Century Aluminum Co (CENX) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host Mr. Peter Trpkovski. Please go ahead.

Thank you very much, Justin. And good afternoon, everyone, welcome to the conference call. Today's presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the Company and for complying with Regulation FD.

I would also like to remind you that today's discussion will contain forward-looking statements related to future events and expectations, including our expected future financial performance, results of operations and financial condition. These forward-looking statements involve important known and unknown risks and uncertainties, which could cause our actual results to differ materially from those expressed in our forward-looking statements. Please review the forward-looking statements disclosure in today's slides and press release for a full discussion of these risks and uncertainties. In addition, we've included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in the appendix to today's presentation and on our website.

And now I would like to introduce Mike Bless, Century's President and Chief Executive Officer.

Thanks very much, Pete, and thanks to all of you for joining us this afternoon. Before I get started, I would like to give you all an update on Rick Dillon, our CFO. As you will recall, we put out an announcement a couple of weeks ago about his health. First we would like to thank you, and Rick to whom I have spoken almost every day of course would like to add his thanks to those of you have inquired about him. I am happy to say that he is coming along very well. He expects to be back in the seat at least on a part time basis maybe as early as mid to late next week. And then as we expected, he will be back in the seat full time by the end of March. And it goes without saying we are looking forward to having him back.

With that said, if we could turn to slide four please, and as usual I will take you through some of the highlights of the last couple of months. During which we think we have made generally good progress on most fronts. This in a continuing volatile environment and I will talk about the market in just a couple of minutes. First and most importantly, we completed the acquisition of the remaining interest in Mt. Holly on the 1st of December, that was the scheduled date. We are obviously very pleased to complete the transaction and now we are focused on the various integration activities. The most significant of which in the near-term is the transition of the various business systems. We have had a closer look during the last two months and this has confirmed our long-held perceptions of this plant; that it is a terrific plant with an exceptional management team and group of employees. We are already seeing good cooperation with our other plants in areas like safety and production. We have also confirmed our assessment that there are certain deferred investments that need to be made at Mt. Holly. We are addressing the very important items now and the remainder will come after we reach a new power agreement. And I will talk about the status of our discussions on a post 2015 power contract in a few moments.

Moving down, the new value added product lines at Grundartangi and Sebree are now running at full capacity. As a reminder, these are as a result of some modest investments we made early in the year in 2014. As expected, we had some breaking in issues at both plants, but the quality at both are now good and we have sold all of the products for 2015. The foundry alloy and billet markets remain reasonably good in the U.S. and in Europe, so we are looking forward to a good year in those product lines.

Lastly, power prices in the U.S. Midwest have continued to decline. Generation continues to be strong in the region and demand has not kept pace. This is partly of course due to the reasonably benign weather conditions that we have had until the last week or so. Fuel prices especially since the turn of the year have come down significantly. Obviously the biggest factor is in natural gas and coal in our power price, and this has resulted in very favorable power prices thus far in 2015. And importantly, we have had a lack of the congestion issues we saw last winter. As I said, obviously we have seen a bit of an uptick on some of the very cold days during the last week but this seems to be abating.

Okay. If we could turn to slide five please, just a couple of comments about the external environment. It goes without saying that the LME cash price has been exceptionally volatile over the last several months. Just to give you a reminder here we started the month of September up at the $2100 mark on the cash price and that fell through the month. And we began the fourth quarter at about $1900. The price rose straight back into the low $2000s. And just back in November we averaged $2050, and then again it has come straight back down. 2015 year-to-date we have averaged $1815. Again this is on the cash price, and today we are sitting at about $1790. Shelly will give you some more detail on the pricing and our realized pricing during the fourth quarter in just a couple of minutes.

Turning to the more macro environment the weakness in the commodity price in our assessment is due significantly to issues a lot larger than the aluminum markets or even the base metals markets. Obviously there have been geopolitical developments in the Middle East and in Ukraine. We've had the Greek elections and the impact of the continuing bail out negotiations in the EU, obviously the precipitous fall of crude price. All of these factors and more have lead to the strengthening of the dollar and, of course, the selling of dollar based commodities. Delivery premiums remain strong through the fourth quarter but have begun to come down over the last couple of weeks as those of you have seen who follow these markets. The EU has been the hardest hit due to relatively weak demand in that region and building imports principally from Russia. The duty paid premium in Europe is now posted at $435 a metric ton, but we have information and others do that business is being transacted well below that, perhaps in the range of $400 per metric ton plus or minus $20 to $30. It's a wide range given the lack of liquidity in these markets.

