CENTURY ALUMINUM CO - Annual Report: 2008 (Form 10-K)
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, 2008
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
Global Select Market
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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 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 definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
Accelerated Filer
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x
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Accelerated
Filer
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¨
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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, 2008, the approximate aggregate market value of the
common stock held by non-affiliates of the registrant was approximately
$1,952,000,000. As of February 20, 2009, 73,556,562 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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1
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PART
I
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Item
1
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1
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Item
1A
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12
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Item
1B
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25
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Item
2
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25
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Item
3
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25
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Item
4
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25
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PART
II
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Item
5
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27
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Item
6
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28
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Item
7
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30
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Item
7A
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45
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Item
8
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49
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Item
9
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101
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Item
9A
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101
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Item
9B
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101
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PART
III
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Item
10
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102
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Item
11
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Executive
Compensation
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102
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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102
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Item
13
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Certain
Relationships and Related Transactions and Director
Independence
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102
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Item
14
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Principal
Accountant Fees and Services
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102
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PART
IV
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Item
15
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103
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108
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PART
I
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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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,”
“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 further declines in the price of aluminum,
additional curtailment of certain of our operations, the possible need for
alternate liquidity sources, the continuation or worsening of global financial
and economic conditions, our ability to access the credit and capital markets,
further reductions in our selling, general and administrative expenses, our
ability to meet pension funding obligations, deterioration of economic and
political conditions in Iceland, further volatility in our stock price, our
planned construction and development activities, including our Helguvik site,
debt servicing requirements, year-end and possible future asset write downs,
changes in our credit ratings, costs to curtail unprofitable operations, our
ability to close a new long-term power contract at Hawesville and receipt of
federal tax refunds. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, actual results may
vary materially from those expected, estimated or projected. The risks described
herein in 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” should be considered when reading any
forward-looking statements in this document.
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
(“LME”). Our primary aluminum facilities produce value-added and
standard-grade primary aluminum products. In 2004, we acquired
Grundartangi, an Icelandic primary aluminum facility which became our first
production facility located outside of the United States. We produced
approximately 804,000 metric tons of primary aluminum in 2008 with net sales of
approximately $2.0 billion. Our current primary aluminum production
capacity is 785,000 metric tons per year (“mtpy”). We have begun
construction on a primary aluminum facility in Helguvik, Iceland and have
curtailed operations at our Ravenswood, West Virginia facility. We
are currently evaluating the Helguvik project’s cost, scope and schedule in
light of global
economic conditions and weakening commodity prices. During the
evaluation, we have significantly reduced spending on the project.
In
addition to our primary aluminum assets, we have 50% joint venture interests in
the Gramercy alumina refinery, located in Gramercy, Louisiana and a related
bauxite mining operation in Jamaica and a 40% stake in Baise Haohai Carbon Co.,
Ltd. (“BHH”), a carbon anode and cathode facility located in the Guangxi Zhuang
Autonomous Region of south China. The Gramercy refinery supplies
substantially all of the alumina used for the production of primary aluminum at
our Hawesville, Kentucky facility, assuming Gramercy and Hawesville operate at
full capacity. The BHH facility has annual anode production capacity
of 180,000 metric tons and an annual cathode production capacity of 20,000
metric tons and supplies a portion of the anodes used in our Grundartangi
facility.
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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Ownership
Percent
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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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100%
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Hawesville
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Hawesville,
Kentucky, USA
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1970
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244,000
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100%
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Ravenswood(1)
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Ravenswood,
West Virginia, USA
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1957
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170,000
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100%
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Mt.
Holly (2)
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Mt.
Holly, South Carolina, USA
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1980
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224,000
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49.7%
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(1)
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On
February 20, 2009, we curtailed all operations at the Ravenswood facility
until economic conditions warrant the possibility of
restarting.
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(2)
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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
Percent
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Gramercy
(1)
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Gramercy,
Louisiana, USA
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Alumina
refinery
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1.2
million mtpy
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50%
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St.
Ann Limited (2)
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St.
Ann, Jamaica
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Bauxite
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4.5
million mtpy
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50%
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Baise
Haohai Carbon Co., Ltd (3)
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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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Gramercy
is currently operating at a reduced capacity of 700,000
mtpy.
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(2)
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The
Government of Jamaica has granted St. Ann Bauxite Limited (“SABL”) rights
to mine 4.5 million dry metric tons of bauxite on specified lands annually
through September 30, 2030.
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(3)
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BHH
is currently operating at 50% of its rated capacity due to the reduced
operations of its main customer in
China.
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Our
long-term strategic objectives are to: (i) expand our primary aluminum business
by investing in or acquiring additional capacity that offers favorable returns
and lowers our per unit production costs; (ii) further diversify our
geographic presence; and, (iii) pursue 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.
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PRIMARY
ALUMINUM SHIPMENTS (in
thousands of metric tons):
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Shipments
from U.S. Operations
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Shipments
from Iceland Operations
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TOTAL
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2004
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535
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63
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598
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2005
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523
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93
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616
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2006
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523
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157
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680
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2007
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532
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235
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767
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2008
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532
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272
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804
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Since
2004, our growth activities have
included:
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●
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acquiring
the Grundartangi facility (“Grundartangi”) in April
2004;
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●
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acquiring
a 50% joint venture in the Gramercy facility (“Gramercy”), our first
alumina refining facility, together with related bauxite mining assets in
October 2004, and;
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●
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expanding
Grundartangi’s production capacity to 260,000 mtpy of primary aluminum
(from 90,000 mtpy at the time of our acquisition), and;
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●
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acquiring
a 40% joint venture in the Baise Haohai Carbon Co. Ltd., a carbon anode
and cathode facility and our first investment in China in April
2008.
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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 and Ravenswood plants are each located adjacent to their largest
customer. This location allows the plants 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. Our Hawesville plant also
has a competitive advantage due to its ability to produce the high purity
aluminum needed by its largest customer for the manufacture of electrical
transmission lines. On February 20, 2009, we curtailed all operations at the
Ravenswood facility until economic conditions warrant the possibility of
restarting.
Customer
Base
In 2008,
we derived approximately 76% of our consolidated sales from our four major
customers: Southwire, Alcan, Glencore and BHP Billiton. Additional
information about the revenues and percentage of sales to these major customers
is available in Note 22 of the Consolidated Financial Statements included
herein. We currently have primary aluminum sales or tolling contracts
with each of these customers. More information about these contracts
is available under “Long-term Primary Aluminum Sales Contracts” in Note 18 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 22 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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●
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electricity
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●
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carbon
anodes
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●
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silicon
carbide
|
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●
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alumina
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●
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cathode
blocks
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●
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caustic
soda
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●
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aluminum
fluoride
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●
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liquid
pitch
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●
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calcined
petroleum coke
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●
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natural
gas
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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
2008 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.”
Key
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, 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
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Through
December 31, 2013
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Variable,
LME-based
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Hawesville
|
Gramercy
Alumina
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Through
December 31, 2010
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Variable,
Cost-based
|
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Ravenswood
(1)
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Glencore
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Through
December 31, 2009
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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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If
we are unable to use the contracted alumina in our other operations or
sell the alumina at prices consistent with our contract costs, we could
incur significant losses under these contracts. As a result of the
Ravenswood curtailment, we expect to incur cash losses of approximately
$15 to $20 million in 2009 associated with the sale of excess alumina that
will be received under this alumina supply agreement. This
estimate is based on current alumina contract pricing which is indexed to
LME prices for primary aluminum, our estimate of spot alumina prices and
the forecasted internal use of a portion of this material in our other
smelting operations.
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Electrical
Power Supply Agreements
We use
significant amounts of electricity in the aluminum production
process. In addition to the contracts listed below, we have entered
into long-term power supply agreements to supply power for the Helguvik
project. These contracts, described in Note 17 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)(2)
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Appalachian
Power Company
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Through
June 30, 2009
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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
(3)
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Kenergy
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Through
December 31, 2010
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Fixed
price through 2010
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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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|||
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HS Orka
hf.
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(1)
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On
February 20, 2009, we curtailed all operations at the Ravenswood facility
until economic conditions warrant the possibility of
restarting. 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, see the Note 26 Subsequent Events in the Consolidated
Financial Statements included herein for additional
information. 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. The experimental rate design is effective through June
30, 2009.
|
|
(2)
|
This
contract contains LME-based pricing provisions that are an embedded
derivative. The embedded derivative does not qualify for cash
flow hedge treatment and is marked to market quarterly. Gains
and losses on the embedded derivative are included in Net gain (loss) on
forward contracts in the Consolidated Statement of
Operations.
|
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(3)
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Under
this contract, approximately 70% (339 MW) of Hawesville’s power
requirements are at fixed prices. We continuously review our
options to manage the balance, or 30%, of this power and price the
remaining power when we believe the combination of price and term is
appropriate. We are working with Big Rivers Electric
Corporation (“Big Rivers”) and Kenergy on a proposal that would
restructure and extend this contract. The proposed new
long-term power contract was filed with the Kentucky Public Service
Commission in late December 2008. The contract would provide
all of Hawesville’s power requirements through 2023 at cost-based
pricing. The parties involved expect the transaction to close
in the second quarter of 2009.
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Labor
Agreements
Our labor
costs at Ravenswood and Hawesville are subject to the terms of labor contracts
with the United Steelworkers of America (“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.
|
Facility
|
Organization
|
Term
|
|
Hawesville
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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
May 31, 2009
|
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Grundartangi
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Icelandic
labor unions
|
Through
December 31, 2009
|
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Gramercy
|
USWA
|
Through
September 30, 2010
|
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St.
Ann (1)
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Jamaican
labor unions
|
Through
April 30, 2007 and December 31,
2010
|
|
(1)
|
St.
Ann has two labor unions, the University and Allied Workers Union (the
“UAWU”) and the Union of Technical and Supervisory Personnel (the
“UTASP”). We signed a contract with the UTASP in December 2008;
the contract term is through December 31, 2010. Contracts with
the UAWU expired on April 30, 2007. We are currently in
arbitration for the UAWU contract and expect a decision in expected in the
second quarter of 2009. There has been no change in mine
operations and none is expected. We expect any contract changes will
be applied retroactively to the expiration
date.
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Pricing
Our
operating results are 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.
We offer
a number of pricing alternatives to our customers which, combined with our
metals risk management activities, are designed to achieve a certain level of
price stability on our primary aluminum sales. 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 its tolling revenues are based on a percentage of the LME
price. Grundartangi is not directly exposed to fluctuations in the
price of alumina. Grundartangi’s tolling revenues include a premium
based on the European Union (“EU”) import duty for primary
aluminum. In May 2007, the EU members reduced the 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 impacted Grundartangi’s revenues and further
decreases would also have a negative impact on Grundartangi’s
revenues.
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Primary
Aluminum Facilities
|
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: (i) an investment agreement which establishes Grundartangi's
tax status and the Government's obligations to grant certain permits; (ii) a
reduction plant site agreement by which Grundartangi leases the property through
2020, subject to renewal at its option; and (iii) a harbor agreement by which
Grundartangi is granted access to the port at Grundartangi.
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 18 in the Consolidated Financial Statements for
more information about these agreements.
Power. Grundartangi purchases
power from Landsvirkjun (a power company jointly owned by the Republic of
Iceland), 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 a rate 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 establishes wages and work rules for covered
employees for the period through December 31, 2009.
Hawesville
Hawesville
is owned by our subsidiary, Century Kentucky, Inc. 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.
Four of
Hawesville's potlines are specially configured and operated to produce high
purity primary aluminum and have an annual production capacity of approximately
195,000 metric tons. 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. The high purity primary aluminum
provides the conductivity required by Hawesville’s largest customer, Southwire,
for its electrical wire and cable products as well as for certain aerospace
applications. A fifth potline has an annual capacity of approximately
49,000 metric tons of standard-purity aluminum.
Metal Sales
Agreement. Hawesville has a long-term aluminum sales contract
with Southwire (the “Southwire Metal Agreement”). The Southwire Metal
Agreement expires March 31, 2011, subject to automatic renewal for additional
five-year terms, unless either party provides 12 months’ notice that it has
elected not to renew. 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. Southwire has an option to purchase an equal amount of standard-grade
molten aluminum in 2011.
Alumina. Hawesville
purchases alumina under a supply agreement with Gramercy Alumina LLC (“GAL”),
our 50% joint venture company, which owns and operates the Gramercy alumina
refinery. The alumina supply agreement runs through December 31, 2010
and the contract pricing varies based on GAL’s cost of
production.
Power. Hawesville
purchases substantially all of its power from Kenergy Corp. (“Kenergy”), a
retail electric member cooperative of Big Rivers Electrical Corporation (“Big
Rivers”), under a power supply contract that expires at the end of
2010. Under this contract, approximately 70% of this power is at
fixed prices. We continuously review our options to manage the
remaining power balance of 30% and price it when we believe the combination of
price and term are appropriate.
We are
working with Big Rivers Electric Corporation (“Big Rivers”) and Kenergy on a
proposal that would restructure and extend the existing power supply contract
through 2023. Hawesville’s proposed new long-term power contract was
filed with the Kentucky Public Service Commission in December
2008. The contract would provide all of Hawesville’s power
requirements through 2023 at cost-based pricing. The parties involved
expect the transaction to close in the second quarter of 2009.
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.
Ravenswood
The
Ravenswood facility (“Ravenswood”) is owned and operated by our subsidiary,
Century Aluminum of West Virginia, Inc.
(“Century of West Virginia”). Built in 1957, Ravenswood operates four
potlines with a production capacity of 170,000 metric tons. The
facility is located adjacent to the Ohio River near Ravenswood, West Virginia.
As the
rapid and significant deterioration in our industry’s conditions became evident
during the second half of 2008, we began taking actions to reduce our overall
cost base. At Ravenswood, we suspended production of one potline in
December 2008, representing approximately 42,500 mtpy, or approximately 25% of
the plant’s capacity. We also agreed to reduce deliveries to Alcan, our major
customer at Ravenswood. In addition, we issued a Federal Worker
Adjustment and Retraining Notification ("WARN") Act notice on
December 17, 2008, commencing a 60-day process, which at its conclusion led
to the decision to curtail the operations of the entire plant. We initiated this
process due to Ravenswood’s high operating cost in relation to our other
facilities. In February 2009, we conducted an orderly
curtailment of the remaining 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 the possibility of restarting. See
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Recent Developments” for additional information about the
Ravenswood curtailment.
Metal Sales Agreements. We
have a supply contract with Alcan under which Alcan will purchase 14 million
pounds (approximately 6,350 metric tons) per month of molten aluminum through
August 31, 2009 (the “Alcan Metal Agreement”). The price for primary
aluminum delivered under the Alcan Metal Agreement is variable and determined by
reference to the U.S. Midwest Market Price. Under this contract, we
can deliver molten aluminum, which reduces our casting and shipping
costs. Prior to the Ravenswood curtailment in February 2009, we sold
10,200 metric tons per year of primary aluminum produced at Ravenswood under a
contract with Glencore (the “Glencore Metal Agreement II”). Under the
Glencore Metal Agreement II, Glencore purchased a total of 20,400 metric tons
per year of the primary aluminum produced at the Ravenswood and Mt. Holly
facilities, 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. We plan to assign Ravenswood production requirements under
this contract to Mt. Holly or 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 Alcan and Glencore. For a description
of certain risks attendant to these agreements, see Item 1A, “Risk
Factors.”
Alumina. Glencore
supplies the alumina used at Ravenswood under a contract that expires on
December 31, 2009. The contract pricing varies based on the LME price
for primary aluminum. If we are unable to use the contracted
alumina in our other operations or sell the alumina at prices consistent with
our contract costs, we could incur significant losses under these
contracts. As a result of the Ravenswood curtailment, we expect to incur
cash losses of approximately $15 to $20 million in 2009 associated with the sale
of excess alumina that will be received under this alumina supply
agreement. This estimate is based on current alumina contract pricing
which is indexed to LME prices for primary aluminum, our estimate of spot
alumina prices and the forecasted internal use of a portion of this material in
our other smelting operations. For a description of
certain 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. Effective July 28, 2006, the Public Service Commission for
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. Under our agreement with APCo, we are
obligated to pay minimum demand charges through the contract term which expires
June 30, 2009. We expect that those minimum demand charges will be
approximately $5.0 to $6.0 million in 2009.
In April
2008, APCo requested a rate increase to cover the increased cost of fuel and
purchased power as well as capital improvements. The West Virginia
Public Service Commission approved an approximate 11% increase in the special
contract rate paid by our Ravenswood smelter on June 26, 2008. The
rate increase was effective July 1, 2008.
Employees. The
bargaining unit employees at Ravenswood are represented by the
USWA. The collective bargaining agreement that covers all of the
represented hourly employees at Ravenswood expires May 31, 2009.
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 to Glencore 50,000
metric tons of primary aluminum produced at Mt. Holly each year through December
31, 2009 (the “Glencore Metal Agreement I”). The Glencore Metal
Agreement I provides for variable pricing determined by reference to the quoted
LME price of primary aluminum. Mt. Holly also sells 10,200 metric
tons per year of primary aluminum under the Glencore Metal Agreement II. More
information on the Glencore Metal Agreement II is available under “Long-term
Primary Aluminum Sales Contracts” in Note 18 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 are 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.
Employees. The
employees at Mt. Holly are employed by Alcoa and are not unionized.
Helguvik
greenfield 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 global economic crisis and weakening 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 modest capital expenditures for the construction and
development of our new Helguvik smelter project. In 2008, we expended
cash of approximately $71 million in capital expenditures for the Helguvik
greenfield project, and, from inception through December 31, 2008, we expended
cash of approximately $83 million for Helguvik. We expect that capital
expenditures on this project during 2009 will be in the range of $25 to
$30 million until and unless a decision is made to restart major
construction and engineering activities. This amount includes approximately
$19 million for deferred payments to suppliers.
Power Supply
Agreements. Nordural Helguvik has signed electrical power
supply agreements with HS Orka hf and OR, for the proposed Helguvik
smelter. Under the agreements, power will be supplied to the proposed
Helguvik facility in four 90,000 mtpy stages, beginning with an initial phase of
up to 160 megawatts (“MW”). HS Orka hf will provide up to 150 MW in
this initial stage, and OR will supply up to 47.5 MW. Electricity
delivery for this first phase is targeted to begin in late 2011. The
agreements which are subject to the satisfaction of certain conditions provide
for additional power, as available to support a complete potline of 360,000
mtpy.
Site and other
agreements. To date, we have signed a site agreement and a
harbor agreement.
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.
Transmission Agreement. In
October 2007, Nordural Helguvik signed a transmission agreement with Landsnet to
provide an electrical power transmission system to the proposed Helguvik
smelter. Landsnet is the company responsible for operating and
managing Iceland’s 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.
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Joint
Venture Facilities
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Baise
Haohai Carbon Company, Ltd.
In April
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 production capacity of 20,000 metric tons. Construction on
the facility was completed in 2008.
We paid
$27.6 million for the investment and transferred an additional $9.4 million for
a loan to BHH. 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. We received a $1.8 million payment on our loan to
BHH in December 2008.
BHH is
currently operating at 50% of its rated capacity due to the reduced operations
of its main customer in China.
Gramercy
Alumina LLC (“GAL”)
The
alumina refinery in Gramercy, owned by GAL, is equally owned by Century and a
joint venture partner. Gramercy began operations in 1959 and consists
of a production facility, a powerhouse for steam and electricity production, a
deep water dock and a barge loading facility. Extensive portions of
the Gramercy plant were rebuilt and modernized between 2000 and
2002.
Alumina
Operations. The Gramercy refinery has an annual rated capacity
of 1.2 million metric tons of alumina per year. Gramercy’s production
consists of approximately 80% smelter grade alumina and 20% alumina hydrate or
chemical grade alumina. GAL sells approximately 50% of its smelter
grade alumina to Hawesville at prices based on Gramercy's production costs under
an alumina supply contract due to expire on December 31, 2010. All of
the chemical grade alumina production is currently sold under short-term and
long-term contracts with approximately twenty third-party customers. Gramercy is
currently operating at a reduced capacity of 500,000 metric tons of smelter
grade alumina while we and our joint venture partners assess market
conditions. Gramercy’s chemical grade alumina production has not been
affected by this reduction in production.
Supply
Agreements. Bauxite is the principal raw material used in the
production of alumina, and natural gas is the principal energy
source. The Gramercy plant purchases all of its bauxite requirements
from St. Ann Bauxite Ltd. under a contract that expires at the end of 2010. The
Gramercy plant purchases its natural gas requirements at market prices under
agreements with local suppliers.
St.
Ann Bauxite Limited (“SABL”)
SABL,
which owns bauxite mining operations, is equally owned by Century and a joint
venture partner. The bauxite mining operations are comprised of: (i)
a concession from the Government of Jamaica (“GOJ”) to mine bauxite in Jamaica
(the “mining rights,”) and (ii) a 49% interest in a Jamaican partnership that
owns certain mining assets in Jamaica (the “mining assets”). The GOJ
owns the remaining 51% interest in the partnership. The mining assets
consist primarily of rail facilities, other mobile equipment, dryers, and
loading and dock facilities.
Bauxite Mining
Rights. Under the terms of the mining rights, SABL manages the
operations of the partnership, pays operating costs and is entitled to all of
its bauxite production. The GOJ receives: (i) a royalty based on the
amount of bauxite mined, (ii) an annual “asset usage fee” for the use of the
GOJ's 51% interest in the mining assets and (iii) certain fees for lands owned
by the GOJ that are covered by the mining rights. SABL also pays to
the GOJ customary income taxes and certain other fees pursuant to an agreement
with the GOJ that establishes a fiscal regime for SABL. A production
levy normally applicable to bauxite mined in Jamaica has been waived for SABL
through December 2008. If the levy is subsequently assessed on
bauxite produced by SABL, the Establishment Agreement provides that certain
payments to the GOJ will be reduced and SABL and the GOJ will negotiate
amendments to SABL's fiscal regime in order to mitigate the effects of the
levy.
Under the
terms of the mining rights, SABL mines the land covered by the mining rights and
the GOJ retains surface rights and ownership of the land. The GOJ
granted the mining rights and entered into other agreements with SABL for the
purpose of ensuring the St. Ann facility is able to provide its customers with
sufficient reserves to meet their annual alumina requirements.
Under the
mining rights, GOJ has granted SABL rights to mine 4.5 million dry metric tons
of bauxite on specified lands annually through September 30,
2030. The GOJ will provide additional land if the land covered by the
mining rights does not contain sufficient quantities of commercially exploitable
bauxite. SABL is responsible for reclamation of the land that it
mines. As of December 31, 2008, SABL’s reclamation obligations
amounted to approximately $7.4 million.
Customers. Approximately
60% of the bauxite from St. Ann is refined into alumina at the Gramercy
refinery and the remainder is sold to Sherwin Alumina Company, which is owned by
Glencore, a related party. SABL and GAL have a contract under which
SABL will supply the Gramercy plant's bauxite requirements through December
2010. The price for bauxite under the contract is fixed through
2010.
SABL has
various short-term agreements with third parties for the supply of fuel oil,
diesel fuel, container leasing and other locally provided
services.
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Environmental
Matters
|
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 Note 17 Commitments and Contingencies to the
Consolidated Financial Statements included herein.
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Intellectual
Property
|
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
|
As of
February 27, 2008, we employed a work force of approximately 1,370 employees,
which reflects layoffs as a result of the curtailment of our operations at
Ravenswood.
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Available
Information
|
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, Suite A200, 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.
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.
Recent
declines in aluminum prices have adversely affected our financial position and
results of operations and could result in further curtailment of operations at
one or more of our facilities if alternate sources of liquidity are not
available or prices do not increase.
The price
of primary aluminum is frequently volatile and changes in response to general
economic conditions, expectations for supply and demand growth or contraction
and the level of global inventories. The recent 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. The Chinese market
has become a significant source of global demand for primary aluminum and now
represents approximately one-third of global aluminum demand. China’s demand for
aluminum has more than doubled in the last five years, but demand has recently
declined significantly. Declining demand for aluminum products in
developed and developing nations, increasing stocks on the LME and other
locations, and a general lack of confidence in future economic conditions, have
combined to produce an unprecedented decline in the LME price for aluminum. The
price we realize for our products is primarily set on the LME; we have no
ability to influence this price. The LME price has fallen 62% from its high on
July 11, 2008 ($3,292 per metric ton), to February 20, 2009 ($1,264 per metric
ton), with the rate of decline accelerating in the fourth quarter of 2008. This
decline represents one of the most, if not the most, substantial and rapid in
the history of recorded LME prices. The average LME price for primary aluminum
dropped 53% in the second half of 2008 and, at December 31, 2008, was
approximately 38% lower than at December 31, 2007. At February 20, 2009, the LME
price for primary aluminum was $1,264 per metric ton, or 16% lower than at
December 31, 2008.
Any
decline in aluminum prices adversely affects our business, our financial
position, our results of operations and our cash flows. Sustained depressed
prices for aluminum would likely have a material adverse impact on our financial
position, results of operations and cash flows. At recent primary aluminum
prices, we believe at least two-thirds of global primary aluminum capacity,
including all of our domestic facilities, is operating below cash breakeven.
Recently, we have seen certain operating costs begin to decrease. The pricing
under our alumina contract at Mt. Holly is linked to the LME price for primary
aluminum; as a result, such costs have fallen. However, other
operating expenses may not decrease to any meaningful extent or, in certain
cases, may even increase. If the price we realize for our products
continues to be below our cost of production, we will have to rely on other
sources of liquidity to fund our operations. If primary aluminum prices were to
remain at or near recent levels for the entirety of 2009, or were to decline
further, our liquidity would be at risk. 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. We cannot assure you that any of these financing
alternatives will be available or, if available, that they will be successfully
completed. In addition, 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 contain restrictive
covenants. We may also curtail additional operations at one or more
of our facilities. Such curtailments require cash expenditures which
we might not be able to fund. There can be no assurances that in current market
conditions 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.
A
continuation or worsening of global financial and economic conditions could
adversely impact our
financial
position and results of operations.
The
recent global financial and credit market disruptions have reduced the
availability of liquidity and credit generally. The shortage of liquidity and
credit, combined with recent substantial reductions in asset values, is likely
extending and worsening the worldwide economic recession. The general slowdown
in economic activity caused by the recent domestic recession and difficult
international financial and economic conditions will adversely affect our
business, as the demand for primary aluminum has been reduced and the price of
our products has fallen. A continuation or worsening of the current difficult
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
financial position, results of operations and cash flows.
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 the deterioration of these
markets.
Our
consolidated cash and short-term investment balance at January 31, 2009 was
approximately $154 million. This amount includes $25 million borrowed under our
revolving credit facility during the fourth quarter of 2008 and invested in
highly rated short-term securities. During February 2009, we repaid
the borrowing under our revolving credit facility and completed a public
offering of 24.5 million shares of our common stock. The net proceeds
of the offering to us were approximately $104.7 million, after underwriter
discounts and commissions, and before offering expenses. Pro forma
for the revolving credit facility repayment and the common stock offering
proceeds, our cash and short-term investment balance at January 31, 2009 would
have been $235 million. Availability under our revolving credit
facility would be up to $35 million. This availability has been and
will continue to be reduced by the reduced value of our inventory and the
curtailment of operations at the Ravenswood facility, which reduces the working
capital constituting the borrowing base under the revolving credit
facility. For more information, see Item 7, Management’s Discussion
and Analysis of Financial Position and Results of Operations – Liquidity and
Capital Resources - Liquidity. Due to the recent downturn in the
financial markets, including the issues surrounding the solvency of many
institutional lenders and the recent failure of several banks, we may be unable
to utilize the full borrowing capacity under our credit facility if any of the
committed lenders is unable or unwilling to fund their respective portion of any
funding request we make under our credit facility. 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. Finally, our revolving credit facility will mature in September 2010,
and the holders of our $175 million principal amount of convertible notes 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 as market prices up to
the principal amount of the convertible notes upon conversion, which may occur
at any time. Each of these events will increase our liquidity needs.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations —Liquidity and Capital Resources” for additional
information about our sources of liquidity.
Although
in the past we have generally been able 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 remain on average at or around recent levels, or were to decline further, or
(2) our costs are higher than contemplated, or (3) we suffer unexpected
production outages, or (4) Icelandic laws change and limit our access to cash
flow from our Icelandic operations, our expectations of our liquidity would
change and we would need to identify additional sources of liquidity sooner and
the period of time for which we would expect our liquidity to be sufficient to
fund our operations would be shorter. Current conditions have made,
and will likely continue to make, it difficult to obtain new funding for our
operating and capital needs, if required, from the credit and capital markets.
In particular, the cost of raising money in the debt and equity capital markets
has increased, while the availability of funds from those markets has diminished
and we have limited available committed financing. 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 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. An inability to access capital
and credit markets could be expected to have an adverse effect on our results of
operations and financial position.
Due to
these factors, we cannot be certain that funding for our operating or capital
needs will be available from the credit and capital markets if needed and to the
extent required, or on acceptable terms. 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, any of which could have a material
adverse effect on our revenues, results of operations and financial
position.
The
recent turmoil in the financial markets could have 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 in
2008 due to the global financial crisis, the benefit plans we maintain were
underfunded as of December 31, 2008, and could require significant cash
contributions in 2010, further stressing our liquidity position. If capital
markets remain depressed, pension fund balances would remain reduced and
additional cash contributions to the pension funds would be
required.
If
economic and political conditions in Iceland continue to deteriorate, our
financial position and results of operations could be adversely
impacted.
Approximately
one-third of our existing primary aluminum production capacity is located in
Iceland. In addition, our most significant new growth prospects are in Iceland.
In order to operate our business and pursue our growth activities, we maintain
cash management accounts in Iceland with Icelandic banks. The three major
Icelandic banks were taken into government administration during the fourth
quarter of 2008, and, on January 26, 2009, Iceland’s Prime Minister and his
cabinet resigned, requiring an interim government until elections scheduled to
be held in May 2009. As a result of concern about the stability of the Icelandic
financial markets, cash management activities in Iceland have become more
challenging. 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. 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. The Icelandic government has fully
guaranteed all of the accounts in the Icelandic banks and both before and after
the banks were taken into government administration our transactions through the
Icelandic banking system have been successfully transmitted. However, 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. On January 27, 2009, the Icelandic president assigned the task
of forming a new government to the Social Democratic party. The Social
Democratic party led a minority government formed with the Left Green
Party. The Left Green Party has generally been less supportive of
aluminum projects than the parties leading the prior government. This
change in Icelandic government could delay or otherwise adversely affect the
passage of the Enabling Act and approval of the Investment
Agreement. While we cannot predict the outcome of the upcoming
elections, uncertainty or instability in the Icelandic government could have an
adverse effect on our business.
The
market price of our common stock has declined significantly, may continue to be
volatile, and may decline further.
As a
result of the global economic and financial crisis and the global decline in
aluminum prices, the market price of our common stock has declined significantly
in recent months, and it may continue to be volatile. From January 1, 2008,
through February 20, 2009, the intra-day sales price of our common stock on
NASDAQ ranged from $2.22 to $80.52 per share. In addition, the securities
markets have experienced significant price and volume fluctuations. The market
price for our common stock may be affected by a number of factors, including
actual or anticipated variations in our quarterly results of operations,
expectations about the future price of aluminum, changes in earnings estimates
or recommendations by securities analysts, changes in research coverage by
securities analysts, any announcement by us of significant acquisitions,
curtailments, strategic partnerships, joint ventures or capital commitments,
developments in the aluminum industry, including with respect to our major
competitors, and sales of substantial numbers of shares by current holders of
our common stock in the public market. In addition, general economic, political
and market conditions and other factors unrelated to our operating performance
may cause the market price of our common stock to be volatile. We cannot predict
the price at which our common stock will trade in the future, and it may
continue to decline. As a result, holders of our stock may not be
able to sell it when they want, at prices they want or at all.
Our
planned construction and development activities require substantial capital. We
may be unable to obtain needed capital or financing on satisfactory terms or at
all, which could delay or curtail our planned construction
projects.
In light
of current global financial and economic conditions, we are reviewing our
capital plans and reducing, stopping or deferring all non-critical capital
expenditures in our existing smelters. We have made and continue making modest
capital expenditures for the construction and development of our new Helguvik
smelter project. In 2008, we expended approximately $71 million in capital
expenditures for the Helguvik greenfield project, and, from inception through
December 31, 2008, we expended approximately $83 million for Helguvik. We are
currently evaluating the Helguvik project’s cost, scope and schedule in light of
the global economic crisis and weakening commodity prices. During this
evaluation process, we have significantly reduced spending on the project; we
expect that capital expenditures on this project during 2009 will be in the
range of $25 to $30 million until and unless a decision is made to restart major
construction and engineering activities. This amount includes approximately $19
million for deferred payments to suppliers. See “— Construction at our Helguvik
smelter site is under review” below.
We intend
to finance our future capital expenditures from available cash, our cash flow
from operations and from future capital raising. 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. Continued turbulence in the U.S. and international markets and
economy may adversely affect our liquidity, our ability to access the capital
markets and our financial condition. If additional capital resources are
unavailable, we may further curtail construction and development
activities.
Construction
at our Helguvik smelter site is under review.
We are
currently evaluating the Helguvik project’s cost, scope and schedule in light of
the global economic crisis and weakening commodity prices. During this
evaluation process, 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 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, and a
loss of our investment would have a negative impact on our future
earnings.
If we
decide to proceed, this project is subject to various contractual approvals and
conditions. There can be no assurance that we will receive the necessary
approvals to proceed with construction of our Helguvik smelter, on a timely
basis or at all. In addition, such approvals as we do receive may be subject to
conditions that are unfavorable or make the project impracticable or less
attractive from a financial standpoint. Even if we receive necessary approvals
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 negative impact on our financial performance and future
prospects.
We
may be required to write down the 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
current lack of profitability of certain of our production facilities and, more
generally, 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. In December 2008, we determined an
impairment charge to reduce the carrying value of a portion of our long-lived
assets was not currently required under Statement of Financial Accounting
Standards No. (“FAS”) 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” We will continue to evaluate these assets as long
as events or circumstances indicate that their net carrying amount may not be
recoverable and we may be required to record impairment charges in the
future. We recorded a $94.8 million impairment charge to eliminate
the carrying value of our goodwill relating to the acquisition of Nordural in
accordance with FAS 142, “Goodwill and Other Intangible Assets.” We
also recorded a $544.1 million valuation allowance against a significant portion
of our deferred tax assets based upon our best estimate of our ability to
realize the net deferred tax assets. Management 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.
Our
credit ratings have been recently changed by two major credit rating
agencies.
Two major
credit rating agencies have recently changed the status of our ratings on a
general basis and on our specific debt securities. On January 30, 2009, Standard
& Poor’s removed their CreditWatch and downgraded our credit rating to “B”
with a negative outlook from “BB-“. Standard & Poor’s has stated
that the downgrade reflects their expectation that operating results will
deteriorate over the next several quarters due to continued low aluminum prices
that are unlikely to show significant improvement until general economic
activity picks up globally and high inventory levels are
reduced. According to Standard & Poor’s, an obligation rated “B”
is more vulnerable to nonpayment than obligations rated “BB”, but the obligor
currently has the capacity to meet its financial commitment on the
obligation. Standard & Poor’s also notes that adverse business,
financial, or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation. On
December 17, 2008, Moody’s Investors Service downgraded our credit rating to
“B2” from “Ba3” and kept our ratings under review for further possible
downgrade. Moody’s has stated the “B2” corporate family rating reflects Moody’s
expectation that earnings and cash flow will be pressured by the impact of
substantially lower aluminum prices on our higher cost U.S.
operations. According to Moody’s, obligations rated “B” are
considered speculative and subject to high credit risk. A security rating is not
a recommendation to buy, sell or hold securities, it may be subject to revision
or withdrawal at any time by the assigning rating organization and each rating
should be evaluated independently of any other rating. These recent actions by
Standard & Poor’s and Moody’s, and any further actions the credit rating
agencies may take, could negatively impact our ability to access liquidity in
the credit and capital markets in the future and could lead to worsened trade
terms, increasing our liquidity needs.
