Nov 4, 2013
Executives
Michael A. Bless - President and CEO Shelly Harrison - SVP, Finance and Treasurer Peter Trpkovski - Senior Corporate Financial Analyst
Analysts
Brett Levy – Jefferies & Company Sal Tharani - Goldman Sachs Group Inc. Bruce Klein - Credit Suisse Anthony Rizzuto - Cowen and Company Timna Tanners - Bank of America David Gagliano – Barclays
Operator
Ladies and gentlemen, thanks for standing by and welcome to the Third Quarter 2013 Earnings Conference. At this time, all participants are in a listen-only mode.
Later we will conduct the question-and-answer session and instructions will be given at that time (Operator Instructions) And as a reminder, today’s conference is being recorded. I’d now like to turn the conference over to our host, Peter Trpkovski.
Please go ahead.
Peter Trpkovski
Thank you very much, Gwenn. Good afternoon, everyone and welcome to today’s conference call.
Before we begin, I’d 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 conditions. 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 at www.centuryaluminum.com. With that, I’d now like to introduce Mike Bless, Century’s President and Chief Executive Officer.
Michael A. Bless
Thanks, Pete and thanks to all of you for joining us this afternoon. If we could just switch over to Slide 4 please, to give you a quick overview of the things we’ve been working on over the last couple of months.
The quarter that just ended and then we’ll move on to talk about the industry and the operations. I will talk in the next slide in more details about the industry environment, but sufficed to say, we’re finding it hard to call a trend at this point on many of the key issues that impact our industry.
In that respect we’re managing the Company in the near-term in this context with an eye towards the near-term downside. That having been said, I will talk in a few minutes about the demand and supply trends we’re seeing.
Given these were become increasingly confident that we got more attractive at industry conditions on the horizon here the next year or two. Moving along, we had a really good quarter in the operations.
We are very proud of it and I will give you some more details in a few moments. Most importantly safety was good was good across the business generally.
Sebree had a difficult to start to the summer in the safety area and in the production in key metrics area and I will detail this in a minute. The plant has come back very nicely over the last couple of months.
Very importantly, operating costs were down at Hawesville, down at Mt. Holly and down at Grundartangi.
Before we go forward, I think it might be useful if we take a step back and look at the Company’s cost structure here and how it’s evolved over the last couple of years and I think importantly -- it’s important to isolate Hawesville, because there we’ve had a dramatic improvement. So let me just give you a little bit of data here.
If you put power aside, I will come back and pick up power in a moment, obviously it being our most important cost. But if you put power aside and just look at the rest of the operating costs and we compare the third quarter at Hawesville to the same quarter two years ago, operating costs were down $260 a tonne.
And if you look at September in isolation, the plant continues to make improvement. Hawesville’s costs are down $300 a tonne versus two years ago.
Now picking up power, if you look at quarter to two years ago third quarter, Hawesville’s operating costs were down $325 a tonne. And in last to add it all up, if you look at the September run rate obviously that’s a useful and relevant benchmark, because September as you know is the first month during which Hawesville operated under its new power arrangement for a full month.
So if you compare September to two years ago, Hawesville’s operating costs are down just shy of $500 a tonne and obviously on a production base of 250,000 tonnes. That’s a significant improvement in the plant’s cash flow.
We are extraordinarily pleased with the improvement that the team has at Hawesville has made. Grundartangi and Mt.
Holly have also continued their consistent improvement. And now let me just bring a bottom line on the -- on a consolidated basis to give you a sense of how we’ve lowered the Company’s cost, cost structure and break even.
If you look at the quarter we just ended Q3, and compare it to the same quarter last year, so Q3 over Q3. And you look at the adjusted operating income you will see those data -- the details in the back of the slides.
Basically we define our adjusted operating income as equivalent, in effect to EBITDA. You will see that the two quarters had virtually identical results within a million dollars or two.
But of course this year the LME average during the quarter was $140 lower than last year. So you would see the improvement we’ve made in the cost structure.
We obviously got more improvement to come as this quarter will have a full quarter of Hawesville’s new power arrangement and then Sebree beginning in February of next year. Just to bottom line it all for you, after Sebree is also on market power, so beginning in essence in February of 2014, the Company’s consolidated cash flow break even will be below the current cash metal price.
When we use that figure or that term consolidated cash flow break even, we’re talking about cash flow after average thing in essence, after SG&A, after interest expense, after maintenance CapEx, after everything other than the discretionary capital that we choose to invest in our business, some meaningful improvement here over the last couple of years. Okay.
