CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2022 | | Level 3 Assets | | Level 3 Liabilities |
| | LME forward financial sales contracts | | Nord Pool swaps | | LME forward financial sales contracts | | FX swaps | | Casthouse currency hedges |
Balance as of January 1, 2022 | | | $ | — | | | $ | 0.2 | | | $ | (5.1) | | | $ | (0.2) | | | $ | — | |
Total realized/unrealized gains (losses) | | | | | | | | | | | |
Included in Net Income (1) | | | 1.6 | | | — | | | 5.3 | | | — | | | — | |
Purchases, sales, settlements | | | | | | | | | | | |
Purchases | | | | | | | | | | | — | |
Sales | | | | | | | | | | | — | |
Settlements | | | | | | | | | | | — | |
Transfers into Level 3 (2) | | | 1.6 | | | — | | | (2.5) | | | — | | | 0.0 | |
Transfers out of Level 3 (3) | | | — | | | (0.2) | | | — | | | 0.2 | | | — | |
Balance as of September 30, 2022 | | | $ | 3.2 | | | $ | — | | | $ | (2.3) | | | $ | — | | | $ | 0.0 | |
| | | | | | | | | | | |
Change in unrealized gains (losses) (1) | | | $ | 1.6 | | | $ | — | | | $ | 5.3 | | | $ | — | | | $ | — | |
(1) Gains and losses are presented in the Consolidated Statement of Operations within the line item "Net gain (loss) on forward and derivative contracts."
(2) Transfers into Level 3 due to contracts with applied discount rate entered into during the nine months ended September 30, 2022.
(3) Transfers out of Level 3 due to period of time remaining in derivative contract. | | | | | | | | | | | | | | | | | | | | |
| | Level 3 Assets | | Level 3 Liabilities |
For the nine months ended September 30, 2021 | | Nord Pool swaps | | LME forward financial sales contracts | | FX swaps |
Balance as of January 1, 2021 | | $ | — | | | $ | 2.9 | | | $ | 0.1 | |
Total realized/unrealized gains (losses) | | | | | | |
Included in net income (loss) (1) | | — | | | (28.0) | | | (0.5) | |
Purchases, sales, settlements | | | | | | |
Purchases | | — | | | — | | | — | |
Sales | | — | | | — | | | — | |
Settlements | | — | | | — | | | — | |
Transfers into Level 3 (2) | | 1.5 | | | (1.0) | | | (0.4) | |
Transfers out of Level 3(3) | | (1.5) | | | 11.5 | | | (0.1) | |
Balance as of September 30, 2021 | | $ | — | | | (14.6) | | | $ | (0.9) | |
| | | | | | |
Change in unrealized gains (losses) (1) | | $ | — | | | $ | (28.0) | | | $ | (0.5) | |
(1) Gains and losses are presented in the Consolidated Statement of Operations within the line item "Net gain (loss) on forward and derivative contracts."
(2) Transfers into Level 3 due to contracts with applied discount rate entered into during the nine months ended September 30, 2021.
(3) Transfers out of Level 3 due to period of time remaining in derivative contract.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
Our announcement on June 22, 2022 to curtail operations of the Hawesville smelter represented a significant adverse change in the extent and manner in which this smelter will be used, and we accordingly evaluated the Hawesville asset group for recoverability. As the carrying value of the Hawesville asset group was determined to not be recoverable based on the estimated undiscounted cash flows expected to be generated over the life of the asset group, we wrote the asset group down to its estimated fair value of $15.0 million.
The following table presents the inputs for this non-recurring fair value measurements categorized within Level 3 of the fair value hierarchy, along with information regarding the significant unobservable inputs used:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Recurring Level 3 Fair Value Measurements: | | As of September 30, 2022 | |
Asset / Liability | | Valuation Technique | | Significant Unobservable Input | | Fair Value | | Value/Range of Unobservable Input | |
Hawesville asset group | | Market approach | | Comparable transaction | | $15.0 | | $15.0 | |
6. Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") amounts are calculated by dividing net income (loss) allocated to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive securities.
