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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 0-27918
CENTURY ALUMINUM COMPANY
(Exact name of Registrant as specified in its Charter)
DELAWARE 13-3070826
(State of Incorporation) (IRS Employer Identification No.)
2511 GARDEN ROAD 93940
BUILDING A, SUITE 200 (Zip Code)
MONTEREY, CALIFORNIA
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (831) 642-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The registrant had 21,070,543 shares of common stock outstanding at
October 31, 2003.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS.
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
ASSETS
Current Assets:
Cash and cash equivalents ............................................................... $ 50,603 $ 45,092
Accounts receivable - net ............................................................... 53,410 46,240
Due from affiliates ..................................................................... 12,681 22,732
Inventories ............................................................................. 76,181 77,135
Prepaid and other current assets ........................................................ 11,501 4,777
--------- ---------
Total current assets .............................................................. 204,376 195,976
Property, Plant and Equipment - net ........................................................... 498,504 417,621
Intangible Asset - net ........................................................................ 103,720 119,744
Due from Affiliates - Less current portion .................................................... 24 974
Other Assets .................................................................................. 29,110 30,852
--------- ---------
Total ............................................................................. $ 835,734 $ 765,167
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ................................................................. $ 37,858 $ 37,757
Due to affiliates ....................................................................... 18,910 15,811
Industrial revenue bonds ................................................................ 7,815 7,815
Accrued and other current liabilities ................................................... 38,207 24,114
Accrued employee benefits costs - current portion ....................................... 9,909 10,890
Deferred Taxes - current portion ........................................................ 1,632 4,971
--------- ---------
Total current liabilities ......................................................... 114,331 101,358
--------- ---------
Senior Secured Notes Payable - net ........................................................... 322,191 321,852
Notes Payable - Affiliates .................................................................... 40,000 --
Accrued Pension Benefits Costs - Less current portion ......................................... 13,451 10,751
Accrued Postretirement Benefits Costs - Less current portion .................................. 76,530 70,656
Other Liabilities ............................................................................. 35,160 8,376
Deferred Taxes - Less current portion ........................................................ 43,035 41,376
--------- ---------
Total noncurrent liabilities ...................................................... 530,367 453,011
--------- ---------
Minority Interest ............................................................................. -- 18,666
Contingencies and Commitments (See Note 6)
Shareholders' Equity:
Convertible preferred stock (8.0% cumulative, 500,000 shares outstanding) ............... 25,000 25,000
Common stock (one cent par value, 50,000,000 shares authorized; 21,070,543 and 21,054,302
shares outstanding at September 30, 2003 and December 31, 2002, respectively) ........ 211 211
Additional paid-in capital .............................................................. 172,405 172,133
Accumulated Other Comprehensive Income (Loss) ........................................... (7,405) 1,173
Retained Earnings (Deficit) ............................................................. 825 (6,385)
--------- ---------
Total shareholders' equity ........................................................ 191,036 192,132
--------- ---------
Total ............................................................................. $ 835,734 $ 765,167
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
NET SALES:
Third-party customers ................................................. $ 170,086 $ 149,412 $ 487,287 $ 451,989
Related parties ....................................................... 31,402 27,580 89,377 84,440
--------- --------- --------- ---------
201,488 176,992 576,664 536,429
Cost of Goods Sold ..................................................... 191,448 176,745 551,142 523,916
--------- --------- --------- ---------
Gross Profit ........................................................... 10,040 247 25,522 12,513
Selling, General and Administrative Expenses ........................... 3,929 4,282 12,150 12,221
--------- --------- --------- ---------
Operating Income (Loss) ................................................ 6,111 (4,035) 13,372 292
Interest Expense - Third Party ......................................... (10,341) (10,360) (30,894) (30,515)
Interest Expense - Related Party ....................................... (1,000) -- (2,000) --
Interest Income ........................................................ 83 111 278 240
Net Gain (Loss) on Forward Contracts ................................... (3,481) -- 38,423 --
Other Expense .......................................................... (10) (1,872) (510) (1,975)
--------- --------- --------- ---------
Income (Loss) before Income Taxes and Minority Interest ................ (8,638) (16,156) 18,669 (31,958)
Income Tax (Expense) Benefit ........................................... 3,271 7,079 (6,556) 12,187
--------- --------- --------- ---------
Income (Loss) Before Minority Interest and Cumulative Effect of
Change in Accounting Principle ..................................... (5,367) (9,077) 12,113 (19,771)
Minority Interest ...................................................... -- 1,313 986 3,939
--------- --------- --------- ---------
Income (Loss) before Cumulative Effect of Change in Accounting Principle (5,367) (7,764) 13,099 (15,832)
Cumulative Effect of Change in Accounting Principle, net of tax
benefit of $3,430 ................................................... -- -- (5,878) --
--------- --------- --------- ---------
Net Income (Loss) ...................................................... (5,367) (7,764) 7,221 (15,832)
Preferred Dividend requirements ........................................ (500) (500) (1,500) (1,500)
--------- --------- --------- ---------
Net Income (Loss) Applicable to Common Shareholders .................... $ (5,867) $ (8,264) $ 5,721 $ (17,332)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Income (Loss) before cumulative effect of change in
accounting principle ......................................... $ (0.28) $ (0.40) $ 0.55 $ (0.84)
Cumulative effect of change in accounting principle ............. $ -- $ -- $ (0.28) $ --
--------- --------- --------- ---------
Net Income (Loss) ............................................... $ (0.28) $ (0.40) $ 0.27 $ (0.84)
========= ========= ========= =========
Diluted:
Income (Loss) before cumulative effect of change in
accounting principle ......................................... $ (0.28) $ (0.40) $ 0.55 $ (0.84)
Cumulative effect of change in accounting principle ............. $ -- $ -- $ (0.28) $ --
--------- --------- --------- ---------
Net Income (Loss) ............................................... $ (0.28) $ (0.40) $ 0.27 $ (0.84)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .............................................................. 21,070 20,554 21,070 20,554
========= ========= ========= =========
Diluted ............................................................ 21,070 20,554 21,074 20,554
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE ............................................. $ -- $ 0.05 $ -- $ 0.15
========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ................................................ $ 7,221 $(15,832)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Unrealized net gain on forward contracts ................... (6,974) --
Depreciation and amortization .............................. 38,403 42,308
Deferred income taxes ...................................... 3,125 6,684
Pension and other postretirement benefits .................. 7,592 6,173
Inventory market adjustment ................................ (1,617) 2,654
Loss on disposal of assets ................................. 841 682
Minority interest .......................................... (986) (3,939)
Cumulative effect of change in accounting principle ........ 9,308 --
Changes in operating assets and liabilities:
Accounts receivable - net ............................ (7,170) (853)
Due from affiliates .................................. (866) 4,002
Inventories .......................................... 4,512 (984)
Prepaids and other current assets .................... (1,046) (1,317)
Accounts payable, trade .............................. 101 (8,229)
Due to affiliates .................................... 3,897 12,743
Accrued and other current liabilities ................ 11,392 9,001
Other - net .......................................... 10,309 743
-------- --------
Net cash provided by operating activities .................. 78,042 53,836
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................ (12,389) (12,570)
Acquisitions ..................................................... (59,837) --
-------- --------
Net cash used in investing activities ...................... (72,226) (12,570)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing fees ................................................... (297) --
Dividends ........................................................ (11) (4,591)
Issuance of common stock ......................................... 3 5
-------- --------
Net cash used in financing activities ...................... (305) (4,586)
-------- --------
NET INCREASE IN CASH ................................................ 5,511 36,680
CASH, BEGINNING OF PERIOD ........................................... 45,092 13,388
-------- --------
CASH, END OF PERIOD ................................................. $ 50,603 $ 50,068
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. GENERAL
The accompanying unaudited interim consolidated financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2002. In management's
opinion, the unaudited interim consolidated financial statements reflect all
adjustments, which are of a normal and recurring nature, that are necessary for
a fair presentation of financial results for the interim periods presented.
Operating results for the first nine months of 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. Certain reclassifications of 2002 information were made to conform to the
2003 presentation.
2. ACQUISITIONS
On April 1, 2003, the Company completed the acquisition of the 20%
interest in its Hawesville, Kentucky primary aluminum reduction facility which
was indirectly owned by Glencore International AG, the Company's largest
shareholder (together with its subsidiaries, "Glencore") together with
Glencore's pro rata interest in certain related assets (collectively the
"Acquired Assets"). The operating results of the 20% interest acquired have been
included in the Company's consolidated financial statements from the date of
acquisition. Century paid a purchase price of approximately $100.0 million for
the Acquired Assets, which it financed with approximately $60.0 million of
available cash and a six-year 10% $40.0 million promissory note payable to
Glencore (the "Glencore Note"). See Note 5 for a discussion of the Glencore
Note. In connection with the acquisition, the Company entered into a ten-year
contract with Glencore from 2004 through 2013 under which Glencore will purchase
approximately 45.0 million pounds per year of primary aluminum produced at the
Ravenswood and Mt. Holly facilities, at prices based on then-current market
prices, adjusted by a cap and a floor as applied to the current U.S. Midwest
premium.
Glencore originally purchased the Acquired Assets from Century in April
2001 when Century acquired the Hawesville facility and related assets (the
"Hawesville Acquisition") from Southwire Company ("Southwire"). Glencore also
assumed direct responsibility for a pro rata portion of certain liabilities and
obligations related to the Hawesville facility, including: (i) delivery
obligations under the Molten Aluminum Supply Agreement, dated April 1, 2001,
between Century and Southwire, (ii) debt service obligations related to $7.8
million in industrial revenue bonds ("IRBs") assumed by Century in connection
with the Hawesville Acquisition, (iii) any post-closing payments due Southwire
pursuant to the terms of the Company's agreement with Southwire, and (iv)
certain other post-closing liabilities and obligations (including environmental)
related to the Hawesville facility (collectively, the "Assumed Liabilities").
In connection with the Company's subsequent purchase of the Acquired
Assets from Glencore, the Company assumed all of Glencore's obligations related
to the Assumed Liabilities. In addition, the Company issued a promissory note to
Glencore to secure any payments Glencore could be required to make as issuer of
a letter of credit in April 2001 in support of the IRBs.
4
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Raw materials .............. $32,825 $32,064
Work-in-process ............ 13,165 13,310
Finished goods ............. 8,024 9,853
Operating and other supplies 22,167 21,908
------- -------
$76,181 $77,135
======= =======
At September 30, 2003 and December 31, 2002, approximately 76% and 78% of
inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market, respectively. The excess of LIFO cost (or market, if lower) over first
in, first out ("FIFO") cost was approximately $318 and $1,105 at September 30,
2003 and December 31, 2002, respectively.
