424B3
Filed Pursuant to Rule 424(b)(3)
of the Rules and Regulations
Under the Securities Act of 1933
Registration No. 333-121255
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 15, 2005
$175,000,000
1.75% Convertible Senior Notes due August 1, 2024
and Shares of Common Stock Issuable Upon Conversion of the Notes
This prospectus supplement supplements the prospectus dated February 15, 2005, which is
part of a Registration Statement on Form S-1, as amended (Registration No. 333-121255) that we have
filed with the Securities and Exchange Commission. We have attached to this prospectus supplement,
and incorporated by reference into it, our Annual Report on Form 10-K for the year ended December
31, 2004.
The prospectus and this prospectus supplement relate to resales of our 1.75% Convertible
Senior Notes due August 1, 2024 and shares of our common stock issuable upon conversion of the
notes. The prospectus and this prospectus supplement also relate to the issuance of shares of our
common stock upon conversion of the notes by holders other than the selling securityholders
identified in the prospectus under Selling Securityholders, unless such issuance qualifies for
the exemption under Section 3(a)(9) of the Securities Act.
You should read this prospectus supplement in conjunction with the prospectus. This
prospectus supplement updates information in the prospectus. If there is any inconsistency between
the information in the prospectus and this prospectus supplement, you should rely on the
information in this prospectus supplement.
The date of this
prospectus supplement is March 16, 2005
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-27918
CENTURY ALUMINUM COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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13-3070826 |
(State or other jurisdiction of
Incorporation or organization) |
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(IRS Employer
Identification No.) |
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2511 Garden Road
Building A, Suite 200
Monterey, California
(Address of registrants principal offices) |
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93940
(Zip Code) |
Registrants telephone number, including area code
(831) 642-9300
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
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Title of Each Class |
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Common Stock, $0.01 par value per share
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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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrants knowledge, in a definitive proxy or
information statement incorporated by reference in Part III
of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
Based upon the NASDAQ closing price on June 30, 2004, the
aggregate market value of the common stock held by
non-affiliates of the registrant was $554,381,748. As of
March 11, 2005, 32,070,306 shares of common stock of
the registrant were issued and outstanding.
Documents Incorporated By Reference:
None.
TABLE OF CONTENTS
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Page |
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Part I |
Forward-Looking Statements |
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3 |
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Item 1
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Business
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Item 2
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Properties
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21 |
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Item 3
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Legal Proceedings
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22 |
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Item 4
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Submission of Matters to a Vote of Security Holders
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Part II |
Item 5
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Market for Registrants Common Stock and Related
Stockholder Matters
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23 |
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Item 6
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Selected Consolidated Financial Data
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24 |
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Item 7
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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34 |
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Item 7A
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Quantitative and Qualitative Disclosure about Market Risk
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51 |
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Item 8
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Financial Statements and Supplementary Data
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54 |
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Item 9
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Changes in and Disagreements with Accountants and Financial
disclosure
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99 |
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Item 9A
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Controls and Procedures
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99 |
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Item 9B
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Other Information
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102 |
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Part III |
Item 10
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Directors and Executive Officers of the Registrant
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102 |
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Item 11
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Executive Compensation
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105 |
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Item 12
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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110 |
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Item 13
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Certain Relationships and Related Transactions
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111 |
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Item 14
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Principal Accountant Fees and Services
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113 |
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Part IV |
Item 15
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Exhibits, Financial Statement Schedules
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114 |
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2
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements. The Company has based these forward-looking
statements on current expectations and projections about future
events. Many of these statements may be identified by the use of
forward-looking words such as expects,
anticipates, plans,
believes, projects,
estimates, intends, should,
could, would, will, and
potential and similar words. These forward-looking
statements are subject to risks, uncertainties and assumptions
including, among other things, those discussed under
Part I, Item 1, Business, Part II,
Item 7, Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and Part II,
Item 8, Financial Statements and Supplementary
Data, and:
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The Companys high level of indebtedness reduces cash
available for other purposes, such as the payment of dividends,
and limits the Companys ability to incur additional debt
and pursue its growth strategy; |
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The cyclical nature of the aluminum industry causes variability
in the Companys earnings and cash flows; |
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The loss of a customer to whom the Company delivers molten
aluminum would increase the Companys production costs; |
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Glencore International AG owns a large percentage of the
Companys common stock and has the ability to influence
matters requiring shareholder approval; |
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The Company could suffer losses due to a temporary or prolonged
interruption of the supply of electrical power to its
facilities, which can be caused by unusually high demand,
blackouts, equipment failure, natural disasters or other
catastrophic events; |
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Due to volatile prices for alumina, the principal raw material
used in primary aluminum production, the Companys raw
materials costs could be materially impacted if the Company
experiences changes to or disruptions in its current alumina
supply arrangements, or if production costs at the
Companys recently acquired alumina refining operations
increase significantly; |
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By expanding the Companys geographic presence and
diversifying its operations through the acquisition of bauxite
mining, alumina refining and additional aluminum reduction
assets, the Company is exposed to new risks and uncertainties
that could adversely affect the overall profitability of its
business; |
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Changes in the relative cost of certain raw materials and energy
compared to the price of primary aluminum could affect the
Companys margins; |
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Most of the Companys employees are unionized and any labor
dispute or failure to successfully renegotiate an existing labor
agreement could materially impair the Companys ability to
conduct its production operations at its unionized facilities; |
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The Company is subject to a variety of environmental laws that
could result in unanticipated costs or liabilities; |
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The Company may not realize the expected benefits of its growth
strategy if it is unable to successfully integrate the
businesses it acquires; and |
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The Company cannot guarantee that the Companys subsidiary
Nordural will be able to complete its expansion in the time
forecast or without significant cost overruns or that the
Company will be able to realize the expected benefits of the
expansion. |
Although the Company believes the expectations reflected in its
forward-looking statements are reasonable, the Company cannot
guarantee its future performance or results of operations. All
forward-looking statements in this filing are based on
information available to the Company on the date of this filing;
however,
3
the Company is not obligated to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise. The risks described
above and elsewhere in this report, including in Item 7,
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations, should be considered when reading any
forward-looking statements in this filing. Given these
uncertainties and risks, the reader should not place undue
reliance on these forward-looking statements.
The Company obtained the market data used throughout this
Form 10-K from its own research and from surveys or studies
conducted by third parties and cited in industry or general
publications, including studies prepared by CRU International
Inc., an internationally recognized research firm which collects
and analyzes data about the aluminum industry. Industry and
general publications and surveys generally state that they have
obtained information from sources believed to be reliable, but
do not guarantee the accuracy and completeness of such
information. While the Company believes that each of these
studies and publications is reliable, the Company has not
independently verified such data and does not make any
representation as to its accuracy. Similarly, the Company
believes its internal research is reliable but it has not been
verified by any independent sources.
Overview
Century Aluminum Company (Century or the
Company) is a leading producer of primary aluminum.
The Companys facilities produce value-added and
standard-grade primary aluminum products. Century is the second
largest primary aluminum producer in the United States, behind
Alcoa Inc. (together with its affiliates, Alcoa).
Century produced approximately 1.2 billion pounds of
primary aluminum in 2004 with net sales of
$1,060.7 million. In April 2004, the Company acquired
Nordural, an Icelandic facility which is the Companys
first facility located outside of the United States. The Company
currently has an annual primary aluminum production capacity of
approximately 1.4 billion pounds of primary aluminum with
pro forma net sales of $1,099.1 million for the year ended
December 31, 2004.
The Company currently owns:
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the Nordural facility, located in Grundartangi, Iceland, which
began operations in 1998 and has an annual production capacity
of 198 million pounds of primary aluminum, which will
increase by up to 269 million pounds to approximately
467 million pounds upon completion of an ongoing expansion
in 2006; |
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the Hawesville facility, located in Hawesville, Kentucky, which
began operations in 1970 and has an annual production capacity
of 538 million pounds of primary aluminum; |
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the Ravenswood facility, located in Ravenswood, West Virginia,
which began operations in 1957 and has an annual production
capacity of 375 million pounds of primary aluminum; |
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a 49.7% ownership interest in the Mt. Holly facility, located in
Mt. Holly, South Carolina, which began operations in 1980,
contributes 243 million pounds to the Companys
overall annual production capacity and is operated by Alcoa,
which holds the remaining 50.3% ownership interest; |
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a 50% joint venture interest in the Gramercy alumina refinery,
located in Gramercy, Louisiana, which has an annual production
capacity of 1.2 million metric tons of alumina; and |
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a 50% joint venture interest in bauxite mining operations in
Jamaica, which have an annual production capacity of
approximately 4.5 million dry metric tons. |
For a description of these facilities, see Part I,
Item 1, Facilities and Production.
The Companys strategic objectives are to grow its aluminum
business by pursuing opportunities to acquire primary aluminum
reduction facilities that offer favorable investment returns and
lower its per unit
4
production costs; diversifying the Companys geographic
presence; and pursuing opportunities in bauxite mining and
alumina refining. To date, the Companys growth activities
have included:
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acquiring an additional 23% interest in the Mt. Holly facility
in April 2000; |
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acquiring an 80% interest in the Hawesville facility in April
2001; |
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acquiring the remaining 20% interest in the Hawesville facility
in April 2003; |
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acquiring the Nordural facility in April 2004; |
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expanding Nordurals production capacity; and |
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acquiring through a joint venture its first alumina refining
facility, together with related bauxite mining assets in October
2004. |
For a description of these acquisitions, see Part I,
Acquisitions.
Prior to its initial public offering in April 1996, the Company
was an indirect, wholly-owned subsidiary of Glencore
International AG (together with its subsidiaries,
Glencore). As of December 31, 2004, Glencore,
the Companys largest shareholder, owned 29.1% of
Centurys outstanding common shares.
The Company files annual, quarterly, and other selected reports
with the Securities and Exchange Commission (SEC).
The public may read and copy any materials filed with the SEC at
the SECs Public Reference Room at 450 Fifth Street,
NW, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330 (1-800-732-0330). The SEC maintains a website
(http://www.sec.gov) that contains reports, statements and other
information regarding registrants that file electronically.
Additional information about the Company may also be obtained
from the Companys website, which is located at
www.centuryca.com. The Companys website provides access to
filings it has made through the SECs EDGAR filing system,
including its annual, quarterly and current reports filed on
Forms 10-K, 10-Q and 8-K, respectively, and ownership
reports filed on Forms 3, 4 and 5 after December 16,
2002 by the Companys directors, executive officers and
beneficial owners of more than 10% of the Companys
outstanding common stock. Information contained in the
Companys website is not incorporated by reference in, and
should not be considered a part of, this Annual Report on
Form 10-K.
Acquisitions
The Gramercy Acquisition. On October 1, 2004, the
Company and Noranda Finance Inc., through 50/50 joint venture
companies, acquired an alumina refinery in Gramercy, Louisiana
and related bauxite mining assets in Jamaica (collectively, the
Gramercy assets.) from Kaiser Aluminum &
Chemical Company (Kaiser). The purchase price for
the Gramercy assets was $23.0 million, subject to working
capital adjustments. The Company paid one-half, or
$11.5 million of the unadjusted purchase price, which was
funded with available cash. Noranda paid the remaining
$11.5 million.
Nordural Acquisition. On April 27, 2004, the Company
completed the acquisition of Nordural hf (now known as Nordural
ehf.) (Nordural) from Columbia Ventures Corporation,
a privately-owned investment company headquartered in Vancouver,
Washington. Nordural is an Icelandic company that owns and
operates the Nordural facility, a primary aluminum reduction
facility located in Grundartangi, Iceland, approximately
25 miles northwest of Reykjavik, Icelands capital.
The Company paid $195.3 million, which was paid with a
portion of the proceeds of the Companys public equity
offering of 9,000,000 shares of its common stock in April
2004 at a price to the public of $24.50 per share.
Hawesvilles Remaining 20% Interest. On
April 1, 2003, the Company acquired the remaining 20%
interest in the Hawesville facility owned by Glencore for a
purchase price of $99.4 million. The Company also assumed
Glencores pro rata share of the industrial revenue bonds
and post-closing payments to Southwire, which are described
below. As a result of this acquisition, the Company owns all of
the Hawesville facility. The Company financed a portion of the
purchase price by issuing a six-year $40.0 million note to
Glencore bearing interest at a rate of 10% per annum (the
Glencore Note). The Company repaid
$26.0 million of
5
principal under the Glencore Note in the fourth quarter of 2003,
and the balance of $14.0 million in April 2004.
80% Interest in the Hawesville Facility. Effective
April 1, 2001, the Company completed the acquisition of the
Hawesville facility from Southwire Company
(Southwire), a privately held wire and cable
manufacturing company. Concurrently with the acquisition, the
Company effectively sold a 20% interest in the Hawesville
facility to Glencore. As part of the acquisition, the Company
and Glencore each assumed a pro rata share of industrial revenue
bonds related to the Hawesville facility in the principal amount
of $7.8 million and post-closing payments to Southwire of
up to $7.0 million if the market price of primary aluminum
exceeds specified levels during any of the seven years following
closing. The entire $7.0 million will become due in April
2005.
Facilities and Production
The Nordural facility is owned by Nordural ehf, a wholly-owned
indirect subsidiary of the Company. The Nordural facility is
located in Grundartangi, Iceland, approximately 25 miles
northwest of Reykjavik, Icelands capital. Built in 1998
and expanded in 2001, the Nordural facility is the
Companys most recently constructed and lowest cost
facility. It has an annual production capacity of approximately
198 million pounds, which will increase by up to
269 million pounds to approximately 467 million pounds
upon completion of an ongoing expansion of the facility, with
potential for further expansion to 573 million pounds of
annual production capacity. The Nordural facility is situated on
two hundred acres leased from the Government of Iceland and
consists of an aluminum reduction plant with two potlines and
casting equipment used to cast molten aluminum into ingot.
The following table shows primary aluminum shipments from the
Nordural facility during each of the periods indicated:
Nordural Facility Primary Aluminum Shipments
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Year Ended December 31, | |
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2004(1) | |
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2003 | |
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2002 | |
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(In millions of pounds) | |
Standard-grade primary aluminum ingot
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204.0 |
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198.7 |
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198.3 |
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Shipments for the year ended December 31, 2004 included
65.8 million pounds shipped prior to the acquisition of
Nordural on April 27, 2004. |
The Nordural facility operates under various long-term
agreements with the Government of Iceland. These agreements
include (i) an investment agreement which establishes
Nordurals tax status and the Governments obligations
to grant certain permits, (ii) a reduction plant site
agreement by which Nordural leases the property through 2020,
subject to renewal at its option; and (iii) a harbor
agreement by which Nordural is granted access to the port at
Grundartangi. In connection with the expansion of the Nordural
facility, Nordural has entered into amendments to the investment
agreement and the reduction plant site agreements with the
Government of Iceland.
The Company has commenced work on an expansion of the Nordural
facility that will increase its annual production capacity to
approximately 467 million pounds. As currently planned, the
expansion will add 269 million pounds to the Nordural
facilitys annual production capacity. The expansion is
projected to be completed by late-2006 and is expected to cost
approximately $454 million. Following completion of the
expansion, Nordural will have all the infrastructure and support
facilities necessary for further expansion to 573 million
pounds of annual production capacity.
On February 10, 2005, Nordural executed agreements and
documents related to a $365.0 million senior term loan
facility arranged by Landsbanki Islands hf. and Kaupthing Bank
hf, which funded on February 15,
6
2005. See Part II, Item 7, Managements
Discussion and Analysis Recent
Developments Nordurals New Term
Loan Facility. Amounts borrowed under Nordurals
new term loan facility were used to refinance debt under
Nordurals prior term loan facility. In addition, the new
term loan facility will be used to finance a portion of the
costs associated with the ongoing expansion of the Nordural
facility and for Nordurals general corporate purposes. The
Company expects to fund the remaining costs of the expansion
capacity with operating cash flow generated by its operations,
including the operations of the Nordural facility.
Nordural is party to a long-term alumina tolling contract with a
subsidiary of BHP Billiton which expires December 31, 2013.
Under this contract, which is for virtually all of the Nordural
facilitys existing production capacity, Nordural receives
an LME-based fee for the conversion of alumina, supplied by BHP
Billiton, into primary aluminum. Nordural has entered into a
ten-year alumina tolling contract with Glencore for
198 million pounds of the expansion capacity at the
Nordural facility. The fee Nordural will receive under that
contract will also be LME-based.
The Nordural facility purchases power from Landsvirkjun, a power
company jointly owned by the Republic of Iceland and two
Icelandic municipal governments, under a long-term contract due
to expire in 2019. The power delivered to the Nordural facility
under its current contract is from hydroelectric and geothermal
sources, competitively-priced and renewable sources of power for
the Nordural facility, at a rate based on the LME price for
primary aluminum. In connection with the expansion, Nordural
entered into an agreement with Hitaveita Suóurnesja hf.
(Sudurnes Energy) and Orkuveita Reykjavíkur
(Reykjavik Energy) for the supply of the additional
power required for the 269 million pounds of expansion
capacity. Under this agreement, Nordural will be required to
take or pay for a significant percentage of the power to be
supplied beginning a specified period after signing (subject to
extension for agreed upon events), even if the Nordural
expansion is not completed. The agreement also includes power
for an additional 18 million pounds of capacity, upon
satisfaction of certain conditions, including the completion of
a power transmission agreement. With the additional
18 million pounds of capacity, the total annual production
capacity of the Nordural facility would increase to
485 million pounds by late 2006. A decision on the
additional 18 million pounds of capacity is expected in
early 2005. Under the terms of Nordurals energy contracts
with Sudurnes Energy and Reykjavik Energy, the rate for the
power supplied for the expansion capacity will be LME-based.
Landsvirkjun has agreed on a best commercial efforts basis to
provide backup power to Nordural if Sudurnes Energy and
Reykjavík Energy are unable to meet the obligations of
their contract to provide power for the Nordural expansion. The
Companys plans to further increase the size of the
expansion project beyond 485 million pounds will depend on
its ability to enter into certain key contracts for that
capacity. The Company is in discussions for the supply of
electric power to support the further expansion of the Nordural
facility to the full 573 million pounds of annual
production capacity.
Nordural has a contract for the supply of anodes for its
existing capacity which expires in 2013. The Company is
currently exploring options for the supply of anodes for the
expansion capacity and does not currently believe the price to
be paid for those anodes will be materially different than under
Nordurals current arrangement.
The Hawesville facility is owned by NSA Ltd. and Hancock
Aluminum, LLC and operated by Century Aluminum of Kentucky, LLC,
each a wholly-owned direct or indirect subsidiary of the
Company. The Hawesville facility, strategically located adjacent
to the Ohio River near Hawesville, Kentucky, began operations in
1970 and has an annual production capacity of 538 million
pounds.
The Hawesville facilitys original four potlines have an
annual production capacity of approximately 426 million
pounds and are specially configured and operated so as to
produce high purity primary aluminum. The average purity level
of primary aluminum produced by these potlines is 99.9%,
compared to standard-purity aluminum which is approximately
99.7%. This high purity primary aluminum provides the
conductivity required by Hawesvilles largest customer,
Southwire, for its electrical wire and cable products as well as
for certain aerospace applications. A fifth potline added in
2001 has an annual capacity of approximately 112 million
pounds of standard-purity aluminum. See Sales and
Distribution The Hawesville Facility.
7
The Hawesville facility produces primary aluminum in molten,
ingot and sow form. The following table shows primary aluminum
shipments from the Hawesville facility during each of the
periods indicated:
Hawesville Facility Primary Aluminum Shipments
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Year Ended December, 31 | |
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2004 | |
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2003(2) | |
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2002(1) | |
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(In millions of pounds) | |
Molten aluminum
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314.1 |
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310.3 |
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303.2 |
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Primary aluminum ingot
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186.1 |
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159.8 |
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131.7 |
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Foundry alloys
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53.0 |
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70.8 |
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104.3 |
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Total
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553.2 |
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540.9 |
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539.2 |
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(1) |
Shipments for the year ended December 31, 2002 include
108.4 million pounds shipped by Glencore. |
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(2) |
Effective April 1, 2003, Century completed the acquisition
of Glencores Hawesville interest. Shipments for the year
ended December 31, 2003 include 27.1 million pounds
shipped by Glencore. |
The alumina used by the Hawesville facility is purchased under a
supply agreement with Gramercy Alumina LLC (GAL),
which was entered into on November 2, 2004 in connection
with the Gramercy acquisition. GAL, a joint venture company
owned 50/50 by Century and Noranda owns and operates the
Gramercy alumina refinery. . See Facilities
and Production The Gramercy Facility. This
supply agreement runs through December 31, 2010 and
replaces the previous supply agreement with Kaiser. The price
the Company pays for alumina used by the Hawesville facility is
now based on the cost of alumina production. Under its previous
agreement with Kaiser, the Company purchase alumina at prices
based on the London Metals Exchange (LME) price for
primary aluminum.
The Hawesville facility purchases all of its power from Kenergy
Corp. (Kenergy), a local retail electric
cooperative, under a power supply contract that expires at the
end of 2010. Kenergy acquires most of the power it provides to
the Hawesville facility from a subsidiary of LG&E Energy
Corp., with delivery guaranteed by LG&E. The Hawesville
facility currently purchases all of its power from Kenergy at
fixed prices. Approximately 27% of the Hawesville
facilitys power requirements are unpriced for the period
from 2006 to 2010.
The Ravenswood facility is owned and operated by the
Companys subsidiary, Century Aluminum of West Virginia,
Inc. (Century of West Virginia). Built in 1957, the
Ravenswood facility operates four potlines with an annual
production capacity of 375 million pounds. The facility is
strategically located adjacent to the Ohio River in Ravenswood,
West Virginia.
The Ravenswood facility produces molten aluminum that is
delivered to Pechineys adjacent fabricating facility and
standard-grade ingot that Century sells in the marketplace. See
Sales and Distribution The Ravenswood
Facility.
8
The following table shows primary aluminum shipments from the
Ravenswood facility during each of the periods indicated:
Ravenswood Facility Primary Aluminum Shipments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002(1) | |
|
|
| |
|
| |
|
| |
|
|
(In millions of pounds) | |
Molten aluminum
|
|
|
294.0 |
|
|
|
288.4 |
|
|
|
309.1 |
|
Standard-grade primary aluminum ingot
|
|
|
83.8 |
|
|
|
86.9 |
|
|
|
72.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
377.8 |
|
|
|
375.3 |
|
|
|
381.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Shipments for the year ended December 31, 2002 include
6.0 million pounds of standard-grade primary aluminum ingot
purchased and resold. |
Since January 1, 2002, the alumina used at the Ravenswood
facility has been supplied by Glencore under a five-year
contract at a variable price determined by reference to the LME
price for primary aluminum. The Company purchases the
electricity used at the Ravenswood facility under a fixed-price
power supply contract with Ohio Power, a subsidiary of American
Electric Power, which runs through December 31, 2005. On
February 18, 2005, Century of West Virginia signed an
agreement with Appalachian Power Company for the supply of
electricity to the Ravenswood facility beginning January 1,
2006. The agreement has an initial term of two years and
continues thereafter until Century gives 12 months
notice of cancellation. Appalachian Power has filed a petition
with the Public Services Commission of West Virginia
(PSC) seeking affirmation of its authorization to
provide service to the Ravenswood facility. In 2000, the PSC
found that the Ravenswood facility was in Appalachian
Powers service territory and had jurisdiction over the
provision of service. The agreement will become effective unless
the PSC fails to affirm its previous findings. Power under the
new agreement is priced under an Appalachian Power tariff.
The Mt. Holly facility, located in Mt. Holly, South Carolina,
was built in 1980 and is the most recently constructed aluminum
reduction facility in the United States. The facility consists
of two potlines with a total annual production capacity of
489 million pounds and casting equipment used to cast
molten aluminum into standard-grade ingot, extrusion billet and
other value-added primary aluminum products. Value-added primary
aluminum products are sold at higher prices than standard-grade
primary aluminum. The Companys 49.7% interest represents
243 million pounds of the facilitys production
capacity.
Centurys interest in the Mt. Holly facility is held
through its subsidiary, Berkeley Aluminum, Inc.
(Berkeley). Under the Mt. Holly ownership structure,
the Company holds an undivided 49.7% interest in the property,
plant and equipment comprising the aluminum reduction operations
at the Mt. Holly facility and an equivalent share in the general
partnership responsible for the operation and maintenance of the
facility. Alcoa owns the remaining 50.3% interest in the Mt.
Holly facility and an equivalent share of the operating
partnership. Under the terms of the operating partnership, Alcoa
is responsible for operating and maintaining the facility. Each
owner supplies its own alumina for conversion to primary
aluminum and is responsible for its proportionate share of
operational and maintenance costs.
9
The following table shows the Companys primary aluminum
shipments from the Mt. Holly facility during each of the periods
indicated:
Mt. Holly Facility Primary Aluminum Shipments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In millions of pounds) | |
Standard-grade primary aluminum ingot
|
|
|
111.9 |
|
|
|
119.5 |
|
|
|
113.4 |
|
Rolling ingot, foundry alloys and extrusion billets
|
|
|
137.7 |
|
|
|
118.0 |
|
|
|
122.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
249.6 |
|
|
|
237.5 |
|
|
|
236.1 |
|
|
|
|
|
|
|
|
|
|
|
Glencore supplies all of the Companys alumina requirements
for the Mt. Holly facility under contracts which expire
December 31, 2006 and January 31, 2008. The price
under both contracts is determined by reference to the quoted
LME price for primary aluminum.
The Mt. Holly facility purchases all of its power requirements
from the South Carolina Public Service Authority (also called
Santee Cooper), under a contract that runs through
2015. Power delivered through 2010 will be priced at rates fixed
under currently published schedules, subject to adjustments for
fuel costs. Rates for the period 2011 through 2015 will be as
provided under then-applicable schedules.
On October 1, 2004, the Company and Noranda Finance Inc.,
through 50/50 joint venture companies, acquired an alumina
refinery in Gramercy, Louisiana and related bauxite mining
assets in Jamaica (collectively, the Gramercy
assets) from Kaiser Aluminum & Chemical Company
(Kaiser.) The Gramercy assets were acquired pursuant
to the terms of an Asset Purchase Agreement, dated May 17,
2004, among Gramercy Alumina LLC, St. Ann Bauxite Limited,
Kaiser, and Kaiser Bauxite Company. Gramercy Alumina LLC
(GAL) and St. Ann Bauxite Limited (SABL)
are joint venture companies formed by Century and Noranda to
separately acquire the Gramercy plant and the bauxite mining
assets, respectively.
The purchase price for the Gramercy assets was $23 million,
subject to working capital adjustments. The Company paid
one-half, or $11.5 million of the unadjusted purchase
price, which the Company funded with available cash. Noranda
paid the remaining $11.5 million. The Company accounts for
its investment in the Gramercy assets using the equity method of
accounting. Kaiser sold the Gramercy assets with the approval of
the United States Bankruptcy Court for the District of Delaware
as part of its plan to emerge from Chapter 11 bankruptcy.
Alumina Refining Operations
The alumina refinery in Gramercy is owned by GAL, a Delaware
limited liability company. The Gramercy plant began operations
in 1959 and consists of a production facility, a powerhouse for
steam and electricity production, a deep water dock and a barge
loading facility. Extensive portions of the Gramercy plant were
rebuilt and modernized between 2000 and 2002.
The Gramercy plant currently produces alumina at a capacity rate
of approximately 1.2 million metric tons per year,
consisting of approximately 80% smelter grade alumina
(SGA), and 20% alumina hydrate, or chemical grade
alumina (CGA).
10
The following table shows annual production from the Gramercy
plant facility during each of the periods indicated:
Gramercy Plant Alumina Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004(1) | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In millions of metric tons) | |
Alumina
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Prior to the acquisition, Kaiser produced 0.9 million
metric tons of alumina at the Gramercy plant during 2004. |
The Company expects production at the Gramercy plant to remain
at or near capacity for the foreseeable future.
Bauxite is the principal raw material used in the production of
alumina, and natural gas is the principal energy source. The
Gramercy plant purchases all of its bauxite requirements from
the affiliated Jamaican bauxite mining operations described
below under a contract that expires at the end of 2010 at a
price that is fixed through 2005. The Gramercy plant purchases
its natural gas requirements at market prices under short-term
agreements with local suppliers.
Bauxite Mining Operations
The bauxite mining assets were acquired by SABL, a
newly-established Jamaican limited liability company jointly
owned by Century and Noranda. The bauxite mining assets are
comprised of: (i) a concession from the Government of
Jamaica (GOJ) to mine bauxite in Jamaica (the
mining rights,) and (ii) a 49% interest in a
Jamaican partnership that owns certain mining assets in Jamaica
(the mining assets.) The GOJ owns the remaining 51%
interest in the partnership. Following the acquisition, SABL and
the GOJ established a new partnership to hold the mining assets
and to conduct mining and related operations pursuant to the
mining rights. The mining assets consist primarily of rail
facilities, other mobile equipment, dryers, and loading and dock
facilities. The age and remaining lives of the mining assets
vary and they may be repaired or replaced from time to time as
part of SABLs ordinary capital expenditure plan. Under the
terms of the mining rights, SABL manages the operations of the
new partnership, pays operating costs and is entitled to all of
its bauxite production. The GOJ receives: (i) a royalty
based on the amount of bauxite mined, (ii) an annual
asset usage fee for the use of the GOJs 51%
interest in the mining assets, and (iii) certain fees for
lands owned by the GOJ that are covered by the mining rights.
SABL also pays to the GOJ customary income and other taxes and
fees pursuant to an Establishment Agreement with the GOJ that
establishes the fiscal regime for SABL through December 2005. A
production levy normally applicable to bauxite mined in Jamaica
has been waived for SABL through December 2007. If the levy is
subsequently assessed on bauxite produced by SABL, the
Establishment Agreement provides that certain payments to the
GOJ will be reduced and SABL and GOJ will negotiate amendments
to SABLs fiscal regime in order to mitigate the effects of
the levy.
Mining Rights. Under the terms of the mining rights, SABL
mines the land covered by the mining rights and the GOJ retains
surface rights and ownership of the land. The GOJ granted the
mining rights and entered into other agreements with SABL for
the purpose of ensuring the Gramercy plant will have sufficient
reserves to meet its annual alumina requirements and existing or
contemplated future obligations under third party contracts.
Under the mining rights, SABL is entitled to mine
4.5 million dry metric tons, (DMT), of bauxite
on specified lands annually through September 30, 2030. The
GOJ is required to provide additional land if the land covered
by the mining rights does not contain sufficient levels of
commercially exploitable bauxite. SABL is responsible for
reclamation of the land that it mines. In addition, SABL assumed
reclamation obligations related to prior operations of
approximately $9 million.
11
SABL Bauxite Production
The following table shows annual production from the Jamaican
mining operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December, 31 | |
|
|
| |
|
|
2004(1)(2) | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In millions of dry metric tons) | |
Bauxite
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Production for the year ended December 31, 2004 was
curtailed due to a temporary reduction in production following
the failure of a bauxite loading facility in October 2004. |
|
(2) |
Prior to the acquisition, Kaiser produced 3.2 million DMT
of bauxite in 2004. |
Provided existing customers continue to purchase bauxite at
previous levels, SABL is expected to produce approximately
4.0 million DMT in 2005 and if current market conditions
continue, will proceed with raising production to fully use its
annual bauxite mining rights.
SABL has various short-term agreements with third parties for
the supply of fuel oil, diesel fuel, container leasing and other
locally provided services.
Industry Overview
The most commonly used bench mark for pricing primary aluminum
is the price for aluminum transactions quoted on the LME. The
LME price, however, does not represent the actual price paid for
all aluminum products. For example, products delivered to
U.S. customers are often sold at a premium to the LME
price, typically referred to as the U.S. Midwest Market
Price. Over the last ten years through December 2004, the
average monthly Midwest premium has ranged from $0.021 to
$0.077 per pound. In addition, premiums are charged for
adding certain alloys to aluminum for use in specific
applications and for casting aluminum into specific shapes, such
as extrusion billet or rolling slab.
During 2002, global demand increased modestly, however supply
growth matched the increase and the market price for primary
aluminum declined. In 2003, global demand for aluminum increased
approximately 7.7% to 60.0 billion pounds in 2003, but
global aluminum supply did not keep pace as global aluminum
production increased only approximately 7.1% to
61.5 billion pounds. During 2004, global demand increased
by 9.0% to 66.3 billion pounds and LME inventories declined
54% from 1.5 million metric tons to 695,000 metric tons.
The primary aluminum industry is currently experiencing a period
of strong prices based on favorable production and consumption
trends. Spot aluminum prices, as quoted on the LME, remain above
the five and ten-year averages. The key factors in the current
strong pricing environment are: (i) strengthening global
demand for aluminum driven by the global economic recovery;
(ii) strong demand growth in China; (iii) a tightening
market for alumina, the major raw material input for aluminum,
that has resulted in a rapid escalation of alumina prices; and
(iv) the recent weakening of the U.S. dollar. The
average LME cash price for aluminum was $0.78, $0.65, and
$0.61 per pound for the years ended December 31, 2004,
2003 and 2002, respectively.
