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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002.
Commission file number 0-27918
Century Aluminum Company
(Exact name of Registrant as specified in its Charter)
Delaware 13-3070826
(State of Incorporation) (IRS Employer Identification No.)
2511 Garden Road
Building A, Suite 200
Monterey, California 93940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (831) 642-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The registrant had 20,554,302 shares of common stock outstanding at
November 01, 2002.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements.
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents .......................................................... $ 50,068 $ 13,388
Accounts receivable, trade - net ................................................... 49,218 48,365
Due from affiliates ................................................................ 22,288 15,699
Inventories ........................................................................ 73,547 75,217
Prepaid and other assets ........................................................... 6,830 3,918
--------- --------
Total current assets .......................................................... 201,951 156,587
Property, Plant and Equipment - net ...................................................... 419,347 430,074
Intangible Asset - net ................................................................... 126,309 146,002
Due from Affiliates - Less current portion ............................................... 4,661 8,364
Other Assets ............................................................................. 33,059 35,679
--------- --------
Total ......................................................................... $ 785,327 $776,706
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ............................................................ $ 34,165 $ 42,394
Due to affiliates .................................................................. 18,413 2,201
Industrial revenue bonds ........................................................... 7,815 7,815
Accrued and other current liabilities .............................................. 43,685 34,065
Accrued employee benefits costs - current portion .................................. 8,541 7,800
--------- --------
Total current liabilities ..................................................... 112,619 94,275
--------- --------
Long Term Debt - net ..................................................................... 321,746 321,446
Accrued Pension Benefits Costs - Less current portion .................................... 5,255 4,017
Accrued Postretirement Benefits Costs - Less current portion ............................. 69,821 65,627
Other Liabilities ........................................................................ 8,583 10,697
Deferred Taxes ........................................................................... 45,538 39,542
--------- --------
Total noncurrent liabilities .................................................. 450,943 441,329
--------- --------
Minority Interest ........................................................................ 19,979 23,917
Contingencies and Commitments (See Note 5)
Shareholders' Equity:
Convertible preferred stock (8.0% cumulative, 500,000 shares outstanding) .......... 25,000 25,000
Common stock (one cent par value, 50,000,000 shares authorized; 20,554,302 and
20,513,287 shares outstanding at September 30, 2002 and December 31, 2001,
respectively) .................................................................... 206 205
Additional paid-in capital ......................................................... 168,958 168,414
Accumulated other comprehensive income ............................................. 11,230 6,752
Retained earnings (deficit) ........................................................ (3,608) 16,814
--------- --------
Total shareholders' equity .................................................... 201,786 217,185
--------- --------
Total ......................................................................... $ 785,327 $776,706
========= ========
See notes to consolidated financial statements
1
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES:
Third-party customers ...................................... $ 149,412 $ 156,638 $ 451,989 $ 399,856
Related parties ............................................ 27,580 26,733 84,440 83,124
--------- --------- --------- ---------
176,992 183,371 536,429 482,980
Cost of Goods Sold ............................................. 176,745 180,101 523,916 457,525
--------- --------- --------- ---------
Gross Profit ................................................... 247 3,270 12,513 25,455
Selling, General and Administrative Expenses ................... 4,282 3,943 12,221 10,305
--------- --------- --------- ---------
Operating Income (Loss) ........................................ (4,035) (673) 292 15,150
Interest Expense ............................................... (10,360) (10,493) (30,515) (21,033)
Interest Income ................................................ 111 235 240 784
Other Income (Expense) ......................................... (1,872) 3,264 (1,975) 3,203
Net Loss on Forward Contracts .................................. -- -- -- (176)
--------- --------- --------- ---------
Loss Before Income Taxes and Minority Interest ................. (16,156) (7,667) (31,958) (2,072)
Income Tax Benefit ............................................. 7,079 2,519 12,187 111
--------- --------- --------- ---------
Net Loss Before Minority Interest .............................. (9,077) (5,148) (19,771) (1,961)
Minority Interest .............................................. 1,313 1,306 3,939 2,613
--------- --------- --------- ---------
Net Income (Loss) .............................................. (7,764) (3,842) (15,832) 652
Preferred Dividends ............................................ (500) (500) (1,500) (1,000)
--------- --------- --------- ---------
Net Loss Available to Common Shareholders ...................... $ (8,264) $ (4,342) $ (17,332) $ (348)
========= ========= ========= =========
LOSS PER COMMON SHARE:
Basic ...................................................... $ (0.40) $ (0.21) $ (0.84) $ (0.02)
Diluted .................................................... $ (0.40) $ (0.21) $ (0.84) $ (0.02)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ...................................................... 20,554 20,513 20,554 20,459
========= ========= ========= =========
Diluted .................................................... 20,554 20,513 20,554 20,459
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE ..................................... $ 0.05 $ 0.05 $ 0.15 $ 0.15
========= ========= ========= =========
See notes to consolidated financial statements
2
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine months ended
September 30,
-----------------------
2002 2001
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $(15,832) $ 652
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ...................................... 42,308 30,422
Deferred income taxes .............................................. 6,684 183
Pension and other postretirement benefits .......................... 6,173 5,703
Inventory market adjustment ........................................ 2,654 3,175
Loss on disposal of assets ......................................... 682 --
Minority Interest .................................................. (3,938) (2,613)
Change in operating assets and liabilities:
Accounts receivable, trade - net .............................. (853) (5,106)
Due from affiliates ........................................... 4,002 5,347
Inventories ................................................... (984) 4,079
Prepaids and other assets ..................................... (1,317) (15)
Accounts payable, trade ....................................... (8,229) (8,776)
Due to affiliates ............................................. 12,743 (2,138)
Accrued and other current liabilities ......................... 9,001 14,877
Other - net ................................................... 742 1,071
-------- ---------
Net cash provided by operating activities .......................... 53,836 46,861
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ............................... (12,570) (9,257)
Proceeds from sale of property, plant and equipment ..................... -- 22
Divestitures ............................................................ -- 98,971
Acquisitions ............................................................ -- (464,176)
-------- ---------
Net cash used in investing activities .............................. (12,570) (374,440)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings .............................................................. -- 321,352
Financing fees .......................................................... -- (15,440)
Dividends ............................................................... (4,591) (4,210)
Issuance of common or preferred stock ................................... 5 25,000
-------- ---------
Net cash provided by (used in) financing activities ................ (4,586) 326,702
-------- ---------
NET INCREASE (DECREASE) IN CASH ............................................ 36,680 (877)
CASH, BEGINNING OF PERIOD .................................................. 13,388 32,962
-------- ---------
CASH, END OF PERIOD ........................................................ $ 50,068 $ 32,085
======== =========
See notes to consolidated financial statements
3
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
1. General
The Company's critical accounting policies are disclosed in Footnote 1 of
the audited consolidated financial statements contained in the Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. As of September 30, 2002,
there were no material changes to the significant accounting policies for the
Company.
The accompanying unaudited interim consolidated financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2001. In management's
opinion, the unaudited interim consolidated financial statements reflect all
adjustments, which are of a normal and recurring nature, which are necessary for
a fair presentation, in all material respects, of financial results for the
interim periods presented. Operating results for the first nine months of 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. Certain reclassifications of 2001 information were
made to conform to the 2002 presentation.
2. Inventories
Inventories consist of the following:
September 30, December 31,
2002 2001
------------- ------------
Raw materials ...................... $33,807 $36,686
Work-in-process .................... 14,403 11,911
Finished goods ..................... 8,662 11,219
Operating and other supplies ....... 16,675 15,401
------- -------
$73,547 $75,217
======= =======
At September 30, 2002 and December 31, 2001, approximately 76% and 79% of
inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market, respectively. The excess of LIFO cost (or market, if lower) over first
in, first out ("FIFO") cost was approximately $598 at September 30, 2002. The
excess of FIFO cost over LIFO cost (or market, if lower) of inventory was $3,374
at December 31, 2001.
3. Intangible Asset
The intangible asset consists of the power contract acquired in connection
with the Company's acquisition of an aluminum reduction facility located in
Hawesville, Kentucky in April 2001. The contract value is being amortized over
its term (ten years) using a method that results in annual amortization equal to
the expected annual benefits. As of September 30, 2002, the gross carrying
amount of the intangible asset was $165,696 with accumulated amortization of
$39,387. For the three month and nine month periods ended September 30, 2002,
amortization expense for the intangible asset totaled $6,565 and $19,694,
respectively. For the year ending December 31, 2002, the estimated aggregate
amortization expense for the intangible asset will be $26,258.
4
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Estimated Amortization Expense:
For the year ending 12/31/03 ................. $19,710
For the year ending 12/31/04 ................. 12,448
For the year ending 12/31/05 ................. 14,600
For the year ending 12/31/06 ................. 12,914
For the year ending 12/31/07 ................. 13,686
4. Debt
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company issued and sold $325,000 of its 11 3/4% senior
secured first mortgage notes due 2008 (the "Notes") to certain institutional
investors in a private placement under Rule 144A of the Securities Act of 1933.
