UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27918
CENTURY ALUMINUM COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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13-3070826
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(State or other jurisdiction of
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(IRS Employer Identification No.)
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Incorporation or organization)
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2511 Garden Road
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93940
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Building A, Suite 200
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(Zip Code)
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Monterey, California
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(Address of registrant’s principal offices)
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Registrant’s telephone number, including area code: (831) 642-9300
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class:
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Name of each exchange on which registered:
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Common Stock, $0.01 par value per share
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NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes ¨ No ¨
* - The registrant is not currently required to submit interactive data files.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer
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¨
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Accelerated Filer
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x
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Non-Accelerated Filer
(Do not check if a smaller reporting company)
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¨
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Smaller Reporting Company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Based upon the closing price of the registrant’s common stock on the NASDAQ Global Select Market on June 30, 2009, the approximate aggregate market value of the common stock held by non-affiliates of the registrant was approximately $285,000,000. As of February 28, 2010, 92,535,991 shares of common stock of the registrant were issued and outstanding.
Documents Incorporated by Reference:
All or a portion of Items 10 through 14 in Part III of this Form 10-K are incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A, which will be filed within 120 days after the close of the fiscal year covered by this report on Form 10-K, or if the Registrant’s Schedule 14A is not filed within such period, will be included in an amendment to this Report on Form 10-K which will be filed within such 120 day period.
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PAGE
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PART I
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1
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13
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24
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25
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25
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25
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PART II
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27
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28
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30
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49
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52
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118
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118
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118
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PART III
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119
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119
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119
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119
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119
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PART IV
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120
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127
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Item 1. Business
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Century Aluminum Company is a Delaware corporation with our principal executive offices located at 2511 Garden Road, Building A, Suite 200, Monterey, California 93940.
Throughout this Form 10-K, and unless expressly stated otherwise or as the context otherwise requires, "Century Aluminum Company," "Century Aluminum," "Century," "we," "us," and "our" refer to Century Aluminum Company and its subsidiaries.
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Available Information
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Additional information about Century may be obtained from our website, which is located at www.centuryaluminum.com. Our website provides access to filings we have made through the SEC's EDGAR filing system, including our annual, quarterly and current reports filed on Forms 10-K, 10-Q and 8-K, respectively, and ownership reports filed on Forms 3, 4 and 5 after December 16, 2002 by our directors, executive officers and beneficial owners of more than 10% of our outstanding common stock. These filings are also available on the SEC website at www.sec.gov. In addition, we will make available free of charge copies of our Forms 10-K, Forms 10-Q, and Forms 8-K upon request. Requests for these documents can be made by contacting our Investor Relations Department by mail at: 2511 Garden Road, Building A, Suite 200, Monterey, CA 93940, or phone at: (831) 642-9300. Information contained in our website is not incorporated by reference in, and should not be considered a part of, this Annual Report on Form 10-K.
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FORWARD-LOOKING STATEMENTS
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This Annual Report on Form 10-K contains forward-looking statements. We have based these forward-looking statements on current expectations and projections about future events. Many of these statements may be identified by the use of forward-looking words such as “expects,” “anticipates,” “plans,” “believes,” “projects,” “estimates,” “intends,” “should,” “could,” “may,” “would,” “will,” “scheduled,” “potential” and similar words. These forward-looking statements are subject to risks, uncertainties and assumptions including, among other things, those discussed under Item 1, “Business,” Item 1A, “Risk Factors,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” including;
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Declines in aluminum prices have adversely affected our financial position and results of operations in the recent past and future declines in aluminum prices or an increase in our operating costs could result in further curtailment of operations at one or more of our facilities if alternate sources of liquidity are not available.
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As part of our operational restructuring, we have curtailed and may continue to curtail operations at one or more of our facilities, which has required us to incur and may require us to further incur substantial costs and subject us to substantial risks in the future. The failure to successfully implement our operational restructuring or to achieve its intended benefits could have a material adverse effect on our business, financial condition, results of operations and liquidity.
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A continuation or worsening of global financial and economic conditions could adversely impact our financial position and results of operations.
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Our ability to access the credit and capital markets on acceptable terms to obtain funding for our operations and capital projects may be limited due to our credit ratings, our financial condition or the deterioration of these markets.
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Poor performance in the financial markets and/or our curtailment actions could have significant and adverse effects on our pension funding obligations.
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The cyclical nature of the aluminum industry causes variability in our earnings and cash flows.
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International operations expose us to political, regulatory, currency and other related risks.
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If economic and political conditions in Iceland deteriorate further, our financial position and results of operations could be adversely impacted.
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Any future reductions in the duty on primary aluminum imports into the European Union (the “EU”) would decrease our revenues at our smelter in Grundartangi, Iceland (“Grundartangi”).
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Substantial additional delays in the completion of the Nordural Helguvik ehf smelter (“Helguvik project”) may increase its cost, lower the project’s financial returns and impose other risks to completion that are not foreseeable today.
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Our power supply agreements for the Helguvik project are subject to fulfillment of certain conditions, and there can be no assurance that these conditions will be met or that the cost required to meet the conditions makes the project impracticable or less attractive from a financial standpoint.
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Changes in the relative cost and availability of certain raw materials and energy compared to the price of primary aluminum could adversely affect our operating results.
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Many of our contracts for raw materials, including certain contracts for alumina and electrical power, require us to take-or-pay for fixed quantities of such materials that may limit our ability to curtail unprofitable production capacity.
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Further consolidation within the metals industry could provide advantages to our competitors.
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Disruptions in our power supplies could adversely affect our operations.
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Union disputes or our inability to extend any of our existing collective bargaining agreements could raise our production costs or impair our production operations.
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We are subject to a variety of environmental laws and regulations that could result in significant costs or liabilities to us.
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Climate change legislation or regulations restricting certain types of emission of “greenhouse gases” could result in increased operating costs and cost of compliance for our business.
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We may be required to write down the book value of certain assets.
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We require significant cash flow to meet our debt service requirements, which increases our vulnerability to adverse economic and industry conditions, reduces cash available for other purposes and limits our operational flexibility.
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Despite our substantial level of debt, we may incur additional debt in the future.
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We depend upon intercompany transfers from our subsidiaries to meet our debt service obligations and any limitations on the ability of our subsidiaries to do so may adversely affect our ability to meet our debt service obligations.
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We have implemented a Tax Benefit Preservation Plan and taken other efforts to protect against a possible limitation on our ability to use net operating losses (“NOLs”), tax credits and other tax assets, however, there can be no assurance that these actions will be effective or that the Tax Benefit Preservation Plan will remain in place.
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Many of these factors are beyond our control. We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date of this Form 10-K. However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations, and you should not place undue reliance on these forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law, you are advised to consult any additional disclosures we make in our quarterly reports on Form 10-Q, annual report on Form 10-K and current reports on Form 8-K filed with the SEC. See Item 1, “Business - Available Information.”
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Overview
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We produce primary aluminum. Aluminum is an internationally traded commodity, and its price is effectively determined on the London Metal Exchange (the “LME”). Our primary aluminum facilities produce value-added and standard-grade primary aluminum products. Our current primary aluminum production capacity is 785,000 metric tons per year (“mtpy”), of which approximately 219,000 mtpy was curtailed as of February 28, 2010. We produced approximately 605,000 mtpy of primary aluminum in 2009.
Our primary aluminum capacity includes our facility in Grundartangi, Iceland with capacity of 260,000 mtpy; our facility in Hawesville, Kentucky (“Hawesville”) with capacity of 244,000 mtpy; a facility in Ravenswood, West Virginia (“Ravenswood”), currently curtailed, with capacity of 170,000 mtpy; and a 49.7% interest in a facility in Mt. Holly, South Carolina (“Mt. Holly”) that provides us with capacity of 111,000 mtpy. We are also developing a 360,000 mtpy primary aluminum facility in Helguvik, Iceland. In addition to our primary aluminum assets, we have a 40% stake in Baise Haohai Carbon Co., Ltd. (“BHH”), a carbon anode and cathode facility located in China. The BHH facility has an annual anode production capacity of up to 180,000 mtpy and an annual cathode graphitization capacity of up to 20,000 mtpy and supplies a portion of the anodes used in our Grundartangi facility.
In light of global economic conditions and our high relative operating cost structure, as of December 31, 2009, all operations at Ravenswood and one potline at Hawesville remain curtailed. We have also significantly reduced spending on the Helguvik project. With the curtailment actions implemented, our annualized production rate of primary aluminum is approximately 566,000 mtpy. During 2009, we implemented several restructuring activities and we may consider implementing further restructuring activities in the future. See Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations —Operational Restructuring.”
Primary Aluminum Facilities:
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Facility
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Location
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Operational
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Capacity (mtpy)
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Active Operating Capacity (mtpy)
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Ownership Percentage
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Grundartangi
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Grundartangi, Iceland
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1998
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260,000
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260,000
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100%
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Hawesville (1)
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Hawesville, Kentucky, USA
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1970
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244,000
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195,000
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100%
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Ravenswood(2)
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Ravenswood, West Virginia, USA
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1957
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170,000
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—
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100%
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Mt. Holly (3)
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Mt. Holly, South Carolina, USA
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1980
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224,000
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111,000
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49.7%
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(1)
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In March 2009, we curtailed one potline at the Hawesville facility. We are currently operating four potlines with a capacity of 195,000 mtpy. We may restart the curtailed potline if economic conditions improve.
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(2)
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In February 2009, we curtailed all operations at the Ravenswood facility. We may restart the curtailed operations if economic conditions improve.
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(3)
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Alcoa holds the remaining 50.3% ownership interest and is the operator. Century’s share of Mt. Holly’s capacity is approximately 111,000 mtpy.
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Joint Venture Facilities:
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Facility
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Location
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Type
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Capacity
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Ownership Percentage
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Baise Haohai Carbon Co., Ltd (1)
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Guangxi Zhuang, China
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Carbon anode and cathode
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180,000 mtpy anode; 20,000 mtpy cathode
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40%
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(1)
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Guangxi Qiangqiang Carbon Co., Ltd. holds the remaining 60% ownership interest and is the operator.
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Our current long-term strategic objectives are to: (a) expand our primary aluminum business by constructing, investing in or acquiring additional capacity that offers favorable returns and lowers our per unit production costs; (b) further diversify our geographic presence; and (c) pursue low-cost upstream opportunities in bauxite mining, alumina refining and the production of other key raw materials. The following table shows our primary aluminum shipment volumes since 2004.
Recent Developments
Information on our recent developments is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.
Competition
The market for primary aluminum is global, and demand for aluminum varies widely from region to region. We compete with U.S. and international companies in the aluminum industry primarily in the areas of price, quality and service. In addition, aluminum competes with materials such as steel, copper, carbon fiber, composites, plastic and glass, which may be substituted for aluminum in certain applications.
Our Hawesville plant is located adjacent to its largest customer. This location allows Hawesville to deliver a portion of their production in molten form, at a cost savings to both parties, providing a competitive advantage over other potential suppliers. We believe that Hawesville also has a competitive advantage in that it currently is the largest producer of high purity aluminum in North America.
Customer Base
In 2009, we derived approximately 70% of our consolidated sales from our three major customers: Southwire Company (“Southwire”), Glencore International AG (together with its subsidiaries, “Glencore”) and BHP Billiton. Additional information about the revenues and percentage of sales to these major customers is available in Note 23 Business Segments of the Consolidated Financial Statements included herein. We currently have long-term primary aluminum sales or tolling contracts with each of these customers. More information about these contracts is available under “Forward Physical Delivery Agreements” in Note 19 Forward Delivery Contracts of the Consolidated Financial Statements included herein.
Financial Information about Segments and Geographic Areas
We operate in one reportable segment, primary aluminum. Additional information about our primary aluminum segment and certain geographic information is available in Note 23 Business Segments to the Consolidated Financial Statements included herein. For a description of certain risks attendant to our operations, see Item 1A, “Risk Factors.”
Energy, Key Supplies and Raw Materials
We consume the following key supplies and raw materials in the primary aluminum reduction process:
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electricity
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carbon anodes
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liquid pitch
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alumina
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cathode blocks
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calcined petroleum coke
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aluminum fluoride
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natural gas
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silicon carbide
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Electrical power, alumina, carbon anodes and labor are the principal components of cost of goods sold. These components together represented over 75% of our 2009 cost of goods sold. We have long-term contracts to attempt to ensure the future availability of many of our cost components. For a description of certain risks attendant to our raw material supplies and labor, see Item 1A, “Risk Factors.”
Long-term Supply Contracts
Alumina Supply Agreements
A summary of our alumina supply agreements is provided below. Grundartangi does not have alumina supply agreements because this facility tolls alumina provided by BHP Billiton, Norsk Hydro ASA (“Hydro”) and Glencore into primary aluminum.
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Facility
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Supplier
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Term
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Pricing
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Mt. Holly
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Trafigura AG
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Through December 31, 2013
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Variable, LME-based
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Hawesville (1)
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Gramercy Alumina
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September 1, 2009 through December 31, 2010
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Fixed Price/ Variable, LME-based
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Various
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Glencore
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January 1, 2010 through December 31, 2014
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Variable, LME-based
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(1)
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Pricing under the new contract is fixed for the first 125,000 metric tons (“MT”) delivered and LME-based for the remaining 65,500 MT (subject to certain conditions for floor pricing).
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Electrical Power Supply Agreements
We use significant amounts of electricity in the aluminum production process. We have entered into long-term power supply agreements to provide power for the Helguvik project. These contracts, described in Note 18 to the Consolidated Financial Statements included herein, are subject to various conditions. A summary of our long-term power supply agreements is provided below.
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Facility
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Supplier
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Term
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Pricing
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Ravenswood (1)
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Appalachian Power Company
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Through September 30, 2010
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Based on published tariff, with provisions for pricing based on the LME price for primary aluminum
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Mt. Holly
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South Carolina Public Service Authority
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Through December 31, 2015
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Fixed price, with fuel cost adjustment clause through 2010; subject to a new fixed price schedule after 2010
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Hawesville (2)
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Big Rivers Energy Corporation (“Big Rivers”)
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Through December 31, 2023
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Cost-based
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Grundartangi
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Landsvirkjun
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Through 2019 - 2029
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Variable rate based on the LME price for primary aluminum
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Orkuveita Reykjavíkur
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HS Orka hf
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Helguvik (3)
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Orkuveita Reykjavíkur
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Through December 2036
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Variable rate based on the LME price for primary aluminum
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HS Orka hf
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(1)
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In February 2009, we curtailed all operations at the Ravenswood facility. Appalachian Power supplies all of Ravenswood’s power requirements. We will be subject to minimum demand charges associated with this contract and these costs are included in our curtailment costs. Effective July 28, 2006, the Public Service Commission of the State of West Virginia approved an experimental rate design in connection with an increase in the applicable tariff rates. Under the experimental rate, Ravenswood may be excused from or may defer the payment of the increase in the tariff rate if aluminum prices as quoted on the LME fall below pre-determined levels. In September 2009, the West Virginia Public Service Commission (the “PSC”) extended the experimental rate design through September 30, 2010.
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(2)
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On July 16, 2009, Century Aluminum of Kentucky, our wholly owned subsidiary, (“CAKY”) along with E.ON U.S. (“E.ON”) and Big Rivers, agreed to an “unwind” of the former contractual arrangement between Big Rivers and E.ON and entered into a new arrangement (“Big Rivers Agreement”).The Big Rivers Agreement provides adequate power for Hawesville’s full production capacity requirements (approximately 482 megawatts (“MW”)) with pricing based on the provider’s cost of production. The Big Rivers Agreement is take-or-pay for Hawesville’s energy requirements at full production. Under the terms of the Big Rivers Agreement, any power not required by Hawesville will be made available for sale and we will receive credits for actual power sales up to our cost for that power.
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(3)
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The agreements are subject to the satisfaction of certain material conditions including, among other things, approval by the boards of directors of the power companies and environmental agency approval. See Item 1A, “Risk Factors — If we are unable to procure a reliable source of power the Helguvik project will not be feasible.”
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Labor Agreements
Our labor costs at Ravenswood and Hawesville are subject to the terms of labor contracts with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (“USWA”) which generally have provisions for annual fixed increases in hourly wages and benefits adjustments. The five labor unions represented at Grundartangi operate under a labor contract that establishes wages and work rules for covered employees. The employees at Mt. Holly are employed by Alcoa and are not unionized. A summary of key labor agreements is provided below.
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Facility
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Organization
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Term
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Hawesville (1)
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USWA
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Through March 31, 2010
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Ravenswood
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USWA
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Through August 31, 2010
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Grundartangi (2)
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Icelandic labor unions
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Through December 31, 2009
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(1)
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We are currently in discussions with the USWA regarding this labor contract, but are unable to predict the outcome of such negotiations at this time.
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(2)
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We are currently in discussions with the Grundartangi labor unions regarding this labor contract. It has been our experience that discussions past the contract expiration are not unusual in Iceland. The plant has continued to operate normally during these extended negotiations. See Item 1A, “Risk Factors — Union disputes could raise our production cost or impair our production operations.”
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Pricing
Our operating results are highly sensitive to changes in the price of primary aluminum, power and the raw materials used in its production. As a result, we try to mitigate the effects of fluctuations in primary aluminum, power and raw material prices through the use of various fixed-price commitments and financial instruments.
Generally, we price our products at an indexed or “market” price, in which the customer pays an agreed-upon premium over the LME price or other market indices.
Grundartangi derives substantially all of its revenues from tolling arrangements whereby it converts alumina provided by its customers into primary aluminum for a fee based on the LME price for primary aluminum. Grundartangi's revenues are subject to market price risk associated with the LME price for primary aluminum; however, because Grundartangi tolls alumina for its customers it is not exposed to fluctuations in the price of alumina. Grundartangi’s tolling revenues include a premium based on the EU import duty for primary aluminum. In May 2007, the EU members agreed to review the three percent duty after three years. Any further decreases in the duty could have a negative impact on Grundartangi’s revenues.
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Primary Aluminum Facilities
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Grundartangi
The Grundartangi facility located in Grundartangi, Iceland, is owned and operated by our subsidiary, Nordural Grundartangi ehf. Grundartangi is our most modern and lowest cost facility. Operations began in 1998 and production capacity was expanded in 2001, 2006 and 2007. The facility has a production capacity of 260,000 mtpy.
Grundartangi operates under various long-term agreements with the Government of Iceland, local municipalities, and Faxafloahafnir sf (which operates the harbor at Grundartangi and is jointly owned by several municipalities). These agreements include: (a) an investment agreement which establishes Grundartangi's tax status and the Government's obligations to grant certain permits; (b) a reduction plant site agreement by which Grundartangi leases the property; and (c) a harbor agreement by which Grundartangi is granted access to the port at Grundartangi through 2020, subject to renewal at its option.
