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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1993
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.)
6177 Sunol Boulevard, Pleasanton, California 94566-7769
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510)
462-1122
Securities registered pursuant to Section 12(b) of the
Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Cumulative Convertible Preference
Stock (par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock
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,
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
As of March 21, 1994, there were 46,171,365 shares of the common
stock of the registrant outstanding, all of which were owned by
Kaiser Aluminum Corporation, the parent corporation of the
registrant. As of March 21, 1994, non-affiliates of the
registrant held 794,473 shares of Cumulative (1985 Series A)
Preference Stock and 139,863 shares of Cumulative (Series B)
Preference Stock of the registrant. The aggregate value of the
Cumulative (1985 Series A) Preference Stock and the Cumulative
(1985 Series B) Preference Stock, based upon the redemption price
for such stock, is $46.7 million.
Certain portions of the registrant's definitive proxy statement
to be filed not later than 120 days after the close of the
registrant's fiscal year are incorporated by reference into Part
III of this Report on Form 10-K.
===============================================================
N O T E
Kaiser Aluminum & Chemical Corporation's Report on Form 10-K
filed with the Securities and Exchange Commission includes all
exhibits required to be filed with the Report. Copies of this
Report on Form 10-K, including only Exhibit 21 of the exhibits
listed on pages 73-78 of this Report, are available without
charge upon written request. The registrant will furnish copies
of the other exhibits to this Report on Form 10-K upon payment of
a fee of 25 cents per page. Please contact the office set forth
below to request copies of this Report on Form 10-K and for
information as to the number of pages contained in each of the
other exhibits and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
6177 Sunol Boulevard
Pleasanton, California 94566-7769
(i)
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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T A B L E O F C O N T E N T S
Page
----
PART I. . .. . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS.. . .. . .. . . . .. . . 1
ITEM 2. PROPERTIES . .. . .. . .. . .. . .. . . 14
ITEM 3. LEGAL PROCEEDINGS .. . .. . .. . .. . . 14
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.. . . . . 18
PART II.. .. . . . . . . . . . . . . . . . 18
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS. . .. . .. . .. . .. . .. . . 18
ITEM 6. SELECTED FINANCIAL DATA. .. .. . . 19
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS . .. . .. . .. . .. . . 20
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA . .. . .. . .. . . 31
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE .. . .. . .. . .. . .. . . 70
PART III. .. . . . . . . . . . . . . . . . 70
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT . . . . . . . . 70
ITEM 11. EXECUTIVE COMPENSATION . . . . . . 70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . 70
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS. . . . . . . 70
PART IV. . . .. . .. . .. . .. . .. . .. . .. . . 70
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . 70
SIGNATURES . .. . .. . .. . .. . .. . .. . .. . . 72
INDEX OF EXHIBITS. .. . .. . .. . .. . .. . .. . . 73
EXHIBIT 21 . .. . .. . .. . .. . .. . .. . .. . . 79
(ii)
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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PART I
ITEM 1. BUSINESS
Industry Overview
Primary aluminum is produced by the refining of bauxite (the
major aluminum-bearing ore) into alumina (the intermediate
material) and the reduction of alumina into primary aluminum.
Approximately two pounds of bauxite are required to produce one
pound of alumina, and approximately two pounds of alumina are
required to produce one pound of primary aluminum. Aluminum s
valuable physical properties include its light weight, corrosion
resistance, thermal and electrical conductivity, and high tensile
strength.
Demand
The packaging and transportation industries are the principal
consumers of aluminum in the United States, Japan, and Western
Europe. In the packaging industry, which accounted for
approximately 22% of consumption in 1992, aluminum s
recyclability and weight advantages have enabled it to gain
market share from steel and glass, primarily in the beverage
container area. The aluminum packaging market in the United
States, Japan, and Western Europe grew at a rate of approximately
4.0% per year during the period 1982-1992, and total United
States aluminum beverage can shipments increased at a rate of
approximately 2.5% in 1993, 1.5% in 1992, and 3.9% in 1991.
Nearly all beer cans and approximately 95% of the soft drink cans
manufactured for the United States market are made of aluminum.
Despite the flat demand currently being experienced in the can
stock market, growth in the packaging area is generally expected
to continue in the 1990s due to general population increase and
to further penetration of the beverage can market in Western
Europe and Japan, where aluminum cans are a substantially lower
percentage of the total beverage container market than in the
United States.
In the transportation industry, which accounted for approximately
28% of aluminum consumption in the United States, Japan, and
Western Europe in 1992, automotive manufacturers use aluminum
instead of steel or copper for an increasing number of
components, including radiators, wheels, and engines, in order to
meet more stringent environmental and fuel efficiency
requirements through vehicle weight reduction. Management
believes that sales of aluminum to the transportation industry
have considerable growth potential due to projected increases in
the use of aluminum in automobiles. According to industry
sources, aluminum content in United States automobiles nearly
doubled in the last 15 years to an average of 191 pounds per
vehicle and the amount of aluminum consumed in the manufacture of
Japanese automobiles more than doubled from 1983 to 1990.
Management believes that the use of aluminum in automobiles in
the United States and Japan will approximately double between
1991 and 2006.
Supply
As of year-end 1993, Western world aluminum capacity from 109
smelting facilities was approximately 16.4 million tons* per
year. Net exports of aluminum from the Commonwealth of
Independent States (the "C.I.S.") increased substantially from
1990 levels during the period from 1991 through 1993 and have
contributed to a significant increase in London Metal Exchange
stocks of primary aluminum.
- --------------------
* All references to tons in this Report refer to metric tons of
2,204.6 pounds.
- 1 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
Based upon information currently available, Kaiser Aluminum &
Chemical Corporation (the "Company") believes that only moderate
additions will be made during 1994-1995 to Western world alumina
and primary aluminum production capacity; however, due to the
decline of primary aluminum prices since January 1, 1991, and
other factors, curtailments or permanent shutdowns have been
announced, to management's knowledge, with respect to
approximately three million tons of primary aluminum production
capacity. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Trends." The increases in
alumina capacity during 1994-1995 will come from incremental
expansions of existing refineries and not from new plants, which
generally require a four to five-year design, engineering, and
construction period.
Recent Industry Trends
The aluminum industry has been cyclical and market prices of
alumina and primary aluminum have been volatile from time to
time. During 1989, tight supply conditions for alumina and strong
demand for primary aluminum resulted in unusually high spot
prices for alumina. During 1990, a moderate surplus of alumina
supply developed due to new alumina production from two
facilities restarted in prior years (including the Company s
Alpart refinery) and increased production at other refineries.
Furthermore, curtailments of primary aluminum production in
response to declining ingot prices have increased the surplus of
alumina supply. Since 1990, spot prices of alumina have declined
substantially due to these factors and slow economic growth in
major aluminum consuming countries. Contract prices for
deliveries of alumina in 1993 were in a lower range than the
ranges applicable during the past several years. As a result of
these factors and the continuing expansion of existing alumina
refineries during 1992-1993, the current surplus of alumina is
expected to continue.
During 1989 and 1990, primary aluminum smelters throughout the
world operated at near capacity levels. This factor, combined
with increased production from smelter capacity additions during
1989 and 1990, resulted in a reduction of the market price of
primary aluminum from 1988 peak prices. Additions to smelter
capacity in 1991, 1992, and 1993, continued high operating rates
in the Western world, and slow economic growth in major aluminum
consuming countries, as well as exports from the C.I.S. have
contributed to an oversupply of primary aluminum and a
significant increase in primary aluminum inventories in the
world. If Western world production and exports from the C.I.S.
continue at current levels, primary aluminum inventory levels are
expected to increase further in 1994. The foregoing factors have
contributed to a significant reduction in the market price of
primary aluminum, and may continue to adversely affect the market
price of primary aluminum in the future. The average price of
primary aluminum was at historic lows in real terms for the year
ended 1993. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends."
Government officials from the European Union, the United States,
Canada, Norway, Australia, and the Russian Federation met in a
multilateral conference in January 1994 to discuss the current
excess global supply of primary aluminum. All participants have
ratified as a trade agreement the resulting Memorandum which
provides, in part, for (i) a reduction in Russian Federation
primary aluminum production by 300,000 tons per year within three
months of the date of ratification of the Memorandum and an
additional 200,000 tons within the following three months, (ii)
improved availability of comprehensive data on Russian aluminum
production, and (iii) certain assistance to the Russian aluminum
industry. A Russian Federation Trade Ministry official has
publicly stated that the output reduction would remain in effect
for 18 months to two years, provided that other worldwide
production cutbacks occur, existing trade restrictions on
aluminum are eliminated, and no new trade restrictions on
aluminum are imposed. The Memorandum does not require specific
levels of production cutbacks by other producing nations. The
Memorandum was finalized at a second meeting of the participants
held at the end of February 1994.
- 2 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
The Company
General
The Company is a direct subsidiary of Kaiser Aluminum Corporation
("Kaiser") and is an indirect subsidiary of MAXXAM Inc.
("MAXXAM"). The Company operates in all principal aspects of the
aluminum industry the mining of bauxite, the refining of
bauxite into alumina, the production of primary aluminum from
alumina, and the manufacture of fabricated (including
semi-fabricated) aluminum products. In addition to the
production utilized by the Company in its operations, the Company
sells significant amounts of alumina and primary aluminum in the
domestic and international markets. In 1993, the Company
produced approximately 2,826,600 tons of alumina, of which
approximately 71% was sold to third parties, and produced 436,200
tons of primary aluminum, of which approximately 56% was sold to
third parties. The Company is also a major domestic supplier of
fabricated aluminum products. In 1993, the Company shipped
approximately 373,200 tons of fabricated aluminum products to
third parties, which accounted for approximately 6% of the total
tonnage of United States domestic shipments in 1993. A majority
of the Company's fabricated products are used by customers as
components in the manufacture and assembly of finished end-use
products.