4. INTANGIBLE ASSET
The intangible asset consists of the power contract acquired in connection
with the Company's acquisition of its aluminum reduction facility located in
Hawesville, Kentucky in April 2001. The contract value is being amortized over
its term of ten years through 2010, using a method that results in annual
amortization equal to the percentage of a given year's expected gross annual
benefit to the total as applied to the total recorded value of the power
contract. As part of the acquisition of Glencore's interest in the Hawesville
facility on April 1, 2003, the 20% portion of the power contract that was
indirectly owned by Glencore was revalued in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." As a
result, the gross carrying amount of the contract and the accumulated
amortization, both related to the 20% portion of the contract indirectly owned
by Glencore, were removed and the fair value of the 20% of the power contract
acquired on April 1, 2003 was recorded. As of September 30, 2003, the gross
carrying amount of the intangible asset was $153,592 with accumulated
amortization of $49,872. For the three month periods ended September 30, 2003
and September 30, 2002, amortization expense for the intangible asset totaled
$4,584 and $6,565, respectively. For the nine month periods ended September 30,
2003 and September 30, 2002, amortization expense for the intangible asset
totaled $14,095 and $19,694, respectively. For the year ending December 31,
2003, the estimated aggregate amortization expense for the intangible asset will
be approximately $18,680. The estimated aggregate amortization expense for the
intangible asset for the following five years is as follows:
5
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CENTURY ALUMINUM INTANGIBLE ASSET AMORTIZATION
For the year ending December 31,
2004 2005 2006 2007 2008
---- ---- ---- ---- ----
Estimated Amortization Expense $ 12,326 $ 14,162 $ 12,695 $ 13,617 $14,669
In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company evaluates the intangible asset for impairment
whenever events or circumstances indicate that the carrying amount may not be
recoverable.
5. DEBT
The Company has $325.0 million of 11-3/4% senior secured first mortgage
notes due 2008 (the "Notes"). The Company had unamortized bond discounts on the
Notes of $2,809 and $3,148 at September 30, 2003 and December 31, 2002,
respectively. The indenture governing the Notes contains customary covenants
including limitations on the Company's ability to pay dividends, incur debt,
make investments, sell assets or stock of certain subsidiaries, and purchase or
redeem capital stock. The Company suspended its common and preferred stock
dividends in the fourth quarter of 2002. This action was taken because the
Company was near the limits on allowable dividend payments under the covenants
in its bond indenture.
Effective April 1, 2001, the Company entered into a $100.0 million senior
secured revolving credit facility (the "Revolving Credit Facility") with a
syndicate of banks. The Revolving Credit Facility will mature on April 2, 2006.
There were no outstanding borrowings under the Revolving Credit Facility as of
September 30, 2003.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company assumed IRBs in the aggregate principal amount
of $7,815. From April 1, 2001 through April 1, 2003, Glencore assumed 20% of the
liability related to the IRBs consistent with its ownership interest in the
Hawesville facility. The IRBs mature on April 1, 2028, and bear interest at a
variable rate not to exceed 12% per annum determined weekly based on prevailing
rates for similar bonds in the bond market. The IRBs are secured by a Glencore
guaranteed letter of credit and the Company will provide for the servicing costs
for the letter of credit. Century has indemnified Glencore for all costs arising
from the letter of credit. The interest rate on the IRBs at September 30, 2003
was 1.37%, with interest paid quarterly. The IRBs are classified as current
liabilities because they are remarketed weekly and could be required to be
repaid upon demand if there is a failed remarketing, as provided in the
indenture governing the IRBs.
On April 1, 2003, the Company completed the acquisition of the 20%
interest in its Hawesville facility owned by Glencore which it financed in part
with a six-year 10% $40.0 million promissory note payable to Glencore. Amounts
outstanding under the Glencore Note, together with Century's reimbursement
obligations related to the letter of credit provided by Glencore securing the
IRBs, are secured by a first priority security interest in the Acquired Assets.
Century's maximum potential
6
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
amount of future payments under the reimbursement obligations for the Glencore
letter of credit securing the IRBs would be $8,150. Until the Glencore Note
matures on April 1, 2009, the Company will make principal and interest payments
semi-annually. Principal payments will range from $0 to $3,000 based on the
average closing prices for aluminum quoted on the London Metals Exchange ("LME")
for the six month period ending prior to each payment date. The Company's
obligations under the Glencore Note are guaranteed by each of its material
consolidated subsidiaries, except for Century of Kentucky LLC (see Note 15 for a
discussion of note guarantees).
6. CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL CONTINGENCIES
The Company believes its environmental liabilities are not likely to have
a material adverse effect on the Company. However, there can be no assurance
that future requirements at currently or formerly owned properties will not
result in liabilities which may have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Century of West Virginia is performing certain remedial measures at its
Ravenswood Facility pursuant to a RCRA 3008(h) order issued by the Environmental
Protection Agency ("EPA") in 1994 (the "3008(h) Order"). Century of West
Virginia also conducted a RCRA facility investigation ("RFI") under the 3008(h)
Order evaluating other areas at Ravenswood that may have contamination requiring
remediation. The RFI was submitted to the EPA in December 1999. Century of West
Virginia, in consultation with the EPA, has completed interim remediation
measures at two sites identified in the RFI, and the Company expects that
neither the EPA, nor the State of West Virginia will require further remediation
under the 3008(h) Order. The Company believes a significant portion of the
contamination on the two identified sites is attributable to the operations of
Kaiser Aluminum and Chemical ("Kaiser"), the prior owner, and will be the
financial responsibility of that owner, as discussed below.
Kaiser owned and operated the Ravenswood facility for approximately 30
years prior to its acquisition by Century of West Virginia. Many of the
conditions that Century of West Virginia is remedying exist because of
activities that occurred during Kaiser's ownership and operation. Under the
terms of the agreement to purchase the Ravenswood Facility ("Kaiser Purchase
Agreement"), Kaiser retained the responsibility to pay the costs of cleanup of
those conditions. In addition, Kaiser retained title to certain land within the
Ravenswood premises and is responsible for those areas. On February 12, 2002,
Kaiser and certain wholly owned subsidiaries filed voluntary petitions under
Chapter 11 of the Federal Bankruptcy Code ("Kaiser Bankruptcy"). While the
Company believes the Kaiser Bankruptcy will not relieve Kaiser of its
obligations to do remediation work under government orders, the ultimate outcome
of the Kaiser Bankruptcy is uncertain. Nevertheless, the Company does not expect
the Kaiser Bankruptcy to have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Under the terms of the agreement to sell its fabricating businesses to
Pechiney (the "Pechiney Agreement"), the Company and Century of West Virginia
provided Pechiney with certain indemnifications. Those include the assignment of
certain of Century of West Virginia's
7
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
indemnification rights under the Kaiser Purchase Agreement (with respect to the
real property transferred to Pechiney) and the Company's indemnification rights
under its stock purchase agreement with Alcoa relating to the Company's purchase
of Century Cast Plate, Inc. The Pechiney Agreement provides further
indemnifications, which are limited, in general, to pre-closing conditions that
were not disclosed to Pechiney and to off-site migration of hazardous substances
from pre-closing acts or omissions of Century of West Virginia. Environmental
indemnifications under the Pechiney Agreement expire September 20, 2005 and are
payable only to the extent they exceed $2,000. Payments under this
indemnification would be limited to $25,000 for on-site liabilities, but there
is no limit on potential future payments for any off-site liabilities. The
Company does not believe there are any undisclosed pre-closing conditions or
off-site migration of hazardous substances, and it does not believe that it will
be required to make any potential future payments under this indemnification.
On July 6, 2000, while the Hawesville facility was owned by Southwire, the
EPA issued a final Record of Decision ("ROD"), under the federal Comprehensive
Environmental Response, Compensation and Liability Act, which detailed response
actions to be implemented at several locations at the Hawesville site to address
actual or threatened releases of hazardous substances. Those actions include:
- removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
- management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
- the continued extraction and treatment of cyanide contaminated ground
water using the existing ground water treatment system.
Under the Company's agreement with Southwire to purchase the Hawesville
facility, Southwire indemnified the Company against all on-site environmental
liabilities known to exist prior to the closing of the acquisition, including
all remediation, operation and maintenance obligations under the ROD. The total
costs for the remedial actions to be undertaken and paid for by Southwire
relative to these liabilities are estimated under the ROD to be $12,600 and the
forecast of annual operating and maintenance costs is $1,200. Century will
operate and maintain the ground water treatment system required under the ROD on
behalf of Southwire, and Southwire will reimburse Century for any expense that
exceeds $400 annually.
If on-site environmental liabilities relating to pre-closing activities at
Hawesville that were not known to exist as of the date of the closing of the
acquisition become known before March 31, 2007, the Company will share the costs
of remedial action with Southwire on a sliding scale depending on the year the
liability is identified. Any on-site environmental liabilities arising from
pre-closing activities which do not become known until on or after March 31,
2007, will be the responsibility of the Company. In addition, the Company will
be responsible for any post-closing environmental costs which result from a
change in environmental laws after the closing or from its own activities,
including a change in the use of the facility. In addition, Southwire
indemnified the Company against
8
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
all risks associated with off-site hazardous material disposals by the
Hawesville plant which pre-date the closing of the acquisition.
The Company acquired the Hawesville facility by purchasing all of the
outstanding equity securities of Metalsco Ltd., which was a wholly owned
subsidiary of Southwire. Metalsco previously owned certain assets which are
unrelated to the Hawesville plant's operations, including the stock of Gaston
Copper Recycling Corporation ("Gaston"), a secondary metals recycling facility
in South Carolina. Gaston has numerous liabilities related to environmental
conditions at its recycling facility. Gaston and all other non-Hawesville assets
owned at any time by Metalsco were identified in the Company's agreement with
Southwire as unwanted property and were distributed to Southwire prior to the
closing of the Hawesville acquisition. Southwire indemnified the Company for all
liabilities related to the unwanted property. Southwire also retained ownership
of certain land adjacent to the Hawesville facility containing Hawesville's
former potliner disposal areas, which are the sources of cyanide contamination
in the facility's groundwater. Southwire retained full responsibility for this
land, which was never owned by Metalsco and is located on the north boundary of
the Hawesville site.
Southwire has secured its indemnity obligations to the Company for
environmental liabilities until April 1, 2008 by posting a letter of credit,
currently in the amount of $14,200, issued in the Company's favor, with an
additional $15,000 to be posted if Southwire's net worth drops below a
pre-determined level during that period. The amount of security Southwire
provides may increase (but not above $14,700 or $29,700, as applicable) or
decrease (but not below $3,000) if certain specified conditions are met. The
Company cannot be certain that Southwire will be able to meet its indemnity
obligations. In that event, under certain environmental laws which impose
liability regardless of fault, the Company may be liable for any outstanding
remedial measures required under the ROD and for certain liabilities related to
the unwanted properties. If Southwire fails to meet its indemnity obligations or
if the Company's shared or assumed liability is significantly greater than
anticipated, the Company's financial condition, results of operations and
liquidity could be materially adversely affected.