Payment obligations under the Notes are unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries") and secured by mortgages and security interests granted by two of
the Company's subsidiaries in all of their respective interests in the real
property, plant and equipment comprising the Hawesville and Ravenswood
facilities. The Company had unamortized bond discounts on the Notes of $3,254
and $3,554 at September 30, 2002 and December 31, 2001, respectively. The
indenture governing the Notes contains customary covenants including limitations
on the Company's ability to pay dividends, incur debt, make investments, sell
assets or stock of certain subsidiaries, and purchase or redeem capital stock.
The Company will suspend its common and preferred stock dividends beginning in
the fourth quarter of 2002. This action is being taken because the Company is
near the limits on allowable dividend payments under the covenants in its bond
indenture. The Note guarantees rank equally in right of payment to the other
senior indebtedness of the guarantors and senior in right of payment to all
subordinated indebtedness of the guarantors.
In November 2001, the Company exchanged the Notes for a like principal
amount of 11 3/4% senior secured first mortgage notes due 2008 (the "Exchange
Notes"), which are registered under the Securities Act of 1933. The terms of the
Exchange Notes are substantially similar to the Notes, except the Exchange Notes
do not have the transfer restrictions and registration rights relating to the
Notes. The Exchange Notes are not listed on any securities exchange or included
in any automated quotation system.
Effective April 1, 2001, the Company entered into a $100,000 senior
secured revolving credit facility (the "Revolving Credit Facility") with a
syndicate of banks. The Revolving Credit Facility may be used for working
capital needs, capital expenditures and other general corporate purposes.
Borrowings under the Revolving Credit Facility are subject to a $30,000 reserve
and limited to a borrowing base based upon certain eligible inventory and
receivables. The Company is subject to customary covenants, including
restrictions on capital expenditures, additional indebtedness, liens,
guarantees, mergers and acquisitions, dividends, distributions, capital
redemptions and investments. The Company's obligations under the Revolving
Credit Facility are unconditionally guaranteed by its domestic subsidiaries
(other than Century Aluminum of Kentucky, LLC ("LLC")) and secured by a first
priority security interest in all accounts receivable and inventory belonging to
the Company and its
5
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
subsidiary borrowers. Amounts outstanding under the Revolving Credit Facility
bear interest, at the Company's option, at either a floating LIBOR rate or Fleet
National Bank's base rate, in each case plus an applicable interest margin. The
applicable interest margin ranges from 2.25% to 3.0% over the LIBOR rate and
0.75% to 1.5% over the base rate and is determined by certain financial
measurements of the Company. The Revolving Credit Facility will mature on April
2, 2006. There were no outstanding borrowings under the Revolving Credit
Facility as of September 30, 2002.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company assumed industrial revenue bonds ("IRBs") in
the aggregate principal amount of $7,815. An affiliate of Glencore International
AG, the Company's largest shareholder (together with its subsidiaries,
"Glencore"), effectively purchased a 20% interest in the Hawesville facility
from the Company on April 1, 2001. Under the terms of the agreement governing
the sale, Glencore agreed to assume a pro rata portion of that debt and will pay
a pro rata portion of service costs of the IRBs through its investment in the
Hawesville facility. The IRBs mature on April 1, 2028, are secured by a Glencore
letter of credit and bear interest at a variable rate not to exceed 12% per
annum determined weekly based on prevailing rates for similar bonds in the bond
market. The interest rate on the IRBs at September 30, 2002 was 2.00%. Interest
is paid quarterly. The IRBs are classified as current liabilities because they
are remarketed weekly and could be required to be repaid upon demand if there is
a failed remarketing, as provided in the indenture governing the IRBs.
5. Contingencies and Commitments
Environmental Contingencies
The Company spends significant amounts to comply with environmental laws
and to assure compliance with known and anticipated requirements. The Company
believes it does not have environmental liabilities that are likely to have a
material adverse effect on the Company. However, there can be no assurance that
future requirements at currently or formerly owned properties will not result in
liabilities which may have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Century of West Virginia is performing certain remedial measures at its
Ravenswood Facility pursuant to a RCRA 3008(h) order issued by the Environmental
Protection Agency ("EPA") in 1994 (the "3008(h) Order"). Century of West
Virginia also conducted a RCRA facility investigation ("RFI") evaluating other
areas at Ravenswood that may have contamination requiring remediation. The RFI
was submitted to the EPA in December 1999. Century of West Virginia, in
consultation with the EPA, has completed interim remediation measures at two
sites identified in the RFI. The Company expects that the EPA will not require
further work as a result of the RFI. The Company believes a significant portion
of the contamination on the two identified sites is attributable to the
operations of Kaiser Aluminum and Chemical ("Kaiser"), the prior owner, and will
be the financial responsibility of that owner, as discussed below.
Kaiser owned and operated the Ravenswood Facility for approximately 30
years prior to its acquisition by Century of West Virginia. Many of the
conditions that Century of West Virginia is
6
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
remedying exist because of activities that occurred during Kaiser's ownership
and operation. Under the terms of the agreement to purchase the Ravenswood
Facility ("Kaiser Purchase Agreement"), Kaiser retained the responsibility to
pay the costs of cleanup of those conditions. In addition, Kaiser retained title
to certain land within the Ravenswood premises and is responsible for those
areas. On February 12, 2002, Kaiser and certain wholly owned subsidiaries filed
voluntary petitions under Chapter 11 of the Federal Bankruptcy Code ("Kaiser
Bankruptcy"). While the Company believes the Kaiser Bankruptcy will not relieve
Kaiser of its obligations to do remediation work under government orders, the
ultimate outcome of the Kaiser Bankruptcy is uncertain. Nevertheless, the
Company does not expect the Kaiser Bankruptcy to have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
Under the terms of the agreement to sell its fabricating businesses to
Pechiney (the "Pechiney Agreement"), the Company and Century of West Virginia
provided Pechiney with certain indemnifications. Those include the assignment of
certain of Century of West Virginia's indemnification rights under the Kaiser
Purchase Agreement (with respect to the real property transferred to Pechiney)
and the Company's indemnification rights under its stock purchase agreement with
Alcoa relating to the Company's purchase of Century Cast Plate, Inc. The
Pechiney Agreement provides further indemnifications, which are limited, in
general, to pre-closing conditions that were not disclosed to Pechiney and to
off-site migration of hazardous substances from pre-closing acts or omissions of
Century of West Virginia. Environmental indemnifications under the Pechiney
Agreement expire September 20, 2005 and are payable only to the extent they
exceed $2,000.
The Hawesville Facility has been listed on the National Priorities List
under the federal Comprehensive Environmental Response, Compensation and
Liability Act. On July 6, 2000, the EPA issued a final Record of Decision
("ROD") which details response actions to be implemented at several locations at
the Hawesville site to address actual or threatened releases of hazardous
substances. Those actions include:
o removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
o management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
o the continued extraction and treatment of cyanide contaminated
ground water using the existing ground water treatment system.
The total costs for the remedial actions to be undertaken and paid for by
Southwire relative to this site are estimated under the ROD to be $12,600 and
the forecast of annual operating and maintenance costs is $1,200. Under the
Company's agreement with Southwire to purchase the Hawesville facility,
Southwire indemnified the Company against all on-site environmental liabilities
known to exist prior to the closing of the acquisition, including all
remediation, operation and maintenance obligations under the ROD. On behalf of
Southwire, Century will operate and maintain the ground water treatment system
required under the ROD. Southwire will reimburse Century for any such expense
that exceeds $400 annually. Under the terms of the Company's agreements with
Glencore relating to the Company's
7
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
ownership and operation of the Hawesville Facility, Glencore will share pro rata
in any environmental costs (net of any amounts available under the indemnity
provisions in the Company's stock purchase agreement with Southwire) associated
with the Hawesville Facility.
If on-site environmental liabilities relating to Southwire's pre-closing
activities at the Hawesville facility that were not known to exist as of the
date of the closing of the acquisition, become known within six years after the
closing, the Company and Glencore, based on each company's respective percentage
interests in the Hawesville Facility, will share the costs of remedial action
with Southwire on a sliding scale depending on the year the claim is brought.
Any on-site environmental liabilities arising from pre-closing activities which
do not become known until on or after the sixth anniversary of the closing of
the Hawesville acquisition will be the responsibility of Glencore and the
Company. In addition, the Company and Glencore will be responsible for a pro
rata portion of any post-closing environmental costs which result from a change
in environmental laws after the closing or from their own activities, including
a change in the use of the facility.
