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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
For the fiscal year ended December 31, 1999
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-0928288
(State of Incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 267-3777
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 January 28, 2000, 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 January 28, 2000, nonaffiliates
of the registrant held 350,167 shares of Cumulative (1985 Series A) Preference
Stock and 40,086 shares of Cumulative (1985 Series B) Preference Stock of the
registrant. The aggregate value of such Cumulative (1985 Series A) Preference
Stock and Cumulative (1985 Series B) Preference Stock, based upon the redemption
price for such stock, is $19.5 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.
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NOTE
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 65-71 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
exhibits and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
(713) 267-3777
(i)
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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TABLE OF CONTENTS
Page
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PART I........................................................................................................ 1
ITEM 1. BUSINESS.................................................................................... 1
ITEM 2. PROPERTIES.................................................................................. 16
ITEM 3. LEGAL PROCEEDINGS........................................................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 17
PART II....................................................................................................... 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................................... 17
ITEM 6. SELECTED FINANCIAL DATA..................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 63
PART III...................................................................................................... 63
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 63
ITEM 11. EXECUTIVE COMPENSATION...................................................................... 63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................................ 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 63
PART IV....................................................................................................... 63
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................................................... 63
SIGNATURES.................................................................................................... 64
INDEX OF EXHIBITS............................................................................................. 65
EXHIBIT 21 SUBSIDIARIES................................................................................ 72
(ii)
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K (the "Report") contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Report (see, for example, Item 1. "Business - Incident at
Gramercy Facility," "- Strategic Initiatives," "- Business Operations," "-
Competition," "- Research and Development," "- Environmental Matters," and "-
Factors Affecting Future Performance," Item 3. "Legal Proceedings," and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory
requirements, and changing prices and market conditions. Certain sections of
this Report identify other factors that could cause differences between such
forward-looking statements and actual results. No assurance can be given that
these are all of the factors that could cause actual results to vary materially
from the forward-looking statements.
General
Kaiser Aluminum & Chemical Corporation (the "Company"), a Delaware corporation
organized in 1940, is a direct subsidiary of Kaiser Aluminum Corporation
("Kaiser") and an indirect subsidiary of MAXXAM Inc. ("MAXXAM"). Kaiser owns all
of the Company's Common Stock, and MAXXAM and one of its wholly-owned
subsidiaries together own approximately 63% of Kaiser's Common Stock, with the
remaining approximately 37% publicly held. 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 domestic
and international markets. In 1999, the Company produced approximately 2,524,000
tons1 of alumina, of which approximately 83% was sold to third parties, and
produced approximately 426,400 tons of primary aluminum, of which approximately
62% was sold to third parties. In 1999, the Company shipped approximately
389,000 tons of fabricated aluminum products to third parties, which accounted
for approximately 5% of total United States domestic shipments.
The Company's operations are conducted through its business units. The following
table sets forth total shipments and intersegment transfers of the Company's
alumina, primary aluminum, and fabricated aluminum operations:
Year Ended December 31,
-----------------------------------
1999 1998 1997
------- ------- -------
(in thousands of tons)
ALUMINA: (1)
Shipments to Third Parties 2,093.9 2,250.0 1,929.8
Intersegment Transfers 757.3 750.7 968.0
------- ------- -------
PRIMARY ALUMINUM: 2,851.2 3,000.7 2,897.8
------- ------- -------
Shipments to Third Parties 295.6 263.2 327.9
Intersegment Transfers 171.2 162.8 164.2
------- ------- -------
466.8 426.0 492.1
------- ------- -------
FLAT-ROLLED PRODUCTS 217.9 235.6 247.9
ENGINEERED PRODUCTS 171.1 169.4 152.1
(1) As a result of the explosion at the Gramercy alumina refinery in July 1999,
which completely curtailed production ("the Gramercy incident"), shipments
to third parties and intersegment transfers for 1999 include approximately
264,000 tons of
- ------------------------
(1) All references to tons in this Report refer to metric tons of
2,204.6 pounds.
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ITEM 1. BUSINESS (CONTINUED)
alumina purchased and resold to certain unaffiliated customers and 131,000
tons of alumina purchased and transferred to the Company's primary aluminum
business unit. See Note 2 of Notes to Consolidated Financial Statements for
additional information regarding the impact of the Gramercy incident.
See Note 13 of Notes to Consolidated Financial Statements for segment and
geographical financial information.
Incident at Gramercy Facility
On July 5, 1999, the Company's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is currently expected to remain completely
curtailed until the third quarter of 2000 when the Company expects to begin
partial production. Based on current estimates, full production is expected to
be achieved during the first quarter of 2001 or shortly thereafter. The Company
has received the regulatory permit required to operate the plant once the
facility is ready to resume production. In the interim, the Company is
purchasing alumina from third parties, in excess of the amounts of alumina
available from other Company-owned facilities, to supply major customers' needs
and to meet intersegment requirements.
The cause of the incident is under investigation by the Company and governmental
agencies. In January 2000, the U.S. Mine Safety and Health Administration
("MSHA") issued 21 citations in connection with its investigation of the
incident. The citations allege, among other things, that certain aspects of the
plant's operations were unsafe and that such mode of operation contributed to
the explosion. To date, no monetary penalty has been proposed by MSHA. Although
the Company expects that a fine will be levied, the Company cannot predict the
amount of any such fine(s). It is possible that other civil or criminal fines or
penalties could be levied against the Company. The Company has previously
announced that it disagrees with the substance of the citations and has
challenged them. However, as more fully explained below, based on what is known
to date and discussions with the Company's advisors, the Company believes that
the financial impact of this incident (in excess of insurance deductibles and
self-retention provisions) will be largely offset by insurance coverage.
Deductibles and self-retention provisions under the insurance coverage for the
incident total $5.0 million, which amounts have been charged to Cost of products
sold in 1999.
As of December 31, 1999, the Company had recorded estimated recoveries for
clean-up, site preparation and business interruption costs incurred of
approximately $55.0 million. As of December 31, 1999, approximately $50.0
million of insurance recoveries had been received. Additionally through February
29, 2000, the Company had received approximately $25.0 million of additional
insurance recoveries. Also, based on discussions with the insurance carriers and
their representatives and third party engineering reports, the Company recorded
a pretax gain of $85.0 million, representing the difference between the minimum
expected property damage reimbursement amount and the net carrying value of the
damaged property of $15.0 million. The Company continues to work with the
insurance carriers to maximize the amount of recoveries and to minimize, to the
extent possible, the period of time between when the Company expends funds and
when it is reimbursed. However, the Company will likely have to fund an average
of 30 - 60 days of property damage and business interruption activity, unless
some other arrangement is agreed with the insurance carriers, and such amounts
will be significant. The Company believes it has sufficient financial resources
to fund the construction and business interruption costs on an interim basis.
However, no assurances can be given in this regard. If insurance recoveries were
to be delayed or if there were to be other significant uses of the Company's
existing Credit Agreement capacity, delays in the rebuilding of the Gramercy
refinery could occur and could have a material adverse impact on the Company's
liquidity and operating results.
See Note 2 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financing Activities and Liquidity" for more detailed information regarding the
impacts of the Gramercy incident.
Labor Matters
Substantially all of the Company's hourly workforce at the Gramercy, Louisiana,
alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood,
Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a
master labor agreement with the United Steelworkers of America (the "USWA")
which expired on September 30, 1998. The parties did not reach an agreement
prior to the expiration of the master agreement and the USWA chose to strike. In
January 1999, the Company declined an offer by the USWA to have the striking
workers return to work at the five plants without a new
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ITEM 1. BUSINESS (CONTINUED)
agreement. The Company imposed a lock-out to support its bargaining position and
continues to operate the plants with salaried employees and other workers as it
has since the strike began.
While the Company initially experienced an adverse strike-related impact on its
profitability, the Company currently believes that the Company's operations at
the affected facilities, excluding the Gramercy facility (see "- Incident at
Gramercy Facility" above), have been substantially stabilized and will be able
to run at, or near, full capacity, and that the incremental costs associated
with operating the affected plants during the dispute were virtually eliminated
in early 1999 (excluding the impacts of the restart costs and the effect of
market factors such as the continued partial curtailment at the Tacoma smelter
(see "- Business Operations - Primary Aluminum Business Unit" in this Report).
However, no assurances can be given that the Company's efforts to run the plants
on a sustained basis, without a significant business interruption or material
adverse impact on the Company's operating results, will be successful.
Further, the Company believes that charges of unfair labor practices made
against it by the USWA are without merit. See Note 11 of Notes to Consolidated
Financial Statements.
The Company and the USWA continue to communicate. The objective of the Company
has been, and continues to be, to negotiate a fair labor contract that is
consistent with its business strategy and the commercial realities of the
marketplace.
See Note 1 of Notes to Consolidated Financial Statements, "- Labor Related
Costs," Note 11 of Notes to Consolidated Financial Statements, "- Labor Matters"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Labor Matters" for additional information with respect to the USWA
dispute.