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. Currently, we are experiencing
unfavorable global economic conditions and a substantial decline in worldwide
demand for primary aluminum. Declines in primary aluminum prices
reduce our earnings and cash flows. This downturn in aluminum prices has
significantly reduced the amount of cash available to meet our current
obligations and fund our long-term business strategies.
Our
molten aluminum sales at Ravenswood and Hawesville are subject to sales
contracts which limit our ability to cut costs and create dependence on two
major customers.
We have
contracts with Alcan and Southwire which are due to expire in August 2009 and
March 2011, respectively. These contracts obligate us to deliver required
quantities of aluminum which limit our ability to cut costs by curtailing
operations. In addition, our contract with Southwire requires us to deliver
molten metal. Curtailing operations at these facilities does not
relieve us of our contractual obligations. We will continue to incur
costs under these contracts to meet our contractual obligations, including
potentially securing other aluminum to satisfy our obligations.
In
addition, when LME prices improve, the loss of Southwire as a customer could
increase our production costs at Hawesville and increase our sales and marketing
costs. Approximately 20% of our consolidated net sales for 2008 were derived
from sales to Southwire. Southwire’s facility is located adjacent to Hawesville.
Due to this proximity, we are able to deliver molten aluminum to this customer,
thereby eliminating our casting and shipping costs and our customer’s freight
and remelting costs and reducing our sales and marketing costs. We may be unable
to extend or replace our contract with Southwire when it terminates. If we are
unable to renew this contract 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. Hawesville is not currently qualified to sell metal directly
to the LME; if it were required to make sales outside of the Southwire long-term
contract prior to us receiving this qualification, these sales would likely
require the services of third party agents which would require us to incur
additional costs. There can be no assurance that our current initiatives to
qualify Hawesville will be successful.
We
will be required to incur substantial costs in order to curtail unprofitable
aluminum production.
None of
our U.S. smelting capacity is profitable on a cash basis at recent primary
aluminum prices, and we are currently assessing cost reduction actions,
including the further curtailment of production at unprofitable facilities, in
light of these unfavorable economic conditions. We have curtailed our operations
at Ravenswood and additional operations at our facilities could be curtailed
unless the LME selling price for aluminum stabilizes and we are able to
materially reduce costs and stem monthly losses. Curtailing unprofitable
production in order to reduce our operating costs will require us to incur
substantial expense, both at the time of the curtailment and ongoing. These
facilities are subject to contractual and other fixed costs that will continue
even if we curtail operations at these facilities. These costs will reduce the
cost saving advantages of curtailing unprofitable aluminum production. In
addition, the prospect of these costs limits our flexibility to curtail all of
our unprofitable production. In addition to these costs, our joint
ownership of certain of our operations limits our ability to curtail these
operations.
Losses
caused by disruptions in the supply of power would reduce the profitability of
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 failure, 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
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.
The
cost of alumina used at Hawesville may be higher than under our LME-based
alumina contracts.
We
acquire alumina used at Ravenswood and Mt. Holly at prices based on the LME
price for primary aluminum. Gramercy supplies substantially all of the alumina
used at Hawesville at prices based on Gramercy’s production costs. Those
production costs are materially higher than the price paid under LME based
contracts during periods, such as exist at the present time, when aluminum
prices are low.
Changes
or disruptions to our current alumina and other raw material supply arrangements
could increase our raw material costs.
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. Gramercy supplies
substantially all the alumina used at Hawesville. Our joint venture bauxite
mining operation in St. Ann, Jamaica, supplies all of the bauxite used in the
production of alumina at Gramercy. If there is a significant disruption of St.
Ann bauxite shipments in the future, Gramercy could incur additional costs if it
is required to use bauxite from other sources. Our business also
depends upon the adequate supply of other raw materials, including caustic soda,
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 or other
unforeseen factors may adversely affect our operating results if we are unable
to secure alternate supplies of these materials at comparable
prices.
Our
contracts for alumina require us to take-or-pay for fixed quantities of alumina,
even if we curtail unprofitable production capacity.
We have
contractual obligations under our existing alumina purchase contracts to
take-or-pay for specified quantities of alumina over the term of those
contracts, regardless of our operating requirements. We have an alumina
contract with Glencore to supply Ravenswood through December 2009. We also
have entered into a follow-on long-term alumina contract with Glencore to
provide for our future alumina requirements for Ravenswood and, potentially, our
Helguvik project. Deliveries under that contract will begin in January
2010 and continue through 2014.
In
February 2009, we curtailed operations at our Ravenswood facility; in addition
our Helguvik project is under review. We cannot be certain when or if we will
restart major construction and engineering activities or ultimately complete the
Helguvik project. See the risk factor “Construction at our Helguvik
smelter site is under review” above for additional information about this
project. Curtailing operations does not relieve us of our contractual
obligations. We will continue to incur costs under these contracts to meet
or settle our contractual obligations.
If we are
unable to use the contracted alumina in our other operations or sell the alumina
at prices consistent with our contract costs, we could incur significant losses
under these contracts. As a result of the Ravenswood curtailment, we
expect to incur cash losses of approximately $15 to $20 million in 2009
associated with the sale of excess alumina that will be received under our
alumina supply agreement that expires December 31, 2009. This
estimate is based on current alumina contract pricing which is indexed to LME
prices for primary aluminum, our estimate of spot alumina prices and the
forecasted internal use of a portion of this material in our other smelting
operations.
Changes
in the relative cost and availability of certain raw materials and energy
compared to the price of primary aluminum could affect our operating
results.
Our
operating results vary significantly with changes in the price of primary
aluminum and the raw materials used in its production, including alumina,
caustic soda, 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 and 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. 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. We purchase
a significant portion of our electricity for our U.S. facilities under
fixed-price contracts. Portions of the contracted cost of the electricity
supplied to Mt. Holly vary with the supplier’s fuel costs. An increase in these
fuel costs would increase the price this facility pays for electricity. Costs
under this contract have substantially increased in recent years, and this trend
appears to be continuing into 2009. Approximately 70% of Hawesville’s power
requirements are supplied under a fixed-price contract. As a result, Hawesville
is subject to market-based pricing for approximately 30% of its power
requirements. The profitability of Hawesville is affected by the market price
for electric power. We are working with a local power company on a proposal that
would restructure and extend Hawesville’s existing power supply contract through
2023. This agreement is expected to close in the second quarter of
2009 and is subject to contractual conditions, which include obtaining the
approvals of federal and state regulatory agencies. We cannot assure whether or
when the closing will occur. If we are not successful in replacing such power
requirements, we may be forced to curtail or idle a portion of our production
capacity, which would lower our revenues and adversely affect the profitability
of our operations when the price of primary aluminum is high. If we are
successful in restructuring the contract for the power supply at Hawesville, the
new rate we will pay, which will be based on the supplier’s cost of production,
could be higher than the price we currently pay under our current fixed-price
contract, which could increase Hawesville’s production costs.
Unexpected
events, including natural disasters, may increase our cost of doing business or
disrupt our operations.
Unexpected
events, including fires or explosions at our facilities, natural disasters, such
as hurricanes, unplanned power outages, supply disruptions, or equipment
failures, may increase our cost of doing business or otherwise disrupt our
operations.
We
are subject to the risk of union disputes.
The
bargaining unit employees at Ravenswood and Hawesville and Gramercy are
represented by the USWA. Century’s USWA labor contracts at Ravenswood and
Hawesville and the labor contract at Gramercy expire in May 2009, March 2010 and
September 2010, respectively. Our bargaining unit employees at Grundartangi are
represented by five unions under a collective bargaining agreement that expires
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 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 results.
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, the EU and Jamaica. 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. We, along with others,
including current and former owners of a facility on St. Croix in the Virgin
Islands, formerly owned by a subsidiary of ours, have been sued for alleged
natural resources damages at the facility. In addition, in December 2006,
Century and the company that purchased the assets of our St. Croix facility in
1995 were sued by the Commissioner of the U.S. Virgin Islands Department of
Planning and Natural Resources, alleging our failure to take certain actions
specified in a Virgin Islands Coastal Zone management permit issued to our
subsidiary, Virgin Island Alumina Corporation LLC, in October 1994. In July
2006, Century was named as a defendant together with certain affiliates of Alcan
Inc. in a lawsuit brought by Alcoa Inc. seeking to determine responsibility for
certain environmental indemnity obligations related to the sale of a cast
aluminum plate manufacturing facility located in Vernon, California, which we
purchased from Alcoa Inc. in December 1998, and sold to Alcan Rolled
Products-Ravenswood LLC in July 1999. Our known liabilities with respect to
these and other matters relating to environmental compliance and cleanup, based
on current information, are not expected to be material. 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 be material and
could affect our liquidity and our operating results. 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. See Note 17 to our Consolidated
Financial Statements included herein for additional information regarding our
environmental matters and associated costs and risks.
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 if 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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we
may spend time and money pursuing target acquisitions that do not
close;
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acquired
companies may have contingent or hidden
liabilities;
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it
may be challenging for us to manage our existing business as we integrate
acquired operations;
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we
may not achieve the anticipated benefits from our acquisitions;
and
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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.
International
operations expose us to political, regulatory, currency and other related
risks.
Grundartangi
was our first facility located outside of the United States, and it represents
approximately 33% of our overall primary aluminum production capacity. In
addition, we have begun to construct an aluminum smelter near Helguvik, Iceland.
The St. Ann bauxite operations related to Gramercy are located in Jamaica. In
April 2008, we purchased 40% of Baise Haohai Carbon Co., Ltd., a carbon anode
and cathode facility located in the Guangxi Zhuang Autonomous Region of south
China. 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. 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. Grundartangi’s revenues are denominated in U.S.
dollars, while its labor costs are denominated in ISK and a portion of its anode
costs are denominated in euros. Economic, financial and political conditions in
Iceland have deteriorated significantly. See “— If economic and political
conditions in Iceland continue to deteriorate, our financial position and
results of operations could be adversely impacted.” and “— Construction at our
Helguvik smelter site is under review” above for more information. 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.
Our
historical financial information may not be comparable to our results for future
periods.
Our
historical financial information is not necessarily indicative of our future
results of operations, financial position and cash flows. For example, certain
of our historical financial data do not reflect the effects of:
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the
130,000 mtpy expansion capacity of Grundartangi that was completed in the
fourth quarter of 2006;
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the
40,000 mtpy expansion capacity of Grundartangi that was completed in the
fourth quarter of 2007; and,
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our
results for 2008 also do not reflect the February 2009 curtailment of
Ravenswood’s remaining three
potlines.
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Our level of
indebtedness requires significant cash flow to meet our debt service
requirements, which reduces cash available for other purposes, such as the
payment of dividends, and limits our ability to pursue our growth
opportunities.
We had an
aggregate of approximately $458 million of outstanding indebtedness, including
$25 million borrowed under our revolving credit facility, as of December 31,
2008. See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources” for
additional information.
The level
of our indebtedness could have important consequences, including:
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increasing
our vulnerability to adverse economic and industry
conditions;
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limiting
cash flow available for 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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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
we have to service the interest on our outstanding debt and for other
uses. We will be required to settle in cash at market prices up to
the principal amount of our $175 million principal amount of convertible notes
(which are convertible at market value by the holder at any time) upon
conversion, which could increase our debt service obligations. In August 2011,
the holders of these convertible notes have an option to require us to
repurchase all or any portion of these securities at par. In addition to our
indebtedness, we have liabilities and other obligations which could reduce cash
available for other purposes and could limit our ability to pursue our growth
opportunities. We are also exposed to risks of interest rate
increases. Our industrial revenue bonds (“IRBs”) and any borrowings on our
credit facility are at variable interest rates. Future borrowing
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.
Our
ability to pay interest and to repay or refinance our indebtedness, including
our senior unsecured notes and convertible notes 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, and access to additional sources of liquidity. Accordingly, there
is 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
indebtedness 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.
Restrictive
covenants in our credit facility and the indenture governing our senior notes
limit our ability to incur additional debt and pursue our growth
strategy.
Our
revolving credit facility and the indenture governing our senior 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 pursue our growth
strategy. Any failure to comply with those covenants would likely
constitute a breach under the revolving credit facility or the indenture
governing the 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.
If
we are unable to procure a reliable source of power, the Helguvik project would
not be feasible.
Our
greenfield smelter near Helguvik, Iceland, will require generation and
transmission of geothermally generated electricity to power the smelter. Our
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 company agreements are subject to certain
conditions, some of which are not expected to be satisfied until June 2009.
These conditions include approvals by the boards of directors of the power
companies, as well as environmental agency approvals for the power producing
assets. 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. Factors which could delay or impede the generation and
delivery of electric power are substantially beyond our ability to control,
influence or predict. In October 2007, Nordural signed a transmission agreement
with Landsnet to provide an electrical power transmission system to the Helguvik
smelter. If we are unable to proceed with the project, we would have to
reimburse Landsnet for certain expenditures under this agreement.
Reductions
in the duty on primary aluminum imports into the European Union decrease our
revenues at Grundartangi.
Grundartangi’s
tolling revenues 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 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.
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 indentures governing our
senior and convertible notes, future borrowings by our subsidiaries could
contain restrictions or prohibitions on the 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. 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.
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 and amended and restated
bylaws, 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:
|
·
|
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;
|
|
·
|
provide,
under our charter documents, for a board of directors consisting of three
classes, each of which serves for a different three-year
term;
|
|
·
|
require
stockholders to give advance notice prior to submitting proposals for
consideration at stockholders’ meetings or to nominate persons for
election as directors; and
|
|
·
|
restrict,
under our charter documents, certain business combinations between us and
any person who beneficially owns 10% or more of our outstanding voting
stock.
|
In
addition, several of our officers have entered into employment and severance
compensation agreements that provide for cash payments, immediate vesting of
stock options and performance shares and acceleration of other benefits under
certain circumstances, including a change in control of Century. Our
1996 Stock Incentive Plan, as amended, also provides for acceleration of the
ability to exercise stock options and the vesting of performance shares upon a
change in control, and our Non-Employee Directors’ Stock Option Plan provides
for acceleration of an option holder’s ability to exercise stock options upon a
change in control. Our relationship with Glencore may also deter a
takeover. As of February 20, 2009, we believe that Glencore beneficially owned,
through common stock and preferred stock ownership, approximately 38.1% of our
issued and outstanding common stock and an overall 48.9% economic ownership of
Century. In addition, we have extensive commercial dealings with
Glencore. We have agreed with Glencore that if we make a widely
distributed public offering for cash and Glencore is not permitted to maintain
its economic ownership of us at 47% in such offering, Glencore can purchase in
the open market enough voting securities to maintain its 47% economic ownership
interest of us.
Under the terms of our
Standstill and Governance Agreement, Glencore agreed that through April 7, 2009,
Glencore may not vote more than 28.5% of our common stock, nor, subject to
certain limited exceptions, acquire more than 28.5% of our voting
securities. Any voting securities held by Glencore in excess
of 28.5% until April 8, 2009, will be voted by our Board of
Directors. Upon Glencore’s participation in our January 2009 equity
offering, we entered into an agreement with Glencore to amend the terms of our
Standstill and Governance Agreement to increase the percentage of our voting
securities that Glencore may acquire prior to April 7, 2009 and to allow
Glencore to exercise voting rights with respect to any shares of our common
stock it purchased in the January 2009 offering. As a result,
currently until April 7, 2009 Glencore has voting rights with respect to
approximately 37% of the outstanding voting securities and thereafter would
voting rights with respect to approximately 38.1% of our outstanding voting
securities. See Note 13 Shareholders’ Equity —Preferred Stock — Series A Convertible
Preferred Stock in the Consolidated Financial Statements included
herein. Subject to certain limited exceptions, from April 8, 2009 to
January 7, 2010, Glencore may not acquire more than 49% of our voting
securities. Glencore also has agreed to forego or restrict certain actions,
including unsolicited business combination proposals, tender offers, proxy
contests and sales of its common and preferred shares for a limited period of
time. These limitations on Glencore’s ability to acquire voting securities and
seek control of Century could deter a takeover by Glencore. Glencore’s
substantial ownership interest in us and our other commercial dealings with
Glencore could have the effect of deterring a takeover bid by a third party.
|
|
Item 1B. Unresolved Staff
Comments
|
We have
no unresolved comments from the staff of the Securities and Exchange
Commission.
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 proposed Helguvik
greenfield 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 a
primary aluminum reduction facility in Mt. Holly, South Carolina (“Mt. Holly”)
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 operations at our Ravenswood facility which were fully curtailed in February
2009, and our joint ventures in BHH and Gramercy Alumina, 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.”
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.
For a description of certain environmental matters involving Century, see Note
17 to the Consolidated Financial Statements included herein.
No
matters were submitted to a vote of our security holders during the fourth
quarter of 2008.
|
|
Our
Executive Officers
|
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 February 28, 2009.
|
Name
|
Age
|
Position
and Duration
|
|
Logan
W. Kruger
|
58
|
President
and Chief Executive Officer since December 2005.
|
|
Michael
A. Bless
|
43
|
Executive
Vice President and Chief Financial Officer since January
2006.
|
|
Wayne
R. Hale
|
53
|
Executive
Vice President and Chief Operating Officer since March
2007.
|
|
Robert
R. Nielsen
|
64
|
Executive
Vice President, General Counsel and Secretary since May
2006.
|
|
Steve
Schneider
|
53
|
Senior
Vice President, Chief Accounting Officer and Controller since June 2006,
Vice President and Corporate Controller from April 2002 through May
2006.
|
|
Giulio
Casello
|
49
|
Senior
Vice President of Business Development since April 2007, Vice President of
Bauxite and Alumina Operations from December 2005 through May 2006 and
Vice President of Century Alumina, Inc. from September 2005 to December
2005.
|
|
Michelle
M. Lair
|
33
|
Vice
President and Treasurer since February 2007, Treasurer since June 2006,
Assistant Treasurer from November 2005 to June 2006, Corporate Financial
Analyst for more than five years.
|
|
William
J. Leatherberry
|
38
|
Vice
President, Assistant General Counsel and Assistant Secretary since January
2008. Assistant General Counsel and Assistant Secretary since
July 2007, Assistant Secretary since May 2007 and Corporate Counsel since
January 2005.
|
|
Jerry
E. Reed
|
45
|
Vice
President of Business Development since June
2007.
|
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. From August 1997 through January 2004, Mr. Bless served in a
number of senior executive positions with Rockwell Automation, Inc. (formerly
known as Rockwell International Corporation), a leading industrial automation
hardware, software and services company, including as Senior Vice President and
Chief Financial Officer from June 2001 to January 2004.
Prior to
joining Century, Mr. Hale served as Senior Vice President of Sual-Holding from
April 2004 to February 2007; held various senior management positions with
Kennecott Utah Copper Corporation from April 2000 to April 2004, including Chief
Operating Officer from April 2002 to April 2004.
Prior to
joining Century, Mr. Nielsen served as Senior Vice President, General Counsel
and Secretary for Tanimura and Antle, Inc. from July 2005 to April 2006, and
Vice President, General Counsel and Secretary from March 1993 to June
2005.
Prior to
joining Century, Mr. Casello served in a number of senior positions with Alcoa
World Alumina Australia from 1986 to 2005, including as Director of Western
Australian Operations from January 2003 to September 2005.
Prior to
joining Century, Mr. Leatherberry served as Senior Transactions Counsel of
VarTec Telecom Inc. from September 2003 to January 2005.
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.
PART
II
|
|
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
|
Market
Information
Our
common stock trades on the NASDAQ National Market tier of the NASDAQ Stock
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 closed at $2.22 on February 20,
2009.
|
Year
|
2008
|
2007
|
||
|
High
sales price
|
Low
sales price
|
High
sales price
|
Low
sales price
|
|
|
First
quarter
|
$70.89
|
$38.92
|
$49.83
|
$38.65
|
|
Second
quarter
|
$80.52
|
$63.40
|
$58.60
|
$46.66
|
|
Third
quarter
|
$66.66
|
$25.09
|
$67.85
|
$40.00
|
|
Fourth
quarter
|
$27.38
|
$4.35
|
$59.40
|
$49.38
|
Holders
As of
February 13, 2009, 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.
Dividend
Information
We did
not declare dividends in 2008 or 2007 on our common stock. We do not
anticipate paying cash dividends in the foreseeable future.
Our
revolving credit facility and the indenture governing our senior 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 10 Debt to the Consolidated Financial Statements included
herein.
Recent
Sales of Unregistered Securities
Series A
Convertible Preferred Stock
On July
7, 2008, we issued 160,000 unregistered shares of our Series A Convertible
Preferred Stock to Glencore in a direct transaction. No underwriters
participated in the transaction. We received cash as consideration
for the shares of Series A Convertible Preferred Stock
issued. We used the cash received to settle a portion of outstanding
contract liabilities associated with the primary aluminum forward
financial sales contracts with Glencore for the years 2006 through 2010 and 2008
through 2015, respectively (the “Financial Sales
Contracts”). See Note 4 Termination Transaction of the
Consolidated Financial Statements included herein for additional information
about this transaction.
We
believe the issuance of the Series A Convertible Preferred Stock is exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
given that this transaction did not involve any public
offering.
See the
Note 13 Shareholders Equity in the Consolidated Financial Statements included
herein for additional information about the characteristics of the Series A
Convertible Preferred Stock, the rights of the holders, certain restrictions on
the holder’s actions and registration rights agreements. In July
2008, our underwriters in a registered public offering transaction exercised
their over-allotment rights which triggered an automatic conversion provision of
the preferred stock. Approximately 4,200 shares of preferred stock
were converted into approximately 420,000 shares of common stock. As
of December 31, 2008, 155,787 shares of our Series A Convertible
Preferred Stock, par value $0.01 per share, were
outstanding.
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, 2008 and 2007 and the selected
consolidated statement of operations data for each of the years ended December
31, 2008, 2007 and 2006 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, 2006, 2005 and 2004 and the selected consolidated statement of
operations data for each of the years ended December 31, 2005 and 2004 is
derived from our consolidated financial statements audited by Deloitte &
Touche LLP which are not included herein.
Our
selected historical results of operations include:
|
·
|
the
results of operations from Nordural since we acquired it in April
2004;
|
|
·
|
our
equity in the earnings of our 50% joint venture investments in Gramercy
Alumina LLC and St. Ann Bauxite Ltd. since we acquired an interest in
those companies in October 2004;
|
|
·
|
the
results of operations from our 130,000 mtpy expansion of Grundartangi
which became operational in the fourth quarter of 2006;
|
|
·
|
the
results of operations from our 40,000 mtpy expansion of Grundartangi which
became operational in the fourth quarter of 2007; and,
|
|
·
|
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.
|
Our
results for these periods and prior periods are not fully comparable to our
results of operations for fiscal year 2008 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.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2008(1)
|
2007(2)
|
2006
(3)
|
2005
(4)
|
2004
(5)
|
||||||||||||||||
|
Net
sales
|
$ | 1,970,776 | $ | 1,798,163 | $ | 1,558,566 | $ | 1,132,362 | $ | 1,060,747 | ||||||||||
|
Gross
profit
|
311,624 | 363,463 | 348,522 | 161,677 | 185,287 | |||||||||||||||
|
Operating
income
|
168,557 | 303,543 | 309,159 | 126,904 | 160,371 | |||||||||||||||
|
Net
income (loss)
|
(898,316 | ) | (101,249 | ) | (40,955 | ) | (116,255 | ) | 33,482 | |||||||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
and Diluted:
|
||||||||||||||||||||
|
Net
income (loss) per share
|
$ | (20.07 | ) | $ | (2.72 | ) | $ | (1.26 | ) | $ | (3.62 | ) | $ | 1.14 | ||||||
|
Dividends
per common share
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
|
Total
assets
|
$ | 2,036,099 | $ | 2,578,271 | $ | 2,185,234 | $ | 1,677,431 | $ | 1,332,553 | ||||||||||
|
Total
debt (6)
|
457,815 | 432,815 | 772,251 | 671,901 | 524,108 | |||||||||||||||
|
Long-term
debt obligations (7)
|
275,000 | 250,000 | 559,331 | 488,505 | 330,711 | |||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2008(1)
|
2007(2)
|
2006
(3)
|
2005
(4)
|
2004
(5)
|
||||||||||||||||
|
Other
information:
|
||||||||||||||||||||
|
Shipments
– Primary aluminum:
|
||||||||||||||||||||
|
Direct
shipment pounds (000)
|
1,173,563 | 1,171,889 | 1,152,617 | 1,153,731 | 1,179,824 | |||||||||||||||
|
Toll
shipment pounds (000)
|
598,446 | 518,945 | 346,390 | 203,967 | 138,239 | |||||||||||||||
|
Average
realized price per pound:
|
||||||||||||||||||||
|
Direct
shipments
|
$ | 1.23 | $ | 1.13 | $ | 1.09 | $ | 0.86 | $ | 0.83 | ||||||||||
|
Toll
shipments
|
$ | 0.89 | $ | 0.91 | $ | 0.88 | $ | 0.67 | $ | 0.62 | ||||||||||
|
Average
LME price per pound
|
$ | 1.167 | $ | 1.197 | $ | 1.166 | $ | 0.861 | $ | 0.778 | ||||||||||
|
Average
Midwest premium per pound
|
$ | 0.042 | $ | 0.031 | $ | 0.055 | $ | 0.056 | $ | 0.068 | ||||||||||
|
(1)
|
Net
income (loss) includes an after-tax charge of $742.1 million (net of gain
on settlement), or $16.58 per basic share for mark-to-market losses on
forward contracts that do not qualify for cash flow hedge accounting, a
$522.9 million tax adjustment to establish reserves on deferred tax
assets, or $11.68 per basic share, a $94.9 million charge, or $2.12 per
basic share for goodwill impairment and an inventory write down to market
value of $55.9 million ($1.14 per basic share).
|
|
(2)
|
Net
income (loss) includes an after-tax charge of $328.3 million, or $8.83 per
basic share for mark-to-market losses on forward contracts that do not
qualify for cash flow hedge accounting.
|
|
(3)
|
Net
income (loss) includes an after-tax charge of $241.7 million, or $7.46 per
basic share 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.
|
|
(4)
|
Net
income (loss) includes an after-tax charge of $198.2 million, or $6.17 per
basic share for mark-to-market losses on forward contracts that do not
qualify for cash flow hedge accounting.
|
|
(5)
|
Net
income (loss) includes an after-tax charge of $30.4 million, or $1.06 per
basic share for a loss on early extinguishment of debt.
|
|
(6)
|
Total
debt includes all long-term debt obligations and any debt classified as
short-term obligations, including, current portion of long-term debt, the
IRBs and the 1.75% convertible senior notes.
|
|
(7)
|
Long-term
debt obligations are all payment obligations under long-term borrowing
arrangements, excluding the current portion of long-term
debt.
|
|
|
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of
Operations
|
|
|
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.
|
|
|
·
|
In
normal circumstances our facilities operate at or near capacity, and
fluctuations in volume, other than through curtailments, acquisitions or
expansion, generally are small.
|
|
|
·
|
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
2008 cost of goods sold. Many of these costs are governed by
long-term contracts.
|
Shipment
volumes, average realized price and cost of goods sold per pound 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.
Cost of
goods sold could exhibit significant variation in the near-term as the price of
certain raw materials fall (lowering our cost of goods sold) and our facilities
potentially operate at less than full capacity (increasing our cost of goods
sold). Fluctuations in the cost of alumina in our U.S. facilities are
expected as the pricing in these contracts is variable and, except for the
Gramercy alumina contract, based on LME prices. Power contracts for
our U.S. facilities primarily provide for fixed priced power through 2010,
subject to possible adjustments for fuel costs in Mt. Holly and adjustments in
tariff rates in Ravenswood, were the plant to resume
operations. Power contract pricing for Nordural is variable and based
on LME prices.
Approximately
30% of Hawesville’s power requirements (141 MW) are unpriced in 2009 and 2010
and power rates for the unpriced portion are expected to be higher than those
under our current long-term power contracts. We are working with Big
Rivers Electric Corporation and Kenergy Corporation on a proposal that would
restructure and extend Hawesville’s existing power supply contract from 2009
through 2023. The proposed new long-term power contract was filed
with the Kentucky Public Service Commission in December 2008. The
contract would provide all of Hawesville’s power requirements through 2023 at
cost-based pricing. The parties involved expect the transaction to
close in the second quarter of 2009.
Recent
Events
The
crisis in financial and credit markets has led to a pronounced downturn in
global economic activity and 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 other locations, and a general lack of
confidence in future economic conditions, have combined to produce an
unprecedented decline in the LME price for aluminum. The average LME price has
fallen 62% from its high on July 11, 2008 ($3,292 per metric ton) to
February 20, 2009 ($1,264 per metric ton), with the rate of decline
accelerating in the fourth quarter of 2008. This decline represents one of the
most, if not the most, substantial and rapid decline in the history of recorded
LME prices. The average LME price for primary aluminum dropped 53% in the second
half of 2008 and, at December 31, 2008, was approximately 38% lower than at
December 31, 2007. At February 20, 2009, the LME price for primary aluminum
was $1,264 per metric ton, or 16% lower than at December 31, 2008. At
recent primary aluminum prices, we believe at least two-thirds of global primary
aluminum capacity, including all of our domestic facilities, is operating below
cash breakeven. While this has led to significant production curtailments,
industry experts believe supply still outweighs weakened demand, as evidenced in
the continuing increase in inventories in LME warehouses.
During
the last several months, the primary aluminum industry has responded to these
circumstances. All but a few projects aimed at bringing significant
new capacity on-stream during the next several years have been cancelled or
suspended. Significant in-place capacity has been curtailed. Based on
public announcements, industry experts and our own market information, we
believe more than 6 million metric tons of capacity (representing
approximately 16% of global capacity) has been announced for closure in 2009. We
expect additional cuts to be announced and implemented in the near future as
supply still exceeds demand.
At recent
primary aluminum prices, none of our U.S. smelting capacity is profitable
on a cash basis. Recently, we have seen certain operating costs begin to
decrease. The pricing under our alumina contracts at Ravenswood and Mt. Holly
and our power contract at Grundartangi are linked to the LME price for primary
aluminum. As a result, such costs have fallen. In addition, based upon
discussions with our major suppliers, we believe certain of our other costs will
decline in 2009 versus 2008. However, other operating expenses may not decrease
to any meaningful extent or, in certain cases, may even increase.
It is our
intention, through a combination of cost reduction actions and accessing of
additional financial liquidity, to strengthen our position from which to address
current and forecasted weak market conditions. We believe the weak conditions
and pricing environment will continue through 2009, until stimulative global
fiscal measures and the return of a more typical supply/demand equilibrium
results in any meaningful increase in primary aluminum prices.
As
described above, we believe primary aluminum producers are generally responding
to the current global economic crisis by significantly curtailing production at
existing facilities and suspending construction of new facilities. We believe it
will take time for primary aluminum producers to resume production at plants at
which they have curtailed production with cost disadvantaged facilities unlikely
to restart. In addition, we expect little new capacity will enter production
during the next several years, and sponsors of these postponed projects will not
restart them until confidence returns relating to future economic conditions.
The construction period for a major expansion or a new greenfield plant outside
of China is several years. For these reasons, industry experts believe that
conditions in the primary aluminum industry are likely to be strong once global
economic conditions improve.
Cost
Reduction Actions
As the
rapid and significant deterioration in industry conditions in the second half of
2008 became evident, we began taking actions to reduce our overall cost base.
During 2008, all discretionary capital spending was cancelled; the 2009 budget
for capital expenditures is essentially zero, other than spending required for
safe operations or compliance, which requires the approval of our Chief
Operating Officer. We believe capital spending in 2009, excluding the modest
activity which will continue on the Helguvik, Iceland, greenfield project (see
discussion below), will be approximately $15 million compared to
$54 million in 2008. We have ceased all discretionary operations-related
spending at our production facilities. We have significantly reduced our
SG&A spending. These actions are expected to result in an approximate 35%
decrease in annualized SG&A spending as compared to 2008. Based on current
operating conditions, we believe SG&A will total approximately
$31 million in 2009 compared to $48 million in 2008. Such
reduction is expected to result in approximately $13 million of cash
savings.
Recently,
we announced and began implementation of significant cost reduction actions at
our production facilities. At Ravenswood, we curtailed all operations of the
plant in February 2009. We made this decision due to Ravenswood’s high operating
cost in relation to our other facilities. Ravenswood’s aluminum production
capacity is 170,000 mtpy. See “Recent Developments - Ravenswood
Curtailment” below.
We have
also implemented an initial personnel reduction across our U.S. salaried
workforce, and will make additional reductions as conditions warrant. In
addition, we continue to analyze other significant potential cost reduction
actions including curtailments of operations at other
facilities.
Construction
activity at our greenfield smelter project near Helguvik, Iceland, has been
reduced to a modest level, pending an ongoing review of the project. We believe
conditions in Iceland remain in place that makes this one of the most attractive
locations in the world for primary aluminum production. Subject to
the project review, as well as ongoing discussions with the major constituencies
in Iceland, we will proceed with a modest amount of construction and engineering
activity during the coming months. We are actively working with the Government
of Iceland to support an Investment Agreement, through legislation, providing
governmental support for our Helguvik project similar to the one that was in
place for our Grundartangi plant. This investment agreement, if accepted, would
provide governmental support for the Helguvik project through, among other
measures, establishing a ceiling on the tax rate payable by our Helguvik
operations. In December 2008 we agreed to a prospective form of Investment
Agreement with the Ministry of Industries of the Government of Iceland. Before
this Investment Agreement becomes effective, an Enabling Act must be enacted by
the Icelandic Parliament adopting necessary legislative changes to enable the
government to enter into the Investment Agreement. In addition, the European
Surveillance Authority must approve the transaction. We expect that the
Icelandic Parliament will consider the Investment Agreement as early as the
first quarter of 2009. On January 26, 2009, the Prime Minister of Iceland
announced his resignation and that of his cabinet and called for a general
election to select a new Parliament and Prime Minister. On January 27,
2009, the Icelandic president asked the Social Democratic party to form a new
government. The Social Democratic party led a minority government formed with
the Left Green party. The Left Green party has generally been less
supportive of aluminum projects than the parties leading the prior
government. However, to date the minority government has accepted the
Helguvik project. On February 27, 2009, this new Icelandic government
agreed to forward the Enabling Act to the Parliament for enacting. We have no
assurance that the Enabling Act will be passed or if passed, will be in the form
agreed to by us. We expect that capital expenditures on this project during the
first half of 2009 will be in the range of $25 to $30 million until and
unless a decision is made to restart major construction and engineering
activities. This amount includes approximately $19 million for deferred
payments to suppliers. All other business development activities have been
suspended.
Recent
Developments
Ravenswood
Curtailment
At
Ravenswood, we suspended production of one potline in December 2008,
representing approximately 42,500 mtpy, or approximately 25% of the plant’s
capacity and recorded charges of approximately $2 million for employee
severance costs. We also agreed to reduce deliveries to Alcan, our major
customer at Ravenswood. In addition, we issued a WARN Act notice
on December 17, 2008, commencing a 60-day process which, at its conclusion
led to the curtailment of operations of the entire plant on February 20, 2009.
We initiated this process due to Ravenswood’s high operating cost in relation to
our other facilities and the continued decline in the LME from December 17, 2008
through February 2009. Ravenswood’s aluminum production capacity is
170,000 mtpy.
We expect
to record approximately $27 million to $28 million in net charges related to the
curtailment of Ravenswood's operations in February 2009 (the
"Curtailment"). Included in the charge is approximately $26
million to $28 million for employee severance costs (including pension plan
curtailments); $7 million to $8 million in contract termination and other costs
associated with the Curtailment; and a gain of approximately $8 million related
to other postemployment benefits plan curtailments. We are currently
evaluating the effect of the Ravenswood operations on the net carrying value of
property, plant and equipment which was $80.4 million at December 31,
2008.