Tolling Agreements. Grundartangi has long-term tolling agreements for all of its production capacity with BHP Billiton, Glencore and Hydro. The tolling counterparties provide alumina and receive primary aluminum in return for tolling fees that are based on the LME price of primary aluminum. See Note 19 Forward Delivery Contracts in the Consolidated Financial Statements included herein for more information about these agreements.
Power. Grundartangi purchases power from Landsvirkjun (a power company jointly owned by the Republic of Iceland and two Icelandic municipal governments), HS Orka hf and Orkuveita Reykjavíkur (“OR”) under various long-term contracts due to expire between 2019 and 2029. The power delivered to Grundartangi is priced at rates based on the LME price for primary aluminum and is produced from hydroelectric and geothermal sources.
Employees. Our employees at Grundartangi are represented by five labor unions that operate under a labor contract that established wages and work rules for covered employees for the period through December 31, 2009. We are currently in extended discussions with the unions and the plant has continued to operate normally during such negotiations.
Hawesville
Hawesville is owned by Century Aluminum of Kentucky, our wholly owned subsidiary. Hawesville is located adjacent to the Ohio River near Hawesville, Kentucky and began operations in 1970. Hawesville has five reduction potlines with an annual rated production capacity of 244,000 metric tons.
In March 2009, CAKY completed the curtailment of one potline at its Hawesville, Kentucky aluminum smelter. The action reduced primary aluminum production by approximately 49,000 metric tons per year and impacted approximately 120 employees.
Hawesville's four operating potlines are specially configured and operated to produce high purity primary aluminum and have an annual capacity of approximately 195,000 metric tons, making it the largest producer of high purity primary aluminum in North America. The average purity level of primary aluminum produced by these potlines is 99.9%, compared to standard-purity aluminum which is approximately 99.7%. High purity primary aluminum is sold at a premium to standard-purity aluminum. Hawesville’s specially configured plant provides the high-conductivity metal required by Hawesville’s largest customer, Southwire, for its electrical wire and cable products as well as for certain aerospace applications. The fifth curtailed potline has an annual capacity of approximately 49,000 metric tons of standard-purity aluminum.
Metal Sales Agreement. Hawesville has an aluminum sales contract with Southwire (the “Southwire Metal Agreement”). The Southwire Metal Agreement will expire March 31, 2011. The price for the molten aluminum delivered to Southwire is variable and is determined by reference to the U.S. Midwest Market Price. Under the contract, Hawesville supplies 240 million pounds (approximately 109,000 metric tons) of high-conductivity molten aluminum annually to Southwire’s adjacent wire and cable manufacturing facility. Under this contract, Southwire will also purchase 60 million pounds (approximately 27,000 metric tons) of standard-grade molten aluminum each year through December 2010. In addition, we have a contract to sell to Glencore all primary aluminum we produce in the U.S., less existing agreements and high purity sales through December 31, 2010 (the “Glencore Sweep Agreement”). The Glencore Sweep Agreement provides for variable pricing determined by reference to the U.S. Midwest Market Price. More information on the Southwire Metal Agreement and Glencore Sweep Agreement is available under “Forward Physical Delivery Agreements” in Note 19 Forward Delivery Contracts of the Consolidated Financial Statements included herein.
Alumina. In 2009, Hawesville received essentially all of its alumina supply from Gramercy Alumina LLC (“Gramercy”). In 2010, Hawesville will receive its alumina supply from Gramercy and Glencore.
Power. On July 16, 2009, CAKY, along with E.ON and Big Rivers, agreed to an “unwind” of the former contractual arrangement between Big Rivers and E.ON and entered into the Big Rivers Agreement to provide long-term cost-based power to CAKY.The term of the Big Rivers Agreement is through December 31, 2023 and provides adequate power for Hawesville’s full production capacity requirements (approximately 482 MW) with pricing based on the provider’s cost of production. The Big Rivers Agreement is take-or-pay for Hawesville’s energy requirements at full production. Under the terms of the agreement, any power not required by Hawesville will be made available for sale and we will receive credits for actual power sales up to our cost for that power. The current market price of electrical power in this region is less than Big Rivers’ forecasted cost.
E.ON has agreed to mitigate a significant portion of this near-term risk through December 2010. During this time, to the extent Hawesville does not use all the power under the take-or-pay contract, E.ON will, with some limitations, assume Hawesville's obligations. As part of this arrangement, E.ON will pay up to approximately $81 million to CAKY in the form of direct payments to Big Rivers under the Big Rivers Agreement to compensate CAKY for the fair value of the previous contract and to compensate CAKY for power in excess of CAKY’s current demand. At Hawesville's current production rate, Hawesville would receive the entirety of these economic benefits over the term of the agreement. To the extent the aggregate payments made by E.ON exceed the approximately $81 million commitment, Hawesville would repay this excess to E.ON over time, but only if the LME primary aluminum price were to exceed certain thresholds. See Note 3 Long-term Power Contract for Hawesville in the Consolidated Financial Statements included herein.
Employees. The bargaining unit employees at Hawesville are represented by the USWA. Century’s collective bargaining agreement, which covers all of the represented hourly employees at Hawesville, expires March 31, 2010. We are currently in discussions with the USWA, but are unable to predict the outcome of such negotiations at this time.
Mt. Holly
Mt. Holly, located in Mt. Holly, South Carolina, was built in 1980 and is the most recently constructed aluminum reduction facility in the United States. The facility consists of two potlines with a total annual rated production capacity of 224,000 metric tons and casting equipment used to cast molten aluminum into standard-grade ingot, extrusion billet and other value-added primary aluminum products. Value-added primary aluminum products are sold at a premium to standard-grade primary aluminum. Our 49.7% interest represents approximately 111,000 metric tons of the facility’s annual production capacity.
Our interest in Mt. Holly is held through our subsidiary, Berkeley Aluminum, Inc. (“Berkeley”). Under the Mt. Holly ownership structure, we hold an undivided 49.7% interest in the property, plant and equipment comprising the aluminum reduction operations at Mt. Holly and an equivalent share in the general partnership responsible for the operation and maintenance of the facility. Alcoa owns the remaining 50.3% interest in Mt. Holly and an equivalent share of the operating partnership. Under the terms of the operating partnership, Alcoa is responsible for operating and maintaining the facility. Each owner supplies its own alumina for conversion to primary aluminum and is responsible for its proportionate share of operational and maintenance costs.
Metal Sales Agreements. We have a contract to sell Glencore 20,400 metric tons per year of primary aluminum produced at Mt. Holly or Hawesville at a price determined by reference to the U.S. Midwest market price, subject to an agreed cap and floor as applied to the U.S. Midwest Premium (the “Glencore Metal Agreement”). Under the Glencore Sweep Agreement, any additional primary aluminum produced in the U.S. (including Mt. Holly), less existing agreements and high purity sales, will be sold to Glencore at variable pricing determined by reference to the U.S. Midwest Market Price. More information on the Glencore Metal Agreement and Glencore Sweep Agreement is available under “Forward Physical Delivery Agreements” in Note 19 Forward Delivery Contracts of the Consolidated Financial Statements included herein.
Alumina. Substantially all of our alumina requirements for Mt. Holly will be provided by Trafigura AG under an agreement that extends through 2013. The pricing for alumina under our contract with Trafigura is variable and based on the LME price for primary aluminum.
Power. Mt. Holly purchases all of its power requirements from the South Carolina Public Service Authority (“Santee Cooper”) under a contract that runs through 2015. Power delivered through 2010 will be priced at rates fixed under currently published schedules, subject to adjustments to cover Santee Cooper’s fuel costs. Rates for the period 2011 through 2015 will be as provided under then-applicable schedules. We are currently in discussions with Santee Cooper regarding rates for these years.
Employees. The employees at Mt. Holly are employed by Alcoa and are not unionized.
Ravenswood
The Ravenswood facility is owned and operated by our subsidiary, Century Aluminum of West Virginia, Inc. Built in 1957, Ravenswood has four potlines with a production capacity of 170,000 metric tons. The facility is located adjacent to the Ohio River near Ravenswood, West Virginia.
In February 2009, we conducted an orderly curtailment of the plant operations at Ravenswood. Layoffs for the majority of Ravenswood's employees were completed by February 20, 2009. We expect that Ravenswood’s operations will remain curtailed until economic conditions warrant restarting. Such conditions would include an enabling power and labor contracts and a sustainable and suitably priced LME environment
Metal Sales Agreements. Prior to the Ravenswood curtailment in February 2009, we sold 10,200 metric tons per year of primary aluminum produced at Ravenswood under the Glencore Metal Agreement. Following the Ravenswood curtailment, we assigned Ravenswood production requirements under this contract to Mt. Holly and Hawesville. However, curtailing operations at Ravenswood does not relieve us of our contractual obligations. We may continue to incur costs under these contracts to meet our contractual obligations, including potentially securing other aluminum to satisfy our obligations to Glencore. In May 2009, we agreed with Alcan to terminate all remaining obligations under an agreement pursuant to which Alcan had previously agreed to purchase 14 million pounds of primary aluminum per month through August 31, 2009 and paid Alcan $0.6 million to settle the remaining delivery obligations. For a description of certain risks attendant to these agreements, see Item 1A, “Risk Factors.”
Alumina. On April 21, 2009, we agreed with Glencore to amend two alumina purchase agreements dated April 14, 2008 and April 26, 2006, respectively (collectively, the “Amendments”). The Amendments reduce the amount of alumina Glencore will supply to Century from 330,000 metric tons to 110,368 metric tons in 2009 and from 290,000 metric tons to 229,632 metric tons in 2010, for an overall alumina supply reduction of 280,000 metric tons.
Glencore supplied the alumina used at Ravenswood under a contract that expired on December 31, 2009. As a result of the Ravenswood curtailment, we incurred cash losses of approximately $7.5 million in 2009 associated with the sale of excess alumina that was received under this alumina supply agreement. For a description of material risks attendant to these agreements, see Item 1A, “Risk Factors.”
Power. Appalachian Power Company (“APCo”) supplies all of Ravenswood’s power requirements under an agreement at prices set forth in published tariffs, which are subject to change. Under the special rate contract, Ravenswood may be excused from or may defer the payment of the increase in the tariff rate if aluminum prices as quoted on the LME fall below pre-determined levels. In March 2009, APCo filed a request for a rate increase to recover unrecovered fuel costs and to cover the increased cost of fuel and purchased power as well as capital improvements. In September 2009, the PSC agreed to extend the special rate contract terms of the existing agreement for one year and attributed approximately $16 million of the unrecovered fuel costs to Ravenswood. This amount will be factored into the special rate provision which excuses or defers payments above set tariff rates depending on aluminum prices. We are reviewing options to further extend the term of the existing agreement that establishes the LME-based cap on the tariff rates.
Employees. The bargaining unit employees at Ravenswood are represented by the USWA. In 2009, we reached an agreement with the USWA to extend the labor contract at Ravenswood to August 31, 2010.
Helguvik project
The Helguvik project site is located approximately 30 miles from the city of Reykjavik and is owned and would be operated through our Nordural Helguvik ehf subsidiary. This site provides a flat location and existing harbor, as well as proximity to the international airport, the capital and other industry.
We are currently evaluating the Helguvik project’s cost, scope and schedule in light of the current economic climate and commodity prices. During this evaluation process, we have significantly reduced spending on the project. See Item 1A, “Risk Factors – Construction at our Helguvik smelter site is under review” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cost Reduction Actions” for additional information.
We have made and continue making capital expenditures for the construction and development of our new Helguvik smelter project. In 2009, we expended cash of approximately $22 million in capital expenditures for the Helguvik project, and, from inception through December 31, 2009, we capitalized approximately $108 million for Helguvik. We expect that capital expenditures on this project during 2010 will be in the range of $40 to $45 million until a decision is made to restart major construction and engineering activities.
Power Supply Agreements. Nordural Helguvik has signed electrical power supply agreements with HS Orka and OR, for the proposed Helguvik smelter. We are currently finalizing the timing and delivery arrangements with the power suppliers based on the residual scope of the project into four 90,000 MT phases. The agreements, which are subject to the satisfaction of certain material conditions, provide for additional power, as available, to support a complete smelter of 360,000 mtpy. See Item 1A, “Risk Factors — If we are unable to procure a reliable source of power, the Helguvik project will not be feasible.”
Helguvik Investment Agreement. An Enabling Act for an Investment Agreement with the Government of Iceland for Helguvik, which governs certain meaningful aspects of the construction of a primary aluminum facility in Helguvik, Iceland such as the fiscal regime, was approved in April 2009 by the Icelandic Parliament. In July 2009, the Investment Agreement was approved by the European Surveillance Authority and in August 2009 the agreement was executed by Nordural Helguvik ehf and the Icelandic Minister of Industry. Among other things, the Investment Agreement includes a commitment by the Government of Iceland to assist us in obtaining necessary regulatory approvals for completion of the Helguvik project.
Environmental Impact Assessment. In October 2007, Nordural received a positive opinion from the Icelandic Planning Agency on the Environmental Impact Assessment (“EIA”) for the proposed Helguvik smelter. In January 2010, the Ministry for the Environment confirmed the opinion of the National Planning Agency that a joint EIA for south west (“SW”) power transmission lines and related projects is not necessary.
Transmission Agreement. In October 2007, Nordural Helguvik signed a transmission agreement, which was subsequently amended in February and July 2009, with Landsnet hf (“Landsnet”) to provide an electrical power transmission system to the Helguvik project. Landsnet is the company responsible for operating and managing Iceland’s transmission system. As a result of delays in construction of the Helguvik project, the parties are currently in discussions with respect to the timeline for construction of the transmission system.
Operating License. On September 10, 2008, the Environmental Agency of Iceland issued an Operating License for the Helguvik smelter project. The license authorizes production of up 250,000 mtpy through December 31, 2024.
Other agreements. We have also entered into a site and harbor agreement with respect to the Helguvik project.
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Joint Venture Facilities
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Baise Haohai Carbon Company, Ltd.
In 2008, we entered into a joint venture agreement whereby we acquired a 40% stake in Baise Haohai Carbon Co., Ltd., a carbon anode and cathode facility located in the Guangxi Zhuang Autonomous Region of south China. The BHH facility has annual anode production capacity of 180,000 metric tons and an annual cathode baking and graphitization capacity of 20,000 metric tons. Construction on the facility was completed in 2008.
We paid $27.6 million for the investment and loaned BHH an additional $9.4 million. Through December 2009, BHH has repaid $3.6 million on the loan. Our investment in the joint venture is accounted for using the equity method of accounting with results of operations reported on a one-quarter lag.
Anode agreement. BHH provides anodes to Grundartangi under a long-term agreement through 2012, renewable through December 31, 2015.
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Environmental Matters
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We are subject to various environmental laws and regulations. We have spent, and expect to spend, significant amounts for compliance with those laws and regulations. In addition, some of our past manufacturing activities have resulted in environmental consequences which require remedial measures. Under certain environmental laws, which may impose liability regardless of fault, we may be liable for the costs of remediation of contaminated property, including our current and formerly owned or operated properties or adjacent areas, or for the amelioration of damage to natural resources. We believe, based on currently available information, that our current environmental liabilities are not likely to have a material adverse effect on Century. However, we cannot predict the requirements of future environmental laws and future requirements at current or formerly owned or operated properties or adjacent areas. Such future requirements may result in unanticipated costs or liabilities which may have a material adverse effect on our financial condition, results of operations or liquidity. More information concerning our environmental contingencies can be found in Item 3, "Legal Proceedings" and in Note 18 Commitments and Contingencies to the Consolidated Financial Statements included herein.
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Intellectual Property
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We own or have rights to use a number of patents or patent applications relating to various aspects of our operations. We do not consider our business to be materially dependent on any of these patents or patent applications.
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Employees
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As of December 31, 2009, we employed a work force of approximately 1,260 employees.
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Item 1A. Risk Factors
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The following describes certain of the risks and uncertainties we face that could cause our future results to differ materially from our current results and from those anticipated in our forward-looking statements. These risk factors should be considered together with the other risks and uncertainties described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein.
This list of significant risk factors is not all-inclusive or necessarily in order of importance.
We face substantial risks relating to our operational restructuring and our failure to successfully implement such plan could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our operational restructuring plan entails previous and possible additional capacity curtailment at our facilities, the renegotiation of long-term commercial contracts, the reduction of other operating costs, the reduction of capital expenditures, the possible financing of our Helguvik facility and potential asset sales, among other things. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We face several risks related to the implementation of the operational restructuring, including our ability to successfully complete these actions as planned and to continue to successfully operate our business following such restructuring. In addition, we may be exposed to liabilities as a result of our operational restructuring. For additional risks relating to the operational restructuring, see “—Construction at our Helguvik smelter site is under review. Substantial delay in the completion of this project may increase its cost and impose other risks to completion that are not foreseeable today,” “—A majority of our aluminum sales at Hawesville are subject to contracts which limit our ability to curtail capacity and create dependence on a major customer,” “—We would be required to incur substantial costs in order to curtail unprofitable aluminum production,” “—Changes or disruptions to our current alumina and other raw material supply arrangements could increase our raw material costs,” “—Certain of our contracts for raw materials, including certain contracts for alumina and electricity, require us to take-or-pay for fixed quantities of such materials, even if we curtail unprofitable production capacity” and “—Union disputes could raise our production costs or impair our production operations.” As a result of the above, we cannot provide assurance that we will be successful in implementing the operational restructuring as planned or receive the benefits we are seeking from its implementation.
In connection with our operational restructuring, whether as a consequence of its actual implementation or the difficulty in realizing the intended benefits of the operational restructuring, we may have to seek bankruptcy protection for some or all of our U.S. subsidiaries and/or may be forced to divest some or all of our U.S. subsidiaries. If we were to seek bankruptcy protection for these subsidiaries, we would face additional risks. Such action could cause concern among our customers and suppliers generally, distract our management and our other employees and subject us to increased risks of lawsuits. Other negative consequences could include negative publicity, which could have a material negative impact on the trading price of our securities and negatively affect our ability to raise capital in the future.
The failure to successfully implement the operational restructuring or to achieve its intended benefits could have a material adverse effect on our business, financial condition, results of operations and liquidity. Even if we successfully complete the operational restructuring, factors beyond our control, such as LME prices, global supply and demand for aluminum and our competitive position, among others, could have a material adverse effect on our business, financial condition, results of operations and liquidity.
A continuation or worsening of global financial and economic conditions could adversely impact our financial position and results of operations.
Following the global financial and credit market disruptions in 2008 and 2009, we have experienced a reduction in the availability of liquidity and credit generally. The general slowdown in economic activity caused by the domestic recession and difficult international financial and economic conditions continues to adversely affect our business, financial condition, results of operations and liquidity as the demand for primary aluminum has been reduced and the price of our products has fallen. A continuation or worsening of the current financial and economic conditions could adversely affect our customers’ ability to meet the terms of sale and could have a material adverse impact on our business, financial condition, results of operations and liquidity.
Our ability to access the credit and capital markets on acceptable terms to obtain funding for our operations and capital projects may be limited due to our credit ratings, our financial condition or the deterioration of these markets.
