Quarterly Report

---

 

---

---

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2009

 

OR

 

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______.

 

Commission file number 1-34474

 

 

Century Aluminum Company

 

(Exact name of Registrant as specified in its Charter)

 

Delaware (State or other Jurisdiction of Incorporation or Organization)	13-3070826 (IRS Employer Identification No.)
2511 Garden Road Building A, Suite 200 Monterey, California (Address of principal executive offices)	93940 (Zip Code)

 

Registrant’s telephone number, including area code: (831) 642-9300

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x   Yes                 o   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*   o   Yes       o   No

* - The registrant is not currently required to submit interactive data files.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	x	Accelerated Filer	o
Non-Accelerated Filer (Do not check if a smaller reporting company)	o	Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o   Yes      x   No

The registrant had 92,530,068 shares of common stock outstanding at November 3, 2009.

---

---

 

 

---

Table of Contents

TABLE OF CONTENTS
	Page
PART I
FINANCIAL INFORMATION
Item 1.  Financial Statements (As Restated)	1
Notes to Consolidated Financial Statements	4
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	58
Item 4.  Controls and Procedures	61
PART II
OTHER INFORMATION
Item 1A. Risk Factors	62
Item 6.  Exhibit Index	77
SIGNATURES	78

 

 

---

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
		September 30,				December 31,
		2009				2008
ASSETS
Cash		$	196,337			$	129,400
Restricted cash			8,369				865
Short-term investments			—				13,686
Accounts receivable — net			44,661				60,859
Due from affiliates			16,052				39,062
Inventories			130,623				138,111
Prepaid and other current assets			90,262				99,861
Deferred taxes — current portion			—				32,290
Total current assets			486,304				514,134
Property, plant and equipment — net			1,307,855				1,340,037
Intangible asset — net			—				32,527
Due from affiliates – less current portion			7,599				7,599
Other assets			76,912				141,061
TOTAL		$	1,878,670			$	2,035,358
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Accounts payable, trade		$	82,412			$	102,143
Due to affiliates			26,517				70,957
Accrued and other current liabilities			48,867				58,777
Accrued employee benefits costs — current portion			12,070				12,070
Convertible senior notes			145,292				152,700
Industrial revenue bonds			7,815				7,815
Total current liabilities			322,973				404,462
Senior unsecured notes payable			250,000				250,000
Revolving credit facility			—				25,000
Accrued pension benefits costs — less current portion			44,622				50,008
Accrued postretirement  benefits costs — less current  portion			163,317				219,539
Other liabilities			35,730				33,464
Deferred taxes			66,432				71,805
Total noncurrent liabilities			560,101				649,816
CONTINGENCIES AND COMMITMENTS (NOTE 17)
SHAREHOLDERS’ EQUITY:
Preferred stock (one cent par value, 5,000,000 shares authorized; 145,895 and 155,787 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively)			2				2
Common stock (one cent par value, 195,000,000 shares authorized and 76,149,918 shares issued and outstanding at September 30, 2009; 100,000,000 shares authorized and 49,052,692 shares issued and outstanding at December 31, 2008)			761				491
Additional paid-in capital			2,392,505				2,272,128
Accumulated other comprehensive loss			(61,711	)			(137,208	)
Accumulated deficit			(1,335,961	)			(1,154,333	)
Total shareholders’ equity			995,596				981,080
TOTAL		$	1,878,670			$	2,035,358

See notes to consolidated financial statements

 

- 1 -

---

Table of Contents

 

CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
		Three months ended September 30,								Nine months ended September 30,
		2009				2008				2009				2008
NET SALES:
Third-party customers		$	169,927			$	426,771			$	480,438			$	1,203,696
Related parties			58,772				125,468				162,001				364,882
			228,699				552,239				642,439				1,568,578
Cost of goods sold			231,051				430,256				722,379				1,194,376
Gross profit (loss)			(2,352	)			121,983				(79,940	)			374,202
Other operating income – net			(55,599	)			—				(22,101	)			—
Selling, general and administrative expenses			11,395				11,253				32,786				43,970
Operating income (loss)			41,852				110,730				(90,625	)			330,232
Interest expense			(8,004	)			(7,892	)			(24,023	)			(23,915	)
Interest expense – related parties			—				(1,144	)			—				(1,144	)
Interest income			159				1,602				1,235				6,417
Interest income – affiliates			145				146				431				146
Net loss on forward contracts			(914	)			(79,103	)			(7,784	)			(731,195	)
Other income (expense) – net			(243	)			(1,370	)			101				(1,597	)
Income (loss) before income taxes and equity in earnings (losses) of joint ventures			32,995				22,969				(120,665	)			(421,056	)
Income tax benefit			6,577				10,313				8,100				206,949
Income (loss) before equity in earnings (losses) of joint ventures			39,572				33,282				(112,565	)			(214,107	)
Equity in earnings (losses) of joint ventures			570				2,507				(69,063	)			12,466
Net income (loss)		$	40,142			$	35,789			$	(181,628	)		$	(201,641	)
EARNINGS (LOSS) PER COMMON SHARE:
Basic		$	0.45			$	0.58			$	(2.56	)		$	(4.66	)
Diluted		$	0.45			$	0.55			$	(2.56	)		$	(4.66	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands):
Basic			74,214				47,720				71,023				43,317
Diluted			74,721				49,975				71,023				43,317
Net income (loss) allocated to common shareholders		$	33,270			$	27,461			$	(181,628	)		$	(201,641	)

See notes to consolidated financial statements

 

- 2 -

---

Table of Contents

CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
		Nine months ended September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:						(As Restated, see Note 3)
Net loss		$	(181,628	)		$	(201,641	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Unrealized net loss on forward contracts			1,680				605,105
Unrealized net gain on contractual receivable			(81,168	)			—
Realized benefit on contractual receivable			8,634				—
Write-off of intangible asset			23,759				—
Accrued plant curtailment costs			12,956				—
Depreciation and amortization			56,886				62,912
Lower of cost or market inventory adjustment			(40,494	)			—
Deferred income taxes			26,212				(200,330	)
Pension and other post retirement benefits			10,721				11,677
Stock-based compensation			2,068				12,034
Equity investment impairment			73,234				—
Undistributed earnings of joint ventures			(4,171	)			(12,466	)
Non-cash gain on early extinguishment of debt			(768	)			—
Changes in operating assets and liabilities:
Accounts receivable – net			16,198				(22,403	)
Purchase of short-term trading securities			—				(97,532	)
Sale of short-term trading securities			13,686				348,416
Due from affiliates			23,010				(9,771	)
Inventories			29,656				(36,119	)
Prepaid and other current assets			69,284				(389	)
Accounts payable, trade			(11,260	)			15,266
Due to affiliates			(18,152	)			(1,145,002	)
Accrued and other current liabilities			(7,058	)			(28,523	)
Other – net			5,426				45
Net cash provided by (used in) operating activities			28,711				(698,721	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(14,667	)			(26,691	)
Nordural expansion			(17,606	)			(53,397	)
Investments in and advances to joint ventures			(1,038	)			(36,973	)
Restricted and other cash deposits			(7,504	)			(9,710	)
Net cash used in investing activities			(40,815	)			(126,771	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt – related party			—				(480,198	)
Repayments under revolving credit facility			(25,000	)			—
Excess tax benefits from shared-based compensation			—				657
Issuance of preferred stock			—				929,480
Issuance of common stock – net			104,041				443,646
Net cash provided by financing activities			79,041				893,585
NET CHANGE IN CASH			66,937				68,093
Cash, beginning of the period			129,400				60,962
Cash, end of the period		$	196,337			$	129,055

 

See notes to consolidated financial statements

 

- 3 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements for the

Three and nine months ended September 30, 2009 and 2008

(Dollar amounts in thousands, except per share amounts)

(UNAUDITED)

1.