Strategic Initiatives
The Company's strategy is to improve its financial results by: increasing the
competitiveness of its existing plants; continuing its cost reduction
initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of non-core businesses; and strengthening its financial position.
In 1999, the Company completed the acquisition of the remaining 45% interest in
Kaiser LaRoche Hydrate Partners ("KLHP"), an alumina marketing venture, for a
purchase price of approximately $10.0 million and the sale of its 50% interest
in AKW L.P. ("AKW") to its partner for $70.4 million. The strategic analysis
process also resulted in the Company's agreement in January 2000 to sell its
Micromill(TM) assets and technology. See Notes 3 and 4 of Notes to Consolidated
Financial Statements for information on the AKW and Micromill sales.
Another area of emphasis has been a continuing focus on managing the Company's
legacy liabilities. The Company believes that it has insurance coverage
available to recover certain incurred and future environmental costs and a
substantial portion of its asbestos-related costs and is actively pursuing
claims in this regard. During 1998, the Company received recoveries totaling
approximately $35.0 million from certain of its insurers related to current and
future environmental claims. The timing and amount of future recoveries of
asbestos-related claims from insurance carriers remains a major priority of the
Company, but will depend on the pace of claims review and processing by such
carriers and the resolution of any disputes regarding coverage under the
insurance policies that may arise. However, during 1999, the Company reached
preliminary agreements under which it expects to collect a substantial portion
of its 2000 expected asbestos-related payments from certain insurance carriers.
See Note 11 of Notes to Consolidated Financial Statements for additional
information regarding the legacy liabilities and related insurance coverages.
Sensitivity to Prices and Hedging Programs
The Company's operating results 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. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices by up to three months. In addition, the Company's operations are
exposed to risks from fluctuating energy prices for fuels used in the production
process and from foreign currency movements in respect of material cash
3
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ITEM 1. BUSINESS (CONTINUED)
commitments to foreign subsidiaries and affiliates. From time to time in the
ordinary course of business, the Company enters into hedging transactions to
provide risk management in respect of its net exposure of earnings and cash flow
related to the above items. While such hedging activities typically are designed
to provide protection against unfavorable price charges, they can, in certain
circumstances, limit the Company's ability to realize favorable price changes
and can also impact the Company's liquidity. See Note 1 of Notes to Consolidated
Financial Statements, "- Derivative Financial Instruments," Note 12 of Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Activities and
Liquidity," for additional information.
Business Operations
The Company conducts its business through four main business units, each of
which is discussed below.
o Alumina Business Unit
The following table lists the Company's bauxite mining and alumina refining
facilities as of December 31, 1999:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- ----------------- ---------- ---------- --------- ------------ ----------
(tons) (tons)
Bauxite Mining KJBC Jamaica 49.0% 4,500,000 4,500,000
Alpart(1) Jamaica 65.0% 2,275,000 3,500,000
--------- ---------
6,775,000 8,000,000
========= =========
Alumina Refining Gramercy(2) Louisiana 100.0% 1,075,000 1,075,000
Alpart Jamaica 65.0% 942,500 1,450,000
QAL Australia 28.3% 1,032,950 3,650,000
--------- ---------
3,050,450 6,175,000
========= =========
- ------------
(1) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina
at the Alpart refinery.
(2) Production is currently completely curtailed. See discussion below.
The Company is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. The Company's strategy
is to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirements under multi-year sales contracts with prices
linked to the price of primary aluminum. See "- Competition" and "- Sensitivity
to Prices and Hedging Programs" in this Report.
The Government of Jamaica has granted the Company a mining lease for the mining
of bauxite which will, at a minimum, satisfy the bauxite requirements of the
Company's Gramercy, Louisiana alumina refinery so that it will be able to
produce at its current rated capacity until 2020. Kaiser Jamaica Bauxite Company
("KJBC") mines bauxite from the land which is subject to the mining lease as an
agent for the Company. Although the Company owns 49% of KJBC, it is entitled to,
and generally takes, all of its bauxite output. A substantial majority of the
bauxite mined by KJBC is refined into alumina at the Gramercy facility and the
remainder is sold to a third party. KJBC's operations have been impacted by the
Gramercy incident. Subject to the rebuilding of the Gramercy facility with a
double digest bauxite system, the Government of Jamaica has recently agreed to
grant the Company an additional bauxite mining lease. The new mining lease will
be effective upon the expiration of the current lease in 2020 and will enable
the Gramercy facility to produce at its rated capacity for an additional ten
year period. See Note 2 of Notes to Consolidated Financial Statements for a
detailed discussion of the Gramercy incident.
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ITEM 1. BUSINESS (CONTINUED)
Alumina produced by the Gramercy plant is primarily sold to third parties but a
portion is used by the Company in its operations. Production at the Gramercy
refinery is currently completely curtailed as it was extensively damaged by an
explosion in the digestion area of the plant in July 1999. Production at the
plant is currently expected to remain curtailed until the third quarter of 2000
when partial production is expected to begin. Based on current estimates, full
production is expected to be achieved during the first quarter of 2001 or
shortly thereafter. In the interim, the Company is purchasing alumina from third
parties, in excess of the amounts of alumina available from other Company-owned
facilities, to supply major customers' needs as well as to meet intersegment
requirements. The Company believes that the cost to rebuild the Gramercy
facility and the adverse impact of the incident on operations will be largely
offset by insurance coverage. See Note 2 of Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financing Activities and Liquidity" for additional
information regarding the impacts of the Gramercy incident. Also, the Gramercy
refinery is one of the five Company plants which is subject to the continuing
USWA dispute. See Note 11 of Notes to Consolidated Financial Statements, "-
Labor Matters" for a discussion of the labor dispute.
In February 1999, the Company, through a subsidiary, purchased its partner's 45%
interest in KLHP, a partnership which markets chemical grade alumina
manufactured at the Company's Gramercy facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview -
Strategic Initiatives" for additional information. Chemical grade alumina is
sold at a premium price over smelter grade alumina, and this acquisition will
permit the Company to expand its market position in this business in North
America. However, these operations have been impacted by the Gramercy incident.
The Company has entered into the necessary arrangements to allow it to supply a
significant portion of its customers' chemical grade alumina needs. The Company
believes that any incremental costs incurred in connection with such
arrangements, as well as lost profits, will be substantially covered by its
insurance.
Alpart holds bauxite reserves and owns a 1,450,000 ton per year alumina plant
located in Jamaica. The Company owns 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. The Government of Jamaica has granted Alpart a mining lease and
has entered into other agreements with Alpart designed to assure that sufficient
reserves of bauxite will be available to Alpart to operate its refinery, as it
may be expanded up to a capacity of 2,000,000 tons per year, through the year
2024.
In 1999, Alpart and JAMALCO, a joint venture between affiliates of Alcoa Inc.
and the Government of Jamaica, agreed to form a bauxite mining operation joint
venture that will consolidate their bauxite mining operations in Jamaica, with
the objective of optimizing mining operating and capital costs. The joint
venture agreement also grants Alpart certain rights to acquire bauxite mined
from JAMALCO's reserves. The joint venture will commence operations in the first
quarter of 2000.
The Company owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which
owns the largest and one of the most competitive alumina refineries in the
world, located in Queensland, Australia. QAL refines bauxite into alumina,
essentially on a cost basis, for the account of its shareholders under long-term
tolling contracts. The shareholders, including the Company, purchase bauxite
from another QAL shareholder under long-term supply contracts. The Company has
contracted with QAL to take approximately 868,000 tons per year of alumina or
pay standby charges. The Company is unconditionally obligated to pay amounts
calculated to service its share ($103.6 million at December 31, 1999) of certain
debt of QAL, as well as other QAL costs and expenses, including bauxite shipping
costs.
In 1999, the Company sold alumina to approximately 21 customers, the largest and
top five of which accounted for approximately 23% and 72% of net sales,
respectively. All of the Company's third-party sales of bauxite in 1999 were
made to one customer, which sales represent approximately 7% of total bauxite
and alumina third party net sales. The Company's principal customers for bauxite
and alumina consist of other aluminum producers that purchase bauxite and
smelter grade alumina, trading intermediaries who resell raw materials to
end-users, and users of chemical grade alumina.
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ITEM 1. BUSINESS (CONTINUED)
o Primary Aluminum Business Unit
The following table lists the Company's primary aluminum smelting facilities as
of December 31, 1999:
Annual Rated Total 1999
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- -------------- -------- --------- ------------ -------- ---------
(tons) (tons)
United States
Washington Mead 100% 200,000 200,000 102%(1)
Washington Tacoma 100% 73,000 73,000 73%(1)
------- -------
Subtotal 273,000 273,000
------- -------
International
Ghana Valco 90% 180,000 200,000 57%(2)
Wales, United Kingdom Anglesey 49% 66,150 135,000 102%
------- -------
Subtotal 246,150 335,000
------- -------
Total 519,150 608,000
======= =======
- ------------------
(1) 1999 operating rates were affected by the continuing USWA dispute. See
discussion below.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview - Valco Operating Level" for
additional information regarding recent and future operating levels.