Our revolving credit facility will mature in September 2010. In addition, our availability under our revolving credit facility has been negatively impacted by the curtailment of production capacity at Ravenswood and the partial curtailment of production capacity at Hawesville, which have reduced the amount of our domestic accounts receivable and inventory. Further curtailments of production capacity would incrementally reduce domestic accounts receivable and inventory, further reducing availability under our revolving credit facility. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, the lenders under our revolving credit facility have the ability to modify the reserve criteria in the facility, which could further reduce our borrowing base. As a result, liquidity available to us under the revolving credit facility could be reduced. In addition, the holders of the approximately $47 million aggregate principal amount of our 1.75% convertible senior notes due 2024 (the “1.75% Notes”) that remain outstanding have an option to require us to repurchase all or any portion of these securities at par in August 2011 and to require us to settle in cash at market prices up to the aggregate principal amount of the 1.75% Notes upon conversion, which may occur at any time. Each of these events would increase our liquidity needs. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Provisions in our charter documents and state law may make it difficult for others to obtain control of Century Aluminum, even though some stockholders may consider them to be beneficial.
Certain provisions of our restated certificate of incorporation, amended and restated bylaws and our Tax Benefit Preservation Plan, as well as provisions of the Delaware General Corporation Law, may have the effect of delaying, deferring or preventing a change in control of Century, including transactions in which our stockholders might otherwise have received a substantial premium for their shares over then current market prices. For example, these provisions:
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give authority to our board of directors to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any stockholder vote;
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provide for a board of directors consisting of three classes, each of which serves for a different three-year term;
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require stockholders to give advance notice prior to submitting proposals for consideration at stockholders’ meetings or to nominate persons for election as directors; and
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restrict certain business combinations between us and any person who beneficially owns 10% or more of our outstanding voting stock.
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Our Tax Benefit Preservation Plan would also cause substantial dilution to any person or group who attempts to acquire a significant interest in us without advance approval from our board of directors.
While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
Our relationship with Glencore may also deter a takeover. As of December 31, 2009, we believe that Glencore beneficially owned, through its common stock, approximately 39.1% of our issued and outstanding common stock and, through its ownership of common and preferred stock, an overall 44.1% economic ownership of Century. See Note 9 Shareholders’ Equity in the Consolidated Financial Statements included herein.
Declines in aluminum prices have adversely affected our financial position and results of operations, and further declines or an increase in our operating costs could result in further curtailment of operations at one or more of our facilities if alternate sources of liquidity are not available.
The price of primary aluminum is frequently volatile and fluctuates in response to general economic conditions, expectations for supply and demand growth or contraction and the level of global inventories. The crisis in financial and credit markets has led to a pronounced downturn in global economic activity, which is expected to be long in duration. The global market for commodities has deteriorated in line with the decline in the global economy. Declining demand for aluminum products in developed and developing nations, increasing stocks on the LME and a general lack of confidence in future economic conditions combined in late 2008 and 2009 to produce an unprecedented decline in the LME price for aluminum. The LME price for primary aluminum fell 62% from its high on July 11, 2008 ($3,292 per metric ton), to a low of $1,254 per metric ton on February 24, 2009, before rising to $2,216 per metric ton on March 12, 2010. This represents one of the most substantial and rapid declines in the history of recorded LME prices. The decline in aluminum prices in 2008 and 2009 adversely impacted our operations, particularly in our U.S. facilities, since our operating costs did not fall to the degree that aluminum prices dropped.
Any decline in aluminum prices adversely affects our business, financial position, results of operations and liquidity. Sustained depressed prices for aluminum would have a material adverse impact on our business, financial condition, results of operations and liquidity. If the price we realize for our products falls below our cost of production, we will have to rely on other sources of liquidity, identify additional cash reductions or further curtail operations to fund our operations. Potential other sources of liquidity could include additional issuances of equity, equity-linked securities, debt issuances, prepaid aluminum sales, asset sales and sales of minority interests in our operations. Any future equity or equity-linked security issuance may be dilutive to our existing stockholders, and any future debt incurrence would increase our leverage and interest expense and would likely contain restrictive covenants. We cannot provide assurance that any of these financing alternatives will be available or, if available, that they would be successfully completed. There can be no assurances that we will be able to secure the required alternative sources of liquidity to fund our operations or to take actions necessary to curtail additional operations, if these steps are required.
We could require substantial resources to fund our capital expenditures
If we are unable to generate funds from our operations to pay our operating expenses and fund our capital expenditures and other obligations, our ability to continue to meet these cash requirements in the future could, depending upon the future price of aluminum (over which we have no control) and our future capital programs, require substantial liquidity and access to sources of funds, including from capital and credit markets. Changes in global economic conditions, including material cost increases and decreases in economic activity, and the success of plans to manage costs, inventory and other important elements of our business, may significantly impact our ability to generate funds from operations. If, among other factors, (1) primary aluminum prices were to decline, (2) our costs are higher than contemplated, (3) we suffer unexpected production outages, or (4) Icelandic laws change and either increase our tax obligations or limit our access to cash flow from our Icelandic operations, we would need to identify additional sources of liquidity. During 2008 and 2009, credit market conditions made and could continue to make, it difficult to obtain new funding from the credit and capital markets for our operating and capital needs. Although credit availability has improved, the cost of raising money in the debt and equity capital markets has increased significantly, while the availability of funds from those markets has diminished. Also, as a result of concern about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining funding from the credit markets has increased significantly as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced and, in some cases, ceased to provide funding to borrowers. In addition, our credit ratings were downgraded in 2009, and further negative actions the credit agencies may take could negatively affect our ability to access the credit and capital markets in the future and could lead to worsened trade terms, increasing our liquidity needs. An inability to access capital and credit markets could have a material adverse effect on our business, financial condition, results of operations and liquidity.
In light of the global economic climate, we continue to review our future capital plans and have reduced, deferred or halted most non-critical capital expenditures at our existing smelters and have reduced capital expenditures at our Helguvik project. See “Construction at our Helguvik smelter site is under review.” If funding is not available when needed, or is available only on unacceptable terms, we may be unable to respond to competitive pressures or fund operations, capital expenditure or other obligations, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Our business and growth prospects may be negatively impacted by reductions in our capital expenditures and other responses to unfavorable economic conditions.
In response to the global economic downturn and related disruptions in the financial markets, in recent times we have curtailed significant production capacity and greatly reduced capital expenditures, including development of our Helguvik smelter. If demand for aluminum improves, our ability to take advantage of improved market conditions may be constrained by these earlier curtailments, capital expenditure restrictions and other similar actions, and the long-term value of our business could be adversely impacted. Our position in relation to our competitors may also deteriorate. We may also be required to address commercial and political issues in relation to our reductions in capital expenditures or operational curtailment in certain of the jurisdictions in which we operate. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and liquidity.
Future declines in the financial markets and/or our curtailment actions could have significant and adverse effects on our pension funding obligations.
We maintain two qualified defined benefit plans, and contribute to a third, on behalf of our employees. As a result of poor investment returns due to the global financial crisis, the benefit plans we maintain were underfunded as of December 31, 2009. If capital markets experience further significant losses, pension fund balances would remain reduced and additional cash contributions to the pension funds could be required. Additionally, as a result of our curtailment actions, we may be required to make additional significant contributions to the pension funds earlier than anticipated.
International operations expose us to political, regulatory, currency and other related risks.
We receive a significant portion of our revenues from our international operations. International operations expose us to risks, including unexpected changes in foreign laws and regulations, political and economic instability, challenges in managing foreign operations, increased cost to adapt our systems and practices to those used in foreign countries, export duties, tariffs and other trade barriers, and the burdens of complying with a wide variety of foreign laws. For example, recent changes in Icelandic tax law and agreements with the Icelandic Ministers of Finance and Industry will significantly increase our Icelandic tax liabilities in 2010 through 2012. Changes in foreign laws and regulations are generally beyond our ability to control, influence or predict and further adverse changes in these laws in the future could have a material adverse effect on our business, financial condition, results of operations and liquidity.
In addition, we may be exposed to fluctuations in currency exchange rates and, as a result, an increase in the value of foreign currencies relative to the U.S. dollar could increase our operating expenses which are denominated and payable in those currencies. As we continue to explore other opportunities outside the U.S., including the Helguvik facility, our currency risk with respect to the ISK and other foreign currencies will significantly increase.
If economic and political conditions in Iceland continue to deteriorate, our financial position and results of operations could be adversely impacted.
Iceland is important to our business. Recent turmoil in Iceland’s financial and political systems has created concern for the stability of Iceland’s financial markets and made cash management activities in Iceland more challenging. For example, the Icelandic government and the Central Bank of Iceland are restricting the free transfer of funds outside of Iceland and, specifically, foreign currency within and outside of Iceland. By letter dated January 23, 2009, we were notified that our Icelandic operations are exempt from these foreign currency rules. However, we cannot control further actions by the Central Bank of Iceland, which might restrict our ability to transfer funds through the Icelandic banking system and outside of Iceland. While we currently maintain essentially all of our Icelandic operating funds in accounts outside of Iceland, and are receiving substantially all of our customer payments in such accounts, a portion of our funds remain in the Icelandic banks to meet local working capital requirements. In addition, as payables become due in Iceland, we must transfer funds through the Icelandic banking system. If economic and financial conditions in Iceland deteriorate, or if counterparties and lenders become unwilling to engage in normal banking relations with and within Iceland, our ability to pay vendors, process payroll and receive payments could be adversely impacted. In addition, the collapse of the Icelandic banking system, combined with other factors, has resulted in a significant deterioration in the general economic conditions in the country. While our business in Iceland is currently operating without significant difficulties, further impacts, if any, of these developments are uncertain and cannot be estimated at this time.
Construction at our Helguvik smelter site is under review. Substantial delay in the completion of this project may increase its cost and impose other risks to completion that are not foreseeable today.
Nordural Helguvik ehf is currently evaluating the Helguvik project’s cost, scope and schedule in light of the global economic crisis and current commodity prices. During this evaluation process, Nordural Helguvik ehf has redesigned the scope of this project into four 90,000 MT phases and significantly reduced spending on the project. Nordural Helguvik ehf cannot be certain when or if it will restart major construction and engineering activities or ultimately complete the Helguvik project or, if completed, that the Helguvik smelter would operate in a profitable manner. We will not realize any return on our significant investment in the Helguvik project until we are able to commence Helguvik operations in a profitable manner. If we fail to achieve operations, we may have to recognize a loss on our investment, which would have an adverse impact on our future earnings.
If Nordural Helguvik ehf decides to proceed with the Helguvik project, this project is subject to various contractual approvals and conditions. Many of the contractual arrangements related to the Helguvik project have time periods for performance. The delay in restoring major construction and completing the Helguvik project has caused Nordural Helguvik ehf to renegotiate and extend, or undertake to renegotiate and extend, existing contractual commitments, including with respect to power, transmission, technology and raw materials. There can be no assurance that the contractual approvals and conditions, including extensions, necessary to proceed with construction of the Helguvik smelter will be obtained or satisfied on a timely basis or at all. In addition, such approvals or extensions as are received may be subject to conditions that are unfavorable or make the project impracticable or less attractive from a financial standpoint. Even if we receive the necessary approvals and extensions on terms that we determine are acceptable, the construction of this project is a complex undertaking. There can be no assurance that we will be able to complete the project within our projected budget and schedule. To successfully execute this project, we will also need to arrange additional financing and either enter into tolling arrangements or secure a supply of alumina. In addition, unforeseen technical difficulties could increase the cost of the project, delay the project or render the project not feasible. Any delay in the completion of the project or increased costs could have a material adverse effect on our business, financial condition, results of operations and liquidity.
We intend to finance our future capital expenditures from future capital raising, available cash and cash flow from operations. We may be unable to raise additional capital, or do so on attractive terms, due to a number of factors including a lack of demand, poor economic conditions, unfavorable interest rates or our financial condition or credit rating at the time. If additional capital resources are unavailable, we may further curtail construction and development activities.
If we are unable to procure a reliable source of power, the Helguvik project will not be feasible.
The Helguvik project will require generation and transmission of a substantial amount of electricity to power the smelter. Our indirect, wholly owned Iceland subsidiary, Nordural Helguvik ehf, has entered into agreements with two providers of geothermal power in Iceland for a substantial portion of this power. These two power agreements are subject to certain conditions for each stage of delivery of power. These conditions include approvals by the boards of directors of the power companies, as well as environmental agency approvals for the power producing assets. Given the uncertainty surrounding power generation, there may be a delay in the completion of the necessary power infrastructure to serve the Helguvik project. In addition, generation of the electrical power contracted for the Helguvik smelter will require successful development of new geothermal energy sources within designated areas in Iceland. If there are construction delays or technical difficulties in developing these new geothermal fields, power may be delayed or may not be available. Development of the generation and transmission infrastructure is expensive and requires significant resources from the power and transmission providers. Factors which could delay or impede the generation and delivery of electric power are substantially beyond our ability to control, influence or predict, including the power providers’ ability to finance the development of new geothermal energy sources. In addition, we and the power providers have agreed to extend the time periods for satisfying certain of the conditions relating to the power commitment due to delays in construction of the Helguvik project and the power plants resulting from the financial crisis in 2008 and 2009. There can be no assurance that we and the power providers will continue to extend the time periods for satisfaction of these conditions. If we are unable to continue to agree with the power providers to extend the time periods for satisfaction of these conditions to coincide with the resumption of major construction activities or operation of the smelter, we may have to commit to purchase power prior to our preferred time period, risk losing the power commitments or become subject to other unforeseen risks relating thereto.
In October 2007, Nordural Helguvik ehf signed a transmission agreement with Landsnet to provide an electrical power transmission system to the Helguvik smelter. If Nordural Helguvik ehf is unable to proceed with the project, it may have to reimburse Landsnet for certain significant expenditures under the transmission agreement.
Any reduction in the duty on primary aluminum imports into the European Union decreases our revenues at Grundartangi.
Certain of Grundartangi’s tolling agreements include a premium based on the EU import duty for primary aluminum. In May 2007, the EU members reduced the import duty for primary aluminum to three percent and agreed to review the new duty after three years. This decrease in the EU import duty for primary aluminum has adversely impacted our revenues from Grundartangi, and further decreases would also have an adverse impact on our revenues.
A majority of our aluminum sales at Hawesville are subject to contracts which limit our ability to curtail capacity and create dependence on a major customer.
Our primary aluminum supply agreement with Southwire will expire in March 2011. Approximately 26% of our consolidated net sales for 2009 were derived from sales to Southwire. We may be unable to extend or replace our contract with Southwire when it terminates. Due to Southwire's proximity to Hawesville, we are able to deliver molten aluminum to Southwire, thereby eliminating our casting and reducing our sales and marketing costs. Our contract with Southwire obligates us to deliver quantities of molten aluminum, which limits our ability to cut costs by curtailing operations. Curtailing operations at this facility would not relieve us of our contractual obligations.
If we are unable to renew this contract on satisfactory terms when it expires or if Southwire significantly reduces its purchases under this contract, we would incur higher casting and shipping costs and potentially higher sales and marketing costs.
We could be required to incur substantial costs in order to curtail unprofitable aluminum production.
Curtailing unprofitable production to reduce our operating costs requires us to incur substantial expense, both at the time of the curtailment and on an ongoing basis. Our facilities are subject to contractual and other fixed costs that continue even if we curtail operations at these facilities. These costs reduce the cost saving advantages of curtailing unprofitable aluminum production. In addition, the prospect of these costs and our joint ownership of certain of our operations limit our flexibility to curtail all of our unprofitable production.
Losses caused by disruptions in the supply of power would adversely affect our operations.
We use large amounts of electricity to produce primary aluminum. Any loss of power which reduces the amperage to our equipment or causes an equipment shutdown would result in a reduction in the volume of molten aluminum produced, and sudden losses of power may result in the hardening or “freezing” of molten aluminum in the pots where it is produced. Interruptions in the supply of electrical power to our facilities can be caused by a number of circumstances, including unusually high demand, blackouts, equipment or transformer failure, human error, natural disasters or other catastrophic events. If such a condition were to occur, we may lose production for a prolonged period of time and incur significant losses. We operate our plants at close to peak amperage. Accordingly, even partial failures of transformers, such as our recent issues at Grundartangi, will affect our production. For example, we expect the repair at Grundartangi will result in a loss of production of approximately 2,600 MT. We maintain property and business interruption insurance to mitigate losses resulting from catastrophic events, but are required to pay significant amounts under the deductible provisions of those insurance policies. In addition, the coverage under those policies may not be sufficient to cover all losses, or may not cover certain events. Certain of our insurance policies do not cover any losses that may be incurred if our suppliers are unable to provide power during periods of unusually high demand. Certain losses or prolonged interruptions in our operations may trigger a default under our revolving credit facility.
Changes or disruptions to our current alumina, other raw material supply and electricity arrangements could increase our production costs even if we curtail unprofitable production capacity.
We depend on a limited number of suppliers for alumina. Disruptions to our supply of alumina could occur for a variety of reasons, including disruptions of production at a particular supplier’s alumina refinery. These disruptions may require us to purchase alumina on the spot market on less favorable terms than under our current agreements. Because we sell our products based on the LME price for primary aluminum, we will not be able to pass on these increased costs to our customers. Our business also depends upon the adequate supply of other raw materials, including aluminum fluoride, calcined petroleum coke, pitch, finished carbon anodes and cathodes, at competitive prices. Although there remain multiple sources for these raw materials worldwide, consolidation among suppliers has globally reduced the number of available suppliers in this industry. A disruption in our raw materials supply from our existing suppliers due to a labor dispute, shortage of their raw materials, curtailment of operations or other unforeseen factors may affect our operating results if we are unable to secure alternate supplies of these materials at comparable prices.
In addition, we have obligations under certain contracts to take-or-pay for specified quantities of alumina and electricity over the term of those contracts, regardless of our operating requirements. Therefore, our financial position and results of operations may be affected by the market price for electric power, even if we curtail unprofitable production capacity because we will continue to incur costs under these contracts to meet or settle our contractual obligations. If we are unable to use such raw materials in our operations or sell them at prices consistent with or greater than our contract costs, we could incur significant losses under these contracts. In addition, these commitments may also limit our ability to take advantage of favorable changes in the market prices for primary aluminum or raw materials and may have a material adverse effect our financial position, results of operations and liquidity.
Electricity represents our single largest operating cost. As a result, the availability of electricity at economic prices is critical to the profitability of our operations. Portions of the contracted cost of the electricity supplied to Mt. Holly and all of Hawesville’s electricity costs vary with the supplier’s costs. An increase in these costs would increase the price these facilities pay for electricity. Costs under the Mt. Holly electricity contract have substantially increased in recent years with rising fuel prices. As these contracts have take-or-pay type provisions, the financial position, results of operations and cash flows of Hawesville and Mt. Holly may be affected by the price for electric power even if we curtail unprofitable production capacity. Significant increases in electricity costs at any of our operations may have a material adverse effect our business, financial condition, results of operations and liquidity.