The U.S. has held up relatively better. Until last week the posted price was still above $0.24 per pound of course. The metal bulletin price now stands at $0.2378, but again business is being done well below those posted levels. There is a range of factors for this of course. One is that the fall of the EU premium is obviously going to put pressure on the U.S. premium. Second the contagos remain quite narrow. And in both regions, obviously in all markets as we all know, this kind of environment becomes a self fulfilling prophecy where owners of assets obviously seek to monetize them before prices fall further. There has not been much movement in value added products premiums. The billet premium is coming down in Europe but only in line with the delivery premium but no demission of value of the billet net price. And U.S. billet premiums have been holding relatively stable.

There is a variety of fundamentals facing our industry. In North America conditions remain good with favorable short and longer term profiles. In Europe conditions remain somewhat stagnant, and we have several key regions in the world that are struggling. Russia and Brazil are noteworthy examples. Of course, the debate remains over China's trajectory -- the trajectory of their overall economy, and obviously that gets plenty of press so we won't cover it here.

Turning to our industry in specific on the fundamentals. Demand for primary aluminum as a whole has remained good. We exited the year and the fourth quarter up 6% versus the prior year. China was up 10% and the rest of the world hanging in there at 2%, again with continuing weakness in the BRIC countries. North America continues to be a standout, up 8% in the fourth quarter versus 2013 with the EU flat and expected to continue around that level. In China supply growth has more than kept up with consumption. Closures continue but new capacity in the western part of the country is driving surpluses. Production growth was up 14% in the quarter versus the 10% increase in consumption. We will continue to have surpluses in China especially in the first quarter as normal as business slows considerably during the present New Year holidays. Net exports of primary metal out of China has continued at low levels in the range of 100,000 to 200,000 metric tons per quarter. However, the flow of semi fabricated products in essence disguised as prime continues. For industry sources this level has been in the range of about 300,000 metric tons in Q4. This is in addition to 600,000 tons of real semis that came out of China in Q4. Bottom line, global supply was up 8% in the fourth quarter and up 3%, excluding China.

Putting the demand and the supply together the global market had a small surplus in 2014. Again there will be a reasonably larger surplus in Q1 due to the holidays in China and for that reason, as you've seen, there has been agreement amongst market participants in China to hold back metal from the market. Turning to inventories. As you see on the slide, they continue to come down with LME stocks now inside 4 million tons. And again as you see on the slide here, total identified inventories globally are now down close to 40 days of consumption. Lastly, just quickly on the alumina price it had been relatively sticky until recently but now has started to fall. The index price had held until recently at or above $350 a metric ton. Of course, that is the Pacific price and it is now down around $340 or maybe just a little bit inside that level. With the Atlantic price trading at around $330 or again a little bit below that level.

Okay. If we could turn to slide six please. A couple of comments as normal on the operations on which we think we made generally very good progress during the quarter. Let me just give you some detail. First on safety, every plant had better safety performance in the fourth quarter versus the third. And all of our U.S. plants had a better 2014 in total than 2013. However, as I said, we are simply not where we need to be on safety at any of our facilities and thus we are redoubling our efforts. Some of the issues are easily identifiable and tactical in nature while some are more complex.

Down the page now turning to production. It was up, as you can see, at all plants quarter-to-quarter. Hawesville, first and foremost, as you remember is still at a relatively low base, still at about 3% to 4% below its full capacity. As a reminder earlier in the year we had some significant power modulations at the plant and some issues in the rodding shop in both the second and third quarters. Third quarter, as we expected, did turn out to be the low point. You'll remember we did talk about this on the last call. Just to give you a sense we had 30 production cells out of service that quarter. That's about 5.5% of the plant?s capacity. Q4 was a bit better, down to 21 cells out on average, just shy of 4% out. Today we only have 4 cells out. The guys at the plant have done a very good job by bringing it back to largely stable condition. We are struggling this week with some issues caused by the cold weather of the last couple days. It will take a significant effort this year to maintain the stable conditions as we work to correct some of the underlying longer term issues, and in this respect we?ve planned a large investment this year of about $15 million for the refurbishment of the anode rodding shop, which has seen no major modernization in the 40 year history of the plant. Shelly will make some comments about our CapEx budget for the year in just a couple of minutes. As you can see the other plants had good production performance.

Running down the page further, production efficiencies or KPIs, as you can see, were stable across the plants. I would make the same comment on Hawesville. We had good improvement from Q3 but we are still reasonably below where we were at the beginning of 2014 when the plant was operating at an exceptional level. Lastly on the page, as you can see, we have had generally good progress on conversion costs. The only issue you see there at Grundartangi is a couple of more cell failures than we have had historically. That obviously drives up reline costs. This is expected as we continue to crank up the line current ?- the amperage in the plant, due to the capacity creep program. And that entire increase that you see there at Hawesville is explained by increased maintenance spending to correct the issues about which I just spoke. Assuming the cold weather problems that we have seen here over the last day or two abate, we shouldn't see a repeat of this maintenance spending in Q1.

