ITEM 1. BUSINESS
Our company was incorporated in 1998, and, through its three primary operating subsidiaries, Goldendale Aluminum Company, Northwest Aluminum Company and Northwest Aluminum Specialties, Inc., is a leading producer of primary aluminum and selected specialty engineered high quality value-added aluminum products. Our revenues come from two main sources: fees received from tolling alumina into aluminum and sales of value-added aluminum products. At our two facilities on the Columbia River east of Portland, Oregon, we operate two primary aluminum smelters with combined production capacity of 250,000 metric tons, making us one of the five largest primary aluminum producers in the United States. We produce approximately two-thirds of our primary aluminum under a tolling agreement with Hydro Aluminum Louisville, Inc., a large international industrial and trading company. In conjunction with our smelter operations, we operate three casthouses that produce a range of value-added aluminum products, including our proprietary line of direct-cast, small diameter, alloyed billet products.
We sell value-added billet and related products directly to the extrusion and direct forge industries for further processing into final products such as fire extinguishers, automobile air bag canisters, golf club heads, bicycle frames and a variety of automotive and aircraft parts. We believe our cost competitive position, strategic relationships, investment in new smelting and casting technologies and mix of higher-margin, value-added products are key competitive advantages and have been primary determinants of our historical profitability.
We believe that historically we have ranked among the lower cost aluminum producers in the United States. We attribute our historical profitability to a number of factors including access to and innovative procurement of low-cost hydroelectric power, technical innovation at the plant level, good labor relations and low levels of corporate overhead.
The aluminum industry in the Pacific Northwest is facing a critical time in its history. Among the primary factors affecting any aluminum smelting operation is the cost of its electrical power. Due to an extreme under-supply of power and other factors, the market price of electrical power in the Pacific Northwest has risen to a level that currently prohibits smelting operations in a cost effective manner. We were able to remarket most of our existing supply of power at prices in excess of its cost, with the proceeds to be applied to certain "Qualified Expenditures," as described below. We believe that through partnering with our primary supplier of electricity, our labor force, and our major suppliers, in the future we will be able to continue operating our smelters at reduced levels while still meeting our obligations to employees, creditors and others. Additionally, by pursuing the development of new power generation facilities, we believe we will not only survive the current crisis, but will emerge as a more efficient provider of aluminum with access to lower cost power and with the ability to re-market that power during periods of high market power prices.
ACCESS TO ELECTRIC POWER
One of our primary costs is electrical power and prior to mid-2000, those costs had been relatively stable. The source of the majority of our power has been through the Bonneville Power Administration (BPA). We have supplemented the BPA power with purchases of market power during time periods when market prices historically have been lower than the price we pay BPA under our contract.
Because electricity is both necessary for the manufacturing of aluminum and the single largest cost of making primary aluminum, the availability and pricing of electricity and access to transmission is crucial to our operations. Approximately 80% of all power produced or consumed in the Pacific Northwest is delivered over the transmission system of BPA. Both of our smelters are connected directly to the main high voltage transmission grid of BPA. Each plant has a 20-year transmission agreement with BPA, expiring in April 2015, for transmission capacity that we believe is sufficient to meet both plants' existing and projected energy needs. These transmission agreements obligate BPA to offer Goldendale Aluminum Company and Northwest Aluminum Company a new transmission agreement upon the expiration of the current agreements. Moreover, the transmission agreements also obligate BPA to act as agent for Goldendale and Northwest to obtain transmission services over other transmission systems if requested. With the exception of limited rights to restrict transmission service in the event of certain threats to system stability, the transmission agreements obligate BPA to provide Goldendale and Northwest with the same
open access transmission available to utilities and power companies under the rules of the Federal Energy Regulatory Commission.
Goldendale and Northwest are buying energy from BPA under a five-year power sale agreement through which approximately 60% of each plant's energy needs are contractually secured at predetermined prices through September 30, 2001. The published annual average rate for power from BPA is 2.2 cents per kilowatt-hour. The power sale agreement allows us to schedule our purchases in different months when power is priced at different rates in such a way that power purchased from BPA has an actual rate that is lower than the published average rate. The remaining 40% of Northwest's and Goldendale's energy requirements is obtained by purchasing blocks of energy under periodic contracts from various suppliers, including BPA, PacifiCorp, Enron, Illinova Energy, Duke Energy, Avista Energy, the Avista Utilities and others.
Beginning in the latter part of 2000, the power market began suffering from extreme under-supply pressures and other factors, resulting in a sharp increase in power prices. These prices required us to adjust the power procurement strategies we had pursued in the past. We had planned to cover our power needs for half of February, all of March and April, and half of May of 2001 by purchasing power on the spot market. The forward prices of power, however, made it clear that market power for those months would not be affordable. We were unwilling to shut down all of our smelting operations during those months due to the costs involved. We chose to reduce our production capacity to approximately 60% of normal beginning in October 2000. Our intent was to have BPA remarket and sell power we did not need because of reduced production and to use the resulting proceeds to buy power for any open periods. We refer to the process of using proceeds from BPA's remarketing of power to purchase power during other periods as "reshaping." Our current power sale contract with BPA allows us to reshape our power purchases in this manner. We proceeded with the curtailment, the related reduction in our work force and adjustments to our long-term alumina supply contracts. BPA remarketed and sold the excess power made available for the months of October, November and December of 2000, and part of the excess power of January 2001.
By the end of December 2000, market prices for electrical power had further escalated to the point that the financially prudent option was to have all electrical power available to us remarketed by BPA instead of producing aluminum with it. Late in December, we shut down essentially all remaining smelter production capacity, leaving only approximately 25 metric tons of capacity on line at the Goldendale facility and none at Northwest.
We entered into an agreement with BPA which allows BPA to remarket the power available to us and use these proceeds to reimburse us for defined qualified expenditures. Additionally, agreements were made with the United Steel Workers of America in regard to employee lay-offs, with Norsk Hydro Americas, Inc. in regard to readjusting our tolling contract with Hydro and with Glencore in regard to readjusting the alumina supply contract.
We entered into a Remarketing Addendum (the "Addendum") with BPA in December 2000. Under the Addendum, our operating subsidiaries, Goldendale Aluminum Company and Northwest Aluminum Company, agreed to curtail smelter production and assist BPA in remarketing the electric power that they had the right to purchase. BPA agreed to use the proceeds from the remarketing to reimburse Goldendale Aluminum Company and Northwest Aluminum Company or their designees for specified qualified expenditures, including, among others, expenses associated with debt service and workforce reductions resulting from the curtailment, and expenditures for the planning, licensing, siting, acquisition and/or construction of conventional or renewable resources to provide power for future operations of our smelters. For a given sale of remarketed power, the net proceeds are equal to the revenue received by BPA in the sale, minus the price we would have been obligated to pay had we purchased the power, minus a specified amount retained by BPA, plus any interest costs BPA avoids as a result of the net proceeds. We estimate that from December 29, 2000 through September 30, 2001, $285.0 million of net proceeds will be available for reimbursement of qualified expenditures. The Addendum is effective through the earlier of the date on which all of the net proceeds have been paid by BPA or September 30, 2010.
In October 2000, we entered into a new power sale agreement with BPA that will be effective from October 1, 2001 through September 30, 2006. The contract will allow us to direct available power to either or both of our operating facilities. Approximately 50% of our power requirements will be met through the contract. Last summer, BPA completed a rate proceeding to determine the base rate under this new power contract. The base rate adopted by BPA was $23.5 per megawatt-hour. The rate adopted by BPA also included a "Cost Recovery Adjustment Clause," which allows BPA to adjust rates under certain defined circumstances. Past BPA rates also contained a similar
adjustment clause, but rate adjustments had never occurred in the past. However, during the fall and winter of 2000, BPA indicated that it probably would need to impose a significant surcharge on rates effective after October 1, 2001. In March 2001, BPA proposed a revised and expanded "Cost Recovery Adjustment Clause" that would grant BPA very broad discretion to adjust rates every six months to ensure that it could recover all its costs and repay its obligations to the U.S. Treasury under almost any circumstances. This revised "Cost Recovery Adjustment Clause" and the initial rate adjustment is subject to a new BPA rate proceeding that is scheduled to be completed by June 2001 and to review by the Federal Energy Regulatory Commission ("FERC"). While the outcome of these proceedings is uncertain, we expect the resulting power costs to be significantly higher than under our current power sale agreements with BPA. Because the rate for BPA power will not be determinable until the conclusion of the rate case, we have a unilateral right to terminate the contract within a specified period after FERC approves the new rates. We anticipate FERC approval by September 2001. Under the new contract, we will not be able to reshape or have BPA remarket our procurements of power. In addition, the BPA Administrator may have broad discretion to temporarily or permanently limit or terminate our purchases of power in circumstances in which the Administrator determines that we are not in compliance with all applicable federal, state and local laws and regulations. We do not expect to receive any cost-based firm power service directly from BPA after our new contract expires on September 30, 2006.
Given the change and uncertainties in future BPA service and power markets, our long-term power strategy is now one of self-reliance, severing our dependence on BPA and other power providers, and becoming a power supplier as well as a power consumer. We believe this strategy will allow us to realize the economic value either of producing aluminum or selling power. Entities controlled by our sole shareholder are actively pursuing development of the following power projects:
1. A 248 MW natural gas-fired combined cycle combustion turbine project near Goldendale, Washington. 2. Wind projects to be developed in Klickitat County, Washington and north central Oregon. 3. A 520 MW natural gas-fired combined cycle combustion turbine project near St. Helens, Oregon. 4. Four GE LM6000 turbines and associated equipment to be located at the Goldendale smelter facility.
If all of the projects are developed as presently anticipated, the system would include 770 megawatts of base-load, gas-fired, combined cycle combustion turbine capacity, 180 megawatts of "peaking" capacity and 300 to 600 megawatts of intermittent wind generation capacity. We are negotiating a plan and agreement with Northwest Energy Development, LLC, of which our sole shareholder is the sole member ("Northwest Energy"), pursuant to which we will be able to purchase at cost up to 100% of the power generated by the facilities to be built by Northwest Energy for the first 20 years after each facility begins commercial operation. We will then be able to use the power in our operations or remarket it to third parties at market prices. If we remarket the power, we will be able to keep the proceeds if allowed by the project financing arrangement of the particular facility from which we purchase the power or pay the proceeds to the facility to reduce project financing and other costs. We will designate Northwest Energy as the recipient of up to $25 million in BPA remarketing proceeds to reimburse expenditures incurred in connection with the development of the power generation facilities. We also anticipate entering into an agreement with BPA or another party under which BPA or the other party would agree to guarantee or provide up to $200 million of third party revolving debt secured by a portion of the remarketing proceeds to finance qualified expenditures in connection with the development of these power supply facilities. BPA would be able to treat as unavailable for reimbursement of qualified expenditures remarketing proceeds of up to 110% of the amount of its guarantee. We will be eligible to receive liquidated damages from Northwest Energy if a specified minimum amount of generating capacity is not available by October 1, 2006.
OPERATIONS
We conduct our business and derive revenues through two principal business activities: the production of value-added specialty aluminum products under tolling contracts and for direct sales, and the production of primary aluminum under a tolling contract. All of our business is conducted under one segment as defined by Statement of Financial Accounting Standards No. 131.
PRODUCTION OF VALUE-ADDED ALUMINUM PRODUCTS
We operate a value-added production operation which blends primary aluminum, produced at the Goldendale smelter or purchased from Hydro, Glencore Ltd. and other aluminum producers, with various alloys into a variety of value-added products, including proprietary small diameter billet ("SDB") and related products. Our SDB products are cast directly from molten aluminum in a process that eliminates the expense associated with the extrusion process typically required to manufacture SDB products. Our SDB products are frequently manufactured to customer specifications, and, as such, can be priced to provide us with enhanced margins relative to commodity aluminum products. Since Northwest Aluminum Specialties began its value-added operations in the early 1990s, the business has grown to represent a significant percentage of our total revenues. Our SDB products are typically forged or extruded by our customers into end use forms which include fire extinguishers, automobile air bag canisters, golf club heads, bicycle frames and a variety of automotive and aircraft parts.
In late 1996, Specialties added a new billet machining operation that allows us to manufacture SDB in any diameter between 2 inches and 5 inches, within extremely tight engineering tolerances. Bar sawing capabilities were also added that allow us to deliver cut billet "pucks" that meet customer specifications. These new capabilities have led to additional business and opportunities that we believe will allow us to continue to increase the size of our value-added aluminum business and enhance the average premium received.
Our value-added standard extrusion billet and hot molten metal products that are not produced under tolling arrangements are sold at the Midwest market price, which includes a premium of $.03 to $.05 per pound over the London Metal Exchange price, plus a premium of between $.06 and $.13 per pound. Our specialty extrusion billet, hot closed die forging, cold impact forging and semi-solid forging are sold at the Midwest market price plus a premium of between $.13 and $.81 per pound.
Because of our remelt capability, our non-tolled value-added production has not been impacted by the curtailments to the same extent as our smelter production. Production through the casthouse operations at Northwest is approximately 50% of normal. Sales of non-tolled products were $202.6 million and $219.6 million for the years ended December 31, 1999 and December 31, 2000, respectively.
PRODUCTION OF PRIMARY ALUMINUM
Our subsidiaries operate two aluminum smelters in The Dalles, Oregon and Goldendale, Washington. The smelters have the capacity to produce approximately 250,000 metric tons of primary aluminum per year. A metric ton is equal to 2,204.6 pounds. These smelters consist of 826 vertical pin Soderberg technology reduction cells organized into five pot lines. The smelters use advanced conservation technology, computer control procedures and environmental control equipment to enhance their efficiency. Capital investment in the facilities by us and the smelters' previous owners over the life of the facilities, competitive wage rates, access to low cost hydroelectric power, low overhead and tolling agreements that have historically insured full smelter utilization have also contributed to the smelters' efficiency. The efficiency of the smelters has allowed us to maintain a competitive cost position relative to other industry participants, many of which are significantly larger than we are.
SMELTING METHODS. Smelting, which involves the reduction of alumina to aluminum ingot, is an electrolytic process. Raw alumina is dissolved in an electrolytic bath in large cells, or pots, which are insulated with brick and lined with carbon. The cell lining acts as the negative cathode, and a carbon block, which is partially immersed in the electrolytic bath serves as a positive anode. The carbon anode is composed of petroleum coke and coal tar pitch and is consumed in the smelting process, as oxygen released from alumina in the reduction process binds with the carbon to form carbon dioxide. Because of the high cost of removing metallic impurities from aluminum, careful attention must be given to avoiding impurity introduction by way of the raw materials used in the anode manufacturing process. Petroleum coke and coal tar pitch are used as the carbon and binder sources because of their relatively high purity. Gases and particulate matter are collected in the hood around the lower rim of the anode casing and are passed through the smelter's air and water purification systems. Molten aluminum is drawn from the bottom of the cell, and, typically, poured into molds as unalloyed metal, or sow, or routed into holding furnaces where various alloying ingredients may be added before casting into plate, slab, logs or ingot.
The world's aluminum smelters are evenly split between two basic anode technologies, Soderberg and pre-bake. The two processes differ only in the fabrication and connection of the carbon anode. Most recently constructed smelters use pre-bake technology, which has certain inherent advantages relative to Soderberg technology and may permit primary aluminum production at a lower cost, albeit at a higher initial investment.
Soderberg anodes are baked by utilizing waste heat from the smelting cell and, as such, are referred to as self-baking. A steel casing or mold six to eight meters by two meters containing the coke aggregate and coal tar pitch mixture is mounted over the smelting cell and its contents bake as they progress toward the electrolytic bath. The carbon mass is allowed to slip through the casing at the rate of its oxidation in the electrolytic bath. In the vertical spike version of the Soderberg cell, electrical contact is made by steel tipped aluminum spikes entering from the top. They are pulled by a special tool and reset as their tips approach the electrolytic bath surface due to consumption of the anode. In the horizontal spike version of the Soderberg cell the steel-aluminum spikes enter through the side of the casing instead of through the top. They must be removed and reset as the anode is consumed.
Pre-bake anodes are formed by blending sized petroleum coke aggregate and coal tar pitch, molding it into blocks complete with preformed electrical connection sockets by hydraulic pressing or vibration forming, and firing in oil- or gas-fired ceramic-lined ring furnace pits. A typical block is 70 centimeters wide, 125 centimeters long and 50 centimeters high. Electrical contact and physical support is obtained through aluminum or copper rods welded or bolted to steel stubs. The stubs are set in the anode sockets and molten cast iron is poured around them to produce a strong joint with low electrical resistance.
GOLDENDALE SMELTER. The smelter in Goldendale, Washington was built in 1971, making it the most recently constructed aluminum smelter in the Pacific Northwest, and was expanded in 1981. The total annual production capacity of the Goldendale smelter is 168,000 metric tons of primary aluminum output. The Goldendale smelter employs vertical pin Soderberg technology and consists of 526 reduction cells organized into three pot lines. The Goldendale smelter has undergone a number of technology upgrades during its lifetime. These upgrades have resulted in a significant improvement in production efficiencies over the years as measured by energy consumption, carbon consumption and cell life.
The Goldendale smelter was constructed from engineering plans based on Norsk Hydro ASA's Karmoy, Norway facility, and as such is similar in terms of layout, smelter design and operating processes. The Goldendale smelter was also designed to operate in tandem with our smelter located in The Dalles, Oregon.
NORTHWEST SMELTER. Located across the Columbia River and approximately 35 miles west of the Goldendale smelter, our smelter in The Dalles produces primary aluminum. Built in 1958, The Dalles smelter consists of 300 vertical pin Soderberg reduction cells organized into two pot lines. The smelter's production capacity is about 82,000 metric tons of primary aluminum per year.
We also operate a carbon plant at The Dalles facility. The plant produces approximately 40,000 metric tons of carbon briquettes, which are consumed during the alumina reduction process. We have surplus capacity in the plant and recently have begun selling briquettes to a non-affiliated aluminum producer.
