======================================================================



                  SECURITIES AND EXCHANGE COMMISSION
                        Washington, D.C.  20549


                               FORM 10-Q


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

             For the quarterly period ended September 30, 1994March 31, 1995

                     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 2600, Houston, Texas  77057-3010
         (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   Xx        No      
   -----         ------

     ------

     As of October 31, 1994,At April 30, 1995, the registrant had 58,201,26358,205,833 shares of common
stock outstanding.


==========================================================================================================================================











         KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

                    PART I - FINANCIAL INFORMATION


ItemITEM 1.  FINANCIAL STATEMENTS
         --------------------
CONSOLIDATED BALANCE SHEETS (In millions of dollars) March 31, December 31, 1995 1994 -------------------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 7.4 $ 17.6 Receivables 266.5 199.2 Inventories 503.1 468.0 Prepaid expenses and other current assets 105.0 158.0 ----------------------- Total current assets 882.0 842.8 Investments in and advances to unconsolidated affiliates 168.6 169.7 Property, plant, and equipment - net 1,123.0 1,133.2 Deferred income taxes 280.0 271.2 Other assets 319.2 281.2 ----------------------- Total $2,772.8 $2,698.1 ======================= Liabilities & Stockholders' Equity Current liabilities: Accounts payable $ 145.1 $ 152.1 Accrued interest 13.8 32.6 Accrued salaries, wages, and related expenses 71.3 77.7 Accrued postretirement medical benefit obligation - current portion 47.0 47.0 Other accrued liabilities 156.2 176.9 Payable to affiliates 87.2 85.3 Long-term debt - current portion 12.2 11.5 ----------------------- Total current liabilities 532.8 583.1 Long-term liabilities 539.4 495.5 Accrued postretirement medical benefit obligation 738.1 734.9 Long-term debt 824.3 751.1 Minority interests 122.4 116.2 Stockholders' equity: Preferred stock .6 .6 Common stock .6 .6 Additional capital 528.1 527.8 Accumulated deficit (504.4) (502.6) Additional minimum pension liability (9.1) (9.1) ----------------------- Total stockholders' equity 15.8 17.3 ----------------------- Total $2,772.8 $2,698.1 =======================
The followingaccompanying notes to interim consolidated financial statements are an integral part of the registrant and its consolidated subsidiary companies are set forth below in response to Item 1, Part I, of this Form 10-Q: Consolidated Balance Sheets - September 30, 1994 (unaudited) and December 31, 1993; Statements of Consolidated Loss (unaudited) - quarter and nine months ended September 30, 1994 and 1993; Statements of Consolidated Cash Flows (unaudited) - nine months ended September 30, 1994 and 1993. For further information, refer to the consolidated financial statements and the footnotes thereto included in the annual report of the registrant on Form 10-K for the year ended December 31, 1993.these statements. - 1 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED BALANCE SHEETSINCOME (LOSS) (Unaudited) (In millions of dollars) September 30, Decemberdollars, except per share amounts) Quarter Ended March 31, -------------------- 1995 1994 1993 ------------- ----------- (Unaudited) Assets-------------------- Current assets: CashNet sales $513.0 $415.1 -------------------- Costs and cash equivalents $ 53.1 $ 14.7 Receivables 214.0 234.7 Inventories 413.2 426.9 Prepaidexpenses: Cost of products sold 426.7 387.8 Depreciation 23.7 24.9 Selling, administrative, research and development, and general 30.0 28.0 -------------------- Total costs and expenses 480.4 440.7 -------------------- Operating income (loss) 32.6 (25.6) Other income (expense): Interest and other current assets 98.3 60.7 -------- -------- Total current assets 778.6 737.0 Investments in and advances to unconsolidated affiliates 171.4 183.2 Property, plant, and equipment--net 1,125.2 1,163.7 Deferredincome (expense) - net (.8) 2.0 Interest expense (23.6) (21.4) -------------------- Income (loss) before income taxes, 268.9 210.8 Other assets 254.1 233.2 -------- -------- Total $2,598.2 $2,527.9 ======== ======== Liabilities & Stockholders' Equity Current liabilities: Accounts payable $ 126.1 $ 126.3 Accrued interest 13.5 23.6 Accrued salaries, wages,minority interests, and related expenses 66.3 56.1 Accrued postretirement benefit obligation--current portion 47.6 47.6 Other accrued liabilities 137.1 133.2 Payable to affiliates 79.7 62.4 Short-term borrowings .5 Long-term debt--current portion 11.5 8.7 -------- -------- Total current liabilities 481.8 458.4 Long-term liabilities 499.2 501.8 Accrued postretirement benefit obligation 723.4 713.1 Long-term debt 744.7 720.2extraordinary loss 8.2 (45.0) Credit (provision) for income taxes (2.9) 15.8 Minority interests 111.6 105.0 Stockholders' equity: Preferred(1.8) (.1) -------------------- Income (loss) before extraordinary loss 3.5 (29.3) Extraordinary loss on early extinguishment of debt, net of tax benefit of $2.9 (5.4) -------------------- Net income (loss) 3.5 (34.7) Dividends on preferred stock .6 .2 Common stock .6 .6 Additional capital 527.5 425.9 Accumulated deficit (469.6) (375.7) Additional minimum pension liability (21.6) (21.6) -------- -------- Total stockholders' equity 37.5 29.4 -------- -------- Total $2,598.2 $2,527.9 ======== ========(5.3) (4.2) -------------------- Net loss attributable to common shareholders $ (1.8) $(38.9) ==================== Per common and common equivalent share: Loss before extraordinary loss $ (.03) $ (.58) Extraordinary loss (.09) -------------------- Net loss $ (.03) $ (.67) ==================== Weighted average common and common equivalent shares outstanding (000) 58,205 58,096 ====================