Okay. If we could turn to slide seven please. Before I turn it you over to Shelly, I would just like to make a couple other points on the operations. Again Shelly will give you some more detail about product premiums when she goes through our 2015 plans. But I thought it was important at this point to show you what the portfolio looks like and how it breaks down. As you can see in 2015 we are planning on about 60% of our production to be in a form other than standard Grundartangi, so called value added product or purity product or premium product. You see the significant level at Sebree will be close to 100% value added products this year. As you may recall the plant was only at 50% value added products when we acquired it just 18 months ago. As we have talked to you about in the past, we are looking to improve this product mix further. And we continue to analyze some significant investments at Hawesville and Grundartangi. At this point we have made no decision on those.

Just on to page eight please. Power prices obviously being critical. This page shows the monthly average Indiana Hub day ahead energy price and this price obviously is impacted by a number of factors including fuel prices, supply and demand, again until last week the absence of extreme weather. The forward curve for this power remains reasonably flat. One and three year energy are trading around $32 for that strip per megawatt hour and $34 for the three year. The delivered price to our plants in Q4 was up just nominally versus Q3, up about 1% and Shelly will give you much more detail on the impact on our financial performance in Q4. Since Q4 energy prices have obviously taken a significant step down. In January and February, again until the last couple of days we were looking at Indiana Hub day ahead energy prices in the high $20s to the very low $30s. Again, we have seen some higher prices in the last couple of days but nothing near last year's level.

With that, I'll turn it over to Shelly to go through the financials.

Thanks, Mike. If you could turn to slide nine please, I will take you through the company's financial performance for the quarter. Our U.S. shipments were up 3% in Q4 and this was largely due to the acquisition of the remaining 50% of Mt. Holly which closed on December 1st. In Iceland volume was up about 5% as a result of the ongoing expansion project as well as timing of shipments. The overall global shipments were up 4% quarter-over-quarter.

On a one month lag basis the U.S. Midwest transaction price which includes both the LME and the regional premium was up 5%, which is in line with our increase in U.S. realized prices. In Iceland we sell most of our metal on a two month lag, so on that basis the LME plus European Duty paid premium rose 9% quarter-over-quarter which is also in line with the improvement in Grundartangi realized price for Q4.

Continuing down the P&L, in Q4 we had adjusted EBITDA of $92 million, which compared to adjusted EBITDA of $80 million in Q3. This quarter we had two adjusting items for EBITDA including $5 million primarily related to a onetime non cash pension charge and $3 million related to a charge for separation of former senior executives.

So let me take you through some of the changes quarter-over-quarter. Higher all in aluminum prices increased EBITDA by $26 million net of the impact of our LME based alumina and power contracts. And this is partially offset by $4 million of increased casting cost as we produced more value added products in Q4. Higher shipments primarily from Grundartangi and the additional stake in Mt. Holly contributed about $4 million to the quarter-over-quarter increase in EBITDA. At Hawesville operating costs were up about $3 million mostly due to increased maintenance cost. However, at Mt. Holly we benefited from lower natural gas prices driving a quarter-over-quarter savings of $3 million in power.

Moving on to the EPS data. For Q4 we had adjusted net income of $63 million or $0.65 per share. In addition to the two adjusting items I mentioned for EBITDA we also adjusted net income to exclude a $7 million net purchase accounting benefit related to the Mt. Holly acquisition. Continuing down to the balance sheet info we ended the year with $163 million in cash and debt just under $260 million. Availability under our revolver is down $38 million from Q3 and that's primarily due to credit support requirements for the Mt. Holly power contract.

Okay. Moving on to slide ten please. On this next slide we show our normal cash flow waterfall bridging Q3 to Q4. In the fourth quarter we spent a total of $17 million for CapEx. In addition to our normal maintenance CapEx, we spent $9 million on investment projects last quarter. These include the (Inaudible) upgrades at Grundartangi and Sebree that Mike mentioned as well as the capacity creep program at Grundartangi. In November we received a refund of $10 million for withholding taxes in Iceland, and this was partially offset by $2 million paid for income taxes. At this point we have about $6 million in withholding taxes that were paid in 2014 and will be refunded to us in Q4 of 2015.

Okay. Moving on to the right. We used $54 million of cash on hand for the Mt. Holly acquisition in Q4. We expect to have additional acquisition related cash out flows in 2015 primarily related to pension funding for Mt. Holly, and I will talk about those in just a minute. On the right hand side of the chart you can see a $10 million working capital cash inflow primarily related to shorter customer payment terms and lower finished goods inventory as a result of a new offtake agreement. We expect to see an incremental cash inflow from working capital reductions in Q1 when the new sales took full effect. So quarter-over-quarter cash was up $30 million, and that includes the purchase of the remaining 50% of Mt. Holly which we financed entirely with cash on hand.

