CENTURY ALUMINUM COMPANY
This Management's Discussion and Analysis ("MD&A") provides information that
management believes is relevant to an assessment and understanding of the
consolidated financial condition and results of operations of Century Aluminum
Company and its subsidiaries (collectively, "Century," the "Company," "our" and
"we") and should be read in conjunction with the accompanying consolidated
financial statements and related notes thereto in Item 8. Financial Statements
and Supplementary Data and in Item 1A. Risk Factors . This MD&A contains
"forward-looking statements" - See "Forward-Looking Statements" above.
Overview
We are a global producer of primary aluminum with aluminum reduction facilities,
or "smelters," in the United States and Iceland . The key determinants of our
results of operations and cash flow from operations are as follows:
•the price of primary aluminum, which is based on the London Metal Exchange
("LME") and other exchanges, plus any regional premiums and value-added product
premiums;
•the cost of goods sold, the principal components of which are electrical power,
alumina, carbon products and labor, which in aggregate represent more
than 75% of our cost of goods sold; and
•our production volume.
COVID-19 Update
In response to the COVID-19 pandemic, we have taken a number of actions to
protect the health and well-being of our employees and to prevent the spread of
COVID-19 within our operations. As a result, our plants have not experienced any
disruption in operations as a result of the pandemic, and we continue to sell
all of our metal essentially as it is cast.
The COVID-19 pandemic has disrupted the global economy and created significant
volatility in the primary aluminum industry. Such adverse impacts to the global
market include the drop in the LME price for primary aluminum to $1,457 in April
2020 from $1,772 at the start of 2020. However, we have seen some measurable
improvement in the global market for primary aluminum along with an increase in
the price for our product and a return to more stability in the market in which
we operate in recent months. The LME price for primary aluminum averaged $1,702
per tonne for 2020 as compared to an average of $1,792 for 2019, due in part to
the impacts that COVID-19 had on the LME price during 2020. Because we sell our
product on a one- to three-month lag to current prices, our results reflect the
LME price on this one to three month lag basis. Customer demand for value-added
aluminum products and, in turn, the product premium we receive for such
products, also have generally returned to first quarter 2020 levels after having
been negatively impacted by the COVID-19 pandemic. Decreases in the prices of
our products have also been partially offset by decreases in the prices of our
key cost inputs.
We have taken actions to mitigate the financial impact of the COVID-19 pandemic,
including reducing discretionary spending, optimizing working capital and
deferring non-essential capital projects. The potential future impact of the
COVID-19 pandemic on our business, results of operations and financial
performance is difficult to predict and will depend on future developments, and
such effects could exist for an extended period of time. See I tem 1A. Risk
Factors for additional information on the potential risks associated with the
COVID-19 pandemic.
Pricing of aluminum
The overall price of primary aluminum consists of three components: (i) the base
commodity price, which is based on quoted prices on the LME and other exchanges;
plus (ii) any regional premium (e.g., the Midwest premium for metal sold in the
United States ("MWP") and the European Duty Paid premium for metal sold into
Europe ); plus (iii) any product premium. Each of these price components has its
own drivers and variability.
The aluminum price is influenced by a number of factors, including global
supply-demand balance, inventory levels, speculative activities by market
participants, production activities by competitors and political and economic
conditions, as well as production costs in major production regions. These
factors can be highly speculative and difficult to predict which can lead to
significant volatility in the aluminum price. Increases or decreases in primary
aluminum prices result in increases and decreases in our revenues (assuming all
other factors are unchanged). Information regarding financial contracts is
included in Note 19. Derivatives.
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--------------------------------------------------------------------------------The historic volatility of the price of aluminum is reflected in the chart below:
[[Image Removed: cenx-20201231_g3.jpg]]
The average LME price for primary aluminum was $1,702 per tonne in 2020,
compared to $1,792 per tonne in 2019, and $2,110 in 2018. The average MWP price
was $267 per tonne in 2020 compared to $396 per tonne in 2019 and $420 per tonne
in 2018. The average European Duty Paid premium was $126 per tonne in 2020
compared to $142 per tonne in 2019 and $164 per tonne in 2018. We did see a
decline in LME, MWP, and European Duty Paid premium prices beginning in the
first half of 2020, with the LME price for primary aluminum falling from $1,772
per tonne, MWP price of $320 per tonne, and European Duty Paid premium price of
$140 per tonne as of January 2, 2020 to $1,433 , $176 , and $98 , respectively by
May 15, 2020 . There were improvements in the global markets through the second
half of 2020 resulting in an increase in LME, MWP and European Duty Paid premium
prices by the end of 2020, with the LME price for primary aluminum at $1,978 per
tonne, MWP price at $323 per tonne and European Duty Paid premium at $150 per
tonne as of December 31, 2020 .
Energy, Key Supplies and Raw Materials
Our operating costs are significantly impacted by changes in the prices of the
materials used in the production of aluminum, including alumina, electrical
power and carbon products. Because we sell our products based principally on the
LME price for primary aluminum, regional premiums and product premiums, we are
unable to pass increased production costs on to our customers. Although we
attempt to mitigate the effects of price fluctuations from time to time through
the use of various fixed-price commitments, financial instruments and also by
negotiating LME-based pricing in some of our raw materials and electrical power
contracts, these efforts also limit our ability to take advantage of favorable
changes in the market prices for primary aluminum or raw materials and may
affect our financial position, results of operations and cash flows.