As a
result of the curtailment of Ravenswood, we expect to incur cash losses of
approximately $15 million to $20 million in 2009 to sell excess alumina that
will be received under our alumina supply agreement that expires December
31, 2009. This estimate is based on current LME prices for primary
aluminum which our alumina contracts prices are based on, current reported spot
prices received for sale of alumina and the expectation that a portion of this
material will be available to be used in our other smelting
operations.
We
estimate that future cash expenditures related to the curtailment will be
approximately $32 million over the next 24 months. In addition, we
expect to incur cash losses of $15 million to $20 million in connection
with the sale of excess alumina, discussed above. We estimate that
ongoing activities at Ravenswood following the curtailment will result in future
cash expenditures over the next 24 months of $20 million to $25
million.
Equity
Offering
In
February 2009, we completed a public equity offering of 24,500,000 shares of
common stock at a price of $4.50 per share. We received approximately
$104.7 million in net proceeds (after underwriting discounts and commissions of
approximately $5.5 million). In addition, we incurred offering
expenses of approximately $0.7 million from this offering. See Note 26
Subsequent Events in the Consolidated Financial Statements included herein for
additional information.
We intend
to use the net proceeds from the sale of our common stock for general corporate
purposes, including repayment of debt.
Unwind
of foreign currency forward contracts
During
2008, we entered into foreign currency forward contracts to hedge our exposure
to fluctuations in the Icelandic ISK for our forecasted operations at
Grundartangi and forecasted capital expenditures for the Helguvik project. In
October 2008, following the substantial devaluation of the ISK versus the
U.S. dollar, we reached an agreement with our counterparties and settled
the remaining forward contracts that extended through September
2009. This settlement encompassed all of our remaining foreign
currency forward contracts. We paid our counterparties approximately
$30.2 million, an amount based on the intrinsic values of the contracts as
determined by the forward curve on the date of settlement. The losses
on the settlement of our forecasted operations costs were recorded in other
comprehensive income and will be recognized in earnings over the original term
of the forward contracts through September 2009. The losses on the
effective portion of the settlement of our forecasted capital expenditures for
Helguvik were recorded in other comprehensive income and will be capitalized and
recognized in earnings over the useful life of the Helguvik assets. We
recognized losses of $15.8 million in the fourth quarter of 2008 on the
ineffective portions of the forward contracts associated with the forecasted
Helguvik capital expenditures. The ineffective portion of these forward
contracts represents forward contract positions in excess of the revised
forecast of Helguvik future capital expenditures.
Final
payment made for termination of forward financial sales contracts
In
October 2008, we made the final $25 million principal payment to Glencore
in connection with the termination of primary aluminum forward financial sales
contracts entered into in November 2004 and June 2005 with Glencore for the
years 2006 through 2010 and 2008 through 2015, respectively. On July 7,
2008, Century and Glencore agreed to terminate the Financial Sales Contracts
upon the payment by Century to Glencore of cash (with a portion being deferred)
and upon the issuance by Century to Glencore of 160,000 shares of
non-voting preferred stock, which shares are convertible under certain
circumstances into common stock at a conversion ratio of 100 shares of
common stock per each share of Series A Convertible Preferred
Stock. See Note 4 Termination Transaction and Note 13 Shareholders
Equity Note — Preferred Stock in the Consolidated Financial Statements included
herein for additional information. As of February 20, 2009, Glencore
beneficially owned 155,787 shares of our Series A Convertible
Preferred Stock, which are convertible under certain circumstances into
15,578,718 shares of common stock. As of February 20, 2009, we
believe that Glencore is the beneficial owner of approximately 38.1% of our
issued and outstanding common stock.
Together,
the shares of our common stock and preferred stock beneficially owned by
Glencore give Glencore an approximate 48.9% economic ownership of
Century. Subject to certain limited exceptions, Glencore has agreed
not to vote more than 28.5% of our voting securities nor, subject to certain
limited exceptions, acquire more than 28.5% of our voting securities until
April 8, 2009. We have agreed with Glencore that if we make a
widely distributed public offering for cash and Glencore is not permitted to
maintain at least a 47% economic ownership of us, Glencore can purchase in the
open market enough voting securities to maintain up to its 47% economic
ownership interest. Following the closing of our public offering of common stock
on July 16, 2008, Glencore purchased shares of our common stock in the open
market to maintain its economic interest at 47%. As a result of such purchases,
Glencore increased its beneficial ownership of our common stock to approximately
30.2%. Per the terms of the original agreement, Glencore agreed that any voting
securities held by Glencore in excess of 28.5% until April 8, 2009, will be
voted by our Board of Directors. Upon Glencore’s
participation in our January 2009 equity offering, we entered into an agreement
with Glencore to amend the terms of our Standstill and Governance Agreement to
increase the percentage of our voting securities that Glencore may acquire prior
to April 7, 2009 and to allow Glencore to exercise voting rights with respect to
any shares of our common stock it purchased in the January 2009
offering. As a result, currently until April 7, 2009 Glencore has
voting rights with respect to approximately 37% of the outstanding voting
securities and thereafter would voting rights with respect to approximately
38.1% of our outstanding voting securities. Subject to certain
limited exceptions, from April 8, 2009 to January 7, 2010, Glencore
may not acquire more than 49% of our voting securities. Glencore also has agreed
to forego or restrict certain actions until April 8, 2009, including
unsolicited business combination proposals, tender offers, proxy contests and
sales of its common and preferred shares. We have given Glencore registration
rights whereby we have agreed, from time to time, subject to certain
restrictions, to register with the Securities and Exchange Commission the offer
and sale of the common stock into which the preferred shares are convertible.
For additional information about the Series A Convertible Preferred Stock, see
Note 13 Shareholders Equity Note — Preferred Stock in the Consolidated Financial
Statements included herein.
- 33
-
|
|
Results
of Operations
|
|
|
The
following discussion reflects our historical results of operations, which
do not include results from:
|
|
·
|
the
130,000 mtpy expansion capacity of Grundartangi until it was completed in
the fourth quarter of 2006;
|
|
·
|
the
40,000 mtpy expansion of Grundartangi until it was completed in the fourth
quarter of 2007;
|
|
·
|
our
results for 2008 also do not reflect the February 2009 curtailment of
Ravenswood’s remaining three potlines;
and,
|
|
·
|
our
equity in the earnings of our 40% joint venture investments in Baise
Haohai Carbon Co. since we acquired an interest in the company
in April 2008.
|
Accordingly,
the results for fiscal years 2007 and 2006 are not fully comparable to the
results of operations for fiscal year 2008. 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 Consolidated Statements of
Operations.
|
|
Percentage
of Net Sales
|
|||||||||||
|
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of goods sold
|
(84.2 | ) | (79.8 | ) | (77.6 | ) | ||||||
|
Gross
profit
|
15.8 | 20.2 | 22.4 | |||||||||
|
Selling,
general and administrative expenses
|
(2.4 | ) | (3.3 | ) | (2.5 | ) | ||||||
|
Goodwill
impairment
|
(4.8 | ) | — | — | ||||||||
|
Operating
income
|
8.6 | 16.9 | 19.9 | |||||||||
|
Interest
expense - third party
|
(1.2 | ) | (1.8 | ) | (2.4 | ) | ||||||
|
Interest
income (expense) – related parties
|
(0.1 | ) | — | — | ||||||||
|
Interest
income - third party
|
0.4 | 0.6 | 0.1 | |||||||||
|
Loss
on early extinguishment of debt
|
— | (0.2 | ) | — | ||||||||
|
Other
income (expense)
|
(0.1 | ) | — | 0.4 | ||||||||
|
Net
loss on forward contract
|
(37.8 | ) | (28.3 | ) | (25.0 | ) | ||||||
|
Loss
before income taxes and equity in earnings of joint
ventures
|
(30.2 | ) | (12.8 | ) | (7.0 | ) | ||||||
|
Income
tax (expense) benefit
|
(16.2 | ) | 6.3 | 3.3 | ||||||||
|
Loss
before equity in earnings of joint ventures
|
(46.4 | ) | (6.5 | ) | (3.7 | ) | ||||||
|
Equity
in earnings of joint ventures
|
0.9 | 0.9 | 1.1 | |||||||||
|
Net
loss
|
(45.6 | )% | (5.6 | )% | (2.6 | )% | ||||||
The
following table sets forth, for the periods indicated, the shipment volumes and
the average sales price per pound shipped:
|
Primary
Aluminum
|
|||
|
Direct
(1)
|
|||
|
Metric
tons
|
Pounds
(000)
|
$/pound
|
|
|
2008
|
532,320
|
1,173,563
|
$1.23
|
|
2007
|
531,561
|
1,171,889
|
$1.13
|
|
2006
|
522,819
|
1,152,617
|
$1.09
|
|
Toll
(2)
|
|||
|
Metric
tons
|
Pounds
(000)
|
$/pound
|
|
|
2008
|
271,451
|
598,446
|
$0.89
|
|
2007
|
235,390
|
518,945
|
$0.91
|
|
2006
|
157,120
|
346,390
|
$0.88
|
|
(1)
|
Direct
shipments do not include toll shipments from
Grundartangi.
|
|
(2)
|
Grundartangi
expansion capacity start-up began in February 2006. Annual
production of 220,000 mtpy was reached in the fourth quarter of
2006. Annual production of 260,000 mtpy was reached in the
fourth quarter of 2007.
|
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 $8.4 million to $24.5 million. The decrease in interest expense was
due to the retirement of Nordural’s outstanding debt in 2007.
Interest
income: 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 $544.1
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.
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net sales: Net
sales for the year ended December 31, 2007 increased $239.6 million to $1,798.2
million. Higher price realizations for primary aluminum in the year
ended December 31, 2007, due to improved LME prices for primary aluminum,
contributed $67.1 million to the sales increase. Additional net sales
volume contributed $172.5 million to the sales increase. Direct
shipments increased 19.3 million pounds from the same period in 2006, primarily
due to the temporary shutdown of a potline in August 2006, and toll shipments
increased 21.8 million pounds from the same period in 2006 due to the
Grundartangi expansion capacity that has come on-stream since September
2006.
Gross Profit: For
the year ended December 31, 2007, gross profit increased $14.9 million to $363.4
million. Improved price realizations, net of LME-based alumina and
LME-based power contract cost increases, improved gross profit by $13.1
million. Increased shipment volume contributed $60.0 million in
additional gross profit. Partially offsetting these gains were $58.2
million in net cost increases comprised of: increased power costs at
our U.S. smelters, $14.0 million; increased costs for maintenance, supplies and
materials, $18.2 million; increased costs for our non-LME-based alumina, $11.0
million; increased net amortization and depreciation charges, primarily at
Grundartangi, $8.8 million; and other cost increases, $6.2 million.
Selling, general and administrative
expenses: Selling, general and administrative expenses for the
year ended December 31, 2007 increased $20.6 million to $59.9
million. Approximately 55% of the increase is due to spending on the
proposed Helguvik project, and the reminder of the increase is due primarily to
compensation related expenses, outside professional support and expenses
incurred for business development activities.
Interest expense – third
party: Interest expense for the year ended December 31, 2007
decreased $4.1 million to $32.9 million. The decrease in interest expense is due
to the retirement of Nordural’s outstanding debt in 2007 and offset by lower
interest capitalized on the Grundartangi expansion during 2007.
Interest
income: Interest income for the year ended December 31, 2007
increased by $9.1 million to $10.8 million. The increased interest
income is a result of higher average cash and short-term investment balances
during 2007 due to proceeds of the equity offering, improved operating results
and reduced investing activities for the Nordural expansion, offset by the
repayment of Nordural’s outstanding debt.
Net loss on forward
contracts: For the year ended December 31, 2007, the net loss
on forward contracts was $508.9 million compared to a net loss on forward
contracts of $389.8 million for 2006. The losses reported for the years ended
December 31, 2007 and 2006 were primarily a result of mark-to-market losses
associated with our long term financial sales contracts with Glencore that do
not qualify for cash flow hedge accounting. Cash settlement of
financial sales contracts that do not qualify for cash flow hedge treatment
accounted for $98.3 million of the 2007 net loss and accounted for $54.2 million
of the 2006 net loss. The remaining $411.0 million in net loss for
2007 are unrealized losses related to our outstanding financial sales contracts
that do not qualify for cash flow hedge accounting that are due for settlement
in 2008 through 2015, 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. We recorded a tax benefit of $8.3 million in 2007
to increase the carrying amount of deferred tax assets as a result of the West
Virginia tax law change.
Liquidity
and Capital Resources
Liquidity
Our
financial position and liquidity have been and will continue to be materially
adversely affected by declining aluminum prices. If prices remain at current
levels or continue to decline, we will have to take additional actions to reduce
costs, including significant curtailment of our operations and/or raise
additional financing, in order to have the liquidity required to operate through
2010, and there can be no assurance that these actions will be
sufficient.
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 the sales of our equity in 2007, 2008 and in
February 2009. We are continuously exploring alternative or
supplementary financing arrangements to the revolving credit facility. Our
principal uses of cash are operating costs, payments of principal and interest
on our outstanding debt, the funding of capital expenditures, working capital,
investments in related businesses and other general corporate
requirements.
As of
December 31, 2008, we had $457.8 million of indebtedness outstanding, consisting
of $175 million principal amount of our 1.75% convertible senior notes, $250
million principal amount of our 7.5% senior notes, $7.8 million under our
industrial revenue bonds and $25 million borrowed under our revolving credit
facility. Our revolving credit facility and the indenture governing
our senior 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 pursue our growth
strategy. More information concerning the various debt instruments
and our borrowing arrangements is available in Note 10 to the Consolidated
Financial Statements included herein.
Our
ability to pay interest and to repay or refinance our indebtedness, including
our senior notes and convertible notes 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 and access to additional sources of liquidity. Accordingly, there is 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 repay or service our debt obligations or to fund our other
liquidity needs. If we are unable to meet our debt obligations or fund our other
liquidity needs, we could attempt to restructure or refinance our indebtedness
or seek additional debt or equity capital. There can be no assurance that we
would be able to accomplish those actions on satisfactory terms or at
all.
Our consolidated cash and
short-term investment balance at January 31, 2009 was approximately $154
million. This amount includes $25 million borrowed under our revolving credit
facility during the fourth quarter of 2008 and invested in highly rated
short-term securities. During February 2009, we repaid the
borrowing under our revolving credit facility and completed a public
offering of 24.5 million shares of our common stock with net proceeds to us of
approximately $104.7 million after underwriter discounts and commissions and
before other offering costs. Pro forma for the revolving credit
facility repayment and the common stock offering proceeds, our cash and
short-term investment balance at January 31, 2009 would have been $235
million. We believe the current availability under our revolving
credit facility is $35 million. This availability has been reduced by
the reduced value of our inventory and the curtailment of operations at the
Ravenswood facility. Additionally, our
revolving credit facility will mature in September 2010, and the holders of our
$175 million principal amount of convertible notes 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 as market prices up to the
principal amount of the convertible notes upon conversion, which may occur at
any time. Each of these events which will increase our
liquidity needs.
Our U.S.
operations are not cash flow positive at recent aluminum prices and our
Icelandic operations are breaking even. We completed an equity
offering in January 2009 to provide additional liquidity. Forecasts
of primary aluminum prices for 2009 recently published by various industry
analysts have generally been in the range of $1,550 to $1,650 per metric
ton. Assuming the lower end of this range, and taking into account
our current balance of cash and short-term investments, availability under our
revolving credit facility and the proceeds of the January 2009 offering and
other operating and financial assumptions, we would expect to have sufficient
liquidity to fund our operations for approximately the next
18 months. If primary aluminum prices were to remain on average
at or around recent levels of $1,350 per metric ton, we would expect such
liquidity would be sufficient to fund our operations through the end of
2009. We believe we also have options to further curtail
operations. The result of such actions would, at recent metal prices,
reduce our cash losses and thus improve our liquidity, even after accounting for
the cost of implementing such actions. Actual results could differ
materially from our estimates if aluminum prices are different, any of our key
assumptions as to our production levels and operating costs prove incorrect, we
cannot obtain the liquidity we expect, changes in Icelandic rules limit our
access to cash flow from our Icelandic operations, or due to any of the factors
described under Item 1A, “Risk Factors” included herein.
Potential
Additional Sources of Liquidity
While we
do not have other committed sources of capital, we believe we have identified
potential alternative sources of liquidity in the near term in addition to our
cash balances and short-term investments. Upon the possible closing
of a new long-term power contract for Hawesville, we expect to receive a cash
payment of $45 million; the possible closing is expected by the second
quarter of 2009. This closing is subject to contractual conditions, which
include obtaining the approvals of federal and state regulatory agencies; and we
cannot assure whether or when the closing will occur. In February
2009, we received $10.1 million refund from the Internal Revenue Service
(“IRS”) for estimated federal income taxes paid in respect of the 2008 tax
year. On February 24, 2009, we filed a carry back refund claim under
Section 6411 of the Internal Revenue Code of 1986, as amended, seeking
refunds in the amounts of $56.3 million and $28.1 million,
respectively, for federal income taxes paid in respect of the 2006 and 2007 tax
years. Both of these claims relate, in part, to the federal income
tax loss generated upon the termination in July 2008 of our forward financial
sales contracts. We believe that the IRS is obligated to pay this claim within
90 days of our filing or it must begin to accrue interest on the claim.
There can be no assurance that the IRS will pay the claim within the required
period rather than accruing interest on the claim. Furthermore, if the claims
are timely paid by the IRS, they could be subject to further challenge by the
IRS in a subsequent audit proceeding, in which case we may be required to return
to the IRS some or all of the refund and pay interest on the returned
amount.
Given the
state of the financial and credit markets and our current and expected liquidity
and capital resource needs, we are exploring a variety of financing
transactions. These may include equity, equity-linked and short
and/or long-term debt financings on a secured or unsecured basis by Century, its
subsidiaries or a combination of Century and its subsidiaries. We may
also explore project financings and nontraditional structures that could include
an offering of securities or loans by a subsidiary on a nonrecourse
basis. We might also explore exchange offers with our existing
security holders and transactions with our outstanding securities given their
secondary market trading prices. If we were to affect an equity or
equity-linked securities offering, it might result in dilution to existing
shareholders. If we were to incur debt, we would become more
leveraged and would have higher interest expense. We cannot assure
you that, if we pursue any of these transactions, that we will be successful in
completing a transaction on attractive terms or at all.
Credit
Rating Downgrades
Two major
credit rating agencies have recently changed the status of our ratings on a
general basis and of our specific debt securities. On January 30, 2009, Standard
& Poor’s removed their CreditWatch and downgraded our credit rating to “B”
with a negative outlook from “BB-“. Standard & Poor’s has stated
that the downgrade reflects their expectation that operating results will
deteriorate over the next several quarters due to continued low aluminum prices
that are unlikely to show significant improvement until general economic
activity picks up globally and high inventory levels are
reduced. According to Standard & Poor’s, an obligation rated “B”
is more vulnerable to nonpayment than obligations rated “BB”, but the obligor
currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation. On December 17, 2008, Moody’s Investors
Service downgraded our credit rating to “B2” from “Ba3” and kept our ratings
under review for further possible downgrade. Moody’s has stated the “B2”
corporate family rating reflects Moody’s expectation that earnings and cash flow
will be pressured by the impact of substantially lower aluminum prices on our
higher cost U.S. operations. According to Moody’s, obligations rated
“B” are considered speculative and subject to high credit risk. A security
rating is not a recommendation to buy, sell or hold securities, it may be
subject to revision or withdrawal at any time by the assigning rating
organization and each rating should be evaluated independently of any other
rating. These recent actions by Standard & Poor’s and Moody’s, and any
further actions the credit rating agencies may take, could negatively impact our
ability to access liquidity in the credit and capital markets in the future and
could lead to worsened trade terms, increasing our liquidity needs.
Capital
Resources
We intend
to finance our future capital expenditures from available cash, our cash flow
from operations and from future capital raising. 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 economy may adversely affect our
liquidity, our ability to access the capital markets and our financial
condition. If additional capital resources are unavailable, we may further
curtail construction and development activities.
Capital
expenditures for 2008 were $124.9 million, $80.3 million of which was related to
the expansion projects at Grundartangi and the Helguvik project, with the
balance principally related to upgrading production equipment, improving
facilities and complying with environmental requirements. We believe
capital spending in 2009, excluding the modest activity which will continue on
the Helguvik greenfield project, will be approximately $15 million compared
to $54 million in 2008.
In light
of current global financial and economic conditions, we are reviewing our
capital plans and reducing, stopping or deferring all non-critical capital
expenditures in our existing smelters. We have made and continue making modest
capital expenditures for the construction and development of our new Helguvik
smelter project. In 2008, we expended approximately $71 million in capital
expenditures for the Helguvik greenfield project. From inception
through December 31, 2008, we expended approximately $83 million for
Helguvik. We are currently evaluating the Helguvik project’s cost,
scope and schedule in light of the global economic crisis and weakening
commodity prices. During this evaluation process, we have significantly reduced
spending on the project; we expect that capital expenditures on this project
during 2009 will be in the range of $25 to $30 million until and unless a
decision is made to restart major construction and engineering activities. This
amount includes approximately $19 million for deferred payments to
suppliers. 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, 2008, 2007 and 2006
are summarized below:
|
2008
|
2007
|
2006
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Net
cash (used in ) provided by operating activities
|
$ | (665,438 | ) | $ | (5,755 | ) | $ | 185,353 | ||||
|
Net
cash used in investing activities
|
(159,731 | ) | (108,571 | ) | (211,937 | ) | ||||||
|
Net
cash provided by financing activities
|
893,607 | 78,923 | 105,197 | |||||||||
|
Net
change in cash
|
$ | 68,438 | $ | (35,403 | ) | $ | 78,613 | |||||
Net cash
used in operating activities in 2008 was $665.4 million, which included a net
$266.5 million source of cash from the sale of short-term investments and a use
of $929.5 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 the same period in 2006.
Net cash
from operating activities of $185.4 million in 2006 was $50.5 million higher
than the same period in 2005. This increase was a direct result of
improved price realizations and the added margin contributions from the
expansion capacity at Grundartangi.
Net cash
used in investing activities in 2008 was $159.7.0 million, an increase of $51.1
million from 2007. This increase was due primarily to higher
expenditures for the Helguvik greenfield 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
used in investing activities in 2006 was $211.9 million of which $193.5 million
were expenditures on the Grundartangi expansion project, $23.6 million for
purchases of property, plant and equipment, $7.8 million proceeds from the sale
of property, plant, and equipment and restricted and other cash deposits during
the year of $2.6 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.
Net cash
provided by financing activities during 2006 was $105.2 million, a decrease of
$38.8 million from the previous year. During 2006, we borrowed $109.0
million under Nordural’s term loan facility and repaid $8.7 million, consisting
of payments of $8.1 million for the repayment of the revolving credit facility
and $0.6 million for other miscellaneous debt payments. We received
proceeds of $3.5 million from the issuance of common stock and realized a $1.4
million tax benefit from our share-based compensation programs.
|
|
Critical
Accounting Estimates
|
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 and health care inflation rate.
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 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, 2008, we selected a discount rate of 6.00% for all our
pension plans and a discount rate of 5.75% 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
2008:
|
Effect
of changes in the discount rates on the Projected Benefit Obligations
for:
|
50
basis point increase
|
50
basis point decrease
|
||||||
|
(dollars
in millions)
|
||||||||
|
Pension
plans
|
$ | (6.4 | ) | $ | 7.1 | |||
|
Other
postemployment benefit (“OPEB”) plans
|
$ | (16.1 | ) | $ | 18.1 | |||
Century
provides postemployment benefit plans that provide health care and life
insurance benefits for substantially all retired employees of our U.S. based
operations. SFAS No. 106 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 2008:
|
1%
Increase
|
1%
Decrease
|
|||||||
|
(dollars
in millions)
|
||||||||
|
Effect
on total of service and interest cost components
|
$ | 3.6 | $ | (3.0 | ) | |||
|
Effect
on accumulated postretirement benefit obligation
|
$ | 39.7 | $ | (31.8 | ) | |||
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 recorded a valuation allowance of $558
million against a portion of our deferred tax assets as of December 31,
2008, 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
capital expenditures capitalized through December 31, 2008 related to the
Helguvik project is $89.0 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 exceeds the
expected cost of constructing the Helguvik project. If the global
economy and commodity prices do not stabilize and we were to not restart
construction, we would recognize a loss on our investment at the time that a
decision was 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 $80.4 million at December 31, 2008. 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, 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.
Goodwill
We
recorded $94.8 million of goodwill as a result of the acquisition of
Nordural. We test our goodwill annually for impairment in the second
quarter of the fiscal year and at other times whenever events or circumstances
indicate that the carrying amount of goodwill may exceed its fair
value. If the carrying value of goodwill exceeds its fair value, an
impairment loss will be recognized. We tested our goodwill again in
the fourth quarter due to the worldwide downturn in the primary aluminum
market. At that time, we determined that 100% of the goodwill was
impaired and recognized a $94.8 million impairment loss.
The
analysis of potential goodwill requires a two-step process and requires
significant assumptions about future market conditions. The first
step is the estimation of fair value of the reporting unit. If step
one indicates that impairment potentially exists, the second step is performed
to measure the amount of impairment, if any. Goodwill is impaired
when the implied fair value of goodwill is less than its carrying
value.
For this
analysis, we measured the fair value of the Nordural Grundartangi operating unit
using a discounted cash flow model. Inputs to that analysis include
significant estimates about future primary aluminum prices, expected operating
costs, expected cash flow assumptions and other material estimates, including
the expected service life. Based on our analysis, the implied fair
value of goodwill was less than its carrying value, primarily due to the global
economic downturn and significant decrease in commodity prices. We
recorded a non-cash impairment charge of $94.8 million on the statement of
operations.
|
|
Environmental
Expenditures
|
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, 2008 and December 31, 2007, 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 $11 to 12
million in 2009, 2010 and 2011, respectively. These amounts do not
include any projected capital expenditures or operating expenses for our joint
ventures. As part of our general capital expenditure plan, we also
expect to incur modest capital expenditures for other capital projects that may,
in addition to improving operations, reduce certain environmental
impacts. See Note 17 Commitments and Contingencies to the
Consolidated Financial Statements included herein.
|
|
Other
Contingencies
|
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 17
Commitments and Contingencies to the Consolidated Financial Statements included
herein for additional information.
|
|
Recently
Issued Accounting Standards
|
Information
regarding recently issued accounting pronouncements is included in Note 1 of the
Consolidated Financial Statements included herein.
|
|
Contractual
Obligations
|
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.
|
Payments
Due by Period
|
||||||||||||||||||||||||||||
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||||||
|
(dollars
in millions)
|
||||||||||||||||||||||||||||
|
Long-term
debt (1)
|
$ | 458 | $ | — | $ | 25 | $ | — | $ | — | $ | — | $ | 433 | ||||||||||||||
|
Estimated
interest payments (2)
|
156 | 22 | 22 | 22 | 22 | 22 | 46 | |||||||||||||||||||||
|
Purchase
obligations (3)
|
2,657 | 403 | 391 | 306 | 306 | 249 | 1,002 | |||||||||||||||||||||
|
OPEB
obligations (4)
|
118 | 8 | 9 | 10 | 11 | 12 | 68 | |||||||||||||||||||||
|
Other
liabilities (5)
|
80 | 26 | 21 | 7 | 5 | 4 | 17 | |||||||||||||||||||||
|
Total
|
$ | 3,469 | $ | 459 | $ | 468 | $ | 345 | $ | 344 | $ | 287 | $ | 1,566 | ||||||||||||||
|
(1)
|
Long-term debt
includes principal repayments on the senior notes, convertible notes, the
IRBs and outstanding balances on the revolving credit facility and is
based on the assumption that all outstanding debt instruments will remain
outstanding until their respective due dates. The
holders of our 1.75%
convertible notes 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 as market prices up to the principal amount of the
convertible notes upon conversion, which may occur at any
time.
|
|
(2)
|
Estimated
interest payments on our long-term debt are based on several assumptions,
including an assumption that all outstanding debt instruments 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, 2008 rate for that debt continues
until the respective due date.
|
|
(3)
|
Purchase
obligations include long-term alumina, electrical power contracts and
anode contracts. Nordural's power contracts and our domestic
alumina contracts, except for our Gramercy alumina contract, are priced as
a percentage of the LME price of primary aluminum. We assumed
an LME price consistent with the LME forward market at December 31,
2008. Our Gramercy long-term alumina contract has variable
cost-based pricing. The Gramercy refinery is currently operating at a
reduced production capacity. We used Gramercy production and cost
forecasts to calculate the expected future cash flows for this
contract. A portion of certain Nordural anode contracts are
denominated in euros. We assumed a $1.30/euro conversion rate to estimate
the obligations under these contracts.
|
|
(4)
|
Includes
the estimated benefit payments for our OPEB obligations through 2018,
which are unfunded.
|
|
(5)
|
Other
liabilities include our expected severance benefit cost for the Ravenswood
curtailment, SERB benefit payments, workers' compensation benefit
payments, settlement payments and asset retirement obligations and
uncertain tax positions. Expected benefit payments for the SERB
plans, which are unfunded, are included for 2009 through
2017. Asset retirement obligations are estimated disposal costs
for the potliner in service. As of December 31, 2008, the
gross liability for uncertain tax positions under FIN No. 48 is
approximately $21.6 million. We have not included the
remaining FIN No. 48 obligations in the contractual obligations
table as we are unable to provide a reasonable estimate of the timing of
future settlements.
|
|
|
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
|
|
|
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
Long-term
Primary Aluminum Sales Contracts
|
Contract
|
Customer
|
Volume
|
Term
|
Pricing
|
|
Alcan
Metal Agreement (1)
|
Alcan
|
14
million pounds per month
|
Through
August 31, 2009
|
Variable,
based on U.S. Midwest market
|
|
Glencore
Metal Agreement I (2)
|
Glencore
|
50,000
mtpy
|
Through
December 31, 2009
|
Variable,
LME-based
|
|
Glencore
Metal Agreement II (3)
|
Glencore
|
20,400
mtpy
|
Through
December 31, 2013
|
Variable,
based on U.S. Midwest market
|
|
Southwire
Metal Agreement (4)
|
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)
|
A
force majeure at the Alcan facility reduced our January 2009 shipments
under this contract approximately 3 million pounds.
|
|
(2)
|
We
account for the Glencore Metal Agreement I as a derivative instrument
under SFAS No. 133. We have not designated the Glencore Metal
Agreement I as “normal” because it replaced and substituted for a
significant portion of a sales contract which did not qualify for this
designation. Because the Glencore Metal Agreement I is variably
priced, we do not expect significant variability in its fair value, other
than changes that might result from the absence of the U.S. Midwest
premium.
|
|
(3)
|
We
account for the Glencore Metal Agreement II as a derivative instrument
under SFAS No. 133. Under the Glencore Metal Agreement II,
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.
|
|
(4)
|
The
Southwire Metal Agreement will automatically renew for additional
five-year terms, unless either party provides 12 months notice that it has
elected not to renew.
|
Long-term
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 European Union (“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 Alcan Metal Agreement, Glencore Metal Agreement I, Glencore Metal
Agreement II and Southwire Metal Agreement, we had forward delivery contracts to
sell 84,047 metric tons and 96,807 metric tons of primary aluminum at December
31, 2008 and December 31, 2007, respectively. Of these forward
delivery contracts, we had fixed price commitments to sell 330 metric tons and
2,818 metric tons of primary aluminum at December 31, 2008 and December 31,
2007, respectively, of which 319 metric tons at December 31, 2008 and none at
December 31, 2007 were with Glencore.
|
|
Forwards
and Financial Purchase Agreements
|
|
|
Financial
Sales Agreements
|
All of
the outstanding financial sales contracts were settled in July 2008 in a
termination transaction with Glencore. See Note 4 Termination
Transaction in the Consolidated Financial Statements included herein for
additional information. As of December 31, 2008, we had no fixed
price financial sales contracts outstanding. We had no fixed price
financial contracts to purchase aluminum at December 31, 2008 or December 31,
2007. Glencore was the counterparty for all of the primary aluminum
financial sales 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.
|
Natural
Gas Financial Purchase Contracts as of:
|
|||
|
(Thousands
of MMBTU)
|
|||
|
December
31, 2008
|
December
31, 2007
|
||
|
2008
|
—
|
1,150
|
|
|
2009
|
3,340
|
—
|
|
|
Total
|
3,340
|
1,150
|
|
On a
hypothetical basis, a $1.00 per MMBTU decrease in the market price of natural
gas is estimated to have an unfavorable impact of $3.3 million after tax on
accumulated other comprehensive income for the period ended December 31, 2008 as
a result of the forward natural gas financial purchase contracts outstanding at
December 31, 2008.
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, 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 greenfield smelter project, although we are currently evaluating
the Helguvik project’s cost, scope and schedule in light of the global credit
crisis and weakening 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 manage
our foreign currency exposure by entering into foreign currency forward
contracts. During 2008, we purchased foreign currency forward
contracts to hedge our foreign currency risk in the ISK associated with a
portion of the forecasted operating costs paid in ISK at Grundartangi and for a
portion of the forecasted capital expenditures paid in ISK for the Helguvik
project. These forward contracts, which are designated as cash flow
hedges and qualify for hedge accounting under SFAS No.133, have maturities
through September 2009. The critical terms of the contracts
essentially match those of the underlying exposure. The effective
portion of the forward contracts gain or loss is reported in other comprehensive
income, and the ineffective portion will be reported currently in
earnings.
Each
month, when we settled the foreign currency forward contracts, the realized gain
or loss on our cash flow hedges for Grundartangi operating costs are recognized
in income as part of our cost of goods sold. The realized gain or
loss for our cash flow hedges for the Helguvik capital expenditures is
accumulated in other comprehensive income and will be reclassified to earnings
when the project is completed as part of the depreciation expense of the capital
assets.
Unwind
of foreign currency forward contracts
In
October 2008, following a significant devaluation of the ISK versus the U.S.
dollar, we reached an agreement with our counterparties and settled the
remaining outstanding forward contracts that extended through September
2009. This settlement represented all of our remaining foreign
currency forward contracts. We paid our counterparties approximately
$30.2 million, an amount based on the intrinsic values of the contracts as
determined by the forward curve on the date of settlement.
We
recognized losses of approximately $15.8 million in the fourth quarter of 2008
on the ineffective portions of the settled ISK forward contracts for the
forecasted Helguvik capital expenditures. The ineffective portion of these
forward contracts represents forward contract positions in excess of the revised
forecast schedule of Helguvik capital expenditures.
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.
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
Hawesville’s alumina contract with Gramercy, are indexed to the LME price for
primary aluminum, they act as a natural hedge for approximately 8% of our
production. As of February 28, 2009, approximately 25% of our
production for 2009 was hedged by our LME-based alumina contracts,
Grundartangi’s electrical power and tolling contracts, and by fixed price
forward delivery.
|
|
Subprime
and Related Risks
|
Asset-backed
securities related to subprime consumer mortgages experienced a significant
increase in expected default rates, resulting in a dramatic reduction in asset
prices and market liquidity. Our exposure to these instruments is
limited, but we continue to review this exposure. At present, we
believe our exposure is limited to assets in our pension plans that are invested
in bond funds. We believe that approximately 2.5% of our pension
assets are invested in various subprime investments. The approximate
value of these assets at December 31, 2008 was $1.5 million. We do
not expect that any defaults would be material to our financial position or
results of operations. Any defaults in these funds would lower our
actual return on plan assets and increase the defined benefit plan net loss in
other comprehensive income, and subsequently increase our pension expense and
future funding requirements as these losses are amortized over the service life
of the participants.