CELL RELINING. Each smelter's cells are grouped into series electrical circuits varying from 150 to 186 cells. Each cell must be relined on average every 2,300 to 2,600 days. When a cell is relined, it is removed from the production process by electrically isolating the cell, allowing the electricity to flow past the cell to the next cell in the circuit. The cell is allowed to cool and the lower half of the cell, known as the cathode, is removed and taken from the cell lines to our cell relining area. The residual cooled and hardened electrolyte and aluminum and the spent pot liner, which consists of carbon blocks and insulating brick, are removed from the steel cell casing. The steel casing is then straightened and patched if necessary. The cell is then relined with new insulating brick, carbon blocks and other material and supplies, including ramming paste and collector bars. The total cell relining costs are approximately $75,000 per cell. The number of cells relined each year varies based on the quality of materials used, operating conditions and the number of cells that have been relined over the years.
THE HYDRO TOLLING AGREEMENT. Goldendale and Hydro Aluminum Louisville, Inc. entered into a ten-year contract effective January 1, 1997. The Hydro tolling agreement has been extended another seven years, until December 2013.
Under the terms of the Hydro tolling agreement, Goldendale must use its smelter exclusively to produce at least 157,000 metric tons of aluminum annually from the alumina supplied to it by Hydro, and Hydro is required to supply sufficient alumina to enable Goldendale to produce that amount of aluminum. Hydro supplies the alumina at no cost to Goldendale, and at all times the alumina and aluminum inventory is owned by Hydro. Goldendale bears the entire cost of unloading and storing the alumina and transporting it to the smelter from Goldendale's unloading facility. Hydro pays a tolling fee to Goldendale for converting the alumina to aluminum based on a percentage of the price of aluminum on the London Metal Exchange. Pursuant to its tolling agreement with Hydro, Goldendale receives an additional tolling fee for casting the aluminum into value-added "casthouse products" such as extrusion billet, foundry "T" or sheet ingot. In addition, Goldendale shares premiums that Hydro is able to realize on sales of value-added products in the market. Hydro is required to place orders for at least 70,000 metric tons of value-added products each year. The tolling agreement also specifies quality and efficiency requirements. If the products or production schedules do not meet the required specifications, the parties have agreed to work together to identify and correct the problem; however, Hydro may terminate the agreement if Goldendale's production were to continue to fall below the product or schedule specifications.
The Hydro agreement also requires Goldendale to use any additional smelter capacity resulting from the installation of new point feeder technology under the facilities investment program, discussed below, exclusively to produce aluminum products for Hydro, subject to some maximum volumes. Hydro is required to supply sufficient alumina to enable Goldendale to produce the additional volume. However, Hydro's commitment to place orders for value-added products remains at 70,000 metric tons and has not been increased to reflect the additional casthouse capacity expected to result from the facilities investment program. Hydro has informed us that it will utilize the additional casthouse capacity. Hydro would like to receive more of the primary aluminum produced at the Goldendale smelter in the form of billet rather than ingot. In contrast to ingot, billet is a casthouse product. If Hydro's demand for billet does not use the full capacity of the Goldendale casthouse, we anticipate using the excess capacity to cast primary aluminum from the smelter at The Dalles into commodity billet for other value-added customers.
In December of 2000, we entered into a "Side Agreement to Agreement to Toll Convert Alumina into Aluminum" with Hydro. As a consequence of the current power market conditions in the Pacific Northwest, we had curtailed production at the Goldendale smelter and allowed the Bonneville Power Administration to remarket the excess power made available because of the curtailment. We agreed with Hydro that for the period from October 1, 2000 through December 31, 2002, we would curtail the production level at the Goldendale smelter by 53,000 metric tons annually, to a production level of 105,000 metric tons annually. For the period from December 24, 2000 through September 30, 2001, we agreed to further curtail the production level at the Goldendale smelter by an additional 83,000 metric tons annually. During that period a total of approximately 16,500 metric tons of aluminum would be delivered to Hydro. We agreed to pay a cancellation fee of $38.8 million in connection with these adjustments in the tolling agreement. We paid $9.2 million of this amount on March 1, 2001 and will pay the remainder in monthly installments through September 30, 2001. These qualify as expenditures that are reimbursable under the Addendum.
THE GLENCORE TOLLING AGREEMENT. Northwest was a party to a tolling contract with Glencore, Ltd. until the contract expired in December 1999. Under the Glencore tolling agreement, Glencore provided alumina to Northwest for conversion into primary aluminum. Glencore supplied enough alumina to support the full production capacity of the Northwest smelter, and Northwest used its best efforts to produce 82,000 metric tons of aluminum ingot and other finished products for Glencore in exchange for a tolling fee based on a certain percentage of the London Metal Exchange price for aluminum.
Due to the growth of its value-added operations, Northwest had increased its purchases of primary aluminum from Glencore and others to such an extent that it was purchasing more primary aluminum from Glencore and others than the production capacity of the Northwest smelter. Glencore's tolling contract allowed us to operate The Dalles smelter at full capacity while we had no developed market for our smelter production. The success of our non-tolled products, however, reduced the importance of this contract, and we did not renew it when it expired in December 1999. We have, however, entered into an agreement with Glencore to have Glencore supply the smelter at The Dalles with all of its alumina requirements from October 1, 1999 to December 31, 2004. Amendments have been made to that agreement to accommodate the recent curtailments in production levels. We have agreed to pay
Glencore cancellation fees totaling $3.2 million. These fees qualify as expenditures that are reimbursable under the Addendum.
UNLOADING FACILITIES. We receive raw alumina at our Portland, Oregon unloading facility. A ship channel maintained by the U.S. Army Corps of Engineers serves the facility. Three steel silos are located on the property with the capacity to store 42,000 metric tons of alumina. Alumina is delivered to the facility by ship and is then transferred into silos for short-term storage and delivered to our smelters by rail. The unloading facility has sufficient capacity to handle our unloading and storage requirements.
FACILITIES INVESTMENT PROGRAM
Both we and previous owners of our facilities have periodically made major investments in new plant and equipment. From 1978 to 1981, Martin Marietta Corporation made a major investment in both smelters by implementing new anode and cathode technology, modernizing electrical and environmental control systems and adding the third cell line at the Goldendale smelter. In 1991 and 1997, Northwest Aluminum Specialties added new casting capability.
We have undertaken the facilities investment program to expand capacity and enhance operating efficiency. With the financial and technical support of Hydro, we plan to expand the casthouse at Goldendale and upgrade the cell lines at Goldendale and at The Dalles. We have borrowed $20.0 million from Hydro under a note purchase agreement to partially finance the facilities investment program. We intend to implement the facilities investment program over the next five years, in two stages.
In the first stage we modernized the Goldendale casthouse. The Goldendale casthouse expansion is designed to increase the facility's capacity to produce value-added billet from 13 million pounds per month to an initial capacity of 22 million pounds per month, with the option to expand capacity to over 30 million pounds per month. The additional value-added production will be sold by Hydro under the tolling agreement, with the same sharing of market premiums in excess of costs. As discussed below, our share of any incremental earnings from the facilities investment program will be used to repay the debt owed to Hydro. Hydro has informed us that its own U.S. extrusion plants should be able to use a significant portion of this additional capacity. The expansion was completed in 2000 at a total cost of $12.6 million, which was somewhat less than our estimate of the project's total cost of $13.5 million.
The first stage also includes a 12 to 18-month demonstration of the planned cell line improvements in a 34-cell section at Goldendale. Conversion of this section and the demonstration are budgeted to cost $6.4 million. Cell improvements include point feeders to control alumina additions, magnetic compensation to stabilize cell operations, cathode redesign to optimize heat balance, new computer controls and other related technologies. The technology for the cell line improvements has been licensed from Hydro, which already has implemented these changes at a similar smelter in Norway. Based upon Hydro's experience, we expect the improvements to increase smelter production, reduce average unit costs of production, increase production efficiencies and significantly reduce air emissions. The improvements are underway, and were expected to be substantially complete by the end of 2000. The curtailment of operations has necessitated a delay in the completion until the end of 2001. Through December 2000, expenditures related to this conversion totaled $3.5 million, which is consistent with our estimate of the project's total cost. Results of this test phase obtained thus far are positive.
We have temporarily suspended Phase II of the Facilities Investment Program because of our recent curtailments and uncertainties in our long-term supply of competitively priced electric power. We plan to begin the second stage of converting the remaining cells at both smelters when our long-term power supply is secure and we complete the demonstration of our cell line upgrades and obtain all necessary permits. The conversion can be performed cell by cell, with minimal disruption of operations, and can be accelerated or slowed for market or other reasons. We estimate that conversion of the remaining cells at both smelters will cost approximately $55.0 million, and estimate that the cost of conversion of a cell will be recovered in about 3.5 years. Hydro has agreed, subject to certain conditions, to provide an additional $10.0 million of subordinated financing if we decide to convert the remaining cells at Goldendale. We expect the remaining $45.0 million, and any additional costs of the facilities investment program, will be funded through cash from operations and borrowings under our revolving credit facility.
RESEARCH AND DEVELOPMENT AND INTELLECTUAL PROPERTY
We have traditionally placed emphasis on innovation and research and development. We have laboratory facilities dedicated to environmental compliance, quality testing and research and development. We engage in several research and development activities designed to improve earnings by increasing value-added margins or reducing costs. Expenditures for activities designated as research and development were $0.8 million in 2000, $2.1 million in 1999, and $1.2 million in 1998. We also have received grants from state and federal governments for certain research and development activities.
Our research and development encompasses five broad initiatives:
- First, we undertake research and development to develop new alloys and casting and homogenizing practices that improve the characteristics of metal sold to customers. We endeavor to protect our proprietary interest in our products and processes by filing patent applications where appropriate and otherwise by seeking to protect them as trade secrets. This research has resulted in several proprietary products and an issued patent for a new alloy.
- Second, we have focused research in the area of semi-solid metalworking ("SSM"). SSM is intended to give automotive and other parts the physical properties of forgings with the production cost of die-castings. We have obtained a patent for the casting and transformation of aluminum to produce SSM parts.
- Third, we have undertaken an initiative to further develop a process to recycle Spent Pot Lining ("SPL"). We believe this process may allow SPL to be recycled into several marketable products rather than being treated and land filled at a significant cost. We have a patent on our method of treating SPL from aluminum reduction cells and have applications for other patents on SPL recycling.
- Fourth, our subsidiary, Northwest Aluminum Technologies, has acquired and expects to develop a new technology to smelt aluminum in a low temperature bath using inert metallic anodes and titanium diboride cathodes. In our pursuit of this technology, we have acquired four patents and intend to file additional patent applications. We also have received three grants from the U.S. government to fund additional research to develop new smelting technologies.
- Fifth, we engage in several other research and development projects to continuously improve our smelting and casting operations.
We have eight patents and two trademarks. We have set out a description and the termination date of each in the following table. We also have a number of patents pending.
SALES AND MARKETING
Hydro and Glencore have been our largest customers, accounting for 43% and 5% of our revenues in 2000 and 37% and 17% of our revenues in 1999, respectively. The Glencore tolling arrangement expired on December 31, 1999. We directly sell value-added aluminum products to approximately 100 extruders, forgers, casters, traders and other customers throughout the United States and abroad. Our Vice President of Sales and Marketing oversees a small sales and customer service group that makes and supports these direct sales.
SUPPLIERS
The major raw materials we use are alumina, petroleum coke and coal tar pitch, aluminum ingot, scrap aluminum and alloying elements and electricity. We obtain our raw materials either through annual contracts or on the spot market. Our recent curtailments have altered the delivery schedules of our longer term supply arrangements.
Alumina consumed in the production of aluminum is supplied by Hydro for all the alumina requirements of the smelter operations at Goldendale under the tolling agreement. Glencore supplies all of the alumina requirements of the smelter at The Dalles under a long-term supply agreement.
The other raw materials involved in the reduction of alumina are petroleum coke, coal tar pitch and carbon lining. Petroleum coke is used to make anodes and carbon lining and is sourced locally from a large producer of quality coke, which is one of several suppliers. Coal tar pitch is available from several suppliers. Carbon lining, which acts as the cathode in the smelting cells, is purchased from various suppliers.
We annually purchase aluminum to supplement our smelter production. Prior to December 31, 1999, we were buying back from Glencore almost the entire 82,000 metric tons of our smelter production at The Dalles. Additionally, we were purchasing approximately 45,000 metric tons from other producers, including Hydro, at market prices in the form of primary ingot, primary molten metal and scrap metal. Primary suppliers include Hydro, Vanalco and Alcoa. The other major inputs in the making of aluminum products are alloying elements, such as magnesium and silicon, which are provided by various suppliers.
HEDGING ACTIVITIES
Our revenues and earnings are sensitive to changes in the price of primary aluminum and in the premiums for, and mix of, our value-added products. For example, the tolling fees we receive are tied to the London Metal Exchange price of aluminum. The premiums that we must pay for base metal that we do not produce in our own smelters fluctuates within an historical range of minus $0.01/lb to plus $0.075/lb. This premium is dependent on the geographic location of the source materials and the destination, as well as the general availability of metal inventory and demand.
Primary aluminum prices historically have been subject to significant cyclical price fluctuations. The timing of changes in the market price of aluminum are largely unpredictable. Aluminum prices historically have shown long periods of average, or below average, prices followed by sudden, relatively short periods of above average prices. The sudden rise of prices is generally the result of some unforeseen event that changes the fundamental dynamic of the existing marketplace. The fall of communism and the resultant excess of Russian metal on world markets was one such event and the massive shortage of electricity in the western United States is another such event. Over the thirteen-year period between January 1, 1988 and December 31, 2000, the three month price of aluminum on the London Metal Exchange has ranged between a low of approximately $0.47 per pound to a high of approximately $1.26 per pound. During this period prices averaged $0.72 per pound.
In general when we engage in fixed price forward sales contracts, we also purchase the base material at a fixed price and premium for delivery or settlement during the time period when the sale occurs. In general we do not hedge our smelter production, preferring to utilize that production for formula based sales, since we have some degree of control in reducing our manufacturing costs. Because our curtailments left us exposed to obligations to sell value-added primary aluminum products without a corresponding production capability, we acquired a limited number of call options over the expected period of the curtailment to hedge our sales obligations. In order to manage the risk of market aluminum prices and continue to service our customer commitments, the strategic use of options on aluminum were employed. When we initially curtailed our smelter operations in October 2000, we purchased the same tonnage of options (3500 mt per month) for the expected period of curtailment that we would normally have purchased. When we further curtailed our smelter operations in December 2000, we then purchased an additional tonnage of options. Historically, we have agreed to sell our value-added products from two to six months before the start of the calendar year. The current year was no different because there was little information regarding the ultimate severity of electricity shortages.
BACKLOG
The only sales for which we have a backlog are those for which an absolute price has been agreed. The amount of backlog expands and contracts throughout the year depending on (1) fixed price orders our customers receive from their customers and (2) our customers' beliefs regarding the future direction of aluminum pricing. Another major factor that is affecting backlog this year is the decline in the truck trailer market and the reduction of fixed forward orders placed by two of our customers that supply that market. For these reasons as well as the timing of shipments, backlog may not be a reliable indicator of future sales activity. Our fixed price backlog at December 31, 2000 was $27.7 million as compared to $31.7 million at December 31, 1999. At March 22, 2001 our fixed price backlog was $24.6 million as compared to $62.4 million at March 22, 2000.
COMPETITION
Competition within the aluminum industry is intense. We compete with both domestic and foreign producers of primary aluminum and with primarily domestic producers of extrusion billet and other value-added products and with primarily domestic producers of other products such as copper, steel, glass and plastic. Many of our competitors have greater financial resources than we do, which may adversely affect our ability to compete effectively.
Primary aluminum is a commodity with standard qualities. Competition generally is based upon the ability to produce primary aluminum at a cost below the market price, which generally is established through trading on the London Metal Exchange. We also compete with various aluminum producers, casting companies, extruders and other fabricators in the production of extrusion billet, sheet ingot, small diameter ingot and other value-added products. In the extrusion billet market, we compete primarily with Alcan and Alumax, a subsidiary of Alcoa. Northwest Aluminum Specialties' major competition in the small diameter billet segment comes from Alcoa, Kaiser, Pimalco, a large, efficient extruder and subsidiary of Alcoa, Newman and Allgoods, which are both punched plate producers. Competition in the sale of these value-added products generally is based upon price, quality, availability, service and other factors. We concentrate on the sale of value-added products in which we believe we have production expertise, cost, quality, geographic and other competitive advantages.
ENVIRONMENTAL AND HEALTH MATTERS
We are subject to federal, state and local environmental laws. From time to time, these environmental laws are amended and new ones are adopted. These laws regulate, among other things, air emissions and water discharges; the use, generation, storage, treatment, transportation and disposal of solid and hazardous materials and wastes; and the release of hazardous or toxic substances or other contaminants into the environment. In addition, we are subject to various federal, state and local workplace health and safety laws and regulations. The environmental and health laws are administered by the U.S. Environmental Protection Agency, and various other federal, state and local agencies.
To operate our business in compliance with environmental and health laws, we must obtain and maintain in effect permits for each of our facilities for a variety of operations. These permits include without limitation permits for discharges of wastewater, emission of air pollutants and management of hazardous wastes. As a result, we sometimes are required to make expenditures for pollution control equipment or for other purposes related to our permits and compliance with the environmental and health laws. We have been fined or penalized for breaches or alleged breaches of the environmental and health laws and subjected to claims and litigation brought by federal, state or local agencies and by private parties seeking remedial or other enforcement action under the environmental and health laws or damages related to injuries or alleged injuries to health or to the environment. The Dalles smelter, the Goldendale smelter and the Portland unloading facility were subject to an environmental compliance assessment by an independent environmental consultant in 1996 that was updated in the summer of 1998. In both cases, we hired and paid the consultant. These assessments were intended to evaluate our compliance with the environmental laws regulating discharges of wastewater, emission of air pollutants and the management of hazardous wastes. These assessments identified no condition of non-compliance that we believe would have a material adverse effect on our financial condition or results of operations, nor are we aware of any such material condition.
Our manufacturing facilities have been in operation for several decades, and these facilities have used substances and generated and disposed of wastes that are or may be considered hazardous. For example, these facilities have in the past stored or disposed of wastewater treatment sludge in on-site surface impoundments such as ponds and lagoons and have handled spent pot liner and disposed of spent pot liner and other wastes in on-site regulatorily-approved waste piles.
Martin Marietta Corporation, a prior owner of The Dalles smelter, conducted an investigation of soil and groundwater at the smelter and implemented clean-up measures at the smelter site, including the removal of hazardous substances from groundwater and certain areas of the site and the encapsulation of other areas where hazardous substances were disposed or released. Martin Marietta performed this work under the supervision of the U.S. Environmental Protection Agency. In 1996, Martin Marietta completed the investigations and clean-up measures required by the EPA at The Dalles smelter site. Although the purpose of the Martin Marietta investigation was to identify all areas at the smelter where hazardous substances had been disposed or released, some affected areas may not have been identified or the clean-up measures may not perform as expected in the future.