The following table sets forth total shipments and intracompany
transfers of the Company's alumina, primary aluminum, and
fabricated aluminum operations:
Year Ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
(in thousands of tons)
ALUMINA:
Shipments to Third Parties 1,997.5 2,001.3 1,945.9
Intracompany Transfers 807.5 878.2 884.2
PRIMARY ALUMINUM:
Shipments to Third Parties 242.5 355.4 340.6
Intracompany Transfers 233.6 224.4 199.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 373.2 343.6 314.2
Business Strategy
The Company has made significant changes in the mix of products
sold to customers by disposing of selected assets, restarting and
increasing its percentage ownership interest in the Alumina
Partners of Jamaica ("Alpart") alumina refinery, and increasing
production of alumina at Gramercy, Louisiana, and Queensland
Alumina Limited ("QAL") in Australia. The percentage of the
Company's alumina production sold to third parties increased
from
approximately 35% in 1987 to approximately 71% in 1993, and the
percentage of its primary aluminum production sold to third
parties increased from approximately 20% in 1987 to approximately
56% in 1993.
The Company has concentrated its fabricated products operations
on the beverage container market (which historically has been
recession-resistant); high value-added, heat-treated sheet and
plate products for the aerospace industry; hubs, wheels and other
products for the truck, trailer and shipping container industry;
parts for air bag canisters and other automotive components; and
distributor markets for a variety of semifabricated aluminum
products. Since January 1,
- 3 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
1989, the Company has constructed four new fabrication facilities
and has modernized and expanded others, with the objective of
reducing manufacturing costs and expanding sales in selected
product markets in which the Company has production expertise,
high-quality capability, and geographic and other competitive
advantages.
The Company has taken steps to control and reduce costs, improve
the efficiency and increase the capacity of its alumina and
primary aluminum production and fabricating operations, modernize
its facilities, and streamline and decentralize its management
structure to reduce corporate overhead and shift decision-making
and accountability to its business units. In October 1993, the
Company announced that it is restructuring its flat-rolled
products operation at its Trentwood plant in Spokane, Washington,
to reduce that facility's annual operating costs. This effort is
in response to overcapacity in the aluminum rolling industry,
flat demand in the U. S. can stock market, and declining demand
for aluminum products sold to customers in the commercial
aerospace industry, all of which have resulted in declining
prices in Trentwood's key markets. The Trentwood restructuring
is
expected to result in annual cost savings of at least $50.0
million after it has been fully implemented (which is expected to
occur by the end of 1995). See "- Production Operations -
Fabricated Products - Flat-Rolled Products."
Primary aluminum production at the Company's Mead and Tacoma
smelters was curtailed in 1993 because of a power reduction
imposed by the Bonneville Power Administration (the "BPA") which
reduced the operating rates for those smelters. See "- Primary
Aluminum Products". Furthermore, the Company announced on
February 24, 1994, that it will curtail approximately 9.3% of its
annual production capacity currently available from its primary
aluminum smelters.
The Company has also attempted to lessen its exposure to possible
future declines in the market prices of alumina and primary
aluminum by entering into fixed and variable rate power and fuel
supply contracts, and a labor contract with the United
Steelworkers of America (the "USWA") which provides for semi-
variable compensation with respect to approximately 73% of the
Company's domestic hourly work force. See "- Production
Operations" and " Employees."
Sensitivity to Prices and Hedging Programs
The Company's earnings are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and
also depend to a significant degree upon the volume and mix of
all products sold by the Company. Through its variable cost
structures, forward sales, and hedging programs, the Company has
attempted to mitigate its exposure to possible further declines
in the market prices of alumina and primary aluminum while
retaining the ability to participate in favorable pricing
environments that may materialize. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Trends Sensitivity to Prices and Hedging Programs."
Production Operations
The Company's operations are conducted through the Company s
decentralized business units which compete throughout the
aluminum industry.
o The Alumina Business Unit, which mines bauxite and obtains
additional bauxite tonnage under long-term contracts,
produced approximately 8% of Western world alumina in 1993.
During 1993, the Company utilized approximately 82% of its
bauxite production at its alumina refineries and the
remainder was either sold to third
- 4 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
parties or tolled into alumina by a third party. In addition,
during 1993 the Company utilized approximately 29% of its alumina
for internal purposes and sold the remainder to third parties.
The Company's share of total Western world alumina capacity was
8% in 1993.
o The Primary Aluminum Products Business Unit operates two
domestic smelters wholly owned by the Company and two foreign
smelters in which the Company holds significant ownership
interests. In 1993, the Company utilized approximately 44% of
its primary aluminum for internal purposes and sold the
remainder to third parties. The Company's share of total
Western world primary aluminum capacity was 3% in 1993.
o Fabricated products are manufactured by three Business Units
Flat-Rolled Products, Extruded Products (including rod and
bar), and Forgings which manufacture a variety of
fabricated products (including body, lid, and tab stock for
beverage containers, sheet and plate products, screw machine
stock, redraw rod, forging stock, truck wheels and hubs, air
bag canisters, and other forgings and extruded products) and
operate plants located in principal marketing areas of the
United States and Canada. Substantially all of the primary
aluminum utilized in the Company's fabricated products
operations is obtained internally, with the balance of the
metal utilized in its fabricated products operations obtained
from scrap metal purchases. In 1993, the Company shipped
approximately 373,200 tons of fabricated aluminum products to
third parties, which accounted for approximately 6% of the
total tonnage of United States domestic fabricated shipments
for such year.
Alumina
--------
The following table lists the Company's bauxite mining and
alumina refining facilities as of December 31, 1993:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- -------- -------- -------- --------- ------------ ----------
(tons) (tons)
Bauxite Mining KJBC (1) Jamaica 49% 4,500,000 4,500,000
Alpart (2) Jamaica 65% 2,275,000 3,500,000
--------- ---------
6,775,000 8,000,000
========= =========
Alumina Refining Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
--------- ---------
2,877,000 5,750,000
========= =========
- --------------------
(1) Although the Company owns 49% of Kaiser Jamaica
Bauxite Company, it has the right to receive all of such
entity's output.
(2) Alpart bauxite is refined into alumina at the Alpart
refinery.
Bauxite mined in Jamaica by Kaiser Jamaica Bauxite Company
("KJBC") is refined into alumina at the Company's plant at
Gramercy, Louisiana, or is sold to third parties. In 1979, the
Government of Jamaica granted the Company a mining lease
- 5 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
for the mining of bauxite sufficient to supply the Company s
then-existing Louisiana alumina refineries at their annual
capacities of 1,656,000 tons per year until January 31, 2020.
Alumina from the Gramercy plant is sold to third parties. The
Company has entered into a series of medium-term contracts for
the supply of natural gas to the Gramercy plant. The price of
such gas varies based upon certain spot natural gas prices, with
floor and ceiling prices applicable to approximately one-half of
the delivered gas. The Company has, however, established a fixed
price for a portion of the delivered gas through a hedging
program.
Alpart holds bauxite reserves and owns an alumina plant located
in Jamaica. The Company has a 65% interest in Alpart and Hydro
Aluminium a.s ("Hydro") owns the remaining 35% interest. The
Company has management responsibility for the facility on a fee
basis. The Company and Hydro have agreed to be responsible for
their proportionate shares of Alpart's costs and expenses.
Alpart
began a program of modernization and expansion of its facilities
in 1991. As a part of that program, the capacity of the Alpart
alumina refinery has been increased to 1,450,000 tons per year as
of December 31, 1992. In 1981, the Government of Jamaica granted
Alpart a mining lease covering bauxite reserves sufficient to
operate the Alpart plant until December 31, 2019. In connection
with the expansion program, the Alpart partners have entered into
an agreement with the Government of Jamaica designed to assure
that sufficient reserves of bauxite will be available to Alpart
to operate its refinery, as it has been expanded and as it may be
expanded through the year 2024 (to a capacity of 2,000,000 tons
per year).
In mid-1990, Alpart entered into a five-year agreement for the
supply of substantially all of its fuel oil, the refinery s
primary energy source. In February 1992, the term of this
agreement was extended to 1996 and the quantity of fuel oil to be
supplied was increased. The price for 80% of the initial
quantity remains fixed at a price which prevailed in the fourth
quarter of 1989; the price for 80% of the increased quantity is
fixed at a negotiated price; and the price for the balance of the
initial and increased quantities was based upon certain spot fuel
oil prices plus transportation costs. Alpart has purchased all
of the quantities of fuel oil which could be purchased based upon
certain spot fuel oil prices under both the initial and extended
agreements.
The Company holds a 28.3% interest in QAL, which owns the largest
and one of the most efficient alumina refineries in the world,
located in Queensland, Australia. QAL refines bauxite into
alumina, essentially on a cost basis, for the account of its
stockholders pursuant to long-term tolling contracts. The
stockholders, including the Company, purchase bauxite from
another QAL stockholder pursuant to long-term supply contracts.
The Company has contracted to take approximately 751,000 tons per
year of capacity or pay standby charges. The Company is
unconditionally obligated to pay amounts calculated to service
its share ($73.6 million at December 31, 1993) of certain debt of
QAL, as well as other QAL costs and expenses, including bauxite
shipping costs. QAL's annual production capacity is
approximately 3,300,000 tons, of which approximately 934,000 tons are
availableto the Company.
The Company's principal customers for bauxite and alumina
consistof large and small domestic and international aluminum producers
that purchase bauxite and reduction-grade alumina for use in
their internal refining and smelting operations and trading
intermediaries who resell raw materials to end-users. In 1993,
the Company sold all of its bauxite to one customer, and sold
alumina to 13 customers, the largest and top five of which
accounted for approximately 22% and 79% of such sales,
respectively. Among alumina producers, the Company believes it is
now the world's second largest seller of alumina to third
parties. The Company's strategy is to sell a substantial portion
of the bauxite and alumina available to it in excess of its
internal refining and smelting requirements pursuant to forward
sales contracts. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends -
Sensitivity to Prices and Hedging Programs". Marketing and sales
efforts are conducted by executives of the Alumina Business Unit
and the Company.
