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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 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, 2004
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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NEW CF&I, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-20781 93-1086900
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1000 S.W. BROADWAY, SUITE 2200, PORTLAND, OREGON 97205
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(Address of principal executive offices) (Zip Code)
(503) 223-9228
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
CF&I STEEL, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 02-20779 93-1103440
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1000 S.W. BROADWAY, SUITE 2200, PORTLAND, OREGON 97205
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(Address of principal executive offices) (Zip Code)
(503)223-9228
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 (1) is an accelerated
filer (as defined in Rule 12b-2 of the Act)
Yes No X
---- ----
NEW CF&I, INC.
CF&I STEEL, L.P.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION................................................2
Item 1. Financial Statements - New CF&I, Inc...........................2
Notes to Consolidated Financial Statements.....................5
Item 1. Financial Statements - CF&I Steel, L.P........................11
Notes to Financial Statements.................................14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk...........................................24
Item 4. Controls and Procedures.......................................24
PART II. OTHER INFORMATION...................................................25
Item 1. Legal Proceedings.............................................25
Item 6. Exhibits......................................................25
SIGNATURES ..............................................................26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - NEW CF&I, INC.
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 5
Trade accounts receivable, net of allowance
for doubtful accounts of $1,385 and $361 52,023 39,097
Inventories 44,367 35,028
Deferred income taxes 26,411 3,396
Other 1,300 1,754
--------- ---------
Total current assets 124,103 79,280
--------- ---------
Property, plant and equipment:
Land and improvements 3,225 3,225
Buildings 19,904 19,852
Machinery and equipment 275,287 270,772
Construction in progress 6,493 6,030
--------- ---------
304,909 299,879
Accumulated depreciation (150,152) (137,622)
--------- ---------
Net property, plant and equipment 154,757 162,257
--------- ---------
Intangibles, net 33,654 11,803
Non-current deferred income taxes 30,366 37,766
Minority interest 7,515 6,969
--------- ---------
TOTAL ASSETS $ 350,395 $ 298,075
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 28,884 $ 21,988
Accrued expenses 29,602 21,363
--------- ---------
Total current liabilities 58,486 43,351
Long-term debt - Oregon Steel Mills, Inc. 284,869 276,359
Environmental liability 25,416 24,885
Deferred employee benefits 48,739 27,659
Other liabilities 196 --
--------- ---------
Total liabilities 417,706 372,254
--------- ---------
Redeemable common stock, 26 shares 21,840 21,840
--------- ---------
Contingencies (Note 4)
STOCKHOLDERS' DEFICIT
Common stock, par value $1 per share, 1,000 shares
authorized; 200 issued and outstanding 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (101,555) (108,423)
Accumulated other comprehensive loss:
Minimum pension liability (4,200) (4,200)
--------- ---------
Total stockholders' deficit (89,151) (96,019)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 350,395 $ 298,075
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
SALES:
Product sales $ 135,661 $ 82,927 $ 359,532 $ 253,270
Freight 4,216 3,907 12,451 11,518
--------- --------- --------- ---------
139,877 86,834 371,983 264,788
COSTS AND EXPENSES:
Cost of sales 101,636 82,326 296,384 249,048
Labor dispute settlement adjustment (Note 4) 4,532 -- 43,400 --
Fixed and other asset impairment charges (Note 7) -- -- -- 9,157
Loss (gain) on disposal of assets 1,016 (641) 733 (1,032)
Selling, general and administrative expenses 8,248 4,039 20,019 13,171
Incentive compensation 2,391 -- 3,480 --
--------- --------- --------- ---------
117,823 85,724 364,016 270,344
--------- --------- --------- ---------
Operating income (loss) 22,054 1,110 7,967 (5,556)
OTHER INCOME (EXPENSE):
Interest expense (5,516) (6,024) (17,504) (17,929)
Minority interests (663) 293 546 1,240
Other income, net 63 56 189 178
--------- --------- --------- ---------
Income (loss) before income taxes 15,938 (4,565) (8,802) (22,067)
Income tax benefit (expense) 6,076 (5,536) 15,670 (2,741)
--------- --------- --------- ---------
Net income (loss) $ 22,014 $ (10,101) $ 6,868 $ (24,808)
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
-3-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2004 2003
---------- ---------
Cash flows from operating activities:
Net income (loss) $ 6,868 $ (24,808)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Fixed and other asset impairment charges (Note 7) -- 9,157
Depreciation and amortization 13,849 13,944
Deferred income taxes, net (15,615) 2,726
Long-term environmental liability 531 (4,150)
Loss (gain) on disposal of assets 733 (1,032)
Minority interests (546) (1,240)
Other, net (1,049) --
Changes in current assets and liabilities:
Trade accounts receivable (12,926) 6,076
Inventories (9,339) 5,561
Accounts payable 6,896 2,061
Accrued expenses 8,239 (613)
Other, net 454 1,354
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,905) 9,036
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (7,023) (9,882)
Proceeds from disposal of property and equipment 415 1,396
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (6,608) (8,486)
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 207,965 104,604
Payments to Oregon Steel Mills, Inc. (199,455) (105,208)
Payment of long-term debt -- (68)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 8,510 (672)
--------- ---------
Net decrease in cash and cash equivalents (3) (122)
Cash and cash equivalents at the beginning of period 5 289
--------- ---------
Cash and cash equivalents at the end of period $ 2 $ 167
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
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Interest $ 18,197 $ 18,294
The accompanying notes are an integral part of the consolidated financial statements.
-4-
NEW CF&I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of New CF&I,
Inc. and its subsidiaries ("New CF&I"). New CF&I owns a 95.2 percent interest in
CF&I Steel, L.P. ("CF&I"), which is one of New CF&I's principal subsidiaries.
Oregon Steel Mills, Inc. ("Oregon Steel") holds an 87 percent ownership interest
in New CF&I. Oregon Steel also owns directly an additional 4.3 percent interest
in CF&I. In January 1998, CF&I assumed the trade name Rocky Mountain Steel
Mills. New CF&I also owns a 100 percent interest in the Colorado and Wyoming
Railway Company, which is a short-line railroad servicing CF&I. All significant
intercompany balances and transactions have been eliminated.
The unaudited financial statements include estimates and other adjustments,
consisting of normal recurring accruals and other charges, as described in Note
4, "CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING"
and in Note 7, "ASSET IMPAIRMENTS," which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an interim
period are not necessarily indicative of results for a full year. Reference
should be made to New CF&I's 2003 Annual Report on Form 10-K for additional
disclosures including a summary of significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132 (revised),
"EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS." SFAS
No. 132 (revised) prescribes employers' disclosures about pension plans and
other postretirement benefit plans; it does not change the measurement or
recognition of those plans. SFAS No. 132 (revised) retains and revises the
disclosure requirement contained in the original SFAS No. 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. SFAS No. 132 (revised) generally is effective for fiscal years
ending after December 15, 2003. New CF&I discloses the requirements of SFAS No.
132 (revised) in Note 6, "EMPLOYEE BENEFIT PLANS."
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods to conform to the
current year presentation. Such reclassifications do not affect results of
operations as previously reported.
2. INVENTORIES
-----------
Inventories are stated at the lower of manufacturing cost or market value
with manufacturing cost determined under the average cost method. The components
of inventories are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
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(IN THOUSANDS)
Raw materials $20,376 $ 5,183
Semi-finished product 2,809 5,683
Finished product 10,073 12,916
Stores and operating supplies 11,109 11,246
------- -------
Total inventory $44,367 $35,028
======= =======
3. LONG-TERM DEBT
--------------
Borrowing requirements for capital expenditures and working capital have
been provided through three revolving loans from Oregon Steel to CF&I. The loans
include interest on the daily amount outstanding, paid monthly, at the rate of
10.65% per annum. The principal is due on demand or on December 31, 2006 if no
demand is made.
-5-
At September 30, 2004 principal payments on long-term debt were due as
follows (in thousands):
2006 $284,869
Oregon Steel is not required to provide financing to CF&I and, although the
demand for repayment of the obligation in full is not expected during 2004 or
2005, Oregon Steel may demand repayment of the loans at any time. If Oregon
Steel were to demand repayment of the loans, it is not likely that CF&I would be
able to obtain the external financing necessary to repay the loans or to fund
its capital expenditures and other cash needs and, if available, that such
financing would be on terms satisfactory to CF&I.
4. CONTINGENCIES
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ENVIRONMENTAL MATTERS
All material environmental remediation liabilities for non-capital
expenditures, which are probable and estimable, are recorded in the financial
statements based on current technologies and current environmental standards at
the time of evaluation. Adjustments are made when additional information is
available that suggests different remediation methods or periods may be required
and affect the total cost. The best estimate of the probable cost within a range
is recorded; however, if there is no best estimate, the low end of the range is
recorded and the range is disclosed.
