UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE
FISCAL YEAR ENDED DECEMBER 31, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THESECURITIES 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
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(State
or other jurisdiction of Incorporation
or organization)
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(IRS
Employer Identification No.)
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2511
Garden Road
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93940
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Building
A, Suite 200
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(Zip
Code)
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Monterey,
California
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(Address
of registrant’s principal offices)
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Registrant’s
telephone number, including area code
(831)
642-9300
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered:
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Common
Stock, $0.01 par value per share
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x
No
¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
¨
Indicate
by check mark 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 registrant’s 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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
file and large accelerated filer” in Rule 12b-2 of the Act).
Large
Accelerated Filer x
Accelerated Filer ¨
Non-Accelerated Filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No
x
Based
upon
the closing price of the registrant’s common stock on the NASDAQ Global Select
Market on June 30, 2006, the approximate aggregate market value of the common
stock held by non-affiliates of the registrant was approximately $819,647,000.
As of February 28, 2007, 32,522,340 shares of common stock of the registrant
were issued and outstanding.
Documents
Incorporated by Reference:
All
or a
portion of Items 10 through 14 in Part III of this Form 10-K are incorporated
by
reference to the Registrant’s definitive proxy statement on Schedule 14A, which
will be filed within 120 days after the close of the fiscal year
covered by this report on Form 10-K, or if the Registrant’s Schedule 14A is not
filed within such period, will be included in an amendment to this Report
on Form 10-K which will be filed within such 120 day period.
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PART
I
Throughout
this Form 10-K, and unless expressly stated otherwise or as the context
otherwise requires, "Century Aluminum," "Century," "we," "us," "our" and "ours"
refer to Century Aluminum Company and its consolidated
subsidiaries.
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements. We have 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,”
“scheduled,” “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 I, Item 1A, “Risk
Factors,” Part II, Item 7, “Management’s 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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·
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The
cyclical nature of the aluminum industry causes variability in our
earnings and cash flows;
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·
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The
loss of a customer to whom we deliver molten aluminum would increase
our
production costs;
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·
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Glencore
International AG owns a large percentage of our common stock and
has the
ability to influence matters requiring shareholder
approval;
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·
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We
enter into forward sales and hedging contracts with Glencore International
AG that help us manage our exposure to fluctuating aluminum prices.
Because Glencore is our sole metal hedge counterparty, a material
change
in our relationship with Glencore, could affect how we hedge our
exposure
to metal price risk;
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|
·
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We
could suffer losses due to a temporary or prolonged interruption
of the
supply of electrical power to one or more of our 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 and electricity, the principal cost
components of primary aluminum production, our production costs could
be
materially impacted if we experience changes to or disruptions in
our
current alumina or power supply arrangements, production costs at
our
alumina refining operation increase significantly, or if we are unable
to
obtain economic replacement contracts for our alumina supply or power
as
those contracts expire;
|
|
·
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By
expanding our geographic presence and diversifying our operations
through
the acquisition of bauxite mining, alumina refining and additional
aluminum reduction assets, we are exposed to new risks and uncertainties
that could adversely affect the overall profitability of our
business;
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·
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Changes
in the relative cost of certain raw materials and energy compared
to the
price of primary aluminum could affect our margins;
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·
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Most
of our employees are unionized and any labor dispute could materially
impair our ability to conduct our production operations at our unionized
facilities;
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·
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We
are subject to a variety of existing environmental laws that could
result
in unanticipated costs or liabilities and our planned environmental
spending over the next three years may be inadequate to meet our
requirements;
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·
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We
may not realize the expected benefits of our growth strategy if we
are
unable to successfully integrate the businesses we
acquire;
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·
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We
cannot guarantee that our subsidiary Nordural will be able to complete
its
expansion from 220,000 metric tons to 260,000 metric tons in the
time
forecast or without cost overruns;
and
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·
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Our
high level of indebtedness reduces cash available for other purposes
and
limits our ability to incur additional debt and pursue our growth
strategy.
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We
believe the expectations reflected in our forward-looking statements are
reasonable, based on information available to us on the date of this filing.
However, given the described uncertainties and risks, we cannot guarantee
our
future performance or results of operations and you should not place undue
reliance on these forward-looking statements. We undertake no obligation
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 1A, “Risk Factors” should be considered when
reading any forward-looking statements in this filing.
Overview
Prior
to
our initial public offering in April 1996, we were an indirect, wholly-owned
subsidiary of Glencore International AG (together with its subsidiaries,
“Glencore”). As of February 23, 2007, Glencore, our largest shareholder, owned
approximately 28.7% of our outstanding common stock.
We
produce primary aluminum. Aluminum is an internationally traded commodity,
and
its price is effectively determined on the London Metal Exchange (“LME”). Our
primary aluminum facilities produce value-added and standard-grade primary
aluminum products. We are the third largest primary aluminum producer in North
America, behind ALCOA Inc. (together with its affiliates, “ALCOA”) and Alcan
Inc. (together with its affiliates, “Alcan”). In April 2004, we acquired
Nordural, an Icelandic primary aluminum facility which became our first
production facility located outside of the United States. We produced
approximately 680,000 metric tons of primary aluminum in 2006 with net sales
of
approximately $1.6 billion. Our current primary aluminum production capacity
is
745,000 metric tons per year (“mtpy”). With the scheduled expansion of our
Nordural facility from 220,000 mtpy to 260,000 mtpy (“Phase V expansion”) in the
fourth quarter of 2007, our rated production capacity will increase to 785,000
mtpy. In addition to our primary aluminum assets, we have 50 percent joint
venture interests in the Gramercy alumina refinery, located in Gramercy,
Louisiana and a related bauxite mining operation in Jamaica. The Gramercy
refinery supplies substantially all of the alumina used for the production
of
primary aluminum at our Hawesville, Kentucky primary aluminum
facility.
Primary
Aluminum Facilities:
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Facility
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Location
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Operational
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Capacity
(mtpy)
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Ownership
Percent
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Nordural
(1)
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Grundartangi,
Iceland
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1998
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220,000
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100%
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Hawesville
(2)
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Hawesville,
Kentucky, USA
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1970
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244,000
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100%
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Ravenswood
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Ravenswood,
West Virginia, USA
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1957
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170,000
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100%
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Mt.
Holly (3)
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Mount
Holly, South Carolina, USA
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1980
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224,000
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49.7%
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(1)
Nordural’s rated production capacity is scheduled to increase to 260,000
mtpy in the fourth quarter of 2007 upon completion of the Phase V
expansion.
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||||
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(2)
The facility completed an expansion in 1999, increasing the capacity
at
the facility to 244,000 mtpy of primary aluminum.
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||||
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(3)
ALCOA holds the remaining 50.3% ownership interest and is the operator.
Century’s share of Mt. Holly’s capacity is approximately 111,000
mtpy.
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Bauxite
and Alumina Facilities:
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Facility
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Location
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Type
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Capacity
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Ownership
Percent
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Gramercy
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Gramercy,
Louisiana, USA
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Alumina
Refinery
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1.2
million mtpy
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50%
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St.
Ann Limited (1)
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St.
Ann, Jamaica
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Bauxite
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4.5
million mtpy
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50%
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(1)
The Government of Jamaica has granted St. Ann Bauxite Limited (“SABL”)
rights to mine 4.5 million dry metric tons of bauxite on specified
lands
annually through September 30, 2030.
|
Our
strategic objectives are to: (i) increase our primary aluminum business in
Iceland by expanding our existing capacity and building additional greenfield
capacity; (ii) expand our primary aluminum business by investing in or acquiring
additional capacity that offers favorable returns and lowers our per unit
production costs; (iii) further diversify our geographic presence; and (iv)
pursue upstream opportunities in bauxite mining and alumina refining. The
following table shows our primary aluminum shipment volumes since
2000.
To
date,
our growth activities have included:
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·
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acquiring
an additional 23% interest in the Mt. Holly facility (“Mt. Holly”) in
April 2000;
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·
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acquiring
an 80% interest in the Hawesville facility (“Hawesville”) in April 2001;
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·
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acquiring
the remaining 20% interest in Hawesville in April 2003;
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·
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acquiring
the Grundartangi
facility (“Nordural”) in April 2004;
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·
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acquiring
a 50% joint venture in the Gramercy facility (“Gramercy”), our first
alumina refining facility, together with related bauxite mining assets
in
October 2004, and;
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|
·
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an
ongoing expansion of Nordural’s production capacity to 260,000 metric tons
of primary aluminum (from 90,000 mtpy at the time of our acquisition),
which is expected to be completed in the fourth quarter of
2007.
|
Recent
Developments
More
information on our recent developments is available in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included herein.
Competition
The
market for primary aluminum is global, and demand for aluminum varies widely
from region to region. We compete with U.S. and international companies in
the
aluminum industry primarily in the areas of price, quality and service. In
addition, aluminum competes with materials such as steel, copper, plastic and
glass, which may be substituted for aluminum in certain applications.
Our
Hawesville and Ravenswood plants are each located adjacent to their largest
customer which allows them to deliver metal in molten form, at a cost savings
to
both parties, providing a competitive advantage over other potential suppliers.
Our Hawesville plant also has a competitive advantage due to its ability to
produce the high purity aluminum needed by its largest customer for the
manufacture of electrical transmission lines.
Customer
Base
In
2006,
we derived approximately 84% of our consolidated sales from the following four
major customers: Southwire, Alcan, Glencore and BHP Billiton. Additional
information about the revenues and percentage of sales to these major customers
is available in Note 17 of the Consolidated Financial Statements included
herein. A loss of any of these customers could have a material adverse effect
on
our results of operations. We currently have long-term primary aluminum sales
or
tolling contracts with Southwire, Glencore and BHP Billiton (The Alcan Metal
agreement expires in July 2007). More information about these contracts is
available at “Key Long-term Primary Aluminum Sales Contracts” in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Financial
Information about Segments and Geographic Areas
We
operate in one reportable segment, primary aluminum. Additional information
about our primary aluminum segment and certain geographic information is
available in Note 17 to the Consolidated Financial Statements included herein.
For a description of certain risks attendant to our foreign operations, see
Item
1A “Risk Factors.”
Energy,
Key Supplies and Raw Materials
We
consume the following key supplies and raw materials in the primary aluminum
reduction process:
|
·
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electricity
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·
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carbon
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·
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silicon
carbide
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|
·
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alumina
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·
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cathode
blocks
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·
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caustic
soda
|
|
·
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aluminum
fluoride
|
·
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liquid
pitch
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·
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calcined
petroleum coke
|
|
·
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natural
gas
|
Electrical
power, alumina, and labor are the principal components of cost of goods sold.
These components together represented
over 70 percent of our 2006 cost of goods sold. We have long-term contracts
to
ensure the future availability of many of these cost components. Additional
information about our long-term supply and labor contracts is available under
“Key Long-term Supply Contracts” in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” For a description of
certain risks attendant to our raw material supplies and labor, see Item 1A
“Risk Factors.”
Pricing
Our
operating results are sensitive to changes in the price of primary aluminum
and
the raw materials used in our production. As a result, we try to mitigate the
effects of fluctuations in primary aluminum and raw material prices through
the
use of various fixed-price commitments and financial instruments.
We
offer
a number of pricing alternatives to our customers which, combined with our
metals risk management activities, are designed to achieve a certain level
of
price stability on our primary aluminum sales. Generally, we price our products
at an indexed or “market” price, in which the customer pays an agreed-upon
premium over the LME price or other market indices.
Nordural
derives substantially all of its revenues from tolling arrangements whereby
it
converts alumina provided by its customers into primary aluminum for a fee
based
on the LME price for primary aluminum. Nordural's revenues are subject to market
price risk for the LME price of primary aluminum; however, because it produces
primary aluminum under a tolling arrangement, Nordural is not exposed to
fluctuations in the price for alumina, the principal raw material used in the
production of primary aluminum. Nordural’s tolling revenues include a premium
based on the exemption available to Icelandic aluminum producers from the
European Union (“EU”) import duty for primary aluminum. The European Commission
has considered and is currently considering various proposals that would
phase-out this import duty. While the import duty remains intact to date, any
decrease in the EU import duty will negatively impact Nordural’s revenue. 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
is
hedged against downswings in the market for primary aluminum; however, this
hedge also limits Nordural's upside as the LME price increases.
Primary
Aluminum Facilities
Nordural
The
Nordural facility located in Grundartangi, Iceland, is owned and operated by
our
subsidiary, Nordural ehf. Nordural is our most modern and lowest cost facility.
Operations at Nordural began in 1998 and production capacity was expanded in
2001 and again in 2006. The facility has an annual rated production capacity
of
220,000 metric tons, which is scheduled to increase 40,000 metric tons to
260,000 metric tons upon completion of the Phase V expansion expected in the
fourth quarter of 2007.
Nordural
operates under various long-term agreements with the Government of Iceland,
local municipalities, and Faxafloahafnir sf (which operates the harbor at
Grundartangi and is jointly owned by several municipalities). These agreements
include: (i) an investment agreement which establishes Nordural's tax status
and
the Government's 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 its expansion, Nordural
has entered into amendments to the investment agreement and the reduction plant
site agreements with the Government of Iceland.
Expansion
Project. In
late
2006, we completed the expansion of the Nordural facility from an annual
production capacity of 90,000 mtpy to 220,000 metric tons at a total cost of
approximately $482 million. A further expansion to 260,000 metric
tons of annual production capacity
began in
2006 and is projected to be completed in the fourth quarter of 2007 at an
estimated total cost of approximately $132 million. We
expect
to fund the remaining costs of the expansion with operating cash flow generated
by Nordural’s operations and with the remaining borrowing availability under
Nordural’s $365 million senior term loan facility.
Tolling
Agreements. Nordural has a long-term alumina tolling contract with a
subsidiary of BHP Billiton which expires December 31, 2013. Under this contract,
which is for approximately 130,000 metric tons of Nordural’s annual capacity,
Nordural receives an LME-based fee for the conversion of alumina, supplied
by
BHP Billiton, into primary aluminum. Nordural’s tolling revenues include a
premium based on the exemption available to Icelandic aluminum producers from
the European Union (“EU”) import duty for primary aluminum. Nordural has entered
into a 10-year alumina tolling contract with Glencore for 90,000 metric tons
of
annual capacity that expires in 2016. Deliveries under this agreement started in
July 2006. Nordural receives an LME-based fee under the Glencore contract.
In
2005, Glencore assigned 45,000 mtpy of its tolling rights under this agreement
to Hydro Aluminum AS (“Hydro”) for the period 2007 to 2010. Nordural consented
to the assignment.
Power.
Landsvirkjun,
a power company jointly owned by the Republic of Iceland and two Icelandic
municipal governments, provides power for 90,000 mtpy of the Nordural facility’s
production capacity under a long-term contract due to expire in 2019. The power
delivered by Landsvirkjun is priced at a rate based on the LME price for primary
aluminum and is from hydroelectric and geothermal sources. Hitaveita Suðurnesja
hf. (“HS”) and Orkuveita Reykjavíkur (“OR”) supply the power required for
Nordural’s remaining 130,000 mtpy of production capacity. The price paid by
Nordural for power delivered by HS and OR is also LME-based. OR has agreed
to
deliver additional power, on a long-term basis, which will allow a further
expansion of Nordural’s production capacity to 260,000 mtpy. Delivery of power
from OR under the additional agreement is scheduled to start in late 2008.
Nordural has made a
short
term agreement with Landsvirkjun which will allow startup of the further
expansion to 260,000 mtpy in the fourth quarter of 2007. The power agreement
and
the construction of additional production capacity are each subject to the
satisfaction of certain conditions.
Employees.
Our employees at Nordural are represented by five labor unions that operate
under a labor contract that establishes wages and work rules for covered
employees for the period through December 31, 2009.
