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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-0928288
(State of incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes / / No /X/
At October 31, 2003, the registrant had 46,171,365 shares of Common Stock
outstanding.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions of dollars)
September 30, December 31,
2003 2002
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 50.2 $ 78.7
Receivables:
Trade, less allowance for doubtful receivables of $10.2 and $11.0 117.2 103.1
Other 38.8 51.4
Inventories 227.7 254.9
Prepaid expenses and other current assets 36.4 33.5
-------------- ---------------
Total current assets 470.3 521.6
Investments in and advances to unconsolidated affiliates 75.9 69.7
Property, plant, and equipment - net 970.8 1,009.9
Other assets 534.6 629.2
-------------- ---------------
Total $ 2,051.6 $ 2,230.4
============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise -
Current liabilities:
Accounts payable $ 140.4 $ 129.0
Accrued interest 4.4 2.9
Accrued salaries, wages, and related expenses 40.6 46.7
Accrued postretirement medical benefit obligation - current portion 60.2 60.2
Other accrued liabilities 46.0 64.3
Payable to affiliates 49.1 28.0
Long-term debt - current portion 1.2 .9
-------------- ---------------
Total current liabilities 341.9 332.0
Long-term liabilities 85.3 86.9
Long-term debt 42.3 42.7
-------------- ---------------
469.5 461.6
Liabilities subject to compromise 2,755.6 2,726.0
Minority interests 122.4 121.1
Commitments and contingencies
Stockholders' equity (deficit):
Preference stock .7 .7
Common stock 15.4 15.4
Additional capital 2,454.2 2,454.8
Accumulated deficit (1,328.6) (1,113.6)
Accumulated other comprehensive income (loss) (245.9) (243.9)
Less: Note receivable from parent (2,191.7) (2,191.7)
-------------- ---------------
Total stockholders' equity (deficit) (1,295.9) (1,078.3)
-------------- ---------------
Total $ 2,051.6 $ 2,230.4
============== ===============
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars)
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ---------- ------------
Net sales $ 327.1 $ 348.0 $ 1,024.9 $ 1,104.9
----------- ----------- ---------- ------------
Costs and expenses:
Cost of products sold 343.3 337.6 1,063.2 1,040.3
Depreciation and amortization 18.0 22.6 55.4 67.6
Selling, administrative, research and development, and
general 25.8 27.0 77.7 97.5
Other operating charges, net 15.0 25.3 15.6 34.4
----------- ----------- ---------- ------------
Total costs and expenses 402.1 412.5 1,211.9 1,239.8
----------- ----------- ---------- ------------
Operating loss (75.0) (64.5) (187.0) (134.9)
Other income (expense):
Interest expense (excluding unrecorded contractual interest
expense of $23.8 for both quarters and $71.2 and $60.3
for the nine-month periods, respectively) (2.9) (2.2) (8.2) (18.2)
Reorganization items (5.4) (8.5) (20.2) (24.6)
Other - net (6.7) (1.5) (8.4) 1.0
----------- ----------- ---------- ------------
Loss from continuing operations before income taxes,
minority interests and discontinued operations (90.0) (76.7) (223.8) (176.7)
Provision for income taxes (.5) (7.0) (4.9) (21.4)
Minority interests 1.9 1.4 5.8 4.3
----------- ----------- ---------- ------------
Loss from continuing operations (88.6) (82.3) (222.9) (193.8)
----------- ----------- ---------- ------------
Discontinued operations:
Loss from operations of curtailed Tacoma facility - (1.0) (1.6) (4.0)
Gain from sale of Tacoma facility - - 9.5 -
----------- ----------- ---------- ------------
Income (loss) from discontinued operations - (1.0) 7.9 (4.0)
----------- ----------- ---------- ------------
Net loss $ (88.6) $ (83.3) $ (215.0) $ (197.8)
=========== =========== ========== ============
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions of dollars)
For the Nine Months Ended September 30, 2003
Accumulated Note
Accu- Other Receivable
Preference Common Additional mulated Comprehensive From
Stock Stock Capital Deficit Income (Loss) Parent Total
- ------------------------------- ---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, December 31, 2002 $ .7 $ 15.4 $ 2,454.8 $(1,113.6) $ (243.9) $ (2,191.7) $ (1,078.3)
Net loss - - - (215.0) - - (215.0)
Unrealized net decrease in
value of derivative
instruments arising during
the period (including net
decrease in value of $1.9 for
the quarter ended
September 30, 2003) - - - - (1.3) - (1.3)
Reclassification adjustment for
net realized gains on
derivative instruments
included in net loss
(including net realized gains
of $.2 for the quarter ended
September 30, 2003) - - - - (.7) - (.7)
-----------
Comprehensive income (loss) - - - - - - (217.0)
Restricted stock cancellations - - (.9) - - - (.9)
Restricted stock accretion - - .3 - - - .3
---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, September 30, 2003 $ .7 $ 15.4 $ 2,454.2 $(1,328.6) $ (245.9) $ (2,191.7) $ (1,295.9)
========== ========= ========== ========== ============== =========== ===========
For the Nine Months Ended September 30, 2002
Accumulated Note
Accu- Other Receivable
Preference Common Additional mulated Comprehensive From
Stock Stock Capital Deficit Income (Loss) Parent Total
- ------------------------------- ---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, December 31, 2001 $ .7 $ 15.4 $ 2,437.6 $ (645.2) $ (67.3) $ (2,175.2) $ (434.0)
Net loss - - - (197.8) - - (197.8)
Unrealized net decrease in
value of derivative
instruments during the
period prior to settlement - - - - (12.1) - (12.1)
Reclassification adjustment
for net realized gains on
derivative instruments
included in net loss
(including net realized
gains of $6.3 for the
quarter ended September
30, 2002) - - - - (21.2) - (21.2)
-----------
Comprehensive income (loss) - - - - (231.1)
Interest on note receivable
from parent - - 16.5 - - (16.5) -
Contributions for LTIP shares
and restricted stock
accretion - - .6 - - - .6
---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, September 30, 2002 $ .7 $ 15.4 $ 2,454.7 $ (843.0) $ (100.6) $ (2,191.7) $ (664.5)
========== ========= ========== ========== ============== =========== ===========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Nine Months Ended
September 30,
-----------------------
2003 2002
----------- ----------
Cash flows from operating activities:
Net loss $ (215.0) $ (197.8)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation and amortization (including deferred financing costs of $3.8 and $2.7,
respectively) 59.2 70.3
Non-cash charges for restructuring charges in 2003; restructuring charges and
reorganization items in 2002 1.9 37.2
Gain on sale of Tacoma facility in 2003 and real estate in 2002 (14.5) (4.0)
Equity in earnings of unconsolidated affiliates, net of distributions (7.2) (6.7)
Minority interests (5.8) (4.3)
(Increase) decrease in trade and other receivables (1.4) 43.0
Decrease in inventories 27.2 8.3
(Increase) decrease in prepaid expenses and other current assets (4.4) 42.4
Increase in accounts payable and accrued interest 17.0 31.3
Increase (decrease) in other accrued liabilities 3.0 (36.4)
Increase (decrease) in payable to affiliates 21.1 (20.3)
Decrease in accrued and deferred income taxes (39.0) (11.2)
Net cash impact of changes in long-term assets and liabilities 69.6 14.5
Other 7.9 (9.2)
----------- ----------
Net cash used by operating activities (80.4) (42.9)
----------- ----------
Cash flows from investing activities:
Net proceeds from dispositions: primarily Tacoma facility and interests
in office building complex in 2003; equipment and miscellaneous real estate in 2002 83.2 20.8
Capital expenditures (27.3) (29.2)
----------- ----------
Net cash provided (used) by investing activities 55.9 (8.4)
----------- ----------
Cash flows from financing activities:
Financing costs, primarily DIP Facility related (4.0) (8.1)
----------- ----------
Net cash used by financing activities (4.0) (8.1)
----------- ----------
Net decrease in cash and cash equivalents during the period (28.5) (59.4)
Cash and cash equivalents at beginning of period 78.7 153.3
----------- ----------
Cash and cash equivalents at end of period $ 50.2 $ 93.9
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest of $1.0 and $.9, respectively $ 2.5 $ 4.4
Income taxes paid 44.7 31.3
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share amounts)
1. REORGANIZATION PROCEEDINGS
Kaiser Aluminum & Chemical Corporation (the "Company"), its parent company,
Kaiser Aluminum Corporation ("Kaiser"), and 24 of the Company's subsidiaries
have filed separate voluntary petitions in the United States Bankruptcy Court
for the District of Delaware (the "Court") for reorganization under Chapter 11
of the United States Bankruptcy Code (the "Code"); the Company, Kaiser and 15 of
the Company's subsidiaries (the "Original Debtors") filed in the first quarter
of 2002 and nine additional Company subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" shall mean, with
respect to any particular Debtor, the date on which such Debtor filed its Case.
None of the Company's non-U.S. joint ventures are included in the Cases. The
Cases are being jointly administered. The Debtors are managing their businesses
in the ordinary course as debtors-in-possession subject to the control and
administration of the Court.