The Company acquired the Hawesville facility by purchasing all of the
outstanding equity securities of Metalsco Ltd., which owns a direct 1%
partnership interest in NSA Ltd. ("NSA") and an indirect 99% partnership
interest in NSA through its wholly-owned subsidiary, Skyliner, Inc. NSA is the
Kentucky limited partnership which owns the assets comprising the Hawesville
facility. Metalsco previously owned certain assets which are unrelated to NSA,
including the stock of Gaston Copper Recycling Corporation ("Gaston"), a
secondary metals reduction facility in South Carolina. Gaston has numerous
liabilities related to environmental conditions at its reduction facility.
Gaston and all other non-NSA assets owned at any time by Metalsco were
identified in the Company's agreement with Southwire as unwanted property and
were distributed to Southwire prior to the closing of the Hawesville
acquisition. Southwire indemnified the Company for all liabilities related to
the unwanted property. Southwire also retained ownership of certain land
adjacent to the Hawesville Facility containing NSA's former potliner disposal
areas, which are the sources of cyanide contamination in the facility's
groundwater. Southwire retained full responsibility for this land, which was
never owned by Metalsco and is located on the north boundary of the Hawesville
site. In addition, Southwire indemnified the Company against all risks
associated with off-site hazardous material disposals by NSA which pre-date the
closing of the acquisition.
Under the terms of the Company's agreement to purchase the Hawesville
facility, Southwire secured its indemnity obligations for environmental
liabilities for seven years after the closing by posting a $15,000 letter of
credit issued in the Company's favor, with an additional $15,000 to be posted if
Southwire's net worth drops below a pre-determined level during that period. The
Company's indemnity rights under the agreement are shared pro rata with
Glencore. The amount of security Southwire provides may increase (but not above
$15,000 or $30,000, as applicable) or decrease (but not below $3,000) if certain
specified conditions are met. The Company cannot be certain that Southwire will
be able to meet its indemnity obligations. In that event, under certain
environmental laws which impose liability regardless of fault, the Company may
be liable for any outstanding remedial measures required under the ROD and for
certain liabilities related to the unwanted properties. If Southwire fails to
meet its indemnity obligations or if the Company's shared or assumed liability
is significantly greater
8
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
than anticipated, the Company's financial condition, results of operations and
liquidity could be materially adversely affected.
The Company, together with all other past and present owners of an alumina
facility at St. Croix, Virgin Islands, has entered into an Administrative Order
on Consent with the Environmental Protection Agency (the "Order") pursuant to
which the signatories have agreed to carry out a Hydrocarbon Recovery Plan to
remove and manage oil floating on top of groundwater underlying the facility.
Recovered hydrocarbons and groundwater will be delivered to the adjacent
petroleum refinery where they will be received and managed. The owner of the
petroleum refinery will compensate the other signatories by paying them the fair
market value for the petroleum recovered. Lockheed Martin Corporation
("Lockheed"), which sold the facility to one of the Company's affiliates, Virgin
Islands Alumina Corporation ("Vialco"), in 1989, has tendered indemnity and
defense of this matter to Vialco pursuant to terms of the Lockheed-Vialco Asset
Purchase Agreement. The Company also gave certain environmental indemnity rights
to St. Croix Alumina, LLC ("St. Croix"), an indirect affiliate of Alcoa, Inc.,
when it sold the facility to St. Croix. Those rights extend only to
environmental conditions arising from Vialco's operation of the facility and
then only after St. Croix has spent $300 on such conditions. Vialco's
indemnification obligation to St. Croix expired on July 24, 2001. Management
does not believe Vialco's liability under this Order or its indemnification
obligation to St. Croix, if any, will have a material adverse effect on the
Company's financial condition, results of operations, or liquidity.
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1,566 and $1,800 at
September 30, 2002 and December 31, 2001, respectively. All accruals have been
recorded without giving effect to any possible recoveries. With respect to
ongoing environmental compliance costs, including maintenance and monitoring,
such costs are expensed as incurred.
Because of the issues and uncertainties described above, and the Company's
inability to predict the requirements of the future environmental laws, there
can be no assurance that future capital expenditures and costs for environmental
compliance will not have a material adverse effect on the Company's future
financial condition, results of operations, or liquidity. Based upon all
available information, management does not believe that the outcome of these
environmental matters, or environmental matters concerning Mt. Holly, will have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
Legal Contingencies
The Company has pending against it or may be subject to various other
lawsuits, claims and proceedings related primarily to employment, commercial,
environmental and safety and health matters. Although it is not presently
possible to determine the outcome of these matters, management believes their
ultimate disposition will not have a material adverse effect on the Company's
financial condition, results of operations, or liquidity.
9
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Other Contingency
Pechiney Rolled Products, Inc., Century of West Virginia's principal
customer, has publicly announced it is experiencing financial losses and that it
is considering various alternatives to address its losses, including
restructuring. If a restructuring should be undertaken, it could have a material
adverse effect on the Company. Pechiney purchases between 23.0 and 27.0 million
pounds of molten aluminum each month from Century of West Virginia on 30 day
terms. No provision for loss has been made because a loss is not probable.
Based on current market conditions and the performance of the equity
markets, it appears likely that the Company's accumulated pension benefit
obligation will exceed the fair value of the pension plan assets at year end.
Under current accounting guidance, the Company would be required to record a
minimum pension liability at year end. The amount of the minimum pension
liability will vary depending on changes in market conditions, performance of
pension investments for the remainder of the year, and the level of company
contributions to the pension plans. Based on current market conditions and fair
values of plan assets, Century expects a charge to shareholders' equity of
approximately $7 to 10 million.
Power Commitments
The Company purchases all of the electricity requirements for the
Ravenswood Facility from Ohio Power Company, a unit of American Electric Power
Company, pursuant to a fixed price power supply agreement. That agreement
expires on July 31, 2003. On May 3, 2002, the Company signed a new contract to
purchase electric power for its Ravenswood facility from Ohio Power. The new
agreement is effective August 1, 2003, when the Company's current power contract
with Ohio Power expires. The new contract will provide power for the Ravenswood
facility at competitive rates under a GS-4 schedule approved by the Public
Utilities Commission of Ohio. The GS-4 schedule is due to expire on December 31,
2005.
The Hawesville facility currently purchases all of its power from Kenergy
Corporation at fixed prices. Approximately 14% of the Hawesville facility's
power requirements were unpriced in calendar year 2003 through 2005. The
unpriced portion of the contract increases to approximately 26% in 2006. On June
26, 2002, the Company entered into a fixed price power supply agreement for the
14% of the power that was unpriced for calendar year 2003.
The Company is subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as by labor
shortages and catastrophic events. Power interruptions may have a material
adverse effect on the Company's business because it uses large amounts of
electricity in the primary aluminum production process. Any loss of power which
causes an equipment shutdown can result in the hardening or "freezing" of molten
aluminum in the pots where it is produced. If this occurs, significant losses
can occur if the pots are damaged and require repair or replacement, a process
that could limit or shut down the Company's production operations for a
significant period of time. Certain shutdowns not covered by insurance could be
a default under the
10
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
revolving credit facility. No assurance can be given that a material shutdown
will not occur in the future or that such a shutdown would not have a material
adverse effect on the Company.
Although the Company maintains property damage insurance to provide for
the repair or replacement of damaged equipment or property, as well as business
interruption insurance to mitigate losses resulting from any equipment failure
or production shutdown caused by a catastrophic event, the Company may still be
required to pay significant amounts under the deductible provisions of those
insurance policies. In addition, coverage may not be sufficient to cover all
losses which result from a catastrophic event. Furthermore, Century maintains
insurance to cover losses resulting from damage to the Company's power
suppliers' facilities, or transmission lines that would cause an interruption of
the power supply to the Company's facilities. This insurance contains large
deductibles and self-insured amounts and does not cover losses resulting from a
power loss due solely to lack of sufficient electrical power resulting from
unusually high usage in the regions. Century renewed its property and business
interruption insurance policies in April 2002 for one year. As expected,
premiums increased significantly in the aftermath of September 11 and the
policies contain much higher deductibles and self-insured amounts.
Labor Commitments
Century of West Virginia's hourly employees, which comprise 39% of the
Company's workforce, are represented by the USWA and are currently working under
a four-year labor agreement that would have expired May 31, 2003. On March 8,
2002, the labor agreement was extended through May 31, 2006.
The Hawesville LLC's hourly employees, which comprise 41% of the Company's
workforce, are represented by the USWA and are currently working under a
five-year labor agreement effective April 1, 2001.
6. Forward Delivery Contracts and Financial Instruments
As a producer of primary aluminum products, the Company is exposed to
fluctuating raw material and primary aluminum prices. The Company routinely
enters into fixed and market priced contracts for the sale of primary aluminum
and the purchase of raw materials in future periods.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase
Agreement (the "Pechiney Metal Agreement") with Pechiney that expires December
31, 2005. This contract will be automatically extended through July 31, 2007
provided that the Company's power contract is extended through that date.