General

 

The accompanying unaudited interim consolidated financial statements of Century Aluminum Company should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008.  In management’s opinion, the unaudited interim consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented.  This unaudited interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our current report on Form 8-K filed on October 20, 2009.  Operating results for the first nine months of 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  Throughout this Form 10-Q, and unless expressly stated otherwise or as the context otherwise requires, "Century Aluminum," "Century," "we," "us," "our" and "ours" refer to Century Aluminum Company and its consolidated subsidiaries.

 

2.	Management’s Plans

 

We have incurred losses each year since 2005 and had an accumulated deficit of $1,335,961 as of September 30, 2009.  For the nine months ended September 30, 2009 and the year ended December 31, 2008, we sustained net losses available to common stockholders of $181,628 and $895,187 (as adjusted for the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-20, formerly FSP APB 14-1, see Note 7), respectively.  Our financial position and liquidity have been and may continue to be materially adversely affected by low aluminum prices as compared to our cost of production.

 

At recent aluminum prices of approximately $1,800 per metric ton, our U.S. operations are roughly break-even on a cash basis.  On a consolidated basis, including our Nordural facility at Grundartangi, Iceland (“Grundartangi”) operations, corporate overhead, interest and capital expenditures, we would expect to be cash flow break even at aluminum prices in the $1,800 to $1,900 per metric ton range during the fourth quarter of 2009.  We estimate that an increase or decrease of $100 per metric ton in the price of primary aluminum would result in a corresponding increase or decrease in our cash from operations of approximately $40,000 annually. Thus, if primary aluminum prices decrease, we may either need to identify new sources of liquidity, implement additional cost reductions or further curtail operations to fund ongoing operations and investments.

 

Our principal sources of liquidity are available cash, cash flow from operations and available borrowings under our revolving credit facility.  We will continue to explore alternative or supplementary financing arrangements to the revolving credit facility.  Our principal uses of cash are operating costs, curtailment and idling costs, payments of principal and interest on our outstanding debt, the funding of capital expenditures and investments in related businesses, working capital and other general corporate requirements.

 

3.	Correction of an error in previously issued financial statements

 

As disclosed in our current report on Form 8-K filed on March 2, 2009, we determined that our previously issued financial statements for the nine months ended September 30, 2008 included in our periodic report on Form 10-Q for that period should no longer be relied upon as a result of an error in the interim consolidated statement of cash flows.  We determined that preferred stock issued in July 2008 was not presented on the consolidated statements of cash flows in accordance with ASC 230 “Statement of Cash Flows” (formerly, Statement of Financial Accounting Standards (“SFAS”) No. 95).

 

- 4 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

We initially reported cash flows associated with the termination of primary aluminum forward financial sales contracts by issuing $929,480 of Series A Convertible Preferred Stock on a net basis as an operating activity.  We have concluded the transaction should have been presented on a gross presentation basis as both an operating activity and a financing activity to reflect the cash receipts and disbursements associated the transaction.

 

The restatement had the following impact on our consolidated statement of cash flows for the nine month ended September 30, 2008:

 

		As Previously Reported				As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Due to affiliates		$	(215,522	)		$	(1,145,002	)
Net cash provided by (used in) operating activities			230,759				(698,721	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred stock			—				929,480
Net cash provided by (used in) financing activities		$	(35,895	)		$	893,585

 

4.	Long-term power contract for Hawesville

 

To secure a new, long-term power contract for o ur primary aluminum smelter in Hawesville, Kentucky (“ Hawesville”), on July 16, 2009, our wholly owned subsidiary, Century Aluminum of Kentucky (“ CAKY”) along with E.ON U.S. (“E.ON”) and Big Rivers Energy Corporation (“Big Rivers”) , agreed to an “unwind” of the former contractual arrangement between Big Rivers and E.ON and entered into a new arrangement (“Big Rivers Agreement”) to provide long-term cost-based power to CAKY. The term of the Big Rivers Agreement is through 2023 and provides adequate power for Hawesville’s full production capacity requirements (approximately 482 MW) with pricing based on the provider’s cost of production.  The Big Rivers Agreement is take-or-pay for Hawesville’s energy requirements at full production.  Under the terms of the agreement, any power not required by Hawesville would be available for sale and we would receive credits for actual power sales up to our cost for that power.  The current market price of electrical power in this region is less than Big Rivers’ forecasted cost.  

 

E.ON has agreed to mitigate a significant portion of this near-term risk, at a minimum, through December 2010.  During this time, to the extent Hawesville does not use all the power under the take-or-pay contract, E.ON will, with some limitations, assume Hawesville's obligations.  As part of this arrangement, E.ON will pay up to approximately $80,000 to CAKY in the form of direct payments to Big Rivers under the Big Rivers Agreement to compensate CAKY for the fair value of the previous contract and to compensate CAKY for power in excess of CAKY’s current demand.  At Hawesville's current production rate, Hawesville would receive the entirety of these economic benefits over the term of the agreement.  To the extent the aggregate payments made by E.ON exceed the approximately $80,000 commitment, Hawesville would repay this excess to E.ON over time, but only if the London Metal Exchange (“LME”) aluminum price were to exceed certain thresholds.

 

As the previous power contract was designated as a normal contract under ASC 815 (formerly SFAS No. 133, “Accounting for Derivatives), in the third quarter of 2009 when it became no longer probable that we would continue to take physical delivery of the power under the previous contract, we recorded an $80,723 contractual receivable from E.ON representing the net present value of the consideration provided to CAKY from E.ON to net settle the previous contract, wrote off a $23,759 intangible asset associated with the former power contract and recorded a $56,964 net gain on this transaction on our consolidated statements of operations in other operating income – net.

 

- 5 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

The new power contract has been designated as a normal purchase contract under ASC 815.  Unlike the previous power contract that was a fixed price contract where the purchase price of power was below market prices without an explicit net settlement provision, the Big Rivers Agreement is a cost-based contract that is not expected to have any significant value and is with a regulated power generator.  While the Big Rivers Agreement is a take-or-pay contract where we may net settle any unused power with Big Rivers, we would only receive credits up to our cost for such power sales and would not profit on any sales made above our cost for such power under the current election made under the Big Rivers Agreement.

 

5.	Convertible debt for equity exchange transactions

 

We have agreed to issue an aggregate of approximately 11.4 million shares of our common stock in exchange for approximately $127,933 aggregate principal amount of our 1.75% Convertible Senior Notes due 2024 (“ 1.75% Notes”).  After concluding these debt-for-equity exchanges, we will have approximately $47,067 aggregate principal amount of 1.75% Notes outstanding.  Holders of the 1.75% Notes may require us to purchase for cash all or part of the 1.75% Notes then outstanding at par on August 1, 2011.  In addition, investors party to these agreements have agreed to consent to certain amendments or modifications to the indenture governing the 1.75% Notes.  As a result, we have secured consents constituting the requisite consents necessary to amend the 1.75% Notes indenture.

 

 

In September 2009, two of the exchange transactions were settled.  We issued 1,229,824 shares of common stock in exchange for $14,858 principal value of our 1.75% Notes.  Additional exchange transactions for $113,075 principal value in exchange for 10,135,870 shares of our common stock are expected to price and settle in October and November 2009.  See Note 25 Subsequent Events for additional information.

 

6.	Gramercy and St. Ann Bauxite transfer

 

On September 1, 2009, we completed the sale of our 50% ownership positions in Gramercy Alumina LLC (“Gramercy”) and St. Ann Bauxite Limited (“St. Ann”) to Noranda Aluminum Holding Corporation (together with its consolidated subsidiaries, “Noranda”).  At closing, we divested our entire interest in these businesses and Noranda assumed 100% ownership of Gramercy and St. Ann.  In connection with this transaction, we made a $5,000 cash payment during the third quarter of 2009 and expect to make an additional $5,000 payment in the fourth quarter of 2009.

 

Hawesville currently receives all of its alumina supply from Gramercy.  As part of the transaction, the former alumina supply agreement with Gramercy was terminated and we entered into a new alumina supply agreement.  The new alumina supply agreement term is through December 2010.  Pricing under the new contract will be fixed for the first 125,000 metric tons (“MT”) and LME-based for the remaining 65,500 MT (subject to certain conditions for floor pricing).  