Moving on during the quarter we made great progress as you saw mid quarter on Hawesville’s power arrangement. You saw that the Kentucky Public Service Commission approved the new contract in the middle of August, exactly as it was submitted back in the spring.
And we’ve been successfully purchasing power from the MISO market since the 20th of August. Thus far the delivery cost to power the plant has been exactly as we forecasted and this includes as you may remember the net costs of Big Rivers power station that sits adjacent to Hawesville.
Per the contract, we pick up those net costs in the short-term. And I will quantify the financial impact of that short come obligation here in a few moments.
Now we’re working to complete the arrangements with the grid regulators to allow for sustainable operations, assuming that Big Rivers curtail this power station as they file to do. And again, I will give you some more detail on that in just a couple of minutes.
Lastly over the last 10 days the delivered price to the plant has been a bit higher than normal due to some local transmission issues and we’re watching this development closely. We think it’s just a short-term issue.
Moving along we’re making good progress on the integration of Sebree. As you would suspect, we need to transition from the various Alcan operating and finance systems per agreement with them.
We are setting up the infrastructure required to access the new markets that came with this plant. That was one of the real benefits we saw in this business and we’re making some very modest investments to do so.
And we’re finding really good ways for the two plants to work together. Just moving along as a multi-year expansion project at Grundartangi is on track.
As you know this is a complex multi-year project with many areas of plant requiring major upgrade in modernization. Project on budget thus far and importantly the estimates to complete the project is below budget.
And as we normally do in February, we’ll update you on all of this and give you all of our financial goals and objectives and metrics for the year. Importantly the expansion is ahead of plan.
As you will see Grundartangi produced in the third quarter at an annualized rate of 295,000 tonnes, so continued terrific performance there. And lastly, the project to restart the Vlissingen anode plant is nearing its successful conclusion.
Again, I’ll provide some comments on that at the end of my comments. Okay.
If we can move along to Slide 5, as I said some comments on the industry environment. First, the average cash metal price during the quarter was 1,700, $81 a tonne.
That’s down 3% from Q2 when it was 1,835 a tonne. As you know that’s the lowest average price we’ve seen since the second quarter of 2009.
LME inventories remain around their all-time high, by 5.4 million tonnes. I will talk about the fundamentals in a moment, but given increasing demand in the industry, the days of inventories have been falling.
As you know the LME recently announced that they’ve taken a decision on the proposed changes in the warehousing rules, but we’re yet to see any details of their plan yet. And obviously the future of both on and off exchange inventories will depend heavily on the specifics of any plan that they make permanent.
Regional premiums as expected fell through most of the quarter after the original announcement that the LME made that -- though they’ve recently stabilized and even firmed up a little bit in certain regions of the world. U.S., Midwest premium had a lower than $0.98 during the quarter as now stands at $0.010.
As you recall that’s down from a high of a $0.118 before the LME made its original announcement. The EU duty paid premium has been stable over the last couple of months at about $245 a metric tonne.
Obviously the future of premium depends heavily on a number of factors, including expectations for interest rates. But for now the (indiscernible) remains wide and favorable for financing.
Turning to fundamentals just for a few moments. Demand has remained reasonably good.
Global consumption is up about 5% during the third quarter of this year. Excluding China, that’s about 2% increase.
EU is starting to see some stability in its demand and even some low growth and China had a decent quarter after a period of relative weakness earlier in the year. That said, key developing markets continue to be pretty weak, Brazil, India, South Korea, Indonesia and others.
Bottom line, we expect demand to continue to grow at least a 6% annual pace here over the next couple of years. On the supply side, we’re finally starting to see some momentum, with curtailments in closures announced in Russia and the EU and in the U.S.
These are beginning to add up slowly. We’ve also seen some announcements of delayed projects in Russia and Canada.
In China the central government again is trying to get control over this industry through some new rules regarding new projects and regional power subsidies. But time will tell whether the central government again is able to get control over the regional development in this industry.
Bottom line global supply growth is also up about 5% this year. It’s up about 1.5% excluding China.
As you see, the industry is largely in balance. There have been slight deficit thus far this year and we expect this trend to continue and obviously these deficits need to grow in order to start and increase -- in order to start eating into those inventory balances.
Just a couple of comments on alumina before we move on here, the current index price stands just a little bit above $320 a tonne. That represents just shy of 18% of the current three month metal price.
And we’ve heard about recent deals on an LME index basis short-term deals, a year or less, going at about the same price. This trend is obviously a concern for us for watching it closely, given our short aluminum position.
Okay. If we can move along to Slide 6, to just round up the industry discussion.
I won’t spend a lot of time on this slide. We’ve shown you this cost curve before; we’ve just updated it here.
