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, 2007
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number 0-27918
CENTURY
ALUMINUM COMPANY
(Exact
name of registrant as specified in its charter)
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Delaware
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13-3070826
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(State
or other jurisdiction of
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(IRS
Employer Identification No.)
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Incorporation
or organization)
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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, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filer x Accelerated
Filer ¨ Non-Accelerated
Filer ¨ Smaller
Reporting Company ¨
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 29, 2007, the approximate aggregate market value of the
common stock held by non-affiliates of the registrant was approximately
$1,588,632,000. As of January 31, 2008, 41,008,573 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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PAGE
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1
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PART
I
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Item
1
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2
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Item
1A
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13
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Item
1B
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20
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Item
2
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20
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Item
3
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20
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Item
4
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21
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PART
II
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Item
5
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23
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Item
6
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23
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Item
7
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25
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Item
7A
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35
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Item
8
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38
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Item
9
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78
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Item
9A
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78
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Item
9B
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78
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PART
III
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Item
10
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79
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Item
11
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79
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Item
12
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79
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Item
13
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79
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Item
14
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79
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PART
IV
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Item
15
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80
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85
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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.
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 and potentially our sales and marketing
costs;
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·
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Glencore
International AG (“Glencore”) 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 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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·
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Due
to volatile prices for alumina and electrical power, 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 electrical 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
electrical power as those contracts expire;
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·
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Changes
in the relative cost of certain raw materials and electrical power
compared to the price of primary aluminum could affect our
margins;
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·
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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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We
may not realize the expected benefits of our growth strategy if we are
unable to successfully integrate the businesses we acquire or
establish;
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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 and regulations
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 be able to renew or renegotiate existing long-term supply and sale
contracts on terms that are favorable to us, or at all;
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·
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Our
proposed Helguvik project and other projects could be subject to cost
over-runs and other unanticipated expenses and delays;
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·
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Operating
in foreign countries exposes us to political, regulatory, currency and
other related risks;
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Our
indebtedness reduces cash available for other purposes and limits our
ability to incur additional debt and pursue our growth
strategy;
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Our
proposed Helguvik project is subject to various conditions and risks that
may affect our ability to complete the project;
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·
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Continued
consolidation of the metals industry may limit our ability to implement
our strategic goals effectively; and
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·
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Any
further reduction in the duty on primary aluminum imports into the
European Union would further decrease our revenue at
Grundartangi.
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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.
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Overview
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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. In 2004, we acquired
Nordural, an Icelandic primary aluminum facility which became our first
production facility located outside of the United States. We produced
approximately 767,000 metric tons of primary aluminum in 2007 with net sales of
approximately $1.8 billion. Our current primary aluminum production
capacity is 785,000 metric tons per year (“mtpy”), after the completed expansion
of our Grundartangi facility to 260,000 mtpy (“Phase V expansion”) in the fourth
quarter of 2007. We are seeking approval to construct a primary
aluminum facility in Helguvik, Iceland. Our goal for this facility
is to begin operations in late 2010 with an initial production capacity of
150,000 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 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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Grundartangi
(1)
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Grundartangi,
Iceland
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1998
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260,000
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100%
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Hawesville
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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 (2)
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Mt.
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)
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Grundartangi’s
production capacity increased to 260,000 mtpy in the fourth quarter of
2007 with the completion of the Phase V expansion.
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(2)
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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.
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Our
strategic objectives are to: (i) expand our primary aluminum business
by investing in or acquiring additional capacity that offers favorable returns
and lowers our per unit production costs; (ii) further diversify our
geographic presence; and, (iii) pursue upstream opportunities in
bauxite mining, alumina refining and the production of other key raw
materials. The following table shows our primary aluminum shipment
volumes since 2001.
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 (“Grundartangi”) 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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expanding
Grundartangi’s production capacity to 260,000 mtpy of primary aluminum
(from 90,000 mtpy at the time of our
acquisition).
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Recent
Developments
Proposed
power contract for Hawesville
Hawesville’s
proposed new long-term power contract was filed with the Kentucky Public Service
Commission in late December 2007. The contract would provide all of
Hawesville’s power requirements through 2023 at cost-based
pricing. The parties involved expect the transaction to close late in
the second quarter of 2008.
Glencore
alumina agreement
In
November 2007, Glencore and Century agreed to terms for a long-term alumina
supply agreement for the period January 2010 through December 2014.
Nordural
received a positive opinion on proposed Helguvik Environmental Impact
Assessment
In
October 2007, Nordural received a positive opinion from the Icelandic Planning
Agency on the Environmental Impact Assessment for our proposed greenfield
smelter to be constructed near Helguvik, Iceland.
Transmission
Agreement signed for proposed Helguvik project
In
October 2007, Nordural Helguvik signed a transmission agreement with Landsnet to
provide an electrical power transmission system to the proposed Helguvik
smelter. Landsnet is the company responsible for operating and
managing Iceland’s transmission system.
Century
prices power for Hawesville
In
October 2007, Century acquired 22% of the 27% unpriced position of Hawesville’s
power requirements for the first six months of 2008. The power was
acquired through Kenergy from Big Rivers and Constellation Energy at fixed
prices. Approximately five percent of Hawesville’s power requirements
for the first six months of 2008 and 27% for the balance of 2008 remain
unpriced.
Alcan
metal agreement
Century
Aluminum of West Virginia, Inc.’s (“CAWV”) and Alcan signed a contract for a
long-term metal agreement through August 31, 2009.
Increase
in electrical power tariff rates in West Virginia
In May
2007, the West Virginia Public Service Commission (“PSC”) agreed on proposed
adjustments to the tariff rates paid by purchasers of electrical power from
Appalachian Power Company (“APCo”). APCo supplies all the electrical
power requirements for our Ravenswood smelter. The agreement became
effective July 1, 2007 and increased the special contract rate for CAWV by
approximately ten percent.
Equity
offering raises $414 million, net of offering costs
In June
2007, we completed a public equity offering of 8,337,500 shares of common stock,
which included the exercise of the over-allotment option of 1,087,500 shares of
common stock, at a price of $52.50 per share, raising $437.7 million before
offering costs. We sold the 8,337,500 shares of common stock in a
simultaneous offering in the United States and Iceland. Shares of
common stock offered and sold in Iceland are represented by global depositary
receipts, with one depositary receipt representing one share of common
stock. The offering costs were approximately $23.6 million,
representing underwriting discounts and commissions and offering
expenses.
Repayment
of Nordural debt
Nordural
repaid all of the principal balances associated with its senior term loan
facility, harbor loan and site loans in 2007. In June 2007, we used a
portion of the net proceeds from the equity offering to prepay $200.0 million of
principal of the Nordural senior term loan facility. The remaining
repayments were provided by available cash and cash generated from
operations.
Century
signs power contracts for the proposed Helguvik project
In June
2007, we entered into an electrical power supply agreement with Orkuveita
Reykjavikur (“OR) to supply a portion of the electrical power for the proposed
Helguvik project. The price of the electrical power provided under
the contract will be based on the LME price of primary aluminum. The
contract is subject to various conditions. With this agreement,
together with the electric power supply agreement entered into with Hitaveita
Suðurnesja hf. (“HS”) in April 2007, we have secured adequate electrical power
supplies for the initial phase of the proposed Helguvik
project. Successful completion of the proposed Helguvik project is
subject to various conditions.
EU
lowers European import duty for primary aluminum
In May
2007, the European Union (“EU”) members reduced the EU import duty for primary
aluminum from six percent to three percent and agreed to review the new duty
after three years. The decrease in the EU
import duty for primary aluminum reduces Grundartangi’s revenues and any future
decreases would lower Grundartangi’s revenues further. We do
not expect the change in the import duty to have a material effect on our
financial position or results of operations.
Century
signs memorandum of understanding with Guangxi Investment Group
Company
In June
2007, we signed a memorandum of understanding with the Guangxi Investment Group
Company to explore the feasibility of developing a high purity aluminum
reduction project and related bauxite and alumina supplies in
China.
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, carbon fiber, composites, 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. This location allows the plants to deliver a portion of
their production 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 2007,
we derived approximately 79% of our consolidated sales from our 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 18 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 each of these
customers. More information about these contracts is available under
“Primary Aluminum Sales Contracts” in Note 14 of the Consolidated Financial
Statements included herein.
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 18 to the Consolidated Financial Statements
included herein. For a description of certain risks attendant to our
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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●
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electricity
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●
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carbon
anodes
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●
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silicon
carbide
|
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●
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alumina
|
●
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cathode
blocks
|
●
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liquid
pitch
|
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●
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aluminum
fluoride
|
●
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natural
gas
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●
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calcined
petroleum coke
|
Electrical
power, alumina, carbon anodes and labor are the principal components of cost of
goods sold. These components together represented over 75 percent of
our 2007 cost of goods sold. We have long-term contracts to ensure
the future availability of many of our cost components. For a
description of certain risks attendant to our raw material supplies and labor,
see Item 1A “Risk Factors.”
Key
Long-term Supply Contracts
Alumina
Supply Agreements
A summary
of our alumina supply agreements is provided below. Grundartangi does
not have alumina supply agreements because this facility tolls alumina provided
by BHP Billiton, Hydro and Glencore.
|
Facility
|
Supplier
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Term
|
Pricing
|
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Mt.
Holly
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Glencore
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Through
January 31, 2008
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Variable,
LME-based
|
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Mt.
Holly (1)
|
Trafigura
|
Through December
31, 2013
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Variable,
LME-based
|
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Hawesville
|
Gramercy
Alumina
|
Through
December 31, 2010
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Variable,
Cost-based
|
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Ravenswood
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Glencore
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Through
December 31, 2009
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Variable,
LME-based
|
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Various
(2)
|
Glencore
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January
1, 2010 through December 31, 2014
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Variable,
LME-based
|
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(1)
|
The
alumina supply contract with Trafigura provided Century with 125,000
metric tons in 2007 and will provide 220,000 metric tons in 2008 through
2013.
|
|
(2)
|
In
November 2007, we agreed to terms for a long-term supply agreement with
Glencore.