Century is a party to an Administrative Order on Consent with the
Environmental Protection Agency (the "Order") pursuant to which other past and
present owners of an alumina facility at St. Croix, Virgin Islands have agreed
to carry out a Hydrocarbon Recovery Plan to remove and manage hydrocarbons
floating on top of groundwater underlying the facility. Pursuant to the
Hydrocarbon Recovery Plan, recovered hydrocarbons and groundwater will be
delivered to the adjacent petroleum refinery where they will be received and
managed. The owner of the petroleum refinery will pay the parties participating
in the recovery effort the fair market value of the petroleum hydrocarbon
recovered. Lockheed Martin Corporation ("Lockheed"), which sold the facility to
one of the Company's affiliates, Virgin Islands Alumina Corporation ("Vialco"),
in 1989, has tendered indemnity and defense of this matter to Vialco pursuant to
terms of the Lockheed - Vialco Asset Purchase Agreement. Management does not
believe Vialco's liability under the Order or its indemnity to Lockheed will
have a material adverse effect on the Company's financial condition, results of
operations, or liquidity. The Company expects the future potential payments
under this indemnification will be an immaterial amount. However, under the
indemnification, there is no limit to the potential future payments.
9
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1,778 and $1,370 at
September 30, 2003 and December 31, 2002, respectively. All accrued amounts have
been recorded without giving effect to any possible future recoveries. With
respect to ongoing environmental compliance costs, including maintenance and
monitoring, such costs are expensed as incurred.
Because of the issues and uncertainties described above, and the Company's
inability to predict the requirements of the future environmental laws, there
can be no assurance that future capital expenditures and costs for environmental
compliance will not have a material adverse effect on the Company's future
financial condition, results of operations, or liquidity. Based upon all
available information, management does not believe that the outcome of these
environmental matters, or environmental matters concerning Mt. Holly, will have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
LEGAL CONTINGENCIES
Prior to the Kaiser bankruptcy, Century was a named defendant, along with
Kaiser and many other companies, in civil actions brought by employees of third
party contractors who alleged asbestos-related diseases arising out of exposure
at facilities where they worked, including Ravenswood. All of those actions
relating to the Ravenswood facility have been dismissed or settled with respect
to the Company and as to Kaiser. Only 14 plaintiffs were able to show they had
been on the Ravenswood premises during the period the Company owned the plant,
and the parties have agreed to settle all of those claims for non-material
amounts. The Company is awaiting receipt of final documentation of those
settlements and the entry of dismissal orders. The Company does not expect the
Kaiser Bankruptcy will have any effect on the settlements it has reached on
those asbestos claims. Since the Kaiser Bankruptcy, the Company has been named
in an additional 82 civil actions based on similar allegations with unspecified
monetary claims against Century. The Company does not know if any of the 82
claimants were in the Ravenswood facility during the Company's ownership, but
management believes that the costs of investigation or settlements, if any, will
be immaterial.
The Company has pending against it or may be subject to various other
lawsuits, claims and proceedings related primarily to employment, commercial,
environmental and safety and health matters. Although it is not presently
possible to determine the outcome of these matters, management believes their
ultimate disposition will not have a material adverse effect on the Company's
financial condition, results of operations, or liquidity.
POWER COMMITMENTS
The Company purchases all of the electricity requirements for the
Ravenswood Facility from Ohio Power Company, a unit of American Electric Power
Company, pursuant to a fixed price power supply agreement that expired on July
31, 2003. On May 3, 2002, the Company signed a new contract to purchase electric
power for its Ravenswood facility from Ohio Power. The new agreement was
effective August 1, 2003 and will provide power for the Ravenswood facility at
competitive rates
10
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
under a GS-4 schedule approved by the Public Utilities Commission of Ohio. The
GS-4 schedule is due to expire on December 31, 2005.
The Hawesville facility currently purchases all of its power from Kenergy
Corporation ("Kenergy"), a local retail electric cooperative, under a power
supply contract that expires at the end of 2010. Kenergy acquires the power it
provides to the Hawesville facility under fixed price contracts, mostly with a
subsidiary of LG&E Energy Corporation ("LG&E"), with delivery guaranteed by
LG&E. The Hawesville facility currently purchases all of its power from Kenergy
at fixed prices. Approximately 15% of the Hawesville facility's power
requirements are unpriced in calendar year 2005. The unpriced portion of the
contract increases to approximately 26% in 2006.
The Mt. Holly facility purchases all of its power from the South Carolina
Public Service Authority ("Santee Cooper") at rates fixed by published
schedules. One of those schedules is a fuel adjustment clause which permits the
Authority to pass through charges or credits to the extent its actual costs vary
from those costs calculated by a formula set forth in that schedule. The Mt.
Holly power contract expires December 31, 2005. In September 2003, Mt. Holly
signed an agreement with Santee Cooper to supply electric power to the Mt. Holly
facility from 2006 through 2015. Rates for the period 2006 through 2010 will be
as set forth in presently approved schedules. Rates for the period 2011 through
2015 will be as provided under then applicable published schedules.
Equipment failures at the Ravenswood, Mt. Holly or Hawesville facilities
could limit or shut down the Company's production for a significant period of
time. In order to minimize the risk of equipment failure, the Company follows a
comprehensive maintenance and loss prevention program and periodically reviews
its failure exposure.
The Company is subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as other events.
Power interruptions may have a material adverse effect on the Company's
business. Any loss of power which causes an equipment shutdown may result in the
hardening or "freezing" of molten aluminum in the pots where it is produced. If
this freezing occurs, significant losses can occur if the pots are damaged and
require repair or replacement, a process that could limit or shut down the
Company's production operations for a significant period of time. Certain
shutdowns not covered by insurance could be a default under the revolving credit
facility. No assurance can be given that a material shutdown will not occur in
the future or that such a shutdown would not have a material adverse effect on
the Company.
Although the Company maintains property damage insurance to provide for
the repair or replacement of damaged equipment or property, as well as business
interruption insurance to mitigate losses resulting from any equipment failure
or production shutdown caused by a catastrophic event, the Company may still be
required to pay significant amounts under the deductible provisions of those
insurance policies. In addition, coverage may not be sufficient to cover all
losses which result from a catastrophic event. Furthermore, while Century
maintains insurance to cover losses resulting from damage to power suppliers'
facilities or transmission lines that interrupt the power supply to the
Company's facilities, this insurance contains large deductibles and self-insured
amounts, and it does not cover losses resulting from a power loss due solely to
lack of sufficient electrical power caused by unusually high usage within the
applicable service territory.
11
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LABOR COMMITMENTS
Century of West Virginia's hourly employees, which comprise approximately
39% of the Company's workforce, are represented by the United Steelworkers of
America ("USWA") and are currently working under a labor agreement that expires
May 31, 2006. The Hawesville LLC's hourly employees, which comprise
approximately 41% of the Company's workforce, are represented by the USWA and
are currently working under a five-year labor agreement that expires March 31,
2006.
OTHER COMMITMENTS
The Company may be required to make post-closing payments to Southwire up
to an aggregate maximum of $7,000 if the price of primary aluminum on the LME
exceeds specified levels during the seven years following closing of the
Hawesville acquisition in April 2001.
7. FORWARD DELIVERY CONTRACTS AND FINANCIAL INSTRUMENTS
As a producer of primary aluminum products, the Company is exposed to
fluctuating raw material and primary aluminum prices. The Company routinely
enters into fixed and market priced contracts for the sale of primary aluminum
and the purchase of raw materials in future periods.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase
Agreement (the "Pechiney Metal Agreement") with Pechiney that expires December
31, 2005. This contract will be automatically extended through July 31, 2007
provided that the Company's power contract is extended through that date.
Pursuant to the Pechiney Metal Agreement, Pechiney purchases, on a monthly
basis, at least 23.0 million pounds and no more than 27.0 million pounds of
molten aluminum at a variable price determined by reference to the U.S. Midwest
market price. Pechiney has the right, upon 12 months notice, to reduce its
purchase obligations under the contract by 50%.
On April 1, 2000, the Company entered into an agreement, expiring December
31, 2009, with Glencore to sell and deliver monthly, primary aluminum totaling
approximately 110.0 million pounds per year at a fixed price for the years 2002
through 2009 (the "Original Sales Contract"). In January 2003, Century and
Glencore agreed to terminate and settle the Original Sales Contract for the
years 2005 through 2009. At that time, the parties entered into a new contract
(the "New Sales Contract") that requires Century to deliver the same quantity of
primary aluminum as did the Original Sales Contract for these years. However,
the New Sales Contract provides for variable pricing for the years 2005 through
2009, equal to the quarterly average price of aluminum as quoted by the LME for
the quarter preceding delivery of the primary aluminum. For deliveries in the
years 2003 and 2004, the sale price of primary aluminum delivered will remain at
fixed prices.
Prior to the January 2003 agreement to terminate and settle the years 2005
though 2009 of the Original Sales Contract, the Company had been classifying and
accounting for it as a Normal Sales contract under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." A contract that is so designated
and that meets other conditions established by SFAS No. 133 is exempt from the
requirements of SFAS No. 133, although by its term the contract would otherwise
be
12
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
accounted for as a derivative instrument. Accordingly, prior to January 2003,
the Original Sales Contract was recorded on an accrual basis of accounting and
changes in the fair value of the Original Sales Contract were not recognized.
According to SFAS No. 133, it must be probable that at inception and
throughout its term, a contract classified as "normal" will not result in a net
settlement and will result in physical delivery. Because in January 2003 the
Company and Glencore intended to net settle a significant portion of the
Original Sales Contract, it no longer qualified for the "normal" exception of
SFAS No. 133, requiring the Company to mark it to current fair value in its
entirety. Accordingly, in the first quarter of 2003 the Company recorded a
derivative asset and a pre-tax gain of $41.7 million. Of the total recorded
gain, $26.1 million relates to the favorable terms of the Original Sales
Contract for the years 2005 through 2009, and $15.6 million relates to the
favorable terms of the Original Sales Contract for 2003 through 2004.
The Company determined the fair value by estimating the excess of the
contractual cash flows of the Original Sales Contract (using contractual prices
and quantities) above the estimated cash flows of a contract based on identical
quantities using LME-quoted prevailing forward market prices for aluminum plus
an estimated U.S. Midwest Premium adjusted for delivery considerations. The
Company discounted the excess estimated cash flows to present value using a
discount rate of 7%.