So you know the basis of it and as you can see upwards of 40% maybe a little bit more of it at the current metal price at global capacity, it’s currently operating at a cash loss. Okay.
If we can move along to Slide 7 please, some comments as I promised on the operations this quarter. As I said, we’re really pleased with the performance at all the plants this quarter.
We are very convinced, we’ve got the right teams in place and you can see that now through the tangible progress that they’ve been making. We will obviously add Sebree in this chart next quarter when we have a Q-over-Q comparison to make, but I will make a couple of comments here on Sebree as we move forward as appropriate.
First and foremost, safety. We are continuing the really good performance we’ve had after the reasonably rough start we had for the year as we have briefed to you before.
Hawesville especially have had great improvement through this year. Sebree as I said had a really difficult June-July.
The plant came into the hot summer weather unprepared. Obviously, this kind of hot weather can lead to difficult times in the plant from a health and safety standpoint.
Obviously there were some anxiety amongst the employee population about the transfer of ownership as we took control of the plant on the first of June. And early July we had a full stop of all discretionary activity at the plant.
It’s focused on getting the safety performance back to where we need it to be. And I’m pleased to say the performance has been good since about the middle of the summer.
Moving down to production volumes, as you can see really good across the board as I said before, Grundartangi producing at an annualized rate of 295,000 tonnes. And it’s important to note that in these charts -- these data measured just hot metal production and therefore it ignores some other key statistics, for example Hawesville has been producing record amounts of high purity metal over the last couple of months.
And Sebree also has gone two months now of record weekly billet production. These as you know are premium products.
So this kind of performance is key to this plant’s profitability. Production metrics as you can see have been good.
Good efficiencies across the plants with Sebree exhibiting the same trend here as on safety. A poor beginning to the summer, but then the plant has come back strong since then.
Production costs, I will give you some details before over the longer term. This is just quarter-to-quarter Q3 over Q2.
You see the good performance across the plants, let me just give you a little bit of detail behind each of these. At Hawesville all the performance – all the improvement rather this quarter was from power as the plant spent half of the quarter on its new power contract.
At Mt. Holly the quarter-to-quarter improvement came primarily from better power and carbon prices.
And at Grundartangi the improvement came from all areas of the plant, as the management team here continuous to turn in great performance. They’re obviously leveraging their higher production volumes to absorb fixed costs better and they’re attacking successfully costs on the department basis.
We really couldn’t be more proud of the team at Nordural. And with that, I’ll turn it over to Shelly to go through the financials.
Shell?
Shelly Harrison
All right. Thanks, Mike.
So if you could turn to Slide 8 please, I'll take you through the Company's financial performance for the quarter. Shipments were up 21% in Q3 and this was largely due to the Sebree acquisition in June.
We also had a 15% increase in shipments at Hawesville as we reduced the surplus finished goods inventory that we built up in Q2 prior to receiving our approval to move the plant to market based power. Quarter-over-quarter the shipments were down about 5% at Mt.
Holly were results of finished goods inventory. In Iceland, we had direct shipments of approximately 1,200 tonnes and total volume for Iceland was up just slightly as a result of the additional volume for the ongoing capacity creep project.
On one month lag basis, the average cash LME price was down about 3.5% from Q2 to Q3. When you look at our realized unit prices, they were down approximately 2% in the U.S and 4% in Iceland.
They both pretty much in line with the change in LME. We have seen some decline in the regional premiums, in reaction to the announcement of potential changes in the LME warehouse rule, but on one month lag basis, the impact on realized prices was minimal for Q3.
Moving on to the income statement data, net sales were up 20% Q3 over Q2 due to higher shipments from Sebree and Hawesville. But that volume benefit was partially offset by weaker metal prices in the quarter.
Continuing down to the operating loss line, this quarter we had just our normal adjustments for depreciation and amortization and lower cost of market inventory adjustments. After backing out these non-cash items, we had an operating loss of $4.5 million in Q3, which is down $6 million from Q2.
Lower LME prices in Q3 reduced revenues by about $10 million. But lower cost of sales associated with our LME linked alumina and power contracts partially offset this impact by $4 million.
We saw power costs at Hawesville improve by $7 million in Q3 as a result of the new market based power arrangement that began in late August. The power costs at Sebree went up by almost $4 million due to the pending rate increase that was imposed when Hawesville left the system.
Just this last week, the Public Service Commission filed their ruling on the rate case approving about 75% of what was reflected by the power provider. As a result, we expect to receive a credit on Sebree’s next power invoice of about $900,000 for excess amounts charged in Q3.