In connection with Oregon Steel's acquisition of the steelmaking and
finishing facilities located at Pueblo, Colorado ("Pueblo mill"), CF&I accrued a
liability of $36.7 million for environmental remediation related to the prior
owner's operations. CF&I believed this amount was the best estimate of costs
from a range of $23.1 million to $43.6 million. CF&I's estimate of this
liability was based on two initial remediation investigations conducted by
environmental engineering consultants, and included costs for the Resource
Conservation and Recovery Act facility investigation, a corrective measures
study, remedial action, and operation and maintenance associated with the
proposed remedial actions. In October 1995, CF&I and the CDPHE finalized a
postclosure permit for hazardous waste units at the Pueblo mill. As part of the
postclosure permit requirements, CF&I must conduct a corrective action program
for the 82 solid waste management units at the facility and continue to address
projects on a prioritized corrective action schedule which substantially
reflects a straight-line rate of expenditure over 30 years. The State of
Colorado mandated that the schedule for corrective action could be accelerated
if new data indicated a greater threat existed to the environment than was
currently believed to exist. In September 2004, CF&I increased the environmental
reserve by $1.6 million for environmental remediation based upon remediation
investigations conducted by two environmental engineering consultants. At
September 30, 2004, the total accrued liability was $27.1 million, of which
$24.2 million was classified as non-current on New CF&I's consolidated balance
sheet.
The CDPHE inspected the Pueblo mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a judicial enforcement action ("Action") in the second quarter of
2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which
was approved by the court (the "State Consent Decree"). The State Consent Decree
provided for CF&I to pay $300,000 in penalties, fund $1.5 million of community
projects, and to pay approximately $400,000 for consulting services. CF&I is
also required to make certain capital improvements expected to cost
approximately $25.8 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed
below. The State Consent Decree provides that the two existing furnaces will be
permanently shut down approximately 16 months after the issuance of a Prevention
of Significant Deterioration ("PSD") air permit. The PSD permit was issued June
21, 2004.
In May 2000, the EPA issued a final determination that one of the two
electric arc furnaces at the Pueblo mill was subject to federal NSPS AA. This
determination was contrary to an earlier "grandfather" determination first made
in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth
Circuit Court of Appeals. The issue has been resolved by entry of a Consent
Decree on November 26, 2003, and the Tenth Circuit dismissed the appeal on
December 10, 2003. In that Consent Decree and overlapping with the commitments
made to the CDPHE described above, CF&I committed to the conversion to the new
NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit
approval and expected to cost, with all related emission control improvements,
approximately $25.8 million), and to pay approximately $450,000 in penalties and
fund certain supplemental environmental projects valued at approximately $1.1
million, including the installation of certain pollution control equipment at
the Pueblo mill. The above mentioned expenditures for supplemental environmental
projects will be both capital and non-capital expenditures. Under this
settlement and the settlement with the CDPHE, CF&I is subject to certain
stipulated penalties if it fails to comply with the terms of the settlement. In
March 2004, the CDPHE notified CF&I of alleged violations of the State Consent
Decree relating to opacity. In June 2004, the CDPHE assessed stipulated
penalties of $270,000. On July 26, 2004, CF&I sought judicial review of the
determination. At this time, no date for a hearing has been set. In addition to
these penalties, CF&I may in the future incur additional penalties related to
this matter. To date, such penalties have not been material to its results of
operations and cash flows; however, CF&I cannot be assured that future penalties
will not be material.
-6-
In response to the CDPHE settlement and subsequent alleged violations and
the resolution of the EPA action, CF&I expensed $2.8 million in 2001 and
$500,000 and $632,000 for the three and nine months ended September 30, 2004 for
possible fines and non-capital related expenditures. As of September 30, 2004,
the remaining accrued liability was approximately $745,000.
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the CAA requiring that the furnace subject to the EPA
action operate in compliance with NSPS AA standards. The Title V permit has been
modified several times and gives CF&I adequate time (at least 15 1/2 months from
the issuance of the PSD permit, or June 21, 2004) to convert to a single NSPS
AAa compliant furnace. Any decrease in steelmaking production during the furnace
conversion period when both furnaces are expected to be shut down will be offset
by increasing production prior to the conversion period by building up
semi-finished steel inventory and to a much lesser degree, if necessary,
purchasing semi-finished steel ("billets") for conversion into rod products at
spot market prices. Pricing and availability of billets is subject to
significant volatility.
In a related matter, in April 2000, the United Steelworkers of America
("Union") filed suit in the United States District Court in Denver, Colorado,
asserting that New CF&I and CF&I had violated the CAA at the Pueblo mill for a
period extending over five years. The Union sought declaratory judgement
regarding the applicability of certain emission standards, injunctive relief,
civil penalties and attorney's fees. On July 6, 2001, the presiding judge
dismissed the suit. The 10th Circuit Court of Appeals on March 3, 2003 reversed
the District Court's dismissal of the case and remanded the case for further
hearing to the District Court. The parties to the above-referenced litigation
have negotiated a settlement of the labor dispute and all associated litigation,
including this Union suit. As a result, the Union suit was dismissed on August
3, 2004. See "Labor Matters" for a description of the settlement.
LABOR MATTERS
CF&I LABOR DISPUTE SETTLEMENT
On January 15, 2004, CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I ("Settlement") that had been ongoing
since October 1997 and on September 10, 2004, the Settlement was finalized and
became effective. The Settlement resulted in the dismissal of all court actions
between CF&I and the Union relating to the labor dispute and environmental
matters and the NLRB's issuance of an Order Withdrawing Complaints and
Conditionally Approving Withdrawals of Charges related to the labor dispute and
includes the ratification of new five-year collective bargaining agreements. The
Settlement called for the establishment of a trust and on September 10, 2004,
the Rocky Mountain Steel Mills - United Steelworkers of America Back Pay Trust
("Trust") was established. As part of the tentative settlement, Oregon Steel had
originally planned to issue four million shares of Oregon Steel's common stock
to the Trust on behalf of CF&I. On September 10, 2004, the parties agreed
instead that the Trust would receive cash in an amount equal to the gross
proceeds from the sale of four million shares of Oregon Steel's common stock in
an underwritten stock offering.
The Settlement also includes payment by CF&I of: (1) a cash contribution of
$2,500 for each beneficiary, a total of $2.5 million and (2) beginning on the
effective date of the Settlement, a ten year profit participation obligation
consisting of 25% of CF&I's quarterly profit, as defined, for years 2004 and
2007 through 2013, and 30% for years 2005 and 2006, not to exceed $3.0 million
per year for 2004 through 2008 and $4.0 million per year for 2009 through 2013;
these cap amounts are subject to a carryforward/carryback provision described in
the Settlement documents. The beneficiaries are those individuals who (1) as of
October 3, 1997 were employees of CF&I and represented by the Union, (2) as of
December 31, 1997 had not separated, as defined, from CF&I and (3) are entitled
to an allocation as defined in the Trust. The Settlement, certain elements of
which are effected through the new five-year collective bargaining agreements,
also includes: (1) early retirement with immediate enhanced pension benefit
where CF&I will offer bargaining unit employees an early retirement opportunity
based on seniority until a maximum of 200 employees have accepted the offer, the
benefit will include immediate and unreduced pension benefits for all years of
service (including the period of the labor dispute) and for each year of service
prior to March 3, 1993 (including service with predecessor companies) an
additional monthly pension of $10, (2) pension credit for the period of the
labor dispute whereby CF&I employees who went on strike will be given pension
credit for both eligibility and pension benefit determination purposes for the
period beginning October 3, 1997 and ending on the latest of said employees'
actual return to work, termination of employment, retirement or death, (3)
pension credit for service with predecessor companies whereby for retirements
after January 1, 2004, effective January 2, 2006 for each year of service prior
to March 3, 1978 (including service with predecessor companies), CF&I will
provide an additional monthly benefit to employees of $12.50, and for
retirements after January 1, 2006, effective January 2, 2008 for each year of
service between March 3, 1978 and March 3, 1993 (including service with
predecessor companies), CF&I will provide an additional monthly benefit of
$12.50, and (4) individuals who are members of the bargaining units as of
October 3, 1997 will be immediately eligible to apply for and receive qualified
long-term disability ("LTD") benefits on a go forward basis, notwithstanding the
date of the injury or illness, service requirements or any filing deadlines. The
Settlement also includes Oregon Steel's agreement to nominate a director
designated by the Union on Oregon Steel's board of directors, and to a
broad-based neutrality clause for certain of Oregon Steel's facilities in the
future.
-7-
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
CF&I recorded charges of $31.1 million in the fourth quarter of 2003, $7.0
million in the first quarter of 2004, and an additional charge of $31.9 million
in the second quarter of 2004, of which $23.2 million, $7.0 million, and $28.7
million, respectively, related to the agreement to issue four million shares of
Oregon Steel common stock as part of the Settlement. The non-cash portion of the
charges in the first and second quarters of 2004 are a result of adjusting the
previously recorded value at December 31, 2003 of the four million shares of
Oregon Steel common stock ($23.2 million at $5.81 per share) to market at March
31, 2004 and June 30, 2004, respectively. The closing price of Oregon Steel
common stock on the New York Stock Exchange at March 31, 2004 was $7.56 per
share, resulting in an additional labor dispute settlement charge of $7.0
million for the first quarter of 2004, and at June 30, 2004 was $14.74 per
share, resulting in an additional labor dispute settlement charge of $28.7
million for the second quarter of 2004.
