grundartangi for the cost of repairs to a transformer damaged in transit, a related business interruption claim, interest and other fees associated with the claim. We recorded the payment on the consolidated statement of operations in other income - net.
Based on current actuarial and other assumptions, we expect to make contributions to the qualified defined benefit plans we sponsor of approximately $7.3 million during 2012. Through September 30, 2012, we have made contributions to these plans of $7.3 million. We may choose to make additional contributions to these plans from time to time at our discretion.
In June 2011, the Pension Benefit Guaranty Corporation (the "PBGC") informed us that it believed that a "cessation of operations" under the Employee Retirement Income Security Act of 1974 ("ERISA") had occurred at our Ravenswood facility as a result of the curtailment of operations at the facility and requested that we engage in discussions with the PBGC relating thereto. We have notified the PBGC that we do not believe that a "cessation of operations" has occurred and have entered into ongoing discussions with the PBGC to resolve the matter. If a "cessation of operations" is ultimately determined to have occurred under ERISA, it may be necessary for Century Aluminum of West Virginia to accelerate the timing of additional contributions to certain of its defined pension plans or post other collateral with the PBGC or negotiate an alternative agreement. In March 2012, we reached an agreement in principle with the CAWV retirees to make contributions to a voluntary employee beneficiary association ("VEBA") trust that would provide certain health care benefits to these retirees and their eligible dependents in the event of a restart of our Ravenswood facility. If this agreement were entered into, our obligations under the agreement, including any contributions to the VEBA, would be contingent upon the occurrence of several future events that are necessary in order to restart the Ravenswood facility. None of these events, including the finalization of this agreement, are certain to occur.


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Under an agreement with the Government of Iceland, Nordural Grundartangi ehf agreed to prepay taxes during 2012, 2011 and 2010 as an advance levy of income taxes and other governmental taxes for the period of 2013 through 2018. The amount of prepaid taxes paid through September 30, 2012 was approximately $6.5 million and we expect to prepay an additional $3.1 million in 2012. The prepaid taxes will offset taxes otherwise payable in equal installments over the period 2013 through 2018. In addition, in 2012, we expect to make estimated income tax payments in Iceland of approximately $12.4 million. Through September 30, 2012, we made approximately $7.0 million of these payments.
We paid approximately $20 million in net withholding tax for intercompany dividend payments in Iceland in 2011 and paid an additional $22.6 million through the first nine months of 2012. We received approximately $28 million in withholding tax refunds in the fourth quarter of 2012 related to withholding taxes paid on intercompany dividend payments through February 2012. We paid an additional $13.1 million in withholding taxes in the third quarter of 2012 which we expect will be refunded in the fourth quarter of 2013. The withholding taxes and associated refunds are payable in Icelandic krona ("ISK") and we are subject to foreign currency risk associated with fluctuations in the value of the U.S. dollar as compared the ISK.
In June 2012, Nordural Grundartangi entered into a new supplemental power contract with Landsvirkjun. The supplemental power contract, which will expire in October 2029 (or upon the occurrence of certain earlier events), will provide Nordural Grundartangi with supplemental power, as Nordural Grundartangi may request from time to time, at LME-based variable rates. Nordural Grundartangi has agreed to make certain prepayments to Landsvirkjun in connection with the contract, which will reduce the price paid for power at the time of consumption. Capital Resources
We intend to finance our future recurring capital expenditures from available cash and our cash flow from operations. For major investment projects, such as the Helguvik project, we would seek financing from various capital and loan markets and may potentially pursue the formation of strategic alliances. We may be unable to issue additional debt or equity securities, or to issue these securities on attractive terms, due to a number of factors including a lack of demand, unfavorable pricing, poor economic conditions, unfavorable interest rates, or our financial condition or credit rating at the time. Future uncertainty in the U.S. and international markets and economies may adversely affect our liquidity, our ability to access the capital markets and our financial condition.
Capital expenditures for the nine months ended September 30, 2012 were $15.9 million, $5.5 million of which was related to the Helguvik project, with the balance principally related to upgrading production equipment, improving facilities and complying with environmental requirements. We believe capital spending in 2012, excluding the activity on the Century Vlissingen and Helguvik projects, will be approximately $20 to $25 million.
In order to restart the first 75,000 metric tons of annual anode capacity at the Century Vlissingen project, we currently intend to make approximately $30 million in capital expenditures over the next 12 months and approximately $45 million over the next three years. We expect this capacity will be restarted in the third quarter of 2013 and will provide an anode supply to replace third-party anode supply contracts that will terminate in 2013. Before committing to this capital program, we intend to evaluate the current and prospective global economic climate. If we deem the environment unfavorable, we have the option to defer the capital program and thus the restart of the anode facility. We would, for the short term, increase our purchases from other suppliers, including BHH.
We have made and continue to make capital expenditures for the construction and development of our Helguvik project. We have substantial future contractual commitments for the Helguvik project. If we were to cancel the Helguvik project, we estimate that our exposure to contract cancellation costs would be approximately $20 million. We are continuing to negotiate with the power suppliers to the project to remove all the remaining conditions to their obligations to supply contracted power. The timing of the power availability together with other factors, including financing, will determine the timing of any resumption of major construction activity at Helguvik. We expect that the portion of capital expenditures for this project that we will fund from our existing cash and operating cash flow will be approximately $1 million per month through 2012 and then reducing to approximately $1 million per quarter until the restart of major construction activities. We cannot, at this time, predict when the restart of major construction activity will occur.


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Historical
Our statements of cash flows for the nine months ended September 30, 2012 and
2011 are summarized below:

                                             Nine months ended September 30,
                                                 2012                2011
                                                  (dollars in thousands)
Net cash provided by operating activities $         21,085    $         11,094
Net cash used in investing activities              (27,078 )           (13,016 )
Net cash used in financing activities               (4,033 )           (85,979 )
Net change in cash and cash equivalents   $        (10,026 )  $        (87,901 )

Net cash provided by operating activities in the nine months ended September 30, 2012 was $21.1 million compared to net cash provided by operating activities of $11.1 million in the first nine months of 2011. The increase in cash from operations in 2012 was primarily due to reduced withholding tax payments in Iceland, lower pension and benefit contributions, and a decrease in working capital, which were partially offset by the impact of lower LME prices. Our net cash used in investing activities for the first nine months of 2012 was $27.1 million compared to $13.0 million in the nine months ended September 30, 2011. The increase in cash used was primarily due to the purchase of carbon anode assets for $14.2 million, offset by lower capital expenditures in 2012 and the return of restricted cash deposits in 2011 of $3.7 million.
Our net cash used in financing activities for the nine months ended September 30, 2012 was $4.0 million. The cash used was related to the repurchase of our common stock. Our net cash used in financing activities for the first nine months of 2011 was $86.0 million. This use was primarily for the redemption of our 1.75% convertible senior notes in May 2011 and the repurchase of common stock.
Other Commitments and Contingencies
We are a defendant in several actions relating to various aspects of our business. While there are uncertainties relating to the ultimate disposition of any litigation, management, based on information currently available, does not believe that the resolution of any of these lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or liquidity. See Note 10 Commitments and contingencies to the consolidated financial statements included herein for additional information.


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