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FORM 10-Q/A
(Amendment No. 1)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] 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 333-72245
GOLDEN NORTHWEST ALUMINUM, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1249606
- -------------------------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3313 West Second Street
The Dalles, Oregon 97058
------------------------------------ ------------------------
(Address of principal executive offices) (Zip Code)
(541) 296-6161
--------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 10, 2001
----- ---------------------------
Common Stock 1,000
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This quarterly report on Form 10-Q/A also constitutes a quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
following subsidiaries of Golden Northwest Aluminum, Inc.:
State of I.R.S. Employer
Commission file incorporation Identification
Company number or organization Number
- -----------------------------------------------------------------------------------------------
Goldendale Holding Company 333-72245-04 Delaware 91-1785763
Goldendale Aluminum Company 333-72245-05 Delaware 91-1380241
Northwest Aluminum Company 333-72245-02 Oregon 93-0905834
Northwest Aluminum Specialties, Inc. 333-72245-01 Oregon 93-1019176
Northwest Aluminum Technologies, LLC 333-72245-03 Washington 93-1196863
The address of the principal executive offices for each of these entities is
3313 West Second Street, The Dalles, Oregon 97058 and their telephone number is
(541) 296-6161.
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Part I, Item 1 of the Quarterly Report of Golden Northwest Aluminum,
Inc. and its subsidiaries on Form 10-Q for the quarterly period ended March 31,
2001 is hereby amended to read as follows:
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, MARCH 31,
2000 2001
----------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents .................................................... $ 1,982 $ 1,503
Trade accounts receivable, less allowance for doubtful accounts of $100 ...... 41,768 27,471
Reimbursement receivable ..................................................... 40,795 43,044
Current portion of receivable due from related company ....................... 2,141 2,408
Inventories .................................................................. 89,316 84,774
Income taxes refundable ...................................................... 811 --
Deferred income taxes ........................................................ 2,825 2,837
Other current assets ......................................................... 2,149 3,516
--------- ---------
Total current assets ............................................... 181,787 165,553
--------- ---------
Property, plant and equipment, net ................................................. 139,147 137,569
Goodwill, net of accumulated amortization of $18,829 and $19,947 .................. 74,186 73,068
Advances to shareholder ............................................................ 2,000 2,000
Receivable due from related company, less current portion .......................... 1,985 1,881
Other assets, net .................................................................. 9,388 9,974
--------- ---------
$ 408,493 $ 390,045
========= =========
LIABILITIES, PREFERRED STOCK AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt ............................................ $ 47,233 $ 23,766
Trade accounts payable ....................................................... 21,744 15,379
Accrued expenses ............................................................. 16,986 22,024
Accrued curtailment expenses ................................................. 42,833 31,778
Income taxes payable ......................................................... -- 1,243
Current portion of dividends payable ......................................... 8,500 1,879
Intercompany payable ......................................................... 4,241 14,797
--------- ---------
Total current liabilities .......................................... 141,537 110,866
--------- ---------
Long-term debt, less current portion ......................................... 170,000 170,000
Deferred income taxes ........................................................ 15,498 15,280
Other long-term liabilities .................................................. 1,893 1,895
Dividends payable ............................................................ 8,311 15,844
--------- ---------
Total liabilities .................................................. 337,239 313,885
--------- ---------
Commitments and contingencies
Preferred stock of subsidiary ...................................................... 29,663 29,663
Shareholder's equity:
Common stock, no par value; 350,000 shares authorized; 1,000 shares
issued and outstanding .................................................... -- --
Additional paid-in capital ................................................... 63,628 63,628
Accumulated other comprehensive loss ......................................... -- (509)
Accumulated deficit .......................................................... (22,037) (16,622)
--------- ---------
Total shareholder's equity ......................................... 41,591 46,497
--------- ---------
$ 408,493 $ 390,045
========= =========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------
2000 2001
---------- ----------
(IN THOUSANDS)
Revenues.............................................. $ 127,892 47,813
Cost of revenues...................................... 119,287 66,037
--------- ---------
Gross margin.......................................... 8,605 (18,224)
Net gains on power sales.............................. -- 31,769
Reimbursement of expenditures......................... -- 13,676
Curtailment expenses.................................. -- (7,290)
General and administrative expenses................... (3,835) (4,800)
--------- ---------
Operating income ..................................... 4,770 15,131
Other income (expense):
Interest expense................................... (6,033) (6,089)
Other income (expense), net........................ 316 (618)
--------- ---------
Net other expense..................................... (5,717) (6,707)
--------- ---------
Income (loss) before income taxes..................... (947) 8,424
Income tax expense.................................... 1,352 2,097
--------- ---------
Net income (loss)..................................... $ (2,299) $ 6,327
--------- ---------
Net income (loss)..................................... $ (2,299) $ 6,327
Dividends accrued on preferred stock of subsidiary.... (912) (912)
--------- ---------
Net income (loss) available to common shareholder..... $ (3,211) $ 5,415
--------- ---------
Net income (loss) .................................... $ (2,299) $ 6,327
Other comprehensive income, net of tax:
Unrealized loss on derivative financial instrument.. -- (783)
Tax benefit on unrealized loss ..................... -- 274
--------- ---------
Comprehensive income (loss)........................... $ (2,299) $ 5,818
--------- ---------
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED MARCH 31,
---------------------------
2000 2001
---------- ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss) .......................................................... $ (2,299) $ 6,327
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................... 5,765 6,639
Amortization of financing costs ......................................... 265 265
Loss on disposal of assets .............................................. 15 347
Realized loss on aluminum call options .................................. -- 728
Unrealized loss on aluminum call options ................................ -- 1,380
Premiums paid for aluminum call options ................................. -- (2,183)
Deferred income taxes ................................................... 92 44
Change in assets and liabilities:
Trade accounts receivable .......................................... 3,436 14,297
Reimbursement receivable ........................................... -- (2,249)
Inventories ........................................................ (11,979) 4,542
Other current assets ............................................... 457 (1,292)
Income taxes refundable ............................................ 1,260 811
Other assets ....................................................... (1,360) (857)
Trade accounts payable ............................................. (4,875) (6,365)
Accrued expenses ................................................... 1,695 5,105
Accrued curtailment expenses ....................................... -- (11,055)
Income taxes payable ............................................... -- 1,243
Intercompany payable ............................................... 3,253 10,556
Other liabilities .................................................. 13 2
--------- ---------
Net cash provided by (used in) operating activities ........................... (4,262) 28,285
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment .............................. (6,673) (4,284)
Net payments from (advances to) related company ........................... 413 (163)
--------- ---------
Net cash used in investing activities ......................................... (6,260) (4,447)
Cash flows from financing activities:
Borrowings under revolving credit facilities .............................. 91,992 92,941
Repayments under revolving credit facilities .............................. (82,260) (116,408)
Principal payments on deferred compensation notes ......................... (176) (356)
Increase (decrease) in bank overdraft ..................................... 2,380 (494)
--------- ---------
Net cash provided by (used in) financing activities ........................... 11,936 (24,317)
--------- ---------
Net increase (decrease) in cash and cash equivalents .......................... 1,414 (479)
Cash and cash equivalents, beginning of period ................................ 1,929 1,982
--------- ---------
Cash and cash equivalents, end of period ...................................... $ 3,343 $ 1,503
--------- ---------
Supplemental Disclosures of Cash Flow Information (Note 7)
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
1. BASIS OF PRESENTATION
The foregoing unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X as promulgated by the Securities and Exchange Commission.
Accordingly, these financial statements do not include all of the disclosures
required by generally accepted accounting principles for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 2000. In the opinion of management, the unaudited
interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature, necessary for a fair
statement of the results for the interim periods presented.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published, and the reported amounts of revenues and expenses
during the reporting period. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's (defined below)
consolidated financial statements; accordingly, it is possible that the actual
results could differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Company's consolidated financial
position and results of operations.
Operating results for the three-month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
2. OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Golden Northwest Aluminum, Inc. (the "Company") was incorporated in the
state of Oregon on June 3, 1998 for the purposes of becoming the holding company
of Northwest Aluminum Company, Northwest Aluminum Specialties, Inc.
