CENTURY ALUMINUM COMPANY
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005.
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission file number 0-27918
Century Aluminum Company
(Exact name of Registrant as specified in its Charter)
     
Delaware   13-3070826
(State of Incorporation)   (IRS Employer Identification No.)
     
2511 Garden Road
Building A, Suite 200
Monterey, California

(Address of principal executive offices)
  93940
(Zip Code)
Registrant’s telephone number, including area code: (831) 642-9300
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
     The registrant had 32,149,154 shares of common stock outstanding at August 4, 2005.
 
 

 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. — Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Part II. OTHER INFORMATION
Item 6. Exhibit Index
SIGNATURES
Exhibit Index
EX-4.1: SUPPLEMENTAL INDENTURE NO. 1
EX-4.2: SUPPLEMENTAL INDENTURE NO. 3
EX-10.1: AMENDED AND RESTATED TOLLING AGREEMENT
EX-10.2: AMENDMENT AGREEMENT TO EMPLOYMENT AGREEMENT
EX-10.3: SECOND AMENDMENT AGREEMENT TO EMPLOYMENT AGREEMENT
EX-10.4: SECOND AMENDMENT AGREEMENT TO EMPLOYMENT AGREEMENT
EX-10.5: SECOND AMENDMENT OF THE SUPPLEMENTAL INCOME RETIREMENT BENEFIT PLAN
EX-10.6: SEVERANCE PROTECTION AGREEMENT
EX-10.7: SEVERANCE PROTECTION AGREEMENT
EX-10.8: SEVERANCE PROTECTION AGREEMENT
EX-10.9: SEVERANCE PROTECTION AGREEMENT
EX-10.10: SEVERANCE PROTECTION AGREEMENT
EX-10.11: SUMMARY OF BASE COMPENSATION
EX-10.12: CONSULTING AGREEMENT
EX-18.1: LETTER REGARDING A CHANGE IN ACCOUNTING PRINCIPLE
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. — Financial Statements.
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
                 
    June 30,   December 31,
    2005   2004
            (Restated)
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 35,174     $ 44,168  
Restricted cash
    2,027       1,678  
Accounts receivable — net
    104,575       79,576  
Due from affiliates
    14,044       14,371  
Inventories
    104,450       111,284  
Prepaid and other current assets
    16,172       10,055  
Deferred taxes — current portion
    23,458       24,642  
 
               
Total current assets
    299,900       285,774  
 
               
Property, plant and equipment — net
    916,008       806,250  
Intangible asset — net
    81,989       86,809  
Goodwill
    94,844       95,610  
Due from affiliates — less current portion
    2,747        
Other assets
    74,614       58,110  
 
               
Total
  $ 1,470,102     $ 1,332,553  
 
               
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Accounts payable — trade
  $ 47,926     $ 47,479  
Due to affiliates
    44,574       84,815  
Accrued and other current liabilities
    59,258       53,309  
Accrued employee benefits costs — current portion
    8,458       8,458  
Long-term debt — current portion
    561       10,582  
Convertible senior notes
    175,000       175,000  
Industrial revenue bonds
    7,815       7,815  
 
               
Total current liabilities
    343,592       387,458  
 
               
 
               
Senior unsecured notes payable
    250,000       250,000  
Nordural debt
    153,739       80,711  
Accrued pension benefits costs — less current portion
    12,358       10,685  
Accrued postretirement benefits costs — less current portion
    91,296       85,549  
Other liabilities
    35,459       34,961  
Due to affiliates — less current portion
    17,402       30,416  
Deferred taxes
    94,778       68,273  
 
               
Total noncurrent liabilities
    655,032       560,595  
 
               
 
               
Contingencies and Commitments (See Note 8)
               
Shareholders’ equity:
               
Common stock (one cent par value, 50,000,000 shares authorized; 32,149,154 and 32,038,297 shares outstanding at June 30, 2005 and December 31, 2004, respectively)
    321       320  
Additional paid-in capital
    418,412       415,453  
Accumulated other comprehensive loss
    (20,626 )     (52,186 )
Retained earnings
    73,371       20,913  
 
               
Total shareholders’ equity
    471,478       384,500  
 
               
Total
  $ 1,470,102     $ 1,332,553  
 
               
See notes to consolidated financial statements

1


Table of Contents

CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
                                 
    Three months ended   Six months ended
    June 30,   June 30,
    2005   2004   2005   2004
            (Restated)           (Restated)
NET SALES:
                               
Third-party customers
  $ 243,329     $ 225,430     $ 490,754     $ 417,776  
Related parties
    39,927       38,303       77,898       78,051  
 
                               
 
    283,256       263,733       568,652       495,827  
Cost of goods sold
    237,908       217,054       471,737       410,795  
 
                               
Gross profit
    45,348       46,679       96,915       85,032  
 
                               
Selling, general and administrative expenses
    8,046       3,991       16,842       9,399  
 
                               
Operating income
    37,302       42,688       80,073       75,633  
 
                               
Interest expense — third party
    (6,517 )     (11,474 )     (13,201 )     (21,849 )
Interest expense — related party
          (51 )           (380 )
Interest income
    275       244       493       341  
Net gain (loss) on forward contracts
    24,496       (1,177 )     1,001       (13,997 )
Other income (expense)
    (472 )     9       (65 )     (605 )
 
                               
Income before income taxes and equity in earnings of joint ventures
    55,084       30,239       68,301       39,143  
Income tax expense
    (19,239 )     (11,020 )     (26,074 )     (14,331 )
 
                               
Income before equity in earnings of joint ventures
    35,845       19,219       42,227       24,812  
Equity in earnings of joint ventures
    4,899             10,247        
 
                               
Net income
    40,744       19,219       52,474       24,812  
Preferred dividends
          (269 )           (769 )
 
                               
Net income applicable to common shareholders
  $ 40,744     $ 18,950     $ 52,474     $ 24,043  
 
                               
 
                               
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 1.27     $ 0.64     $ 1.63     $ 0.95  
Diluted
  $ 1.27     $ 0.63     $ 1.63     $ 0.94  
 
                               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
                               
Basic
    32,140       29,629       32,099       25,412  
Diluted
    32,196       30,542       32,162       25,588  
See notes to consolidated financial statements

2


Table of Contents

CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
                 
    Six months ended
    June 30,
    2005   2004
            (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 52,474     $ 24,812  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Unrealized net (gain) loss on forward contracts
    (3,429 )     6,659  
Depreciation and amortization
    28,050       23,731  
Deferred income taxes
    26,074       5,994  
Pension and other post retirement benefits
    7,421       5,376  
(Gain) loss on disposal of assets
    (4 )     695  
Non-cash loss on early extinguishment of debt
    253        
Changes in operating assets and liabilities:
               
Accounts receivable — net
    (24,999 )     (8,264 )
Due from affiliates
    327       (1,059 )
Inventories
    6,834       (5,768 )
Prepaids and other current assets
    (5,712 )     (2,724 )
Accounts payable — trade
    (6,745 )     (1,294 )
Due to affiliates
    (9,548 )     (3,383 )
Accrued and other current liabilities
    (3,948 )     9,308  
Other — net
    (8,324 )     (2,472 )
 
               
Net cash provided by operating activities
    58,724       51,611  
 
               
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Nordural expansion
    (113,654 )      
Purchase of other property, plant and equipment
    (5,481 )     (5,712 )
Business acquisitions, net of cash acquired
    (7,000 )     (184,869 )
Restricted cash deposits
    (350 )      
Proceeds from sale of property, plant and equipment
    59        
 
               
Net cash used in investing activities
    (126,426 )     (190,581 )
 
               
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings
    145,378        
Repayment of debt
    (83,023 )     (20,659 )
Financing fees
    (4,617 )      
Dividends
    (16 )     (3,311 )
Issuance of common stock
    986       209,905  
 
               
Net cash provided by financing activities
    58,708       185,935  
 
               
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (8,994 )     46,965  
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    44,168       28,204  
 
               
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 35,174     $ 75,169  
 
               
See notes to consolidated financial statements

3


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(unaudited)
1. General
     The accompanying unaudited interim consolidated financial statements of Century Aluminum Company (the “Company” or “Century”) should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2004. In management’s opinion, the unaudited interim consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for the first six months of 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
2. Acquisitions
  Nordural Acquisition
     The Company acquired Nordural in April 2004 and accounted for the acquisition as a purchase using the accounting standards established in Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” In the first quarter of 2005, goodwill decreased $766 from previously reported amounts at year-end as the result of asset allocation adjustments. The Company recognized $94,844 of goodwill in the transaction. None of the goodwill is expected to be deductible for Icelandic tax purposes; however, all of the goodwill is expected to be deductible for U.S. tax purposes. During the second quarter of 2005, the Company determined that certain Nordural earnings would remain invested outside the United States indefinitely.
     The purchase price for Nordural was $195,346, allocated as follows:
         
Allocation of Purchase Price:
       
Current assets
  $ 41,322  
Property, plant and equipment
    276,597  
Goodwill
    94,844  
Current liabilities
    (25,848 )
Long-term debt
    (177,898 )
Other non-current liabilities
    (13,671 )
 
       
Total purchase price
  $ 195,346  
 
       
     The following table represents the unaudited pro forma results of operations for the period ended June 30, 2004 assuming the acquisition occurred on January 1, 2004. The unaudited pro forma amounts may not be indicative of the results that actually would have occurred if the transaction described above had been completed and in effect for the periods indicated. The pro forma results of operations reflect the retroactive restatement of earnings for a change in accounting principle, see Note 3.
                 