Original Debtors. During the first quarter of 2002, the Original Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
of the Company included in such filings were: Kaiser Bellwood Corporation,
Kaiser Aluminium International, Inc., Kaiser Aluminum Technical Services, Inc.,
Kaiser Alumina Australia Corporation (and its wholly owned subsidiary, Kaiser
Finance Corporation) and ten other entities with limited balances or activities.
The necessity for filing the Cases by the Original Debtors was attributable to
the liquidity and cash flow problems of the Company and its subsidiaries arising
in late 2001 and early 2002. The Company was facing significant near-term debt
maturities at a time of unusually weak aluminum industry business conditions,
depressed aluminum prices and a broad economic slowdown that was further
exacerbated by the events of September 11, 2001. In addition, the Company had
become increasingly burdened by asbestos litigation and growing legacy
obligations for retiree medical and pension costs. The confluence of these
factors created the prospect of continuing operating losses and negative cash
flows, resulting in lower credit ratings and an inability to access the capital
markets.
The outstanding principal of, and accrued interest on, all debt of the Original
Debtors became immediately due and payable upon commencement of the Cases.
However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal
proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business,
subject to certain limitations. In July 2002, the Court also issued a final
order authorizing the Company to fund the cash requirements of its foreign joint
ventures in the ordinary course of business and to continue using the Company's
existing cash management systems. The Original Debtors also have the right to
assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, "assumption"
means that the Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original Debtors are relieved from their obligations to perform further
under an executory contract and are subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of a
pre-Filing Date executory contract is treated as a general unsecured claim in
the Cases.
Generally, pre-Filing Date claims, including certain contingent or unliquidated
claims, against the Original Debtors will fall into two categories: secured and
unsecured. Under the Code, a creditor's claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the Filing Date. A fully secured claim, however, does
accrue interest after the Filing Date until the amount due and owing to the
secured creditor, including interest accrued after the Filing Date, is equal to
the value of the collateral securing such claim. The amount and validity of
pre-Filing Date contingent or unliquidated claims, although presently unknown,
ultimately may be established by the Court or by agreement of the parties. As a
result of the Cases, additional pre-Filing Date claims and liabilities may be
asserted, some of which may be significant.
The Court set January 31, 2003 as the last date by which holders of pre-Filing
Date claims against the Original Debtors (other than asbestos-related personal
injury claims and certain hearing loss claims) could file their claims. Any
holder of a claim that was required to file a claim by such date and did not do
so may be barred from asserting such claim against any of the Original Debtors
and, accordingly, may not be able to participate in any distribution in any of
the Cases on account of such claim. The Company has not yet completed its
analysis of all of the proofs of claim to determine their validity. However,
during the course of the Cases, certain matters in respect of the claims have
been resolved. All material provisions in respect of claim settlements are
included in the accompanying financial statements and are fully disclosed
elsewhere herein. The January 31, 2003 bar date does not apply to
asbestos-related personal injury claims, for which the Original Debtors reserve
the right to establish a separate bar date at a later time. A separate bar date
for certain hearing loss claims, which was originally set for June 30, 2003, has
been extended to December 31, 2003.
Additional Debtors. On January 14, 2003, the Additional Debtors filed separate
voluntary petitions for reorganization. The wholly owned subsidiaries included
in such filings were: Kaiser Bauxite Company, Kaiser Jamaica Corporation, Alpart
Jamaica Inc., Kaiser Aluminum & Chemical of Canada Limited and five other
entities with limited balances or activities.
The Cases filed by the Additional Debtors were commenced, among other reasons,
to protect the assets held by these Debtors against possible statutory liens
that may arise and be enforced by the Pension Benefit Guaranty Corporation
("PBGC") primarily as a result of the Company's failure to meet a $17.0
accelerated funding requirement to its salaried employee retirement plan in
January 2003 (see Note 10 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2002 for additional
information regarding the accelerated funding requirement). From an operating
perspective, the filing of the Cases by the Additional Debtors had no impact on
the Company's day-to-day operations.
In connection with the Additional Debtors' filings, the Court authorized the
Additional Debtors to continue to make payments in the normal course of business
(including payments of certain pre-Filing Date amounts), including payments of
wages and benefits, payments for items such as materials, supplies and freight
and payments of taxes. The Court also approved the continuation of the Company's
existing cash management systems and routine intercompany transactions
involving, among other transactions, the transfer of materials and supplies
among subsidiaries and affiliates.
In March 2003, the Court set May 15, 2003 as the last date by which holders of
pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) could
file their claims. Any holder of a claim that was required to file a claim by
such date and did not do so may be barred from asserting such claim against any
of the Additional Debtors and, accordingly, may not be able to participate in
any distribution in any of the Cases on account of such claim. The Company has
not yet completed its analysis of all of the proofs of claim to determine their
validity. However, during the course of the Cases, certain matters in respect of
the claims have been resolved. All material provisions in respect of claim
settlements are included in the accompanying financial statements and are fully
disclosed elsewhere herein.
All Debtors. Two creditors' committees, one representing the unsecured creditors
(the "UCC") and the other representing the asbestos claimants (the "ACC"), have
been appointed as official committees in the Cases and, in accordance with the
provisions of the Code, will have the right to be heard on all matters that come
before the Court. In August 2003, the Court approved the appointment of a
committee of salaried retirees (the "1114 Committee" and, together with the UCC
and the ACC, the "Committees") with whom the Debtors are discussing necessary
changes, including the modification or termination, of certain retiree benefits
(such as medical and insurance) under Section 1114 of the Code. The Debtors
expect that the Committees, together with the legal representative for potential
future asbestos claimants (the "Futures' Representative") that has been
appointed in the Cases, will play important roles in the Cases and the
negotiation of the terms of any plan or plans of reorganization. The Debtors are
required to bear certain costs and expenses for the Committees and the Futures'
Representative, including those of their counsel and other advisors.
As provided by the Code, the Original Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the initial Filing Date. The
Court has subsequently approved several extensions of the exclusivity period for
all Debtors, the most recent of which was set to expire October 31, 2003. A
motion to extend the exclusivity period through February 29, 2004, was filed by
the Debtors in October 2003. By filing the motion to extend the exclusivity
period, the period is automatically extended until the December 15, 2003 Court
hearing date. As the Debtors' motion to extend the exclusivity period through
February 29, 2004 was agreed to by the UCC, the ACC and the Futures'
Representative in advance of the filing, the Debtors expect the motion to be
approved by the Court. Additional extensions are likely to be sought. However,
no assurance can be given that such future extension requests will be granted by
the Court. If the Debtors fail to file a plan of reorganization during the
exclusivity period, or if such plan is not accepted by the requisite numbers of
creditors and equity holders entitled to vote on the plan, other parties in
interest in the Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.
The Debtors anticipate that substantially all liabilities of the Debtors as of
the date of the Filing will be settled under one or more plans of reorganization
to be proposed and voted on in accordance with the provisions of the Code.
Although the Debtors intend to file and seek confirmation of such a plan or
plans, there can be no assurance as to when the Debtors will file such a plan or
plans or as to whether such plan or plans will be confirmed by the Court and
consummated. At this time, it is not possible to predict the outcome of the
Cases, in general, or the effect any such outcome may have on the businesses of
the Debtors.
In working toward a plan of reorganization, the Debtors have been, and continue
to be, engaged in discussions with each of their key constituencies, including
the Committees, the Futures' Representative, the PBGC, and the appropriate union
representatives. The treatment of individual groups of creditors in any such
plan of reorganization cannot be determined definitively at this time. The
ultimate treatment of and recoveries to individual creditors is dependent on,
among other things, the total amount of claims against the Debtors as ultimately
determined by the Court, the priority of the applicable claim, the outcome of
ongoing discussions with the key constituencies, the amount of value available
for distribution in respect of claims and the completion of the plan
confirmation process consistent with applicable bankruptcy law.
The Debtors' objective is to achieve the highest possible recoveries for all
stakeholders, consistent with the Debtors' abilities to pay, and to continue the
operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that it is likely that their
liabilities will be found to exceed the fair value of their assets. Therefore,
the Debtors currently believe that it is likely that substantially all
pre-Filing Date claims will be settled at less than 100% of their face value and
the equity of the Company's stockholders will be cancelled without
consideration. Further, the Debtors believe that it is likely that: (a) the
claims of pre-petition creditors that are given certain priorities by statute or
have the benefit of guarantees or other contractual or structural seniority will
likely receive substantially greater recoveries than pre-petition creditors that
have no such priorities or seniority; and (b) all pending and future
asbestos-related personal injury claims are likely to be resolved through the
formation, pursuant to a plan of reorganization, of a statutory trust to which
all claims would be directed by a channeling injunction that would permanently
remove all asbestos liability from the Debtors. The trust would be funded
according to statutory requirements, using the Debtors' insurance assets and
certain other consideration that has yet to be agreed. No assurances can be
provided that the foregoing will ultimately be included in any plan(s) of
reorganization the Debtors may file. Further, while the Debtors believe it is
possible to successfully reorganize their operations and emerge from Chapter 11
in 2004, their ability to do so is subject to inherent market-related risks as
well as successful negotiation and Court approval for the treatment of creditors
consistent with the applicable bankruptcy law.
