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CENX > SEC Filings for CENX > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for CENTURY ALUMINUM CO

Form 10-Q for CENTURY ALUMINUM CO


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following discussion reflects our historical results of operations.
Century's financial highlights include:
                                          Three months ended March 31,
                                           2014                   2013
                                     (In thousands, except per share data)
NET SALES:
Third-party customers             $           135,264     $           188,514
Related parties                               285,583                 132,760
Total                             $           420,847     $           321,274
Gross profit (loss)               $            (1,758 )   $            17,582
Net income (loss)                 $           (20,104 )   $             8,253
EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted                 $             (0.23 )   $              0.09



                                            Three months ended March 31,
                                                   2014                2013
Shipments - primary aluminum (tonnes):
Direct                                        173,296                 93,472
Toll                                           33,489                 65,304
Total                                         206,785                158,776

Net sales (in millions) 2014 2013 $ Difference % Difference Three months ended March 31, $ 420.8 $ 321.3 $ 99.5 31.0 %

Higher shipment volumes, due to the acquisition of the Sebree smelter on June 1, 2013 and the replacement of a tolling contract that expired December 31, 2013 with a direct sales contract at Grundartangi, had a $137.3 million positive impact on net sales. Direct shipments from our four operating smelters increased 79,824 tonnes in the three months ended March 31, 2014 compared to the same period in 2013. Toll shipments decreased 31,815 tonnes relative to the same period last year. Lower price realizations for our primary aluminum shipments in the three months ended March 31, 2014 were due to lower LME prices for primary aluminum, which were partially offset by increased regional and product premiums. The lower price realizations resulted in a $37.8 million decrease in sales.
Gross profit (loss) (in millions) 2014 2013 $ Difference % Difference Three months ended March 31, $ (1.8 ) $ 17.6 $ (19.4 ) (110.2 )%

During the three months ended March 31, 2014, lower price realizations, net of LME-based power cost and alumina, decreased gross profit by $29.9 million, while increased volume due to the acquisition of the Sebree smelter and the mix shift between toll and direct sales at Grundartangi increased gross profit by $5.7 million. In addition, we experienced $7.6 million in net cost increases at our owned smelters (excluding Sebree) relative to the same period in 2013, comprised of: higher costs for power and natural gas at our U.S. smelters of $7.5 million; lower costs for materials, supplies and maintenance of $3.4 million; other cost decreases of $1.6 million; increased depreciation of $2.0 million and an increase in our accrual for legal matters of $3.1 million.
As part of the accounting for the purchase of the Sebree smelter, we recorded a $36.6 million estimated liability for the power contract we assumed based on the difference between the forecasted contract rates and market power rates through the


contract termination date in January 2014. This liability was fully 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 months ended March 31, 2014, the credit for the amortization of the power contract was $5.5 million.
As of March 31, 2014, 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 $0.1 million which was $1.1 million less than the reserve recorded at December 31, 2013. This resulted in a credit to cost of goods sold for the three months ended March 31, 2014 of $1.1 million. As of March 31, 2013, the market value of our inventory was below its cost basis, resulting in the recording of an LCM inventory reserve of $5.8 million and a charge to cost of goods sold for the three months ended March 31, 2013 of $5.8 million. This resulted in a quarter to quarter increase in gross profit of $6.9 million.
Other operating expense - net (in millions) 2014 2013 $ Difference % Difference Three months ended March 31, $ 2.4 $ 1.1 $ 1.3 118.2 %

Other operating expense - net is primarily related to items associated with Ravenswood. Period to period charges at the facility have been relatively stable, except in the first quarter of 2013 we reduced an accrual for a legal liability that was ultimately settled for an amount lower than the original accrual.
Selling, general and administrative
expenses (in millions) 2014 2013 $ Difference % Difference Three months ended March 31, $ 10.1 $ 16.3 $ (6.2 ) (38.0 )%

During the three months ended March 31, 2014, we experienced decreased selling, general and administrative expenses due to a reduction in external legal and outside professional service support and the absence of the relocation and severance expenses we incurred in the first quarter of 2013 to move our headquarters to Chicago. In addition, we incurred $2.8 million of general and administrative expenses in the first quarter of 2013 related to the integration of the Century Vlissingen anode facility into our business. Century Vlissingen is now producing anodes and its costs are included in cost of goods sold. Net gain (loss) on forward and derivative

contracts
(in millions)                                 2014         2013      $ Difference  % Difference
Three months ended March 31,              $     (0.9 ) $     15.5   $      (16.4 )    (105.8 )%