    Three months ended   Six months ended
    June 30, 2004   June 30, 2004
Net sales
  $ 272,721     $ 534,202  
Net income
    20,381       31,719  
Net income available to common shareholders
    20,112       30,950  
Earnings per share:
               
Basic
  $ 0.65     $ 1.00  
Diluted
  $ 0.64     $ 1.00  

4


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
3. Change in Accounting Principle
     During the second quarter of fiscal 2005, the Company changed its method of inventory costing from last-in-first-out (LIFO) to first-in-first-out (FIFO). The Company believes that using the FIFO method provides better matching of expenses and revenues and provides more consistent inventory costing on a company-wide basis. Prior to the change approximately 69% of the Company’s inventory was valued based upon the LIFO method. The change has been applied retroactively and the financial statements have been restated for all prior periods presented. In the first quarter of 2005, the Company previously reported net income, basic and diluted earnings per share of $11,127 or $0.35 a share. As the result of the change in inventory costing, first quarter 2005 net income increased $603 to $11,730 and basic and diluted earnings per share increased $0.02 to $0.37. The effect of the change on net income for the three and six months ended June 30, 2005 was a (decrease)/increase of ($93) and $510, respectively. The effect of the change on retained earnings for the year ended December 31, 2004 was an increase of $1,683. The effect of the accounting change on income and earnings per share during the three and six month periods ended June 30, 2004, is as follows:
                 
    Three months   Six months
    ended   ended
    June 30,   June 30,
    2004   2004
    (Restated)   (Restated)
Net income applicable to common shareholders as reported
    18,019       22,319  
Change in inventory costing method
    931       1,724  
 
               
 
               
Net income applicable to common shareholders as restated
    18,950       24,043  
 
               
 
               
Basic earnings per share as reported
    0.61       0.88  
Change in inventory costing method
    0.03       0.07  
 
               
Basic earnings per share as restated
    0.64       0.95  
 
               
 
               
Diluted earnings per share as reported
    0.60       0.87  
Change in inventory costing method
    0.03       0.07  
 
               
Diluted earnings per share as restated
    0.63       0.94  
 
               
4. Stock-Based Compensation
     The Company has elected not to adopt the recognition provisions for employee stock-based compensation as permitted in SFAS No. 123, “Accounting for Stock-Based Compensation.” As such, the Company accounts for stock based compensation in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees.” No compensation cost has been recognized for the stock option portions of the plan because the exercise prices of the stock options granted were equal to the market value of the Company’s stock on the date of grant. Had compensation cost for the Stock Incentive Plan been determined using the fair value method provided under SFAS No. 123, the Company’s net income and earnings per share would have changed to the pro forma amounts indicated below:

5


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
                                         
            Three months ended   Six months ended
            June 30,   June 30,
            2005   2004   2005   2004
                    (Restated)           (Restated)
Net income applicable to common shareholders
  As Reported   $ 40,744     $ 18,950     $ 52,474     $ 24,043  
 
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
            252       169       1,683       1,046  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
            (392 )     (235 )     (1,953 )     (1,179 )
 
                                       
Pro forma net income
          $ 40,604     $ 18,884     $ 52,204     $ 23,910  
 
                                       
 
                                       
Basic earnings per share
  As reported   $ 1.27     $ 0.64     $ 1.63     $ 0.95  
 
  Pro forma   $ 1.26     $ 0.64     $ 1.63     $ 0.94  
Diluted earnings per share
  As reported   $ 1.27     $ 0.63     $ 1.63     $ 0.94  
 
  Pro forma   $ 1.26     $ 0.63     $ 1.62     $ 0.93  
5. Inventories
     Inventories consist of the following:
                 
    June 30,   December 31,
    2005   2004
Raw materials
  $ 51,064     $ 54,186  
Work-in-process
    18,693       10,215  
Finished goods
    4,298       8,954  
Operating and other supplies
    30,395       37,929  
 
               
 
  $ 104,450     $ 111,284  
 
               
     Inventories are stated at the lower of cost, using the first-in, first-out method, or market.
6. Goodwill and Intangible Asset
     The Company recognized $94,844 of goodwill in the Nordural acquisition, see Note 2. The Company will annually test its goodwill for impairment in the second quarter of the fiscal year and at other times whenever events or circumstances indicate that the carrying amount of goodwill may exceed its fair value. If the carrying value of goodwill exceeds its fair value, an impairment loss will be recognized. The fair value is estimated using market comparable information.
     The intangible asset consists of the power contract acquired in connection with the Company’s acquisition of the Hawesville facility. The contract value is being amortized over its term (10 years) using a method that results in annual amortization equal to the percentage of a given year’s expected gross annual benefit to the total as applied to the total recorded value of the power contract. As of June 30, 2005, the gross carrying amount of the intangible asset was $155,986 with accumulated amortization of $73,997. In April 2005, the Company made a $7,000 post-

6


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
closing payment to Southwire related to the acquisition of the Hawesville facility. This payment satisfied in full the Company’s obligation to pay contingent consideration to Southwire under the acquisition agreement. This post-closing payment obligation was allocated to the acquired fixed assets and intangible asset based on the allocation percentages used in original acquisition. The gross carrying amount of the intangible asset increased $2,394 as a result of this liability.
     For the six month periods ended June 30, 2005 and June 30, 2004, amortization expense for the intangible asset totaled $7,214 and $6,164, respectively. For the three month periods ended June 30, 2005 and June 30, 2004, amortization expense for the intangible asset totaled $3,674 and $3,082, respectively.
     For the year ending December 31, 2005, the estimated aggregate amortization expense for the intangible asset will be approximately $14,561. The estimated aggregate amortization expense for the intangible asset for the following five years is as follows:
                                         
    For the year ending December 31,
    2006   2007   2008   2009   2010
Estimated Amortization Expense
  $ 13,048     $ 13,991     $ 15,076     $ 16,149     $ 16,379  
     The intangible asset is reviewed for impairment in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” whenever events or circumstances indicate that its net carrying amount may not be recoverable.
7. Debt
  Secured First Mortgage Notes
     In April 2005, the Company exercised its right to call the remaining 11.75% senior secured first mortgage notes due 2008 at 105.875% of the principal balance, plus accrued and unpaid interest. The early extinguishment of the Notes resulted in a $253 loss reported as other income (expense).
  Nordural’s Term Loan Facility
     On February 15, 2005, Nordural closed and borrowed under a new $365.0 million senior term loan facility. Amounts borrowed under the new term loan facility were used to refinance debt under Nordural’s previous term loan facility, and will be used to finance a portion of the costs associated with the ongoing expansion of the Nordural facility and for Nordural’s general corporate purposes. Amounts borrowed under Nordural’s new term loan facility generally will bear interest at a margin over the applicable Eurodollar rate. Nordural’s obligations under the new term loan facility have been secured by a pledge of all of Nordural’s shares pursuant to a share pledge agreement with the lenders. In addition, substantially all of Nordural’s assets are pledged as security under the loan facility. Nordural is required to make the following minimum repayments of principal on the facility: $15.5 million on February 28, 2007 and $14.0 million on each of August 31, 2007, February 29, 2008, August 31, 2008, February 28, 2009, August 31, 2009 and February 28, 2010. If Nordural makes a dividend payment (dividends are not permitted until the Nordural facility has been expanded to a production level of 212,000 metric tons per year), it must simultaneously make a repayment of principal in an amount equal to 50% of the dividend. The new term loan facility is non-recourse to Century Aluminum Company. All outstanding principal must be repaid at final maturity on February 28, 2010.
     Nordural’s loan facility contains customary covenants, including limitations on additional indebtedness, investments, capital expenditures (other than related to the expansion project), dividends, and hedging agreements. Nordural is also subject to various financial covenants, including a net worth covenant and certain maintenance covenants, including minimum interest coverage and debt service coverage beginning December 31, 2006.

7


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
8. Contingencies and Commitments
  Environmental Contingencies
     The Company believes its current environmental liabilities do not have, and are not likely to have, a material adverse effect on the Company’s financial condition, results of operations or liquidity. However, there can be no assurance that future requirements at currently or formerly owned or operated properties will not result in liabilities which may have a material adverse effect.
     Century Aluminum of West Virginia, Inc. (“Century of West Virginia”) continues to perform remedial measures at its Ravenswood facility pursuant to an order issued by the Environmental Protection Agency (“EPA”) in 1994 (the “3008(h) Order”). Century of West Virginia also conducted a RCRA facility investigation (“RFI”) under the 3008(h) Order evaluating other areas at the Ravenswood facility that may have contamination requiring remediation. The RFI has been approved by appropriate agencies. Century of West Virginia has completed interim remediation measures at two sites identified in the RFI, and the Company believes no further remediation will be required. A Corrective Measures Study, which will formally document the conclusion of these activities, is being completed with the EPA. The Company believes a significant portion of the contamination on the two sites identified in the RFI is attributable to the operations of other third parties and is their financial responsibility.
     Prior to the Company’s purchase of the Hawesville facility, the EPA issued a final Record of Decision (“ROD”) under the Comprehensive Environmental Response, Compensation and Liability Act. By agreement, Southwire is to perform all obligations under the ROD. Century Kentucky, LLC (“Century Kentucky”) has agreed to operate and maintain the ground water treatment system required under the ROD on behalf of Southwire, and Southwire will reimburse Century Kentucky for any expense that exceeds $400 annually.
     Century is a party to an EPA Administrative Order on Consent (the “Order”) pursuant to which other past and present owners of an alumina refining facility at St. Croix, Virgin Islands have agreed to carry out a Hydrocarbon Recovery Plan to remove and manage hydrocarbons floating on groundwater underlying the facility. Pursuant to the Hydrocarbon Recovery Plan, recovered hydrocarbons and groundwater are delivered to the adjacent petroleum refinery where they are received and managed. Lockheed Martin Corporation (“Lockheed”), which sold the facility to one of the Company’s affiliates, Virgin Islands Alumina Corporation (“Vialco”), in 1989, has tendered indemnity and defense of this matter to Vialco pursuant to terms of the Lockheed–Vialco Asset Purchase Agreement. Management does not believe Vialco’s liability under the Order or its indemnity to Lockheed will require material payments. Through June 30, 2005, the Company has expended approximately $440 on the Recovery Plan. Although there is no limit on the obligation to make indemnification payments, the Company expects the future potential payments under this indemnification to comply with the Order will be approximately $200, which may be offset in part by sales of recoverable hydrocarbons.
     On May 5, 2005, a complaint was filed by the Commissioner of the Department of Planning and Natural Resources, in his capacity as Trustee for Natural Resources of the United States Virgin Islands against the Company, Vialco and other parties. The complaint alleges damages to natural resources caused by alleged releases from the alumina refinery facility at St. Croix and the adjacent petroleum refinery. Lockheed has tendered indemnity and defense of the case to Vialco pursuant to terms of the Lockheed-Vialco Asset Purchase Agreement. The complaint seeks unspecified monetary damages, costs and attorney fees.
     It is the Company’s policy to accrue for costs associated with environmental assessments and remedial efforts when it becomes probable that a liability has been incurred and the costs can be reasonably estimated. The aggregate environmental-related accrued liabilities were $706 and $596 at June 30, 2005 and December 31, 2004, respectively. All accrued amounts have been recorded without giving effect to any possible future recoveries. With respect to cost for ongoing environmental compliance, including maintenance and monitoring, such costs are expensed as incurred.
     Because of the issues and uncertainties described above, and the Company’s inability to predict the requirements of the future environmental laws, there can be no assurance that future capital expenditures and costs for environmental compliance will not have a material adverse effect on the Company’s future financial condition, results of operations, or liquidity. Based upon all available information, management does not believe that the