We may be required to write down the book value of certain assets.
We are required to perform various analyses related to the carrying value of various tangible and intangible assets annually or whenever events or circumstances indicate that their net carrying amount may not be recoverable. Given the recent lack of profitability of certain of our production facilities and recent global economic conditions, which in part drive assumptions for the future in such analyses, we could have significant adjustments in the carrying value for certain assets. For example, in our results for the quarter ended December 31, 2009, we determined that an impairment charge to reduce the carrying value of a portion of our long-lived assets was not currently required under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35 (formerly Statement of Financial Accounting Standards No. (“SFAS”) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”). In the future, we will continue to evaluate our tangible and intangible assets for impairments and valuation allowance, which could be significant. Any such adjustments would be in the form of a non-cash charge which would reduce our earnings and reduce our balance of retained earnings.
The cyclical nature of the aluminum industry causes variability in our earnings and cash flows.
Our operating results depend on the market for primary aluminum, which is a highly cyclical commodity with prices that are affected by global demand and supply factors and other conditions. Historically, aluminum prices have been volatile, and we expect such volatility to continue. During 2008 and 2009, we experienced unfavorable global economic conditions and a decline in worldwide demand for primary aluminum. Declines in primary aluminum prices reduce our earnings and cash flows. A further downturn in aluminum prices may significantly reduce the amount of cash available to meet our obligations and fund our long-term business strategies.
Union disputes could raise our production costs or impair our production operations.
The bargaining unit employees at Hawesville and Ravenswood are represented by the USWA. Century’s USWA labor contracts at Hawesville and Ravenswood expire in March 2010 and August 2010, respectively. Our bargaining unit employees at Grundartangi are represented by five unions under a collective bargaining agreement that expired on December 31, 2009. If we fail to maintain satisfactory relations with any labor union representing our employees, our labor contracts may not prevent a strike or work stoppage at any of these facilities in the future. Any threatened or actual work stoppage in the future or inability to renegotiate our collective bargaining agreements could prevent or significantly impair our ability to conduct production operations at our unionized facilities, which could have a material adverse effect on our financial condition, results of operations and liquidity.
Climate change, climate change legislation or regulations and greenhouse effects may adversely impact our operations.
Climate change and greenhouse gas emissions are the subject of significant attention in the countries in which we operate and a number of governments or governmental bodies in these countries have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. For example, as a member of the European Economic Area and a signatory to the Kyoto Protocol, Iceland has implemented legislation to abide by the Kyoto Protocol and prepare to abide by Directive 2003/87/EC of the European Parliament which establishes a “cap and trade” scheme for greenhouse gas emission allowance trading. Because Iceland was granted emissions allowances under the Kyoto Protocol through 2012, Iceland has not yet implemented Directive 2003/87/EC, but it is anticipated that Iceland will begin complying with the Directive in 2013. In addition, we are aware of potential U.S. legislation that if enacted, among other things, would implement a “cap and trade” system of allowances and credits in the United States.
Implementation of these potential regulatory changes or others is uncertain and may be either voluntary or legislated and may impact our operations directly or indirectly through customers or our supply chain. As a result of the foregoing, we may incur increased capital expenditures resulting from required compliance with such regulatory changes, increased energy costs, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles, a change in competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by us and indirectly, from changes in costs of goods sold. In addition, the potential physical impacts of climate change on our operations are highly uncertain and will be particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other natural resources, changing sea levels, changing storm patterns and intensities, and changing temperature levels. Any adverse regulatory and physical changes may have a material adverse effect on our business, financial condition, results of operations and liquidity.
We are subject to a variety of environmental laws and regulations that could result in costs or liabilities.
We are obligated to comply with various federal, state and other environmental laws and regulations, including the environmental laws and regulations of the United States, Iceland and the EU. Environmental laws and regulations may expose us to costs or liabilities relating to our manufacturing operations or property ownership. We incur operating costs and capital expenditures on an ongoing basis to comply with applicable environmental laws and regulations. In addition, we are currently and may in the future be responsible for the cleanup of contamination at some of our current and former facilities or for the amelioration of damage to natural resources. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, previously unknown environmental conditions or damages to natural resources are discovered or alleged, or if contributions from other responsible parties with respect to sites for which we have cleanup responsibilities are not available, we may be subject to additional liability, which may have a material adverse effect on our business, financial condition, results of operations and liquidity. Further, additional environmental matters for which we may be liable may arise in the future at our present sites where no problem is currently known, with respect to sites previously owned or operated by us, by related corporate entities or by our predecessors, or at sites that we may acquire in the future. In addition, overall production costs may become prohibitively expensive and prevent us from effectively competing in price sensitive markets if future capital expenditures and costs for environmental compliance or cleanup are significantly greater than current or projected expenditures and costs.
Acquisitions may present difficulties.
We have a history of making acquisitions and we expect to make acquisitions in the future based on several factors, including whether primary aluminum prices in the global market improve. We are subject to numerous risks as a result of our acquisition strategy, including the following:
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·
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we may spend time and money pursuing target acquisitions that do not close;
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·
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acquired companies may have contingent or unidentified liabilities;
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·
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it may be challenging for us to manage our existing business as we integrate acquired operations;
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·
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we may not achieve the anticipated benefits from our acquisitions; and
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·
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management of acquisitions will require continued development of financial controls and information systems, which may prove to be expensive, time-consuming and difficult to maintain.
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Accordingly, our past or future acquisitions might not ultimately improve our competitive position and business prospects as anticipated.
We require significant cash flow to meet our debt service requirements, which increases our vulnerability to adverse economic and industry conditions, reduces cash available for other purposes and limits our operational flexibility.
As of December 31, 2009, we had an aggregate of approximately $307 million principal amount of outstanding debt. We may incur additional debt in the future.
The level of our debt could have important consequences, including:
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·
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increasing our vulnerability to adverse economic and industry conditions;
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·
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reducing cash flow available for other purposes, including capital expenditures, acquisitions, dividends, working capital and other general corporate purposes, because a substantial portion of our cash flow from operations must be dedicated to servicing our debt; and
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·
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limiting our flexibility in planning for, or reacting to, competitive and other changes in our business and the industry in which we operate.
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We have various obligations to make payments in cash that will reduce the amount of cash available to make interest payments required on our outstanding debt and for other uses. Holders of our 1.75% Notes have the right to convert their notes at any time, which would require us to deliver cash up to the aggregate principal amount of notes to be converted. In addition, in August 2011, the holders of our 1.75% Notes have an option to require us to repurchase all or any portion of these securities at par. Our industrial revenue bonds (“IRBs”) and any future borrowings on our credit facility are at variable interest rates, and future borrowings required to fund working capital at Grundartangi or the construction of the Helguvik facility may be at variable rates. An increase in interest rates would increase our debt service obligations under these instruments, further limiting cash flow available for other uses. In addition to our debt, we have liabilities and other obligations which could reduce cash available for other purposes and could limit our operational flexibility.
Our ability to pay interest on and to repay or refinance our debt, and to satisfy other commitments, will depend upon our future operating performance, which is subject to general economic, financial, competitive, legislative, regulatory, business and other factors, including market prices for primary aluminum, that are beyond our control, as well as our access to additional sources of liquidity. Accordingly, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay debt service obligations, or to fund our other liquidity needs. If we are unable to meet our debt service obligations or fund our other liquidity needs, we could attempt to restructure or refinance our debt or seek additional equity or debt capital. There can be no assurance that we would be able to accomplish those actions on satisfactory terms or at all and if we are unable to ultimately meet our debt service obligations and fund our other liquidity needs it may have a material adverse effect on our business, financial condition, results of operations and liquidity.
Despite our substantial level of debt, we may incur more debt, which could exacerbate any or all of the risks described above.
We may incur substantial additional debt in the future. Although the loan and security agreement governing our revolving credit facility and the indenture governing the 8.0% Senior Secured Notes due 2014 (the “8.0% Notes”) limits our ability and the ability of certain of our subsidiaries to incur additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. For example, as of December 31, 2009, approximately $41 million would be available to us for borrowing under our revolving credit facility. In addition, the loan and security agreement governing our revolving credit facility and the indenture governing the 8.0% Notes do not prevent us from incurring certain obligations that do not constitute debt. To the extent that we incur additional debt or such other obligations, the risks associated with our substantial debt described above, including our possible inability to service our debt, would increase.
Our debt instruments subject us to covenants and restrictions
Our revolving credit facility and the indenture governing our 8.0% Notes each contain various covenants that restrict the way we conduct our business and limit our ability to incur debt, pay dividends and engage in transactions such as acquisitions and investments, among other things, which may impair our ability to obtain additional liquidity and grow our business. Any failure to comply with those covenants would likely constitute a breach under the revolving credit facility or the indenture governing the 8.0% Notes, which may result in the acceleration of all or a substantial portion of our outstanding indebtedness and termination of commitments under our revolving credit facility. If our indebtedness is accelerated, we may be unable to repay the required amounts and our secured lenders could foreclose on any collateral securing our secured debt.
Further consolidation within the metals industry could provide competitive advantages to our competitors.
The metals industry has experienced consolidation over the past several years and there may be more consolidation transactions in the future. Consolidation by our competitors may enhance their capacity and their access to resources, lower their cost structure and put us at a competitive disadvantage. Continued consolidation may limit our ability to implement our strategic objectives effectively. We cannot reliably predict the impact on us of further consolidation in the metals industry.
We depend upon intercompany transfers from our subsidiaries to meet our debt service obligations.
We are a holding company and conduct all of our operations through our subsidiaries. Our ability to meet our debt service obligations depends upon the receipt of intercompany transfers from our subsidiaries. Subject to the restrictions contained in our revolving credit facility and the indenture governing our 8.0% Notes, future borrowings by our subsidiaries could contain restrictions or prohibitions on intercompany transfers by those subsidiaries. In addition, under applicable law, our subsidiaries could be limited in the amounts that they are permitted to pay as dividends on their capital stock. For example, the Icelandic government and the Central Bank of Iceland are restricting the free transfer of funds outside of Iceland. In furtherance of this, on November 28, 2008, the Central Bank of Iceland adopted rules regarding the movement of foreign currency within and outside of Iceland. The rules are broad and impose many restrictions on the movement of foreign currencies outside of Iceland. In January 2009, we were notified that our Icelandic operations are exempt from these foreign currency rules. However, we cannot control further actions by the Central Bank of Iceland, which might restrict our ability to transfer funds through the Icelandic banking system and outside of Iceland.
Our ability to utilize certain net operating losses, tax credits and other tax assets to offset future taxable income may be significantly limited if we experience an “ownership change” under the Internal Revenue Code.
As of December 31, 2009, we had net operating losses, tax credits and other tax assets of approximately $1,700,000, after adjusting for losses carried back to previous tax years, which could offset future taxable income. Our ability to utilize our deferred tax assets to offset future taxable income may be significantly limited if we experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change would occur if our “five−percent shareholders,” as defined under the Code, collectively increase their ownership in us by more than 50 percentage points over a rolling three−year period.
In September 2009, we adopted a Tax Benefits Preservation Plan. The Tax Benefits Preservation Plan is subject to shareholders’ approval at our 2010 Annual Meeting. The purpose of the Plan is to minimize the likelihood of an ownership change occurring for Section 382 purposes. Despite adoption of the Tax Benefits Preservation Plan, future transactions in our stock that may not be in our control may cause us to experience an ownership change and thus limit our ability to utilize net operating losses, tax credits and other tax assets to offset future taxable income. See Note 9 Shareholders’ Equity to our Consolidated Financial Statements included herein.
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Item 1B. Unresolved Staff Comments
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We have no unresolved comments from the staff of the Securities and Exchange Commission.
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Item 2. Properties
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We own the property on which our Hawesville and Ravenswood facilities are located. The site on which the Grundartangi facility is situated is leased from Faxafloahafnir sf under a long-term lease that runs through 2020, renewable at our option. The site for our Helguvik project is leased from Reykjaneshofn, an independent public authority owned by the Municipality of Reykjanesbaer, under a long-term lease expected to run through 2060, with an automatic extension provision. Our corporate offices are subject to an operating lease that expires in June 2010. We hold a 49.7% interest in a partnership which operates the Mt. Holly facility and a 49.7% undivided interest in the property on which the Mt. Holly facility is located. The remaining interest in the undivided property at Mt. Holly is owned by Alumax of South Carolina, Inc., a subsidiary of Alcoa.
Except for our Ravenswood facility, which was fully curtailed in February 2009, and Hawesville, where one potline was curtailed in March 2009, all of our facilities are operating at or near their productive capacity. We believe all of our facilities are suitable and adequate for our current operations. Additional information about the age, location, and productive capacity of our facilities is available in the “Overview” section of Item 1, “Business.”
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Item 3. Legal Proceedings
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We have pending against us or may be subject to various lawsuits, claims and proceedings related primarily to employment, commercial, environmental, safety and health matters. Although it is not presently possible to determine the outcome of these matters, management believes the ultimate disposition will not have a material adverse effect on our financial condition, results of operations, or liquidity.
In July 2005, the Environmental Protection Agency (“EPA”) began an initiative to perform an oversight inspection of all Secondary Maximum Achievable Control Technology (“MACT”) facilities which deal with casting furnaces, including Hawesville. Partial inspections were also conducted at co-located Primary MACT facilities which deal with potlines, including Hawesville. In April 2008, the EPA sent CAKY requests under the Clean Air Act for copies of certain records dating back to 2000. In November 2009, the EPA sent CAKY a Notice of Violation (“NOV”) alleging 12 violations relating to the Clean Air Act including, among other things, violations of the MACT emissions standards and the prevention of significant deterioration program for unpermitted major modifications.
The matter is under investigation. An initial hearing with the EPA occurred in January 2010 at which CAKY agreed to provide the EPA with additional information regarding the alleged violations. CAKY provided such information in February 2010. We cannot reasonably estimate the liabilities with respect to this matter, but they are not expected to be material. We expect to resolve the matter in 2010. For descriptions of certain environmental matters involving Century, see Note 18 Contingencies and Commitments to the Consolidated Financial Statements included herein.
In March 2009, four purported stockholder class actions were filed against us in the United States District Court for the Northern District of California. The actions are entitled Petzschke v. Century Aluminum Co., et al., Abrams v. Century Aluminum Co., et al., McClellan v. Century Aluminum Co., et al., and Hilyard v. Century Aluminum Co., et al. These actions have been consolidated and a lead plaintiff has been confirmed. These cases allege that we improperly accounted for cash flows associated with the termination of certain forward financial sales contracts which accounting allegedly resulted in artificial inflation of our stock price and investor losses. These actions seek rescission of our February 2009 common stock offering, unspecified compensatory damages, including interest thereon, costs and expenses and counsel fees. Management intends to vigorously defend these actions, but at the date of this report, it is not possible to predict the ultimate outcome of these actions or to estimate a range of possible damage awards.
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Item 4. (Removed and Reserved).
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Our Executive Officers
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Executive officers are appointed by and serve at the discretion of the Board of Directors. The following table details certain information about our executive officers as of March 16, 2010.
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Name
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Age
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Position and Duration
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Logan W. Kruger
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59
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President and Chief Executive Officer since December 2005.
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Michael A. Bless
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44
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Executive Vice President and Chief Financial Officer since January 2006.
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Wayne R. Hale
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54
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Executive Vice President and Chief Operating Officer since March 2007.
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Steve Schneider
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54
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Senior Vice President, Chief Accounting Officer and Controller since June 2006, Vice President and Corporate Controller from April 2002 through May 2006.
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Michelle M. Lair
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34
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Vice President and Treasurer since February 2007, Treasurer since June 2006, Assistant Treasurer from November 2005 to June 2006, Corporate Financial Analyst from May 2000 to October 2005.
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William J. Leatherberry
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39
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Executive Vice President, General Counsel and Secretary since January 2010. Senior Vice President, General Counsel and Assistant Secretary from April 2009 to December 2009. Vice President, Assistant General Counsel and Assistant Secretary from January 2008 to March 2009. Assistant General Counsel and Assistant Secretary from July 2007 to December 2007, Corporate Counsel and Assistant Secretary from May 2007 to June 2007 and Corporate Counsel from January 2005 to April 2007.
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Jerry E. Reed
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46
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Vice President of Commercial Management and Business Development since May 2009. Vice President of Business Development from June 2007 to April 2009.
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Prior to joining Century, Mr. Kruger served as President, Asia/Pacific for Inco Limited, from September 2005 to November 2005; and Executive Vice President, Technical Services from September 2003 to September 2005.
Prior to joining Century, Mr. Bless served as managing director of M. Safra & Co., Inc., from February 2005 to January 2006 and Executive Vice President and Chief Financial Officer of Maxtor Corporation from August 2004 to October 2004.
Prior to joining Century, Mr. Hale served as Senior Vice President of Sual-Holding from April 2004 to February 2007.
Prior to joining Century, Mr. Reed served as Strategic Marketing Director for Alcoa Primary Products from July 2004 to May 2007, and various senior management positions for Alcoa, including Commercial Manager for Alcoa Australia and Alumina Market Manager for Alcoa World Alumina from 2001 through 2004.
Prior to joining Century, Mr. Leatherberry served as Senior Transactions Counsel of VarTec Telecom Inc. from September 2003 to January 2005.
Ms. Lair and Mr. Schneider joined Century in 2000 and 2001, respectively. Their respective biographical information is set forth in the table above.
PART II
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Market Information
Our common stock trades on the NASDAQ Global Market under the symbol: CENX. The following table sets forth, on a quarterly basis, the high and low sales prices of the common stock during the two most recent fiscal years. Our common stock reached a record intra-day high of $80.52 on May 19, 2008 and reached a record intra-day low of $1.04 on March 9, 2009.
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Year
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2009
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2008
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High sales price
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Low sales price
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High sales price
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Low sales price
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First quarter
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$ | 12.80 | $ | 1.04 | $ | 70.89 | $ | 38.92 | ||||||||
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Second quarter
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$ | 8.39 | $ | 1.90 | $ | 80.52 | $ | 63.40 | ||||||||
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Third quarter
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$ | 12.18 | $ | 4.70 | $ | 66.66 | $ | 25.09 | ||||||||
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Fourth quarter
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$ | 16.90 | $ | 8.00 | $ | 27.38 | $ | 4.35 | ||||||||
Holders
As of February 28, 2010, there were 17 holders of record of our common stock, which does not include the much larger number of beneficial owners whose common stock was held in street name or through fiduciaries.
Dividend Information
We did not declare dividends in 2009 or 2008 on our common stock. We do not currently anticipate paying cash dividends in the foreseeable future.
Our revolving credit facility and the indenture governing the 8.0% Notes contain restrictions which limit our ability to pay dividends. Additional information about the terms of our long-term borrowing agreements is available at Note 8 Debt to the consolidated financial statements included herein.