Hazardous substances have also been released at the Goldendale facility, and the site was listed in the EPA's Comprehensive Environmental Response, Compensation, and Liability Information System database in 1980. We expect expenditures will be necessary at the Goldendale smelter to investigate and clean up releases of hazardous substances disposed or released at the Goldendale smelter. We have requested the State of Washington Department of Ecology to approve a plan to close an on-site surface impoundment at the Goldendale facility by 2005-2006. We expect to receive a response from the State of Washington. As of December 31, 2000, the estimated cost of the surface impoundment closure and post-closure actions was $1.9 million. We have established a trust fund of approximately $1.3 million as of December 31, 2000, to help pay these costs, and we have procured insurance coverage to provide funds to the State of Washington for closure if we default. The actual closure costs may exceed our estimate. Under a contract with the former owners of the Goldendale smelter, the former owners have agreed to reimburse Goldendale Aluminum Company for certain anticipated expenditures. We do not assure you the former owners of the Goldendale smelter will contribute their contractually allocated share of the costs necessary to investigate and cleanup hazardous substances disposed or released at the Goldendale smelter site or to obtain regulatory closure of surface impoundments at the site.
Due to continuing environmental regulations regarding spent pot liner disposal, over the past few years we have experienced substantial increases in costs associated with the disposal of SPL from our smelters. We presently dispose of SPL under a contract with a chemical waste treatment company, which expires on February 14, 2003. EPA has proposed but not published a new treatment standard for SPL. The Company cannot predict if or when EPA will publish the proposed rule nor can the Company predict what, if any, impact the proposed rule would have on the Company's SPL disposal practices.
In December 2000, the Company was designated as a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and by the State of Oregon under applicable state laws with respect to the Portland Harbor Superfund site in Portland, Oregon. Other PRP's also have been so designated. The Company, along with other PRP's, is participating in the funding of a remedial investigation/feasibility study. Management does not anticipate selection of a remedy for several years and is of the opinion that the Company will be found to have a de minimus liability, if any, in the outcome of the matter.
An environmental condition that we do not know about could exist as to one or more of our properties and could have an adverse effect on our results of operations or financial condition. Future environmental or health laws could have an adverse effect on our results of operation or financial condition.
EMPLOYEES
As of December 31, 2000, we employed 1,084 workers, 494 of which are members of Local 8147 and 366 of which are members of Local 9170 of the United Steelworkers of America (USW). Goldendale Aluminum Company is signatory to a collective bargaining agreement with the USW for the period May 24, 1996 through May 31, 2001. Northwest Aluminum Company is a signatory to a collective bargaining agreement with the USW for the period July 1, 1996 through June 30, 2001. Because of uncertainties surrounding our future power supply and rates and operating levels after October 2001, the Company and the USW are in discussions to extend the expiration date of current labor agreements until September 2001.
Both labor agreements provide for a 4% wage increase each year of the contract. During the contract period there is a no strike/no lockout agreement. We provide a profit sharing program in addition to the base compensation for all employees, and a fully paid medical, dental and vision health care plan. We have a 401(k) plan but no defined benefit plan.
In conjunction with our agreement with BPA to remarket excess power resulting from the December 2000 curtailment, we reached an agreement with the United Steelworkers of America concerning the use of the proceeds from the remarketing of power. We are required to obtain the USW's consent in order to use the remarketing proceeds for nonemployee-related qualified expenditures. The USW has agreed that its consent will not be unreasonably withheld.
We believe we have a good relationship with the union and an employee involvement process that encourages creativity, productivity and positive employer-employee relations.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to our goals, plans and expectations regarding: the future availability of low-cost power, the facilities investment program, the regulation of the disposal of spent pot liner, the development of new smelting technology by Northwest Aluminum Technologies, and capital expenditures. Risk factors related to these forward looking statements are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements."
ITEM 2.
ITEM 2. PROPERTIES
We own all of our facilities. The following table shows (1) each facility, (2) its square footage, (3) its annual production capacity and (4) its use.
FACILITIES
We believe these facilities are adequate to meet our current needs. We are expanding or upgrading some of our facilities as a result of the facilities investment program. Most of our facilities are subject to mortgages and other claims held by our creditors to secure our 12% first mortgage notes and our indebtedness to Hydro. See Item 1, "Business -- Facilities Investment Program."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising from our normal business activities. We believe these legal proceedings, individually or combined, will not have a material adverse effect on our financial condition, results of operations or cash flows.
In December 1999, Goldendale settled a dispute with the Internal Revenue Service relating to proposed adjustments in its taxable income for prior years. In August 1999, Northwest settled a similar dispute with the IRS. Goldendale and Northwest have agreed to capitalize certain expenditures for prior years. As a result, we paid a dividend of $1.9 million to our shareholder for payment of these taxes.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock. There is one holder of our common stock.
We are a subchapter S corporation and pay dividends to our sole shareholder. In 1999 and 2000, we paid cash dividends of $1.9 million and $0, respectively, to our sole shareholder.
With certain exceptions, we will not, and will not permit our subsidiaries to, create or otherwise allow to exist any consensual restrictions on the ability of any subsidiaries to pay dividends or make any other distributions on their capital stock or pay any indebtedness owed to us or any of our other subsidiaries or to make loans or advances or transfer any of their assets to us or any of our other subsidiaries.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below includes the accounts of Northwest Aluminum Company, Northwest Aluminum Technologies and Northwest Aluminum Specialties for all periods presented. It also includes the accounts of Goldendale Holding Company and Goldendale Aluminum Company from May 22, 1996, the date Goldendale was acquired by Brett Wilcox, our sole shareholder. This data should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this document.
- --------- (1) For the years ended December 31, 1998, 1999 and 2000, earnings were insufficient to cover fixed charges. The earnings deficiency was $2,390, $27,880 and $8,409 in 1998, 1999 and 2000, respectively.
EBITDA represents operating income before deductions for depreciation and amortization. EBITDA has been presented because we believe it is commonly used by investors to analyze operating performance and to determine a company's ability to take on additional indebtedness or service indebtedness. EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or any other measure of income or cash flow that is prepared as generally accepted accounting principles require, or as a measure of a company's profitability or liquidity. In addition, our definition of EBITDA may not be identical to similarly entitled measures used by other companies. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements included elsewhere in this document.
For purposes of the computation of the ratio of earnings to fixed charges, fixed charges consist of interest expense, amortization of deferred financing costs and dividends accrued on the Goldendale preferred stock. Earnings consist of income before income taxes plus fixed charges.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to reading this section, you should read the consolidated financial statements and related notes that begin on page. That section contains all of our detailed financial information including our results of operations.
BASIS OF PRESENTATION
We were incorporated in the state of Oregon in June 1998 for the purposes of becoming the holding company of Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., Northwest Aluminum Technologies, LLC and Goldendale Holding Company and its wholly owned subsidiary, Goldendale Aluminum Company. For purposes of this section only, the term "Northwest" refers to Northwest Aluminum Company and Northwest Aluminum Specialties, Inc., the term "Goldendale" refers to Goldendale Holding Company and Goldendale Aluminum Company and the term "Technologies" refers to Northwest Aluminum Technologies, LLC. We, along with Goldendale and Technologies, report on a December 31 fiscal year basis. Northwest reports on a September 30 fiscal year basis. Included in intercompany payable at December 31, 2000 is $4.2 million representing the portion of intercompany transactions that do not eliminate due to the differing year-ends. All other significant intercompany accounts and transactions have been eliminated. We do not believe seasonal or other factors materially affect the consolidation of these differing fiscal periods. During 2000 we curtailed operations at our facilities. Refer to discussion of this matter included in Item 1, "Business".
OVERVIEW
Our revenues have historically come from two primary sources:
(1) fees received from smelting alumina into aluminum and casting that aluminum into primary and value-added aluminum products under tolling contracts with Hydro and until December 31, 1999 with Glencore, and
(2) the sale of non-tolled value-added aluminum products to other customers.
Revenue from fees for the conversion of alumina and processing of aluminum under tolling arrangements is recognized upon completion of the tolling process. Under the tolling arrangements, alumina suppliers deliver their alumina to us. The alumina is converted to aluminum in reduction cells by putting it in liquid form by dissolving it in an "electrolyte" solution and then passing electric current through the electrolyte to separate the alumina into its two parts, aluminum and oxygen. This process is continuous and is nearly instantaneous as the alumina is dissolved in the electrolyte. The molten aluminum is withdrawn from the cells and cast or formed into finished products. Revenue from the sale of non-tolled value-added aluminum products is recognized upon shipment to the customer.
Because our tolling fees are a percentage of prices of aluminum on the London Metal Exchange, the amount of revenue from tolling activities varies depending on market aluminum prices, especially LME prices and gross smelter production volumes. The tolling fees are based on prior three-month average LME prices and not current market aluminum prices. Additional revenue for tolled value-added products is dependent on the volume of value-
added production and the cost of production versus the dollar amount of pricing premiums. The amount of revenue from non-tolled value-added sales varies depending on market aluminum prices, demand for our value-added products and the pricing premiums we are able to realize for these products. Our revenues from non-tolled value-added products may not be as strongly affected by lower LME prices as is the case with tolling fees because of increased demand for value-added products at lower prices.
The aluminum industry is highly cyclical, with market prices fluctuating widely based on global supply and demand factors, most of which are beyond our control. As shown below, for 2000, the average price per pound of aluminum on the London Metal Exchange was higher than the average price in 1999 and 1998. The average three-month LME prices per pound of aluminum over the last six years were as follows:
The timing and magnitude of an increase or decrease in aluminum prices is uncertain. As of December 31, 2000, the three-month LME price per pound of aluminum was $0.71, and more recently LME prices have fluctuated around $0.68 per pound.
One of our primary costs is electrical power and prior to 2000, those costs had been relatively stable. The source of the majority of our power has been through the Bonneville Power Administration (BPA). We have supplemented the BPA power with purchases of market power during time periods that have historically had lower cost than our cost through BPA.
Beginning in the latter part of 2000, the market price of electric power began to increase dramatically because of an extreme shortage of supply and other factors. As an example, our average cost of power per pound of aluminum produced was $.16 and $.18 in 1999 and 2000. The average market price of power for the last six months has been approximately $245 per megawatt, equating to $1.95 per pound of aluminum produced. These changes in power prices made it apparent that we needed to change our strategies to obtain affordable power long term.
While most of our power supply during the 4th quarter of 2000 and the first three quarters of 2001 were under fixed price contracts with BPA, a portion was not covered during the late Spring 2001 when market power prices historically have been very low. Because of the dramatic increase in forward power prices that occurred in 2000 it became uneconomic to purchase power to meet our open requirements during the Spring 2001. We therefore chose to reduce our production level to approximately 60% of normal beginning October 2000 and "reshape" or sell power where we had excess over operational need because of reduced production level and "reshape" or buy power for any open periods.
By the end of December 2000, market prices for electrical power had further escalated to the point that the financially prudent option was to have all electrical power available to us remarketed by BPA instead of producing aluminum with it. Late in December, we shut down essentially all remaining smelter production capacity, leaving only approximately 25 metric tons of capacity on line at the Goldendale facility and none at Northwest.
We entered into an agreement with BPA, which allows BPA to remarket the power available to us and use these proceeds to reimburse us for defined qualified expenditures. Additionally, agreements were made with the United Steelworkers of America in regard to employee lay-offs, with Norsk Hydro in regard to readjusting our tolling agreement with Hydro and with Glencore in regard to readjusting the alumina supply contract.
We entered into a Remarketing Addendum (the "Addendum") with BPA in December 2000. Under the Addendum, our operating subsidiaries, Goldendale Aluminum Company and Northwest Aluminum Company,
agreed to curtail smelter production and assist BPA in remarketing the electric power that they had the right to purchase. BPA agreed to use the proceeds from the remarketing to reimburse Goldendale Aluminum Company and Northwest Aluminum Company or their designees for specified qualified expenditures, including, among others, expenses associated with debt service and workforce reductions resulting from the curtailment, and expenditures for the planning, licensing, siting, acquisition and/or construction of conventional or renewable resources to provide power for future operations of our smelters. For a given sale of remarketed power, the net proceeds are equal to the revenue received by BPA in the sale, minus the price we would have been obligated to pay had we purchased the power, minus a specified amount retained by BPA, plus any interest costs BPA avoids as a result of the net proceeds. We estimate that from December 29, 2000 through September 30, 2001, $285.0 million of net proceeds will be available for reimbursement of qualified expenditures. The Addendum is effective through the earlier of the date on which all of the net proceeds have been paid by BPA or September 30, 2010.
In October 2000, we entered into a new power sale agreement with BPA that will be effective from October 1, 2001 through September 30, 2006. The contract will allow us to direct available power to either or both of our operating facilities. Approximately 50% of our power requirements will be met through the contract. Last summer, BPA completed a rate proceeding to determine the base rate under this new power contract. The base rate adopted by BPA was $23.5 per megawatt-hour. The rate adopted by BPA also included a "Cost Recovery Adjustment Clause," which allows BPA to adjust rates under certain defined circumstances. While past BPA rates also contained a similar adjustment clause, rate adjustments had never been implemented in the past. But because of dramatically higher power market prices for the power BPA needed to purchase to meet its supply obligations, BPA indicated during the fall of 2000 and winter of 2001 that it probably would need to impose a significant surcharge on rates effective after October 1, 2001. In March 2001, BPA proposed a revised and expanded "Cost Recovery Adjustment Clause" that would grant BPA very broad discretion to adjust rates every six months to ensure that it could recover all its costs and repay its obligations to the U.S. Treasury under almost any circumstances. This revised "Cost Recovery Adjustment Clause" and the initial rate adjustment is subject to a new BPA rate proceeding that is scheduled to be completed by June 2001 and to review by the Federal Energy Regulatory Commission ("FERC"). While the outcome of these proceedings is uncertain, we expect the resulting power costs to be significantly higher than under our current power sale agreements with BPA. Because the rate for BPA power will not be determinable until the conclusion of the rate case, we have a unilateral right to terminate the contract within a specified period after FERC approves the new rates. We anticipate FERC approval by September 2001. Under the new contract, we will not be able to reshape or have BPA remarket our procurements of power. In addition, the BPA Administrator may have broad discretion to temporarily or permanently limit or terminate our purchases of power in circumstances in which the Administrator determines that we are not in compliance with all applicable federal, state and local laws and regulations. We do not expect to receive any cost-based firm power service directly from BPA after our new contract expires on September 30, 2006.
Our long-term power strategy is now one of self-reliance, severing our dependence on BPA and becoming a power supplier as well as a power consumer. This posture will allow us opportunities to choose between producing aluminum when aluminum prices are high and power prices low or selling power when aluminum prices are low and power prices high.
Our cash flow and earnings are highly sensitive to aluminum prices and now to market power prices because the balance of our production costs are largely fixed. At low market aluminum prices and/or high market power prices, we are able to reduce some variable costs, but most of the production costs of primary aluminum are constant in the short term (alumina, labor, carbon), and therefore such changes in market prices will cause declines in earnings. Conversely, increased market aluminum prices and/or decreased market power prices will cause increases in earnings.
To reduce our reliance on market-priced primary aluminum and to improve overall profitability, we have pursued a strategy of increasing both our "tolled" and "non-tolled" value-added production through specialty casting and processing operations. Through these operations, we are able to realize premiums over market LME prices, the amount of which varies with the degree of value-added content of the product and uniqueness of the product in the marketplace. Our volume of value-added production has increased significantly over the past decade relative to the volume of our primary production. Our continued investment in value-added production operations is designed to further increase our value-added production capabilities. As a consequence of this strategy, the volume of non-tolled value-added production at Northwest has grown from 153.7 million pounds in 1993 to 266.6 million pounds in 2000. Prior to January 1, 2000, the smelter operation at The Dalles was under a tolling contract with Glencore.
The Glencore tolling contract allowed Northwest to operate the smelter at The Dalles at full capacity while it developed value-added products. The success of our non-tolled products, however, reduced the importance of this contract, and it was not renewed upon its expiration in December 1999. The effect of this non-renewal was the elimination of revenue and cost of revenue related to tolling aluminum for Glencore. The underlying cost for primary aluminum is now our own production cost rather than the market price we were paying Glencore and others for aluminum for our value added operation.
THE BUSINESS COMBINATION
On December 18, 1998, Brett Wilcox contributed to Golden Northwest Aluminum, Inc. his membership interest in Technologies and all of the outstanding shares of common stock of Northwest and Goldendale. This business combination was treated for accounting purposes as a combination of entities under common control in a manner similar to a pooling of interests. The business combination has not had and we do not expect it to have a significant impact on our financial position, results of operations or cash flows. In accordance with generally accepted accounting principles, however, the amount recorded as Goldendale preferred stock has been reclassified and recorded as a minority interest of our company.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data as a percentage of revenues for 1998, 1999 and 2000.
2000 COMPARED TO 1999
Total revenues decreased from $452.5 million to $423.8 million for the years ended December 31, 1999 and December 31, 2000, respectively, a decrease of $28.7 million, or 6.3%. Revenues were primarily influenced by the cessation of the Glencore tolling agreement, by a partial curtailment of operations to facilitate the opportunity to sell electrical power into the marketplace and by changes in the market prices of aluminum and power.
The cessation of the Glencore tolling agreement eliminated approximately 500,000 pounds per day of production billable under tolling arrangements beginning January 1, 2000. Because of Northwest's September 30 year-end, the impact on the Company's consolidated financial statements was reported beginning April 1, 2000. For the year ended December 31 tolling revenues decreased $54.3 million from 1999 to 2000 due to the cessation of this agreement. Tolling revenues continued to be earned under the Company's Hydro tolling contract, increasing from $166.6 million to $180.1 million for the years ended December 31, 1999 and December 31, 2000, respectively.
Total revenues from tolling agreements decreased from $241.6 million to $200.8 million for the years ended December 31, 1999 and December 31, 2000, respectively, a decrease of $40.8 million, or 16.9%.