Hawesville
Hawesville
is owned by our subsidiary, Century Kentucky, Inc. Hawesville is located
adjacent to the Ohio River near Hawesville, Kentucky and began operations in
1970. Hawesville has five reduction potlines with an annual rated production
capacity of 244,000 metric tons.
Hawesville's
original four potlines have an annual production capacity of approximately
195,000 metric tons and are specially configured and operated 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%. High purity primary aluminum is sold at a premium to
standard-purity aluminum. The high purity primary aluminum provides the
conductivity required by Hawesville’s largest customer, Southwire, for its
electrical wire and cable products as well as for certain aerospace
applications. A fifth potline added in 1999 has an annual capacity of
approximately 49,000 metric tons of standard-purity aluminum.
Metal
Sales Agreement.
Hawesville has a long-term aluminum sales contract with Southwire (the
“Southwire Metal Agreement”). The Southwire Metal Agreement expires March 31,
2011, subject to automatic renewal for additional five-year terms, unless either
party provides 12 months’ notice that it has elected not to renew. The price for
the molten aluminum delivered to Southwire is variable and is determined by
reference to the U.S. Midwest Market Price. Under the contract, Hawesville
supplies 240 million pounds (approximately 109,000 metric tons) of high-purity
molten aluminum annually to Southwire’s adjacent wire and cable manufacturing
facility. Under this contract, Southwire will also purchase 60 million pounds
(approximately 27,000 metric tons) of standard-grade molten aluminum each year
through December 2010. Southwire has an option to purchase an equal amount
of
standard-grade molten aluminum in 2011. In addition, Southwire will purchase
an
additional 48 million pounds (approximately 22,000 metric tons) of standard
grade molten aluminum during 2007.
Alumina.
Hawesville
purchases alumina under a supply agreement with Gramercy Alumina LLC (“GAL”).
GAL is a joint venture company owned by Century and Xstrata (as successor by
merger with Falconbridge Limited), which owns and operates the Gramercy alumina
refinery. The alumina supply agreement runs through December 31, 2010 and the
contract pricing varies based on GAL’s cost of production.
Power.
Hawesville
purchases all of its power from Kenergy Corp. (“Kenergy”), a local retail
electric cooperative, under a power supply contract that expires December 31,
2010. Kenergy acquires most of the power it provides to Hawesville from a
subsidiary of LG&E Energy Corp., with delivery guaranteed by LG&E. In
2007, Hawesville has unpriced power requirements of approximately 14 megawatts
(“MW”) or about 3% of its power requirements. All unpriced power will be priced
at market prices. Hawesville has unpriced power requirements of 126 MW or 27%
of
its power requirements from 2008 through 2010. We are currently reviewing our
options for pricing the unpriced power in 2008 through 2010. In addition, we
are
working with Big Rivers Electric Corporation (“Big Rivers”) and Kenergy on a
proposal that would restructure and extend the existing power supply contract
from 2008 through 2023.
Employees.
The
bargaining unit employees at Hawesville are represented by the United
Steelworkers of America (“USWA”). Century’s collective bargaining agreement,
which covers all of the represented hourly employees at Hawesville, expires
March 31, 2010.
Ravenswood
The
Ravenswood facility (“Ravenswood”) is owned and operated by our subsidiary,
Century Aluminum of West Virginia, Inc. (“Century of West Virginia”). Built in
1957, Ravenswood operates four potlines with an annual rated production capacity
of 170,000 metric tons. The facility is located adjacent to the Ohio River
near
Ravenswood, West Virginia.
Metal
Sales Agreements. Ravenswood
produces molten aluminum that is delivered to Alcan’s adjacent fabricating
facility and standard-grade ingot that we sell in the marketplace. We have
a
contract with Alcan under which Alcan purchases 23 to 27 million pounds
(approximately 10,500 to 12,250 metric tons) per month of molten aluminum
produced at Ravenswood through July 31, 2007 (the “Alcan Metal Agreement”). The
price for primary aluminum delivered under the Alcan Metal Agreement is variable
and determined by reference to the U.S. Midwest Market Price. This contract
requires us to deliver molten aluminum, which reduces our casting and shipping
costs. Ravenswood also sells 10,200 metric tons per year of primary aluminum
under a contract with Glencore (the “Glencore Metal Agreement II”) through
December 31, 2013. Under the Glencore Metal Agreement II, Glencore purchases
20,400 metric tons 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.
Alumina.
Glencore
supplies the alumina used at Ravenswood under a contract that expires on
December 31, 2009. The contract pricing varies based on the LME price for
primary aluminum.
Power.
Appalachian Power Company supplies all of Ravenswood’s power requirements. After
December 31, 2007, Ravenswood may terminate the agreement by providing 12 months
notice of termination. Power delivered under the supply agreement is as set
forth in published tariffs. Effective July 28, 2006, the Public Service
Commission for the State of West Virginia approved an experimental rate design
in connection with an increase in the applicable tariff rates. Under the
experimental rate, Ravenswood may be excused from or may defer the payment
of
the increase in the tariff rate if aluminum prices as quoted on the LME fall
below pre-determined levels.
Employees.
The
bargaining unit employees at Ravenswood are represented by the USWA. The
collective bargaining agreement that covers all of the represented hourly
employees at Ravenswood expires May 31, 2009.
Mt.
Holly
Mt.
Holly, 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 rated production capacity
of 224,000 metric tons 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 a premium to
standard-grade primary aluminum. Our 49.7% interest represents approximately
111,000 metric tons of the facility’s annual production capacity.
Our
interest in Mt. Holly is held through our subsidiary, Berkeley Aluminum, Inc.
(“Berkeley”). Under the Mt. Holly ownership structure, we hold an undivided
49.7% interest in the property, plant and equipment comprising the aluminum
reduction operations at Mt. Holly 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 Mt. Holly 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.
Metal
Sales Agreements. We
have a
contract to sell to Glencore 50,000 metric tons of primary aluminum produced
at
Mt. Holly each year through December 31, 2009 (the “Glencore Metal Agreement
I”). The Glencore Metal Agreement I provides for variable pricing determined
by
reference to the quoted LME price of primary aluminum. Mt. Holly also sells
10,200 metric tons per year of primary aluminum under the Glencore Metal
Agreement II. More information on the Glencore Metal Agreement II is available
under “Key Long-term Primary Aluminum Sales Contracts” in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Alumina.
Glencore supplies approximately 46% of our alumina requirements for Mt. Holly
under a contract which expires January 31, 2008. As of January 1, 2007, under
an
agreement that extends through 2013, Trafigura AG provides us with 54% of Mt.
Holly’s alumina requirements for 2007 and will provide all of Mt. Holly’s
alumina requirements when our agreement with Glencore expires in 2008. The
price
for alumina under our contracts with Trafigura and Glencore are variable and
based on the LME price for primary aluminum.
Power.
Mt.
Holly purchases all of its power requirements from the South Carolina Public
Service Authority (“SCPSA”) under
a
contract that runs through 2015. Power
delivered through 2010 will be priced at
rates
fixed under currently published
schedules, subject to adjustments to cover SCPSA’s fuel costs. Rates for the
period 2011 through 2015 will be as provided under then-applicable
schedules.
Employees.
The
employees at Mt. Holly are employed by ALCOA and are not unionized.
Joint
Venture Facilities
On
October 1, 2004, Century and Xstrata (as successor by merger with
Falconbridge Limited), through joint venture companies, acquired equal interests
in an alumina refinery in Gramercy, Louisiana and related bauxite mining assets
in Jamaica (collectively, the “Gramercy assets”) from Kaiser Aluminum &
Chemical Company (“Kaiser”). Glencore, our largest shareholder, is a major
shareholder in Xstrata.
Gramercy
Alumina LLC
The
alumina refinery in Gramercy, owned by GAL, 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,
including a double digestion system.
Alumina
Operations.
The
Gramercy plant has an annual rated capacity rate of 1.2 million metric tons
of alumina per year. Gramercy’s production consists of approximately 80% smelter
grade alumina and 20% alumina hydrate or chemical grade alumina. GAL sells
approximately 50% of its smelter grade alumina to Hawesville at prices based
on
Gramercy's production costs under an alumina supply contract due to expire
on
December 31, 2010. All of the chemical grade alumina production is currently
sold under existing short-term and long-term contracts with approximately 20
third party purchasers.
We
expect
production at the Gramercy plant to remain at or near capacity for the
foreseeable future.
Supply
Agreements.
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 SABL under a contract that expires at the end of 2010. The
Gramercy plant purchases its natural gas requirements at market prices under
short-term agreements with local suppliers.
St.
Ann Bauxite Limited
SABL,
which owns the bauxite mining operations, is jointly owned by Century and
Xstrata. The bauxite mining operations 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. The mining assets consist primarily of rail
facilities, other mobile equipment, dryers, and loading and dock facilities.
Bauxite
Mining Rights.
Under
the terms of the mining rights, SABL manages the operations of the 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 GOJ's 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 taxes and certain other
fees
pursuant to an agreement with the GOJ that establishes a fiscal regime for
SABL.
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 the GOJ will negotiate
amendments to SABL's fiscal regime in order to mitigate the effects of the
levy.
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 St. Ann facility is able to provide the Gramercy plant with
sufficient reserves to meet its annual alumina requirements and existing or
contemplated future obligations under third party contracts.
Under
the
mining rights, the GOJ has granted SABL the rights to mine 4.5 million
dry metric tons of bauxite on specified lands annually through September 30,
2030. The GOJ will provide additional land if the land covered by the mining
rights does not contain sufficient quantities of commercially exploitable
bauxite. SABL is responsible for reclamation of the land that it mines. As
of
December 31, 2006, SABL’s reclamation obligations amounted to approximately $8.5
million.
Customers.
Approximately 50 percent of the bauxite from St. Ann is refined into
alumina at the Gramercy refinery and the remainder is sold to a third party
alumina refinery in Texas (Sherwin Alumina Company). SABL and GAL have a
contract under which SABL will supply the Gramercy plant's bauxite requirements
through December 2010. The price for bauxite under the contract is fixed through
2008.
SABL
has
various short-term agreements with third parties for the supply of fuel oil,
diesel fuel, container leasing and other locally provided services.
Environmental
Matters
We
are
subject to various environmental laws and regulations. We have spent, and expect
to spend, significant amounts for compliance with those laws and regulations.
In
addition, some of our past manufacturing activities have resulted in
environmental consequences which require remedial measures. Under certain
environmental laws which may impose liability regardless of fault, we may be
liable for the costs of remediation of contaminated property, including our
current and formerly owned or operated properties or adjacent areas, or for
the
amelioration of damage to natural resources. We believe, based on currently
available information, that our current environmental liabilities are not likely
to have a material adverse effect on Century. However, we 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 unanticipated costs or liabilities which may have
a
material adverse effect on our financial condition, results of operations or
liquidity. More information concerning our environmental contingencies can
be
found in Note 12 to the Consolidated Financial Statements included
herein.
Intellectual
Property
We
own or
have rights to use a number of patents or patent applications relating to
various aspects of our operations. We do not consider our business to be
materially dependent on any of these patents or patent
applications.
Employees
We
employ
a work force of approximately 1,850, consisting of 1,530 hourly employees and
320 salaried employees.
Available
Information
Additional
information about Century may be obtained from our website, which is located
at
www.centuryaluminum.com. Our website provides access to filings we have made
through the SEC's EDGAR filing system, including our 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 our directors,
executive officers and beneficial owners of more than 10% of our outstanding
common stock. These filings are also available on the SEC website at
www.sec.gov.
In
addition, we will make available free of charge copies of our Forms 10-K, Forms
10-Q, and Forms 8-K upon request. Requests for these documents can be made
by
contacting our Investor Relations Department by mail at: 2511 Garden Road,
Suite
A200, Monterey, CA 93940, or phone at: (831) 642-9300. Information contained
in
our website is not incorporated by reference in, and should not be considered
a
part of, this Annual Report on Form 10-K.
The
following describes certain of the risks and uncertainties we face that could
cause our future results to differ materially from our current results and
from
those anticipated in our forward-looking statements. These risk factors
should
be
considered together with the other risks and uncertainties described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere herein.
The
cyclical nature of the aluminum industry causes variability in our earnings
and
cash flows; our hedging transactions may limit our ability to benefit from
increased prices.
Our
operating results depend on the market for primary aluminum, which is a highly
cyclical commodity with prices that are affected by global demand and supply
conditions and other conditions. Historically, aluminum prices have been
volatile and we expect there to be volatility in the future. Although we use
contractual arrangements to manage our exposure to fluctuations in the commodity
price, a decline in primary aluminum prices will reduce our earnings and cash
flows. Any significant downturn in prices for primary aluminum will
significantly reduce the amount of cash available to meet our current
obligations and fund our long-term business strategies and may force the
curtailment of all or a portion of our operations at one or more of our
smelters.
Conversely,
as prices for aluminum increase, certain of our hedging transactions, including
our forward sales of primary aluminum and our LME-based alumina and power
contracts, limit our ability to take advantage of the increased prices. More
information about Century’s market risks is available in Item 7A, “Quantitative
and Qualitative Disclosures About Market Risk.”
We
reduce our casting
and shipping costs by selling molten aluminum to the major customers of our
Ravenswood and Hawesville facilities; the loss of one of these major customers
would increase our production costs at those
facilities.
Approximately
53% of our consolidated net sales for 2006 were derived from sales to Alcan
and
Southwire. Alcan's facility is located adjacent to Ravenswood and Southwire's
facility is located adjacent to Hawesville. Due to this proximity, we are able
to deliver molten aluminum to these customers, thereby eliminating our casting
and shipping costs and our customers' remelting costs. Century has contracts
with Alcan and Southwire which are due to expire in July 2007 and March 2011,
respectively. Southwire has the right to reduce purchases under its contract
by
20% beginning in 2010. We may be unable to extend or replace these contracts
when they terminate. If we are unable to renew these contracts when they expire,
or if either customer significantly reduces its purchases under those contracts,
we will incur higher casting and shipping costs.
A
material change in our
relationship with Glencore could affect how we hedge our exposure to metal
price
risk.
We
benefit from our relationship with Glencore, our largest shareholder. We enter
into forward sales and hedging contracts with Glencore that help us manage
our
exposure to fluctuating aluminum prices. Because Glencore is our sole metal
hedge counterparty, a material change in our relationship with Glencore could
affect how we hedge our exposure to metal price risk, which could impact our
results of operations.
Losses
caused by disruptions in the supply of power would reduce the profitability
of
our operations.
We
use large amounts of electricity to produce primary aluminum. Any loss of
power which reduces the amperage to our equipment or causes an equipment
shutdown will result in a reduction in the volume of molten aluminum produced
and may result in the hardening or “freezing” of molten aluminum in the pots
where it is produced. Interruptions in the supply of electrical power to our
facilities can be caused by a number of circumstances, including unusually
high
demand, blackouts, equipment failure, natural disasters or other catastrophic
events. If such a condition were to occur, we may lose production for a
prolonged period of time and incur significant losses. Although we maintain
property and business interruption insurance to mitigate losses resulting from
catastrophic events, we 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 our insurance policies do not cover any losses that
may be incurred if our suppliers are unable to provide power during periods
of
unusually high demand. Certain losses or prolonged interruptions in our
operations may trigger a default under our revolving credit
facility.
The
cost of alumina used at Hawesville may be higher than under our LME-based
alumina contracts.
We
acquire alumina used at our Ravenswood and Mt. Holly facilities at prices based
on the LME price for primary aluminum. The Gramercy refinery that Century and
Xstrata acquired from Kaiser supplies all of the alumina used at Hawesville
at
prices based on the Gramercy refinery's production costs. Those production
costs
could be materially higher than the price paid under LME-based contracts during
periods when aluminum prices are low and raw material costs used in the
production of alumina, such as natural gas, are high.