Pursuant to the Pechiney Metal Agreement, Pechiney purchases, on a monthly
basis, at least 23.0 million pounds and no more than 27.0 million pounds of
molten aluminum at a variable price determined by reference to the U.S. Midwest
Market Price. After July 31, 2003, Pechiney will have the right, upon 12 months
notice, to reduce its purchase obligations under the contract by 50%.
Concurrent with the Company's purchase of an additional 23% interest in
the Mt. Holly facility from Xstrata, effective April 1, 2000, the Company
entered into a ten-year agreement with Glencore (the "Glencore Metal Agreement")
to sell approximately 110.0 million pounds of primary aluminum
11
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
products per year. Selling prices under the Glencore Metal Agreement through
December 31, 2001 were determined by a market-based formula while the remaining
eight years are at a fixed price as defined in the agreement.
In connection with the acquisition of the Hawesville facility in April
2001, the Company entered into a 10-year contract with Southwire (the "Southwire
Metal Agreement") to supply 240 million pounds of high-purity molten aluminum
annually to Southwire's wire and cable manufacturing facility located adjacent
to the Hawesville facility. Under this contract, Southwire will also purchase 60
million pounds of standard grade molten aluminum each year for the first five
years of the contract, with an option to purchase an equal amount in each of the
remaining five years. The Company and Glencore will each be responsible for
providing a pro rata portion of the aluminum supplied to Southwire under this
contract. The price for the molten aluminum to be delivered to Southwire from
the Hawesville facility is variable and will be determined by reference to the
U.S. Midwest Market Price. This agreement expires on December 31, 2010, and will
automatically renew for additional five-year terms, unless either party provides
12 months notice that it has elected not to renew.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement, the Company had forward delivery contracts to sell
219.8 million pounds and 377.1 million pounds of primary aluminum at September
30, 2002 and December 31, 2001, respectively. Of these forward delivery
contracts, 5.0 million pounds and 25.5 million pounds at September 30, 2002 and
December 31, 2001, respectively, were with the Glencore Group.
The Company was party to a long-term supply agreement with Alcoa to
purchase alumina through the end of 2006. The contract was unpriced from 2002
through 2006. The Company negotiated pricing with both Alcoa and Glencore which
resulted in a more competitive agreement with Glencore. The new long-term supply
agreements with Glencore, which replaced the Alcoa alumina agreement, will
extend through 2006. These new agreements provide that Glencore will supply a
fixed quantity of alumina at prices determined by a market-based formula. In
addition, as part of its acquisition of an additional 23% interest in the Mt.
Holly facility, the Company assumed an alumina supply agreement with Glencore
for its alumina requirements relative to the additional interest. This agreement
terminates in 2008 and is priced with a market-based formula. As part of its
acquisition of the Hawesville facility, the Company assumed a market based
alumina supply agreement (the "Supply Agreement") with Kaiser Aluminum &
Chemical Corporation ("Kaiser") which expires in 2005. In connection with its
ongoing Chapter 11 bankruptcy proceedings, Kaiser filed a Motion for an Order
Authorizing the Assumption of Certain Critical Customer Supply Contracts (the
"Motion"). The Motion was granted by the Bankruptcy Court on August 27, 2002. As
a result, Kaiser has assumed the Supply Agreement and cured all existing
defaults thereunder. All of Kaiser's continuing obligations under the Supply
Agreement are to be performed in the ordinary course of its business and any
claims the Company has under the Supply Agreement will be afforded
administrative expense claim status pursuant to Seciton 503 of the Bankruptcy
Code.
To mitigate the volatility in its market priced forward delivery
contracts, the Company enters into fixed price financial sales contracts, which
settle in cash in the period corresponding to the intended delivery dates of the
forward delivery contracts. At September 30, 2002 and December 31, 2001, the
Company had financial instruments, primarily with the Glencore Group, for 194.2
million pounds and 248.8 million pounds, respectively. These financial
instruments are scheduled for settlement at various dates in 2002 through 2003.
The Company had no fixed price financial purchase contracts to purchase aluminum
at September 30, 2002. Additionally, to mitigate the volatility of the natural
gas markets, the Company enters into fixed price financial purchase contracts,
which settle in cash in the period
12
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
corresponding to the intended usage of natural gas. At September 30, 2002 and
December 31, 2001, the Company had financial instruments for 1.9 million and 3.1
million DTH (one decatherm is equivalent to one million British Thermal Units),
respectively. These financial instruments are scheduled for settlement at
various dates in 2002 through 2005. Based on the fair value of the Company's
financial instruments as of September 30, 2002, accumulated other comprehensive
income of $8,331 is expected to be reclassified to earnings over the next twelve
month period.
The forward financial sales and purchase contracts are subject to the risk
of non-performance by the counterparties. However, the Company only enters into
forward financial contracts with counterparties it determines to be
creditworthy. If any counterparty failed to perform according to the terms of
the contract, the accounting impact would be limited to the difference between
the nominal value of the contract and the market value on the date of
settlement.
7. Supplemental Cash Flow Information
Nine months Ended
September 30,
---------------------
2002 2001
-------- --------
Cash paid for:
Interest .................... $18,534 $ 48
Income taxes ................ -- 466
Cash received for:
Interest .................... 240 784
Income tax refunds .......... $17,574 $ 31
8. Acquisitions
Effective April 1, 2001, the Company completed the acquisition of the
Hawesville facility. The following table represents the unaudited pro forma
results of operations for the nine months ended September 30, 2001 assuming the
acquisition occurred on January 1, 2001. The unaudited pro forma amounts may not
be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future.
Nine months ended
September 30,
2001
-----------------
(unaudited)
Net sales .................................... $ 568,903
Net income ................................... (76)
Net income available to common shareholders .. (1,576)
Earnings per share ........................... $ (0.08)
13
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
9. New Accounting Standards
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which became effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, SFAS No.
142 includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption. There was no impact on the Company's Balance Sheet or Statement of
Operations from the adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing the
details of this standard. The adoption of SFAS No. 143 is not expected to have a
material impact on the company's consolidated statements of income or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long Lived Assets." Effective January 1, 2002, the Company
adopted SFAS No. 144. This statement addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. The provisions
of this standard are generally to be applied prospectively. Adoption of the
standard had no impact on the Company's consolidated statements of income or
financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement establishes
standards for accounting for costs associated with disposal activities, or with
exit (or restructuring) activities. The standard is required to be adopted by
the Company beginning January 1, 2003. The Company is currently assessing the
details of this standard. The adoption of SFAS No. 146 is not expected to have a
material impact on the company's consolidated statements of income or financial
position.
14
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
10. Comprehensive Income
Nine months ended
September 30,
2002 2001
---------------------
Net Income (Loss) ..................................... $(15,832) $ 652
Other Comprehensive Income (Loss):
Net unrealized gain on financial instruments, net
of tax of $(3,581) and $(6,130), respectively ..... 6,304 11,093
Net amount reclassified as income, net of tax
of $1,105 and $0, respectively .................... (1,826) --
-------- -------
Comprehensive Income (Loss) ........................... $(11,354) $11,745
======== =======
11. Consolidating Condensed Financial Information
The Company's 11 3/4% Senior Secured First Mortgage Notes due 2008 are
jointly and severally and fully and unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries"). Condensed consolidating financial information was not provided
for the periods prior to the acquisition because: (i) Century Aluminum Company
has no independent assets or operations, (ii) the guarantees are full and
unconditional and joint and several, and (iii) for those periods, any
subsidiaries of the Company other than the subsidiary guarantors were minor. As
of September 30, 2002, as a result of the acquisition of the Hawesville
facility, the Company indirectly holds an 80% equity interest in Century
Aluminum of Kentucky, LLC ("LLC") and as such consolidates 100% of the assets,
liabilities and operations of the LLC into its financial statements, showing the
interest of the 20% owners as "Minority Interest". LLC (the "Non-Guarantor
Subsidiary") has not guaranteed the Exchange Notes, and the Company has not
caused its indirect equity interests in the LLC to be pledged as collateral for
the Exchange Notes. The Company's interest in the Mt. Holly facility's property,
plant and equipment has not been pledged as collateral. Other subsidiaries of
the Company which are immaterial will not guarantee the Exchange Notes
(collectively, the "Non-Guarantor Subsidiaries"). During 2001, the Company
adopted a policy for financial reporting purposes of allocating expenses to
subsidiaries. For the nine months ended September 30, 2002 and 2001, the Company
allocated total corporate expenses of $3.8 and $3.4 million to its subsidiaries,
respectively. Additionally, the Company charges interest on certain intercompany
balances.
Because the LLC is not a minor subsidiary, the Company is providing
condensed consolidating financial information for the periods following the
Company's acquisition of the Hawesville facility. The Exchange Notes contain
customary covenants limiting the ability of both the Company and the Guarantor
Subsidiaries to pay dividends, incur additional debt, make investments, sell
assets or stock of certain subsidiaries and purchase or redeem capital stock.