(collectively "Northwest"), Goldendale Holding Company and its wholly owned
subsidiary, Goldendale Aluminum Company (collectively "Goldendale") and
Northwest Aluminum Technologies, LLC ("Technologies"). The consolidated
financial statements include the accounts of Northwest, Goldendale and
Technologies.
The operations of the Company consist primarily of the smelting conversion
of alumina to aluminum, processing of aluminum into primary products, and the
sale of those products within one business segment. In 2000 and during the first
three months of 2001, the Company curtailed substantially all of its smelting
operations. The Company's operating subsidiaries' smelting operations were under
tolling agreements with aluminum suppliers through December 1999. In December
1999, Northwest chose not to continue its tolling arrangement and allowed it to
expire. Goldendale's smelting operations are under a tolling agreement that has
been amended and now expires
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
December 31, 2013. The operations are located in the Pacific Northwest on the
Columbia River. Approximately 80% of the labor force of the Company's
subsidiaries is subject to collective bargaining agreements. The agreement with
Goldendale's labor force was due to expire June 1, 2001 and the agreement with
Northwest's labor force was due to expire July 1, 2001. The Company and the
collective bargaining units have entered into an agreement to extend the
expiration dates of current labor agreements until September 30, 2001.
The Company, Goldendale and Technologies report on a calendar year basis;
Northwest reports on a September 30 fiscal year basis. Included in current
liabilities at December 31, 2000 is $4,241 and at March 31, 2001 is $14,797,
representing the balance of intercompany transactions which do not eliminate due
to the differing year-ends. All other significant intercompany accounts and
transactions have been eliminated.
3. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138 ("SFAS No. 138"), Accounting for Certain Derivative Instruments and
Certain Hedging Activities. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 and No. 138 are effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Effective January 1, 2001, the Company
adopted SFAS No. 133 and 138. The Company reflected the difference between the
fair market value of the derivative instruments and the recorded book value of
the derivative instruments as a cumulative effect type adjustment to accumulated
other comprehensive income.
The Company believes that the majority of its non-trading derivative
contracts, power purchase agreements and aluminum purchase and sale agreements
qualify for the normal purchases and sales exception of SFAS No. 133 and
therefore would not be recognized at fair value on the balance sheet. The
Company does, however use certain derivative instruments to limit its exposures
to commodity price risk and interest rate risk. The Company's interest rate swap
agreement permits it to limit exposure to interest rate risk and meets the
requirements for hedge accounting under SFAS No. 133. The Company recorded the
changes in the fair value of this contract in accumulated other comprehensive
income on the balance sheet. Aluminum call options entered into to limit
exposure to commodity price risk are not accounted for as hedging instruments
under SFAS No. 133 and as a result, changes in fair value of these instruments
are immediately recognized in income.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
Fair value of interest rate swap (liability).......... $783
Increase in accumulated other comprehensive
income, net of tax of $122 ......................... $228
Upon initial adoption of the standard, the Company recorded $228, net of tax,
cumulative effect adjustment to accumulated other comprehensive income. This
adjustment relates to the fair value of the interest rate swap contract that
qualified for cash flow hedge accounting prior to the initial adoption of SFAS
No. 133. This amount will reduce interest expense when the related hedged
transaction occurs.
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31, MARCH 31,
2000 2001
----------- --------
Purchased metals and tolling in process.. $ 60,425 $ 52,710
Supplies and alloys ..................... 15,303 16,770
Carbon plant materials .................. 4,844 4,124
Alumina ................................. 8,744 11,170
-------- --------
$ 89,316 $ 84,774
-------- --------
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, MARCH 31,
2000 2001
----------- --------
First mortgage notes .................... $150,000 $150,000
Subordinated credit agreement ........... 20,000 20,000
Revolving credit facility ............... 47,233 23,766
-------- --------
Long-term debt .......................... 217,233 193,766
Less current portion .................... 47,233 23,766
-------- --------
Long-term debt less current portion ..... $170,000 $170,000
-------- --------
In December 1998, the Company issued $150 million of 12% first mortgage
notes due on December 15, 2006. Interest is payable semi-annually on June 15 and
December 15, commencing June 15, 1999. Payment of the notes is guaranteed by all
of the Company's subsidiaries. The debt is collateralized by substantially all
of the real property, plant and equipment of the Company's subsidiaries and by a
pledge of all of the issued and outstanding capital stock of the Company's
subsidiaries. On or after December 15, 2002, the notes are redeemable at the
option of the Company at specified redemption prices. There are no sinking fund
requirements. The indenture agreement limits principal payments on subordinated
debt, dividends or shareholder distributions, and investments in subsidiaries.
In connection with the issuance of the notes, each of the Company's direct and
indirect wholly owned subsidiaries has jointly and severally guaranteed the
notes on a full and unconditional basis.
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
In December 1998, the Company entered into a $75 million bank revolving
credit facility, which matures on December 20, 2003 and is collateralized by
inventory, accounts receivable and related intangibles, including a security
interest in the Company's tolling agreement. Borrowings under the credit
facility bear interest at a floating base rate plus from 0.50% to 1.00% (10.50%
at March 31, 2001) or the LIBOR rate plus from 2.00% to 2.50% (9.18% at March
31, 2001). The additional margin is dependent upon the consolidated ratio of
earnings before interest, income taxes, depreciation and amortization to
interest expense. The credit facility provides for the payment of a commitment
fee of 0.50% per annum based on the unused portion of the credit facility. The
credit agreement contains restrictive covenants, including a minimum net worth
requirement, a minimum excess availability requirement and limitations on
capital expenditures, dividends, additional indebtedness, mergers and other
business combinations, assets sales, encumbrances, investments and transactions
with affiliates. The Company was in compliance with these covenants at March 31,
2001. The Administrative Agent for the bank revolving credit facility increased
the "borrowing base reserve" from $15.0 million to $20.0 million effective April
24, 2001, thus reducing the amount which the Company is eligible to borrow under
the credit agreement.
Also in December 1998, the Company entered into a subordinated credit
agreement with Norsk Hydro USA, Inc. pursuant to which $20 million was advanced.
The debt bears interest at LIBOR plus two percent (8.82% at March 31, 2001) and
is due in December 2005. The debt is secured by a second lien and a pledge on
the collateral securing the first mortgage notes and is guaranteed by the
Company's subsidiaries. Except for the collateral security, the guarantees by
the Company are subordinate to the indebtedness under the bank revolving credit
facility. The credit agreement provides for additional borrowings of $10 million
on or prior to December 31, 2001.
On January 21, 1999, the Company entered into an interest rate swap
agreement that expires in 2003. The fixed interest rate paid on the swap
agreement is 6.4% and covers $20 million of notional principal amount of
floating rate (LIBOR) indebtedness of the Company. Although the Company is
exposed to credit loss on the interest rate swap in the event of nonperformance
by the counterparties, the Company estimates the likelihood of such
nonperformance to be remote. At December 31, 2000, the fair value of the
interest rate swap was approximately $350, and at March 31, 2001 the fair value
of the contract was $783. These amounts reflect the estimated amount that the
Company would pay to terminate the contracts. The interest rate swap agreement
is accounted for as a cash flow hedge. Changes in fair value are recognized in
other comprehensive income.
6. COMMITMENTS AND CONTINGENCIES
The Company, in the regular course of business, is involved in
investigations and claims by various regulatory agencies. The Company is also
engaged in various legal proceedings incidental to its normal business
activities. The Company's management does not believe that
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
the ultimate resolution of these investigations, claims and legal proceedings
will have a material effect on its financial position, results of operations or
cash flows.
During 1999, the Company contracted for the design and construction of a
bath reclaim facility at Goldendale. In connection therewith, a dispute has
arisen over contract change orders to an engineering and construction contract.
The Company has accrued an estimate of the costs to settle the claim in the
amount of $520. If the settlement offer is not accepted, the ultimate cost to
the Company may exceed this accrual.
