Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. The following discussion and analysis are for the year ended December 31, 2022, compared with the same period in 2021 unless otherwise stated. For discussion and analysis of the year ended December 31, 2021, compared with the same period in 2020, please refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7. of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the "SEC") on February 25, 2022. 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 85% of our cost of goods sold; and
•our production volume and product mix.
Hawesville temporary curtailment
On June 22, 2022, we announced that we would temporarily idle all of our production capacity at our Hawesville smelter, as a direct result of historically high energy costs and declining LME prices. As part of this action, we issued a notice to most of the employees at the facility pursuant to the Worker Adjustment and Retraining Notification (“WARN”) Act regarding our intentions to temporarily curtail Hawesville plant operations by no later than August 20, 2022. We have since fully curtailed all of our production at the facility and expect to continue to maintain the plant with the intention of restarting operations when market conditions permit, including energy prices returning to more normalized levels and aluminum prices maintaining levels that can support the on-going costs and capital expenditures necessary to restart and operate the plant.
As the curtailment represents a significant adverse change in the extent and manner in which the Hawesville smelter will be used, 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, an impairment charge of $159.4 million was recognized to write down the asset group to its estimated fair value. We recognized $18.1 million of expense during the year related to wages and severance triggered by our issuance of the WARN notice and excess capacity charges, partially offset by final plant idling activities. We also recognized a non-cash other postretirement benefits ("OPEB") curtailment gain totaling $8.9 million for the year ended December 31, 2022.
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 value-added product premium. Each of these price components has its own drivers and variability.
The price of aluminum 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 variable 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). From time to time, we may seek to manage our exposure to fluctuations in the LME price of primary aluminum and/or associated regional premiums through financial instruments designed to protect our downside price risk exposure. Information regarding financial contracts is included in Note 19. Derivatives and risks affiliated with such financial contracts are disclosed specifically in Item 1A. Risk Factors.
The historic volatility of the price of aluminum is reflected in the chart below:
During 2022, global, macroeconomic conditions, including the onset of the Russia-Ukraine conflict in the first quarter of 2022, contributed to a 32% decline in the LME spot price for primary aluminum for the year with a monthly average price in March 2022 of $3,538 compared to a monthly average price in December 2022 of $2,395. The average LME price for primary aluminum was $2,707 per tonne in 2022, compared to $2,475 per tonne in 2021, and $1,702 per tonne in 2020. The average MWP price was $657 per tonne in 2022 compared to $581 per tonne in 2021 and $267 per tonne in 2020. The average European Duty Paid premium was $466 per tonne in 2022 compared to $272 per tonne in 2021 and $126 per tonne in 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. These costs may be subject to increasing inflationary pressures, which could adversely affect our business, financial condition and results of operations. Because we sell our products based principally on the LME price for primary aluminum, regional premiums and value-added 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 varies from contract to contract. 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, natural disasters and weather events, and other factors outside of our control. The average market alumina index price as a percentage of market LME price per tonne for 2022 was 13% compared to 13% for 2021 and 16% for 2020.
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 and Grundartangi receives 20% of its electricity requirements from market-based power agreements. Market-based energy prices are driven in large part by the price of coal, natural gas, and
other fuel sources, weather influenced reservoir or generation levels for wind, solar and hydro production and weather-influenced electric loads. Extreme weather events, such as that experienced in mid-February 2021 throughout the United States, the low rain levels experienced in Nordic regions during winter 2021 and 2022, can result in low generation, power outages and/or significant increases in demand, which may result in significant increased power costs incurred in our operations. Additionally, extreme geopolitical events, such as the Russia-Ukraine conflict in 2022, which led to the cut-off of natural gas supply to Western Europe and increased exports of U.S natural gas as result, may result in significant power costs globally.
Our Mt. Holly plant has a power supply agreement with Santee Cooper that runs 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 the Mt. Holly smelter to produce at 75% of full production capacity.
In Iceland, approximately 70% of the power requirements for our Grundartangi plant are indexed to the price of primary aluminum, which provides a natural hedge of one of our largest production costs. Approximately 20% of Grundartangi’s power requirements is linked to the market price for power in the Nord Pool power market, the trading market for power in the Nordic countries and certain other areas of Europe, and the remaining 10% of power requirements is fixed. In July 2021, Grundartangi reached an agreement with Landsvirkjun for an extension of the existing contract to supply power for 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 further 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.
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. Our 2022 shipment volumes were adversely impacted by power curtailments in Iceland in winter 2022 driven by low reservoir levels and the curtailment of our Hawesville facility in August 2022, partially offset by the restart of production at Mt. Holly bringing operating capacity to 75% in second quarter of 2022.
The following table sets forth, for the periods indicated, the shipment volumes and revenues for primary aluminum shipments:
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SHIPMENTS - PRIMARY ALUMINUM(1) | | | | |
| United States | | Iceland | | Total |
| Tonnes | | Revenue $ | | Tonnes | | Revenue $ | | Tonnes | | Revenue $ |
| (dollars in millions) |
2022 | 459,991 | | | $ | 1,650.4 | | | 308,700 | | | $ | 1,040.1 | | | 768,691 | | | $ | 2,690.5 | |
2021 | 468,729 | | | 1,368.0 | | | 314,918 | | | 790.8 | | | 783,647 | | | 2,158.8 | |
2020 | 495,433 | | | 985.3 | | | 315,743 | | | 570.8 | | | 811,176 | | | 1,556.1 | |
(1) Excludes scrap aluminum, purchased aluminum and alumina sales
Results of Operations
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
| | | | | | | | | | | |
Net sales (in millions) | 2022 | | 2021 |
Twelve months ended December 31, | $ | 2,777.3 | | | $ | 2,212.5 | |
Net sales: Net sales (excluding scrap aluminum and alumina sales) increased by $564.8 million for the twelve months ended December 31, 2022, compared to the same period in 2021, primarily driven by favorable LME and regional premium price realizations of $496.9 million and favorable product mix of $82.0 million driven by higher value-added product premiums, partially offset by $26.8 million in volume primarily related to the full curtailment of our Hawesville smelter in the third quarter of 2022.
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Gross profit (loss) (in millions) | 2022 | | 2021 |
Twelve months ended December 31, | $ | 46.7 | | | $ | 124.2 | |
Gross profit (loss): Gross profit decreased by $77.5 million for the twelve months ended December 31, 2022, compared to the same period in 2021, primarily driven by unfavorable raw material price realizations of $338.4 million and unfavorable power price realizations of $285.5 million. The changes were partially offset by favorable LME and regional premium price realizations of $496.9 million, and favorable volume and product mix of $28.2 million driven by the restart at our Mt. Holly facility, curtailment at our Hawesville smelter and higher value-added product premiums.
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Asset impairment charge (in millions) | 2022 | | 2021 |
Twelve months ended December 31, | $ | 159.4 | | | $ | — | |
Asset impairment charge: An asset impairment charge was recognized for the twelve months ended December 31, 2022 as a result of the temporary curtailment of the Hawesville facility, announced during June 2022. As the curtailment represents a significant adverse change in the extent and manner in which Hawesville will be used, we accordingly evaluated the Hawesville asset group for recoverability which resulted in the recognized impairment charge of $159.4 million.
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Selling, general and administrative expenses (in millions) | 2022 | | 2021 |
Twelve months ended December 31, | $ | 37.5 | | | $ | 57.6 | |
Selling, general and administrative expenses: Selling, general and administrative expenses decreased $20.1 million in 2022 compared to 2021, primarily due to decreases in share-based compensation due to fluctuations in the Company's stock price year over year.
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Net gain (loss) on forward and derivative contracts (in millions) | 2022 | | 2021 |
Twelve months ended December 31, | $ | 197.1 | | | $ | (212.4) | |
Net gain (loss) on forward and derivative contracts: In 2022, we recognized gains of $197.1 million primarily driven by decreases in LME and MWP forward prices, and increased gains on Nord Pool derivative contracts due to Nord Pool power forward price increases. In 2021, we recognized losses of $212.4 million primarily related to LME and MWP fixed forward financial sales contracts. The losses were primarily driven by fluctuations in forward prices. See Note 19. Derivatives to the consolidated financial statements included herein for additional information.
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Income tax (expense) benefit (in millions) | 2022 | | 2021 |
Twelve months ended December 31, | $ | (47.4) | | | $ | 30.6 | |
Income tax benefit (expense): We have a valuation allowance against all of our U.S. and certain foreign deferred tax assets. We recognized $(47.4) million income tax expense in 2022 as compared to income tax benefit of $30.6 million in 2021. The period-to-period change is primarily related to foreign earnings in the current period, and a discrete tax benefit of $49.8 million related to the recognition of certain foreign deferred tax assets in 2021. See Note 15. Income Taxes to the consolidated financial statements included herein for additional information.
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 U.S. and Iceland revolving credit facilities (collectively, the "revolving credit facilities") and have raised capital in the past through public equity and debt markets. Additionally, on December 9, 2022, Vlissingen entered into the Vlissingen Facility Agreement (defined below) pursuant to which it may borrow from time to time up to $90.0 million. 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 of December 31, 2022, we had cash and cash equivalents of approximately $54.3 million, unused availability under our revolving credit facilities of $100.7 million, and additional liquidity of $90.0 million under the Vlissingen Facility Agreement, resulting in a total liquidity position of approximately $245.0 million.
Available Cash
Our available cash and cash equivalents balance at December 31, 2022 was $54.3 million compared to $29.0 million at December 31, 2021.
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 ended December 31, 2022, 2021 and 2020 are summarized below: | | | | | | | | | | | | | | | | | |
| Twelve months ended December 31, |
| 2022 | | 2021 | | 2020 |
| (dollars in millions) |
Net cash provided by (used in) operating activities | $ | 25.9 | | | $ | (64.7) | | | $ | 42.9 | |
Net cash used in investing activities | (85.5) | | | (82.6) | | | (11.8) | |
Net cash provided by financing activities | 74.4 | | | 103.7 | | | 13.5 | |
Change in cash, cash equivalents and restricted cash | $ | 14.8 | | | $ | (43.6) | | | $ | 44.6 | |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Net cash provided by operating activities for 2022 was $25.9 million, compared to cash used in operating activities of $64.7 million in 2021. The change in net cash provided by operating activities was primarily driven by improvement in results of operations year over year. The change was further due to changes in working capital primarily attributable to timing of payables, timing of raw material receipts, and pricing increases, and partially offset by hedge settlements.
The increase in net cash used in investing activities during 2022 was primarily due to higher spending on capital projects during the twelve months ended December 31, 2022, driven by capital investments in the Mt. Holly restart project and the Grundartangi casthouse project.
The change in net cash provided by financing activities from 2022 compared to 2021 was primarily due to borrowings under the Grundartangi casthouse facility and Iceland term facility in 2022 as compared to net borrowings on our revolving credit facilities in 2021.
Availability under Our Credit Facilities
Our U.S. revolving credit facility, dated May 2018 (as amended, the "U.S. revolving credit facility"), previously provided for borrowings of up to $220.0 million, including up to $110.0 million under a letter of credit sub-facility. In June 2022, we entered into a Fourth Amendment to our existing $220.0 million U.S. revolving credit facility, increasing the maximum capacity from $220.0 million to $250.0 million, including up to $150.0 million under a letter of credit sub-facility. The U.S.
revolving credit facility matures in June 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.
We have also entered into, through our wholly-owned subsidiary Nordural Grundartangi ehf ("Grundartangi"), a revolving credit facility, dated November 2013, as amended (the "Iceland revolving credit facility") which originally provided for borrowings of up to $50.0 million in the aggregate. On February 4, 2022, we amended the Iceland revolving credit facility and increased the facility amount to $80.0 million in the aggregate. On September 28, 2022, we further amended the Iceland revolving credit facility and increased the facility amount to $100.0 million in the aggregate. The Iceland revolving credit facility matures November 2024.
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 of December 31, 2022, our U.S. revolving credit facility had a borrowing base of $165.5 million, $90.0 million in outstanding borrowings, and $34.9 million in letters of credit outstanding. The borrowing base under the U.S. revolving credit facility has been adversely affected by the curtailment of our Hawesville facility. Of the outstanding letters of credit, $21.6 million related to our power commitments, $13.3 million are related to hedging collateral, and the remainder are primarily for the purpose of securing certain secured debt and workers’ compensation commitments. As of December 31, 2022, our Iceland revolving credit facility had a borrowing base of $95.1 million and $35.0 million in outstanding borrowings.
As of December 31, 2022, our credit facilities had $100.7 million of net availability after consideration of our outstanding borrowings and letters of credit. We may borrow and make repayments under our revolving 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 the U.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 the U.S. revolving credit facility is less than or equal to $25.0 million, or 10% of the borrowing base but not less than $17.85 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 our U.S. revolving credit facility. Our Iceland revolving credit facility contains covenants that require Grundartangi to maintain a minimum equity ratio. As of December 31, 2022, we were in compliance with all such covenants or maintained availability above such covenant triggers.
Grundartangi Casthouse Facility
On November 2, 2021, in connection with the casthouse project at Grundartangi, we entered into an eight-year Term Facility Agreement with Arion Bank hf, to provide for borrowings up to $130.0 million (the “Casthouse Facility”). 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. The Casthouse Facility will mature in December 2029. The Casthouse Facility bears interest at a rate equal to USD LIBOR 3 month plus an applicable margin. The Casthouse Facility is secured by a $430.0 million general bond. As of December 31, 2022, there were $50.0 million in borrowings outstanding under the Casthouse Facility.
The Casthouse Facility also contains customary covenants, including restrictions on mergers and acquisitions, indebtedness, preservation of assets, and dispositions of assets and contains a covenant that requires Grundartangi to maintain a minimum equity ratio. As of December 31, 2022, we were in compliance with all such covenants or maintained availability above such covenant triggers.
Senior Notes and Convertible Senior Notes
We have $250.0 million principal of senior secured notes that mature on April 1, 2028, unless earlier refinanced in accordance with their terms. Interest on the 2028 Notes is payable semi-annually on April 1 and October 1 of each year, beginning on October 1, 2021, at a rate of 7.5% per year. The indenture governing the 2028 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.
In April 2021, we issued $86.3 million in aggregate principal amount of Convertible Notes due 2028, unless earlier converted, repurchased or redeemed. The Convertible Notes bear interest semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2021, at a rate of 2.75% per annum in cash.
Iceland Term Facility
Our wholly-owned subsidiary, Grundartangi, 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. Under the Iceland Term Facility, 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 by the European Money Markets Institute. As of December 31, 2022, there were $14.5 million (€13.6 million) in outstanding borrowings under the Iceland Term Facility.
Vlissingen Facility Agreement
On December 9, 2022, Vlissingen entered into the Vlissingen Facility Agreement with Glencore International AG pursuant to which Vlissingen may borrow from time to time up to $90 million in one or more loans at a fixed interest rate equal to 8.75% per annum and payable on December 2, 2024. The obligations under the Vlissingen Facility Agreement are secured by liens on the ground lease on which Vlissingen’s facilities are located, Vlissingen’s moveable assets, financial assets, receivables and other assets, and Vlissingen’s shares. The Vlissingen Facility Agreement contains customary covenants, including with respect to mergers, guarantees and preservation and dispositions of assets. The availability period for borrowings under the Vlissingen Facility Agreement ends December 2, 2024. Amounts drawn, if any, under the Vlissingen Facility Agreement are expected to be used for general corporate and working capital purposes of Century and its subsidiaries. As of December 31, 2022, there were no outstanding borrowings under the Vlissingen Facility Agreement.
Supplemental Guarantor Financial Information
The Company has filed a Registration Statement on Form S-3 (the "Universal Shelf Registration Statement") with the SEC pursuant to which the Company may, from time to time, offer an indeterminate amount of securities, which may include securities that are guaranteed by certain of the Company's subsidiaries. As of December 31, 2022, we have not issued any debt securities pursuant to the Universal Shelf Registration Statement. However, any securities that we may issue in the future may limit our ability, and the ability of certain of our subsidiaries, to pay dividends or make distributions in respect of capital stock.
"Guarantor Subsidiaries" refers to all of our material domestic subsidiaries except for Nordural US LLC, Century Aluminum Development LLC and Century Aluminum of West Virginia, Inc. The Guarantor Subsidiaries are 100% owned by Century. All guarantees will be full and unconditional; all guarantees will be joint and several. Our foreign subsidiaries, together with Nordural US LLC, Century Aluminum Development LLC and Century Aluminum of West Virginia, Inc., are collectively referred to as the "Non-Guarantor Subsidiaries". We allocate corporate expenses or income to our subsidiaries and charge interest on certain intercompany balances.
