SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20052007
 
Commission file number 1-94470-52105
 
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
 
   
Delaware
 94-3030279
(State of Incorporation)
 (I.R.S. Employer
Identification No.)
   
27422 PORTOLA PARKWAY, SUITE 350,
FOOTHILL RANCH, CALIFORNIA
(Address of principal executive offices)
 92610-2831
(Zip Code)
 
Registrant’s telephone number, including area code:
(949) 614-1740
 
Securities registered pursuant to Section 12(b) of the Act:
None
Title of Class
Name of Exchange on Which Registered
Common Stock, par value $0.01 par valueNasdaq Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par valueNONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes oþ     No þo
 
If this report is an annual or transition report, indicateIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o     Accelerated filer o     Non-accelerated filer
Large Accelerated Filer þ
Accelerated Filer oNon-accelerated Filer oSmaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of June 30, 2005, there were 79,671,531 shares of the Common Stock of the registrant outstanding. As of June 30, 2005, theThe aggregate market value of the registrant’s Common Stockcommon stock held by non-affiliates based upon the average bid and asked price of the Common Stockregistrant as reported byof the OTC Bulletin Board maintained by the National Association of Securities Dealers, Inc., for June 30, 2005 (which was the last business day of the registrant’s most recently completed second fiscal quarter)quarter (June 29, 2007) was $.9 million. However,approximately $1.1 billion.
Indicate by check mark whether the market valueregistrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the registrant’s Common Stock may not be meaningful, because as partSecurities Exchange Act of 1934 subsequent to the registrant’sdistribution of securities under a plan of reorganization, the equity interests of the Company’s existing stockholders are expected to be cancelled without consideration.confirmed by a court.  Yes þ     No o
 
As of February 28, 2006January 31, 2008, there were 79,671,53120,580,815 shares of Common Stockcommon stock of the registrant outstanding.
 
Documents Incorporated By Reference
NoneReference. Certain portions of the registrant’s definitive proxy statement related to the registrant’s 2008 annual meeting of stockholders are incorporated by reference into Part III of this Report onForm 10-K.
 

 

NOTE
Kaiser Aluminum Corporation’s Report onForm 10-K filed with the Securities and Exchange Commission includes all exhibits required to be filed with the Report. Copies of this Report onForm 10-K, including only Exhibit 21 of the exhibits listed on pages 136-142 of this Report, are available without charge upon written request. The registrant will furnish copies of the other exhibits to this Report onForm 10-K upon payment of a fee of 25 cents per page. Please contact the office set forth below to request copies of this Report onForm 10-K and for information as to the number of pages contained in each of the exhibits and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum Corporation
27422 Portola Parkway, Suite 350
Foothill Ranch, California92610-2831
(949) 614-1740


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
TABLE OF CONTENTS
 
       
    
Page
 
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 1411
Item 1B. Unresolved Staff Comments 1822
Item 2. Properties 1823
Item 3. Legal Proceedings 1823
Item 4. Submission of Matters to a Vote of Security Holders 2023
PART II 2024
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters 2024
Item 6. Selected Financial Data 2126
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2127
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 4360
Item 8. Financial Statements and Supplementary Data 4561
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 104122
Item 9A. Controls and Procedures 104122
Item 9B. Other Information 105122
PART III 106122
Item 10. Directors and Executive Officers of the Registrant 106122
Item 11. Executive Compensation 110122
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 120122
Item 13. Certain Relationships and Related Transactions 122123
Item 14. Principal Accountant Fees and Services 122123
PART VI 124
PART IV.123
Item 15. Exhibits and Financial Statement Schedules 124123
SCHEDULE I 126
SIGNATURES 135124
INDEX OF EXHIBITS 136
EXHIBIT 21 SUBSIDIARIES125 143
In this Report, all references to “Kaiser,” “we,” “us,” “the Company” and “our” refer to Kaiser Aluminum Corporation and its subsidiaries, unless the context otherwise requires or where otherwise indicated.


iii

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
PART I
 
Item 1.  Business
Forward-Looking Statements
 
This Annual Report onForm 10-K (the “Report”) contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places inthroughout this Report, (including, but not limited to,including this Item 1. “Business — Business Operations,” “— Competition” “— Environmental Matters,”and“—Item 1A. “Risk Factors, Affecting Future Performance,”Item 3. “Legal Proceedings,” and Item 7. “Management’s Discussion and Analysis of Financial ConditionConditions and Results of Operations”). SuchOperations.” These forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans”“plans,” or “anticipates”“anticipates,” or the negative thereofof the foregoing or other variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors includeinclude: the effectiveness of management’s strategies and decisions,decisions; general economic and business conditions, including cyclicality and other conditions in the aerospace and other end markets we serve; developments in technology,technology; new or modified statutory or regulatory requirements, andrequirements; changing prices and market conditions. Certain sectionsconditions; and other factors discussed in Item 1A. “Risk Factors” and elsewhere in this Report.
Readers are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included herein are made only as of the date of this Report, identify other factors that could cause differences between suchand we undertake no obligation to update any information contained in this Report or to publicly release any revisions to any forward-looking statements and actual results (for example, see Item 1.“Business — Factors Affecting Future Performance”). No assurance canthat may be givenmade to reflect events or circumstances that these are alloccur, or that we become aware of, after the factors that could cause actual results to vary materially from the forward-looking statements.date of this Report.
 
GeneralAvailability of Information
We make available our Annual Reports on Form10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge through our Internet website atwww.kaiseraluminum.com under the heading “Investor Relations” as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (“SEC”). The public also may read and copy any of these materials at the SEC’s Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at1-800-732-0330. The SEC also maintains an Internet site that contains the Company’s filings; the address of that site ishttp://www.sec.gov.
Business Overview
 
Kaiser Aluminum Corporation (“Kaiser”Kaiser,” “the Company,” “we” or the “Company”“us”) is a Delaware corporation organizedan independent fabricated aluminum products manufacturing company with 2007 net sales of approximately $1.5 billion. We were founded in 1987. The Company operates primarily through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation (“KACC”). The Company’s primary line1946 and operate 10 production facilities in the United States and one in Canada. We manufacture rolled, extruded, drawn and forged aluminum products within three end use categories consisting of business is the productionaerospace and high strength products (which we refer to as Aero/HS products), general engineering products (which we refer to as GE products) and custom automotive and industrial products (which we refer to as Custom products).
We produced and shipped approximately 548 million pounds of fabricated aluminum products in 2007 which comprised 86% of our total net sales. We have long-standing relationships with our customers, which include leading aerospace companies, automotive suppliers and metal distributors. We strive to tightly integrate the management of the operations within our Fabricated Products segment across multiple production facilities, product lines and target markets in order to maximize the efficiency of product flow to our customers. In our served markets, we seek to be the supplier of choice by pursuing “Best in Class” customer satisfaction and offering a broad product portfolio.


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In order to capitalize on the significant growth in demand for high quality heat treat aluminum plate products in the market for Aero/HS products, in the third quarter of 2005 we began a major expansion at our Trentwood facility in Spokane, Washington. The Trentwood expansion significantly increased our aluminum plate production capacity and enables us to produce thicker gauge aluminum plate. The three phase expansion is expected to amount to $139 million in capital investment. The first phase became fully operational in the fourth quarter of 2006. The second phase was fully operational at December 31, 2007 and the third phase is expected to be fully operational by the end of 2008.
In 2007, we announced a $91 million investment program in our rod, bar and tube value stream including a facility expected to be in Kalamazoo, Michigan, as well as improvements at three existing extrusion and drawing facilities. This investment program is expected to significantly improve the capabilities and efficiencies of our rod and bar and seamless extruded and drawn tube operations and enhance the market position of such products. The Kalamazoo facility will be equipped with two extrusion presses and a remelt operation. Completion of these investments is expected to occur by late 2009.
In February 2008, we announced $14 million of additional programs that will enhance our Kaiser Select® capabilities in our Tulsa, Oklahoma and Sherman, Texas extrusion plants and significantly reduce energy consumption at one of our casting units in our Trentwood facility. We expect the majority of these additional programs to be completed during 2008.
In addition the Company ownsto our core Fabricated Products operations, we have a 49% ownership interest in Anglesey Aluminium Limited (which we refer to as “Anglesey”), a company that owns an aluminum smelter based in Wales, UK.Holyhead, Wales. Anglesey has produced in excess of 300 million pounds of primary aluminum for each of the last three fiscal years, of which 49% is available to us. During 2007, sales of our portion of Anglesey’s output represented 14% of our total net sales. Because we also purchase primary aluminum for our fabricated products at market prices, Anglesey’s production acts as a natural hedge for our Fabricated Products operations. Anglesey operates under a power agreement that provides sufficient power to sustain its aluminum reduction operations at full capacity through September 2009. The nuclear facility which supplies power to Anglesey is scheduled to close operations in 2010. Anglesey’s ability to operate its aluminum reduction operations past September 2009 is dependent upon procuring adequate power on acceptable terms. We can give no assurance that Anglesey will be able to do so. If Anglesey cannot obtain adequate power on acceptable terms, Anglesey’s aluminum reduction operations will likely be shut down. Given the potential for future shutdown and related costs, dividends from Anglesey were temporarily suspended while Anglesey studied future cash requirements. A shutdown process may involve significant costs to Anglesey which could decrease or eliminate its ability to pay future dividends. Based on a review of cash anticipated to be available for future cash requirements, Anglesey removed the temporary suspension of dividends and distributed $4.4 million and $9.9 million in dividends in August and December of 2007, respectively. No assurance can be given that Anglesey will not suspend dividends again in the future. The process of shutting down aluminum reduction operations may involve transition complications which may prevent Anglesey from operating at full capacity until the expiration of the power agreement.
Between the first quarter of 2002 and the first quarter of 2003, Kaiser and certain25 of itsour then-existing subsidiaries have filed separatevoluntary petitions for relief in the United States Bankruptcy Court for the District of Delaware (the “Court”(which we refer to as the “Bankruptcy Court”) for reorganization under Chapterchapter 11 of the United States Bankruptcy Code (the “Code”) and are currently managing their businesses as “debtor in possession”. The Company, KACC and the KACC subsidiaries are collectively referred(which we refer to herein as the “Debtors” and the Chapter“Bankruptcy Code”). Pursuant to our Second Amended Plan of Reorganization (which we refer to as our “Plan”), we emerged from chapter 11 proceedings of these entities are collectively referredbankruptcy on July 6, 2006 (which we refer to herein as the “Cases.” For purposes of this Report, the term “Filing“Effective Date” means, with respect). Our Plan allowed us to any particular Debtor, the date on which such Debtor filed its Case.
As more fully discussed below, the Company filed a plan of reorganization and disclosure statement in 2005. The plan was accepted by all classes of creditors entitled to vote on the plan and the plan was confirmed by the Court on February 6, 2006. The confirmation order remains subject to motions for review and appeals filed by certain of KACC’s insurers and must still be adopted or affirmed by the United States District Court. Othereliminate significant conditions to emergence include completion of the Company’s exit financing, listing of the new common stock on the NASDAQ stock market and formation of the trusts for the benefit of the torts claimants. As provided in the plan of reorganization, once the Court’s confirmation order is adopted or affirmed by the United States District Court, even if the affirmation order is appealed, the Company can proceed to emerge if the United States District Court does not stay its order adopting or affirming the confirmation order and the key constituents in the Chapter 11 proceedings agree. Assuming the United States District Court adopts or affirms the confirmation order, the Company believes that it is possible that it will emerge in the second quarter of 2006. No assurances can be given that the Court’s confirmation order will ultimately be adopted or affirmed by the United States District Court or that the transactions contemplated by the plan of reorganization will ultimately be consummated.
As previously reported, the Company’s restructuring would resolve prepetition claims that are currently subject to compromiselegacy liabilities, including long-term indebtedness, pension obligations, retiree medical pension,obligations and liabilities relating to asbestos and other tort, bond,personal injury claims. In addition, prior to our emergence from chapter 11 bankruptcy, we sold all of our interests in bauxite mining operations, alumina refineries and note claims. The plan of reorganization would resultaluminum smelters, other than our interest in the cancellation of the equity interests of current stockholdersAnglesey, in order to focus on our fabricated aluminum products business, which we believe has a stronger competitive position and the distribution of equity in the emerging company to creditors and creditor representatives. Under the terms of the plan, twopresents greater opportunities for growth.


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voluntary employee beneficiary associations that were created in 2004 to provide medical benefits or funds to defray the cost of medical benefits for salaried and hourly retirees are entitled to receive a majority of the new equity distributed. Retiree medical plans existing at that time were cancelled.
When the restructuring process began, Kaiser was an integrated producer in the aluminum industry with operations that included the production and sale of bauxite, alumina, and primary aluminum (the “commodities interests”) and the production of fabricated aluminum products. However, the Company’s strategic reviews indicated that its commodities interests were typically higher cost, required significant capital investment, and exposed the Company to significant volatility and cash consumption during weak pricing environments. As a result, Kaiser implemented a strategy of focusing on its fabricated products operations and divesting all but one of its commodities interests.
Business Operations
 
• Fabricated Products Business Unit
 
Overview.  Kaiser’sOur Fabricated productsProducts business unit produces rolled, extruded, drawn, and forged aluminum products used principally for aerospace and defense, automotive, consumer durables, electronics, electrical, and machinery and equipment end-use applications. Kaiser’s participation is focused generallyIn general, the Fabricated Products business unit manufactures products in specialty nichesone of these larger product categories.three broad categories: Aero/HS products; GE products; and Custom products. During the period 2003 through2007, 2006 and 2005, the Company’sour eleven North American fabricated products manufacturing facilities have produced and shipped approximately 372, 459548, 523 and 482 million pounds respectively, of fabricated aluminum products. In general, products, manufactured are in onerespectively, which accounted for approximately 86%, 85% and 86% of four broad categories: general engineering (“GE”), aerospaceour total net sales for 2007, 2006 and high strength (“Aero/HS”), automotive (“Auto”), and custom industrial (“CI”).
A description of the manufacturing processes and category of products at each of the 11 production facilities is shown below:
Manufacturing
Location
Process
Types of Products
Chandler, ArizonaDrawingAero/HS
Greenwood, South CarolinaForgingAuto
Jackson, TennesseeExtrusion/DrawingAero/HS, GE
London, OntarioExtrusionAuto, CI
Los Angeles, CaliforniaExtrusionGE, CI
Newark, OhioExtrusion/Rod RollingAero/HS, GE, Conversion products(1)
Richland, WashingtonExtrusionAero/HS, GE
Richmond, VirginiaExtrusion/DrawingGE, Auto, CI
Sherman, TexasExtrusionAuto, CI
Spokane, WashingtonFlat RollingAero/HS, GE
Tulsa, OklahomaExtrusionGE
(1)Conversion products can undergo one or two additional processing steps before being identified to an end-use application.
Further discussion is provided below in respect of major types of products produced and the types of manufacturing processes employed.
As can be seen in the table above, many of the facilities employ the same basic manufacturing process and produce the same type of products. Over the past several years, given the similar economic and other characteristics at each location, Kaiser has made a significant effort to more tightly integrate the management of its Fabricated products business unit across multiple manufacturing locations, product lines, and target markets to maximize the efficiency of product flow to customers. Purchasing is centralized for a substantial portion of the Fabricated products business unit’s primary aluminum requirements in order to try to maximize price, credit and other benefits. Because many customers purchase a number of different products that are produced at different plants, there has


2

also been substantial integration of the sales force and its management. The Company believes that integration of its operations will allow the Company to capture efficiencies while allowing the plant locations to remain highly focused.
Industry sales margins for fabricated products fluctuate in response to competitive and market dynamics. However, changes in primary aluminum price typically are passed through to customers, and, where fabricated product shipments are based on firm prices (including the primary aluminum content), the Company’s exposure to metal price fluctuations is mitigated by employing appropriate hedging techniques. For internal reporting purposes, whenever the Fabricated products business unit enters into a firm price contract, it also enters into an “internal hedge” with the Primary aluminum business unit, so that all the metal price risk resides in the Primary aluminum business unit. Results from internal hedging activities between the two business units are eliminated in consolidation.
In a majority of the cases, the operations purchase primary aluminum ingot and recycled and scrap aluminum in varying percentages depending on various market factors including price and availability. Primary aluminum purchased for the Fabricated products business unit is typically based on the Average Midwest Transaction Price (“Midwest Price”), which typically ranges between $.03 to $.075 per pound above the price traded on the London Metal Exchange (“LME”) depending on primary aluminum supply/demand dynamics in North America. Recycled and scrap aluminum are typically purchased at a modest discount to ingot prices but can require additional processing. In addition to producing fabricated aluminum products for sale to third parties, certain of the plants provide one another with billet, log or other intermediate material in lieu of purchasing such items from third party suppliers. For example, a substantial majority of the product from the Richland, Washington location is used as base input at the Chandler, Arizona location; the Sherman plant is currently supplying billet and logs to the Tulsa, Oklahoma facility; the Richmond, Virginia plant typically receives some portion of its metal supply from either (or both of) the London, Ontario or Newark, Ohio facilities; and the Newark, Ohio facility also supplies billet and log to the Jackson, Tennessee facility and extruded forge stock to the Greenwood, South Carolina facility.2005, respectively.
 
Types of Products Produced
 
The aluminum fabricated mill products market is broadly defined to include the markets for flat-rolled, extruded, drawn, forged and cast aluminum products, used in a variety of end-use applications. We participate in certain portions of the markets for flat-rolled, extruded/drawn and forged products focusing on highly engineered products for Aero/HS products; GE products; and Custom products. The portions of the markets in which we participate accounted for approximately 20% of total North American shipments of aluminum fabricated mill products in 2007.
Aerospace and High Strength Products.  Our Aero/HS products include high quality heat treat plate and sheet, as well as cold finish bar, seamless drawn tube and billet that are manufactured to demanding specifications for the global aerospace and defense industries. These industries use our products in applications that demand high tensile strength, superior fatigue resistance properties and exceptional durability even in harsh environments. For instance, aerospace manufacturers use high-strength alloys for a variety of structures that must perform consistently under extreme variations in temperature and altitude. Our Aero/HS products are used for a wide variety of end uses. We make aluminum plate and tube for aerospace applications, and we manufacture a variety of specialized rod and bar products that are incorporated in diverse applications. The aerospace and defense market’s consumption of fabricated aluminum products is driven by overall levels of industrial production, airframe build rates, which are cyclical in nature, and defense spending, as well as the potential availability of competing materials such as composites. Demand growth is expected to increase for thick plate with growth in “monolithic” construction of commercial and other aircraft. In monolithic construction, aluminum plate is heavily machined to form the desired part from a single piece of metal (as opposed to creating parts using aluminum sheet, extrusions or forgings that are affixed to one another using rivets, bolts or welds). Military applications for heat treat plate and sheet include aircraft frames for military use and skins and armor plating to protect ground vehicles from explosive devices. Products sold for Aero/HS applications represented 32% of our 2007 fabricated products shipments. Aero/HS products net sales in 2007 were approximately 39% of our 2007 fabricated products net sales.
General Engineering ProductsProducts.  — General engineeringGE products consist primarily of standard catalog items sold to large metal distributors. These products have a wide range of uses, many of which involve further fabrication of these products for numerous transportation and industrial end-use applications where machining of plate, rod and bar is intensive. Our GE products consist of 6000-series alloy rod, bar, tube, sheet, plate and standard extrusions. The 6000-series alloy is an extrudable medium-strength alloy that is heat treatable and extremely versatile. Our GE products have a wide range of uses and applications, many of which involve further fabrication of these products for numerous transportation and other industrial end uses. For example, our products are used in the enhancement of military vehicles, in the specialized manufacturing process for liquid crystal display screens, and in the vacuum chambers in which semiconductors are made. Our rod and bar products are manufactured into rivets, nails, screws, bolts and parts of machinery and equipment. Demand growth and cyclicality for GE products tend to mirror broad economic patterns and industrial activity in North America. A substantial majorityDemand is also impacted by the destocking and restocking of inventory in the Company’sfull supply chain. Products sold for GE applications represented 45% of our 2007 fabricated products shipments. GE products are sold to large distributorsnet sales in North America, with orders often representing standard catalog items shipped with a relatively short lead-time. Key competitive dynamics reflect a variety2007 were approximately 40% of factors including product-line breadth, product quality, delivery performance and customer service, in addition to product price. The Company services this market with a nationwide sales force focused on GE and Aero/HS products.our 2007 fabricated products net sales.
 
AerospaceCustom Automotive and High Strength ProductsIndustrial Products.  — Aero/HSOur Custom products include aerospace, defense, and recreational products, a majorityconsist of which are sold to distributors with the remainder being sold directly to customers. Sales are made either under contracts (with terms spanning from one year to several years) ororder-by-order basis. The Company serves this market with a North American sales force focused on GE and Aero/HS products and direct sales representatives in Western Europe. The key demand drivers are commercial aircraft builds (which in turn are often reflective of broad economic patterns) and defense spending.
Automotive Extruded and Forged Products — The Company supplies extruded, extruded/drawn and forged aluminum products for applications in themany North American automotive industry. Kaiser supplies aand industrial end uses, including consumer durables,


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electrical/electronic, machinery and equipment, automobile, light truck, heavy truck and truck trailer applications. Examples of the wide variety of custom products includingthat we supply to the automotive industry include extruded products for bumpers and anti-lock braking systems, drawn tube for drive shafts and forgings for suspension control arms and drive train yokes. For some products, Kaiser performs limited fabrication. Customers primarily include tier-one suppliers to equipment manufacturers. Sales contracts for these products are typically medium to long-term in length. Almost all sales of automotive extruded and forged products occur through direct channels. The key demand drivers have been (a) North American light vehicle builds and (b) increased use of aluminum in vehicles as aluminum displaces steel parts to reduce vehicle weight in response to ever-tightening governmental standards for vehicle emissions.


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Other Custom Industrial Products — The Company manufactures custom products for many end uses, including consumer durables, electrical, machinery and equipment, and truck trailer applications. A significant portion of Kaiser’s custom industrial product sales in recent years has beeninclude extruded products for water heater anodes, truck trailers and electrical/electronic heat exchangers. The Company typically sells custom shapes directlyFor some Custom products, we perform limited fabrication, including sawing and cutting to end-users under medium-term contracts. The Company sells theselength. Demand growth and cyclicality for Custom products using a nationwide directtend to mirror broad economic patterns and industrial activity in North America, with specific individual market segments such as automotive, heavy truck and truck trailer applications tracking their respective build rates. Products sold for Custom applications represented 23% of our 2007 fabricated products shipments. Custom products net sales force that works closely with the technical sales organization in pre-sale efforts.2007 were approximately 21% of our 2007 fabricated products net sales.
 
ConcentrationsEnd Markets In Which We Do Not Participate.  — In 2005, the Fabricated products business unit had approximately 575 customers. The largest and top five customersWe have elected not to participate in certain end markets for fabricated aluminum products, accountedincluding beverage and food cans, building and construction materials, and foil used for packaging. We believe our chosen end markets present better opportunities for sales growth and premium pricing of differentiated products. The markets we have elected to participate in represented approximately 11% and 33%, respectively,7% of the Company’s third-party net sales in 2005. Subsequent to December 31, 2005, the largest customer for the FabricatedNorth American flat rolled products segment, Reliance Group, entered into an agreement to acquire onemarket and 54% of the Company’s other top five customers. The acquisition is expected to be completedNorth American extrusion market in the second quarter of 2006. Sales to Reliance Group and the other customer (on a combined basis) accounted for approximately 19% of the Company’s third party net sales in 2005. The loss of Reliance Group, as a customer, would have a material adverse effect on the Company taken as a whole. However, in the Company’s opinion, the relationship between Reliance Group and the Company is good and the risk of loss of Reliance Group, as a customer, is remote. See Item 1. “Business — Competition” in this Report. Sales are made directly to end-use customers and distributors by KACC sales personnel located in the United States and Europe, and by independent sales agents in Asia, Mexico and the Middle East.2007.
 
GE and Aero/HS shipments in recent years have been approximately 50% and 20%, respectively, of total Fabricated products business unit shipments with the remainder being relatively equally split between Auto and CI. However, on a revenue basis, Aero/HS would be approximately double its relative shipment percentage and CI would be approximately half its relative shipment percentage, reflecting the relative pricing of these types of products.
Types of Manufacturing Processes Employed
 
We utilize the following manufacturing processes to produce our fabricated products:
Flat Rolled Productsrolling. —  The traditional manufacturing process for aluminum rolledflat-rolled products uses ingot, a large rectangular slab of aluminum, as the starter material. The ingot is processed through a series of rolling operations, both hot and cold. Finishing steps may include heat treatment, annealing, coating, stretching, leveling or slitting to achieve the desired metallurgical, dimensional and performance characteristics. Aluminum rolledflat-rolled products are manufactured using a variety of alloy mixtures, a range of tempers (hardness), gauges (thickness) and widths, and various coatings and finishes. RolledFlat-rolled aluminum semi-finished products are generally either sheet (under .250.25 inches in thickness) or plate (up to 15 inches in thickness). The vast majority of the North American market for aluminum rolledflat-rolled products uses (a) “common alloy” material for construction and other applications and (b) beverage/food can sheet. However, these are products and markets in which Kaiser chooseswe have chosen not to participate. Rather, Kaiser has chosen to focus itswe have focused our efforts on “heat treat” products. Heat treat products are distinguished from common alloy products by higher strength and other desired product attributes, which result in higher value added in the market than for most other types of rolled products. The size of this specialized market segment is less than 10% of the total flat-rolled market.attributes. The primary end use of heat treat rolledflat-rolled sheet and plate is for aerospaceAero/HS and GE products.
 
Extruded ProductsExtrusion. —  The extrusion process typically starts with a cast billet, which is an aluminum cylinder of varying length and diameter. The first step in the process is to heat the billet to an elevated temperature whereby the metal is malleable. The billet is put into an extrusion press and pushed, or extruded, through a die that gives the material the desired two-dimensional cross section. The material is either quenched as it leaves the press, or subjected to a post extrusionpost-extrusion heat treatment cycle, to control the material’s physical properties. The extrusion is then straightened by stretching and cut to length before being hardened in aging ovens. The largest end uses of extruded products are in the construction, transportation (including automotive), custom industrial, and general engineering segments.and custom markets. Building and construction products representsrepresent the single largest end useend-use market for extrusions by a significant amount. However, Kaiser haswe have chosen to focus itsour efforts in theon GE and Custom products because we believe we have strong production of transportation, general engineeringcapability, well-developed technical expertise and custom industrialhigh product quality with respect to these products.
 
Forged ProductsDrawing.  —Drawing is a fabrication operation in which extruded tubes and rods are pulled through a die, or drawn. The purpose of drawing is to reduce the diameter and wall thickness while improving physical properties and dimensions. Material may go through multiple drawing steps to achieve the final dimensional specifications. Aero/HS products is a primary end-use market and is our focus.
Forging.  Forging is a manufacturing process in which metal is pressed, pounded or squeezed under great pressure into high strengthhigh-strength parts known as forgings, creating unique property characteristics.forgings. Forged parts are heat treated before final shipment to the customer. The end usesend-use applications are primarily in transportation, where high strengthstrength-to-weight ratios in products are valued. We focus our production on certain types of automotive and sports vehicle applications.


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A description of the manufacturing processes and category of products at each of our 11 production facilities is shown below:
Manufacturing
Location
Process
Types of Products
Chandler, ArizonaDrawingAero/HS
Greenwood, South CarolinaForgingCustom
Jackson, TennesseeExtrusion/DrawingAero/HS, GE
London, OntarioExtrusionCustom
Los Angeles, CaliforniaExtrusionGE, Custom
Newark, OhioExtrusion/Rod RollingAero/HS, GE
Richland, WashingtonExtrusionAero/HS, GE
Richmond, VirginiaExtrusion/DrawingGE, Custom
Sherman, TexasExtrusionCustom
Spokane, WashingtonFlat RollingAero/HS, GE
Tulsa, OklahomaExtrusionGE
As can be seen in the table above, many of our facilities employ the same basic manufacturing process and produce the same type of end use products. Over the past several years, given the similar economic and other characteristics at each location, we have made a significant effort to weightmore tightly integrate the management of our Fabricated Products business unit across multiple manufacturing locations, product qualitieslines, and target markets to maximize the efficiency of product flow to customers. Purchasing is centralized for a substantial portion of the Fabricated Products business unit’s primary aluminum requirements in order to maximize price, credit and other benefits. Because many customers purchase a number of different products that are valued. Kaiser’s participation isproduced at different plants, there has also been substantial integration of the sales force and its management. We believe that integration of our operations allows us to capture efficiencies while allowing our facilities to remain highly focused on certain types of automotive applications.focused.
 
Legal StructureRaw Materials
 
AllWe purchase substantially all of the Company’s fixed assets utilized byprimary aluminum and recycled and scrap aluminum used to make our fabricated products from third-party suppliers. In a majority of the cases, we purchase primary aluminum ingot and recycled and scrap aluminum in varying percentages depending on various market factors including price and availability. The price for primary aluminum purchased for the Fabricated productsProducts business unit are currently owned directly by KACC with two exceptions: (1)is typically based on the Average Midwest Transaction Price (or “Midwest Price”), which from 2002 to 2007, has ranged between approximately $.02 to $.08 per pound above the price traded on the London OntarioMetal Exchange (or “LME”) depending on primary aluminum supply/demand dynamics in North America. Recycled and scrap aluminum are typically purchased at a modest discount to ingot prices but can require additional processing. In addition to producing fabricated aluminum products for sale to third parties, certain of our production facilities provide one another with billet, log or other intermediate material in lieu of purchasing such items from third party suppliers. For example, a substantial majority of the product from the Richland, Washington facility is owned by Kaiser Aluminum & Chemical of Canada Limited (“KACOCL”), a wholly owned subsidiary, which was one of KACC’s subsidiaries that filed a petition for reorganization underused as base input at the Code in January 2003, and (2)Chandler, Arizona facility; the Sherman, Texas facility is currently supplying billet to the Tulsa, Oklahoma facility; the Richmond, Virginia facility typically receives some portion of its metal supply from either (or both of) the London, Ontario or Newark, Ohio facilities; and the Newark, Ohio facility also supplies billet and log to the Jackson, Tennessee facility and extruded forge stock to the Greenwood, South Carolina facility.
Pricing
The price we pay for primary aluminum, the principal raw material for our fabricated aluminum products business, consists of two components: the price quoted for primary aluminum ingot on the LME and the Midwest Transaction Premium, a premium to LME reflecting domestic market dynamics as well as the cost of shipping and warehousing. Because aluminum prices are volatile, we manage the risk of fluctuations in the price of primary


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aluminum through a combination of pricing policies, internal hedging and financial derivatives. Our three principal pricing mechanisms are as follows:
• Spot price.  Some of our customers pay a product price that incorporates the spot price of primary aluminum in effect at the time of shipment to a customer. This pricing mechanism typically allows us to pass commodity price risk to the customer.
• Index-based price.  Some of our customers pay a product price that incorporates an index-based price for primary aluminum such as Platt’s Midwest price for primary aluminum. This pricing mechanism also typically allows us to pass commodity price risk to the customer.
• Firm price.  Some of our customers pay a firm price. We bear commodity price risk on firm-price contracts, which we normally hedge though a combination of financial derivatives and production from Anglesey. For internal reporting purposes, whenever the Fabricated Products business unit enters into a firm price contract, it also enters into an “internal hedge” with the Primary Aluminum business unit, so that all the metal price risk resides in the Primary Aluminum business unit. Results from internal hedging activities between the two business units are eliminated in consolidation.
Sales, Marketing and Distribution
Industry sales margins for fabricated products fluctuate in response to competitive and market dynamics. Sales are made directly to customers by our sales personnel located in the United States, Canada and Europe, and by independent sales agents in Asia, Mexico and the Middle East. Our sales and marketing efforts are focused on the markets for Aero/HS, GE, and Custom products.
Aerospace and High Strength Products.  Approximately 50% of our Aero/HS product shipments are sold to distributors with the remainder sold directly to customers. Sales are made either under contracts (with terms spanning from one year to several years) or on anorder-by-order basis. We serve this market with a North American sales force focused on Aero/HS and GE products and direct sales representatives in Western Europe. Key competitive dynamics for Aero/HS products include the level of commercial aircraft construction spending (which in turn is owned by Kaiser Bellwood Corporation (“Bellwood”),often subject to broader economic cycles) and defense spending.
General Engineering Products.  A substantial majority of our GE products are sold to large distributors in North America, with orders primarily consisting of standard catalog items shipped with a wholly owned subsidiaryrelatively short lead-time. We service this market with a North American sales force focused on GE and Aero/HS products. Key competitive dynamics for GE products include product price, product-line breadth, product quality, delivery performance and customer service.
Custom Automotive and Industrial Products.  Our Custom products are sold primarily to first tier automotive suppliers and industrial end users. Sales contracts are typically medium to long term in length. Almost all sales of KACC, which filedCustom products occur through direct channels using a petitionNorth American direct sales force that works closely with our technical sales organization. Key demand drivers for reorganizationour automotive products include the level of North American light vehicle manufacturing and increased use of aluminum in February 2002. The Company does not believe that KACOCL’s or Bellwood’s operations have been adversely affected byvehicles in response to increasingly strict governmental standards for fuel efficiency. Demand for industrial products is directly linked to the Cases.strength of the U.S. industrial economy.
Customers
 
In connection2007, our Fabricated Products business unit had approximately 600 customers. The largest, Reliance Steel & Aluminum, and the five largest customers for fabricated products accounted for approximately 15% and 36%, respectively, of our net sales in 2007. The loss of Reliance, as a customer, would have a material adverse effect on us. However, we believe that our relationship with Reliance is good and the effective daterisk of loss of Reliance as a customer is remote.


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Research and Development
We operate three research and development centers.  Our Rolling and Heat Treat Center and our Metallurgical Analysis Center are both located at our Trentwood facility in Spokane, Washington. The Rolling and Heat Treat Center has complete hot rolling, cold rolling and heat treat capabilities to simulate, in small lots, processing of flat-rolled products for process and product development on an experimental scale. The Metallurgical Analysis Center consists of a full metallographic laboratory and a scanning electron microscope to support research development programs as well as respond to plant technical service requests. The third center, our Solidification and Casting Center, is located in Newark, Ohio and has a short stroke experimental caster with ingot cast rolling capabilities for the plan of reorganization, the Companyexperimental rolling mill and its subsidiaries will be restructured sofor extrusion billet used in plant extrusion trials. Due to our research and development efforts, we have been able to introduce products such as to reduce the number of companies and associated administrative costs to the extent possible. It is contemplated that the restructuring will include one or more mergers, consolidations, reorganizations, asset transfers or dissolutions.our unique T-Form® sheet which provides aerospace customers with high formability as well as requisite strength characteristics.
 
• Primary Aluminum Business Unit
 
TheOur Primary aluminumAluminum business unit after excluding discontinued operations, has been redefined by management as containingcontains two primary elements: (a) activities related to the Company’sour interests in and related to Anglesey Aluminium Limited (“Anglesey”), and (b) primary aluminum hedging-related activities. Our Primary Aluminum business unit accounted for approximately 14%, 15% and 14% of our total net sales for 2007, 2006 and 2005, respectively.
 
Anglesey.  KACC ownsWe own a 49% interest in Anglesey, which owns an aluminum smelter at Holyhead, Wales. The smelterRio Tinto Plc owns the remaining 51% ownership interest in Anglesey and has a total annual rated capacityday-to-day operating responsibilities for Anglesey. Anglesey has produced in excess of approximately 135,000 metric tons of which approximately 66,150 metric tons300 million pounds for each of the annual rated capacity are available to the Company. The Anglesey smelter uses pre-bake technology. KACC supplieslast three fiscal years. We supply 49% of Anglesey’s alumina requirements and purchasespurchase 49% of Anglesey’s aluminum output, at market related prices.in each case based on a market-related pricing formula. Anglesey produces billet, rolling ingot and sow for the U.K.United Kingdom and European marketplace. KACC sells itsWe sell our share of Anglesey’s output to a single third party.party at market prices. The price received for sales of production from Anglesey typically approximateapproximates the LME price. KACCWe also realizesrealize a premium (historically between $.05 and $.12 per pound above LME price depending on the product) for sales of valuevalue- added products such as billet and rolling ingot.
To meet our obligation to sell alumina to Anglesey in proportion to our ownership percentage, we purchase alumina under a contract that provides adequate alumina for operations through August 2009 at prices that are based on market prices for primary aluminum. We will need to secure a new alumina contract for the period after August 2009 in the event additional power is secured. We can give no assurance regarding our ability to secure a source of alumina on comparable terms. If we are unable to do so, the results of our Primary Aluminum operations will be affected.
Anglesey operates under a power agreement that provides sufficient power to sustain its operations at full capacity through September 2009. The nuclear facility which supplies power to Anglesey is scheduled to close operations in 2010. Anglesey’s ability to operate its aluminum reduction operations past September 2009 is dependent upon findingprocuring adequate power at anon acceptable purchase price.terms. We can give no assurance that Anglesey will be able to do so. If Anglesey cannot obtain adequate power on acceptable terms, Anglesey’s aluminum reduction operations will likely be shut down. Given the potential for future shutdown and related costs, dividends from Anglesey were temporarily suspended while Anglesey studied future cash requirements. Based on the review of cash anticipated to be available for future cash requirements, Anglesey removed the temporary suspension of dividends and distributed $4.4 million and $9.9 million in dividends to us in August and December of 2007, respectively. No assurancesassurance can be given that Anglesey will not suspend dividends again in this regard. Rio Tinto Plc owns the remaining 51% ownership interest in Anglesey. As majority shareholder, Rio Tinto hasday-to-dayfuture. The shutdown process may involve significant costs to Anglesey which could decrease or eliminate its ability to pay future dividends. The process of shutting down operations may involve transition complications which may prevent Anglesey from operating responsibility for Anglesey, although certain decisions require unanimous approvalat full capacity until the expiration of the shareholders.
The Company is responsible for selling alumina to Anglesey in proportion to the Company’s ownership percentage. Such alumina is purchased under contracts at prices that are tied to primary aluminum prices that extend through 2007. The Company will need to secure a new alumina contract for the period after 2007. No assurances can be provided currently regarding the ability to secure a source of alumina at a price that will maintain the viability of the Anglesey operations. Anglesey did not file a petition for reorganization. KACC does not believe Anglesey’s operations have been adversely affected as a result of the Cases as the Debtors received the authority from the Court to fund the Debtors’ cash requirements in respect of Anglesey in the ordinary course of business.power agreement.
 
Hedging.  KACC’s share of primary aluminum production from Anglesey is approximately 150 million pounds annually. Because KACC purchases alumina for Anglesey at prices linked to primary aluminum prices, only a portion of the Company’s net revenues associated with Anglesey are exposed to price risk. The Company estimates the net portion of its share of Anglesey production exposed to primary aluminum price risk to be approximately 100 million pounds annually.
As stated above, the Company’sOur pricing of fabricated aluminum products, as discussed above, is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to itsour customers. However, in certain instances the Company doeswe do enter into firm price arrangements. In such instances, the Company doeswe have price risk on itsour anticipated primary aluminum purchasepurchases in respect of the customer’s order. Total fabricated products shipments for which we were subject to price risk were 239, 200 and 155 (in millions of pounds) during 2007, 2006 and 2005, respectively.


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customer’s order. Total fabricated products shipments during 2003, 2004,Whenever our Fabricated Products business unit enters into a firm price contract, our Primary Aluminum business unit and 2005 andFabricated Products business unit enter into an “internal hedge” so that all the shipments for which the Company hadmetal price risk were (in millions of pounds) 97.6, 119.0,resides in our Primary Aluminum business unit. Results from internal hedging activities between the two segments eliminate in consolidation. As more fully discussed in Item 7A. “Quantitative and 155.0, respectively.
DuringQualitative Disclosures About Market Risk,” during the last three years, the Company’sour net exposure to primary aluminum price risk at Anglesey substantially offset or roughly equaled the volume of fabricated products shipments with underlying primary aluminum price risk. As such, the Company considers itswe consider our access to Anglesey production overall to be a “natural” hedge against any fabricated productsFabricated Products firm metal-price risk. For internal reporting purposes, whenever the Fabricated products business unit enters into a firm price contract, the Primary aluminum business unit and Fabricated products business unit segments enter into an “internal hedge” so that all the metal price risk resides in the Primary aluminum business unit. Results from internal hedging activities between the two segments eliminate in consolidation. However, since the volume of fabricated products shipped under firm prices may not match up on amonth-to-month basis with expected Anglesey-related primary aluminum shipments and to the Companyextent that firm price contracts from our Fabricated Products business unit exceed the Anglesey-related primary aluminum shipments, we may use third party hedging instruments to eliminate any net remaining primary aluminum price exposure existing at any time.
 
Primary aluminum-related hedging activities have beenare managed centrally on behalf of all of KACC’sour business segments to minimize transaction costs, to monitor consolidated net exposures and to allow for increased responsiveness to changes in market factors. Hedging activities are conducted in compliance with a policy approved by the Company’sour board of directors, and hedging transactions are only entered into after appropriate approvals are obtained from the Company’sour hedging committee (which includes the Company’sour chief executive officer and key financial officers).
 
• Discontinued Operations
 
Prior to 2004, KACC waswe were a majormore significant producer of primary aluminum and sold significant amounts of itsour alumina and primary aluminum production in domestic and international markets. KACC’sOur strategy was to sell a substantial portionall of the alumina and primary aluminum available to itus in excess of itsour internal requirements to third parties. However, as more fully discussed in Note 5As part of Notesour reorganization, we made a strategic decision to Consolidated Financial Statements and below, the Company has soldsell all of itsour commodity-related interests, other than itsour interests in and related to Anglesey.
Valco.  The Company, with Court approval, sold its interests in and related to Volta Aluminium Company Limited (“Valco”) in October 2004. KACC owned a 90% interest in Valco, which owns an aluminum smelter in Ghana. The smelter had a total annual capacity of approximately 200,000 tons of which approximately 180,000 tons of the annual capacity was available to KACC. However, the Valco smelter had been fully curtailed since early in the second quarter of 2003 due to power supply issues. Valco did not file a petition for reorganization.
Washington Smelters.  The Company owned and operated two aluminum smelters in the State of Washington (the Mead and Tacoma smelters). Both smelters were fully curtailed during the2002-2004 period. The Company, with Court approval, sold the Tacoma smelter in early 2003 and the Mead facility in the second quarter of 2004.
KJBC.  With Court approval, the Company sold its interests in and related to Kaiser Jamaica Bauxite Company (“KJBC”) on October 1, 2004. KJBC mined bauxite (approximately 4,500,000 tons annually)Anglesey, as an agent for KACC from land that was subject to a mining lease from the Government of Jamaica. KACC held its interest in KJBC through a wholly owned subsidiary, Kaiser Bauxite Company (“KBC”), which was one of KACC’s subsidiaries that filed a petition for reorganization under the Code in January 2003. KJBC did not file a petition for reorganization. Although KACC (through KBC) owned 49% of KJBC, it was entitled to, and generally took, all of KJBC’s bauxite output. A substantial majority of the bauxite mined by KJBC was refined into alumina at the Gramercy facility and the remainder was sold to a third party.
Gramercy.  With Court approval, the Gramercy facility was sold on October  1, 2004. Alumina produced by the Gramercy refinery was primarily sold to third parties. Production at the plant was fully or partially curtailed from July 1999 until January 2002 as a result of an explosion in the digestion area of the plant. Since the end of February 2002, the plant had, except for normal operating variations, generally operated at approximately 100% of its rated annual capacity of 1,250,000 tons.
Alpart.  With Court approval, the Company sold its interests in and related to Alumina Partners of Jamaica (“Alpart”) on July 1, 2004. KACC owned a 65% interest in Alpart. KACC held its interests in Alpart through two wholly owned subsidiaries, Kaiser Jamaica Corporation (“KJC”) and Alpart Jamaica Inc. (“AJI”), which were two


6

of KACC’s wholly owned subsidiaries that filed petitions for reorganization under the Code in January 2003. Alpart did not file a petition for reorganization. Alpart held bauxite reserves and owned a 1,650,000-ton per year alumina plant located in Jamaica.
QAL.  With Court approval, the Company sold its interests in and related to Queensland Alumina Limited (“QAL”) in April 2005. KACC owned a 20% interest in QAL. KACC held its interest in QAL through a wholly owned subsidiary, Kaiser Alumina Australia Corporation (“KAAC”), which is one of KACC’s subsidiaries that filed a petition for reorganization under the Code in 2002. QAL, which is located in Queensland, Australia, owns one of the largest and most competitive alumina refineries in the world. The refinery has a total annual production capacity of approximately 3,650,000 tons from which approximately 730,000 tons of the annual production capacity was available to KAAC. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its shareholders under long-term tolling contracts. In recent years, KACC sold its share of QAL’s production to third parties.
Commodities Marketing.  Given the significance of the Company’s exposure to primary aluminum and alumina prices (alumina prices typically are linked to primary aluminum prices on a lagged basis) in prior years, the commodity marketing activities were considered a separate business unit. In the accompanying financial statements, the Company has reclassified to discontinued operations all of the primary aluminum hedging results in respect of the commodity-related interests that have been sold and that are also treated as discontinued operations. As stated above, remaining primary aluminum hedging activities related to the Company’s interests in Anglesey and any firm price fabricated product shipments are considered part of the “Primary aluminum business unit”.
Competition
KACC markets fabricated aluminum products it manufactures in the United States and abroad. Sales are made both directly and through distributors to a large number of end-use customers. Competition in the sale of fabricated products is based upon quality, availability, price and service, including delivery performance. KACC concentrates its fabricating operations on selected products for which it believes it has production capability, technical expertise, high-product quality, and geographic and other competitive advantages. However, KACC competes with numerous domestic and international fabricators in the sale of fabricated aluminum products. Many of KACC’s competitors have greater financial resources than KACC.
Research and Development
Expenditures for the Fabricated products business unit’s research and development activities were $2.0 million in 2005, $1.7 million in 2004 and $1.6 million in 2003. KACC estimates that research and development expenditures for the Fabricated products business unit will be in the range of $2.0 million to $3.0 million in 2006. Research and development facilities in Jackson, Tennessee; Trentwood, Washington; and Newark, Ohio, focus on advanced metallurgical analysis and process technology.
Employees
At December 31, 2005, KACC employed approximately 2,400 persons, of which approximately 2,350 were employed in the Fabricated products business unit and approximately 50 were employed in Corporate. At December 31, 2004, KACC employed approximately 2,260 persons of which approximately 2,200 were employed in the Fabricated products business unit and approximately 60 were employed in Corporate.


7

The table below shows each manufacturing location, the primary union affiliation, if any, and the expiration date for the current union contract.summarized below.
 
     
  Contract
LocationEntity/Facility
 
UnionLocation
 
Expiration DateProduct
Period of Disposition
 
Chandler, AZQueensland Alumina Limited Non-unionAustralia NA
Greenwood, SCAlumina Non-unionSecond Quarter 2005
Gramercy refinery NA
Jackson, TNLouisiana Non-unionAlumina NAFourth Quarter 2004
London, OntarioKaiser Jamaica Bauxite Company USW CanadaJamaica Feb 2009
Los Angeles, CABauxite TeamstersFourth Quarter 2004
Volta Aluminium Company Limited May 2006
Newark, OHGhana USWAPrimary Aluminum Sept 2010Fourth Quarter 2004
Richland, WAAlumina Partners of Jamaica Non-unionJamaica NA
Richmond, VAAlumina USWA IAMThird Quarter 2004
Mead Smelter Nov 2010
Sherman, TXWashington IAMPrimary Aluminum Dec 2007
Spokane, WAUSWASept 2010
Tulsa, OKUSWANov 2010Second Quarter 2004
 
Environmental Matters
The Company, KACC and KACC’s subsidiaries are subject to a wide variety of international, federal, state and local environmental laws and regulations in the United States and Canada with respect to, among other things, air, water, and the handling and disposal of hazardous waste materials. The Company has casting, or remelt, operations at six of its facilities (London, Los Angeles, Newark, Richmond, Sherman, and Spokane) that purchase and recycle aluminum scrap in various forms, and purchase primary metal from third parties. Purchased metal is inspected for impurities and other contaminants before introduction into the remelt process. These cast house facilities are subject to air and water environmental regulations, and have in force the necessary permits and inspection and control systems for current and expected operating levels. Manufacturing operations are subject to the same regulations, and have the necessary permits for current and expected operations. Any hazardous materials, which are relatively minor in volume in comparison to the volume of primary aluminum consumed and produced, are shipped offsite to recycling or storage operations, which are approved and periodically audited by the Company’s environmental staff. KACC has also maintained PCB and asbestos removal programs for several years.
The Company has previously disclosed that, 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 to KACC’s Trentwood facility in Spokane, 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 regulations at the Trentwood facility and intends to defend any claim 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.
For additional discussion of this subject, see “Factors Affecting Future Performance”. KACC’s current or past operations subject it to environmental compliance,clean-up and damage claims that may be costly. During the pendency of the Cases, substantially all pending litigation, except certain environmental claims and litigation, against the Debtors is stayed.
Reorganization Proceedings
• Background
The Company, KACC and 24 of KACC’s subsidiaries have filed separate voluntary petitions in the Court for reorganization under Chapter 11 of the Code. In December 2005, four of the KACC subsidiaries were dissolved, pursuant to two separate plans of liquidation as more fully discussed below. The Company, KACC and the remaining 20 KACC subsidiaries continue to manage their businesses in the ordinary course as


8

debtors-in-possession subject to the control and administration of the Court and are collectively referred to herein as the “Reorganizing Debtors.”
In addition to KAC and KACC, the Debtors include the following subsidiaries: Bellwood, Kaiser Aluminium International, Inc. (“KAII”), Kaiser Aluminum Technical Services, Inc. (“KATSI”), KAAC (and its wholly owned subsidiary, Kaiser Finance Corporation (“KFC”)), KBC, KJC, AJI, KACOCL and 15 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 filings in the United States.
The Debtors found it necessary to file the Cases primarily because of liquidity and cash flow problems of the Company and its subsidiaries that arose 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 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 Debtors’ Cases, the Court, upon motion by the Debtors, authorized the 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 and to continue using the Company’s existing cash management systems. The Reorganizing 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 Reorganizing Debtors agree to perform their obligations and cure certain existing defaults under an executory contract and “rejection” means that the Reorganizing 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.
• Case Administration
Generally, pre-Filing Date claims, including certain contingent or unliquidated claims, against the 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 bar dates (established by the Court) by which holders of pre-Filing Date claims against the Debtors (other than asbestos-related personal injury claims) could file their claims have passed. Any holder of a claim that was required to file such claim by such bar date and did not do so may be barred from asserting such claim against any of the 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 bar dates do not apply to asbestos-related personal injury claims, for which no bar date has been set.
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 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 Court-appointed legal representatives for (a) potential future asbestos


9

claimants (the “Asbestos Futures’ Representative”) and (b) potential future silica and coal tar pitch volatile claimants (the “Silica/CTPV Futures’ Representative” and, collectively with the Asbestos Futures” Representative, the “Futures’ Representatives”), have played and will continue to 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’ Representatives, including those of their counsel and other advisors.
• Commodity-related and Inactive Subsidiaries
As previously disclosed, the Company generated net cash proceeds of approximately $686.8 million from the sale of the Company’s interests in and relatedWe refer to Queensland Alumina Limited (“QAL”) and Alumina Partners of Jamaica (“Alpart”). The Company’s interests inherein as QAL and related to QAL were owned by KAAC and KFC. The Company’s interests in and related to Alpart, were owned by AJI and KJC. Throughout most of 2005, the proceeds were being held in separate escrow accounts pending distribution to the creditors of AJI, KJC, KAAC and KFC (collectively the “Liquidating Subsidiaries”) pursuant to certain liquidating plans.respectively.
 
During November 2004, the Liquidating Subsidiaries filed separate joint plans of liquidation and related disclosure statements with the Court. Such plans, together with the disclosure statements and all amendments filed thereto, are referred to as the “as the “Liquidating Plans.” In general, the Liquidating Plans provided for the vast majority of the net sale proceeds to be distributed to the Pension Benefit Guaranty Corporation (the “PBGC”) and the holders of KACC’s 97/8% and 107/8% Senior Notes (the “Senior Notes”) and claims with priority status.
As previously disclosed in 2004, a group of holders (the “Sub Note Group”) of KACC’s 123/4% Senior Subordinated Notes (the “Sub Notes”) formed an unofficial committee to represent all holders of Sub Notes and retained its own legal counsel. The Sub Note Group asserted that the Sub Note holders’ claims against the subsidiary guarantors (and in particular the Liquidating Subsidiaries) may not, as a technical matter, be contractually subordinated to the claims of the holders of the Senior Notes against the subsidiary guarantors (including AJI, KJC, KAAC and KFC). A separate group that holds both the Sub Notes and Senior Notes made a similar assertion, but also, maintained that a portion of the claims of holders of Senior Notes against the subsidiary guarantors were contractually senior to the claims of holders of Sub Notes against the subsidiary guarantors. The effect of such positions, if ultimately sustained, would be that the holders of Sub Notes would be on a par with all or a portion of the holders of the Senior Notes in respect of proceeds from sales of the Company’s interests in and related to the Liquidating Subsidiaries.
The Court ultimately approved the disclosure statements related to the Liquidating Plans in February 2005. In April 2005, voting results on the Liquidating Plans were filed with the Court by the Debtors’ claims agent. Based on these results, the Court determined that a sufficient volume of creditors (in number and amount) had voted to accept the Liquidating Plans to permit confirmation proceedings with respect to the Liquidating Plans to go forward even though the filing by the claims agent also indicated that holders of the Sub Notes, as a group, voted not to accept the Liquidating Plans. Accordingly, the Court conducted a series of evidentiary hearings to determine the allocation of distributions among holders of the Senior Notes and the Sub Notes. In connection with those proceedings, the Court also determined that there could be an allocation to the Parish of St. James, State of Louisiana, Solid Waste Revenue Bonds (the “Revenue Bonds”) of up to $8.0 million and ruled against the position asserted by the separate group that holds both Senior Notes and the Sub Notes.
On December 20, 2005, the Court confirmed the Liquidating Plans (subject to certain modifications). Pursuant to the Court’s order, the Liquidating Subsidiaries were authorized to make partial cash distributions to certain of their creditors, while reserving sufficient amounts for future distributions until the Court resolved the contractual subordination dispute among the creditors of these subsidiaries and for the payment of administrative and priority claims and trust expenses. The Court’s ruling did not resolve the dispute between the holders of the Senior Notes and the holders of the Sub Notes regarding their respective entitlement to certain of the proceeds from sale of interests by the Liquidating Subsidiaries (the “Senior Note-Sub Note Dispute”). However, as a result of the Court’s approval, all restricted cash or other assets held on behalf of or by the Liquidating Subsidiaries were transferred to a trustee in accordance with the terms of the Liquidating Plans. The trustee was then authorized to make partial cash distributions after setting aside sufficient reserves for amounts subject to the Senior Note-Sub Note Dispute (approximately $213.0 million) and for the payment of administrative and priority claims and trust expenses


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(approximately $40.0 million). After such reserves, the partial distribution totaled approximately $430.0 million, of which, pursuant to the Liquidating Plans, approximately $196.0 million was paid to the PBGC and $202.0 million was paid to the indenture trustees for the Senior Notes for subsequent distribution to the holders of the Senior Notes. Of the remaining partial distribution, approximately $21.0 million was paid to KACC and $11.0 million was paid to the PBGC on behalf of KACC. Partial distributions were made in late December 2005 and, in connection with the effectiveness of the Liquidating Plans, the Liquidating Subsidiaries were deemed to be dissolved and took the actions necessary to dissolve and terminate their corporate existence.
On December 22, 2005, the Court issued a decision in connection with the Senior Note-Sub Note Dispute, finding in favor of the Senior Notes. On January  10, 2006, the Court held a hearing on a motion by the indenture trustee for the Sub Notes to stay distribution of the amounts reserved under the Liquidating Plans in respect of the Senior Note-Sub Note Dispute pending appeals in respect of the Court’s December 22, 2005 decision that the Sub Notes were contractually subordinate to the Senior Notes in regard to certain subsidiary guarantors (particularly the Liquidating Subsidiaries) and that certain parties were not due certain reimbursements. An agreement was reached at the hearing and subsequently approved by Court order dated March 7, 2006, authorizing the trustee to distribute the amounts reserved to the indenture trustees for the Senior Notes and further authorize the indenture trustees to make distributions to holders of the Senior Notes while such appeals proceed, in each case subject to the terms and conditions stated in the order.
Based on the objections and pleadings filed by the Sub Note Group and the group that holds Sub Notes and Senior Notes and the assumptions and estimates upon which the Liquidating Plans are based, if the holders of Sub Notes were ultimately to prevail on their appeal, the Liquidating Plans indicated that it is possible that the holders of the Sub Notes could receive between approximately $67.0 million and approximately $215.0 million depending on whether the Sub Notes were determined to rank on par with a portion or all of the Senior Notes. Conversely, if the holders of the Senior Notes prevail on appeal, then the holders of the Sub Notes will receive no distributions under Liquidating Plans. The Company believes that the intent of the indentures in respect of the Senior Notes and the Sub Notes was to subordinate the claims of the Sub Note holders in respect of the subsidiary guarantors (including the Liquidating Subsidiaries) and that the Court’s ruling on December 22, 2005, was correct. The Company cannot predict, however, the ultimate resolution of the matters raised by the Sub Note Group, or the other group, on appeal, when any such resolution will occur, or what impact any such resolution may have on the Company, the Cases or distributions to affected noteholders.
The distributions in respect of the Liquidating Plans also settled substantially all amounts due between KACC and the creditors of the Liquidating Subsidiaries pursuant to the Intercompany Settlement Agreement (the “Intercompany Agreement”) that went into affect in February 2005 other than certain payments of alternative minimum tax paid by the Company that it expects to recoup from the liquidating trust for the KAAC and KFC joint plan of liquidation (“the KAAC/KFC Plan”) during the second half of 2006 in connection with a 2005 tax return (see Note 8 of Notes to Consolidated Financial Statements). The Intercompany Agreement also resolved substantially all pre-and post-petition intercompany claims among the Debtors.
KBC is being dealt with in the KACC plan of reorganization as more fully discussed below.
• Entities Containing the Fabricated Products and Certain Other Operations
Under the Code, claims of individual creditors must generally be satisfied from the assets of the entity against which that creditor has a lawful claim. The claims against the entities containing the Fabricated products and certain other operations have to be resolved from the available assets of KACC, KACOCL, and Bellwood, which generally include the fabricated products plants and their working capital, the interests in and related to Anglesey Aluminium Limited (“Anglesey”) and proceeds received by such entities from the Liquidating Subsidiaries under the Intercompany Agreement. Sixteen of the Reorganizing Debtors have no material ongoing activities or operations and have no material assets or liabilities other than intercompany claims (which were resolved pursuant to the Intercompany Agreement). The Company has previously disclosed that it believed that it is likely that most of these entities will ultimately be merged out of existence or dissolved in some manner.
In June 2005, KAC, KACC, Bellwood, KACOCL and 17 of KACC’s subsidiaries (i.e., the Reorganizing Debtors) filed a plan of reorganization and related disclosure statement with the Court. Following an interim filing


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in August 2005, in September 2005, the Reorganizing Debtors filed amended plans of reorganization (as modified, the “Kaiser Aluminum Amended Plan”) and related amended disclosure statements (the “Kaiser Aluminum Amended Disclosure Statement”) with the Court. In December 2005, with the consent of creditors and the Court, KBC was added to the Kaiser Aluminum Amended Plan.
The Kaiser Aluminum Amended Plan, in general (subject to the further conditions precedent as outlined below), resolves substantially all pre-Filing Date liabilities of the Remaining Debtors under a single joint plan of reorganization. In summary, the Kaiser Aluminum Amended Plan provides for the following principal elements:
(a) All of the equity interests of existing stockholders of the Company would be cancelled without consideration.
(b) All post-petition and secured claims would either be assumed by the emerging entity or paid at emergence (see “Exit Cost” discussion below).
(c) Pursuant to agreements reached with salaried and hourly retirees in early 2004, in consideration for the agreed cancellation of the retiree medical plan, as more fully discussed in Note 9 of Notes to Consolidated Financial Statements, KACC is making certain fixed monthly payments into Voluntary Employee Beneficiary Associations (“VEBAs”) until emergence and has agreed thereafter to make certain variable annual VEBA contributions depending on the emerging entity’s operating results and financial liquidity. In addition, upon emergence the VEBAs are entitled to receive a contribution of 66.9% of the new common stock of the emerged entity.
(d) The PBGC will receive a cash payment of $2.5 million and 10.8% of the new common stock of the emerged entity in respect of its claims against KACOCL. In addition, as described in (f) below, the PBGC will receive shares of new common stock based on its direct claims against the Remaining Debtors (other than KACOCL) and its participation, indirectly through the KAAC/KFC Plan in claims of KFC against KACC, which the Company currently estimates will result in the PBGC receiving an additional 5.4% of the new common stock of the emerged entity (bringing the PBGC’s total ownership percentage of the new entity to approximately 16.2%). The $2.5 million cash payment discussed above is in addition to the cash amounts the Company has already paid to the PBGC (see Note 9 of Notes to Consolidated Financial Statements) and that the PBGC has received and will receive from the Liquidating Subsidiaries under the Liquidating Plans.
(e) Pursuant to an agreement reached in early 2005, all pending and future asbestos-related personal injury claims, all pending and future silica and coal tar pitch volatiles personal injury claims and all hearing loss claims would be resolved through the formation of one or more trusts to which all such claims would be directed by channeling injunctions that would permanently remove all liability for such claims from the Debtors. The trusts would be funded pursuant to statutory requirements and agreements with representatives of the affected parties, using (i) the Debtors’ insurance assets, (ii) $13.0 million in cash from KACC, (iii) 100% of the equity in a KACC subsidiary whose sole asset will be a piece of real property that produces modest rental income, and (iv) the new common stock of the emerged entity to be issued as per (f) below in respect of approximately $830.0 million of intercompany claims of KFC against KACC that are to be assigned to the trust, which the Company currently estimates will entitle the trusts to receive approximately 6.4% of the new common stock of the emerged entity.
(f) Other pre-petition general unsecured claims against the Remaining Debtors (other than KACOCL) are entitled to receive approximately 22.3% of the new common stock of the emerging entity in the proportion that their allowed claim bears to the total amount of allowed claims. Claims that are expected to be within this group include (i) any claims of the Senior Notes, the Sub Notes and PBGC (other than the PBGC’s claim against KACOCL), (ii) the approximate $830.0 million of intercompany claims that will be assigned to the personal injury trust(s) referred to in (e) above, and (iii) all unsecured trade and other general unsecured claims, including approximately $276.0 million of intercompany claims of KFC against KACC. However, holders of general unsecured claims not exceeding a specified small amount will receive a cash payment equal to approximately 2.9% of their agreed claim value in lieu of new common stock. In accordance with the contractual subordination provisions of the indenture governing the Sub Notes and terms of the settlement between the holders of the Senior Notes and the holders of the Revenue Bonds, the new common stock or cash


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that would otherwise be distributed to the holders of the Sub Notes in respect of their claims against the Debtors would instead be distributed to holders of the Senior Notes and the Revenue Bonds on a pro rata basis based on their relative allowed amounts of their claims.
The Kaiser Aluminum Amended Plan was accepted by all classes of creditors entitled to vote on it and the Kaiser Aluminum Amended Plan was confirmed by the Court on February 6, 2006. The confirmation order remains subject to motions for review and appeals filed by certain of KACC’s insurers and must still be adopted or affirmed by the United States District Court. Other significant conditions to emergence include completion of the Company’s exit financing, listing of the new common stock on the NASDAQ stock market and formation of certain trusts for the benefit of different groups of the torts claimants. As provided in the Kaiser Aluminum Amended Plan, once the Court’s confirmation order is adopted or affirmed by the United States District Court, even if the affirmation order is appealed, the Company can proceed to emerge if the United States District Court does not stay its order adopting or affirming the confirmation order and the key constituents in the Chapter 11 proceedings agree. Assuming the United States District Court adopts or affirms the confirmation order, the Company believes that it is possible that it will emerge before May 11, 2006. No assurances can be given that the Court’s confirmation order will ultimately be adopted or affirmed by the United States District Court or that the transactions contemplated by the Kaiser Aluminum Amended Plan will ultimately be consummated.
At emergence from Chapter 11, the Reorganizing Debtors will have to pay or otherwise provide for a material amount of claims. Such claims include accrued but unpaid professional fees, priority pension, tax and environmental claims, secured claims, and certain post-petition obligations (collectively, “Exit Costs”). The Company currently estimates that its Exit Costs will be in the range of $45.0 million to $60.0. million. The Company currently expects to fund such Exit Costs using existing cash resources and borrowing availability under an exit financing facility that would replace the current Post-Petition Credit Agreement (see Note 7 of Notes to Consolidated Financial Statements). If funding from existing cash resources and borrowing availability under an exit financing facility are not sufficient to pay or otherwise provide for all Exit Costs, the Company and KACC 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 any issues that may arise in respect of an exit financing facility or be able to negotiate a reasonable alternative. However, no assurance can be given in this regard.
• Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in accordance with American Institute of Certified Professional Accountants (“AICPA”) Statement ofPosition 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 bySOP 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 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 liabilities subject to compromise (that will be relieved upon emergence), comparisons between the current historical financial statements and the financial statements upon emergence may be difficult to make.


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Segment and Geographical Area Financial Information
 
The information set forth in Note 1516 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” regarding the Company’s operatingour segments and geographical areas in which the Company operateswe operate is incorporated herein by reference.
Competition
The fabricated aluminum industry is highly competitive. We concentrate our fabricating operations on highly engineered products for which we believe we have production capability, technical expertise, high product quality, and geographic and other competitive advantages. We differentiate ourselves from our competition by Best in Class customer satisfaction which is driven by quality, availability, price and service, including delivery performance. Our primary competition in the global heat treated flat-rolled products is Alcoa and Rio Tinto (through it’s ownership of Alcan’s fabricated aluminum products business). In the extrusion market, we compete with many regional participants as well as larger companies with national reach such as Sapa AG (the joint venture formed by Orkla and Alcoa), Norsk Hydro ASA and Indalex. Some of our competitors are substantially larger, have greater financial


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resources, and may have other strategic advantages, including more efficient technologies or lower raw material costs.
Our fabricated aluminum products facilities are located in North America. To the extent our competitors have production facilities located outside North America, they may be able to produce similar products at a lower cost. We may not be able to adequately reduce costs to compete with these products. Increased competition could cause a reduction in our shipment volume and profitability or increase our expenditures, any one of which could have a material adverse effect on our results of operations.
In addition, our fabricated aluminum products compete with products made from other materials, such as steel and composites, for various applications, including aircraft manufacturing. The willingness of customers to accept substitutions for aluminum and the ability of large customers to exert leverage in the marketplace to reduce the pricing for fabricated aluminum products could adversely affect our results of operations.
For the heat treat plate and sheet products, new competition is limited by technological expertise that only a few companies have developed through significant investment in research and development. Further, use of plate and sheet in safety critical applications make quality and product consistency critical factors. Suppliers must pass a rigorous qualification process to sell to airframe manufacturers. Additionally, significant investment in infrastructure and specialized equipment is required to supply heat treat plate and sheet.
Barriers to entry are lower for extruded and forged products, mostly due to the lower required investment in equipment. However, the products that we produce are somewhat differentiated from the majority of products sold by competitors. We maintain a competitive advantage by using application engineering and advanced process engineering to distinguish our company and our products. We believe our metallurgical expertise and controlled manufacturing processes enable superior product consistency.
Employees
At December 31, 2007, we employed approximately 2,600 persons, of which approximately 2,540 were employed in our Fabricated Products business unit and approximately 60 were employed in our corporate group, most of whom are located in our offices in Foothill Ranch, California.
The table below shows each manufacturing location, the primary union affiliation, if any, and the expiration date for the current union contract.
Contract
Location
Union
Expiration Date
Chandler, AZNon-union—
Greenwood, SCNon-union—
Jackson, TNNon-union—
London, OntarioUSW CanadaFeb 2009
Los Angeles, CATeamstersMay 2009
Newark, OHUSWSept 2010
Richland, WANon-union—
Richmond, VAUSW/IAMNov 2010
Sherman, TXIAMDec 2010
Spokane, WAUSWSept 2010
Tulsa, OKUSWNov 2010
As part of our chapter 11 reorganization, we entered into a settlement with the United Steelworkers, or USW, regarding, among other things, pension and retiree medical obligations. Under the terms of the settlement, we agreed to adopt a position of neutrality regarding the unionization of any of our employees.


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Environmental Matters
We are subject to numerous environmental laws and regulations with respect to, among other things: air and water emissions and discharges; the generation, storage, treatment, transportation and disposal of solid and hazardous waste; and the release of hazardous or toxic substances, pollutants and contaminants into the environment. Compliance with these environmental laws is and will continue to be costly.
Our operations, including our operations conducted prior to our emergence from chapter 11 bankruptcy in July 2006, have subjected, and may in the future subject, us to fines or penalties for alleged breaches of environmental laws and to obligations to perform investigations or clean up of the environment. We may also be subject to claims from governmental authorities or third parties related to alleged injuries to the environment, human health or natural resources, including claims with respect to waste disposal sites, the clean up of sites currently or formerly used by us or exposure of individuals to hazardous materials. Any investigation,clean-up or other remediation costs, fines or penalties, or costs to resolve third-party claims, may be significant and could have a material adverse effect on our financial position, results of operations and cash flows.
We have accrued, and will accrue as necessary, for costs relating to the above matters that are reasonably expected to be incurred based on available information. However, it is possible that actual costs may differ, perhaps significantly, from the amounts expected or accrued, and such differences could have a material adverse effect on our financial position, results of operations and cash flows. In addition, new laws or regulations, or changes to existing laws and regulations may occur, and we cannot assure you as to the amount that we would have to spend to comply with such new or amended laws and regulations or the effects that they would have on our financial position, results of operations and cash flows.
Emergence From Reorganization Proceedings
From the first quarter of 2002 to June 30, 2006, Kaiser and 25 of its subsidiaries operated under chapter 11 of the United States Bankruptcy Code under the supervision of the Bankruptcy Court. Pursuant to our Plan, Kaiser and its subsidiaries, which included all of our core fabricated products facilities and operations and a 49% interest in Anglesey, emerged from chapter 11 on July 6, 2006. Pursuant to the Plan, all material pre-petition debt, pension and post-retirement medical obligations and asbestos and other tort liabilities, along with other pre-petition claims (which in total aggregated at June 30, 2006 approximately $4.4 billion) were addressed and resolved. Pursuant to the Plan, all of the equity interests of Kaiser’s pre-emergence stockholders were cancelled without consideration. Equity of the newly emerged Kaiser was issued and delivered to a third-party disbursing agent for distribution to claimholders pursuant to the Plan.
All financial statement information before July 1, 2006 relates to Kaiser before emergence from chapter 11 (sometimes referred to herein as the “Predecessor”). Kaiser after emergence is sometimes referred to herein as the “Successor.” As more fully discussed below, there will be a number of differences between the financial statements before and after emergence that will make comparisons of future and past financial information difficult and may make it more difficult to assess our future prospects based on historical performance.
We also made some changes to our accounting policies and procedures as part of the application of “fresh start” accounting as required by the American Institute of Certified Professional Accountants Statement of Position90-7(“SOP 90-7”),Financial Reporting by Entities in Reorganization Under the Bankruptcy Codeand the emergence process. In general, our accounting policies are the same as or similar to those historically used to prepare our financial statements. In certain cases, however, we adopted different accounting principles for, or applied methodologies differently to, our post emergence financial statement information. For instance, we changed our accounting methodologies with respect to inventory accounting. While we still account for inventories on alast-in, first-out (“LIFO”) basis after emergence, we are applying LIFO differently than we did in the past. Specifically, we now view each quarter on a standalone basis for computing LIFO; in the past, we recorded LIFO amounts with a view to the entire fiscal year, which, with certain exceptions, tended to result in LIFO charges being recorded in the fourth quarter or second half of the year.


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Legal Structure
In connection with our Plan, we restructured and simplified our corporate structure. The result of the simplified corporate structure is summarized as follows:
• We directly own 100% of the issued and outstanding shares of capital stock of Kaiser Aluminum Investments Company, a Delaware corporation (“KAIC”), which functions as an intermediate holding company.
• KAIC owns 49% of the ownership interests of Anglesey and 100% of the ownership interests of each of:
• Kaiser Aluminum Fabricated Products, LLC, a Delaware limited liability company (“KAFP”), which holds the assets and liabilities associated with our Fabricated Products business unit (excluding those assets and liabilities associated with our London, Ontario facility);
• Kaiser Aluminum Canada Limited, an Ontario corporation (“KACL”), which holds the assets and liabilities associated with our London, Ontario facility and certain former Canadian subsidiaries that were largely inactive;
• Kaiser Aluminum & Chemical Corporation, LLC, a Delaware limited liability company (“KACC, LLC”), which, as a successor by merger to Kaiser Aluminum & Chemical Corporation, holds our remaining non-operating assets and liabilities not assumed by KAFP;
• Kaiser Aluminium International, Inc., a Delaware corporation which functions primarily as the seller of our products delivered outside the United States; and
• Trochus Insurance Co., Ltd., a corporation formed in Bermuda which has historically functioned as a captive insurance company.
 
Item 1A.  Risk Factors
 
This section discusses certain factors that could cause actual resultsItem may contain statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. “Business — Forward Looking Statements” for cautionary information with respect to vary, perhaps materially, from the results described insuch forward-looking statements. Such cautionary information should be read as applying to all forward-looking statements madewherever they appear in this Report. Forward-looking statements in this Report are not guarantees of future performance and involve significant risks and uncertainties. In addition to the factors identified below, actualActual results may vary materially from those in such forward-looking statements as a result of a varietynumber of other factors including those we discuss in this Item and elsewhere in this Report.
In addition to the factors discussed elsewhere in this Report, the risks described below are those which we believe are the material risks we face. The occurrence of any of the events discussed below could significantly and adversely affect our business, prospects, financial condition, results of operations and cash flows as well as the trading price of our common stock.
A reader may not be able to compare our historical financial information to our financial information relating to periods after our emergence from chapter 11 bankruptcy.
As a result of the effectiveness of management’s strategiesour chapter 11 plan of reorganization, our Plan, on July 6, 2006, we are operating our business under a new capital structure. In addition, we adopted fresh start reporting in accordance with American Institute of Certified Public Accountants Statement of Position90-7, orSOP 90-7,Financial Reporting by Entities in Reorganization Under the Bankruptcy Codeas of July 1, 2006. BecauseSOP 90-7 requires us to account for our assets and decisions, generalliabilities at their fair values as of the effectiveness of our Plan, our financial condition and results of operations from and after July 1, 2006 are not comparable in some material respects to the financial condition or results of operations reflected in our historical financial statements at dates or for periods prior to July 1, 2006.
We operate in a highly competitive industry which could adversely affect our profitability.
The fabricated products segment of the aluminum industry is highly competitive. Competition in the sale of fabricated aluminum products is based upon quality, availability, price and service, including delivery performance. Many of our competitors are substantially larger than we are and have greater financial resources than we do, and


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may have other strategic advantages, including more efficient technologies or lower raw material costs. Our facilities are primarily located in North America. To the extent that our competitors have production facilities located outside North America, they may be able to produce similar products at a lower cost. We may not be able to adequately reduce costs to compete with these products. Increased competition could cause a reduction in our shipment volumes and profitability or increase our expenditures, any one of which could have a material adverse effect on our financial position, results of operations and cash flows.
Recent economic factors.
Over recent months, several banks and business conditions, developments in technology, new or modified statutory or regulatory requirements,other financial institutions have announced multi-billion dollar write-downs related to their exposure to mortgage-backed securities and changing prices and market conditions.other financial instruments. This, Report also identifiesalong with other factors, that could cause such differences. No assurance can be given that these factorshas led to a tightening in the credit markets for certain borrowers. In addition, oil prices have hit unprecedented high levels and are allhaving a negative impact on air carriers around the world. Further, there is uncertainty over the general direction of the U.S. economy. Although certain markets we serve, including aerospace and defense, remain strong, the impact of the high price of oil or a downturn in the U.S. or global economy could result in a decrease in demand for our products, cause our customers to fail to meet contractual commitments and have a material adverse impact on our financial position, results of operations and cash flows.
We depend on a core group of significant customers.
In 2007, our largest fabricated products customer, Reliance, accounted for approximately 15% of our fabricated products net sales, and our five largest customers accounted for approximately 36% of our fabricated products net sales. If our existing relationships with significant customers materially deteriorate or are terminated and we are not successful in replacing lost business, our financial position, results of operations and cash flows could be materially and adversely affected. In addition, a significant downturn in the business or financial condition of any of our significant customers could materially and adversely affect our financial position, results of operations and cash flows.
Our industry is very sensitive to foreign economic, regulatory and political factors that may adversely affect our business.
We import primary aluminum from, and manufacture fabricated products used in, foreign countries. We also own 49% of Anglesey. We purchase alumina to supply to Anglesey and we purchase aluminum from Anglesey for sale to a third party in the United Kingdom. Factors in the politically and economically diverse countries in which we operate or have customers or suppliers, including inflation, fluctuations in currency and interest rates, competitive factors, civil unrest and labor problems, could cause actualaffect our financial position, results to vary materially from the forward-looking statements.of operations and cash flows. Our financial position, results of operations and cash flows could also be adversely affected by:
 
• The Casesacts of war or terrorism or the threat of war or terrorism;
• government regulation in the countries in which we operate, service customers or purchase raw materials;
• the implementation of controls on imports, exports or prices;
• the adoption of new forms of taxation and any planduties;
• the imposition of currency restrictions;
• the nationalization or plansappropriation of reorganization may have adverse consequences on the Companyrights or other assets; and its stakeholders and/
• trade disputes involving countries in which we operate, service customers or our reorganization from the Cases may not be successfulpurchase raw materials.
 
WhileThe aerospace industry is cyclical and downturns in the aerospace industry, including downturns resulting from acts of terrorism, could adversely affect our revenues and profitability.
We derive a significant portion of our revenue from products sold to the aerospace industry, which is highly cyclical and tends to decline in response to overall declines in industrial production. As a result, our business is affected by overall levels of industrial production and fluctuations in the aerospace industry. The commercial


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aerospace industry is historically driven by the demand from commercial airlines for new aircraft. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, by the state of the U.S. and world economies and numerous other factors, including the effects of terrorism. The military aerospace cycle is highly dependent on U.S. and foreign government funding; however, it is also driven by the effects of terrorism, a changing global political environment, U.S. foreign policy, regulatory changes, the retirement of older aircraft and technological improvements to new aircraft engines that increase reliability. The timing, duration and severity of cyclical upturns and downturns cannot be predicted with certainty. A future downturn or reduction in demand could have a material adverse effect on our financial position, results of operations and cash flows.
In addition, because we and other suppliers are expanding production capacity, heat treat plate prices may eventually begin to decrease as production capacity increases or demand decreases. Although we have receivedimplemented cost reduction and sales growth initiatives to minimize the impact on our results of operations, as heat treat plate prices return to more typical historical levels, these initiatives may not be adequate and our financial position, results of operations and cash flows may be adversely affected. Similarly, additional delays in the ramp up of production of new commercial aircraft programs could substantially reduce near-term demand for certain of our products. A reduction in anticipated demand could have a confirmationmaterial adverse effect on our financial position, results of operations and cash flows.
A number of major airlines have also recently undergone chapter 11 bankruptcy and continue to experience financial strain from high fuel prices. Continued financial instability in the industry may lead to reduced demand for new aircraft that utilize our products, which could adversely affect our financial position, results of operations and cash flows.
The aerospace industry suffered significantly in the wake of the events of September 11, 2001, resulting in a sharp decrease globally in new commercial aircraft deliveries and order cancellations or deferrals by the major airlines. This decrease reduced the demand for our Aero/HS products. While there has been a recovery since 2001, the threat of terrorism and fears of future terrorist acts could negatively affect the aerospace industry and our financial position, results of operations and cash flows.
Our customers may reduce their demand for aluminum products in favor of alternative materials.
Our fabricated aluminum products compete with products made from other materials, such as steel and composites, for various applications. For instance, the Court, additional conditions precedentcommercial aerospace industry has used and continues to emergence remainevaluate the further use of alternative materials to aluminum, such as composites, in order to reduce the weight and increase the fuel efficiency of aircraft. The willingness of customers to accept substitutions for aluminum or the ability of large customers to exert leverage in the marketplace to reduce the pricing for fabricated aluminum products could adversely affect the demand for our products, particularly our aerospace and high strength products, and thus adversely affect our financial position, results of operations and cash flows.
Further downturns in the automotive industry could adversely affect our net sales and profitability.
The demand for many of our general engineering and custom products is dependent on the production of automobiles, light trucks and heavy duty vehicles in North America. The automotive industry is highly cyclical, as new vehicle demand is dependent on consumer spending and is tied closely to the overall strength of the North American economy. The North American automotive industry is facing costly inventory corrections which could adversely affect our net sales and profitability. Multiple production cuts by heavy duty truck and major United States automobile manufacturers in recent years may continue to adversely affect the demand for our products. The North American automotive manufacturers are also burdened with substantial structural costs, including pension and healthcare costs that impact their profitability and labor relations. If the financial condition of these auto manufacturers continues to be unsteady or if any of these automobile manufacturers seek restructuring or relief through bankruptcy proceedings, the demand for our products may decline, adversely affecting our net sales and profitability. Similarly, any decline in the demand for new automobiles, particularly in the United States, District Court affirmation, completioncould have a material adverse effect on our financial position, results of operations and cash flows. Seasonality experienced by the automotive industry in the third and fourth quarters of the Company’s exit financing, listing on the NASDAQcalendar year also affects our financial position, results of operations and formationcash flows.


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Changes in consumer demand may adversely affect our operations which supply automotive end users.
Recent and any future increases in energy costs that consumers incur is resulting in shifts in consumer demand away from motor vehicles that typically have a higher content of the trusts for the benefitproducts we currently supply, such as light trucks and SUVs. The loss of the torts claimants. As such, while we are optimistic that all of the conditions will be completed successfully, no assurances can be given that we will be able to achieve a successful reorganization and remain a going concern.
Our objective has been to achieve the highest possible recoveries for all stakeholders, consistent with our ability to pay and the continuation of our businesses. The reorganization plan provides for the payments to a number of secured creditors and creditors whose claims have certain priorities. However, the equity interests of the Company’s stockholders will be cancelled without consideration and unsecured creditors without priority claims will receive settlements in the range of 2.9% of their claim. Because of such likelihood, the value of the Common Stock and unsecured claims without priority is speculative and any investment in the Common Stock and these unsecured claims would pose a high degree of risk.
Additionally, while the Debtors operate their businesses asdebtors-in-possession pursuant to the Code during the pendency of the Cases, the Debtors are required to obtain the approval of the Court prior to engaging in any transaction outside the ordinary course of business. In connection with any such approval, creditors and other parties in interest may raise objections to such approval and may appear and be heard at any hearingbusiness with respect to, any such approval. Accordingly, the Debtors may be prevented from engaging in transactions that might otherwise be considered beneficial to the Company. The Court also has the authority to overseeor a lack of commercial success of, one or more particular vehicle models for which we are a significant supplier could have an adverse impact on our financial position, results of operations and exert control over the Debtors’ ordinary course operations.cash flows.
 
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 pension, 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 $45.0 million to $60.0 million. KACC currently expects to fund such Exit Costs using existing cash resources and available borrowing availability under an exit financing facility that would replace the current Post-Petition Credit Agreement (see Note 7 of Notes to Consolidated Financial Statements). If funding from existing cash resources and borrowing availability under an exit financing facility are not sufficient to pay or otherwise provide for all Exit Costs, the Company and KACC willWe may not be able to emergesuccessfully negotiate pricing terms with our automotive customers.
Cost cutting initiatives that our automotive customers have adopted generally result in increased downward pressure on pricing and our automotive customers typically seek agreements requiring reductions in pricing over the period of production. Pricing pressure may increase further, particularly in North America, as North American manufacturers pursue cost cutting initiatives. If we are unable to generate sufficient production cost savings in the future to offset any required price reductions our financial position, results of operations and cash flows could be adversely impacted.
Because our products are often components of our customers’ products, reductions in demand for our products may be more severe than, and may occur prior to reductions in demand for, our customers’ products.
Our products are often components of the end-products of our customers. Customers purchasing our fabricated aluminum products, such as those in the cyclical automotive and aerospace industries, generally require significant lead time in the production of their own products. Therefore, demand for our products may increase prior to demand for our customers’ products. Conversely, demand for our products may decrease as our customers anticipate a downturn in their respective businesses. As demand for our customers’ products begins to soften, our customers typically reduce or eliminate their demand for our products and meet the reduced demand for their products using their own inventory without replenishing that inventory, which results in a reduction in demand for our products that is greater than the reduction in demand for their products. This amplified reduction in demand for our products in the event of a downswing in our customers’ respective businesses (de-stocking) may adversely affect our financial position, results of operations and cash flows.
Our business is subject to unplanned business interruptions which may adversely affect our performance.
The production of aluminum and fabricated aluminum products is subject to unplanned events such as explosions, fires, inclement weather, natural disasters, accidents, transportation interruptions and supply interruptions. Operational interruptions at one or more of our production facilities, particularly interruptions at our Trentwood facility in Spokane, Washington where our production of plate and sheet is concentrated, could cause substantial losses in our production capacity. Furthermore, because customers may be dependent on planned deliveries from Chapter 11 unless and until sufficient funding can be obtained. Management believes it willus, customers that have to reschedule their own production due to our delivery delays may be able to successfully resolvepursue financial claims against us, and we may incur costs to correct such problems in addition to any issuesliability resulting from such claims. Such interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business. To the extent these losses are not covered by insurance, our financial position, results of operations and cash flows may be adversely affected by such events.
Covenants and events of default in our debt instruments could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
Our revolving credit facility contains negative and financial covenants and events of default that may ariselimit our financial flexibility and ability to undertake certain types of transactions. For instance, we are subject to negative covenants that restrict our activities, including restrictions on creating liens, engaging in respectmergers, consolidations and sales of an exit financingassets, incurring indebtedness, providing guaranties, engaging in different businesses, making loans and investments, making certain dividends, debt and other restricted payments, making certain prepayments of indebtedness, engaging in certain transactions with affiliates and entering into certain restrictive agreements. If we fail to satisfy the covenants set forth in our revolving credit facility or be able to negotiate a reasonable alternative. However, no assurances can be given in this regard.another event of default occurs under the


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• Werevolving credit facility, we could be prohibited from borrowing for our working capital needs. If we cannot borrow under the revolving credit facility to meet our working capital needs, we could be required to seek additional financing, if available, or curtail our operations. Additional financing may not operate profitably inbe available on commercially acceptable terms, or at all. If the futurerevolving credit facility is terminated and we do not have sufficient cash on hand to pay any amounts due, we could be required to sell assets or to obtain additional financing.
We depend on our subsidiaries for cash to meet our obligations and pay any dividends.
 
As discussed more fully below,We are a holding company. Our subsidiaries conduct all of our operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations or pay dividends to our stockholders depend upon the resultscash flow of the Fabricated products business unit are sensitive to a number of market and economic factors outside the Company’s controlour subsidiaries and the Company competes with companies manypayment of which have substantially greater resources. Our Fabricated products business unit, which is nowfunds by our core business, reported segment operating income of $87.2 million for the year ended December 31, 2005 comparedsubsidiaries to segment operating income of $33.0 millionus in the year ended December 31, 2004form of dividends, tax sharing payments or otherwise. Our subsidiaries’ ability to provide funding will depend on their earnings, the terms of their indebtedness (including the revolving credit facility), tax considerations and a segment operating loss of $21.2 million in the year ended December 31, 2003. Operating results for 2005, 2004 and 2003 included non-cashlast-in, first-out (“LIFO”) inventory charges of $9.3 million, $12.1 million and $3.2 million, respectively. The improved operating results primarily reflect an increase in demand for fabricated aluminum products. There can be no assurances that the Fabricated products business unit will continue to generate a profit or that we will operate profitability in future periods.legal restrictions.
 
• Our business is subjectWe may not be able to adverse changes in various market conditions outside ofsuccessfully implement our controlproductivity and cost reduction initiatives.
 