Alumina and electrical power represent the two largest components of our cost of
goods sold. As a result, the availability of these cost components at
competitive prices is critical to the profitability of our operations. The
pricing under our alumina supply contracts is variable. A major portion of our
alumina requirements is indexed to the price of primary aluminum, which provides
a natural hedge to one of our largest production costs. We also purchase alumina
based on a published alumina index and at fixed prices. The alumina price is
influenced by a number of factors, including global supply-demand balance and
other factors outside of our control. Various external events in the alumina
markets during 2018 caused significant increases in the price of alumina
resulting in the ratio of alumina prices to aluminum prices to well exceed
historical levels, which persisted throughout 2018 and much of 2019. By the end
of 2019, the relationship between alumina and aluminum prices returned to
historical levels following the resolution of these supply dislocations and
remained stable during 2020. The average market
27
--------------------------------------------------------------------------------alumina index price as a percentage of market LME price per tonne for 2020 was 16% compared to 19% for 2019 and 22% for 2018.
Electrical power is our other largest operating cost. Currently, our Hawesville and Sebree plants receive all of their electricity requirements under market-based power agreements. In the U.S., market-based energy prices are driven in large part by coal, natural gas, wind, and other fuel sources, as well as weather influenced electric loads. Extreme weather events, such as that experienced inmid-February 2021 throughoutthe United States , can result in power outages and/or significant increases in demand, which can result in significant increased power costs incurred in our operations. Our Mt. Holly aluminum smelter is currently party to both a power agreement with a third party supplier (providing 75% of Mt. Holly's power) and withSantee Cooper (supplying 25% of Mt. Holly's power) to supply the Mt. Holly smelter with all its power needs. Both of these power agreements were set to expire onDecember 31, 2020 but were extended throughMarch 31, 2021 as we finalize a new, three-year power arrangement withSantee Cooper that is expected to be effectiveApril 1, 2021 . It is expected that under the new power contract withSantee Cooper , 100% of Mt. Holly's electrical power requirements will be supplied fromSantee Cooper's generation at cost of service based rates. The new contract withSantee Cooper is expected to provide sufficient energy to allow the smelter to increase its current production to 75% of Mt. Holly's full production capacity. If we are unable to finalize this proposed new power contract withSantee Cooper and obtain all necessary government approvals, we may choose, or be forced, to further curtail operations at the plant. See Item 1A. Risk Factors . InIceland , approximately 70% of the power requirements for our Grundartangi plant is indexed to the price of primary aluminum, which provides a natural hedge of one of our largest production costs. SinceNovember 2019 , the price of the remaining 30% of Grundartangi's power requirements has been linked to the market price for power in theNord Pool power market, the trading market for power in the Nordic countries and certain other areas ofEurope . Production/Shipment Volumes Shipment volume is another key determinant of our financial results. In normal circumstances, fluctuations in production and shipment volumes, other than through acquisitions or expansions, are generally small period over period. Any adverse changes in the conditions that affect shipment volumes could have a material adverse effect on our results of operations and cash flows. The following table sets forth, for the periods indicated, the shipment volumes and revenues for primary aluminum shipments: SHIPMENTS - PRIMARY ALUMINUM(1) United States Iceland Total Tonnes Revenue $ Tonnes Revenue $ Tonnes Revenue $ (dollars in millions) 2020 495,433$ 985.3 315,743$ 570.8 811,176$ 1,556.1 2019 495,096 1,143.8 316,148 628.3 811,244 1,772.1 2018 428,389 1,126.4 321,461 752.3 749,850 1,878.7 (1) Excludes scrap aluminum and alumina sales Results of Operations The following discussion for the year endedDecember 31, 2020 reflects restart activity at Hawesville and no change in production capacities at our other operating facilities. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net sales: Net sales (excluding alumina sales) decreased by$220.2 million for the twelve months endedDecember 31, 2020 , compared to the same period in 2019, primarily driven by unfavorable LME and regional premium price realizations of$188.6 million and unfavorable volume and product mix of$31.6 million . 