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CENX > SEC Filings for CENX > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for CENTURY ALUMINUM CO


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Recent Developments
Conditional WARN Notice issued to Sebree On November 1, 2013, Century Sebree issued a conditional notice to employees at the Sebree smelter of its intent to curtail all plant operations on January 31, 2014 if Century Sebree cannot secure a competitively priced power contract. Century Sebree is continuing to work with its power provider and regulatory agencies to obtain access to market-priced power prior to the termination of its current power contract on January 31, 2014. The conditional notice was made pursuant to the federal Worker Adjustment and Retraining Notification Act. The WARN notice specifies that the plant will be curtailed unless Century Sebree can gain access to competitively priced power.
CAKY enters an agreement for market priced power for Hawesville Effective August 20, 2013, CAKY began purchasing power for the Hawesville smelter under new agreements with Big Rivers and Kenergy Corp. Under the new arrangement, the power companies will purchase power on the open market and resell it to Hawesville at the market price plus transmission and other costs incurred by them. CAKY is also seeking approval from applicable regional transmission organizations and regulatory bodies regarding grid stability and energy import capability. The definitive contracts with Big Rivers and Kenergy were approved by the KPSC on August 14, 2013. On September 11, 2013, a group of industrial customers in Kentucky filed a complaint appealing the KPSC's order. We believe this appeal is without merit and that the points argued in the appeal were already rejected by the KPSC prior to the issuance of its order approving the new power supply arrangement at Hawesville. See Part II Item 1A - Risk Factors for a discussion of risks related to the Hawesville power agreement. Withholding tax refund received

On November 1, 2013, we received a refund of approximately $21.7 million for withholding taxes we paid Iceland in the third quarter of 2012 and in the first quarter of 2013 related to intercompany dividend payments. Century acquires the Sebree aluminum smelter On June 1, 2013, Century Sebree acquired the Sebree aluminum smelter from a subsidiary of Rio Tinto Alcan, Inc ("RTA"). Sebree, located in Robards, Kentucky has an annual hot metal production capacity of 205,000 metric tons of primary aluminum and employs approximately 500 people.
The purchase price for the acquisition was $61 million (subject to customary working capital adjustments), of which we have paid approximately $48 million as of September 30, 2013. The remaining portion of the purchase price will be paid following final determination of the applicable working capital adjustments, which will be determined based on the amount of working capital transferred to Century Sebree at closing versus a target working capital amount of $71 million. As part of the transaction, RTA retained all historical environmental liabilities of the Sebree smelter and has funded the pension plan assumed by Century at Sebree in accordance with the purchase agreement. See Part II Item 1A
- Risk Factors for a discussion of risks related to the Sebree acquisition. Revolving Credit Facility Amended

We and certain of our direct and indirect domestic subsidiaries and Wells Fargo Capital Finance, LLC, as lender and agent, and Credit Suisse AG and BNP Paribas, as lenders, entered into the Credit Facility, dated May 24, 2013, as amended, modifying the credit facility signed July 1, 2010. The Credit Facility extended the term through May 24, 2018 and provides for borrowings of up to $137.5 million in the aggregate, including up to $80 million under a letter of credit sub-facility. Any letters of credit issued and outstanding under the Credit Facility reduce our borrowing availability on a dollar-for-dollar basis.


Century issues $250 million of 7.5% senior secured notes On June 4, 2013, we issued $250 million 7.5% Notes. The notes have an interest rate of 7.5% per annum and were issued at a price equal to 98.532% of their face value. Century used the net proceeds from the sale of the notes and available cash on hand for the tender offer and redemption of our outstanding 8% Notes. See Note 10 Debt for additional information about the 8.0% Notes Tender Offer and Redemption.
Tender offer and redemption of 8.0% senior secured notes due 2014 On May 20, 2013, we commenced a cash tender offer for any and all of our 8.0% Notes. We received tenders and consents from holders of a majority of the principal amount of the 8.0% Notes in the tender offer.
On June 4, 2013, we elected to redeem the remaining outstanding 8.0% Notes at par, plus accrued and unpaid interest and transferred the necessary funds to our trustee to complete the redemption. See Note 10 Debt for additional information about the 8.0% Notes Tender Offer and Redemption.