The net loss on forward and derivative contracts for the three months ended March 31, 2014 was primarily the result of settlements of contracts put in place to provide partial downside price protection for our domestic facilities. As of March 31, 2014, all of these contracts were settled. The net gain on forward and derivative contracts for the three months ended March 31, 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 $15.7 million for the three months ended March 31, 2013.
Income tax benefit (expense) (in millions) 2014 2013 $ Difference % Difference Three months ended March 31, $ 1.1 $ (2.5 ) $ 3.6 (144.0 )%

Our income tax benefit (expense) is based on a forecasted annual effective tax rate applied to current period results, as well as the tax effects of certain discrete items. The application of the requirements for accounting for income taxes in interim periods, after consideration of our valuation allowance against all of Century's U.S. and certain foreign deferred tax assets, can cause significant variations in the typical relationship between income tax benefit (expense) and pretax income. For the first quarter of 2014, our effective income tax rate was a benefit of 5.3%. For the first quarter of 2013, our effective income tax rate was an expense of 25.6%.


Liquidity and Capital Resources
Liquidity
Our principal sources of liquidity are available cash, cash flow from operations and available borrowings under our revolving credit facilities. We have also raised capital in the past through the public equity and debt markets and we regularly explore various other financing alternatives. Our principal uses of cash are the funding of operating costs (including post-retirement 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, working capital and other general corporate requirements.
Our consolidated cash and cash equivalents balance at March 31, 2014 was approximately $52 million compared to approximately $84 million at December 31, 2013. Century's U.S. revolving credit facility matures in May 2018 and our Iceland revolving credit facility matures in November 2016. As of March 31, 2014, our credit facilities had no outstanding borrowings and approximately $129 million of aggregate net availability. As of March 31, 2014, we had approximately $71 million of letters of credit outstanding under our U.S. revolving credit facility. We borrow and make repayments under our credit facilities in the ordinary course based on a number of factors, including the timing of payments from our customers and payments to our suppliers. Borrowings and repayments under our credit facilities for the quarter ended March 31, 2014 on a gross basis were approximately $18.9 million and $24.9 million, respectively. During the same period, total outstanding indebtedness under our credit facilities at any given time did not exceed $16.7 million. The availability of funds under our credit facilities is limited by a specified borrowing base consisting of certain accounts receivable and inventory. Future curtailments of production capacity would reduce accounts receivable and inventory, which comprise the borrowing base of our revolving credit facilities, and could result in a corresponding reduction in availability under the revolving credit facilities. The acquisition of the Sebree smelter increased domestic accounts receivable and inventory and resulted in a corresponding increase in availability under the U.S. revolving credit facility.

We have $250 million in 7.5% senior secured notes payable that will mature on June 1, 2021. Our remaining 7.5% senior unsecured notes due August 2014 will reach maturity this year, and we expect to make a $2.6 million repayment to retire these notes in the third quarter of 2014.
As of March 31, 2014, the principal and accrued interest for the E.ON contingent obligation was $17.1 million, which was fully offset by a derivative asset. 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 March 31, 2014 and management's estimate of the LME forward market beyond the quoted market period, we currently believe that we will not be required to make payments on the E.ON contingent obligation during the term of the agreement through 2028. There can be no assurance that circumstances will not change thus accelerating the timing of such payments. See Note 4 Derivative and hedging instruments and Note 9 Debt to the consolidated financial statements included herein for additional information. In August 2011, our Board of Directors approved a $60 million common stock repurchase program. Through March 31, 2014, we had expended approximately $50 million under the program, but no repurchases have been made since March 2012. At March 31, 2014, we had approximately $10 million remaining under the repurchase program authorization. The repurchase program may be suspended or discontinued by our Board, in its sole discretion, 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. 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. The remaining contributions under this agreement are approximately $10.7 million, of which approximately $3.7 million was scheduled to be made in 2014. Under certain circumstances, in periods of lower primary aluminum prices relative to our cost of 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. In the first quarter of 2014, we elected to defer contributions under the PBGC agreement and have provided the PBGC with the appropriate security.
In addition to the contributions required pursuant to the PBGC settlement, based on current actuarial and other assumptions, we expect to make minimum required contributions to the qualified defined benefit plans and unqualified