On April 1, 2003, the Company received $35.5 million from Glencore, $26.1
million of which relates to the settlement of the Original Sales Contract for
the years 2005 through 2009, and $9.4 million of which represents the fair value
of the New Sales Contracts, discussed below. The Company will account for the
unsettled portion of the Original Sales Contract (years 2003 and 2004) as a
derivative and will recognize period-to-period changes in fair value in current
income. The Company will also account for the New Sales Contract as a derivative
instrument under SFAS No. 133. The Company has not designated the New Sales
Contract as "normal" because it replaces and substitutes for a significant
portion of the Original Sales Contract which, after January 2003, no longer
qualified for this designation. The $9.4 million initial fair value of the New
Sales Contract is a derivative liability and represents the present value of the
contract's favorable term to Glencore in that the New Sales Contract excludes in
its variable price an estimated U.S. Midwest Premium, adjusted for delivery
considerations. Because the New Sales Contract is variably priced, the Company
does not expect significant variability in its fair value, other than changes
that might result from the absence of the U.S. Midwest Premium.
In connection with the acquisition of the Hawesville facility in April
2001, the Company entered into a 10-year contract with Southwire (the "Southwire
Metal Agreement") to supply 240 million pounds of high-purity molten aluminum
annually to Southwire's wire and cable manufacturing facility located adjacent
to the Hawesville facility. Under this contract, Southwire will also purchase 60
million pounds of standard grade molten aluminum each year for the first five
years of the contract, with an option to purchase an equal amount in each of the
remaining five years. Prior to the acquisition of Glencore's interest in the
Hawesville facility on April 1, 2003, the Company and Glencore were each
responsible for providing a pro rata portion of the aluminum supplied to
Southwire under this contract. On April 1, 2003, in connection with the
Company's acquisition of Glencore's interest in the Hawesville facility, the
Company assumed Glencore's delivery obligations
13
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
under the Southwire Metal Agreement. The price for the molten aluminum to be
delivered to Southwire from the Hawesville facility is variable and will be
determined by reference to the U.S. Midwest Market Price. This agreement expires
on December 31, 2010, and will automatically renew for additional five-year
terms, unless either party provides 12 months notice that it has elected not to
renew.
In connection with the 2003 acquisition of the 20% interest in the
Hawesville facility, the Company entered into a ten-year contract with Glencore
(the "Glencore Metal Agreement") from 2004 through 2013 under which Glencore
will purchase approximately 45.0 million pounds per year of primary aluminum
produced at the Ravenswood and Mt. Holly facilities, at prices based on
then-current market prices, adjusted by a cap and a floor as applied to the
current U.S. Midwest premium.
Apart from the Pechiney Metal Agreement, the Glencore Metal Agreement,
Original Sales Contract, New Sales Contract and Southwire Metal Agreement, the
Company had forward delivery contracts to sell 223.5 million pounds and 329.0
million pounds of primary aluminum at September 30, 2003 and December 31, 2002,
respectively. Of these forward delivery contracts, the Company had fixed price
commitments to sell 39.8 million pounds and 42.9 million pounds of primary
aluminum at September 30, 2003 and December 31, 2002, respectively. Of these
forward delivery contracts, 11.3 million pounds and 0.3 million pounds at
September 30, 2003 and December 31, 2002, respectively, were with the Glencore
Group.
The Company is party to long-term supply agreements with Glencore that
extend through 2006 and provide that Glencore will supply a fixed quantity of
alumina at prices indexed to the price of primary aluminum on the LME. In
addition, as part of its acquisition of an additional 23% interest in the Mt.
Holly facility, the Company assumed an alumina supply agreement with Glencore
for its alumina requirements relative to the additional interest. This agreement
terminates in 2008 and the price is indexed to the price of primary aluminum on
the LME.
As part of its acquisition of the Hawesville facility in 2001, the
Company assumed an alumina supply agreement with Kaiser. The agreement, which
is for all of Hawesville's requirements, is market-based and expires in 2005.
Kaiser is a debtor in a pending Chapter 11 bankruptcy case and, on August 27,
2002, the Bankruptcy Court made its Order authorizing Kaiser to assume certain
contracts, including the Company's alumina supply agreement. As a result of its
assumption of the agreement, all continuing obligations of Kaiser under the
agreement are to be performed in the ordinary course of its business, and any
claims the Company may have under the agreement will be afforded priority as an
administrative expense. On May 30, 2003, the Company entered into a second
alumina supply agreement with Kaiser. This second agreement is also for all of
Hawesville's requirements; it is market-based and covers the period 2006
through 2008. Because this agreement was entered into after Kaiser's bankruptcy
filing, this agreement will be accorded the same legal status as the agreement
which Kaiser assumed pursuant to the Order of the Bankruptcy Court.
Kaiser currently is soliciting proposals to purchase the facility which
presently supplies the Company's alumina under the foregoing agreements. The
Company expects that Kaiser or a successor will continue to supply alumina to
the Company pursuant to the terms of the Company's agreements, but if Kaiser or
a successor fails to do so, the Company's cost of alumina could increase
substantially and there would be no assurance that the Company would be able to
recoup its added costs as an administrative expense in the Kaiser Chapter 11
bankruptcy case.
To mitigate the volatility in its market priced forward delivery
contracts, the Company enters into fixed price financial sales contracts, which
settle in cash in the period corresponding to the intended delivery dates of the
forward delivery contracts. Certain of these financial sales contracts are
accounted for as cash flow hedges depending on the Company's designation of each
contract at its inception. At September 30, 2003 and December 31, 2002, the
Company had financial instruments,
14
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
primarily with the Glencore Group, for 125.0 million pounds and 181.0 million
pounds, respectively, of which 80.9 million pounds and 181.0 million pounds,
respectively, were designated cash flow hedges. These financial instruments are
scheduled for settlement at various dates in 2003 through 2004. The Company had
no fixed price financial purchase contracts to purchase aluminum at September
30, 2003. Additionally, to mitigate the volatility of the natural gas markets,
the Company enters into fixed price financial purchase contracts, accounted for
as cash flow hedges, which settle in cash in the period corresponding to the
intended usage of natural gas. At September 30, 2003 and December 31, 2002, the
Company had financial instruments for 2.7 million and 1.5 million DTH (one
decatherm is equivalent to one million British Thermal Units), respectively.
These financial instruments are scheduled for settlement at various dates in
2003 through 2005. Based on the fair value of the Company's financial
instruments as of September 30, 2003 accumulated other comprehensive income of
$2,197 is expected to be reclassified to earnings over the next twelve month
period.
The forward financial sales and purchase contracts are subject to the risk
of non-performance by the counterparties. However, the Company only enters into
forward financial contracts with counterparties it determines to be
creditworthy. If any counterparty failed to perform according to the terms of
the contract, the accounting impact would be limited to the difference between
the nominal value of the contract and the market value on the date of
settlement.
8. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
---- ----
Cash paid for:
Interest .................................................................. $19,169 $18,534
Cash received for:
Interest .................................................................. 278 240
Income tax refunds ........................................................ -- 17,574
Seller financing related to the acquisition of the 20% interest in the Hawesville
facility ........................................................................ 40,000 --
9. ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement
establishes standards for accounting for legal obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company adopted the Standard during the first quarter of 2003. SFAS
143 requires that the Company record the fair value of a legal liability for an
asset retirement obligation ("ARO") in the period in which it is incurred and
capitalize the ARO by increasing the carrying amount of the related asset. The
liability is accreted to its present value each period and the capitalized cost
is depreciated over the useful life of the related asset. The Company's asset
retirement obligations consist primarily of costs associated with the removal
and disposal of reduction plant spent pot liner.
15
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
With the adoption of SFAS 143 in the first quarter 2003, Century recorded
an ARO asset of $8,718, net of accumulated amortization of $8,989 and a Deferred
Tax Asset of $3,430. The net amount initially recognized as a result of applying
the Statement is reported as a cumulative effect of a change in accounting
principle. The Company recorded a one-time, non-cash charge of $5,878, for the
cumulative effect of a change in accounting principle. For the nine months ended
September 30, 2003, $1,795 of the additional ARO liability incurred is related
to the acquisition of the 20% interest in the Hawesville facility.
The reconciliation of the changes in the asset retirement obligations is
presented below:
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2003 2002 (PRO FORMA)
-------------- ----------------
BEGINNING BALANCE, ARO LIABILITY $ 17,902 $ 17,416
ADDITIONAL ARO LIABILITY INCURRED 4,239 2,694
ARO LIABILITIES SETTLED ......... (3,329) (3,645)
ACCRETION EXPENSE ............... 1,187 1,437
-------- --------
ENDING BALANCE, ARO LIABILITY ... $ 19,999 $ 17,902
======== ========
10. NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The implementation of SFAS No. 149 had no impact on the Company's
Consolidated Financial Statements. The Company will apply the provisions of the
Statement prospectively for any applicable contracts.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and is otherwise
effective for the Company beginning July 1, 2003. The Company has reviewed its
current financial instruments and does not believe that any are within the scope
of this Statement. The Company will apply the provisions of the Statement
prospectively for any future financial instruments that are within the scope of
this Statement.
16
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
11. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
---- ----
Net Income (Loss) ..................................................................... $ 7,221 $(15,832)
Other Comprehensive Income (Loss):
Net unrealized gain (loss) on financial instruments, net of tax of $51 and ($3,581),
respectively ..................................................................... (140) 6,304
Net amount reclassified as income, net of tax of $3,632 and $1,105,
respectively ..................................................................... (6,443) (1,826)
Minimum Pension Liability Adjustment, net of tax of
$1,122 ........................................................................... (1,995) --
-------- --------
Comprehensive Loss .................................................................... $ (1,357) $(11,354)
======== ========
Composition of Accumulated Other Comprehensive Income (Loss):
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Net Unrealized gain on financial instruments, net of tax of
($1,147) and ($4,829) ..................................... $ 2,028 $ 8,611
Minimum Pension Liability adjustment, net of tax of $5,306 and
$4,183 .................................................... (9,433) (7,438)
------- -------
Total Accumulated Other Comprehensive Income (Loss) $(7,405) $ 1,173
======= =======
12. STOCK-BASED COMPENSATION
The Company has elected not to adopt the recognition provisions for
employee stock-based compensation as permitted in SFAS No. 123, "Accounting for
Stock-Based Compensation". As such, the Company accounts for stock based
compensation in accordance with Accounting Principles Board ("APB") Opinion No.