The accompanying notes to interim consolidated financial statements are an integral part of these statements. - 2 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED LOSSCASH FLOWS (Unaudited) (In millions of dollars, except share amounts) dollars) Quarter Ended Nine Months Ended September 30, September 30, ---------------- -------------------March 31, ----------------- 1995 1994 1993 1994 1993 ------ ------ -------- ------------------------- Cash flows from operating activities: Net sales $461.1 $428.4 $1,335.7 $1,303.2 ------ ------ -------- -------- Costs and expenses: Costincome (loss) $ 3.5 $(34.7) Adjustments to reconcile net income (loss) to net cash used for operating activities: Depreciation 23.7 24.9 Non-cash postretirement medical benefit expenses 3.2 3.4 Amortization of products sold 416.0 389.9 1,222.8 1,181.0 Depreciation 22.8 24.4 72.8 72.9 Selling, administrative, research and development, and general 29.2 31.6 86.8 90.7 ------ ------ -------- -------- Totalexcess investment over equity in net assets of unconsolidated affiliates 2.9 2.9 Amortization of deferred financing costs and expenses 468.0 445.9 1,382.4 1,344.6 ------ ------ -------- -------- Operating loss (6.9) (17.5) (46.7) (41.4) Other income (expense): Interest and other income (expense)--net (.7) 3.0 2.5 10.0 Interest expense (22.3) (20.5) (65.9) (63.8) ------ ------ -------- -------- Loss before income taxes, minority interests, extraordinary loss, and cumulative effectdiscount on long-term debt 1.3 2.2 Equity in (income) losses of changes in accounting principles (29.9) (35.0) (110.1) (95.2) Credit for income taxes 10.5 14.4 38.6 39.5unconsolidated affiliates (1.8) 1.3 Minority interests (1.4) (.4) (2.2) (1.3) ------ ------ -------- -------- Loss before extraordinary loss and cumulative effect of changes in accounting principles (20.8) (21.0) (73.7) (57.0)1.8 .1 Extraordinary loss on early extinguishment of debt - net 5.4 Increase in receivables (69.6) (6.6) (Increase) decrease in inventories (35.1) 14.5 Decrease (increase) in prepaid expenses and other current assets 43.8 (7.3) Incurrence of financing costs (.7) (17.1) Decrease in accounts payable (7.0) (12.8) Decrease in accrued interest (18.6) (10.7) Decrease in payable to affiliates and accrued liabilities (3.8) (8.8) Decrease in accrued and deferred income taxes (3.7) (17.7) Other 3.7 (6.9) ----------------- Net cash used for operating activities (56.4) (67.9) ----------------- Cash flows from investing activities: Net proceeds from disposition of property and investments 1.1 2.3 Capital expenditures (13.7) (9.6) Redemption fund for minority interest preference stock (1.2) (2.3) ----------------- Net cash used for investing activities (13.8) (9.6) ----------------- Cash flows from financing activities: Repayments of long-term debt, including revolving credit (237.5) (321.4) Borrowings of long-term debt, including revolving credit 311.2 353.5 Net short-term debt repayments (.5) Dividends paid (10.6) (4.2) Capital stock issued 100.4 Redemption of minority interests' preference stock (3.1) (7.4) ----------------- Net cash provided by financing activities 60.0 120.4 ----------------- Net (decrease) increase in cash and cash equivalents during the period (10.2) 42.9 Cash and cash equivalents at beginning of period 17.6 14.7 ----------------- Cash and cash equivalents at end of period $ 7.4 $ 57.6 ================= Supplemental disclosure of cash flow information: Interest paid, net of tax benefit of $2.9 and $11.2 for 1994 and 1993 periods, respectively (5.4) (21.8) Cumulative effect of changes in accounting principles, net of tax benefit of $237.7 (507.3) ------ ------ -------- -------- Net loss (20.8) (21.0) (79.1) (586.1) Dividends on preferred stock (5.3) (3.2) (14.8) (3.2) ------ ------ -------- -------- Net loss attributable to common shareholders $(26.1) $(24.2)capitalized interest $ (93.9)40.9 $ (589.3) ====== ====== ======== ======== Per common and common equivalent share: Loss before extraordinary loss and cumulative effect of changes in accounting principles $ (.45) $ (.42) $ (1.53) $ (1.05) Extraordinary loss (.09) (.38) Cumulative effect of changes in accounting principles (8.85) ------- ------ -------- -------- Net loss $ (.45) $ (.42) $ (1.62) $ (10.28) ====== ====== ======== ======== Weighted average common and common equivalent shares outstanding (000) 58,161 57,332 58,118 57,330 ====== ====== ======== ========29.9 Income taxes paid 4.0 2.4
The accompanying notes to interim consolidated financial statements are an integral part of these statements. - 3 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (In millions of dollars)
Nine Months Ended September 30, -------------------- 1994 1993 ------- -------- Cash flows from operating activities: Net loss $ (79.1) $ (586.1) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 72.8 72.9 Amortization of deferred financing costs and discount on long-term debt 4.8 8.5 Non-cash postretirement benefit expenses other than pensions 10.4 14.6 Minority interests 2.2 1.3 Extraordinary loss on early extinguishment of debt 5.4 21.8 Cumulative effect of changes in accounting principles 507.3 Decrease in accrued and deferred income taxes (46.2) (48.8) Equity in losses of unconsolidated affiliates 3.2 11.8 (Decrease) increase in accrued interest (9.8) 5.7 Incurrence of financing costs (19.1) (12.0) Decrease in receivables 13.4 25.2 Decrease in inventories 13.7 8.8 (Increase) decrease in prepaid expenses and other current assets (13.2) 12.8 Decrease in accounts payable (.3) (31.3) Increase (decrease) in payable to affiliates and accrued liabilities 5.3 (10.1) Other 5.5 (4.8) ------- -------- Net cash used for operating activities (31.0) (2.4) ------- -------- Cash flows from investing activities: Net proceeds from disposition of property and investments 4.2 11.6 Capital expenditures (37.5) (36.4) Redemption fund for minority interest preference stock (1.2) (.2) ------- -------- Net cash used for investing activities (34.5) (25.0) ------- -------- Cash flows from financing activities: Repayments of long-term debt, including revolving credit (326.2) (1,011.3) Borrowings of long-term debt, including revolving credit 353.5 920.0 Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0 Tender premiums and other costs of early extinguishment of debt (27.1) Net short-term (payments) borrowings (.5) 13.7 Dividends paid (14.8) (3.2) Capital stock issued 100.4 119.3 Redemption of minority interests' preference stock (8.5) (4.2) ------- -------- Net cash provided by financing activities 103.9 22.2 ------- -------- Net increase (decrease) in cash and cash equivalents during the period 38.4 (5.2) Cash and cash equivalents at beginning of period 14.7 19.1 ------- -------- Cash and cash equivalents at end of period $ 53.1 $ 13.9 ======= ======== Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 70.9 $ 49.6 Income taxes paid 9.7 9.3 Tax allocation payments from MAXXAM Inc. (3.6) Supplemental disclosure of non-cash financing activities: Exchange of the borrowings from MAXXAM Group Inc. for capital stock $ 15.0