28 -------------------------------------------------------------------------------- Gross profit (loss): Gross loss increased by$12.6 million for the twelve months endedDecember 31, 2020 , compared to the same period in 2019, primarily driven by unfavorable LME and regional premium price realizations of$188.6 million . The increases to gross loss were offset by favorable raw material price realizations of$178.6 million . Selling, general and administrative expenses: Selling, general and administrative expenses decreased$3.9 million in 2020 compared to 2019, primarily due to decreases in compensation cost in the current year, partially offset by increases in professional fees. Net (gain) loss on forward and derivative contracts: In 2020, we recognized losses of$17.3 million primarily related to LME, MWP andNord Pool fixed forward financial sales contracts. The losses were primarily driven by fluctuations in forward prices. In 2019, we had recognized gains of$12.0 million primarily related to LME and MWP fixed forward financial sales contracts. The gains were primarily driven by decreases in the LME and MWP prices during 2019. Income tax expense (benefit): We have a valuation allowance against all of ourU.S. and certain foreign deferred tax assets. We recognized a$3.1 million income tax benefit in 2020 as compared to income tax benefit of$8.4 million in 2019. The decrease in income tax benefit year over year primarily relates to an increase in earnings of certain of our foreign entities. Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net sales: Net sales for the twelve months endedDecember 31, 2019 decreased$56.6 million compared to the same period in 2018, driven by lower price realizations of$249.5 million primarily resulting from decreases in the LME price offset by$136.2 million in favorable volume and product mix year over year. Gross profit: Gross profit for the twelve months endedDecember 31, 2019 decreased$1.0 million compared to the same period in 2018, driven primarily by lower price realizations of$249.5 million due to decreases in the LME. The decrease to gross profit is offset by favorable price realizations of alumina and other raw materials of$170.7 million , power price realizations of$47.2 million , volume and product mix of$24.2 million , and operating expenses of$5.6 million . Selling, general and administrative expenses: Selling, general and administrative expenses decreased$7.2 million in 2019 compared to 2018, primarily due to increases in compensation cost in the current year (favorable stock compensation expense in 2018, reflecting our lower stock price). Net (gain) loss on forward and derivative contracts: In 2019, we recognized gains of$12.0 million primarily related to LME and MWP fixed forward financial sales contracts. The gains were primarily driven by decreases in the LME and MWP prices during 2019. In 2018, we recognized gains of$6.3 million primarily related toNord Pool and LME fixed forward financial sales contracts which settle fromNovember 2019 throughDecember 2020 . These gains were primarily driven by the increase in theNord Pool price. Income tax expense (benefit): We have a valuation allowance against all of ourU.S. and certain foreign deferred tax assets. We recognized an$8.4 million income tax benefit in 2019 as compared to income tax benefit of$0.2 million in 2018. The increase in income tax benefit year over year primarily relates to a decrease in earnings of certain of our foreign entities. Liquidity and Capital Resources Liquidity Our principal sources of liquidity are available cash and cash flow from operations. We also have access to our existing revolving credit facilities and have raised capital in the past through public equity and debt markets. We regularly explore various other financing alternatives. Our principal uses of cash include the funding of operating costs (including post-retirement benefits), debt service requirements, capital expenditures, investments in our growth activities and in related businesses, working capital and other general corporate requirements. We believe that cash provided from operations and financing activities will be adequate to cover our operations and business needs over the next 12 months. As ofDecember 31, 2020 , we had cash and cash equivalents of approximately$81.6 million and unused availability under our revolving credit facilities of$100.6 million , resulting in a total liquidity position of approximately$182.2 million . 29
-------------------------------------------------------------------------------- Adverse changes in the price of aluminum or our principal costs of production could materially impact our ability to generate and raise cash. Furthermore, the COVID-19 pandemic could continue to impact the economy which may impact the price of our products as well as our ability to access capital and/or the terms under which we can do so. In 2020, we took preemptive action to preserve our liquidity and manage our cash flow. Such actions include reducing discretionary spending, optimizing working capital and deferring non-essential capital projects. To preserve liquidity in light of the uncertainty in the global markets due to COVID-19, inMarch 2020 , we drew down a total of$90.0 million under ourU.S. andIceland revolving credit facilities. We have since repaid$45.0 million on ourU.S. revolving credit facility. As ofDecember 31, 2020 , the remaining outstanding borrowings on theIceland revolving credit facility were$45.0 million . We also effectively extended the maturities of our principal debt obligations. OnJuly 1, 2020 , we issued$250.0 million in aggregate principal amount of our senior secured notes that will mature in 2025 (the "2025 Notes") and used the proceeds, together with cash on hand, to purchase all of our 7.5% senior secured notes that were set to mature in 2021 (the "2021 Notes"). In connection with the offering of the 2025 Notes, we also entered into Amendment No.1 to ourU.S. revolving credit facility extending the maturity date toMay 16, 2023 . As the impact of the COVID-19 pandemic on the economy and our operations is fluid and constantly evolving, we will continue to assess a variety of measures to improve our financial performance and liquidity. See
Item 1A. Risk Factors for additional information.
