CENX

Century Aluminum Company - 10-Q Summary (Period Ended September 30, 2010)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2010, and the nine-month period ended on the same date. Century Aluminum Company is a primary aluminum producer with operations in the United States (Hawesville, Kentucky; Ravenswood, West Virginia) and Iceland (Grundartangi). The company operates under a "take-or-pay" power contract at Hawesville and maintains a significant portion of its production capacity in a curtailed state at Ravenswood.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 22.1% for the quarter and 32.7% for the nine-month period compared to 2009, driven primarily by higher LME aluminum prices.
• Profitability Improvement: The company returned to profitability on a gross basis ($15.8M gross profit vs. $2.4M loss in Q3 2009) and operating income ($0.2M vs. $41.9M in Q3 2009, though 2009 included a one-time gain). The nine-month net loss narrowed significantly to $5.3 million from $181.6 million in 2009.
• Derivative Losses: A net loss on forward contracts of $12.1 million in Q3 2010 (vs. $0.9 million in Q3 2009) impacted earnings, primarily due to mark-to-market adjustments on aluminum put options.
• Curtailment Costs: Other operating expenses included $3.1 million in curtailment charges for Q3 2010, down from $1.8 million in Q3 2009, but significantly lower than the $35.3 million incurred in the first nine months of 2009.
• Joint Venture Impact: The massive loss in 2009 included a $73.2 million impairment charge on joint ventures (Gramercy and St. Ann), which was not present in 2010.

Guidance, Outlook, and Risks

• Labor Disputes: A contract proposal for the Hawesville smelter was not ratified by the USWA in late October 2010. Negotiations are ongoing, and the plant continues to operate normally.
• Ravenswood Restructuring: The company eliminated retiree medical benefits effective January 2011 to restructure costs at the curtailed Ravenswood facility, aiming to position it for a potential restart. This resulted in a $39 million reduction in postretirement benefit liabilities.
• Liquidity: The company secured a new $100 million revolving credit facility in July 2010, maturing in 2014. As of September 30, 2010, there were no borrowings, with approximately $83 million in availability.
• Helguvik Project: Construction on the Helguvik project in Iceland faces delays due to power contract conditions. The company is pursuing arbitration regarding power supply terms. Cancellation costs are estimated at $25–$35 million.
• Legal Contingencies: Pending securities litigation regarding accounting for forward contracts remains unresolved. Environmental investigations by the EPA at Hawesville are ongoing but are not expected to be material.

Investor Verification Checklist

• Power Contract Viability: Verify the status of the Hawesville power contract negotiations and the outcome of the Helguvik power arbitration, as these are critical to operational costs and expansion.
• Labor Agreement Status: Monitor the resolution of the Hawesville labor dispute to assess the risk of a strike or production disruption.
• Derivative Exposure: Review the impact of aluminum price volatility on the company's put option contracts, which caused significant mark-to-market losses in Q3.
• Debt Covenants: Confirm compliance with the new credit facility covenants, particularly regarding liquidity and borrowing base limitations tied to accounts receivable and inventory.
• Ravenswood Restart Potential: Assess the feasibility of restarting the Ravenswood smelter given the recent benefit plan changes and the new West Virginia special power rate legislation.