25 "Accounting for Stock Issued to Employees." No compensation cost has been
recognized for the stock option portions of the plan because the exercise prices
of the stock options granted were equal to the market value of the Company's
stock on the date of grant. Had compensation cost for the Stock Incentive Plan
been determined using the fair value method provided under SFAS No. 123, the
Company's Net Income (Loss) and earnings (loss) per share would have changed to
the pro forma amounts indicated below:
17
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income (Loss) applicable
to common shareholders - As Reported (5,867) (8,264) $ 5,721 $ (17,332)
Add: Stock-based employee
compensation expense
included in reported Net
Income, net of related tax
effects 119 43 317 129
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (276) (100) (823) (301)
---------- ---------- ---------- ----------
Pro forma Net Income (loss) (6,024) (8,321) $ 5,215 $ (17,504)
========== ========== ========== ==========
Basic earnings (loss) per share - As reported $ (0.28) $ (0.40) $ 0.27 $ (0.84)
- Pro forma $ (0.29) $ (0.40) $ 0.25 $ (0.85)
Diluted earnings (loss) per share - As reported $ (0.28) $ (0.40) $ 0.27 $ (0.84)
- Pro forma $ (0.29) $ (0.40) $ 0.25 $ (0.85)
13. EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the computation of the
basic and diluted earnings (loss) per share for income from continuing
operations:
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
--------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
Loss before cumulative effect of
change in accounting principle $ (5,367) $ (7,764)
Less: Preferred stock dividends (500) (500)
-------- --------
BASIC EPS:
Loss applicable to common shareholders (5,867) 21,070 $(0.28) (8,264) 20,554 $(0.40)
EFFECT OF DILUTIVE SECURITIES:
Plus: Incremental Shares from
assumed conversion -- -- -- --
-------- -------- ------- -------
DILUTED EPS:
Loss applicable to common
shareholders with assumed
conversions $ (5,867) 21,070 $(0.28) $ (8,264) 20,554 $(0.40)
======== ====== ====== ======== ====== ======
18
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
--------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
Income (loss) before cumulative effect
of change in accounting principle $ 13,099 $(15,832)
Less: Preferred stock dividends (1,500) (1,500)
-------- --------
BASIC EPS:
Income (loss) applicable to
common shareholders 11,599 21,070 $0.55 (17,332) 20,554 $(0.84)
EFFECT OF DILUTIVE SECURITIES:
Plus: Incremental Shares from
assumed conversion Options -- 4 -- --
-------- ------- -------- -------
DILUTED EPS:
Income (loss) applicable to
common shareholders
with assumed conversions $ 11,599 21,074 $0.55 $(17,332) 20,554 $(0.84)
======== ======= ======= ======== ======= ======
Options to purchase 711,867 and 642,450 shares of common stock were outstanding
during the periods ended September 30, 2003 and September 30, 2002,
respectively. For the nine month period ended September 30, 2003, 4,302
incremental shares were included in the computation of diluted earnings per
share based upon the average market price of the common shares during the
period. For the three month period ended September 30, 2003, these shares and
convertible preferred stock shares were not included in the computation of
diluted earnings per share because the assumed conversion would have had an
antidilutive effect on earnings per share. In 2002, these shares and convertible
preferred stock shares were not included in the computation of diluted earnings
per share because the assumed conversion would have had an antidilutive effect
on earnings per share.
14. PREFERRED AND COMMON STOCK DIVIDENDS
In the fourth quarter of 2002, the Company suspended its common and
preferred stock dividends. The action was taken because the Company was near the
limits on allowable dividend payments under the covenants in its bond indenture
and due to current economic conditions. In accordance with current accounting
guidance, no liability for cumulative preferred dividends is recorded until the
dividends are declared. As of September 30, 2003, the Company had total
cumulative preferred dividend arrearages of $2,000 or $4.00 per preferred stock
share.
19
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's 11-3/4% Senior Secured First Mortgage Notes due 2008 are
jointly and severally and fully and unconditionally guaranteed by all of the
Company's material consolidated subsidiaries, other than Century Aluminum of
Kentucky LLC ("LLC") (the "Guarantor Subsidiaries"). As of September 30, 2003,
the Company holds a 100% equity interest in LLC and as such consolidates 100% of
the assets, liabilities and operations of LLC into its financial statements.
Based on the joint ownership of LLC prior to April 1, 2003, LLC (the
"Non-Guarantor Subsidiary") did not guarantee the Notes, and the Company has not
caused its equity interests in LLC to be pledged as collateral for the Notes.
The Company's interest in the Mt. Holly facility's property, plant and equipment
has not been pledged as collateral. Other subsidiaries of the Company which are
immaterial did not guarantee the Notes (collectively, the "Non-Guarantor
Subsidiaries"). For the nine months ended September 30, 2003 and 2002, the
Company allocated total corporate expenses of $2.9 and $8.2 million to its
subsidiaries, respectively. For the three months ended September 30, 2003 and
2002, the Company allocated total corporate expenses of $0.3 and $4.4 million to
its subsidiaries, respectively. Additionally, the Company charges interest on
certain intercompany balances.
Because LLC is not a minor subsidiary, the Company is providing condensed
consolidating financial information for the periods following the Company's
acquisition of the Hawesville facility. The Notes contain customary covenants
limiting the ability of both the Company and the Guarantor Subsidiaries to pay
dividends, incur additional debt, make investments, sell assets or stock of
certain subsidiaries and purchase or redeem capital stock (see Note 5 to the
Consolidated Financial Statements for information about the terms of the Notes).
The following summarized condensed consolidating balance sheets as of
September 30, 2003, and December 31, 2002, condensed consolidating statements of
operations for the nine and three month periods ended September 30, 2003 and
2002, and the condensed consolidating statements of cash flows for the nine
months ended September 30, 2003 and 2002 present separate results for Century
Aluminum Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary.
This summarized condensed consolidating financial information may not
necessarily be indicative of the results of operations or financial position had
the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiary operated
as independent entities.
20
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2003
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ ------- ---------------- ------------
Assets:
Cash and cash equivalents $ 186 $ 206 $ 50,211 $ -- $ 50,603
Accounts receivables, net 53,177 233 -- -- 53,410
Due from affiliates 126,591 18,501 451,614 (584,025) 12,681
Inventories 53,901 22,280 -- -- 76,181
Prepaid and other current assets 6,120 270 5,111 -- 11,501
--------- --------- --------- --------- ---------
Total current assets 239,975 41,490 506,936 (584,025) 204,376
Investment in subsidiaries 83,304 -- 182,877 (266,181) --
Property, plant and equipment, net 493,423 4,868 213 -- 498,504
Intangible asset - net -- 103,720 -- -- 103,720
Due from affiliates - less current portion 24 -- -- -- 24
Other assets 11,399 -- 17,711 -- 29,110
--------- --------- --------- --------- ---------
Total assets $ 828,125 $ 150,078 $ 707,737 $(850,206) $ 835,734
========= ========= ========= ========= =========
Liabilities and shareholders' equity:
Accounts payable, trade $ 16,946 $ 20,912 $ -- $ -- $ 37,858
Due to affiliates 29,752 5,265 118,074 (134,181) 18,910
Industrial revenue bonds 7,815 -- -- -- 7,815
Accrued and other current liabilities 8,384 7,331 22,492 -- 38,207
Accrued employee benefits costs - current portion 7,719 905 1,285 -- 9,909
Deferred taxes - current portion 1,632 -- -- -- 1,632
--------- --------- --------- --------- ---------
Total current liabilities 72,248 34,413 141,851 (134,181) 114,331
--------- --------- --------- --------- ---------
Senior Secured Notes Payable - net -- -- 322,191 -- 322,191
Notes Payable - Affiliates -- -- 40,000 -- 40,000
Accrued Pension benefits Costs - less current portion 4,879 -- 8,572 -- 13,451
Accrued Postretirement Benefits Costs - less current
portion 51,865 24,037 608 -- 76,530
Other liabilities/Intercompany loan 476,630 8,304 -- (449,774) 35,160
Deferred taxes - less current portion 39,626 -- 3,479 (70) 43,035
--------- --------- --------- --------- ---------
Total non-current liabilities 573,000 32,361 374,850 (449,844) 530,367
--------- --------- --------- --------- ---------
Shareholders' Equity:
Convertible preferred stock -- -- 25,000 -- 25,000
Common stock 59 -- 211 (59) 211
Additional paid-in capital 236,906 133,175 172,405 (370,081) 172,405
Accumulated other comprehensive income (loss) (7,405) -- (7,405) 7,405 (7,405)
Retained earnings (deficit) (46,683) (49,871) 825 96,554 825
--------- --------- --------- --------- ---------
Total shareholders' equity 182,877 83,304 191,036 (266,181) 191,036
--------- --------- --------- --------- ---------
Total liabilities and
equity $ 828,125 $ 150,078 $ 707,737 $(850,206) $ 835,734
========= ========= ========= ========= =========
21
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ ------- ---------------- ------------
Assets:
Cash and cash equivalents $ 745 $ -- $ 44,347 $ -- $ 45,092
Accounts receivables, net 45,936 304 -- -- 46,240
Due from affiliates 87,071 10,102 353,292 (427,733) 22,732
Inventories 55,877 21,258 -- -- 77,135
Prepaid and other current assets 2,887 178 4,434 (2,722) 4,777
--------- --------- --------- --------- ---------
Total current assets 192,516 31,842 402,073 (430,455) 195,976
Investment in subsidiaries 74,663 -- 184,234 (258,897) --
Property, plant and equipment - net 416,590 780 251 -- 417,621
Intangible asset - net -- 119,744 -- -- 119,744
Due from affiliates - less current portion 974 -- -- -- 974
Other Assets 13,041 -- 17,811 -- 30,852
--------- --------- --------- --------- ---------
Total assets $ 697,784 $ 152,366 $ 604,369 $(689,352) $ 765,167
========= ========= ========= ========= =========
Liabilities and shareholders' equity:
Accounts payable, trade $ 14,588 $ 23,169 $ -- $ -- $ 37,757
Due to affiliates 32,711 -- 64,243 (81,143) 15,811
Industrial revenue bonds -- 7,815 -- -- 7,815
Accrued and other current liabilities 6,257 5,055 12,802 -- 24,114
Accrued employee benefits costs - current portion 8,966 559 1,365 -- 10,890
Deferred Taxes - current portion 7,763 -- -- (2,792) 4,971
--------- --------- --------- --------- ---------
Total current liabilities 70,285 36,598 78,410 (83,935) 101,358
--------- --------- --------- --------- ---------
Long term debt - net -- -- 321,852 -- 321,852
Accrued Pension benefits Costs - less current portion 3,771 -- 6,980 -- 10,751
Accrued Postretirement Benefits Costs -
less current portion 48,335 21,840 481 -- 70,656
Other liabilities/Intercompany Loan 354,297 599 -- (346,520) 8,376
Deferred taxes - less current portion 36,862 -- 4,514 -- 41,376