At
December 31, 2008, we had approximately $13.7 million invested in short-term
investments of highly-rated municipal bonds. The risk associated with
these investments is a default by the underlying issuer. We only
invest in highly-rated municipal bonds and we diversify our investment
portfolio. A hypothetical default in our largest position at December
31, 2008 would result in a loss of approximately $6.0 million.
Our
primary financial instruments are cash and short-term investments, including
cash in bank accounts, other highly-rated money market investments and
government securities which are classified as cash equivalents and tax-exempt
municipal bonds, which are classified as short-term
investments.
|
|
Item
8. Financial Statements and Supplementary
Data
|
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
50-51
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
52
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
53
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2008,
2007 and 2006
|
54-55
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
56
|
|
Notes
to the Consolidated Financial Statements
|
57-100
|
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, 2008 and 2007, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2008.
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, 2008 and 2007, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
As
discussed in Note 16 to the consolidated financial statements, in 2007 the
Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes.
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, 2008, 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 February 27, 2009 expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
27, 2009
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, 2008, 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, 2008, 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 as of and
for the year ended December 31, 2008 of the Company and our report dated
February 27, 2009 expressed an unqualified opinion on those financial
statements.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
27, 2009
|
CENTURY
ALUMINUM COMPANY
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(Dollars
in thousands, except share data)
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Cash
|
$ | 129,400 | $ | 60,962 | ||||
|
Restricted
cash
|
865 | 873 | ||||||
|
Short-term
investments
|
13,686 | 280,169 | ||||||
|
Accounts
receivable — net
|
60,859 | 93,451 | ||||||
|
Due
from affiliates
|
39,062 | 26,693 | ||||||
|
Inventories
|
138,111 | 175,101 | ||||||
|
Prepaid
and other current assets
|
99,861 | 40,091 | ||||||
|
Deferred
taxes — current portion
|
32,290 | 69,858 | ||||||
|
Total
current assets
|
514,134 | 747,198 | ||||||
|
Property,
plant and equipment — net
|
1,340,037 | 1,260,040 | ||||||
|
Intangible
asset — net
|
32,527 | 47,603 | ||||||
|
Goodwill
|
— | 94,844 | ||||||
|
Deferred
taxes – less current portion
|
— | 321,068 | ||||||
|
Due
from affiliates – less current portion
|
7,599 | — | ||||||
|
Other
assets
|
141,802 | 107,518 | ||||||
|
TOTAL
|
$ | 2,036,099 | $ | 2,578,271 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Accounts
payable, trade
|
$ | 102,143 | $ | 79,482 | ||||
|
Due
to affiliates
|
70,957 | 216,754 | ||||||
|
Accrued
and other current liabilities
|
58,777 | 60,482 | ||||||
|
Accrued
employee benefits costs — current portion
|
12,070 | 11,997 | ||||||
|
Convertible
senior notes
|
175,000 | 175,000 | ||||||
|
Industrial
revenue bonds
|
7,815 | 7,815 | ||||||
|
Total
current liabilities
|
426,762 | 551,530 | ||||||
|
Senior
unsecured notes payable
|
250,000 | 250,000 | ||||||
|
Revolving
credit facility
|
25,000 | — | ||||||
|
Accrued
pension benefits costs — less current portion
|
50,008 | 14,427 | ||||||
|
Accrued
postretirement benefits costs — less
current portion
|
219,539 | 184,853 | ||||||
|
Due
to affiliates – less current portion
|
— | 913,683 | ||||||
|
Other
liabilities
|
33,464 | 39,643 | ||||||
|
Deferred
taxes
|
71,805 | 62,931 | ||||||
|
Total
noncurrent liabilities
|
649,816 | 1,465,537 | ||||||
|
CONTINGENCIES
AND COMMITMENTS (NOTE 17)
|
||||||||
|
SHAREHOLDERS’
EQUITY:
|
||||||||
|
Preferred
stock (one cent par value, 5,000,000 shares authorized; 155,787 shares
issued and outstanding at December 31, 2008)
|
2 | — | ||||||
|
Common
stock (one cent par value, 100,000,000 shares authorized; 49,052,692 and
40,988,058 shares issued and outstanding at December 31, 2008 and
2007, respectively)
|
491 | 410 | ||||||
|
Additional
paid-in capital
|
2,240,014 | 857,787 | ||||||
|
Accumulated
other comprehensive loss
|
(137,208 | ) | (51,531 | ) | ||||
|
Accumulated
deficit
|
(1,143,778 | ) | (245,462 | ) | ||||
|
Total
shareholders’ equity
|
959,521 | 561,204 | ||||||
|
TOTAL
|
$ | 2,036,099 | $ | 2,578,271 | ||||
See
notes to consolidated financial statements.
- 52
-
|
CENTURY
ALUMINUM COMPANY
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
NET
SALES:
|
||||||||||||
|
Third-party
customers
|
$ | 1,474,815 | $ | 1,449,750 | $ | 1,299,035 | ||||||
|
Related
parties
|
495,961 | 348,413 | 259,531 | |||||||||
| 1,970,776 | 1,798,163 | 1,558,566 | ||||||||||
|
Cost
of goods sold
|
1,659,152 | 1,434,700 | 1,210,044 | |||||||||
|
Gross
profit
|
311,624 | 363,463 | 348,522 | |||||||||
|
Selling,
general and administrative expenses
|
48,223 | 59,920 | 39,363 | |||||||||
|
Goodwill
impairment
|
94,844 | — | — | |||||||||
|
Operating
income
|
168,557 | 303,543 | 309,159 | |||||||||
|
Interest
expense – third party
|
(24,496 | ) | (32,899 | ) | (37,002 | ) | ||||||
|
Interest
expense – related parties
|
(1,145 | ) | — | — | ||||||||
|
Interest
income – related parties
|
318 | — | — | |||||||||
|
Interest
income – third party
|
7,481 | 10,790 | 1,705 | |||||||||
|
Net
loss on forward contracts
|
(744,448 | ) | (508,875 | ) | (389,839 | ) | ||||||
|
Loss
on early extinguishment of debt
|
— | (2,461 | ) | — | ||||||||
|
Other
income (expense) — net
|
(2,178 | ) | (841 | ) | 6,898 | |||||||
|
Loss
before income taxes and equity in earnings of joint
ventures
|
(595,911 | ) | (230,743 | ) | (109,079 | ) | ||||||
|
Income
tax (expense) benefit
|
(319,311 | ) | 113,849 | 52,041 | ||||||||
|
Loss
before equity in earnings of joint ventures
|
(915,222 | ) | (116,894 | ) | (57,038 | ) | ||||||
|
Equity
in earnings of joint ventures
|
16,906 | 15,645 | 16,083 | |||||||||
|
Net
loss
|
$ | (898,316 | ) | $ | (101,249 | ) | $ | (40,955 | ) | |||
|
LOSS
PER COMMON SHARE:
|
||||||||||||
|
Basic
and Diluted
|
$ | (20.07 | ) | $ | (2.72 | ) | $ | (1.26 | ) | |||
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, 2005
|
$ | — | $ | 322 | $ | 419,009 | $ | (91,418 | ) | $ | (95,358 | ) | $ | 232,555 | ||||||||||||||
|
Comprehensive
income (loss) – 2006
|
||||||||||||||||||||||||||||
|
Net
loss – 2006
|
$ | (40,955 | ) | (40,955 | ) | (40,955 | ) | |||||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||
|
Net
unrealized loss on financial instruments, net of $57,556
tax
|
(85,309 | ) | ||||||||||||||||||||||||||
|
Net
amount reclassified to income, net of $(48,734) in tax
|
83,186 | |||||||||||||||||||||||||||
|
Minimum
pension liability adjustment, net of $1,631 in tax
|
(2,532 | ) | ||||||||||||||||||||||||||
|
Other
comprehensive loss
|
(4,655 | ) | (4,655 | ) | (4,655 | ) | ||||||||||||||||||||||
|
Total
comprehensive loss
|
$ | (45,610 | ) | |||||||||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158, net of $46,161 tax
|
(70,499 | ) | (70,499 | ) | ||||||||||||||||||||||||
|
Excess
tax benefits from share-based compensation
|
1,394 | 1,394 | ||||||||||||||||||||||||||
|
Share-based
compensation expense
|
5,582 | 5,582 | ||||||||||||||||||||||||||
|
Issuance
of common stock – compensation plans
|
3 | 6,285 | 6,288 | |||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
$ | — | $ | 325 | $ | 432,270 | $ | (166,572 | ) | $ | (136,313 | ) | $ | 129,710 | ||||||||||||||
|
Comprehensive
income (loss) – 2007
|
||||||||||||||||||||||||||||
|
Net
loss – 2007
|
$ | (101,249 | ) | (101,249 | ) | (101,249 | ) | |||||||||||||||||||||
|
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
|
$ | 13,792 | ||||||||||||||||||||||||||
|
Adjustment
to retained earnings upon adoption of FIN 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 | $ | 857,787 | $ | (51,531 | ) | $ | (245,462 | ) | $ | 561,204 | ||||||||||||||
|
CENTURY
ALUMINUM COMPANY
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
|
||||||||||||||||||||||||||||
|
(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, 2007
|
$ | — | $ | 410 | $ | 857,787 | $ | (51,531 | ) | $ | (245,462 | ) | $ | 561,204 | ||||||||||||||
|
Comprehensive
income (loss) – 2008
|
||||||||||||||||||||||||||||
|
Net
loss – 2008
|
$ | (898,316 | ) | (898,316 | ) | (898,316 | ) | |||||||||||||||||||||
|
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
|
$ | (983,993 | ) | |||||||||||||||||||||||||
|
Excess
tax benefits from share-based compensation
|
657 | 657 | ||||||||||||||||||||||||||
|
Share-based
compensation expense
|
4,381 | 4,381 | ||||||||||||||||||||||||||
|
Issuance
of common stock – compensation plans
|
2 | 6,544 | 6,546 | |||||||||||||||||||||||||
|
Issuance
of preferred stock
|
2 | 929,478 | 929,480 | |||||||||||||||||||||||||
|
Conversion
of preferred stock to common stock
|
4 | (4 | ) | — | ||||||||||||||||||||||||
|
Issuance
of common stock – equity offering, net
|
75 | 441,171 | 441,246 | |||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
$ | 2 | $ | 491 | $ | 2,240,014 | $ | (137,208 | ) | $ | (1,143,778 | ) | $ | 959,521 | ||||||||||||||
See
notes to consolidated financial statements.
|
CENTURY
ALUMINUM COMPANY
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Year Ended December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
loss
|
$ | (898,316 | ) | $ | (101,249 | ) | $ | (40,955 | ) | |||
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||||||
|
Unrealized
net loss on forward contracts
|
602,389 | 411,023 | 333,081 | |||||||||
|
Goodwill
impairment
|
94,844 | — | — | |||||||||
|
Lower
of cost or market adjustment
|
55,865 | — | — | |||||||||
|
Depreciation
and amortization
|
84,268 | 78,060 | 69,220 | |||||||||
|
Deferred
income taxes
|
329,526 | (131,819 | ) | (126,342 | ) | |||||||
|
Pension
and other post retirement benefits
|
16,430 | 12,688 | 14,561 | |||||||||
|
Workers’
compensation
|
(359 | ) | (743 | ) | 987 | |||||||
|
Stock-based
compensation
|
11,753 | 5,962 | 5,582 | |||||||||
|
Excess
tax benefits from share-based compensation
|
(657 | ) | (588 | ) | (1,394 | ) | ||||||
|
Loss
(gain) on disposal of assets
|
49 | 69 | (6,851 | ) | ||||||||
|
Non-cash
loss on early extinguishment of debt
|
— | 2,461 | — | |||||||||
|
Undistributed
earnings of joint ventures
|
(16,906 | ) | (15,645 | ) | (16,083 | ) | ||||||
|
Change
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable — net
|
32,592 | 19,920 | (30,355 | ) | ||||||||
|
Purchase
of short-term trading securities
|
(106,532 | ) | (721,271 | ) | — | |||||||
|
Sale
of short-term trading securities
|
373,015 | 441,102 | — | |||||||||
|
Due
from affiliates
|
(12,369 | ) | 10,850 | (18,904 | ) | |||||||
|
Inventories
|
(18,839 | ) | (26,080 | ) | (28,524 | ) | ||||||
|
Prepaids
and other current assets
|
11,502 | (12,540 | ) | 89 | ||||||||
|
Accounts
payable, trade
|
(1,515 | ) | 18,211 | 9,608 | ||||||||
|
Due
to affiliates
|
(1,153,348 | ) | 13,188 | 9,701 | ||||||||
|
Accrued
and other current liabilities
|
(69,728 | ) | (16,912 | ) | 18,965 | |||||||
|
Other
— net
|
898 | 7,558 | (7,033 | ) | ||||||||
|
Net
cash (used in) provided by operating activities
|
(665,438 | ) | (5,755 | ) | 185,353 | |||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase
of property, plant, and equipment
|
(44,536 | ) | (24,240 | ) | (23,602 | ) | ||||||
|
Nordural
expansion
|
(80,314 | ) | (88,764 | ) | (193,511 | ) | ||||||
|
Investments
in and advances to joint ventures
|
(36,974 | ) | — | — | ||||||||
|
Payment
received on advances from joint ventures
|
1,754 | — | — | |||||||||
|
Restricted
and other cash deposits
|
8 | 3,738 | (2,583 | ) | ||||||||
|
Proceeds
from sale of property, plant, and equipment
|
331 | 695 | 7,759 | |||||||||
|
Net
cash used in investing activities
|
(159,731 | ) | (108,571 | ) | (211,937 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Borrowings
of long-term debt
|
— | 30,000 | 109,000 | |||||||||
|
Repayment
of long-term debt
|
— | (369,436 | ) | (581 | ) | |||||||
|
Repayment
of long-term debt – related party
|
(505,198 | ) | — | — | ||||||||
|
Borrowings
under revolving credit facility
|
35,000 | — | — | |||||||||
|
Repayment
under revolving credit facility
|
(10,000 | ) | — | (8,069 | ) | |||||||
|
Excess
tax benefits from share-based compensation
|
657 | 588 | 1,394 | |||||||||
|
Issuance
of preferred stock
|
929,480 | — | — | |||||||||
|
Issuance
of common stock, net
|
443,668 | 417,771 | 3,453 | |||||||||
|
Net
cash provided by financing activities
|
893,607 | 78,923 | 105,197 | |||||||||
|
CHANGE
IN CASH
|
68,438 | (35,403 | ) | 78,613 | ||||||||
|
CASH,
BEGINNING OF YEAR
|
60,962 | 96,365 | 17,752 | |||||||||
|
CASH,
END OF YEAR
|
$ | 129,400 | $ | 60,962 | $ | 96,365 | ||||||
See
notes to consolidated financial statements.
CENTURY
ALUMINUM COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2008, 2007 and 2006
(Dollars
in thousands, except share and per share amounts)
|
1.
|
Summary
of Significant Accounting Policies
|
Organization and Basis of
Presentation — Century Aluminum Company (“Century Aluminum,” “Century,”
“we”, “us”, “our” or “ours”) is a holding company, whose principal subsidiaries
are Century Aluminum of West Virginia, Inc. (“Century of West Virginia”),
Berkeley Aluminum, Inc. (“Berkeley”), Century Kentucky, Inc. and Nordural ehf
(“Nordural”). Century of West Virginia operates a primary aluminum
reduction facility in Ravenswood, West Virginia
(“Ravenswood”). Berkeley holds a 49.7% interest in a partnership
which operates a primary aluminum reduction facility in Mt. Holly, South
Carolina (“Mt. Holly”) and a 49.7% undivided interest in the property, plant,
and equipment comprising Mt. Holly. The remaining interest in the
partnership and the remaining undivided interest in Mt. Holly are owned by
Alumax of South Carolina, Inc., a subsidiary of Alcoa (“ASC”). ASC
manages and operates Mt. Holly pursuant to an Owners Agreement, prohibiting the
disposal of the interest held by any of the owners without the consent of the
other owners and providing for certain rights of first refusal. Pursuant to the
Owners Agreement, each owner furnishes their own alumina, for conversion to
aluminum, and is responsible for their pro rata share of the operating and
conversion costs. Century Kentucky, Inc. operates a primary aluminum
reduction facility in Hawesville, Kentucky (“Hawesville”). Nordural
Grundartangi ehf operates a primary aluminum reduction facility in Grundartangi,
Iceland (“Grundartangi”).
In
addition to our primary aluminum assets, we have 50% joint venture interests in
the Gramercy alumina refinery, located in Gramercy, Louisiana (“Gramercy”) and
St. Ann Bauxite, a related bauxite mining operation in Jamaica. The Gramercy
refinery supplies substantially all of the alumina used for the production of
primary aluminum at Hawesville. We also own a 40% stake in Baise
Haohai Carbon Co., Ltd. (“BHH”), a carbon anode and cathode facility located in
the Guangxi Zhuang Autonomous Region of south China. BHH, in addition
to its Chinese customers, supplies anodes to Grundartangi.
Prior to
April 1996, we were an indirect, wholly-owned subsidiary of Glencore
International AG (together with its subsidiaries, “Glencore”). In
April 1996, we completed an initial public offering of our common stock. At
December 31, 2008, Glencore owned 30.2% of Century’s outstanding common stock
and all of our outstanding Series A Convertible Preferred stock convertible in
certain circumstances into 15,578,718 common shares. Together, the
shares of our common stock and preferred stock beneficially owned by Glencore
give Glencore an approximate 47% economic interest in
Century. Century and Glencore enter into various transactions such as
the purchase and sale of primary aluminum, purchase of alumina, tolling
agreements and forward primary aluminum financial sales contracts.
Principles of Consolidation —
The consolidated financial statements include the accounts of Century
Aluminum Company and our subsidiaries, after elimination of all significant
intercompany transactions and accounts. Berkeley’s interest in the
Mt. Holly partnership and our interest in the Gramercy, St. Ann Bauxite and BHH
joint ventures are accounted for under the equity method. Our equity
in the earnings of St. Ann Bauxite is recorded net of Jamaican
taxes.
Revenue recognition— Revenue
is recognized when title and risk of loss pass to customers in accordance with
contract terms. In some instances, we invoice our customers prior to
physical shipment of goods. In such instances, revenue is recognized
only when the customer has specifically requested such treatment and has made a
commitment to purchase the product. The goods must be complete, ready
for shipment and physically separated from other inventory with risk of
ownership passing to the customer. We must retain no performance
obligations and a delivery schedule must be obtained. Sales returns
and allowances are treated as a reduction of sales and are provided for based on
historical experience and current estimates.
Cash and Cash Equivalents —
Cash equivalents are comprised of cash, money market funds and short-term
investments having maturities of less than 90 days at the time of purchase. The
carrying amount of cash equivalents approximates fair value.
Short-term investments – We
account for short-term investment securities in accordance with Statement of
Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” At December 31, 2008, our
short-term investments primarily consist of investments in tax-exempt municipal
bonds. These investments were classified as trading securities and
recorded at fair value with unrealized holding gains and losses included in
interest income.
We held
investments in Variable Rate Demand Notes (“VRDNs”) in 2007 which were
tax-exempt municipal bonds that were purchased from a remarketing
agent. We could tender the notes to the remarketing agent whenever
the rates were reset, usually upon a seven-day notice. While the
securities were long-term municipal bonds, the ability to tender the notes to
the remarketing agent upon short notice provides liquidity and allows the
investments to be classified as current assets. As of December 31,
2008, we did not hold any VRDNs and all investments were successfully
remarketed.
Accounts Receivable — The
accounts receivable are net of an allowance for uncollectible accounts of $1,000
at December 31, 2008 and 2007.
Inventories — Our inventories
are stated at the lower of cost (using the first-in, first-out (“FIFO”) method)
or market.
Property, Plant and Equipment
— Property, plant and equipment is stated at cost. Additions, renewals and
improvements are capitalized. Asset and accumulated depreciation accounts are
relieved for dispositions with resulting gains or losses included in other
income (expense). Maintenance and repairs are expensed as incurred.
We capitalize interest for the construction of qualifying
assets. Depreciation of plant and equipment is provided for by the
straight-line method over the following estimated useful lives:
|
Buildings
and improvements
|
14
to 45 years
|
|
Machinery
and equipment
|
5 to 22 years
|
We
periodically evaluate the carrying value of long-lived assets to be held and
used when events and circumstances warrant such a review. The carrying value of
a separately identifiable, long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. We recognized no impairment
losses on our long-lived fixed assets during 2008, 2007 or 2006.
Goodwill and Intangible Asset –
We recorded $94,844 of goodwill as a result of the acquisition of
Nordural in 2004. We test our goodwill annually for impairment in the
second quarter of the fiscal year and at other times whenever events or
circumstances indicate that the carrying amount of goodwill may exceed its fair
value. If the carrying value of goodwill exceeds its fair value, an impairment
loss will be recognized. We tested our goodwill again in the fourth
quarter of 2008 due to the worldwide downturn in the primary aluminum
market. We determined that 100% of the goodwill was impaired and
recognized a $94,844 impairment loss. No impairment loss was recorded
in 2007 or 2006.
The
analysis of goodwill requires a two-step process. The first step
is the estimation of fair value. If step one indicates that
impairment potentially exists, the second step is performed to measure the
amount of impairment, if any. Goodwill is impaired when the implied
fair value of goodwill is less than its carrying value.
For this
analysis, we estimated the fair value of the Nordural
Grundartangi reporting unit using a discounted cash flow
model. Inputs to that model include various estimates, such
as future primary aluminum prices, operating costs, discount rates and
cash flow assumptions. Based on our analysis, the implied fair value
of goodwill was less than its carry value and a non-cash impairment charge of
$94,844 was recorded on the Consolidated Statements of
Operations.
The
changes in carrying amount of goodwill are as follows:
|
Goodwill
|
||||
|
Balance
as of January 1, 2008
|
$ | 94,844 | ||
|
Impairment
charge
|
(94,844 | ) | ||
|
Balance
as of December 31, 2008
|
$ | — | ||
Our
intangible asset consists of the power contract acquired in connection with our
acquisition of Hawesville. The contract value is being amortized over
its remaining term (through 2010) using a method that results in annual
amortization equal to the percentage of a given year’s expected gross annual
benefit to the total as applied to the total recorded value of the power
contract. As of December 31, 2008 and 2007, the gross carrying amount
of the intangible asset was $155,986 with accumulated amortization of $123,459
and $108,383, respectively.
For the
years ended December 31, 2008, 2007 and 2006, amortization expense for the
intangible asset totaled $15,076, $13,991 and $13,049,
respectively. The estimated aggregate amortization expense for the
intangible asset (assuming the power contract is not renegotiated) for the
remainder of the contract term is as follows:
|
For
the year ending December 31,
|
||||||||
|
2009
|
2010
|
|||||||
|
Estimated
amortization expense
|
$ | 16,149 | $ | 16,378 | ||||
The
intangible asset is reviewed for impairment in accordance with Statement of
Financial Accounting Standard (“SFAS”) No. 144, “Goodwill and Other Intangible
Assets,” whenever events or circumstances indicate that its net carrying amount
may not be recoverable.
Other Assets — At December
31, 2008 and 2007, other assets consist primarily of Century’s investment in the
Mt. Holly partnership, the investment in the Gramercy, St. Ann Bauxite and BHH
joint ventures, deferred financing costs, deferred pension assets, and cash
surrender value of life insurance policies. Our equity share of the
undistributed earnings (loss) increases (decreases) the investment in the joint
ventures. Deferred financing costs are amortized on a
straight-line basis over the life of the related financing.
We
account for our 49.7% interest in the Mt. Holly partnership using the equity
method of accounting. Additionally, our 49.7% undivided interest in
certain property, plant and equipment of Mt. Holly is held outside of the
partnership and the undivided interest in these assets of the facility is
accounted for in accordance with the EITF Issue No. 00-01, “Investor Balance
Sheet and Income Statement Display under the Equity Method for Investments in
Certain Partnerships and Other Ventures.” Accordingly, the undivided
interest in these assets and the related depreciation are being accounted for on
a proportionate gross basis.
Income Taxes — We account for
income taxes using the liability method, whereby deferred income taxes reflect
the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. In evaluating our ability to realize deferred tax assets,
we use judgment in considering the relative impact of negative and positive
evidence. The weight given to the potential effect of negative and positive
evidence is commensurate with the extent to which it can be objectively
verified. Based on the weight of evidence, both negative and
positive, if it is more likely than not that some portion or all of a deferred
tax asset will not be realized, a valuation allowance is
established. We recorded a valuation allowance of $538,803 against a
portion of our federal and state deferred tax assets as of December 31, 2008,
due to our belief that it is more likely than not that these assets will not be
realized. We recorded a valuation allowance of $19,206 and $13,881
against a portion of our Icelandic and Hong Kong NOL deferred tax assets as of
December 31, 2008 and December 31, 2007, respectively, due to our belief that it
is more likely than not that these assets will not be realized.
We have
removed our election to permanently reinvest foreign earnings for
2009. We recorded deferred income taxes of $30,394 related to the
change in our election. We did not change the election in place for
years prior to December 31, 2007. See Note 16 Income Taxes for
additional information.
Postemployment Benefits — We
provide certain postemployment benefits to former and inactive employees and
their dependents during the period following employment, but before retirement.
These benefits include salary continuance, supplemental unemployment and
disability healthcare. Postemployment benefits are accounted for in accordance
with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” The
statement requires recognition of the estimated future cost of providing
postemployment benefits on an accrual basis over the active service life of the
employee.
Forward Contracts and Financial
Instruments — We routinely enter into fixed and market priced contracts
for the sale of primary aluminum and the purchase of raw materials in future
periods. We also enter into fixed price financial sales contracts to
be settled in cash to manage our exposure to changing primary aluminum prices.
We have also entered into financial purchase contracts for natural gas to be
settled in cash to manage our exposure to changing natural gas
prices. See Note 18 for additional information about these
contracts.
Certain
physical delivery and financial sales contracts for primary aluminum that are
not designated cash flow hedges or do not qualify for cash flow hedge treatment
are marked-to-market quarterly. Fluctuations in the LME price of
primary aluminum may have a significant impact on gains and losses included in
our financial statements from period to period. We recognize the
unrealized and realized gains and losses associated with these contracts in net
gain (loss) on forward contracts. See Note 4 Termination Transaction
for additional information about our financial sales contracts for primary
aluminum.
Financial Instruments — Our
receivables, payables, debt related to industrial revenue bonds (“IRBs”) and
forward financial contracts are carried at amounts that approximate fair value.
At December 31, 2008 and 2007, our 7.5% senior unsecured notes and 1.75%
convertible senior notes had carrying amounts of $250,000 and $175,000,
respectively. At December 31, 2008, we estimated the fair values
based on the last available trading data of the 7.5% senior unsecured notes and
1.75% convertible senior notes were $145,000 and $94,624,
respectively. At December 31, 2007, the estimated fair value of the
7.5% senior unsecured notes and 1.75% convertible senior notes were $251,250 and
$325,589, respectively.
Concentration of Credit Risk —
Financial instruments, which potentially expose us to concentrations of
credit risk, consist principally of trade receivables and short-term
investments. Our limited customer base increases our concentrations
of credit risk with respect to trade receivables. We routinely assess the
financial strength of our customers. At December 31, 2008, we had
approximately $13,686 invested in short-term investments of highly-rated
municipal bonds. The risk associated with these investments is a
default by the underlying issuer.
Use of Estimates — The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation — We
adopted SFAS No. 123(R), “Share-Based Payment” effective January 1,
2006. We use the Black-Scholes option-pricing model to estimate the
fair value of our stock option grants and service-based share awards on the
grant date of the share award. Information about our assumptions used
to determine the fair value of the grants in 2008, 2007 and 2006 is available in
Note 14.
Recently Issued Accounting
Standards–FSP APB 14-1. In May 2008, the FASB issued FASB
Staff Position (‘FSP”) APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).” This FSP clarifies that convertible debt instruments
that may be settled in cash upon conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase
Warrants.” Additionally, this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. We
expect the adoption of FSP APB 14-1 will impact the current presentation of our
senior unsecured convertible notes. We will separately account for
the liability and equity components of our convertible
notes. Additionally, we will make a retrospective restatement of
previous financial statements to reflect the “non-convertible” borrowing rate
for which the convertible notes were outstanding and a cumulative effect of the
change in accounting principle for periods prior to presentation will be
recognized. We have not completed the analysis of the impact of the
adoption of this FSP on our financial position, cash flows and results of
operations at this time.
SFAS No. 160. In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS
No. 160 amends ARB No. 51, “Consolidated Financial Statements,” to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
will be effective for financial statements issued for fiscal years beginning
after December 15, 2008, and the interim periods within those
years. SFAS No. 160 will be effective for Century on January 1,
2009. We do not expect the adoption of SFAS No. 160 will have
material impact on our financial position and results of
operations.
SFAS No. 161. In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133.” This Statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosure about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement No.133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. SFAS No. 161 will be
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. This pronouncement becomes effective for
Century on January 1, 2009. This pronouncement only requires more
robust disclosures for our derivative and hedging activities, the adoption of
SFAS No. 161 will not have a significant impact on our Consolidated Financial
Statements.
SFAS No. 141R. In December
2007 issued SFAS No. 141R, “Business Combinations” which replaces SFAS No. 141,
“Business Combinations.” This statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves control.
Statement 141 did not define the acquirer, although it included guidance on
identifying the acquirer, as does this Statement. This Statement’s scope is
broader than that of Statement 141, which applied only to business combinations
in which control was obtained by transferring consideration. By applying the
same method of accounting—the acquisition method—to all transactions and other
events in which one entity obtains control over one or more other
businesses. This Statement retains the guidance in Statement 141 for
identifying and recognizing intangible assets separately from
goodwill.
SFAS No.
141R requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. That is a
significant change from the previous cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. Previous
guidance resulted in some assets and liabilities not being recognized at the
acquisition date, and also resulted in measuring some assets and liabilities at
amounts other than their fair values at the acquisition date. For
example, Statement 141 required the acquirer to include the costs incurred to
effect the acquisition (acquisition-related costs) in the cost of the
acquisition that was allocated to the assets acquired and the liabilities
assumed. SFAS No. 141R requires those costs to be recognized separately from the
acquisition.
This
Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. As this Statement
applies to prospective transactions, we will apply it to our business
combinations in future periods.
FSP FAS
132(R)-1. In December 2008, the FASB issued FSP 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (the
“FSP”). The FSP amends SFAS No. 132 (revised 2003), “Employers’
Disclosures about Pensions and Other Postretirement Benefits,” to provide
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. This guidance is intended to
ensure that an employer meets the objectives of the disclosures
about plan assets in an employer’s defined benefit pension or other
postretirement plan to provide users of financial statements with an
understanding of the following: (1) how investment allocation
decisions are made; (2) the major categories of plan assets; (3) the inputs and
valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements using significant unobservable inputs on
change in plan assets, and; (5) significant concentrations of risk within the
plan assets. The FSP becomes effective for Century on December 31,
2009. The FSP only requires enhanced disclosures, and therefore we
have determined that the adoption of the FSP will not have a significant impact
on our Consolidated Financial Statements.
Recently Adopted Accounting
Standards–Effective January 1, 2008, we adopted Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. This pronouncement applies to a broad range of other
existing accounting pronouncements that require or permit fair value
measurements. See Note 9 Adoption of SFAS No. 157 for additional
information.
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. Nordural ehf uses the U.S. dollar as its functional currency,
however a portion of the Nordural facility at Grundartangi’s operating expenses
are denominated and payable in currencies other than the U.S.
dollar. Grundartangi’s labor costs are denominated in ISK and a
portion of its anode costs are denominated in euros. Transactions
denominated in currencies other than the functional currency are recorded based
on exchange rates at the time such transactions arise and any transaction gains
and losses are reflected in other income (expense) in the Consolidated
Statements of Operations. In addition, our joint venture investment
in BHH uses the Chinese yuan as its functional currency. BHH is
accounted for under the equity method and gains and losses associated with
foreign currency exchange rates are included in equity in earnings of joint
ventures.
|
2.
|
Management’s
Plans
|
We have
incurred operating losses each year since 2005 and had an accumulated deficit of
$1,143,778 as of December 31, 2008. For the years ended December 31,
2008 and 2007, we sustained net losses available to common stockholders of
$898,316 and $101,249, respectively. Our financial position and
liquidity have been and will continue to be materially adversely affected by
declining aluminum prices. If prices remain at current levels, we would expect
such liquidity would be sufficient to fund our operations through the end of
2009.
Our
principal sources of liquidity are available cash, cash flow from operations and
available borrowings under our revolving credit facility. We intend
to explore alternative or supplementary financing arrangements to the revolving
credit facility. Our principal uses of cash are operating costs,
payments of principal and interest on our outstanding debt, the funding of
capital expenditures and investments in related businesses, working capital and
other general corporate requirements.
We
believe our cost reduction actions when combined with available cash and
short-term investments at December 31, 2008, the proceeds of the equity offering
completed subsequent to year-end, see Note 26 Subsequent Events, and
availability under our revolving credit facility, see Note 10 Debt, provide us
with adequate liquidity for 2009.
|
3.
|
Equity
Offerings
|
In July
2008, we completed a public equity offering of 7,475,000 shares of common stock,
which included the exercise of the over-allotment option of 975,000 shares of
common stock, at a price of $62.25 per share, raising $465,319 before offering
costs. The offering costs were approximately $24,073, representing
underwriting discounts and commissions and offering expenses.
In July
2008, we applied the net proceeds from the equity offering to pay a portion of
the deferred cash payment required in connection with the termination of primary
aluminum forward
financial sales contracts with Glencore, described in Note 4 Termination
Transaction.
In June
2007, we completed a public equity offering of 8,337,500 shares of common stock,
which included the exercise of the over-allotment option of 1,087,500 shares of
common stock, at a price of $52.50 per share, raising $437,719 before offering
costs. We sold the 8,337,500 shares of common stock in a simultaneous
offering in the United States and Iceland. Shares of common stock
offered and sold in Iceland are represented by global depositary receipts, with
one depositary receipt representing one share of common stock. The
offering costs were approximately $23,573, representing underwriting discounts
and commissions and offering expenses.
In June
2007, we used a portion of the net proceeds from the equity offering to prepay
$200,000 of principal of the Nordural senior term loan facility. The
balance of the equity offering proceeds was used as partial funding for the
Termination Transaction and for general corporate purposes.
See Note
26 Subsequent Events – Equity Offering for additional information about our 2009
equity offering.
|
4.
|
Termination
Transaction
|
In November 2004 and June
2005, we entered into primary aluminum forward financial sales contracts with
Glencore for the years 2006 through 2010 and 2008 through 2015, respectively
(the “Financial Sales Contracts”). While these Financial Sales
Contracts were outstanding, they were marked-to-market on a quarterly basis
based on the LME forward market prices for primary aluminum. Gains or
losses were recognized in our Consolidated Statements of Operations in net loss
on forward contracts and an asset or liability was recognized on our
consolidated balance sheet. The Financial Sales Contracts had a fixed volume
that was net settled in cash monthly. As the contracts were in a liability
position, cash payments were made to Glencore on a monthly basis which reduced
the associated contract liability.
On July
7, 2008, Century and Glencore agreed to terminate the Financial Sales Contracts
upon the payment by Century to Glencore of $1,820,457 in cash ($1,315,259 paid
immediately and $505,198 financed through a deferred settlement agreement, which
was repaid during 2008) and the issuance by Century to Glencore of 160,000
shares of non-voting perpetual preferred stock, convertible into 16,000,000
shares of common stock. We received $1,090,259 of
cash as consideration for the shares of Series A Convertible Preferred
Stock issued. We used the cash received to settle a portion of
outstanding contract liabilities associated with the Financial Sales
Contracts. See
Note 13 Shareholders’ Equity for additional information about the convertible
preferred stock.
