KAISER ALUMINUM CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

COMMISSION FILE NUMBER 1-9447

KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer Identification No.)

5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)

(713) 267-3777
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

At April 30, 2004, the registrant had 79,826,028 shares of Common Stock
outstanding.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED INCOME (LOSS)

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
2

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2004

FOR THE QUARTER ENDED MARCH 31, 2003

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
3

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED CASH FLOWS

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
4

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

1. REORGANIZATION PROCEEDINGS

Kaiser Aluminum Corporation ("Kaiser", "KAC" or the "Company"), its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), and 24 of
KACC's subsidiaries have filed separate voluntary petitions in the United States
Bankruptcy Court for the District of Delaware (the "Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company,
KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first
quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" means, with respect
to any particular Debtor, the date on which such Debtor filed its Case. None of
KACC's non-U.S. joint ventures are included in the Cases. The Cases are being
jointly administered. The Debtors are managing their businesses in the ordinary
course as debtors-in-possession subject to the control and administration of the
Court.

Original Debtors. During the first quarter of 2002, the Original Debtors
filed separate voluntary petitions for reorganization. The wholly owned
subsidiaries of KACC included in such filings were: Kaiser Bellwood Corporation
("Bellwood"), Kaiser Aluminium International, Inc. ("KAII"), Kaiser Aluminum
Technical Services, Inc. ("KATSI"), Kaiser Alumina Australia Corporation
("KAAC") (and its wholly owned subsidiary, Kaiser Finance Corporation ("KFC"))
and ten other entities with limited balances or activities.

The necessity for filing the Cases by the Original Debtors was attributable
to the liquidity and cash flow problems of the Company and its subsidiaries
arising in late 2001 and early 2002. The Company was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, the
Company had become increasingly burdened by asbestos litigation and growing
legacy obligations for retiree medical and pension costs. The confluence of
these factors created the prospect of continuing operating losses and negative
cash flows, resulting in lower credit ratings and an inability to access the
capital markets.

The outstanding principal of, and accrued interest on, all debt of the
Original Debtors became immediately due and payable upon commencement of the
Cases. However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal
proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business,
subject to certain limitations. In July 2002, the Court also issued a final
order authorizing the Company to fund the cash requirements of its foreign joint
ventures in the ordinary course of business and to continue using the Company's
existing cash management systems. The Original Debtors also have the right to
assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, "assumption"
means that the Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original Debtors are relieved from their obligations to perform further
under an executory contract and are subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of a
pre-Filing Date executory contract is treated as a general unsecured claim in
the Cases.

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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Generally, pre-Filing Date claims, including certain contingent or
unliquidated claims, against the Original Debtors will fall into two categories:
secured and unsecured. Under the Code, a creditor's claim is treated as secured
only to the extent of the value of the collateral securing such claim, with the
balance of such claim being treated as unsecured. Unsecured and partially
secured claims do not accrue interest after the Filing Date. A fully secured
claim, however, does accrue interest after the Filing Date until the amount due
and owing to the secured creditor, including interest accrued after the Filing
Date, is equal to the value of the collateral securing such claim.

The Court set January 31, 2003 as the last date by which holders of
pre-Filing Date claims against the Original Debtors (other than asbestos-related
personal injury claims and certain hearing loss claims) could file their claims.
Any holder of a claim that was required to file such claim by January 31, 2003
and did not do so may be barred from asserting such claim against any of the
Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. The Company has not
yet completed its analysis of all of the proofs of claim to determine their
validity. However, during the course of the Cases, certain matters in respect of
the claims have been resolved. Material provisions in respect of claim
settlements are included in the accompanying financial statements and are fully
disclosed elsewhere herein. The January 31, 2003 bar date does not apply to
asbestos-related personal injury claims, for which the Original Debtors reserve
the right to establish a separate bar date at a later time. A separate bar date
for certain hearing loss and coal tar pitch volatiles claims was reset to
February 29, 2004.

Additional Debtors. On January 14, 2003, the Additional Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
included in such filings were: Kaiser Bauxite Company ("KBC"), Kaiser Jamaica
Corporation ("KJC"), Alpart Jamaica Inc. ("AJI"), Kaiser Aluminum & Chemical of
Canada Limited ("KACOCL") and five other entities with limited balances or
activities. Ancillary proceedings in respect of KACOCL and two Additional
Debtors were also commenced in Canada simultaneously with the January 14, 2003
filings.

The Cases filed by the Additional Debtors were commenced, among other
reasons, to protect the assets held by these Debtors against possible statutory
liens that might have arisen and been enforced by the Pension Benefit Guaranty
Corporation ("PBGC") primarily as a result of the Company's failure to meet a
$17.0 accelerated funding requirement to its salaried employee retirement plan
in January 2003 (see Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding the accelerated funding requirement). The filing of the
Cases by the Additional Debtors had no impact on the Company's day-to-day
operations.

In connection with the Additional Debtors' filings, the Court authorized
the Additional Debtors to continue to pay or otherwise honor certain pre-Filing
Date claims, including employee wages and benefits, and customer and vendor
claims in the ordinary course of business. The Court also approved the
Additional Debtors' continued participation in the Company's existing cash
management systems and routine intercompany transactions involving, among other
transactions, the transfer of materials and supplies among subsidiaries and
affiliates.

In March 2003, the Court set May 15, 2003 as the last date by which holders
of pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss and coal tar
pitch volatiles claims) could file their claims. Any holder of a claim that was
required to file such claim by May 15, 2003 and did not do so may be barred from
asserting such claim against any of the Additional Debtors and, accordingly, may
not be able to participate in any distribution in any of the Cases on account of
such claim. The Company has not yet completed its analysis of all of the proofs
of claim to determine their validity. However, during the course of the Cases,
certain matters in respect of the claims have
6

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

been resolved. Material provisions in respect of claim settlements are included
in the accompanying financial statements and are fully disclosed elsewhere
herein.