Available Cash Our available cash and cash equivalents balance atDecember 31, 2020 was$81.6 million compared to$38.9 million atDecember 31, 2019 . Sources and Uses of Cash Our cash flows from operating, investing and financing activities as reflected in the consolidated statement of cash flows for the twelve months endedDecember 31, 2020 , 2019 and 2018 are summarized below: Twelve
months ended
2020 2019 2018
(dollars in millions)
Net cash provided by (used in) operating activities $ 42.9 $ 17.7 $ (69.1)
Net cash (used in) investing activities (11.8) (38.8) (82.9)
Net cash provided by financing activities 13.5 21.1 23.7
Change in cash, cash equivalents and restricted cash
$ -
Year Ended
Net cash provided by operating activities for 2020 was$42.9 million , compared to$17.7 million for 2019. The increase in net cash provided by operating activities was primarily driven by improvements in working capital. The improvements in working capital were primarily attributable to timing of raw material receipts and the timing of trade receivable collections, offset by increasing raw material prices. The decrease in net cash used in investing activities during 2020 was due to lower capital expenditures related to Hawesville restart activities and deferral of capital projects in response to COVID-19. Net cash provided by financing activities decreased by$7.6 million during 2020 primarily due to payments made on our term loan withGlencore Ltd. ("the Hawesville Term Loan"), offset by net borrowings on ourU.S. revolving credit facility andIceland revolving credit facility. Borrowings on our revolving credit facilities are available, if needed, for working capital requirements, general corporate or other purposes. Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Net cash provided by operating activities for 2019 was$17.7 million , compared to net cash used in operating activities of$69.1 million for 2018. The increase in net cash provided by operating activities was primarily driven by lower inventory costs and a decrease in accounts receivable due to timing of receivable collections. 30 -------------------------------------------------------------------------------- The decrease in net cash used in investing activities was due to lower capital expenditures related to Hawesville restart activities and the receipt of$20.8 million from the sale of our interest inBaise Haohai Carbon Co., Ltd. ("BHH"), a former joint venture withGuangxi Qiangqiang Carbon Co., Ltd. ("GQQ") during 2019. Net cash provided by financing activities decreased by$2.6 million during 2019 due to lower net borrowings under ourU.S. revolving credit facility, offset by proceeds from the Hawesville Term Loan. Borrowings on ourU.S. revolving credit facility are short term in nature to fund working capital requirements and are repaid on a continuous basis. Borrowings on our Hawesville Term Loan are required to be paid ratably over 24 months beginning inJanuary 2020 and are used to partially finance the second phase of the Hawesville restart project. Availability Under Our Credit Facilities TheU.S. revolving credit facility, datedMay 2018 , provides for borrowings of up to$175.0 million in the aggregate including up to$110.0 million under a letter of credit sub-facility, and also includes an uncommitted accordion feature whereby borrowers may increase the capacity of theU.S. revolving credit facility by up to$50.0 million , subject to agreement with the lenders. TheU.S. revolving credit facility matures inMay 2023 . Any letters of credit issued and outstanding under theU.S. revolving credit facility reduce our borrowing availability on a dollar-for-dollar basis. We have also entered into, through our wholly-owned subsidiary Nordural Grundartangi ehf ("Grundartangi"), a$50.0 million revolving credit facility, datedNovember 2013 , as amended (the "Iceland revolving credit facility"). TheIceland revolving credit facility matures inNovember 2022 . The availability of funds under our credit facilities is limited by a specified borrowing base consisting of certain accounts receivable, inventory and qualified cash deposits which meet the lenders' eligibility criteria. Increases in the price of aluminum and/or restarts of previously curtailed operations, for example, increase our borrowing base by increasing our accounts receivable and inventory balances; decreases in the price of aluminum and/or curtailments of production capacity would decrease our borrowing base by reducing our accounts receivable and inventory balances. As ofDecember 31, 2020 , ourU.S. revolving credit facility had a borrowing base of$129.9 million , no outstanding borrowings, and$34.3 million in letters of credit outstanding. Of the outstanding letters of credit,$16.2 million related to our power commitments and the remainder are primarily for the purpose of securing secured certain debt and workers' compensation commitments. As ofDecember 31, 2020 , ourIceland revolving credit facility had a borrowing base of$50.0 million and$45.0 million in outstanding borrowings. As ofDecember 31, 2020 , our credit facilities had$100.6 million of net availability after consideration of our outstanding borrowings and letters of credit. We may borrow and make repayments under our credit facilities in the ordinary course based on a number of factors, including the timing of payments from our customers and payments to our suppliers. Our credit facilities contain customary covenants, including restrictions on mergers and acquisitions, indebtedness, affiliate transactions, liens, dividends and distributions, dispositions of collateral, investments and prepayments of indebtedness, including in theU.S. revolving credit facility, a springing financial covenant that requires us to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 any time availability under theU.S. revolving credit facility is less than or equal to$17.5 million , or 10% of the borrowing base but not less than$12.5 million . We intend to maintain availability to comply with these levels any time we would not meet the ratio, which could limit our ability to access the full amount of our availability under ourU.S. revolving credit facility. OurIceland revolving credit facility contains a covenant that requires Grundartangi to maintain a minimum equity ratio. As ofDecember 31, 2020 , we were in compliance with all such covenants or maintained availability above such covenant triggers. Senior Secured Notes We have$250.0 million aggregate principal of senior secured notes that will mature onJuly 1, 2025 (the "2025 Notes"), unless earlier refinanced in accordance with their terms. Interest on the 2025 Notes is payable semi-annually onJanuary 1 andJuly 1 of each year, beginning onJanuary 1, 2021 , at a rate of (i) 10.00% per annum in cash and (ii) 2.00% per annum in the form of additional notes or in cash, at Century's option. The indenture governing the 2025 Notes contains customary covenants which may limit our ability, and the ability of certain of our subsidiaries, to: (i) incur additional debt; (ii) incur additional liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) purchase or redeem capital stock; (v) make investments or certain other restricted payments; (vi) sell assets; (vii) issue or sell stock of certain subsidiaries; (viii) enter into transactions with shareholders or affiliates; and (ix) effect a consolidation or merger. 