The following table shows the basic and diluted earnings (loss) per share:
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, |
| 2022 | | 2021 |
| Net Income (Loss) | | Shares (in millions) | | Per Share | | Net Income (Loss) | | Shares (in millions) | | Per Share |
Net income (loss) | $ | 44.3 | | | | | | | $ | (52.4) | | | | | |
Less: net income allocated to participating securities | 2.7 | | | | | | | — | | | | | |
Basic EPS: | | | | | | | | | | | |
Net income (loss) allocated to common stockholders | $ | 41.6 | | | 91.3 | | | $ | 0.46 | | | $ | (52.4) | | | 90.1 | | | $ | (0.58) | |
Effect of Dilutive Securities(1): | | | | | | | | | | | |
Share-based compensation | (0.4) | | | 1.4 | | | | | — | | | — | | | |
Convertible senior notes | 0.7 | | | 4.6 | | | | | — | | | — | | | |
Diluted EPS: | | | | | | | | | | | |
Net income (loss) allocated to common stockholders with assumed conversion | $ | 41.9 | | | 97.3 | | | $ | 0.43 | | | $ | (52.4) | | | 90.1 | | | $ | (0.58) | |
| | | | | | | | | | | |
| For the nine months ended September 30, |
| 2022 | | 2021 |
| Net Income (Loss) | | Shares (in millions) | | Per Share | | Net Income (Loss) | | Shares (in millions) | | Per Share |
Net income (loss) | $ | 99.4 | | | | | | | $ | (227.5) | | | | | |
Less: net income allocated to participating securities | 6.0 | | | | | | | — | | | | | |
Basic EPS: | | | | | | | | | | | |
Net income (loss) allocated to common stockholders | $ | 93.4 | | | 91.3 | | | $ | 1.02 | | | $ | (227.5) | | | 90.1 | | | $ | (2.52) | |
Effect of Dilutive Securities: | | | | | | | | | | | |
Share-based compensation | (1.2) | | | 1.7 | | | | | — | | | — | | | |
Convertible senior notes | 2.1 | | | 4.6 | | | | | — | | | — | | | |
Diluted EPS: | | | | | | | | | | | |
Net income (loss) allocated to common stockholders with assumed conversion | $ | 94.3 | | | 97.6 | | | $ | 0.97 | | | $ | (227.5) | | | 90.1 | | | $ | (2.52) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
Securities excluded from the calculation of diluted EPS (in millions)(1): | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Share-based compensation | — | | | 2.5 | | | — | | | 2.5 | | | | | |
Convertible preferred shares | 5.8 | | | 6.3 | | | 5.8 | | | 6.3 | | | | | |
Convertible senior notes | — | | | 4.8 | | | — | | | 4.8 | | | | | |
(1) In periods when we report a net loss, all share-based compensation awards, convertible preferred shares and convertible senior notes are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on earnings (loss) per share.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
7. Shareholders’ Equity
Common Stock
As of September 30, 2022 and December 31, 2021, we had 195,000,000 shares of common stock, $0.01 par value per share, authorized under our Restated Certificate of Incorporation, of which 98,533,750 shares were issued and 91,347,229 shares were outstanding at September 30, 2022, and 98,418,132 shares were issued and 91,231,611 shares were outstanding at December 31, 2021.
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
As of September 30, 2022 and December 31, 2021, we had 5,000,000 shares of preferred stock, $0.01 par value per share, authorized under our Restated Certificate of Incorporation. 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, liquidating 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 2008, we issued 160,000 shares of our Series A Convertible Preferred Stock. Glencore holds all of the issued and outstanding Series A Convertible Preferred Stock. At September 30, 2022 and December 31, 2021, there were 58,046 shares and 58,542 shares of Series A Convertible Preferred Stock outstanding, respectively.
The issuance of common stock under our stock incentive programs, debt exchange transactions and any stock offering that excludes Glencore participation triggers anti-dilution provisions of the preferred stock agreement and results in the automatic conversion of Series A Convertible Preferred Stock shares into shares of common stock. The conversion ratio of preferred to common shares is 100 shares of common stock for each share of preferred stock.
The Common and Preferred Stock table below contains additional information about preferred stock conversions during the nine months ended September 30, 2022 and September 30, 2021.
| | | | | | | | | | | | | | | | | |
| Preferred stock | | Common stock |
Common and Preferred Stock Activity (in shares): | Series A Convertible | | Treasury | | Outstanding |
Beginning balance as of December 31, 2021 | 58,542 | | | 7,186,521 | | | 91,231,611 | |
Conversion of convertible preferred stock | (496) | | | — | | | 49,617 | |
Issuance for share-based compensation plans | — | | | — | | | 66,001 | |
Ending balance as of September 30, 2022 | 58,046 | | | 7,186,521 | | | 91,347,229 | |
| | | | | |
Beginning balance as of December 31, 2020 | 63,589 | | | 7,186,521 | | | 90,055,797 | |
| | | | | |
Conversion of convertible preferred stock | (315) | | | — | | | 31,465 | |
Issuance for share-based compensation plans | — | | | — | | | 41,856 | |
Ending balance as of September 30, 2021 | 63,274 | | | 7,186,521 | | | 90,129,118 | |
Stock Repurchase Program
In 2011, our Board of Directors authorized a $60.0 million common stock repurchase program and during the first quarter of 2015, our Board of Directors increased the size of the program by $70.0 million. 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
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
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. The stock repurchase program may be suspended or discontinued at any time.
Shares of common stock repurchased are recorded at cost as treasury stock and result in a reduction of shareholders’ equity in the consolidated balance sheets. From time to time, treasury shares may be reissued as contributions to our employee benefit plans and for the conversion of convertible preferred stock. When shares are reissued, we use an average cost method for determining cost. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital.
We have repurchased 7,186,521 shares of common stock under the program for an aggregate purchase price of $86.3 million. We have made no repurchases since April 2015 and we have $43.7 million remaining under the repurchase program authorization as of September 30, 2022.
8. Income Taxes
For the three months ended September 30, 2022 and September 30, 2021, we recorded an income tax expense of $20.6 million and $6.8 million, respectively, and for the nine months ended September 30, 2022 and September 30, 2021, we recorded an income tax expense of $64.6 million and an income tax benefit of $43.8 million, respectively. The change is primarily due to improved operational results over the comparison period.
Our income tax benefit or expense is based on an annual effective tax rate forecast, including estimates and assumptions that could change during the year. The application of the accounting requirements for income taxes in interim periods, after consideration of our valuation allowance on domestic losses, causes a significant variation in the typical relationship between income tax expense/benefit and pre-tax accounting income/loss as reported on the consolidated statement of operations.