As of March 31, 2001, the Company had a liability of approximately $1,895
($1,893 at December 31, 2000), for estimated environmental remediation
activities to be taken on the Company's facility. The Company's estimate of this
liability is based on a remediation study conducted by independent engineering
consultants. The total cost of remediation is estimated at $3 million; however,
under a court decree the Company is only responsible for approximately one-half
of the total. The remaining cost is the responsibility of prior owners. No
accrual has been provided for the Northwest facility as the Company is unaware
of any current condition which would give rise to remedial action.
In December 2000, the Company was designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, and by the
State of Oregon under applicable state laws with respect to the Portland Harbor
Superfund site in Portland, Oregon. Other PRPs also have been so designated. The
Company, along with other PRPs, is participating in the funding of a remedial
investigation/feasibility study. Management does not anticipate selection of a
remedy for several years and is of the opinion that the Company will be found to
have a de minimus liability, if any, in the outcome of the matter.
The Company has entered into various agreements for the purchase of power,
alumina, and aluminum, including agreements with the Bonneville Power
Administration (BPA) for the purchase of electrical power at fixed rates.
Contracts with BPA expiring on September 30, 2001, were modified in December
2000.
Future estimated minimum payments under non-cancelable agreements at
December 31, 2000 are as follows:
Year ending December 31, Amount
------------------------ -------
2001 ......................... $ 66,781
2002 ......................... 32,022
2003 ......................... 32,022
2004 ......................... 32,022
--------
$162,847
--------
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
In October 2000, the Company entered into a new power sale agreement with
BPA that will be effective from October 1, 2001 through September 30, 2006. The
contract will allow the Company to direct available power to either or both of
its operating facilities. Approximately 50% of the Company's power requirements
will be met through the contract. In the summer of 2000, BPA completed a rate
proceeding to determine the base rate under this new power contract. The base
rate adopted by BPA was $23.50 per megawatt-hour. The rate adopted by BPA also
included a "Cost Recovery Adjustment Clause," which allows BPA to adjust rates
under certain defined circumstances. While past BPA rates also contained a
similar adjustment clause, rate adjustments had not been implemented. Because of
dramatically higher market prices for the power BPA needs to purchase to meet
its supply obligations, BPA indicated during the fall and winter of 2000 that it
may impose a significant surcharge on rates effective after October 1, 2001. In
March 2001, BPA proposed a revised and expanded "Cost Recovery Adjustment
Clause" that would grant BPA broad discretion to adjust rates every six months
to ensure that it could recover all its costs and repay its obligations to the
U.S. Treasury. This revised "Cost Recovery Adjustment Clause" and the initial
rate adjustment is subject to a new BPA rate proceeding that is scheduled to be
completed by June 2001 and to be reviewed by the Federal Energy Regulatory
Commission ("FERC"). While the outcome of these proceedings is uncertain, the
Company expects the resulting power costs to be significantly higher than under
the current power sale agreements with BPA. Because the rate for BPA power will
not be determinable until the conclusion of the rate case, the Company has a
unilateral right to terminate the contract within a specified period after FERC
approves the new rates. The Company anticipates FERC approval by September 2001.
Under the new contract, the Company will not be able to reshape or have BPA
remarket its procurements of power. In addition, the BPA Administrator may have
broad discretion to temporarily or permanently limit or terminate the Company's
purchases of power in circumstances in which the Administrator determines that
the Company is not in compliance with all applicable federal, state and local
laws and regulations. The Company does not expect to receive any cost-based firm
power service directly from BPA after the new contract expires on September 30,
2006.
On April 18, 2001, a Petition for Review under the Northwest Power Act and
Suit for Declaratory and Injunctive Relief under 28 U.S.C. Section 2201(a) for
Violation of 42 U.S.C. Sections 4321, et seq. was filed against BPA in the
United States Court of Appeals for the Ninth Circuit by individuals and the
Utility Reform Project. The plaintiffs seek review of contracts that obligate
BPA to pay industrial customers for not purchasing or not using power the
customer might otherwise purchase from BPA. Our Remarketing Addendum may be
included in this group of contracts. The plaintiffs also seek to enjoin BPA from
performing or attempting to implement these contracts on the basis that BPA's
conduct in executing these contracts violated the Bonneville Project Act of 1937
and other statutes. We intervened in the case on May 14, 2001. We do not expect
the plaintiffs' lawsuit to have any impact on BPA's ability to perform under the
Remarketing Addendum due to the passage of the applicable statute of
limitations, prior favorable court decisions and other factors. Notwithstanding
the foregoing, if BPA were enjoined from performing the Remarketing Addendum,
our business, financial condition and results of operations would be materially
and adversely affected.
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information is as follows:
Three Months Ended March 31,
----------------------------
2000 2001
------ ------
Cash paid during the period for:
Interest ........................................... $1,631 $1,758
Income taxes ....................................... $ -- $ --
Non-cash investing and financing activities:
Dividends accrued on preferred stock ............... $ 912 $ 912
8. SUBSEQUENT EVENTS
In May 2001, the Company curtailed smelter production further, to a level
of approximately 5% of total capacity. The excess power made available for May
2001 as a result of the additional curtailment was sold for approximately
$4,900, before related power costs.
In May 2001, the Company redeemed 13,734.754 shares of preferred stock for
$227.25 per share. The total redemption, including payment of accrued dividends
on redeemed stock, amounted to $5,000.
On May 8, 2001, the Company entered into a Plan and Agreement for
Construction of Resources to Provide Power for Future Operations of Goldendale
Aluminum Company and Northwest Aluminum Company (the "Plan") with Northwest
Energy Development, LLC ("Northwest Energy") and the United Steelworkers of
America. Northwest Energy is an affiliate owned by the sole shareholder of the
Company. Under the Plan, the Company will enter into a power purchase agreement
giving it the right, but not the obligation, to purchase up to 100% of the
output from power generation facilities to be developed or owned by Northwest
Energy. The purchase price for the power to be charged to the Company will be
the generating facility's cost of fuel, direct operations and maintenance,
financing, distributions to pay taxes and reasonable general and administrative
expenses. The items included in each of these categories will be negotiated when
the Company enters into power sale agreements with the generating facilities.
The Company's right to purchase power will last for 20 years commencing on
commercial operation of the projects. The Company has the option to use this
power in its operations, cause the power to be remarketed at market prices on
the Company's behalf, or do a combination of both. If the Company causes the
power to be remarketed, it generally will be entitled to any financial benefits
in excess of the power's cost. However, these benefits will be applied to reduce
the financing debt of the generating facilities, if needed, in order to obtain
project financing. Reducing the debt would result in reducing the future cost of
power from the facilities, which may result in a lower cost of power to the
Company.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments principally to manage
the risk that changes in interest rates will affect the amount of its future
interest payments and that changes in aluminum prices will affect the cost of
its future purchases. The following is a summary of the Company's risk
management strategies and the effect of these strategies on the consolidated
financial statements.
Commodity Price Risk Management
The Company holds aluminum call options for the purpose of limiting
exposure to price fluctuations of anticipated aluminum purchases. These options
require the payment of an upfront premium in return for the right to receive the
amount, if any, by which the price at the settlement date exceeds the strike
price. At December 31, 2000 and March 31, 2001, the Company had option contracts
that established a price range for 3,400 to 6,800 metric tons of primary
aluminum per month over a 16-month period beginning January 1, 2001. Although
these options are intended to hedge the risk of market price fluctuations, the
Company elected not to apply hedge accounting. As such, pursuant to SFAS No.
133, the call options are in the no hedging designation category. Accordingly,
the Company recognized a non-cash decrease in fair market value of call options
of $1,380 in the first quarter of 2001. The fair value of these options at
December 31, 2000 and March 31, 2001 is $2,008 and $2,083, respectively and is
included in other current assets.