In the second quarter of 2004, as part of the Settlement, CF&I agreed,
under certain circumstances, to pay on behalf of the Trust, certain expenses
that would otherwise be incurred by the Trust related to the issuance of four
million shares of Oregon Steel common stock. Accordingly, CF&I recorded a charge
in the second quarter of 2004 of approximately $3.3 million as part of the cost
of the Settlement. Since the second quarter, the Settlement was revised so that
no stock would be issued to the Trust, but rather the Trust would receive the
gross cash proceeds from the sale of four million shares of Oregon Steel common
stock. The circumstances, which would have required CF&I to pay $3.3 million did
not arise, and the charge was reversed in the third quarter of 2004.
On September 29, 2004 the public offering price was established at $16.00
per share. CF&I recorded a charge of $5.1 million in the third quarter of 2004
related to the obligation to pay the gross proceeds from the sale of four
million shares of Oregon Steel common stock to the Trust on behalf of CF&I,
resulting in a total accrual for shares of $64.0 million at September 30, 2004.
During the three and nine months ended September 30, 2004, CF&I recorded $3.6
million and $6.9 million, respectively, for the Settlement profit participation
obligation. The existing accrual for the LTD benefits ($5.3 million at September
30, 2004), which was expensed in the fourth quarter of 2003, may also change, as
better claims information becomes available. During the three months ended
September 30, 2004, the first 79 employees had accepted early retirement
benefits, resulting in a charge of $2.7 million. CF&I expects to record an
additional net charge for early retirement benefits during the fourth quarter of
2004 estimated at approximately $4.5 million. The post-retirement medical
benefit enhancements extended to all participants resulted in unrecognized prior
service costs of $6.4 million in accordance with SFAS No. 106. The pension
benefit enhancements extended to all participants resulted in the recognition of
unrecognized prior service costs of $22.3 million at September 30, 2004. CF&I
recorded an intangible asset and off-setting liability in the third quarter of
$22.3 million in accordance with SFAS No. 87. The unrecognized prior service
costs for both the pension and post-retirement medical benefits will be
amortized prospectively over the future service life of the active participants.
PURCHASE COMMITMENTS
Effective February 2, 1993, CF&I entered into an agreement, which was
subsequently amended on December 15, 1994, to purchase a base amount of oxygen
produced at a facility located at the Pueblo Mill. The agreement specifies that
CF&I will pay a base monthly charge that is adjusted annually based upon a
percentage change in the Producer Price Index. The monthly base charge at
September 30, 2004 was $119,000.
CF&I purchases electricity used at the Pueblo mill from an independent
third party under an agreement that expires in May 2008. This commitment
specifies that CF&I will pay a minimum monthly charge of $33,000 per month.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305.0 million of 10% First Mortgage
Notes due 2009 ("10% Notes") at a discount of 98.772% and an interest rate of
10.0%. Interest is payable on January 15 and July 15 of each year. The 10% Notes
are secured by a lien on substantially all of the property, plant and equipment,
and certain other assets of Oregon Steel, excluding accounts receivable,
inventory, and certain other assets. As of September 30, 2004, Oregon Steel had
outstanding $305.0 million of principal amount under the 10% Notes. The
Indenture under which the Notes were issued contains restrictions on new
indebtedness and various types of disbursements, including dividends, based on
the cumulative amount of Oregon Steel's net income, as defined. Under these
restrictions, there was no amount available for cash dividends at September 30,
2004. New CF&I and CF&I (collectively, the "Guarantors") guarantee the
obligations of the 10% Notes, and those guarantees are secured by a lien on
substantially all of the property, plant and equipment and certain other assets
of the Guarantors, excluding accounts receivable, inventory, and certain other
assets.
As of September 30, 2004, Oregon Steel, New CF&I, CF&I, and Colorado and
Wyoming Railway Company ("Borrowers") maintained a $65.0 million revolving
credit agreement ("Credit Agreement"), which will expire on June 30, 2005. At
September 30, 2004, $5.0 million was restricted under the Credit Agreement,
$16.0 million was restricted under outstanding letters of credit, and $44.0
million was available for use. Amounts under the Credit Agreement bear interest
based on either (1) the prime rate
-8-
plus a margin ranging from 0.25% to 1.00%, or (2) the adjusted LIBO rate plus a
margin ranging from 2.50% to 3.25%. Unused commitment fees range from 0.25% to
0.75%. During the quarter ended September 30, 2004, there were no short-term
borrowings under the Credit Agreement. As of September 30, 2004, there was no
outstanding balance due under the Credit Agreement. Had there been an
outstanding balance, the average interest rate for the Credit Agreement would
have been 5.1% for the quarter ended September 30, 2004. The unused commitment
fees were 0.58% for the quarter ended September 30, 2004. The margins and unused
commitment fees will be subject to adjustment within the ranges discussed above
based on a quarterly leverage ratio. The Credit Agreement contains various
restrictive covenants including minimum consolidated tangible net worth amount,
a minimum consolidated earnings before interest, taxes, depreciation and
amortization amount, a minimum fixed charge coverage ratio, limitations on
maximum annual capital and environmental expenditures, a borrowing availability
limitation relating to inventory, limitations on stockholder dividends and
limitations on incurring new or additional debt obligations other than as
allowed by the Credit Agreement. Oregon Steel cannot pay cash dividends without
prior approval from the lenders.
OTHER CONTINGENCIES
New CF&I is party to various other claims, disputes, legal actions and
other proceedings involving contracts, employment and various other matters. In
the opinion of management, the outcome of these matters would not have a
material adverse effect on the consolidated financial condition of New CF&I, its
results of operations, and liquidity.
5. INCOME TAXES
------------
The effective income tax benefit rates were 38.1% and 178.0% for the three
and nine months ended September 30, 2004, as compared to tax expense rates of
121.3% and 12.4% in the corresponding periods in 2003. The effective income tax
benefit rate for the three and nine months ended September 30, 2004 varied from
the combined state and federal statutory rate principally because Oregon Steel
reversed a portion of the valuation allowance, established in 2003, for certain
federal and state net operating loss carry-forwards, state tax credits, and
alternative minimum tax credits that were allocated to New CF&I as noted below.
Oregon Steel files its income tax return as part of a consolidated group,
for which a formal tax allocation agreement exists. As a subsidiary of Oregon
Steel, New CF&I is included in the consolidated group and thus does not file a
separate tax return. Under the terms of the tax allocation agreement, New CF&I
is required to compute a separate tax liability as if it had filed a separate
tax return and shall pay such amount to Oregon Steel. Also, New CF&I will be
compensated by Oregon Steel to the extent that tax benefits generated by New
CF&I provide a benefit on a consolidated basis. On this basis, New CF&I computes
its stand alone tax assets and liabilities, and reflects such balances in its
consolidated balance sheets.
SFAS No. 109, "ACCOUNTING FOR INCOME TAXES," requires that tax benefits for
federal and state net operating loss carry-forwards, state tax credits, and
alternative minimum tax credits each be recorded as an asset to the extent that
management assesses the utilization of such assets to be "more likely than not";
otherwise, a valuation allowance is required to be recorded. Based on this
guidance, Oregon Steel reduced the valuation allowance in the three and nine
months ended September 30, 2004 due to less uncertainty regarding the
realization of deferred tax assets. New CF&I has been allocated $13.5 million
and $17.9 million, respectively, of this valuation allowance reduction for the
three and nine months ended September 30, 2004. At September 30, 2004, the
valuation allowance for deferred tax assets was $8.9 million.
Oregon Steel will continue to evaluate the need for valuation allowances in
the future. Changes in estimated future taxable income and other underlying
factors may lead to adjustments to the valuation allowances.
6. EMPLOYEE BENEFIT PLANS
----------------------
New CF&I has noncontributory defined benefit retirement plans, certain
health care and life insurance benefits, and qualified Thrift (401(k)) plans
covering all of its eligible employees.
Components of net periodic benefit cost related to the defined benefit and
certain health care and life insurance benefit plans were as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -----------------------------------
2004 2003 2004 2003
-------- -------- --------- --------
(IN THOUSANDS) (IN THOUSANDS)
Service cost $ 586 $ 577 $ 1,759 $ 1,730
Interest cost 759 698 2,276 2,093
Expected return on plan assets (442) (393) (1,325) (1,178)
Recognized net loss 231 196 692 589
Amortization of prior service cost 18 18 53 53
Curtailment loss 965 -- 965 --
------- ------- ------- -------
Total net periodic benefit cost $ 2,117 $ 1,096 $ 4,420 $ 3,287
======= ======= ======= =======
-9-
New CF&I made contributions of $2.6 million and $3.7 million to its
pension plans for the three and nine months ended September 30, 2004,
respectively. New CF&I does not expect to make additional contributions in the
fourth quarter of 2004.
The 2003 changes in medicare regulations do not apply to New CF&I's
post-retirement medical benefits because the plan provides only a fixed benefit
to retirees.