All Debtors. Two creditors' committees, one representing the unsecured
creditors (the "UCC") and the other representing the asbestos claimants (the
"ACC"), have been appointed as official committees in the Cases and, in
accordance with the provisions of the Code, have the right to be heard on all
matters that come before the Court. In August 2003, the Court approved the
appointment of a committee of salaried retirees (the "1114 Committee" and,
together with the UCC and the ACC, the "Committees") with whom the Debtors have
negotiated necessary changes, including the modification or termination, of
certain retiree benefits (such as medical and insurance) under Section 1114 of
the Code. The Committees, together with the legal representative for potential
future asbestos claimants (the "Futures' Representative") that has been
appointed in the Cases, will play important roles in the Cases and in the
negotiation of the terms of any plan or plans of reorganization. The Debtors are
required to bear certain costs and expenses for the Committees and the Futures'
Representative, including those of their counsel and other advisors.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through May 31,
2004 for KAAC, KJC and AJI and June 30, 2004 for the remaining Debtors. By
filing the motion to extend the exclusivity period, the period is automatically
extended until the May 18, 2004 Court hearing date. As the Debtors' motion to
extend the exclusivity period was agreed to by the UCC in advance of the filing,
the Debtors expect the motion to be approved by the Court. Additional extensions
are likely to be sought. However, no assurance can be given that any such future
extension requests will be granted by the Court. If the Debtors fail to file a
plan of reorganization during the exclusivity period, or if such plan is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Cases may be permitted to
propose their own plan(s) of reorganization for the Debtors.

The Debtors anticipate that substantially all liabilities of the Debtors as
of their Filing Date will be settled under one or more plans of reorganization
to be proposed and voted on in accordance with the provisions of the Code.
Although the Debtors intend to file and seek confirmation of such a plan or
plans, there can be no assurance as to when the Debtors will file such a plan or
plans or as to whether such plan or plans will be confirmed by the Court and
consummated.

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the Committees, the Futures' Representative, the PBGC,
and the appropriate union representatives. The treatment of individual groups of
creditors in any such plan of reorganization cannot be determined definitively
at this time. The ultimate treatment of and recoveries to individual creditors
is dependent on, among other things, the total amount of claims against the
Debtors as ultimately determined by the Court, the priority of the applicable
claims, the outcome of ongoing discussions with the key constituencies, the
amount of value available for distribution in respect of claims and the
completion of the plan confirmation process consistent with applicable
bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is
likely that their liabilities will be found to significantly exceed the fair
value of their assets. Therefore, the Debtors currently believe that
7

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

it is likely that substantially all pre-Filing Date claims will be settled at
less than 100% of their face value and the equity interests of the Company's
stockholders will be cancelled without consideration. Further, the Debtors
believe that it is likely that: (a) the claims of pre-petition creditors that
are given certain priorities by statute or have the benefit of guarantees or
other contractual or structural seniority will likely receive substantially
greater recoveries than pre-petition creditors that have no such priorities or
seniority; and (b) all pending and future asbestos-related personal injury
claims are likely to be resolved through the formation, pursuant to a plan of
reorganization, of a statutory trust to which all claims would be directed by a
channeling injunction that would permanently remove all asbestos liability from
the Debtors. A similar trust arrangement is anticipated in respect of pending
and future silica, hearing loss and coal tar pitch volatiles personal injury
claims. The trusts would be funded pursuant to statutory requirements and
agreements with representatives of the affected parties, using the Debtors'
insurance assets and certain other consideration that has yet to be agreed. No
assurances can be provided that the foregoing will ultimately be included in any
plan(s) of reorganization the Debtors may file. Further, while the Debtors
believe it is possible to successfully reorganize their operations and emerge
from Chapter 11 in 2004, their ability to do so is subject to inherent market-
related risks as well as successful negotiation and Court approval for the
treatment of creditors consistent with the applicable bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against KACC. These
include claims in respect of substantially all of the Debtors' debt obligations,
obligations in respect of pension and retiree medical benefits, asbestos-related
and personal injury claims, and known environmental obligations. As such, all of
these claimholders will have claims against KACC that, except as further
described below, will have to be satisfied by KACC's assets, which generally
include the alumina refinery located at Gramercy, Louisiana ("Gramercy"), the
interests in Anglesey Aluminium Limited ("Anglesey"), the interests in Volta
Aluminium Company Limited ("Valco") and the fabricated products plants (other
than the London, Ontario, Canada and Richmond, Virginia extrusion facilities,
which are owned by separate subsidiaries that are also Debtors). KACC's assets
also include certain intercompany receivables from certain of its Debtor
subsidiaries for funding provided to its joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against KACC's other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no material ongoing
activities or operations and have no material assets or liabilities other than
intercompany items. The Company believes that it is likely that most, if not
all, of these entities will ultimately be merged out of existence or dissolved
in some manner. The remaining Debtor subsidiaries (which include AJI, KJC, KAAC,
KAII, KACOCL, KBC, Bellwood, KATSI and KFC) own certain extrusion facilities or
act largely as intermediaries between KACC and certain of its other subsidiaries
and joint venture affiliates or interact with third parties on behalf of KACC
and its joint venture affiliates. As such, the vast majority of the pre-
petition claims against such entities are related to intercompany activities.
However, certain of those entities holding claims against KACC also have claims
against certain KACC subsidiaries that own the Company's interests in joint
venture affiliates and which represent a significant portion of KACC's
consolidated asset value. For example, noteholders have claims against each of
AJI and KJC, which own the Company's interests in Alumina Partners of Jamaica
("Alpart"), and KAAC, which owns the Company's interests in Queensland Alumina
Limited ("QAL"), as a result of AJI, KJC and KAAC having been subsidiary
guarantors of KACC's Senior Notes and Senior Subordinated Notes. Additionally,
the PBGC, pursuant to
8