The accompanying notes to interim consolidated financial statements are an integral part of these statements. - 4 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars) 1. General ------- Kaiser Aluminum Corporation ("Kaiser" or the(the "Company") is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM owns approximately 59%58% of Kaiser'sthe Company's common stock, assuming the conversion of each outstanding $.65 Depositary Share, each representing ownership of one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"), and each outstanding share of 8.255% PRIDES, (as defined below)Convertible Preferred Stock (the PRIDES ), into one share of Kaiser'sthe Company's common stock, with the remaining 41%42% publicly held. The Company operates through its direct subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods presented have been included. Operating results for the first nine monthsquarter of 19941995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1994. Certain reclassifications of prior-periodprior- period information were made to conform to the current presentation. In the first quarter of 1994, the Company consummated the public offering of 8,855,550 shares of 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES"). The net proceeds from the sale of the PRIDES were approximately $100.4. The Company used such net proceeds to make non-interest-bearing loans to KACC in the aggregate principal amount of $33.2 (the aggregate dividends scheduled to accrue on the PRIDES from the issuance date until December 31, 1997, the date on which the outstanding PRIDES are mandatorily convertible into shares of the Company's common stock) and used the balance of such net proceeds to make capital contributions to KACC in the aggregate amount of approximately $67.2. At September 30, 1994, 28,000,000 shares of the Company's common stock owned by MAXXAM were pledged as security for debt issued by a subsidiary of MAXXAM, consisting of $100.0 aggregate principal amount of 11-1/4% Senior Secured Notes due 2003, and $126.7 aggregate principal amount of 12-1/4% Senior Secured Discount Notes due 2003. 2. Inventories ----------- The classification of inventories is as follows:
September 30,March 31, December 31, 1995 1994 1993 ------------- ------------------------------------- Finished fabricated aluminum products $ 58.155.8 $ 83.749.4 Primary aluminum and work in process 158.8 141.4222.8 203.1 Bauxite and alumina 88.1 94.0110.3 102.3 Operating supplies and repair and maintenance parts 108.2 107.8 ------ ------114.2 113.2 ------------------------ Total $413.2 $426.9 ====== ======$503.1 $468.0 ========================
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. - 5 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars) 3. Long-Term Debt Long-term debt is as follows:
September 30, December 31, 1994 1993 ------------- ------------ 1994 Credit Agreement 1989 Credit Agreement (6.59% at December 31, 1993) Revolving Credit Facility $188.0 9-7/8% Senior Notes, net of discount of $1.4 $223.6 Pollution Control and Solid Waste Disposal Facilities Obligations (6.00% - 7.75%) 38.1 39.2 Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 Alpart Term Loan (8.95%) 18.8 25.0 12-3/4% Senior Subordinated Notes 400.0 400.0 Other borrowings (fixed and variable rates) 15.7 16.7 ------ ------ Total 756.2 728.9 Less current portion 11.5 8.7 ------ ------ Long-term debt $744.7 $720.2 ====== ======
On February 17, 1994, the Company and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. (as agent for itself and other lenders), Bank of America National Trust and Savings Association, and certain other lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a $275.0 five-year secured, revolving line of credit, scheduled to mature in 1999, and replaces the credit agreement entered into in December 1989 by the Company and KACC with a syndicate of commercial banks and other financial institutions (as amended, the "1989 Credit Agreement"). KACC is able to borrow under the facility by means of revolving credit advances and letters of credit in an aggregate amount equal to the lesser of $275.0 or a borrowing base related to eligible accounts receivable plus eligible inventory. As of September 30, 1994, $65.8 of letters of credit were outstanding, leaving $209.2 of borrowing capacity unused under the 1994 Credit Agreement (of which $59.2 could have been used for letters of credit). The 1994 Credit Agreement is unconditionally guaranteed by the Company and by certain significant subsidiaries of KACC. Loans under the 1994 Credit Agreement bear interest at a rate per annum, at KACC's election, equal to (i) a Reference Rate (as defined) plus 1-1/2% or (ii) LIBO Rate (Reserve Adjusted) (as defined) plus 3- 1/4%. After June 30, 1995, the interest rate margins applicable to borrowings under the 1994 Credit Agreement may be reduced by up to 1-1/2% based upon a financial test, determined quarterly. The 1994 Credit Agreement was amended as of July 21, 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition." The Company recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. Concurrent with the offering by the Company of the PRIDES, KACC issued $225.0 of its 9-7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the offering of the Senior Notes were used to reduce outstanding borrowings under the 1989 Credit Agreement immediately prior to the effectiveness of the 1994 Credit Agreement and for working capital and general corporate purposes. - 6 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars) 4. Net Loss per Common and Common Equivalent Share ----------------------------------------------- Net loss per common and common equivalent share is computed based on the weighted average number of common and common equivalent shares outstanding during each period. For the quarter and nine months ended September 30, 1994,March 31, 1995, common stock equivalentsequivalent shares of 19,382,950 attributable to the Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares") andShares, 8,855,550 attributable to the PRIDES, and 1,119,680 attributable to nonqualified stock options were excluded from the calculation of weighted average shares because they were antidilutive. Aggregate dividends on the Series A Shares and the PRIDES ($5.3 and $14.8 for the quarter and nine months ended September 30, 1994, respectively) are added to net loss for the purpose of calculating net loss per common and common equivalent share. 5.- 4 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES 4. Contingencies ------------- Environmental Contingencies - The Company and KACC are subject to a wide variety of environmental laws and regulations and to fines or penalties assessed for alleged breaches of the environmental laws and to claims and litigation based uponon such laws. KACC currently is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based uponon the Company's evaluation of these and other environmental matters, the Company has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 1994,March 31, 1995, the balance of such accruals, which is primarily included in Long- termLong-term liabilities, was $38.2.$40.8. These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based uponon presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation actionsaction to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to thethese environmental accrualaccruals will be approximately $4.0$3.0 to $8.0$11.0 for the years 19941995 through 19981999 and an aggregate of approximately $12.7$11.