The Company expects that, when the Debtors ultimately file a plan of
reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage, improved cost structure and competitive strength; (b) a company
positioned to execute its long-standing vision of market leadership and growth
in fabricated products specifically with a financial structure that provides
financial flexibility, including access to capital markets, for accretive
acquisitions; (c) a company that delivers a broad product offering and
leadership in service and quality for its customers and distributors; and (d) a
company with continued presence in those commodities markets that have the
potential to generate significant cash at steady-state metal prices. While the
Company intends to continue to pursue a standalone fabricated products company
emergence strategy, from time to time the Debtors may also evaluate other
reorganization strategies, consistent with the Debtors' responsibility to
maximize the recoveries for its stakeholders. The Company's advisors have
developed a preliminary timeline that, assuming the current pace of the Cases
continues, could allow the Company to emerge from Chapter 11 in mid-2004.
However, the Debtors' ability to do so is subject to the confirmation of a plan
of reorganization in accordance with the applicable bankruptcy law. Accordingly,
no assurances can be given in this regard.
In light of the Company's stated strategy and to further the Debtors' ultimate
planned emergence from Chapter 11, the Debtors, with the approval of the Board
of Directors and in consultation with the UCC, the ACC and the Futures'
Representative, are exploring the possible sale of one or more of their
commodities businesses. In particular, the Debtors are currently exploring the
possible sale of their interests in and related to: (a) Alumina Partners of
Jamaica ("Alpart"); (b) Anglesey Aluminium Limited ("Anglesey"); and (c) the
Company's alumina refinery located at Gramercy, Louisiana ("Gramercy") and
Kaiser Jamaica Bauxite Company ("KJBC"). The possible sale of the Debtors'
interests in respect of Gramercy and KJBC is being explored jointly given their
significant integration.
In exploring the sale of the commodities businesses, the Debtors, through their
investment advisors, surveyed the potential market and initiated discussions
with numerous parties believed to have an interest in such assets. In addition,
other parties contacted the Debtors and/or their investment advisors to express
an interest in purchasing the assets. The Debtors provided (subject to
confidentiality agreements) information regarding the applicable interests to
these parties, each of which was asked to submit a non-binding expression of
interest regarding the individual assets. After receiving these initial
expressions of interest from potential purchasers, the Debtors determined which
of the expressions of interest received through the date hereof represented
reasonable indications of value ("Qualified Bids"). Potential bidders
("Qualified Bidders") that submitted Qualified Bids were then permitted to
conduct due diligence in respect of the assets for which they submitted a
Qualified Bid and to submit definitive proposals.
The Debtors are currently reviewing the definitive proposals submitted and, in
consultation with the UCC, the ACC and the Futures' Representative, and other
key constituencies, will determine whether to pursue further negotiations with
Qualified Bidders. Although the Company's Board of Directors has authorized the
Debtors to explore the potential divestiture of each of the identified
commodities businesses, the Company's Board of Directors has not, as of this
time, authorized the sale of any of the interests. Any sale that the Debtors
might ultimately choose to pursue would be subject to the approval of the
Company's Board of Directors, the lenders under the Debtors' post-petition
credit agreement (the "DIP Facility" - see Note 5) and the Court. In addition,
the DIP Facility would have to be amended or modified in connection with any
such sales. Moreover, in connection with any sales of the interests in Alpart
and Anglesey, the Debtors would be required to accommodate certain rights of the
other holders in those entities to purchase the Debtors' interests at the price
specified at which such interests are proposed to be sold by the Debtors.
While no commodity asset sales are currently imminent, it is possible that one
or more sales may occur during the first half of 2004. However, no assurances
can be given that acceptable offers will be received for any assets or that any
assets will ultimately be sold. Further, the Company's strategic vision is
subject to continuing review in consultation with the Company's stakeholders and
may also be modified from time to time as the Cases proceed due to such items as
changes in the global markets, changes in the economics of the Company's
facilities or changing financial circumstances.
Continued sales of non-core assets and facilities that are ultimately determined
not to be an important part of the reorganized entity are likely.
Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with AICPA Statement of Position
90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.
As previously disclosed, if the Company were to decide to sell certain assets
not deemed a critical part of a reorganized Kaiser, such asset sales could
result in gains or losses (depending on the asset sold) and such gains or losses
could be significant. This is because, under generally accepted accounting
principles ("GAAP"), assets to be held and used are evaluated for recoverability
differently than assets to be sold or disposed of. Assets to be held and used
are evaluated based on their expected undiscounted future net cash flows. So
long as the Company reasonably expects that such undiscounted future net cash
flows for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if possible or probable plans to
sell or dispose of an asset or group of assets meet a number of specific
criteria, then, under GAAP, such assets should be considered held for
sale/disposition and their recoverability should be evaluated, for each asset,
based on expected consideration to be received upon disposition. Sales or
dispositions at a particular time will be affected by, among other things, the
existing industry and general economic circumstances as well as the Company's
own circumstances, including whether or not assets will (or must) be sold on an
accelerated or more extended timetable. Such circumstances may cause the
expected value in a sale or disposition scenario to differ materially from the
realizable value over the normal operating life of assets, which would likely be
evaluated on long-term industry trends.
As discussed more fully above, the Company is exploring the possible divestiture
of certain of its commodity assets. Specifically, the Company is engaged in
separate processes that could result in the divestiture of the Company's
interests in Anglesey, Alpart and Gramercy/KJBC. Definitive bids for such assets
have recently been received and are currently being evaluated. It is possible
that additional bids may be received. It is possible that one or all of the bids
could be deemed to be acceptable and that sale transactions in respect of the
Company's interests in these assets may be completed during the first half of
2004. It is also possible that the Company's Board of Directors, after
appropriate consultation with the Company's advisors and the UCC, the ACC and
the Futures' Representative and other key constituencies in the Cases, may
determine that a sale of one or more of these assets, at this point, is not in
the best interests of creditors and other stakeholders.
For the purpose of preparing the September 30, 2003 financial statements, the
Company evaluated the book value of its interests in long-term assets related to
these interests on a "hold and use" basis since, among other requirements, none
of the Company's Board of Directors, the DIP Facility lenders or the Court have
approved any possible sales. The Company believes that, if the assets are
retained, undiscounted net cash flows associated with these assets are
sufficient to recover the Company's book value of these long-term assets at
September 30, 2003, which were as follows:
Anglesey $ 15.0
Alpart(1) 196.6
Gramercy/KJBC 375.9
-------------------
$ 587.5
===================
- ---------------------------
(1) Kaiser's 65% share of Alpart's net property, plant and equipment.
The Company cannot currently predict whether the Company's interests in
Anglesey, Alpart and Gramercy/KJBC will ultimately be sold as a result of the
aforementioned processes. Further, as stated above, the Company has not had
sufficient time to evaluate the terms of the various proposals submitted by the
possible purchasers. Additionally, it is possible that the terms of any
transactions may change by the time that definitive agreements are signed,
requisite approvals of the DIP Facility lenders are obtained and the Court
approval for such transaction would be sought. Therefore, in evaluating the
Debtors' share of the long-term assets and interests related to Anglesey, Alpart
and Gramercy/KJBC, the Company did not include a sale scenario in its impairment
evaluation. However, the Company believes that if it were to sell these assets,
it is likely that (a) a gain would result on the sale of interests in Anglesey,
(b) the interests in Alpart would be sold for amounts within a reasonable range
of its net book value, and (c) the sale of the Company's interests in
Gramercy/KJBC would result in a material non-cash impairment charge.
However, as discussed above, since any sale is subject to a number of approvals
(including the Board of Directors, the DIP Facility lenders and the Court) and
further negotiations still have to occur, no assurances can be given that any of
the foregoing interests or other assets will be sold.
Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Current assets $ 331.1 $ 29.5 $ 109.7 $ - $ 470.3
Investments in subsidiaries and
affiliates 1,418.9 206.1 .1 (1,549.2) 75.9
Intercompany receivables (payables), net (979.5) 893.7 85.8 - -
Property and equipment, net 572.2 18.0 380.6 - 970.8
Deferred income taxes (81.9) 81.9 - - -
Other assets 526.5 .4 7.7 - 534.6
------------- ------------- -------------- ---------------- --------------
$ 1,787.3 $ 1,229.6 $ 583.9 $ (1,549.2) $ 2,051.6
============= ============= ============== ================ ==============
Liabilities not subject to compromise -
Current liabilities $ 244.7 $ 25.4 $ 85.3 $ (13.5) $ 341.9
Long-term liabilities 82.8 16.1 28.7 - 127.6
Liabilities subject to compromise 2,755.6 - - - 2,755.6
Minority interests .1 - 104.9 17.4 122.4
Stockholders' equity (deficit) (1,295.9) 1,188.1 365.0 (1,553.1) (1,295.9)
------------- ------------- -------------- ---------------- --------------
$ 1,787.3 $ 1,229.6 $ 583.9 $ (1,549.2) $ 2,051.6
============= ============= ============== ================ ==============
For condensed consolidating balance sheets of the Debtors and non-Debtors as of
December 31, 2002, see Note 1 of Notes to Consolidated Financial Statements in
the Company's Form 10-K for the year ended December 31, 2002.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net sales $ 292.6 $ 10.9 $ 23.6 $ - $ 327.1
------------- ------------- -------------- ---------------- --------------
Costs and expenses -
Operating costs and expenses 342.8 9.9 34.4 - 387.1
Other operating charges, net 15.0 - - - 15.0
------------- ------------- -------------- ---------------- --------------
357.8 9.9 34.4 402.1
------------- ------------- -------------- ---------------- --------------
Operating income (loss) (65.2) 1.0 (10.8) - (75.0)
Interest expense (2.7) - (.2) - (2.9)
All other income (expense), net (11.8) (3.1) .1 2.7 (12.1)
Income tax and minority interests (1.3) (1.2) 3.9 - 1.4
Equity in income of subsidiaries (7.6) - - 7.6 -
------------- ------------- -------------- ---------------- --------------
Income (loss) from continuing operations (88.6) (3.3) (7.0) 10.3 (88.6)
Discontinued operations - - - - -
------------- ------------- -------------- ---------------- --------------
Net income (loss) $ (88.6) $ (3.3) $ (7.0) $ 10.3 $ (88.6)
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net sales $ 309.5 $ 13.1 $ 52.0 $ (26.6) $ 348.0
------------- ------------- -------------- ---------------- --------------
Costs and expenses -
Operating costs and expenses 352.5 5.5 55.8 (26.6) 387.2
Other operating charges, net 24.3 - 1.0 - 25.3
------------- ------------- -------------- ---------------- --------------
376.8 5.5 56.8 (26.6) 412.5
------------- ------------- -------------- ---------------- --------------
Operating income (loss) (67.3) 7.6 (4.8) - (64.5)
Interest expense (2.0) - (.2) - (2.2)
All other income (expense), net (9.6) (3.0) .1 2.5 (10.0)
Income tax and minority interests (2.2) (5.8) 2.4 - (5.6)
Equity in income of subsidiaries (1.2) - - 1.2 -
------------- ------------- -------------- ---------------- --------------
Income (loss) from continuing operations (82.3) (1.2) (2.5) 3.7 (82.3)
Discontinued operations (1.0) - - - (1.0)
------------- ------------- -------------- ---------------- --------------
Net income (loss) $ (83.3) $ (1.2) $ (2.5) $ 3.7 $ (83.3)
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net sales $ 920.2 $ 35.4 $ 82.7 $ (13.4) $ 1,024.9
------------- ------------- -------------- ---------------- --------------
Costs and expenses -
Operating costs and expenses 1,068.9 22.2 118.6 (13.4) 1,196.3
Other operating charges, net 15.6 - - - 15.6
------------- ------------- -------------- ---------------- --------------
1,084.5 22.2 118.6 (13.4) 1,211.9
------------- ------------- -------------- ---------------- --------------
Operating income (loss) (164.3) 13.2 (35.9) - (187.0)
Interest expense (7.6) - (.6) - (8.2)
All other income (expense), net (30.1) (7.5) .8 8.2 (28.6)
Income tax and minority interests (3.9) (8.4) 13.2 - .9
Equity in income of subsidiaries (17.0) - - 17.0 -
------------- ------------- -------------- ---------------- --------------
Income (loss) from continuing operations (222.9) (2.7) (22.5) 25.2 (222.9)
Discontinued operations 7.9 - - - 7.9
------------- ------------- -------------- ---------------- --------------
Net income (loss) $ (215.0) $ (2.7) $ (22.5) $ 25.2 $ (215.0)
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net sales $ 996.2 $ 36.1 $ 156.3 $ (83.7) $ 1,104.9
------------- ------------- -------------- ---------------- --------------
Costs and expenses -
Operating costs and expenses 1,105.9 13.2 170.0 (83.7) 1,205.4
Other operating charges, net 33.4 - 1.0 - 34.4
------------- ------------- -------------- ---------------- --------------
1,139.3 13.2 171.0 (83.7) 1,239.8
------------- ------------- -------------- ---------------- --------------
Operating income (loss) (143.1) 22.9 (14.7) - (134.9)
Interest expense (17.2) - (1.0) - (18.2)
All other income (expense), net (22.7) (8.6) .1 7.6 (23.6)
Income tax and minority interests (5.9) (16.2) 5.0 - (17.1)
Equity in income of subsidiaries (4.9) - - 4.9 -
------------- ------------- -------------- ---------------- --------------
Income (loss) from continuing operations (193.8) (1.9) (10.6) 12.5 (193.8)
Discontinued operations (4.0) - - - (4.0)
------------- ------------- -------------- ---------------- --------------
Net income (loss) $ (197.8) $ (1.9) $ (10.6) $ 12.5 $ (197.8)
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net cash provided (used) by:
Operating activities $ (100.6) $ .1 $ 20.1 $ - $ (80.4)
Investing activities 76.2 (.2) (20.1) - 55.9
Financing activities (4.0) - - - (4.0)
------------- ------------- -------------- ---------------- --------------
Net decrease in cash and cash
equivalents (28.4) (.1) - - (28.5)
Cash and cash equivalents, beginning of
period 75.5 2.1 1.1 - 78.7
------------- ------------- -------------- ---------------- --------------
Cash and cash equivalents, end of period $ 47.1 $ 2.0 $ 1.1 $ - $ 50.2
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net cash provided (used) by:
Operating activities $ (67.2) $ 1.3 $ 23.0 $ - $ (42.9)
Investing activities 15.1 (.6) (22.9) - (8.4)
Financing activities (8.1) - - - (8.1)
------------- ------------- -------------- ---------------- --------------
Net (decrease) increase in cash and cash
equivalents (60.2) .7 .1 - (59.4)
Cash and cash equivalents, beginning of
period 151.6 1.4 .3 - 153.3
------------- ------------- -------------- ---------------- --------------
Cash and cash equivalents, end of period $ 91.4 $ 2.1 $ .4 $ - $ 93.9
============= ============= ============== ================ ==============
Classification of Liabilities as "Liabilities Not Subject to Compromise" Versus
"Liabilities Subject to Compromise." Liabilities not subject to compromise
include: (1) liabilities incurred after the Filing Date of the Cases; (2)
pre-Filing Date liabilities that the Debtors expect to pay in full, including
priority tax and employee claims and certain environmental liabilities, even
though certain of these amounts may not be paid until a plan of reorganization
is approved; and (3) pre-Filing Date liabilities that have been approved for
payment by the Court and that the Debtors expect to pay (in advance of a plan of
reorganization) over the next twelve-month period in the ordinary course of
business, including certain employee related items (salaries, vacation and
medical benefits), claims subject to a currently existing collective bargaining
agreement, and postretirement medical and other costs associated with retirees
(however, see note (2) to the table below).
Liabilities subject to compromise refer to all other pre-Filing Date liabilities
of the Debtors. The amounts of the various categories of liabilities that are
subject to compromise are set forth below. These amounts represent the Company's
estimates of known or probable pre-Filing Date claims that are likely to be
resolved in connection with the Cases. Such claims remain subject to future
adjustments. Further, the Debtors currently believe that it is likely that
substantially all pre-Filing Date claims will be settled at less than 100% of
their face value and the equity of the Company's stockholders will be cancelled
without consideration.
The amounts subject to compromise at September 30, 2003 and December 31, 2002
consisted of the following items:
September 30, December 31,
2003 2002
--------------- ----------------
Items, absent the Cases, that would have been considered current:
Accounts payable $ 50.9 $ 47.6
Accrued interest 44.0 44.0
Accrued salaries, wages and related expenses(1) 159.0 59.0
Other accrued liabilities (including asbestos liability of $130.0 - Note 7) 145.7 150.6
Items, absent the Cases, that would have been considered long-term:
Accrued pension benefits 299.8 362.7
Accrued postretirement medical obligation(2) 661.4 672.4
Long-term liabilities(3) 564.6 559.5
Debt (Note 5) 830.2 830.2
--------------- ----------------
$ 2,755.6 $ 2,726.0
=============== ================
(1) Accrued salaries, wages and related expenses represent estimated minimum
pension contributions that, absent the Cases, would have otherwise been
payable. Amounts for the period ended September 30, 2003 include
approximately $100.0 associated with estimated special liquidity and
other pension contributions that were not made. As previously disclosed,
the Company does not currently expect to make any pension contributions
in respect of its domestic pension plans. See Note 10 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the
year ended December 31, 2002 for additional information about
non-payment of pension contributions.
(2) In August 2003, the Court approved the appointment of the 1114 Committee
with whom the Debtors are discussing necessary changes, including the
modification or termination, of certain salaried retiree benefits (such
as medical and insurance) under Section 1114 of the Code. Separately,
the Debtors are discussing modification or termination of hourly retiree
benefits pursuant to collective bargaining agreements with the
appropriate union representatives. The Company has continued to report
the current portion of accrued postretirement medical obligations as
liabilities not subject to compromise, but this treatment is subject to
change depending on the outcome of the aforementioned discussions and
specific actions by the Company.