 

Impact on our financial position, results of operations and cash flows

 

As a result of entering into an agreement to transfer our joint venture investments, we undertook an evaluation to determine the impact, if any, on the carrying amount of the equity investments in the joint venture assets as of June 30, 2009.  We concluded that the terms of the asset transfer agreement provided indications of an impairment of the equity investments in the joint ventures.  We performed an impairment analysis to determine the appropriate carrying amount of these assets as of June 30, 2009.  Based on the impairment analysis, we recorded a $73,234 impairment loss in the second quarter of 2009.  

 

- 6 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

 

The $73,234 loss consisted of the following amounts:

		Impairment loss
Equity investments in Gramercy and St. Ann, equity in the earnings of Gramercy and St. Ann and intercompany profit elimination		$	(74,783	)
Pension and OPEB obligations for Gramercy and St. Ann			1,549
Total		$	(73,234	)

 

The impairment loss was recorded on the consolidated statements of operations in equity in earnings (losses) of joint ventures.  On the consolidated balance sheets, the impairment to reduce the equity investments was recorded in other assets where our equity investments were recorded.  The pension and OPEB obligations of the equity investments were recorded in accumulated other comprehensive loss. Amounts due to Gramercy under our previous alumina contract were recorded under due to affiliates through September 1, 2009; amounts due under the new alumina contract are now recorded in accounts payable.

 

This transaction does not affect our obligation, per our agreement reached in April 2009, to pay St. Ann $6,000 in compensation for the reduced bauxite sales associated with agreements to reduce the amount of bauxite St. Ann will supply Glencore International AG (together with its subsidiaries, “Glencore”) in 2009.  Payments are due to be made in monthly installments through December 2009.  Through September 30, 2009, we have made payments totaling $3,750.  The $6,000 in compensation to St. Ann was due to the curtailment of the West Virginia smelter (“Ravenswood”) and one potline at Hawesville which created an oversupply of alumina company wide.  Therefore, the $6,000 was recorded in other operating income – net in our consolidated statements of operations in the second quarter of 2009.  See Note 17 Contingencies and Commitments for additional information about these payments to St. Ann.

7.	ASC 470-20 (FSP APB 14-1) Adoption

 

ASC 470-20 (formerly FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”) (”ASC 470-20”) fundamentally changes the accounting for certain convertible debt instruments.  Issuers of convertible debt instruments affected by ASC 470-20 must separately account for the liability and equity components of the convertible debt instruments in a manner that reflects the entity’s hypothetical nonconvertible borrowing rate.  ASC 470-20 requires the retrospective application of these changes to our financial statements back to the date of issuance of our 1.75% Notes with a cumulative effect adjustment recognized as of the beginning of the first period presented.  January 1, 2009 was our effective date for applying ASC 470-20.

 

ASC 470-20 applies to our 1.75% Notes.  The holders of our 1.75% Notes may convert at any time at an initial conversion rate of 32.743 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of $30.5409 per share of common stock.  Upon conversion, we would deliver cash up to the principal amount of the 1.75% Notes to be converted and, at our election, cash, common stock or a combination thereof for any conversion obligation in excess of the principal amount of the 1.75% Notes to be converted.  We did not enter into any derivative transactions in connection with the issuance of the 1.75% Notes.  Currently, the if-converted value of the 1.75% Notes is significantly less than the principal balance of the 1.75% Notes.

 

- 7 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

 

We applied the guidance in ASC 470-20 to measure the fair value of the liability component of the 1.75% Notes using a discounted cash flow model.  We assessed the expected life of the liability component to be seven years through August 1, 2011 (based on the noteholder’s put option August 1, 2011) and applied a hypothetical nonconvertible borrowing rate (7.25%) which was based on yields of similarly rated nonconvertible instruments issued in August 2004.  We determined the carrying amount of the equity component by deducting the fair value of the liability component from the principal amount of the 1.75% Notes.  The tax effect of the temporary basis difference associated with the liability component of the 1.75% Notes is recorded as an adjustment to additional paid in capital as proscribed by ASC 470-20.

 

In 2004, we capitalized approximately $6,000 of transaction costs related to the issuance of the 1.75% Notes.  We amortize these capitalized financing fees to interest expense over the expected life of the 1.75% Notes.  ASC 470-20 requires the allocation of these capitalized financing fees to the liability and equity components and accounting for the allocated fees as either debt issuance costs or equity issuance costs.

 

The adoption of ASC 470-20 resulted in the following amounts recognized in our financial statements:

		September 30, 2009				December 31, 2008
Principal of the liability component of 1.75% Notes (1)		$	160,142			$	175,000
Unamortized debt discount			(14,850	)			(22,300	)
Net carrying amount of liability component of 1.75% Notes		$	145,292			$	152,700
Net carrying amount of equity component of 1.75% Notes (net of $18,261 taxes and $1,799 issuance costs)		$	32,114			$	32,114

 

(1)	In the third quarter of 2009, we exchanged $14,858 principal value of our 1.75% Notes for common stock. See Note 5 Convertible debt for equity exchange transactions for additional information.

Interest expense related to the 1.75% convertible senior notes due 2024:
		Three months ended September 30,								Nine months ended September 30,
		2009				2008				2009				2008
Contractual interest coupon		$	764			$	766			$	2,295			$	2,297
Amortization of the debt discount on the liability component			2,062				1,920				6,067				5,649
Total		$	2,826			$	2,686			$	8,362			$	7,946
Effective interest rate for the liability component for the period			6.46	%			6.14	%			6.37	%			6.05	%

 

 

- 8 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

The estimated amortization expense for the debt discount for the 1.75% Notes through the remaining expected life (August 2011) is as follows:

		Three months ending December 31, 2009				2010				2011
Estimated debt discount amortization expense (1)		$	903			$	2,243			$	1,584

(1)

The estimated debt discount amortization expense has been adjusted for a subsequent event. We have agreements in place to exchange an additional $113,075 principal value of our 1.75% Notes for common stock in the fourth quarter of 2009.  Upon closing, approximately $10,120 of the debt discount will be derecognized as part of these transactions; the remaining debt discount will be amortized over the expected life of the 1.75% Notes.  See Note 25 Subsequent Events for additional information about these exchange transactions.

 

The adoption of ASC 470-20 requires the retrospective application to all periods presented as of the beginning of the first period presented.  As of January 1, 2009, ASC 470-20 was adopted and comparative financial statements of prior years have been adjusted to apply ASC 470-20 retrospectively.  The line items for the 2008 financial statements affected by the change in accounting principle are indicated below.

CONDENSED CONSOLIDATED BALANCE SHEETS
		December 31, 2008
		As Reported				Effect of change				As Adjusted
ASSETS
Total current assets		$	514,134			$	—			$	514,134
Property, plant and equipment — net			1,340,037				—				1,340,037
Intangible asset — net			32,527				—				32,527
Due from affiliates – less current portion			7,599				—				7,599
Other assets			141,802				(741	)			141,061
TOTAL		$	2,036,099			$	(741	)		$	2,035,358
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Accounts payable, trade		$	102,143			$	—			$	102,143
Due to affiliates			70,957				—				70,957
Accrued and other current liabilities			58,777				—				58,777
Accrued employee benefits costs — current portion			12,070				—				12,070
Convertible senior notes			175,000				(22,300	)			152,700
Industrial revenue bonds			7,815				—				7,815
Total current liabilities			426,762				(22,300	)			404,462
Total noncurrent liabilities			649,816				—				649,816
SHAREHOLDERS’ EQUITY:
Preferred stock			2				—				2
Common stock			491				—				491
Additional paid-in capital			2,240,014				32,114				2,272,128
Accumulated other comprehensive loss			(137,208	)			—				(137,208	)
Accumulated deficit			(1,143,778	)			(10,555	)			(1,154,333	)
Total shareholders’ equity			959,521				21,559				981,080
TOTAL		$	2,036,099			$	(741	)		$	2,035,358

 