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Electrical
Power Supply Agreements
We use
significant amounts of electricity in the aluminum production
process. In addition to the contracts listed below, we have entered
into long-term power supply agreements to supply power for the proposed Helguvik
project. These contracts, described above in “Recent Developments”,
are subject to various conditions. A summary of our long-term power
supply agreements is provided below.
|
Facility
|
Supplier
|
Term
|
Pricing
|
|
Ravenswood
(1)(2)
|
Appalachian
Power Company
|
Continuous
|
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
(3)
|
Kenergy
|
Through
December 31, 2010
|
Fixed
price through 2010
|
|
Nordural
|
Landsvirkjun
|
Through
2019
|
Variable
rate based on the LME price for primary aluminum
|
|
Nordural
(4)(5)
|
Hitaveita
Suðurnesja
|
Through
2026-2028
|
Variable
rate based on the LME price for primary aluminum
|
|
Nordural
(5)
|
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. The experimental rate design is effective through June
30, 2009.
|
|
(2)
|
This
contract contains LME-based pricing provisions that are 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 in the Consolidated Statement of
Operations.
|
|
(3)
|
Under
this contract, approximately 73% of Hawesville’s power requirements are at
fixed prices. We continuously review our options to manage the
balance, or 27%, of this power and price the remaining power when we
believe the combination of price and term is appropriate. We
are working with Big Rivers Electric Corporation (“Big Rivers”) and
Kenergy on a proposal that would restructure and extend this
contract. The proposed new long-term power contract was filed
with the Kentucky Public Service Commission in late December
2007. The contract would provide all of Hawesville’s power
requirements through 2023 at cost-based pricing. The parties
involved expect the transaction to close late in the second quarter of
2008.
|
|
(4)
|
In
April 2006, we announced an expansion of the Nordural facility from
220,000 mtpy to 260,000 mtpy which was 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.
|
|
(5)
|
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 through
2028.
|
Labor
Agreements
Our labor
costs at Ravenswood and Hawesville are subject to the terms of labor contracts
with the United Steelworkers of America (“USWA”) which generally have provisions
for annual fixed increases in hourly wages and benefits
adjustments. The five labor unions represented at Grundartangi
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
|
|
Grundartangi
|
Icelandic
labor unions
|
Through
December 31, 2009
|
|
Gramercy
|
USWA
|
Through
September 30, 2010
|
|
St.
Ann (1)
|
Jamaican
labor unions
|
Through
April 30, 2007 and December 31,
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”). Contracts with both the UAWU and the UTASP expired on
April 30, 2007 and December 31, 2007, respectively. Both sides
continue to develop their proposals with the expectation of prolonged
negotiations, which is common in Jamaica. There has been no
change in mine operations and none is expected. We expect any
contract changes will be applied retroactively to the expiration
date.
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Pricing
Our
operating results are sensitive to changes in the price of primary aluminum and
the raw materials used in its 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.
Grundartangi
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. Grundartangi's revenues are
subject to market price risk associated with the LME price for primary aluminum;
however, because it produces primary aluminum under a tolling arrangement,
Grundartangi is not directly exposed to fluctuations in the price for
alumina. Grundartangi purchases power under its current power
contract 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, Grundartangi is partially hedged against downswings
in the market for primary aluminum; however, this hedge also limits
Grundartangi's upside as the LME price increases. Grundartangi’s
tolling revenues include a premium based on the EU import duty for primary
aluminum. In May 2007, the EU members reduced the import duty for
primary aluminum from six percent to three percent and agreed to review the new
duty after three years. This decrease in the EU import duty for
primary aluminum negatively impacted Grundartangi’s revenues and further
decreases would also have a negative impact on Grundartangi’s
revenues.
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Primary
Aluminum Facilities
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Grundartangi
The
Grundartangi facility located in Grundartangi, Iceland, is owned and operated by
our subsidiary, Nordural ehf. Grundartangi is our most modern and
lowest cost facility. Operations began in 1998 and production
capacity was expanded in 2001, 2006 and 2007. The facility has a
production capacity of 260,000 mtpy.
Grundartangi
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.
Recently Completed Expansion
Projects. Since our acquisition of Nordural in 2004, we have completed
two major expansion projects at the Grundartangi facility. In late
2006, we completed the expansion of the Grundartangi facility from a production
capacity of 90,000 mtpy to 220,000 mtpy at a total cost of approximately $483
million. In the fourth quarter of 2007, we completed a further
expansion to 260,000 mtpy of production capacity at an estimated total cost of
$131 million.
Tolling
Agreements. Grundartangi has long-term tolling agreements for
all of its production capacity with BHP Billiton, Glencore and
Hydro. The tolling counterparties provide alumina and receive primary
aluminum in return for tolling fees that are based on the LME price of primary
aluminum. See Note 14 in the Consolidated Financial Statements for
more information about these agreements.
Power.
Grundartangi purchases power from Landsvirkjun (a power
company jointly owned by the Republic of Iceland and two Icelandic municipal
governments), HS and OR under long-term contracts due to expire in 2019, 2026
and 2028. The power delivered to Grundartangi is priced at a rate based on the
LME price for primary aluminum and is produced from hydroelectric and geothermal
sources. Landsvirkjun is also delivering power on an interim basis
for the Phase V expansion capacity until late 2008, when OR is expected to be
the primary provider of electrical power for this capacity.
Employees. Our
employees at Grundartangi 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 purchased 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”) our
50% joint venture company, 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 substantially all of its power from Kenergy Corp. (“Kenergy”), a
retail electric member cooperative of the Big Rivers Electrical Corporation
(“Big Rivers”), under a power supply contract that expires at the end of
2010. Under this contract, approximately 73% of this power is at
fixed prices. We continuously review our options to manage the
balance, or 27% (126 MW), of this power and price the remaining power when we
believe the combination of price and term are appropriate. In October
2007, Century acquired 22% of the 27% unpriced position of the power
requirements for Hawesville for the first six months of 2008. The
power was acquired through Kenergy from Big Rivers and Constellation Energy at
fixed prices. Approximately five percent of Hawesville’s power
requirements for the first
six months of 2008 and 27% for the balance of 2008 remain
unpriced. Hawesville has unpriced power requirements of 126 MW or 27%
of its power requirements from mid-2008 through 2010.
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
through 2023. Hawesville’s proposed new long-term power contract was
filed with the Kentucky Public Service Commission in late December
2007. The contract would provide all of Hawesville’s power
requirements through 2023 at cost-based pricing. The parties involved
expect the transaction to close late in the second quarter of 2008.
Employees. The
bargaining unit employees at Hawesville are represented by the
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 a 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 new supply contract with Alcan under which
Alcan purchases 19 million pounds (approximately 8,600 metric tons) per month of
molten aluminum through December 31, 2008 and 14 million pounds (approximately
6,350 metric tons) per month of molten aluminum produced at Ravenswood through
August 30, 2009 (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 a total of 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 (“APCo”) supplies all of Ravenswood’s power
requirements. Power delivered under the supply agreement is as set
forth in published tariffs. Ravenswood may terminate the agreement by
providing 12 months notice of termination. 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.
In May
2007, the West Virginia Public Service Commission (“PSC”) agreed on proposed
adjustments to the tariff rates paid by purchasers of electrical power from
APCo. APCo supplies all the electrical power requirements for the
Ravenswood facility. APCo requested an increase in the tariff rate
established in July 2006 for pollution control additions and higher than
anticipated fuel, purchased power and capacity charges. The agreement
became effective July 1, 2007 and increased the special contract rate for
Ravenswood by approximately ten percent.
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 “Primary
Aluminum Sales Contracts” in Note 14 of the Consolidated Financial Statements
included herein.
Alumina. Substantially
all of our alumina requirements for Mt. Holly will be provided by Trafigura AG
under an agreement that extends through 2013. The pricing for alumina
under our contract with Trafigura 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 (“Santee Cooper”) under a contract that runs through 2015. Power
delivered through 2010 will be priced at rates fixed under currently published
schedules, subject to adjustments to cover Santee Cooper’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.
Proposed
Helguvik project (expected to be operational in late 2010)
The
proposed Helguvik smelter would be located approximately 30 miles from the city
of Reykjavik and would be operated through our Nordural ehf subsidiary. This
site provides a flat location and existing harbor, as well as proximity to the
capital and other industry.
The first
phase of construction which corresponds with a production capacity of at least
150,000 mtpy is currently being planned based on the expectation that power
would be available beginning in late 2010 for startup of production. Additional
power is expected to become available not later than 2015 which would allow us
to increase the proposed Helguvik project’s capacity to approximately 250,000
mtpy. The smelter will use AP36 technology which is capable of
supporting a single potline with a production capacity of 360,000 mtpy. Successful completion
of the proposed Helguvik project is subject to various conditions and
approvals.
Power Supply
Agreements. In April 2007 and June 2007, Nordural signed
electrical power supply agreements with HS and OR, respectively, for the
proposed Helguvik smelter. Under the agreements, power will be
supplied to the proposed Helguvik facility in stages, beginning with an initial
phase of up to 250 megawatts (“MW”), which will support production capacity of
about 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 to begin in late 2010. The agreements provide
for a total of 435 MW, which will ultimately provide power for a 250,000 mtpy
facility. The agreements are subject to the satisfaction of certain
conditions.
Site and other
agreements. To date, we have signed a site agreement and a
harbor agreement.
Environmental Impact
Assessment. In
October 2007, Nordural received a positive opinion from the Icelandic Planning
Agency on the Environmental Impact Assessment (“EIA”) for the proposed Helguvik
smelter.
Transmission Agreement. In
October 2007, Nordural Helguvik signed a transmission agreement with Landsnet to
provide an electrical power transmission system to the proposed Helguvik
smelter. Landsnet is the company responsible for operating and
managing Iceland’s transmission system.
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Joint
Venture Facilities
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Gramercy
Alumina LLC (“GAL”)
The
alumina refinery in Gramercy, owned by GAL, is equally owned by Century and a
joint venture partner. Gramercy 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.
Alumina
Operations. The Gramercy refinery has an annual rated capacity
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 short-term and
long-term contracts with approximately twenty third-party
customers.
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 agreements with
local suppliers.
St.