Changes
or disruptions to our
current alumina supply arrangements and other raw materials could increase
our
raw material costs.
We
depend
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
three years, and the construction of new production facilities requires
substantial lead time. Disruptions to our supply of alumina could occur for
a
variety of reasons, including disruptions of production at a particular
supplier's alumina refinery. These disruptions may require Century to purchase
alumina on the spot market on less favorable terms than under our current
agreements.
Gramercy
supplies substantially all the alumina used at Hawesville. Our joint venture
bauxite mining operations in St. Ann, Jamaica supplies all of the bauxite used
in the production of alumina at the Gramercy alumina refinery. 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.
Our
business depends upon the adequate supply of other raw materials, including
caustic soda, aluminum fluoride and calcined petroleum coke, pitch, and
cathodes, at competitive prices. Although worldwide there remain multiple
sources for these raw materials, consolidation among certain North American
suppliers has reduced the number of available suppliers in this industry. A
disruption in our raw materials supply from our existing suppliers due to a
labor dispute, shortage of their raw materials or other unforeseen factors
may
adversely affect our operating results if we are unable to secure alternate
supplies of these materials at reasonable prices.
Changes
in the relative cost and
availability of certain raw materials and energy compared to the price of
primary aluminum could affect our operating results.
Our
operating results vary significantly with changes in the price of primary
aluminum and the raw materials used in its production, including alumina,
caustic soda, aluminum fluoride and calcined petroleum coke, pitch, and
cathodes. Because we sell our products based on the LME price for primary
aluminum, we can not pass on increased costs to our customers. Although we
attempt to mitigate the effects of price fluctuations for raw materials through
the use of various fixed-price commitments and financial instruments, these
efforts also limit our ability to take advantage of favorable changes in the
market prices for primary aluminum or raw materials. In addition, because we
have sold forward a certain amount of our production capacity in future years,
rising raw material and energy prices would negatively impact our earnings
and
cash flow, all other things being equal. See “Item 7A - Quantitative and
Qualitative Disclosures About Market Risk.”
Electricity
represents our single largest operating cost. As a result, the availability
of
electricity at economic prices is critical to the profitability of our
operations. While we purchase virtually all of our electricity for our existing
U.S. facilities under fixed-price contracts through 2007, portions of the
contracted cost of the electricity supplied to Mt. Holly vary with the
supplier's fuel costs. An increase in these fuel costs would increase the price
this facility pays for electricity. Hawesville has unpriced power requirements
of approximately 27% of its power requirements from 2008 through 2010.The
profitability of our Hawesville operations could be adversely affected if we
are
unable to obtain power for the unpriced portions of Hawesville’s power
requirements at economic rates. In addition, we may be forced to curtail or
idle
a portion of our production capacity, which would lower our revenues and
adversely affect the profitability of our operations.
Unexpected
events, including natural disasters, may increase our cost of doing business
or
disrupt our operations.
Unexpected
events, including fires or explosions at our facilities, natural disasters,
such
as hurricanes, unplanned power outages, supply disruptions, or equipment
failures, may increase our cost of doing business or otherwise disrupt our
operations.
We
are subject to the risk of union disputes.
The
bargaining unit employees at our Ravenswood and Hawesville facilities and at
the
Gramercy refinery are represented by the United Steel Workers of America.
Century’s labor contracts at Hawesville, Ravenswood and Gramercy expire in March
2010, May 2009, and September 2010, respectively. In addition, our contract
with
Nordural’s employees expires in 2009. If we fail to maintain satisfactory
relations with any labor union representing our employees, our labor contracts
may not prevent a strike or work stoppage at any of these facilities in the
future. As a result of a threatened strike in July 2006, we commenced an orderly
shut down of one of the four potlines at the Ravenswood facility. Although
the
notice to strike was rescinded after we reached agreement with the USWA on
a new
labor contract, our production at the Ravenswood facility was curtailed while
we
restarted the potline. Any threatened or actual work stoppage in the future
could prevent or significantly impair our ability to conduct production
operations at our unionized facilities, which could have a material adverse
affect on our financial results.
We
are
subject to a variety of environmental laws that could result in costs or
liabilities.
We
are
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 us to costs or liabilities relating to our manufacturing operations
or
property ownership. We incur operating costs and capital expenditures on an
ongoing basis to comply with applicable environmental laws and regulations.
In
addition, we are currently and may in the future be responsible for the cleanup
of contamination at some of our current and former manufacturing facilities
or
for the amelioration of damage to natural resources. For example, we, along
with
others, including former owners of our former St. Croix facility, have been
sued
for alleged natural resources damages at the facility. In addition, in December,
2006, we and the company that purchased the assets of our St. Croix facility
in
1995 were sued by the Commissioner of the Department of Planning and Natural
Resources alleging our failure to take certain actions specified in a Coastal
Zone management permit issued to Vialco in October 1994.
Although
our known liabilities with respect to these and other matters relating to
compliance and cleanup, based on current information, are not expected to be
material, 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 we have cleanup
responsibilities are not available, we may be subject to additional liability,
which may be material and could affect our liquidity and our operating results.
Further, additional environmental matters for which we may be liable may arise
in the future at our present sites where no problem is currently known, with
respect to sites previously owned or operated by us, by related corporate
entities or by our predecessors, or at sites that we may acquire in the future.
In addition, overall production costs may become prohibitively expensive and
prevent us 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
“Management's Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources — Environmental Expenditures and
Other Contingencies” and Note 12 to our consolidated financial statements for
additional information regarding our environmental matters and associated costs
and risks.
Acquisitions
may present difficulties.
We
have a
history of making strategic acquisitions and we expect to make strategic
acquisitions in the future. We are subject to numerous risks as a result of
our
acquisitions, including the following:
· it
may be
challenging for us to manage our existing business as we integrate acquired
operations;
· we
may
not achieve the anticipated benefits from our acquisitions; and
· management
of acquisitions will require continued development of financial controls and
information systems, which may prove to be expensive, time-consuming, and
difficult to maintain.
Accordingly,
our recent or future acquisitions might not ultimately improve our competitive
position and business prospects as anticipated.
Operating
in foreign countries exposes us to political, regulatory, currency and other
related risks.
Nordural
is our first facility located outside of the United States and following
completion of the ongoing expansion, it will represent approximately 33% of
our
overall primary aluminum production capacity.
The
bauxite operations related to the Gramercy plant are located in Jamaica. .
In
February 2007, we signed a memorandum of understanding (“MOU”) with the Republic
of the Congo (“ROC”) for the exclusive right to develop an aluminum business in
the ROC consisting of an aluminum smelter, an alumina refinery and a bauxite
mine. We may in the future consider other investments in foreign countries.
International operations may expose us to risks, including unexpected changes
in
foreign laws and regulations, political and economic instability, challenges
in
managing foreign operations, increased cost to adapt our 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, we may 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 our operating expenses which are denominated and payable
in those currencies. For example, Nordural's 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. In addition, a majority of our
costs in connection with the ongoing expansion of the Nordural facility are
denominated in currencies other than the U.S. dollar.
Our
historical financial information may not be comparable to our results for future
periods.
Our
historical financial information is not necessarily indicative of our future
results of operations, financial position and cash flows. For example, our
historical financial data does not reflect the effects of:
· the
130,000 mtpy expansion capacity of Nordural that was completed in the fourth
quarter of 2006;
· our
acquisition of Nordural prior to April 27, 2004; and
· the
equity in the earnings of our joint ventures prior to October 1,
2004.
Our
high level of indebtedness requires significant cash flow to meet our debt
service requirements, which reduces cash available for other purposes, such
as
the payment of dividends, and limits our ability to pursue our growth
strategy.
We
are
highly leveraged. We have an aggregate of approximately $772.3 million of
outstanding indebtedness as of December 31, 2006. In addition, we could borrow
additional amounts under our $100.0 million credit facility and Nordural has
access to an additional $34.0 million under its $365.0 million term loan
facility. The level of our indebtedness could have important consequences,
including:
· limiting
cash flow
available for capital expenditures, acquisitions, dividends, working capital
and
other general corporate purposes because a substantial portion of our cash
flow
from operations must be dedicated to servicing our debt;
· increasing
our vulnerability to adverse economic and industry conditions;
· limiting
our flexibility in planning for, or reacting to, competitive and other changes
in our business and the industry in which we operate;
· placing
us at a disadvantage compared to our competitors who may have less debt and
greater financing flexibility than we do; and
· limiting
our ability to borrow additional funds, which may prevent us from pursuing
favorable acquisition opportunities when they arise.
In
addition to our indebtedness, we have liabilities and other obligations which
could reduce cash available for other purposes and limit our ability to pursue
our growth strategy. We will need a significant amount of cash to service our
debt. In addition, we will be required to settle in cash up to the principal
amount of our convertible notes (which are convertible by the holder at any
time) upon conversion, which could increase our debt service obligations. More
information about our liquidity and debt service obligations is available at
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included herein.
We
are
also exposed to risks of interest rate increases. We had approximately $340.6
million of debt with variable interest rates at December 31, 2006, of which,
$331.0 million are borrowings under Nordural’s $365.0 million senior term loan
facility. Nordural's annual debt service requirements will vary, as amounts
outstanding under its term loan facility bear interest at a variable rate.
Our
ability to pay interest and to repay or refinance our indebtedness, including
Nordural’s senior term loan facility, our senior unsecured notes and convertible
notes, and to satisfy other commitments, including funding the ongoing Nordural
expansion, will depend upon our future operating performance, which is subject
to general economic, financial, competitive, legislative, regulatory, business
and other factors, including market prices for primary aluminum, that are beyond
our control. Accordingly, there is no assurance that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to us in an amount sufficient to enable us to pay debt service obligations,
including the notes, or to fund our other liquidity needs. If we are unable
to
meet our debt service obligations or fund our other liquidity needs, we could
attempt to restructure or refinance our indebtedness or seek additional equity
capital. There can be no assurance that we will be able to accomplish those
actions on satisfactory terms.
Restrictive
covenants in our
credit facility and the indenture governing our senior notes limit our ability
to incur additional debt and pursue our growth
strategy.
Our
revolving credit facility and the indenture governing our senior unsecured
notes
each contain various covenants that restrict the way we conduct our business
and
limit our ability to incur debt, pay dividends and engage in transactions such
as acquisitions and investments, which may impair our ability to pursue our
growth strategy. See “Management's Discussion and Analysis of Financial
Condition and Results of Operations - “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 our
outstanding indebtedness and termination of commitments under our revolving
credit facility. If our indebtedness is accelerated, we may be unable to repay
the required amounts and our secured lenders could foreclose on any collateral
securing our secured debt.
Substantially
all of Nordural's assets are pledged as security under its term loan facility.
In addition, the shares of Nordural have been pledged to the lenders as
collateral. If Nordural is unable to comply with the covenants in its term
loan,
the lenders would be able to cancel commitments under this 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
term
loan facility also contains restrictions on Nordural's 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 “Management's Discussion
and Analysis of Financial Condition and Results of Operations - “Liquidity and
Capital Resources.” Based on Nordural's needs for cash to finance its expansion
and operations, we do not currently anticipate that Nordural will distribute
any
cash in the foreseeable future.
Further
metals industry consolidation could provide competitive advantages to our
competitors.
The
metals industry has experienced consolidation over the past several years and
there may be more consolidation transactions in the future. Consolidation by
our
competitors may enhance their capacity and their access to resources, lower
their cost structure and put us at a competitive disadvantage. Continued
consolidation may limit our ability to implement our strategic objectives
effectively. We cannot reliably predict the impact on us of further
consolidation in the aluminum industry.
We
depend upon dividends from our subsidiaries to meet
our
debt service obligations.
We
are a
holding company and conduct all of our operations through our subsidiaries.
Our
ability to meet our debt service obligations depends upon the receipt of
dividends from our subsidiaries. Nordural's senior term loan facility places
significant limitations on Nordural's ability to pay dividends. Subject to
the
restrictions contained in our revolving credit facility and the indentures
governing our senior and convertible notes, future borrowings by our
subsidiaries could contain restrictions or prohibitions on the payment of
dividends by those subsidiaries. In addition, under applicable law, our
subsidiaries could be limited in the amounts that they are permitted to pay
as
dividends on their capital stock.
The
price of our
common stock may fluctuate significantly.
The
market price of our common stock has experienced significant volatility from
time to time, and this volatility may continue in the future. From January
1,
2006, through February 28, 2007, the intra-day sales price of our common stock
on NASDAQ ranged from $26.14 to $56.57 per share. In addition, the securities
markets have experienced significant price and volume fluctuations. The market
price for our common stock may be affected by a number of factors, including
actual or anticipated variations in our 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, any announcement by us 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 our common stock in the public market. In addition, general economic,
political and market conditions and other factors unrelated to our operating
performance may cause the market price of our common stock to be
volatile.
Provisions
in our
charter documents and state law may make it difficult for others to obtain
control of Century Aluminum, even though some stockholders may consider it
to be
beneficial.
Certain
provisions of our 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 Century,
including transactions in which our stockholders might otherwise have received
a
substantial premium for their shares over then current market prices. For
example, these provisions:
· give
authority to our board of directors to issue preferred stock and to determine
the price, rights, preferences, privileges and restrictions of those shares
without any stockholder vote;
· provide,
under our charter documents, for a board of directors consisting of three
classes, each of which serves for a different three-year term;
· require
stockholders to give advance notice prior to submitting proposals for
consideration at stockholders' meetings or to nominate persons for election
as
directors; and
· restrict,
under our charter documents, certain business combinations between us and any
person who beneficially owns 10% or more of our outstanding voting
stock.
In
addition, several of our officers 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 Century. Our 1996
Stock
Incentive Plan, as amended, also provides for acceleration of the ability
to
exercise stock options and the vesting of performance shares upon a change
of
control, and our Non-Employee Directors’ Stock Option Plan provides for
acceleration of an option holder's ability to exercise stock options upon
a
change of control.
This
list of important risk factors is not all-inclusive or necessarily in order
of
importance.
We
have
no unresolved comments with the Securities and Exchange Commission.
We
own the property on which our Hawesville and Ravenswood facilities are located.
The 220 acres upon which the Nordural facility is situated is leased from the
Government of Iceland under a long-term lease that runs through 2020, renewable
at our option. In addition, substantially all of Nordural’s assets (including,
but not limited to, all of Nordural's property, plant and equipment related
to
the smelter and the harbor area) are pledged as security for Nordural’s
obligations under its term loan facility. Our corporate offices are subject
to
an operating lease that expires in June 2010. We hold a 49.7% interest in a
partnership which operates a primary aluminum reduction facility in Mt. Holly,
South Carolina (“Mt. Holly”) and a 49.7% undivided interest in the property that
the Mt. Holly facility is located. The remaining interest in the undivided
property at Mt. Holly is owned by Alumax of South Carolina, Inc., a subsidiary
of ALCOA.
All
of
our facilities are operating at or near their productive capacity. We believe
all of our facilities are suitable and adequate for our current operations.
Additional information about the age, location, and productive capacity of
our
facilities is available in the “Overview” section of Item 1,
“Business.”
We
have
pending against us or may be subject to various lawsuits, claims and proceedings
related primarily to employment, commercial, environmental, 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 our financial condition, results of operations, or liquidity.
For
a
description of certain environmental matters involving Century, see Note 12
to
the Consolidated Financial Statements included herein.
No
matters were submitted to a vote of our security holders during the fourth
quarter of 2006.
Our
Executive Officers
Executive
officers are appointed by and serve at the discretion of the Board of Directors.
The following table details certain information about our executive officers
as
of February 28, 2007.
|
Name
|
Age
|
Position
and Duration
|
|
Logan
W. Kruger
|
56
|
President
and Chief Executive Officer since December 2005.
|
|
Michael
A. Bless
|
41
|
Executive
Vice President and Chief Financial Officer since January
2006.
|
|
E.