As of September 30, 2022, all of Century's U.S. and certain foreign deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance.
The Inflation Reduction Act of 2022 was signed into law on August 16, 2022, and the CHIPS and Science Act of 2022 was signed into law on August 9, 2022. These laws implement new tax provisions, primarily a 15% corporate alternative minimum tax and a nondeductible 1% excise tax on the fair market value of stock repurchased by publicly traded corporations. As of September 30, 2022, we do not anticipate any material impact of these provisions which are effective January 1, 2023. The two acts also provide various tax credits, several of which are transferable or refundable, for the investment in or production of clean-energy effective January 1, 2023. Century will continue to evaluate potential tax benefits available under the acts as additional guidance is issued in future periods.
9. Inventories
Inventories consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 62.7 | | | $ | 132.9 | |
Work-in-process | 56.2 | | | 76.1 | |
Finished goods | 41.0 | | | 43.9 | |
Operating and other supplies | 223.3 | | | 172.7 | |
Total inventories | $ | 383.2 | | | $ | 425.6 | |
Inventories are stated at the lower of cost or Net Realizable Value ("NRV") using the first-in, first-out or the weighted average cost method.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
10. Debt
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Debt classified as current liabilities: | | | |
Hancock County industrial revenue bonds ("IRBs") due April 1, 2028, interest payable quarterly (variable interest rates (not to exceed 12%)) (1) | $ | 7.8 | | | $ | 7.8 | |
U.S. Revolving Credit Facility(2) | 63.5 | | | 63.6 | |
Iceland Revolving Credit Facility (3) | 50.0 | | | 50.0 | |
Debt classified as non-current liabilities: | | | |
Grundartangi casthouse facility, net of financing fees of $0.6 million at September 30, 2022(4) | 39.4 | | | — | |
7.5% senior secured notes due April 1, 2028, net of financing fees of $3.6 million at September 30, 2022, interest payable semiannually | 246.4 | | | 245.8 | |
2.75% convertible senior notes due May 1, 2028, net of financing fees of $2.0 million at September 30, 2022, interest payable semiannually | 84.3 | | | 84.0 | |
| | | |
Total | $ | 491.4 | | | $ | 451.2 | |
(1) 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 IRBs interest rate at September 30, 2022 was 2.60%.
(2) We incur interest at a base rate plus applicable margin as defined within the agreement. The interest rate at September 30, 2022 was 6.75%.
(3) We incur interest at LIBOR plus applicable margin as defined within the agreement. The interest rate at September 30, 2022 was 6.62%.
(4) We incur interest at a base rate plus applicable margin as defined within the agreement. The interest rate at September 30, 2022 was 6.03%.
7.5% Senior Secured Notes due 2028
In April 2021, we issued $250.0 million in aggregate principal amount of 7.5% senior secured notes due April 1, 2028 (the "2028 Notes"). We received proceeds of $245.2 million, after payment of certain financing fees and related expenses. The 2028 Notes bear interest semi-annually in arrears on April 1 and October 1 of each year, which began on October 1, 2021, at a rate of 7.5% per annum in cash. The 2028 Notes are senior secured obligations of Century, ranking equally in right of payment with all existing and future senior indebtedness of Century, but effectively senior to unsecured debt to the extent of the value of collateral.
As of September 30, 2022, the total estimated fair value of the 2028 Notes was $223.8 million. Although we use quoted market prices for identical debt instruments, the markets on which they trade are not considered to be active and are therefore considered Level 2 fair value measurements.
Convertible Notes due 2028
In April 2021, we completed a private offering of $86.3 million aggregate principal amount of convertible senior notes due May 1, 2028 unless earlier converted, repurchased, or redeemed (the "Convertible Notes"). The Convertible Notes were issued at a price of 100% of their aggregate principal amount. We received proceeds of $83.7 million, after payment of certain financing fees and related expenses. The Convertible Notes bear interest semi-annually in arrears on May 1 and November 1 of each year, which began on November 1, 2021, at a rate of 2.75% per annum in cash.
The initial conversion rate for the Convertible Notes is 53.3547 shares of the Company's common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $18.74 per share of the Company's common stock. The conversion rate and conversion price are subject to customary adjustments under certain circumstances in accordance with the terms of the indenture. As of September 30, 2022, the conversion rate remains unchanged.
The Convertible Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
Company’s senior secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
As of September 30, 2022, the if-converted value of the Convertible Notes does not exceed the outstanding principal amount.
As of September 30, 2022, the total estimated fair value of the Convertible Notes was $54.3 million. Although we use quoted market prices for identical debt instruments, the markets on which they trade are not considered to be active and are therefore considered Level 2 fair value measurements.
U.S. Revolving Credit Facility
We and certain of our direct and indirect domestic subsidiaries (the "Borrowers") have a senior secured revolving credit facility with a syndicate of lenders (as amended from time to time, the "U.S. revolving credit facility"). On June 14, 2022 we amended our U.S. revolving credit facility, increasing our borrowing capacity to $250.0 million in the aggregate, including up to $150.0 million under a letter of credit sub-facility. The U.S. revolving credit facility matures on June 14, 2027.