Changes in global, regionalWe have undertaken and expect to continue to undertake productivity and cost reduction initiatives to improve performance, including deployment of company-wide business improvement methodologies, such as our production system, the Kaiser Production System, which involves the integrated utilization of application and advanced process engineering and business improvement methodologies such as Lean Enterprise, Total Productive Maintenance and Six Sigma. We cannot assure you that all of these initiatives will be completed or country-specific economic conditions can have a significant impact on overall demand for aluminum-intensive products, especiallybeneficial to us or that any estimated cost saving from such activities will be fully realized. Even when we are able to generate new efficiencies successfully in the transportation, distributionshort to medium term, we may not be able to continue to reduce cost and aerospace markets. Such changesincrease productivity over the long term.
Our profitability could be adversely affected by increases in demand may directly affect the Company’s earnings by impacting the overall volumecost of raw materials and mix of such products sold. To the extent that these end-use markets weaken, demand can also diminish for primary aluminum, adversely affecting the financial results of the Company relating to its interests in Anglesey, which owns and operates an aluminum smelter.freight.
 
The price of primary aluminum has historically been subject to significant cyclical price fluctuations, and the timing of changes in the market price of aluminum is largely unpredictable. Although the Company’sour pricing of fabricated aluminum products willis generally be intended to lock in a conversion margin (representing the value added from the fabrication process) and pass the risk of price fluctuations on to itsour customers, the Companywe may not be able to pass on the entire cost of such increases to itsour customers or offset fully the effects of higher costs for other raw materials, which may cause the Company’sour profitability to decline. There will also be a potential time lag between increases in prices for raw materials under the Company’sour purchase contracts and the point when the Companywe can implement a corresponding increase in price under itsour sales contracts with itsour customers. As a result, the Companywe may be exposed to fluctuations in raw materialsmaterial prices, including aluminum, since, during the time lag, the Companywe may have to bear the additional cost of the price increase under itsour purchase contracts, whichcontracts. If these events were to occur, they could have a material adverse effect on the Company’s profitability.our financial position, results of operations and cash flows. Furthermore, the Company will bewe are party to arrangements based on fixed prices that include the primary aluminum price component, so that the Company willwe bear the entire risk of rising aluminum prices, which may cause itsour profitability to decline. In addition, an increase in raw materialsmaterial prices may cause some of theour customers of the Company to substitute other materials for theirour products, adversely affecting the Company’sour financial position, results of operations because ofand cash flows due to both a decrease in the sales of fabricated aluminum products and a decrease in demand for the primary aluminum produced at Anglesey.
 
The CompanyWe are responsible for selling and delivering alumina to Anglesey in proportion to our ownership percentage at a predetermined price. Such alumina is purchased under contracts that extends through August 2009 at prices tied to primary aluminum prices. In addition we delivered the alumina to Anglesey under the terms of a freight contract that expired at the end of 2007. Current freight rates are substantially higher than rates under the former contract. We cannot assure you that we will consume substantial amountsbe able to secure a source of energy in its operations. A numberalumina at comparable process for the period after August of factors could increase the cost2009. If we are unable to do so or freight rates do not improve, our financial position, results of energy,operations and if energy prices rise, the profitability of the Company could decline.cash flows associated with our Primarily Aluminum business segment may be adversely affected.
 
• The price volatility of energy costs may adversely affect our profitability.
Our profitsincome and cash flows depend on the margin above fixed and variable expenses (including energy costs) at which we are able to sell our fabricated aluminum products. The volatility in costs of fuel, principally natural gas,


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and other utility services, principally electricity, used by our production facilities affect operating costs. Fuel and utility prices have been, and will continue to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both local and regional markets. The daily closing price of the front-month futures contract for natural gas per million British thermal units as reported on NYMEX ranged between $5.38 and $8.64 in 2007, $4.20 and $10.63 in 2006 and $5.79 and $15.38 in 2005. Typically, electricity prices fluctuate with natural gas prices which increases our exposure to energy costs. Future increases in fuel and utility prices may be adversely impacted by thehave an adverse effect on our financial position, results of KACC’soperations and cash flows.
Our hedging programs may limit the income and cash flows we would otherwise expect to receive if our hedging program were not in place.
 
From time to time in the ordinary course of business, KACC enterswe may enter into hedging transactions to limit itsour exposure resulting fromto price risks in respect ofrelating to primary aluminum prices, energy prices and foreign currency requirements. Entering into suchcurrency. To the extent that these hedging transactions while reducingfix prices or removingexchange rates and the prices for primary aluminum exceed the fixed or ceiling prices established by these hedging transactions or energy costs or foreign exchange rates are below the fixed prices, our exposure to price risk, may cause our profitsincome and cash flow toflows will be lower than they otherwise would have been. Additionally, to the extent that primary aluminum prices, energy prices and/or foreign currency exchange rates deviate materially and adversely from fixed or ceiling prices or rates established by outstanding hedging transactions, we could incur margin calls which could adversely impact our liquidity.
 
• We operate in a highly competitive industryThe expiration of the power agreement for Anglesey may adversely affect our cash flows and affect our hedging programs.
Each of the segments of the aluminum industry in which the Company operates is highly competitive. There are numerous companies that operate in the aluminum industry. Certain of our competitors are substantially larger, have greater financial resources than we do and may have other strategic advantages.


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• Our business could be adversely affected by the loss of specific customers or changes in the business or financial condition of specific customers
In 2005, the largest customer of the Company’s fabricated products business unit accounted for approximately 11% of the Company’s third-party net sales, and the largest five customers accounted for approximately 33% of the Company’s third-party net sales. If existing relationships with significant customers materially deteriorate or are terminated and the Company is not successful in replacing lost business, the Company’s results of operations could be materially adversely affected. In addition, a significant downturn in the business or financial condition of the Company’s significant customers could materially adversely affect the results of operations.
• Unplanned business interruptions may adversely impact our performance
The production of fabricated aluminum products is subject to unplanned events such as explosions, fires, inclement weather, natural disasters, accidents, transportation interruptions and supply interruptions. Operational interruptions at one of the Company’s production facilities could cause substantial losses in the Company’s production capacity. Furthermore, because customers may be dependent on planned deliveries from the Company, customers that have to reschedule their own production due to delivery delays from the Company may be able to pursue financial claims against them, and the Company may incur costs to correct such problems in addition to any liability resulting from such claims. Such interruptions may also harm the reputation of the Company among actual and potential customers, potentially resulting in a loss of business. To the extent these losses are not covered by insurance, the Company’s cash flows may be adversely impacted by such events.
A significant number of the Company’s employees are represented by labor unions under labor contracts with varying durations and expiration dates. The Company may not be able to satisfactorily renegotiate the labor contracts when they expire, in which case there could potentially be a work stoppage at one of more of the Company’s facilities in the future. Any work stoppage could have a material adverse effect on the income and cash flows of the Company.
• Expiration of power agreement of Anglesey may adversely impact our cash flows and hedging programs
 
The agreement under which Anglesey receives power expires in September 2009, and the nuclear facility which supplies such power is scheduled to cease operations shortly thereafter. No assurance can be given thatin 2010. As of the date of this Report, Anglesey will be ablehas not identified a source from which to obtain sufficient power to sustain its operations on reasonably acceptable terms thereafter.after the expiration of the current agreement in September 2009, and we cannot assure you that Anglesey will be able to do so. If, as a result, Anglesey’s aluminum reduction is curtailed or its costs are increased, our cash flows may be adversely affected. In addition, any decrease in Anglesey’s production would reduce or eliminate the “natural hedge” against rising primary aluminum prices created by our participation in the Company’s access to suchprimary aluminum (see “Primary Aluminum Business Unit — Hedging”)market and, accordingly, the Companywe may deem it appropriate to increase theirour hedging activity to limit exposure to such price risks, potentially adversely affecting our financial position, results of operations and cash flows.
If Anglesey cannot obtain sufficient power on acceptable terms, Anglesey’s aluminum reduction operations will likely be shut down. Given the incomepotential for future shut down and related costs, Anglesey temporarily suspended dividends during the last half of 2006 and the first half of 2007 while it studied future cash requirements. Based on a review of cash anticipated to be available for future cash requirements, Anglesey removed the temporary suspension of dividends and declared dividends in August 2007 and November 2007. The shut down may involve significant costs to Anglesey which could decrease or eliminate its ability to pay dividends. The process of shutting down aluminum reduction operations may involve transition complications which may prevent Anglesey from operating its aluminum reduction operations at full capacity until the expiration of the power contract. As a result, our financial position, results of operations and cash flows may be negatively affected even before the September 2009 expiration of the Company.power contract.
 
• Loss of key management and other personnel or inability to attract management or other personnel may adversely impact performance
We are exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation and other economic factors in the countries in which we operate.
 
The Company willEconomic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates in the countries in which we operate, could affect our revenues, expenses and results of operations. In particular, lower valuation of the U.S. dollar against other currencies, particularly the Canadian dollar, Euro and British Pound Sterling, may affect our profitability as some important raw materials are purchased in other currencies, while products generally are sold in U.S. dollars.


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Our ability to keep key management and other personnel in place and our ability to attract management and other personnel may affect our performance.
We depend on itsour senior executive officesofficers and other key personnel to run itsour business. The loss of any of these officers or other key personnel could materially and adversely affect the Company’sour operations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of theour business of the Company could hinder theirour ability to improve manufacturing operations, conduct research activities successfully andor develop marketable products.
 
• ComplianceOur production costs may increase and we may not sustain our sales and earnings if we fail to maintain satisfactory labor relations.
A significant number of our employees are represented by labor unions under labor contracts with varying durations and expiration dates. All of these contracts currently expire in 2009 and 2010, including labor contracts with the USW covering four of our manufacturing locations and approximately 1,055, or 41%, of our employees scheduled to expire in the Fall of 2010. We may not be able to renegotiate these or our other labor contracts on satisfactory terms when they expire. As part of any such renegotiation, we may reach agreements with respect to future wages and benefits that could materially and adversely affect our future financial position, results of operations and cash flows. In addition, such negotiations could divert management attention or result in union-initiated work actions, including strikes or work stoppages that could have a material adverse effect on our financial position, results of operations and cash flows. Moreover, the existence of labor agreements may not prevent such union-initiated work actions.
Our business is regulated by a wide variety of health and safety laws and regulations and compliance may be costly and may adversely affect our results of operationsoperations.
 
TheOur operations of the Company will beare regulated by a wide variety of health and safety laws and regulations. Compliance with these laws and regulations may be costly and could have a material adverse effect on the Company’sour results of operations. In addition, these laws and regulations are subject to change at any time, and therewe can begive you no assurance as to the effect that any such changes would have on the Company’sour operations or the amount that the Companywe would have to spend to comply with such laws and regulations as so changed.


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• Other legal proceedings or investigations or changes of lawsEnvironmental compliance, clean up and damage claims may decrease our cash flow and regulations in which we will be subject may adversely affect our operations
In addition to environmental proceedings and investigations of the types described above, the Company may from time to time be involved in, or be the subject of, disputes, proceedings and investigations with respect to a variety of matters, including matters related to health and safety, product liability, employees, taxes and contracts, as well as other disputes and proceedings that arise in the ordinary course of business. It could be costly to defend against any claims against the Company or any investigations involving the Company, whether meritorious or not, and such efforts could divert management’s attention as well as operational resources, negatively impacting the Company’s results of operations. It could also be costly to make payments on account of any such claims.
 
Additionally, as with theWe are subject to numerous environmental laws and regulations to which the Company will be subject, the other laws and regulations which will govern the business of the Company are subject to change and there can be no assurance as to the amount that the Company would have to spend to comply with such laws and regulations as so changed or otherwise asrespect to, the effect that any such changes would have on the Company’s operations.
• KACC’s current or past operations subject it to environmental compliance,clean-up and damage claims that have been andcontinue to be costly
The operations of KACC’s and its subsidiaries’ facilities are regulated by a wide variety of international, federal, state and local environmental laws. These environmental laws regulate, among other things,things: air and water emissions and discharges; the generation, storage, treatment, transportation and disposal of solid and hazardous waste; and the release of hazardous or toxic substances, pollutants and contaminants into the environment. Compliance with these environmental laws is costly. While legislative, regulatory and economic uncertainties make it difficult for uswill continue to project future spending for these purposes, we currently anticipate thatbe costly.
Our operations, including our operations conducted prior to our emergence from chapter 11 bankruptcy, have subjected, and may in the 2006 — 2007 period, KACC’s environmental capital spending will be approximately $1.1 million per year and that KACC’s operating costs will include pollution control costs totaling approximately $3.0 million per year. However, subsequent changes in environmental laws may change the way KACC must operate and may force KACC to spend more than we currently project.
Additionally, KACC’s current and former operations canfuture subject, itus to fines or penalties for alleged breaches of environmental laws and to other actions seekingclean-upobligations to perform investigations or other remedies under these environmental laws. KACCclean up of the environment. We may also may be subject to damagesclaims from governmental authorities or third parties related to alleged injuries to the environment, human health or to the environment,natural resources, including claims with respect to certain waste disposal sites, and theclean-up clean up of sites currently or formerly used by KACC.us or exposure of individuals to hazardous materials. Any investigation,clean-up or other remediation costs, fines or penalties, or costs to resolve third-party claims may be significant and could have a material adverse effect on our financial position, results of operations and cash flows.
 
Currently, KACC is subject to certain lawsuits under the Comprehensive Environmental Response, CompensationWe have accrued, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (“CERCLA”). KACC, along with certain other companies, has been named as a Potentially Responsible Partywill accrue, forclean-up costs at certain third-party sites listed on the National Priorities List under CERCLA. As a result, KACC may be exposed not only to its assessed share ofclean-up but alsorelating to the above matters that are reasonably expected to be incurred based on available information. However, it is possible that actual costs may differ, perhaps significantly, from the amounts expected or accrued, and such differences could have a material adverse effect on our financial position, results of others if they are unableoperations and cash flows. In addition, new laws or regulations or changes to pay.
In response to environmental concerns, we have established environmental accruals representing our estimate of the costs we reasonably expect KACC to incur in connection with these matters. At December 31, 2005, the balance of our accruals, which are primarily included in our long-term liabilities, was $46.5 million. We estimate that the annual costs charged to these environmental accruals will be approximately $14.5 million in 2006, $2 million to $3.8 million per year for the years 2007 through 2010existing laws and an aggregate of approximately $25.5 million thereafter. However,regulations may occur, and we cannot assure you as to the amount that KACC’s actual costs will not exceed our current estimates. We believe that it is reasonably possible that costs associatedwe would have to spend to comply with these environmental matters may exceed current accruals by amounts that could range, insuch new or amended laws and regulations or the aggregate, up to an estimated $20.0 million.
During April 2004, KACC was served with a subpoena for documents and has been notified by Federal authoritieseffects that they are investigating certain environmental compliance issues with respect to KACC’s Trentwood facility in Spokane,Washington. KACC is undertaking its own internal investigationwould have on our financial position, results 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 lawsoperations and requirementscash flows.


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atOther legal proceedings or investigations or changes in the Trentwood facilitylaws and intendsregulations to which we are subject may adversely affect our results of operations.
In addition to the matters described above, we may from time to time be involved in, or be the subject of, disputes, proceedings and investigations with respect to a variety of matters, including matters related to personal injury, employees, taxes and contracts, as well as other disputes and proceedings that arise in the ordinary course of business. It could be costly to defend against these claims or any claiminvestigations involving them, whether meritorious or charges, ifnot, and legal proceedings and investigations could divert management’s attention as well as operational resources, negatively affecting our financial position, results of operations and cash flows. It could also be costly to make payments on account of any should result, vigorously. The Companysuch claims.
Additionally, as with the environmental laws and regulations to which we are subject, the other laws and regulations which govern our business are subject to change at any time, and we cannot assess what, ifassure you as to the amount that we would have to spend to comply with such laws and regulations as so changed or otherwise as to the effect that any impacts this matter maysuch changes would have on the Company’s or KACC’s financial statements.
See Note 11 of Notes to Consolidated Financial Statements for additional information on environmental matters.our operations.
 
• KACC is subject to politicalProduct liability claims against us could result in significant costs or negatively affect our reputation and regulatory risks in a numbercould adversely affect our results of countriesoperations.
 
KACC’sWe are sometimes exposed to warranty and its subsidiaries’ facilities operateproduct liability claims. We cannot assure you that we will not experience material product liability losses arising from such claims in the United States and Canada. In addition, KACC owns a 49% interest in a facility located in the United Kingdom. While we believe KACC’s relationships in the these countries arefuture. We generally satisfactory,maintain insurance against many product liability risks but we cannot assure you that future developmentsour coverage will be adequate for liabilities ultimately incurred. In addition, we cannot assure you that insurance will continue to be available to us on terms acceptable to us. A successful claim that exceeds our available insurance coverage could have a material adverse effect on our financial position, results of operations and cash flows.
Our Trentwood expansion and rod, bar, and tube investment projects may not be completed as scheduled.
We are currently in the process of a $139 million expansion of production capacity and gauge capability at our Trentwood facility which includes the final $34 million follow-on investment announced in June 2007. While the first two phases were successfully completed at December 31, 2007, our ability to complete the final phase of this project, and the timing and costs of doing so, are subject to various risks associated with all major construction projects, many of which are beyond our control, including technical or governmental actionsmechanical problems. If completion of the final phase is significantly delayed or interupts production, we may lose production or be unable to meet shipping deadlines on time or at all, which would adversely affect our results of operations, may lead to litigation and may damage our relationships with these customers and our reputation generally.
In the third quarter of 2007 we announced a $91 million investment in our rod, bar, and tube value stream including the development of a production facility expected to be in Kalamazoo, Michigan. If we are unable to fully complete these countriesprojects or if the actual costs for these projects exceed our current expectations, our financial position, results of operations and cash flows could be adversely affected.
We may not be able to successfully execute our strategy of growth through acquisitions.
A component of our growth strategy is to acquire fabricated products assets in order to complement our product portfolio. Our ability to do so will be dependent upon a number of factors, including our ability to identify acceptable acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets, obtain financing to fund acquisitions and support our growth and many other factors beyond our control. Risks associated with acquisitions include those relating to:
• diversion of management’s time and attention from our existing business;
• challenges in managing the increased scope, geographic diversity and complexity of operations;
• difficulties integrating the financial, technological and management standards, processes, procedures and controls of the acquired business with those of our existing operations;


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• liability for known or unknown environmental conditions or other contingent liabilities not covered by indemnification or insurance;
• greater than anticipated expenditures required for compliance with environmental or other regulatory standards or for investments to improve operating results;
• difficulties achieving anticipated operational improvements;
• incurrence of indebtedness to finance acquisitions or capital expenditures relating to acquired assets; and
• issuance of additional equity, which could result in further dilution of the ownership interests of existing stockholders.
We may not be successful in acquiring additional assets, and any acquisitions that we do consummate may not produce the anticipated benefits or may have adverse effects on our financial position, results of operations and cash flows.
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. While we have concluded that at December 31, 2007 we have no material weaknesses in our internal controls over financial reporting we cannot assure you that we will not have a material weakness in the future. A “material weakness” is a control deficiency, or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to maintain a system of internal controls over financial reporting that meets the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or by the NASDAQ Stock Market LLC. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and our stock price may be adversely affect KACC’s operationsaffected. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may not have access to the capital markets, and our stock price may be adversely affected.
We may not be able to adequately protect proprietary rights to our technology.
Our success will depend in part upon our proprietary technology and processes. Although we attempt to protect our intellectual property through patents, trademarks, trade secrets, copyrights, confidentiality and nondisclosure agreements and other measures, these measures may not be adequate to protect such intellectual property, particularly or our industry generally. Amongin foreign countries where the risks inherent in KACC’s operations are unexpected changes in regulatory requirements, unfavorable legal rulings, new or increased taxes and levies, and new or increased import or export restrictions. KACC’s operations outsidelaws may offer significantly less intellectual property protection than is offered by the laws of the United StatesStates. In addition, any attempts to enforce our intellectual property rights, even if successful, could result in costly and prolonged litigation, divert management’s attention and adversely affect our results of operations and cash flows. Failure to adequately protect our intellectual property may adversely affect our results of operations as our competitors would be able to utilize such property without having had to incur the costs of developing it, thus potentially reducing our relative profitability. Furthermore, we may be subject to claims that our technology infringes the intellectual property rights of another. Even if without merit, those claims could result in costly and prolonged litigation, divert management’s attention and adversely affect our income and cash flows. In addition, we may be required to enter into licensing agreements in order to continue using technology that is important to our business. However, we may be unable to obtain license agreements on acceptable terms, which could negatively affect our financial position, results of operations and cash flows.
We may not be able to utilize all of our net operating loss carry-forwards.
We have net operating loss carry-forwards and other significant U.S. tax attributes that we believe could offset otherwise taxable income in the United States. At December 31, 2007, these tax attributes could together offset $897.5 million of otherwise taxable income. The amount of net operating loss carry-forwards available in any year to offset our net taxable income will be reduced or eliminated if we experience an “ownership change” as defined in the Internal Revenue Code (the “Code”). Upon our emergence from chapter 11 bankruptcy, we entered into a stock transfer restriction agreement with our largest stockholder, a VEBA that provides benefits for certain eligible


19

retirees represented by certain unions and their spouses and eligible dependents (which we refer to as the Union VEBA), and our certificate of incorporation was amended to prohibit and void certain transfers of our common stock. Both reduce the risk that an ownership change will jeopardize our net operating loss carry-forwards. Because U.S. tax law limits the time during which carry-forwards may be applied against future taxes, we may not be able to take full advantage of the carry-forwards for federal income tax purposes. In addition, the tax laws pertaining to net operating loss carry-forwards may be changed from time to time such that the net operating loss carry-forwards may be reduced or eliminated. If the net operating loss carry-forwards become unavailable to us or are fully utilized, our future income will not be shielded from federal income taxation, thereby reducing funds otherwise available for general corporate purposes.
Transfer restrictions and other factors could hinder the market for our common stock.
In order to reduce the risk that any change in our ownership would jeopardize the preservation of our U.S. federal income tax attributes, including net operating loss carry-forwards, for purposes of Sections 382 and 383 of the Code, upon emergence from chapter 11 bankruptcy, we entered into a stock transfer restriction agreement with our largest stockholder, the Union VEBA, and amended and restated our certificate of incorporation to include restrictions on transfers involving 5% ownership. These transfer restrictions could hinder the market for our common stock. In addition, the market price of our common stock may be subject to significant fluctuations in response to numerous factors, including variations in our annual or quarterly financial results or those of our competitors, changes by financial analysts in their estimates of our future earnings, substantial amounts of our common stock being sold into the public markets upon the expiration of share transfer restrictions, which expire in July 2016, or upon the occurrence of certain events relating to U.S. tax benefits available under section 382 of the Code, conditions in the economy or stock market in general or in the fabricated aluminum products industry in particular or unfavorable publicity.
We may not be able to engage in or approve certain transactions involving our common shares without impairing the use our federal income tax attributes.
Section 382 of the Code affects our ability to use our federal income tax attributes, including our net operating loss carry-forwards, following a more than 50% change in ownership during any period of 36 consecutive months, all as determined under the Code, an “ownership change”. Certain transactions may be included in the calculation of an ownership change, including transactions involving our repurchase of our common shares, our issuance of new common shares, the sale of additional common shares by the Union VEBA, any person or group of persons becoming a 5% holder of our common shares and any 5% holder increasing the number of common shares held. Transactions included in the calculation of an ownership change may limit our ability to engage in or approve additional transactions during the balance of the applicable 36 month period without affecting our ability to use our federal income tax attributes. The limitation on our inability to engage in or approve additional transactions may adversely impact the market for our common shares and our ability to pursue certain transactions, including the repurchase of our common shares or to raise capital in the equity marketsand/or to issue new common shares to pursue external growth opportunities.
Our net sales, operating results and profitability may vary from period to period, which may lead to volatility in the trading price of our stock.
Our financial and operating results may be significantly below the expectations of public market analysts and investors and the price of our common stock may decline due to the following factors:
• volatility in the spot market for primary aluminum and energy costs;
• changes in the volume, price and mix of the products we sell;
• our annual accruals for variable payment obligations to the Union VEBA and another VEBA that provides benefits for certain other eligible retirees and their surviving spouses and eligible dependents (which we refer to as the Salaried VEBA);
• non-cash charges includinglast-in, first-out, or LIFO, inventory charges and impairments;


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• global economic conditions;
• unanticipated interruptions of our operations for any reason;
• variations in the maintenance needs for our facilities;
• unanticipated changes in our labor relations;
• cyclical aspects impacting demand for our products; and
• reductions in defense spending.
Our annual variable payment obligations to the Union VEBA and Salaried VEBA are linked with our profitability, which means that not all of our earnings will be available to our stockholders.
We are obligated to make annual payments to the Union VEBA and Salaried VEBA calculated based on our profitability and therefore not all of our earnings will be available to our stockholders. The aggregate amount of our annual payments to these VEBAs is capped however at $20 million and is subject to other limitations. As a result of these payment obligations, our earnings and cash flows may be reduced. Although our obligation to make annual payments to the Union VEBA terminates for periods beginning after December 31, 2012, the Union VEBA or other groups representing our current and future retired hourly employees may seek to extend our obligation beyond the termination date. Any such extension could have a material adverse effect on our financial position, results of operations and cash flows.
A significant percentage of our stock is held by the Union VEBA which may exert significant influence over us.
The Union VEBA owns 23.5% of our common stock as of December 31, 2007. As a result, the Union VEBA has significant influence over matters requiring stockholder approval, including the composition of our Board of Directors. Further, to the extent that the Union VEBA and other substantial stockholders were to act in concert, they could potentially control any action taken by our stockholders. This concentration of ownership could also facilitate or hinder proxy contests, tender offers, open market purchase programs, mergers or other purchases of our common stock that might otherwise give stockholders the opportunity to realize a premium over the then prevailing market price of our common stock or cause the market price of our common stock to decline. We cannot assure you that the interests of our major stockholders will not conflict with our interests or the interests of our other investors.
The USW has director nomination rights through which it may influence us, and USW interests may not align with our interests or the interests of our other investors.
Pursuant to an agreement, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC, or USW, has been granted rights to nominate candidates which, if elected, would constitute 40% of our Board of Directors through December 31, 2012 at which time the USW is required to cause any director nominated by the USW to submit his or her resignation to our Board of Directors, which submission our Board of Directors may accept or reject in its discretion. As a result, the directors nominated by the USW may have a significant voice in the decisions of our Board of Directors. It is possible that the USW may seek to extend the term of the agreement and its right to nominate board members beyond 2012 and continue its ability to have a significant voice in the decisions of our Board of Directors.
Payment of dividends may not continue in the future and our payment of dividends and stock repurchases are subject to restriction.
In June 2007, our Board of Directors initiated the payment of a numberregular quarterly cash dividend of additional risks, including but$0.18 per common share per quarter. A quarterly cash dividend has been paid in each subsequent quarter. Future declaration and payment of dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our results of operations, financial condition, cash requirements, future prospects and other factors. We can give no assurance that any dividends will be declared and paid in the future. Our revolving credit facility currently restricts our ability to pay any dividends or purchase any of our stock. Under our revolving credit facility, we may pay cash


21

dividends only if we are not in default or would not be in default as a result of the dividends, and are limited to currency exchange rate fluctuations, currencyan amount based on a portion of cumulative earnings, net of dividends, as adjusted for certain other cash inflows.
Our certificate of incorporation includes transfer restrictions that may void transactions in our common stock effected by 5% stockholders.
Our certificate of incorporation places restrictions on transfer of our equity securities if either (1) the transferor holds 5% or more of the fair market value of all of our issued and nationalizationoutstanding equity securities or (2) as a result of assets.the transfer, either any person would become such a 5% stockholder or the percentage stock ownership of any such 5% stockholder would be increased. These restrictions are subject to exceptions set forth in our certificate of incorporation. Any transfer that violates these restrictions will be unwound as provided in our certificate of incorporation. Moreover, as indicated below, these provisions may make our stock less attractive to large institutional holders, and may also discourage potential acquirers from attempting to take over our company. As a result, these transfer restrictions may have the effect of delaying or deterring a change of control of our company and may limit the price that investors might be willing to pay in the future for shares of our common stock.
Delaware law, our governing documents and the stock transfer restriction agreement we entered into as part of our Plan may impede or discourage a takeover, which could adversely affect the value of our common stock.
Provisions of Delaware law, our certificate of incorporation and the stock transfer restriction agreement with the Union VEBA may have the effect of discouraging a change of control of our company or deterring tender offers for our common stock. We are currently subject to anti-takeover provisions under Delaware law. These anti-takeover provisions impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. Additionally, provisions of our certificate of incorporation and bylaws impose various procedural and other requirements, which could make it more difficult for stockholders to effect some corporate actions. For example, our certificate of incorporation authorizes our Board of Directors to determine the rights, preferences and privileges and restrictions of unissued shares of preferred stock without any vote or action by our stockholders. Thus, our Board of Directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of common stock. Our certificate of incorporation also divides our Board of Directors into three classes of directors who serve for staggered terms. A significant effect of a classified board of directors may be to deter hostile takeover attempts because an acquirer could experience delays in replacing a majority of directors. Moreover, stockholders are not permitted to call a special meeting. As indicated above, our certificate of incorporation prohibits certain transactions in our common stock involving 5% stockholders or parties who would become 5% stockholders as a result of the transaction. In addition, we are party to a stock transfer restriction agreement with the Union VEBA which limits its ability to transfer our common stock. The general effect of the transfer restrictions in the stock transfer restriction agreement and our certificate of incorporation is to ensure that a change in ownership of more than 45% of our outstanding common stock cannot occur in any three-year period. These rights and provisions may have the effect of delaying or deterring a change of control of our company and may limit the price that investors might be willing to pay in the future for shares of our common stock.
 
Item 1B.  Unresolved Staff Comments
 
None.


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Item 2.  Properties
 
The locations and general character of the principal plants and other materially important physical properties relating to KACC’s operationsour Fabricated Products business unit are described in Item 1 “Business — Business Operations” and those descriptions are incorporated herein by reference. KACC owns in fee or leases all the real estate and facilities used in connection with its business. below:
         
Location
 Square footage  Owned or Leased 
 
Chandler, Arizona  57,000   Leased(1)
Greenwood, South Carolina  134,000   Owned 
Jackson, Tennessee  310,000   Owned 
London, Ontario (Canada)  274,000   Owned 
Los Angeles, California  178,000   Leased(2)
Newark, Ohio  1,293,000   Owned 
Richland, Washington  48,000   Leased(3)
Richmond, Virginia  443,000   Owned 
Plainfield, Illinois  80,000   Leased(4)
Sherman, Texas  313,000   Owned 
Spokane, Washington  2,854,000   Owned/Leased(5)
Tulsa, Oklahoma  23,000   Owned 
         
Total  6,007,000     
         
(1)The Chandler, Arizona facility is subject to a lease with a primary lease term that expires in 2033. We have certain extension rights in respect of the Chandler lease.
(2)The Los Angeles, California facility is subject to a lease with a 2014 expiration date.
(3)The Richland, Washington facility is subject to a lease with a 2011 expiration date, subject to certain extension rights held by us.
(4)The Plainfield, Illinois facility is subject to a lease with a 2010 expiration date with a renewal option subject to certain terms and conditions.
(5)2,733,000 square feet is owned and 121,000 square feet is leased with a 2010 expiration date with a renewal option subject to certain terms and conditions.
Plants and equipment and other facilities are generally in good condition and suitable for their intended uses.
 
All but three of KACC’s fabricated aluminum production facilities are owned by KACCand/or its subsidiaries. The Chandler, Arizona location is subject to a lease with a primary lease term that expires in 2033. KACC has certain extension rights in respect of the Chandler lease. The Richland, Washington location is subject to a lease with a 2011 expiration date, subject to certain extension rights held by KACC. The Los Angeles location is subject to a lease with a 2014 expiration date.
In connection with the ongoing reorganization efforts and sale of substantially all of the Company’s commodities interests, the Company, in 2004, relocated itsOur corporate headquarters and primary place of business from Houston, Texas tolocated in Foothill Ranch, California, which is where the Fabricated products business unit was headquartered.a leased facility consisting of 21,500 square feet.
 
KACC’sOur obligations under the DIP Facilityrevolving credit facility are secured by, among other things, liens on KACC’s domestic plants.our U.S. production facilities. See Note 78 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” for further discussion.
 
Item 3.  Legal Proceedings
 
This section contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1 of this Report for cautionary information with respect to such forward-looking statements.
Reorganization Proceedings
 
During the pendency of the Cases, substantially all claims and litigation pending on the Filing Date, 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 settledThe discussion in connection with the plan of reorganization. See


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Item 1. “Business — Emergence from Reorganization Proceedings” for a discussion of the reorganization proceedings. Such discussion is incorporated herein by reference.
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 to 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 lawNotes 2 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, impact this matter may have on the Company’s or KACC’s financial statements.
Asbestos and Certain Other Personal Injury Claims
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, or 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 asbestos-related claims were pending. The Company has also previously disclosed that certain other personal injury claims had been filed in respect of alleged pre-Filing Date exposure to silica and coal tar pitch volatiles (approximately 3,900 claims and 300 claims, respectively).
Due to the Cases, holders of asbestos, silica and coal tar pitch volatile claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Debtors. As a result, the Company has not made any payments in respect of any of these types of claims during the Cases. Despite the Cases, the Company continues to pursue insurance collections in respect of asbestos-related amounts paid prior to its Filing Date and, as described below, to negotiate insurance settlements and prosecute certain actions to clarify policy interpretations in respect of such coverage.
During the fourth quarter of 2004, the Company updated its estimate of costs expected to be incurred in respect of asbestos, silica and coal tar pitch volatile claims and expected insurance recoveries. The portion of Note 1119 of Notes to Consolidated Financial Statements under the heading“Asbestosincluded in Item 8. “Financial Statements and Certain Other Personal Injury Claims”isSupplementary Data” are incorporated herein by reference.
Labor Matters
In connection with Pursuant to our Plan, on July 6, 2006, the United Steelworkerspre-petition ownership interests of America (“USWA”) strikeKaiser were cancelled without consideration and subsequent lock-out by KACC, certain allegationsapproximately $4.4 billion of unfair labor practices (“ULPs”) were filed by the USWA with the National Labor Relations Board (“NLRB”). As previously disclosed, KACC responded to all such allegations and believed they were without merit.
In January 2004, as part of its settlement with the USWA with respect to pension and retiree medical benefits, KACC and the USWA agreed to settle their case pending before the NLRB, subject to approval of the NLRB General Counsel and the Court and ratification by the union members. Thereafter, the NLRB General Counsel and the Court approved the settlement and the agreement has been ratified by the union members. Under the terms of the agreement, solely for the purposes of determining distributions in connection with the reorganization, an unsecured pre-petition claim in the amount of $175.0 million will be allowed. Also, as part of the agreement, the Company agreed to adopt a position of neutrality regarding the unionization of any employees of the reorganized company.
All material contingenciesclaims against us, including claims in respect of the settlement have now beendebt, pension and postretirement medical obligations and asbestos and other tort liabilities were resolved (the last having been resolved in February 2005) and, therefore, the Company recorded a non-cash $175.0 million charge in the fourth quarter of 2004 and an off setting liability. The portion of Note 11 of Notes to Consolidated Financial Statements under the heading“Labor Matters”is incorporated herein by reference.


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Hearing Loss Claims
During February 2004, the Company reached a settlement in principle in respect of 400 claims, which alleged that certain individuals who were employees of the Company, principally at a facility previously owned and operated by KACC in Louisiana, suffered hearing loss in connection with their employment. Under the terms of the settlement, which is still subject to Court approval, the claimants will be allowed claims totaling $15.8 million. During the Cases, the Company has received approximately 3,200 additional proofs of claim alleging pre-petition injury due to noise induced hearing loss. It is not known at this time how many, if any, of such claims have merit or at what level such claims might qualify within the parameters established by the above-referenced settlement in principle for the 400 claims. Accordingly, the Company cannot presently determine the impact or value of these claims. However, under the plan of reorganization, all noise induced hearing loss claims will be transferred, along with certain rights against certain insurance policies, to a separate trust as provided in the Kaiser Aluminum Amended Plan, and resolved in that manner rather than being settled prior to the Company’son our emergence from the Cases. The portion of Notechapter 11 of Notes to Consolidated Financial Statements under the heading“Hearing Loss Claims”is incorporated herein by reference.bankruptcy.
Other Matters
Various other lawsuits and claims are pending against KACC. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
See Note 11 of Notes to Consolidated Financial Statements for discussion of additional litigation.
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
No matter wasmatters were submitted to a vote of our security holders of the Company during the fourth quarter of 2005.2007.


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PART II
 
Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters
 
The Company’s Common StockMarket Information
Our outstanding common stock is traded on the OTC Bulletin BoardNasdaq Global Select Market under the ticker symbol “KLUCQ.OB.“KALU.”
The number of record holders offollowing table sets forth the Company’s Common Stock at February 28, 2006, was 542. The high and low salessale prices for the Company’s Common Stockof our common stock for each quarterly period since such common stock began trading on July 7, 2006 following our emergence from Chapter 11 bankruptcy.
         
  High  Low 
 
Fiscal 2006        
Third quarter (from July 7, 2006) $44.50  $37.50 
Fourth quarter $62.00  $43.50 
Fiscal 2007        
First quarter $78.00  $57.60 
Second quarter $88.68  $72.33 
Third quarter $78.26  $57.88 
Fourth quarter $80.58  $66.27 
Holders
As of 2005January 31, 2008, there were 601 holders of record of our common stock.
Dividends
In June 2007, our Board of Directors initiated the payment of a regular quarterly cash dividend of $0.18 per common share per quarter. A quarterly cash dividend has been paid in each subsequent quarter. Future declaration and 2004,payment of dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our results of operations, financial condition, cash requirements, future prospects and other factors. We can give no assurance that any dividends will be declared or paid in the future. Our revolving credit facility currently restricts our ability to pay any dividends or purchase any of our stock. Under our revolving credit facility, we may pay cash dividends only if we are not in default or would not be in default as reporteda result of the dividends, and are limited to an amount based on a portion of cumulative earnings, net of dividends, as adjusted for certain other cash inflows.


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Stock Performance Graph
The following graph compares the cumulative total shareholder return on the OTC Bulletin BoardCompany’s common stock with: (i) the Dow Jones Wilshire 5000 Index, (ii) the Russell 2000 which we are a part of and (iii) the S&P SmallCap 600. The graph assumes (i) an initial investment of $100 as of July 7, 2006, the first day on which the Company’s common stock began trading on the Nasdaq, and (ii) reinvestment of all dividends. The performance graph is set forthnot necessarily indicative of future performance of our stock price.
COMPARISON OF 18 MONTH CUMULATIVE TOTAL RETURN*
Among Kaiser Aluminum Corporation, The Dow Jones Wilshire 5000 Index,
The Russell 2000 Index and The S&P SmallCap 600 Index
* $100 invested on 7/7/06 in stock or on 6/30/06 in index-including reinvestment of dividends.
Fiscal year ending December 31.
Our performance graph reflects the cumulative return of (i) the Dow Jones Wilshire 5000 Index, a broad equity market index that includes companies whose equity securities are traded on the Nasdaq Global Select Market, (ii) the Russell 2000, a broad equity market index of which we are a component and (iii) the S&P SmallCap 600. We added the comparison to the Russell 2000 index in the Quarterlyabove graph as we became a component of the index in 2007. We elected to use the S&P SmallCap 600 index after determining that no published industry or line-of-business indexes were closely enough related to our industry or business to provide a reasonable basis for comparison. Similarly, we determined that we could not identify comparables to include in a peer group that would provide a reasonable basis for comparison and that, as a result, an index consisting of companies with similar market capitalizations was appropriate.


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Item 6.Selected Financial Data
The following table represents our selected financial data. The table should be read in conjunctions with Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”and Item 8,“Financial Statements and Supplementary Data on page 100 in,” of this ReportReport.
                          
         Predecessor 
     Year Ended December 31, 2006          
     July 1, 2006
              
  Year Ended
  through
   January 1, 2006
          
  December 31,
  December 31,
   to
  Year Ended December 31, 
  2007  2006   July 1, 2006  2005  2004  2003 
  (In millions of dollars, except shipments, average sales price and per share amounts) 
Net sales $1,504.5  $667.5   $689.8  $1,089.7  $942.4  $710.2 
                          
Income (loss) from continuing operations  101.0   26.2    3,136.9   (1,112.7)  (868.1)  (273.6)
                          
Income (loss) from discontinued operations  —   —    4.3   363.7   121.3   (514.7)
                          
Cumulative effect of accounting change  —   —    —   (4.7)  —   — 
                          
Net income Earnings (loss) per share: $101.0  $26.2   $3,141.2  $(753.7) $(746.8) $(788.3)
                          
Basic:                         
Income (loss) from continuing operations $5.05  $1.31   $39.37  $(13.97) $(10.88) $(3.41)
                          
Income (loss) from discontinued operations  —   —    .05   4.57   1.52   (6.42)
                          
Cumulative effect of accounting change  —   —    —   (.06)  —   — 
                          
Net income (loss) $5.05  $1.31   $39.42  $(9.46) $(9.36) $(9.83)
                          
Diluted:                         
Income from continuing operations $4.97  $1.30                  
                          
Income (loss) from discontinued operations  —   —                  
                          
Cumulative effect of accounting change  —   —                  
                          
Net income $4.97  $1.30                  
                          
Shipments (mm lbs)  705.0   326.9    350.6   637.5   615.2   531.0 
                          
Average realized third party sales price (per lb) $2.13  $2.04   $1.97  $1.71  $1.53  $1.34 
                          
Cash dividends declared per common share $0.54  $—   $—  $—  $—  $— 
                          
Capital expenditures, net of accounts payable $61.8  $30.0   $28.1  $31.0  $7.6  $8.9 
                          
Depreciation expense $11.9  $5.5   $9.8  $19.9  $22.3  $25.7 
                          


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         Predecessor 
  December 31, 
  2007  2006   2005  2004  2003 
Total assets $1,165.2  $655.4   $1,538.9  $1,882.4  $1,623.5 
Long-term borrowings, including amounts due within one year  —   50.0    1.2   2.8   2.2 
The financial information for all prior periods has been reclassified to reflect discontinued operations. See Note 20 of Notes to Consolidated Financial Statements. Earnings (loss) per share and is incorporated herein by reference. However, the sales pricesshare information for the Company’s Common StockPredecessor may not be meaningful because, pursuant to the Kaiser Aluminum Amended Plan, the equity interests ofin the Company’s existing stockholders are expected to bewere cancelled without consideration.
 
The Company has not paid any dividends on its Common Stock duringIn addition to the two most recent fiscal years. In accordance with the Code and the DIP Facility, the Company is currently not permitted to pay any dividends or purchase any of its stock.
The Company’s non-qualified stock option plans, which are the Company’s only stock option plans, have been approved by the Company’s stockholders. The number of shares of Common Stock to be issued upon exercise of outstanding options, the weighted average price per share of the outstanding options and the number of shares of Common Stock available for future issuance under the Company’s non-qualified stock option plans at December 31, 2005, included under the heading“Incentive Plans”operational results presented in Note 9 of Notes to Consolidated Financial Statements is incorporated herein by reference.
See NoteItem 7, of Notes to Consolidated Financial Statements under the heading “Debt Covenants and Restrictions” and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations, — Liquidity and Capital Resources — Capital Structure” for additional information, which information is incorporated herein by reference.significant items that impacted the results included, but were not limited to, the following:


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Item 6.Selected Financial Data
 
Selected financial data2007: During the fourth quarter we repaid our $50 million term loan. In June of 2007, our Board of Directors initiated a regular quarterly dividend of $.18 per share. We declared total dividends of $11.1 million in 2007. In addition, in 2007 we determined that we met the “more likely than not” criteria for recognition of our deferred tax assets and we released the vast majority of the valuations allowance. At December 31, 2007, total assets included net deferred tax assets of $327.8 million.
2006: We emerged from chapter 11 bankruptcy on July 6, 2006 with all of our fabricated product facilities and operations and a 49% interest in Anglesey. During the period from January 1, 2006 to July 1, 2006 we recorded gains on emergence and other reorganization related benefits (costs) of approximately $3.1 billion.
2005: We were in chapter 11 bankruptcy for the Company is incorporated herein by referenceentire year. During 2005 we recorded reorganization costs of approximately $1.2 billion. We also recorded a $4.7 million charge as a result of adopting accounting for conditional asset retirement obligations.
2004: We were in chapter 11 bankruptcy for the entire year. We disposed of various foreign operations and recorded settlement and termination charges related to the table at page 25termination of Management’s Discussionpost-retirement medical and Analysispension benefits plans. During 2004 we recorded reorganization costs of Financial Condition and Resultsapproximately $39 million.
2003: We were in chapter 11 bankruptcy for the entire year. We recorded an impairment charge of Operations,$368.0 million relating to Note 15our interests in Gramercy/Kaiser Jamaica Bauxite Company which were sold in 2004. We also recorded non-cash charges of Notes to Consolidated Financial Statements, and to the Five-Year Financial Data on pages 102-103 in this Report.$121.2 million upon termination of a pension plan.
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Annual Report onForm 10-K contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places inthroughout this section (see “Overview,” “Results of Operations,” “LiquidityReport and Capital Resources” and “Other Matters”). Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereofof the foregoing or other variations thereon orof comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors includeinclude: the effectiveness of management’s strategies and decisions,decisions; general economic and business conditions including cyclicality and other conditions in the aerospace, automobile and other end markets we serve; developments in technology,technology; new or modified statutory or regulatory requirementsrequirements; and changing prices and market conditions. SeeThis Item 1. “Business-Factors Affecting Future Performance.”and Item 1A. “Risk Factors” each identify other factors that could cause actual results to vary. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.
Reorganization Proceedings
Background.  The Company, KACC and 24 of KACC’s subsidiaries have filed separate voluntary petitions in the Court for reorganization under Chapter 11 of the Code. In December 2005, four of the KACC subsidiaries were dissolved, pursuant to two separate plans of liquidation as more fully discussed below. The Company, KACC and the remaining 20 KACC subsidiaries continue to manage their businesses in the ordinary course asdebtors-in-possession subject to the control and administration of the Court and are collectively referred to herein as the “Reorganizing Debtors.”
 
In addition to KAC and KACC, the Debtors include the following subsidiaries: 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”)), Kaiser Bauxite Company (“KBC”), Kaiser Jamaica Corporation (“KJC”), Alpart Jamaica Inc. (“AJI”), Kaiser Aluminum & Chemical of Canada Limited (“KACOCL”) and fifteen other entitiesaccordance with limited balances or activities.
Commodity-related and Inactive Subsidiaries.  As previously disclosed, the Company generated net cash proceeds of approximately $686.8 million from the saleSection 404 of the Company’s interests inSarbanes-Oxley Act of 2002, our management, including our Chief Executive Officer and related to Queensland Alumina Limited (“QAL”) and Alumina PartnersChief Financial Officer, conducted an evaluation of Jamaica (“Alpart”). The Company’s interests in and related to QAL were owned by KAAC and KFC. The Company’s interests in and related to Alpart were owned by AJI and KJC. Throughout 2005, the proceeds were being held in separate escrow accounts pending distribution to the creditors of AJI, KJC, KAAC and KFC (collectively the “Liquidating Subsidiaries”) pursuant to certain liquidating plans.
During November 2004, the Liquidating Subsidiaries filed separate joint plans of liquidation and related disclosure statements with the Court. Such plans, together with the disclosure statements and all amendments filed thereto, are referred to as the “Liquidating Plans.” In general, the Liquidating Plans provided for the vast majority of the net sale proceeds to be distributed to the Pension Benefit Guaranty Corporation (the “PBGC”) and the holders of KACC’s 97/8% and 107/8% Senior Notes (the “Senior Notes”) and claims with priority status.
As previously disclosed in 2004, a group of holders (the “Sub Note Group”) of the KACC’s 123/4% Senior Subordinated Notes (the “Sub Notes”) formed an unofficial committee to represent all holders of Sub Notes and retained its own legal counsel. The Sub Note Group asserted that the Sub Note holders’ claims against the subsidiary guarantors (and in particular the Liquidating Subsidiaries) may not, as a technical matter, be contractually subordinated to the claims of the holders of the Senior Notes against the subsidiary guarantors (including AJI,our internal control over financial


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KJC, KAACreporting and KFC). A separate groupconcluded that holds both Subsuch control was effective as of December 31, 2007. Management’s report on the effectiveness of our internal control over financial reporting and the related report of our independent registered public accounting firm are included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report onForm 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in ten sections:
• Overview
• Financial Reporting Changes
• Business Strategy and Core Philosophies
• Management Review of 2007 and Outlook for the Future
• Results of Operations
• Other Matters
• Liquidity and Capital Resources
• Contractual Obligations, Commercial Commitments and Off-Balance-Sheet and Other Arrangements
• Critical Accounting Estimates
• New Accounting Pronouncements
We believe our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, “Financial Statements and Senior Notes made a similar assertion, but also, maintained that a portionSupplementary Data,” of this Annual Report onForm 10-K.
Unless otherwise noted, this MD&A relates only to results from continuing operations. In the claimsdiscussion of holders of Senior Notes against the subsidiary guarantors were contractually senioroperating results below, certain items are referred to the claims of holders of Sub Notes against the subsidiary guarantors. The effectas non-run-rate items. For purposes of such positions, if ultimately sustained, would bediscussion, non-run-rate items are items that, the holders of Sub Notes would be on a par with all or portion of the holders of the Senior Notes in respect of proceedswhile they may recur from sales of the Company’s interests in and relatedperiod to the Liquidating Subsidiaries.
The Court ultimately approved the disclosure statements relatedperiod, are (i) particularly material to the Liquidating Plans in February 2005. In April 2005, voting results, on the Liquidating Plans were filed with the Court by the Debtors’ claims agent. Based on these results, the Court determined that a sufficient volume of creditors (in number and amount) had voted to accept the Liquidating Plans to permit confirmation proceedings with respect to the Liquidating Plans to go forward even though the filing by the claims agent also indicated that holders of the Sub Notes, as a group, voted not to accept the Liquidating Plans. Accordingly, the Court conducted a series of evidentiary hearings to determine the allocation of distributions among holders of the Senior Notes and the Sub Notes. In connection with those proceedings, the Court also determined that there could be an allocation to the Parish of St. James, State of Louisiana, Solid Waste Revenue Bonds (the “Revenue Bonds”) of up to $8.0 million and ruled against the position asserted by the separate group that holds both Senior Notes and the Sub Notes.
On December 20, 2005, the Court confirmed the Liquidating Plans (subject to certain modifications). Pursuant to the Court’s order, the Liquidating Subsidiaries were authorized to make partial cash distributions to certain of their creditors, while reserving sufficient amounts for future distributions until the Court resolved the contractual subordination dispute among the creditors of these subsidiaries (more fully discussed above) and for the payment of administrative and priority claims and trust expenses. The Court’s ruling did not resolve the dispute between the holders of the Senior Notes and the holders of the Sub Notes regarding their respective entitlement to certain of the proceeds from sale of interests by the Liquidating Subsidiaries (the “Senior Note-Sub Note Dispute”). However,(ii) affect costs primarily as a result of the Court’s approval, all restricted cash or other assets held on behalf of or by the Liquidating Subsidiaries were transferred to a trusteeexternal market factors, and (iii) may not recur in accordance with the terms of the Liquidating Plans. The trustee was then authorized to make partial cash distributions after setting aside sufficient reserves for amounts subject to the Senior Note-Sub Note Dispute (approximately $213.0 million) and for the payment of administrative and priority claims and trust expenses (approximately $40.0 million). After such reserves, the partial distribution totaled approximately $430.0 million, of which, pursuant to the Liquidating Plans, approximately $196.0 million was paid to the PBGC and $202.0 amount was paid to the indenture trustees for the Senior Notes for subsequent distribution to the holders of the Senior Notes. Of the remaining partial distribution, approximately $21.0 million was paid to KACC and $11.0 million was paid to the PBGC on behalf of KACC. Partial distributions were made in late December 2005 and, in connection with the effectiveness of the Liquidation Plans, the Liquidating Subsidiaries were deemed to be dissolved and took the actions necessary to dissolve and terminate their corporate existence.
On December 22, 2005, the Court issued a decision in connection with the Senior Note-Sub Note Dispute, finding in favor of the Senior Notes. On January  10, 2006, the Court held a hearing on a motion by the indenture trustee for the Sub Notes to stay distribution of the amounts reserved under the Liquidating Plans in respect of the Senior Note-Sub Note Dispute pending appeals in respect of the Court’s December 22, 2005 decision that the Sub Notes were contractually subordinate to the Senior Notes in regard to certain subsidiary guarantors (particularly the Liquidating Subsidiaries) and that certain parties were not due certain reimbursements. An agreement was reached at the hearing and subsequently approved by Court order dated March 7, 2006, authorizing the trustee to distribute the amounts reserved to the indenture trustees for the Senior Notes and further authorize the indenture trustees to make distributions to holders of the Senior Notes while such appeals proceed, in each case subject to the terms and conditions stated in the order.
Based on the objections and pleadings filed by the Sub Note Group and the group that holds Sub Notes and Senior Notes and the assumptions and estimates upon which the Liquidating Plans are based,future periods if the holderssame level of Sub Notesunderlying performance were ultimately to prevail on their appeal, the Liquidating Plans indicated that it is possible that the holdersoccur. Non-run-rate items are part of the Sub Notes could receive between approximately $67.0 millionour business and approximately $215.0 million depending on whether the Sub Notes were determined to rank on par with a portion or alloperating environment but are worthy of the Senior Notes. Conversely, if the holders of the Senior Notes prevail on appeal, then the holders of the Sub Notes will receive no distributions under Liquidating Plans. The Company believes that the intent of the indentures in respect of the Senior Notes and the Sub


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Notes was to subordinate the claims of the Sub Note holders in respect of the subsidiary guarantors (including the Liquidating Subsidiaries) and that the Court’s ruling on December 22, 2005, was correct. The Company cannot predict, however, the ultimate resolution of the matters raised by the Sub Note Group, or the other group, on appeal, when any such resolution will occur, or what impact any such resolution may have on the Company, the Cases or distributions to affected noteholders.
The distributions in respect of the Liquidating Plans also settled substantially all amounts due between KACC and the creditors of the Liquidating Subsidiaries pursuant to the Intercompany Settlement Agreement (the “Intercompany Agreement”) that went into affect in February 2005 other than certain payments of alternative minimum tax paid by the Company that it expects to recoup from the liquidating trust for the KAAC and KFC joint plan of liquidation (“the KAAC/KFC Plan”) during the second half of 2006 in connection with a 2005 tax return (see Note 8 of Notes to Consolidated Financial Statements). The Intercompany Agreement also resolved substantially all pre-and post-petition intercompany claims among the Debtors.
KBC is being dealt with in the KACC plan of reorganization as more fully discussed below.
Entities Containing the Fabricated Products and Certain Other Operations.  Under the Code, claims of individual creditors must generally be satisfied from the assets of the entity against which that creditor has a lawful claim. The claims against the entities containing the Fabricated products and certain other operations have to be resolved from the available assets of KACC, KACOCL, and Bellwood, which generally include the fabricated products plants and their working capital, the interests in and related to Anglesey and proceeds received by such entities from the Liquidating Subsidiaries under the Intercompany Agreement. Sixteen of the Reorganizing Debtors have no material ongoing activities or operations and have no material assets or liabilities other than intercompany claims (which were resolved pursuant to the Intercompany Agreement). The Company has previously disclosed that it believed that it is likely that most of these entities will ultimately be merged out of existence or dissolved in some manner.
In June 2005, KAC, KACC, Bellwood, KACOCL and 17 of KACC’s subsidiaries (i.e., the Reorganizing Debtors) filed a plan of reorganization and related disclosure statement with the Court. Following an interim filing in August 2005, in September 2005, the Company filed amended plans of reorganization (as modified, the “Kaiser Aluminum Amended Plan”) and related amended disclosure statements (the “Kaiser Aluminum Amended Disclosure Plan”) with the Court. In December 2005, with the consent of creditors and the Court, KBC was added to the Kaiser Aluminum Amended Plan.
The Kaiser Aluminum Amended Plan, in general (subject to the further conditions precedent as outlined below), resolves substantially all pre-Filing Date liabilities of the Remaining Debtors under a single joint plan of reorganization. In summary, the Kaiser Aluminum Amended Plan provides for the following principal elements:
(a) All of the equity interests of existing stockholders of the Company would be cancelled without consideration.
(b) All post-petition and secured claims would either be assumed by the emerging entity or paid at emergence (see “Exit Cost” discussion below).
(c) Pursuant to agreements reached with salaried and hourly retirees in early 2004, in consideration for the agreed cancellation of the retiree medical plan, as more fully discussed in Note 9 of Notes to Consolidated Financial Statements, KACC is making certain fixed monthly payments into Voluntary Employee Beneficiary Associations (“VEBAs”) until emergence and has agreed thereafter to make certain variable annual VEBA contributions depending on the emerging entity’s operating results and financial liquidity. In addition, upon emergence the VEBAs are entitled to receive a contribution of 66.9% of the new common stock of the emerged entity.
(d) The PBGC will receive a cash payment of $2.5 million and 10.8% of the new common stock of the emerged entity in respect of its claims against KACOCL. In addition, as described in (f) below, the PBGC will receive shares of new common stock based on its direct claims against the Remaining Debtors (other than KACOCL) and its participation, indirectly through the KAAC/KFC Plan in claims of KFC against KACC, which the Company currently estimates will result in the PBGC receiving an additional 5.4% of the new


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common stock of the emerged entity (bringing the PBGC’s total ownership percentage of the new entity to approximately 16.2%). The $2.5 million cash payment discussed above is in addition to the cash amounts the Company has already paid to the PBGC (see Note 9 of Notes to Consolidated Financial Statements) and that the PBGC has received and will receive from the Liquidating Subsidiaries under the Liquidating Plans.
(e) Pursuant to an agreement reached in early 2005, all pending and future asbestos-related personal injury claims, all pending and future silica and coal tar pitch volatiles personal injury claims and all hearing loss claims would be resolved through the formation of one or more trusts to which all such claims would be directed by channeling injunctions that would permanently remove all liability for such claims from the Debtors. The trusts would be funded pursuant to statutory requirements and agreements with representatives of the affected parties, using (i) the Debtors’ insurance assets, (ii) $13.0 million in cash from KACC, (iii) 100% of the equity in a KACC subsidiary whose sole asset will be a piece of real property that produces modest rental income, and (iv) the new common stock of the emerged entity to be issued as per (f) below in respect of approximately $830.0 million of intercompany claims of KFC against KACC that are to be assigned to the trust, which the Company currently estimates will entitle the trusts to receive approximately 6.4% of the new common stock of the emerged entity.
(f) Other pre-petition general unsecured claims against the Remaining Debtors (other than KACOCL) are entitled to receive approximately 22.3% of the new common stock of the emerging entity in the proportion that their allowed claim bears to the total amount of allowed claims. Claims that are expected to be within this group include (i) any claims of the Senior Notes, the Sub Notes and PBGC (other than the PBGC’s claim against KACOCL), (ii) the approximate $830.0 of intercompany claims that will be assigned to the personal injury trust(s) referred to in (e) above, and (iii) all unsecured trade and other general unsecured claims, including approximately $276.0 million of intercompany claims of KFC against KACC. However, holders of general unsecured claims not exceeding a specified small amount will receive a cash payment equal to approximately 2.9% of their agreed claim value in lieu of new common stock. In accordance with the contractual subordination provisions of the indenture governing the Sub Notes and terms of the settlement between the holders of the Senior Notes and the holders of the Revenue Bonds, the new common stock or cash that would otherwise be distributed to the holders of the Sub Notes in respect of their claims against the Debtors would instead be distributed to holders of the Senior Notes and the Revenue Bonds on a pro rata basis based on their relative allowed amounts of their claims.
The Kaiser Aluminum Amended Plan was accepted by all classes of creditors entitled to vote on it and the Kaiser Aluminum Amended Plan was confirmed by the Court on February 6, 2006. The confirmation order remains subject to motions for review and appeals filed by certain of KACC’s insurers and must still be adopted or affirmed by the United States District Court. Other significant conditions to emergence include completion of the Company’s exit financing, listing of the new common stock on the NASDAQ stock market and formation of certain trustshighlighted for the benefit of different groupsthe users of torts claimants. As providedthe financial statements. Our intent is to allow users of the financial statements to consider our results both in the Kaiser Aluminum Amended Plan, once the Court’s confirmation order is adopted or affirmed by the United States District Court, even if the affirmation order is appealed, the Company can proceed to emerge if the United States District Court does not stay its order adopting or affirming the confirmation orderlight of and the key constituentsseparately from items such as fluctuations in the Chapter 11 proceedings agree. Assuming the United States District Court adopts or affirms the confirmation order, the Company believes that it is possible that it will emerge before May 11, 2006. No assurances can be given that the Court’s confirmation order will ultimately be adopted or affirmed by the United States District Court or that the transactions contemplated by the Kaiser Aluminum Amended Plan will ultimately be consummated.
At emergence from Chapter 11, the Reorganizing Debtors will have to pay or otherwise provide for a material amount of claims. Such claims include accrued but unpaid professional fees, priority pension, taxunderlying metal prices, natural gas prices and environmental claims, secured claims, and certain post-petition obligations (collectively, “Exit Costs”). The Company currently estimates that its Exit Costs will be in the range of $45.0 million to $60.0 million. The Company currently expects to fund such Exit Costs using existing cash resources and borrowing availability under an exit financing facility that would replace the current Post-Petition Credit Agreement (see Note 7 of Notes to Consolidated Financial Statements). If funding from existing cash resources and borrowing availability under an exit financing facility are not sufficient to pay or otherwise provide for all Exit Costs, the Company and KACC will not be able to emerge from Chapter 11 unless and until sufficient funding can be obtained. Management believes it will be able to


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successfully resolve any issues that may arise in respect of an exit financing facility or be able to negotiate a reasonable alternative. However, no assurance can be given in this regard.currency exchange rates.
 
Overview
 
The Company’s primary line of business is the production and saleWe are a leading producer of fabricated aluminum products.products for aerospace / high strength, general engineering and custom automotive and industrial applications. In addition, the Company ownswe own a 49% interest in Anglesey, which owns and operates an aluminum smelter in Holyhead, Wales. Historically, the Company, through its wholly owned subsidiary, KACC, operated in
We have two reportable operating segments, Fabricated Products and Primary Aluminum, and our Corporate segment. The Fabricated Products segment is comprised of all principal sectors of the operations within the fabricated aluminum products industry including our eleven fabricating facilities in North America at the productionend of 2007. The Fabricated Products segment sells value-added products such as heat treat aluminum sheet and saleplate, extrusions and forgings which are used in a wide range of bauxite, aluminaindustrial applications, including aerospace, defense, automotive and primary aluminum in domesticgeneral engineering end-use applications.
The Primary Aluminum segment produces commodity grade products as well as value-added products such as ingot and international markets. However, as previously disclosed, asbillet, for which we receive a part of the Company’s reorganization efforts, the Company has sold substantially all of its commodities’ operations other than Anglesey. The balancespremium over normal commodity market prices and results of operationsconducts hedging activities in respect of the commodities interests sold are now considered discontinued operations (see Notes 3 and 5 of Notesour exposure to Consolidated Financial Statements). The presentation in the table below restates the segment information for such reclassifications. The amounts remaining in Primary aluminum relate primarily to the Company’s interests in and related to Anglesey and the Company’s primary aluminum hedging-related activities.price risk.
 
The table below provides selected operational and financial information on a consolidated basis with respect to the Company for the years ended December 31, 2005, 2004 and 2003. The following data should be read in


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conjunction with the Company’s consolidated financial statements and the notes thereto contained elsewhere herein. See Note 15 of Notes to Consolidated Financial Statements for further information regarding segments.
             
  Year Ended December 31, 
  2005  2004  2003 
  (In millions of dollars, except shipments and prices) 
 
Shipments (mm lbs):            
Fabricated Products  481.9   458.6   372.3 
Primary Aluminum  155.6   156.6   158.7 
             
   637.5   615.2   531.0 
             
Average Realized Third Party Sales Price (per pound):            
Fabricated Products(1) $1.95  $1.76  $1.61 
Primary Aluminum $.95  $.85  $.71 
Net Sales:            
Fabricated Products $939.0  $809.3  $597.8 
Primary Aluminum  150.7   133.1   112.4 
             
Total Net Sales $1,089.7  $942.4  $710.2 
             
Segment Operating Income (Loss):            
Fabricated Products(2) $87.2  $33.0  $(21.2)
Primary Aluminum(3)  16.4   13.9   6.7 
Corporate and Other  (35.8)  (71.3)  (74.7)
Other Operating Charges, Net(4)  (8.0)  (793.2)  (141.6)
             
Total Operating Income (Loss) $59.8  $(817.6) $(230.8)
             
Reorganization Items $(1,162.1) $(39.0) $(27.0)
             
Discontinued Operations $363.7  $121.3  $(514.7)
             
Loss from Cumulative Effect on Years Prior to 2005 of Adopting Accounting For Conditional Asset Retirement Obligations(5) $(4.7) $—  $— 
             
Net Loss $(753.7) $(746.8) $(788.3)
             
Capital Expenditures (excluding discontinued operations) $31.0  $7.6  $8.9 
             
(1)Average realized prices for the Company’s Fabricated products business unit are subject to fluctuations due to changes in product mix as well as underlying primary aluminum prices and is not necessarily indicative of changes in underlying profitability. See “Business”.
(2)Operating results for 2005, 2004 and 2003 include LIFO inventory charges of $9.3, $12.1, and $3.2, respectively.
(3)Includes non-cash charges of approximately $4.1 million in respect of the Company’s decision to restate its accounting for derivative financial instruments as more fully discussed in Notes 2, 12 and 16 of Notes to Consolidated Financial Statements.
(4)See Note 6 of Notes to Consolidated Financial Statements for a detailed summary of the components of Other operating charges, net and the business segment to which the items relate.
(5)See Notes 2 and 4 of Notes to Consolidated Financial Statements for a discussion of the changes in accounting for conditional asset retirement obligations.
Significant Items
Market-related Factors.Changes in global, regional, or country-specific economic conditions can have a significant impact on overall demand for aluminum-intensive fabricated products in the aerospace, automotive,markets in which we participate. Such changes in


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distribution, and packaging markets. Such changes in demand can directly affect the Company’sour earnings by impacting the overall volume and mix of such products sold. During 2007, 2006, and 2005, the markets for aerospace and high strength products markets in which the Company participateswe participate were strong, resulting in higher shipments and improved margins.
 
Changes in primary aluminum prices also affect the Company’sour Primary aluminum business unitAluminum segment and expected earnings under any fixedfirm price fabricated products contracts. However, the impacts of such changes are generally offset by each other or by primary aluminum hedges. The Company’sOur operating results are also, albeit to a lesser degree, sensitive to changes in prices for power and natural gas and changes in certain foreign exchange rates. All of the foregoing have been subject to significant price fluctuations over recent years. For a discussion of the possible impacts of the reorganization on the Company’sour sensitivity to changes in market conditions, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risks, Sensitivity.”
 
During 2005,2007, the average London Metal Exchange, or LME, transaction price per pound of primary aluminum was $.86 per pound.$1.20. During 20042006 and 2003,2005, the average LME price per pound for primary aluminum was $.78$1.17 and $.65,$.86, respectively. At February 28, 2006,January 31, 2008, the LME price was approximately $.1.08$1.20 per pound.
 
Credit Arrangement.  On February 1,Financial Reporting Changes
From the first quarter of 2002 to June 30, 2006, Kaiser and 25 of its subsidiaries operated under chapter 11 of the Court approved an amendmentUnited States Bankruptcy Code under the supervision of the Bankruptcy Court. Pursuant to the post-petition credit facilityPlan, Kaiser and its subsidiaries, which owned all of our core fabricated products facilities and operations and a 49% interest in Anglesey, emerged from chapter 11 on July 6, 2006. Pursuant to the Plan, all material pre-petition debt, pension and post-retirement medical obligations and asbestos and other tort liabilities, along with other pre-petition claims (which in total aggregated at June 30, 2006 approximately $4.4 billion) were addressed and resolved. Pursuant to the Plan, all of the financing agreement to extend its expiration date through the earlierequity interests of May 11, 2006, the effective date of a plan of reorganization or voluntary termination by Company. In addition, the Court approved an extensionKaiser’s pre-emergence stockholders were cancelled without consideration. Equity of the cancellation date ofnewly emerged Kaiser was issued and delivered to a third-party disbursing agent for distribution to claimholders pursuant to the leaders’ commitment for the exit financing in the form of a revolving credit facilityPlan. See Notes 2 and a fully drawn term loan to May 11, 2006. As discussed in Note 119 of Notes to Consolidated Financial Statements included in this Report for additional information on Kaiser’s reorganization and the Company believesPlan.
Our emergence from chapter 11 bankruptcy and adoption of fresh start accounting resulted in a new reporting entity for accounting purposes. Although we emerged from chapter 11 bankruptcy on July 6, 2006, we adopted fresh start accounting under the provisions of American Institute of Certified Professional Accountants (“AICPA”) Statement of Position90-7(“SOP 90-7”),Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, effective as of the beginning of business on July 1, 2006. As such, it was assumed that itthe emergence was completed instantaneously at the beginning of business on July 1, 2006 so that all operating activities during the period from July 1, 2006 through December 31, 2006 are reported as applying to the new reporting entity. We believe that this is possible it will emerge by Maya reasonable presentation as there were no material non-Plan-related transactions between July 1, 2006 and July 6, 2006.
All financial statement information before July 1, 2006 relates to Kaiser before emergence from chapter 11 2006. However, if(sometimes referred to herein as the Company does not emerge from“Predecessor”). Kaiser after emergence is sometimes referred to herein as the Cases prior to May 11, 2006, it“Successor.” As more fully discussed below, there will be necessary fora number of differences between the Companyfinancial statements before and after emergence that will make comparisons of financial information difficult and may make it more difficult to extend the expiration dateassess our future prospects based on historical performance.
As indicated above, we also made changes to our accounting policies and procedures as part of the DIP Facility or make alternative financing arrangements. The Company has begun discussions with the agent bank that represents the DIP Facility lenders regarding the likely need for a short-term extensionapplication of the DIP Facility. While the Company believes that, if necessary, it would be successful in negotiating an extension of the DIP Facility or adequate alternative financing arrangements, no assurances can be given in this regard.
The principal terms of the committed revolving credit facility would be essentially“fresh start” accounting as required bySOP 90-7. In general, our accounting policies are the same as or more favorablesimilar to those historically used to prepare our financial statements. In certain cases, however, we adopted different accounting principles for, or applied methodologies differently to, our post emergence financial statement information. For instance, we changed our accounting methodologies with respect to inventory accounting. While we still account for inventories on alast-in, first-out (“LIFO”) basis after emergence, we are applying LIFO differently than we did in the DIP Facility, except that, among other things,past. Specifically, we now view each quarter on a standalone year-to-date basis for computing LIFO; in the revolving credit facility would close and be available uponpast, the Debtors’ emergence fromPredecessor recorded LIFO amounts with a view to the Chapter 11 proceedings and would be expectedentire fiscal year, which, with certain exceptions, tended to mature five years fromresult in LIFO charges being recorded in the date of emergence. The term loan commitment would be expected to close upon the Debtors’ emergence from the Chapter 11 proceedings and would be expected to mature on May 11, 2010. The agent bank representing the exit financing lenders is the same as the agent bank for the DIP Facility lenders and the Company has begun parallel discussions with the agent bank regarding the extensionfourth quarter or second half of the expiration date for the exit financing commitment in the event the Company does not emerge from the Cases prior to May 11, 2006.
Asbestos-Related Insurance Coverage Conditional Settlements.  The Company has previously disclosed that it estimated that it had approximately $1.4 billion of remaining solvent asbestos-related insurance coverage. The Company has recognized approximately $965.5 million of such amount in its financial statements. As disclosed throughout our SEC filings (including in the Notes and Critical Accounting Policies), the tort liability and offsetting insurance receivable amounts recognized (and disclosed) in the financial statements are nominal amounts, as the Company cannot predict the timing of cash flows. The Company has also disclosed that it is possible that amounts may be settled at less than the face value of policies for various reasons including the possible present value effect. During the latter half of 2005, the Company entered into certain conditional settlement agreements with insurers under which the insurers agreed (in aggregate) to pay approximately $375.0 million in respect of substantially all coverage under certain policies having a combined face value of approximately $459.0 million. The settlements, which were approved by the Court, have several conditions, including a legislative contingency and are only payable to the trust(s) being set up under the Company’s plan of reorganization upon emergence (more fully discussed in Note 1 of Notes to Consolidated Financial Statements). One set of insurers paid approximately $137.0 million into a separate escrow account in November 2005. If the Company does not emerge, the agreement is null and void and the funds (along with any interest that has accumulated) will be returned to the insurers.
During March 2006, the Company reached a conditional settlement agreement with another group of insurers under which the insurers would pay approximately $67.0 million in respect of certain policies having a combined face value of approximately $80.0 million. The conditional settlement, which has similar terms and conditions toyear.


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Additionally, certain items such as earnings per share and Statement of Financial Accounting StandardsNo. 123-R,Share-Based Payment(see discussion in Note 11 and Note 15 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”), which had few, if any, implications while we were in chapter 11 bankruptcy, will have increased importance in our future financial statement information.
Business Strategy and Core Philosophies
We are a leading manufacturer of fabricated aluminum products. We specialize in providing highly engineered solutions that meet the other conditional settlement agreement discussed above, must stilldemanding needs of the transportation and industrial markets. We are leaders in our industry, maintaining a strong competitive position in a significant majority of the markets we serve. In a very competitive marketplace, we distinguish ourselves with our “Best in Class” customer satisfaction along with a broad and deep product offering. Our blue-chip customer base includes some of the top names in industry, with whom we share long-standing relationships based on quality and trust. We have established a platform for growth that is well positioned within the industry.
We strive to reinforce our position as supplier of choice through our “Best in Class” customer satisfaction, seeking to continuously improve our cost performance and efforts to be approvedthe low cost provider by eliminating waste throughout the value stream.
Our line of Kaiser Select® products reflects a structured approach to reduce waste and variability for our customers. Our Kaiser Select® products are manufactured according to strict specifications that deliver enhanced product characteristics with improved consistency that result in better performance and in many cases lower cost for our customers.
Our lean enterprise initiative is facilitated by the Court. Negotiations with other insurers continue.Kaiser Production System (“KPS”), which is an integrated application of the tools of Lean manufacturing, Six Sigma and Total Productive Manufacturing which underpins our continuous effort to provide “Best in Class” customer satisfaction. KPS enables us to deliver superior customer service through consistent, on-time delivery of superior quality products on short lead times. We are committed to imbedding KPS as the common culture through which we continuously improve our operations and enhance our total competitive position.
 
The Company has not provided any accounting recognitionManagement Review of 2007 and Outlook for the conditional agreements inFuture
In 2007, we continued our focus on the accompanying financial statements given: (1) the conditional naturegeneration of the settlements; (2) the fact that, if the Company’s plan of reorganization is not approved by creditors or the Court, the Company’s interests with respectlong-term value through our organic growth initiatives, cost control, and ongoing focus on streamlining our existing value streams. This focus contributed to the insurance policies covered by the agreements are not impaired in any way; and (3) the Company believes that collection of the approximate $965.5 million amount of Personal injury-related insurance recovery receivable is probable even if the conditional agreements are ultimately approved. No assurances can be given as to whether the conditional agreements will become final or as to what amounts will ultimately be collected in respect of the insurance policies covered by the conditional settlement or any other insurance policies.
Legislation entitled “The Fairness in Asbestos Injury Resolution Act of 2005” (the “FAIR Act”) is currently pending before the U.S. Congress. If passed, the FAIR Act could affect the rights and obligations of certain companies with asserted asbestos liabilities and their insurers. Because the exact terms of the proposed legislation are still the subject of negotiation and Congressional debate, it is uncertain how, if at all, such legislation might impact the Company, holders of asbestos, silica, coal tar pitch volatiles and hearing loss-related personal injury claims, or other creditors or entities involved in the Cases. Given such uncertainty, the Company currently plans on proceeding as previously disclosed, but will take the then current status of this proposed legislation into account when determining how to proceed with confirmation and consummation of a plan or plans of reorganization.
KBC Agreement Rejection Claim.  As previously disclosed during the fourth quarter of 2005, the UCC negotiated a settlement with a third party that had asserted an approximate $67.0 million claim for damages against KBC for rejection of a bauxite supply agreement. Pursuant to the settlement, among other things, the Company has agreed to (a) allow the third party an unsecured pre-petition claim in the amount of $42.1 million, (b) substantively consolidate KBC with certain of the other debtors solely for the purpose of treating that claim, and any other pre-petition claim of KBC, under the Kaiser Aluminum Amended Plan and (c) modify the Kaiser Aluminum Amended Plan to implement the settlement. In consideration of the settlement, the third party has, among other things, agreed to not object to the Kaiser Aluminum Amended Plan. The settlement was approved by the Court in January 2006 and the Company recorded a charge of $42.1 million in the fourth quarter of 2005 in Discontinued operations and reflected an increase in Discontinued operations liabilities subject to compromise by the same amount.
Significant Charges Associated with the Reorganization Process.  The Company has previously disclosed that it has made substantial progress in its reorganization efforts and has reached various agreements with substantially all of the key creditor constituencies as to the value of their claims and the agreed treatment for such claims in any plans of reorganization that is ultimately filed by the Debtors. These agreements have however resulted in a number of significant charges including:following financial achievements:
 
 • A chargeRecord Fabricated Products segment shipments of $1,131.5548 million in 2005 related to implementationpounds, and Fabricated Products operating income of the Liquidating Plans, whereby (for purposes$169 million with Fabricated Products net sales growth over 2006 of computing distributions under the KAAC/KFC Plan) the value of an intercompany claim is being treated as being for the benefit of certain third party creditors. (See Reorganization Items in Note 1 of Notes to Consolidated Financial Statements).12%;
 
 • Charges related to the saleConsolidated net income of commodity interests in 2003 and 2004. These items are classified as “discontinued operations” in the accompanying financial statements. See Note 3 of Notes to Consolidated Financial Statements for additional discussion of these items and amounts.$101 million, or $4.97 per diluted share;
 
 • Significant chargesIncome from continuing operations for 2007 up 39% from 2006 (Predecessor and Successor combined excluding Reorganization items) in 2003 and 2004 related to the termination of certainspite of the Company’s previous pension and retiree medical planscontinued high cost for primary aluminum, natural gas and other agreements reached with the PBGC, the USWA and certain other labor unions. These items are discussed in Note 9 and Note 11 of Notes to Consolidated Financial Statements.general cost inflation;
 
 • Certain environmental chargesCash provided by operating activities of $130 million which funded all capital investment and also allowed us to repay our $50 million term loan during the fourth quarter of 2007;
• Recognition of $328 million of net deferred tax assets at December 31, 2007 primarily in 2003 and 2004 associated with various settlements and transactions. See Note 11 of Notesrelation to Consolidated Financial Statementsour net operating loss carry-forwards.
 
Additionally, while not resultingDuring 2007 our results benefited from higher average realized third party sales prices in a significant net charge,both our Fabricated Products and Primary Aluminum segments due primarily to favorable mix and higher value-added pricing as well as higher underlying primary metal prices. In addition, there was continued strong demand for our products in the Company did substantially increase its recorded liability in respect of asbestosaerospace, high strength and other personal injury related claims and expected insurance recoveries in respect of such amounts. See Note 11 of Notes to Consolidated Financial Statements.defense markets. We brought additional heat treat capacity online at our Trentwood


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Environmental Matters.  The Company has previously disclosed that, 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 to KACC’s Trentwood facility in Spokane, 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 claim or charges, if any shouldbenefited from continued strong demand for our products in the aerospace, high strength and defense markets. In 2007 we also faced a number of challenges including; weakness in demand in the ground transportation and general industrial markets; lower industry mill shipments of general engineering rod and bar products primarily as a result vigorously. The Company cannot assess what, if any, impacts this matter may have on the Company’s or KACC’s financial statements.of service center de-stocking; and higher energy prices.
 
Looking into 2008 and beyond we anticipate our main areas of focus will be:
• Completing and realizing the benefits from our organic growth initiatives described above together with the additional $14 million investment announced on February 13, 2008;
• Capitalizing on our strong market presence and generating a return on capital that exceeds our cost of capital;
• Generating cash from operations that funds capital expenditures made in the ordinary course of business as well as other initiatives, including additional organic growth programs and external growth acquisitions;
• Managing our debt and capital structure to maintain a balance between cost and flexibility; and
• Maximization of shareholder value.
Results of Operations
 
Fiscal 2007 Summary
For the purposes of this discussion the Successor’s results for the period from July 1, 2006 through December 31, 2006 have been combined with the Predecessor’s results for the period from January 1, 2006 to July 1, 2006 and are compared to the Successor’s results for the year ended December 31, 2007.
• Net income for the year ended December 31, 2007 was $101.0 million compared with $3,167.4 million for the year ended December 31, 2006. Net income for the year ended December 31, 2006 included a non-cash gain of approximately $3,110.3 million related to our implementation of the Plan and application of fresh start accounting.
• Net sales for the year ended December 31, 2007 increased by 11% to $1,504.5 million compared to $1,357.3 million the year ended December 31, 2006. The increase primarily reflected higher shipments, favorable product mix and higher value-added pricing in Fabricated Products as well as higher market prices for primary aluminum. Such increases in primary aluminum market prices do not necessarily directly translate to increased profitability because (a) a substantial portion of the business conducted by our Fabricated Products business unit passes primary aluminum prices on directly to customers and (b) our hedging activities, while limiting our risk of losses, may limit our ability to participate in price increases.
• Our operating income for the year ended December 31, 2007 increased by 81% to $182.0 million compared to the year ended December 31, 2006. The increase was primarily a result of increased shipments, favorable product mix and higher value-added pricing for the period in our Fabricated Products segment together with gains in our Primary Aluminum segment from higher realized primary aluminum prices (net of hedging), improved contractual alumina pricing, favorable currency exchange (net of hedging), higher shipments and lower operating costs.
• Net income for the year ended December 31, 2007 included Other operating benefits of $13.6 million related primarily to the reimbursement of $8.3 million of amounts paid in connection with the sale of our interests in and related to Queensland Alumina Limited in 2005, a $4.9 million non-cash gain from the settlement of a claim by the purchaser of the Gramercy alumina refinery and our interests in and related to Kaiser Jamaica Bauxite Company, a $1.6 million gain from the resolution of contingencies relating to the sale of a property prior to emergence, a $1.3 million gain related to a settlement with the Pension Benefit Guaranty Corporation or PBGC, and a charge of $2.6 million related to other post-emergence chapter 11 related items (see Note 14 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”).


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• Our effective tax rate remained high at 44.6% for the year ended December 31, 2007 (see discussion of “Provision for Income Taxes”).
• Starting in June 2007, our Board of Directors initiated the payment of a regular quarterly cash dividend of $.18 per common share per quarter. During the year ended December 31, 2007 we made two dividend payments totaling $0.36 per common share or $7.4 million in the aggregate. During December 2007, we declared a third quarterly cash dividend of $.18 per common share, or $3.7 million, which was paid in February 2008.
Consolidated Selected Operational and Financial Information
The table below provides selected operational and financial information on a consolidated basis (in millions of dollars, except shipments and prices). The selected operational and financial information after July 6, 2006 are those of the Successor and are not comparable to those of the Predecessor. However, for purposes of this discussion (in the table below and subsequently throughout this section), the Successor’s results for the period from July 1, 2006 through December 31, 2006 have been combined with the Predecessor’s results for the period from January 1, 2006 to July 1, 2006 and are compared to the Successor’s results for the year ended December 31, 2007 and Predecessor’s results for the year ended December 31, 2005. Differences between periods due to fresh start accounting are explained when material.


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The following data should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8. “Financial and Supplementary Data.” See Note 16 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” for further information regarding segments.
                      
     Year Ended December 31, 2006    
     July 1, 2006
   Predecessor
     Predecessor
 
  Year Ended
  through
   January 1, 2006
     Year Ended
 
  December 31,
  December 31,
   to
     December 31,
 
  2007  2006   July 1, 2006  Combined  2005 
  (In millions of dollars, except shipments and average sales price) 
Shipments (mm lbs):                     
Fabricated Products  547.8   249.6    273.5   523.1   481.9 
Primary Aluminum  157.2   77.3    77.1   154.4   155.6 
                      
   705.0   326.9    350.6   677.5   637.5 
                      
Average Realized Third Party Sales Price (per pound):                     
Fabricated Products(1) $2.37  $2.27   $2.16  $2.21  $1.95 
Primary Aluminum(2) $1.31  $1.30   $1.28  $1.29  $.95 
Net Sales:                     
Fabricated Products $1,298.3  $567.2   $590.9  $1,158.1  $939.0 
Primary Aluminum  206.2   100.3    98.9   199.2   150.7 
                      
Total Net Sales $1,504.5  $667.5   $689.8  $1,357.3  $1,089.7 
                      
Segment Operating Income (Loss):                     
Fabricated Products(3)(4) $169.0  $60.8   $61.2  $122.0  $87.2 
Primary Aluminum(5)(6)  46.5   10.8    12.4   23.2   16.4 
Corporate and Other  (47.1)  (25.5)   (20.3)  (45.8)  (35.8)
Other Operating Benefits (Charges), Net(7)  13.6   2.2    (.9)  1.3   (8.0)
                      
Total Operating Income $182.0  $48.3   $52.4  $100.7  $59.8 
                      
Discontinued Operations $—  $—   $4.3  $4.3  $363.7 
                      
Reorganization Items(8) $—  $—   $3,090.3  $3,090.3  $(1,162.1)
                      
Loss from Cumulative Effect on Years Prior to 2005 of Adopting Accounting For Conditional Asset Retirement Obligations(9) $—  $—   $—  $—  $(4.7)
                      
Income tax provision $81.4  $23.7   $6.2  $29.9  $2.8 
                      
Net Income (Loss) $101.0  $26.2   $3,141.2  $3,167.4  $(753.7)
                      
Capital Expenditures, (net of accounts payable and excluding discontinued operations) $61.8  $30.0   $28.1  $58.1  $31.0 
                      
(1)Average realized prices for our Fabricated Products business unit are subject to fluctuations due to changes in product mix as well as underlying primary aluminum prices and are not necessarily indicative of changes in underlying profitability. See Item 1. “Business”.
(2)Average realized prices for our Primary Aluminum business unit exclude hedging revenues.
(3)Fabricated Products business unit operating results for 2007, 2006 combined and 2005 include non-cash LIFO inventory benefits (charges) of $14.0 million, $(25.0) million and $(9.3) million, respectively, and metal gains (losses) of approximately $(13.1) million, $20.8 million and $4.6 million, respectively.