- 6 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
Primary Aluminum Products
- -------------------------
The following table lists the Company's primary aluminum
smelting
facilities as of December 31, 1993:
Annual Rated Total
Capacity Annual 1993
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- -------- -------- --------- ------------ -------- --------
(tons) (tons)
Domestic
Washington Mead 100% 200,000 200,000 80%
Washington Tacoma 100% 73,000 73,000 77%
------- -------
Subtotal 273,000 273,000
------- -------
International
Ghana Valco 90% 180,000 200,000 88%
Wales, United Kingdom Anglesey 49% 55,000 112,000 112%
------- -------
Subtotal 235,000 312,000
------- -------
Total 508,000 585,000
======= =======
The Company owns two smelters located at Mead and Tacoma,
Washington, where alumina is processed into primary aluminum. The
Mead facility uses pre-bake technology and produces primary
aluminum, almost all of which is used at the Company's Trentwood
fabricating facility and the balance of which is sold to third
parties. The Tacoma plant uses Soderberg technology and produces
primary aluminum and high-grade, continuous-cast, redraw rod,
which currently commands a premium price in excess of the price
of primary aluminum. Both smelters have achieved significant
production efficiencies in recent years through retrofit
technology, cost controls, and semi-variable wage and power
contracts, leading to increases in production volume and
enhancing their ability to compete with newer smelters. At the
Mead plant, the Company has converted to welded anode assemblies
to increase energy efficiency, reduced the number of anodes used
in the smelting process, changed from pencil to liquid pitch to
produce carbon anodes which achieved environmental and operating
savings, and engaged in efforts to increase production through
the use of improved, higher-efficiency reduction cells.
Electrical power represents an important production cost for the
Company at its Mead and Tacoma smelters. The electricity supply
contracts between the BPA and the Company expire in 2001. The
electricity contracts between the BPA and its direct service
industry customers (which consist of 15 energy intensive
companies, principally aluminum producers, including the Company)
permit the BPA to interrupt up to 25% of the amount of power
which it normally supplies to such customers. Both the Mead and
Tacoma plants operated at approximately full rated capacity
during 1991-1992, but operated at less than rated capacity
throughout 1993. As a result of drought conditions, in January
1993 the BPA reduced the amount of power it normally supplies to
its direct service industry customers. In response to such
reduction, the Company removed three reduction potlines from
production (two at the Mead smelter and one at the Tacoma
smelter) and purchased substitute power in the first quarter of
1993 at increased costs. Despite the temporary availability of
such power through July 1993, the Company operated its Mead and
Tacoma smelters at the reduced operating rates introduced in
January 1993, and operated its Trentwood fabrication facility
without any curtailment of its production. The Company currently
anticipates that in 1994, the Company will operate the Mead and
Tacoma smelters at rates which do not exceed the current
operating rates of 75% of full capacity for such smelters. The
BPA has recently notified its direct service industry customers
that it intends to restore full power through July 31, 1994.
- 7 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
Through June 1996, the Company pays for power on a basis which
varies, within certain limits, with the market price of primary
aluminum, and thereafter the Company will pay for power at
variable rates to be negotiated. During 1993, the Company paid
for power under its power supply contract with the BPA at the
floor rate. Effective October 1, 1993, an increase in the base
rate the BPA charges to its direct service industry customers for
electricity was adopted which will increase the Company s
production costs at the Mead and Tacoma smelters by approximately
$15.0 million per year (approximately $9.1 million per year based
on the Company's current operating rate of approximately 75% of
full capacity). The rate increase generally is expected to remain
in effect for two years. In the event that the BPA's revenues
fall below certain levels prior to April 1994, the BPA may impose
up to a 10% surcharge on the base rate it charges to its direct
service industry customers, effective during the period from
October 1994 through October 1995 (which would increase the
Company's production costs at the Mead and Tacoma smelters by
approximately $9.1 million per year based on the Company s
current operating rate of approximately 75% of full capacity). In
addition, in order to comply with certain federal laws and
regulations applicable to endangered fish species, the BPA may be
required in the future to reduce its power generation and to
purchase substitute power (at greater expense) from other
sources.
The Company manages, and holds a 90% interest in, the Volta
Aluminum Limited ("Valco") aluminum smelter in Ghana. The Valco
smelter uses pre-bake technology and processes alumina supplied
by the Company and the other participant into primary aluminum
under long-term tolling contracts which provide for proportionate
payments by the participants in amounts intended to pay not less
than all of Valco's operating and financing costs. The Company s
share of the primary aluminum is sold to third parties. Power
for the Valco smelter is supplied under an agreement which
expires in 1997, subject to Valco's right to extend the
agreement
for 20 years. The agreement indexes the price of two-thirds of
the contract quantity to the market price of primary aluminum and
fixes the price for the remainder. The agreement also provides
for a review and adjustment of the base power rate and the price
index every five years. The Valco smelter restarted production
early in 1985 after being closed for more than two years due to
lack of rainfall and the resultant hydroelectricity shortage. The
Company believes that there has been sufficient rainfall and
water storage such that an adequate supply of electricity for the
Valco plant at its current operating rate is probable for at
least one year.
The Company has a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility at Holyhead,
Wales. The Anglesey smelter uses pre-bake technology. The Company
supplies 49% of Anglesey's alumina requirements and purchases
49%
of Anglesey's aluminum output. The Company sells its share of
Anglesey's output to third parties. Power for the Anglesey
aluminum smelter is supplied under an agreement which expires in
2001.
The Company has developed and installed proprietary retrofit
technology in all of its smelters. This technology which
includes the redesign of the cathodes and anodes that conduct
electricity through reduction cells, improved "feed" systems that
add alumina to the cells, and a computerized system that controls
energy flow in the cells enhances the Company's ability to
compete more effectively with the industry's newer smelters. The
Company is actively engaged in efforts to license this technology
and sell technical and managerial assistance to other producers
worldwide, and may participate in joint ventures or similar
business partnerships which employ the Company's technical and
managerial knowledge. Pursuant to various arrangements, the
Company's technology has been installed in aluminum smelters
located in West Virginia, Ohio, Missouri, Kentucky, Sweden,
Germany, India, Australia, New Zealand, Ghana, the C.I.S., and
the United Kingdom. See " Research and Development".
The Company's principal primary aluminum customers consist of
large trading intermediaries and metal brokers, who resell
primary aluminum to fabricated product manufacturers, and large
and small international aluminum fabricators. In 1993, the
Company sold the approximately 56% of its primary aluminum
production not utilized for internal purposes to approximately 50
customers, the largest and top five of which accounted for
approximately 44% and 64% of such sales, respectively. Marketing
and sales efforts are conducted by a small staff located at the
business unit's headquarters in
- 8 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 1. BUSINESS (continued)
Pleasanton, California, and by senior executives of the Company
who participate in the structuring of major sales transactions. A
majority of the business unit's sales are based upon long-term
relationships with metal merchants and end-users.
Fabricated Products
-------------------
The Company manufactures and markets fabricated aluminum products
for the packaging, transportation, construction, and consumer
durables markets in the United States and abroad. Sales in these
markets are made directly and through distributors to a large
number of customers, both domestic and foreign. In 1993, seven
domestic beverage container manufacturers constituted the leading
customers for the Company's fabricated products and accounted
for
approximately 19% of the Company's sales revenue.
The Company's fabricated products compete with those of numerous
domestic and foreign producers and with products made with steel,
copper, glass, plastic, and other materials. Product quality,
price, and availability are the principal competitive factors in
the market for fabricated aluminum products. The Company has
refocused its fabricated products operations to concentrate on
selected products in which the Company has production expertise,
high quality capability, and geographic and other competitive
advantages.
Flat-Rolled Products The Flat-Rolled Products Business Unit,
the largest of the Company's fabricated products businesses,
operates the Trentwood sheet and plate mill at Spokane,
Washington. The Trentwood facility is the Company's largest
fabricating plant and accounted for substantially more than one-
half of the Company's 1993 fabricated products shipments. The
business unit supplies the beverage container market (producing
body, lid, and tab stock), the aerospace market, and the tooling
plate, heat-treated alloy and common alloy coil markets, both
directly and through distributors. The Company announced in
October 1993 that it is restructuring its flat-rolled products
operation at its Trentwood plant to reduce that facility's
annual
operating costs. This effort is in response to overcapacity in
the aluminum rolling industry, flat demand in the U.S. can stock
market, and declining demand for aluminum products sold to
customers in the commercial aerospace industry, all of which have
resulted in declining prices in Trentwood's key markets. The
Trentwood restructuring is expected to result in annual cost
savings of at least $50.0 million after it has been fully
implemented (which is expected to occur by the end of 1995). In
connection with the restructuring, Trentwood completed an
organizational streamlining that included a reduction of
approximately 80 salaried employees. In addition, the Company
has reached an agreement with the USWA that will reduce the total
number of hourly employees at Trentwood by approximately 300
employees, or about 25%, by the end of 1995. The agreement with
the USWA also includes a commitment by the Company to spend up to
$50.0 million of capital at Trentwood over three years, provided
that goals on cost reduction and profitability are met or
exceeded.
The Company's flat-rolled products are sold primarily to
beverage
container manufacturers located in the western United States
where the Company has a transportation advantage. Quality of
products for the beverage container industry, timeliness of
delivery, and price are the primary bases on which the Company
competes. The Company believes that the Company's capital
improvements at Trentwood have enhanced the quality of the
Company's products for the beverage container industry and the
capacity and efficiency of the Company's manufacturing
operations. The Company believes that it is one of the highest
quality producers of aluminum beverage can stock in the world.
In 1993, the Flat-Rolled Products Business Unit had 22 foreign
and domestic can stock customers, the majority of which were
beverage can manufacturers (including seven of the eight major
domestic beverage can manufacturers) and the balance of which
were brewers. The largest and top five of such customers
accounted for approximately 25% and 56%, respectively, of the
business unit's sales revenue. In 1993, the business unit
shipped
products to over 200 customers in the aerospace, transportation,
and industrial ("ATI") markets, most of which were distributors
who sell
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 1. BUSINESS (continued)
to a variety of industrial end-users. The top five customers in
the ATI markets for flat-rolled products accounted for
approximately 10% of the business unit's sales revenue. The
marketing staff for the Flat-Rolled Products Business Unit is
headquartered in Pleasanton, California, and is also located at
the Trentwood facility. Sales are made directly to customers
(including distributors) from ten sales offices located
throughout the United States. International customers are served
by a sales office in the Netherlands and by independent sales
agents in Asia and Latin America. See also "MANAGEMENT S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Trends - Sensitivity to Prices and Hedging Programs
- - Aluminum Processing" for a discussion of demand for fabricated
products in the aerospace market.