Regulatory Approvals and Conditional WARN Notice at Hawesville In connection with the new power agreements with Big Rivers, CAKY is seeking approval from applicable regional transmission organizations and regulatory bodies regarding grid stability and energy import capability. CAKY could curtail all smelter operations if these approvals are not ultimately received. In addition, CAKY has kept in place a conditional notice to the employees at the Hawesville smelter of its intent to curtail all plant operations if the remaining approvals are not received. The conditional notice was made on April 16, 2013 pursuant to a WARN notice and has been extended through December 20, 2013.
Century Aluminum of West Virginia reaches agreement with PBGC for future pension contributions
In April 2013, we entered into a settlement agreement with the PBGC regarding an alleged "cessation of operations" at our Ravenswood facility as a result of the curtailment of operations at the facility. While we do not believe that a "cessation of operations" has occurred, we have reached an agreement with the PBGC to resolve the matter. Pursuant to the terms of the agreement, we will make additional contributions (above any minimum required contributions) to our defined benefit pension plans totaling approximately $17.4 million over the term of the agreement, which runs through 2016. In April 2013, we made the first scheduled contribution pursuant to this agreement of $5.9 million. Under certain circumstances, in periods of low primary aluminum prices relative to our operations, we may defer one or more of these payments, but we would be required to provide the PBGC with acceptable security for any deferred payments. Century signs lease for Chicago corporate headquarters In February 2013, we signed a 10-year operating lease for office space for our corporate headquarters in Chicago, Illinois. We have completed our relocation to Chicago, but we expect to continue to incur relocation expenses through the end of the year.


Results of Operations
The following discussion reflects our historical results of operations.
Century's financial highlights include:
                                        Three months ended September 30,       Nine months ended September 30,
                                            2013                2012                2013               2012
                                                        (In thousands, except per share data)
Net sales:
Third-party customers                $        271,016    $        170,023   $         680,480    $      542,884
Related parties                               128,912             134,612             372,659           411,560
Total                                $        399,928    $        304,635   $       1,053,139    $      954,444
Gross profit                         $         12,354    $          3,250   $          24,238    $       29,799
Net loss                             $         (9,507 )  $        (12,023 ) $         (30,638 )  $      (28,701 )
Loss per common share:
Basic and Diluted                    $          (0.11 )  $          (0.14 ) $           (0.35 )  $        (0.32 )



                                        Three months ended        Nine months ended
                                           September 30,            September 30,
                                         2013         2012        2013        2012
Shipments - primary aluminum (metric
tons):
Direct                                  140,120       95,747     339,876     283,665
Toll                                     72,677       67,684     207,967     200,561
Total                                   212,797      163,431     547,843     484,226



Net sales (in millions)             2013      2012    $ Difference    % Difference
Three months ended September 30, $   399.9  $ 304.6  $         95.3        31.3 %
Nine months ended September 30,  $ 1,053.1  $ 954.4  $         98.7        10.3 %

Lower price realizations for our primary aluminum shipments in the three months ended September 30, 2013 were due to lower LME prices for primary aluminum, which were partially offset by increased premiums. The lower price realizations resulted in a $7.6 million decrease in net sales. Higher shipment volumes had a $102.9 million positive impact on net sales. Direct shipments from our four operating smelters increased 44,373 metric tons in the three months ended September 30, 2013 compared to the same period in 2012, primarily due to the acquisition of the Sebree smelter on June 1, 2013. Toll shipments increased 4,993 metric tons relative to the same period last year.
Lower price realizations for our primary aluminum shipments in the nine months ended September 30, 2013 were due to lower LME prices for primary aluminum, which were partially offset by increased premiums. The lower price realizations resulted in a $38.7 million net sales decrease. Higher shipment volumes had a $137.4 million positive impact on net sales. Direct shipments from our four operating smelters increased 56,211 metric tons in the nine months ended September 30, 2013 compared to the same period in 2012, primarily due to the acquisition of the Sebree smelter on June 1, 2013. Toll shipments increased 7,406 metric tons relative to the same period last year.