The Company has developed and installed proprietary retrofit and control
technology in all of its smelters, as well as at third party locations. This
technology - which includes the redesign of the cathodes, anodes and bus that
conduct electricity through reduction cells, improved feed systems that add
alumina to the cells, computerized process control and energy management
systems, and furnace technology for baking of anode carbon - has significantly
contributed to increased and more efficient production of primary aluminum and
enhanced the Company's ability to compete more effectively with the industry's
newer smelters.
The Mead facility uses pre-bake technology. Approximately 77% of Mead's 1999
production was used at the Company's Trentwood, Washington, rolling mill, and
the balance was sold to third parties. The Company has modernized and expanded
the carbon baking furnace at its Mead smelter. The project has improved the
reliability of the carbon baking operations, increased productivity, enhanced
safety, and improved the environmental performance of the facility. The first
stage of this project, the construction of a new 90,000 ton per year furnace,
was completed in 1997. The remaining modernization work was completed in early
1999. The Tacoma facility 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 through retrofit technology and a
variety of cost controls, leading to increases in production volume and
enhancing their ability to compete with newer smelters. The business unit
maintains specialized laboratories and a miniature carbon plant in the state of
Washington which concentrate on the development of cost-effective technical
innovations such as equipment and process improvements.
The Mead and Tacoma, Washington, smelters are two of the five Company plants
which are subject to the continuing USWA dispute. KACC temporarily curtailed
three out of a total of eleven potlines at its Mead and Tacoma, Washington,
aluminum smelters at September 30, 1998, as a result of the USWA strike. The
curtailed potlines represented approximately 70,000 tons of annual production
capacity out of a total combined production capacity of 273,000 tons per year at
the facilities. Restarts of the two Mead potlines were completed during
mid-1999. While a portion of the curtailed potline at Tacoma has been restarted
to meet internal requirements, the timing for a complete restart of the potline
(representing approximately 10,000 tons of idle production capacity) has yet to
be determined and will depend upon market conditions and other factors. See Note
11 of Notes to Consolidated Financial Statements, "- Labor Matters" for a
discussion of the labor dispute on smelting production rates.
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ITEM 1. BUSINESS (CONTINUED)
The Company manages, and owns a 90% interest in, the Volta Aluminium Company
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 tolling contracts which provide for
proportionate payments by the participants. The Company's share of the primary
aluminum is sold to third parties. Valco's operating level has been subject to
fluctuations resulting from the amount of power it is allocated by the Volta
River Authority ("VRA"). The operating level over the last five years has ranged
from one to four out of a total of five potlines. During 1999, Valco operated an
average of three potlines. The Company expects Valco to operate four potlines
during 2000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview - Valco Operating Level" for additional
information regarding past and future operating levels.
The Company owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey")
aluminum smelter 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.
The Company's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 1999, the Company sold its primary aluminum
production not utilized for internal purposes to approximately 42 customers, the
largest and top five of which accounted for approximately 29% and 68% of net
sales, respectively. See "- Competition" in this Report. Marketing and sales
efforts are conducted by personnel located in Houston, Texas; and Tacoma and
Spokane, Washington.
Electric Power
Electric power represents an important production cost for the Company at its
aluminum smelters. For information on this subject, see "- Factors Affecting
Future Performance - The operations of our smelters depend on attaining reliable
and affordable electric power" in this Report.
o Flat-Rolled Products Business Unit
The flat-rolled products business unit operates the Trentwood, Washington,
rolling mill. The business unit sells to the aerospace and general engineering
markets (producing heat treat sheet and plate products), the beverage container
market (producing body, lid, and tab stock), and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products), both directly
and through distributors. The Trentwood facility is one of the five Company
plants which is subject to the continuing USWA dispute. See Note 11 of Notes to
Consolidated Financial Statements, "- Labor Matters" for additional information
on the labor dispute.
The Company continues to shift the product mix of its Trentwood rolling mill
away from beverage can body stock toward higher value added product lines, such
as heat treat, beverage can lid and tab stock, automotive, and other niche
businesses in an effort to maximize its profitability. Global sales of the
Company's heat treat products are made primarily to the aerospace and general
engineering markets. In 1999, the business unit shipped products to
approximately 147 customers in the aerospace, transportation, and industrial
("ATI") markets, most of which were distributors who sell to a variety of
industrial end-users. The top five customers in the ATI markets for flat-rolled
products accounted for approximately 18% of the business unit's net sales.
The Company's flat-rolled products are also sold to beverage container
manufacturers located primarily in western North America and in the Asian
Pacific Rim countries. Quality of products for the beverage container industry,
service, price, and timeliness of delivery are the primary bases on which the
Company competes. In 1999, the business unit had approximately 25 domestic and
foreign can stock customers, supplying approximately 35 can plants worldwide.
The largest and top five of such customers accounted for approximately 12% and
36%, respectively, of the business unit's net sales. See "- Competition" in this
Report. The marketing staff for the business unit is located at the Trentwood
facility. Sales are made directly to end-use customers and distributors from
four sales offices in the United States, from a sales office in England, and by
independent sales agents in Asia and Latin America.
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ITEM 1. BUSINESS (CONTINUED)
o Engineered Products Business Unit
The engineered products business unit operates soft-alloy and hard-alloy
extrusion facilities and engineered component (forgings) facilities in the
United States and Canada. Major markets for extruded products are in the
transportation industry, to which the business unit sells extruded shapes for
automobiles, light-duty vehicles, heavy duty trucks and trailers, and shipping
containers, and in the distribution, durable goods, defense, building and
construction, ordnance and electrical markets.
The business unit sells forged parts to customers in the automotive, heavy-duty
truck, general aviation, rail, machinery and equipment, and ordnance markets.
The high strength-to-weight properties of forged aluminum make it particularly
well-suited for automotive applications. The business unit maintains a sales and
engineering office in Southfield, Michigan, which works with automobile makers
and other customers and plant personnel to create new automotive component
designs and to improve existing products.
Soft-alloy extrusion facilities are located in Los Angeles, California; Sherman,
Texas; Richmond, Virginia; and London, Ontario, Canada. Each of the soft-alloy
extrusion facilities has fabricating capabilities and provides finishing
services. Products manufactured at these facilities include rod, bar, tube,
shapes, and billet. The Richmond, Virginia, facility was acquired in mid- 1997
and increased the Company's extruded products capacity and enhanced its existing
extrusion business due to that facility's ability to manufacture seamless tubing
and large circle size extrusions and to serve the distribution and ground
transportation industries. A 1999 acquisition of an extrusion press in the Los
Angeles area also increased capacity in both seamless tube and rod and bar
products. Hard-alloy rod and bar extrusion facilities are located in Newark,
Ohio, and Jackson, Tennessee, and produce screw machine stock, redraw rod,
forging stock, and billet. The Newark facility is one of the five Company plants
which is subject to the continuing USWA dispute. See Note 11 of Notes to
Consolidated Financial Statements, "- Labor Matters" for additional information
on the labor dispute. A facility located in Richland, Washington, produces
seamless tubing in both hard and soft alloys. The business unit also operates an
aluminum cathodic protection business located in Tulsa, Oklahoma. The business
unit operates forging facilities at Oxnard, California, and Greenwood, South
Carolina, and a machine shop at Greenwood, South Carolina. The Company sold a
small casting operations in Canton, Ohio in May 1999.
In 1997, the Company and Accuride Corporation ("Accuride") formed AKW to design,
manufacture and sell heavy aluminum truck wheels. In April 1999, the Company
sold its 50% interest in AKW to Accuride for $70.4 million, which resulted in a
net pre-tax gain of $50.5 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Strategic Initiatives" and Note
3 of Notes to Consolidated Financial Statements.
In 1999, the engineered products business unit had approximately 400 customers,
the largest and top five of which accounted for approximately 5% and 18%,
respectively, of the business unit's net sales. See "- Competition" below. Sales
are made directly from plants and from marketing locations elsewhere in the
United States.
Competition
The Company competes globally with producers of bauxite, alumina, primary
aluminum, and fabricated aluminum products. Many of the Company's competitors
have greater financial resources than the Company. 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. Aluminum competes in many markets with steel, copper,
glass, plastic, and other materials. Beverage container materials, including
aluminum, face increased competition from plastics as increased polyethylene
terephthalate ("PET") container capacity is brought on line by plastics
manufacturers. The Company competes with numerous domestic and international
fabricators in the sale of fabricated aluminum products. The Company
manufactures and markets fabricated aluminum products for the transportation,
packaging, 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. 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 it believes it has production expertise, high-quality
capability, and geographic and other competitive advantages. 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 the Company's financial condition or results of operations.