Interest Rate Risk Management
The Company uses an interest rate swap contract to manage the amount of
total debt that is subject to variable interest rates. Under the interest rate
swap contract, the Company agrees to pay amounts equal to a specified fixed-rate
of interest multiplied by a notional principal amount, and to receive amounts in
return equal to a variable rate of interest multiplied by the same notional
principal amount. The notional amount of the contract is not exchanged. No other
cash payments are made unless the contract is terminated prior to maturity, in
which case the amount paid or received in settlement is established by agreement
at the time of termination and represents the market quotation, at current rates
of interest, of the remaining obligation to exchange payments under the terms of
the contract. The differential between the variable interest rate and the fixed
interest rate, which is to be paid or received, is recognized in interest
expense. Pursuant to SFAS No. 133, the Company accounts for its interest rate
swap contract as a cash flow hedging instrument. With the adoption of SFAS 133,
these swaps resulted in the recognition of a liability of $783 at March 31, 2001
and a loss in accumulated other comprehensive income for the quarter ended March
31, 2001 of $433 (net of tax of $152).
10. NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. AND
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
Financial statements and financial statement schedules for Northwest and
Goldendale have been omitted because the 12% first mortgage notes issued by the
Company and its subsidiaries and registered under the Securities Act of 1933, of
which the subsidiaries are guarantors (thus subjecting them to the reporting
requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934)
are fully and unconditionally guaranteed by the subsidiaries. Financial
information relating to these companies is presented herein in accordance with
Staff Accounting Bulletin 53 as an addition to the footnotes to the financial
statements of Golden Northwest Aluminum, Inc. Summarized unaudited financial
information is as follows:
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
Northwest Aluminum Company and Northwest Aluminum Specialties, Inc.
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
1999 2000
--------- ---------
CONDENSED STATEMENT OF OPERATIONS:
Revenues:
Customers ................................... $ 74,828 $ 37,044
Parent and related companies ................ 62 601
--------- ---------
74,890 37,645
Cost of revenues ............................ (74,089) (38,486)
Net gains on power sales .................... -- 13,981
Reimbursement of expenditures ............... -- 5,439
Curtailment expenses ........................ -- (6,971)
General and administrative expenses ......... (1,380) (2,263)
--------- ---------
Operating income (loss) ..................... (579) 9,345
Net other expense ........................... (2,673) (4,089)
--------- ---------
Net income (loss)............................ $ (3,252) $ 5,256
========= =========
CONDENSED BALANCE SHEET:
Current assets .............................. $ 94,436 $ 99,905
Non-current assets .......................... 44,309 44,844
--------- ---------
Total assets ............................. $ 138,745 $ 144,749
========= =========
Current liabilities ......................... $ 68,863 $ 74,022
Non-current liabilities ..................... 66,872 66,871
Shareholder's equity ........................ 3,010 3,856
--------- ---------
Total liabilities and shareholder's equity $ 138,745 $ 144,749
========= =========
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GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE DATA)
Goldendale Holding Company and Subsidiary
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 2001
--------- ---------
CONDENSED STATEMENT OF OPERATIONS:
Revenues:
Customers ................................... $ 53,064 $ 10,769
Parent and related companies ................ 378 460
--------- ---------
53,442 11,229
Cost of revenues ............................ (45,638) (26,504)
Net gains on power sales .................... -- 17,788
Reimbursement of expenditures ............... -- 8,237
Curtailment expenses ........................ -- (319)
General and administrative expenses ......... (2,350) (2,282)
--------- ---------
Operating income............................. 5,454 8,149
Net other expense ........................... (2,683) (2,560)
Income tax expense .......................... 1,352 2,097
--------- ---------
Net income.................................. $ 1,419 $ 3,492
========= =========
CONDENSED BALANCE SHEET:
Current assets .............................. $ 43,579 $ 63,188
Non-current assets .......................... 179,675 173,376
--------- ---------
Total assets ............................. $ 223,254 $ 236,564
========= =========
Current liabilities ......................... $ 35,248 $ 43,671
Non-current liabilities ..................... 108,385 111,347
Stockholder's equity ........................ 79,621 81,546
--------- ---------
Total liabilities and stockholder's equity $ 223,254 $ 236,564
========= =========
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Part I, Item 2 of the Quarterly Report of Golden Northwest Aluminum, Inc.
and its subsidiaries on Form 10-Q for the quarterly period ended March 31, 2001
is hereby amended to read as follows:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section should be read in conjunction with the financial statements
in Item 1, Part I, of this report.
OVERVIEW
Our revenues have historically come from two primary sources:
(1) fees received from smelting alumina into aluminum and casting that
aluminum into primary and value-added aluminum products under
tolling contracts with Hydro and until December 31, 1999 with
Glencore, and
(2) the sale of non-tolled value-added aluminum products to other
customers.
Revenue from fees for the conversion of alumina and processing of aluminum under
tolling arrangements is recognized upon completion of the tolling process. Under
the tolling arrangements, alumina suppliers deliver their alumina to us. The
alumina is converted to aluminum in reduction cells by putting it in liquid form
by dissolving it in an "electrolyte" solution and then passing electric current
through the electrolyte to separate the alumina into its two parts, aluminum and
oxygen. This process is continuous and is nearly instantaneous as the alumina is
dissolved in the electrolyte. The molten aluminum is withdrawn from the cells
and cast or formed into finished products. Revenue from the sale of non-tolled
value-added aluminum products is recognized upon shipment to the customer.
Because our tolling fees are a percentage of prices of aluminum on the
London Metal Exchange, the amount of revenue from tolling activities varies
depending on market aluminum prices, especially LME prices, and gross smelter
production volumes. The tolling fees are based on prior three-month average LME
prices and not current market aluminum prices. Additional revenue for tolled
value-added products is dependent on the volume of value-added production and
the cost of production versus the dollar amount of pricing premiums. The amount
of revenue from non-tolled value-added sales varies depending on market aluminum
prices, demand for our value-added products and the pricing premiums we are able
to realize for these products. Our revenues from non-tolled value-added products
may not be as strongly affected by lower LME prices as is the case with tolling
fees because of increased demand for value-added products at lower prices.
The aluminum industry is highly cyclical, with market prices fluctuating
widely based on global supply and demand factors, most of which are beyond our
control. As shown below, for 2000, the average price per pound of aluminum on
the London Metal Exchange was higher than the average price in 1999 and 1998.
The average three-month LME prices per pound of aluminum over the last six years
were as follows:
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16
Price Per
Year Ended December 31, Pound
----------------------- -----
1995....................................................$0.83
1996....................................................$0.70
1997....................................................$0.74
1998....................................................$0.63
1999....................................................$0.63
2000....................................................$0.71
The timing and magnitude of an increase or decrease in aluminum prices is
uncertain. As of March 31, 2001, the three-month LME price per pound of aluminum
was $0.67, and more recently LME prices have fluctuated around $0.70 per pound.
One of our primary costs is electrical power and prior to 2000, those
costs had been relatively stable. The source of the majority of our power has
been through the Bonneville Power Administration (BPA). We have supplemented the
BPA power with purchases of market power during time periods that have
historically had lower cost than our cost through BPA.
Beginning in the latter part of 2000, the market price of electric power
began to increase dramatically because of an extreme shortage of supply and
other factors. As an example, our average cost of power per pound of aluminum
produced was $.16 and $.18 in 1999 and 2000, respectively. The average market
price of power for the last six months has been approximately $245 per megawatt,
equating to $1.95 per pound of aluminum produced. These changes in power prices
made it apparent that we needed to change our strategies to obtain affordable
power long term.
While most of our power supply during the fourth quarter of 2000 and the
first three quarters of 2001 were under fixed price contracts with BPA, a
portion was not covered during the late spring 2001 when market power prices
historically have been very low. Because of the dramatic increase in forward
power prices that occurred in 2000, it became uneconomic to purchase power to
meet our open requirements during the spring 2001. We therefore chose to reduce
our production level to approximately 60% of normal beginning October 2000,
"reshape" or sell power that exceeded what we needed for our operations as a
result of our reduced production level and "reshape" or buy power for the open
periods. Our contracts with BPA allow us to cause BPA to remarket power we do
not need for operations and to pay us the excess proceeds from those sales over
the cost we would be required to pay under the contract. This right is subject
to minimum notice provisions and other terms that make it impractical to make
forward sales of greater than one month.