If we could move along to slide 11, I will take you through the Company's full year performance. Total Company shipments were up 13%, primarily due to our ownership of Sebree for a full year in 2014, the acquisition of Mt. Holly this past December and the ongoing expansion project at Grundartangi. In 2014 the average one month lag LME price was essentially flat year-over-year but Midwest premiums were up almost 80% resulting in an 8% increase in the Midwest transaction price which is in line with our increase in U.S. realized prices. In Iceland our average realized price was up 28% year-over-year primarily due to the shift from tolling to direct sales and a 40% increase in the lagged European Duty paid premium. Adjusted EBITDA increased by over $200 million in 2014 with the most significant impact coming from higher premiums globally and lower prices for our Kentucky smelters. The increase in realized aluminum prices contributed about $150 million to the year-over-year improvement in EBITDA and this net of the impact from our LME linked alumina and power contracts. Partially offsetting this was $14 million in additional casting cost as we produced more value added products in 2014.

On the power side lower power prices in Kentucky added $53 million to the increase in EBITDA primarily as a result of our new market base power arrangements for Hawesville and Sebree. However, at Mt. Holly power prices were up $7 million year-over-year driven by extreme weather and high natural gas prices early in the year.

Okay. Moving on to slide 12 please. Here we have the full year cash flow waterfall and I will just call out a couple of items to note. We spent a total of $56 million in CapEx for the year including $13 million to finalize the restart of the first furnace at (Inaudible) and another $13 million on the expansion in Grundartangi. We also contributed $6 million to our defined benefit plan and paid down $9 million in debt including $3 million for bonds that matured in August. So for the full year we generated positive cash flow of $79 million.

If you could turn to slide 13 please. On the next couple of slides I'll take you through the Company's expectations for financial measures in the coming year. There is a lot of data on these pages so I'm just going to focus on some of the key points. In 2015 we anticipate that all operating facilities will be producing at full capacity levels and the volumes you see here reflect the additional value added products as result of our recent (Inaudible) in Sebree and Grundartangi. Similar to last year we provided our expectation for the average premium we'll receive on value added products on top of the LME and regional premium. Please note that this is the average we receive over just the value added tons and not a weighted average over all tons. For power we are assuming Kentucky prices will average in the mid to high $30s on a fully delivered basis. This is a 10% to 15% improvement over 2014 mainly due to the milder winter we are experiencing this year. Even though temperatures have dropped significantly over this past week, we are still expecting winter prices on average will come in lower than the prior year. At Mt. Holly we are assuming natural gas prices will average $3 per mmbtu in 2015, which translates to a 15% reduction in power costs as compared to last year.

Our assumptions for power in Kentucky and South Carolina were determined based on the forward markets for power and natural gas in their respective regions. For 2015 we agreed to use the spot index price for most of our alumina contracts as opposed to the LME linked structure we have historically used. This change along with the Mt. Holly acquisition increases our sensitivity to changes in the LME price. So for every $100 per ton movement in the LME our EBITDA now changes by $85 million annually. We have also included our latest sensitivities to premiums and power in the appendix to this presentation so you can check that out when you have a chance.

Down at the bottom of the slide we have updated our forecast for net cash cost. As in past years, we are presenting these costs net of all premiums that we receive above the LME price. That way this number is directly comparable to the LME, meaning that if you take the LME and deduct this number the resulting amount is our expected cash margin per ton with no further adjustment needed for regional or value added premium.

All right. If you can turn to slide 14 please. Corporate SG&A is expected to come in around $40 million, including roughly $6 million in non cash expenses. Keep in mind that we expect an additional $10 million or so in plant SG&A that we have accounted for in cash cost on the previous slide. In the first half of 2015 we expect to make a contribution of $35 million to $40 million into the Mt. Holly pension plan. As part of the acquisition, the partners agree to fully fund the plan now that Alcoa has already funded their portion. Moving down to CapEx, with the acquisition of the remaining portion of Mt. Holly, we now expect maintenance CapEx to be $20 million to $25 million annually. In addition, we expect to spend $10 million this year on the Grundartangi expansion and $15 million on the restart of the second (inaudible) at Vlissingen. We have another $35 million to $40 million we expect to spend on mostly high return quick payback projects in the U.S. The largest of our investment projects relates to the anode rodding shop at Hawesville. As Mike mentioned this is a mandatory project required to maintain the facility but it also comes with a decent return primarily as a result of improved energy efficiency. Lastly on taxes we continue to expect our US NOLs to shelter essentially all of our US taxable income, other than some modest state taxes. In Iceland, we?ll pay some cash taxes related to 2014 income, but these payments will be partially offset by the withholding tax refund we expect in November. With that, I will hand it back over to Mike.