The remaining decrease in operating income relates primarily to the additional two months of ownership at Sebree in Q3 as well as the reduction of finished goods inventory at Sebree in Q2 that did not recur in the third quarter. Moving on to the EPS data, for Q3 we had an adjusted loss of $27 million or $0.28 per share.
In calculating adjusted earnings we had only two adjustments this quarter. First, we backed out the lower cost in market inventory adjustments and then we also eliminated the $11.7 million credit related to the amortization of the Sebree power contract liability.
This is a remainder that liability was reported as part of the Sebree purchase accounting and will be amortized in full by the end of January 2014 when that power contract terminates. So continuing down to the balance sheet info, you can see here we had a modest increase in cash quarter-over-quarter.
As I mentioned on our last call, it was a $22 million customer payment that was inadvertently paid late on the first business day after quarter end since month end fell on a weekend in Q2. So our Q3 ending cash reflected the benefit of this payment coming in.
At the end of September we had $70 million outstanding on our revolving credit facility. This balance was repaid subsequent to year-end, but we will likely draw on the facility again in Q4 as our U.S working capital requirements fluctuate throughout the quarter.
As a result of this borrowing, our funded debt was up $17 million from Q2, but ending net debt was relatively flat at a $136 million. Moving on to Slide 9, so here we show are normal cash flow waterfall within Q2 to Q3.
Capital spending picked up this past quarter with $5 million spend on the restart of our anode plants in the Netherlands. We also had $60 million in CapEx at our smelter facilities and this includes the investment in the capacity creep project at Grundartangi as well as a full quarter for Sebree.
During Q3, we also paid about $10 million of withholding taxes in Iceland. As we mentioned previously, these are temporary taxes and will be refunded to us in November of next year.
Moving on to the right, you can see the $70 million revolver borrowing I mentioned as well as our $31 million cash inflows for Morgan Capital. The main drivers of the inflow from working capital are the late customer payment we received in Q3 as well as their reduction in Hawesville’s finished goods inventory.
The quarter-over-quarter cash was up $30 million and we ended September with a $141 million on the balance sheet. While we’re discussing cash flow, just a couple of items I want to mention to keep an eye out for in Q4.
Just last Friday we received a refund of about $22 million for temporary withholding taxes we paid in Iceland. To this point the remaining balance in withholding taxes is just the $10 million we paid last quarter is due to be refunded at the end of next year.
We also have our first semiannual interest payments on our new 7.5% senior notes in December and that will be just over $9 million. The last thing I wanted to point out for Q4 is that, this will be the heaviest capital spending quarter of the year.
We expect to spend another roughly $20 million to complete the first phase of the anode plant start up and most of that will go out in Q4 with a small amount carrying over to early 2014. We also plan to spend about $15 million at our smelters in Q4, as we continue to progress the Grundartangi expansion project.
And with that, I’ll hand it back to, Mike.
Michael A. Bless
Thanks, Shelly. If we could turn to Slide 10 please, as normal I would like to end here before we take your questions just to give you a sense of some of the major items that we’re working on now and will be during the next couple of months.
First and foremost at Hawesville, we need as I briefed earlier -- we need to finish the discussions with the regulators that are required to ensure the stability of the grid and our ability to import energy reliably and cost effectively. These are technical procedures governing the mitigation of risk when transmission lines are down for maintenance either on a scheduled or unscheduled basis.
We believe this process should be in place and completed by the early part of 2014. And as I said I’ve quantified this before just a bit under 10% of the current delivered power price we’re paying at Hawesville that we’ve been paying since mid August will go away once this process is completed and Big Rivers’ is able to shut its generation station.
Moving on to Sebree; we need to finalize the power contract with Big Rivers' and Cennergi and file that with the Kentucky Public Service Commission. As we said before this will essentially be the same arrangement as we have as Hawesville.
In addition it shouldn’t have the complicating factor of the transmission issues of that which we, I just spoke. We believe this will be approved before the termination of the existing contract on the 31st of January.
At Mt. Holly, just to remind you the current power arrangement with the off-system resource expires at the end of December, 2015.
This is the deal as you may remember that we put in place in the middle of last year. Under the terms of this deal we need to provide notice by the end of this December, i.e.
next month if we wish to terminate the master agreement with Santee Cooper for post 2015 service. The various parties have been working on this for the better part of the year.
We’ve already mutually extended that notice date a few times. We’re working really hard with all the applicable parties here including the State Government of South Carolina at its very highest levels.
As you know this is a terrific plant but thus far the long-term power cost the utility has been showing us doesn’t support the operations of any smelter and thus we have more work to do here. As I said the year long restart project at Vlissingen is coming to an end as scheduled.