Volumes produced under tolling contracts decreased from 527.9 million pounds to 373.6 million pounds for the years ended December 31, 1999 and December 31, 2000, respectively, a decrease of 154.3 million pounds, or 29.2%. The decrease in production volume due to the non-renewal of the Glencore tolling agreement was 137.8 million pounds, with a related decrease in revenues of $56.7 million. Other than the decrease due to the non-renewal of the Glencore tolling agreement, the decrease in production level under tolling arrangements was due to a partial curtailment beginning in October 2000 of production capacity to facilitate the reshaping of electrical power procurement to open periods. The production capacity of the Goldendale facility was cut to approximately two-thirds of normal capacity for the final three months of 2000, resulting in a decrease in production volume of 16.5 million pounds, with a related decrease in revenues from tolling agreements of $8.0 million.
Offsetting the impact of volume changes, increases in average effective LME aluminum prices from $.60 per pound to $.71 per pound for the years ended December 31, 1999 and December 31, 2000, respectively, increased revenues from tolling contracts by $23.8 million.
Sales of non-tolled products increased from $202.6 million to $219.6 million for the years ended December 31, 1999 and December 31, 2000, respectively, an increase of $17.0 million, or 8.4%. The primary factors affecting revenues from sales of non-tolled products were the rise in market prices of aluminum and changes in volumes shipped.
An increase in average selling price of $.07 per pound because of the overall rise in the market price of aluminum provided an increase in non-tolling revenues of $18.1 million from 1999 to 2000. Somewhat offsetting this positive impact was a slight decrease in shipments of non-tolled aluminum products from 268.1 million pounds to 266.6 million pounds for the years ended December 31, 1999 and December 31, 2000, respectively, a decrease of 1.5 million pounds, or approximately one-half of one percent.
Other revenues, primarily from the sale of carbon briquettes, decreased from $8.3 million for the year ended December 31, 1999 to $3.4 million for the year ended December 31, 2000.
Cost of revenues decreased from $438.1 million to $394.8 million for the years ended December 31, 1999 and December 31, 2000, respectively, a decrease of $43.3 million, or 9.9%. As a percentage of revenues, cost of revenues declined from 96.8% to 93.2% for the years ended December 31, 1999 and December 31, 2000, respectively. The primary influences on cost of revenue were the cessation of the Glencore tolling agreement, a partial curtailment of production to facilitate the opportunity to have BPA remarket electrical power into the market place, an increase in market aluminum prices and an increase in our cost of power.
Beginning January 1, 2000, the cessation of the Glencore tolling agreement enabled us to utilize our Northwest smelting capacity to provide material for our sales of non-tolled value-added product. This eliminated $57.9 million of cost of revenues for the year ended December 31, 2000. In addition, the cost of materials for approximately 75% of our non-tolled value-added product is now at our internal smelter production cost instead of market aluminum prices.
The production capacity of the Goldendale facility was cut to approximately two-thirds of normal capacity during the last three months of 2000. This resulted in a decrease in production volume of 16.5 million pounds and a decrease in cost of revenues of $7.8 million.
The increased market price of aluminum from 1999 to 2000 resulted in an increase of $15.5 million in our purchased metal costs over the prior year.
For the years ended December 31, 1999 and December 31, 2000, respectively, power costs increased $4.8 million from $86.0 million in 1999 to $90.8 million in 2000. If we had been at full operation for the entire year our cost of power would have increased by approximately $9.4 million, but our reduced levels of production decreased our usage, thus decreasing our cost $4.6 million.
Gross margin increased from $14.4 million for the year ended December 31, 1999, to $29.0 million for the year ended December 31, 2000, an increase of $14.6 million, or 101.4%. As a percentage of revenues, gross margin rose from 3.2% to 6.8% for the years ended December 31, 1999 and December 31, 2000, respectively. The increase in gross margin resulted primarily from the changes in revenues and cost of revenues (discussed above).
Sales of the power made available from the curtailment in October 2000 generated $18.3 million, less the cost of the power, resulting in net proceeds of $14.0 million.
The employee and contract costs related to the production curtailments at Goldendale during 2000 totaled $42.9 million, of which $40.8 million is reimbursable from the remarketing proceeds. The employee and contract costs related to the production curtailments at Northwest totaled $6.6 million, of which $5.4 million is reimbursable from the remarketing proceeds. Due to differing year-ends, the statement of operations does not include the Northwest costs or reimbursements.
General and administrative expenses increased from $16.7 million to $19.4 million, for the years ended December 31, 1999 and December 31, 2000, respectively. As a percentage of revenues, general and administrative expenses increased from 3.7% to 4.6% for the years ended December 31, 1999 and December 31, 2000, respectively. The increase resulted primarily from the recognition of a $2.0 million provision for the possible non-collection of an account receivable.
Interest expense increased from $22.0 million to $23.7 million for the years ended December 31, 1999 and December 31, 2000, respectively. The increase from 1999 to 2000 is due to increased borrowings under our revolving credit facility.
Income tax benefit decreased from $3.7 million to an income tax expense of $4.4 million for the years ended December 31, 1999 and December 31, 2000, respectively. This change was due primarily to an increase in taxable income of Goldendale, a C corporation, for the year ended December 31, 2000 compared to 1999.
As a result of the foregoing factors, we reported a net loss of $6.8 million for the year ended December 31, 2000 versus a net loss of $19.9 million for the year ended December 31, 1999.
1999 COMPARED TO 1998
Primary and value-added aluminum produced under tolling contracts increased slightly from 526.3 million pounds in 1998 to 527.9 million pounds in 1999. Shipments of non-tolled value-added aluminum products were 270.5 million pounds and 268.1 million pounds for 1998 and 1999, respectively, a decrease of less than 1%.
Revenues decreased from $479.3 million in 1998 to $452.5 million in 1999, a decrease of $26.8 million, or 5.6%. Revenues from tolling contracts decreased 9.3% from $266.3 million in 1998 to $241.6 million in 1999, primarily due to the decrease in average effective LME aluminum prices from $.67 per pound in 1998 to $.60 per pound in 1999. Sales on non-tolled value-added products decreased slightly from $204.6 million in 1998 to $202.6 million in 1999, due to the slight decrease in shipments from 1998 to 1999. Tolling revenues earned in 1998 and 1999 under the Hydro and Glencore tolling contracts were $178.1 million and $166.6 million, and $88.2 million and $75.0 million, respectively.
Cost of revenues decreased from $447.9 million in 1998 to $438.1 million in 1999, a decrease of $9.8 million, or 2.2%. The cost of revenues decreased due to the decrease in the effective market aluminum prices in 1999 and reduced power costs from the liquidation of a power contract for $3.5 million.
Gross margin decreased from $31.4 million in 1998 to $14.4 million in 1999, a decrease of 54.1%. As a percentage of revenues, gross margin declined from 6.6% to 3.2%. Gross margin declined due primarily to the decrease in revenues of $26.8 million, offset by a decrease in cost of revenues of $9.8 million.
General and administrative expenses decreased from $18.1 million in 1998 to $16.7 million in 1999, primarily due to the $1.5 million write-off of a long-term trade receivable in 1998. As a percentage of revenues, general and administrative expenses decreased from 3.8% in 1998 to 3.7% in 1999.
Interest expense increased from $14.2 million in 1998 to $22.0 million in 1999, or 54.9%, primarily as a result of the first mortgage notes that have a substantially greater interest rate than our prior borrowings and because of increased indebtedness. Our debt load during 1999 included the 12% first mortgage notes, the Hydro note, and beginning in the fourth quarter, borrowings against our revolving credit facility.
Income tax expense decreased from $3.0 million in 1998 to an income tax benefit of $3.7 million in 1999, primarily as a result of Goldendale's loss before income taxes of $13.0 million.
As a result of the foregoing factors, we reported a net loss of $19.9 million in 1999 versus a net loss of $4.9 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
During this period of curtailment, our cash flow and liquidity from operations will be supplemented by reimbursements for "qualified expenditures" from the remarketing proceeds received by BPA. "Qualified expenditures" include reimbursements for curtailment related employee costs, contract breakage fees, and operational inefficiencies, for capital expenditures and for debt service. For the period January 1, 2001 through September 30, 2001, these reimbursements are estimated to be $100 million, however no assurance can be given that such amounts will be realized.
Historically, our cash and capital requirements have been satisfied through cash generated from operating activities and borrowings under our primary credit facilities. Before December 21, 1998, Goldendale and Northwest operated under independent credit facilities which were scheduled to mature in 2001 and consisted of total borrowings at December 21, 1998 of $125.2 million under term loans and revolving credit facilities. See Note 4 to the consolidated financial statements. We repaid these credit facilities with proceeds from the sale of our 12% first mortgage notes.
Our current credit facility with Fleet Capital (previously BankBoston) is a $75.0 million senior secured revolving credit facility collateralized by all of the inventory, accounts receivable and other rights to payment of our subsidiaries. Availability under the revolving line of credit is controlled by a borrowing base formula based on eligible receivables and inventory, and there must always be at least $15 million available for borrowing at any given time. Based on this formula, we had net availability of approximately $62.5 million under the revolving line of credit at December 31, 2000, against which we had borrowed $47.2 million.
Our liquidity and capital needs relate primarily to payment of principal and interest on borrowings, capital expenditures, including our facilities investment program, and distributions to our sole shareholder to pay income taxes. The first stage of the facilities investment program consisting of an expansion of the Goldendale casthouse and a 34-cell demonstration of new cell line technology has been completed. We have borrowed $20.0 million from Hydro under a note purchase agreement to partially finance this facilities investment program. Our liquidity and capital needs also relate to working capital and other general corporate requirements. Additionally, the Goldendale preferred stock became redeemable at our discretion after December 31, 1998. We anticipate that the funds necessary to redeem the Goldendale preferred stock will be drawn from our revolving credit facility with Fleet Capital. The redemption price for the Goldendale preferred stock at December 31, 2000 was $30.0 million plus any accrued but unpaid dividends, which totaled $16.8 million at December 31, 2000. We intend to pay a portion of accrued dividends (approximately $8.5 million) in 2001 to fund distributions from the Goldendale Retirement Plan, the holder of the Preferred Stock. Furthermore, we are subject to a number of contingencies and uncertainties.
Our statement of cash flows for the periods indicated is summarized below:
Net cash provided by (used in) operating activities was $28.3 million, $(24.1) million and $8.6 million for 1998, 1999 and 2000, respectively. The net cash provided by operating activities during 2000 of $8.6 million was primarily attributable to cash provided by our net loss, as adjusted for non-cash charges, of $24.1 million. Additionally, changes in working capital used net cash of $15.5 million. The decrease in working capital was primarily due to the transition from the Glencore tolling arrangement with related impacts on trade accounts receivable, inventories and trade accounts payable. The decrease in intercompany receivable was primarily due to the normalization of working capital needs of Northwest during the year and the net proceeds from sales of remarketed power that otherwise would have been used by Northwest in the fourth quarter of 2000.
The net cash used in operating activities during 1999 of $24.1 million was primarily attributable to cash provided by our net loss, as adjusted for non-cash charges, of $8.2 million, offset by cash used in operating activities of $32.3 million attributable to changes in working capital needs. The changes in working capital requirements were primarily due to the rise in market aluminum prices and Northwest's transition from tolling to non-tolling.
Net cash used in investing activities was $30.4 million in 2000, compared to net cash used in investing activities of $32.6 million in 1999 and $18.7 million in 1998. Cash used in investing activities in 2000 was primarily attributable to capital expenditures of $27.2 million. Cash used in investing activities in 1999 was primarily attributable to capital expenditures of $33.1 million.
Net cash provided by financing activities was $21.9 million in 2000, compared to net cash provided by financing activities of $21.0 million in 1999, and net cash provided by financing activities of $26.8 million in 1998. Net cash provided from financing activities in 2000 was primarily attributable to net borrowings of $22.0 million under our credit facility. Net cash provided from financing activities in 1999 was primarily attributable to net borrowings of $25.3 million under our credit facility and $1.9 million paid in dividends.
We believe cash flow from operations, available borrowings under our revolving credit facility and under our note purchase agreement with Hydro, reimbursements from BPA for "qualified expenditures" and cash on hand will provide adequate funds for our foreseeable working capital needs, planned capital expenditures and debt service and other obligations through 2001.
Our ability to fund operations, make planned capital expenditures, such as our facilities investment program, make principal and interest payments on the notes, and remain in compliance with all of the financial covenants under our debt agreements will be dependent on our future operating performance. Our future operating performance is dependent on a number of factors, including aluminum and power prices, many of which are beyond our control. These factors include prevailing economic conditions and financial, competitive, regulatory and other factors affecting our business and operations, and may be dependent on the availability of borrowings under our revolving credit facility or other borrowings. We do not assure you our cash flow from operations, together with other sources of liquidity, will be adequate
- to make required payments of principal and interest on the notes and our other debt; - to finance anticipated capital expenditures; - to fund working capital requirements; or - to fund the possible redemption of all outstanding shares of the Goldendale preferred stock.
If we do not have sufficient available resources to repay any of our indebtedness when it becomes due and payable, we may need to refinance the indebtedness. We do not assure you refinancing will be available or available on reasonable terms.
SEASONALITY AND INFLATION
Our results of operations can be affected by seasonal factors, such as substantial changes in the cost of electricity caused by weather related factors. We do not believe inflation has had a material effect on the consolidated financial statements for the periods presented.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), Accounting for Certain Derivative Instruments and Certain Hedging Activities. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 and No. 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We adopted SFAS No. 133 and No. 138 as of the beginning of the fiscal year 2001. Management does not believe that the adoption of SFAS No. 133 and No. 138 will have any initial impact on its consolidated financial statements.
As prescribed in EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", we began reclassifying shipping and handling costs from a component of revenues to cost of revenues in the fourth quarter of 2000. This change required a restatement of revenues and cost of revenues for all periods presented.
FORWARD-LOOKING STATEMENTS
This report contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report (see, for example, "-Overview," "-Recent Developments," "-Results of Operations," and "-Liquidity and Capital Resources" and "Business"). Such statements can be identified by the use of forward looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the following:
- fluctuations in the price of primary aluminum;
- fluctuations in the market price of electricity;
- our ability to obtain an affordable and reliable supply of electricity;
- servicing our substantial indebtedness;
- the incurrence of future indebtedness;
- restrictions on our ability to operate our business imposed by the terms of our indebtedness;
- the effects of federal and state environmental laws and regulations;
- the continued viability of the technology used in our smelters;
- our ability to operate effectively with and without tolling agreements, including the Hydro and Glencore tolling agreement;
- retaining and recruiting key personnel;
- changes in labor relations with the unions representing our employees;
- the timing of the restart of our smelter operations; and
- our ability to create or locate cost effective supplies of power.
Other factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements, and changing prices and market conditions. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We manage interest rate risk through the strategic use of fixed and variable interest rate debt and, to a limited extent, interest rate derivatives. At December 31, 2000, our derivative instrument consisted of an interest rate swap agreement which expires in 2003 and effectively fixes our interest rate at 6.4% on a notional principal amount of $20.0 million on our floating rate long-term debt. The agreement requires quarterly cash settlements for interest rate fluctuation outside of the fixed rate.
In order to manage the risk of market aluminum prices and continue to service our customer commitments, the strategic use of options on aluminum were employed. During the curtailment, we are purchasing the 7,500 tons per month of aluminum that normally would be provided through our Northwest smelter operation. Options covering from 3,400 tons to 6,800 tons per month have been employed to protect against high aluminum prices.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplemental data required by this item are included in this Report on Form 10-K commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about our directors, executive officers and certain other key employees as of the date of this document.
Brett E. Wilcox has served as our President since our inception in June 1998. Mr. Wilcox is also the President of Northwest Aluminum Company, which he founded in 1986, and since 1996 has served as the President of Goldendale Aluminum Company. Before founding Northwest in 1986, Mr. Wilcox was the Executive Director of Direct Service Industries, a trade association of ten large aluminum and other energy-intensive companies that purchase electricity from the Bonneville Power Administration. Before 1986, Mr. Wilcox was an attorney with Preston and Gates in Seattle, Washington, concentrating in energy and general business matters. Mr. Wilcox is chairman of the Oregon Economic Development Commission, Vice Chair of the Oregon Progress Board and active in various civic and business organizations.
Allen Barkley joined Northwest in June 1995 as Production Engineering Manager and became Vice President and General Manager in October 1996. He became Deputy Chief Operations Officer of Golden Northwest Aluminum in October 2000 when the management groups of Northwest and Goldendale consolidated. Before joining Northwest, Mr. Barkley spent 18 years at a primary aluminum smelter facility in Columbia Falls, Montana where he served in a variety of capacities, including production, engineering, maintenance and public affairs.
William R. Reid joined Northwest in 1986, became its Controller in 1993 and was appointed Chief Financial Officer of Northwest in 1996 and of Golden Northwest Aluminum in August 1998. Before joining Northwest, Mr. Reid was a senior auditor with Touche Ross & Co.
Daniel J. Gnall joined Northwest in August 1991 as a metal trader, and in 1992 became Vice President -- Sales and Marketing responsible for metal purchasing and sales. He became Vice President - Sales and Marketing of Golden Northwest Aluminum in October 2000 when the management groups of Northwest and Goldendale consolidated. Before joining Northwest, Mr. Gnall was an account executive with Martin Marietta Corporation and worked for Cassmet International, Inc., a metals trading company where he served as its General Manager in charge of physical operations and non-ferrous metal purchasing and sales.
Muhsin (Mac) Seyhanli became Chief Operations Officer of Golden Northwest Aluminum in August 1998. He was one of the founders of Columbia Aluminum Company, the predecessor of Goldendale, and since 1994 has been the general manager for all operations at Goldendale, becoming its Vice President and General Manager in 1996. Before his current position, Mr. Seyhanli was a cell line manager for both Columbia and Commonwealth Aluminum. Mr. Seyhanli has over 29 years of experience in the aluminum industry.
Gerald Miller became Vice President, General Counsel and Secretary of Golden Northwest Aluminum in August 1998. He joined Columbia Aluminum Company in 1989 as General Counsel and Corporate Secretary. In 1996, Mr. Miller was named to the additional post of Vice President -- Energy and Government Affairs of Goldendale. Before joining Goldendale, Mr. Miller was a trial lawyer in private practice in the state of Washington. Mr. Miller is a member of the Board of Directors of the State of Washington Economic Development Finance Authority.