7. ASSET IMPAIRMENTS
-----------------
As discussed in Note 4, "CONTINGENCIES - ENVIRONMENTAL MATTERS" above,
part of the settlement with the CDPHE and the EPA requires CF&I to install one
new electric arc furnace, and thus the two existing furnaces with a combined
melting and casting capacity of approximately 1.2 million tons through two
continuous casters will be shut down. CF&I has determined that the new single
furnace operation will not have the capacity to support a two-caster operation
and therefore CF&I has determined that one caster and other related assets have
no future service potential. Accordingly, in the second quarter of 2003, New
CF&I recorded a pre-tax impairment charge to earnings of $9.1 million. Of this
impairment charge recognized, $8.1 million represented impairment of fixed
assets and $1.0 million pertained to reduction of related stores items to net
realizable value. Because it is believed the caster has no salvage value
following the impairment charge, the carrying value of the fixed assets was zero
after the effect of the impairment charge.
8. SUBSEQUENT EVENTS
-----------------
On October 5, 2004, Oregon Steel received funds related to the completed
underwritten offering of 8,625,000 shares of Oregon Steel common stock at a
price to the public of $16.00 per share, which included the underwriters' over
allotment option of 1,125,000 shares. After deducting the underwriting discount
of $7.2 million, the net proceeds received by Oregon Steel from the offering
were $130.8 million. Also on October 5, 2004, Oregon Steel paid $64.0 million of
the proceeds to the Trust as part of the Settlement on behalf of CF&I.
-10-
ITEM 1. FINANCIAL STATEMENTS - CF&I STEEL, L.P.
CF&I STEEL, L.P.
BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net of allowance for
doubtful accounts of $1,334 and $361 50,439 37,708
Inventories 44,023 34,729
Other 898 1,511
--------- ---------
Total current assets 95,360 73,948
--------- ---------
Property, plant and equipment:
Land and improvements 3,219 3,219
Buildings 18,511 18,459
Machinery and equipment 272,692 268,112
Construction in progress 6,494 6,030
--------- ---------
300,916 295,820
Accumulated depreciation (147,802) (135,394)
--------- ---------
Net property, plant and equipment 153,114 160,426
--------- ---------
Intangibles, net 33,654 11,803
--------- ---------
TOTAL ASSETS $ 282,128 $ 246,177
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 40,381 $ 29,114
Accrued expenses 28,102 20,877
--------- ---------
Total current liabilities 68,483 49,991
Long-term debt - Oregon Steel Mills, Inc. 284,869 276,359
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 25,416 24,885
Deferred employee benefits 48,739 27,659
--------- ---------
Total liabilities 449,263 400,650
--------- ---------
Contingencies (Note 4)
PARTNERS'
DEFICIT
General partner (159,619) (147,059)
Limited partners (7,516) (7,414)
--------- ---------
Total partners' deficit (167,135) (154,473)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 282,128 $ 246,177
========= =========
The accompanying notes are an integral part of the financial statements.
-11-
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- -----
SALES:
Product sales $ 133,645 $ 80,914 $ 353,436 $ 247,671
Freight 4,216 3,907 12,451 11,518
--------- --------- --------- ---------
137,861 84,821 365,887 259,189
COSTS AND EXPENSES:
Cost of sales 100,647 81,264 293,008 245,275
Labor dispute settlement adjustment (Note 4) 4,532 -- 43,400 --
Fixed and other asset impairment charges (Note 6) -- -- -- 9,157
Loss (gain) on disposal of assets 1,024 (540) 780 (942)
Selling, general and administrative 8,170 3,986 19,742 12,953
Incentive compensation 2,391 -- 3,480 --
--------- --------- --------- ---------
116,764 84,710 360,410 266,443
--------- --------- --------- ---------
Operating income (loss) 21,097 111 5,477 (7,254)
OTHER INCOME (EXPENSE):
Interest expense (5,817) (6,267) (18,327) (18,759)
Other income, net 63 56 188 178
--------- --------- --------- ---------
Net income (loss) $ 15,343 $ (6,100) $ (12,662) $ (25,835)
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
-12-
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2004 2003
----------- ----------
Cash flows from operating activities:
Net loss $ (12,662) $ (25,835)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Fixed and other asset impairment charges (Note 6) -- 9,157
Depreciation and amortization 13,680 13,747
Long-term environmental liability 531 (4,149)
Loss (gain) on disposal of assets 780 (942)
Other, net (1,256) --
Changes in current assets and liabilities:
Trade accounts receivable (12,731) 6,062
Inventories (9,294) 5,572
Accounts payable 11,267 566
Accrued expenses 7,225 3,609
Other, net 613 1,420
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,847) 9,207
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (7,019) (9,820)
Proceeds from disposal of property and equipment 356 1,285
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (6,663) (8,535)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 207,965 104,604
Payments to related parties (199,455) (105,208)
Payment of long-term debt -- (68)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 8,510 (672)
--------- ---------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents at the beginning of period -- --
--------- ---------
Cash and cash equivalents at the end of period $ -- $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
--------------
Interest $ 18,197 $ 18,294
The accompanying notes are an integral part of the financial statements.
-13-
CF&I STEEL, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The financial statements include the accounts of CF&I Steel, L.P. ("CF&I").
Oregon Steel Mills, Inc. ("Oregon Steel") owns an 87 percent interest in New
CF&I, Inc. ("New CF&I") which owns a 95.2 percent interest in CF&I. Oregon Steel
also owns directly an additional 4.3 percent interest in CF&I. In January 1998,
CF&I assumed the trade name of Rocky Mountain Steel Mills.
The unaudited financial statements include estimates and other adjustments,
consisting of normal recurring accruals and other charges, as described in Note
4, "CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING"
and in Note 6, "ASSET IMPAIRMENTS," which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an interim
period are not necessarily indicative of results for a full year. Reference
should be made to CF&I's 2003 Annual Report on Form 10-K for additional
disclosures including a summary of significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised), "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS." SFAS No. 132 (revised) prescribes employers'
disclosures about pension plans and other postretirement benefit plans; it does
not change the measurement or recognition of those plans. SFAS No. 132 (revised)
retains and revises the disclosure requirement contained in the original SFAS
No. 132. It also requires additional disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. SFAS No. 132 (revised) generally is
effective for fiscal years ending after December 15, 2003. CF&I discloses the
requirements of SFAS No. 132 (revised) in Note 5, "EMPLOYEE BENEFIT PLANS."
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods to conform to the
current year presentation. Such reclassifications do not affect results of
operations as previously reported.
2. INVENTORIES
-----------
Inventories are stated at the lower of manufacturing cost or market value
with manufacturing cost determined under the average cost method. The components
of inventories are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(IN THOUSANDS)
Raw materials $20,376 $5,183
Semi-finished product 2,809 5,683
Finished product 10,073 12,916
Stores and operating supplies 10,765 10,947
------- -------
Total inventory $44,023 $34,729
======= =======
3. LONG-TERM DEBT
--------------
Borrowing requirements for capital expenditures and working capital have
been provided through three revolving loans from Oregon Steel to CF&I. The loans
include interest on the daily amount outstanding, paid monthly, at the rate of
10.65% per annum. The principal is due on demand or on December 31, 2006 if no
demand is made.
At September 30, 2004 principal payments on long-term debt were due as
follows (in thousands):
2006 $284,869
Oregon Steel is not required to provide financing to CF&I and, although the
demand for repayment of the obligation in full is not expected during 2004 or
2005, Oregon Steel may demand repayment of the loans at any time. If Oregon
Steel were to demand
-14-
repayment of the loans, it is not likely that CF&I would be able to obtain the
external financing necessary to repay the loans or to fund its capital
expenditures and other cash needs and, if available, that such financing would
be on terms satisfactory to CF&I.
4. CONTINGENCIES
-------------
ENVIRONMENTAL MATTERS
All material environmental remediation liabilities for non-capital
expenditures, which are probable and estimable, are recorded in the financial
statements based on current technologies and current environmental standards at
the time of evaluation. Adjustments are made when additional information is
available that suggests different remediation methods or periods may be required
and affect the total cost. The best estimate of the probable cost within a range
is recorded; however, if there is no best estimate, the low end of the range is
recorded and the range is disclosed.
In connection with Oregon Steel's acquisition of the steelmaking and
finishing facilities located at Pueblo, Colorado ("Pueblo mill"), CF&I accrued a
liability of $36.7 million for environmental remediation related to the prior
owner's operations. CF&I believed this amount was the best estimate of costs
from a range of $23.1 million to $43.6 million. CF&I's estimate of this
liability was based on two initial remediation investigations conducted by
environmental engineering consultants, and included costs for the Resource
Conservation and Recovery Act facility investigation, a corrective measures
study, remedial action, and operation and maintenance associated with the
proposed remedial actions. In October 1995, CF&I and the CDPHE finalized a
postclosure permit for hazardous waste units at the Pueblo mill. As part of the
postclosure permit requirements, CF&I must conduct a corrective action program
for the 82 solid waste management units at the facility and continue to address
projects on a prioritized corrective action schedule which substantially
reflects a straight-line rate of expenditure over 30 years. The State of
Colorado mandated that the schedule for corrective action could be accelerated
if new data indicated a greater threat existed to the environment than was
currently believed to exist. In September 2004, CF&I increased the environmental
reserve by $1.6 million for environmental remediation based upon remediation
investigations conducted by two environmental engineering consultants. At
September 30, 2004, the total accrued liability was $27.1 million, of which
$24.2 million was classified as non-current on CF&I's balance sheet.