31 -------------------------------------------------------------------------------- We applied the net proceeds from the offering of the 2025 Notes described above, together with cash on hand, toward payment of the total consideration amount to holders whose 2021 Notes were accepted and purchased in the tender offer and to fund the redemption of any remaining 2021 Notes. As a result, the Company's and the guarantors' obligations under the indenture governing the 2021 Notes have been fully discharged. Hawesville Term Loan OnApril 29, 2019 , we entered into a term loan agreement withGlencore Ltd. pursuant to which the Company borrowed$40.0 million . Borrowings under the Hawesville Term Loan were used to partially finance the second phase of the Hawesville restart project. The Hawesville Term Loan matures onDecember 31, 2021 , and is being repaid in 24 equal monthly installments of principal that began onJanuary 31, 2020 . The Hawesville Term Loan bears interest, due monthly, at a floating rate equal to LIBOR plus 5.375% per annum. The Hawesville Term Loan is not secured by any collateral. As ofDecember 31, 2020 , the outstanding balance of the Hawesville Term Loan was$20.0 million . Contingent Commitments We have a contingent obligation in connection with the "unwind" of a contractual arrangement between Century Aluminum Kentucky ("CAKY"), Big Rivers and a third party and the execution of a long-term cost-based power contract withKenergy , a member of a cooperative of Big Rivers, inJuly 2009 . This contingent obligation consists of the aggregate payments made to Big Rivers by the third party on CAKY's behalf in excess of the agreed upon base amount under the long-term cost-based power contract withKenergy . As ofDecember 31, 2020 , the principal and accrued interest for the contingent obligation was$26.6 million , which was fully offset by a derivative asset. We may be required to make installment payments for the contingent obligation in the future. These payments are contingent based on the LME price of primary aluminum and the level of Hawesville's operations. Based on the LME forward market atDecember 31, 2020 and management's estimate of the LME forward market beyond the quoted market period, we believe that we will not be required to make payments on the contingent obligation during the term of the agreement, which expires in 2028. There can be no assurance that circumstances will not change thus accelerating the timing of such payments. Employee Benefit Plan Contributions In 2013, we entered into a settlement agreement with thePension Benefit Guaranty Corporation ("PBGC") regarding an alleged "cessation of operations" at our Ravenswood facility. Pursuant to the terms of the agreement, we agreed to make additional contributions (above any minimum required contributions) to our defined benefit pension plans totaling approximately$17.4 million . Under certain circumstances, in periods of lower primary aluminum prices relative to our cost of operations, we are able to defer one or more of these payments, but would then be required to provide the PBGC with acceptable security for deferred payments. We did not make any contributions during the years endedDecember 31, 2020 , 2019 and 2018. We have elected to defer certain payments under the PBGC agreement and have provided the PBGC with the appropriate security. The remaining contributions under this agreement are approximately$9.6 million . Section 232 Aluminum Tariff OnMarch 23, 2018 , theU.S. implemented a 10% tariff on imported primary aluminum products into theU.S. These tariffs are intended to protectU.S. national security by incentivizing the restart of primary aluminum production in theU.S. , reducing reliance on imports and ensuring that domestic producers, like Century, can supply all the aluminum necessary for critical industries and national defense. In addition to primary aluminum products, the tariffs also cover certain other semi-finished products. All imports that directly compete with our products are covered by the tariff, with the exception of imports fromAustralia ,Argentina ,Canada , andMexico or imports that receive a product exclusion from theDepartment of Commerce . Other Items InDecember 2020 , we announced a preliminary agreement withSantee Cooper on a new three year power agreement that is expected to be effective onApril 1, 2021 . This new power contract is expected to provide sufficient energy to allow the smelter to increase its production to 75% of Mt. Holly's full production capacity. We anticipate spending approximately$50.0 million in 2021 to bring Mt. Holly's annualized production capacity to 170,000 tonnes. For certain risks related to the anticipated restart, see Item 1A. Risk Factors . InMarch 2018 , we announced our intention to return our Hawesville smelter, which since 2015 had been operating at approximately 40% capacity, to full production and upgrade its existing reduction technology. The first phase of the project, 32
-------------------------------------------------------------------------------- which involved the restart of the three potlines and approximately 150,000 tonnes of production capacity that had been curtailed in 2015, was successfully completed on budget and ahead of schedule in early 2019. The second phase of the project involves the rebuilding of the pots from the two potlines that had continued to operate past their expected life cycle and the implementation of certain new technology across all production. These two potlines were taken out of production in February andSeptember 2019 , respectively. The rebuild of the first of these potlines was completed in the second quarter of 2020. With the restart of this potline, the Hawesville smelter is currently operating at approximately 80% production capacity, with total project costs to date of approximately$108.3 million . The rebuild of the fifth and final potline and the completion of the technology upgrades is expected to be completed over the next several years, subject to market conditions. InMay 