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ITEM 1. BUSINESS (CONTINUED)
See the discussion of competitive conditions, markets, and principal methods of
competition in the description of each business unit under the headings
"-Alumina Business Unit," "-Primary Aluminum Business Unit," "-Flat-Rolled
Products Business Unit," and "-Engineered Products Business Unit" in this
Report.
Research and Development
Net expenditures for Company-sponsored research and development activities were
$11.0 million in 1999, $13.7 million in 1998, and $19.7 million in 1997.
Approximately $.8 million of the 1999 research and development net expenditures
were attributable to the development of the Micromill assets and technology,
which were sold in January 2000 (see Note 4 of Notes to Consolidated Financial
Statements). The Company's research staff totaled 50 at December 31, 1999. The
Company estimates that research and development net expenditures will be in the
range of $9.0 million to $11.0 million in 2000.
Employees
During 1999, the Company employed an average of approximately 8,600 persons,
compared with an average of approximately 9,200 persons in 1998 and
approximately 9,600 persons in 1997. At December 31, 1999, the Company employed
approximately 8,300 persons. The foregoing employee counts for 1999 and 1998
include the USWA workers who are currently subject to the lockout imposed by the
Company as a result of the continuing labor dispute. Since the inception of the
labor dispute, the Company has operated the five affected facilities with
temporary workers who are not included in the employee counts for 1999 and 1998.
The average number of temporary workers employed during 1999 at the five plants
affected by the USWA labor dispute was approximately 25% less than the average
number of USWA workers employed prior to the labor dispute.
The labor agreements with employees at the Alpart refinery in Jamaica and the
Valco smelter in Ghana both expire in 2001.
Environmental Matters
The Company is subject to a wide variety of international, federal, state and
local environmental laws and regulations. For a discussion of this subject, see
"Factors Affecting Future Performance - our current or past operations subject
us to environmental compliance, clean-up and damage claims that may be costly"
below.
Factors Affecting Future Performance
This section discusses certain factors that could cause actual results to vary,
perhaps materially, from the results described in forward-looking statements
made in this Report. Forward-looking statements in this Report are not
guarantees of future performance and involve significant risks and
uncertainties. In addition to the factors identified below, actual results may
vary materially from those in such forward-looking statements as a result of a
variety of other factors including the effectiveness of management's strategies
and decisions, general economic and business conditions, developments in
technology, new or modified statutory or regulatory requirements, and changing
prices and market conditions. This Report also identifies other factors that
could cause such differences. No assurance can be given that these factors are
all of the factors that could cause actual results to vary materially from the
forward-looking statements.
o Our earnings are sensitive to a number of variables
Our operating earnings are sensitive to a number of variables over which we have
no direct control. Two key variables in this regard are commodity prices for
primary aluminum and general economic conditions.
The commodity price of primary aluminum significantly affects our financial
results. Primary aluminum prices historically have been subject to significant
cyclical price fluctuations. We believe the timing of changes in the market
price of aluminum are largely unpredictable. Since 1993, the Average Midwest
United States transaction price (the "AMT price") has ranged from approximately
$.50 to $1.00 per pound. During 1999, the AMT price averaged $.66 per pound. At
January 28, 2000, the AMT price was $.84 per pound. Although we attempt to
mitigate the impact of low prices through hedging activity (as described below),
changes in market prices for primary aluminum typically influence the realized
prices for our products, most directly in the alumina and primary aluminum
businesses.
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ITEM 1. BUSINESS (CONTINUED)
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect our earnings by impacting the overall volume and mix
of such products sold. To the extent that these end-use markets weaken, demand
can also diminish for alumina and primary aluminum.
o Our profits and cash flows may be adversely impacted by the results of our
hedging programs
We are exposed to the risk of fluctuating aluminum prices, which influence the
prices at which we sell our products. We enter into hedging transactions to
limit our net exposure resulting from (1) our anticipated sales of alumina,
primary aluminum, and fabricated aluminum products, less (2) our expected costs
of purchasing certain items such as aluminum scrap, bauxite and rolling ingot,
whose prices fluctuate with the price of primary aluminum. Such hedging
transactions may involve the use of forward sales contracts, which effectively
fix the price at which we sell our products, or the use of option contracts,
which set a floor or a ceiling or both on the price at which we sell our
products. To the extent that the prices for primary aluminum exceed the fixed or
ceiling prices established by our hedging transactions, our profits and cash
flow would be lower than they otherwise would have been. As a result of our
hedging activities, at December 31, 1999, approximately 70% and 40% of our net
hedgeable volume with respect to 2000 and 2001, respectively, is subject to
minimum and maximum contract prices. The average minimum contract price with
respect to each period is significantly below the average AMT price for the week
ended January 28, 2000. The average maximum contract price with respect to 2000
is below the average AMT price for the week ended January 28, 2000. The average
maximum contract price with respect to 2001 approximates the AMT price for the
week ended January 28, 2000. Because the average maximum contract price of our
2000 and 2001 hedging positions approximates or is below the AMT price for the
week ended January 28, 2000, we will not realize the full benefit of such AMT
price or any subsequent price increases that may occur with respect to the
volumes covered by our 2000 and 2001 hedging positions.
Hedging activities can also have a temporary adverse impact on our liquidity. We
have established credit limits with certain counterparties related to open
forward sales and option contracts. When unrealized gains or losses on open
positions are in excess of such credit limits, we are entitled to receive margin
advances from the counterparties or are required to make margin advances to
counterparties, as the case may be. At December 31, 1999, we had made margin
advances of $38.0 million and had posted letters of credit totaling $40.0
million in lieu of making margin advances. Increases in primary aluminum prices
subsequent to December 31, 1999, could result in our having to make additional
margin advances or post additional letters of credit and such amounts could be
significant. Our exposure to margin advances is expected to improve throughout
2000 as our year 2000 positions, which have a lower average maximum contract
price than our 2001 positions, expire. We are considering various financing and
hedging strategies to limit our exposure to further margin advances in the event
of aluminum price increases. However, we cannot assure you we will be successful
in this regard.
A portion of the metal hedging transactions we have entered into do not qualify
for "hedge" accounting under current accounting guidelines, even though they are
consistent with its hedging objectives. Accordingly, we must reflect the change
in the market value of these transactions in each period's earnings. This can
cause material swings in our reported financial results when period-end to
period-end movements in prices are large. A total of approximately $32.8 million
of net pre-tax mark-to-market charges was reflected in our 1999 results. If the
forward price for primary aluminum were to increase further from the year-end
price, additional mark-to-market charges would be required and the charges could
be significant.
We from time to time in the ordinary course of business also enter into hedging
transactions with major suppliers of energy and energy related financial
instruments to reduce our exposure to the energy price risk from fluctuating
prices for fuel oil and diesel oil used in our production process. In addition,
we enter into foreign exchange contracts to hedge our cash commitments in
respect of foreign subsidiaries and affiliates. However, we cannot assure you
that our hedging strategies will reduce our exposure to the risk of fluctuating
prices for fuel oil, diesel oil and foreign currencies or that the results of
such hedging transactions will be more favorable than if we had not entered into
such transactions.
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ITEM 1. BUSINESS (CONTINUED)
o Our substantial indebtedness and high leverage could adversely affect us
We are highly leveraged and have significant debt services requirements. As of
December 31, 1999, our total debt was approximately $972.8 million which does
not give effect to $103.6 million of our guaranteed debt of unconsolidated
affiliates and $57.6 million of other guarantees and letters of credit. The
ratio of our total debt to stockholders' equity was approximately 14 to 1. In
addition, we expect to borrow additional amounts under our credit agreement, as
amended (the "Credit Agreement"), or from other sources in the future, if
available.
Our high level of debt affects our operations in several important ways:
o a large portion of the cash we generate is used to pay interest;
o the agreements governing such debt may limit our flexibility in planning
for and reacting to changes in our business conditions;
o we may be more vulnerable in the event of a downturn in our business, the
aluminum industry or general economic conditions;
o some or all of the agreements governing such debt limit our ability to
borrow additional money, to pay dividends and to consolidate or merge with
other companies;
o a high level of debt may impair our ability to obtain additional financing
for working capital, capital expenditures, acquisitions, general corporate
and other purposes;
o we may experience a competitive disadvantage because we are more highly
leveraged than some of our competitors; and
o the agreements governing such debt permit our creditors to accelerate
payments if we default or experience a change in the control of our
ownership as set forth in such agreements.
Our ability to make payments on and to refinance such debt depends on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond our control.