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(4)Fabricated Products business unit operating results for 2007 and 2006 combined include non-cash mark-to-market gains (losses) on natural gas and foreign currency hedging activities totaling $1.7 million and $(2.2) million. For further discussion regarding mark-to-market matters, see Note 13 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data.”
(5)Primary Aluminum business unit operating results for 2007, 2006 combined, include non-cash mark-to-market gains (losses) on primary aluminum hedging activities totaling $16.2 million and $5.7 million, respectively, and on foreign currency derivatives of $(8.2) million and $11.6 million, respectively. 2005 included a non-cash mark-to-market loss of $4.1 million on primary aluminum and foreign currency hedging and derivative activities. For further discussion regarding mark-to-market matters, see Note 13 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data.”
(6)Primary Aluminum business unit operating results for 2005 include non-cash charges of approximately $4.1 million in respect of our decision in 2006 to restate our accounting for derivative financial instruments.
(7)See Note 14 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” for a detailed summary of the components of Other operating benefits (charges), net and the business segment to which the items relate.
(8)See Notes 2 and 19 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” for a discussion of Reorganization items.
(9)See Notes 1 and 5 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” for a discussion of the changes in accounting for conditional asset retirement obligations.
Summary.  The CompanyWe reported net income of $101.0 million for 2007 compared to net income of $3,167.4 million for 2006 and a net loss of $753.7 million $9.46for 2005. Net income for 2006 includes a non-cash gain of basic$3,110.3 million related to the implementation of our Plan and application of fresh start accounting. Net loss per common sharefor 2005 includes a non-cash loss of $1,131.5 million related to the assignment of intercompany claims for the benefit of certain creditors offset by a gain of $365.6 million on the sale of our interests in and related to QAL and favorable QAL operating results prior to its sale on April 1, 2005. All years include a number of non-run-rate items that are more fully explained in the sections below.
Net Sales.  We reported Net sales in 2007 of $1,504.5 million compared to $1,357.3 million in 2006 and $1,089.7 million in 2005. As more fully discussed below, the increase in revenues in 2007 is primarily the result of higher shipments, favorable product mix and value-added pricing in Fabricated Products as well as a higher market price for primary aluminum. Such increases in primary aluminum market prices do not necessarily directly translate to increased profitability because (a) a substantial portion of the business conducted by the Fabricated Products business unit passes primary aluminum prices on directly to customers and (b) our hedging activities, while limiting our risk of losses, may limit our ability to participate in price increases.
The increase in revenues in 2006 as compared to 2005 is primarily due to higher market prices for primary aluminum and secondarily due to increased fabricated products shipments.
Cost of Products Sold.  Cost of goods sold in 2007 totaled $1,251.1 million compared to $1,176.8 million in 2006 or 83% and 87% of net sales respectively. The reduction in Cost of products sold as a percentage of nets sales in 2007 was primarily the result of a LIFO gain of $14.0 million in 2007 compared to a LIFO charge of $25.0 million in 2006. Cost of products sold in 2006 totaled $1,176.8 million compared to $951.1 million in 2005 or 87% in both years.
Depreciation and Amortization.  Depreciation and amortization for 2007 was $11.9 million compared to $15.3 million for 2006. The period from July 1, 2006 to December 31, 2006 and the year ended December 31, 2007 benefited from lower depreciation as a result of the application of fresh start accounting. This accounted for a reduction in depreciation expense of approximately $4.5 million related to the first half of 2007 compared to the period from January 1, 2006 through July 1, 2006. This reduction was partially offset in 2007 by an increase in depreciation expense as a result of construction in progress being placed into production during the second half of 2007.


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Depreciation and amortization for 2006 was $15.3 million compared to $19.9 million for 2005. The period from July 1, 2006 to December 31, 2006 benefited from $4.3 million of lower depreciation as a result of the application of fresh start accounting.
Selling, Administrative, Research and Development, and General.  Selling, administrative, research and development, and general expense totaled $73.1 million in 2007 compared to $65.8 million in 2006. The increase in 2007 is primarily related to an increase in non-cash equity compensation expense from $4.0 million in 2006 to $9.1 million in 2007. In addition, in 2007 we incurred $2.8 million of additional expenses in relation to the continued investment in research and development, our Kaiser Production System group and management of our capital spending programs.
Selling, administrative, research and development, and general expense totaled $65.8 million in 2006 compared to $50.9 million in 2005. The increase of $14.9 million in 2006 primarily related to higher incentive compensation expense of approximately $8.3 million, approximately $1.9 million in professional fees relating to work in regard to the Sarbanes-Oxley Act of 2002 and approximately $1.3 million of costs associated with certain computer upgrades.
Other Operating (Benefits) Charges, Net.  Included within Other operating (benefits) charges, net (in millions of dollars) for 2007, 2006 and 2005 were the following:
                  
         Predecessor 
     Year Ended December 31, 2006    
     July 1, 2006
        
  Year Ended
  through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to
  December 31,
 
  2007  2006   July 1, 2006  2005 
Reimbursement of amounts paid in connection with sale of the Company’s interests in and related to QAL-Corporate:                 
AMT (Note 9) $(7.2) $—   $—  $— 
Professional fees  (1.1)  —    —   — 
Pension benefit related to terminated pension plans — Corporate (Notes 10 and 24)  —   (4.2)   —   — 
Resolution of a “pre-emergence” contingency — Corporate (Note 12)  —   (3.0)   —   — 
Pension Benefit Guaranty Corporation (“PBGC”) settlement — Corporate(1)  (1.3)  —    —   — 
Non-cash benefit resulting from settlement of a $5.0 claim by the purchaser of the Gramercy, Louisiana alumina refinery and Kaiser Jamaica Bauxite Company for payment of $.1 — Corporate  (4.9)  —    —   — 
Resolution of contingencies relating to sale of property prior to emergence — Corporate(2)  (1.6)  —    —   — 
Post emergence Chapter 11 — related items — Corporate(3)  2.6   4.5    —   — 
Charges associated with retroactive portion of contributions to defined contribution plans upon termination of defined benefit plans(4) (Note 10) —                 
Fabricated Products  —   .4    —   6.3 
Corporate  —   —    —   .5 
Other  (.1)  .1    .9   1.2 
                  
  $(13.6) $(2.2)  $.9  $8.0 
                  


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(1)The PBGC proceeds consist of a payment related to a settlement agreement entered into with the PBGC in connection with the our chapter 11 reorganization (see Note 12).
(2)During 2007, certain contingencies related to the sale of the Predecessor’s interest in a smelter in Tacoma, Washington were resolved with the buyer. As a result, approximately $1.6 million of the sale proceeds which had been placed into escrow at the time of sale, were released to us. At the Effective Date, no value had been ascribed to the funds in escrow because they were deemed to be contingent assets at that time.
(3)Post-emergencechapter 11-related items include primarily professional fees and expenses incurred after emergence which related directly to our reorganization.
(4)Amount in 2006 represents a one time contribution related to the retroactive implementation of the hourly defined benefit plans (See Note 10).
Interest Expense.  Interest expense was $4.3 million in 2007 compared with $1.9 million in 2006 resulting in an increase of $2.4 million. The increase in interest expense is primarily related to the prepayment of a term loan resulting in a $1.5 million write-off of the remaining unamortized deferred financing costs as interest expense and the change in total borrowing outstanding during the period, partially offset by an increase in interest capitalized as construction in progress during the year.
Interest expense was $1.9 million in 2006 compared to $5.2 million in 2005 resulting in a decrease of $3.3 million. The period from January 1, 2006 to July 1, 2006 excluded unrecorded contractual interest expense of $47.4 million and 2005 excluded unrecorded contractual interest expense of $95.0 million because we were still in chapter 11 bankruptcy during these periods.
Reorganization Items.  We recognized no costs or benefits in relation to reorganization items in 2007 compared to a benefit of $3,090.3 million in 2006 and a cost of $1,162.1 million in 2005. The primary component of the benefit recognized in 2006 was a gain of $3,110.3 million related to the implementation of our Plan and the application of fresh start accounting. The primary component of the cost recognized in 2005 was a loss of $746.8$1,131.5 million $9.36related to the assignment of basicintercompany claims for the benefit of certain creditors.
Other Income (Expense) — Net.  Other income (expense) — net was a benefit of $4.7 million in 2007 compared to a benefit of $3.9 million in 2006. The increase in 2007 is primarily related to an increase in interest income of $3.3 million. Interest income was recorded as a reduction in reorganization expense before our emergence from bankruptcy. This increase was partially offset by a $1.6 million gain on the sale of real estate in 2006 compared to a loss per common shareon disposition of assets of $.6 million in 2007.
Other income (expense) — net was a benefit of $3.9 million in 2006 compared to a charge of $2.4 million in 2005. The change of $6.3 million is primarily due to a $2.0 million increase in interest income. Interest income was recorded as a reduction in reorganization expense before our emergence from bankruptcy. Also included in 2006 was $1.6 million of gain on sales of real estate.
Provision for Income Taxes.  Our effective tax rate was 44.6% for 2007. The high effective tax rate in 2007 was impacted by several factors including:
• The Company’s equity in income before income taxes of Anglesey is treated as a reduction (increase) in Cost of products sold, excluding depreciation expense. The income tax effects of the Company’s equity in income are included in the tax provision. This resulted in $12.9 million being included in the income tax provision, increasing the effective tax rate by approximately 7%.
• Benefits associated with changes in the valuation allowance established at emergence were first utilized to reduce intangible assets, with any excess being recorded as an adjustment to Stockholders’ equity. This resulted in $62.2 million of benefits not being included in the income tax provision but increasing Stockholders’ equity. This increased the effective tax rate by approximately 34%.
• The impact of unrecognized tax benefits, including interest and penalties, increased the income tax provision by $3.0 million and the effective tax rate by approximately 2%.


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• The foreign currency impact on unrecognized tax benefits, interest and penalties resulted in a $3.8 million currency translation adjustment that was recorded in Accumulated other comprehensive income.
• A favorable geographical distribution of income.
Comparison of the 2007 effective tax rate to the rates in 2006 and 2005 are not useful due to the significant reorganization related benefits and costs recognized in those periods that were not subject to normal income tax treatment. Accordingly, no comparison to prior years is provided.
Income From Discontinued Operations.  Income from discontinued operations for 2006 included a payment from an insurer for certain residual claims relating to the 2000 incident at our Gramercy, Louisiana alumina facility, which was sold in 2004, and a net lossrefund related to certain energy surcharges, which had been pending for a number of $788.3years. These amounts were partially offset by a charge resulting from an agreement between the Bonneville Power Administration and us for a rejected electric power contract (see Note 20 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”). Operating results from discontinued operations for 2005 included the $365.6 million $9.83gain on the sale of basic loss per common shareour interests in and related to QAL and the favorable operating results of our interests in and related to QAL, which were sold as of April 1, 2005.
Cumulative Effect of Accounting Change.  Effective December 31, 2005, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 47, “Accounting for 2003. However, basic income (loss) per common share may not be meaningful, because pursuant toConditional Asset Retirement Obligations” (FIN 47) and recorded a cumulative effect adjustment of $4.7 million, consisting primarily of costs associated with the Kaiser Aluminum Amended Plan, the equity interestsremoval and disposal of the Company’s existing stockholders are expectedasbestos (all of which is believed to be cancelled without consideration.
Net salesfully contained and encapsulated within walls, floors, ceilings or piping) of certain older plants if such plants were to undergo major renovation or be demolished (see Note 1 of Notes to Consolidated Financial Statements included in 2005 totaled $1,089.7 million compared to $942.4 million in 2004Item 8. “Financial Statements and $710.2 million in 2003.Supplementary Data”).
 
2005 as Compared to 2004Segment Information
 
Our continuing operations are organized and managed by product type and include two operating segments and the Corporate segment. The accounting policies of the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”. Segment results are evaluated internally by us before any allocation of Corporate overhead and without any charge for income taxes, interest expense, or Other operating (benefits) charges, net.
Fabricated Aluminum Products.Products
The table below provides selected operational and financial information for our Fabricated Products segment:
                      
     Year Ended December 31, 2006  Predecessor 
     July 1, 2006
   Predecessor
       
  Year Ended
  through
   January 1, 2006
     Year Ended
 
  December 31,
  December 31,
   to
     December 31,
 
  2007  2006   July 1, 2006  Combined  2005 
Shipments (mm lbs)  547.8   249.6    273.5   523.1   481.9 
Average realized third party sales price (per pound) $2.37  $2.27   $2.16  $2.21  $1.95 
Net sales $1,298.3  $567.2   $590.9  $1,158.1  $939.0 
Segment Operating Income $169.0  $60.8   $61.2  $122.0  $87.2 
Net sales of fabricated products increased by 16% during 200512% to $1,298.3 million for 2007 as compared to 20042006, primarily due to a 10%5% increase in shipments and a 7% increase in average realized prices. Shipments of products for aerospace and defense applications were higher in 2007 as compared to 2006, reflecting continued strong demand for such products as well as incremental capacity from two new heat treat plate furnaces at our Trentwood facility in Spokane, Washington which were fully operational for the entire year in 2007. This was partially offset by lower shipments of products for ground transportation and other industrial applications as compared to 2006. The increase


37

in the average realized prices primarily reflects improved value-added pricing and a favorable product mix as well as the pass-through to customers of higher underlying primary aluminum prices.
Overall, we believe the mix of products will continue to benefit from increased heat treat plate shipments in 2008 that will be made possible by incremental capacity from the third heat treat plate furnace and the new stretcher which enables us to produce heavier gauge plate products, both of which were fully operational at December 31, 2007, as well as the final Trentwood capacity expansion phase which is scheduled to be fully operational by the end of 2008. 2007 reflected an overall richer product mix which we expect to continue into 2008. Recent trends in other parts of our business that could affect 2008 include a potential weakening of industrial demand, service center re-stocking of extruded rod and bar inventories which began in late 2007 and reduced vehicle builds in 2008 offset by our participation in new automotive programs and selected export opportunities.
Net sales of fabricated products increased by 23% to $1,158.1 million for 2006 as compared to 2005, primarily due to a 13% increase in average realized prices and a 6%9% increase in shipments. The increase in the average realized prices primarily reflects (in relatively equal proportions) higher conversion prices and higher underlying primary aluminum prices.prices together with a richer product mix. The increase in volume in 2006 was led by Aero/HS and defense-related shipments. Shipments of custom automotive and industrial products and general engineering products were also higher conversion prices are primarily attributable to continuing strength in fabricated aluminum product markets, particularly for2006. The increased aerospace and high strength products,defense-related shipments reflect the strong demand for such products. Additionally, the first new heat treat plate furnace of our $139 million Trentwood expansion project reached full capacity and started producing in fourth quarter of 2006, contributing to increased shipments and a richer product mix in that quarter.
Operating income for 2007 of $169.0 million was $47.0 million higher than 2006. Operating income for 2007 included favorable impacts from heat treat plate of approximately $41.5 million from higher shipments and stronger value added pricing as wellcompared to the prior year. The impact of shipments for ground transportation and other industrial applications to operating income was approximately $2.1 million unfavorable. The results of 2007 also reflect higher planned major maintenance expense and other costs, including energy and research and development as compared to 2006, partially offset by improved general cost performance year over year. Depreciation and amortization in 2007 was approximately $3.4 million lower than 2006, primarily as a result of the application of fresh start accounting partially offset by Construction in progress being placed into production in 2007.
Operating income for 2006 of $122.0 million was $34.8 million higher than for the prior year. Operating income for 2006 included a favorable impact of $33.6 million from higher shipments, favorable mix, stronger value-added pricing and favorable scrap raw material costs as compared to the prior year. Energy costs and cost performance both slightly improved year over year, offset by slightly higher major maintenance. Depreciation and amortization in 2006 was $4.6 million lower than 2005, primarily as a result of the typeadoption of aerospace/high strength productsfresh start accounting.
Operating income for 2007, 2006 and 2005 includes non-run-rate items. Non-run-rate items to us are items that, while they may recur from period to period, are (1) particularly material to results, (2) affect costs primarily as a result of external market factors, and (3) may not recur in future periods if the earlysame level of underlying performance were to occur. Non-run-rate items are part of 2005. Current period shipments were higher than 2004 shipments due primarilyour business and operating environment but are worthy of being highlighted for the benefit of the users of the financial statements. Our intent is to allow users of the aforementioned strengthfinancial statements to consider our results both in aerospacelight of and high strength product demand.separately from fluctuations in underlying metal prices, natural gas prices and currency exchange rates. These items are listed below (in millions of dollars) (Predecessor and Successor periods in 2006 have been combined for the purpose of this discussion):
             
  Year Ended December 31, 
  2007  2006  2005 
 
Metal gains (losses) (before considering LIFO) $(13.1) $20.8  $4.6 
Non-cash LIFO benefit (charges)  14.0   (25.0)  (9.3)
Mark-to-market gains (losses)  1.7   (2.2)  — 
             
Total non-run-rate items $2.6  $(6.4) $(4.7)
             
 
Segment operating results (before Other operating charges, net) for 2005 improved over 2004 by approximately $54.0 million. The improvement consisted of improved sales performance (primarily due to factors cited above) of approximately $64.0 million, offset, by higher operating costs, particularly for natural gas. Higher natural gas prices had a particularly significant impact on the fourth quarter of 2005. Natural gas prices have reduced somewhat during early2007, 2006 but have not yet reached the price level experienced during the first nine months of 2005. Lowerand 2005 charges for legacy pension and retiree medical-related costs (approximately $5.0 million; see Note 9 of Notes to Consolidated Financial Statements) were largely offset by other cost increases versus 2004 including approximately $6.0 million of higher non-cash LIFO inventory charges ($9.0 in 2005 versus $3.2 in 2004). Segment operating results for 2005 and 2004 include gains on intercompany hedging activities with the primary aluminumPrimary Aluminum business unit totaltotaling $19.8 million, $44.6 million and $11.1 million, and $8.6 million, respectively. These amounts eliminate in consolidation.
Segment operating results for 2005, discussed above, exclude deferred contribution savings plan charges of approximately $6.3 million (see Note 6 of Notes to Consolidated Financial Statements).
Primary Aluminum.  Third party net sales of primary aluminum in 2005 increased by approximately 13% as compared to 2004. The increase was almost entirely attributable to the increase in average realized primary aluminum prices.
Segment operating results for 2005 included approximately $32.0 million related to sale of primary aluminum resulting from the Company’s ownership interests in Anglesey offset by (a) losses on intercompany hedging activities with the Fabricated products business unit (which eliminate in consolidation) totaling approximately $11.1 million and (b) approximately $4.1 million of non-cash charges associated with the discontinuance of hedge accounting treatment of derivative instruments as more fully discussed in Notes 2, 12 and 16 of Notes to Consolidated Financial Statements. Primary aluminum hedging transactions with third parties were essentially neutral in 2005. In 2004, segment operating results consisted of approximately $21.0 related to sales of primary aluminum resulting from the Company’s ownership interests in Anglesey and approximately $2.0 million of gains


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fromamounts eliminate in consolidation. Segment operating results exclude defined contribution savings plan charges of approximately $.4 million and $6.3 million for 2006 and 2005, respectively, which are included in Other operating (benefits) charges, net (see Note 14 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”).
Primary Aluminum
The table below provides selected operational and financial information (in millions of dollars except shipments and prices) for our Primary Aluminum segment:
                      
     Year Ended December 31, 2006       
     July 1, 2006
   Predecessor
     Predecessor
 
  Year Ended
  through
   January 1, 2006
     Year Ended
 
  December 31,
  December 31,
   to
     December 31,
 
  2007  2006   July 1, 2006  Combined  2006 
Shipments (mm lbs)  157.2   77.3    77.1   154.4   155.6 
Average realized third party sales price (per pound) $1.31  $1.30   $1.28  $1.29  $.95 
Net sales $206.2  $100.3   $98.9  $199.2  $150.7 
Segment Operating Income $46.5  $10.8   $12.4  $23.2  $16.4 
During 2007, third party net sales of primary aluminum increased 4% compared to 2006. The increase in net sales is primarily due to a 2% increase in shipments and a 2% increase in average realized prices. During 2006, third party net sales of primary aluminum increased 32% compared to 2005. This increase in 2006 was almost entirely attributable to the increases in average realized primary aluminum prices. The net sales and unit prices do not consider the impact of hedging activities offsettransactions.
The following table recaps the major components of segment operating results for the current and prior year periods (in millions of dollars) and the discussion following the table looks at the primary factors leading to such differences. Many of such factors indicated are subject to significant fluctuation from period to period and are largely impacted by items outside management’s control. See Item 1A. “Risk Factors.” (Predecessor and Successor periods in 2006 have been combined for the purpose of this discussion.)
             
  Year Ended December 31, 
  2007  2006  2005 
 
Anglesey operations-related(1)(4) $58.7  $49.4  $32.5 
Internal hedging with Fabricated Products(2)  (19.8)  (44.6)  (11.1)
Derivative settlements — Pound Sterling(3)(4)  10.2   (.1)  (.6)
Derivative settlements — External metal hedging(3)(4)  (10.6)  1.2   (.3)
Market-to-market on derivative instruments(3)  8.0   17.3   (4.1)
             
  $46.5  $23.2  $16.4 
             
(1)Operating income from sales of production from Anglesey is impacted by the market price for primary aluminum and alumina pricing, offset by the impact of foreign currency translation.
(2)Eliminates in consolidation.
(3)Impacted by positions and market prices.
(4)In 2007 we began to track Pound Sterling and external metal hedging derivative settlement gains and losses separately from the Anglesey operations-related income. As such we have conformed the presentation for 2006 and 2005 to that of 2007 to allow for an appropriate comparison of results.
Primary Aluminum segment operating income in 2007 as compared to 2006 was favorably impacted approximately $8.6$14.7 million by improved realized pricing (after considering the impact of hedging transactions), the components of which were (a) $24.8 million of bylower losses on intercompany hedging activities with the


39

Fabricated products business unit (which eliminateProducts segment (these intercompany hedge amounts are eliminated in consolidation), (b) $11.8 million of higher realized losses on external metal derivative transactions, and (c) $1.7 million of favorable impact from the changes in the LME price for primary aluminum on the operations of Anglesey (included in “Angleseyoperations-related” in the table above). Anglesey operations-related results in 2007 also reflected a 20% favorable contractual pricing adjustment for alumina starting in the second quarter of 2007, with a favorable impact of $7.6 million as compared to 2006. Additionally, higher shipments and lower operating costs had a favorable impact of $6.5 million on Anglesey operations-related results. The foreign currency exchange rate (Pound Sterling) caused an adverse impact of $8.0 million to Anglesey operations-related results, which was more than offset by realized hedging gains on Pound Sterling derivative transactions, which was $10.3 million more favorable in 2007 than 2006. Segment operating results for 2007 reflected unrealized mark-to-market gains for metal and currency derivative transactions of $8.0 million compared to $17.3 million for 2006.
In 2008, we anticipate that the Primary Aluminum segment will be adversely impacted by approximately $9 million due to the impact of Pound Sterling exchange rates, reflecting derivative transactions that set a higher effective exchange rate in 2008 than those in place for 2007. Additionally, management believes ocean freight cost increases will have an adverse impact of approximately $7 million in 2008 as compared to 2007.
The improvement in Anglesey-relatedAnglesey operations-related results in 2006 over 2005, versus 2004as well as the offsetting adverse internal hedging results were driven primarily from the improvementby increases in primary aluminum market prices discussed above. The primary aluminum market price driven improvementprices. Beginning in Anglesey-relatedthe second quarter of 2005, the Anglesey operations-related operating results were offsetadversely affected by an approximate 20% increase in contractual alumina costs. Anglesey operations-related operating results were also affected by an approximate 15% contractual increase in Anglesey’s power costs during the fourth quarterin 2006 (an adverse change of 2005 as well as an increase in major maintenance costs incurred in 2005 (over 2004)approximately $5 million compared to 2005). Segment operating results for 2006 reflected unrealized mark-to-market gains for metal and currency derivative transactions of $17.3 million compared to unrealized losses of $4.1 million for 2006.
 
The Company’s future results related to Anglesey will continue to be affected by the higher contractual power rate through the term of the existing power agreement, which ends in 2009, as well as an approximate 20% increase in contractual alumina costs during the remainder of the term of the Company’s existing alumina purchase contract, which extends through 2007. Power and alumina costs, in general, represent approximately two-thirds of Anglesey’s costs and, as such, future results will be adversely affected by these changes. Further, the nuclear plant that supplies Anglesey its power is currently slated for decommissioning in late 2009 or 2010, approximately the same time as when Anglesey’s current power agreement expires.2010. For Anglesey to be able to operatecontinue aluminum reduction past September 2009 the power plant will need to operate pastwhen its current decommissioning date andpower contract expires, Anglesey will have to secure a new or alternative power contract at prices that make its operationaluminum reduction operations viable. No assurancesassurance can be provided that Anglesey will be successful in this regard.
 
CorporateIn addition, given the potential for future shutdown and Other.  Corporate operating expenses represent corporate general and administrative expenses which are not allocated torelated costs, Anglesey temporarily suspended dividends during the Company’s business segments. In 2005, corporate operating expenses were comprisedlast half of approximately $30.0 million of expenses related to ongoing operations and $5.0 million related to retiree medical expenses. In 2004, corporate operating expenses were comprised of approximately $21.0 million of expenses related to ongoing operations and approximately $50.0 million of retiree medical expenses.
The increase in expenses related to ongoing operations in 2005 compared to 2004 was due to an increase in professional expenses associated primarily with the Company’s initiatives to comply with the Sarbanes-Oxley Act of 2002 by December 31, 2006 and emergence-related activity, relocation of the corporate headquarters and transition costs, offset by the fact that key personnel ceased receiving retention payments as of the end of the first quarterhalf of 2007 while it studied future cash requirements. Based on a review of cash anticipated to be available for future cash requirements, Anglesey removed the temporary suspension of dividends and declared and paid dividends in August and December of 2007. We received total dividends of $14.3 million in respect of our 49% ownership interest in 2007. Dividends over the past five years have fluctuated substantially depending on various operational and market factors. During the last five years, cash dividends received were as follows: 2007 — $14.3, 2006 — $11.8, 2005 — $9.0, 2004 pursuant to— $4.5 and 2003 — $4.3. No assurance can be given that Anglesey will not suspend dividends again in the Company’s key employee retention program (see Note 13 of Notes to Consolidated Financial Statements). The decline in retiree-related expenses is primarily attributable to the termination of the Inactive Pension Plan in 2004 and the change in retiree medical payments (see Note 9 of Notes to Consolidated Financial Statements).
Corporate operating results for 2005, discussed above, exclude defined contribution savings plan charges of approximately $.5 million (see Note 6 of Notes to Consolidated Financial Statements).future.
 
Reorganization Items.Corporate and Other  Reorganization items consist primarily of income, expenses (including professional fees) or losses that are realized or incurred by the Company due to its reorganization. Reorganization items increased substantially in 2005 over 2004 as a result a non-cash charge for approximately of $1,131.5 million in the fourth quarter of 2005. As more fully discussed in Note 1 of Notes to Consolidated Financial Statements, the non-cash charge was recognized in connection with the consummation of the Liquidating Plans as the value associated with an intercompany amount owed to KFC by KACC is now for the benefit of certain third party creditors (see “Reorganization Proceedings”).
 
Discontinued Operations.  Discontinued operations in 2005 include the operating results of the Company’s interests in and related to QAL for the first quarter of 2005 and the gain that resulted from the sale of such interests on April 1, 2005. Discontinued operations in 2004 included a full year of operating results attributable to the Company’s interests in and related to QAL, as well as the operating results of the commodity interests (Valco, Mead, Alpart and Gramercy/KJBC) that were sold at various times during 2004.
Income from discontinued operations for 2005 increased approximately $242.0 million over 2004. The primary factor for the improved results was the larger gain on the sale of the QAL-related interests (approximately $366.0 million) in 2005 compared to the gains from the sale of the Company interests in and related to Alpart and the sale of the Mead Facility (approximately $127.0 million) in 2004. The adverse impacts in 2005 of the $42.0 million KBC non-cash contract rejection charge were largely offset by improved operating results in 2005


30

associated with QAL (approximately $12.0 million) and the avoidance of approximately $33.0 million net losses by other commodity-related interests in 2004.
2004 as Compared to 2003
Fabricated Aluminum Products.  Net sales of fabricated products increased by 35% during 2004 as compared to 2003 primarily due to a 23% increase in shipments and a 9% increase in average realized prices. Shipments in 2004 were higher than 2003 shipments as a result of improved demand for most of the Company’s fabricated aluminum products, especially aluminum plate for the general engineering market as well as extrusions and forgings for the automotive market. Demand for the Company’s products in the aerospace and high strength market was also markedly higher in 2004 than in 2003. The increase in the average realized price reflects changes in the mix of products sold, stronger demand, and higher underlying metal prices. Extrusion prices are thought to have recovered from the recessionary lows experienced in 2002 and 2003 but are still below prices experienced during peaks in the business cycle. Plate prices increased to near peak-level pricing in response to strong near-term demand.
Segment operating results (before Other operating charges, net) for 2004 improved over 2003 primarily due to the increased shipment and price levels noted above, improved market conditions and improved cost performance offset, in part, by modestly increased natural gas prices and a $12.1 million non-cash LIFO inventory charge. Operating results for 2003 included increased energy costs, a $3.2 million non-cash LIFO inventory charge, and higher pension related expenses offset, in part, by reductions in overhead and other operating costs as a result of cost cutting initiatives. Segment operating results for 2004 and 2003 include gains (losses) on intercompany hedging activities with the Primary aluminum business unit totaling $8.6 million and $(2.3) million. These amounts eliminate in consolidation.
Segment operating results for 2003, discussed above, exclude a net gain of approximately $3.9 million from the sale of equipment (see Note 6 of Notes to Consolidated Financial Statements).
Primary aluminum.  Third party net sales of primary aluminum increased 18% for 2004 as compared to the same period in 2003 primarily as a result of a 20% increase in third party average realized prices offset by a 1% decrease in third party shipments. The increases in the average realized prices was primarily due to the increases in primary aluminum market prices. Shipments in 2004 were better than comparable prior year primarily due to the timing of shipments.
Segment operating results (before Other Operating charges, net) for 2004 improved over 2003 primarily due to the increases in prices and shipments discussed above. Segment operating results for 2004 and 2003 include gains (losses) on intercompany hedging activities with the Fabricated products business unit totaling $(8.6) million and $2.3 million. These amounts eliminate in consolidation.
Segment operating results discussed above for 2003, exclude a pre-Filing Date claim of approximately $3.2 million related to a restructured transmission agreement and a net gain of approximately $9.5 million from the sale of the Tacoma, Washington smelter (see Note 6 of Notes to Consolidated Financial Statements).
Corporate and Other.Corporate operating expenses represent corporate general and administrative expenses that are not allocated to the Company’sour business segments. In 2004, Corporate operating costs were comprised of approximately $21.2 million of expenses related to ongoing operations and approximately $50.0 million of retiree related expenses. In 2003, exclude Other operating (benefit) charges, net discussed above.
Corporate operating costs consisted of expenses related to ongoing operations of approximately $39.0for 2007 were $1.3 million and $35.0 million of retiree related expenses. The declinehigher than in expenses related to ongoing operations from 2003 to 2004 was primarily attributable to lower2006. Of this increase, salary ($1.0 million), retention ($4.0 million) and incentive compensation ($2.5 million) costsaccruals were $9.6 million higher primarily as a result of better operating results in 2007 as compared to 2006. Included in the increase was an increase of $5.1 million in non-cash charges associated with equity compensation (see NotesNote 11 and 13 of Notes to Consolidated Financial Statements) as well as lower accruals for pension related costs primarily asStatements included in Item 8. “Financial Statements and Supplementary Data”). These increases were partially offset by a result of the December 2003 termination by the PBGC of the Company’s salaried employees pension plan ($2.5 million). The increasereduction in retiree related expensesmedical expense of $1.0 million, a reduction in 2004 from 2003 reflects management’s decision to allocate to the Corporate segment the excessVEBA net periodic benefit income (costs) of post retirement medical$3.2 million and lower costs for outside services related to compliance with the Fabricated products business unit and Discontinued operations for the period May 1, 2004 through December 31, 2004 over the amountSarbanes-Oxley Act of 2002 of $1.1 million. Additionally, in 2006 we incurred approximately $1.3 million related to computer system upgrades compared to $.3 million of such segments allocated share of VEBAcosts in 2007.


3140

 

contributions,Corporate operating expenses for 2006 were $10.0 million higher than in 2005. Incentive compensation accruals were $8.3 million higher in 2006 than in 2005, including a $4.0 million non-cash charge associated with the granting of vested and non-vested shares of our common stock at emergence as more fully discussed in Notes 1 and 10 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data.” Additionally, we incurred $1.9 million of preparation costs related to the Sarbanes-Oxley Act of 2002 and $1.3 million of costs associated with certain computer system upgrades. The remaining change in 2006 primarily reflects lower salary and other costs related to the movement toward a post-emergence structure.
Other Matters
Internal Revenue Service Section 382 Ruling
On May 2, 2007, we received a ruling from the Internal Revenue Service (the “IRS”) relating to the application of Section 382 of the Internal Revenue Code of 1986 (the “Code”) to our federal income tax attributes (the “IRS ruling”).
Section 382 of the Code affects a corporation’s ability to use its federal income tax attributes, including its net operating loss carry-forwards, following a more than 50% change in ownership during any period of 36 consecutive months, all as determined under the Code (an “ownership change”). Under Section 382(l)(5) of the Code, if we were to have an ownership change prior to July 6, 2008 (i.e., within the two-year period following our emergence from chapter 11 bankruptcy on July 6, 2006), our ability to use our federal income tax attributes would be eliminated. However, if we were to have an ownership change on or after July 6, 2008, our ability to use our federal income tax attributes would be limited, but not eliminated. In such circumstances, the amount of post-ownership change annual taxable income that could be offset by pre-ownership change tax attributes would be limited to an amount equal to the product of (a) the aggregate value of our outstanding common shares immediately prior to the ownership change and (b) the applicable federal long-term tax exempt rate in part, by lower pension- related accrualseffect on the date of the ownership change.
In order to reduce the risk that any change in our ownership would jeopardize the preservation of our federal income tax attributes existing upon our emergence from chapter 11 bankruptcy, our certificate of incorporation prohibits certain transfers of our equity securities. More specifically, subject to certain exceptions for transactions that would not impair our federal income tax attributes, our certificate of incorporation prohibits a transfer of our equity securities without the prior approval of our Board of Directors if either (a) the transferor holds 5% or more of the total fair market value of all of our issued and outstanding equity securities (such person, a “5% shareholder”) or (b) as a result of such transfer, either (i) any person or group of persons would become a 5% shareholder or (ii) the December 2003 termination by the PBGCpercentage stock ownership of the Company’s salaried employees pension plan.
Corporate operating results for 2004, discussed above, exclude pension charges of approximately $310.0 million related to terminated pension plans whose responsibility was assumed by the PBGC,any 5% shareholder would be increased (any such transfer, a settlement charge of approximately $175.0 million related to the USWA settlement and settlement charges of approximately $312.5 million related to the termination of the post-retirement medical benefit plans (all of which are included in Other operating charges, net). Corporate operating results for 2003 exclude a pension charge of approximately $121.2 million related to the terminated salaried employees pension plan whose responsibility was assumed by the PBGC, an environmental multi-site settlement charge of $15.7 million and hearing loss claims of $15.8 million (all of which are included in Other operating charges, net)“5% transaction”).
 
AsIn addition, we entered into a stock transfer restriction agreement with the Company completesUnion VEBA, which was our largest shareholder upon our emergence from chapter 11 bankruptcy. Under the dispositionstock transfer restriction agreement, until the restriction release date, subject to exceptions for certain transactions that would not impair our federal income tax attributes, the Union VEBA is prohibited from transferring or otherwise disposing of more than 15% of the commodities intereststotal common shares issued to the Union VEBA pursuant to our Plan during any12-month period without the prior approval of our Board of Directors. Under our Plan, the Union VEBA had rights to receive 11,439,900 common shares upon our emergence from chapter 11 bankruptcy; however, prior to emergence, the Union VEBA sold its right to 2,630,000 of such shares. Under the terms of the stock transfer restriction agreement, the Union VEBA was treated as if it received the full 11,439,900 shares at emergence and prepares for and emergessold 2,630,000 of such shares immediately thereafter.
The stock transfer restriction agreement contemplated that a ruling would be sought from the Cases,IRS that, for purposes of Section 382 of the Company expects there willCode, we could treat the Union VEBA as having received 8,809,900 rather than 11,439,900 common shares pursuant to our plan of reorganization. On May 2, 2007, we received the IRS ruling, which was to that effect. As a result of the IRS ruling, under the stock transfer restriction agreement, the number of common shares that generally may be sold by the Union VEBA during any12-month period was reduced from 1,715,985 to 1,321,485 and the next date on which the Union VEBA could sell common shares without the prior consent of our Board of Directors was January 31, 2009. At the September 2007 meeting of our Board of Directors, the Board approved a substantial declineresolution granting its consent to the sale by the Union VEBA of up to 627,200 common


41

shares. All 627,200 shares were sold by the Union VEBA in Corporatethe fourth quarter of 2007. The next date on which the Union VEBA may sell common shares without the prior consent of our Board of Directors is January 31, 2010.
Preserving our federal income tax attributes affects our ability to issue new common shares because such issuances must be considered in determining whether an ownership change has occurred under Section 382 of the Code. The IRS ruling increased the number of common shares that we can currently issue without potentially impairing our ability to use our federal income tax attributes. As a result of the IRS ruling, we can currently issue approximately 17,400,000 common shares without potentially impairing our ability to use our federal income tax attributes. However, additional sales by the Union VEBA could, and other costs. However, certain5% transactions would, decrease the number of these restructuring activities may have adverse short term cost consequences.common shares we can issue during any 36 month period without impairing our ability to use our federal income tax attributes. Similarly, any issuance of common shares by us would limit the number of shares that could be transferred in 5% transactions (other than sales permitted to be made by the Union VEBA under the stock transfer restriction agreement without the consent of our Board of Directors). If at any time we were to issue the maximum number of common shares that we could possibly issue without potentially impairing our ability to use of our federal income tax attributes, there could be no 5% transactions (other than sales by the Union VEBA permitted under the stock transfer restriction agreement without the consent of our Board of Directors) during the36-month period thereafter.
 
Discontinued Operations.  Discontinued operations include the operating results for Alpart, Gramercy/ KJBC, Valco, QAL and the Mead Facility and gains from the sale of the Company’s interests in and related to these interests (except for the gain on the sale of the Company’s interests in and related to QAL was sold in April 2005). Results for discontinued operations for 2004 improved approximately $636.0 million over 2003. Approximately $460.0 million of such improvement resulted from three non- recurring items: (a) the approximate $126.6 million gain on the sale of the Company’s interests in and related to Alpart and the sale of the Mead Facility; (b) the $368.0 million of impairment charges in respect of the Company’s interests in and related to commodities interests in 2003; and (c) $33.0 million of Valco-related impairment charges in 2004. The balance of the improvement primarily resulted from approximately $132.0 million of improved operating results at Alpart, Gramercy/KJBC and QAL, a substantial majority of which was related to the improvement in average realized alumina prices.
Liquidity and Capital Resources
 
AsSummary
We ended 2007 with $68.7 million of cash and cash equivalents, up from $50.0 million at the end of 2006. Working capital, the excess of current assets over current liabilities, was $289.2 million at the end of 2007, up from $208.5 million at the end of 2006. The increase in working capital is primarily driven by increases in cash, inventories and deferred income tax assets, partially offset by a decrease in current derivative assets; and a decrease in current derivative liabilities primarily as a result of the filingchanging underlying metal prices and foreign currency exchange rates.
Cash equivalents consist primarily of money market accounts and other highly liquid investments with an original maturity of three months or less when purchased. Our liquidity is affected by restricted cash that is pledged as collateral for certain letters of credit or restricted to use for workers’ compensation requirements and other agreements. Short term restricted cash, included in Prepaid expenses and other current assets, totaled $1.5 million and $1.7 million as of December 31, 2007 and 2006, respectively. Long term restricted cash, which was included in Other Assets, was $14.4 million and $23.5 million as of December 31, 2007 and 2006, respectively.


42

Cash Flows
The following table summarizes our cash flow from operating, investing and financing activities for each of the Cases, claims against the Debtors for principal and accrued interest on secured and unsecured indebtedness existing on their Filing Date are stayed while the Debtors continue business operations asdebtors-in-possession, subject to the control and supervisionpast three years (in millions of the Court. See Note 1 of Notes to Consolidated Financial Statements for additional discussion of the Cases.dollars):
                      
     Year Ended December 31, 2006    
         Predecessor
       
     Period from
   Period from
     Predecessor
 
  Year Ended
  July 1, 2006
   January 1, 2006
     Year Ended
 
  December 31,
  to December 31,
   to July 1,
     December 31,
 
  2007  2006   2006  Combined  2005 
Total cash provided by (used in):                     
Operating activities:                     
Fabricated Products $144  $62   $13  $75  $88 
Primary Aluminum  25   (7)   36   29   20 
Corporate and Other  (39)  (36)   (70)  (106)  (108)
Discontinued Operations  —   —    9   9   17 
                      
  $130  $19   $(12) $7  $17 
                      
Investing activities:                     
Fabricated Products  (62)  (30)   (27)  (57)  (30)
Corporate and Other  9   —    —   —   — 
Discontinued Operations  —   —    —   —   401 
                      
  $(53) $(30)  $(27) $(57) $371 
                      
Financing activities:                     
Corporate and Other  (58)  49    1   50   (7)
Discontinued Operations  —   —    —   —   (387)
                      
  $(58) $49   $1  $50  $(394)
                      
 
Operating Activities.Activities
Fabricated Products —In 2005,2007, Fabricated productsProducts operating activities provided approximately $88.0$144 million of cash. This amount compares with 2006 when Fabricated Products operating activities provided approximately $75 million of cash (substantiallyand with 2005 when the Fabricated Products operating activities of the Predecessor provided approximately $88 million of cash. Cash provided in 2007 and 2006 was primarily due to improved operating results offset in part by increased working capital. The increase in working capital in 2007 and 2006 was primarily the result of the impact of higher primary aluminum prices and increased demand for fabricated aluminum products on inventories and accounts receivable. Substantially all of whichthe cash provided in 2005 was generated from operating results; working capital changes were modest).modest.
Primary Aluminum —In 2007, operating activities attributable to our interest in and related to Anglesey provided approximately $25 million in cash. This amount compares with 2004to 2006, when Fabricated products operating activities provided approximately $35.0$29 million of cash (approximately $70.0 million of which was generated from operating results offset by increasesattributable to our interest in working capital of approximately $35.0 million) and 2003 when Fabricated productsrelated to Anglesey. In 2005 the operating activities of the Predecessor provided approximately $30.0$20 million of cash (substantially all of which was generated from operating results; working capital changes were modest). The increases in cash provided by Fabricated Products operating results in 2005 and 2004 were primarily due to improving demand for fabricated aluminum products. The increase in working capital in 2004 reflects the increase in demand as well as the significant increase in primary aluminum prices. In 2003, cost-cutting initiatives offset reduced product prices and shipments so that cash provided by operations approximated that in 2002. The foregoing analysis of fabricated products cash flow excludes consideration of pension and retiree cash payments made by the Company on behalf of current and former employees of the Fabricated products facilities. Such amounts are part of the “legacy” costs that the Company internally categorizes as a corporate cash outflow. See Corporate and other operating activities below.
Cash flows attributable to the Company’sour interests in and related to Primary aluminum business provided approximately $20.0 million, $14.0 million and $12.0 million in 2005, 2004 and 2003, respectively.Anglesey. The increaseincreases in cash flows between 2007 and 2006 and between 2006 and 2005 and 2004 iswere primarily attributable to increases in primary aluminum market prices. Higher primary aluminum prices in 2004 caused the
Corporate and Other —Corporate and Other operating activities used approximately $39 million of cash flows attributable to salesduring 2007. Corporate and Other operating activities (including all “legacy” costs) used approximately $106 million of primary aluminum production from Anglesey to be approximately $2.0 million higher in 2004 than in 2003. The balancecash during 2006. Corporate and Other operating activities of the differences in cash flows between 2004 and 2003 is primarily attributable to timing of shipments, payments and receipts.Predecessor used approximately


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Corporate and other operating activities (including all of the Company’s “legacy” costs) utilized approximately $108.0 million, $150.0 million and $100.0$108 million of cash in 2005, 2004 and 2003, respectively.2005. Cash outflows from Corporatecorporate and other operating activities in 2007, 2006 and 2005 2004 and 2003 included: (a) approximately $37.0 million, $57.0(1) zero, $11 million and $60.0$37 million, respectively, in respect of former employee and retiree medical obligations and VEBAthrough funding for former and current operating units; (b)of the VEBAs; (2) payments for reorganization costs of approximately $39.0$7 million, $35.0$28 million and $27.0$39 million, respectively; and (c)(3) payments in respect of Generalgeneral and Administrativeadministrative costs totaling approximately $29.0$43 million, $26.0$41 million, and $27.0$29 million, respectively. CorporateThe cash outflows in 2007 were offset by approximately $9 million of proceeds from Other operating cash flow in 2003 included asbestos related insurance receipts of approximately $18.0 million.(benefits) charges, net. Cash outflows for Corporate and Other operating activities in 20042006 also included $27.3 millionpayments pursuant to settle certain multi-site environmental claims.our Plan of $25 million.
 
Discontinued Operations —In 2005,2006, Discontinued operationOperations operating activities provided $17.0$9 million of cash. This compares with 2004 and 20032005 when Discontinued operationOperations operating activities of the Predecessor provided $64.0 million and used $29.0$17 million of cash, respectively.cash. Cash provided by Discontinued Operations in 2006 consisted of the proceeds from an $8 million payment from an insurer and a $1 million refund from commodity interests energy vendors. The decrease in cash provided by Discontinued operationsOperations in 20052006 over 20042005 resulted primarily from a decrease in favorable operating results due to the sale of substantially all of the commodity interests between the second half of 2004 and early 2005. The remaining commodity interests were sold as ofon April 1, 2005.
Investing Activities
Fabricated Products —Cash used in investing activities for Fabricated Products was $62 million in 2007. This compares to 2006 when Fabricated Products investing activities used $57 million in cash. Cash used in investing activities for Predecessor Fabricated Products was $30 million in 2005. The increase in cash provided by Discontinued operationsused in 2004 over 2003 resulted from improved operating resultsinvesting activities in 2007 compared to 2006 and 2006 compared to 2005 is primarily due primarily to the improvementhigher capital expenditures at our Trentwood facility in average realized alumina prices.Spokane, WA. Refer to “Capital Expenditures” below for additional information.
 
Investing Activities.Corporate and Other —  Total capital expendituresCash provided in investing activities for Fabricated products were $30.6 million, $7.6 million,Corporate and $8.9Other was $9 million in 2005, 2004 and 2003, respectively. The capital expenditures were made primarily to improve production efficiency, reduce operating costs and expand capacity at existing facilities. Total capital expenditures for Fabricated products are currently expected to be in the $55.0 million to $65.0 million range for 2006 and in the $40.0 million to $50.0 million range for 2007. The higher level of capital spending primarily reflects incremental investments, particularly at the Company’s Spokane, Washington facility. New equipment, furnacesand/or services will enable the Company to supply heavy gauge heat treat stretched plateThis is related to the aerospacerelease of restricted funds that we had on deposit as financial assurance for workers’ compensation claims from the State of Washington.
Financing Activities
Corporate and general engineering markets. The total capital spending for this project is expectedOther —Cash used in 2007 was primarily related to bea $50 million repayment of the term loan and approximately $7 million in the range of $75.0 million. Approximately $17.0 million of such cost was incurred in 2005. The balance will likely be incurredcash dividends paid to shareholders. Cash provided in 2006 was primarily related to drawing upon the $50 million term loan facility subsequent to emergence from chapter 11 bankruptcy. Cash used in 2005 primarily relates to net cash used by Discontinued Operations of approximately $387 million.
Sources of Liquidity
Our most significant sources of liquidity are funds generated by operating activities and 2007,available cash and cash equivalents. We believe funds generated from the expected results of operations, together with the majority of such costs being incurred in 2006. Besides the $75.0 million project at the Spokane, Washington facility, the Company’s remaining capital spending in 2006available cash and 2007cash equivalents will be spread among all manufacturing locations with a significant portion beingsufficient to finance anticipated expansion plans and strategic initiatives for the next fiscal year. In addition, our revolving credit facility is available for additional working capital needs or investment opportunities. There can be no assurance, however, that we will continue to generate cash flows at the Spokaneor above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility. A majority of the remaining capital spending is expected to reduce operating costs, improve product quality or increase capacity. However, no other individual project of significant size has been committed at this time.
 
The levelIn December 2007, we expanded our revolving line of capital expenditures may be adjustedcredit to $265 million. At December 31, 2007, we could borrow approximately $239.6 million under this facility. Under the revolving credit facility, we are able to borrow (or obtain letters of credit) from time to time depending on the Company’s business plans, price outlook for metal and other products, KACC’s ability to maintain adequate liquidity and other factors.
Total capital expenditures for Discontinued operations were $3.5 million and $28.3 million in 2004 and 2003, respectively (of which $1.0 million and $8.9 million were funded by the minority partners in certain foreign joint ventures).
Financing Activities and Liquidity.  On February 11, 2005, the Company and KACC entered into a new financing agreement with a group of lenders under which the Company was provided with a replacement for the existing post-petition credit facility and a commitment for a multi-year exit financing arrangement upon the Debtors’ emergence from the Chapter 11 proceedings. The new financing agreement:
• Replaced the existing post-petition credit facility with a new $200.0 million “DIP Facility” and
• Included a commitment, upon the Debtors’ emergence from the Chapter 11 proceedings, for exit financing in the form of a $200.0 million revolving credit facility (the “Revolving Credit Facility”) and a fully drawn term loan (the “Term Loan”) of up to $50.0 million (collectively referred to as the “Exit Financing”).
On February 1, 2006, the Court approved an amendment to the DIP Facility to extend its expiration date through the earlier of May 11, 2006, the effective date of a plan of reorganization or voluntary termination by the Company. In addition, the Court approved an extension of the cancellation date of the lenders’ commitment for the Exit Financing to May 11, 2006. Under the DIP Facility, which provides for a secured, revolving line of credit, the Company, KACC and certain subsidiaries of KACC are able to borrow amounts by means of revolving credit advances and to have issued letters of credit (up to $60.0 million) in an aggregate amount equal to the lesser of


33

$200.0 $265 million orand a borrowing base comprised of eligible accounts receivable, eligible inventory and certain eligible machinery, equipment and real estate, reduced by certain reserves, all as definedspecified in the DIP Facility agreement. This amount availablerevolving credit facility. The revolving credit facility has a five-year term and matures in July 2011, at which time all principal amounts outstanding thereunder will be due and payable. Borrowings under the DIP Facility shall be reduced by $20.0 million if net borrowing availability falls below $40.0 million. Interest on any outstanding borrowings willrevolving credit facility bear interest at a spread overrate equal to either a base prime rate or LIBOR, at KACC’s option.
our option, plus a specified variable percentage determined by reference to the then remaining borrowing availability under the revolving credit facility. The DIP Facility is currently expectedrevolving credit facility may, subject to expire on May 11, 2006. As discussed in Note 1certain conditions and the agreement of Noteslenders thereunder, be increased up to Consolidated Financial Statements, the Company believes that it is possible it will emerge before the May 11, 2006. However, if the Company does not emerge from the Cases prior to May 11, 2006, it will be necessary for the Company to extend the expiration date of the DIP Facility or make alternative financing arrangements. The Company has begun discussions with the agent bank that represents the DIP Facility lenders regarding the likely need for a short-term extension of the DIP Facility. While the Company believes that, if necessary, it would be successful in negotiating an extension of the DIP Facility or adequate alternative financing arrangements, no assurances can be given in this regard.$275 million.


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Amounts owed under the DIP Facilityrevolving credit facility may be accelerated underupon the occurrence of various circumstances more fully describedevents of default set forth in the DIP Facility agreement, including, but not limited to,without limitation, the failure to make principal or interest payments when due under the DIP Facility,and breaches of certain covenants, representations and warranties set forth in the DIP Facility agreement, and certain events having a material adverse effect on the business, assets, operations or condition of the Company taken as a whole.agreement.
 
The DIP Facilityrevolving credit facility is secured by a first priority lien on substantially all of our assets and the assets of the Company, KACC and KACC’s domesticour US operating subsidiaries and is guaranteed by KACC and all of KACC’s remaining material domestic subsidiaries.
that are also borrowers thereunder. The DIP Facilityrevolving credit facility places restrictions on the Company’s, KACC’s and KACC’s subsidiaries’our ability to, among other things, incur debt, create liens, make investments, pay dividends, sell assets, undertake transactions with affiliates and enter into unrelated lines of business. At January 31, 2008, there were no borrowings outstanding and approximately $12.7 million of outstanding letters of credit under the revolving credit facility.
Capital Expenditures
A component of our long-term strategy is our capital expenditure program including our organic growth initiatives.
We continue to fund our $139 million heat treat plate expansion project at our Trentwood facility in Spokane, Washington, the majority of which is now fully operational. This project significantly increases our heat treat plate production capacity and augments our product offering by increasing the thickness of heat treat stretched plate we can produce for aerospace and defense and general engineering applications. Approximately $112.7 million of spending on this project was incurred through 2007. Much of the capital spending related to the last phase of the heat treat plate project, a $34 million follow-on investment announced in June 2007, will carry over to 2008.
In 2007, we announced a $91 million investment program in our rod, bar and tube value stream including a facility expected to be located in Kalamazoo, Michigan as well as improvements at three existing extrusion and drawing facilities. This investment program is expected to significantly improve the capabilities and efficiencies of our rod and bar and seamless extruded and drawn tube operations and enhance the market position of such products. We expect the facility in Kalamazoo, Michigan to be equipped with two extrusion presses and a remelt operation. Completion of these investments is expected to occur by late 2009. Approximately $7 million of spending on these projects was incurred in 2007. Management estimates that approximately an additional $30 million to $35 million will be incurred in 2008 and the remainder will be incurred in 2009.
In February 2008, we announced $14 million of additional programs that will enhance Kaiser Select® capabilities in our Tulsa, Oklahoma and Sherman, Texas extrusion plants and significantly reduce energy consumption at one of our casting units in our Trentwood facility. We expect the majority of these additional programs to be completed during 2008.
 
The principal termsremainder of the committed Revolving Credit Facility would be essentially the same as or more favorable than the DIP Facility, except that,our capital spending in 2007 was spread among other things, the Revolving Credit Facility would close and be available upon the Debtors’ emergence from the Chapter 11 proceedings and would beall manufacturing locations on projects expected to mature five years from the date of emergence. The Term Loan commitment would be expected to close upon the Debtors’ emergence from the Chapter 11 proceedings and would be expected to mature on May 11, 2010. The agent bank representing the Exit Financing lenders is the same as the agent bank for the DIP Facility lenders and the Company has begun parallel discussions with the agent bank regarding the extension of the expiration date for the Exit Financing commitment in the event the Company does not emerge from the Cases prior to May 11, 2006.reduce operation costs, improve product quality or increase capacity.
 
The DIP Facility replaced a post-petition credit facility (the “Replaced Facility”) that the Company and KACC entered into on February 12, 2002. The Replaced Facility was amended a numberfollowing table presents our capital expenditures, net of times during its term as a result of, among other things, reorganization transactions, including dispositionaccounts payable, for each of the Company’s commodity-related assets.past three fiscal years (in millions of dollars):
 
                  
         Predecessor 
     Year Ended December 31, 2006    
     Period from
   Period from
    
  Year Ended
  July 1, 2006 through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to July 1,
  December 31,
 
  2007  2006   2006  2005 
Heat treat expansion project $41  $26   $22  $18 
Rod, bar and tube value stream investment  7   —    —   — 
Other  17   10    8   13 
Capital expenditures in accounts payable  (3)  (6)   (2)  — 
                  
Total capital expenditures, net of accounts payable $62  $30   $28  $31 
                  
The Company and KACC


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Total capital expenditures for Fabricated Products are currently believe thatexpected to be in the cash$80 million to $90 million range for 2008 and cash equivalents, cash flows from operations and cash available from the DIP Facility will provide sufficient working capital to allow the Company to meet its obligations during the expected pendency of the Cases. At February 28, 2006, there were no outstanding borrowings under the DIP Facility. There were approximately $17.5 million of letters of credit outstanding under the DIP Facility at February 28, 2006.
Commitments and Contingencies.  During the pendency of the Cases, substantially all pending litigation against the Debtors, except that relating to certain environmental matters, is stayed. Generally, claims against a Reorganizing Debtor arising from actions or omissions prior to its Filing Date are expected to be settledfunded using cash from operations. Capital expenditures in 2008 will primarily be comprised of (a) the remainder of the follow-on heat treat plate investment noted above, (b) additional spending related to the $91 million investment program discussed above, and (c) the $14 million of investment programs also noted above. We anticipate the remainder of the 2008 capital spending to be spread among all manufacturing locations on projects expected to reduce operating costs, improve product quality, increase capacity or enhance operational security. We anticipate capital spending in 2009 on currently approved capital projects and maintenance activities to be in the $60 million to $70 million range.
The level of capital expenditures may be adjusted from time to time depending on our business plans, price outlook for fabricated aluminum products, our ability to maintain adequate liquidity and other factors. No assurances can be provided as to the timing or success of any such expenditures.
Debt and Capital
Concurrent with the execution of the revolving credit facility on July 6, 2006 discussed in theSources of Liquiditysection above, we entered into a term loan facility with a group of lenders that provided for a $50 million term loan guaranteed by certain of our domestic operating subsidiaries. The term loan facility was fully drawn on August 4, 2006. The term loan facility had a five-year term expiring in July 2011, at which time all principal amounts outstanding thereunder would be due and payable. Borrowings under the term loan facility bore interest at a rate equal to either a premium over a base prime rate or a premium over LIBOR, at our option. On December 13, 2007, the term loan was paid in full without incurring any pre-payment penalties.
Dividends
In June 2007, our Board of Directors approved the payment of a regular quarterly cash dividend of $.18 per common share. In 2007 we declared and paid a total of approximately $7.4 million, or $.36 per common share, in cash dividends under this program. Additionally, on December 11, 2007, we declared a third dividend of $3.7 million, or $.18 per common share, to stockholders of record at the close of business on January 25, 2008, which was paid on February 15, 2008 bringing the total dividends declared for 2007 to approximately $11.1 million or $0.54 per common share.
Capital Structure
Successor:  On the July 6, 2006 effective date of our Plan, pursuant to the Plan, all equity interests in Kaiser Aluminum Amendedoutstanding immediately prior to such date were cancelled without consideration and issued 20,000,000 new shares of common stock to a third-party disbursing agent for distribution in accordance with our Plan. SeeAs we discussed in Note 119 of Notes to Consolidated Financial Statements for a more complete discussionincluded in Item 8. “Financial Statements and Supplementary Data” and elsewhere in this Report, there are restrictions on the transfer of these matters.our common stock. In addition, under our revolving credit facility, there are restrictions on ability to purchase our common stock and limitations on our ability to pay dividends.
 
The CompanyPredecessor:  Prior to July 6, 2006, effective date of our Plan, MAXXAM Inc. and KACCone of its wholly owned subsidiaries collectively owned approximately 63% of our common stock, with the remaining approximately 37% being publicly held. However, as discussed in Note 19 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”, pursuant to our Plan, all of the pre-emergence equity interests in Kaiser were cancelled without consideration upon our emergence from chapter 11 bankruptcy on July 6, 2006.
Environmental Commitments and Contingencies
We 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. Based on the Company’sour evaluation of these and other environmental matters, the Company haswe have established environmental


34

accruals of $46.5$7.7 million at December 31, 2005.2007. However, the Company believeswe believe that it is reasonably possible that changes in various factors could cause costs associated with these environmental matters to exceed current accruals by amounts that could range,be, in the aggregate, up to an


46

estimated $20.0 million.
The Company has previously disclosed that, during April 2004, KACC was served$15.5 million primarily in connection with a subpoena for documents and has been notified by Federal authorities that they are investigating certain environmental compliance issues with respectour ongoing efforts to KACC’s Trentwood facility inaddress the Statehistorical use 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 requirementsoils containing polychlorinated biphenyls, or PCBs, at the Trentwood facility where we are working with regulatory authorities and intendsperforming studies and remediation pursuant to defendseveral consent orders with the State of Washington.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet and Other Arrangements
Contractual Obligations and Commercial Commitments
We are obligated to make future payments under various contracts such as long-term purchase obligations and lease agreements. We have grouped these contractual obligations into operating activities, investing activities and financing activities in the same manner as they are classified in the Statement of Consolidated Cash Flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information.
The following table provides a summary of our significant contractual obligations at December 31, 2007 (dollars in millions):
                         
        Payments Due by Period 
                 2012 and
 
  Total  2008  2009  2010  2011  Thereafter 
 
Operating activities:                        
Operating leases $10.7   3.8   3.5   2.0   .9   .5 
Purchase obligations(1)  24.8   12.5   1.2   1.2   1.2   8.7 
Deferred revenue arrangements(2)  1.5   1.5   —   —   —   — 
Investing activities:                        
Capital equipment(3)  .4   .4   —   —   —   — 
Financing activities:                        
Dividends to shareholders(4)  3.7   3.7   —   —   —   — 
Other:                        
Standby letters of credit(5)  14.1                     
Uncertain tax liabilities (FIN 48)(6)  26.5                     
                         
Total contractual obligations(7)     $21.9  $4.7  $3.2  $2.1  $9.2 
                         
(1)We have various contracts with suppliers of aluminum that require us to purchase minimum quantities of aluminum in future years at a price to be determined at the time of purchase primarily based on the underlying metal price at that time. Amounts presented in the table exclude such contracts as it is not possible to determine what the cost of the commitments will be at the time of payment. We believe the minimum quantities are lower than our current requirements for aluminum.
(2)See “Obligations for operating activities.”
(3)See “Obligations for investing activities.”
(4)See “Obligations for financing activities.”
(5)This amount represents the total amount committed under standby letters of credit, substantially all of which expire within approximately twelve months. The letters of credit relate primarily to workers’ compensation, environmental and other activities. As the amounts under these letters of credit are contingent on nonpayment to third parties, it is not practical to present annual payment information.
(6)At December 31, 2007, we had uncertain tax positions which ultimately could result in a tax payment. As the amount of ultimate tax payment is contingent on the tax authorities’ assessment, it is not practical to present annual payment information.
(7)Total contractual obligations exclude future annual variable cash contributions to the VEBAs, which cannot be determined at this time. See “Off-Balance Sheet and Other Arrangements” below for a summary of possible annual variable cash contribution amounts at various levels of earnings and cash expenditures.


47

Obligations for operating activities
Cash outlays for operating activities consist primarily of operating leases. Operating leases represent multi-year obligations for certain manufacturing facilities, warehousing , office space and equipment. Deferred revenue arrangements relate to commitment fees received from customers for future delivery of products over the specified contract period. While these obligations are not expected to result in cash payments, they represent contractual obligations for which we would be obligated if the specified product deliveries could not be made. Purchase obligations represent raw-material, energy and other purchase obligations.
Obligations for investing activities
Capital project spending included in the preceding table represents non-cancelable capital commitments as of December 31, 2007. We expect capital projects to be funded through cash from our operations.
Obligations for financing activities
Cash outlays for financing activities consist of dividends to shareholders. In June 2007, our Board of Directors initiated the payment of a regular quarterly cash dividend of $.18 per common share. In 2007 we declared and paid a total of approximately $7.4 million, or $.36 per common share, in cash dividends under this program. On December 11, 2007, the Company declared a third dividend of $3.7 million, or $.18 per common share, to stockholders of record at the close of business on January 25, 2008, which was paid on February 15, 2008.
Off-Balance Sheet and Other Arrangements
We have agreements to supply alumina to and to purchase aluminum from Anglesey. Both the alumina sales agreement and primary aluminum purchase agreement are tied to primary aluminum prices.
Our employee benefit plans include the following:
• We are obligated to make monthly contributions of one dollar per hour worked by each bargaining unit employee to the appropriate multi-employer pension plans sponsored by the USW and International Association of Machinists and certain other unions at six of our production facilities. This obligation came into existence in December 2006 for four of our production facilities upon the termination of four defined benefit plans. The arrangement for the other two locations came into existence during the first quarter of 2005. We currently estimate that contributions will range from $1 million to $3 million per year.
• We have a defined contribution 401(k) savings plan for hourly bargaining unit employees at five of our production facilities. We are required to make contributions to this plan for active bargaining unit employees at these production facilities that will range from $800 to $2,400 per employee per year, depending on the employee’s ageand/or service. This arrangement came into existence in December 2004 for two production facilities upon the termination of one defined benefit plan. The arrangement for the other three locations came into existence during December 2006. We currently estimate that contributions to such plans will range from $1 million to $3 million per year.
• We have a defined benefit plan for our salaried employees at our production facility in London, Ontario with annual contributions based on each salaried employee’s age and years of service.
• We have a defined contribution 401(k) savings plan for salaried and non-bargaining unit hourly employees providing for a match of certain contributions dollar for dollar on the first four percent of compensation made by employees plus an annual contribution of between 2% and 10% of their compensation depending on their age and years of service. All new hires after January 1, 2004 receive a fixed 2% contribution. We currently estimate that contributions to such plan will range from $1 million to $3 million per year.
• We have a non-qualified defined contribution restoration plan for key employees who would otherwise suffer a loss of benefits under our defined contribution 401(k) savings plan as a result of the limitations by the Code.


48

• We have an annual variable cash contribution to the VEBA under agreements reached during our chapter 11 bankruptcy. Under these agreements, the amount to be contributed to the VEBAs will be 10% of the first $20 million of annual cash flow (as defined; but generally, earnings before interest, taxes and depreciation and amortization less cash payments for, among other things, interest, income taxes and capital expenditures), plus 20% of annual cash flow, as defined, in excess of $20 million. Our agreement with the Union VEBA terminates for periods beginning after December 31, 2012. Under these agreements the aggregate annual payments may not exceed $20 million and are also limited (with no carryover to future years) to the extent that the payments would cause our liquidity to be less than $50 million. Such amounts are determined on an annual basis and payable upon the earlier of (a) 120 days following the end of fiscal year, or within 15 days following the date on which we file ourForm 10-K with the SEC (or, if no such report is required to be filed, within 15 days of the delivery of the independent auditor’s opinion of our annual financial statements).
The following table shows (in millions of dollars) the estimated amount of variable VEBA payments that would occur under these agreements at differing levels of earnings before depreciation, interest, income taxes (“EBITDA”) and cash payments in respect of, among other items, interest, income taxes and capital expenditures. The table below does not consider the liquidity limitation and certain other factors that could impact the amount of variable VEBA payments due and, therefore, should be considered only for illustrative purposes.
                 
  Cash Payments for
 
  Capital Expenditures, Income Taxes,
 
  Interest Expense, etc. 
EBITDA
 $25.0  $50.0  $75.0  $100.0 
 
$20.0 $—  $—  $—  $— 
 40.0  1.5   —   —   — 
 60.0  5.0   1.0   —   — 
 80.0  9.0   4.0   .5   — 
100.0  13.0   8.0   3.0   — 
120.0  17.0   12.0   7.0   2.0 
140.0  20.0   16.0   11.0   6.0 
160.0  20.0   20.0   15.0   10.0 
180.0  20.0   20.0   19.0   14.0 
200.0  20.0   20.0   20.0   18.0 
• We have a short term incentive compensation plan for certain members of management payable in cash which is based primarily on earnings, adjusted for certain safety and performance factors. Most of our production facilities have similar programs for both hourly and salaried employees.
• We have a stock-based long-term incentive plan for certain members of management and our directors. As more fully discussed in Note 11 of Notes to Consolidated Financial Statements, included in Item 8, “Financial Statements and Supplementary Data,” an initial, emergence-related award was made under this program in the second half of 2006. Awards were also made in April and June 2007 and additional awards are expected to be made in future years.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance


49

with United States GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1, “Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements,” included in Item 8, “Financial Statements and Supplementary Data.” Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.
Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Application of fresh start accounting.
Upon emergence from chapter 11 bankruptcy, we applied “fresh start” accounting to our consolidated financial statements as required bySOP 90-7. As such, in July 2006, we adjusted stockholders’ equity to equal the reorganization value of the entity at emergence. Additionally, items such as accumulated depreciation, accumulated deficit and accumulated other comprehensive income (loss) were reset to zero. We allocated the reorganization value to our individual assets and liabilities based on their estimated fair value at the emergence date based, in part, on information from a third party appraiser. Such items as current liabilities, accounts receivable and cash reflected values similar to those reported prior to emergence. Items such as inventory, property, plant and equipment, long-term assets and long-term liabilities were significantly adjusted from amounts previously reported. Because fresh start accounting was adopted at emergence and because of the significance of liabilities subject to compromise that were relieved upon emergence, meaningful comparisons between the historical financial statements and the financial statements from and after emergence are difficult to make.We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies.Although we believe that the judgments and estimates discussed herein are reasonable, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be significant.


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Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Our judgments and estimates with respect to commitments and contingencies.
Valuation of legal and other contingent claims is subject to a great deal of judgment and substantial uncertainty. Under United States GAAP, companies are required to accrue for contingent matters in their financial statements only if the amount of any potential loss is both “probable” and the amount (or a range) of possible loss is “estimatable.” In reaching a determination of the probability of an adverse ruling in respect of a matter, we typically consult outside experts. However, any such judgments reached regarding probability are subject to significant uncertainty. We may, in fact, obtain an adverse ruling in a matter that we did not consider a “probable” loss and which, therefore, was not accrued for in our financial statements. Additionally, facts and circumstances in respect of a matter can change causing key assumptions that were used in previous assessments of a matter to change. It is possible that amounts at risk in respect of one matter may be “traded off” against amounts under negotiations in a separate matter.In estimating the amount of any loss, in many instances a single estimation of the loss may not be possible. Rather, we may only be able to estimate a range for possible losses. In such event, United States GAAP requires that a liability be established for at least the minimum end of the range assuming that there is no other amount which is more likely to occur.Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material if different than those reflected in our accruals.
To the extent we prevail in matters for which reserves have been established or are required to pay amounts in excess of our reserves, our future results from operations could be materially affected.


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Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Our judgments and estimates in respect of our employee defined benefit plans.
At December 31, 2007 we had two defined benefit postretirement medical plans (the postretirement medical plans maintained by the VEBAs which we are required to reflect on our financial statements) and a pension plan for our Canadian plant. Liabilities and expenses for pension and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age, and mortality). The most significant assumptions used in determining the estimated year-end obligations were the assumed discount rate, long-term rate of return (“LTRR”) and the assumptions regarding future medical cost increases (See Note 10).Since recorded obligations represent the present value of expected pension and postretirement benefit payments over the life of the plans, decreases in the discount rate (used to compute the present value of the payments) would cause the estimated obligations to increase. Conversely, an increase in the discount rate would cause the estimated present value of the obligations to decline. The LTRR on plan assets reflects an assumption regarding what the amount of earnings would be on existing plan assets (before considering any future contributions to the plans). Increases in the assumed LTRR would cause the projected value of plan assets available to satisfy pension and postretirement obligations to increase, yielding a reduced net expense in respect of these obligations. A reduction in the LTRR would reduce the amount of projected net assets available to satisfy pension and postretirement obligations and, thus, cause the net expense in respect of these obligations to increase. As the assumed rate of increase in medical costs goes up, so does the net projected obligation. Conversely, if the rate of increase was assumed to be smaller, the projected obligation would decline.The rate used to discount future estimated liabilities is determined considering the rates available at year end on debt instruments that could be used to settle the obligations of the plan. A change in the discount rate of 1/4 of 1% would impact the accumulated pension benefit obligations by approximately $.2 million, $1.3 million and $7.0 million in relation the Canadian pension plan, the VEBA that provides benefits for eligible salaried retirees and their surviving spouses and eligible dependents (the “Salaried VEBA”) and the Union VEBA, respectively, and have an immaterial impact to net income in 2008.

The long-term rate of return on plan assets is estimated by considering historical returns and expected returns on current and projected asset allocations. A change in the assumption for the long-term rate of return on plan assets of 1/4 of 1% would impact net income by approximately zero, $.2 million and $.9 million in 2008 in relation to the Canadian pension plan, the Salaried VEBA and the Union VEBA, respectively.

An increase in the health care trend rate of 1/4 of 1% would increase the accumulated benefit obligations of the Union VEBA by approximately $6.7 million and net income by $.6 million in 2008 and a decrease in the health care trend rate of 1/4 of 1% would decrease accumulated benefit obligations of the Union VEBA by approximately $7.0 million and net income by $.5 million in 2008.


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Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Our judgments and estimates in respect to environmental commitments and contingencies.
We are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of such laws and regulations and to claims and litigation based upon such laws and regulations. Based on our evaluation of environmental matters, we have established environmental accruals, primarily related to potential solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent our estimate of costs reasonably expected to be incurred on a going concern basis in the ordinary course of business based on presently enacted laws and regulations, currently available facts, existing technology and our assessment of the likely remediation action to be taken.Making estimates of possible environmental remediation costs is subject to inherent uncertainties. 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.Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material if different than those reflected in our accruals.
To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our future results from operations could be materially affected.
See Note 12 of Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for additional information in respect of environmental contingencies.


53

Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Our judgments and estimates in respect of conditional asset retirement obligations.
We recognize conditional asset retirement obligations (CAROs) related to legal obligations associated with the normal operations of certain of our facilities. These CAROs consist primarily of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, ceilings or piping) of certain of the older facilities if such facilities were to undergo major renovation or be demolished. No plans currently exist for any such renovation or demolition of such facilities and the Company’s current assessment is that the most probable scenarios are that no such CARO would be triggered for 20 or more years, if at all.
Under current accounting guidelines, liabilities and costs for CAROs must be recognized in a company’s financial statements even if it is unclear when or if the CARO will be triggered. If it is unclear when or if a CARO will be triggered, companies are required to use probability weighting for possible timing scenarios to determine the probability weighted amounts that should be recognized in the company’s financial statements.		The estimation of CAROs is subject to a number of inherent uncertainties including: (1) the timing of when any such CARO may be incurred, (2) the ability to accurately identify all materials that may require special handling or treatment, (3) the ability to reasonably estimate the total incremental special handling and other costs, (4) the ability to assess the relative probability of different scenarios which could give rise to a CARO, and (5) other factors outside a company’s control including changes in regulations, costs and interest rates. As such, actual costs and the timing of such costs may vary significantly from the estimates, judgments and probable scenarios we considered, which could, in turn, have a material impact on our future financial statements.Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material if different than those reflected in our accruals.
See Note 5 of Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” for additional information in respect of environmental contingencies.


54

Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Long Lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the assets estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset.Our impairment loss calculations would contain uncertainties because they require management to make assumptions and apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses from impairment charges that could be material.


55

Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Income Tax Provision.
We have substantial tax attributes available to offset the impact of future income taxes. We have a process for determining the need for a valuation allowance with respect to these attributes. The process includes an extensive review of both positive and negative evidence including our earnings history, future earnings, adverse recent occurrences, carry forward periods, an assessment of the industry and the impact of the timing differences. At the conclusion of this process in 2007, we determined we met the “more likely than not” criteria to recognize the vast majority of our tax attributes. The benefit associated with the reduction of the valuation allowance, previously recorded against these tax attributes, was recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. We expect to record a full statutory tax provision in future periods and, therefore, the benefit of any tax attributes realized will only affect future balances sheets and statements of cash flows.
In accordance with United States GAAP, financial statements for interim periods include an income tax provision based on the effective tax rate expected to be incurred in the current year.		Inherent within the completion of our assessment of the need for a valuation allowance, we made significant judgments and estimates with respect to future operating results, timing of the reversal of deferred tax assets and our assessment of current market and industry factors. In order to determine the effective tax rate to apply to interim periods estimates and judgments are made (by taxable jurisdiction) as to the amount of taxable income that may be generated, the availability of deductions and credits expected and the availability of net operating loss carry forwards or other tax attributes to offset taxable income.
Making such estimates and judgments is subject to inherent uncertainties given the difficulty predicting such factors as future market conditions, customer requirements, the cost for key inputs such as energy and primary aluminum, overall operating efficiency and many other items. However, if among other things, (1) actual results vary from our forecasts due to one or more of the factors cited above or elsewhere in this Report, (2) income is distributed differently than expected among tax jurisdictions, (3) one or more material events or transactions occur which were not contemplated, (4) other uncontemplated transactions occur, or (5) certain expected deductions, credits or carry forwards are not be available, it is possible that the effective tax rate for a year could vary materially from the assessments used to prepare the interim consolidated financial statements. See Note 9 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” for additional discussion of these matters.		Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
A change in our effective tax rate by 1% would have had an impact of approximately $1.8 to net income for the year ended December 31, 2007.


56

Potential Effect if Actual Results
DescriptionJudgments and UncertaintiesDiffer From Assumptions
Tax Contingencies.
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”) at emergence. The adoption of FIN 48 did not have a material impact on our financial statements.
In accordance with FIN 48, we use a “more likely than not” threshold for recognition of tax attributes that are subject to uncertainties and measure reserves in respect of such expected benefits based on their probability as prescribed by FIN 48. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved or clarified. We adjust our FIN 48 reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available.		Our FIN 48 reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions.
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new plants or business ventures, the level of earnings and the results of tax audits.		Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement could require use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.
A change in our effective tax rate by 1% would have had an impact of approximately $1.8 to net income for the year ended December 31, 2007.
Predecessor:
Our critical accounting policies after emergence from chapter 11 bankruptcy will, in some cases, be different from those before emergence. Many of the significant judgments affecting our financial statements relate to matters related to chapter 11 bankruptcy proceedings or liabilities that were resolved pursuant to our Plan. Where critical accounting policies before emergence were the same as current policiesand/or no unique circumstances existed, the policies are not repeated below.
1. Predecessor Reporting While in Reorganization.
Our consolidated financial statements as of and for dates and periods prior to July 1, 2006, were prepared on a “going concern” basis in accordance withSOP 90-7 and did not include the impacts of our Plan including adjustments relating to recorded asset amounts, the resolution of liabilities subject to compromise and the cancellation of the interests of our pre-emergence stockholders. Adjustments related to our Plan materially affected the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” as more fully shown in the opening July 1, 2006 balance sheet presented in Note 2 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”.
In addition, during the course of the chapter 11 bankruptcy proceedings, there were material impacts including:
• Additional filing date claims were identified through the proof of claim reconciliation process and arose in connection with actions taken by us in the chapter 11 bankruptcy proceedings. For example, while we considered rejection of the Bonneville Power Administration, or BPA, contract to be in our best long-term interests, the rejection resulted in an approximate $75 million claim by the BPA. In the second quarter of 2006, an agreement with the BPA was approved by the Bankruptcy Court under which the claim was settled for a pre-petition claim of $6.1 million.


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• The amount of pre-filing date claims ultimately allowed by the Bankruptcy Court in respect of contingent claims and benefit obligations was materially different from the amounts reflected in our consolidated financial statements.
• As more fully discussed below, changes in business plans precipitated by the chapter 11 bankruptcy proceedings resulted in significant charges associated with the disposition of assets.
2. Our judgments and estimates with respect to commitments and contingencies.
Valuation of legal and other contingent claims is subject to judgment and substantial uncertainty. Under United States GAAP, companies are required to accrue for contingent matters in their financial statements only if the amount of any potential loss is both “probable” and the amount or range of possible loss is “estimatable.” In reaching a determination of the probability of adverse rulings, we typically consult outside experts. However, any judgments reached regarding probability are subject to significant uncertainty. We may, in fact, obtain an adverse ruling in a matter that it did not consider a “probable” loss and which was not accrued for in our financial statements. Additionally, facts and circumstances causing key assumptions that were used in previous assessments are subject to change. It is possible that amounts at risk in one matter may be “traded off” against amounts under negotiation in a separate matter. Further, in many instances a single estimation of a loss may not be possible. Rather, we may only be able to estimate a range for possible losses. In such event, United States GAAP requires that a liability be established for at least the minimum end of the range assuming that there is no other amount which is more likely to occur.
Prior to our emergence from chapter 11 bankruptcy, we had two potentially material contingent obligations that were subject to significant uncertainty and variability in their outcome: (1) the USW unfair labor practice claim or charges, ifand (2) the net obligation in respect of personal injury-related matters.
As more fully discussed in Note 24 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”, we accrued an amount in the fourth quarter of 2004 for the USW unfair labor practice matter. We did not accrue any should result, vigorously. The Company cannot assess what, if any, impactsamount prior to the fourth quarter of 2004 because we did not consider the loss to be “probable.” Our assessment had been that the possible range of loss in this matter may haveranged from zero to $250 million based on the Company’sproof of claims filed (and other information provided) by the National Labor Relations Board, or KACC’sNLRB, and the USW in connection with our chapter 11 bankruptcy proceedings. While we continued to believe that the unfair labor practice charges were without merit, during January 2004, we agreed to allow a claim in favor of the USW in the amount of the $175 million as a compromise and in return for the USW agreeing to substantially reduce or eliminate certain benefit payments as more fully discussed in Note 24 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”. However, this settlement was not recorded at that time because it was still subject to Bankruptcy Court approval. The settlement was ultimately approved by the Bankruptcy Court in February 2005 and, as a result of the contingency being removed with respect to this item (which arose prior to the December 31, 2004 balance sheet date), a non-cash charge of $175 million was reflected in our consolidated financial statements.statements at December 31, 2004.
 
KACC has beenAlso, as more fully discussed in Note 24 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”, we were one of many defendants in personal injury claims by a large number of lawsuits, some of which involve claims of multiple persons in which the plaintiffs allegewho assert that certain of their injuries were caused by, among other things, exposure to asbestos during, or as a result of, their employment or association with KACC, or exposure to products containing asbestos last produced or sold by KACC. The lawsuits generally relate to products KACC has not sold forus more than 20 years. As of the initial Filing Date, approximately 112,000 asbestos-related claims were pending. The Company hasyears ago. We have also previously disclosed that certain other personal injury claims had been filed in respect of alleged pre-Filing Datepre-filing date exposure to silica and coal tar pitch volatiles (approximately 3,900 claims and 300 claims, respectively).volatiles. Due to the Cases, holders of asbestos, silica and coal tar pitch volatile claims are stayed from continuing to prosecute pending litigation and from commencing newchapter 11 bankruptcy proceedings, existing lawsuits against the Reorganizing Debtors. 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 all such personal injury claims were stayed and new lawsuits could not be commenced against us. Our June 30, 2006 financial statements included a liability for estimated asbestos-related amounts paid prior to its Filing Datecosts of $1,115 million, which represented our estimate of the minimum end of a range of costs. The upper end of our estimate of costs was approximately $2,400 million and as described below, to negotiate insurance settlements and prosecutewe were aware that certain actions to clarify policy interpretationsconstituents had asserted that they believed that actual costs could exceed the top end of our estimated range, by a potentially material amount. No estimation of our liabilities in respect of such coverage. As of December 31, 2005, the Company has established a $1,115.0 million accrual for estimated asbestos, silica and coal tar pitch volatile personal injury claims, before consideration of insurance recoveries. However, the Company believes that substantial recoveries from insurance carriers are probable. Accordingly, as of December 31, 2005, the Company has recorded an estimated aggregate insurance recovery of $965.5 million (determined on the same basis as the asbestos-related cost accrual). 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. See Note 11 for additional discussion of this matter.
During February 2004, KACC reached a settlement in principle in respect of 400 claims, which alleged that certain individuals who were employees of the Company, principally at a facility previously owned and operated by KACC in Louisiana, suffered hearing loss in connection with their employment. Under the terms of the settlement, which is still subject to Court approval, the claimants will be allowed claims totaling $15.8 million. During the Cases, the Company has received approximately 3,200 additional proofs of claim alleging pre-petition injury due to noise induced hearing loss. It is not known at this time how many, if any, of such claims have merit or at what level such claims might qualify within the parameters established by the above-referenced settlement in principle for the 400 claims. Accordingly, the Company cannot presently determine the impact or value of these claims. However, the Company currently expects that all noise induced hearing loss claims will be transferred, along with certain rights against certain insurance policies, to a separate trust along with the settled hearing loss cases discussed above, whether or not such claims are settled prior to the Company’s emergence from the Cases.
Capital Structure.  MAXXAM Inc. and one of its wholly owned subsidiaries collectively own approximately 63% of the Company’s Common Stock, with the remaining approximately 37% of the Company’s Common Stock being publicly held. However, as more fully discussed in Note 1 of Notes to Consolidated Financial Statements, pursuant to the Kaiser Aluminum Amended Plan MAXXAM’s equity interests are expected to be cancelled without considerationoccurred as a part of our Plan. However, given that our Plan was implemented in July 2006, all such obligations in respect of these personal injury claims have been resolved and will not have a plan of reorganization.
Other Matters
Income Tax Matters.  In light of the Cases, the Company has provided valuation allowances for all of its net deferred income tax assets as the Company no longer believes that the “more likely than not” recognition criteria iscontinuing effect on our financial condition after emergence.


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appropriate. A substantial portion orOur June 30, 2006 financial statements included a long-term receivable of $963.3 million for estimated insurance recoveries in respect of personal injury claims. We believed that, prior to the implementation of our Plan, recovery of this amount was probable (if our Plan was not approved) and additional amounts were recoverable in the future if additional liability was ultimately determined to exist. However, we could not provide assurance that all of its tax attributes maysuch amounts would be utilizedcollected. However, as our Plan was implemented in July 2006, the rights to offset any gains that may resultthe proceeds from these policies have been transferred (along with the commodity asset salesand/or cancellation of indebtednessapplicable liabilities) to certain personal injury trusts set up as a part of our Plan and we have no continuing interests in such policies.
3. Our judgments and estimates related to employee benefit plans.
Pension and postretirement medical obligations included in the Company’s reorganization. See Note 8consolidated financial statements at June 30, 2006 and at prior dates were based on assumptions that were subject to variation from year to year. Such variations can cause our estimate of Notessuch obligations to Consolidated Financial Statementsvary significantly. Restructuring actions relating to our exit from most of our commodities businesses also had a significant impact on the amount of these obligations.
For pension obligations, the most significant assumptions used in determining the estimated year-end obligation were the assumed discount rate and LTRR on pension assets. Since recorded pension obligations represent the present value of expected pension payments over the life of the plans, decreases in the discount rate used to compute the present value of the payments cause the estimated obligations to increase. Conversely, an increase in the discount rate would cause the estimated present value of the obligations to decline. The LTRR on pension assets reflected our assumption regarding what the amount of earnings would be on existing plan assets before considering any future contributions to the plans. Increases in the assumed LTRR would cause the projected value of plan assets available to satisfy pension obligations to increase, yielding a reduced net pension obligation. A reduction in the LTRR would reduce the amount of projected net assets available to satisfy pension obligations and, thus, cause the net pension obligation to increase.
For postretirement obligations, the key assumptions used to estimate the year-end obligations were the discount rate and the assumptions regarding future medical costs increases. The discount rate affected the postretirement obligations in a similar fashion to that described above for pension obligations. As the assumed rate of increase in medical costs went up, so did the net projected obligation. Conversely, as the rate of increase was assumed to be smaller, the projected obligation declined.
Since our largest pension plans and the post-retirement medical plans were terminated in 2003 and 2004, the amount of variability in respect of such plans was substantially reduced. However, there were five remaining defined benefit pension plans that were still ongoing pending the resolution of certain litigation with the PBGC. We prevailed in the litigation against the PBGC in August 2006 upholding earlier decisions, and four of these remaining plans were terminated in December 2006 pursuant to an agreement reached with PBGC.
Given that all of our significant benefit plans after the emergence date are defined contribution plans or have limits on the amounts to be paid, our future financial statements will not be subject to the same volatility as our financial statements prior to emergence and the termination of the plans.
4. Our judgments and estimates related to environmental commitments and contingencies.
We are subject to a discussionnumber of environmental laws and regulations, to fines or penalties that may be assessed for alleged breaches of such laws and regulations, and toclean-up obligations and other claims and litigation based upon such laws and regulations. We have in the past been and may in the future be 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, or CERCLA.
Based on our evaluation of these and other income tax matters.environmental matters, we have established environmental accruals, primarily related to investigations and potential remediation of the soil, groundwater and equipment at our current operating facilities that may have been adversely impacted by hazardous materials, including PCBs. These environmental accruals represent our estimate of costs reasonably expected to be incurred on a going concern basis in the ordinary course of business based on presently enacted laws and regulations, currently available facts, existing technology and our assessment of the likely remedial action to be taken. However, making estimates of possible environmental costs is subject to inherent uncertainties. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, actual costs may exceed the current environmental accruals.


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New Accounting Pronouncements
 
The section “New Accounting Pronouncements” from Note 21 of Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” is incorporated herein by reference.
 