(3) Long-term liabilities include environmental liabilities of $43.0 at
September 30, 2003 and $21.7 at December 31, 2002 (Note 7) and asbestos
liabilities of $480.1 at September 30, 2003 and December 31, 2002 (Note
7).
The classification of liabilities "not subject to compromise" versus liabilities
"subject to compromise" is based on currently available information and
analysis. See Note 5 for a discussion of the solid waste disposal revenue bonds
which are currently classified as liabilities not subject to compromise.
However, a portion of the bonds could be reclassified to liabilities subject to
compromise based on the results of an appraisal which the Company is currently
obtaining. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the Company evaluates the proofs of claim
filed in the Cases, adjustments will be made for those claims that the Company
believes will probably be allowed by the Court. The amount of such claims could
be significant.
Reorganization Items. Reorganization items under the Cases are expense or income
items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-Filing Date liabilities. For the quarter and nine-month
periods ended September 30, 2003 and 2002, reorganization items were as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ---------- ------------
Professional fees $ 5.5 $ 8.9 $ 20.7 $ 19.8
Accelerated amortization of certain deferred
financing costs - - - 4.5
Interest income (.2) (.5) (.7) (1.6)
Other .1 .1 .2 1.9
----------- ----------- ---------- ------------
$ 5.4 $ 8.5 $ 20.2 $ 24.6
=========== =========== ========== ============
As required by SOP 90-7, in the first quarter of 2002, the Company recorded the
Debtors' pre-Filing Date debt that is subject to compromise at the allowed
amount. Accordingly, the Company accelerated the amortization of debt-related
premium, discount and costs attributable to this debt and recorded a net expense
of approximately $4.5 in Reorganization items during the first quarter of 2002.
Trust Fund. During the first quarter of 2002, the Company paid $5.8 into a trust
fund in respect of potential liability obligations of directors and officers.
2. GENERAL
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Going Concern. The interim consolidated financial statements of the Company have
been prepared on a "going concern" basis which contemplates the realization of
assets and the liquidation of liabilities in the ordinary course of business;
however, as a result of the commencement of the Cases, such realization of
assets and liquidation of liabilities are subject to a significant number of
uncertainties. Specifically, the interim consolidated financial statements do
not present: (a) the realizable value of assets on a liquidation basis or the
availability of such assets to satisfy liabilities, (b) the amount which will
ultimately be paid to settle liabilities and contingencies which may be allowed
in the Cases, or (c) the effect of any changes that may occur in connection with
the Debtors' capitalizations or operations of the Debtors as a result of a plan
of reorganization. Because of the ongoing nature of the Cases, the discussions
and consolidated financial statements contained herein are subject to material
uncertainties. See Financial Statement Presentation in Note 1 for a discussion
of possible impairment charges as a result of the Company's potential
divestitures of its interests in any or all of its commodities businesses.
Principles of Consolidation. The Company is the principal subsidiary of Kaiser.
Kaiser is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its wholly
owned subsidiaries together own approximately 62% of Kaiser's Common Stock, with
the remaining approximately 38% publicly held.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with GAAP for interim financial information and the rules
and regulations of the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures required by GAAP for
complete financial statements. 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 unless otherwise
noted, necessary for a fair statement of the results for the interim periods
presented.
The preparation of financial statements in accordance with GAAP 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
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 quarter and nine-month periods ended September 30,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate the Company's exposure
to changes in prices for certain of the products which the Company sells and
consumes and, to a lesser extent, to mitigate the Company's exposure to change
in foreign currency exchange rates. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Company's
derivative activities are initiated within guidelines established by management
and approved by the Company's Company's board of directors. Hedging transactions
are executed centrally on behalf of all of the Company's business segments to
minimize transaction costs, monitor consolidated net exposure and allow for
increased responsiveness to changes in market factors.
See Note 2 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2002 and Note 8 for additional information
regarding derivative financial instruments.
3. INVENTORIES
The classification of inventories is as follows:
September 30, December 31,
2003 2002
--------------- ----------------
Finished fabricated aluminum products $ 23.3 $ 28.1
Primary aluminum and work in process 74.9 71.2
Bauxite and alumina 52.2 72.9
Operating supplies and repair and maintenance parts 77.3 82.7
--------------- ----------------
Total $ 227.7 $ 254.9
=============== ================
Substantially all product inventories are stated at last-in, first-out ("LIFO")
cost, not in excess of market. Replacement cost is not in excess of LIFO cost.
4. PACIFIC NORTHWEST SMELTER CURTAILMENTS AND RELATED POWER MATTERS
Future Power Supply. During October 2000, the Company signed a new power
contract with the Bonneville Power Administration ("BPA") under which the BPA,
starting October 1, 2001, was to provide the Company's operations in the State
of Washington with approximately 290 megawatts of power through September 2006.
The contract provided the Company with sufficient power to fully operate the
Company's Trentwood facility, as well as approximately 40% of the combined
capacity of the Company's Mead and Tacoma aluminum smelting operations which
have been curtailed since the last half of 2000.
As a part of the reorganization process, the Company concluded that it was in
its best interest to reject the BPA contract as permitted by the Code. As such,
with the authorization of the Court, the Company rejected the BPA contract on
September 30, 2002. The contract rejection gives rise to a pre-petition claim
(see Note 1). The BPA has filed a proof of claim for approximately $75.0 in
connection with the Cases in respect of the contract rejection. The claim is
expected to be settled in the overall context of the Debtors' plan of
reorganization. Accordingly, any payments that may be required as a result of
the rejection of the BPA contract are expected to only be made pursuant to a
plan of reorganization and upon the Company's emergence from the Cases. The
amount of the BPA claim will be determined either through a negotiated
settlement, litigation or a computation of prevailing power prices over the
contract period. As the amount of the BPA's claim in respect of the contract
rejection has not been determined, no provision has been made for the claim in
the accompanying financial statements. The Company has entered into a rolling
short-term contract with an alternate supplier to provide the power necessary to
operate its Trentwood facility.
In addition to the BPA power contract, the Company had a transmission service
agreement with the BPA under which the BPA transmitted power to the Company's
Mead, Tacoma and Trentwood facilities. In October 2003, with the approval of the
Court, the BPA agreement was restructured. Key aspects of the restructuring
included: (a) the existing transmission service agreement was terminated; (b)
the Company and the BPA entered into two new transmission service agreements
that provide for the transmission of power for the Mead and Trentwood facilities
at reduced transmission costs; and (c) the Company and the BPA agreed that the
BPA would be allowed to file an unsecured pre-Filing Date claim of approximately
$3.2 (which amount has been reflected in Other operating charges, net - see Note
10 in respect of the termination of the existing agreement).
Smelter Operating Rate. In January 2003, the Company announced the indefinite
curtailment of the Mead facility. The curtailment of the Mead facility was due
to the continuing unfavorable market dynamics, specifically unattractive
long-term power prices and weak primary aluminum prices - both of which are
significant impediments for an older smelter with higher-than-average operating
costs. The Mead facility is expected to remain completely curtailed unless and
until an appropriate combination of reduced power prices, higher primary
aluminum prices and other factors occurs. The restart of a portion of the
Company's Mead facility would require the purchase of additional power from
available sources. For the Company to make such a decision, it would have to be
able to purchase such power at a reasonable price in relation to current and
expected market conditions for a sufficient term to justify its restart costs,
which could be significant depending on the number of lines restarted and the
length of time between the shutdown and restart. Given recent primary aluminum
prices and the forward price of power in the Northwest, it is unlikely that the
Company will operate the Mead facility in the near future. If the Company were
to restart all or a portion of its Mead facility, it would take at least three
to six months to reach the full operating rate for such operations, depending
upon the number of lines restarted. Even after achieving the full operating
rate, operating only a portion of the Mead facility would result in
production/cost inefficiencies such that operating results would, at best, be
breakeven to modestly negative at long-term primary aluminum prices. See Note 5
of Notes to Consolidated Financial Statements in the Company's Form 10-K for the
year ended December 31, 2002, for a discussion of the Northwest smelters 2002
impairment charge.
In January 2003, the Court approved the sale of the Tacoma facility to the Port
of Tacoma. The sale closed in February 2003. See Note 9 for additional
discussion on the sale of the Tacoma facility.