8


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
outcome of these environmental matters will have a material adverse effect on the Company’s financial condition, results of operations, or liquidity .
  Legal Contingencies
     The Company has pending against it or may be subject to various lawsuits, claims and proceedings related primarily to employment, commercial, environmental and safety and health matters. Although it is not presently possible to determine the outcome of these matters, management believes their ultimate disposition will not have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.
  Power Commitments
     The Hawesville facility currently purchases all of its power from Kenergy Corporation (“Kenergy”), a local retail electric cooperative, under a power supply contract that expires at the end of 2010. Kenergy acquires the power it provides to the Hawesville facility mostly from a subsidiary of LG&E Energy Corporation (“LG&E”), with delivery guaranteed by LG&E. The Hawesville facility currently purchases all of its power from Kenergy at fixed prices. Approximately 130 megawatts (“MW”) or 27% of the Hawesville facility’s power requirements are unpriced in calendar years 2006 through 2010. The Company will negotiate the price for the unpriced portion of the contract at such times as the Company deems appropriate.
     The Company purchases all of the electricity requirements for the Ravenswood facility from Ohio Power Company, a unit of American Electric Power Company, under a fixed price power supply agreement that runs through December 31, 2005. Under a new power contract approved by the Public Services Commission of West Virginia, Appalachian Power Company has agreed to supply power to the Ravenswood facility from January 1, 2006 through December 31, 2010; provided that after December 31, 2007, Century Aluminum of West Virginia, Inc. may terminate the agreement by providing 12 months notice of termination.
     The Mt. Holly facility purchases all of its power from the South Carolina Public Service Authority at rates established by published schedules. The Mt. Holly facility’s current power contract expires December 31, 2015. Power delivered through 2010 will be priced as set forth in currently published schedules, subject to adjustments for fuel costs. Rates for the period 2011 through 2015 will be as provided under then-applicable schedules.
     The Nordural facility purchases power from Landsvirkjun, a power company jointly owned by the Republic of Iceland and two Icelandic municipal governments, under a contract due to expire in 2019. The power delivered to the Nordural facility under its current contract is from hydroelectric and geothermal sources, both competitively-priced and renewable sources of power in Iceland, at a rate based on the London Metal Exchange (“LME”) price for primary aluminum. In connection with the planned expansion, Nordural has entered into power contracts with Hitaveita Sujurnesja hf. (“Sudurnes Energy”) and Orkuveita Reykjavíkur (“Reykjavik Energy”) for the supply of the additional power required for the expansion capacity up to 220,000 metric tons per year and with Reykjavik Energy for further expansion up to 260,000 metric tons per year, subject to certain conditions. Power under these agreements will be generated from predominately geothermal resources and prices will be LME-based. By the terms of a Second Amendment to the Landsvirkjun/Nordural Power Contract, dated as of April 21, 2004, Landsvirkjun has agreed on a best commercial efforts basis to provide backup power to Nordural should Sudurnes Energy or Reykjavik Energy be unable to meet the obligations of their contract to provide power for the Nordural expansion capacity.

9


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
  Labor Commitments
     Approximately 81% of the Company’s U.S. based workforce is represented by the United Steelworker’s of America (the “USWA”) and working under agreements that expire as follows: March 31, 2006 (Hawesville) and May 31, 2006 (Ravenswood).
     Approximately 80% of Nordural’s workforce is represented by six national labor unions under an agreement that expires on December 31, 2009.
   Other Commitments and Contingencies
     The Company’s income tax returns are periodically examined by various tax authorities. The Company is currently under audit by the Internal Revenue Service (“IRS”) for the tax years through 2002. In connection with such examinations, the IRS has raised issues and proposed tax deficiencies. The Company is reviewing the issues raised by the IRS and plans to contest the proposed tax deficiencies. Based on current information, the Company does not believe that the outcome of the tax audit will have a material impact on the Company’s financial condition or results of operations.
     At June 30, 2005 and December 31, 2004, the Company had outstanding capital commitments related to the Nordural expansion of $199,847 and $218,800, respectively. The Company’s cost commitments for the Nordural expansion may materially change depending on the exchange rate between the U.S. dollar and certain foreign currencies, principally the euro and the Icelandic krona.
9. Forward Delivery Contracts and Financial Instruments
     As a producer of primary aluminum products, the Company is exposed to fluctuating raw material and primary aluminum prices. The Company routinely enters into fixed and market priced contracts for the sale of primary aluminum and the purchase of raw materials in future periods.
   Primary Aluminum Sales Contracts
                 
Contract   Customer   Volume   Term   Pricing
Pechiney Metal Agreement
 (1)
  Pechiney   125,192 to 146,964 metric tons per year (“mtpy”)   Through July 31, 2007   Based on U.S. Midwest market
 
               
Glencore Metal Agreement
 I (2)
  Glencore   50,000 mtpy   Through December 31, 2009   LME-based
 
               
Glencore Metal Agreement
 II (3)
  Glencore   20,000 mtpy   Through December 31, 2013   Based on U.S. Midwest market
 
               
Southwire Metal
 Agreement (4)
  Southwire   108,862 mtpy (high purity
molten aluminum)
  Through March 31, 2011   Based on U.S. Midwest market
 
               
 
      27,216 mtpy (standard-grade
molten aluminum)
  Through December 31, 2008   Based on U.S. Midwest market
 
(1)   The Pechiney Metal Agreement was extended through July 31, 2007 when Century of West Virginia signed an agreement with Appalachian Power Company for the supply of electricity beyond that date. Pechiney has the right, upon 12 months notice, to reduce its purchase obligations by 50% under this contract
 
(2)   Referred to as the “New Sales Contract” in the Company’s 2004 Annual Report on Form 10-K. The Company accounts for the Glencore Metal Agreement I as a derivative instrument under SFAS No. 133. The Company has not designated the Glencore Metal Agreement I as “normal” because it replaced and substituted for a significant portion of a sales contract which did not qualify for this designation. Because the Glencore Metal Agreement I is variably priced, the Company does not expect significant variability in its fair value, other than changes that might result from the absence of the U.S. Midwest premium.

10


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
(3)   Referred to as the “Glencore Metal Agreement” in the Company’s 2004 Annual Report on Form 10-K. The Glencore Metal Agreement II pricing is based on then-current market prices, adjusted by a negotiated U.S. Midwest premium with a cap and a floor as applied to the current U.S. Midwest premium.
 
(4)   The Southwire Metal Agreement will automatically renew for additional five-year terms, unless either party provides 12 months notice that it has elected not to renew.
   Tolling Contracts
                 
Contract   Customer   Volume   Term   Pricing
Billiton Tolling Agreement
 (1)
  BHP Billiton   90,000 mtpy   Through December 31, 2013   LME-based
 
               
Glencore Tolling
  Agreement (2)
  Glencore   90,000 mtpy   Through July 2016   LME-based
 
(1)   Substantially all of Nordural’s sales consist of tolling revenues earned under a long-term Alumina Supply, Toll Conversion and Aluminum Metal Supply Agreement between Nordural and a subsidiary of BHP Billiton Ltd. (the “Billiton Tolling Agreement”). Under the Billiton Tolling Agreement, which is for virtually all of Nordural’s existing production capacity, Nordural receives an LME-based fee for the conversion of alumina, supplied by BHP Billiton, into primary aluminum. The Company acquired Nordural in April 2004.
 
(2)   The Company entered into a 10-year LME-based alumina tolling agreement for 90,000 metric tons of the expansion capacity at the Nordural facility. The term of the agreement will begin upon completion of the expansion, which is expected to be in late-2006.
     Apart from the Pechiney Metal Agreement, Glencore Metal Agreement I, Glencore Metal Agreement II and Southwire Metal Agreement, the Company had forward delivery contracts to sell 93,569 metric tons and 113,126 metric tons of primary aluminum at June 30, 2005 and December 31, 2004, respectively. Of these forward delivery contracts, the Company had fixed price commitments to sell 8,923 metric tons and 6,033 metric tons of primary aluminum at June 30, 2005 and December 31, 2004, respectively, of which none were with Glencore.
   Alumina Supply Agreements
     The Company is party to long-term agreements with Glencore that supply a fixed quantity of alumina to the Company’s Ravenswood and Mt. Holly facilities at prices indexed to the price of primary aluminum quoted on the LME. In addition, as part of the Gramercy acquisition, the Company entered into a long-term agreement on November 2, 2004 with Gramercy Alumina LLC that supplies a fixed quantity of alumina to the Company’s Hawesville facility at prices based on the alumina production costs at the Gramercy refinery. A summary of these agreements is provided below. The Company’s Nordural facility toll converts alumina provided by BHP Billiton, and will toll convert alumina provided by Glencore beginning in 2006.
             