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Our operating results are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. As discussed more fully in Note 13 of Notes to Interim Consolidated Financial Statements, we historically have utilized hedging transactions to lock-in a specified price or range of prices for certain products which we sell or consume in our production process and to mitigate our exposure to changes in foreign currency exchange rates.
Critical Accounting PoliciesSensitivity
 
CriticalPrimary Aluminum.  Our share of primary aluminum production from Anglesey is approximately 150 million pounds annually. Because we purchase alumina for Anglesey at prices linked to primary aluminum prices, only a portion of our net revenues associated with Anglesey is exposed to price risk. We estimate the net portion of our share of Anglesey production exposed to primary aluminum price risk to be approximately 100 million pounds annually (before considering income tax effects).
Our pricing of fabricated aluminum products is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to customers. However, in certain instances, we do enter into firm price arrangements. In such instances, we do have price risk on anticipated primary aluminum purchases in respect of the customer orders. Total fabricated products shipments during 2007, the period from January 1, 2006 to July 1, 2006, the period from July 1, 2006 to December 31, 2006 and 2005 for which we had price risk were (in millions of pounds) 239.1, 103.9, 96.0 and 155.0, respectively.
During the last three years, the volume of fabricated products shipments with underlying primary aluminum price risk was at least as much as our net exposure to primary aluminum price risk at Anglesey. As such, we consider our access to Anglesey production overall to be a “natural” hedge against fabricated products firm metal-price risks. However, since the volume of fabricated products shipped under firm prices may not match up on amonth-to-month basis with expected Anglesey-related primary aluminum shipments and to the extent that firm price contracts from our Fabricated Products business unit exceed the Anglesey related primary aluminum shipments, we may use third party hedging instruments to eliminate any net remaining primary aluminum price exposure existing at any time.
At December 31, 2007, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated primary aluminum purchases for the period 2008 through 2012 totaling approximately (in millions of pounds): 2008 — 161; 2009 — 89; 2010 — 86; 2011 — 77 and 2012 — 8.
Foreign Currency.  We from time to time will enter into forward exchange contracts to hedge material exposures for foreign currencies. Our primary foreign exchange exposure is the Anglesey-related commitment that we fund in Pound Sterling. We estimate that, before consideration of any hedging activities, a US $0.01 increase (decrease) in the value of the Pound Sterling results in an approximate $.4 million (decrease) increase in our annual pre-tax operating income.
From time to time in the ordinary course of business, we enter into hedging transactions for Pound Sterling. As of December 31, 2007, we had forward purchase agreements for a total of 4.2 million Pound Sterling for the months of November and December 2008.
Energy.  We are exposed to energy price risk from fluctuating prices for natural gas. We estimate that, before consideration of any hedging activities, each $1.00 change in natural gas prices (per mmbtu) impacts our annual pre-tax operating results by approximately $4.0 million.
We from time to time in the ordinary course of business enter into hedging transactions with major suppliers of energy and energy-related financial investments. As of December 31, 2007, our exposure to increases in natural gas prices had been substantially limited for approximately 87% of natural gas purchases for January 2008 through March 2008, approximately 13% of natural gas purchases for April 2008 through June 2008 and approximately 1% of natural gas purchases for July 2008 through September 2008.


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Item 8.Financial Statements and Supplementary Data
Page
Management’s Report on the Financial Statements and Internal Control Over Financial Reporting
62
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
64
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
65
Consolidated Balance Sheets
66
Statements of Consolidated Income (Loss)
67
Statements of Consolidated Stockholders’ Equity and Comprehensive Income (Loss)
68
Statements of Consolidated Cash Flows
70
Notes to Consolidated Financial Statements
71
Quarterly Financial Data (Unaudited)
119
Five-Year Financial Data
120


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Management’s Report on the Financial Statements
Our management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The financial statements have been prepared in conformity with accounting policies are thoseprinciples generally accepted in the United States of America and necessarily include certain amounts that are both very importantbased on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report onForm 10-K and is responsible for its accuracy and consistency with the financial statements.
The consolidated financial statements have been audited by Deloitte & Touche LLP for the years ended December 31, 2007, the period from July 1, 2006 through December 31, 2006, the period from January 1, 2006 to July 1, 2006 and 2005, an independent registered public accounting firm who conducted their audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firms’ responsibility is to express an opinion as to the portrayalfairness with which such financial statements present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed under the supervision of our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and include those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets;
(2) Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.


62

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2007, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control — Integrated Framework.Based on its assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2007. Based on management’s assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 31, 2007. Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements for the year ended December 31, 2007, included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report onForm 10-K, has issued an audit report on the effectiveness of our internal control over financial reporting.
/s/  Jack A. Hockema/s/  Joseph P. Bellino
President and Chief Executive OfficerExecutive Vice President and Chief Financial Officer
(Principal Executive Officer)(Principal Financial Officer)


63

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of
Kaiser Aluminum Corporation
Foothill Ranch, California
We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006 (Successor Company balance sheets), and the related consolidated statements of income (loss), stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for the year ended December 31, 2007 (Successor Company operations), the period from July 1, 2006 to December 31, 2006 (Successor Company operations), the period from January 1, 2006 to July 1, 2006 (Predecessor Company operations) and for the year ended December 31, 2005 (Predecessor Company operations). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial condition and results, and require management’s most difficult, subjective,and/or complex judgments. Typically, the circumstances that make these judgments difficult, subjectiveand/or complex have to dostatements based on our audits.
We conducted our audits in accordance with the needstandards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to makeobtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates aboutmade by management, as well as evaluating the effect of mattersoverall financial statement presentation. We believe that are inherently uncertain. Whileour audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company believes thatemerged from bankruptcy on July 6, 2006. In connection with its emergence, the Company adopted fresh-start reporting pursuant to American Institute of Certified Public Accountants Statement of Position90-7,Financial Reporting by Entities in Reorganization under the Bankruptcy Code, as of July 1, 2006. As a result, the consolidated financial statements of the Successor Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable.
In our opinion, the Successor Company consolidated financial statements referred to above present fairly, in all aspectsmaterial respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the year ended December 31, 2007 and period from July 1, 2006 to December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company consolidated financial statements should be studiedreferred to above present fairly, in all material respects, and understoodthe results of its operations and its cash flows for the period from January 1, 2006 to July 1, 2006 and for the year ended December 31, 2005, in assessing its current (and expected future) financial condition and results,conformity with accounting principles generally accepted in the Company believes that the accounting policies that warrant additional attention include:United States of America.
 
1.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/  DELOITTE & TOUCHE LLP
Costa Mesa, California
February 25, 2008


64

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kaiser Aluminum Corporation
Foothill Ranch, California
We have audited the internal control over financial reporting of Kaiser Aluminum Corporation and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2005 have been prepared2007, of the Company, and our report dated February 25, 2008, expressed an unqualified opinion on those financial statements.
/s/  DELOITTE & TOUCHE LLP
Costa Mesa, California
February 25, 2008


65

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
         
  December 31,
  December 31,
 
  2007  2006 
  (In millions of dollars, except share amounts) 
 
ASSETS
Current assets:        
Cash and cash equivalents $68.7  $50.0 
Receivables:        
Trade, less allowance for doubtful receivables of $1.4 and $2.0  96.5   98.4 
Due from affiliate  9.5   1.3 
Other  6.3   6.3 
Inventories  207.6   188.1 
Prepaid expenses and other current assets  66.0   40.8 
         
Total current assets  454.6   384.9 
Investments in and advances to unconsolidated affiliate  41.3   18.6 
Property, plant, and equipment — net  222.7   170.3 
Net assets in respect of VEBAs  134.9   40.7 
Deferred tax assets — net  268.6   — 
Other assets  43.1   40.9 
         
Total $1,165.2  $655.4 
         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:        
Accounts payable $70.1  $73.2 
Accrued salaries, wages, and related expenses  40.1   39.4 
Other accrued liabilities  36.6   47.6 
Payable to affiliate  18.6   16.2 
         
Total current liabilities  165.4   176.4 
Long-term liabilities  57.0   58.3 
Long-term debt  —   50.0 
         
   222.4   284.7 
Commitments and contingencies        
Stockholders’ equity:        
Common stock, par value $.01, 45,000,000 shares authorized; 20,580,815 shares issued and outstanding at December 31, 2007; 20,525,660 shares issued and outstanding at December 31, 2006  .2   .2 
Additional capital  948.9   487.5 
Retained earnings  116.1   26.2 
Common stock owned by Union VEBA subject to transfer restrictions, at reorganization value, 4,845,465 shares at December 31, 2007 and 6,291,945 shares at December 31, 2006  (116.4)  (151.1)
Accumulated other comprehensive income  (6.0)  7.9 
         
Total stockholders’ equity  942.8   370.7 
         
Total $1,165.2  $655.4 
         
The accompanying notes to consolidated financial statements are an integral part of these statements.


66

72KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
                  
         Predecessor 
     Year Ended
    
     December 31, 2006    
     July 1, 2006
        
  Year Ended
  through
   January 1,
  Year Ended
 
  December 31,
  December 31,
   2006 to
  December 31,
 
  2007  2006   July 1, 2006  2005 
  (In millions of dollars, except share and per share amounts) 
Net sales $1,504.5  $667.5   $689.8  $1,089.7 
                  
Costs and expenses:                 
Cost of products sold excluding depreciation  1,251.1   580.4    596.4   951.1 
Depreciation and amortization  11.9   5.5    9.8   19.9 
Selling, administrative, research and development, and general  73.1   35.5    30.3   50.9 
Other operating (benefits) charges, net  (13.6)  (2.2)   .9   8.0 
                  
Total costs and expenses  1,322.5   619.2    637.4   1,029.9 
                  
Operating income  182.0   48.3    52.4   59.8 
Other income (expense):                 
Interest expense (excluding unrecorded contractual interest expense of $47.4 for the period from January 1, 2006 to July 1, 2006 and $95.0 in 2005)  (4.3)  (1.1)   (.8)  (5.2)
Reorganization items  —   —    3,090.3   (1,162.1)
Other income (expense) — net  4.7   2.7    1.2   (2.4)
                  
Income (loss) before income taxes and discontinued operations  182.4   49.9    3,143.1   (1,109.9)
Provision for income taxes  (81.4)  (23.7)   (6.2)  (2.8)
                  
Income (loss) from continuing operations  101.0   26.2    3,136.9   (1,112.7)
                  
Discontinued operations:                 
Income (loss) from discontinued operations, net of income taxes, including minority interests  —   —    4.3   (2.5)
Gain from sale of commodity interests  —   —    —   366.2 
                  
Income from discontinued operations  —   —    4.3   363.7 
                  
Cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  —   —    —   (4.7)
                  
Net income (loss) $101.0  $26.2   $3,141.2  $(753.7)
                  
Earnings per share — Basic:                 
Income (loss) from continuing operations $5.05  $1.31   $39.37  $(13.97)
                  
Income from discontinued operations $—  $—   $.05  $4.57 
                  
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations $—  $—   $—  $(.06)
                  
Net income (loss) $5.05  $1.31   $39.42  $(9.46)
                  
Earnings per share — Diluted (same as Basic for Predecessor):                 
Income from continuing operations $4.97  $1.30          
                  
Income from discontinued operations $—  $—          
                  
Net income $4.97  $1.30          
                  
Weighted average shares outstanding (000):                 
Basic  20,014   20,003    79,672   79,675 
                  
Diluted  20,308   20,089    79,672   79,675 
                  
The accompanying notes to consolidated financial statements are an integral part of these statements.


67

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS) — Predecessor
                         
           Common
       
           Stock
       
           Owned by
       
           Union
  Accumulated
    
           VEBA
  Other
    
        Retained
  Subject to
  Comprehensive
    
  Common
  Additional
  Earnings
  Transfer
  Income
    
  Stock  Capital  (Deficit)  Restriction  (Loss)  Total 
  (In millions of dollars) 
 
BALANCE, December 31, 2004 $.8  $538.0  $(2,917.5) $—  $(5.5) $(2,384.2)
Net loss  —   —   (753.7)  —   —   (753.7)
Minimum pension liability adjustment  —   —   —   —   (3.2)  (3.2)
Unrealized net decrease in value of derivative instruments arising during the year  —   —   —   —   (.3)  (.3)
Reclassification adjustment for net realized losses on derivative instruments included in net loss  —   —   —   —   .2   .2 
                         
Comprehensive income (loss)                      (757.0)
                         
BALANCE, December 31, 2005  .8   538.0   (3,671.2)  —   (8.8)  (3,141.2)
                         
Net Income (same as Comprehensive income)  —   —   35.9   —   —   35.9 
                         
BALANCE, June 30, 2006  .8   538.0   (3,635.3)  —   (8.8)  (3,105.3)
Cancellation of Predecessor common stock  (.8)  .8   —   —   —   — 
Issuance of Successor common stock (20,000,000 shares) to creditors  .2   480.2   —   —   —   480.4 
Common stock owned by Union VEBA subject to transfer restrictions, at reorganization value, 6,291,945 shares  —   —   —   (151.1)  —   (151.1)
Plan and fresh start adjustments  —   (538.8)  3,635.3   —   8.8   3,105.3 
                         
BALANCE, July 1, 2006 $.2  $480.2  $—  $(151.1) $—  $329.3 
                         
The accompanying notes to consolidated financial statements are an integral part of these statements.


68

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME — Successor
                             
              Common
       
              Stock
       
              Owned by
       
              Union
       
              VEBA
  Accumulated
    
              Subject to
  Other
    
  Common
  Common
  Additional
  Retained
  Transfer
  Comprehensive
    
  Shares  Stock  Capital  Earnings  Restriction  Income (Loss)  Total 
  (In millions of dollars, except for shares) 
 
BALANCE, July 1, 2006  20,000,000  $.2  $480.2  $—  $(151.1) $—  $329.3 
Net income      —   —   26.2   —   —   26.2 
Benefit plan adjustments not recognized in earnings      —   —   —   —   7.9   7.9 
                             
Comprehensive income                          34.1 
Issuance of common stock to directors in lieu of annual retainer fees  4,273   —   .2   —   —   —   .2 
Recognition of pre-emergence tax benefits in accordance with fresh start accounting      —   3.3   —   —   —   3.3 
Issuance of restricted stock to employees and directors  521,387   —   —   —   —   —   — 
Amortization of unearned equity compensation      —   3.8   —   —   —   3.8 
                             
BALANCE, December 31, 2006  20,525,660   .2   487.5   26.2   (151.1)  7.9   370.7 
                             
Net income      —   —   101.0   —   —   101.0 
Foreign currency translation adjustment      —   —   —   —   (3.7)  (3.7)
Benefit plan adjustments not recognized in earnings      —   —   —   —   (10.2)  (10.2)
                             
Comprehensive income                          87.1 
Removal of transfer restrictions on 1,446,480 shares of common stock owned by Union VEBA, net of income taxes of $9.9      —   48.2   —   34.7   —   82.9 
Recognition of pre-emergence tax benefits in accordance with fresh start accounting (including release of valuation allowance of $343.0 and current year tax benefits of $14.1 and $62.2 for the quarter and year ended December 31, 2007, respectively)      —   404.5   —   —   —   404.5 
Equity compensation recognized by an unconsolidated affiliate      —   .3   —   —   —   .3 
Cancellation of common stock held by employees on vesting of restricted stock  (8,346)  —   (.7)  —   —   —   (.7)
Issuance of common stock to directors in lieu of annual retainer fees  3,877   —   .3   —   —   —   .3 
Issuance of restricted stock to employees and directors  61,662   —   —   —   —   —   — 
Issuance of common stock to employees upon vesting of restricted stock units  1,232   —   —   —   —   —   — 
Cancellation of restricted stock upon forfeiture  (3,270)  —   —   —   —   —   — 
Cash dividends on common stock      —   —   (11.1)  —   —   (11.1)
Amortization of unearned equity compensation (including unearned equity compensation of $2.3 for the quarter ended December 31, 2007)      —   8.8   —   —   —   8.8 
                             
   20,580,815  $.2  $948.9  $116.1  $(116.4) $(6.0) $942.8 
                             
The accompanying notes to consolidated financial statements are an integral part of these statements.


69

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
                  
         Predecessor 
     Year Ended
    
     December 31, 2006    
     July 1,
   January 1,
    
     2006
   2006
    
  Year Ended
  through
   to
  Year Ended
 
  December 31,
  December 31,
   July 1,
  December 31,
 
  2007  2006   2006  2005 
  (In millions of dollars) 
Cash flows from operating activities:                 
Net income (loss) $101.0  $26.2   $3,141.2  $(753.7)
Less net income from discontinued operations  —   —    4.3   363.7 
                  
Net income (loss) from continuing operations, including loss from cumulative effect of adopting change in accounting in 2005  101.0   26.2    3,136.9   (1,117.4)
Adjustments to reconcile net income(loss) from continuing operations to net cash used by continuing operations:                 
Recognition of pre-emergence tax benefits in accordance with fresh start accounting  62.2   3.3    —   — 
Non-cash charges in reorganization items in 2005  —   —    —   1,131.5 
Depreciation and amortization (including deferred financing costs of $2.1, $.3, $.9 and $4.4 , respectively)  14.0   5.7    10.7   24.3 
Deferred income taxes  —   3.0    (.7)  (.4)
Non-cash equity compensation  9.1   4.0    —   — 
Gain on discharge of pre-petition obligations and fresh start adjustments  —   —    (3,110.3)  — 
Payments pursuant to plan of reorganization  —   —    (25.3)  — 
Net non-cash (benefit) charges in other operating (benefits) charges, net and LIFO charges (benefits)  (18.9)  3.3    21.7   9.3 
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  —   —    —   4.7 
(Gains)/losses on sale and disposition of property, plant and equipment  .6   —    (1.6)  (.2)
Equity in (income) loss of unconsolidated affiliates, net of distributions  (22.4)  (7.5)   (10.1)  1.5 
Decrease (increase) in trade and other receivables  (6.3)  14.5    (18.3)  9.3 
Increase in inventories, excluding LIFO adjustments and other non-cash operating items  (5.5)  (19.4)   (29.5)  (18.7)
Decrease (increase) in prepaid expenses and other current assets  33.8   (7.1)   (14.5)  — 
(Decrease) increase in accounts payable  (6.2)  13.1    5.7   (2.5)
(Decrease) increase in other accrued liabilities  (14.8)  (12.7)   4.7   (14.9)
(Decrease) increase in payable to affiliates  2.4   (16.8)   18.2   .1 
(Decrease) increase in accrued income taxes  (1.4)  5.9    .2   (3.9)
Net cash impact of changes in long-term assets and liabilities  (7.8)  (4.6)   (8.0)  (25.0)
Benefit plan adjustments not recognized in earnings  (10.2)  7.9    —   — 
Net cash provided by discontinued operations  —   —    8.5   17.9 
Other  —   —    —   1.3 
                  
Net cash (used) provided by operating activities  129.6   18.8    (11.7)  16.9 
                  
Cash flows from investing activities:                 
Capital expenditures, net of accounts payable of $3.1, $5.8, $1.6 and $0, respectively  (61.8)  (30.0)   (28.1)  (31.0)
Net proceeds from dispositions: real estate in 2006 and 2005  —   —    1.0   .9 
Decrease in restricted cash  9.2   —    —   — 
Net cash provided by discontinued operations; primarily proceeds from sale of commodity interests in 2005  —   —    —   401.4 
                  
Net cash (used) provided by investing activities  (52.6)  (30.0)   (27.1)  371.3 
                  
Cash flows from financing activities:                 
Borrowings under Term Loan Facility  —   50.0    —   — 
Financing costs  (.2)  (.8)   (.2)  (3.7)
Cash dividend paid to shareholders  (7.4)  —    —   — 
Retirement of common stock  (.7)  —    —   — 
Repayment of debt  (50.0)  —    —   (1.7)
Decrease (increase) in restricted cash  —   —    1.5   (1.5)
Net cash used by discontinued operations: primarily increase in restricted cash in 2005  —   —    —   (387.2)
                  
Net cash (used) provided by financing activities  (58.3)  49.2    1.3   (394.1)
                  
Net increase (decrease) in cash and cash equivalents during the period  18.7   38.0    (37.5)  (5.9)
Cash and cash equivalents at beginning of period  50.0   12.0    49 .5   55.4 
                  
Cash and cash equivalents at end of period $68.7  $50.0   $12.0  $49.5 
                  
                  
The accompanying notes to consolidated financial statements are an integral part of these statements.


70

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
The accompanying financial statements include the financial statements of Kaiser Aluminum Corporation (“the Company”) both before and after emergence from chapter 11 bankruptcy. Financial information related to the Company after emergence is generally referred to throughout this Report as “Successor” information. Information of the Company before emergence is generally referred to as “Predecessor” information. The financial information of the Successor entity is not comparable to that of the Predecessor given the impacts of the Plan, implementation of fresh start reporting and other factors as more fully described below.
The Notes to Consolidated Financial Statements are grouped into two categories: (1) those primarily affecting the Successor entity (Notes 1 through 17) and (2) those primarily affecting the Predecessor entity (Notes 18 through 24).
SUCCESSOR
1.  Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation.  The consolidated financial statements include the statements of the Company and its wholly owned subsidiaries. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. The only such affiliate for the periods covered by this report was Anglesey Aluminium Limited (“Anglesey”). Intercompany balances and transactions are eliminated.
The Company’s emergence from chapter 11 bankruptcy and adoption of fresh start accounting resulted in a “going concern” basis in accordance with AICPAnew reporting entity for accounting purposes. Although the Company emerged from chapter 11 bankruptcy on July 6, 2006 (the “Effective Date”), the Company adopted “fresh start” accounting as required by the American Institute of Certified Professional Accountants Statement of PositionPosition 90-7,90-7(“SOP 90-7”),Financial Reporting by Entities in Reorganization Under the Bankruptcy Code(“SOP 90-7”), and do not include possible impacts arising in respect effective as of the Cases.beginning of business on July 1, 2006. As such, it was assumed that the emergence was completed instantaneously at the beginning of business on July 1, 2006 such that all operating activities during the period from July 1, 2006 through December 31, 2006 are reported as applying to the Successor. The Company believes that this is a reasonable presentation as there were no material transactions between July 1, 2006 and July 6, 2006 that were not related to Kaiser’s Second Amended Plan of Reorganization (the “Plan”). Due to the implementation of the Plan, the application of fresh start accounting and changes in accounting policies and procedures, the financial statements of the Successor are not comparable to those of the Predecessor.
The Predecessor Statement of Consolidated Cash Flows for the period January 1, 2006 to July 1, 2006 includes Plan-related payments of $25.3 made between July 1, 2006 and July 6, 2006.
Use of Estimates in the Preparation of Financial Statements.  The preparation of financial statements in accordance with United States Generally Accepted Accounting Principles (“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 included elsewhere in this Report do not include all adjustments relatingstatements; 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 operation.
Recognition of Sales.  Sales are recognized when title, ownership and risk of loss pass to the recoverabilitybuyer and classification of recorded asset amountscollectibility is reasonably assured. A provision for estimated sales returns from and allowances to customers is made in the same period as the related revenues are recognized, based on historical experience or the amount and classificationspecific identification of liabilities or the effect on existing stockholders’ equity that may result from the Kaiser Aluminum Amended Plan, arrangements or other actions arising from the Cases, or the possible inability of the Company to continue in existence. Adjustments necessitatedan event necessitating a reserve.
Earnings per Share.  Basic earnings per share is computed by dividing earnings by the Kaiser Aluminum Amended Plan, arrangements or other actions could materially change the consolidated financial statements included elsewhere in this Report. For example,
a. 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 aweighted average number of specific criteria, then, under GAAP, such assets should be considered heldcommon shares outstanding during the applicable period. The shares owned by a voluntary employee beneficiary association (“VEBA”) for sale/dispositionthe benefit of certain union retirees, their surviving spouses and their recoverability should be evaluated, for each asset, based on expected considerationeligible dependents (the “Union VEBA”) that are subject to be received upon disposition. Sales or dispositions at a particular time will be affected by, among other things, the existing industry and general economic circumstances as well as the Company’s own circumstances, including whether or not assets will (or must) be sold on an accelerated or more extended timetable. Such circumstances may cause the expected value in a sale or disposition scenario to differ materially from the realizable value over the normal operating life of assets, which would likely be evaluated on long-term industry trends.
As previously disclosed,transfer restrictions, while the Company had stated that it was considering the possibility of disposing of one or more of its commodities interests, the Company, through the third quarter of 2003, 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 its interests in and related to Alpart, Gramercy/KJBC and Valco were possible and, therefore, that recoverability should be considered differently as of December 31, 2003 and subsequent periods. As a result of the change in status, the Company recorded impairment charges of approximately $33.0 milliontreated in the first quarter of 2004 and $368.0 million in the fourth quarter of 2003.
b. Additional pre-Filing Date claims may be identified through the proof of claim reconciliation process and may arise in connection with actions taken by the Debtors in the Cases. For example, while the Debtors consider rejection of the Bonneville Power Administration (“BPA”) contract to be in theConsolidated Balance


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Company’s best long-term interests,
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sheets as being similar to treasury stock (i.e., as a reduction in Stockholders’ equity), are included in the computation of basic shares outstanding in the Statement of Consolidated Income because such rejection may increaseshares were irrevocably issued and have full dividend and voting rights.
Diluted earnings per share is computed by dividing earnings by the sum of (a) the weighted average number of common shares outstanding during the period and (b) the dilutive effect of potential common share equivalents consisting of non-vested common shares, restricted stock units and stock options (see Note 15).
Stock-Based Employee Compensation.  The Company accounts for stock-based employee compensation plans at fair value. The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and the number of awards expected to ultimately vest. The cost of the award is recognized as an expense over the period that the employee provides service for the award. The Company has elected to amortize compensation expense for equity awards with grading vesting using the straight line method. During the year ended December 31, 2007 and period from July 1, 2006 through December 31, 2006, $9.1 million and $4.0 of compensation cost, respectively, was recognized in connection with vested and non-vested stock and restricted stock units issued to executive officers, other key employees and directors (see Note 11).
Other Income (Expense), net.  Amounts included in Other income (expense), other than interest expense and reorganization items in 2007, 2006 and 2005, included the following pre-tax gains (losses):
                 
        Predecessor 
     July 1, 2006
  January 1,
    
  Year Ended
  through
  2006
  Year Ended
 
  December 31,  December 31,
  to July 1,
  December 31, 
  2007  2006  2006  2005 
 
Interest income(a) $5.3  $2.0  $—  $— 
All other, net  (.6)  .7   1.2   (2.4)
                 
  $4.7  $2.7  $1.2  $(2.4)
                 
(a)In accordance with S0P90-7, interest income during the pendency of the chapter 11 reorganization proceedings was treated as a reduction of reorganization expense.
Income Taxes.  Deferred income taxes reflect the future tax effect of temporary differences between the carrying amount of assets and liabilities for financial and income tax reporting and are measured by applying statutory tax rates in effect for the year during which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent it is more likely than not that the deferred tax assets will not be realized.
Although the Company had approximately $981 of tax attributes, including the net operating loss (“NOL”) carryforwards, available at December 31, 2006 to offset the impact of future income taxes, the Company did not meet the “more likely than not” criteria for recognition of such attributes at December 31, 2006 primarily because the Company did not have sufficient history of paying taxes. As such, the Company recorded a full valuation allowance against the amount of pre-Filing Date claimstax attributes available and no deferred tax asset was recognized. The benefit associated with any reduction of the valuation allowance was first utilized to reduce intangible assets with any excess being recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. During the fourth quarter of 2007, after the completion of a robust analysis of expected future taxable income and other factors, the Company concluded that it had met the “more likely than not” criteria for recognition of its deferred tax assets and as a result released the vast majority of the valuation allowance as of December 31, 2007. In accordance with fresh start accounting, the release of the valuation allowance was recorded as an adjustment to Stockholders’ equity rather than through the income statement (see Note 9). The Company currently maintains a valuation allowance on deferred tax assets that did not meet the “more likely than not” recognition criteria which are


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
related to state NOL carryforwards and general business credits that the Company believes will more likely than not expire unused.
In accordance withSOP 90-7, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109(“FIN 48”) at emergence. In accordance with FIN 48, the Company uses a “more likely than not” threshold for recognition of tax attributes that are subject to uncertainties and measures any reserves in respect of such expected benefits based on their probability as prescribed by FIN 48.
Cash and Cash Equivalents.  The Company considers only those short-term, highly liquid investments with original maturities of 90 days or less when purchased to be cash equivalents.
Restricted Cash.  The Company is required to keep certain amounts on deposit relating to workers’ compensation, collateral for certain letters of credit and other agreements totaling $15.9 and $25.2 at December 31, 2007 and 2006, respectively. On July 17, 2007, the State of Washington reduced the amount the Company is required to have on deposit with the State by approximately $75.0 million$9.5. The remaining $7.7 on deposit with the State of Washington represents the deposit required to serve as collateral for existing workers’ compensation claims. Of the restricted cash balance at December 31, 2007 and 2006, $1.5 and $1.7, respectively are considered short term and are included in Prepaid expenses and other current assets; $14.4 and $23.5, respectively, are considered long term and are included in Other assets on the balance sheet (see Note 7).
Inventories.  Inventories are stated at the lower of cost or market value. Finished products, work in process and raw material inventories are stated on thelast-in, first-out (“LIFO”) basis. Other inventories, principally operating supplies and repair and maintenance parts, are stated at average cost. Inventory costs consist of material, labor and manufacturing overhead, including depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage, are accounted for as current period charges (see Note 3).
Shipping and Handling Costs.  Shipping and handling costs are recorded as a component of Cost of products sold excluding depreciation.
Advertising Costs.  Advertising costs, which are included in Selling, administrative, research and development, and general, are expensed as incurred. Advertising costs for the year ended December 31, 2007, for the period from July 1, 2006 through December 31, 2006 and the period from January 1, 2006 to July 1, 2006 and for the year ended December 31, 2005 were $.6, $.1, zero and $.2, respectively.
Depreciation.  Depreciation is computed principally using the straight-line method at rates based on the BPA’s proof of claim filed in connection with the Cases in respectestimated useful lives of the contract rejection.various classes of assets. The principal estimated useful lives, are as follows:
Useful Life
(Years)
Land improvements3-7
Buildings15-35
Machinery and equipment2-22
 
c. As more fully discussed below, the amount of pre-Filing Date claims ultimately allowed by the Court in respect of contingent claims and benefit obligations may be materially different from the amounts reflected in the Consolidated Financial Statements.
While valuation of the Company’s assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Company currently believes that its liabilities will be found in the Cases to exceed the fair value of its assets. Therefore, pursuant to the Kaiser Aluminum Amended Plan, it is expected that substantially all pre-Filing Date claims will be paid at less than 100% of their face value and the equity interests of the Company’s stockholders will be cancelled without consideration.
Additionally, uponUpon emergence from reorganization, the Cases, the Company expectsaccumulated depreciation was reset to apply “fresh start”zero as a result of applying fresh start accounting to its consolidated financial statements as required bySOP 90-7. Fresh start accounting is required if: (1) a debtor’s liabilities are determinedThe new lives and carrying values assigned 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 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 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. Becauseapplication of fresh start accounting (see Notes 2 and 6) will cause future depreciation expense to be adopted at emergence, and becausedifferent than the historical depreciation expense of the significancePredecessor. Depreciation expense relating to Fabricated Products is not included in Cost of products sold excluding depreciation and is shown separately on the Statements of Consolidated Income (Loss).
Major Maintenance Activities.  Substantially all of the completed asset sales and liabilities subject to compromise (that will be relieved upon emergence), meaningful comparison betweenmajor maintenance costs are accounted for using the current historical financial statements and the financial statements upon emergence may be difficult to make.
2. The Company’s judgments and estimates with respect to commitments and contingencies, in particular: (a) future personal injury related costs and obligations as well as estimated insurance recoveries, and (b) possible liability in respect of claims of unfair labor practices (“ULPs”) which were not resolved as a part of the Company’s September 2000 labor settlement.
Valuation of legal and other contingent claims is subject to a great deal of judgment and substantial uncertainty. Under GAAP, companies are required to accrue for contingent matters in their financial statements only if the amount of any potential loss is both “probable” and the amount (or a range) of possible loss is “estimatable.” In reaching a determination of the probability of an adverse ruling in respect of a matter, the Company typically consults outside experts. However, any such judgments reached regarding probability are subject to significant uncertainty. The Company may, in fact, obtain an adverse ruling in a matter that it did not consider a “probable” loss and which, therefore, was not accrued for in its financial statements. Additionally, facts and circumstances in respect of a matter can change causing key assumptions that were used in previous assessments of a matter to change. It is possible that amounts at risk in respect of one matter may be “traded off” against amounts under negotiations in a separate matter. Further, in estimating the amount of any loss, in many instances a single estimation of the loss may not be possible. Rather, the Company may only be able to estimate a range of possible losses. In such event, GAAP requires that a liability be established for at least the minimum end of the range assuming that there is no other amount which is more likely to occur.
During the period2002-2005, the Company has had two potentially material contingent obligations that were/are subject to significant uncertainty and variability in their outcome: (a) the United Steelworkers of America’s (“USWA”) ULP claim, and (b) the net obligation in respect of personal injury-related matters. Both of these matters are discussed in Note 11 of Notes to Consolidated Financial Statements.
As more fully discussed in Note 11 of Notes to Consolidated Financial Statements, we accrued an amount in the fourth quarter of 2004 in respect of the USWA ULP matter. We did not accrue any amount prior to thedirect expensing method.


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fourth quarter
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases.  For leases that contain predetermined fixed escalations of 2004the minimum rent, the Company recognizes the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. The Company records any difference between the straight-line rent amounts and the amount payable under the lease as we didpart of deferred rent, in accrued liabilities or Other long term liabilities, as appropriate. Deferred rent for all periods presented was not considermaterial.
Capitalization of Interest.  Interest related to the lossconstruction of qualifying assets is capitalized as part of the construction costs. The aggregate amount of interest capitalized is limited to be “probable.” Our assessment had been that the possible rangeinterest expense incurred in the period.
Deferred Financing Costs.  Costs incurred to obtain debt financing are deferred and amortized over the estimated term of lossthe related borrowing. Such amortization is included in this matter was anywhere from zeroInterest expense. Deferred financing costs included in other assets at December 31, 2007 and 2006 were $.9 and $2.8, respectively.
Foreign Currency.  The Company uses the United States dollar as the functional currency for its foreign operations.
Derivative Financial Instruments.  Hedging transactions using derivative financial instruments are primarily designed to $250.0 million based on the proof of claims filed (and other information provided) by the National Labor Relations Board (“NLRB”) and USWA in connection withmitigate the Company’s and KACC’s reorganization proceedings. Whileexposure to changes in prices for certain of the products which the Company continuessells and consumes and, to believe thata lesser extent, to mitigate the ULP charges were without merit, during January 2004, theCompany’s exposure to changes in foreign currency exchange rates. The Company agreed to allow a claim in favor of the USWA in the amount of $175.0 million as a compromisedoes not utilize derivative financial instruments for trading or other speculative purposes. The Company’s derivative activities are initiated within guidelines established by management and in return for the USWA agreeing to substantially reduceand/or eliminate certain benefit payments as more fully discussed in Note 11 of Notes to Consolidated Financial Statements. However, this settlement was not recorded at that time as it was still subject to Court approval. The settlement was ultimately approved by the Court in February 2005 and, as a resultCompany’s board of the contingency being removed with respect to this item (which arose prior to the December 31, 2004 balance sheet date), a non-cash chargedirectors. Hedging transactions are executed centrally on behalf of $175.0 million was reflected in the Company’s consolidated financial statements at December 31, 2004.
Also, as more fully discussed in Note 11 of Notes to Consolidated Financial Statements, KACC is one of many defendants in personal injury claims by large number of persons who assert that their injuries were caused by, among other things, exposure to asbestos during, or as a result of, their employment or association with KACC or by exposure to products containing asbestos last produced or sold by KACC more than 20 years ago. The Company has also previously disclosed that certain other personal injury claims had been filed in respect of alleged pre-Filing Date exposure to silica and coal tar pitch volatiles. Due to the Cases, existing lawsuits in respect of all such personal injury claims are stayed and new lawsuits cannot be commenced against us or KACC. It is difficult to predict the number of claims that will ultimately be made against KACC or the settlement value of such claims. Our December 31, 2005, balance sheet includes a liability for estimated asbestos-related costs of $1,115.0 million, which represents the Company’s estimate of the minimum end of a range of costs. The upper end of the Company’s estimate of costs is approximately $2,400.0 million and the Company is aware that certain constituents have asserted that they believe that actual costs may exceed the top end of the Company’s estimated range, by perhaps a material amount. As a part of any plan of reorganization it is likely that an estimation of KACC’s entire asbestos-related liability may occur. Any such estimation will likely result from negotiations between the Company and key creditor constituencies or an estimation process overseen by the Court. It is possible that any resulting estimate of KACC’s asbestos-related liability resulting from either process could exceed, perhaps significantly, the liability amounts reflected in the Company’s consolidated financial statements.
We believe KACC has insurance coverage for a substantial portion of such asbestos-related costs. Accordingly, our December 31, 2005 balance sheet includes a long-term receivable for estimated insurance recoveries of $965.5 million. We believe that recovery of this amount is probable and additional amounts may be recoverable in the future if additional liability is ultimately determined to exist. However, we cannot assure you that all such amounts will be collected. The timing and amount of future recoveries from KACC’s insurance carriers will depend on the pendency of the Cases and on the resolution of disputes regarding coverage under the applicable insurance policies. Over the past several years, the Company has received a number of rulings in respect of insurance related litigation that it believes supports the amount reflected on the balance sheet. The trial court may hear additional issues from time to time. Further, depending on the amount of asbestos-related claims ultimately determined to exist, it is possible that the amount of such claims could exceed the amount of additional insurance recoveries available. Additionally, the Company continues to discuss terms for possible settlements with certain insurers that would establish payment obligations of the insurers to the personal injury trusts discussed more fully in Note 1 of Notes to Consolidated Financial Statements. Given uncertainties about the timing of the insurance-related cash flows (as well as the related liability amounts) such amounts, as previously disclosed have been recorded in nominal terms. Settlement amounts may be different from the face amount of the policies, which are stated in nominal terms. Settlement amounts may be affected by, among other things, the present value of possible cash receipts versus the potential obligation of the insurers to pay over time, which could impact the amount of receivables recorded. An example of such possible settlements are the conditional settlements discussed in Note 11 of Notes to Consolidated Financial Statements.


38

Any adjustments ultimately deemed to be required as a result of the reevaluation of KACC’s asbestos-related liabilities or estimated insurance recoveries could have a material impact on the Company’s future financial statements. However, under an agreed term sheet, all of the Company’s personal injury — related obligations together with the benefits of its insurance policiesbusiness segments to minimize transaction costs, monitor consolidated net exposures and certain other consideration areallow for increased responsiveness to be transferred into one or more trusts at emergence.
See Note 11 of Notes to Consolidated Financial Statements for a more complete discussion of these matters.
3. The Company’s judgments and estimates in respect of its employee benefit plans.
Pension and post-retirement medical obligations included in the consolidated balance sheet are based on assumptions that are subject to variation fromyear-to-year. Such variations can cause the Company’s estimate of such obligations to vary significantly. Restructuring actions (such as the indefinite curtailment of the Mead smelter) can also have a significant impact on such amounts.
For pension obligations, the most significant assumptions used in determining the estimated year-end obligation are the assumed discount rate and long-term rate of return (“LTRR”) on pension assets. Since recorded pension obligations represent the present value of expected pension payments over the life of the plans, decreases in the discount rate (used to compute the present value of the payments) will cause the estimated obligations to increase. Conversely, an increase in the discount rate will cause the estimated present value of the obligations to decline. The LTRR on pension assets reflects the Company’s assumption regarding what the amount of earnings will be on existing plan assets (before considering any future contributions to the plans). Increases in the assumed LTRR will cause the projected value of plan assets available to satisfy pension obligations to increase, yielding a reduced net pension obligation. A reduction in the LTRR reduces the amount of projected net assets available to satisfy pension obligations and, thus, causes the net pension obligation to increase.
For post-retirement obligations, the key assumptions used to estimate the year-end obligations are the discount rate and the assumptions regarding future medical cost increases. The discount rate affects the post-retirement obligations in a similar fashion to that described above for pension obligations. As the assumed rate of increase in medical costs goes up, so does the net projected obligation. Conversely, if the rate of increase is assumed to be smaller, the projected obligation will decline.
As more fully discussed in Note 9 of Notes to Consolidated Financial Statements, certain charges have been recorded in 2003 and 2004 in respect of changes in KACC’s pension and post-retirement benefit plans. The PBGC has assumed responsibility for the three largest of the Company’s pension plans. Initially, the Company reflected the effects of these terminations based on the accounting methodologies for continuing plans. This resulted in charges of approximately $121.0 million in 2003 and another $155.0 million in 2004. This methodology was used to record these effects because there were arguments that the ultimate amount of liability could be higher or lower than that resulting from following GAAP for continuing plans, but the ultimate outcome was unknown. Ultimately, in order to advance the Cases, our negotiations with the PBGC resulted in the Company ultimately agreeing to a settlement amount that exceeded the recorded liability by approximately $154.0 million. The settlement was contingent on Court approval. While Court approval was received in January 2005, a charge was reflected in the fourth quarter of 2004 for this settlement as the pension obligations to which the charge related existed at December 31, 2004. Pursuant to the agreement with the PBGC, the Company will continue to sponsor the Company’s remaining pension plans. In addition, as previously disclosed, the Company’s post-retirement medical plans were terminated during 2004 and were replaced with medical coverage through COBRA or the VEBAs. However, definitive, final termination of the previous post-retirement benefit plan was contingent on Court approval of the Intercompany Agreement, which was ultimately received in February 2005. As a result of the removal of the contingency, the Company reflected an approximately $312.5 million charge associated with the termination of the plan at December 31, 2004 as the liability for this existed at the balance sheet date. The amount of the charge relates to amounts previously deferred under GAAP for continuing plans.


39

As more fully discussed in Note 11 of Notes to Consolidated Financial Statements, it is possible that certain remaining defined benefit pension plans could be terminated. If this were to happen, additional settlement charges in the range of $6.0 million to $7.0 million could be recorded, despite the fact that any such terminations would not be expected to have any adverse cash consequences to the Company or KACC.
While the amounts involved with the new/remaining plans are substantially less than the amounts in respect of the terminated plans (and thus subject to a lesser amount of expected volatility in amounts) they are, nonetheless, subject to the same sorts of changes and any such changes could be material to continuing operations. See Note 9 of Notes to Consolidated Financial Statements regarding the Company’s pension and post-retirement obligations.
4. The Company’s judgments and estimates in respect to environmental commitments and contingencies.market factors.
 
The Company KACCrecognizes all derivative instruments as assets or liabilities in its balance sheet and KACC’s subsidiariesmeasures those instruments at fair value by “marking-to-market” all of its hedging positions at each period-end (see Note 13). The Company does not meet the documentation requirements for hedge (deferral) accounting under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS No. 133”). Changes in the market value of the Company’s open derivative positions resulting from the mark-to-market process are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of such laws and regulations, and to claims and litigation based upon such laws and regulations. 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.reflected in Net income.
 
Based on the Company’s evaluation of these and other environmental matters,Conditional Asset Retirement Obligations.  Effective December 31, 2005, the Company has established environmental accruals, primarily related to potential solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent the Company’s estimateadopted FASB Interpretation No. 47 (“FIN 47”),Accounting for Conditional Asset Retirement Obligations, an interpretation of costs (in nominal dollars without discounting) reasonably expected to be incurred on a going concern basis 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. However, making estimates of possible environmental remediation costs is subject to inherent uncertainties. 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.
An example of how environmental accruals could change is provided by the multi-site agreement discussed in Note 11 of Notes to Consolidated Financial Statements. Another example discussed in Note 11 of Notes to Consolidated Financial Statements is the agreements ultimately reached with the parties and approved by the Court in October 2004 pursuant to which KACC resolved certain environment obligations in return for cash payments totaling approximately $27.3 million. As a means of expediting the reorganization process and to assure treatment of the claims under a plan of reorganization that is favorableFASB Statement No. 143 (“SFAS No. 143”)retroactive to the Debtorsbeginning of 2005. Pursuant to SFAS No. 143 and their stakeholders, it may be in the best interests of the stakeholders for the Company to agree to claim amounts in excess of previous accruals, which were based on an ordinary course, going concern basis.
5. The Company’s judgments and estimates in respect of conditional asset retirement obligations
CompaniesFIN 47, companies are required to estimate incremental costs for special handling, removal and disposal costs of materials that may or will give rise to conditional asset retirement obligations (“CAROs”) and then discount the expected costs back to the current year using a credit adjusted risk free rate. Under current accountingthe guidelines clarified in FIN 47, liabilities and costs for CAROs must be recognized in a Company’scompany’s financial statements even if it is unclear when or if the CARO may/will be triggered. If it is unclear when or if a CARO will be triggered, companies are required to use probability weighting for possible timing scenarios to determine the probability weighted amounts that should be recognized in the company’s financial statements. As more fully discussed in Note 2 of Notes to Consolidated Financial Statements, theThe Company has evaluated its exposures to CAROsFIN 47 and determined that it has CAROs at several of its fabricated products facilities. The vast majority of such CAROs consist of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, ceilings or piping) of certain of the older plants if such plants were to undergo major renovation or be demolished. The retroactive application of FIN 47 resulted in the Company recognizing, retroactive to the beginning of 2005, the following in the fourth quarter of 2005: (i) a charge of approximately $2.0 reflecting the cumulative earnings impact of adopting FIN 47, (ii) an increase in Property, plant and equipment of $.5 and (iii) offsetting the amounts in (i) and (ii), an increase in Long-term liabilities of approximately $2.5. In addition, pursuant to FIN 47 there was an immaterial amount of incremental depreciation expense recorded (in Depreciation and amortization) for the year ended December 31, 2005 as a result of the retroactive increase in


74

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, plant and equipment (discussed in (ii) above) and there was an incremental $.2 of non-cash charges (in Cost of products sold) to reflect the accretion of the liability recognized at January 1, 2005 (discussed in (iii) above) to the estimated fair value of the CARO of $2.7 at December 31, 2005.
The Company’s estimates and judgments that affect the probability weighted estimated future contingent cost amounts did not change during the year ended December 31, 2007. However, a revision was made to the estimated timing for certain future contingent costs during the year ended December 31, 2007 which resulted in an incremental charge of approximately $.1 (see Note 5).
Anglesey (see Note 4) also recorded CARO liabilities of approximately $15.0 in its financial statements as of December 31, 2005. During the first quarter of 2007, based on a new surveyor’s report and new environmental related regulations enacted in Wales, Anglesey increased its CARO liability by approximately $9.0. The treatment applied by Anglesey was not consistent with the principles of SFAS No. 143 or FIN 47. Accordingly, the Company adjusted Anglesey’s recording of the CARO to comply with United States GAAP treatment (see Note 5).
New Accounting Pronouncements.  Statement of Accounting Standards No. 141 (revised 2007),Business Combinations(“SFAS No. 141R”) was issued in December 2007. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for the Company in its fiscal year beginning January 1, 2009. The Company is currently evaluating what impact, if any, this pronouncement will have on its consolidated financial statements.
Statement of Accounting Standards No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51(“SFAS No. 160”) was issued in December 31, 2007. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company in fiscal years beginning January 1, 2009. The adoption of SFAS No. 160 is not currently expected to have a material impact on the Company’s consolidated financial statements.
Emerging Issues Task Force issue06-11,Tax benefit on dividend payment Accounting for Income Tax Benefits of Dividends on Share-Based Payment Award,(“Issue06-11”) was issued in June 2007.Issue 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under Statement of Accounting Standards No. 123 (revised 2004),Share-Based Payments (“SFAS No. 123R”) and result in an income tax deduction for the employer. The Task Force reached a consensus that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards (as described in Statement 123(R)). The consensus inIssue 06-11 is effective for the Company for income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning January 1, 2008. The Company is currently evaluating what impact, if any, this pronouncement will have on its consolidated financial statements.


75

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115(“SFAS No. 159”) was issued in February 2007 and will become effective for the Company on January 1, 2008. SFAS No. 159 permits entities the option to measure many financial instruments and certain other items at fair value. Unrealized gains and losses in respect of assets and liabilities for which the fair value option has been elected will be reported in earnings. Selection of the fair value option is irrevocable and can be applied on a partial basis, i.e., to some but not all similar financial assets or liabilities. The Company has determined that it will not elect the fair value option under SFAS No. 159 for any of its financial assets and liabilities for which SFAS No. 159 allowed such an election to be made.
Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS No. 157”) was issued in September 2006 to increase consistency and comparability in fair value measurements and to expand their disclosures. The new standard includes a definition of fair value as well as a framework for measuring fair value. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective with fiscal years beginning after November 15, 2007 and should be applied prospectively, except for certain financial instruments where it must be applied retrospectively as a cumulative-effect adjustment to the balance of opening retained earnings in the year of adoption. In November 2007, the FASB agreed to a one-year deferral of SFAS No. 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The FASB also intends to clarify disclosure requirements about the fair-value measurements of pension plan assets by plan sponsors and will develop additional guidance on how SFAS No. 157 applies to measurements of liabilities. The Company does not currently anticipate that the adoption of this standard will have a material impact on its financial statements.
Significant accounting policies of the Predecessor are discussed in Note 18.
2.  Emergence from Reorganization Proceedings.
Summary.  As more fully discussed in Note 19, from the first quarter of 2002 to June 30, 2006, the Company and 25 of its subsidiaries operated under chapter 11 of the United States Bankruptcy Code (the “Code”) under the supervision of the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).
As also outlined in Note 19, Kaiser and its debtor subsidiaries which included all of the Company’s core fabricated products facilities and a 49% interest in Anglesey which owns a smelter in the United Kingdom, emerged from chapter 11 on Effective Date pursuant to the Plan. Four subsidiaries not related to the Fabricated Products operations were liquidated in December 2005. Pursuant to the Plan, all material pre-petition debt, pension and postretirement medical obligations and asbestos and other tort liabilities, along with other pre-petition claims (which in total aggregated to approximately $4.4 billion in the June 30, 2006 consolidated financial statements) were addressed and resolved. Pursuant to the Plan, the equity interests of all of Kaiser’s pre-emergence stockholders were cancelled without consideration. The equity of the newly emerged Kaiser was issued and delivered to a third-party disbursing agent for distribution to claimholders pursuant to the Plan.
Impacts on the Opening Balance Sheet After Emergence.  As a result of the Company’s emergence from chapter 11, the Company applied “fresh start” accounting to its opening July 2006 consolidated financial statements as required bySOP 90-7. As such, the Company adjusted its stockholders’ equity to equal the reorganization value at the Effective Date. Items such as accumulated depreciation, accumulated deficit and accumulated other comprehensive income (loss) were reset to zero. The Company allocated the reorganization value to its individual assets and liabilities based on their estimated fair value. Items such as current liabilities, accounts receivable, and cash reflected values similar to those reported prior to emergence. Items such as inventory, property, plant and equipment, long-term assets and long-term liabilities were significantly adjusted from amounts previously reported. Because fresh start accounting was applied at emergence and because of the significance of liabilities subject to compromise that were relieved upon emergence, comparisons between the historical financial statements and the financial statements from and after emergence are difficult to make.


76

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following shows the impacts of the Plan and the adoption of fresh start accounting on the opening balance sheet of the new reporting entity.
                 
           Adjusted
 
     Plan
  Fresh Start
  Balance
 
  Historical  Adjustments(a)  Adjustments(b)  Sheet 
 
ASSETS
Current assets:                
Cash and cash equivalents $37.3  $(25.3) $—  $12.0 
Receivables:                
Trade, less allowance for doubtful receivables  114.1   —   .7   114.8 
Other  5.7   —   —   5.7 
Inventories  123.1   —   48.9   172.0 
Prepaid expenses and other current assets  34.0   (.3)  —   33.7 
                 
Total current assets  314.2   (25.6)  49.6   338.2 
Investments in and advances to unconsolidated affiliate  22.7   (.3)  (11.3)  11.1 
Property, plant, and equipment — net  242.7   (4.1)  (98.9)  139.7 
Personal injury-related insurance recoveries receivable  963.3   (963.3)  —   — 
Intangible assets  11.4   (11.7)  12.6   12.3 
Net assets in respect of VEBAs  —   33.2(c)  —   33.2 
Other assets  43.6   2.1   (.8)  44.9 
                 
Total $1,597.9  $(969.7) $(48.8) $579.4 
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities not subject to compromise —                
Current liabilities:                
Accounts payable $56.1  $(.5) $(1.8) $53.8 
Accrued interest  1.1   (1.1)  —   — 
Accrued salaries, wages, and related expenses  37.0   (4.1)  .7   33.6 
Other accrued liabilities  61.0   (1.8)  —   59.2 
Payable to affiliate  33.0   —   —   33.0 
Long-term debt — current portion  1.1   (1.1)  —   — 
Discontinued operations’ current liabilities  1.5   —   —   1.5 
                 
Total current liabilities  190.8   (8.6)  (1.1)  181.1 
Long-term liabilities  49.0   17.5   2.5   69.0 
Long-term debt  1.2   (1.2)  —   — 
Discontinued operations’ liabilities (liabilities subject to compromise)  73.5   (73.5)  —   — 
                 
   314.5   (65.8)  1.4   250.1 
Liabilities subject to compromise  4,388.0   (4,388.0)  —   — 
Minority interests  .7   (.7)  —   — 
Commitments and contingencies Stockholders’ equity:                
Common stock  .8   .2(d)  (.8)  .2 
Additional capital  538.0   480.2(d)  (538.0)  480.2 
Common stock owned by Union VEBA subject to transfer restrictions  —   (151.1)(c)  —   (151.1)
Accumulated deficit  (3,635.3)  3,155.5(e)  479.8(f)  — 
Accumulated other comprehensive income (loss)  (8.8)  —   8.8   — 
                 
Total stockholders’ equity (deficit)  (3,105.3)  3,484.8   (50.2)  329.3 
                 
Total $1,597.9  $(969.7) $(48.8) $579.4 
                 


77

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(a)Reflects impacts on the Effective Date of implementing the Plan, including the settlement of liabilities subject to compromise and related payments, distributions of cash and new shares of common stock and the cancellation of predecessor common stock (see Note 19). Includes the reclassification of approximately $21.0 from Liabilities subject to compromise to Long-term liabilities in respect of certain pension and benefit plans retained by the Company pending the outcome of the litigation with the Pension Benefit Guaranty Corporation (“PBGC”) as more fully discussed in Note 12.
(b)Reflects the adjustments to reflect “fresh start” accounting. These include the write up of Inventories (see Note 3) and Property, plant and equipment to their appraised values and the elimination of Accumulated deficit and Additional paid in capital. The fresh start adjustments for intangible assets and stockholders’ equity are based on a third party appraisal report.
In accordance with United States GAAP, the reorganization value is allocated to individual assets and liabilities by first allocating value to current assets, current liabilities, monetary and similar long-term items for which specific market values are determinable. The remainder is allocated to long-term assets such as property, plant and equipment, equity investments, identified intangibles and unidentified intangibles (e.g. goodwill). To the extent that there is insufficient value to allocate to long-term assets after first allocating to the current, monetary and similar items, such shortfall is first used to reduce unidentified intangibles to zero and then to proportionately reduce the amount allocated to property, plant and equipment, equity investments and identified intangibles based on the initial (pre-reorganization value allocation) assessed fair value. In allocating the reorganization value, the Company determined that the value of the long-term assets exceeded the amount of reorganization value available to be allocated to such items by approximately $187.2. Such excess value was allocated to Property, plant and equipment, Investment in unconsolidated affiliate and Identified intangibles in the following amounts based on initial fair value assessments determined by a third party appraisal:
             
  Appraised Value
 Allocation of
 Opening Balance
  Based on Third
 Reorganization
 Sheet Amount at
  Party Appraisal Value Shortfall July 1, 2006
 
Property, plant and equipment $299.8  $(160.1) $139.7 
Investment in and advances to unconsolidated affiliate $24.0  $(12.9) $11.1 
Identified intangibles $26.5  $(14.2) $12.3 
(c)As more fully discussed in Note 10, after discussions with the staff of the Securities and Exchange Commission, the Company concluded that, while the Company’s only obligations in respect of two VEBAs is an annual variable contribution obligation based primarily on earnings and capital spending, the Company should account for the VEBAs as defined benefit postretirement plans with a cap.
(d)Reflects the issuance of new common stock to pre-petition creditors.
(e)Reflects gain extinguishment of obligations from implementation of the Plan.
(f)Reflects fresh start loss of $47.4 and elimination of retained deficit.


78

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3.  Inventory.
Inventories consist of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Fabricated Products —        
Finished products $68.6  $61.1 
Work in process  76.9   72.8 
Raw materials  49.5   42.0 
Operating supplies and repairs and maintenance parts  12.5   12.1 
         
   207.5   188.0 
Commodities — Primary Aluminum  .1   .1 
         
  $207.6  $188.1 
         
As stated in Note 1, the Company determines cost for substantially all of its product inventories on a LIFO basis. All Predecessor LIFO layers were eliminated in connection with the application of fresh start accounting. The Company applies LIFO differently than the Predecessor did in that it views each quarter on a standalone year-to-date basis for computing LIFO; whereas the Predecessor recorded LIFO amounts with a view to the entire fiscal year which, with certain exceptions, tended to result in LIFO charges being recorded in the fourth quarter or the second half of the year. The Company recorded a net non-cash LIFO benefit of approximately $14.0 during the year ended December 31, 2007, and net non-cash LIFO charges of $3.3, $21.7 and $9.3 for the period from July 1, 2006 through December 31, 2006, the period from January 1, 2006 to July 1, 2006 and the year ended December 31, 2005, respectively. These amounts are primarily a result of changes in metal prices.
Pursuant to fresh start accounting, as more fully discussed in Note 2, all inventory amounts at the Effective Date were stated at fair market value. Raw materials and Operating supplies and repairs and maintenance parts were recorded at published market prices including any location premiums. Finished products and Work in process (“WIP”) were recorded at selling price less cost to sell, cost to complete and a reasonable apportionment of the profit margin associated with the selling and conversion efforts. As a result, as reported in Note 2, inventories were increased by approximately $48.9 at the Effective Date.
Given the recent strength in demand for many types of fabricated aluminum products and primary aluminum, the Company has a larger volume of raw materials, WIP and finished goods than is its long term historical average, and the price for such goods that was reflected in the opening inventory balance at the Effective Date, given the application of fresh start accounting, is higher than long term historical averages. As such, with the inevitable ebb and flow of business cycles, non-cash LIFO charges and potential lower of cost and market adjustments will result when inventory levels dropand/or margins compress. Such adjustments could be material to results in future periods.
4.  Investment In and Advances To Unconsolidated Affiliate.
The Company has a 49% ownership interest in Anglesey, which owns an aluminum smelter at Holyhead, Wales. The Company accounts for its 49% ownership in Anglesey using the equity method. The Company’s equity in income before income taxes of Anglesey is treated as a reduction (increase) in Cost of products sold gross of our share of United Kingdom corporation tax. The income tax effects of the Company’s equity in income are included in the Company’s income tax provision.
The nuclear plant that supplies power to Anglesey is currently slated for decommissioning in late 2010. For Anglesey to be able to continue its aluminum reduction operations past September 2009, when its current power contract expires, Anglesey will have to secure power at prices that make its aluminum reduction operation viable. No assurances can be provided that Anglesey will be successful in this regard. In addition, given the potential for future shutdown and related costs, Anglesey temporarily suspended dividends during the last half of 2006 and the


79

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
first half of 2007 while it studied future cash requirements. Based on a review of cash anticipated to be available for future cash requirements, Anglesey removed the temporary suspension of dividends and paid dividends in both August and December of 2007. Dividends in respect of the Company’s ownership interests totaled $14.3 in 2007 resulting in a reduction of Investment in unconsolidated affiliate. Dividends over the past five years have fluctuated substantially depending on various operational and market factors. During the last five years, cash dividends received were as follows: 2007— $14.3, 2006 — $11.8, 2005 — $9.0, 2004 — $4.5 and 2003 — $4.3. No assurance can be given that Anglesey will not suspend dividends again in the future.
Summary of Anglesey’s Financial Position
         
  December 31,
  December 31,
 
  2007  2006 
 
Current assets(1) $160.0  $111.7 
Non-current assets (primarily property, plant, and equipment, net)  52.0   51.1 
         
Total assets $212.0  $162.8 
         
Current liabilities $81.1  $62.5 
Long-term liabilities  26.2   30.9 
Stockholders’ equity  104.7   69.4 
         
Total liabilities and stockholders’ equity $212.0  $162.8 
         
(1)Includes cash and cash equivalents of $85.2 and $39.0.
Summary of Anglesey’s Operations
                 
        Predecessor 
  
Year Ended December 31, 2006
 
     July 1, 2006
  January 1, 2006
    
  Year Ended
  through
  to
  Year Ended
 
  December 31,  December 31,
  July 1,
  December 31, 
  2007  2006  2006  2005 
 
Net sales $408.7  $198.1  $170.1  $266.2 
Costs and expenses  (319.7)  (155.2)  (132.1)  (243.9)
Provision for income taxes  (26.0)  (12.2)  (11.2)  (6.7)
                 
Net income $63.0  $30.7  $26.8  $15.6 
                 
Company’s equity in income(1) $33.4  $18.3  $11.0  $4.8 
                 
Dividends received $14.3  $9.1  $2.7  $9.0 
                 
(1)The Company’s equity income differs from the summary net income due to equity method accounting adjustments and applying United States GAAP.
Since the Company’s emergence from chapter 11 reorganization, total equity earnings from Anglesey have been $51.7, of which $23.4 of dividends has been distributed, leaving $28.3 in the Company’s retained earnings as of December 31, 2007.
The Company and Anglesey have interrelated operations. The Company is responsible for selling alumina to Anglesey in respect of its ownership percentage. During the first three quarters of 2007, such alumina is purchased at prices that were tied to primary aluminum prices under a contract that expired at the end of the third quarter in 2007. The Company secured a new contract to purchase alumina at comparable prices that expires in August 2009.


80

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is responsible for purchasing primary aluminum from Anglesey in respect to its ownership percentage at prices tied to primary aluminum market prices.
Purchases from and sales to Anglesey were as follows:
                 
     July 1, 2006
  Predecessor 
  Year Ended
  through
  January 1, 2006
  Year Ended
 
  December 31,
  December 31,
  to
  December 31,
 
  2007  2006  July 1, 2006  2005 
 
Purchases $199.3  $95.0  $82.4  $150.4 
Sales  50.2   24.4   24.9   35.1 
At December 31, 2007 and 2006, the receivables from Anglesey were $9.5 and $1.3, respectively, and payables to Anglesey were $18.6 and $16.2, respectively.
As a result of fresh start accounting, the Company decreased its investment in Anglesey at the Effective Date by $11.6 (see Note 2). The $11.6 difference between the Company’s share of Anglesey’s equity and the investment amount reflected in the Company’s balance sheet is being amortized (included in Cost of products sold) over the period from July 2006 to September 2009, the end of the current power contract. The non-cash amortization was approximately $3.6 and $1.8 for the year ended December 31, 2007 and 2006, respectively. At December 31, 2007, the remaining unamortized amount was $6.2.
During the year ended December 31, 2007, the Company recorded a $.3 charge for share-based equity compensation for employees of Anglesey who participate in the employee share savings plan of its parent (“Rio Tinto”). The $.3 has been recognized as a reduction in the equity in earnings of Anglesey for the year ended December 31, 2007. In accordance with Accounting Principles Board Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock, this transaction has been accounted for as a capital transaction of Anglesey. As a result, the Company increased its Additional capital for the year ended December 31, 2007 by $.3 rather than adjust its Investment in and advances to unconsolidated affiliate.
5.  Conditional Asset Retirement Obligations
The Company has conditional asset retirement obligations (“CAROs”) at several of its fabricated products facilities. The vast majority of such CAROs consist of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, ceilings or piping) at certain of the older plants if such plants were to undergo major renovation or be demolished. No plans currently exist for any such renovation or demolition of such facilities and the Company’s current assessment is that the most probable


40

scenarios are that no such significant CARO would be triggered for 20 or more years, if at all. Nonetheless, the retroactive application of FASB Interpretation No. 47 (“FIN 47”),Accounting for Conditional Assets Retirement Obligations, an interpretation of FASB Statement No. 143(“SFAS No. 143”) resulted in the Company has recorded an estimated CAROrecognizing a Long-term liability of approximately $2.7 million$2.5 at December 31, 2005 and such amount will increase substantially over time.2005.
 
The estimationCompany’s estimates and judgments that affect the probability weighted estimated future contingent cost amounts did not change during the year ended December 31, 2007. However, there was a revision to the estimated timing for certain future contingent costs during the year ended December 31, 2007 that resulted in a $.1 charge to Net income. In addition, the Company’s results for the year ended December 31, 2007 and 2006, included an immaterial incremental amount of CAROs is subject to a numberdepreciation expense and an incremental accretion of inherent uncertainties including: (a) the timingestimated liability of when any such$.2 (recorded in Cost of products sold). The estimated fair value of the CARO may be incurred, (b)at December 31, 2007 was $3.0.
Anglesey (see Note 4) also recorded CARO liabilities of approximately $15.0 in its financial statements as of December 31, 2005. During the ability to accurately identify all materials that may require special handling,first quarter of 2007, based on new surveyor’s report and new environmental related regulations enacted in Wales, Anglesey increased its CARO liability by approximately $9.0. The treatment etc. (c)applied by Anglesey was not consistent with the ability to reasonably estimate the total incremental special handling and other costs, (d) the ability to assess the relative probabilityprinciples of different scenarios which could give rise to a CARO, and (e) other factors outside a company’s control including changes in regulations, costs, interest rates, etc. As such, actual costs and the timing of such costs may vary significantly from the estimates, judgments, and probable scenarios considered bySFAS No. 143 or FIN 47. Accordingly, the Company which could, in turn, have a material impact onadjusted Anglesey’s recording of the Company’s future financial statements.CARO to comply with United States GAAP treatment. The Company adjusted its


81

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
 
Contractual ObligationsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equity in earnings for Anglesey for the year ended December 31, 2007, the period from January 1, 2006 to July 1, 2006, from July 1, 2006 through December 31, 2006 and Commercial Commitmentsthe year ended December 31, 2005 by $1.3, $.3, $.3 and $.1, respectively, to reflect the impact of applying United States GAAP with respect to the Anglesey CARO liability.
For purposes of the Company’s fair value estimates with respect to the CARO liabilities, a credit adjusted risk free rate of 7.5% was used.
6.  Property, Plant and Equipment
 
The following summarizesmajor classes of property, plant, and equipment are as follows:
         
  December 31,
  December 31,
 
  2007  2006 
 
Land and improvements $12.9  $12.8 
Buildings  25.2   18.6 
Machinery and equipment  168.7   92.3 
Construction in progress  33.0   51.9 
         
   239.8   175.6 
Accumulated depreciation  (17.1)  (5.3)
         
Property, plant, and equipment, net $222.7  $170.3 
         
Pursuant to fresh start accounting, as more fully discussed in Note 2, the Company adjusted its Property, plant and equipment to its fair value as adjusted for the allocation of the reorganization value and reset Accumulated depreciation to zero. The fair value of the vast majority of the Company’s significant contractual obligationsProperty, plant and equipment was based on an independent appraisal with only a small portion being based on management’s estimates. The fair value of the Property, plant and equipment at July 1, 2006 was estimated to be approximately $300.0. However, as a result of the allocation of the reorganization value, the value at July 1, 2006 was reduced to $139.7 (i.e.the net results of the fresh start process, as reported in Note 2, was a net decrease in Property, plant and equipment of $103.0). The amount of depreciation to be recognized by the Company was initially lower than the amount historically recognized by the Predecessor.
Approximately $20.2 of the Construction in progress at December 31, 2005 (dollars in millions):2007, relates to the Company’s Spokane, Washington facility (seeCommitments— Note 12).
 
                     
     Payments Due in 
     Less Than
  2-3
  4-5
  More Than
 
Contractual Obligations
 Total  1 Year  Years  Years  5 Years 
 
Long-term debt, including capital lease of $.8(a) $2.3  $1.1  $1.2  $—  $— 
Operating leases  7.4   2.6   3.1   1.6   .1 
                     
Total cash contractual obligations $9.7  $3.7  $4.3  $1.6  $.1 
                     
For the year ended December 31, 2007, the period from July 1, 2006 through December 31, 2006, the period from January 1, 2006 to July 1, 2006 and the year ended December 31, 2005, the Company recorded depreciation expense of $11.8, $5.2, $9.7 and $19.6, respectively, relating to the Company’s operating facilities in its Fabricated Products segment.
7.  Supplemental Balance Sheet Information
Prepaid Expenses and Other Current Assets.  Prepaid expenses and other current assets were comprised of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Current derivative assets (Note 13) $1.5  $29.8 
Current deferred tax assets  59.2   — 
Short term restricted cash  1.5   1.7 
Prepaid expenses  3.8   9.3 
         
Total $66.0  $40.8 
         


82

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Assets.  Other assets were comprised of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Derivative assets (Note 13) $27.6  $13.4 
Restricted cash  14.4   23.5 
Other  1.1   4.0 
         
Total $43.1  $40.9 
         
Other Accrued Liabilities.  Other accrued liabilities were comprised of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Current derivative liabilities (Note 13) $6.6  $25.4 
Accrued income taxes, taxes payable and FIN 48 liabilities  2.2   9.8 
Accrued bank overdraft — see below  5.4   2.8 
Dividend payable  3.7   — 
Accrued annual VEBA contribution  8.8   — 
Other  9.9   9.6 
         
Total $36.6  $47.6 
         
The accrued bank overdraft balance at December 31, 2007 and 2006 represents uncleared cash disbursements.
Long-term Liabilities.  Long-term liabilities were comprised of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
FIN 48 liabilities $26.5  $12.5 
Workers’ compensation accruals  17.2   17.4 
Environmental accruals  6.0   6.7 
Derivative liabilities (Note 13)  1.9   5.4 
Asset retirement obligations  3.0   2.9 
Other long term liabilities  2.4   13.4 
         
Total $57.0  $58.3 
         
8.  Secured Debt and Credit Facilities
Secured debt and credit facilities debt consisted of the following:
         
  December 31,
  December 31,
 
  2007  2006 
 
Revolving Credit Facility $—  $— 
Term Loan Facility  —   50.0 
         
Total  —   50.0 
Less — Current portion  —   — 
         
Long-term debt $—  $50.0 
         
On the Effective Date, the Company and certain subsidiaries of the Company entered into a new Senior Secured Revolving Credit Agreement with a group of lenders providing for a $200.0 revolving credit facility (the


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
“Revolving Credit Facility”), of which up to a maximum of $60.0 may be utilized for letters of credit. Under the Revolving Credit Facility, the Company is able to borrow (or obtain letters of credit) from time to time in an aggregate amount equal to the lesser of a stated amount, initially $200.0 and a borrowing base comprised of eligible accounts receivable, eligible inventory and certain eligible machinery, equipment and real estate, reduced by certain reserves, all as specified in the Revolving Credit Facility. The Revolving Credit Facility has a five-year term and matures in July 2011, at which time all principal amounts outstanding thereunder will be due and payable. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base prime rate or LIBOR, at the Company’s option, plus a specified variable percentage determined by reference to the then remaining borrowing availability under the Revolving Credit Facility. The Revolving Credit Facility may, subject to certain conditions and the agreement of lenders thereunder, be increased to $275.0 at the request of the Company. During the fourth quarter of 2007, certain conditions were met and the Company and the lenders amended the Revolving Credit Facility, effective December 10, 2007, to increase the stated amount of the credit facility from $200.0 to $265.0.
Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of various events of default set forth in the agreement, including, without limitation, the failure to make principal or interest payments when due, and breaches of covenants, representations and warranties. The Revolving Credit Facility is secured by a first priority lien on substantially all of the assets of the Company and certain of its U.S. operating subsidiaries that are also borrowers thereunder. The Revolving Credit Facility places restrictions on the ability of the Company and certain of its subsidiaries to, among other things, incur debt, create liens, make investments, pay dividends, sell assets, undertake transactions with affiliates and enter into unrelated lines of business. At December 31, 2007, the Company was in full compliance with all covenants related to the Revolving Credit Facility.
At December 31, 2007, there were no borrowings outstanding under the Revolving Credit Facility and there were approximately $14.1 of outstanding letters of credit.
Concurrent with the execution of the Revolving Credit Facility, the Company also entered into a Term Loan and Guaranty Agreement with a group of lenders (the “Term Loan Facility”). The Term Loan Facility provided for a $50.0 term loan and was guaranteed by the Company and certain of its domestic operating subsidiaries. The Term Loan Facility was fully drawn on August 4, 2006. The Term Loan Facility had a five-year term expiring in July 2011, at which time all principal amounts outstanding thereunder would have been due and payable. Borrowings under the Term Loan Facility bore interest at a rate equal to either a premium over a base prime rate or LIBOR, at the Company’s option. On December 13, 2007, the Company repaid in full the outstanding balance of the Term Loan Facility and the related accrued interest. In connection with the repayment, $1.5 of related deferred financing costs were written off and included in interest expense.
9.  Income Tax Matters
Tax Attributes.  Although the Company had approximately $981 of tax attributes, including the NOL carry-forwards available at December 31, 2006 to offset the impact of future income taxes, the Company did not meet the “more likely than not” criteria for recognition of such attributes primarily because the Company did not have sufficient history of paying taxes. As such, the Company recorded a full valuation allowance against the amount of tax attributes available and no deferred tax asset was recognized. The benefit associated with any reduction of the valuation allowance was first utilized to reduce intangible assets with any excess being recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. In order to assess whether a valuation allowance was still required at December 31, 2007, the Company executed a process for determining the need for a valuation allowance. The process included extensive review of both positive and negative evidence including the Company’s earnings history; existing contracts and backlog; future earnings; adverse recent occurrences; carry forward periods; an assessment of the industry; loss contingencies; and the impact of timing differences. At the conclusion of this process the Company concluded that it had met the “more likely than not” criteria for recognition of its deferred tax assets and thus released the vast majority of the valuation allowance at December 31, 2007. In


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accordance with fresh start accounting, the release of the valuation allowance was taken as an adjustment to Stockholders’ equity rather than through the income statement. The Company maintains a valuation allowance on deferred tax assets that did not meet the “more likely than not” recognition criteria and these assets are primarily state NOL carryforwards that the Company believes will likely expire unused.
At December 31, 2007, the Company had $897.5 of net operating loss carry-forwards available to reduce future cash payments for income taxes in the United States. Of the $897.5 of NOL carryforwards, $1.0 relates to the excess tax benefits from employee restricted stock. Equity will be increased by $1.0 if and when such excess tax benefits are ultimately realized. Such NOL carryfowards expire periodically through 2027. The Company also had $90.1 of other tax attributes including $88.4 of gross alternative minimum tax (“AMT”) credit carry-forwards with an indefinite life, available to offset regular federal income tax requirements. The remainder is general business credits that will expire periodically through 2011.
Pursuant to the Plan, to preserve the NOL carryforwards that may be available to the Company after emergence, on the Effective Date, the Company’s certificate of incorporation was amended and restated to, among other things, include certain restrictions on the transfer of common stock and the Company and the Union VEBA, the Company’s largest stockholder, entered into a stock transfer restriction agreement.
Tax Provision.  Income (loss) before income taxes and minority interests by geographic area (excluding discontinued operations and cumulative effect of change in accounting principle) is as follows:
                 
        Predecessor 
     July 1, 2006
       
  Year Ended
  through
  January 1,
  Year Ended
 
  December 31,
  December 31,
  2006 to
  December 31,
 
  2007  2006  July 1, 2006  2005 
 
Domestic $127.9  $27.0  $3,082.6  $(1,130.7)
Foreign  54.5   22.9   60.5   20.8 
                 
Total $182.4  $49.9  $3,143.1  $(1,109.9)
                 
Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The (provision) benefit for income taxes on income (loss) before income taxes and minority interests (excluding discontinued operations and cumulative effect of change in accounting principle) consists of:
                 
  Federal  Foreign  State  Total 
 
2007                
Current $—  $(22.1) $(.4) $(22.5)
Deferred  —   (.5)  —   (.5)
Benefit applied to (increase)/decrease Additional capital/Other comprehensive income  (55.8)  3.9   (6.5)  (58.4)
                 
Total $(55.8) $(18.7) $(6.9) $(81.4)
                 
July 1, 2006 through December 31, 2006                
Current $—  $(9.4) $(.5) $(9.9)
Benefit applied to reduce intangible assets and increase Additional capital  (14.1)  —   (1.3)  (15.4)
Deferred  —   1.6   —   1.6 
                 
Total $(14.1) $(7.8) $(1.8) $(23.7)
                 
   
  Predecessor
   
January 1, 2006 to July 1, 2006                
Current $.9  $(7.9) $(.1) $(7.1)
Deferred  —   .9   —   .9 
                 
Total $.9  $(7.0) $(.1) $(6.2)
                 
2005                
Current $—  $(3.8) $.5  $(3.3)
Deferred  —   .5   —   .5 
                 
Total $—  $(3.3) $.5  $(2.8)
                 
A reconciliation between the (provision) benefit for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes and minority interests (excluding discontinued operations and cumulative effect of change in accounting principle) is as follows:
                 
        Predecessor 
     July 1, 2006
  January 1,
    
  Year Ended
  through
  2006
  Year Ended
 
  December 31,
  December 31,
  to July 1,
  December 31,
 
  2007  2006  2006  2005 
 
Amount of federal income tax benefit (expense) based on the statutory rate $(63.8) $(17.5) $(1,100.1) $388.5 
Decrease (increase) in valuation allowances(1)  —   —   1,099.3   (379.8)
Non-deductible Expense  (1.6)  —   —   — 
State income taxes, net of federal benefit  (4.5)  (1.2)  —   — 
Foreign income taxes  (11.5)  (4.7)  (.5)  3.9 
Other  —   (.3)  (4.9)  (15.4)
                 
Provision for income taxes $(81.4) $(23.7) $(6.2) $(2.8)
                 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1)At December 31, 2007 the valuation allowance was $24.8 compared to $503.8 at December 31, 2006. The entire change in the valuation was recorded as an adjustment in Additional capital in accordance with fresh start accounting.
The table above reflects a full statutory U.S. tax provision despite the fact that the Company is only paying AMT in the U.S. in some years. SeeTax Attributesabove.
Deferred Income Taxes.  Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of the Company’s net deferred income tax assets (liabilities) are as follows:
         
  December 31,
  December 31,
 
  2007  2006 
 
Deferred Income Tax Assets:        
Loss and credit carryforwards $398.1  $442.4 
Pension benefits  3.3   .7 
Other assets  15.3   19.1 
Inventories and other  13.6   61.8 
Valuation allowances  (24.8)  (503.8)
         
Total deferred income tax assets — net  405.5   20.2 
         
Deferred income tax liabilities:        
Property, plant, and equipment  (14.7)  (5.8)
VEBA  (50.8)  (16.0)
Other  (12.2)  (3.0)
         
Total deferred income tax liabilities  (77.7)  (24.8)
         
Net deferred income tax assets (liabilities)(1)(2) $327.8  $(4.6)
         
 
 
(a)(1)See Note 7Of the total net deferred income tax assets of Notes$327.8, $59.2 was included in Prepaid expenses and other current assets and $268.6 was presented as Deferred tax assets, net on the Consolidated Balance Sheet as of December 31, 2007.
(2)Due to the full valuation allowance in 2006, the Company netted deferred tax assets and deferred tax liabilities, and recorded a net $4.6 of deferred tax liabilities which is included in Long-term liabilities on the Consolidated Financial Statements for information in respectBalance Sheet as of long-term debt. Long-term debt obligations exclude debt subject to compromise of approximately $847.6 million, which amounts will be dealt with in connection with a plan of reorganization. See Notes 1 and 7 of Notes to Consolidated Financial Statements for additional information about debt subject to compromise.December 31, 2006.
 
In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The following paragraphs summarizeultimate realization of deferred tax assets is dependent upon the Company’s off-balance sheet arrangements.
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. As of December 31, 2005, outstanding letters2007, due to uncertainties surrounding the realization of credit undersome of the DIP Facility were approximately $17.8 million, substantially allCompany’s deferred tax assets including state NOLs sustained during the prior years and expiring tax benefits, the Company has a valuation allowance of which expire within approximately twelve months. The letters$24.8 against its deferred tax assets. When recognized, the tax benefits relating to any reversal of credit relate primarilythe valuation allowance will be recorded as an adjustment of Stockholders’ equity rather than as a reduction of income tax expense. Valuation allowance adjustments related to insurance, environmental and other activities.post emergence events will flow through the tax provision.
 
Other.The Company has agreements to supply alumina to and purchase aluminum from Anglesey, a 49%-owned aluminum smelterits subsidiaries file income tax returns in Holyhead, Wales. Both the alumina sales agreementUS federal jurisdiction and primary aluminum purchase agreement are tied to primary aluminum prices.
various states and foreign jurisdictions. The Company’s federal income tax return for the 2004 tax year is currently under examination by the Internal Revenue Service. The Company in March 2005, announceddoes not expect that the implementationresults of the new salaried and hourly defined contribution savings plans. The salaried plan was implemented retroactive to January 1, 2004 and the hourly plan was implemented retroactive to May 31, 2004.
Pursuant to the terms of the new defined contribution savings plan, KACCthis examination will be required to make annual contributions into the Steelworkers Pension Trust on the basis of one dollar per USWA employee hour worked at two facilities. KACC will also be required to make contributions to a defined contribution savings plan for active USWA employees that will range from eight hundred dollars to twenty-four hundred dollars per employee per year, depending on the employee’s age. Similar defined contribution savings plans have been established for non-USWA hourly employees subject to collective bargaining agreements. The Company currently estimates that contributions to all such plans will range from $3.0 million to $6.0 million per year.
The new defined contribution savings plan for salaried employees provides for a match of certain contributions made by such employees plus a contribution of between 2% and 10% of their salary depending on their age and years of service.


4187

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
have a material effect on its financial condition or results of operations. The Canada Revenue Agency audited and issued assessment notices for 1998 through 2001 for which Notices of Objection have been filed. The 2002 to 2004 tax years are currently under audit by the Canada Revenue Agency. The Company currently does not expect that the results of these examinations will have a material effect on its financial condition or results of operations. Certain past years are still subject to examination by taxing authorities and the use of NOL carry-forwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.
No US federal or state liability has been recorded for the undistributed earnings of the Company’s Canadian subsidiaries at December 31, 2007. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for US federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred US income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation.
In accordance with the requirements ofSOP 90-7, the Company adopted the provisions of FIN 48 on July 1, 2006. The Company has gross unrecognized tax benefits of $19.7 and $14.6 at December 31, 2007 and 2006, respectively. The change during the year ended December 31, 2007 was primarily due to currency fluctuations and $3.0 of additional unrecognized tax benefits that were offset by net operating losses. The Company recognizes interest and penalties related to these unrecognized tax benefits in the income tax provision. During the year ended December 31, 2007 and 2006, the Company recognized approximately $5.1, of which $1.6 was taken as an adjustment to additional capital, and $.5, respectively, in interest and penalties. In 2007, the foreign currency impact on gross unrecognized tax benefits, interest and penalties resulted in a $3.8 currency translation adjustment that was recorded in Accumulated other comprehensive income, of which $2.7 related to gross unrecognized tax benefits and $1.1 related to accrued interest and penalties. Additionally, the Company had approximately $10.7 and $4.5 accrued at December 31, 2007 and 2006, respectively, for interest and penalties which were included in Long-term liabilities in the balance sheet. Due to the potential for resolution of a Federal audit of the 2004 tax year, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months by $2.5. This will not have a material impact on the Company’s earnings.
A summary of activities with respect to the gross unrecognized tax benefits for the year ended December 31, 2007 is as follows:
     
Gross unrecognized tax benefits at December 31, 2006 $14.6 
Gross increases for tax positions of prior years  2.5 
Gross increases for tax positions of current years  .2 
Settlements  (.3)
Foreign currency translation  2.7 
     
Gross unrecognized tax benefits at December 31, 2007(1) $19.7 
     
(1)Of the $19.7, $15.8 is recorded as a FIN 48 liability on the balance sheet in Long term liabilities and $3.9 is offset by net operating losses and indirect tax benefits. If and when the $19.7 ultimately is recognized, $15.8 will go through the Company’s income tax provision and thus affect the effective tax rate in future periods.
In connection with the sale of the Company’s interests in and related to Queensland Alumina Limited (“QAL”), the Company made payments totaling approximately $8.5 for AMT in the United States (approximately $8.0 of federal AMT and approximately $.5 of state AMT). Such payments were made in the fourth quarter of 2005. Upon completion of the Company’s 2005 federal income tax return, the Company determined that approximately $1.0 of AMT was overpaid and was refundable. The Company applied for the refund in the 2005 federal income tax return filed in September 2006 and received the refund in October 2006. The Company believed that the remainder of the United States AMT amounts paid in respect of the sale of its QAL interests should, in accordance with the Intercompany Settlement Agreement entered into in connection with the Company’s chapter 11 bankruptcy, be


88

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reimbursed to the Company from the funds held by the liquidating trustee for the plan of liquidation of two former subsidiaries of the Company (Kaiser Alumina Australia Corporation and Kaiser Finance Corporation). A claim for reimbursement of $7.2 was made in January 2007. In May 2007, the liquidating trust approved the claim and the Company received the $7.2 reimbursement, which amount was recorded as a benefit in Other operating benefits (charges), net in the second quarter of 2007 (see Note 14).
Income tax matters of the Predecessor are discussed in Note 22.
10.  Employee Benefits
Pension and Similar Plans.  Pensions and similar plans include:
• Monthly contributions of one dollar per hour worked by each bargaining unit employee to the appropriate multi-employer pension plans sponsored by the United Steelworkers and International Association of Machinists and certain other unions at six of our production facilities. This obligation came into existence in December 2006 for four of our production facilities upon the termination of four defined benefit plans. The arrangement for the other two locations came into existence during the first quarter of 2005. The Company currently estimates that contributions will range from $1 to $3 per year.
• A defined contribution 401(k) savings plan for hourly bargaining unit employees at five of the Company’s production facilities. The Company is required to make contributions to this plan for active bargaining unit employees at these production facilities ranging from $800 to $2,400 per employee per year, depending on the employee’s ageand/or service. This arrangement came into existence in December 2004 for two production facilities upon the termination of one defined benefit plan. The arrangement for the other three locations came into existence during December 2006. The Company currently estimates that contributions to such plans will range from $1 to $3 per year.
• A defined benefit plan for our salaried employees at the Company’s facility in London, Ontario with annual contributions based on each salaried employee’s age and years of service.
• A defined contribution savings plan for salaried and non-bargaining unit hourly employees (which we refer to herein as the “Salaried DC Plan”) providing for a match of certain contributions made by employees plus a contribution of between 2% and 10% of their compensation depending on their age and years of service. All new hires after January 1, 2004 receive a fixed 2% contribution. The Company currently estimates that contributions to such plans will range from $1 to $3 per year.
• A non-qualified defined contribution plan for key employees who would otherwise suffer a loss of benefits under the Company’s defined contribution plan as a result of the limitations by the Code.
Postretirement Medical Obligations.  As a part of the Company’s reorganization efforts, the Predecessor’s postretirement medical plan was terminated in 2004. Participants were given the option of COBRA coverage or participation in the applicable (Union or Salaried) VEBA. All past and future bargaining unit employees are covered by the Union VEBA. The Salaried VEBA covers all other retirees including employees who retired prior to the 2004 termination of the prior plan or who retire with the required age and service requirements so long as their employment commenced prior to February 2002. The benefits paid by the VEBAs are at the sole discretion of the respective VEBA trustees and are outside the Company’s control.
At emergence, the Salaried VEBA received rights to 1,940,100 shares of the Company’s newly issued common stock. However, prior to the Company’s emergence, the Salaried VEBA sold its rights to approximately 940,200 shares and received net proceeds of approximately $31. The remaining approximately 999,900 shares of the Company’s common stock held by the Salaried VEBA at July 1, 2006 were unrestricted. The Salaried VEBA sold its remaining shares during the second half of 2006.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At emergence, the Union VEBA had rights to receive 11,439,900 common shares upon the Company’s emergence from chapter 11 bankruptcy. However, prior to the Company’s emergence, the Union VEBA sold its rights to approximately 2,630,000 shares and received net proceeds of approximately $81.
During the first quarter of 2007, 6,281,180 common shares were sold to the public by existing stockholders pursuant to a registered offering. The Company did not sell any shares in, and did not receive any proceeds from, the offering. The Union VEBA was one of the selling stockholders. Of the 3,337,235 shares sold by the Union VEBA in the offering, 819,280 common shares were unable to be sold without the Company’s approval under an agreement restricting the Union VEBA’s ability to sell or otherwise transfer its common shares. However, during the first quarter of 2007, the Union VEBA received approval from the Company to include such shares in the offering.
The 819,280 previously restricted shares were treated as a reduction of Stockholders’ equity (at the $24.02 per share reorganization value) in the December 31, 2006 balance sheet. As a result of the relief of the restrictions, during the first quarter of 2007: (i) the value of the 819,280 shares previously restricted was added to VEBA assets at the approximate $58.19 per share price realized by the Union VEBA in the offering (totaling $47.7); (ii) approximately $19.7 of the December 31, 2006 reduction in Stockholders’ equity associated with the restricted shares (common shares owned by Union VEBA subject to restrictions) was reversed and (iii) the difference between the two amounts (approximately $23, net of income taxes of $5) was credited to Additional capital.
During the fourth quarter of 2007, the Union VEBA sold an additional 627,200 shares upon the Board of Directors’ approval. The 627,200 shares sold resulted in (i) an increase of $45.1 in VEBA assets at an approximate $72.03 weighted average per share price realized by the Union VEBA, (ii) a reduction of $15.1 in common stock owned by Union VEBA (at the $24.02 per share reorganization value), and (iii) the difference between the two amounts (approximately $25.2, net of income taxes of $4.9) was credited to Additional capital. After the sale, the Union VEBA now owns approximately 23.5% of the outstanding common stock as of December 31, 2007.
As of the date of filing of this Report, the Company’s only obligation to the VEBAs is an annual variable cash contribution. The amount to be contributed to the VEBAs is 10% of the first $20.0 of annual cash flow (as defined; in general terms, the principal elements of cash flow are earnings before interest expense, provision for income taxes and depreciation and amortization less cash payments for, among other things, interest, income taxes and capital expenditures), plus 20% of annual cash flow, as defined, in excess of $20.0. Such annual payments may not exceed $20.0 and are also be limited (with no carryover to future years) to the extent that the payments would cause the Company’s liquidity to be less than $50.0. Such amounts are determined on an annual basis and payable upon the earlier of (a) 120 days following the end of fiscal year, or within 15 days following the date on which the Company files its Annual Report onForm 10-K with the Securities and Exchange Commission (“SEC”) (or, if no such report is required to be filed, within 15 days of the delivery of the independent auditor’s opinion of the Company’s annual financial statements). During the course of the reorganization process, $49.7 of contributions were made to the VEBAs, of which $12.7 was available to reduce post emergence payments that may become due pursuant to the annual variable cash requirement. Of this amount, $1.9 was utilized in 2006 and the remaining $10.8 was utilized in 2007. At December 31, 2007, the Company owed the VEBAs $8.8 million under this arrangement which has been recorded in Other accrued liabilities in the Company’s consolidated balance sheets and a corresponding increase in net assets in respect of the VEBAs.
For accounting purposes, after discussions with the staff of the SEC, the Company has concluded that the postretirement medical benefits to be paid by the VEBAs and the Company’s related annual variable contribution obligations should be treated as defined benefit postretirement plans with the current VEBA assets and future variable contributions described above, and earnings thereon, operating as a cap on the benefits to be paid. As such, while the Company’s only obligation to the VEBAs is to pay the annual variable contribution amount and has no control over the plan assets, the Company must account for net periodic postretirement benefit costs in accordance with Statement of Financial Accounting Standards No. 106, Employers’ Accounting for Postretirement Benefits other than Pensions(“SFAS No. 106”) and record any difference between the assets of each VEBA and its accumulated postretirement benefit obligation (“APBO”) in the Company’s financial statements. Such information


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
must be obtained from the Salaried VEBA and Union VEBA on a periodic basis. In general, as more fully described below, given the significance of the assets currently available and expected to be available to the VEBAs in the future and the current level of benefits, the cap does not impact the computation of the APBO. However, should the benefit formulas being used by the VEBAs increaseand/or if the assets were to substantially decrease, it is possible that existing assets may be insufficient alone to fund such benefits and that the benefits to be paid in future periods could be reduced to the amount of annual variable contributions reasonably expected to be paid by the Company in those years. Any such limitations would also have to consider any remaining amount of excess pre-emergence VEBA contributions made.
Key assumptions made in computing the net obligation of each VEBA and in total at the December 31, 2007 and 2006 include:
With respect to VEBA assets:
• The 4,845,465 shares of the Company’s common stock held by the Union VEBA that were not transferable have been excluded from assets used to compute the net asset or liability of the Union VEBA, and will continue to be excluded until the restrictions lapse. Such shares are being accounted for similar to “treasury stock” in the interim (see Note 1).
• At December 31, 2007, neither VEBA held any unrestricted shares of the Company’s common stock. At December 31, 2006, the fair value of the unrestricted shares of common stock held by each VEBA was $55.98 per share.
• Based on the information received from the VEBAs at December 31, 2007 and 2006, both the Salaried and Union VEBA assets were invested in various managed proprietary funds.
• The Company assumed that the Salaried VEBA would achieve a long term rate of return of approximately 5.50% and 5.50% on its assets as of December 31, 2007 and 2006, respectively. The Company assumed that the Union VEBA would achieve a long term rate of return of approximately 5.50% and 5.50% on its assets as of December 31, 2007 and 2006, respectively. The long-term rate of return assumption is based on the Company’s expectation of the investment strategies to be utilized by the VEBAs’ trustees.
• The annual variable payment obligation is being treated as a funding/contribution policy and not counted as a VEBA asset at December 31, 2007 for actuarial purposes. However, the amount owed under the funding obligation in relation to the results for the year ended December 31, 2007 has been accrued and is included within Other accrued liabilities and Net assets in respect of VEBAs.
With respect to VEBA obligations:
• The APBO for each VEBA has been computed based on the level of benefits being provided by each VEBA at December 31, 2007 and 2006.
• The present value of APBO for each VEBA was computed using a discount rate of return of 6.00% and 5.75% at December 31, 2007 and 2006, respectively.
• Since the Salaried VEBA was paying a fixed annual amount to its constituents at both December 31, 2007 and 2006, no future cost trend rate increase has been assumed in computing the APBO for the Salaried VEBA.
• For the Union VEBA, which is currently paying certain prescription drug benefits, an initial cost trend rate of 12% has been assumed and the trend rate is assumed to decline to 5% by 2013 at both December 31, 2007 and 2006. The trend rate used by the Company was based on information provided by the Union VEBA and industry data from the Company’s actuaries.