- 9 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		Three months ended September 30, 2008
		As Reported				Effect of change				As Adjusted
Net Sales		$	552,239			$	—			$	552,239
Cost of goods sold			430,256				—				430,256
Gross profit			121,983				—				121,983
Selling, general and administrative expenses			11,253				—				11,253
Operating income			110,730				—				110,730
Interest expense – third party			(6,036	)			(1,856	)			(7,892	)
Interest expense – related party			(1,144	)			—				(1,144	)
Interest income – related parties			146				—				146
Interest income – third party			1,602				—				1,602
Net loss on forward contracts			(79,103	)			—				(79,103	)
Other expense- net			(1,370	)			—				(1,370	)
Income before income taxes and equity in earnings of joint ventures			24,825				(1,856	)			22,969
Income tax benefit			9,641				672				10,313
Income before equity in earnings of joint ventures			34,466				(1,184	)			33,282
Equity in earnings of joint ventures			2,507				—				2,507
Net income		$	36,973			$	(1,184	)		$	35,789
EARNINGS PER COMMON SHARE:
Basic		$	0.59			$	(0.01	)		$	0.58
Diluted		$	0.57			$	(0.02	)		$	0.55
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands):
Basic			47,720								47,720
Diluted			49,975								49,975
Net income (loss) allocated to common shareholders		$	28,369			$	(908	)		$	27,461

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		Nine months ended September 30, 2008
		As Reported				Effect of change				As Adjusted
Net Sales		$	1,568,578			$	—			$	1,568,578
Cost of goods sold			1,194,376				—				1,194,376
Gross profit			374,202				—				374,202
Selling, general and administrative expenses			43,970				—				43,970
Operating income			330,232				—				330,232
Interest expense – third party			(18,460	)			(5,455	)			(23,915	)
Interest expense – related party			(1,144	)			—				(1,144	)
Interest income – related parties			146				—				146
Interest income – third party			6,417				—				6,417
Net loss on forward contracts			(731,195	)			—				(731,195	)
Other expense - net			(1,597	)			—				(1,597	)
Loss before income taxes and equity in earnings of joint ventures			(415,601	)			(5,455	)			(421,056	)
Income tax benefit			204,971				1,978				206,949
Loss before equity in earnings of joint ventures			(210,630	)			(3,477	)			(214,107	)
Equity in earnings of joint ventures			12,466				—				12,466
Net loss		$	(198,164	)		$	(3,477	)		$	(201,641	)
LOSS PER COMMON SHARE:
Basic and Diluted		$	(4.57	)		$	(0.09	)		$	(4.66	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands):
Basic and Diluted			43,317								43,317
Net loss allocated to common shareholders		$	(198,164	)		$	(3,477	)		$	(201,641	)

 

- 10 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Nine months ended September 30, 2008
		As Restated (See Note 3)				Effect of change				As Adjusted
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(198,164	)		$	(3,477	)		$	(201,641	)
Adjustments to reconcile net loss to net cash used in operating activities:
Unrealized net loss on forward contracts			605,105				—				605,105
Depreciation and amortization			62,912				—				62,912
Deferred income taxes			(198,352	)			(1,978	)			(200,330	)
Pension and other post retirement benefits			11,677				—				11,677
Stock-based compensation			12,034				—				12,034
Undistributed earnings of joint ventures			(12,466	)			—				(12,466	)
Changes in operating assets and liabilities:							—
Accounts receivable – net			(22,403	)			—				(22,403	)
Purchase of short-term trading securities			(97,532	)			—				(97,532	)
Sale of short-term trading securities			348,416				—				348,416
Due from affiliates			(9,771	)			—				(9,771	)
Inventories			(36,119	)			—				(36,119	)
Prepaid and other current assets			(389	)			—				(389	)
Accounts payable, trade			15,266				—				15,266
Due to affiliates			(1,145,002	)			—				(1,145,002	)
Accrued and other current liabilities			(28,523	)			—				(28,523	)
Other – net			(5,410	)			5,455				45
Net cash used in operating activities			(698,721	)			—				(698,721	)
Net cash used in investing activities			(126,771	)			—				(126,771	)
Net cash provided by financing activities			893,585				—				893,585
NET CHANGE IN CASH			68,093				—				68,093
Cash, beginning of the period			60,962				—				60,962
Cash, end of the period		$	129,055			$	—			$	129,055

 

As the result of the accounting change, our accumulated deficit as of January 1, 2008, increased $13,684 from $245,462 to $259,146.

8.	Curtailment of Operations – Ravenswood and Hawesville

 

On December 17, 2008, our subsidiary, Century Aluminum of West Virginia, Inc. (“CAWV”), issued a conditional Worker Adjustment and Retraining Notification Act (“WARN”) notice at its Ravenswood, West Virginia smelter related to a curtailment of plant operations in 60 days. This facility employed approximately 684 persons.  Simultaneously with the issuance of the WARN, CAWV began the immediate curtailment of one of its four potlines which was completed by December 20, 2008.  In December 2008, we incurred curtailment costs of $1,667 for this partial curtailment at CAWV.

 

On February 4, 2009, we announced the curtailment of the remaining plant operations at Ravenswood.  Layoffs for the majority of Ravenswood's employees were completed by February 20, 2009.  The decision to curtail operations was due to the relatively high operating cost at Ravenswood and the depressed global price for primary aluminum.

 

- 11 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

 

On March 3, 2009, CAKY announced the curtailment of one potline at its Hawesville, Kentucky aluminum smelter.  Hawesville has production capacity of approximately 244,000 metric tons per year (“mtpy”) of primary aluminum from five potlines. The potline curtailment was completed in March 2009.  The action reduced primary aluminum production by approximately 4,370 metric tons per month and impacted approximately 120 employees.

 

We incurred curtailment charges of $1,810 and $35,308 during the three and nine months ended September 30, 2009, respectively, which are reported in other operating income - net in the consolidated statements of operations.  The majority of the curtailment charges related to Ravenswood.  The components of the curtailment costs for the three and nine months ended September 30, 2009 are as follows:

		Three months ended September 30, 2009				Nine months ended September 30, 2009
Severance/employee-related cost (1)		$	(3,220	)		$	21,243
Alumina contract – spot sales net losses			36				753
Alumina contract amendment cost			—				6,000
Power/other contract termination costs			—				6,332
Ongoing site costs			4,994				13,332
Gross expense			1,810				47,660
Pension plan curtailment adjustment			—				2,478
OPEB plan curtailment adjustment			—				(14,830	)
Net expense		$	1,810			$	35,308

(1)	The extension of unemployment benefits in West Virginia resulted in lower severance and employee-related benefit costs.

 

Cash expenditure forecasts and cash payments to date

 

		Total gross cash expenditure forecast				Approximate cash payments through September 30, 2009
Curtailment of operations at Ravenswood and Kentucky (24 months)		$	30,000			$	16,822
Ongoing idling costs at Ravenswood (24 months)		$	25,000			$	8,592
Contract termination costs (1)		$	15,000			$	12,315

(1)	This estimate is based on realized losses to date and $6,000 in payments to St. Ann Bauxite Ltd. in compensation for the reduced bauxite sales related to alumina and bauxite contract amendments (of which $3,750 has been paid as of September 30, 2009).

 

9.	Equity Offering

 

February 2009 Offering

 

In February 2009, we completed a public offering of 24,500,000 shares of common stock at a price of $4.50 per share, raising $110,250 before offering costs.  The offering costs were approximately $6,209, representing underwriting discounts and commissions and offering expenses.

 

- 12 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

Glencore purchased 13,242,250 shares of common stock in the February 2009 offering.  As of September 30, 2009, we believe that Glencore beneficially owned, through its common stock, approximately 38.1% of our issued and outstanding common stock and, through its ownership of common and preferred stock, an overall 48.1% economic ownership of Century.

 

We intend to use the net proceeds from the sale of our common stock for general corporate purposes, including repayment of debt.