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

statute, has joint and several claims against KACC and all entities which are
80% or more owned by KACC (referred to as "Controlled Group Members").
Controlled Group Members include each of AJI, KJC and KAAC, as well as all of
the other Debtors. The only other significant claims against AJI, KJC and KAAC
are intercompany claims related to funding provided to these entities by KACC.
As such, it is likely that the vast majority of any value realized in respect of
the Company's interests in Alpart and QAL, either from their disposition or
realized upon emergence from such operations, is likely to be for the benefit of
the noteholders and the PBGC.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of KACC and its claimholders (in respect of KACC's intercompany
claims against such entities), an intercompany settlement agreement is being
negotiated between the UCC and the Company (the "Intercompany Agreement"). The
proposed Intercompany Agreement would also release or resolve substantially all
other pre-and post-petition intercompany claims between the Debtors. The
proposed Intercompany Agreement, if finalized substantially in its current form,
would provide, among other things, for payments of cash by AJI, KJC and KAAC to
KACC of $85.0 in respect of its intercompany claims against AJI, KJC and KAAC
plus any amounts up to $14.3 plus accrued and unpaid interest and fees paid by
KACC to retire Alpart-related debt. Under the proposed Intercompany Agreement,
such amount would be increased or decreased for (1) any net cash flows collected
by or funded by KACC between the effective date of the proposed Intercompany
Agreement and the earlier of (a) AJI's, KJC's and KAAC's emergence from Chapter
11 or (b) the sale of AJI's, KJC's and KAAC's respective interests in and
related to Alpart and QAL and (2) any purchase price adjustments (other than
incremental amounts related to alumina sales contracts to be transferred)
pursuant to KACC's agreement to sell its interests in Alpart, if consummated.
The proposed Intercompany Agreement calls for such payments to be made to KACC
at the earlier of the sale of the Company's interests in Alpart and QAL or the
emergence of AJI, KJC and KAAC from Chapter 11. The Company expects that all
such payments under the proposed Intercompany Agreement, other than $28.0 to be
paid to KACC upon the sale of Alpart and any amounts paid by KACC in respect of
retiring the Alpart-related debt, are likely to be held in escrow for the
benefit of KACC until KACC's emergence from the Cases. In the interim, KACC's
claims against these entities will be secured by liens. There are still a number
of issues with respect to the proposed Intercompany Agreement that must be
satisfactorily resolved. The Intercompany Agreement once finalized will be
subject to Court approval. Discussions are ongoing between the Company, the UCC,
the ACC and the Futures' Representative in an attempt to make the terms of the
proposed Intercompany Agreement acceptable to each of the groups. The Company is
targeting to have the Court consider the proposed Intercompany Agreement at the
regularly scheduled June 2004 omnibus hearing. However, no assurances can be
provided that the issues can be resolved within the time frame necessary to
submit the Intercompany Agreement to the Court under that time frame.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 to $120.0. KACC
currently expects to fund such Exit Costs using the proceeds to be received
under the proposed Intercompany Agreement together with existing cash resources
and available liquidity under an exit financing facility that will replace the
current Post-Petition Credit Agreement (see Note 5). If payments under the
proposed Intercompany Agreement together with liquidity available under an exit
financing facility are not sufficient to pay or otherwise provide for all Exit
Costs, KACC and some or all of its other Debtor subsidiaries will not be able to
emerge from Chapter 11 unless and until sufficient funding can be obtained.
Management believes it will be able to successfully resolve

9

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

any issues that may arise in respect of the proposed Intercompany Agreement or
be able to negotiate a reasonable alternative. However, no assurances can be
given in this regard.

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders. The Company's advisors have developed a timeline that, assuming
the current pace of the Cases continues, is expected to allow the Company to
file a plan or plans of reorganization by mid-year 2004 and emerge from Chapter
11 as early as late in the third quarter of 2004. However, the Debtors' ability
to do so is subject to the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances
can be given as to whether or when any plan or plans of reorganization will
ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representative, began exploring the possible sale of one or more of
their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) KACC's Gramercy alumina refinery and Kaiser
Jamaica Bauxite Company ("KJBC"). The possible sale of the Debtors' interests in
respect of Gramercy and KJBC was explored jointly given their significant
integration. More recently, the Company also began the process of exploring the
possible sale of its 20% interest in and related to QAL. While the Company
believes that the QAL-related interests are likely to be its most valuable
commodity asset and expects that there are or will be a number of parties
interested in acquiring such interests, no assurances can be given that any such
sale will occur.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their advisors, surveyed the potential market and
initiated discussions with numerous parties believed to have an interest in such
assets. In addition, other parties contacted the Debtors and/or their investment
advisors to express an interest in purchasing the assets. The Debtors provided
(subject to confidentiality agreements) information regarding the applicable
interests to these parties, each of which was asked to submit a non-binding
expression of interest regarding the individual assets. After receiving these
initial expressions of interest from potential purchasers, the Debtors
determined which of the expressions of interest received represented reasonable
indications of value ("Qualified Bids"). Potential bidders ("Qualified Bidders")
that submitted Qualified Bids were then permitted to conduct due diligence in
respect of the assets for which they submitted a Qualified Bid and to submit
definitive proposals.

The Debtors reviewed the definitive proposals submitted and, in
consultation with the UCC, the ACC and the Futures' Representative, and other
key constituencies, determined with which Qualified Bidders the Debtors would
pursue further negotiations. See Note 4 for a discussion of subsequent
developments regarding potential dispositions of Alpart, Valco and
Gramercy/KJBC.

10

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of Alpart, Valco and Gramercy/KJBC were
likely and, therefore, that recoverability should be evaluated differently at
December 31, 2003 and subsequent periods. The change in evaluation methodology
was required because, under generally accepted accounting principles ("GAAP"),
assets to be held and used are evaluated for recoverability differently than
assets to be sold or disposed of. Assets to be held and used are evaluated based
on their expected undiscounted future net cash flows. So long as the Company
reasonably expects that such undiscounted future net cash flows for each asset
will exceed the recorded value of the asset being evaluated, no impairment is
required. However, if plans to sell or dispose of an asset or group of assets
meet a number of specific criteria, then, under GAAP, such assets should be
considered held for sale/disposition and their recoverability should be
evaluated, for each asset, based on expected consideration to be received upon
disposition. Sales or dispositions at a particular time will be affected by,
among other things, the existing industry and general economic circumstances as
well as the Company's own circumstances, including whether or not assets will
(or must) be sold on an accelerated or more extended timetable. Such
circumstances may cause the expected value in a sale or disposition scenario to
differ materially from the realizable value over the normal operating life of
assets, which would likely be evaluated on long-term industry trends.