Facility   Supplier   Term   Pricing
Ravenswood
  Glencore   Through December 31, 2006   LME-based
 
           
Mt. Holly
  Glencore   Through December 31, 2006 (54% of requirement)   LME-based
 
           
Mt. Holly
  Glencore   Through January 31, 2008 (46% of requirement)   LME-based
 
           
Hawesville
  Gramercy Alumina(1)   Through December 31, 2010   Cost-based

11


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
 
(1)   The alumina supply agreement with Gramercy Alumina LLC, which was entered into on November 2, 2004, replaced the Company’s alumina supply agreement with Kaiser.
   Anode Purchase Agreement
     Nordural has a contract for the supply of anodes for its existing capacity which expires in 2013. Pricing for the anode contract is variable and is indexed to the raw material market for petroleum coke products, certain labor rates, and maintenance cost indices. On August 4, 2005, Nordural signed a memorandum of understanding for the provision of anodes for its presently planned expansion capacity.
   Financial Sales Agreements
     To mitigate the volatility in its unpriced forward delivery contracts, the Company enters into fixed price financial sales contracts, which settle in cash in the period corresponding to the intended delivery dates of the forward delivery contracts. Certain of these fixed price financial sales contracts are accounted for as cash flow hedges depending on the Company’s designation of each contract at its inception.
Fixed Price Financial Sales Contracts at June 30, 2005:
                                                         
    (Metric Tons)
    2005   2006   2007   2008   2009   Thereafter   Total
Primary aluminum
    103,500       167,950       169,900       109,200       105,000       480,000       1,135,550  
     At June 30, 2005 and December 31, 2004, the Company had fixed price financial sales contracts with Glencore for 1,135,550 metric tons and 764,933, respectively, of which 374,750 metric tons and 464,333 metric tons, respectively, were designated as cash flow hedges. These fixed price financial sales contracts are scheduled for settlement at various dates in 2005 through 2015. Certain of these sales contracts, for the period 2006 through 2015, contain clauses that trigger additional shipment volume when the market price for a contract month is above the contract ceiling price. These contracts will be settled monthly, and if the market price exceeds the ceiling price for all contract months through 2015, the maximum additional shipment volume would be 760,800 metric tons. The Company had no fixed price financial purchase contracts to purchase aluminum at June 30, 2005 or December 31, 2004.
     Additionally, to mitigate the volatility of the natural gas markets, the Company enters into fixed price financial purchase contracts, accounted for as cash flow hedges, which settle in cash in the period corresponding to the intended usage of natural gas.
Fixed Price Financial Purchase Contracts at June 30, 2005:
                                         
    (Thousands of DTH)
    2005   2006   2007   2008   Total
Natural Gas
    1,990       1,680       780       480       4,930  
     At June 30, 2005 and December 31, 2004, the Company had fixed price financial purchase contracts for 4.9 million and 4.3 million DTH (one decatherm is equivalent to one million British Thermal Units), respectively. These financial instruments are scheduled for settlement at various dates in 2005 through 2008.
     Based on the fair value of the Company’s fixed price financial sales contracts for primary aluminum and financial purchase contracts for natural gas that qualify as cash flow hedges as of June 30, 2005, accumulated other

12


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
comprehensive loss of $8,642 is expected to be reclassified as a reduction to earnings over the next 12 month period.
     The forward financial sales and purchase contracts are subject to the risk of non-performance by the counterparties. However, the Company only enters into forward financial contracts with counterparties it determines to be creditworthy. If any counterparty failed to perform according to the terms of the contract, the accounting impact would be limited to the difference between the contract price and the market price applied to the contract volume on the date of settlement.
10. Supplemental Cash Flow Information
                 
    Six months ended
    June 30,
    2005   2004
Cash paid for:
               
Interest
  $ 13,514     $ 21,230  
Income tax
    2,975       198  
 
               
Cash received for:
               
Interest
    415       339  
Income tax refunds
          135  
 
               
Non-cash Investing activities:
               
Accrued Nordural expansion costs
    7,192        
11. Asset Retirement Obligations
     The reconciliation of the changes in the asset retirement obligations is as follows:
                 
    For the six months   For the Year ended
    ended June 30, 2005   December 31, 2004
Beginning balance, ARO liability
  $ 17,232     $ 16,495  
Additional ARO liability incurred
    903       1,383  
ARO liabilities settled
    (1,439 )     (3,379 )
Accretion expense
    459       2,733  
 
               
Ending balance, ARO liability
  $ 17,155     $ 17,232  
 
               
12. New Accounting Standards
     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement replaces the guidance in APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires retrospective application as the required method for reporting a change in accounting principle, unless impracticable. The Statement differentiates retrospective application for changes in accounting principle and changes in reporting entity from restatement for corrections of errors. In addition, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. The Statement is effective for fiscal year 2006 and thereafter. The Company is currently assessing the Statement and does not expect the impact of adopting SFAS No. 154 to have a material effect on the Company’s financial position and results of operations.
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share Based Payment.” This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock

13


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
Issued to Employees.” This statement focuses primarily on accounting for transactions in which a company obtains services in share-based payment transactions. This Statement will require the Company to recognize the grant date fair value of an award of equity-based instruments to employees and the cost will be recognized over the period in which the employees are required to provide service. The Statement is effective for fiscal year 2006 and thereafter. The Company is currently assessing the Statement and does not expect the impact of adopting SFAS No. 123(R) to have a material effect on the Company’s financial position and results of operations.
     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” This Statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting treatment for certain inventory costs. In addition, the Statement requires that the allocation of production overheads be based on the facilities’ normal production capacity. The Statement is effective for fiscal year 2006 and thereafter. The Company is currently assessing the Statement and has not yet determined the impact of adopting SFAS No. 151 on the Company’s financial position and results of operations.
13. Comprehensive Income and Accumulated Other Comprehensive Income (Loss)
  Comprehensive Income:
                 
    Six months ended
    June 30,
    2005   2004
            (Restated)
Net income
  $ 52,474     $ 24,812  
Other comprehensive income (loss):
               
Net unrealized gain (loss) on financial instruments, net of tax of ($8,762) and $5,848, respectively
    15,205       (10,442 )
Net amount reclassified to income, net of tax of ($9,413) and ($612), respectively
    16,534       1,108  
 
               
Comprehensive income
  $ 84,033     $ 15,478  
 
               
   Composition of Accumulated Other Comprehensive Loss:
                 
    June 30,   December 31,
    2005   2004
Net unrealized loss on financial instruments, net of tax of $9,837 and $28,011
  $ (17,553 )   $ (49,113 )
Minimum pension liability adjustment, net of tax of $1,728 and $1,728
    (3,073 )     (3,073 )
 
               
Total accumulated other comprehensive loss
  $ (20,626 )   $ (52,186 )
 
               

14


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
14. Earnings Per Share
     The following table provides a reconciliation of the computation of the basic and diluted earnings per share:
                                                 
    Three months ended June 30,
    2005   2004
    Income   Shares   Per-Share   Income   Shares   Per-Share
                (Restated)        
Net income
  $ 40,744                     $ 19,219                  
 
                                               
Less: Preferred stock dividends
                          (269 )                
 
                                               
 
                                               
Basic EPS:
                                               
 
Income applicable to common shareholders
    40,744       32,140     $ 1.27       18,950       29,629     $ 0.64  
 
                                               
Effect of Dilutive Securities:
                                               
 
                                               
Plus: Incremental shares
          56                     162          
 
                                               
Plus: Convertible preferred stock
                        269       751          
 
                                               
 
                                               
Diluted EPS:
                                               
 
                                               
Income applicable to common shareholders with assumed conversions
  $ 40,744       32,196     $ 1.27     $ 19,219       30,542     $ 0.63  
 
                                               
                                                 
    Six months ended June 30,
    2005   2004
    Income   Shares   Per-Share   Income   Shares   Per-Share
                (Restated)        
Net income
  $ 52,474                     $ 24,812                  
 
                                               
Less: Preferred stock dividends
                          (769 )                
 
                                               
 
                                               
Basic EPS:
                                               
 
                                               
Income applicable to common shareholders
    52,474       32,099     $ 1.63       24,043       25,412     $ 0.95  
 
                                               
Effect of Dilutive Securities:
                                               
 
                                               
Plus: Incremental shares
          63                     176          
 
                                               
 
                                               
Diluted EPS:
                                               
 
                                               
Income applicable to common shareholders with assumed conversions
  $ 52,474       32,162     $ 1.63     $ 24,043       25,588     $ 0.94  
 
                                               
     Options to purchase 276,913 and 597,593 shares of common stock were outstanding during the periods ended June 30, 2005 and 2004, respectively. At June 30, 2005, 20,000 options were not included in the calculation of diluted EPS because the option’s exercise price exceeded the average market price of the common stock.

15


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
15. Components of Net Periodic Benefit Cost
                                 
    Pension Benefits
    Three months   Six months ended
    ended June 30,   June 30,
    2005   2004   2005   2004
Service cost
  $ 929     $ 775     $ 1,962     $ 1,678  
Interest cost
    1,222       1,103       2,341       2,129  
Expected return on plan assets
    (1,506 )     (1,175 )     (2,950 )     (2,376 )
Amortization of prior service cost
    1,299       211       1,481       421  
Amortization of net gain
    202       138       314       163  
 
                               
Net periodic benefit cost
  $ 2,146     $ 1,052     $ 3,148     $ 2,015  
 
                               
                                 
    Other Postemployment Benefits
    Three months   Six months ended
    ended June 30,   June 30,
    2005   2004   2005   2004
Service cost
  $ 1,178     $ 1,184     $ 2,516     $ 2,302  
Interest cost
    2,345       2,131       4,439       3,991  
Expected return on plan assets
                       
Amortization of prior service cost
    (220 )     (84 )     (439 )     (168 )
Amortization of net gain
    1,093       795       1,857       1,233  
 
                               
Net periodic benefit cost
  $ 4,396     $ 4,026     $ 8,373     $ 7,358  
 
                               
16. Condensed Consolidating Financial Information
     The Company’s 7.5% Senior Unsecured Notes due 2014 and 1.75% Convertible Senior Notes due 2024 are guaranteed by each of the Company’s existing and future domestic subsidiaries other than Nordural U.S. LLC. These notes are not guaranteed by the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”). During the quarter, Century Aluminum of Kentucky LLC (the “LLC”) became a guarantor subsidiary. In periods prior to this reporting period, the LLC was included in Non-Guarantor Subsidiaries. The Company’s policy for financial reporting purposes is to allocate expenses or income to subsidiaries. For the three months ended June 30, 2005 and June 30, 2004, the Company allocated total corporate income/(expense) of $2,505 and ($1,143) to its subsidiaries, respectively. For the six months ended June 30, 2005 and June 30, 2004, the Company allocated total corporate income/(expense) of $1,986 and ($56) to its subsidiaries, respectively. Additionally, the Company charges interest on certain intercompany balances.
     The following summarized condensed consolidating balance sheets as of June 30, 2005 and December 31, 2004, condensed consolidating statements of operations for the three and six months ended June 30, 2005 and June 30, 2004 and the condensed consolidating statements of cash flows for the six months ended June 30, 2005 and June 30, 2004 present separate results for Century Aluminum Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries.
     This summarized condensed consolidating financial information may not necessarily be indicative of the results of operations or financial position had the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries operated as independent entities.