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following recaps the net assets of each VEBA as of December 31, 2007 and 2006 (such information is also included in the tables required under United States GAAP below which roll forward the assets and obligations):
                         
  December 31, 2007  December 31, 2006 
  Union VEBA  Salaried VEBA  Total  Union VEBA  Salaried VEBA  Total 
 
APBO $(232.0) $(62.7) $(294.7) $(226.6) $(51.5) $(278.1)
Plan assets  353.6   76.0   429.6   241.4   77.4   318.8 
                         
Net asset $121.6  $13.3  $134.9  $14.8  $25.9  $40.7 
                         
The Company’s results of operations included the following impacts associated with the VEBAs: (a) charges for service rendered by employees; (b) a charge for accretion of interest; (c) a benefit for the return on plan assets; and (d) amortization of net gains or losses on assets, prior service costs associated with plan amendments and actuarial differences. The VEBA-related amounts included in the results of operations are shown in the tables below.
Financial Data.
Assumptions —The following recaps the key assumptions used and the amounts reflected in the Company’s financial statements with respect to the Successor’s and Predecessor’s pension plans and other postretirement benefit plans. In accordance with generally accepted accounting principles, impacts of the changes in the Company’s pension and other postretirement benefit plans discussed above have been reflected in such information.
The Company uses a December 31 measurement date for all of its plans.
Weighted-average assumptions used to determine benefit obligations as of December 31 and net periodic benefit cost (income) for the years ended December 31 are:
                         
  Pension Benefits(1)  Medical/Life Benefits(2) 
  2007  2006  2005  2007  2006  2005 
 
Benefit obligations assumptions:                        
Discount rate  5.60%  5.20%  5.50%  6.00%  5.75%  — 
Rate of compensation increase  3.75%  3.00%  3.00%  —   —   — 
Net periodic benefit cost assumptions:                        
Discount rate  5.20%  5.20%  5.75%  5.75%  6.25%  — 
Expected return on plan assets  6.00%  6.00%  8.50%  5.50%  5.50%  — 
Rate of compensation increase  3.00%  3.00%  3.00%  —   —   — 
(1)Pension Benefits for 2007 and 2006 primarily represent the defined benefit plan of the Canadian facility. Pension Benefits for 2005 primarily represent the Predecessor’s defined benefit plans that were terminated in December 2006 as more fully discussed above.
(2)Medical /Life Benefits percentages for 2007 and 2006 relate to the VEBAs.


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Benefit Obligations and Funded Status — The following table presents the benefit obligations and funded status of the Company’s pension and other postretirement benefit plans as of December 31, 2007 and 2006, and the corresponding amounts that are included in the Company’s Consolidated Balance Sheets.
                 
  Pension Benefits  Medical/Life Benefits 
  2007  2006  2007  2006 
 
Change in Benefit Obligation:                
Obligation at beginning of year $4.0  $32.1  $278.1  $1,017.0 
Foreign currency translation adjustment  .8   —   —   — 
Service cost  .2   1.1   1.4   .6 
Interest cost  .2   1.6   15.5   7.9 
Plan amendments relating to Salaried VEBA  —   —   9.2   — 
Curtailments, settlements and amendments — Predecessor plans  —   (28.2)  —   (1,005.6)
Actuarial (gain) loss  —   (1.9)  7.2   14.9 
Benefits paid — Predecessor plans  —   (.7)  —   (11.4)
Benefits paid — Successor plans  (.3)  —   —   — 
Creation of VEBA  —   —   —   262.0 
Reimbursement from Retiree Drug Subsidy(1)  —   —   3.3   — 
Benefits paid by VEBA  —   —   (20.0)  (7.3)
                 
Obligation at end of year  4.9   4.0   294.7   278.1 
                 
Change in Plan Assets:                
FMV of plan assets at beginning of year  3.6   21.5   318.8   — 
Foreign currency translation adjustment  .7   —   —   — 
Actual return on assets  .1   1.0   25.8   30.9 
Employer contributions(2)  .3   1.8   101.7   306.6 
Reimbursement from Retiree Drug Subsidy(1)  —   —   3.3   — 
Assets for which contributions transferred to the PBGC  —   (20.0)  —   — 
Benefits paid(3)  (.3)  (.7)  (20.0)  (18.7)
                 
FMV of plan assets at end of year  4.4   3.6   429.6   318.8 
                 
Accrued (prepaid) benefit liability(4) $.5  $.4  $(134.9) $(40.7)
                 
(1)In January 2005, the Department of Health and Human Services’ Centers for Medicare and Medicaid Services (CMS) released final regulations governing the Medicare prescription drug benefit and other key elements of the Medicare Modernization Act that went into effect January 1, 2006. The Union VEBA is eligible for the Retiree Drug Subsidy because the plan meets the definition of actuarial equivalence and therefore qualifies for federal subsidies equal to 28% of allowable drug costs. As a result, the Company has measured its obligations and costs to take into account this subsidy.
(2)Employer contributions to Medical/Life benefit plans in 2007 consist of $92.8 related to the release of transfer restrictions and subsequent sale of 1,446,480 shares of the Company’s common stock held by the Union VEBA plus $8.8 owed to the VEBAs, but unpaid, at December 31, 2007 in respect to the annual variable cash contribution which will be paid in the first quarter of 2008. Employer contributions to Medical/Life benefit plans in 2006 consist of $11.4 paid by the VEBAs before emergence and $295.2 of value associated with assets received by the VEBA at the Effective Date.


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(3)Benefits paid by Medical/Life benefit plans in 2006 consist of $11.4 paid by the VEBAs prior to emergence and $7.3 paid by the VEBAs after the Effective Date.
(4)Accrued benefit liability for the defined benefit pension plan(s) at December 31, 2007 and 2006 were included in Long-term liabilities on the Consolidated Balance Sheet.
The accumulated benefit obligation for all defined benefit pension plans (other than the Terminated Plans) was $4.1 and $3.6 at December 31, 2007 and 2006, respectively.
The amount of loss which is recognized in the balance sheet (in Accumulated other comprehensive income) associated with the Company’s defined benefit pension plan and the VEBAs that have not been recognized in earnings as of December 31, 2007 were $.4 and $1.9, respectively. The portion of the pension plan and VEBA amounts not recognized in earnings at December 31, 2007 that is expected to be recognized in earnings in 2008 is $1.2.
Components of Net Periodic Benefit Cost (Income) —The following table presents the components of net periodic benefit cost (income) for the years ended December 31, 2007, 2006 and 2005:
                         
  Pension Benefits  Medical/Life Benefits 
  2007  2006  2005  2007  2006  2005 
 
Service cost $.2  $1.1  $1.2  $1.4  $.6  $— 
Interest cost  .2   1.6   1.6   15.5   7.9   — 
Expected return on plan assets  (.2)  (1.7)  (1.5)  (19.5)  (7.9)  — 
Amortization of prior service cost  —   —   .1   —   —   — 
Amortization of net loss  —   .3   .4   —   —   — 
                         
Net periodic benefit costs  .2   1.3   1.8   (2.6)  .6   — 
Defined contribution plans  9.9   8.1   7.2   —   —   — 
                         
  $10.1  $9.4  $9.0  $(2.6) $.6  $— 
                         
The above table excludes pension plan curtailment and settlement costs of $.2 and $6.3 in 2007 and 2006, respectively, and pension plan curtailment and settlement credits of $.7 in 2005.
The periodic pension costs associated with the Terminated Plans were zero, $1.1 and $1.6 for the years ended December 31, 2007, 2006 and 2005.


94

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Components of Net Periodic Benefit Cost (Income) and Cash Flow and Charges —The following tables present the components of net periodic pension benefits cost for the years ended December 31, 2007, 2006 and 2005:
                 
        Predecessor 
     Year Ended December 31, 2006    
     July 1, 2006
       
  Year Ended
  through
  January 1, 2006
  Year Ended
 
  December 31,
  December 31,
  to
  December 31,
 
  2007  2006  July 1, 2006  2005 
 
VEBA:                
Service cost $1.4  $.6  $—  $— 
Interest cost  15.5   7.9   —   — 
Expected return on plan assets  (19.5)  (7.9)  —   — 
                 
   (2.6)  .6   —   — 
Defined benefit pension plans (including service costs of $.2, $.5, $.6 and $1.2)  .2   .5   .8   1.8 
Defined contributions plans  9.9   4.0   4.1   7.2 
Retroactive impact of defined contribution plans adoption included in Other operating charges, net  —   .4   —   6.8 
                 
  $7.5  $5.5  $4.9  $15.8 
                 
The following tables present the allocation of these charges (income):
                 
        Predecessor 
     Year Ended December 31, 2006    
     July 1, 2006
       
  Year Ended
  through
  January 1, 2006
  Year Ended
 
  December 31,
  December 31,
  to
  December 31,
 
  2007  2006  July 1, 2006  2005 
 
Fabricated Products segment $9.3  $4.9  $4.5  $8.7 
Corporate segment  (1.8)  .2   .4   .3 
Other operating charges, net (Note 14)  —   .4   —   6.8 
                 
  $7.5  $5.5  $4.9  $15.8 
                 
For all periods presented, the net periodic benefits relating to the VEBAs are included as a component of Selling, administrative, research and development and general expense within the Corporate segment and substantially all of the Fabricated Products segment’s related charges are in Cost of products sold with the balance being in Selling, administrative, research and development and general expense.
An amount of $.8 was accrued at December 31, 2006 in Accrued salaries, wages, and related expenses relating to the retroactive implementation of the remaining defined benefit plans. Of the $.8, $.4 was recorded in Cost of products sold and $.4 was recorded in Other operating charges, net (Note 14). The amount recorded in Other operating charges, net represents a one time payment. This amount was paid in 2007. The amount related to the retroactive implementation of the defined contribution savings plans ($5.9 million)Salaried DC Plan was paid in July 2005.
In September 2005, the Company and the USWAUSW amended the collective bargaininga prior agreement entered into during the second quarter of 2005 to provide, among other things, for the Company to contribute per employee amounts to the Steelworkers’ Pension Trust totaling approximately $.9. The amendmentamended agreement was approved by the Bankruptcy Court and such amount was recorded in the fourth quarter of 2005. This amount was


95

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Successor also paid benefits applicable to the Predecessor (seeCash and other Compensationin Note 11).
Employee benefit and incentive plans of the Predecessor are discussed in Note 23.
11.  Employee Incentive Plans
Equity Based Compensation.
General —Upon the Company’s emergence from chapter 11 bankruptcy, the 2006 Equity and Performance Incentive Plan (the “Equity Incentive Plan”) became effective. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors of the Company, are eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan permits the granting of awards in the form of options to purchase common shares, stock appreciation rights, shares of non-vested and vested stock, restricted stock units, performance shares, performance units and other awards. The Equity Incentive Plan will expire on July 6, 2016. No grants will be made after that date, but all grants made on or prior to that date will continue in effect thereafter subject to the terms thereof and of the Equity Incentive Plan. The Company’s Board of Directors may, in its discretion, terminate the Equity Incentive Plan at any time. The termination of the Equity Incentive Plan will not affect the rights of participants or their successors under any awards outstanding and not exercised in full on the date of termination.
Subject to certain adjustments that may be required from time to time to prevent dilution or enlargement of the rights of participants under the Equity Incentive Plan, 2,222,222 common shares were reserved for issuance under the Equity Incentive Plan.
Compensation charges related to the Equity Incentive Plan for the year ended December 31, 2007 were $9.1, of which $8.9 related to vested and non-vested common shares and restricted stock units and $.2 related to stock options. Compensation charges related to the Equity Incentive Plan for the period from July 1, 2006 to December 31, 2006 were $4.0 all of which related to vested and non-vested common shares. The total charges for all periods were included in Selling, administrative, research and development and general expense.
At December 31, 2007, 1,604,197 common shares were available for additional awards under the Equity Incentive Plan.
Non-vested Common Shares and Restricted Stock Units —In June 2007, the Company granted 7,281non-vested common shares to its non-employee directors. The shares are subject to a one year vesting requirement that lapses on June 6, 2008. The fair value of the shares granted of $.5 is being amortized to expense over a one year period on a ratable basis. An additional 3,877 common shares were issued to non-employee directors electing to receive common shares in lieu of all or a portion of their annual retainer fee. The fair value of the shares of $.3, based on the fair value of the shares at date of issuance, was recognized in earnings in the year ended December 31, 2007 as a period expense.
In April 2007, the Company issued 54,381 non-vested common shares and granted 1,260 restricted stock units to executive officers and other key employees. The shares and the restricted stock units are subject to a three year vesting requirement that lapses on April 3, 2010. The fair value of the shares issued, after assuming a 5% forfeiture rate, is being amortized to expense over a three year period on a ratable basis. The restricted stock units have rights similar to the rights of non-vested common shares and the employee will receive one common share for each restricted stock unit upon the vesting of the restricted stock unit. The restricted stock units vest one third on the first anniversary of the grant date and one third on each of the second and third anniversaries of the date of issuance. The fair value of the restricted stock units issued, after assuming a 5% forfeiture rate is being amortized to expense over the vesting period on a ratable basis.
Upon emergence from chapter 11 reorganization, the Company issued 521,387 shares of non-vested common shares and 3,699 restricted stock units to directors, executive officers and other key employees. The weighted average grant date fair value for non-vested common shares and restricted stock units were $42.31 and $62.0, respectively. No non-vested common shares or restricted stock units vested during 2006. The non-vested common


96

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares and restricted stock units issued to executive officers and other key employees are subject to a three year vesting requirement that lapses on various dates in 2009. The non-vested common shares issued to directors were subject to a one year vesting requirement that lapsed on August 1, 2007. An additional 4,273 common shares were issued in 2006 to non-employee directors electing to receive common shares in lieu of all or a portion of their annual retainer fee. The fair value of the shares of $.2, based on the fair value of the shares at date of issuance, was recognized in earnings in the year ended December 31, 2006 as a period expense.
The fair value of the non-vested common shares and restricted stock units is determined based on the closing trading price of the common shares on the grant date. A summary of the activity with respect to non-vested common shares and restricted stock units for the year ended December 31, 2007 is as follows:
                 
  Non-Vested
  Restricted
 
  Common Shares  Stock Units 
     Weighted-
     Weighed-
 
     Average
     Average
 
     Grant-Date
     Grant-Date
 
  Shares  Fair Value  Units  Fair Value 
 
Non-vested shares and restricted stock units at January 1, 2007  521,387  $42.31   3,699  $62.00 
Granted  61,662   79.31   1,260   80.01 
Vested  (30,708)  43.09   (1,232)  62.00 
Forfeited  (3,270)  53.76   —   — 
                 
Non-vested shares and restricted stock units at December 31, 2007  549,071  $46.36   3,727  $68.09 
                 
Under the Equity Incentive Plan, the Company allows participants to elect to have the Company withhold common shares to satisfy minimum statutory tax withholding obligations arising on the vesting of non-vested shares and restricted stock units and stock options. When the Company withholds the shares, it is required to remit to the appropriate taxing authorities the fair value of the shares withheld. During the year ended December 31, 2007, 8,346 shares (which are included in vested shares in the above tables) were withheld upon the vesting of common shares. During the fourth quarter of 2006.2007, the Board of Directors approved the cancellation of such shares and all future shares withheld as a result of vesting of non-vested shares and restricted stock units and the exercising of stock options. The fair value of the common shares withheld of $.7 has been recorded as a reduction to Additional capital in the year ended December 31, 2007.
 
As of December 31, 2007, there was $13.5 of unrecognized compensation cost related to non-vested common shares and restricted stock units. That cost is expected to be recognized over a replacementweighted-average period of 1.6 years.
Stock Options —On April 3, 2007, the Company granted options to purchase 25,137 of its common shares to executive officers and other key employees with a contractual life of ten years.
The fair value of each of the Company’s stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the Company’s stock option awards, which are subject to graded vesting, is expensed on a straight line basis over the vesting period of the stock options. Due to the Company’s short trading history for its common shares since emergence from chapter 11 bankruptcy on July 6, 2006, expected volatility could not be reliably calculated based on the historical volatility of the common shares. As such, the Company has determined volatility for use in the Black-Sholes option-pricing model using the volatility of the stock of a number of similar public companies over a period equal to the expected option life of six years. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon US Treasury bond on the date the stock option is awarded. The Company uses historical data to estimate employee terminations and the simplified method to estimate the expected option life within the valuation model.


97

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The significant weighted average assumptions used in determining the grant date fair value of the option awards granted on April 3, 2007 were as follows:
Dividend yield—%
Volatility rate45%
Risk-free interest rate4.59%
Expected option life (years)6.0
Prior to April 3, 2007, the Company had no outstanding options to purchase common shares. A summary of the Company’s stock option activity for the Company’s current postretirement benefit plans,year ended December 31, 2007 is as follows:
                 
        Weighted-
    
     Weighted-
  Average
    
     Average
  Remaining
  Aggregate
 
  Number of
  Exercise
  Contractual
  Intrinsic
 
  Shares  Price  Life (In years)  Value 
           (In millions) 
 
Outstanding at January 1, 2007  —  $—         
Grants  25,137   80.01         
Forfeited  —   —         
Exercise  —   —         
                 
Outstanding at December 31, 2007  25,137  $80.01   9.25  $— 
                 
Expected to vest at December 31, 2007 (assuming a 5% forfeiture rate)  23,880  $80.01   9.25  $— 
                 
Exercisable at December 31, 2007  —  $—   —  $— 
                 
The weighted average fair value of the Company agreedoptions granted during the year ended December 31, 2007 was $39.90. At December 31, 2007, there was $.7 of unrecognized compensation costs related to contribute certain amountsstock options. This cost is expected to one or more VEBAs. Such contributions are to include:be recognized over a weighted-average period of 2.3 years.
Cash and other Compensation.
 
 • An amount not to exceed $36.0 millionA short term incentive compensation plan for management, payable in cash, which is based primarily on earnings, adjusted for certain safety and payable on emergence from the Chapter 11 proceedings so long asperformance factors. Most of the Company’s liquidity (i.e. cash plus borrowing availability) is at least $50.0 million after considering such payments. Tolocations also have similar programs for both hourly and salaried employees. During 2007, 2006 and 2005, the extent that less thanCompany recorded charges of $12.0, $7.9 and $5.7, respectively, related to these plans. Of the full $36.0 million is paidtotal charges in 2007, 2006 and the Company’s interests2005, $3.1, $2.9 and $3.3, respectively, were included in Anglesey are subsequentlyCost of products sold a portion of such sales proceeds,and $8.9, $5.0 and $2.4, respectively, were included in certain circumstances, will be used to pay the shortfall.Selling, administrative, research and development and general.
 • On an annual basis, 10%Certain employment agreements between the Company and certain members of management remain effective. Additionally, other members of management continue to retain certain pre-emergence contractual arrangements. In particular, the terms of the first $20.0 millionchange in control agreements survive after the Effective Date for a period ending two years following a change in control, unless superseded by another agreement (see Note 23). The terms of annual cash flow, as defined, plus 20%the severance agreements with certain members of annual cash flow, as defined,management terminated in excess of $20.0 million. Such annual payments shall not exceed $20.0 million and will also be limited (with no carryover to future years) to the extent that the payments do not cause the Company’s liquidity to be less than $50.0 million.2007.
12.  • Advances of $3.1 million in June 2004Commitments and $1.9 million per month thereafter until the Company emerges from the Cases. Any advances made pursuant to such agreement will constitute a credit toward the $36.0 million maximum contribution due upon emergence.Contingencies
 
On June 1, 2004, the Court approved an order making theCommitments.  The Company and its subsidiaries have a variety of financial commitments, including purchase agreements, regarding pensionforward foreign exchange and postretirement medical benefits effective on June 1, 2004 notwithstanding that the Intercompany Agreement was not effective asforward sales contracts (see Note 13), letters of that date. In October 2004, thecredit and guarantees. The Company entered into an amendmentand its subsidiaries also have agreements to the USWA agreement, which was approved by the Court in February 2005.supply alumina to and to purchase aluminum from Anglesey (see Note 4). As provided in the amendment, the Company will pay an additional contribution of $1.0 million in excess of the originally agreed to $36.0 million contribution described above, which amount was paid in March 2005. Under the terms of the amended agreement, the Company is required to continue to make the monthly VEBA contributions as long as it remains in Chapter 11, even if the sum of such monthly payments exceeds the $37.0 million maximum amount discussed above. Any monthly amounts paid during the Chapter 11 process in excess of the $37.0 million limit will offset future variable contribution requirements post emergence. VEBA-related payments through December 31, 2005 totaled approximately $38.3 million.
As a part of the September 2005 agreement with the USWA discussed above, which was approved by the Court in October 2005, KACC has also agreed to provide advances of up to $8.5 million to the VEBA during the first two years after emergence from the Cases, if requested by the VEBA and subject to certain specified conditions. Any such advances would accrue interest at a market rate and would first reduce any required annual variable contributions. Any advanced amounts in excess of required variable contributions would, at KACC’s option, be repayable to KACC in cash, shares of new common stock of the emerging entity or a combination thereof.
In connection with the sale of the Gramercy facility and KJBC, the Company indemnified the buyer against losses suffered by the buyer that result from any breaches of certain seller representations and warranties up to $5.0 million, which amount has been recorded in long-term liabilities in the accompanying financial statements. The indemnity expires in October 2006. A claim for the full amount of the indemnity has been made. Such amount is fully accrued in the accompanying consolidated balance sheet.
During August 2005, the Company2007, orders were placed orders for certain equipment furnaces,and/or services intended to augment the Company’s heat treat and aerospace capabilities at the Spokane, WashingtonCompany’s Trentwood facility in respect of which the Company became obligated for costs in the range of $75.0 million. Approximately $17.0 million of such costs were incurred in 2005. The balance will likely be incurred in 2006 and 2007, with the majority of such costs being incurred in 2006.
During the latter half of 2005, the Company entered into certain conditional settlement agreements with insurers under which the insurers agreed (in aggregate) to pay approximately $362.0 million in respect ofSpokane,


4298

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Washington. The Company expects the total costs for such equipment and services to be approximately $139. Approximately $112.7 of such costs were incurred from inception of the Trentwood project through the end of 2007. The balance is expected to be incurred during 2008. As of December 31, 2007, orders were also placed for certain equipment and/or services relating to the $91 rod, bar and tube value stream investment. Approximately $7.3 was incurred from inception of the investment through the end of 2007. The balance is expected to be incurred during 2008 and 2009.
Minimum rental commitments under operating leases at December 31, 2007, are as follows: years ending December 31, 2008 — $3.8; 2009 — $3.5; 2010 — $2.0; 2011 — $.9 and 2012 and thereafter — $.5. Rental expenses, after excluding rental expenses of discontinued operations, were $5.0, $4.0 and $3.6 for the years ended December 31, 2007, 2006 and 2005, respectively.
Environmental Contingencies.  The Company and its subsidiaries are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims based upon such laws.
A substantial portion of the Company’s pre-emergence obligations, primarily in respect of non-owned locations, was resolved by the chapter 11 proceedings (see Note 24). The remaining environmental accruals are primarily related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the period from July 1, 2006 through December 31, 2007 (see Note 24 for a table that presents the changes in the environmental accruals for the period from January 1, 2006 to July 1, 2006 and the year ended December 31, 2005).
         
     July 1, 2006
 
  Year Ended
  through
 
  December 31,
  December 31,
 
  2007  2006 
 
Beginning balance $8.4  $10.4 
Additional accruals  1.1   .7 
Less expenditures  (1.8)  (2.7)
         
Ending balance $7.7  $8.4 
         
These environmental accruals represent the Company’s estimate of costs reasonably expected to be incurred 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 and are calculated on an undiscounted basis. In the ordinary course, the Company expects that these remediation actions will be taken over the next several years and estimates that expenditures to be charged to these environmental accruals will be approximately $1.7 in 2008, $1.8 in 2009, $.7 in 2010 , $.8 in 2011 and $2.7 in 2012 and 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 that could range, in the aggregate, up to an estimated $15.5. 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.
Other Environmental Matters.  The Company has been working with regulatory authorities and performing studies and remediation pursuant to several consent orders with the State of Washington relating to the historical use of oils containing PCBs at our Trentwood facility in Spokane, Washington before 1978. During April 2004, the Company was served with a subpoena for documents and notified by Federal authorities that they were investigating certain environmental compliance issues with respect to the Company’s Trentwood facility in Spokane, Washington. The Company undertook its own internal investigation of the matter through specially retained counsel to


99

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ensure that it had all relevant facts regarding Trentwood’s compliance with applicable environmental laws. In early 2007, the Company received a letter from the regulatory authorities confirming that their investigation had been closed.
Resolution of Contingencies with respect to the PBGC.  As more fully described in Note 24, in response to the January 2004 motion to terminate or substantially modify substantially all coverageof the Company’s defined benefit pension plans, the Bankruptcy Court ruled that the Company had met the factual requirements for distress termination as to all of the plans at issue. The PBGC appealed the Bankruptcy Court’s ruling. However, as more fully discussed in Note 24, while the PBGC’s appeal was pending, the Company and the PBGC reached a settlement under certain policies havingwhich the PBGC agreed to assume the Terminated Plans (as defined below). The Bankruptcy Court approved this settlement in January 2005. The Company believed that all issues in respect of such matters were resolved. However, despite the settlement with the PBGC, the intermediate appellate court proceeded to consider the PBGC’s earlier appeal and issued a combined face valueruling dated March 31, 2005 affirming the Bankruptcy Court’s rulings regarding distress termination of approximately $443.0 million. The settlements,all such plans. In July 2005, the Company and the PBGC reached an agreement, which werewas approved by the Bankruptcy Court have several conditions, including a legislative contingency and are only payable to the trust(s) being set up under the Kaiser Aluminum Amended Plan upon emergence. One set of insurers paid approximately $137.0 million into a separate escrow account in November 2005. If the Company does not emerge, the agreement is null and void and the funds (along with any interest that has accumulated) will be returned to the insurers. During DecemberSeptember 2005, the Company entered into additional conditional insurance settlement agreements with an insurer under which the insurer agreedPBGC agreement previously approved by the Bankruptcy Court was amended to pay approximately $13.0 million in respect of substantially all coverage under certain policies having a combined face value of approximately $16.0 million. The conditional terms and structures of these additional agreements were substantiallypermit the same asPBGC to further appeal the disclosed terms of the earlier agreements except that certain of the settlement payments would be made to the applicable personal injury trust over time rather than in a lump sum (for example, assuming, among other things, an emergence in early to mid 2006, annual payments of approximately $2.1 million would be from 2006 through 2011). The additional conditional insurance settlement is subject to Court approval and, similar to the previous agreements, is null and void if the Company does not emerge from Chapter 11 pursuant tointermediate appellate court ruling. Under the terms of the Kaiser Aluminum Amended Plan.amended PBGC agreement, if the PBGC were to prevail in the further appeal, all aspects of the previously approved PBGC agreement would remain the same. On the other hand, under the amended agreement, if the intermediate appellate court ruling was upheld on further appeal, the PBGC would be required to: (a) approve the distress termination of the remaining defined benefit pension plans; and (b) reduce the amount of the administrative claim to $11.0 (from $14.0). Under the amended agreement, both the Company and the PBGC agreed to take up no further appeals. Pending the final resolution of this matter, the Company’s settlement with the PBGC remained in full force and effect. Upon consummation of the two separate plans of liquidation (collectively, the “Liquidating Plans”) in December 2005, the $11.0 minimum was paid to the PBGC.
 
During MarchIn July 2006, the Company reachedUnited States Third Circuit Court of Appeals affirmed the intermediate appellate court’s ruling upholding the Bankruptcy Court’s finding that the factual requirements for distress termination of all defined benefit plans had been met. Accordingly, four of the five remaining plans were terminated by the PBGC on December 29, 2006. These four pension plans, together with the pension plans terminated by the PBGC in 2004 and 2003 (see Note 23) are herein after collectively referred to as the “Terminated Plans”. The Terminated Plans were replaced with defined contribution plans as described in Note 10. As a conditional settlement agreement with another groupresult of insurers under which the insurers would pay approximately $67.0 millionJuly 2006 ruling, the $3.0 of previously recorded administrative claim included in respectthe Company’s opening balance sheet was credited to Other operating charges, net (see Note 14). The termination of certain policies havingthe Terminated Plans in 2006 resulted in a combined face valuenon-cash benefit of approximately $80.0 million. The conditional settlement, which has similar terms and conditions to the other conditional settlement agreement discussed above, is still pending Court approval. Negotiations with other insurers continue.$4.2 (reflected in Other operating (benefits) charges, net — see Note 14).
 
At emergence from Chapter 11, KACC willOther Contingencies.  The Company and its subsidiaries are involved in various other claims, lawsuits, and proceedings relating to a wide variety of matters related to past or present operations. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have to pay or otherwise provide for a material amountadverse effect on the Company’s consolidated financial position, results of claims. Such claims include accrued but unpaid professional fees, priority pension, taxoperations, or liquidity.
Commitment and environmental claims, secured claims, and certain post-petition obligations (collectively, “Exit Costs”). The Company currently estimates that its Exit Costs will becontingencies of the Predecessor are discussed in the range of $60.0 million to $80.0 million. KACC expects to fund such Exit Costs using the proceeds to be received under the Intercompany Agreement together with existing cash resources and borrowing availability under the Exit Financing facilities that are expected to replace the DIP Facility.Note 24.
 
Item 7A.13.  QuantitativeDerivative Financial Instruments and Qualitative Disclosures About Market RiskRelated Hedging Programs
 
In conducting its business, the Company uses various instruments, including forward contracts and options, to manage the risks arising from fluctuations in aluminum prices, energy prices and exchange rates. The Company’s operating results are sensitiveCompany has historically entered into derivative transactions from time to changes in the pricestime to limit its exposure resulting from (1) its anticipated sales of alumina, primary aluminum and fabricated aluminum products, net of expected purchase costs for items that fluctuate with aluminum prices, (2) the energy price risk from fluctuating prices for natural gas used in its production process, and also depend(3) foreign currency requirements with respect to a significant degree uponits cash commitments with foreign


100

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
subsidiaries and affiliates. As the volume and mix of all products sold. As discussed more fully in Notes 2 and 12 of Notes to Consolidated Financial Statements, KACC historically has utilizedCompany’s hedging transactionsactivities are generally designed to lock-in a specified price or range of prices, for certain products which it sellsrealized gains or consumeslosses on the derivative contracts utilized in its production process and to mitigate KACC’s exposure to changes in foreign currency exchange rates.the hedging activities (excluding the impact of mark-to-market fluctuations on those contracts discussed below) generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged.
 
Sensitivity
Primary Aluminum.  KACC’sThe Company’s share of primary aluminum production from Anglesey is approximately 150 million150,000,000 pounds annually. Because KACCthe Company purchases alumina for Anglesey at prices linked to primary aluminum prices, only a portion of the Company’s net revenues associated with Anglesey are exposed to price risk. The Company estimates the net portion of its share of Anglesey production exposed to primary aluminum price risk to be approximately 100 million100,000,000 pounds annually.annually (before considering income tax effects).
 
As stated above, theThe Company’s pricing of fabricated aluminum products is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to its customers. However, in certain instances the Company does enter into firm price arrangements. In such instances, the Company does have price risk on its anticipated primary aluminum purchase in respect of the customer’s order. Total fabricated products shipments during 2003, 2004the year ended December 31, 2007, the period from January 1, 2006 to July 1, 2006, the period from July 1, 2006 through December 31, 2006 and the year ended December 31, 2005 for which the Company hadthat contained fixed price riskterms were (in millions of pounds) 97.6, 119.0239.1, 103.9, 96.0 and 155.0, respectively.
 
During the last three years, the Company’s net exposure to primary aluminum price risk at Anglesey substantially offset or roughly equaled the volume of fabricated products shipments with underlying primary aluminum price risk.risk were at least as much as the Company’s net exposure to primary aluminum price risk at Anglesey. As such, the Company considers its access to Anglesey production overall to be a “natural” hedge against any fabricated products firm metal-price risk.risks. However, since the volume of fabricated products


43

shipped under firm prices may not match up on amonth-to-month basis with expected Anglesey-related primary aluminum shipments and to the extent that firm price contracts from our Fabricated Products business unit exceed the Anglesey related primary aluminum shipments, the Company may use third party hedging instruments to eliminate any net remaining primary aluminum price exposure existing at any time.
 
At December 31, 2005,2007, the fabricated products business held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of primary aluminum purchases forduring the period 2006 — 20092008 through 2012 totaling approximately (in millions of pounds): 2006: 123.0, 2007: 79.0, 2008: 56.0,2008 — 161.4, 2009 — 88.5, 2010 — 86.5, 2011 — 77.5 and 2009: 44.0.2012 — 8.1.
 
Foreign Currency.  KACC from time to time will enter into forward exchange contracts to hedge material cash commitments for foreign currencies. After considering the completed sales ofThe following table summarizes the Company’s commodities interests, KACC’s primary foreign exchange exposure is the Anglesey-related commitment that the Company funds in Great Britain Pound Sterling (“GBP”). The Company estimates that, before consideration of any hedging activities, a US $0.01 increase (decrease) in the value of the GBP results in an approximate $.5 million (decrease) increase in the Company’s annual pre-tax operating income.material derivative positions at December 31, 2007:
 
             
     Notional
    
     Amount of
  Carrying/
 
     Contracts
  Market
 
Commodity
 Period  (mmlbs)  Value 
 
Aluminum —            
Option purchase contracts  1/11through 12/11   48.9  $12.7 
Fixed priced purchase contracts  1/08through 12/12   169.3  $9.6 
Fixed priced sales contracts  1/08through 12/09   68.6  $(1.0)
Energy.  KACC is exposed to energy price risk from fluctuating prices for natural gas. The Company estimates that each $1.00 change in natural gas prices (per mcf) impacts the Company’s annual pre-tax operating results by approximately $4.0 million.
 
             
     Notional
    
     Amount of
  Carrying/
 
     Contracts
  Market
 
Foreign Currency
 Period  (mm)  Value 
 
Pounds Sterling —            
Fixed priced purchase contracts  11/08 through 12/08   £4.2  $(.2)
Euro Dollars —            
Fixed priced purchase contracts  1/08 through 7/09  €9.3  $.1 
KACC from time to time in the ordinary course of business enters into hedging transactions with major suppliers of energy and energy-related financial investments. As of December 31, 2005, there were no outstanding energy-related derivative contracts.


44101

 

 
Item 8.Financial Statements and Supplementary Data
Page
Report of Independent Registered Public Accounting Firm46
Consolidated Balance Sheets47
Statements of Consolidated Income (Loss)48
Statements of Consolidated Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)49
Statements of Consolidated Cash Flows50
Notes to Consolidated Financial Statements51
Quarterly Financial Data (Unaudited)100
Five-Year Financial Data102


45

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
             
     Notional
    
     Amount of
  Carrying/
 
     Contracts
  Market
 
Energy
 Period  (mmbtu)  Value 
 
Natural gas —            
Fixed priced purchase contracts(a)  1/08 through 9/08   1,120,000  $(.6)
 
We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation(Debtor-In-Possession and subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income (loss), stockholders’ equity (deficit) and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
(a)As of December 31, 2007, the Company’s exposure to increases in natural gas prices had been substantially limited for approximately 87% of natural gas purchases for January 2008 through March 2008, approximately 13% of natural gas purchases for April 2008 through June 2008 and approximately 1% of natural gas purchases for July 2008 through September 2008.
 
As more fully discussed in Note 1, the Company andreflects changes in the market value of its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation (“KACC”), and certain of KACC’s subsidiaries have filed for reorganization under Chapter 11derivative instruments in Net income (rather than deferring such gains/losses to the date of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purportunderlying transactions to reflect or providewhich the related hedges occur). Included in Net income (Cost of products sold) for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.
As discussed in Note 2, in 2005, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143”, effectiveyear ended December 31, 2005.
The accompanying consolidated financial statements have been prepared assuming that2007 were realized gains (losses) and unrealized gains (losses) of $(3.6) and $9.7, respectively. Included in Net income (Cost of product sold) for the Company will continue as a going concern. As discussedperiod from January 1, 2006 to July 1, 2006 and for the period from July 1, 2006 through December 31, 2006 were realized gains (losses) of $1.6 and $(4.6), respectively, and unrealized gains of $6.1 and $9.0, respectively. Included in Notes 1Net income (Cost of products sold) for the year ended December 31, 2005 were realized gains of $1.0 and 2, the actionunrealized losses of filing for reorganization under Chapter 11 of the Federal Bankruptcy Code, losses from operations and stockholders’ capital deficiency raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/  DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 2006$4.1.


46102

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
NOTES TO CONSOLIDATED BALANCE SHEETSFINANCIAL STATEMENTS — (Continued)
 
         
  December 31, 
  2005  2004 
  (In millions of dollars, except share amounts) 
 
ASSETS
Current assets:        
Cash and cash equivalents $49.5  $55.4 
Receivables:        
Trade, less allowance for doubtful receivables of $2.9 and $6.9  94.6   97.4 
Due from affiliate  —   8.0 
Other  6.9   5.6 
Inventories  115.3   105.3 
Prepaid expenses and other current assets  21.0   19.6 
Discontinued operations’ current assets  —   30.6 
         
Total current assets  287.3   321.9 
Investments in and advances to unconsolidated affiliate  12.6   16.7 
Property, plant, and equipment — net  223.4   214.6 
Restricted proceeds from sale of commodity interests  —   280.8 
Personal injury-related insurance recoveries receivable  965.5   967.0 
Goodwill  11.4   11.4 
Other assets  38.7   31.1 
Discontinued operations’ long-term assets  —   38.9 
         
Total $1,538.9  $1,882.4 
         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities not subject to compromise —         
Current liabilities:        
Accounts payable $51.4  $51.8 
Accrued interest  1.0   .9 
Accrued salaries, wages, and related expenses  42.0   48.9 
Other accrued liabilities  55.2   73.7 
Payable to affiliate  14.8   14.7 
Long-term debt — current portion  1.1   1.2 
Discontinued operations’ current liabilities  2.1   57.7 
         
Total current liabilities  167.6   248.9 
Long-term liabilities  42.0   32.9 
Long-term debt  1.2   2.8 
Discontinued operations’ liabilities (liabilities subject to compromise)  68.5   26.4 
         
   279.3   311.0 
Liabilities subject to compromise  4,400.1   3,954.9 
Minority interests  .7   .7 
Commitments and contingencies        
Stockholders’ equity (deficit):        
Common stock, par value $.01, authorized 125,000,000 shares; issued and outstanding 79,671,531 and 79,680,645 shares  .8   .8 
Additional capital  538.0   538.0 
Accumulated deficit  (3,671.2)  (2,917.5)
Accumulated other comprehensive income (loss)  (8.8)  (5.5)
         
Total stockholders’ equity (deficit)  (3,141.2)  (2,384.2)
         
Total $1,538.9  $1,882.4 
         
14.  Other Operating (Benefits) Charges, Net
The (income) loss impact associated with other operating (benefits) charges, net, was as follows:
                 
        Predecessor 
     Year Ended December 31, 2006    
     July 1,
  January 1,
    
     2006
  2006
    
  Year Ended
  through
  to
  Year Ended
 
  December 31,
  December 31,
  July 1,
  December 31,
 
  2007  2006  2006  2005 
 
Reimbursement of amounts paid in connection with sale of Company’s interests in and related to QAL-Corporate:                
AMT (Note 9) $(7.2) $—  $—  $— 
Professional fees  (1.1)  —   —   — 
Pension benefit related to terminated pension plans — Corporate (Notes 10 and 23)  —   (4.2)  —   — 
Resolution of a “pre-emergence” contingency — Corporate (Note 12)  —   (3.0)  —   — 
Pension Benefit Guaranty Corporation (“PBGC”) settlement — Corporate(1)  (1.3)  —   —   — 
Non-cash benefit resulting from settlement of a $5 claim by the purchaser of the Gramercy, Louisiana alumina refinery and Kaiser Jamaica Bauxite Company for payment of $.1 — Corporate  (4.9)  —   —   — 
Resolution of contingencies relating to sale of property prior to emergence — Corporate(2)  (1.6)  —   —   — 
Post emergence Chapter 11 — related items — Corporate(3)  2.6   4.5   —   — 
Charges associated with retroactive portion of contributions to defined contribution plans upon termination of defined benefit plans(4) (Note 10) — Fabricated Products  —   .4   —   6.3 
Corporate  —   —   —   .5 
Other  (.1)  .1   .9   1.2 
                 
  $(13.6) $(2.2) $.9  $8.0 
                 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
(1)The PBGC proceeds consist of a payment related to a settlement agreement entered into with the PBGC in connection with the Company’s chapter 11 reorganization (Note 12).
(2)During 2007, certain contingencies related to the sale of the Predecessor’s interest in a smelter in Tacoma, Washington were resolved with the buyer. As a result, approximately $1.6 of the sale proceeds which had been placed into escrow at the time of sale were released to the Company. At the Effective Date, no value had been ascribed to the funds in escrow as they were deemed to be contingent assets at that time.
(3)Post-emergencechapter 11-related items include primarily professional fees and expenses incurred after emergence which related directly to the Company’s reorganization and chapter 11 bankruptcy proceedings.
(4)Amount in 2006 represents a one time contribution related to the retroactive implementation of the hourly defined benefit plans. (Note 10)


47103

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CONSOLIDATED INCOME (LOSS)— (Continued)
 
             
  Year Ended December 31, 
  2005  2004  2003 
  (In millions of dollars, except share and per share amounts) 
 
Net sales $1,089.7  $942.4  $710.2 
             
Costs and expenses:            
Cost of products sold  951.1   852.2   681.2 
Depreciation and amortization  19.9   22.3   25.7 
Selling, administrative, research and development, and general  50.9   92.3   92.5 
Other operating charges, net  8.0   793.2   141.6 
             
Total costs and expenses  1,029.9   1,760.0   941.0 
             
Operating income (loss)  59.8   (817.6)  (230.8)
Other income (expense):            
Interest expense (excluding unrecorded contractual interest expense of $95.0 in 2005, 2004 and 2003)  (5.2)  (9.5)  (9.1)
Reorganization items  (1,162.1)  (39.0)  (27.0)
Other — net  (2.4)  4.2   (5.2)
             
Loss before income taxes and discontinued operations  (1,109.9)  (861.9)  (272.1)
Provision for income taxes  (2.8)  (6.2)  (1.5)
             
Loss from continuing operations  (1,112.7)  (868.1)  (273.6)
             
Discontinued operations:            
Loss from discontinued operations, net of income taxes, including minority interests  (2.5)  (5.3)  (514.7)
Gain from sale of commodity interests  366.2   126.6   — 
             
Income (loss) from discontinued operations  363.7   121.3   (514.7)
             
Cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  (4.7)  —   — 
             
Net loss $(753.7) $(746.8) $(788.3)
             
Earnings (loss) per share — Basic/Diluted:            
Loss from continuing operations $(13.97) $(10.88) $(3.41)
             
Income (loss) from discontinued operations $4.57  $1.52  $(6.42)
             
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations $(.06) $—  $— 
             
Net loss $(9.46) $(9.36) $(9.83)
             
Weighted average shares outstanding (000):            
Basic/Diluted  79,675   79,815   80,175 
             
15.  Earnings Per Share
Basic and diluted earnings per share for the year ended December 31, 2007, the period from July 1, 2006 through December 31, 2006, the period from January 1, 2006 to July 1, 2006 and the year ended December 31, 2005 were calculated as follows:
                 
        Predecessor 
     Year Ended December 31, 2006    
  Year Ended
  July 1, 2006
  January 1, 2006
  Year Ended
 
  December 31,
  through
  through
  December 31,
 
  2007  December 31, 2006  July 1, 2006  2005 
 
Numerator:                
Net Income (Loss) from continuing operations $101.0  $26.2  $3,136.9  $(1,112.7)
Income from discontinued operations  —   —   4.3   363.7 
Cumulative effect of accounting adjustment  —   —   —   (4.7)
                 
Net income (Loss) $101.0  $26.2  $3,141.2  $(753.7)
                 
Denominator:                
Weighted average common shares outstanding  20,014   20,003   79,672   79,675 
Effect of dilutive securities:                
Non-vested common shares and restricted stock units  294   86   —   — 
                 
Weighted average common shares outstanding, assuming full dilution  20,308   20,089   79,672   79,675 
                 
Earnings per share — Basic:                
Net Income (Loss) from continuing operations $5.05  $1.31  $39.37  $(13.97)
Income from discontinued operations  —   —   .05   4.57 
Cumulative effect of accounting adjustment  —   —   —   (.06)
                 
Net income (Loss) $5.05  $1.31  $39.42  $(9.46)
                 
Earnings per share — Diluted:                
Net Income (Loss) from continuing operations $4.97  $1.30  $39.37  $(13.97)
Income from discontinued operations  —   —   .05   4.57 
Cumulative effect of accounting adjustment  —   —   —   (.06)
                 
Net income (Loss) $4.97  $1.30  $39.42  $(9.46)
                 
 
The accompanying notesOptions to consolidated financial statements arepurchase 25,137 common shares at an integral partaverage exercise price of these statements.$80.01 were outstanding at December 31, 2007. 552,798 and 525,086 non-vested common shares and restricted stock units were outstanding at December 31, 2007 and 2006, respectively. Diluted income per share reflects the potential dilutive effect of options to purchase common shares and non-vested common shares and restricted stock units using the treasury stock method. Options to purchase 25,137 common shares for the year ended December 31, 2007 were excluded from the weighted average diluted shares computation because their inclusion would have been anti-dilutive. Additionally, for the year ended December 31, 2007 and the period from July 1, 2006 to December 31, 2006, 257,996, and


48104

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)

STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
 
                     
           Accumulated
    
           Other
    
           Comprehensive
    
  Common
  Additional
  Accumulated
  Income
    
  Stock  Capital  Deficit  (Loss)  Total 
  (In millions of dollars) 
 
BALANCE, December 31, 2002 $.8  $539.9  $(1,382.4) $(243.9) $(1,085.6)
Net loss  —   —   (788.3)  —   (788.3)
Minimum pension liability adjustment  —   —   —   138.6   138.6 
Unrealized net decrease in value of derivative instruments arising during the year  —   —   —   (1.6)  (1.6)
Reclassification adjustment for net realized gains on derivative instruments included in net loss  —   —   —   (1.0)  (1.0)
                     
Comprehensive income (loss)                  (652.3)
Restricted stock cancellations  —   (1.0)  —   —   (1.0)
Restricted stock accretion  —   .2   —   —   .2 
                     
BALANCE, December 31, 2003  .8   539.1   (2,170.7)  (107.9)  (1,738.7)
Net loss  —   —   (746.8)  —   (746.8)
Minimum pension liability adjustment  —   —   —   97.9   97.9 
Unrealized net increase in value of derivative instruments arising during the year  —   —   —   2.1   2.1 
Reclassification adjustment for net realized losses on derivative instruments included in net loss  —   —   —   2.4   2.4 
                     
Comprehensive income (loss)                  (644.4)
Restricted stock cancellations  —   (1.1)  —   —   (1.1)
                     
BALANCE, December 31, 2004  .8   538.0   (2,917.5)  (5.5)  (2,384.2)
Net loss  —   —   (753.7)  —   (753.7)
Minimum pension liability adjustment  —   —   —   (3.2)  (3.2)
Unrealized net decrease in value of derivative instruments arising during the year  —   —   —   (.3)  (.3)
Reclassification adjustment for net realized losses on derivative instruments included in net loss  —   —   —   .2   .2 
                     
Comprehensive income (loss)                  (757.0)
                     
BALANCE, December 31, 2005 $.8  $538.0  $(3,671.2) $(8.8) $(3,141.2)
                     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
439,732 non-vested common shares and restricted stock units were excluded from the average share computation, respectively, because their inclusion would be anti-dilutive.
In June 2007, the Board of Directors initiated the payment of a regular quarterly cash dividend of $.18 per common share. In 2007 the Company paid a total of approximately $7.4, or $.36 per common share, in cash dividends under this program. Additionally, on December 11, 2007, the Company declared a third dividend of $3.7, or $.18 per common share, to stockholders of record at the close of business on January 25, 2008, which was paid on February 15, 2008, bringing the total dividends declared for 2007 to approximately $11.1 or $0.54 per common share.
16.  Segment and Geographical Area Information
The Company’s primary line of business is the production of fabricated aluminum products. In addition, the Company owns a 49% interest in Anglesey, which owns an aluminum smelter in Holyhead, Wales.
 
The accompanying notesCompany’s continuing operations are organized and managed by product type and include two operating segments of the aluminum industry and the corporate segment. The aluminum industry segments include: Fabricated Products and Primary Aluminum. The Fabricated Products segment sells value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial applications, including for automotive, aerospace and general engineering end-use applications. The Primary Aluminum segment produces commodity grade products as well as value-added products such as ingot and billet, for which the Company receives a premium over normal commodity market prices and conducts hedging activities in respect of the Company’s exposure to consolidated financial statementsprimary aluminum price risk. The accounting policies of the segments are an integral partthe same as those described in Note 1. Segment results are evaluated internally by management before any allocation of these statements.corporate overhead and without any charge for income taxes, interest expense or Other operating charges, net.
Financial information by operating segment, excluding discontinued operations, at and for the year ended December 31, 2007, 2006 and 2005 is as follows:
                  
         Predecessor 
     Year Ended December 31, 2006    
     July 1, 2006
        
  Year Ended
  through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to
  December 31,
 
  2007  2006   July 1, 2006  2005 
Net Sales:                 
Fabricated Products $1,298.3  $567.2   $590.9  $939.0 
Primary Aluminum  206.2   100.3    98.9   150.7 
                  
  $1,504.5  $667.5   $689.8  $1,089.7 
                  
Equity in income of unconsolidated affiliate:                 
Primary Aluminum $33.4  $18.3   $11.0  $4.8 
                  
Segment Operating Income (Loss):                 
Fabricated Products(1) $169.0  $60.8   $61.2  $87.2 
Primary Aluminum  46.5   10.8    12.4   16.4 
Corporate and Other  (47.1)  (25.5)   (20.3)  (35.8)
Other Operating Benefits (Charges), Net — Note 14  13.6   2.2    (.9)  (8.0)
                  
  $182.0  $48.3   $52.4  $59.8 
                  


49105

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)

STATEMENTS OF CONSOLIDATED CASH FLOWS
 
             
  Year Ended December 31, 
  2005  2004  2003 
  (In millions of dollars) 
 
Cash flows from operating activities:            
Net loss $(753.7) $(746.8) $(788.3)
Less net income (loss) from discontinued operations  363.7   121.3   (514.7)
             
Net loss from continuing operations, including loss from cumulative effect of adopting change in accounting in 2005  (1,117.4)  (868.1)  (273.6)
Adjustments to reconcile net loss from continuing operations to net cash used by continuing operations            
Non-cash charges in reorganization items in 2005 and other operating charges in 2004 and 2003  1,131.5   805.3   161.7 
Depreciation and amortization (including deferred financing costs of $4.4, $5.8 and $4.7, respectively)  24.3   28.1   30.4 
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  4.7   —   — 
Gains — sale of real estate in 2005; sale of Tacoma facility in 2003  (.2)  —   (14.5)
Equity in (income) loss of unconsolidated affiliates, net of distributions  1.5   (4.0)  1.0 
Decrease (increase) in trade and other receivables  9.3   (30.5)  (13.3)
(Increase) decrease in inventories, excluding LIFO adjustments and other non-cash operating items  (9.4)  (24.5)  10.7 
(Increase) decrease in prepaid expenses and other current assets  —   .8   3.1 
(Decrease) increase in accounts payable and accrued interest  (2.4)  16.4   8.1 
(Decrease) increase in other accrued liabilities  (15.0)  (18.6)  9.8 
Increase in payable to affiliates  .1   3.3   .2 
(Decrease) increase in accrued and deferred income taxes  (4.3)  1.7   (4.1)
Net cash impact of changes in long-term assets and liabilities  (25.0)  (11.5)  27.1 
Net cash provided (used) by discontinued operations  17.9   64.0   (29.5)
Other  1.3   (.4)  (4.0)
             
Net cash provided (used) by operating activities  16.9   (38.0)  (86.9)
             
Cash flows from investing activities:            
Capital expenditures  (31.0)  (7.6)  (8.9)
Net proceeds from dispositions: real estate in 2005, real estate and equipment in 2004, primarily Tacoma facility and interests in office building complex in 2003  .9   2.3   83.0 
Net cash provided (used) by discontinued operations; primarily proceeds from sale of commodity interests in 2005 and 2004 and Alpart-related capital expenditures in 2003  401.4   356.7   (25.0)
             
Net cash provided by investing activities  371.3   351.4   49.1 
             
Cash flows from financing activities:            
Financing costs, primarily DIP Facility related  (3.7)  (2.4)  (4.1)
Repayment of debt  (1.7)  —   — 
Increase in restricted cash  (1.5)  —   — 
Net cash used by discontinued operations: primarily increase in restricted cash in 2005 and increase in restricted cash and payment of Alpart CARIFA loan of $14.6 in 2004  (387.2)  (291.1)  — 
             
Net cash used by financing activities  (394.1)  (293.5)  (4.1)
             
Net (decrease) increase in cash and cash equivalents during the year  (5.9)  19.9   (41.9)
Cash and cash equivalents at beginning of year  55.4   35.5   77.4 
             
Cash and cash equivalents at end of year $49.5  $55.4  $35.5 
             
Supplemental disclosure of cash flow information:            
Interest paid, net of capitalized interest of $.6, $.1, and $.2 $.7  $3.8  $4.0 
Less interest paid by discontinued operations, net of capitalized interest of $.9 in 2003  —   (.9)  (1.2)
             
  $.7  $2.9  $2.8 
             
Income taxes paid $22.3  $10.7  $46.1 
Less income taxes paid by discontinued operations  (18.9)  (10.7)  (41.3)
             
  $3.4  $—  $4.8 
             
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1)Operating results for 2007 includes a LIFO inventory benefit of $14.0. Operating results for 2006 and 2005 include LIFO inventory charges of $25.0 and $9.3, respectively.
                  
         Predecessor 
     Year Ended December 31, 2006    
     July 1, 2006
        
  Year Ended
  through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to
  December 31,
 
  2007  2006   July 1, 2006  2005 
Depreciation and amortization                 
Fabricated Products $11.8  $5.2   $9.7  $19.6 
Primary Aluminum  —   —    —   — 
Corporate and Other  .1   .3    .1   .3 
                  
  $11.9  $5.5   $9.8  $19.9 
                  
Capital expenditures, net of accounts payable:                 
Fabricated Products $61.7  $29.7   $27.2  $30.6 
Corporate and Other  .1   .3    .9   .4 
                  
  $61.8  $30.0   $28.1  $31.0 
                  
         
  December 31,
  December 31,
 
  2007  2006 
 
Investments in and advances to unconsolidated affiliate:        
Primary Aluminum $41.3  $18.6 
         
Segment assets:        
Fabricated Products $486.3  $434.4 
Primary Aluminum  99.1   87.8 
Corporate and Other(1)  579.8   133.2 
         
  $1,165.2  $655.4 
         
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
(1)Corporate and Other includes all of the Company’s cash and cash equivalents, net assets in respect of VEBAs and net deferred income tax assets.
                  
         Predecessor 
     Year Ended December 31, 2006    
     July 1, 2006
        
  Year Ended
  through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to
  December 31,
 
  2007  2006   July 1, 2006  2005 
Income taxes paid:(1)                 
Fabricated Products —                 
United States $.8  $—   $.2  $— 
Canada  2.6   .7    1.0   3.4 
                  
  $3.4  $.7   $1.2  $3.4 
                  
(1)Income taxes paid excludes income tax paid by discontinued operations of $18.9 in 2005.


50106

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions — (Continued)
Geographical information for net sales, based on country of dollars, except share amounts)origin, and long-lived assets follows:
                  
         Predecessor 
     Year Ended December 31,    
     July 1, 2006
        
  Year Ended
  through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to
  December 31,
 
  2007  2006   July 1, 2006  2005 
Net sales to unaffiliated customers:                 
Fabricated Products —                 
United States $1,197.0  $517.0   $532.8  $836.1 
Canada  101.3   50.2    58.1   102.9 
                  
   1,298.3   567.2    590.9   939.0 
                  
Primary Aluminum —                 
United States  —   —    —   2.6 
United Kingdom  206.2   100.3    98.9   148.1 
                  
   206.2   100.3    98.9   150.7 
                  
  $1,504.5  $667.5   $689.8  $1,089.7 
                  
         
  December 31,
  December 31,
 
  2007  2006 
 
Long-lived assets:(1)        
Fabricated Products —        
United States $208.3  $155.6 
Canada  10.3   10.6 
         
   218.6   166.2 
Primary Aluminum —        
United Kingdom  41.3   18.6 
Corporate and Other —        
United States  4.1   4.1 
         
  $264.0  $188.9 
         
(1)Long-lived assets include Property, plant, and equipment, net and Investments in and advances to unconsolidated affiliates.
The aggregate foreign currency transaction gains (losses) included in determining net income was immaterial for the years ended December 31, 2007, 2006 and 2005. Sales to the Company’s largest fabricated products customer accounted for sales of approximately 15%, 18% and 19% of total revenue in 2007, 2006 and 2005. The loss of the customer would have a material adverse effect on the Company taken as a whole. However, in the Company’s opinion, the relationship between the customer and the Company is good and the risk of loss of the customer is remote. Export sales were less than 10% of total revenue during the years ended December 31, 2007, 2006 and 2005.


107

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
 
1.  Reorganization ProceedingsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
17.  Supplemental cash flow information
Background.  Kaiser Aluminum Corporation (“Kaiser”, “KAC”
                  
         Predecessor 
     Year Ended December 31,    
     July 1, 2006
        
  Year Ended
  through
   January 1, 2006
  Year Ended
 
  December 31,
  December 31,
   to
  December 31,
 
  2007  2006   July 1, 2006  2005 
Supplemental disclosure of cash flow information:                 
Interest paid, net of capitalized interest of $3.1, $1.6, $1.0 and $.6, respectively $3.1  $.2   $—  $.7 
                  
Income taxes paid $3.4  $.7   $1.2  $22.3 
Less income taxes paid by discontinued operations  —   —    —   (18.9)
                  
  $3.4  $.7   $1.2  $3.4 
                  
Supplemental disclosure of non-cash transactions:                 
Removal of transfer restrictions on common stock owned by Union VEBA (Note 10) $92.8  $—   $—  $— 
                  
Dividend declared and unpaid $3.7  $—   $—  $— 
                  
Recognition of deferred income tax assets and liabilities due to release of valuation allowance through equity $343.0  $—   $—  $—  
                  
PREDECESSOR
18.  Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Predecessor were prepared on a “going concern” basis in accordance withSOP 90-7, and do not include the impacts of the Plan including adjustments relating to recorded asset amounts, the resolution of liabilities subject to compromise, or the “Company”),cancellation of the interests of the Company’s pre-emergence stockholders.
In most instances, but not all, the accounting policies of the Predecessor were the same or similar to those of the Successor. Where accounting policies differed or the Predecessor applied methodologies differently to its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation (“KACC”),financial statement information than that which is used in preparing and 24presenting Successor financial statement information, discussion has been added to this Report in the appropriate section of KACC’sthe Successor notes.
19.  Reorganization Proceedings
Background.  The Company and 25 of its subsidiaries filed separate voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the “Court”) for reorganization under Chapterchapter 11 of the United States Bankruptcy Code (the “Code”);Code; the Company KACC and 1516 of KACC’sits 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. In December 2005, four of the KACC subsidiaries were dissolved pursuant to two separate plans of liquidation as more fully discussed below. The Company KACC and the remaining 20 KACCits subsidiaries continuecontinued to manage their businesses in the ordinary course asdebtors-in-possession subject to the control and administration of the Bankruptcy Court. The Original Debtors and the 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” and the Company, KACC and the remaining 20 KACC subsidiaries are collectively referred to herein as the “Reorganizing Debtors.”. 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’schapter 11 proceeding.


108

non-U.S. jointKAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
 ventures were included in the Cases.
 
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.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Original Debtors found it necessary to file the Caseschapter 11 proceedings primarily because of liquidity and cash flow problems of the Company and its subsidiaries that arose 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.
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. Ancillarychapter 11 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”PBGC.
Reorganizing Debtors; Entities Containing the Fabricated Products and Certain Other Operations.  On February 6, 2006, the Bankruptcy Court entered an order (the “Confirmation Order”) primarily as a resultconfirming the Plan. On May 11, 2006, the District Court for the District of Delaware entered an order affirming the Confirmation Order and adopting the Bankruptcy Court’s findings of fact and conclusions of law regarding confirmation of the Company’s failurePlan. On July 6, 2006, the Plan became effective and was substantially consummated, whereupon the Company emerged from chapter 11.
Pursuant to meet a $17.0 accelerated funding requirement to its salaried employee retirement plan in January 2003 (see Note 9 for additional information regarding the accelerated funding requirement). The filing of the Cases by the Additional Debtors had no impactPlan, on the Company’sday-to-day operations.Effective Date, the pre-emergence ownership interests in the Company were cancelled without consideration and all material pre-petition claims against the Company and its remaining debtor subsidiaries, including claims in respect of debt, pension and postretirement medical obligations, and asbestos and other tort liabilities (totaling approximately $4.4 billion in the June 30, 2006 consolidated financial statements), were resolved as follows:
 
The outstanding principal(a) Claims in Respect of Retiree Medical Obligations. Pursuant to settlements reached with representatives of hourly and accrued interest on, all debtsalaried retirees:
• an aggregate of 11,439,900 shares of the Company’s common stock were delivered to the Union VEBA and entities that prior to the Effective Date acquired from the Union VEBA rights to receive a portion of such shares (see Note 10);
• an aggregate of 1,940,100 shares of common stock were delivered to the Salaried VEBA and entities that prior to the Effective Date acquired from the Salaried VEBA rights to receive a portion of such shares (see Note 10); and
• the Company became obligated to make certain contingent annual cash payments of up to $20.0 annually to the VEBAs that fluctuate based on earnings, adjusted for certain cash flow items (see Note 10).
(b) Priority Claims and Secured Claims. All pre-petition priority claims, pre-petition priority tax claims and pre-petition secured claims were paid in full in cash.
(c) Unsecured Claims. With respect to pre-petition unsecured claims (other than the Debtors became immediately due and payable upon commencement of the Cases. However, the vast majority of thepersonal injury 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 Debtors’ Cases, the Court, upon motion by the Debtors, authorized the 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 limitationsspecified below):
• all pre-petition unsecured claims of the PBGC against the Company’s Canadian debtor affiliates were satisfied by the delivery of 2,160,000 shares of common stock and $2.5 in cash; and
• all pre-petition general unsecured claims against the Company and its remaining debtor subsidiaries, other than Canadian debtor subsidiaries, including claims of the PBGC and holders of public debt, were satisfied by the issuance of 4,460,000 shares of common stock to a third-party disbursing agent, with such shares to be delivered to the holders of such claims in accordance with the terms of the Plan (to the extent not constituting convenience claims satisfied with cash payments). Of such 4,460,000 shares of common stock, less than 200,000 shares continue to be held by the third-party disbursing agent as a reserve pending resolution of


51109

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

disputed claims; to the extent a holder of a disputed claim is not entitled to shares reserved in respect of such claim, such shares will be distributed to holders of allowed claims.
(d) Personal Injury Claims. Certain trusts (the “PI Trusts”) were formed to receive distributions from the Company, assume responsibility from the Company for personal injury liabilities (including those resulting from alleged pre-petition exposures to asbestos, silica and coal tar pitch volatiles and noise-induced hearing loss), and to continue using the Company’s existing cash management systems. The Reorganizing 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 Reorganizing Debtors agree to perform their obligations and cure certain existing defaults under an executory contract and “rejection” means that the Reorganizing 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.
Case Administration.  Generally, pre-Filing Date claims, including certain contingent or unliquidated claims, against the 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 bar dates (established by the Court) by which holders of pre-Filing Date claims against the Debtors (other than asbestos-related personal injury claims) could file their claims have passed. Any holder of a claim that was required to file such claim by such bar date and did not do so may be barred from asserting such claim against any of the 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 mattersmake payments in respect of such personal injury claims. The Company contributed to the claims have been resolved. Material provisions in respect of claim settlements are includedPI Trusts:
• the rights with respect to proceeds associated with personal injury-related insurance recoveries that were reflected on the Company’s financial statements at June 30, 2006 as a receivable having a value of $963.3 (see Note 24);
• $13.0 in cash, less approximately $.3 advanced prior to the Effective Date, which was paid on the Effective Date;
• the stock of a subsidiary whose primary assets was approximately 145 acres of real estate located in Louisiana and the rights as lessor under a lease agreement for such real property that produces modest rental income; and
• 75% of a pre-petition general unsecured claim against one of the Company’s subsidiaries in the amount of $1.1 billion entitling certain of the PI Trusts to a share of the 4,460,000 shares of common stock distributed to unsecured claimholders.
The PI Trusts assumed all liability and responsibility for the accompanying financial statementspast, pending and are fully disclosed elsewhere herein. The bar dates do not apply to asbestos-relatedfuture personal injury claims for which no bar date has been set.
Two creditors’ committees, one representing the unsecured creditors (the “UCC”) and the other representing theresulting from alleged pre-petition exposures to 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 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 Court-appointed legal representatives for (a) potential future asbestos claimants (the “Asbestos Futures’ Representative”) and (b) potential future silica and coal tar pitch volatile, claimants (the “Silica/CTPV Futures’ Representative” and collectively with the Asbestos Futures” Representative, the “Futures’ Representatives”), have played and will continue to play important roles in the Cases and in the negotiationpending noise induced hearing loss personal injury claims. As of the termsEffective Date, injunctions were entered prohibiting any person from pursuing any claims against the Company or any of any plan or plansits affiliates in respect of reorganization. The Debtors are requiredsuch matters.
Cash payments on the Effective Date for priority and secured claims, payments to bear certain coststhe PI Trusts, bank and expenses for the Committeesprofessional fees totaled approximately $29.0 and the Futures’ Representatives, including those of their counsel and other advisors.were funded using existing cash resources.
 
Commodity-related and Inactive Subsidiaries.  Liquidating Debtors.As previously disclosed in prior periods, the Company generated net cash proceeds of approximately $686.8 from the sale of its interests in and related to Queensland Alumina Limited (“QAL”)QAL and Alumina Partners of Jamaica (“Alpart”). The Company’s interests in and related to QAL were owned by KAAC and KFC. The Company’s interests in and related to Alpart were owned by AJIfour of its debtor subsidiaries (the “Liquidating Subsidiaries”) that were subsidiary guarantors of one of the Company’s subsidiaries’ senior and KJC.senior subordinated notes. Throughout 2005, the proceeds were being held in separate escrow accounts pending distribution to the creditors of AJI, KJC, KAAC and KFC (collectively the “Liquidating Subsidiaries”) pursuant to certain liquidating plans.
During November 2004, the Liquidating Subsidiaries filed separate joint plans of liquidation and related disclosure statements with the Court. Such plans, together with the disclosure statements and all amendments filed thereto, are referred to as the “Liquidating Plans.” In general, the Liquidating Plans provided for the vast majority of the net sale proceeds to be distributed to the PBGC and the holders of KACC’s 97/8% and 107/8% Senior Notes (the “Senior Notes”) and claims with priority status.


52

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As previously disclosed in 2004, a group of holders (the “Sub Note Group”) of KACC’s 123/4% Senior Subordinated Notes (the “Sub Notes”) formed an unofficial committee to represent all holders of Sub Notes and retained its own legal counsel. The Sub Note Group asserted that the Sub Note holders’ claims against the subsidiary guarantors (and in particular the Liquidating Subsidiaries) may not, as a technical matter, be contractually subordinated to the claims of the holders of the Senior Notes against the subsidiary guarantors (including AJI, KJC, KAAC and KFC). A separate group that holds both Sub Notes and Senior Notes made a similar assertion, but also, maintained that a portion of the claims of holders of Senior Notes against the subsidiary guarantors were contractually senior to the claims of holders of Sub Notes against the subsidiary guarantors. The effect of such positions, if ultimately sustained, would be that the holders of Sub Notes would be on a par with all or portion of the holders of the Senior Notes in respect of proceeds from sales of the Company’s interests in and related to the Liquidating Subsidiaries.
The Court ultimately approved the disclosure statements related to the Liquidating Plans in February 2005. In April 2005, voting results on the Liquidating Plans were filed with the Court by the Debtors’ claims agent. Based on these results, the Court determined that a sufficient volume of creditors (in number and amount) had voted to accept the Liquidating Plans to permit confirmation proceedings with respect to the Liquidating Plans to go forward even though the filing by the claims agent also indicated that holders of the Sub Notes, as a group, voted not to accept the Liquidating Plans. Accordingly, the Court conducted a series of evidentiary hearings to determine the allocation of distributions among holders of the Senior Notes and the Sub Notes. In connection with those proceedings, the Court also determined that there could be an allocation to the Parish of St. James, State of Louisiana, Solid Waste Revenue Bonds (the “Revenue Bonds”) of up to $8.0 and ruled against the position asserted by the separate group that holds both Senior Notes and the Sub Notes.
 
On December 20, 2005, the Bankruptcy Court confirmedentered an order confirming the two separate joint plans of liquidation (the “Liquidating Plans”) for the Liquidating Subsidiaries. On December 22, 2005, the Liquidating Plans (subject to certain modifications). Pursuant to the Court’s order, the Liquidating Subsidiaries were authorized to make partial cash distributions to certain of their creditors, while reserving sufficient amounts for future distributions until the Court resolved the contractual subordination dispute among the creditors of these subsidiariesbecame effective and for the payment of administrative and priority claims and trust expenses. The Court’s ruling did not resolve the dispute between the holders of the Senior Notes and the holders of the Sub Notes (more fully described below) regarding their respective entitlement to certain of the proceeds from sale of interests by the Liquidating Subsidiaries (the “Senior Note-Sub Note Dispute”). However, as a result of the Court’s approval, all restricted cash orand other assets held on behalf of or by the Liquidating Subsidiaries, consisting primarily of approximately $686.8 of net cash proceeds from the sale of interests in and related to QAL and Alpart, were transferred to a trustee for subsequent distribution to holders of claims against the Liquidating Subsidiaries in accordance with the terms of the Liquidating Plans. The trustee was then authorized to make partial cash distributions after setting aside sufficient reserves for amounts subject to the Senior Note-Sub Note Dispute (approximately $213.0) and for the payment of administrative and priority claims and trust expenses (approximately $40.0). After such reserves, the partial distribution totaled approximately $430.0, of which, pursuant to the Liquidating Plans, approximately $196.0 was paid to the PBGC and $202.0 amount was paid to the indenture trustees for the Senior Notes for subsequent distribution to the holders of the Senior Notes. Of the remaining partial distribution, approximately $21.0 was paid to KACC and $11.0 was paid to the PBGC on behalf of KACC. Partial distributions were made in late December 2005 and, inIn connection with the effectiveness of the Liquidating Plans, the Liquidating Subsidiaries were deemeddissolved and their corporate existence was terminated.
When the Liquidating Plans became effective, substantially all amounts were to be dissolvedpaid to (or received by) the Company from/to the creditors of the Liquidating Subsidiaries pursuant to the Intercompany Agreement, other than certain payments of alternative minimum tax paid by the Company. The Company received $7.2 that was ultimately determined to be due from two of the Liquidating Subsidiaries (Kaiser Alumina Australia Corporation and tookKaiser Finance Corporation under the actions necessaryLiquidating Plan (hereafter referred to dissolveas the “KAAC/KFC Plan”) during the first half of 2007 in connection with the completion of its 2005 tax return (see Note 9). The Intercompany Agreement also resolved substantially all pre- and terminate their corporate existence.post-petition intercompany claims among the Debtors.


110

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effectiveness of the Liquidating Plans and the dissolution of the Liquidating Subsidiaries did not resolve a dispute between the holders of senior notes and the holders of senior subordinated notes regarding their respective entitlement to certain of the proceeds from the sales by the Liquidating Subsidiaries of interests in QAL and Alpart (the “Senior Note-Sub Note Dispute”). On December 22, 2005, the Bankruptcy Court issued a decision in connection with the Senior Note-Sub Note Dispute, finding in(in favor of the Senior Notes. On January 10, 2006, the Court held a hearing on a motion by the indenture trustee for the Sub Notes to stay distribution of the amounts reserved under the Liquidating Plans in respect of the Senior Note-Sub Note Dispute pending appeals in respect of the Court’s December 22, 2005 decisionsenior notes) that the Sub Notessenior subordinated notes were contractually subordinate to the Senior Notessenior notes in regard to certain subsidiary guarantors (particularly the Liquidating Subsidiaries) and that certain parties were not due certain reimbursements. An agreement was reached at the hearing and subsequently approved by Court order dated March 7, 2006, authorizing the trustee to distribute the amounts reserved to the indenture trustees for the Senior Notes and further authorize the indenture trustees to


53

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

make distributions to holders of the Senior Notes while such appeals proceed, in each case subject to the terms and conditions stated in the order.
Based on the objections and pleadings filed by the Sub Note Group and the group that holds Sub Notes and the Senior Notes and the assumptions and estimates upon which the Liquidating Plans are based, if the holders of Sub Notes were ultimately to prevail on their appeal, the Liquidating Plans indicated that it is possible that the holders of the Sub Notes could receive between approximately $67.0 and approximately $215.0 depending on whether the Sub Notes were determined to rank on par with a portion or all of the Senior Notes. Conversely, if the holders of the Senior Notes prevail on appeal, then the holders of the Sub Notes will receive no distributions under Liquidating Plans. The Company believes that the intent of the indentures in respect of the Senior Notes and the Sub Notes was to subordinate the claims of the Sub Note holders in respect of the subsidiary guarantors (including the Liquidating Subsidiaries) and that theBankruptcy Court’s ruling on December 22, 2005, was correct.appealed and in January 2008, the District Court affirmed the Bankruptcy Court’s ruling. The District Court’s ruling has been appealed. The Company cannot predict, however, the ultimate resolution of the matters raised by the SubSenior Note-Sub Note Group, or the other group,Dispute on appeal, when any such resolution will occur, or what impact any such resolution mayoutcome will have on the Company, the Cases or distributions to affected note holders.
The distributionsholders under the Liquidating Plans. However, given the Company’s now completed emergence from the chapter 11, the Company does not have any continuing liability in respect of the Liquidating Plans also settled substantially all amounts due between KACC and the creditors of the Liquidating Subsidiaries pursuant to the Intercompany Settlement Agreement (the “Intercompany Agreement”) that went into affect in February 2005 other than certain payments of alternative minimum tax paid by the Company that it expects to recoup from the liquidating trust for the KAAC and KFC joint plan of liquidation (the “KAAC/KFC Plan”) during the second half of 2006 in connection with a 2005 tax return (seeSenior Note-Sub Note 8). The Intercompany Agreement also resolved substantially all pre- and post-petition intercompany claims among the Debtors.Dispute.
KBC is being dealt with in the KACC plan of reorganization as more fully discussed below.
Entities Containing the Fabricated Products and Certain Other Operations.  Under the Code, claims of individual creditors must generally be satisfied from the assets of the entity against which that creditor has a lawful claim. The claims against the entities containing the Fabricated products and certain other operations have to be resolved from the available assets of KACC, KACOCL, and Bellwood, which generally include the fabricated products plants and their working capital, the interests in and related to Anglesey Aluminium Limited (“Anglesey”) and proceeds received by such entities from the Liquidating Subsidiaries under the Intercompany Agreement. Sixteen of the Reorganizing Debtors have no material ongoing activities or operations and have no material assets or liabilities other than intercompany claims (which were resolved pursuant to the Intercompany Agreement). The Company has previously disclosed that it believed that it is likely that most of these entities will ultimately be merged out of existence or dissolved in some manner.
In June 2005, KAC, KACC, Bellwood and KACOCL and 17 of KACC’s subsidiaries (i.e., the Reorganizing Debtors) filed a plan of reorganization and related disclosure statement with the Court. Following an interim filing in August 2005, in September 2005, the Reorganizing Debtors filed amended plans of reorganization (as modified, the “Kaiser Aluminum Amended Plan”) and related amended disclosure statements (the “Kaiser Aluminum Amended Disclosure Statement”) with the Court. In December 2005, with the consent of creditors and the Court, KBC was added to the Kaiser Aluminum Amended Plan.
The Kaiser Aluminum Amended Plan, in general (subject to the further conditions precedent as outlined below), resolves substantially all pre-Filing Date liabilities of the Remaining Debtors under a single joint plan of reorganization. In summary, the Kaiser Aluminum Amended Plan provides for the following principal elements:
(a) All of the equity interests of existing stockholders of the Company would be cancelled without consideration.


54

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(b) All post-petition and secured claims would either be assumed by the emerging entity or paid at emergence (see “Exit Cost” discussion below).
(c) Pursuant to agreements reached with salaried and hourly retirees in early 2004, in consideration for the agreed cancellation of the retiree medical plan, as more fully discussed in Note 9, KACC is making certain fixed monthly payments into Voluntary Employee Beneficiary Associations (“VEBAs”) until emergence and has agreed thereafter to make certain variable annual VEBA contributions depending on the emerging entity’s operating results and financial liquidity. In addition, upon emergence the VEBAs are entitled to receive a contribution of 66.9% of the new common stock of the emerged entity.
(d) The PBGC will receive a cash payment of $2.5 and 10.8% of the new common stock of the emerged entity in respect of its claims against KACOCL. In addition, as described in (f) below, the PBGC will receive shares of new common stock based on its direct claims against the Remaining Debtors (other than KACOCL) and its participation, indirectly through the KAAC/KFC Plan in claims of KFC against KACC, which the Company currently estimates will result in the PBGC receiving an additional 5.4% of the new common stock of the emerged entity (bringing the PBGC’s total ownership percentage of the new entity to approximately 16.2%). The $2.5 cash payment discussed above is in addition to the cash amounts the Company has already paid the PBGC (see Note 9) and that the PBGC has received and will receive from the Liquidating Subsidiaries under the Liquidating Plans.
(e) Pursuant to an agreement reached in early 2005, all pending and future asbestos-related personal injury claims, all pending and future silica and coal tar pitch volatiles personal injury claims and all hearing loss claims would be resolved through the formation of one or more trusts to which all such claims would be directed by channeling injunctions that would permanently remove all liability for such claims from the Debtors. The trusts would be funded pursuant to statutory requirements and agreements with representatives of the affected parties, using (i) the Debtors’ insurance assets, (ii) $13.0 in cash from KACC, (iii) 100% of the equity in a KACC subsidiary whose sole asset will be a piece of real property that produces modest rental income, and (iv) the new common stock of the emerged entity to be issued as per (f) below in respect of approximately $830.0 of intercompany claims of KFC against KACC that are to be assigned to the trust, which the Company currently estimates will entitle the trusts to receive approximately 6.4% of the new common stock of the emerged entity.
(f) Other pre-petition general unsecured claims against the Remaining Debtors (other than KACOCL) are entitled to receive approximately 22.3% of the new common stock of the emerging entity in the proportion that their allowed claim bears to the total amount of allowed claims. Claims that are expected to be within this group include (i) any claims of the Senior Notes, the Sub Notes and PBGC (other than the PBGC’s claim against KACOCL), (ii) the approximate $830.0 of intercompany claims that will be assigned to the personal injury trust(s) referred to in (e) above, and (iii) all unsecured trade and other general unsecured claims, including approximately $276.0 of intercompany claims of KFC against KACC. However, holders of general unsecured claims not exceeding a specified small amount will receive a cash payment equal to approximately 2.9% of their agreed claim value in lieu of new common stock. In accordance with the contractual subordination provisions of the indenture governing the Sub Notes and terms of the settlement between the holders of the Senior Notes and the holders of the Revenue Bonds, the new common stock or cash that would otherwise be distributed to the holders of the Sub Notes in respect of their claims against the Debtors would instead be distributed to holders of the Senior Notes and the Revenue Bonds on a pro rata basis based on the relative allowed amounts of their claims.
The Kaiser Aluminum Amended Plan was accepted by all classes of creditors entitled to vote on it and the Kaiser Aluminum Amended Plan was confirmed by the Court on February 6, 2006. The confirmation order remains subject to motions for review and appeals filed by certain of KACC’s insurers and must still be adopted or affirmed by the United States District Court. Other significant conditions to emergence include completion of the Company’s


55

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

exit financing, listing of the new common stock on the NASDAQ stock market and formation of certain trusts for the benefit of different groups of torts claimants. As provided in the Kaiser Aluminum Amended Plan, once the Court’s confirmation order is adopted or affirmed by the United States District Court, even if the affirmation order is appealed, the Company can proceed to emerge if the United States District Court does not stay its order adopting or affirming the confirmation order and the key constituents in the Chapter 11 proceedings agree. Assuming the United States District Court adopts or affirms the confirmation order, the Company believes that it is possible that it will emerge before May 11, 2006. No assurances can be given that the Court’s confirmation order will ultimately be adopted or affirmed by the United States District Court or that the transactions contemplated by the Kaiser Aluminum Amended Plan will ultimately be consummated.
At emergence from Chapter 11, the Reorganizing Debtors will have to pay or otherwise provide for a material amount of claims. Such claims include accrued but unpaid professional fees, priority pension, tax and environmental claims, secured claims, and certain post-petition obligations (collectively, “Exit Costs”). The Company currently estimates that its Exit Costs will be in the range of $45.0 to $60.0. The Company currently expects to fund such Exit Costs using existing cash resources and borrowing availability under an exit financing facility that would replace the current Post-Petition Credit Agreement (see Note 7). If funding from existing cash resources and borrowing availability under an exit financing facility are not sufficient to pay or otherwise provide for all Exit Costs, the Company and KACC 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 any issues that may arise in respect of an exit financing facility or be able to negotiate a reasonable alternative. However, no assurance can be given in this regard.
Financial Statement Presentation.  The accompanying consolidated financial statements have been prepared in accordance with American Institute of Certified Professional Accountants (“AICPA”) Statement ofPosition 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 bySOP 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 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 liabilities subject to compromise (that will be relieved upon emergence), comparisons between the current historical financial statements and the financial statements upon emergence may be difficult to make.