On July
7, 2008, our Due to affiliates, current and non-current balances, included
$1,832,056 of liabilities associated with the outstanding Financial Sales
Contracts, with a non-current portion of $1,529,178. The following
table sets forth a comparison of the consideration given and received by Century
in the termination transaction:
|
Cash
paid
|
$ | 1,315,259 | ||
|
Series
A Convertible Preferred Stock
|
929,480 | |||
|
Deferred
settlement amount
|
505,198 | |||
|
Total
consideration given
|
2,749,937 | |||
|
Financial
Sales Contracts liability
|
(1,832,056 | ) | ||
|
Cash
received
|
(1,090,259 | ) | ||
|
Gain
on settlement
|
$ | (172,378 | ) |
The value
of the Series A Convertible Preferred Stock was based on the closing value of
our common stock on the date of the transaction with adjustments for certain
costs associated with these instruments borne by holder of the Series A
Convertible Preferred Stock. The cash
received in the table above of $1,090,259 represents the fair value of the
Series A Convertible Preferred Stock plus a negotiated premium, such premium was
repaid to Glencore in the cash paid of $1,315,259 in the termination
transaction.We recorded a $161,976 gain ($172,378 gain, net of $10,402
transaction costs) on forward contracts relating to the terminated Financial
Sales Contracts in our Consolidated Statements of Operations in Net loss on
forward contracts.
|
Investment
in carbon facility in China
|
In April
2008, we entered into a joint venture agreement whereby we acquired a 40% stake
in BHH, a carbon anode and cathode facility located in the Guangxi Zhuang
Autonomous Region of south China. As of December 31, 2008, we paid
approximately $27,600 cash for the investment and transferred approximately
$9,400 cash in a loan to BHH in July 2008. In December, we received a
loan payment of $1,754 from BHH. 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. Our Statement of Operations
for the year ended December 31, 2008 includes our equity in earnings of joint
venture for BHH results of operations for the six months ended September 30,
2008.
|
6.
|
Short-term
Investments
|
The
composition of our short-term investments was as follows at December
31:
|
2008
|
2007
|
|||||||
|
Trading
securities:
|
||||||||
|
Municipal
bonds
|
$ | 13,686 | $ | 265,107 | ||||
|
Municipal
short-term paper
|
— | 15,062 | ||||||
|
Short-term
investments
|
$ | 13,686 | $ | 280,169 | ||||
|
7.
|
Inventories
|
Inventories,
at December 31, consist of the following:
|
|
2008
|
2007
|
||||||
|
Raw
materials
|
$ | 19,664 | $ | 73,926 | ||||
|
Work-in-process
|
16,133 | 22,201 | ||||||
|
Finished
goods
|
8,203 | 7,968 | ||||||
|
Operating
and other supplies
|
94,111 | 71,006 | ||||||
|
Inventories
|
$ | 138,111 | $ | 175,101 | ||||
In
December 2008, we recorded a $55,867 reduction in inventory balances for lower
of cost or market adjustments due to significant decreases in the net realizable
value of our inventory in the current market. Such amount was
recorded in cost of goods sold in our Consolidated Statements of
Operations.
|
8.
|
Property,
Plant and Equipment
|
Property,
plant and equipment, at December 31, consist of the following:
|
2008
|
2007
|
|||||||
|
Land
and improvements
|
$ | 13,055 | $ | 13,061 | ||||
|
Buildings
and improvements
|
309,324 | 297,548 | ||||||
|
Machinery
and equipment
|
1,338,901 | 1,317,781 | ||||||
|
Construction
in progress
|
141,572 | 25,922 | ||||||
| 1,802,852 | 1,654,312 | |||||||
|
Less
accumulated depreciation
|
(462,815 | ) | (394,272 | ) | ||||
|
Property,
plant and equipment - net
|
$ | 1,340,037 | $ | 1,260,040 | ||||
For the
years ended December 31, 2008, 2007 and 2006, we recorded depreciation expense
of $69,192, $64,069 and $56,171, respectively.
At
December 31, 2008 and 2007, the cost of property, plant and equipment includes
$168,465 and $163,790, respectively, and accumulated depreciation includes
$85,006 and $78,738, respectively, representing our undivided interest in the
property, plant and equipment comprising Mt. Holly.
|
9.
|
Adoption
of SFAS No. 157
|
Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. This pronouncement applies to a broad range
of other existing accounting pronouncements that require or permit fair value
measurements.
SFAS No.
157 defines fair value as “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.” Under SFAS No. 157, fair value
is an exit price and that exit price should reflect all the assumptions that
market participants would use in pricing the asset or liability.
SFAS No.
157 recognizes three different valuation techniques; the market approach, income
approach, and/or cost approach. Primarily, we use the market and
income approaches. We use the income approach to value our derivative
contracts. Valuation
techniques used to measure fair value under SFAS No. 157 are based upon
observable and unobservable inputs. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect our
internal market assumptions. These two types of inputs create the
following fair value hierarchy:
|
|
·
|
Level
1 – Valuations are based on quoted prices for identical assets or
liabilities in an active market.
|
|
|
·
|
Level
2 – Valuations are based on quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; and model-derived
valuations for which all significant inputs are observable or can be
corroborated by observable market
data.
|
|
|
·
|
Level
3 – Assets or liabilities whose significant inputs are
unobservable. Valuations are determined using pricing models
and discounted cash flow models and include management judgment and
estimation which may be
significant.
|
SFAS No.
157 requires consideration of market risks in our valuations that other market
participants might consider, specifically non-performance risk and counterparty
credit risk. Consideration of the non-performance risk and
counterparty credit risk could result in changes to the discount rates used in
our fair value measurements. We considered the effects of our credit
risk (non-performance risk) and we reviewed the credit standing of our
counterparties to develop appropriate risk-adjusted discount rates used in our
fair value measurements.
The
following section describes the valuation methodology used to measure our
financial assets and liabilities that were accounted for at fair
value.
Short-term
Investments. Our short-term investments consist of tax-exempt
municipal bonds. The market value of these investments is based upon
their quoted market price in markets that are not actively traded.
Derivatives. Our
derivative contracts include natural gas forward financial purchase contracts,
foreign currency forward contracts, primary aluminum forward physical and
financial sales contracts and the Ravenswood power contract. We
measure the fair value of these contracts based on the quoted future market
prices at the reporting date in their respective principal markets for all
available periods. We discount the expected cash flows from these
contracts using a risk-adjusted discount rate. All primary aluminum
physical delivery contracts are marked-to-market using the LME spot and forward
market for primary aluminum and the U.S. Midwest Premium. Because
there is no quoted futures market price for the U.S. Midwest premium component
of the market price for primary aluminum, it is necessary for management to
estimate the U.S. Midwest premium based on the historical U.S. Midwest
premium. Prior to the termination of the Financial Sales Contracts,
the term of one of our primary aluminum financial sales contracts extended
beyond the quoted LME futures market. We estimated the fair value of
that contract by making certain assumptions about future market prices of
primary aluminum beyond the quoted LME market prices in 2013. These
future market assumptions were significant to the fair value
measurements. The Ravenswood power contract derivative is valued
based in part on the LME forward market.
Fluctuations
in the market prices for our primary aluminum forward financial sales contracts
had a significant impact on gains and losses from forward contracts included in
our financial statements from period to period. Unrealized gains and
losses for these primary aluminum forward financial sales contracts were
included in net gain (loss) on forward contracts. Our other
derivative contracts, natural gas forward financial purchase contracts and
foreign currency forward contracts, qualify for cash flow hedge treatment under
SFAS No. 133. The effective portion of these contracts is recorded in
other comprehensive income. The realized gains or losses on these
hedges are recorded in the statement of operations when the hedged transaction
affects earnings. The ineffective portions of these hedges are
recognized immediately in the statement of operations.
The
following table sets forth by level within the SFAS No. 157 fair value hierarchy
our financial assets and liabilities that were accounted for at fair value on a
recurring basis. As required by SFAS No. 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. Our assessment of
the significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value assets and liabilities and
the placement within the fair value hierarchy levels.
|
Recurring
Fair Value Measurements
|
As
of December 31, 2008
|
|||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
ASSETS:
|
||||||||||||||||
|
Short-term
investments
|
$ | — | $ | 13,686 | $ | — | $ | 13,686 | ||||||||
|
Derivative
assets
|
— | — | 2,202 | 2,202 | ||||||||||||
|
TOTAL
|
$ | — | $ | 13,686 | $ | 2,202 | $ | 15,888 | ||||||||
|
LIABILITIES:
|
||||||||||||||||
|
Derivative
liabilities
|
$ | (10,130 | ) | — | $ | (1,759 | ) | $ | (11,889 | ) | ||||||
|
Change
in Level 3 Fair Value Measurements during the year ended December 31,
2008
|
||||||||||||||||||||
|
Beginning
balance, January 1, 2008
|
Total
loss (realized/unrealized) included in earnings
|
Settlements
|
Ending
balance
|
Amount
of total loss included in earnings attributable to the change in
unrealized loss relating to assets/liabilities held at December 31,
2008
|
||||||||||||||||
|
Derivative
assets/liabilities - net
|
$ | (1,070,290 | ) | $ | (890,442 | ) | $ | 1,961,175 | $ | 443 | $ | 774,537 | ||||||||
The net
loss on our derivative assets and liabilities is recorded in our statement of
operations under Net loss on forward contracts. Our Level 3
derivative assets were included in Prepaid and other current
assets. Our Level 3 derivative liabilities were included in our Due
to affiliates and Due to affiliates – less current portion line items of our
consolidated balance sheets.
|
10.
|
Debt
|
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Debt
classified as current liabilities:
|
||||||||
|
1.75%
convertible senior notes due 2024, interest payable semiannually
(1)(2)(3)
|
$ | 175,000 | $ | 175,000 | ||||
|
Hancock
County industrial revenue bonds due 2028, interest payable quarterly
(variable interest rates (not to exceed 12%))(1)
|
7,815 | 7,815 | ||||||
|
Debt
classified as non-current liabilities:
|
||||||||
|
7.5%
senior unsecured notes payable due 2014, interest payable semiannually
(3)(4)
|
250,000 | 250,000 | ||||||
|
Revolving
credit facility (5)
|
25,000 | — | ||||||
|
Total
Debt
|
$ | 457,815 | $ | 432,815 | ||||
|
(1)
|
The
convertible notes are classified as current because they are convertible
at any time by the holder. The IRBs are classified as current
liabilities because they are remarketed weekly and could be required to be
repaid upon demand if there is a failed remarketing. The IRB interest rate
at December 31, 2008 was 1.55%.
|
|
(2)
|
The
convertible notes are convertible at any time by the holder at an initial
conversion rate of 32.7430 shares of Century common stock per one thousand
dollars of principal amount of convertible notes, subject to adjustments
for certain events. The initial conversion rate is equivalent
to a conversion price of approximately $30.5409 per share of Century
common stock. Upon conversion of a convertible note, the holder of such
convertible note shall receive cash equal to the principal amount of the
convertible note and, at our election, either cash or Century common
stock, or a combination thereof, for the convertible notes conversion
value in excess of such principal amount, if any. We may redeem
some or all of the notes on or after August 6, 2009 at a price equal
to 100% of the principal amount of the notes being redeemed, plus accrued
and unpaid interest, if any. Holders of the convertible notes
may require us to purchase for cash all or part of the notes on each of
August 1, 2011, August 1, 2014 and August 1, 2019 at a
price equal to 100% of the principal amount of the notes being purchased,
plus accrued and unpaid interest, if any.
|
|
(3)
|
The
obligations of Century pursuant to the notes are unconditionally
guaranteed, jointly and severally, on a senior unsecured basis by all of
our existing domestic restricted subsidiaries. The indentures
governing these obligations contain customary covenants, including
limitations on our ability to incur additional indebtedness, pay
dividends, sell assets or stock of certain subsidiaries and purchase or
redeem capital stock.
|
|
(4)
|
On
or after August 15, 2009, we may redeem any of the senior notes, in whole
or in part, at an initial redemption price equal to 103.75% of the
principal amount, plus accrued and unpaid interest. The
redemption price will decline each year after 2009 and will be 100% of the
principal amount, plus accrued and unpaid interest, beginning on August
15, 2012.
|
|
(5)
|
Borrowings
under the revolving line of credit are, at our option, at the LIBOR rate
or bank base rate, plus or minus in each case an applicable
margin. The revolving line of credit is subject to customary
covenants, including limitations on capital expenditures, additional
indebtedness, affiliate transactions, liens, guarantees, mergers and
acquisitions, dividends, distributions, capital redemptions and
investments.
|
We have a
$100,000 senior secured revolving credit facility (“Credit Facility”) with a
syndicate of banks that will mature September 19, 2010. Our
obligations under the Credit Facility are unconditionally guaranteed by our
domestic subsidiaries (other than Century Aluminum Holdings, Inc., Century
Louisiana, Inc., and Nordural US LLC) and secured by a first priority security
interest in all accounts receivable and inventory belonging to Century and our
subsidiary borrowers. The availability of funds under the Credit
Facility is subject to a $15,000 reserve and limited by a specified borrowing
base consisting of certain eligible accounts receivable and
inventory. Borrowings under the Credit Facility are, at our option,
at the LIBOR rate or bank base rate, plus or minus in each case an applicable
margin. The Credit Facility is subject to customary covenants,
including limitations on capital expenditures, additional indebtedness,
affiliate transactions, liens, guarantees, mergers and acquisitions, dividends,
distributions, capital redemptions and investments. We could issue up to a
maximum of $25,000 in letters of credit under the Credit Facility. As of
December 31, 2008, we have letters of credit totaling $11,263
outstanding. Any outstanding letters of credit reduce our borrowing
availability on a dollar-for-dollar basis. In addition to the letters
of credit, we had $25,000 other outstanding borrowings under the Credit Facility
as of December 31, 2008. As of December 31, 2008, we had additional
borrowing availability of $34,560 under the Credit Facility. We pay a
commitment fee for the unused portion of the line.
The
curtailment of our Ravenswood facility will reduce the amount of accounts
receivable and inventory balances that will in turn reduce the borrowing base
and availability of funds under the Credit Facility. See Note 26
Subsequent Events for additional information. If all of Ravenswood’s
operations had been curtailed as of December 31, 2008, our remaining
availability under our revolving credit facility would have decreased from
$34,560 to $3,556.
Principal
Payments on Long Term Debt
Principal
payments on our long term debt in the next five years and thereafter are as
follows:
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||||||
|
7.5%
senior notes due August 2014
|
$ | 250,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 250,000 | ||||||||||||||
|
Senior
secured revolving credit facility
|
25,000 | — | 25,000 | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 275,000 | $ | — | $ | 25,000 | $ | — | $ | — | $ | — | $ | 250,000 | ||||||||||||||
|
11.
|
Composition
of certain balance sheet accounts at December
31
|
|
Components
of Prepaid and other current assets:
|
2008
|
2007
|
||||||
|
Domestic
income tax receivable
|
$ | 76,528 | $ | 9,990 | ||||
|
Prepaid
assets
|
12,771 | 4,474 | ||||||
|
VAT
receivable, net
|
5,818 | 4,605 | ||||||
|
Other
current assets
|
2,366 | 11,100 | ||||||
|
Derivative
asset
|
2,202 | — | ||||||
|
Foreign
withholding tax receivable
|
176 | 9,922 | ||||||
| $ | 99,861 | $ | 40,091 | |||||
|
Components
of Other assets:
|
2008
|
2007
|
||||||
|
Investments
in Mt. Holly and joint ventures
|
$ | 124,132 | $ | 83,974 | ||||
|
Cash
surrender value of life insurance policies
|
11,080 | 9,484 | ||||||
|
Capitalized
financing fees
|
6,590 | 8,319 | ||||||
|
Pension
assets
|
— | 5,741 | ||||||
| $ | 141,802 | $ | 107,518 | |||||
|
Components
of Accrued and other current liabilities:
|
2008
|
2007
|
||||||
|
Other
accrued and current liabilities
|
$ | 17,875 | $ | 22,936 | ||||
|
Derivative
liability
|
10,130 | 81 | ||||||
|
Income
taxes payable
|
8,381 | 466 | ||||||
|
Accrued
bond interest
|
8,359 | 8,359 | ||||||
|
Accrued
vacation pay
|
6,437 | 7,486 | ||||||
|
Accrued
tax reserve
|
5,732 | 9,200 | ||||||
|
Accrued
expenses
|
1,863 | 11,954 | ||||||
| $ | 58,777 | $ | 60,482 | |||||
|
Components
of Accumulated Other Comprehensive Loss:
|
2008
|
2007
|
||||||
|
Unrealized
loss on financial instruments, net of $784 and $1,443 tax
benefit
|
$ | (17,506 | ) | $ | (170 | ) | ||
|
Defined
benefit plan liabilities, net of $26,534 and $28,581 tax
benefit
|
(114,032 | ) | (51,334 | ) | ||||
|
Equity
in investee other comprehensive income, net of $0 and $286 tax
(1)
|
(5,670 | ) | (27 | ) | ||||
| $ | (137,208 | ) | $ | (51,531 | ) | |||
|
(1)
|
Includes
our equity in the other comprehensive income of Gramercy Alumina LLC, St.
Ann Bauxite Ltd and Mt. Holly Aluminum Company. Their other
comprehensive income consists primarily of pension and other
postretirement benefit obligations.
|
|
12.
|
Pension
and Other Postretirement Benefits
|
Pension
Benefits
We
maintain noncontributory defined benefit pension plans for all of our domestic
hourly and salaried employees. For the domestic salaried employees,
plan benefits are based primarily on years of service and average compensation
during the later years of employment. For hourly employees at Ravenswood, plan
benefits are based primarily on a formula that provides a specific benefit for
each year of service. Our funding policy is to contribute amounts
based upon actuarial and economic assumptions designed to achieve adequate
funding of the projected benefit obligations and to meet the minimum funding
requirements of ERISA. Plan assets consist principally of U.S. equity
securities, growth funds and fixed income accounts. In addition, we provide
supplemental executive retirement benefits (“SERB”) for certain current and
former executive officers. We use a measurement date of December
31st
to determine the pension and OPEB liabilities.
The
hourly employees at Hawesville are part of a United Steelworkers of America
(“USWA”) sponsored multi-employer plan. Our contributions to the plan
are determined at a fixed rate per hour worked. During the years
ended December 31, 2008, 2007 and 2006, we contributed $1,573, $1,409 and
$1,585, respectively, to the plan, and had no outstanding liability at year
end.
Other
Postretirement Benefits (OPEB)
In
addition to providing pension benefits, we provide certain healthcare and life
insurance benefits for substantially all domestic retired employees. We account
for these plans in accordance with SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions.” SFAS No. 106 requires companies to
accrue 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.
Obligations
and Funded Status
The
change in benefit obligations and change in plan assets as of December 31 are as
follows:
|
Pension
|
OPEB
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Change
in benefit obligation:
|
||||||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 99,995 | $ | 99,324 | $ | 192,253 | $ | 212,961 | ||||||||
|
Service
cost
|
4,342 | 4,220 | 6,362 | 7,004 | ||||||||||||
|
Interest
cost
|
6,297 | 5,770 | 11,954 | 11,644 | ||||||||||||
|
Plan
changes
|
— | 5 | — | — | ||||||||||||
|
Medicare
subsidy reimbursements
|
— | — | — | 336 | ||||||||||||
|
Actuarial
loss (gain)
|
6,676 | (3,957 | ) | 23,432 | (33,822 | ) | ||||||||||
|
Benefits
paid
|
(5,651 | ) | (5,367 | ) | (6,654 | ) | (5,870 | ) | ||||||||
|
Curtailments
|
(143 | ) | — | — | — | |||||||||||
|
Benefit
obligation at end of year
|
$ | 111,516 | $ | 99,995 | $ | 227,347 | $ | 192,253 | ||||||||
|
Change
in plan assets:
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 90,016 | $ | 81,853 | $ | — | $ | — | ||||||||
|
Actual
return on plan assets
|
(25,421 | ) | 5,296 | — | — | |||||||||||
|
Employer
contributions
|
1,289 | 8,234 | 6,654 | 5,870 | ||||||||||||
|
Benefits
paid
|
(5,651 | ) | (5,367 | ) | (6,654 | ) | (5,870 | ) | ||||||||
|
Fair
value of assets at end of year
|
$ | 60,233 | $ | 90,016 | $ | — | $ | — | ||||||||
|
Pension
|
OPEB
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Funded
status of plans:
|
||||||||||||||||
|
Funded
status
|
$ | (51,283 | ) | $ | (9,979 | ) | $ | (227,347 | ) | $ | (192,253 | ) | ||||
|
Amounts
Recognized in the Statement of Financial Position:
|
||||||||||||||||
|
Non-current
assets
|
— | 5,741 | — | — | ||||||||||||
|
Current
liabilities
|
(1,275 | ) | (1,293 | ) | (7,808 | ) | (7,400 | ) | ||||||||
|
Non-current
liabilities
|
(50,008 | ) | (14,427 | ) | (219,539 | ) | (184,853 | ) | ||||||||
|
Net
amount recognized
|
$ | (51,283 | ) | $ | (9,979 | ) | $ | (227,347 | ) | $ | (192,253 | ) | ||||
|
Amounts
Recognized in accumulated other comprehensive loss
(pre-tax):
|
||||||||||||||||
|
Net
unrecognized actuarial loss
|
$ | 54,583 | $ | 15,707 | $ | 86,826 | $ | 66,245 | ||||||||
|
Unrecognized
prior service cost (benefit)
|
2,400 | 3,367 | (3,242 | ) | (5,404 | ) | ||||||||||
| $ | 56,983 | $ | 19,074 | $ | 83,584 | $ | 60,841 | |||||||||
Our
pension plans’ projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets as of December 31 are as follows:
|
Projected
Benefit Obligation
|
Accumulated
Benefit Obligation
|
Fair
Value of Plan assets
|
||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||
|
Hourly
pension plan
|
$ | 51,085 | $ | 48,600 | $ | 50,580 | $ | 48,119 | $ | 34,036 | $ | 51,299 | ||||||||||||
|
Salaried
pension plan
|
43,418 | 35,674 | 36,365 | 30,734 | 26,197 | 38,717 | ||||||||||||||||||
|
Supplemental
executive benefits pension plan (“SERB”)
|
17,013 | 15,721 | 16,685 | 15,602 | — | — | ||||||||||||||||||
|
Total
|
$ | 111,516 | $ | 99,995 | $ | 103,630 | $ | 94,455 | $ | 60,233 | $ | 90,016 | ||||||||||||
There are
no plan assets in the SERB due to the nature of the plan.
Components
of Net periodic benefit cost and other amounts recognized in other comprehensive
income:
|
Net
Periodic Benefit Cost:
|
||||||||||||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
Pension
|
OPEB
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
Service
cost
|
$ | 4,342 | $ | 4,220 | $ | 3,710 | $ | 6,362 | $ | 7,004 | $ | 6,140 | ||||||||||||
|
Interest
cost
|
6,297 | 5,770 | 5,190 | 11,954 | 11,643 | 10,394 | ||||||||||||||||||
|
Expected
return on plan assets
|
(7,456 | ) | (6,943 | ) | (6,800 | ) | — | — | — | |||||||||||||||
|
Amortization
of prior service costs
|
727 | 727 | 544 | (2,162 | ) | (2,162 | ) | (1,818 | ) | |||||||||||||||
|
Amortization
of net loss
|
534 | 1,057 | 1,144 | 2,851 | 5,139 | 4,555 | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 4,444 | $ | 4,831 | $ | 3,788 | $ | 19,005 | $ | 21,624 | $ | 19,271 | ||||||||||||
|
Curtailment
cost
|
239 | — | — | — | — | — | ||||||||||||||||||
|
Total
benefit cost
|
$ | 4,683 | $ | 4,831 | $ | 3,788 | $ | 19,005 | $ | 21,624 | $ | 19,271 | ||||||||||||
|
Other
changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income (pre-tax):
|
||||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||
|
Pension
|
OPEB
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
loss (gain)
|
$ | 39,410 | $ | (2,309 | ) | $ | 23,432 | $ | (33,822 | ) | ||||||
|
Prior
service costs arising during the period
|
— | 5 | — | — | ||||||||||||
|
Amortization
of net loss
|
(534 | ) | (1,057 | ) | (2,851 | ) | (5,139 | ) | ||||||||
|
Amortization
of prior service costs
|
(966 | ) | (728 | ) | 2,162 | 2,162 | ||||||||||
|
Total
amount recognized in other comprehensive income
|
37,910 | (4,089 | ) | 22,743 | (36,799 | ) | ||||||||||
|
Net
periodic benefit cost
|
4,683 | 4,831 | 19,005 | 21,624 | ||||||||||||
|
Total
recognized in net periodic benefit cost and other comprehensive
income
|
$ | 42,593 | $ | 742 | $ | 41,748 | $ | (15,175 | ) | |||||||
The
estimated net loss and prior service cost (benefit) for our defined benefit
pension plans expected to be amortized from accumulated other comprehensive
income into net periodic benefit cost during 2009 are $3,345 and $534,
respectively. The estimated net loss and prior service cost for our
OPEB plans expected to be amortized from accumulated other comprehensive income
into net periodic benefit cost during 2009 is $4,223 and $1,221,
respectively.
Weighted
average assumptions were used to determine benefit obligations at December
31:
|
Salaried
and SERB Pension
|
Hourly
Pension
|
OPEB
|
||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||
|
Discount
rate
|
6.00 | % | 6.50 | % | 6.00 | % | 6.25 | % | 5.75 | % | 6.50 | % | ||||||||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||||
|
Measurement
date
|
12/31/2008
|
12/31/2007
|
12/31/2008
|
12/31/2007
|
12/31/2008
|
12/31/2007
|
||||||||||||||||||
Weighted
average assumptions were used to determine net periodic benefit cost for the
years ended December 31:
|
Pension
|
OPEB
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
Measurement
date
|
12/31/2007
|
12/31/2006
|
12/31/2005
|
12/31/2007
|
12/31/2006
|
12/31/2005
|
||||||||||||||||||
|
Fiscal
year end
|
12/31/2008
|
12/31/2007
|
12/31/2006
|
12/31/2008
|
12/31/2007
|
12/31/2006
|
||||||||||||||||||
|
Discount
rate
|
6.50 | % (1) | 5.75 | % | 5.50 | % | 6.50 | % | 5.75 | % | 5.50 | % | ||||||||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||||||
|
Expected
return on plan assets
|
8.50 | % | 8.50 | % | 9.00 | % | — | — | — | |||||||||||||||
|
(1)
|
Discount
rate assumption for the hourly pension plan for 2008 was
6.25%.
|
In
developing the long-term rate of return assumption for pension fund assets, we
evaluated input from our actuaries, including their review of asset class return
expectations as well as long-term inflation assumptions. Projected
returns are based on historical returns of broad equity and bond
indices. We also considered our historical 10-year compound returns.
We anticipate that our investments will generate long-term rates of return of
8.5%, based on target asset allocations.
Effect
of Medicare Part D
Century’s
prescription drug programs are assumed to be actuarially equivalent and eligible
for Medicare Part D subsidy as written into law on December 8,
2003. The approach used to measure this impact is based on our
understanding of FASB Staff Position (“FSP’) 106-2 published May 19,
2004. We recognized the impact of these changes during 2004 on a
prospective basis. As of December 31, 2008, the effect of the
Medicare Part D subsidy reduced the accumulated projected benefit obligation of
our OPEB plans by $25,006, which is an approximate 23% decrease for our OPEB
plans.
For
measurement purposes, medical cost inflation is initially estimated to be 10%,
declining to 5% over six years and thereafter.
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care benefit obligations. A one-percentage-point change in the
assumed health care cost trend rates would have had the following effects in
2008:
|
1%
Increase
|
1%
Decrease
|
|
|
Effect
on total of service and interest cost
|
$3,619
|
$(3,038)
|
|
Effect
on accumulated postretirement benefit obligation
|
$39,684
|
$(31,783)
|
Century
401(k) Plans
We
sponsor a tax-deferred savings plan under which eligible domestic employees may
elect to contribute specified percentages of their compensation with
Century. In December 2008, we announced that we were suspending our
company matching contributions to the 401(k) plan for 2009. In 2008
and 2007, for our eligible employees, we matched 100% of the first 3% of a
participants annual compensation and 50% of the next 2% of their annual
compensation contributed to the savings plan. In 2006, we provided
matching contributions of 60% of the first 6% of a participant’s annual
compensation contributed to the savings plan. In all years, one half
of our contribution is invested in the common stock of Century and the other
half of our contribution is invested based on employee election. Our
contributions to the savings plan were $915, $1,017 and $558, for the years
ended December 31, 2008, 2007 and 2006, respectively. Shares of common stock of
Century may be sold at any time. Employees are considered fully vested in the
plan upon completion of two years of service. A year of service is
defined as a plan year in which the employee works at least 1,000
hours.
Pension
Plan Assets
Our
pension plans’ weighted average asset allocations are as follows:
|
Pension
Plan Assets
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Equity
securities
|
65 | % | 65 | % | ||||
|
Debt
securities
|
35 | % | 35 | % | ||||
| 100 | % | 100 | % | |||||
We seek a
balanced return on plan assets through a diversified investment strategy. Our
weighted average target allocation for plan assets is 65% equity securities and
funds and 35% fixed income funds.
Our other
postretirement benefit plans are unfunded. We fund these benefits as the
retirees submit claims.
Pension
and OPEB Cash Flows
Contributions
We expect
to make approximately $1,275 in benefit payments for our unfunded SERB plan for
2009. While no mandatory pension plan contributions are required at
this time, we may decide to make a voluntary contribution to the plans during
the year. We expect to provide approximately $7,800 for benefit
payments for our other postretirement benefit plans for the year ending December
31, 2009.
Estimated
Future Benefit Payments
The
following table provides the estimated future benefit payments for the pension
and other postretirement benefit plans.
|
Pension
Benefits
|
OPEB
Benefits
|
|||||||
|
2009
|
$ | 6,123 | $ | 7,808 | ||||
|
2010
|
6,350 | 8,981 | ||||||
|
2011
|
6,584 | 10,037 | ||||||
|
2012
|
6,818 | 10,830 | ||||||
|
2013
|
7,013 | 11,565 | ||||||
|
2014
- 2018
|
42,867 | 68,767 | ||||||
|
13.
|
Shareholders’
Equity
|
Common
Stock
Under our
Restated Certificate of Incorporation, our Board of Directors is authorized to
issue up to 100,000,000 shares of common stock. See Note 14
Share Based Compensation for information about the issuance of common shares
during 2008 as part of our stock incentive plans for stock option exercises,
service-based share awards and performance share awards.
The
rights, preferences and privileges of holders of our common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
series of our preferred stock which are currently outstanding, including our
Series A Convertible Preferred Stock, or which we may designate and issue
in the future.
Preferred
Stock
Under our
Restated Certificate of Incorporation, our Board of Directors is authorized to
issue up to 5,000,000 shares of preferred stock. Our Board of
Directors may issue preferred stock in one or more series and determine for each
series the dividend rights, conversion rights, voting rights, redemption rights,
liquidation preferences, sinking fund terms and the number of shares
constituting that series, as well as the designation
thereof. Depending upon the terms of preferred stock established by
our Board of Directors, any or all of the preferred stock could have preference
over the common stock with respect to dividends and other distributions and upon
the liquidation of Century. In addition, issuance of any shares of preferred
stock with voting powers may dilute the voting power of the outstanding common
stock.
Series A
Convertible Preferred Stock
Shares Authorized and
Outstanding. In July 2008, we issued 160,000 shares of our
Series A Convertible Preferred Stock. All shares of
Series A Convertible Preferred Stock are held by Glencore and were issued
in connection with the termination of the Financial Sales Contracts on
July 7, 2008. In July and December 2008, we issued additional
shares of common stock and triggered an automatic conversion provision of the
preferred stock. In July 2008, our underwriters exercised their
over-allotment in an equity offering which triggered an automatic conversion
provision of the preferred stock and approximately 4,200 shares of preferred
stock were converted into approximately 420,000 shares of common
stock. In December 2008, 13 shares of preferred stock were converted
into 1,296 shares of common stock as a result of stock option exercises in the
fourth quarter of 2008. As of December 31, 2008, 155,787 shares
of our Series A Convertible Preferred Stock, par value $0.01 per share,
were outstanding.
Dividend Rights.
So long as any shares of our Series A Convertible Preferred
Stock are outstanding, we may not pay or declare any dividend or make any
distribution upon or in respect of our common stock or any other capital stock
ranking on a parity with or junior to the Series A Convertible Preferred
Stock in respect of dividends or liquidation preference, unless we, at the same
time, declare and pay a dividend or distribution on the shares of Series A
Convertible Preferred Stock (a) in an amount equal to the amount such
holders would receive if they were the holders of the number of shares of our
common stock into which their shares of Series A Convertible Preferred
Stock are convertible as of the record date fixed for such dividend or
distribution, or (b) in the case of a dividend or distribution on other
capital stock ranking on a parity with or junior to the Series A
Convertible Preferred Stock in such amount and in such form as (based on the
determination of holders of a majority of the Series A Convertible
Preferred Stock) will preserve, without dilution, the economic position of the
Series A Convertible Preferred Stock relative to such other capital
stock.
Voting Rights.
The Series A Convertible Preferred Stock has no voting rights
for the election of directors or on other matters where the shares of common
stock have voting rights. However, we may not change the powers,
preferences or rights given to the Series A Convertible Preferred Stock, or
authorize, create or issue any additional shares of Series A Convertible
Preferred Stock without the affirmative vote of the holders of a majority of the
shares of Series A Convertible Preferred Stock then outstanding (voting
separately as a class).
Liquidation Rights.
Upon any liquidation, dissolution or winding-up of Century, the
holders of shares of Series A Convertible Preferred Stock are entitled to
receive a preferential distribution of $0.01 per share out of the assets
available for distribution. In addition, upon any liquidation,
dissolution or winding-up of Century, if our assets are sufficient to make any
distribution to the holders of the common stock, then the holders of shares of
Series A Convertible Preferred Stock are also entitled to share ratably
with the holders of common stock in the distribution of Century’s assets (as
though the holders of Series A Convertible Preferred Stock were holders of
that number of shares of common stock into which their shares of Series A
Convertible Preferred Stock are convertible). However, the amount of
any such distribution will be reduced by the amount of the preferential
distribution received by the holders of the Series A Convertible Preferred
Stock.
Transfer Restrictions.
Glencore is prohibited from transferring shares of Series A
Convertible Preferred Stock to any party other than an affiliate who agrees to
become bound by certain agreements associated with these shares.
Automatic Conversion.
The Series A Convertible Preferred Stock automatically
converts, without any further act of Century or any holders of Series A
Convertible Preferred Stock, into shares of common stock, at a conversion ratio
of 100 shares of common stock for each share of Series A Convertible
Preferred Stock, upon the occurrence of any of the following automatic
conversion events:
|
•
|
If
we sell or issue shares of common stock or any other stock that votes
generally with our common stock, or the occurrence of any other event,
including a sale, transfer or other disposition of common stock by
Glencore, as a result of which the percentage of voting stock held by
Glencore decreases, an amount of Series A Convertible Preferred Stock
will convert to common stock to restore Glencore to its previous ownership
percentage;
|
|
•
|
If
shares of Series A Convertible Preferred Stock are transferred to an
entity that is not an affiliate of Glencore, such shares of Series A
Convertible Preferred Stock will convert to shares of our common stock,
provided that such transfers may only be made pursuant to an effective
registration statement;
|
|
•
|
Upon
a sale of Series A Convertible Preferred Stock by Glencore in a Rule
144 transaction in which the shares of Series A Convertible Preferred
Stock and our common stock issuable upon the conversion thereof are not
directed to any purchaser, such shares of Series A Convertible Preferred
Stock sold will convert to shares of our common
stock; and
|
|
•
|
Immediately
prior to and conditioned upon the consummation of a merger, reorganization
or consolidation to which we are a party or a sale, abandonment, transfer,
lease, license, mortgage, exchange or other disposition of all or
substantially all of our property or assets, in one or a series of
transactions where, in any such case, all of our common stock would be
converted into the right to receive, or exchanged for, cash and/or
securities, other than any transaction in which the Series A
Convertible Preferred Stock will be
redeemed.
|
Optional Conversion.