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts which cannot presently be estimated.that could range, in the aggregate, up to approximately $20.0. While uncertainties are inherent in the ultimatefinal outcome of these environmental matters, and it is presently impossible to presently determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect uponon the Company's consolidated financial position or results of operations. Asbestos Contingencies - KACC is a defendant in a number of lawsuits 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 manufactured for at least 15 years. As of the date of this report,At March 31, 1995, the number of such lawsuits pending was approximately 21,300. - 7 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars)29,200. Based upon prior experience, the Company estimates annual future cash payments in connection with such litigation of approximately $8.0 to $13.0 for each of the years 1994 through 1998, and an aggregate of approximately $98.9 thereafter through 2007. Based uponon past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2007. The Company's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, the current state of case law related to asbestos claims, and the advice of counsel. Accordingly, an asbestos-related cost accrual of $135.1, before considerations for insurance recoveries, is included primarily in Long-term liabilities at March 31, 1995. KACC estimates that annual future cash payments in connection with such litigation will be approximately $11.0 to $13.0 for each of the years 1995 through 1999, and an aggregate of approximately $74.0 thereafter through 2007. The Company does not presently believe there is a reasonable basis for estimating such costs beyond 2007 and, accordingly, no accrual has been recorded for such costs which may be incurred. This accrual was calculated based upon the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, the current state of case law related to asbestos claims, the advice of counsel, and the anticipated effects of inflation and discounting at an estimated risk-free rate. Accordingly, an asbestos-related cost accrual of $103.1 is included primarily in Long-term liabilities at September 30, 1994. The aggregate amount of the undiscounted liability at September 30, 1994, is $144.7, before considerations for insurance recoveries.incurred beyond 2007. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. While claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, the Company believes, based uponon prior insurance-relatedinsurance- related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of counsel, that - 5 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recoveriesrecovery of $95.3,$119.5, determined on the same basis as the asbestos-related cost accrual, areis recorded primarily in Other assets asat March 31, 1995. While uncertainties are inherent in the final outcome of September 30, 1994. Based uponthese asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management currently believes that, based on the factors discussed in the two preceding paragraphs, management currently believes that the resolution of the asbestos- relatedasbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect uponon the Company's consolidated financial position or results of operations. Other Contingencies - The Company orand KACC isare involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the ultimatefinal outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect uponon the Company's consolidated financial position or results of operations. 6.5. Derivative Financial Instruments and Related Hedging Programs ------------------------------------------------------------- KACC enters into a number of financial instrumentsprimary metal hedging transactions with off-balance-sheetoff-balance sheet risk in the normal course of business thatbusiness. The prices realized by the Company under certain sales contracts for alumina, primary aluminum, and fabricated aluminum products as well as the costs incurred by the Company on certain items, such as aluminum scrap, rolling ingot, power, and bauxite, fluctuate with the market price of primary aluminum, together resulting in a "net exposure" of earnings. The primary metal hedging transactions are designed to reduce itsmitigate the net exposure to fluctuations in foreign exchange rates, alumina and primary aluminum prices, and the cost of purchased commodities. KACC has significant expenditures which are denominated in foreign currencies related to long-term purchase commitments with its affiliates in Australia and the United Kingdom, which expose KACC to certain exchange rate risks. In order to mitigate its exposure, KACC periodically enters into forward foreign exchange and currency option contracts in Australian Dollars and Pounds Sterling to hedge these commitments. The forward foreign currency exchange contracts are agreements to purchase or sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At September 30, 1994, KACC had net forward foreign - 8 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars) exchange contracts totaling approximately $17.2 for the purchase of 25.5 million Australian Dollars through May 1995. The option contracts are agreements that establish the maximum price or establish a range of prices at which the foreign currency may be acquired. At September 30, 1994, such options established a price range of $15.1 to $15.8 for the purchase of 24.0 million Australian Dollars through December 1994, and established a maximum price of $1.5 for the purchase of 1.0 million Pounds Sterling through December 1994. To mitigate its exposureearnings to declines in the market pricesprice of alumina and primary aluminum, while retaining the ability to participate in favorable pricing environments that may materialize,materialize. KACC has developed strategies which include forward sales of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. Under the principal components of KACC's price risk management strategy, which can be modified at any time, (i) varying quantities of KACC's anticipated production are sold forward at fixed prices; (ii) call options are purchased to allow KACC to participate in certain higher market prices, should they materialize, for a portion of KACC's excess primary aluminum and alumina sold forward; (iii) option contracts are entered into to establish a price range KACC will receive for a portion of its excess primary aluminum and alumina; and (iv) put options are purchased to establish minimum prices KACC will receive for a portion of its excess primary aluminum and alumina. In this regard, in respect of its remaining 19941995 anticipated primary aluminum and alumina production, as of September 30, 1994,net exposure, at March 31, 1995, KACC had soldnet forward 11,250 metric tons of primary aluminum at fixed prices, and had purchased call options in respect of 15,000 metric tons of primary aluminum. Further, in respect of its 1995 anticipated primary aluminum production, as of September 30, 1994, KACC had sold forward 41,700 metric tonssales contracts for 235,800 tons* of primary aluminum at fixed