16


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (cotinued)
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2005
                                         
    Combined   Combined            
    Guarantor   Non-Guarantor   The   Reclassifications    
    Subsidiaries   Subsidiaries   Company   and Eliminations   Consolidated
Assets:
                                       
 
                                       
Cash and cash equivalents
  $     $ 20,263     $ 14,911     $     $ 35,174  
Restricted cash
    2,027                         2,027  
Accounts receivables — net
    94,489       10,086                   104,575  
Due from affiliates
    222,356             688,912       (897,224 )     14,044  
Inventories
    93,647       12,850             (2,047 )     104,450  
Prepaid and other current assets
    4,229       6,374       5,569             16,172  
Deferred taxes — current portion
    20,460             2,998             23,458  
 
                                       
Total current assets
    437,208       49,573       712,390       (899,271 )     299,900  
Investment in subsidiaries
    12,884             365,694     (378,578 )      
Property, plant and equipment — net
    464,120       451,537       351             916,008  
Intangible asset — net
    81,989                         81,989  
Goodwill
          94,844                   94,844  
Due from affiliates — less current portion
                2,747             2,747  
Deferred taxes — less current portion
                14,343       (14,343 )      
Other assets
    41,499       12,233       20,882             74,614  
 
                                       
Total assets
  $ 1,037,700     $ 608,187     $ 1,116,407     $ (1,292,192 )   $ 1,470,102  
 
                                       
 
                                       
Liabilities and shareholders’ equity:
                                       
 
                                       
Accounts payable — trade
  $ 28,052     $ 19,874     $     $     $ 47,926  
Due to affiliates
    54,768       44,160       168,300       (222,654 )     44,574  
Industrial revenue bonds
    7,815                         7,815  
Accrued and other current liabilities
    17,746       3,101       38,411             59,258  
Long-term debt — current portion
          561                   561  
Accrued employee benefits costs — current portion
    8,458                         8,458  
Deferred taxes — current
                             
Convertible senior notes
                175,000             175,000  
 
                                       
Total current liabilities
    116,839       67,696       381,711       (222,654 )     343,592  
 
                                       
Senior unsecured notes payable
                250,000             250,000  
Nordural debt
          153,739                   153,739  
Accrued pension benefits costs — less current portion
                12,358             12,358  
Accrued post retirement benefits costs — less current portion
    90,436             860             91,296  
Other liabilities/intercompany loan
    440,353       273,040             (677,934 )     35,459  
Due to affiliates — less current portion
    17,402                         17,402  
Deferred taxes — less current portion
    90,656       17,149             (13,027 )     94,778  
 
                                       
Total non-current liabilities
    638,847       443,928       263,218       (690,961 )     655,032  
 
                                       
 
                                       
Shareholders’ Equity:
                                       
Common stock
    60       12       321       (72 )     321  
Additional paid-in capital
    247,016       75,339       418,412       (322,355 )     418,412  
Accumulated other comprehensive income (loss)
    (20,626 )           (20,626 )     20,626       (20,626 )
Retained earnings (accumulated deficit)
    55,564       21,212       73,371       (76,776 )     73,371  
 
                                       
Total shareholders’ equity
    282,014       96,563       471,478       (378,577 )     471,478  
 
                                       
Total liabilities and equity
  $ 1,037,700     $ 608,187     $ 1,116,407     $ (1,292,192 )   $ 1,470,102  
 
                                       

17


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2004 (as restated)
                                         
    Combined   Combined           Reclassifications    
    Guarantor   Non-Guarantor   The   and    
    Subsidiaries   Subsidiaries   Company   Eliminations   Consolidated
Assets:
                                       
Cash and cash equivalents
  $ 185     $ 1,759     $ 42,224     $     $ 44,168  
Restricted cash
    1,174       504                   1,678  
Accounts receivable — net
    71,051       8,449       76             79,576  
Due from affiliates
    168,328       8,474       684,458       (846,889 )     14,371  
Inventories
    73,515       38,688             (918 )     111,284  
Prepaid and other assets
    1,514       4,299       4,242             10,055  
Deferred taxes — current portion
    24,018       293             331       24,642  
 
                                       
Total current assets
    339,785       62,466       731,000       (847,447 )     285,774  
Investment in subsidiaries
    66,393             270,178       (336,571 )      
Property, plant and equipment — net
    464,418       341,692       140             806,250  
Intangible asset — net
          86,809                   86,809  
Goodwill
          95,610                   95,610  
Other assets
    20,391       16,792       20,927             58,110  
 
                                       
Total assets
  $ 890,987     $ 603,369     $ 1,022,245     $ (1,184,048 )   $ 1,332,553  
 
                                       
 
                                       
Liabilities and shareholders’ equity:
                                       
 
                                       
Accounts payable — trade
  $ 12,000     $ 35,479     $     $     $ 47,479  
Due to affiliates
    84,151       2,499       162,150       (163,985 )     84,815  
Industrial revenue bonds
    7,815                         7,815  
Accrued and other current liabilities
    15,545       10,023       27,741             53,309  
Long term debt — current portion
          704       9,878             10,582  
Accrued employee benefits costs — current portion
    6,507       1,951                   8,458  
Convertible senior notes
                175,000             175,000  
 
                                       
Total current liabilities
    126,018       50,656       374,769       (163,985 )     387,458  
 
                                       
Senior unsecured notes payable
                250,000             250,000  
Nordural debt
          80,711                   80,711  
Accrued pension benefit costs — less current portion
                10,685             10,685  
Accrued postretirement benefit costs — less current portion
    56,947       27,812       790             85,549  
Other liabilities/intercompany loan
    479,213       239,124             (683,376 )     34,961  
Due to affiliates — less current portion
    30,416                         30,416  
Deferred taxes
    47,509       19,379       1,501       (116 )     68,273  
 
                                       
Total noncurrent liabilities
    614,085       367,026       262,976       (683,492 )     560,595  
 
                                       
Shareholders’ Equity:
                                       
Common stock
    59       13       320       (72 )     320  
Additional paid-in capital
    188,424       242,818       415,453       (431,242 )     415,453  
Accumulated other comprehensive income (loss)
    (51,665 )     (521 )     (52,186 )     52,186       (52,186 )
Retained earnings (accumulated deficit)
    14,066       (56,623 )     20,913       42,557       20,913  
 
                                       
Total shareholders’ equity
    150,884       185,687       384,500       (336,571 )     384,500  
 
                                       
Total liabilities and shareholders’ equity
  $ 890,987     $ 603,369     $ 1,022,245     $ (1,184,048 )   $ 1,332,553  
 
                                       

18


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three months ended June 30, 2005
                                         
    Combined   Combined           Reclassifications    
    Guarantor   Non-Guarantor   The   and    
    Subsidiaries   Subsidiaries   Company   Eliminations   Consolidated
Net sales:
                                       
Third-party customers
  $ 208,879     $ 34,450     $     $     $ 243,329  
Related parties
    39,927                         39,927  
 
                                       
 
    248,806       34,450                   283,256  
 
                                       
Cost of goods sold
    220,967       21,649             (4,708 )     237,908  
 
                                       
Gross profit
    27,839       12,801             4,708       45,348  
Selling, general and administrative expenses
    8,046                         8,046  
 
                                       
Operating income
    19,793       12,801             4,708       37,302  
Interest expense – third party
    (6,236 )     (281 )                 (6,517 )
Interest income (expense) – affiliates
    6,584       (6,584 )                  
Interest income
    252       23                   275  
Net gain on forward contracts
    24,496                         24,496  
Other income (expense), net
    (890 )     418                   (472 )
 
                                       
Income before income taxes and equity in earnings (loss) of subsidiaries and joint ventures
    43,999       6,377             4,708       55,084  
Income tax (expense) benefit
    (19,028 )     1,484             (1,695 )     (19,239 )
 
                                       
Income before equity in earnings (loss) of subsidiaries
    24,970       7,861             3,013       35,845  
Equity in earnings (loss) of subsidiaries and joint ventures
    8,390       50       40,744       (44,285 )     4,899  
 
                                       
Net income (loss)
  $ 33,361     $ 7,911     $ 40,744     $ (41,272 )   $ 40,744  
 
                                       

19


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2004
(as restated)
                                         
    Combined   Combined           Reclassifications    
    Guarantor   Non-Guarantor   The   and    
    Subsidiaries   Subsidiaries   Company   Eliminations   Consolidated
Net sales:
                                       
Third-party customers
  $ 203,947     $ 21,483     $     $     $ 225,430  
Related parties
    38,303                         38,303  
 
                                       
 
    242,250       21,483                   263,733  
Cost of goods sold
    199,447       100,372             (82,765 )     217,054  
 
                                       
Reimbursement from owner
          (82,805 )           82,805        
 
                                       
Gross profit (loss)
    42,803       3,916             (40 )     46,679  
Selling, general and administrative expenses
    3,991                         3,991  
 
                                       
Operating income (loss)
    38,812       3,916             (40 )     42,688  
Interest expense – third party
    (8,578 )     (2,896 )                 (11,474 )
Interest expense – related party
    (51 )                       (51 )
Interest income
    195       22             27       244  
Net loss on forward contracts
    (1,177 )                       (1,177 )
Other income (expense), net
    (61 )     59             11       9  
 
                                       
Income (loss) before taxes, minority interest and cumulative effect of change in accounting principle
    29,140       1,101             (2 )     30,239  
Income tax (expense) benefit
    (10,747 )     (1,444 )           1,171       (11,020 )
 
                                       
Income (loss) before equity in earnings (loss) of subsidiaries
    18,393       (343 )           1,169       19,219  
Equity in earnings (loss) of subsidiaries
    (1,910 )           19,219       (17,309 )      
 
                                       
Net income (loss)
  $ 16,483     $ (343 )   $ 19,219     $ (16,140 )   $ 19,219  
 
                                       

20


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six months ended June 30, 2005
                                         
    Combined   Combined           Reclassifications    
    Guarantor   Non-Guarantor   The   and    
    Subsidiaries   Subsidiaries   Company   Eliminations   Consolidated
Net sales:
                                       
Third-party customers
  $ 422,589     $ 68,165     $     $     $ 490,754  
Related parties
    77,898                         77,898  
 
                                       
 
    500,487       68,165                   568,652  
 
                                       
Cost of goods sold
    428,346       48,099             (4,708 )     471,737  
 
                                       
Gross profit
    72,141       20,066             4,708       96,915  
Selling, general and administrative expenses
    16,842                         16,842  
 
                                       
Operating income
    55,299       20,066             4,708       80,073  
Interest expense – third party
    (12,654 )     (547 )                 (13,201 )
Interest income (expense) – affiliates
    11,333       (11,333 )                  
Interest income
    419       74                   493  
Net gain on forward contracts
    1,001                         1,001  
Other income (expense), net
    (887 )     822                   (65 )
 