Extruded Products The Extruded Products Business Unit is
headquartered in Dallas, Texas, and operates soft-alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs,
California; Sherman, Texas; and London, Ontario, Canada; a
cathodic protection business located in Tulsa, Oklahoma, that
also extrudes both aluminum and magnesium; and rod and bar
facilities in Newark, Ohio, and Jackson, Tennessee, which produce
screw machine stock, redraw rod, forging stock, and billet. Each
of the soft-alloy extrusion facilities has fabricating
capabilities and provides finishing services. The Extruded
Products Business Unit's major markets are in the transportation
industry, to which it provides extruded shapes for automobiles,
trucks, trailers, cabs, and shipping containers, and
distribution, durable goods, defense, building and construction,
ordnance, and electrical markets. In 1993, the Extruded Products
Business Unit had over 900 customers for its products, the
largest and top five of which accounted for approximately 6% and
19%, respectively, of its sales revenue. Sales are made directly
from plants as well as marketing locations across the United
States.
Forgings The Forgings Business Unit operates forging facilities
at Erie, Pennsylvania; Oxnard, California; and Greenwood, South
Carolina; and a machine shop at Greenwood, South Carolina. The
Forgings Business Unit is one of the largest producers of
aluminum forgings in the United States and is a major supplier of
high-quality forged parts to customers in the automotive,
commercial vehicle, and ordnance markets. The high strength-to-
weight properties of forged aluminum make it particularly well
suited for automotive applications. The Forgings Business Unit
entered the castings business by purchasing the assets of Winters
Industries, which supplies cast aluminum engine manifolds to the
automobile, truck, and marine markets. The casting production
facilities include two foundries and a machining facility in
Ohio. The Company has recently implemented a plan to discontinue
its castings operations at these facilities. See "MANAGEMENT S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Results of Operations Aluminum Processing". In
1993, the Forgings Business Unit had over 500 customers for its
products, the largest and top five of which accounted for
approximately 20% and 57%, respectively, of the Forgings Business
Unit's sales revenue. The Forgings Business Unit's headquarters
is located in Erie, Pennsylvania, and additional sales,
marketing, and engineering groups are located in the midwestern
and western United States.
Competition
Aluminum products compete in many markets with steel, copper,
glass, plastic, and numerous other materials. Within the aluminum
business, the Company competes with both domestic and foreign
producers of bauxite, alumina, and primary aluminum, and with
domestic and foreign fabricators. The Company's principal
competitors in the sale of alumina include Alcoa of Australia
Ltd., Billiton International Metals B.V., Clarendon Ltd., and
Pechiney S.A. In addition to the foregoing, the Company competes
with most aluminum producers in the production of primary
aluminum. Many of the Company's competitors have greater
financial resources than the Company. In addition, the C.I.S. has
been supplying large quantities of primary aluminum to the
Western world.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
Primary aluminum and, to some degree, alumina are commodities
with generally standard qualities, and competition in the sale of
these commodities is based primarily upon price, quality, and
availability. The Company believes that, assuming the current
relationship between worldwide supply and demand for alumina and
primary aluminum does not change materially, the loss of any one
of its customers, including intermediaries, would not have a
material adverse effect on its business or operations.
The Company also competes with a wide range of domestic and
international fabricators in the sale of fabricated aluminum
products. Competition in the sale of fabricated products is based
upon quality, availability, price, and service, including
delivery performance. The Company concentrates its fabricating
operations on selected products in which the Company has
production expertise, high quality capability, and geographic and
other competitive advantages.
Research and Development
The Company conducts research and development activities
principally at three facilities dedicated to that purpose the
Center for Technology ("CFT") in Pleasanton, California; the
Primary Aluminum Products Division Technology Center ("DTC")
adjacent to the Mead smelter in Washington; and the Alumina
Development Laboratory ("ADL") at the Gramercy, Louisiana
refinery. Net expenditures for Company-sponsored research and
development activities were $18.5 million in 1993, $13.5 million
in 1992, and $11.4 million in 1991. The Company's research staff
totaled 160 at December 31, 1993. The Company estimates that
research and development net expenditures will be in the range of
approximately $17 - $19 million in 1994.
CFT concentrates its research and development efforts on flat-
rolled products while providing specialized services to the
Company's other business units. Its activities include
development of can stock products and aircraft sheet and plate
products, and process improvements directed at efficiency and
quality. In can stock, CFT works to optimize the product s
metallurgy, surface characteristics, coatings, and lubrication.
CFT also offers research and development, technical services, and
selected proprietary technology for license or sale to third
parties. CFT provided technology and technical assistance to
Samyang Metal Co. Ltd. in building an aluminum rolling mill in
Yongju, Korea. CFT also is engaged in cooperative research and
development projects with Furukawa Electric Co., Ltd., Pechiney
Rhenalu, and Kawasaki Steel Corporation of Japan, with respect to
the ground transportation market.
DTC maintains specialized laboratories and a miniature carbon
plant where experiments with new anode and cathode technology are
performed. DTC supports the Company's primary aluminum smelters,
concentrating on the development of cost-effective technical
innovations and equipment and process improvements. Energy
savings of approximately 10% have been achieved at smelters
utilizing proprietary DTC developed technologies (which are
employed in both retrofit and new construction applications),
such as improved cathode and anode design and insulation,
modified electrolyte chemistry, distributive microprocessor
control, and modified cell magnetics. Other proprietary DTC
retrofit technologies, such as redesigned reduction cells, have
helped the Company's older smelters achieve competitiveness with
more recently constructed facilities. The Company is actively
engaged in efforts to license this technology and sell technical
and managerial assistance to other producers worldwide. Pursuant
to various arrangements, the Company's technology has been
installed in aluminum smelters located in West Virginia, Ohio,
Missouri, Kentucky, Sweden, Germany, India, Australia, New
Zealand, Ghana, and the United Kingdom.
The Company has entered into agreements with respect to the
Krasnoyarsk smelter located in Russia pursuant to which it has
licensed certain of its technology for use in such facility and
agreed to provide purchasing services in obtaining western-
sourced technology and equipment to be used in such facility.
These agreements were entered into in November 1990, and the
services under them are expected to be completed in 1994. In
addition, the Company has entered into
- 11 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
agreements with respect to the Nadvoitsy smelter located in
Russia and the Korba smelter of the Bharat Aluminum Co. Ltd.,
located in India, pursuant to which the Company has licensed
certain of its technology for use in such facilities. The
agreements relating to the Nadvoitsy and Korba smelters were
entered into in 1993, and the services under such agreements are
expected to be completed in 1995 and 1994, respectively.
ADL has developed technologies which have improved alumina
refinery efficiency. These include a high capacity thickener
process used in the separation of alumina from bauxite slurry,
plant conversion designs that enable alumina refineries to
convert from the production of fine alumina to the preferred
coarser "sandy" alumina, technology that enables refineries to
process different qualities of bauxite, and computer-aided
instrumentation systems to improve process efficiencies and
energy use in alumina refineries. The Company is actively
pursuing the licensing of alumina refinery technology worldwide.
The Company's technology is in use in alumina refineries in the
Americas, Australia, India, and Europe.
The Company's technology sales and revenue from technical
assistance to third parties were $12.8 million in 1993, $14.1
million in 1992, and $10.9 million in 1991.
Employees
During 1993, the Company employed an average of approximately
10,220 persons, compared with an average of approximately 10,130
employees in 1992, and approximately 9,970 employees in 1991. At
December 31, 1993, the Company's work force was approximately
10,029, including a domestic work force of approximately 5,930,
of whom approximately 4,150 were paid at an hourly rate. Most
hourly paid domestic employees are covered by collective
bargaining agreements with various labor unions. Approximately
73% of such employees are covered by a master agreement (the
"Labor Contract") with the USWA which expires on October 31,
1994. The Labor Contract covers the Company's plants in Spokane
(Trentwood), Mead, and Tacoma, Washington; Gramercy, Louisiana;
and Newark, Ohio.
The Labor Contract provides for floor level wages at all covered
plants. In addition, for workers covered by the Labor Contract at
the Mead and Newark plants, for any quarterly period when the
average Midwest U.S. transaction price of primary aluminum is
$.54 per pound or above, a bonus payment is made. The amount of
the quarterly bonus payment changes incrementally with each full
cent change in the price of primary aluminum between $.54 per
pound and $.61 per pound, remains constant when the price is $.61
or more per pound but is below $.74 per pound, changes
incrementally again with each full cent change in the price
between $.74 per pound and $.81 per pound, and remains at the
ceiling when the price is $.81 per pound or more. Workers covered
by the Labor Contract at the Trentwood, Tacoma, and Gramercy
plants may receive quarterly bonus payments based on various
indices of productivity, efficiency, and other aspects of
specific plant performance, as well as, in certain cases, the
price of alumina or primary aluminum. The particular quarterly
bonus variable compensation formula currently applicable at each
plant will remain applicable for the remainder of the contract
term.
Pursuant to the Labor Contract, base wage rates were raised $.50
per hour in 1990 and were raised an additional $.50 per hour
effective November 1, 1993. Each of the employees covered by the
Labor Contract has received $2,000 in lump-sum signing and
special bonuses. In addition, in the first quarter of 1991 the
Company acquired up to $4,000 of preference stock held in the
stock bonus plan for the benefit of approximately 80% of the
employees covered by the Labor Contract, and in February 1994
acquired an additional $2,000 of such preference stock held in
the stock bonus plan for the benefit of substantially the same
employees. In the first quarter of 1991, the Company also
acquired up to $4,000 of preference stock which had been held for
the benefit of each of certain
- 12 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
salaried employees, and in February 1994 acquired an additional
$2,000 of such preference stock held in the stock bonus plan for
the benefit of substantially the same employees. The February
1994 acquisitions of preference stock were in the aggregate
amount of $5.4 million. The Company considers its employee
relations to be satisfactory.