Jack Gates (1)
|
65
|
Executive
Vice President and Chief Operating Officer since April 2003; Vice
President, Reduction Operations from December 2000 to March
2003.
|
|
Robert
R. Nielsen
|
62
|
Executive
Vice President, General Counsel and Secretary since May
2006.
|
|
Steve
Schneider
|
51
|
Senior
Vice President, Chief Accounting Officer and Controller since June
2006,
Vice President and Corporate Controller since April 2002; Corporate
Controller for more than five years.
|
|
Giulio
Casello
|
47
|
Vice
President of Bauxite and Alumina Operations since December
2005.
|
|
Peter
C. McGuire
|
59
|
Vice
President and Associate General Counsel since April 2002; Associate
General Counsel for more than five years.
|
|
Michelle
M. Lair
|
31
|
Vice
President and Treasurer since February 2007, Treasurer since June
2006, Assistant Treasurer since November 2005; Corporate Financial
Analyst
for more than five
years.
|
|
(1)
On February 28, 2007, we announced that Wayne R. Hale had been
appointed
to succeed E. Jack Gates as Executive Vice President and Chief
Operating
Officer, effective March 1, 2007. Mr. Gates will continue as an
employee
of the Company through June 30, 2007 and will then serve as a consultant
through December 31, 2007.
|
Prior
to
joining Century,
Mr.
Kruger served as President,
Asia/Pacific for Inco Limited, from September 2005 to November 2005; Executive
Vice-President, Technical Services from September 2003 to September 2005; Chief
Executive Officer of Anglo American Chile Ltd., from July 2002 through September
2003; and President and Chief Executive Officer, Hudson Bay Mining and Smelting
Co., Limited, from September 1996 until June 2002.
Prior
to
joining Century, Mr. Nielsen served as Executive Vice President, General Counsel
and Secretary for Tanimura and Antle, Inc. from July 2005 to April 2006, and
Vice President, General Counsel and Secretary from March 1993 to June
2005.
Prior
to
joining Century,
Mr.
Bless served as managing director of M. Safra & Co., Inc., from February
2005 to January 2006 and Executive Vice President and Chief Financial Officer
of
Maxtor Corporation from August 2004 to October 2004. From August 1997 through
January 2004, Mr. Bless served in a number of senior executive positions with
Rockwell Automation, Inc. (formerly known as Rockwell International
Corporation), a leading industrial automation hardware, software and services
company, including as Senior Vice President and Chief Financial Officer from
June 2001 to January 2004.
Mr.
Giulio Casello has served as Vice President of Bauxite and Alumina Operations
since December 2005. Mr. Casello served as Vice President of Century Alumina,
Inc. from September 2005 to December 2005. Prior
to
joining Century,
Mr.
Casello served in a number of senior positions with ALCOA World Alumina
Australia from 1986 to 2005, including as Director of Western Australian
Operations from January 2003 to September 2005; General Manager of ALCOA World
Chemicals from April 2001 to December 2002; and Kwinana Alumina Refinery
Location Manager from April 1999 to April 2001.
PART
II
Market
Information
Our
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. Our common stock reached a record intra-day high of $56.57
on May 11, 2006 and closed at $45.53 on February 28, 2007.
|
Year
|
2006
|
2005
|
||
|
High
sales price
|
Low
sales price
|
High
sales price
|
Low
sales price
|
|
|
First
quarter
|
$44.50
|
$26.14
|
$34.70
|
$23.69
|
|
Second
quarter
|
$56.57
|
$31.28
|
$32.18
|
$20.16
|
|
Third
quarter
|
$39.16
|
$29.60
|
$27.60
|
$20.00
|
|
Fourth
quarter
|
$47.34
|
$30.31
|
$26.79
|
$17.82
|
Holders
As
of
January 31, 2007, there were 14 holders of record, which does not include the
number of beneficial owners whose common stock was held in street
name.
Dividend
Information
We
did
not declare dividends in 2006 or 2005 on our common stock. We do not anticipate
paying cash dividends in the foreseeable future.
Our
revolving credit facility and the indenture governing our senior notes contain
restrictions which limit our ability to pay dividends. Nordural’s term loan
facility contains restrictions on Nordural’s ability to pay dividends.
Additional information about the terms of our long-term borrowing agreements
is
available at Note 5 to the Consolidated Financial Statements included herein.
The
following table presents selected consolidated financial data for each of the
last five fiscal years. The selected consolidated historical balance sheet
data
as of each of the years ended December 31, 2006 and 2005 and the selected
consolidated statement of operations data for each of the years ended December
31, 2006, 2005, and 2004 is derived from our consolidated financial statements
audited by Deloitte & Touche LLP included herein. The selected consolidated
historical balance sheet data as of each of the years ended December 31, 2004,
2003 and 2002 and the selected consolidated statement of operations data for
each of the years ended December 31, 2003 and 2002 is derived from our
consolidated financial statements audited by Deloitte & Touche LLP which are
not included herein. Our selected historical results of operations
include:
|
·
|
the
results of operations from the remaining 20% interest in Hawesville
since
we acquired it in April 2003;
|
|
·
|
the
results of operations from Nordural since we acquired it in April
2004;
|
|
·
|
our
equity in the earnings of our joint venture investments in Gramercy
Alumina LLC and St. Ann Bauxite Ltd. since we acquired an interest
in
those companies in October 2004;
and
|
|
·
|
the
results of operations from our 130,000 mtpy expansion of Nordural
which
became fully operational in the fourth quarter of
2006.
|
Our
results for these periods and prior periods are not fully comparable to our
results of operations for fiscal year 2006 and may not be indicative of our
future financial position or results of operations. The information set forth
below should be read in conjunction with Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Item 8,
“Financial Statements and Supplementary Data” and notes thereto.
|
Year
Ended December 31,
|
||||||||||||||||
|
|
2006
(1)
|
2005
(2)
|
2004
(3)
|
2003
(4)
|
2002
|
|||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Net
sales revenue
|
$
|
1,558,566
|
$
|
1,132,362
|
$
|
1,060,747
|
$
|
782,479
|
$
|
711,338
|
||||||
|
Gross
profit
|
348,522
|
161,677
|
185,287
|
43,370
|
20,360
|
|||||||||||
|
Operating
income
|
309,159
|
126,904
|
160,371
|
22,537
|
4,577
|
|||||||||||
|
Income
(loss) before cumulative effect of change in accounting
principle
|
(40,955
|
)
|
(116,255
|
)
|
33,482
|
3,922
|
(18,443
|
)
|
||||||||
|
Net
income (loss)
|
(40,955
|
)
|
(116,255
|
)
|
33,482
|
(1,956
|
)
|
(18,443
|
)
|
|||||||
|
Earnings
(loss) per share:
|
||||||||||||||||
|
Basic
and Diluted:
|
||||||||||||||||
|
Income
(loss) before cumulative effect of change in accounting
principle
|
$
|
(1.26
|
)
|
$
|
(3.62
|
)
|
$
|
1.14
|
$
|
0.09
|
$
|
(0.99
|
)
|
|||
|
Cumulative
effect of change in accounting principle
|
--
|
--
|
--
|
(0.28
|
)
|
--
|
||||||||||
|
Net
income (loss) per share
|
$
|
(1.26
|
)
|
$
|
(3.62
|
)
|
$
|
1.14
|
$
|
(0.19
|
)
|
$
|
(0.99
|
)
|
||
|
Dividends
per common share
|
$
|
0.00
|
$
|
0.00
|
$
|
0.00
|
$
|
0.00
|
$
|
0.15
|
||||||
|
Total
assets
|
$
|
2,185,234
|
$
|
1,677,431
|
$
|
1,332,553
|
$
|
804,242
|
$
|
763,751
|
||||||
|
Total
debt (5)
|
772,251
|
671,901
|
524,108
|
344,125
|
329,667
|
|||||||||||
|
Long-term
debt obligations (6)
|
559,331
|
488,505
|
330,711
|
336,310
|
321,852
|
|||||||||||
|
Other
information:
|
||||||||||||||||
|
Shipments
- Primary aluminum:
|
||||||||||||||||
|
Direct
shipment pounds (000)
|
1,152,617
|
1,153,731
|
1,179,824
|
1,126,542
|
1,049,295
|
|||||||||||
|
Toll
shipment pounds (000) (7)
|
346,390
|
203,966
|
138,239
|
--
|
--
|
|||||||||||
|
Average
LME per pound
|
$
|
1.166
|
$
|
0.861
|
$
|
0.778
|
$
|
0.649
|
$
|
0.612
|
||||||
|
Average
Midwest premium per pound
|
$
|
0.055
|
$
|
0.056
|
$
|
0.068
|
$
|
0.037
|
$
|
0.041
|
||||||
|
Average
realized price per pound:
|
||||||||||||||||
|
Direct
shipments
|
$
|
1.09
|
$
|
0.86
|
$
|
0.83
|
$
|
0.69
|
$
|
0.68
|
||||||
|
Toll
shipments
|
$
|
0.88
|
$
|
0.67
|
$
|
0.62
|
--
|
--
|
||||||||
|
(1) Income
(loss) before cumulative effect of change in accounting principle
and Net
income (loss) include an after-tax charge of $241.7 million, or
$7.19 per
diluted share for mark-to-market losses on forward contracts that
do not
qualify for cash flow hedge accounting and by a gain on the sale
of
surplus land.
|
|
(2) Income
(loss) before
cumulative effect of change in accounting principle and Net income
(loss)
include an after-tax charge of $198.2 million, or $6.17 per diluted
share
for mark-to-market losses on forward contracts that do not qualify
for
cash flow hedge accounting.
|
|
(3) Income
(loss) before
cumulative effect of change in accounting principle and Net income
(loss)
include an after-tax charge of $30.4 million, or $1.06 per diluted
share
for a loss on early extinguishment of debt, see Note 5 in the Consolidated
Financial Statements included herein.
|
|
(4) We
adopted Statement
of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset
Retirement Obligations” on January 1, 2003. As a result, we recorded a
one-time, non-cash charge of $5,878, for the cumulative effect
of a change
in accounting principle.
|
|
(5) Total
debt includes all long-term debt obligations and any debt classified
as
short-term obligations, including, current
portion of long-term debt, the industrial revenue bonds (“IRBs”) and the
1.75% convertible senior notes, excluding any outstanding preferred
stock.
|
|
(6) Long-term
debt obligations are all payment obligations under long-term borrowing
arrangements, excluding the current portion of long-term
debt.
|
|
(7) Nordural
completed
a 130,000 mtpy capacity expansion in the fourth quarter of 2006.
|
The
following discussion reflects our historical results of operations, which do
not
include results from:
|
·
|
the
130,000 mtpy expansion capacity of Nordural that was completed in
the
fourth quarter of 2006;
|
|
·
|
our
ownership of Nordural until acquired in late April 2004,
and;
|
|
·
|
our
ownership interest in the Gramercy assets until acquired in October
2004.
|
Accordingly,
the results for fiscal years 2004 and 2005 are not fully comparable to the
results of operations for fiscal year 2006. Our historical results are not
indicative of our current business. You should read the following discussion
in
conjunction with our consolidated financial statements included
herein.
Overview
We
produce 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 our results of operations and cash flow
from
operations are as follows:
|
·
|
Our
selling price is based on the LME and U.S. Midwest prices of primary
aluminum and fixed price sales
contracts.
|
|
·
|
Our
facilities operate at or near capacity, and fluctuations in volume,
other
than through acquisitions, generally are small.
|
|
·
|
The
principal components of cost of goods sold are alumina, electrical
power,
and labor, which in aggregate were in excess of 70% of the 2006 cost
of
goods sold. Many of these costs are covered by long-term contracts,
as
described below.
|
Shipment
volumes, average realized price and cost of goods sold per pound shipped
are our
key performance indicators. Revenue can vary significantly from period to
period
due to fluctuations in the LME and Midwest price of primary aluminum. Any
adverse changes in the conditions that affect shipment volumes or the market
price of primary aluminum could have a material adverse effect on our results
of
operations and cash flows. Revenue is also impacted by our hedging activities.
Fluctuations in working capital are influenced by shipments, the LME and
Midwest
price of primary aluminum and by the timing of cash receipts and disbursements
from major customers and suppliers.
Cost
of
goods sold, excluding alumina and energy costs, is expected to remain relatively
stable because our facilities generally operate near capacity and our major
cost
drivers are covered by long-term contracts. Fluctuations in the cost of alumina
in our U.S. facilities are expected as the pricing in these contracts is
variable and except for the Gramercy alumina contract, is based on LME prices.
Power contracts for our U.S. facilities primarily provide for fixed priced
power
through 2009, subject to adjustments for fuel costs in Mt. Holly and possible
adjustments in tariff rates in Ravenswood. Approximately 27% of Hawesville’s
power requirements (126 MW) are unpriced beginning in 2008 through 2010.
We have
negotiated short-term contracts to cover this requirement through 2007 at
approximately market prices. We are currently reviewing our options for pricing
the unpriced power in 2008 through 2010. We are working with Big Rivers Electric
Corporation and Kenergy Corporation on a proposal that would restructure
and
extend Hawesville’s existing power supply contract from 2008 through 2023. We
expect power rates for the unpriced power to be significantly higher than
the
rates paid under our current long-term power contracts. Effective July 28,
2006,
the Public Service Commission for the State of West Virginia approved an
experimental rate design in conjunction with an increase in the applicable
tariff rates. Under the experimental rate, Ravenswood may be excused from
or may
defer the payment of the increase in the tariff rate if aluminum prices as
quoted on the LME fall below pre-determined levels. Power contract pricing
for
Nordural is variable and based on LME prices.
In
2006,
we entered into LME based, long-term alumina contracts for the supply of
alumina
to our Ravenswood and Mt. Holly facilities beginning in January 2007 and
expiring at the end of 2009 and 2013, respectively. These contracts were
negotiated during a period of tight supply in the alumina market and as a
result, the LME pricing in our new alumina contracts will be higher than
under
the contracts they replaced. Labor agreements with the United Steelworkers
of
America at our Hawesville and Ravenswood facilities were ratified in 2006
and
will expire in 2010 and 2009, respectively.
Through
our ownership of Ravenswood, Hawesville and Nordural, and our ownership interest
in Mt. Holly, we have an annual rated production capacity of approximately
745,000 metric tons of primary aluminum. Our annual production capacity should
increase to 785,000 metric tons by the end of 2007 as a result of expansions
at
Nordural.
Recent
Developments
Reservoir
water levels on the Cumberland River may impact Hawesville’s power
costs
In
February 2007, we were informed that the Corps of Engineers (“COE”) is planning
to lower water levels in reservoirs on the Cumberland River for repair and
maintenance. This will reduce electrical production from the dams of these
reservoirs that were expected to provide a portion of the electrical power
we
purchase from Big Rivers Electrical Corp. for the use by our Hawesville facility
during 2007.
Based
on
current expectations of reservoir levels, we expect any impact to be limited
to
the summer months, when usage rates on the Big Rivers system are at peak
consumption. Based on our most recent information from the COE, we expect this
to affect only approximately 1.5% of Hawesville’s load requirements during this
period. We are exploring alternative sources of energy during the summer
period. We may have to pay a premium over and above our power contracts
for this energy. Based on the current market for electrical power, we
don’t expect the premium to have a material adverse effect on our financial
condition, results of operation or liquidity.
Republic
of the Congo aluminum venture memorandum of understanding
signed
In
February 2007, we signed a memorandum of understanding (“MOU”) with the Republic
of the Congo (“ROC”) for the exclusive right to develop an integrated aluminum
business in the ROC consisting of an aluminum smelter, an alumina refinery
and a
bauxite mine. The MOU is subject to satisfaction of certain conditions and
the
project that it contemplates is in the early stages of feasibility study and
review.