Jessie Casswell became Vice President - Purchasing of Golden Northwest Aluminum in October 2000 when the management groups of Northwest and Goldendale consolidated. Prior to October 2000, she had been the Chief Financial Officer of Goldendale since 1998 and the Controller since 1984. She has served as Chief Financial Officer of Technologies since 1999. From 1972 to 1984, Ms. Casswell served as the Controller of Northwest. Ms. Casswell is also a member of the Executive Committee of the Goldendale profit sharing plan and is the Chairperson of the Trustees of the profit sharing plan.
Stephen E. Babson became a director of Golden Northwest Aluminum in 1998. Since 1996, he has served as a director of Goldendale. Mr. Babson is the Chairman and a partner in the Portland office of Stoel Rives LLP, which acts as our counsel, since 1984. Mr. Babson is also a director of Roseburg Forest Products Co. and TechTracker.com, Inc., and serves on the advisory boards of several Pacific Northwest based technology companies. He is the general partner of Babson Capital Partners, LP, a private investment fund, and the secretary and director of the Oregon Symphony Association.
David Bolender became a director of Golden Northwest Aluminum in 1998. Since 1996, he has served as a director of Goldendale. Since 1991, Mr. Bolender has served as Chairman of the Board of Electro Scientific Industries, Inc., a manufacturer of machine tools for the electronics industry. From May 1998 to 2000, Mr. Bolender served as Chief Executive Officer and Chairman of the Board of Protocol Systems, a manufacturer of medical vital sign monitoring instrumentation. From 1982 to 1991, Mr. Bolender was President of Pacific Power and Light Company and PacifiCorp Electric Operations Group. Before joining PacifiCorp in 1982, Mr. Bolender spent 12 years with Westinghouse Electric Corporation, where he managed the construction and operation of power plants around the world. He is a member of the board of directors of Benson Industries.
Mark O. Hatfield became a director of Golden Northwest Aluminum and Goldendale in 1999. Since 1997, he has served as an administrative consultant to the Lasker Foundation, and as Chairman of Funding First, a medical and health research program of the Mary Woodward Lasker Trust. From 1967 to 1997, Mr. Hatfield served in the United States Senate as senator from the state of Oregon. From 1959 to 1967, he served as Governor of the state of Oregon. Mr. Hatfield serves on the board of directors of Lattice Semiconductor Corporation, a developer of high-performance programmable logic devices. Mr. Hatfield also serves on the Boards of Directors of Oregon Health Sciences University, the Bonneville Environmental Foundation, and GeoTrust Corp. Mr. Hatfield also is the Chairman of the Board of Directors of the Northwest Health Foundation.
Michael G. Psaros became a director of Golden Northwest Aluminum in 1998. Since 1996, he has served as a director of Goldendale. Since 1991, Mr. Psaros has been a Principal of Keilin & Co. LLC, a New York investment bank. In 1998, Mr. Psaros became a founding Principal of KPS (Keilin, Psaros, Shapiro) Special Situations Fund, L.P., a private equity fund focused on investing in underperforming, distressed and troubled companies. Before joining Keilin and founding KPS, Mr. Psaros worked in the investment banking department of Bear, Stearns & Co. Inc. Mr. Psaros serves on the board of directors of United Road Services, Inc. Mr. Psaros was originally nominated to Goldendale's board by the President of the United Steelworkers of America.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In the last fiscal year, our board of directors utilized the services of Messrs. Babson, Bolender, Hatfield and Psaros, our four outside directors, as a compensation committee. With the advice of the compensation committee, Brett Wilcox made the compensation decisions for executive officers.
EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth compensation information for the President and our other six most highly compensated executives, each of whose total annual compensation exceeded $100,000 in 2000.
Summary Compensation Table
The salaries of the above-named executive officers will be the same in fiscal 2001. Any increases in bonuses or other annual compensation will be dependent upon operating results and performance in fiscal 2001.
In connection with the acquisition of Goldendale, we entered into deferred compensation agreements with certain employees in exchange for the employees waiving their rights under stock-based compensation and other employment agreements which existed at the time. Payments made under those agreements are included above under Other Annual Compensation.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our articles of incorporation eliminate, to the fullest extent permitted by Oregon law, liability of our directors for monetary damages for conduct as a director. Although liability for monetary damages has been eliminated, equitable remedies such as injunctive relief or rescission remain available. In addition, a director is not relieved of his responsibilities under any other law, including the federal securities laws.
Our articles of incorporation require us to reimburse the directors for any liabilities and related expenses arising from our operations to the fullest extent not prohibited by law. We believe that the limitation of liability provisions in our articles of incorporation may enhance our ability to attract and retain qualified individuals to serve as directors.
DIRECTORS' COMPENSATION
Directors who are not our employees receive a fee of $5,000 per board meeting attended.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 27, 2001, 1,000 shares of common stock were outstanding, held of record by Brett E. Wilcox.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We sell semi-solid metalworking and other value-added products to Hot Metal Technologies, Inc. and Hot Metal Moldings, Inc. under annual purchase orders. Hot Metal Technologies and Hot Metal Moldings, suppliers of automotive parts, are each wholly owned by Brett Wilcox, our President and sole shareholder. Our sales to these companies under these purchase orders totaled approximately $5.8 million for the year ended December 31, 1999 and $6.4 for the year ended December 31, 2000. The terms of these sales were comparable to similar sales to non-affiliates. We also made advances to Hot Metal Technologies and Hot Metal Moldings during the years ended December 31, 1999 and 2000 by way of payroll and benefits expenses paid by Northwest Aluminum Company for Northwest employees on loan to these companies. On December 31, 1997, $4.0 million of the total amount then owed by Hot Metal Technologies and Hot Metal Moldings to us for accounts receivable and advances was converted to a note receivable. The note bears interest at 9.25% per year and is payable in quarterly installments beginning April 1, 1998 through September 2005. As of December 31, 2000, a combined total of approximately $4.1 million was owed by these companies to us, consisting of approximately $2.4 million on the note receivable and accounts receivable of approximately $1.7 million. The highest amount of total indebtedness of Hot Metal Technologies and Hot Metal Moldings to us since January 1, 1997 was $6.5 million.
In 1998, the federal government made a grant of $750,000 to Hot Metal Technologies as contractor, and Northwest Aluminum Specialties as subcontractor, for semi-solid metalworking research.
In 1999, we paid $1.9 million to Mr. Wilcox to pay taxes owed by him as a result of Internal Revenue Service adjustments for taxes owed for earlier periods for Northwest, which files as a Subchapter S corporation. In 1997, Northwest Aluminum Company paid $4.9 million to Mr. Wilcox to pay taxes owed by him as a result of Northwest's status as a Subchapter S corporation. The amount paid was in excess of actual tax liabilities and, of this amount, $2.9 million was recorded as a dividend. The remaining $2.0 million is recorded as a receivable on our consolidated balance sheet and is outstanding. No interest is payable upon the receivable.
Mr. Wilcox has entered into an agreement with Northwest, Northwest Aluminum Specialties and us under which we have agreed not to file any amended income tax return or change any election or accounting method without the consent of Mr. Wilcox if the filing or change would increase any tax liability of Mr. Wilcox. In
addition, the companies have agreed to reimburse Mr. Wilcox for any adjustment for taxes owed for earlier periods, including interest on any such payments, and for certain other fees and costs relating to periods before December 18, 1998.
Under a voting agreement effective May 17, 1996, Mr. Wilcox must cause Goldendale Holding Company to vote the shares of Goldendale Aluminum Company common stock held by it to ensure that
(1) the Goldendale Aluminum Company board of directors consists of not more than five directors; (2) not less than one director is a nominee designated by the President of the United Steel Workers of America; and
(3) not less than two directors are nominees of Mr. Wilcox who have no significant continuing business relationship with Mr. Wilcox or any entity controlled by him.
The voting agreement will remain in force so long as the USW represents the collective bargaining unit of the Goldendale facility, except that clauses (1) and (3) of the preceding sentence will continue only until the termination of the initial term of the Collective Bargaining Agreement dated April 7, 1996 between Goldendale Aluminum Company and the USW.
We are negotiating a plan and agreement with Northwest Energy Development, LLC, of which Mr. Wilcox is the sole member, pursuant to which we will be able to purchase at cost up to 100% of the power generated by the facilities to be built by Northwest Energy for the first 20 years after each facility begins commercial operation. See "Business - Access to Electric Power."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
3. EXHIBITS:
(a) The exhibits listed below are filed as part of this report
Exhibit Number
3.1 Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.1 Indenture, dated as of December 21, 1998, between Registrant, as Issuer, Northwest Aluminum Specialties, Inc., Northwest Aluminum Company, Northwest Aluminum Technologies, LLC, Goldendale Holding Company, and Goldendale Aluminum Company, as Guarantors, and U.S. Trust Company, N.A., as Trustee. Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.2 Credit Agreement, dated December 21, 1998, among the Financial Institutions named therein, BancBoston, N.A., as Administrative Agent, U.S. Bank National Association, as Documentation Agent, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., Goldendale Aluminum Company, and Northwest Aluminum Technologies, as amended by the Agreement and Amendment No. 1, dated as of January 21, 1999. Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.3 Registration Rights Agreement, dated as of December 21, 1998, by and among the Registrant, the Subsidiary Guarantors party to this Agreement; and BancBoston Robertson Stephens Inc., and Libra Investments, Inc. Incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.4 Certificate of Incorporation of Goldendale Holding Company. Incorporated by reference to Exhibit 4.4 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.1 Agreement to Toll Convert Alumina into Aluminum, dated May 22, 1996, between Hydro Aluminum Louisville, Inc., and Goldendale Aluminum Company. Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). (Confidential treatment of portions of this document has been granted by order of the Commission. The information omitted from this exhibit has been filed with the Commission.)
10.2 First Amendment to Agreement to Toll Convert Alumina into Aluminum, dated December 21, 1998. Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.3 Tax Indemnification Agreement, dated as of December 21, 1998, between Registrant, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., and Brett E. Wilcox. Incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.4 General Transmission Agreement, dated April 7, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.5 Power Sale Agreement, dated September 28, 1995, between the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.6 Voting Agreement dated May 17, 1996, by Brett Wilcox for the benefit of the United Steelworkers of America, Local 8147. Incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.7 General Transmission Agreement, dated May 4, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.8 Power Sales Agreement, dated September 18, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.9 Cancelable Swap Agreement dated January 21, 1999, between Goldendale Aluminum Company and BankBoston, N.A. Incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.10 Alumina Supply Agreement dated October 15, 1999 by Glencore Ltd. and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 31, 1999. (Confidential treatment of portions of this document has been requested. The information omitted from this exhibit has been filed with the Commission.)
10.11 Phantom Stock Termination Agreement dated August 1, 1996 between Goldendale Aluminum Company and Jessie Casswell. Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the year ended December 31, 1999.*
10.12 Block Power Sales Agreement, effective October 1, 2001, between the Bonneville Power Administration and the Registrant.
10.13 Amendment to Alumina Supply Agreement, dated as of October 23, 2000, between Glencore Ltd. and Northwest Aluminum Company.
10.14 Agreement on the Use of Net Proceeds from Remarketing, dated December 27, 2000, between the Registrant and the United Steelworkers of America.
10.15 Remarketing Addendum to the 1996 Agreements, dated effective December 29, 2000, executed by the Bonneville Power Administration and the Registrant, Goldendale Aluminum Company and Northwest Aluminum Company.
10.16 Side Agreement to Agreement to Toll Covert Alumina into Aluminum (Tolling Contract) between Hydro Aluminum Metal Products North America, Inc. and Goldendale Aluminum Company.
10.17 Second Amendment to Alumina Supply Agreement, dated January 5, 2001, between Glencore Ltd. and Northwest Aluminum Company.
10.18 Memorandum of Understanding, Curtailment of Operations due to Power Sale, dated January 11, 2001, between the Bargaining Units of the United Steelworkers of America and the Registrant, Northwest Aluminum Company and Goldendale Aluminum Company.
12.1 Statements re Computation of Ratios.
21.1 Subsidiaries of the Registrant.
24.1 Powers of Attorney (included on signature pages of the Registration Statement).
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* Management contract or compensatory arrangement.
(b) Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Golden Northwest Aluminum, Inc., and the Co-Registrants named below, have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized, in The Dalles, Oregon, on March 30, 2001.
GOLDEN NORTHWEST ALUMINUM, INC.
By: /s/ BRETT E. WILCOX ------------------------------------ Brett E. Wilcox President and Chairman of the Board
CO-REGISTRANTS
GOLDENDALE HOLDING COMPANY GOLDENDALE ALUMINUM COMPANY NORTHWEST ALUMINUM COMPANY NORTHWEST ALUMINUM SPECIALTIES, INC.
By /s/ BRETT E. WILCOX ------------------------------------- Brett Wilcox President
NORTHWEST ALUMINUM TECHNOLOGIES, L.L.C.
By /s/ WILLIAM R. REID ------------------------------------- William R. Reid Vice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Brett E. Wilcox and William R. Reid his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 30, 2001 on behalf of the Registrant and in the capacities indicated:
REGISTRANT OFFICERS AND DIRECTORS
CO-REGISTRANT OFFICERS AND DIRECTORS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Golden Northwest Aluminum, Inc. and Subsidiaries The Dalles, Oregon
We have audited the accompanying consolidated balance sheets of Golden Northwest Aluminum, Inc. and Subsidiaries as of December 31, 1999 and 2000 and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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.
As disclosed in Note 15 to the consolidated financial statements, during the year ended December 31, 2000 Golden Northwest Aluminum, Inc. and Subsidiaries temporarily curtailed the production of aluminum at its two smelter facilities.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Northwest Aluminum, Inc. and Subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Spokane, Washington March 9, 2001
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosures of Cash Flow Information (Note 12)
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
OPERATIONS, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The operations of Golden Northwest Aluminum, Inc. ("Golden" or the "Company") consist primarily of the smelting conversion of alumina to aluminum, processing of aluminum into primary products, and the sale of those products within one business segment (Note 15). The Company's operating subsidiaries' smelting operations were under tolling agreements with aluminum suppliers through December 1999. In December 1999, Northwest Aluminum Company chose not to continue its tolling arrangement and allowed it to expire. Goldendale Aluminum Company smelting operations are under a tolling agreement that has been amended and now expires December 31, 2013. The operations are located in the Pacific Northwest on the Columbia River. Approximately 80% of the labor force of the Company's subsidiaries is subject to collective bargaining agreements. The agreement with Goldendale's labor force is due to expire June 1, 2001 and the agreement with Northwest's labor force is due to expire July 1, 2001. The Company and the collective bargaining units are in discussions to extend the expiration dates of current labor agreements until September 2001.
The Company was incorporated in the state of Oregon on June 3, 1998 for the purposes of becoming the holding company of Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., (collectively "Northwest"), Goldendale Holding Company and its wholly owned subsidiary, Goldendale Aluminum Company (collectively "Goldendale") and Northwest Aluminum Technologies, LLC ("Technologies"). The sole shareholder of the Company also owned all of the outstanding shares of common stock of Northwest, Goldendale and Technologies. On December 18, 1998, the sole shareholder of Golden contributed all of the issued and outstanding shares of common stock of Northwest, Goldendale and Technologies to the Company. The transaction was accounted for as a merger of entities under common control in a manner similar to a pooling of interests. Accordingly, the financial statements give retroactive effect to this transaction. The consolidated financial statements include the accounts of Northwest, Goldendale and Technologies.
The Company, Goldendale and Technologies report on a December 31 year basis; Northwest reports on a September 30 fiscal year basis. Included in current assets at December 31, 1999 is $13,106, and included in current liabilities at December 31, 2000 is $4,241, representing the portion of intercompany advances which do not eliminate due to the differing year-ends. All other significant intercompany accounts and transactions have been eliminated.
Consolidated and separate results of Northwest, Goldendale and Technologies are as follows:
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
REVENUE RECOGNITION
Revenues for the conversion of alumina and processing of aluminum under tolling arrangements are recognized upon completion of the tolling process. Under the tolling arrangements, alumina suppliers deliver their alumina to the Company. The alumina is converted to aluminum in reduction cells by putting it in liquid form by dissolving it in an "electrolyte" solution and then passing electric current through the "electrolyte" to separate the alumina into its two parts, aluminum and oxygen. This process is continuous and is nearly instantaneous as the alumina is dissolved in the "electrolyte". Revenues from the processing and sale of aluminum products are recognized upon shipment. Net gains from the sale of power are recognized during the period that the associated power is provided.
Revenues billed to customers from shipping and handling are included in revenues for financial reporting purposes. Costs for the related shipping and handling expenses have been included in cost of revenues.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the weighted-average cost method.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates (Note 5).
The Company does not invest in financial instruments or derivatives for trading purposes. From time to time, as part of its risk management strategy, the Company uses derivative financial instruments to hedge exposure to changes in the price of aluminum. If the financial instrument qualifies for hedge accounting, changes in market value of the instrument and the premium paid are deferred until the gain or loss is recognized on the hedged commodity. If the contract is not a hedge or does not qualify for hedge accounting, changes in market value are recorded currently in cost of revenues.
Goldendale has entered into an interest rate swap agreement for purposes of minimizing exposure to interest rate risk. The differential between the floating interest rate and the fixed interest rate, which is to be paid or received, is recognized in interest expense as the floating interest rate changes over the life of the agreement.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment including cell relining costs are stated at cost, less accumulated depreciation and amortization. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to forty years, using the straight-line method.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is being amortized on a straight-line basis over twenty years. The Company periodically evaluates the recoverability of goodwill. The measurement of possible impairment is based primarily on the Company's ability to recover the unamortized balance of the goodwill from expected future operating cash flows on an undiscounted basis (Note 10).
ASSET IMPAIRMENT
The Company evaluates its long-lived assets for financial impairment, and continues to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
INTEREST COSTS
The Company follows the policy of capitalizing interest as a component of the cost of property, plant and equipment constructed for its own use. Interest costs of $44, $576 and $498 were capitalized during the years ended December 31, 1998, 1999 and 2000, respectively.
INCOME TAXES
Both the Company and its Northwest and Technologies subsidiaries have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company, including these subsidiaries, does not pay federal or state corporate income taxes on its taxable income. Instead, the Company's shareholder is liable for individual federal and state income taxes on its taxable income. It is the Company's intention to pay dividends to the shareholder in an amount no less than the sum of these federal and state income taxes.