supplemental executive retirement benefits ("SERB") plan of approximately $4.6 million and $1.8 million, respectively, during 2014. We may choose to make additional contributions to these plans from time to time at our discretion. In May 2014, we expect to receive approximately $5.5 million from receivables related to adjustments under certain of our power contracts.
In May 2014, we expect to pay withholding taxes of approximately $2.8 million, which we anticipate will be refunded in November 2015. In November 2014, we expect to receive a refund for withholding taxes paid in 2013 of $9.8 million. 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 December 2013, we received a ruling in the arbitration of a lawsuit filed by our former Chief Executive Officer, Logan Kruger. In its ruling, the arbitration panel awarded Mr. Kruger approximately $8.7 million in severance payments, plus accrued interest. We made the severance payment in the first quarter of 2014 and no additional payments related to this issue are expected in future periods.
In June 2012, Nordural Grundartangi ehf 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 ehf with supplemental power, as Nordural Grundartangi ehf may request from time to time, at LME-based variable rates. Nordural Grundartangi ehf has agreed to make certain prepayments to Landsvirkjun for power expected to be used at a later date in connection with the contract, which will reduce the price paid for power at the time of consumption. As of March 31, 2014, these power prepayments totaled approximately $2.0 million. We expect the amount of the prepayment to continue to grow slowly and we do not expect to realize the benefits from the prepayments in the near term. Capital Resources
We intend to finance our future recurring capital expenditures from available cash, our cash flow from operations and available borrowings under our revolving credit facilities. For major investment projects, such as the Helguvik project, we would likely 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 enter into other financing arrangements on attractive terms, or at all, 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 debt or capital markets and our financial condition.
Capital expenditures for the three months ended March 31, 2014 were $15.5 million, of which $6.1 million was related to the Grundartangi expansion project and $5.7 million was related to the Century Vlissingen restart. The remaining amounts are related to upgrading production equipment, improving facilities and complying with environmental requirements. We believe capital spending in 2014, excluding any expansion of the current production capacity at Century Vlissingen, will be approximately $50 million.
On June 1, 2013, we acquired the Sebree aluminum smelter from a subsidiary of RTA. 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 March 31, 2014. The remaining portion of the purchase price, if any, will be paid following final determination of the applicable working capital adjustments. We are working with RTA to resolve our disagreement relating to the working capital amount in accordance with the procedures set forth in the purchase agreement. We expect the matter to be resolved by the end of the second quarter of 2014. The transaction was funded with available cash on hand. See Note 2 Acquisition of Sebree aluminum smelter in the consolidated financial statements contained herein for additional information.
In order to restart the first 75,000 tonnes of annual anode capacity at Century Vlissingen, we have made approximately $23.9 million in aggregate capital expenditures through March 31, 2014. The first 75,000 tonnes of capacity was restarted in late 2013 and will provide an anode supply to Grundartangi to replace third-party anode supply contracts that terminated in 2013. We may increase production capacity to 150,000 tonnes when we conclude it is feasible and advantageous to do so.


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 and other costs would be approximately $20 million, of which we currently have accrued liabilities of approximately $12.8 million. We are continuing to negotiate with the power suppliers to the project to, among other things, remove all the remaining conditions to their obligations to supply contracted power. The timing of the power availability together with other factors will determine the timing of resumption of major construction activity at Helguvik. We expect that capital expenditures for this project will be less than $0.5 million per year until the restart of major construction activities. We cannot, at this time, predict when the restart of major construction activity will occur. Adjusted Operating Income (Loss)
We use certain non-GAAP measures when reviewing our operating results, including adjusted operating income (loss). We define adjusted operating income (loss) as operating income (loss) adjusted for certain non-cash items from the statement of cash flows and certain non-recurring items.
Our calculations of adjusted operating income (loss) may not be comparable to similarly titled measures reported by other companies due to differences in the components used in their calculations. We believe the presentation of adjusted operating income (loss) is a useful measure to help investors evaluate our capacity to fund our ongoing cash operating requirements, including capital expenditures and debt service obligations. Adjusted operating income (loss) should not be considered as a substitute for operating income (loss) as determined in accordance with GAAP. The following tables include reconciliations of adjusted operating income (loss) to their most comparable GAAP financial measures.

Adjusted Operating Income (Loss)
                                      Three months ended March 31,
                                          2014             2013
                                             (in thousands)
Operating income (loss)            $       (14,234 )  $         187
Depreciation                                17,768           15,688
Sebree power contract amortization          (5,534 )              -
LCM adjustment                              (1,107 )          5,838
Litigation reserve adjustment                3,100    $      (2,225 )
Corporate relocation                             -    $       2,213
Adjusted operating income (loss)   $            (7 )  $      21,701

Historical
Our statements of cash flows for the three months ended March 31, 2014 and 2013
are summarized below:
                                                            Three months ended March 31,
                                                                2014             2013
                                                                   (in thousands)
Net cash provided by (used in) operating activities      $       (10,741 )  $      22,401
Net cash used in investing activities                            (14,852 )        (10,906 )
Net cash used in financing activities                             (5,997 )              -
Change in cash and cash equivalents                      $       (31,590 )  $      11,495