The CDPHE inspected the Pueblo mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a judicial enforcement action ("Action") in the second quarter of
2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which
was approved by the court (the "State Consent Decree"). The State Consent Decree
provided for CF&I to pay $300,000 in penalties, fund $1.5 million of community
projects, and to pay approximately $400,000 for consulting services. CF&I is
also required to make certain capital improvements expected to cost
approximately $25.8 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed
below. The State Consent Decree provides that the two existing furnaces will be
permanently shut down approximately 16 months after the issuance of a Prevention
of Significant Deterioration ("PSD") air permit. The PSD permit was issued June
21, 2004.
In May 2000, the EPA issued a final determination that one of the two
electric arc furnaces at the Pueblo mill was subject to federal NSPS AA. This
determination was contrary to an earlier "grandfather" determination first made
in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth
Circuit Court of Appeals. The issue has been resolved by entry of a Consent
Decree on November 26, 2003, and the Tenth Circuit dismissed the appeal on
December 10, 2003. In that Consent Decree and overlapping with the commitments
made to the CDPHE described above, CF&I committed to the conversion to the new
NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit
approval and expected to cost, with all related emission control improvements,
approximately $25.8 million), and to pay approximately $450,000 in penalties and
fund certain supplemental environmental projects valued at approximately $1.1
million, including the installation of certain pollution control equipment at
the Pueblo mill. The above mentioned expenditures for supplemental environmental
projects will be both capital and non-capital expenditures. Under this
settlement and the settlement with the CDPHE, CF&I is subject to certain
stipulated penalties if it fails to comply with the terms of the settlement. In
March 2004, the CDPHE notified CF&I of alleged violations of the State Consent
Decree relating to opacity. In June 2004, the CDPHE assessed stipulated
penalties of $270,000. On July 26, 2004, CF&I sought judicial review of the
determination. At this time, no date for a hearing has been set. In addition to
these penalties, CF&I may in the future incur additional penalties related to
this matter. To date, such penalties have not been material to its results of
operations and cash flows; however, CF&I cannot be assured that future penalties
will not be material.
In response to the CDPHE settlement and subsequent alleged violations and
the resolution of the EPA action, CF&I expensed $2.8 million in 2001 and
$500,000 and $632,000 for the three and nine months ended September 30, 2004 for
possible fines and non-capital related expenditures. As of September 30, 2004,
the remaining accrued liability was approximately $745,000.
-15-
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the CAA requiring that the furnace subject to the EPA
action operate in compliance with NSPS AA standards. The Title V permit has been
modified several times and gives CF&I adequate time (at least 15 1/2 months from
the issuance of the PSD permit, or June 21, 2004) to convert to a single NSPS
AAa compliant furnace. Any decrease in steelmaking production during the furnace
conversion period when both furnaces are expected to be shut down will be offset
by increasing production prior to the conversion period by building up
semi-finished steel inventory and to a much lesser degree, if necessary,
purchasing semi-finished steel ("billets") for conversion into rod products at
spot market prices. Pricing and availability of billets is subject to
significant volatility.
In a related matter, in April 2000, the United Steelworkers of America
("Union") filed suit in the United States District Court in Denver, Colorado,
asserting that New CF&I and CF&I had violated the CAA at the Pueblo mill for a
period extending over five years. The Union sought declaratory judgement
regarding the applicability of certain emission standards, injunctive relief,
civil penalties and attorney's fees. On July 6, 2001, the presiding judge
dismissed the suit. The 10th Circuit Court of Appeals on March 3, 2003 reversed
the District Court's dismissal of the case and remanded the case for further
hearing to the District Court. The parties to the above-referenced litigation
have negotiated a settlement of the labor dispute and all associated litigation,
including this Union suit. As a result, the Union suit was dismissed on August
3, 2004. See "Labor Matters" for a description of the settlement.
LABOR MATTERS
CF&I LABOR DISPUTE SETTLEMENT
On January 15, 2004, CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I ("Settlement") that had been ongoing
since October 1997 and on September 10, 2004, the Settlement was finalized and
became effective. The Settlement resulted in the dismissal of all court actions
between CF&I and the Union relating to the labor dispute and environmental
matters and the NLRB's issuance of an Order Withdrawing Complaints and
Conditionally Approving Withdrawals of Charges related to the labor dispute and
includes the ratification of new five-year collective bargaining agreements. The
Settlement called for the establishment of a trust and on September 10, 2004,
the Rocky Mountain Steel Mills - United Steelworkers of America Back Pay Trust
("Trust") was established. As part of the tentative settlement Oregon Steel had
originally planned to issue four million shares of Oregon Steel's common stock
to the Trust on behalf of CF&I. On September 10, 2004, the parties agreed
instead that the Trust would receive cash in an amount equal to the gross
proceeds from the sale of four million shares of Oregon Steel's common stock in
an underwritten stock offering.
The Settlement also includes payment by CF&I of: (1) a cash contribution of
$2,500 for each beneficiary, a total of $2.5 million and (2) beginning on the
effective date of the Settlement, a ten year profit participation obligation
consisting of 25% of CF&I's quarterly profit, as defined, for years 2004 and
2007 through 2013, and 30% for years 2005 and 2006, not to exceed $3.0 million
per year for 2004 through 2008 and $4.0 million per year for 2009 through 2013;
these cap amounts are subject to a carryforward/carryback provision described in
the Settlement documents. The beneficiaries are those individuals who (1) as of
October 3, 1997 were employees of CF&I and represented by the Union, (2) as of
December 31, 1997 had not separated, as defined, from CF&I and (3) are entitled
to an allocation as defined in the Trust. The Settlement, certain elements of
which are effected through the new five-year collective bargaining agreements,
also includes: (1) early retirement with immediate enhanced pension benefit
where CF&I will offer bargaining unit employees an early retirement opportunity
based on seniority until a maximum of 200 employees have accepted the offer, the
benefit will include immediate and unreduced pension benefits for all years of
service (including the period of the labor dispute) and for each year of service
prior to March 3, 1993 (including service with predecessor companies) an
additional monthly pension of $10, (2) pension credit for the period of the
labor dispute whereby CF&I employees who went on strike will be given pension
credit for both eligibility and pension benefit determination purposes for the
period beginning October 3, 1997 and ending on the latest of said employees'
actual return to work, termination of employment, retirement or death, (3)
pension credit for service with predecessor companies whereby for retirements
after January 1, 2004, effective January 2, 2006 for each year of service prior
to March 3, 1978 (including service with predecessor companies), CF&I will
provide an additional monthly benefit to employees of $12.50, and for
retirements after January 1, 2006, effective January 2, 2008 for each year of
service between March 3, 1978 and March 3, 1993 (including service with
predecessor companies), CF&I will provide an additional monthly benefit of
$12.50, and (4) individuals who are members of the bargaining units as of
October 3, 1997 will be immediately eligible to apply for and receive qualified
long-term disability ("LTD") benefits on a go forward basis, notwithstanding the
date of the injury or illness, service requirements or any filing deadlines. The
Settlement also includes Oregon Steel's agreement to nominate a director
designated by the Union on Oregon Steel's board of directors, and to a
broad-based neutrality clause for certain of Oregon Steel's facilities in the
future.
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
CF&I recorded charges of $31.1 million in the fourth quarter of 2003, $7.0
million in the first quarter of 2004, and an additional charge of $31.9 million
in the second quarter of 2004, of which $23.2 million, $7.0 million, and $28.7
million, respectively, related to the agreement to issue four million shares of
Oregon Steel common stock as part of the Settlement. The non-cash portion of the
charges in the first and second quarters of 2004 are a result of adjusting the
previously
-16-
recorded value at December 31, 2003 of the four million shares of Oregon Steel
common stock ($23.2 million at $5.81 per share) to market at March 31, 2004 and
June 30, 2004, respectively. The closing price of Oregon Steel common stock on
the New York Stock Exchange at March 31, 2004 was $7.56 per share, resulting in
an additional labor dispute settlement charge of $7.0 million for the first
quarter of 2004, and at June 30, 2004 was $14.74 per share, resulting in an
additional labor dispute settlement charge of $28.7 million for the second
quarter of 2004.
In the second quarter of 2004, as part of the Settlement, CF&I agreed,
under certain circumstances, to pay on behalf of the Trust, certain expenses
that would otherwise be incurred by the Trust related to the issuance of four
million shares of Oregon Steel common stock. Accordingly, CF&I recorded a charge
in the second quarter of 2004 of approximately $3.3 million as part of the cost
of the Settlement. Since the second quarter, the Settlement was revised so that
no stock would be issued to the Trust, but rather the Trust would receive the
gross cash proceeds from the sale of four million shares of Oregon Steel common
stock. The circumstances, which would have required CF&I to pay $3.3 million did
not arise, and the charge was reversed in the third quarter of 2004.
On September 29, 2004 the public offering price was established at $16.00
per share. CF&I recorded a charge of $5.1 million in the third quarter of 2004
related to the obligation to pay the gross proceeds from the sale of four
million shares of Oregon Steel common stock to the Trust on behalf of CF&I,
resulting in a total accrual for shares of $64.0 million at September 30, 2004.