10.	Fair Value Measurements and Derivative Instruments

 

ASC 820, “Fair Value Measurements and Disclosures,” (formerly, SFAS No. 157) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  This pronouncement applies to a broad range of other existing accounting pronouncements that require or permit fair value measurements.  ASC 820 defines fair value as “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.”  Under ASC 820, fair value is an exit price and that exit price should reflect all the assumptions that market participants would use in pricing the asset or liability.

 

Fair Value Measurements

 

The following table sets forth by level within the ASC 820 fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis.  As required by general accounting principles for fair value measurements and disclosures, financial assets and liabilities 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.

Recurring Fair Value Measurements		As of September 30, 2009
		Level 1				Level 2				Level 3				Total
ASSETS:
Primary aluminum put option contracts		$	—			$	8,475			$	—			$	8,475
Power contract - Ravenswood			—				—				84				84
TOTAL		$	—			$	8,475			$	84			$	8,559
LIABILITIES:
Derivative liabilities		$	(707	)		$	—			$	(1,222	)		$	(1,929	)

 

Recurring Fair Value Measurements		As of December 31, 2008
		Level 1				Level 2				Level 3				Total
ASSETS:
Short-term investments		$	—			$	13,686			$	—			$	13,686
Power contract - Ravenswood			—				—				2,202				2,202
TOTAL		$	—			$	13,686			$	2,202			$	15,888
LIABILITIES:
Derivative liabilities		$	(10,130	)		$	—			$	(1,759	)		$	(11,889	)

 

- 13 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

Change in Level 3 Fair Value Measurements during the three months ended September 30,
		Derivative liabilities/assets
		2009				2008
Beginning balance July 1,		$	(2,093	)		$	(1,614,221	)
Total gain (loss) (realized/unrealized) included in earnings			720				(241,026	)
Settlements			235				1,852,929
Ending balance, September 30		$	(1,138	)		$	(2,318	)
Amount of total (gain) loss included in earnings attributable to the change in unrealized gain losses relating to assets and liabilities held at September 30,		$	(2,615	)		$	240,781

 

 

Change in Level 3 Fair Value Measurements during the nine months ended September 30,
		Derivative liabilities/assets
		2009				2008
Beginning balance January 1,		$	443			$	(1,070,290	)
Total loss (realized/unrealized) included in earnings			(4,385	)			(892,984	)
Settlements			2,804				1,960,956
Ending balance, September 30,		$	(1,138	)		$	(2,318	)
Amount of total (gain) loss included in earnings attributable to the change in unrealized gains/losses relating to assets and liabilities held at September 30,		$	(4,385	)		$	777,298

 

The net loss on our derivative liabilities is recorded in our statement of operations under net loss on forward contracts.  In 2009, our Level 3 derivative liabilities are included in our accrued and other liabilities and other liabilities line items of our consolidated balance sheet.  In 2008, our Level 3 derivative liabilities are included in our due to affiliates, accrued and other liabilities, due to affiliates – less current portion and other liabilities line items of our consolidated balance sheets.

 

Short-term Investments.   Our short-term investments held at December 31, 2008 consist of tax-exempt municipal bonds.  The market value of these investments is based upon their quoted market price in markets that are not actively traded.  At September 30, 2009, we did not hold any short-term investments.

 

Derivatives .  Our derivative contracts have included natural gas forward financial purchase contracts, foreign currency forward contracts, primary aluminum forward physical delivery and financial sales contracts, the Ravenswood power contract and primary aluminum put option contracts.  We measure the fair value of these contracts based on the quoted future market prices (if available) at the reporting date in their respective principal markets for all available periods.  In some cases, we use discounted cash flows from these contracts using a risk-adjusted discount rate.  Primary aluminum forward physical delivery contracts that are accounted for as derivatives are marked-to-market using the LME spot and forward market for primary aluminum and the U.S. Midwest Premium.  Because there is no quoted futures market price for the U.S. Midwest premium component of the market price for primary aluminum, it is necessary for management to estimate the U.S. Midwest premium based on the historical U.S. Midwest premium.  Prior to the termination of the primary aluminum forward financial sales contracts in July 2008, the term of one of these contracts extended beyond the quoted LME futures market.  We estimated the fair value of that contract by making certain assumptions about future market prices of primary aluminum beyond the quoted LME market prices.  These future market assumptions were significant to the fair value measurements.  The Ravenswood power contract derivative is valued based in part on the LME forward market.  In September 2009, we entered into primary aluminum put option contracts that settle monthly from October 2009 through December 2010 based on LME prices.  We determine the fair value of the put options using quoted market values from a third-party.

 

- 14 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

Fluctuations in the market prices for our primary aluminum forward financial sales contracts had a significant impact on gains and losses from forward contracts included in our financial statements from period to period.  Unrealized gains and losses for these primary aluminum forward financial sales contracts were included in net loss on forward contracts.

 

Upon the transfer of our joint venture investment in Gramercy in the third quarter of 2009, we discontinued cash flow hedge treatment for our natural gas forward financial purchase contracts in September 2009 because the originally forecasted natural gas transactions will not occur by the end of originally specified time periods.  We account for these contracts as derivative instruments and marked the contracts to market.  In accordance with ASC 815, the changes in the fair value of these contracts are recorded in the consolidated statements of operations in loss on forward contracts.

 

Fair Value of Derivative Assets and Liabilities
	Balance sheet location		September 30, 2009				December 31, 2008
ASSETS:
Primary aluminum put option contracts	Prepaid and other assets		$	8,475			$	—
Power contract - Ravenswood	Prepaid and other assets			84				2,202
TOTAL ASSETS			$	8,559			$	2,202
LIABILITIES:
Natural gas forward financial contracts	Accrued and other current liabilities		$	(707	)		$	(10,130	)
Aluminum sales premium contracts – current portion	Accrued and other current liabilities			(743	)			(1,256	)
Aluminum sales premium contracts – less current portion	Other liabilities			(479	)			(503	)
TOTAL LIABILITIES			$	(1,929	)		$	(11,889	)

 

Derivatives in Cash Flow Hedging Relationships:
		Three months ended September 30, 2009
		Amount of loss recognized in OCI on derivative, net of tax (effective portion)			Loss reclassified from OCI to income on derivatives (effective portion)					Loss recognized in income on derivative (ineffective portion)
		Amount			Location		Amount			Location		Amount
Natural gas forward financial contracts (1)		$	—		Cost of goods sold		$	(1,047	)	Net loss on forward contracts		$	—
Foreign currency forward contracts (2)		$	(898	)	Cost of goods sold		$	(1,488	)	Net loss on forward contracts		$	—
		Nine months ended September 30, 2009
		Amount of loss recognized in OCI on derivative, net of tax (effective portion)			Loss reclassified from OCI to income on derivatives (effective portion)					Loss recognized in income on derivative (ineffective portion)
		Amount			Location		Amount			Location		Amount
Natural gas forward financial contracts (1)		$	—		Cost of goods sold		$	(14,449	)	Net loss on forward contracts		$	—
Foreign currency forward contracts (2)		$	(898	)	Cost of goods sold		$	(6,194	)	Net loss on forward contracts		$	1,701

 

- 15 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

(1)	With the transfer of our joint venture investment in Gramercy in the third quarter of 2009, we discontinued accounting for these contracts as cash flow hedges.
(2)	We had no foreign currency forward contracts or options outstanding at September 30, 2009 or December 31, 2008.  We settled our foreign currency forward contract contracts in October 2008.

 

Natural gas forward financial contracts

 

To mitigate the volatility of the natural gas markets, we enter into fixed-price forward financial purchase contracts which settle in cash in the period corresponding to the intended usage of natural gas.  These forward contracts were previously designated as cash flow hedges.  Upon the transfer of our joint venture investment in Gramercy the originally forecasted transactions will not occur by the end of originally specified time periods, as such, we discontinued cash flow hedge treatment in September 2009 and account for these contracts as derivative instruments.  These contracts have maturities through November 2009.