By the end of December 2000, market prices for electrical power had
further escalated to the point that the financially prudent option was to have
electrical power available to us remarketed by BPA instead of producing aluminum
with it. Late in December, we shut down essentially all remaining smelter
production capacity, leaving only approximately 25 metric tons of capacity
on-line at the Goldendale facility and none at Northwest.
To allow us to sell our excess power forward to periods of more than a
month, we entered into a Remarketing Addendum (Addendum) with BPA, which allows
BPA to remarket the power available to us and to use the resulting proceeds to
reimburse us for defined qualified expenditures. Additionally, we entered into
agreements with the United Steelworkers of America in regard to employee
layoffs, with Norsk Hydro in regard to readjusting our tolling agreement and
with Glencore in regard to readjusting our alumina supply contract.
14
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We entered into the Addendum with BPA in December 2000. Under the
Addendum, our operating subsidiaries, Goldendale Aluminum Company and Northwest
Aluminum Company, agreed to curtail smelter production and assist BPA in
remarketing the electric power that they had the right to purchase. BPA agreed
to use the proceeds from the remarketing to reimburse Goldendale Aluminum
Company and Northwest Aluminum Company or their designees for specified
qualified expenditures, including, among others, expenses associated with debt
service and workforce reductions resulting from the curtailment, and
expenditures for the planning, licensing, siting, acquisition and/or
construction of conventional or renewable resources to provide power for future
operations of our smelters. For a given sale of remarketed power, the net
proceeds are equal to the revenue received by BPA on the sale, minus the price
we would have been obligated to pay had we purchased the power, minus a
specified amount retained by BPA, plus any interest costs BPA avoids as a result
of the net proceeds. We estimate that from December 29, 2000 through September
30, 2001, $285.0 million of net proceeds will be available for reimbursement of
qualified expenditures. The Addendum is effective through the earlier of the
date on which all of the net proceeds have been paid by BPA or on September 30,
2010.
In October 2000, we entered into a new power sale agreement with BPA that
will be effective from October 1, 2001 through September 30, 2006. The contract
will allow us to direct available power to either or both of our operating
facilities. Approximately 50% of our power requirements will be met through the
contract. In the summer of 2000, BPA completed a rate proceeding to determine
the base rate under this new power contract. The base rate adopted by BPA was
$23.50 per megawatt-hour. The rate adopted by BPA also included a "Cost Recovery
Adjustment Clause," which allows BPA to adjust rates under certain defined
circumstances. While past BPA rates also contained a similar adjustment clause,
rate adjustments had never been implemented in the past. But because of
dramatically higher market prices for the power BPA needed to purchase to meet
its supply obligations, BPA indicated during the fall and winter of 2000 that it
probably would need to impose a significant surcharge on rates effective after
October 1, 2001. In March 2001, BPA proposed a revised and expanded "Cost
Recovery Adjustment Clause" that would grant BPA very broad discretion to adjust
rates every six months to ensure that it could recover all its costs and repay
its obligations to the U.S. Treasury under almost any circumstances. This
revised "Cost Recovery Adjustment Clause" and the initial rate adjustment is
subject to a new BPA rate proceeding that is scheduled to be completed by June
2001 and to be reviewed by the Federal Energy Regulatory Commission ("FERC").
While the outcome of these proceedings is uncertain, we expect the resulting
power costs to be significantly higher than under our current power sale
agreements with BPA. Because the rate for BPA power will not be determinable
until the conclusion of the rate case, we have a unilateral right to terminate
the contract within a specified period after FERC approves the new rates. We
anticipate FERC approval by September 2001. Under the new contract, we will not
be able to reshape or have BPA remarket our procurements of power. In addition,
the BPA Administrator may have broad discretion to temporarily or permanently
limit or terminate our purchases of power in circumstances in which the
Administrator determines that we are not in compliance with all applicable
federal, state and local laws and regulations. We do not expect to receive any
cost-based firm power service directly from BPA after our new contract expires
on September 30, 2006.
15
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Our cash flow and earnings are highly sensitive to aluminum prices and to
market power prices because the balance of our production costs are largely
fixed. At low market aluminum prices and/or high market power prices, we are
able to reduce some variable costs, but most of the production costs of primary
aluminum are constant in the short term (labor, carbon), and therefore
such changes in market prices will cause declines in earnings. Conversely,
increased market aluminum prices and/or decreased market power prices will cause
increases in earnings.
To reduce our reliance on market-priced primary aluminum and to improve
overall profitability, we have pursued a strategy of increasing both our
"tolled" and "non-tolled" value-added production through specialty casting and
processing operations. Through these operations, we are able to realize premiums
over market LME prices, the amount of which varies with the degree of
value-added content of the product and uniqueness of the product in the
marketplace. Our volume of value-added production has increased significantly
over the past decade relative to the volume of our primary production. Our
continued investment in value-added production operations is designed to further
increase our value-added production capabilities. As a consequence of this
strategy, the volume of non-tolled value-added production at Northwest has grown
from 153.7 million pounds in 1993 to 266.6 million pounds in 2000. Prior to
January 1, 2000, the smelter operation at The Dalles was under a tolling
contract with Glencore. The Glencore tolling contract allowed Northwest to
operate the smelter at The Dalles at full capacity while it developed
value-added products. The success of our non-tolled products, however, reduced
the importance of this contract, and it was not renewed upon its expiration in
December 1999. The effect of this non-renewal was the elimination of revenue and
cost of revenue related to tolling aluminum for Glencore. The underlying cost
for primary aluminum is now our own production cost rather than the market price
we were paying Glencore and others for aluminum for our value added operation.
RECENT DEVELOPMENTS
Because of the instability in power markets and the uncertainty of future
BPA service, our long-term power strategy is now one of self-reliance, reducing,
and ultimately eliminating, our dependence on BPA and other power providers and
becoming a power generator as well as a power consumer. We believe this strategy
will allow us to realize the economic value either of producing aluminum or
selling power and therefore provide us with more stable operating results.
The Remarketing Addendum with BPA requires us to dedicate at least $100
million of the remarketing proceeds to the development of new power generation
resources. The development of power generation facilities is not consistent with
our core business and requires financing independent of that available under our
current financing arrangements. For these reasons and because the terms of the
indenture governing our first mortgage notes and our bank credit agreement do
not allow us to invest directly in the development of power generation
facilities, our sole shareholder formed Northwest Energy Development, LLC
("Northwest Energy") for this purpose.
16
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On May 8, 2001, we entered into a Plan and Agreement for Construction of
Resources to Provide Power for Future Operations of Goldendale Aluminum Company
and Northwest Aluminum Company (the "Plan") with Northwest Energy and the United
Steelworkers of America. Under the Plan, we will enter into a power purchase
agreement giving us the right, but not the obligation, to purchase up to 100% of
the output from power generation facilities to be developed or owned by
Northwest Energy. Our purchase price for the power will be the generating
facility's cost of fuel, direct operations and maintenance, financing,
distributions to pay taxes and reasonable general and administrative expenses.
The items included in each of these categories will be negotiated when we enter
into power sale agreements with the facilities. Our right to purchase power will
last for 20 years commencing on commercial operation of the projects. We will be
able to use this power in our operations, cause the power to be remarketed at
market prices on our behalf, or do a combination of both. If we cause the power
to be remarketed, we generally will be entitled to any financial benefits in
excess of the power's cost. These benefits will be applied to reduce the
financing debt of the facilities, however, if we need to do so to obtain project
financing. Reducing the debt would result in reducing the future cost of power
from the facilities, which would result in a lower cost of power for us. In the
short term, we do not anticipate purchasing all of the output from the
facilities. As a result, the facilities will be able sell their power on the
open market and use the profits to obtain project financing and reduce project
debt.
Northwest Energy is actively pursuing development of or interests in the
following power projects, which will be subject to the Plan and our power
purchase rights under the Plan.