The following summarized financial information of both the Company and the Guarantor Subsidiaries ("Guarantors") is presented on a combined basis. Intercompany balances and transactions between the Company and the Guarantors have been eliminated and the summarized financial information does not reflect investments of the Company or the Guarantors in the Non-Guarantor Subsidiaries. The Company’s or Guarantors’ amounts due from, amounts due to, and transactions with the Non-Guarantor Subsidiaries are disclosed below:
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| December 31, 2022 | | December 31, 2021 |
Current assets | $ | 305.7 | | | $ | 395.3 | |
Non-current assets | 704.5 | | 935.3 |
Current liabilities | 309.6 | | 375.1 |
Non-current liabilities | 487.1 | | 556.1 |
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| Twelve months ended December 31, 2022 |
Net sales | $ | 1,737.2 | |
Gross profit (loss) | (37.6) | |
Income (loss) before income taxes | (187.6) | |
Net income (loss) | (14.1) | |
As of December 31, 2022 and December 31, 2021, an intercompany receivable due to the Company and Guarantors from the Non-Guarantor Subsidiaries totaled $18.2 million and $15.1 million, respectively, and an intercompany non-current loan due to the Company from the Non-Guarantor Subsidiaries totaled $466.3 million and $554.2 million, respectively.
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 with Kenergy, a member of a cooperative of Big Rivers, in July 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 with Kenergy. As of December 31, 2022, the principal and accrued interest for the contingent obligation was $29.5 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 at December 31, 2022 and our expected level of Hawesville's operations, 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 the Pension Benefit Guarantee 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 during the years ended December 31, 2021 and 2020. We historically elected to defer certain payments under the PBGC Settlement Agreement and provided the PBGC with the appropriate security. On October 1, 2021, we amended the PBGC Settlement Agreement (the "Amended 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 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. As of December 31, 2022, we made contributions of $2.4 million related to the Amended PBGC Settlement Agreement.
Section 232 Aluminum Tariff
On March 23, 2018, the U.S. implemented a 10% tariff on imported primary aluminum products into the U.S. These tariffs are intended to protect U.S. national security and incentivize the restart of primary aluminum production in the U.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 from Australia, Canada and Mexico. Additionally, primary aluminum imports from Argentina are allowed up to an annual quota limit of 169,000 metric tonnes, the first 18,000 metric tonnes of imports from the European Union and the first 900 metric tonnes of imports from the United Kingdom are also allowed duty free. Imports that receive a product exclusion from the Department of Commerce may also enter the US duty free. In July 2022, the International Trade Commission (ITC) initiated a review of the Section 301 and 232 duties as required by law every four years. The process will conclude no later than March 15, 2023.
Other Items
On January 17, 2023, our wholly owned subsidiary, Mt. Holly Commerce Park LLC, entered into a binding agreement, subject to ordinary course conditions, to sell approximately 133 acres of land for approximately $28.5 million. We previously formed the commerce park, located near our Mt. Holly smelter, to develop excess land at the site and to assist the county with bringing additional business and commerce to the area.
During 2021, we initiated efforts to restart the curtailed capacity at our Mt. Holly facility. The project was completed during the second quarter of 2022, resulting in total production of 75% of Mt. Holly's full capacity.
During 2021, we announced plans for construction of a new billet casthouse at Grundartangi. The Grundartangi casthouse project began in late 2021 and is expected to continue through the second half of 2023. The Grundartangi casthouse project will be fully funded through the Casthouse Facility. The project is progressing and is expected to be completed on-time and on-budget, subject to market conditions.
In October 2021, Nordural Helguvik ehf ("Helguvik"), a past subsidiary of ours and owner of the former Helguvik project site which has been curtailed since 2008, filed for bankruptcy and on October 28, 2021, a district court in Iceland issued a verdict declaring bankruptcy of Helguvik. We recognized a deferred tax asset and recorded a discrete tax benefit of $49.8 million related to the future tax benefit we expect to realize for deductible costs related to our historical investment in Helguvik. There are no other financial statement impacts as a result of the bankruptcy filing.
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 2022, 2021, and 2020. As of December 31, 2022, 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.
In November 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 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 agreed to pay the remaining amounts under the settlement agreement in annual increments of $2.0 million for nine years. At December 31, 2022, we had $2.0 million in other current liabilities and $4.8 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 16. 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 the U.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 ended December 31, 2022 were $17.3 million, excluding expenditures of $16.2 million associated with the restart at Mt. Holly and $40.0 million associated with the Grundartangi casthouse project. We
estimate our total capital spending in 2023, excluding the Grundartangi casthouse project, will be approximately $24 million, related to our ongoing investment and sustainability projects at our plants.
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 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 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: | 2022 | | 2021 |
Pension plans | 5.50% | | 2.89% |
OPEB plans | 5.57% | | 2.75% |
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 of December 31, 2022: | | | | | | | | | | | |
Effect of changes in the discount rates on the Projected Benefit Obligations for: | 50 basis point increase | | 50 basis point decrease |
| (dollars in millions) |
Pension plans | $ | (14.4) | | | $ | 16.0 | |
OPEB plans | (2.9) | | | 3.1 | |
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 2022.
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 $487.9 million recorded against our net U.S. deferred tax assets and a portion of our Icelandic deferred tax assets as of December 31, 2022.
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.
Recently Issued Accounting Standards Updates
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 2031 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 | | | | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| (dollars in millions) |
Long-term debt (1) | $ | 475 | | | | | | $ | — | | | $ | 8 | | | $ | 9 | | | $ | 9 | | | $ | 9 | | | $ | 440 | |
Estimated interest payments (2) | 169 | | | | | | 26 | | | 31 | | | 31 | | | 30 | | | 30 | | | 21 | |
Operating lease obligations (3) | 36 | | | | | | 3 | | | 3 | | | 3 | | | 3 | | | 3 | | | 21 | |
Purchase obligations (4) | 1,369 | | | | | | 741 | | | 325 | | | 90 | | | 83 | | | 47 | | | 83 | |
Other long-term liabilities (5) | 24 | | | | | | 6 | | | 3 | | | 3 | | | 7 | | | 5 | | | — | |
Total | $ | 2,073 | | | | | | 776 | | | 370 | | | 136 | | | 132 | | | 94 | | | 565 | |
(1)Long-term debt includes principal repayments on our 2028 Notes, Convertible Notes, the Casthouse Facility, the IRB and the Iceland Term Facility. 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, 2022 and expected Hawesville operating levels, 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, 2022 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, 2022 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, 2022.
(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, 2022, estimated future payments related to these obligations through the year 2032 amount to approximately $180.8 million, $16.3 million, $59.2 million and $9.6 million, respectively.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS | | | | | |
| Page |
| |
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | |
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 | |
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2022, 2021 and 2020 | |
Consolidated Balance Sheets at December 31, 2022 and 2021 | |
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 | |
Notes to the Consolidated Financial Statements | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Century Aluminum Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Century Aluminum Company and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets — Refer to Note 1 to the financial statements.
Critical Audit Matter Description
The Company reviews property, plant, and equipment (“long-lived assets”) for impairment whenever events or changes in circumstances, known as triggering events, indicate that the carrying amount of a long-lived asset or asset group, may not be recoverable. Management considers various factors when determining if long-lived assets should be evaluated for impairment, including a significant adverse change in the business climate or industry conditions (such as sustained decreases in commodity prices, volatility in energy costs, and the global economy), a current period operating or cash flow loss combined with a history of losses, a significant adverse change in the extent or manner in which an asset is used, or a current expectation that the asset will be sold or otherwise disposed of before the end of its useful life. The carrying value of property, plant, and equipment, net as of December 31, 2022 was $744.4 million.
We identified the identification of impairment indicators for long-lived assets as a critical audit matter because of the significant assumptions management makes when determining whether events or circumstances have occurred indicating that the carrying amounts of property, plant and equipment may not be recoverable. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assessment of possible indicators of impairment included the following, among others:
•We tested the effectiveness of internal controls related to management’s identification of events or circumstances that may indicate the carrying amount of long-lived assets may not be recoverable
•We evaluated management’s analysis of impairment indicators by:
•Considering industry conditions, commodity price trends and the impact of macroeconomic factors, such as adverse changes in the regulatory environment, legislation or other factors that may represent impairment indicators not previously contemplated in management’s analysis.
•Evaluating management’s judgements around historical trends, macroeconomic and industry conditions, and whether forecasts are consistent with the Company’s operating strategy.
•Evaluating reasonableness of management’s assessment of future market prices of the revenue-generating commodity and future input costs necessary for operations by comparing these against available forward market pricing data.
•Inspecting minutes of the board of directors and committees of executive management to understand if there were factors that would represent potential impairment indicators for the Company’s asset groups.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 27, 2023
We have served as the Company's auditor since 1992.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Century Aluminum Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Century Aluminum Company and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 27, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 27, 2023
| | | | | | | | | | | | | | | | | |
CENTURY ALUMINUM COMPANY |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(in millions, except per share amounts) |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
NET SALES: | | | | | |
Related parties | $ | 1,671.1 | | | $ | 1,337.0 | | | $ | 1,025.5 | |
Other customers | 1,106.2 | | | 875.5 | | | 579.6 | |
Total net sales | 2,777.3 | | | 2,212.5 | | | 1,605.1 | |
Cost of goods sold | 2,730.6 | | | 2,088.3 | | | 1,641.6 | |
Gross profit (loss) | 46.7 | | | 124.2 | | | (36.5) | |
Selling, general and administrative expenses | 37.5 | | | 57.6 | | | 43.5 | |
Asset impairment | 159.4 | | | — | | | — | |
Other operating expense - net | 0.0 | | | 0.6 | | | 0.5 | |
Operating income (loss) | (150.2) | | | 66.0 | | | (80.5) | |
Interest expense – Hawesville term loan | — | | | (1.6) | | | (1.9) | |
Interest expense | (29.3) | | | (28.8) | | | (29.7) | |
Interest income | 0.5 | | | 0.8 | | | 0.8 | |
Net gain (loss) on forward and derivative contracts | 197.1 | | | (212.4) | | | (17.3) | |
Loss on early extinguishment of debt | — | | | (24.7) | | | (1.2) | |
Other income - net | 15.3 | | | 3.1 | | | 3.5 | |
Income (loss) before income taxes and equity in earnings of joint ventures | 33.4 | | | (197.6) | | | (126.3) | |
Income tax (expense) benefit | (47.4) | | | 30.6 | | | 3.1 | |
Loss before equity in earnings of joint ventures | (14.0) | | | (167.0) | | | (123.2) | |
| | | | | |
Equity in losses of joint ventures | (0.1) | | | (0.1) | | | (0.1) | |
Net loss | $ | (14.1) | | | $ | (167.1) | | | $ | (123.3) | |
| | | | | |
| | | | | |
| | | | | |
LOSS PER COMMON SHARE: | | | | | |
Basic and diluted | $ | (0.15) | | | $ | (1.85) | | | $ | (1.38) | |
| | | | | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | | | | | |
Basic and diluted | 91.4 | | | 90.2 | | | 89.5 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | |
CENTURY ALUMINUM COMPANY |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
(in millions) |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Net loss | $ | (14.1) | | | $ | (167.1) | | | $ | (123.3) | |
Other comprehensive (loss) income before income tax effect: | | | | | |
| | | | | |
| | | | | |
Net loss on foreign currency cash flow hedges reclassified as income | (0.2) | | | (0.1) | | | (0.2) | |
Defined benefit plans and other postretirement benefits: | | | | | |
Net (loss) gain arising during the period | (5.9) | | | 31.6 | | | (13.4) | |
OPEB curtailment gain | (8.9) | | | — | | | — | |
Amortization of prior service benefit during the period | (1.2) | | | (3.1) | | | (3.0) | |
Amortization of net loss during the period | 4.8 | | | 8.4 | | | 8.7 | |
| | | | | |
Other comprehensive (loss) income before income tax effect | (11.4) | | | 36.8 | | | (7.9) | |
Income tax effect | (0.3) | | | (0.3) | | | (1.0) | |
Other comprehensive (loss) income | (11.7) | | | 36.5 | | | (8.9) | |
Total comprehensive loss | $ | (25.8) | | | $ | (130.6) | | | $ | (132.2) | |
See notes to consolidated financial statements.