Ann Bauxite Limited (“SABL”)
SABL,
which owns bauxite mining operations, is equally owned by Century and a joint
venture partner. 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 2008. 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 its customers with
sufficient reserves to meet their annual alumina requirements.
Under the
mining rights, GOJ has granted SABL 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, 2007, SABL’s reclamation obligations
amounted to approximately $8.0 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 Sherwin Alumina Company, which is
owned by Glencore, a related party.
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.
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Environmental
Matters
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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 13 to the Consolidated Financial Statements
included herein.
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Intellectual
Property
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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.
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Employees
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We employ
a work force of approximately 1,900 employees.
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Available
Information
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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 aluminum prices which are currently near historical
highs.
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
factors and other conditions. Historically, aluminum prices have been volatile
and we expect such volatility to continue. Currently, we are
experiencing favorable global economic conditions and continued strong demand in
China and other developing regions. Although we use contractual arrangements to
manage our exposure to fluctuations in the commodity price, a decline in primary
aluminum prices would reduce our earnings and cash flows. Any significant
downturn in prices for primary aluminum would 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 facilities.
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 these increased prices. More
information about Century's market risks is available in Item 7A, “Quantitative
and Qualitative Disclosures About Market Risk.”
We
sell molten aluminum to the major customers of Ravenswood and Hawesville; the
loss of one of these major customers would increase our production costs at
those facilities and could increase our sales and marketing costs.
Approximately
45% of our consolidated net sales for 2007 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’ freight and remelting costs and reducing
our sales and marketing costs. Century has contracts with Alcan and Southwire
which are due to expire in August 2009 and March 2011,
respectively. 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 would incur higher casting and shipping costs and potentially higher sales
and marketing 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. Prior to our initial public offering in April 1996, we
were an indirect, wholly-owned subsidiary of Glencore. As of January
31, 2008, Glencore owned approximately 28.5% of our outstanding common
stock. 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
would 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. We maintain property
and business interruption insurance to mitigate losses resulting from
catastrophic events, but are 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 Ravenswood and Mt. Holly at prices based on the LME
price for primary aluminum. Gramercy supplies substantially all of
the alumina used at Hawesville at prices based on Gramercy’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 and energy costs used in the production of alumina, such as
natural gas, are high.
Changes
or disruptions to our current alumina and other raw material supply arrangements
could increase our raw material costs.
We depend
on a limited number of suppliers for alumina. 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 operation in St. Ann, Jamaica supplies all of the bauxite used in
the production of alumina at Gramercy. If there is a significant disruption of
St. Ann bauxite shipments in the future, Gramercy could incur additional costs
if it is required to use bauxite from other sources. Production shortfalls at
Gramercy during 2007 required spot purchases of alumina to support Hawesville’s
operations which increased our cost of goods sold in 2007.
Our
business also depends upon the adequate supply of other raw materials, including
caustic soda, aluminum fluoride, calcined petroleum coke, pitch, finished carbon
anodes and cathodes, at competitive prices. Although there remain multiple
sources for these raw materials worldwide, consolidation among suppliers has
globally 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 comparable 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, calcined petroleum coke, pitch, and cathodes.
Because we sell our products based on the LME price for primary aluminum, we
cannot pass on increased costs to our customers. Although we attempt to mitigate
the effects of price fluctuations through the use of various fixed-price
commitments and financial instruments and by pricing some of our raw materials
and energy contracts based on LME prices, 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. 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. We purchase virtually all of our electricity for our U.S. facilities
under fixed-price contracts. 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. Approximately five percent of Hawesville’s power
requirements for the first six months of 2008 and 27% for the balance of 2008
through 2010 remain unpriced. The profitability of Hawesville could
be adversely affected if we are unable to obtain power for the unpriced portions
of Hawesville’s power requirements at economic rates. We are working with a
local power company on a proposal that would restructure and extend Hawesville’s
existing power supply contract through 2023. If we are not successful
in replacing such power requirements, 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. At Ravenswood, power prices have
some variability based upon the LME price for primary aluminum and are subject
to possible adjustments in the published tariff. An agreement was
reached in a tariff rate case pending before the West Virginia Public Service
Commission, or PSC, which increased the special contract rate for Ravenswood by
approximately 10% effective July 1, 2007. Other possible future rate
cases could lead to a further increase in the price that Ravenswood pays for
electricity and thereby decrease profit margins.
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 Ravenswood and Hawesville and at the Gramercy
refinery are represented by the USWA. Century’s USWA labor contracts
at Ravenswood, Hawesville and the labor contract at Gramercy expire in May 2009,
March 2010 and September 2010, respectively. Our bargaining unit
employees at Grundartangi are represented by five unions under a collective
bargaining agreement that expires on December 31, 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. 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 effect on our financial results.
We
are subject to a variety of environmental laws and regulations 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 the United
States, Iceland, the EU 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
facilities or for the amelioration of damage to natural resources.
We, along
with others, including current and former owners of a facility on St. Croix in
the Virgin Islands, formerly owned by a subsidiary of ours, have been sued for
alleged natural resources damages at the facility. In addition, in December
2006, Century and the company that purchased the assets of our St. Croix
facility in 1995 were sued by the Commissioner of the U.S. Virgin Islands
Department of Planning and Natural Resources alleging our failure to take
certain actions specified in a Virgin Islands Coastal Zone management permit
issued to our subsidiary, Virgin Island Alumina Corporation LLC, in October
1994. In July 2006, Century was named as a defendant together with
certain affiliates of Alcan Inc. in a lawsuit brought by Alcoa Inc. seeking to
determine responsibility for certain environmental indemnity obligations related
to the sale of a cast aluminum plate manufacturing facility located in Vernon,
California, which we purchased from Alcoa Inc. in December 1998, and sold to
Alcan Rolled Products-Ravenswood LLC in July 1999. Our known liabilities with
respect to these and other matters relating to environmental 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 alleged, 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 -- Environmental Contingencies” and Note 13 to our consolidated
financial statements herein for additional information regarding our
environmental matters and associated costs and risks.
Acquisitions
may present difficulties.
We have a
history of making acquisitions and we expect to make 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 past or future acquisitions might not ultimately improve our competitive
position and business prospects as anticipated.
International
operations expose us to political, regulatory, currency and other related
risks.
Grundartangi,
in Iceland, was our first facility located outside of the United States and it
represents approximately 33% of our overall primary aluminum production
capacity. In addition, we intend to construct an aluminum smelter
near Helguvik, Iceland. The St. Ann bauxite operations related to the
Gramercy plant are located in Jamaica. International operations
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. 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. As we continue to explore other
opportunities outside the U.S. and construct the proposed Helguvik facility, our
currency risk with respect to the Icelandic krona and other foreign currencies
will significantly increase.
The
influence of China may negatively impact our results in the event of a slowdown
in consumption.
The
Chinese market has become a significant source of global demand for primary
aluminum. China now represents in excess of 25 percent of aluminum demand.
China’s demand for aluminum has more than doubled in the last five years.
Consequently, in response to its increased demand for commodities, China is
increasingly seeking self-sufficiency in key commodities, including investments
in additional developments in other countries. These investments may impact
future demand and supply balances and prices.
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, certain
of our historical financial data do not reflect the effects of:
|
•
|
the
130,000 mtpy expansion capacity of Grundartangi that was completed in the
fourth quarter of 2006; and
|
|
•
|
the
40,000 mtpy expansion capacity of Grundartangi that was completed in the
fourth quarter of 2007.
|
Our
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 had an
aggregate of approximately $432.8 million of outstanding indebtedness as of
December 31, 2007. In addition, we could borrow additional amounts
under our $100 million credit facility, and we expect to incur additional
indebtedness to finance the proposed Helguvik project. 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;
and
|
|
•
|
limiting
our flexibility in planning for, or reacting to, competitive and other
changes in our business and the industry in which we
operate.
|
We will
be required to settle in cash up to the principal amount of our $175 million
convertible notes (which are convertible by the holder at any time) upon
conversion, which could increase our debt service obligations. In addition to
our indebtedness, we have liabilities and other obligations which could reduce
cash available for other purposes and could limit our ability to pursue our
growth strategy. More information about our liquidity and debt service
obligations is set forth under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity and Capital Resources”
included herein.
We are
also exposed to risks of interest rate increases. Our industrial
revenue bonds (“IRBs”) and any borrowings on our credit facility would be at
variable interest rates. Future borrowing required to fund the
construction of the proposed Helguvik facility may be at variable
rates. An increase in the interest rates would increase our debt
service obligations under these instruments, further limiting cash flow
available for other uses.
Our
ability to pay interest and to repay or refinance our indebtedness, including
our senior unsecured notes and convertible notes and to satisfy other
commitments, 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 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 would 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.” 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.
Further
consolidation within the metals industry 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 metals
industry.
The
proposed Helguvik project is subject to certain conditions and risks.
We intend
to use the net proceeds from our June 2007 equity offering primarily as part of
the funding for the construction of a greenfield aluminum smelter near Helguvik,
Iceland. In June 2007, we used a portion of the net proceeds from the
equity offering to prepay $200 million of principal of the Nordural senior term
loan facility, which is expected to increase our borrowing capacity to secure
financing for the Helguvik project. This project is subject to
various Icelandic regulatory and other approvals and conditions. Recently, there
has been increasing opposition among some voters in Iceland to the construction
of new aluminum smelters and the further development of heavy industry in
general. There can be no assurance that we will receive the necessary
approvals to proceed with construction of our proposed Helguvik smelter, on a
timely basis or at all. In addition, such approvals as we do receive
may be subject to conditions that are unfavorable or make the project
impracticable or less attractive from a financial standpoint. Even if we receive
necessary approvals on terms that we determine are acceptable, the construction
of this project is a complex undertaking. There can be no assurance that we will
be able to complete the project within our projected budget and schedule. In
addition, unforeseen technical difficulties could increase the cost of the
project, delay the project or render the
project not feasible. Any delay in the completion of the project or increased
costs could have a material negative impact on our financial performance and
future prospects. To successfully execute this project, we will also need to
arrange additional financing and either enter into tolling arrangements or
secure a supply of alumina.