Any letters of credit issued and outstanding under the U.S. revolving credit facility reduce our borrowing availability on a dollar-for-dollar basis. At September 30, 2022, there were $63.5 million in outstanding borrowings and $39.9 million of outstanding letters of credit issued under our U.S. revolving credit facility. Principal payments, if any, are due upon maturity of the U.S. revolving credit facility and may be prepaid without penalty.
| | | | | |
Status of our U.S. revolving credit facility: | September 30, 2022 |
Credit facility maximum amount | $ | 250.0 | |
Borrowing availability | 190.3 | |
Outstanding letters of credit issued | 39.9 | |
Outstanding borrowings | 63.5 | |
Borrowing availability, net of outstanding letters of credit and borrowings | 86.9 | |
Iceland Revolving Credit Facility
Our wholly-owned subsidiary, Nordural Grundartangi ehf ("Grundartangi"), has entered into a $80.0 million revolving credit facility agreement with Landsbankinn hf., dated November 2013, as amended (the "Iceland revolving credit facility"). On September 28, 2022, we further amended the Iceland revolving credit facility and increased the facility amount to $100.0 million in the aggregate. Under the terms of the Iceland revolving credit facility, when Grundartangi borrows funds it will designate a repayment date, which may be any date prior to the maturity of the Iceland revolving credit facility. At September 30, 2022, there were $50.0 million in outstanding borrowings under our Iceland revolving credit facility. The Iceland revolving credit facility has a term through November 2024.
| | | | | |
Status of our Iceland revolving credit facility: | September 30, 2022 |
Credit facility maximum amount | $ | 100.0 | |
Borrowing availability | 100.0 | |
Outstanding letters of credit issued | — | |
Outstanding borrowings | 50.0 | |
Borrowing availability, net of borrowings | 50.0 | |
Grundartangi Casthouse Facility
Our wholly-owned subsidiary, Grundartangi, has entered into an eight-year Term Facility Agreement with Arion Bank hf, dated November 2021, as amended (the "Casthouse Facility") to provide for borrowings up to $130.0 million associated with construction of the new billet casthouse at Grundartangi (the"casthouse project"). Under the Casthouse Facility, repayments of principal amounts will be made in equal quarterly installments equal to 1.739% of the principal amount, the first payment occurring in July 2024, with the remaining 60% of the principal amount to be paid no later than the termination date in December 2029. As of September 30, 2022, there were $40.0 million in outstanding borrowings under the Casthouse Facility.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
Surety Bond Facility
As part of our normal business operations, we are required to provide surety bonds or issue letters of credit in certain states in which we do business as collateral for certain workers' compensation obligations. In June 2022, we entered into a surety bond facility with an insurance company to provide such bonds when applicable. As of September 30, 2022, we had issued surety bonds totaling $6.6 million. As we had previously guaranteed our workers' compensation obligations through issuance of letters of credit against our revolving credit facility, the surety bond issuance increases credit facility availability.
Iceland Term Facility
Our wholly-owned subsidiary, Grundartangi, has entered into a Term Facility Agreement with Arion Bank hf, dated September 2022, (the "Iceland Term Facility") to provide for borrowings up to €13.6 million. Repayments of principal amounts will be made in equal monthly installments, the first payment occurring in February 2023, with the remainder of the principal amount to be paid no later than the termination date in January 2024. Borrowings under the Iceland Term Facility will bear interest at a rate equal to 3.2% plus EUR EURIBOR 1 month as published at any time by the European Money Markets Institute. As of September 30, 2022, there were no outstanding borrowings under the Iceland Term Facility.
11.Commitments and Contingencies
We have pending against us or may be subject to various lawsuits, claims and proceedings related primarily to employment, commercial, stockholder, environmental, safety and health matters and are involved in other matters that may give rise to contingent liabilities. While the results of such matters and claims cannot be predicted with certainty, we believe that the ultimate outcome of any such matters and claims will not have a material adverse impact on our financial condition, results of operations or liquidity. However, because of the nature and inherent uncertainties of litigation and estimating liabilities, should the resolution or outcome of these actions be unfavorable, our business, financial condition, results of operations and liquidity could be materially and adversely affected.
In evaluating whether to accrue for losses associated with legal or environmental contingencies, it is our policy to take into consideration factors such as the facts and circumstances asserted, our historical experience with contingencies of a similar nature, the likelihood of our prevailing and the severity of any potential loss. For some matters, no accrual is established because we have assessed our risk of loss to be remote. Where the risk of loss is probable and the amount of the loss can be reasonably estimated, we record an accrual, either on an individual basis or with respect to a group of matters involving similar claims, based on the factors set forth above. While we regularly review the status of, and our estimates of potential liability associated with, contingencies to determine the adequacy of any associated accruals and related disclosures, the ultimate amount of loss may differ from our estimates.