56

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Financial Information.  UnderSOP 90-7 disclosures are required to distinguish the balance sheet, income statement and cash flows amounts in the consolidated financial statements between Debtors and non-Debtors. The vast majority of financial information included in the consolidated financial statements relates to Debtors. Condensed combined financial information of the non-debtor subsidiaries included in the consolidated financial statements is set forth below.
Condensed Consolidating Balance Sheets
December 31, 2005 and 2004
         
  2005  2004 
 
Current assets $2.3  $2.1 
Intercompany receivables (payables), net(1)  4.0   4.5 
         
  $6.3  $6.6 
         
Liabilities not subject to compromise —         
Current liabilities $3.9  $3.2 
Long-term liabilities  1.4   1.2 
Stockholders’ equity (deficit)(1)  1.0   2.2 
         
  $6.3  $6.6 
         
(1)Intercompany receivables (payables), net and stockholders’ equity (deficit) amounts are eliminated in consolidation.
Condensed Consolidating Statements of Income (Loss)
For the Year Ended December 31, 2005, 2004, and 2003
             
  2005  2004  2003 
 
Costs and expenses —             
Operating costs and expenses $1.5  $.5  $.7 
             
Operating loss  (1.5)  (.5)  (.7)
All other income (expense), net  .4   .6   .2 
Income tax and minority interests  —   —   .1 
Equity in income of subsidiaries  —   —   — 
             
Income (loss) from continuing operations  (1.1)  .1   (.4)
Discontinued operations(1)  —   (58.1)  (32.0)
             
Net loss $(1.1) $(58.0) $(32.4)
             
(1)Non-debtor subsidiary activity in 2005 was nominal. In 2004 and 2003, the combined non-debtor subsidiary financial information included amounts attributed to Valco Aluminum Company Limited (“Valco”) and Alpart that were sold in 2004 (see Note 3).


57

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2005, 2004, and 2003
             
  2005  2004  2003 
 
Net cash provided (used) by:            
Operating activities —             
Continuing operations $(.3) $(.2) $(.7)
Discontinued operations(1)  —   18.0   27.3 
             
   (.3)  17.8   26.6 
             
Investing activities —             
Continuing operations  —   —   — 
Discontinued operations(1)  —   (2.9)  (26.5)
             
   —   (2.9)  (26.5)
             
Financing activities —             
Continuing operations  —   —   — 
Discontinued operations(1)  —   (14.6)  — 
             
   —   (14.6)    
             
Net decrease in cash and cash equivalents  (.3)  .3   .1 
Cash and cash equivalents, beginning of period  .4   .1   — 
             
Cash and cash equivalents, end of period $.1  $.4  $.1 
             
(1)Non-debtor subsidiary activity in 2005 was nominal. In 2004 and 2003, the combined non-debtor subsidiary financial information included amounts attributed to Valco Aluminum Company Limited (“Valco”) and Alpart that were sold in 2004 (see Note 3).
 
Classification of Liabilities as “Liabilities Not Subject to Compromise” Versus “Liabilities Subject to Compromise.”  Liabilities not subject to compromise include: include the following:
(1) liabilities incurred after the date each entity filed for reorganization (i.e., its Filing Date of the Cases; Date);
(2) pre-Filing Date liabilities that the Reorganizing Debtors expectwere expected to paybe paid 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;liabilities; and
(3) pre-Filing Date liabilities that have beenwere approved for payment by the Bankruptcy Court and that the Reorganizing Debtors expectwere expected to paybe paid (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,agreements, and certain postretirement medical and other costs associated with retirees.
 
Liabilities subject to compromise refer to all other pre-Filing Date liabilities of the Reorganizing 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, it is expected that pursuant to the Kaiser Aluminum Amended Plan, 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.


58

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amounts subject to compromise at December 31, 2005 and 2004 consisted of the following items:
         
  December 31, 
  2005  2004 
 
Accrued postretirement medical obligation (Note 9) $1,017.0  $1,042.1 
Accrued asbestos and certain other personal injury liabilities (Note 11)  1,115.0   1,115.0 
Assigned intercompany claims for benefit of certain creditors (see Reorganization Items below)  1,131.5   — 
Debt (Note 7)  847.6   847.6 
Accrued pension benefits (Note 9)  626.2   625.7 
Unfair labor practice settlement (Note 11)  175.0   175.0 
Accounts payable  29.8   29.8 
Accrued interest  44.7   47.5 
Accrued environmental liabilities (Note 11)  30.7   30.6 
Other accrued liabilities  37.2   41.6 
Proceeds from sale of commodity interests  (654.6)  — 
         
  $4,400.1  $3,954.9 
         
(1)Other accrued liabilities include hearing loss claims of $15.8 at December 31, 2005 and 2004 (see Note 11).
(2)The above amounts exclude $68.5 at December 31, 2005 and $26.4 at December 31, 2004 of liabilities subject to compromise related to discontinued operations. The increase between 2004 and 2005 primarily relates to a $42.1 claim settlement in the fourth quarter of 2005 (see Note 3). The balance of the amounts at December 31, 2005 and 2004 were primarily accounts payable.
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 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 arewere incurred or realized by the Company because it iswas in reorganization. These items include, but are not limited to, professional fees and similar types of expenses incurred directly related to the Cases,reorganization proceedings, loss accruals or gains or losses resulting from activities of the reorganization process, and interest earned on cash accumulated by the Debtors because they arewere not paying their pre-Filing Date liabilities. For the yearsyear ended December 31, 2005, 20042006 and 2003,2005, reorganization items were as follows:
 
                        
 Years Ended December 31,    Predecessor 
 2005 2004 2003  Year Ended December 31, 2006   
 July 1, 2006
     
 through
 January 1, 2006
 Year Ended
 
 December 31,
 to
 December 31,
 
 2006 July 1, 2006 2005 
Gain on plan implementation and fresh start $—  $(3,110.3) $— 
Professional fees $35.2  $39.0  $27.5   —   21.2   35.2 
Interest income  (2.1)  (.8)  (.8)  —   (1.4)  (2.1)
Assigned intercompany claims for benefit of certain creditors  1,131.5   —   —   —   —   1,131.5 
Other  (2.5)  .8   .3   —   .2   (2.5)
              
 $1,162.1  $39.0  $27.0  $—  $(3,090.3) $1,162.1 
              

The Company continued to incur legal and certain other costs related to the emergence from chapter 11 in 2007, the costs are included in Other operating charges (benefits). Additionally, certain professionals were


59111

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As discussed above, pursuant to the Kaiser Aluminum Amended Plan for purposes of determining distributions under the Kaiser Aluminum Amendment Plan, the value associated with an intercompany note payable by KACC to KFC of approximately $1,131.5 will be treated as being for the benefit of certain creditor constituents (see (e) and (f) above). Prior to the implementation of the Liquidating Plans, the intercompany note payable between KACC and KFC eliminated in consolidation. However, since the Liquidating Plans were implemented in December 2005, the value associated with the intercompany note payable is now treated in the accompanying consolidated financial statements as of and for the year ended December 31, 2005 as a third party obligation. As such, the Company recorded a Reorganization charge associated with implementation of the Liquidating Plans of $1,131.5 in the fourth quarter of 2005 and an increase in Liabilities subject to compromise.
2.  Summary of Significant Accounting Policies
 
Going Concern.  The consolidated financial statementscontractually due certain “success” fees due upon the Company’s emergence from chapter 11 and Bankruptcy Court approval. Approximately $5.0 of such amounts were borne by the Company have been prepared on a “going concern” basis which contemplatesand were recorded by 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 consolidated financial statements do not include all of the necessary adjustments to 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 which may be madePredecessor in connection with the Reorganizing Debtors’ capitalizations or operations as a result of the Kaiser Aluminum Amended Plan. Because of the ongoing nature of the Cases, the discussionsemergence and consolidated financial statements contained herein are subject to material uncertainties.fresh start accounting. The $5.0 was paid in January 2007.
 
Additionally, as discussed above (seeFinancial 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 December 31, 2005 financial statements to the financial statements of the entity upon emergence.
Principles of Consolidation.  The consolidated financial statements include the statements of the Company and its majority owned subsidiaries. The Company is a subsidiary of MAXXAM Inc. (“MAXXAM”) and conducts its operations through its wholly owned subsidiary, KACC.
The preparation of financial statements in accordance with generally accepted accounting principles 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 operation.
Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. Intercompany balances and transactions are eliminated.
Recognition of Sales.  Sales are recognized when title, ownership and risk of loss pass to the buyer. A provision for estimated sales returns and allowances from customers is made in the same period as the related revenues are recognized, based on historical experience or the specific identification of an event necessitating a reserve.
Earnings per Share.  Basic earnings per share is computed by dividing the weighted average number of common shares 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 per share may not be meaningful, because as a part of a plan of reorganization for the Company, it is likely that the equity interests of the Company’s


60

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

existing stockholders are expected to be cancelled without consideration pursuant to the Kaiser Aluminum Amended Plan.
Cash and Cash Equivalents.  The Company considers only those short-term, highly liquid investments with original maturities of 90 days or less when purchased to be cash equivalents.
Inventories.  Substantially all product inventories are stated atlast-in, first-out (“LIFO”) cost, not in excess of market value. Other inventories, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor, and manufacturing overhead, including depreciation. Inventories, after deducting inventories related to discontinued operations, consist of the following:
         
  December 31, 
  2005  2004 
 
Fabricated products —         
Finished products $34.7  $23.3 
Work in process  43.1   42.2 
Raw materials  26.3   27.9 
Operating, repairs and maintenance parts  11.1   11.8 
         
   115.2   105.2 
Commodities — Primary aluminum  .1   .1 
         
  $115.3  $105.3 
         
The above table excludes commodities inventories related to discontinued operations of $8.8 in 2004 and $113.7 in 2003. Inventories related to discontinued operations in 2004 were reduced by a net charge of $1.2 to write down certain alumina inventories to their estimated net realizable value as a result of the Company’s sale of its interests in and related to Valco (Note 5).
Inventories were reduced by LIFO inventory charges of $9.3, $12.1, and $3.2 during the years ended December 31, 2005, 2004 and 2003, respectively. These amounts exclude LIFO inventory charges related to discontinued operations of $1.6 in 2004 and $3.4 in 2003.
Depreciation.  Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of assets. The principal estimated useful lives of land improvements, buildings, and machinery and equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years, respectively. As more fully discussed in Note 1, upon emergence from the Cases, the Company expects to apply “fresh start” accounting to its consolidated financial statements as required bySOP 90-7. As a result, accumulated depreciation will be reset to zero. With the allocation of the reorganization value to the individual assets and liabilities, it is possible that future depreciation will differ from historical depreciation.
Stock-Based Compensation.  The Company applies the intrinsic value method to account for a stock-based compensation plan whereby compensation cost is recognized only to the extent that the quoted market price of the stock at the measurement date exceeds the amount an employee must pay to acquire the stock. No compensation cost has been recognized for this plan as the exercise price of the stock options granted in 2001 were at or above the market price. No stock options have been granted since 2001. The pro forma after-tax effect of the estimated fair value of the grants would have had no effect on the net loss in 2005 and would have increased the net loss in 2004 and 2003 by $.3 and $.4, respectively. The pro forma after tax effect of the estimated fair value of the grants would have resulted in no change in the basic/diluted income (loss) per share for 2005, 2004, and 2003. The fair value of the 2001 stock option grants were estimated using a Black-Scholes option pricing model.


61

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The pro forma effect of the estimated value of stock options may not be meaningful, because as a part of a plan of reorganization for the Company, it is likely the equity interests of the holders of outstanding options are expected to be cancelled without consideration pursuant to the Kaiser Aluminum Amended Plan.
Other Income (Expense).  Amounts included in Other income (expense) in 2005, 2004 and 2003, other than interest expense and reorganization items, included the following pre-tax gains (losses):
             
  Year Ended December 31, 
  2005  2004  2003 
 
Gains on sale of real estate and miscellaneous equipment associated with properties with no operations (Note 5) $—  $1.8  $— 
Settlement of outstanding obligations of former affiliate  —   6.3   — 
Asbestos and personal injury-related charges (Note 11)  —   (1.0)  — 
Adjustment to environmental liabilities (Note 11)  —   (1.4)  (7.5)
All other, net  (2.4)  (1.5)  2.3 
             
  $(2.4) $4.2  $(5.2)
             
The above table excludes pre-tax gains (losses), net related to discontinued operations of $(.1) in 2005, $1.0 in 2004, and $(1.3) in 2003.
Deferred Financing Costs.  Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the related borrowing. Such amortization is included in Interest expense. As a result of the Cases, the unamortized portion of the deferred financing costs related to the Debtors’ unsecured debt was expensed on the Filing Date (see Note 1).
Goodwill.  The Company reviews goodwill for impairment at least annually in the fourth quarter of each year. As of December 31, 2005, goodwill (related to the Fabricated products business unit) was approximately $11.4. With the allocation of the reorganization value to the individual assets and liabilities (see Note 1), it is possible that the goodwill amount will change.
Foreign Currency.  The Company uses the United States dollar as the functional currency for its foreign operations.
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 changes 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 board of directors. Hedging transactions are executed centrally on behalf of all of KACC’s business segments to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.
The Company recognizes all derivative instruments as assets or liabilities in the balance sheet and measures those instruments at fair value by“marking-to-market” all of its hedging positions at each period-end (see Note 12). Changes in the market value of the Company’s open hedging positions resulting from themark-to-market process represent unrealized gains or losses. Such unrealized gains or losses will fluctuate, based on prevailing market prices at each subsequent balance sheet date, until the transaction date occurs. These changes are recorded as an increase or reduction in stockholders’ equity through either other comprehensive income (“OCI”) or net income, depending on the facts and circumstances with respect to the hedge and its documentation. If the derivative transaction qualifies for hedge (deferral) treatment under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS No. 133”), the changes are recorded initially in OCI. Such changes reverse out of OCI (offset by any fluctuations in other “open” positions) and are recorded in


62

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

net income (included in Net sales or Cost of products sold, as applicable) when the subsequent physical transactions occur. To the extent that derivative transactions do not qualify for hedge accounting treatment, the changes in market value are recorded in net income. In order to qualify for hedge accounting treatment, the derivative transaction must meet criteria established by SFAS No. 133. Even if the derivative transaction meets the SFAS No. 133 criteria, the Company must also comply with a number of highly complex documentation requirements, which, if not met, result in the derivative transaction being precluded from being treated as a hedge (i.e. it must then be marked-to-market) unless and until such documentation is modified and determined to be in accordance with SFAS No. 133. Additionally, if the level of physical transactions ever falls below the net exposure hedged, “hedge” accounting must be terminated for such “excess” hedges. In such an instance, themark-to-market changes on such excess hedges would be recorded in the income statement rather than in OCI.
As more fully discussed in Note 16, in connection with the Company’s preparation of its December 31, 2005 financial statements, the Company concluded that its derivative financial instruments did not meet certain specific derivative criteria in SFAS No. 133 and, as such, the Company has restated its prior quarter results and has marked all of its derivatives to market in 2005. The change in accounting for derivative contracts was related to the form of the Company’s documentation in respect of derivatives contracts it enters into to reduce exposures to changes in prices for primary aluminum and energy and in respect of foreign exchange rates. The Company determined that its hedging documentation did not meet the strict documentation standards established by SFAS No. 133. More specifically, the Company’s documentation did not comply with the SFAS No. 133 was in respect to the Company’s methods for testing and supporting that changes in the market value of the hedging transactions would correlate with fluctuations in the value of the forecasted transaction to which they relate. The Company had documented that the derivatives it was using would qualify for the “short cut” method whereby regular assessments of correlation would not be required. However, it ultimately concluded that, while the terms of the derivatives were essentially the same as the forecasted transaction, they were not identical and, therefore, the Company should have done certain mathematical computations to prove the ongoing correlation of changes in value of the hedge and the forecasted transaction. As a result, under SFAS No. 133, the Company “de-designated” its open derivative transactions and reflected fluctuations in the market value of such derivative transactions in its results each period rather than deferring the effects until the forecasted transaction (to which the hedges relate) occur. The effect on the first three quarters of 2005 as a result of marking the derivatives to market each quarter rather than deferring gains/losses was to increase Cost of products sold and decrease Operating income by $2.0, $1.5 and $1.0, respectively.
The rules provide that, once de-designation has occurred, the Company can modify its documentation and re-designate the derivative transactions as “hedges” and, if appropriately documented, re-qualify the transactions for prospectively deferring changes in market fluctuations after such corrections are made. The Company is working to modify its documentation and to re-qualify open and post 2005 hedging transactions for treatment as hedges beginning in the second quarter of 2006. However, no assurances can be provided in this regard.
In general, material fluctuations in OCI and Stockholders’ equity will occur in periods of price volatility, despite the fact that the Company’s cash flow and earnings will be “fixed” to the extent hedged. This result is contrary to the intent of the Company’s hedging program, which is to “lock-in” a price (or range of prices) for products sold/used so that earnings and cash flows are subject to reduced risk of volatility.
Fair Value of Financial Instruments.  Given the fact that the fair value of substantially all of the Company’s outstanding indebtedness will be determined as part of the plan of reorganization, it is impracticable and inappropriate to estimate the fair value of these financial instruments at December 31, 2005 and 2004.
Asset Retirement Obligations.  Effective December 31, 2005, the Company adopted FASB Interpretation No. 47 (“FIN 47”),Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (“SFAS No. 143”) retroactive to the beginning of 2005. Pursuant to SFAS No. 143 and FIN 47, companies are required to estimate incremental costs for special handling, removal and disposal costs of materials that may or will give rise to conditional asset retirement obligations (“CAROs”) and then discount the expected costs back to the


63

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

current year using a credit adjusted risk free rate. Under the guidelines clarified in FIN 47, liabilities and costs for CAROs must be recognized in a company’s financial statements even if it is unclear when or if the CARO may/will be triggered. If it is unclear when or if a CARO will be triggered, companies are required to use probability weighting for possible timing scenarios to determine the probability weighted amounts that should be recognized in the company’s financial statements. The Company has evaluated FIN 47 and determined that it has CAROs at several of its fabricated products facilities. The vast majority of such CAROs consist of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, ceilings or piping) of certain of the older plants if such plants were to undergo major renovation or be demolished. No plans currently exist for any such renovation or demolition of such facilities and the Company’s current assessment is that the most probable scenarios are that no such CARO would be triggered for 20 or more years, if at all. Nonetheless, consistent with the guidelines of FIN 47, the retroactive application of FIN 47 resulted in the Company recognizing the following in the fourth quarter of 2005: (i) a charge of approximately $2.0 reflecting the cumulative earnings impact of adopting FIN 47 (set out separately on the statement of operations), (ii) an increase in Property, plant and equipment of $.5 and (iii) offsetting the amounts in (i) and (ii), an increase in Long term liabilities of approximately $2.5. In addition, pursuant to FIN 47 there was an immaterial amount of incremental depreciation provision recorded (in Depreciation and amortization) for the year ended December 31, 2005 as a result of the retroactive increase in Property, plant and equipment (discussed in (ii) above) and there was an incremental $.2 of non-cash charges (in Cost of products sold) to reflect the accretion of the liability recognized at January 1, 2005 (discussed in (iii) above) to the estimated fair value of the CARO at December 31. 2005 ($2.7). Had the cumulative effect of FIN 47 been retrospectively applied, Long term liabilities as of December 31, 2004, 2003 and 2002 would have been increased by $2.5, $2.3 and $2.2, respectively, Loss from continuing operations and Net loss for 2004 and 2003 each would have been increased by $.2 and $.2, respectively, and the related Earnings (loss) per share amounts for 2004 and 2003 would not have changed.
For purposes of the Company’s fair value estimates it used a credit adjusted risk free rate of 7.5%.
Also see Note 4 for a discussion of the recording of a CARO at Anglesey.
New Accounting Pronouncements.  Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(“SFAS No. 123-R”) was issued in December 2004 and replaces Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensationand supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. In general terms,SFAS No. 123-R eliminates the intrinsic value method of accounting for employee stock options and requires a company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the award will be recognized as an expense over the period that the employee provides service for the award. The Company is required to adoptSFAS No. 123-R on January 1, 2006. The adoption ofSFAS No. 123-R will have no material impact on the existing Company’s financial statements as all of the Company’s outstanding options are fully vested. However, the adoption ofSFAS No. 123-R could have a material impact on the financial statements of the emerging entity depending on the nature of any share based payments that may be granted after the Company emergence from Chapter 11.
Statement of Financial Accounting Standards No. 151,Inventory Costs, an Amendment of ARB No. 43, Chapter 4(“SFAS No. 151”) was issued in November 2004 and is effective for fiscal years beginning after June 15, 2005. SFAS No. 151 amends ARB No. 43, Chapter 4 to clarify that abnormal costs, such as idle facility expenses, freight, handling costs and spoilage, be accounted as current period charges rather than as a portion of inventory costs. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s financial statements.
Statement of Financial Accounting Standards No. 154,Accounting Changes and Error Corrections(“SFAS No. 154”) was issued in May 2005 and replaces Accounting Principles Board Opinion No. 20,Accounting Changes(“APB No. 20”) and Statement of Financial Accounting Standards No. 3,Reporting Changes in Interim


64

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Financial Statements.SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle and carries forward without changing the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements. In general terms, SFAS No. 154 requires the retrospective application to prior periods’ financial statements of a change in an accounting principle. This contrasts with APB No. 20 which required that a change in an accounting principle be recognized in the period the change was adopted by including in net income the cumulative effect of adopting the new accounting principle. SFAS No. 154 is effective for all financial statements beginning January 1, 2006 and applies to all accounting changes and corrections of errors made after such effective dates. The adoption of SFAS No. 154 is not currently expected to have a material impact on the Company’s financial statements.
Reclassifications.  Certain prior years’ amounts in the consolidated financial statements have been reclassified to conform to the 2005 presentations. The reclassifications had no impact on prior years’ reported net losses.
3.  Discontinued Operations
20.  Discontinued Operations
 
As part of the Company’s plan to divest certain of its commodity assets, as more fully discussed in Notes 1 and 5, the Company completed the sale of its interests in and related to Alpart, KACC’s Gramercy, Louisiana alumina refinery (“Gramercy”), Kaiser Jamaica Bauxite Company (“KJBC”), Valco, and the Mead facility and certain related property (the “Mead Facility”) in 2004 and the sale ofsold its interests in and related to QAL in 2005. AllApril 2005 for net cash proceeds totaling approximately $401.4. The buyer assumed the Company’s obligations for approximately $60.0 of QAL debt and the Company’s obligation to pay its proportionate share (20%) of debt, operating expenses and certain other costs of QAL. In connection with the sale, the Company also paid a termination fee of $11.0. After considering transaction costs (including the termination fee and a $7.7 deferred charge associated with aback-up bid fee), the transaction resulted in a gain, net of estimated income tax of $7.9, of approximately $366.2. As described in Note 19, a substantial majority of the foregoing commodity assets are collectively referredproceeds from the sale of the Company’s interests in and related to asQAL were held in escrow for the “Commodity Interests”. benefit of the creditors under the liquidating trust for the KAAC/KFC Plan until the KAAC/KFC Plan was confirmed by the Bankruptcy Court and became effective in December 2005.
In accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“SFAS No. 144”), the assets, liabilities, operating results and gains from sale of the Commodity InterestsQAL have been reported as discontinued operations in the accompanying financial statements.
 
Under SFAS No. 144, only those assets, liabilities and operating results that are being sold/discontinued are treated as “discontinued operations”. In the case of the sale of Gramercy/KJBC and the Mead Facility, the buyers did not assume such items as accrued workers compensation, pension or postretirement benefit obligations in respect of the former employees of these facilities. As discussed more fully in Note 1, the Company expects that retained obligations will generally be resolved pursuant to the Kaiser Aluminum Amended Plan. As such, the balances related to such obligations are still included in the consolidated financial statements. Because the Company owned a 65% interest in Alpart, Alpart’s balances and results of operations were fully consolidated into the Company’s consolidated financial statements. Accordingly, the amounts reflected below for Alpart include the 35% interest in Alpart owned by Hydro Aluminium as. (“Hydro”). Hydro’s share of the net investment in Alpart is reflected as a minority interest.
The balances and operating results associated with the Company’s interests in and related to Alpart, Gramercy/KJBC and QAL were previously included in the Bauxite and alumina business segment and the balances and operating results associated with the Company’s interests in and related to Valco and the Mead Facility were previously included in the Primary aluminum business segment. The Company has also reported as discontinued operations the portion of the commodity marketing external hedging activities that were attributable to the Company’s Commodity Interests.
The carrying amounts of the assets and liabilities in respect of the Company’s interest in and related to the sold Commodity Interests as of December 31, 2005 and 2004 are included in the accompanying Consolidated Balance Sheets for the years ended December 31, 2005 and 2004. Income statement information in respect of the Company’s


65

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

interest in and related to the sold Commodity Interests for the years ended December 31, 2005, 2004 and 2003 included in income (loss) from discontinued operations was as follows:
                                     
  2005  2004  2003 
     Primary
        Primary
        Primary
    
  Alumina
  Aluminum
     Alumina
  Aluminum
     Alumina
  Aluminum
    
  Interests  Interests  Total  Interests  Interests  Total  Interests  Interests  Total 
 
Net sales $42.9  $—  $42.9  $546.0  $.2  $546.2  $637.9  $26.8  $664.7 
Operating income (loss)  (20.7)  .7   (20.0)  53.6   (59.8)  (6.2)  (450.1)  (58.2)  (508.3)
Gain on sale of commodity interests  366.2   —   366.2   103.2   23.4   126.6   —   —   — 
Income (loss) before income taxes and minority interests —   363.4   .7   364.1   158.2   (35.7)  122.5   (453.7)  (57.5)  (511.2)
Net income (loss)  363.0   .7   363.7   142.7   (21.4)  121.3   (459.9)  (54.8)  (514.7)
(1)Alumina interests for the year ended December 31, 2003 include Gramercy/KJBC impairment charges of $368.0 (see Note 5).
(2)Primary aluminum interests for the year ended December 31, 2004 includes impairment charges of $33.0 (Valco — Notes 2 and 5).
(3)Alumina interests for the year ended December 31, 2005 includes a KBC bauxite supply agreement rejection charge of $42.1 (see below).
As previously disclosed during the fourth quarter of 2005, the UCCofficial committee of unsecured creditors (the “UCC”) negotiated a settlement with a third party that had asserted an approximate $67.0 claim for damages against KBCKaiser Bauxite Company (“KBC”) for rejection of a bauxite supply agreement. Pursuant to the settlement, among other things, the Company agreed to (a) allow the third party an unsecured pre-petition claim in the amount of $42.1, (b) substantively consolidate KBC with certain of the other debtorsDebtors solely for the purpose of treating that claim, and any other pre-petition claim of KBC, under the Kaiser Aluminum Amended Plan and (c) modify the Kaiser Aluminum Amended Plan to implement the settlement. In consideration of the settlement, the third party, among other things, agreed to not object to the Kaiser Aluminum Amended Plan. The settlement was approved by the Bankruptcy Court in January 2006 and the Company recorded a charge of $42.1 in the fourth quarter of 2005 in Discontinued operations and reflected an increase in Discontinued operations liabilities subject to compromise by the same amount.
 
In connection with its investmentDuring the second quarter of 2006, the Company recorded a $5.0 charge as a result of an agreement between the Company and the Bonneville Power Administration (“BPA”) related to a rejected electric power contract (see Note 24). This amount is included in QAL, KACC had entered into several financial commitments consisting of long-term agreementsDiscontinued operations for the purchase and tolling of bauxite into alumina in Australia by QAL. Under the agreements, KACC was unconditionally obligatedperiod from January 1, 2006 to pay its proportional share (20%) of debt, operating costs, and certain other costs of QAL.
KACC’s share of payments, including operating costs and certain other expenses under the agreements, generally ranged between $70.0-$100.0 in 2004 and 2003. The Company’s interests in and related to QAL was sold as of AprilJuly 1, 2005 (see Note 5). In connection with the QAL sale, KACC’s obligations in respect of its share of QAL’s debt were assumed by the buyer.
Contributions to foreign pension plans included in discontinued operations were approximately $12.0 during 2004, including approximately $10.0 of end of service payments in respect of Valco employees. Contributions to foreign pension plans included in discontinued operations in 2003 was approximately $9.0.2006.
 
During Marchthe first quarter of 2006, the Company received a $7.5 payment from an insurer in settlement of certain residual claims the Company had in respect of thea 2000 incident at its Gramercy, Louisiana alumina refinery (which was sold in 2004). This amount is expected to be included in Discontinued operations incomefor the period from January 1, 2006 to July 1, 2006.
Operating activity during the first quarter of 2006.


66

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.  Investment In and Advances To Unconsolidated Affiliate
Summary financial information is provided below for Anglesey, a 49.0% owned unconsolidated aluminum investment, which owns an aluminum smelter at Holyhead, Wales. The agreement under which Anglesey receives power expires in September 2009 and the nuclear facility which supplies such power is scheduled to cease operations shortly thereafter. No assurance can be given that Anglesey will be able to obtain sufficient power to sustain its operations on reasonably acceptable terms thereafter. The Company is responsible for selling Anglesey’s alumina in respect of its ownership percentage. Such alumina is purchased under a long-term contract with the former Alpart facility at prices that are tied to primary aluminum prices.
Summary of Financial Position
         
  December 31, 
  2005  2004 
 
Current assets $69.9  $50.7 
Non-current assets (primarily property, plant, and equipment, net)  52.9   36.3 
         
Total assets $122.8  $87.0 
         
Current liabilities $36.1  $15.6 
Long-term liabilities  50.1   21.6 
Stockholders’ equity  36.6   49.8 
         
Total liabilities and stockholders’ equity $122.8  $87.0 
         
Summary of Operations
             
  Year Ended December 31, 
  2005  2004  2003 
 
Net sales $266.2  $249.2  $205.5 
Costs and expenses  (243.9)  (223.1)  (196.5)
Provision for income taxes  (6.7)  (7.4)  (2.6)
             
Net income $15.6  $18.7  $6.4 
             
Company’s equity in income $4.8  $8.2  $3.3 
             
Dividends received $9.0  $4.5  $4.3 
             
The Company’s equity in income differs from the summary net income due to equity method accounting adjustments and applying US generally accepted accounting principles (“GAAP”). At year-end 2005, Anglesey recorded a CARO liability of approximately $15.0 in its financial statements. The treatment applied by Anglesey was not consistent with the principles of SFAS No. 143 or FIN 47. Accordingly, the Company adjusted Anglesey’s recording of the CARO to comply with US GAAP treatment. The Company determined that application of US GAAP would have resulted in (a) a non-cash cumulative adjustment of $2.7 reducing the Company’s investment retroactive to the beginning of 2005 and (b) a decrease in the Company’s share of Anglesey’s earnings totaling approximately $.1 for 2005 (representing additional depreciation, accretion and foreign exchange charges). Had US GAAP principles been applied to prior years, the pro forma effects would have been as follows: (a) the Company’s investment in Anglesey as of December 31, 2004, 2003 and 2002 would have been reduced by $.8, $.8 and $.7, respectively, in respect of the additional CARO liability, and (b) the Company’s share of Anglesey’s earnings for 2004 and 2003 each would have been decreased by $.8 (in respect of the incremental depreciation, accretion and


67

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

foreign exchange). However, had these affects been retroactively applied, the related Earnings (loss) per share amounts for 2004 and 2003 would not have changed.
For purposes of the Company’s fair value estimates, it used a credit adjusted risk free rate of 7.5%.
At December 31, 2005 and 2004, KACC’s net receivables from Anglesey were none and $8.0, respectively.
The Company’s equity in income before income taxes of Anglesey is treated as a reduction (increase) in Cost of products sold. The Company and Anglesey have interrelated operations. KACC provided Anglesey with management services during 2004 and 2003. Significant activities with Anglesey include the acquisition and processing of alumina into primary aluminum. Purchases from Anglesey were $150.4, $120.9 and $100.0, in the yearsyear ended December 31, 2005 2004consisted almost exclusively of the Company’s interests in and 2003, respectively. Sales to Anglesey were $35.1, $23.7, and $32.9, in the years ended December 31, 2005, 2004 and 2003, respectively.
5.  Property, Plant, and Equipment
The major classes of property, plant, and equipment, after deducting property, plant and equipment, net related to discontinued operations, are as follows:
         
  December 31, 
  2005  2004 
 
Land and improvements $7.7  $8.2 
Buildings  62.4   63.8 
Machinery and equipment  460.4   459.8 
Construction in progress  25.0   6.1 
         
   555.5   537.9 
Accumulated depreciation  (332.1)  (323.3)
         
Property, plant, and equipment, net $223.4  $214.6 
         
During the period from 2003 toQAL, which were sold in April 2005, the Company completed several dispositions which are discussed below:
2005 — and related hedging activity.
 
21.  • In April 2005, the Company completed the sale of its interests inDebt and related to QAL. Net cash proceeds from the sale total approximately $401.4. The buyer also assumed KACC’s obligations in respect of approximately $60.0 of QAL debt (see Note 4). In connection with the completion of the sale, the Company also paid a termination fee of $11.0. After considering transaction costs (including the termination fee and a $7.7 deferred charge associated with aback-up bid fee), the transaction resulted in a gain, net of estimated income tax of $7.9, of approximately $366.2. As described in Note 1, a substantial majority of the proceeds from the sale of the Company’s interests in and related to QAL were held in escrow for the benefit of KAAC’s creditors until the KAAC/KFC Plan was confirmed by the Court (see Note 1) and became effective. In accordance with SFAS No. 144, balances and results of operations related to the Company’s interests in and related to QAL have been reported as discontinued operations in the accompanying financial statements (see Note 3).
2004 — 
• On July 1, 2004, with Court approval, the Company completed the sale of its interests in and related to Alpart for a base purchase price of $295.0 plus certain adjustments of approximately $20.0. The transaction resulted in a gross sales price of approximately $315.0, subject to certain post-closing adjustments, and a pre-tax gain


68

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)Credit Facilities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of approximately $101.6. Offsetting the cash proceeds were approximately $14.5 of payments made by KACC to fund the prepayment of KACC’s share of the Alpart-related debt (see Note 7) and $3.3 of transaction-related costs. The balance of the proceeds were held in escrow primarily for the benefit of certain creditors as provided in the AJC and KJC joint plan of liquidation (the “AJC/KJC Plan”). In accordance with SFAS No. 144, balances and results of operations related to the Company’s interests and related to Alpart have been reported as discontinued operations in the accompanying financial statements (see Note 3). A net benefit of approximately $1.6 was recorded in December 2004 in respect of the Alpart-related purchase price adjustments. Such amounts were collected during the second quarter of 2005.

• In May 2004, the Company entered into an agreement to sell its interests in and related to the Gramercy facility and KJBC. The sale closed on October 1, 2004 with Court approval. Net proceeds from the sale were approximately $23.0, subject to various closing and post closing adjustments. Such adjustments were insignificant. The transaction was completed at an amount approximating its remaining book value (after impairment charges). A substantial portion of the proceeds were used to satisfy transaction related costs and obligations. As previously reported, the Company had determined that the fair values of its interests in and related to Gramercy/KJBC was below the carrying values of the assets because all offers that had been received for such assets were substantially below the carrying values of the assets. Accordingly, in the fourth quarter of 2003, KACC adjusted the carrying value of its interests in and related to Gramercy/KJBC to the estimated fair value, which resulted in a non-cash impairment charge of approximately $368.0 (which amount was reflected in discontinued operations — see Note 3). In accordance with SFAS No. 144, the Company’s interests in and related to the Gramercy facility and KJBC have been reported as discontinued operations in the accompanying financial statements (see Note 3).
• During 2003, the Company and Valco participated in extensive negotiations with the Government of Ghana (“GoG”) and the Volta River Authority (“VRA”) regarding Valco’s 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 Understanding (“MOU”) in December 2003 pursuant to which KACC would sell its 90% interest in and related to Valco to the GoG. The Company collected $5.0 pursuant to the MOU. However, a new financial agreement was reached in May 2004 and the MOU was amended. Under the revised financial terms, the Company was to retain the $5.0 already paid by the GoG and $13.0 more was to be paid by the GoG 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 $9.8) which the GoG was to assume under the original MOU. The agreement was approved by the Court on September 29, 2004. The sale closed on October 29, 2004. As the revised purchase price under the amended MOU was well below the Company’s recorded value for Valco, the Company recorded a non-cash impairment charge of $31.8 in its first quarter 2004 financial statements to reduce the carrying value of its interests in and related to Valco at March 31, 2004 to the amount of the expected proceeds (which amount was reflected in discontinued operations — see Note 3). As a result, at closing there was no material gain or loss on disposition. In accordance with SFAS No. 144, balances and results of operations related to the Company’s interests in and related to Valco have been reported as discontinued operations in the accompanying financial statements (see Note 3).
• In June 2004, with Court approval, the Company completed the sale of the Mead Facility for approximately $7.4 plus assumption of certain site-related liabilities. The sale resulted in net proceeds of approximately $6.2 and a pre-tax gain of approximately $23.4. The pre-tax gain includes the impact from the sale of certain non-operating land in the first quarter of 2004 that was adjacent to the Mead Facility. The pre-tax gain on the sale of this property had been deferred pending the finalization of the sale of the Mead Facility and transfer of the site-related liabilities. Proceeds from the sale of the Mead Facility totaling $4.0 were held in escrow as Restricted proceeds from sale of commodity interests until the value of the secured claim of the holders of the 7.6% solid waste disposal revenue bonds was determined by the Court (see Note 7). In accordance with


69

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS No. 144, the assets, liabilities and operating results of the Mead Facility have been reported as discontinued operations in the accompanying financial statements (see Note 3).

• In the ordinary course of business, KACC sold non-operating real estate and certain miscellaneous equipment for total proceeds of approximately $1.9. These transactions resulted in pre-tax gains of $1.8 (included in Other income (expense) — see Note 2).
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 theon-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 6). The operating results of the Tacoma facility for 2004, 2003 and 2002 have not been reported as discontinued operations in the accompanying Statements of Consolidated Income (Loss) because such amounts were 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 asale-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 (which amount was reflected in Other operating charges (benefits), net — see Note 6). The sale was approved by the Court in February 2003 and closed in March 2003. Net cash proceeds were approximately $61.1.
• In July 2003, with Court approval, the Company sold certain equipment at the Spokane, Washington facility that was no longer required as a part of past product rationalizations. Proceeds from the sale were approximately $7.0, resulting in a net gain of approximately $5.0 after considering sale related costs. The gain on the sale of this equipment has been netted against additional impairment charges of approximately $1.1 associated with equipment to be abandoned or otherwise disposed of primarily as a result of product rationalizations (which amounts were reflected in Other operating charges (benefits), net — see Note 6). The equipment that was sold in July 2003 had been previously impaired to a zero basis. The impairment was based on information available at that time and the expectation that proceeds from the eventual sale of the equipment would be fully offset by sale related costs to be borne by the Company.


70

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.  Other Operating Charges, Net
The income (loss) impact associated with other operating charges, net, after deducting other operating charges, net related to discontinued operations, for 2005, 2004 and 2003, was as follows:
             
  Year Ended December 31, 
  2005  2004  2003 
 
Charges associated with 2004 portion of deferred contribution plans implemented in 2005 (Note 9) —             
Fabricated Products $(6.3) $—  $— 
Corporate  (.5)  —   — 
Pension charge related to terminated pension plans — Corporate (Note 9)  —   (310.0)  (121.2)
Charge related to settlement with United Steelworkers of America unfair labor practice allegations — Corporate (Note 11)  —   (175.0)  — 
Settlement charge related to termination of Post-retirement medical benefits plans — Corporate (Note 9)  —   (312.5)  — 
Restructured transmission service agreement — Primary Aluminum (Note 14)  —   —   (3.2)
Environmental multi-site settlement — Corporate (Note 11)  —   —   (15.7)
Hearing loss claims — Corporate (Note 11)  —   —   (15.8)
Gain on sale of Tacoma facility — Primary Aluminum (Note 5)  —   —   9.5 
Gain on sale of equipment, net — Fabricated Products (Note 5)  —   —   3.9 
Other  (1.2)  4.3   .9 
             
  $(8.0) $(793.2) $(141.6)
             
The above table excludes other operating charges, net related to discontinued operations of $95.2 in 2004 and $(369.4) in 2003.


71

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.  Long-Term Debt
Long-term debt, after deducting debt related to discontinued operations, consists of the following:
         
  December 31, 
  2005  2004 
 
Secured:        
Post-Petition Credit Agreement $—  $— 
7.6% Solid Waste Disposal Revenue Bonds due 2027  —   1.6 
Other borrowings (fixed rate)  2.3   2.4 
Unsecured or Undersecured:        
97/8% Senior Notes due 2002, net
  172.8   172.8 
107/8% Senior Notes due 2006, net
  225.0   225.0 
123/4% Senior Subordinated Notes due 2003
  400.0   400.0 
7.6% Solid Waste Disposal Revenue Bonds due 2027  17.4   17.4 
Other borrowings (fixed and variable rates)  32.4   32.4 
         
Total  849.9   851.6 
Less — Current portion  (1.1)  (1.2)
 Pre-Filing Date claims included in subject to compromise (i.e. unsecured debt) (Note 1)  (847.6)  (847.6)
         
Long-term debt $1.2  $2.8 
         
On February 11, 2005, the Company and KACC entered into a new financing agreement with a group of lenders under which the Company was provided with a replacement for the existing post-petition credit facility and a commitment for a multi-year exit financing arrangement upon the Debtors’ emergence from the Chapter 11 proceedings. The new financing agreement:
• Replaced the existing post-petition credit facility with a new $200.0 post-petition credit facility (the “DIP Facility”) and
• Included a commitment, upon the Debtors’ emergence from the Chapter 11 proceedings, for exit financing in the form of a $200.0 revolving credit facility (the “Revolving Credit Facility”) and a fully drawn term loan (the “Term Loan”) of up to $50.0 (collectively referred to as “Exit Financing”).
 
On February 1, 2006, the Court approved an amendment to the DIP Facility to extend its expiration date through the earlier ofand again on May 11, 2006, the effective date of a plan of reorganization or voluntary termination by the Company. In addition, theBankruptcy Court approved an extensionamendments to the Company’s Secured Super-PriorityDebtor-In-Possession Revolving Credit and Guaranty Agreement (the “DIP Facility”) extending its expiration date ultimately to the earlier of the cancelation date ofCompany’s emergence from chapter 11 or August 31, 2006. The DIP Facility terminated on the lenders’ commitment for the Exit Financing to May 11, 2006. Effective Date.
Under the DIP Facility, which providesprovided for a secured, revolving line of credit, the Company KACC and certain of its subsidiaries of KACC arewere able to borrow amounts by means of revolving credit advances and to have issued letters of credit (up


112

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(up to $60.0) in an aggregate amount equal to the lesser of $200.0 or a borrowing base comprised of eligible accounts receivable, eligible inventory and certain eligible machinery, equipment and real estate, reduced by certain reserves, as defined in the DIP Facility agreement. This amount availableAt June 30, 2006, there were no outstanding borrowings under the DIP Facility will be reduced by $20.0 if net borrowing availability falls below $40.0. Interestand there were outstanding letters of credit of approximately $17.7 (which on anythe Effective Date were converted to outstanding borrowings will bear a spread over either a base rate or LIBOR, at KACC’s option.letters of credit under the Revolving Credit Facility).
 
The DIP Facility, is currently expected to expire on May 11, 2006. As discussed in Note 1,which was implemented during the Company believes that it is possible that it will emerge before May 11, 2006. However, if the Company does not emerge from the Cases prior to May 11, 2006, it will be necessary for the Company to extend the expiration datefirst quarter of the DIP Facility or make alternative financing arrangements. The Company has begun discussions with the agent bank that


72

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

represents the DIP Facility lenders regarding the likely need for a short-term extension of the DIP Facility. While the Company believes that, if necessary, it would be successful in negotiating an extension of the DIP Facility or adequate alternative financing arrangements, no assurances can be given in this regard.
The DIP Facility is secured by substantially all of the assets of the Company, KACC and KACC’s domestic subsidiaries and is guaranteed by KACC and all of KACC’s remaining material domestic subsidiaries.
Amounts owed under the DIP Facility may be accelerated under various circumstances more fully described in the DIP Facility agreement, including,but not limited to, the failure to make principal or interest payments due under the DIP Facility, breaches of certain covenants, representations and warranties set forth in the DIP Facility agreement, and certain events having a material adverse effect on the business, assets, operations or condition of the Company taken as a whole.
The DIP Facility places restrictions on the Company’s, KACC’s and KACC’s subsidiaries’ ability to, among other things, incur debt, create liens, make investments, pay dividends, sell assets, undertake transactions with affiliates, and enter into unrelated lines of business.
The principal terms of the committed Revolving Credit Facility would be essentially the same as or more favorable than the DIP Facility, except that, among other things, the Revolving Credit Facility would close and be available upon the Debtors’ emergence from the Chapter 11 proceedings and would be expected to mature five years from the date of emergence. The Term Loan commitment would be expected to close upon the Debtors’ emergence from the Chapter 11 proceedings and would be expected to mature on May 11, 2010. The agent bank representing the Exit Financing lenders is the same as the agent bank for the DIP Facility lenders and the Company has begun parallel discussions with the agent bank regarding the extension of the expiration date for the Exit Financing commitment in the event the Company does not emerge from the Cases prior to May 11, 2006.
The DIP Facility2005, replaced a post-petition credit facility (the “Replaced Facility”) that the Company and KACCone of its subsidiaries entered into on February 12, 2002. The Replaced Facility was amended a number of times during its term as a result of, among other things, reorganization transactions, including disposition of the Company’s Commodity Interests.interests in its commodity subsidiaries.
 
At December 31, 2005, there were no outstanding borrowings under the DIP Facility. There were approximately $17.8 of outstanding letters of credit under the DIP Facility and there were no outstanding letters of credit that remained outstanding under the Replaced Facility. The Company had (duringDuring the first quarter of 2005)2005, the Company deposited cash of $13.3 as collateral for the Replaced FacilityFacility’s letters of credit and deposited approximately $1.7 of collateral with the Replaced FacilityFacility’s lenders until certain other banking arrangements arewere terminated. As of December 31, 2005,June 30, 2006, all of the $13.3 collateral for the Replacement FacilityReplaced Facility’s letters of credit and $.2 of the collateral for certain other certain bondingbanking arrangements (of which $1.5 was received during 2006) had been refunded to the Company.
 
22.  Income Tax Matters
7.6% Solid Waste Disposal Revenue Bonds.
For the six months ended June 30, 2006, the income tax provision for continuing operations included a foreign income tax provision of approximately $7.0. The 7.6% solid waste disposal revenue bonds (the “Solid Waste Bonds”) were secured by certain (but not all) of the facilities and equipment at the Mead Facility which was sold inincome tax provision for continuing operations related primarily to foreign income taxes. The six months ended June 2004 (see Note 5). The Company believes that the value of the collateral that secured the Solid Waste Bonds was in the30, 2006 include an approximate $1.0 range and, asbenefit associated with a result, has reclassified $18.0 of the Solid Waste Bonds balance to Liabilities subject to compromise (see Note 1). However, in connection with the sale of the Mead Facility, $4.0 of the proceeds were placed in escrow for the benefit of the holders of the Solid Waste Bonds until the value of the secured claim of the bondholders is determined by the Court. The value of the secured claim was ultimately agreed to be approximately $1.6. As such, the amount of the Solid Waste Bonds considered in Liabilities subject to compromise has been reduced to $17.4. During the second quarter of 2005, the Court approved distribution of the escrowed amounts to the bondholders and the Company. As such, during the second quarter of 2005,U.S. income tax refund. While the Company received $2.4considered the July 2006 emergence from escrow and the bondholders received the balancechapter 11 for purposes of $1.6. As the Solid Waste Bonds were not a part of the Mead Facility sale transaction, they were not reported as discontinued operations in the accompanying Consolidated Balance Sheets. During the second quarter of 2005, the Company also reversed (in Reorganization items) approximately $2.7 of post-Filing Date interest that was accrued in respect of the Solid Waste Bonds before the value of the collateral was able to be estimated.


73

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

83/4% Alpart CARIFA Loans.  In December 1991, Alpart entered into a loan agreement with the Caribbean Basin Projects Financing Authority (“CARIFA”). 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 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 incomeestimating impacts on the bonds.
Pursuant to the CARIFA loan agreement, the Alpart CARIFA financing was repaid in connection with the sale ofeffective tax rate, the Company’s interests in and related to Alpart, which were sold on July 1, 2004 (see Note 5). Upon such payment, the Company’s letter of credit obligation under the DIP Facility securing the loans was cancelled.
97/8% Notes, 107/8% Notes and 123/4% Notes.  The obligations of KACC with respect to its Senior Notes and its Sub Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC.
Debt Covenants and Restrictions.  The indentures governing the Senior Notes and the Sub Notes (collectively, the “Indentures”) restrict, among other things, KACC’s ability to incur debt, undertake transactions with affiliates, and pay dividends. Further, the Indentures provide that KACC must offer to purchase the Senior Notes and the Sub Notes upon the occurrence of a Change of Control (as defined therein).
8.  Income Taxes
Income (loss) before income taxes and minority interests by geographic area (excluding discontinued operations and cumulative effect of change in accounting principle) is as follows:
             
  Year Ended December 31, 
  2005  2004  2003 
 
Domestic $(1,130.7) $(886.1) $(286.7)
Foreign  20.8   24.2   14.6 
             
Total $(1,109.9) $(861.9) $(272.1)
             
Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes.
The (provision) benefitprovisions for income taxes on income (loss) before income taxes and minority interests (excluding discontinued operations and cumulative effectas of change in accounting principle) consists of:
                 
  Federal  Foreign  State  Total 
 
2005 Current $—  $(3.8) $.5  $(3.3)
Deferred  —   .5   —   .5 
                 
Total $—  $(3.3) $.5  $(2.8)
                 
2004 Current $—  $(6.4) $—  $(6.4)
Deferred  —   .2   —   .2 
                 
Total $—  $(6.2) $—  $(6.2)
                 
2003 Current $—  $(1.3) $—  $(1.3)
Deferred  —   (.2)  —   (.2)
                 
Total $—  $(1.5) $—  $(1.5)
                 


74

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation between the (provision) benefit for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes and minority interests (excluding discontinued operations and cumulative effect of change in accounting principle) is as follows:
             
  Year Ended December 31, 
  2005  2004  2003 
 
Amount of federal income tax benefit based on the statutory rate $388.5  $301.7  $95.2 
Increase in valuation allowances  (379.8)  (304.7)  (98.1)
Percentage depletion  —   5.1   6.4 
Foreign taxes  3.9   (6.3)  (1.5)
Other  (15.4)  (2.0)  (3.5)
             
Provision for income taxes $(2.8) $(6.2) $(1.5)
             
Deferred Income Taxes.  Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components ofJune 30, 2006 did not include any direct impacts from the Company’s net deferred income tax assets (liabilities)emergence from chapter 11. Such impacts are reflected in periods following emergence as follows:
         
  December 31, 
  2005  2004 
 
Deferred income tax assets:        
Postretirement benefits other than pensions $398.9  $396.0 
Loss and credit carryforwards  348.0   411.3 
Pension benefits  170.5   243.6 
Other liabilities  168.3   153.7 
Other  39.0   75.0 
Assigned intercompany claim for benefit of certain creditors  443.9   — 
Valuation allowances  (1,527.1)  (1,221.3)
         
Total deferred income tax assets — net  41.5   58.3 
         
Deferred income tax liabilities:        
Property, plant, and equipment  (41.3)  (39.0)
Other  (2.5)  (22.0)
         
Total deferred income tax liabilities  (43.8)  (61.0)
         
Net deferred income tax assets (liabilities)(1) $(2.3) $(2.7)
         
more fully discussed in Note 9.
 
(1)23.  These deferred income tax liabilities are included in the Consolidated Balance Sheets as of December 31, 2005Employee Benefit and 2004, respectively, in the caption entitled Long-term liabilities.Incentive Plans
 
In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. As of December 31, 2005, due to uncertainties surrounding the realization of the Company’s deferred tax assets including the cumulative federal and state net operating losses sustained during the prior years, the Company has a valuation


75

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

allowance of $1,547.2 against its deferred tax assets. When recognized, the tax benefits relating to any reversal of the valuation allowance will primarily be accounted for as a reduction of income tax expense.
Tax Attributes.  At December 31, 2005, the Company had certain tax attributes available to offset regular federal income tax requirements, subject to certain limitations, including net operating loss and general business credit carryforwards of $768.0 and $.6, respectively, which expire periodically through 2024 and 2011, respectively, and alternative minimum tax (“AMT”) credit carryforwards of $31.0, which have an indefinite life.
A substantial portion of the Company’s attributes would likely be used to offset any gains that may result from the cancellation of indebtedness as a part of the Company’s reorganization. Any tax attributes not utilized by the Company prior to emergence from Chapter 11 may be subject to certain limitations as to their utilization post-emergence. Pursuant to the Kaiser Aluminum Amended Plan, in order to preserve the net operating loss carryforwards available to the Company, certain major stockholders of the emerging entity, including the VEBAs and the PBGC, would be limited to the number of shares of common stock that they will be able to sell for several years after emergence.
Other.  In March 2003, the Company paid approximately $22.0 in settlement of certain foreign tax matters in respect of a number of prior periods.
In connection with the sale of the Company’s interests in and related to QAL, the Company made payments totaling approximately $8.5 for alternative minimum tax (“AMT”) in the United States. Such payments were made in the fourth quarter of 2005. The Company believes that such amounts paid in respect of the sale of interests should, in accordance with the Intercompany Agreement, be reimbursed to the Company from the funds held by the Liquidating Trustee. However, at this point, as this has yet to be agreed, the Company has not recorded a receivable for this amount. The Company expects to resolve this matter in the latter part of 2006 in connection with the filing of its 2005 Federal income tax return.
No U.S. federal or state liability has been recorded for the undistributed earnings of the Company’s Canadian subsidiaries at December 31, 2005. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation.
9.  Employee Benefit and Incentive Plans
Historical Pension and Other Postretirement Benefit Plans.The Company and its subsidiaries have historically provided (a) postretirement health care and life insurance benefits to eligible retired employees and their dependents and (b) pension benefit payments to retirement plans. Substantially all employees became eligible for health care and life insurance benefits if they reached retirement age while still working for the Company or its subsidiaries. The Company did not fund the liability for these benefits, which were expected to be paid out of cash generated by operations. The Company reserved the right, subject to applicable collective bargaining agreements, to amend or terminate these benefits. Retirement plans were generally non-contributory for salaried and hourly employees and generally provided for benefits based on formulas which considered such items as length of service and earnings during years of service.
 
Reorganization Efforts Affecting Pension and Post Retirement Medical Obligations.  The Company has stated since the inception of its Chapter 11 proceedings that legacy items that included its pension and post-retirement benefit plans would have to be addressed before the Company could successfully reorganize. The Company previously disclosed that it did not intend to make any pension contributions in respect of its domestic pension plans during the pendency of the Cases as it believed that virtually all amounts were pre-Filing Date obligations. The Company did not make required accelerated funding payments to its salaried employee retirement


76

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

plan. As a result, during 2003, the Company engaged in lengthy negotiations with the PBGC, the 1114 Committee and the appropriate union representatives for the hourly employees subject to collective bargaining agreements regarding its plans to significantly modify or terminate these benefits.
In January 2004, the Company filed motions with the Bankruptcy Court to terminate or substantially modify postretirement medical obligations for both salaried and certain hourly employees and for the distressed termination of substantially all domestic hourly pension plans. The Company subsequently concluded agreements with a committee appointed in the 1114 CommitteeCompany’s reorganization proceedings that represented salaried employees and union representatives that representrepresented the vast majority of the Company’s hourly employees. The agreements provideprovided for the termination of existing salaried and hourly postretirement medical benefit plans, and the termination of existing hourly pension plans. Under the agreements, salaried and hourly retirees would bewere provided an opportunity for continued medical coverage through COBRA or a VEBAthe VEBAs and active salaried and hourly employees would bewere provided with an opportunity to participate in one or more replacement pension plansand/or defined contribution plans. The agreements with the 1114 Committee and certain of the unions have beenwere approved by the Bankruptcy Court, but were subject to certain conditions, including Bankruptcy Court approval of the Intercompany Agreement in a form acceptable to the Debtors and the UCC (see Note 1). The ongoing financial impacts of the new and continuing pension plans and the VEBA are discussed below in “Cash Flow”.UCC.
 
On June 1, 2004, the Bankruptcy Court entered an order, subject to certain conditions including final Bankruptcy Court approval forof the Intercompany Agreement, authorizing the Company to implement termination ofterminate its


113

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
postretirement medical plans as of May 31, 2004 and the Company’s plan to make advance payments to one or morethe VEBAs. As previously disclosed, pending the resolution of all contingencies in respect of the termination of the existing postretirement medical benefit plan, during the period June 1, 2004 through December 31, 2004, the Company continued to accrue costs based on the existing plan and has treated the VEBA contributioncontributions as a reduction of its liability under the plan. However, sincebecause the Intercompany Agreement was approved in February 2005 and all other contingencies had already been met, the Company determined that the existing post retirementpostretirement medical plan should be treated as terminated as of December 31, 2004. This resulted in the Company recognizing a non-cash charge in 2004 of approximately $312.5 (reflected in Other operating charges, net — Note 6).
 
The PBGC has assumed responsibility for the Company’s three largest of the Company’s pension plans, which represented the vast majority of the Company’s net pension obligation including the Company’s Salaried Employees Retirement Plan (in December 2003), the Inactive Pension Plan (in July 2004) and the Kaiser Aluminum Pension Plan (in September 2004). The Salaried Employees Retirement Plan, the Inactive Pension Plan and the Kaiser Aluminum Pension Plan are hereinafter, collectively referred to as the “Terminated Plans”Terminated Plans (see Note 12). The PBGC’s assumption of the Terminated Plans resulted in the Company recognizing non-cash pension charges of approximately $121.2 in the fourth quarter of 2003, approximately $155.5 in the third quarter of 2004 and approximately $154.5 in the fourth quarter of 2004. The fourth quarter 2003 and third quarter 2004 charges were determined by the Company based on assumptions that are consistent with the GAAP criteria for valuing ongoing plans. The Company believed this represented a reasonable interim estimation methodology as there were reasonable arguments that could have been made that could have resulted$310.0 in the final allowed claim amounts being either more or less than that reflected in the financial statements. The fourth quarter 2004 charge was based on the final agreement with the PBGC which was approved by the Court in January 2005.2004. Pursuant to the agreement with the PBGC, the Company and the PBGC agreed, among other things, that: (a) the Company willwould continue to sponsor the Company’s remaining pension plans (which primarily are in respect of hourly employees at four Fabricated productsProducts facilities) and madepaid approximately $5.0 of minimum funding contributionscontribution for these plans in March 2005; (b) the PBGC would have an allowed post-petition administrative claim of $14.0, which iswas expected to be paid upon the consummation of a plan of reorganization for the Company or the consummation of the KAAC/KFC plan,Plan, whichever comescame first; and (c) the PBGC willwould have allowed pre-petition unsecured claims in respect of the Terminated Plans in the amount of $616.0, which willwould be resolved underin the Kaiser Aluminum Amended Plan, pursuant to whichCompany’s plan or plans of reorganization provided that the PBGC’s cash recovery from proceeds of the Company’s sale of its interests in and related to Alpart and QAL will bewas limited to 32% of the net proceeds distributable to holders of the Company’s Senior Notes, Sub Notessenior notes, senior subordinated notes and the PBGC.


77

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

However, certain contingencies have arisenarose in respect of the settlement with the PBGC.PBGC which were ultimately resolved in the Company’s favor. See Note 1112 —Resolution of Contingencies Regarding Settlement with respect to the PBGC.
 
Financial Data.
Assumptions
The following recaps the key assumptions used and the amounts reflected in the Company’s financial statements with respect to the Company’s pension plans and other postretirement benefit plans. In accordance with generally accepted accounting principles, impacts of the changes in the Company’s pension and other postretirement benefit plans discussed above have been reflected in such information.
The Company uses a December 31 measurement date for all of its plans.
Weighted-average assumptions used to determine benefit obligations as of December 31 and net periodic benefit cost for the years ended December 31 are:
                         
  Pension Benefits  Medical/Life Benefits 
  2005  2004  2003  2005  2004  2003 
 
Benefit obligations assumptions:                        
Discount rate  5.50%  5.75%  6.00%  —   5.75%  6.00%
Rate of compensation increase  3.00%  3.00%  4.00%  —   4.00%  4.00%
Net periodic benefit cost assumptions:                        
Discount rate  5.75%  5.75%  6.00%  —   6.00%  6.75%
Expected return on plan assets  8.50%  8.50%  9.00%  —   —   — 
Rate of compensation increase  3.00%  3.00%  4.00%  —   4.00%  4.00%
As more fully discussed above, all of the Company’s postretirement medical benefit plans have been terminated as a part of the Company’s reorganization efforts. As such, the Company’s obligations with respect to the existing plans are fixed.


78

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Benefit Obligations and Funded Status
The following table presents the benefit obligations and funded status of the Company’s pension and other postretirement benefit plans as of December 31, 2005 and 2004, and the corresponding amounts that are included in the Company’s Consolidated Balance Sheets. The following table excludes the pension plan balances and amounts related to Alpart, KJBC and Valco, which operations were sold and the obligations assumed by the buyers (see Note 3). The Company’s pension plan obligations related to the Gramercy facility were a part of the Terminated Plans and are excluded from the table below.
                 
  Pension Benefits  Medical/Life Benefits 
  2005  2004  2005  2004 
 
Change in Benefit Obligation:                
Obligation at beginning of year $27.2  $644.7  $1,042.0  $1,014.0 
Service cost  1.2   3.8   —   7.0 
Interest cost  1.6   28.6   —   58.9 
Curtailments, settlements and amendments  (.2)  (609.6)  —   — 
Actuarial (gain) loss  3.4   (37.0)  —   19.1 
Benefits paid  (1.1)  (3.3)  (25.0)  (57.0)
                 
Obligation at end of year  32.1   27.2   1,017.0   1,042.0 
                 
Change in Plan Assets:                
FMV of plan assets at beginning of year  14.2   364.1   —   — 
Actual return on assets  2.0   (13.0)  —   — 
Employer contributions  6.4   2.4   25.0   57.0 
Assets for which contributions transferred to the PBGC  —   (336.0)  —   — 
Benefits paid  (1.1)  (3.3)  (25.0)  (57.0)
                 
FMV of plan assets at end of year  21.5   14.2   —   — 
                 
Obligation in excess of plan assets  10.6   13.0   1,017.0   1,042.0 
Unrecognized net actuarial loss  (9.6)  (6.6)  —   — 
Unrecognized prior service costs  (1.1)  (.5)  —   — 
Adjustment required to recognize minimum liability  8.9   6.8   —   — 
Estimated net liability to PBGC in respect of Terminated Plans  619.0   630.0   —   — 
Intangible asset and other  1.1   1.3   —   — 
                 
Accrued benefit liability $628.9  $644.0  $1,017.0  $1,042.0 
                 
As discussed more fully in Note 1, the amount of net liability to the PBGC in respect of the Terminated Plans and in respect of the terminated post retirement benefit plan are expected to be resolved pursuant to the Kaiser Aluminum Amended Plan.
The accumulated benefit obligation for all defined benefit pension plans (other than the Terminated Plans and those plans that are part of discontinued operations) was $31.4 and $26.6 at December 31, 2005 and 2004, respectively.


79

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The projected benefit obligation, aggregate accumulated benefit obligation and fair value of plan assets for continuing pension plans with accumulated benefit obligations in excess of plan assets were $32.1, $31.4 and $21.5, respectively, as of December 31, 2005 and $27.2, $26.5 and $14.2, respectively, as of December 31, 2004.
Components of Net Periodic Benefit Cost — 
The following table presents the components of net periodic benefit cost for the years ended December 31, 2005, 2004 and 2003:
                         
  Pension Benefits  Medical/Life Benefits 
  2005  2004  2003  2005  2004  2003 
 
Service cost $1.2  $4.7  $10.2  $—  $7.0  $7.1 
Interest cost  1.6   30.8   60.7   —   58.9   51.3 
Expected return on plan assets  (1.5)  (22.9)  (38.6)  —   —   — 
Amortization of prior service cost  .1   2.6   3.6   —   (21.7)  (22.5)
Amortization of net (gain) loss  .4   5.0   16.1   —   24.6   9.7 
                         
Net periodic benefit costs  1.8   20.2   52.0   —   68.8   45.6 
Less discontinued operations reported separately  —   (7.8)  (15.3)  —   (10.2)  (11.9)
                         
Defined benefit plans  1.8   12.4   36.7   —   58.6   33.7 
401K (pension)  7.2   —   —   —   —   — 
                         
  $9.0  $12.4  $36.7  $—  $58.6  $33.7 
                         
The above table excludes pension plan curtailment and settlement credits of $.7 in 2005 and pension plan curtailment and settlement costs of $142.4, and $122.9 in 2004 and 2003, respectively. The above table also excludes a post retirement medical plan termination charge of approximately $312.5 in 2004.
The periodic pension costs associated with the Terminated Plans were $16.9 and $46.1 for the years ended December 31, 2004 and 2003, respectively. The amount of 2004 and 2003 periodic pension costs related to continuing operations that related to the Fabricated products segment was $8.3 and $16.6, respectively, and the balances related to the Corporate segment. The amount of 2004 and 2003 net periodic medical benefit costs related to continuing operations that related to the Fabricated products segment was $25.2 and $16.2, respectively, with the remaining amounts being related to the Corporate segment.
Additional Information
The increase (decrease) in the minimum liability included in other comprehensive income was $3.2, $(97.9), and $(138.6) for the years ended December 31, 2005, 2004 and 2003, respectively.
Description of Defined Contribution Plans
The Company, in March 2005, announced the implementation of the new salaried and hourly defined contribution savings plans. The salaried plan is being implemented retroactive to January 1, 2004 and the hourly plan is being implemented retroactive to May 31, 2004.
Pursuant to the terms of the new defined contribution savings plan, KACC will be required to make annual contributions into the Steelworkers Pension Trust on the basis of one dollar per United Steelworkers of America (“USWA”) employee hour worked at two facilities. KACC will also be required to make contributions to a defined contribution savings plan for active USWA employees that will range from eight hundred dollars to twenty-four


80

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

hundred dollars per employee per year, depending on the employee’s age. Similar defined contribution savings plans have been established for non-USWA hourly employees subject to collective bargaining agreements. The Company currently estimates that contributions to all such plans will range from $3.0 to $6.0 per year.
In September 2005, the Company and the USWA amended a prior agreement to provide, among other things, for the Company to contribute per employee amounts to the Steelworkers’ Pension Trust totaling approximately $.9. The amended agreement was approved by the Court and such amount was recorded in the fourth quarter of 2005.
The new defined contribution savings plan for salaried employees provides for a match of certain contributions made by such employees plus a contribution of between 2% and 10% of their salary depending on their age and years of service.
The Company recorded charges in respect of these plans (including the retroactive implementation) of $14.0 for the year ended December 31, 2005. Of such total amount, approximately $6.3 is included in Cost of products sold (related to the Fabricated products segment) and $.9 is included in Selling, administrative, research and development and general expense (“SG&A”) (which amount is split between the Corporate segment of $.4 and the Fabricated products segment of $.5). The amount ($6.8) related to the retroactive implementation (i.e., the 2004 portion) of the plans is reflected in Other operating charges, net (see Note 6).
Plan Assets
As discussed above, the PBGC assumed responsibility for the Company’s Terminated Plans in December 2003 and the third quarter of 2004. Upon termination, the assets and administration were transferred to the PBGC. All pension assets for the domestic plans that the Company continues to sponsor are held in Kaiser Aluminum Pension Master Trust (the “Master Trust”) solely for the benefit of the pension plans’ participants and beneficiaries. Historically, the weighted average asset allocation of these plans, by asset category, consisted primarily of equity securities of approximately 70% and others of 30% at December 31, 2005 and 2004. However, the Company currently anticipates that after emergence from Chapter 11 proceedings the investment guidelines will be revised to reflect a more conservative investment strategy with a higher portion of the Master Trusts assets being invested in fixed income funds/securities. The pension plan assets are managed by a trustee.
Cash Flow and Charges.
 
Domestic Plans.  Plans—As previously discussed, duringDuring the first three years of the Chapterchapter 11 proceedings, the Company did not make any further significant contributions to any of its domestic pension plans. However, as discussed above in connection with the PBGC settlement agreement, which was approved by the Bankruptcy Court in January 2005, the Company paid approximately $5.0 in March 2005 and approximately $1.0 in July 2005 in respect of minimum funding contributions for retained pension plans and paid $11.0 in respect of post-petition administrative claims of the PBGC when the KAAC/KFC Plan became effective in December 2005. An additional $3.0 could become payable as an administrative claim depending onwas pending the outcomeresolution of certain legal proceedingsthe ongoing litigation with the PBGC (see Note 11)12). Any other payments to the PBGC are expected to bewere limited to recoveries under the Liquidating Plans and the Kaiser Aluminum Amended Plan.
 
The amount relatedPrior to the retroactive implementation of the defined contribution savings plans (see above) was paid in July 2005.
As a replacement for the Company’s previous postretirement benefit plans,Effective Date, the Company agreed to contribute certain amountsmake the following contributions to one or more VEBA’s. Such contributions are to include:
• An amount not to exceed $36.0 and payable on emergence from the Chapter 11 proceedings so long as the Company’s liquidity (i.e. cash plus borrowing availability) is at least $50.0 after considering such payments.


81

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)the VEBAs:
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)a) an amount not to exceed $36.0 payable on emergence from the chapter 11 proceedings so long as the Company’s liquidity (i.e., cash plus borrowing availability) was at least $50.0 after considering such payments; and

To the extent that less than the full $36.0 is paid and the Company’s interests in Anglesey are subsequently sold, a portion of such sales proceeds, in certain circumstances, will be used to pay the shortfall.

 
• On an annual basis, 10% of the first $20.0 of annual cash flow, as defined, plus 20% of annual cash flow, as defined, in excess of $20.0. Such annual payments shall not exceed $20.0 and will also be limited (with no carryover to future years) to the extent that the payments do not cause the Company’s liquidity to be less than $50.0.
• Advances of $3.1 in June 2004 and $1.9 per month thereafter until the Company emerges from the Cases. Any advances made pursuant to such agreement will constitute a credit toward the $36.0 maximum contribution due upon emergence.
b) advances of $3.1 in June 2004 and $1.9 per month thereafter until the Company emerged from the chapter 11 proceedings. Any advances made pursuant to such agreement constitute a credit toward the $36.0 maximum contribution due upon emergence.
 
In October 2004, the Company entered into an amendment to the USWAUSW agreement to satisfy certain technical requirements for the follow-on hourly pension plans discussed above. The Company also agreed(see Note 24) to pay an additional $1.0 to the VEBAVEBAs in excess of the originally agreed to $36.0 contribution described above, which amount was paid in March 2005. Under the terms of the amended agreement, the Company iswas required to continue to make the monthly VEBA contributions as long as it remainsremained in Chapterchapter 11, even if the sum of such monthly payments exceedsexceeded the $37.0 maximum amount discussed above. AnyThe monthly amounts paid during the Chapterchapter 11


114

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
process in excess of the $37.0 limit will offset future variable contribution requirements postafter emergence. The amended agreement was approved by the Bankruptcy Court in February 2005. VEBA-related payments through December 31, 2005prior to the Effective Date totaled approximately $38.3.
$49.7. As a partresult, $12.7 was available to the Company to offset future VEBA contributions of the September 2005 agreement withSuccessor at the USWA discussed above, which was approved by the Court in October 2005, KACC has also agreed to provide advances of up to $8.5 to the VEBA for hourly employees during the first two years after emergence from the Cases, if requested by the VEBA for hourly employees and subject to certain specified conditions. Any such advances would accrue interest at a market rate and would first reduce any required annual variable contributions. Any advanced amounts in excess of required variable contributions would, at KACC’s option, be repayable to KACC in cash, shares of new common stock of the emerging entity or a combination thereof.Effective Date (see Note 10).
 
Total charges associated with the VEBAs duringin 2006 prior to the Effective Date and the year ended December 31, 2005 were $11.4 and $23.8, whichrespectively. These amounts arewere reflected in the accompanying financial statements as a reduction inof Liabilities subject to compromise (see Note 16 regardingcompromise.
Key Employee Retention Plan—Under the accounting treatmentKey Employee Retention Plan (“KERP”), approved by the Bankruptcy Court in September 2002, financial incentives were provided to retain certain key employees during the chapter 11 proceedings. The KERP included six key elements: a retention plan, a severance plan, a change in control plan, a completion incentive plan, the continuation for certain participants of an existing supplemental executive retirement plan (“SERP”) and a long-term incentive plan. Under the VEBA charges).KERP:
• Pursuant to the retention plan, retention payments were paid between September 2002 and March 31, 2004, except that 50% of the amounts payable to certain senior officers were withheld until the Company’s emergence from chapter 11 proceedings or as otherwise agreed pursuant to the KERP.
• The severance and change in control plans generally provided for severance payments of between nine months and three years of salary and certain benefits, depending on the facts and circumstances and the level of employee involved.
• The completion incentive plan lapsed without any amounts being due.
• The SERP generally provided additional non-qualified pension benefits for certain active employees at the time that the KERP was approved, who would suffer a loss of benefits based on Internal Revenue Code limitations, so long as such employees were not subsequently terminated for cause or voluntarily terminated their employment prior to reaching their retirement age. The Successor’s board of directors terminated the SERP and funded payments totaling $2.3. Such amounts had been fully accrued by the Predecessor and were included in the Successor’s opening balance sheet.
• The long-term incentive plan generally provided for incentive awards to key employees based on an annual cost reduction target. Payment of such long-term incentive awards generally will be made: (a) 50% upon emergence and (b) 50% one year from the date the Debtors emerged from the chapter 11 proceedings. Approximately $3.4 which was previously accrued by the Predecessor at December 31, 2006 in respect of the KERP long-term incentive plan was paid in 2007 by the Successor.
 
Foreign Plans.  Plans—Contributions to foreign pension plans (excluding those that are considered part of discontinued operations — see Note 3)operations) were nominal.
 
Significant Charges in 2004 and 2003
In 2004 and 2003, in connection with the Company’s termination of its Terminated Plans (as discussed above), the Company recorded non-cash charges of $310.0 and $121.2, respectively, which amounts have been included in Other operating charges, net (see Note 6). The charges recorded in the fourth quarter of 2003 and third quarter of 2004 had no material impact on the pension liability associated with the plans since the Company had previously recorded a minimum pension liability, as also required by GAAP, which amount was offset by charges to Stockholders’ equity.
In 2004, in connection with the termination of the Company’s post-retirement medical plans (as discussed above), the Company recorded a $312.5 non-cash charge, which amount has been included in Other operating charges, net (see Note 6).
Postemployment Benefits.  The Company has historically provided certain benefits to former or inactive employees after employment but before retirement. However, as a part of the agreements more fully discussed above, such benefits were discontinued in mid-2004.


82

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Common Stock.  The Company has a restricted stock plan, which was one of its stock incentive compensation plans, for its officers and other employees. Pursuant to the plan, approximately 1,181,000 restricted shares of the Company’s Common Stock were outstanding as of January 31, 2002. During 2002 through 2005, approximately 1,122,000 of the unvested restricted shares were cancelled or voluntarily forfeited. As of December 31, 2005, there were no restricted shares outstanding.
Incentive Plans.  The Company has an unfunded incentive compensation program, which provides incentive compensation based on performance against annual plans and over rolling three-year periods. In addition, the Company has a “nonqualified” stock option plan and KACC has a defined contribution plan for salaried employees which provides for matching contributions by the Company at the discretion of the board of directors. Given the challenging business environment encountered during 2005, 2004 and 2003 and the disappointing results of operations for all years, only modest incentive payments were made and no matching contribution were awarded in respect of either year. The Company’s expense for all of these plans was $3.5, $1.7 and $6.1 for the years ended December 31, 2005, 2004, and 2003, respectively.
Up to 8,000,000 shares of the Company’s Common Stock were initially reserved for issuance under its stock incentive compensation plans. At December 31, 2005, 4,864,889 shares of Common Stock remained available for issuance under those plans. Stock options granted pursuant to the Company’s nonqualified stock option program are to be granted at or above the prevailing market price, generally vest at a rate of 20 — 33% per year, and have a five or ten year term. Information concerning nonqualified stock option plan activity is shown below. The weighted average price per share for each year is shown parenthetically.
             
  2005  2004  2003 
 
Outstanding at beginning of year ($3.14, $3.34 and $5.63, respectively)  810,040   850,140   1,454,861 
Expired or forfeited ($2.49, $7.25 and $8.86, respectively)  (318,920)  (40,100)  (604,721)
             
Outstanding at end of year ($3.57, $3.14 and $3.34, respectively)  491,120   810,040   850,140 
             
Exercisable at end of year ($3.41, $3.04 and $3.34, respectively)  462,936   781,856   645,659 
             
Options exercisable at December 31, 2005 had exercisable prices ranging from $1.72 to $10.06 and a weighted average remaining contractual life of 5.6 years. Given that the average sales price of the Company’s Common Stock is currently in the $.03 per share range, the Company believes it is unlikely any of the stock options will be exercised. Further, the equity interests of the holders of outstanding options are expected to be cancelled without consideration pursuant to the Kaiser Aluminum Amended Plan.
10.  Minority Interests
KACC has four series of $100 par value Cumulative Convertible Preference Stock (“$100 Preference Stock”) outstanding with annual dividend requirements of between 41/8% and 43/4%. KACC has the option to redeem the $100 Preference Stock at par value plus accrued dividends. KACC does not intend to issue any additional shares of the $100 Preference Stock. By its terms, the $100 Preference Stock can be exchanged for per share cash amounts between $69 — $80. The Company records the $100 Preference Stock at their exchange amounts for financial statement presentation and includes such amounts in minority interests. At December 31, 2005 and 2004, outstanding shares of $100 Preference Stock were 8,669. In accordance with the Code and DIP Facility, KACC is not permitted to repurchase or redeem any of its stock. Further, the equity interests of the holders of the $100 Preference Stock are expected to be cancelled without consideration pursuant to the Kaiser Aluminum Amended Plan.


83

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.  Commitments and Contingencies
24.  Commitments and Contingencies
 
Impact of Reorganization Proceedings.During the pendency of the Cases,chapter 11 proceedings, substantially all pending litigation, except certain environmental claims and litigation, against the Debtors iswas stayed. Generally, claims against a Reorganizing Debtor arising from actions or omissions prior to its Filing Date are expected to be settledwere resolved pursuant to the Kaiser Aluminum Amended Plan.
Commitments.  KACC has a variety of financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 12), letters of credit, and guarantees. A significant portion of these commitments relate to the Company’s interests in and related to QAL, which were sold in April 2005 (see Note 3). KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. During the third quarter of 2005, the Company placed orders for certain equipment, furnacesand/or services intended to augment the Company’s heat treat and aerospace capabilities at the Spokane, Washington facility in respect of which the Company expects to become obligated for costs likely to total in the range of 75.0. Approximately $17.0 of such costs were incurred in 2005. The balance will likely be incurred in 2006 and 2007, with the majority of such costs being incurred in 2006.
Minimum rental commitments under operating leases at December 31, 2005, are as follows: years ending December 31, 2006 — $2.6; 2007 — $1.7; 2008 — $1.4; 2009 — $1.3; 2010 — $.3; thereafter — $.1. Pursuant to the Code, the Debtors may elect to reject or assume unexpired pre-petition leases. Rental expenses, after excluding rental expenses of discontinued operations, were $3.6, $3.1 and $8.6, for the years ended December 31, 2005, 2004 and 2003, respectively. Rental expenses of discontinued operations were $4.9 and $6.6 for the years ended December 31, 2004 and 2003, respectively.
 
Environmental Contingencies.The Company and KACC areone of its subsidiaries were subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws and regulations. KACC currently isThe Company was also 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 beenwas named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA.


115

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Based on the Company’s evaluation of these and other environmental matters, the Company has established an environmental accruals,accrual, primarily related to potential solid waste disposal and soil and groundwaterground water remediation matters. During the year ended December 31, 2003, KACC recorded charges of $23.2 to increase its environmental accrual. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the yearsperiod from January 1, 2006 to July 1, 2006 and the year ended December 31, 2005, 2004 and 2003:2005:
 
        
 January 1, 2006
 Year Ended
 
             to
 December 31,
 
 2005 2004 2003  July 1, 2006 2005 
Balance at beginning of period $58.3  $82.5  $59.1  $46.5  $58.3 
Additional accruals  .5   8.4   25.6   .3   .5 
Less expenditures  (12.3)  (32.6)  (2.2)  (7.0)  (12.3)
Less amounts resolved in connection with the Plan  (29.4)  — 
            
Balance at end of period(1) $46.5  $58.3  $82.5 
Balance at end of period $10.4  $46.5 
            
(1)As of December 31, 2005 and 2004, $30.7 and $30.6, respectively, of the environmental accrual was included in Liabilities subject to compromise (see Note 1) and the balance was included in Long-term liabilities.
These environmental accruals represent the Company’s estimate of costs (in nominal dollars without discounting) reasonably expected to be incurred 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 will be taken over the next several years


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and estimates that annual expenditures to be charged to these environmental accruals will be approximately $14.5 in 2006, $.2 to $3.8 per year for the years 2007 through 2010 and an aggregate of approximately $25.5 thereafter. Approximately $20.2 of the $25.5 environmental liabilities expected to be settled after 2010 relates to non-owned property sites has been included in the after 2010 balance because such amounts are expected to be settled solely pursuant to the Kaiser Aluminum Amended Plan.
Approximately $20.2 of the amount provided in 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 the portion of the $20.2 accrual that relates to locations with operations ($15.7) in Other operating charges, net (see Note 6). The remainder of the accrual ($4.5), which relates to locations that have not operated for a number of years was recorded in Other income (expense) (see Note 2).
During 2004 and 2003, the Company also provided additional accruals totaling approximately $1.4 and $3.0, respectively, associated with certain KACC-owned properties with no current operations (recorded in Other income (expense) — see Note 2). The 2004 accrual resulted from facts and circumstances determined in the ordinary course of business. The additional 2003 accruals resulted primarily from additional cost estimation efforts undertaken by the Company in connection with its reorganization efforts. Both the 2004 and 2003 accruals were recorded as liabilities not subject to compromise as they relate to properties owned by the Company.
The Company has previously disclosed that it is possible that its assessment of environmental accruals could increase because it may be in the interests of all stakeholders to agree to increased amounts to, among other things, achieve a claim treatment that is favorable and to expedite the reorganization process. The September 2003 multi-site settlement is one example of such a situation.
In June, 2004, the Company reported that it was close to entering settlement agreements with various parties pursuant to which a substantial portion of the unresolved environmental claims could be settled for approximately $25.0 — $30.0. In September 2004, agreements with the affected parties were reached and Court approval for such agreements was received. During October 2004, the Company paid approximately $27.3 to completely settle these liabilities. The amounts paid approximated the amount of liabilities recorded and did not result in any material net gain or loss.
 
As additional facts are developedof June 30, 2006 and definitive remediation plansDecember 31, 2005 $29.4 and necessary regulatory approvals for implementation$30.7, respectively, of remediation are established or alternative technologies are developed, changesthe environmental accrual was included 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 $20.0 (a majority of which are estimated to relate to owned sites that are likely notLiabilities subject to compromise)compromise (see Note 19). As the resolution of these matters is subjectThese amounts related to further regulatory reviewnon-owned locations and approval, no specific assurance can be givenwere resolved 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. 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 to KACC’s Trentwood facility in the State of Washington. KACC is undertaking its own internal investigationpart of the


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(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 law 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, impact this matter may have on the Company’s or KACC’s financial statements. Plan.
 
Asbestos and Certain Other Personal Injury Claims.KACC has been  The Company was one of many defendants in a number of lawsuits, some of which involveinvolved claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos or exposure to products containing asbestos produced or sold by KACCthe Company or as a result of employment or association with KACC.the Company. The lawsuits generally relaterelated to products KACC hasthe Company had not sold for more than 20 years. As of the initial Filing Date, approximately 112,000 asbestos-related claims were pending. The Company has also previously disclosed that certain other personal injury claims had been filed in respect of alleged pre-Filing Date exposure to silica and coal tar pitch volatiles (approximately 3,900 claims and 300 claims, respectively).
 
Due to the Cases,reorganization proceedings, holders of asbestos, silica and coal tar pitch volatile claims arewere stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Reorganizing Debtors. As a result, the Company hasdid not mademake any asbestos payments in respect of any of these types of claims(or other payments) during the Cases. Despitependency of the Cases,reorganization proceedings. However, the Company continuescontinued to pursue insurance collections in respect of asbestos-related amounts paid prior to its Filing Date and, as described below, to negotiate insurance settlements and prosecute certain actions to clarify policy interpretations in respect of such coverage.
 
The following tables present historical information regarding KACC’s asbestos, silica and coal tar pitch volatiles-related balances and cash flows:
         
  December 31, 
  2005  2004 
 
Liability $1,115.0  $1,115.0 
Receivable(1)  965.5   967.0 
         
  $149.5  $148.0 
         
                 
  Year Ended December 31,  Inception
 
  2005  2004  2003  to Date 
 
Payments made, including related legal costs $—  $—  $—  $(355.7)
Insurance recoveries(2)  1.5   2.7   18.6   267.7 
                 
  $1.5  $2.7  $18.6  $(88.0)
                 
(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. Amounts are stated in nominal dollars and not discounted to present value as the Company cannot currently project the actual timing of payments or insurance recoveries particularly in light of the expected treatment of such items in any plan of reorganization that is ultimately filed. The Company believes that, as of December 31, 2005, it had received all insurance recoveries that it is likely to collect in respect of asbestos-related costs paid. See Note 1.
(2)Excludes certain amounts paid by insurers into a separate escrow account (in respect of future settlements) more fully discussed below.
As previously disclosed, at the Filing Date, the Company had accrued approximately $610.1 (included in Liabilities Subject to Compromise) in respect of asbestos and other similar personal injury claims. As disclosed,


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(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

such amount represented the Company’s estimate for current claims and claims expected to be filed over a 10 year period (the longest period KACC believed it could then reasonably estimate) based on, among other things existing claims, assumptions about the 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. The Company also disclosed that there were inherent limitations to such estimates and that the Company’s actual liabilities in respect of such claims could significantly exceed the amounts accrued; that at some point during the reorganization process, the Company expected that an estimation of KACC’s entire asbestos-related liability would occur; and that until such process was complete or KACC had more information, KACC was unlikely to be able to adjust its accruals.
Over the last year-plus period, the Company has engaged in periodic negotiations with the representatives of the asbestos, silica and coal tar pitch claimants and the Company’s insurers as part of its reorganization efforts. As more fully discussed in Note 1, these efforts resulted in an agreed term sheet in early 2005 between the Company and other key constituents as to the treatment for such claims in any plan(s) of reorganization the Company files. While a formal estimation process has not beenwas never completed, now that the Company can reasonably predict the path forward for resolution of these claims and based on the information resulting from the negotiations process, the Company believesbelieved it hashad obtained sufficient information to project a range of likely asbestos and other tort-related costs. The Company now estimatesestimated that its total liability for asbestos, silica and coal tar pitch volatile personal injury claims iswas expected to be between approximately $1,100.0 and $2,400.0. However, as previously disclosed, the Company doesdid not anticipatethink that other constituents willwould necessarily agree with this range and the Company anticipates that, as a part of any estimation process that may occur in the Cases, other constituents are expected to disagree with the Company’s estimated range of costs.cost range. In particular, the Company iswas aware that certain informal assertions have been made by representatives for the asbestos, silica and coal tar pitch volatiles claimants suggested that the actual liability maymight exceed, perhaps significantly, the top end of the Company’s expected range. While the Company cannotcould not reasonably predict what the ultimate amount of such claims willmight be determined to be, the Company believesbelieved that the minimum end of the range iswas both probable and reasonably estimatable. Accordingly, in accordance with GAAP, the Company recordedreflected an approximate $500.0 charge in 2004 to increase its accrued liability at December 31, 2004 toof $1,115.0 for the $1,115.0 minimum end of the expected range (includedrange. All of such amounts (which were included in Liabilities subject to Compromise — seecompromise) were resolved as a part of the Plan (see Note 1)19). Future adjustments to such accruals are possible as the reorganizationand/or estimation process proceeds and it is possible that such adjustments will be material.
 