Glencore has the option to convert the Series A Convertible
Preferred Stock in a tender offer or exchange offer in which a majority of the
outstanding shares of our common stock have been tendered by the holders thereof
and not duly withdrawn at the expiration time of such tender or exchange offer,
so long as the Series A Convertible Preferred Stock is tendered or
exchanged in such offer.
Stock Combinations;
Adjustments. If, at any time while the Series A
Convertible Preferred Stock is outstanding, Century combines outstanding common
stock into a smaller number of shares, then the number of shares of common stock
issuable on conversion of each share of Series A Convertible Preferred
Stock will be decreased in proportion to such decrease in the aggregate number
of shares of common stock outstanding.
Redemptions or Repurchases of Common
Stock. We may not redeem or repurchase our common stock
unless we redeem or repurchase, or otherwise make a payment on, a pro rata
number of shares of the Series A Convertible Preferred Stock. These
restrictions do not apply to our open market repurchases or our repurchases
pursuant to our employee benefit plans.
Right of Redemption.
The Series A Convertible Preferred Stock will be redeemed by
Century if any of the following events occur (at a redemption price based on the
trading price of our common stock prior to the announcement of such event) and
Glencore votes its shares of our common stock in opposition to such
events:
|
•
|
We
propose a merger, reorganization or consolidation, sale, abandonment,
transfer, lease, license, mortgage, exchange or other disposition of all
or substantially all of our property or assets where any of our common
stock would be converted into the right to receive, or exchanged for,
assets other than cash and/or securities traded on a national stock
exchange or that are otherwise readily
marketable, or
|
|
•
|
We
propose to dissolve and wind up and assets other than cash and/or
securities traded on a national stock exchange or that are otherwise
readily marketable are to be distributed to the holders of our common
stock.
|
|
14.
|
Share
Based Compensation
|
1996 Stock Incentive Plan —
We award performance-based and service-based (time vested) share awards and
grant qualified incentive and nonqualified stock options to our salaried
officers, non-employee directors, and other key employees from our 1996 Stock
Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan has
5,000,000 shares authorized for issuance with approximately 3,393,000 shares
remaining at December 31, 2008. Granted stock options have a term of
10 years and typically vest one-third on the grant date and additional one-third
on the first and second anniversary dates of the grant. In 2008, our
non-employee director’s received annual grants of service-based share awards
that vest following 12 months of service. In previous years, our
non-employee directors received an annual option grants that vested one-fourth
each calendar quarter. In addition to the stock options, we grant service-based
stock awards that typically vest over a period of three years from the date of
grant provided that the recipient is still our employee at the time of
vesting.
In April
2008, we instituted changes to the equity compensation program for our
directors. Continuing directors will now receive annual grants of
service-based share awards, rather than an annual stock option
award. New directors will receive a one-time initial award of 1,000
service-based share awards that vest 50% following 12 months of service and 50%
following 24 months of service. These awards are included in our
service-based share awards for periods after April 2008.
As of
December 31, 2008, options to purchase 427,434 shares of common stock were
outstanding and approximately 79,076 service-based stock awards have been
authorized and will vest if the employee recipients are employed for the
requisite service periods.
The Stock
Incentive Plan provides for grants of performance share units upon the
attainment of certain established performance goals. The performance
share units represent the right to receive common stock, on a one-for-one basis
on their vesting dates. As of December 31, 2008, approximately
380,000 performance share units have been authorized and will vest upon the
attainment of the performance goals.
In April
2008, we instituted changes to our performance share program. Under
the amended performance share plan, a portion of the performance share award
will be granted in service-based share awards at the grant
date. These shares will be awarded to the plan participant if the
participant is still an employee on the award date and are included in our
service-based share awards for periods after April 2008. Prior to the
performance share plan amendments, our goal-based performance share units were
not considered common stock equivalents until it became probable that
performance goals would be obtained.
Non-Employee Directors Stock Option
Plan — Our non-employee directors’ stock option plan is no longer an
active plan. As of December 31, 2008, this plan has 28,500 outstanding options,
but no new options will be issued out of this plan.
A summary
of the changes in options outstanding under our Stock Incentive Plan and the
Non-Employee Directors Stock Option Plan during the year ended December 31, 2008
is presented below:
|
Options
|
Number
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
484,717 | $ | 37.40 | |||||||||||||
|
Granted
|
25,000 | 54.71 | ||||||||||||||
|
Exercised
|
(76,616 | ) | 37.10 | |||||||||||||
|
Forfeited
|
(5,667 | ) | 52.84 | |||||||||||||
|
Outstanding
and expected to vest at December 31, 2008 (1)
|
427,434 | $ | 38.29 | 7.5 | $ | 22 | ||||||||||
|
Fully
vested and exercisable at December 31, 2008
|
365,847 | $ | 35.88 | 7.3 | $ | 22 | ||||||||||
|
(1)
|
We
expect all of our outstanding options to vest as our forfeitures are
immaterial.
|
|
Service-based
share awards (1)
|
Number
|
|||
|
Outstanding
at January 1, 2008
|
82,834 | |||
|
Granted
|
44,408 | |||
|
Vested
(Awarded)
|
(48,166 | ) | ||
|
Forfeited
|
— | |||
|
Outstanding
at December 31, 2008
|
79,076 | |||
|
(1)
|
All
of our service-based stock awards require the recipients to remain an
employee for a certain period of time before the award
vests. Recipients receive common stock upon
vesting.
|
|
Non-vested
Stock Options:
|
Number
|
Weighted
Average Fair Value
|
||||||
|
Non-vested
options at January 1, 2008
|
183,337 | $ | 24.17 | |||||
|
Granted
|
25,000 | 20.61 | ||||||
|
Vested
|
(141,417 | ) | 23.15 | |||||
|
Forfeited
|
(5,333 | ) | 27.97 | |||||
|
Non-vested
options at December 31, 2008
|
61,587 | $ | 24.74 | |||||
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Weighted
average per share fair value of:
|
||||||||||||
|
Stock
options grants
|
$ | 20.61 | $ | 28.80 | $ | 24.38 | ||||||
|
Service-based
share grants
|
69.60 | 48.43 | 36.12 | |||||||||
|
Total
intrinsic value of option exercises
|
2,166 | 2,615 | 3,632 | |||||||||
|
Share-based
liabilities paid (1)
|
3,692 | 2,281 | 2,867 | |||||||||
|
Total
fair value of shares vested during the period
|
3,275 | 4,044 | 1,771 | |||||||||
|
(1)
|
Share
based liabilities paid represent the fair value of shares issued on the
vesting date to certain key employees under our performance share
program.
|
Option Pricing Model – We
estimate the fair value of each option and service-based share award using the
Black-Scholes option-pricing model on the date of grant. We used the
following assumptions to estimate the fair value of our share awards for 2008
and 2007.
|
2008
|
2007
|
|||||||
|
Risk-free
interest rate
|
1.98-2.92 | % | 3.60-5.02 | % | ||||
|
Expected
dividend yield
|
$ | 0.00 | $ | 0.00 | ||||
|
Expected
volatility
|
47 – 52 | % | 45 – 60 | % | ||||
|
Expected
forfeiture rate
|
0% – 3 | % | 0% – 3 | % | ||||
|
Expected
term (years)
|
3.0 – 5.0 | 3.0 – 6.25 | ||||||
In 2008,
our expected term assumption was based on historical exercise data for fully
vested awards. Through December 31, 2007, we estimated the expected
term of the options using the method specified in the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 107. The risk-free
interest rate is based on the yield on the measurement date for zero-coupon U.S.
Treasury bond strips with terms similar to the expected life of the
option. The dividend yield is zero, based on our current dividends
policy. Expected volatility is estimated using the historical
volatility of the price of our common stock over the expected term of the
options. The expected forfeiture rate is based on our historical
forfeiture rate by employee class.
The
following table summarizes the compensation cost recognized for the year ended
December 31, 2008, 2007 and 2006, respectively, for all options, service-based
share and performance-based share awards. No share-based compensation
cost was capitalized during these periods and there were no significant
modifications of any share-based awards in 2008, 2007, or 2006.
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Share-based
compensation expense reported:
|
||||||||||||
|
Stock
option grants
|
$ | 2,635 | $ | 4,478 | $ | 4,358 | ||||||
|
Service-based
stock awards
|
1,787 | 1,484 | 1,224 | |||||||||
|
Performance-based
stock grants
|
8,045 | 2,946 | 3,947 | |||||||||
|
Total
share-based compensation expense before income tax
|
12,467 | 8,908 | 9,529 | |||||||||
|
Income
tax benefit
|
— | (3,274 | ) | (3,516 | ) | |||||||
|
Total
share-based compensation expense, net of income tax
benefit
|
$ | 12,467 | $ | 5,634 | $ | 6,013 | ||||||
As of
December 31, 2008, we had unrecognized compensation expense of $3,206 before
taxes, related to non-vested stock options and service-based stock
awards. This expense will be recognized over a weighted average
period of 0.75 years. The unrecognized compensation expense is
expected to be recognized over the following periods:
|
2009
|
2010
|
2011
|
||||||||||
|
Stock-based
compensation expense (pre-tax)
|
$ | 2,279 | $ | 912 | $ | 15 | ||||||
During
the year ended December 31, 2008, we received $2,843 from employees for the
exercise of stock options. For the year ended December 31, 2008, we
recorded an excess tax benefit of $657 related to these stock option
exercises.
It has
been our policy to issue new shares to satisfy the requirements of our
share-based compensation plans. We do not expect to repurchase shares
in the future to support our share-based compensation plans.
|
15.
|
Earnings
(Loss) Per Share
|
Basic
earnings per share (“EPS”) amounts are calculated by dividing earnings available
to common shareholders by the average number of common shares
outstanding. Diluted EPS amounts assume the issuance of common stock
for all potentially dilutive common shares outstanding. During 2008,
2007 and 2006, we reported net losses, so any dilutive common shares would be
antidilutive to EPS. The following table shows the basic and diluted
earnings (loss) per share for these periods:
|
Basic
and Diluted EPS:
|
Income
|
Shares
(000)
|
Per-Share
|
|||||||||
|
Net
loss
|
||||||||||||
|
Year
end December 31, 2008
|
$ | (898,316 | ) | 44,759 | $ | (20.07 | ) | |||||
|
Year
end December 31, 2007
|
$ | (101,249 | ) | 37,199 | $ | (2.72 | ) | |||||
|
Year
end December 31, 2006
|
$ | (40,955 | ) | 32,395 | $ | (1.26 | ) | |||||
Impact
of issuance of Series A Convertible Preferred Stock on EPS
We issued
160,000 shares of Series A Convertible Preferred Stock (convertible into
16,000,000 common shares) as a portion of the consideration for the Financial
Sales Contract termination transaction. See Note 4 Termination
Transaction for additional information. The preferred stock has
similar characteristics of a “participating security” as described by SFAS No.
128, “Earnings Per Share” and EITF 03-6, “Participating Securities and the
Two-Class Method under FASB Statement No. 128.” In accordance with
the guidance in SFAS No. 128 and EITF 03-6, we would calculate basic EPS using
the Two-Class Method, allocating undistributed income to our preferred
shareholders consistent with their participation rights, and diluted EPS using
the If-Converted Method when applicable.
EITF 03-6
does not require the presentation of basic and diluted EPS for securities other
than common stock and the EPS amounts, as presented, only pertain to our common
stock.
The
Two-Class Method is an earnings allocation formula that determines earnings per
share for common shares and participating securities according to dividends
declared (or accumulated) and the participation rights in undistributed
earnings. Our preferred stock is a non-cumulative perpetual
participating convertible preferred stock with no set dividend
preferences. The dividend rights of our preferred shareholder are
equal to our common shareholders, as if it held the number of common shares into
which its shares of preferred stock are convertible into as of the record
date. The liquidation rights of the preferred stock mirror their
dividend rights, in that the preferred stock ranks in parity to the common stock
in respect of liquidation preference and would be entitled to share ratably with
common stock holders in the distribution of assets in a liquidation (as though
the preferred stock holders held the number of shares of common stock into which
their shares of preferred stock were convertible). See Note 13
Shareholders’ Equity for additional information about the rights and features of
the preferred stock.
The
holders of our convertible preferred stock do not have a contractual obligation
to share in the losses of Century. Thus, in periods where we report
net losses, we do not allocate the net losses to the convertible preferred stock
for the computation of basic or diluted EPS.
For the
calculation of basic and diluted EPS for the 2008 using the Two-Class Method, we
did not allocate any of our undistributed net loss to the convertible preferred
stock. During 2007 and 2006, there was no preferred stock outstanding
and the Two-Class Method was not applied for the comparable periods in 2007 or
2006.
For the
period ended December 31, 2008, 427,434 options to purchase common stock and
79,076 service-based share awards were outstanding, but were excluded from the
calculation of diluted earnings per share because of the antidilutive
effect. Based on the average price for our common stock for the year
ended December 31, 2008, we would have issued approximately 2,030,000 shares
upon an assumed conversion of our convertible debt. These shares were
also excluded from the calculation of diluted earnings per share because of the
antidilutive effect.
For the
period ended December 31, 2007, 484,717 options to purchase common stock and
82,834 service-based share awards were outstanding, but were excluded from the
calculation of diluted earnings per share because of the antidilutive
effect. Based on the average price for our common stock for the year
ended December 31, 2007, we would have issued approximately 2,566,000 shares
upon an assumed conversion of our convertible debt. These shares were
also excluded from the calculation of diluted earnings per share because of the
antidilutive effect.
For the
period ended December 31, 2006, 423,537 options to purchase common stock and
91,500 service-based share awards were outstanding, but were excluded from the
calculation of diluted earnings per share because of the antidilutive
effect. Based on the average price for our common stock for the year
ended December 31, 2006, we would have issued approximately 1,091,000 shares
upon an assumed conversion of our convertible debt. These shares were
also excluded from the calculation of diluted earnings per share because of the
antidilutive effect.
Subsequent
issuance of common stock
In
February 2009, we completed an equity offering and issued 24,500,000 shares of
our common stock. This issuance would have materially changed the
number of common shares outstanding at December 31, 2008 had the offering
occurred prior to the end of the period. See Note 26 Subsequent Event
for additional information about the equity offering.
|
16.
|
Income
Taxes
|
|
The
components of pre-tax book loss consist of the following:
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
|
$ | (592,729 | ) | $ | (315,153 | ) | $ | (158,380 | ) | |||
|
Foreign
|
(3,182 | ) | 84,410 | 49,301 | ||||||||
|
Total
|
$ | (595,911 | ) | $ | (230,743 | ) | $ | (109,079 | ) | |||
|
Significant
components of the income tax benefit (expense) consist of the
following:
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current:
|
||||||||||||
|
U.S.
federal current expense (benefit)
|
$ | (62,064 | ) | $ | 24,471 | $ | 62,279 | |||||
|
State
current expense (benefit)
|
4,848 | (3,205 | ) | 11,840 | ||||||||
|
Foreign
current expense (benefit)
|
8,381 | (3,296 | ) | 182 | ||||||||
|
Total
current expense (benefit)
|
(48,835 | ) | 17,970 | 74,301 | ||||||||
|
Deferred:
|
||||||||||||
|
U.S.
federal expense (benefit)
|
345,618 | (162,208 | ) | (135,760 | ) | |||||||
|
State
deferred expense (benefit)
|
20,447 | 7,918 | (27,165 | ) | ||||||||
|
Foreign
deferred tax expense (benefit)
|
2,081 | 22,471 | 36,583 | |||||||||
|
Total
deferred expense (benefit)
|
368,146 | (131,819 | ) | (126,342 | ) | |||||||
|
Total
income tax expense (benefit)
|
$ | 319,311 | $ | (113,849 | ) | $ | (52,041 | ) | ||||
|
A
reconciliation of the statutory U.S. Federal income tax rate to the
effective income tax rate on income (loss) is as follows:
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
Statutory Rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Effect
of:
|
||||||||||||
|
Permanent
differences
|
2.2 | % | 1.0 | % | (0.8 | )% | ||||||
|
State
taxes, net of Federal benefit
|
1.8 | % | 5.7 | % | 6.1 | % | ||||||
|
Foreign
earnings taxed at different rates than U.S.
|
(5.1 | )% | 17.2 | % | 10.8 | % | ||||||
|
Equity
earnings in joint ventures
|
(1.1 | )% | (2.4 | )% | (3.4 | )% | ||||||
|
Valuation
allowance
|
(87.7 | )% | (6.0 | )% | — | |||||||
|
Other
|
1.3 | % | (1.2 | )% | — | |||||||
|
Effective
tax rate
|
(53.6 | )% | 49.3 | % | 47.7 | % | ||||||
Our
permanent differences primarily relate to tax-exempt interest income, domestic
production deduction, nondeductible executive compensation, meals and
entertainment disallowance and other nondeductible expenses.
|
Significant
components of our deferred tax assets and liabilities as of December 31
are as follows:
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Accrued
postretirement benefit cost
|
$ | 46,859 | $ | 42,099 | ||||
|
Accrued
liabilities
|
8,781 | 7,798 | ||||||
|
Share-based
compensation
|
4,491 | 4,012 | ||||||
|
Derivative
and hedging contracts
|
560,413 | 390,791 | ||||||
|
Equity
contra - other comprehensive loss
|
56,582 | 30,310 | ||||||
|
State
net operating losses
|
3,345 | 1,885 | ||||||
|
Foreign
net operating losses
|
21,755 | 15,968 | ||||||
|
Other
|
2,696 | 339 | ||||||
|
Total
deferred tax assets
|
704,922 | 493,202 | ||||||
|
Valuation
allowance
|
(558,009 | ) | (13,881 | ) | ||||
|
Net
deferred tax assets
|
$ | 146,913 | $ | 479,321 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Tax
over financial statement depreciation
|
$ | (132,492 | ) | $ | (131,190 | ) | ||
|
Pension
|
(1,942 | ) | (3,145 | ) | ||||
|
Income
from domestic partnership
|
(3,532 | ) | (3,339 | ) | ||||
|
Unrepatriated
foreign earnings
|
(42,705 | ) | (12,311 | ) | ||||
|
Foreign
basis differences
|
(5,757 | ) | (1,341 | ) | ||||
|
Total
deferred tax liabilities
|
(186,428 | ) | (151,326 | ) | ||||
|
Net
deferred tax (liability)/asset
|
$ | (39,515 | ) | $ | 327,995 | |||
The net
deferred tax liability of $39,515 at December 31, 2008, is net of a non-current
deferred foreign income tax liability of $66,038 and includes $32,290 of current
deferred tax assets and $5,767 of non-current deferred tax
liabilities. The net deferred tax asset of $327,995 at December 31,
2007, is net of a non-current deferred foreign income tax liability of $62,931
and includes $69,858 of current deferred tax assets and $321,068 of non-current
deferred tax assets.
Under
SFAS No.109, “Accounting for Income Taxes”, a valuation allowance must be
established when it is more likely than not that all or a portion of a deferred
tax asset will not be realized. The amount of 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 recorded a valuation allowance of $538,803 against a
portion of our federal and state deferred tax assets as of December 31, 2008,
due to our belief that it is more likely than not that these assets will not be
realized. We recorded a valuation allowance of $19,206 against a
portion of our Icelandic and Hong Kong NOL deferred tax assets as of December
31, 2008, due to our belief that it is more likely than not that these assets
will not be realized.
At
December 31, 2008, we had state net operating loss carry forwards of $3,345 and
Icelandic net operating loss carry forwards of $21,755. State net
operating losses begin to expire in 2009, and Icelandic net operating losses
begin to expire in 2016.
We have
removed our assertion to permanently reinvest foreign earnings for the current
year. We recorded deferred income taxes of $30,394 related to the
change in our election for the current year. We did not change the
assertion in place for periods prior to and including December 31,
2007. The cumulative amount of foreign undistributed earnings for
which no deferred taxes have been provided was $34,864 at December 31,
2008.
We
adopted the provisions of FASB Interpretation (“FIN”) No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of SFAS No 109," as of January
1, 2007. As a result of the adoption of FIN 48, we increased our
January 1, 2007 retained deficit balance approximately $7,900. As of
the adoption date, we had unrecognized tax benefits of $21,800 (including
interest and net of federal benefit). If recognized, $15,200 of
unrecognized tax benefits would affect the effective tax rate.
|
A
reconciliation of the beginning and ending amounts of unrecognized tax
benefits (excluding interest) is as follows:
|
||||||||
|
2008
|
2007
|
|||||||
|
Balance
as of January 1,
|
$ | 40,600 | $ | 18,100 | ||||
|
Additions
based on tax positions related to the current year
|
1,800 | 6,600 | ||||||
|
Reductions
based on tax positions related to the current year
|
(4,400 | ) | — | |||||
|
Additions
based on tax positions of prior years
|
— | 16,200 | ||||||
|
Reductions
for tax positions of prior years
|
(1,000 | ) | (300 | ) | ||||
|
Decreases
due to lapse of applicable statute of limitations
|
(4,200 | ) | — | |||||
|
Settlements
|
(11,200 | ) | — | |||||
|
Balance
as of December 31,
|
$ | 21,600 | $ | 40,600 | ||||
Included
in the above $21,600 balance at December 31, 2008 are $7,200 of tax positions
whose tax characterization is highly certain but for which there is uncertainty
about the timing of tax return inclusion. Because of the impact of deferred tax
accounting, other than interest and penalties, the timing would not impact the
annual effective tax rate but could accelerate the payment of cash to the taxing
authority to an earlier period. Included in the balance at December 31, 2008,
are estimates of uncertain tax positions related to state tax
filings.
Included
in the above $40,600 balance at December 31, 2007 are $21,600 of tax positions
whose tax characterization is highly certain but for which there is uncertainty
about the timing of tax return inclusion. Because of the impact of deferred tax
accounting, other than interest and penalties, the timing would not impact the
annual effective tax rate but could accelerate the payment of cash to the taxing
authority to an earlier period. Included in the balance at December 31, 2007,
are estimates of uncertain tax positions related to state tax
filings.
It is our
policy to recognize potential accrued interest and penalties related to
unrecognized tax benefits in income tax expense. In 2008 and 2007, we
recognized $(4,900) and $1,800, respectively, in interest and
penalties.
Century
and its subsidiaries file income tax returns in the U.S. federal jurisdiction
and various state and local jurisdictions, and Iceland. In connection with an
audit conducted by Internal Revenue Service (“IRS”) for the tax years 2000
through 2002, the IRS raised issues and proposed tax deficiencies. We
filed an administrative appeal with the IRS with respect to these examinations,
and in April 2008, we received notification from the IRS Appeals Office that the
Joint Committee had approved the settlement of all issues related to these
examinations. As a result of our settlement of all issues related to
this examination, our unrecognized tax benefits were reduced by $20,100 which
includes a reduction in accrued interest of $3,300 and recognition of a current
tax payable of $16,800 of which $11,247 was paid in the third quarter of 2008
and the remainder was paid in the fourth quarter of 2008. The statute
of limitations for the federal and some state income tax years closed September
15, 2008 which resulted in a decrease of $4,200 in our liability of unrecognized
tax benefits.
Our
federal income tax returns beginning in 2005 are subject to
examination. Material state and local income tax matters have been
concluded for years through 2002. West Virginia completed an income
tax examination for 2003 through 2005 with no changes. The majority
of our other state returns beginning in 2003 are subject to
examination. Our Icelandic tax returns are subject to examination and
income tax matters have been concluded for years through 2001.
We do not expect a significant change in the balance of
unrecognized tax benefits within the next twelve months.
|
17.
|
Contingencies
and Commitments
|
Environmental
Contingencies
We
believe our current environmental liabilities do not have, and are not likely to
have, a material adverse effect on our financial condition, results of
operations or liquidity. However, there can be no assurance that future
requirements or conditions at currently or formerly owned or operated properties
will not result in liabilities which may have a material adverse
effect.
Century
Aluminum of West Virginia, Inc. (“CAWV”) continues to perform remedial measures
at our Ravenswood, West Virginia facility (“Ravenswood”) pursuant to an order
issued by the Environmental Protection Agency (“EPA”) in 1994 (the “3008(h)
Order”). CAWV also conducted a RCRA facility investigation (“RFI”) under the
3008(h) Order evaluating other areas at Ravenswood that may have contamination
requiring remediation. The RFI has been approved by appropriate agencies. CAWV
has completed interim remediation measures at two sites identified in the RFI,
and we believe no further remediation will be required. A Corrective Measures
Study, which will formally document the conclusion of these activities, is being
completed with the EPA. We believe a significant portion of the contamination on
the two sites identified in the RFI is attributable to the operations of third
parties and is their financial responsibility.
Prior to
our purchase of Hawesville, the EPA issued a final Record of Decision (“ROD”)
under the Comprehensive Environmental Response, Compensation and Liability Act.
By agreement, Southwire, the former owner and operator is to perform all
obligations under the ROD. Century Aluminum of Kentucky General
Partnership (“Century Kentucky”) has agreed to operate and maintain the ground
water treatment system required under the ROD on behalf of Southwire, and
Southwire will reimburse Century Kentucky for any expense that exceeds $400
annually.
Century
is a party to an EPA Administrative Order on Consent (the “Order”) pursuant to
which other past and present owners of an alumina refining facility at St.
Croix, Virgin Islands have agreed to carry out a Hydrocarbon Recovery Plan to
remove and manage hydrocarbons floating on groundwater underlying the
facility. Pursuant to the Hydrocarbon Recovery Plan, recovered
hydrocarbons and groundwater are delivered to the adjacent petroleum refinery
where they are received and managed. Lockheed Martin Corporation (“Lockheed”),
which sold the facility to one of our affiliates, Virgin Islands Alumina
Corporation (“Vialco”), in 1989, has tendered indemnity and defense of this
matter to Vialco pursuant to the terms of the Lockheed–Vialco Asset Purchase
Agreement. Management does not believe Vialco’s liability under the
Order or its indemnity to Lockheed will require material
payments. Through December 31, 2008, we have expended approximately
$770 on the Hydrocarbon Recovery Plan. Although there is no limit on
the obligation to make indemnification payments, we expect the future potential
payments under this indemnification to comply with the Order will be
approximately $500, which may be offset in part by sales of recoverable
hydrocarbons.
In May
2005, Century and Vialco were among several defendants listed in a lawsuit filed
by the Commissioner of the Department of Planning and Natural Resources, in his
capacity as Trustee for Natural Resources of the United States Virgin
Islands. The complaint alleges damages to natural resources caused by
alleged releases from the alumina refinery facility at St. Croix and the
adjacent petroleum refinery. The primary cause of action is pursuant
to the natural resource damage provisions of the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, but various ancillary
Territorial law causes of action were included also. Lockheed has
tendered indemnity and defense of the case to Vialco pursuant to the terms of
the Lockheed-Vialco Asset Purchase Agreement. The complaint seeks
unspecified monetary damages, costs and attorney fees.
In July
2005, Century and Vialco and the other defendants timely filed separate
motions to dismiss asserting certain affirmative defenses including the statute
of limitations. On October 31, 2008, the district judge issued his
ruling on these motions. The judge denied the defendants' motions to
dismiss based on the statute of limitations, but granted the motions as to
certain of the Territorial law causes of action. As to the motions to
dismiss, the judge concluded that defendants had not proved the defense based
only on the pleadings and did not consider the various exhibits attached to the
motions. Accordingly, this ruling does not foreclose a later finding,
after appropriate discovery is conducted, that the statute of limitations bars
certain claims.
In
December 2006, Vialco and the two succeeding owners of the alumina facility were
named as defendants in a lawsuit filed by the Commissioner of the Department of
Planning and Natural Resources of the United States Virgin
Islands. The complaint alleges the defendants failed to take certain
actions specified in a Coastal Zone management permit issued to Vialco in
October 1994, and seeks statutory and other unspecified monetary penalties for
the alleged violations. Vialco filed its answer to the complaint
asserting factual and affirmative defenses. The parties are currently
engaged in the discovery process.
We intend
to defend both Vialco lawsuits vigorously and to assert all applicable
defenses. Pursuant to the terms of the asset purchase agreement
between Vialco and the purchaser of the facility in 1995, the purchaser assumed
responsibility for all costs and other liabilities associated with the bauxite
waste disposal facilities, including pre-closure and post-closure
liabilities. At this time, it is impossible to predict the ultimate
outcome of these actions or to estimate a range of possible damage
awards.
In July
2006, Century was named as a defendant, together with certain affiliates of
Alcan Inc., in a lawsuit brought by Alcoa Inc. seeking to determine
responsibility for certain environmental indemnity obligations related to the
sale of a cast aluminum plate manufacturing facility located in Vernon,
California, which we purchased from Alcoa Inc. in December 1998, and sold to
Alcan Rolled Products-Ravenswood LLC (formerly Pechiney Rolled Products, LLC) in
July 1999. The complaint also seeks costs and attorney fees. At this
time, it is impossible to predict the ultimate outcome of these actions or to
estimate a range of possible damage awards.
It is our
policy to accrue for costs associated with environmental assessments and
remedial efforts when it becomes probable that a liability has been incurred and
the costs can be reasonably estimated. The aggregate
environmental-related accrued liabilities were $848 and $790 at December 31,
2008 and December 31, 2007, respectively. All accrued amounts have been recorded
without giving effect to any possible future recoveries. With respect to costs
for ongoing environmental compliance, including maintenance and monitoring, such
costs are expensed as incurred.
Because
of the issues and uncertainties described above, and our inability to predict
the requirements of future environmental laws, there can be no assurance that
future capital expenditures and costs for environmental compliance will not have
a material adverse effect on our future financial condition, results of
operations, or liquidity. Based upon all available information, management does
not believe that the outcome of these environmental matters will have a material
adverse effect on our financial condition, results of operations, or
liquidity.
Legal
Contingencies
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 their ultimate disposition will not have a material
adverse effect on our financial condition, results of operations, or
liquidity.
Power
Commitments
Hawesville
purchases substantially all of its power from Kenergy Corp. (“Kenergy”), a
retail electric member cooperative of the Big Rivers Electrical Corporation
(“Big Rivers”), under a power supply contract that expires at the end of
2010. Under this contract, approximately 70% (339 megawatts (“MW”))
of Hawesville’s current power requirements are at fixed prices. We
acquire the remaining power requirements for Hawesville through a combination of
short-term fixed-price contracts and deliveries at the spot market
rates.
We are
working with Big Rivers and Kenergy on a proposal that would restructure and
extend the existing power supply contract. The proposed new long-term
power contract was filed with the Kentucky Public Service Commission in late
December 2008. The contract would provide all of Hawesville’s power
requirements through 2023 at cost-based pricing. We expect the
transaction to close in the second quarter of 2009.
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. On April 29, 2008, APCo requested a rate increase to cover
the increased cost of fuel and purchased power as well as capital
improvements. The West Virginia Public Service Commission approved an
approximate 11% increase in the special contract rate paid by our Ravenswood
smelter on June 26, 2008. The rate increase was effective July 1,
2008. 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. We are
reviewing options to extend the term of the existing agreement that establishes
an LME based cap on the tariff rates.
Mt. Holly
purchases all of its power from the South Carolina Public Service Authority at
rates established by published schedules. Mt. Holly’s current power contract
expires December 31, 2015. Power delivered through 2010 will be
priced as set forth in currently published schedules, subject to adjustments for
fuel costs. Rates for the period 2011 through 2015 will be as provided under
then-applicable schedules.
The
Nordural facility at Grundartangi, Iceland (“Grundartangi”) purchases power from
Landsvirkjun, HS Orka hf and Orkuveita Reykjavíkur (“OR”) under long-term
contracts due to expire between 2019 and 2029. The power delivered to
Grundartangi is priced at a rate based on the LME price for primary aluminum, is
paid in U.S. dollars and is from hydroelectric and geothermal
sources.
Nordural
Helguvik has signed electrical power supply agreements with HS Orka hf and OR,
for the proposed Helguvik smelter. Under the agreements, power will
be supplied to the proposed Helguvik facility in four 90,000 mtpy stages,
beginning with an initial phase of up to 160 megawatts (“MW”). HS
Orka hf will provide up to 150 MW in this initial stage, and OR will supply up
to 47.5 MW. Electricity delivery for this first phase is targeted to
begin in late 2011. The agreements which are subject to the
satisfaction of certain conditions provide for additional power, as available to
support a complete potline of 360,000 mtpy.
Labor
Commitments
Approximately
79% of our U.S. based work force is represented by the United Steelworkers of
America (the “USWA”). Our Ravenswood plant employees represented by
the USWA are under a labor agreement that will expire on May 31,
2009. The agreement covers approximately 550 hourly employees at the
Ravenswood plant. For additional information about Ravenswood
operations see the Subsequent Events Note. Our Hawesville, Kentucky,
plant employees represented by the USWA are under a collective bargaining
agreement that will expire on March 31, 2010. The agreement covers
approximately 610 hourly workers at the Hawesville plant.
Approximately
84% of Grundartangi’s work force is represented by five labor unions under an
agreement that expires on December 31, 2009.
|
18.
|
Forward
Delivery Contracts and Financial
Instruments
|
As a
producer of primary aluminum, we are exposed to fluctuating raw material and
primary aluminum prices. We routinely enter into fixed and market
priced contracts for the sale of primary aluminum and the purchase of raw
materials in future periods.
Forward
Physical Delivery Agreements
Long-term
Primary Aluminum Sales Contracts
|
Contract
|
Customer
|
Volume
|
Term
|
Pricing
|
|
Alcan
Metal Agreement (1)
|
Alcan
|
14
million pounds per month in 2009
|
Through
August 31, 2009
|
Variable,
based on U.S. Midwest market
|
|
Glencore
Metal Agreement I (2)
|
Glencore
|
50,000
metric tons per year
|
Through
December 31, 2009
|
Variable,
LME-based
|
|
Glencore
Metal Agreement II (3)
|
Glencore
|
20,400
metric tons per year
|
Through
December 31, 2013
|
Variable,
based on U.S. Midwest market
|
|
Southwire
Metal Agreement (4)
|
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)
|
A
force majeure at the Alcan facility reduced our January 2009 shipments
under this contract approximately 3 million pounds.
|
|
(2)
|
We
account for the Glencore Metal Agreement I as a derivative instrument
under SFAS No. 133. We have not designated the Glencore Metal
Agreement I as “normal” because it replaced and substituted for a
significant portion of a sales contract which did not qualify for this
designation. Because the Glencore Metal Agreement I is variably
priced, we do not expect significant variability in its fair value, other
than changes that might result from the absence of the U.S. Midwest
premium.
|
|
(3)
|
We
account for the Glencore Metal Agreement II as a derivative instrument
under SFAS No. 133. Under the Glencore Metal Agreement II,
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.
|
|
(4)
|
The
Southwire Metal Agreement will automatically renew for additional
five-year terms, unless either party provides 12 months notice that it has
elected not to renew.
|
Long-term
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 European Union (“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 Alcan Metal Agreement, Glencore Metal Agreement I, Glencore Metal
Agreement II and Southwire Metal Agreement, we had forward delivery contracts to
sell 84,047metric tons and 96,807 metric tons of primary aluminum at December
31, 2008 and December 31, 2007, respectively. Of these forward
delivery contracts, we had fixed price commitments to sell 330 metric tons and
2,818 metric tons of primary aluminum at December 31, 2008 and December 31,
2007, respectively, of which 319 metric tons at December 31, 2008 and none at
December 31, 2007 were with Glencore.