The Company's other subsidiary, Goldendale, accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 uses the liability method so that deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws and tax rates. Deferred income tax expense or benefit is based on the changes in the financial statement basis versus the tax basis in Goldendale's assets or liabilities from period to period.
ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. Northwest sells its products to various customers involved in the manufacturing of aluminum products located throughout the United States. Credit risk arising from these receivables is controlled through credit approval, credit limit and monitoring procedures. Receivables due from the Company's two primary tolling customers prior to December 1999 comprise 41% of the Company's total trade accounts receivable at December 31, 1999. Receivables due from the Company's one tolling customer after December 1999 comprise 30% of the Company's total trade accounts receivable at December 31, 2000. All of the reimbursement receivable is due from Bonneville Power Administration. In management's opinion the credit risk associated with non-payment of the reimbursement receivable is considered minimal as the Bonneville Power Administration is an agent of the government of the United States of America.
RESEARCH AND DEVELOPMENT COSTS
Expenditures associated with research and development for existing product process improvements are expensed as incurred. These costs amounted to $1,194, $2,070 and $853 during the years ended December 31, 1998, 1999 and 2000, respectively. Depreciation on equipment used for research and development amounted to $0, $47 and $14 during the years ended December 31, 1998, 1999 and 2000.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability for an environmental matter when it is probable and can be reasonably estimated. The liability is adjusted as further information develops or circumstances change. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers.
RECLASSIFICATIONS
Certain reclassifications of 1998 and 1999 amounts have been made to conform to classifications used in 2000. As prescribed in EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company began reclassifying shipping and handling costs from a component of revenues to cost of revenues in the fourth quarter of 2000. This change required a restatement of revenues and cost of revenues for all periods presented.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), Accounting for Certain Derivative Instruments and Certain Hedging Activities. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 and 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 and No. 138 as of the beginning of the fiscal year 2001. Management does not believe that the adoption of SFAS No. 133 and No. 138 will have any initial impact on its consolidated financial statements.
EARNINGS (LOSS) PER SHARE
Basic earnings per share includes no dilution and is calculated by dividing income (loss) available to common shareholders after preferred stock dividends accrued, by the average number of shares actually outstanding during the period. Diluted earnings per share reflects the potential dilution of securities (such as stock options, warrants and securities convertible into common stock) that could share in the earnings of an entity. The Company has no dilutive securities as of December 31, 2000.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
1. INVENTORIES
Inventories consist of the following:
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
During 1998, the Company changed its method of accounting for cell relining costs from expensing such costs as incurred to capitalizing and amortizing these costs over future periods. As a result of relining the cells with improved materials, the useful life of the individual cells has increased. In addition, the cell relining activity and related expenditures vary each year. The Company believes that the new method improves the matching of revenues and costs as technological improvements have extended the estimated period of economic benefit realized from cell relining. The change was applied by retroactively restating the previously issued consolidated financial statements.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
3. OTHER ASSETS
Other assets consist of the following:
Restricted cash consists of cash held in trust and committed for environmental cleanup and workers compensation self-insurance as required by the State of Washington. These monies will be disbursed at a future date as allowed by the State.
4. LONG-TERM DEBT
Long-term debt consists of the following:
In December 1998, the Company issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by all of the Company's subsidiaries. The debt is collateralized by substantially all of the real property, plant and equipment of the Company's subsidiaries and by a pledge of all of the issued and outstanding capital stock of the Company's subsidiaries. On or after December 15, 2002, the notes are redeemable at the option of the Company at specified redemption prices. There are no sinking fund requirements. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries. In connection with the issuance of the notes, each of the Company's direct and indirect wholly owned subsidiaries has jointly and severally guaranteed the notes on a full and unconditional basis. (See Note 5.)
In December 1998, the Company entered into a $75 million bank revolving credit facility, which matures on December 20, 2003 and is collateralized by inventory, accounts receivable and related intangibles, including a security interest in the Company's tolling agreement. Borrowings under the credit facility bear interest at a floating base rate plus from 0.50% to 1.00% (10.50% at December 31, 2000) or the LIBOR rate plus from 2.00% to 2.50% (9.18% at December 31, 2000). The additional
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
margin is dependent upon the consolidated ratio of earnings before interest, income taxes, depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit agreement contains restrictive covenants, including a minimum net worth requirement, a minimum excess availability requirement and limitations on capital expenditures, dividends, additional indebtedness, mergers and other business combinations, assets sales, encumbrances, investments and transactions with affiliates. The Company was in compliance with these covenants at December 31, 2000.
Also in December 1998, the Company entered into a subordinated credit agreement with Norsk Hydro USA, Inc. pursuant to which $20 million was advanced. The debt bears interest at LIBOR plus two percent (8.82% at December 31, 2000) and is due in December 2005. The debt is secured by a second lien and a pledge on the collateral securing the first mortgage notes and is guaranteed by the Company's subsidiaries. Except for the collateral security, the guarantees by the Company are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001.
On January 21, 1999, the Company terminated at no cost its existing interest rate swap agreements and entered into a new swap agreement that expires in 2003. The fixed interest rate paid on the new swap is 6.4% and covers $20 million of notional principal amount of floating rate (LIBOR) indebtedness of the Company. Although the Company is exposed to credit loss on the interest rate swap in the event of nonperformance by the counterparties, the Company estimates the likelihood of such nonperformance to be remote. At December 31, 1999 and 2000, the fair value of the interest rate swap was approximately $92 and $350, respectively, which reflects the estimated amount that the Company would pay to terminate the contracts.
5. FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company holds call options for the purpose of mitigating the risk of market price fluctuations of anticipated aluminum purchases. These options required the payment of an upfront premium in return for the right to receive the amount, if any, by which the price at the settlement date exceeds the strike price. At December 31, 2000, the Company had option contracts that established a price range for 3,400 to 6,800 metric tons of primary aluminum per month over an 11-month period beginning January 1, 2001. For the year ended December 31, 2000, there was a loss as a result of these positions of $1,567. At December 31, 2000, the fair value of these options of $2,008 is included in other current assets.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, certain long-term debt, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities. Consequently, such financial instruments are not included in the following table that provides information about the carrying amounts and estimated fair values of the first mortgage notes based on quoted market prices (Note 4):
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
6. ALUMINA TOLLING CONVERSION AGREEMENTS
Both Goldendale and Northwest had agreements with alumina suppliers for the conversion of alumina to aluminum for a tolling charge under which the entire production capacity of the smelting facilities is dedicated to the tolling of its supplier's alumina. The supplier is obligated to supply, without charge, alumina sufficient to meet the requirements for full operation. The tolling fees set forth in the contracts are a percentage of the price of aluminum quoted on the London Metal Exchange. Goldendale's agreement, as amended, continues through December 31, 2011, and Northwest's agreement terminated on December 31, 1999. These two tolling customers accounted for 19% and 37% of the Company's consolidated revenues in 1998, 17% and 37% of the Company's consolidated revenue in 1999, and 5% and 43% of the Company's consolidated revenue in 2000.
In December 2000, Goldendale entered into an agreement modifying the terms of its alumina tolling agreement. The modification allows for a reduction in the amount of aluminum production through September 2001 to a level of approximately 15% of Goldendale's capacity and extends the tolling arrangement to December 31, 2013. In connection with the modification, Goldendale incurred modification charges of $38,750, which is included in curtailment expenses in the statement of operations (Note 15).
In October 1999, Northwest entered into an agreement to purchase alumina from a supplier at a cost based on a percentage of the price of aluminum quoted on the London Metals Exchange with deliveries scheduled over a 5-year period. In October 2000 and again in December 2000, the Company entered into agreements modifying the terms of their alumina supply contract. The modifications allow for a reduction in the amount of alumina to be purchased through 2001. The modifications are reflected in the commitment schedule (Note 9). In connection with the modifications, Northwest incurred charges of $3,200 (Note 15).
7. EMPLOYEE BENEFIT PLANS
Profit Sharing Bonus Plans
Northwest has entered into a contractual agreement, which continues through June 30, 2001, with the United Steelworkers of America, AFL-CIO, to pay annually as additional compensation 20% of the combined net income of Northwest, as adjusted in accordance with the agreement. Northwest's total additional compensation bonuses under this agreement amounted to approximately $829, $298 and $698 during the fiscal years ended September 30, 1998, 1999 and 2000, respectively.
Goldendale has a profit sharing plan for its hourly and salaried employees. All Goldendale employees are eligible participants in this plan upon completion of a probationary period. The plan provides for payments equal to a percentage of Goldendale's profits, as defined. These amounts are to be distributed to eligible participants on or before March 31 following Goldendale's year-end. For the years ended December 31, 1998, 1999 and 2000, Goldendale recorded approximately $380, $0 and $1,488, respectively, of expense related to this plan.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
Retirement Benefit Plans
Northwest has a defined contribution 401(k) profit sharing plan (the "401(k) Plan") covering substantially all Northwest employees under which employees may elect to defer pay subject to statutory limits. Northwest is committed to contribute the greater of $.25 per eligible hour worked or 5% of the combined adjusted net income of Northwest. In addition, Northwest is required to make matching contributions of 25% of elective deferrals. Northwest may also make discretionary contributions to the 401(k) Plan. Total contributions by Northwest to the 401(k) Plan amounted to approximately $341, $694 and $964 during the fiscal years ended September 30, 1998, 1999 and 2000, respectively.
Goldendale has a 401(k) profit sharing plan under which employees may elect to defer pay subject to statutory limits. Goldendale also makes matching contributions for nonbargaining employees on the basis of percentages specified in the plan and discretionary contributions as determined on an annual basis. Goldendale also maintained a separate profit sharing retirement plan (the "DC Plan") which provided retirement benefits for substantially all of its employees. Goldendale is committed to contribute the greater of 5% of net income or $.25 per eligible hour worked. During 1999, the separate profit sharing retirement plan was merged into the 401(k) profit sharing plan. For the periods ended December 31, 1998, 1999 and 2000, Goldendale recorded approximately $290, $514 and $384 of expense for plan contributions.
Deferred Compensation Notes Payable
In connection with the acquisition of Goldendale in 1996, the Company entered into deferred compensation agreements with certain employees in exchange for the employees waiving their rights under stock-based compensation and other employment agreements which existed at that date. The notes are payable in monthly installments of approximately $115, including interest at 8.75%, through 2001.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
9. COMMITMENTS AND CONTINGENCIES
The Company, in the regular course of business, is involved in investigations and claims by various regulatory agencies. The Company is also engaged in various legal proceedings incidental to its normal business activities. The Company's management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows.
During 1999, the Company contracted for the design and construction of a bath reclaim facility at Goldendale. In connection therewith, a dispute has arisen over contract change orders to an engineering
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
and construction contract. The Company has accrued an estimate of the costs to settle the claim in the amount of $520. If the settlement offer is not accepted, the ultimate cost to the Company may exceed this accrual.
As of December 31, 1999 and 2000, the Company had a liability of approximately $1,825 and $1,893, respectively, for estimated environmental remediation activities to be taken on the Company's facility. The Company's estimate of this liability is based on a remediation study conducted by independent engineering consultants. The total cost of remediation is estimated at $3 million; however, under a court decree the Company is only responsible for approximately one-half of the total. The remaining cost is the responsibility of prior owners. No accrual has been provided for the Northwest facility as the Company is unaware of any current condition which would give rise to remedial action.
In December 2000, the Company was designated as a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and by the State of Oregon under applicable state laws with respect to the Portland Harbor Superfund site in Portland, Oregon. Other PRPs also have been so designated. The Company, along with other PRPs, is participating in the funding of a remedial investigation/feasibility study. Management does not anticipate selection of a remedy for several years and is of the opinion that the Company will be found to have a de minimus liability, if any, in the outcome of the matter.
The Company has entered into various agreements for the purchase of power, alumina, and aluminum, including agreements with the Bonneville Power Administration (BPA) for the purchase of electrical power at fixed rates. Contracts with BPA expiring on September 30, 2001, were modified in December 2000 (Note 15).
Future estimated minimum payments under non-cancelable agreements at December 31, 2000 are as follows:
In October 2000, the Company entered into a new electrical power sale agreement with BPA that will be effective from October 1, 2001 through September 30, 2006. The Company expects that 50% of its electrical power requirements will be met through this contract. The new contract allows the Company to direct the available power to the facilities. The power rates set forth under the new contract are subject to review by the Federal Energy Regulatory Commission. Because the rate for BPA power will not be determinable until the conclusion of the review, the Company has the right to terminate the contract within a specified time period after the review. Under the new contract, the BPA Administrator may have broad discretion to temporarily or permanently limit or terminate purchases of power in circumstances in which the Administrator determines that the Company is not in compliance with all applicable federal, state and local laws and regulations.
10. INCOME TAXES
Income tax expense (benefit) consists of the following:
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
The difference between the federal statutory tax rate and the effective tax rate resulted from the following:
Significant components of the Company's deferred tax assets and liabilities are as follows:
In 1999, as a result of an audit by the Internal Revenue Service, the Company entered into an agreement to capitalize certain expenditures for income tax purposes. As a result of the agreement, goodwill and interest expense were reduced by approximately $2 million and $1 million, respectively, during 1999. The sole shareholder of the Company incurred additional taxes and interest associated with this agreement. In December 1999, the Company made a dividend distribution of approximately $1.9 million to reimburse the shareholder for such amounts. In 2000, as a result of the resolution of an estimated deferred tax liability arising from the acquisition of the Company, the Company reduced goodwill and interest expense by approximately $2.6 million and $.5 million, respectively.
11. PREFERRED STOCK OF SUBSIDIARY
Goldendale has authorized 150,000 shares of $.01 par value Series A cumulative, nonconvertible preferred stock. At December 31, 2000 and 1999, 131,836.1 shares were issued and outstanding. The shares were issued in connection with the acquisition of Goldendale in 1996 and are stated at their per share fair value when issued of $225. The liquidation preference on the preferred stock is $225 per share plus accumulated dividends.
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
Terms of the Goldendale preferred stock provide for dividends accruing quarterly and payable in cash as declared by the Board of Directors according to the following schedule:
Commencing on January 1, 2002, the preferred shareholders have the option of receiving additional shares of preferred stock in satisfaction of any cumulative dividend in arrears that may exist at that time. At December 31, 1999 and 2000, dividends payable on preferred stock were $13,163 ($99.85 per share) and $16,811 ($127.53 per share), respectively. The Company plans to pay a portion of dividends payable in 2001 in order to fund distributions from the Goldendale Retirement Plan.
The Company may redeem any or all outstanding shares of Series A Preferred Stock at the following redemption prices:
The shares of preferred stock and shares of common stock vote together as a single class on all matters submitted to a vote of shareholders of Goldendale. The holders of shares of preferred stock are entitled to one vote per share and have full voting rights and power equal to those of the holders of common stock.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information is as follows:
13. RELATED PARTY TRANSACTIONS
Sales to a company related by common ownership amounted to $6,406, $5,766, and $6,380 for the years ended December 31, 1998, 1999 and 2000, respectively. The receivable due from the related company includes the balance due from those sales, together with cash advances, of which $4,000 was
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
converted to a note receivable on December 31, 1997. The note bears interest at 9.25% and is payable in quarterly installments through September 2005. Interest income from this related company amounted to $263, $304 and $230 for the years ended December 31, 1998, 1999 and 2000, respectively. Purchases from this related company amounted to $1,998 and $3,216 for the years ended December 31, 1999 and 2000, respectively, of which $189 is included in trade accounts payable at December 31, 1999. There were no purchases from this related company in 1998.
A member of the Company's board of directors is a partner in a law firm which performs legal services for the Company. Fees paid to this firm amounted to $959, $96 and $153 for the years ended December 1998, 1999 and 2000. Included in trade accounts payable is $3 and $45 due to this firm at December 31, 1999 and 2000, respectively.
14. VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
Northwest has an arrangement with a third party to distribute aluminum throughout Texas. In addition to providing distribution services, the third party was a long-term customer of Northwest purchasing aluminum products for resale. In 1998, because the third party was experiencing financial problems, Northwest entered into an arrangement to extend the terms of repayment and provide a method for the third party to repay its debt to Northwest by direct retention of a portion of earned services. Northwest also ceased selling aluminum products to this third party. In September 2000, Northwest determined that, primarily due to the third party's increasingly limited earnings potential, the financial condition of the third party was worsening and an impairment of the long-term trade receivable had occurred. As a result, Northwest took a write-down on the receivable and recognized a loss of $2,037.
15. POWER SALES AND CURTAILMENT
In September 2000, the Company curtailed smelter production levels to 60% of capacity as a result of significant increases in the spot market price of electrical power. At reduced production levels, the Company was able to sell excess electrical power contractually available under its existing power contracts with the Bonneville Power Administration (BPA). As a result of these power sales, the Company recorded a net gain from power sales of approximately $13,980 in 2000, which was composed of gross proceeds of $18,277 offset by incremental excess power costs.
In December 2000, the Company curtailed smelter production further, to a level of approximately 15% of capacity at Goldendale and ceased smelting production at Northwest. This second curtailment was done in conjunction with a modification to the Company's existing electrical power contracts with BPA. The modification to the contracts allows BPA to remarket the electrical power that the Company would have used. The proceeds from the remarketed power will become available to the Company as reimbursement for "qualified expenditures" through December 2010. As defined in the remarketing agreement, "qualified expenditures" are costs related to curtailing production (including employee layoff
GOLDEN NORTHWEST ALUMINUM COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
expenditures, contract cancellation fees, unabsorbed fixed costs and debt service payments), costs incurred pursuant to plans to secure a future power supply and enhance operations of the facilities, and payment of tax liabilities related to these reimbursements. Revenue from reimbursement of expenditures is recognized in the period that the qualified expenditures are incurred to the extent that such expenditures will be reimbursed. Revenue from reimbursable expenditures by Goldendale amounted to $40,795 during 2000 and is included in the statement of operations. Due to differing year-ends, revenue from reimbursable expenditures does not include revenue from reimbursable expenditures by Northwest during 2000. Such revenue amounted to $5,439.
In connection with these curtailments, the Company reduced its active workforce by 471 hourly employees. Terminated and inactive employees were provided severance packages that included either a severance payment or compensation continuation for a period time. In addition, these employees received a continuation of medical benefits for a period ranging from nine to twelve months.