Thanks, Shelly. Just to finish up here before we get to your questions, if we could turn to slide 15, and we'll just give you a sense of what you ought to be expecting from us over the next couple of months. As I said, the post 2015 power contract at Mt. Holly is now a significant focus. Just to take a step back, as a reminder, in mid 2012 we entered into a three and a half year agreement. And that agreement over the last couple of years has had us taking power from Mt. Holly's traditional electric power supplier as well as from an off-system designated resource. About a year ago -- a little longer than a year ago, in late 2013 going into 2014 we tried to reach an agreement for post 2015 service but were unsuccessful in doing so, and thus we needed to tender that termination notice in June, which you saw us do, for post 2015 service. As a reminder, this was required to eliminate any further payments after 2015 if a new agreement can't be reached and the plant can't operate post 2015. After that, we had relatively few discussions with the power supplier through the summer into the fall. We have now re-initiated those discussions as the sole owner of the plant, and thus far we have had a lot of very good back and forth. We have the full attention and responsiveness from the power provider. This is clearly important to them as well. We have not yet reached a framework of agreement with them. There is a complex series of issues being debated, and thus it is hard to speculate at this point the type of structure that could ultimately make sense to both parties. That having been said, we must find a solution here as the plant simply is not viable at what the power company has thus far put on the table.

A couple other items here at Hawesville. The current five year labor agreement expires on the 31st of March, so we will obviously be working hard on this over the next couple of weeks. In fact, yesterday we began negotiations with the steel workers. At Grundartangi the multi-year agreement expired at the end of last year. Iceland is a little bit different. The convention there is only to begin serious dialogue between the company and the union around the time of the expiry. So we have been in discussions with the union since January and our expectation is that those discussions will continue over the coming weeks. Obviously, plant operations are going along without any disturbance at all. At Ravenswood we submitted the full formal proposal to the power company in January as we had planned. They have given us a preliminary response which we are reviewing right now. We have not yet reached an agreement there but continue to be hopeful and believe our proposed structure should satisfy the criteria of all the constituencies.

As a reminder the transmission grid in Western Kentucky is relatively weak especially in Hawesville's specific load pocket. This puts Hawesville at risk in nonstandard conditions in the transmission grid and those can come in a number of ways. You can have obviously high demand, you can have constrained supply due to key generation and transmission assets being removed from service for maintenance -- either planned maintenance or emergency maintenance or you can have unusual transmission flows through the system. This condition also puts a cap on future economic development in the region. And for all these reasons we continue to work with MISO and all the other relevant constituencies on an upgrade to the transmission grid. One solution that has been identified is a new line that could be built from the Indiana side of the Ohio River to a substation adjacent to Hawesville. It is a relatively short distance, less than 20 miles as the crow flies. We believe this project meets all of MISO?s various investment criteria and thus we are pushing on this very hard. Implementation of an upgrade like this would mitigate a significant black swan type risk especially for Hawesville.

Shelly did a very good job in taking you through the detail on the CapEx budget for 2015, so I won't belabor it. But given the number of large projects and the importance of those projects, it goes without saying we will be putting a lot of focus on project execution from both the timing and budget standpoint. And with that, we can, Pete, open it up for Q&A.

Thanks, Mike. Justin, if you can go ahead and kick us off with the Q&A session please.

Thank you. (Operator Instructions). And our first question comes from Brett Levy with Jefferies.

Mike, thank you for the candor and also thank you for all the good financial information as well.

Hi, Brett.

Can you guys talk a little bit about any hedging? Is hedging out of the story now for North America or what is your thought? And then also talk about the Midwest premium. I asked this on another aluminum call. Obviously $0.24 is a good number. You want to make it sure it holds up. What makes you think it does?

On hedging -- Brett, thanks for the questions -- I wouldn't say it is out of the picture. I mean this is the age old debate, right, and we rehash it here if not daily then several times weekly. This is the same old story where, I mean, I'll talk about one example is natural gas. So you look at $3.50 and say that's a nice price relative to where it has been over the last couple of years and then all the sudden you wake up one day and the strip for next year is at $2.90. And obviously humans are hopefully learning animals so you say, gosh, I'm glad I didn't do that. So we continue to look at it, Brett. I would say we continue to look at it on a tactical basis. As you have heard us talk about in the past, we do have fundamental view that taking long-term positions in these commodity markets, this is one point I'll make and then I'll make another, is not the right thing to do. And number two, when you look at the key commodities that we would seek to hedge in our cost structure the key obviously being Indian Hub Power on the one hand and natural gas on the other, you have to think long and hard. Again, this is consistent with what we have been saying about only taking one side of that trade, I suppose, is one way to say it. So if you were to fix a portion of your electric power and your electric power constitutes, let's call it, 35% of your cash cost of sales can you responsibly do that without taking a position, i.e. selling forward 35% of your revenue. So that's a lot of words. We are actively considering it; that I can assure you, but we haven't bid on anything yet.