1. Five GE LM6000 turbines and associated equipment to be located at the
Goldendale smelter facility, which we expect will be ready for
commercial operation in February 2002 (the "Turbine Project")
2. A 520 MW natural gas-fired combined cycle combustion turbine project
near Clatskanie, Oregon
3. Wind projects to be developed in south central Washington and north
central Oregon
4. A potential contract with a 248 MW natural gas-fired combined cycle
combustion turbine project near Goldendale, Washington
If all of these projects are developed, the resources available to us would
include 770 megawatts of base-load, gas-fired, combined cycle combustion turbine
capacity, 225 megawatts of "peaking" capacity and 300 to 600 megawatts of
intermittent wind generation capacity. This capacity would exceed the maximum
requirements of our smelters.
17
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These power projects are in the early stages of development. We do not
assure you that any of these projects will be completed or that Northwest Energy
will be able to procure any interests in them. Even if these projects are
completed, their completion may be delayed, which will also delay and reduce
anticipated benefits under the Plan. Although we will be able to purchase power
from these facilities at cost, the cost could be too high to economically
produce aluminum. For example, if the price of natural gas increased sharply,
this would result in increased cost to produce electricity at two of the above
listed facilities. If this occurs in conjunction with a decrease in the market
price of power generally, we may be unable to produce aluminum or remarket
power.
Under the Plan, we designated Northwest Energy as the recipient of up to
$25 million in BPA remarketing proceeds to reimburse it for expenditures
incurred or to be incurred in connection with the development of the power
generation facilities. To support loans to Northwest Energy to finance
development of the power generation facilities, under the Plan Northwest Energy
may:
1. request BPA directly or indirectly to guarantee or otherwise
provide credit support for up to $200 million of third party
debt, with the remarketing proceeds available as collateral or
for offset; or
2. enter into other arrangements with BPA that have a similar
economic effect.
The lender or guarantor's recourse under any credit support arrangement
contemplated by the Plan will be limited to the remarketing proceeds designated
to support the credit arrangement. BPA, for example, will be able to treat as
unavailable for reimbursement of non-energy related qualified expenditures
remarketing proceeds of up to 110% of the amount of its guarantee or other
credit support. We believe the $200 million in maximum credit support will be
sufficient to fund all of the energy development projects identified above if
the majority of capital is committed sequentially to allow remarketing proceeds
subject to guarantees of earlier financings to be released and made available
for guarantees of financings of later projects. We may not, however, be able to
commit the capital sequentially. Based on assumptions we have made about our
operating costs, we believe, but cannot assure you, that the remaining
remarketing proceeds of between $100 million and $110 million not used for
credit support, together with other committed sources of capital, will be
sufficient to fund our operations, debt service and employment obligations
through the next 12 months. By that time, we expect increased remarketing
proceeds to be available for non-energy related qualified expenditure because of
a reduced need for BPA credit support as a result of the anticipated refinancing
of the Turbine Project. We may not be able to refinance the Turbine Project on
reasonable terms, or at all.
Northwest Energy has agreed to use the proceeds of loans supported by
BPA credit support for the initial development of the power generation
facilities described above and to use commercially reasonable best efforts to
obtain permanent financing unsupported by BPA credit support at the earliest
opportunity. Northwest Energy may use the proceeds of the loans supported by BPA
credit support for other purposes only with the approval of our board of
directors. We will be eligible to receive liquidated damages from Northwest
Energy if at least 484 megawatts of generation capacity is not available by
October 1, 2006. The liquidated damages would be equal to (1) the percentage by
which energy available to the smelters as of October 1, 2006 is less than 484
megawatts multiplied by (2) the amount of remarketing proceeds paid to Northwest
Energy to support development of the facilities. To secure payment of this
potential obligation of Northwest Energy, we will take a security interest in
the assets of Northwest Energy and its subsidiary project companies. If we
foreclose on the assets, the sales proceeds resulting from the foreclosure may
not cover the amount of liquidated damages. In addition, we have agreed to
release our security interest in a specific project company if requested by a
project lender in connection with project financing through which remarketing
proceeds would be released to another project.
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To consider the Plan, our board of directors designated a special
committee of three independent directors. As required by the indenture governing
our first mortgage notes, the board and special committee engaged a business
valuation firm as financial advisor to the special committee to deliver an
opinion as to the fairness of the Plan to Golden Northwest Aluminum, Inc. from a
financial point of view. The board and special committee also engaged
independent legal counsel to advise the special committee.
In deciding to approve the Plan, the special committee compared the likely
outcomes of three alternatives: operations under the Plan; a sale or liquidation
of the Company; and a continuation of the curtailment until the power markets
stabilize enough to permit smelter operations to begin again. Based on this
review, we believe the Plan provides the only means for our stakeholders to
receive a return on their investment. We do not believe the holders of our first
mortgage notes would receive their full principal under either of the
alternatives to the Plan. The analysis of these alternatives required the
development of numerous assumptions, any of which could prove to be incorrect.
Execution of the Plan is subject to many risks and uncertainties. We do
not assure you that Northwest Energy will be successful in developing the
resources discussed above in a timely manner or at all. Remarketing proceeds
used for development of power resources may not be available for the repayment
of debt or for other non-energy-related qualified expenditures.
On April 18, 2001, a Petition for Review under the Northwest Power Act and
Suit for Declaratory and Injunctive Relief under 28 U.S.C. Section 2201(a) for
Violation of 42 U.S.C. Sections 4321, et seq. was filed against BPA in the
United States Court of Appeals for the Ninth Circuit by individuals and the
Utility Reform Project. The plaintiffs seek review of contracts that obligate
BPA to pay industrial customers for not purchasing or not using power the
customer might otherwise purchase from BPA. Our Remarketing Addendum may be
included in this group of contracts. The plaintiffs also seek to enjoin BPA from
performing or attempting to implement these contracts on the basis that BPA's
conduct in executing these contracts violated the Bonneville Project Act of 1937
and other statutes. We intervened in the case on May 14, 2001. We do not expect
the plaintiffs' lawsuit to have any impact on BPA's ability to perform under the
Remarketing Addendum due to the passage of the applicable statute of
limitations, prior favorable court decisions and other factors. Notwithstanding
the foregoing, if BPA were enjoined from performing the Remarketing Addendum,
our business, financial condition and results of operations would be materially
and adversely affected.
On April 10, 2001, Stephen Babson resigned as a member of our board of
directors. Our board is reviewing candidates to fill the resulting vacancy.
Power prices in the Pacific Northwest continue to be extremely high
compared to historic levels in the region. Beginning May 1, 2001 smelter
production has been further reduced to 5% of capacity, allowing for the sale of
25 MW of BPA supplied electrical power. This will generate approximately $4.9
million of gross proceeds from the sale of the power for May 2001. Sale of the
power for the months of June through September of 2001 has not been completed.
Remaining smelter production and open market purchases of aluminum are
sufficient to allow us to fulfill our tolling obligations to Hydro.
As a result of the high market price of power, we entered into an
agreement with the United Steelworkers of America to extend the collective
bargaining agreements between the United Steelworkers of America and Northwest
Aluminum Company and the United Steelworkers of America and Goldendale Aluminum
Company until September 30, 2001.
On April 24, 2001, Fleet Capital, as Administrative Agent of our revolving
credit facility, informed us that it had increased the borrowing base reserve to
$20.0 million, reducing by $5.0 million the amount potentially available for
borrowing.
In May 2001, we redeemed 13,734.754 shares of our Preferred Stock for
$227.25 per share. The total redemption, including payment of accrued dividends
on the redeemed shares, was $5.0 million.
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RESULTS OF OPERATIONS
The following table sets forth the combined statement of income data as a
percentage of revenues for the three months ended March 31, 2000 and 2001.