The
ROC
port area of Pointe Noire has been identified as a potential site for the
aluminum smelter and alumina refinery. The location of the bauxite mine is
dependent upon a future assessment and mapping of the ROC bauxite reserves.
The
MOU specifies that the Government of ROC will provide a minimum commitment
of
500 MW of gas-generated electrical energy to the facility.
Anode
Supplier declares Force Majeure
On
February 16, 2007, the anode supplier for Nordural’s 130,000 mtpy expansion,
Alcan Trading Ltd, declared a Force Majeure due to delays in their raw material
supply. The reduction in anode deliveries is not expected to have a significant
impact on operations in the near term. However, a prolonged shortage could
deplete Nordural’s inventory which could significantly impact Nordural’s future
operations. Alcan Trading has informed us that they expect anode delivery
schedules to return to normal in April 2007.
Helguvik
Power memorandum of understanding signed
In
June
2006, Nordural signed a MOU to purchase electrical energy with two major
Icelandic geothermal power producers, Hitaveita Sudurnesja (“HS”) and Orkuveita
Reykjavikur (“OR”). Under the MOU, power will be supplied to the planned
Helguvik facility in stages, beginning with an initial phase of up to 250 MW,
which will support production capacity of up to 150,000 mtpy. HS will provide
up
to 150 MW in this initial stage, and OR will supply up to 100 MW. Electricity
delivery for this first phase is targeted for 2010. The MOU provides for a
total
of 435 MW, which will ultimately provide power for a 250,000 mtpy facility.
The
MOU is subject to the satisfaction of certain conditions, including conditions
relating to environmental licensing and the construction of the new facility.
It
is our intention to sign an electrical energy agreement in 2007.
Helguvik
Harbor and Site agreements
In
April
2006, in furtherance of a joint action plan to evaluate the possible
construction of a new aluminum smelter in the vicinity of Helguvik, Iceland,
approximately 30 miles from the city of Reykjavik, we signed a harbor and site
agreement with the Reykjanesbaer Municipal Council, the Gardur Municipal Council
and the Reykjanes Harbour Board.
Nordural
Phase V Expansion Schedule Accelerated
In
April
2006, we announced an acceleration in the further expansion of our Nordural
facility from 220,000 mtpy to 260,000 mtpy. The construction of the expansion
is
expected to be completed in the fourth quarter of 2007. We had previously
announced that OR had agreed to deliver the power for the additional expansion
by late 2008. Landsvirkjun, Iceland's national power company, has agreed to
deliver power for the additional capacity on an interim basis until power is
available from OR in late 2008.
Alumina
Supply Contract with Glencore
In
April
2006, Century entered into a three year supply contract with Glencore for the
supply of alumina to our Ravenswood facility. Glencore will supply approximately
330,000 metric tons per year of alumina beginning January 1, 2007 through
December 31, 2009. The contract pricing is variable, based on the LME price
for
primary aluminum.
Ravenswood
Electrical Power Supply Agreements
Appalachian
Power Company supplies all of Ravenswood’s power requirements. Power delivered
under the supply agreement is as set forth in published tariffs. Effective
July
28, 2006, the Public Service Commission for the State of West Virginia approved
an experimental rate design in connection with an increase in the applicable
tariff rates. Under the experimental rate, Ravenswood may be excused from
or may defer the payment of the increase in the rate
if
aluminum prices as quoted on the LME fall below pre-determined levels. After
December 31, 2007, Ravenswood may terminate the agreement by providing 12 months
notice of termination.
Labor
Agreement with USWA at Hawesville Ratified
In
May
2006, our Hawesville, Kentucky plant employees represented by the United
Steelworkers of America (“USWA”) ratified a four-year collective bargaining
agreement that will extend through March 31, 2010. The agreement covers
approximately 600 hourly workers at the Hawesville plant.
Labor
Agreement with USWA at Ravenswood Ratified
On
August
4, 2006, the membership of the USWA Local 5668 voted to ratify a three-year
labor agreement covering the hourly workers at the Ravenswood facility.
Potline
Shutdown and Restart at Ravenswood
On
July
29, 2006, we received a 72-Hour Notice of Termination of Extension Agreement
and
Intent to Strike the Employer from the USWA, which represents the 580 hourly
workers at the Ravenswood facility. Based on the USWA’s notice to strike, we
completed an orderly shut down of one of the four potlines at the Ravenswood
facility. Following the ratification of the labor contract on August 4, 2006,
we
began the process of restarting the affected potline. As of December 31, 2006,
Ravenswood reached full production on that line and in the plant.
As
a
result of the strike notice and subsequent potline shutdown at Ravenswood,
on
August 2, 2006, we delivered force majeure notices to Alcan and Glencore and,
pursuant to these notices, reduced deliveries under the Alcan Metal Agreement
and the Glencore Metal Agreement II. On November 2, 2006, we rescinded the
force
majeure notices and have resumed full deliveries under these
contracts.
Joint
Venture with Minmetals Aluminum Company
In
May
2006, we entered into a joint venture agreement with Minmetals Aluminum Company
to explore the potential of developing a bauxite mine and associated 1.5 million
mtpy alumina refining facility in Jamaica.
The
first
stage of the project, a pre-feasibility stage, will assess the quality and
quantity of bauxite reserves. This stage is expected to take up to 18 months.
If
this stage is successful, a full feasibility study would follow. The parties
estimate that the mine and alumina refinery could be operational within three
years following the completion of the full feasibility study.
Key
Long-Term Contracts
Primary
Aluminum Sales Contracts
We
routinely enter into market priced contracts for the sale of primary aluminum.
A
summary of Century’s long-term primary aluminum sales contracts is provided
below.
|
Contract
|
Customer
|
Volume
|
Term
|
Pricing
|
|
Alcan
Metal Agreement
|
Alcan
|
276
to 324 million pounds per year
|
Through
July 31, 2007
|
Variable,
based on U.S. Midwest market
|
|
Glencore
Metal Agreement I (1)
|
Glencore
|
50,000
mtpy
|
Through
December 31, 2009
|
Variable,
LME-based
|
|
Glencore
Metal Agreement II (2)
|
Glencore
|
20,400
mtpy
|
Through
December 31, 2013
|
Variable,
based on U.S. Midwest market
|
|
Southwire
Metal Agreement
|
Southwire
|
240
million pounds per year (high purity molten aluminum) (3)
|
Through
March 31, 2011
|
Variable,
based on U.S. Midwest market
|
|
60
million pounds per year (standard-grade molten aluminum)
(3)
|
Through
December 31, 2010
|
Variable,
based on U.S. Midwest market
|
||
|
48
million pounds per year (standard-grade molten aluminum)
|
Through
December 31, 2007
|
Variable,
based on U.S. Midwest market
|
|
(1) We
account for the Glencore Metal Agreement I as a derivative instrument
under SFAS No. 133. We have not designated the Glencore Metal Agreement
I
as “normal” because it replaced and substituted for a significant portion
of a sales contract which did not qualify for this designation. Because
the Glencore Metal Agreement I is variably priced, we do not expect
significant variability in its fair value, other than changes that
might
result from the absence of the U.S. Midwest premium.
|
|
(2) We
account for the Glencore Metal Agreement II as a derivative instrument
under SFAS No. 133. Under the Glencore Metal Agreement II, pricing
is
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.
|
|
(3) The
Southwire Metal Agreement will automatically renew for additional
five-year terms, unless either party provides 12 months notice that
it has
elected not to renew.
|
Tolling
Contracts
|
Contract
|
Customer
|
Volume
|
Term
|
Pricing
|
|
Billiton
Tolling Agreement (1)(4)
|
BHP
Billiton
|
130,000
mtpy
|
Through
December 2013
|
LME-based
|
|
Glencore
Tolling Agreement (2)(3)(4)
|
Glencore
|
90,000
mtpy
|
Through
July 2016
|
LME-based
|
|
1) In
September 2005, Nordural and BHP Billiton amended the Billiton
Tolling
Agreement to increase the tolling arrangement from 90,000 metric
tons to
130,000 metric tons of the annual production capacity at Nordural
effective upon the completion of the expansion to 220,000
mtpy.
|
|
(2) Nordural
entered into a 10-year LME-based alumina tolling agreement with
Glencore
for 90,000 metric tons of the expansion capacity at Nordural. Deliveries
under this agreement started in July 2006.
|
|
(3) In
December 2005, Glencore assigned to Hydro 50% of its tolling rights
under
this agreement for the period 2007 to 2010. Nordural consented
to the
assignment.
|
|
(4) Nordural’s
tolling revenues include a premium based on the European Union
(“EU”)
import duty for primary aluminum. The European Commission has considered
and is currently considering various proposals that would phase-out
this
import duty. While the import duty remains intact to date, any
decrease in
the EU import duty will negatively impact Nordural’s
revenue.
|
Key
Long-Term Supply Agreements
Alumina
Supply Agreements
A
summary
of our alumina supply agreements is provided below. Nordural toll converts
alumina provided by BHP Billiton, Hydro and Glencore.
|
Facility
|
Supplier
|
Term
|
Pricing
|
|
Mt.
Holly
|
Glencore
|
Through
January 31, 2008 (46% of requirements)
|
Variable,
LME-based
|
|
Mt.
Holly (1)
|
Trafigura
|
January
1, 2007 through December 31, 2013
|
Variable,
LME-based
|
|
Hawesville
|
Gramercy
Alumina
|
Through
December 31, 2010
|
Variable,
Cost-based
|
|
Ravenswood
|
Glencore
|
January
1, 2007 through December 31, 2009
|
Variable,
LME-based
|
|
(1) The
alumina supply contract with Trafigura will provide Century with
125,000
metric tons in 2007 and 220,000 metric tons in 2008 through
2013.
|
Electrical
Power Supply Agreements
We
use
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)(2)
|
Appalachian
Power Company
|
Through
June 30, 2009
|
Based
on published tariff, with provisions for pricing based on the LME
price
for primary aluminum
|
|
Mt.
Holly
|
South
Carolina Public Service Authority
|
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 2010 (approximately 73% of Hawesville’s requirement)
|
|
Nordural
(3)
|
Landsvirkjun
|
Through
2019
|
Variable
rate based on the LME price for primary aluminum
|
|
Nordural
(4)
|
Hitaveita
Suðurnesja
|
Through
2026-2028
|
Variable
rate based on the LME price for primary aluminum
|
|
Nordural
(4)
|
Orkuveita
Reykjavíkur
|
Through
2026-2028
|
Variable
rate based on the LME price for primary
aluminum
|
|
(1) Appalachian
Power supplies all of Ravenswood’s power requirements. After December 31,
2007, Ravenswood may terminate the agreement by providing 12 months
notice
of termination. Effective July 28, 2006, the Public Service Commission
of
the State of West Virginia approved an experimental rate design
in
connection with an increase in the applicable tariff rates. Under
the
experimental rate, Ravenswood may be excused from or may defer
the payment
of the increase in the tariff rate if aluminum prices as quoted
on the LME
fall below pre-determined levels.
|
|
(2)
This contract contains LME-based pricing provisions that are considered
an
embedded derivative. The embedded derivative does not qualify for
cash
flow hedge treatment and is marked to market quarterly. Gains and
losses
on the embedded derivative are included in the Net gain (loss)
on forward
contracts on the Consolidated Statement of Operations.
|
|
(3) In
April 2006, we announced an expansion of the Nordural facility
from
220,000 mtpy to 260,000 mtpy which is expected to be completed
in the
fourth quarter of 2007. OR has agreed to deliver the power for
the
additional expansion capacity by late 2008. Landsvirkjun has agreed
to
deliver power for the additional capacity on an interim basis until
power
is available from OR in late 2008.
|
|
(4)
The power agreement for the power requirements for the expansion
to
220,000 mtpy is through 2026. The term of the power agreement for
the
expansion to 260,000 mtpy is until 2028.
|
Labor
Agreements
Our
labor
costs at Ravenswood and Hawesville are subject to the terms of labor contracts
which generally have provisions for annual fixed increases in hourly wages
and
benefits adjustments. The five labor unions represented at Nordural operate
under a labor contract that establishes wages and work rules for covered
employees. The employees at Mt. Holly are employed by ALCOA and are not
unionized. A summary of key labor agreements is provided below.
|
Facility
|
Organization
|
Term
|
|
Hawesville
|
USWA
|
Through
March 31, 2010
|
|
Ravenswood
|
USWA
|
Through
May 31, 2009
|
|
Nordural
|
Icelandic
labor unions
|
Through
December 31, 2009
|
|
Gramercy
|
USWA
|
Through
September 30, 2010
|
|
St.
Ann (1)
|
Jamaican
labor unions
|
Through
April 30, 2007
|
|
(1) St.
Ann has two labor unions, the University and Allied Workers Union
(the
“UAWU”) and the Union of Technical and Supervisory Personnel (the
“UTASP”). The UAWU labor agreement will expire on April 30, 2007. On
February 14, 2006, the UTASP agreed to a labor contract that will
expire
on December 31, 2007.
|
Application
of Critical Accounting Policies
Our
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 our financial
position or results of operations. Significant judgments and estimates made
by
our management include expenses and liabilities related to pensions and other
postemployment benefits and forward delivery contracts and financial
instruments.
Pension
and Other Postemployment Benefit Liabilities
We
sponsor various pension plans and also participate in a union sponsored
multi-employer pension plan for the collective bargaining unit employees at
Hawesville. The liabilities and annual income or expense of our 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 our expected long-term rate of return assumption for pension fund
assets, we evaluated input from our 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. We
also considered our historical 10-year compound returns. We anticipate that
our
pension investments will generate long-term rates of return of 9.0%. Our
expected long-term rate of return is based on an assumed asset allocation of
65%
equity funds and 35% fixed-income funds.
Discount
Rate Selection
It
is our
policy to select a discount rate for purposes of measuring obligations under
the
pension and retiree medical plans by matching cash flows separately for each
plan to yields on zero coupon bonds. We use the Citigroup Pension Liability
Index for determining these yields.
The
Citigroup Pension Liability Index was specifically developed to meet the
criteria set forth in paragraph 186 of SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other than Pensions.” The published information at
the end of each calendar month includes spot rate yields (zero coupon bond
yield
estimates) in half year increments for use in tailoring a discount rate to
a
particular plan's projected benefit cash flows. The Citigroup Pension
Liability Index rate represents the discount rate developed from these spot
rate
yields, based on the pattern and duration of the benefit payments of a typical,
large, somewhat mature pension plan.
The
individual characteristics of each plan, including projected cash flow patterns
and payment durations, have been taken into account, since discount rates are
determined on a plan-by-plan basis. We will generally select a discount rate
rounded to the nearest 0.25%, unless specific circumstances provide for a more
appropriate non-rounded rate to be used. We believe the projected cash flows
used to determine the Citigroup Pension Liability Index rate provide a good
approximation of the timing and amounts of our defined benefits payments under
our plans and no adjustment to the Citigroup Pension Liability Index rate has
been made.
Therefore,
as of December 31, 2006, Century selected a discount rate of 5.75% for all
of
the pension and post-employment benefit plans and 5.25% for our worker’s
compensation plans.
Although
the duration of the Supplemental Executive Retirement Benefits (“SERB”) Plan is
slightly shorter than our other pension plans, Century Aluminum will also use
a
5.75% discount rate for this plan, because we do not believe that the difference
in duration is significant, and because the obligations of the SERB are small
in
comparison to the other plans, we believe that the disclosure of a single rate
that was used for the majority of the obligations will enhance the reader’s
understanding of the employee benefit footnote, rather than a weighted average
rate that may complicate any determinations the reader may have.
Lowering
the expected long-term rate of return by 0.5% (from 9.0% to 8.5%) would have
increased our pension expense for the year ended December 31, 2006 by
approximately $0.3 million. Lowering the discount rate assumptions by 0.5%
would
have increased our pension expense for the year ended December 31, 2006 by
approximately $0.4 million.