2018 , we temporarily curtailed one potline at our Sebree aluminum smelter due to an equipment failure. Sebree was returned to full capacity by the end of the third quarter of 2018. As ofDecember 31, 2020 , we received$19.9 million of insurance proceeds. InJanuary 2021 , the claims process was concluded and a final payment of$1.4 million of insurance proceeds was received onJanuary 21, 2021 . In 2011, our Board of Directors approved a$60.0 million common stock repurchase program and subsequently increased this program by$70.0 million in the first quarter of 2015. Under the program, Century is authorized to repurchase up to$130.0 million of our outstanding shares of common stock, from time to time, on the open market at prevailing market prices, in block trades or otherwise. The timing and amount of any shares repurchased will be determined by our management based on its evaluation of market conditions, the trading price of our common stock and other factors. We made no repurchases during the years ended 2020, 2019, and 2018. As ofDecember 31, 2020 , we had$43.7 million remaining under the repurchase program authorization. The repurchase program may be expanded, suspended or discontinued by our Board, in its sole discretion, at any time. InNovember 2009 ,Century Aluminum of West Virginia, Inc. ("CAWV") filed a class action complaint for declaratory judgment against the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial andService Workers International Union ("USW"), the USW's local and certain CAWV retirees, individually and as class representatives ("CAWV Retirees"), seeking a declaration of CAWV's rights to modify/terminate retiree medical benefits. Later inNovember 2009 , the USW and representatives of a retiree class filed a separate suit against CAWV,Century Aluminum Company , Century Aluminum Master Welfare Benefit Plan, and various John Does with respect to the foregoing. OnAugust 18, 2017 , theDistrict Court for the Southern District of West Virginia approved a settlement agreement in respect of these actions, pursuant to which, CAWV agreed to make payments into a trust for the benefit of the CAWV Retirees in the aggregate amount of$23.0 million over the course of ten years. Upon approval of the settlement, we paid$5.0 million to the aforementioned trust inSeptember 2017 and agreed to pay the remaining amounts under the settlement agreement in annual increments of$2.0 million for nine years. AtDecember 31, 2020 , we had$2.0 million in other current liabilities and$7.5 million in other liabilities related to this agreement. 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 Note 15. Commitments and Contingencies to the consolidated financial statements included herein for additional information. Capital Resources We intend to finance our future capital expenditures from available cash, cash flow from operations and if necessary, borrowings under our existing revolving credit facilities. For major investment projects, we would likely seek financing from various capital and loan markets and may potentially pursue the formation of strategic alliances. We may be unable, however, to issue additional debt or equity securities, or enter into other financing arrangements on attractive terms, or at all, 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. Future uncertainty in theU.S. and international markets and economies may adversely affect our liquidity, our ability to access the debt or capital markets and our financial condition. Capital expenditures incurred for the year endedDecember 31, 2020 were$8.7 million , excluding expenditures of$5.6 million associated with the restart at Hawesville. We estimate our total capital spending excluding the Mt. Holly restart project in 2021 will be approximately$25.0 million , related to our ongoing investment and sustainability projects at our plants. 33 -------------------------------------------------------------------------------- Critical Accounting Estimates Our significant accounting policies are described in Note 1. Summary of Significant Accounting Policies to 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 our financial position or results of operations. Significant judgments and estimates made by our management include expenses and liabilities related to inventories, pensions and other postretirement benefits ("OPEB"), 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. Inventories Our inventories are stated at lower of cost or net realizable value ("NRV"). Our estimate of the market value of our inventories involves establishing a net realizable value for both finished goods and the components of inventory that will be converted to finished goods, raw materials and work in process. This requires management to use its judgment when making assumptions about future selling prices and the costs to complete our inventory during the period in which it will be sold. Our assumptions are subject to inherent uncertainties given the volatility surrounding the market price for primary aluminum sales and the market price for our major inputs, alumina and electrical power. Although we believe that the assumptions used to estimate the market value of our inventory are reasonable, actual market conditions at the time our inventory is sold may be more or less favorable than management's current estimates. Pension and Other Postretirement Benefit Liabilities We sponsor several pension and other OPEB plans. Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care cost inflation rate and the long-term rate of return on plan assets. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate. Discount Rate Selection We select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to the yields on high-quality zero coupon bonds. We use the Ryan Above Median Yield Curve (the "Ryan Curve"). We believe the projected cash flows used to determine the Ryan Curve rate provide a good approximation of the timing and amounts of our defined benefit payments under our plans and no adjustment to the Ryan Curve rate has been made. Weighted Average Discount Rate Assumption for: 2020 2019 Pension plans 2.58% 3.26% OPEB plans 2.34% 3.07% 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 as ofDecember 31, 2020 : Effect of changes in the discount rates on the Projected 50 basis point 50 basis point Benefit Obligations for: increase decrease (dollars in millions) Pension plans$ (26.7) $ 30.4 OPEB plans (5.6) 5.9 Medical Trend Rate 34
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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 benefit
obligation. Changes in the health care cost trend rates have a significant
effect on the amounts reported for the health care benefit obligation.