We’ll be restarting half of the plant’s $150,000 tonne per year capacity here soon. At Greenville we’ll be restarting very soon and we expect to have anodes in the baking ovens in December for shipment of the Grundartangi in January.
Project is on time, and is likely to come in nicely under budget. And next we’ll need to decide when we’ll spend the additional $30 million that’s required to restart the second half of this plant.
Moving along we’re finalizing our replacements for some major commercial contracts that are expiring at the end of this year, there are two in particular. First, the original total contract at Grundartangi comes up at the end of this year.
As you know that’s for a 130,000 tonnes per year of metal and obviously the related amount of alumina, it's a totaling contract that’s coming up. The second one is the multi-metal contract with Southwire at Hawesville; both of these processes are right where they should be at this time in November.
We continue to work very hard on the situation in West Virginia. We’ve had recent discussions with the state and the power company in fact those discussions are continuing this week.
We are quite appreciative about the commitment of Governor Tomblin of West Virginia and the other key state leaders in helping us try to get this plant restarted. We’re trying to find a way to get an appropriate power price with enough longevity to justify the investment required to restart this plant.
We remain absolutely committed to getting Ravenswood back going again. There’s absolutely no reason this plant shouldn’t run with the right power arrangement.
And lastly at Helguvik, we continue to work to reach agreement with HS and OR and continue to do so as you know those are the two power companies with whom we have existing contracts. Given the state of those two companies, we’ve recently made a request to the National Power Company that’s the third major power company in Iceland.
We believe their involvement is necessary to get this project going in the near term. In addition we understand that the Government of Iceland is reviewing its Energy Development Program over the next six months or so.
We believe they’re committed to take the steps required to get this project resumed, and thus realize the significant benefits it will bring. And with that, Pete, Shelly, I think we can move to questions.
Peter Trpkovski
Gwenn, if you could please take the first question on line.
Operator
Thank you. (Operator Instructions) And our first question comes from Brett Levy with Jefferies.
Please go ahead.
Brett Levy – Jefferies & Company
Hi, guys excellent progress particularly on the cost front.
Michael A. Bless
Thanks, Brett.
Brett Levy – Jefferies & Company
Can you give us little bit more color around, like the steps that are going to happen for Helguvik; if you bring the National Power Company in, sort of what have they said? Will the other two guys potentially expand aside?
I know it's sort of a sensitive point in the negotiations but, obviously having a second plant in Iceland is a key part of your long-term strategic plans. I just want to get a sense as to sort of, how optimistic you are that maybe someone can come in and restart these conversations in a constructive way because they’ve installed for so long.
Michael A. Bless
Yeah, it's good, thanks Brett, it's a good question. I would start by agreeing absolutely with your last comment about the importance of the project.
Two, I’ll take yours in reverse order if it's okay. Two, absolutely not on the other two guys stepping aside; they continue to tell us that they want to participate in some way.
We continue to wish them to participate in a pragmatic and sensible way. The real point here is that, we want to get this project going in the near term, and we think in order to do that we need the national power company, it’s called landsvirkjun of course to come in here.
In answer to your first question, it's really too early to tell and as you would expect and hopefully appreciate Brett, this isn’t something that we want to negotiate in the public domain like this. But we have had some very constructive discussions here over the last month or two and we’ll see where those take us.
Brett Levy – Jefferies & Company
All right, and then the second question is, I mean you guys have given clear metrics that at current prices, at least the U.S. production is going to struggle after all of the CapEx and everything else to be breaking even.
What is your level of hedging, and I ask this every quarter, what is your level of hedging for the current quarter and any future quarters to sort of stabilize cash flow to neutral for the U.S. operations?
Michael A. Bless
Sure. There is no hedges in place right now.
There’s some very minor premium hedges that are on the books, but they’re de minimis and but there were no LME hedges spread on the books right now.
Brett Levy – Jefferies & Company
Any plans to put some on?
Michael A. Bless
Something that we look at all the time; I know that you’d probably prefer more precise answer. It's a complex analysis as you would expect and tough in this environment to consider putting on hedges with metal kind of bouncing around 1,800.
But it's something that we do look at all the time and I might add just to expand a little bit, you didn’t ask the question but perhaps it might be the next one that you ask. We’re also looking to doing a quite a bit of analysis as you would hope on alternatives to hedge our power exposure as we move here to become a major market purchaser of power.
So that’s something that we’ll be focusing on here over the next couple of months.
Brett Levy – Jefferies & Company
Thanks very much guys.