prices, purchased call options in respect of 30,000 metric47,250 tons of primary aluminum, purchased put options to establish a minimum price for 181,500 metric160,250 tons of primary aluminum, and entered into option contracts that established a price range for 12,000 metric71,000 tons of primary aluminum. In addition, since several alumina sales contracts have pricing provisions which link the selling price of alumina to the spot price of primary aluminum, KACC has hedged a portionrespect of its 1996 anticipated net exposure, at March 31, 1995, alumina sales on the primary aluminum forward market. As of September 30, 1994, KACC had sold 37,500 metricforward 15,000 tons of primary aluminum forward at fixed pricesprices. KACC also enters into hedging transactions in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates. At March 31, 1995, KACC had net forward foreign exchange contracts totaling approximately $139.5 for the purchase of 192.0 Australian dollars through March 1997. At March 31, 1995, the net unrealized loss on KACC's position in aluminum forward sales and entered into option contracts that established(based on a market price range for 78,000 metric tonsof $1,859 per ton of primary aluminum) and forward foreign exchange contracts was $16.3. KACC has established margin accounts with its counterparties related to aluminum forward sales and option contracts. KACC is entitled to receive advances from counterparties related to unrealized gains and, in turn, is required to make margin deposits with counterparties to cover unrealized losses related to these contracts. At March 31, 1995, KACC had $7.5, compared with $50.5 at December 31, 1994, on deposit with various counterparties in respect of such alumina sales contracts. KACC will not receive the benefit of market price increases to the extent (i) the quantity of production sold forward is greater than the tonnage covered by the purchased call options; (ii) market prices exceed the prices at which primary aluminum is sold forward, butunrealized losses. These amounts are less than the strike pricerecorded in Prepaid expenses and other current assets. See Note 10 of the purchased call options, on the tonnage covered by the options; or (iii) market prices exceed the maximum of the price range on the tonnage covered by the option contracts enteredNotes to establish a price range. In addition, KACC enters into forward fixed price arrangements with certain customers which provideConsolidated Financial Statements for the delivery of a specific quantity of fabricated aluminum products over a specified future period of time. In orderyear ended December 31, 1994. - ------------------------- * All references to establish the cost of primary aluminum for a portion of such sales, KACC may enter into forward and options contracts. Intons in this regard, at September 30, 1994, KACC had purchased 9,000report refer to metric tons of primary aluminum forward purchase contracts at fixed prices that expire at various times through December 1995. KACC has also entered into a natural gas pricing contract to fix future prices of a portion (20,000 million BTU's per day) of a plant's natural gas supply through March 1995.2,204.6 pounds. - 96 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (In millions of dollars) At September 30, 1994, the net unrealized gain on KACC's position in forward foreign exchange and foreign currency options was $3.0 and the net unrealized loss on aluminum forward sales and option contracts and the natural gas pricing contract was $39.5, based on dealer quoted prices. Gains and losses arising from the use of hedging instruments are reflected in the Company's operating results concurrently with the consummation of the underlying hedged transactions. KACC is exposed to credit risk in the event of non-performance by other parties to these currency and commodity contracts, but KACC does not anticipate non-performance by any of these counter-parties. ItemITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- (In millions of dollars, except shipments, prices, and per share amounts) The following should be read in conjunction with the response to Item 1, Part I, of this Report. Results of Operations - ---------------------- The Company's operating results are sensitive to changes in prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree on the volume and mix of all products sold and on KACC's hedging strategies. See Note 5 of Notes to Interim Consolidated Financial Statements for an explanation of KACC's hedging strategies. The table on the following page provides selected operational and financial information on a consolidated basis with respect to the Company for the quarters ended March 31, 1995 and nine months ended September 30, 1994 and 1993.1994. As an integrated aluminum producer, the Company uses a portion of its bauxite, alumina, and primary aluminum production for additional processing at certain of its other facilities. Intracompany shipments and sales are excluded from the information set forth on the following page. - 107 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
SELECTED OPERATIONAL AND FINANCIAL INFORMATION (In millions of dollars, except shipments and prices) Quarter Ended Nine Months Ended September 30, September 30, --------------March 31, ----------------- 1995 1994 1993 1994 1993 ------ ------ ------ ----------------------- Shipments: (000 tons) Alumina 534.9 576.9 1,577.3 1,508.5446.5 468.2 Aluminum processing:products: Primary aluminum 48.4 55.3 175.8 183.447.7 64.3 Fabricated aluminum products 105.4 92.9 307.1 280.0 ------ ------ -------- --------94.5 96.8 ----------------- Total aluminum products 153.8 148.2 482.9 463.4 ====== ====== ======== ========142.2 161.1 ================= Average realized sales price: Alumina (per ton) $ 171197 $ 165 $ 162 $ 169155 Primary aluminum (per pound) .60 .56 .56 .57.81 .55 Net sales: Bauxite and alumina: Alumina $ 91.587.9 $ 95.3 $ 255.3 $ 255.572.5 Other 19.8 23.0 60.6 64.1 ------ ------ -------- --------19.1 20.4 ----------------- Total bauxite and alumina 111.3 118.3 315.9 319.6 ------ ------ -------- --------107.0 92.9 ----------------- Aluminum processing: Primary aluminum 64.1 68.7 218.2 229.385.0 77.3 Fabricated aluminum products 281.9 238.3 790.8 744.6316.2 241.5 Other 3.8 3.1 10.8 9.7 ------ ------ -------- --------4.8 3.4 ----------------- Total aluminum processing 349.8 310.1 1,019.8 983.6 ------ ------ -------- --------406.0 322.2 ----------------- Total net sales $461.1 $428.4 $1,335.7 $1,303.2 ====== ====== ======== ========$513.0 $415.1 ================= Operating income (loss): Bauxite and alumina $ 7.81.4 $ 2.3 $ 5.3 $ (1.8)(2.4) Aluminum processing 3.3 (4.7) 1.4 12.649.3 (6.0) Corporate (18.0) (15.1) (53.4) (52.2) ------ ------ -------- --------(18.1) (17.2) ----------------- Total operating lossincome (loss) $ (6.9) $(17.5) $ (46.7) $ (41.4) ====== ====== ======== ======== Loss32.6 $(25.6) ================= Income (loss) before income taxes, minority interests, and extraordinary loss and cumulative effect of changes in accounting principles $(29.9) $(35.0) $ (110.1) $ (95.2) ====== ====== ======== ======== Loss8.2 $(45.0) ================= Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles $(20.8) $(21.0) $ (73.7) $ (57.0)3.5 $(29.3) Extraordinary loss on early extinguishment of debt, net of tax benefit of $2.9 and $11.2 for 1994 and 1993 periods, respectively (5.4) (21.8) Cumulative effect of changes in accounting principles, net of tax benefit of $237.7 (507.3) ------ ------ -------- ------------------------- Net loss $(20.8) $(21.0)income (loss) $ (79.1) $ (586.1) ====== ====== ======== ========3.5 $(34.7) ================= Capital expenditures $ 15.813.7 $ 13.1 $ 37.5 $ 36.4 ====== ====== ======== ========9.6 ================= -------------------------------------------------- ------------------------------------ All references to tons refer to metric tonsIn thousands of 2,204.6 pounds.tons. Includes net sales of bauxite. Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
- 118 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net Sales Bauxite and Alumina - Revenue from net sales to third parties for the bauxite and alumina segment was $111.3 million in the thirdfirst quarter of 1995 was 15% higher than the first quarter of 1994. Revenue from alumina increased 21% in the first quarter of 1995 from the first quarter of 1994, compared with $118.3 million in the third quarter of 1993, and $315.9 million in the first nine months of 1994, compared with $319.6 million in the first nine months of 1993. Revenue from alumina decreased 4% to $91.5 million in the third quarter of 1994 from $95.3 million in the third quarter of 1993, principally due to decreased shipmentsincreased average realized prices, partially offset by higher average realized prices. Revenue from alumina was $255.3 million in the first nine months of 1994, compared with $255.5 million in the first nine months of 1993, as increased shipments were offset by lower average realized prices.shipments. Aluminum Processing - Revenue from net sales to third parties for the aluminum processing segment was $349.8 million in the third quarter of 1994, compared with $310.1 million in the third quarter of 1993, and $1,019.8 million in the first nine monthsquarter of 1994, compared with $983.6 million in1995 was 26% higher than the first nine monthsquarter of 1993.1994. Revenue from primary aluminum decreased 7% to $64.1 millionincreased 10% in the thirdfirst quarter of 1995 from the first quarter of 1994, from $68.7 million in the third quarter of 1993, principally due to decreased shipments, partially offset by higher average realized prices, significantly offset by decreased shipments caused by the strike by the United Steelworkers of America ("USWA") discussed below and decreased 5% to $218.2 million inby a mid-1994 partial curtailment of production at the first nine months of 1994 from $229.3 million in the first nine months of 1993, primarily because of lower shipments and, to a lesser extent, lower average realized prices.Company's 90%-owned Valco smelter. Shipments of primary aluminum to third parties constitutedwere approximately 31% and 36%34% of total aluminum products shipments in the thirdfirst quarter, and first nine months of 1994, respectively, compared with approximately 37% and 40% in the thirdfirst quarter and first nine months of 1993.1994. Revenue from fabricated aluminum products increased 18% to $281.9 million31% in the thirdfirst quarter of 1995 from the first quarter of 1994, from $238.3 million in the third quarter of 1993, due to increased shipments and, to a lesser extent, higher average realized prices, and increased 6% to $790.8 million in the first nine months of 1994 from $744.6 million in the first nine months of 1993, as increased shipments were partially offset by lower average realized prices. Although KACC has realized improved pricesshipments for allmost of its productsthese products. Operating Income (Loss) First quarter results were adversely affected by (i) an eight-day strike at five major domestic locations by the USWA, (ii) a six-day strike by the National Workers Union at the Company's 65%-owned Alpart alumina refinery in Jamaica, and (iii) a four-day disruption of alumina production at Alpart caused by a boiler failure. The combined impact of these events on the first quarter results was approximately $17.0 in the third quarter of 1994 compared with the third quarter of 1993aggregate (on a pre-tax basis) principally from lower production volume and the second quarter of 1994, the third-quarter results continued to be unfavorably affected by: the defensive hedging of primary aluminum prices in respect of 1994 shipments, which were put in place prior to refinancings carried out in 1994 and recent improvements in metal prices; energy-related curtailments of primary aluminum production (see "Trends"); relatively low fixed-price contracts for can sheet, which will expire at year-end; and the lag time in more fully realizing margin improvements associated with the recently announced price increases for other fabricated products. Operating Loss The Company had an operating loss of $6.9 million in the third quarter of 1994, compared with $17.5 million in the third quarter of 1993, and $46.7 million in the first nine months of 1994, compared with $41.4 million in the first nine months of 1993.related costs. Bauxite and Alumina - This segment'ssegment had operating income in the thirdfirst quarter of 1994 was $7.8 million, compared with $2.3 million in the third quarter of 1993, and was $5.3 million in the first nine months of 1994,1995, compared with an operating loss of $1.8 million in the first nine monthsquarter of 1993. The increase in operating income was1994, principally due to lower manufacturing costs. - 12 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)higher revenue, partially offset by the effect of the strikes and boiler failure. Aluminum Processing - This segment'ssegment had operating income was $3.3 million in the thirdfirst quarter of 1994,1995, compared with an operating loss of $4.7 million in the thirdfirst quarter of 1993, as increased shipments of fabricated aluminum products and1994, principally due to higher average realized prices of primary aluminum and fabricated aluminum products wererevenue, partially offset by decreased shipmentsthe effect of primary products. This segment's operating income was $1.4 million in the first nine months of 1994, compared with $12.6 million in the first nine months of 1993, principally due to lower average realized prices of fabricated aluminum products. Third quarter results continued to be adversely affectedstrike by the defensive hedging of primary aluminum prices and the constraints on more fully realizing margin improvements of some fabricated products, as discussed