We will need to refinance all or a substantial portion of such debt on or before
its maturity. We have a $325.0 million Credit Agreement which expires in August
2001. As of February 29, 2000, we had $212.6 million of unused availability
remaining under the Credit Agreement after allowing for $30.0 million of
outstanding borrowings and $82.4 million for outstanding letters of credit. In
addition, as of December 31, 1999, we had $850.2 million of public notes
outstanding, of which $224.6 million principal amount of senior notes are due in
2002, $400.0 million principal amount of senior subordinated notes are due in
2003 and $225.6 million principal amount of senior notes are due in 2006. We
cannot assure you that we will be able to refinance such debt on acceptable
terms, if at all.
o The explosion at the Gramercy alumina refinery could result in adverse
consequences to us
On July 5, 1999, our Gramercy, Louisiana, alumina refinery was extensively
damaged by an explosion. The cause of the explosion is under investigation by
various governmental agencies. In January 2000, the U.S. Mine Safety and Health
Administration ("MSHA") issued 21 citations in connection with its investigation
of the Gramercy incident. The citations allege, among other things, that certain
aspects of the plant's operations were unsafe and that such mode of operation
contributed to the explosion. Additional civil or criminal fines or penalties
are still possible. To date, no monetary penalty has been proposed by MSHA.
Although we expect that a fine will be levied, we cannot predict the amount of
any such fine(s). It is possible that other civil or criminal fines or penalties
could be levied against us. We previously announced that we disagree with the
substance of the citations and have challenged them. Twenty-four employees were
injured in the incident, several of them severely. We may be liable for claims
relating to the injured employees. The incident has also resulted in thirty-six
class action lawsuits being filed against us alleging, among other things,
property damage and personal injury. The aggregate amount of damages sought in
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ITEM 1. BUSINESS (CONTINUED)
the lawsuits cannot be determined at this time. While we believe our insurance
will cover the majority of these lawsuits and claims relating to the injured
employees, it is anticipated that any civil or criminal fines or penalties will
not be covered by such insurance.
Production at the plant is expected to be completely curtailed until the third
quarter of 2000 when we expect partial production to begin and, based on our
current estimates, we expect full production to be achieved during the first
quarter of 2001 or shortly thereafter. We have received the regulatory permit
required to operate the plant once the facility is ready to resume production.
In addition, shortly after the incident, we declared force majeure with respect
to certain of our sales contracts with customers. We could experience the loss
of one or more customers as a result of the Gramercy incident. Such a loss would
adversely affect the plant's competitive position unless we are able to gain new
customers. We are working with our customers to ensure a continued supply of
alumina by purchasing alumina for our customers in the open market at prices in
excess of the prices we are currently receiving from our customers. We are also
currently purchasing alumina in the open market for a portion of our internal
requirements. While the excess cost of such open market purchases is expected to
be substantially offset by insurance recoveries, if, in the future, we are not
successful in assuring an adequate supply of alumina at a competitive price for
our smelters or if delays in the rebuild were to occur and certain sublimits
within our insurance coverage were deemed to apply, our results could be
negatively affected.
We continue to work with the insurance carriers to maximize the amount of
recoveries and to minimize, to the extent possible, the period of time between
when we expend funds and when we are reimbursed. However, we will likely have to
fund an average of 30 - 60 days of property damage and business interruption
activity, unless some other arrangement is agreed with the insurance carriers,
and such amounts could be significant. If insurance recoveries were to be
delayed or if there were other significant uses of our existing Credit Agreement
capacity, delays in the rebuilding of the Gramercy refinery could occur and
could have a material adverse impact on our liquidity and operating results.
Based on what is known to date, we believe that the financial impact of this
incident (in excess of the $5 million of insurance deductibles and
self-retention provisions, which has already been recorded) will be largely
offset by insurance coverage. However, delays in receiving insurance proceeds
could adversely affect the timing of rebuilding the Gramercy refinery and could
temporarily adversely impact our liquidity and operating results.
o Our labor dispute could adversely affect us
Substantially all of our hourly work force at our Gramercy, Louisiana, alumina
refinery; Mead and Tacoma, Washington aluminum smelters, Trentwood, Washington,
rolling mill; and Newark, Ohio, extrusion facility were covered by a master
labor agreement with the USWA which expired on September 30, 1998. The parties
did not reach an agreement prior to the expiration of the master agreement and
the USWA chose to strike. In January 1999, we declined an offer by the USWA to
have the striking workers return to work at the five plants without a new
agreement. We imposed a lock-out to support our bargaining position and continue
to operate the plants (excluding our Gramercy facility) with salaried employees
and other workers as we have since the strike began.
The labor dispute with the USWA involves a number of uncertainties, including
the ultimate cost of a settlement with the USWA and the resolution of the USWA's
appeal of a ruling by the Oakland, California, regional office of the National
Labor Relations Board (the "NLRB") that was favorable to us. Although we are
satisfied with the productivity improvements achieved by the temporary work
force at these plants and although turnover rates have declined significantly
since the beginning of the dispute, there can be no assurance about our ability
to retain and motivate such a work force for an indefinite period.
Since the beginning of the dispute, we have held periodic but unsuccessful talks
with the USWA to seek a new labor agreement. Our proposal to the union has
encompassed wage and benefit increases in exchange for productivity
improvements. We believe such a proposal would result in a significant net
reduction in operating costs for the affected plants compared to pre-strike
levels. However, upon settlement, our earnings may reflect a one-time charge for
certain costs associated with the new labor agreement. There can be no assurance
that this proposal will be accepted.
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ITEM 1. BUSINESS (CONTINUED)
In July 1999, the Oakland, California regional office of the NLRB dismissed the
USWA's allegations of unfair labor practices against the Company. In September
1999, the union filed an appeal of this ruling with the NLRB general counsel's
office in Washington, D.C. If the original decision were to be reversed, the
matter would be referred to an administrative judge for a hearing whose outcome
would be subject to additional appeal either by the USWA or the Company. This
process could take months or years. There can be no certainty that the original
NLRB decision will be upheld. If these proceedings eventually resulted in a
definitive ruling against us, we could be obligated to provide back pay to USWA
members at the five plants. The amount of such back pay could be significant.
Back pay, if any, would not cover the period prior to the USWA's January 1999
offer to return to work.
The USWA has publicly stated that it is conducting a corporate campaign against
us. Such campaigns are often conducted by unions during a labor dispute and are
designed to bring public pressure to bear on a company in the belief that such
pressure will expedite the settlement of the dispute. As part of its corporate
campaign against us, the USWA has engaged in a number of activities, including
contacting our customers, suppliers, members of the investment community,
clergymen, and various public agencies with whom we have ongoing relationships.
Although such efforts on the part of the USWA have generated publicity in the
news media, we believe that they have had little or no material impact on our
operations. We do not know if the corporate campaign will continue or, if so,
how long it might continue, or what specific actions the USWA may take. We do
not know if such efforts may have a material impact on our operations in the
future.
o The asbestos-related lawsuits against us could continue to increase and could
adversely impact our financial position
We are a defendant in numerous lawsuits in which the plaintiffs allege that they
have injuries caused by exposure to asbestos during, and as a result of, their
employment or association with us, or exposure to products containing asbestos
produced or sold by us. The lawsuits generally relate to products we sold twenty
or more years ago. On December 31, 1999, there were 100,000 claims pending,
compared with 86,400 claims at December 31, 1998. We have reached agreements
under which we expect to settle approximately 31,900 of the claims pending on
December 31, 1999 over an extended period.
Our December 31, 1999, balance sheet includes a liability for estimated
asbestos-related costs of $387.8 million. We cannot assure you that this
liability will not increase in the future. In determining the amount of the
liability, we have only included estimates for the cost of claims for a ten year
period through 2009 because we do not have a reasonable basis for estimating
costs beyond that period. However, we expect that these costs may continue
beyond 2009 and that they could be substantial.
We believe we have insurance coverage for a substantial portion of such
asbestos-related costs. Accordingly, our December 31, 1999, balance sheet
incudes a long term receivable for estimated insurance recoveries of $315.5
million.
As a result of the net increases in our estimates for such asbestos-related
liabilities and receivables during 1999, we recorded pre- tax charges of $53.2
million during the year ended December 31, 1999.
Prior to insurance recoveries, we estimate that our annual cash payments for
asbestos-related costs will be approximately $75.0 - $85.0 million for each of
the years 2000 through 2002, approximately $35.0 - $55.0 million for each of the
years 2003 and 2004, and a total of $58.0 million beyond 2004. We believe that
we will recover a substantial portion of these payments from insurance, but
cannot assure you that we will receive substantial insurance payments or that
the timing of such payments will occur in the year we are required to make the
payments. However, we have reached preliminary agreements with certain insurance
carriers under which we expect to collect a substantial portion of our
anticipated 2000 asbestos-related payments. However, delays in receiving these
or future repayments would have an adverse impact on our liquidity.
We continue to monitor claims activity, the status of lawsuits, legislative
developments and other factors. We cannot assure you that our estimates of
liabilities and recoveries will not change in the future. We also cannot assure
you that the amounts related to future asbestos-related claims will not exceed
our aggregate insurance coverage.
o We have recently experienced net losses
We reported a net loss of $52.4 million for the year ended December 31, 1999.