Environmental Matters
The Company is subject to a wide variety of international, state,
and local environmental laws and regulations ("Environmental
Laws") which continue to be adopted and amended. The
Environmental Laws regulate, among other things, air and water
emissions and discharges; the generation, storage, treatment,
transportation, and disposal of solid and hazardous waste; the
release of hazardous or toxic substances, pollutants and
contaminants into the environment; and, in certain instances, the
environmental condition of industrial property prior to transfer
or sale. In addition, the Company is subject to various federal,
state, and local workplace health and safety laws and regulations
("Health Laws").
From time to time, the Company is subject, with respect to its
current and former operations, to fines or penalties assessed for
alleged breaches of the Environmental and Health Laws and to
claims and litigation brought by federal, state or local agencies
and by private parties seeking remedial or other enforcement
action under the Environmental and Health Laws or damages related
to alleged injuries to health or to the environment, including
claims with respect to certain waste disposal sites and the
remediation of sites presently or formerly operated by the
Company. See " LEGAL PROCEEDINGS." The Company is currently
subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of
1986 ("CERCLA"). The Company, along with several other entities,
has been named as a Potentially Responsible Party ("PRP") for
remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA and, in certain instances,
may be exposed to joint and several liability for those costs or
damages to natural resources.
The Company's Mead, Washington facility has been listed on the
National Priorities List under CERCLA. In addition, in connection
with certain of its asset sales, the Company has indemnified the
purchasers of assets with respect to certain liabilities (and
associated expenses) resulting from acts or omissions arising
prior to such dispositions, including environmental liabilities.
While the ultimate extent of the Company's liability for pending
or potential fines, penalties, remedial costs, claims, and
litigation relating to environmental and health and safety
matters cannot be determined at this time and, in light of
evolving case law relating to insurance coverage for
environmental claims, management is unable to determine
definitively the extent of such coverage, management currently
believes that the resolution of these matters (even without
giving effect to potential insurance recovery) should not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
Environmental capital spending was $12.6 million in 1993, $13.1
million in 1992, and $11.2 million in 1991. Annual operating
costs for pollution control, not including corporate overhead or
depreciation, were approximately $22.4 million in 1993, $21.6
million in 1992, and $17.8 million in 1991. Legislative,
regulatory, and economic uncertainties make it difficult to
project future spending for these purposes. However, the Company
currently anticipates that in the 1994-1995 period, environmental
capital spending will be within the range of approximately $7
$20.0 million per year, and operating costs for pollution control
will be within the range of $20.0 - $22.0 million per year. These
expenditures will be made to assure compliance with applicable
Environmental Laws and are expected to include, among other
things, additional "red mud" disposal facilities and improved
levees at the Gramercy, Louisiana refinery (which are being
financed by the industrial revenue bonds); bath crushing
improvements, baking furnace modernization, and
- 13 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 1. BUSINESS (continued)
improved calcining controls at the Mead, Washington facility; new
and continuing environmental projects at the Trentwood,
Washington facility; and environmental projects required under
the Clean Air Act Amendments of 1990. In addition, $7.2 million
in cash expenditures in 1993, $9.6 million in 1992, and $14.0
million in 1991 were charged to previously established reserves
relating to environmental cost. Approximately $7.0 million is
expected to be charged to such reserves in 1994.
Note 10 of the Notes to the Consolidated Financial Statements
contained in the Company's 1993 Annual Report to Shareholders
(the "Annual Report") is incorporated herein by reference.
ITEM 2. PROPERTIES
The locations and general character of the principal plants,
mines, and other materially important physical properties
relating to the Company's operations are described in "ITEM 1.
BUSINESS," and those descriptions are incorporated herein by
reference. The Company owns in fee or leases all the real estate
and facilities used in connection with its business. Plants and
equipment and other facilities are generally in good condition
and suitable for their intended uses, subject to changing
environmental requirements. Although the Company's domestic
aluminum smelters and alumina facility were initially designed
early in the Company's history, they have been modified
frequently over the years to incorporate technological advances
in order to improve efficiency, increase capacity, and achieve
energy savings. The Company believes that its domestic plants are
cost competitive on an international basis. Due to the Company s
variable cost structure, the plants operating costs are
relatively lower in periods of low primary aluminum prices and
relatively higher in periods of high primary aluminum prices.
The Company's obligations under the Credit Agreement entered into
on February 17, 1994, which replaced the Company's prior credit
agreement, are secured by, among other things, mortgages on the
Company's major domestic plants (other than the Gramercy alumina
plant). See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Financial Condition and
Capital Spending."
ITEM 3. LEGAL PROCEEDINGS
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund
National Priorities List, is composed of five separate sites
around the town of Aberdeen, North Carolina. These sites
(collectively, the "Sites") include the Farm Chemicals Site, Twin
Sites, Fairway Six Site, McIver Dump Site and the Route 211 Site.
The Sites are of concern to the United States Environmental
Protection Agency (the "EPA") because of their past use as either
pesticide formulation facilities or pesticide disposal areas from
approximately the mid 1930s through the late 1980s.
The United States originally filed a cost recovery complaint (as
amended, the "Complaint") in the United States District Court for
the Middle District of North Carolina, Rockingham Division, No.
C-89-231-R, against five defendants on March 31, 1989, and
subsequently amended its complaint to add another ten defendants
on February 6, 1991, and another four defendants on August 1,
1991. The Company was not a named defendant in the Complaint. The
Complaint seeks reimbursement for past and future response costs
and a determination of liability of the defendants
- 14 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS (continued)
under Section 107 of CERCLA. On or about October 2, 1991, the
Company, along with approximately 17 other parties, was served
with third party complaints from four of the defendants named in
the Complaint (the "Third Party Plaintiffs") alleging claims
arising under various theories of contribution and indemnity. On
October 22, 1992, the United States filed a motion for leave to
file an amended complaint naming the Company as a first party
defendant in its cost recovery action. On February 16, 1993, the
court granted that motion.
The EPA has performed a Remedial Investigation/Feasibility Study
and issued a Record of Decision ("ROD") dated September 30, 1991,
for the Sites. The major remedy selected for the five Sites in
the ROD consisted of excavation of contaminated soil, treatment
of the contaminated soil at a single location utilizing thermal
treatment, and placement of the treated material back into the
areas of excavation. The estimated cost of such remedy for the
five Sites is approximately $32 million. Other possible remedies
described in the ROD included on-site incineration and on-site
ash disposal at an estimated cost of approximately $53 million,
and off-site incineration and disposal at an estimated cost of
approximately $222 million. The Company understands that the EPA
is also investigating contamination of groundwater at the Sites.
The EPA has stated that it has incurred past costs at the Sites
in the range of $7.5 - $8 million as of February 9, 1993, and
alleges that response costs will continue to be incurred in the
future.
On May 20, 1993, the EPA issued three unilateral Administrative
Orders under Section 106(a) of CERCLA ordering the respondents,
including the Company, to perform the remedial design and
remedial action described in the ROD for the Farm Chemicals Site
(EPA Docket No. 93-13-C), Twin Sites (EPA Docket No. 93-14-C) and
Fairway Six Site (EPA Docket No. 93-15-C). The estimated cost as
set forth in the ROD for the remedial action at the three Sites
is approximately $27 million. In addition to the Company,
respondents named in the Administrative Orders for all three
Sites include J.M. Taylor, Grower Service Corporation, E.I.
DuPont de Nemours & Co., Olin Corporation, UCI Holdings, Inc.,
PPG Industries, Inc., and Union Carbide Corporation. Ciba-Geigy
Corporation, Hercules, Inc., Mobil Oil Corporation, Shell Oil
Company, The Boots Company (USA), Inc., Nor-Am Chemical Co.,
George D. Anderson, Farm Chemicals, Inc., Partners In The Pits,
Ltd., Dan F. Maples, Pits Management Corp., Maples Golf
Construction, Inc., Yadco of Pinehurst, Inc., and Robert Trent
Jones are named as Respondents for one or two of the Sites.
The Company has entered into an Agreement in Principle with
certain of the respondents to participate jointly in responding
to the Administrative Orders, to share costs incurred on an
interim basis, and to seek to reach a final allocation of costs
through agreement or to allow such final allocation and
determination of liability to be made by the United States
District Court. A definitive PRP Participation Agreement is
currently awaiting execution by the group. By letter dated July
6, 1993, the Company has notified the EPA of its ongoing
participation with such group of respondents which, as a group,
are intending to comply with the Administrative Orders to the
extent consistent with applicable law.
By letters dated December 30, 1993, the EPA notified the Company
of its potential liability for, and requested that the Company,
along with certain other companies, undertake or agree to
finance, groundwater remediation at certain of the Sites. With
respect to the Farm Chemicals and Twin Sites, in addition to the
Company, the EPA issued such letters to J.M. Taylor, Grower
Services Corporation, Farm Chemicals, Inc., E.I. DuPont de
Nemours and Company, Olin Corporation, UCI Holdings, Inc., Union
Carbide Corporation, Miles, Inc., Mobil Oil Corporation, Shell
Oil Company, Hercules, Inc., The Boots Company (USA), Inc., Nor-
Am Chemical Company, and Ciba-Geigy Corporation. With respect to
the Fairway Six Site, in addition to the Company, the EPA issued
such letters to J.M. Taylor, G.D. Anderson, Grower Service
Corporation, Partners in Pits, Dan Maples, Pits Management
Corporation, Maples Golf Construction, Inc., Yadco of Pinehurst
Inc., Robert Trent Jones, E.I. DuPont de Nemours and Company,
Olin Corporation, UCI Holdings, Inc., Union Carbide Corporation,
Miles, Inc., Ciba-Geigy Corporation, and Hercules, Inc. The ROD-
selected remedy for the groundwater remediation selected by the
EPA includes extraction, on site treatment by coagulation,
flocculation,
- 15 -
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS (continued)
precipitation, air stripping, GAC absorption, and discharge on
site for the Farm Chemicals/Twin Sites and extraction, on-site
treatment by GAC absorption and discharge on-site for the Fairway
Six Site. The EPA has estimated the total present worth cost,
including 30 years of operation and maintenance, at $11,849,757.