Sales and Distribution
The majority of the products produced at the Companys
facilities are sold to a limited number of customers. The
Company derived a combined total of approximately 76.3% of its
2004 consolidated sales from Pechiney, Southwire, BHP Billiton
and Glencore, Centurys four largest customers. Out of
total revenues of $1,060.7 million for 2004, sales to
Pechiney represented $301.0 million, or 28.4% of
Centurys total revenues, sales to Southwire represented
$258.3 million, or 24.4% of total revenues, sales to
Glencore represented $163.2 million, or 15.4% of total
revenues, and sales to BHP Billiton represented
$85.5 million, or 8.1% of total revenues. The remaining
$252.7 million, or 23.7% of Centurys total revenues,
represented sales to approximately 50 customers.
12
Nordural is party to a long-term alumina tolling contract with a
subsidiary of BHP Billiton which is due to expire
December 31, 2013. Under this contract, which is for
virtually all of the Nordural facilitys existing
production capacity, Nordural receives an LME-based fee for the
conversion of alumina, supplied by BHP Billiton, into primary
aluminum. Nordural has agreed to a 10-year alumina tolling
contract with Glencore for 198 million pounds of the
expansion capacity at the Nordural facility. The fee Nordural
will receive under that contract will also be LME-based.
Sales of primary aluminum to Southwire accounted for
$258.3 million or 56.0% of Centurys revenues from the
Hawesville facility in 2004. Sales to parties other than
Southwire accounted for the remaining $203.0 million or
44.0% of the Companys revenues from the Hawesville
facility during 2004. In connection with the acquisition of the
Hawesville facility in April 2001, the Company entered into a
ten-year contract with Southwire (the Southwire Metal
Agreement) to supply 240 million pounds of
high-purity molten aluminum annually to Southwires 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 through March 2008. Southwire has an option
to purchase an equal amount of standard-grade molten aluminum in
each of the remaining three years. The price for the molten
aluminum to be delivered to Southwire from the Hawesville
facility is variable and determined by reference to the
U.S. Midwest Market Price. This contract requires the
Company to deliver molten aluminum, thereby reducing its casting
and shipping costs. This agreement expires on March 31,
2011, and will automatically renew for additional five-year
terms, unless either party provides 12 months notice
that it has elected not to renew.
Concurrently with its acquisition of the remaining interest in
the Hawesville facility, the Company entered into a ten-year
contract with Glencore (the Glencore Metal
Agreement) under which Glencore agreed to purchase,
beginning on January 1, 2004, 45.0 million pounds per
year of the primary aluminum produced at the Ravenswood and Mt.
Holly facilities, at a price determined by reference to the
U.S. Midwest Market Price, subject to an agreed cap and
floor as applied to the U.S. Midwest Premium.
Sales of primary aluminum to Pechiney represented
$249.9 million or 83.0% of revenues from the Ravenswood
facility in 2004. Sales to parties other than Pechiney
represented $51.1 million or 17.0% of Ravenswoods
revenues in 2004. Century has a contract with Pechiney (the
Pechiney Metal Agreement) under which Pechiney
purchases 23 to 27 million pounds, per month, of
molten aluminum produced at the Ravenswood facility through
July 31, 2007. This contract provides that it will be
automatically extended through July 31, 2007 upon the
Companys entering into a new power contract for the
Ravenswood facility through that date. On February 18,
2005, Century of West Virginia signed an agreement with
Appalachian Power Company for the supply of electricity to the
Ravenswood facility beginning January 1, 2006. The new
power agreement has an initial term of two years and continues
thereafter until Century gives 12 months notice of
cancellation. Appalachian Power has filed a petition with the
Public Services Commission of West Virginia (PSC)
seeking affirmation of its authorization to provide service to
the Ravenswood facility. In 2000, the PSC found that the
Ravenswood facility was in Appalachian Powers service
territory and had jurisdiction over the provision of service.
The new power agreement will become effective unless the PSC
fails to affirm its previous findings. The price for primary
aluminum delivered under the Pechiney Metal Agreement is
variable and determined by reference to the U.S. Midwest
Market Price. This contract requires the Company to deliver
molten aluminum, thereby reducing its casting and shipping
costs. Pechiney has the right, upon 12 months notice,
to reduce its purchase obligations by 50% under this contract.
Alcan acquired Pechiney in February 2004.
13
Sales of primary aluminum to Glencore represented
$109.5 million or 51.4% of Centurys revenues from the
Mt. Holly facility in 2004. Sales to third parties other than
Glencore represented $103.6 million or 48.6% of revenues
from the Mt. Holly facility in 2004. Century had a contract to
sell Glencore approximately 110 million pounds of primary
aluminum produced at the Mt. Holly facility each year through
December 31, 2009 (the Original Sales
Contract). In January 2003, Century and Glencore agreed to
terminate and settle the Original Sales Contract for the years
2005 through 2009 which had provided for fixed prices. At that
time, the parties entered into a new contract (the New
Sales Contract) that requires Century to deliver the same
quantity of primary aluminum as did the Original Sales Contract
for these years. The New Sales Contract provides for variable
pricing determined by reference to the LME for the years 2005
through 2009. The price of primary aluminum delivered in 2004
remained fixed.
Prior to the January 2003 agreement to terminate and settle the
years 2005 though 2009 of the Original Sales Contract, the
Company had been classifying and accounting for it as a normal
sales contract under Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. A contract that is so
designated and that meets other conditions established by
SFAS No. 133 is exempt from the requirements of
SFAS No. 133, although by its term the contract would
otherwise be accounted for as a derivative instrument.
Accordingly, prior to January 2003, the Original Sales Contract
was recorded on an accrual basis of accounting and changes in
the fair value of the Original Sales Contract were not
recognized.
According to SFAS No. 133, it must be probable that at
inception and throughout its term, a contract classified as
normal will not result in a net settlement and will
result in physical delivery. In April 2003, the Company and
Glencore net settled a significant portion of the Original Sales
Contract, and it no longer qualified for the normal
exception of SFAS No. 133. The Company marked the
Original Sales Contract to current fair value in its entirety.
Accordingly, in the first quarter of 2003 the Company recorded a
derivative asset and a pre-tax gain of $41.7 million. Of
the total recorded gain, $26.1 million related to the
favorable terms of the Original Sales Contract for the years
2005 through 2009, and $15.6 million relates to the
favorable terms of the Original Sales Contract for 2003 through
2004.
The Company determined the fair value by estimating the excess
of the contractual cash flows of the Original Sales Contract
(using contractual prices and quantities) above the estimated
cash flows of a contract based on identical quantities using
LME-quoted prevailing forward market prices for aluminum plus an
estimated U.S. Midwest premium adjusted for delivery
considerations. The Company discounted the excess estimated cash
flows to present value using a discount rate of 7%.
On April 1, 2003, the Company received $35.5 million
from Glencore, $26.1 million of which related to the
settlement of the Original Sales Contract for the years 2005
through 2009, and $9.4 million of which represented the
fair value of the New Sales Contracts, discussed below. The
Company accounted for the unsettled portion of the Original
Sales Contract (years 2003 and 2004) as a derivative and
recognized period-to-period changes in fair value in current
income. The Company accounts for the New Sales Contract as a
derivative instrument under SFAS No. 133. The Company
has not designated the New Sales Contract as normal
because it replaces and substitutes for a significant portion of
the Original Sales Contract which, after January 2003, no longer
qualified for this designation. The $9.4 million initial
fair value of the New Sales Contract is a derivative liability
and represents the present value of the contracts
favorable term to Glencore in that the New Sales Contract
excludes from its variable price an estimated U.S. Midwest
premium, adjusted for delivery considerations. Because the New
Sales Contract is variably priced, the Company does not expect
significant variability in its fair value, other than changes
that might result from the absence of the U.S. Midwest
premium.
Alumina Sales. Approximately 80% of Gramercys
annual production capacity is supplied to the Companys
Hawesville and Norandas New Madrid primary aluminum
production facilities. The Companys Hawesville facility
purchases virtually all of its alumina requirements from the
Gramercy refinery. Prior to the
14
acquisition by GAL of the Gramercy plant, substantially all of
the SGA produced at the Gramercy plant was sold to the Company
and to Noranda under formula-priced alumina supply contracts
calculated as a percentage of the LME price of primary aluminum.
Following the acquisition, GAL sells SGA to the Company and to
Noranda based on Gramercys production costs under alumina
supply contracts due to expire on December 31, 2010. All of
the CGA production is currently sold under existing short-term
and long-term contracts with approximately 20 third party
purchasers. GAL expects to continue CGA production and sales in
order to optimize fixed costs.
Bauxite Sales. Prior to the acquisition, Kaiser used
approximately 60% of the bauxite produced by the bauxite mining
assets to supply the alumina requirements at the Gramercy plant.
The remaining 40% was sold to a third party alumina refinery in
Texas. Concurrently with the acquisition by SABL and GAL of the
Gramercy assets, SABL and GAL entered into a contract under
which SABL will supply the Gramercy plants bauxite
requirements through December 2010. The price for bauxite under
the contract is fixed through December 31, 2005. SABL is
currently negotiating a renewal of the third party agreement for
the sale of its remaining bauxite production.
Pricing and Risk Management
The Companys operating results are sensitive to changes in
the price of primary aluminum and the raw materials used in its
production. As a result, Century attempts to mitigate the
effects of fluctuations in primary aluminum and raw material
prices through the use of various fixed-price commitments and
financial instruments.
The Company offers a number of pricing alternatives to its
customers which, combined with Centurys metals risk
management activities, are designed to lock in a certain level
of price stability on its primary aluminum sales. Pricing of
Centurys products is generally offered at an indexed or
market price, where the customer pays an agreed-upon
premium over the LME price or relative to other market indices.
Substantially all of Nordurals revenues are derived from a
tolling arrangement whereby it converts alumina provided to it
into primary aluminum for a fee based on the LME price for
primary aluminum. Nordurals revenues are subject to the
risk of decreases in the market price of primary aluminum;
however, because it produces primary aluminum under a tolling
arrangement, Nordural is not exposed to increases in the price
for alumina, the principal raw material used in the production
of primary aluminum. In addition, under its current power
contract, Nordural purchases power at a rate which is a
percentage of the LME price for primary aluminum. By linking its
most significant production cost to the LME price for primary
aluminum, Nordural has a natural hedge against downswings in the
market for primary aluminum; however, this hedge also limits
Nordurals upside as the LME price increases.
The Company manages its exposure to fluctuations in the price of
primary aluminum by selling primary aluminum at fixed prices for
future delivery, through financial instruments, and by
purchasing alumina under supply contracts with prices tied to
the same indices as the Companys aluminum sales contracts.
To mitigate the volatility of the natural gas markets, the
Company enters into fixed price financial purchase contracts.
The Companys metals and natural gas risk management
activities are subject to the control and direction of senior
management. These activities are regularly reported to the Board
of Directors of Century. The Companys risk management
activities do not include trading or speculative transactions.
See Part II, Item 7A, Quantitative and
Qualitative Disclosures about Market Risk.
Nordural does not currently have any material financial
instruments to hedge commodity, currency or interest rate risk.
Nordural is exposed to foreign currency risk due to fluctuations
in the value of the U.S. dollar as compared to the euro and
the Icelandic krona. Under its long-term tolling agreement with
BHP Billiton, Nordural receives revenues denominated in
U.S. dollars. Nordurals labor costs are denominated in
15
Icelandic kronur and a portion of its anode costs are
denominated in euros. As a result, an increase in the value of
those currencies relative to the U.S. dollar would affect
Nordurals operating margins.
SABLs Jamaican bauxite mining operations do not currently
have any material financial instruments to hedge commodity or
currency risk. SABLs Jamaican operations are exposed to
foreign currency risk due to fluctuations in the value of the
U.S. dollar as compared to the Jamaican dollar. Under its
long-term bauxite agreement with the Gramercy plant, SABL
receives revenues denominated in U.S. dollars. SABLs
labor costs are denominated in Jamaican dollars. As a result, an
increase in the value of that currency relative to the
U.S. dollar would affect SABLs operating margins.
Competition
The market for primary aluminum is world-wide, and demand for
aluminum often varies widely from region to region. Aluminum
production also takes place throughout the world. Aluminum
competes with materials such as steel, plastic and glass, which
may be substituted for aluminum in certain applications.
In the United States, where most of the Companys
production capacity is located, the competitors are Alcoa, Alcan
and a few smaller producers. At present, the U.S. demand
for aluminum is robust, and U.S. production capacity has
declined substantially over the past few years in the face of
rising electrical power prices. As a consequence, much of the
U.S. demand must be met by foreign production, and delivery
premiums to the U.S. Midwest (reflecting cost of delivery
to this market) have risen sharply. The geographic proximity of
the Companys plants to the U.S. Midwest provides the
Company a competitive advantage over its off-shore competitors
by enabling it to capture the premium without incurring the
additional delivery costs.
The Company also has certain advantages in product quality and
customer service. Its Hawesville plant produces the high purity
aluminum needed by Southwires next-door plant for the
manufacture of electrical transmission lines. That high purity
metal is delivered in molten form, a cost savings and
competitive advantage to both parties. The Companys
Ravenswood plant also delivers molten metal to the adjacent
Pechiney Rolled Products rolling mill, providing similar
competitive advantages to the Company and Pechiney. And the
Companys versatile cast house at Mt. Holly permits it to
focus its production at that plant almost exclusively on premium
products.
The current weak U.S. dollar also provides the Company with
a competitive advantage. The LME aluminum price is a
U.S. dollar price. The impact of the current weak
U.S. dollar has the effect of improving the Companys
relative cost position versus off-shore competitors which must
pay some or all of their production costs in currencies which
have strengthened against the dollar.
In addition, there is a duty payable by non-European producers
for sales of aluminum into Europe. Icelandic aluminum producers
are exempt from this duty. The alumina toll conversion
agreements between the Companys Nordural ehf subsidiary
and third parties allow Nordural to receive portions of the
premium received by those third parties as a result of these
duty-free European sales.
Environmental Matters
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Environmental Contingencies |
The Company is subject to various environmental laws and
regulations. The Company has spent, and expects to spend,
significant amounts for compliance with those laws and
regulations. In addition, some of the Companys past
manufacturing activities have resulted in environmental
consequences which require remedial measures. Under certain
environmental laws which may impose liability regardless of
fault, the Company may be liable for the costs of remediation of
contaminated property, including its current and formerly owned
or operated properties or adjacent areas, or for the
amelioration of damage to natural resources. The Company
believes, based on information currently available to its
management, that its current environmental liabilities are not
likely to have a material adverse effect on the Company.
However, the Company cannot predict the requirements of future
environmental laws and future requirements at current or
formerly owned or operated properties or adjacent areas. Such
future requirements may result in liabilities which may have a
material adverse effect on the Companys financial
condition, results of operations or liquidity.
16
The 1990 amendments to the Clean Air Act impose stringent
standards on the aluminum industrys air emissions. These
amendments affect the Companys operations as
technology-based standards relating to reduction facilities and
carbon plants have been instituted. Although the Company cannot
predict with certainty how much it will be required to spend to
comply with these standards, its general capital expenditure
plan includes certain projects designed to improve its
compliance with both known and anticipated air emissions
requirements.
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. It is Centurys policy to accrue for costs
associated with environmental assessments and remedial efforts
when it becomes probable that the Company is liable and the
associated costs can be reasonably estimated. The aggregate
environmental-related accrued liabilities were $0.8 million
at December 31, 2002, $0.7 million at
December 31, 2003 and $0.6 million at
December 31, 2004. All accrued amounts have been recorded
without giving effect to any possible future recoveries. Century
has planned capital expenditures related to environmental
matters at all of its facilities of approximately
$0.6 million in 2005, $1.3 million in 2006 and
$0.4 million in 2007. In addition, the Company expects to
incur operating expenses relating to environmental matters of
approximately $9.9 million in 2005, $10.7 million in
2006 and $11.0 million in 2007. These amounts do not
include any projected capital expenditures or operating expenses
for matters relating to environmental control, remediation,
monitoring and compliance for the Companys joint venture
interest in the Gramercy assets. See Item 1,
Business Facilities and Production
The Gramercy Facility. As part of the Companys
general capital expenditure plan, the Company also expects to
incur capital expenditures for other capital projects that may,
in addition to improving operations, reduce certain
environmental impacts. With respect to ongoing environmental
compliance costs, including maintenance and monitoring, the
Company expense the costs when incurred.
Nordural is subject to various Icelandic and other environmental
laws and regulations. These laws and regulations are subject to
change, which changes could result in increased costs. Operating
in a foreign country exposes the Company to political,
regulatory, currency and other related risks. The Nordural
facility, built in 1998, uses technology currently defined to be
best available technology under the European
Unions Integrated Pollution Prevention and Control
Directive of 1996, or IPPC. The operational restrictions for the
Nordural facility, as determined by the Icelandic Minister for
the Environment, are set forth in the facilitys operating
license. The license currently allows for both the
facilitys current and planned expansion capacity.
Under the Companys 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 and against risks
associated with off-site hazardous material disposals which
pre-dated the closing.
Prior to the closing of the acquisition, the
U.S. Environmental Protection Agency, or EPA, had issued a
final record of decision, under the Comprehensive Environmental
Response, Compensation and Liability Act, directing that certain
response actions be taken at the Hawesville facility. By
agreement, Southwire is to perform all obligations under the
record of decision. The total costs for the obligations to be
undertaken and paid for by Southwire relative to these
liabilities are estimated under the record of decision to be
$12.6 million, and the forecast of annual operating and
maintenance costs is $1.2 million. Century Kentucky, LLC
will operate and maintain the ground water treatment system
required under the record of decision on behalf of Southwire,
and Southwire will reimburse Century Kentucky, LLC for expenses
that exceeds $0.4 million annually.
If any on-site environmental liabilities arising from
pre-closing activities at the Hawesville facility that were
unknown on the date the acquisition closed but become known
prior to March 31, 2007, the Company and Southwire will
share the costs of remedial action pro rata depending on the
year the liability is identified.
17
The Company will be responsible for all environmental
liabilities which first become known on or after March 31,
2007 and any post-closing environmental liabilities that result
from a change in laws.
The Company acquired the Hawesville facility by purchasing all
of the outstanding equity securities of Metalsco Ltd., a
wholly-owned subsidiary of Southwire. Metalsco previously owned
certain assets unrelated to the Hawesville plants
operations. These assets owned by Metalsco were distributed to
Southwire before the closing of the Hawesville acquisition.
Southwire indemnified the Company for all liabilities related to
these assets. Southwire also retained ownership of and full
responsibility for certain land adjacent to the Hawesville
facility containing potliner disposal areas.
Southwire has secured its environmental indemnity obligations to
the Company through April 1, 2008 by posting a letter of
credit in favor of the Company in the amount of
$14.0 million. Southwire is obligated to post an additional
$15.0 million if its net worth drops below a pre-determined
level prior to April 1, 2008. The amount of security
Southwire provides may increase (but not above
$14.5 million or $29.5 million, as applicable) or
decrease (but not below $3.0 million) if certain specified
conditions are met.
The Company cannot be certain 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 record of decision and for certain
liabilities related to the properties previously owned by
Metalsco. If Southwire fails to meet its indemnity obligations
or if the Companys shared or assumed liability is
significantly greater than anticipated, the Companys
financial condition, results of operations and liquidity could
be materially adversely affected.
Century Aluminum of West Virginia, Inc. continues to perform
remedial measures at its Ravenswood facility pursuant to an
order issued by the EPA in 1994. Century of West Virginia also
conducted a facility investigation under the order evaluating
other areas at the Ravenswood facility that may have
contamination requiring remediation. The facility investigation
has been approved by appropriate agencies. Century of West
Virginia has completed interim remediation measures at two sites
identified in the facility investigation, and the Company
believes no further remediation will be required. A corrective
measures study, which will formally document the conclusion of
these activities, is being completed with the EPA. The Company
believes a significant portion of the contamination on the two
sites identified in the facility investigation is attributable
to the operations of Kaiser, which had previously owned and
operated the Ravenswood facility, and is the financial
responsibility of Kaiser.
On September 28, 2004, the Bankruptcy Court for the
District of Delaware approved an agreement by Kaiser to transfer
its environmental liability at Ravenswood to TRC Companies, Inc.
and TRC Environmental Corporation. The Bankruptcy Court also
approved an agreement between, Kaiser, TRC, Century of West
Virginia and Pechiney Rolled Products, Inc., effective as of
September 1, 2004, pursuant to which TRC assumed all of
Kaisers environmental liabilities at Ravenswood. TRC has
purchased insurance in amounts the Company believes are
sufficient to cover the costs of any TRC liability at
Ravenswood. Also, as of September 1, 2004, Century of West
Virginia and Pechiney entered into an agreement releasing
Century of West Virginia from all of the environmental
indemnification obligations for Kaiser-related matters arising
out of the Century of West Virginias 1999 sale of the
Ravenswood rolling mill to Pechiney.
The Company is not aware of any material cost of environmental
compliance or any material environmental liability for which it
would be responsible at the Mt. Holly facility.
The Company is a party to an EPA administrative order on consent
pursuant to which other past and present owners of an alumina
refining facility at St. Croix, Virgin Islands have agreed to
carry out a Hydrocarbon Recovery Plan to remove and manage
hydrocarbons floating on groundwater underlying the
18
facility. Pursuant to the Hydrocarbon Recovery Plan, recovered
hydrocarbons and groundwater are delivered to the adjacent
petroleum refinery where they are received and managed. Lockheed
Martin Corporation, which sold the facility to an affiliate of
the Company, Virgin Islands Alumina Corporation, or Vialco, in
1989, has tendered indemnity and defense of this matter to
Vialco pursuant to terms of the asset purchase agreement between
Lockheed and Vialco. The Companys management does not
believe Vialcos liability under the order or its indemnity
to Lockheed will require material payments. Through
December 31, 2004, the Company has expended approximately
$0.4 million on the Recovery Plan. Although there is no
limit on the obligation to make indemnification payments, the
Company expects the future potential payments under this
indemnification will be approximately $0.2 million which
may be offset in part by sales of recoverable hydrocarbons.
The Company, along with others, including former owners of the
Companys former St. Croix facility, received notice of a
threatened lawsuit alleging natural resources damages at the
facility. The Company has entered into a joint defense agreement
with the other parties who received notification of the
threatened lawsuit. While it is not presently possible to
determine the outcome of this matter, the Companys known
liabilities with respect to this and other matters relating to
compliance and cleanup, based on current information, are not
expected to be material and should not materially adversely
affect the operating results of the Company. However, if more
stringent compliance or cleanup standards under environmental
laws or regulations are imposed, previously unknown
environmental conditions or damages to natural resources are
discovered, or if contributions from other responsible parties
with respect to sites for which the Company has cleanup
responsibilities are not available, the Company may be subject
to additional liability, which may be material.
Prior to purchasing the Gramercy assets from Kaiser, the Company
and Noranda performed a pre-purchase due diligence investigation
of the environmental conditions present at the Gramercy plant.
The results of this investigation were submitted to state
regulatory officials. In addition, as part of this submittal,
the Company and Noranda agreed to undertake certain specified
remedial activities at the Gramercy plant. Based on the
submission, and conditioned on completion of the specified
remedial activities, state environmental officials have
confirmed that the Company and Noranda met the conditions for
bona fide prospective purchase protections against liability for
pre-existing environmental conditions at the facility. In
addition, pursuant to the terms of the purchase agreement with
Kaiser, Kaiser agreed to escrow $2.5 million of the
purchase price as an indemnity for expenses incurred in the
performance of environmental remediation at the Gramercy plant.
GAL, the 50/50 joint venture company formed by the Company and
Noranda to purchase the Gramercy plant, plans to spend
approximately $0.3 million in 2005 for environmental
remediation at the Gramercy plant. In connection with the
acquisition, GAL posted a $5.5 million bond as security for
certain clean-up obligations that would arise under state
environmental laws upon the termination of operations at the
Gramercy plant. Based on current information, the Company does
not believe its purchase of the Gramercy plant presents the
Company with any material environmental liabilities.
In conjunction with the purchase of the Gramercy plant, the
Company and Noranda jointly purchased Kaisers 49% interest
in Kaiser-Jamaica Bauxite Company, or KJBC, a partnership
located in Jamaica and 51% owned by the Jamaican government. Now
reconstituted as St. Ann Jamaican Bauxite Partnership, the
entity carries out bauxite mining, drying, storage and shipping
operations. The Company and Noranda performed a pre-purchase due
diligence investigation of the KJBC operations which disclosed
no significant environmental liabilities or regulatory
non-compliance. While it is impossible to predict what future
environmental requirements might be, based on current
information, the Company does not believe that the acquisition
of KJBC presents the Company with any material environmental
liabilities.
Intellectual Property
The Company owns or has rights to use a number of patents or
patent applications relating to various aspects of its
operations. The Company does not consider its business to be
materially dependent on any of these patents or patent
applications.
19
Employees and Labor Relations
The Company employs a work force of approximately 1,420 persons
in the United States, consisting of 1,150 hourly employees
and 270 salaried employees. The Company has approximately
560 hourly employees and 104 salaried employees at the
Ravenswood facility, and approximately 590 hourly employees
and 150 salaried employees at the Hawesville facility. The
bargaining unit employees at the Ravenswood and Hawesville
facilities are represented by the United Steelworkers of America
(USWA). The employees at the Mt. Holly facility are
employed by Alcoa and are not unionized. The Companys
corporate office, located in Monterey, California, has 16
salaried employees.
The represented hourly employees at the Ravenswood facility are
covered by a labor agreement with the USWA that expires
May 31, 2006. The agreement calls for fixed increases in
hourly wages and provides for certain benefit adjustments each
year.
In connection with the Hawesville acquisition, Century
negotiated a five-year collective bargaining agreement, expiring
March 31, 2006, which covers all of the represented hourly
employees at the Hawesville facility. The agreement provides for
fixed increases in hourly wages in the first, third, fourth and
fifth years and certain benefit adjustments over the life of the
agreement.
At the Gramercy plant, GAL employs 135 salaried employees and
352 unionized hourly employees. In connection with the
acquisition, GAL negotiated a new collective bargaining
agreement with the United Steelworkers of America that covers
all of the represented hourly employees at the Gramercy plant.
The wage, benefit and other terms of that agreement, which
expires in September 2005, are substantially identical to the
terms of the previous agreement with Kaiser. The Company and
Noranda established or provide directly certain operating level
business functions for the Gramercy plant that were provided by
Kaiser prior to the acquisition, including: procurement;
shipping; engineering; sales and marketing; human resources;
treasury; environmental programs; insurance; information
technology and business systems; tax and legal.
In Iceland, the Company employs 205 people at the Nordural
facility, of whom 163 are hourly employees and 42 are salaried.
There are six national labor unions represented in
Nordurals unionized work force. The labor contract with
these unions, which sets forth the work rules and wages for the
covered employees, expired on December 31, 2004. A new
contract is expected to be settled early in 2005. Nordural
expects to hire up to 160 new employees for the expansion,
comprised of approximately 155 hourly employees and 5
salaried employees.
At the Jamaican mining operations, SABL employs approximately
589 employees, comprised of approximately 139 unionized and
non-unionized salaried employees, 333 unionized hourly employees
and 117 rotating temporary workers. SABL is currently
negotiating with local unions to enter into new labor contracts
that are expected to contain substantially similar terms to
recently expired labor contracts. The Company and Noranda
established or provide directly all non-operating level and
certain operating level business functions for the mining
operations that were provided by Kaiser prior to the
acquisition, including: procurement; shipping; engineering;
sales and marketing; human resources; treasury; environmental
programs; insurance; information technology and business
systems; and legal.
Century maintains noncontributory defined benefit pension plans
for all salaried employees and the hourly employees at the
Ravenswood facility and the Company contributes to a
multi-employer benefit plan for the hourly employees at the
Hawesville facility. In addition, the Company maintains
postretirement healthcare and life insurance benefit plans and
defined contribution 401(k) plans for its salaried and hourly
employees. Management believes that its relations with its
employees are good.
20
In connection with the Gramercy acquisition, GAL agreed to
establish a defined benefit pension plan and a defined
contribution plan for employees of the Gramercy plant to replace
the plans previously provided by Kaiser. Kaiser retained all
worker compensation, pension and post-retirement medical
obligations related to pre-acquisition operations at the
Gramercy plant.
In connection with the bauxite mining acquisition, SABL assumed
all of Kaisers pension and benefit obligations for the
employees of the mining operations.
The Nordural facility is located in Grundartangi, Iceland,
approximately 25 miles northwest of Reykjavik,
Icelands capital. Built in 1998, the Nordural facility is
the Companys most recently constructed and lowest cost
facility. It has an annual production capacity of approximately
198 million pounds, which will increase by up to
269 million pounds to approximately 467 million pounds
upon completion of an ongoing expansion of the facility, with
potential for further expansion to 573 million pounds of
annual production capacity. The Nordural facility is situated on
two hundred acres leased from the Government of Iceland. See
Item 1, Business Facilities and
Production Nordural Facility. The Nordural
facility is subject to mortgages in connection with
Nordurals term loan facility as further described in
Part II, Item 7, Managements Discussion
and Analysis Debt Service.
The Hawesville facility occupies 189 acres on a site
totaling 747 acres located adjacent to the Ohio River in
Hawesville, Kentucky. The Hawesville facility began operations
in 1970 and has an annual production capacity of approximately
538 million pounds. As of April 1, 2003, Century owns
100% of the Hawesville facility. From April 1, 2001 to
April 1, 2003, Centurys portion of the annual
production capacity of the Hawesville facility was
430 million pounds. See Item 1,
Business Facilities and Production
Hawesville Facility.
The Ravenswood facility occupies 350 acres on a site
totaling 2,290 acres located adjacent to the Ohio River
near Ravenswood, West Virginia. The Ravenswood facility was
built in 1957 and has an annual production capacity of
approximately 375 million pounds. See Item 1,
Business Facilities and Production
Ravenswood Facility.
The Hawesville and Ravenswood facilities are subject to
mortgages in connection with the Companys outstanding debt
as further described in Part II, Item 7,
Managements Discussion and Analysis Debt
Service.
The Mt. Holly facility occupies 1,000 acres on a site
totaling 6,500 acres located in Mt. Holly, South Carolina.
The Mt. Holly facility was constructed in 1980 and has an annual
production capacity of approximately 489 million pounds.
Century owns a 49.7% interest in the Mt. Holly facility and the
remaining interest is owned by Alcoa. Alcoa manages and operates
the facility pursuant to an owners agreement whereby each
owner furnishes its own alumina for conversion to aluminum and
is responsible for its pro rata share of the operating and
conversion costs. See Item 1, Business
Facilities and Production Mt. Holly Facility.
The Gramercy plant sits on a site totaling 1,650 acres
located adjacent to the Mississippi River in Gramercy,
Louisiana. The Gramercy plant began operations in 1959 and
consists of a production facility, a powerhouse for steam and
electricity production, a deep water dock and a barge loading
facility. Extensive portions of the Gramercy plant were rebuilt
and modernized between 2000 and 2002. The Gramercy plant
currently produces alumina at a capacity rate of approximately
1.2 million metric tons per year, consisting of
approximately 80% smelter grade alumina and 20% alumina hydrate,
or chemical grade alumina. See Item 1,
Business Facilities and Production
The Gramercy Facility for a description of the alumina
refining operations at the Gramercy plant.
The bauxite mining operations of the Company are located in St.
Ann, Jamaica. Under the terms of mining rights granted by the
GOJ, SABL mines the land covered by the mining rights and the
GOJ retains surface rights and ownership of the land. The GOJ
granted the mining rights and entered into other agreements with
SABL for the purpose of ensuring the Gramercy plant will have
sufficient reserves to meet its
21
annual alumina requirements and existing or contemplated future
obligations under third party contracts. Under the mining
rights, SABL is entitled to mine 4.5 million dry metric
tons, or DMT, of bauxite on specified lands annually through
September 30, 2030. The GOJ is required to provide
additional land if the land covered by the mining rights does
not contain sufficient levels of commercially exploitable
bauxite. See Item 1, Business Facilities
and Production The Gramercy Facility for a
description of the alumina refining operations at the Gramercy
plant and bauxite mining operations in Jamaica.
Equipment failures at the Ravenswood, Mt. Holly, Hawesville,
Nordural, or Gramercy facilities could limit or shut down the
Companys production for a significant period of time. In
order to minimize the risk of equipment failure, the Company
follows a comprehensive maintenance and loss prevention program
and periodically reviews its failure exposure.
The Company may suffer losses due to a temporary or prolonged
interruption of the supply of electrical power to its
facilities, which can be caused by unusually high demand,
blackouts, equipment failure, natural disasters or other
catastrophic events. See Part II, Item 7, Risk
Factors.
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Item 3. |
Legal Proceedings |
The Company has pending against it or may be subject to various
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 the ultimate
disposition will not have a material adverse effect on the
Companys financial condition, results of operations, or
liquidity. For a description of certain environmental matters
involving the Company, see Item 1, Environmental
Matters.
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Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders of the
Company during the fourth quarter of 2004.
Executive Officers
The following table sets forth certain information concerning
the executive officers of the Company. Each such person serves
at the discretion of the Board of Directors.