15
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
The following summarized condensed consolidating balance sheets as of
September 30, 2002, and December 31, 2001, condensed consolidating statements of
operations for the three and nine months ended September 30, 2002 and 2001
(reflecting six months of activity at the Non-guarantor and recently acquired
Guarantor subsidiaries for 2001), and the condensed consolidating statements of
cash flows for the nine months ended September 30, 2002 and 2001 present
separate results for Century Aluminum Company, the Guarantor Subsidiaries and
the Non-Guarantor Subsidiary.
This summarized condensed consolidating financial information may not
necessarily be indicative of the results of operations or financial position had
the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiary operated
as independent entities.
16
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2001
Combined Combined
Guarantor Non-Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ---------------- ------------
Assets:
Cash and cash equivalents ........................... $ 1,020 $ -- $ 12,368 $ -- $ 13,388
Accounts receivables, net ........................... 48,365 -- -- -- 48,365
Due from affiliates ................................. 56,711 838 366,855 (408,705) 15,699
Inventory ........................................... 46,649 28,568 -- -- 75,217
Other current assets ................................ 7,395 98 1,674 (5,249) 3,918
--------- --------- -------- --------- --------
Total current assets ........................ 160,140 29,504 380,897 (413,954) 156,587
Investment in subsidiaries .......................... 95,670 -- 208,419 (304,089) --
Property, plant and equipment, net .................. 428,721 878 475 -- 430,074
Intangible asset .................................... -- 146,002 -- -- 146,002
Due from affiliates - Less current portion .......... 8,364 -- -- -- 8,364
Other non-current assets ............................ 20,467 1,674 16,784 (3,246) 35,679
--------- --------- -------- --------- --------
Total assets ............................... $ 713,362 $ 178,058 $606,575 $(721,289) $776,706
========= ========= ======== ========= ========
Liabilities and shareholders' equity:
Accounts payable, trade ............................. $ 19,922 $ 22,472 $ -- $ -- $ 42,394
Due to affiliates ................................... -- 1,998 47,089 (46,886) 2,201
Industrial revenue bonds ............................ -- 7,815 -- -- 7,815
Accrued and other current liabilities ............... 16,437 5,269 17,680 (5,321) 34,065
Accrued employee benefits costs - current
portion ............................................. 7,653 147 -- -- 7,800
--------- --------- -------- --------- --------
Total current liabilities ................... 44,012 37,701 64,769 (52,207) 94,275
--------- --------- -------- --------- --------
Long term debt - net ................................ -- -- 321,446 -- 321,446
Accrued Pension benefits Costs - less current
portion ............................................. 1,555 -- 2,462 -- 4,017
Accrued Postretirement Benefits Costs - less
current portion ..................................... 45,008 20,619 -- -- 65,627
Other liabilities/Intercompany Loan ................. 371,580 151 713 (361,747) 10,697
Deferred taxes ...................................... 42,788 -- -- (3,246) 39,542
--------- --------- -------- --------- --------
Total non-current liabilities ............... 460,931 20,770 324,621 (364,993) 441,329
--------- --------- -------- --------- --------
Minority interest ................................... -- -- -- 23,917 23,917
Shareholders' Equity:
Convertible preferred stock ......................... -- -- 25,000 -- 25,000
Common stock ........................................ 59 -- 205 (59) 205
Additional paid-in capital .......................... 226,996 139,281 168,414 (366,277) 168,414
Accumulated other comprehensive income .............. 6,752 -- 6,752 (6,752) 6,752
Retained earnings (deficit) ......................... (25,388) (19,694) 16,814 45,082 16,814
--------- --------- -------- --------- --------
Total shareholders' equity .................. 208,419 119,587 217,185 (328,006) 217,185
--------- --------- -------- --------- --------
Total liabilities and
equity ...................................... $ 713,362 $ 178,058 $606,575 $(721,289) $776,706
========= ========= ======== ========= ========
17
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2002
Combined Combined
Guarantor Non-Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ---------------- ------------
Assets:
Cash and cash equivalents ................................. $ 620 $ -- $ 49,448 $ -- $ 50,068
Accounts receivables, net ................................. 49,192 26 -- -- 49,218
Due from affiliates ....................................... 76,976 4,696 341,291 (400,675) 22,288
Inventory ................................................. 52,059 21,488 -- -- 73,547
Other current assets ...................................... 4,095 520 4,544 (2,329) 6,830
--------- --------- --------- --------- ---------
Total current assets ........................... 182,942 26,730 395,283 (403,004) 201,951
Investment in subsidiaries ................................ 79,915 -- 197,065 (276,980) --
Property, plant and equipment, net ........................ 415,598 3,442 307 -- 419,347
Intangible asset .......................................... -- 126,309 -- -- 126,309
Due from affiliates - Less current portion ................ 4,661 -- -- -- 4,661
Other non-current assets .................................. 18,414 -- 16,216 (1,571) 33,059
--------- --------- --------- --------- ---------
Total assets ................................... $ 701,530 $ 156,481 $ 608,871 $(681,555) $ 785,327
========= ========= ========= ========= =========
Liabilities and shareholders' equity:
Accounts payable, trade ................................... $ 12,133 $ 22,032 $ -- $ -- $ 34,165
Due to affiliates ......................................... 23,478 -- 55,376 (60,441) 18,413
Industrial revenue bonds .................................. -- 7,815 -- -- 7,815
Accrued and other current liabilities ..................... 15,364 5,236 25,482 (2,397) 43,685
Accrued employee benefits costs - current portion ......... 7,653 888 -- -- 8,541
--------- --------- --------- --------- ---------
Total current liabilities ...................... 58,628 35,971 80,858 (62,838) 112,619
--------- --------- --------- --------- ---------
Long term debt - net ...................................... -- -- 321,746 -- 321,746
Accrued Pension benefits Costs - less current portion ..... 594 634 4,027 -- 5,255
Accrued Postretirement Benefits Costs - less current
portion ................................................... 47,540 21,827 454 -- 69,821
Other liabilities/Intercompany loan ....................... 350,594 (1,845) -- (340,166) 8,583
Deferred taxes ............................................ 47,109 -- -- (1,571) 45,538
--------- --------- --------- --------- ---------
Total non-current liabilities .................. 445,837 20,616 326,227 (341,737) 450,943
--------- --------- --------- --------- ---------
Minority interest ......................................... -- -- -- 19,979 19,979
Shareholders' Equity:
Convertible preferred stock ............................... -- -- 25,000 -- 25,000
Common stock .............................................. 59 -- 206 (59) 206
Additional paid-in capital ................................ 226,997 139,281 168,958 (366,278) 168,958
Accumulated other comprehensive income .................... 11,230 -- 11,230 (11,230) 11,230
Retained earnings (deficit) ............................... (41,221) (39,387) (3,608) 80,608 (3,608)
--------- --------- --------- --------- ---------
Total shareholders' equity ..................... 197,065 99,894 201,786 (296,959) 201,786
--------- --------- --------- --------- ---------
Total liabilities and equity ................... $ 701,530 $ 156,481 $ 608,871 $(681,555) $ 785,327
========= ========= ========= ========= =========
18
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three months Ended September 30, 2002
Combined Combined Reclassifications
Guarantor Non-Guarantor The and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ ------- ------------ ------------
Net sales:
Third-party customers ....................... $ 149,412 $ -- $ -- $ -- $ 149,412
Related parties ............................. 27,580 -- -- -- 27,580
--------- -------- ------- --------- ---------
176,992 -- -- -- 176,992
Cost of goods sold ............................... 170,180 64,391 -- (57,826) 176,745
Reimbursement from owners ........................ -- (57,870) -- 57,870 --
--------- -------- ------- --------- ---------
Gross profit (loss) .............................. 6,812 (6,521) -- (44) 247
Selling, general and administrative
expenses ...................................... 4,282 -- -- -- 4,282
--------- -------- ------- --------- ---------
Operating income (loss) .......................... 2,530 (6,521) -- (44) (4,035)
Interest income (expense), net ................... (10,249) (33) -- 33 (10,249)
Other income (expense), net ...................... (1,872) (11) -- 11 (1,872)
--------- -------- ------- --------- ---------
Income (loss) before taxes and
minority interest ............................. (9,591) (6,565) -- -- (16,156)
Income tax benefit ............................... 5,083 -- -- 1,996 7,079
--------- -------- ------- --------- ---------
Net income (loss) before minority
interest ...................................... (4,508) (6,565) -- 1,996 (9,077)
Minority interest ................................ -- -- -- 1,313 1,313