Recent Sales of Unregistered Securities
Equity for debt exchanges
In September, October and November 2009, we issued a total of 11,365,693 shares of our common stock in exchange for $127,933,000 principal amount of our 1.75% Notes. Additional information about the terms of our equity for debt exchange is available at Note 8 Debt to the consolidated financial statements included herein. The issuance of common stock in connection with the 1.75% Note Exchange Offers was made by us pursuant to an exemption from the registration requirements of the Securities Act contained in Section 3(a)(9) of the Securities Act.
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Item 6. Selected Financial Data
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The following table presents selected consolidated financial data for each of the last five fiscal years. The selected consolidated historical balance sheet data as of each of the years ended December 31, 2009 and 2008 and the selected consolidated statement of operations data for each of the years ended December 31, 2009, 2008 and 2007 is derived from our consolidated financial statements audited by Deloitte & Touche LLP included herein. The selected consolidated historical balance sheet data as of each of the years ended December 31, 2007, 2006 and 2005 and the selected consolidated statement of operations data for each of the years ended December 31, 2006 and 2005 is derived from our consolidated financial statements audited by Deloitte & Touche LLP which are not included herein.
Our selected historical results of operations include:
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the curtailment of operations of our 170,000 mtpy Ravenswood smelter which became fully curtailed in the first quarter of 2009;
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the curtailment of one potline at our 244,000 mtpy Hawesville smelter in the first quarter of 2009;
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our equity in the earnings and related losses on disposition of our 50% joint venture investments in Gramercy Alumina LLC and St. Ann Bauxite Ltd. prior to divesting our interest in those companies in August 2009;
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the results of operations from our 130,000 mtpy expansion of Grundartangi which became operational in the fourth quarter of 2006;
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the results of operations from our 40,000 mtpy expansion of Grundartangi which became operational in the fourth quarter of 2007; and,
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our equity in the earnings of our 40% joint venture investments in Baise Haohai Carbon Co. since we acquired an interest in that company in April 2008.
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Our results for these periods and prior periods are not fully comparable to our results of operations for fiscal year 2009 and may not be indicative of our future financial position or results of operations. The information set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” and notes thereto.
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Year Ended December 31,
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2009 (1)
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2008 (2)
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2007 (3)
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2006 (4)
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2005 (5)
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Net sales
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$ | 899,253 | $ | 1,970,776 | $ | 1,798,163 | $ | 1,558,566 | $ | 1,132,362 | ||||||||||
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Gross profit (loss)
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(65,665 | ) | 311,624 | 363,463 | 348,522 | 161,677 | ||||||||||||||
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Operating income (loss)
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(97,456 | ) | 168,557 | 303,543 | 309,159 | 126,904 | ||||||||||||||
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Net loss
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(205,982 | ) | (895,187 | ) | (105,586 | ) | (44,976 | ) | (119,990 | ) | ||||||||||
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Loss per share:
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Basic and diluted
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$ | (2.73 | ) | $ | (20.00 | ) | $ | (2.84 | ) | $ | (1.39 | ) | $ | (3.73 | ) | |||||
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Dividends per common share
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$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
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Total assets
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1,861,750 | 2,035,358 | 2,566,809 | 2,171,038 | 1,660,671 | |||||||||||||||
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Total debt (6)
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298,678 | 435,515 | 402,923 | 735,288 | 628,353 | |||||||||||||||
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Long-term debt obligations (7)
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247,624 | 275,000 | 250,000 | 559,331 | 488,505 | |||||||||||||||
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Year Ended December 31,
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2009 (1)
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2008 (2)
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2007 (3)
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2006 (4)
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2005 (5)
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Other information:
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Shipments – Primary aluminum:
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Direct shipment pounds (000)
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726,040 | 1,173,563 | 1,171,889 | 1,152,617 | 1,153,731 | |||||||||||||||
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Toll shipment pounds (000)
|
608,031 | 598,446 | 518,945 | 346,390 | 203,967 | |||||||||||||||
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Average realized price per pound:
|
||||||||||||||||||||
|
Direct shipments
|
$ | 0.78 | $ | 1.23 | $ | 1.13 | $ | 1.09 | $ | 0.86 | ||||||||||
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Toll shipments
|
$ | 0.54 | $ | 0.89 | $ | 0.91 | $ | 0.88 | $ | 0.67 | ||||||||||
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Average LME price per pound
|
$ | 0.755 | $ | 1.167 | $ | 1.197 | $ | 1.166 | $ | 0.861 | ||||||||||
|
Average Midwest premium per pound
|
$ | 0.047 | $ | 0.042 | $ | 0.031 | $ | 0.055 | $ | 0.056 | ||||||||||
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(1)
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Net loss includes an after-tax charge of $73.2 million for loss on disposition of our equity investments in Gramercy and St. Ann, an after-tax charge of $41.7 million of curtailment costs for our U.S. smelters, an after-tax benefit of $57.8 million for gains related to the termination of a power contract and a replacement power contract at Hawesville and a benefit of $14.3 million for discrete tax adjustments.
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|
(2)
|
Net loss includes an after-tax charge of $742.1 million (net of gain on settlement) for mark-to-market losses on forward contracts that do not qualify for cash flow hedge accounting, a $515.1 million tax adjustment to establish reserves on deferred tax assets, a $94.9 million charge for goodwill impairment and an inventory write down to market value of $55.9 million.
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|
(3)
|
Net loss includes an after-tax charge of $328.3 million for mark-to-market losses on forward contracts that do not qualify for cash flow hedge accounting.
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|
(4)
|
Net loss includes an after-tax charge of $241.7 million for mark-to-market losses on forward contracts that do not qualify for cash flow hedge accounting and by a gain on the sale of surplus land.
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|
(5)
|
Net loss includes an after-tax charge of $198.2 million for mark-to-market losses on forward contracts that do not qualify for cash flow hedge accounting.
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(6)
|
Total debt includes all long-term debt obligations and any debt classified as short-term obligations, net of any debt discounts, including current portion of long-term debt, the IRBs and the 1.75% Notes.
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(7)
|
Long-term debt obligations are all payment obligations under long-term borrowing arrangements, excluding the current portion of long-term debt and net of any debt discounts.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Overview
|
We produce primary aluminum. The aluminum industry is cyclical and the price of primary aluminum (which trades as a commodity) is determined by global supply and demand. The key determinants of our results of operations and cash flow from operations are as follows:
|
|
·
|
Our selling price is based on the LME price of primary aluminum and is influenced by regional premiums and at certain times by fixed price sales contracts.
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|
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·
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In normal circumstances, our facilities operate at or near capacity, and fluctuations in volume, other than through curtailments, acquisitions or expansion, generally are small.
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·
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The principal components of cost of goods sold are alumina, electrical power, labor and carbon products, which in aggregate were in excess of 75% of the 2009 cost of goods sold. Many of these costs are governed by long-term contracts.
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Shipment volumes, average realized price and cost of goods sold per metric ton shipped are our key performance indicators. Revenue can vary significantly from period to period due to fluctuations in the LME and Midwest price of primary aluminum. Any adverse changes in the conditions that affect shipment volumes or the market price of primary aluminum could have a material adverse effect on our results of operations and cash flows. Fluctuations in working capital are influenced by shipments, the LME and Midwest price of primary aluminum and by the timing of cash receipts from major customers and disbursements to our suppliers.
Our operating results vary significantly with changes in the price of primary aluminum and the raw materials used in its production, including electrical power, alumina, aluminum fluoride, calcined petroleum coke, pitch, finished carbon anodes and cathodes. Because we sell our products based on the LME price for primary aluminum, we cannot pass on increased costs to our customers. Although we attempt to mitigate the effects of price fluctuations through the use of various fixed-price commitments, financial instruments and by pricing some of our raw materials and energy contracts based on LME prices, these efforts also limit our ability to take advantage of favorable changes in the market prices for primary aluminum or raw materials and may affect our financial position, results of operations and cash flows if we curtail unprofitable production capacity.
Electricity represents our single largest operating cost. As a result, the availability of electricity at competitive prices is critical to the profitability of our operations. Portions of the contracted cost of the electricity supplied to Mt. Holly and all of Hawesville’s electricity costs vary with the supplier’s costs. An increase in these costs would increase the price these facilities pay for electricity. Costs under the Mt. Holly electricity contract have substantially increased in recent years, partially caused by rising fuel prices. As these contracts have take-or-pay type provisions, the financial position, results of operations and cash flows of Hawesville and Mt. Holly may be affected by the price for electric power even if we curtail unprofitable production capacity.
The crisis in financial and credit markets in 2008 and 2009 led to a pronounced downturn in global economic activity. The global market for commodities has deteriorated in line with the decline in the global economy. Declining demand for aluminum products in developed and developing nations, increasing stocks on the LME and a general lack of confidence in future economic conditions combined in 2009 to produce an unprecedented decline in the LME price for aluminum. The average LME price for primary aluminum fell 62% from its high on July 11, 2008 ($3,292 per metric ton), to a low of $1,254 per metric ton on February 24, 2009, before rising to $2,216 per metric ton on March 12, 2010. The movement in 2008 and 2009 represents one of the most substantial and rapid declines in the history of recorded LME prices. The decline in aluminum prices in 2008 and 2009 has adversely impacted our operations, particularly in our U.S. facilities, since our operating costs did not fall to the degree that aluminum prices dropped.
Operational Restructuring
In response to the conditions in our industry, we have taken steps and are evaluating taking further steps to reduce our costs to withstand weak LME prices and improve our financial condition and liquidity in the future. We summarize these steps below and refer to them as the “operational restructuring.”
Reduce Capacity
Production capacity and operations have been curtailed at two facilities that have been unprofitable given recent aluminum prices.
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·
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Ravenswood. Between December 2008 and February 2009, our subsidiary, Century Aluminum of West Virginia, Inc. (“CAWV”) curtailed the entire operations of Ravenswood, representing 170,000 mtpy of production capacity, due to the plant’s high operating costs. As of December 31, 2009, CAWV had incurred cash costs related to the curtailed Ravenswood facility of approximately $47 million. Such costs relate to (a) contractual payments due to employees and other costs directly related to the curtailment; (b) ongoing costs such as insurance for and maintenance of the facility; and (c) losses from the satisfaction or termination of commercial contracts. As of December 31, 2009, CAWV’s forecast for the aggregate amount of such costs remaining for the 24-month period following curtailment is approximately $23 million. CAWV intends to continue discussions with the USWA to reduce the labor expenses associated with the curtailment.
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|
·
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Hawesville. In March 2009, our subsidiary CAKY curtailed one of the five potlines at Hawesville, reducing the production rate from approximately 244,000 mtpy to 195,000 mtpy. In connection with this action, CAKY laid off approximately 120 out of a total of approximately 755 employees. Hawesville is currently operating at approximately 80% of its capacity, and CAKY is continuing to evaluate its operating level in light of recent economic conditions. We recently purchased aluminum put options and entered into collar contracts (combination of a put and a call option) for approximately 60% of Hawesville’s current production level through 2010 with a strike price around the facility’s cash break-even price. These options were purchased to partially mitigate the risk of a future decline in aluminum prices, and we may consider purchasing additional put options or other hedging vehicles in the future.
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·
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Gramercy and St. Ann. In September 2009, we completed the disposition of our 50% ownership position in Gramercy and St. Ann to Noranda. After the disposition Noranda assumed 100% ownership of Gramercy and St. Ann. In connection with this transaction, we made a $5 million cash payment during the third quarter of 2009 and an additional $5 million cash payment in the fourth quarter of 2009 to settle amounts owed to Gramercy and recorded a loss on disposition of our equity investment of approximately $73 million. We entered into an agreement with Noranda under which we will purchase alumina from Gramercy for a limited period of time for our aluminum smelter in Hawesville, Kentucky.
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·
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Helguvik. We are currently evaluating the Helguvik project’s cost, scope and schedule. During this evaluation, we have significantly reduced spending on the project. We cannot be certain when or if we will restart major construction and engineering activities or ultimately complete the Helguvik project. We are evaluating a variety of potential financing alternatives which could be employed to fund the first phase (90,000 mtpy) of construction, including project financing alternatives.
|
We continue to monitor global economic conditions, commodity prices and our operations. Subject to these factors, we will evaluate further options to reduce domestic capacity, including a partial or complete curtailment and/or a permanent exit of all of our domestic operations.
Renegotiate Long-Term Commercial Contracts
We have renegotiated and amended certain long-term supply and customer contracts that have been unprofitable and are evaluating others on an ongoing basis.
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·
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Alumina Contract Amendments. Following CAWV’s curtailment of Ravenswood, we had agreements to purchase quantities of alumina in excess of our requirements. To address this situation, in April 2009, we amended two alumina purchase agreements with Glencore. These amendments reduced the amount of alumina Glencore supplied to us from 330,000 to 110,368 metric tons in 2009 and will reduce the amount of alumina Glencore supplies to us from 290,000 to 229,632 metric tons in 2010.
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|
·
|
Big Rivers Agreement. To secure a new, long-term power contract for the Hawesville facility, on July 16, 2009, CAKY, along with E.ON and Big Rivers, agreed to an “unwind” of the former contractual arrangement between Big Rivers and E.ON and entered into the Big Rivers Agreement to provide long-term cost-based power to CAKY. The term of the Big Rivers Agreement runs through 2023 and provides adequate power for Hawesville’s full production capacity requirements (approximately 482 MW) with pricing based on the provider’s cost of production. See “- Long-term power contract for Hawesville signed.”
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|
·
|
Other Contracts. We continue to review all of our outstanding commercial contracts with the objective of seeking improved commercial terms. In furtherance of this objective, we have approached various counterparties on our significant contracts to determine what, if any, modifications might be appropriate to provide us with additional flexibility given the current market for our products. We cannot predict whether these discussions will lead to favorable changes, as any changes would require the consent of the counterparty.
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Reduce Other Operating Costs
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·
|
We have made progress over the past year toward reducing operating costs at our production facilities. At Hawesville, during the peak declines in the LME, CAKY delayed the reconstruction of reduction cells, deferred non-essential maintenance activities and reduced or delayed major non-safety related maintenance items. In addition to these cost savings, the reduction in production during these price declines reduced operating losses. In addition to cost deferrals, we have received improved pricing terms for anode production materials. Our subsidiary Berkeley is not the operating partner for the Mt. Holly facility; however, we are analyzing the cost structure at Mt. Holly to ensure that appropriate measures are taken to continue to optimize performance and reduce costs. Berkeley is in discussions with the operating partner relating to such cost improvement measures and other alternatives. Finally, through continued focus on operational controls, we have improved operational efficiencies, controlled consumption of supplies and raw materials and reduced utilization of overtime. Recently, we also have taken steps to address our other post-employment benefits, specifically medical benefits, through adjustments in plan designs and benefits delivered. We continue to evaluate additional potential operation cost improvements, although we believe we have captured the majority of these opportunities.
|
Potential Asset Sales
We will continue to evaluate the potential divestiture of all or a portion of our owned and jointly-owned domestic assets. Any decision to divest any of these assets would be based on a range of factors, including the terms of any such divestiture, the terms of certain indentures governing our debt, its operational impact to our business, including how the assets fit into our long-range strategy, and the objectives of the Operational Restructuring.
Recent Developments
Additional 7.5% Notes Exchanges in January and March 2010
We completed debt for debt exchanges in January and March 2010. Investors received $950 worth of 8.0% Notes for every $1,000 principal amount tendered of our 7.5% senior notes due 2014 (the “7.5% Notes”) . In addition, these investors received the accrued interest for their 7.5% Notes, net of interest that has accrued on the 8.0% notes since the original issuance date. Through March 15, 2010, $4.3 million of 7.5% Notes were exchanged for $4.1 million of 8.0% Notes. As of March 16, 2010, we had $2.6 million and $249.6 million of aggregate principal amount outstanding of the 7.5% Notes and 8.0% Notes, respectively.
LME approves Century as a high grade primary aluminum brand
In February 2010, the LME approved the listing of Century as a high grade primary aluminum brand. This allows our Hawesville smelter and its customers to sell primary aluminum to any LME warehouse at any time and receive the LME cash price for the Century metal. We expect this approval to provide our Hawesville smelter ready access to a terminal market and reduce liquidity risk in slow or declining market conditions.
Helguvik Transmission Lines
The Ministry for the Environment has confirmed the opinion of the National Planning Agency that a joint EIA for power transmission lines and certain projects relating to the Helguvik project is not necessary.
Exchange Offer and Consent Solicitation Related to the 7.5% senior notes due 2014 and Consent Solicitation for the 1.75% senior convertible notes due 2024
In the fourth quarter of 2009, we completed (a) an exchange offer and consent solicitation relating to our 7.5% Notes and (b) a consent solicitation relating to our 1.75% Notes. See Note 8 Debt in the consolidated financial statements included herein for additional information.
Convertible debt for equity exchange transactions
In a series of transactions in September, October and November 2009, we issued a total of 11,365,693 shares of our common stock in exchange for $127.9 million principal amount of our 1.75% Notes. Upon completion of the convertible debt-for-equity exchanges, approximately $47.1 million principal amount of our 1.75% Notes outstanding remained. Holders of the outstanding 1.75% Notes may require us to purchase for cash all or part of the 1.75% Notes then outstanding at par on August 1, 2011.
Ravenswood Retiree Medical Benefits changes
CAWV amended its post retirement medical benefit plan January 1, 2010 for all current and former salaried employees, their dependents and all bargaining unit employees who retired before June 1, 2006, and their dependents.
The principal change to the plan is that, upon attainment of age 65, all CAWV provided retiree medical benefits will cease for retirees and dependents. In addition, pre-65 bargaining unit retirees and pre-65 dependents will now be covered by the salary retiree medical plan which requires out-of pocket payments for premiums, co-pays and deductibles by participants.
We recorded the impact of these changes for our current and former salaried retirees and their dependents in the fourth quarter of 2009. We have not recognized the impact of these changes for our bargaining unit retirees and their dependents, subject to pending litigation. If we had recognized these changes, our net periodic benefit cost in 2009 would be $0.8 million lower and the amounts recognized in accumulated other comprehensive income as of December 31, 2009 would decrease by $38.5 million. See Note 14 Pension and other postemployment benefits in the Consolidated Financial Statements included herein for additional information on this matter.
There were no changes to the retiree medical benefits for salaried retirees or retirees who retired as a bargaining unit employee from our Hawesville facility.
Disposition of Gramercy and St. Ann Bauxite joint ventures
In September 2009, we completed the disposition of our 50% ownership positions in Gramercy and St. Ann to Noranda. At closing, we divested our entire interest in these businesses and Noranda assumed 100% ownership of Gramercy and St. Ann. In connection with this transaction, we made a $5 million cash payment during the third quarter of 2009 and an additional $5 million cash payment in the fourth quarter of 2009 to settle amounts owed to Gramercy.