The Company ultimately concluded that no impairment of its interests in and
related to Alpart was appropriate based on its updated expectation that the sale
of the Company's interests in Alpart would result in a pre-tax gain (see Note
4). By contrast, based on the Company reaching a financial agreement in early
May 2004 with the Government of Ghana ("GoG") in respect of the sale of its
interests in and related to Valco, the Company determined that it should impair
its interests in and related to Valco to the amount of the expected proceeds to
be received from the GoG. As a result, as of March 31, 2004, KACC recorded a
non-cash charge of approximately $33.0 (see Note 4). Additionally, in evaluating
the recoverability of the Company's basis in Gramercy/KJBC, the Company recorded
an impairment charge of approximately $368.0 in the fourth quarter of 2003
because all offers received for such assets were substantially below the
carrying value of the assets (see Note 4). The actual amount of gain or loss if
and when the potential sales of Valco and Gramercy/KJBC are consummated may
differ from these amounts as a result of closing adjustments, changes in
economic circumstances and other matters.

Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with AICPA Statement of Position
90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.

Upon emergence from the Cases, the Company expects to apply "fresh start"
accounting to its consolidated financial statements as required by SOP 90-7.
Fresh start accounting is required if: (1) a debtor's liabilities are determined
to be in excess of its assets and (2) there will be a greater than 50% change in
the equity ownership of the entity. As previously disclosed, the Company expects
both such circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as determined in its
plan(s) of reorganization and approved by the Court. Additionally, items such as
accumulated depreciation, accumulated deficit and accumulated other
comprehensive income (loss) will be reset to zero. The Company will allocate the
reorganization value to its individual assets and liabilities based
11

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

on their estimated fair value at the emergence date. Typically such items as
current liabilities, accounts receivable, and cash will be reflected at values
similar to those reported prior to emergence. Items such as inventory, property,
plant and equipment, long-term assets and long-term liabilities are more likely
to be significantly adjusted from amounts previously reported. Because fresh
start accounting will be adopted at emergence, and because of the significance
of the pending asset sales and liabilities subject to compromise (that will be
relieved upon emergence), meaningful comparisons between the current historical
financial statements and the financial statements upon emergence may be
difficult to make.

Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:

CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004

For condensed consolidating balance sheets of the Debtors and non-Debtors
as of December 31, 2003, see Note 1 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003.

12

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2004

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2003

13

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003

Classification of Liabilities as "Liabilities Not Subject to Compromise"
Versus "Liabilities Subject to Compromise." Liabilities not subject to
compromise include: (1) liabilities incurred after the Filing Date of the Cases;
(2) pre-Filing Date liabilities that the Debtors expect to pay in full,
including priority tax and employee claims and certain environmental
liabilities, even though certain of these amounts may not be paid until a plan
of reorganization is approved; and (3) pre-Filing Date liabilities that have
been approved for payment by the Court and that the Debtors expect to pay (in
advance of a plan of reorganization) over the next twelve-month period in the
ordinary course of business, including certain employee related items (salaries,
vacation and medical benefits), claims subject to a currently existing
collective bargaining agreement, and certain postretirement medical and other
costs associated with retirees (however, see Note (2) to the table below).

Liabilities subject to compromise refer to all other pre-Filing Date
liabilities of the Debtors. The amounts of the various categories of liabilities
that are subject to compromise are set forth below. These amounts represent the
Company's estimates of known or probable pre-Filing Date claims that are likely
to be resolved in connection with the Cases. Such claims remain subject to
future adjustments. Further, the Debtors currently believe that it is likely
that substantially all pre-Filing Date claims will be settled at less than 100%
of

14

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

their face value and the equity interests of the Company's stockholders will be
cancelled without consideration.

The amounts subject to compromise at March 31, 2004 and December 31, 2003
consisted of the following items:

- ---------------

(1) Accrued salaries, wages and related expenses represent estimated minimum
pension contributions that, absent the Cases, would have otherwise been
payable. Amounts as of March 31, 2004 and December 31, 2003 include
approximately $100.0 associated with estimated special liquidity and other
pension contributions that were not made. As previously disclosed, the
Company does not currently expect to make any pension contributions in
respect of its domestic pension plans. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December
31, 2003 for additional information about non-payment of pension
contributions.

(2) In February 2004, the Company concluded an agreement with the 1114 Committee
and union representatives that represent the vast majority of the hourly
employees that provides for the termination of the existing salaried and
hourly postretirement benefit plans, subject to certain conditions. The
Company has included postretirement medical obligations expected to be paid
through May 31, 2004 in the accompanying balance sheets at March 31, 2004
and December 31, 2003, as liabilities not subject to compromise. Such
amounts total $21.7 at March 31, 2004 and $32.5 at December 31, 2003 (see
Note 9 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 for additional information about
termination of postretirement benefit plans).

(3) Long-term liabilities include hearing loss claims of $15.8 at March 31, 2004
and December 31, 2003 (see Note 7), environmental liabilities of $43.0 at
March 31, 2004 and December 31, 2003 (see Note 7) and asbestos liabilities
of $480.1 at March 31, 2004 and December 31, 2003 (see Note 7).

The classification of liabilities "not subject to compromise" versus
liabilities "subject to compromise" is based on currently available information
and analysis. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the

15

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Company evaluates the proofs of claim filed in the Cases, adjustments will be
made for those claims that the Company believes will probably be allowed by the
Court. The amount of such claims could be significant.

Reorganization Items. Reorganization items under the Cases are expense or
income items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-Filing Date liabilities. For the quarters ended March 31,
2004 and 2003, reorganization items were as follows:

2. GENERAL

This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Going Concern. The interim consolidated financial statements of the
Company have been prepared on a "going concern" basis which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business; however, as a result of the commencement of the Cases, such
realization of assets and liquidation of liabilities are subject to a
significant number of uncertainties. Specifically, the interim consolidated
financial statements do not present: (a) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (b)
the amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Cases, or (c) the effect of any changes that may
occur in connection with the Debtors' capitalizations or operations of the
Debtors as a result of a plan of reorganization. Because of the ongoing nature
of the Cases, the discussions and consolidated financial statements contained
herein are subject to material uncertainties.