| | | | | | | | | | | |
CENTURY ALUMINUM COMPANY |
CONSOLIDATED BALANCE SHEETS |
(in millions) |
| December 31, |
| 2022 | | 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 54.3 | | | $ | 29.0 | |
Restricted cash | 1.2 | | | 11.7 | |
Accounts receivable - net | 66.9 | | | 80.6 | |
Due from affiliates | 4.8 | | | 8.3 | |
Inventories | 398.8 | | | 425.6 | |
Derivative assets | 127.3 | | | 34.8 | |
Prepaid and other current assets | 24.5 | | | 28.2 | |
Total current assets | 677.8 | | | 618.2 | |
Property, plant and equipment - net | 744.4 | | | 892.5 | |
Other assets | 49.8 | | | 59.2 | |
| | | |
TOTAL | $ | 1,472.0 | | | $ | 1,569.9 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
LIABILITIES: | | | |
Accounts payable, trade | $ | 167.3 | | | $ | 186.5 | |
| | | |
Due to affiliates | 17.0 | | | 65.8 | |
Accrued and other current liabilities | 60.7 | | | 62.7 | |
Derivative liabilities | 9.7 | | | 102.1 | |
Accrued employee benefits costs | 9.9 | | | 8.9 | |
Iceland term facility | 13.3 | | | — | |
U.S. revolving credit facility | 90.0 | | | 63.6 | |
Iceland revolving credit facility | 35.0 | | | 50.0 | |
| | | |
Industrial revenue bonds | 7.8 | | | 7.8 | |
Total current liabilities | 410.7 | | | 547.4 | |
Senior notes payable | 246.6 | | | 245.8 | |
Convertible senior notes payable | 84.4 | | | 84.0 | |
Grundartangi casthouse debt facility | 49.4 | | | — | |
Iceland term facility, net of current portion | 1.2 | | | — | |
Accrued pension benefits costs - less current portion | 44.5 | | | 28.6 | |
Accrued postretirement benefits costs - less current portion | 67.6 | | | 93.3 | |
Other liabilities | 36.0 | | | 46.3 | |
Leases - right of use liabilities | 20.9 | | | 22.9 | |
Due to affiliates - less current portion | 8.3 | | | 21.9 | |
Deferred taxes | 103.1 | | | 58.7 | |
Total noncurrent liabilities | 662.0 | | | 601.5 | |
COMMITMENTS AND CONTINGENCIES (NOTE 16) | | | |
SHAREHOLDERS’ EQUITY: | | | |
| 0.0 | | 0.0 |
| 1.0 | | | 1.0 | |
Additional paid-in capital | 2,539.6 | | | 2,535.5 | |
Treasury stock, at cost | (86.3) | | | (86.3) | |
Accumulated other comprehensive loss | (94.0) | | | (82.3) | |
Accumulated deficit | (1,961.0) | | | (1,946.9) | |
Total shareholders’ equity | 399.3 | | | 421.0 | |
TOTAL | $ | 1,472.0 | | | $ | 1,569.9 | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CENTURY ALUMINUM COMPANY | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | |
(in millions) | |
| | Preferred stock | | Common stock | | Additional paid-in capital | | Treasury stock, at cost | | Accumulated other comprehensive loss | | Accumulated deficit | | Total shareholders’ equity | |
Balance, December 31, 2019 | | $ | 0.0 | | | $ | 1.0 | | | $ | 2,526.5 | | | $ | (86.3) | | | $ | (109.8) | | | $ | (1,656.4) | | | $ | 675.0 | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (123.3) | | | (123.3) | | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | (8.9) | | | — | | | (8.9) | | |
| | | | | | | | | | | | | | | |
Share-based compensation | | — | | | 0.0 | | | 3.5 | | | — | | | — | | | — | | | 3.5 | | |
Conversion of preferred stock to common stock | | 0.0 | | | 0.0 | | | 0.0 | | | — | | | — | | | — | | | 0.0 | | |
Balance, December 31, 2020 | | $ | 0.0 | | | $ | 1.0 | | | $ | 2,530.0 | | | $ | (86.3) | | | $ | (118.8) | | | $ | (1,779.8) | | | $ | 546.1 | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (167.1) | | | (167.1) | | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | 36.5 | | | — | | | 36.5 | | |
| | | | | | | | | | | | | | | |
Share-based compensation | | — | | | 0.0 | | | 10.1 | | | — | | | — | | | — | | | 10.1 | | |
Conversion of preferred stock to common stock | | 0.0 | | | 0.0 | | | 0.0 | | | — | | | — | | | — | | | 0.0 | | |
Capped call premiums | | — | | — | | (4.6) | | — | | | — | | | — | | | (4.6) | |
Balance, December 31, 2021 | | $ | 0.0 | | | $ | 1.0 | | | $ | 2,535.5 | | | $ | (86.3) | | | $ | (82.3) | | | $ | (1,946.9) | | | $ | 421.0 | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (14.1) | | | (14.1) | | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | (11.7) | | | — | | | (11.7) | | |
Share-based compensation | | — | | | 0.0 | | 4.1 | | | — | | | — | | | — | | | 4.1 | | |
Conversion of preferred stock to common stock | | 0.0 | | 0.0 | | 0.0 | | — | | | — | | | — | | | 0.0 | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2022 | | $ | 0.0 | | | $ | 1.0 | | | $ | 2,539.6 | | | $ | (86.3) | | | $ | (94.0) | | | $ | (1,961.0) | | | $ | 399.3 | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | |
CENTURY ALUMINUM COMPANY |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(in millions) |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net loss | $ | (14.1) | | | $ | (167.1) | | | $ | (123.3) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
Lower of cost or NRV inventory adjustment | 39.6 | | | — | | | 45.0 | |
(Gain) loss on derivative instruments | (201.5) | | | 102.9 | | | 15.7 | |
Depreciation and amortization | 73.4 | | | 82.6 | | | 83.0 | |
Change in deferred tax provision (benefit) | 44.2 | | | (30.6) | | | — | |
Asset impairment | 159.4 | | | — | | | — | |
OPEB curtailment gain | (8.9) | | | — | | | — | |
| | | | | |
Loss on early extinguishment of debt | — | | | 24.7 | | | 1.0 | |
Other non-cash items - net | (22.8) | | | (1.7) | | | (0.9) | |
Change in operating assets and liabilities: | | | | | |
Accounts receivable - net | 13.7 | | | (16.2) | | | 19.1 | |
Due from affiliates | 3.6 | | | 0.7 | | | 20.8 | |
Inventories | (12.8) | | | (134.5) | | | (15.5) | |
Prepaid and other current assets | 5.6 | | | (13.4) | | | 0.6 | |
Accounts payable, trade | (15.8) | | | 44.8 | | | 20.6 | |
Due to affiliates | (43.5) | | | 38.3 | | | (22.4) | |
Accrued and other current liabilities | 8.8 | | | 5.0 | | | (1.2) | |
Ravenswood retiree legal settlement | (2.0) | | | (2.0) | | | (2.0) | |
Ravenswood PBGC settlement | (2.4) | | | — | | | — | |
Other - net | 1.4 | | | 1.8 | | | 2.4 | |
Net cash provided by (used in) operating activities | 25.9 | | | (64.7) | | | 42.9 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Purchase of property, plant and equipment | (86.3) | | | (83.0) | | | (13.4) | |
Proceeds from sale of property, plant and equipment | 0.8 | | | 0.4 | | | 1.6 | |
| | | | | |
Net cash used in investing activities | (85.5) | | | (82.6) | | | (11.8) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Repayment of Senior Notes due 2021 | — | | | — | | | (250.0) | |
Proceeds from issuance of Senior Notes due 2025 | — | | | — | | | 243.8 | |
Repayment of Senior Notes due 2025 | — | | | (250.0) | | | — | |
Early redemption and tender premiums paid | — | | | (18.1) | | | — | |
Proceeds from issuance of Senior Notes due 2028 | — | | | 250.0 | | | — | |
Proceeds from issuance of Convertible Senior Notes | — | | | 86.3 | | | — | |
| | | | | |
Repayments under Hawesville Term Loan | — | | | (20.0) | | | (20.0) | |
| | | | | |
Borrowings under revolving credit facilities | 1,126.2 | | | 978.8 | | | 258.9 | |
Repayments under revolving credit facilities | (1,114.8) | | | (910.2) | | | (217.9) | |
Debt issuance cost | (1.5) | | | (7.4) | | | (1.1) | |
Debt retirement cost | — | | | — | | | (0.2) | |
| | | | | |
| | | | | |
Purchase of capped calls related to Convertible Senior Notes | — | | | (5.7) | | | — | |
| | | | | |
Borrowings under Grundartangi casthouse debt facility | 50.0 | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Borrowings under Iceland term facility | 14.5 | | | — | | | — | |
Net cash provided by financing activities | 74.4 | | | 103.7 | | | 13.5 | |
CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 14.8 | | | (43.6) | | | 44.6 | |
Cash, cash equivalents and restricted cash, beginning of year | 40.7 | | | 84.3 | | | 39.7 | |
Cash, cash equivalents and restricted cash, end of year | $ | 55.5 | | | $ | 40.7 | | | $ | 84.3 | |
| | | | | |
Supplemental Cash Flow Information: | | | | | |
Cash paid for: | | | | | |
Interest | $ | 27.0 | | | $ | 36.8 | | | $ | 14.5 | |
Taxes, net of refunds | 0.9 | | | 3.1 | | | 0.2 | |
Non-cash investing activities: | | | | | |
Capital expenditures | 3.7 | | | 7.1 | | | 0.9 | |
Capitalized interest | 4.2 | | | 1.6 | | | — | |
| | | | | |
See notes to consolidated financial statements.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
1. Summary of Significant Accounting Policies
Organization — Century Aluminum Company ("Century Aluminum," "Century," the "Company", "we", "us", "our" or "ours") is a holding company, whose principal subsidiaries are Century Kentucky, Inc. (together with its subsidiaries, "CAKY"), Nordural ehf ("Nordural"), Century Aluminum Sebree LLC ("Century Sebree") and Century Aluminum of South Carolina ("CASC"). CAKY operates a primary aluminum reduction facility in Hawesville, Kentucky ("Hawesville"). Nordural Grundartangi ehf, a subsidiary of Nordural, operates a primary aluminum reduction facility in Grundartangi, Iceland ("Grundartangi"). Century Sebree operates a primary aluminum reduction facility in Robards, Kentucky ("Sebree"). CASC operates a primary aluminum reduction facility in Goose Creek, South Carolina ("Mt. Holly").
In addition to our primary aluminum assets, our subsidiary, Century Aluminum Vlissingen B.V., owns and operates a carbon anode production facility located in Vlissingen, the Netherlands ("Vlissingen"). Carbon anodes are used in the production of primary aluminum and Vlissingen currently supplies carbon anodes to Grundartangi.
As of December 31, 2022, Glencore owns 42.9% of Century’s outstanding common stock (46.1% on a fully-diluted basis assuming the conversion of all of the Series A Convertible Preferred Stock) and all of our outstanding Series A Convertible Preferred Stock. See Note 8. Shareholders' Equity for a full description of our outstanding Series A Convertible Preferred Stock. Century and Glencore enter into various transactions from time to time such as the purchase and sale of primary aluminum, purchase and sale of alumina and raw materials, tolling agreements as well as forward financial contracts and borrowing and other debt transactions. See Note 3. Related Party Transactions. Basis of Presentation — The consolidated financial statements include the accounts of Century Aluminum Company and our subsidiaries, after elimination of all intercompany transactions and accounts.
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents — Cash and cash equivalents are comprised of cash, money market funds and short-term investments having original maturities of three months or less. The carrying amount of cash equivalents approximates fair value.
Accounts Receivable and Due from Affiliates — These amounts are net of an allowance for expected losses of $0.5 million and $1.0 million at December 31, 2022 and 2021, respectively.
Inventories — Our inventories are stated at the lower of cost or net realizable value, using the first-in, first-out ("FIFO") and the weighted average cost method. Due to the nature of our business, our inventory values are subject to market price changes and these changes can have a significant impact on cost of goods sold and gross profit in any period. Reductions in net realizable value below cost basis at the end of a period will have an impact on our cost of goods sold as this inventory is sold in subsequent periods.
Property, Plant and Equipment — Property, plant and equipment is stated at cost. Additions and improvements are capitalized when each asset is placed into service. Asset and accumulated depreciation accounts are relieved for dispositions with resulting gains or losses included in Other income - net. Maintenance and repairs are expensed as incurred. Depreciation of plant and equipment is provided for by the straight-line method over the following estimated useful lives:
Building and improvements 10 to 45 years
Machinery and equipment 5 to 35 years
Technology and software 3 to 7 years
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
During the second half of 2022, we fully curtailed production at our Hawesville facility and ceased our efforts to rebuild the fifth potline.
During 2022, we continued efforts to restart the curtailed capacity at our Mt. Holly facility. Restart work at the Mt. Holly smelter was completed in the second quarter of 2022 bringing its operations to 75% of Mt. Holly's maximum production capacity. All associated costs that meet the capitalization criteria have been capitalized as a component of property, plant and equipment.
Impairment of long-lived assets — The Company reviews property, plant and equipment ("long-lived assets") for impairment whenever events or changes in circumstances, known as triggering events, indicate that the carrying amount of a long-lived asset or an asset group may not be recoverable. Management considers various factors when determining if long-lived assets should be evaluated for impairment, including a significant adverse change in the business climate or industry conditions (such as sustained decreases in commodity prices, volatility in energy costs, and the global economy), a current period operating or cash flow loss combined with a history of losses, a significant adverse change in the extent or manner in which an asset is used or a current expectation that the asset will be sold or otherwise disposed of before the end of its useful life. If a triggering event is identified, the Company determines if the long-lived asset or asset group is recoverable. Recoverability is measured by comparison of the carrying amount of a long-lived asset or asset group held and used to estimate undiscounted future net cash flows expected to be generated by the long-lived asset or asset group. Impairment evaluation and fair value is based on estimates and assumptions that take into account our business plans and a long-term investment horizon, including consideration of commodity pricing, energy costs and other global economic conditions which may have an adverse effect on recoverability. If deemed unrecoverable, an impairment loss would be recognized for the amount by which the carrying amount exceeds the estimated fair value of the long-lived asset or asset group.
Leases — We determine whether an arrangement is a lease at the inception of the arrangement based on the terms and conditions in the contract. A contract contains a lease if there is an identified asset which we have the right to control. We have made a policy election not to separate lease and non-lease components within contracts. We have also elected not to recognize the impact of short term leases in the right of use asset ("ROUA") and right of use liability ("ROUL") balances. Short term leases are leases that have a lease term less than one year and do not include a purchase option.
Income Taxes — We account for income taxes using the asset and liability method, whereby deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In evaluating our ability to realize deferred tax assets, we use judgment to determine if it is more likely than not that some portion or all of a deferred tax asset will not be realized, and if a corresponding valuation allowance is required.
Defined Benefit Pension and Other Postretirement Benefits — We sponsor defined benefit pension and OPEB plans for certain of our domestic hourly and salaried employees and a supplemental executive retirement benefit plan for certain current and former executive officers. Plan assets and obligations are measured annually or more frequently if there is a re-measurement event, based on the Company’s measurement date utilizing various actuarial assumptions. We attribute the service costs for the plans over the working lives of plan participants. The effects of actual results differing from our assumptions and the effects of changing assumptions are considered actuarial gains or losses. Actuarial gains or losses are recorded in Accumulated Other Comprehensive Income (Loss).
We contribute to our defined benefit pension plans based upon actuarial and economic assumptions designed to achieve adequate funding of the projected benefit obligations and to meet the minimum funding requirements.
Postemployment Benefits — We provide certain postemployment benefits to certain former and inactive employees and their dependents during the period following employment, but before retirement. These benefits include salary continuance, supplemental unemployment and disability health care. We recognize the estimated future cost of providing postemployment benefits on an accrual basis over the active service life of the employee.
Derivatives and Hedging — As a global producer of primary aluminum, our operating results and cash flows from operations are subject to risk of fluctuations in the market prices of primary aluminum. We may from time to time enter into financial contracts to manage our exposure to such risk. Derivative instruments may consist of variable to fixed financial contracts and back-to-back fixed to floating arrangements for a portion of our sale of primary aluminum, where we receive fixed and pay floating prices from our customers and to counterparties, respectively.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
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. We are also exposed to foreign currency risk, and 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.
Our derivatives are not designated as cash flow hedges.
Derivative and hedging instruments are recorded in due from affiliates, derivative assets, other assets, due to affiliates, derivative liabilities and derivative liabilities - less current portion in the consolidated balance sheets at fair value. We value our derivative and hedging instruments using quoted market prices and other significant unobservable inputs.
We recognize changes in fair value and settlements of derivative instruments in net gain (loss) on forward and derivative contracts in the consolidated statements of operations as they occur.
Unrealized gains on forward and derivative contracts are reported as part of cash flows from operations in the consolidated statements of cash flows.
Foreign Currency – We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the Euro and the Icelandic krona ("ISK"), and the Chinese renminbi. Grundartangi and Vlissingen use the U.S. dollar as their functional currency, as contracts for sales of aluminum and purchases of alumina and power are denominated in U.S. dollars. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise and any transaction gains and losses are reflected in Other income - net in the consolidated statements of operations.
Financial Instruments — Receivables, certain life insurance policies, payables, borrowings under revolving credit facilities and debt related to industrial revenue bonds ("IRBs") are carried at amounts that approximate fair value.
Earnings per share — Basic earnings (loss) per share ("EPS") amounts are calculated by dividing earnings (loss) available to common stockholders by the weighted average number of common shares outstanding using the two-class method. Under the two-class method, net income is allocated between shares of common stock and other participating securities based on their participating rights. Net loss is not allocated to other participating securities if they are not obligated to share in the losses based on their contractual terms. Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
The dilutive effect to earnings per share is determined using the "if converted" method whereby, if the conversion of the convertible notes would be dilutive, interest expense on the outstanding notes is added back to the diluted earnings numerator and all of the potentially dilutive shares are included in the diluted common shares outstanding denominator for the computation of diluted earnings per share.
Our Series A Convertible Preferred Stock is a non-cumulative perpetual participating convertible preferred stock with no set dividend preferences. In periods where we report net losses, we do not allocate these losses to the Convertible Preferred Stock for the computation of basic or diluted EPS.
Asset Retirement Obligations — We are subject to environmental regulations which create certain legal obligations related to the normal operations of our domestic primary aluminum smelter operations. Our asset retirement obligations ("AROs") consist primarily of costs associated with the disposal of spent potliner used in the reduction cells of our domestic facilities. AROs are recorded on a discounted basis at the time the obligation is incurred (when the potliner is put in service) and accreted over time for the change in the present value of the liability. We capitalize the asset retirement costs by increasing the carrying amount of the related long-lived assets and depreciating these assets over their remaining useful lives.
Certain conditional asset retirement obligations ("CAROs") relate to the remediation of our primary aluminum facilities for hazardous material, such as landfill materials and asbestos which have not been recorded because they have an indeterminate settlement date. CAROs are a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within our control.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Concentrations of Credit Risk — Financial instruments, which potentially expose us to concentrations of credit risk, consist principally of trade receivables. Our limited customer base increases our concentrations of credit risk with respect to trade receivables. We routinely assess the financial strength of our customers and collectability of our trade receivables and recognize an allowance based on our estimate of lifetime expected credit losses in accordance with the current expected credit loss ("CECL") model.
Share-Based Compensation — We measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. We recognize the cost over the period during which an employee is required to provide service in exchange for the award. We issue shares to satisfy the requirements of our share-based compensation plans. At this time, we do not plan to issue treasury shares to support our share-based compensation plans, but we may in the future. We award performance units to certain officers and employees. The performance units may be settled in cash or common stock at the discretion of the Board. We have not issued any stock options since 2009.
Recently Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” as amended by ASU 2021-01 in January 2021, directly addressing the effects of reference rate reform on financial reporting as a result of the cessation of the publication of London Interbank Offered Rate ("LIBOR") and provides optional expedients for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by LIBOR or other reference rates expected to be discontinued. These optional expedients can be applied from March 2020 through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, "Reference Rate Reform: Deferral of the Sunset Date of Topic 848," which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. Arrangements that were entered into during the year ended December 31, 2022, including amendments to our U.S. and Iceland revolving credit facilities and our new Iceland Term Facility no longer use LIBOR as a reference rate. LIBOR continues to be the reference rate for our Grundartangi casthouse facility set to mature in 2028. The phase out of LIBOR reference rates will occur at different dates and began on January 1, 2022. Our adoption of this new standard occurred during the year ended December 31, 2022, in conjunction with the first phase-out of the LIBOR reference rate. There was no material impact to our consolidated financial statements, nor do we expect the adoption of this standard to have a material impact on our consolidated financial statements during the LIBOR transition.