If
we are unable to procure a reliable source of power, the proposed Helguvik
project would not be feasible.
Our
proposed greenfield smelter near Helguvik, Iceland will require generation and
transmission of geothermally-generated electricity to power the
smelter. Our wholly-owned Iceland subsidiary, Nordural Helguvik sf,
has entered into agreements with two providers of geothermal power in Iceland
for a substantial portion of this power. These two power company agreements are
subject to certain conditions, some of which are not expected to be satisfied
until the fourth quarter of 2008. These conditions include approvals by the
boards of directors of the power companies, as well as environmental agency
approvals. Generation of the electrical power contracted for the proposed
Helguvik smelter will require successful development of new geothermal energy
sources within designated areas in Iceland. If there are construction delays or
technical difficulties in developing these new geothermal fields, power may be
delayed or may not be available. Factors which could delay or impede the
generation and delivery of electric power are substantially beyond our ability
to control, influence or predict. In October 2007, Nordural Helguvik
signed a transmission agreement with Landsnet to provide an electrical power
transmission system to the proposed Helguvik smelter.
Reductions
in the duty on primary aluminum imports into the European Union decrease our
revenues at Grundartangi.
Grundartangi’s
tolling revenues include a premium based on the EU import duty for primary
aluminum. In May 2007, the EU members reduced the import duty for primary
aluminum from six percent to three percent and agreed to review the new duty
after three years. This decrease in the EU import duty for primary
aluminum negatively impacts Grundartangi’s revenues and further decreases would
also have a negative impact on Grundartangi’s revenues.
We
depend upon intercompany transfers 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 intercompany transfers from our
subsidiaries. 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 intercompany transfers 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 has fluctuated 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 15, 2008, the intra-day sales price of our common stock
on NASDAQ ranged from $26.14 to $67.85 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, including with respect to our major
competitors, 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
them 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 in 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 in
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 in control.
This
list of significant risk factors is not all-inclusive or necessarily in order of
importance.
We have
no unresolved comments from the staff of the Securities and Exchange
Commission.
We own
the property on which our Hawesville and Ravenswood facilities are
located. The site on which the Grundartangi facility is situated is
leased from the Government of Iceland under a long-term lease that runs through
2020, renewable at our option. The site for our proposed Helguvik
greenfield project is leased from Reykjaneshofn, an independent public authority
owned by the Municipality of Reykjanesbaer, under a long-term lease expected to
run through 2060, with an automatic extension provision. 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 and a 49.7%
undivided interest in the property on which 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
13 to the Consolidated Financial Statements included herein.
No
matters were submitted to a vote of our security holders during the fourth
quarter of 2007.
|
|
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, 2008.
|
Name
|
Age
|
Position
and Duration
|
|
Logan
W. Kruger
|
57
|
President
and Chief Executive Officer since December 2005.
|
|
Michael
A. Bless
|
42
|
Executive
Vice President and Chief Financial Officer since January
2006.
|
|
Wayne
R. Hale
|
52
|
Executive
Vice President and Chief Operating Officer since March
2007.
|
|
Robert
R. Nielsen
|
63
|
Executive
Vice President, General Counsel and Secretary since May
2006.
|
|
Steve
Schneider
|
52
|
Senior
Vice President, Chief Accounting Officer and Controller since June 2006,
Vice President and Corporate Controller from April 2002 through May 2006;
Corporate Controller since April 2001.
|
|
Giulio
Casello
|
48
|
Senior
Vice President of Business Development since April 2007, Vice President of
Bauxite and Alumina Operations from December 2005 through May 2006 and
Vice President of Century Alumina, Inc. from September 2005 to December
2005.
|
|
Michelle
M. Lair
|
32
|
Vice
President and Treasurer since February 2007, Treasurer since June 2006,
Assistant Treasurer from November 2005 to June 2006, and Corporate
Financial Analyst from May 2000 to October 2005.
|
|
William
J. Leatherberry
|
37
|
Vice
President, Assistant General Counsel and Assistant Secretary since January
2008. Assistant General Counsel and Assistant Secretary since
July 2007, Assistant Secretary since May 2007 and Corporate Counsel since
January 2005.
|
|
Jerry
E. Reed
|
44
|
Vice
President of Business Development since June
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. 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.
Prior to
joining Century, Mr. Hale served as Senior Vice President of Sual-Holding from
April 2004 to February 2007; held various senior management positions with
Kennecott Utah Copper Corporation from April 2000 to April 2004, including Chief
Operating Officer from April 2002 to April 2004.
Prior to
joining Century, Mr. Nielsen served as Senior 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. 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.
Prior to
joining Century, Mr. Leatherberry served as Senior Transactions Counsel of
VarTec Telecom Inc. from September 2003 to January 2005 and Associate with the
law firm of Jones Day from May 1996 to September 2003.
Prior to
joining Century, Mr. Reed served as Strategic Marketing Director for Alcoa
Primary Products from July 2004 to May 2007, and various senior management
positions for Alcoa, including Commercial Manager for Alcoa Australia and
Alumina Market Manager for Alcoa World Alumina from 2001 through
2004.
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 $67.85 on July 13, 2007 and closed at $62.84 on February 15,
2008.
|
Year
|
2007
|
2006
|
||||||||||||||
|
High
sales price
|
Low
sales price
|
High
sales price
|
Low
sales price
|
|||||||||||||
|
First
quarter
|
$ | 49.83 | $ | 38.65 | $ | 44.50 | $ | 26.14 | ||||||||
|
Second
quarter
|
$ | 58.60 | $ | 46.66 | $ | 56.57 | $ | 31.28 | ||||||||
|
Third
quarter
|
$ | 67.85 | $ | 40.00 | $ | 39.16 | $ | 29.60 | ||||||||
|
Fourth
quarter
|
$ | 59.40 | $ | 49.38 | $ | 47.34 | $ | 30.31 | ||||||||
Holders
As of
January 31, 2008, there were 18 holders of record of our common stock, which
does not include the much larger number of beneficial owners whose common stock
was held in street name.
Dividend
Information
We did
not declare dividends in 2007 or 2006 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. Additional
information about the terms of our long-term borrowing agreements is available
at Note 6 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, 2007 and 2006 and the selected
consolidated statement of operations data for each of the years ended December
31, 2007, 2006 and 2005 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, 2005, 2004 and 2003 and the selected consolidated statement of
operations data for each of the years ended December 31, 2004 and 2003 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;
|
|
·
|
the
results of operations from our 130,000 mtpy expansion of Grundartangi
which became operational in the fourth quarter of 2006;
and
|
|
·
|
the
results of operations from our 40,000 mtpy expansion of Grundartangi which
became operational in the fourth quarter of
2007.
|
Our
results for these periods and prior periods are not fully comparable to our
results of operations for fiscal year 2007 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,
|
||||||||||||||||||||
|
2007(1)
|
2006
(2)
|
2005
(3)
|
2004
(4)
|
2003
(5)
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,798,163 | $ | 1,558,566 | $ | 1,132,362 | $ | 1,060,747 | $ | 782,479 | ||||||||||
|
Gross
profit
|
363,463 | 348,522 | 161,677 | 185,287 | 43,370 | |||||||||||||||
|
Operating
income
|
303,543 | 309,159 | 126,904 | 160,371 | 22,537 | |||||||||||||||
|
Income
(loss) before cumulative effect of change in accounting
principle
|
(101,249 | ) | (40,955 | ) | (116,255 | ) | 33,482 | 3,922 | ||||||||||||
|
Net
income (loss)
|
(101,249 | ) | (40,955 | ) | (116,255 | ) | 33,482 | (1,956 | ) | |||||||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
and Diluted:
|
||||||||||||||||||||
|
Income
(loss) before cumulative effect of change in accounting
principle
|
$ | (2.72 | ) | $ | (1.26 | ) | $ | (3.62 | ) | $ | 1.14 | $ | 0.09 | |||||||
|
Cumulative
effect of change in accounting principle
|
-- | -- | -- | -- | (0.28 | ) | ||||||||||||||
|
Net
income (loss) per share
|
$ | (2.72 | ) | $ | (1.26 | ) | $ | (3.62 | ) | $ | 1.14 | $ | (0.19 | ) | ||||||
|
Dividends
per common share
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
|
Total
assets
|
$ | 2,578,271 | $ | 2,185,234 | $ | 1,677,431 | $ | 1,332,553 | $ | 804,242 | ||||||||||
|
Total
debt (6)
|
432,815 | 772,251 | 671,901 | 524,108 | 344,125 | |||||||||||||||
|
Long-term
debt obligations (7)
|
250,000 | 559,331 | 488,505 | 330,711 | 336,310 | |||||||||||||||
|
Other
information:
|
||||||||||||||||||||
|
Shipments
– Primary aluminum:
|
||||||||||||||||||||
|
Direct
shipment pounds (000)
|
1,171,889 | 1,152,617 | 1,153,731 | 1,179,824 | 1,126,542 | |||||||||||||||
|
Toll
shipment pounds (000)
|
518,945 | 346,390 | 203,967 | 138,239 | -- | |||||||||||||||
|
Average
realized price per pound:
|
||||||||||||||||||||
|
Direct
shipments
|
$ | 1.13 | $ | 1.09 | $ | 0.86 | $ | 0.83 | $ | 0.69 | ||||||||||
|
Toll
shipments
|
$ | 0.91 | $ | 0.88 | $ | 0.67 | $ | 0.62 |
|
-- | ||||||||||
|
Average
LME price per pound
|
$ | 1.197 | $ | 1.166 | $ | 0.861 | $ | 0.778 | $ | 0.649 | ||||||||||
|
Average
Midwest premium per pound
|
$ | 0.031 | $ | 0.055 | $ | 0.056 | $ | 0.068 | $ | 0.037 | ||||||||||
| (1) |
Income
(loss) before cumulative effect of change in accounting principle and net
income (loss) include an after-tax charge of $328.3 million, or $8.83 per
basic share for mark-to-market losses on forward contracts that do not
qualify for cash flow hedge accounting.
|
||
| (2) |
Income
(loss) before cumulative effect of change in accounting principle and net
income (loss) include an after-tax charge of $241.7 million, or $7.46 per
basic 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.