Equity earnings (loss) of subsidiaries ........... (3,256) -- (7,764) 11,020 --
--------- -------- ------- --------- ---------
Net income (loss) ................................ $ (7,764) $ (6,565) $(7,764) $ 14,329 $ (7,764)
========= ======== ======= ========= =========
19
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2001
Combined
Recently
Acquired and Combined
Newly Formed Other Combined Reclassifications
Guarantor Guarantor Non-guarantor The and
Subsidiaries Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ ------------ ------- ------------ ------------
Net sales:
Third-party customers .................. $ 75,132 $ 81,506 $ -- $ -- $ -- $ 156,638
Related parties ........................ 148 26,585 -- -- -- 26,733
--------- --------- -------- ------- --------- ---------
75,280 108,091 -- -- -- 183,371
Cost of goods sold .......................... 69,521 104,491 87,863 -- (81,774) 180,101
Reimbursements from owners .................. -- -- (82,190) -- 82,190 --
--------- --------- -------- ------- --------- ---------
Gross profit (loss) ......................... 5,759 3,600 (5,673) -- (416) 3,270
Selling, general and administrative
expenses ................................. 2,909 590 971 -- (527) 3,943
--------- --------- -------- ------- --------- ---------
Operating income (loss) ..................... 2,850 3,010 (6,644) -- 111 (673)
Interest income (expense), net .............. (10,095) -- (52) -- (111) (10,258)
Other income (expense), net ................. (119) 3,221 162 -- -- 3,264
--------- --------- -------- ------- --------- ---------
Income (loss) before taxes and
minority interest ........................ (7,364) 6,231 (6,534) -- -- (7,667)
Income tax (expense) benefit ................ 2,776 (2,244) -- -- 1,987 2,519
--------- --------- -------- ------- --------- ---------
Net income (loss) before minority
interest ................................. (4,588) 3,987 (6,534) -- 1,987 (5,148)
Minority interest ........................... -- -- -- -- 1,306 1,306
Equity earnings (loss) of subsidiaries ...... (3,241) -- -- (3,842) 7,083 --
--------- --------- -------- ------- --------- ---------
Net income (loss) ........................... $ (7,829) $ 3,987 $ (6,534) $(3,842) $ 10,376 $ (3,842)
========= ========= ======== ======= ========= =========
20
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine months Ended September 30, 2002
Combined Combined Reclassifications
Guarantor Non-Guarantor The and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ ------- ------------ ------------
Net sales:
Third-party customers .................... $ 451,989 $ -- $ -- $ -- $ 451,989
Related parties .......................... 84,440 -- -- -- 84,440
--------- --------- -------- --------- ---------
536,429 -- -- -- 536,429
Cost of goods sold ............................ 504,222 190,432 -- (170,738) 523,916
Reimbursement from owners ..................... -- (170,876) -- 170,876 --
--------- --------- -------- --------- ---------
Gross profit (loss) ........................... 32,207 (19,556) -- (138) 12,513
Selling, general and administrative
expenses ................................... 12,221 -- -- -- 12,221
--------- --------- -------- --------- ---------
Operating income (loss) ....................... 19,986 (19,556) -- (138) 292
Interest income (expense), net ................ (30,275) (99) -- 99 (30,275)
Other income (expense), net ................... (1,975) (39) -- 39 (1,975)
--------- --------- -------- --------- ---------
Income (loss) before taxes and
minority interest .......................... (12,264) (19,694) -- -- (31,958)
Income tax benefit ............................ 6,200 -- -- 5,987 12,187
--------- --------- -------- --------- ---------
Net income (loss) before minority
interest ................................... (6,064) (19,694) -- 5,987 (19,771)
Minority interest ............................. -- -- -- 3,939 3,939
Equity earnings (loss) of subsidiaries ........ (9,768) -- (15,832) 25,600 --
--------- --------- -------- --------- ---------
Net income (loss) ............................. $ (15,832) $ (19,694) $(15,832) $ 35,526 $ (15,832)
========= ========= ======== ========= =========
21
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001
Combined
Recently
Acquired and
Newly Formed Combined Combined Reclassifications
Guarantor Other Guarantor Non-guarantor The and
Subsidiaries Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ ------------ ------------ ------- ------------ ------------
Net sales:
Third-party customers ............. $ 153,863 $ 245,993 $ -- $ -- $ -- $ 399,856
Related parties ................... 177 82,947 -- -- -- 83,124
--------- --------- --------- ------- --------- ---------
154,040 328,940 -- -- -- 482,980
Cost of goods sold ..................... 135,675 309,203 168,839 -- (156,192) 457,525
Reimbursements from owners ............. -- -- (157,243) -- 157,243 --
--------- --------- --------- ------- --------- ---------
Gross profit (loss) .................... 18,365 19,737 (11,596) -- (1,051) 25,455
Selling, general and administrative
expenses ............................ 8,082 1,854 1,518 -- (1,149) 10,305
--------- --------- --------- ------- --------- ---------
Operating income (loss) ................ 10,283 17,883 (13,114) -- 98 15,150
Interest income (expense), net ......... (20,028) -- (123) -- (98) (20,249)
Other income (expense), net ............ (11) 2,868 170 -- -- 3,027
--------- --------- --------- ------- --------- ---------
Income (loss) before taxes and
minority interest ................... (9,756) 20,751 (13,067) -- -- (2,072)
Income tax (expense) benefit ........... 3,609 (7,471) -- -- 3,973 111
--------- --------- --------- ------- --------- ---------
Net income (loss) before minority
interest ............................ (6,147) 13,280 (13,067) -- 3,973 (1,961)
Minority interest ...................... -- -- -- -- 2,613 2,613
Equity earnings (loss) of
subsidiaries ........................ (6,481) -- -- 652 5,829 --
--------- --------- --------- ------- --------- ---------
Net income (loss) ...................... $ (12,628) $ 13,280 $ (13,067) $ 652 $ 12,415 $ 652
========= ========= ========= ======= ========= =========
22
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine months Ended September 30, 2002
Combined Combined
Guarantor Non-guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------- ---------------- ------------
Net cash provided by operating activities ........... $ 53,476 $ 360 $ -- $ -- $ 53,836
-------- ------- -------- --------- --------
Investing activities:
Purchase of property, plant and
equipment, net .................................. (9,788) (2,782) -- -- (12,570)
-------- ------- -------- --------- --------
Net cash used in investing activities ............ (9,788) (2,782) -- -- (12,570)
-------- ------- -------- --------- --------
Financing activities:
Dividends ........................................ -- -- (4,591) -- (4,591)
Intercompany transactions ........................ (44,088) 2,422 41,666 -- --
Issuance of common or preferred stock ............ -- -- 5 -- 5
-------- ------- -------- --------- --------
Net cash provided by (used in) financing
activities ......................................... (44,088) 2,422 37,080 -- (4,586)
-------- ------- -------- --------- --------
Net increase (decrease) in cash ..................... (400) -- 37,080 -- 36,680
Cash, beginning of period ........................... 1,020 -- 12,368 -- 13,388
-------- ------- -------- --------- --------
Cash, end of period ................................. $ 620 $ -- $ 49,448 $ -- $ 50,068
======== ======= ======== ========= ========
23
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Nine Month Periods Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001
Combined
Recently
Acquired and
Newly Formed Combined Combined
Guarantor Other Guarantor Non-guarantor The Reclassifications
Subsidiaries Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ ------------ ------------ ------- ---------------- ------------
Net cash provided by (used in)
operating activities ................... $ 37,109 $ 12,832 $(3,080) $ -- $ -- $ 46,861
--------- -------- ------- --------- --------- ---------
Investing activities:
Purchase of property, plant and
equipment, net ...................... -- (9,133) (150) 48 -- (9,235)
Divestitures ......................... 98,971 -- -- -- -- 98,971
Acquisition of the Hawesville
Facility, net ....................... (464,176) -- -- -- -- (464,176)
--------- -------- ------- --------- --------- ---------
Net cash provided by (used in)
investing activities ................ (365,205) (9,133) (150) 48 -- (374,440)
--------- -------- ------- --------- --------- ---------
Financing activities:
Borrowings, third party .............. -- -- -- 321,352 -- 321,352
Financing fees ....................... -- -- -- (15,440) -- (15,440)
Dividends ............................ -- -- -- (4,210) -- (4,210)
Intercompany transactions ............ 328,096 (36,661) 3,230 (294,665) -- --
Issuance of preferred stock .......... -- -- -- 25,000 -- 25,000
--------- -------- ------- --------- --------- ---------
Net cash provided by (used in)
financing activities ................... 328,096 (36,661) 3,230 32,037 -- 326,702
--------- -------- ------- --------- --------- ---------
Net increase (decrease) in cash ......... -- (32,962) -- 32,085 -- (877)
Cash, beginning of period ............... -- 32,962 -- -- -- 32,962
--------- -------- ------- --------- --------- ---------
Cash, end of period ..................... $ -- $ -- $ -- $ 32,085 $ -- $ 32,085
========= ======== ======= ========= ========= =========
24
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER THE PRIVATE
SECURITIES REFORM ACT OF 1995.