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|
|
Business Experience and Principal Occupation or |
|
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|
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Employment During the Past 5 Years; |
Name |
|
Age | |
|
Positions Held with Company |
|
|
| |
|
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Craig A. Davis
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|
|
64 |
|
|
Chairman of the Company for more than five years. Chief
Executive Officer of the Company for more than five years. |
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Gerald J. Kitchen
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|
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64 |
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Executive Vice President, General Counsel and Chief
Administrative Officer of the Company for more than five years. |
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David W. Beckley
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60 |
|
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Executive Vice President and Chief Financial Officer of the
Company for more than five years. |
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E. Jack Gates
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|
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63 |
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Executive Vice President and Chief Operating Officer since
October 2003, Vice President, Reduction Operations, of the
Company since December 2000; President and Chief Executive
Officer of F.G. Pruitt, Inc., from 1997 until December 2000;
various management positions with Reynolds Metals Company from
1964 until 1997. |
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Daniel J. Krofcheck
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|
|
51 |
|
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Vice President and Treasurer of the Company for more than five
years. |
22
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Business Experience and Principal Occupation or |
|
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|
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Employment During the Past 5 Years; |
Name |
|
Age | |
|
Positions Held with Company |
|
|
| |
|
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Steve Schneider
|
|
|
49 |
|
|
Vice President and Corporate Controller of the Company since
April 2002; Corporate Controller of the Company since April
2001; Private Business Consultant from 2000 through April 2001;
various management positions with Alcoa Inc. from 1977 until
2000. |
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Peter C. McGuire
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|
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57 |
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Vice President and Associate General Counsel for the Company
since April 2002; Associate General Counsel for the Company for
more than five years. |
Craig A. Davis, who served as the Companys Chief Executive
Officer for more than five years through January 1, 2003,
was reelected as its Chief Executive Officer on October 15,
2003.
PART II
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Item 5. |
Market for Registrants Common Equity and Related
Stockholder Matters |
The Companys common stock trades on the NASDAQ National
Market tier of the NASDAQ Stock Market under the symbol: CENX.
The following table sets forth, on a quarterly basis, the high
and low sales prices of the common stock during the two most
recent fiscal years.
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High | |
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Low | |
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| |
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| |
2004
|
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|
|
|
|
|
|
|
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Fourth Quarter
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$ |
29.10 |
|
|
$ |
22.42 |
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Third Quarter
|
|
$ |
28.00 |
|
|
$ |
21.70 |
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Second Quarter
|
|
$ |
29.40 |
|
|
$ |
18.64 |
|
|
First Quarter
|
|
$ |
29.70 |
|
|
$ |
19.15 |
|
2003
|
|
|
|
|
|
|
|
|
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Fourth Quarter
|
|
$ |
22.25 |
|
|
$ |
10.41 |
|
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Third Quarter
|
|
$ |
12.71 |
|
|
$ |
6.90 |
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Second Quarter
|
|
$ |
7.61 |
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$ |
5.82 |
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First Quarter
|
|
$ |
7.65 |
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|
$ |
5.61 |
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At February 28, 2005, there were 23 holders of record of
the Companys outstanding common stock, which does not
include the number of beneficial owners whose common stock was
held in street name.
The Company did not declare any dividends in 2004 or 2003 on its
common stock. The Company did not declare or pay any dividends
in 2003 on its preferred stock; however, in May 2004, the
Company paid $3.3 million in dividend arrearages on its
convertible preferred stock. In May 2004, all of the outstanding
shares of the Companys convertible preferred stock were
converted into common stock, eliminating the accumulation of
dividends on the Companys preferred stock. The
Companys revolving credit facility and the indenture
governing the Companys senior notes, among other things,
contain restrictions on the payment of dividends by the Company.
See Part II, Item 7, Liquidity and Capital
Resources. Nordurals new term loan facility, among
other things, contains restrictions on Nordurals ability
to pay dividends. See Part II, Item 7,
Managements Discussion and
Analysis Recent Developments
Nordurals New Term Loan Facility. The Company
has the capacity to pay dividends subject to certain financial
covenants under the revolving line of credit and the indenture
governing its senior notes. Although the Company does not
anticipate declaring dividends in the near future, under its
most restrictive covenants contained in the revolving line of
credit, the Company would be permitted to pay dividends up to
$5.0 million.
23
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Item 6. |
Selected Consolidated Financial Data |
The following table presents consolidated financial data of the
Company for the years indicated. The selected consolidated
historical balance sheet data as of each of the years ended
December 31, 2004 and 2003 and the selected consolidated
statement of operations data for each of the years ended
December 31, 2004, 2003, and 2002 is derived from the
Companys consolidated financial statements audited by
Deloitte & Touche LLP which are included herein. The
selected consolidated historical balance sheet data as of each
of the years ended December 31, 2002, 2001 and 2000 and the
selected consolidated statement of operations data for each of
the years ended December 31, 2001 and 2000 is derived from
the Companys consolidated financial statements audited by
Deloitte & Touche LLP which are not included herein.
The Companys selected historical results of operations
include:
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the results from the additional 23% interest in the Mt. Holly
facility since the Company acquired it in April 2000; |
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the results from the 80% interest in the Hawesville facility
since the Company acquired it in April 2001; |
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the results from the remaining 20% interest in the Hawesville
facility since the Company acquired it in April 2003; |
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the results from the Nordural facility since the Company
acquired it in April 2004; and |
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|
the Companys equity in the earnings of GAL and SABL since
the Company acquired a 50% joint venture interest in those
companies in October 2004. |
Accordingly, the results for those periods and prior periods are
not fully comparable to the results of operations for fiscal
year 2004 and are not indicative of the Companys current
business. The information set forth below should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Financial Statements and Supplementary Data and
notes thereto appearing in Part II, Items 7
and 8, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004(6) | |
|
2003(4) | |
|
2002 | |
|
2001(2) | |
|
2000(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales third party customers
|
|
$ |
897,538 |
|
|
$ |
660,593 |
|
|
$ |
603,744 |
|
|
$ |
543,453 |
|
|
$ |
299,277 |
|
|
Net sales related parties
|
|
|
163,209 |
|
|
|
121,886 |
|
|
|
107,594 |
|
|
|
111,469 |
|
|
|
129,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,060,747 |
|
|
|
782,479 |
|
|
|
711,338 |
|
|
|
654,922 |
|
|
|
428,597 |
|
|
Cost of goods sold
|
|
|
884,273 |
|
|
|
734,441 |
|
|
|
691,277 |
|
|
|
634,214 |
|
|
|
396,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
176,474 |
|
|
|
48,038 |
|
|
|
20,061 |
|
|
|
20,708 |
|
|
|
32,458 |
|
|
Selling, general and administrative expenses
|
|
|
24,916 |
|
|
|
20,833 |
|
|
|
15,783 |
|
|
|
18,598 |
|
|
|
13,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
151,558 |
|
|
|
27,205 |
|
|
|
4,278 |
|
|
|
2,110 |
|
|
|
18,527 |
|
|
Gain on sale of fabricating businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,156 |
|
|
Interest expense third party
|
|
|
(39,946 |
) |
|
|
(41,269 |
) |
|
|
(40,813 |
) |
|
|
(31,565 |
) |
|
|
(408 |
) |
|
Interest expense related parties
|
|
|
(380 |
) |
|
|
(2,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,086 |
|
|
|
339 |
|
|
|
392 |
|
|
|
891 |
|
|
|
2,675 |
|
|
Loss on early extinguishment of debt(7)
|
|
|
(47,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(1,305 |
) |
|
|
(688 |
) |
|
|
(1,843 |
) |
|
|
2,592 |
|
|
|
6,461 |
|
|
Net gain (loss) on forward contracts(3)
|
|
|
(21,521 |
) |
|
|
25,691 |
|
|
|
|
|
|
|
(203 |
) |
|
|
4,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004(6) | |
|
2003(4) | |
|
2002 | |
|
2001(2) | |
|
2000(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
|
Income (loss) before income taxes, minority interest, equity in
earnings of joint venture and cumulative effect of change in
accounting principle
|
|
|
42,044 |
|
|
|
8,699 |
|
|
|
(37,986 |
) |
|
|
(26,175 |
) |
|
|
36,606 |
|
|
Income tax benefit (expense)
|
|
|
(14,894 |
) |
|
|
(2,841 |
) |
|
|
14,126 |
|
|
|
8,534 |
|
|
|
(11,301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest, equity in earnings of
joint venture and cumulative effect of change in accounting
principle
|
|
|
27,150 |
|
|
|
5,858 |
|
|
|
(23,860 |
) |
|
|
(17,641 |
) |
|
|
25,305 |
|
|
Minority interest
|
|
|
|
|
|
|
986 |
|
|
|
5,252 |
|
|
|
3,939 |
|
|
|
|
|
|
Equity in earnings of joint venture(8)
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
27,971 |
|
|
|
6,844 |
|
|
|
(18,608 |
) |
|
|
(13,702 |
) |
|
|
25,305 |
|
|
Cumulative effect of change in accounting principle, net of tax
benefit of $3,430(5)
|
|
|
|
|
|
|
(5,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
27,971 |
|
|
|
966 |
|
|
|
(18,608 |
) |
|
|
(13,702 |
) |
|
|
25,305 |
|
|
Preferred dividends
|
|
|
(769 |
) |
|
|
(2,000 |
) |
|
|
(2,000 |
) |
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$ |
27,202 |
|
|
$ |
(1,034 |
) |
|
$ |
(20,608 |
) |
|
$ |
(15,202 |
) |
|
$ |
25,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$ |
0.95 |
|
|
$ |
0.23 |
|
|
$ |
(1.00 |
) |
|
$ |
(0.74 |
) |
|
$ |
1.25 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.95 |
|
|
$ |
(0.05 |
) |
|
$ |
(1.00 |
) |
|
$ |
(0.74 |
) |
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$ |
0.95 |
|
|
$ |
0.23 |
|
|
$ |
(1.00 |
) |
|
$ |
(0.74 |
) |
|
$ |
1.24 |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.95 |
|
|
$ |
(0.05 |
) |
|
$ |
(1.00 |
) |
|
$ |
(0.74 |
) |
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Common Share
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.15 |
|
|
$ |
0.20 |
|
|
$ |
0.20 |
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004(6)(8) | |
|
2003(4)(5) | |
|
2002 | |
|
2001(2) | |
|
2000(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
(103,367 |
) |
|
$ |
78,534 |
|
|
$ |
94,618 |
|
|
$ |
62,312 |
|
|
$ |
76,701 |
|
|
Intangible asset power contract-net
|
|
|
86,809 |
|
|
|
99,136 |
|
|
|
119,744 |
|
|
|
146,002 |
|
|
|
|
|
|
Total assets
|
|
|
1,330,870 |
|
|
|
810,326 |
|
|
|
765,167 |
|
|
|
776,706 |
|
|
|
333,770 |
|
|
Long-term debt
|
|
|
330,711 |
|
|
|
336,310 |
|
|
|
321,852 |
|
|
|
321,446 |
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
560,595 |
|
|
|
513,758 |
|
|
|
453,011 |
|
|
|
441,329 |
|
|
|
74,511 |
|
|
Total shareholders equity
|
|
|
382,817 |
|
|
|
187,697 |
|
|
|
192,132 |
|
|
|
217,185 |
|
|
|
202,639 |
|
|
|
(1) |
On April 1, 2000, the Company purchased an additional 23%
interest in the Mt. Holly facility from Xstrata, an affiliate of
Glencore, increasing the Companys ownership interest to
49.7%. Accordingly, the results of operations following that
date reflect the increased production which resulted from that
purchase. Similarly, balance sheet data as of and following
December 31, 2000 includes the assets and liabilities
related to the additional 23% interest in the Mt. Holly facility. |
|
(2) |
On April 1, 2001, the Company purchased the Hawesville
facility from Southwire Company. Simultaneously, the Company
effectively sold a 20% interest in the Hawesville facility to
Glencore. Accordingly, the results of operations following that
date reflect the increased production which resulted from
Centurys 80% interest. Similarly, balance sheet data as of
and following December 31, 2001 includes assets and
liabilities related to the Companys 80% interest in the
Hawesville facility. |
|
(3) |
On January 1, 2001, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities and related amendments. As a result, to the
extent that the Companys derivatives are designated as
effective cash flow hedges, unrealized gains (losses) are
reported as accumulated other comprehensive income, rather than
reported in the Statement of Operations as was done in 2000.
Beginning in 2001, realized gains (losses) resulting from
effective cash flow hedges are reported as adjustments to net
sales and cost of goods sold. |
|
(4) |
In April 2003, the Company purchased Glencores 20%
interest in the Hawesville facility. Accordingly, the results of
operations following that date reflect the increased production
which resulted from Centurys additional 20% interest in
the Hawesville facility. Similarly, balance sheet data as of and
following December 31, 2003 includes assets and liabilities
related to the Companys additional 20% interest in the
Hawesville facility. |
|
(5) |
With the adoption of SFAS No. 143, Accounting
for Asset Retirement Obligations on January 1, 2003,
Century recorded an asset retirement obligation
(ARO) asset of $6,848, net of accumulated
amortization of $7,372, a Deferred Tax Asset of $3,430 and an
ARO liability of $14,220. The net amount initially recognized as
a result of applying the Statement is reported as a cumulative
effect of a change in accounting principle. The Company recorded
a one-time, non-cash charge of $5,878, for the cumulative effect
of a change in accounting principle. |
|
(6) |
In April 2004, the Company purchased the Nordural facility.
Accordingly, the results of operations following that date
reflect the increased production which resulted from that
purchase. Similarly, balance sheet data as of and following
December 31, 2004 includes the assets and liabilities
related to the interest in the Nordural facility. |
|
(7) |
In August 2004, the Company refinanced $325.0 million of
its senior secured first mortgage notes due 2008 with the
proceeds from a private placement of $250.0 million of
7.5% senior unsecured notes due 2014 and
$175.0 million of convertible senior notes due 2024. The
Company recorded a loss of $47.4 million for the one-time
cost of tendering these notes. |
|
(8) |
In October 2004, the Company, together with Noranda, completed
the joint purchase of the Gramercy, Louisiana alumina refinery
owned by Kaiser and Kaisers 49% interest in a Jamaican
bauxite mining |
26
|
|
|
partnership. The Company uses the equity method of accounting
for its investment in the joint venture. Accordingly, the
results of operations following that date reflect the
Companys equity in the joint venture income. Similarly,
balance sheet data as of and following December 31, 2004
includes assets related to the Companys interest in the
joint venture. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
RISK FACTORS
The following describes certain of the risks and
uncertainties faced by the Company that could cause its future
results to differ materially from its current results and from
those anticipated in its forward-looking statements. These risk
factors should be considered together with the other risks and
uncertainties described in Managements Discussion
and Analysis of Financial Condition and Results of
Operations and elsewhere herein.
|
|
|
The cyclical nature of the aluminum industry causes
variability in the Companys earnings and cash
flows. |
The Companys operating results depend on the market for
primary aluminum, which is a cyclical commodity affected by
global demand and supply conditions. Historically, global demand
and prices for primary aluminum have fluctuated in part due to
economic and market conditions in the United States and other
major global economies, as well as currency fluctuations. The
relative pricing of other materials, such as steel, plastic and
glass, which are used as alternatives for aluminum in some
applications, also affects demand for aluminum. Certain aluminum
end-use markets, including the automotive sector and the
building and construction sector, are also cyclical. When
downturns occur in these sectors, demand for primary aluminum
decreases resulting in lower prices for the Companys
products. Over the past twenty years, the average annual cash
price for primary aluminum on the LME was $0.69 per pound
and has ranged from a low of $0.47 per pound in 1985 to a
high of $1.15 per pound in 1988. The average LME price was
$0.65 per pound for the year ended December 31, 2003
and $0.78 per pound for the year ended December 31,
2004. Primary aluminum prices could decline below current
levels, reducing the Companys earnings and cash flows. A
prolonged downturn in prices for primary aluminum could
significantly reduce the amount of cash available to the Company
to meet its current obligations and fund its long-term business
strategies.
Conversely, if prices increase, certain of the Companys
hedging transactions, including its LME-based alumina contracts,
may limit the Companys ability to take advantage of the
increased prices. See Item 7A
Quantitative and Qualitative Disclosures About Market Risk.
|
|
|
The Company has reduced its casting and shipping costs by
selling molten aluminum to the major customers of its Ravenswood
and Hawesville facilities; the loss of one of these major
customers would increase its production costs at those
facilities. |
A combined total of 53% of the Companys consolidated net
sales for 2004 were derived from sales to Pechiney Rolled
Products, LLC and Southwire Company. Pechiney was acquired by
Alcan in February 2004. Pechineys facility is located
adjacent to the Ravenswood facility and Southwires
facility is located adjacent to the Hawesville facility. Due to
this proximity, the Company is able to deliver molten aluminum
to these customers, thereby eliminating the Companys
casting and shipping costs and its customers remelting
costs. The Company has long-term contracts with Pechiney and
Southwire which are due to expire at the end of 2005 and at the
end of 2011, respectively. The Company has entered into a new
contract for the supply of power to the Ravenswood facility that
would extend the Pechiney contract through July 31, 2007.
The new power contract is subject to certain approvals by the
Public Service Commission of West Virginia. See Item 1,
Facilities and Production Ravenswood
facility. Pechiney has the right to reduce its purchases
under its contract by 50%, upon 12 months notice, and
Southwire has the right to reduce purchases under its contract
by 20% beginning in 2009. The Company may be unable to extend or
replace these contracts when they terminate. If the Company is
unable to renew these contracts when they expire, or if either
customer
27
significantly reduces its purchases under those contracts, the
Company will incur higher casting and shipping costs.
|
|
|
A material change in the Companys relationship with
Glencore could affect how it purchases raw materials, sell its
products and hedge its exposure to metal price risk. |
The Company benefits from its relationship with Glencore
International AG, its largest shareholder. The Company has
entered into various long-term contracts with Glencore to sell
up to 13.4% of its current annual primary aluminum production
and to purchase up to 53.5% of its annual alumina requirements
under contracts expiring at various dates from 2006 through
2013. In addition, the Company has entered into an alumina
tolling agreement with Glencore for 198 million pounds of
the expansion capacity at the Nordural facility. The Company
also enters into forward sales and hedging contracts with
Glencore, which helps the Company manage its exposure to
fluctuating aluminum prices. Because Glencore is a major
customer, supplier and metal hedge counterparty, a material
change in the Companys relationship with Glencore,
including any significant change in its investment in the
Company, could affect how the Company purchases raw materials,
sells its products and hedges its exposure to metal price risk,
which could impact the Companys operating costs.
|
|
|
Losses caused by disruptions in the supply of power would
reduce the profitability of the Companys
operations. |
The Company may incur losses due to a temporary or prolonged
interruption of the supply of electrical power to its
facilities, which can be caused by unusually high demand,
blackouts, equipment failure, natural disasters or other
catastrophic events. Large amounts of electricity are used to
produce primary aluminum, and 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, the Company may lose production for a
prolonged period of time and incur significant losses. Although
the Company maintains property and business interruption
insurance to mitigate losses resulting from catastrophic events,
it may be required to pay significant amounts under the
deductible provisions of those insurance policies. In addition,
the coverage under those policies may not be sufficient to cover
all losses, or may not cover certain events. Certain of the
Companys insurance policies do not cover any losses that
may be incurred if the Companys suppliers are unable to
provide power during periods of unusually high demand. Certain
losses which are not covered by insurance may trigger a default
under the Companys revolving credit facility.
|
|
|
Changes or disruptions to the Companys current
supply arrangements could increase its raw material
costs. |
The Company depends on a limited number of suppliers for
alumina, the principal raw material used to produce primary
aluminum. Supply of alumina has been constrained over the past
two years, and the construction of new production facilities
requires substantial lead time. Disruptions to the
Companys supply of alumina could occur for a variety of
reasons, including disruptions of production at a particular
suppliers alumina refinery. These disruptions may require
the Company to purchase alumina on less favorable terms than
under its current agreements. Spot alumina prices are currently
substantially higher than the prices the Company pays under its
long-term agreements.
The Company and Noranda Finance Inc., through 50/50 joint
venture companies, recently purchased the Gramercy, Louisiana
alumina refinery that supplies the alumina used at the
Companys Hawesville and Norandas New Madrid primary
aluminum production facilities. As part of the acquisition, the
joint venture also purchased an interest in a Jamaican
partnership that owns bauxite mining assets in St. Ann, Jamaica.
Bauxite is the principal raw material used in the production of
alumina and all of the bauxite used at the Gramercy alumina
refinery is purchased from the Jamaican partnership. In October
2004, certain equipment used by the partnership to load bauxite
at the St. Ann port facility failed, resulting in a temporary
interruption of bauxite shipments. The St. Ann port facility,
which is used to ship bauxite to the Gramercy alumina facility
and to other customers, operated at a reduced shipping level
until full operations resumed in December 2004.
28
If there is a significant disruption of bauxite shipments in the
future, the joint venture could incur additional costs if it is
required to use bauxite from other sources.
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The cost of alumina used at the Hawesville facility may be
higher than under the Companys previous LME-based contract
depending on certain market conditions. |
The Gramercy refinery that the Company and Noranda recently
acquired from Kaiser supplies all of the alumina used at the
Companys Hawesville facility. Prior to the acquisition,
the Company purchased alumina from Kaiser under a long-term
contract at prices based on the LME price for primary aluminum.
Following the acquisition, that contract was replaced with a
contract that provides for alumina prices based on the Gramercy
refinerys production costs. As a result, the price the
Company pays for the alumina used at its Hawesville facility is
now based on the cost of alumina production, rather than the LME
price for primary aluminum. Those production costs could be
materially higher than the price paid under the Company previous
LME-based contract during periods when aluminum prices are low
and natural gas prices are high.
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Changes in the relative cost of certain raw materials and
energy compared to the price of primary aluminum could affect
the Companys operating results. |
The Companys operating results are sensitive to changes in
the price of primary aluminum and the raw materials used in its
production. Although the Company attempts to mitigate the
effects of such price fluctuations through the use of various
fixed-price commitments and financial instruments, these efforts
may limit its ability to take advantage of favorable changes in
the market prices for primary aluminum or raw materials. See
Item 7A Quantitative and Qualitative
Disclosures About Market Risk.
Electricity represents the Companys single largest
operating cost. As a result, the availability of electricity at
affordable prices is crucial to the profitability of the
Companys operations. While the Company purchases primarily
all of its electricity for its existing U.S. facilities
under fixed-price contracts through 2005, a portion of the
contracted cost of the electricity supplied to the Mt. Holly
facility varies with suppliers fuel costs. An increase in
these fuel costs would increase the price the Mt. Holly facility
pays for electricity. The fixed price portions of the
Companys current power contracts are due to expire at
various times from the end of 2005 through 2010. The Company has
entered into a new power contract with Appalachian Power Company
for the supply of power to the Ravenswood facility beginning
January 1, 2006. That agreement, which must be affirmed by
the Public Services Commission of West Virginia, would have an
initial term of 2 years and continue thereafter until the
Company gives 12 months notice of cancellation. If
the Company is unable to obtain power at affordable rates upon
the expiration of its contracts, the Company may be forced to
curtail or idle a portion of its production capacity, which
would lower its revenues and adversely affect the profitability
of its operations.
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The Company is subject to the risk of union
disputes. |
The bargaining unit employees at the Companys Ravenswood
and Hawesville facilities and at the Gramercy refinery are
represented by the United Steel Workers of America. The
Companys labor contracts expire in 2006 at the Ravenswood
and Hawesville facilities and in 2005 at the Gramercy plant.
Nordurals employees are represented by unions and were
employed under a contract that expired at the end of 2004. New
labor contracts are being negotiated to replace the recently
expired contracts covering employees at Nordural and the
Jamaican bauxite mining operations. The Company may be unable to
satisfactorily renegotiate those labor contracts. In addition,
existing labor contracts may not prevent a strike or work
stoppage at any of these facilities in the future, and any such
work stoppage could prevent or significantly impair the
Companys ability to conduct production operations at those
facilities.
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The Company depends on key management personnel. |
The Companys management structure is streamlined and, as a
result, it relies heavily on a small core senior management
team. The unexpected loss of the services of one or more key
employees could significantly harm the Companys business,
financial condition and operating results. The employment
agreements for certain key management personnel expire at the
end of 2005 and it is anticipated that one or more of those
individuals may retire at that time.
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The Company is subject to a variety of environmental laws
that could result in costs or liabilities. |
The Company is obligated to comply with various federal, state
and other environmental laws and regulations, including the
environmental laws and regulations of Iceland, the European
Economic Area and Jamaica. Environmental laws and regulations
may expose the Company to costs or liabilities relating to its
manufacturing operations or property ownership. The Company
incurs operating costs and capital expenditures on an ongoing
basis to comply with applicable environmental laws and
regulations. In addition, the Company is currently and may in
the future be responsible for the cleanup of contamination at
some of its current and former manufacturing facilities or for
the amelioration of damage to natural resources. For example,
the Company, along with others, including former owners of the
Companys former St. Croix facility, received notice of a
threatened lawsuit alleging natural resources damages at the
facility. While it is not presently possible to determine the
outcome of this matter, the Companys known liabilities
with respect to this and other matters relating to compliance
and cleanup, based on current information, are not expected to
be material and should not materially adversely affect the
Companys operating results. However, if more stringent
compliance or cleanup standards under environmental laws or
regulations are imposed, previously unknown environmental
conditions or damages to natural resources are discovered, or if
contributions from other responsible parties with respect to
sites for which the Company has cleanup responsibilities are not
available, the Company may be subject to additional liability,
which may be material. Further, additional environmental matters
for which the Company may be liable may arise in the future at
its present sites where no problem is currently known, with
respect to sites previously owned or operated by the Company, by
related corporate entities or by its predecessors, or at sites
that the Company may acquire in the future. Overall production
costs may become prohibitively expensive and prevent the Company
from effectively competing in price sensitive markets if future
capital expenditures and costs for environmental compliance or
cleanup are significantly greater than current or projected
expenditures and costs. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Environmental Expenditures and Other
Contingencies and Note 12 to the Companys
audited consolidated financial statements for a detailed
description of the Companys environmental matters and
associated costs and risks.
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Acquisitions may present difficulties for the
Company. |
In April 2004, the Company acquired the Nordural facility, which
is located in Grundartangi, Iceland. In October 2004, the
Company acquired a joint venture interest in an alumina refinery
located in Gramercy, Louisiana and a 49% interest in related
bauxite operations in Jamaica. The Company may make other
strategic acquisitions in the future. The Company is subject to
numerous risks as a result of its acquisitions, including the
following:
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it may be difficult for the Company to manage its existing
business as it integrates acquired operations; |
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the Company may not achieve the anticipated reductions in
average unit production costs as a result of its
acquisitions; and |
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management of acquisitions will require continued development of
financial controls and information systems, which may prove to
be expensive, time-consuming, and difficult. |
Accordingly, the Companys recent or future acquisitions
might not improve the Companys competitive position and
business prospects as anticipated.
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The Company may not realize the expected benefits of the
planned expansion of the Nordural facility. |
The ongoing expansion of the Companys Nordural facility,
which is expected to be completed in late 2006, will more than
double the facilitys existing production capacity. The
expected benefits of the expansion may not be realized if
Nordural is unable to complete the expansion in the time
forecast or experiences significant cost overruns. The Company
may add additional capacity to the current expansion project or
in a future expansion of the Nordural facility. In each case,
the Companys ability to add the additional capacity
depends on its ability to enter into certain key contracts for
that capacity.
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Operating in foreign countries exposes the Company to
political, regulatory, currency and other related risks |
The Nordural facility is the Companys first facility
located outside of the United States. The bauxite operations
related to the Gramercy plant, which the Company recently
acquired through a joint venture with Noranda, are located in
Jamaica. The Company may in the future consider other
acquisitions in foreign countries. International operations may
expose the Company to risks, including unexpected changes in
foreign laws and regulations, political and economic
instability, challenges in managing foreign operations,
increased cost to adapt the Companys systems and practices
to those used in foreign countries, export duties, tariffs and
other trade barriers, and the burdens of complying with a wide
variety of foreign laws. In addition, the Company will be
exposed to fluctuations in currency exchange rates and, as a
result, an increase in the value of foreign currencies relative
to the U.S. dollar could increase its operating expenses
which are denominated and payable in those currencies. For
example, Nordurals revenues are denominated in
U.S. dollars, while its labor costs are denominated in
Icelandic kronur and a portion of its anode costs are
denominated in euros.
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The Companys historical financial information may
not be comparable to its results for future periods. |
The Company historical financial information is not necessarily
indicative of its future results of operations, financial
position and cash flows. For example, the Companys
historical financial data does not reflect the effects of:
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its acquisition of the remaining 20% interest in the Hawesville
facility prior to April 1, 2003; |
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its acquisition of the Nordural facility prior to April 27,
2004; and |
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the equity earnings of the joint venture purchases of the
Gramercy assets. |
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The Companys high level of indebtedness requires
significant cash flow to meet its debt service requirements,
which reduces cash available for other purposes, such as the
payment of dividends, and limits the Companys ability to
pursue its growth strategy. |
The Company is highly leveraged. It had an aggregate of
approximately $524.1 million of outstanding indebtedness
for borrowed money as of December 31, 2004. In addition,
Nordural can borrow up to an aggregate of $365.0 million
under its new term loan facility. The level of the
Companys indebtedness could have important consequences,
including:
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limiting cash flow available for capital expenditures,
acquisitions, dividends, working capital and other general
corporate purposes because a substantial portion of its cash
flow from operations must be dedicated to servicing its debt; |
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increasing its vulnerability to adverse economic and industry
conditions; |
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limiting its flexibility in planning for, or reacting to,
competitive and other changes in its business and the industry
in which it operates; |
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placing the Company at a disadvantage compared to its
competitors who may have less debt and greater operating and
financing flexibility than it does; and |
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limiting the Companys ability to borrow additional funds,
which may prevent it from pursuing favorable acquisition
opportunities when they arise. |
In addition to its indebtedness, the Companys has
liabilities and other obligations which could reduce cash
available for other purposes and limit its ability to pursue its
growth strategy. See Liquidity and Capital
Resources. The Company will need a significant amount of
cash to service its debt. While the Companys debt service
has decreased as a result of the 2004 refinancing, it will
increase as Nordural draws down under its new term loan
facility. In addition, the Company will be required to settle in
cash up to the principal amount of its convertible notes (which
are convertible at any time) upon conversion, which could
increase its debt service obligations.
31
The Company is also exposed to risks of interest rate increases.
Nordural recently entered into a new $365.0 million senior
term loan facility. Nordurals annual debt service
requirements will vary, as amounts outstanding under its new
term loan facility will bear interest at a variable rate.
The Companys ability to pay interest and to repay or
refinance its indebtedness, including its senior term notes and
convertible notes, and satisfy other commitments, including
funding the Nordural expansion, will depend upon its future
operating performance, which is subject to general economic,
financial, competitive, legislative, regulatory, business and
other factors that are beyond its control. Accordingly, there is
no assurance that the Companys business will generate
sufficient cash flow from operations or that future borrowings
will be available to the Company in an amount sufficient to
enable it to pay its indebtedness, including the notes, or to
fund its other liquidity needs. If the Company is unable to meet
its debt service obligations or fund its other liquidity needs,
the Company could attempt to restructure or refinance its
indebtedness or seek additional equity capital. There can be no
assurance that the Company will be able to accomplish those
actions on satisfactory terms, or at all.
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Restrictive covenants in the Companys credit
facilities and the indenture governing its senior notes limit
the Companys ability to incur additional debt and pursue
its growth strategy. |
The Companys revolving credit facility and the indenture
governing its senior term notes each contain various covenants
that restrict the way it conducts its business and limits the
Companys ability to incur debt, pay dividends and engage
in transactions such as acquisitions and investments, which may
impair its ability to pursue its growth strategy. See
Liquidity and Capital Resources Debt
Service. Any failure to comply with those covenants may
constitute a breach under the revolving credit facility or the
indenture governing the notes, which may result in the
acceleration of all or a substantial portion of its outstanding
indebtedness and termination of commitments under its revolving
credit facility. If its indebtedness is accelerated, the Company
may be unable to repay those amounts upon acceleration and the
Companys secured lenders could foreclose on any collateral
securing the Companys secured debt.
Substantially all of Nordurals assets are pledged as
security under its new term loan facility, including, but not
limited to, all of Nordurals property, plant and equipment
related to the smelter and the harbor area and all of
Nordurals current and future inventory, receivables,
insurance policies, bank accounts, and rights under specified
contracts relating to the operation of the Nordural facility,
including its tolling, anode supply and power contracts having a
term longer than two years. In addition, the shares of Nordural
have been pledged to the lenders as collateral. If Nordural is
unable to comply with these covenants, the lenders would be able
to cancel commitments under Nordurals loan facility, cause
all or part of the amounts outstanding under the loan facility
to be immediately due and payable and foreclose on any
collateral securing the loan facility. The new term loan
facility also contains restrictions on Nordurals ability
to pay dividends, including a requirement that Nordural make a
repayment of principal in an amount equal to 50% of any dividend
paid to shareholders. See Liquidity and Capital
Resources. Based on Nordurals needs for cash to
finance its expansion and operations, the Company does not
currently anticipate that Nordural will distribute any cash
until the expansion is complete.