Financial
Sales Agreements
To
mitigate the volatility in our unpriced forward delivery contracts, we enter
into fixed price financial sales contracts, which settled in cash in the period
corresponding to the intended delivery dates of the forward delivery
contracts. Certain of these fixed price financial sales contracts
were accounted for as cash flow hedges depending on our designation of each
contract at its inception.
All
aluminum-based financial and physical delivery contracts are marked-to-market
using the LME spot and forward market for primary aluminum. Because
there is no quoted futures market price for the U.S. Midwest premium component
of the market price for primary aluminum, it is necessary for management to
estimate the U.S. Midwest premium based on the historical U.S. Midwest premium.
The forward natural gas purchase contracts are marked-to-market using the NYMEX
spot and forward market for natural gas.
As of
December 31, 2008, we had no fixed price financial sales contracts
outstanding. We had no fixed price financial contracts to purchase
aluminum at December 31, 2008 or December 31, 2007. Our primary
aluminum financial sales contracts open position, with Glencore as the
counterparty, for December 31, 2007 is summarized below:
|
Primary
Aluminum Financial Sales Contracts as of:
|
||||||||||||
|
(Metric
tons)
|
||||||||||||
|
December
31, 2007
|
||||||||||||
|
Cash
Flow Hedges
|
Derivatives
|
Total
|
||||||||||
|
2008
|
9,000 | 100,200 | 109,200 | |||||||||
|
2009
|
— | 105,000 | 105,000 | |||||||||
|
2010
|
— | 105,000 | 105,000 | |||||||||
|
2011
|
— | 75,000 | 75,000 | |||||||||
|
2012
|
— | 75,000 | 75,000 | |||||||||
|
2013-2015
|
— | 225,000 | 225,000 | |||||||||
|
Total
|
9,000 | 685,200 | 694,200 | |||||||||
Forwards
and Financial Purchase Agreements
Power
We are
party to a power supply agreement at Ravenswood that contains LME-based pricing
provisions that are an embedded derivative. The embedded derivative
does not qualify for cash flow hedge treatment and is marked to market
quarterly. Gains and losses on the embedded derivative are recorded
in net gain (loss) on forward contracts on the Consolidated Statement of
Operations. We recorded a $2,202 gain on the embedded derivative
during 2008, gains and losses on the embedded derivative were not significant to
our financial position or results of operations during 2007 and
2006.
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.
|
Natural
Gas Financial Purchase Contracts as of:
|
||||||||
|
(Thousands
of MMBTU)
|
||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
2008
|
— | 1,150 | ||||||
|
2009
|
3,340 | — | ||||||
|
Total
|
3,340 | 1,150 | ||||||
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 Icelandic krona (“ISK”) and the Chinese
yuan. Grundartangi’s labor costs, 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 greenfield smelter project, although we are currently evaluating
the Helguvik project’s cost, scope and schedule in light of the global credit
crisis and weakening 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 manage
our foreign currency exposure by entering into foreign currency forward
contracts. During 2008, we purchased foreign currency forward
contracts to hedge our foreign currency risk in the ISK associated with a
portion of the forecasted operating costs paid in ISK at Grundartangi and for a
portion of the forecasted capital expenditures paid in ISK for the Helguvik
project. These forward contracts, which are designated as cash flow
hedges and qualify for hedge accounting under SFAS No.133, have maturities
through September 2009. The critical terms of the contracts
essentially match those of the underlying exposure. The effective
portion of the forward contracts gain or loss is reported in other comprehensive
income, and the ineffective portion is reported currently in
earnings.
Each
month, when we settle the foreign currency forward contracts, the realized gain
or loss on our cash flow hedges for Grundartangi operating costs are recognized
in income as part of our cost of goods sold. The realized gain or
loss for our cash flow hedges for the Helguvik capital expenditures are
accumulated in other comprehensive income and will be reclassified to earnings
when the project is completed as part of the depreciation expense of the capital
assets.
Certain
financial sales contracts for primary aluminum, our foreign currency forward and
option contracts and all financial purchase contracts for natural gas have been
designated as cash flow hedges in accordance with the provisions of SFAS No. 133
(as amended). We assess the effectiveness of these cash flow hedges
quarterly. To the extent such cash flow hedges are effective, unrealized gains
and losses on the financial sales contracts are deferred on the balance sheet as
accumulated other comprehensive income. When the hedged transaction
is recognized in earnings, we recognize the realized gain or loss in the
Consolidated Statement of Operations. Any ineffective portion of the
gain or loss is reported in earnings immediately.
Unwind
of foreign currency forward contracts.
In
October 2008, following the appreciable devaluation of the ISK versus the U.S.
dollar, we reached an agreement with our counterparties and settled the
remaining forward contracts that extended through September
2009. This settlement represented all of our remaining foreign
currency forward contracts. We paid our counterparties approximately
$30,200, an amount based on the intrinsic values of the contracts as determined
by the forward curve on the date of settlement.
We
recognized losses of approximately $15,750 in the fourth quarter of 2008 on the
ineffective portions of the forward contracts for the forecasted Helguvik
capital expenditures. These losses are recorded in net loss on
forward contracts in our Consolidated Statements of Operations. The
ineffective portion of these forward contracts represents forward contract
positions in excess of the revised forecast schedule of Helguvik capital
expenditures. During 2007 and 2006, we did not recognize any gains or
losses for the ineffective portion of our cash flow hedges.
The
foreign currency forward and natural gas financial purchase contracts are
subject to the risk of counterparty credit risk. However, we only
enter into forward financial contracts with counterparties we determine to be
creditworthy at the time of entering into the contract. Due to the
fact that we are in a liability position for almost all of our forward
contracts, our counterparty risk is very minimal. If any counterparty
failed to perform according to the terms of the contract, the accounting impact
would be limited to the difference between the contract price and the market
price applied to the contract volume on the date of settlement.
As of
December 31, 2008 and 2007, we had recorded in accumulated other comprehensive
income deferred losses of $17,506 and $170, net of tax, respectively, on our
cash flow hedges. As of December 31, 2008, an accumulated other
comprehensive loss of $16,158 is expected to be reclassified to earnings over
the next 12-month period.
|
19.
|
Asset
Retirement Obligations (“ARO”)
|
Our asset
retirement obligations consist primarily of costs associated with the disposal
of spent pot liner used in the reduction cells of our domestic
facilities.
The
reconciliation of the changes in the asset retirement obligations is presented
below:
|
Year
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Beginning
balance, ARO liability
|
$ | 13,586 | $ | 12,864 | ||||
|
Additional
ARO liability incurred
|
2,140 | 2,038 | ||||||
|
ARO
liabilities settled
|
(2,464 | ) | (2,348 | ) | ||||
|
Accretion
expense
|
1,075 | 1,032 | ||||||
|
Ending
balance, ARO liability
|
$ | 14,337 | $ | 13,586 | ||||
Certain
conditional AROs related to the disposal costs of fixed assets at our primary
aluminum facilities have not been recorded because they have an indeterminate
settlement date. These conditional AROs will be initially recognized
in the period in which sufficient information exists to estimate their fair
value.
|
20.
|
Related
Party Transactions
|
The
significant related party transactions occurring during the years ended December
31, 2008, 2007, and 2006, are described below.
One of
the members of our board of directors is the Chairman of the Board of Directors
of Glencore International AG.
In
addition to the transactions with Glencore described below, Century of Kentucky
has purchased alumina in transactions with Gramercy at cost.
St. Ann
Bauxite sells bauxite to Sherwin Alumina at prices which management believes
approximated market. Since May 1, 2007, Sherwin Alumina has been owned by
Glencore.
Recent
Transactions with Glencore
As of
December 31, 2008, we had no outstanding forward financial sales contracts
with Glencore. In November 2004 and June 2005, we entered into forward financial
sales contracts with Glencore for the years 2006 through 2010 and 2008 through
2015, respectively, for a minimum of 300,600 and 460,200 metric tons of primary
aluminum, respectively, over the term of the contracts, which contained clauses
that triggered additional shipment volumes when the market price for a contract
month was above the contract ceiling price. These contracts were to be settled
monthly. On July 7, 2008, Century and Glencore agreed to
terminate the Financial Sales Contracts upon the payment by Century to Glencore
of cash (with a portion being deferred) and upon the issuance by Century to
Glencore of 160,000 shares of non-voting preferred stock, which shares are
convertible under certain circumstances into our common stock at a conversion
ratio of 100 shares of common stock per each share of Series A
Convertible Preferred Stock. In October 2008, we made the final
$25,000 principal payment to Glencore in connection with the termination of the
Financial Sales Contracts. See Note 4 Termination Transaction for
additional information.
Financial
Sales Contract Cash Settlements to Glencore
Cash
payments for the historical settlements of the recently terminated Financial
Sales Contracts with Glencore were based on the contract shipment volume,
contract price and the actual LME price for primary aluminum for the
corresponding period. In 2008 through the date of the termination transaction on
July 7, 2008, we settled 100,200 metric tons, which consisted of the
original contract volume plus the additional volume that was triggered when the
LME exceeded certain thresholds. Our cash payments for the contract settlements
in 2008, 2007 and 2006 are in the Summary table below.
Purchases
from Glencore
We
purchased alumina from Glencore on both a spot and long-term contract basis. We
believe that all of the alumina purchased under these contracts was purchased at
prices which approximated market. We have also purchased alumina from Glencore
on a spot basis. We determined the market price for the spot alumina we
purchased based on a survey of suppliers at the time that had the ability to
deliver spot alumina on the specified terms. Based on this survey, we
believe that all of the spot alumina purchased from Glencore was purchased at
prices that approximate market. During 2008, we purchased from Glencore all of
our alumina requirements for Ravenswood. The supply agreement for Ravenswood
runs through December 31, 2009.
Sales
to Glencore
We sold
primary aluminum and alumina to Glencore both a spot and long-term contract
basis. See Note 22 Business Segments for additional information about
the percentage of sales of primary aluminum to Glencore.
We sold
primary aluminum under our long-term sales contracts with Glencore at prices
based on the LME price for primary aluminum, as adjusted to reflect the Midwest
Premium (a premium typically added for deliveries of aluminum within the U.S.).
In addition, we received tolling fees from Glencore under tolling contracts that
provide for delivery of primary aluminum produced at Grundartangi. The fee paid
by Glencore under these tolling contracts is based on the LME price for primary
aluminum, as adjusted to reflect the reduced European Union import duty paid on
Icelandic primary aluminum. We believe that all of the transactions with
Glencore under these contracts were at market prices.
We have a
long-term contract to sell Glencore approximately 50,000 metric tons of primary
aluminum produced at Mt. Holly each year through December 31, 2009, at a
variable price determined by reference to the LME. We have a long-term contract
to sell Glencore 20,400 mtpy of primary aluminum through December 31, 2013,
at a variable price based on the LME, adjusted by a negotiated U.S. Midwest
market premium with a cap and floor as applied to the current U.S. Midwest
Premium.
Other
Transactions with Glencore
We are
party to separate ten-year and seven-year LME-based alumina tolling agreements
with Glencore, for 90,000 and 40,000 metric tons of capacity per year,
respectively, at Grundartangi, which run through 2016 and 2014,
respectively. Glencore assigned 50% of its tolling rights under the
ten-year agreement to Hydro Aluminum AS for the period 2007 to
2010.
We signed
a long-term agreement to buy alumina from Glencore in April 2008. Glencore has
agreed to supply us with 290,000 metric tons of alumina in 2010, 365,000 metric
tons in 2011, 450,000 metric tons in 2012, 450,000 metric tons in 2013, and
730,000 metric tons in 2014. The alumina price will be indexed to the LME price
of primary aluminum.
Summary
A summary
of the aforementioned related party transactions for the years ended December
31, 2008, 2007 and 2006 is as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Termination
transaction (1)
|
$ | 1,659,678 | $ | — | $ | — | ||||||
|
Net
sales to Glencore
|
495,961 | 348,413 | 259,531 | |||||||||
|
Purchases
from Glencore
|
146,366 | 178,971 | 185,462 | |||||||||
|
Cash
settlement of financial sales contracts that do not qualify for cash flow
hedge accounting
|
115,019 | 98,259 | 54,236 | |||||||||
|
Gramercy
alumina purchases
|
162,417 | 139,383 | 134,178 | |||||||||
|
St.
Ann Bauxite sales to Sherwin Alumina
|
61,028 | 18,721 | — | |||||||||
|
(1)
|
See
Note 4 Termination Transaction for additional
information.
|
See Note
18 for a discussion of our fixed-price commitments, forward financial contracts,
and contract settlements with related parties.
|
21.
|
Supplemental
Cash Flow Information
|
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
paid for:
|
||||||||||||
|
Interest
|
$ | 23,240 | $ | 34,321 | $ | 42,607 | ||||||
|
Income
taxes
|
21,777 | 53,338 | 58,476 | |||||||||
|
Cash
received from:
|
||||||||||||
|
Interest
|
7,804 | 9,878 | 1,331 | |||||||||
|
Income
tax refunds
|
224 | — | 587 | |||||||||
|
Non-cash
investing activities:
|
||||||||||||
|
Accrued
capital costs
|
$ | (22,117 | ) | $ | 3,592 | $ | 6,679 | |||||
Non-Cash
Activities
In 2008,
2007 and 2006, we issued shares of common stock to certain key employees to
satisfy performance share liabilities of $3,692, $2,281 and $2,867,
respectively, as part of our performance share program.
During
the years ended December 31, 2007 and 2006, we capitalized interest costs
incurred in the construction of equipment of $3,739 and $8,861,
respectively.
In 2007,
we recorded a $2,461 non-cash loss on extinguishment of debt arising from the
write-off of deferred financing costs for the Nordural senior term loan
facility.
|
22.
|
Business
Segments
|
We
operate in one reportable business segment, primary aluminum. A
reconciliation of our consolidated assets to the total of primary aluminum
segment assets is provided below.
|
Segment assets (1)
|
2008
|
2007
|
2006
|
|||||||||
|
Primary
|
$ | 1,937,830 | $ | 2,547,432 | $ | 2,159,429 | ||||||
|
Corporate,
unallocated
|
98,269 | 30,839 | 25,805 | |||||||||
|
Total
assets
|
$ | 2,036,099 | $ | 2,578,271 | $ | 2,185,234 | ||||||
|
(1)
|
Segment
assets include accounts receivable, due from affiliates, inventory,
intangible assets, and property, plant and equipment-net; the remaining
assets are unallocated corporate assets, and deferred tax
assets.
|
Geographic
information
Included
in the consolidated financial statements are the following amounts related to
geographic locations:
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales:
|
||||||||||||
|
United
States
|
$ | 1,428,948 | $ | 1,318,435 | $ | 1,245,167 | ||||||
|
Other
|
541,828 | 479,728 | 313,399 | |||||||||
|
Long-lived
assets:(1)
|
||||||||||||
|
United
States
|
$ | 552,635 | $ | 561,285 | $ | 569,124 | ||||||
|
Iceland
|
911,082 | 932,339 | 880,776 | |||||||||
|
Other
|
58,248 | 16,382 | 14,244 | |||||||||
|
(1)
|
Includes
long-lived assets other than financial instruments and deferred tax
assets.
|
Major
customer information
In 2008,
2007 and 2006, we had four major customers whose sales revenue exceeded 10% of
our net sales. A loss of any of these customers could have a material
adverse effect on our results of operations. The revenue and
percentage of net sales for these customers are as follows:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Glencore
|
$ | 495,961 | 25.2 | % | $ | 348,413 | 19.4 | % | $ | 259,531 | 16.7 | % | ||||||||||||
|
Southwire
|
404,393 | 20.5 | % | 431,460 | 24.0 | % | 420,100 | 27.0 | % | |||||||||||||||
|
Alcan
|
337,216 | 17.1 | % | 378,294 | 21.0 | % | 400,908 | 25.7 | % | |||||||||||||||
|
BHP
Billiton
|
262,752 | 13.3 | % | 255,646 | 14.2 | % | 229,524 | 14.7 | % | |||||||||||||||
|
23.
|
Quarterly
Information (Unaudited)
|
Financial
results by quarter for the years ended December 31, 2008 and 2007 are as
follows:
|
Net
Sales
|
Gross
Profit (Loss)
|
Net
Income (Loss)
|
Net
Income (Loss) Per Share
|
|||||||||||||
|
2008:
|
||||||||||||||||
|
4th
Quarter(1)
|
$ | 402,198 | $ | (62,578 | ) | $ | (700,152 | ) | $ | (14.27 | ) | |||||
|
3rd
Quarter (2)
|
552,239 | 121,983 | 36,973 | 0.59 | ||||||||||||
|
2nd
Quarter (3)
|
545,197 | 156,224 | (2,341 | ) | (0.06 | ) | ||||||||||
|
1st
Quarter (4)
|
471,142 | 95,995 | (232,796 | ) | (5.67 | ) | ||||||||||
|
2007:
|
||||||||||||||||
|
4th
Quarter (5)
|
$ | 432,130 | $ | 59,923 | $ | (112,303 | ) | $ | (2.74 | ) | ||||||
|
3rd
Quarter (6)
|
454,371 | 84,496 | 7,470 | 0.18 | ||||||||||||
|
2nd
Quarter (7)
|
464,005 | 108,392 | (60,665 | ) | (1.77 | ) | ||||||||||
|
1st
Quarter
|
447,657 | 110,652 | 64,249 | 1.98 | ||||||||||||
|
(1)
|
The
fourth quarter of 2008 net loss includes a charge of $94,844 for goodwill
impairment, a charge of $55,867 for lower-cost-or market inventory
adjustments and a $522,895 charge for reserves on deferred income tax
assets.
|
|
(2)
|
The
third quarter of 2008 net income includes a charge of $50,440 net of tax,
for loss on forward contracts.
|
|
(3)
|
The
second quarter of 2008 net loss includes a charge of $129,943, net of tax,
for loss on forward contracts and a benefit of $15,506 for tax benefits
from principally foreign corporate tax rate reductions.
|
|
(4)
|
The
first quarter of 2008 net loss includes a charge of $285,864, net of tax,
for loss on forward contracts.
|
|
(5)
|
The
fourth quarter of 2007 net loss includes a charge of $147,737, net of tax,
for loss on forward contracts
|
|
(6)
|
The
third quarter of 2007 net income includes a charge of $46,206 net of tax,
for loss on forward contracts.
|
|
(7)
|
The
second quarter of 2007 net loss includes a charge of $125,091, net of tax,
for loss on forward contracts.
|
|
24.
|
Investment
in Unconsolidated 50% or Less Owned Joint
Ventures
|
We have
50% interest in joint ventures with St. Ann Bauxite, Gramercy Alumina and
Mincenco. Mincenco is our joint venture with Minmetals Aluminum
Company to explore the potential of developing a bauxite mine and associated 1.5
million metric ton alumina refining facility in Jamaica. These
investments are accounted for using the equity method and the investments are
included in other assets in the consolidated balance sheet.
In April
2008, we entered into a joint venture agreement whereby we acquired a 40% stake
in BHH, a carbon anode and cathode facility located in the Guangxi Zhuang
Autonomous Region of south China. 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. Our Statement of Operations
includes our equity in earnings of joint venture for BHH results of operations
for the six months ended September 30, 2008.
The
summarized financial information presented below represents 100% of the
aggregate financial data for this group of joint ventures after elimination of
intercompany balances and profits. These amounts do not include
elimination of the intercompany profits from Century and thus are not directly
comparable to our equity earnings in joint ventures reported in our Consolidated
Statement of Operations. Amounts presented below include financial
information for BHH as of and through September 30, 2008. The
aggregate summarized financial data for these investments is as
follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
assets
|
$ | 201,335 | $ | 143,227 | ||||
|
Total
assets
|
367,281 | 237,078 | ||||||
|
Current
liabilities
|
102,029 | 76,034 | ||||||
|
Total
liabilities
|
148,917 | 89,830 | ||||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 595,366 | $ | 471,787 | $ | 457,300 | ||||||
|
Gross
profit
|
52,674 | 59,187 | 51,848 | |||||||||
|
Income
from continuing operations
|
32,456 | 36,972 | 37,199 | |||||||||
|
25.
|
Condensed
Consolidating Financial Information
|
Our 7.5%
Senior Notes due 2014 and 1.75% Convertible Senior Notes due 2024 are guaranteed
by each of our material existing and future domestic subsidiaries, except for
Nordural US LLC. Each subsidiary guarantor is 100% owned by
Century. All guarantees are full and unconditional; and all
guarantees are joint and several. These notes are not guaranteed by
our foreign subsidiaries (such subsidiaries and Nordural US LLC, collectively
the “Non-Guarantor Subsidiaries”). We allocate corporate expenses or
income to our subsidiaries. For the years ended December 31, 2008,
2007 and 2006 we allocated total corporate expenses of $12,380, $10,030 and
$6,460 to our subsidiaries, respectively. Additionally, we charge interest on
certain intercompany balances.
The
following summarized condensed consolidating balance sheets as of December 31,
2008 and December 31, 2007, condensed consolidating statements of operations for
the years ended December 31, 2008, December 31, 2007 and December 31, 2006 and
the condensed consolidating statements of cash flows for the years ended
December 31, 2008, December 31, 2007 and December 31, 2006 present separate
results for Century, the guarantor subsidiaries, the non-guarantor subsidiaries,
consolidating adjustments and total consolidated amounts.
This
summarized condensed consolidating financial information may not necessarily be
indicative of the results of operations or financial position had Century, the
guarantor subsidiaries or the non-guarantor subsidiaries operated as independent
entities.
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor Subsidiaries
|
The Company
|
Reclassifications
and Eliminations
|
Consolidated
|
||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash
|
$ | — | $ | 71,545 | $ | 57,855 | $ | — | $ | 129,400 | ||||||||||
|
Restricted
cash
|
865 | — | — | — | 865 | |||||||||||||||
|
Short-term
investments
|
— | — | 13,686 | — | 13,686 | |||||||||||||||
|
Accounts
receivable — net
|
46,506 | 14,353 | — | — | 60,859 | |||||||||||||||
|
Due
from affiliates
|
649,440 | 4,878 | 2,431,954 | (3,047,210 | ) | 39,062 | ||||||||||||||
|
Inventories
|
87,673 | 50,438 | — | — | 138,111 | |||||||||||||||
|
Prepaid
and other assets
|
2,204 | 18,479 | 79,177 | — | 99,860 | |||||||||||||||
|
Deferred
taxes — current portion
|
32,290 | — | — | — | 32,290 | |||||||||||||||
|
Total
current assets
|
818,978 | 159,693 | 2,582,672 | (3,047,210 | ) | 514,133 | ||||||||||||||
|
Investment
in subsidiaries
|
40,356 | — | (880,857 | ) | 840,501 | — | ||||||||||||||
|
Property,
plant and equipment — net
|
427,532 | 911,083 | 1,422 | — | 1,340,037 | |||||||||||||||
|
Intangible
asset — net
|
32,527 | — | — | — | 32,527 | |||||||||||||||
|
Due
from affiliates — less current portion
|
— | 7,599 | — | — | 7,599 | |||||||||||||||
|
Other
assets
|
62,169 | 50,649 | 17,670 | 11,315 | 141,803 | |||||||||||||||
|
Total
assets
|
$ | 1,381,562 | $ | 1,129,024 | $ | 1,720,907 | $ | (2,195,394 | ) | $ | 2,036,099 | |||||||||
|
Liabilities
and shareholders’ equity:
|
||||||||||||||||||||
|
Accounts
payable – trade
|
$ | 61,094 | $ | 40,913 | $ | 136 | $ | — | $ | 102,143 | ||||||||||
|
Due
to affiliates
|
2,147,116 | 50,860 | 251,456 | (2,378,475 | ) | 70,957 | ||||||||||||||
|
Accrued
and other current liabilities
|
27,991 | 8,836 | 21,950 | — | 58,777 | |||||||||||||||
|
Accrued
employee benefits costs — current portion
|
10,744 | — | 1,326 | — | 12,070 | |||||||||||||||
|
Convertible
senior notes
|
— | — | 175,000 | — | 175,000 | |||||||||||||||
|
Industrial
revenue bonds
|
7,815 | — | — | — | 7,815 | |||||||||||||||
|
Total
current liabilities
|
2,254,760 | 100,609 | 449,868 | (2,378,475 | ) | 426,762 | ||||||||||||||
|
Senior
unsecured notes payable
|
— | — | 250,000 | — | 250,000 | |||||||||||||||
|
Revolving
credit facility
|
— | — | 25,000 | — | 25,000 | |||||||||||||||
|
Accrued
pension benefit costs — less current portion
|
29,772 | — | 20,236 | — | 50,008 | |||||||||||||||
|
Accrued
postretirement benefit costs — less current portion
|
216,895 | — | 2,644 | — | 219,539 | |||||||||||||||
|
Other
liabilities/intercompany loan
|
29,434 | 647,812 | 13,638 | (657,420 | ) | 33,464 | ||||||||||||||
|
Deferred
taxes — less current portion
|
5,767 | 66,038 | — | — | 71,805 | |||||||||||||||
|
Total
noncurrent liabilities
|
281,868 | 713,850 | 311,518 | (657,420 | ) | 649,816 | ||||||||||||||
|
Shareholders’
equity:
|
||||||||||||||||||||
|
Preferred
stock
|
— | — | 2 | — | 2 | |||||||||||||||
|
Common
stock
|
60 | 12 | 491 | (72 | ) | 491 | ||||||||||||||
|
Additional
paid-in capital
|
297,292 | 144,371 | 2,240,014 | (441,663 | ) | 2,240,014 | ||||||||||||||
|
Accumulated
other comprehensive income (loss)
|
(147,979 | ) | (5,837 | ) | (137,208 | ) | 153,816 | (137,208 | ) | |||||||||||
|
Retained
earnings (accumulated deficit)
|
(1,304,439 | ) | 176,019 | (1,143,778 | ) | 1,128,420 | (1,143,778 | ) | ||||||||||||
|
Total
shareholders’ equity
|
(1,155,066 | ) | 314,565 | 959,521 | 840,501 | 959,521 | ||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,381,562 | $ | 1,129,024 | $ | 1,720,907 | $ | (2,195,394 | ) | $ | 2,036,099 | |||||||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor Subsidiaries
|
The Company
|
Reclassifications
and Eliminations
|
Consolidated
|
||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Cash
|
$ | — | $ | 11,128 | $ | 49,834 | $ | — | $ | 60,962 | ||||||||||
|
Restricted
cash
|
873 | — | — | — | 873 | |||||||||||||||
|
Short-term
investments
|
— | — | 280,169 | — | 280,169 | |||||||||||||||
|
Accounts
receivable — net
|
80,999 | 12,452 | — | — | 93,451 | |||||||||||||||
|
Due
from affiliates
|
44,199 | 7,977 | 1,020,688 | (1,046,171 | ) | 26,693 | ||||||||||||||
|
Inventories
|
136,766 | 38,937 | — | (602 | ) | 175,101 | ||||||||||||||
|
Prepaid
and other assets
|
4,667 | 21,884 | 13,540 | — | 40,091 | |||||||||||||||
|
Deferred
taxes — current portion
|
17,867 | — | — | 51,991 | 69,858 | |||||||||||||||
|
Total
current assets
|
285,371 | 92,378 | 1,364,231 | (994,782 | ) | 747,198 | ||||||||||||||
|
Investment
in subsidiaries
|
41,499 | — | 110,866 | (152,365 | ) | — | ||||||||||||||
|
Property,
plant and equipment — net
|
421,416 | 837,496 | 1,128 | — | 1,260,040 | |||||||||||||||
|
Intangible
asset — net
|
47,603 | — | — | — | 47,603 | |||||||||||||||
|
Goodwill
|
— | 94,844 | — | — | 94,844 | |||||||||||||||
|
Deferred
taxes — less current portion
|
— | — | 575,676 | (254,608 | ) | 321,068 | ||||||||||||||
|
Other
assets
|
60,130 | 16,382 | 18,503 | 12,503 | 107,518 | |||||||||||||||
|
Total
assets
|
$ | 856,019 | $ | 1,041,100 | $ | 2,070,404 | $ | (1,389,252 | ) | $ | 2,578,271 | |||||||||
|
Liabilities
and shareholders’ equity:
|
||||||||||||||||||||
|
Accounts
payable – trade
|
$ | 50,601 | $ | 28,303 | $ | 578 | $ | — | $ | 79,482 | ||||||||||
|
Due
to affiliates
|
501,271 | 93,431 | 87,415 | (465,363 | ) | 216,754 | ||||||||||||||
|
Industrial
revenue bonds
|
7,815 | — | — | — | 7,815 | |||||||||||||||
|
Accrued
and other current liabilities
|
16,514 | 17,743 | 26,225 | — | 60,482 | |||||||||||||||
|
Accrued
employee benefits costs — current portion
|
10,653 | — | 1,344 | — | 11,997 | |||||||||||||||
|
Deferred
taxes –current portion
|
— | — | 24,054 | (24,054 | ) | — | ||||||||||||||
|
Convertible
senior notes
|
— | — | 175,000 | — | 175,000 | |||||||||||||||
|
Total
current liabilities
|
586,854 | 139,477 | 314,616 | (489,417 | ) | 551,530 | ||||||||||||||
|
Senior
unsecured notes payable
|
— | — | 250,000 | — | 250,000 | |||||||||||||||
|
Accrued
pension benefit costs — less current portion
|
— | — | 14,427 | — | 14,427 | |||||||||||||||
|
Accrued
postretirement benefit costs — less current portion
|
183,479 | — | 1,374 | — | 184,853 | |||||||||||||||
|
Other
liabilities/intercompany loan
|
26,419 | 571,368 | 15,100 | (573,244 | ) | 39,643 | ||||||||||||||
|
Due
to affiliates — less current portion
|
— | — | 913,683 | — | 913,683 | |||||||||||||||
|
Deferred
taxes — less current portion
|
230,381 | 6,776 | — | (174,226 | ) | 62,931 | ||||||||||||||
|
Total
noncurrent liabilities
|
440,279 | 578,144 | 1,194,584 | (747,470 | ) | 1,465,537 | ||||||||||||||
|
Shareholders’
equity:
|
||||||||||||||||||||
|
Common
stock
|
60 | 12 | 410 | (72 | ) | 410 | ||||||||||||||
|
Additional
paid-in capital
|
292,434 | 136,797 | 857,787 | (429,231 | ) | 857,787 | ||||||||||||||
|
Accumulated
other comprehensive income (loss)
|
(52,674 | ) | 5,524 | (51,531 | ) | 47,150 | (51,531 | ) | ||||||||||||
|
Retained
earnings (accumulated deficit)
|
(410,934 | ) | 181,146 | (245,462 | ) | 229,788 | (245,462 | ) | ||||||||||||
|
Total
shareholders’ equity
|
(171,114 | ) | 323,479 | 561,204 | (152,365 | ) | 561,204 | |||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 856,019 | $ | 1,041,100 | $ | 2,070,404 | $ | (1,389,252 | ) | $ | 2,578,271 | |||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2008
|
||||||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor Subsidiaries
|
The
Company
|
Reclassifications
and Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||
|
Third-party
customers
|
$ | 1,127,084 | $ | 347,731 | $ | — | $ | — | $ | 1,474,815 | ||||||||||
|
Related
parties
|
307,932 | 188,029 | — | — | 495,961 | |||||||||||||||
| 1,435,016 | 535,760 | — | — | 1,970,776 | ||||||||||||||||
|
Cost
of goods sold
|
1,284,861 | 373,706 | — | 585 | 1,659,152 | |||||||||||||||
|
Gross
profit
|
150,155 | 162,054 | — | (585 | ) | 311,624 | ||||||||||||||
|
Selling,
general and administrative expenses
|
44,806 | 3,417 | — | — | 48,223 | |||||||||||||||
|
Goodwill
impairment
|
— | 94,844 | — | — | 94,844 | |||||||||||||||
|
Operating
income (loss)
|
105,349 | 63,793 | — | (585 | ) | 168,557 | ||||||||||||||
|
Interest
expense – third party
|
(24,496 | ) | — | — | — | (24,496 | ) | |||||||||||||
|
Interest
expense – affiliates
|
54,755 | (55,900 | ) | — | — | (1,145 | ) | |||||||||||||
|
Interest
income
|
5,340 | 2,141 | — | — | 7,481 | |||||||||||||||
|
Interest
income – affiliates
|
— | 318 | — | — | 318 | |||||||||||||||
|
Net
loss on forward contracts
|
(728,698 | ) | (15,750 | ) | — | — | (744,448 | ) | ||||||||||||
|
Other
expense - net
|
(4,394 | ) | 2,216 | — | — | (2,178 | ) | |||||||||||||
|
Income
(loss) before taxes and equity in earnings (loss) of subsidiaries and
joint ventures
|
(592,144 | ) | (3,182 | ) | — | (585 | ) | (595,911 | ) | |||||||||||
|
Income
tax benefit (expense)
|
(326,436 | ) | 6,882 | — | 243 | (319,311 | ) | |||||||||||||
|
Income
(loss) before equity in earnings (loss) of subsidiaries and joint
ventures
|
(918,580 | ) | 3,700 | — | (342 | ) | (915,222 | ) | ||||||||||||
|
Equity
in earnings (loss) of subsidiaries and joint ventures
|
12,976 | 5,054 | (898,316 | ) | 897,192 | 16,906 | ||||||||||||||
|
Net
income (loss)
|
$ | (905,604 | ) | $ | 8,754 | $ | (898,316 | ) | $ | 896,850 | $ | (898,316 | ) | |||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2007
|
||||||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor Subsidiaries
|
The Company
|
Reclassifications
and Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||
|
Third-party
customers
|
$ | 1,101,311 | $ | 348,439 | $ | — | $ | — | $ | 1,449,750 | ||||||||||
|
Related
parties
|
223,818 | 124,595 | — | — | 348,413 | |||||||||||||||
| 1,325,129 | 473,034 | — | — | 1,798,163 | ||||||||||||||||
|
Cost
of goods sold
|
1,115,673 | 321,477 | — | (2,450 | ) | 1,434,700 | ||||||||||||||
|
Gross
profit
|
209,456 | 151,557 | — | 2,450 | 363,463 | |||||||||||||||
|
Selling,
general and administrative expenses
|
45,250 | 14,670 | — | — | 59,920 | |||||||||||||||
|
Operating
income
|
164,206 | 136,887 | — | 2,450 | 303,543 | |||||||||||||||
|
Interest
expense – third party
|
(24,329 | ) | (8,570 | ) | — | — | (32,899 | ) | ||||||||||||
|
Interest
expense – affiliates
|
42,435 | (42,435 | ) | — | — | — | ||||||||||||||
|
Interest
income
|
9,136 | 1,654 | — | — | 10,790 | |||||||||||||||
|
Net
loss on forward contracts
|
(508,875 | ) | — | — | — | (508,875 | ) | |||||||||||||
|
Loss
on early extinguishment of debt
|
— | (2,461 | ) | — | — | (2,461 | ) | |||||||||||||
|
Other
income (expense) - net
|
(176 | ) | (665 | ) | — | — | (841 | ) | ||||||||||||
|
Income
(loss) before taxes and equity in earnings (loss) of subsidiaries and
joint ventures
|
(317,603 | ) | 84,410 | — | 2,450 | (230,743 | ) | |||||||||||||
|
Income
tax (expense) benefit
|
106,068 | 8,715 | — | (934 | ) | 113,849 | ||||||||||||||
|
Net
income (loss) before equity in earnings (loss) of subsidiaries and joint
ventures
|
(211,535 | ) | 93,125 | — | 1,516 | (116,894 | ) | |||||||||||||
|
Equity
in earnings (loss) of subsidiaries and joint ventures
|
25,197 | 2,747 | (101,249 | ) | 88,950 | 15,645 | ||||||||||||||
|
Net
income (loss)
|
$ | (186,338 | ) | $ | 95,872 | $ | (101,249 | ) | $ | 90,466 | $ | (101,249 | ) | |||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||
|
For
the Year Ended December 31, 2006
|
||||||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor Subsidiaries
|
The Company
|
Reclassifications
and Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||
|
Third-party
customers
|
$ | 1,071,670 | $ | 227,365 | $ | — | $ | — | $ | 1,299,035 | ||||||||||
|
Related
parties
|
180,478 | 79,053 | — | — | 259,531 | |||||||||||||||
| 1,252,148 | 306,418 | — | — | 1,558,566 | ||||||||||||||||
|
Cost
of goods sold
|
1,000,879 | 213,469 | — | (4,304 | ) | 1,210,044 | ||||||||||||||
|
Gross
profit
|
251,269 | 92,949 | — | 4,304 | 348,522 | |||||||||||||||
|
Selling,
general and administrative expenses
|
38,567 | 796 | — | — | 39,363 | |||||||||||||||
|
Operating
income
|
212,702 | 92,153 | — | 4,304 | 309,159 | |||||||||||||||
|
Interest
expense – third party
|
(24,632 | ) | (12,370 | ) | — | — | (37,002 | ) | ||||||||||||
|
Interest
expense – affiliates
|
30,699 | (30,699 | ) | — | — | — | ||||||||||||||
|
Interest
income
|
1,254 | 451 | — | — | 1,705 | |||||||||||||||
|
Net
loss on forward contracts
|
(389,839 | ) | — | — | — | (389,839 | ) | |||||||||||||
|
Other
income (expense) - net
|
7,132 | (234 | ) | — | — | 6,898 | ||||||||||||||
|
Income
(loss) before taxes and equity in earnings (loss) of subsidiaries and
joint ventures
|
(162,684 | ) | 49,301 | — | 4,304 | (109,079 | ) | |||||||||||||
|
Income
tax (expense) benefit
|
56,297 | (2,707 | ) | — | (1,549 | ) | 52,041 | |||||||||||||
|
Net
income (loss) before equity in earnings (loss) of subsidiaries and joint
ventures
|
(106,387 | ) | 46,594 | — | 2,755 | (57,038 | ) | |||||||||||||
|
Equity
in earnings (loss) of subsidiaries and joint ventures
|
17,383 | 5,366 | (40,955 | ) | 34,289 | 16,083 | ||||||||||||||
|
Net
income (loss)
|
$ | (89,004 | ) | $ | 51,960 | $ | (40,955 | ) | $ | 37,044 | $ | (40,955 | ) | |||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||
|
For
the Year Ended December 31, 2008
|
||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor Subsidiaries
|
The
Company
|
Consolidated
|
|||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (712,325 | ) | $ | 46,887 | $ | — | $ | (665,438 | ) | ||||||
|
Investing
activities:
|
||||||||||||||||
|
Purchase
of property, plant and equipment
|
(34,715 | ) | (9,005 | ) | (816 | ) | (44,536 | ) | ||||||||
|
Nordural
expansion
|
— | (80,314 | ) | — | (80,314 | ) | ||||||||||
|
Investments
in and advances to joint ventures
|
— | — | (36,974 | ) | (36,974 | ) | ||||||||||
|
Payments
received on advances to joint ventures
|
225 | 1,529 | 1,754 | |||||||||||||
|
Proceeds
from sale of property
|
286 | 45 | — | 331 | ||||||||||||
|
Restricted
cash deposits
|
8 | — | — | 8 | ||||||||||||
|
Net
cash used in investing activities
|
(34,196 | ) | (89,274 | ) | (36,261 | ) | (159,731 | ) | ||||||||
|
Financing
activities:
|
||||||||||||||||
|
Repayment
of long-term debt – related party
|
— | — | (505,198 | ) | (505,198 | ) | ||||||||||
|
Borrowing
on revolving credit facility
|
— | — | 35,000 | 35,000 | ||||||||||||
|
Repayments
on revolving credit facility
|
— | — | (10,000 | ) | (10,000 | ) | ||||||||||
|
Excess
tax benefits from share-based compensation
|
— | — | 657 | 657 | ||||||||||||
|
Intercompany
transactions
|
746,521 | 102,804 | (849,325 | ) | — | |||||||||||
|
Issuance
of preferred stock
|
— | — | 929,480 | 929,480 | ||||||||||||
|
Issuance
of common stock
|
— | — | 443,668 | 443,668 | ||||||||||||
|
Net
cash provided by financing activities
|
746,521 | 102,804 | 44,282 | 893,607 | ||||||||||||
|
Net
change in cash
|
— | 60,417 | 8,021 | 68,438 | ||||||||||||
|
Cash,
beginning of the period
|
— | 11,128 | 49,834 | 60,962 | ||||||||||||
|
Cash,
end of the period
|
$ | — | $ | 71,545 | $ | 57,855 | $ | 129,400 | ||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||
|
For
the Year Ended December 31, 2007
|
||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor
Subsidiaries
|
The Company
|
Consolidated
|
|||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (136,445 | ) | $ | 130,690 | $ | — | $ | (5,755 | ) | ||||||
|
Investing
activities:
|
||||||||||||||||
|
Purchase
of property, plant and equipment
|
(18,773 | ) | (5,283 | ) | (184 | ) | (24,240 | ) | ||||||||
|
Nordural
expansion
|
— | (88,764 | ) | — | (88,764 | ) | ||||||||||
|
Proceeds
from sale of property, plant and equipment
|
3 | 692 | — | 695 | ||||||||||||
|
Restricted
and other cash deposits
|
3,738 | — | — | 3,738 | ||||||||||||
|
Net
cash used in investing activities
|
(15,032 | ) | (93,355 | ) | (184 | ) | (108,571 | ) | ||||||||
|
Financing
activities:
|
||||||||||||||||
|
Borrowings
of long-term debt
|
— | 30,000 | — | 30,000 | ||||||||||||
|
Repayment
of long-term debt
|
— | (369,436 | ) | — | (369,436 | ) | ||||||||||
|
Excess
tax benefits from share-based compensation
|
— | — | 588 | 588 | ||||||||||||
|
Intercompany
transactions
|
151,477 | 301,363 | (452,840 | ) | — | |||||||||||
|
Issuance
of common stock
|
— | — | 417,771 | 417,771 | ||||||||||||
|
Net
cash provided by (used in) financing activities
|
151,477 | (38,073 | ) | (34,481 | ) | 78,923 | ||||||||||
|
Net
change in cash
|
— | (738 | ) | (34,665 | ) | (35,403 | ) | |||||||||
|
Cash, beginning
of the year
|
— | 11,866 | 84,499 | 96,365 | ||||||||||||
|
Cash,
end of year
|
$ | — | $ | 11,128 | $ | 49,834 | $ | 60,962 | ||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||
|
For
the Year Ended December 31, 2006
|
||||||||||||||||
|
Combined
Guarantor Subsidiaries
|
Combined
Non-Guarantor
Subsidiaries
|
The Company
|
Consolidated
|
|||||||||||||
|
Net
cash provided by operating activities
|
$ | 146,868 | $ | 38,485 | $ | — | $ | 185,353 | ||||||||
|
Investing
activities:
|
||||||||||||||||
|
Purchase
of property, plant and equipment
|
(15,599 | ) | (7,294 | ) | (709 | ) | (23,602 | ) | ||||||||
|
Nordural
expansion
|
— | (193,511 | ) | — | (193,511 | ) | ||||||||||
|
Proceeds
from sale of property, plant and equipment
|
7,620 | 139 | — | 7,759 | ||||||||||||
|
Restricted
and other cash deposits
|
(2,583 | ) | — | — | (2,583 | ) | ||||||||||
|
Net
cash used in investing activities
|
(10,562 | ) | (200,666 | ) | (709 | ) | (211,937 | ) | ||||||||
|
Financing
activities:
|
||||||||||||||||
|
Borrowings
of long-term debt
|
— | 109,000 | — | 109,000 | ||||||||||||
|
Repayment
of long-term debt
|
— | (581 | ) | — | (581 | ) | ||||||||||
|
Repayment
of revolving credit facility
|
— | — | (8,069 | ) | (8,069 | ) | ||||||||||
|
Excess
tax benefits from share-based compensation
|
— | — | 1,394 | 1,394 | ||||||||||||
|
Intercompany
transactions
|
(136,306 | ) | 46,623 | 89,683 | — | |||||||||||
|
Issuance
of common stock
|
— | — | 3,453 | 3,453 | ||||||||||||
|
Net
cash provided by (used in) financing activities
|
(136,306 | ) | 155,042 | 86,461 | 105,197 | |||||||||||
|
Net
change in cash and cash equivalents
|
— | (7,139 | ) | 85,752 | 78,613 | |||||||||||
|
Cash
and cash equivalents, beginning of the year
|
— | 19,005 | (1,253 | ) | 17,752 | |||||||||||
|
Cash
and cash equivalents, end of year
|
$ | — | $ | 11,866 | $ | 84,499 | $ | 96,365 | ||||||||
|
26.