5. LONG-TERM DEBT
Debt consists of the following:
September 30, December 31,
2003 2002
- -------------------------------------------------------------------- ---------------- --------------
Secured:
Post-Petition Credit Agreement $ - $ -
8 1/4% Alpart CARIFA Loans due 2007 22.0 22.0
7.6% Solid Waste Disposal Revenue Bonds due 2027 19.0 19.0
Other borrowings (fixed rate) 2.5 2.6
Unsecured (reflected as Liabilities Subject to Compromise):
9 7/8% Senior Notes due 2002, net 172.8 172.8
10 7/8% Senior Notes due 2006, net 225.0 225.0
12 3/4% Senior Subordinated Notes due 2003 400.0 400.0
Other borrowings (fixed and variable rates) 32.4 32.4
---------------- --------------
Total 873.7 873.8
Less - Current portion 1.2 .9
Pre-Filing Date claims included in liabilities
subject to compromise (Note 1) 830.2 830.2
---------------- --------------
Long-term debt $ 42.3 $ 42.7
================ ==============
Post-Petition Credit Agreement. On February 12, 2002, the Company and Kaiser
entered into the DIP Facility with a group of lenders for debtor-in-possession
financing. In March 2003, certain of the Additional Debtors were added as
co-guarantors and the DIP Facility lenders received super-priority status with
respect to certain of the Additional Debtors' assets. The DIP Facility provides
for a secured, revolving line of credit through the earlier of February 13, 2005
(extended from February 12, 2004 in August 2003 as discussed below), the
effective date of a plan of reorganization or voluntary termination by the
Company. Under the DIP Facility, the Company is able to borrow amounts by means
of revolving credit advances and to have issued for its benefit letters of
credit (up to $125.0) in an aggregate amount equal to the lesser of $285.0
(reduced from $300.0 in August 2003 as discussed below) or a borrowing base
relating to eligible accounts receivable, eligible inventory and an amortizing
fixed asset component, reduced by certain reserves, as defined in the DIP
Facility agreement. The DIP Facility is guaranteed by the Company and certain
significant subsidiaries of the Company. Interest on any outstanding borrowings
will bear a spread over either a base rate or LIBOR, at the Company's option. As
of September 30, 2003, $154.3 was available to the Company under the DIP
Facility (of which up to $75.1 could be used for additional letters of credit)
and no borrowings were outstanding under the revolving credit facility.
The DIP Facility requires the Company to comply with certain covenants and
places restrictions on Kaiser's, the Company's and the Company's subsidiaries'
ability to, among other things, incur debt and liens, make investments, pay
dividends, sell assets, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business. During June 2003 and
August 2003, the Company and the DIP Facility lenders completed two amendments.
The first of the two amendments (the fifth amendment to the DIP Facility) was
necessary in order to permit the Company to take certain actions necessary to
facilitate access by Queensland Alumina Limited ("QAL"), the Company's 20%-owned
affiliate, to amounts available to QAL under its financing arrangements, thereby
reducing the Company's and the other owners' funding requirements for QAL. The
Company's share of such additional financings at QAL is $43.0. The fifth
amendment to the DIP Facility was approved by the Court in June 2003. The major
provisions of the second of the two amendments (the sixth amendment to the DIP
Facility) included: (a) an extension of the maturity of the DIP Facility to
February 2005, (b) an increase in the eligible borrowing base amount under the
DIP Facility by, among other things, restoring the amortizing fixed asset
component to the original $100.0 amount as of August 2003, (c) the incorporation
of the May 2003 limited waiver and a further modification of the financial
covenant for periods beginning June 30, 2003, and (d) a reduction of the
commitment amount of the DIP Facility to $285.0. The sixth amendment was
approved by the Court in August 2003.
The DIP Facility contains a number of provisions that address or could be
affected by any asset sales that may result from the possible commodity asset
divestiture program (see Note 1), including provisions that: (a) limit asset
dispositions by the Debtors; (b) limit releases of collateral securing
obligations under the DIP Facility; (c) address the Debtors' use of proceeds
from asset dispositions; (d) impact the determination of the borrowing base and
the amount of commitments under the DIP Facility; and (e) provide for certain
financial provisions. As a result, amendments or modifications to the DIP
Facility would be necessary in connection with any proposed commodity asset
sales. The Debtors will seek the requisite amendments or modifications to the
DIP Facility as required.
The borrowing base under the DIP Facility could be materially affected by any
asset dispositions that are ultimately completed because: (a) the DIP Facility
currently provides that the fixed asset component of the borrowing base is
reduced by the amount of proceeds received from certain asset dispositions (but
not to an amount less than zero); (b) eligible receivables and inventories
related to such assets would no longer be included; and (c) it is unclear to
what extent sales proceeds resulting from any asset sales that may be completed
would be available to the Company or be available to support the borrowing base.
8 1/4% Alpart CARIFA Loans. The Alpart CARIFA financing would have to be repaid
if the Company's interests in Alpart were to be sold (as discussed in Note 1).
Additionally, upon any such payment, the Company's letter of credit obligation
under the DIP Facility securing the loans (see Note 7 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2002) would be cancelled.
7.6% Solid Waste Disposal Revenue Bonds. The 7.6% solid waste disposal revenue
bonds (the "Solid Waste Bonds") are secured by certain (but not all) of the
facilities and equipment at the curtailed Mead facility (see Note 4). Given the
uncertainty regarding the Mead facility's future operations, the Company
currently believes that it is unlikely that the value of the collateral securing
the Solid Waste Bonds will be sufficient for full recovery of the bondholders'
claim. To the extent that the total claim amount exceeds the value of the
collateral, any such excess will represent an unsecured claim subject to
compromise. The Company is currently obtaining an independent appraisal that
will assist it in estimating the value of the collateral securing the Solid
Waste Bonds. No adjustment has been reflected in the accompanying financial
statements to reclassify any amount of claims in excess of the collateral value
from secured debt (i.e. liabilities not subject to compromise) to liabilities
subject to compromise. However, the Company expects that such a reclassification
is likely and that the portion of the claim amount that will be reclassified to
liabilities subject to compromise will be significant.
6. INCOME TAXES
The income tax provisions of $.5 and $7.0 for the quarters ended September 30,
2003 and 2002, respectively, and $4.9 and $21.4 for the nine-month periods ended
September 30, 2003 and 2002, respectively, relate primarily to foreign income
taxes. For the quarter and nine-month periods ended September 30, 2003 and 2002,
as a result of the Cases, the Company did not recognize any U.S. income tax
benefit for the losses incurred from its domestic operations (including
temporary differences) or any U.S. income tax benefit for foreign income taxes.
Instead, the increases in federal and state deferred tax assets as a result of
additional net operating losses and foreign tax credits generated in 2003 and
2002 were fully offset by increases in valuation allowances. See Note 9 of Notes
to Consolidated Financial Statements in the Company's Form 10-K for the year
ended December 31, 2002 for additional information regarding the Deferred Tax
Assets and Valuation Allowances.
In March 2003, the Company paid approximately $22.0 in settlement of certain
foreign tax matters in respect of a number of prior periods.
7. COMMITMENTS AND CONTINGENCIES
Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, claims against a Debtor
arising from actions or omissions prior to its Filing Date will be settled in
connection with the plan of reorganization.
Commitments. The Company has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 8), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, the Company
is unconditionally obligated to pay its proportional share (20%) of debt,
operating costs, and certain other costs of QAL. the Company's share of the
aggregate minimum amount of required future principal payments as of September
30, 2003, was $60.0, which amount matures in varying amounts during the 2005 to
2008 period. The Company's share of QAL's debt increased by approximately $8.0
during the quarter ended September 30, 2003 as the additional draw downs on QAL
financing (the Company's share $40.0) more than offset the Company's share
($32.0) of QAL's debt principal payment. During July 2002, the Company made
payments of approximately $29.5 to QAL to fund the Company's share of QAL's
scheduled debt maturities (see Note 5). The Company's share of payments to QAL,
including operating costs and certain other expenses under the agreements, has
ranged between $95.0 - $103.0 per year over the past three years. The Company
also has agreements to supply alumina to and to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 2002, were as
follows: years ending December 31, 2003 - $15.2; 2004 - $6.2; 2005 - $5.4; 2006
- - $3.1; 2007 - $2.4; thereafter - $3.7. Pursuant to the Code, the Debtors may
elect to reject or assume unexpired pre-petition leases. At this time, no
decisions have been made as to which significant leases will be accepted or
rejected (see Note 1).
Rental expenses were $38.3, $41.0 and $42.5 for the years ended December 31,
2002, 2001 and 2000, respectively.
The Company had a long-term liability, net of estimated subleases income, in
respect of the Kaiser Center office complex in Oakland, California, in which the
Company had not maintained offices for a number of years, but for which it was
responsible for lease payments as master tenant through 2008 under a
sale-and-leaseback agreement. The Company also held an investment in certain
notes issued by the owners of the building (which were included in Other
Assets). In October 2002, the Company entered into a contract to sell its
interests in the office complex. As the contract amount was less than the
asset's net carrying value, the Company recorded a non-cash impairment charge in
2002 of approximately $20.0 (see Note 10). The sale was approved by the Court in
February 2003 and closed in March 2003. Net cash proceeds were approximately
$61.1.
Environmental Contingencies. The Company is subject to a number of environmental
laws, to fines or penalties assessed for alleged breaches of the environmental
laws, and to claims and litigation based upon such laws. The Company currently
is subject to a number of claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities,
has been named as a potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental matters, the
Company has established environmental accruals, primarily related to potential
solid waste disposal and soil and groundwater remediation matters. At September
30, 2003, the balance of such accruals was $82.2 (of which $43.0 was included in
Liabilities subject to compromise - see Note 1). These environmental accruals
represent the Company's estimate of costs reasonably expected to be incurred in
the ordinary course of business based on presently enacted laws and regulations,
currently available facts, existing technology, and the Company's assessment of
the likely remediation action to be taken. In the ordinary course, the Company
expects that these remediation actions would be taken over the next several
years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $8.0 to $12.0 in 2003 and 2004,
$1.0 to $4.0 in 2005 through 2007 and an aggregate of approximately $57.0
thereafter. Approximately $20.2 of the adjustments to the environmental
liabilities in the third quarter of 2003 (see below) that applied to non-owned
property sites has been included in the after 2007 balance because such amounts
are expected to be settled solely in connection with the Debtors' plan of
reorganization.