                                       
Income before income taxes and equity in earnings (loss) of subsidiaries and joint ventures
    54,511       9,082             4,708       68,301  
Income tax expense
    (21,788 )     (2,591 )           (1,695 )     (26,074 )
 
                                       
Income (loss) before equity in earnings (loss) of subsidiaries
    32,723       6,491             3,013       42,227  
Equity in earnings (loss) of subsidiaries and joint ventures
    4,850       5,397       52,474       (52,474 )     10,247  
 
                                       
Net income (loss)
  $ 37,573     $ 11,888     $ 52,474     $ (49,461 )   $ 52,474  
 
                                       

21


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six months Ended June 30, 2004
(as restated)
                                         
    Combined   Combined           Reclassifications    
    Guarantor   Non-Guarantor   The   and    
    Subsidiaries   Subsidiaries   Company   Eliminations   Consolidated
Net sales:
                                       
Third-party customers
  $ 396,293     $ 21,483     $     $     $ 417,776  
Related parties
    78,051                         78,051  
 
                                       
 
    474,344       21,483                   495,827  
Cost of goods sold
    390,106       183,556             (162,867 )     410,795  
 
                                       
Reimbursement from owners
          (162,941 )           162,941        
 
                                       
Gross profit (loss)
    84,238       868             (74 )     85,032  
Selling, general and administrative expenses
    9,399                         9,399  
 
                                       
Operating income (loss)
    74,839       868             (74 )     75,633  
Interest expense — third party
    (18,921 )     (2,928 )                 (21,849 )
Interest expense — related party
    (380 )                       (380 )
Interest income
    267       22             52       341  
Net loss on forward contracts
    (13,997 )                       (13,997 )
Other income (expense), net
    (682 )     57             20       (605 )
 
                                       
Income (loss) before income taxes and equity in earnings (loss) of subsidiaries
    41,126       (1,981 )           (2 )     39,143  
Income tax (expense) benefit
    (15,229 )     (1,444 )           2,342       (14,331 )
Equity in earnings (loss) of subsidiaries
    (3,821 )           24,812       (20,991 )      
 
                                       
Net income (loss)
  $ 22,076     $ (3,425 )   $ 24,812     $ (18,651 )   $ 24,812  
 
                                       

22


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2005
                                 
    Combined   Combined        
    Guarantor   Non-guarantor   The    
    Subsidiaries   Subsidiaries   Company   Consolidated
Net cash provided by operating activities
  $ 4,666     $ 54,058     $     $ 58,724  
 
                               
 
                               
Investing activities:
                               
Nordural expansion
          (113,654 )           (113,654 )
Purchase of property, plant and equipment, net
    (3,572 )     (1,584 )     (325 )     (5,481 )
Business acquisitions, net of cash acquired
                (7,000 )     (7,000 )
Restricted cash deposits
    (350 )                 (350 )
Proceeds from sale of property, plant and equipment
    6       53             59  
 
                               
Net cash used in investing activities
    (3,916 )     (115,185 )     (7,325 )     (126,426 )
 
                               
 
                               
Financing activities:
                               
Borrowings
          145,378             145,378  
Repayment of debt
          (72,494 )     (10,529 )     (83,023 )
Financing fees
          (4,617 )           (4,617 )
 
                               
Intercompany transactions
    (935 )     11,364       (10,429 )      
 
                               
Dividends
                (16 )     (16 )
Issuance of common stock
                986       986  
 
                               
Net cash provided by (used in) financing activities
    (935 )     79,631       (19,988 )     58,708  
 
                               
Net increase (decrease) in cash and cash equivalents
    (185 )     18,504       (27,313 )     (8,994 )
Cash and cash equivalents, beginning of period
    185       1,759       42,224       44,168  
 
                               
Cash and cash equivalents, end of period
  $     $ 20,263     $ 14,911     $ 35,174  
 
                               

23


Table of Contents

CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements — (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2004 (as restated)
                                 
    Combined   Combined        
    Guarantor   Non-Guarantor   The    
    Subsidiaries   Subsidiaries   Company   Consolidated
Net cash provided by (used in) operating activities
  $ 55,058     $ (3,447 )   $     $ 51,611  
 
                               
 
                               
Investing activities:
                               
Purchase of property, plant and equipment, net
    (3,618 )     (2,094 )           (5,712 )
 
                               
Acquisitions, net of cash acquired
                (184,869 )     (184,869 )
 
                               
Net cash used in investing activities
    (3,618 )     (2,094 )     (184,869 )     (190,581 )
 
                               
 
                               
Financing activities:
                               
Repayment of debt
          (6,659 )     (14,000 )     (20,659 )
Dividends
                (3,311 )     (3,311 )
Intercompany transactions
    (51,146 )     26,522       24,624        
Issuance of common stock
                209,905       209,905  
 
                               
Net cash provided by (used in) financing activities
    (51,146 )     19,864       217,218       185,935  
 
                               
Net increase in cash
    293       14,323       32,349       46,965  
Cash, beginning of period
    104             28,100       28,204  
 
                               
Cash, end of period
  $ 397     $ 14,323     $ 60,449     $ 75,169  
 
                               

24


Table of Contents

FORWARD — LOOKING STATEMENTS — CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995.
     This Quarterly Report on Form 10-Q contains forward-looking statements. The Company has based these forward-looking statements on current expectations and projections about future events. Many of these statements may be identified by the use of forward-looking words such as “expects,” “anticipates,” “plans,” “believes,” “projects,” “estimates,” “intends,” “should,” “could,” “would,” “will,” and “potential” and similar words. These forward-looking statements are subject to risks, uncertainties and assumptions including, among other things, those discussed under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part I, Item 1, “Financial Statements and Supplementary Data,” and:
    The Company’s high level of indebtedness reduces cash available for other purposes, such as the payment of dividends, and limits the Company’s ability to incur additional debt and pursue its growth strategy;
 
    The cyclical nature of the aluminum industry causes variability in the Company’s earnings and cash flows;
 
    The loss of a customer to whom the Company delivers molten aluminum would increase the Company’s production costs;
 
    Glencore International AG owns a large percentage of the Company’s common stock and has the ability to influence matters requiring shareholder approval;
 
    The Company could suffer losses due to a temporary or prolonged interruption of the supply of electrical power to its facilities, which can be caused by unusually high demand, blackouts, equipment failure, natural disasters or other catastrophic events;
 
    Due to volatile prices for alumina, the principal raw material used in primary aluminum production, the Company’s raw materials costs could be materially impacted if the Company experiences changes to or disruptions in its current alumina supply arrangements, or if production costs at the Company’s recently acquired alumina refining operations increase significantly;
 
    By expanding the Company’s geographic presence and diversifying its operations through the acquisition of bauxite mining, alumina refining and additional aluminum reduction assets, the Company is exposed to new risks and uncertainties that could adversely affect the overall profitability of its business;
 
    Changes in the relative cost of certain raw materials and energy compared to the price of primary aluminum could affect the Company’s margins;
 
    Most of the Company’s employees are unionized and any labor dispute or failure to successfully renegotiate an existing labor agreement could materially impair the Company’s ability to conduct its production operations at its unionized facilities;
 
    The Company is subject to a variety of environmental laws that could result in unanticipated costs or liabilities;
 
    The Company may not realize the expected benefits of its growth strategy if it is unable to successfully integrate the businesses it acquires; and
 
    The Company cannot guarantee that the Company’s subsidiary Nordural will be able to complete its expansion in the time forecast or without significant cost overruns or that the Company will be able to realize the expected benefits of the expansion.
     Although the Company believes the expectations reflected in its forward-looking statements are reasonable, the Company cannot guarantee its future performance or results of operations. All forward-looking statements in this filing are based on information available to the Company on the date of this filing; however, the Company is not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. When reading any forward-looking statements in this filing, the reader should consider the risks described above and elsewhere in this report as well as those described in the Company’s Annual Report on Form

25


Table of Contents

10-K for the year ended December 31, 2004. Given these uncertainties and risks, the reader should not place undue reliance on these forward-looking statements.
      Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
     The following discussion reflects Century’s historical results of operations, which do not include results for the Nordural facility until it was acquired in April 2004 and the Company’s equity interest in the earnings of Gramercy Alumina LLC (“GAL”) and St. Ann Bauxite Limited (“SABL”) until the Company acquired a 50% joint venture interest in those companies in October 2004. All periods have been restated to reflect the Company’s change in inventory valuation.
     Century’s financial highlights include:
                                 
    Three months ended June 30,   Six months ended June 30,
    2005   2004   2005   2004
    (In thousands, except per share data)
            (Restated)           (Restated)
Net sales:
                               
Third-party customers
  $ 243,329     $ 225,430     $ 490,754     $ 417,776  
Related party customers
    39,927       38,303       77,898       78,051  
 
                               
Total
  $ 283,256     $ 263,733     $ 568,652     $ 495,827  
 
                               
 
                               
Net income
  $ 40,744     $ 19,219     $ 52,474     $ 24,812  
Net income applicable to common shareholders
  $ 40,744     $ 18,950     $ 52,474     $ 24,043  
 
                               
Earnings per common share:
                               
Basic
  $ 1.27     $ 0.64     $ 1.63     $ 0.95  
Diluted
  $ 1.27     $ 0.63     $ 1.63     $ 0.94  
     Net sales: Net sales for the three months ended June 30, 2005 increased $19.5 million or 7%, to $283.3 million. Higher price realizations for primary aluminum in the second quarter 2005, due to improved London Metal Exchange (“LME”) prices and Midwest premiums for primary aluminum, contributed an additional $13.3 million in sales that were partially offset by $4.8 million in reduced direct shipment revenues. Direct shipments were 6.1 million pounds less than the previous year period due to production and inventory differences between quarters. The additional volume provided by Nordural for the three months ended June 30, 2005 contributed $11.0 million to the quarterly net sales increase.
     Net sales for the six months ended June 30, 2005 increased $72.8 million or 15%, to $568.7 million. Higher price realizations for primary aluminum in the current period, due to improved London Metal Exchange (“LME”) prices and Midwest premiums for primary aluminum, contributed an additional $41.0 million in sales that were partially offset by $12.9 million in reduced direct shipment revenues. Direct shipments were 16.0 million pounds less than the previous year period due to fewer days in the first six months of 2005 versus 2004 and production and inventory differences between periods. The additional volume provided by Nordural for the six months ended June 30, 2005 contributed $44.7 million to the quarterly net sales increase.
     Gross profit: Gross profit for the three months ended June 30, 2005 decreased $1.3 million to $45.3 million from $46.7 million, for the same period in 2004. Improved price realizations net of increased alumina costs improved gross profit by $5.8 million and the net increased shipment volume, a result of the Nordural facility acquisition, contributed $4.1 million in additional gross profit. Offsetting these gains were $11.2 million in net cost increases during the current quarter comprised of a decline in raw material quality and increased replacement of pot