Loss on disposition of our equity investments
In August 2009, upon signing an agreement to transfer our equity investment in Gramercy and St. Ann to Noranda, we undertook an evaluation to determine the impact of the transaction, if any, on the carrying amount of the equity investments in the joint venture assets. We concluded that the terms of the asset transfer agreement provided an indication that the carrying amount of the equity investments in the joint ventures exceeded the recoverable value of these assets. As a result, we recorded an approximate $73.2 million loss. The approximate $73.2 million loss consisted of the following amounts:
|
Loss related to disposition of equity investments
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||||
|
(in thousands)
|
||||
|
Equity investments in Gramercy and St. Ann, equity in the earnings of Gramercy and St. Ann and intercompany profit elimination, net of amounts owed to Gramercy and St. Ann
|
$ | (74,783 | ) | |
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Pension and OPEB obligations for Gramercy and St. Ann
|
1,549 | |||
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Total
|
$ | (73,234 | ) | |
The loss was recorded on the consolidated statements of operations in equity in earnings (losses) of joint ventures. On the consolidated balance sheets, the adjustment of the equity investments carrying amount was recorded in other assets. The pension and OPEB obligations of the equity investments were recorded in other comprehensive income. Amounts due to Gramercy under our previous alumina contract were recorded under due to affiliates through September 1, 2009; amounts due under the new alumina contract are now recorded in accounts payable.
Long-term power contract for Hawesville signed
To secure a new, long-term power contract for the Hawesville facility, on July 16, 2009, CAKY, along with E.ON and Big Rivers, agreed to an “unwind” of the former contractual arrangement between Big Rivers and E.ON and entered into a new arrangement (“Big Rivers Agreement”) to provide long-term cost-based power to CAKY. The term of the Big Rivers Agreement is through 2023 and provides power for Hawesville’s full production capacity requirements (approximately 482 MW) with pricing based on the provider’s cost of production. The Big Rivers Agreement is take-or-pay for Hawesville’s energy requirements at full production. Under the terms of the agreement, any power not required by Hawesville will be available for sale and we will receive credits for actual power sales up to our cost for that power. The current market price of electrical power in this region is less than Big Rivers’ forecasted cost. See Note 3 Long-term power contract for Hawesville in Consolidated Financial Statements included herein for additional information about these agreements.
Helguvik Investment Agreement
An Enabling Act for an Investment Agreement with the Government of Iceland for Helguvik, which governs certain meaningful aspects of the construction of a primary aluminum facility in Helguvik, Iceland such as the fiscal regime, was approved in April 2009 by the Icelandic Parliament. In July 2009, the Investment Agreement was approved by the European Surveillance Authority and in August 2009 the agreement was signed by Nordural Helguvik ehf and the Icelandic Minister of Industry. Among other things, the Investment Agreement includes a commitment by the Government of Iceland to assist us in obtaining necessary regulatory approvals for completion of the Helguvik project.
Recent Changes in Icelandic Tax Law
In the fourth quarter of 2009, we, along with several other industrial companies operating in Iceland, reached agreement with the Icelandic Ministers of Finance and Industry to make advance payments in respect of our 2010, 2011 and 2012 tax years of certain prospective corporate and other taxes that would have otherwise been due in tax years 2013 through 2018. In addition, Iceland has also implemented an additional temporary tax on electricity usage applicable to our 2010, 2011 and 2012 tax years. This agreement and the additional taxes on electricity are expected to significantly increase our Icelandic tax liabilities in our 2010, 2011 and 2012 tax years.
Alcan Metal Agreement terminated
In April 2009, Alcan and CAWV agreed to terminate all remaining obligations under the Alcan Metal Agreement. CAWV paid Alcan $0.6 million to settle the remaining delivery obligations.
IRS Tax Refunds received
In the first quarter of 2009, we received a federal income tax refund of $79.7 million related to a carryback of a portion of the December 31, 2008 taxable loss to tax years ended December 31, 2006 and December 31, 2007. Additionally, we received a $10.1 million federal income tax refund related to overpayments of December 31, 2008 estimated tax payments.
Curtailment of Operations at Ravenswood and Hawesville
In February 2009, Century Aluminum of West Virginia announced the curtailment of the remaining plant operations at Ravenswood. Layoffs for the majority of Ravenswood's employees were completed by the end of February 2009. The decision to curtail operations was due to the relatively high operating cost at Ravenswood and the depressed global price for primary aluminum.
In March 2009, our subsidiary, CAKY announced the orderly curtailment of one potline at Hawesville. Hawesville has production capacity of approximately 244,000 mtpy of primary aluminum from five potlines. The potline curtailment was completed in March 2009. The action reduced primary aluminum production by approximately 49,000 metric tons per year and impacted approximately 120 employees. The action was taken to reduce the continuing cash losses as a result of the depressed global price for primary aluminum.
Credit Rating Downgrade
In April 2009, Moody’s further downgraded our credit rating to “Caa3” from “B2.” The downgrade reflects Moody’s concerns regarding the level of cash consumption, and the potential for liquidity challenges absent a significant recovery in the aluminum markets. Moody’s has stated the Caa3 corporate family rating anticipates that operating cash flow generated from Grundartangi is unlikely to be sufficient to support ongoing operations across Century on a sustained basis. According to Moody’s, obligations rated “Caa3” are judged to be of poor standing and are subject to very high credit risk, and have “extremely poor credit quality.”
Equity Offering
In February 2009, we completed a public offering of 24,500,000 shares of common stock at a price of $4.50 per share, raising approximately $110.2 million before offering costs. The offering costs were approximately $6.2 million, representing underwriting discounts and commissions and offering expenses.
Alumina and bauxite contract amendments
In April 2009, we agreed with Glencore to amend two alumina purchase agreements (collectively, the “Amendments”).
The Amendments reduce the amount of alumina Glencore will supply to Century from 330,000 metric tons to 110,368 metric tons in 2009 and from 290,000 metric tons to 229,632 metric tons in 2010, for an overall alumina supply reduction of 280,000 metric tons.
In conjunction with these alumina supply reductions, St. Ann agreed to reduce the amount of bauxite it will supply to Glencore in 2009 by 775,000 dry metric tons, with 650,000 dry metric tons being cancelled and 125,000 dry metric tons being deferred to 2010. As part of this transaction, we agreed to pay St. Ann $6.0 million in compensation for the reduced bauxite sales.
Impact of the adoption of ASC 470-20 (formerly FASB Staff Position (“FSP”) APB 14-1)
We adopted ASC 470-20 (formerly FSP APB 14-1“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”) effective January 1, 2009 and retrospectively applied the changes under this new accounting principle to our financial statements. Retrospective application to all periods presented is required. Accordingly, we have adjusted our previously issued financial statements to reflect the changes that resulted from the adoption of the guidance to give effect to ASC 470-20, as applicable.
Extension of labor contract at Ravenswood
We reached an agreement with the USWA to extend the labor contract at Ravenswood to August 31, 2010.
APCo Rate filing
APCo supplies all of Ravenswood’s power requirements under an agreement at prices set forth in published tariffs, which are subject to change. Under the special rate contract, Ravenswood may be excused from or may defer the payment of the increase in the tariff rate if aluminum prices as quoted on the LME fall below pre-determined levels. In March 2009, APCo filed a request for a rate increase to recover unrecovered fuel costs and to cover the increased cost of fuel and purchased power as well as capital improvements. In September 2009, the PSC agreed to extend the special rate contract terms of the existing agreement for one year and attributed approximately $16 million of the unrecovered fuel costs to Ravenswood. This amount will be factored into the special rate provision which excuses or defers payments above set tariff rates depending on aluminum prices. We are reviewing options to further extend the term of the existing agreement that establishes the LME-based cap on the tariff rates.
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Results of Operations
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The following discussion reflects our historical results of operations, which do not include results from:
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|
·
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the 40,000 mtpy expansion of Grundartangi until it was completed in the fourth quarter of 2007;
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·
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the curtailment of operations of one potline at Ravenswood until it was completed in December 2008;
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·
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the curtailments of operations of Ravenswood’s remaining three potlines and one potline at Hawesville until they were completed in February 2009 and March 2009, respectively;
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·
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the transfer of our 50% ownership positions in Gramercy and St. Ann to Noranda on September 1, 2009; and,
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·
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our equity in the earnings of our 40% joint venture investments in Baise Haohai Carbon Co. until we acquired an interest in April 2008.
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Accordingly, the results for fiscal years 2008 and 2007 are not fully comparable to the results of operations for fiscal year 2009. Our historical results are not indicative of our current business. You should read the following discussion in conjunction with our Consolidated Financial Statements included herein.
The following table sets forth, for the years indicated, the percentage relationship to net sales of certain items included in our Statements of Operations.
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Percentage of Net Sales
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||||||||||||
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2009
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2008
|
2007
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||||||||||
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Net sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Cost of goods sold
|
(107.3 | ) | (84.2 | ) | (79.8 | ) | ||||||
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Gross profit (loss)
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(7.3 | ) | 15.8 | 20.2 | ||||||||
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Other operating income - net
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1.8 | — | — | |||||||||
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Selling, general and administrative expenses
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(5.3 | ) | (2.4 | ) | (3.3 | ) | ||||||
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Goodwill impairment
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— | (4.8 | ) | — | ||||||||
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Operating income (loss)
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(10.8 | ) | 8.6 | 16.9 | ||||||||
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Interest expense
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(3.4 | ) | (1.6 | ) | (2.2 | ) | ||||||
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Interest income (expense) – related parties
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0.1 | (0.1 | ) | — | ||||||||
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Interest income
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0.2 | 0.4 | 0.6 | |||||||||
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Loss on early extinguishment of debt
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(0.3 | ) | — | (0.2 | ) | |||||||
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Other expense
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(0.2 | ) | (0.1 | ) | — | |||||||
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Net loss on forward contract
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(2.2 | ) | (37.8 | ) | (28.3 | ) | ||||||
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Loss before income taxes and equity in earnings (losses) of joint ventures
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(16.7 | ) | (30.6 | ) | (13.2 | ) | ||||||
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Income tax (expense) benefit
|
1.4 | (15.7 | ) | 6.5 | ||||||||
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Loss before equity in earnings (losses) of joint ventures
|
(15.3 | ) | (46.3 | ) | (6.7 | ) | ||||||
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Equity in earnings (losses) of joint ventures
|
(7.6 | ) | 0.9 | 0.9 | ||||||||
|
Net loss
|
(22.9 | )% | (45.4 | )% | (5.8 | )% | ||||||
The following table sets forth, for the periods indicated, the shipment volumes and the average sales price per pound shipped:
|
Primary Aluminum shipments
|
||||||||||||
|
Direct (1)
|
||||||||||||
|
Metric tons
|
Pounds (000)
|
$/pound
|
||||||||||
|
2009
|
329,327 | 726,040 | $ | 0.78 | ||||||||
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2008
|
532,320 | 1,173,563 | $ | 1.23 | ||||||||
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2007
|
531,561 | 1,171,889 | $ | 1.13 | ||||||||
|
Toll (2)
|
||||||||||||
|
Metric tons
|
Pounds (000)
|
$/pound
|
||||||||||
|
2009
|
275,799 | 608,031 | $ | 0.54 | ||||||||
|
2008
|
271,451 | 598,446 | $ | 0.89 | ||||||||
|
2007
|
235,390 | 518,945 | $ | 0.91 | ||||||||
|
(1)
|
Direct shipments do not include toll shipments from Grundartangi.
|
|
(2)
|
Annual capacity of 260,000 mtpy was reached in the fourth quarter of 2007.
|
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net sales: Net sales for the year ended December 31, 2009 declined $1,071.5 million to $899.3 million. Lower price realizations for primary aluminum in the year ended December 31, 2009, contributed $535.8 million to the sales decline. The monthly average LME cash price for 2009 was down 35% from the monthly average LME cash price in 2008. Lower net sales volume contributed $535.7 million to the sales decline. Direct shipments declined 447.5 million pounds from the same period in 2008 due to capacity curtailments in the U.S. Toll shipments increased 9.6 million pounds from the same period in 2008 due to production efficiencies at the Grundartangi facility.
Gross profit (loss): During 2009, lower price realizations, net of LME based alumina cost and LME-based power cost decreases, reduced gross profit by $445.9 million. Lower shipment volume, due to capacity curtailments, resulted in a $64.9 million decrease in gross profit. Offsetting these declines were $44.0 million in net cost decreases comprised of: reduced costs for maintenance, supplies and materials, $13.0 million; reduced costs for our non-LME-based alumina, $23.9 million; reduced net amortization and depreciation charges, primarily at Hawesville, $11.9 million; other cost reductions, $13.0 million; and increased power cost at our U.S. smelters, $17.8 million.
Due to the turnover of inventory during 2009 and increased market prices as of December 31, 2009, the previously recognized lower of cost or market inventory reserve was adjusted to reflect the lower of cost or market value of our December 31, 2009 ending inventory. These adjustments favorably impacted cost of goods sold by $33.6 million during 2009 and represent an $89.5 million swing in 2009 from the $55.9 million charge required in 2008 to report our inventories on a lower of cost or market basis.
Other operating income – net: During 2009, the expenses associated with the idled potlines at our Ravenswood and Hawesville facilities were $41.7 million. This amount includes expenses incurred to curtail operations and to maintain the Ravenswood facility in an idled state. See Note 4 Curtailment of Operations – Ravenswood and Hawesville in Consolidated Financial Statements included herein.
During 2009, we recorded a gain of $81.6 million related to our agreement with E.ON that was consummated concurrently with the new long term power contract for Hawesville. In addition, we wrote off the remaining carrying value of the intangible asset associated with the previous power contract that was terminated July 16, 2009. The amount of the write-off was $23.8 million. See Note 3 Long-term power contract for Hawesville in the Consolidated Financial Statements included herein for additional information about this contract.
Interest income – third party: Interest income for the year ended December 31, 2009 decreased by $6.2 million as a result of lower average cash and short-term investment balances and lower interest rates during 2009.
Net loss on forward contracts: For the year ended December 31, 2009, the net loss on forward contracts was $19.4 million compared to a net loss on forward contracts of $744.4 million for 2008. Over half of the net loss reported for the year ended December 31, 2009 relates to the mark-to-market of options that were put in place to provide some downside price protection for our Hawesville facility. The remainder of the loss relates to the discontinuation of cash flow hedge accounting treatment for our natural gas financial forward contracts associated with our investment in Gramercy, recognition of previously settled ISK hedges associated with the Helguvik project and losses on derivatives associated with the Hawesville and Ravenswood power contracts.
The loss reported for the year ended December 31, 2008 was primarily the result of mark-to-market losses associated with our long term financial sales contracts with Glencore that did not qualify for cash flow hedge accounting. In July 2008, we terminated these contracts, recording a net gain of $162.0 million ($172.4 million, net of $10.4 million in transaction costs).
In 2008, cash settlement of the financial sales contracts that did not qualify for cash flow hedge treatment accounted for $115.0 million of the net loss. In addition, we recorded a net loss on forward contracts of $15.8 million on the ineffective portion of our ISK cash flow hedges and a net gain on forward contracts of $2.2 million related to the LME component of our power contract at the Ravenswood facility. The remaining $778.6 million in net loss were unrealized losses as of the date our outstanding financial sales contracts that did not qualify for cash flow hedge accounting were terminated. These amounts were offset by a $0.8 million gain in 2008 for non-cash settlements of physical delivery sales contracts that are accounted for as derivatives and marked-to-market.
Tax provision: The changes in income tax (expense) benefit in 2009 from 2008 are primarily the result of benefits from the release of ASC 740-10-30 income tax reserves for uncertain tax positions due to statute of limitations expiration and additional NOLs carry back claims due to recently enacted U.S. tax law offset by increased Iceland tax rates.
Equity in earnings (losses) of joint ventures: In August 2009, we signed an agreement to transfer our ownership interests in Gramercy and St. Ann to our joint venture partner, Noranda resulting in a loss on disposition of $73.2 million. See Note 10 Gramercy and St. Ann transfer in the Consolidated Financial Statements included herein for additional information about this transaction.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net sales: Net sales for the year ended December 31, 2008 increased $172.6 million to $1,970.8 million. Higher price realizations for primary aluminum in the year ended December 31, 2008, contributed $97.1 million to the sales increase. The monthly average LME cash prices for 2008 were down 3% from the monthly average LME cash prices in 2007. Despite this decline, we averaged higher price realizations in 2008 because our cash flow hedges, which were in a loss position and lowered our realized prices, expired in January 2008. Additional net sales volume contributed $75.5 million to the sales increase. Direct shipments increased 1.7 million pounds from the same period in 2007 and toll shipments increased 79.5 million pounds from the same period in 2007 due to the Grundartangi expansion capacity that came on-stream during 2007.
Gross Profit: For the year ended December 31, 2008, gross profit decreased $51.8 million to $311.6 million. Improved price realizations, net of LME-based alumina and LME-based power contract cost increases, improved gross profit by $75.5 million. Increased shipment volume contributed $29.9 million in additional gross profit. Offsetting these gains were $157.2 million in net cost increases comprised of: increased power and natural gas costs at our U.S. smelters, $19.9 million; increased costs for maintenance, supplies and materials, $39.1 million; increased costs for our non-LME-based alumina, $29.2 million; increased net amortization and depreciation charges, primarily at Grundartangi, $5.9 million; and other cost increases, $7.2 million. Due to the rapid drop in LME prices in the fourth quarter of 2008, the market value of our inventory at December 31, 2008 was significantly below its cost basis, resulting in a charge to inventory and thus a reduction in gross profit of $55.9 million.
Selling, general and administrative expenses: Selling, general and administrative expenses for the year ended December 31, 2008 decreased $11.7 million to $48.2 million. Most of the decrease in 2008 was due to the absence of non-capitalized expenses related to the Helguvik project that occurred in 2007.
Goodwill impairment: As a result of the goodwill impairment test performed at December 31, 2008, the entire balance of goodwill associated with the 2004 purchase of the Grundartangi facility, $94.8 million, was written off.
Interest expense- third party: Interest expense for the year ended December 31, 2008 decreased $7.9 million to $31.8 million. The decrease in interest expense was due to the retirement of Nordural’s outstanding debt in 2007.
Interest income- third party: Interest income for the year ended December 31, 2008 decreased by $3.3 million to $7.8 million. The decrease in interest income is a result of lower interest rates and average cash and short-term investment balances during 2008.
Net loss on forward contracts: For the year ended December 31, 2008, the net loss on forward contracts was $744.4 million compared to a net loss on forward contracts of $508.9 million for 2007. The losses reported for the years ended December 31, 2008 and 2007 were primarily a result of mark-to-market losses associated with our long term financial sales contracts with Glencore that did not qualify for cash flow hedge accounting. In July, 2008, we terminated these contracts, recording a net gain of $162.0 million ($172.4 million, net of $10.4 million in transaction costs).