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The Company depends upon dividends from its subsidiaries
to meet its debt service obligations. |
The Company is a holding company and conducts all of its
operations through its subsidiaries. The Companys ability
to meet its debt service obligations depends upon its receipt of
dividends from its subsidiaries. Nordurals new senior term
loan facility places significant limits on Nordurals
ability to pay dividends. Subject to the restrictions contained
in the Companys revolving credit facility and the
indenture governing its senior notes, future borrowings by the
Companys subsidiaries could contain restrictions or
prohibitions on the payment of dividends by those subsidiaries.
In addition, under applicable law, the Companys
subsidiaries could be limited in the amounts that they are
permitted to pay as dividends on their capital stock.
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Despite current levels of indebtedness, the Company may be
able to incur substantially more indebtedness. |
Despite its current and anticipated debt levels, the Company may
be able to incur significant additional indebtedness from time
to time, subject to the restrictions contained in its revolving
credit facility and the indenture governing its senior term
notes. The Company may borrow amounts under its revolving credit
facility, and any such borrowings would be secured by all of the
Companys accounts receivable and inventory. Although the
indenture governing the notes contains restrictions on the
Companys incurrence of debt, these restrictions are
subject to a number of qualifications and exceptions and, under
certain circumstances, the Company could incur substantial
indebtedness while remaining in compliance with these
restrictions. See Managements Discussion and
Analysis of Results of Operations and Financial
Condition Liquidity and Capital Resources.
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The price of the Companys common stock may fluctuate
significantly. |
The market price of the Companys common stock has
experienced significant volatility from time to time, and this
volatility may continue in the future. From January 1,
2004, through March 11, 2005, the intra-day sales price of
our common stock on NASDAQ ranged from $18.64 to $34.27 per
share. In addition, the securities markets have experienced
significant price and volume fluctuations. The market price for
the Companys common stock may be affected by a number of
factors, including actual or anticipated variations in the
Companys quarterly results of operations, expectations
about the future price of aluminum, changes in earnings
estimates or recommendations by securities analysts, changes in
research coverage by securities analysts, the conversion of some
or all of the Companys outstanding convertible notes, any
announcement by the Company of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
developments in the aluminum industry and sales of substantial
numbers of shares by current holders of the Companys
common stock in the public market. In addition, general
economic, political and market conditions and other factors
unrelated to the Companys operating performance may cause
the market price of its common stock to be volatile.
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Provisions in the Companys charter documents and
state law may make it difficult for others to obtain control of
the Company, even though some stockholders may consider it to be
beneficial. |
Certain provisions of the Companys restated certificate of
incorporation and amended and restated bylaws, as well as
provisions of the Delaware General Corporation Law may have the
effect of delaying, deferring or preventing a change of control
of the Company, including transactions in which the
Companys stockholders might otherwise have received a
substantial premium for their shares over then current market
prices. For example, these provisions:
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give authority to the Companys board of directors to issue
preferred stock and to determine the price, rights, preferences,
privileges and restrictions of those shares without any
stockholder vote; |
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provide, under the Companys charter documents, for a board
of directors consisting of three classes, each of which serves
for a different three-year term; |
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require stockholders to give advance notice prior to submitting
proposals for consideration at stockholders meetings or to
nominate persons for election as directors; and |
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restrict, under the Companys charter documents, certain
business combinations between us and any person who beneficially
owns 10% or more of its outstanding voting stock. |
In addition, certain officers of the Company have entered into
employment and severance compensation agreements that provide
for cash payments, immediate vesting of stock options and
performance shares and acceleration of other benefits under
certain circumstances, including a change in control of the
Company. The Companys 1996 Stock Incentive Plan also
provides for acceleration of the ability to exercise stock
options and the vesting of performance shares upon a change of
control, and the Companys Non-Employee Directors Stock
Option Plan provides for acceleration of an option holders
ability to exercise stock options upon a change of control.
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Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion reflects the Companys historical
results of operations, which do not include results from:
(1) the Companys 80% interest in the Hawesville
facility until acquired in April 2001, (2) the remaining
20% interest in the Hawesville facility until acquired in April
2003, (3) the Companys ownership of Nordural until
acquired in late April 2004 and (4) the Companys
ownership interest in the Gramercy assets until acquired in
October 2004. Accordingly, the results for fiscal years 2002 and
2003 are not fully comparable to the results of operations for
fiscal year 2004. Historical results are not indicative of the
Companys current business. You should read the following
discussion in conjunction with the Companys consolidated
financial statements included elsewhere in this filing.
Overview
The Company produces primary aluminum. The aluminum industry is
cyclical and the price of primary aluminum (which trades as a
commodity) is determined by global supply and demand. The key
determinants of the Companys results of operations and
cash flow from operations are as follows:
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The Companys selling price is based on the LME price of
primary aluminum and fixed price sales contracts. |
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The Companys plants operate at or near capacity, and
fluctuations in volume, other than through acquisitions,
generally are small. |
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The principal components of cost of goods sold are alumina,
power and labor, which were in excess of 70% of the 2004 cost of
goods sold. Many of these costs are covered by long-term
contracts as described below. |
Average realized price and cost of goods sold per pound shipped
are key performance indicators. Revenue varies significantly
from period to period due to fluctuations in the LME price of
aluminum. Any adverse changes in the conditions that affect the
market price of primary aluminum could have a material adverse
effect on the Companys results of operations and cash
flows. Revenue is also impacted by the Companys hedging
activities. Working capital is relatively stable. Fluctuations
in working capital are influenced by the LME price of primary
aluminum and by the timing of cash receipts and disbursements
from major customers and suppliers.
Cost of goods sold, excluding alumina, is expected to remain
relatively stable because the Companys plants operate near
capacity and its major cost drivers are covered by long-term
contracts. Fluctuations in the cost of alumina are expected as
the pricing in these contracts, except for the Gramercy alumina
contract, is variable and based on LME prices. Power contracts
for U.S. facilities provide for primarily fixed priced
power through 2005, subject to adjustments for fuel costs for
Mt. Holly. On February 18, 2005, Century of West Virginia
signed an agreement with Appalachian Power Company for the
supply of electricity to the Ravenswood facility beginning
January 1, 2006. See Item 1,
Business Facilities and Production
Ravenswood Facility. Power usage is expected to be
consistent with prior periods. Labor costs should be consistent
with modest increases for negotiated salary and benefit
increases.
Through the Companys ownership of the Ravenswood,
Hawesville and Nordural facilities, and the Companys
ownership interest in the Mt. Holly facility, the Company has an
annual production capacity of approximately 1.4 billion
pounds of primary aluminum.
Recent Developments
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Nordurals New Term Loan Facility |
On February 10, 2005, Nordural executed a loan agreement
and other agreements and documents related to a new
$365.0 million senior term loan facility arranged by
Landsbanki Islands hf. and Kaupthing Bank hf. The term loan
facility closed and funded on February 15, 2005. Amounts
borrowed under the new term loan facility refinanced debt under
Nordurals prior term loan facility, and will be used to
finance a portion of the costs associated with the ongoing
expansion of the Nordural facility and for Nordurals
general corporate
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purposes. Borrowings are subject to customary conditions,
including the absence of any default under the loan agreement or
any material adverse change in Nordurals condition
(financial or otherwise), business, operations, assets,
liabilities or prospects. See Liquidity and Capital
Resources Debt Service Nordurals
New Term Loan Facility
On October 1, 2004, the Company and Noranda Finance Inc.,
through 50/50 joint venture companies, acquired an alumina
refinery in Gramercy, Louisiana and related bauxite mining
assets in Jamaica (collectively, the Gramercy
assets) from Kaiser Aluminum & Chemical Company
(the Gramercy acquisition.). The purchase price for
the Gramercy assets was approximately $23 million, subject
to working capital adjustments. The Company and Noranda each
paid one-half, or $11.5 million of the unadjusted purchase
price. Kaiser sold the Gramercy assets as part of its
reorganization to emerge from Chapter 11 bankruptcy.
Gramercy has an annual production capacity of 1.2 million
metric tons of alumina, approximately 80% of which is supplied
to the Hawesville facility and to a primary aluminum production
facility separately owned by Noranda. The Hawesville facility
purchases virtually all of its alumina requirements from
Gramercy.
In October 2004, certain bauxite loading equipment used by the
bauxite mining partnership at its St. Ann, Jamaica port facility
failed, resulting in a temporary interruption of bauxite
shipments from the facility. The St. Ann port facility, which is
used to ship bauxite to the Gramercy alumina facility and to
other customers, operated at a reduced shipping level until full
operations resumed in December 2004.
Post-Acquisition Operation
of the Gramercy assets
Alumina is the principal raw material used in the production of
primary aluminum. The Company acquired its share of the Gramercy
assets to ensure a stable supply of alumina to the
Companys primary aluminum production facilities at
acceptable costs and to avoid the risk of significant cost
increases if the Company was required to replace this source of
supply in the current high priced and volatile spot alumina
market.
Prior to the acquisition, the Gramercy assets were operated by
Kaiser as a non-autonomous part of Kaisers business. The
dominant portion of the revenues from these operations was
derived from alumina sales to Century and to Noranda. Following
the acquisition, the Company uses its share of the Gramercy
assets as a source of alumina for its Hawesville facility. Third
party CGA and bauxite sales are incidental and, standing alone,
are not significant and will be maintained only to optimize
fixed costs. Further, Century and Noranda have assumed certain
essential management and business functions previously provided
by Kaiser. Accordingly, there is a lack of continuity between
pre- and post-acquisition revenue-producing activity and the
manner in which essential management and business functions are
handled. In addition, Kaiser did not maintain separate financial
statements for the operations that comprise the Gramercy assets.
Based on the foregoing, the Company believes that disclosure of
historical financial information relating to the Gramercy assets
would not be material to an understanding of the Companys
future operations.
On August 26, 2004, the Company announced the
Companys repurchase of approximately $315.1 million
in aggregate principal amount of the Companys
11.75% senior secured first mortgage notes due 2008 that
were validly tendered pursuant to a tender offer and consent
solicitation commenced on July 29, 2004. Under the terms of
the tender offer, the Company paid $1,096.86 for each $1,000
principal amount of first mortgage notes purchased in the tender
offer, plus accrued and unpaid interest. Holders who tendered
their notes prior to 5:00 p.m., New York City time, on
August 6, 2004, received an additional payment of
$20.00 per $1,000 of principal amount of first mortgage
notes tendered.
The primary purpose of the tender offer and consent solicitation
was to refinance $325.0 million of the Companys
outstanding first mortgage notes with debt bearing a lower
interest rate, thereby reducing the Companys annual
interest expense. Approximately $9.9 million in aggregate
principal amount of first mortgage notes remain outstanding
following the tender offer and are scheduled to mature on
April 15, 2008.
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In connection with the tender offer and consent solicitation,
the Company received consents needed to amend the indenture
governing the remaining first mortgage notes to eliminate
substantially all restrictive covenants and certain default
provisions. The Company has provided the trustee under the
indenture notice of its intent to call for redemption all
outstanding first mortgage notes on or about April 15, 2005.
The Company financed the tender offer and consent solicitation
with a portion of the net proceeds from (i) the private
placement of $175.0 million aggregate principal amount of
the Companys 1.75% convertible senior notes due
August 1, 2024, and (ii) the private placement of
$250.0 million aggregate principal amount of the
Companys 7.5% senior notes due August 15, 2014.
The Company used the remaining proceeds from the sale of the
Companys convertible notes and senior notes for general
corporate purposes.
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The Nordural Acquisition and Expansion |
On April 27, 2004, the Company completed the acquisition of
all of the outstanding equity shares of Nordural hf. (now known
as Nordural ehf.) from Columbia Ventures Corporation. Nordural
is an Icelandic company that owns and operates the Nordural
facility, a primary aluminum reduction facility located in
Grundartangi, Iceland. Built in 1998, the Nordural facility is
the Companys most recently constructed and lowest cost
facility. It currently has an annual production capacity of
approximately 198 million pounds.
Since the acquisition, the Company has commenced work on an
expansion of the Nordural facility to increase its annual
production capacity to approximately 467 million pounds, or
more than double its current annual production capacity. As
currently planned, the expansion will add up to 269 million
pounds to the Nordural facilitys annual production
capacity. The expansion is projected to be completed by late
2006 and is expected to cost approximately $454 million.
In connection with the expansion, the Company agreed on the
terms of amendments to several long-term contracts with the
Government of Iceland, local municipalities and the Grundartangi
Harbour Fund, which were effective upon the closing of
Nordurals new term loan facility. The Company agreed to an
LME-based ten-year alumina tolling contract with Glencore for
198 million pounds of the expansion capacity. The power
needed for the expansion capacity will be purchased under a
long-term LME-based agreement with Sudurnes Energy and Reykjavik
Energy. The Companys new energy agreement includes power
for approximately 18 million pounds of additional capacity,
upon satisfaction of certain conditions, including the
completion of a power transmission agreement. With the
additional 18 million pounds of capacity, the total annual
production capacity of the Nordural facility would increase to
485 million pounds by late 2006. A decision on the
additional 18 million pounds of capacity is expected in
early 2005. Following completion of the expansion, Nordural will
have all the infrastructure and support facilities necessary for
further expansion to 573 million pounds of annual
production capacity. This expansion would be made at relatively
low capital cost. The Company is in discussions for the supply
of electric power to support this further expansion.
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Key Long-Term Primary Aluminum Sales Contracts |
The Company routinely enters into market priced contracts for
the sale of primary aluminum. A summary of Centurys
long-term primary aluminum sales contracts is provided below.
See Part I, Item 1, Sales and Distribution
for further discussion of these contracts.
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|
|
|
|
Contract |
|
Customer |
|
Volume |
|
Term |
|
Pricing |
|
|
|
|
|
|
|
|
|
Pechiney Metal Agreement
|
|
Pechiney |
|
276 to 324 million pounds per year |
|
Through December 31, 2005(1) |
|
Variable, based on U.S. Midwest market |
|
New Sales Contract
|
|
Glencore |
|
110 million pounds per year |
|
January 2005 through December 31, 2009 |
|
Variable, LME-based |
|
Glencore Metal Agreement
|
|
Glencore |
|
45 million pounds per year |
|
January 2004 through December 31, 2013 |
|
Variable, based on U.S. Midwest market |
|
Southwire Metal Agreement
|
|
Southwire |
|
240 million pounds per year (high purity molten aluminum) |
|
Through March 31, 2011 |
|
Variable, based on U.S. Midwest market |
|
|
|
|
|
60 million pounds per year (standard-grade molten aluminum) |
|
Through December 31, 2008 |
|
Variable, based on U.S. Midwest market |
|
Billiton Tolling Agreement(2)
|
|
BHP Billiton |
|
198 million pounds |
|
Through December 31, 2013 |
|
Variable, LME-based |
|
Glencore Tolling Agreement
|
|
Glencore |
|
198 million pounds |
|
Through July 2016(3) |
|
Variable, LME-based |
|
|
(1) |
The Pechiney Metal Agreement will be automatically extended
through July 31, 2007, if the Company extends its
Ravenswood power contract through that date. On
February 18, 2005, Century of West Virginia signed an
agreement with Appalachian Power Company for the supply of
electricity to the Ravenswood facility beginning January 1,
2006. See Item 1, Business Facilities
and Production Ravenswood Facility. |
|
(2) |
Substantially all of Nordurals sales consist of tolling
revenues earned under a long-term Alumina Supply, Toll
Conversion and Aluminum Metal Supply Agreement between Nordural
and a subsidiary of BHP Billiton Ltd. (the Billiton
Tolling Agreement). Under the Billiton Tolling Agreement,
which is for virtually all of Nordurals existing
production capacity, Nordural receives an LME-based fee for the
conversion of alumina, supplied by BHP Billiton, into primary
aluminum. The Company acquired Nordural in April 2004. |
|
(3) |
As of August 1, 2004, the Company entered into a ten-year
LME-based alumina tolling agreement for 198 million pounds
of the expansion capacity at the Nordural facility. The term of
the agreement will begin upon completion of the expansion, which
is expected to be in late-2006. |
Apart from the Pechiney Metal Agreement, New Sales Contract, the
Glencore Metal Agreement and Southwire Metal Agreement, the
Company had forward delivery contracts to sell
249.4 million pounds and 351.8 million pounds of
primary aluminum at December 31, 2004 and December 31,
2003, respectively. Of these forward delivery contracts, the
Company had fixed price commitments to sell 13.3 million
pounds and 70.5 million pounds of primary aluminum at
December 31, 2004 and December 31, 2003, respectively,
of which none at December 31, 2004 and 53.5 million
pounds December 31, 2003, were with Glencore.
|
|
|
Key Long-Term Supply Agreements |
|
|
|
Alumina Supply Agreements |
The Company is party to long-term supply agreements with
Glencore that supply a fixed quantity of alumina to the
Companys Ravenswood and Mt. Holly facilities at prices
indexed to the price of primary
37
aluminum quoted on the LME. In addition, as part of the Gramercy
acquisition, the Company entered into a long-term supply
agreement on November 2, 2004 with Gramercy Alumina LLC
that supplies a fixed quantity of alumina to the Companys
Hawesville facility at prices based on the alumina production
costs at the Gramercy refinery. A summary of these agreements is
provided below. The Companys Nordural facility toll
converts alumina provided by BHP Billiton, and will toll convert
alumina provided by Glencore beginning in 2006. See Part I,
Item 1, Facilities and Production for
additional discussion of the Companys alumina and tolling
agreements.
|
|
|
|
|
|
|
Facility |
|
Supplier |
|
Term |
|
Pricing |
|
|
|
|
|
|
|
Ravenswood
|
|
Glencore |
|
Through December 31, 2006 |
|
Variable, LME-based |
Mt. Holly
|
|
Glencore |
|
Through December 31, 2006
(54% of requirement) |
|
Variable, LME-based |
Mt. Holly
|
|
Glencore |
|
Through January 31, 2008
(46% of requirement) |
|
Variable, LME-based |
Hawesville
|
|
Gramercy Alumina(1) |
|
Through December 31, 2010 |
|
Cost-based |
|
|
(1) |
The alumina supply agreement with Gramercy Alumina LLC, which
was entered into on November 2, 2004, replaced the
Companys alumina supply agreement with Kaiser. |
|
|
|
Electrical Power Supply Agreements |
The Company uses significant amounts of electricity in the
aluminum production process. A summary of these power supply
agreements is provided below.
|
|
|
|
|
|
|
Facility |
|
Supplier |
|
Term |
|
Pricing |
|
|
|
|
|
|
|
Ravenswood(1)
|
|
Ohio Power Company |
|
Through December 31, 2005 |
|
Fixed price |
Mt. Holly
|
|
Santee Cooper |
|
Through December 31, 2015 |
|
Fixed price, with fuel cost adjustment clause through 2010;
subject to a new fixed price schedule after 2010 |
Hawesville
|
|
Kenergy |
|
Through December 31, 2010 |
|
Fixed price through 2005, 27% (or 121 MW) unpriced 2006
though 2010 |
Nordural(2)
|
|
Landsvirkjun |
|
Through 2019 |
|
Variable rate based on the LME price for primary aluminum. |
|
|
(1) |
On February 18, 2005, Century of West Virginia signed an
agreement with Appalachian Power Company for the supply of
electricity to the Ravenswood facility beginning January 1,
2006. The agreement has an initial term of two years and
continues thereafter until Century gives 12 months
notice of cancellation. Appalachian Power has filed a petition
with the Public Services Commission of West Virginia
(PSC) seeking affirmation of its authorization to
provide service to the Ravenswood facility. In 2000, the PSC
found that the Ravenswood facility was in Appalachian
Powers service territory and had jurisdiction over the
provision of service. The agreement will become effective unless
the PSC fails to affirm its previous findings. Power under the
new agreement is priced under an Appalachian Power tariff. |
|
(2) |
In connection with the expansion of the Nordural facility, the
Company has entered into contracts with Sudurnes Energy and
Reykjavik Energy for the supply of the power required for
269 million pounds of the expansion capacity at the
Nordural facility. The Company may purchase additional
electrical power under one of those contracts to support the
further expansion of the facility. The rate for the power
supplied under both contracts will also be LME-based. |
38
The Companys labor costs at the Ravenswood and Hawesville
facilities are subject to the terms of labor contracts which
generally have provisions for annual fixed increases in hourly
wages and benefits adjustments. The six national labor unions
represented at the Nordural facility operate under a labor
contract that establishes wages and work rules for covered
employees. The employees at the Mt. Holly facility are employed
by Alcoa and are not unionized. The two national labor unions
represented at the Jamaican bauxite mining operations operate
under labor contracts that establish wages and work rules for
covered employees on a plant specific basis. A summary of key
labor agreements is provided below. See Item 1,
Business Employees and Labor Relations
for additional discussion about the Companys work force.
|
|
|
|
|
Facility |
|
Organization |
|
Term |
|
|
|
|
|
Ravenswood
|
|
USWA |
|
Through May 31, 2006 |
Hawesville
|
|
USWA |
|
Through March 31, 2006 |
Mt. Holly
|
|
Not unionized |
|
Not Applicable |
Nordural
|
|
Icelandic labor unions |
|
Through December 31, 2004(1) |
Gramercy
|
|
USWA |
|
Through September 30, 2005 |
Jamaica
|
|
Jamaican labor unions |
|
Through December 31, 2004(2) |
|
|
(1) |
The current labor contract at the Nordural facility expired on
December 31, 2004. A new contract is expected to be settled
in 2005. |
|
(2) |
The labor contracts at the Jamaican bauxite operation expired on
December 31, 2004 with respect to unionized hourly
employees, and December 31, 2003 with respect to unionized
salaried employees. New contracts are expected to be settled in
2005. |
Application of Critical Accounting Policies
The Companys significant accounting policies are discussed
in Note 1 of the consolidated financial statements. The
preparation of the financial statements requires that management
make subjective estimates, assumptions and judgments in applying
these accounting policies. Those judgments are normally based on
knowledge and experience about past and current events and on
assumptions about future events. Critical accounting estimates
require management to make assumptions about matters that are
highly uncertain at the time of the estimate and a change in
these estimates may have a material impact on the presentation
of the Companys financial position or results of
operations. Significant judgments and estimates made by the
Company include expenses and liabilities related to pensions and
other postemployment benefits and forward delivery contracts and
financial instruments.
|
|
|
Pension and Other Postemployment Benefit
Liabilities |
The Company sponsors various pension plans and also participates
in a union sponsored multi-employer pension plan for the
collective bargaining unit employees at the Hawesville facility.
The liabilities and annual income or expense of the
Companys pension and other postemployment benefit plans
are determined using methodologies that involve several
actuarial assumptions, the most significant of which are the
discount rate and the long-term rate of asset return.
In developing its expected long-term rate of return assumption
for pension fund assets, the Company evaluated input from its
actuaries, including their review of asset class return
expectations as well as long-term inflation assumptions.
Projected returns are based on historical returns of broad
equity and bond indices. The Company also considered its
historical 10-year compound returns. Century anticipates that
the Companys investments will generate long-term rates of
return of 9.0%. The Companys expected long-term rate of
return is based on an assumed asset allocation of 65% equity
funds and 35% fixed-income funds.
The discount rate that the Company utilizes for determining
future pension and post employment obligations is based on a
review of long-term bonds that receive one of the two highest
ratings given by a
39
recognized rating agency. The discount rate determined on this
basis has decreased to 5.75% at December 31, 2004 from
6.25% and 6.5% at December 31, 2003 and 2002, respectively.
Lowering the expected long-term rate of return by 0.5% (from
9.0% to 8.5%) would have increased the Companys pension
expense for the year ended December 31, 2004 by
approximately $0.3 million. Lowering the discount rate
assumptions by 0.5% would have increased the Companys
pension expense for the year ended December 31, 2004 by
approximately $0.4 million.
The Company provides postemployment benefit plans that provide
health care and life insurance benefits for substantially all
retired employees. SFAS No. 106 requires the Company
to accrue the estimated cost of providing postretirement
benefits during the working careers of those employees who could
become eligible for such benefits when they retire. The Company
funds these benefits as the retirees submit claims.
Measurement of the Companys postretirement benefit
obligations requires the use of several assumptions about
factors that will affect the amount and timing of future benefit
payments. The assumed health care cost trend rates are the most
critical assumptions for measurement of the postretirement
benefits obligation. Changes in the health care cost trend rates
have a significant effect on the amounts reported for the health
care benefit obligations.
The Company assumes medical inflation is initially 9%, declining
to 5% over six years and thereafter. A one-percentage-point
change in the assumed health care cost trend rates would have
the following effects in 2004:
|
|
|
|
|
|
|
|
|
|
|
One | |
|
One | |
|
|
Percentage | |
|
Percentage | |
|
|
Point Increase | |
|
Point Decrease | |
|
|
| |
|
| |
|
|
(In thousands) | |
Effect on total of service and interest cost components
|
|
$ |
2,241 |
|
|
$ |
(1,761 |
) |
Effect on accumulated postretirement benefit obligation
|
|
$ |
27,101 |
|
|
$ |
(21,511 |
) |
|
|
|
Forward Delivery Contracts and Financial
Instruments |
The Company routinely enters into market priced physical and
fixed-priced financial contracts for the sale of primary
aluminum and the purchase of raw materials in future periods.
The Company applies the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended, in accounting for these types of
contracts. For those physical delivery contracts which
management believes are probable of future delivery, such
contracts are classified as normal purchases and normal sales
and are not accounted for as derivatives.
The aluminum-based financial and physical delivery contracts
that are derivatives, as provided for in current accounting
standards, are marked-to-market using the LME spot and forward
market for primary aluminum. Because there is no quoted futures
market price for the U.S. Midwest premium component of the
market price for primary aluminum, it is necessary for
management to estimate the U.S. Midwest premium.
Fluctuations in the LME price of primary aluminum have a
significant impact on gains and losses included in the
Companys financial statements from period to period.
Unrealized gains and losses are either included in Other
comprehensive income (loss) or Net gain (loss) on forward
contracts, depending on criteria as provided for in the
accounting standards.
The forward natural gas purchase contracts are marked-to-market
using the NYMEX spot and forward market for natural gas.
Fluctuations in the NYMEX price of natural gas can have a
significant impact on gains and losses included in the
Companys financial statements from period to period. The
Company has designated these forward contracts as cash flow
hedges for forecasted natural gas transactions in accordance
with the provisions of SFAS No. 133 (as amended). The
Company assesses the effectiveness of these cash flow hedges
quarterly. The effective portion of the gains and losses are
recorded in Other comprehensive income (loss) and subsequently
reclassified into earnings when the forecasted transaction
affects earnings. The ineffective portion of the gain or loss is
reported in earnings immediately.
40
The principal contracts affected by these standards and the
resulting effects on the financial statements are described in
the consolidated financial statements and related notes thereto.
Results of Operations
The following table sets forth, for the years indicated, the
percentage relationship to net sales of certain items included
in the Companys Statements of Operations. The following
table includes the results from the Companys additional
20% interest in the Hawesville facility since its acquisition in
April 2003, the results from the Companys purchase of the
Nordural facility since its acquisition in April 2004 and the
results from the Companys interest in the Gramercy assets
since its acquisition in October 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net Sales | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold
|
|
|
(83.4 |
) |
|
|
(93.9 |
) |
|
|
(97.2 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16.6 |
|
|
|
6.1 |
|
|
|
2.8 |
|
Selling, general and administrative expenses
|
|
|
(2.3 |
) |
|
|
(2.6 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14.3 |
|
|
|
3.5 |
|
|
|
0.6 |
|
Interest expense
|
|
|
(3.8 |
) |
|
|
(5.6 |
) |
|
|
(5.7 |
) |
Interest income
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Loss on early extinguishment of debt
|
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
Other expense
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
Net gain (loss) on forward contracts
|
|
|
(2.0 |
) |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority interest, equity in
earnings of joint venture and cumulative effect of change in
accounting principle
|
|
|
3.9 |
|
|
|
1.2 |
|
|
|
(5.3 |
) |
Income tax benefit (expense)
|
|
|
(1.4 |
) |
|
|
(0.4 |
) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest, equity in earnings of
joint venture and cumulative effect of accounting change
|
|
|
2.5 |
|
|
|
0.8 |
|
|
|
(3.3 |
) |
Minority interest
|
|
|
|
|
|
|
0.1 |
|
|
|
0.7 |
|
Equity in earnings of joint venture
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
2.6 |
|
|
|
0.9 |
|
|
|
(2.6 |
) |
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.6 |
% |
|
|
0.1 |
% |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, the
pounds and the average sales price per pound shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Aluminum | |
|
|
| |
|
|
Direct | |
|
Toll | |
|
|
| |
|
| |
|
|
Pounds | |
|
$/Pound | |
|
Pounds | |
|
$/Pound | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(pounds in thousands) | |
|
(pounds in thousands) | |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
296,743 |
|
|
$ |
0.78 |
|
|
|
|
|
|
$ |
|
|
|
Second Quarter(2)
|
|
|
294,816 |
|
|
|
0.82 |
|
|
|
35,600 |
|
|
|
0.60 |
|
|
Third Quarter
|
|
|
292,978 |
|
|
|
0.83 |
|
|
|
51,218 |
|
|
|
0.60 |
|
|
Fourth Quarter
|
|
|
295,287 |
|
|
|
0.87 |
|
|
|
51,421 |
|
|
|
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,179,824 |
|
|
$ |
0.83 |
|
|
|
138,239 |
|
|
$ |
0.62 |
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Aluminum | |
|
|
| |
|
|
Direct | |
|
Toll | |
|
|
| |
|
| |
|
|
Pounds | |
|
$/Pound | |
|
Pounds | |
|
$/Pound | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(pounds in thousands) | |
|
(pounds in thousands) | |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
257,040 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
Second Quarter(1)
|
|
|
290,023 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
292,567 |
|
|
|
0.69 |
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
286,912 |
|
|
|
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,126,542 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
263,019 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
262,470 |
|
|
|
0.69 |
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
262,262 |
|
|
|
0.67 |
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
261,544 |
|
|
|
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,049,295 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
The table includes the results from the Companys
additional 20% interest in the Hawesville facility since its
acquisition in April 2003. |
|
(2) |
The table includes the results from the Companys purchase
of the Nordural facility since its acquisition in April 2004. |
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Net sales. Net sales for the year ended December 31,
2004 increased $278.3 million or 36% to
$1,061 million. Higher price realizations for primary
aluminum in 2004, due to an improved LME price and Midwest
premium for primary aluminum, contributed an additional
$155.4 million in sales. Shipment volume increased
191.5 million pounds, primarily associated with the
Nordural facility acquisition beginning in late April 2004 and
the additional 20% interest in the Hawesville facility beginning
in April 2003. Tolling revenues from the Nordural facility
acquisition contributed an additional $85.4 million in net
sales. The remaining $37.5 million increase was associated
with increased direct shipment volumes.
Gross profit. For the year ended December 31, 2004,
gross profit improved $128.4 million to
$176.5 million. Improved price realizations net of
increased alumina costs improved gross profit by
$112.6 million with increased shipment volume, primarily a
result of the Nordural facility acquisition in April 2004 and
the additional 20% interest in the Hawesville facility beginning
in April 2003, contributing $36.8 million in additional
gross profit. Offsetting these gains were increased power costs
due to lower efficiencies and price, $7.7 million; reduced
credits to cost of goods sold for lower-of-cost or market
adjustments, $5.2 million; raw material quality issues,
$4.6 million; and costs associated with the replacement of
pot cells and its effect on operational performance,
$3.5 million.
Selling, general and administrative expenses. Selling,
general and administrative expenses for the year ended
December 31, 2004 increased $4.1 million from the same
period in 2003. The increase was primarily a result of incentive
compensation expense accruals and increased fees associated with
Sarbanes Oxley Section 404 compliance work during the year.
Interest expense, net: Interest expense during the year
ended December 31, 2004 declined $4.3 million to
$39.2 million. The change in interest expense was a direct
result of the Companys refinancing activities in the
current year.
Net gain/loss on forward contracts. For the year ended
December 31, 2004, net loss on forward contracts was
$21.5 million as compared to a net gain on forward
contracts of $25.7 million for the same period in 2003. The
loss and gain reported for the years ended December 31,
2004 and December 31, 2003,
42
respectively, primarily relate to the early termination in 2003
of a fixed price forward sales contract with Glencore and the
improved LME price and Midwest premium for primary aluminum in
the current period. See Business Sales and
Distribution Mt. Holly.
Loss on early extinguishment of debt. For the year ended
December 31, 2004, the Company recorded a loss on early
extinguishment of debt of $47.4 million for the one-time
cost of tendering for the $325.0 million in first mortgage
notes.
Tax provision. Income tax expense for the year ended
December 31, 2004 increased $12.1 million due to the
changes in income before income taxes discussed above.