26


Table of Contents

cells, $4.6 million; higher power costs, $2.9 million; increased net amortization and depreciation charges, $1.7 million and; other spending, $2.0 million.
     Gross profit for the six months ended June 30, 2005 increased $11.9 million to $96.9 million from $85.0 million, for the same period in 2004. Improved price realizations net of increased alumina costs improved gross profit by $23.9 million and the net increased shipment volume, a result of the Nordural facility acquisition, contributed $13.4 million in additional gross profit. Partially offsetting these gains were $25.4 million in net cost increases during the current period comprised of: a decline in raw material quality and increased replacement of pot cells, $10.1 million; higher power costs, $6.1 million; increased net amortization and depreciation charges, $4.3 million and; other spending, $4.9 million.
     Selling, general and administrative expenses: Selling, general and administrative expenses for the three months ended June 30, 2005 increased $4.1 million to $8.0 million relative to the same period in 2004. Approximately 61%, or $2.5 million of the increase, was a result of increased compensation and pension expense, with the remaining increase in expense associated with increased audit, other professional fees and other general expenses. In addition, the allowance for bad debts was reduced $0.6 million in the second quarter of 2004, reflecting the settlement of a claim.
     Selling, general and administrative expenses for the six months ended June 30, 2005 increased $7.4 million to $16.8 million relative to the same period in 2004. Approximately 65%, or $4.8 million of the increase, was a result of increased compensation and pension expense, with the remaining increase in expense associated with increased audit, other professional fees and other general expenses. In addition, allowance for bad debts was reduced $0.6 million in six months ended June 30, 2004, reflecting the settlement of a claim.
     Net gain/loss on forward contracts: Net gain on forward contracts for the three months ended June 30, 2005 was $24.5 million as compared to a net loss of $1.2 million for the same period in 2004. For the six months ended June 30, 2005, net gain on forward contracts was $1.0 million as compared to a net loss of $14.0 for the same period in 2004. The gain reported for the three and six months ended June 30, 2005, was primarily a result of mark-to-market gains associated with the Company’s long term financial sales contracts which do not qualify for cash flow hedge accounting. The loss reported for the three and six month period ended June 30, 2004, primarily relates to the early termination of a fixed price forward sales contract with Glencore.
     Tax provision: Income tax expense for the three months and six months ended June 30, 2005 increased $8.2 million and $11.7 million, respectively, from the same periods in 2004. The changes in income tax expense are due to the changes in income before income taxes and changes in the equity in earnings of joint ventures which were partially offset by the discontinuance of accrual for United States taxes on Nordural’s earnings resulting from a decision that such earnings would remain invested outside the United States indefinitely.
     Equity in earnings of joint ventures: Equity in earnings from the Gramercy assets, which were acquired on October 1, 2004, was $4.9 million and $10.2 million for the three and six months ended June 30, 2005, respectively. These earnings represent the Company’s share of profits from third party bauxite and hydrate sales.
     Liquidity and Capital Resources
     The Company’s statements of cash flows for the six months ended June 30, 2005 and 2004 are summarized below:

27


Table of Contents

                 
    Six months ended
    June 30,
    2005   2004
    (dollars in thousands)
Net cash provided by operating activities
  $ 58,724     $ 51,611  
Net cash used in investing activities
    (126,426 )     (190,581 )
Net cash provided by financing activities
    58,708       185,935  
 
               
Net increase (decrease) in cash and cash equivalents
  $ (8,994 )   $ 46,965  
 
               
     Net cash from operating activities in the first six months of 2005 increased $7.1 million to $58.7 million from the comparable 2004 period of $51.6 million. The increase in net cash provided by operating activities during the first six months of 2005 was the result of the April 2004 Nordural facility acquisition, and improved market conditions, as discussed above. Due to a banking delay, the Company received a June 30th payment for $24.8 million on July 1, 2005. Absent the error, net cash from operating activities in the first six months of 2005 would have been $83.6 million.
     The Company’s net cash used in investing activities for the six month period ended June 30, 2005 was $126.4 million, primarily a result of the ongoing expansion of the Nordural facility. The Company’s remaining net cash used for investing activities consisted of capital expenditures to maintain and improve plant operations and a payment of $7.0 million to Southwire in connection with the 2001 acquisition of the Hawesville facility. The Company was required to make post-closing payments of up to $7.0 million if the LME price exceeded specified levels during any of the seven years following closing. The payment was made in April 2005. During the six month period ended June 30, 2004, the Company used cash to acquire the Nordural facility and for capital expenditures to maintain and improve plant operations.
     Net cash provided by financing activities during the first six months of 2005 was $58.7 million as a result of borrowings under Nordural’s new $365.0 million senior term loan facility. Amounts borrowed under the new term loan facility during the period were used to finance a portion of the costs associated with the ongoing expansion of the Nordural facility. During the six months ended June 30, 2005, the Company used cash of $83.0 million to retire the Nordural senior term facility, the senior secured first mortgage notes and debt related to the Landsvirkjun power contract.
Liquidity
     The Company’s principal sources of liquidity are cash flow from operations, available borrowings under the Company’s revolving credit facility and Nordural’s new term loan facility. The Company believes these sources will provide sufficient liquidity to meet working capital needs, fund capital improvements, and provide for debt service requirements. At June 30, 2005, the Company had borrowing availability of $100.0 million under its revolving credit facility, subject to customary covenants, with no outstanding borrowings. As of June 30, 2005, the Company had remaining borrowing availability of $220.0 million under Nordural’s $365.0 million term loan facility.
     The Company’s principal uses of cash are operating costs, payments of principal and interest on the Company’s outstanding debt, the funding of capital expenditures and investments in related businesses, working capital and other general corporate requirements. During 2004, the Company refinanced its public debt obligations and commenced work on the expansion of the Nordural facility, which the Company believes are transactions that may favorably impact the current and future financial condition and results of operations of the Company.
Capital Resources
     The Company anticipates capital expenditures of approximately $20.0 million in 2005, exclusive of the Nordural expansion. The revolving credit facility limits the Company’s ability to make capital expenditures at its

28


Table of Contents

U.S. reduction facilities; however, the Company believes that the amount permitted will be adequate to maintain its properties and business and comply with environmental requirements.
     The Company has commenced work on an expansion of the Nordural facility that will increase its annual production capacity from 90,000 metric tons to 220,000 metric tons. The Company estimates the expansion will cost approximately $473.0 million. The Company plans to finance the current expansion project through cash flow and borrowings under Nordural’s term loan facility, which is non-recourse to Century Aluminum Company.
     The Nordural expansion will require approximately $330.0 million of capital expenditures in 2005. Through June 30, 2005, the Company had outstanding capital commitments related to the Nordural expansion of $199.8 million. The Company’s cost commitments for the Nordural expansion may materially change depending on the exchange rate between the U.S. dollar and certain foreign currencies, principally the euro and the Icelandic krona. Approximately 64% of the expected project costs for the Nordural expansion are denominated in currencies other than the U.S. dollar, primarily the euro and the krona. As of June 30, 2005, the Company had no hedges to mitigate the Company’s foreign currency exposure. The expansion is projected to be substantially completed by mid-2006 with the final 8,000 metric tons of capacity projected to be completed by mid-2007.
     In February 2005, Nordural closed and borrowed under a new $365.0 million senior term loan facility. Amounts borrowed under the new term loan facility were used to refinance debt under Nordural’s existing term loan facility, and will be used to finance a portion of the costs associated with the ongoing expansion of the Nordural facility and for Nordural’s general corporate purposes. Amounts borrowed under Nordural’s term loan facility generally bear interest at a margin over the applicable Eurodollar rate.
     In April 2005, the Company signed an agreement with Hitaveita Sujurnesja hf. (“Sudurnes Energy”) and Orkuveita Reykjavíkur (“Reykjavik Energy”) to purchase the power required to further expand the production capacity of the Nordural facility. Under the agreement, Sudurnes Energy will provide 15 megawatts (“MW’) of power annually, which will permit Nordural to expand the plant’s annual capacity by an additional 8,000 metric tons to 220,000 metric tons by mid-2007, and Reykjavik Energy has agreed to deliver 70 MW annually, which will allow a further expansion to 260,000 metric tons by the fourth quarter of 2008. The power agreement and the construction of additional production capacity are each subject to the satisfaction of certain conditions. The Company is considering various options for financing the additional capacity.
Other Contingencies
     The Company’s income tax returns are periodically examined by various tax authorities. The Company is currently under audit by the Internal Revenue Service (“IRS”) for the tax years through 2002. In connection with such examinations, the IRS has raised issues and proposed tax deficiencies. The Company is reviewing the issues raised by the IRS and has filed an administrative appeal within the IRS, contesting the proposed tax deficiencies. The Company believes that its tax position is well-supported and, based on current information, does not believe that the outcome of the tax audit will have a material impact on the Company’s financial condition or results of operations.
     Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Prices
     The Company is exposed to the price of primary aluminum. The Company manages its exposure to fluctuations in the price of primary aluminum by selling aluminum at fixed prices for future delivery and through financial instruments as well as by purchasing alumina under certain of its supply contracts at prices tied to the same indices as the Company’s aluminum sales contracts (see Item 1, Notes to the Consolidated Financial Statements, Note 9 – Forward Delivery Contracts and Financial Instruments). The Company’s risk management activities do not include trading or speculative transactions.
     Apart from the Pechiney Metal Agreement, Glencore Metal Agreement I, Glencore Metal Agreement II and Southwire Metal Agreement, the Company had forward delivery contracts to sell 93,569 metric tons and 113,126