 

We had the following outstanding forward financial purchase contracts:

		(Million British Thermal Units (“MMBTU”))
		September 30, 2009				December 31, 2008
Natural gas forward financial contracts			250,000				3,340,000

 

Foreign currency forward contracts

 

We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the euro, the Icelandic krona (“ISK”) and the Chinese yuan.  The labor costs, maintenance costs and other local services at Grundartangi are denominated in ISK and a portion of its anode costs are denominated in euros.  As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Grundartangi’s operating margins.  In addition, we expect to incur capital expenditures for the construction of a primary aluminum facility in Helguvik, Iceland (the “Helguvik project”), although we are currently evaluating the Helguvik project’s cost, scope and schedule.  A significant portion of the capital expenditures for the Helguvik project are forecasted to be denominated in currencies other than the U.S. dollar with a significant portion in ISK.

 

We manage our foreign currency exposure by entering into foreign currency forward contracts when management deems such transactions appropriate.  We had foreign currency forward contracts to manage the currency risk associated with Grundartangi operating costs and the Helguvik project capital expenditures.  These contracts were designated as cash flow hedges, qualified for hedge accounting under ASC 815 and had maturities through September 2009.  As of September 30, 2009, we had no foreign currency forward contracts outstanding.

 

The realized gain or loss on our foreign currency forward contracts cash flow hedges for Grundartangi operating costs was recognized in income as part of our cost of goods sold.  The realized gain or loss for our cash flow hedges for the Helguvik project capital expenditures were accumulated in other comprehensive income and will be reclassified to earnings when the project is completed as part of the depreciation expense of the capital assets.

 

- 16 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

In October 2008, following the appreciable devaluation of the ISK versus the U.S. dollar, we reached an agreement with our counterparties and settled the remaining forward contracts that extended through September 2009.

 

We recognized losses of approximately $1,701 in the nine months ended September 30, 2009, respectively, (none in the three months ended September 30, 2009 or in the three and nine months ended September 30, 2008) on the ineffective portions of the forward contracts for the forecasted Helguvik project capital expenditures.  These losses are recorded in net loss on forward contracts in our consolidated statements of operations.  The ineffective portion of these forward contracts represents forward contract positions in excess of the revised forecast schedule of Helguvik project capital expenditures.

 

The natural gas forward financial purchase contracts are subject to counterparty credit risk.  However, we only enter into forward financial contracts with counterparties we determine to be creditworthy at the time of entering into the contract.  Due to the fact that we are currently in a liability position for all of our forward contracts, our counterparty risk is very minimal at this time.  If any counterparty failed to perform according to the terms of the contract, the impact would be limited to the difference between the contract price and the market price applied to the contract volume on the date of settlement.

 

As of September 30, 2009, an accumulated other comprehensive loss of $4,294 is expected to be reclassified to earnings over the next 12-month period.

 

Power contracts

 

We are party to a power supply agreement at Ravenswood that contains LME-based pricing provisions that are an embedded derivative.  The embedded derivative does not qualify for cash flow hedge treatment and is marked to market quarterly.  Based on our expected power usage over the remaining term of the contract, gains and losses associated with the embedded derivative are recorded in net loss on forward contracts in the consolidated statements of operations.  We have recorded a derivative asset of $84 and $2,202 for the embedded derivative at September 30, 2009 and December 31, 2008, respectively.

 

Primary aluminum put options

 

In September 2009, we entered into primary aluminum put option contracts that settle monthly from October 2009 through December 2010 based on LME prices.  Our counterparties include Glencore, a related party, and a non-related third party.  We paid a cash premium to enter into these contracts and recorded a short-term asset in prepaid and other current assets on the consolidated balance sheets.  We determined the fair value of the put options using quoted market values from a third-party and account for the put options as derivative financial instruments with gains and losses in the fair value of the contracts recorded on the consolidated statements of operations in net losses on forward contracts.

Aluminum sales premium contracts

 

The Glencore Metal Agreement I is a physical delivery contract for 50,000 mtpy of primary aluminum through December 31, 2009 with variable, LME-based pricing.  We account for the Glencore Metal Agreement I as a derivative instrument under ASC 815 (formerly SFAS No.133).  We have not designated the Glencore Metal Agreement I as “normal” because it replaced and was a substitute for a significant portion of a sales contract which did not qualify for this designation.  Because the Glencore Metal Agreement I is variably priced, we do not expect significant variability in its fair value, other than changes that might result from the absence of the U.S. Midwest premium.  Gains and losses on the derivative are based on, (1) the difference between a contracted U.S. Midwest premium and the actual U.S. Midwest premium at settlement, and (2) the difference between a contracted U.S. Midwest premium and a forecast of the U.S. Midwest premium for future periods.  Settlements are recorded in related party sales.  Unrealized gains (losses) based on forecasted U.S. Midwest premiums are recorded in net loss on forward contracts on the consolidated statements of operations.

 

- 17 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

 

The Glencore Metal Agreement II is a physical delivery contract for 20,400 mtpy of primary aluminum through December 31, 2013 with variable, LME-based pricing.  Under the Glencore Metal Agreement II, pricing is based on market prices, adjusted by a negotiated U.S. Midwest premium with a cap and a floor as applied to the current U.S. Midwest premium.  We account for the Glencore Metal Agreement II as a derivative instrument under ASC 815.  Gains and losses on the derivative are based on the difference between the contracted U.S. Midwest premium and actual and forecasted U.S. Midwest premiums.  Settlements are recorded in related party sales.  Unrealized gains (losses) based on forecasted U.S. Midwest premiums are recorded in net loss on forward contracts on the consolidated statements of operations.

Derivatives not designated as hedging instruments:
	Gain (loss) recognized in income from derivatives
			Three months ended September 30, 2009				Nine months ended September 30, 2009
	Location		Amount				Amount
Power contracts	Net loss on forward contracts		$	(11	)		$	(4,788	)
Primary aluminum put options	Net loss on forward contracts			555				555
Natural gas forward contracts (1)	Net loss on forward contracts			(1,381	)			(1,381	)
Aluminum sales premium contracts	Related party sales			1,103				2,779
Aluminum sales premium contracts	Net loss on forward contracts			(77	)			(469	)

 

(1)	We discontinued cash flow hedge treatment for our natural gas forward contracts after the transfer of our joint venture investments in Gramercy in the third quarter of 2009.  Amount represents contract settlements after the transfer.

 

We had the following outstanding forward contracts that were entered into that were not designated as hedging instruments:

 

		September 30, 2009				December 31, 2008
Power contracts (in megawatt hours (“MWH”)) (1)			6,552				1,066,000
Primary aluminum sales contract premiums (metric tons) (2)			97,059				152,000
Primary aluminum put contracts (metric tons)			75,000				—
Natural gas forward financial contracts (MMBTU)(3)			250,000				—

 

(1)	We mark the Ravenswood power contract to market based on our expected usage during the remaining term of the contract. In September 2009, the West Virginia PSC extended the term of this contract for an additional year.
(2)	Represents the remaining physical deliveries under our Glencore Metal Agreements I and II.
(3)	We discontinued cash flow hedge treatment for our natural gas forward contracts after the transfer of our joint venture investments in Gramercy in the third quarter of 2009.

 

 

- 18 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

11.	Earnings Per Share

 

The following table provides a reconciliation of the computation of the basic and diluted earnings per share:

 

		For the three months ended September 30,
		2009												2008
		Income				Shares (000)				Per-Share				Income				Shares (000)				Per-Share
Net income		$	40,142				74,214							$	35,789				47,720
Amount allocated to common shareholders			82.88	%											76.73	%
Basic EPS:
Income allocable to common shareholders		$	33,270				74,214			$	0.45			$	27,461				47,720			$	0.58
Effect of Dilutive Securities: Plus:
Options			—				5								—				59
Service-based stock awards			—				502								—				76
Assumed conversion of convertible debt			—				—								—				2,120
Diluted EPS:
Income applicable to common shareholders with assumed conversion		$	33,270				74,721			$	0.45			$	27,461				49,975			$	0.55

 

 

 

		For the nine months ended September 30,
		2009												2008
		Loss				Shares (000)				Per-Share				Loss				Shares (000)				Per-Share
Net loss		$	(181,628	)			71,023			$	(2.56	)		$	(201,641	)			43,317			$	(4.66	)
Amount allocated to common shareholders (1)			100	%											100	%
Basic and Diluted EPS:
Loss allocable to common shareholders		$	(181,628	)			71,023			$	(2.56	)		$	(201,641	)			43,317			$	(4.66	)

 

(1)	We have not allocated the net los s allocable to common shareholders between common and preferred shareholders, as the holders of our preferred shares do not have a contractual obligation to share in the loss.