The Company, along with other notified parties, plans to meet
with representatives of the EPA to discuss whether an agreement
to perform this remediation is possible.
Based upon the information presently available to it, the Company
is unable to determine whether the Company has any liability with
respect to any of the Sites or, if there is any liability, the
amount thereof. Two government witnesses have testified that the
Company acquired pesticide products from the operator of the
formulation site over a two to three year period. The Company has
been unable to confirm the accuracy of this testimony.
United States of America v. Kaiser Aluminum & Chemical
Corporation
On February 8, 1989, a civil action was filed by the United
States Department of Justice at the request of the EPA against
the Company in the United States District Court for the Eastern
District of Washington, Case No. C-89-106-CLQ. The complaint
alleged that emissions from certain stacks at the Company s
Trentwood facility in Spokane, Washington intermittently violated
the opacity standard contained in the Washington State
Implementation Plan ("SIP"), approved by the EPA under the
federal Clean Air Act. The complaint sought injunctive relief,
including an order that the Company take all necessary action to
achieve compliance with the Washington SIP opacity limit and the
assessment of civil penalties of not more than $25,000 per day.
In the course of the litigation, questions arose as to whether
the observers who recorded the alleged exceedances were qualified
under the Washington SIP to read opacity. In July 1990, the
Company and the Department of Justice agreed to a voluntary
dismissal of the action. At that time, however, the EPA had
arranged for increased surveillance of the Trentwood facility by
consultants and the EPA's personnel. From May 1990 through May
1991, these observers recorded approximately 130 alleged
exceedances of the SIP opacity rule. Justice Department
representatives have stated their intent to file a second lawsuit
against the Company based on the opacity observations recorded
during that period.
The second lawsuit has not yet been filed. Instead, the Company
has entered into negotiations with the EPA to resolve the claims
against the Company through a consent decree. Although the EPA
and the Company have made substantial progress in negotiating the
terms of the consent decree, key issues remain to be resolved.
Anticipated elements of any settlement would include a commitment
by the Company to improve the emission control equipment at the
Trentwood facility and a civil penalty assessment against the
Company, in an amount to be determined.
At this time, the Company cannot predict the likelihood that the
EPA and the Company will reach an agreement upon the terms of a
consent decree. In the event that the negotiations are not
successful the matter likely would be resolved in federal court.
Catellus Development Corporation v. Kaiser Aluminum & Chemical
Corporation and James L. Ferry & Son, Inc.
On January 7, 1991, the City of Richmond, et al. (the
"Plaintiffs") filed a Second Amended Complaint for Damages and
Declaratory Relief against the United States of America, the
United States Maritime Administration and Santa Fe Land
Corporation (now known as Catellus Development Corporation
("Catellus")) (collectively, the "Defendants") alleging, among
other things, that the Defendants caused or allowed hazardous
substances, pollutants, contaminants, debris, and other solid
wastes to be discharged, deposited, disposed of or released on
certain property located in Richmond, California (the "Property")
formerly owned by Catellus and leased to (i) the Company for the
purpose of
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 3. LEGAL PROCEEDINGS (continued)
shipbuilding activities conducted by the Company on behalf of the
United States during World War II, and (ii) subsequent tenants
thereafter. Plaintiffs allege, among other things, that (i) the
Defendants are jointly and severally liable for response costs
and natural resources damages under CERCLA, (ii) Defendant United
States of America is liable on grounds of negligence for damages
under the Federal Tort Claims Act, and (iii) Defendant Catellus
is strictly liable on grounds of negligence for such discharge,
deposit, disposal or release. Certain of the Plaintiffs have
alleged that they had incurred or expect to incur costs and
damages in the amount of approximately $49 million, in the
aggregate.
On or about September 23, 1992, the Plaintiffs filed a Third
Amended Complaint, alleging, among other things, that (i) the
Defendants are jointly and severally liable for response costs,
declaratory relief, and natural resources damages under CERCLA;
(ii) Defendant United States of America is liable on grounds of
negligence, continuing trespass and continuing nuisance for
damages under the Federal Tort Claims Act; (iii) Defendant
Catellus is strictly liable on grounds of continuing nuisance,
continuing trespass, and negligence for such discharge, deposit,
disposal or release; (iv) Catellus is liable to indemnify
Plaintiffs; and (v) Catellus is liable for fraudulent concealment
of the alleged contamination.
On February 20, 1991, Catellus filed a third party complaint (the
"Third Party Complaint") against the Company and James L. Ferry &
Son, Inc. ("Ferry") in the United States District Court for the
Northern District of California, Case No. C-89-2935 DLJ. The
Third Party Complaint was served on the Company as of April 12,
1991. The Third Party Complaint alleges that, if the allegations
of the Plaintiffs are true, then the Company and Ferry (which is
alleged to have performed certain excavation activities on the
Property and, as a result thereof, to have released contaminants
on the Property and to have arranged for the transportation,
treatment, and disposal of such contaminants) are liable for
Catellus response costs and damages under CERCLA and damages
under other theories of negligence and nuisance and, in the case
of the Company, waste. Catellus seeks (i) contribution from the
Company and Ferry, jointly and severally, for its costs and
damages pursuant to CERCLA; (ii) indemnity from the Company and
Ferry for any liability or judgment imposed upon it; (iii)
indemnity from the Company and Ferry for reasonable attorneys
fees and costs incurred by it; (iv) damages for the injury to its
interest in the Property; and (v) treble damages from the Company
pursuant to California Code of Civil Procedure Section 732. On
June 4, 1991, Catellus served on the Company a first amended
third party complaint which alleges, in addition to the
allegations of the Third Party Complaint, that the Company and/or
a predecessor in interest to the Company is also liable for
Catellus damages, if any, on the basis of alleged contractual
indemnities contained in certain former leases of the Property.
The Third Party Complaint was amended on or about October 26,
1992. The amended Third Party Complaint alleges that, if the
allegations of the Plaintiffs are true, then the Company and
Ferry are liable for (i) Catellus response costs and natural
resources damage under CERCLA; (ii) damages under theories of
negligence, trespass and nuisance; (iii) indemnity (equitable and
contractual); and (iv) attorneys fees under California Code of
Civil Procedure Section 1021.6.
By letter dated October 26, 1992, counsel for certain
underwriters at Lloyd's London and certain London Market
insurance companies ("London Insurers") advised that the London
Insurers agreed to reimburse the Company for defense expenses in
the third party action filed by Catellus, subject to a full
reservation of rights.
The Plaintiffs filed a motion for leave to file a Third Amended
Complaint which would have added the Company as a first party
defendant. This motion was denied. On October 26, 1992, the
Plaintiffs served a separate Complaint against the Company for
damages and declaratory relief. The claims asserted by the
Plaintiffs are for (i) recovery of costs, natural resources
damages, and declaratory relief under CERCLA; (ii) damages for
injury to the Property arising from negligence;
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 3. LEGAL PROCEEDINGS (continued)
(iii) damages under a theory of strict liability; (iv) continuing
nuisance and continuing trespass; (v) equitable indemnity; (vi)
response costs incurred by the Richmond Redevelopment Agency
under California Health & Safety Code Section 33459.4; and (vii)
declaratory relief on the state claims. This matter has been
tendered to the London Insurers.
Picketville Road Landfill Matter
On July 1, 1991, the EPA served on the Company and 13 other PRPs
a Unilateral Administrative Order For Remedial Design and
Remedial Action (the "Order") at the Picketville Road Landfill
site in Jacksonville, Florida. The EPA seeks remedial design and
remedial action pursuant to CERCLA from some, but apparently not
all, PRPs based upon a Record of Decision outlining remedial
cleanup measures to be undertaken at the site adopted by the EPA
on September 28, 1990. The site was operated as a municipal and
industrial waste landfill from 1968 to 1977 by the City of
Jacksonville. The Company was first notified by the EPA on
January 17, 1991, that wastes from one of the Company's plants
may have been transported to and deposited in the site. In its
Record of Decision, the EPA estimated that the total capital,
operations, and maintenance costs of its elected remedy for the
site would be approximately $9.9 million. In addition, the EPA
has reserved the right to seek recovery of its costs incurred
relating to the Order, including, but not limited to,
reimbursement of the EPA's cost of response. Through
negotiations
with the EPA and other PRPs, the Company has reached an agreement
with such PRPs under which the Company will fund $146,700 of the
cost of the remedial action (unless remedial costs exceed $19
million in which event the settlement agreement will be re-
opened). The implementation of the foregoing agreement is subject
to continuing discussions among the EPA, the other PRPs, and the
Company.
Asbestos-related Litigation
The Company is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by
exposure to asbestos during, and as a result of, their employment
with the Company or to products containing asbestos produced or
sold by the Company. The lawsuits generally relate to products
the Company has not manufactured for at least 15 years. The
number of such lawsuits instituted against the Company increased
substantially in 1993 and management believes the number of such
lawsuits will continue to increase at a greater annualized rate
than in prior years. For additional information see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Financial Condition and Capital Spending - Asbestos
Contingencies."
Various other lawsuits and claims are pending against the
Company. Management believes that resolution of the lawsuits and
claims made against the Company, including matters discussed
above, will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's
common stock, which is held solely by Kaiser. Page 64 of this
Report, and the information in Note 10 of the Notes to
Consolidated Financial Statements under the heading "Dividends on
Common Stock" at page 54 of this Report, are incorporated herein
by reference.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------
The Indentures and the 1994 Credit Agreement (Exhibits 4.1
through 4.4 to this Report) contain restrictions on the ability
of the Company to pay dividends on or make distributions on
account of the Company's common stock and restrictions on the
ability of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends, loans or advances.
Exhibits 4.1 through 4.4 to this Report; Note 6 of the Notes to
Consolidated Financial Statements at pages 40-43 of this Report;
and the information under the heading "Financial Condition and
Capital Spending--Capital Structure" at pages 23-25 of this
Report, are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by
reference to the table at page 3 of this Report; to the table at
page 20 of this Report; to the discussion under the heading
"Results of Operations" at page 21 of this Report; to Note 1 of
the Notes to Consolidated Financial Statements at pages 36-38 of
this Report; and to pages 62-63 of this Report.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kaiser Aluminum & Chemical Corporation ("KACC" or the "Company"),
operates in two business segments: bauxite and alumina, and aluminum
processing. Intracompany shipments and sales are excluded from the
information set forth below.