On the Midwest premium I think you heard us say we don't think $0.24 is a good number. We think it is coming down. Let me just be blunt, it is coming down. Anybody that is in these markets knows that the deals that have been being transacted have been done. Number one, the posted prices have come down. Midwest is below $0.24, Europe has fallen more, as we said. And actual business that is being transacted is happening below those posted prices. Now, as I said, there is not a lot of liquidity there and I think that is because both buyers and sellers -- people who are metal and people who need to own metal are sitting there saying, you know -- there is a gulf between buyers and sellers as to what is going to happen in the future so unless you really need metal or unless you really need liquidity as an owner you are not acting. But the evidence says to us watching these markets very carefully, as you would hope we do, that those premiums are coming down. How fast and how hard until they find an equilibrium would be very, very difficult to speculate.

And then on the power agreement front is there any way of kind going back to your power suppliers and saying, listen, whether it is natural gas or coal your input costs are down. You should give us some sort of break on that. And then to some extent, when they come back to you are they asking for something that sort of asks for an adjustment back up again if these input costs ever go back up for them?

That is a great question. It's like you have been sitting at the table here. So your question really is specific to South Carolina to Mt. Holly because implicitly the answer to your question is yes in Kentucky. Since we are buying on the market that marginal generation that prices our power and everybody else's power in the dispatch order, in effect has current fuel prices in it, call it, natural gas that is embedded in the price, in our LMP and our marginal price that MISO assigns to us every day. That is a long winded way of saying yes in Kentucky. You are on the right path for some place like South Carolina. Of course, the power provider there has its own structure in terms of fuel costs. So one way to get about it would be to say, okay, we'll take our own, we'll manage our fuel costs by ourselves. That would require some work to do. Obviously, be being treated differently than other people in the system but it can happen. The other way that could happen perhaps more directly is to do a deal similar to the one that we did the so called off system resource deal into which we entered mid 2012. That one has us exposed to -- directly to natural gas. The reason you don't see as much volatility in our final power price at Mt. Holly, as I've said -- as I've reminded you guys, it is a mix right now of -- I don't want to call it fixed, but reasonably fixed price power from the power company on the one hand and power from the third party resource that floats based on the natural gas price on the other hand. I hope that answered the question.

Good answer. I'll get back in queue. Thanks.

Okay. Thanks.

Our next question comes from Timna Tanners with Bank of America Merrill Lynch.

Thanks. Good afternoon.

Hi, Timna.

I'm still trying to understand what the gap is on Ravenswood and I know you characterized it as you are in the process and I get it. But is there anything else you can tell us to help us characterize the probability of that succeeding? You are one of the few companies that looks to be restarting, and if you could talk to us about any further detail there. And how much do you think about the price of the LME vis-a-vis that decision? I know it's about power, but at some level does the LME price factor in?

That's a good question, Timna. I'll take the second question first if I may. The answer there is our view -- sort mid to long-term view hasn't changed. You can't make decisions like this based on -- you know as I said, we were up at $2100 just a couple months ago. Now we are down at $1800. Premiums are coming down a little bit but they are way, way up from like a year ago when we would have happily restarted the plant had we gotten the right power deal. Again, long-winded way of saying of course, we look at it. If we had a view, our view is no better than anybody else, that things were looking really ugly in the world here over the next couple of years, of course that would be different. But other than that, we have got to proceed here responsibly with a longer term view than that.

It is very simple, in answer to your first question, the posted tariff of the power provider, it is a regulated power market there so there is a -- they don't like us to use this word but it is what it is, it is a monopoly power provider there, of course, as it is in all regulated regions in the U.S. And their posted tariff just doesn't work, doesn't come close to working. As you know, we have been voted very generous support by the state of West Virginia. And so taking that and reducing the posted price from the power provider we're still not there. So that, I think you used, in my opinion, the exact right word -- that gap there is what we are trying to solve. And we haven't gotten there yet. What we have on the table we think is a structure that should solve it. And again, it would be difficult to speculate at this point in time. We think it works but we're not quite there yet.

Well, you have track record so that means something and that is why we are still hopeful as well.

Just to be clear, we would like to start that, we really would.

No, that's fair. Okay. Then the only other thing I want to ask about is what you didn't talk about which was Helguvik and maybe I missed it but is that still something that -- is it more on the back burner now or where does that stand?

No, thanks for bringing it up Timna. We didn't mention it only because we don't like to add filler. It is very much on the front burner but there just has been no substantive change since last time and so we probably should have put it on there. We were still very focused on it, we are in discussions with all the relevant parties as late as I can say -- yes, with all three within the last couple of weeks but two we have contracted in the larger company that we have mentioned in the past that's not yet part of the power supply for Helguvik, but we?d certainly would like to come in there. That's a national power company owned by the State of Iceland. And so it is just that there hasn't been -- there has been a lot of discussion and some developments but nothing that rises to updating you guys on this call.