29


Table of Contents

metric tons of primary aluminum at June 30, 2005 and December 31, 2004, respectively. Of these forward delivery contracts, the Company had fixed price commitments to sell 8,923 metric tons and 6,033 metric tons of primary aluminum at June 30, 2005 and December 31, 2004, respectively, of which none were with Glencore.
     At June 30, 2005 and December 31, 2004, the Company had fixed price financial sales contracts with Glencore for 1,135,550 metric tons and 764,933, respectively, of which 374,750 metric tons and 464,333 metric tons, respectively, were designated as cash flow hedges. These fixed price financial sales contracts are scheduled for settlement at various dates in 2005 through 2015. Certain of these sales contracts, for the period 2006 through 2015, contain clauses that trigger additional shipment volume when the market price for a contract month is above the contract ceiling price. These contracts will be settled monthly, and if the market price exceeds the ceiling price for all contract months through 2015, the maximum additional shipment volume would be 760,800 metric tons. The Company had no fixed price financial purchase contracts to purchase aluminum at June 30, 2005 or December 31, 2004.
Fixed Price Financial Sales Contracts at June 30, 2005:
                                                         
    (Metric Tons)
    2005   2006   2007   2008   2009   Thereafter   Total
Primary aluminum
    103,500       167,950       169,900       109,200       105,000       480,000       1,135,550  
     Additionally, to mitigate the volatility of the natural gas markets, the Company enters into fixed price financial purchase contracts, accounted for as cash flow hedges, which settle in cash in the period corresponding to the intended usage of natural gas. At June 30, 2005 and December 31, 2004, the Company had fixed price financial purchase contracts for 4.9 million and 4.3 million DTH (one decatherm is equivalent to one million British Thermal Units), respectively. These financial instruments are scheduled for settlement at various dates in 2005 through 2008.
Fixed Price Financial Purchase Contracts at June 30, 2005:
                                         
    (Thousands of DTH)
    2005   2006   2007   2008   Total
Natural Gas
    1,990       1,680       780       480       4,930  
     On a hypothetical basis, a $20 per ton increase or decrease in the market price of primary aluminum is estimated to have an unfavorable or favorable impact of $4.8 million after tax on accumulated other comprehensive income for the contracts designated as cash flow hedges, and $9.7 million on net income for the contracts designated as derivatives, for the period ended June 30, 2005 as a result of the forward primary aluminum financial sales contracts outstanding at June 30, 2005.
     On a hypothetical basis, a $0.50 per DTH decrease or increase in the market price of natural gas is estimated to have an unfavorable or favorable impact of $1.6 million after tax on accumulated other comprehensive income for the period ended June 30, 2005 as a result of the forward natural gas financial purchase contracts outstanding at June 30, 2005.
     The Company’s metals and natural gas risk management activities are subject to the control and direction of senior management. The metals related activities are regularly reported to the Board of Directors of Century.
     This quantification of the Company’s exposure to the commodity price of aluminum is necessarily limited, as it does not take into consideration the Company’s inventory or forward delivery contracts, or the offsetting impact on

30


Table of Contents

the sales price of primary aluminum products. Because all of the Company’s alumina contracts, except the alumina contract with GAL for the Hawesville facility, are indexed to the LME price for aluminum, they act as a natural hedge for approximately 11% of the Company’s production. As of June 30, 2005, approximately 53% and 44% of the Company’s production for the years 2005 and 2006, respectively, was either hedged by the alumina contracts, Nordural electrical power and tolling contracts, and/or by fixed price forward delivery and financial sales contracts.
     Nordural. Substantially all of Nordural’s revenues are derived from a Toll Conversion Agreement with a subsidiary of BHP Billiton whereby it converts alumina provided to it into primary aluminum for a fee based on the LME price for primary aluminum. Because of this agreement, Nordural’s revenues are subject to the risk of decreases in the market price of primary aluminum; however, Nordural is not exposed to increases in the price for alumina, the principal raw material used in the production of primary aluminum. In addition, under its power contract, Nordural purchases power at a rate which is a percentage of the LME price for primary aluminum, providing Nordural with a natural hedge against downswings in the market for primary aluminum.
     Nordural is exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the euro and the Icelandic krona. Under its Toll Conversion and power contracts, Nordural’s revenues and power costs are based on the LME price for primary aluminum, which is denominated in U.S. dollars. There is no currency risk associated with these contracts. Nordural’s labor costs are denominated in Icelandic krona and a portion of its anode costs are denominated in euros. As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Nordural’s operating margins.
     Nordural does not currently have financial instruments to hedge commodity or currency risk. Nordural may hedge such risks in the future, including the purchase of aluminum put options to hedge Nordural’s commodity risk.
Interest Rates
     Interest Rate Risk. The Company’s primary debt obligations are the outstanding senior unsecured notes, convertible notes, the Nordural debt, borrowings under its revolving credit facility, if any, and the IRBs that the Company assumed in connection with the Hawesville acquisition. Because the senior unsecured notes and convertible notes bear a fixed rate of interest, changes in interest rates do not subject the Company to changes in future interest expense with respect to these borrowings. Borrowings under the Company’s revolving credit facility, if any, are at variable rates at a margin over LIBOR or the Fleet National Bank base rate, as defined in the revolving credit facility. The IRBs bear interest at variable rates determined by reference to the interest rate of similar instruments in the industrial revenue bond market. At June 30, 2005, Nordural had approximately $153.7 million of long-term debt consisting primarily of obligations under the Nordural loan facility. Borrowings under Nordural’s loan facility bear interest at a margin over the applicable LIBOR rate. At June 30, 2005, Nordural had $147.3 million of liabilities which bear interest at a variable rate.
     At June 30, 2005, the Company had $155.1 million of variable rate borrowings. A hypothetical one percentage point increase or decrease in the interest rate would increase or decrease the Company’s annual interest expense by $1.6 million, assuming no debt reduction. The Company does not currently hedge its interest rate risk, but may do so in the future through interest rate swaps which would have the effect of fixing a portion of its floating rate debt.
     The Company’s primary financial instruments are cash and short-term investments, including cash in bank accounts and other highly rated liquid money market investments and government securities.

31


Table of Contents

Item 4. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures
As of June 30, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
b. Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2005, the Company had no changes in internal control over financial reporting that would have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 6. Exhibit Index
     
Exhibit    
Number   Description of Exhibit
4.1
  Supplemental Indenture No. 1 for Century Aluminum Company’s 7.5% Senior Notes, dated as of August 26,2004, among Century Aluminum Company, as issuer, the guarantors party thereto and Wilmington Trust Company, as trustee
 
   
4.2
  Supplemental Indenture No. 3 for Century Aluminum Company’s 1.75% Convertible Senior Notes, dated as of October 26,2004, among Century Aluminum Company, as issuer, the guarantors party thereto and Wilmington Trust Company, as trustee
 
   
10.1
  Amended and Restated Tolling Agreement, dated as of February 10, 2005, between Nordural ehf and Glencore AG*
 
   
10.2
  Amendment Agreement to Employment Agreement, dated as of June 28, 2005, by and between Century Aluminum Company and Craig A. Davis
 
   
10.3
  Second Amendment Agreement to Employment Agreement, dated as of June 28, 2005, by and between Century Aluminum Company and Gerald J. Kitchen
 
   
10.4
  Second Amendment Agreement to Employment Agreement, dated as of June 28, 2005, by and between Century Aluminum Company and David W. Beckley
 
   
10.5
  Second Amendment of the Century Aluminum Company Supplemental Income Retirement Benefit Plan
 
   
10.6
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Craig A. Davis
 
   
10.7
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Gerald J. Kitchen
 
   
10.8
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and David W. Beckley
 
   
10.9
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Jack E. Gates
 
   
10.10
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Daniel J. Krofcheck
 
   
10.11
  Summary of base compensation for Named Executive Officers
 
   
10.12
  Consulting Agreement, effective as of January 1, 2006, by and between Century Aluminum Company and Gerald J. Kitchen
 
   
18.1
  Independent Registered Public Accounting Firm Letter regarding a Change in Accounting Principle.
 
   
31.1
  Certification of Chief Executive Officer
 
   
31.2
  Certification of Chief Financial Officer
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350
     
*
  Confidential information has been omitted from this exhibit pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.

32


Table of Contents

SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
      Century Aluminum Company
 
       
Date: August 9, 2005
  By:   /s/ Craig A. Davis
 
       
 
      Craig A. Davis
 
      Chairman and Chief Executive Officer
 
       
Date: August 9, 2005
  By:   /s/ David W. Beckley
 
       
 
      David W. Beckley
 
      Executive Vice-President/Chief Financial Officer

33


Table of Contents

Exhibit Index
     
Exhibit    
Number   Description of Exhibit
4.1
  Supplemental Indenture No. 1 for Century Aluminum Company’s 7.5% Senior Notes, dated as of August 26,2004, among Century Aluminum Company, as issuer, the guarantors party thereto and Wilmington Trust Company, as trustee
 
   
4.2
  Supplemental Indenture No. 3 for Century Aluminum Company’s 1.75% Convertible Senior Notes, dated as of October 26,2004, among Century Aluminum Company, as issuer, the guarantors party thereto and Wilmington Trust Company, as trustee
 
   
10.1
  Amended and Restated Tolling Agreement, dated as of February 10, 2005, between Nordural ehf and Glencore AG*
 
   
10.2
  Amendment Agreement to Employment Agreement, dated as of June 28, 2005, by and between Century Aluminum Company and Craig A. Davis
 
   
10.3
  Second Amendment Agreement to Employment Agreement, dated as of June 28, 2005, by and between Century Aluminum Company and Gerald J. Kitchen
 
   
10.4
  Second Amendment Agreement to Employment Agreement, dated as of June 28, 2005, by and between Century Aluminum Company and David W. Beckley
 
   
10.5
  Second Amendment of the Century Aluminum Company Supplemental Income Retirement Benefit Plan
 
   
10.6
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Craig A. Davis
 
   
10.7
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Gerald J. Kitchen
 
   
10.8
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and David W. Beckley
 
   
10.9
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Jack E. Gates
 
   
10.10
  Severance Protection Agreement, dated as of August 1, 2005, by and between Century Aluminum Company and Daniel J. Krofcheck
 
   
10.11
  Summary of base compensation for Named Executive Officers
 
   
10.12
  Consulting Agreement, effective as of January 1, 2006, by and between Century Aluminum Company and Gerald J. Kitchen
 
   
18.1
  Independent Registered Public Accounting Firm Letter regarding a Change in Accounting Principle.
 
   
31.1
  Certification of Chief Executive Officer
 
   
31.2
  Certification of Chief Financial Officer
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350
     
*
  Confidential information has been omitted from this exhibit pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.