Year Ended December 31,
--------------------------------
(In millions of dollars, except shipments and prices) 1993 1992 1991
-------------------------------------------------------------------------------------
Shipments: (000 tons)(1)
Alumina 1,997.5 2,001.3 1,945.9
Aluminum products:
Primary aluminum 242.5 355.4 340.6
Fabricated products 373.2 343.6 314.2
------- -------- --------
Total aluminum products 615.7 699.0 654.8
======= ======== ========
Average realized sales price:
Alumina (per ton) $ 169 $ 195 $ 240
Primary aluminum (per pound) .56 .66 .72
Net sales:
Bauxite and alumina:
Alumina (2)(3) $ 338.2 $ 390.8 $ 466.5
Other 85.2 75.7 84.3
-------- -------- --------
Total bauxite and alumina 423.4 466.5 550.8
-------- -------- --------
Aluminum processing:
Primary aluminum 301.7 515.0 538.5
Fabricated products 981.4 913.7 898.9
Other (3) 12.6 13.9 12.6
-------- -------- --------
Total aluminum processing 1,295.7 1,442.6 1,450.0
-------- -------- --------
Total net sales $1,719.1 $1,909.1 $2,000.8
======== ======== ========
Operating income (loss):
Bauxite and alumina $ (4.5) $ 62.6 $ 150.0
Aluminum processing (46.3) 104.9 150.2
Corporate (72.3) (77.3) (84.4)
-------- -------- --------
Total operating income (loss) $ (123.1) $ 90.2 $ 215.8
======== ======== ========
Income (loss) before income taxes, minority
interests, extraordinary loss, and cumulative
effect of changes in accounting principles $ (208.8) $ 28.4 $ 149.5
======== ======== ========
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles $ (117.6) $ 29.6 $ 124.7
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $11.2 (21.8)
Cumulative effect of changes in accounting
principles net of tax benefit of $237.7 (507.9)
-------- -------- ---------
Net income (loss) $ (647.3) $ 29.6 $ 124.7
======== ======== =========
Capital expenditures $ 67.7 $ 114.4 $ 118.1
======== ======= ==========
(1) All references to tons refer to metric tons of 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests
in consolidated subsidiaries.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
----------------------------------------------------------------------
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree upon the volume and mix of all products
sold. The previous table provides selected operational and financial
information on a consolidated basis with respect to the Company for
the years ended December 31, 1993, 1992, and 1991. As an integrated
aluminum producer, the Company uses a portion of its bauxite, alumina,
and primary aluminum production for additional processing at certain
of its other facilities.
Net Sales
Bauxite and Alumina - Revenue from net sales of bauxite and alumina to
third parties was $423.4 million in 1993, compared with $466.5 million
in 1992 and $550.8 million in 1991. Revenue from alumina decreased
13% to $338.2 million in 1993 from $390.8 million in 1992 because of
lower average realized prices. Revenue from alumina decreased 16% to
$390.8 million in 1992 from $466.5 million in 1991 as significantly
lower average realized prices more than offset a 3% increase in
alumina shipments, which was principally attributable to increased
production at all three of the Company's refineries. The remainder of
the segment's sales revenues were from sales of bauxite, which
remained about the same throughout the three years, and the portion of
sales of alumina attributable to the minority interest in Alumina
Partners of Jamaica ("Alpart").
Aluminum Processing -- Revenue from net sales to third parties for
the aluminum processing segment was $1,295.7 million in 1993, compared
with $1,442.6 million in 1992 and $1,450.0 million in 1991. The bulk
of the segment's sales represents the Company's primary aluminum and
fabricated aluminum products, with the remainder attributable to the
portion of sales of primary aluminum related to the minority interest
in Volta Aluminium Company Limited.
Revenue from primary aluminum decreased 41% to $301.7 million in 1993
from $515.0 million in 1992 because of lower shipments and lower
average realized prices. Shipments of primary aluminum to third
parties were approximately 39% of total aluminum products shipments in
1993, compared with approximately 51% in 1992. Revenue from primary
aluminum decreased 4% to $515.0 million in 1992 from $538.5 million in
1991, as an 8% decrease in average realized prices more than offset a
4% increase in primary aluminum shipments. Shipments of primary
aluminum to third parties were approximately 51% of total aluminum
products shipments in 1992, compared with approximately 52% in 1991.
Revenue from fabricated aluminum products increased 7% to $981.4
million in 1993 from $913.7 million in 1992, principally due to
increased shipments of most fabricated aluminum products, partially
offset, to a lesser extent, by a decrease in average realized prices
of most of these products. Revenue from fabricated aluminum products
increased 2% to $913.7 million in 1992 from $898.9 million in 1991,
primarily because lower average realized prices were more than offset
by a 9% increase in shipments of fabricated aluminum products.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Operating Income (Loss)
The Company had an operating loss of $123.1 million in 1993, compared
with income of $90.2 million in 1992 and $215.8 million in 1991. In
the fourth quarter of 1993, the Company recorded a pre-tax charge of
approximately $35.8 million related to the restructuring charges (see
Note 3 of the Notes to Consolidated Financial Statements) and a pre-
tax charge of $19.4 million ($29.0 million in the fourth quarter of
1992) because of a reduction in the carrying value of its inventories
caused principally by prevailing lower prices for alumina, primary
aluminum, and fabricated products.
Bauxite and Alumina -- This segment's operating loss in 1993 was $4.5
million, compared with income of $62.6 million in 1992 and $150.0
million in 1991. In 1993 compared with 1992, operating income was
adversely affected principally due to a decrease in average realized
prices for alumina, which more than offset above-market prices for
virtually all of its excess alumina sold forward in prior periods
under long-term contracts. In 1992 compared to 1991, operating income
was adversely affected by a decrease in average realized prices for
alumina, which more than offset higher alumina shipments and above-
market prices for significant quantities of alumina sold forward in
prior periods under long-term contracts.
Aluminum Processing -- This segment's operating loss was $46.3 million
in 1993, compared with income of $104.9 million in 1992. This
decrease was caused principally by reduced shipments and lower average
realized prices of primary aluminum products which more than offset
increased shipments of fabricated products. In 1993, KACC implemented
a restructuring plan for its flat-rolled products operation at its
Trentwood plant in response to overcapacity in the aluminum rolling
industry, flat demand in the U.S. can stock market, and declining
demand for aluminum products sold to customers in the commercial
aerospace industry, all of which have resulted in declining prices in
Trentwood's key markets. Additionally, KACC implemented a plan to
discontinue its casting operations, which include three facilities
located in Ohio. This entire restructuring is expected to be
completed by the end of 1995 and will affect approximately 670
employees. The pre-tax charge for this restructuring of $35.8 million
includes $25.2 million for pension, severance, and other termination
benefits; $4.7 million for a writedown of the casting facilities to
net realizable value; $3.3 million for estimated 1994 casting
operating losses until the date of closure or sale; and $2.6 million
for various other items. The Trentwood restructuring is expected to
result in annual cost savings of at least $50.0 million after it has
been fully implemented. Other contributing factors were lower
production at the Company's smelters in the Pacific Northwest in 1993
as a result of the removal of three reduction potlines from production
at those smelters in January 1993 in response to the Bonneville Power
Administration's (the "BPA") reduction during the first quarter of
1993 of the amount of power it normally provides to the Company, and
the increased cost of substitute power in such quarter. In 1993, the
Company's average realized price from sales of primary aluminum was
approximately $.56 per pound, compared to the average Midwest United
States transaction price of approximately $.54 per pound during such
period. In both 1993 and 1992, the Company realized above-market
prices for significant quantities of primary aluminum sold forward in
prior periods under long-term contracts. Operating income for the
aluminum processing segment was $104.9 million in 1992, a decrease of
30% from $150.2 million in 1991. Operating income in 1992 was
adversely affected by a decrease in average realized prices for
primary aluminum and most fabricated aluminum products, partially
offset by increased shipments. In both 1992 and 1991, the Company
realized above-market prices for significant quantities of primary
aluminum sold forward in prior periods under long-term contracts.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Corporate -- Corporate operating expenses of $72.3 million, $77.3
million, and $84.4 million in 1993, 1992, and 1991, respectively,
represented corporate general and administrative expenses which were
not allocated to segments.
Income (Loss) Before Extraordinary Loss and Cumulative Effect of
Changes in Accounting Principles
Loss before extraordinary loss and cumulative effect of changes in
accounting principles in 1993 was $117.6 million, compared with income
of $29.6 million in 1992. This decrease resulted from the lower
operating income previously described and approximately $10.8 million
of other pre-tax charges, principally related to establishing
additional litigation and environmental reserves. Other income
remained about the same in 1992 and 1991, as approximately $14.0
million of income for non-recurring adjustments to previously recorded
liabilities and reserves in the fourth quarter of 1992 approximately
equaled the receipt of a $12.0 million fee in the first quarter of
1991 from the Company's minority partner in Alpart in consideration
for the execution of an expansion agreement for the Alpart alumina
refinery.
Income before extraordinary loss and cumulative effect of changes in
accounting principles in 1992 was $29.6 million, a decrease of 76%
from $124.7 million in 1991. This decrease resulted from the lower
operating income previously described, partially offset by an increase
in other income principally due to approximately $14.0 million of
income for non-recurring adjustments to previously recorded
liabilities and reserves in the fourth quarter of 1992.
Net Income (Loss)
The Company reported a net loss of $647.3 million in 1993, compared
with net income of $29.6 million in 1992 and $124.7 million in 1991.
The principal reasons for the earnings decline in 1993 compared with
1992 were the cumulative effect of changes in accounting principles of
$507.9 million related to the adoption of Statements of Financial
Accounting Standards No. 106, 112, and 109 (see Note 1 of the Notes to
Consolidated Financial Statements), the extraordinary loss on early
extinguishment of debt of $21.8 million, and the operating losses
described above.