|
||
| (3) |
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
basic share for mark-to-market losses on forward contracts that do not
qualify for cash flow hedge accounting.
|
||
| (4) |
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
basic share for a loss on early extinguishment of debt.
|
||
| (5) |
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.
|
||
| (6) |
Total
debt includes all long-term debt obligations and any debt classified as
short-term obligations, including, current portion of long-term debt, the
IRBs and the 1.75% convertible senior notes.
|
||
| (7) |
Long-term
debt obligations are all payment obligations under long-term borrowing
arrangements, excluding the current portion of long-term
debt.
|
|
|
The
following discussion reflects our historical results of operations, which
do not include results from:
|
|
·
|
the
130,000 mtpy expansion capacity of Grundartangi until it was completed in
the fourth quarter of 2006; and
|
|
·
|
the
40,000 mtpy expansion of Grundartangi until it was completed in the fourth
quarter of 2007.
|
Accordingly,
the results for fiscal years 2006 and 2005 are not fully comparable to the
results of operations for fiscal year 2007. 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 price of primary aluminum and is
influenced by regional premiums and fixed price sales
contracts.
|
|
|
·
|
Our
facilities operate at or near capacity, and fluctuations in volume, other
than through acquisitions or expansion, generally are
small.
|
|
|
·
|
The
principal components of cost of goods sold are alumina, electrical power,
labor and carbon products, which in aggregate were in excess of 75% of the
2007 cost of goods sold. Many of these costs are covered by
long-term contracts.
|
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. Our 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 from major customers and
disbursements to our suppliers.
Cost of
goods sold, excluding alumina and certain energy costs, is expected to remain
relatively stable because our facilities generally operate near capacity and our
major cost drivers are subject to 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, based
on LME prices. Power contracts for our U.S. facilities primarily
provide for fixed priced power through 2010, subject to possible adjustments for
fuel costs in Mt. Holly and adjustments in tariff rates in
Ravenswood. Power contract pricing for Nordural is variable and based
on LME prices.
Approximately
27% of Hawesville’s power requirements (126 MW) are unpriced beginning in
mid-2008 through 2010. We have negotiated short-term contracts to
cover most of this requirement through the first half of 2008 at approximately
market prices. 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 mid-2008 through
2023. The proposed new long-term power contract was filed with the
Kentucky Public Service Commission in late December 2007. The
contract would provide all of Hawesville’s power requirements through 2023 at
cost-based pricing. The parties involved expect the transaction to
close late in the second quarter of 2008. We expect power rates for
the 27% of Hawesville’s requirements not covered by long-term contracts to be
higher than those under our current long-term power contracts.
|
|
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.
|
|
Percentage
of Net Sales
|
|||||||||||
|
|
2007
|
2006
|
2005
|
|||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of goods sold
|
(79.8 | ) | (77.6 | ) | (85.7 | ) | ||||||
|
Gross
profit
|
20.2 | 22.4 | 14.3 | |||||||||
|
Selling,
general and administrative expenses
|
(3.3 | ) | (2.5 | ) | (3.1 | ) | ||||||
|
Operating
income
|
16.9 | 19.9 | 11.2 | |||||||||
|
Interest
expense
|
(1.8 | ) | (2.4 | ) | (2.3 | ) | ||||||
|
Interest
income
|
0.6 | 0.1 | 0.1 | |||||||||
|
Loss
on early extinguishment of debt
|
(0.2 | ) | — | (0.1 | ) | |||||||
|
Other
income (expense) - net
|
— | 0.4 | — | |||||||||
|
Net
loss on forward contracts
|
(28.3 | ) | (25.0 | ) | (27.2 | ) | ||||||
|
Loss
before income taxes and equity in earnings of joint
ventures
|
(12.8 | ) | (7.0 | ) | (18.3 | ) | ||||||
|
Income
tax benefit
|
6.3 | 3.3 | 7.1 | |||||||||
|
Loss
before equity in earnings of joint ventures
|
(6.5 | ) | (3.7 | ) | (11.2 | ) | ||||||
|
Equity
in earnings of joint ventures
|
0.9 | 1.1 | 0.9 | |||||||||
|
Net
loss
|
(5.6 | )% | (2.6 | )% | (10.3 | )% | ||||||
The
following table sets forth, for the periods indicated, the shipment volumes and
the average sales price per pound shipped:
|
Primary
Aluminum
|
|||
|
Direct
(1)
|
|||
|
Metric
tons
|
Pounds
(000)
|
$/pound
|
|
|
2007
|
531,561
|
1,171,889
|
$1.13
|
|
2006
|
522,819
|
1,152,617
|
$1.09
|
|
2005
|
523,324
|
1,153,731
|
$0.86
|
|
|
Toll
(2)
|
||
|
Metric
tons
|
Pounds
(000)
|
$/pound
|
|
|
2007
|
235,390
|
518,945
|
$0.91
|
|
2006
|
157,120
|
346,390
|
$0.88
|
| 2005 | 92,518 | 203,966 | $0.67 |
| (1) |
Direct
shipments do not include toll shipments from
Grundartangi.
|
||
| (2) |
Grundartangi
expansion capacity start-up began in February 2006. Annual
production of 220,000 mtpy was reached in the fourth quarter of
2006. Annual production of 260,000 mtpy was reached in the
fourth quarter of 2007.
|
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net sales: Net
sales for the year ended December 31, 2007 increased $239.6 million to $1,798.2
million. Higher price realizations for primary aluminum in the year
ended December 31, 2007, due to improved LME prices for primary aluminum,
contributed $67.1 million to the sales increase. Additional net sales
volume contributed $172.5 million to the sales increase. Direct
shipments increased 19.3 million pounds from the same period in 2006, primarily
due to the temporary shutdown of a potline in August 2006, and toll shipments
increased 21.8 million pounds from the same period in 2006 due to the
Grundartangi expansion capacity that has come on-stream since September
2006.
Gross Profit: For
the year ended December 31, 2007, gross profit increased $14.9 million to $363.4
million. Improved price realizations, net of LME-based alumina and
LME-based power contract cost increases, improved gross profit by $13.1
million. Increased shipment volume contributed $60.0 million in
additional gross profit. Partially offsetting these gains were $58.2
million in net cost increases comprised of: increased power costs at
our U.S. smelters, $14.0 million; increased costs for maintenance, supplies and
materials, $18.2 million; increased costs for our non-LME-based alumina, $11.0
million; increased net amortization and depreciation charges, primarily at
Grundartangi, $8.8 million; and other cost increases, $6.2 million.
Selling, general and administrative
expenses: Selling, general and administrative expenses for the
year ended December 31, 2007 increased $20.6 million to $59.9
million. Approximately 55% of the increase is due to spending on the
proposed Helguvik project, and the reminder of the increase is due primarily to
compensation related expenses, outside professional support and expenses
incurred for business development activities.
Interest
expense: Interest expense for the year ended December 31, 2007
decreased $4.1 million to $32.9 million. The decrease in interest expense is due
to the retirement of Nordural’s outstanding debt in 2007 and offset by lower
interest capitalized on the Grundartangi expansion during 2007.
Interest
income: Interest income for the year ended December 31, 2007
increased by $9.1 million to $10.8 million. The increased interest
income is a result of higher average cash and short-term investment balances
during 2007 due to proceeds of the equity offering, improved operating results
and reduced investing activities for the Nordural expansion, offset by the
repayment of Nordural’s outstanding debt.
Net loss on forward
contracts: For the year ended December 31, 2007, the net loss
on forward contracts was $508.9 million compared to a net loss on forward
contracts of $389.8 million for 2006. The losses reported for the years ended
December 31, 2007 and 2006 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 settlement of
financial sales contracts that do not qualify for cash flow hedge treatment
accounted for $98.3 million of the 2007 net loss and accounted for $54.2 million
of the 2006 net loss. The remaining $411.0 million in net loss for
2007 are unrealized losses related to our outstanding financial sales contracts
that do not qualify for cash flow hedge accounting that are due for settlement
in 2008 through 2015, offset by a $0.4 million gain for non-cash settlements of
physical delivery sales contracts that are accounted for as derivatives and
marked-to-market.
Tax provision: The
changes in the income tax provision were a result of changes in the level of
earnings and losses within the various tax jurisdictions in which we operate,
changes in the current year’s effective tax rate and a change in the West
Virginia tax law. We recorded a tax benefit of $8.3 million in 2007
to increase the carrying amount of deferred tax assets as a result of the West
Virginia tax law change.
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
Grundartangi 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 Grundartangi 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: Interest expense for the year ended December 31, 2006
increased $11.3 million to $35.3 million. The increase in interest
expense is due to higher debt at Nordural.
Net 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
ventures: Equity in earnings from the Gramercy and SABL
investments improved to $16.1 million for the year ended December 31, 2006 and
$10.7 million in 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. 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 capital and 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,
settlement of our primary aluminum financial sales contracts, payments of
principal and interest on our outstanding debt, the funding of capital
expenditures and investments in related businesses, working capital and other
general corporate requirements.
Our
management believes the presentation of free cash flow is a useful measure that
helps investors evaluate our capacity to fund ongoing cash operating
requirements, including capital expenditures and debt service obligations, and
to make acquisitions or other investments. We define free cash flow
as net cash (used in) provided by operating activities less capital expenditures
(other than capital expenditures related to the expansion of Grundartangi) and
including the net increase in short term investments due to their
liquidity. Our calculation of free cash flow may not be comparable to
similarly titled measures reported by other companies due to differences in the
components used in its calculation. A reconciliation of free cash
flow to cash flow from operating activities, which is the most directly
comparable generally accepted accounting principles in the United States
(“GAAP”) financial measure is provided below. Free cash flow should
not be considered as a substitute for cash flows from operating activities as
determined in accordance with GAAP.
|
Reconciliation
of Cash Flow from Operations to Free Cash Flow
|
||||||||||||
|
Year
ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (5,755 | ) | $ | 185,353 | $ | 134,936 | |||||
|
Increase
in short-term investments – net
|
280,169 | -- | -- | |||||||||
|
Purchase
of property, plant and equipment (1)
|
(24,240 | ) | (23,602 | ) | (18,027 | ) | ||||||
|
Free
Cash Flow
|
$ | 250,174 | $ | 161,751 | $ | 116,909 | ||||||
| (1 | ) |
Excludes
capital expenditures for the Grundartangi expansion.
|
As of
December 31, 2007, we had a borrowing availability of $97.4 million under our
revolving credit facility. We could issue up to a maximum of $25.0
million in letters of credit under the revolving credit facility. Any
outstanding letters of credit reduce our borrowing availability on a dollar for
dollar basis. We have issued letters of credit totaling $2.6 million
and had no other outstanding borrowings under the revolving credit facility as
of December 31, 2007.