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "forecasts," "intends," "plans," "believes," "projects," and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements include, but are not
limited to, statements regarding new business and customers, contingencies,
environmental matters and liquidity under "Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Part
I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk" and
"Part II, Item 1 Legal Proceedings." These statements are not guarantees of
future performance and involve risks and uncertainties and are based on a number
of assumptions that could ultimately prove to be wrong. Actual results and
outcomes may vary materially from what is expressed or forecast in such
statements. Among the factors that could cause actual results to differ
materially are general economic and business conditions, changes in demand for
the Company's products and services or the products of the Company's customers,
fixed asset utilization, competition, the risk of technological changes and the
Company's competitors developing more competitive technologies, the Company's
dependence on certain important customers, the availability and terms of needed
capital, risks of loss from environmental liabilities, and other risks detailed
in this report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following information should be read in conjunction
with the Company's 2001 Form 10-K along with the consolidated financial
statements and related footnotes included within the Form 10-K.
25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following discussion reflects Century's historical results of
operations, which do not include results for the Company's 80% interest in the
Hawesville facility until it was acquired in April 2001.
Century's financial highlights include (in thousands, except per share
data):
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales
Third-party customers .............. $ 149,412 $ 156,638 $ 451,989 $ 399,856
Related party customers ............ 27,580 26,733 84,440 83,124
--------- --------- --------- ---------
Total ................................. $ 176,992 $ 183,371 $ 536,429 $ 482,980
========= ========= ========= =========
Net income (loss) ..................... $ (7,764) $ (3,842) $ (15,832) $ 652
Net loss available to common
shareholders ....................... $ (8,264) $ (4,342) $ (17,332) $ (348)
Loss per share - basic ................ $ (0.40) $ (0.21) $ (0.84) $ (0.02)
Net sales. Net sales for the three months ended September 30, 2002
decreased $6.4 million or 3.5% to $177.0 million from $183.4 million for the
same period in 2001. The decrease of $8.4 million was primarily the result of a
lower market price of aluminum, which was partially offset by $2.0 million due
to higher shipment volume. Net Sales for the nine months ended September 30,
2002 increased $53.4 million or 11.1% to $536.4 million from $483.0 million for
the nine months ended September 30, 2001. The increase was primarily the result
of increased shipment volume due to the acquisition of the Hawesville facility
on April 1, 2001. Increased shipment volume accounted for $90.2 million, which
was partially offset by a $36.8 million decrease due to lower market prices for
primary aluminum.
Gross profit. Gross profit for the three months ended September 30, 2002
decreased $3.1 million to $0.2 million from $3.3 million for the three months
ended September 30, 2001. The decrease was primarily the result of lower market
prices for primary aluminum. Cost of goods sold increased slightly due to
increased sales volume, an unfavorable LCM adjustment, higher depreciation and
insurance expense for the period, offset by reduced raw material costs. For the
nine months ended September 30, 2002, gross profit decreased $13.0 million to
$12.5 million from $25.5 million for the same period in 2001. This decrease is
primarily the result of additional depreciation and amortization expense related
to the Hawesville facility. In addition, a portion of the decrease is due to
lower gross margins on increased sales volume, primarily due to lower market
prices for primary aluminum.
26
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 30, 2002 increased
$0.4 million to $4.3 million from $3.9 million for the three months ended
September 30, 2001. Selling, general and administrative expenses increased
primarily due to increased insurance expenses in 2002. For the nine months ended
September 30, 2002, selling, general, and administrative expenses increased $1.9
million to $12.2 million from $10.3 million for the nine months ended September
30, 2001. Selling, general and administrative expenses as a percentage of
revenue increased slightly to 2.3% for the nine months ended September 30, 2002
from 2.1% for the nine months ended September 30, 2001.
Operating income or loss. Operating loss for the three months ended
September 30, 2002 increased $3.3 million to a $4.0 million loss from a $0.7
million loss for the three months ended September 30, 2001. Operating loss
increased for the reasons discussed above. For the nine months ended September
30, 2002 operating income decreased $14.9 million to $0.3 million from $15.2
million for the nine months ended September 30, 2001. The decrease is due to the
reasons discussed above.
Interest Expense. Interest expense during the three months ended September
30, 2002 did not change materially from the three months ended September 30,
2001. For the nine months ended September 30, 2002 interest expense increased
$9.5 million to $30.5 million from $21.0 million for the nine months ended
September 30, 2001 reflecting the additional three months of borrowing in 2002
required to fund the acquisition of the Hawesville facility in April 2001.
Interest Income. Interest income during the three months ended September
30, 2002 decreased $0.1 million to $0.1 million from $0.2 million for the three
months ended September 30, 2001. For the nine months ended September 30, 2002
interest income decreased $0.5 million to $0.3 million from $0.8 million for the
nine months ended September 30, 2001. The change in interest income was a result
of using available cash to fund the Hawesville acquisition in April 2001.
Tax Provision/Benefit. Income tax benefit for the three months ended
September 30, 2002 increased $4.6 million to $7.1 million from $2.5 million for
the three months ended September 30, 2001. For the nine months ended September
30, 2002 income tax benefit increased $12.1 million to an income tax benefit of
$12.2 million from an income tax benefit of $0.1 million for the nine months
ended September 30, 2001. The change in income taxes was primarily the result of
a larger pre-tax loss in the three and nine months ended September 30, 2002
compared to pre-tax loss in the three and nine months ended September 30, 2001.
Additionally, a portion of the increase in benefit is due to a reduction in
estimated income taxes of $1.5 million in September 2002.
Minority Interest. Minority interest reflects Glencore's interest in the
net operating results of Century Aluminum of Kentucky, LLC, which consists of
amortization of the power contract. The limited liability company holds the
power contract for the Hawesville facility, among other assets.
27
Net Income or loss. The Company had a net loss of $7.8 million and $15.8
million during the three and nine months ended September 30, 2002, respectively,
compared to a net loss of $3.8 million for the three months ended September 30,
2001 and net income of $0.7 million for the nine months ended September 30,
2001. The reasons for the change in profitability are discussed above.
Liquidity and Capital Resources
Revolving Credit Facility
The availability of funds under the revolving credit facility is subject
to a $30.0 million reserve and limited by a specified borrowing base consisting
of certain eligible accounts receivable and inventory. The Company expects the
borrowing base, less the reserve, will permit the Company to borrow
approximately $45.0 to $50.0 million under the revolving credit facility.
Working Capital
Working capital was $89.3 million at September 30, 2002. The Company
believes that its working capital will be consistent with past experience and
that borrowing availability under the revolving credit facility should be
sufficient to meet working capital needs.
Historical
The Company's statements of cash flows for the nine months ended September
30, 2002 and 2001 are summarized below (dollars in thousands):
Nine months ended
September 30,
2002 2001
--------- ---------
Net cash provided by operating activities ............ $ 53,836 $ 46,861
Net cash used in investing activities ................ (12,570) (374,440)
Net cash provided by (used in) financing activities .. (4,586) 326,702
--------- ---------
Increase (decrease) in cash .......................... $ 36,680 $ (877)
========= =========
Operating activities generated $53.8 million in net cash during the first
nine months of 2002 primarily as a result of operating cash flow from the
Hawesville and Berkeley operations and tax refunds of $17.6 million received
during the year. Operating activities generated $46.9 million in net cash during
the first nine months of 2001 as a result of operating income, reductions in
inventory and increases in accrued liabilities which were partially offset by
increases in accounts receivable and reductions in trade payables.
The Company's net cash used for investing activities was $12.6 million
during the first nine months of 2002. The cash was used for capital expenditures
to purchase, modernize, and/or upgrade production equipment, maintain facilities
and comply with environmental
28
regulations. The Company's net cash used in investing activities was $374.4
million during the first nine months of 2001. The cash was used primarily for
the acquisition of the Hawesville facility and was partially offset by the
proceeds from the sale to Glencore of the minority interest in the Hawesville
facility.
Net cash used in financing activities during the first nine months of 2002
was used to fund common and preferred stock dividend payments. Century will
suspend its common and preferred stock dividends beginning in the fourth quarter
of 2002. This action is being taken because the company is near the limits on
allowable dividend payments under the covenants in its bond indenture. The
Company's net cash provided from financing activities during the first nine
months of 2001 was $326.7 million. The cash from financing activities was
primarily from borrowing and issuance of preferred stock related to the
acquisition of the Hawesville facility.
Environmental Expenditures and Other Contingencies
The Company has incurred and in the future will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. The aggregate environmental
related accrued liabilities were $1.6 million and $1.8 million at September 30,
2002 and December 31, 2001, respectively. The Company believes that compliance
with current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity; however, environmental laws and regulations may change, and the
Company may become subject to more stringent environmental laws and regulations
in the future. There can be no assurance that compliance with more stringent
environmental laws and regulations that may be enacted in the future, or future
remediation costs, would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company is a defendant in several actions relating to various aspects
of its business. While it is impossible to predict the ultimate disposition of
any litigation, the Company does not believe that any of these lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 5 of
the financial statements contained herein.
