Century Aluminum Company — FY 2016 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. Century produces primary aluminum at smelters in the United States and Iceland and reports one segment. Annual capacity was approximately 1.012 million tonnes; 2016 production was approximately 738,000 tonnes. Hawesville operated at about 40% capacity and Mt. Holly at 50%, while other operating smelters were near capacity.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1.319 billion | $1.950 billion |
| Gross profit (loss) | ($11.0 million); approximately -0.8% margin | $41.3 million; approximately 2.1% margin |
| Operating income (loss) | ($234.2 million) | ($39.1 million) |
| Net income (loss) | ($252.4 million) | ($59.3 million) |
| Diluted loss per share | ($2.90) | ($0.68) |
| Cash from operations | $38.2 million | $31.9 million |
| Capital expenditures | $21.9 million | $54.7 million |
| Cash and cash equivalents | $132.4 million | $115.4 million |
| Total debt | $255.5 million | $255.1 million |
Net sales fell approximately 32% year over year. Management attributed $400.7 million of the decline to lower shipment volumes following production curtailments and $230.1 million to lower aluminum price realization. Shipments fell to 733,825 tonnes, including direct and toll shipments. Average LME aluminum price declined to $1,604 per tonne from $1,663; the U.S. Midwest premium fell to $169 from $279.
Cash increased by $17.0 million during 2016. The company reported no year-end borrowings under its revolving facilities and approximately $100.1 million of net availability across its U.S. and Iceland facilities, subject to borrowing-base limits. Its $250 million principal amount of 7.5% senior secured notes matures in 2021; reported debt also includes $7.8 million of industrial revenue bonds. The filing reports no dividends in 2016 or 2015 and no plan for cash dividends in the foreseeable future.
Material changes and unusual items
- Century recorded a $152.2 million impairment of the Helguvik project after an arbitration ruling found its HS Orka power agreement no longer in force. Construction remains curtailed.
- Ravenswood charges totaled $26.8 million in 2016, including a $23.0 million provision for a retiree medical settlement and a $3.8 million asset impairment. The company completed the sale of the facility and assets for $15.0 million in January 2017.
- 2016 results also included a $6.9 million unfavorable charge for discrete tax items, partly offset by a $2.2 million favorable inventory valuation adjustment.
- Fourth-quarter 2016 net loss was $168.5 million, including the Helguvik impairment; the comparable quarter’s net loss was $43.1 million.
- Net property, plant and equipment declined to $1.026 billion from $1.232 billion, largely reflecting impairment and depreciation. The company reported a $839.1 million valuation allowance against U.S. and certain Icelandic deferred tax assets; federal net operating loss carryforwards were approximately $1.51 billion.
Outlook, commentary, risks and contingencies
The filing gives no quantified earnings, production or cash-flow guidance. Management emphasizes that results depend heavily on aluminum prices and premiums, power and raw-material costs, and production volumes. It describes continued Chinese overcapacity and exports, volatile commodity prices, and competitive power access as significant risks.
- Mt. Holly power: The plant’s cost-based Santee Cooper supply covers 25% of its power requirements, with the remainder tied to market prices. Century filed an antitrust lawsuit against Santee Cooper in January 2017 seeking damages and access to open-market power. The filing warns that continued uncompetitive power terms could lead to further curtailment or closure.
- Customer concentration: Glencore accounted for approximately 89% of 2016 net sales and owns 42.9% of common stock (47.5% on a fully diluted basis). The 2015–2016 U.S. sales agreement expired at year-end; new agreements cover substantial North American production and substantially all Grundartangi production through 2017.
- Helguvik and power commitments: The project’s future is uncertain, with approximately $11.9 million of accrued cancellation and other liabilities and potential additional costs or take-or-pay exposure. A portion of Grundartangi power supply is scheduled to move to Nord Pool market pricing in November 2019.
- Liquidity and obligations: Fixed costs and certain take-or-pay commitments continue during curtailments. Contractual obligations include $1.881 billion of purchase obligations over multiple years, as well as debt service, pension and postretirement obligations. The filing says financing access depends on market conditions and the company’s financial condition.
- Other exposures: Risks include energy and raw-material cost increases, labor disputes, operational or power interruptions, environmental liabilities, foreign-exchange and Iceland-related risks, and limits on using tax attributes if an ownership change occurs. The Ravenswood settlement is subject to final court approval; other disclosed litigation outcomes and some environmental losses cannot be estimated clearly.
Most important facts for investors to verify
- Current aluminum prices, Midwest and European premiums, alumina costs, and whether the company’s cost base supports profitable production.
- Progress and outcome of the Santee Cooper litigation, Mt. Holly’s power arrangements, and any resulting changes in operating capacity.
- Glencore contract terms, renewal or replacement arrangements after 2017, and continued dependence on this customer and shareholder.
- Helguvik’s remaining obligations and any further impairment, cancellation costs, or decision to resume or abandon the project.
- Available borrowing capacity under the borrowing-base facilities, cash needs during curtailments, and ability to meet debt, pension, and contractual commitments.
- Final court approval and payment schedule for the Ravenswood retiree medical settlement, plus developments in other legal and environmental matters.