Additionally, as discussed above (see Financial Statement Presentation),
the Company believes that it would, upon emergence, apply fresh start accounting
to its consolidated financial statements which would also adversely impact the
comparability of the March 31, 2004 financial statements to the financial
statements of the entity upon emergence.

Principles of Consolidation. The Company is a subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly owned subsidiary,
KACC.

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with GAAP for interim financial information and the
rules and regulations of the Securities and Exchange Commission. Accordingly,
these financial statements do not include all of the disclosures required by
GAAP for complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature unless otherwise
noted, necessary for a fair statement of the results for the interim periods
presented.

16

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

The preparation of financial statements in accordance with GAAP requires
the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities known to exist
as of the date the financial statements are published, and the reported amounts
of revenues and expenses during the reporting period. Uncertainties with respect
to such estimates and assumptions are inherent in the preparation of the
Company's consolidated financial statements; accordingly, it is possible that
the actual results could differ from these estimates and assumptions, which
could have a material effect on the reported amounts of the Company's
consolidated financial position and results of operations.

Operating results for the quarter ended March 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.

Earnings per Share. Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of Common
Stock outstanding during the period including the weighted average impact of the
shares of Common Stock issued during the year from the date(s) of issuance.
However, earnings (loss) per share may not be meaningful, because as a part of a
plan of reorganization, it is likely that the equity interests of the Company's
existing stockholders will be cancelled without consideration.

Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate KACC's exposure to
changes in prices for certain of the products which KACC sells and consumes and,
to a lesser extent, to mitigate KACC's exposure to change in foreign currency
exchange rates. KACC does not utilize derivative financial instruments for
trading or other speculative purposes. KACC's derivative activities are
initiated within guidelines established by management and approved by KACC's and
the Company's boards of directors. Hedging transactions are executed centrally
on behalf of all of KACC's business segments to minimize transaction costs,
monitor consolidated net exposure and allow for increased responsiveness to
changes in market factors.

See Notes 2 and 8 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding derivative financial instruments.

17

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

3. INVENTORIES

The classification of inventories is as follows:

Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market. Replacement cost is not in excess of
LIFO cost.

Inventories at March 31, 2004, have been reduced by a net charge of $1.2
(included in Other operating charges (benefits), net -- see Note 9) to
write-down certain alumina inventories to their estimated net realizable value
as a result of the Company's possible sale of its interests in and related to
Valco (see Note 4).

4. PROPERTY, PLANT, AND EQUIPMENT

The major classes of property, plant, and equipment are as follows:

The following discusses the divestiture activities of certain of the
Company's commodity assets during the quarters ended March 31, 2004 and 2003.

18

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

2004 --

- As previously disclosed, the Company entered into an agreement in January
2004 to sell its interest in Alpart. Net proceeds from the sale pursuant
to the agreement would, at a minimum, have been in the range of $160.0 to
$170.0, subject to certain closing and post-closing adjustments. However,
such purchase price could have increased, possibly significantly,
depending on what, if any, alumina sales contracts were transferred to
the buyer as a part of the transaction. In February 2004, another
potential purchaser filed certain objections with the Court in respect of
the January 2004 sales agreement and stated that it was willing to bid
significantly more than the other party for KACC's interests in and
related to Alpart. In March 2004, the Court terminated the January 2004
contract and ordered that an auction be held during April 2004 in respect
of the possible sale of the Company's interests in and related to Alpart.
As a result of the auction and after consultation with the UCC and
others, the Company entered into an agreement with the successful bidder
to sell its interest in Alpart for a base purchase price of $295.0 plus
certain adjustments, which are expected to be in the range of $20.0. The
transaction is expected to result in a gross sales price in the range of
$315.0 and a pre-tax gain of approximately $100.0. The agreement was
approved by the Court in April 2004. As previously disclosed, under
Alpart's existing partnership arrangement, its partner retains the right
for 30 days from date of Court approval to purchase the Company's
interest in Alpart at the price in the agreement approved by the Court.
The Company has targeted a closing date for the transaction near the end
of the second quarter of 2004. The Company currently expects that the
proceeds from the sale will be held in escrow pending the completion and
approval by the Court of a DIP Facility amendment (see Note 5) and the
Intercompany Agreement (see Note 1). However, no assurances can be
provided as to the actual timing of the transaction or whether the sale
will actually be completed on the terms outlined above.

- The Company believes that an agreement to sell its interests in the
Gramercy facility and KJBC will be signed and filed with the Court in the
very near future. Net proceeds from the sale are expected to be in the
$20.0 range, a substantial portion of which may be used to satisfy
transaction related costs and obligations. The Company expects that, if
the agreement is finalized, it would likely be submitted to the Court for
consideration in the second quarter of 2004. While the potential sale of
Gramercy/KJBC has not yet been approved by the Court and, therefore, may
not ultimately occur or may close under different terms and conditions,
the Company determined that the fair value of its interests in
Gramercy/KJBC was below the carrying value of the assets because all
offers received for such assets were substantially below the carrying
value of the assets. Accordingly, KACC adjusted the carrying value of its
interest in Gramercy/KJBC to their estimated fair value, which resulted
in a fourth quarter 2003 non-cash impairment charge of approximately
$368.0. Previously, the Company had evaluated the book value of its
interests of the Gramercy/KJBC assets on a "hold and use" basis assuming
a normal economic life for the facility and more normal market conditions
than have recently existed and such analysis indicated that no impairment
charge was required. Final adjustments to the carrying value of the
Gramercy facility and KJBC assets may cause the actual loss from the sale
of the Company's interest in and related to the Gramercy facility and
KJBC, if consummated, to vary from the impairment charge.