Costs related to the curtailments, including contract cancellation charges of $38,750 and workforce reduction costs of $4,219, incurred by Goldendale are included in the statement of operations. Due to differing year-ends, the statement of operations does not include curtailment costs incurred by Northwest during 2000. Northwest incurred contract cancellation charges of $3,200 and workforce reduction costs of $3,371.
During the curtailment, the Company's recycling, remelt and casting operations will continue to operate and supply existing customers. The Company expects to return to full production levels once power is available at acceptable price levels. However, no assurances can be given that the Company's plans for restarting its smelter operations will occur as currently planned, if at all.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a condensed summary of quarterly results of operations for the years ended December 31, 1999 and 2000 (dollars in thousands, except per share data). As prescribed in EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company began reclassifying shipping and handling costs from a component of revenues to cost of revenues in the fourth quarter of 2000. This change required a restatement of revenues and cost of revenues for all periods presented.
INDEX TO FINANCIAL STATEMENT SCHEDULES
S-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. The Dalles, Oregon
We have audited the accompanying combined balance sheets of Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. as of September 30, 1999 and 2000, and the related combined statements of operations, shareholder's equity (deficit), and cash flows for each of the three years in the period ended September 30, 2000. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined 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, the combined financial statements referred to above present fairly, in all material respects, the financial position of Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. as of September 30, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Spokane, Washington November 3, 2000, except for Note 12 as to which the date is December 27, 2000
S-2 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED BALANCE SHEETS
See accompanying summary of significant accounting policies and notes to combined financial statements.
S-3
NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. COMBINED STATEMENTS OF OPERATIONS
See accompanying summary of significant accounting policies and notes to combined financial statements.
S-4
NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
S-5 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosures of Cash Flow Information (Note 9)
S-6 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
PRINCIPLES OF COMBINATION, BASIS OF PRESENTATION, AND OPERATIONS
The financial statements are presented on a combined basis as Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. (the "Companies") are under common ownership and common management. All intercompany transactions have been eliminated in combination. On December 18, 1998, the sole shareholder of the Companies transferred all of the issued and outstanding shares of common stock of the Companies to Golden Northwest Aluminum, Inc. (GNA), a company also wholly-owned by the shareholder.
The operations of the Companies consist primarily of the smelting conversion of alumina to aluminum, processing of aluminum into primary products, and the sale of those products. The Companies' smelting operations were under a tolling agreement with an alumina supplier through December 1999. In December 1999, the Companies' tolling agreement expired. The operations are located in the Pacific Northwest on the Columbia River. Approximately 80% of the Companies' labor force is subject to collective bargaining agreements. The Companies' agreement with its labor force is set to expire July 1, 2001. The Company and the collective bargaining unit are in discussions to extend the expiration date of the current labor agreement until September 2001.
REVENUE RECOGNITION
Revenues from the sale of aluminum products are recognized upon shipment. Revenues for the conversion of alumina and processing of aluminum under a tolling arrangement through December 1999 were recognized upon completion of the tolling process.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method, except for certain supply inventories that are based upon the weighted average cost method.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. It is management's belief that financial instruments held by the Companies approximate fair market value.
The Companies do not invest in derivatives for trading purposes. From time to time, as part of its risk management strategy, the Companies use derivative financial instruments to hedge exposure to changes in the price of aluminum. If the financial instrument qualifies for hedge accounting, changes in the market value of the instrument and the premium paid are deferred until the gain or loss is recognized on the hedged commodity. If the contract is not a hedge or does not qualify for hedge accounting, changes in market value are recorded currently.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from five to twenty-five years, using the straight-line method.
S-7 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
ASSET IMPAIRMENT
The Companies evaluate their long-lived assets for financial impairment and continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Companies evaluate the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
INTEREST COSTS
The Companies follow the policy of capitalizing interest as a component of the cost of property, plant and equipment constructed for its own use. Interest costs of $147, $76 and $35 were capitalized during the years ended September 30, 1998, 1999 and 2000, respectively.
INCOME TAXES
The Companies have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Companies do not pay federal or state corporate income taxes on their taxable income. Instead, the shareholder is liable for individual federal and state income taxes on the Companies' taxable income. It is the Companies' intention to pay distributions to the shareholder in an amount no less than the sum of these federal and state income taxes.
ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Companies to a concentration of credit risk consist of cash and cash equivalents and trade accounts receivable. The Companies place their cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. The Companies sell their products to various customers involved in the manufacturing of aluminum products located throughout the United States. Credit risk arising from these receivables is controlled through credit approval, credit limit and monitoring procedures. Receivables due from the Companies' primary tolling customer prior to December 1999 comprised 18% and 17% of the Companies' total trade accounts receivable at September 30, 1998 and 1999, respectively.
S-8 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
RESEARCH AND DEVELOPMENT COSTS
Expenditures associated with research and development for existing product process improvements are expensed as incurred. These costs amounted to $71, $111 and $109 during the years ended September 30, 1998, 1999 and 2000, respectively.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash flows, the Companies consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Companies expense environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Companies record a liability for an environmental matter when it is probable and can be reasonably estimated.
RECLASSIFICATIONS
Certain reclassifications of 1999 amounts have been made to conform to classifications used in 2000. As prescribed in EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Companies began reclassifying shipping and handling costs from a component of revenues to cost of revenues in the fourth quarter of 2000. This change required a restatement of revenues and cost of revenues for all periods presented.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), Accounting for Certain Derivative Instruments and Certain Hedging Activities. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 and No. 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Companies are currently analyzing the financial impact (if any) the adoption of SFAS No. 133 and No. 138 will have on their combined financial statements.
S-9 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
1. INVENTORIES
Inventories consist of the following:
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Companies hold call options for the purpose of mitigating the risk of market price fluctuations of anticipated aluminum purchases. These options required the payment of an upfront premium in return for the right to receive the amount, if any, by which the price at the settlement date exceeds the strike price. At September 30, 2000, the Companies had option contracts that established a price range for 3,400 metric tons of primary aluminum per month over a 6-month period beginning January 1, 2001. For the year ended September 30, 2000, there was no gain or loss as a result of these positions. At September 30, 2000, the fair value of these options of $1,622 is included in other current assets.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
4. LONG-TERM DEBT
On December 21, 1998, GNA issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the Companies and by other subsidiaries of GNA. The debt is collateralized by substantially all of the real property, plant and equipment of the Companies and by a pledge of all of the issued and outstanding capital stock of GNA. On or after December 15, 2002 the notes are redeemable at the option of GNA at specified redemption prices. There are no sinking fund requirements. The net proceeds from the sale of the notes were used to repay all amounts then outstanding under the Companies' then existing credit facility and term loan, to fund capital expenditures
S-10 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
and for working capital and other general corporate purposes. In connection with the extinguishment of its existing debt, the Companies recognized an extraordinary loss of $549 in fiscal 1999. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries.
On December 21, 1998, the Companies, together with GNA's other subsidiaries, entered into a $75 million bank revolving credit facility, collateralized by inventory, accounts receivable and related intangibles, including a security interest in Northwest Aluminum Company's tolling agreement with Glencore, which matured on December 31, 1999 (see Note 5). Borrowings under the credit facility bear interest at a floating base rate specified in the credit agreement plus 0.50% to 1.00% or LIBOR plus 2.00% to 2.50%, depending on the consolidated ratio of earnings before interest, income taxes, depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit agreement contains restrictive covenants, including a minimum net worth requirement, a minimum excess availability requirement and limitations on capital expenditures, dividends, additional indebtedness, mergers and other business combinations, asset sales, encumbrances, investments and transactions with affiliates.
Also on December 21, 1998, GNA entered into a subordinated credit agreement for $20 million. The debt bears interest at LIBOR plus 2.00% (8.32% at September 30, 2000) and is due in December 2005. The debt is secured by a second lien and pledge on the collateral securing the first mortgage notes and is guaranteed by the Companies and by other subsidiaries of GNA. Except for the collateral security, the guarantees by the Companies are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001.
The long-term debt due to parent represents the Companies' allocable share of the proceeds from the first mortgage notes and is repayable to GNA under the same terms and conditions as the first mortgage notes described above.
The total outstanding debt of GNA co-guaranteed by the Companies at September 30, 2000 amounted to:
S-11 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
5. ALUMINA SUPPLY
Northwest Aluminum Company had an agreement with Glencore, Ltd. (Glencore), which continued through December 31, 1999, for the conversion of alumina to aluminum for a tolling charge under which the entire production capacity of the smelting facility was dedicated to the tolling of its supplier's alumina. The supplier was obligated to supply, without charge, alumina sufficient to meet the requirements for full operation. The tolling fee set forth in the contract was a percentage of the price of aluminum quoted on the London Metals Exchange. This tolling customer accounted for 30%, 27% and 9% of the Companies' combined revenues in fiscal 1998, 1999 and 2000, respectively.
On October 15, 1999, Northwest Aluminum Company entered into an agreement to purchase alumina from a supplier at a cost based on a percentage of the price of aluminum quoted on the London Metals Exchange with deliveries scheduled over the next 5 years. Subsequent to September 30, 2000, Northwest Aluminum Company entered into an agreement modifying the terms of their alumina supply contract. The modification includes a reduction in the amount of alumina to be purchased and requires a fee to be paid for reduced purchases. This modification has been included in the commitment schedule (Note 8).
6. EMPLOYEE BENEFIT PLANS
Profit Sharing Bonus Plan
The Companies have entered into a contractual agreement, which continues through 2001, with the United Steelworkers of America, AFL-CIO, to pay annually as additional compensation 20% of the combined net income of the Companies, as adjusted in accordance with the agreement. The Companies' total additional compensation bonuses under this agreement amounted to approximately $829, $298 and $698 in fiscal 1998, 1999 and 2000, respectively.
Retirement Benefit Plan
The Companies have also established a defined contribution 401(k) profit sharing plan (the "401(k) Plan") covering substantially all employees under which employees may elect to defer pay subject to statutory limits. The Companies are committed to contribute the greater of $.25 per eligible hour worked or 5% of the combined adjusted net income of the Companies. In addition, the Companies are required to make matching contributions of 25% of elective deferrals. The Companies may also make discretionary contributions to the 401(k) Plan. Total contributions by the Companies to the 401(k) Plan amounted to approximately $341, $694 and $964 in fiscal 1998, 1999 and 2000, respectively.
S-12 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
8. COMMITMENTS AND CONTINGENCIES
In 1998, as a result of an audit by the Internal Revenue Service, the Companies entered into an agreement to capitalize certain expenditures. Because the Companies have Subchapter S tax reporting status, the sole shareholder of the Companies incurred additional taxes and interest associated with the agreement. As a result, the Companies declared and paid a distribution of $1,876 to GNA, the parent of the Companies, to reimburse the shareholder for such amounts.
The Companies, in the regular course of business, are involved in investigations and claims by various regulatory agencies. The Companies are engaged in various legal proceedings incidental to its normal business activities. The Companies' management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows.
The Companies have entered into various agreements for the purchase of power, alumina, and aluminum, including an agreement with the Bonneville Power Administration (BPA) for the purchase of electrical power at fixed rates. The contract with BPA expires September 30, 2001. Subsequent to year-end, a new contract with BPA was entered into (Note 12).
Future estimated minimum payments under these non-cancelable agreements at September 30, 2000 are as follows:
S-13 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
10. RELATED PARTY TRANSACTIONS
GNA, the parent of the Companies, allocates substantially all of its costs to its subsidiaries based on the ratio of each subsidiary's borrowings (Note 4) to the total borrowings by all subsidiaries. For the year ended September 30, 1999, the Company incurred $8,308 and $485 in interest charges and other expenses, respectively, which were charged to the Companies by GNA. For the year ended September 30, 2000, the Company incurred $11,310 and $1,972 in interest charges and other expenses, respectively, which were charged to the Companies by GNA. Accrued expenses include $2,798 and $3,151 of interest payable to GNA at September 30, 1999 and 2000, respectively.
Sales to a company related by common ownership amounted to $6,406, $5,766 and $6,380 for the years ended September 30, 1998, 1999 and 2000, respectively. The receivable due from related company includes the balance due from those sales, together with cash advances, of which $4,000 was converted to a note receivable on December 31, 1997. The note bears interest at 9.25% and is payable in quarterly installments through September 2005. Interest income from this related company amounted to $263, $304 and $230 for the years ended September 30, 1998, 1999 and 2000, respectively. Purchases from this related company amounted to $1,998 and $3,216 for the years ended September 30, 1999 and 2000, respectively, of which $189 is included in trade accounts payable at September 30, 1999.
Sales to another company related by common ownership amounted to $294, $330 and $67, for the years ended September 30, 1998, 1999 and 2000, respectively. Purchases from this related company amounted to $1,181, $1,573 and $1,562 for the years ended September 30, 1998, 1999 and 2000, respectively. Trade accounts payable includes balances due this company amounting to $900 and $1,890 at September 30, 1999 and 2000, respectively.
S-14 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
11. LONG-TERM TRADE RECEIVABLE
The Companies have an arrangement with a third party to distribute aluminum throughout Texas. In addition to providing distribution services, the third party was a long-term customer of the Companies, purchasing aluminum products for resale. In 1998, because the third party was experiencing financial problems, the Companies entered into an arrangement to extend the terms of repayment and provide a method for the third party to repay its debt to the Companies by direct retention of a portion of earned services. The Companies also ceased selling aluminum products to this third party. In September 2000, the Companies determined that primarily due to the third party's increasingly limited earnings potential, the financial condition of the third party was worsening and an impairment of the long-term trade receivable had occurred. As a result, the Companies took a write-down on the receivable and recognized a loss of $2,000.
12. SUBSEQUENT EVENTS
In late September 2000, the Companies reduced smelter production levels to 50% of capacity as a result of significant increases in the spot market price of electrical power. At reduced production levels, the Companies will be able to reshape or sell electrical power contractually available under its existing power contracts with the Bonneville Power Administration (BPA) to minimize the effect of high market power prices. In connection with this partial curtailment, the Companies reduced its workforce by 66 employees and provided a severance package to employees that were terminated. Costs related to the curtailment and related workforce reduction of approximately $1 million were recognized in October 2000.
In October 2000, GNA, the parent of the Companies, entered into a new electrical power sale agreement with BPA that will be effective from October 1, 2001 through September 30, 2006. The Companies expect that 50% of their electrical power requirements will be met through this contract. The new contract allows GNA to direct the available power to the Companies' facility as well as to a facility related by common ownership. The power rates set forth under the new contract are subject to review by the Federal Energy Regulatory Commission. Because the rate for BPA power will not be determinable until the conclusion of the review, GNA has the right to terminate the contract within a specified time period after the review. Under the new contract, the BPA Administrator may have broad discretion to temporarily or permanently limit or terminate purchases of power in circumstances in which the Administrator determines that the Companies are not in compliance with all applicable federal, state and local laws and regulations.
In late December 2000, the Companies curtailed all remaining smelter production. This further curtailment was done in conjunction with a modification to the Companies' existing electrical power contract with BPA. The modification to the contract allows BPA to remarket the electrical power that the Companies would have used. The proceeds from the remarketed power will become available to the Companies as reimbursement for costs defined in the remarketing agreement as "qualified expenditures". "Qualified expenditures" are costs related to curtailing production (including employee layoff expenditures, contract cancellation fees, unabsorbed fixed costs and debt service payments), costs incurred pursuant to plans to secure a future power supply and enhance operations of the facilities, and payment of tax liabilities related to these reimbursements. During the curtailment, the Companies' recycling, remelt and casting operations will continue to operate and supply their existing customers. Costs related to this subsequent workforce reduction will be recognized in December 2000. The Companies expect to resume smelter production once power is available at acceptable price levels.
S-15
NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (DOLLARS IN THOUSANDS)
However, no assurances can be given that the Companies' plans for restarting its smelter operations will occur as currently planned, if at all.
S-16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Goldendale Holding Company and Subsidiary Goldendale, Washington
We have audited the accompanying consolidated balance sheets of Goldendale Holding Company and Subsidiary as of December 31, 1999 and 2000 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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.
As disclosed in Note 13 to the consolidated financial statements, during the year ended December 31, 2000 Goldendale Holding Company and Subsidiary temporarily curtailed the production of aluminum.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Goldendale Holding Company and Subsidiary as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Spokane, Washington February 22, 2001
S-17 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
See accompanying summary of significant accounting policies and notes to combined financial statements.
S-18 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying summary of significant accounting policies and notes to combined financial statements.
S-19 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See accompanying summary of significant accounting policies and notes to combined financial statements.
S-20
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosures of Cash Flow Information (Note 11)
S-21 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
OPERATIONS, PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION
The operations of the Company consist primarily of the smelting conversion of alumina to aluminum under a tolling arrangement with an alumina supplier. In addition, the Company operates an alumina unloading facility. The Company operates within one business segment. The operations are located in the Pacific Northwest on the Columbia River. During 2000, the Company curtailed a substantial portion of its operations (Note 13).
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Goldendale Aluminum Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Approximately 81% of the Company's labor force is subject to collective bargaining agreements. The Company's agreement with its labor force is due to expire June 1, 2001. The Company and the collective bargaining unit are in discussions to extend the expiration date of the current labor agreement until September 2001.
REVENUE RECOGNITION
Revenues for the conversion of alumina and processing of aluminum under a tolling arrangement is recognized upon completion of the tolling process. Net gains from the sale of power are recognized during the period that the associated power is provided.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the weighted-average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment including cell-relining costs are stated at cost, less accumulated depreciation and amortization. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to thirty years, using the straight-line method.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is being amortized on a straight-line basis over twenty years. The Company periodically evaluates the recoverability of goodwill. The measurement of possible impairment is based primarily on the Company's ability to recover the unamortized balance of the goodwill from expected future operating cash flows on an undiscounted basis (Note 9).
ASSET IMPAIRMENT
The Company evaluates its long-lived assets for financial impairment, and continues to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the
S-22 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
INTEREST COSTS
The Company follows the policy of capitalizing interest as a component of the cost of property, plant and equipment constructed for its own use. Interest costs of $0, $500 and $463 were capitalized during the years ended December 31, 1998, 1999 and 2000, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 uses the liability method so that deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws and tax rates. Deferred income tax expense or benefit is based on the changes in the financial statement basis versus the tax bases in assets or liabilities from period to period.
ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. Receivables due from the Company's primary tolling customer comprised 98% and 96% of the Company's total trade accounts receivable at December 31, 1999 and 2000, respectively. All of the reimbursement receivable is due from Bonneville Power Administration. In management's opinion the credit risk associated with non-payment of the reimbursement receivable is considered minimal as the Bonneville Power Administration is an agent of the government of the United States of America.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. It is management's belief that financial instruments held by the Company approximate fair value. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes.
S-23 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
The Company has entered into an interest rate swap agreement for purposes of minimizing exposure to interest rate risk. The differential between the floating interest rate and the fixed interest rate which is to be paid or received is recognized in interest expense as the floating interest rate changes over the life of the agreement.
RESEARCH AND DEVELOPMENT COSTS
Expenditures associated with research and development for existing product process improvements are expensed as incurred. These costs amounted to $789, $1,516 and $0 during the years ended December 31, 1998, 1999 and 2000, respectively. Depreciation on equipment used for research and development amounted to $0, $47 and $14 during the years ended December 31, 1998, 1999 and 2000, respectively.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability for an environmental matter when it is probable and can be reasonably estimated. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers.
RECLASSIFICATIONS
Certain reclassifications of 1998 and 1999 amounts have been made to conform to classifications used in 2000.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), Accounting for Certain Derivative Instruments and Certain Hedging Activities. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the
S-24
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 and 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 and No. 138 as of the beginning of the fiscal year 2001. Management does not believe that the adoption of SFAS No. 133 and No. 138 will have any initial impact on its consolidated financial statements.
S-25 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. INVENTORIES
Inventories consist of the following:
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
During 1998, the Company changed its method of accounting for cell relining costs from expensing such costs as incurred to capitalizing and amortizing these costs over future periods. The Company believes that the new method is preferable since it improves the matching of revenues and costs as technological improvements have extended the estimated period of economic benefit realized from cell relining. The change was applied by retroactively restating the previously issued consolidated financial statements. The effect of this change was to decrease net loss by $2,829 for the year ended December 31, 1998.
3. OTHER ASSETS
Other assets consist of the following:
S-26 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
Restricted cash consists of cash held in trust and committed for environmental cleanup and workers compensation self-insurance as required by the State of Washington. These monies will be disbursed at a future date as allowed by the State.
4. LONG-TERM DEBT
Long-term debt consists of the following:
On December 18, 1998, the sole common stock shareholder of the Company transferred all of the issued and outstanding shares of common stock of the Company to Golden Northwest Aluminum, Inc. (GNA), a company also wholly-owned by the shareholder.
On December 21, 1998, GNA issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the Company and by other subsidiaries of GNA. The debt is collateralized by substantially all of the real property, plant and equipment of the Company and by a pledge of all of the issued and outstanding capital stock of GNA. On or after December 15, 2002, the notes are redeemable at the option of GNA at specified redemption prices. There are no sinking fund requirements. The net proceeds from the sale of the notes were used to repay all amounts then outstanding under the Company's existing credit facility and term loans, to fund capital expenditures and for working capital and other general corporate purposes. In connection with the extinguishment of its existing debt, the Company recognized an extraordinary loss, net of income taxes, of $953 in 1998. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries.
On December 21, 1998, the Company, together with GNA's other subsidiaries, entered into a $75 million bank revolving credit facility which matures on December 20, 2003 and is collateralized by inventory, accounts receivable and related intangibles, including a security interest in the Company's tolling agreement. Borrowings under the credit facility bear interest at a floating base rate plus from 0.50% to 1.00% (10.50% at December 31, 2000) or LIBOR plus from 2.00% to 2.50%, (9.18% at December 31, 2000) depending on the consolidated ratio of earnings before interest, income taxes, depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit agreement contains restrictive covenants, including a minimum net worth requirement, a minimum excess availability requirement and limitations on capital expenditures, dividends, additional indebtedness, mergers and other business combinations, assets sales, encumbrances, investments and transactions with affiliates. The Company was in compliance with these covenants at December 31, 2000.
Also on December 21, 1998, GNA entered into a subordinated credit agreement for $20 million. The debt bears interest at LIBOR plus 2.00% (8.82% at December 31, 2000) and is due in December 2005. The debt is secured by a second lien and pledge on the collateral securing the first mortgage notes and is guaranteed by the Company and other subsidiaries of GNA. Except for the collateral security, the
S-27 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
guarantees by the Company are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001.
The long-term debt due to parent represents the Company's allocable share of the proceeds from the first mortgage notes, a portion of the proceeds from the subordinated credit agreement and the Company's net borrowings from the $75 million bank revolving credit facility. This debt is repayable to GNA under the same terms and conditions as the first mortgage notes, the subordinated credit agreement and the bank revolving credit facility described above.
On January 21, 1999, the Company terminated at no cost its existing interest rate swap agreement and entered into a new swap agreement that expires in 2003. The fixed interest rate paid on the new swap is 6.4% and covers $20 million of notional principal amount of floating rate (LIBOR) indebtedness of the Company. Although the Company is exposed to credit loss on the interest rate swap in the event of nonperformance by the counterparties, the Company estimates the likelihood of such nonperformance to be remote. At December 31, 1999 and 2000, the fair value of the interest rate swap was approximately $92 and $350, respectively, which reflects the estimated amount that the Company would pay to terminate the contracts.
The total outstanding debt of GNA co-guaranteed by the Company at December 31, 2000 amounted to:
5. ALUMINA TOLLING CONVERSION AGREEMENT
The Company has an agreement with an alumina supplier for the conversion of alumina to aluminum for a tolling charge under which the entire production capacity of the smelting facilities is dedicated to the tolling of the supplier's alumina. The supplier is obligated to supply, without charge, alumina sufficient to meet the requirements for full operation. The tolling fees set forth in the contract are a percentage of the price of aluminum quoted on the London Metal Exchange. The agreement, as amended, continues through December 31, 2011. This tolling customer accounted for 99% of the Company's consolidated revenue in 1998, 1999 and 2000.
In December 2000, the Company entered into an agreement modifying the terms of its alumina tolling agreement. The modification allows for a reduction in the amount of aluminum production through September 2001 to a level of approximately 15% of capacity and extends the tolling arrangement to December 31, 2013. In connection with the modification the Company incurred modification charges of $38,750, which is included in curtailment expenses in the statement of operations (Note 13).
S-28 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
6. EMPLOYEE BENEFIT PLANS
Profit Sharing Bonus Plan
The Company has a profit sharing plan for its hourly and salaried employees. All employees are eligible participants in this plan upon completion of a probationary period. The plan provides for payments equal to a percentage of profits, as defined. Allocation of the payments is based upon hours worked. These amounts are to be distributed to eligible participants on or before March 31 following the Company's year-end. For the years ended December 31, 1998, 1999 and 2000, the Company recorded approximately $380, $0 and $1,488, respectively, of expense related to this plan.
Retirement Benefit Plans
The Company has a 401(k) profit sharing plan under which employees may elect to defer pay, subject to statutory limits; the Company also makes matching contributions for nonbargaining employees on the basis of percentages specified in the plan and discretionary contributions as determined on an annual basis. The Company also maintained a separate profit sharing retirement plan (the "DC Plan") which provided retirement benefits for substantially all of its employees. Goldendale is committed to contribute the greater of 5% of net income or $.25 per eligible hour worked. During 1999, the separate profit sharing retirement plan was merged into the 401(k) profit sharing plan. For the years ended December 31, 1998, 1999 and 2000, the Company recorded approximately $290, $514 and $384 of expense for plan contributions.
Deferred Compensation Notes Payable
In connection with the acquisition of the Company in 1996, the Company entered into deferred compensation agreements with certain employees in exchange for the employees waiving their rights under stock-based compensation and other employment agreements which existed at the acquisition date. The notes are payable in monthly installments of approximately $115, including interest at 8.75%, through 2001.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
S-29 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
The Company, in the regular course of business, is involved in investigations and claims by various regulatory agencies. The Company is engaged in various legal proceedings incidental to its normal business activities. The Company's management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows.
During 1999, the Company contracted for the design and construction of a bath reclaim facility. In connection therewith, a dispute has arisen over contract change orders to an engineering and construction contract. The Company has accrued an estimate of the costs to settle the claim in the amount of $520. If the settlement offer is not accepted, the ultimate cost to the Company may exceed this accrual.
As of December 31, 1999 and 2000, the Company had a liability of approximately $1,825 and $1,893, respectively, for estimated environmental remediation activities to be taken on the Company's facility. The Company's estimate of this liability is based on a remediation study conducted by independent engineering consultants. The total cost of remediation is estimated at $3 million; however, under a court decree the Company is only responsible for approximately one-half of the total. The remaining cost is the responsibility of prior owners.
In December 2000, the Company was designated as a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, and by the State of Oregon under applicable state laws with respect to the Portland Harbor Superfund site in Portland, Oregon. Other PRPs also have been so designated. The Company, along with other PRPs, is participating in the funding of a remedial investigation/feasibility study. Management does not anticipate selection of a remedy for several years and is of the opinion that the Company will be found to have a de minimus liability, if any, in the outcome of the matter.
The Company has an existing agreement for the purchase of power with the Bonneville Power Administration (BPA) for the purchase of electrical power at fixed rates. The contracts with BPA expiring on September 30, 2001, was modified in December 2000 (Note 13). Future estimated minimum payments under this agreement at December 31, 2000 are $43,676 in 2001.
In October 2000, the parent of the Company entered into a new electrical power sale agreement with BPA that will be effective from October 1, 2001 through September 30, 2006. The Company expects that 50% of its electrical power requirements will be met through this contract. The new contract allows GNA to direct the available power to the Company's facility as well as to a facility related by common ownership. The power rates set forth under the new contract are subject to review by the Federal Energy Regulatory Commission. Because the rate for BPA power will not be determinable until the conclusion of the review, GNA has the right to terminate the contract within a specified time period after the review. Under the new contract, the BPA Administrator may have broad discretion to temporarily or permanently limit or terminate purchases of power in circumstances in which the Administrator determines that the Company is not in compliance with all applicable federal, state and local laws and regulations.
S-30 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
9. INCOME TAXES
Income tax expense (benefit) consists of the following:
The difference between the federal statutory tax rate and the effective tax rate resulted from the following:
Significant components of the Company's deferred tax assets and liabilities are as follows:
S-31 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
In 1999, as a result of an audit by the Internal Revenue Service, the Company entered into an agreement to capitalize certain expenditures for income tax purposes. As a result of the agreement, goodwill and interest expense were reduced by approximately $2 million and $1 million, respectively, during 1999. In 2000, as a result of the resolution of an estimated deferred tax liability arising from the acquisition of the Company, the Company reduced goodwill and interest expense by approximately $2.6 million and $.5 million, respectively.
10. SHAREHOLDERS' EQUITY
Terms of the Company's preferred stock provide for dividends accruing quarterly and payable in cash as declared by the Board of Directors according to the following schedule:
Commencing on January 1, 2002, the preferred shareholders have the option of receiving additional shares of preferred stock in satisfaction of any cumulative dividend in arrears that may exist at that time. At December 31, 1999 and 2000, dividends payable on preferred stock were $13,163 ($99.85 per share) and $16,811 ($127.53 per share), respectively. The Company plans to pay a portion of dividends payable in 2001 in order to fund distributions from the Goldendale Retirement Plan.
The Company may redeem any or all outstanding shares of Series A Preferred Stock at the following redemption prices:
The shares of preferred stock and shares of common stock vote together as a single class on all matters submitted to a vote of the shareholders of the Company. The holders of shares of preferred stock are entitled to one vote per share and have full voting rights and power equal to those of the holders of common stock.
S-32 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information is as follows:
12. RELATED PARTY TRANSACTIONS
GNA, the parent of the Company, allocates substantially all of its costs to its subsidiaries based on the ratio of each subsidiary's borrowings to the total borrowings by all subsidiaries. For the years ended December 31, 1999 and 2000, the Company incurred $9,978 and $10,682, respectively, in interest charges and other expenses which were charged to the Company by GNA. Accrued expenses include $704 and $650 of interest payable to GNA at December 31, 1999 and 2000, respectively.
Sales to a company related by common ownership amounted to $1,102, $1,750 and $1,621 for the years ended December 31, 1998, 1999 and 2000, respectively. Purchases from this company amounted to $202, $561 and $596 for the years ended December 31, 1998, 1999 and 2000, respectively. Trade accounts receivable includes balances due from this company amounted to $1,214 and $1,435 at December 31, 1999 and 2000, respectively. Also included in trade accounts receivable are balances due from another company related by common ownership amounted to $86 and $704 at December 31, 1999 and 2000, respectively.
A member of the Company's board of directors is a partner in a law firm which performs legal services for the Company. Fees paid to this firm amounted to $180, $3 and $54 for the years ended December 1998, 1999 and 2000.
S-33 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(DOLLARS IN THOUSANDS)
13. POWER SALES AND CURTAILMENT
In September 2000, the Company curtailed smelter production levels to approximately 67% of capacity as a result of significant increases in the spot market price of electrical power. At reduced production levels, the Company was able to sell excess electrical power contractually available under its existing power contracts with the Bonneville Power Administration (BPA). As a result of these power sales, the Company recorded a net gain from power sales of approximately $13,980 in 2000 which was composed of gross proceeds of $18,277 offset by incremental excess power costs. In connection with the initial curtailment, the Company reduced its workforce by 88 hourly employees and provided a severance package to employees that were either voluntarily or involuntarily terminated.
In December 2000, the Company curtailed smelter production further, to a level of approximately 15% of capacity. This second curtailment was done in conjunction with a modification to the Company's existing electrical power contract with BPA. The modification to the contract allows BPA to remarket the electrical power that the Company would have used. The proceeds from the remarketed power will become available to the Company as reimbursement for "qualified expenditures" through December 2010. As defined in the remarketing agreement, "qualified expenditures" are costs related to curtailing production (including employee layoff expenditures, contract cancellation fees, unabsorbed fixed costs and debt service payments), costs incurred pursuant to plans to secure a future power supply and enhance operations of the facilities, and payment of tax liabilities related to these reimbursements. Income from reimbursable costs amounted to $40,795 in 2000. Revenue from reimbursement of expenditures is recognized in the period that the qualified expenditures are incurred to the extent that such expenditures will be reimbursed. Costs related to the curtailments, including contract cancellation charges of $38,750 and workforce reduction costs of $4,219 have been incurred.
In connection with this second curtailment, the Company reduced its active workforce by 208 hourly employees. These inactive employees were provided a severance package that includes full wages and benefits to September 30, 2001.
The Company expects to return to full production levels once power is available at acceptable price levels. However, no assurances can be given that the Company's plans for restarting its smelter operations will occur as currently planned, if at all.
S-34
EXHIBIT INDEX
Exhibit Number - ------------
3.1 Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.1 Indenture, dated as of December 21, 1998, between Registrant, as Issuer, Northwest Aluminum Specialties, Inc., Northwest Aluminum Company, Northwest Aluminum Technologies, LLC, Goldendale Holding Company, and Goldendale Aluminum Company, as Guarantors, and U.S. Trust Company, N.A., as Trustee. Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.2 Credit Agreement, dated December 21, 1998, among the Financial Institutions named therein, BancBoston, N.A., as Administrative Agent, U.S. Bank National Association, as Documentation Agent, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., Goldendale Aluminum Company, and Northwest Aluminum Technologies, as amended by the Agreement and Amendment No. 1, dated as of January 21, 1999. Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.3 Registration Rights Agreement, dated as of December 21, 1998, by and among the Registrant, the Subsidiary Guarantors party to this Agreement; and BancBoston Robertson Stephens Inc., and Libra Investments, Inc. Incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
4.4 Certificate of Incorporation of Goldendale Holding Company. Incorporated by reference to Exhibit 4.4 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.1 Agreement to Toll Convert Alumina into Aluminum, dated May 22, 1996, between Hydro Aluminum Louisville, Inc., and Goldendale Aluminum Company. Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). (Confidential treatment of portions of this document has been granted by order of the Commission. The information omitted from this exhibit has been filed with the Commission.)
10.2 First Amendment to Agreement to Toll Convert Alumina into Aluminum, dated December 21, 1998. Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.3 Tax Indemnification Agreement, dated as of December 21, 1998, between Registrant, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., and Brett E. Wilcox. Incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.4 General Transmission Agreement, dated April 7, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.5 Power Sale Agreement, dated September 28, 1995, between the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.6 Voting Agreement dated May 17, 1996, by Brett Wilcox for the benefit of the United Steelworkers of America, Local 8147. Incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.7 General Transmission Agreement, dated May 4, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.8 Power Sales Agreement, dated September 18, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.9 Cancelable Swap Agreement dated January 21, 1999, between Goldendale Aluminum Company and BankBoston, N.A. Incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
10.10 Alumina Supply Agreement dated October 15, 1999 by Glencore Ltd. and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 31, 1999. (Confidential treatment of portions of this document has been requested. The information omitted from this exhibit has been filed with the Commission.)
10.11 Phantom Stock Termination Agreement dated August 1, 1996 between Goldendale Aluminum Company and Jessie Casswell. Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the year ended December 31, 1999.*
10.12 Block Power Sales Agreement, effective October 1, 2001, between the Bonneville Power Administration and the Registrant.
10.13 Amendment to Alumina Supply Agreement, dated as of October 23, 2000, between Glencore Ltd. and Northwest Aluminum Company.
10.14 Agreement on the Use of Net Proceeds from Remarketing, dated December 27, 2000, between the Registrant and the United Steelworkers of America.
10.15 Remarketing Addendum to the 1996 Agreements, dated effective December 29, 2000, executed by the Bonneville Power Administration and the Registrant, Goldendale Aluminum Company and Northwest Aluminum Company.
10.16 Side Agreement to Agreement to Toll Covert Alumina into Aluminum (Tolling Contract) between Hydro Aluminum Metal Products North America, Inc. and Goldendale Aluminum Company.
10.17 Second Amendment to Alumina Supply Agreement, dated January 5, 2001, between Glencore Ltd. and Northwest Aluminum Company.
10.18 Memorandum of Understanding, Curtailment of Operations due to Power Sale, dated January 11, 2001, between the Bargaining Units of the United Steelworkers of America and the Registrant, Northwest Aluminum Company and Goldendale Aluminum Company.
12.1 Statements re Computation of Ratios.
21.1 Subsidiaries of the Registrant.
24.1 Powers of Attorney (included on signature pages of the Registration Statement).
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* Management contract or compensatory arrangement.
(b) Reports on Form 8-K
Not applicable.