There can be no assurance that we will operate profitability in future periods.
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ITEM 1. BUSINESS (CONTINUED)
o We operate in a highly competitive industry
The production of alumina, primary and fabricated aluminum products is highly
competitive. There are numerous companies who operate in the aluminum industry.
Certain of our competitors are substantially larger, have greater financial
resources than we do and may have other strategic advantages.
o The operation of our smelters depends on obtaining reliable and affordable
electric power
The process of converting alumina into aluminum requires significant amounts of
electric power. The cost of electric power is an important production cost of
our aluminum smelters. We have smelters located in Mead and Tacoma, Washington,
Ghana, and Wales, the United Kingdom.
Pacific Northwest
o We purchase electric power for the Mead and Tacoma, Washington, smelters
from the Bonneville Power Administration ("BPA"), which supplies
approximately half of the electric power for the two plants, and from other
suppliers. The power contracts with the BPA expire in September 2001, and
the power contracts with other suppliers expire at various times though
September 2001.
The BPA is engaged in the process of determining the allocation and price
of electric power to its customers for the period October 2001 to September
2006. We believe that adequate electric power will be available during that
period, from the BPA and from other suppliers, for the operation of our
smelters in Washington. The price of power purchased from the BPA could be
significantly greater than the current price for such power, which would
have an adverse effect on the profitability of such facilities.
Ghana
o Electric power for the 90%-owned Valco smelter is produced by hydroelectric
generators operated by the Volta River Authority ("VRA"). The delivery of
electric power to the smelter is subject to interruption periodically
because of drought and other factors beyond the control of Valco. Electric
power is supplied under a contract with the VRA which expires in 2017. The
power contract indexes a portion of the price of power to the market price
of primary aluminum, and provides for a review and adjustment of the base
power rate and the price index every five years. In December 1999, Valco
and the VRA reached an agreement that provides for sufficient power to
operate four of Valco's five potlines in 2000 and 2001. In addition, the
agreement provides a framework for resolving longer-term issues. This
framework, among other things, is anticipated to result in an improvement
in the reliability of Valco's long-term power supply and an increase in the
price of power beginning in 2000, which increase will be partially offset
in 2000 and 2001 by compensation Valco will receive from the VRA with
respect to the provision of power in 1998 and 1999. However, we cannot
provide assurance that in the long-term Valco will continue to be
allocated sufficient power to operate at the desired operating levels past
2001 or that such power will be available at an affordable price.
Wales
o Electric power for the 49%-owned Anglesey smelter is supplied under a
contract which expires in 2001. Anglesey expects to enter into a new power
agreement during the first quarter of 2000 under which the existing
contract would terminate early, in April 2000, and the new agreement would
replace it for the period April 2000 through September 2005. We expect that
the price of power under the new agreement will be significantly greater
than the price under the present contract, which would have an adverse
effect on our financial results associated with the Anglesey smelter.
However, Anglesey has ongoing initiatives to offset the impact of increased
energy costs through cost reduction and revenue enhancement initiatives by
2001. However, we cannot assure you that these initiatives will be
successful in fully offsetting such increased energy costs.
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ITEM 1. BUSINESS (CONTINUED)
We cannot provide assurance that electric power at affordable prices will be
available in the future for these smelters.
o Our current or past operations subject us to environmental compliance,
clean-up and damage claims that may be costly
The operations of our facilities are regulated by a wide variety of
international, federal, state and local environmental laws. These environmental
laws regulate, among other things:
o air and water emissions and discharges;
o the generation, storage, treatment, transportation and disposal of solid
and hazardous waste; and
o the release of hazardous or toxic substances, pollutants and contaminants
into the environment.
Compliance with these environmental laws is costly. While legislative,
regulatory and economic uncertainties make it difficult for us to project future
spending for these purposes, we currently anticipate that in the 2000 - 2001
period our environmental capital spending will be approximately $13.0 million
per year and that our operating costs will include pollution control costs
totaling approximately $35.0 million per year. However, subsequent changes in
environmental laws may change the way we must operate and may force us to spend
more then we currently project.
Additionally, our current and former operations can subject us to fines or
penalties for alleged breaches of environmental laws and to other actions
seeking clean-up or other remedies under these environmental laws. We also may
be subject to damages related to alleged injuries to health or to the
environment, including claims with respect to certain waste disposal sites and
the clean-up of sites currently or formerly used by us.
Currently, we are subject to certain lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). We, along
with certain other companies, have been named as a Potentially Responsible Party
for clean-up costs at certain third-party sites listed on the National
Priorities List under CERCLA. As a result, we may be exposed not only to our
assessed share of clean-up but also the costs of others if they are unable to
pay. Additionally, our Mead, Washington, facility has been listed on the
National Priorities List under CERCLA and we will be required to implement one
of several acceptable remedial options suggested by the regulatory authorities.
In response to environmental concerns, we have established environmental
accruals representing our estimate of the costs we reasonably expect we will
incur in connection with these matters. Our estimates are based on presently
enacted laws, existing technology, and our assessment of the likely remediation
to be performed in each case. At December 31, 1999, the balance of our accruals,
which are primarily included in our long-term liabilities, was $48.9 million. We
estimate that the annual costs charged to these environmental accruals will be
approximately $3.0 million to $9.0 million per year for the years 2000 through
2004 and an aggregate of approximately $23.0 million thereafter. However, we
cannot assure you that our actual costs will not exceed our current estimates.
As additional facts develop, definitive clean-up plans are established, the
necessary regulatory approvals are received, or other technologies are
developed, changes in these and other factors may result in our costs exceeding
our current expectations. We believe that it is reasonably possible that costs
associated with these environmental matters may exceed current accruals by
amounts that could range, in the aggregate, up to an estimated $30.0 million. As
the resolution of these matters is subject to further regulatory review and
approval, no assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, we are currently working to resolve certain of these matters.
o We are subject to political and regulatory risks in a number of countries
We operate facilities in the U.S. and in a number of other countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. While we believe our
relationships in the countries in which it operates are generally satisfactory,
we cannot assure you that future country developments or governmental actions
will not adversely affect our operations particularly or the aluminum industry
generally. Among the risks inherent in our operations are unexpected changes in
regulatory requirements, unfavorable legal rulings, new or increased taxes and
levies, and new or increased import or export restrictions. Our operations
outside of the
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ITEM 1. BUSINESS (CONTINUED)
U.S. are subject to a number of additional risks, including but not limited to
currency exchange rate fluctuations, currency restrictions, and nationalization
of assets.
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 Operations" 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, other than the Gramercy, Louisiana alumina refinery (see
Item 1 "- Incident at Gramercy Facility"), 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 plants are cost competitive on an international basis.
The Company's obligations under the Credit Agreement are secured by, among other
things, mortgages on its major domestic plants (other than the Gramercy alumina
refinery). See Note 5 of Notes to Consolidated Financial Statements for further
discussion.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. See
Item 1 of this Report for cautionary information with respect to such
forward-looking statements.
Gramercy Litigation
On July 5, 1999, the Company's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. The
cause of the accident is under investigation by the Company and various
governmental agencies. In January 2000, MSHA issued 21 citations in connection
with its investigation of the Gramercy incident. The citations allege, among
other things, that certain aspects of the plant's operations were unsafe and
that such mode of operation contributed to the explosion. To date, no monetary
penalty has been proposed by MSHA. Although the Company expects that a fine will
be levied, it cannot predict the amount of any such fine(s). It is possible that
other civil or criminal fines or penalties could be levied against the Company.
The Company has previously announced that it disagrees with the substance of the
citations and has challenged them.
Twenty-four employees were injured in the incident, several of them severely.
The Company may be liable for claims relating to the injured employees. The
incident has also resulted in thirty-six lawsuits, most of which were styled as
class action suits, being filed against the Company on behalf of more than
13,000 claimants. The lawsuits allege, among other things, property damage and
personal injury. Such lawsuits were initially filed, on dates ranging from July
5, 1999, through December 26, 1999, in the Fortieth Judicial District Court for
the Parish of St. John the Baptist, State of Louisiana, or in the Twenty-Third
Judicial District Court for the Parish of St. James, State of Louisiana, and
such lawsuits have been removed to the United Stated District Court, Eastern
District of Louisiana, and are consolidated under the caption Carl Bell, et al.
v. Kaiser Aluminum & Chemical Corporation, No. 99-2078, et seq. Plaintiffs have
filed motions to remand the actions to state court, and the federal court has
taken the matter under advisement. The cases are currently stayed pending
mediation between the parties. The aggregate amount of damages sought in the
lawsuits cannot be determined at this time. See Note 2 of Notes to Consolidated
Financial Statements.
Asbestos-related Litigation
The Company is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for at least 20
years. The portion of Note 11 of Notes to Consolidated Financial Statements
under the heading "Asbestos Contingencies" is incorporated herein by reference.