Net cash used in operating activities in the three months ended March 31, 2014 was $10.7 million, compared to net cash provided by operating activities of $22.4 million in the three months ended March 31, 2013. The decrease in cash from operations in 2014 was due to lower adjusted operating income (loss) of approximately $22 million compared to the corresponding period in 2013, primarily due to higher power costs and lower LME pricing, a separation payment to our former CEO of approximately $10 million in 2014, and an increase in the cash used for working capital of approximately $12 million


in the three months ended March 31, 2014 compared to 2013. These increases in cash used were partially offset by payments of income and withholding taxes in the first quarter of 2013 of approximately $11 million compared to approximately $2 million in the first quarter of 2014.
Our net cash used in investing activities in the three months ended March 31, 2014 was $14.9 million, compared to $10.9 million in the three months ended March 31, 2013. The increase in cash used was primarily due to capital expenditures for the Vlissingen restart project. The increase was offset slightly by a decrease in restricted cash deposits of $0.7 million and lower capital expenditures for the Helguvik project for the three months ended March 31, 2014 compared to the same period in 2013.
Our net cash used in financing activities in the three months ended March 31, 2014 was $6.0 million, which was related to net repayments under our revolving credit facilities of $6.0 million.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. Commodity Price Sensitivity
We are exposed to price risk for primary aluminum. From time to time, we may manage our exposure to fluctuations in the price of primary aluminum through financial instruments designed to protect our downside price risk exposure. In addition, we manage our exposure to fluctuations in our costs by purchasing certain of our alumina and power requirements under supply contracts with prices tied to the same indices as our aluminum sales contracts (the LME price of primary aluminum). Our risk management activities do not include any trading or speculative transactions.
Apart from the Glencore Grundartangi Metal Agreement, the Southwire Metal Agreement and the Glencore Sweep
Agreement (which expired at the end of 2013), we had the following forward delivery contractual commitments:

Other forward delivery contracts
                                               March 31, 2014  December 31, 2013
                                                          (in tonnes)
Other forward delivery contracts - total              101,649            118,373
Other forward delivery contracts - Glencore            23,692             20,008
Other forward delivery contracts - fixed price             52                  -

We had no outstanding primary aluminum forward financial sales contracts at March 31, 2014. We had no fixed price forward financial contracts to purchase aluminum at March 31, 2014.
Market-Based Power Price Sensitivity
Market-Based Electrical Power Agreement
Hawesville and Sebree terminated their long-term cost-based electrical power agreements with Kenergy and Big Rivers in August 2013 and January 2014, respectively. The KPSC has approved new power supply agreements with Kenergy and Big Rivers to provide market-based electrical power to the Hawesville smelter, effective August 20, 2013 and to the Sebree smelter, effective February 1, 2014. Under the market-based power agreements, Kenergy and Big Rivers purchase market-based electrical power on the open market and pass it through to Hawesville and Sebree at MISO pricing, plus transmission and other costs incurred by them.


Electrical Power Price Sensitivity
We are exposed to market price risk due to fluctuations in the price of power available on the MISO market. Power represents our single largest operating cost, so changes in the price and/or availability of market-based power could significantly impact the profitability of Hawesville and Sebree. In addition, indirect factors that lead to power cost increases, such as increasing market prices for natural gas or coal, fluctuations in or extremes in weather patterns, new or more stringent environmental regulations, or problems associated with power transmission, grid stability or energy import capability may severely impact our financial condition, results of operations and liquidity. Electrical power price sensitivity by location:

                                       Hawesville           Sebree              Total
Expected average load (in MW)                   482                 385                867
Quarterly estimated electrical
power usage (in MWh)                      1,055,580             843,150          1,898,730
Quarterly cost impact of an
increase or decrease of $1 per MWh
(in thousands)                     $          1,100   $             800   $          1,900
Annual expected electrical power
usage (in MWh)                            4,222,320           3,372,600          7,594,920
Annual cost impact of an increase
or decrease of $1 per MWh (in
thousands)                         $          4,200   $           3,400   $          7,600

While we currently have not entered into any forward contracts to mitigate the price risk associated with our open market power purchases, we may manage our exposure by entering into certain forward contracts or option contracts in future periods.

Forwards and Financial Purchase Agreements Foreign Currency
We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the ISK, the euro, the Chinese yuan and other currencies. Grundartangi's labor costs, part of its maintenance costs and other local services are denominated in ISK and a portion of its anode costs are denominated in euros and Chinese yuan. We have deposits denominated in ISK in Icelandic banks; in addition, our tax payments in Iceland for withholding taxes on intercompany dividends and estimated payments of Icelandic income taxes and any associated refunds are denominated in ISK. As a result, an increase or . . .

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