Medical cost inflation is initially estimated to be 6.1% and 6.7% for pre and
post-65 participants, respectively, declining to 4.5% over ten years and
thereafter. A one-percentage-point change in the assumed health care cost trend
rate would have had the following effects in 2020:
1% Increase 1% Decrease
(dollars in millions)
Effect on total of service and interest cost components
11.1 (9.4)
Long-term Rate of Return on Plan Assets Assumption Our expected long-term rate of return on plan assets is derived from our asset allocation strategies and anticipated future long-term performance of individual asset classes. Our analysis gives consideration to recent plan performance and historical returns; however, the assumptions are primarily based on long-term, prospective rates of return. The weighted average long-term rate of return on plan assets for our defined benefit pension plans is 7.25% for 2020. Based on information provided by independent actuaries and other relevant sources, the Company believes that the assumptions used to estimate expenses, assets and liabilities of pensions and other postretirement benefits are reasonable; however, changes in these assumptions could impact the Company's financial position, results of operations or cash flows. 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 not be realized, a valuation allowance is established. The amount of a valuation allowance is based upon our best estimate of our ability to realize the net deferred tax assets. We have a valuation allowance of$499.4 million recorded for all of ourU.S. deferred tax assets and a portion of our Icelandic deferred tax assets as ofDecember 31, 2020 . Property, Plant and Equipment Impairment We review our property, plant and equipment for impairment 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 assets (asset group). In that case, an impairment loss would be recognized for the amount by which 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 assets (asset group), the remaining useful life, expenditures to maintain the 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 sales volumes, future selling prices and estimated raw material and conversion costs, alternative uses for the asset, and estimated proceeds from the disposal of the asset. 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 Note 15. Commitments and Contingencies to the consolidated financial statements included herein for additional information. Recently Issued Accounting Standards Updates 35 --------------------------------------------------------------------------------
Information regarding recently issued accounting pronouncements is included in
Note 1. Summary of Significant Accounting Policies to 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 through the year 2029 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 2021 2022 2023 2024 2025 Thereafter
(dollars in millions)
Long-term debt (1) $ 323 $ 20 $ 45 $ - $ - $ 250 $ 8
Estimated interest payments (2) 138 32 31 30 30 15 -
Operating lease obligations (3) 44 3 3 3 3 3 29
Purchase obligations (4) 1,557 543 318 256 220 72 148
Other long-term liabilities (5) 22 6 4 6 3 3 -
Total $ 2,084 604 401 295 256 343 185
(1)Long-term debt includes principal repayments on our 2025 Notes, Hawesville
Term Loan, Iceland Revolving Credit facility, and the IRB. Payments are based on
the assumption that all outstanding debt instruments will remain outstanding
until their respective due dates. For our contingent obligation, based on the
LME forward market prices for primary aluminum at December 31, 2020 , we believe
that we will not have any payment obligations through the term of the agreement,
which expires in 2028.
(2)Estimated interest payments on our long-term debt assume 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, 2020 rate for that debt continues until
the respective due date. We assume that no interest payments on the contingent
obligation will be paid through the term of agreement, see above.
(3)Operating leases include long-term leases for land, office space,
automobiles, and mobile equipment.
(4)Purchase obligations include long-term alumina and power contracts, excluding
market-based power and raw material requirements contracts. Purchase
obligations not executed or legally binding as of December 31, 2020 have been
excluded from this table. For contracts with LME-based pricing provisions,
including our long-term Icelandic power contracts, we assumed an LME price using
the LME forward curve as of December 31, 2020 .
(5)Other long-term liabilities include asset retirement obligations. Asset
retirement obligations are primarily estimated disposal costs for spent potliner
used in the reduction cells of our domestic smelters.
Material Commitments
We also have outstanding commitments related to pension, supplemental executive
retirement benefit ("SERB") plans, OPEB and workers' compensation obligations.
As of December 31, 2020 , estimated future payments related to these obligations
through the year 2030 amount to approximately $186.1 million , $16.5 million ,
$61.7 million and $9.8 million , respectively.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price and Raw Material Costs Sensitivities
Aluminum is an internationally traded commodity, and its price is effectively
determined on the LME plus any regional premium (e.g. the Midwest premium for
aluminum sold in the United States and the European Duty Paid premium for metal
sold into Europe ) and any product premiums. From time to time, we may manage our
exposure to fluctuations in the LME price of primary aluminum and/or the
regional premium through financial instruments designed to protect our downside
price risk exposure. From time to time, we also enter into financial contracts
to offset fixed price sales arrangements with certain of our customers (the
"fixed for floating swaps").
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We are also exposed to price risk for alumina which is one of the largest
components of our cost of goods sold. Some of the alumina we purchase is priced
based on a published alumina index. As a result, our cost structure is exposed
to market fluctuations and price volatility. Because we sell our products based
principally on the LME price for primary aluminum, regional premiums and
value-added product premiums, we are not able to directly pass on increased
production costs to our customers. From time to time, we may manage our exposure
to fluctuations in our alumina costs by purchasing certain of our alumina
requirements under supply contracts with prices tied to the same indices as our
aluminum sales contracts (the LME price of primary aluminum).