2. Curtailment of Operations - Hawesville
On June 22, 2022, our subsidiary, Century Aluminum of Kentucky ("CAKY"), issued a Worker Adjustment and Retraining Notification Act ("WARN") notice at its Hawesville, Kentucky aluminum smelter related to a temporary curtailment of plant operations within 60 days as a result of current market conditions, including historically high energy costs and declining London Metal Exchange ("LME") prices. We have since fully curtailed production at the facility and expect to continue to maintain the plant with the intention of restarting operations when market conditions permit, including energy prices returning to more normalized levels and aluminum prices maintaining levels that can support the on-going costs and capital expenditures necessary to restart and operate the plant.
As the curtailment represents a significant adverse change in the extent and manner in which the Hawesville smelter will be used, 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, an impairment charge of $159.4 million was recognized to write down the asset group to its estimated fair value of $15.0 million. We classified the estimated remaining fair value of the long lived assets within Level 3 of the fair value hierarchy as its fair value was determined based on recent comparable transactions with inputs that are not readily observable in the market. We recognized approximately $18.1 million of expense during the year related to wages and severance triggered by our issuance of the WARN notice and excess capacity charges, partially offset by final plant idling activities. We also recognized a non-cash other postretirement benefits ("OPEB") curtailment gain totaling $8.9 million for the year ended December 31, 2022. See Note 12. Pension and other postretirement benefits to the consolidated financial statements included herein for additional information.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
3. Related Party Transactions
The significant related party transactions occurring during the years ended December 31, 2022, 2021 and 2020 are described below. We believe all of our transactions with related parties are at prices that approximate market.
Glencore ownership
As of December 31, 2022, Glencore plc and its affiliates (together "Glencore") beneficially owned 42.9% of Century’s outstanding common stock (46.1% on a fully-diluted basis assuming the conversion of all of the Series A Convertible Preferred Stock) and all of our outstanding Series A Convertible Preferred Stock. See Note 8. Shareholders' Equity for a full description of our outstanding Series A Convertible Preferred Stock. Century and Glencore enter into various transactions from time to time such as the purchase and sale of primary aluminum, purchase and sale of alumina and raw materials, tolling agreements as well as forward financial contracts and borrowing and other debt transactions. Sales to Glencore
For the years ended December 31, 2022, 2021 and 2020 we derived approximately 60%, 60% and 64% of our consolidated sales from Glencore, respectively.
Glencore purchases aluminum produced at our U.S. smelters at prices based on the LME plus the Midwest regional delivery premium plus any additional market-based product premiums. Glencore purchases aluminum produced at our Grundartangi, Iceland smelter at prices based on the LME plus the European Duty Paid premium plus any additional market-based product premiums.
We have entered into agreements with Glencore pursuant to which we sell certain amounts of alumina at market-based prices. For the years ended December 31, 2022, 2021 and 2020 we recorded $24.9 million, $18.3 million, and $17.9 million of revenue related to alumina sales to Glencore, respectively.
Purchases from Glencore
We purchase a portion of our alumina and certain other raw material requirements from Glencore. Alumina purchases from Glencore during 2022 were priced based on published alumina and aluminum indices as well as fixed prices.
Glencore Agreement Settlement
In July 2021, we reached a full and final legal settlement agreement with Glencore resolving a dispute related to alumina purchases and, accordingly, recorded a $4.0 million settlement loss to Cost of goods sold. This amount was paid during the fourth quarter of 2021.
Financial contracts with Glencore
We have certain financial contracts with Glencore. See Note 19. Derivatives regarding these forward financial sales contracts.
Vlissingen Facility Agreement
On December 9, 2022, Vlissingen entered into a Facility Agreement with Glencore International AG pursuant to which Vlissingen may borrow from time to time up to $90 million (the “Vlissingen Facility Agreement”) in one or more loans at a fixed interest rate equal to 8.75% per annum and payable on December 2, 2024. See Note 7. Debt for additional information. Borrowings under the Facility Agreement are expected to be used for general corporate and working capital purposes of Century and its subsidiaries.
Summary
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
A summary of the aforementioned significant related party sales and purchases for the years ended December 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net sales to Glencore | $ | 1,671.1 | | | $ | 1,337.0 | | | $ | 1,025.5 | |
Purchases from Glencore (1) | 284.7 | | | 334.6 | | | 197.6 | |
| | | | | |
(1) Includes settlements of financial contract positions.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
4. Revenue
We disaggregate our revenue by geographical region as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
Net Sales | | 2022 | | 2021 | | 2020 |
United States | | $ | 1,737.2 | | | $ | 1,413.0 | | | $ | 1,007.5 | |
Iceland | | 1,040.1 | | | 799.5 | | | 597.6 | |
Total | | $ | 2,777.3 | | | $ | 2,212.5 | | | $ | 1,605.1 | |
We enter into contracts to sell mainly primary aluminum to our customers. Revenue is recognized when our performance obligations with our customers are satisfied. Our obligations under the contracts are satisfied when we transfer control of our primary aluminum to our customers which is generally upon shipment or delivery to customer directed locations. The amount of consideration we receive, thus the revenue we recognize, is a function of volume delivered, market price of primary aluminum, which is based on the LME, plus regional premiums and any value-added product premiums.
The payment terms and conditions in our contracts vary and are not significant to our revenue. We complete an appropriate credit evaluation for each customer at contract inception. Customer payments are due in arrears and are recognized as accounts receivable - net and due from affiliates in our consolidated balance sheets.
In connection with our sales agreement with Glencore, we invoice Glencore prior to physical shipment of goods for a majority of production generated from each of our U.S. domestic smelters. For those sales, revenue is recognized only when Glencore has specifically requested such treatment and has made a commitment to purchase the product. The goods must be complete, ready for shipment and separated from other inventory with control over the goods passing to Glencore. We must retain no further performance obligations.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
5. Leases
We are a lessee in various agreements for the lease of office space, land, automobiles, and mobile equipment. All our leases are considered operating leases. The terms of our leases vary, including the lease term and the ability to renew or extend certain leases. As part of determining the lease term and potential extensions for purposes of calculating the ROUA and ROUL, we consider our historical practices related to renewal of certain leases. The weighted average remaining lease term for our operating leases was 12.2 years as of December 31, 2022 and 13.2 years as of December 31, 2021. Certain lease payment amounts are variable in nature and change periodically based on the local market consumer price index.
We use our incremental borrowing rate as the basis for the discount rate used to calculate the ROUA and ROUL, respectively, for our operating leases. The incremental borrowing rate is determined on a lease-by-lease basis and is based on the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to our lease payments. We consider the most likely financing options available for each lease based on the leased asset, legal entity party to the lease, economic environment in which the lease is denominated, the market conditions relative to the leased asset and our historical practices of obtaining financing for similar types of costs. The weighted average discount rate for our operating leases was 7.3% as of December 31, 2022 and 2021.
Our ROUA and ROUL balances for the years ended December 31, 2022 and December 31, 2021 were as follows (in millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
ROUA(1) | $ | 20.9 | | | $ | 22.9 | |
| | | |
ROUL - current(2) | $ | 1.8 | | | $ | 1.6 | |
ROUL - non-current(3) | 20.9 | | | 22.9 | |
Total ROUL | $ | 22.7 | | | $ | 24.5 | |
(1) ROUA was recorded as part of Other Assets within Non-current assets at December 31, 2022 and 2021.
(2) ROUL - current was recorded as part of Accrued and other current liabilities within Current liabilities at December 31, 2022 and 2021.
(3) ROUL - non-current was recorded as part of Leases - Right of use liabilities within Non-current liabilities at December 31, 2022 and 2021.
The undiscounted maturities of our operating lease liability balances as of December 31, 2022 are as follows (in millions):
| | | | | |
Year | December 31, |
2023 | $ | 3.4 | |
2024 | 3.0 | |
2025 | 2.8 | |
2026 | 2.5 | |
2027 | 2.6 | |
Thereafter | 21.2 | |
Total | 35.5 | |
Less: Interest | (12.8) | |
ROUL | $ | 22.7 | |
During 2022 and 2021, we entered into new lease obligations, which resulted in $1.7 million and $2.3 million of additional right of use assets.
Total operating expense includes the following (in millions):
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Operating leases expense | $ | 4.5 | | | $ | 4.7 | |
Short term lease expense | 0.4 | | | 0.6 | |
Total(1) | $ | 4.9 | | | $ | 5.3 | |
(1) Total lease expense is included in cost of goods sold and selling, general, and administrative expenses on the Consolidated Statements of Operations.
We had cash outflows of $4.1 million for amounts included in the ROUL balance at the beginning of the year related to our operating leases for the years ended December 31, 2022 and December 31, 2021.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
6. Fair Value Measurements
We measure certain of our assets and liabilities at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In general, reporting entities should apply valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are developed using market data and reflect assumptions that market participants would use when pricing the asset or liability. Unobservable inputs are developed using the best information available about the assumptions and estimates that market participants would use when pricing the asset or liability.
The fair value hierarchy provides transparency regarding the inputs we use to measure fair value. We categorize each fair value measurement in its entirety into the following three levels, based on the lowest level input that is significant to the entire measurement:
•Level 1 Inputs – quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
•Level 2 Inputs – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•Level 3 Inputs – unobservable inputs for the asset or liability.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Recurring Fair Value Measurements | | As of December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
ASSETS: | | | | | | | | |
Cash equivalents | | $ | 5.6 | | | $ | — | | | $ | — | | | $ | 5.6 | |
Trust assets (1) | | 0.1 | | — | | | — | | | 0.1 |
Derivative instruments | | — | | | 127.3 | | | 1.8 | | | 129.1 | |
TOTAL | | $ | 5.7 | | | $ | 127.3 | | | $ | 1.8 | | | $ | 134.8 | |
LIABILITIES: | | | | | | | | |
Contingent obligation – net (2) | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Derivative instruments | | — | | | 26.4 | | | 4.6 | | | 31.0 | |
TOTAL | | $ | — | | | $ | 26.4 | | | $ | 4.6 | | | $ | 31.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Recurring Fair Value Measurements | | As of December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
ASSETS: | | | | | | | | |
Cash equivalents | | $ | 14.2 | | | $ | — | | | $ | — | | | $ | 14.2 | |
Trust assets (1) | | 0.1 | | — | | | — | | | 0.1 | |
Derivative instruments | | — | | | 42.6 | | | 0.2 | | | 42.8 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
TOTAL | | $ | 14.3 | | | $ | 42.6 | | | $ | 0.2 | | | $ | 57.1 | |
LIABILITIES: | | | | | | | | |
| | | | | | | | |
Contingent obligation – net (2) | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Derivative instruments | | — | | | 140.9 | | | 5.3 | | | 146.2 | |
TOTAL | | $ | — | | | $ | 140.9 | | | $ | 5.3 | | | $ | 146.2 | |
(1)Trust assets are currently invested in money market funds. These trust assets are held to fund the non-qualified supplemental executive pension benefit obligations for certain of our officers.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
The following section describes the valuation techniques and inputs used for fair value measurements categorized within Level 2 or Level 3 of the fair value hierarchy:
| | | | | | | | | | | | | | |
Level 2 Fair Value Measurements: |
Asset / Liability | | Valuation Techniques | | Inputs |
LME forward financial sales contracts | | Discounted cash flows | | Quoted LME forward market |
Midwest Premium ("MWP") forward financial sales contracts | | Discounted cash flows | | Quoted MWP forward market |
Fixed for floating swaps | | Discounted cash flows | | Quoted LME forward market, quoted MWP forward market |
Nord Pool power price swaps | | Discounted cash flows | | Quoted Nord Pool forward market |
Indiana Hub power price swaps | | Discounted cash flows | | Quoted Indiana Hub forward market |
FX swaps | | Discounted cash flows | | Euro/USD forward exchange rate |
Casthouse currency hedges | | Discounted cash flows | | Euro/USD forward exchange rate; ISK/USD forward exchange rate |
When valuing Level 3 assets and liabilities, we use certain significant unobservable inputs. Management incorporates various inputs and assumptions including forward commodity prices, commodity price volatility, and macroeconomic conditions, including interest rates and discount rates. Our estimates of significant unobservable inputs are ultimately based on our estimates of risks that market participants would consider when valuing our assets and liabilities.
The following table presents the inputs for fair value measurements categorized within Level 3 of the fair value hierarchy, along with information regarding significant unobservable inputs used to value Level 3 assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Level 3 Fair Value Measurements: | | As of December 31, 2022 | | As of December 31, 2021 |
Asset / Liability | | Valuation Technique | | Observable Inputs | | Significant Unobservable Input | | Fair Value | | Value/Range of Unobservable Input | | Fair Value | | Value/Range of Unobservable Input |
LME forward financial sales contracts | | Discounted cash flows | | Quoted LME forward market | | Discount rate net (1) | | $ | (2.8) | | | 8.58% | | $ | (5.1) | | | 8.58% |
FX Swaps | | Discounted cash flows | | Euro/USD forward exchange rate | | Discount rate net (1) | | $ | — | | | 8.58% | | $ | (0.2) | | | 8.58% |
Nord Pool Swaps | | Discounted cash flows | | Quoted Nord Pool forward market | | Discount rate net (1) | | $ | — | | | 8.58% | | $ | 0.2 | | | 8.58% |
Casthouse currency hedges | | Discounted cash flows | | Euro/USD forward exchange rate; ISK/USD forward exchange rate | | Discount rate net (1) | | $ | — | | | 8.58% | | $ | — | | | —% |
Contingent Obligation | | Discounted cash flows | | Quoted LME forward market | | Expected monthly Hawesville production level (2) | | $ | — | | | 0 MT/month | | $ | — | | | 14,000 - 15,000 MT/month |
(1) Represents risk adjusted discount rate
(2) Represents management's estimate of expected monthly Hawesville production levels through the term of the agreement in December 2028.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
The following table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the twelve months ended December 31, 2022 | | Level 3 Assets | | Level 3 Liabilities | | | | |
| Nord Pool Swaps | LME forward financial sales contracts | | | LME forward financial sales contracts | | FX Swaps | Casthouse currency hedges | | | |
Balance as of January 1, 2022 | | $ | 0.2 | | $ | 0.0 | | | | $ | (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) | | — | | 1.7 | | | | (2.5) | | | — | | 0.0 | | | |
Transfers out of Level 3 (3) | | (0.2) | | (1.5) | | | | (2.3) | | | 0.2 | | 0.0 | | | |
Balance as of December 31, 2022 | | $ | — | | $ | 1.8 | | | | $ | (4.6) | | | $ | — | | $ | — | | | | |
| | | | | | | | | | | | |
Change in unrealized gains (losses) (1) | | $ | — | | $ | 1.6 | | | | $ | 5.3 | | | $ | — | | $ | — | | | | |
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
(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 2022.
(3) Transfer out of Level 3 due to period of time remaining in derivative contract.
| | | | | | | | | | | | | | | | | | | | | |
For the twelve months ended December 31, 2021 | | Level 3 Assets | | Level 3 Liabilities | | | |
| 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 (1) | | — | | | | (28.7) | | (0.6) | | | | |
Purchases, sales, settlements | | | | | | | | | |
Purchases | | — | | | | — | | — | | | | |
Sales | | — | | | | — | | — | | | | |
Settlements | | — | | | | — | | — | | | | |
Transfers into Level 3 (2) | | 1.7 | | | | (1.0) | | (0.4) | | | | |
Transfers out of Level 3 (3) | | (1.5) | | | | 21.7 | | 0.7 | | | | |
Balance as of December 31, 2021 | | $ | 0.2 | | | | $ | (5.1) | | $ | (0.2) | | | | |
| | | | | | | | | |
Change in unrealized gains (losses) (1) | | $ | — | | | | $ | (28.7) | | $ | (0.6) | | | | |
(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 2021.
(3) Transfer out of Level 3 due to period of time remaining in derivative contract.