Equity in earnings of joint venture: Equity in earnings
from the Gramercy assets, which were acquired on October 1,
2004, was $0.8 million in the current period.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Net sales. Net sales for the year ended December 31,
2003 increased $71.1 million or 10.0% to
$782.5 million. Increased shipment volume of
77.2 million pounds in 2003, primarily associated with the
additional 20% interest in the Hawesville facility beginning in
April 2003, accounted for $52.4 million of the increase.
Higher price realizations for primary aluminum in 2003 due to an
improved LME price for primary aluminum contributed an
additional $18.8 million in sales.
Gross profit. Gross profit for the year ended
December 31, 2003 increased $28.0 million or 139.5% to
$48.0 million from $20.1 million for the same period
in 2002. Increased shipments, primarily from the additional 20%
interest in the Hawesville facility beginning in April 2003,
improved gross profit by $5.7 million. The remaining
$22.3 million improvement in gross profit was a result of
lower depreciation and amortization charges, $5.4 million,
primarily due to lower amortization charges related to the
intangible asset, see Part II, Item 8, Note 1 to
the Consolidated Financial Statements, reduced
charges to cost of goods sold for lower-of-cost or market
inventory adjustments, $7.3 million, and improved price
realizations net of increased alumina costs, $10.2 million,
other net benefits of $1.0 million, partially offset a
charge for the excess cost of spot alumina purchases of
$1.6 million due to a production curtailment at a
suppliers production facility.
Selling, general and administrative expenses. Selling,
general and administrative expenses for the year ended
December 31, 2003 increased $5.1 million to
$20.8 million. The increase was primarily a result of a
$3.1 million charge related to an executive resignation in
2003. The remaining increase of $2.0 million was a result
of increased incentive compensation associated with improved
2003 financial and operational results.
Interest Expense. Interest expense during the year ended
December 31, 2003 increased $3.0 million or 7.4% to
$43.8 million. The change in interest expense was primarily
a result of related party interest expense of $2.6 million
associated with the Glencore Note.
Other Income/ Expense. Other Expense for the year ended
December 31, 2003 declined by $1.2 million primarily
due to a write-off in 2002 of $1.7 million in deferred
costs associated with a prospective acquisition.
Net Gain on Forward Contracts. Net Gain on Forward
Contracts for the year ended December 31, 2003 was
$25.7 million with no gain or loss reported for the same
period in 2002. The gain recorded in 2003 primarily relates to
the early termination of a fixed price forward sales contract
with Glencore. See Part I, Item 1,
Business Sales and Distribution
Mt. Holly.
Tax Provision/ Benefit. Income tax provision increased
$17.0 million to $2.8 million from an income tax
benefit in 2002. The change in income taxes was a result of a
pre-tax gain in 2003 compared to a pre-tax loss in 2002. The
2002 tax benefit was affected by a $1.5 million reduction
in estimated income taxes payable relating to the reversal of
prior period accruals.
Minority Interest. Minority Interest reflects
Glencores interest in the net operating results of Century
Aluminum of Kentucky, LLC (the LLC), the limited
liability company which holds the power contract for the
Hawesville facility. The Minority Interest primarily represented
the amortization of the power contract.
43
Minority Interest for the year ended December 31, 2003
decreased $4.3 million to $1.0 million. The decrease
was a result of eliminating the minority interest in April 2003
through Centurys acquisition of Glencores 20%
interest in the Hawesville facility.
Cumulative Effect of Change in Accounting Principle. The
Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations on January 1, 2003. The
cumulative effect of adopting this standard was a one-time,
non-cash charge of $5.9 million, net of tax of
$3.4 million.
Liquidity and Capital Resources
The Companys principal sources of liquidity are cash flow
from operations and available borrowings under the
Companys revolving credit facility and Nordurals new
term loan facility. The Companys principal uses of cash
are operating costs, payments of interest on the Companys
outstanding debt, the funding of capital expenditures and
investments in related businesses, working capital and other
general corporate requirements.
As of December 31, 2004, the Company had
$524.1 million of indebtedness outstanding, including
$9.9 million of principal under the Companys first
mortgage notes, net of unamortized issuance discount,
$175.0 million of principal under the Companys
convertible notes, $250.0 million of principal under the
Companys senior notes, $7.8 million in industrial
revenue bonds which were assumed in connection with the
Hawesville acquisition, and $81.4 million of debt
outstanding at Nordural.
First Mortgage Notes. Interest payments on the
Companys first mortgage notes are payable semiannually in
arrears beginning on October 15, 2001. Payment obligations
under the notes are guaranteed by the Companys domestic
restricted subsidiaries and secured by mortgages and security
interests in 80% of the real property, plant and equipment
comprising the Hawesville facility and 100% of the real
property, plant and equipment comprising the Ravenswood
facility. The first mortgage notes are due to mature in 2008. In
August 2004, the Company completed a tender offer and consent
solicitation for the Companys first mortgage notes. In
connection with the consent solicitation, the Company entered
into a supplemental indenture that eliminated substantially all
of the restrictive covenants and certain default provisions
contained in the first mortgage notes indenture. The Company
purchased approximately $315.1 million in aggregate
principal amount of the first mortgage notes validly tendered in
the tender offer and not withdrawn. Following the purchase of
the first mortgage notes accepted in the tender offer,
$9.9 million in aggregate principal amount of the first
mortgage notes remain outstanding. See Managements
Discussion and Analysis Recent
Developments The 2004 Refinancing. The Company
has provided the trustee under the indenture notice of its
intent to call for redemption all outstanding first mortgage
notes on or about April 15, 2005.
Convertible Notes. Interest payments on the
Companys convertible notes are payable semiannually in
arrears beginning on February 1, 2005. The Companys
obligations under the notes are guaranteed by each of the
Companys substantial existing and future domestic
restricted subsidiaries if and for so long as such subsidiary
guarantees the Companys senior notes. The convertible
notes are due to mature on August 1, 2024. The convertible
notes are convertible at any time at an initial conversion rate
of 32.7430 shares of common stock per $1,000 principal
amount of notes, subject to adjustments for certain events. The
initial conversion rate is equivalent to a conversion price of
approximately $30.5409 per share of the Companys
common stock. Upon conversion of a convertible note, the holder
will receive cash up to the aggregate principal amount of the
notes to be converted, and, at the Companys election,
cash, common stock or a combination thereof in respect of the
remainder, if any, of the Companys conversion obligation
in excess of the principal amount. The convertible notes are
redeemable at the Companys option beginning on
August 6, 2009. The holders may require the Company to
repurchase all or part of their convertible notes on each of
August 1, 2011, August 1, 2014 and August 1,
2019. The convertible notes are classified as current because
they are convertible at any time.
Senior Notes. Interest payments on the Companys
senior notes are payable semiannually in arrears beginning on
February 15, 2005. The senior notes are guaranteed by each
of the Companys substantial
44
existing and future domestic restricted subsidiaries. The senior
notes are due to mature on August 15, 2014. The indenture
governing the Companys senior notes contains customary
covenants, including limitations on the Companys ability
to incur additional indebtedness, pay dividends, sell assets or
stock of certain subsidiaries and purchase or redeem capital
stock. The Company agreed to file and cause to become effective
a registration statement to exchange the senior notes for new
notes in a transaction registered under the Securities Act. On
February 11, 2005, the exchange offer registration
statement filed by the Company was declared effective. On
March 14, 2005, the exchange offer period expired. All of
the Companys 7.5% Senior Notes due August 15,
2014 were exchanged in the exchange offer. The terms of the
exchange notes are substantially identical to the senior notes,
except that the exchange notes are not subject to transfer
restrictions.
Revolving Credit Facility. Effective April 1, 2001,
the Company entered into a $100.0 million senior secured
revolving credit facility with a syndicate of banks. The
revolving credit facility will mature on April 2, 2006. The
Companys obligations under the revolving credit facility
are guaranteed by each of the Companys substantial
existing domestic subsidiaries and secured by a first priority
security interest in all accounts receivable and inventory
belonging to the Company and the Companys subsidiary
borrowers. 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. Borrowings under the
revolving credit facility are, at the Companys option, at
the LIBOR or the Fleet National Bank base rate plus, in each
case, 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 us. There were no outstanding
borrowings under the revolving credit facility as of
December 31, 2004 and December 31, 2003. Interest
periods for LIBOR rate borrowings are one, two, three or six
months, at the Companys option. The Company measures the
Companys borrowing base at month-end. At December 31,
2004, the Company had a borrowing base of $87.9 million
under the revolving credit facility. The Company is subject to
customary covenants, including limitations on capital
expenditures, additional indebtedness, liens, guarantees,
mergers and acquisitions, dividends, distributions, capital
redemptions and investments.
Glencore Note Payable. In April 2004, the Company
repaid the remaining $14.0 million of outstanding principal
on a six-year $40.0 million promissory note payable to
Glencore that was issued on April 1, 2003 in connection
with the Companys acquisition of the remaining 20%
interest in the Hawesville facility. The payment consisted of a
$2.0 million required principal payment and an optional
$12.0 million prepayment of principal. The Glencore note
bore interest at a rate of 10% per annum and was due to
mature on April 1, 2009.
Industrial Revenue Bonds. Effective April 1, 2001,
as part of the purchase price for the Hawesville acquisition,
the Company assumed industrial revenue bonds, or IRBs, in the
aggregate principal amount of $7.8 million which were
issued in connection with the financing of certain solid waste
disposal facilities constructed at the Hawesville facility. From
April 1, 2001 through April 1, 2003, Glencore assumed
20% of the liability related to the IRBs consistent with its
ownership interest in the Hawesville facility during that
period. The IRBs mature on April 1, 2028, and bear interest
at a variable rate not to exceed 12% per annum determined
weekly based upon prevailing rates for similar bonds in the
industrial revenue bond market. Interest on the IRBs is paid
quarterly. At December 31, 2004, the interest rate on the
IRBs was 2.30%. The IRBs are classified as current liabilities
because they are remarketed weekly and, under the indenture
governing the IRBs, repayment upon demand could be required if
there is a failed remarketing. The IRBs are secured by a
Glencore guaranteed letter of credit. The Company has agreed to
reimburse Glencore for all costs arising from the letter of
credit and have secured the reimbursement obligation with a
first priority security interest in the 20% interest in the
Hawesville facility. The Companys maximum potential amount
of future payments under the reimbursement obligations for the
Glencore letter of credit securing the IRBs would be
approximately $8.2 million.
Nordurals Term Loan Facility. At
December 31, 2004 Nordural had $68.5 million of debt
outstanding under its then existing $185 million loan
facility. On February 10, 2005, Nordural executed
agreements and documents related to a new $365.0 million
senior term loan facility arranged by Landsbanki Islands hf. and
Kaupthing Bank hf. The new term loan facility closed and funded
on February 15, 2005. Amounts borrowed under the new term
loan facility refinanced debt under Nordurals former term
loan facility, and will be used
45
to finance a portion of the costs associated with the ongoing
expansion of the Nordural facility and for Nordurals
general corporate purposes. Amounts borrowed under
Nordurals new term loan facility generally will bear
interest at a margin over the applicable Eurodollar rate, plus
any increased cost of compliance by the lenders with any
applicable reserve asset requirements. Nordurals
obligations under the new term loan facility have been secured
by a pledge of all of Nordurals shares pursuant to a share
pledge agreement with the lenders. In addition, substantially
all of Nordurals assets are pledged as security under the
loan facility. Nordural is required to make the following
minimum repayments of principal on the facility:
$15.5 million on February 28, 2007 and
$14.0 million on each of August 31, 2007,
February 29, 2008, August 31, 2008, February 28,
2009, August 31, 2009 and February 28, 2010. If
Nordural makes a dividend payment (which dividends are not
permitted until the Nordural facility has been expanded to a
production level of 212,000 metric tons per year), it must
simultaneously make a repayment of principal in an amount equal
to 50% of the dividend. The new term loan facility is
non-recourse to Century Aluminum Company. All outstanding
principal must be repaid at final maturity on February 28,
2010.
Nordurals loan facility contains customary covenants,
including limitations on additional indebtedness, investments,
capital expenditures (other than related to the expansion
project), dividends, and hedging agreements. Nordural is also
subject to various financial covenants, including a net worth
covenant and certain maintenance covenants, including minimum
interest coverage and debt service coverage beginning as of
December 31, 2004.
|
|
|
Convertible Preferred Stock |
In connection with the Hawesville acquisition, the Company
issued $25.0 million of the Companys convertible
preferred stock to Glencore. The Company was required to pay
dividends on the preferred stock at a rate of 8% per year,
which was cumulative (see Item 8 Consolidated financial
statements, Note 8). In accordance with accounting
guidance, no liability for cumulative preferred dividends was
recorded until the dividends were declared. In May 2004, the
Company used proceeds from the Companys April 2004 equity
offering to pay $3.3 million in dividend arrearages on the
Companys convertible preferred stock. Subsequent to the
dividend payment in May 2004, Glencore converted the
500,000 shares of the Companys convertible preferred
stock it owned into 1,395,089 shares of the Companys
common stock, representing a conversion price of $17.92 per
share. The conversion was effected in accordance with the terms
of the Certificate of Designation for the preferred stock.
The Company had negative working capital of $103.4 million
at December 31, 2004, primarily because the convertible
notes are classified as current liabilities. Excluding the
convertible notes, working capital would have been
$71.6 million.
The Companys working capital increased modestly with the
acquisition of Nordural in April 2004 and a further
proportionate increase is expected as the Nordural expansion
comes on line in 2006. With the exception of Nordural, the
Company does not anticipate significant changes in working
capital. The Company believes that cash flow from operations and
borrowing availability under the revolving credit facility will
be sufficient to meet working capital needs.
Capital expenditures for 2004 were $75.0 million,
$59.8 million of which was related to the expansion project
at the Nordural facility, with the balance principally related
to upgrading production equipment, maintaining facilities and
complying with environmental requirements. The revolving credit
facility limits the Companys ability to make capital
expenditures at its U.S. reduction facilities; however, the
Company believes that the amount permitted will be adequate to
maintain its properties and business and comply with
environmental requirements. The Company anticipates capital
expenditures of approximately $20.0 million in 2005,
exclusive of the Nordural expansion. The Nordural expansion will
require approximately $320.0 million of capital
expenditures in 2005. Through December 31, 2004, the
Company had outstanding capital
46
commitments related to the Nordural expansion of
$218.8 million. The Companys cost commitments for the
Nordural expansion may materially change depending on the
exchange rate between the U.S. dollar and certain foreign
currencies, principally the euro and the Icelandic krona.
Approximately 64% of the expected project costs for the Nordural
expansion are denominated in currencies other than the
U.S. dollar, primarily the euro and the krona. As of
December 31, 2004, the Company had no hedges to mitigate
the Companys foreign currency exposure. See
Managements Discussion and Analysis
Recent Developments Nordural Acquisition and
Expansion.
|
|
|
Acquisitions, Liquidity and Financing |
The Companys strategic objectives are to grow the
Companys aluminum business by acquiring primary aluminum
reduction facilities that offer favorable investment returns and
lower the Companys unit production costs, to diversify the
Companys geographic presence, and to pursue opportunities
in bauxite mining and alumina refining. The Company anticipates
that operating cash flow, together with borrowings under the
revolving credit facility and the Nordural term loan facility,
will be sufficient to meet its future debt service obligations
as they become due, as well as working capital and capital
expenditures requirements. The Companys ability to meet
its liquidity needs, including any and all of its debt service
obligations, will depend upon the Companys future
operating performance, which will be affected by general
economic, financial, competitive, regulatory, business and other
factors, many of which are beyond the Companys control.
The Company will continue from time to time to explore
additional financing methods and other means to lower its cost
of capital, including stock issuances or debt financing and the
application of the proceeds to the repayment of bank debt or
other indebtedness.
The Companys Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Net cash provided by operating activities
|
|
$ |
105,828 |
|
|
$ |
87,379 |
|
|
$ |
54,486 |
|
Net cash used in investing activities
|
|
|
(275,286 |
) |
|
|
(78,695 |
) |
|
|
(18,196 |
) |
Net cash (used in) provided by financing activities
|
|
|
185,422 |
|
|
|
(25,572 |
) |
|
|
(4,586 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$ |
15,964 |
|
|
$ |
(16,888 |
) |
|
$ |
31,704 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities of $105.8 million in
2004 was $18.4 million higher than the same period in 2003.
Exclusive of the $35.5 million settlement received in 2003
from the termination of the Original Sales Contract and entering
into the New Sales Contract with Glencore for the years 2005
through 2009 and the $50.3 million cash payment in 2004 for
the tender premium plus accrued interest for the refinancing of
the Companys first mortgage notes, net cash from operating
activities increased $104.2 million in 2004. This increase
was a direct result of improved price realizations and the added
margin contributions from the Nordural facility which was
acquired in April 2004.
Net cash from operating activities in 2003 increased
$32.9 million to $87.4 million from the 2002 level.
The increase in 2003 was primarily the result of the
$35.5 million first quarter termination and settlement of
the Original Sales Contract as discussed in Part I,
Item 1, Business Sales and
Distribution. Gross profit associated with increased
shipments of 77.2 million pounds, mainly the result of the
April 1, 2003 acquisition of the 20% interest in the
Hawesville facility, improved cash provided from operating
activities by an additional $5.6 million. Reduced tax
refunds of $8.1 million and increased cash payments for
interest of $2.0 million, primarily associated with the
Glencore Note, partially offset the favorable change in cash
from operating activities discussed above.
The Companys net cash used in investing activities in 2004
was $275.3 million, an increase of $196.6 million from
2003. The net acquisition cost of the Nordural facility in April
2004 and the Gramercy assets in October 2004 was
$198.6 million as compared to the net acquisition cost for
the additional 20% interest in the Hawesville facility in April
2003 of $59.8 million. Purchases of property, plant and
equipment,
47
including the Nordural expansion costs, were $75.0 million
in 2004 as compared to the 2003 purchases of property, plant and
equipment of $18.9 million.
The Companys net cash used in investing activities was
$78.7 million in 2003, consisting of $59.8 million for
the acquisition of the 20% interest in the Hawesville facility
and $18.9 million of capital expenditures. The use of cash
for investing activities in 2002 consisted primarily of capital
expenditures.
Net cash provided by financing activities during 2004 was
$185.4 million, an increase of $211.0 million from the
previous year. The increase was primarily due to the issuance of
$425.9 million of debt, and the issuance of
$215.8 million of common stock. This increase was partially
offset by debt repayments of $439.9 million, consisting of
payments of $315.1 million for the first mortgage notes
tendered in a debt refinancing, $106.9 million for the
Nordural term loan facility, the $14.0 million repayment of
Glencore note debt, and $3.9 million for other
miscellaneous debt payments. Additionally, the Company paid
$13.1 million of financing fees for the debt issued in the
fourth quarter of 2004 and $3.3 million payment of accrued
preferred dividends in the second quarter of 2004.
Net cash used in financing activities in 2003 was a result of
paying $26.0 million on the Glencore Note. The cash used
for financing activities in 2002 related primarily to common and
preferred stock dividend payments made during the year.
The Company believes that cash flow from operations, its unused
revolving credit facility, and Nordurals new term loan
facility will provide sufficient liquidity to meet working
capital needs, fund capital improvements and the planned
expansion at Nordural, and provide for the debt service
requirements.
Contractual Obligations
In the normal course of business, the Company has entered into
various contractual obligations that will be settled in cash.
These obligations consist primarily of long-term debt
obligations and purchase obligations. The expected future cash
flows required to meet these obligations are shown in the table
below. The purchase obligations consist of long-term supply
contracts for alumina and electrical power. The Other long-term
liabilities include pension, SERB, other postretirement
benefits, workers compensation liabilities, asset
retirement obligations and estimated deferred tax payments. More
information is available on these contractual obligations in
Part II, Item 8, Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
Total | |
|
<1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
>5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Debt(1)(2)
|
|
$ |
889.1 |
|
|
$ |
79.1 |
|
|
$ |
31.2 |
|
|
$ |
57.8 |
|
|
$ |
721.0 |
|
Estimated interest payments(2)
|
|
|
323.0 |
|
|
|
16.7 |
|
|
|
90.0 |
|
|
|
88.2 |
|
|
|
128.1 |
|
Operating lease obligations
|
|
|
2.2 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.4 |
|
Purchase obligations(3)
|
|
|
1,224.2 |
|
|
|
354.3 |
|
|
|
418.1 |
|
|
|
276.9 |
|
|
|
174.9 |
|
Other long-term liabilities(4)
|
|
|
233.7 |
|
|
|
14.9 |
|
|
|
31.0 |
|
|
|
34.0 |
|
|
|
153.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,672.2 |
|
|
$ |
465.4 |
|
|
$ |
571.0 |
|
|
$ |
457.6 |
|
|
$ |
1,178.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Debt includes principal repayments on the 11.75% senior
secured first mortgage notes, 7.5% senior notes due 2014,
1.75% convertible senior notes due 2024, the IRBs and the
Nordural debt. |
|
(2) |
Estimated interest payments on the Companys long-term debt
are based on several assumptions, including the borrowing under
the new term loan facility for the Nordural expansion project
and assumptions for the interest rates for the Companys
variable rate debt. The Company expects to borrow an additional
$293.0 million under the new term loan facility through
mid-2006. The Companys variable rate debt is based
primarily on the Eurodollar rate plus an applicable margin. The
Company assumes that the Eurodollar rate will be 2.50% in 2005
increasing to 5.00% in 2008 and remaining steady thereafter. The
IRBs interest rate is variable and the Company estimated
future payments based on a rate of 2.30%. In addition, the
Company assumes the 11.75% senior secured first mortgage
notes will be called in April |
48
|
|
|
2005 and the 7.5% senior notes due 2014 and
1.75% convertible senior notes due 2024 will remain
outstanding until their respective due dates. |
|
|
(3) |
Purchase obligations include long-term alumina, electrical
power, anode contracts and the Nordural expansion project
commitments. Nordurals power contracts and domestic
alumina contracts, except for Century Kentucky, are priced as a
percentage of the LME price of primary aluminum. The Company
assumed an LME price of $1,750 per metric ton for 2005,
$1,695 per metric ton for 2006, $1,638 per metric ton
for 2007 and $1,550 per metric ton thereafter for purposes
of calculating expected future cash flows for these contracts.
Century Kentuckys long-term alumina contract has variable
cost-based pricing. The Company used cost forecasts provided by
the supplier to calculate the expected future cash flows for
this contract. The Nordural anode contract and some Nordural
expansion contract commitments are denominated in euros. The
Company assumed a $1.20/ Euro conversion rate to estimate the
obligations under these contracts. |
|
(4) |
Other long-term liabilities include the Companys expected
pension contributions, OPEB and SERB benefit payments,
workers compensation benefit payments, estimated deferred
tax payments and asset retirement obligations. Expected benefit
payments for the SERB and OPEB plans, which are unfunded, are
included for 2005 through 2014. The Companys estimated
contributions to the pension plans are included for 2005.
Estimated contributions for 2006 and beyond are not included in
the table because these estimates would be heavily dependent
upon assumptions about future events, including among other
things, future regulatory changes, changes to tax laws, future
interest rates levels and future return on plan assets. Asset
retirement obligations consist primarily of disposal costs for
spent potliner, the amount and timing of these costs are
estimated based on the number of the Companys operating
pots and their expected pot life. |
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 $0.6 million and $0.7 million at
December 31, 2004 and December 31, 2003, respectively.
The Company believes that compliance with current environmental
laws and regulations is not likely to have a material adverse
effect on the Companys 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.
The Company has planned environmental capital expenditures of
approximately $0.6 million for 2005, $1.3 million for
2006 and $0.4 million for 2007. In addition, the Company
expects to incur operating expenses relating to environmental
matters of approximately $9.9 million, $10.7 million,
and $11.0 million in 2005, 2006 and 2007, respectively.
These amounts do not include any projected capital expenditures
or operating expenses for the Companys joint venture
interest in the Gramercy assets, which have not yet been
determined. See Part I, Item 1 Environmental
Matters. As part of the Companys general capital
expenditure plan, it also expects to incur capital expenditures
for other capital projects that may, in addition to improving
operations, reduce certain environmental impacts. See
Part I, Item 1 Environmental Matters.
The Companys income tax returns are periodically examined
by various tax authorities. The Company is currently under audit
by the Internal Revenue Service (IRS) for the tax
years through 2002. In connection with such examinations, the
IRS has raised issues and proposed tax deficiencies. The Company
is reviewing the issues raised by the IRS and plans to contest
the proposed tax deficiencies. The Company believes that its tax
position is well-supported and, based on current information,
does not believe that the outcome of the tax audit will have a
material impact on the Companys financial condition or
results of operations.
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
Companys financial condition, results of operations or
liquidity. See Item 3, Legal Proceedings.
49
New Accounting Standards
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share
Based Payment. This Statement is a revision of FASB
Statement No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees. This statement focuses
primarily on accounting for transactions in which a company
obtains employee services in share-based payment transactions.
This Statement will require the Company to recognize the grant
date fair value of an award of equity-based instruments to
employees and the cost will be recognized over the period in
which the employees are required to provide service. The
Statement is effective for the first interim period beginning
after June 15, 2005. The Company is currently assessing the
Statement and does not expect the impact of adopting
SFAS No. 123(R) to have a material effect on the
Companys financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs. This Statement amends the guidance
in Accounting Research Bulletin No. 43,
Chapter 4, Inventory Pricing to clarify the
accounting treatment for certain inventory costs. In addition,
the Statement requires that the allocation of production
overheads be based on the facilities normal production
capacity. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2005. The
Company is currently assessing the Statement and has not yet
determined the impact of adopting SFAS No. 151 on the
Companys financial position and results of operations.
On December 8, 2003, the Medicare Prescription Drug
Improvement and Modernization Act of 2003, or the Medicare
Act, was signed into law. The Medicare Act introduces a
prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially
equivalent to Medicare Part D.
In the second quarter of 2004, an FASB Staff Position (FSP
FAS 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003) was issued providing guidance
on the accounting for the effects of the Medicare Act for
employers that sponsor postretirement health care plans that
provide prescription drug benefits. This FSP superseded FSP
FAS 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003. The FSP is effective for the
first interim or annual period beginning after June 15,
2004.
The guidance in this FSP applies only to the sponsor of a
single-employer defined benefit postretirement health plan for
which the employer has concluded that prescription drug benefits
available under the plan are actuarially equivalent and thus
qualify for the subsidy under the Medicare Act and the expected
subsidy will offset or reduce the employers share of the
costs of postretirement prescription drug coverage provided by
the plan. The Company determined that the Companys plans
were actuarially equivalent and elected to adopt the provisions
of FSP FAS 106-2 in the third quarter of 2004 on a
prospective basis only. The Company compared the Medicare
Part D plan to its retiree prescription drug coverage using
actuarial equivalencies and reflecting the retiree premiums and
cost sharing provisions of the various plans. This analysis
showed the Companys plans provide more valuable benefits
to retirees than the Medicare Part D plan. Based on the
Companys understanding of the intent of the Medicare Act
and subsequent proposed regulations, the Company still believes
the Companys plans will meet the actuarial equivalence
requirements necessary to receive the Medicare reimbursement.
For retirees with post-65 prescription drug benefits, the
Company estimates the net effect on post-65 per capita
medical and prescription drug costs to be a reduction of
approximately 11% to 14% due to the Medicare reimbursement. The
changes are assumed to have no impact on future participation
rates in the Companys post-65 prescription drug programs.
50
|
|
Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
Commodity Prices
The Company is exposed to the price of primary aluminum. 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 Companys aluminum sales contracts.
See Part II, Item 7, Managements
Discussion and Analysis Key Long-Term Supply
Agreements. The Companys risk management activities
do not include trading or speculative transactions.
Apart from the contracts described under Key Long-Term
Primary Aluminum Sales Contracts, the Company had forward
delivery contracts to sell 196.7 million pounds and
351.8 million pounds of primary aluminum at
December 31, 2004 and December 31, 2003, respectively.
Of these forward delivery contracts, the Company had fixed price
commitments to sell 13.6 million pounds and
70.5 million pounds of primary aluminum at
December 31, 2004 and December 31, 2003, respectively,
of which, none at December 31, 2004 and 53.5 million
pounds at December 31, 2003, were with Glencore.
At December 31, 2004 and December 31, 2003, the
Company had fixed price financial sales contracts, primarily
with Glencore, for 1,686.4 million pounds and
102.9 million pounds of primary aluminum, respectively, of
which 1,023.7 million pounds and 58.8 million pounds,
respectively, were designated cash flow hedges. Certain of these
sales contracts contain clauses that trigger additional shipment
volume when the market price for a period is above the contract
ceiling price for that period. These contracts are evaluated
monthly and the maximum additional shipment volume over the life
of the contract would be 662.7 million pounds, if the
market price exceeded the ceiling price for all months during
the term of the contract. These fixed price financial sales
contracts are scheduled for settlement at various dates in 2005
through 2010. The Company had no fixed price financial purchase
contracts to purchase aluminum at December 31, 2004 or
December 31, 2003.
Fixed Price Financial Sales Contracts at
December 31, 2004:
Primary Aluminum
|
|
|
|
|
|
|
(Millions of pounds) | |
2005
|
|
|
425.7 |
|
2006
|
|
|
370.3 |
|
2007
|
|
|
374.6 |
|
2008
|
|
|
185.2 |
|
2009
|
|
|
165.3 |
|
2010
|
|
|
165.3 |
|
|
|
|
|
Total
|
|
|
1,686.4 |
|
|
|
|
|
Additionally, to mitigate the volatility of the natural gas
markets, the Company enters into fixed price financial purchase
contracts, accounted for as cash flow hedges, which settle in
cash in the period corresponding to the intended usage of
natural gas.
Fixed Price Financial Purchase Contracts at
December 31, 2004:
Natural Gas
|
|
|
|
|
|
|
(Thousands of DTH) | |
2005
|
|
|
2,880 |
|
2006
|
|
|
480 |
|
2007
|
|
|
480 |
|
2008
|
|
|
480 |
|
|
|
|
|
Total
|
|
|
4,320 |
|
|
|
|
|
51
At December 31, 2004 and December 31, 2003, the
Company had fixed price financial purchase contracts for
4.3 million and 2.7 million DTH (one decatherm is
equivalent to one million British Thermal Units), respectively.
These financial instruments are scheduled for settlement at
various dates in 2005 through 2008.
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 $6.5 million
after tax on accumulated other comprehensive income for the
contracts designated as cash flow hedges, and $4.2 million
on net income, for the contracts designated as derivatives, for
the year ended December 31, 2004 as a result of the forward
primary aluminum financial sales contracts outstanding at
December 31, 2004.
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 $1.4 million after
tax on accumulated other comprehensive income for the year ended
December 31, 2004 as a result of the forward natural gas
financial purchase contracts outstanding at December 31,
2004.
The Companys metals and natural gas risk management
activities are subject to the control and direction of senior
management. The metals related activities are regularly reported
to the Companys board of directors.
This quantification of the Companys exposure to the
commodity price of aluminum is necessarily limited, as it does
not take into consideration the Companys inventory or
forward delivery contracts, or the offsetting impact on the
sales price of primary aluminum products. Because all of the
Companys alumina contracts, except the GAL Alumina
contract for the Hawesville facility, are indexed to the LME
price for aluminum, beginning in 2002, they act as a natural
hedge for approximately 12% of the Companys production. As
of December 31, 2004, approximately 49% and 43% of the
Companys production for the years 2005 and 2006,
respectively, was either hedged by the alumina contracts,
Nordural electrical power and tolling contracts, and/or by fixed
price forward delivery and financial sales contracts.
Nordural. Substantially all of Nordurals revenues
are derived from the Billiton Tolling Agreement whereby it
converts alumina provided to it into primary aluminum for a fee
based on the LME price for primary aluminum. Nordurals
revenues are subject to the risk of decreases in the market
price of primary aluminum; however, Nordural is not exposed to
increases in the price for alumina, the principal raw material
used in the production of primary aluminum. In addition, under
its current power contract, Nordural purchases power at a rate
which is a percentage of the LME price for primary aluminum,
providing Nordural with a natural hedge against downswings in
the market for primary aluminum.
Nordural is exposed to foreign currency risk due to fluctuations
in the value of the U.S. dollar as compared to the euro and
the Icelandic krona. Under its Billiton Tolling Agreement and
power contracts, Nordurals revenues and power costs are
based on the LME price for primary aluminum, which is
denominated in U.S. dollars. There is no currency risk
associated with these contracts. Nordurals labor costs are
denominated in Icelandic krona and a portion of its anode costs
are denominated in euros. As a result, an increase or decrease
in the value of those currencies relative to the
U.S. dollar would affect Nordurals operating margins.
Interest Rates
Interest Rate Risk. The Companys primary debt
obligations are the outstanding senior notes, convertible notes,
first mortgage notes, the Nordural debt, borrowings under the
revolving credit facility, if any, and the IRBs. Because the
senior notes, convertible notes and first mortgage 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 these borrowings. Borrowings under the 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 IRBs bear interest at variable
rates determined by reference to the interest rate of similar
instruments in the industrial revenue bond market. At
December 31, 2004, Nordural had approximately
$75.7 million of long-term debt consisting primarily of
obligations under its then existing term loan facility.