above.USWA. Corporate - Corporate operating expenses of $18.0 million and $15.1 million in the third quarters of 1994 and 1993 and $53.4 million and $52.2 million in the first nine months of 1994 and 1993 represented corporate general and administrative expenses which are not allocated to the Company's segments. Extraordinary Loss on Early ExtinguishmentNet Income (Loss) The Company had a net loss of Debt In$.03 per common and common equivalent share for the first quarter of 1994, the Company recorded1995 (as net income was more than offset by dividends on preferred stock), compared with a pre-tax extraordinarynet loss of $8.3 million ($5.4 million after taxes), consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. The Company recorded a pre-tax extraordinary loss of $33.0 million in$.67 per common and common equivalent share for the first quarter of 1993 ($21.8 million after taxes), consisting primarily of premiums1994. The principal reason for this change was the improvement in operating income previously described. Liquidity and the write-off of unamortized discount and deferred financing costs related to the early redemption of the 14-1/4% Senior Subordinated Notes due 1995. Cumulative Effect of Changes in Accounting Principles As of January 1, 1993,Capital Resources - ------------------------------- Operating Activities At March 31, 1995, the Company adopted Statementhad working capital of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), Statement$349.2, compared with working capital of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), and Statement$259.7 at December 31, 1994. The increase in working capital was due to an increase in Receivables (as a result of Financial Accounting Standards No. 112, Employers' "Accounting for Postemployment Benefits" ("SFAS 112"). The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced results of operations by $497.7 million, net of a related income tax benefit of $234.2 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 reduced results of operations by $7.3 million, net of a related income tax benefit of $3.5 million. The new accounting methods have no effect on the Company's cash outlays for postretirement and postemployment benefits. The Company reserves the right, subject to applicable collective bargaining agreements, to amend or terminate these benefits. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 reduced results of operations by $2.3 million. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to pre-tax amounts from net- of-tax amounts originally recorded in connection with the acquisition of the Company by MAXXAM.an - 139 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net Loss The Company recordedincrease in net sales) and Inventories (as a net lossresult of $20.8 million, or $.45 per commonlower shipments) and common equivalent share, for the third quarter of 1994, compared with a net loss of $21.0 million, or $.42 per common and common equivalent share, for the third quarter of 1993, as a decrease in operating loss wasAccrued interest and Other accrued liabilities. The increase in working capital is partially offset by lower credits for income taxes and a reduction in other income. For the first nine months of 1994, net loss was $79.1 million, or $1.62 per common and common equivalent share, compared with $586.1 million, or $10.28 per common and common equivalent share, in the same period of 1993. The principal reasons for the decrease in net loss werePrepaid expenses and other current assets (due to lower margin deposits). See Note 5 of the cumulative effect of changes in accounting principles of $507.3 million and the extraordinary loss of $21.8 million recordedNotes to Interim Consolidated Financial Statements. Investing Activities Cash used for investing activities in the first quarter of 1993, partially offset by higher1995 primarily consisted of capital expenditures to improve production efficiency, reduce operating lossescosts, and the 1994 extraordinary loss described above. Financial Conditionexpand capacity at existing facilities. Financing Activities At September 30, 1994,March 31, 1995, the Company had working capital of $296.8 million and long-term debt of $744.7 million,$824.3, compared to working capital of $278.6 million and long-term debt of $720.2 millionwith $751.1 at December 31, 1993. As of September 30, 1994, of the $275.0 million available under1994. In March 1995, the 1994 Credit Agreement $65.8 million was outstanding in the form of letters of credit. In the first quarter of 1994, the Company consummated the public offering of 8,855,550 shares of its PRIDES. The net proceeds from the sale(see Note 5 of the PRIDES were approximately $100.4 million. The Company used such net proceedsNotes to make non-interest-bearing loans to KACC inConsolidated Financial Statements for the aggregate principal amount of $33.2 million (the aggregate dividends scheduled to accrue on the PRIDES from the issuance date untilyear ended December 31, 1997, the date on which the outstanding PRIDES are mandatorily convertible into shares of the Company's common stock) and used the balance of such net proceeds to make capital contributions to KACC in the aggregate amount of approximately $67.2 million. The offering of the PRIDES, issuance of the Senior Notes, and entering into the 1994 Credit Agreement were the final steps of a comprehensive refinancing plan which the Company and KACC began in January 1993 which extended the maturities of KACC's outstanding indebtedness, enhanced its liquidity, and raised new equity capital. The 1994 Credit Agreement1994) was amended as of July 21, 1994, by the FirstSecond Amendment to Credit Agreement (the "First"Second Amendment"). The FirstSecond Amendment provided, among other things, for an increase in the revolving line of credit from $250.0 million$275.0 to $275.0 million, and$325.0. At March 31, 1995, $173.4 (of which $57.5 could have been used for an increase in the inventory sub-limitletters of the borrowing base from $175.0 millioncredit) was available to $200.0 million,KACC under the 1994 Credit Agreement. The obligations ofTrends - ------ In March 1995, the Bonneville Power Administration (the "BPA") offered to its industrial customers, including KACC, with respectsurplus firm power at a discounted rate for the period April 1, 1995, through July 31, 1995, to the Senior Notesenable such customers to restart idle industrial loads. In April 1995, KACC and the 12-3/BPA entered into a contract for an amount of such power, and KACC expects to restart one-half of an idle potline (approximately 9,000 tons of annual capacity) at its Tacoma, Washington, smelter in the near future. In February 1995, the BPA issued an initial rate increase announcement which proposed a 5.4% increase to its direct service industry customers (the "DSIs") to apply during a two-year period beginning October 1, 1995. In April 1995, the DSIs, including KACC, entered