During the three and nine months ended September 30, 2004, CF&I recorded $3.6
million and $6.9 million, respectively, for the Settlement profit participation
obligation. The existing accrual for the LTD benefits ($5.3 million at September
30, 2004), which was expensed in the fourth quarter of 2003, may also change, as
better claims information becomes available. During the three months ended
September 30, 2004, the first 79 employees had accepted early retirement
benefits, resulting in a charge of $2.7 million. CF&I expects to record an
additional net charge for early retirement benefits during the fourth quarter of
2004 estimated at approximately $4.5 million. The post-retirement medical
benefit enhancements extended to all participants resulted in unrecognized prior
service costs of $6.4 million in accordance with SFAS No. 106. The pension
benefit enhancements extended to all participants resulted in the recognition of
unrecognized prior service costs of $22.3 million at September 30, 2004. CF&I
recorded an intangible asset and off-setting liability in the third quarter of
$22.3 million in accordance with SFAS No. 87. The unrecognized prior service
costs for both the pension and post-retirement medical benefits will be
amortized prospectively over the future service life of the active participants.
PURCHASE COMMITMENTS
Effective February 2, 1993, CF&I entered into an agreement, which was
subsequently amended on December 15, 1994, to purchase a base amount of oxygen
produced at a facility located at the Pueblo Mill. The agreement specifies that
CF&I will pay a base monthly charge that is adjusted annually based upon a
percentage change in the Producer Price Index. The monthly base charge at
September 30, 2004 was $119,000.
CF&I purchases electricity used at the Pueblo mill from an independent
third party under an agreement that expires in May 2008. This commitment
specifies that CF&I will pay a minimum monthly charge of $33,000 per month.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305.0 million of 10% First Mortgage
Notes due 2009 ("10% Notes") at a discount of 98.772% and an interest rate of
10.0%. Interest is payable on January 15 and July 15 of each year. The 10% Notes
are secured by a lien on substantially all of the property, plant and equipment,
and certain other assets of Oregon Steel, excluding accounts receivable,
inventory, and certain other assets. As of September 30, 2004, Oregon Steel had
outstanding $305.0 million of principal amount under the 10% Notes. The
Indenture under which the Notes were issued contains restrictions on new
indebtedness and various types of disbursements, including dividends, based on
the cumulative amount of Oregon Steel's net income, as defined. Under these
restrictions, there was no amount available for cash dividends at September 30,
2004. New CF&I and CF&I (collectively, the "Guarantors") guarantee the
obligations of the 10% Notes, and those guarantees are secured by a lien on
substantially all of the property, plant and equipment and certain other assets
of the Guarantors, excluding accounts receivable, inventory, and certain other
assets.
As of September 30, 2004, Oregon Steel, New CF&I, CF&I, and Colorado and
Wyoming Railway Company ("Borrowers") maintained a $65.0 million revolving
credit agreement ("Credit Agreement"), which will expire on June 30, 2005. At
September 30, 2004, $5.0 million was restricted under the Credit Agreement,
$16.0 million was restricted under outstanding letters of credit, and $44.0
million was available for use. Amounts under the Credit Agreement bear interest
based on either (1) the prime rate plus a margin ranging from 0.25% to 1.00%, or
(2) the adjusted LIBO rate plus a margin ranging from 2.50% to 3.25%. Unused
commitment fees range from 0.25% to 0.75%. During the quarter ended September
30, 2004, there were no short-term borrowings under the Credit Agreement. As of
September 30, 2004, there was no outstanding balance due under the Credit
Agreement. Had there been an outstanding balance, the average interest rate for
the Credit Agreement would have been 5.1% for the quarter ended September 30,
2004. The unused commitment fees were 0.58% for the quarter ended September 30,
2004. The margins and unused commitment fees will be subject to adjustment
within the ranges discussed above based on a quarterly
-17-
leverage ratio. The Credit Agreement contains various restrictive covenants
including minimum consolidated tangible net worth amount, a minimum consolidated
earnings before interest, taxes, depreciation and amortization amount, a minimum
fixed charge coverage ratio, limitations on maximum annual capital and
environmental expenditures, a borrowing availability limitation relating to
inventory, limitations on stockholder dividends and limitations on incurring new
or additional debt obligations other than as allowed by the Credit Agreement.
Oregon Steel cannot pay cash dividends without prior approval from the lenders.
OTHER CONTINGENCIES
CF&I is party to various other claims, disputes, legal actions and other
proceedings involving contracts, employment and various other matters. In the
opinion of management, the outcome of these matters would not have a material
adverse effect on the financial condition of CF&I, its results of operations,
and liquidity.
5. EMPLOYEE BENEFIT PLANS
----------------------
CF&I has noncontributory defined benefit retirement plans, certain health
care and life insurance benefits, and qualified Thrift (401(k)) plans covering
all of its eligible employees.
Components of net periodic benefit cost related to the defined benefit and
certain health care and life insurance benefit plans were as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
--------- -------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Service cost $ 586 $ 577 $ 1,759 $ 1,730
Interest cost 759 698 2,276 2,093
Expected return on plan assets (442) (393) (1,325) (1,178)
Recognized net loss 231 196 692 589
Amortization of prior service cost 18 18 53 53
Curtailment loss 965 -- 965 --
------- ------- ------- -------
Total net periodic benefit cost $ 2,117 $ 1,096 $ 4,420 $ 3,287
======= ======= ======= =======
CF&I made contributions of $2.6 million and $3.7 million to its pension
plans for the three and nine months ended September 30, 2004, respectively. CF&I
does not expect to make additional contributions in the fourth quarter of 2004.
The 2003 changes in medicare regulations do not apply to CF&I's
post-retirement medical benefits because the plan provides only a fixed benefit
to retirees.
6. ASSET IMPAIRMENTS
-----------------
As discussed in Note 4, "CONTINGENCIES - ENVIRONMENTAL MATTERS" above,
part of the settlement with the CDPHE and the EPA requires CF&I to install one
new electric arc furnace, and thus the two existing furnaces with a combined
melting and casting capacity of approximately 1.2 million tons through two
continuous casters will be shut down. CF&I has determined that the new single
furnace operation will not have the capacity to support a two-caster operation
and therefore CF&I has determined that one caster and other related assets have
no future service potential. Accordingly, in the second quarter of 2003, CF&I
recorded an impairment charge to earnings of $9.1 million. Of this impairment
charge recognized, $8.1 million represented impairment of fixed assets and $1.0
million pertained to reduction of related stores items to net realizable value.
Because it is believed the caster has no salvage value following the impairment
charge, the carrying value of the fixed assets was zero after the effect of the
impairment charge.
7. SUBSEQUENT EVENTS
-----------------
On October 5, 2004, Oregon Steel received funds related to the completed
underwritten offering of 8,625,000 shares of Oregon Steel common stock at a
price to the public of $16.00 per share, which included the underwriters' over
allotment option of 1,125,000 shares. After deducting the underwriting discount
of $7.2 million, the net proceeds received by Oregon Steel from the offering
were $130.8 million. Also on October 5, 2004, Oregon Steel paid $64.0 million of
the proceeds to the Trust as part of the Settlement on behalf of CF&I.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following information contains forward-looking statements, which are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements made in this report that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this report can be identified by forward-looking words such as, but not
limited to, "expect," "anticipate," "believe," "intend," "plan," "seek,"
"forecast," "estimate," "continue," "may," "will," "would," "could," "likely"
and similar expressions. These forward-looking statements are subject to risks
and uncertainties and actual results could differ materially from those
projected. These risks and uncertainties include, but are not limited to:
[BULLET] changes in market supply and demand for steel, including the effect of
changes in general economic conditions and imports;
[BULLET] changes in the availability and costs of steel scrap, steel scrap
substitute materials, billets and other raw materials or supplies used
by New CF&I, as well as the availability and cost of electricity and
other utilities;
[BULLET] downturns in the industries New CF&I serves, including the rail
transportation, construction, capital equipment, oil and gas, and
durable goods segments;
[BULLET] increased levels of steel imports;
[BULLET] New CF&I's substantial indebtedness, debt service requirements, and
liquidity constraints;
[BULLET] New CF&I's highly leveraged capital structure and the effect of
restrictive covenants in New CF&I's debt instruments on New CF&I's
operating and financial flexibility;
[BULLET] availability and adequacy of New CF&I's cash flow to meet New CF&I's
requirements;
[BULLET] actions by New CF&I's domestic and foreign competitors;
[BULLET] unplanned equipment failures and plant outages;
[BULLET] costs of environmental compliance and the impact of governmental
regulations;
[BULLET] risks related to pending environmental matters, including the risk
that costs associated with such matters may exceed New CF&I's
expectations or available insurance coverage, if any, and the risk
that New CF&I may not be able to resolve any matter as expected;
[BULLET] risks relating to New CF&I's relationship with its current unionized
employees;
[BULLET] changes in New CF&I's relationship with its workforce, and
[BULLET] changes in United States or foreign trade policies affecting steel
imports or exports.