Okay. Thank you.

Thanks.

Next will be John Tumazos with John Tumazos Very Independent Research.

Thank you very much for your very good performance, it helps the job security of all the metals analysts to have somebody do some good things.

Thank you, John. We're concerned about our own as well, but thank you.

We certainly like to see your progress. Two questions, could you talk a little bit about the forward tax rate and the cash and book base as NOLs going forward, first? And second, looking beyond the 2015 year, further out, if you had some good earnings several back to back years how would your capital allocation priorities lean, oh, I thought of nine different things. Paying down debt, paying down benefit liabilities, dividends, buybacks, restarting West Virginia, Iceland expansions and acquisitions, raw materials, CapEx in existing plants. You remember how there used to be a nickel quarterly dividend back 12, 13 years ago. Lots of ways to use money when it comes in.

Thanks, John. We don't get quite up to nine when we talk about it at the Board level but so let me take the tax rate first. It's pretty straightforward as of right now. We'll get to -- as you correctly imply, on the book side of the U.S. there is zero provision right now because of the deferred tax asset. So it's pretty simple on a cash basis. Obviously, Shelly and Pete have given you the modeling assumptions, obviously based on your own commodity assumptions so take whatever your model spits out for U.S. taxable income and obviously use a 0% tax rate until further notice and take what gets spit out for Iceland using 18% tax rate. That's what we have right now. The statutory rate in Iceland being 20% but we have an investment agreement, as you know, that caps us at 18%. So that one is pretty straightforward. NOLs. There is still a very large NOL in our books. You'll see the size of it when we file our K here over the next couple of days but it's just a little smaller then it was before. Because we had used a little bit of it as we start to generate taxable income in the U.S. I am happy to say it's still fully allowed for. There is still full valuation allowance against it and until further notice that's the way it's being carried on the books.

Capital allocations, so, look, capital projects are always looked at. You know this vis-a-vis our weighted average cost to capital and our hurdle rates. And the ones that we have on the docket for 2015, obviously some of them are maintenance related or sustaining. We believe they nicely make the grade. Using your example, it is something that things continue to go well and commodity price continues to support it and we are going to look at it. I think at this point in time I should let Shelly comment. Paying down debt is probably not something we would look at. We think we're -- on behalf of the share owners reasonably capitalized from a leverage standpoint, i.e. not over leveraged. So all else being equal at this point in time, I think we'd look at how we return capital to the share owners. As you know, we haven't done that in a direct sense for some time and everybody has his or her own way of looking at dividends versus repurchased but we would look at the panoply of that stuff. I hope we are talking to you about that over the coming couple of quarters.

Thank you.

Thanks.

And next question comes from Tony Rizutto with Cowen & Company.

Hi, Mike and Shelly. How are you guys?

Hi, Tony. How are you?

Good, good. Listen, my first question is during the last call you talked about significant investments that you're considering in both the U.S. and Iceland in value added product capability and I would assume that you're looking at or evaluating maybe the electrical and auto markets, so kind of in the billet and slabs area. Would that be correct to assume?

That is very correct to assume.

Okay. And then could you give us an idea about the magnitude of investment? You talked about your 2015 kind of CapEx but let's think a little bit longer term, what could be the magnitude of those types of investments and how do you foresee that playing out just to go forward with that?

You bet, Tony, good question. And so those, as we've said, would be more significant than the small cash house projects that we had last year. So in the U.S. we are still working on this. We are working on evaluating the market and then the capital project, but there, given that we have existing cast houses, i.e. value added cast houses, some of the infrastructure there right now so you can leverage off of that. You got casting pits. You know how all this works. You know, you?re probably there talking about a couple tens of millions of dollars, but no more than that. Whereas in Iceland you are starting from scratch, all you have right now -- all we have right now, of course, is an ingot cast house that value added product line there that the foundry alloy is still being casted as ingot, that's why the investment there was so low. So in Iceland, number one, that reason, you need to dig down into the earth to put in casting pits, ordering new equipment, homogenization furnaces and sawing equipment. And because of the seismic requirements in Iceland, when you start touching the earth in such, you are talking about an order of magnitude above that. If in the U.S. you are talking about a $20 million to $30 million investment, in Iceland you are talking about maybe 2.5 to 3 times that and so we are approaching all of that with a good degree of optimism but a good degree of caution as well. Both, as I said, on the capital side and on the market assessment side given that the market is moving around here a little bit. Obviously, these are long-term investments. These projects would each take on the order of 18 to 24 months once you fired the starters pistol to -- before you started having your first cast -- your first production, but we want to take a sober look at this before we move forward.