Legal Contingencies
Ravenswood Retiree Medical Benefits
In November 2009, Century Aluminum of West Virginia ("CAWV") filed a class action complaint for declaratory judgment against the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service 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 in November 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. On August 18, 2017, the District 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 in September 2017 and recognized a gain of $5.5 million to arrive at the then-net present value of $12.5 million. CAWV has agreed to pay the remaining amounts under the settlement agreement in annual increments of $2.0 million for nine years. As of September 30, 2022, $2.0 million is recorded in other current liabilities and $4.7 million is recorded in other liabilities.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
PBGC Settlement
In 2013, we entered into a settlement agreement with the Pension Benefit Guaranty Corporation (the "PBGC") regarding an alleged "cessation of operations" at our Ravenswood facility (the "PBGC Settlement Agreement"). Pursuant to the terms of the PBGC Settlement 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 were able to defer one or more of these payments, provided that we provide the PBGC with acceptable security for such deferred payments. We did not make any contributions for the three month periods ended September 30, 2022, or 2021. We historically elected to defer certain payments under the PBGC Settlement Agreement and provided the PBGC with the appropriate security. In October 2021, we amended the PBGC Settlement Agreement such that we removed the deferral mechanism and agreed to contribute approximately $2.4 million per year to our defined benefit pension plans for a total of approximately $9.6 million, over the next four years beginning on November 30, 2022 and ending on November 30, 2025, subject to acceleration if certain terms and conditions are met in such amendment.
Power Commitments and Contingencies
Hawesville
Hawesville has a power supply arrangement with Kenergy and EDF Trading North America, LLC (“EDF") which provides market-based power to the Hawesville smelter. Under this arrangement, the power companies purchase power on the open market and pass it through to Hawesville at Midcontinent Independent System Operator ("MISO") pricing plus transmission and other costs. The power supply arrangement with Kenergy has an effective term through December 2023. The arrangement with EDF to act as our market participant with MISO has an effective term through May 2023. On April 26, 2022 EDF gave notice that it would no longer serve as the MISO Market Participant for Hawesville. The notice terminated EDF’s contract, effective May 31, 2023, to purchase power from MISO for resale to Kenergy, which then resells the power to Hawesville. Century is in discussions with other companies, currently authorized as MISO Market Participants, to replace EDF and expects to have a replacement Market Participant in place prior to the expiration of the contract with EDF.
In connection with the temporary curtailment of production at Hawesville, energy use at the smelter has been significantly reduced. However, such reduction in energy use does not reduce Hawesville’s capacity payment obligation to MISO which extends through May 2023.
Sebree
Sebree has a power supply arrangement with Kenergy and EDF which provides market-based power to the Sebree smelter. Similar to the arrangement at Hawesville, the power companies purchase power on the open market and pass it through to Sebree at MISO pricing plus transmission and other costs. The power supply arrangement with Kenergy has an effective term through December 2023. The arrangement with EDF to act as our market participant with MISO has an effective term through May 2023. On April 26, 2022 EDF gave notice that it would no longer serve as the MISO Market Participant for Sebree. The notice terminated EDF’s contract, effective May 31, 2023, to purchase power from MISO for resale to Kenergy, which then resells the power to Sebree. Century is in discussions with other companies, currently authorized as MISO Market Participants, to replace EDF and expects to have a replacement Market Participant in place prior to the expiration of the contract with EDF.
Mt. Holly
Century Aluminum of South Carolina, Inc. has a power supply agreement with Santee Cooper that has an effective term from April 1, 2021 through December 2023. Under this power supply agreement, 100% of Mt. Holly’s electrical power requirements are supplied from Santee Cooper’s generation at cost of service based rates. The contract provides sufficient energy to allow Mt. Holly to produce at 75% of full production capacity.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
Grundartangi
Grundartangi has power purchase agreements for approximately 545 MW with HS Orka hf ("HS"), Landsvirkjun and Orkuveita Reykjavikur ("OR") to provide power to its Grundartangi smelter. These power purchase agreements expire on various dates from 2026 through 2036 (subject to extension). The power purchase agreements with HS and OR provide power at LME-based variable rates for the duration of these agreements. In July 2021, Grundartangi reached an agreement with Landsvirkjun for an extension of its existing 161 MW power contract that would have expired in December 2023. Under the terms of the extension, Landsvirkjun will continue to supply power to Grundartangi from January 1, 2024 through December 31, 2026 and will increase the existing contract from 161 MW to 182 MW over time to provide the necessary flexibility to support the most recent capacity creep requirements and future growth opportunities for value-added products at the Grundartangi plant, including the Grundartangi casthouse project. In September 2022, this agreement was amended to provide for 42 MW at a fixed price and 119 MW at rates linked to Nord Pool plus transmission through 2023 and beginning January 1, 2024 through December 31, 2026, this agreement allows for fixed rates plus a small variable rate portion of the full 182 MW. Grundartangi also has a 25 MW power purchase agreement with Landsvirkjun at LME-based variable rates.
Other Commitments and Contingencies
Labor Commitments
The bargaining unit employees at our Grundartangi, Vlissingen, Hawesville and Sebree facilities are represented by labor unions, representing approximately 58% of our total workforce.
Approximately 87% of Grundartangi’s work force is represented by five labor unions, governed by a labor agreement that establishes wages and work rules for covered employees. This agreement is effective through December 31, 2024.
100% of Vlissingen's work force is represented by the Federation for the Metal and Electrical Industry ("FME"), a Netherlands' employers' organization for companies in the metal, electronics, electrical engineering and plastic sectors. The FME negotiates working conditions with trade unions on behalf of its members, which, when agreed upon, are then applicable to all employees of Vlissingen. The current labor agreement is effective through November 30, 2022. On September 22, 2022, a new labor agreement was reached which will go into effect on December 1, 2022, and expire on May 31, 2024.