Three Months Ended
March 31,
------------------
2000 2001
------ ------
Revenues 100.0% 100.0%
Cost of revenues 93.3% 138.1%
----- -----
Gross margin 6.7% (38.1)%
Net gain on power sales 0.0% 66.4%
Reimbursement of expenditures 0.0% 28.6%
Curtailment expenses 0.0% (15.3)%
General and administrative expenses (3.0)% (10.0)%
----- -----
Operating income 3.7% 31.6%
Interest expense (4.7)% (12.7)%
Other income, net 0.3% (1.3)%
----- -----
Income (loss) before income taxes (0.7)% 17.6%
Income tax expense (benefit) 1.1% 4.4%
----- -----
Net income (loss) (1.8)% 13.2%
----- -----
THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2001
Total revenues decreased from $127.9 million to $47.8 million for the
three months ended March 31, 2000 and March 31, 2001, respectively, a decrease
of $80.1 million, or 62.6%. Revenues were primarily influenced by the cessation
of the Glencore tolling agreement, by the curtailment of significantly all of
our smelter operations to facilitate the opportunity to sell electrical power
into the marketplace and by changes in the market prices of aluminum and power.
The cessation of the Glencore tolling agreement eliminated approximately
500,000 pounds per day of production billable under tolling arrangements
beginning January 1, 2000. Because of Northwest's September 30 year-end, the
impact on the Company's consolidated financial statements was reported beginning
April 1, 2000. For the three months ended March 31 tolling revenues decreased
$20.7 million from 2000 to 2001 due to the cessation of this agreement. Tolling
revenues continued to be earned under the Company's Hydro tolling contract,
decreasing from $53.0 million to $10.8 million for the three months ended March
31, 2000 and March 31, 2001, respectively. Total revenues from tolling
agreements decreased from $73.7 million to $10.8 million for the three months
ended March 31, 2000 and March 31, 2001, respectively, a decrease of $62.9
million, or 85.4%.
Volumes produced under tolling contracts decreased from 136.7 million
pounds to 17.3 million pounds for the three months ended March 31, 2000 and
March 31, 2001, respectively, a decrease of 119.4 million pounds, or 87.4%. The
decrease in production volume due to the non-renewal of the Glencore tolling
agreement was 44.5 million pounds, with a related decrease in revenues of $20.7
million. Other than the decrease due to the non-renewal of the Glencore tolling
agreement, the decrease in production level under tolling arrangements was due
to the curtailment of significantly all of our smelter production capacity to
facilitate electrical power remarketing. The
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production levels at the Goldendale facility were cut to approximately 15% of
normal capacity by early January of 2001, resulting in a decrease in production
volume of 74.9 million pounds, with a related decrease in revenues from tolling
agreements of $43.1 million.
Average effective LME aluminum prices for the three months ended March 31,
2000 and March 31, 2001, remained fairly level at approximately $.70 per pound
for each of the three-month periods.
Sales of non-tolled products decreased from $52.9 million to $36.2 million
for the three months ended March 31, 2000 and March 31, 2001, respectively, a
decrease of $16.7 million, or 31.6%. The primary factors affecting revenues from
sales of non-tolled products were the softening of the economy and demand, the
partial curtailment of production capacity, which could only partially be offset
by remelt activity, and a slight decline in average premiums attained for
value-added products.
Shipments of non-tolled aluminum products decreased from 69.3 million
pounds to 48.7 million pounds for the three months ended March 31, 2000 and
March 31, 2001, respectively, a decrease of 20.6 million pounds with a
corresponding decrease in revenues of $15.7 million. The curtailment of smelting
capacity at Northwest reduced the volume of non-tolled product by 21.5 million
pounds, partially offset with 900,000 additional pounds of aluminum made
available through our remelt operations. A decrease in average selling price of
$.02 per pound because of the change in product mix provided a decrease in
non-tolling revenues of $1.0 million from the three months ended March 31, 2000
to the same period in 2001.
Other revenues, primarily from the sale of carbon briquettes, decreased
from $1.3 million for the three months ended March 31, 2000 to $900,000 for the
three months ended March 31, 2001.
Cost of revenues decreased from $119.3 million to $66.0 million for the
three months ended March 31, 2000 and March 31, 2001, respectively, a decrease
of $53.3 million, or 44.6%. As a percentage of revenues, cost of revenues
increased from 93.3% to 138.1% for the three months ended March 31, 2000 and
March 31, 2001, respectively. The primary influences on cost of revenue were the
cessation of the Glencore tolling agreement, a partial curtailment of production
to facilitate the opportunity to have BPA remarket electrical power into the
marketplace, an increase in market aluminum prices and an increase in our cost
of power.
Beginning January 1, 2000, the cessation of the Glencore tolling agreement
eliminated both tolling revenue and the related cost of revenue. This eliminated
$18.7 million of cost of revenues for the three months ended March 31, 2001.
Smelting production capacity was curtailed to approximately 26% of normal
for the three months ended March 31, 2001. The production capacity of the
Goldendale facility was cut to approximately 15% of normal capacity during the
first three months of 2001, and the production capacity of the Northwest
facility was cut to approximately 50% for the last three months of 2000. This
resulted in a decrease in production volume of 96.5 million pounds and a
decrease in cost of revenues of $57.9 million.
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Gross margin decreased from $8.6 million for the three months ended March
31, 2000, to $(18.2) million for the three months ended March 31, 2001, a
decrease of $26.8 million, or 311.8%. As a percentage of revenues, gross margin
decreased from 6.8% to (38.1)% for the three months ended March 31, 2000 and
March 31, 2001, respectively. The decrease in gross margin resulted primarily
from the changes in revenues and cost of revenues discussed above.
Sales of the power made available from the curtailment in October 2000
generated net proceeds of $31.8 million for the three months ended March 31,
2001. During the three months ended March 31, 2001, the expenses related to the
December 2000 production curtailment totaled $7.3 million, of which $3.9 million
were attributable to contract cancellation charges and $3.4 million were
attributable to workforce reduction costs. Reimbursements to us for both expense
and non-expense qualified expenditures related to the December 2000 production
curtailment totaled $13.7 million.
General and administrative expenses increased from $3.8 million to $4.8
million, for the three months ended March 31, 2000 and March 31, 2001,
respectively. Of this increase, bonuses attributed $400,000 and professional and
legal fees $300,000. As a percentage of revenues, general and administrative
expenses increased from 3.0% to 10.0% for the three months ended March 31, 2000
and March 31, 2001, respectively.
Interest expense increased slightly from $6.0 million to $6.1 million for
the three months ended March 31, 2000 and March 31, 2001, respectively.
Income tax expense increased from $1.4 million to $2.1 million for the
three months ended March 31, 2000 and March 31, 2001, respectively. This change
was due primarily to an increase in taxable income of Goldendale, a C
corporation, for the three months ended March 31, 2001 compared to 2000.
As a result of the foregoing factors, we reported net income of $6.3
million for the three months ended March 31, 2001 versus a net loss of $2.3
million for the three months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
During this period of curtailment, our cash flow and liquidity from
operations will be supplemented by reimbursements for "qualified expenditures"
from the remarketing proceeds received by BPA. "Qualified expenditures" include
reimbursements for curtailment related employee costs and contract breakage
fees, for capital expenditures and for debt service. For the period January 1,
2001 through September 30, 2001, the reimbursement for these qualified
expenditures are estimated to be $100 million, however no assurance can be given
that such amounts will be realized. We are dependent upon distribution of
remarketing proceeds for continued funding of operations. Qualified expenditures
submitted for reimbursements through March 31, 2001, including those before
January 2001, total $54.5 million.
Historically, our cash and capital requirements have been satisfied
through cash generated from operating activities and borrowings under our
primary credit facilities. Our credit facility with Fleet Capital Corporation is
a $75.0 million senior secured revolving credit facility collateralized by all
of the inventory, accounts receivable and other rights to payment of our
subsidiaries. Availability under the revolving line of credit is controlled by a
borrowing base formula based on eligible receivables and inventory, and a
borrowing base reserve that is
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presently set at $20.0 million. Based on this formula, we had net availability
of approximately $60.8 million under the revolving line of credit at March 31,
2001, against which we had borrowed $23.8 million.