Absolutely. Mike, how far along are you at this point in the evaluation process?

Pretty far. I mean, in Iceland we've got RFPs out to vendors for quotes and I just reviewed them when I was there with the team a couple of weeks ago and our board is going to review them soon. And so there we are going to have a pretty good capital budget. I am reasonably confident because they are going to be good quotes. U.S. again, less equipment needs to be ordered. The U.S. at this point in time is more, I'd say, a market assessment, Tony, at this point which is fundamentally harder, of course. Capital, you got good engineers and good quotes and you put in the contingency that's reasonable and you are going to get it right hopefully if you execute well. The market is of course more esoteric debt analysis so that's where we are -- I wouldn?t say hit the pause button but we are trying to be careful here.

Well, you guys have made a lot of very astute investments and so far, so good. I want to switch gears a little bit and talk a little bit about Ravenswood. Just if you can help me understand, I understand about power and obviously it?s critical for smelter but from my recollection it's an old vintage smelter. I think it's got or had relatively poor energy efficiency levels. So assuming you guys can obtain the kind of power contract that you would need from that monopoly power provider, what kind of magnitude of investment might you be looking at there or is this something that you kind of got a deal in pocket with some of the subsidies that you might be able receive there from local and state constituencies?

Good question Tony, so the two parts to your question and two answers to it, so on the investment side we've continued to look at this, we've continued to question our assumptions and the start up cost are still coming in around where we thought it were. On the fix start up cost if you will i.e. non working capital start up cost because there is another way to term it. That's still looking like a $40 million to $45 million investment of which only a third or so is CapEx, maybe a bit more than that and the rest is preproduction labor, preproduction power, et cetera, et cetera, i.e. cash cost that you have to bear before you start making product in cash flow. On the energy efficiency side you touched at a very good point. So given the vintage of that plant, sounds a bit defeatist but it's just pragmatic, you are never going to be able to be as productive there in terms of unit of output or unit of energy input as you are, there are other plants. Even at our next productive plant down the curve, Mt. Holly being the most productive so the next one would be Hawesville. Even Hawesville would be I'd say 8% or 9% more productive from an energy efficient standpoint than Ravenswood. And how that manifests Tony, I think you scratched at it or hit it is and Timna hit this as well as I mean, let's just blunt, the power price that we require to start that plant, given the technology we just have to be very realistic about what it will take to operate that plan responsibly and profitably over the long term.

Okay. That's great stuff. I appreciate it, Mike. Thank you.

Thanks, Tony.

(Operator Instructions). The next question comes from Jorge Beristain with Deutsche Bank.

Good afternoon Mike and everybody.

Hi, Jorge, how are you?

Good, thank you. I guess my question is really on the tolling, I guess you have given the implicit guidance of about 95,000 tons for 2015, and I was wondering if you could just give an outlook maybe our longer-term 2016, 2017, if we should continue to see tolling fall off in Iceland?

That is good question. So, the guidance there is easy. I mean that is the amount that is still subject to the portion of the old tolls that hasn't expired yet. And so that should be a pretty good number assuming we produce it at that level and assuming (Inaudible) the alumina is delivered and we produced under that 10 year plus old toll. I think, long-term I think we would, if I had to speculate at this point in time, we would guess that toll would be replaced by direct sale for two reasons. One is to have a good tolling customer and a robust auction for a toll, you need to have market participants who are, on the one hand, long alumina and, on the other hand, short metal, i.e. want the product. And when Nordural first put those tolls into place, Shelly, what, late ?90s, there were a lot of folks -- big majors like that out there. There are very few or really no market participants who have those dual attributes today. And so the world can change but if I had to speculate forward a year when those are being replaced, I would say more likely direct sales than tolls.

And just to pile on that, that contract expires mid 2016 so that's the time frame we are looking at.

Thanks, Shelly.

Perfect. And could you talk about the value added premiums at Sebree and Grundartangi? Are they remaining the same? I think you mentioned on the call it was about $0.045 a pound. Could you just talk about what's happening there with the value added premium?

Those are relatively stable. Those markets, as we?ve said, Sebree is -- the incremental margin there or the incremental value added production there is in foundry of billet. A smidge of slab as well we will be making this year as well, small amount of slab. And at Grundartangi foundry alloy and thus far those premiums have kind of gone sideways in each of those markets. So that is the implicit assumption there; you are correct.

Great. Thanks very much.

Thanks.

And that does conclude the question-and-answer session. I will now turn the conference back over to you for any additional or closing remarks, sir.

We very much appreciate your participation and good questions again today. Again, we will be filing the 10-K here in the next couple of business days and we?ll look forward to speaking with you in April as a group if not before. Thanks very much.

Well, thank you. And that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.