Approximately 42% of our U.S. based work force is represented by USW through separately negotiated labor agreements for each facility. The labor agreement for Hawesville employees is effective through April 1, 2026. Upon announcement of the temporary curtailment, Hawesville and the USW local union entered into effects bargaining. An agreement was reached on July 19, 2022, covering the curtailment period. Century Sebree's labor agreement with the USW for its employees is effective through October 28, 2023. Mt. Holly employees are not represented by a labor union.
Contingent obligations
We have a contingent obligation in connection with the "unwind" of a contractual arrangement between Century Aluminum of Kentucky ("CAKY"), Big Rivers Electric Corporation and a third party and the execution in July 2009 of a long-term cost-based power contract with Kenergy, a member of a cooperative of Big Rivers. 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 with Kenergy. As of September 30, 2022, the principal and accrued interest for the contingent obligation was $29.1 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. As of September 30, 2022, the LME forward market prices do not exceed the threshold for payment. In addition, based on the current level of Hawesville's operations, including the temporary curtailment, 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.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
12.Components of Accumulated Other Comprehensive Loss
| | | | | | | | | | | |
Components of AOCL: | September 30, 2022 | | December 31, 2021 |
Defined benefit plan liabilities | $ | (92.3) | | | $ | (86.7) | |
| | | |
Unrealized gain (loss) on financial instruments | 1.8 | | | 1.9 | |
Other comprehensive loss before income tax effect | (90.5) | | | (84.8) | |
Income tax effect (1) | 2.3 | | | 2.5 | |
Accumulated other comprehensive loss | $ | (88.2) | | | $ | (82.3) | |
(1) The allocation of the income tax effect to the components of other comprehensive loss is as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Defined benefit plan liabilities | $ | 2.6 | | | $ | 2.9 | |
| | | |
Unrealized loss on financial instruments | (0.4) | | | (0.4) | |
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
The following table summarizes the changes in the accumulated balances for each component of AOCL:
| | | | | | | | | | | | | | | | | |
| Defined benefit plan and other postretirement liabilities | | Unrealized gain (loss) on financial instruments | | Total, net of tax |
Balance, July 1, 2022 | $ | (82.6) | | | $ | 1.7 | | | $ | (80.9) | |
Net amount reclassified to net income (loss) | (7.3) | | | 0.0 | | | (7.3) | |
Balance, September 30, 2022 | $ | (89.9) | | | $ | 1.7 | | | $ | (88.2) | |
| | | | | |
Balance, July 1, 2021 | $ | (118.1) | | | $ | 1.7 | | | $ | (116.4) | |
Net amount reclassified to net income (loss) | 1.2 | | | 0.0 | | | 1.2 | |
Balance, September 30, 2021 | $ | (116.9) | | | $ | 1.7 | | | $ | (115.2) | |
| | | | | |
Balance, December 31, 2021 | $ | (84.0) | | | $ | 1.7 | | | $ | (82.3) | |
Net amount reclassified to net income (loss) | (5.9) | | | 0.0 | | (5.9) | |
Balance, September 30, 2022 | $ | (89.9) | | | $ | 1.7 | | | $ | (88.2) | |
| | | | | |
Balance, December 31, 2020 | $ | (120.6) | | | $ | 1.8 | | | $ | (118.8) | |
Net amount reclassified to net income (loss) | 3.7 | | | (0.1) | | | 3.6 | |
Balance, September 30, 2021 | $ | (116.9) | | | $ | 1.7 | | | $ | (115.2) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Reclassifications out of AOCL were included in the consolidated statements of operations as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended September 30, | | Nine months ended September 30, | | |
AOCL Components | | Location | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Defined benefit plan and other postretirement liabilities | | Cost of goods sold | | $ | 0.4 | | | $ | 0.7 | | | $ | 1.3 | | | $ | 2.2 | | | | | |
| | Other income (expense) - net | | (8.0) | | | — | | | (8.0) | | | — | | | | | |
| | Selling, general and administrative expenses | | 0.2 | | | 0.2 | | | 0.5 | | | 0.6 | | | | | |
| | Other operating (income) expense - net | | 0.2 | | | 0.4 | | | 0.7 | | | 1.2 | | | | | |
| | Income tax effect | | (0.1) | | | (0.1) | | | (0.3) | | | (0.3) | | | | | |
| | Net of tax | | $ | (7.3) | | | $ | 1.2 | | | $ | (5.8) | | | $ | 3.7 | | | | | |
| | | | | | | | | | | | | | |
Unrealized loss on financial instruments | | Cost of goods sold | | $ | 0.0 | | | $ | 0.0 | | | $ | (0.1) | | | $ | (0.1) | | | | | |
| | Income tax effect | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | | | |
| | Net of tax | | $ | 0.0 | | | $ | 0.0 | | | $ | (0.1) | | | $ | (0.1) | | | | | |
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
13. Components of Net Periodic Benefit Cost
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Service cost | $ | 1.1 | | | $ | 1.2 | | | $ | 3.2 | | | $ | 3.5 | | | | | |
Interest cost | 2.6 | | | 2.4 | | | 7.7 | | | 7.3 | | | | | |
Expected return on plan assets | (5.9) | | | (5.6) | | | (17.6) | | | (16.8) | | | | | |
Amortization of prior service costs | 0.0 | | | 0.0 | | 0.1 | | | 0.1 | | | | | |
Amortization of net loss | 0.9 | | | 1.5 | | | 2.6 | | | 4.5 | | | | | |
Net periodic benefit cost (income) | $ | (1.3) | | | $ | (0.5) | | | $ | (4.0) | | | $ | (1.4) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Postretirement Benefits |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Service cost | $ | 0.0 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.2 | | | | | |
Interest cost | 0.9 | | | 0.6 | | | 2.2 | | | 1.8 | | | | | |
Amortization of prior service cost | (0.3) | | | (0.8) | | | (1.3) | | | (2.4) | | | | | |
Amortization of net loss | 0.2 | | | 0.6 | | | 1.0 | | | 1.7 | | | | | |
Curtailment gain, net | (8.0) | | | — | | | (8.0) | | | — | | | | | |
Net periodic benefit cost (income) | $ | (7.2) | | | $ | 0.5 | | | $ | (6.0) | | | $ | 1.3 | | | | | |
We measure our obligations under our defined benefit plan and other post retirement benefits annually or more frequently at interim periods when a significant event occurs. ASC 715, Compensation-Retirement Benefits, defines a curtailment as an event that significantly reduces the expected years of future service of present employees or eliminates defined benefits for some or all of a significant number of employees. In the third quarter, we took actions to re-measure certain other postretirement benefits triggered by the Hawesville smelter curtailment, leading to a non-cash OPEB curtailment gain, net totaling $8.0 million for the three and nine months ended September 30, 2022.