As of
December 31, 2007, we had $432.8 million of indebtedness outstanding, including
$175.0 million under our 1.75% convertible senior notes, $250.0 million under
our 7.5% senior notes and $7.8 million under our industrial revenue
bonds. More information concerning the various debt instruments and
our borrowing arrangements is available in Note 6 to the Consolidated Financial
Statements included herein.
We are
party to primary aluminum financial sales contracts with Glencore. In
the event of a material adverse change in our creditworthiness, Glencore has the
option to require a letter of credit, or any other acceptable security or
collateral, for the outstanding balances on these contracts.
Capital
Resources
Capital
expenditures for 2007 were $113.3 million, $88.8 million of which was related to
the expansion projects at Grundartangi, with the balance principally related to
upgrading production equipment, improving facilities and complying with
environmental requirements. We expect to incur an additional $6.0
million of capital expenditures for the completion of the Grundartangi expansion
project in 2008. We anticipate capital expenditures of approximately
$75.0 million in 2008. In addition, we expect to incur approximately
$200.0 to $250.0 million in capital expenditures for the proposed Helguvik
greenfield project in 2008. We believe that we have access to
financing adequate to complete the first two phases (to a minimum capacity of
250,000 mtpy) of the proposed Helguvik plant through a combination of cash on
hand, short-term investments, Grundartangi’s cash from operations and borrowings
under a new debt facility in Iceland which we are presently
negotiating. Our cost commitments for the proposed Helguvik project
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 the past, we purchased foreign currency options to hedge
our foreign currency risk in the Icelandic krona associated with a portion of
the capital expenditures from the Grundartangi expansion
project. Currently, we do not have any hedges for our exposure to
foreign currency risk, but we will continue to evaluate our exposure and
available hedging instruments and we may hedge our foreign currency exposure in
the future.
Historical
Our
Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
are summarized below:
|
2007
|
2006
|
2005
|
||||||||||
|
(dollars
in thousands)
|
||||||||||||
|
Net
cash (used in ) provided by operating activities
|
$ | (5,755 | ) | $ | 185,353 | $ | 134,936 | |||||
|
Net
cash used in investing activities
|
(108,571 | ) | (211,937 | ) | (305,339 | ) | ||||||
|
Net
cash provided by financing activities
|
78,923 | 105,197 | 143,987 | |||||||||
|
Change
in cash
|
$ | (35,403 | ) | $ | 78,613 | $ | (26,416 | ) | ||||
Net cash
used in operating activities in 2007 was $5.8 million, which included a net
$280.2 million use of cash for the purchase of short-term
investments. Such investments generally yield higher returns than
cash or other money market instruments. If we had not used cash to
purchase those investments, our net cash from operations would have increased
due to improved price realizations and the additional shipment volume from
Grundartangi compared to the same period in 2006. See reconciliation
of free cash flow above.
Net cash
used in investing activities in 2007 was $108.6 million, a decrease of $103.4
million from 2006. This decrease was due primarily to lower
expenditures for the Grundartangi expansion project.
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
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 Grundartangi 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
provided by financing activities during 2007 was $78.9 million. We
received $417.8 million in net proceeds from the issuance of common stock from
our equity offering in June 2007 and the exercise of stock
options. We borrowed an additional $30.0 million for the Grundartangi
expansion project. This amount was offset by principal payments of
$369.4 million on Nordural debt, which included $200.0 million from the proceeds
of the equity offering in June 2007.
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.
|
|
Critical
Accounting Estimates
|
Our
significant accounting policies are discussed in Note 1 of the Consolidated
Financial Statements. The preparation of the financial statements
requires that management make judgments, assumptions and estimates 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, forward delivery contracts and financial instruments
and the realizability of our deferred tax assets. Our management has
discussed the development and selection of these critical accounting estimates
with the audit committee of our board of directors and the audit committee has
reviewed our disclosure.
Pension
and Other Postemployment Benefit Liabilities
We
sponsor several pension and other postemployment benefit plans. Our
liabilities under these defined benefit plans are determined using methodologies
that involve several actuarial assumptions, the most significant of which are
the discount rate and health care inflation rate.
Discount
Rate Selection
It is our
policy to select a discount rate for purposes of measuring obligations under
defined benefit 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 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, 2007, we selected a discount rate of 6.5% for all our
post-employment benefit plans, except for our pension plan for hourly employees
for which we selected a discount rate of 6.25%.
A change
of a half percentage point in the discount rate for our defined benefit plans
would have the following effects on our obligations under these plans in
2008:
|
Effect
of changes in the discount rates on the Projected Benefit Obligations
for:
|
50
basis point increase
|
50
basis point decrease
|
||||||
|
(dollars
in thousands)
|
||||||||
|
Pension
plans
|
$ | (5,472 | ) | $ | 6,038 | |||
|
Other
postemployment benefit (“OPEB”) plans
|
$ | (12,982 | ) | $ | 14,563 | |||
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
estimates 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 2008:
|
One
Percent Increase
|
One
Percent Decrease
|
|||||||
|
(dollars
in thousands)
|
||||||||
|
Effect
on total of service and interest cost components
|
$ | 4,136 | $ | (3,190 | ) | |||
|
Effect
on accumulated postretirement benefit obligation
|
$ | 32,176 | $ | (25,965 | ) | |||
Forward
Delivery Contracts and Financial Instruments
Estimating
the fair value of certain of our forward financial contracts requires us to make
assumptions about future market prices of primary aluminum. As part
of our commodity price risk management activities, we enter into market priced
fixed-priced financial contracts for the sale of primary aluminum 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 current
LME futures quote only provides pricing through 2013. 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 2013.
The
aluminum-based financial 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. Fluctuations in the LME price of primary aluminum have a
significant impact on gains and losses included in our financial statements from
period to period. Unrealized gains and losses for these derivative
instruments are included in net gain (loss) on forward contracts.
The
principal contracts affected by these standards and the resulting effects on the
financial statements are described in Item 7A "Quantitative and Qualitative
Disclosures about Market Risk" and Note 14 to the Consolidated Financial
Statements included herein.
Deferred
Income Tax Assets
We
regularly assess the likelihood that deferred tax assets will be recovered from
future taxable income. To the extent we believe that it is more
likely than not that a deferred tax asset will or may not be realized, a
valuation allowance is established. When a valuation allowance is
established or increased, an income tax charge is included in the consolidated
financial statements and net deferred tax assets are adjusted
accordingly. Changes in the tax laws, statutory tax rates and
estimates of our future taxable income levels could result in actual realization
of the deferred tax assets being materially different from the amounts provided
for in the consolidated financial statements. If the actual recovery
amount of the deferred tax asset is less than anticipated, we would be required
to write-off the remaining deferred tax asset and increase the tax provision,
resulting in a reduction of net income and shareholders’ equity.
In 2007,
we assessed the realizability of our deferred tax assets in Iceland following
the preparation of long-range financial projections for our
operations. We concluded that due to uncertainties related to certain
tax positions in Iceland and based on current circumstances, the deferred tax
assets related to net tax operating loss carryforwards (NOLs) in Iceland may not
be realizable prior to their expiration. As of December 31, 2007, we
established a valuation allowance for those NOLs of $13.9
million. Previously, we assessed that it was more likely than not
that we would realize our NOLs through future projected taxable
income.
|
|
Environmental
Expenditures
|
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 $0.8 million and $0.6
million at December 31, 2007 and December 31, 2006, 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 $2.5 million for
2008. In addition, we expect to incur operating expenses relating to
environmental matters of approximately $17 to $19 million each year during 2008,
2009 and 2010, respectively. These amounts do not include any
projected capital expenditures or operating expenses for our joint venture
interests. 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 13 “Commitments and Contingencies” to the
Consolidated Financial Statements included herein.
|
|
Other
Contingencies
|
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 have reached a tentative agreement with the IRS
which is subject to final approval by the Joint Committee on
Taxation. We expect that this agreement will be
approved. Based on current information, we do not believe that the
outcome of the tax audit will have a material impact on our financial condition
or results of operations. In 2008, we anticipate making a
settlement payment of approximately $20.0 million related to the IRS
examination.