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Labor Matters
In connection with the USWA strike and subsequent lock-out by the Company,
certain allegations of unfair labor practices ("ULPs") were filed by the USWA
with the National Labor Relations Board ("NLRB"). In July 1999, the Oakland,
California, regional office of the NLRB dismissed all material charges filed
against the Company. In September 1999, the union filed an appeal of this ruling
with the NLRB general counsel's office in Washington, D.C. The portion of Note
11 of Notes to Consolidated Financial Statements under the heading "Labor
Matters" is incorporated herein by reference.
Other Matters
Various other lawsuits and claims are pending against the Company. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
See Note 11 of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the Company during
the fourth quarter of 1999.
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. The information in Note 5 of Notes to
Consolidated Financial Statements under the heading "Debt Covenants and
Restrictions" at page 42 of this Report is incorporated herein by reference. The
Company has not paid any dividends on its Common Stock during the two most
recent fiscal years.
The Indentures and the Credit Agreement (Exhibits 4.1 through 4.35 to the
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 4.35 to this
Report, Note 5 of Notes to Consolidated Financial Statements in this Report, and
the information under the heading, "Financing Activities and Liquidity" at page
26 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 1 of this Report, to the table at pages 18 - 19 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, to Note 1 of Notes to Consolidated Financial Statements, and to The
Five-Year Financial Data on pages 61 - 62 in this Report.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates in all principal aspects of the aluminum industry through
the following business segments: Bauxite and alumina, Primary aluminum,
Flat-rolled products and Engineered products. The Company uses a portion of its
bauxite, alumina, and primary aluminum production for additional processing at
certain of its downstream facilities. Intersegment transfers are valued at
estimated market prices. The table below provides selected operational and
financial information on a consolidated basis with respect to the Company for
the years ended December 31, 1999, 1998, and 1997. The following data should be
read in conjunction with the Company's consolidated financial statements and the
notes thereto, contained elsewhere herein. See Note 13 of Notes to Consolidated
Financial Statements for further information regarding segments. (All references
to tons refer to metric tons of 2,204.6 pounds.)
Year Ended December 31,
--------------------------------------------------
(In millions of dollars, except shipments and prices) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Shipments: (000 tons)
Alumina
Third Party 2,093.9(1) 2,250.0 1,929.8
Intersegment 757.3(1) 750.7 968.0
------------ ------------ ------------
Total Alumina 2,851.2 3,000.7 2,897.8
------------ ------------ ------------
Primary Aluminum
Third Party 295.6 263.2 327.9
Intersegment 171.2 162.8 164.2
------------ ------------ ------------
Total Primary Aluminum 466.8 426.0 492.1
------------ ------------ ------------
Flat-Rolled Products 217.9 235.6 247.9
------------ ------------ ------------
Engineered Products 171.1 169.4 152.1
------------ ------------ ------------
Average Realized Third Party Sales Price: (2)
Alumina (per ton) $ 177 $ 197 $ 198
Primary Aluminum (per pound) $ .67 $ .71 $ .75
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of bauxite) $ 397.9(1) $ 472.7 $ 411.7
Intersegment 129.0(1) 135.8 201.7
------------ ------------ ------------
Total Bauxite & Alumina 526.9 608.5 613.4
------------ ------------ ------------
Primary Aluminum
Third Party 439.1 409.8 543.4
Intersegment 240.6 233.5 273.8
------------ ------------ ------------
Total Primary Aluminum 679.7 643.3 817.2
------------ ------------ ------------
Flat-Rolled Products 576.2 714.6 743.3
Engineered Products 542.6 581.3 581.0
Minority Interests 88.5 78.0 93.8
Eliminations (369.6) (369.3) (475.5)
------------ ------------ ------------
Total Net Sales $ 2,044.3 $ 2,256.4 $ 2,373.2
============ ============ ============
Operating Income (Loss):
Bauxite & Alumina $ (6.0)(3) $ 42.0(7) $ 54.2
Primary Aluminum 8.0 49.9(7) 148.3
Flat-Rolled Products 17.1 70.8(7) 28.2(8)
Engineered Products 38.6 47.5(7) 42.3(8)
Micromill (30.7)(5) (63.4)(5) (24.5)
Eliminations 6.9 8.9 (5.9)
Corporate (62.5) (64.7) (72.7)
------------ ------------ ------------
Total Operating Income (Loss) $ (28.6) $ 91.0 $ 169.9
============ ============ ============
Net Income (Loss) $ (52.4)(6) $ 2.7 $ 52.1
============ ============ ============
Capital Expenditures $ 68.4 $ 77.6 $ 128.5
============ ============ ============
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(1) Net sales for the year ended December 31, 1999, included approximately 264
tons of alumina purchased from third parties and resold to certain
unaffiliated customers and 131 tons of alumina purchased from third
parties and transferred to the Company's primary aluminum business unit.
(2) Average realized prices for the Company's Flat-rolled products and
Engineered products segments are not presented as such prices are subject
to fluctuations due to changes in product mix. Average realized third
party sales prices for alumina and primary aluminum include the impact of
hedging activities.
(3) Operating income (loss) for the year ended December 31, 1999, included
charges of $5.0 related to insurance deductibles and self-insurance
provisions and estimated business interruption insurance recoveries
totaling $41.0. Additionally, depreciation was suspended for the Gramercy,
Louisiana alumina refinery for the last six months of 1999, as a result of
the July 5, 1999, incident. Depreciation expense for the Gramercy refinery
for the six months ended June 30, 1999, was approximately $6.0.
(4) Operating income (loss) for the year ended December 31, 1999, included
potline restart costs of $12.8.
(5) Operating income (loss) for the years ended December 31, 1999 and 1998
included non-cash charges of $19.1 and $45.0, respectively, related to the
impairment of the Company's Micromill assets.
(6) Net income (loss) for the year ended December 31, 1999, included a pre-tax
gain of $85.0 on involuntary conversion at Gramercy facility, which amount
represents the difference between the minimum expected property damage
reimbursement amount for the Gramercy alumina refinery and the net
carrying value of the damaged property.
(7) Operating income (loss) for the year ended December 31, 1998, for the
Bauxite and alumina, Primary aluminum, Flat-rolled products and Engineered
products segments included unfavorable strike-related impacts of
approximately $11.0, $29.0, $16.0, and $4.0, respectively.
(7) Operating income (loss) for the year ended December 31, 1997, included
pre-tax charges of $2.6, $12.5 and $4.6 related to restructuring of
operations for the Flat-rolled products, Engineered products and Corporate
segments, respectively.
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see "Overview,"
"Results of Operations," "Liquidity and Capital Resources" and "Other Matters").
Such statements can be identified by the use of forward- looking terminology
such as "believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, developments in technology,
new or modified statutory or regulatory requirements and changing prices and
market conditions. No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.
OVERVIEW
Market-related Factors
The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree on the volume and mix of all products sold and on the
Company's hedging strategies. Primary aluminum prices have historically been
subject to significant cyclical price fluctuations. See Notes 1 and 12 of Notes
to Consolidated Financial Statements for a discussion of the Company's hedging
activities.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what the Company sometimes refers to as the
"upstream" products: alumina and primary aluminum.
During 1999, the Average Midwest United States transaction price ("AMT price")
per pound of primary aluminum declined to a low of approximately $.57 per pound
in February 1999 and then began a steady increase ending 1999 at $.79 per pound.
During 1998, the AMT price per pound of primary aluminum experienced a steady
decline during the year, beginning the year in the $.70 to $.75 range and ending
the year in the low $.60 range. During 1997, the AMT price remained in the $.75
to $.80 price range for the first eleven months before declining to the low $.70
range in December.
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Subsequent to December 31, 1999, the AMT price continued to rise. At January 28,
2000, the AMT price was approximately $.84 per pound.
Incident at Gramercy Facility
On July 5, 1999, the Company's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is currently expected to remain completely
curtailed until the third quarter of 2000 when the Company expects to begin
partial production. Based on current estimates, full production is expected to
be achieved during the first quarter of 2001 or shortly thereafter. The Company
has received the regulatory permit required to operate the plant once the
facility is ready to resume production.
The cause of the incident is under investigation by the Company and governmental
agencies. In January 2000, the U.S. Mine Safety and Health Administration
("MSHA") issued 21 citations in connection with its investigation of the
incident. The citations allege, among other things, that certain aspects of the
plant's operations were unsafe and that such mode of operation contributed to
the explosion. To date, no monetary penalty has been proposed by MSHA. Although
the Company expects that a fine will be levied, the Company cannot predict the
amount of any such fine(s). It is possible that other civil or criminal fines or
penalties could be levied against the Company. The Company has previously
announced that it disagrees with the substance of the citations and has
challenged them. However, as more fully explained below, based on what is known
to date and discussions with the Company's advisors, the Company believes that
the financial impact of this incident (in excess of insurance deductibles and
self-retention provisions) will be largely offset by insurance coverage.