14. Derivatives
As of September 30, 2022, we had an open position of 148,416 tonnes related to LME forward financial sales contracts to fix the forward LME aluminum price. These contracts are expected to settle monthly through December 2024. We also had an open position of 48,750 tonnes related to MWP forward financial sales contracts to fix the forward MWP price. These contracts are expected to settle monthly through December 2022. We have also entered into financial contracts with various counterparties to offset fixed price sales arrangements with certain of our customers ("fixed for floating swaps") to remain exposed to the LME and MWP aluminum prices. As of September 30, 2022, we had 1,014 tonnes related to fixed for floating swaps that will settle monthly through February 2023.
We have entered into financial contracts to hedge a portion of Grundartangi's exposure to the Nord Pool power market (“Nord Pool power price swaps”). All of our Nord Pool power price swaps will cash settle monthly through December 2023. Because the Nord Pool power price swaps are settled in Euros, we have entered into financial contracts to hedge the risk of fluctuations associated with the Euro ("FX swaps"). As of September 30, 2022, we had an open position related to the FX swaps of €37.9 million that will settle monthly through December 2023.
During the third quarter of 2022, we entered certain floating Nord Pool financial contracts to unwind a portion of our fixed contract position as a result of the recent power agreement amendment, making us predominantly hedged against Nord Pool power price fluctuations during 2023. As of September 30, 2022, we had an open net position of 1,239,497 MWh related to the Nord Pool power price swaps. The pricing relationship between the fixed and floating Nord Pool contracts created a realized gain of $16.0 million, which we recognized for the three and nine months ended September 30, 2022.
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
We have entered into financial contracts to fix a portion of our exposure to the Indiana Hub power market at our Kentucky plants ("Indiana Hub power price swaps"). As of September 30, 2022, we had an open position of 219,360 MWh. The Indiana Hub power price swaps are expected to settle monthly through December 2023.
We have entered into forward contracts to hedge the risk of fluctuations associated with the Icelandic Krona (ISK) and Euro for contracts related to the construction of the Grundartangi casthouse denominated in these currencies ("casthouse currency hedges"). As of September 30, 2022, we had an open position related to the ISK casthouse swaps of $52.0 million that will settle monthly through July 2023. As of September 30, 2022, we had an open position related to the Euro casthouse swaps of $13.8 million that will settle monthly through February 2024.
Our agreements with derivative counterparties contain certain provisions requiring collateral to be posted in the event the market value of our position exceeds the margin threshold limit of our master agreement with the counterparty. As of September 30, 2022 and December 31, 2021, the Company had recorded restricted cash of $0.0 million and $8.6 million, respectively, as collateral related to open derivative contracts under the master arrangements with our counterparties.
The following table sets forth the Company's derivative assets and liabilities that were accounted for at fair value and not designated as cash flow hedges as of September 30, 2022 and December 31, 2021, respectively:
| | | | | | | | | | | |
| Asset Fair Value |
| September 30, 2022 | | December 31, 2021 |
Commodity contracts (1) | $ | 229.0 | | | $ | 42.9 | |
Foreign exchange contracts (2) | — | | | — | |
Total | $ | 229.0 | | | $ | 42.9 | |
| | | |
| | | | | | | | | | | |
| Liability Fair Value |
| September 30, 2022 | | December 31, 2021 |
Commodity contracts (1) | $ | 16.4 | | | $ | 143.3 | |
Foreign exchange contracts (2) | 13.7 | | | 2.9 | |
Total | $ | 30.1 | | | $ | 146.2 | |
| | | |
(1) Commodity contracts reflect our outstanding LME forward financial sales contracts, MWP forward financial sales contracts, fixed for floating swaps, Nord Pool power price swaps, and Indiana Hub power price swaps. At September 30, 2022, $0.5 million of Due to affiliates, $4.5 million of Due to affiliates - less current portion, $0.8 million of Due from affiliates, and $0.2 million of Due from affiliates - less current portion were related to commodity contracts with Glencore. At December 31, 2021, $17.1 million of Due to affiliates, and $21.9 million of Due to affiliates - less current portion were related to commodity contract liabilities with Glencore.