Century
provides postemployment benefit plans that provide health care and life
insurance benefits for substantially all retired employees of our U.S. based
operations. SFAS No. 106 requires the accrual of the estimated cost of providing
postretirement benefits during the working careers of those employees who could
become eligible for such benefits when they retire. We fund these benefits
as
the retirees submit claims.
Measurement
of our 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.
Century
assumes medical inflation is initially 10%, 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 2007:
|
|
One
Percentage Point
Increase
|
One
Percentage Point
Decrease
|
|||||
|
(in
thousands)
|
|||||||
|
Effect
on total of service and interest cost components
|
$
|
3,786
|
$
|
(2,808
|
)
|
||
|
Effect
on accumulated postretirement benefit obligation
|
$
|
38,024
|
$
|
(30,417
|
)
|
||
Forward
Delivery Contracts and Financial Instruments
Estimating
the fair value of certain of our forward financial and physical delivery
contracts requires us to make assumptions about future market prices of primary
aluminum and the U.S. Midwest premium. We routinely enter into market priced
physical and fixed-priced financial contracts for the sale of primary aluminum
and the purchase of raw materials in future periods. We apply the provisions
of
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as
amended,” in accounting for these types of contracts. We have fixed price
financial contracts for the sale of primary aluminum with settlement dates
through 2015, but the LME futures quotes run through 2012. Determining the
fair
value of these forward contracts requires us to make certain assumptions about
future market prices of primary aluminum beyond the quoted future market prices
in 2012. In addition, our Glencore Metal Agreement II forward physical sales
contract is accounted for as derivative and contains pricing provisions based
on
the U.S. Midwest market price of 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 us to estimate the U.S. Midwest
premium for future periods. 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
and do not qualify for the normal purchases and normal sales exception, as
provided for in current accounting standards, are marked-to-market using the
LME
spot and forward market for primary aluminum. For derivative contracts extending
beyond the quoted LME market periods, we estimate the forward LME market price
beyond the quoted periods based upon market price trends in the final months
of
the quoted LME market. We estimate the U.S. Midwest premium by using third
party
expectations for future U.S. Midwest premiums, when available. Third-party
estimates rarely extend beyond 24 months. For periods beyond the third-party
information, we estimate the U.S. Midwest premium by using its 10-year rolling
average. Fluctuations in the LME price of primary aluminum and U.S. Midwest
premium have a significant impact on gains and losses included in our financial
statements from period to period. Unrealized gains and losses are either
included in Other comprehensive income (loss) (for cash flow hedges) or Net
gain
(loss) on forward contracts (for derivative instruments), 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 an impact on Other comprehensive income in our financial statements
from period to period. We have designated these forward contracts as cash flow
hedges for forecasted natural gas transactions in accordance with the provisions
of SFAS No. 133 (as amended). We assess 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.
The
principal contracts affected by these standards and the resulting effects on
the
financial statements are described in Note 13 to the Consolidated Financial
Statements included herein.
Results
of Operations
The
following table sets forth, for the years indicated, the percentage relationship
to net sales of certain items included in our Statements of Operations. The
following table includes the results from our purchase of Nordural since its
acquisition in April 2004 and the results from our interest in the Gramercy
assets since its acquisition in October 2004.
|
|
Percentage
of Net Sales
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of goods sold
|
(77.6
|
)
|
(85.7
|
)
|
(82.5
|
)
|
||||
|
Gross
profit
|
22.4
|
14.3
|
17.5
|
|||||||
|
Selling,
general and administrative expenses
|
(2.5
|
)
|
(3.1
|
)
|
(2.4
|
)
|
||||
|
Operating
income
|
19.9
|
11.2
|
15.1
|
|||||||
|
Interest
expense
|
(2.4
|
)
|
(2.3
|
)
|
(3.8
|
)
|
||||
|
Interest
income
|
0.1
|
0.1
|
0.1
|
|||||||
|
Loss
on early extinguishment of debt
|
—
|
(0.1
|
)
|
(4.5
|
)
|
|||||
|
Other
expense
|
0.4
|
—
|
(0.1
|
)
|
||||||
|
Net
loss on forward contracts
|
(25.0
|
)
|
(27.2
|
)
|
(2.0
|
)
|
||||
|
Income
(loss) before income taxes and equity in earnings of joint
ventures
|
(7.0
|
)
|
(18.3
|
)
|
4.8
|
|||||
|
Income
tax benefit (expense)
|
3.3
|
7.1
|
(1.7
|
)
|
||||||
|
Income
(loss) before equity in earnings of joint
ventures
|
(3.7
|
)
|
(11.2
|
)
|
3.1
|
|||||
|
Equity
in earnings of joint ventures
|
1.1
|
0.9
|
0.1
|
|||||||
|
Net
income (loss)
|
(2.6
|
)%
|
(10.3
|
)%
|
3.2
|
%
|
||||
The
following table sets forth, for the periods indicated, the shipment volumes
and
the average sales price per pound shipped:
|
|
Primary
Aluminum
|
||||||||||||||||||
|
|
Direct
(1)
|
Toll
(2)(3)
|
|||||||||||||||||
|
|
Metric
Tons
|
|
Pounds
(000)
|
|
$/Pound
|
|
Metric
Tons
|
|
Pounds
(000)
|
|
$/Pound
|
||||||||
|
2006
|
|||||||||||||||||||
|
Fourth
Quarter
|
131,041
|
288,895
|
$
|
1.12
|
50,634
|
111,630
|
$
|
0.90
|
|||||||||||
|
Third
Quarter
|
126,810
|
279,568
|
1.07
|
42,788
|
94,331
|
0.86
|
|||||||||||||
|
Second
Quarter
|
132,590
|
292,311
|
1.12
|
39,125
|
86,255
|
0.90
|
|||||||||||||
|
First
Quarter
|
132,378
|
291,843
|
1.03
|
24,573
|
54,174
|
0.83
|
|||||||||||||
|
Total
|
522,819
|
1,152,617
|
$
|
1.09
|
157,120
|
346,390
|
$
|
0.88
|
|||||||||||
|
2005
|
|||||||||||||||||||
|
Fourth
Quarter
|
132,712
|
292,581
|
$
|
0.88
|
23,302
|
51,372
|
$
|
0.69
|
|||||||||||
|
Third
Quarter
|
129,555
|
285,619
|
0.83
|
23,435
|
51,665
|
0.64
|
|||||||||||||
|
Second
Quarter
|
130,974
|
288,748
|
0.86
|
23,025
|
50,761
|
0.67
|
|||||||||||||
|
First
Quarter
|
130,083
|
286,783
|
0.88
|
22,756
|
50,168
|
0.67
|
|||||||||||||
|
Total
|
523,324
|
1,153,731
|
$
|
0.86
|
92,518
|
203,966
|
$
|
0.67
|
|||||||||||
|
2004
|
|||||||||||||||||||
|
Fourth
Quarter
|
133,940
|
295,287
|
$
|
0.87
|
23,324
|
51,421
|
$
|
0.64
|
|||||||||||
|
Third
Quarter
|
132,893
|
292,978
|
0.83
|
23,232
|
51,218
|
0.61
|
|||||||||||||
|
Second
Quarter
|
133,726
|
294,816
|
0.82
|
16,148
|
35,600
|
0.60
|
|||||||||||||
|
First
Quarter
|
134,601
|
296,743
|
0.78
|
—
|
—
|
—
|
|||||||||||||
|
Total
|
535,160
|
1,179,824
|
$
|
0.83
|
62,704
|
138,239
|
$
|
0.62
|
|||||||||||
|
(1) Direct
shipments do not include toll shipments from Nordural.
|
|
(2) Nordural
expansion capacity start-up began in February 2006. Full expansion
production of 220,000 mtpy was reached in the fourth quarter of
2006.
|
|
(3) The
table includes the results from our purchase of Nordural since its
acquisition in April 2004.
|
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Net
sales:
Net
sales for the year ended December 31, 2006 increased $426.2 million or 38%
to
$1,558.6 million. Higher price realizations for primary aluminum in 2006, due
to
improved LME prices and Midwest premiums, contributed $331.5 million of the
sales increase. This amount was partially offset by a $1.0 million decrease
in
direct shipment revenues. Direct shipments were 1.1 million pounds less than
the
previous year due to the potline shutdown at Ravenswood, offset by production
increases at the other U.S. smelters. The additional revenue provided by the
increase in Nordural tolling shipments for the year ended December 31, 2006
contributed $95.7 million to the 2006 net sales increase.
Gross
profit:
For the
year ended December 31, 2006, gross profit increased $186.8 million to $348.5
million. Improved price realizations net of increased LME-based alumina costs
improved gross profit by $213.6 million. Improved tolling fee realizations
net
of increased LME-based power costs improved gross profit by $48.2 million.
Increased shipment volume, the result of the Nordural expansion, contributed
$33.3 million in additional gross profit. Offsetting these gains were $108.3
million in net cost increases comprised of: higher power and natural gas costs,
$41.2 million; higher raw materials, supplies and maintenance costs, $26.3
million; increased cost for Gramercy alumina, $12.3 million; restart and
increased average costs due to the temporary potline shutdown at Ravenswood,
$7.3 million; increased net amortization and depreciation charges, $12.7
million; increased pension and other postemployment benefit accruals, $4.6
million, and other increased spending, $3.9 million.
Selling,
general and administrative expenses:
Selling,
general and administrative expenses for the year ended December 31, 2006
increased $4.6 million to $39.4 million relative to the same period in 2005.
The
increase is primarily due to the adoption of SFAS No. 123(R), “Share-Based
Payments.”
Interest
expense, net:
Interest
expense for the year ended December 31, 2006 increased $11.0 million to $35.3
million. The increase in interest expense is due to higher Nordural debt loan
balances.
Net
gain/loss on forward contracts:
For the
year ended December 31, 2006, net loss on forward contracts was $389.8 million
compared to a net loss on forward contracts of $309.7 million for 2005. The
losses reported for the years ended December 31, 2006 and 2005 were primarily
a
result of mark-to-market losses associated with our long term financial sales
contracts with Glencore that do not qualify for cash flow hedge accounting.
Cash
settlements of financial metal sales contracts that do not qualify for cash
flow
hedge treatment accounted for $54.2 million of the net loss, of which $2.6
million loss is due to the non-cash settlements of derivatives associated with
the Glencore Metal agreements. The remaining $335.6 million is unrealized losses
consisting of: $335.4 million unrealized losses related to our outstanding
financial metals sales contracts that do not qualify for treatment as cash
flow
hedges due for settlement in 2007 through 2015, and $0.2 million unrealized
loss
due to an embedded derivative in our Ravenswood power contract.
Tax
provision:
We
recorded an income tax benefit for the year ended December 31, 2006 of $52.0
million, a reduction of $28.7 million from the recorded tax benefit of $80.7
million for the year ended December 31, 2005. The reduction in the tax benefit
is due to the reduced loss before income taxes and increased equity in earnings
of joint ventures.
Equity
in earnings of joint venture:
Equity
in earnings from the Gramercy and SABL investments improved to $16.1 million
for
the year ended December 31, 2006 from $10.7 million in 2005. These earnings
represent our share of profits from third party bauxite, hydrate and chemical
grade alumina sales.
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Net
sales:
Net
sales for the year ended December 31, 2005 increased $71.6 million or 7% to
$1,132.0 million. Higher price realizations for primary aluminum in 2005, due
to
an improved LME price and Midwest premium, contributed an additional $41.7
million in sales. This amount was partially offset by a $21.5 million decrease
in direct shipment revenues. Direct shipments were 26.1 million pounds less
than
the previous year due to a reduced pot count at Hawesville and fewer days in
2005 versus 2004. The additional revenue provided by Nordural tolling activities
for the year ended December 31, 2005 contributed $51.4 million to the 2005
net
sales increase.
Gross
profit:
For the
year ended December 31, 2005, gross profit decreased $23.6 million to $161.7
million. Improved price realizations net of increased alumina costs improved
gross profit by $42.6 million. Increased shipment volume, the result of the
Nordural acquisition, contributed $11.6 million in additional gross profit.
Offsetting these gains were $77.8 million in net cost increases comprised of:
higher raw material costs and replacement of pot cells, $22.9 million; increased
cost of Gramercy alumina, $19.5 million; higher power and natural gas costs,
$17.6 million; increased net amortization and depreciation charges, $6.2
million; increased pension and other post-employment benefit accruals, $3.3
million and other increased spending, $8.3 million.
Selling,
general and administrative expenses:
Selling,
general and administrative expenses for the year ended December 31, 2005
increased $9.9 million to $34.8 million relative to the same period in 2004.
Approximately 63%, or $6.2 million of the increase, was a result of increased
compensation and pension expense, with the remaining increase associated with
increased professional fees and other general expenses. In addition, allowance
for bad debts was reduced $0.6 million in 2004, reflecting the settlement of
a
claim.
Interest
expense, net:
Interest
expense for the year ended December 31, 2005 declined $14.9 million to $24.3
million. The reduction in interest expense was a direct result of our
refinancing activities during the year 2004.
Net
gain/loss on forward contracts:
For the
year ended December 31, 2005, net loss on forward contracts was $309.7 million
as compared to a net loss on forward contracts of $21.5 million for the same
period in 2004. The loss reported for the year ended December 31, 2005 was
primarily a result of mark-to-market losses associated with our long term
financial sales contracts with Glencore that do not qualify for cash flow hedge
accounting. The losses reported for the year ended December 31, 2004 primarily
relate to the early termination of a fixed price forward sales contract with
Glencore.
Loss
on early extinguishment of debt:
For the
year ended December 31, 2005, we recorded a loss of $0.8 million related to
the
redemption of the remaining $9.9 million of outstanding 11.75% senior secured
first mortgage notes. For the year ended December 31, 2004, we recorded a loss
of $47.4 million for the cost of tendering for the first mortgage
notes.
Tax
provision:
We
recorded an income tax benefit for the year ended December 31, 2005 of $80.7
million, a change of $98.9 million from the recorded tax expense of $18.2
million for the year ended December 31, 2004. The change in the tax provision
is
due to changes in the income (loss) before income taxes and the discontinuance
of accrual for United States taxes on Nordural’s earnings, resulting from a
decision made in 2005 that such earnings would remain invested outside the
United States indefinitely. These items were partially offset by changes in
equity in earnings of joint ventures.
Equity
in earnings of joint venture:
Equity
in earnings from the Gramercy and SABL investments, which were acquired on
October 1, 2004, was $10.7 million for the year ended December 31, 2005. These
earnings represent our share of profits from third party bauxite, hydrate and
chemical grade alumina sales.
Liquidity
and Capital Resources
Our
principal sources of liquidity are cash flow from operations and available
borrowings under our revolving credit facility and Nordural's term loan
facility. We believe these sources of cash will be sufficient to meet our
near-term working capital needs. We have not determined the sources of funding
for our long-term debt repayment requirements; however, we believe that our
cash
flow from operations, available borrowing under our revolving credit facility
and, to the extent necessary and/or economically attractive, future financial
market activities will be adequate to address our long-term liquidity
requirements. Our principal uses of cash are operating costs, payments of
interest on our outstanding debt, the funding of capital expenditures and
investments in related businesses, working capital and other general corporate
requirements.
As
of
December 31, 2006, we had $772.3 million of indebtedness outstanding, including
$175.0 million of principal under our 1.75% convertible senior notes, $250.0
million of principal under our 7.5% senior notes, $331.0 million of indebtedness
under the term loan at Nordural, $7.8 million of principal under our industrial
revenue bonds, and $8.5 million indebtedness for various site loans at Nordural.
More information concerning the various debt instruments and our borrowing
arrangements is available in Note 5 to the Consolidated Financial Statements
included herein.