7. Debt
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Debt classified as current liabilities: | | | |
Hancock County industrial revenue bonds ("IRBs") due April 2028, interest payable quarterly (variable interest rates (not to exceed 12%)) (1) | $ | 7.8 | | | $ | 7.8 | |
U.S. Revolving Credit Facility (2) | 90.0 | | | 63.6 | |
Iceland Revolving Credit Facility (3) | 35.0 | | | 50.0 | |
Iceland Term Facility (5) | 13.3 | | | — | |
Debt classified as non-current liabilities: | | | |
Grundartangi casthouse facility, net of financing fees of $0.6 million at December 31, 2022 (4) | 49.4 | | | — | |
Iceland Term Facility, net of financing fees of $0.0 million and current portion at December 31, 2022 (5) | 1.2 | | | — | |
7.5% senior secured notes due April 1, 2028, net of financing fees of $3.4 million at December 31, 2022, interest payable semiannually | 246.6 | | | 245.8 | |
2.75% convertible senior notes due May 1, 2028, net of financing fees of $1.9 million at December 31, 2022, interest payable semiannually | 84.4 | | | 84.0 | |
Total | $ | 527.7 | | | $ | 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 interest rate at December 31, 2022 was 3.80%.
(2)We incur interest at a base rate plus applicable margin as defined within the agreement. The interest rate at December 31, 2022 was 8.00%.
(3)We incur interest at a base rate plus applicable margin as defined within the agreement. The interest rate at December 31, 2022 was 7.41%.
(4)We incur interest at a base rate plus applicable margin as defined within the agreement. The interest rate at December 31, 2022 was 7.73%.
(5)We incur interest at a rate equal to 3.2% plus EUR EURIBOR 1 month as published by the European Money Markets Institute as defined within the agreement. The interest rate at December 31, 2022 was 4.74%.
7.5% Senior Secured Notes due 2028
General. On April 14, 2021, we issued $250.0 million in aggregate principal amount of 7.5% senior secured notes due 2028 (the "2028 Notes"). We received proceeds of $245.2 million, after payment of certain financing fees and related expenses.
Interest Rate. The 2028 Notes bear interest semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021, at a rate of 7.5% per annum in cash.
Maturity. The 2028 Notes mature on April 1, 2028.
Seniority. 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.
Guaranty. Our obligations under the 2028 Notes are guaranteed by all of our existing and future domestic restricted subsidiaries (the “Guarantor Subsidiaries”), except for foreign owned holding companies, any domestic restricted subsidiary that owns no assets other than equity interests or other investments in foreign subsidiaries and certain immaterial subsidiaries, which guaranty shall in each case be a senior secured obligation of such Guarantor Subsidiaries, ranking equally in right of payment with all existing and future senior indebtedness of such Guarantor Subsidiaries but effectively senior to unsecured debt to the extent of the value of collateral.
Collateral. Our obligations under the 2028 Notes and the Guarantor Subsidiaries' obligations under the guarantees are secured by a pledge of and lien on (subject to certain exceptions):
(i) all of our and the Guarantor Subsidiaries' property, plant and equipment (other than certain excluded property);
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
(ii) all equity interests in subsidiaries directly owned by Century or any Guarantor Subsidiaries; and
(iii) proceeds of the foregoing.
Under certain circumstances, the indenture and the security documents governing the 2028 Notes will permit us and the Guarantors to incur additional debt that also may be secured by liens on the collateral that are equal to or have priority over the liens securing the 2028 Notes. The collateral agent for the 2028 Notes will agree with the collateral agent for the other debt holders and us under such circumstances to enter into an intercreditor agreement that will cause the liens securing the 2028 Notes to be contractually subordinated to the liens securing such additional debt.
Redemption Rights. Prior to April 1, 2024, we may redeem the 2028 Notes, in whole or in part, at a redemption price equal to 100.00% of the principal amount plus a make-whole premium and accrued and unpaid interest, and if redeemed during the twelve-month period beginning on April 1 of the years indicated below, at the following redemption prices plus accrued and unpaid interest: | | | | | |
Year | Percentage |
2024 | 103.750% |
2025 | 101.875% |
2026 and Thereafter | 100.000% |
Upon a change of control (as defined in the indenture governing the 2028 Notes), we will be required to make an offer to purchase the 2028 Notes at a purchase price equal to 101% of the outstanding principal amount of the 2028 Notes on the date of the purchase, plus accrued and unpaid interest to, but not including, the date of purchase.
Covenants. The indenture governing the 2028 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.
Fair Value. As of December 31, 2022, the total estimated fair value of the 2028 Notes was $217.9 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.
2.75% Convertible Notes due 2028
General. On April 9, 2021, we completed a private offering of $86.3 million aggregate principal amount of convertible senior notes due 2028 (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 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.
Interest Rate. The Convertible Notes will bear interest semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2021, at a rate of 2.75% per annum in cash.
Maturity. The Convertible Notes will mature on May 1, 2028, unless earlier converted, repurchased, or redeemed.
Seniority. 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 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.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Redemption rights. We may not redeem the Convertible Notes prior to May 6, 2025. On or after May 6, 2025, we may redeem for cash all or part of the Convertible Notes at our option if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on and including the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest.
Upon conversion, we may satisfy our conversion obligation by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on the applicable conversion rate. In addition, if certain corporate events that constitute a make-whole fundamental change (as defined in the indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. Additionally, in the event of a corporate event constituting a fundamental change (as defined in the indenture), holders of the Convertible Notes may require us to repurchase all or a portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes being repurchased, plus accrued and unpaid interest to, but excluding, the date of the fundamental change repurchase.
As of December 31, 2022, the if-converted value of the Convertible Notes did not exceed the outstanding principal amount.
Fair Value. As of December 31, 2022, the total estimated fair value of the Convertible Notes was $62.3 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
General. We and certain of our direct and indirect domestic subsidiaries (the "Borrowers") have a senior secured revolving credit facility with a syndicate of lenders (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, 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 December 31, 2022, there were $90.0 million outstanding borrowings and $34.9 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: | | | | | |
| December 31, 2022 |
Credit facility maximum amount | $ | 250.0 | |
Borrowing availability | 165.5 | |
Outstanding letters of credit issued | 34.9 | |
Outstanding borrowings | 90.0 | |
Borrowing availability, net of outstanding letters of credit and borrowings | 40.6 | |
| |
| |
| |
Borrowing Base. The availability of funds under the U.S. revolving credit facility is limited by a specified borrowing base consisting of the Borrower's accounts receivable and inventory which meet the eligibility criteria.
Guaranty. The Borrowers' obligations under the U.S. revolving credit facility are guaranteed by certain of our domestic subsidiaries and secured by a continuing lien upon and a security interest in all of the Borrowers' accounts receivable, inventory and certain bank accounts. Each Borrower is liable for any and all obligations under the U.S. revolving credit facility on a joint and several basis.
Interest Rates and Fees. Any amounts outstanding under the U.S. revolving credit facility will bear interest at our option of either the secured overnight financing rate ("SOFR") or a base rate, plus, in each case, an applicable interest margin. The applicable interest margin is determined based on the average daily availability for the immediately preceding quarter. In addition, we pay an unused line fee on undrawn amounts, less the amount of our letters of credit exposure. For standby letters
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
of credit, we are required to pay a fee on the face amount of such letters of credit that varies depending on whether the letter of credit exposure is cash collateralized.
Prepayments. We can make prepayments of amounts outstanding under the U.S. revolving credit facility, in whole or in part, without premium or penalty, subject to standard breakage costs, if applicable. We may be required to apply the proceeds from sales of collateral accounts, other than sales of inventory in the ordinary course of business, to repay amounts outstanding under the revolving credit facility and correspondingly reduce the commitments there under.
Covenants. The U.S. revolving credit facility contains customary covenants, including restrictions on mergers and acquisitions, indebtedness, affiliate transactions, liens, dividends and distributions, dispositions of collateral, investments, and prepayments of indebtedness, as well as a covenant that requires the Borrowers to maintain certain minimum liquidity or availability requirements.
Events of Default. The U.S. revolving credit facility also includes customary events of default, including nonpayment, misrepresentation, breach of covenant, bankruptcy, change of ownership, certain judgments and certain cross defaults. Upon the occurrence of an event of default, commitments under the U.S. revolving credit facility may be terminated and amounts outstanding may be accelerated and declared immediately due and payable.
Iceland Revolving Credit Facility
General. Our wholly-owned subsidiary, Nordural Grundartangi ehf ("Grundartangi"), entered into a revolving credit facility agreement with Landsbankinn hf., dated November 2013, as amended (the "Iceland revolving credit facility") which originally provided for borrowings of up to $50.0 million in the aggregate. On February 4, 2022, we amended the Iceland revolving credit facility and increased the facility amount to $80.0 million in the aggregate. On September 28, 2022, we further amended the Iceland revolving credit facility and increased the facility amount to $100.0 million in 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 December 31, 2022, there were $35.0 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: | | | | | |
| December 31, 2022 |
Credit facility maximum amount | $ | 100.0 | |
Borrowing availability | 95.1 | |
Outstanding letters of credit issued | — | |
Outstanding borrowings | 35.0 | |
Borrowing availability, net of outstanding letters of credit and borrowings | 60.1 | |
Borrowing Base. The availability of funds under the Iceland revolving credit facility is limited by a specified borrowing base consisting of inventory and accounts receivable of Grundartangi.
Security. Grundartangi's obligations under the Iceland revolving credit facility are secured by a general bond under which Grundartangi's inventory and accounts receivable are pledged to secure full payment of the loan.
Interest Rates and Fees. Any amounts outstanding under the Iceland revolving credit facility will bear interest at SOFR plus a margin per annum.
Prepayments. Any outstanding borrowings may be prepaid without penalty or premium in whole or in part.
Covenants. The Iceland revolving credit facility contains customary covenants, including restrictions on mergers and acquisitions, dispositions of assets, compliance with permits, laws and payment of taxes, as well as a covenant that requires Grundartangi to maintain a certain minimum equity ratio.
Events of Default. The Iceland revolving credit facility also includes customary events of default, including nonpayment, loss of license, cessation of operations, unlawfulness, breach of covenant, bankruptcy, change of ownership, certain judgments
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
and certain cross defaults. Upon the occurrence of an event of default, commitments under the Iceland revolving credit facility may be terminated and amounts outstanding may be accelerated and declared immediately due and payable.
Grundartangi Casthouse Facility
On November 2, 2021, in connection with the casthouse project at Grundartangi, we entered into an eight-year Term Facility Agreement with Arion Bank hf, to provide for borrowings up to $130.0 million (the "Casthouse Facility"). 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 December 31, 2022, there were $50.0 million in outstanding borrowings under the Casthouse Facility.
Security. Grundartangi's obligations under the Casthouse Facility are secured by a general bond on an aggregate of $430.0 million in assets and rights related to Grundartangi.
Interest Rates and Fees. The interest rate shall be the sum of the interest rate equal to USD LIBOR 3 month plus the applicable margin as set forth in the agreement. Grundartangi shall pay an arrangement fee equal to 0.78% of the total facility amount, 50% of which was paid upfront and 50% to be paid at the end of the availability period, and shall pay a commitment fee of 0.38% per annum on undrawn commitments, payable quarterly at the same time as interest payments are due and payable. Upon occurrence of the LIBOR transition, the Casthouse Facility provides for the use of an alternative base interest rate to LIBOR aimed at achieving the same commercial result.
Prepayments. We can make prepayments of amounts outstanding under the Casthouse Facility, in whole or in part, without premium or penalty, together with accrued interest on the amount prepaid and subject to standard breakage costs, if applicable.
Covenants. The Casthouse Facility contains customary covenants, including restrictions on mergers and acquisitions, indebtedness, preservation of assets, and dispositions of assets, as well as a covenant that requires Grundartangi to maintain a certain minimum equity ratio.
Events of Default. The Casthouse Facility also includes customary events of default, including nonpayment, loss of license, cessation of operations, unlawfulness, breach of covenant, bankruptcy, change of ownership, certain judgments and certain cross defaults. Upon the occurrence of an event of default, commitments under the Casthouse facility may be terminated and amounts outstanding may be accelerated and declared immediately due and payable.
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 by the European Money Markets Institute. As of December 31, 2022, there were $14.5 million (€13.6 million) in outstanding borrowings under the Iceland Term Facility.
Vlissingen Facility Agreement
On December 9, 2022, Vlissingen entered into a Facility Agreement with Glencore International AG pursuant to which Vlissingen may borrow from time to time up to $90 million (the “Vlissingen Facility Agreement”) in one or more loans payable on December 2, 2024, the maturity date of the Facility Agreement. As of December 31, 2022, there were no outstanding borrowings under the Vlissingen Facility Agreement.
Security. Vlissingen’s obligations under the Vlissingen Facility Agreement are secured by liens on the ground lease on which Vlissingen’s facilities are located, Vlissingen’s moveable assets, financial assets, receivables and other assets, and Vlissingen’s shares.
Interest Rates and Fees. Any amounts outstanding under the Vlissingen Facility Agreement will bear interest at a fixed interest rate equal to 8.75% per annum and payable on December 2, 2024
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Prepayments. Any outstanding borrowings may be prepaid without penalty or premium in whole or in part without any charge, fee premium or penalty.
Covenants. The Vlissingen Facility Agreement contains customary covenants including with respect to mergers, guarantees and preservation and dispositions of assets
Events of Default. The Vlissingen Facility Agreement also includes customary events of default, including nonpayment, breach of any provision or representation under the agreement, and certain cross-default and insolvency events. Upon the occurrence of an event of default, commitments under the Vlissingen Facility Agreement may be terminated and amounts outstanding may be accelerated and declared immediately due and payable.
Hancock County Industrial Revenue Bonds
As part of the purchase price for our acquisition of the Hawesville facility, we assumed IRBs which were issued in connection with the financing of certain solid waste disposal facilities constructed at the Hawesville facility. The IRBs bear interest at a variable rate not to exceed 12% per annum determined weekly based upon prevailing rates for similar bonds in the industrial revenue bond market and interest on the IRBs is paid quarterly. The IRBs are secured by a letter of credit issued under our U.S revolving credit facility and mature in April 2028.
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 December 31, 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.
8. Shareholders' Equity
Common Stock
As of December 31, 2022 and 2021, we had 195,000,000 shares of common stock, $0.01 cent par value, authorized under our Restated Certificate of Incorporation, of which 99,510,499 shares were issued and 92,323,978 shares were outstanding at December 31, 2022; 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 December 31, 2022 and 2021, we had 5,000,000 shares of preferred stock, $0.01 cent 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, liquidation 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.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
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 December 31, 2022 and December 31, 2021, 53,854 shares and 58,542 shares were 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 of preferred to common shares is 100 shares of common for each share of preferred stock. Our Series A Convertible Preferred Stock has a par value of $0.01 per share.
The Common and Preferred Stock Activity table below contains additional information about preferred stock conversions during 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
Common and Preferred Stock Activity: | Preferred Stock | | Common stock |
(in shares) | Series A Convertible | | Treasury | | Outstanding |
Balance as of December 31, 2019 | 67,323 | | | 7,186,521 | | | 89,185,661 | |
| | | | | |
Conversion of convertible preferred stock | (3,734) | | | — | | | 373,416 | |
Issuance for share-based compensation plans | — | | | — | | | 496,720 | |
Balance as of December 31, 2020 | 63,589 | | | 7,186,521 | | | 90,055,797 | |
| | | | | |
Conversion of convertible preferred stock | (5,047) | | | — | | | 504,596 | |
Issuance for share-based compensation plans | — | | | — | | | 671,218 | |
Balance as of December 31, 2021 | 58,542 | | | 7,186,521 | | | 91,231,611 | |
| | | | | |
Conversion of convertible preferred stock | (4,688) | | | — | | | 468,785 | |
Issuance for share-based compensation plans | — | | | — | | | 623,582 | |
Balance as of December 31, 2022 | 53,854 | | | 7,186,521 | | | 92,323,978 | |
Dividend Rights. So long as any shares of our Series A Convertible Preferred Stock are outstanding, we may not pay or declare any dividend or make any distribution upon or in respect of our common stock or any other capital stock ranking, on a parity with or junior to, the Series A Convertible Preferred Stock in respect of dividends or liquidation preference, unless we, at the same time, declare and pay a dividend or distribution on the shares of Series A Convertible Preferred Stock (a) in an amount equal to the amount such holders would receive if they were the holders of the number of shares of our common stock into which their shares of Series A Convertible Preferred Stock are convertible as of the record date fixed for such dividend or distribution, or (b) in the case of a dividend or distribution on other capital stock ranking on a parity with or junior to the Series A Convertible Preferred Stock in such amount and in such form as (based on the determination of holders of a majority of the Series A Convertible Preferred Stock) will preserve, without dilution, the economic position of the Series A Convertible Preferred Stock relative to such other capital stock.