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.” and Note 13
“Commitments and Contingencies” to the Consolidated Financial Statements
included herein for additional information.
|
|
Recently
Issued Accounting Standards
|
Information
regarding recently issued accounting pronouncements is included in Note 1 of the
Consolidated Financial Statements included herein.
|
|
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
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||||||
|
(dollars
in millions)
|
||||||||||||||||||||||||||||
|
Long-term
debt (1)
|
$ | 433 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 433 | ||||||||||||||
|
Estimated
interest payments (2)
|
181 | 22 | 22 | 22 | 22 | 22 | 71 | |||||||||||||||||||||
|
Purchase
obligations (3)
|
3,600 | 677 | 499 | 447 | 311 | 305 | 1,361 | |||||||||||||||||||||
|
OPEB
obligations (4)
|
110 | 7 | 8 | 10 | 11 | 11 | 63 | |||||||||||||||||||||
|
Other
liabilities (5)
|
66 | 27 | 5 | 5 | 5 | 5 | 19 | |||||||||||||||||||||
|
Total
|
$ | 4,390 | $ | 733 | $ | 534 | $ | 484 | $ | 349 | $ | 343 | $ | 1,947 | ||||||||||||||
| (1) |
Debt
includes principal repayments on the 7.5% senior notes, 1.75% convertible
senior notes and the IRBs and is based on the assumption that all
outstanding debt instruments will remain outstanding until their
respective due dates.
|
||
| (2) |
Estimated
interest payments on our long-term debt are based on several assumptions,
including an assumption that all outstanding debt instruments will remain
outstanding until their respective due dates. The IRB interest
rate is variable and our estimated future payments are based on a rate of
4.00%.
|
||
| (3) |
Purchase
obligations include long-term alumina, electrical power contracts and
anode contracts. 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, 2007,
decreasing to the 10-year historical LME 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 cost
forecasts to calculate the expected future cash flows for this
contract. A portion of certain Nordural anode contracts are
denominated in euros. We assumed a $1.40/euro conversion rate to estimate
the obligations under these contracts.
|
||
| (4) |
Includes
the estimated benefit payments for our OPEB obligations through 2017,
which are unfunded.
|
||
| (5) |
Other
liabilities include our expected SERB benefit payments, workers'
compensation benefit payments, settlement payments and asset retirement
obligations and uncertain tax positions. Expected benefit
payments for the SERB plans, which are unfunded, are included for 2008
through 2016. Asset retirement obligations are estimated
disposal costs for the potliner in service. In 2008, we
anticipate paying approximately $20.0 million related to an IRS
examination as discussed in the Note 12 to the Consolidated Financial
Statements included herein. As of December 31, 2007, the
gross liability for uncertain tax positions under FIN No. 48 is
approximately $40.6 million. We expect to make a $20.0 million
payment to the IRS related to a portion of these obligations within the
next twelve months. We have not included the remaining
FIN No. 48 obligations in the contractual obligations table as
we are unable to provide a reasonable estimate of the timing of future
settlements.
|
For a
discussion of our related party transactions, see Note 16 to the Consolidated
Financial Statements included herein.
|
|
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, 2007
|
|||||
|
2008
(1)(2)
|
2009
(2)
|
2010
(2)
|
2011(2)
|
2012-2015
(2)
|
|
|
Base
Volume:
|
|||||
|
Pounds
(000)
|
246,958
|
231,485
|
231,485
|
165,347
|
661,386
|
|
Metric
tons
|
112,018
|
105,000
|
105,000
|
75,000
|
300,000
|
|
Percent
of estimated capacity
|
14%
|
13%
|
13%
|
9%
|
9%
|
|
Potential
additional volume (2):
|
|||||
|
Pounds
(000)
|
220,903
|
231,485
|
231,485
|
165,347
|
661,386
|
|
Metric
tons
|
100,200
|
105,000
|
105,000
|
75,000
|
300,000
|
|
Percent
of estimated capacity
|
12%
|
13%
|
13%
|
9%
|
9%
|
| (1) |
The
forward priced sales in 2008 exclude January 2008 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 2008 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
remaining contract months through 2015, the potential sales volume would
be equivalent to the amounts shown.
|
Apart
from our long-term primary aluminum sales contracts discussed in Note 14 of the
Consolidated Financial Statements included herein (the Alcan Metal Agreement,
Glencore Metal Agreement I, Glencore Metal Agreement II and Southwire Metal
Agreement), we had forward delivery contracts to sell 96,807 metric tons and
132,726 metric tons of primary aluminum at December 31, 2007 and December 31,
2006, respectively. Of these forward delivery contracts, we had fixed
price commitments to sell 2,818 metric tons and 2,538 metric tons of primary
aluminum at December 31, 2007 and December 31, 2006, respectively, of which none
were with Glencore at December 31, 2007 or 2006.
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.
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
685,200 metric tons. These contracts are settled monthly. We had no
fixed price financial contracts to purchase aluminum at December 31, 2007 or
December 31, 2006.
|
Primary
Aluminum Financial Sales Contracts as of:
|
||||||
|
(Metric
tons)
|
||||||
|
December
31, 2007
|
December
31, 2006
|
|||||
|
Cash
Flow Hedges
|
Derivatives
|
Total
|
Cash
Flow Hedges
|
Derivatives
|
Total
|
|
|
2007
|
--
|
--
|
--
|
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
|
--
|
75,000
|
75,000
|
--
|
75,000
|
75,000
|
|
2013-2015
|
--
|
225,000
|
225,000
|
--
|
225,000
|
225,000
|
|
Total
|
9,000
|
685,200
|
694,200
|
128,500
|
735,600
|
864,100
|
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.
|
Natural
Gas Financial Purchase Contracts as of:
|
||
|
(Thousands
of MMBTU)
|
||
|
December
31, 2007
|
December
31, 2006
|
|
|
2007
|
--
|
2,200
|
|
2008
|
1,150
|
480
|
|
Total
|
1,150
|
2,680
|
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 $1.2 million
after tax on accumulated other comprehensive income for the contracts designated
as cash flow hedges, and $87.7 million on net income for the contracts
designated as derivatives, for the period ended December 31, 2007 as a result of
the forward primary aluminum financial sales contracts outstanding at December
31, 2007.
On a
hypothetical basis, a $1.00 per MMBTU decrease in the market price of natural
gas is estimated to have an unfavorable impact of $0.7 million after tax on
accumulated other comprehensive income for the period ended December 31, 2007 as
a result of the forward natural gas financial purchase contracts outstanding at
December 31, 2007.
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, 2007, approximately 50% (including
100,200 metric tons of potential additional volume under our derivative sales
contracts) of our production for 2008 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.
Grundartangi. Substantially
all of Grundartangi’s revenues are derived from toll conversion agreements with
Glencore, Hydro and a subsidiary of BHP Billiton Ltd. whereby Grundartangi
converts alumina provided by these companies into primary aluminum for a fee
based on the LME price for primary aluminum. Grundartangi’s LME-based
toll revenues are subject to the risk of decreases in the market price of
primary aluminum; however, Grundartangi 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, Grundartangi
purchases power at a rate which is a percentage of the LME price for primary
aluminum, providing Grundartangi with a natural hedge against downswings in the
market for primary aluminum. Grundartangi’s tolling revenues include
a premium based on the exemption available to Icelandic aluminum producers from
the EU import duty for primary aluminum. In May 2007, the EU members
reduced the EU import duty for primary aluminum from six percent to three
percent and agreed to review the new duty after three years. This decrease in the EU
import duty for primary aluminum negatively impacts Grundartangi’s revenues and
further decreases would also have a negative impact on Grundartangi’s
revenues.
Grundartangi
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. Grundartangi’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. However, Grundartangi’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 Grundartangi’s operating
margins.
During
2006, we entered into currency options to mitigate a portion of our foreign
currency exposure to the Icelandic krona for the Phase V expansion capital
expenditures. The option contracts, which are designated as cash flow
hedges and qualify for hedge accounting under SFAS No.133, had maturities
through November 2007. The critical terms of the contracts matched
those of the underlying exposure. We did not have any outstanding
foreign currency options outstanding as of December 31, 2007.
|
|
Subprime
and Related Risks
|
During
2007, asset-backed securities related to subprime consumer mortgages experienced
a significant increase in expected default rates, resulting in a dramatic
reduction in asset prices and market liquidity. Our exposure to these
instruments is limited, but we continue to review this exposure. At
present, we believe our exposure is limited to assets in our pension plans that
are invested in bond funds. We are working with our pension fund
trustee and we believe that approximately 2% of our pension assets may be
invested in various subprime investments. The approximate value of
these assets at December 31, 2007 was $1.7 million. We do not expect
that any defaults would be material to our financial position or results from
operation. Any defaults in these funds would lower our actual return
on plan assets and increase the defined benefit plan net loss in other
comprehensive income, and subsequently increase our pension expense as these
losses are amortized over the service life of the participants.
At
December 31, 2007, we had approximately $280.2 million invested in variable rate
demand notes (“VRDN”). These VRDNs are tax-exempt municipal bonds
that are purchased from a remarketing agent. We may tender the notes
to the remarketing agent whenever the rates are reset, usually upon a seven-day
notice. While the underlying securities are long-term municipal
bonds, the ability to tender the notes to the remarketing agent upon short
notice provides liquidity.
There are
two main risks associated with investments in VRDNs. The primary risk
is that the remarketing agent may not be able to repurchase the notes, in which
case we would have investments in long-term municipal bonds and we would lose
significant liquidity. Our remarketing agents have standby
letters-of-credit and insurance to protect us against a failed
tender. The second risk is that the underlying securities
default. We invest in highly rated municipal bonds (at December 31,
2007, our portfolio of investments was rated investment grade by Standard &
Poor’s) and we diversify our investment portfolio, a hypothetical default in our
largest positions at December 31, 2007 would result in a loss of approximately
$21 million.
Our
primary financial instruments are cash and short-term investments, including
cash in bank accounts, other highly rated liquid money market investments and
government securities which are classified as cash equivalents and short-term
investments, primarily variable-rate demand notes, which are classified as
short-term investments.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
39 - 40
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
41
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2006 and
2005
|
42
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2007,
2006 and 2005
|
43
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
44
|
|
Notes
to the Consolidated Financial Statements
|
45 - 77
|
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, 2007 and 2006, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2007.