 

Impact of issuance of Series A Convertible Preferred Stock on EPS

 

In July 2008, we issued 160,000 shares of Series A Convertible Preferred Stock (convertible into 16,000,000 common shares) as a portion of the consideration for the termination of primary aluminum forward financial sales contracts with Glencore .  The preferred stock has similar characteristics of a “participating security” as described by ASC 260-10-45-59A “Participating Securities and the Two-Class Method” (Formerly, SFAS No. 128, “Earnings Per Share” and EITF 03-6, “Participating Securities and the Two-Class Method under SFAS No. 128”).  In accordance with the guidance in the ASC 260-10-45-59A, we calculated basic EPS using the Two-Class Method, allocating undistributed income to our preferred shareholder consistent with their participation rights, and diluted EPS using the If-Converted Method.

 

The general accounting principles for reporting EPS do not require the presentation of basic and diluted EPS for securities other than common stock and the EPS amounts, as presented, only pertain to our common stock.

 

- 19 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

 

The Two-Class Method is an earnings allocation formula that determines earnings per share for common shares and participating securities according to dividends declared (or accumulated) and the participation rights in undistributed earnings.  Our preferred stock is a non-cumulative perpetual participating convertible preferred stock with no set dividend preferences.  The dividend rights of our preferred shareholder are equal to our common shareholders, as if it held the number of common shares into which its shares of preferred stock are convertible as of the record date.  The liquidation rights of the preferred stock mirror their dividend rights, in that the preferred stock ranks in parity to the common stock in respect of liquidation preference and would be entitled to share ratably with common stock holders in the distribution of assets in a liquidation (as though the preferred stock holders held the number of shares of common stock into which their shares of preferred stock were convertible).  The preferred stock has a liquidation preference of $0.01 per share.

 

The holders of our convertible preferred stock do not have a contractual obligation to share in the losses of Century.  Thus, in periods where we report net losses, we will not allocate the net losses to the convertible preferred stock for the computation of basic or diluted EPS.

 

Impact of the Tax Benefit Preservation Plan on EPS

 

In September 2009, we entered into a Tax Benefit Preservation Plan whereby each common shareholder and preferred shareholder of record on October 9, 2009 received preferred share purchase rights (“Rights”).  These Rights would only be exercisable upon the occurrence of certain triggering events.  Each Right will allow its holder to purchase one one-hundredth of a share of Series B Junior Participating Preferred Stock, once the Rights become exercisable.  This portion of a Series B Preferred Share will give the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock.  Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.  Upon the occurrence of a triggering event, our Board of Directors may extinguish the Rights by exchanging common stock for the Rights.

 

In accordance with general accounting principles for the calculation of EPS, the Rights are considered contingently issuable shares but will not be included in the calculation of EPS until the necessary conditions for exercise or exchange have been satisfied.  Upon an issuance, the Series B Junior Participating Preferred stock would be participating securities and we would calculate EPS in accordance with the Two-Class Method described above.  See Note 12 Shareholders’ Equity for additional information about the Tax Benefit Preservation Plan.

 

Calculation of EPS

 

Options to purchase 692,075 and 430,434 shares of common stock were outstanding as of September 30, 2009 and 2008, respectively.  For the three months ended September 30, 2009, approximately 383,000 options were excluded from the calculation of diluted EPS because the exercise price of these options was greater than the average market price of the underlying common stock.  For the nine months ended September 30, 2009, all options, service-based stock and shares to be issued upon the assumed conversion of our convertible debt were excluded from the calculation of diluted EPS because of their antidilutive effect on earnings per share.  The average price for our common stock in the three and nine months ended September 30, 2009 was below the conversion price of our 1.75% Notes.

 

For the three months ended September 30, 2008, approximately 108,000 options were excluded from the calculation of diluted EPS because the exercise price of these options was greater than the average market price of the underlying common stock.  For the nine months ended September 30, 2008, all options, service-based stock and shares to be issued upon the assumed conversion of our convertible debt were excluded from the calculation of diluted EPS because of their antidilutive effect on earnings per share.  Based on the average price for our common stock in the three and nine months ended September 30, 2008, we would have been required to issue approximately 2,120,000 and 2,706,000 shares of common stock, respectively, upon an assumed conversion of our convertible debt.

 

- 20 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

 

Service-based stock for which vesting is based upon continued service is not considered issued and outstanding shares of common stock until vested.  However, the service-based stock is considered a common stock equivalent and, therefore, the weighted average service-based stock is included, using the treasury stock method, in common shares outstanding for diluted earnings per share computations if they have a dilutive effect on earnings per share.  There were approximately 502,000 and 79,000 unvested shares of service-based stock outstanding at September 30, 2009 and 2008, respectively.  Our goal-based performance share units are not considered common stock equivalents until it becomes probable that performance goals will be obtained.

 

For the calculation of basic and diluted EPS for the three and nine months ended September 30, 2009, using the Two-Class Method, we allocated $6,872 and $0, respectively, of our undistributed income (loss) to the convertible preferred stock.  For the calculation of basic and diluted EPS for the three and nine months ended September 30, 2008, using the Two-Class Method, we allocated $8,328 and $0, respectively, of our undistributed income (loss) to the convertible preferred stock.  See the reconciliation below:

 

		Three months ended September 30, 2009												Three months ended September 30, 2008
		Common stock				Preferred stock (1)				Total				Common stock				Preferred stock (1)				Total
Weighted average shares outstanding			74,214				15,329				89,543				47,720				14,472				62,192
Undistributed earnings		$	33,270			$	6,872			$	40,142			$	27,461			$	8,328			$	35,789

 

(1)	Represents the participation rights of our preferred shareholder as if it held the number of common shares into which its shares of preferred stock are convertible as of the record date.

12.	Shareholders’ Equity

 

Common Stock

 

In May 2009, our shareholders approved an amendment to our Restated Certificate of Incorporation, as amended, to increase the total number of authorized shares of our common stock, par value $0.01 per share, to 195,000,000.

 

Series A Convertible Preferred Stock Conversions

 

In July 2008, we issued 160,000 shares of our Series A Convertible Preferred Stock.  All shares of Series A Convertible Preferred Stock are held by Glencore and were issued in connection with the termination of primary aluminum forward financial sales contracts with Glencore on July 7, 2008.  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 shares of Series A Convertible Preferred Stock into shares of common stock.

 

Series A Convertible Preferred Stock:		2009
Shares outstanding at December 31, 2008			155,787
Automatic conversions during the nine months ended September 30, 2009			(9,892	)
Total shares outstanding at September 30, 2009			145,895

 

- 21 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

Tax Benefit Preservation Plan

 

 

In September 2009, we adopted the Tax Benefit Preservation Plan (the “Plan”) in an effort to protect against a possible limitation on our ability to use net operating losses, tax credits and other tax assets (the “Tax Attributes”), to reduce potential future U.S. federal income tax obligations.  In the past, we have experienced substantial operating losses, and under the Internal Revenue Code of 1986, as amended (the “Code”), and rules promulgated by the Internal Revenue Service, we may carry forward these losses in certain circumstances to offset future earnings and thus reduce our federal income tax liability, subject to certain requirements and restrictions.  To the extent that the Tax Attributes do not otherwise become limited, we believe that we might be able to use a significant amount of the Tax Attributes, and therefore these Tax Attributes could be a substantial asset to us.