The principal reason for the earnings decline in 1992 compared with
1991 was the decrease in average realized prices for alumina, primary
aluminum, and most fabricated products, partially offset by an
increase in shipments of such products.
Financial Condition and Capital Spending
Capital Structure
On February 17, 1994, the Company and its parent, Kaiser Aluminum
Corporation ("Kaiser"), entered into a credit agreement with
BankAmerica Business Credit, Inc. (as agent for itself and other
lenders), the Bank of America National Trust and Savings Association,
and certain other lenders (the "1994 Credit Agreement"). The 1994
Credit Agreement replaced the credit agreement entered into in
December 1989 by the Company and Kaiser with a syndicate of commercial
banks and other financial institutions (as amended, the "1989 Credit
Agreement") and consists of a $250.0 million five-year secured,
revolving line of credit, scheduled to mature in 1999. The Company is
able to borrow under the facility by means of revolving credit
advances and letters of credit (up to $125.0 million) in an aggregate
amount equal to the lesser of $250.0 million or a borrowing base
relating to eligible
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
accounts receivable plus eligible inventory. The Company will
record a pre-tax extraordinary loss of approximately $8.3
million in the first quarter of 1994, consisting primarily of the
write-off of unamortized deferred financing costs related to the 1989
Credit Agreement. As of February 24, 1994, the amount outstanding
under the 1994 Credit Agreement was $67.4 million of letters of
credit. The 1994 Credit Agreement is unconditionally guaranteed by
the all significant subsidiaries of KACC which were guarantors of
KACC's obligations under the 1989 Credit Agreement and by Kaiser.
Loans under the 1994 Credit Agreement bear interest at a rate per
annum, at KACC's election, equal to (i) a Reference Rate (as defined)
plus 1-1/2 % or (ii) LIBO Rate (Reserve Adjusted) plus 3-1/4%. After June
30, 1995, the interest rate margins applicable to borrowings under the
1994 Credit Agreement may be reduced by up to 1 % (non-cumulatively),
based upon a financial test, determined quarterly.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
common stock dividends, undertake transactions with affiliates, make
capital expenditures, and enter into unrelated lines of business. The
1994 Credit Agreement is secured by, among other things, (i) mortgages
on KACC's major domestic plants (excluding the Gramercy plant); (ii)
subject to certain exceptions, liens on the accounts receivable,
inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
On February 17, 1994, Kaiser consummated the public offering of
8,000,000 shares of its 8.255% PRIDES, Convertible Preferred Stock
(the "PRIDES"). The net proceeds from the sale of the shares of
PRIDES were approximately $90.6 million. Kaiser used such net
proceeds to make a non-interest bearing loan to KACC in a principal
amount equal to $30.0 million (the aggregate dividends scheduled to
accrue on the shares of PRIDES from the issuance date until December
31, 1997, the date on which the outstanding PRIDES will be mandatorily
converted into shares of Kaiser's common stock), evidenced by an
intercompany note, and used the balance of such net proceeds to make a
capital contribution to KACC in the amount of approximately $60.6
million. In connection with the PRIDES offering, Kaiser granted the
underwriters an over allotment option for up to 1,200,000 of such
shares.
Concurrent with the offering of the PRIDES, on February 17, 1994, KACC
issued $225.0 million of its 9-7/8% Senior Notes due 2002 (the "Senior
Notes"). The net proceeds of the offering of the Senior Notes were
used to reduce outstanding borrowings under the Revolving Credit
Facility of the 1989 Credit Agreement immediately prior to the
effectiveness of the 1994 Credit Agreement and for working capital and
general corporate purposes.
The offering of the PRIDES, the concurrent issuance of the Senior
Notes, and the replacement of the 1989 Credit Agreement are the final
steps of a comprehensive refinancing plan which the Company and Kaiser
began in January 1993 which extended the maturities of the Company's
outstanding indebtedness, enhanced its liquidity, and raised new
equity capital.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
At December 31, 1993, the Company's total consolidated indebtedness
was $729.4 million, compared to $795.8 million at December 31, 1992.
As of December 31, 1992, the Company's long-term indebtedness
consisted principally of $321.7 million aggregate amount of the 14-
1/4% Senior Subordinated Notes due 1995 (the "14-1/4% Notes") and the
1989 Credit Agreement. KACC refinanced the 14-1/4% Notes through the
issuance in February 1993 of $400.0 million aggregate principal amount
of the 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4%
Notes"). The net proceeds from the sale of the 12-3/4% Notes were
used to retire $321.7 million aggregate principal amount of, and pay
premiums on, the 14-1/4% Notes, to prepay $18.0 million of the term
loan under the 1989 Credit Agreement, and to reduce outstanding
borrowings under the Revolving Credit Facility of the 1989 Credit
Agreement. These transactions resulted in a pre-tax extraordinary
loss of approximately $33.0 million in the first quarter of 1993
($21.8 million after taxes), consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the 14-1/4%
Notes and the payment of premiums on the 14-1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the 12-3/4%
Notes are guaranteed, jointly and severally, by certain subsidiaries
of KACC. The indentures governing the Senior Notes and the 12-3/4% Notes
and the 1994 Credit Agreement restricts, among other things, Kaiser's
and KACC's ability, to incur debt, undertake transactions with
affiliates, and pay dividends.
To increase its equity capital, Kaiser consummated a public offering
of its $.65 Depositary Shares in June 1993, each representing one-
tenth of a share of Series A Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares") pursuant to which it realized
net cash proceeds of approximately $119.3 million. In connection with
the offering of the $.65 Depositary Shares, Kaiser made a non-interest
bearing loan to KACC in the principal amount of $37.8 million (the
aggregate dividends scheduled to accrue on the Series A Shares from
the issuance date until the date on which the outstanding Series A
Shares mandatorily convert into shares of Kaiser's common stock). The
loan is evidenced by an intercompany note which matures on June 29,
1996, and is payable in quarterly installments. As of December 31,
1993, the aggregate principal amount of such intercompany note was
$31.5 million.
Cash from Operations
Cash provided by operations was $25.3 million in 1993, compared with
$28.0 million in 1992 and $143.7 million in 1991. The decrease in
1992 compared with 1991 was primarily because of the decline in net
income and a $66.3 million decrease in previously withdrawn equity
resulting from the excess of current market value over the premiums
paid in certain option contracts.
Capital Expenditures
The Company's capital expenditures of approximately $300.2 million (of
which $42.6 million was funded by the Company's minority partners in
certain foreign joint ventures) during the three years ended December
31, 1993, were made primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct
new facilities. Total consolidated capital expenditures were $67.7
million in 1993, compared with $114.4 million in 1992 and $118.1
million in 1991 (of which $9.4, $17.1, and $16.1 million were funded
by the minority partners in certain foreign joint ventures in 1993,
1992, and 1991, respectively). Total consolidated capital
expenditures (of which approximately 5% is expected to be funded by
the minority partners in certain foreign joint ventures) are expected
to be in the range of $50.0 to $75.0 million per year in the years
1994-1996.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Debt Service and Capital Expenditure Requirements
The Company expects that it will be able to satisfy its debt service
and capital expenditure requirements through at least December 31,
1995, from cash flows generated by operations and, to the extent
necessary, from borrowings under the 1994 Credit Agreement.
Dividends and Distributions
The declaration and payment of dividends by the Company and Kaiser on
their shares of common stock is subject to certain covenants contained
in the 1994 Credit Agreement and, in the case of the Company, the
Senior Note Indenture and the 12-3/4% Note Indenture. The 1994 Credit
Agreement does not permit the Company or Kaiser to pay any dividends
on their common stock. The declaration and payment of dividends by
Kaiser on the shares of the Series A Shares and the PRIDES is
expressly permitted by the terms of the 1994 Credit Agreement to the
extent Kaiser receives payments on the intercompany notes or certain
other permitted distributions from the Company.
Other Obligations
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the
"Louisiana Parish"), pursuant to which the Louisiana Parish issued
$20.0 million aggregate principal amount of its 7-3/4% Bonds due
August 1, 2022 (the "Bonds"), to finance the construction of certain
solid waste disposal facilities at KACC's Gramercy plant. The
proceeds from the sale of the Bonds were deposited into a construction
fund and may be withdrawn, from time to time, pursuant to the terms of
the Sale Agreement and the Bond indenture. At December 31, 1993,
$10.8 million remained in the construction fund. The Sale Agreement
requires KACC to make payments to the Louisiana Parish in installments
due on the dates and in the amounts required to permit the Louisiana
Parish to satisfy all of its payment obligations under the Bonds.
The Company has historically participated in various raw material
joint ventures outside the United States. At December 31, 1993, the
Company was unconditionally obligated for $73.6 million of
indebtedness of one such joint venture affiliate.
Environmental Contingencies
The Company and Kaiser are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based
upon such laws. KACC is currently subject to a number of lawsuits
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 upon KACC's evaluation of these and other environmental matters,
KACC has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation
matters. The following table presents the changes in such accruals,
which are primarily included in Long-term liabilities, for the years
ended December 31, 1993, 1992, and 1991:
(In millions of dollars) 1993 1992 1991
-------------------------------------------------------------------
Balance at beginning of period $ 46.4 $ 51.5 $ 57.7
Additional amounts 1.7 4.5 7.8
Less expenditures (7.2) (9.6) (14.0)
------ ------ ------
Balance at end of period $ 40.9 $ 46.4 $ 51.5
====== ====== ======
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
These environmental accruals represent KACC's estimate of costs
reasonably expected to be incurred based upon presently enacted laws
and regulations, currently available facts, existing technology, and
KACC's assessment of the likely remediation action to be taken. KACC
expects that these remediation actions will be taken over the next
several years and estimates that expenditures to be charged to the
environmental accrual will be approximately $4.0 to $8.0 million for
the years 1994 through 1998 and an aggregate of approximately $12.8
million thereafter.
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 by amounts which cannot presently be
estimated. While uncertainties are inherent in the ultimate outcome
of these matters and it is impossible to presently determine the
actual costs that ultimately may be incurred, management believes that
the resolution of such uncertainties should not have a material
adverse effect upon the Company's consolidated financial position or
results of operations.
Asbesto