--------- --------- --------- --------- ---------
Total non-current liabilities 443,265 22,439 333,827 (346,520) 453,011
--------- --------- --------- --------- ---------
Minority interest -- -- -- 18,666 18,666
Shareholders' Equity:
Convertible preferred stock -- -- 25,000 -- 25,000
Common stock 59 -- 211 (59) 211
Additional paid-in capital 226,998 139,281 172,133 (366,279) 172,133
Accumulated other comprehensive income 1,173 -- 1,173 (1,173) 1,173
Retained earnings (deficit) (43,996) (45,952) (6,385) 89,948 (6,385)
--------- --------- --------- --------- ---------
Total shareholders' equity 184,234 93,329 192,132 (277,563) 192,132
--------- --------- --------- --------- ---------
Total liabilities and
equity $ 697,784 $ 152,366 $ 604,369 $(689,352) $ 765,167
========= ========= ========= ========= =========
22
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------- ------------ ------------
Net sales:
Third-party customers $ 170,086 $ -- $ -- $ -- $ 170,086
Related parties 31,402 -- -- -- 31,402
--------- --------- --------- --------- ---------
201,488 -- -- -- 201,488
Cost of goods sold
186,891 83,524 -- (78,967) 191,448
Reimbursement from owner -- (78,996) -- 78,996 --
--------- --------- --------- --------- ---------
Gross profit (loss) 14,597 (4,528) -- (29) 10,040
Selling, general and administrative expenses 3,929 -- -- -- 3,929
--------- --------- --------- --------- ---------
Operating income (loss) 10,668 (4,528) -- (29) 6,111
Interest expense - Third Party (10,334) (30) -- 23 (10,341)
Interest expense - Affiliates (1,000) -- -- -- (1,000)
Interest income 83 -- -- -- 83
Net Gain on Forward Contracts (3,481) -- -- -- (3,481)
Other income (expense), net 10 (26) -- 6 (10)
--------- --------- --------- --------- ---------
Loss before taxes (4,054) (4,584) -- -- (8,638)
Income tax benefit 1,529 -- -- 1,742 3,271
--------- --------- --------- --------- ---------
Net Income (Loss) before equity earnings
(loss) of subsidiaries (2,525) (4,584) -- 1,742 (5,367)
Equity earnings (loss) of subsidiaries (2,842) -- (5,367) 8,209 --
--------- --------- --------- --------- ---------
Net Income (Loss) $ (5,367) $ (4,584) $ (5,367) $ 9,951 $ (5,367)
========= ========= ========= ========= =========
23
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------ ------- ------------ ------------
Net sales:
Third-party customers $ 149,412 $ -- $ -- $ -- $ 149,412
Related parties 27,580 -- -- -- 27,580
--------- --------- --------- --------- ---------
176,992 -- -- -- 176,992
Cost of goods sold 170,180 64,391 -- (57,826) 176,745
Reimbursement from owners -- (57,870) -- 57,870 --
--------- --------- --------- --------- ---------
Gross profit (loss) 6,812 (6,521) -- (44) 247
Selling, general and administrative expenses 4,282 -- -- -- 4,282
--------- --------- --------- --------- ---------
Operating income (loss) 2,530 (6,521) -- (44) (4,035)
Interest expense (10,360) (33) -- 33 (10,360)
Interest income 111 -- -- -- 111
Other income (expense), net (1,872) (11) -- 11 (1,872)
--------- --------- --------- --------- ---------
Income (loss) before taxes and minority
interest (9,591) (6,565) -- -- (16,156)
Income tax benefit 5,083 -- -- 1,996 7,079
--------- --------- --------- --------- ---------
Net Income (Loss) before minority interest (4,508) (6,565) -- 1,996 (9,077)
Minority interest -- -- -- 1,313 1,313
Equity earnings (loss) of subsidiaries (3,256) -- (7,764) 11,020 --
--------- --------- --------- --------- ---------
Net Income (Loss) $ (7,764) $ (6,565) $ (7,764) $ 14,329 $ (7,764)
========= ========= ========= ========= =========
24
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ------- ----------------- ------------
Net sales:
Third-party customers ...... $ 487,287 $ -- $ -- $ -- $ 487,287
Related parties ............ 89,377 -- -- -- 89,377
--------- --------- ------ --------- ---------
576,664 -- -- -- 576,664
Cost of goods sold ............. 537,089 250,496 -- (236,443) 551,142
Reimbursement from owners ...... -- (236,533) -- 236,533 --
--------- --------- ------ --------- ---------
Gross profit (loss) ............ 39,575 (13,963) -- (90) 25,522
Selling, general and
administrative expenses ...... 12,150 -- -- -- 12,150
--------- --------- ------ --------- ---------
Operating income (loss) ........ 27,425 (13,963) -- (90) 13,372
Interest expense - Third Party . (30,881) (91) -- 78 (30,894)
Interest expense - Affiliates .. (2,000) -- -- -- (2,000)
Interest income ................ 278 -- -- -- 278
Net Gain on Forward Contracts .. 38,423 -- -- -- 38,423
Other income (expense), net .... (481) (41) -- 12 (510)
--------- --------- ------ --------- ---------
Income (loss) before taxes ..... 32,764 (14,095) -- -- 18,669
Income tax (expense) benefit ... (11,537) -- -- 4,981 (6,556)
--------- --------- ------ --------- ---------
Net Income (Loss) before
minority interest and
cumulative effect of change in
accounting principle ......... 21,227 (14,095) -- 4,981 12,113
Minority interest .............. -- -- -- 986 986
--------- --------- ------ --------- ---------
Net income (loss) before
cumulative effect of change in
accounting principle ........... 21,227 (14,095) -- 5,967 13,099
Cumulative Effect of Change in
Accounting Principle, net of tax
benefit of $3,430 .............. (5,878) -- -- -- (5,878)
Equity earnings (loss) of
subsidiaries ................. (8,128) -- 7,221 907 --
--------- --------- ------ --------- ---------
Net Income (Loss) .............. $ 7,221 $ (14,095) $7,221 $ 6,874 $ 7,221
========= ========= ====== ========= =========
25
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
Net sales:
Third-party customers .... $ 451,989 $ -- $ -- $ -- $ 451,989
Related parties .......... 84,440 -- -- -- 84,440
--------- --------- -------- --------- ---------
536,429 -- -- -- 536,429
Cost of goods sold ........... 504,222 190,432 -- (170,738) 523,916
Reimbursement from owners .... -- (170,876) -- 170,876 --
--------- --------- -------- --------- ---------
Gross profit (loss) .......... 32,207 (19,556) -- (138) 12,513
Selling, general and
administrative expenses .... 12,221 -- -- -- 12,221
--------- --------- -------- --------- ---------
Operating income (loss) ...... 19,986 (19,556) -- (138) 292
Interest expense ............. (30,515) (99) -- 99 (30,515)
Interest income .............. 240 -- -- -- 240
Other income (expense), net .. (1,975) (39) -- 39 (1,975)
--------- --------- -------- --------- ---------
Income (loss) before taxes and
minority interest .......... (12,264) (19,694) -- -- (31,958)
Income tax benefit ........... 6,200 -- -- 5,987 12,187
--------- --------- -------- --------- ---------
Net Income (Loss) before
minority interest .......... (6,064) (19,694) -- 5,987 (19,771)
Minority interest ............ -- -- -- 3,939 3,939
Equity earnings (loss) of
subsidiaries ............... (9,768) -- (15,832) 25,600 --
--------- --------- -------- --------- ---------
Net Income (Loss) ............ $ (15,832) $ (19,694) $(15,832) $ 35,526 $ (15,832)
========= ========= ======== ========= =========
26
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
COMBINED COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARIES COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ----------------- ------------
Net cash provided by operating
activities ........................... $ 75,976 $ 2,066 $ -- $ -- $ 78,042
-------- ------- -------- -------- --------
Investing activities:
Purchase of property, plant and
equipment, net ..................... (11,522) (736) (131) -- (12,389)
Acquisition of minority interest .... -- -- (59,837) (59,837)
-------- ------- -------- -------- --------
Net cash used in investing activities (11,522) (736) (59,968) -- (72,226)
-------- ------- -------- -------- --------
Financing activities:
Financing Fees ...................... -- -- (297) -- (297)
Dividends ........................... -- -- (11) -- (11)
Intercompany transactions ........... (65,013) (1,124) 66,137 -- --
Issuance of common stock ............ -- -- 3 -- 3
-------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities ................. (65,013) (1,124) 65,832 -- (305)
-------- ------- -------- -------- --------
Net increase (decrease) in cash ....... (559) 206 5,864 -- 5,511
Cash, beginning of period ............. 745 -- 44,347 -- 45,092
-------- ------- -------- -------- --------
Cash, end of period ................... $ 186 $ 206 $ 50,211 $ -- $ 50,603
======== ======= ======== ======== ========
27
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
COMBINED COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARIES COMPANY AND ELIMINATIONS CONSOLIDATED
------------ ------------ --------- ----------------- ------------
Net cash provided by operating
activities ........................... $ 53,476 $ 360 $ -- $ -- $ 53,836
-------- ------- -------- ----- --------
Investing activities:
Purchase of property, plant and
equipment, net ..................... (9,788) (2,782) -- -- (12,570)
-------- ------- -------- ----- --------
Net cash used in investing activities (9,788) (2,782) -- -- (12,570)
-------- ------- -------- ----- --------
Financing activities:
Dividends ........................... -- -- (4,591) -- (4,591)
Intercompany transactions ........... (44,088) 2,422 41,666 -- --
Issuance of common or preferred stock -- -- 5 -- 5
-------- ------- -------- ----- --------
Net cash provided by (used in)
financing activities ................. (44,088) (2,422) 37,080 -- (4,586)
-------- ------- -------- ----- --------
Net increase (decrease) in cash ....... (400) -- 37,080 -- 36,680
Cash, beginning of period ............. 1,020 -- 12,368 -- 13,388
-------- ------- -------- ----- --------
Cash, end of period ................... $ 620 $ -- $ 49,448 $ -- $ 50,068
======== ======= ======== ===== ========
28
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER THE PRIVATE
SECURITIES REFORM ACT OF 1995.
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "forecasts," "intends," "plans," "believes," "projects," and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements include, but are not
limited to, statements regarding new business and customers, contingencies,
environmental matters and liquidity under "Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk."
These statements are not guarantees of future performance and involve risks and
uncertainties and are based on a number of assumptions that could ultimately
prove to be wrong. Actual results and outcomes may vary materially from what is
expressed or forecast in such statements. Among the factors that could cause
actual results to differ materially are general economic and business
conditions, changes in demand for the Company's products and services or the
products of the Company's customers, fixed asset utilization, competition, the
risk of technological changes and the Company's competitors developing more
competitive technologies, the Company's dependence on certain important
customers, the availability and terms of needed capital, risks of loss from
environmental liabilities, and other risks detailed in this report. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. The
following information should be read in conjunction with the Company's 2002 Form
10-K along with the consolidated financial statements and related footnotes
included within the Form 10-K.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion reflects Century's historical results of
operations.