Borrowings under Nordurals term loan
52
facility in place as of December 31, 2004 bore interest at
a margin over the applicable LIBOR rate. On February 10,
2005, the Company executed agreements and documents related to a
new $365.0 million senior term loan facility arranged by
Landsbanki Islands hf. and Kaupthing Bank hf. The new term loan
facility closed and funded on February 15, 2005, at which
time a portion of the proceeds of the new facility were used to
refinance the prior loan facility. See Item 7
Managements Discussion and Analysis
Recent Developments Nordurals New Term
Loan Facility. Borrowings under Nordurals new
term loan facility bear interest at a margin over the applicable
Eurodollar rate.
At December 31, 2004, the Company had $76.3 million of
variable rate borrowings. A hypothetical one percentage point
increase in the interest rate would increase the Companys
annual interest expense by $0.8 million, assuming no debt
reduction.
The Companys primary financial instruments are cash and
short-term investments, including cash in bank accounts and
other highly rated liquid money market investments and
government securities.
53
|
|
Item 8. |
Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
55 |
|
|
|
|
56 |
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60-98 |
|
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Century Aluminum Company:
We have audited the accompanying consolidated balance sheets of
Century Aluminum Company and subsidiaries (the
Company) as of December 31, 2004 and 2003, and
the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2004. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Century Aluminum Company and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 11, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
As discussed in Note 14 to the consolidated financial
statements, on January 1, 2003, the Company adopted
Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations.
/s/ Deloitte &
Touche LLP
Pittsburgh, Pennsylvania
March 11, 2005
55
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Dollars in thousands, | |
|
|
except share data) | |
ASSETS |
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
44,168 |
|
|
$ |
28,204 |
|
Restricted cash
|
|
|
1,678 |
|
|
|
|
|
Accounts receivable net
|
|
|
79,576 |
|
|
|
51,370 |
|
Due from affiliates
|
|
|
14,371 |
|
|
|
10,957 |
|
Inventories
|
|
|
108,555 |
|
|
|
89,360 |
|
Prepaid and other current assets
|
|
|
10,055 |
|
|
|
4,101 |
|
Deferred taxes current portion
|
|
|
25,688 |
|
|
|
3,413 |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
284,091 |
|
|
|
187,405 |
|
Property, plant and equipment net
|
|
|
806,250 |
|
|
|
494,957 |
|
Intangible asset net
|
|
|
86,809 |
|
|
|
99,136 |
|
Goodwill
|
|
|
95,610 |
|
|
|
|
|
Other assets
|
|
|
58,110 |
|
|
|
28,828 |
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
1,330,870 |
|
|
$ |
810,326 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$ |
47,479 |
|
|
$ |
34,829 |
|
Due to affiliates
|
|
|
84,815 |
|
|
|
27,139 |
|
Industrial revenue bonds
|
|
|
7,815 |
|
|
|
7,815 |
|
Accrued and other current liabilities
|
|
|
53,309 |
|
|
|
30,154 |
|
Accrued employee benefits costs current portion
|
|
|
8,458 |
|
|
|
8,934 |
|
Convertible senior notes
|
|
|
175,000 |
|
|
|
|
|
Long term debt current portion
|
|
|
10,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
387,458 |
|
|
|
108,871 |
|
|
|
|
|
|
|
|
Senior secured notes payable less current portion
|
|
|
|
|
|
|
322,310 |
|
Senior unsecured notes payable net
|
|
|
250,000 |
|
|
|
|
|
Nordural debt
|
|
|
80,711 |
|
|
|
|
|
Notes payable affiliates
|
|
|
|
|
|
|
14,000 |
|
Accrued pension benefits costs less current portion
|
|
|
10,685 |
|
|
|
10,764 |
|
Accrued postretirement benefits costs less current
portion
|
|
|
85,549 |
|
|
|
78,218 |
|
Due to affiliates less current portion
|
|
|
30,416 |
|
|
|
|
|
Other liabilities
|
|
|
34,961 |
|
|
|
33,372 |
|
Deferred taxes
|
|
|
68,273 |
|
|
|
55,094 |
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
560,595 |
|
|
|
513,758 |
|
|
|
|
|
|
|
|
CONTINGENCIES AND COMMITMENTS (NOTE 12)
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Convertible preferred stock (8% cumulative, 500,000 shares
outstanding at December 31, 2003)
|
|
|
|
|
|
|
25,000 |
|
Common stock (one cent par value, 50,000,000 shares
authorized; 32,038,797 and 21,130,839 shares issued and
outstanding at December 31, 2004 and 2003, respectively)
|
|
|
320 |
|
|
|
211 |
|
Additional paid-in capital
|
|
|
415,453 |
|
|
|
173,138 |
|
Accumulated other comprehensive loss
|
|
|
(52,186 |
) |
|
|
(5,222 |
) |
Retained earnings (accumulated deficit)
|
|
|
19,230 |
|
|
|
(5,430 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
382,817 |
|
|
|
187,697 |
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
1,330,870 |
|
|
$ |
810,326 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
56
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
NET SALES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party customers
|
|
$ |
897,538 |
|
|
$ |
660,593 |
|
|
$ |
603,744 |
|
Related parties
|
|
|
163,209 |
|
|
|
121,886 |
|
|
|
107,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060,747 |
|
|
|
782,479 |
|
|
|
711,338 |
|
Cost of goods sold
|
|
|
884,273 |
|
|
|
734,441 |
|
|
|
691,277 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
176,474 |
|
|
|
48,038 |
|
|
|
20,061 |
|
Selling, general and administrative expenses
|
|
|
24,916 |
|
|
|
20,833 |
|
|
|
15,783 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
151,558 |
|
|
|
27,205 |
|
|
|
4,278 |
|
Interest expense third party
|
|
|
(39,946 |
) |
|
|
(41,269 |
) |
|
|
(40,813 |
) |
Interest expense related party
|
|
|
(380 |
) |
|
|
(2,579 |
) |
|
|
|
|
Interest income
|
|
|
1,086 |
|
|
|
339 |
|
|
|
392 |
|
Net gain (loss) on forward contracts
|
|
|
(21,521 |
) |
|
|
25,691 |
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
(47,448 |
) |
|
|
|
|
|
|
|
|
Other income (expense) net
|
|
|
(1,305 |
) |
|
|
(688 |
) |
|
|
(1,843 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, minority interest, equity in
earnings of joint venture and cumulative effect of change in
accounting principle
|
|
|
42,044 |
|
|
|
8,699 |
|
|
|
(37,986 |
) |
Income tax benefit (expense)
|
|
|
(14,894 |
) |
|
|
(2,841 |
) |
|
|
14,126 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest, equity in earnings of
joint venture and cumulative effect of change in accounting
principle
|
|
|
27,150 |
|
|
|
5,858 |
|
|
|
(23,860 |
) |
Minority interest
|
|
|
|
|
|
|
986 |
|
|
|
5,252 |
|
Equity in earnings of joint venture
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
27,971 |
|
|
|
6,844 |
|
|
|
(18,608 |
) |
Cumulative effect of change in accounting principle, net of tax
benefit of $3,430
|
|
|
|
|
|
|
(5,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
27,971 |
|
|
|
966 |
|
|
|
(18,608 |
) |
Preferred dividends
|
|
|
(769 |
) |
|
|
(2,000 |
) |
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$ |
27,202 |
|
|
$ |
(1,034 |
) |
|
$ |
(20,608 |
) |
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$ |
0.95 |
|
|
$ |
0.23 |
|
|
$ |
(1.00 |
) |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.95 |
|
|
$ |
(0.05 |
) |
|
$ |
(1.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$ |
0.95 |
|
|
$ |
0.23 |
|
|
$ |
(1.00 |
) |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.95 |
|
|
$ |
(0.05 |
) |
|
$ |
(1.00 |
) |
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER COMMON SHARE
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
57
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Convertible | |
|
|
|
Additional | |
|
Other | |
|
Retained | |
|
Total | |
|
|
Comprehensive | |
|
Preferred | |
|
Common | |
|
Paid-In | |
|
Comprehensive | |
|
Earnings | |
|
Shareholders | |
|
|
Income (Loss) | |
|
Stock | |
|
Stock | |
|
Capital | |
|
Income (Loss) | |
|
(Deficit) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Balance, January 1, 2002
|
|
|
|
|
|
$ |
25,000 |
|
|
$ |
205 |
|
|
$ |
168,414 |
|
|
$ |
6,752 |
|
|
$ |
16,814 |
|
|
$ |
217,185 |
|
Comprehensive income (loss) 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss 2002
|
|
$ |
(18,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,608 |
) |
|
|
(18,608 |
) |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on financial instruments, net of $2,752 in
tax
|
|
|
4,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount reclassified to income, net of $1,624 in tax
|
|
|
(2,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of $4,183 in tax
|
|
|
(7,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(5,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,579 |
) |
|
|
|
|
|
|
(5,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$ |
(24,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common, $0.15 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,091 |
) |
|
|
(3,091 |
) |
|
Preferred, $3 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500 |
) |
|
|
(1,500 |
) |
Issuance of common stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
545 |
|
Issuance of common stock pension plans
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
3,175 |
|
|
|
|
|
|
|
|
|
|
|
3,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
|
|
|
$ |
25,000 |
|
|
$ |
211 |
|
|
$ |
172,133 |
|
|
$ |
1,173 |
|
|
$ |
(6,385 |
) |
|
$ |
192,132 |
|
Comprehensive income (loss) 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income 2003
|
|
$ |
966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
966 |
|
|
|
966 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on financial instruments, net of $2,171 in
tax
|
|
|
(3,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount reclassified to income, net of $3,531 in tax
|
|
|
(6,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of $1,371 in tax
|
|
|
3,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(6,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,395 |
) |
|
|
|
|
|
|
(6,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$ |
(5,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Issuance of common stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
|
|
|
$ |
25,000 |
|
|
$ |
211 |
|
|
$ |
173,138 |
|
|
$ |
(5,222 |
) |
|
$ |
(5,430 |
) |
|
$ |
187,697 |
|
Comprehensive income (loss) 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income 2004
|
|
$ |
27,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,971 |
|
|
|
27,971 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on financial instruments, net of $29,380 in
tax
|
|
|
(51,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount reclassified to income, net of $(2,196) in tax
|
|
|
3,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of $360 in tax
|
|
|
640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(46,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,964 |
) |
|
|
|
|
|
|
(46,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$ |
(18,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
(42 |
) |
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,269 |
) |
|
|
(3,269 |
) |
Preferred stock conversion
|
|
|
|
|
|
|
(25,000 |
) |
|
|
14 |
|
|
|
24,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock equity offering
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
208,121 |
|
|
|
|
|
|
|
|
|
|
|
208,211 |
|
Issuance of common stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
9,208 |
|
|
|
|
|
|
|
|
|
|
|
9,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
|
|
|
$ |
|
|
|
$ |
320 |
|
|
$ |
415,453 |
|
|
$ |
(52,186 |
) |
|
$ |
19,230 |
|
|
$ |
382,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
27,971 |
|
|
$ |
966 |
|
|
$ |
(18,608 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net loss on forward contracts
|
|
|
2,405 |
|
|
|
6,325 |
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
50,254 |
|
|
|
51,264 |
|
|
|
56,655 |
|
|
|
Deferred income taxes
|
|
|
6,623 |
|
|
|
8,892 |
|
|
|
4,965 |
|
|
|
Pension and other post retirement benefits
|
|
|
8,040 |
|
|
|
10,986 |
|
|
|
10,415 |
|
|
|
Workers compensation
|
|
|
820 |
|
|
|
1,426 |
|
|
|
1,619 |
|
|
|
Inventory market adjustment
|
|
|
(2,273 |
) |
|
|
(7,522 |
) |
|
|
(247 |
) |
|
|
Loss on disposal of assets
|
|
|
761 |
|
|
|
1,040 |
|
|
|
252 |
|
|
|
Non-cash loss on early extinguishment of debt
|
|
|
9,659 |
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
(986 |
) |
|
|
(5,252 |
) |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
9,308 |
|
|
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable net
|
|
|
(19,440 |
) |
|
|
(5,130 |
) |
|
|
2,125 |
|
|
|
|
Due from affiliates
|
|
|
(3,623 |
) |
|
|
(2,155 |
) |
|
|
2,918 |
|
|
|
|
Inventories
|
|
|
(4,937 |
) |
|
|
(2,762 |
) |
|
|
(1,671 |
) |
|
|
|
Prepaids and other assets
|
|
|
(3,590 |
) |
|
|
(261 |
) |
|
|
(1,838 |
) |
|
|
|
Accounts payable, trade
|
|
|
2,602 |
|
|
|
(2,928 |
) |
|
|
(4,637 |
) |
|
|
|
Due to affiliates
|
|
|
16,179 |
|
|
|
3,660 |
|
|
|
10,142 |
|
|
|
|
Accrued and other current liabilities
|
|
|
15,507 |
|
|
|
2,211 |
|
|
|
(3,447 |
) |
|
|
|
Other net
|
|
|
(1,130 |
) |
|
|
13,045 |
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
105,828 |
|
|
|
87,379 |
|
|
|
54,486 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(15,240 |
) |
|
|
(18,858 |
) |
|
|
(18,427 |
) |
|
Nordural expansion
|
|
|
(59,784 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
231 |
|
|
Business acquisitions, net of cash acquired
|
|
|
(198,584 |
) |
|
|
(59,837 |
) |
|
|
|
|
|
Restricted cash deposits
|
|
|
(1,678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(275,286 |
) |
|
|
(78,695 |
) |
|
|
(18,196 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
425,883 |
|
|
|
|
|
|
|
|
|
|
Repayment of debt third party
|
|
|
(425,881 |
) |
|
|
|
|
|
|
|
|
|
Repayment of debt related party
|
|
|
(14,000 |
) |
|
|
(26,000 |
) |
|
|
|
|
|
Financing fees
|
|
|
(13,062 |
) |
|
|
(297 |
) |
|
|
|
|
|
Issuance of common stock
|
|
|
215,793 |
|
|
|
736 |
|
|
|
5 |
|
|
Dividends
|
|
|
(3,311 |
) |
|
|
(11 |
) |
|
|
(4,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used in) by financing activities
|
|
|
185,422 |
|
|
|
(25,572 |
) |
|
|
(4,586 |
) |
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
|
15,964 |
|
|
|
(16,888 |
) |
|
|
31,704 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
28,204 |
|
|
|
45,092 |
|
|
|
13,388 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
44,168 |
|
|
$ |
28,204 |
|
|
$ |
45,092 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
59
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002
(Dollars in Thousands except Per Share Amounts)
|
|
1. |
Summary of Significant Accounting Policies |
Organization and Basis of Presentation
Century Aluminum Company (Century or the
Company) is a holding company, whose principal
subsidiaries are Century Aluminum of West Virginia, Inc.
(Century of West Virginia), Berkeley Aluminum, Inc.
(Berkeley), Century Kentucky, Inc. (Century
Kentucky) and Nordural ehf (Nordural). Century
of West Virginia operates a primary aluminum reduction facility
in Ravenswood, West Virginia (the Ravenswood
facility). Berkeley holds a 49.7% interest in a
partnership which operates a primary aluminum reduction facility
in Mt. Holly, South Carolina (the Mt. Holly
facility) and a 49.7% undivided interest in the property,
plant, and equipment comprising the Mt. Holly facility. The
remaining interest in the partnership and the remaining
undivided interest in the Mt. Holly facility are owned by Alumax
of South Carolina, Inc., a subsidiary of Alcoa
(ASC). ASC manages and operates the Mt. Holly
facility pursuant to an Owners Agreement, prohibiting the
disposal of the interest held by any of the owners without the
consent of the other owners and providing for certain rights of
first refusal. Pursuant to the Owners Agreement, each owner
furnishes its own alumina, for conversion to aluminum, and is
responsible for its pro rata share of the operating and
conversion costs.
Prior to April 1996, the Company was an indirect, wholly-owned
subsidiary of Glencore International AG (Glencore
and, together with its subsidiaries, the Glencore
Group). In April 1996, the Company completed an initial
public offering of its common stock. At December 31, 2004,
Glencore owned 29.1% of Centurys common stock outstanding.
Century and Glencore enter into various transactions such as the
purchase and sale of primary aluminum, alumina and forward
primary aluminum financial sales contracts.
The Companys historical results of operations included in
the accompanying consolidated financial statements may not be
indicative of the results of operations to be expected in the
future.
Principles of Consolidation The consolidated
financial statements include the accounts of Century Aluminum
Company and its subsidiaries, after elimination of all
significant intercompany transactions and accounts.
Berkeleys interest in the Mt. Holly partnership and the
Companys interest in the Gramercy and St. Ann Bauxite
joint ventures, see Note 2, are accounted for under the
equity method. There are no material undistributed earnings in
the Mt. Holly partnership or the Gramercy and St. Ann Bauxite
joint ventures.
Prior to the acquisition of the 20% interest in the Hawesville
facility on April 1, 2003, discussed in Note 2, the
Company had recorded the Hawesville property, plant and
equipment that it owned directly (potlines one through four) on
a 100% basis and had recorded its 80% undivided interest in the
remaining property, plant and equipment (excluding the fifth
potline which was owned directly by Glencore) on a proportionate
basis. In each case its interest in the property, plant and
equipment including the related depreciation, was recorded in
accordance with Emerging Issues Task Force (EITF)
Issue No. 00-01, Investor Balance Sheet and Income
Statement Display under the Equity Method for Investments in
Certain Partnerships and Other Ventures. The Company
consolidated the assets and liabilities and related results of
operations of the Century Aluminum of Kentucky, LLC (the
LLC) and reflected Glencores 20% interest in
the LLC as a minority interest.
Revenue Revenue is recognized when title and
risk of loss pass to customers in accordance with contract
terms. In some instances, the Company invoices customers prior
to physical shipment of goods. In such instances, revenue is
recognized only when the customer has specifically requested
such treatment and has made a fixed commitment to purchase the
product. The goods must be complete, ready for shipment and
physically separated from other inventory with risk of ownership
passing to the customer. The Company must retain no performance
obligations and a delivery schedule must be obtained. Sales
returns and allowances are treated as a reduction of sales and
are provided for based on historical experience and current
estimates.
60
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and Cash Equivalents Cash equivalents
are comprised of cash and short-term investments having
maturities of less than 90 days at the time of purchase.
The carrying amount of cash equivalents approximates fair value.
Accounts Receivable The accounts receivable
are net of an allowance for uncollectible accounts of $1,020 and
$3,968 at December 31, 2004 and 2003, respectively.
Inventories The majority of the
Companys inventories, including alumina and aluminum
inventories, are stated at the lower of cost (using the last-in,
first-out (LIFO) method) or market. Inventories at
Nordural are stated at the lower of first in, first out
(FIFO) cost or market. The remaining inventories
(principally supplies) are valued at the lower of average cost
or market.
Property, Plant and Equipment Property, plant
and equipment is stated at cost. Additions, renewals and
improvements are capitalized. Asset and accumulated depreciation
accounts are relieved for dispositions with resulting gains or
losses included in earnings. Maintenance and repairs are
expensed as incurred. Depreciation of plant and equipment is
provided for by the straight-line method over the following
estimated useful lives:
|
|
|
|
|
Buildings and improvements
|
|
|
14 to 45 years |
|
Machinery and equipment
|
|
|
5 to 22 years |
|
The Company periodically evaluates the carrying value of
long-lived assets to be held and used when events and
circumstances warrant such a review. The carrying value of a
separately identifiable, long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is
less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
Intangible Asset The intangible asset
consists of the power contract acquired in connection with the
Hawesville acquisition. The contract value is being amortized
over its term (ten years) using a method that results in annual
amortization equal to the percentage of a given years
expected gross annual benefit to the total as applied to the
total recorded value of the power contract. As part of the
acquisition of the 20% interest in the Hawesville facility on
April 1, 2003, the 20% portion of the power contract that
was indirectly owned by Glencore was revalued in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations. As a result,
the gross carrying amount of the contract and the accumulated
amortization, both related to the 20% portion of the contract
indirectly owned by Glencore, were removed and the fair value of
the 20% of the power contract acquired on April 1, 2003 was
recorded. As of December 31, 2004 and 2003, the gross
carrying amount of the intangible asset was $153,592 and
accumulated amortization totaled $66,783 and $54,456,
respectively. For the years ended December 31, 2004, 2003
and 2002 amortization expense totaled $12,327, $18,680 and
$26,258, respectively. The estimated intangible asset
amortization expense for the next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ending December 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
Estimated Amortization Expense
|
|
$ |
14,162 |
|
|
$ |
12,695 |
|
|
$ |
13,617 |
|
|
$ |
14,669 |
|
|
$ |
15,717 |
|
The intangible asset is reviewed for impairment in accordance
with SFAS No. 142, Goodwill and Other Intangible
Assets, whenever events or circumstances indicate that its
net carrying amount may not be recoverable.
Other Assets At December 31, 2004 and
2003, other assets consist primarily of the Companys
investment in the Mt. Holly partnership, the investment in the
Gramercy and St. Ann Bauxite joint venture, deferred financing
costs, deferred pension assets, and intangible pension assets.
The Companys equity share of
61
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the undistributed earnings (loss) increases (decreases) the
investment in the joint venture. Deferred financing costs are
amortized on a straight-line basis over the life of the related
financing. In 2004 and 2003, the Company recorded an additional
minimum liability related to employee pension plan obligations
as required under SFAS No. 87.
The Company accounts for its 49.7% interest in the Mt. Holly
partnership using the equity method of accounting. Additionally,
the Companys 49.7% undivided interest in certain property,
plant and equipment of the Mt. Holly facility is held outside of
the partnership, and the undivided interest in these assets of
the facility is accounted for in accordance with the EITF Issue
No. 00-01, Investor Balance Sheet and Income
Statement Display under the Equity Method for Investments in
Certain Partnerships and Other Ventures. Accordingly, the
undivided interest in these assets and the related depreciation
are being accounted for on a proportionate gross basis.
Income Taxes The Company accounts for income
taxes using the liability method, whereby deferred income taxes
reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
In evaluating the Companys ability to realize deferred tax
assets, the Company uses judgment in considering the relative
impact of negative and positive evidence. The weight given to
the potential effect of negative and positive evidence is
commensurate with the extent to which it can be objectively
verified. Based on the weight of evidence, both negative and
positive, if it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation
allowance is established.
Tax reserves have been established which the Company believes to
be adequate in relation to the potential for additional
assessments. Once established, reserves are adjusted only when
there is more information available or when an event occurs
necessitating a change to the reserves.
Postemployment Benefits The Company provides
certain postemployment benefits to former and inactive employees
and their dependents during the period following employment, but
before retirement. These benefits include salary continuance,
supplemental unemployment and disability healthcare.
Postemployment benefits are accounted for in accordance with
SFAS No. 112, Employers Accounting for
Postemployment Benefits. The statement requires
recognition of the estimated future cost of providing
postemployment benefits on an accrual basis over the active
service life of the employee.
Forward Contracts and Financial Instruments
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. The Company also enters into
fixed price financial sales contracts to be settled in cash to
manage the Companys exposure to changing primary aluminum
prices. The Company has also entered into financial purchase
contracts for natural gas to be settled in cash to manage the
Companys exposure to changing natural gas prices.
All aluminum-based financial and physical delivery contracts are
marked-to-market using the LME spot and forward market for
primary aluminum. Because there is no quoted futures market
price for the U.S. Midwest premium component of the market
price for primary aluminum, it is necessary for management to
estimate the U.S. Midwest premium. The forward natural gas
purchase contracts are marked-to-market using the NYMEX spot and
forward market for natural gas. Fluctuations in the NYMEX price
of natural gas can have a significant impact on gains and losses
included in the Companys financial statements from period
to period.
Certain financial sales contracts for primary aluminum and all
financial purchase contracts for natural gas have been
designated as cash flow hedges in accordance with the provisions
of SFAS No. 133 (as amended). The Company assesses the
effectiveness of these cash flow hedges quarterly. To the extent
such cash flow hedges are effective, unrealized gains and losses
on the financial sales contracts are deferred in the balance
sheet as accumulated other comprehensive income until the hedged
transaction occurs when the realized gain
62
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
or loss is recognized as revenue in the Statement of Operations.
Any ineffective portion of the gain or loss is reported in
earnings immediately. Mark-to-market gains and losses are
recorded in net gain (loss) on forward contracts in the period
delivery is no longer deemed probable.
The aluminum-based financial and physical delivery contracts
that are derivatives, as provided for in current accounting
standards, are marked-to-market monthly. Fluctuations in the LME
price of primary aluminum have a significant impact on gains and
losses included in the Companys financial statements from
period to period. Unrealized gains and losses are included in
net gain (loss) on forward contracts.
The effectiveness of the Companys hedges is measured by a
historical and probable future high correlation of changes in
the fair value of the hedging instruments with changes in value
of the hedged item. If high correlation ceases to exist, then
gains or losses will be recorded in net gain (loss) on forward
contracts. To date, high correlation has always been achieved.
During 2004 and 2003, the Company did not recognize any gains or
losses for ineffective portions of hedging instruments. As of
December 31, 2004 and 2003, the Company had deferred losses
of $49,113 and 1,591, respectively, on its hedges, net of tax.
Financial Instruments The Companys
financial instruments (principally receivables, payables, debt
related to the Industrial Revenue Bonds (the IRBs)
and forward financial contracts) are carried at amounts that
approximate fair value. At December 31, 2004, the
Companys 7.5% Senior Unsecured Notes due 2014 and
1.75% Convertible Senior Notes due 2024 had carrying
amounts of $250,000 and $175,000, respectively. At
December 31, 2004, the estimated fair value of the
7.5% Senior Unsecured Notes due 2014 and
1.75% Convertible Senior Notes due 2024 are $266,250 and
192,171, respectively. The Company has provided the trustee
under the indenture notice of its intent to call for redemption
all outstanding first mortgage notes on or about April 15,
2005 at 105.875% of the principal balance, plus accrued and
unpaid interest.
Concentration of Credit Risk Financial
instruments, which potentially expose the Company to
concentrations of credit risk, consist principally of cash
investments and trade receivables. The Company places its cash
investments with highly rated financial institutions. At times,
such investments may be in excess of the FDIC insurance limit.
The Companys limited customer base increases its
concentrations of credit risk with respect to trade receivables.
The Company routinely assesses the financial strength of its
customers.
Use of Estimates 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.
Stock-Based Compensation The Company has
elected not to adopt the recognition provisions for employee
stock-based compensation as permitted in SFAS No. 123,
Accounting for Stock-Based Compensation. As such,
the Company accounts for stock based compensation in accordance
with Accounting Principles Board (APB) Opinion
No. 25 Accounting for Stock Issued to
Employees. No compensation cost has been recognized for
the stock option portions of the plan because the exercise
prices of the stock options granted were equal to the market
value of the Companys stock on the date of grant. Had
compensation cost for the Stock Incentive Plan, see Note 9,
been determined using the fair value method
63
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provided under SFAS No. 123, the Companys net
income (loss) and earnings (loss) per share would have changed
to the pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
|
|
| |
|
| |
|
| |
Net income (loss) applicable to common shareholders
|
|
As Reported |
|
$ |
27,202 |
|
|
$ |
(1,034 |
) |
|
$ |
(20,608 |
) |
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
|
|
1,767 |
|
|
|
1,441 |
|
|
|
172 |
|
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
|
|
|
|
|
(2,148 |
) |
|
|
(2,106 |
) |
|
|
(402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
|
|
$ |
26,821 |
|
|
$ |
(1,699 |
) |
|
$ |
(20,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
As Reported |
|
$ |
0.95 |
|
|
$ |
(0.05 |
) |
|
$ |
(1.00 |
) |
|
|
Pro Forma |
|
$ |
0.94 |
|
|
$ |
(0.08 |
) |
|
$ |
(1.01 |
) |
Diluted income (loss) per share
|
|
As Reported |
|
$ |
0.95 |
|
|
$ |
(0.05 |
) |
|
$ |
(1.00 |
) |
|
|
Pro Forma |
|
$ |
0.93 |
|
|
$ |
(0.08 |
) |
|
$ |
(1.01 |
) |
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2004,
2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Weighted average fair value per option granted during the year
|
|
$ |
14.12 |
|
|
$ |
7.78 |
|
|
$ |
6.66 |
|
Dividends per quarter
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.05 |
|
Risk-free interest rate
|
|
|
3.54 |
% |
|
|
3.11 |
% |
|
|
3.82 |
% |
Expected volatility
|
|
|
70 |
% |
|
|
75 |
% |
|
|
69 |
% |
Expected lives (in years)
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
New Accounting Standards In December 2004,
the Financial Accounting Standards Board (FASB)
issued SFAS No. 123(R), Share Based
Payment. This Statement is a revision of FASB Statement
No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees. This statement focuses
primarily on accounting for transactions in which a company
obtains employee services in share-based payment transactions.
This Statement will require the Company to recognize the grant
date fair value of an award of equity-based instruments to
employees and the cost will be recognized over the period in
which the employees are required to provide service. The
Statement is effective for the first interim period beginning
after June 15, 2005. The Company is currently assessing the
Statement and does not expect the impact of adopting
SFAS No. 123(R) to have a material effect on the
Companys financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs. This Statement amends the guidance
in Accounting Research Bulletin No. 43,
Chapter 4, Inventory Pricing to clarify the
accounting treatment for certain inventory costs. In addition,
the Statement requires that the allocation of production
overheads be based on the facilities normal production
capacity. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2005. The
Company is currently assessing the Statement and has not yet
determined the impact of adopting SFAS No. 151 on the
Companys financial position and results of operations.
On December 8, 2003, the Medicare Prescription Drug
Improvement and Modernization Act of 2003, or the Medicare
Act, was signed into law. The Medicare Act introduces a
prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially
equivalent to Medicare Part D.
64
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the second quarter of 2004, a FASB Staff Position (FSP
FAS 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003) was issued providing guidance
on the accounting for the effects of the Medicare Act for
employers that sponsor postretirement health care plans that
provide prescription drug benefits. This FSP superseded FSP
FAS 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003. The FSP was effective for the
first interim or annual period beginning after June 15,
2004.
The guidance in this FSP applies only to the sponsor of a
single-employer defined benefit postretirement health plan for
which the employer has concluded that prescription drug benefits
available under the plan are actuarially equivalent and thus
qualify for the subsidy under the Medicare Act and the expected
subsidy will offset or reduce the employers share of the
costs of postretirement prescription drug coverage provided by
the plan. The Company determined that the Companys plans
were actuarially equivalent and elected to adopt the provisions
of FSP FAS 106-2 in the third quarter of 2004 on a
prospective basis only. The Company compared the Medicare
Part D plan to its retiree prescription drug coverage using
actuarial equivalencies and reflecting the retiree premiums and
cost sharing provisions of the various plans. This analysis
showed the Companys plans provide more valuable benefits
to retirees than the Medicare Part D plan. Based on the
Companys understanding of the intent of the Medicare Act
and subsequent proposed regulations, the Company still believes
the Companys plans will meet the actuarial equivalence
requirements necessary to receive the Medicare reimbursement.
For retirees with post-65 prescription drug benefits, the
Company estimates the net effect on post-65 per capita
medical and prescription drug costs to be a reduction of
approximately 11% to 14% due to the Medicare reimbursement. The
changes are assumed to have no impact on future participation
rates in the Companys post-65 prescription drug programs.
The Company has reduced the Companys accumulated benefit
obligation (ABO) for the subsidy related to benefits
attributed to past service by approximately $26.4 million.
The reduction will be recognized on the balance sheet through
amortization.
Foreign Currency The Companys Nordural
subsidiary located in Iceland uses the U.S. Dollar as its
functional currency. Certain operating and construction expenses
are denominated and payable in foreign currencies. For example,
Nordurals revenues are denominated in U.S. Dollars,
while its labor costs are denominated in Icelandic krona and a
portion of its anode costs are denominated in euros.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise and result in transaction gains and losses
which are reflected in the Consolidated Statement of Operations.
On October 1, 2004, the Company, together with subsidiaries
of Noranda Finance, Inc. (Noranda), completed the
joint purchase of the Gramercy, Louisiana alumina refinery
(Gramercy) owned by Kaiser Aluminum and Chemical
Corporation (Kaiser) and Kaisers 49% interest
in a Jamaican bauxite mining partnership (St. Ann
Bauxite). The purchase price was $23.0 million,
subject to working capital adjustments. The Company and Noranda
each paid one-half of the purchase price. All of the bauxite
mined by the partnership is used for the production of alumina
at the Gramercy refinery and a third party refinery in Texas.
The Gramercy refinery chemically refines bauxite into alumina,
the principal raw material in the production of primary
aluminum. The Hawesville facility purchases virtually all of its
alumina requirements from Gramercy. The Company uses the equity
method of accounting for its investment in Gramercy and St. Ann
Bauxite.
65
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On April 27, 2004, the Company completed the acquisition of
Nordural hf (Nordural) from Columbia Ventures
Corporation. Nordural is an Icelandic company that owns and
operates the Nordural facility, a primary aluminum reduction
facility located in Grundartangi, Iceland, approximately
25 miles northwest of Reykjavik, Icelands capital.