In 2008, cash settlement of the financial sales contracts that did not qualify for cash flow hedge treatment accounted for $115.0 million of the net loss. In addition, we recorded a net loss on forward contracts of $15.8 million on the ineffective portion of our ISK cash flow hedges and a net gain on forward contracts of $2.2 million related to the LME component of our power contract at the Ravenswood facility. The remaining $778.6 million in net loss were unrealized losses as of the date our outstanding financial sales contracts that did not qualify for cash flow hedge accounting were terminated. These amounts were offset by a $0.8 million gain in 2008 for non-cash settlements of physical delivery sales contracts that are accounted for as derivatives and marked-to-market.
In 2007, cash settlement of the financial sales contracts that did not qualify for cash flow hedge treatment accounted for $98.3 million of the net loss. The remaining $411.0 million in net loss were unrealized losses related to our outstanding financial sales contracts that did not qualify for cash flow hedge accounting that were due for settlement in 2008 through 2015. These amounts were offset by a $0.4 million gain for non-cash settlements of physical delivery sales contracts that are accounted for as derivatives and marked-to-market.
Tax provision: The changes in the income tax provision were a result of changes in the level of earnings and losses within the various tax jurisdictions in which we operate, changes in the current year’s effective tax rate and a change in the West Virginia tax law. In addition, we recorded a tax charge of $536.3 million in 2008 as a valuation allowance against certain deferred tax assets. A significant portion of these deferred tax assets were created by the losses on our long term financial sales contracts with Glencore. A valuation allowance was required because our current estimates of future U.S. taxable income do not support the utilization of the deferred tax assets.
Liquidity and Capital Resources
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 through public offerings of our common stock in each of the last three years and in 2004 we accessed the public debt markets. We are continuously exploring various financing alternatives. Our principal uses of cash are the funding of operating costs (including post-employment benefits), maintenance of curtailed production facilities, payments of principal and interest on our outstanding debt, the funding of capital expenditures, investments in our aluminum growth activities and in related businesses, working capital and other general corporate requirements. We are not required to make a contribution in 2010 to any defined benefit plan which we sponsor, but may choose to make a voluntary contribution of up to $10 million.
Our financial position and liquidity were materially adversely affected by weak aluminum prices relative to our operating costs in 2009. Our consolidated cash balance at December 31, 2009 was $198 million compared to $129 million at December 31, 2008. The increase in cash related primarily to proceeds from a public equity offering, working capital reductions and significant tax refunds received in 2009, partially offset by operating losses. As of December 31, 2009, we had no amounts outstanding, approximately $11.5 million issued but undrawn letters of credit and approximately $41 million of net availability under our revolving credit facility. This availability has been negatively impacted by the curtailment of production capacity at Ravenswood and the partial curtailment of production capacity at Hawesville, which have reduced the amount of our domestic accounts receivable and inventory, which comprise the borrowing base of such facility. Further curtailments of production capacity would incrementally reduce domestic accounts receivable and inventory, further reducing availability under our revolving credit facility. In addition, our current revolving credit facility is due to expire in September 2010. We currently expect to have a new revolving credit facility in place before that time.
Recently enacted legislation would allow Century to carryback our NOLs for 2008 for up to five years, two years longer than the law previously allowed. Under the new law, we expect to receive a tax refund of approximately $16 million by carrying back losses to our 2005 tax year. Our federal tax returns for the years 2005 through 2008 are currently under audit which may delay the receipt of the tax refund.
Convertible Debt for Exchanges
During the third and fourth quarters of 2009, we issued approximately 11.4 million shares of our common stock in exchange for approximately $128 million aggregate principal amount of our 1.75% Notes. After concluding these convertible debt-for-equity exchanges, we have approximately $47 million aggregate principal amount of 1.75% Notes outstanding. Current holders of the 1.75% Notes may require us to purchase for cash all or part of the 1.75% Notes then outstanding at par on August 1, 2011. In addition, we have received consents to certain amendments or modifications to the indenture governing the 1.75% Notes.
7.5% Notes Exchange Offer and Consent Solicitation
In December 2009, we completed an exchange offer and consent solicitation relating to our 7.5% Notes. We issued approximately $245 million 8.0% Notes in exchange for approximately $243 million of principal amount of our 7.5% Notes and received consents to modify certain provisions of the indenture governing the 7.5% Notes, including eliminating most restrictive covenants and certain events of default in the 7.5% Notes, for which we paid a consent payment consisting of $2.4 million of cash and $2.4 million of principal amount of 8.0% Notes. In January and March 2010, we completed additional exchanges of approximately $4.3 million of our 7.5% Notes for approximately $4.1 million of our 8.0% Notes. These investors received the accrued interest for their 7.5% Notes, net of interest that has accrued on the 8.0% Notes since the original issuance date. As of March 16, 2009, we had $2.6 million and $249.6 million of aggregate principal amount outstanding of the 7.5% Notes and 8.0% Notes, respectively.
The amendment to the indenture for the 7.5% Notes provides Century with incremental flexibility to pursue financing for current and future growth opportunities, including:
|
·
|
Our foreign subsidiaries will be permitted to incur up to $125 million of debt to finance construction or expansion of the Grundartangi facilities, provided that such debt is not guaranteed by us or any of the guarantors of the 8.0% Notes.
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|
·
|
We will be allowed to incur up to $500 million of unsecured debt, which will be effectively junior to the 8.0% Notes with respect to the value of the assets securing them, provided that such debt has a stated maturity after the maturity of the 8.0% Notes and a cash interest rate no higher than that of the 8.0% Notes.
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|
·
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Proceeds from any such unsecured debt issuance may be invested into our unrestricted subsidiaries, including Helguvik, and joint ventures.
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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. Continued turbulence 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 2009 were $38.9 million, $22.0 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 2010, excluding the activity on the Helguvik project, will be approximately $15 million compared to $16.9 million in 2009.
In light of current global financial and economic conditions, we continue to review our capital plans and, where possible, reduce, stop or defer most non-critical capital expenditures in our existing smelters. We have made and continue making capital expenditures for the construction and development of our Helguvik project. From inception through December 31, 2009, we capitalized approximately $108 million for Helguvik and we have substantial future contractual commitments for the Helguvik project. If we were to cancel the Helguvik project, we would expect to incur an additional $25 to $35 million for contract cancellation costs. We continue to evaluate the Helguvik project’s cost, scope and schedule in light of the global economic crisis and recent commodity prices. In addition, we are working to complete the activities required for a full restart of construction activity at Helguvik, including the finalization of the contracts with the power suppliers and the confirmation that they will be in a firm position to finance and deliver the power per an agreed schedule. 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 $40 million during 2010; this estimate assumes the balance of the capital required for the first phase of the Helguvik project will be raised from various financing sources. See Item 1A, “Risk Factors — Construction at our Helguvik smelter site is under review” included herein.
Historical
Our Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 are summarized below:
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2009
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2008
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2007
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||||||||||
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(dollars in thousands)
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||||||||||||
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Net cash provided by (used in ) operating activities
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$ | 39,399 | $ | (665,438 | ) | $ | (5,755 | ) | ||||
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Net cash used in investing activities
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(46,213 | ) | (159,731 | ) | (108,571 | ) | ||||||
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Net cash provided by financing activities
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75,648 | 893,607 | 78,923 | |||||||||
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Net change in cash
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$ | 68,834 | $ | 68,438 | $ | (35,403 | ) | |||||
Net cash provided by operating activities in 2009 was $39.4 million. Our net cash from operations was due to tax refunds offset by operating losses and costs of curtailed operations in 2009.
Net cash used in operating activities in 2008 was $665.4 million, which included a net $266.5 million source of cash for the sale of short-term investments and a use of $1,315.3 million as payment for the termination of fixed price forward financial sales contracts. This was partially offset by increased cash from operations due to improved price realizations and the additional shipment volume from Grundartangi compared to the same period in 2007.
Net cash used in operating activities in 2007 was $5.8 million, which included a net $280.2 million use of cash for the purchase of short-term investments. Such investments generally yield higher returns than cash or other money market instruments. If we had not used cash to purchase those investments, our net cash from operations would have increased due to improved price realizations and the additional shipment volume from Grundartangi compared to prior periods.
Net cash used in investing activities in 2009 was $46.2 million, a decrease of $113.5 million from 2008. This decrease was due primarily to reduced expenditures for the Helguvik project and the reduction, deferral or cancellation of all non-critical capital expenditures at our other smelters.
Net cash used in investing activities in 2008 was $159.7 million, an increase of $51.1 million from 2007. This increase was due primarily to higher expenditures for the Helguvik project and investments in and advances made to joint ventures.
Net cash used in investing activities in 2007 was $108.6 million, a decrease of $103.4 million from 2006. This decrease was due primarily to lower expenditures for the Grundartangi expansion project.
Net cash provided by financing activities during 2009 was $75.6 million. We received $103.1 million in net proceeds from the issuance of common stock from our equity offering in February 2009. We repaid $25.0 million on our revolving line of credit borrowed in 2008 and paid financing fees of $2.4 million.
Net cash provided by financing activities during 2008 was $893.6 million. We received $929.5 million in net proceeds from the issuance of preferred stock in connection with the settlement of fixed price primary aluminum financial sales contracts. We received $443.7 million in net proceeds from the issuance of common stock from our equity offering in July 2008 and the exercise of stock options. We used the proceeds of the equity offering and available cash to pay $505.2 million to a related party for a deferred settlement associated with the termination of financial sales contracts. In addition, we borrowed $35.0 million and repaid $10.0 million from our revolving line of credit and recognized a $0.6 million tax benefit from our share-based compensation programs.
Net cash provided by financing activities during 2007 was $78.9 million. We received $417.8 million in net proceeds from the issuance of common stock from our equity offering in June 2007 and the exercise of stock options. We borrowed an additional $30.0 million for the Grundartangi expansion project. This amount was offset by principal payments of $369.4 million on Nordural debt, which included $200.0 million from the proceeds of the equity offering in June 2007.
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Critical Accounting Estimates
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Our significant accounting policies are discussed in Note 1 of the Consolidated Financial Statements. The preparation of the financial statements requires that management make judgments, assumptions and estimates in applying these accounting policies. Those judgments are normally based on knowledge and experience about past and current events and on assumptions about future events. Critical accounting estimates require management to make assumptions about matters that are highly uncertain at the time of the estimate and a change in these estimates may have a material impact on the presentation of our financial position or results of operations. Significant judgments and estimates made by our management include expenses and liabilities related to pensions and other postemployment benefits, deferred tax assets and property, plant and equipment. Our management has discussed the development and selection of these critical accounting estimates with the audit committee of our board of directors and the audit committee has reviewed our disclosure.
Pension and Other Postemployment Benefit Liabilities
We sponsor several pension and other postemployment benefit plans. Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care inflation rate and the long-term rate of return on plan assets.
Discount Rate Selection
It is our policy to select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to yields on zero coupon bonds. We use the Citigroup Pension Liability Index for determining these yields.
The Citigroup Pension Liability Index was specifically developed to meet the criteria set forth in FASB ASC 715 (formerly SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions”). The published information at the end of each calendar month includes spot rate yields (zero coupon bond yield estimates) in half year increments for use in tailoring a discount rate to a particular plan's projected benefit cash flows. The Citigroup Pension Liability Index rate represents the discount rate developed from these spot rate yields, based on the pattern and duration of the benefit payments of a typical, large, somewhat mature pension plan.
The individual characteristics of each plan, including projected cash flow patterns and payment durations, have been taken into account, since discount rates are determined on a plan-by-plan basis. We will generally select a discount rate rounded to the nearest 0.25%, unless specific circumstances provide for a more appropriate non-rounded rate to be used. We believe the projected cash flows used to determine the Citigroup Pension Liability Index rate provide a good approximation of the timing and amounts of our defined benefits payments under our plans and no adjustment to the Citigroup Pension Liability Index rate has been made.
Therefore, as of December 31, 2009, we selected a weighted-average discount rate of 5.75% for all our pension plans and a weighted-average discount rate of 5.89% for our other postemployment benefit plans.
A change of a half percentage point in the discount rate for our defined benefit plans would have the following effects on our obligations under these plans in 2009:
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Effect of changes in the discount rates on the Projected Benefit Obligations for:
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50 basis point increase
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50 basis point decrease
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||||||
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(dollars in millions)
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||||||||
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Pension plans
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$ | (6.3 | ) | $ | 7.0 | |||
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Other postemployment benefit (“OPEB”) plans
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$ | (11.0 | ) | $ | 12.2 | |||
Century provides postemployment benefit plans that provide health care and life insurance benefits for a portion of the retired employees of our U.S. based operations. ASC 715 requires the accrual of the estimated cost of providing postretirement benefits during the working careers of those employees who could become eligible for such benefits when they retire. We fund these benefits as the retirees submit claims.
Measurement of our postretirement benefit obligations requires the use of several assumptions about factors that will affect the amount and timing of future benefit payments. The assumed health care cost trend rates are the most critical estimates for measurement of the postretirement benefits obligation. Changes in the health care cost trend rates have a significant effect on the amounts reported for the health care benefit obligations.
Century assumes medical inflation is initially 10%, declining to 5% over six years and thereafter. A one-percentage-point change in the assumed health care cost trend rates would have the following effects in 2009:
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1% Increase
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1% Decrease
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|||||||
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(dollars in millions)
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||||||||
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Effect on total of service and interest cost components
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$ | 2.4 | $ | (2.0 | ) | |||
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Effect on accumulated postretirement benefit obligation
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$ | 26.2 | $ | (22.4 | ) | |||
Long-term Rate of Return on Plan assets assumption
We are currently using an 8.0% long-term rate of return on plan assets for the development of the net periodic cost for the defined benefit pension plans. The rate was selected by taking into account our expected asset mix and is based on historical performance as well as expected future rates of return on plan assets.
Deferred Income Tax Assets
We regularly assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent we believe that it is more likely than not that a deferred tax asset will or may not be realized, a valuation allowance is established. When a valuation allowance is established or increased, an income tax charge is included in the consolidated financial statements and net deferred tax assets are adjusted accordingly. Changes in the tax laws, statutory tax rates and future taxable income levels could result in actual realization of the deferred tax assets being materially different from the amounts provided for in the consolidated financial statements. If the actual recovery amount of the deferred tax asset is less than anticipated, we would be required to write-off the remaining deferred tax asset and increase the tax provision, resulting in a reduction of net income and shareholders’ equity.
The amount of a valuation allowance is based upon our best estimate of our ability to realize the net deferred tax assets. A valuation allowance can subsequently be reversed when we believe that the assets are realizable on a more likely than not basis. We have a valuation allowance of $681.1 million against all of our U.S. deferred tax assets and a portion of our Icelandic deferred tax assets as of December 31, 2009, due to our assessment that it is more likely than not that these assets will not be realized based on our cumulative net losses and unfavorable future market conditions.
Property, Plant and Equipment Impairment
We review our property, plant and equipment whenever events or circumstances indicate that the carrying amount of these assets (asset group) may not be recoverable. The carrying amount of the assets (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). In that case, an impairment loss would be recognized for the amount the carrying amount exceeds the fair value of the assets (asset group), with the fair value determined using a discounted cash flow calculation. These estimates of future cash flows include management’s assumptions about the expected use of the asset (asset group), the remaining useful life, expenditures to maintain its service potential, market and cost assumptions.
Determination as to whether and how much an asset is impaired involves significant management judgment involving highly uncertain matters, including estimating the future success of product lines, future sales volumes, future selling prices and cost, alternative uses for the assets, and estimated proceeds from the disposal of the assets. However, the impairment reviews and calculations are based on estimates and assumptions that take into account our business plans and long-term investment decisions at the time of such impairment reviews.
We are currently evaluating the Helguvik project’s cost, scope and schedule, in light of the global economic crisis and weakening commodity prices. The aggregate capital expenditures through December 31, 2009 related to the Helguvik project were $108 million. In evaluating the construction in progress at Helguvik, we considered the costs to complete the construction and the estimated undiscounted future cash flows over the estimated useful life of Helguvik and concluded that the undiscounted future cash flows exceed the expected cost of constructing the Helguvik project. If we were to not restart construction, we would recognize a loss on our investment at the time that a decision were made to abandon the project.
In February 2009, we curtailed the operations of the Ravenswood facility. The net carrying value of the asset group at the Ravenswood facility was $73.8 million at December 31, 2009. If the carrying value of the asset group were to exceed the fair value of the asset group based on the estimated future undiscounted cash flows or our assumptions for the use of this facility were to change, we would recognize a loss on all or a portion of the assets at the time. The estimated future undiscounted cash flows assume that the operations at the Ravenswood facility would resume once LME prices for primary aluminum increase and are sustained and upon the successful negotiation and execution of certain critical enabling agreements for power and labor.
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Environmental Expenditures
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We have incurred and in the future will continue to incur capital expenditures and operating expenses for matters relating to environmental control, remediation, monitoring and compliance.
The aggregate environmental related accrued liabilities were $0.8 million and $0.8 million at December 31, 2009 and December 31, 2008, respectively. We believe that compliance with current environmental laws and regulations is not likely to have a material adverse effect on our financial condition, results of operations or liquidity; however, environmental laws and regulations may change, and we may become subject to more stringent environmental laws and regulations in the future.
We expect to incur operating expenses relating to environmental matters of $10 to $11 million in 2010. These amounts do not include any projected capital expenditures or operating expenses for our joint ventures. See Item 3 and Note 18 Commitments and Contingencies to the Consolidated Financial Statements included herein.
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Other Contingencies
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We are a defendant in several actions relating to various aspects of our business. While it is impossible to predict the ultimate disposition of any litigation, we do not believe that 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 Item 3, “Legal Proceedings” and Note 18 Commitments and Contingencies to the Consolidated Financial Statements included herein for additional information.
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Recently Issued Accounting Standards Updates
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Information regarding recently issued accounting pronouncements is included in Note 1 of the Consolidated Financial Statements included herein.
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Contractual Obligations
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In the normal course of business, we have entered into various contractual obligations that will be settled in cash. These obligations consist primarily of long-term debt obligations and purchase obligations. The expected future cash flows required to meet these obligations are shown in the table below. More information is available about these contractual obligations in the notes to the Consolidated Financial Statements included herein.
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Payments Due by Period
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Total
|
2010
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2011
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2012
|
2013
|
2014
|
Thereafter
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||||||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||||||||||
|
Long-term debt (1)
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$ | 307 | $ | — | $ | 47 | $ | — | $ | — | $ | 252 | $ | 8 | ||||||||||||||
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Estimated interest payments (2)
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101 | 21 | 21 | 21 | 21 | 9 | 8 | |||||||||||||||||||||
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Purchase obligations (3)
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2,849 | 557 | 383 | 372 | 311 | 326 | 900 | |||||||||||||||||||||
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OPEB obligations (4)
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121 | 9 | 10 | 11 | 11 | 12 | 68 | |||||||||||||||||||||
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Other liabilities (5)
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250 | 84 | 67 | 65 | 3 | 3 | 28 | |||||||||||||||||||||
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Total
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$ | 3,628 | $ | 671 | $ | 528 | $ | 469 | $ | 346 | $ | 602 | $ | 1,012 | ||||||||||||||
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(1)
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Long-term debt includes principal repayments on the 7.5% Notes, the 8.0% Notes, the 1.75% Notes and the IRBs. Payments are based on the assumption that, except for the 1.75% Notes that have an option to require us to repurchase all or any portion of these securities at par in August 2011, all outstanding debt instruments will remain outstanding until their respective due dates.