Century's financial highlights include:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2003 2002 2003 2002
---------- ---------- --------- ----------
(dollars in thousands, except per share amounts)
Net sales
Third-party customers ....................... $ 170,086 $ 149,412 $487,287 $ 451,989
Related party customers ..................... 31,402 27,580 89,377 84,440
--------- --------- -------- ---------
Total .......................................... $ 201,488 $ 176,992 $576,664 $ 536,429
========= ========= ======== =========
Net Income (Loss) .............................. $ (5,367) $ (7,764) $ 7,221 $ (15,832)
Net Income (Loss) applicable
to common shareholders ....................... $ (5,867) $ (8,264) $ 5,721 $ (17,332)
Earnings (Loss) per share - basic .............. $ (0.28) $ (0.40) $ 0.27 $ (0.84)
Earnings (Loss) per share - diluted ............ $ (0.28) $ (0.40) $ 0.27 $ (0.84)
Net sales. Net sales for the three months ended September 30, 2003
increased $24.5 million to $201.5 million from $177.0 million for the same
period in 2002, primarily as a result of a 30.3 million pound increase in
shipment volume in the current quarter. The increased shipment volume in the
current quarter was a direct result of the April 1, 2003, acquisition of the 20%
interest in its Hawesville Kentucky primary aluminum reduction facility
(collectively, the "Acquired Assets"). Shipment volume for the three months
ended September 30, 2003 totaled 292.6 million pounds vs. 262.3 million pounds
for the same period in 2002. The increased shipment volume accounted for a $20.5
million increase in net sales and higher realized prices accounted for $4.0
million of additional sales. Price realizations were negatively impacted in the
three month period ended September 30, 2003 as a result of excluding the
beneficial effects of the above market, fixed price, 110.0 million pound annual
metal delivery contract that remains in place for 2003 and 2004 (see the
discussion of the contract termination in Note 7 to the Consolidated Financial
Statements). In compliance with Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
the Company began marking this contract and its replacement contract to market
in the first quarter of 2003, resulting in a before tax gain of $15.6 million in
that quarter. Net Sales for the third quarter 2003 and year to date would have
been increased $1.8 million and $5.3 million respectively had the Company
accounted for the contract on the same basis as last year.
30
Net sales for the nine months ended September 30, 2003 increased $40.2
million. Shipment volume increased 51.8 million pounds to 839.6 million pounds
from 787.8 million pounds from the same period in 2002. The increased shipment
volume, primarily a result of the acquisition of the Acquired Assets on April 1,
2003, accounted for an increase of $35.3 million with the remaining increase due
to higher realized prices in the current nine month period partially offset by
the mark to market impact discussed in the preceding paragraph.
See Note 7 of the Consolidated Financial Statements for a discussion of
the Company's alumina supply agreements with Kaiser and the effect of the Kaiser
Bankruptcy.
Gross profit. Gross profit for the three months ended September 30, 2003
increased $9.8 million from the same period in 2002. The additional $24.5
million in Net sales in the current quarter were offset by cost of goods sold
increases of $14.7 million, primarily a result of higher shipment volumes as
disclosed in the previous paragraph. Net reductions of $1.5 million in
depreciation and power contract amortization costs and higher Lower of Cost or
Market (LCM) credits of $4.6 million partially offset the increase in cost of
goods sold due to the volume increase and $1.6 million of additional alumina
costs associated with an unplanned production curtailment at a supplier
facility. For the nine months ended September 30, 2003, gross profit increased
$13.0 million from the same period in 2002. The increase is primarily due to
additional shipment volume in the period.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three month period ended September 30, 2003
decreased $0.4 million from the same period in 2002. Expenses for the nine month
period ended September 30, 2003 were unchanged from the same period in 2002.
Selling, general and administrative expenses as a percentage of revenue
decreased to 2.1% for the nine months ended September 30, 2003 compared to 2.3%
for the nine months ended September 30, 2002.
Operating income. Operating income for the three month and nine month
periods ended September 30, 2003 improved $10.1 million and $13.1 million,
respectively, from the same periods in 2002 for the reasons discussed above.
Interest Expense - third party. Third party interest expense for the three
month period ended September 30, 2003 remained constant from the same period in
2002. Third party interest expense for the nine month period ended September 30,
2003 increased $0.4 million from the same period in 2002.
Interest Expense - related party. Related party interest expense during
the three month and nine month periods ended September 30, 2003 was $1.0 million
and $2.0 million, respectively, as a result of interest charges on the Glencore
Note associated with the acquisition of the Acquired Assets on April 1, 2003
(see the discussion of the Glencore Note in Note 5 to the Consolidated Financial
Statements).
Net Gain (Loss) on Forward Contracts. Net Gain (Loss) on Forward Contracts
for the three and nine month periods ended September 30, 2003 were $(3.5)
million and $38.4 million, respectively, with no gain or loss reported for the
same periods in 2002. On April 1, 2000, the Company entered into an agreement,
expiring December 31, 2009, with Glencore to sell and deliver monthly, primary
aluminum totaling approximately 110.0 million pounds per year at a fixed price
for the years 2002 through 2009 (the "Original Sales Contract"). In January
2003, Century and Glencore agreed to terminate and settle the Original Sales
Contract for the years 2005 through 2009 (see the discussion of the contract
termination in Note 7 to the
31
Consolidated Financial Statements). Because the Company and Glencore intended to
net settle a significant portion of the Original Sales Contract, it no longer
qualified for the "normal" exception of SFAS No. 133, requiring the Company to
mark it and its replacement contract to current fair value in its entirety.
Accordingly, in the first quarter of 2003 the Company recorded a derivative
liability of $9.4 million and a pre-tax gain of $41.7 million. No gain or loss
on forward contracts was recognized in the three or nine month periods ended
September 30, 2002 because delivery on the contract under its original fixed
price terms was considered probable and the contract qualified as a normal sales
contract under SFAS 133, as amended.
Other Expense. Other Expense for the three months ended September 30, 2003
decreased $1.9 million from the same period in 2002. The decrease is primarily
due to the third quarter 2002 write-off of direct costs associated with a
prospective acquisition. For the nine months ended September 30, 2003, Other
Expense decreased $1.5 million from the same period in 2002 for the reasons
discussed above, offset by a loss on disposal of assets in the second quarter of
2003.
Tax Provision/Benefit. Income tax benefit for the three months ended
September 30, 2003 decreased $3.8 million from the same period in 2002. For the
nine months ended September 30, 2003 income tax expense increased $18.7 million
from the same period in 2002. The change in income taxes was due to the $7.5
million and $50.6 million increases in Income (Loss) Before Income Taxes in the
three and nine month periods ended September 30, 2003 compared to the same
periods in 2002. The increase in Income (Loss) Before Income Taxes was primarily
the result of improved shipments in the third quarter 2003 and the Net Gain on
Forward Contracts for the nine month period ended September 30, 2003 as
discussed above.
Minority Interest. Prior to the acquisition of the Acquired Assets,
Minority Interest reflected Glencore's interest in the net operating results of
Century Aluminum of Kentucky LLC, ("LLC") which included Glencore's 20% share of
the power contract amortization expense. Subsequent to the acquisition of the
Acquired Assets, the Company no longer has a minority interest.
Cumulative Effect of Change in Accounting Principle. The Company adopted
SFAS No. 143, "Accounting for Asset Retirement Obligations" during the three
months ended March 31, 2003. The cumulative effect of adopting this standard was
a one-time, non-cash charge of $5.9 million, net of tax of $3.4 million.
Net Income or (Loss). Net loss for the three months ended September 30,
2003 improved $2.4 million from the same period in 2002. Net Income for the nine
months ended September 30, 2003 increased $23.1 million from the same period in
2002. The reasons for the change in profitability are discussed above.
32
LIQUIDITY AND CAPITAL RESOURCES
Revolving Credit Facility
On January 14, 2003, Moody's Investor Service ("Moody's") issued an
announcement revising its long-term debt ratings for the Company. Moody's
lowered the rating on the Company's senior secured revolving credit facility
from Ba2 to Ba3.
The availability of funds under the revolving credit facility is subject
to a $30.0 million reserve and limited by a specified borrowing base consisting
of certain eligible accounts receivable and inventory. The Company expects that
the borrowing base, less the reserve, will permit the Company to borrow
approximately $50.0 to $60.0 million under the revolving credit facility.
Working Capital
Working capital was $90.0 million at September 30, 2003. The Company
believes that its working capital will be consistent with past experience and
that cash flow from operations and borrowing availability under the revolving
credit facility should be sufficient to meet working capital needs.
Historical
The Company's statements of cash flows for the nine months ended September
30, 2003 and 2002 are summarized below:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
-------- --------
(dollars in thousands)
Net cash provided by operating activities $ 78,042 $ 53,836
Net cash used in investing activities ... (72,226) (12,570)
Net cash used in financing activities ... (305) (4,586)
-------- --------
Increase in cash ........................ $ 5,511 $ 36,680
======== ========
Net cash from operating activities in the first nine months of 2003 was
$24.2 million higher than the same period in 2002. Cash flows from operating
activities increased primarily due to the $35.5 million settlement received
during the second quarter 2003 for the termination of the Original Sales
Contract and issuance of the New Sales Contract with Glencore for the years 2005
through 2009.
The Company's net cash used in investing activities during the nine month
periods ended September 30, 2003 increased $59.7 million from the same period in
2002 with $59.8 million of the increase being a direct result of the acquisition
of the Acquired Assets on April 1, 2003.
33
Net cash used in financing activities during the nine month period ended
September 30, 2003 decreased $4.3 million due to the suspension of common and
preferred stock dividend payments. Century suspended its common and preferred
stock dividends in the fourth quarter of 2002 because the Company was near the
limits on allowable dividend payments under the covenants in its bond indenture.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
The Company has incurred and in the future will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. The aggregate environmental
related accrued liabilities were $1.8 million and $1.4 million at September 30,
2003 and December 31, 2002, respectively. The Company believes that compliance
with current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity; however, environmental laws and regulations may change, and the
Company may become subject to more stringent environmental laws and regulations
in the future. There can be no assurance that compliance with more stringent
environmental laws and regulations that may be enacted in the future, or future
remediation costs, would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity. See Note 6 to the
Consolidated Financial Statements contained herein for a discussion of the
Company's environmental contingencies.
The Company is a defendant in several actions relating to various aspects
of its business. While it is impossible to predict the ultimate disposition of
any litigation, the Company does not believe that any of these lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 6 to
the Consolidated Financial Statements contained herein for a discussion of the
Company's legal contingencies.
The Company may be required to make post-closing payments to Southwire up
to an aggregate maximum of $7.0 million if the price of primary aluminum on the
LME exceeds specified levels during the seven years following closing of the
Hawesville acquisition in 2001. Prior to April 1, 2003, Glencore was responsible
for its pro rata portion of any post-closing payments made to Southwire. After
April 1, 2003, with the completion of the acquisition of the 20% interest in the
Hawesville facility owned by Glencore, the Company assumed Glencore's
obligations for any future post-closing payments to Southwire that may be
required.
See Note 6 to the Consolidated Financial Statements contained herein for a
discussion of other contingencies.
NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The implementation of SFAS No. 149 had no impact on the Company's
Consolidated Financial Statements. The Company will apply the provisions of the
Statement prospectively for any applicable contracts.