As previously disclosed, KACC believes thatthe Company believed it hashad insurance coverage available tothat would recover a substantial portion of its asbestos-related costscosts. However, the timing and amount of future insurance recoveries were dependent on the resolution of disputes regarding coverage under certain of the applicable insurance policies through the process of negotiations or further litigation. The Company previously stated that it believed that substantial recoveries from the insurance carriers were probable and had estimated the amount of remaining solvent


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
insurance coverage (before considering the contingent settlement agreements discussed below) to be in the range of $1,400.0 — $1,500.0. Further, the Company previously disclosed that, assuming that actual asbestos, silica and coal tar pitch volatile costs were to be the $1,115.0 amount accrued for expected recoveries(as discussed above) the Company believed that it would be able to recover from insurers amounts totaling approximately $463.1$965.0, which amount was reflected as of September“Personal injury-related insurance recoveries receivable” (reduced to $963.3 at June 30, 2004, after considering the approximately $54.4 of asbestos-related insurance receipts received from the Filing Date through September 30, 2004. As previously disclosed, 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 LLP with respect2006 due to applicable insurance coverage law relating to the terms and conditions of those policies.certain subsequent recoveries).
 
As a part ofThroughout the negotiationreorganization process, described above, the Company has continued its efforts with insurers to make clear the amount of insurance coverage expected to be available in respect of asbestos, silica and coal tar pitch personal injury claims. The Company has settled asbestos-related coverage matters withPart of such efforts focused on certain of its insurance carriers. However, other carriers have not yet agreed to settlements and disputes with carriers exist. During 2000, KACC filed suitlitigation in San Francisco Superior Court against a group of its insurers, which suit was thereafter split into two related actions. Additional insurersCourt. The Company’s efforts in this regard were addedalso intended to provide certainty as to the litigation in 2000amounts available to the PI Trusts and 2002. During October 2001, June 2003, February 2004 and April 2004, the court ruled favorably on a number of policy interpretation issues. Additionally, one of the favorable October 2001 rulings was affirmed in February 2002to resolve certain appeals by an intermediate appellate court in responseinsurers to a petition from the insurers. The litigation is continuing. Certain insurers have filed motions for review and appeals to object to certain aspects of the confirmation order in respect of the Kaiser Aluminum Amended Plan, including with regard to whether the rights to proceeds of certain of the insurance policies may be


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

transferred upon emergence to the applicable personal injury trust(s) contemplated by the Kaiser Aluminum Amended Plan as part of the resolution of the outstanding tort claims. It is expected that the United States District Court will decide this matter as a part of the plan affirmation process. While the Company believes that the applicable law supports the transfer of such rights to proceeds to the Applicable Personal Injury Trust(s), no assurances can be provided on how the Court will ultimately rule on this or other aspects of the Kaiser Aluminum Amended Plan.
The timing and amount of future insurance recoveries continues to be dependent on the resolution of any disputes regarding coverage under the applicable insurance policies thru the process of negotiations or further litigation. However, the Company believes that substantial recoveries from the insurance carriers are probable. The Company estimates that at December 31, 2005 its remaining solvent insurance coverage was in the range of $1,400.0 - $1,500.0. Further, assuming that actual asbestos, silica and coal tar pitch volatile costs were to be the $1,115.0 amount now accrued (as discussed above) the Company believes that it would be able to recover from insurers amounts totaling approximately $965.5, and, accordingly the Company recorded in 2004 an approximate $500.0 increase in its personal injury-related insurance receivable. The foregoing estimates are based on, among other things, negotiations, the results of the litigation efforts discussed above and the advice of Heller Ehrman LLP with respect to applicable insurance coverage law relating to the terms and conditions of those policies. While the Company considers the approximate $965.5 amount to be probable (based on the factors cited above) it is possible that facts and circumstances could change and, if such a change were to occur, that a material adjustment to the amount recorded could occur. Additionally, it should be noted that, if through the estimation process or negotiation, it was determined that a significantly higher amount of costs were expected to be paid in respect of asbestos, silica and coal tar pitch volatile claims: (a) any amounts in excess of $1,400.0 — $1,500.0 would likely not be offset by any expected incremental insurance recoveries and (b) it is presently uncertain to what extent additional insurance recoveries would be determined under GAAP to be probable in respect of expected costs between the $1,100.0 amount accrued at December 31, 2005 and total amount of estimated solvent insurance coverage available. Further, it is possible that, in order to provide certainty in respect of tort-related insurance recoveries, the Company and the insurers may enter into further settlement agreements establishing payment obligations of insurers to the trusts discussed in Note 1. Settlement amounts may be different from the face amount of the policies, which are stated in nominal terms, and may be affected by, among other things, the present value of possible cash receipts versus the potential obligation of the insurers to pay over time which could impact the amount of receivables recorded.
Since the start of the Cases, KACC has entered into settlement agreements with several of the insurers whose asbestos-related obligations are primarily in respect of future asbestos claims. These settlement agreements were approved by the Court. In accordance with the Court approval, the insurers have paid certain amounts, pursuant to the terms of that approved escrow agreements, into funds (the “Escrow Funds”) in which KACC has no interest, but which amounts will be available for the ultimate settlement of KACC’s asbestos-related claims. Because the Escrow Funds are under the control of the escrow agents, who will make distributions only pursuant to a Court order, the Escrow Funds are not included in the accompanying consolidated balance sheet at December 31, 2005. In addition, since neither the Company nor KACC received any economic benefit or suffered any economic detriment and have not been relieved of any asbestos-related obligation as a result of the receipt of the escrow funds, neither the asbestos-related receivable nor the asbestos-related liability have been adjusted as a result of these transactions.
 
During the latter half of 2005 and the first half of 2006, the Company entered into certain conditional settlement agreements with insurers (all of which were approved by the Bankruptcy Court) under which the insurers agreed (in aggregate) to pay approximately $375.0$1,246.0 in respect of substantially all coverage under certain policies having a combined face value of approximately $459.0. The settlements, which were approved$1,460.0. Many of the agreements provided for multi-year payouts and for some of the settlement amounts to be accessed, claims would have to be made against the PI Trusts that would aggregate well in excess of the approximate $1,115.0 liability amount reflected by the Court, have several conditions, including a legislative contingency andCompany at June 30, 2006. There are only payableno remaining policies that are expected to yield any material amounts for the trust(s) being set up under the Kaiser Aluminum Amended Plan upon emergence (more fully discussed in Note 1). One setbenefit of insurers paid approximately $137.0 into a separate escrow account in November 2005. If the Company does not emerge,or the agreement is null and void and the funds (along with any interest that has accumulated) will be returned to the insurers. As of December 31, 2005, the insurers had paid $152.0 into the Escrow Funds, a substantial


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

portion of which related to the conditional settlements. It is possible that settlements with additional insurers will occur. However, no assurance can be given that such settlements will occur.
During March 2006, the Company reached a conditional settlement agreement with another group of insurers under which the insurers would pay approximately $67.0 in respect of certain policies having a combined face value of approximately $80.0. The conditional settlement, which has similar terms and conditions to the other conditional settlement agreement discussed above, must still be approved by the Court. Negotiations with other insurers continue.PI Trusts.
 
The Company hasdid not providedprovide any accounting recognition for the conditional settlement agreements in the accompanyingJune 30, 2006 financial statements given: (1) the conditional nature of the settlements; (2) the fact that, if the Kaiser Aluminum Amended Plan doesdid not become effective as of June 30, 2006, the Company’s interests with respect to the insurance policies covered by the agreements arewere not impaired in any way; and (3) the Company believesbelieved that collection of the approximate $965.5$963.3 amount of Personal injury-related insurance recovery receivable iswas probable even if the conditional agreements arewere ultimately approved. No assurances can be given as to whether the conditional agreements will become final or as to what amounts will ultimately be collected in respect of the insurance policies covered by the conditional settlement or any other insurance policies.
 
Hearing Loss Claims.During February 2004, the Company reached a settlement in principle in respect of 400 claims, which alleged that certain individuals who were employees of the Company, principally at a facility previously owned and operated by KACC in Louisiana, suffered hearing loss in connection with their employment. Under the terms of the settlement, which is still subject to Court approval the claimants will bewere allowed claims totaling $15.8. As such, the Company recorded aup to $15.8 charge (in Other operating charges, net — see Note 6) in 2003 and a corresponding obligation (included in Liabilities subject to compromise, Other accrued liabilities — see Note 1)19). However, no cash payments by the Company are required in respect of these amounts. Rather the settlement agreement contemplates that, atAt emergence, these claims will bewere transferred to a separate trustthe PI Trusts along with certain rights against certain insurance policies of the Company and that such insurance policies will be the sole source of recourse to the claimants.Company. While the Company believesbelieved that the insurance policies arewere of value, no amounts have beenwere reflected in the Company’s financial statements at December 31, 2005 in respect of such policies as the Company could not with the level of certainty necessary determine the amount of recoveries that were probable.
 
During the Cases,chapter 11 proceedings, the Company has received approximately 3,200 additional proofs of claim alleging pre-petition injury due to noise induced hearing loss. It is not known at this timewas never determined how many, if any, of such claims havehad merit or at what level such claims might qualify within the parameters established by the above-referenced settlement in principle for the 400 claims. Accordingly, the Company cannot presently determine the impact or value of these claims. However, under the plan of reorganizationPlan all such claims will bewere transferred, along with certain rights against certain insurance policies, to a separate trustthe PI Trusts and resolved in that manner rather than being settled prior to the Company’s emergence from the Cases.chapter 11 proceedings.
 
Labor Matters.In connection with the USWA strike and subsequent lock-out by KACC, which was settled in September 2000, certain allegations of unfair labor practices (“ULPs”) were filed with the National Labor Relations Board (“NLRB”) by the USWA. As previously disclosed, KACC responded to all such allegations and believed that they were without merit. Twenty-two of twenty-four allegations of ULPs previously brought against KACC by the USWA have been dismissed. A trial before an administrative law judge for the two remaining allegations concluded in September 2001. In May 2002, the administrative law judge ruled against KACC in respect of the two remaining ULP allegations and recommended that the NLRB award back wages, plus interest, less any earnings of the workers during the period of the lockout. The administrative law judge’s ruling did not contain any specific amount of proposed award and was not self-executing.
In January 2004, as part of its settlement with the USWAUSW with respect to pension and retiree medical benefits, KACCthe Company and the USWAUSW agreed to settle theira case pending before the NLRB, subject to approvalNational Labor Relations Board in respect of certain unfair labor practice (“ULP”) claims made by the NLRB


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

General CounselUSW in connection with a 1998 USW strike and subsequent lock-out by the Court and ratification by union members.Company. Under the terms of the agreement, solely for the purposes of determining distributions in connection with the reorganization, an unsecured pre-petition claim in the amount of $175.0 will bewas allowed. Also, as part of the agreement, the Company agreed to adopt a position of neutrality regarding the unionization of any employees of the reorganized company.
Company. The settlement was ratifiedapproved by the union members in February 2004, amended in October 2004, and ultimately approved by theBankruptcy Court in February 2005. Until February 2005, the settlement was also contingent on the Court’s approval of the Intercompany Agreement. However, such contingency was removed when the Court approved the Intercompany Agreement in February 2005. Since all material contingencies in respect of this settlement have been resolved and, since the ULP claim existed as of the December 31, 2004 balance sheet date, theThe Company


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded a $175.0 non-cash charge in the fourth quarter of 2004 (reflected in Other operating charges, net — Note 6).
Labor Agreement.  associated with the ULP settlement. The Company previously disclosed that the labor agreement covering the USWA workers at KACC’s Spokane, Washington rolling mill and Newark, Ohio extrusion and rod rolling facility were set to expire in September 2005 and that KACC and representatives of the USWA had begun discussions regarding a new labor agreement. During June 2005, KACC and representatives of the USWA reached an agreementobligations in respect of the labor agreements for such locations andULP claim were resolved on the union members subsequently ratified the agreement. Additionally, new labor agreements were reached with USWA members at the Richmond, Virginia, and Tulsa, Oklahoma extrusion facilities. The new agreements at all of these locations commenced on July 1, 2005 and run through various expiration dates in 2010. The agreements provide for the following at each plant: a ratification-signing bonus; typical industry-level annual wage increases; an opportunity to share in plant profitability; and a continuation of benefits modeled along the lines of the settlement between the parties approved by the Court in February 2005. The approximately $.9 of ratification signing bonuses were expensed in the second quarter of 2005 since that is when ratification occurred (included in Cost of products sold).Effective Date.
 
Contingencies Regarding Settlement with the PBGC.  Pacific Northwest Power Matters.As more fully described in Note 8, in response to the January 2004 Debtors’ motion to terminate or substantially modify substantially alla part of the Debtors’ defined benefit pension plans, the Court ruled thatreorganization process, the Company had met the factual requirements for distress termination as to all of the plans at issue. The PBGC appealed the Court’s ruling. However, as more fully discussed in Note 9, during the pendency of the PBGC’s appeal, the Company and the PBGC reachedrejected a settlement under which the PBGC agreed to assume the Terminated Plans. The Court approved this settlement in January 2005. The Company believed that, subject to the Kaiser Aluminum Amended Plan and the Liquidating Plans complying with the terms of the PBGC settlement, all issues in respect of such matters were resolved. However, despite the settlement with the PBGC, the intermediate appellate court proceeded to consider the PBGC’s earlier appeal and issued a ruling dated March 31, 2005 affirming the Court’s rulings regarding distress termination of all such plans. If the current appellate ruling became final, it is possible that the remaining defined benefit plans would be assumed by the PBGC. Since the Company and the PBGC became aware of the intermediate appellate court ruling, the Company and the PBGC have conducted additional discussions. In July 2005, the Company and the PBGC reached an agreement, which was approved by the Court in September 2005, under which the PBGC agreement previously approved by the Court was amended to permit the PBGC to further appeal the intermediate appellate court ruling. Under the terms of the amended PBGC agreement, if the PBGC were to prevail in the further appeal, all aspects of the previously approved PBGC agreement would remain the same. Accordingly, in essence, if the PBGC’s further appeal were to prevail, the Company does not believe there would be any material adverse consequences. On the other hand, under the amended agreement, if the intermediate appellate court ruling is upheld on further appeal, the PBGC is required to: (a) approve the distress termination of the remaining defined benefit pension plans; and (b) reduce the amount of the administrative claim to $11.0 (from $14.0). Under the amended agreement, both the Company and the PBGC agreed to take up no further appeals. Pending a final resolution of this matter, the Company’s settlement with the PBGC remains in full force and effect. Upon consummation of the Liquidating Plans, the $11.0 minimum was paid to the PBGC. The remaining $3.0 that would be payable if the PBGC were to be paid the maximum amount of the administrative claim was accrued at December 31, 2005 in Accrued salaries, wages, and related expenses. The


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company continues to believe that any outcome would not be less favorable (from a cash perspective) than the terms of the PBGC settlement or the amended PBGC agreement. However, if the remaining defined benefit pension plans were to be terminated, it would likely result in a non-cash charge of approximately $6.0 — $7.0.
The indenture trustee for the Sub Notes appealed the Court’s order approving the settlement with the PBGC. In March 2006, the first level appellate court affirmed the Court’s approval of the settlement with the PBGC.
Other Contingencies.  The Company or KACC is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters related to past or present operations. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
12.  Derivative Financial Instruments and Related Hedging Programs
In conducting its business, KACC has historically used various instruments, including forward contracts and options, to manage the risks arising from fluctuations in aluminum prices, energy prices and exchange rates. KACC has historically entered into hedging transactions from time to time to limit its exposure resulting from (1) its anticipated sales primary aluminum and fabricated aluminum products, net of expected purchase costs for items that fluctuate with aluminum prices, (2) the energy price risk from fluctuating prices for natural gas used in its production process, and (3) foreign currency requirements with respect to its cash commitments with foreign subsidiaries and affiliates. As KACC’s hedging activities are generally designed to lock-in a specified price or range of prices, gains or losses on the derivative contracts utilized in the hedging activities (except the impact of those contracts discussed below which have been marked to market) generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged.
KACC’s share of primary aluminum production from Anglesey is approximately 150,000,000 pounds annually. Because KACC purchases alumina for Anglesey at prices linked to primary aluminum prices, only a portion of the Company’s net revenues associated with Anglesey are exposed to price risk. The Company estimates the net portion of its share of Anglesey production exposed to primary aluminum price risk to be approximately 100,000,000 pounds annually.
As stated above, the Company’s pricing of fabricated aluminum products is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to its customers. However, in certain instances the Company does enter into firm price arrangements. In such instances, the Company does have price risk on its anticipated primary aluminum purchase in respect of the customer’s order. Total fabricated products shipments during 2003, 2004 and 2005 that contained fixed price terms were (in millions of pounds) 97.6, 119.0, and 155.0 respectively.
During the last three years the volume of fabricated products shipments with underlying primary aluminum price risk substantially offset or roughly equaled the Company’s net exposure to primary aluminum price risk at Anglesey. As such, the Company considers its access to Anglesey production overall to be a “natural” hedge against any fabricated products firm metal-price risk. However, since the volume of fabricated products shipped under firm prices may not match up on amonth-to-month basis with expected Anglesey-related primary aluminum shipments, the Company may use third party hedging instruments to eliminate any net remaining primary aluminum price exposure existing at any time.
At December 31, 2005, the fabricated products business held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of primary aluminum for the period 2006 — 2009 totaling approximately (in millions of pounds): 2006: 123.0, 2007: 79.0, 2008: 56.0, and 2009: 44.0.


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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes KACC’s material derivative positions at December 31, 2005:
             
     Notional
    
     Amount of
  Carrying/
 
     Contracts
  Market
 
Commodity
 
Period
  (mmlbs)  Value 
 
Aluminum —             
Option sale contracts  1/06 through 12/11   84.7  $1.5 
Fixed priced purchase contracts  1/06 through 12/06   15.7   1.1 
             
     Notional
    
     Amount of
  Carrying/
 
     Contracts
  Market
 
Foreign Currency
 
Period
  (mm GBP)  Value 
 
Pounds Sterling —             
Option purchase contracts  1/06 through 12/07   84.0  $3.2 
Fixed priced purchase contracts  1/06 through 12/07   84.0   (4.2)
The above table excludes certain aluminum option sales contracts whose positions were liquidated prior to their settlement date during the year ended December 31, 2005. A net loss associated with these liquidated positions was deferred and is being recognized over the period during which the underlying transactions to which the hedges related are expected to occur. As of December 31, 2005, the remaining unamortized net loss was approximately $2.1.
Hedging activities during 2005 (all of which were attributable to continuing operations) resulted in a net loss of approximately $.1 for the year ended 2005. Hedging activities during the years ended December 31, 2004 and 2003 resulted in net losses of approximately $2.5 and $1.7, respectively. Hedging activities in 2004 and 2003 were deemed to be fully attributable to the Company’s commodity-related operations and are reported in Discontinued operations.
As more fully discussed in Notes 2 and 16, in connection with the Company’s preparation of its December 31, 2005 financial statements, the Company concluded that its derivative financial instruments did not qualify for hedge accounting treatment. The net impact of the change was a non-cash charge (in Cost of products sold) of approximately $4.1 (which would have otherwise been classified as a reduction of OCI if the transactions had qualified for hedge accounting treatment).
13.  Key Employee Retention Program
In June 2002, the Company adopted a key employee retention program (the “KERP”), which was approved by the Court in September 2002. The KERP is a comprehensive program that is designed to provide financial incentives sufficient to retain certain key employees during the Cases. The KERP includes six key elements: a retention plan, a severance plan, a change in control plan, a completion incentive plan, the continuation for certain participants of an existing supplemental employee retirement plan (“SERP”) and a long-term incentive plan. Under the KERP, retention payments commenced in September 2002 and were paid every six months through March 31, 2004, except that 50% of the amounts payable to certain senior officers were withheld until the Debtors emerge from the Cases or as otherwise agreed pursuant to the KERP. During 2004 and 2003, the Company recorded charges of $1.5 and $6.1, respectively (included in Selling, administrative, research and development, and general), related to the retention plan of the KERP. The severance and change in control plans, which are similar to the provisions of previous arrangements that existed for certain key employees, generally provide for severance payments of between six months and three years of salary and certain benefits, depending on the facts and circumstances and the level of employee involved. The completion incentive plan generally provided for payments that reduced over time to certain senior officers depending on the elapsed time until the Debtors emerged from the Cases. The completion


92

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

incentive lapsed with no payments due. The SERP generally provides additional non-qualified pension benefits for certain active employees at the time that the KERP was approved, who would suffer a loss of benefits based on Internal Revenue Code limitations, so long as such employees are not subsequently terminated for cause or voluntarily terminate their employment prior to reaching their retirement age. The long-term incentive plan generally provides for incentive awards to key employees based on an annual cost reduction target. Payment of such long-term incentive awards generally will be made: (a) 50% when the Debtors emerge from the Cases and (b) 50% one year from the date the Debtors emerge from the Cases. At December 31, 2005, approximately $8.2 was accrued in respect of the KERP long-term incentive.
14.  Pacific Northwest Power Matters
During October 2000, KACC signed an electric power contract with the Bonneville Power Administration (“BPA”) under which the BPA starting October  1, 2001, was to provide KACC’s operations in the State of Washington with approximately 290 megawatts of power through September 2006. The contractthat provided KACC with sufficient power to fully operate KACC’sthe Trentwood facility, as well as approximately 40% of the combined capacity of KACC’sthe Company’s former Mead and Tacoma aluminum smelting operations, which had been curtailed since the last half of 2000.
As a part of the reorganization process, the Company concluded that it was in its best interest to reject the BPA contract as permitted by the Code. As such, with the authorization of the Court, the Company rejected the BPA contract on September 30, 2002. The contract rejection gives rise to a pre-petition claim (see Note 1). The BPA has filed a proof of claim for approximately $75.0 in connection with the Cases in respect of the contract rejection. In June 2006, the Bankruptcy Court approved an agreement between the Company and the BPA which resolved the claim by granting the BPA an unsecured pre-petition claim totaling approximately $6.1 (i.e., $5.0 in addition to $1.1 of previously accrued pre-petition accounts payable). The Company has previously disclosed that the amount of the BPA claim would ultimately be determined either throughrecorded a negotiated settlement, litigation or a computation of prevailing power prices over the contract period and that, as the amount of the BPA’s claim in respect of the contract rejection had not been determined, no provision had been madenon-cash charge for the claimincremental $5.0 amount in the Company’s prior period financial statements. In Octobersecond quarter of 2005 the Debtors asked the Court to reduce the(in Discontinued operations — see Note 20). This claim to $1.1 as thetake-or-pay contract price has consistently been below average market prices. The $1.1 amount represents only certain pre-petition invoices and such amount is (and has been) fully accrued. Whatever the ultimate amount of the BPA claim, it is expected to be settled pursuant to the Kaiser Aluminum Amended Plan. Accordingly, any payments that may be required as a result of the rejection of the BPA contract are expected to only be made pursuant to the Kaiser Aluminum Amended Plan upon the Company’s emergence from the Cases.
15.  Segment and Geographical Area Information
The Company’s primary line of business is the production of fabricated aluminum products. In addition, the Company owns a 49% interest in Anglesey, which owns an aluminum smelter in Holyhead, Wales. Historically, the Company, through its wholly owned subsidiary, KACC, operated in all principal sectors of the aluminum industry including the production and sale of bauxite, alumina and primary aluminum in domestic and international markets. However, as previously disclosed,was resolved as a part of the Company’s reorganization efforts, the CompanyPlan and has completed the sale of substantially all of its commodities operations (including the Company’s interests in and related to QAL which were sold in April 2005). The balances and results in respect of such operations are now considered discontinued operations (see Note 3 and 5). The amounts remaining in Primary aluminum relate primarily to the Company’s interests in and related to Anglesey and the Company’s primary aluminum hedging-related activities.
The Company’s operations are organized and managed by product type. The Company’s operations, after the discontinued operations reclassification, include two operating segments of the aluminum industry and the corporate segment. The aluminum industry segments include: Fabricated products and Primary aluminum. The Fabricated products group sells value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial applications, including for automotive, aerospace and general


93

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

engineering end-use applications. The Primary aluminum business unit produces commodity grade products as well as value-added products such as ingot and billet, for which the Company receives a premium over normal commodity market prices and conducts hedging activities in respect of KACC’s exposure to primary aluminum price risk. The accounting policies of the segments are the same as those described in Note 2. Business unit results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes, interest expense or Other operating charges, net.
The Company changed its segment presentation in 2004 to eliminate the “Eliminations” segment as the primary purpose for such segment was to eliminate intercompany profit on sales by the Primary aluminum and Bauxite and alumina business units, substantially all of which are now considered Discontinued operations. Eliminations not representing Discontinued operations are now included in segment results.
Given the significance of the Company’s exposure to primary aluminum prices and alumina prices (which typically are linked to primary aluminum prices on a lagged basis) in prior years, the commodity marketing activities were considered a separate business unit. In the accompanying financial statements, the Company has reclassified to discontinued operations all of the primary aluminum hedging results in respect of the commodity-related interests that have been sold (including the Company’s interests in and related to QAL which were sold in April 2005) and that are also treated as discontinued operations. As stated above, remaining primary aluminum hedging activities related to the Company’s interests in Anglesey and any firm price fabricated product shipments are considered part of the “Primary aluminum business unit”.
Financial information by operating segment, excluding discontinued operations, at December 31, 2005, 2004 and 2003 is as follows:
             
  Year Ended December 31, 
  2005  2004  2003 
 
Net Sales:            
Fabricated Products $939.0  $809.3  $597.8 
Primary Aluminum  150.7   133.1   112.4 
             
  $1,089.7  $942.4  $710.2 
             
Equity in income (loss) of unconsolidated affiliate:            
Primary Aluminum $4.8  $8.5  $3.3 
             
Segment Operating Income (Loss):(2)            
Fabricated Products(1) $87.2  $33.0  $(21.2)
Primary Aluminum  16.4   13.9   6.7 
Corporate and Other  (35.8)  (71.3)  (74.7)
Other Operating Charges Net — Note 6  (8.0)  (793.2)  (141.6)
             
  $59.8  $(817.6) $(230.8)
             
(1)Operating results for 2005, 2004 and 2003 include LIFO inventory charges of $9.3, $12.1 and $3.2, respectively.
(2)In 2005 and 2004, the Company chose to reallocate for segment purposes the amount of post-retirement medical costs charged to the business units so that the Corporate segment began to incur the excess of the total expenses over the amount of VEBA contributions allocable to the Fabricated products business unit and Discontinued operations.


94

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

             
  Year Ended December 31, 
  2005  2004  2003 
 
Depreciation and amortization(1)            
Fabricated Products $19.6  $21.8  $22.8 
Primary Aluminum  —   .2   1.1 
Corporate and Other  .3   .3   1.8 
             
  $19.9  $22.3  $25.7 
             
Capital expenditures:(2)            
Fabricated Products $30.6  $7.6  $8.9 
Corporate and Other  .4   —   — 
             
  $31.0  $7.6  $8.9 
             

(1)Depreciation and amortization expense excludes depreciation and amortization expense of discontinued operations of $13.1 in 2004 and $47.5 in 2003.
(2)Capital expenditures exclude capital expenditures of discontinued operations of $3.5 in 2004 and $28.3 in 2003.
         
  December 31, 
  2005  2004 
 
Investments in and advances to unconsolidated affiliate:        
Primary Aluminum $12.6  $16.7 
Corporate and Other  —   — 
         
  $12.6  $16.7 
         
Segment assets:        
Fabricated Products $403.8  $430.0 
Primary Aluminum  62.3   95.5 
Corporate and Other, including restricted proceeds from the sale of commodity interests in 2004 of $280.8  1,072.8   1,287.4 
Discontinued operations  —   69.5 
         
  $1,538.9  $1,882.4 
         
             
  Year Ended
 
  December 31, 
  2005  2004  2003 
 
Income taxes paid:(1)            
Fabricated Products —             
United States $—  $—  $.1 
Canada  3.4   —   4.7 
             
  $3.4  $—  $4.8 
             
(1)Income taxes paid excludes income tax paid by discontinued operations of $18.9 in 2005, $10.7 in 2004 and $41.3 in 2003.

95

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Geographical information for net sales, based on country of origin, and long-lived assets follows:
             
  Year Ended December 31, 
  2005  2004  2003 
 
Net sales to unaffiliated customers:            
Fabricated Products            
United States $836.1  $705.7  $525.6 
Canada  102.9   103.6   72.2 
             
   939.0   809.3   597.8 
             
Primary Aluminum            
United States  2.6   —   3.8 
United Kingdom  148.1   133.1   108.6 
             
   150.7   133.1   112.4 
             
  $1,089.7  $942.4  $710.2 
             
         
  December 31, 
  2005  2004 
 
Long-lived assets:(1)        
Fabricated Products —         
United States $204.0  $193.4 
Canada  17.6   17.8 
         
   221.6   211.2 
Primary Aluminum —         
United Kingdom  12.6   16.7 
Corporate and Other —         
United States  2.1   3.4 
         
  $236.3  $231.3 
         
(1)Long-lived assets include Property, plant, and equipment, net and Investments in and advances to unconsolidated affiliates. Prepared on a going-concern basis — see Note 2.
(2)Long-lived assets excludes long-lived assets of discontinued operations of $38.9 in 2004.
The aggregate foreign currency gain included in determining net income was immaterial for the years ended December 31, 2005, 2004 and 2003. Sales to the Company’s largest fabricated products customer accounted for sales of approximately 11%, 10%, and 9% of total revenue in 2005, 2004 and 2003. Subsequent to December 31, 2005, this customer entered into an agreement to acquire one of the Company’s other fabricated products customers. The acquisition is expected to be completed in the second quarter of 2006. Sales to the combined customers accounted for approximately 19%, 18% and 15% of total revenues in 2005, 2004 and 2003. The loss of the combined customers would have a material adverse effect on the Company taken as a whole. However, in the Company’s opinion, the relationship between the customer and the Company is good and the risk of loss of the customer is remote. Export sales were less than 10% of total revenue during the years ended December 31, 2005, 2004 and 2003.


96

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.  Restated 2005 Quarterly Financial Data (Unaudited)
During March 2006, the Company determined that its previously issued financial statements for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 should be restated for two items: (1) VEBA-related payments made during the first nine months of 2005 should have been recorded as a reduction of the pre-petition retiree medical obligations rather than as a current operating expense as was done in the Company’s Quarterly Reports onForm 10-Q and (2) as more fully discussed in Note 2, the Company determined that its derivative financial instrument transactions did not qualify for hedge (deferral) treatment as the transactions had been accounted for in the Company’s Quarterly Reports onForm 10-Q. The effect of the restatement related to the VEBA payments is to decrease operating expenses by $6.7, $5.7 and $5.7 in the first, second and third quarters of 2005, respectively with an offsetting decrease in Liabilities subject to compromise at March 31, 2005, June 30, 2005 and September 30, 2005. The net effect of the restatement related to the derivative transactions was to increase operating expenses by $2.0, $1.5 and $1.0 in the first, second and third quarters of 2005, respectively, with an offsetting increase in OCI at March 31, 2005, June 30, 2005 and September 30, 2005, respectively. There is no net impact on the Company’s cash flows as a result of either restatement.Successor.
The following tables show the full income statement affects of the restatements on each quarter in 2005 as well as the changes in balance sheet and cash flow statement line items.
Statements of Consolidated Income (Loss) — Unaudited
                         
  As
     As
     As
    
  Previously
  As
  Previously
  As
  Previously
  As
 
  Reported(1)  Restated  Reported(1)  Restated  Reported(1)  Restated 
  Mar. 31,
  Mar. 31,
  Jun 30,
  Jun. 30,
  Sept. 30,
  Sept. 30,
 
  2005  2005  2005  2005  2005  2005 
 
Net sales $281.4  $281.4  $262.9  $262.9  $271.6  $271.6 
                         
Costs and expenses:                        
Cost of products sold  242.2   243.0   234.2   234.4   233.7   233.5 
Depreciation and amortization  4.9   4.9   5.2   5.2   4.9   4.9 
Selling, administration, research and development, and general  17.7   12.2   17.0   12.6   17.7   13.2 
Other operating charges, net  6.2   6.2   —   —   .3   .3 
                         
Total costs and expenses  271.0   266.3   256.4   252.2   256.6   251.9 
                         
Operating income (loss)  10.4   15.1   6.5   10.7   15.0   19.7 


97

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                         
  As
     As
     As
    
  Previously
  As
  Previously
  As
  Previously
  As
 
  Reported(1)  Restated  Reported(1)  Restated  Reported(1)  Restated 
  Mar. 31,
  Mar. 31,
  Jun 30,
  Jun. 30,
  Sept. 30,
  Sept. 30,
 
  2005  2005  2005  2005  2005  2005 
 
                         
Other income (expense):                        
Interest expense (excluding unrecorded interest expense  (2.1)  (2.1)  (1.1)  (1.1)  (1.0)  (1.0)
Reorganization items  (7.8)  (7.8)  (9.3)  (9.3)  (8.2)  (8.2)
Other-net  (.4)  (.4)  (.6)  (.6)  (.5)  (.5)
                         
Income (loss) before income taxes and discontinued operations  .1   4.8   (4.5)  (.3)  5.3   10.0 
Provision for income taxes  (2.4)  (2.4)  (2.2)  (2.2)  (1.4)  (1.4)
                         
Income (loss) from continuing operations  (2.3)  2.4   (6.7)  (2.5)  3.9   8.6 
Income (loss) from discontinued operations  10.6   10.6   368.3   368.3   8.0   8.0 
Cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  (4.7)  (4.7)  —   —   —     
                         
Net income (loss) $3.6  $8.3  $361.6  $365.8  $11.9  $16.6 
                         
Earnings (loss) per share — Basic/Diluted:                        
Income (loss) from continuing operations $(.03) $.03  $(.08) $(.03) $.05  $.11 
                         
Income (loss) from discontinued operations $.13  $.13  $4.62  $4.62  $.10  $.10 
                         
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations $(.06) $(.06) $—  $—  $—  $— 
                         
Net income (loss) $.04  $.10  $4.54  $4.59  $.15  $.21 
                         
Weighted average shares outstanding (000):                        
Basic/Diluted  79,681   79,681   79,674   79,674   79,672   79,672 
                         

98

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Balance Sheets — Unaudited
                         
  As
     As
     As
    
  Previously
  As
  Previously
  As
  Previously
  As
 
  Reported(1)  Restated  Reported(1)  Restated  Reported(1)  Restated 
  Mar. 31,
  Mar. 31,
  Jun 30,
  Jun. 30,
  Sept. 30,
  Sept. 30,
 
  2005  2005  2005  2005  2005  2005 
 
Liabilities subject to compromise $3,952.9  $3,946.2  $3,950.4  $3,938.0  $3,949.8  $3,931.7 
Stockholders’ equity (deficit):                        
Common stock  .8   .8   .8   .8   .8   .8 
Additional capital  538.0   538.0   538.0   538.0   538.0   538.0 
Accumulated deficit  (2,913.9)  (2,909.2)  (2,552.3)  (2,543.4)  (2,540.4)  (2,526.8)
Accumulated other comprehensive income (loss)  (7.6)  (5.6)  (9.0)  (5.5)  (10.0)  (5.5)
                         
Total stockholders’ equity (deficit)  (2,382.7)  (2,376.0)  (2,022.5)  (2,010.1)  (2,011.6)  (1,993.5)
                         
Total liabilities and stockholders’ equity (deficit) $1,570.2  $1,570.2  $1,927.9  $1,927.9  $1,938.2  $1,938.2 
                         
Statements of Consolidated Cash Flows — Unaudited
                             
  As
     As
     As
       
  Previously
  As
  Previously
  As
  Previously
  As
    
  Reported(1)  Restated  Reported(1)  Restated  Reported(1)  Restated    
  Mar. 31,
  Mar. 31,
  Jun 30,
  Jun. 30,
  Sept. 30,
  Sept. 30,
    
  2005  2005  2005  2005  2005  2005    
 
Cash flows from operating activities:                            
Net income (loss) $3.6  $8.3  $365.2  $374.1  $377.1  $390.7     
Less net income (loss) from discontinued operations  10.6   10.6   378.9   378.9   386.9   386.9     
                             
Net income (loss) from continuing operations, including from cumulative effect of adopting change in accounting in 2005  (7.0)  (2.3)  (13.7)  (4.8)  (9.8)  3.8     
(Decrease) increase in prepaid expenses and other current assets  (2.5)  .5   (1.3)  8.0   .3   7.1     
Increase (decrease) in other accrued liabilities  4.8   4.1   2.5   (3.4)  (8.9)  (11.8)    
Net cash impact of changes in long-term assets and liabilities  (1.0)  (8.0)  (.3)  (12.6)  2.6   (14.9)    
Net cash provided (used) by operating activities $(8.3) $(8.3) $11.3  $11.3  $15.1  $15.1     
                             
(1)The “As previously reported” amounts shown above include the effect of the adoption of FIN 47 on December 31, 2005 retroactive to the beginning of the year as discussed in Notes 2 and 4. Such retroactive application is required by GAAP and is not considered a “restatement.” The retroactive impact of the adoption of FIN 47 was a charge of $4.7 in the first quarter of 2005 in respect of the cumulative effect upon adoption and immaterial adjustments to cost of products sold in each quarter of 2005.


99118

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
QUARTERLY FINANCIAL DATA (Unaudited)
(In millions of dollars, except share amounts)
 
                 
  Quarter Ended 
  March 31,
  June 30,
  September 30,
    
  (Restated)(1)  (Restated)(1)  (Restated)(1)  December 31, 
 
2005                
Net sales $281.4  $262.9  $271.6  $273.8 
Operating income (loss)  15.1   10.7   19.7   14.3 
Income (loss) from continuing operations  2.4   (2.5)  8.6   (1,121.2)(2)
Income (loss) from discontinued operations  10.6   368.3(3)  8.0   (23.2)
Cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  (4.7)  —   —   — 
Net income (loss)  8.3   365.8   16.6   (1,144.4)
Basic/diluted earnings (loss) per share(6)                
Income (loss) from continuing operations  .03   (.03)  .11   (14.07)
Income (loss) from discontinued operations  .13   4.62   .10   (.29)
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  (.06)  —   —   — 
Net income (loss)  .10   4.59   .21   (14.36)
Common stock market price:(6)                
High  .12   .09   .07   .05 
Low  .05   .06   .01   .03 
                 
  Quarter Ended
  Quarter Ended
  Quarter Ended
  Quarter Ended
 
  March 31  June 30  September 30  December 31 
 
2007                
Net sales $392.2  $385.1  $366.7  $360.5 
Costs of products sold  337.1   314.0   303.3   296.7 
Operating income  32.3   62.7   44.0   43.0 
Net income  17.1   34.7   24.8   24.4 
Earnings per share — Basic:(2)                 
Net income  .86   1.73   1.24   1.22 
Earnings per share — Diluted:                
Net income  .85   1.71   1.22   1.20 
Common stock market price:(2)                
High  78.00   88.68   78.26   80.58 
Low  57.60   72.33   57.88   66.27 
 
                                    
 Quarter Ended  Predecessor     
 March 31, June 30, September 30, December 31,  Quarter Ended
 Quarter Ended
   July 1 through
 Quarter Ended
 
 March 31 June 30 July 1 September 30 December 31 
2004                
2006                    
Net sales $210.2  $230.1  $244.4  $257.7  $336.3  $353.5  $—  $331.4  $336.1 
Operating income (loss)  (10.3)  (4.4)  (160.5)  (642.4)
Loss from continuing operations  (22.6)  (14.8)  (173.2)(4)  (657.5)(5)
Costs of products sold  272.2   324.2   —   291.8   288.6 
Operating income  44.0   8.4   —   21.7   26.6 
Income from continuing operations  31.1   .5   3,105.3(1)  14.3   11.9 
Income (loss) from discontinued operations  (41.4)  39.0   103.7   20.0   7.3   (3.0)  —   —   — 
Net income (loss)  (64.0)  24.2   (69.5)  (637.5)  38.4   (2.5)  3,105.3   14.3   11.9 
Basic/diluted earnings (loss) per share(6)                
Loss from continuing operations  (.28)  (.19)  (2.17)  (8.25)
Earnings per share — Basic:(2)                     
Income from continuing operations  .39   .01   38.98   .72   .59 
Income (loss) from discontinued operations  (.52)  .49   1.30   .25   .09   (.04)  —   —   — 
Net income (loss)  (.80)  .30   (.87)  (8.00)  .48   (.03)  38.98   .72   .59 
Common stock market price:(6)                
Earnings per share — Diluted (same as basic for Predecessor):                    
Income from continuing operations              .72   .59 
Income from discontinued operations              —   — 
Net income              .72   .59 
Common stock market price:(2)                    
High  .15   .10   .08   .10   .07   .26   —   44.50   62.00 
Low  .08   .02   .03   .04   .03   .04   —   37.50   43.50 
 
 
(1)As more fully discussed in Note 16 of Notes to Consolidated Financial Statements, the Company has restated its financial statements for the quarters ended March 31, 2005; June 30, 2005; and September 30, 2005, to reflect a different treatment for cash payments to the VEBAs and change in accounting for derivative financial instruments.
(2)Includes a non-cash reorganization chargegain of $1,131.5$3,110.3 related to assignment (for the purposes of determining distribution under the KAAC/KFC Plan)implementation of the valuePlan and application of an intercompany claim to certain third party creditorsfresh start accounting (see Note 119 of Notes to Consolidated Financial Statements).
 
(3)Includes a gain of approximately $366.2 in respect of the sale of the Company’s interests in and related to QAL.


100

(4)Includes a non-cash pension charge of $155.5 (see Note 6 of Notes to Consolidated Financial Statements).
(5)Includes a non-cash pension charge of $154.5, a non-cash charge related to termination of post-retirement medical benefits plan of $312.5 and a related non-cash charge of $175.0 related to a settlement with the United Steel Workers of America (see Note 6 of Notes to Consolidated Financial Statements).
(6)(2)Earnings (loss) per share and market pricefor the first two quarters of 2006 may not be meaningful because the equity interests of the Company’s existing stockholders are expected to bewere cancelled without consideration pursuant to the Kaiser Aluminum Amended Plan.


101119

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
FIVE-YEAR FINANCIAL DATA
UNAUDITED CONSOLIDATED BALANCE SHEETS(1)(2)
 
                    
 December 31,                     
 2005 2004 2003 2002 2001      Predecessor 
 (In millions of dollars)  December 31, 
 2007 2006   2005 2004 2003 
ASSETS
ASSETS
                     
Current assets:                                         
Cash and cash equivalents $49.5  $55.4  $35.5  $77.4  $154.1  $68.7  $50.0   $49.5  $55.4  $35.5 
Receivables  101.5   111.0   80.5   62.5   66.8   112.3   106.0    101.5   111.0   80.5 
Inventories  115.3   105.3   92.5   103.8   138.3   207.6   188.1    115.3   105.3   92.5 
Prepaid expenses and other current assets  21.0   19.6   23.8   27.0   20.6   66.0   40.8    21.0   19.6   23.8 
Discontinued operations’ current assets  —   30.6   193.7   245.9   379.4   —   —    —   30.6   193.7 
                        
Total current assets  287.3   321.9   426.0   516.6   759.2   454.6   384.9    287.3   321.9   426.0 
Investments in and advances to unconsolidated affiliate  12.6   16.7   13.1   15.2   18.9   41.3   18.6    12.6   16.7   13.1 
Property, plant, and equipment — net  223.4   214.6   230.1   255.3   294.4   222.7   170.3    223.4   214.6   230.1 
Restricted proceeds from sale of commodity interests  —   280.8   —   —   —   —   —    —   280.8   — 
Personal injury-related insurance recoveries receivable  965.5   967.0   465.4   484.0   501.2   —   —    965.5   967.0   465.4 
Goodwill  11.4   11.4   11.4   11.4   11.4 
Intangible assets including goodwill  —   —    11.4   11.4   11.4 
Net assets in respect of VEBAs  134.9   40.7    —   —   — 
Deferred tax assets — net  268.6   —    —   —   — 
Other assets  38.7   31.1   43.7   126.3   149.9   43.1   40.9    38.7   31.1   43.7 
Discontinued operations’ long-term assets  —   38.9   433.8   816.6   1,008.7   —   —    —   38.9   433.8 
                        
Total $1,538.9  $1,882.4  $1,623.5  $2,225.4  $2,743.7  $1,165.2  $655.4   $1,538.9  $1,882.4  $1,623.5 
                        
   
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
                     
Liabilities not subject to compromise —                                          
Current liabilities:                                         
Accounts payable and accruals $149.6  $175.3  $98.4  $93.7  $274.4  $146.8  $160.2   $149.6  $175.3  $98.4 
Accrued postretirement medical benefit obligation — current portion  —   —   32.5   60.2   62.0   —   —    —   —   32.5 
Payable to affiliate  14.8   14.7   11.4   11.2   10.9   18.6   16.2    14.8   14.7   11.4 
Long-term debt — current portion  1.1   1.2   1.3   .9   173.5   —   —    1.1   1.2   1.3 
Discontinued operations’ current liabilities  2.1   57.7   177.5   167.6   282.6   —   —    2.1   57.7   177.5 
                        
Total current liabilities  167.6   248.9   321.1   333.6   803.4   165.4   176.4    167.6   248.9   321.1 
Long-term liabilities  42.0   32.9   59.4   55.7   808.8   57.0   58.3    42.0   32.9   59.4 
Accrued postretirement medical benefit obligation  —   —   —   —   642.2 
Long-term debt  1.2   2.8   2.2   20.7   678.7   —   50.0    1.2   2.8   2.2 
Discontinued operations’ liabilities, including liabilities subject to compromise and minority interests  68.5   26.4   208.7   226.4   251.0   —   —    68.5   26.4   208.7 
                        
  279.3   311.0   591.4   636.4   3,184.1   222.4   284.7    279.3   311.0   591.4 
Liabilities subject to compromise  4,400.1   3,954.9   2,770.1   2,673.9   —   —   —    4,400.1   3,954.9   2,770.1 
Minority interests  .7   .7   .7   .7   .7   —   —    .7   .7   .7 
Stockholders’ equity:                                         
Common stock  .8   .8   .8   .8   .8   .2   .2    .8   .8   .8 
Additional capital  538.0   538.0   539.1   539.9   539.1   948.9   487.5    538.0   538.0   539.1 
Accumulated deficit  (3,671.2)  (2,917.5)  (2,170.7)  (1,382.4)  (913.7)
Retained earnings (deficit)  116.1   26.2    (3,671.2)  (2,917.5)  (2,170.7)
Common stock owned by Union VEBA subject to transfer restrictions, at reorganization value  (116.4)  (151.1)   —   —   — 
Accumulated other comprehensive income (loss)  (8.8)  (5.5)  (107.9)  (243.9)  (67.3)  (6.0)  7.9    (8.8)  (5.5)  (107.9)
                        
Total stockholders’ equity  (3,141.2)  (2,384.2)  (1,738.7)  (1,085.6)  (441.1)  942.8   370.7    (3,141.2)  (2,384.2)  (1,738.7)
                        
Total $1,538.9  $1,882.4  $1,623.5  $2,225.4  $2,743.7  $1,165.2  $655.4   $1,538.9  $1,882.4  $1,623.5 
                        
 
 
(1)Prepared on a “going concern” basis. See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the possible impact of the Cases. Also, as more fully discussed in Note 1 of Notes to Consolidated Financial Statements, the Company expects that, upon emergence from the Cases, fresh start accounting would be applied which would adversely affect comparability of the December 31, 2005 balance sheet to the balance sheet of the entity upon emergence.
(2)The Selected Consolidated Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto. The consolidated financial data has been derived from the audited consolidated financial statements.


102120

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
 
FIVE-YEAR FINANCIAL DATA
UNAUDITED STATEMENTS OF CONSOLIDATED INCOME (LOSS)(1)(2)
 
                        
     Predecessor 
                       Year Ended December 31, 2006     
 Year Ended December 31,    July 1, 2006
           
 2005 2004 2003 2002 2001  Year Ended
 through
           
 (In millions of dollars, except share amounts)  December 31,
 December 31,
   January 1, 2006
 Year Ended December 31, 
 2007 2006   to July 1, 2006 2005 2004 2003 
Net sales $1,089.7  $942.4  $710.2  $709.0  $889.5  $1,504.5  $667.5   $689.8  $1,089.7  $942.4  $710.2 
                          
Costs and expenses:                                             
Cost of products sold  951.1   852.2   681.2   671.4   823.4 
Cost of products sold excluding depreciation  1,251.1   580.4    596.4   951.1   852.2   681.2 
Depreciation and amortization  19.9   22.3   25.7   32.3   32.1   11.9   5.5    9.8   19.9   22.3   25.7 
Selling, administrative, research and development, and general  50.9   92.3   92.5   118.6   93.7   73.1   35.5    30.3   50.9   92.3   92.5 
Other operating charges, net  8.0   793.2   141.6   31.8   30.1 
Other operating (benefits) charges, net  (13.6)  (2.2)   .9   8.0   793.2   141.6 
                          
Total costs and expenses  1,029.9   1,760.0   941.0   854.1   979.3   1,322.5   619.2    637.4   1,029.9   1,760.0   941.0 
                          
Operating income (loss)  59.8   (817.6)  (230.8)  (145.1)  (89.8)  182.0   48.3    52.4   59.8   (817.6)  (230.8)
Other income (expense):                                             
Interest expense (excluding unrecorded contractual interest expense of $95.0 in 2005, 2004 and 2003, respectively, and $84/0 in 2002)  (5.2)  (9.5)  (9.1)  (19.0)  (106.2)
Interest expense (excluding unrecorded contractual interest expense of $47.4 for the period from January 1, 2006 to July 1, 2006,$95.0 in 2005, 2004 and 2003, respectively.)  (4.3)  (1.1)   (.8)  (5.2)  (9.5)  (9.1)
Reorganization items  (1,162.1)  (39.0)  (27.0)  (33.3)  —   —   —    3,090.3   (1,162.1)  (39.0)  (27.0)
Other — net  (2.4)  4.2   (5.2)  (.9)  (68.7)
Other income (expense) — net  4.7   2.7    1.2   (2.4)  4.2   (5.2)
                          
Loss before income taxes and discontinued operation  (1,109.9)  (861.9)  (272.1)  (198.3)  (264.7)
Income (loss) before income taxes and discontinued operation  182.4   49.9    3,143.1   (1,109.9)  (861.9)  (272.1)
Provision for income taxes  (2.8)  (6.2)  (1.5)  (4.4)  (523.4)  (81.4)  (23.7)   (6.2)  (2.8)  (6.2)  (1.5)
Minority interests  —   —   —   —   (.2)
                          
Loss from continuing operations  (1,112.7)  (868.1)  (273.6)  (202.7)  (788.3)
Income (loss) from continuing operations  101.0   26.2    3,136.9   (1,112.7)  (868.1)  (273.6)
                          
Discontinued operations:                                             
Loss from discontinued operation, net of income taxes and minority interests  (2.5)  (5.3)  (514.7)  (266.0)  165.3   —   —    4.3   (2.5)  (5.3)  (514.7)
Gain from sale of commodity interests  366.2   126.6   —   —   163.6   —   —    —   366.2   126.6   — 
                          
Income (loss) from discontinued operations  363.7   121.3   (514.7)  (266.0)  328.9   —   —    4.3   363.7   121.3   (514.7)
                          
Cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations  (4.7)  —   —   —   —   —   —    —   (4.7)  —   — 
                          
Net loss $(753.7) $(746.8) $(788.3) $(468.7) $(459.4)
Net income (loss) $101.0  $26.2   $3,141.2  $(753.7) $(746.8) $(788.3)
                          
Earnings (loss) per share — Basic/Diluted:(3)                    
Loss from continuing operations $(13.97) $(10.88) $(3.41) $(2.52) $(9.82)
Earnings (loss) per share — Basic:(2)                         
Income (loss) from continuing operations $5.05  $1.31   $39.37  $(13.97) $(10.88) $(3.41)
                          
Income (loss) from discontinued operations $4.57  $1.52  $(6.42) $(3.30) $4.09  $—  $—   $.05  $4.57  $1.52  $(6.42)
                          
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations $(.06) $—  $—  $—  $—  $—  $—   $—  $(.06) $—  $— 
                          
Net loss $(9.46) $(9.36) $(9.83) $(5.82) $(5.73)
Net income (loss) $5.05  $1.31   $39.42  $(9.46) $(9.36) $(9.83)
               
Earnings per share — Diluted (same as basic for predecessor):                         
Income from continuing operations $4.97  $1.30                  
       
Income from discontinuing operations $—  $—                  
       
Loss from cumulative effect on years prior to 2005 of adopting accounting for conditional asset retirement obligations $—  $—                  
       
Net income $4.97  $1.30                  
                  
Dividends per common share $—  $—  $—  $—  $—  $.54  $—   $—  $—  $—  $— 
                          
Weighted average shares outstanding (000):(3)                    
Basic  79,675   79,815   80,175   80,578   80,235 
Weighted average shares outstanding (000):(2) Basic  20,014   20,003    79,672   79,675   79,815   80,175 
Diluted  79,675   79,815   80,175   80,578   80,235   20,308   20,089    79,672   79,675   79,815   80,175 
 
 
(1)Prepared on a “going concern” basis. See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the possible impact of the Cases.
(2)The Selected Consolidated Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto. The consolidated financial data has been derived from the audited consolidated financial statements.
 
(3)(2)Earnings (loss) per share and share information for the Predecessor may not be meaningful because, pursuant to the Kaiser Aluminum Amended Plan, the equity interests of the Company’s existing stockholders are expected to bewere cancelled without consideration.


103121

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 as amended (the “Exchange Act”) is processed, recorded, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures was performed as of the end of the period covered by this Report under the supervision of and with the participation of the Company’sour management, including the principal executive officer and principal financial officer. Based on that evaluation, the Company’sour principal executive officer and principal financial officer concluded that the Company’sour disclosure controls and procedures were effective except as described below.of December 31, 2007.
 
During the final reporting and closing process relating to our first quarter of 2005, we evaluated the accounting treatment for the VEBA payments and concluded that such payments should be presented as a period expense. As more fully discussed in Note 16 of the Notes to ConsolidatedManagement’s Annual Report on Internal Control Over Financial Statements, during our reporting and closing process relating to the preparation of the December 31, 2005 financial statements and analyzing the appropriate post-emergence accounting treatment for the VEBA payments, the Company concluded that the VEBA payments made in 2005 should be presented as a reduction of pre-petition retiree medical obligations rather than as a period expense. While the incorrect accounting treatment employed relating to the VEBA payments does indicate a deficiency in the Company’s internal controls over financial reporting such deficiency was remediated during the final reporting and closing process in connection with the preparation of the December 31, 2005 financial statements.
During the final reporting and closing process relating to the preparation of the December 31, 2005 financial statements, the Company concluded that our controls and procedures were not effective as of the end of the period covered by thisReporting.  Our management’s report because a material weakness inon internal control over financial reporting exists relating to our accounting for derivative financial instruments under Statement of Financial Accounting Standards 133,Accounting for Derivative Instrumentsis included in Item 8. “Financial Statements and Hedging Activities (“SFAS No. 133”). Specifically, we lacked sufficient technical expertise as to the application of SFAS 133,Supplementary Data” and our procedures relating to hedging transactions were not designed effectively such that each of the complex documentation requirements for hedge accounting treatment set forth in SFAS No. 133 were evaluated appropriately. More specifically, the Company’s documentation did not comply with the SFAS No. 133 in respect to the Company’s methods for testing and supporting that changes in the market value of the hedging transactions would correlate with fluctuations in the value of the forecasted transaction to which they relate. The Company believed that the derivatives it was using would qualify for the “short-cut” method whereby regular assessments of correlation would not be required. However, it ultimately concluded that, while the terms of the derivatives were essentially the same as the forecasted transaction, they were not identical and, therefore, the Company should have done certain mathematical computations to prove the ongoing correlation of changes in value of the hedge and the forecasted transaction.
Management has concluded that, had the Company completed its documentation in strict compliance with SFAS No. 133, the derivative transactions would have qualified for “hedge” (e.g. deferral) treatment. The rules provide that, once de-designation has occurred, the Company can modify its documentation and re-designate the derivative transactions as “hedges” and, if appropriately documented, re-qualify the transactions for prospectively deferring changes in market fluctuations after such corrections are made.


104

The Company is working to modify its documentation and to re-qualify open and post 2005 derivative transactions for treatment as hedges beginning in the second quarter of 2006. Specifically, the Company will, as a part of the re-designation process, modify the documentation in respect of all its derivative transactions to require the “long form” method of testing and supporting correlation. The Company also intends to have outside experts review its revised documentation once completed and to use such experts to perform reviews of documentation in respect of any new forms of documentation on future transactions and to do periodic reviews to help reduce the risk that other instances of non-compliance with SFAS No. 133 will occur. However, as SFAS No. 133 is a highly complex document and different interpretations are possible, absolute assurances cannot be provided that such improved controls will prevent any/all instances of non-compliance.
As a result of the material weakness, we have restated our financial statements for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. In light of these restatements, our management, including our principal executive officer and principal financial officer has determined that this deficiency constituted a material weakness in our internal control over financial reporting.incorporated herein by reference.
 
Changes in Internal Controls Over Financial Reporting.  The Company relocated its corporate headquarters from Houston, Texas to Foothill Ranch, California, where the Fabricated Products business unit, the Company’s core business, is headquartered. Staff transition occurred startingWe had no changes in late 2004 and was ongoing primarily during the first half of 2005. A small core group of Houston corporate personnel were retained throughout 2005 to supplement the Foothill Ranch staff and handle certain of the remainingChapter 11-related matters. During the second half of 2005, the monthly and quarterly accounting, financial reporting and consolidation processes were thought to have functioned adequately.
As previously announced, in January 2006, the Company’s Vice President (“VP”) and Chief Financial Officer (“CFO”) resigned. His decision to resign was based on a personal relationship with another employee, which the Company determined to be inappropriate. The resignation was in no way related to the Company’sour internal controls, financial statements, financial performance or financial condition. The Company formed the “Office of the CFO” and split the CFO’s duties between the Company’s Chief Executive Officer and two long tenured financial officers, the VP-Treasurer and VP-Controller. In February 2006, a person with a significant corporate accounting role resigned. This person’s duties were split between the VP-Controller and other key managers in the corporate accounting group. The Company also used certain former personnel to augment the corporate accounting team and is working on more permanent arrangements.
While the Company believes that the Company’s corporate internal accounting controls and its controls over financial reporting during our most recently completed fiscal quarter that have operated satisfactorily except as described above, these changes have made the yearend accounting and reporting process more difficult duematerially affected, or are reasonably likely to the combined loss of the two individuals and reduced amounts of institutional knowledge in the new corporate accounting group. The Company believes that it has addressed all material matters necessary for this report, but notes that the level of assurance it hasmaterially affect, our internal controls over internal accounting and financial accounting control is not as strong as desired or as in past periods.reporting.
 
Item 9B.Other Information
 
None.


105

PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Current Directors and Executive Officers
The following table sets forth certain information, as of March 24, 2006, with respect to the executive officers and directors of the Company and KACC. All officers and directors hold office until their respective successors are elected and qualified or until their earlier death, resignation or removal. The Company’s plan of reorganization contemplates the term of each of the current directors (other than Mr. Hockema) to end upon the Company’s emergence from Chapter 11.
Name
Positions and Offices with the Company and KACC*
Jack A. HockemaPresident, Chief Executive Officer and Director
John BarnesonSenior Vice President and Chief Administrative Officer
Edward F. HouffChief Restructuring Officer
John M. DonnanVice President, Secretary and General Counsel
Daniel D. MaddoxVice President and Controller
Daniel J. RinkenbergerVice President and Treasurer
Robert J. CruikshankDirector
George T. Haymaker, JrChairman of the Board and Director
Charles E. HurwitzDirector
Ezra G. LevinDirector
John D. RoachDirector
*All named individuals hold the same positions and offices with both the Company and KACC.
Jack A. Hockema.  Mr. Hockema, age 59, was elected to the position of President and Chief Executive Officer and as a director of the Company and KACC in October 2001. He previously served as Executive Vice President and President of Kaiser Fabricated Products of KACC from January 2000 until October 2001, and Executive Vice President of the Company from May 2000 until October 2001. He served as Vice President of the Company from May 1997 until May 2000. Mr. Hockema was Vice President of KACC and President of Kaiser Engineered Products from March 1997 until January 2000. He served as President of Kaiser Extruded Products and Engineered Components from September 1996 to March 1997. Mr. Hockema served as a consultant to KACC and acting President of Kaiser Engineered Components from September 1995 until September 1996. Mr. Hockema was an employee of KACC from 1977 to 1982, working at KACC’s Trentwood facility, and serving as plant manager of its former Union City, California can plant and as operations manager for Kaiser Extruded Products. In 1982, Mr. Hockema left KACC to become Vice President and General Manager of Bohn Extruded Products, a division of Gulf+Western, and later served as Group Vice President of American Brass Specialty Products until June 1992. From June 1992 until September 1996, Mr. Hockema provided consulting and investment advisory services to individuals and companies in the metals industry.
John Barneson.  Mr. Barneson, age 55, was elected to the position of Senior Vice President and Chief Administrative Officer of the Company and KACC effective August 2001. He previously served as Vice President and Chief Administrative Officer of the Company and KACC from December 1999 through August 2001. He served as Engineered Products Vice President of Business Development and Planning from September 1997 until December 1999. Mr. Barneson served as Flat-Rolled Products Vice President of Business Development and Planning from April 1996 until September 1997. Mr. Barneson has been an employee of KACC since September 1975 and has held a number of staff and operation management positions within the Flat-Rolled and Engineered Products business units.
Edward F. Houff.  Mr. Houff, age 59, was elected to the position of Senior Vice President and Chief Restructuring Officer of the Company and KACC effective January 2005. On August 15, 2005, Mr. Houff’s employment with KACC terminated in anticipation of the emergence of the Company and KACC from bankruptcy and Mr. Houff continued to serve in his capacity as Chief Restructuring Officer pursuant to the terms of a non-exclusive consulting agreement. Mr. Houff previously served as Vice President and General Counsel of the


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Company and KACC from April 2002 through December 2004, and Secretary of the Company and KACC from October 2002 through December 2004. He served as Acting General Counsel of the Company and KACC from February 2002 until April 2002, and Deputy General Counsel for Litigation of the Company and KACC from October 2001 until February 2002. Mr. Houff was President and Managing Shareholder of the law firm Church & Houff, P.A. in Baltimore, Maryland from April 1989 through September 2001.
John M. Donnan.  Mr. Donnan, age 45, was elected to the position of Vice President, Secretary and General Counsel of the Company and KACC effective January 2005. Mr. Donnan joined the legal staff of the Company and KACC in 1993 and was named Deputy General Counsel of the Company and KACC in 2000. Prior to joining KACC, Mr. Donnan was an associate in the Houston, Texas office of the law firm of Chamberlain, Hrdlicka, White, Williams & Martin.
Daniel D. Maddox.  Mr. Maddox, age 46, was elected to the position of Vice President and Controller of the Company effective September 1998, and of KACC effective July 1998. He served as Controller, Corporate Consolidation and Reporting of the Company and KACC from October 1997 through September 1998 and July 1998, respectively. Mr. Maddox previously served as Assistant Corporate Controller of the Company from May 1997 to September 1997, and of KACC from June 1997 to September 1997, and Director External Reporting of KACC from June 1996 to May 1997. Mr. Maddox was with Arthur Andersen LLP from 1982 until joining KACC in June 1996.
Daniel J. Rinkenberger.  Mr. Rinkenberger, age 47, was elected to the position of Vice President and Treasurer of the Company and KACC effective January 2005. He previously served as Vice President of Economic Analysis and Planning of the Company and KACC from February 2002 through December 2004. He served as Vice President, Planning and Business Development of Kaiser Fabricated Products of KACC from June 2000 through February 2002. Prior to that, he served as Vice President, Finance and Business Planning of Kaiser Flat-Rolled Products of KACC from February 1998 to February 2000, and as Assistant Treasurer of the Company and KACC from January 1995 through February 1998.
Robert J. Cruikshank.  Mr. Cruikshank, age 75, has served as a director of the Company and KACC since January 1994. In addition, Mr. Cruikshank has been a director of MAXXAM since May 1993. Mr. Cruikshank was a Senior Partner in the international public accounting firm of Deloitte & Touche from December 1989 until his retirement in March 1993. Mr. Cruikshank served on the board of directors of Deloitte Haskins & Sells from 1981 to 1985 and as Managing Partner of the Houston, Texas office from June 1974 until its merger with Touche Ross & Co. in December 1989. Mr. Cruikshank also serves as a director of Encysive Pharmaceuticals Inc. (formerly Texas Biotechnology Corp), a biopharmaceutical company; a trust manager of Weingarten Realty Investors; and as advisory director of Compass Bank Houston.
George T. Haymaker, Jr.  Mr. Haymaker, age 68, has been a director of the Company since May 1993, and of KACC since June 1993. He was named as non-executive Chairman of the Board of the Company and KACC effective October 2001. Mr. Haymaker served as Chairman of the Board and Chief Executive Officer of the Company and KACC from January 1994 until January 2000, and as non-executive Chairman of the Board of the Company and KACC from January 2000 through May 2001. He served as President of the Company from May 1996 through July 1997, and of KACC from June 1996 through July 1997. From May 1993 to December 1993, Mr. Haymaker served as President and Chief Operating Officer of the Company and KACC. Mr. Haymaker also is a director of 360networks Corporation, a provider of broadband network services; Flowserve Corporation, a provider of valves, pumps and seals; a director of CII Carbon, LLC., a producer of calcined coke; a director of Hayes Lemmerz International, Inc., a provider of automotive and commercial vehicle components; non-executive Chairman of the Board of Directors of Safelite Glass Corp., a provider of automotive replacement glass; and a director of SCP Pool Corp., a distributor of swimming pool supplies and products. Since July 1987, Mr. Haymaker has been a director, and from February 1992 through March 1993 was President, ofMid-America Holdings, Ltd. (formerly Metalmark Corporation), which is in the business of semi-fabrication of aluminum extrusions.
Charles E. Hurwitz.  Mr. Hurwitz, age 65, has served as a director of the Company since October 1988, and of KACC since November 1988. From December 1994 until April 2002, he served as Vice Chairman of KACC. Mr. Hurwitz also has served as a member of the Board of Directors and the Executive Committee of MAXXAM since August 1978 and was elected Chairman of the Board and Chief Executive Officer of MAXXAM in March


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1980. From January 1993 to January 1998, he also served MAXXAM as President. Mr. Hurwitz was Chairman of the Board and Chief Executive Officer of Federated Development Company, a Texas corporation, from January 1974 until its merger in February 2002 into Federated Development, LLC (“FDLLC”), a wholly owned subsidiary of Giddeon Holdings, Inc. (“Giddeon Holdings”). Mr. Hurwitz is the President and Director of Giddeon Holdings, a principal stockholder of MAXXAM, which is primarily engaged in the management of investments. Mr. Hurwitz also has been, since its formation in November 1996, Chairman of the Board, President and Chief Executive Officer of MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM and part of MAXXAM’s forest products operations (“MGHI”).
Ezra G. Levin.  Mr. Levin, age 72, has been a director of the Company since July 1991. He has been a director of KACC since November 1988, and a director of MAXXAM since May 1978. Mr. Levin also served as a director of the Company from April 1988 to May 1990. Mr. Levin has served as a director of The Pacific Lumber Company since February 1993, and as a manager on the Board of Managers of Scotia Pacific Company LLC since June 1998, each of which is a wholly owned subsidiary of MAXXAM and is engaged in forest products operations. Mr. Levin is a member and co-chair of the law firm of Kramer Levin Naftalis & Frankel LLP. He has held leadership roles in various legal and philanthropic capacities and also has served as visiting professor at the University of Wisconsin Law School and Columbia College.
John D. Roach.  Mr. Roach, age 62, has been a director of the Company and KACC since April 2002. Since August 2001, Mr. Roach has been the Chairman and Chief Executive Officer of Stonegate International, Inc., a private investment and advisory services firm. From March 1998 to September 2001, Mr. Roach was the Chairman, President and Chief Executive Officer of Builders FirstSource, Inc., a distributor of building products to production homebuilders. From July 1991 to July 1997, Mr. Roach served as Chairman, President and Chief Executive Officer of Fibreboard Corporation. From 1988 to July 1991, he was Executive Vice President of Manville Corporation. Mr. Roach also serves as a director of Material Sciences Corp., a provider of materials-based solutions; PMI Group, Inc., a provider of credit enhancement products and lender services; and URS Corporation, an engineering firm. He is also Executive Chairman of the board of directors of Unidare US Inc., a wholesale supplier of industrial, welding and safety products.
Post — Emergence Directors
Pursuant to the Kaiser Aluminum Amended Plan, the terms of Messrs. Cruikshank, Haymaker, Hurwitz, Levin and Roach as directors of the Company and KACC will end upon the emergence of the Company and KACC from bankruptcy. The following table sets forth certain information, as of March 24, 2006, with respect to each person who is expected to serve on the board of directors of the Company upon emergence. As indicated in the table, the Company will have a classified board upon emergence with three classes, Class I, Class II and Class III, with terms expiring in 2007, 2008 and 2009, respectively. The anticipated class of each person is also reflected in the table.
Name
Anticipated Class
Alfred E. Osborne, Jr., Ph.D. Class I
Jack QuinnClass I
Thomas M. Van LeeuwenClass I
George BeckerClass II
Jack A. HockemaClass II
Georganne C. ProctorClass II
Brett WilcoxClass II
Carl B. FrankelClass III
Teresa A. HoppClass III
William F. MurdyClass III
George Becker.  Mr. Becker, age 77, was with the United Steel Workers of America (the “USW”) for more than fifty years until his retirement in 2001, where he served as two terms as its President, two terms as USW International Vice President and two terms as International Vice President of Administration. Mr. Becker is


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currently chairman of the labor advisory committee to the U.S. Trade Representative and the Department of Labor. He is also a member of the United States — China Economic & Security Review Commission. Mr. Becker previously served as an AFL-CIO vice president, chairing the AFL-CIO Executive Council’s key economic policy committee. During that time Mr. Becker also served as an executive member of the International Metalworkers Federation and Chairman of the World Rubber Council of the International Federation of Chemical, Energy, Mine and General Workers’ Unions.
Carl B. Frankel.  Mr. Frankel, age 71, was General Counsel to the USW from May 1997 until his retirement in September 2000. Before that, Mr. Frankel served as Assistant General Counsel and Associate General Counsel of the USW for 29 years. From 1987 through 1999, Mr. Frankel served at the staff level of the Collective Bargaining Forum, a government sponsored tripartite committee consisting of government, union and employer representatives designed to improve labor relations in the United States. Mr. Frankel is also an elected fellow of the College of Labor and Employment Lawyers and currently serves as a member of the board of directors of LTV Steel Corporation.
Teresa A. Hopp.  Ms. Hopp, age 46, prior to her retirement in 2001, was the Chief Financial Officer for Western Digital Corporation, a hard disk manufacturer, from September 1999 to October 2001 and its Vice President, Finance from September 1998 to September 1999. Prior to her employment with Western Digital Corporation, Ms. Hopp was an audit partner for Ernst & Young LLP from October 1994 through September 1998. Ms. Hopp currently serves as a board member for On Assignment, Inc.
William F. Murdy.  Mr. Murdy, age 64, has been the Chairman and Chief Executive Officer of Comfort Systems USA, a commercial heating, ventilation, and air conditioning constriction and service company, since June 2000. Mr. Murdy previously served as President and Chief Executive Officer of Club Quarters; and Chairman, President and Chief Executive Officer of Landcare USA, Inc. Mr. Murdy has also served as President and Chief Executive Officer of General Investment & Development, and as President and Managing General Partner with Morgan Stanley Venture Capital, Inc. He previously served as Senior Vice President and Chief Operating Officer of Pacific Resources, Inc. Mr. Murdy currently serves on the board of directors of Comfort Systems USA and UIL Holdings Corp.
Alfred E. Osborne, Jr., Ph.D.  Dr. Osborne, age 60, has been the Senior Associate Dean at the UCLA Anderson School of Management since July 2003 and an Associate Professor of Global Economics and Management since July 1978. From July 1987 to June 2003, Dr. Osborne served as the Director of The Harold Price Center for Entrepreneurial Studies at the UCLA Anderson School of Management. He also served as Associate Professor of Global Economics and Management, and Faculty Director of The Head Start Johnson & Johnson Management Fellows Program. Dr. Osborne currently serves on the board of directors of Nordstrom, Inc. , K2, Inc., EMAK Worldwide, Inc., Wedbush, Inc., FPA New Income Fund Inc., FPA Capital Fund Inc. and FPA Crescent Fund, Inc. and serves as a trustee of the WM Group of Funds.
Georganne C. Proctor.  Ms. Proctor, age 49, was the Executive Vice President — Finance for Golden West Financial Corp., a financial thrift and holding company of World Savings Bank, from February 2003 until her retirement in April 2005. From July 1997 through September 2002, Ms. Proctor was Senior Vice President, Chief Financial Officer and a member of the board of directors of Bechtel Group, Inc. and served as the Vice President and Chief Financial Officer of Bechtel Enterprises, one of its subsidiaries, from June 1994 through June 1997. From 1991 through 1994, Ms. Proctor was Director of Project and Division Finance of Walt Disney Imagineering and Director of Finance & Accounting for Buena Vista Home Video International. Ms. Proctor currently serves on the board of directors of Redwood Trust, Inc.
Jack Quinn.  Mr. Quinn, age 54, has been the President of Cassidy & Associates, a government relations firm, since January 2005. From January 1993 to January 2005, Mr. Quinn served as a United States Congressman for the state of New York. While in Congress Mr. Quinn was Chairman of the Transportation and Infrastructure Subcommittee on Railroads. He was also a senior member of the Transportation Subcommittees on Aviation, Highways and Mass Transit. In addition, Mr. Quinn was Chairman of the Executive Committee of the Congressional Steel Caucus. Mr. Quinn currently serves as a trustee of the AFL-CIO Housing Investment Trust.


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Thomas M. Van Leeuwen.  Mr. Van Leeuwen, age 49, served as a Director — Senior Equity Research Analyst for Deutsche Bank Securities Inc. from March 2001 until his retirement in May 2002. Prior to that, Mr. Van Leeuwen served as a Director — Senior Equity Research Analyst for Credit Suisse First Boston from May 1993 to November 2000. Prior to that time, Mr. Van Leeuwen was First Vice President of Equity Research with Lehman Brothers.
Brett E. Wilcox.  Mr. Wilcox, age 52, has been an executive consultant for a number of metals and energy companies since 2005. From 1986 until 2005, Mr. Wilcox served as Chief Executive Officer of Golden Northwest Aluminum Company and its predecessors. Golden Northwest Aluminum Company, together with its subsidiaries, filed a petition for reorganization under the Code on December 22, 2003. Mr. Wilcox has also served as Executive Director of Direct Services Industries, Inc., a trade association of large aluminum and other energy-intensive companies; an attorney with Preston, Ellis & Gates in Seattle, Washington; Vice Chairman of the Oregon Progress Board; a member of the Oregon Governors’s Comprehensive Review of the Northwest Regional Power System; a member of the Oregon Governor’s Task Forces on structure and efficiency of state government, employee benefits and compensation, and government performance and accountability. Mr. Wilcox serves as a director of Oregon Steel Mills, Inc.
Audit Committee Financial Expert
The Board of Directors of the Company has determined that each of Messrs. Cruikshank and Roach, members of the Audit Committee of the Company’s Board of Directors, satisfies the Securities and Exchange Commission’s criteria to serve as an “audit committee financial expert.” The Company’s securities currently are not listed on any exchange. However, the Board of Directors has determined that each of Messrs. Cruikshank, Levin and Roach meet the independence standards set forth in the listing requirements of both of the New York Stock Exchange and the Nasdaq Stock Market, Inc.
Code of Ethics
The Company has a Code of Ethics that applies to all of its officers and other employees, including the Company’s principal executive officer, principal financial officer, and the principal accounting officer or controller. A copy of the Code of Ethics is available from the Company, without charge, upon written request to the Company at the address set forth below:
Corporate Secretary
Kaiser Aluminum Corporation
27422 Portola Parkway, Suite 350
Foothill Ranch, California92610-2831
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the copies of the Forms 3, 4 and 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and written representations from reporting persons that no other Forms 5 were required, the Company believes that its officers, directors and greater than 10% beneficial owners complied with all applicable filing requirements for the year 2005.
 
ITEM 11.Item 10.  EXECUTIVE COMPENSATIONDirectors, Executive Officers and Corporate Governance
 
Summary Compensation Table
Although certain plans or programsThe information called for by this item is set forth under the captions “Executive Officers,” “Proposals Requiring Your Vote — Proposal for Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in which executive officers of the Company participate are jointly sponsored by the Company and KACC, executive officers of the Company generally are directly employed and compensated by KACC. The following table sets forth compensation information, cash and non-cash, for each of the Company’s last three completed fiscal years with respect to the Company’s Chief Executive Officer and the five


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most highly compensated executive officers other than the Chief Executive Officerour proxy statement for the year 2005 (collectively referred to as the “Named Executive Officers”).
                                 
              Long-Term Compensation    
     Annual Compensation  Awards  Payouts    
(a) (b)  (c)  (d)  (e)  (f)  (g)  (h)  (i) 
           Other
  Restricted
  Securities
       
           Annual
  Stock
  Underlying
  LTIP
  All Other
 
Name and Principal
    Salary
  Bonus
  Compensation
  Award(s)
  Options/
  Payouts
  Compensation
 
Position
 Year  ($)  ($)  ($)(1)  ($)  SARS #  ($)(2)  ($) 
 
Jack A. Hockema  2005   730,000   600,000   —   -0-   -0-   -0-   23,193(3)
President and Chief  2004   730,000   378,500   —   -0-   -0-   -0-   199,193(3)(4)(5)
Executive Officer  2003   730,000   -0-   —   -0-   -0-   -0-   365,000(4)
Edward F. Houff  2005   250,000(6)  103,125(7)  —   -0-   -0-   -0-   1,480,777(3)(8)
Chief Restructuring  2004   400,000   218,750(7)  —   -0-   -0-   -0-   118,450(3)(4)
Officer  2003   400,000   125,000(7)  —   -0-   -0-   -0-   200,000(4)
                                 
John Barneson  2005   275,000   150,000   —   -0-   -0-   -0-   23,875(3)
Senior Vice President  2004   275,000   94,625   —   -0-   -0-   -0-   81,200(3)(4)
and Chief  2003   275,000   -0-   —   -0-   -0-   -0-   125,000(4)
Administrative Officer                                
John M. Donnan  2005   260,000   108,000   —   -0-   -0-   -0-   20,733(3)
Vice President,  2004   200,000   45,420   —   -0-   -0-   -0-   109,000(3)(4)
General Counsel  2003   200,000   -0-   —   -0-   -0-   -0-   200.000(4)
and Secretary                                
Daniel D. Maddox  2005   200,000   84,000   —   -0-   -0-   -0-   19,720(3)
Vice President  2004   200,000   52,990   —   -0-   -0-   -0-   116,000(3)(4)
and Controller  2003   200,000   -0-   24,721(9)  -0-   -0-   -0-   200,000(4)
Kerry A. Shiba  2005   270,000   114,000   —   -0-   -0-   -0-   20,825(3)
Former Vice President  2004   242,500   68,130   —   -0-   -0-   -0-   118,925(3)(4)
and Chief Financial  2003   190,000   -0-   —   -0-   -0-   -0-   190,000(4)
Officer(10)                                
(1)Except as otherwise indicated for Mr. Maddox in 2003, excludes perquisites and other personal benefits, which in the aggregate amount do not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the Named Executive Officer.
(2)Awards under the Company’s long-term incentive plan are generally payable in two installments — the first on the date the Company emerges from bankruptcy and the second one year later. Awards under the program are forfeited if the participant voluntarily terminates his or her employment (other than normal retirement) prior to the scheduled payment dates. For additional information, see discussion under “Long Term Incentive Plans — Awards in Last Fiscal Year” and “Employment Contracts, Retention Plan and Agreements and Termination of Employment andChange-in-Control Arrangements — Long-Term Incentive Plan” below.
(3)Includes contributions under the Company’s Salaried Savings Plan made with respect to 2004 and 2005, respectively, in the amount of $16,400 and $23,983 for Mr. Hockema; $18,450 and $5,162 for Mr. Houff; $18,700 and $23,875 for Mr. Barneson; $9,000 and $20,733 for Mr. Donnan; $16,000 and $19,720 for Mr. Maddox; and $23,925 and $20,825 for Mr. Shiba. For additional information, see discussion under “Employment Contracts, Retention Plan and Agreements and Termination of Employment andChange-in-Control Arrangements — Kaiser Salaried Savings Plans”below.
(4)Includes retention payments made during 2004 and 2003, respectively, under the Court approved Key Employee Retention Program in the amount of $182,500 and $365,000 for Mr. Hockema; $100,000 and $200,000 for Mr. Houff; $62,500 and $125,000 for Mr. Barneson; $100,000 and $200,000 for Mr. Donnan; $100,000 and $200,000 for Mr. Maddox; and $95,000 and $190,000 for Mr. Shiba. As described in more detail below, the program was not extended beyond March 2004 and no further retention payments were made after March 2004. In addition to such retention amounts, pursuant to the terms of the Key Employee Retention Program, KACC is withholding additional retention payments with respect to the years 2004, 2003 and 2002, respectively, for each of Messrs. Hockema and Barneson as follows: $182,333, $365,000 and $182,333 for Mr. Hockema; and $62,500, $125,000 and $62,500 for Mr. Barneson. Payment of such additional retention amounts generally is subject to, among other conditions, KACC’s emergence from chapter 11 and the timing thereof. For additional information, see discussion under “Employment Contracts, Retention Plan and


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Agreements and Termination of Employment andChange-in-Control Arrangements — Kaiser Retention Plan and Agreements”below.
(5)Includes $293 paid to Mr. Hockema for unused allowances under the Company’s benefit program.
(6)Reflects the base salary paid to Mr. Houff in 2005 through the termination of his employment on August 15, 2005.
(7)Under the terms of his employment agreement, Mr. Houff was guaranteed a bonus of $125,000 annually. Includes additional short term incentive payments made to Mr. Houff in respect of 2004 and 2005 in the amount of $93,755 and $25,000, respectively.
(8)Includes $1,200,000 in the form of payments made to Mr. Houff in 2005 in connection with the termination of his employment and $275,614 in the form of payments to Mr. Houff under the terms of Mr. Houff’s non-exclusive consulting agreement for services provided in 2005. For additional information, see discussion under “Employment Contracts, Retention Plan and Agreements and Termination of Employment andChange-in-Control Arrangements — Kaiser Retention Plan and Agreements” below.
(9)Includes an auto allowance of $22,217 and personal use of company car of $2,504
(10)Mr. Shiba resigned effective as of January 23, 2006.
Option/SAR Grants in Last Fiscal Year
The Company did not issue any stock options or SARs during the year 2005.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
The table below provides information on an aggregated basis concerning each exercise2008 annual meeting of stock options during the fiscal year ended December 31, 2005, by each of the Company’s Named Executive Officers, and the 2005 fiscal year-end value of unexercised options. During 2005, the Company did not have any SARs outstanding. Pursuant to the Kaiser Aluminum Amended Plan, the equity interests of the Company’s existing stockholders are expected to be cancelled without consideration. Upon any such cancellation, any options to purchase the Company’s Common Stock from the Company also are expected to be cancelled.
                         
(a) (b)  (c)  (d)  (e) 
        Number of Securities
  Value of Unexercised
 
  Shares
     Underlying Unexercised
  in-the-Money
 
  Acquired on
  Value
  Options/SARs at Fiscal Year
  Options/SARs at Fiscal
 
  Exercise
  Realized
  End(#)  Year-End ($) 
Name
 (#)  ($)  Exercisable  Unexercisable  Exercisable  Unexercisable 
 
Jack A. Hockema  -0-   -0-   375,770(1)  28,184(1)  —(2)  —(2)
Edward F. Houff  -0-   -0-   -0-   -0-   —(2)  —(2)
John Barneson  -0-   -0-   -0-   -0-   -0-   -0- 
John M. Donnan  -0-   -0-   -0-   -0-   -0-   -0- 
Daniel D. Maddox  -0-   -0-   35,715(1)  -0-   —(2)  —(2)
Kerry A. Shiba  -0-   -0-   -0-   -0-   -0-   -0- 
(1)Represents shares of the Company’s Common Stock underlying stock options.
(2)No value is shown because the exercise price is higher than the closing price of $0.03 per share of the Company’s Common Stock on the OTC Bulletin Board on December 30, 2005.
Long-Term Incentive Plans — Awards in Last Fiscal Year
During 2002, the Company adopted, and the Court approved as part of the Key Employee Retention Program discussed below, a cash-based long-term incentive program under which participants became eligible to receive an award based on the attainment by the Company of sustained cost reductions above a stipulated threshold for the period 2002 through emergence from bankruptcy (the “Long-Term Incentive Plan”). Although awards have been earned under the Long-Term Incentive Program for each of 2002, 2003, 2004 and 2005, no payments have been made and the awards remain subject to forfeiture. The following table and accompanying footnotes further describe


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the awards that may be earned by the Named Executive Officers under the Long-Term Incentive Program. For additional information concerning the Long-Term Incentive Plan, see “Employment Contracts, Retention Plan and Agreements and Termination of Employment andChange-in-Control Arrangements — Long-Term Incentive Plan” below.
                     
        Estimated Future Payouts
 
        Under Non-Stock Price-Based Plans 
(a) (b)  (c)  (d)  (e)  (f) 
     Performance
          
  Number
  or Other
          
  of Shares,
  Periods Until
          
  Units or
  Maturation
          
Name
 Other Rights  or Payout  Threshold  Target(1)(3)  Maximum(1)(3) 
 
Jack A. Hockema  N/A   (2)  (3) $1,500,000  $4,500,000 
Edward F. Houff  N/A   (2)  (3)  300,000   900,000 
John Barneson  N/A   (2)  (3)  350,000   1,050,000 
John M. Donnan  N/A   (2)  (3)  200,000   600,000(4)
Daniel D. Maddox  N/A   (2)  (3)  100,000   300,000 
Kerry A. Shiba  N/A   (2)  (3)  258,000(5)  774,000(5)
(1)The target and maximum payout amounts in the table are per annum.
(2)Awards are generally payable in two equal installments — the first on the date that the Company emerges from bankruptcy and the second on the one year anniversary of such date. Any awards earned under the program generally are forfeited if the participant voluntarily terminates his or her employment (other than at normal retirement) or is terminated for cause prior to the scheduled payment date.
(3)Final amounts, if any, that may be paid under the program are generally not determinable until the end of the performance period. Subject to the foregoing, based on results during the applicable performance periods, awards for 2002, 2003, 2004 and 2005 are anticipated to be below the target amounts. In this regard, the aggregate anticipated awards for 2002 and 2003 are $2,247,043 for Mr. Hockema; $472,654 for Mr. Houff; $452,960 for Mr. Barneson; $141,796 for Mr. Donnan; and $157,551 for Mr. Maddox, representing average annual payouts ranging from 65% to 78% of the applicable targets. Average awards for 2004 and 2005 are generally expected to be more than 50% lower.
(4)The initial target and maximum for Mr. Donnan were $90,000 and $270,000, respectively. These amounts were increased to the levels indicated in the table effective January 2005 in connection with Mr. Donnan’s promotion to General Counsel.
(5)The initial target and maximum for Mr. Shiba were $90,000 and $270,000, respectively. These amounts were increased to $250,000 and $750,000, respectively, effective April 2004 in connection with Mr. Shiba’s promotion to Chief Financial Officer, and to the levels indicated in the table effective January 2005.
Defined Benefit Plans
Kaiser Retirement Plan.  KACC previously maintained a qualified, defined-benefit retirement plan (the “Kaiser Retirement Plan”) for salaried employees of KACC and co-sponsoring subsidiaries who met certain eligibility requirements. Effective December 17, 2003, the PBGC terminated the Kaiser Retirement Plan. One of the consequences of the termination was the termination of all benefit accruals under the Kaiser Retirement Plan. Another was the significant reduction of benefits available to certain executive officers, including Messrs. Hockema and Barneson, due to the limitation on benefits payable by the PBGC. The table below shows estimated annual retirement benefits which would have otherwise been payable under the terms of the Kaiser Retirement Plan to participants with the indicated years of credited service. These benefits are reflected (a) without reduction for the limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code of 1986, as amended (the “Tax Code”) on qualified plans and before adjustment for the Social Security offset, thereby reflecting aggregate benefits to be received, subject to Social Security offsets and (b) without reduction for the limitation on benefits payable by the PBGC as a result of the involuntary


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termination of the Kaiser Retirement Plan ($43,977 annually for retirement at age 65 and $34,742 for retirement at age 62, the normal retirement age under the Kaiser Retirement Plan).
                     