Gross profit (in millions)        2013    2012    $ Difference   % Difference
Three months ended September 30, $ 12.4  $  3.3  $       9.1        275.8  %
Nine months ended September 30,  $ 24.2  $ 29.8  $      (5.6 )      (18.8 )%

During the three months ended September 30, 2013, lower price realizations, net of LME-based alumina cost and LME-based power cost, decreased gross profit by $2.7 million, with mix and volume factors decreasing gross profit by $12.4 million. In addition, we experienced $14.9 million in net cost decreases at our historically owned smelters, relative to the same period in 2012, comprised of:
lower costs for materials, supplies and maintenance, $8.7 million; lower costs for power and natural gas costs at our U.S. smelters, $5.6 million; other cost decreases, $2.2 million; and increased depreciation, $1.6 million. During the nine months ended September 30, 2013, lower price realizations, net of LME-based alumina cost and LME-based power cost, decreased gross profit by $17.1 million, with mix and volume factors decreasing gross profit by $6.3 million. In addition, we experienced $33.4 million in net cost decreases at our historically owned smelters, relative to the same period in 2012, comprised of:
lower costs for materials, supplies and maintenance, $29.2 million; lower power and natural gas costs at our U.S. smelters, $7.2 million; offset by other cost increases, $0.7 million; and increased depreciation, $2.3 million.
As part of the valuation for the purchase of the Sebree facility, we recorded a $36.6 million estimated liability, subject to adjustment, for the power contract we assumed. The estimated liability was based on the difference between the forecasted contract rate and market power rates through the contract termination date in January 2014. This liability will be amortized over the period from June 1, 2013 through January 31, 2014 resulting in a credit to our depreciation and amortization expense. During the three and nine months ended September 30, 2013, the credit for the amortization of the power contract was $11.7 million and $14.5 million, respectively.
As of September 30, 2013, the market value of our inventory was below its cost basis, resulting in the recording of a lower of cost or market ("LCM") inventory reserve of $10.3 million, which was $5.8 million lower than the reserve recorded at June 30, 2013. This resulted in a credit to cost of goods sold for the three months ended September 30, 2013 of $5.8 million. As of September 30, 2012, the market value of our inventory exceeded its cost basis, resulting in the elimination of a LCM reserve, with a corresponding credit to cost of goods sold of $8.2 million for the three months ended September 30, 2012. This resulted in a quarter to quarter decrease in gross profit of $2.4 million.
As of September 30, 2013, the market value of our inventory was below its cost basis, resulting in the recording of a LCM reserve and a charge to cost of goods sold of $10.3 million for the nine months ended September 30, 2013. As of September 30, 2012, the market value of our inventory exceeded its cost basis, resulting in the elimination of a LCM reserve and a corresponding credit to cost of goods sold of $19.8 million for the nine months ended September 30, 2012. This resulted in a period to period decrease in gross profit of $30.1 million. Other operating expenses - net (in millions) 2013 2012 $ Difference % Difference Three months ended September 30, $ 2.2 $ 7.4 $ (5.2 ) (70.3 )% Nine months ended September 30, $ 6.3 $ 14.9 $ (8.6 ) (57.7 )%

Other operating expenses - net is primarily related to items associated with Ravenswood. Charges at the facility have been relatively stable during the three and nine months ended September 30, 2013 and 2012, except during the third quarter of 2012, when we accrued for a legal liability that was ultimately settled in the second quarter of 2013 for an amount lower than the original accrual.


Selling, general and administrative
expenses (in millions)                     2013         2012       $ Difference    % Difference
Three months ended September 30,       $     14.4   $      9.2   $          5.2         56.5 %
Nine months ended September 30,        $     45.9   $     24.8   $         21.1         85.1 %