34
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and is otherwise
effective for the Company beginning July 1, 2003. The Company has reviewed its
current financial instruments and does not believe that any are within the scope
of this Statement. The Company will apply the provisions of the Statement
prospectively for any future financial instruments that are within the scope of
this Statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICES
The Company manages its exposure to fluctuations in the price of primary
aluminum by selling aluminum at fixed prices for future delivery and through
financial instruments as well as by purchasing alumina under supply contracts
with prices tied to the same indices as the Company's aluminum sales contracts.
The Company's risk management activities do not include trading or speculative
transactions. Although the Company has not materially participated in the
purchase of call or put options, in cases where Century sells forward primary
aluminum, it may purchase call options to benefit from price increases which are
significantly above forward sales prices. In addition, it may purchase put
options to protect itself from price decreases.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase
Agreement (the "Pechiney Metal Agreement") with Pechiney that expires December
31, 2005. This contract will be automatically extended through December 31, 2007
provided the Company's power contract is extended through that date. Pursuant to
the Pechiney Metal Agreement, Pechiney purchases, on a monthly basis, at least
23.0 million pounds and no more than 27.0 million pounds of molten aluminum
produced at the Ravenswood Facility at a variable price determined by reference
to the U.S. Midwest market price. Pechiney has the right, upon 12 months notice,
to reduce its purchase obligations under the contract by 50%.
On April 1, 2000, the Company entered into an agreement, expiring December
31, 2009, with Glencore to sell and deliver monthly, primary aluminum totaling
approximately 110.0 million pounds per year at a fixed price for the years 2002
through 2009. In January 2003, Century and Glencore agreed to terminate and
settle the Original Sales Contract for the years 2005 through 2009. At that
time, the parties entered into a new contract (the "New Sales Contract") that
requires Century to deliver the same quantity of primary aluminum as did the
Original Sales Contract for these years. However, the New Sales Contract
provides for variable pricing for the years 2005 through 2009, equal to the
quarterly average price of aluminum as quoted by the LME for the quarter
preceding delivery of the primary aluminum.
35
For deliveries in the years 2003 and 2004, the sale price of primary aluminum
delivered will remain at fixed prices.
Prior to the January 2003 agreement to terminate and settle the years 2005
though 2009 of the Original Sales Contract, the Company had been classifying and
accounting for it as a Normal Sales contract under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." A contract that is so designated
and that meets other conditions established by SFAS No. 133 is exempt from the
requirements of SFAS No. 133, although by its term the contract would otherwise
be accounted for as a derivative instrument. Accordingly, prior to January, the
Original Sales Contract was recorded on an accrual basis of accounting and
changes in the fair value of the Original Sales Contract were not recognized.
According to SFAS No. 133, it must be probable that at inception and
throughout its term, a contract classified as "normal" will not result in a net
settlement and result in physical delivery. Because in January 2003 the Company
and Glencore intended to net settle a significant portion of the Original Sales
Contract, it no longer qualified for the "normal" exception of SFAS No. 133,
requiring the Company to mark it to current fair value in its entirety.
Accordingly, in the first quarter of 2003 the Company recorded a derivative
asset and a pre-tax gain of $41.7 million. Of the total recorded gain, $26.1
million relates to the favorable terms of the Original Sales Contract for the
years 2005 through 2009, and $15.6 million relates to the favorable terms of the
Original Sales Contract for 2003 through 2004.
In connection with the Hawesville acquisition, the Company entered into
the Southwire Metal Agreement with Southwire to supply 240.0 million pounds of
high-purity molten aluminum per year to Southwire's wire and cable manufacturing
facility located adjacent to the Hawesville facility at a price determined by
reference to the U.S. Midwest Market Price. Under this contract, Southwire will
also purchase 60.0 million pounds of standard-grade molten aluminum each year
for the first five years of the contract, with an option to purchase an equal
amount in each of the remaining five years. The Company and Glencore are each
responsible for providing a pro rata portion of the aluminum supplied to
Southwire under the Southwire Metal Agreement. In connection with the
acquisition of the 20% interest in the Hawesville facility owned by Glencore on
April 1, 2003, the Company assumed Glencore's delivery obligations under the
Southwire Metal agreement.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement,
Original Sales Contract, New Sales Contract and Southwire Metal Agreement the
Company had forward delivery contracts to sell 223.5 and 329.0 million pounds of
primary aluminum at September 30, 2003 and December 31, 2002, respectively. Of
these forward delivery contracts, the Company had fixed price commitments to
sell 39.8 million pounds and 42.9 million pounds of primary aluminum at
September 30, 2003 and December 31, 2002, respectively. Forward delivery
contracts of 11.3 million pounds and 0.3 million pounds at September 30, 2003
and December 31, 2002, respectively, were with the Glencore Group.
The Company is party to long-term supply agreements to purchase alumina
with Glencore that extend through 2006. These agreements provide for a fixed
quantity of alumina at prices determined by a market-based formula (as such term
is described below). In addition, as part
36
of its acquisition of an additional 23% interest in the Mt. Holly Facility, the
Company assumed a supply agreement with Glencore for the alumina raw material
requirements relative to the additional interest. The unit cost is also
determined by a market-based formula. This alumina supply agreement terminates
in 2008. As part of its Hawesville acquisition, the Company assumed an alumina
supply agreement with Kaiser. That agreement will terminate in 2005 and is a
variable priced market based contract. On May 30, 2003, the Company announced
that it had entered into a new alumina supply contract with Kaiser. The new
contract will cover all of the alumina requirements for the Hawesville facility
operations for the period January 1, 2006 through December 31, 2008. The price
of alumina purchased under the foregoing market-based formula contracts will be
indexed to the price of primary aluminum on the LME. See the discussion of the
Kaiser Bankruptcy information at Note 7 to the Consolidated Financial
Statements.
During the three and nine month periods ended September 30, 2003, the
Company incurred additional charges of $1,555 for the added cost of alumina
purchased on the open market due to an unplanned production curtailment at a
supplier facility.
At September 30, 2003 and December 31, 2002, the Company had entered into
125.0 million pounds and 181.0 million pounds, respectively, of fixed priced
forward primary aluminum financial sales contracts primarily with the Glencore
Group to mitigate the risk of commodity price fluctuations inherent in its
business. Certain of these financial sales contracts are accounted for as cash
flow hedges depending on the Company's designation of each contract at its
inception. At September 30, 2003 and December 31, 2002, 80.9 million pounds and
181.0 million pounds, respectively, were designated cash flows hedges. These
contracts will be settled in cash at various dates in 2003 and 2004.
Additionally, in order to mitigate the volatility of the natural gas markets,
the Company enters into fixed price forward financial purchase contracts, which
settle in cash in the period corresponding to the intended usage of natural gas.
At September 30, 2003 and December 31, 2002, the Company had financial
instruments for 2.7 million and 1.5 million DTH of natural gas, respectively
(one decatherm, or DTH, is equivalent to one million British Thermal Units).
These financial instruments are accounted for as cash flow hedges and are
scheduled for settlement at various dates in 2003 through 2005.
On a hypothetical basis, a $0.01 per pound increase or decrease in the
market price of primary aluminum is estimated to have an unfavorable or
favorable impact of $0.5 million after tax on accumulated other comprehensive
income and $0.3 million on Net Income for the nine month period ended September
30, 2003 as a result of the forward primary aluminum financial sale contracts
entered into by the Company at September 30, 2003.
On a hypothetical basis, a $0.50 per DTH decrease or increase in the
market price of natural gas is estimated to have an unfavorable or favorable
impact of $0.9 million after tax on accumulated other comprehensive income for
the nine month period ended September 30, 2003 as a result of the forward
natural gas financial purchase contracts entered into by the Company at
September 30, 2003.
37
The Company's metals and natural gas risk management activities are
subject to the management, control and direction of senior management. The
metals related activities are regularly reported to the Board of Directors of
Century.
This quantification of the Company's exposure to the commodity price of
aluminum is necessarily limited, as it does not take into consideration the
Company's inventory or forward delivery contracts, or the offsetting impact upon
the sales price of primary aluminum products. Because all of the Company's
alumina contracts are indexed to the LME price for aluminum, beginning in 2002,
they act as a natural hedge for approximately 25% of the Company's production.
INTEREST RATES
The Company's primary debt obligations are the outstanding Notes, the
Glencore Note, borrowings under its revolving credit facility and the industrial
revenue bonds the Company assumed in connection with the Hawesville acquisition.
Because the Notes and the Glencore Note bear a fixed rate of interest, changes
in interest rates do not subject the Company to changes in future interest
expense with respect to the outstanding notes. Borrowings under the Company's
revolving credit facility, if any, are at variable rates at a margin over LIBOR
or the Fleet National Bank base rate, as defined in the revolving credit
facility. The industrial revenue bonds bear interest at variable rates
determined by reference to the interest rate of similar instruments in the
industrial revenue bond market. At September 30, 2003 and December 31, 2002, the
Company had $7.8 million of variable rate borrowings. A hypothetical 1% increase
in the interest rate would increase the Company's annual interest expense by
$0.1 million, assuming no debt reduction.
The Company's primary financial instruments are cash and short-term
investments, including cash in bank accounts and other highly rated liquid money
market investments and government securities.
38
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures
As of September 30, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Company's Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective.
b. Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2003, there has not been any change in
the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
39
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Material Defaults of indebtedness - None
(b) Dividend Arrearages - As of September 30, 2003, the Company had total
preferred dividend arrearages on its 8.0% cumulative convertible preferred stock
of $2.0 million or $4.00 per share of preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No items during this quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
31.1 Certification of Disclosure in Century Aluminum Company's
Quarterly Report by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes Oxley Act of 2002 (13 U.S.C.
1350).
31.2 Certification of Disclosure in Century Aluminum Company's
Quarterly Report by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes Oxley Act of 2002 (13 U.S.C.
1350).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes Oxley Act of
2002 (13 U.S.C. 1350).
(b) Reports on Form 8-K - During the quarter ended September 30, 2003, the
Company filed the following three reports on Form 8-K with the Securities and
Exchange Commission:
1. Form 8-K dated July 31, 2003, attaching the Company's earnings
report for the quarter ended June 30, 2003.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Aluminum Company
Date: November 13, 2003 By: /s/ Craig A. Davis
----------------- ----------------------------------------------
Craig A. Davis
Chairman and Chief Executive Officer
Date: November 13, 2003 By: /s/ David W. Beckley
----------------- ----------------------------------------------
David W. Beckley
Executive Vice-President/Chief Financial Officer
41
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
31.1 Certification of Disclosure in Century Aluminum Company's
Quarterly Report by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes Oxley Act of 2002 (13 U.S.C.
1350).
31.2 Certification of Disclosure in Century Aluminum Company's
Quarterly Report by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes Oxley Act of 2002 (13 U.S.C.
1350).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes Oxley Act of
2002 (13 U.S.C. 1350).