Michael A. Bless
Thanks, Brett.
Operator
Thank you. And our next question comes from Sal Tharani with Goldman Sachs.
Please go ahead.
Sal Tharani - Goldman Sachs Group Inc.
Good afternoon, Mike.
Michael A. Bless
Hi, Sal.
Sal Tharani - Goldman Sachs Group Inc.
Mike, you had mentioned in the past also about your short position of alumina and that the contract, the index contracts certainly have gone up a lot 18% you mentioned. I was wondering if you are looking at the Ormet, Louisiana facility for any reason that you think it may fit in your portfolio.
Michael A. Bless
Yeah, it's a good question Sal. As you would hope -- as you know we look at everything and as you would hope we would take a look at this one.
Based on our analysis of the cash cost of that facility even basis current natural gas prices as you know alumina refineries are sensitive to the value of natural gas. It's not an economic facility, even if you look at current index prices of alumina, if you look at current LME reference prices, even if you use that metric 18% which we do and in fact expect to do down here over the next year or two.
It's just -- it's a long winded way of saying, it just doesn’t dollar out.
Sal Tharani - Goldman Sachs Group Inc.
Okay. But you have done your math on this thing?
Michael A. Bless
Most certainly.
Sal Tharani - Goldman Sachs Group Inc.
Okay. Just quickly, you mentioned something about you’re facing some higher transmission cost over the last 10 days; can you just elaborate a little bit more on that what's going on with it?
Michael A. Bless
Yeah, what happens is, and again we do think it's just a short-term issue. What happens is that the owners of the transmission apparatus in the region or in any region, it happens to be Big Rivers' as you would expect.
They do most of their heavy maintenance in the so called shoulder seasons. So they don’t, they try to leave maintenance undone if you will during the summer when power usage is at a high and take the lines down to maintain them in the fall as they call it the shoulder season, and we’ve seen some congestion in the area as they’ve done that.
It's commenced at a time unfortunately where a generating unit or two went down in that plant, so you had kind of a double whammy there and that’s what lead to a spike here for a couple of days over the last 10 days in prices. I don’t want to overplay it here, I just -- it's top of mind for us right now and so it's something that we’re watching.
But again, we think it's a temporary situation.
Sal Tharani - Goldman Sachs Group Inc.
Yeah, how much of asset and transmission cost is of the total cost?
Michael A. Bless
What this really is, is that transmission, let me make sure I explain this; transmission itself is fixed, that’s regulated tariff regulated by the FERC. This is simply the loss of some of that transmission that’s a bit of a hysterical term, but the fact that the lines were down for maintenance driving up actual energy prices in the region.
So, I use transmission as a euphemism. What we’re really talking about here it's just an increase in the market energy prices caused by some of the regional transmission being down.
Sal Tharani - Goldman Sachs Group Inc.
Great. Thank you very much.
Michael A. Bless
Sure thing.
Operator
And our next question comes from Bruce Klein with Credit Suisse. Please go ahead.
Bruce Klein - Credit Suisse
Hi, good afternoon.
Michael A. Bless
Hi, Bruce.
Bruce Klein - Credit Suisse
Hey, I wanted just some color on spot power sort of what you’re -- what you’re sort of seeing out there now? That would be helpful.
Thanks.
Michael A. Bless
Yes, sure. The most liquid hub near Hawesville is the Indiana Hub, and that’s where for example if we were to hedge that’s where one would hedge.
And the price of energy in the day ahead market, we always buy day ahead per our procedures with Big Rivers’ [you might so] [ph], you never want to buy at the real time market because prices there can be much more variable both up and down, but right now the day ahead prices are in the high 20’s between $28 and $30 per megawatt hour. And if you look out over five years there’s quite a liquid forward market, it's reasonably flat.
Last time I looked at it, it was last week. It was up in five years and maybe 2.5 to 3 bucks in five years.
So it's reasonably flat forward curve at this point.
Shelly Harrison
Sorry, to make sure we’re comparing apples-to-apples. The numbers Mike is referring to are undelivered numbers, so on top of that you would need to add transmission cost.
Michael A. Bless
Yeah.
Bruce Klein - Credit Suisse
Okay. I thought mid 30’s was the -- or mid to high …
Michael A. Bless
That got to be right. So, Shelly is got it right.
To that energy price Bruce, you would add about five bucks of a combination of the FERC regulated transmission tariff, which I refer to a couple of minutes ago and then as we’ve detailed in our arrangement with Big Rivers’ we pay a compendium of other fees, their fees for servicing us, a fee to Kenergy for actually providing the service and so the aggregate of the transmission and those other fees added by the roughly of about an 5 bucks or so per megawatt hour. So that’s how you get into the mid 30’s.