Adjusted
Working
Capital
|
Adjusted
Working Capital Calculation as of December 31,
|
|||||||
|
(dollars
in thousands)
|
|||||||
|
2006
|
2005
|
||||||
|
Current
assets
|
$
|
517,639
|
$
|
294,493
|
|||
|
Current
liabilities
|
(646,277
|
)
|
(467,045
|
)
|
|||
|
Working
capital
|
(128,638
|
)
|
(172,552
|
)
|
|||
|
Adjustments
(1):
|
|||||||
|
Convertible
senior notes
|
175,000
|
175,000
|
|||||
|
Industrial
revenue bonds
|
7,815
|
7,815
|
|||||
|
Adjusted
working capital
|
$
|
54,177
|
$
|
10,263
|
|||
|
(1)
The Convertible senior notes mature in 2024. The industrial revenue
bonds
mature in 2028. Due to certain features of these debt instruments,
they
are classified as current liabilities. For example, the convertible
senior
notes are classified as current because they may be converted by
the
holder at any time.
|
Our
adjusted working capital increased during 2006 primarily due to higher market
prices for primary aluminum, which drove increases in accounts receivable,
inventory and cash. This increase was offset somewhat by increases in our
current due to affiliates and current portion of long-term debt. Our due to
affiliates and deferred tax asset increased primarily as a result of the
mark-to-market of derivative contracts with Glencore that settle in 2007.
Capital
Resources
Capital
expenditures for 2006 were $217.1 million, $193.5 million of which was related
to the expansion projects at Nordural, with the balance principally related
to
upgrading production equipment, improving facilities and complying with
environmental requirements. We anticipate capital expenditures of approximately
$30.0 to $35.0 million in 2007, exclusive of costs associated with Nordural’s
expansion to 220,000 mtpy (“Phase IV”) and Nordural’s Phase V expansion. We
expect the Nordural expansion projects will require approximately $95 million
of
capital expenditures in 2007. Through December 31, 2006, we had outstanding
capital commitments related to the Nordural expansion of $67.7 million related
to Phase IV and Phase V expansion projects. We expect to incur approximately
$5
to $10 million in capital expenditures for the Helguvik greenfield project
in
2007. Our 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. In May 2006, we
purchased foreign currency options with a notional value of $41.6 million to
hedge our foreign currency risk in the Icelandic krona associated with a portion
of the capital expenditures from the Phase V expansion project. The option
contracts, which are designated as cash flow hedges and qualify for hedge
accounting under SFAS No.133, have maturities through November 2007. The
critical terms of the contracts match those of the underlying
exposure.
As
of
December
31,
2006,
the fair value of the foreign currency options of $2.2 million was recorded
in
other assets. Accumulated other comprehensive income net of taxes includes
an unrealized gain of $0.4 million, net of tax, related to the foreign currency
options.
Historical
Our
Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
are summarized below:
|
|
2006
|
2005
|
2004
|
|||||||
|
(dollars
in thousands)
|
||||||||||
|
Net
cash provided by operating activities
|
$
|
185,353
|
$
|
134,936
|
$
|
105,828
|
||||
|
Net
cash used in investing activities
|
(211,938
|
)
|
(305,339
|
)
|
(275,286
|
)
|
||||
|
Net
cash provided by financing activities
|
105,197
|
143,987
|
185,422
|
|||||||
|
Increase
(decrease) in cash
and cash equivalents
|
$
|
78,613
|
$
|
(26,416
|
)
|
$
|
15,964
|
|||
Net
cash
from operating activities of $185.4 million in 2006 was $50.5 million higher
than the same period in 2005. This increase was a direct result of improved
price realizations and the added margin contributions from the expansion
capacity at Nordural.
Net
cash
from operating activities of $134.9 million in 2005 was $29.1 million higher
than the same period in 2004. Exclusive of the $50.3 million cash payment in
2004 for the tender premium plus accrued interest for the refinancing of our
first mortgage notes, net cash from operating activities decreased $21.2 million
in 2005. This decrease was a direct result of increased cost of goods sold,
offset by lower debt service costs related to the 2004 debt
refinancing.
Net
cash
used in investing activities in 2006 was $211.9 million, a decrease of $93.4
million from 2005. Exclusive of the $7.8 million proceeds from the sale of
property, plant, and equipment in 2006 and net acquisition cost of $7.0 million
for a Southwire contingency payment in April 2005, related to the Hawesville
acquisition in 2001, the decrease was $78.6 million. This decrease was due
primarily to lower expenditures on the Nordural expansion project of $86.6
million, offset by higher purchases of property, plant and equipment and
restricted and other cash deposits during the year of $8.0 million.
Net
cash
used in investing activities in 2005 was $305.3 million, an increase of $30.0
million from 2004. Exclusive of the net acquisition cost of $7.0 million for
a
Southwire contingency payment in April 2005, related to the Hawesville
acquisition in 2001, the combined net acquisition cost of Nordural in April
2004
and the Gramercy assets in October 2004 of $198.6 million, net cash used in
investing activities increased $221.6 million. Purchases of property, plant
and
equipment, including the Nordural expansion costs, were $298.1 million in 2005
as compared to the purchases of property, plant and equipment of $75.0 million
in 2004.
Net
cash
provided by financing activities during 2006 was $105.2 million, a decrease
of
$38.8 million from the previous year. During 2006, we borrowed $109.0 million
under Nordural’s term loan facility and repaid $8.7 million, consisting of
payments of $8.1 million for the repayment of the revolving credit facility
and
$0.6 million for other miscellaneous debt payments. We received proceeds of
$3.5
million from the issuance of common stock and realized a $1.4 million tax
benefit from our share-based compensation programs.
Net
cash
provided by financing activities during 2005 was $144.0 million, a decrease
of
$41.4 million from the previous year. During 2005, we borrowed $222.9 million
under Nordural’s new term loan facility, borrowed $8.1 million under our
revolving credit facility, and received proceeds from the issuance of common
stock of $1.4 million. The additional borrowings were partially offset by debt
repayments of $83.3 million, consisting of payments of $9.9 million for the
remaining first mortgage notes tendered in a debt refinancing, $68.5 million
for
the prior Nordural term loan facility and $4.9 million for other miscellaneous
debt payments. Additionally, we paid $5.1 million of financing fees for
Nordural’s new term loan facility and the refinancing of our revolving credit
facility.
Contractual
Obligations
In
the
normal course of business, we have 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. More
information is available about these contractual obligations in the notes to
the
Consolidated Financial Statements included herein.
|
Payments
Due by Period
|
||||||||||||||||||||||
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
||||||||||||||||
|
(dollars
in millions)
|
||||||||||||||||||||||
|
Long-term
debt (1)
|
$772
|
$30
|
$29
|
$29
|
$246
|
$1
|
$437
|
|||||||||||||||
|
Estimated
interest payments (2)
|
299
|
46
|
44
|
42
|
32
|
24
|
111
|
|||||||||||||||
|
Purchase
obligations (3)
|
3,084
|
684
|
508
|
470
|
327
|
182
|
913
|
|||||||||||||||
|
OPEB
obligations (4)
|
103
|
7
|
7
|
8
|
10
|
11
|
60
|
|||||||||||||||
|
Other
long-term liabilities (5)
|
43
|
6
|
5
|
5
|
5
|
5
|
17
|
|||||||||||||||
|
Total
|
$4,301
|
$773
|
$593
|
$554
|
$620
|
$223
|
$1,538
|
|||||||||||||||
|
(1)
Debt includes principal repayments on the 7.5% senior notes, 1.75%
convertible senior notes, the IRBs and the Nordural debt.
|
|
(2)
Estimated interest payments on our long-term debt are based on
several
assumptions, including an assumption that our term loan debt is
repaid on
established schedules and is not refinanced. Our variable rate
debt is
based primarily on the Eurodollar rate plus an applicable margin.
We
assume that the Eurodollar rate will be 5.50% in 2007 and remaining
steady
thereafter. The IRB interest rate is variable and our estimated
future
payments are based on a rate of 4.20%. In addition, we assume the
7.5%
senior notes due 2014 and 1.75% convertible senior notes due in
2024 will
remain outstanding until their respective due dates.
|
|
(3) Purchase
obligations include long-term alumina, electrical power contracts,
anode
contracts and the Nordural expansion project commitments. Nordural's
power
contracts and our domestic alumina contracts, except for our Gramercy
alumina contract, are priced as a percentage of the LME price of
primary
aluminum. We assumed an LME price consistent with the LME forward
market
at December 31, 2006, decreasing to the 10-year average LME and
steady
thereafter for purposes of calculating expected future cash flows
for
these contracts. Our Gramercy long-term alumina contract has variable
cost-based pricing. We used GAL cost forecasts to calculate the
expected
future cash flows for this contract. The Nordural anode contract
and some
Nordural expansion contract commitments are denominated in euros.
We
assumed a $1.30/Euro conversion rate to estimate the obligations
under
these contracts.
|
|
(4)
Includes the estimated benefit payments for our OPEB obligations
through
2015, which are unfunded.
|
|
(5)
Other long-term liabilities include our expected
SERB benefit payments, workers' compensation benefit payments and
asset
retirement obligations. Expected benefit payments for the SERB
plans,
which are unfunded, are included for 2007 through 2015. Asset retirement
obligations are estimated disposal costs for the existing spent
potliner.
|
For
a discussion of our related party transactions, see Footnote 15 to the
Consolidated Financial Statements included herein.
Environmental
Expenditures and Other Contingencies
We
have
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 $0.5
million at December 31, 2006 and December 31, 2005, respectively. We believe
that compliance with current environmental laws and regulations is not likely
to
have a material adverse effect on our financial condition, results of operations
or liquidity; however, environmental laws and regulations may change, and we
may
become subject to more stringent environmental laws and regulations in the
future.
We
have
planned environmental capital expenditures of approximately $2.0 million for
2007. In addition, we expect to incur operating expenses relating to
environmental matters of approximately $10 to $15 million each year during
2007,
2008 and 2009, respectively. These amounts do not include any projected capital
expenditures or operating expenses for our joint venture interest in the
Gramercy assets. As part of our general capital expenditure plan, we also expect
to incur capital expenditures for other capital projects that may, in addition
to improving operations, reduce certain environmental impacts. See Note 12
“Commitments and Contingencies” to the Consolidated Financial Statements
included herein.
Century’s
income tax returns are periodically examined by various tax authorities. We
are
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. We are reviewing the issues raised by the IRS
and
plan to contest the proposed tax deficiencies. We believe that our tax position
is well-supported and, based on current information, do not believe that the
outcome of the tax audit will have a material impact on our financial condition
or results of operations.
We
are a
defendant in several actions relating to various aspects of our business. While
it is impossible to predict the ultimate disposition of any litigation, we
do
not believe that any of these lawsuits, either individually or in the aggregate,
will have a material adverse effect on our financial condition, results of
operations or liquidity. See Item 3, “Legal Proceedings.”
Recently
Adopted Accounting Standards
SFAS
158.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158, “Employer’s Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment to SFAS No. 87, 88, 106, and 132(R).” This
statement required us to recognize the funded status of a defined benefit and
other postretirement plan obligations in our financial statements and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. In addition, the statement requires additional
disclosure about certain effects on net periodic benefit cost that arise from
delayed recognition of the gains or losses, prior service costs or credits,
and
transition asset or obligation.
We
have
adopted SFAS No. 158 as of December 31, 2006. The impacts of the new
pronouncement are discussed in the Pension and Other Postretirement Benefits
note (Note 7) to our Consolidated Financial Statements, included herein.
SFAS
123(R).
In
December 2004, the 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 services in share-based
payment transactions. This Statement requires us to recognize the grant date
fair value of an award of equity-based instruments to employees and the cost
to
be recognized over the period in which the employees are required to provide
service. The Statement is effective for fiscal year 2006 and thereafter.
We
have
adopted SFAS No. 123 (R) effective January 1, 2006. We have elected to use
the
Modified Prospective Application Method. Under this method, we will recognize
the fair value of employee stock-based compensation awards as compensation
cost
beginning January 1, 2006. SFAS No. 123 (R) will apply to new awards granted
subsequent to our adoption and for any portion of previous awards that had
not
vested as of January 1, 2006. The compensation cost recognized from the unvested
awards will be based on the original grant-date fair value used to calculate
our pro forma financial disclosure under SFAS No. 123. The impacts of the new
pronouncement are discussed in the Stock Compensation note (Note 9) to our
Consolidated Financial Statements, included herein.
Recently
Issued Accounting Standards
FIN
48.
In July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes.” FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. This Interpretation also provides guidance on derecognition,
classification, interest, and penalties, accounting in interim periods,
disclosure and transition.
The
Interpretation was issued to provide consistent criteria to recognize,
derecognize and measure benefits related to income taxes. SFAS No. 109 contains
no specific guidance on how to address uncertainty in accounting for income
tax
assets and liabilities. Disclosure provisions of the Interpretation will provide
more information about the uncertainty in income taxes and
liabilities.
The
Interpretation will be effective for our 2007 fiscal year. We are currently
assessing the Interpretation and have not yet determined the impact of adopting
FIN No. 48 on our financial position and results of operations.
SFAS
No. 157.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. This pronouncement
applies to other existing accounting pronouncements that require or permit
fair
value measurements. The pronouncement does not require any new fair value
measurements. SFAS No. 157 will be effective for financial statements issued
for
fiscal years beginning after November 15, 2007, and the interim periods within
those years. We are currently assessing the new pronouncement and have not
yet
determined the impact of adopting SFAS No. 157 on our financial position and
results of operations.
SFAS
No. 159.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” The Statement would permit us to
measure certain financial instruments and other items at their fair value.
The
objective of the Statement is to mitigate the volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to
apply complex hedge accounting provisions. This fair value option would allow
us
to choose to measure eligible items at fair value at a specified election
date.
The
Statement is effective for us as of January 1, 2008. We are currently assessing
the Statement and have not yet determined what, if any, impact the adoption
of
SFAS No. 159 will have on our financial position or results of
operations.
Commodity
Price Sensitivity
We
are
exposed to price risk for primary aluminum. We manage our 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 certain of our alumina and power requirements under supply contracts
with prices tied to the same indices as our aluminum sales contracts (the LME
price of primary aluminum). Our risk management activities do not include any
trading or speculative transactions. The following table shows our forward
priced sales as a percentage of our estimated production capacity.
Forward
Priced Sales as of December
31, 2006
|
2007(1)(2)
|
2008
(2)
|
2009
(2)
|
2010
(2)
|
2011-2015
(2)
|
||||||||||||
|
Base
Volume:
|
||||||||||||||||
|
Pounds
(000)
|
380,160
|
240,745
|
231,485
|
231,485
|
826,733
|
|||||||||||
|
Metric
tons
|
172,438
|
109,200
|
105,000
|
105,000
|
375,000
|
|||||||||||
|
Percent
of capacity
|
22
|
%
|
14
|
%
|
13
|
%
|
13
|
%
|
9
|
%
|
||||||
|
Potential
additional volume (2):
|
||||||||||||||||
|
Pounds
(000)
|
111,113
|
220,903
|
231,485
|
231,485
|
826,733
|
|||||||||||
|
Metric
tons
|
50,400
|
100,200
|
105,000
|
105,000
|
375,000
|
|||||||||||
|
Percent
of capacity
|
7
|
%
|
12
|
%
|
13
|
%
|
13
|
%
|
9
|
%
|
||||||
|
(1)
The forward priced sales in 2007 exclude January 2007 shipments to
customers that are priced based upon the prior month’s market
price.
|
|
(2)
Certain financial contracts included in the forward priced sales
base
volume for the period 2006 through 2015 contain clauses that trigger
potential additional sales volume when the market price for a contract
month is above the base contract ceiling price. These contacts will
be
settled monthly and, if the market price exceeds the ceiling price
for all
contract months through 2015, the potential sales volume would be
equivalent to the amounts shown
above.
|
Apart
from the Alcan Metal Agreement, Glencore Metal Agreement I, Glencore Metal
Agreement II and Southwire Metal Agreement, we had forward delivery contracts
to
sell 132,726 metric tons and 107,546 metric tons of primary aluminum at December
31, 2006 and December 31, 2005, respectively. Of these forward delivery
contracts, we had fixed price commitments to sell 2,538 metric tons and 4,643
metric tons of primary aluminum at December 31, 2006 and December 31, 2005,
respectively, of which none were with Glencore at December 31, 2006 and 186
metric tons were with Glencore at December 31, 2005.