 

As of December 31, 2008, we had Tax Attributes, including net operating losses, capital losses and tax credit carryforwards, of approximately $1,600,000, after adjusting for losses carried back to previous tax years, which could offset future taxable income.  If, however, we experience an “ownership change,” as defined in Section 382 of the Code, our ability to use the Tax Attributes will be substantially limited, and the timing of the usage of the Tax Attributes could be substantially delayed, which could significantly impair the value of the Tax Attributes. In general, an ownership change would occur if our “Five−percent shareholders,” as defined under Section 382 of the Code, collectively increase their ownership in Century by more than 50 percentage points over a rolling three−year period.  Five−percent shareholders do not include certain institutional holders, such as mutual fund companies, that hold our stock on behalf of several individual mutual funds where no single fund owns five percent or more of Century stock.

 

Under the Plan, from and after the record date of October 9, 2009, each share of our common stock will carry with it one preferred share purchase right (a “Right”) and each share of Series A Preferred Stock will carry with it one hundred Rights, until the distribution date or earlier expiration of the Rights.  Each Right will allow its holder to purchase one one-hundredth of a share of Series B Junior Participating Preferred Stock (“Series B Preferred Share”) for $80.00, subject to adjustment (the “Exercise Price”), once the Rights become exercisable. This portion of a Series B Preferred Share will give the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock.  Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.

 

Exercisability. The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership, after September 29, 2009, of 4.9% or more of our outstanding common stock (or if already the beneficial owner of at least 4.9% of our outstanding common stock, by acquiring additional shares of our common stock representing one percent (1.0%) or more of the shares of common stock then outstanding), unless exempted by the Board.

 

We refer to the date when the Rights become exercisable as the “Distribution Date.” Until that date or earlier expiration of the Rights, the common stock certificates will also evidence the Rights, and any transfer of shares of common stock will constitute a transfer of Rights.  After that date, the Rights will separate from the common stock and be evidenced by book-entry credits or by Rights certificates that we will mail to all eligible holders of common stock. Any Rights held by an Acquiring Person are void and may not be exercised.

 

Consequences of a Person or Group Becoming an Acquiring Person.   If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person may, for payment of the Exercise Price, purchase shares of our common stock with a market value of twice the Exercise Price, based on the market price of the common stock as of the acquisition that resulted in such person or group becoming an Acquiring Person.

Exchange. After a person or group becomes an Acquiring Person, our Board may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person.

 

- 22 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

 

In general terms, the Rights will work to impose a significant penalty upon any person or group which acquires 4.9% or more of our outstanding common stock after September 29, 2009, without the approval of our Board. Stockholders who own 4.9% or more of the outstanding common stock as of the close of business on September 29, 2009, will not trigger the Rights so long as they do not (i) acquire additional shares of common stock representing one percent (1.0%) or more of the shares of common stock then outstanding or (ii) fall under 4.9% ownership of common stock and then reacquire shares that in the aggregate equal 4.9% or more of the common stock. The Board may, in its sole discretion, exempt any person or group for purposes of the Plan if it determines the acquisition by such person or group will not jeopardize tax benefits or is otherwise in our best interests.  The Plan is not expected to interfere with any merger or other business combination approved by our Board.

 

Series B Preferred Share Provisions . Each one one-hundredth of a Series B Preferred Share, if issued:

 

·	will not be redeemable.

·	will entitle holders to dividends equal to the dividends, if any, paid on one share of common stock.

·	will entitle holders upon liquidation either to receive $1 per share or an amount equal to the payment made on one share of common stock, whichever is greater.

·	will have the same voting power as one share of common stock.

·	will entitle holders to a per share payment equal to the payment made on one share of common stock, if shares of our common stock are exchanged via merger, consolidation, or a similar transaction.

 

The value of one one-hundredth interest in a Series B Preferred Share is expected to approximate the value of one share of common stock.

 

Expiration. The Rights will expire on the earliest of (i) August 1, 2011, (ii) the time at which the Rights are redeemed, (iii) the time at which the Rights are exchanged, (iv) the repeal of Section 382 or any successor statute, or any other change, if the Board determines that this Plan is no longer necessary for the preservation of tax benefits, (v) September 29, 2010 if approval of the Plan by a majority of our stockholders has not been obtained prior to such date, or (vi) a determination by the Board, prior to the time any person or group becomes an Acquiring Person, that the Plan and the Rights are no longer in the best interests of Century and its stockholders.

 

Redemption. Our Board may redeem the Rights for $0.001 per Right at any time before any person or group becomes an Acquiring Person. If our Board redeems any Rights, it must redeem all of the Rights.  Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.001 per Right. The redemption price will be adjusted if we have a stock split or stock dividends of our common stock.

 

Anti-Dilution Provisions . Our Board may adjust the Exercise Price, the number of Series B Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, or a reclassification of the Series B Preferred Shares or common stock.

 

Amendments. The terms of the Plan may be amended by our Board without the consent of the holders of the Rights. After a person or group becomes an Acquiring Person and does not become an exempt person prior to the Distribution Date, our Board may not amend the agreement in a way that adversely affects holders of the Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person).

 

- 23 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

13.	Income Taxes

 

As of September 30, 2009 and December 31, 2008, we had total unrecognized tax benefits (excluding interest) of $16,800 and $21,600, respectively.  The total amount of unrecognized tax benefits (including interest and net of federal benefit) that, if recognized, would affect the effective tax rate as of September 30, 2009 and December 31, 2008, respectively, are $8,200 and $15,200.

 

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense.  As of September 30, 2009, and December 31, 2008, we had approximately $2,800 and $3,400, respectively, of accrued interest related to unrecognized income tax benefits.

 

We do not expect any significant change in the balance of unrecognized tax benefits within the next twelve months.

 

Our federal income tax returns from 2005 through 2008 are currently under examination.  Material state and local income tax matters have been concluded for years through 2002.  West Virginia completed an income tax examination for 2003 through 2005 with no changes. The majority of our other state returns beginning in 2003 are subject to examination.  Our Icelandic tax returns are subject to examination and income tax matters have been concluded for years through 2001.

 

During the nine months ended September 30, 2009, we received a federal income tax refund of $79,724 related to a carryback of a portion of the December 31, 2008 taxable loss to tax years ended December 31, 2006 and December 31, 2007.  Additionally, we received a $10,094 federal income tax refund related to overpayments of December 31, 2008 estimated tax payments.  See Note 25 Subsequent Events for information about the impact of recently enacted tax legislation.

 

14.	Inventories

 

Inventories consist of the following:

 

		September 30, 2009				December 31, 2008
Raw materials		$	28,616			$	19,664
Work-in-process			13,265				16,133
Finished goods			10,749				8,203
Operating and other supplies			77,993				94,111
Inventories		$	130,623			$	138,111

 

Inventories are stated at the lower of cost or market, using the first-in, first-out method (“FIFO”).  Due to the curtailment of our Ravenswood operations in February 2009, approximately $18,326 of items that were classified as inventory at December 31, 2008 are not expected to be consumed within one year and have been reclassified to other assets.

 

At September 30, 2009 and December 31, 2008 the market value of our inventory was less than its FIFO value by $8,123 and $55,867, respectively.

 

- 24 -

---

Table of Contents

CENTURY ALUMINUM COMPANY

Notes to the Consolidated Financial Statements - continued

(UNAUDITED)

15.	Goodwill and Intangible Asset

 

In December 2008, we tested our goodwill for impairment and recorded a $94,844 impairment loss.  As of January 1, 2009, we have no goodwill.

 

The intangible asset consists of a power contract acquired in connection with our acquisition of Hawesville.  In July 2009, we terminated the existing power contracts at Hawesville and entered into a new power agreement.  See Note 4 Long-term Power Contract for Hawesville for additional information about this transaction.  As a result of terminating Hawesville’s previous power contract, we wrote off the remaining carrying amount of the intangible asset of $23,759 in July 2009 and recorded a loss on the consolidated statements of operations in other operating income - net.  As of September 30, 2009, we have no intangible assets.

 

For the three months ended September 30, 2009 and 2008, amortization expense for the intangible asset totaled $695 and $3,769, respectively.  For the nine months ended September 30, 2009 and 2008, amortization expense for the intangible asset totaled $8,769 and $11,307, respectively.

 

16.

Debt