- As more fully discussed in Note 14 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, during 2003, the Company and Valco participated in extensive
negotiations with the GoG and the Volta River Authority ("VRA") regarding
the power situation and other matters. Such negotiations did not result
in a resolution of such matters. However, as an outgrowth of such
negotiations, the Company and the GoG entered into a Memorandum of

19

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Understanding ("MOU") in December 2003 pursuant to which KACC would sell
its 90% interest in and related to Valco to the GoG for consideration of
between $35.0 and $100.0, plus assumption of all of the Company's related
liabilities and obligations. The MOU contemplated that the transaction
would close by April 30, 2004. The consideration was to be paid in 2004
and beyond. During 2004, assuming the $35.0 minimum consideration, the
GoG was to pay $7.0 in cash to the Company and $18.0 in cash to Valco,
thereby reducing the Company's funding to Valco. The remainder of the
consideration (a minimum of $10.0) was to be paid in cash to the Company
over a four-year period from the closing date. The GoG obligation to the
Company was to be guaranteed by the Bank of Ghana. However, as of April
30, 2004, the GoG had only paid $5.0 of the $18.0 that was due to Valco
under the MOU and the $7.0 escrow payment to the Company had not been
funded. The Company met with the GoG in early May 2004 and reached a new
financial agreement. Under the revised financial terms, $13.0 was to be
put into escrow by the GoG by May 14, 2004. As of May 14, 2004, the
Company was informed that $12.0 of the $13.0 had been paid into the
escrow account. The $13.0 amount is to be paid to the Company as full and
final consideration for the transaction at closing. The Company also
agreed to fund certain end of service benefits of Valco employees
(estimated to be approximately $9.0) which the GoG was to assume under
the original MOU. The Company and the GoG are targeting a closing for the
transaction in July 2004, subject to a number of conditions including the
approval by the Ghanaian parliament. No assurance can be made as to when
or if the transaction will close under the revised terms. However, as the
revised purchase price is well below the Company's recorded value for
Valco and given the increased likelihood of a closing and the payment by
the GoG of the escrow amount, the Company determined that it should
impair its interests in and related to Valco at March 31, 2004 to the
amount of the expected proceeds. As such, KACC recorded a non-cash
impairment charge of approximately $33.0 (included in Other operating
charges (benefits), net -- see Note 9). The actual amount of loss if and
when the potential sale of the Company's interests in and related to
Valco is consummated may differ from the above amount as a result of
closing adjustments, changes in economic circumstances and other matters.

- In February 2004, the Company entered into an agreement to sell the Mead
facility and certain related property in connection with which it would
receive net cash proceeds of approximately $3.0 and the buyer would
assume certain site-related liabilities. The sale of the Mead property
was subject to an auction to determine if a higher value could be
obtained. The auction bidding procedures were approved by the Court in
March 2004. As a result of the auction and after consultation with the
UCC and others, the Company entered into an agreement with the successful
bidder to sell the Mead facility and certain related property for
approximately $7.4 plus assumption of certain site-related liabilities.
The Company expects that the sale will result in net proceeds in the
range of $5.0 to $6.0 and a pre-tax gain of approximately $20.0. While
the Company expects the sale to be approved by the Court and close during
the second quarter of 2004, certain objections have been filed by third
parties to the proposed sale and it is unclear what impact these
objections may have on the sales process. No assurances can be given that
the sale will be completed under the items outlined above. Additionally,
it is possible that all or some portion of the proceeds from the sale may
need to be held in escrow until emergence from the Chapter 11 proceedings
for the benefit of the holders of the 7.6% solid waste disposal revenue
bonds (see Note 5).

- In March 2004, the Company completed the sale of certain non-operating
land that was adjacent to the Mead facility. Net proceeds from the sale
were approximately $7.4. The pre-tax impact of the sale was deferred at
March 31, 2004 pending the finalization of the sale of the Mead facility
and transfer of the site-related liabilities.

20

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

2003 --

- In January 2003, the Court approved the sale of the Tacoma facility to
the Port of Tacoma (the "Port"). Gross proceeds from the sale, before
considering approximately $4.0 of proceeds being held in escrow pending
the resolution of certain environmental and other issues, were
approximately $12.1. The Port also agreed to assume the on-site
environmental remediation obligations. The sale closed in February 2003.
The sale resulted in a pre-tax gain of approximately $9.5 (which amount
was reflected in Other operating charges (benefits), net -- see Note 9).
The operating results of the Tacoma facility for 2004 and 2003 have not
been reported as discontinued operations in the accompanying Statements
of Consolidated Income (Loss) because such amounts were not material. The
Tacoma facility's operating loss for the quarter ended March 31, 2003
before considering the gain on the sale and any income tax impact was not
material.

- KACC had a long-term liability, net of estimated subleases income, on an
office complex in Oakland, California, in which KACC had not maintained
offices for a number of years, but for which it was responsible for lease
payments as master tenant through 2008 under a sale-and-leaseback
agreement. The Company also held an investment in certain notes issued by
the owners of the building (which were included in Other Assets). In
October 2002, the Company entered into a contract to sell its interests
and obligations in the office complex. As the contract amount was less
than the asset's net carrying value (included in Other assets), the
Company recorded a non-cash impairment charge in 2002 of approximately
$20.0. The sale was approved by the Court in February 2003 and closed in
March 2003. Net cash proceeds were approximately $61.1.

5. LONG-TERM DEBT

Debt consists of the following:

21

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Post-Petition Credit Agreement. On February 12, 2002, the Company and KACC
entered into the DIP Facility with a group of lenders for debtor-in-possession
financing. In March 2003, certain of the Additional Debtors were added as
co-guarantors and the DIP Facility lenders received super-priority status with
respect to certain of the Additional Debtors' assets. The DIP Facility provides
for a secured, revolving line of credit through the earlier of February 13,
2005, the effective date of a plan of reorganization or voluntary termination by
the Company. Under the DIP Facility, KACC is able to borrow amounts by means of
revolving credit advances and to have issued for its benefit letters of credit
(up to $125.0) in an aggregate amount equal to the lesser of $285.0 or a
borrowing base relating to eligible accounts receivable, eligible inventory and
an amortizing fixed asset subcomponent, reduced by certain reserves, as defined
in the DIP Facility agreement. The DIP Facility is guaranteed by the Company and
certain significant subsidiaries of KACC. Interest on any outstanding borrowings
will bear a spread over either a base rate or LIBOR, at KACC's option. As of
March 31, 2004, $132.1 was available to the Company under the DIP Facility (of
which up to $79.5 could be used for additional letters of credit) and no
borrowings were outstanding under the revolving credit facility.