Our liquidity and capital needs relate primarily to payment of principal
and interest on borrowings, capital expenditures, including our facilities
investment program, and distributions to our sole shareholder to pay income
taxes. The first stage of the Facilities Investment Program consisting of an
expansion of the Goldendale casthouse and a 34-cell demonstration of new cell
line technology has been completed. We have temporarily suspended the second
stage of the Facilities Investment Program because of our recent curtailments
and uncertainties in our long-term supply of competitively priced electric
power. Our liquidity and capital needs also relate to working capital and other
general corporate requirements. Additionally, the Goldendale preferred stock
became redeemable at our discretion after December 31, 1998. If and when
redeemed, we anticipate that the necessary funds would be drawn from our
revolving credit facility with Fleet Capital. The redemption price for the
Goldendale preferred stock at March 31, 2001 was $29.7 million plus any accrued
but unpaid dividends, which totaled $17.7 million at March 31, 2001. In May
2001, we redeemed 13,734.754 shares of our Preferred Stock for $227.25 per share
to fund distributions from the Goldendale Retirement Plan, which holds the
Preferred Stock. The total redemption, including payment of accrued dividends on
the redeemed shares was $5.0 million. Furthermore, we are subject to a number of
contingencies and uncertainties.
Our statement of cash flows for the periods indicated are summarized
below:
Three Months Ended
March 31,
-----------------------
2000 2001
-------- --------
Net cash provided by (used in) operating activities... $ (4,262) $ 28,285
Net cash used in investing activities ................ (6,260) (4,447)
Net cash provided by (used in) financing activities... 11,936 (24,317)
Increase (decrease) in cash .......................... 1,414 (479)
Net cash provided by operating activities was $28.3 million for the three
months ended March 31, 2001 and net cash used in operating activities was $4.3
million for the three months ended March 31, 2000. The net cash provided by
operating activities during the three months ended March 31, 2001 was primarily
attributable to cash provided by our net income, as adjusted for non-cash
charges, of $15.7 million. For the three months ended March 31, 2001, our net
income was $6.3 million, depreciation and amortization was $6.6 million and
other non-cash adjustments totaled $2.8 million. Additionally, changes in
working capital provided net cash of $14.8 million, of which $12.0 million
related to receivables and $4.5 million related to inventories due to the
partial curtailments of operations.
The net cash used in operating activities during the three months ended
March 31, 2000 of $4.3 million was primarily attributable to cash provided by
our net loss, as adjusted for non-cash charges, of $3.8 million. Additionally,
changes in working capital used net cash of $8.1 million.
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Net cash used in investing activities was $4.4 million for the three
months ended March 31, 2001, compared to net cash used in investing activities
of $6.3 million for the three months ended March 31, 2000. Cash used in
investing activities in the three months ended March 31, 2001 was primarily
attributable to capital expenditures of $4.3 million. Cash used in investing
activities in the three months ended March 31, 2000 was primarily attributable
to capital expenditures of $6.7 million.
Net cash used in financing activities was $24.3 million in the three
months ended March 31, 2001, compared to net cash provided by financing
activities of $11.9 million in the three months ended March 31, 2000. Net cash
used in financing activities in the three months ended March 31, 2001 was
primarily attributable to net repayments of $23.5 million under our credit
facility. Net cash provided by financing activities in the three months ended
March 31, 2000 was primarily attributable to net borrowings of $9.7 million
under our credit facility.
We believe cash flow from curtailed operations and the reimbursements from
the remarketing proceeds, available borrowings under our revolving credit
facility and under our note purchase agreement with Hydro and cash on hand will
provide adequate funds for our foreseeable working capital needs, planned
capital expenditures and debt service and other obligations through the next
twelve months.
Our ability to fund operations, make planned capital expenditures, such as
our facilities investment program, make principal and interest payments on the
notes, and remain in compliance with all of the financial covenants under our
debt agreements will be dependent on our future operating performance and the
success of our power development strategy. Our future operating performance is
dependent on a number of factors, including aluminum prices and power costs,
many of which are beyond our control. These factors include prevailing economic
conditions and financial, competitive, regulatory and other factors affecting
our business and operations, and may be dependent on the availability of
borrowings under our revolving credit facility or other borrowings. We do not
assure you our cash flow from operations, together with other sources of
liquidity, will be adequate to:
- - make required payments of principal and interest on the notes and our
other debt;
- - finance anticipated capital expenditures;
- - fund working capital requirements; or
- - fund the possible redemption of all outstanding shares of the Goldendale
preferred stock.
If we do not have sufficient available resources to repay any of our
indebtedness when it becomes due and payable, we may need to refinance the
indebtedness. We do not assure you refinancing will be available or available on
reasonable terms.
SEASONALITY AND INFLATION
Our results of operations can be affected by seasonal factors, such as
substantial increases in the cost of electricity caused by weather related
factors. We do not believe inflation has had a material effect on the combined
financial statements for the periods presented.
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EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138 ("SFAS No. 138"), Accounting for Certain Derivative Instruments and
Certain Hedging Activities. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 and No. 138 are effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Effective January 1, 2001, the Company
adopted SFAS No. 133 and No. 138. The Company reflected the difference between
the fair market value of the derivative instruments and the recorded book value
of the derivative instruments as a cumulative effect type adjustment to
accumulated other comprehensive income.
The Company believes that the majority of its non-trading derivative
contracts, power purchase agreements and aluminum purchase and sale agreements
qualify for the normal purchases and sales exception of SFAS No. 133 and
therefore would not be recognized at fair value on the balance sheet. The
Company does, however use certain derivative instruments to limit its exposures
to commodity price risk and interest rate risk. The Company's interest rate swap
agreement permits it to limit exposure to interest rate risk and meets the
requirements for hedge accounting under SFAS No. 133. The Company recorded the
changes in the fair value of this contract in accumulated other comprehensive
income on the balance sheet. Aluminum call options entered into to limit
exposure to commodity price risk are not accounted for as hedging instruments
under SFAS No. 133 and as a result, changes in fair value of these instruments
are immediately recognized in income.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
Fair value of interest rate swap (liability)............. $783,000
Increase in accumulated other comprehensive
income, net of tax of $122,000 ....................... $228,000
Upon initial adoption of the standard, the Company recorded a $228,000, net of
tax, cumulative effect adjustment to accumulated other comprehensive income.
This adjustment relates to the fair value of the interest rate swap contract
that qualified for cash flow hedge accounting prior to the initial adoption of
SFAS No. 133. This amount will reduce interest expense when the related hedged
transaction occurs.
FORWARD-LOOKING STATEMENTS
This report contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this report (see, for
example, "-Overview," "-Recent Developments," "-Results of Operations," and
"-Liquidity and Capital Resources"). Such statements can be identified by the
use of forward looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans," or "anticipates" or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the following:
- - fluctuations in the price of primary aluminum;
- - fluctuations in the market price of electricity;
- - fluctuations in the price of natural gas necessary for the production of
electricity at one or more Northwest Energy projects;
- - our ability to obtain an affordable and reliable supply of electricity;
- - our ability to obtain remarketing proceeds from BPA;
- - servicing our substantial indebtedness;
- - the incurrence of future indebtedness;
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- - restrictions on our ability to operate our business imposed by the terms
of our indebtedness;
- - the effects of federal and state environmental laws and regulations;
- - the continued viability of the technology used in our smelters;
- - our ability to operate effectively with and without tolling agreements;
- - retaining and recruiting key personnel, particularly when both smelters
have curtailed operations and when continuing severance benefits may be
reduced or terminated;
- - changes in labor relations with the unions representing our employees;
- - possible claims and damages associated with an extended curtailment;
- - the timing of the restart of our smelter operations; and
- - our ability to create or locate cost effective supplies of power.
Other factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, developments in technology,
new or modified statutory or regulatory requirements, and changing prices and
market conditions. No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GOLDEN NORTHWEST ALUMINUM, INC.
NORTHWEST ALUMINUM COMPANY
NORTHWEST ALUMINUM SPECIALTIES, INC.
GOLDENDALE HOLDING COMPANY
GOLDENDALE ALUMINUM COMPANY
NORTHWEST ALUMINUM TECHNOLOGIES, LLC
Date: May 17, 2001 By: /s/ WILLIAM R. REID
------------------------------------
William R. Reid
Chief Financial Officer
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