During the three months ended September 30, 2013, relocation and severance expenses related to moving our headquarters to Chicago increased selling, general and administrative expenses by $1.8 million; litigation matters and accruals for our variable compensation program increased approximately $1.1 million. In addition, we have incurred $1.9 million in general and administrative expenses related to the integration of the Century Vlissingen anode facility into our business. We also incurred approximately $0.4 million in additional selling, general and administrative expenses associated with the newly acquired Sebree facility.
During the nine months ended September 30, 2013, relocation and severance expenses related to moving our headquarters to Chicago increased selling, general and administrative expenses by $6.1 million; litigation matters, accruals for our variable compensation program and other general expenses increased approximately $6.9 million. We also incurred approximately $0.7 million in additional selling, general and administrative expenses associated with the newly acquired Sebree facility. In addition, a $7.4 million increase in general and administrative expenses in 2013 related to the integration of the Century Vlissingen anode facility into our business. Upon the restart of Century Vlissingen operations, these costs will be included in cost of goods sold and not recorded in selling, general and administrative expenses.

Net gain (loss) on forward and
derivative contracts
(in millions)                              2013         2012       $ Difference   % Difference
Three months ended September 30,       $      0.4   $     (0.3 ) $          0.7      (233.3 )%
Nine months ended September 30,        $     16.2   $     (4.0 ) $         20.2      (505.0 )%

The net gain (loss) on forward and derivative contracts for the three and nine months ended September 30, 2013 was primarily the result of an increase in the fair value of a derivative embedded in the E.ON contingent liability. This change in fair value resulted in unrealized gains of $0.4 million and $16.4 million for the three and nine months ended September 30, 2013, respectively. The net loss on forward contracts for the three and nine months ended September 30, 2012 related primarily to marking-to-market and recording settlements on 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 were settled.

Gain on bargain purchase (in millions)  2013   2012   $ Difference  % Difference
Three months ended September 30,       $   -  $   -  $           -      N/A
Nine months ended September 30,        $ 5.3  $   -  $         5.3      N/A

On June 1, 2013, we acquired the Sebree smelter. The allocation of the purchase price to the assets acquired and liabilities assumed is based on the estimated fair values at the acquisition date. The purchase price allocation is preliminary and subject to change based on the finalization of the valuation of assets and liabilities. Based on the preliminary purchase price allocation, we recorded a gain on bargain purchase of $5.3 million. The gain on bargain purchase reflects the LME market and the market risk associated with the power agreement for the facility at June 1, 2013. See Note 2 Acquisition of Sebree aluminum smelter to the consolidated financial statements included herein for additional information.


Loss on early extinguishment of debt
(in millions)                              2013         2012       $ Difference  % Difference
Three months ended September 30,       $        -   $         -   $         -        N/A
Nine months ended September 30,        $     (3.3 ) $         -   $      (3.3 )      N/A

As a result of the tender offer and redemption of the 8% Notes, we recorded charges of $3.3 million for loss on early extinguishment of debt. We determined the tender and redemption of the 8.0% Notes should be treated as an extinguishment of the debt and accordingly, we recorded a loss on early extinguishment of debt in the second quarter of 2013. The loss on early extinguishment of debt consisted of the write-off of deferred financing costs and the debt discount associated with the 8.0% Notes, as well as the tender premium paid as part of the 8.0% Notes Tender Offer. See Note 10 Debt to the consolidated financial statements included herein for additional information. Other income (expense) - net (in millions) 2013 2012 $ Difference % Difference Three months ended September 30, $ 0.2 $ 7.6 $ (7.4 ) (97.4 )% Nine months ended September 30, $ (1.0 ) $ 8.1 $ (9.1 ) (112.3 )%

During the three and nine 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. A significant portion of the remainder of other income (expense) - net relates to exchange rate gains and losses, the majority of which are items denominated in ISK.

Income tax expense (in millions)   2013     2012    $ Difference   % Difference
Three months ended September 30, $ (1.4 ) $ (1.2 ) $      (0.2 )       16.7  %
Nine months ended September 30,  $ (4.7 ) $ (7.4 ) $       2.7        (36.5 )%