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(2)
|
Estimated interest payments on our long-term debt are based on several assumptions, including an assumption that all outstanding debt instruments, except the 1.75% Notes, will remain outstanding until their respective due dates. Our estimated future interest payments for any debt with a variable rate are based on the assumption that the December 31, 2009 rate for that debt continues until the respective due date.
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(3)
|
Purchase obligations include long-term alumina, power contracts and anode contracts. Our CAKY power contract contains a 12 month cancellation cause and allows us to receive credits for unused power that Big Rivers is able to sell to other parties. We assumed that during the contract period, CAKY would maintain their current production levels and we would receive credits for 50% of the unused power. We do not include any credits for E.ON contractual receivables. For contracts with LME-based pricing provisions, including our alumina contracts and Nordural’s power contracts, we assumed an LME price consistent with the LME forward market at December 31, 2009.
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(4)
|
Includes the estimated benefit payments for our OPEB obligations through 2019, which are unfunded.
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(5)
|
Other liabilities include our expected remaining cost for the Ravenswood curtailment, SERB benefit payments, workers' compensation benefit payments, asset retirement obligations and contractual commitments for the Helguvik project. Expected benefit payments for the SERB plans, which are unfunded, are included for 2010 through 2019. Asset retirement obligations are estimated disposal costs for the potliner in service. Our contractual commitments for the Helguvik projects consist of various contracts for equipment and services associated with the project. As of December 31, 2009, the gross liability for uncertain tax positions under ASC 740-10-30 (formerly, FIN No. 48) is approximately $21.2 million. We have not included the uncertain tax position obligations in the contractual obligations table as we cannot provide a reasonable estimate of the timing of future settlements.
|
|
|
Commodity Price Sensitivity
|
We are exposed to price risk for primary aluminum. We manage our exposure to fluctuations in the price of primary aluminum by selling aluminum at fixed prices for future delivery and through financial instruments. 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.
Forward Physical Delivery Agreements
Primary Aluminum Sales Contracts
|
Contract
|
Customer
|
Volume
|
Term
|
Pricing
|
|
Glencore Metal Agreement (1)
|
Glencore
|
20,400 mtpy
|
Through December 31, 2013
|
Variable, based on U.S. Midwest market
|
|
Glencore Sweep Agreement (2)
|
Glencore
|
24,000 mtpy minimum
|
Through December 31, 2010
|
Variable, based on U.S. Midwest market
|
|
Southwire Metal Agreement
|
Southwire
|
240 million pounds per year (high conductivity molten aluminum)
|
Through March 31, 2011
|
Variable, based on U.S. Midwest market
|
|
Southwire Metal Agreement
|
Southwire
|
60 million pounds per year (standard-grade molten aluminum)
|
Through December 31, 2010
|
Variable, based on U.S. Midwest market
|
|
(1)
|
We account for the Glencore Metal Agreement as a derivative instrument under ASC 815 (formerly, SFAS No. 133). Under the Glencore Metal Agreement, pricing is based on then-current market prices, adjusted by a negotiated U.S. Midwest premium with a cap and a floor as applied to the current U.S. Midwest premium.
|
|
(2)
|
The Glencore Sweep Agreement is for all metal produced in the U.S. in 2010, less existing sales agreements and high-purity metal sales. The term of the contract may be extended for one year upon mutual agreement.
|
Tolling Contracts
|
Contract
|
Customer
|
Volume
|
Term
|
Pricing
|
|
Billiton Tolling Agreement (1)
|
BHP Billiton
|
130,000 mtpy
|
Through December 31, 2013
|
LME-based
|
|
Glencore Toll Agreement (1)(2)
|
Glencore
|
90,000 mtpy
|
Through July 31, 2016
|
LME-based
|
|
Glencore Toll Agreement (1)
|
Glencore
|
40,000 mtpy
|
Through December 31, 2014
|
LME-based
|
|
(1)
|
Grundartangi’s tolling revenues include a premium based on the EU import duty for primary aluminum. In May 2007, the EU members reduced the EU import duty for primary aluminum from six percent to three percent and agreed to review the new duty after three years. This decrease in the EU import duty for primary aluminum negatively impacts Grundartangi’s revenues and further decreases would also have a negative impact on Grundartangi’s revenues, but it is not expected to have a material effect on our financial position and results of operations.
|
|
(2)
|
Glencore assigned 50% of its tolling rights under this agreement to Hydro Aluminum through December 31, 2010.
|
Apart from the Glencore Metal Agreement, the Glencore Sweep Agreement and the Southwire Metal Agreements, we had forward delivery contracts to sell 26,140 metric tons and 84,047 metric tons of primary aluminum at December 31, 2009 and December 31, 2008, respectively. Of these forward delivery contracts, we had fixed price commitments to sell 1,559 metric tons and 330 metric tons of primary aluminum at December 31, 2009 and December 31, 2008, respectively, of which none were with Glencore at December 31, 2009 and 319 metric tons were with Glencore at December 31, 2008.
|
|
Forwards and Financial Purchase Agreements
|
|
|
Financial Sales Agreements
|
As of December 31, 2009, we had no fixed price financial primary aluminum sales contracts outstanding.
In September and October 2009, we entered into primary aluminum put option and collar contracts that settle monthly from October 2009 through December 2010 based on the LME prices. Our counterparties include Glencore, a related party, and a non-related third party. We accounted for the put options and collar contracts as derivative financial instruments with gains and losses in the fair value of the contracts recorded on the consolidated statements of operations in net gains losses on forward contracts. The following table shows the primary aluminum put option contracts outstanding as of December 31, 2009.
|
Primary Aluminum option contracts as of December 31, 2009 (in metric tons):
|
||||||||
|
Glencore
|
Other counterparties
|
|||||||
|
Put option contracts, settle monthly through December 2010
|
60,000 | 30,000 | ||||||
|
Collar contracts, settle monthly through December 2010 (1)
|
— | 30,000 | ||||||
|
(1)
|
The collar contracts include 30,000 MT of put option contracts and 30,000 MT of call option contracts.
|
|
|
Financial Purchase Agreements
|
Natural Gas
To mitigate the volatility of the natural gas markets, we enter into fixed-price financial purchase contracts, accounted for as cash flow hedges, which settle in cash in the period corresponding to the intended usage of natural gas.
We had no forward natural gas financial purchase contracts outstanding at December 31, 2009.
Foreign Currency
We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the euro, the ISK and the Chinese yuan. Grundartangi’s labor costs, part of the maintenance costs and other local services are denominated in ISK and a portion of its anode costs are denominated in euros. As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Grundartangi’s operating margins. In addition, we expect to incur capital expenditures for the construction of the Helguvik project, although we are currently evaluating the Helguvik project’s cost, scope and schedule in light of the global credit crisis and commodity prices. A significant portion of the capital expenditures for the Helguvik project are forecasted to be denominated in currencies other than the U.S. dollar with a significant portion in ISK.
We may manage our foreign currency exposure by entering into foreign currency forward contracts. As of December 31, 2009, we had no foreign currency forward contracts outstanding.
Natural Economic Hedges
This quantification of our exposure to the commodity price of aluminum is necessarily limited, as it does not take into consideration our inventory or forward delivery contracts, or the offsetting impact on the sales price of primary aluminum products. Because all of our alumina contracts, except for a portion of Hawesville’s alumina contract with Gramercy, are indexed to the LME price for primary aluminum, they act as a natural hedge for approximately 14% of our production. As of February 28, 2010, approximately 34% of our production for 2010 was hedged by our LME-based alumina contracts and by Grundartangi’s electrical power and tolling contracts.
Risk Management
Our metals, foreign currency and natural gas risk management activities are subject to the control and direction of senior management. These activities are regularly reported to Century’s board of directors.
|
|
Item 8. Financial Statements and Supplementary Data
|
INDEX TO FINANCIAL STATEMENTS
|
Page
|
|
|
Reports of Independent Registered Public Accounting Firm
|
53
|
|
Consolidated Balance Sheets at December 31, 2009 and 2008
|
55
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
|
56
|
|
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007
|
57 - 58
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
|
59
|
|
Notes to the Consolidated Financial Statements
|
60 - 117
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Century Aluminum Company:
We have audited the accompanying consolidated balance sheets of Century Aluminum Company and subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Century Aluminum Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte and Touche LLP
Pittsburgh, Pennsylvania
March 16, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Century Aluminum Company:
We have audited the internal control over financial reporting of Century Aluminum Company and subsidiaries (the "Company") as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009 of the Company and our reports dated March 16, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte and Touche LLP
Pittsburgh, Pennsylvania
March 16, 2010
|
CENTURY ALUMINUM COMPANY
|
||||||||
|
CONSOLIDATED BALANCE SHEETS
|
||||||||
|
(Dollars in thousands, except share data)
|
||||||||
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Cash
|
$ | 198,234 | $ | 129,400 | ||||
|
Restricted cash
|
8,879 | 865 | ||||||
|
Short-term investments
|
— | 13,686 | ||||||
|
Accounts receivable — net
|
37,706 | 60,859 | ||||||
|
Due from affiliates
|
19,255 | 39,062 | ||||||
|
Inventories
|
131,473 | 138,111 | ||||||
|
Prepaid and other current assets
|
93,921 | 99,861 | ||||||
|
Deferred taxes — current portion
|
— | 32,290 | ||||||
|
Total current assets
|
489,468 | 514,134 | ||||||
|
Property, plant and equipment — net
|
1,298,288 | 1,340,037 | ||||||
|
Intangible asset — net
|
— | 32,527 | ||||||
|
Due from affiliates – less current portion
|
5,859 | 7,599 | ||||||
|
Other assets
|
68,135 | 141,061 | ||||||
|
TOTAL
|
$ | 1,861,750 | $ | 2,035,358 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Accounts payable, trade
|
$ | 77,301 | $ | 102,143 | ||||
|
Due to affiliates
|
32,708 | 70,957 | ||||||
|
Accrued and other current liabilities
|
38,598 | 58,777 | ||||||
|
Accrued employee benefits costs — current portion
|
12,997 | 12,070 | ||||||
|
Convertible senior notes
|
43,239 | 152,700 | ||||||
|
Industrial revenue bonds
|
7,815 | 7,815 | ||||||
|
Total current liabilities
|
212,658 | 404,462 | ||||||
|
Senior notes payable
|
247,624 | 250,000 | ||||||
|
Revolving credit facility
|
— | 25,000 | ||||||
|
Accrued pension benefits costs — less current portion
|
43,281 | 50,008 | ||||||
|
Accrued postretirement benefits costs — less current portion
|
177,231 | 219,539 | ||||||
|
Other liabilities
|
31,604 | 33,464 | ||||||
|
Deferred taxes
|
81,622 | 71,805 | ||||||
|
Total noncurrent liabilities
|
581,362 | 649,816 | ||||||
|
CONTINGENCIES AND COMMITMENTS (NOTE 18)
|
||||||||
|
SHAREHOLDERS’ EQUITY:
|
||||||||
|
Series A Preferred stock (one cent par value, 5,000,000 shares authorized; 83,452 and 155,787 shares issued and outstanding at December 31, 2009 and 2008, respectively)
|
1 | 2 | ||||||
|
Common stock (one cent par value, 195,000,000 shares authorized; 92,530,068 shares issued and outstanding at December 31, 2009; 100,000,000 shares authorized; 49,052,692 shares issued and outstanding at December 31, 2008)
|
925 | 491 | ||||||
|
Additional paid-in capital
|
2,501,389 | 2,272,128 | ||||||
|
Accumulated other comprehensive loss
|
(74,270 | ) | (137,208 | ) | ||||
|
Accumulated deficit
|
(1,360,315 | ) | (1,154,333 | ) | ||||
|
Total shareholders’ equity
|
1,067,730 | 981,080 | ||||||
|
TOTAL
|
$ | 1,861,750 | $ | 2,035,358 | ||||
See notes to consolidated financial statements.
|
CENTURY ALUMINUM COMPANY
|
||||||||||||
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||
|
(Dollars in thousands, except per share amounts)
|
||||||||||||
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
NET SALES:
|
||||||||||||
|
Third-party customers
|
$ | 668,344 | $ | 1,474,815 | $ | 1,449,750 | ||||||
|
Related parties
|
230,909 | 495,961 | 348,413 | |||||||||
| 899,253 | 1,970,776 | 1,798,163 | ||||||||||
|
Cost of goods sold
|
964,918 | 1,659,152 | 1,434,700 | |||||||||
|
Gross profit (loss)
|
(65,665 | ) | 311,624 | 363,463 | ||||||||
|
Other operating income -net
|
(16,088 | ) | — | — | ||||||||
|
Selling, general and administrative expenses
|
47,879 | 48,223 | 59,920 | |||||||||
|
Goodwill impairment
|
— | 94,844 | — | |||||||||
|
Operating income (loss)
|
(97,456 | ) | 168,557 | 303,543 | ||||||||
|
Interest expense – third party
|
(30,390 | ) | (31,830 | ) | (39,711 | ) | ||||||
|
Interest expense – related parties
|
— | (1,145 | ) | — | ||||||||
|
Interest income – related parties
|
572 | 318 | — | |||||||||
|
Interest income – third party
|
1,297 | 7,481 | 10,790 | |||||||||
|
Net loss on forward contracts
|
(19,415 | ) | (744,448 | ) | (508,875 | ) | ||||||
|
Loss on early extinguishment of debt
|
(4,711 | ) | — | (2,461 | ) | |||||||
|
Other expense — net
|
(40 | ) | (2,178 | ) | (841 | ) | ||||||
|
Loss before income taxes and equity in earnings (losses) of joint ventures
|
(150,143 | ) | (603,245 | ) | (237,555 | ) | ||||||
|
Income tax benefit (expense)
|
12,357 | (308,848 | ) | 116,324 | ||||||||
|
Loss before equity in earnings (losses) of joint ventures
|
(137,786 | ) | (912,093 | ) | (121,231 | ) | ||||||
|
Equity in earnings (losses) of joint ventures
|
(68,196 | ) | 16,906 | 15,645 | ||||||||
|
Net loss
|
$ | (205,982 | ) | $ | (895,187 | ) | $ | (105,586 | ) | |||
|
LOSS PER COMMON SHARE:
|
||||||||||||
|
Basic and Diluted
|
$ | (2.73 | ) | $ | (20.00 | ) | $ | (2.84 | ) | |||
See notes to consolidated financial statements.
|
CENTURY ALUMINUM COMPANY
|
||||||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||
|
Comprehensive Income (Loss)
|
Preferred Stock
|
Common Stock
|
Additional Paid-in Capital
|
Accumulated Other Comprehensive Loss
|
Retained Earnings (Accumulated Deficit)
|
Total Shareholders’ Equity
|
||||||||||||||||||||||
|
Balance, December 31, 2006
|
$ | — | $ | 325 | $ | 464,384 | $ | (166,572 | ) | $ | (145,660 | ) | $ | 152,477 | ||||||||||||||
|
Comprehensive income (loss) – 2007
|
||||||||||||||||||||||||||||
|
Net loss – 2007
|
$ | (105,586 | ) | (105,586 | ) | (105,586 | ) | |||||||||||||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||||||||||||||
|
Net unrealized loss on financial instruments, net of $448 tax
|
7,730 | |||||||||||||||||||||||||||
|
Net amount reclassified to income, net of $(57,773) tax
|
82,512 | |||||||||||||||||||||||||||
|
Defined benefit plans and other postretirement benefits:
|
||||||||||||||||||||||||||||
|
Net gain arising during the period, net of $(15,424) tax
|
20,730 | |||||||||||||||||||||||||||
|
Prior service cost arising during the period, net of $2 tax
|
(3 | ) | ||||||||||||||||||||||||||
|
Amortization of net loss, net of $(2,643) tax
|
3,553 | |||||||||||||||||||||||||||
|
Amortization of prior service cost, net of $612 tax
|
(822 | ) | ||||||||||||||||||||||||||
|
Change in equity in investee other comprehensive income, net of $(2,229) tax:
|
1,341 | |||||||||||||||||||||||||||
|
Other comprehensive income
|
115,041 | 115,041 | 115,041 | |||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 9,455 | ||||||||||||||||||||||||||
|
Adjustment to retained earnings upon adoption of ASC 740-10-50 (formerly, FIN No. 48)
|
(7,900 | ) | (7,900 | ) | ||||||||||||||||||||||||
|
Excess tax benefits from share-based compensation
|
588 | 588 | ||||||||||||||||||||||||||
|
Share-based compensation expense
|
5,962 | 5,962 | ||||||||||||||||||||||||||
|
Issuance of common stock – compensation plans
|
2 | 4,904 | 4,906 | |||||||||||||||||||||||||
|
Issuance of common stock – equity offering, net
|
83 | 414,063 | 414,146 | |||||||||||||||||||||||||
|
Balance, December 31, 2007
|
$ | — | $ | 410 | $ | 889,901 | $ | (51,531 | ) | $ | (259,146 | ) | $ | 579,634 | ||||||||||||||
|
Comprehensive income (loss) – 2008
|
||||||||||||||||||||||||||||
|
Net loss – 2008
|
$ | (895,187 | ) | (895,187 | ) | (895,187 | ) | |||||||||||||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||||||||||||||
|
Net unrealized loss on financial instruments, net of $0 tax
|
(34,334 | ) | ||||||||||||||||||||||||||
|
Net gain reclassified to income, net of $(2,206) tax
|
(3,442 | ) | ||||||||||||||||||||||||||
|
Net amount of foreign currency cash flow hedges reclassified as income, net of $0 tax
|
18,892 | |||||||||||||||||||||||||||
|
Defined benefit plans and other postretirement benefits:
|
||||||||||||||||||||||||||||
|
Net loss arising during the period, net of $0 tax
|
(62,842 | ) | ||||||||||||||||||||||||||
|
Amortization of net loss, net of $(1,215) tax
|
2,170 | |||||||||||||||||||||||||||
|
Amortization of prior service cost, net of $429 tax
|
(766 | ) | ||||||||||||||||||||||||||
|
Change in equity in investee other comprehensive income, net of $0 tax:
|
(5,355 | ) | ||||||||||||||||||||||||||
|
Other comprehensive loss
|
(85,677 | ) | (85,677 | ) | (85,677 | ) | ||||||||||||||||||||||
|
Total comprehensive loss
|
$ | (980,864 | ) | |||||||||||||||||||||||||
|
Excess tax benefits from share-based compensation
|
||||||||||||||||||||||||||||