Financial
Sales Agreements
To
mitigate the volatility in our unpriced forward delivery contracts, we enter
into fixed price financial sales contracts, which settle in cash in the period
corresponding to the intended delivery dates of the forward delivery contracts.
Certain of these fixed price financial sales contracts are accounted for as
cash
flow hedges depending on our designation of each contract at its inception.
Glencore is our counterparty for all of these financial sales contracts.
Substantially
all of the contracts accounted for as derivatives contain clauses that trigger
additional shipment volume when the market price for a contract month is above
the contract ceiling price. If the market price exceeds the ceiling price for
all contract months through 2015, the maximum additional shipment volume would
be 735,600 metric tons. These contracts will be settled monthly. We had no
fixed
price financial contracts to purchase aluminum at December 31, 2006 or December
31, 2005.
|
Primary
Aluminum Financial Sales Contracts as of:
|
||||||
|
(Metric
Tons)
|
||||||
|
December
31, 2006
|
December
31, 2005
|
|||||
|
Cash
Flow Hedges
|
Derivatives
|
Total
|
Cash
Flow Hedges
|
Derivatives
|
Total
|
|
|
2006
|
--
|
--
|
--
|
142,750
|
51,000
|
193,750
|
|
2007
|
119,500
|
50,400
|
169,900
|
119,500
|
50,400
|
169,900
|
|
2008
|
9,000
|
100,200
|
109,200
|
9,000
|
100,200
|
109,200
|
|
2009
|
--
|
105,000
|
105,000
|
--
|
105,000
|
105,000
|
|
2010
|
--
|
105,000
|
105,000
|
--
|
105,000
|
105,000
|
|
2011
|
--
|
75,000
|
75,000
|
--
|
75,000
|
75,000
|
|
2012-2015
|
--
|
300,000
|
300,000
|
--
|
300,000
|
300,000
|
|
Total
|
128,500
|
735,600
|
864,100
|
271,250
|
786,600
|
1,057,850
|
Additionally,
to mitigate the volatility of the natural gas markets, we enter 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. One
decatherm (“DTH”) is equivalent to one million British Thermal Units
(“BTU”).
|
Natural
Gas Financial Purchase Contracts as of:
|
||
|
(Thousands
of DTH)
|
||
|
December
31,
|
||
|
2006
|
2005
|
|
|
2006
|
--
|
1,680
|
|
2007
|
2,200
|
780
|
|
2008
|
480
|
480
|
|
Total
|
2,680
|
2,940
|
On
a
hypothetical basis, a $200 per metric ton increase in the market price of
primary aluminum is estimated to have an unfavorable impact of $16.2 million
after tax on accumulated other comprehensive income for the contracts designated
as cash flow hedges, and $92.8 million on net income for the contracts
designated as derivatives, for the period ended December 31, 2006 as a result
of
the forward primary aluminum financial sales contracts outstanding at December
31, 2006.
On
a
hypothetical basis, a $1.00 per DTH decrease in the market price of natural
gas
is estimated to have an unfavorable impact of $1.7 million after tax on
accumulated other comprehensive income for the period ended December 31, 2006
as
a result of the forward natural gas financial purchase contracts outstanding
at
December 31, 2006.
Our
metals and natural gas risk management activities are subject to the control
and
direction of senior management. These activities are regularly reported to
Century’s board of directors.
This
quantification of our exposure to the commodity price of aluminum is necessarily
limited, as it does not take into consideration our inventory or forward
delivery contracts, or the offsetting impact on the sales price of primary
aluminum products. Because all of our alumina contracts, except Hawesville’s
alumina contract with Gramercy, are indexed to the LME price for primary
aluminum, they act as a natural hedge for approximately 10% of our production.
As of December 31, 2006, approximately 52% (including 50,400 metric tons of
potential additional volume under our derivative sales contracts) of our
production for 2007 was hedged by our LME-based alumina contracts, Nordural’s
electrical power and tolling contracts, and by fixed price forward delivery
and
financial sales contracts.
Nordural.
Substantially
all of
Nordural’s revenues are derived from toll conversion agreements with Glencore,
Hydro and a subsidiary of BHP Billiton Ltd. whereby Nordural converts alumina
provided by these companies into primary aluminum for a fee based on the LME
price for primary aluminum. Nordural’s LME-based toll 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 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’s tolling revenues
include a premium based on the exemption available to Icelandic aluminum
producers from the European Union (“EU”) import duty for primary aluminum. The
European Commission has considered and is currently considering various
proposals that would phase-out this import duty. While the import duty remains
intact to date, any decrease in the EU import duty will negatively impact
Nordural’s revenue.
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. Nordural’s 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. Nordural’s 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 Nordural’s operating margins.
Nordural
does not currently have financial instruments to hedge commodity price risk.
Nordural may hedge such risks in the future, including through the purchase
of
aluminum put options. We have entered into currency options to mitigate a
portion of our foreign currency exposure to the Icelandic krona for the Phase
V
expansion capital expenditures. See the discussion in the Capital Resources
section of Item 7, "Management’s Discussion and Analysis."
Interest
Rates
Interest
Rate Risk.
Our
primary debt obligations are the $250.0 million of outstanding senior unsecured
notes, $175.0 million of outstanding convertible notes, $7.8 million in
industrial revenue bonds (“IRBs”), borrowings under our revolving credit
facility, and the Nordural debt, including $331.0 million of borrowings under
its term loan facility. Our senior unsecured notes and convertible notes bear
a
fixed rate of interest, so changes in interest rates do not subject us to
changes in future interest expense with respect to these borrowings. Borrowings
under our revolving credit facility are at variable rates at a margin over
LIBOR
or the bank base rate, as defined in the credit agreement. There were no
outstanding borrowings on our revolving credit facility at December 31, 2006.
The IRBs bear interest at variable rates determined by reference to the interest
rate of similar instruments in the industrial revenue bond market. Borrowings
under Nordural's term loan facility bear interest at a margin over the
applicable Eurodollar rate. At December 31,
2006,
we
had
$340.6 million of variable rate borrowings. A hypothetical one percentage point
increase in the interest rate would increase our net loss by $2.8 million,
assuming no debt reduction.
We have
not hedged our interest rate risk, but may do so in the future through interest
rate swaps which would have the effect of fixing a portion of our floating
rate
debt.
Our
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.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Management’s
Annual Report on Internal Control over Financial Reporting
|
38
|
|
Reports
of Independent Registered Public Accounting Firm
|
39-40
|
|
Consolidated
Balance Sheets at December 31, 2006 and 2005
|
41
|
|
Consolidated
Statements of Operations for the Years Ended December
31, 2006, 2005 and 2004
|
42
|
|
Consolidated
Statements of Shareholders’ Equity for the Years
Ended December 31, 2006, 2005 and 2004
|
43
|
|
Consolidated
Statements of Cash Flows for the Years Ended December
31, 2006, 2005 and 2004
|
44
|
|
Notes
to the Consolidated Financial Statements
|
45-77
|
Management’s
Annual Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining an adequate system of internal
controls over financial reporting for the company. This system is designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because of its inherent
limitations, a system of internal controls over financial reporting can provide
only reasonable assurance and may not prevent or detect misstatements. Further,
because of changes in conditions, effectiveness of internal controls over
financial reporting may vary over time. Our system of internal controls contains
self-monitoring mechanisms, and actions are taken to correct deficiencies as
they are identified.
As
required by Section 404 of the Sarbanes-Oxley Act, management conducted an
evaluation of the effectiveness of the system of internal controls over
financial reporting for the year ended December 31, 2006. Management’s
evaluation was based on the framework in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on this evaluation, management concluded that our system of internal
controls over financial reporting was effective as of December 31, 2006.
Management’s assessment of the effectiveness of our internal control over
financial reporting has been audited by Deloitte and Touche LLP, an independent
registered public accounting firm, as stated in their report under the heading
“Report of Independent Registered Public Accounting Firm.”
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of Century Aluminum Company:
We
have
audited management's assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting, that Century
Aluminum Company and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed by,
or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
the
criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of
and
for the year ended December 31, 2006 of the Company and our report dated
February 28, 2007 expressed an
unqualified opinion and includes an explanatory paragraph as to the adoption
of
Statement of Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
28, 2007
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, 2006 and 2005, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2006.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2006,
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 Company's internal
control over financial reporting as of December 31, 2006, 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 February 28, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
As
discussed in Note 7 to the consolidated financial statements, in 2006 the
Company adopted Statement of Financial Accounting Standards No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
28, 2007
|
CENTURY
ALUMINUM COMPANY
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
(Dollars
in thousands, except share data)
|
|||||||
|
ASSETS
|
|||||||
|
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
96,365
|
$
|
17,752
|
|||
|
Restricted
cash
|
2,011
|
2,028
|
|||||
|
Accounts
receivable — net
|
113,371
|
83,016
|
|||||
|
Due
from affiliates
|
37,542
|
18,638
|
|||||
|
Inventories
|
145,410
|
111,436
|
|||||
|
Prepaid
and other current assets
|
19,830
|
23,918
|
|||||
|
Deferred
taxes — current portion
|
103,110
|
37,705
|
|||||
|
Total
current assets
|
517,639
|
294,493
|
|||||
|
Property,
plant and equipment — net
|
1,218,777
|
1,070,158
|
|||||
|
Intangible
asset — net
|
61,594
|
74,643
|
|||||
|
Goodwill
|
94,844
|
94,844
|
|||||
|
Other
assets
|
292,380
|
143,293
|
|||||
|
TOTAL
|
$
|
2,185,234
|
$
|
1,677,431
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
LIABILITIES:
|
|||||||
|
Accounts
payable, trade
|
$
|
64,849
|
$
|
61,919
|
|||
|
Due
to affiliates
|
282,282
|
158,682
|
|||||
|
Accrued
and other current liabilities
|
75,143
|
53,715
|
|||||
|
Long
term debt — current portion
|
30,105
|
581
|
|||||
|
Accrued
employee benefits costs — current portion
|
11,083
|
9,333
|
|||||
|
Convertible
senior notes
|
175,000
|
175,000
|
|||||
|
Industrial
revenue bonds
|
7,815
|
7,815
|
|||||
|
Total
current liabilities
|
646,277
|
467,045
|
|||||
|
Senior
unsecured notes payable
|
250,000
|
250,000
|
|||||
|
Nordural
debt
|
309,331
|
230,436
|
|||||
|
Revolving
credit facility
|
--
|
8,069
|
|||||
|
Accrued
pension benefits costs — less current portion
|
19,239
|
10,350
|
|||||
|
Accrued
postretirement benefits costs — less current portion
|
206,415
|
96,660
|
|||||
|
Due
to affiliates - less current portion
|
554,864
|
337,416
|
|||||
|
Other
liabilities
|
27,811
|
28,010
|
|||||
|
Deferred
taxes
|
41,587
|
16,890
|
|||||
|
Total
noncurrent liabilities
|
1,409,247
|
977,831
|
|||||
|
CONTINGENCIES
AND COMMITMENTS (NOTE 12)
|
|||||||
|
SHAREHOLDERS’
EQUITY:
|
|||||||
|
Common
stock (one cent par value, 100,000,000 shares authorized; 32,457,670
and
32,188,165
shares issued and outstanding at December
31, 2006 and 2005, respectively)
|
325
|
322
|
|||||
|
Additional
paid-in capital
|
432,270
|
419,009
|
|||||
|
Accumulated
other comprehensive loss
|
(166,572
|
)
|
(91,418
|
)
|
|||
|
Accumulated
deficit
|
(136,313
|
)
|
(95,358
|
)
|
|||
|
Total
shareholders’ equity
|
129,710
|
232,555
|
|||||
|
TOTAL
|
$
|
2,185,234
|
$
|
1,677,431
|
|||
See
notes to consolidated financial statements.
|
CENTURY
ALUMINUM COMPANY
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
Thousands, Except Per Share Amounts)
|
||||||||||
|
NET
SALES:
|
||||||||||
|
Third-party
customers
|
$
|
1,299,035
|
$
|
961,335
|
$
|
897,538
|
||||
|
Related
parties
|
259,531
|
171,027
|
163,209
|
|||||||
|
1,558,566
|
1,132,362
|
1,060,747
|
||||||||
|
Cost
of goods sold
|
1,210,044
|
970,685
|
875,460
|
|||||||
|
Gross
profit
|
348,522
|
161,677
|
185,287
|
|||||||
|
Selling,
general and administrative expenses
|
39,363
|
34,773
|
24,916
|
|||||||
|
Operating
income
|
309,159
|
126,904
|
160,371
|
|||||||
|
Interest
expense - third party
|
(37,002
|
)
|
(25,668
|
)
|
(39,946
|
)
|
||||
|
Interest
expense - related party
|
—
|
—
|
(380
|
)
|
||||||
|
Interest
income
|
1,705
|
1,367
|
1,086
|
|||||||
|
Net
loss on forward contracts
|
(389,839
|
)
|
(309,698
|
)
|
(21,521
|
)
|
||||
|
Loss
on early extinguishment of debt
|
—
|
(835
|
)
|
(47,448
|
)
|
|||||
|
Other
income (expense) — net
|
6,898
|
275
|
(1,305
|
)
|
||||||
|
Income
(loss) before income taxes and equity in earnings of joint ventures
|
(109,079
|
)
|
(207,655
|
)
|
50,857
|
|||||
|
Income
tax benefit (expense)
|
52,041
|
80,697
|
(18,196
|
)
|
||||||
|
Income
(loss) before equity in earnings of joint ventures
|
(57,038
|
)
|
(126,958
|
)
|
32,661
|
|||||
|
Equity
in earnings of joint ventures
|
16,083
|
10,703
|
821
|
|||||||
|
Net
income (loss)
|
(40,955
|
)
|
(116,255
|
)
|
33,482
|
|||||
|
Preferred
dividends
|
—
|
—
|
(769
|
)
|
||||||
|
Net
income (loss) applicable to common shareholders
|
$
|
(40,955
|
)
|
$
|
(116,255
|
)
|
$
|
32,713
|
||
|
EARNINGS
(LOSS) PER COMMON SHARE:
|
||||||||||
|
Basic
and Diluted
|
$
|
(1.26
|
)
|
$
|
(3.62
|
)
|
$
|
1.14
|
||
See
notes to consolidated financial statements.
CENTURY
ALUMINUM COMPANY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Comprehensive
Income (Loss)
|
Convertible
Preferred Stock
|
Common
Stock
|
Additional
Paid-in Capital
|
Accumulated
Other Comprehensive Income (Loss)
|
Retained
Earnings (Deficit)
|
Total
Shareholders’ Equity
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
Balance,
December 31, 2003
|
$
|
25,000
|
$
|
211
|
$
|
173,138
|
$
|
(5,222
|
)
|
$
|
(9,258
|
)
|
$
|
183,869
|
||||||||
|
Comprehensive
income (loss) - 2004
|
||||||||||||||||||||||
|
Net
income - 2004
|
$
|
33,482
|
33,482
|
33,482
|
||||||||||||||||||
|
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
|
$
|
(13,482
|
)
|
|||||||||||||||||||
|
Dividends
on common stock
|
(42
|
)
|
(42
|
)
|
||||||||||||||||||
|
Dividends
on preferred stock
|
(3,269
|
)
|
||||||||||||||||||||