Deductibles and self-retention provisions under the insurance coverage for the
incident total $5.0 million, which amounts were charged to Cost of products sold
in 1999.
The Company's insurance policies provide that the Company will be reimbursed for
the costs of repairing or rebuilding the damaged portion of the facility using
new materials of like kind and quality with no deduction for depreciation. Based
on discussions with the insurance carriers and their representatives and third
party engineering reports, the Company recorded a pretax gain of $85.0,
representing the difference between the minimum expected property damage
reimbursement amount and the net carrying value of the damaged property of
$15.0. The receivable attributable to the minimum expected property damage
reimbursement has been classified as a long-term item in Other assets, despite
the fact that substantially all such amounts are expected to be spent during
2000, as such proceeds will be invested in property, plant and equipment. The
overall impact of recognizing the gain will be a significant increase in
stockholders' equity and an increase in deprecation expense in future years once
production is restored.
The Gramercy facility has incurred incremental costs for clean-up and other
activities during 1999 and will continue to incur such costs in 2000. These
clean-up and site preparation activities have been offset by accruals of
approximately $14.0 million for estimated insurance recoveries.
The Company's insurance policies provide for the reimbursement of specified
continuing expenses incurred during the interruption period plus lost profits
(or less expected losses) plus other expenses incurred as a result of the
incident. The Company had recorded expected business interruption insurance
recoveries totaling $19.0 million and $41.0 million in the quarter and year
ended December 31, 1999, as a reduction of Cost of products sold, which amounts
substantially offset actual expenses incurred during these periods. However, the
business interruption insurance amounts recorded represent estimates of the
Company's business interruption coverage, based on preliminary discussions with
the insurance carriers and their representatives, and are, therefore, subject to
change. The Company currently believes that additional amounts may be
recoverable. Any adjustments to the recorded amounts of expected recovery will
be reflected from time to time as such amounts are agreed to by the insurance
carriers. The amounts of such adjustments could be material.
Since production has been curtailed at the Gramercy facility, the Company has,
for the time being, suspended depreciation of the facility. Depreciation expense
for the first six months of 1999 was approximately $6.0 million. However, the
Company believes that the depreciation expense that would have been incurred
may, at least in part, be recoverable under its business interruption insurance
coverage.
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The incident has also resulted in thirty-six class action lawsuits being filed
against the Company alleging, among other things, property damage and personal
injury. In addition, a claim for alleged business interruption losses has been
made by a neighboring business. The aggregate amount of damages sought in the
lawsuits and other claims cannot be determined at this time; however, the
Company does not currently believe the damages will exceed the amount of
coverage under its liability policies.
Claims relating to all of the injured employees are expected to be covered under
the Company's workers' compensation or liability policies. However, the
aggregate amount of workers' compensation claims cannot be determined at this
time and it is possible that such claims could exceed the Company's coverage
limitations. While it is presently impossible to determine the aggregate amount
of claims that may be incurred, or whether they will exceed the Company's
coverage limitations, the Company currently believes that any amount in excess
of the coverage limitations will not have a material effect on the Company's
consolidated financial position or liquidity. However, it is possible that as
additional facts become available, additional charges may be required and such
charges could be material to the period in which they are recorded.
Labor Matters
Substantially all of the Company's hourly workforce at the Gramercy, Louisiana,
alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood,
Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a
master labor agreement with the United Steelworkers of America (the "USWA")
which expired on September 30, 1998. The parties did not reach an agreement
prior to the expiration of the master agreement and the USWA chose to strike. In
January 1999, the Company declined an offer by the USWA to have the striking
workers return to work at the five plants without a new agreement. The Company
imposed a lock-out to support its bargaining position and continues to operate
the plants with salaried employees and other workers as it has since the strike
began.
As a result of the USWA strike, the Company temporarily curtailed three out of a
total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters
at September 30, 1998 (representing approximately 70,000 tons per year of
production capacity out of a total combined production capacity of 273,000 tons
per year at the facilities). Restarts of the two Mead potlines were completed
during mid-1999. While a portion of the curtailed potline at Tacoma has been
restarted to meet internal requirements, the timing for a complete restart of
the potline (representing approximately 10,000 tons of idle production capacity)
has yet to be determined and will depend upon market conditions and other
factors.
While the Company initially experienced an adverse strike-related impact on its
profitability in the fourth quarter of 1998, the Company currently believes that
its operations at the affected facilities have been substantially stabilized and
will be able to run at, or near, full capacity, and that the incremental costs
associated with operating the affected plants during the dispute were virtually
eliminated as of January 1999 (excluding the impacts of the restart costs
discussed above and the effect of market factors such as the continued
market-related curtailment at the Tacoma smelter). However, no assurances can be
given that the Company's efforts to run the plants on a sustained basis, without
a significant business interruption or material adverse impact on its operating
results, will be successful.
The Company and the USWA continue to communicate. The objective of the Company
has been, and continues to be, to negotiate a fair labor contract that is
consistent with its business strategy and the commercial realities of the
marketplace.
Strategic Initiatives
The Company's strategy is to improve its financial results by: increasing the
competitiveness of its existing plants; continuing its cost reduction
initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of its non-core businesses; and strengthening its financial
position.
In addition to working to improve the performance of its existing assets, the
Company has devoted significant efforts analyzing its existing asset portfolio
with the intent of focusing its efforts and capital in sectors of the industry
that are considered most attractive, and in which the Company believes it is
well positioned to capture value. The initial steps of this process resulted in
the June 1997 acquisition of the Bellwood extrusion facility, the May 1997
formation of AKW L.P. ("AKW"), the rationalization of certain of the Company's
engineered products operations and the Company's investment to expand its
production capacity for heat treat flat-rolled products at its Trentwood,
Washington, rolling mill.
This process has continued in 1999. In February 1999, the Company completed the
acquisition of the remaining 45% interest in Kaiser LaRoche Hydrate Partners
("KLHP"), an alumina marketing venture, from its joint venture partner for a
cash purchase price of approximately $10.0 million. Additionally, in April 1999,
the Company completed the sale of its 50% interest in AKW,
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to its partner for $70.4 million. The strategic analysis process also resulted
in the Company's decision in the latter part of 1998 to seek a strategic partner
for the further development and deployment of its Micromill(TM) technology and
to the Company's later agreement in January 2000 to sell the Micromill assets
and technology, for a nominal payment at closing and future payments based on
subsequent performance and profitability of the Micromill technology.
Another area of emphasis has been a continuing focus on managing the Company's
legacy liabilities. The Company believes that it has insurance coverage
available to recover certain incurred and future environmental costs and a
substantial portion of its asbestos-related costs and is actively pursing claims
in this regard. During 1998, the Company received recoveries totaling
approximately $35.0 million from certain of its insurers related to current and
future environmental claims. The timing and amount of future recoveries of
asbestos-related claims from insurance carriers remain a major priority of the
Company, but will depend on the pace of claims review and processing by such
carriers and the resolution of any disputes regarding coverage under the
insurance policies. However, during 1999, the Company reached preliminary
agreements under which it expects to collect a substantial portion of its
expected asbestos-related payments from certain insurance carriers in 2000.
Additional portfolio analysis and initiatives are continuing.
Valco Operating Level
In 1999, the power allocation for the Company's 90%-owned Volta Aluminium
Company Limited ("Valco") smelter in Ghana was sufficient for the smelter to
operate three out of a total of five potlines as of January 1. Each of Valco's
potlines is capable of producing approximately 40,000 tons per year of primary
aluminum. However, production was well below this level in the first half of the
year due to the timing of restarts for the two incremental potlines.
Consequently, to compensate for the low production in the first half of the
year, Valco operated above an equivalent three-potline annual rate during the
last six months of 1999. At December 31, 1999, Valco was operating four
potlines.
Valco operated only one potline during most of 1998. However, Valco earned
compensation in 1998 (in the form of energy credits to be utilized over the last
half of 1998 and during 1999) from the Volta River Authority ("VRA") in lieu of
the power necessary to run two of the potlines that were curtailed during 1998.
The compensation substantially mitigated the financial impact in 1998 of the
curtailment of such lines. However, Valco did not receive any compensation from
the VRA for one additional potline which was curtailed in January 1998.
Under a December 1999 agreement between Valco and the VRA, Valco's power
allocation for 2000 and 2001 will be sufficient for the smelter to operate four
of its five potlines. Valco and the VRA also reached an agreement in December
1999 that provides a framework for resolving longer-term issues. This framework,
among other things, is anticipated to result in an improvement in the
reliability of Valco's long-term power supply and an increase in the price for
power beginning in 2000. The increase in the price for power will be partially
offset by net payments of approximately $13 million Valco will receive from the
VRA over the period 2000 to 2001 with respect to the provision of power in 1998
and 1999.
Flat-Rolled Products