The September 30, 2003 accrual balance includes approximately $23.2 that was
provided during the third quarter of 2003. Approximately $20.2 of the amount
provided in the third quarter of 2003 relates to the previously disclosed
multi-site settlement agreement with various federal and state governmental
regulatory authorities and other parties in respect of the Company's
environmental exposure at a number of non-owned sites. Under this agreement,
among other things, the Company agreed to claims at such sites totaling $25.6
($20.2 greater than amounts that had previously been accrued for these sites)
and, in return, the governmental regulatory authorities have agreed that such
claims would be treated as pre-Filing Date unsecured claims (i.e. liabilities
subject to compromise). While the Company and the various federal and state
governmental regulatory authorities signed the agreement prior to the issuance
of the June 30, 2003 financial statements, the agreement gave the regulatory
authorities the unilateral right to withdraw their approval until after the
conclusion of a public notice and comment period. Further, the agreement was
also subject to Court approval which was not obtained until October 2003.
Because the agreement was subject to significant modification or termination
until the public comment period lapsed and the Court's approval was obtained,
the Company did not record the charge associated with the agreement until the
third quarter of 2003 as it was not previously believed to be "probable" (which
is the criteria for recognition under GAAP). The Company recorded the portion of
the $20.2 accrual that relates to locations with operations ($15.7) in Other
operating charges, net (see Note 10). The remainder of the accrual ($4.5), which
relates to locations that have not operated for a number of years was recorded
in Other income (expense) (see Note 10).
During September 2003, the Company also provided additional accruals totaling
approximately $3.0 associated with certain Company-owned properties with no
current operations (recorded in Other income (expense) - see Note 10). These
additional accruals resulted primarily from additional cost estimation efforts
undertaken by the Company in connection with its reorganization efforts. The
additional accruals were recorded as liabilities not subject to compromise as
they relate to properties owned by the Company.
As additional facts are developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are established or
alternative technologies are developed, changes in these and other factors may
result in actual costs exceeding the current environmental accruals. The Company
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $17.0 (a majority of which are estimated to
relate to owned sites that are likely not subject to compromise). As the
resolution of these matters is subject to further regulatory review and
approval, no specific assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, the Company is currently working to resolve certain of these matters.
The Company believes that it has insurance coverage available to recover certain
incurred and future environmental costs and may pursue claims in this regard.
However, no amounts have been accrued in the financial statements with respect
to such potential recoveries.
Asbestos Contingencies. The Company has been one of many defendants in a number
of lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with the Company or exposure to products containing asbestos
produced or sold by the Company. The lawsuits generally relate to products the
Company has not sold for more than 20 years. As of the initial Filing Date,
approximately 112,000 claims were pending. The lawsuits are currently stayed by
the Cases.
Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, the Company expects
additional asbestos claims will be filed as part of the claims process. A
separate creditors' committee representing the interests of the asbestos
claimants, the ACC, has been appointed. The Debtors' obligations with respect to
present and future asbestos claims will be resolved pursuant to a plan of
reorganization.
The Company has accrued a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed through 2011. At
September 30, 2003, the balance of such accrual was $610.1, all of which was
included in Liabilities subject to compromise (see Note 1). The Company's
estimate is based on the Company's view, at September 30, 2003, of the current
and anticipated number of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut & Klein, P.A., with
respect to the current state of the law related to asbestos claims. However,
there are inherent uncertainties involved in estimating asbestos-related costs
and the Company's actual costs could exceed the Company's estimates due to
changes in facts and circumstances after the date of each estimate. Further,
while the Company does not presently believe there is a reasonable basis for
estimating asbestos-related costs beyond 2011 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2011, the Company
expects that the plan of reorganization process may require an estimation of the
Company's entire asbestos-related liability, which may go beyond 2011, and that
such costs could be substantial.
The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
carriers exist. The timing and amount of future recoveries from these insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. The Company
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, the Company filed suit in San
Francisco Superior Court against a group of its insurers, which suit was
thereafter split into two related actions. Additional insurers were added to the
litigation in 2000 and 2002. During October 2001 and June 2003, the court ruled
favorably on a number of policy interpretation issues, one of which was affirmed
in February 2002 by an intermediate appellate court in response to a petition
from the insurers. The rulings did not result in any changes to the Company's
estimates of its current or future asbestos-related insurance recoveries. The
trial court may hear additional issues from time to time. Given the expected
significance of probable future asbestos-related payments, the receipt of timely
and appropriate payments from its insurers is critical to a successful plan of
reorganization and the Company's long-term liquidity.
The following tables present historical information regarding the Company's
asbestos-related balances and cash flows:
September 30, December 31,
2003 2002
- --------------------------------------------------------- ----------------- ------------------
Liability $ 610.1 $ 610.1
Receivable (included in Other assets)(1) 466.2 484.0
----------------- ------------------
$ 143.9 $ 126.1
================= ==================
(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that
the Company will be able to project similar recovery percentages for
future asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed the Company's aggregate insurance
coverage. As of September 30, 2003 and December 31, 2002, $6.9 and $24.7,
respectively, of the receivable amounts relate to costs paid. The
remaining receivable amounts relate to costs that are expected to be paid
by the Company in the future.
Nine Months
Ended Inception
September 30, 2003 To Date
- -------------------------------------------------------- ---------------------- ------------------
Payments made, including related legal costs $ - $ (355.7)
Insurance recoveries 17.8 263.2
---------------------- ------------------
$ 17.8 $ (92.5)
====================== ==================
During the pendency of the Cases, all asbestos litigation is stayed. As a
result, the Company does not expect to make any asbestos payments in the near
term. Despite the Cases, the Company continues to pursue insurance collections
in respect of asbestos-related amounts paid prior to its Filing Date.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. Additional asbestos-related claims are likely
to be asserted as a part of the Chapter 11 process. Management cannot at this
time reasonably predict the ultimate number of such claims or the amount of the
associated liability. However, it is likely that such amounts could exceed,
perhaps significantly, the liability amounts reflected in the Company's
consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims through 2011. The Company's obligations in
respect of the currently pending and future asbestos-related claims will
ultimately be determined (and resolved) as a part of the overall Chapter 11
proceedings. It is anticipated that resolution of these matters could be a
lengthy process. Management will continue to periodically reassess its
asbestos-related liabilities and estimated insurance recoveries as the Cases
proceed. However, absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related proceedings or in
the Company's Chapter 11 proceedings, it is not anticipated that the Company
will have sufficient information to reevaluate its asbestos-related obligations
and estimated insurance recoveries until much later in the Cases. Any
adjustments ultimately deemed to be required as a result of the reevaluation of
the Company's asbestos-related liabilities or estimated insurance recoveries
could have a material impact on the Company's future financial statements.
The Company has entered into settlement agreements with several of the insurers
whose asbestos-related obligations are primarily in respect of future asbestos
claims. These settlement agreements were approved by the Court. In accordance
with the Court approval, the insurers are to pay certain amounts, pursuant to
the terms of an escrow agreement, into a fund (the "Escrow Fund") in which the
Company has no interest, but which amounts will be available for the ultimate
settlement of the Company's asbestos-related claims. Because the Escrow Fund is
under the control of the escrow agent, who will make distributions only pursuant
to a Court order, the Escrow Fund is not included in the accompanying
consolidated balance sheet at September 30, 2003. In addition, since neither the
Company nor Kaiser received any economic benefit or suffered any economic
detriment and have not been relieved of any asbestos-related obligation as a
result of the receipt of the escrow funds, neither the asbestos-related
receivable or the asbestos-related liability have been adjusted as a result of
these transactions. As of September 30, 2003, the insurers had paid $7.6 into
the Escrow Fund. It is possible that settlements with additional insurers will
occur. However, no assurance can be given that such settlements will occur.
Labor Matters. In connection with the United Steelworkers of America ("USWA")
strike and subsequent lock-out by the Company, which was settled in September
2000, certain allegations of unfair labor practices ("ULPs") were filed with the
National Labor Relations Board ("NLRB") by the USWA. As previously disclosed,
the Company has responded to all such allegations and believes that they were
without merit. Twenty-two of twenty-four allegations of ULPs previously brought
against the Company by the USWA have been dismissed. A trial before an
administrative law judge for the two remaining allegations concluded in
September 2001. In May 2002, the administrative law judge ruled against the
Company in respect of the two remaining ULP allegations and recommended that the
NLRB award back wages, plus interest, less any earnings of the workers during
the period of the lockout. The administrative law judge's ruling did not contain
any specific amount of proposed award and is not self-executing. The USWA has
filed a proof of claim for $240.0 in the Cases in respect of this matter. The
NLRB also filed a proof of claim in respect of this matter for $117.0, including
interest of approximately $18.0. However, the Company was recently notified that
the NLRB had revised its estimate of its claim to $213.0. Depending on the
ultimate amount of any interest due and amount of offsetting employee earnings
and other factors, if the USWA ultimately were to prevail it is possible that
the amount of the award could exceed $200.0. It is also possible that the
Company may ultimately prevail on appeal and that no loss will occur.
