CENX

Century Aluminum Co. 10-Q Summary (Q1 2009)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Century Aluminum Company is a producer of primary aluminum with operations in the U.S. (Ravenswood, Hawesville, Mt. Holly) and Iceland (Grundartangi). The company is currently facing severe headwinds due to depressed global aluminum prices, leading to significant operational curtailments and liquidity concerns.

Key Financial Metrics

Note: Q1 2008 figures have been retrospectively adjusted for the adoption of FSP APB 14-1 regarding convertible debt accounting.

Material Changes vs. Prior Period

• Revenue Decline: Net sales dropped 52.3% year-over-year, driven by a $157.6 million decrease due to lower LME aluminum prices and an $88.9 million decrease due to reduced shipment volumes from plant curtailments.
• Operational Curtailments: The company fully idled the Ravenswood smelter in February 2009 and one potline at Hawesville in March 2009. This resulted in $24.3 million in "Other operating expenses" related to severance, contract terminations, and idling costs.
• Derivative Losses: The massive net loss on forward contracts in Q1 2008 ($448.3 million) was due to mark-to-market adjustments on long-term aluminum contracts terminated in July 2008. Q1 2009 saw a significantly lower loss of $3.6 million, primarily related to Icelandic krona hedges and power contract derivatives.
• Liquidity Improvement: Cash balances increased by $138.1 million, primarily due to a $104.1 million net equity offering in February 2009 and $89.8 million in federal income tax refunds received.

Guidance, Outlook, and Risks

• Liquidity Outlook: Management states that if aluminum prices remain at current levels, liquidity is sufficient to fund operations through mid-2010. However, further price declines could necessitate additional curtailments or financing.
• Credit Rating: In April 2009, Moody's downgraded the company's credit rating to "Caa3" (from B2), citing high cash consumption and liquidity challenges. Standard & Poor's had previously downgraded the rating to "B" with a negative outlook.
• Capital Expenditures: CapEx for 2009 is expected to be $15–$20 million, a significant reduction from 2008. Spending on the Helguvik greenfield project has been reduced to approximately $20 million pending a review of the project's scope and schedule.
• Legal Contingencies: Four stockholder class actions were filed in March 2009 alleging improper accounting for cash flows related to terminated forward contracts. These seek rescission of the February 2009 stock offering and unspecified damages.
• Power Costs: Appalachian Power Company (APCo) filed for a 43% rate increase for Ravenswood, which could further impact costs if approved.

Investor Verification Checklist

• Aluminum Price Sensitivity: Verify current LME aluminum prices against the company's break-even cost of production to assess the viability of the "mid-2010" liquidity runway.
• Debt Covenants: Review the specific covenants in the $100 million revolving credit facility and senior notes to ensure compliance given the recent credit rating downgrades.
• Legal Proceedings: Monitor the status of the four stockholder class actions regarding the accounting of forward contract terminations.
• Power Contract Renewals: Track the regulatory approval status of the new long-term power contract for Hawesville, which is expected to provide a $45 million cash payment upon closing.
• Joint Venture Performance: Assess the operational status of Gramercy Alumina and St. Ann Bauxite, which are operating at reduced capacity (approx. 50-60%).