(2) Foreign exchange contracts reflect our outstanding FX swaps and the casthouse currency hedges.
The following table summarizes the net gain (loss) on forward and derivative contracts:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Commodity contracts(1) | $ | 120.0 | | | $ | (75.6) | | | $ | 301.3 | | | $ | (235.2) | |
Foreign exchange contracts | (7.4) | | | (1.4) | | | (13.6) | | | (3.2) | |
Total | $ | 112.6 | | | $ | (77.0) | | | $ | 287.7 | | | $ | (238.4) | |
(1) For the three months ended September 30, 2022, $13.1 million of the net gain was with Glencore, and for the three months ended September 30, 2021, $26.3 million of the net loss was with Glencore. For the nine months ended
CENTURY ALUMINUM COMPANY
Condensed Notes to the Consolidated Financial Statements (continued)
(amounts in millions, except share and per share amounts)
(Unaudited)
September 30, 2022, $19.4 million of the net gain was with Glencore, and for the nine months ended September 30, 2021, $79.8 million of the net loss was with Glencore.
15. Subsequent Events
On October 10, 2022, Grundartangi borrowed €13.6 million on the Iceland Term Facility.
As previously disclosed, our wholly owned subsidiary, Mt. Holly Commerce Park LLC, entered into a binding agreement on August 3, 2022, subject to ordinary course conditions, to sell approximately 133 acres of land. This agreement was terminated on October 28, 2022.
FORWARD-LOOKING STATEMENTS
This quarterly report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. Forward-looking statements are statements about future events and are based on our current expectations. These forward-looking statements may be identified by the words “believe,” “expect,” “hope,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” “project,” “scheduled,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may.”
Forward-looking statements in this quarterly report and in our other reports filed with the Securities and Exchange Commission (the "SEC"), for example, may include, but are not limited to, statements regarding:
•Our assessment of global and local financial and economic conditions;
•Our assessment of the aluminum market and aluminum prices (including premiums);
•Our assessment of alumina pricing, the outlook on when energy prices, both in the United States and Europe, may return to more normalized levels, costs associated with our other key raw materials and supply and availability of those key raw materials, including power (and related natural gas and coal), and the likelihood and extent of any power curtailments;
•Our assessment of power prices and availability for our U.S. and Vlissingen operations;
•The impact of the COVID-19 pandemic, and governmental guidance and regulations aimed at addressing the pandemic, including any possible impact on our business, operations, financial condition, results of operation, global supply chains or workforce;
•The impact of the war in Ukraine, including any sanctions and export controls targeting Russia and businesses tied to Russia and to sanctioned entities and individuals, including any possible impact on our business, operations, financial condition, results of operations, and global supply chains;
•The future financial and operating performance of the Company and its subsidiaries;
•Our ability to successfully manage market risk and to control or reduce costs;
•Our plans and expectations with respect to future operations of the Company and its subsidiaries, including any plans and expectations to curtail or restart production, including the expected impact of any such actions on our future financial and operating performance;
•Our plans and expectations with regards to future operations of our Mt. Holly smelter, including our expectations as to the restart of curtailed production at Mt. Holly, including the timing, costs and benefits associated with this restart project;
•Our plans with regards to future operations of our Hawesville smelter, including our expectations as to the timing, costs and benefits associated with restarting curtailed production;
•Our plans and expectations with regards to the Grundartangi casthouse project, including our expectations as to the timing, costs and benefits associated with the Grundartangi casthouse project;
•Our ability to successfully obtain and/or retain competitive power arrangements for our operations;
•The impact of Section 232 relief, including tariffs or other trade remedies, the extent to which any such remedies may be changed, including through exclusions or exemptions, and the duration of any trade remedy;
•The impact of any new or changed law, regulation, including, without limitation, sanctions or other similar remedies or restrictions;
•Our anticipated tax liabilities, benefits or refunds including the realization of U.S. and certain foreign deferred tax assets and liabilities;
•Our ability to access existing or future financing arrangements and the terms of any such future financing arrangements;
•Our ability to repay or refinance debt in the future;
•Our ability to recover losses from our insurance;
•Our assessment and estimates of our pension and other postretirement liabilities, legal and environmental liabilities and other contingent liabilities;
•Our assessment of any future tax audits or insurance claims and their respective outcomes;
•Negotiations with current labor unions or future representation by a union of our employees;
•Our assessment of any information technology-related risks, including the risks from the previously disclosed February 2022 cyber incursion event; and
•Our future business objectives, plans, strategies and initiatives, including our competitive position and prospects.
Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from future results expressed, projected or implied by those forward-looking statements. Important factors that could cause actual results and events to differ from those described in such forward-looking statements can be found in the risk factors and forward-looking statements cautionary language contained in our Annual Report on Form 10-K, quarterly reports on Form 10-Q and in other filings made with the SEC. Although we have attempted to identify those material factors that could cause actual results or events to differ from those described in such forward-looking statements, there may be other factors that could cause actual results or events to differ from those anticipated, estimated or intended. Many of these factors are beyond our ability to control or predict. Given these uncertainties, the reader is cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.