Market-Based Power Price Sensitivity
Market-Based Electrical Power Agreements
Hawesville and Sebree have market-based electrical power agreements pursuant to
which EDF and Kenergy purchase electrical power on the open market and pass it
through at MISO energy pricing, plus transmission and other costs incurred by
them. Through March 31, 2021 , 75% of Mt. Holly's electrical power requirements
are supplied at rates based on natural gas prices. See Item 1. Business - Key
Production Costs - Electrical Power Supply Agreements for additional
information about these market-based power agreements.
Power is supplied to Grundartangi from hydroelectric and geothermal sources
under long-term power purchase agreements. These power purchase agreements,
which will expire on various dates from 2023 through 2036 (subject to
extension), primarily provide power at LME-based variable rates. Since November
2019 , the price of approximately 30% of Grundartangi's power requirements has
been linked to the market price for power in the Nord Pool power market. From
time to time, we may manage our exposure to fluctuations in the market price of
power through financial instruments designed to protect our downside risk
exposure.
Electrical Power Price Sensitivity
With the movement toward market-based power supply agreements, we have increased
our electrical power price risk for our operations, whether due to fluctuations
in the price of power available on the MISO or Nord Pool power markets or the
price of natural gas. Power represents one of our largest operating costs, so
changes in the price and/or availability of market power could significantly
impact the profitability and viability of our operations. Transmission line
outages, problems with grid stability or limitations on energy import capability
could also increase power prices, disrupt production through pot instability or
force a curtailment of all or part of the production at these facilities. In
addition, indirect factors that lead to power cost increases, such as any
increasing prices for natural gas or coal, fluctuations in or extremes in
weather patterns or new or more stringent environmental regulations may severely
impact our financial condition, results of operations and liquidity.
The consumption shown in the table below reflects each operation at 100%
production capacity and does not reflect partial production curtailments.
Electrical power price sensitivity by location:
Hawesville Sebree Mt. Holly Grundartangi Total
Expected average load (in megawatts
("MW")) 482 385 400 537 1,804
Annual expected electrical power
usage (in megawatt hours ("MWh")) 4,222,320 3,372,600 3,504,000 4,704,120 15,803,040
Annual cost impact of an increase or
decrease of $1 per MWh (in millions) $ 4.2 $ 3.4 Foreign Currency We are exposed to foreign currency risk due to fluctuations in the value of theU.S. dollar as compared to theIceland krona ("ISK"), the Euro, the Chinese renminbi and other currencies. Grundartangi's labor costs, part of its maintenance costs and other local services are denominated in ISK and a portion of its anode costs are denominated in Euros and Chinese renminbi. We also have deposits denominated in ISK in Icelandic banks, and our estimated payments of Icelandic income taxes and any associated refunds are denominated in ISK. Further, Vlissingen's labor costs, maintenance costs and other local services are denominated in Euros and our existingNord Pool power price swaps described above are settled in Euros. As a result, an increase or decrease in the value of those currencies relative to theU.S. dollar would affect Grundartangi's operating margins. 37 -------------------------------------------------------------------------------- We may manage our exposure by entering into foreign currency forward contracts or option contracts for forecasted transactions and projected cash flows for foreign currencies in future periods. We have entered into financial contracts to hedge the risk of fluctuations associated with the Euro under our power price swaps described above (the "FX swaps"). Natural Economic Hedges Any analysis of our exposure to the commodity price of aluminum should consider the impact of natural hedges provided by certain contracts that contain pricing indexed to the LME price for primary aluminum. Certain of our alumina contracts and a substantial portion of Grundartangi's electrical power requirements were indexed to the LME price for primary aluminum and provide a natural hedge for a portion of our production. Risk Management Any metals, power, natural gas and foreign currency risk management activities are subject to the control and direction of senior management within guidelines established by Century's Board of Directors. These activities are regularly reported to Century's Board of Directors.Fair Values and Sensitivity Analysis The following tables present the fair value of our derivative asset and liabilities as of year end 2020 and 2019 and the effect on the fair value of a hypothetical ten percent (10%) adverse change in the market prices in effect atDecember 31, 2020 and 2019. Our risk management activities do not include any trading or speculative transactions. Asset Fair Value
Fair Value with 10% Adverse Price Change
2020 2019 2020 2019
Commodity contracts (1) $ 12.8 $ 19.7 $ 4.0 $ (2.7)
Foreign exchange contracts (2) 2.4 - (2.5) -
Total $ 15.2 $ 19.7 $ 1.5 $ (2.7)
Liability Fair Value with 10% Adverse
Liability Fair Value Price Change
2020 2019 2020 2019
Commodity contracts (1) $ 16.7 $ 3.6 $ 59.1 $ 7.1
Foreign exchange contracts (2) - 0.6 - 1.2
Total $ 16.7 $ 4.2 $ 59.1 $ 8.3 (1) Commodity contracts reflect our outstanding LME forward financial sales
contracts, MWP forward financial sales contracts, fixed for floating swaps,
NYMEX Henry Hub natural gas price swaps, and
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