The results of operations of Nordural are included in the
Companys Statement of Operations beginning April 28,
2004.
The Nordural facility, built in 1998, is the Companys most
recently constructed and lowest operating cost facility. The
Company is expanding the Nordural facility to increase its
annual production capacity to 467 million pounds, or more
than double its current production capacity.
The Company accounted for the acquisition as a purchase using
the accounting standards established in Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations. The Company received the
final Nordural asset appraisal in December 2004. That appraisal
had significantly higher asset values than the preliminary
appraisal used to record the acquisition. As a result, goodwill
decreased $11,649 from previously reported amounts in interim
periods. The Company recognized $95,610 of goodwill in the
transaction. None of the goodwill is expected to be deductible
for Icelandic tax purposes however; all of the goodwill is
expected to be deductible for U.S. tax purposes.
The purchase price for Nordural was $195,346, allocated as
follows:
|
|
|
|
|
Allocation of Purchase Price: |
|
|
|
|
|
Current assets
|
|
$ |
41,322 |
|
Property, plant and equipment
|
|
|
276,597 |
|
Goodwill
|
|
|
95,610 |
|
Current liabilities
|
|
|
(26,144 |
) |
Long-term debt
|
|
|
(177,898 |
) |
Other non-current liabilities
|
|
|
(14,141 |
) |
|
|
|
|
Total purchase price
|
|
$ |
195,346 |
|
|
|
|
|
The following tables represent the unaudited pro forma results
of operations for the years ended December 31, 2004 and
2003 assuming the acquisition occurred on January 1, 2003.
The unaudited pro forma amounts may not be indicative of the
results that actually would have occurred if the transaction
described above had been completed and in effect for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Net sales
|
|
$ |
1,099,122 |
|
|
$ |
883,418 |
|
Income before cumulative effect of change in accounting principle
|
|
|
34,787 |
|
|
|
20,962 |
|
Net income
|
|
|
34,787 |
|
|
|
15,084 |
|
Net income available to common shareholders
|
|
|
34,018 |
|
|
|
13,084 |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.08 |
|
|
$ |
0.44 |
|
|
Diluted
|
|
$ |
1.07 |
|
|
$ |
0.43 |
|
66
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
The Acquisition of Glencore interest in Hawesville |
On April 1, 2003, the Company completed the acquisition of
the remaining 20% interest in the Hawesville facility. The
operating results of the 20% interest in the Hawesville facility
have been included in the Companys consolidated financial
statements from the date of acquisition. Century paid a purchase
price of $99,400 which it financed with approximately $59,400 of
available cash and $40,000 from the Glencore Note. See
Note 5 for a discussion of the Glencore Note. In connection
with the acquisition, the Company assumed all of Glencores
obligations related to the 20% interest in the Hawesville
facility. In addition, the Company issued a promissory note to
Glencore to secure any payments Glencore could be required to
make as issuer of a letter of credit in April 2001 in support of
the Industrial Revenue Bonds (the IRBs).
Inventories, at December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
51,511 |
|
|
$ |
35,621 |
|
Work-in-process
|
|
|
18,180 |
|
|
|
15,868 |
|
Finished goods
|
|
|
8,307 |
|
|
|
14,920 |
|
Operating and other supplies
|
|
|
30,557 |
|
|
|
22,951 |
|
|
|
|
|
|
|
|
|
|
$ |
108,555 |
|
|
$ |
89,360 |
|
|
|
|
|
|
|
|
At December 31, 2004 and December 31, 2003,
approximately 69% and 78% of the inventories, respectively, were
valued at the lower of LIFO cost or market. At December 31,
2004, the excess of FIFO cost over LIFO cost (or market, if
lower) was $4,775. At December 31, 2003, the excess of LIFO
cost (or market, if lower) over FIFO cost was approximately
$3,762.
|
|
4. |
Property, Plant and Equipment |
Property, plant and equipment, at December 31, consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Land and improvements
|
|
$ |
13,412 |
|
|
$ |
13,371 |
|
Buildings and improvements
|
|
|
116,695 |
|
|
|
41,029 |
|
Machinery and equipment
|
|
|
849,815 |
|
|
|
636,348 |
|
Construction in progress
|
|
|
68,718 |
|
|
|
9,398 |
|
|
|
|
|
|
|
|
|
|
|
1,048,640 |
|
|
|
700,146 |
|
Less accumulated depreciation
|
|
|
(242,390 |
) |
|
|
(205,189 |
) |
|
|
|
|
|
|
|
|
|
$ |
806,250 |
|
|
$ |
494,957 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2004 and 2003, the Company
recorded depreciation expense of $37,927 and $32,584,
respectively.
At December 31, 2004 and 2003, the cost of property, plant
and equipment includes $154,209 and $153,474, respectively, and
accumulated depreciation includes $57,102 and $49,598,
respectively, representing the Companys undivided interest
in the property, plant and equipment comprising the Mt. Holly
facility.
The Company has various operating lease commitments through 2010
relating to office space, machinery and equipment. Expenses
under all operating leases were $423, $331 and $319 for the
years ended
67
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2004, 2003 and 2002, respectively. There were
no noncancelable operating leases as of December 31, 2004.
|
|
|
Secured First Mortgage Notes |
In August 2004, the Company completed a tender offer and consent
solicitation for the Companys 11.75% senior secured
first mortgage notes due 2008 (the Notes). The
principal purpose of the tender offer and consent solicitation
was to refinance Centurys outstanding Notes with debt
bearing a lower interest rate, thereby reducing the
Companys annual interest expense. On August 26, 2004,
the Company purchased $315,055 in principal amount of Notes in
the tender offer. Holders received $1,096.86 for each $1,000
principal amount of Notes purchased in the tender offer, plus
accrued and unpaid interest. Holders who tendered their Notes by
August 6, 2004, received a consent payment of
$20.00 per $1,000 of principal amount of Notes resulting in
a total consideration of $1,116.86 for each $1,000 principal
amount of Notes purchased in the tender offer, plus accrued and
unpaid interest up to but not including the date of payment.
Following the tender offer, the Company has outstanding a
principal amount of $9,945 of Notes. No principal payments are
required until maturity. On April 15, 2005, the Company
will exercise its right to call the remaining Notes at 105.875%
of the principal balance, plus accrued and unpaid interest.
The Company financed the tender offer and consent solicitation
with a portion of the proceeds from the private placement of its
7.5% Senior Unsecured Notes due 2014 (Senior
Unsecured Notes) in the aggregate principal amount of
$250,000 and 1.75% Senior Convertible Notes due 2024
(Convertible Notes) in the aggregate principal
amount of $175,000. The sale of the Convertible Notes closed
August 9, 2004 resulting in net proceeds to the Company of
approximately $169,209. The sale of the Senior Unsecured Notes
closed August 26, 2004 and resulted in net proceeds to the
Company of approximately $243,238. The Company used the
remaining proceeds from these offerings and available cash to
repay a portion of the outstanding debt at Nordural.
The Company had unamortized discounts on the Notes of $67 and
$2,690 at December 31, 2004 and December 31, 2003,
respectively. In connection with the consent solicitation, the
Company entered into a supplemental indenture that eliminated
substantially all of the restrictive covenants and certain
default provisions contained in the indenture governing the
remaining Notes.
In the third quarter of 2004, the Company recognized a loss on
early extinguishment of debt of $47,448 related to the
refinancing of the Notes. The loss was composed of the following:
|
|
|
|
|
Purchase price premium, less consent fee
|
|
$ |
30,516 |
|
Consent payments
|
|
|
6,301 |
|
Write-off of capitalized financing fees
|
|
|
7,373 |
|
Write-off of bond discount
|
|
|
2,286 |
|
Other tender costs
|
|
|
972 |
|
|
|
|
|
|
|
$ |
47,448 |
|
|
|
|
|
On August 9, 2004, the Company completed the sale of
$175,000 aggregate principal amount of its
1.75% Convertible Notes due August 1, 2024. Interest
is payable on February 1st and August 1st of
each year.
The Convertible Notes are convertible at any time at an initial
conversion rate of 32.7430 shares of Century common stock
per one thousand dollars of principal amount of Convertible
Notes, subject to
68
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adjustments for certain events. The initial conversion rate is
equivalent to a conversion price of approximately
$30.5409 per share of Century common stock. Upon conversion
of a Convertible Note, the holder of such Convertible Note shall
receive cash equal to the principal amount of the Convertible
Note and, at Centurys election, either cash, Century
common stock, or a combination thereof, for the Convertible
Notes conversion value in excess of such principal amount,
if any. In addition, the Convertible Notes are redeemable at
Centurys option beginning on August 6, 2009, and the
holders may require Century to repurchase all or part of their
Convertible Notes for cash on each of August 1, 2011,
August 1, 2014 and August 1, 2019. The convertible
notes are classified as current because they are convertible at
any time.
The obligations of the Company pursuant to the Convertible Notes
are unconditionally guaranteed, jointly and severally, on a
senior unsecured basis by all of the Companys existing
domestic restricted subsidiaries other than Century Aluminum of
Kentucky, LLC.
On August 26, 2004, the Company completed the sale of
$250,000 aggregate principal amount of its 7.5% Senior
Unsecured Notes due August 15, 2014. Interest is payable
February 15th and August 15th of each year.
The indenture governing the Senior Unsecured Notes contains
customary covenants, including limitations on the Companys
ability to incur additional indebtedness, pay dividends, sell
assets or stock of certain subsidiaries and purchase or redeem
capital stock.
The obligations of the Company pursuant to the Senior Unsecured
Notes are unconditionally guaranteed, jointly and severally, on
a senior unsecured basis by all of the Companys existing
domestic restricted subsidiaries other than Century Aluminum of
Kentucky, LLC.
On or after August 15, 2009, the Company may redeem any of
the senior notes, in whole or in part, at an initial redemption
price equal to 103.75% of the principal amount, plus accrued and
unpaid interest. The redemption price will decline each year
after 2009 and will be 100% of the principal amount, plus
accrued and unpaid interest, beginning on August 15, 2012.
|
|
|
Revolving Credit Facility |
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 will mature on
April 2, 2006. The Companys obligations under the
Revolving Credit Facility are unconditionally guaranteed by its
domestic subsidiaries (other than Century Aluminum of Kentucky,
LLC (the LLC) and certain subsidiaries formed in
connection with the Nordural and Gramercy acquisitions) and
secured by a first priority security interest in all accounts
receivable and inventory belonging to the Company and its
subsidiary borrowers. The availability of funds under the
Revolving Credit Facility is subject to a $30,000 reserve and
limited by a specified borrowing base consisting of certain
eligible accounts receivable and inventory. As of
December 31, 2004, the Company had a borrowing base of
$87,861 under the Revolving Credit Facility. Borrowings under
the Revolving Credit Facility are, at the Companys option,
at the LIBOR rate or the Fleet National Bank base rate plus, in
each case, 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. There were no
outstanding borrowings under the Revolving Credit Facility as of
December 31, 2004 and December 31, 2003. Interest
periods for LIBOR rate borrowings are one, two, three or six
months, at the Companys option. The Company is subject to
customary covenants, including limitations on capital
expenditures, additional indebtedness, liens, guarantees,
mergers and acquisitions, dividends, distributions, capital
redemptions and investments.
69
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective April 1, 2001, in connection with its acquisition
of the Hawesville facility, the Company assumed the IRBs in the
aggregate principal amount of $7,815. From April 1, 2001
through April 1, 2003, Glencore assumed 20% of the
liability related to the IRBs consistent with its ownership
interest in the Hawesville facility during that period. The IRBs
mature on April 1, 2028, and bear interest at a variable
rate not to exceed 12% per annum determined weekly based on
prevailing rates for similar bonds in the bond market, with
interest paid quarterly. The IRBs are secured by a Glencore
guaranteed letter of credit and the Company provides for the
servicing costs for the letter of credit. The Company has agreed
to reimburse Glencore for all costs arising from the letter of
credit. The Companys maximum potential amount of future
payments under the reimbursement obligations for the Glencore
letter of credit securing the IRBs would be $8,150. The interest
rate on the IRBs at December 31, 2004 was 2.30%. 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. The Companys reimbursement obligations
related to the Glencore letter of credit securing the IRBs are
guaranteed by each of its material consolidated subsidiaries,
except for the LLC (see Note 19 for a discussion of note
guarantees), and secured by a first priority interest in the 20%
interest in the Hawesville facility.
On April 1, 2003, in connection with its acquisition of the
remaining 20% interest in the Hawesville facility, the Company
issued a six-year $40,000 promissory note payable to Glencore
bearing interest at a rate of 10% per annum (the
Glencore Note). In April 2004, the Company paid the
remaining $14,000 of principal on the Glencore Note, which
consisted of a $2,000 required principal payment and an optional
$12,000 prepayment of principal.
|
|
|
Term Loan Facility Nordural |
As of December 31, 2004, Nordural had approximately $68,494
of debt associated with a senior term loan facility maturing
December 31, 2009. In February 2005, the Company repaid the
remaining principal outstanding under the loan facility with
borrowing under a new term loan facility described below.
Amounts borrowed under Nordurals loan facility bore
interest at a margin over the applicable LIBOR rate.
|
|
|
Nordurals New Term Loan Facility |
On February 10, 2005, Nordural executed agreements and
documents related a new $365.0 million senior term loan
facility with Landsbanki Islands hf. and Kaupthing Bank hf,
which closed and funded on February 15, 2005. Amounts
borrowed under the new term loan facility were used to refinance
debt under Nordurals existing term loan facility, and will
be used to finance a portion of the costs associated with the
ongoing expansion of the Nordural facility and for
Nordurals general corporate purposes. Amounts borrowed
under Nordurals new term loan facility generally will bear
interest at a margin over the applicable Eurodollar rate.
Nordurals obligations under the new term loan facility
have been secured by a pledge of all of Nordurals shares
pursuant to a share pledge agreement with the lenders. In
addition, substantially all of Nordurals assets are
pledged as security under the loan facility. Nordural is
required to make the following minimum repayments of principal
on the facility: $15.5 million on February 28, 2007
and $14.0 million on each of August 31, 2007,
February 29, 2008, August 31, 2008, February 28,
2009, August 31, 2009 and February 28, 2010. If
Nordural makes a dividend payment (which dividends are not
permitted until the Nordural facility has been expanded to a
production level of 212,000 metric tons per year), it must
simultaneously make a repayment of principal in an amount equal
to 50% of the dividend. The new term loan facility is
non-recourse to Century Aluminum Company. All outstanding
principal must be repaid at final maturity on February 28,
2010.
70
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Nordurals loan facility contains customary covenants,
including limitations on additional indebtedness, investments,
capital expenditures (other than related to the expansion
project), dividends, and hedging agreements. Nordural is also
subject to various financial covenants, including a net worth
covenant and certain maintenance covenants, including minimum
interest coverage and debt service coverage beginning as of
December 31, 2006.
|
|
|
Principal Payments on Long Term Debt |
Principal payments on the Companys long term debt in the
next five years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
7.5% Senior Notes due August 2014
|
|
$ |
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250,000 |
|
Nordural debt
|
|
|
80,711 |
|
|
|
|
|
|
$ |
831 |
|
|
$ |
30,354 |
|
|
$ |
28,887 |
|
|
$ |
11,916 |
|
|
|
8,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
330,711 |
|
|
|
|
|
|
$ |
831 |
|
|
$ |
30,354 |
|
|
$ |
28,887 |
|
|
$ |
11,916 |
|
|
$ |
255,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
Composition of Certain Balance Sheet Accounts at
December 31 |
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Accrued and Other Current Liabilities
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
11,698 |
|
|
$ |
2,811 |
|
Accrued bond interest
|
|
|
8,148 |
|
|
|
7,956 |
|
Salaries, wages and benefits
|
|
|
15,210 |
|
|
|
7,818 |
|
Asset retirement obligations current portion
|
|
|
3,286 |
|
|
|
3,021 |
|
Stock compensation
|
|
|
2,132 |
|
|
|
2,252 |
|
Other
|
|
|
12,835 |
|
|
|
6,296 |
|
|
|
|
|
|
|
|
|
|
$ |
53,309 |
|
|
$ |
30,154 |
|
|
|
|
|
|
|
|
Accrued Employee Benefit Costs Current Portion
|
|
|
|
|
|
|
|
|
Postretirement benefits
|
|
$ |
4,558 |
|
|
$ |
4,242 |
|
Employee benefits cost
|
|
|
3,900 |
|
|
|
4,692 |
|
|
|
|
|
|
|
|
|
|
$ |
8,458 |
|
|
$ |
8,934 |
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Workers compensation
|
|
$ |
9,317 |
|
|
$ |
8,971 |
|
Asset retirement obligations less current portion
|
|
|
13,946 |
|
|
|
13,474 |
|
Derivative liabilities
|
|
|
10,615 |
|
|
|
10,598 |
|
Other
|
|
|
1,083 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
$ |
34,961 |
|
|
$ |
33,372 |
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
Unrealized loss on financial instruments, net of tax of $28,011
and $864
|
|
$ |
(49,113 |
) |
|
$ |
(1,591 |
) |
Minimum pension liability adjustment, net of tax of $1,728 and
$2,042
|
|
|
(3,073 |
) |
|
|
(3,631 |
) |
|
|
|
|
|
|
|
|
|
$ |
(52,186 |
) |
|
$ |
(5,222 |
) |
|
|
|
|
|
|
|
71
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Century of West Virginia and Century of Kentucky are
self-insured for workers compensation. In addition,
Century of West Virginia has certain catastrophic coverage that
is provided under State of West Virginia insurance programs. The
liability for self-insured workers compensation claims has
been discounted at 4.5% for 2004 and 5.0% for 2003. The
components of the liability for workers compensation at
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Undiscounted liability
|
|
$ |
15,379 |
|
|
$ |
15,100 |
|
Less discount
|
|
|
3,241 |
|
|
|
3,558 |
|
|
|
|
|
|
|
|
|
|
$ |
12,138 |
|
|
$ |
11,542 |
|
|
|
|
|
|
|
|
|
|
7. |
Pension and Other Postretirement Benefits |
The Company maintains noncontributory defined benefit pension
plans for all of the Companys domestic hourly and salaried
employees. For the domestic salaried employees, plan benefits
are based primarily on years of service and average compensation
during the later years of employment. For hourly employees at
the Ravenswood facility, plan benefits are based primarily on a
formula that provides a specific benefit for each year of
service. The Companys funding policy is to contribute
annually an amount based upon actuarial and economic assumptions
designed to achieve adequate funding of the projected benefit
obligations and to meet the minimum funding requirements of
ERISA. Plan assets consist principally of U.S. equity
securities, growth funds and fixed income accounts. In addition,
the Company provides supplemental executive retirement benefits
(SERB) for certain executive officers. The Company
uses a measurement date of December 31st to determine the
pension and OPEB benefit liabilities.
The hourly employees at the Hawesville facility are part of a
United Steelworkers of America (USWA) sponsored
multi-employer plan. The Companys contributions to the
plan are determined at a fixed rate per hour worked. During the
years ended December 31, 2004, 2003 and 2002, the Company
contributed $1,454, $1,407 and $1,467, respectively, to the
plan, and had no outstanding liability at year end.
As of December 31, 2004 and 2003, the Companys
accumulated pension benefit obligation exceeded the fair value
of the pension plan assets at year end. At December 31,
2004 and 2003, the Company was required to record a minimum
pension liability, which primarily related to the Mt. Holly
facility, of $3,073 and $3,631, net of tax, respectively, the
charge for which is included in other comprehensive income. In
the future, the amount of the minimum pension liability will
vary depending on changes in market conditions, performance of
pension investments, and the level of company contributions to
the pension plans. The Company will evaluate and adjust the
minimum pension liability on an annual basis.
|
|
|
Other Postretirement Benefits (OPEB) |
In addition to providing pension benefits, the Company provides
certain healthcare and life insurance benefits for substantially
all domestic retired employees. The Company accounts for these
plans in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions. SFAS No. 106 requires the
Company to accrue the estimated cost of providing postretirement
benefits during the working careers of those employees who could
become eligible for such benefits when they retire. The Company
funds these benefits as the retirees submit claims.
72
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The change in benefit obligations and change in plan assets as
of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Pension | |
|
OPEB | |
|
Pension | |
|
OPEB | |
|
|
| |
|
| |
|
| |
|
| |
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
67,249 |
|
|
$ |
117,525 |
|
|
$ |
58,442 |
|
|
$ |
104,035 |
|
Service cost
|
|
|
3,369 |
|
|
|
4,082 |
|
|
|
3,339 |
|
|
|
3,757 |
|
Interest cost
|
|
|
4,261 |
|
|
|
7,336 |
|
|
|
3,761 |
|
|
|
6,823 |
|
Plan changes
|
|
|
114 |
|
|
|
(4,717 |
) |
|
|
1,649 |
|
|
|
18 |
|
Losses
|
|
|
8,379 |
|
|
|
28,467 |
|
|
|
2,948 |
|
|
|
7,087 |
|
Benefits paid
|
|
|
(3,079 |
) |
|
|
(4,757 |
) |
|
|
(2,890 |
) |
|
|
(4,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
80,293 |
|
|
$ |
147,936 |
|
|
$ |
67,249 |
|
|
$ |
117,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$ |
53,095 |
|
|
$ |
|
|
|
$ |
38,382 |
|
|
$ |
|
|
Actual return (loss) on plan assets
|
|
|
7,321 |
|
|
|
|
|
|
|
14,383 |
|
|
|
|
|
Employer contributions
|
|
|
9,853 |
|
|
|
4,757 |
|
|
|
3,220 |
|
|
|
4,195 |
|
Benefits paid
|
|
|
(3,079 |
) |
|
|
(4,757 |
) |
|
|
(2,890 |
) |
|
|
(4,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets at end of year
|
|
$ |
67,190 |
|
|
$ |
|
|
|
$ |
53,095 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$ |
(13,103 |
) |
|
$ |
(147,936 |
) |
|
$ |
(14,155 |
) |
|
$ |
(117,525 |
) |
Unrecognized actuarial loss
|
|
|
12,852 |
|
|
|
63,248 |
|
|
|
7,370 |
|
|
|
36,613 |
|
Unrecognized transition obligation
|
|
|
60 |
|
|
|
|
|
|
|
234 |
|
|
|
|
|
Unrecognized prior service cost
|
|
|
4,549 |
|
|
|
(5,422 |
) |
|
|
5,104 |
|
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) recognized
|
|
$ |
4,358 |
|
|
$ |
(90,110 |
) |
|
$ |
(1,447 |
) |
|
$ |
(81,956 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the Statement of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
15,043 |
|
|
$ |
|
|
|
$ |
9,274 |
|
|
$ |
|
|
Accrued benefit liability
|
|
|
(10,685 |
) |
|
|
(90,110 |
) |
|
|
(12,458 |
) |
|
|
(81,956 |
) |
Intangible asset
|
|
|
|
|
|
|
|
|
|
|
737 |
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
4,358 |
|
|
$ |
(90,110 |
) |
|
$ |
(1,447 |
) |
|
$ |
(81,956 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys pension plans projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets as
of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit | |
|
Accumulated Benefit | |
|
Fair Value of | |
|
|
Obligation | |
|
Obligation | |
|
Plan Assets | |
|
|
| |
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Hourly pension plan
|
|
$ |
43,941 |
|
|
$ |
37,781 |
|
|
$ |
43,512 |
|
|
$ |
37,781 |
|
|
$ |
44,606 |
|
|
$ |
39,151 |
|
Salaried pension plan
|
|
|
27,300 |
|
|
|
18,702 |
|
|
|
22,579 |
|
|
|
15,231 |
|
|
|
22,584 |
|
|
|
13,944 |
|
Supplemental executive benefits pension plan (SERB)
|
|
|
9,052 |
|
|
|
10,766 |
|
|
|
9,052 |
|
|
|
10,764 |
|
|
|
0 |
|
|
|
0 |
|
There are no plan assets in the SERB due to the nature of the
plan.
73
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic benefit costs were comprised of the following
elements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
Pension | |
|
OPEB | |
|
Pension | |
|
OPEB | |
|
Pension | |
|
OPEB | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Service cost
|
|
$ |
3,369 |
|
|
$ |
4,082 |
|
|
$ |
3,339 |
|
|
$ |
3,757 |
|
|
$ |
3,001 |
|
|
$ |
3,019 |
|
Interest cost
|
|
|
4,261 |
|
|
|
7,336 |
|
|
|
3,761 |
|
|
|
6,823 |
|
|
|
3,554 |
|
|
|
6,229 |
|
Expected return on plan assets
|
|
|
(4,750 |
) |
|
|
|
|
|
|
(3,454 |
) |
|
|
|
|
|
|
(3,554 |
) |
|
|
|
|
Net amortization and deferral
|
|
|
1,167 |
|
|
|
1,493 |
|
|
|
2,055 |
|
|
|
1,148 |
|
|
|
1,425 |
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$ |
4,047 |
|
|
$ |
12,911 |
|
|
$ |
5,701 |
|
|
$ |
11,728 |
|
|
$ |
4,426 |
|
|
$ |
9,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions were used to determine benefit
obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
OPEB | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.75% |
|
|
|
6.25% |
|
|
|
5.75% |
|
|
|
6.25% |
|
Rate of compensation increase
|
|
|
4.00% |
|
|
|
4.00% |
|
|
|
4.00% |
|
|
|
4.00% |
|
Weighted average assumptions were used to determine net periodic
benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
OPEB | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Measurement date
|
|
|
12/31/2003 |
|
|
|
12/31/2002 |
|
|
|
12/31/2003 |
|
|
|
12/31/2002 |
|
Fiscal year end
|
|
|
12/31/2004 |
|
|
|
12/31/2003 |
|
|
|
12/31/2004 |
|
|
|
12/31/2003 |
|
Discount rate
|
|
|
6.25 |
% |
|
|
6.50 |
% |
|
|
6.25 |
% |
|
|
6.50 |
% |
Rate of compensation increase
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
Expected long-term return on plan assets
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
|
|
|
|
|
|
In developing the long-term rate of return assumption for
pension fund assets, the Company evaluated input from its
actuaries, including their review of asset class return
expectations as well as long-term inflation assumptions.
Projected returns are based on historical returns of broad
equity and bond indices. The Company also considered its
historical 10-year compound returns. The Company anticipates
that its investments will generate long-term rates of return of
9.0%, based on target asset allocations discussed below.
|
|
|
Effect of Medicare Part D |
The following table shows the effect of the Medicare Part D
Subsidy on the components of the Companys 2004 net
periodic postretirement benefit cost.
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, 2004 | |
|
|
| |
|
|
Included | |
|
Excluded | |
|
|
| |
|
| |
Service cost
|
|
$ |
4,082 |
|
|
$ |
4,407 |
|
Interest cost
|
|
|
7,336 |
|
|
|
7,850 |
|
Expected return on plan assets
|
|
|
|
|
|
|
|
|
Net amortization and deferral
|
|
|
1,493 |
|
|
|
1,984 |
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$ |
12,911 |
|
|
$ |
14,241 |
|
|
|
|
|
|
|
|
For measurement purposes, medical cost inflation is initially
9%, declining to 5% over six years and thereafter.
74
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care benefit obligations.
A one-percentage-point change in the assumed health care cost
trend rates would have had the following effects in 2004:
|
|
|
|
|
|
|
|
|
|
|
One | |
|
One | |
|
|
Percentage | |
|
Percentage | |
|
|
Point Increase | |
|
Point Decrease | |
|
|
| |
|
| |
Effect on total of service and interest cost components
|
|
$ |
2,241 |
|
|
$ |
(1,760 |
) |
Effect on accumulated postretirement benefit obligation
|
|
$ |
27,101 |
|
|
$ |
(21,511 |
) |
The Company sponsors a tax-deferred savings plan under which
eligible domestic employees may elect to contribute specified
percentages of their compensation with the Company providing
matching contributions of 60% of the first 6% of a
participants annual compensation contributed to the
savings plan. One half of the Companys contribution is
invested in the common stock of Century and one half of the
Companys contribution is invested based on employee
election. Company contributions to the savings plan were $602,
$590 and $607 for the years ended December 31, 2004, 2003
and 2002, respectively. Shares of common stock of the Company
may be sold at any time. Employees are considered fully vested
in the plan upon completion of two years of service. A year of
service is defined as a plan year in which the employee works at
least 1,000 hours.
The Companys pension plans weighted average asset
allocations at December 31, 2004 and 2003, by asset
category are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Plan | |
|
|
Assets at | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Equity securities
|
|
|
65 |
% |
|
|
71 |
% |
Debt securities
|
|
|
35 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The Company seeks a balanced return on plan assets through a
diversified investment strategy. The Companys weighted
average target allocation for plan assets is 65% equity
securities and funds and 35% fixed income funds. The Company
expects the long-term rate of return on the plan assets to be
9.0%.
Equity securities include Century common stock in the amounts of
$0 and $9,505 (18% of total plan assets) at December 31,
2004 and 2003, respectively. There are no plan assets in the
SERB plan due to the nature of the plan.
The Companys other postretirement benefit plans are
unfunded. The Company funds these benefits as the retirees
submit claims.
|
|
|
Pension and OPEB Cash Flows |
Contributions
The Company expects to contribute approximately $500 to fund its
pension plans for the years ended December 31, 2005.
75
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated Future Benefit Payments
The following table provides the estimated future benefit
payments for the pension and other postretirement benefit plans.
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
OPEB Benefits | |
|
|
| |
|
| |
2005
|
|
$ |
3,806 |
|
|
$ |
4,558 |
|
2006
|
|
|
4,587 |
|
|
|
4,547 |
|
2007
|
|
|
4,818 |
|
|
|
5,146 |
|
2008
|
|
|
5,081 |
|
|
|
5,731 |
|
2009
|
|
|
5,437 |
|
|
|
6,378 |
|
Years 2010-2014
|
|
|
30,372 |
|
|
|
41,035 |
|
Preferred Stock Under the Companys
Restated Certificate of Incorporation, the Board of Directors is
authorized to issue up to 5,000,000 shares of preferred
stock, with a par value of one cent per share, in one or more
series. The authorized but unissued preferred shares may be
issued with such dividend rates, conversion privileges, voting
rights, redemption prices and liquidation preferences as the
Board of Directors may determine, without action by shareholders.
On April 2, 2001, the Company issued to Glencore
500,000 shares of its 8.0% cumulative convertible preferred
stock (the Preferred Stock) for a cash purchase
price of $25,000. In May 2004, the Company used a portion of the
proceeds from a registered equity offering that closed in April
2004 to pay preferred stock dividends of $3,269 or
$6.54 per preferred stock share. In May 2004, Glencore
exercised its option to convert its Preferred Stock into shares
of the Companys common stock at a price of $17.92 per
common share. The Company issued 1,395,089 shares of its
common stock to Glencore in the conversion. At December 31,
2004, the Company had no outstanding Preferred Stock.
The Company suspended its common and preferred stock dividends
beginning in the fourth quarter of 2002. The action was taken
because the Company was near the limits on allowable dividend
payments under the then current covenants in its bond indenture
and due to current economic conditions. In August 2004, the
Company refinanced its Notes and removed all restrictive
covenants associated with the Notes. As of December 31,
2003, the Company had total cumulative preferred dividend
arrearages of $2,500, or $5.00 per share of preferred stock.
|
|
9. |
Stock Based Compensation |
1996 Stock Incentive Plan The Company adopted
the 1996 Stock Incentive Plan (the Stock Incentive
Plan) for the purpose of awarding performance share units
and granting qualified incentive stock options and nonqualified
stock options to salaried officers and other key employees of
the Company. The Stock Incentive Plan was amended in 2004 and
its term was extended five years through February 28, 2011.
Additionally, as part of the amendment the number of shares
available under the Stock Incentive Plan was increased
1,000,000 shares to a total of 3,000,000 shares.
Granted stock options vest one-third on the grant date and an
additional one-third on each of the first and second anniversary
dates, and have a term of 10 years. The performance share
units represent the right to receive common stock, on a
one-for-one basis on their vesting dates.
The Stock Incentive Plan provides for grants upon the passage of
time or the attainment of certain established performance goals.
As of December 31, 2004, 536,211 performance share units
have been authorized and will vest upon the attainment of the
performance goals.
76
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recognized $2,761, $2,254 and $269 of expense
related to the Stock Incentive Plan in 2004, 2003 and 2002,
respectively. Service based performance share units do not
affect the issued and outstanding shares of common stock until
conversion at the end of the vesting periods. However, the
service based performance share units are considered common
stock equivalents and therefore are included, using the treasury
stock method, in average common shares outstanding for diluted
earnings per share computations. Goal based performance share
units are not considered common stock equivalents until it
becomes probable that performance goals will be obtained.
Non-Employee Directors Stock Option Plan The
Company adopted a non-employee directors stock option plan
for the purpose of granting non-qualified stock options to
non-employee directors. The number of shares available under
this plan is 200,000, of which options for 179,000 shares
have been awarded. The initial options vest one-third on the
grant date and an additional one-third on each of the first and
second anniversary dates. Subsequent options vest one-fourth
each calendar quarter. Each option granted under this plan will
be exercisable for a period of 10 years from the date of
grant.