into agreements with the BPA pursuant to which (i) the proposed 5.4% rate increase was replaced by an agreed 4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes") are guaranteed, jointlyrate increase to be in effect for the one-year period October 1, 1995, through September 30, 1996, which will increase production costs at KACC's Mead and severally,Tacoma smelters by an aggregate of approximately $4.0 per year, based on the operating rate of those smelters after the restart of one-half of a potline at the Tacoma smelter, discussed above, (ii) the variable rate structure currently in effect was extended through September 30, 1996, (iii) the BPA rate proceedings were deferred, (iv) the DSIs waived their rights to assert certain subsidiaries of KACC. The indentures governing the Senior Notes and the 12-3/4% Notes restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Currently, such restrictions do not permit Kaiser or KACC to pay any dividendsclaims in respect of their common stock. - 14 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Sensitivitypast interruptible service by the BPA, and (v) the BPA agreed to Pricesallow each DSI to supply a portion of its requirement for electric power from sources other than the BPA, up to 50% of its top quartile (interruptible) service beginning October 1, 1995, and Hedging Programs Since September 30, 1994,up to 100% of its top quartile service beginning October 1, 1996, which will help to assure the supply of power and encourage more competitive power rates. Separately, the BPA has offered to contract with each of the DSIs to provide transmission services for power purchased from sources other than the BPA to replace all or any portion of the power now purchased from the BPA under its existing power contract. The amount of power available from the BPA under such an existing power contract would be permanently reduced by the amount of power purchased from such other sources. KACC has entered into additional forward foreign exchange contracts totaling approximately $32.9 million fora transmission services contract with the purchase of 45.0 million Australian Dollars from January through December 1995 in respect of its commitments for 1995 expenditures denominated in foreign currencies. Since September 30, 1994, KACCBPA, but has entered into additional hedge positions in respect of its 1995 anticipated primary aluminum production. Asnot now elected to replace any portion of the date of this report, KACC had sold forward an additional 43,750 metric tons of primary aluminum at fixed prices. See Note 6 of the Notes to Interim Consolidated Financial Statements for derivative positions at September 30, 1994. Trends KACC has operated its Mead and Tacoma smelters in Washington at approximately 75% of their full capacity since January 1993, when three reduction potlines were removedpower which it purchases from production (two at its Mead smelter and one at its Tacoma smelter) in response to a power reduction imposed by the Bonneville Power Administration ("BPA"). Although full BPA power was restored as of April 1, 1994, a 25% power reduction was imposed again by the BPA aswith power from another source. These new arrangements may help to assure the supply of August 1, 1994, which reduction is expected to continue through November 30, 1994. The BPA has given notice that full BPA power will be restored as of December 1, 1994, and that the BPA expects to be able to provide full service through November 30, 1995. KACC is evaluating these new circumstances. In late August 1994, the Volta River Authority ("VRA") notified KACC that it intended to suspend supplyingencourage more competitive power to KACC's 90%-owned Volta Aluminium Company Limited ("VALCO") smelter after Septemberrates. - 10 1994, due to drought conditions in the catchment area of the Volta Lake. Following discussions between KACC and the VRA, an agreement was reached for VALCO to curtail one potline (of the 3-1/2 potlines that were then operating) on September 18, 1994. The agreement also called for KACC and the VRA to meet in late October to discuss data concerning rainfall, lake level, whether an additional curtailment was warranted, compensation due to KACC because of the curtailment, and other matters related to the power contract. Following the discussions in October, the VRA has made sufficient power available to enable VALCO to restart the potline which was shut down in mid-September. Restart preparations have begun, and the potline is expected to be in full operation in early February 1995. The restoration of full operation of the potline will return VALCO to a production rate of approximately 140,000 metric tons of primary aluminum, or 70% of its total annual rated capacity of 200,000 metric tons. With such restored production, the Company would have an annual production rate of approximately 390,000 metric tons of primary aluminum, or 77% of its total annual rated capacity of 508,000 metric tons. - 15 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES PART II - OTHER INFORMATION ItemITEM 5. OTHER INFORMATION ----------------- On August 24, 1994,March 27, 1995, the United States Department of Justice (the "DOJ") issued Civil Investigative Demand No. 11356 ("CID"12503 (the "CID"), as part of an industry-wide investigation requesting information from the CompanyKACC regarding (i) its production, capacity to produce, and sales of primary aluminum from January 1, 1991, to the date of its response; (ii) any actual or contemplated reductionschanges in its productionmethod of pricing can stock from January 1, 1994, through March 31, 1995, (ii) the percentage of aluminum scrap and primary aluminum during that period;ingot used by KACC to produce can stock and the manner in which KACC's cost of acquiring aluminum scrap is factored into its can stock prices, and (iii) any communications with others regarding any actual or contemplated possible or desired reductionschanges in primary aluminum production by the Company or anyits method of its competitors during that period. The Company has submittedpricing can stock from January 1, 1994, through March 31, 1995. KACC is gathering documents and preparing interrogatory answers in order to the DOJ responding tocomply with the CID. ItemITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits. Exhibit No. Exhibit ---------- ------- 10.1 Kaiser 1995 Employee Incentive Compensation Program 27 Financial Data Schedule (b) Reports on Form 8-K. No report on Form 8-K was filed by the Company during the quarter ended September 30, 1994.March 31, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who has signed this report on behalf of the registrant and as the principal financial officer of the registrant. KAISER ALUMINUM CORPORATION /s/ John T. La Duc By:________________________------------------------- John T. La Duc Vice President and Chief Financial Officer Dated: November 10, 1994May 12, 1995 - 1611 -