Voting Rights. The Series A Convertible Preferred Stock has no voting rights for the election of directors or on other matters where the shares of common stock have voting rights. However, we may not change the powers, preferences, or rights given to the Series A Convertible Preferred Stock, or authorize, create or issue any additional shares of Series A Convertible Preferred Stock without the affirmative vote of the holders of a majority of the shares of Series A Convertible Preferred Stock then outstanding (voting separately as a class).
Liquidation Rights. Upon any liquidation, dissolution, or winding-up of Century, the holders of shares of Series A Convertible Preferred Stock are entitled to receive a preferential distribution of $0.01 per share out of the assets available for distribution. In addition, upon any liquidation, dissolution or winding-up of Century, if our assets are sufficient to make any distribution to the holders of the common stock, then the holders of shares of Series A Convertible Preferred Stock are also entitled to share ratably with the holders of common stock in the distribution of Century’s assets (as though the holders of Series A Convertible Preferred Stock were holders of that number of shares of common stock into which their shares of
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Series A Convertible Preferred Stock are convertible). However, the amount of any such distribution will be reduced by the amount of the preferential distribution received by the holders of the Series A Convertible Preferred Stock.
Transfer Restrictions. Glencore is prohibited from transferring shares of Series A Convertible Preferred Stock to any party other than an affiliate who agrees to become bound by certain agreements associated with these shares.
Automatic Conversion. The Series A Convertible Preferred Stock automatically converts, without any further act of Century or any holders of Series A Convertible Preferred Stock, into shares of common stock, at a conversion ratio of 100 shares of common stock for each share of Series A Convertible Preferred Stock, upon the occurrence of any of the following automatic conversion events:
•If we sell or issue shares of common stock or any other stock that votes generally with our common stock, or the occurrence of any other event, including a sale, transfer or other disposition of common stock by Glencore, as a result of which the percentage of voting stock held by Glencore decreases, an amount of Series A Convertible Preferred Stock will convert to common stock to restore Glencore to its previous ownership percentage;
•If shares of Series A Convertible Preferred Stock are transferred to an entity that is not an affiliate of Glencore, such shares of Series A Convertible Preferred Stock will convert to shares of our common stock, provided that such transfers may only be made pursuant to an effective registration statement;
•Upon a sale of Series A Convertible Preferred Stock by Glencore in a Rule 144 transaction in which the shares of Series A Convertible Preferred Stock and our common stock issuable upon the conversion thereof are not directed to any purchaser, such shares of Series A Convertible Preferred Stock sold will convert to shares of our common stock; and
•Immediately prior to and conditioned upon the consummation of a merger, reorganization or consolidation to which we are a party or a sale, abandonment, transfer, lease, license, mortgage, exchange or other disposition of all or substantially all of our property or assets, in one or a series of transactions where, in any such case, all of our common stock would be converted into the right to receive, or exchanged for, cash and/or securities, other than any transaction in which the Series A Convertible Preferred Stock will be redeemed.
Optional Conversion. Glencore has the option to convert the Series A Convertible Preferred Stock in a tender offer or exchange offer, at the same conversion ratio as above, in which a majority of the outstanding shares of our common stock have been tendered by the holders thereof and not duly withdrawn at the expiration time of such tender or exchange offer, so long as the Series A Convertible Preferred Stock is tendered or exchanged in such offer.
Stock Combinations – Adjustments. If, at any time while the Series A Convertible Preferred Stock is outstanding, Century combines outstanding common stock into a smaller number of shares, then the number of shares of common stock issuable on conversion of each share of Series A Convertible Preferred Stock will be decreased in proportion to such decrease in the aggregate number of shares of common stock outstanding.
Redemptions or Repurchases of Common Stock. We may not redeem or repurchase our common stock unless we redeem or repurchase, or otherwise make a payment on, a pro-rata number of shares of the Series A Convertible Preferred Stock. These restrictions do not apply to our open market repurchases or our repurchases pursuant to our employee benefit plans.
Right of Redemption. The Series A Convertible Preferred Stock will be redeemed by Century if any of the following events occur (at a redemption price based on the trading price of our common stock prior to the announcement of such event) and Glencore votes its shares of our common stock in opposition to such events:
•We propose a merger, reorganization or consolidation, sale, abandonment, transfer, lease, license, mortgage, exchange or other disposition of all or substantially all of our property or assets where any of our common stock would be converted into the right to receive, or exchanged for, assets other than cash and/or securities traded on a national stock exchange or that are otherwise readily marketable, or
•We propose to dissolve and wind up operations and any assets, other than cash and/or securities traded on a national stock exchange or that are otherwise readily marketable, are to be distributed to the holders of our common stock.
Stock Repurchase Program
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
In 2011, our Board of Directors authorized a $60.0 million 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 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 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.
Through December 31, 2022, we repurchased 7,186,521 shares of common stock for an aggregate purchase price of $86.3 million. We have made no repurchases since April 2015 and have approximately $43.7 million remaining under the repurchase program authorization as of December 31, 2022.
9. Inventories
Inventories, at December 31, consist of the following:
| | | | | | | | | | | |
| 2022 | | 2021 |
Raw materials | $ | 64.9 | | | $ | 132.9 | |
Work-in-process | 46.0 | | | 76.1 | |
Finished goods | 58.0 | | | 43.9 | |
Operating and other supplies | 229.9 | | | 172.7 | |
Inventories | $ | 398.8 | | | $ | 425.6 | |
10. Property, Plant and Equipment
Property, plant and equipment, at December 31, consist of the following:
| | | | | | | | | | | |
| 2022 | | 2021 |
Land and improvements | $ | 39.8 | | | $ | 40.1 | |
Buildings and improvements | 305.7 | | | 341.1 | |
Machinery and equipment | 1,495.3 | | | 1,522.1 | |
Construction in progress | 59.0 | | | 89.6 | |
| 1,899.8 | | | 1,992.9 | |
Less accumulated depreciation | (1,155.4) | | | (1,100.4) | |
Property, plant and equipment - net | $ | 744.4 | | | $ | 892.5 | |
| | | |
For the years ended December 31, 2022, 2021 and 2020, we recorded depreciation and amortization expense of $73.4 million, $82.6 million, and $83.0 million, respectively.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
11. Accumulated Other Comprehensive Loss ("AOCL")
| | | | | | | | | | | |
Components of AOCL | 2022 | | 2021 |
Defined benefit plan liabilities | $ | (98.0) | | | $ | (86.7) | |
Unrealized gain (loss) on financial instruments | 1.7 | | | 1.9 | |
Other comprehensive loss before income tax effect | (96.3) | | | (84.8) | |
Income tax effect(1) | 2.3 | | | 2.5 | |
Accumulated other comprehensive loss | $ | (94.0) | | | $ | (82.3) | |
(1)The allocation of the income tax effect to the components of other comprehensive loss is as follows: | | | | | | | | | | | |
| 2022 | | 2021 |
Defined benefit plan liabilities | $ | 2.6 | | | $ | 2.9 | |
| | | |
Unrealized loss on financial instruments | (0.3) | | | (0.4) | |
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, December 31, 2019 | $ | (111.7) | | | $ | 1.9 | | | $ | (109.8) | |
Other comprehensive income (loss) before reclassifications | (13.5) | | | — | | | (13.5) | |
Net amount reclassified to net income (loss) | 4.6 | | | (0.1) | | | 4.5 | |
Balance, December 31, 2020 | (120.6) | | | 1.8 | | | (118.8) | |
Other comprehensive income (loss) before reclassifications | 31.6 | | | — | | | 31.6 | |
Net amount reclassified to net income (loss) | 5.0 | | | (0.1) | | | 4.9 | |
Balance, December 31, 2021 | (84.0) | | | 1.7 | | | (82.3) | |
Other comprehensive income (loss) before reclassifications | (5.9) | | | — | | | (5.9) | |
Net amount reclassified to net income (loss) | (5.7) | | | (0.1) | | | (5.8) | |
Balance, December 31, 2022 | $ | (95.6) | | | $ | 1.6 | | | $ | (94.0) | |
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Reclassifications out of AOCL were included in the consolidated statements of operations as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
AOCL Components | | Location | | 2022 | | 2021 | | 2020 |
Defined benefit plan and other postretirement liabilities | | Cost of goods sold | | $ | 3.5 | | | $ | 26.8 | | | $ | (4.7) | |
| | Other income, net | | (8.9) | | | — | | | — | |
| | Selling, general and administrative expenses | | 3.3 | | | 2.9 | | | (2.0) | |
| | Other operating expense (income), net | | (9.0) | | | 7.3 | | | (1.1) | |
| | Income tax expense | | (0.3) | | | (0.4) | | | (1.1) | |
| | Net of tax | | $ | (11.4) | | | $ | 36.6 | | | $ | (8.9) | |
| | | | | | | | |
Gain (loss) on financial instruments | | Cost of goods sold | | $ | (0.2) | | | $ | (0.1) | | | $ | (0.2) | |
| | Income tax effect | | (0.1) | | | 0.0 | | | 0.1 | |
| | Net of tax | | $ | (0.3) | | | $ | (0.1) | | | $ | (0.1) | |
12. Pension and Other Postretirement Benefits
Pension Benefits
We maintain noncontributory defined benefit pension plans for certain domestic hourly and salaried employees. For the eligible domestic salaried employees, plan benefits are based primarily on years of service and average compensation during the later years of employment. For hourly employees, plan benefits are based primarily on a formula that provides a specific benefit for each year of service. Our funding policy is to contribute amounts based upon actuarial and economic assumptions designed to achieve adequate funding of the projected benefit obligations and to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). In addition, we maintain the supplemental executive retirement benefit ("SERB") plan for certain current and former executive officers, which is frozen to future accruals.
Other Postretirement Benefits ("OPEB")
In addition to providing pension benefits, we provide certain healthcare and life insurance benefits for certain domestic retired employees. We accrue the estimated cost of providing postretirement benefits during the working careers of those employees who could become eligible for such benefits when they retire. We fund these benefits as the retirees submit claims.
Retiree medical welfare changes
Under the current Hawesville labor agreement, employees who retire during the term of the labor agreement have been divided into sub-groups based on attributes such as Medicare eligibility, hire date, age and years of service. Levels of benefits are defined for the sub-groups and range from no substantive change from the benefits provided under the previous labor agreement to replacement of the defined retiree medical benefit program with individual health reimbursement accounts for each eligible participant. The health reimbursement accounts are funded based on established rates per hour worked by each eligible participant. Eligible participants will be able to withdraw from their health reimbursement accounts to fund their own retiree medical coverage.
During 2017, the Company amended its non-union retiree medical and life insurance benefits to align the Company’s benefits with the market and achieve a uniform retiree medical benefit design across the Company’s U.S. locations. Effective January 1, 2018, non-union retiree medical and life insurance benefits are restricted to current participants who meet the eligibility criteria as of January 1, 2018. Additionally, effective January 1, 2019, Century will no longer administer non-union retiree medical, prescription drug, dental, or vision benefits and instead will make fixed health reimbursement account contributions.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Obligation and Funded Status
The change in benefit obligation and change in plan assets as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | OPEB |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in benefit obligation: | | | | | | | |
Benefit obligation at beginning of year | $ | 360.1 | | | $ | 385.8 | | | $ | 99.6 | | | $ | 107.9 | |
Service cost | 4.3 | | | 4.7 | | | 0.2 | | | 0.2 | |
Interest cost | 10.3 | | | 9.6 | | | 2.9 | | | 2.4 | |
| | | | | | | |
Actuarial (gain) loss | (87.7) | | | (18.8) | | | (23.2) | | | (5.0) | |
Medicare Part D | — | | | — | | | 0.2 | | | 0.2 | |
| | | | | | | |
Benefits paid | (24.0) | | | (21.2) | | | (6.1) | | | (6.1) | |
Curtailment | — | | | — | | | 0.1 | | | — | |
| | | | | | | |
Benefit obligation at end of year | $ | 263.0 | | | $ | 360.1 | | | $ | 73.7 | | | $ | 99.6 | |
The decreases in both the defined benefit plans' and OPEB plans' benefit obligation were mainly driven by the actuarial gains in 2022, which were primarily attributable to the increases in the discount rates from fiscal year 2021 to 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | OPEB |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in plan assets: | | | | | | | |
Fair value of plan assets at beginning of year | $ | 329.7 | | | $ | 318.8 | | | $ | — | | | $ | — | |
Actual return on plan assets | (93.3) | | | 30.3 | | | — | | | — | |
| | | | | | | |
Employer contributions | 4.2 | | | 1.8 | | | 5.9 | | | 5.9 | |
Medicare Part D subsidy received | — | | | — | | | 0.2 | | | 0.2 | |
Benefits paid | (24.0) | | | (21.2) | | | (6.1) | | | (6.1) | |
| | | | | | | |
Fair value of assets at end of year | $ | 216.6 | | | $ | 329.7 | | | $ | — | | | $ | — | |
The decrease of actual return on plan assets in 2022 was primarily attributable to fluctuations in market prices during the year.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | OPEB |
| 2022 | | 2021 | | 2022 | | 2021 |
Funded status of plans: | | | | | | | |
Funded status | $ | (46.3) | | | $ | (30.4) | | | $ | (73.7) | | | $ | (99.6) | |
Amounts recognized in the Consolidated Balance Sheets: | | | | | | | |
| | | | | | | |
Current liabilities | (1.8) | | | (1.8) | | | (6.1) | | | (6.3) | |
Non-current liabilities | (44.5) | | | (28.6) | | | (67.6) | | | (93.3) | |
Net amount recognized | $ | (46.3) | | | $ | (30.4) | | | $ | (73.7) | | | $ | (99.6) | |
Amounts recognized in accumulated other comprehensive loss (pre-tax): | | | | | | | |
Net loss | $ | 86.7 | | | $ | 61.2 | | | $ | 10.4 | | | $ | 35.0 | |
Prior service cost (benefit) | 0.8 | | | 0.9 | | | 0.0 | | | (10.3) | |
Total | $ | 87.5 | | | $ | 62.1 | | | $ | 10.4 | | | $ | 24.7 | |
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Pension Plans That Are Not Fully Funded
At December 31, 2022, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $263.0 million, $258.8 million, and $216.6 million, respectively.
At December 31, 2021, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $360.1 million, $355.7 million and $329.7 million, respectively.
Components of net periodic benefit cost and other amounts recognized in other comprehensive loss:
Net Periodic Benefit Cost:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Pension | | OPEB |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Service cost | $ | 4.3 | | | $ | 4.7 | | | $ | 4.9 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | |
Interest cost | 10.3 | | | 9.6 | | | 11.4 | | | 2.9 | | | 2.4 | | | 3.1 | |
Expected return on plan assets | (23.5) | | | (22.4) | | | (20.8) | | | — | | | — | | | — | |
Amortization of prior service costs | 0.1 | | | 0.1 | | | 0.1 | | | (1.3) | | | (3.2) | | | (3.2) | |
Amortization of net loss | 3.5 | | | 6.1 | | | 6.5 | | | 1.3 | | | 2.3 | | | 2.2 | |
Net periodic benefit cost | (5.3) | | | (1.9) | | | 2.1 | | | 3.1 | | | 1.7 | | | 2.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Curtailment benefit (1) | — | | | — | | | — | | | (8.9) | | | — | | | — | |
Total benefit cost | $ | (5.3) | | | $ | (1.9) | | | $ | 2.1 | | | $ | (5.8) | | | $ | 1.7 | | | $ | 2.3 | |
(1) During the third quarter, we re-measured certain other postretirement benefits triggered by the Hawesville smelter curtailment, leading to a non-cash OPEB curtailment benefit totaling $8.9 million for the year ended December 31, 2022.