Bruce Klein - Credit Suisse
Okay, that’s helpful. And then the premium, the store with the LME, any sort of bigger picture or thoughts you have on how that sort of gets resolved or what that means to the premium?
Michael A. Bless
No, I mean to be honest, no. We’re waiting like the rest of the industry to see.
As you may have seen the LME somewhat tantalizingly made an announcement, I think it was Shelly two Fridays ago they came out with it?
Shelly Harrison
Yes, (indiscernible).
Michael A. Bless
Yeah, I think it was a week and half ago now saying that their Board has made a decision but they put out nothing sense them, there’s been – you’ve seen a lot of our peers in the industry have commented publicly, sent letters into the LME. Some of the various people who look at the industry, so your peers, Bruce to your firm have made public comments.
But so far the LME is being reasonably [ph] tight lifted. We don’t have any, it's the amount of speculation about why they haven't, if they made a decision just gotten on with it and announced it, but it's a long vivid way of saying we don’t know anything more than anybody else knows at this point.
Bruce Klein - Credit Suisse
Okay, I’ll pass it on. Thanks guys.
Michael A. Bless
All right. See you.
Operator
Thank you. And our next question comes from Tony Rizzuto, Cowen and Company.
Please go ahead.
Anthony Rizzuto - Cowen and Company
Thank very much. Hi, Mike and Shelly and congrats on the improvement in the cost, it looks good.
Michael A. Bless
Thanks, Tony.
Anthony Rizzuto - Cowen and Company
I just wanted to follow up a little bit because the comments such that you made in the press release about diminished volatility associated with the LME warehousing proposal. I was wondering, I was intrigued by that and I was wondering why those comments and if you could elaborate a little bit on what you meant there?
Michael A. Bless
Yeah, I mean, I think just picking up of the last comment made, we’re not sure what the proposal was going to do. We had seen diminished volatility here over the last probably month and half, two months as you remember right after the LME made their original announcement there was quite a bit of volatility kind of the forward markets in all these various premium disappeared almost overnight.
The stock prices, the cash prices on both came down pretty consistently for example the Midwest premium was at 11.8 and it came down to 9.8, I don’t know if it was linearly Shelly, but pretty consistently over maybe 8 to 10 weeks give or take.
Shelly Harrison
Yes.
Michael A. Bless
And then it's firmed up since then, Tony as you know it kicked back up to 10 and it's kind of just the stabilize, same thing in Europe with the duty paid premium and so, we -- it's hard to tell whether that people are sort of beginning to re-price these premiums under what they expect in the regime is going to be or just a lack of sort of direction causing people to freeze. But all we were trying to do there is make an observation that that kind of volatility that seemed to have come out of it at least right now.
Anthony Rizzuto - Cowen and Company
Okay, thank you.
Michael A. Bless
Sure.
Anthony Rizzuto - Cowen and Company
Just a question on, you indicated that your fourth quarter CapEx will be a big quarter. I was wondering if you could give us any guidance at this point for ’14 and do you talk about sustaining and growth in that year?
Michael A. Bless
Sure. We’ll just think, do it at a high level at this point Tony and then …
Anthony Rizzuto - Cowen and Company
It's fine.
Michael A. Bless
Yeah, yeah and then we’ll give you all the details we usually do in February. But we’ll continue along with the Grundartangi program.
It won't be as big and not as it was in 2013, but it will be a happy amount I could see $15 million to $20 million easily, there Shelly is nodding her head up and down here. We’re thinking that the big decision there will be when, it won't be if, but when we decide to spend the fund to start up the second baked oven there and that will be, it's $10 million for the oven and another $3 million for a bunch of ancillary related stuff.
So that will be $13 million at Vlissingen that either it will happen and just we haven't taken the decision yet Tony as to whether we’ll do it in 2014 or towards the beginning of the year back after the year 2015 that one is kind of up in the air at this point. Other than that Shelly, you want to go through, I mean maintenance is yeah, go ahead.
Shelly Harrison
Yes, at Sebree now we’re at about $15 million to $20 million annually for maintenance CapEx. I think you hit [ph] what they want, Mike.
Michael A. Bless
Yes.
Anthony Rizzuto - Cowen and Company
All right, guys. Thank you very much.
Michael A. Bless
Thank you, Tony.
Operator
Thank you. And next we have a question from Timna Tanners, Bank of America.
Please go ahead.
Timna Tanners - Bank of America
Hi, good afternoon.
Michael A. Bless
Hi.