Our 2013 and 2012 income tax expense was primarily driven by our earnings in Iceland, with some additional income tax expense due to U.S. state income taxes, partially offset by the release of a portion of our valuation allowance. In the nine months ended September 30, 2013, as a result of the recently completed audit by the Internal Revenue Service, we reduced our interest receivable by approximately $1.0 million with a charge to income tax expense in the current period.
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 although we have no commitments in place for such transactions. We regularly explore various other financing alternatives. Our principal uses of cash are the funding of operating costs (including postretirement 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, 2013 was approximately $141 million compared to approximately $184 million at December 31, 2012. In May 2013, we entered into the Amended and Restated Loan and Security Agreement which extended the term of our Credit Facility through May 24, 2018 and provides for borrowings of up to $137.5 million in the aggregate, including up to $80 million under a letter of credit sub-facility. As of September 30, 2013, our Credit Facility had approximately $16.7 million outstanding borrowings and approximately $44.3 million of net availability. We have approximately $70.5 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. The acquisition of the Sebree smelter increased domestic accounts receivable and inventory and resulted in a corresponding increase in availability under the Credit Facility.


In August 2014, our 7.5% senior unsecured notes payable will reach maturity and we will make a $2.6 million repayment to retire these notes. In December 2012, February 2013, March 2013 and April 2013, Nordural ehf participated in the 50/50 ISK Auctions (the "Auctions") sponsored by the Central Bank of Iceland ("CBI") and may participate in future auctions. The Auctions allow authorized investors to exchange foreign currency for ISK with 50% exchanged at the official rate set by the CBI and 50% exchanged at the auction rate. The ISK received in the Auctions must be invested in Iceland for a minimum of five years.
We may be required to make installment payments for the E.ON contingent obligation in the future. 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, 2013 and management's estimate of the LME forward market beyond the quoted market period, we reached a determination that we will not be required to make payments on the E.ON contingent obligation during the term of the agreement through 2028. See Note 5 Derivative and hedging instruments and Note 10 Debt to the consolidated financial statements included herein for additional information.
In August 2011, our Board of Directors approved a $60 million stock repurchase program. Through September 30, 2013, we had expended approximately $50 million under the program. At September 30, 2013, we had approximately $10 million remaining under the repurchase program authorization. The repurchase program may be suspended or discontinued at any time.
In April 2013, we entered into a settlement agreement with the PBGC regarding an alleged "cessation of operations" at our Ravenswood facility as a result of the curtailment of operations at the facility. While we do not believe that a "cessation of operations" has occurred, we have reached an agreement with the PBGC to resolve the matter. Pursuant to the terms of the agreement, we will make additional contributions (above any minimum required contributions) to our defined benefit pension plans over the term of the agreement, which runs through 2016. Through October 2013, we made contributions pursuant to this agreement of $5.9 million. We expect to make additional annual contributions through 2016 totaling approximately $11.5 million. Under certain circumstances, in periods of low primary aluminum prices relative to our operations, we may defer one or more of these payments, but we would be required to provide the PBGC with acceptable security for any deferred payments.
Based on current actuarial and other assumptions, we have made the minimum required contributions to the qualified defined benefit plans we sponsor of approximately $2.7 million during 2013 in addition to the contributions required pursuant to the PBGC settlement. In the nine months ended September 30, 2013, we have made contributions to these plans of $8.6 million. We may choose to make additional contributions to these plans from time to time at our discretion. 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 December 31, 2012 was approximately $9.6 million. The prepaid taxes will offset taxes otherwise payable in equal installments over the period 2013 through 2018. In 2013, approximately $1.6 million of the prepaid taxes will be used to offset income taxes due. Through September 30, 2013, we made estimated net income tax payments in Iceland of approximately $8.6 million.
We paid approximately $13.1 million in withholding taxes for intercompany dividend payments in Iceland in the third quarter of 2012 and approximately $8.3 million in first quarter of 2013. On November 1, 2013, we received a refund of the withholding taxes of approximately $21.7 million. In addition, we paid Iceland approximately $9.8 million in withholding taxes in the third quarter of 2013, which we expect will be refunded in 2014. The withholding taxes and associated refunds are payable in 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 May 2013, we received a US federal income tax refund of $5.0 million upon the notification from the Internal Revenue Service that it had finalized the review of our federal income tax returns for the tax years 2008, 2009, and 2010 and refund years of 2004, 2005, 2006, and 2007.


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 for power expected to be . . .

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