Other changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss (pre-tax):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Pension | | OPEB |
| 2022 | | 2021 | | 2022 | | 2021 |
Net loss (gain) | $ | 29.0 | | | $ | (26.7) | | | $ | (23.1) | | | $ | (5.0) | |
| | | | | | | |
Amortization of net loss, including recognition due to settlement | (3.5) | | | (6.1) | | | (1.4) | | | (2.3) | |
Amortization of prior service (cost) benefit, including curtailment | (0.1) | | | (0.1) | | | 10.3 | | | 3.2 | |
| | | | | | | |
Total amount recognized in other comprehensive loss | 25.4 | | | (32.9) | | | (14.2) | | | (4.1) | |
Net periodic benefit cost | (5.3) | | | (1.9) | | | (5.8) | | | 1.7 | |
Total recognized in net periodic benefit cost and other comprehensive loss | $ | 20.1 | | | $ | (34.8) | | | $ | (20.0) | | | $ | (2.4) | |
Weighted average assumptions used to determine benefit obligations at December 31:
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | OPEB |
| 2022 | | 2021 | | 2022 | | 2021 |
Discount rate (1) | 5.50% | | 2.89% | | 5.57% | | 2.75% |
Rate of compensation increase (2) | 4%/3.5% | | 3%/3.5% | | 4%/3.5% | | 3%/3.5% |
Measurement date | 12/31/2022 | | 12/31/2021 | | 12/31/2022 | | 12/31/2021 |
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | OPEB |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Measurement date | 12/31/2021 | | 12/31/2020 | | 12/31/2019 | | 12/31/2021 | | 12/31/2020 | | 12/31/2019 |
Fiscal year end | 12/31/2022 | | 12/31/2021 | | 12/31/2020 | | 12/31/2022 | | 12/31/2021 | | 12/31/2020 |
Discount rate (1) | 2.94% | | 2.77% | | 3.22 | % | | 2.64 | % | | 1.89 | % | | 2.79 | % |
Rate of compensation increase (2) | 3%/3.5% | | 3%/3.5% | | 3%/3.5% | | 3%/3.5% | | 3%/3.5% | | 3%/3.5% |
Expected return on plan assets (3) | 7.25% | | 7.25% | | 7.25 | % | | — | % | | — | % | | — | % |
(1)We use the Ryan Above Median Yield Curve to determine the discount rate.
(2)For 2022, 2021, and 2020, the rate of compensation increase is 3% per year for the first year and 3.5% per year thereafter.
(3)The rate for each of our defined benefit plans was selected by taking into account our expected asset mix and is based on historical performance as well as expected future rates of return on plan assets.
For measurement purposes, medical cost inflation is initially estimated to be 7.0%, and 6.4% for pre- and post-65 participants, respectively, declining to 4.5% over ten years and continuing thereafter.
Benefit Plan Assets
Pension Plan Investment Strategy and Policy
The Pension Plans’ assets are invested in a prudent manner for the exclusive purpose of providing benefits to participants.
Other objectives are to:
•Provide a total return that, over the long term, provides sufficient assets to fund the pension plan liabilities subject to a level of risk, contributions and pension expense deemed appropriate by the company.
•Minimize, where possible, pension expense volatility, and inclusion of liability driven investing as an investment strategy when appropriate. As the funding ratio improves, the objectives will evolve to minimize the funded status volatility.
•Diversify investments within asset classes to reduce the impact of losses in single investments.
The assets of the Pension Plans are invested in compliance with ERISA, as amended, and any subsequent applicable regulations and laws.
Performance
Our performance objective is to outperform the return of weighing passive investment alternatives by the policy target allocations after fees at a comparable level of risk. This investment objective is expected to be achieved over the long term and is measured over rolling multi-year periods. Peer-relative performance comparisons will also be considered especially when performance deviates meaningfully from market indexes. Investment objectives for each asset class are included below.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Asset Allocation Policy
Asset allocation policy is the principal method for achieving the Pension Plans' investment objectives stated above. The Pension Plans’ weighted average long-term strategic asset allocation policy targets are as follows:
| | | | | | | | | | | | | | | | | |
| Pension Plan Asset Allocation |
| 2022 Target | | December 31, 2022 | | December 31, 2021 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Return seeking assets: | | | | | |
Global equity | 50% | | 46% | | 51% |
Diversified credit | 15% | | 19% | | 15% |
Real assets | 10% | | 14% | | 9% |
Liability hedging assets | 25% | | 21% | | 25% |
Cash | —% | | —% | | —% |
| 100% | | 100% | | 100% |
Global equities are held for their long-term expected return premium over fixed income investments and inflation. Fixed income is held for diversification relative to equities, and as a hedging instrument to interest rate volatility for the pension obligation. Diversified Credit and Real Assets are held for diversification relative to equities and for income generation.
The strategic role of global equities is to:
•Provide higher expected returns of the major asset classes.
•Maintain a diversified exposure within global stock markets through the use of multi-manager portfolio strategies.
The strategic role of fixed income is to:
•Diversify the Pension Plans’ equity exposure by investing in fixed income securities that exhibit a low correlation to equities, thereby lowering the overall return volatility of the entire investment portfolio.
•Maintain a diversified exposure within the U.S. fixed income market through the use of portfolio strategies targeting treasury bond exposures.
•Hedge the interest rate risk of the pension obligation by investing in securities that target a similar duration to the pension obligation cash flows.
The strategic role of diversified credit is to:
•Diversify the Pension Plans’ equity exposure by investing in alternative credit securities that exhibit a low correlation to equities, thereby lowering the overall return volatility of the entire investment portfolio.
•Maintain a diversified exposure within the alternative credit markets through the use of multi-manager portfolio strategies targeting, but not limited to, securitized credit, high yield securities, and emerging market debt.
•Achieve returns in excess of passive indexes through the use of active investment managers and strategies.
The strategic role of real assets is to:
•Diversify the Pension Plans’ equity exposure by investing in real assets that exhibit a low correlation to equities, thereby lowering the overall return volatility of the entire investment portfolio.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
•Maintain a diversified exposure within the real asset markets through the use of multi-manager portfolio strategies targeting listed and unlisted exposures.
•Achieve returns in excess of passive indexes through the use of active investment managers and strategies.
The long-term strategic asset allocation policy is reviewed regularly or whenever significant changes occur to Century’s or the Pension Plans' financial position and liabilities.
Fair Value Measurements of Pension Plan assets
The following table sets forth by level the fair value hierarchy our Pension Plans' assets. These assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and the placement within the fair value hierarchy levels.
As more fully described within Note 6. Fair Value Measurements, the Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair values. The fair value hierarchy provides transparency regarding the inputs we use to measure fair value. We categorize each fair value measurement in its entirety into the following three levels, based on the lowest level input that is significant to the entire measurement: •Level 1 Inputs – quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
•Level 2 Inputs – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•Level 3 Inputs – unobservable inputs for the asset or liability.
The following summarizes the Company’s Pension Plans' assets fair value by asset category:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV | | Total |
| | | | | | | | | | |
Cash and cash equivalents | | $ | — | | | $ | — | | | $ | — | | | $ | 1.3 | | | $ | 1.3 | |
Global Equity | | — | | | — | | | — | | | 99.0 | | | 99.0 | |
Diversified Credit | | — | | | — | | | — | | | 40.1 | | | 40.1 | |
Real Assets | | — | | | — | | | — | | | 30.4 | | | 30.4 | |
Liability hedging assets | | — | | | — | | | — | | | 45.8 | | | 45.8 | |
Total plan assets fair value | | $ | — | | | $ | — | | | $ | — | | | $ | 216.6 | | | $ | 216.6 | |
| | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | |
| | | | | | | | | | |
Cash and cash equivalents | | $ | — | | | $ | — | | | $ | — | | | $ | 2.5 | | | $ | 2.5 | |
Global Equity | | — | | | — | | | — | | | 167.8 | | | 167.8 | |
Diversified Credit | | — | | | — | | | — | | | 49.2 | | | 49.2 | |
Real Assets | | — | | | — | | | — | | | 28.6 | | | 28.6 | |
Liability hedging assets | | — | | | — | | | — | | | 81.6 | | | 81.6 | |
Total plan assets fair value | | $ | — | | | $ | — | | | $ | — | | | $ | 329.7 | | | $ | 329.7 | |
Our Pension Plans’ assets are held in certain commingled funds and group trusts which do not have publicly quoted prices. The fair value of the commingled funds and group trusts is based on NAV of the underlying investments. The fair value of the underlying investments held by the commingled funds, separate accounts and common collective trusts is generally based on quoted prices in active markets. Though the Company believes the methods used to estimate fair value are consistent with those used by other market participants, the use of other methods or assumptions could result in a different estimate of fair value.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Our other postretirement benefit plans are unfunded. We fund these benefits as the retirees submit claims.
Pension and OPEB Cash Flows
During 2022 and 2021, we made contributions of approximately $4.2 million and $1.8 million, respectively, to the qualified defined benefit and SERB plans we sponsor and $5.9 million and $5.9 million, respectively, to the other postretirement benefit plans.
We expect to make the following contributions for 2023: | | | | | |
| 2023 |
Expected pension plan contributions | $ | 4.2 | |
Expected OPEB benefits payments | 6.1 | |
Estimated Future Benefit Payments
The following table provides the estimated future benefit payments for the pension and other postretirement benefit plans: | | | | | | | | | | | |
| Pension Benefits | | OPEB Benefits |
2023 | $ | 20.2 | | | $ | 6.1 | |
2024 | 19.9 | | | 6.2 | |
2025 | 19.9 | | | 6.1 | |
2026 | 20.0 | | | 6.0 | |
2027 | 19.7 | | | 6.0 | |
2028 – 2032 | 97.4 | | | 28.8 | |
Participation in Multi-employer Pension Plans
The union-represented employees at Hawesville are part of a United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union ("USWA") sponsored multi-employer plan. Our contributions to the plan are determined at a fixed rate per hour worked. Currently, we do not have any plans to withdraw from or curtail participation in this plan. The risks of participating in a multi-employer plan are different from single-employer plans in the following respects:
•Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
•If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
•If a participating employer chooses to stop participating in a multi-employer plan, the employer may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Century’s participation in the plan for the year ended December 31, 2022, is outlined in the table below.
| | | | | | | | |
Fund | | Steelworkers Pension Trust |
EIN / PN | | 23-6648508/499 |
Pension Protection Act Zone Status 2022 (1) | | Green |
Pension Protection Act Zone Status 2021 (1) | | Green |
Subject to Financial Improvement/Rehabilitation Plan (2) | | No |
Contributions of Century Aluminum 2022 | | $1.6 |
Contributions of Century Aluminum 2021 | | $1.7 |
Contributions of Century Aluminum 2020 | | $1.4 |
Withdrawal from Plan Probable | | No |
Surcharge Imposed | | No |
Expiration Date of Collective Bargaining Agreement (2) | | March 31, 2026 |
(1)The most recent Pension Protection Act zone status available in 2022 and 2021 is for the plan's year-end December 31, 2021 and December 31, 2020, respectively. The zone status is based on information that Century received from the plan as well as publicly available information per the Department of Labor and is certified by the plan’s actuary. Among other factors, plans in the green zone are at least 80 percent funded.
(2)The “Subject to Financial Improvement / Rehabilitation Plan” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject.
Century 401(k) Plans
We sponsor a tax-deferred savings plan under which eligible domestic employees may elect to contribute specified percentages of their compensation with Century. We match a portion of participants' contributions to the savings plan. Employee and matching contributions are considered fully vested immediately upon participation in the plan. Concurrent with the 2014 amendment to the Salaried Pension Plan that eliminated future accruals for participants who are under age 50 as of January 1, 2015 and closed the plan to new entrants, the Company increased the proportional match of contributions made to those affected by the amendment. The expense related to the plan was $6.0 million, $5.3 million, and $4.9 million for 2022, 2021, and 2020, respectively.
13. Share-based Compensation
Amended and Restated Stock Incentive Plan. Under our Amended and Restated Stock Incentive Plan (the "Stock Incentive Plan") we award service-based and performance-based share awards and nonqualified stock options to our salaried officers, non-employee directors, and other key employees. Our service-based and performance-based share awards typically vest over a period of three years from the date of grant, provided that the recipient is still our employee at the time of vesting. Our independent non-employee directors receive annual grants of service-based share awards that typically vest following 12 months of service. The Stock Incentive Plan has 12,900,000 shares authorized for issuance with approximately 4,574,820 shares remaining at December 31, 2022.
Long-Term Incentive Plan. We also grant annual long-term incentive awards under our Amended and Restated Long-Term Incentive Plan (the "LTIP"). The LTIP is designed to provide senior-level employees the opportunity to earn long-term incentive awards through the achievement of performance goals and to align compensation with the interests of our stockholders. This is achieved by linking compensation to share price appreciation and total stockholder return over a multi-year period. Awards made under the LTIP are granted subject to the Stock Incentive Plan to the extent the award is deliverable in stock. We provide two types of LTIP awards: restricted stock units ("RSU") and performance stock units ("PSU").
RSUs are stock-settled awards which do not contain any performance-based vesting requirements. PSUs can be settled in cash or stock and vest based on the achievement of pre-determined performance metrics at the discretion of the Board. Our PSU liability was approximately $1.7 million and $9.1 million as of December 31, 2022 and 2021, respectively. Both the PSUs and RSUs vest, in their entirety, after three years.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
| | | | | | | | |
Service-based share awards | | Number |
Outstanding at January 1, 2022 | | 1,460,013 | |
Granted | | 266,745 | |
Vested | | (739,800) | |
Forfeited | | (247,602) | |
Outstanding at December 31, 2022 | | 739,356 | |
| | |
Performance-based share awards | | Number |
Outstanding at January 1, 2022 | | 1,073,628 | |
Granted | | 217,746 | |
Vested | | (291,466) | |
Forfeited | | (555,852) | |
Outstanding at December 31, 2022 | | 444,056 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
Service-based share awards | 2022 | | 2021 | | 2020 |
Weighted average per share fair value of service-based share grants | $ | 17.30 | | | $ | 9.97 | | | $ | 7.50 | |
| | | | | |
| | | | | |
Fair Value Measurement of Share-Based Compensation Awards. We estimate the fair value of each stock option award using the Black-Scholes model on the date of grant. Our last grant of stock options, awarded in 2009, expired in May 2019. We have not granted any stock options since 2009. For our service-based awards, fair value is equal to the closing stock price on the date of grant. For our performance-based awards, fair value is equal to the closing stock price at each reporting period end.
The following table summarizes the compensation cost recognized for the years ended December 31, 2022, 2021 and 2020 for all service-based and performance-based share awards. The compensation cost is included as part of selling, general and administrative expenses in our Consolidated Statements of Operations. | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Share-based compensation (benefit) expense reported: | | | | | |
Performance-based share (benefit) expense | $ | (5.0) | | | $ | 12.5 | | | $ | 6.3 | |
Service-based share expense | 4.4 | | | 8.3 | | | 3.3 | |
| | | | | |
Total share-based compensation (benefit) expense before income tax | (0.6) | | | 20.8 | | | 9.6 | |
Income tax | — | | | — | | | — | |
Total share-based compensation (benefit) expense, net of income tax | $ | (0.6) | | | $ | 20.8 | | | $ | 9.6 | |
No share-based compensation cost was capitalized during these periods and there were no significant modifications of any share-based awards in 2022, 2021 and 2020. As of December 31, 2022, we had unrecognized compensation cost of $6.8 million before taxes. This cost will be recognized over a weighted average period of 1.7 years.
14. Earnings (Loss) Per Share
Basic EPS amounts are calculated by dividing net income (loss) allocated to common stockholders by the weighted average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive common shares outstanding.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
The following table shows the basic and diluted earnings (loss) per share for 2022, 2021, and 2020: | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2022 |
| Net Loss | | Shares (in millions) | | Per Share |
Net loss | $ | (14.1) | | | | | |
Amount allocated to common stockholders | 100 | % | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Basic and Diluted EPS:(1) | $ | (14.1) | | | 91.4 | | | $ | (0.15) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2021 |
| Net Loss | | Shares (in millions) | | Per Share |
Net loss | $ | (167.1) | | | | | |
Amount allocated to common stockholders | 100 | % | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Basic and Diluted EPS:(1) | $ | (167.1) | | | 90.2 | | | $ | (1.85) | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2020 |
| Net Loss | | Shares (in millions) | | Per Share |
Net loss | $ | (123.3) | | | | | |
Amount allocated to common stockholders | 100 | % | | | | |
| | | | | |
Basic and Diluted EPS:(1) | $ | (123.3) | | | 89.5 | | | $ | (1.38) | |
| | | | | |
| | | | | | | | | | | | | | | | | |
Securities excluded from the calculation of diluted EPS (in millions)(1): | 2022 | | 2021 | | 2020 |
Share-based compensation | 1.7 | | | 2.7 | | | 1.3 | |
Convertible preferred shares | 5.8 | | | 6.3 | | | 6.6 | |
Convertible senior notes | 4.6 | | | 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.