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, 2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
As
discussed in Note 8 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. As discussed
in Note 12 to the consolidated financial statements, in 2007 the Company adopted
Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, 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, 2008 expresses an
unqualified opinion on the Company's internal control over financial
reporting.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
28, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Century Aluminum Company:
We have
audited the internal control over financial reporting of Century Aluminum
Company and subsidiaries (the "Company") as of December 31, 2007, 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,
included in the accompanying Management's Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
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, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, 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, 2007 of the Company and our report dated
February 28, 2008 expresses an unqualified opinion on those financial statements
and includes an explanatory paragraph regarding the adoption of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
/s/
DELOITTE & TOUCHE LLP
Pittsburgh,
Pennsylvania
February
28, 2008
|
CENTURY
ALUMINUM COMPANY
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(Dollars
in thousands, except share data)
|
||||||||
|
ASSETS
|
||||||||
|
Cash
|
$ | 60,962 | $ | 96,365 | ||||
|
Restricted
cash
|
873 | 2,011 | ||||||
|
Short-term
investments
|
280,169 | -- | ||||||
|
Accounts
receivable — net
|
93,451 | 113,371 | ||||||
|
Due
from affiliates
|
26,693 | 37,542 | ||||||
|
Inventories
|
175,101 | 145,410 | ||||||
|
Prepaid
and other current assets
|
40,091 | 19,830 | ||||||
|
Deferred
taxes — current portion
|
69,858 | 103,110 | ||||||
|
Total
current assets
|
747,198 | 517,639 | ||||||
|
Property,
plant and equipment — net
|
1,260,040 | 1,218,777 | ||||||
|
Intangible
asset — net
|
47,603 | 61,594 | ||||||
|
Goodwill
|
94,844 | 94,844 | ||||||
|
Deferred
taxes – less current portion
|
321,068 | 203,452 | ||||||
|
Other
assets
|
107,518 | 88,928 | ||||||
|
TOTAL
|
$ | 2,578,271 | $ | 2,185,234 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Accounts
payable, trade
|
$ | 79,482 | $ | 64,849 | ||||
|
Due
to affiliates
|
216,754 | 282,282 | ||||||
|
Accrued
and other current liabilities
|
60,482 | 75,143 | ||||||
|
Long
term debt — current portion
|
-- | 30,105 | ||||||
|
Accrued
employee benefits costs — current portion
|
11,997 | 11,083 | ||||||
|
Convertible
senior notes
|
175,000 | 175,000 | ||||||
|
Industrial
revenue bonds
|
7,815 | 7,815 | ||||||
|
Total
current liabilities
|
551,530 | 646,277 | ||||||
|
Senior
unsecured notes payable
|
250,000 | 250,000 | ||||||
|
Nordural
debt
|
-- | 309,331 | ||||||
|
Accrued
pension benefits costs — less current portion
|
14,427 | 19,239 | ||||||
|
Accrued
postretirement benefits costs — less
current portion
|
184,853 | 206,415 | ||||||
|
Due
to affiliates – less current portion
|
913,683 | 554,864 | ||||||
|
Other
liabilities
|
39,643 | 27,811 | ||||||
|
Deferred
taxes
|
62,931 | 41,587 | ||||||
|
Total
noncurrent liabilities
|
1,465,537 | 1,409,247 | ||||||
|
CONTINGENCIES
AND COMMITMENTS (NOTE 13)
|
||||||||
|
SHAREHOLDERS’
EQUITY:
|
||||||||
|
Common
stock (one cent par value, 100,000,000 shares authorized; 40,988,058 and
32,457,670 shares issued and outstanding at December 31, 2007 and
2006, respectively)
|
410 | 325 | ||||||
|
Additional
paid-in capital
|
857,787 | 432,270 | ||||||
|
Accumulated
other comprehensive loss
|
(51,531 | ) | (166,572 | ) | ||||
|
Accumulated
deficit
|
(245,462 | ) | (136,313 | ) | ||||
|
Total
shareholders’ equity
|
561,204 | 129,710 | ||||||
|
TOTAL
|
$ | 2,578,271 | $ | 2,185,234 | ||||
See notes
to consolidated financial statements.
|
CENTURY
ALUMINUM COMPANY
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||
|
NET
SALES:
|
||||||||||||
|
Third-party
customers
|
$ | 1,449,750 | $ | 1,299,035 | $ | 961,335 | ||||||
|
Related
parties
|
348,413 | 259,531 | 171,027 | |||||||||
| 1,798,163 | 1,558,566 | 1,132,362 | ||||||||||
|
Cost
of goods sold
|
1,434,700 | 1,210,044 | 970,685 | |||||||||
|
Gross
profit
|
363,463 | 348,522 | 161,677 | |||||||||
|
Selling,
general and administrative expenses
|
59,920 | 39,363 | 34,773 | |||||||||
|
Operating
income
|
303,543 | 309,159 | 126,904 | |||||||||
|
Interest
expense – third party
|
(32,899 | ) | (37,002 | ) | (25,668 | ) | ||||||
|
Interest
income
|
10,790 | 1,705 | 1,367 | |||||||||
|
Net
loss on forward contracts
|
(508,875 | ) | (389,839 | ) | (309,698 | ) | ||||||
|
Loss
on early extinguishment of debt
|
(2,461 | ) | — | (835 | ) | |||||||
|
Other
income (expense) — net
|
(841 | ) | 6,898 | 275 | ||||||||
|
Loss
before income taxes and equity in earnings of joint
ventures
|
(230,743 | ) | (109,079 | ) | (207,655 | ) | ||||||
|
Income
tax benefit
|
113,849 | 52,041 | 80,697 | |||||||||
|
Loss
before equity in earnings of joint ventures
|
(116,894 | ) | (57,038 | ) | (126,958 | ) | ||||||
|
Equity
in earnings of joint ventures
|
15,645 | 16,083 | 10,703 | |||||||||
|
Net
loss
|
$ | (101,249 | ) | $ | (40,955 | ) | $ | (116,255 | ) | |||
|
EARNINGS
(LOSS) PER COMMON SHARE:
|
||||||||||||
|
Basic
and Diluted
|
$ | (2.72 | ) | $ | (1.26 | ) | $ | (3.62 | ) | |||
See notes
to consolidated financial statements.
|
CENTURY
ALUMINUM COMPANY
|
||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||
|
Comprehensive
Income (Loss)
|
Common
Stock
|
Additional
Paid-in Capital
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings (Accumulated Deficit)
|
Total
Shareholders’ Equity
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Balance,
December 31, 2004
|
$ | 320 | $ | 415,453 | $ | (52,186 | ) | $ | 20,913 | $ | 384,500 | |||||||||||||
|
Comprehensive
income (loss) – 2005
|
||||||||||||||||||||||||
|
Net
loss – 2005
|
$ | (116,255 | ) | (116,255 | ) | (116,255 | ) | |||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||
|
Net
unrealized loss on financial instruments, net of $36,420 in
tax
|
(64,710 | ) | ||||||||||||||||||||||
|
Net
amount reclassified to income, net of $(14,655) in tax
|
25,365 | |||||||||||||||||||||||
|
Minimum
pension liability adjustment, net of $63 in tax
|
113 | |||||||||||||||||||||||
|
Other
comprehensive loss
|
(39,232 | ) | (39,232 | ) | (39,232 | ) | ||||||||||||||||||
|
Total
comprehensive loss
|
$ | (155,487 | ) | |||||||||||||||||||||
|
Dividends
on common stock
|
(16 | ) | (16 | ) | ||||||||||||||||||||
|
Issuance
of common stock – compensation plans
|
2 | 3,556 | 3,558 | |||||||||||||||||||||
|
Balance,
December 31, 2005
|
$ | 322 | $ | 419,009 | $ | (91,418 | ) | $ | (95,358 | ) | $ | 232,555 | ||||||||||||
|
Comprehensive
income (loss) – 2006
|
||||||||||||||||||||||||
|
Net
loss – 2006
|
$ | (40,955 | ) | (40,955 | ) | (40,955 | ) | |||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||
|
Net
unrealized loss on financial instruments, net of $57,556
tax
|
(85,309 | ) | ||||||||||||||||||||||
|
Net
amount reclassified to income, net of $(48,734) in tax
|
83,186 | |||||||||||||||||||||||
|
Minimum
pension liability adjustment, net of $1,631 in tax
|
(2,532 | ) | ||||||||||||||||||||||
|
Other
comprehensive loss
|
(4,655 | ) | (4,655 | ) | (4,655 | ) | ||||||||||||||||||
|
Total
comprehensive loss
|
$ | (45,610 | ) | |||||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158, net of $46,161 tax
|
(70,499 | ) | (70,499 | ) | ||||||||||||||||||||
|
Excess
tax benefits from share-based compensation
|
1,394 | 1,394 | ||||||||||||||||||||||
|
Share-based
compensation expense
|
5,582 | 5,582 | ||||||||||||||||||||||
|
Issuance
of common stock – compensation plans
|
3 | 6,285 | 6,288 | |||||||||||||||||||||
|
Balance,
December 31, 2006
|
$ | 325 | $ | 432,270 | $ | (166,572 | ) | $ | (136,313 | ) | $ | 129,710 | ||||||||||||
|
Comprehensive
income (loss) – 2007
|
||||||||||||||||||||||||
|
Net
loss – 2007
|
$ | (101,249 | ) | (101,249 | ) | (101,249 | ) | |||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||
|
Net
unrealized loss on financial instruments, net of $448 tax
|
7,730 | |||||||||||||||||||||||
|
Net
amount reclassified to income, net of $(57,773) tax
|
82,512 | |||||||||||||||||||||||
|
Defined
benefit plans and other postretirement benefits:
|
||||||||||||||||||||||||
|
Net
gain, net of $(15,424) tax
|
20,730 | |||||||||||||||||||||||
|
Prior
service cost, net of $2 tax
|
(3 | ) | ||||||||||||||||||||||
|
Amortization
of net loss, net of $(2,643) tax
|
3,553 | |||||||||||||||||||||||
|
Amortization
of prior service cost, net of $612 tax
|
(822 | ) | ||||||||||||||||||||||
|
Change
in equity in investee other comprehensive income, net of $(2,229)
tax:
|
1,341 | |||||||||||||||||||||||
|
Other
comprehensive income
|
115,041 | 115,041 | 115,041 | |||||||||||||||||||||
|
Total
comprehensive income
|
$ | 13,792 | ||||||||||||||||||||||
|
Adjustment
to retained earnings upon adoption of FIN 48
|
(7,900 | ) | (7,900 | ) | ||||||||||||||||||||
|
Excess
tax benefits from share-based compensation
|
588 | 588 | ||||||||||||||||||||||
|
Share-based
compensation expense
|
5,962 | 5,962 | ||||||||||||||||||||||
|
Issuance
of common stock – compensation plans
|
2 | 4,904 | 4,906 | |||||||||||||||||||||
|
Issuance
of common stock – equity offering, net
|
83 | 414,063 | 414,146 | |||||||||||||||||||||
|
Balance,
December 31, 2007
|
$ | 410 | $ | 857,787 | $ | (51,531 | ) | $ | (245,462 | ) | $ | 561,204 | ||||||||||||
See notes
to consolidated financial statements.
|
CENTURY
ALUMINUM COMPANY
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
Year Ended December
31,
|
||||||||||||
|
2007
|
||||||||||||