In addition, Section 404 of the Sarbanes-Oxley Act of 2002 requires that
New CF&I and CF&I evaluate and report on internal controls over financial
reporting and have their auditor attest to such evaluation. New CF&I and CF&I
have prepared an internal plan of action for compliance and are in the process
of documenting and testing the system of internal controls to provide the basis
for their reports. Due to ongoing evaluation and testing of internal controls
and the uncertainties of the interpretation of these new requirements, New CF&I
and CF&I cannot be assured that there may not be significant deficiencies or
material weaknesses that would be required to be reported.
OVERVIEW
- --------
The New CF&I consolidated financial statements include the accounts of
CF&I, a 95.2% owned subsidiary, and the Colorado and Wyoming Railway Company, a
wholly-owned short-line railroad, serving principally the steel mill in Pueblo,
Colorado. Sales of CF&I were 98.6% and 98.4% for the three and nine months ended
September 30, 2004, respectively, compared to 97.7% and 97.9% for the three and
nine months ended September 30, 2003, respectively, of the consolidated sales of
New CF&I. Cost of sales of CF&I was 99.0% and 98.9% for the three and nine
months ended September 30, 2004, respectively, compared to 98.7% and 98.5% for
the three and nine months ended September 30, 2003, respectively, of the
consolidated cost of sales of New CF&I.
On January 15, 2004, CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I. CF&I recorded charges of $31.1 million
in the fourth quarter of 2003, $7.0 million in the first quarter of 2004, and
$31.9 million in the second quarter of 2004 related to the tentative settlement.
The agreement was finalized in September 2004 and, during the third quarter of
2004, CF&I recorded an additional charge of $4.5 million related to the
Settlement. See Note 4 to the New CF&I Consolidated Financial Statements,
"CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING" for
a discussion of the accounting for the agreement.
On December 4, 2003, President Bush lifted the tariffs on imports of steel
that were imposed March 5, 2002. The tariffs were designed to give the United
States steel industry time to restructure and become competitive in the global
steel market. Since the lifting of the tariffs, the steel industry has seen a
dramatic increase in both the cost of raw materials and the selling price of
most steel products. New CF&I believes that current market conditions are the
result of the combination of a strong steel demand
-19-
in Asia, a weak United States dollar, and an increase in ocean freight costs.
New CF&I anticipates that market conditions will remain unsettled into the
foreseeable future. During this period of time, New CF&I believes that it will
continue to incur increased costs for raw materials.
CF&I determined in the second quarter of 2003 that the new single furnace
operation will not have the capacity to support a two-caster operation and
therefore CF&I has determined that one caster and other related assets have no
future service potential. New CF&I recorded a pre-tax charge to earnings of
approximately $9.1 million in the second quarter of 2003 related to these asset
impairments. See Note 7 to the New CF&I Consolidated Financial Statements,
"ASSET IMPAIRMENTS."
2004 OUTLOOK
- ------------
For 2004, New CF&I expects to sell approximately 390,000 tons and 480,000
tons of rail and rod and bar products, respectively. At these shipment levels
the rail and rod mills would be at approximately 90 percent and 95 percent,
respectively, of their practical capacities. Seamless pipe shipments will be
dependent on market conditions in the drilling industry. At the present time
New CF&I's seamless mill is not operating.
Due to the fourth quarter having fewer shipping days in the November and
December timeframe, New CF&I expects total shipments for the fourth quarter to
be lower than the third quarter. Fourth quarter shipments will also be impacted
by a partial melt shop outage at New CF&I that resulted in approximately 10,000
tons of lost production in October of 2004. New CF&I expects margins to
decrease, as product surcharges are not expected to offset higher scrap costs.
Overall, New CF&I expects its customers to reduce their inventory levels to be
more in line with consumption levels during the fourth quarter.
-20-
DISCUSSION AND ANALYSIS OF INCOME
(Information in tables in thousands except tons, per ton, and percentages)
During the third quarter of 2004, tons sold of 217,600 were up 0.2 percent
from the third quarter of 2003. Sales were $139.9 million for the third quarter
of 2004, up 61.1 percent from the third quarter of 2003.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- ------------------------------------------
% %
2004 2003 CHANGE CHANGE 2004 2003 CHANGE CHANGE
---- ---- ------ ------ ---- ---- ------ ------
Sales $139,877 $ 86,834 $ 53,043 61.1% $371,983 $264,788 $107,195 40.5%
- ----- ======== ======== ======== ======= ======== ======== ======== ======
Tons sold
- ---------
Rail 100,700 76,800 23,900 31.1% 294,600 276,600 18,000 6.5%
Rod and Bar 116,900 124,700 (7,800) (6.3)% 380,200 357,600 22,600 6.3%
Seamless Pipe -- 15,600 (15,600) (100.0%) 3,300 39,800 (36,500) (91.7%)
-------- -------- ------- ------- ------- ------- -------- ------
Total 217,600 217,100 500 0.2% 678,100 674,000 4,100 0.6%
======== ======== ======= ======= ======= ======= ======== ======
Sales price per ton $ 643 $ 400 $ 243 60.8% $ 549 $ 393 $ 156 39.7%
- -------------------- ======== ======== ======= ======= ======== ======== ===== ======
SALES. The increase in sales and average sales price for the three and nine
months ended September 30, 2004 over the same periods ended September 30, 2003
is primarily due to higher average selling prices. Increased selling prices are
the result of a combination of factors including strong demand for steel
products in Asia, a weak United States dollar and increased ocean freight costs,
all of which make the United States market less attractive to foreign producers.
Overall tonnage shipments were comparable for the three and nine months
ended September 30, 2004.
GROSS PROFIT
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- ------ -------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
---- ---- ------ -------- ---- ---- ------ --------
Gross Profit $38,241 $4,508 $33,733 748.3% $75,599 $15,740 $59,859 380.3%
The increase in gross profit for the three months and nine months ended
September 30, 2004 over the same periods ended September 30, 2003 was primarily
a result of higher average sales prices discussed above, partially offset by
higher scrap cost and the inability of CF&I to fully recover its cost of raw
material for rail products.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- -------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
------ ------ ------ -------- ------- ------- ------ --------
Selling, General and Administrative $8,248 $4,039 $4,209 104.2% $20,019 $13,171 $6,848 52.0%
The increase in selling, general and administrative expenses for the three
and nine months ended September 30, 2004 over the same periods ended September
30, 2003 was primarily the result of a $3.6 million and $6.9 million,
respectively, charge due to the 10-year profit participation obligation
resulting from the Settlement. See Note 4 to the New CF&I Consolidated Financial
Statements, "CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT -
ACCOUNTING."
-21-
INCENTIVE COMPENSATION
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
------ ---- ------ -------- ------ ---- ------ --------
Incentive Compensation $2,391 $-- $2,391 100.0% $3,480 $-- $3,480 100.0%
The increase in incentive compensation for the three and nine months ended
September 30, 2004 over the same periods ended September 30, 2003 was the result
of increased operating income before consideration of the labor dispute
settlement adjustment.
INTEREST EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
------ ------ ------ -------- ------- ------- ------ -------
Interest Expense $5,516 $6,024 $(508) (8.4%) $17,504 $17,929 $(425) (2.4%)
Interest expense for the three and nine months ended September 30, 2004,
over the same periods ended September 30, 2003, was effectively the same due to
comparable average borrowing levels and interest rate charged by Oregon Steel.
INCOME TAX (BENEFIT) EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
-------- ------ --------- -------- --------- ------ --------- --------
Income Tax Expense (Benefit) $(6,076) $5,536 $(11,612) (209.8%) $(15,670) $2,741 $(18,411) (671.7%)
The effective income tax benefit rates were 38.1% and 178.0% for the three
and nine months ended September 30, 2004, as compared to tax expense rates of
121.3% and 12.4% in the corresponding periods in 2003, respectively. The
effective income tax benefit rate for the three and nine months ended September
30, 2004 varied from the combined state and federal statutory rate principally
because Oregon Steel reversed a portion of the valuation allowance, established
in 2003, for certain federal and state net operating loss carry-forwards, state
tax credits, and alternative minimum tax credits that were allocated to New
CF&I.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used by operating activities was $1.9 million for the first nine
months of 2004 compared to $9.0 million provided by operations in the same
period of 2003. The items primarily affecting the $10.9 million decrease in
operating cash flows were cash used for net working capital requirements of
$21.1 million offset by increased operating income of $4.3 million, excluding
the non-cash items of depreciation and amortization and fixed asset and other
impairment charges.
Net cash used by investing activities in the first nine months of 2004
totaled $6.6 million compared to $8.5 million in the same period of 2003. Cash
used for additions to property, plant and equipment for the nine months ended
September 30, 2004 and September 30, 2003 were $7.0 million and $9.9 million,
respectively.
Net cash provided by financing activities in the first nine months of 2004
totaled $8.5 million compared to net cash used by investing activities of $0.7
million in the same period of 2003. This increase is due to increased borrowing
to cover cash used by operating activities and amounts owed to Oregon Steel
related to the Settlement. See Note 4 to the New CF&I Consolidated Financial
Statements, "CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT -
ACCOUNTING."