The DIP Facility requires KACC to comply with certain covenants and places
restrictions on the Company's, KACC's and KACC's subsidiaries' ability to, among
other things, incur debt and liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and for all measurement periods through May 31, 2004 and accordingly, the
Company will likely not have to comply with the covenant until June 30, 2004.
The Company is currently working with the DIP Facility lenders to complete an
amendment that is anticipated, among other things, to: (1) reset the financial
covenant based on more recent forecasts; (2) authorize the sale of the Company's
interests in Alpart, QAL, Gramercy/KJBC and Valco within certain parameters and
(3) reduce the availability of the fixed asset subcomponent of the borrowing
base to a level that, by emergence will be based on advances solely in respect
of machinery and equipment at the fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0-$100.0 range and that such amount should be adequate
to support the Company's liquidity requirements through the remainder of the
Cases. This belief is based on the fact that it was the commodities' assets and
operations that subjected the Company to the most variability and exposure both
from a price risk basis as well as from an operating perspective. While the
Company anticipates that it will be successful in completing an amendment to the
DIP Facility along the lines outlined above in time for submission to the Court
in May 2004, no assurances can be given in this regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case completion of the aforementioned amendment is delayed.
The limited consent and waiver would, among other things (1) allow the Company
to complete the sale of its interests in and related to Alpart provided that the
proceeds are escrowed and are subject to the lenders' administrative super
priority claim until the amendment is completed, (2) extend the waiver of the
financial covenant through the June 30, 2004 measurement date and (3) waive the
current DIP Facility requirement that any proceeds from the sale of Alpart
reduce the fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

22

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

8 1/4% Alpart CARIFA Loans. In December 1991, Alpart entered into a loan
agreement with the Caribbean Basin Projects Financing Authority ("CARIFA"). As
of March 31, 2004, Alpart's obligations under the loan agreement were secured by
two letters of credit aggregating $23.5. KACC was a party to one of the two
letters of credit in the amount of $15.3 in respect of its 65% ownership
interest in Alpart. Alpart has also agreed to indemnify bondholders of CARIFA
for certain tax payments that could result from events, as defined, that
adversely affect the tax treatment of the interest income on the bonds.

Pursuant to the CARIFA loan agreement, the Alpart CARIFA financing would
have to be repaid at time of closing of the sale if the Company completes the
previously disclosed sale of its interests in Alpart (see Notes 1 and 4).
However, such repayment would have an essentially neutral effect on the
Company's liquidity as, upon any such payment, the Company's letter of credit
obligation under the DIP Facility securing the loans would be cancelled.

7.6% Solid Waste Disposal Revenue Bonds. The 7.6% solid waste disposal
revenue bonds (the "Solid Waste Bonds") are secured by certain (but not all) of
the facilities and equipment at the curtailed Mead facility (see Note 4 for a
discussion of the pending sale of the Mead facility). The Company currently
believes that it is likely that the value of the collateral securing the Solid
Waste Bonds is insufficient for full recovery of the bondholders' claim. The
Company estimates the value of the collateral to be in the $1.0 range. As a
result, the Company has reclassified $18.0 of the Solid Waste Bonds balance to
Liabilities subject to compromise (see Note 1).

6. INCOME TAXES

The income tax provisions of $6.9 and $4.7 for the quarters ended March 31,
2004 and 2003, respectively, relate primarily to foreign income taxes. For the
quarters ended March 31, 2004 and 2003, as a result of the Cases, the Company
did not recognize any U.S. income tax benefit for the losses incurred from its
domestic operations (including temporary differences) or any U.S. income tax
benefit for foreign income taxes. Instead, the increases in federal and state
deferred tax assets as a result of additional net operating losses and foreign
tax credits generated in 2004 and 2003 were fully offset by increases in
valuation allowances. See Note 8 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding the Deferred Tax Assets and Valuation Allowances.

7. COMMITMENTS AND CONTINGENCIES

Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, claims against a Debtor
arising from actions or omissions prior to its Filing Date will be settled in
connection with its plan of reorganization.

Commitments. KACC has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 8), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share (20%) of debt, operating
costs, and certain other costs of QAL. KACC's share of the aggregate minimum
amount of required future principal payments as of March 31, 2004, was $60.0
which amount matures in varying amounts during the 2005 to 2008 period. KACC's
share of QAL's debt increased by approximately $8.0 during 2003 as additional
drawdowns on QAL financing (KACC's share $40.0) more than offset KACC's share
($32.0) of QAL's debt principal payment. During July 2002, KACC made payments of
approximately $29.5 to QAL to
23

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

fund KACC's share of QAL's scheduled debt maturities. KACC's share of payments,
including operating costs and certain other expenses under the agreements, has
generally ranged between $70-$100 over the past three years. However, as
discussed more fully in Note 1, the Company is considering the possibility of
selling its interests in QAL. If KACC's interest in QAL were to be sold, the
Company believes that KACC's obligations in respect of its share of QAL's debt
would be assumed by the buyer. KACC also has agreements to supply alumina to and
to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 2003, are
as follows: years ending December 31, 2004 -- $7.5; 2005 -- $4.7; 2006 -- $2.1;
2007 - $.3; 2008 -- $.2; thereafter -- $.7. Pursuant to the Code, the Debtors
may elect to reject or assume unexpired pre-petition leases. At this time, no
final decisions have been made as to which significant leases will be accepted
or rejected (see Note 1). Rental expenses were $15.2, $38.3 and $41.0, for the
years ended December 31, 2003, 2002 and 2001, respectively.

Environmental Contingencies. The Company and KACC are subject to a number
of environmental laws, to fines or penalties assessed for alleged breaches of
the environmental laws, and to claims and litigation based upon such laws. KACC
currently is subject to a number of claims under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for remedial costs
at certain third-party sites listed on the National Priorities List under
CERCLA.

Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
March 31, 2004, the balance of such accruals was $82.2 (of which $43.0 was
included in Liabilities subject to compromise -- see Note 1). These
environmental accruals represent the Company's estimate of costs reasonably
expected to be incurred in the ordinary course of business based on presently
enacted laws and regulations, currently available facts, existing technology,
and the Company's assessment of the likely remediation action to be taken. In
the ordinary course, the Company expects that these remediation actions would be
taken over the next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately $25.4 in 2004,
$2.2 to $4.3 per year for the years 2005 through 2008 and an aggregate of
approximately $45.7 thereafter. Approximately $20.2 of the adjustments to the
environmental liabilities in 2003 (see below) that applied to non-owned property
sites has been included in the after 2008 balance because such amounts are
expected to be settled solely in connection with the Debtors' plan or plans of
reorganization.

The March 31, 2004 accrual balance includes approximately $23.2 that was
provided during the third quarter of 2003. Approximately $20.2 of the amount
provided in the third quarter of 2003 relates to the previously disclosed
multi-site settlement agreement with various federal and state governmental
regulatory authorities and other parties in respect of KACC's environmental
exposure at a number of non-owned sites. Under this agreement, among other
things, KACC agreed to claims at such sites totaling $25.6 ($20.2 greater than
amounts that had previously been accrued for these sites) and, in return, the
governmental regulatory authorities have agreed that such claims would be
treated as pre-Filing Date unsecured claims (i.e. liabilities subject to
compromise). The Company recorded in the third quarter of 2003 the portion of
the $20.2 accrual that relates to locations with active operations ($15.7) in
Other operating charges, net. The remainder of the accrual ($4.5), which relates
to locations that have not operated for a number of years was recorded in the
third quarter of 2003 in Other income (expense).

During September 2003, the Company also provided additional accruals
totaling approximately $3.0 associated with certain KACC-owned properties with
no current operations (recorded in the third quarter of
24

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

2003 in Other income (expense)). These additional accruals resulted primarily
from additional cost estimation efforts undertaken by the Company in connection
with its reorganization efforts. The additional accruals were recorded as
liabilities not subject to compromise as they relate to properties owned by the
Company.

As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $15.6 (a majority of which are estimated to
relate to owned sites that are likely not subject to compromise). As the
resolution of these matters is subject to further regulatory review and
approval, no specific assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, the Company is currently working to resolve certain of these matters.

The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries.

Other Environmental Matters. During April 2004, KACC was served with a
subpoena for documents and has been notified by Federal authorities that they
are investigating certain environmental compliance issues with respect of KACC's
Trentwood facility in the State of Washington. KACC is undertaking its own
internal investigation of the matter through specially retained counsel to
ensure that it has all relevant facts regarding Trentwood's compliance with
applicable environmental laws. KACC believes it is in compliance with all
applicable environmental laws and requirements at the Trentwood facility and
intends to defend any claims or charges, if any should result, vigorously. The
Company cannot assess what, if any, impacts this matter may have on the
Company's or KACC's financial statements.

Asbestos Contingencies. KACC has been one of many defendants in a number
of lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced or
sold by KACC. The lawsuits generally relate to products KACC has not sold for
more than 20 years. As of the initial Filing Date, approximately 112,000 claims
were pending. The lawsuits are currently stayed by the Cases.

Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, KACC expects additional
asbestos claims will be filed as part of the claims process. A separate
creditors' committee representing the interests of the asbestos claimants, the
ACC, has been appointed. The Debtors' obligations with respect to present and
future asbestos claims will be resolved pursuant to a plan of reorganization.

The Company has accrued a liability for estimated asbestos-related costs
for claims filed to date and an estimate of claims to be filed through 2011. At
March 31, 2004, the balance of such accrual was $610.1, all of which was
included in Liabilities subject to compromise (see Note 1). The Company's
estimate is based on the Company's view, at March 31, 2004, of the current and
anticipated number of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut & Klein, P.A., with
respect to the current state of the law related to asbestos claims. However,
there are inherent uncertainties involved in estimating asbestos-related costs
and the Company's actual costs could exceed the Company's estimates due to
changes in facts and

25

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

circumstances after the date of each estimate. Further, while the Company does
not presently believe there is a reasonable basis for estimating
asbestos-related costs beyond 2011 and, accordingly, no accrual has been
recorded for any costs which may be incurred beyond 2011, the Company expects
that the plan of reorganization process may require an estimation of KACC's
entire asbestos-related liability, which may go beyond 2011, and that such costs
could be substantial.

The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
carriers exist. The timing and amount of future recoveries from these insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. The Company
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, KACC filed suit in San Francisco
Superior Court against a group of its insurers, which suit was thereafter split
into two related actions. Additional insurers were added to the litigation in
2000 and 2002. During October 2001, June 2003 and February 2004, the court ruled
favorably on a number of policy interpretation issues. Additionally, one of the
favorable October 2001 rulings was affirmed in February 2002 by an intermediate
appellate court in response to a petition from the insurers. The rulings did not
result in any changes to the Company's estimates of its current or future
asbestos-related insurance recoveries. The trial court may hear additional
issues from time to time. Given the expected significance of probable future
asbestos-related payments, the receipt of timely and appropriate payments from
its insurers is critical to a successful plan of reorganization and KACC's
long-term liquidity.

The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:

- ---------------

(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that KACC
will be able to project similar recovery percentages for future
asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed KACC's aggregate insurance coverage.
As of March 31, 2004 and December 31, 2003, $4.3 and $6.1, respectively, of
the receivable amounts relate to costs paid. The remaining receivable
amounts relate to costs that are expected to be paid by KACC in the future.

26

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

During the pendency of the Cases, all asbestos litigation is stayed. As a
result, the Company does not expect to make any asbestos payments in the near
term. Despite the Cases, the Company continues to pursue insurance collections
in respect of asbestos-related amounts paid prior to its Filing Date.

Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. Additional asbestos-related claims are likely
to be asserted as a part of the Chapter 11 process. Management cannot at this
time reasonably predict the ultimate number of such claims or the amount of the
associated liability. However, it is likely that such amounts could exceed,
perhaps significantly, the liability amounts reflected in the Company's
consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims through 2011. KACC's obligations in respect
of the currently pending and future asbestos-related claims will ultimately be
determined (and resolved) as a part of the overall Chapter 11 proceedings. It is
anticipated that resolution of these matters could be a lengthy process.<