Pechiney Rolled Products, Inc., Century of West Virginia's principal
customer, has publicly announced it is experiencing financial losses and that it
is considering various alternatives to address its losses, including
restructuring. If a restructuring should be undertaken, it could have a material
adverse effect on the Company. Pechiney purchases between 23.0 and 27.0 million
pounds of molten aluminum each month from Century of West Virginia on 30 day
terms. No provision for loss has been made because a loss is not probable.
29
Critical Accounting Policies
The Company's critical accounting policies are disclosed in Footnote 1 of
the audited consolidated financial statements contained in the Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. As of September 30, 2002,
there were no material changes to the significant accounting policies for the
Company.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Based on current market conditions and the performance of the equity
markets, it appears likely that the Company's accumulated pension benefit
obligation will exceed the fair value of the pension plan assets at year end.
Under current accounting guidance, the Company would be required to record a
minimum pension liability at year end. The amount of the minimum pension
liability will vary depending on changes in market conditions, performance of
pension investments for the remainder of the year, and the level of company
contributions to the pension plans. Based on current market conditions and fair
values of plan assets, Century expects a charge to shareholders' equity of
approximately $7 to 10 million.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which became effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, SFAS No.
142 includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption. There was no impact on the Company's Balance Sheet or Statement of
Operations from the adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing the
details of this standard. The adoption of SFAS No. 143 is not expected to have a
material impact on the company's consolidated statements of income or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long Lived Assets." Effective January 1, 2002, the Company
adopted SFAS No. 144. This statement addresses financial accounting and
reporting for the impairment and disposal of
30
long-lived assets. The provisions of this standard are generally to be applied
prospectively. Adoption of the standard had no impact on the Company's
consolidated statements of income or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement establishes
standards for accounting for costs associated with disposal activities, or with
exit (or restructuring) activities. The standard is required to be adopted by
the Company beginning January 1, 2003. The Company is currently assessing the
details of this standard. The adoption of SFAS No. 146 is not expected to have a
material impact on the company's consolidated statements of income or financial
position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Prices
The Company manages its exposure to fluctuations in the price of primary
aluminum by selling aluminum at fixed prices for future delivery and through
financial instruments as well as by purchasing alumina under supply contracts
with prices tied to the same indices as the Company's market-based aluminum
sales contracts. The Company's risk management activities do not include trading
or speculative transactions. Although the Company has not materially
participated in the purchase of call or put options, in cases where Century
sells forward primary aluminum, it may purchase call options to benefit from
price increases, which are significantly above forward sales prices. In
addition, it may purchase put options to protect itself from price decreases.
The Company was party to a long-term supply agreement with Alcoa to
purchase alumina through the end of 2006. The contract was unpriced from 2002
through 2006. The Company negotiated pricing with both Alcoa and Glencore which
resulted in a more competitive agreement with Glencore. The new long-term supply
agreements with Glencore, which replaced the Alcoa alumina agreement, will
extend through 2006. These new agreements provide for a fixed quantity of
alumina at prices determined by a market-based formula. In addition, as part of
its acquisition of an additional 23% interest in the Mt. Holly Facility, the
Company assumed a supply agreement with Glencore for the alumina raw material
requirements relative to the additional interest. This alumina supply agreement
terminates in 2008 and is priced with a market-based formula. As part of its
acquisition of the Hawesville facility, the Company assumed an alumina supply
agreement with Kaiser. That agreement will terminate in 2005 and is a
market-based contract. The Company has received assurances from Kaiser
Management that, despite the Kaiser bankruptcy, Kaiser will continue to perform
under this alumina supply agreement. The contract has been assumed in the
bankruptcy process.
At September 30, 2002, the Company had entered into 194.2 million pounds
of fixed priced forward primary aluminum financial sales contracts primarily
with the Glencore Group to mitigate the risk of commodity price fluctuations
inherent in its business. These contracts will be settled in cash at various
dates during 2002 and 2003. Additionally, in order to mitigate the volatility of
the natural gas markets, the Company enters into fixed price forward financial
purchase contracts, which settle in cash in the period corresponding to the
intended usage of
31
natural gas. At September 30, 2002, the Company had financial instruments for
1.9 million DTH (one decatherm, or DTH, is equivalent to one million British
Thermal Units). These financial instruments are scheduled for settlement at
various dates in 2002 through 2005.
On a hypothetical basis a $0.01 per pound increase or decrease in the
market price of primary aluminum is estimated to have an unfavorable or
favorable impact of $1.2 million after tax, respectively, on accumulated other
comprehensive income for the nine months ended September 30, 2002 as a result of
the forward primary aluminum financial sale contracts entered into by the
Company at September 30, 2002.
On a hypothetical basis, a $0.50 per DTH decrease or increase in the
market price of natural gas is estimated to have an unfavorable or favorable
impact of $0.6 million after tax, respectively, on accumulated other
comprehensive income for the nine months ended September 30, 2002 as a result of
the forward natural gas financial purchase contracts entered into by the Company
at September 30, 2002.
Century monitors its overall position, and its metals and natural gas risk
management activities are subject to the management, control and direction of
senior management. Risk management activities are regularly reported to the
Board of Directors of Century.
This quantification of the Company's exposure to the commodity price of
aluminum is necessarily limited, as it does not take into consideration the
Company's inventory or forward delivery contracts, or the offsetting impact upon
the sales price of primary aluminum products. Because all of the Company's
alumina contracts are indexed to the LME price for aluminum beginning in 2002,
they act as a natural hedge for approximately 25% of the Company's production.
Entering the year 2002, approximately 48% and 55% of the Company's production
for the years 2002 and 2003, respectively, was either hedged by the alumina
contracts or by fixed price forward delivery and financial sales contracts.
Interest Rates
Interest Rate Risk. The Company's primary debt obligations are the
outstanding Exchange Notes, borrowings under its revolving credit facility and
the industrial revenue bonds the Company assumed in connection with the
Hawesville acquisition. Because the Exchange Notes bear a fixed rate of
interest, changes in interest rates do not subject the Company to changes in
future interest expense with respect to the outstanding notes. Borrowings under
the Company's revolving credit facility, if any, are at variable rates at a
margin over LIBOR or the Fleet National Bank base rate, as defined in the
revolving credit facility. The industrial revenue bonds bear interest at
variable rates determined by reference to the interest rate of similar
instruments in the industrial revenue bond market. At September 30, 2002, the
Company had $7.8 million of variable rate borrowings. A hypothetical 1% increase
in the interest rate would increase the Company's annual interest expense by
$0.1 million, assuming no debt reduction.
32
Item 4. Controls and Procedures
a. Within the 90 days prior to the date of filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chairman and Chief Executive
Officer along with Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-14(c)) pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chairman and Chief Executive Officer along with the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information to be included in the
Company's reports required to be filed under the Exchange Act is recorded,
processed, summarized and reported within the time period specified in the rules
and forms of the Securities and Exchange Commission.
b. There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date the Company carried out this evaluation.
33
Part II. OTHER INFORMATION
Item 5. Other Information
The Company's chief executive officer and chief financial officer have
furnished to the SEC the certification with respect to this Form 10-Q that is
required by Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on Form 8-K - The Company filed no reports on Form 8-K
during the quarter ended September 30, 2002.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Aluminum Company
Date: November 14, 2002 By: /s/ Craig A. Davis
-------------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: November 14, 2002 By: /s/ David W. Beckley
-------------------------------------
David W. Beckley
Executive Vice-President/
Chief Financial Officer
35
CERTIFICATION
I, Craig A. Davis, Chairman of the Board and Chief Executive Officer of Century
Aluminum Company (Century), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Century as of, and for, the periods presented in this quarterly report;
4. Century's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Century and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Century, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Century's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Century's other certifying officer and I have disclosed, based on our
most recent evaluation, to Century's auditors and the audit committee of
Century's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Century's ability to record,
process, summarize and report financial data and have identified for Century's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Century's internal controls; and
6. Century's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ CRAIG A. DAVIS
--------------------------------
Title: Chairman of the Board and
Chief Executive Officer
I, David W. Beckley, Executive Vice President and Chief Financial Officer of
Century Aluminum Company (Century), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Century as of, and for, the periods presented in this quarterly report;
4. Century's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Century and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Century, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Century's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Century's other certifying officer and I have disclosed, based on our
most recent evaluation, to Century's auditors and the audit committee of
Century's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Century's ability to record,
process, summarize and report financial data and have identified for Century's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Century's internal controls; and
6. Century's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses
Date: November 14, 2002 /s/ DAVID W. BECKLEY
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Title: Executive Vice President
and Chief Financial Officer