Net working capital at September 30, 2004 increased $29.7 million compared
to December 31, 2003, reflecting a $44.8 million increase in current assets,
offset by a $15.1 million increase in current liabilities. The increase in
current assets was primarily due to an increase in accounts receivable,
inventories and deferred income taxes of $12.9 million, $9.3 million, and $23.0
million, respectively. The increase in accounts receivable was primarily related
to increased sales. The increase in the current portion of deferred income taxes
was primarily due to an increase in the deferred tax asset tied to the
Settlement. The
-22-
increase in inventories was primarily related to increased scrap inventories.
The increase in current liabilities was primarily due to an increase in trade
accounts payable of $6.9 million as a result of increased scrap inventory
purchases and an increase in accrued expenses of $8.2 million mainly due to
increased accrued incentive compensation resulting from increased operating
income.
Borrowing requirements for capital expenditures and other cash needs, both
short-term and long-term, are provided through three loans from Oregon Steel to
CF&I. As of September 30, 2004, $284.9 million of aggregate principal amount of
the loans was outstanding, all of which was classified as long-term. The loans
include interest on the daily amount outstanding at the rate of 10.65% per
annum. The principal on the three loans is due on demand or, on December 31,
2006 if no demand is made. New CF&I does not expect Oregon Steel to demand
repayment of the obligations during 2004 or 2005. Interest on the principal
amount of the loans is payable monthly. Because the loans from Oregon Steel are
due on demand, the applicable interest rate is effectively subject to
renegotiation at any time, and there is no assurance the interest rate will not
be materially increased in the future.
New CF&I has been able to fulfill its needs for working capital and
capital expenditures from operations and its financing arrangement with Oregon
Steel. New CF&I expects that operations will continue for 2004, with the
realization of assets, and discharge of liabilities in the ordinary course of
business. New CF&I believes that its prospective needs for working capital and
capital expenditures will be met from cash flows generated by operations and
borrowings pursuant to the financing arrangement with Oregon Steel. If
operations are not consistent with management's plans, there is no assurance
that the amounts from these sources will be sufficient for such purposes. Oregon
Steel is not required to provide financing to New CF&I and, although the demand
for repayment of the obligations in full is not expected during 2004 or 2005,
Oregon Steel may demand repayment of the loans at any time. If Oregon Steel were
to demand repayment of the loans, it is not likely that New CF&I would be able
to obtain the external financing necessary to repay the loans or to fund its
capital expenditures and other cash needs, and if available, that such financing
would be on terms as favorable to New CF&I as that provided by Oregon Steel. The
failure of New CF&I or Oregon Steel to maintain its current financing
arrangement would likely have a material adverse impact on New CF&I.
As of September 30, 2004, Oregon Steel, New CF&I, CF&I, and Colorado and
Wyoming Railway Company ("Borrowers") maintained a $65.0 million revolving
credit agreement ("Credit Agreement"), which will expire on June 30, 2005. At
September 30, 2004, $5.0 million was restricted under the Credit Agreement,
$16.0 million was restricted under outstanding letters of credit, and $44.0
million was available for use. Amounts under the Credit Agreement bear interest
based on either (1) the prime rate plus a margin ranging from 0.25% to 1.00%, or
(2) the adjusted LIBO rate plus a margin ranging from 2.50% to 3.25%. Unused
commitment fees range from 0.25% to 0.75%. During the quarter ended September
30, 2004, there were no short-term borrowings under the Credit Agreement. As of
September 30, 2004, there was no outstanding balance due under the Credit
Agreement. Had there been an outstanding balance, the average interest rate for
the Credit Agreement would have been 5.1% for the quarter ended September 30,
2004. The unused commitment fees were 0.58% for the quarter ended September 30,
2004. The margins and unused commitment fees will be subject to adjustment
within the ranges discussed above based on a quarterly leverage ratio. The
Credit Agreement contains various restrictive covenants including minimum
consolidated tangible net worth amount, a minimum consolidated earnings before
interest, taxes, depreciation and amortization amount, a minimum fixed charge
coverage ratio, limitations on maximum annual capital and environmental
expenditures, a borrowing availability limitation relating to inventory,
limitations on stockholder dividends and limitations on incurring new or
additional debt obligations other than as allowed by the Credit Agreement.
Although New CF&I, CF&I and Colorado and Wyoming Railway Company are borrowers
under the Credit Agreement, New CF&I, CF&I and Colorado and Wyoming Railway
Company borrow directly from Oregon Steel as discussed above.
New CF&I's level of indebtedness presents other risks to investors,
including the possibility that New CF&I and its subsidiaries may be unable to
generate cash sufficient to pay the principal of and interest on their
indebtedness when due. In that event, the holders of the indebtedness may be
able to declare all indebtedness owing to them to be due and payable
immediately, and to proceed against their collateral, if applicable. These
actions would have a material adverse effect on New CF&I. In addition, CF&I
faces potential costs and liabilities associated with environmental compliance
and remediation issues. See Note 4 to the New CF&I Consolidated Financial
Statements, "CONTINGENCIES" for a description of those matters. Any costs or
liabilities in excess of those expected by CF&I could have a material adverse
effect on New CF&I.
See Note 4 to the New CF&I Consolidated Financial Statements,
"Contingencies - Labor Matters - CF&I Labor Dispute Settlement" for details of
the settlement of the labor dispute between the Union and CF&I. There were no
other material changes to New CF&I's significant contractual obligations during
the three and nine months ended September 30, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
Information on New CF&I's off-balance sheet arrangements is disclosed in
the contractual obligations table of New CF&I's 2003 Form 10-K.
-23-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2004, New CF&I and CF&I carried out an evaluation,
under the supervision and with the participation of New CF&I's and CF&I's
management, including New CF&I's and CF&I's Chief Executive Officer and New
CF&I's and CF&I's Chief Financial Officer, of the effectiveness of the design
and operation of New CF&I's and CF&I's disclosure controls and procedures. Based
on the evaluation, New CF&I's and CF&I's Chief Executive Officer and Chief
Financial Officer have concluded that New CF&I's and CF&I's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by New CF&I and CF&I in the reports they file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in New CF&I's and CF&I's internal controls or
in other factors that could significantly affect these controls including any
corrective actions with regard to significant deficiencies and material
weaknesses subsequent to the date New CF&I and CF&I completed their evaluation.
-24-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the New CF&I Consolidated Financial Statements,
"CONTINGENCIES" for a discussion of the status of (a) the environmental issues,
and (b) the Settlement of the labor dispute.
New CF&I is party to various other claims, disputes, legal actions and
other proceedings involving contracts, employment and various other matters. In
the opinion of management, the outcome of these matters should not have a
material adverse effect on the consolidated financial condition of New CF&I.
New CF&I maintains insurance against various risks, including certain
types of tort liability arising from the sale of its products. New CF&I does not
maintain insurance against liability arising out of waste disposal or on-site
remediation of environmental contamination because of the high cost of that
coverage. In addition, our per claim deductible for workers' compensation claims
is $1 million due to the high cost of maintaining such insurance with a lower
deductible. There is no assurance that the insurance coverage carried by New
CF&I will be available in the future at reasonable rates, if at all.
ITEM 6. EXHIBITS
10.1 Rocky Mountain Steel Mills Labor Dispute Settlement Agreement and
Attachment J (filed as exhibit 10.18 to Oregon Steel's Registration
Statement on Form S-3 (SEC Reg. No. 333-118959)).
10.2 Modification Agreement dated as of September 10, 2004 (filed as
exhibit 10.19 to Oregon Steel's Registration Statement on Form S-3
(SEC Reg. No. 333-118959)).
10.3 Rocky Mountain Steel Mills - United Steelworkers of America Back Pay
Trust Agreement (filed as exhibit 10.20 to Oregon Steel's
Registration Statement on Form S-3 (SEC Reg No. 333-118959)).
31.1 Certification of Chief Executive Officer required by Rules
13a-14(a) and 15d-14(a) as promulgated by the Securities and
Exchange Commission and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Rules
13a-14(a) and 15d-14(a) as promulgated by the Securities and
Exchange Commission and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-25-
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.
NEW CF&I, INC.
Date: November 15, 2004 /s/ Jeff S. Stewart
------------------------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
BY: NEW CF&I, INC.
GENERAL PARTNER
Date: November 15, 2004 /s/ Jeff S. Stewart
------------------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
-26-
NEW CF&I, INC.
CF&I STEEL, L.P.
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 30, 2004
10.1 Rocky Mountain Steel Mills Labor Dispute Settlement Agreement and
Attachment J (filed as exhibit 10.18 to Oregon Steel's
Registration Statement on Form S-3 (SEC Reg. No. 333-118959)).
10.2 Modification Agreement dated as of September 10, 2004 (filed as
exhibit 10.19 to Oregon Steel's Registration Statement on Form S-3
(SEC Reg. No. 333-118959)).
10.3 Rocky Mountain Steel Mills - United Steelworkers of America Back
Pay Trust Agreement (filed as exhibit 10.20 to Oregon Steel's
Registration Statement on Form S-3 (SEC Reg No. 333-118959)).
31.1 Certification of Chief Executive Officer required by Rules
13a-14(a) and 15d-14(a) as promulgated by the Securities and
Exchange Commission and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Rules
13a-14(a) and 15d-14(a) as promulgated by the Securities and
Exchange Commission and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-27-