15. Income Taxes | | | | | | | | | | | | | | | | | |
The components of pre-tax book income (loss) consist of the following: |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
U.S. | $ | (193.6) | | | $ | (250.5) | | | $ | (76.7) | |
Foreign | 227.0 | | | 52.9 | | | (49.6) | |
Total | $ | 33.4 | | | $ | (197.6) | | | $ | (126.3) | |
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
Significant components of income tax expense consist of the following: |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
U.S. federal current expense (benefit) | $ | — | | | $ | — | | | $ | — | |
State current expense (benefit) | 0.2 | | | — | | | — | |
Foreign current expense (benefit) | 4.0 | | | 0.1 | | | 4.0 | |
Total current expense (benefit) | 4.2 | | | 0.1 | | | 4.0 |
Deferred: | | | | | |
U.S. federal deferred (benefit) | (0.3) | | | (0.2) | | | (1.2) | |
State deferred benefit | — | | | — | | | — | |
Foreign deferred tax expense (benefit) | 43.5 | | | (30.5) | | | (5.9) | |
Total deferred expense (benefit) | 43.2 | | | (30.7) | | | (7.1) | |
Total income tax expense (benefit) | $ | 47.4 | | | $ | (30.6) | | | $ | (3.1) | |
| | | | | | | | | | | | | | | | | |
A reconciliation of the statutory U.S. Federal income tax rate to the effective income tax rate on income (loss) is as follows: |
| 2022 | | 2021 | | 2020 |
Federal Statutory Rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Permanent differences | (15.2) | | | (0.3) | | | (1.2) | |
State taxes, net of Federal benefit | 0.1 | | | — | | | — | |
Rate change | 0.4 | | | 2.5 | | | (0.2) | |
Foreign earnings taxed at different rates than U.S. | (0.8) | | | (3.9) | | | (0.3) | |
Valuation allowance | (4.2) | | | (15.9) | | | (4.3) | |
Helguvik investment | — | | | 26.4 | | | — | |
Foreign restructuring | — | | | — | | | (2.3) | |
Foreign dividends and inclusions | 122.9 | | | (10.1) | | | (1.5) | |
Net operating loss expiration and remeasurement | 43.1 | | | (5.2) | | | (10.8) | |
Provision to return | (19.1) | | | (0.1) | | | (0.4) | |
Changes in uncertain tax reserves | (5.3) | | | 1.3 | | | 1.4 | |
Other | (0.9) | | | (0.2) | | | 1.0 | |
Effective tax rate | 142.0 | % | | 15.5 | % | | 2.4 | % |
The effective tax rate for the year ending December 31, 2022 was higher than the statutory US tax rate of 21% primarily as a result of the calculated foreign inclusions having a greater impact in comparison to the consolidated pre-tax income generated.
The Company’s accounting policy with respect to releasing income tax effects from accumulated other comprehensive income is to apply a security by security approach whereby the tax effects are measured based on the change in the unrealized gains or losses reflected in other comprehensive loss.
The Inflation Reduction Act of 2022 ("IRA") 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, effective January 1, 2023, 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 December 31, 2022, we do not anticipate any material impact of these provisions. The IRA provides several tax incentives to promote clean energy and the production of critical minerals in the U.S., also effective January 1, 2023. Century will continue to evaluate potential tax benefits available under the acts as additional guidance is issued in future periods.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The significant components of our deferred tax assets and liabilities as of December 31 are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Accrued postretirement benefit cost | $ | 25.7 | | | $ | 29.5 | |
| | | |
| | | |
| | | |
| | | |
Net operating losses and tax credits | 395.8 | | | 453.1 | |
Disallowed interest expense | 27.7 | | | 17.8 | |
| | | |
Derivative and hedging contracts | — | | | 18.6 | |
Fixed asset tax over book basis | 17.0 | | | — | |
Other | 26.1 | | | 20.7 | |
Total deferred tax assets | 492.3 | | | 539.7 | |
Valuation allowance | (487.9) | | | (485.8) | |
Net deferred tax assets | $ | 4.4 | | | $ | 53.9 | |
Deferred tax liabilities: | | | |
Fixed asset book over tax basis | (60.5) | | | (86.2) | |
| | | |
Derivatives | (19.0) | | | — | |
Foreign basis differences | (19.8) | | | (19.6) | |
Other | (7.9) | | | (6.8) | |
Total deferred tax liabilities | (107.2) | | | (112.6) | |
Net deferred tax liability | $ | (102.8) | | | $ | (58.7) | |
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. When a valuation allowance is established or increased, an income tax charge is included in the consolidated statement of operations and net deferred tax assets are adjusted accordingly. Future changes in tax laws, statutory tax rates and taxable income levels could result in actual realization of the deferred tax assets being materially different from the amounts provided for in the consolidated financial statements. If the actual recovery amount of the deferred tax asset is less than anticipated, we would be required to write-off the remaining deferred tax asset and increase the tax provision.
We have a valuation allowance of $487.9 million recorded against our net U.S. deferred tax assets, and a portion of our Icelandic deferred tax assets as of December 31, 2022. The Company is subject to the provisions of ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The increase in deferred tax assets, and the related valuation allowances, is primarily related to the impairment charge recognized to write down the Hawesville asset group to its estimated fair value following curtailment, which was offset by an increase in deferred tax liabilities primarily related to the Company's hedging derivatives.
The changes in the valuation allowance are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Beginning balance, valuation allowance | $ | 485.8 | | | $ | 499.4 | | | $ | 492.4 | |
Remeasurement of deferred tax assets | — | | | — | | | — | |
Release of valuation allowance | — | | | — | | | — | |
Expiration of net operating losses | (15.4) | | | (13.2) | | | (11.7) | |
Other change in valuation allowance | 17.5 | | | (0.4) | | | 18.7 | |
Ending balance, valuation allowance | $ | 487.9 | | | $ | 485.8 | | | $ | 499.4 | |
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
The significant components of our NOLs are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
Federal (1) | $ | 1,487.8 | | | $ | 1,568.4 | |
State (2) | 1,182.7 | | | 1,161.0 | |
Foreign (3) | 106.0 | | | 321.7 | |
(1)The federal NOL begins to expire in 2028.
(2)The state NOLs begin to expire in 2027.
(3)The Icelandic NOLs expire between 2023 and 2026.
Our ability to utilize our deferred tax assets to offset future federal taxable income may be significantly limited if we experience an "ownership change" as defined in the Code. In general, an ownership change would occur if our "five-percent shareholders," as defined under the Code, collectively increase their ownership in us by more than 50 percentage points over a rolling three-year period. Future transactions in our stock that may not be in our control may cause us to experience such an ownership change and thus limit our ability to utilize net operating losses, tax credits and other tax assets to offset future taxable income.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (excluding interest) is as follows: | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Balance as of January 1, | $ | 4.0 | | | $ | 6.5 | | | $ | 8.2 | |
Additions based on tax positions related to the current year | 0.3 | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
Decreases due to lapse of applicable statute of limitations | (2.1) | | | (2.5) | | | (1.7) | |
Settlements | — | | | — | | | — | |
Balance as of December 31, | $ | 2.2 | | | $ | 4.0 | | | $ | 6.5 | |
As of December 31, 2022, the Company’s gross unrecognized tax benefits totaled $2.2 million. After considering the deferred tax accounting impact, it is expected that about $1.4 million of the total as of December 31, 2022 would favorably affect the effective tax rate if resolved in the Company’s favor. Included in the above balances are tax positions relating to temporary differences where there is uncertainty about the timing of tax return inclusion, but not that the amounts will ultimately be tax deductible. Because of the impact of deferred tax accounting, other than interest and penalties, the timing would not impact the annual effective tax rate but could accelerate the payment of cash to the taxing authority to an earlier period. We do not expect a significant change in the balance of unrecognized tax benefits within the next twelve months. It is our policy to recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Century and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and several foreign jurisdictions.
Our federal income tax returns have been reviewed by the IRS through 2010. However, we have NOLs beginning in 2008 that are available for carryforward to future years. Under U.S. tax law, NOLs may be adjusted by the IRS until the statute of limitations expires for the year in which the NOL is used. Accordingly, our 2008 and later NOLs may be reviewed until they are used or expire. Material state and local income tax matters have been concluded for years through 2016.
Our Icelandic tax returns are subject to examination beginning with the 2017 tax year.
16. Commitments and Contingencies
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
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 changes
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 agreement, 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 10 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 December 31, 2022, $2.0 million was recorded in other current liabilities and $4.8 million was recorded in other liabilities.
PBGC Settlement
In 2013, we entered into a settlement agreement with the Pension Benefit Guarantee 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 or nine month periods ended September 30, 2021, and 2020. We historically elected to defer certain payments under the PBGC Settlement Agreement and provided the PBGC with the appropriate security. On October 1, 2021, we amended the PBGC Settlement Agreement (the "Amended 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 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. As of December 31, 2022, we made contributions of $2.4 million related to the Amended PBGC Settlement Agreement.
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
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
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
CASC has a power supply agreement with Santee Cooper that has an effective term from April 1, 2021 and runs 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.
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 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
Contingent Obligation
We have a contingent obligation in connection with the “unwind” of a contractual arrangement between CAKY, Big Rivers Electric Corporation ("Big Rivers") and a third party and the execution of a long-term cost-based power contract with Kenergy, a member of a cooperative of Big Rivers, in July 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 with Kenergy. Our obligation to make repayments is contingent upon certain operating criteria for Hawesville and the LME price of primary aluminum. When the conditions for repayment are met, and for so long as those conditions continue to be met, we will be obligated to make principal and interest payments, in up to 72 monthly payments. Interest accrues at an annual rate equal to 10.94% and the term of the agreement is through December 2028.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
Based on the LME forward market prices for primary aluminum at December 31, 2022, and 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. We recognized a derivative asset which offsets our contingent obligation. As a result, our net liability decreased and we recognized a gain of $1.4 million for each of the years ended December 31, 2022 and 2021. These amounts are exactly offset by interest expense on the contingent obligation which is recorded in interest expense. Future increases in the LME forward market and increased operations at Hawesville may result in a partial or full derecognition of the derivative asset and a corresponding recognition of a loss.
The following table provides information about the balance sheet location and gross amounts offset:
| | | | | | | | | | | | | | | | | | | | |
Offsetting of financial instruments and derivatives | | Balance sheet location | | December 31, 2022 | | December 31, 2021 |
Contingent obligation – principal | | Other liabilities | | $ | (12.9) | | | $ | (12.9) | |
Contingent obligation – accrued interest | | Other liabilities | | (16.6) | | | (15.2) | |
Contingent obligation – derivative asset | | Other liabilities | | 29.5 | | | 28.1 | |
| | | | $ | — | | | $ | — | |
Labor Commitments
The bargaining unit employees at our Grundartangi, Vlissingen, Hawesville and Sebree facilities are represented by labor unions, representing approximately 59% of our total workforce.
Approximately 86% 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 workforce 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 May 31, 2024.
Approximately 43% 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 USW for its employees is effective through October 28, 2023. Mt. Holly employees are not represented by a labor union.
17. Asset Retirement Obligations
The reconciliation of the changes in our AROs is presented below: | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 |
Beginning balance, ARO liability | $ | 20.7 | | | $ | 19.8 | |
Additional ARO liability incurred | 3.8 | | | 4.9 | |
ARO liabilities settled | (4.6) | | | (6.1) | |
Accretion expense | 1.9 | | | 2.1 | |
Revisions in estimated cash flows | (0.6) | | | — | |
Ending balance, ARO liability | $ | 21.2 | | | $ | 20.7 | |
18. Business Segments
Century Aluminum is a producer of primary aluminum, which trades as a global commodity. We are organized as a holding company with each of our operating primary aluminum smelters managed and operated as a separate facility reporting
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
to our corporate headquarters. Each of our operating primary aluminum smelters meets the definition of an operating segment. We evaluated the similar economic and other characteristics, including nearly identical products, production processes, customers and distribution and have aggregated our four operating segments into one reportable segment, primary aluminum, based on these factors. In addition, all of our primary aluminum smelters share several key economic factors inherent in their common products and production processes. For example, all of our facilities' revenue is based on the LME price for primary aluminum.
A reconciliation of our consolidated assets to the total of primary aluminum segment assets is provided below.
| | | | | | | | | | | | | | | | | |
Segment assets (1) | 2022 | | 2021 | | 2020 |
Primary | $ | 1,432.4 | | | $ | 1,513.3 | | | $ | 1,332.0 | |
Corporate, unallocated | 39.6 | | | 56.6 | | | 67.6 | |
Total assets | $ | 1,472.0 | | | $ | 1,569.9 | | | $ | 1,399.6 | |
(1)Segment assets include accounts receivable, due from affiliates, prepaid and other current assets, leases - right of use assets, inventory, intangible assets and property, plant and equipment, net; the remaining assets are unallocated corporate assets.
Geographic information
Included in the consolidated financial statements are the following amounts related to geographic locations:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net sales: (1) | | | | | |
United States | $ | 1,737.2 | | | $ | 1,413.0 | | | $ | 1,007.5 | |
Iceland | 1,040.1 | | | 799.5 | | | 597.6 | |
| | | | | |
Long-lived assets: (2) | | | | | |
United States | $ | 244.9 | | | $ | 400.1 | | | $ | 363.3 | |
Iceland | 491.0 | | | 490.1 | | | 511.8 | |
Other | 58.3 | | | 61.5 | | | 68.6 | |
(1)Includes sales of primary aluminum, scrap aluminum and alumina, and purchased aluminum and alumina.
(2)Includes long-lived assets other than financial instruments and deferred taxes.
Major customer information
Revenues from two customers exceeded 10% of our net sales in 2022, 2021 and 2020. A loss of these customers could have a material adverse effect on our results of operations. The net sales related to the customers is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Glencore | $ | 1,671.1 | | | $ | 1,337.0 | | | $ | 1,025.5 | |
Southwire | 331.3 | | | 304.6 | | | 195.9 | |
19. Derivatives
As of December 31, 2022, we had an open position of 111,741 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 had no open MWP forward financial sales contracts as of December 31, 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
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
exposed to the LME and MWP aluminum prices. As of December 31, 2022, we had 946 tonnes related to fixed for floating swaps that will settle monthly through September 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”). The Nord Pool power price swaps are expected to settle monthly through December 2023. The Nord Pool power price swaps are settled in Euros, therefore we have entered into financial contracts to hedge the risk of fluctuations associated with the Euro ("FX swaps"). As of December 31, 2022, we had an open position related to the FX swaps of €32.7 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. The pricing relationship between the fixed and floating contracts created a realized gain of $16.0 million, which we recognized for the year ended December 31, 2022. As of December 31, 2022, we had an open net position of 989,880 MWh related to the Nord Pool power price swaps.
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 December 31, 2022, we had an open position of 175,200 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 December 31, 2022, we had an open position related to the ISK casthouse swaps of 5.5 billion ISK that will settle monthly through July 2023. As of December 31, 2022, we had an open position related to the Euro casthouse swaps of €8.9 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 December 31, 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 December 31, 2022 and 2021, respectively:
| | | | | | | | | | | |
| Asset Fair Value |
| 2022 | | 2021 |
Commodity contracts (1) | 129.1 | | | $ | 42.9 | |
Foreign exchange contracts (2) | — | | | — | |
Total | $ | 129.1 | | | $ | 42.9 | |
| | | | | | | | | | | |
| Liability Fair Value |
| 2022 | | 2021 |
Commodity contracts (1) | 23.7 | | | 143.3 | |
Foreign exchange contracts (2) | 7.3 | | | 2.9 | |
Total | $ | 31.0 | | | $ | 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 December 31, 2022, $11.9 million of Due to affiliates and $8.3 million of Due to affiliates - less current portion was related to commodity contract liabilities with Glencore. At December 31, 2021, $17.1 million of Due to affiliates, and $21.9 million of Due to affiliates - less current portion was related to commodity contract liabilities with Glencore.
(2) Foreign exchange contracts reflect our outstanding FX swaps and casthouse currency hedges.
CENTURY ALUMINUM COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share and per share amounts)
The following table summarizes the net gain (loss) on forward and derivative contracts for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Commodity contracts (1) | $ | 206.6 | | | $ | (208.0) | | | $ | (16.3) | |
Foreign exchange contracts | (9.4) | | | (4.4) | | | (1.0) | |
Total | $ | 197.2 | | | $ | (212.4) | | | $ | (17.3) | |
(1) For the years ended December 31, 2022, 2021, and 2020, $(13.3) million, $116.9 million, and $(9.2) million of net gain (loss), respectively, was with Glencore.
20. Subsequent events
On January 17, 2023, our wholly owned subsidiary, Mt. Holly Commerce Park LLC, entered into a binding agreement, subject to ordinary course conditions, to sell approximately 133 acres of land for approximately $28.5 million. We previously formed the commerce park, located near our Mt. Holly smelter, to develop excess land at the site and to assist the county with bringing additional business and commerce to the area.