A summary of the status of the Companys Stock Incentive
Plan and the Non-Employee Directors Stock Option Plan as of
December 31, 2004, 2003 and 2002 and changes during the
year ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
Options |
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of year
|
|
|
677,020 |
|
|
$ |
12.94 |
|
|
|
691,200 |
|
|
$ |
12.58 |
|
|
|
595,267 |
|
|
$ |
12.82 |
|
Granted
|
|
|
90,750 |
|
|
|
23.54 |
|
|
|
161,750 |
|
|
|
14.06 |
|
|
|
96,600 |
|
|
|
11.05 |
|
Exercised
|
|
|
(445,840 |
) |
|
|
12.73 |
|
|
|
(60,630 |
) |
|
|
12.48 |
|
|
|
(667 |
) |
|
|
8.15 |
|
Forfeited
|
|
|
(500 |
) |
|
|
7.98 |
|
|
|
(115,300 |
) |
|
|
12.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
321,430 |
|
|
$ |
16.15 |
|
|
|
677,020 |
|
|
$ |
12.94 |
|
|
|
691,200 |
|
|
$ |
12.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
Number | |
|
Weighted Avg. | |
|
|
|
Number | |
|
|
|
|
Outstanding | |
|
Remaining | |
|
Weighted Avg. | |
|
Exercisable | |
|
Weighted Avg. | |
Range of Exercise Prices |
|
at 12/31/04 | |
|
Contractual Life | |
|
Exercise Price | |
|
at 12/31/04 | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$17.00 to $24.51
|
|
|
127,670 |
|
|
|
9.5 years |
|
|
$ |
22.23 |
|
|
|
58,363 |
|
|
$ |
21.66 |
|
$13.00 to $16.99
|
|
|
119,335 |
|
|
|
3.8 years |
|
|
$ |
14.35 |
|
|
|
119,335 |
|
|
$ |
14.35 |
|
$ 7.03 to $12.99
|
|
|
74,425 |
|
|
|
6.7 years |
|
|
$ |
8.62 |
|
|
|
74,425 |
|
|
$ |
8.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,430 |
|
|
|
|
|
|
|
|
|
|
|
252,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10. |
Earnings (Loss) Per Share |
Basic earnings per common share (EPS) amounts are
computed by dividing earnings after the deduction of preferred
stock dividends by the average number of common shares
outstanding. In accordance with current accounting guidance, for
the purpose of calculating EPS, the cumulative preferred stock
dividends accumulated for the period were deducted from net
income, as if declared. Diluted EPS amounts assume the issuance
of common stock for all potentially dilutive common shares
outstanding. The following table provides a reconciliation of
the computation of the basic and diluted earnings (loss) per
share for income before cumulative effect of change in
accounting principle (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
Income | |
|
Shares | |
|
Per-Share | |
|
Income | |
|
Shares | |
|
Per-Share | |
|
Income | |
|
Shares | |
|
Per-Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) before cumulative effect of change in accounting
principle
|
|
$ |
27,971 |
|
|
|
|
|
|
|
|
|
|
$ |
6,844 |
|
|
|
|
|
|
|
|
|
|
$ |
(18,608 |
) |
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(769 |
) |
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) applicable to common shareholders
|
|
|
27,202 |
|
|
|
28,668 |
|
|
$ |
0.95 |
|
|
|
4,844 |
|
|
|
21,073 |
|
|
$ |
0.23 |
|
|
|
(20,608 |
) |
|
|
20,555 |
|
|
$ |
(1.00 |
) |
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Incremental Shares from assumed conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) applicable to common shareholders with assumed
conversions
|
|
$ |
27,202 |
|
|
|
28,775 |
|
|
$ |
0.95 |
|
|
$ |
4,844 |
|
|
|
21,099 |
|
|
$ |
0.23 |
|
|
$ |
(20,608 |
) |
|
|
20,555 |
|
|
$ |
(1.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the periods ended December 31, 2004, 2003 and 2002,
2,500, 59,750, 691,200 shares of common stock issuable
under the Companys stock option plans were excluded from
the calculation of diluted earnings per share because of the
antidilutive effect. Convertible preferred stock, convertible at
the holders option into 1,395,089 of the Companys
common stock were not included in the computation of dilutive
EPS because of their antidilutive effect in 2003 and 2002.
In 2004, there were no common shares associated with the
Companys 1.75% Convertible Senior Notes included in
dilutive EPS because the conversion price had not been met.
Significant components of the income tax expense, before
minority interest and cumulative effect of a change in
accounting principle, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current benefit (expense)
|
|
$ |
(6,378 |
) |
|
$ |
|
|
|
$ |
20,004 |
|
|
Deferred expense
|
|
|
(7,860 |
) |
|
|
(1,794 |
) |
|
|
(7,486 |
) |
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current expense
|
|
|
|
|
|
|
(708 |
) |
|
|
(913 |
) |
|
Deferred (expense) benefit
|
|
|
(656 |
) |
|
|
(339 |
) |
|
|
2,521 |
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$ |
(14,894 |
) |
|
$ |
(2,841 |
) |
|
$ |
14,126 |
|
|
|
|
|
|
|
|
|
|
|
78
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense for the year ended December 31, 2002
includes a $1,500 reduction in reserves established for tax
contingencies.
A reconciliation of the statutory U.S. Federal income tax
rate to the effective income tax rate on income (loss) before
cumulative effect of a change in accounting principle is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Federal statutory rate
|
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
State taxes, net of Federal benefit
|
|
|
|
|
|
|
7 |
|
|
|
3 |
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
Other
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
% |
|
|
33 |
% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
Permanent differences primarily relate to the Companys
settlement of prior year tax examinations, meal and
entertainment disallowance, certain state income tax credits and
other nondeductible expenses.
Significant components of the Companys deferred tax assets
and liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Accrued postretirement benefit cost
|
|
$ |
17,721 |
|
|
$ |
14,535 |
|
|
Accrued liabilities
|
|
|
9,930 |
|
|
|
14,942 |
|
|
NOL carried forward
|
|
|
5,425 |
|
|
|
4,487 |
|
|
Pension
|
|
|
5,925 |
|
|
|
7,296 |
|
|
Inventory write-down
|
|
|
|
|
|
|
2,246 |
|
|
Foreign tax credit
|
|
|
11,359 |
|
|
|
|
|
|
Valuation allowance
|
|
|
(11,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
39,001 |
|
|
|
43,506 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Tax over financial statement depreciation
|
|
|
(107,825 |
) |
|
|
(96,051 |
) |
|
Equity contra other comprehensive income
|
|
|
29,739 |
|
|
|
864 |
|
|
Unrepatriated foreign earnings
|
|
|
(3,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
(42,585 |
) |
|
$ |
(51,681 |
) |
|
|
|
|
|
|
|
The net deferred tax liability of $42,585 at December 31,
2004, is net of a current deferred tax asset of $25,688. The net
deferred tax liability of $51,681 at December 31, 2003, is
net of a current deferred tax asset of $3,413. At
December 31, 2004, the Company has various state net
operating loss carryforwards totaling $22,800 which begin to
expire in 2010, in addition to $24,000 of foreign net operating
loss carryforwards which begin to expire in 2008.
79
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12. |
Contingencies and Commitments |
|
|
|
Environmental Contingencies |
The Company believes its current environmental liabilities do
not have, and are not likely to have, a material adverse effect
on the Companys financial condition, results of operations
or liquidity. However, there can be no assurance that future
requirements at currently or formerly owned or operated
properties will not result in liabilities which may have a
material adverse effect.
Century Aluminum of West Virginia, Inc. (Century of West
Virginia) continues to perform remedial measures at its
Ravenswood facility pursuant to an order issued by the
Environmental Protection Agency (EPA) in 1994 (the
3008(h) Order). Century of West Virginia also
conducted a RCRA facility investigation (RFI) under
the 3008(h) Order evaluating other areas at the Ravenswood
facility that may have contamination requiring remediation. The
RFI has been approved by appropriate agencies. Century of West
Virginia has completed interim remediation measures at two sites
identified in the RFI, and the Company believes no further
remediation will be required. A Corrective Measures Study, which
will formally document the conclusion of these activities, is
being completed with the EPA. The Company believes a significant
portion of the contamination on the two sites identified in the
RFI is attributable to the operations of Kaiser, which had
previously owned and operated the Ravenswood facility, and is
the financial responsibility of Kaiser.
On September 28, 2004, the Bankruptcy Court for the
District of Delaware approved an agreement by Kaiser to transfer
its environmental liability at Ravenswood to TRC Companies,
Inc., and TRC Environmental Corporation (collectively
TRC). The Bankruptcy Court also approved an
agreement between, Kaiser, TRC, Century of West Virginia and
Pechiney Rolled Products, Inc. (Pechiney), effective
as of September 1, 2004, pursuant to which TRC assumed all
of Kaisers environmental liabilities at Ravenswood. TRC
also purchased insurance in amounts the Company believes are
sufficient to cover the costs of any TRC liability at
Ravenswood. Also, as of September 1, 2004, Century of West
Virginia and Pechiney entered into an agreement releasing
Century of West Virginia from all of the environmental
indemnification obligations for Kaiser-related matters arising
out of the Century of West Virginias 1999 sale of the
Ravenswood rolling mill to Pechiney.
Under the Companys agreement with Southwire Company to
purchase the Hawesville, Kentucky facility, Southwire
indemnified the Company against all on-site environmental
liabilities known to exist prior to April 1, 2001 (the
Closing) and against risks associated with off-site
hazardous material disposals which pre-dated the Closing.
Prior to the Closing, the EPA had issued a final Record of
Decision (ROD), under the Comprehensive
Environmental Response, Compensation and Liability Act,
directing that certain response actions be taken at the
Hawesville facility. By agreement, Southwire is to perform all
obligations under the ROD. The total costs for the obligations
to be undertaken and paid for by Southwire relative to these
liabilities are estimated under the ROD to be $12,600, and the
forecast of annual operating and maintenance costs is $1,200.
Century Kentucky, LLC (Century Kentucky) will
operate and maintain the ground water treatment system required
under the ROD on behalf of Southwire, and Southwire will
reimburse Century Kentucky for any expense that exceeds $400
annually.
If any on-site environmental liabilities arising from
pre-Closing activities at the Hawesville facility that were
unknown at Closing, become known prior to March 31, 2007,
the Company and Southwire will share the costs of remedial
action pro rata depending on the year the liability is
identified. The Company will be responsible for all
environmental liabilities which first become known on or after
March 31, 2007 and any post-Closing environmental
liabilities which result from a change in laws.
80
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company acquired the Hawesville facility by purchasing all
of the outstanding equity securities of Metalsco Ltd.
(Metalsco), which was a wholly-owned subsidiary of
Southwire. Metalsco previously owned certain assets unrelated to
the Hawesville plants operations. These assets were
distributed to Southwire prior to the Closing, and Southwire
indemnified the Company for all liabilities related to the
assets previously owned by Metalsco. Southwire also retained
ownership of and full responsibility for certain land adjacent
to the Hawesville facility containing potliner disposal areas.
Southwire has secured its indemnity obligations to the Company
for environmental liabilities through April 1, 2008 by
posting a letter of credit in the Companys favor in the
amount of $14,000. Southwire is obligated to post an additional
$15,000 if its net worth drops below a pre-determined level
prior to April 1, 2008. The amount of security Southwire
provides may increase (but not above $14,500 or $29,500, as
applicable) or decrease (but not below $3,000) if certain
specified conditions are met.
The Company cannot be certain 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 Companys shared or assumed
liability is significantly greater than anticipated, the
Companys financial condition, results of operations and
liquidity could be materially adversely affected.
Century is a party to an EPA Administrative Order on Consent
(the Order) pursuant to which other past and present
owners of an alumina refining facility at St. Croix, Virgin
Islands have agreed to carry out a Hydrocarbon Recovery Plan to
remove and manage hydrocarbons floating on groundwater
underlying the facility. Pursuant to the Hydrocarbon Recovery
Plan, recovered hydrocarbons and groundwater are delivered to
the adjacent petroleum refinery where they are received and
managed. Lockheed Martin Corporation (Lockheed),
which sold the facility to one of the Companys affiliates,
Virgin Islands Alumina Corporation (Vialco), in
1989, has tendered indemnity and defense of this matter to
Vialco pursuant to terms of the LockheedVialco Asset
Purchase Agreement. Management does not believe Vialcos
liability under the Order or its indemnity to Lockheed will
require material payments. Through December 31, 2004, the
Company has expended approximately $440 on the Recovery Plan.
Although there is no limit on the obligation to make
indemnification payments, the Company expects the future
potential payments under this indemnification will be
approximately $200 which may be offset in part by sales of
recoverable hydrocarbons.
The Company, along with others, including former owners of its
former St. Croix facility, received notice of a threatened
lawsuit alleging natural resource damages involving the
subsurface contamination at the facility. Century has entered
into a Joint Defense Agreement with the other parties who
received notification of the threatened lawsuit. While it is not
presently possible to determine the outcome of this matter, the
Companys known liabilities with respect to this and other
matters relating to compliance and cleanup, based on current
information, are not expected to be material and should not
materially adversely affect the Companys operating
results. However, if more stringent compliance or cleanup
standards under environmental laws or regulations are imposed,
previously unknown environmental conditions or damages to
natural resources are discovered, or if contributions from other
responsible parties with respect to sites for which the Company
has cleanup responsibilities are not available, the Company may
be subject to additional liability, which may be material.
Nordural is subject to various Icelandic and other environmental
laws and regulations. These laws and regulations are subject to
change, which changes could result in increased costs. Operating
in a foreign country exposes the Company to political,
regulatory, currency and other related risks. The Nordural
facility, built in 1998, uses technology currently defined to be
best available technology under the European
Unions Integrated Pollution Prevention and Control
Directive of 1996, or IPPC. The operational restrictions for the
Nordural facility, as determined by the Icelandic Minister for
the Environment, are set forth in the facilitys operating
license. The license currently allows for both the
facilitys current and planned expansion capacity.
81
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
It is the Companys 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 $596 and $694 at
December 31, 2004 and December 31, 2003, respectively.
All accrued amounts have been recorded without giving effect to
any possible future recoveries. With respect to ongoing
environmental compliance costs, including maintenance and
monitoring, such costs are expensed as incurred.
Because of the issues and uncertainties described above, and the
Companys 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 Companys future
financial condition, results of operations, or liquidity. Based
upon all available information, management does not believe that
the outcome of these environmental matters will have a material
adverse effect on the Companys financial condition,
results of operations, or liquidity.
The Company has pending against it or may be subject to various
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
Companys financial condition, results of operations, or
liquidity.
The Hawesville facility currently purchases all of its power
from Kenergy Corporation (Kenergy), a local retail
electric cooperative, under a power supply contract that expires
at the end of 2010. Kenergy acquires the power it provides to
the Hawesville facility mostly from a subsidiary of LG&E
Energy Corporation (LG&E), with delivery
guaranteed by LG&E. The Hawesville facility currently
purchases all of its power from Kenergy at fixed prices.
Approximately 121 MW or 27% of the Hawesville
facilitys power requirements are unpriced in calendar
years 2006 through 2010. The Company will negotiate the price
for the unpriced portion of the contract at such times as the
Company and Kenergy deem appropriate.
The Company purchases all of the electricity requirements for
the Ravenswood facility from Ohio Power Company, a unit of
American Electric Power Company, under a fixed price power
supply agreement that runs through December 31, 2005. On
February 18, 2005, Century Aluminum of West Virginia, Inc.
signed an agreement with Appalachian Power Company for the
supply of electricity to the Ravenswood facility beginning
January 1, 2006. The agreement has an initial term of two
years and continues thereafter until Century gives
12 months notice of cancellation. Appalachian Power has
filed a petition with the Public Services Commission of West
Virginia (PSC) seeking affirmation of its
authorization to provide service to the Ravenswood facility. In
2000, the PSC found that the Ravenswood facility was in
Appalachian Powers service territory and had jurisdiction
over the provision of service. The agreement will become
effective unless the PSC fails to affirm its previous findings.
Power under the new agreement is priced under an Appalachian
Power tariff.
The Mt. Holly facility purchases all of its power from the South
Carolina Public Service Authority at rates established by
published schedules. The Mt. Holly facilitys current power
contract expires December 31, 2015. Power delivered through
2010 will be priced as set forth in currently published
schedules, subject to adjustments for fuel costs. Rates for the
period 2011 through 2015 will be as provided under
then-applicable schedules.
The Nordural facility purchases power from Landsvirkjun, a power
company jointly owned by the Republic of Iceland and two
Icelandic municipal governments, under a contract due to expire
in 2019. The power delivered to the Nordural facility under its
current contract is from hydroelectric and geothermal
82
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sources, both competitively-priced and renewable sources of
power in Iceland, at a rate based on the London Metal Exchange
(LME) price for primary aluminum. In connection with
the planned expansion, Nordural has entered into a power
contract with Hitaveita Su#urnesja hf. (Sudurnes
Energy) and Orkuveita Reykjavíkur (Reykjavik
Energy) for the supply of the additional power required
for the expansion capacity. Power under this agreement will be
generated from geothermal resources and prices will be
LME-based. By the terms of a Second Amendment to the
Landsvirkjun/ Nordural Power Contract, dated as of
April 21, 2004, Landsvirkjun has agreed on a best
commercial efforts basis to provide backup power to Nordural
should Sudurnes Energy or Reykjavik Energy be unable to meet the
obligations of their contract to provide power for the Nordural
expansion.
The Company may suffer losses due to a temporary or prolonged
interruption of the supply of electrical power to its
facilities, which can be caused by unusually high demand,
blackouts, equipment failure, natural disasters or other
catastrophic events. The Company uses large amounts of
electricity to produce primary aluminum, and 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, the Company may lose production for
a prolonged period of time and incur significant losses.
Although the Company maintains property and business
interruption insurance to mitigate losses resulting from
catastrophic events, the Company may still be required to pay
significant amounts under the deductible provisions of those
insurance policies. Centurys coverage may not be
sufficient to cover all losses, or certain events may not be
covered. For example, certain of Centurys insurance
policies do not cover any losses the Company may incur if its
suppliers are unable to provide the Company with power during
periods of unusually high demand. Certain material losses which
are not covered by insurance may trigger a default under the
Companys 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.
Approximately 81% of the Companys U.S. based
workforce are represented by the United Steelworkers of
America (the USWA) and are working under agreements
that expire as follows: March 31, 2006 (Hawesville) and
May 31, 2006 (Ravenswood).
There are six national labor unions representing approximately
80% of Nordurals work force. The current contract with
these unions expired on December 31, 2004. The terms of a
new contract are currently being negotiated.
|
|
|
Other Commitments and Contingencies |
The Companys income tax returns are periodically examined
by various tax authorities. The Company is currently under audit
by the Internal Revenue Service (IRS) for the tax
years through 2002. In connection with such examinations, the
IRS has raised issues and proposed tax deficiencies. The Company
is reviewing the issues raised by the IRS and plans to contest
the proposed tax deficiencies. The Company does not believe that
the outcome of the tax audit will have a material impact on the
Companys financial condition or results of operations.
In connection with the acquisition of the Hawesville facility,
the Company would be required to make post-closing payments to
Southwire of up to $7,000, if LME prices exceed specified levels
during any of the seven years following closing. If the LME
price remains at current levels, the entire $7,000 will become
due in April 2005.
At December 31, 2004, the Company had outstanding capital
commitments related to the Nordural expansion of $218,800. The
Companys cost commitments for the Nordural expansion may
materially change
83
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
depending on the exchange rate between the U.S. dollar and
certain foreign currencies, principally the euro and the
Icelandic krona.
|
|
13. |
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.
Nordural is party to a long-term alumina tolling contract with a
subsidiary of BHP Billiton (the Tolling Agreement)
which is due to expire December 31, 2013. Under this
contract, which is for all of the Nordural facilitys
existing production capacity, Nordural receives an LME-based fee
for the conversion of alumina, supplied by BHP Billiton, into
primary aluminum. As of August 1, 2004, the Company entered
into a ten-year alumina toll conversion agreement with Glencore
for approximately 198.4 million pounds per year of
Nordurals expansion capacity. That contract also provides
Nordural with an LME-based fee. The contract is effective in
late-2006.
|
|
|
Primary Aluminum Sales Agreements |
Century has a contract with Pechiney (the Pechiney Metal
Agreement) under which Pechiney purchases 23 to
27 million pounds, per month, of molten aluminum produced
at the Ravenswood facility through December 31, 2005, at a
price determined by reference to the U.S. Midwest Market
Price. This contract will be automatically extended through
July 31, 2007 provided that the Companys power
contract for the Ravenswood facility is extended or replaced
through that date. Pechiney has the right, upon
12 months notice, to reduce its purchase obligations
by 50% under this contract. In December 2003, Alcan Inc.
(Alcan) completed an acquisition of Pechiney and as
a result assumed the Pechiney metal agreement.
The Pechiney rolling mill that purchases primary aluminum from
the Company under this contract is located adjacent to the
Ravenswood facility, which requires the Company to deliver
molten aluminum, thereby reducing its casting and shipping
costs. If Alcan materially reduces its purchases or fails to
renew the contract when it expires, the Companys casting,
shipping and marketing costs at the Ravenswood facility would
increase.
On April 1, 2000, the Company entered into an agreement
with Glencore, expiring December 31, 2009, to sell and
deliver monthly, primary aluminum totaling approximately
110 million pounds per year at a fixed price for the years
2002 through 2009 (the Original Sales Contract). In
January 2003, Century and Glencore agreed to terminate and
settle the Original Sales Contract for the years 2005 through
2009. At that time, the parties entered into a new contract (the
New Sales Contract) that requires Century to deliver
the same quantity of primary aluminum as did the Original Sales
Contract for these years. The New Sales Contract provides for
variable pricing determined by reference to the LME for the
years 2005 through 2009. For deliveries through 2004, the price
of primary aluminum delivered was fixed.
Prior to the January 2003 agreement to terminate and settle the
years 2005 though 2009 of the Original Sales Contract, the
Company had been classifying and accounting for it as a normal
sales contract under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. A
contract that is so designated and that meets other conditions
established by SFAS No. 133 is exempt from the
requirements of SFAS No. 133, although by its terms
the contract would otherwise be accounted for as a derivative
instrument. Accordingly, prior to January 2003, the Original
Sales Contract was recorded on an accrual basis of accounting
and changes in the fair value of the Original Sales Contract
were not recognized.
84
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
According to SFAS No. 133, it must be probable that at
inception and throughout its term, a contract classified as
normal will not result in a net settlement and will
result in physical delivery. In April 2003, the Company and
Glencore net settled a significant portion of the Original Sales
Contract, and it no longer qualified for the normal
exception of SFAS No. 133. The Company marked the
Original Sales Contract to current fair value in its entirety.
Accordingly, in the first quarter of 2003 the Company recorded a
derivative asset and a pre-tax gain of $41,700. Of the total
recorded gain, $26,100 related to the favorable terms of the
Original Sales Contract for the years 2005 through 2009, and
$15,600 relates to the favorable terms of the Original Sales
Contract for 2003 through 2004.
The Company determined the fair value by estimating the excess
of the contractual cash flows of the Original Sales Contract
(using contractual prices and quantities) above the estimated
cash flows of a contract based on identical quantities using
LME-quoted prevailing forward market prices for aluminum plus an
estimated U.S. Midwest premium adjusted for delivery
considerations. The Company discounted the excess estimated cash
flows to present value using a discount rate of 7%.
On April 1, 2003, the Company received $35,500 from
Glencore, $26,100 of which related to the settlement of the
Original Sales Contract for the years 2005 through 2009, and
$9,400 of which represented the fair value of the New Sales
Contracts discussed below. In January 2003, the Company began
accounting for the unsettled portion of the Original Sales
Contract (years 2003 and 2004) as a derivative and recognizing
period-to-period changes in fair value in current income. The
Company also accounts for the New Sales Contract as a derivative
instrument under SFAS No. 133. The Company has not
designated the New Sales Contract as normal because
it replaces and substitutes for a significant portion of the
Original Sales Contract which, after January 2003, no longer
qualified for this designation. The $9,400 initial fair value of
the New Sales Contract is a derivative liability and represents
the present value of the contracts favorable term to
Glencore in that the New Sales Contract excludes from its
variable price an estimated U.S. Midwest premium, adjusted
for delivery considerations. Because the New Sales Contract is
variably priced, the Company does not expect significant
variability in its fair value, other than changes that might
result from the absence of the U.S. Midwest premium.
In connection with the acquisition of the Hawesville facility in
April 2001, the Company entered into a 10-year contract with
Southwire (the Southwire Metal Agreement) to supply
240 million pounds of high-purity molten aluminum annually
to Southwires wire and cable manufacturing facility
located adjacent to the Hawesville facility. Under this
contract, Southwire will also purchase 60.0 million
pounds of standard grade molten aluminum each year for the first
five years of the contract, with an option to purchase an equal
amount in each of the remaining five years. Southwire has
exercised this option through 2008. Prior to the acquisition of
the 20% interest in the Hawesville facility on April 1,
2003, the Company and Glencore were each responsible for
providing a pro rata portion of the aluminum supplied to
Southwire under this contract. In connection with the
Companys acquisition of the 20% interest in the Hawesville
facility, the Company assumed Glencores delivery
obligations under the Southwire Metal Agreement. The price for
the molten aluminum to be delivered to Southwire from the
Hawesville facility is variable and will be determined by
reference to the U.S. Midwest Market Price. This agreement
expires on March 31, 2011, and will automatically renew for
additional five-year terms, unless either party provides
12 months notice that it has elected not to renew.
In connection with the acquisition of the 20% interest in the
Hawesville facility, the Company entered into a ten-year
contract with Glencore (the Glencore Metal
Agreement) from 2004 through 2013 under which Glencore
will purchase approximately 45 million pounds per year of
primary aluminum produced at the Ravenswood and Mt. Holly
facilities, at prices based on then-current market prices,
adjusted by a negotiated U.S. Midwest premium with a cap
and a floor as applied to the current U.S. Midwest premium.
Apart from the Pechiney Metal Agreement, the New Sales Contract,
the Glencore Metal Agreement and the Southwire Metal Agreement,
the Company had forward delivery contracts to sell
249.4 million pounds and
85
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
351.8 million pounds of primary aluminum at
December 31, 2004 and December 31, 2003, respectively.
Of these forward delivery contracts, the Company had fixed price
commitments to sell 13.3 million pounds and
70.5 million pounds of primary aluminum at
December 31, 2004 and December 31, 2003, respectively,
of which, no forward delivery contracts and 53.5 million
pounds at December 31, 2004 and December 31, 2003,
respectively, were with Glencore.
|
|
|
Alumina Purchase Agreements |
The Company is party to long-term supply agreements with
Glencore for the supply of alumina to the Companys
Ravenswood and Mt. Holly facilities that extend through December
2006 and January 2008 at prices indexed to the price of primary
aluminum quoted on the LME.
Prior to October 1, 2004, the Company purchased the alumina
used at its Hawesville facility from Kaiser under a long term
agreement that ran through December 2006. Kaiser filed for
bankruptcy under Chapter 11 of the Bankruptcy Code in
February 2002. Subsequent to that date, and with bankruptcy
court approval, Kaiser agreed to assume the Companys
alumina supply agreement and a new alumina supply agreement for
the Companys Hawesville facility for the years 2006
through 2008. Through September 30, 2004, Kaiser continued
to supply alumina to the Company pursuant to the terms of its
agreement.
On October 1, 2004, the Company and Noranda Finance, Inc.
jointly acquired the Gramercy alumina refinery and related
Jamaican bauxite mining assets from Kaiser for $23,000, subject
to closing adjustments. Century and Noranda each paid one-half,
or $11,500, of the purchase price. See Note 2,
Acquisitions.
The price the Company pays for alumina used by the Hawesville
facility is now based on the cost of alumina production, rather
than the LME price for primary aluminum. Those production costs
may be materially higher than an LME-based price. The impact of
the Gramercy acquisition to the Companys cost of goods
sold may not be materially different than under the
Companys existing LME-based contracts with Gramercy in
periods of high aluminum prices such as the Company is currently
experiencing. However, the Company believes that the price of
alumina based on production costs at Gramercy could be
materially higher than under the LME-based contract price in
periods when aluminum prices are low and natural gas prices are
high.
Nordural has a contract for the supply of anodes for its
existing capacity which expires in 2013. Pricing for the anode
contract is variable and is indexed to the raw material market
for petroleum coke products, certain labor rates, and
maintenance cost indices.
|
|
|
Financial Sales and Purchase Agreements |
At December 31, 2004 and December 31, 2003, the
Company had fixed price financial sales contracts, primarily
with Glencore, for 1,686.4 million pounds and
102.9 million pounds of primary aluminum, respectively, of
which 1,023.7 million pounds and 58.8 million pounds,
respectively, were designated cash flow hedges. Beginning in
2006, certain of these sales contracts contain clauses that
trigger additional shipment volume when the market price for a
period is above the contract ceiling price for that period.
These contracts are evaluated monthly and the maximum additional
shipment volume over the life of the contract would be
662.7 million pounds, if the market price exceeds the
ceiling price for all months during the term of the contract.
These fixed price financial sales contracts are scheduled for
settlement at various dates in 2005 through 2010. The Company
had no fixed price financial purchase contracts to purchase
aluminum at December 31, 2004 or December 31, 2003.
86
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fixed Price Financial Sales Contracts at
December 31, 2004:
Primary Aluminum
|
|
|
|
|
|
|
(Millions of pounds) | |
2005
|
|
|
425.7 |
|
2006
|
|
|
370.3 |
|
2007
|
|
|
374.6 |
|
2008
|
|
|
185.2 |
|
2009
|
|
|
165.3 |
|
2010
|
|
|
165.3 |
|
|
|
|
|
Total
|
|
|
1,686.4 |
|
|
|
|
|
Additionally, to mitigate the volatility of the natural gas
markets, the Company enters into fixed price financial purchase
contracts, accounted for as cash flow hedges, which settle in
cash in the period corresponding to the intended usage of
natural gas. At December 31, 2004 and December 31,
2003, the Company had fixed price financial purchase contracts
for 4.3 million and 2.7 million DTH (one decatherm is
equivalent to one million British Thermal Units), respectively.
These financial instruments are scheduled for settlement at
various dates in 2005 through 2008.
Fixed Price Financial Purchase Contracts at
December 31, 2004:
Natural Gas
|
|
|
|
|
|
|
(Thousands of DTH) | |
2005
|
|
|
2,880 |
|
2006
|
|
|
480 |
|
2007
|
|
|
480 |
|
2008
|
|
|
480 |
|
|
|
|
|
Total
|
|
|
4,320 |
|
|
|
|
|
Based on the fair value of the Companys fixed price
financial sales contracts and financial purchase contracts
financial instruments as of December 31, 2004, accumulated
other comprehensive loss of $30,215 is expected to be
reclassified as a reduction to earnings over the next
12 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.
|
|
14. |
Asset Retirement Obligations |
In June 2001, the Financial Accounting Standards Board issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement establishes standards for
accounting for legal obligations associated with the retirement
of tangible long-lived assets and the associated asset
retirement costs. The Company adopted the Standard during the
first quarter of 2003. SFAS No. 143 requires that the
Company record the fair value of a legal liability for an asset
retirement obligation (ARO) in the period in which
it is incurred and capitalize the ARO by increasing the carrying
amount of the related asset. The liability is accreted to its
87
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
present value each period and the capitalized cost is
depreciated over the useful life of the related asset. The
Companys asset retirement obligations consist primarily of
costs associated with the removal and disposal of reduction
plant spent pot liner.
With the adoption of SFAS No. 143 on January 1,
2003, Century recorded an ARO asset of $6,848, net of
accumulated amortization of $7,372, a deferred tax asset of
$3,430 and an ARO liability of $14,220. The net amount initially
recognized as a result of applying the Statement is reported as
a cumulative effect of a change in accounting principle. The
Company recorded a one-time, non-cash charge of $5,878, for the
cumulative effect of a change in accounting principle. During
the year ended December 31, 2003, $1,795 of the additional
ARO liability incurred is related to the acquisition of the 20%
interest in the Hawesville facility.
The reconciliation of the changes in the asset retirement
obligations is presented below:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Beginning Balance, ARO Liability
|
|
$ |
16,495 |
|
|
$ |
14,220 |
|
Additional ARO Liability incurred
|
|
|
1,383 |
|
|
|
3,402 |
|
ARO Liabilities settled
|
|
|
(3,379 |
) |
|
|
(2,423 |
) |
Accretion Expense
|
|
|
2,733 |
|
|
|
1,296 |
|
|
|
|
|
|
|
|
Ending Balance, ARO Liability
|
|
$ |
17,232 |
|
|
$ |
16,495 |
|
|
|
|
|
|
|
|
|
|
15. |
Related Party Transactions |
The significant related party transactions occurring during the
years ended December 31, 2004, 2003 and 2002, are described
below.
The Chairman of the Board of Directors of Century is a member of
the Board of Directors of Glencore International AG. One of
Centurys Board members is the Chairman of the Board of
Directors of Glencore International AG.