|
Subsequent
Events
|
Ravenswood
Curtailment
On
February 4, 2009, we announced the curtailment of the remaining plant operations
at its Ravenswood, WV aluminum smelter by February 20, 2009. Layoffs for
the majority of Ravenswood's employees were completed February 20,
2009. This announcement followed a Federal Worker Adjustment and
Retraining Notification Act ("WARN") on December 17, 2008 wherein we informed
the employees of the possibility of curtailment of the entire plant at the end
of a 60 day period. The decision to curtail the operations was due to
the high operating cost at the Ravenswood aluminum smelter in relation to our
other facilities and the continued decline in aluminum sales prices from
December 17, 2008 through February 2009.
We expect
to record approximately $25,000 to $28,000 in net charges related to the
curtailment of Ravenswood's operations in February 2009 (the
"Curtailment"). Included in the charge is approximately $26,000
to $28,000 for employee severance costs (including pension plan curtailments);
$7,000 to $8,000 in contract termination and other costs associated with the
Curtailment; and a gain of approximately $8,000 related to other postemployment
benefits plan curtailments. We are currently evaluating the effect of the
Ravenswood operations on the net carrying value of property, plant and equipment
which was $80,365 at December 31, 2008.
As a
result of the curtailment of Ravenswood, we expect to incur cash losses of
approximately $15,000 to $20,000 in 2009 to sell excess alumina that will be
received under our alumina supply agreement that expires December 31,
2009. This estimate is based on current LME prices for primary
aluminum which our alumina contracts prices are based on, current reported spot
prices received for sale of alumina and the expectation that a portion of this
material will be available to be used in our other smelting
operations.
We
estimate that future cash expenditures related to the curtailment will be
approximately $32,000 over the next 24 months. In addition, we expect
to incur cash losses of $15,000 to $20,000 in connection with the sale of excess
alumina, discussed above. We estimate that ongoing activities at
Ravenswood following the curtailment will result in future cash expenditures
over the next 24 months of $20,000 to $25,000.
Equity
Offering
In
February 2009, we completed a public equity offering of 24,500,000 shares of
common stock at a price of $4.50 per share, raising $110,250 before offering
costs. The offering costs were approximately $6,240, representing
underwriting discounts and commissions and offering expenses.
Glencore
purchased 13,242,250 shares in the January 2009 offering. We have
agreed with Glencore to amend the terms of our Standstill and Governance
Agreement to increase the percentage of our voting securities that Glencore may
acquire prior to April 7, 2009 and to allow Glencore to exercise voting
rights with respect to the shares of common stock it purchases in this
offering. As of February 20, 2009, we believe that Glencore
beneficially owned, through common stock and preferred stock ownership,
approximately 38.1% of our issued and outstanding common stock and an overall
48.9% economic ownership of Century.
We intend
to use the net proceeds from the sale of our common stock for general corporate
purposes, including repayment of debt.
Revolving
Credit Facility
We repaid
the $25,000 outstanding borrowings on our revolving credit facility in February
2009.
|
|
Item
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
|
Not
applicable.
|
|
Item
9A. Controls and
Procedures
|
|
|
Disclosure
Controls and Procedures
|
As of
December 31, 2008, we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures. Based upon that evaluation, our management, including the
Chief Executive Officer and the Chief Financial Officer, concluded that our
disclosure controls and procedures were effective.
|
|
Internal
Control over Financial Reporting
|
Management
is responsible for establishing and maintaining an adequate system of internal
controls over financial reporting for the company. This system is
designed 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. Because of
its inherent limitations, a system of internal controls over financial reporting
can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions,
effectiveness of internal controls over financial reporting may vary over
time. Our system of internal controls contains self-monitoring
mechanisms, and actions are taken to correct deficiencies as they are
identified.
As
required by Section 404 of the Sarbanes-Oxley Act, management conducted an
evaluation of the effectiveness of the system of internal controls over
financial reporting for the year ended December 31,
2008. Management’s evaluation was based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission. Based on this evaluation, management
concluded that our system of internal controls over financial reporting was
effective as of December 31, 2008. The effectiveness of our internal
control over financial reporting has been audited by Deloitte and Touche LLP, an
independent registered public accounting firm.
Changes
in Internal Control over Financial Reporting
During
the quarter ended December 31, 2008, there have not been any changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
|
|
Item
9B. Other Information
|
None.
|
|
Item
10. Directors,
Executive Officers and Corporate
Governance
|
This Item
is incorporated by reference to our definitive proxy statement on Schedule 14A,
which will be filed by April 30, 2009, or if our proxy statement is not filed by
that date, will be included in an amendment to this Report on Form 10-K, which
will be filed by April 30, 2009. Information regarding the Executive
Officers of the Registrant is included in Part I of this Form 10-K.
|
|
Item
11. Executive
Compensation
|
This Item
is incorporated by reference to our definitive proxy statement on Schedule 14A,
which will be filed by April 30, 2009, or if our proxy statement is not filed by
that date, will be included in an amendment to this Report on Form 10-K, which
will be filed by April 30, 2009.
|
|
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder
Matters
|
This Item
is incorporated by reference to our definitive proxy statement on Schedule 14A,
which will be filed by April 30, 2009, or if our proxy statement is not filed by
that date, will be included in an amendment to this Report on Form 10-K, which
will be filed by April 30, 2009.
|
|
Item
13. Certain Relationships and Related Transactions and Director
Independence
|
This Item
is incorporated by reference to our definitive proxy statement on Schedule 14A,
which will be filed by April 30, 2009, or if our proxy statement is not filed by
that date, will be included in an amendment to this Report on Form 10-K, which
will be filed by April 30, 2009.
|
|
Item
14. Principal Accountant Fees and
Services
|
This Item
is incorporated by reference to our definitive proxy statement on Schedule 14A,
which will be filed by April 30, 2009, or if our proxy statement is not filed by
that date, will be included in an amendment to this Report on Form 10-K, which
will be filed by April 30, 2009.
PART
IV
|
|
Item
15. Exhibit and Financial Statement
Schedules
|
|
(a)(1)
|
List
of Financial Statements
|
The
following Consolidated Financial Statements of Century Aluminum Company and the
Independent Auditors’ Report are included in Part II, Item 8 of this Form
10-K.
Report of
Independent Registered Public Accounting Firm.
Consolidated
Balance Sheets as of December 31, 2008 and 2007
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006.
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007
and 2006.
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006.
Notes to
the Consolidated Financial Statements.
|
(a)(2)
|
List
of Financial Statement Schedules
|
Report of
Independent Registered Public Accounting Firm.
Schedule
II — Valuation and Qualifying Accounts for the years ended December 31, 2008,
2007 and 2006.
|
(a)(3)
|
List
of Exhibits
|
|
Exhibit
Index
|
|||||
|
Incorporated
by Reference
|
|||||
|
Exhibit
Number
|
Description
of Exhibit
|
Form
|
File
No.
|
Filing
Date
|
Filed
Herewith
|
|
3.1
|
Restated
Certificate of Incorporation of Century Aluminum Company, as
amended
|
8-K
|
000-27918
|
August
16, 2005
|
|
|
3.2
|
Amended
and Restated Bylaws of Century Aluminum Company
|
8-K
|
000-27918
|
August
16, 2005
|
|
|
3.3
|
Certificate
of Designation, Preferences and Rights of Series A Convertible Preferred
Stock of Century Aluminum Company, dated July 7, 2008
|
8-K
|
000-27918
|
July
8, 2008
|
|
|
4.1
|
Form
of Stock Certificate
|
S-1
|
33-95486
|
August
8, 1995
|
|
|
4.2
|
Indenture
for Century Aluminum Company's 7.5% Senior Notes, dated as of August 26,
2004, among Century Aluminum Company, as issuer, the guarantors party
thereto and Wilmington Trust Company, as trustee
|
8-K
|
000-27918
|
September
1, 2004
|
|
|
4.3
|
Supplemental
Indenture No. 1 for Century Aluminum Company's 7.5% Senior Notes, dated as
of July 27, 2005, among Century Aluminum Company, as issuer, Century
Kentucky, LLC, as a guarantor, and Wilmington Trust Company, as
trustee
|
10-Q
|
000-27918
|
August
9, 2005
|
|
|
4.4
|
Supplemental
Indenture No. 2 for Century Aluminum Company’s 7.5% Senior Notes, dated as
of December 29, 2006 among Century Aluminum Company, as Issuer, NSA
General Partnership, as a Guarantor and Wilmington Trust Company, as
Trustee
|
10-K
|
000-27918
|
March
16, 2006
|
|
|
Exhibit
Index
|
||||||
|
Incorporated
by Reference
|
||||||
|
Exhibit
Number
|
Description
of Exhibit
|
Form
|
File
No.
|
Filing
Date
|
Filed
Herewith
|
|
|
4.5
|
Supplemental
Indenture No. 3 for Century Aluminum Company’s 7.5% Senior Notes, dated as
of December 21, 2006 among Century Aluminum Company, as Issuer, Century
California LLC, as a Guarantor and Wilmington Trust Company, as
Trustee
|
10-K
|
000-27918
|
March
1, 2007
|
||
|
4.6.
|
Supplemental
Indenture No. 4 for Century Aluminum Company’s 7.5% Senior Notes, dated as
of April 20, 2007, among Century Aluminum Company as Issuer, Century
Aluminum Development LLC as Guarantor and Wilmington Trust Company as
Trustee
|
10-Q
|
000-27918
|
August
9, 2007
|
||
|
4.7
|
Indenture
for Century Aluminum Company's 1.75% Convertible Senior Notes, dated as of
August 9, 2004, between Century Aluminum Company, as issuer, and
Wilmington Trust Company, as trustee
|
8-K
|
000-27918
|
November
1, 2004
|
||
|
4.8
|
Supplemental
Indenture No. 1 for Century Aluminum Company's 1.75% Convertible Senior
Notes, dated as of October 26, 2004, among Century Aluminum Company, as
issuer, and Wilmington Trust Company, as trustee
|
8-K
|
000-27918
|
November
1, 2004
|
||
|
4.9
|
Supplemental
Indenture No. 2 for Century Aluminum Company's 1.75% Convertible Senior
Notes, dated as of October 26, 2004, among Century Aluminum Company, as
issuer, the guarantors party thereto and Wilmington Trust Company, as
trustee
|
8-K
|
000-27918
|
November
1, 2004
|
||
|
4.10
|
Supplemental
Indenture No. 3 for Century Aluminum Company's 1.75% Convertible Senior
Notes, dated as of July 27, 2005, among Century Aluminum Company, as
issuer, Century Kentucky, LLC, as a guarantor, and Wilmington Trust
Company, as trustee
|
10-Q
|
000-27918
|
August
9, 2005
|
||
|
4.11
|
Supplemental
Indenture No. 4 for Century Aluminum Company's 1.75% Convertible Senior
Notes, dated as of December 29, 2005, among Century Aluminum Company, as
issuer, NSA General Partnership, as a Guarantor, and Wilmington Trust
Company, as trustee
|
10-K
|
000-27918
|
March
16, 2006
|
||
|
4.12
|
Supplemental
Indenture No. 5 for Century Aluminum Company's 1.75% Convertible Senior
Notes, dated as of December 21, 2006, among Century Aluminum Company, as
issuer, Century California LLC, as a Guarantor, and Wilmington Trust
Company, as trustee
|
10-K
|
000-27918
|
March
1, 2007
|
||
|
4.13
|
Supplemental
Indenture No. 6 for Century Aluminum Company’s 1.75% Convertible Senior
Notes, dated as of April 20, 2007, among Century Aluminum Company as
Issuer, Century Aluminum Development LLC as Guarantor and Wilmington Trust
Company as Trustee
|
10-Q
|
000-27918
|
August
9, 2007
|
||
|
10.1
|
Employment
Agreement, dated as of December 13, 2005, by and between Century Aluminum
Company and Logan W. Kruger*
|
10-K
|
000-27918
|
March
16, 2006
|
||
|
10.2
|
Amendment
No. 1 to Employment Agreement dated as of March 19, 2007 by and between
Century Aluminum Company and Logan W. Kruger*
|
X
|
||||
|
10.3
|
Amendment
No. 2 to Employment Agreement dated as of August 30, 2007, by and between
Century Aluminum Company and Logan W. Kruger*
|
10-Q
|
000-27918
|
November
9, 2007
|
||
|
10.4
|
Amendment
No. 3 to Employment Agreement dated as of December 1, 2008, by and between
Century Aluminum Company and Logan W. Kruger*
|
X
|
||||
|
10.5
|
Amended
and Restated Severance Protection Agreement, dated March 19, 2007, by and
between Century Aluminum Company and Logan W. Kruger*
|
10-K
|
000-27918
|
February
29, 2008
|
||
|
Exhibit
Index
|
|||||
|
Incorporated
by Reference
|
|||||
|
Exhibit
Number
|
Description
of Exhibit
|
Form
|
File
No.
|
Filing
Date
|
Filed
Herewith
|
|
10.6
|
Amendment
No. 1 to Amended and Restated Severance Protection Agreement dated
December 1, 2008, by and between Century Aluminum Company and Logan W.
Kruger*
|
X
|
|||
|
10.7
|
Employment
Agreement, dated as of March 1, 2007, by and between Century Aluminum
Company and Wayne R. Hale*
|
10-Q
|
000-27918
|
May
10, 2007
|
|
|
10.8
|
Amendment
No. 1 to Employment Agreement dated as of August 30, 2007, by and between
Century Aluminum Company and Wayne R. Hale*
|
10-Q
|
000-27918
|
November
9, 2007
|
|
|
10.9
|
Amendment
No. 2 to Employment Agreement dated as of December 1, 2008, by and between
Century Aluminum Company and Wayne R. Hale*
|
X
|
|||
|
10.10
|
Severance
Protection Agreement, dated as of March 1, 2007, by and between Century
Aluminum Company and Wayne R. Hale*
|
10-Q
|
000-27918
|
May
10, 2007
|
|
|
10.11
|
Amendment
No. 1 to Severance Protection Agreement dated December 1, 2008, by and
between Century Aluminum Company and Wayne R. Hale*
|
X
|
|||
|
10.12
|
Employment
Agreement, dated as of January 23, 2006, by and between Century Aluminum
Company and Michael A. Bless*
|
8-K
|
000-27918
|
January
25, 2006
|
|
|
10.13
|
Amendment
No. 1 to Employment Agreement dated as of March 19, 2007, by and between
Century Aluminum Company and Michael A. Bless*
|
10-K
|
000-27918
|
February
29, 2008
|
|
|
10.14
|
Amendment
No. 2 to Employment Agreement dated as of August 30, 2007, by and between
Century Aluminum Company and Michael A. Bless*
|
10-Q
|
000-27918
|
November
9, 2007
|
|
|
10.15
|
Amendment
No. 3 to Employment Agreement dated as of December 1, 2008, by and between
Century Aluminum Company and Michael A. Bless*
|
X
|
|||
|
10.16
|
Amended
and Restated Severance Protection Agreement, dated March 19, 2007, by and
between Century Aluminum Company and Michael A. Bless*
|
10-K
|
000-27918
|
February
29, 2008
|
|
|
10.17
|
Amendment
No. 1 to Amended and Restated Severance Protection Agreement dated
December 1, 2008, by and between Century Aluminum Company and Michael A.
Bless*
|
X
|
|||
|
10.18
|
Employment
Agreement, dated as of May 1, 2006, by and between Century Aluminum
Company and Robert R. Nielsen*
|
8-K
|
000-27918
|
May
4, 2006
|
|
|
10.19
|
Amendment
No. 1 to Employment Agreement dated as of March 19, 2007, by and between
Century Aluminum Company and Robert R. Nielsen*
|
10-K
|
000-27918
|
February
29, 2008
|
|
|
10.20
|
Amendment
No. 2 to Employment Agreement dated as of August 30, 2007, by and between
Century Aluminum Company and Robert R. Nielsen*
|
10-Q
|
000-27918
|
November
9, 2007
|
|
|
10.21
|
Amendment
No. 3 to Employment Agreement dated as of December 1, 2008, by and between
Century Aluminum Company and Robert R. Nielsen*
|
X
|
|||
|
10.22
|
Amended
and Restated Severance Protection Agreement, dated as of March 19, 2007,
by and between Century Aluminum Company and Robert R.
Nielsen*
|
10-K
|
000-27918
|
February
29, 2008
|
|
|
10.23
|
Amendment
No. 1 to Amended and Restated Severance Protection Agreement dated as of
December 1, 2008, by and between Century Aluminum Company and Robert R.
Nielsen*
|
X
|
|||
|
10.24
|
Severance
Protection Agreement, dated as of March 20, 2007, by and between Century
Aluminum Company and Giulio Casello*
|
X
|
|||
|
10.25
|
Amendment
No. 1 to Severance Agreement dated as of December 1, 2008, by and between
Century Aluminum Company and Giulio Casello*
|
X
|
|||
|
10.26
|
Non-Employee
Directors Stock Option Plan*
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
Exhibit
Index
|
|||||
|
Incorporated
by Reference
|
|||||
|
Exhibit
Number
|
Description
of Exhibit
|
Form
|
File
No.
|
Filing
Date
|
Filed
Herewith
|
|
10.27
|
Century
Aluminum Company Incentive Compensation Plan (Amended and Restated
Effective June 9, 2006)*
|
8-K
|
000-27918
|
June
14, 2006
|
|
|
10.28
|
Amended
and Restated 1996 Stock Incentive Plan*
|
8-K
|
000-27918
|
August
16, 2005
|
|
|
10.29
|
Form
of Stock Option Agreement – Employee*
|
10-K
|
000-27918
|
March
16, 2006
|
|
|
10.30
|
Form
of Stock Option Agreement – Non-Employee Director*
|
10-K
|
000-27918
|
March
16, 2006
|
|
|
10.31
|
Century
Aluminum Company Amended and Restated 1996 Stock Incentive Plan
Implementation Guidelines For Performance Share Awards (as amended June 8,
2006)*
|
8-K
|
000-27918
|
June
14, 2006
|
|
|
10.32
|
Century
Aluminum Company Supplemental Retirement Income Benefit
Plan*
|
10-Q
|
000-27918
|
May
14, 2002
|
|
|
10.33
|
First
Amendment of the Century Aluminum Company Supplemental Retirement Income
Benefit Plan*
|
10-K
|
000-27918
|
March
16, 2005
|
|
|
10.34
|
Second
Amendment of the Century Aluminum Company Supplemental Retirement Income
Benefit Plan*
|
10-Q
|
000-27918
|
August
9, 2005
|
|
|
10.35
|
Third
Amendment of the Century Aluminum Company Supplemental Retirement Income
Benefit Plan*
|
X
|
|||
|
10.36
|
Amended
and Restated Annual Incentive Plan*
|
8-K
|
000-27918
|
April
11, 2008
|
|
|
10.37
|
Long-Term
Incentive Plan*
|
8-K
|
000-27918
|
April
11, 2008
|
|
|
10.38
|
Form
of Long-Term Incentive Plan (Time-Vesting Performance Share Unit Award
Agreement)*
|
8-K
|
000-27918
|
April
11, 2008
|
|
|
10.39
|
Form
of Long-Term Incentive Plan (Performance Unit Award
Agreement)*
|
8-K
|
000-27918
|
April
11, 2008
|
|
|
10.40
|
Amended
and Restated Asset Purchase Agreement, dated as of December 13, 1988, by
and between Kaiser Aluminum & Chemical Corporation and Ravenswood
Acquisition Corporation
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
10.41
|
Acquisition
Agreement, dated as of July 19, 1995, by and between Virgin Islands
Alumina Corporation and St. Croix Alumina, L.L.C.
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
10.42
|
Ravenswood
Environmental Services Agreement, dated as of February 7, 1989, by and
between Kaiser Aluminum & Chemical Corporation and Ravenswood Aluminum
Corporation
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
10.43
|
Asset
Purchase Agreement, dated as of March 31, 2000, by and between Xstrata
Aluminum Corporation and Berkeley Aluminum, Inc.
|
8-K
|
000-27918
|
April
20, 2000
|
|
|
10.44
|
Form
of Tax Sharing Agreement
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
10.45
|
Form
of Disaffiliation Agreement
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
10.46
|
Amended
and Restated Owners Agreement, dated as of January 26, 1996, by
and between Alumax of South Carolina, Inc., Berkeley Aluminum, Inc. and
Glencore Primary Aluminum Company LLC
|
S-1
|
33-95486
|
March
28, 1996
|
|
|
10.47
|
Alumina
Supply Contract, dated as of April 26, 2006, by and between Century
Aluminum of West Virginia and Glencore AG.
|
8-K
|
000-27918
|
May
11, 2006
|
|
|
10.48
|
Alumina
Supply Contract, dated as of April 14, 2008, by and between Century
Aluminum Company and Glencore AG***
|
10-Q
|
000-27918
|
August
11, 2008
|
|
|
10.49
|
Amended
and Restated Toll Conversion Agreement, dated as of February 10, 2005, by
and between Nordural ehf and Glencore AG
|
10-Q
|
000-27918
|
August
9, 2005
|
|
|
10.50
|
Toll
Conversion Agreement 2, dated as of April 30, 2007 by and between Nordural
ehf and Glencore AG.***
|
10-Q
|
000-27918
|
August
9, 2007
|
|
|
10.51
|
Purchase
Agreement, dated as of May 17, 2004, among Kaiser Aluminum & Chemical
Corporation, Kaiser Bauxite Company, Gramercy Alumina LLC and St. Ann
Bauxite Limited**
|
10-Q
|
000-27918
|
November
9, 2004
|
|
|
10.52
|
General
Bond, dated as of February 10, 2005, by and between Nordural ehf. and
Kaupthing Bank hf., as security trustee
|
S-4/A
|
333-121729
|
February
11, 2005
|
|
|
Exhibit
Index
|
|||||
|
Incorporated
by Reference
|
|||||
|
Exhibit
Number
|
Description
of Exhibit
|
Form
|
File
No.
|
Filing
Date
|
Filed
Herewith
|
|
10.53
|
Loan
and Security Agreement, dated as of September 19, 2005, by and among Bank
of America, N.A., Century Aluminum Company, Berkeley Aluminum, Inc.,
Century Aluminum of West Virginia, Inc., Century Kentucky, Inc., and NSA
LTD
|
10-Q
|
000-27918
|
November
9, 2005
|
|
|
10.54
|
Amendment
No. 1 to Loan and Security Agreement, dated as of February 22, 2007, by
and among Bank of America, N.A., Century Aluminum Company, Berkeley
Aluminum, Inc., Century Aluminum of West Virginia, Inc., Century Kentucky,
Inc., and NSA LTD
|
X
|
|||
|
10.55
|
Termination
Agreement, dated as of July 7, 2008, by and between Century Aluminum
Company and Glencore, Ltd.
|
8-K
|
000-27918
|
July
8, 2008
|
|
|
10.56
|
Stock
Purchase Agreement, dated as of July 7, 2008, by and between Century
Aluminum Company and Glencore Investment Pty Ltd
|
8-K
|
000-27918
|
July
8, 2008
|
|
|
10.57
|
Standstill
and Governance Agreement, dated as of July 7, 2008, by and between Century
Aluminum Company and Glencore AG
|
8-K
|
000-27918
|
July
8, 2008
|
|
|
10.58
|
Registration
Rights Agreement, dated as of July 7, 2008, by and between Century
Aluminum Company and Glencore Investment Pty Ltd
|
8-K
|
000-27918
|
July
8, 2008
|
|
|
21.1
|
List
of Subsidiaries
|
X
|
|||
|
23.1
|
Consent
of Deloitte & Touche LLP
|
X
|
|||
|
24.1
|
Powers
of Attorney
|
X
|
|||
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification – Chief Executive
Officer
|
X
|
|||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification – Chief Financial
Officer
|
X
|
|||
|
32.1
|
Section
1350 Certifications
|
X
|
|||
____________________________
|
*
|
Management
contract or compensatory plan.
|
|
**
|
Schedules
and exhibits are omitted and will be furnished to the Securities and
Exchange Commission upon request.
|
|
***
|
Confidential
information was omitted from this exhibit pursuant to a request for
confidential treatment and filed separately with the Securities and
Exchange Commission.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Century
Aluminum Company
|
||
|
By:
|
/s/
Michael A. Bless
|
|
|
Michael
A. Bless
|
||
|
Executive
Vice-President and Chief Financial Officer
|
||
|
Dated:
March 2, 2009
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
LOGAN W. KRUGER
|
Chief
Executive Officer
|
March
2, 2009
|
||
|
Logan
W. Kruger
|
||||
|
/s/
MICHAEL A. BLESS
|
Executive
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
March
2, 2009
|
||
|
Michael
A. Bless
|
||||
|
/s/
STEVE SCHNEIDER
|
Senior
Vice President and Chief Accounting Officer and Controller (Principal
Accounting Officer)
|
March
2, 2009
|
||
|
Steve
Schneider
|
||||
|
*
|
Chairman
|
March
2, 2009
|
||
|
John
P. O’Brien
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
Jarl
Berntzen
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
Robert
E. Fishman
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
John
C. Fontaine
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
Catherine
Z. Manning
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
Peter
C. Jones
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
Willy
R. Strothotte
|
||||
|
*
|
Director
|
March
2, 2009
|
||
|
Jack
E. Thompson
|
||||
|
*By: /s/ ROBERT R. NIELSEN
Robert
R. Nielsen, as Attorney-in-fact
|
||||
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Century Aluminum Company:
We have
audited the consolidated financial statements of Century Aluminum Company and
subsidiaries (the "Company") as of December 31, 2008 and 2007, and for each of
the three years in the period ended December 31, 2008, and the Company's
internal control over financial reporting as of December 31, 2008, and have
issued our reports thereon dated February 27, 2009 (which report on the audit of
the consolidated financial statements expressed an unqualified opinion and
included an explanatory paragraph regarding the adoption of Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes); such consolidated financial statements and reports are included
elsewhere in this Form 10-K. Our audits also included the consolidated
financial statement schedule of the Company listed in Item 15. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
27, 2009
CENTURY
ALUMINUM COMPANY
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
|
Balance
at Beginning of Period
|
Charged
To Cost and Expense
|
Deductions
|
Balance
at End of Period
|
|||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
| YEAR ENDED DECEMBER 31, 2006: | ||||||||||||||||
|
Allowance
for doubtful trade accounts receivable
|
$ | 1,000 | $ | — | $ | — | $ | 1,000 | ||||||||
| YEAR ENDED DECEMBER 31, 2007: | ||||||||||||||||
|
Allowance
for doubtful trade accounts receivable
|
$ | 1,000 | $ | — | $ | — | $ | 1,000 | ||||||||
|
Deferred
tax asset - valuation allowance
|
$ | — | $ | 13,881 | $ | — | $ | 13,881 | ||||||||
| YEAR ENDED DECEMBER 31, 2008: | ||||||||||||||||
|
Allowance
for doubtful trade accounts receivable
|
$ | 1,000 | $ | — | $ | — | $ | 1,000 | ||||||||
|
Deferred
tax asset - valuation allowance
|
$ | 13,881 | $ | 544,128 | $ | — | $ | 558,009 | ||||||||
|
Inventory
– lower of cost or market reserve
|
$ | — | $ | 55,867 | $ | — | $ | 55,867 | ||||||||