The Company continues to believe that the allegations are without merit and will
vigorously defend its position. The Company has appealed the ruling of the
administrative law judge to the full NLRB. The general counsel of the NLRB and
the USWA have cross-appealed. Any outcome from the NLRB appeal would be subject
to additional appeals in a United States Circuit Court of Appeals by the general
counsel of the NLRB, the USWA or the Company. This process could take several
years. Because the Company believes that it may prevail in the appeals process,
the Company has not recognized a charge in response to the adverse ruling.
However, it is possible that, if the Company's appeal(s) are not ultimately
successful, a charge in respect of this matter may be required in one or more
future periods and the amount of such charge(s) could be significant.
This matter is not currently stayed by the Cases. However, as previously stated,
seeing this matter to its ultimate outcome could take several years. Further,
any amounts ultimately determined by a court to be payable in this matter will
be dealt with in the overall context of the Debtors' plan of reorganization and
will be subject to compromise. Accordingly, any consideration that may
ultimately be required in respect of this matter would only be paid upon or
after the Company's emergence from the Cases.
Other Contingencies. The Company or Kaiser is involved in various other claims,
lawsuits, and other proceedings relating to a wide variety of matters related to
past or present operations. While uncertainties are inherent in the final
outcome of such matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
In conducting its business, the Company uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. The Company enters into
hedging transactions from time to time to limit its exposure resulting from (1)
its anticipated sales of alumina, primary aluminum, and fabricated aluminum
products, net of expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices for natural gas, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign subsidiaries and
affiliates. As the Company's hedging activities are generally designed to
lock-in a specified price or range of prices, gains or losses on the derivative
contracts utilized in the hedging activities generally offset at least a portion
of any losses or gains, respectively, on the transactions being hedged.
2003. The following table summarizes the Company's material derivative positions
at September 30, 2003.
Estimated %
Notional of Periods Carrying/
Amount of Sales/Purchases Market
Commodity Period Contracts Hedged Value
- ------------------------------------ ------------------- --------------- ------------------- ---------------
Aluminum (in tons*) -
Option contracts 10/03 through 12/03 54,000 96% $ 1.9
Energy -
Fuel Oil (in barrels per month):
Option contracts 10/03 through 12/03 230,000 100% .2
Natural gas (in mmbtu per day):
Option contracts 10/03 through 11/03 50 96% .3
In October 2003, the Company purchased additional option contracts which cap the
price that the Company would have to pay for approximately 25% of its fuel oil
requirements for January, February and March 2004 and approximately 25% of its
natural gas requirements for December 2003. During October, the Company also
purchased option contracts that established a floor for approximately one-fourth
of its product sales that are linked to January, February and March 2004 primary
aluminum prices.
The Company anticipates that, subject to prevailing economic conditions, it may
enter into additional hedging transactions with respect to primary aluminum
prices, natural gas and fuel oil prices and foreign currency values to protect
the interests of its constituents. However, no assurance can be given as to when
or if the Company will enter into such additional hedging activities.
As of September 30, 2003, the Company had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for the balance of 2003 and a vast majority of such alumina in 2004
and 2005 at prices indexed to future prices of primary aluminum.
2002. Because the agreements underlying the Company's hedging positions provided
that the counterparties to the hedging contracts could liquidate the Company's
hedging positions if the Company filed for reorganization, the Company chose to
liquidate these positions in advance of the Filing Date. Proceeds from the
liquidation totaled approximately $42.2. A net gain of $23.3 associated with
these liquidated positions was deferred and is being recognized over the period
during which the underlying transactions to which the hedges related are
expected to occur. The net gain upon liquidation consisted of: gains of $30.2
for aluminum contracts and losses of $5.0 for Australian dollars and $1.9 for
energy contracts. As of September 30, 2003, the remaining unamortized amount was
approximately a net loss of $2.0.
9. DISCONTINUED OPERATIONS
The Company has previously disclosed that, in connection with the development of
a plan of reorganization, it conducted a study of the long-term competitive
position of the Mead and Tacoma facilities and potential options for these
facilities. When the Company received the preliminary results of the study, it
analyzed the findings and met with the USWA and other parties prior to making
its determination as to the appropriate action(s). The outcome of the study and
the Company's ongoing work on developing a plan of reorganization led the
Company to conclude that the Tacoma facility, whose aluminum smelting operations
had been curtailed since the last half of 2000, could not compete with the much
larger, newer and more efficient smelters, generally located outside the United
States. As a result, the Company entered into an agreement, which was approved
by the Court in January 2003, to sell the Tacoma facility to the Port of Tacoma
(the "Port"). Gross proceeds from the sale, before considering approximately
$4.0 of proceeds being held in escrow pending the resolution of certain
environmental and other issues, were approximately $12.1. The Port also agreed
to assume the on-site environmental remediation obligations. The sale closed in
February 2003. The sale resulted in a pre-tax gain of approximately $9.5. In
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), the
operating results of the Tacoma facility for the quarter and nine-month periods
ended September 30, 2003 and 2002 and the gain from the sale of the Tacoma
facility have been reported as discontinued operations in the accompanying
Statements of Consolidated Income (Loss). The balances and operating results
associated with the Tacoma facility were previously included in the Primary
Aluminum business segment.
- ---------------
* All references to tons in this report refer to metric tons of 2,204.6 pounds.
10. OTHER OPERATING CHARGES AND OTHER INCOME (EXPENSE)
Other Operating (Charges) Benefits, Net. The income (loss) impact associated
with other operating (charges) benefits, net for the quarter and nine-month
periods ended September 30, 2003 and 2002, was as follows (the business segment
to which the item is applicable is indicated):
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ---------- ------------
Restructuring charges -
Primary Aluminum $ - $ (1.0) $ (1.3) $ (2.7)
Bauxite & Alumina - - (.1) (1.9)
Fabricated Products - (2.8) - (6.7)
Impairment charges -
Primary Aluminum - (3.4) - (3.4)
Eliminations - Intersegment profit elimination on Primary
Aluminum inventory charge - 1.9 - 1.9
Corporate - Kaiser Center Office Complex (Note 7) - (20.0) - (20.0)
Restructured transmission service agreement - Primary
Aluminum (Note 4) (3.2) - (3.2) -
Environmental multi-site settlement - Corporate (Note 7) (15.7) - (15.7) -
Gain on sale of equipment, net - Fabricated Products 3.9 - 3.9 -
Product lines exit charge - Fabricated Products - - - (1.6)
Other - - .8 -
----------- ----------- ---------- ------------
$ (15.0) $ (25.3) $ (15.6) $ (34.4)
=========== =========== ========== ============
Restructuring Charges -
Restructuring charges in 2003 consist of employee benefit costs associated with
approximately 20 job eliminations (all of which have been eliminated) during the
first half of 2003 resulting primarily from the Primary aluminum business
segment's Mead facility's indefinite curtailment (see Note 4 ). Restructuring
charges in 2002 resulted from initiatives designed to increase operating cash
flow, generate cash from inventory reduction and improve the Company's financial
flexibility. These initiatives resulted in restructuring charges in the third
quarter of 2002 of employee benefit and related costs of $3.8 associated with
140 job eliminations. Restructuring charges for the 2002 year-to-date period
consisted of $9.4 of employee benefit and related costs associated with 200 job
eliminations and $1.9 of third party costs associated with cost reduction
initiatives. All of the positions had been eliminated by the end of 2002.
Impairment Charges -
Impairment charges at the Primary aluminum business segment in 2002 included a
third quarter charge of $3.4 to write-down certain alumina inventories at the
Company's Northwest smelters to their net realizable values. The charge at
Primary Aluminum was partially offset by a $1.9 benefit in the Eliminations
segment representing the elimination of deferred intersegment profit included in
the Primary aluminum inventory charge.
Other (Charges) Credits -
In July 2003, with Court approval, the Company sold certain equipment at the
Trentwood flat rolled products facility that was no longer required as a part of
past product rationalizations. Proceeds from the sale were approximately $7.0,
resulting in a net gain of approximately $5.0 after considering sale related
costs. The gain on the sale of this equipment has been netted against additional
impairment charges of approximately $1.1 associated with equipment to be
abandoned or otherwise disposed of primarily as a result of product
rationalizations. The equipment that was sold in July 2003 had been impaired to
a zero basis in the fourth quarter of 2001. The impairment was based on
information available at that time and the expectation that proceeds from the
eventual sale of the equipment would be fully offset by sale related costs to be
borne by the Company (see Note 5 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 2002 for additional
information regarding the 2001 Trentwood impairment charge).
The product line exit charge in 2002 relates to a $1.6 LIFO inventory charge
which resulted from the Fabricated products segment's exit from the lid and tab
stock and brazing sheet product lines.
Other Income (Expense). Other income (expense), other than interest expense, for
the quarter and nine-month periods ended September 30, 2003, included
adjustments to the environmental liabilities of approximately $7.5. Other income
(expense), other than interest expense, for the nine-month period ended
Septembe