Timna Tanners - Bank of America
So since I just wanted to make sure – I’m sorry, if I missed it, but there was a one other (indiscernible) Friday for Sebree, was that the standard procedure then in terms with the process for getting your power contracts?
Michael A. Bless
Yes. Sorry, I never want to call one of those standards because they’re very impactful when you do them, but as you may remember we did something similar at Hawesville.
We were required to do it just because as the one notice itself said Timna, if for whatever reason if we weren’t able to have a new power contract approved before the 31st of January we would be forced that we wouldn’t have a choice. We would have no power.
We would be forced to curtail the plant. That said, nothing is changed, you read -- you may have read I should say the order that the Kentucky PSC issued in August that even talked about Sebree as their expectation that it would be coming even though the order itself pertained only to Hawesville.
The contract is virtually identical and frankly it's less complex, A; because we’ve already done it and B; because it doesn’t have the issues of the generation station right next to Hawesville, there’s no analogue at Sebree. And so we expect it to be approved in due course likely some time in the month, during the month of January.
Timna Tanners - Bank of America
Okay, great. Your confidence kind of answers that question I think.
I think I was just a little confused, I’m sorry if you already talked to this, but I just want to make sure I understand it, what's the timeframe under which we should be expecting kind of the full benefits to flow through for both Hawesville and Sebree if you could? Thanks.
Michael A. Bless
Sure, no problem. So, for Hawesville the answer it, this quarter, and then I’ll come back to this in a moment.
Q4, this year for Sebree the full benefit won't be I suppose until the second quarter. So, I guess bottom line that’s the answer to your question, it won't be until the second quarter of 2014 until both plants have a full quarter on market power.
As Shelly detailed, you may remember we talked about the potentials of our expected benefit to Hawesville. So as you may have heard, she detailed that power cost went down at Hawesville 7 million bucks this quarter and the plant was on market power for just about half a quarter.
So that kind of annual run rate it's something in the sort of mid $50 million improvement we’re right on that estimate that we’ve been making for the year-to-date.
Timna Tanners - Bank of America
Okay, great. Thanks a lot.
Michael A. Bless
Sure.
Operator
Thank you. And next we have a question from David Gagliano, Barclays.
Please go ahead.
David Gagliano – Barclays
Okay, great. Thanks very much.
My question is about the 2014 cash flow. I want to ask a question that, I know you require some assumptions, but I’m hoping we can hone in a bit on the cash flow situation for ’14.
Given the changes in the power cost at Hawesville, assuming you’re successful with renegotiating the power contract at Sebree and based on what you know about 2014 capital spending needs. Can you give us a rough sense as to what realized aluminum price and I when I say realized aluminum price I mean including premiums.
What realized aluminum price you think you need to be essentially cash flow breakeven in 2014?
Shelly Harrison
Yeah, Dave; so if we assume that both the Hawesville and the Sebree power contracts are on that market based power and power prices are around where they’re trending right now, all is breakeven with everything other than investment type CapEx would be in the high 1,700 around 1,775.
David Gagliano – Barclays
And that’s for next year too, correct? And that is reduction, right …
Shelly Harrison
And again, no investment CapEx …
Michael A. Bless
That’s everything we know right now. So in essence, the answer is yes to the question.
Other than as Shelly said, the discretionary go investment CapEx that we just detailed a couple of minutes ago.
David Gagliano – Barclays
Okay. All right, perfect.
That’s all I needed. Thanks.
Michael A. Bless
All right, David.
Operator
And there are no addition -- actually we just got a question from [ph] Tony Risotto, Cohen & Company. Please go ahead.
Unidentified Analyst
I like to be called Risotto.
Michael A. Bless
I like it too. You get me hungry, Tony.
Unidentified Analyst
I do like that. Actually I might try to have some tonight if I can.
Michael A. Bless
There you go.
Unidentified Analyst
I just want to follow up on David’s question that 17 -- around 1,775; does that include -- that’s just LME, now that -- what kind of assumption would you guys be making there in terms of the premium over LME?
Michael A. Bless
Yes.
Shelly Harrison
That’s truly LME comparable. So that takes into account that benefit is at the premiums into our cost structure.
So it's is the near cost Tony when we present cash cost, we present net cash cost and they’re reduced by premiums above the LME. So, when we talk LME it's truly a comparable number.
Unidentified Analyst
Got it. Thank you very much.
Michael A. Bless
Thanks, Tony.
Operator
There are no questions at this time.
Michael A. Bless
Very good. Thanks everybody for participating this afternoon and we’ll look forward to talking with you in, suppose it will be February, if not before.
Operator
And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.