Average Annual
 Years of Service 
Remuneration
 15  20  25  30  35 
 
$250,000 $56,250  $75,000  $93,750  $112,500  $131,250 
350,000  78,750   105,000   131,250   157,500   183,750 
450,000  101,250   135,000   168,750   202,500   236,250 
550,000  123,750   165,000   206,250   247,500   288,750 
650,000  146,250   195,000   243,750   292,500   341,250 
750,000  168,750   225,000   281,250   337,500   393,750 
850,000  191,250   255,000   318,750   382,500   446,250 
950,000  213,750   285,000   356,250   427,500   498,750 
1,050,000  236,250   315,000   393,750   472,500   551,250 
The estimated annual retirement benefits shown are based upon the assumptions that the provisions of the Kaiser Retirement Plan prior to its termination by the PBGC and the Kaiser Supplemental Benefits Plan prior to its amendment as of May 1, 2005 are in effect, that the participant retires at age 62, and that the retiree receives payments based on a straight-life annuity for his lifetime. Messrs. Hockema, Barneson, Donnan, Shiba and Maddox had 12.9, 29.8, 11.2, 6.5, and 8.5 years of credited service, respectively, on December 31, 2005. Mr. Houff is not a participant in either the Kaiser Retirement Plan or the Kaiser Supplemental Benefits Plan and Mr. Shiba’s participation terminated effective as of January 23, 2006. Monthly retirement benefits are determined by multiplying years of credited service (not in excess of 40) by the difference between 1.50% of average monthly compensation for the highest base period (of 36, 48 or 60 consecutive months, depending upon compensation level) in the last 10 years of employment and 1.25% of monthly primary Social Security benefits. Pension compensation covered by the Kaiser Retirement Plan and the Kaiser Supplemental Benefits Plan consisted of salary and bonus.
Participants are entitled to retire and receive pension benefits, unreduced for age, upon reaching age 62 or after 30 years of credited service. Full early pension benefits (without adjustment for Social Security offset prior to age 62) are payable to participants who are at least 55 years of age and have completed 10 or more years of pension service (or whose age and years of pension service total 70) and who have been terminated by KACC or an affiliate for reasons of job elimination or partial disability. Participants electing to retire prior to age 62 who are at least 55 years of age and who have completed 10 or more years of pension service (or whose age and years of pension service total at least 70) may receive pension benefits, unreduced for age, payable at age 62 or reduced benefits payable earlier. Participants who terminate their employment after five years or more of pension service, or after age 55 but prior to age 62, are entitled to pension benefits, unreduced for age, commencing at age 62 or, if they have completed 10 or more years of pension service, actuarially reduced benefits payable earlier. For participants with five or more years of pension service or who have reached age 55 and who die, the Kaiser Retirement Plan provides a pension to their eligible surviving spouses. Upon retirement, participants may elect among several payment alternatives.
As a result of the termination of the Kaiser Retirement Plan by the PBGC, benefits payable to participants will be reduced to a maximum of $34,742 annually for retirement at age 62, lower for retirement prior to age 62, and higher for retirements after age 62 up to $43,977 at age 65, and participants will not accrue additional benefits. In addition, the PBGC will not make lump-sum payments to participants. Because of the PBGC limitation on benefits payable from the Kaiser Retirement Plan, the estimated benefits with respect to the Kaiser Retirement Plan for Messrs. Hockema and Barneson for retirement at age 62 are significantly reduced.
In the second quarter of 2005, KACC modified the terms of the “Salaried Savings Plan” (as defined below). See “— Salaried Savings Plan and Supplemental Retirement Plan.”
Kaiser Supplemental Benefits Plan.  Although the accrual of additional benefits terminated as of May 1, 2005, KACC maintains an unfunded, non-qualified Supplemental Benefits Plan (the “Kaiser Supplemental Benefits Plan”). Prior to May 1, 2005, the Kaiser Supplemental Benefits Plan restored benefits that would otherwise be paid from the Kaiser Retirement Plan or the Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan


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(the “Kaiser Savings Plan”), were it not for the limitations imposed by Section 401(a)(17) and Section 415 of the Tax Code. The Kaiser Supplemental Benefits Plan will not make up benefits lost with respect to the Kaiser Retirement Plan because of limitations on benefits payable by the PBGC. The accrual of benefits under the Kaiser Supplemental Benefits Plan were terminated in connection with the modifications to the Salaried Savings Plan. See “— Salaried Savings Plan and Supplemental Retirement Plan.” Prior to May 1, 2005, participation in the Kaiser Supplemental Benefits Plan was available to all employees and retirees of KACC and its subsidiaries whose benefits under the Kaiser Retirement Plan and Kaiser Savings Plan were likely to be affected by the limitations imposed by the Tax Code. Except as described below, each eligible participant is entitled to receive the benefits accrued in a lump sum 30 days after the date the participant terminates employment.
Pursuant to the Kaiser Key Employee Retention Program discussed below, participants under the Kaiser Supplemental Benefits Plan will forfeit their benefits if they voluntarily terminate their employment prior to the Company’s emergence from bankruptcy (other than normal retirement at age 62). Any claims by participants with respect to amounts not paid under the Kaiser Supplemental Benefits Plan will be resolved in the overall context of a plan of reorganization.
Kaiser Termination Payment Policy.  Most full-time salaried employees of KACC are eligible for benefits under an unfunded termination policy if their employment is involuntarily terminated, subject to a number of exclusions. The policy provides for lump-sum payments after termination ranging from one-half month’s salary for less than one year of service graduating to eight months’ salary for 30 or more years of service. As a result of the filing of the Cases, payments under the policy in respect of periods prior to the Filing Date generally cannot be made by KACC. Any claims for such pre-petition amounts will be resolved in the overall context of the Kaiser Aluminum Amended Plan. The Named Executive Officers and certain other participants in the Kaiser Key Employee Retention Plan waived their rights to any payments under the termination policy in connection with their participation in the Kaiser Key Employee Retention Plan.
Salaried Savings Plan and Supplemental Retirement Plan.  KACC maintains a qualified, defined- contribution retirement plan for salaried employees and retirees of KACC and adopting employees who have met certain eligibility requirements (i.e., the “Kaiser Savings Plan”). The Kaiser Savings Plan was amended and restated as of May 1, 2005. As amended, the Kaiser Savings Plan allows participants to make elective pre-tax deferrals of compensation up to the limits set forth in the Tax Code. In addition, participants, subject to the satisfaction of certain conditions, receive a (i) non-discretionary matching employer contribution in the amount of his or her pre-tax deferrals of compensation up to a maximum of 4% of his or her eligible compensation and (ii) an employer fixed rate contribution based on age of service as of January 1, 2004, the rates of which range from 2% to 10% of eligible compensation. The matching contribution and the employer fixed-rate contributions were made retroactively to participants in the Kaiser Savings Plan who were employed on both the first and last day of 2004 and who had at least 1,000 hours of service during 2004, and were also made retroactively to participants in the plan for the first four months of 2005. In order to receive the employer fixed-rate contribution for 2005, a participant was required to employed on the last day of 2005. Participants in the Kaiser Savings Plan are 100% vested at all times in their elective deferrals and any matching contributions. The fixed-rate contributions fully vest when an employee has five years of service.
In addition, in connection with the amendment and restatement of the Salaried Savings Plan, KACC expects to implement a non-qualified supplemental retirement plan which will restore contributions otherwise subject to Tax Code limitations. Funds under the plan will be set aside in a rabbi trust. When implemented, the plan will enable each participant to receive an aggregate amount equal to the benefits that he or she would have been entitled to receive under the Kaiser Savings Plan in the absence of Tax Code limitations.
Director Compensation
Each of the directors who is not an employee of the Company or KACC generally receives an annual base fee for services as a director. The base fee for the year 2005 was $50,000. During 2005, Messrs. Cruikshank, Hurwitz, Levin and Roach each received base compensation of $50,000. Mr. Haymaker’s compensation for 2005 was covered by a separate agreement with the Company and KACC, which is discussed below.


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For the year 2005, non-employee directors of the Company and KACC who were directors of MAXXAM also received director or committee fees from MAXXAM. In addition, the non-employee Chairman of each of the Company’s and KACC’s committees (other than the Audit Committees) was paid a fee of $3,000 per year for services as Chairman. The fee paid to the Chairman of the Audit Committees was $10,000 per year. All non-employee directors also generally received a fee of $1,500 per day for Board meetings attended in person or by phone and $1,500 per day for committee meetings held in person or by phone on a date other than a Board meeting. Non-employee director members of the Company’s and KACC’s Executive Committees not covered by a separate agreement with the Company and KACC also were paid a fee of $6,000 per year for such services. In respect of 2005, Messrs. Cruikshank, Hurwitz, Levin and Roach received an aggregate of $87,500, $59,000, $96,500 and $97,500 respectively, in such fees from the Company and KACC in the form of cash payments.
James T. Hackett served as a director of the Company and KACC through February 28, 2005. Mr. Hackett was paid director fees in the amount of $8,333 for the period ended February 28, 2005. Mr. Hackett received additional fees for his service as Chairman of the Section 162(m) Compensation Committees for the period ended February 28, 2005 in the amount of $500. Mr. Hackett also received one payment of $1,500 for a meeting attended on February 15, 2005.
Non-employee directors are eligible to participate in the Kaiser 1997 Omnibus Stock Incentive Plan (the “1997 Omnibus Plan”). During 2005, no awards were made to non-employee directors under the 1997 Omnibus Plan.
Directors are reimbursed for travel and other disbursements relating to Board and committee meetings, and non-employee directors are provided accident insurance in respect of Company-related business travel. Subject to the approval of the Chairman of the Board, directors also generally may be paid ad hoc fees in the amount of $750 per one-half day or $1,500 per day for services other than attending Board and committee meetings that require travel in excess of 100 miles. No such payments were made for 2005.
The Company and KACC have a deferred compensation program in which all non-employee directors are eligible to participate. By executing a deferred fee agreement, a non-employee director may defer all or part of the fees from the Company and KACC for services in such capacity for any calendar year. The deferred fees are credited to a book account and are deemed “invested,” in 25% increments, in two investment choices: in phantom shares of the Company’s Common Stock and/or in an account bearing interest calculated using one-twelfth of the sum of the prime rate plus 2% on the first day of each month. If deferred, fees, including all earnings credited to the book account, are paid in cash to the director or beneficiary as soon as practicable following the date the director ceases for any reason to be a member of the Board, either in a lump sum or in a specified number of annual installments not to exceed ten, at the director’s election. No deferral elections were in effect during 2005 and there are no deferral elections currently in effect.
Fees to directors who also are employees of KACC are deemed to be included in their salary. Directors of the Company were also directors of KACC and received the foregoing compensation for acting in both capacities.
As of January 1, 2005 Mr. Haymaker, the Company and KACC entered into an agreement concerning the terms upon which Mr. Haymaker would continue to serve as a director and non-executive Chairman of the Boards of the Company and KACC through the earlier of December 31, 2005 and the effective date of the Company’s and KACC’s emergence from bankruptcy. Mr. Haymaker’s annual base compensation under the agreement is $50,000 for services as a director and $73,000 for services as non-executive Chairman of the Boards of the Company and KACC, inclusive of any Board and committee fees otherwise payable. All compensation under the agreement is paid in cash. Mr. Haymaker’s agreement has been extended through the earlier of June 30, 2006 and the effective date of the Company’s and KACC’s emergence from bankruptcy.
Employment Contracts, Retention Plan and Agreements and Termination of Employment andChange-in-Control Arrangements
Kaiser Key Employee Retention Program.  On September 3, 2002, the Court approved the Key Employee Retention Program (the “KERP”), consisting of the Kaiser Retention Plan, the Kaiser Severance Plan, the Kaiser Change in Control Severance Program and the Long-Term Incentive Plan discussed below.


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Kaiser Retention Plan and Agreements.  Effective September 3, 2002, KACC adopted the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (the “Retention Plan”) and entered into retention agreements with certain key employees, including each of the Named Executive Officers.
In general, awards payable under the Retention Plan vested, as applicable, on September 30, 2002, March 31, 2003, September 30, 2003 and March 31, 2004 (the “Vesting Dates”). The retention agreements further provided that if the participant’s employment terminated within 90 days following the payment of any award for any reason other than death, disability, retirement on or after age 62 or termination without cause (as defined in the Retention Plan), he or she would be required to return the payment to KACC. The Retention Plan was not extended beyond March 2004. Except with respect to payments of the Withheld Amounts (as defined below) to Messrs. Hockema and Barneson, the clawback provisions have expired and no further payments are payable under the Retention Plan.
For Messrs. Hockema and Barneson, the amount vested on each of the Vesting Dates was equal to 62.5% of his base salary at the time of grant. Forty percent of the amount vested on each Vesting Date was paid in a lump sum on that date. Except as described below, of the remaining 60% of the vested amount (the “Withheld Amount”), (i) one third is payable in a lump sum on the date of KACC’s emergence from bankruptcy, and (ii) one third is payable in a lump sum on the first anniversary of the date of KACC’s emergence from bankruptcy. The remaining third has been forfeited because the date of KACC’s emergence from bankruptcy did not occur on or prior to pre-established deadlines, the last of which was August 12, 2005. In each case the person must be employed by KACC on the applicable date. Notwithstanding the foregoing, if the employment of any of Messrs. Hockema, or Barneson is terminated prior to the payment date for any Withheld Amount as a result of his death, disability, retirement from KACC on or after age 62 or KACC’s termination of his employment without cause, he or his estate, as applicable, is entitled to receive his Withheld Amount.
Kaiser Severance Plan and Agreements.  Effective September 3, 2002, KACC adopted the Kaiser Aluminum & Chemical Corporation Severance Plan (the “Severance Plan”) to provide selected executive officers, including Messrs. Hockema, Barneson, Donnan and Maddox, and other key employees of KACC with appropriate protection in the event of certain terminations of employment and entered into Severance Agreements (the “Severance Agreements”) with plan participants. The Severance Plan terminates on the first anniversary of the date KACC emerges from bankruptcy.
The Severance Plan provides for payment of a severance benefit and continuation of welfare benefits in the event of certain terminations of employment. Participants are eligible for the severance payment and continuation of benefits in the event the participant’s employment is terminated without cause (as defined in the Severance Plan) or the participant terminates employment with good reason (as defined in the Severance Plan). The severance payment and continuation of benefits are not available if (i) the participant receives severance compensation or benefit continuation pursuant to a Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement (as described below), (ii) the participant’s employment is terminated other than without cause or by the participant for good reason, or (iii) the participant declines to sign, or subsequently revokes, a designated form of release. In addition, in consideration for the severance payment and continuation of benefits, a participant will be subject to noncompetition, nonsolicitation and confidentiality restrictions following the participant’s termination of employment with KACC.
The severance payment payable under the Severance Plan to Messrs. Hockema, Barneson, Donnan and Maddox consists of a lump sum cash payment equal to two times (for Messrs. Hockema and Barneson) or one times (for Messrs. Donnan and Maddox) his base salary. In addition, medical, dental, vision, life insurance, and disability benefits are continued for a period of two years (for Messrs. Hockema and Barneson) or one year (for Messrs. Donnan and Maddox) following termination of employment. Severance payments payable under the Severance Plan are in lieu of any severance or other termination payments provided for under any plan of KACC or any other agreement between the participant and KACC.
Kaiser Change in Control Severance Program.  In 2002, KACC entered into change in control severance agreements (the “Change in Control Agreements”) with certain key executives, including Messrs. Hockema, Barneson, Donnan and Maddox, in order to provide them with appropriate protection in the event of a termination of employment in connection with a change in control or (except as noted below) significant restructuring (each as


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defined in the Change in Control Agreements) of KACC. The Change in Control Agreements terminate on the second anniversary of a change in control of KACC.
The Change in Control Agreements provide for severance payments and continuation of benefits in the event of certain terminations of employment. The participants are eligible for severance benefits if their employment terminates or constructively terminates due to a change in control during a period that commences ninety (90) days prior to the change in control and ends on the second anniversary of the change in control. Participants (other than Messrs. Hockema and Barneson) also are eligible for severance benefits if their employment is terminated due to a significant restructuring outside of the period commencing ninety (90) days prior to a change in control and ending on the second anniversary of such change in control. These benefits are not available if (i) the participant voluntarily resigns or retires, other than for good reason (as defined in the Change in Control Agreements), (ii) the participant is discharged for cause (as defined in the Change in Control Agreements), (iii) the participant’s employment terminates as the result of death or disability, (iv) the participant declines to sign, or subsequently revokes, a designated form of release, (v) the participant receives severance compensation or benefit continuation pursuant to the Kaiser Aluminum & Chemical Corporation Severance Plan or any other prior agreement, or (vi) in the case of benefits payable as a result of a significant restructuring, KACC or its successor offers the participant suitable employment in North America in a substantially similar capacity and at his or her current base pay and short-term incentive, regardless of whether the participant accepts or rejects such offer. In addition, in consideration for the severance payment and continuation of benefits, a participant will be subject to noncompetition, nonsolicitation and confidentiality restrictions following his or her termination of employment with KACC.
Upon a qualifying termination of employment, Messrs. Hockema, Barneson, Donnan and Maddox are entitled to receive the following: (i) three times (for Messrs. Hockema and Barneson) or two times (for Messrs. Donnan and Maddox) the sum of his base pay and most recent short-term incentive target, (ii) a pro-rated portion of his short-term incentive target for the year of termination, and (iii) a pro-rated portion of his long-term incentive target in effect for the year of his termination, provided that such target was achieved. In addition, medical, dental, life insurance, disability benefits, and perquisites are continued for a period of three years (for Messrs. Hockema and Barneson) or two years (for Messrs. Donnan and Maddox) after termination of employment with KACC. Participants are also entitled to a payment in an amount sufficient, after the payment of taxes, to pay any excise tax due by him under Section 4999 of the Tax Code or any similar state or local tax.
Severance payments payable under the Change in Control Agreements are in lieu of any severance or other termination payments provided for under any plan of KACC or any other agreement between the Named Executive Officer and KACC.
Counsel to the Company and counsel to the UCC have concluded that a change in control will occur under the Change in Control Agreements if the Union VEBA Trust receives more than fifty percent of the Company’s equity upon emergence.
Long-Term Incentive Plan.  During 2002, the Company adopted, and the Court approved as part of the KERP, a long-term incentive plan under which key management employees, including Messrs. Hockema, Barneson, Donnan and Maddox, became eligible to receive a cash award based on the attainment by the Company of sustained cost reductions above a stipulated threshold for the period 2002 through the Company’s emergence from bankruptcy. Under the plan, fifteen percent of cost reductions above the stipulated threshold are placed in a pool to be shared by participants based on their individual target’s percentage of the aggregate target for all participants. A participant’s target percentage may be adjusted upward or downward, within certain limitations, at the discretion of the Company’s Chief Executive Officer. See “Executive Compensation — Long-Term Incentive Plans — Awards for Last Fiscal Year” above for information concerning the target’s for the Named Executive Officers.
Amounts payable under the plan generally are not determinable until conclusion of the plan. If a participant’s employment is terminated without cause or as a result of death, disability or retirement prior to conclusion of the plan, the participant will be entitled to receive a pro rated portion of any award earned through the date of his or her termination of employment. Awards earned under the plan are forfeited if the participant voluntarily terminates his or her employment (other than at normal retirement) or is terminated for cause prior to the scheduled payment date.


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In general, awards payable under the program are payable in two installments — the first on the date that the Company emerges from bankruptcy and the second on the one year anniversary of such date.
Short-Term Incentive Plan.  The Company also maintains a broad based short-term incentive plan pursuant to which participants, including Messrs. Hockema, Barneson, Donnan and Maddox, may earn cash awards. Awards are determined on a sliding scale based on attainment by the Company of various levels of financial performance calculated using internal measures of controllable continuing operating results. Depending on the level of financial performance, participants may earn up to three times their annual award target. Except as otherwise indicated, the current targets under the plan for the Named Executive Officers for 2006 are as follows: Jack A. Hockema — $500,000; John Barneson — $125,000; John M. Donnan — $90,000; and Daniel D. Maddox — $70,000.
Awards under the plan are paid in the year after they are earned. If a participant’s employment is terminated prior to the end of a plan year as a result of death, disability or retirement, the participant will be entitled to receive a pro rated portion of any award earned through the date of his or her termination of employment. Awards earned under the program are forfeited if a participant is terminated for cause prior to payment, or a participant’s employment is terminated prior to the end of a plan year for any reason other than death, disability or retirement.
Consulting Agreement with Edward F. Houff.  On August 15, 2005, Mr. Houff’s employment with KACC was terminated by mutual agreement in anticipation of the Company and KACC emerging from bankruptcy. Upon his termination Mr. Houff received or otherwise became entitled to receive the severance benefits contemplated by the KERP and Mr. Houff and KACC entered into a consulting agreement to secure Mr. Houff’s services as Chief Restructuring Officer through February 14, 2006. On February 4, 2006, KACC and Mr. Houff entered into an amended consulting agreement which secured Mr. Houff’s services as Chief Restructuring Officer through the earlier of KACC’s emergence from Chapter 11 and April 30, 2006. Pursuant to the terms of his consulting agreement Mr. Houff currently receives a monthly base fee of $33,750, plus $450 per hour for each hour worked in excess of 75 hours per month, subject to a monthly cap of 100 billable hours. Effective April 1, 2006, the monthly base fee will be $22,500, Mr. Houff will receive $450 per hour for each hour worked in excess of 50 hours per month, and the monthly cap of billable hours will be reduced to 75. In addition, KACC reimburses Mr. Houff for reasonable and customary expenses incurred while providing consulting services to KACC.
Release with Kerry A. Shiba.  Kerry A. Shiba resigned as the Vice President and Chief Financial Officer of the Company and KACC effective as of January 23, 2006. In connection with his resignation, KACC and Mr. Shiba entered into a release. Pursuant to the terms of the release, KACC and Mr. Shiba agreed that, in lieu of all other benefits to which Mr. Shiba might otherwise be entitled and in consideration of his satisfaction of certain post-termination obligations, Mr. Shiba would receive (i) $141,796 representing earned long term incentive awards for 2002 and 2003, (ii) $42,577 representing his accrued unpaid vacation, (iii) his earned 2005 short term incentive, (iv) an amount equal to Mr. Shiba’s 2004 and 2005 earned long term incentive, without deduction or modifiers, based on results for 2004 and 2005, and (v) two lump sum payments of $135,000, one of which has been paid and the second of which will be paid on July 23, 2006. KACC also agreed to pay Mr. Shiba’s COBRA premiums for his medical and dental coverage through the earlier of (i) the date Mr. Shiba becomes eligible for comparable medical coverage under another employer’s health insurance plans and (ii) February 28, 2007. The release also provides for a mutual release and subjects Mr. Shiba to certain non-competition, non-disclosure and non-solicitation obligations.
Except as otherwise noted, there are no employment contracts between the Company or any of its subsidiaries and any of the Company’s Named Executive Officers. Similarly, except as otherwise noted, there are not any compensatory plans or arrangements that include payments from the Company or any of its subsidiaries to any of the Company’s Named Executive Officers in the event of any such officer’s resignation, retirement, or any other termination of employment with the Company and its subsidiaries, from a change in control of the Company, or from a change in the Named Executive Officer’s responsibilities following a change in control.
Compensation Committee Interlocks and Insider Participation
From January 1, 2005, through February 28, 2005, Messrs. Cruikshank and Levin (Chairman) and James T. Hackett, who resigned as a director of the Company and KACC as of the end of February 2005, were members of the Company’s Compensation Policy Committee, and Messrs. Cruikshank and Hackett (Chairman) were members of the Company’s Section 162(m) Compensation Committee. On February 28, 2005, Mr. Cruikshank became the sole


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member of the Company’s Section 162(m) Compensation Committee and on May 24, 2005, John D. Roach was appointed to the Company’s Compensation Policy Committee.
No member of the Compensation Policy Committee or the Section 162(m) Compensation Committee of the Board was, during the 2005 fiscal year, an officer or employee of the Company or any of its subsidiaries, or was formerly an officer of the Company or any of its subsidiaries, or had any relationships requiring disclosure by the Company under Item 404 ofRegulation S-K.
During the Company’s 2005 fiscal year, no executive officer of the Company served as (i) a member of the compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on the Compensation Policy Committee or Section 162(m) Compensation Committee of the Company, (ii) a director of another entity, one of whose executive officers served on either of such committees, or (iii) a member of the compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served as a director of the Company.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Ownership of the Company
The following table sets forth, as of March 24, 2006, unless otherwise indicated, the beneficial ownership of the Company’s Common Stock by (i) those persons known by the Company to own beneficially more than 5% of the shares of the Company’s Common Stock then outstanding, (ii) each of the directors of the Company, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company and KACC as a group. Pursuant to the Debtors’ Plan of Reorganization the equity interests of the Company’s existing stockholders will be cancelled without consideration. See Item 1. “Business — Reorganization Proceedings”, which is incorporated herein by reference, for a discussion of the principle elements reflected in the disclosure statement and plan of reorganization for the Company, KACC and other Debtors necessary to ongoing operations, as such elements pertain to the issuance of equity in the emerging entity.
             
Name of Beneficial Owner
 Title of Class  # of Shares(1)  % of Class 
 
MAXXAM Inc.   Common Stock   50,000,000(2)  62.8 
John Barneson  Common Stock   10,700   * 
Robert J. Cruikshank  Common Stock   15,009(3)  * 
John M. Donnan  Common Stock   2,076   * 
George T. Haymaker, Jr.   Common Stock   9,685(3)  * 
Jack A. Hockema  Common Stock   393,621(3)  * 
Edward F. Houff  Common Stock   -0-   * 
Charles E. Hurwitz  Common Stock   -0-(4)  * 
Ezra G. Levin  Common Stock   13,009(3)  * 
Daniel D. Maddox  Common Stock   40,144(3)  * 
John D. Roach  Common Stock   -0-   * 
All directors and executive officers of the Company as a group (11 persons)  Common Stock   484,277(5)  * 
*Less than 1%.
(1)Unless otherwise indicated, the beneficial owners have sole voting and investment power with respect to the shares listed in the table. Also includes options exercisable within 60 days of March 24, 2006 to acquire such shares.
(2)Includes 27,938,250 shares beneficially owned by MGHI. The address of MAXXAM is 1330 Post Oak Blvd., Suite 2000, Houston, Texas 77056.


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(3)Includes options exercisable within 60 days of March 24, 2006 to acquire shares of the Company’s Common Stock as follows: Mr. Cruikshank — 13,009; Mr. Haymaker — 7,143; Mr. Hockema — 375,770; Mr. Levin — 13,009; and Mr. Maddox — 35,715.
(4)Excludes shares owned by MAXXAM. Mr. Hurwitz may be deemed to hold beneficial ownership in the Company as a result of his beneficial ownership in MAXXAM.
(5)Includes options exercisable within 60 days of March 24, 2006, to acquire 690,633 shares of the Company’s Common Stock.
Ownership of MAXXAM
As of March 15, 2006, MAXXAM owned, directly and indirectly, approximately 63% of the issued and outstanding Common Stock of the Company. The following table sets forth, as of March 15, 2006, unless otherwise indicated, the beneficial ownership, if any, of the common stock (“MAXXAM Common Stock) and MAXXAM Class A $.05 Non-Cumulative Participating Convertible Preferred Stock (“MAXXAM Preferred Stock”) of MAXXAM by the directors of the Company, the Named Executive Officers, and the directors and the executive officers of the Company and KACC as a group:
                 
        % of
  % of Combined
 
Name of Beneficial Owner
 Title of Class  # of Shares(1)  Class  Voting Power(2) 
 
Charles E. Hurwitz  Common Stock   3,338,116(3)(4)  51.8   76.3 
   Preferred Stock   684,941(4)(5)  99.2     
Robert J. Cruikshank  Common Stock   5,200(6)  *   * 
Ezra G. Levin  Common Stock   5,200(6)  *   * 
All directors and executive officers as a group (11 persons)  Common Stock   3,348,516(3)(4)(6)  53.0     
   Preferred Stock   684,941(4)(5)  99.2   76.7 
*Less than 1%
(1)Unless otherwise indicated, the beneficial owners have sole voting and investment power with respect to the shares listed in the table. Includes the number of shares such persons would have received on March 15, 2006, if any, for their SARs (excluding SARs payable in cash only) exercisable within 60 days of such date if any such rights had been paid solely in shares of MAXXAM Common Stock.
(2)MAXXAM Preferred Stock is generally entitled to ten votes per share on matters presented to a vote of MAXXAM’s stockholders.
(3)Includes 2,451,714 shares of MAXXAM Common Stock owned by Gilda Investments, LLC (“Gilda”), a wholly owned subsidiary of Giddeon Holdings, Inc. (“Giddeon”), as to which Mr. Hurwitz indirectly possesses voting and investment power. Mr. Hurwitz serves as the sole director of Giddeon, and together with members of his immediate family and trusts for the benefit thereof, owns all of the voting shares of Giddeon. Also includes (a) 36,149 shares of MAXXAM Common Stock held by the Charles E. Hurwitz 2004 Retained Annuity Trust, (b) 36,150 shares of MAXXAM Common Stock held by the Barbara R. Hurwitz 2004 Retained Annuity Trust and as to which Mr. Hurwitz disclaims beneficial ownership, (c) 10,127 shares of MAXXAM Common Stock separately owned by Mr. Hurwitz’s spouse and as to which Mr. Hurwitz disclaims beneficial ownership, (d) 46,500 shares of MAXXAM Common Stock owned by the Hurwitz Investment Partnership L.P., a limited partnership in which Mr. Hurwitz and his spouse each have a 4.32% general partnership interest, 2,009 of which shares were separately owned by Mr. Hurwitz’s spouse prior to their transfer to such limited partnership and as to which Mr. Hurwitz disclaims beneficial ownership, (e) 279,535 shares of MAXXAM Common Stock held directly by Mr. Hurwitz, (f) options to purchase 21,029 shares of MAXXAM Common Stock held by Gilda, and (g) options held by Mr. Hurwitz to purchase 456,912 shares of MAXXAM Common Stock exercisable within 60 days of March 15, 2006.
(4)Gilda, Giddeon, the Hurwitz Investment Partnership L.P. and Mr. Hurwitz may be deemed a “group” (the “Stockholder Group”) within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended. As of March 15, 2006, in the aggregate, the members of the Stockholder Group owned


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3,338,116 shares of MAXXAM Common Stock and 684,941 shares of MAXXAM Preferred Stock, aggregating approximately 76.3% of the total voting power of MAXXAM. By reason of his relationship with the members of the Stockholder Group, Mr. Hurwitz may be deemed to possess shared voting and investment power with respect to the shares held by the Stockholder Group. The address of Gilda is 1330 Post Oak Boulevard, Suite 2000, Houston, Texas 77056. The address of the Stockholder Group is Giddeon Holdings, Inc., 1330 Post Oak Boulevard, Suite 2000, Houston, Texas 77056.
(5)Includes options exercisable by Mr. Hurwitz within 60 days of March 15, 2006 to acquire 22,500 shares of MAXXAM Preferred Stock.
(6)Includes options exercisable within 60 days of March 15, 2006 to acquire shares of MAXXAM Common Stock as follows: Mr. Cruikshank — 4,200 and Mr. Levin — 4,200.
Equity Compensation Plan Information
Pursuant to the Company’s plan of reorganization, the equity interests of the Company’s existing stockholders will be cancelled without consideration. However, the following table summarizes the Company’s and KACC’s equity compensation plans as of December 31, 2005:
             
        Number of securities
 
        remaining available for future
 
  Number of securities to be
     issuance under equity
 
  issued upon exercise of
  Weighted-average exercise
  compensation plans
 
  outstanding options,
  price of outstanding options,
  (excluding securities reflected
 
  warrants and rights
  warrants and rights
  in column (a))
 
Plan Category
 (a)  (b)  (c) 
 
Equity compensation plans approved by security holders  491,120(1) $3.57   4,864,889(2)
Equity compensation plans not approved by security holders  —   —   — 
Total  491,120  $3.57   4,864,889 
(1)Represents shares of the Company’s Common Stock underlying outstanding stock options.
(2)Shares are issuable under the 1997 Omnibus Plan. Stock-based awards made under the 1997 Omnibus Plan may be in the form of stock options, stock appreciation rights, restricted stock, performance shares or performance units. Of the shares available for future issuance under the 1997 Omnibus Plan, 1,698,951 may be made in the form of restricted stock.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
 
ITEM 14.Item 11.  PRINCIPAL ACCOUNTANT FEES AND SERVICESExecutive Compensation
 
ForThe information called for by this item is set forth under the years ended December 31, 2005captions “Executive Compensation,” “Director Compensation” and 2004, professional services were performed by Deloitte & Touche LLP, the member firms of Deloitte & Touche Tohmatsu,“Corporate Governance — Board Committees — Compensation Committee — Compensation Committee Interlocks and their respective affiliates.
Audit and audit-related fees aggregated $2,129,750 and $1,973,921Insider Participation” in our proxy statement for the years ended December 31, 2005 and 2004, respectively, and were composed2008 annual meeting of the following:stockholders.
 
Audit FeesItem 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The aggregate fees billed for audit servicesinformation required by this item is incorporated by reference to the information included under the captions “Equity Compensation Plan Information” and “Principal Stockholders and Management Ownership” in our proxy statement for the fiscal years ended December 31, 2005 and 2004 were $1,971,710 and $1,709,907, respectively. These fees relate to the audit2008 annual meeting of the Company’s annual financial statements, the reviews of the financial statements included in the Company’s Quarterly Reports onForm 10-Q and certain statutory foreign audits.stockholders.


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Audit-Related FeesItem 13.  Certain Relationships and Related Transactions, and Director Independence
 
The aggregate fees billed for audit-related servicesinformation required by this item is incorporated by reference to the information included under the captions “Certain Relationships and Related Transactions” and “Corporate Governance — Director Independence” in our proxy statement for the fiscal years ended December 31, 2005 and 2004 were $158,040 and $264,014, respectively. These fees relate to Sarbanes-Oxley Act2008 annual meeting of 2002, Section 404 advisory services, audits of stand-alone financial statements related to a disposition, and audits of certain employee benefit plans for the fiscal year ended December 31, 2005 and 2005.stockholders.
 
Tax Fees
Item 14.Principal Accountant Fees and Services
 
The aggregate fees billed for tax servicesinformation required by this item is incorporated by reference to the information included under the caption “Independent Public Accountants” in our proxy statement for the fiscal years ended December 31, 2005 and 2004 were $210,000 and $440,400, respectively. These fees relate to tax compliance, tax advice and tax planning services for the fiscal years ended December 31, 2005 and 2004.
All Other Fees
There were no fees billed for professional services other than audit fees, audit-related fees and tax service fees for the fiscal year ended December 31, 2005 and 2004.
All fees for 2005 and 2004 tax and audit-related matters requiring pre-approval by the Audit Committee received such pre-approval.
Audit Committee Pre-Approved Policies and Procedures
The Audit Committee of the Company’s Board of Directors has adopted policies and procedures in respect of services performed by the independent auditor which are to be pre-approved. The policy requires that each fiscal year, a description of the services — by major category of type of service — that are expected to be performed by the independent auditor in the following fiscal year (the “Services List”) be presented to the Audit Committee for approval.
In considering the nature of the services to be provided by the independent auditor, the Audit Committee will determine whether such services are compatible with the provision of independent audit services. The Audit Committee will discuss any such services with the independent auditor and Company’s management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the Securities and Exchange Commission to implement the Sarbanes-Oxley Act of 2002, as well as the rules of the American Institute of Certified Public Accountants.
Any request for audit, audit-related, tax, and other services not contemplated on the Services List must be submitted to the Audit Committee for specific pre-approval and cannot commence until such approval has been granted, except as provided below. Normally, pre-approval is to be provided at regularly scheduled meetings. However, the authority to grant specific pre-approval between meetings, as necessary, is delegated to the Chairman of the Audit Committee. The Chairman must update the Audit Committee at the next regularly scheduled2008 annual meeting of any services that were granted specific pre-approval.
As required, the Audit Committee will periodically be provided with and review the status of services and fees incurredyear-to-date against the original Service List for such fiscal year as well as the accumulated costs associated with projects pending retroactive approval. Retroactive approval for permissible non-audit services is allowed under the policy subject to certain limitations. Pre-approval is waived if all of the following criteria are met:
1. The service is not an audit, review or other attest service, except that the management may authorize or incur up to $25,000 in respect of scoping or planning activities by the independent auditor in connection with new or possible attest requirements so long as no formal engagement letter is signed prior to pre-approval by the Audit Committee and audit field work does not begin;
2. The individual project is not expected to and does not exceed $50,000and/or the aggregate amount of all such services pending retroactive approval does not exceed $200,000;
3. Such services were not recognized at the time of the engagement to be non-audit services; and


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4. Such services are brought to the attention of the Audit Committee or its designee at the next regularly scheduled meeting.stockholders.
 
PART IV
 
Item 15.Exhibits and Financial Statement Schedules
 
       
 Page
1.Financial Statements
Management’s Report on the Financial Statements and Internal Control Over Financial Reporting62
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements64
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting65
Consolidated Balance Sheets66
Statements of Consolidated Income (Loss)67
Statements of Consolidated Stockholders’ Equity and Comprehensive Income (Loss)68
Statements of Consolidated Cash Flows70
Notes to Consolidated Financial Statements71
Quarterly Financial Data (Unaudited)119
Five-Year Financial Data120 
    Page
 
1.Financial Statements
Report of Independent Registered Public Accounting Firm46
Consolidated Balance Sheets47
Statements of Consolidated Income (Loss)48
Statements of Consolidated Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)49
Statements of Consolidated Cash Flows50
Notes to Consolidated Financial Statements51
Quarterly Financial Data (Unaudited)100
Five-Year Financial Data102
2. Financial Statement Schedules 
Report of Independent Registered Public Accounting Firm125
  Schedule I — Condensed Balance Sheets — Parent Company,
Condensed Statements of Income — Parent Company,
Condensed Statements of Cash Flows — Parent Company,
and Notes to Condensed Financial Statements — Parent Company		126
 
All other schedules are omitted because they are either inapplicable or the required information is included in the Consolidated Financial Statements or the Notes thereto.thereto included in Item 8. “Financial Statements and Supplementary Data” and are incorporated herein by reference.
 
3.  Exhibits
 
Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 136)125), which index is incorporated herein by reference.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Kaiser Aluminum Corporation:
We have audited the consolidated financial statements of Kaiser Aluminum Corporation(Debtor-in-Possession and subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, and have issued our report thereon dated March 30, 2006 (which report expresses an unqualified opinion and includes explanatory paragraphs (i) relating to emphasis of a matter concerning the Company’s bankruptcy proceedings, (ii) expressing substantial doubt about the Company’s ability to continue as a going concern, and (iii) relating to the Company’s adoption of Financial Accounting Standards Board (FASB) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143”, effective December 31, 2005); such consolidated financial statements and report are included elsewhere in this10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/  DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 2006


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SCHEDULE I
CONDENSED BALANCE SHEET — PARENT COMPANY
         
  December 31, 
  2005  2004 
  (In millions of dollars, except share amounts) 
 
ASSETS
Investment in KACC $(944.0) $(192.5)
         
Total $(944.0) $(192.5)
         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities $—  $— 
Intercompany note payable to KACC, including accrued interest (Note 3)  —   2,191.7 
Stockholders’ equity (deficit):        
Common stock, par value $.01, authorized 125,000,000 shares; issued and outstanding 79,671,531 and 79,680,645 shares  .8   .8 
Additional capital  2,735.2   538.0 
Accumulated deficit  (3,671.2)  (2,917.5)
Accumulated other comprehensive income (loss)  (8.8)  (5.5)
         
Total stockholders’ equity  (944.0)  (2,384.2)
         
Total $(944.0) $(192.5)
         
The accompanying notes to condensed financial statements are an integral part of these statements.


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SCHEDULE I
CONDENSED STATEMENTS OF INCOME (LOSS) — PARENT COMPANY
             
  December 31, 
  2005  2004  2003 
  (In millions of dollars) 
 
Equity in income (loss) of KACC $(753.5) $(746.6) $(788.1)
Administrative and general expense  (.2)  (.2)  (.2)
Interest expense on intercompany note (excluding unrecorded contractual interest expense of $25.6 in 2005 and $153.6 in 2004 and 2003, respectively — Note 3)  —   —   — 
             
Net loss $(753.7) $(746.8) $(788.3)
             
The accompanying notes to condensed financial statements are an integral part of these statements.


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SCHEDULE I
CONDENSED STATEMENTS OF CASH FLOWS — PARENT COMPANY
             
  December 31, 
  2005  2004  2003 
  (In millions of dollars) 
 
Cash flows from operating activities:            
Net loss $(753.7) $(746.8) $(788.3)
Adjustments to reconcile net income to net cash used for operating activities:            
Equity in loss of KACC  753.5   746.6   788.1 
Accrued interest on intercompany note payable to KACC  —   —   — 
             
Net cash used by operating activities  (.2)  (.2)  (.2)
             
Cash flows from investing activities:            
Investment in KACC  —   —   — 
             
Net cash used by investing activities  —   —   — 
             
Cash flows from financing activities:            
Operating cost advances from KACC  .2   .2   .2 
             
Net cash provided by financing activities  .2   .2   .2 
             
Net (decrease) increase in cash and cash equivalents during the year  —   —   — 
Cash and cash equivalents at beginning of year  —   —   — 
             
Cash and cash equivalents at end of year $—  $—  $— 
             
The accompanying notes to condensed financial statements are an integral part of these statements.


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SCHEDULE I
NOTES TO CONDENSED FINANCIAL STATEMENTS — PARENT COMPANY
1.  Reorganization Proceedings
Background.  Kaiser Aluminum Corporation (“Kaiser”, “KAC” or the “Company”), its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation (“KACC”), and 24 of KACC’s subsidiaries 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. In December 2005, four of the KACC subsidiaries were dissolved pursuant to two separate plans of liquidation as more fully discussed below. The Company, KACC and the remaining 20 KACC subsidiaries continue to manage their businesses in the ordinary course asdebtors-in-possession subject to the control and administration of the Court. 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” and the Company, KACC and the remaining 20 KACC subsidiaries are collectively referred to herein as the “Reorganizing Debtors.” 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’snon-U.S. joint ventures were included in the Cases.
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 Original Debtors found it necessary to file the Cases primarily because of liquidity and cash flow problems of the Company and its subsidiaries that arose 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.
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 for additional information regarding the accelerated funding requirement). The filing of the Cases by the Additional Debtors had no impact on the Company’sday-to-day operations.
The outstanding principal of, and accrued interest on, all debt of the 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 Debtors’ Cases, the Court, upon motion by the Debtors, authorized the 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 and to continue using the Company’s existing cash management systems. The Reorganizing Debtors also have the right to assume or reject executory contracts existing prior to the Filing Date, subject to Court approval and certain


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other limitations. In this context, “assumption” means that the Reorganizing Debtors agree to perform their obligations and cure certain existing defaults under an executory contract and “rejection” means that the Reorganizing 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.
Case Administration.  Generally, pre-Filing Date claims, including certain contingent or unliquidated claims, against the 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 bar dates (established by the Court) by which holders of pre-Filing Date claims against the Debtors (other than asbestos-related personal injury claims) could file their claims have passed. Any holder of a claim that was required to file such claim by such bar date and did not do so may be barred from asserting such claim against any of the 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 bar dates do not apply to asbestos-related personal injury claims, for which no bar date has been set.
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 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 Court-appointed legal representatives for (a) potential future asbestos claimants (the “Asbestos Futures’ Representative”) and (b) potential future silica and coal tar pitch volatile claimants (the “Silica/CTPV Futures’ Representative” and, collectively with the Asbestos Futures” Representative, the “Futures’ Representatives”), have played and will continue to 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’ Representatives, including those of their counsel and other advisors.
Commodity-related and Inactive Subsidiaries.  As previously disclosed, the Company generated net cash proceeds of approximately $686.8 from the sale of the Company’s interests in and related to Queensland Alumina Limited (“QAL”) and Alumina Partners of Jamaica (“Alpart”). The Company’s interests in and related to QAL were owned by KAAC and KFC. The Company’s interests in and related to Alpart were owned by AJI and KJC. Throughout 2005, the proceeds were being held in separate escrow accounts pending distribution to the creditors of AJI, KJC, KAAC and KFC (collectively the “Liquidating Subsidiaries”) pursuant to certain liquidating plans.
During November 2004, the Liquidating Subsidiaries filed separate joint plans of liquidation and related disclosure statements with the Court. Such plans, together with the disclosure statements and all amendments filed thereto, are referred to as the “Liquidating Plans.” In general, the Liquidating Plans provided for the vast majority of the net sale proceeds to be distributed to the PBGC and the holders of KACC’s 97/8% and 107/8% Senior Notes (the “Senior Notes”) and claims with priority status.
As previously disclosed in 2004, a group of holders (the “Sub Note Group”) of KACC’s 123/4% Senior Subordinated Notes (the “Sub Notes”) formed an unofficial committee to represent all holders of Sub Notes and retained its own legal counsel. The Sub Note Group asserted that the Sub Note holders’ claims against the subsidiary guarantors (and in particular the Liquidating Subsidiaries) may not, as a technical matter, be contractually subordinated to the claims of the holders of the Senior Notes against the subsidiary guarantors (including AJI, KJC, KAAC and KFC). A separate group that holds both the Sub Notes and Senior Notes made a similar assertion, but also, maintained that a portion of the claims of the holders of Senior Notes against the subsidiary guarantors


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were contractually senior to the claims of holders of Sub Notes against the subsidiary guarantors. The effect of such positions, if ultimately sustained, would be that the holders of Sub Notes would be on a par with all or portion of the holders of the Senior Notes in respect of proceeds from sales of the Company’s interests in and related to the Liquidating Subsidiaries.
The Court ultimately approved the disclosure statements related to the Liquidating Plans in February 2005. In April 2005, voting results on the Liquidating Plans were filed with the Court by the Debtors’ claims agent. Based on these results, the Court determined that a sufficient volume of creditors (in number and amount) had voted to accept the Liquidating Plans to permit confirmation proceedings with respect to the Liquidating Plans to go forward even though the filing by the claims agent also indicated that holders of the Sub Notes, as a group, voted not to accept the Liquidating Plans. Accordingly, the Court conducted a series of evidentiary hearings to determine the allocation of distributions among holders of the Senior Notes and the Sub Notes. In connection with those proceedings, the Court also determined that there could be an allocation to the Parish of St. James, State of Louisiana, Solid Waste Revenue Bonds (the “Revenue Bonds”) of up to $8.0 and ruled against the position asserted by the separate group that holds both Senior Notes and the Sub Notes.
On December 20, 2005, the Court confirmed the Liquidating Plans (subject to certain modifications). Pursuant to the Court’s order, the Liquidating Subsidiaries were authorized to make partial cash distributions to certain of their creditors, while reserving sufficient amounts for future distributions until the Court resolved the contractual subordinated dispute among the creditors of these subsidiaries and for the payment of administrative and priority claims and trust expenses. The Court’s ruling did not resolve the dispute between the holders of the Senior Notes and the holders of the Sub Notes (more fully described below) regarding their respective entitlement to certain of the proceeds from sale of interests by the Liquidating Subsidiaries (the “Senior Note-Sub Note Dispute”). However, as a result of the Court’s approval, all restricted cash or other assets held on behalf of or by the Liquidating Subsidiaries were transferred to a trustee in accordance with the terms of the Liquidating Plans. The trustee was then authorized to make partial cash distributions after setting aside sufficient reserves for amounts subject to the Senior Note-Sub Note Dispute (approximately $213.0) and for the payment of administrative and priority claims and trust expenses (approximately $40.0). After such reserves, the partial distribution totaled approximately $430.0, of which, pursuant to the Liquidating Plans, approximately $196.0 was paid to the PBGC and $202.0 amount was paid to the indenture trustees for the Senior Notes for subsequent distribution to the holders of the Senior Notes. Of the remaining partial distribution, approximately $21.0 was paid to KACC and $11.0 was paid to the PBGC on behalf of KACC. Partial distributions were made in late December 2005 and, in connection with the effectiveness of the Liquidating Plans, the Liquidating Subsidiaries were deemed to be dissolved and took the actions necessary to dissolve and terminate their corporate existence.
On December 22, 2005, the Court issued a decision in connection with the Senior Note-Sub Note Dispute, finding in favor of the Senior Notes. On January  10, 2006, the Court held a hearing on a motion by the indenture trustee for the Sub Notes to stay distribution of the amounts reserved under the Liquidating Plans in respect of the Senior Note-Sub Note Dispute pending appeals in respect of the Court’s December 22, 2005 decision that the Sub Notes were contractually subordinate to the Senior Notes in regard to certain subsidiary guarantors (particularly the Liquidating Subsidiaries) and that certain parties were not due certain reimbursements. An agreement was reached at the hearing and subsequently approved by Court order dated March 7, 2006, authorizing the trustee to distribute the amounts reserved to the indenture trustees for the Senior Notes and further authorize the indenture trustees to make distributions to holders of the Senior Notes while such appeals proceed, in each case subject to the terms and conditions stated in the order.
Based on the objections and pleadings filed by the Sub Note Group and the group that holds Sub Notes and KACC’s 97/8% Senior Notes and the assumptions and estimates upon which the Liquidating Plans are based, if the holders of Sub Notes were ultimately to prevail on their appeal, the Liquidating Plans indicated that it is possible that the holders of the Sub Notes could receive between approximately $67.0 and approximately $215.0 depending on whether the Sub Notes were determined to rank on par with a portion or all of the Senior Notes. Conversely, if the holders of the Senior Notes prevail on appeal, then the holders of the Sub Notes will receive no distributions under Liquidating Plans. The Company believes that the intent of the indentures in respect of the Senior Notes and the Sub Notes was to subordinate the claims of the Sub Note holders in respect of the subsidiary guarantors (including the Liquidating Subsidiaries) and that the Court’s ruling on December 22, 2005 was correct. The Company cannot


131

predict, however, the ultimate resolution of the matters raised by the Sub Note Group, or the other group, on appeal, when any such resolution will occur, or what any such resolution may have on the Company, the Cases or distribution to affected noteholders.
The distributions in respect of the Liquidating Plans also settled substantially all amounts due between KACC and the creditors of the Liquidating Subsidiaries pursuant to the Intercompany Settlement Agreement (the “Intercompany Agreement”) that went into affect in February 2005 other than certain payments of alternative minimum tax paid by the Company that it expects to recoup from the liquidating trust for the KAAC and KFC joint plan of liquidation (the “KAAC/KFC Plan”) during the second half of 2006 in connection with a 2005 tax return (see Note 8 of Kaiser’s Consolidated Financial Statements). The Intercompany Agreement also resolved substantially all pre- and post-petition intercompany claims among the Debtors.
KBC is being dealt with in the KACC plan of reorganization as more fully discussed below.
Entities Containing the Fabricated Products and Certain Other Operations.  Under the Code, claims of individual creditors must generally be satisfied from the assets of the entity against which that creditor has a lawful claim. The claims against the entities containing the Fabricated products and certain other operations will have to be resolved from the available assets of KACC, KACOCL, and Bellwood, which generally include the fabricated products plants and their working capital, the interests in and related to Anglesey Aluminium Limited (“Anglesey”) and proceeds to be received by such entities from the Liquidating Subsidiaries under the Intercompany Agreement. Sixteen of the Reorganizing Debtors have no material ongoing activities or operations and have no material assets or liabilities other than intercompany claims (which were resolved pursuant to the Intercompany Agreement). The Company has previously disclosed that it believed that it is likely that most of these entities will ultimately be merged out of existence or dissolved in some manner.
In June 2005, KAC, KACC, Bellwood, KACOCL and 17 of KACC’s subsidiaries (i.e., the Reorganizing Debtors) filed a plan of reorganization and related disclosure statement with the Court. Following an interim filing in August 2005, in September 2005, the Reorganizing Debtors filed amended plans of reorganization (as modified, the “Kaiser Aluminum Amended Plan”) and related amended disclosure statements (the “Kaiser Aluminum Amended Disclosure Statement”) with the Court. In December 2005, with the consent of creditors and the Court, KBC was added to the Kaiser Aluminum Amended Plan.
The Kaiser Aluminum Amended Plan, in general (subject to the further conditions precedent as outlined below), resolves substantially all pre-Filing Date liabilities of the Remaining Debtors under a single joint plan of reorganization. In summary, the Kaiser Aluminum Amended Plan provides for the following principal elements:
(a) All of the equity interests of existing stockholders of the Company would be cancelled without consideration.
(b) All post-petition and secured claims would either be assumed by the emerging entity or paid at emergence (see “Exit Cost” discussion below).
(c) Pursuant to agreements reached with salaried and hourly retirees in early 2004, in consideration for the agreed cancellation of the retiree medical plan, as more fully discussed in Note 8, KACC is making certain fixed monthly payments into Voluntary Employee Beneficiary Associations (“VEBAs”) until emergence and has agreed thereafter to make certain variable annual VEBA contributions depending on the emerging entity’s operating results and financial liquidity. In addition, upon emergence the VEBAs are entitled to receive a contribution of 66.9% of the new common stock of the emerged entity.
(d) The PBGC will receive a cash payment of $2.5 and 10.8% of the new common stock of the emerged entity in respect of its claims against KACOCL. In addition, as described in (f) below, the PBGC will receive shares of new common stock based on its direct claims against the Remaining Debtors (other than KACOCL) and its participation, indirectly through the KAAC/KFC Plan in claims of KFC against KACC , which the Company currently estimates will result in the PBGC receiving an additional 5.4% of the new common stock of the emerged entity (bringing the PBGC’s total ownership percentage of the new entity to approximately 16.2%). The $2.5 cash payment discussed above is in addition to the cash amounts the Company has already


132

paid to the PBGC (see Note 9 of Notes to Kaiser’s Consolidated Financial Statements) and that the PBGC has received and will receive from the Liquidating Subsidiaries under the Liquidating Plans.
(e) Pursuant to an agreement reached in early 2005, all pending and future asbestos-related personal injury claims, all pending and future silica and coal tar pitch volatiles personal injury claims and all hearing loss claims would be resolved through the formation of one or more trusts to which all such claims would be directed by channeling injunctions that would permanently remove all liability for such claims from the Debtors. The trusts would be funded pursuant to statutory requirements and agreements with representatives of the affected parties, using (i) the Debtors’ insurance assets, (ii) $13.0 in cash from KACC, (iii) 100% of the equity in a KACC subsidiary whose sole asset will be a piece of real property that produces modest rental income, and (iv) the new common stock of the emerged entity to be issued as per (f) below in respect of approximately $830.0 of intercompany claims of KFC against KACC that are to be assigned to the trust, which the Company currently estimates will entitle the trusts to receive approximately 6.4% of the new common stock of the emerged entity.
(f) Other pre-petition general unsecured claims against the Remaining Debtors (other than KACOCL) are entitled to receive approximately 22.3% of the new common stock of the emerging entity in the proportion that their allowed claim bears to the total amount of allowed claims. Claims that are expected to be within this group include (i) any claims of the Senior Notes, the Sub Notes and PBGC (other than the PBGC’s claim against KACOCL), (ii) the approximate $830.0 of intercompany claims that will be assigned to the personal injury trust(s) referred to in (e) above, and (iii) all unsecured trade and other general unsecured claims, including approximately $276.0 of intercompany claims of KFC against KACC. However, holders of general unsecured claims not exceeding a specified small amount will receive a cash payment equal to approximately 2.9% of their agreed claim value in lieu of new common stock. In accordance with the contractual subordination provisions of the indenture governing the Sub Notes and terms of the settlement between the holders of the Senior Notes and the holders of the Revenue Bonds, the new common stock or cash that would otherwise be distributed to the holders of the Sub Notes in respect of their claims against the Debtors would instead be distributed to holders of the Senior Notes and the Revenue Bonds on a pro rata basis based on the relative allowed amounts of their claims.
The Kaiser Aluminum Amended Plan was accepted by all classes of creditors entitled to vote on it and the Kaiser Aluminum Amended Plan was confirmed by the Court on February 6, 2006. The confirmation order remains subject to motions for review and appeals filed by certain of KACC’s insurers and must still be affirmed by the United States District Court Other significant conditions to emergence include completion of the Company’s exit financing, listing of the new common stock on the NASDAQ stock market and formation of certain trusts for the benefit of different groups of torts claimants. As provided in Kaiser Aluminum Amended Plan, once the Court’s confirmation order is adopted or affirmed by the United States District Court, even if the affirmation order is appealed, the Company can proceed to emerge if the United States District Court does not stay its order adopting or affirming the confirmation order and the key constituents in the Chapter 11 proceedings agree. Assuming the United States District Court adopts or affirms the confirmation order, the Company believes that it is possible that it will emerge before May 11, 2006. No assurances can be given that the Court’s confirmation order will ultimately be adopted or affirmed by the United States District Court or that the transactions contemplated by the Kaiser Aluminum Amended Plan will ultimately be consummated.
At emergence from Chapter 11, the Reorganizing Debtors will have to pay or otherwise provide for a material amount of claims. Such claims include accrued but unpaid professional fees, priority pension, tax and environmental claims, secured claims, and certain post-petition obligations (collectively, “Exit Costs”). The Company currently estimates that its Exit Costs will be in the range of $45.0 to $60.0. The Company currently expects to fund such Exit Costs using existing cash resources and borrowing availability under an exit financing facility that would replace the current Post-Petition Credit Agreement (see Note 7 of Notes to Kaiser’s Consolidated Financial Statements). If funding from existing cash resources and borrowing availability under an exit financing facility are not sufficient to pay or otherwise provide for all Exit Costs, the Company and KACC 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 any issues that may arise in respect of an exit financing facility or be able to negotiate a reasonable alternative. However, no assurance can be given in this regard.


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2.  Basis of Presentation
The Company is a holding company and conducts its operations through its wholly owned subsidiary, KACC, which is reported herein using the equity method of accounting. The accompanying parent company condensed financial statements of the Company should be read in conjunction with Kaiser’s 2005 Consolidated Financial Statements.
The accompanying parent company condensed financial statements 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 condensed financial statements do not present: (a) the realizable value of assets on a liquidation basis or the availability of such assets to satisfy liability, (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 which may be made in connection with the Debtors’ capitalizations or operations as a result of a plan of reorganization. Because of the ongoing nature of the Cases, the parent company condensed financial statements are subject to material uncertainties.
3.  Intercompany Note Payable
The Intercompany Note to KACC, as amended, provided for a fixed interest rate of 65/8% and was to mature on December 21, 2020. However, since the Intercompany Note was unsecured, the accrual of interest was discontinued on the Filing Date. The payment of the Intercompany Note and accrued interest which were liabilities subject to compromise, were resolved in connection with the Cases. Under the terms of the Intercompany Agreement (see Note 1), intercompany amounts due from the Company to KACC at February 28, 2005 of $2,197.2, including the Intercompany Note and accrued interest of $2,191.7, were released. The release has been reflected as a credit to Additional Capital for the year ended December 31, 2005.
4.  Restricted Net Assets
The obligations of KACC in respect of the credit facilities under the DIP Facility are guaranteed by the Company and certain significant subsidiaries of KACC. See Note 7 of Notes to Kaiser’s Consolidated Financial Statements.


134

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
KAISER ALUMINUM CORPORATION
 
 By: /s/  Jack A. Hockema
Jack A. Hockema
President and Chief Executive Officer
 
Date: March 30, 2006February 25, 2008
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
   
/s/  Jack A. Hockema
Jack A. Hockema
President, Chief Executive Officer and Director (Principal Executive Officer)		 Date: March 30, 2006
   
/s/  Daniel D. MaddoxJack A. Hockema

Daniel D. MaddoxJack A. Hockema		President, Chief Executive Officer, Chairman of the Board and Director
(Principal Executive Officer)		Date: February 25, 2008
/s/  Joseph P. Bellino

Joseph P. Bellino		Executive Vice President and ControllerChief Financial Officer
(Principal Financial Officer)		 Date: March 30, 2006February 25, 2008
   
/s/  George T. Haymaker Jr.Lynton J. Rowsell

George T. Haymaker, Jr.
Chairman of the BoardLynton J. Rowsell		Vice President and DirectorChief Accounting Officer
(Principal Accounting Officer)		 Date: March 30, 2006February 25, 2008
   
/s/  Robert J. Cruikshank

Robert J. Cruikshank
Carolyn Bartholomew		Director Date: March 30, 2006February 25, 2008
   
/s/  Charles E. Hurwitz

Charles E. Hurwitz
Carl B. Frankel		Director Date: March 30, 2006February 25, 2008
   
/s/  Ezra G. LevinTeresa A. Hopp

Ezra G. Levin
Teresa A. Hopp		Director Date: March 30, 2006February 25, 2008
   
/s/  John D. Roach

John D. Roach
William F. Murphy		Director Date: March 30, 2006February 25, 2008
/s/  Alfred E. Osborne, Jr., Ph.D.

Alfred E. Osborne, Jr., Ph.D.		DirectorDate: February 25, 2008
/s/  Georganne Proctor

Georganne Proctor		DirectorDate: February 25, 2008

Jack Quinn		DirectorDate: February 25, 2008
/s/  Thomas M. Van Leeuwen

Thomas M. Van Leeuwen		DirectorDate: February 25, 2008
/s/  Brett E. Wilcox

Brett E. Wilcox		DirectorDate: February 25, 2008


135124

 

 
INDEX OF EXHIBITS
 
        
Exhibit
Exhibit
  Exhibit
  
Number
Number
 
Description
Number
 
Description
2.1 Purchase Agreement, dated as of June 8, 2004, among Kaiser Aluminum & Chemical Corporation (‘‘KACC”), Kaiser Aluminium International, Inc., Kaiser Bauxite Company (‘‘KBC”), Kaiser Jamaica Corporation and Alpart Jamaica Inc. and Quality Incorporations I Limited (incorporated by reference to Exhibit 2.1 to the Report onForm 8-K, dated as of July 1, 2004, filed by Kaiser Aluminum Corporation (‘KAC”), File No. 1-9447).2.1 Third Amended Joint Plan of Liquidation for Alpart Jamaica Inc. (“AJI”) and Kaiser Jamaica Corporation (“KJC”), dated February 25, 2005 (incorporated by reference to Exhibit 99.1 to the Annual Report on Form 10-K for the period ended December 31, 2004, filed by the Company on March 31, 2005, File No. 1-9447).
    2.2 Modification to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated April 7, 2005 (incorporated by reference to Exhibit 2.2 to the Current Report Form 8-K, filed by the Company on December 23, 2005, File No. 1-9447).
 2.3 Second Modification to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated November 22, 2005 (incorporated by reference to Exhibit 2.3 to the Current Report Form 8-K, filed by the Company on December 23, 2005, File No. 1-9447).
2.2 Purchase Agreement, dated as of May 17, 2004, among KACC, KBC, Gramercy Alumina LLC and St. Ann Bauxite Limited (incorporated by reference to Exhibit 2.1 to the Report onForm 8-K, dated as of October 1, 2004, filed by KAC, File No. 1-9447).2.4 Third Modification to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated December 19, 2005 (incorporated by reference to Exhibit 2.4 to the Current Report Form 8-K, filed by the Company on December 23, 2005, File No. 1-9447).
    2.5 Third Amended Joint Plan of Liquidation for Kaiser Alumina Australia Corporation (“KAAC”) and Kaiser Finance Corporation (“KFC”), dated February 25, 2005 (incorporated by reference to Exhibit 99.3 to the Annual Report on Form 10-K for the period ended December 31, 2004, filed by the Company on March 31, 2005, File No. 1-9447).
 2.6 Modification to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated April 7, 2005 (incorporated by reference to Exhibit 2.6 to the Current Report on Form 8-K, filed by the Company on December 23, 2005, File No. 1-9447).
2.3 Purchase Agreement, dated as of October 29, 2004, between KACC, and the Government of Ghana (incorporated by reference to Exhibit 2.1 to the Report onForm 8-K, dated as of October 29, 2004, filed by KAC, File No. 1-9447).2.7 Second Modification to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated November 22, 2005 (incorporated by reference to Exhibit 2.7 to the Current Report on Form 8-K, filed by the Company on December 23, 2005, File No. 1-9447).
    2.8 Third Modification to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated December 19, 2005 (incorporated by reference to Exhibit 2.8 to the Current Report on Form 8-K, filed by the Company on December 23, 2005, File No. 1-9447)
 2.9 Second Amended Joint Plan of Reorganization for the Company, KACC and Certain of Their Debtor Affiliates, dated as of September 7, 2005 (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K, filed by the Company on September 13, 2005, File No. 1-9447).
2.4 Purchase Agreement, dated as of September 22, 2004, between KACC, Kaiser Alumina Australia Corporation (‘‘KAAC”) and Comalco Aluminium Limited (incorporated by reference to Exhibit 2.3 to the Report onForm 10-Q for the quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).2.10 Modifications to the Second Amended Joint Plan of Reorganization for the Company, KACC and Certain of Their Debtor Affiliates Pursuant to Stipulation and Agreed Order between Insurers, Debtors, Committee and Future Representatives (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K, filed by the Company on February 7, 2006, File No. 1-9447).
    2.11 Modification to the Second Amended Joint Plan of Reorganization for the Company, KACC and Certain of Their Debtor Affiliates, dated as of November 22, 2005 (incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K, filed by the Company on February 7, 2006, File No. 1-9447).
 2.12 Third Modification to the Second Amended Joint Plan of Reorganization for the Company, KACC and Certain of Their Debtor Affiliates, dated as of December 16, 2005 (incorporated by reference to Exhibit 2.4 to the Current Report on Form 8-K, filed by the Company on February 7, 2006, File No. 1-9447).
2.5 Agreement to Submit Qualified Bid for QAL, dated as of September 22, 2004, between KACC, KAAC and Glencore AG (incorporated by reference to Exhibit 2.4 to the Report onForm 10-Q for the quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).2.13 Order Confirming the Second Amended Joint Plan of Reorganization of the Company, KACCand Certain of Their Debtor Affiliates (incorporated by reference to Exhibit 2.5 to the Current Report on Form 8-K, filed by the Company on February 7, 2006, File No. 1-9447).
    2.14 Order Affirming the Confirmation Order of the Second Amended Joint Plan of Reorganization of the Company, KACC and Certain of Their Debtor Affiliates, as modified (incorporated by reference to Exhibit 2.6 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, FileNo. 1-9447).
 
2.6 Purchase Agreement, dated as of October 28, 2004, among KACC, KAAC and Alumina & Bauxite Company Ltd. (incorporated by reference to Exhibit 2.5 to the Report onForm 10-Q for the quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).
    
 
2.7 Third Amended Joint Plan of Liquidation for Alpart Jamaica Inc. (‘‘AJI”) and Kaiser Jamaica Corporation (‘‘KJC”), dated February 25, 2005 (incorporated by reference to Exhibit 99.1 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
    
 
2.8 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code with Respect to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated February 28, 2005 (incorporated by reference to Exhibit 99.2 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
    
 
2.9 Modification to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated April 7, 2005 (incorporated by reference to Exhibit 2.2 to the ReportForm 8-K dated December 19, 2005, filed by KAC, File No. 1-9447).
    
 
2.10 Second Modification to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated November 22, 2005 (incorporated by reference to Exhibit 2.3 to the ReportForm 8-K dated December 19, 2005, filed by KAC, File No. 1-9447).
    
 
2.11 Third Modification to the Third Amended Joint Plan of Liquidation for AJI and KJC, dated December 19, 2005 (incorporated by reference to Exhibit 2.4 to the ReportForm 8-K dated December 19, 2005, filed by KAC, File No. 1-9447).
    
 
2.12 Third Amended Joint Plan of Liquidation for KAAC and Kaiser Finance Corporation (‘‘KFC”), dated February 25, 2005 (incorporated by reference to Exhibit 99.3 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
    
 
2.13 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code with respect to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated February 28, 2005 (incorporated by reference to Exhibit 99.4 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
    
 
2.14 Modification to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated April 7, 2005 (incorporated by reference to Exhibit 2.6 to the Report onForm 8-K dated December 19, 2005, filed by KAC, File No. 1-9447).
    
 
2.15 Second Modification to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated November 22, 2005 (incorporated by reference to Exhibit 2.7 to the Report onForm 8-K dated December 19, 2005, filed by KAC, File No. 1-9447).
    


136125

 

        
Exhibit
Exhibit
  Exhibit
  
Number
Number
 
Description
Number
 
Description
2.16 Third Modification to the Third Amended Joint Plan of Liquidation for KAAC and KFC, dated December 19, 2005 (incorporated by reference to Exhibit 2.8 to the Report onForm 8-K dated December 19, 2005, filed by KAC, File No. 1-9447).2.15 Special Procedures for Distributions on Account of NLRB Claim, as agreed by the National Labor Relations Board, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC (formerly known as the United Steelworkers of America, AFL-CIO, CLC) (the “USW”) and the Company pursuant to Section 7.8e of the Second Amended Joint Plan of Reorganization of the Company, KACC and Certain of Their Debtor Affiliates, as modified (incorporated by reference to Exhibit 2.7 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, File No. 000-52105).
    3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, File No. 000-52105).
 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, File No. 000-52105).
2.17 Second Amended Joint Plan of Reorganization for KAC, KACC and Certain of Their Debtor Affiliates, dated as of September 7, 2005 (incorporated by reference to Exhibit 99.2 to Report onForm 8-K, dated as of September 8, 2005, filed by KAC, File No. 1-9447)10.1 Senior Secured Revolving Credit Agreement, dated as of July 6, 2006, among the Company, Kaiser Aluminum Investments Company, Kaiser Aluminum Fabricated Products, LLC (“KAFP”), Kaiser Aluminum International, Inc., certain financial institutions from time to time thereto, as lenders, J.P. Morgan Securities, Inc., The CIT Group/Business Credit, Inc. and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
    10.2 First Amendment to Senior Secured Revolving Credit Agreement, Consent and Facility Increase, dated as of December 10, 2007 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed by the Company on December 13, 2007, File No. 000-52105)
 10.3 Term Loan and Guaranty Agreement, dated as of July 6, 2006, among KAFP, the Company and certain indirect subsidiaries of the Company listed as dGuarantors’ thereto, certain financial institutions from time to time party thereto, as lenders, J.P. Morgan Securities, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and Wilmington Trust Company, as collateral agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, FileNo. 000-52105).
2.18 Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code for the Second Amended Joint Plan of Reorganization for KAC, KACC and Certain of Their Debtor Affiliates, dated as of September 7, 2005 (incorporated by reference to Exhibit 99.3 to Report onForm 8-K, dated as of September 8, 2005, filed by KAC, File No. 1-9447)**10.4 Description of 2006 Compensation of Directors (incorporated by reference to Exhibit 10.3 to the Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
    **10.5 Description of 2007 Compensation of Directors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed by the Company on June 12, 2007, File No. 000-52105).
 **10.6 2006 Short Term Incentive Plan for Key Managers (incorporated by reference to Exhibit 10.4 to the Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
2.19 Modification to the Second Amended Joint Plan of Reorganization for KAC, KACC and Certain of Their Affiliates Pursuant to Stipulation and Agreed Order between Insurers, Debtors, Committee and Future Representatives (incorporated by reference to Exhibit 2.2 to Report ofForm 8-K, dated as of February 1, 2006, Filed by KAC, File No. 1-9447).**10.7 Summary of the Kaiser Aluminum Fabricated Products 2007 Short Term Incentive Plan for Key Managers (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed by the Company on April 5, 2007, File No. 000-52105).
    **10.8 Employment Agreement, dated as of July 6, 2006, between the Company and Jack A. Hockema (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
 **10.9 Employment Agreement, dated as of July 6, 2006, between the Company and Joseph P. Bellino (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
2.20 Modification to the Second Amended Joint Plan of Reorganization for KAC, KACC and Certain of Their Affiliates, dated as of November 22, 2005 (incorporated by reference to Exhibit 2.3 to Report ofForm 8-K, dated as of February 1, 2006, Filed by KAC, File No. 1-9447).**10.10 Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
    **10.11 Form of Officer Indemnification Agreement (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
 **10.12 Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
2.21 Third Modification to the Second Amended Joint Plan of Reorganization for KAC, KACC and Certain of Their Affiliates, dated as of December 16, 2005 (incorporated by reference to Exhibit 2.3 to Report ofForm 8-K, dated as of February 1, 2006, Filed by KAC, File No. 1-9447).
    
 
2.22 Order Confirming the Second Amended Joint Plan of Reorganization of KAC, KACC and Certain of Their Debtor Affiliates (incorporated by reference to Exhibit 2.5 to the Report ofForm 8-K, dated as of February 1, 2006, Filed by KAC, File No. 1-9447).
    
 
3.2 Certificate of Retirement of KAC, dated October 24, 1995 (incorporated by reference to Exhibit 3.2 to the Report onForm 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447).
    
 
3.3 Certificate of Retirement of KAC, dated February 12, 1998 (incorporated by reference to Exhibit 3.3 to the Report onForm 10-K for the period ended December 31, 1997, filed by KAC, File No. 1-9447).
    
 
3.4 Certificate of Elimination of KAC, dated July 1, 1998 (incorporated by reference to Exhibit 3.4 to the Report onForm 10-Q for the quarterly period ended June 30, 1999, filed by KAC, File No. 1-9447).
    
 
3.5 Certificate of Amendment of the Restated Certificate of Incorporation of KAC, dated January 10, 2000 (incorporated by reference to Exhibit 3.5 to the Report onForm 10-K for the period ended December 31, 1999, filed by KAC, File No. 1-9447).
    
 
3.6 Amended and Restated By-Laws of KAC, dated October 1, 1997 (incorporated by reference to Exhibit 3.3 to the Report onForm 10-Q for the quarterly period ended September 30, 1997, filed by KAC, File No. 1-9447).
    
 
4.1 Indenture, dated as of February 1, 1993, among KACC, as Issuer, KAAC, Alpart Jamaica Inc., and Kaiser Jamaica Corporation, as Subsidiary Guarantors, and The First National Bank of Boston, as Trustee, regarding KACC’s 123/4% Senior Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 to the Report onForm 10-K for the period ended December 31, 1992, filed by KACC, File No. 1-3605).
    
 
4.2 First Supplemental Indenture, dated as of May 1, 1993, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.2 to the Report onForm 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605).
    
 
4.3 Second Supplemental Indenture, dated as of February 1, 1996, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.3 to the Report onForm 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447).
    
 
4.4 Third Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.1 to the Report onForm 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447).
    
 
4.5 Fourth Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of February 1, 1993, (incorporated by reference to Exhibit 4.1 to the Report onForm 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447).
    

137
126

 

        
Exhibit
Exhibit
  Exhibit
  
Number
Number
 
Description
Number
 
Description
4.6 Indenture, dated as of February 17, 1994, among KACC, as Issuer, KAAC, Alpart Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser Finance Corporation, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC’s 97/8% Senior Notes Due 2002 (incorporated by reference to Exhibit 4.3 to the Report onForm 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447).*10.13 Kaiser Aluminum Corporation Amended and Restated 2006 Equity and Performance Incentive Plan.
    **10.14 2006 Form of Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, FileNo. 000-52105).
 **10.15 2006 Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, FileNo. 000-52105).
4.7 First Supplemental Indenture, dated as of February 1, 1996, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.5 to the Report onForm 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447).**10.16 2007 Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to the Current Report on Form 8-K, filed by the Company on June 12, 2007, File No. 000-52105).
    **10.17 Kaiser Aluminum Fabricated Products Restoration Plan (incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K, filed by the Company on July 6, 2006, File No. 000-52105).
 10.18 Stock Transfer Restriction Agreement, dated as of July 6, 2006, between the Company and National City Bank, in its capacity as the trustee for the trust that provides benefits for certain eligible retirees of Kaiser Aluminum & Chemical Corporation represented by the USW, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its Local 1186, the International Association of Machinists and Aerospace Workers, the International Chemical Workers Union Council of the United Food and Commercial Workers, and the Paper, Allied-Industrial, Chemical and Energy Workers International Union, AFL-CIO, CLC and their surviving spouses and eligible dependents (the “Union VEBA”) (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, File No. 000-52105).
4.8 Second Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.2 to the Report onForm 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447).10.19 Registration Rights Agreement, dated as of July 6, 2006, between the Company and the Union VEBA and the other parties thereto (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, File No. 000-52105).
    10.20 Director Designation Agreement, dated as of July 6, 2006, between the Company and the USW (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form 8-A, filed by the Company on July 6, 2006, File No. 000-52105).
 **10.21 Key Employee Retention Plan (effective September 3, 2002) (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K for the period ended December 31, 2002, filed by the Company on March 31, 2003, File No. 1-9447).
4.9 Third Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.2 to the Report onForm 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447).**10.22 Form of Retention Agreement for the KACC Key Employee Retention Plan (effective September 3, 2002) for Jack A. Hockema and John Barneson (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K for the period ended December 31, 2002, filed by the Company on March 31, 2003, File No. 1-9447).
    **10.23 Severance Plan (effective September 3, 2002) (incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K for the period ended December 31, 2002, filed by the Company on March 31, 2003, File No. 1-9447).
 **10.24 Form of Severance Agreement for the Severance Plan (effective September 3, 2002) for John Barneson and John M. Donnan (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K for the period ended December 31, 2002, filed by the Company on March 31, 2003, File No. 1-9447).
4.10 Indenture, dated as of October 23, 1996, among KACC, as Issuer, KAAC, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC’s 107/8% Series B Senior Notes Due 2006 (incorporated by reference to Exhibit 4.2 to the Report onForm 10-Q for the quarterly period ended September 30, 1996, filed by KAC, File No. 1-9447).**10.25 Form of Change in Control Severance Agreement for John Barneson (incorporated by reference to Exhibit 10.32 to the Annual Report on Form 10-K for the period ended December 31, 2002, filed by the Company on March 31, 2003, File No. 1-9447).
    **10.26 Form of Change in Control Severance Agreement for John M. Donnan (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K for the period ended December 31, 2002, filed by the Company on March 31, 2003, File No. 1-9447).
 **10.27 Description of Long-Term Incentive Plan (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the period ended December 31, 2004, filed by the Company on March 31, 2005, File No. 1-9447).
4.11 First Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of October 23, 1996 (incorporated by reference to Exhibit 4.3 to the Report onForm 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447).
    
 
4.12 Second Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of October 23, 1996 (incorporated by reference to Exhibit 4.3 to the Report onForm 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447).
    
 
4.13 Indenture, dated as of December 23, 1996, among KACC, as Issuer, KAAC, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC’s 107/8% Series D Senior Notes due 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement onForm S-4, dated January 2, 1997, filed by KACC, RegistrationNo. 333-19143).
    
 
4.14 First Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of December 23, 1996 (incorporated by reference to Exhibit 4.4 to the Report onForm 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447).
    
 
4.15 Second Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of December 23, 1996 (incorporated by reference to Exhibit 4.4 to the Report onForm 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447).
    
 
4.16 Post-Petition Credit Agreement, dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.44 to the Report onForm 10-K for the period ended December 31, 2001, filed by KAC, File No. 1-9447).
    
 
4.17 First Amendment to Post-Petition Credit Agreement and Post-Petition Pledge and Security Agreement and Consent of Guarantors, dated as of March 21, 2002, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent, and amending a Post-Petition Pledge and Security Agreement dated as of February 12, 2002, among KACC, KAC, certain subsidiaries of KAC and KACC, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.45 to the Report onForm 10-K for the period ended December 31, 2001, filed by KAC, File No. 1-9447).
    

138
127

 

     
Exhibit
  
Number
 
Description
 
 4.18 Second Amendment to Post-Petition Credit Agreement and Consent of Guarantors, dated as of March 21, 2002, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.46 to the Report onForm 10-K for the period ended December 31, 2001, filed by KAC, File No. 1-9447).
     
   
 4.19 Third Amendment to Post-Petition Credit Agreement, Second Amendment to Post-Petition Pledge and Security Agreement and Consent of Guarantors, dated as of December 19, 2002, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.19 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 4.20 Fourth Amendment to Post-Petition Credit Agreement and Consent of Guarantors, dated as of March 17, 2003, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.20 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 4.21 Waiver and Consent with Respect to Post-Petition Credit Agreement, dated October 9, 2002, among KAC, KACC, the financial institutions party to the Post-Petition Credit Agreement, dated as of February 12, 2002, as amended, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.21 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 4.22 Second Waiver and Consent with respect to Post-Petition Credit Agreement, dated January 13, 2003, among KACC, KAC, the financial institutions party to the Post-Petition Credit Agreement, dated as of February 12, 2002, as amended, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.22 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 4.23 Waiver Letter with Respect to Post-Petition Credit Agreement, dated March 24, 2003, among KACC, KAC, the financial institutions party to the Post-Petition Credit Agreement, dated as of February 12, 2002, as amended, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.1 to Report onForm 10-Q for the quarterly period ended March 31, 2003, filed by KAC, File No. 1-9447).
     
   
 4.24 Extension and Modification of Waiver Letter with Respect to Post-Petition Credit Agreement, dated May 5, 2003, among KACC, KAC, the financial institutions party to the Post-Petition Credit Agreement, dated as of February 12, 2002, as amended, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.1 to Report onForm 10-Q for the quarterly period ended June 30, 2003, filed by KAC, File No. 1-9447).
     
   
 4.25 Fifth Amendment to Post-Petition Credit Agreement, dated June 6, 2003, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.2 to Report onForm 10-Q for the quarterly period ended June 30, 2003, filed by KAC, File No. 1-9447).
     
   
 4.26 Sixth Amendment to Post-Petition Credit Agreement, dated August 1, 2003, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.1 to the Report onForm 10-Q for the quarterly period ended September 30, 2003, filed by KAC, FileNo. 1-9447).
     
   
 4.27 Waiver Letter with Respect to Post-Petition Credit Agreement dated March 29, 2004, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.1 to Report onForm 10-Q for the quarterly period ended March 31, 2004, filed by KAC, File No. 1-9447).
     
   
 4.28 Waiver Letter with Respect to Post-Petition Credit Agreement dated May 21, 2004, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.1 to Report onForm 10-Q for the quarterly period ended June 30, 2004, filed by KAC, File No. 1-9447).
     

139

     
Exhibit
  
Number
 
Description
 
 4.29 Waiver Letter with Respect to Post-Petition Credit Agreement dated September 29, 2004, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.2 to Report onForm 10-Q for the quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).
     
   
 4.30 Seventh Amendment to Post-Petition Credit Agreement dated October 28, 2004, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.1 to Report onForm 10-Q for the quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).
     
   
 4.31 Secured Super-Priority Debtor-In-Possession Revolving Credit and Guaranty Agreement Among KAC, KACC and certain of their subsidiaries, as Borrowers, and certain Subsidiaries of KAC and KACC, as Guarantors, and certain financial institutions and JP Morgan Chase Bank, National Association, as Administrative Agent, dated as of February 11, 2005 (incorporated by reference to Exhibit 99.1 to Report onForm 8-K, dated as of February 11, 2005, filed by KAC, File No. 1-9447).
     
   
 4.33 First Amendment to Secured Super-Priority Debtor-In-Possession Revolving Credit and Guaranty Agreement (incorporated by reference to Exhibit 4.1 to the Report onForm 8-K, dated as of February 1, 2006, filed by KAC, File No. 1-9447).
     
   
 4.32 Intercompany Note dated as of December 21, 1989, between KAC and KACC (incorporated by reference to Exhibit 10.10 to the Report onForm 10-K for the period ended December 31, 1996, filed by MAXXAM Inc. (‘‘MAXXAM”), File No. 1-3924).
     
   
 4.34 Confirmation of Amendment of Non-Negotiable Intercompany Note, dated as of October 6, 1993, between KAC and KACC (incorporated by reference to Exhibit 10.11 to the Report onForm 10-K for the period ended December 31, 1996, filed by MAXXAM, File No. 1-3924).
     
   
 4.35 Amendment to Non-Negotiable Intercompany Note, dated as of December 11, 2000, between KAC and KACC (incorporated by reference to Exhibit 4.41 to the Report onForm 10-K for the period ended December 31, 2000, filed by KAC, File No. 1-9447).
     
   
 4.36 Senior Subordinated Intercompany Note between KAC and KACC dated February 15, 1994 (incorporated by reference to Exhibit 4.22 to the Report onForm 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447).
     
   
 4.37 Senior Subordinated Intercompany Note between KAC and KACC dated March 17, 1994 (incorporated by reference to Exhibit 4.23 to the Report onForm 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447). KAC has not filed certain long-term debt instruments not being registered with the Securities and Exchange Commission where the total amount of indebtedness authorized under any such instrument does not exceed 10% of the total assets of KAC and its subsidiaries on a consolidated basis. KAC agrees and undertakes to furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
     
   
 10.1 Form of indemnification agreement with officers and directors (incorporated by reference to Exhibit (10)(b) to the Registration Statement of KAC onForm S-4, FileNo. 33-12836).
     
   
 10.2 Tax Allocation Agreement, dated as of June 30, 1993, between KACC and KAC (incorporated by reference to Exhibit 10.3 to the Report onForm 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605).
     
   
    Executive Compensation Plans and Arrangements[Exhibits 10.3 — 10.26, inclusive]
     
   
 10.3 Kaiser 1997 Omnibus Stock Incentive Plan (incorporated by reference to Appendix A to the Proxy Statement, dated April 29, 1997, filed by KAC, File No. 1-9447).
     
   
 10.4 Non-Executive Chairman of the Boards Agreement, dated March 20, 2006, among KAC, KACC and George T. Haymaker, Jr. (incorporated by reference to Exhibit 10.1 to the Report onForm 8-K, dated March 20, 2006, filed by KAC, File No. 1-9447).
     
   
 10.5 Amended Employment Agreement, dated October 1, 2004, between KACC and Edward F. Houff (incorporated by reference to Exhibit 10.1 to the Report onForm 10-Q for the period ended September 30, 2004, filed by KAC, File No. 1-9447).
     

140

     
Exhibit
  
Number
 
Description
 
 10.6 Stock Option Grant pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to Jack A. Hockema (incorporated by reference to Exhibit 10.1 to the Report onForm 10-Q for the quarterly period ended September 30, 2000, filed by KAC, File No. 1-9447).
     
   
 10.7 Form of Deferred Fee Agreement between KAC, KACC, and directors of KAC and KACC (incorporated by reference to Exhibit 10 to the Report onForm 10-Q for the quarterly period ended March 31, 1998, filed by KAC, File No. 1-9447).
     
   
 10.8 Form of Non-Employee Director Stock Option Grant for options issued commencing January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Report onForm 10-Q for the quarterly period ended June 30, 2001, filed by KAC, File No. 1-9447).
     
   
 10.9 Form of Stock Option Grant for options issued commencing January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Report onForm 10-Q for the quarterly period ended June 30, 2001, filed by KAC, File No. 1-9447)
     
   
 10.10 Form of Restricted Stock Agreement for restricted shares issued commencing January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Report onForm 10-Q for the quarterly period ended June 30, 2001, filed by KAC, File No. 1-9447).
     
   
 10.11 The Kaiser Aluminum & Chemical Corporation Retention Plan, dated January 15, 2002 (the ‘‘January 2002 Retention Plan”) (incorporated by reference to Exhibit 10.35 to the Report onForm 10-K for the period ended December 31, 2001, filed by KAC, File No. 1-9447).
     
   
 10.12 The Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002) (incorporated by reference to Exhibit 10.26 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.13 Form of Retention Agreement for the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002) for John Barneson, Jack A. Hockema and Edward F. Houff (incorporated by reference to Exhibit 10.27 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.14 Form of Retention Agreement for the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002) for Certain Executive Officers including Kerry A. Shiba and Daniel D. Maddox (incorporated by reference to Exhibit 10.29 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.15 Kaiser Aluminum & Chemical Corporation Severance Plan (effective September 3, 2002) (incorporated by reference to Exhibit 10.30 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.16 Form of Severance Agreement for the Kaiser Aluminum & Chemical Corporation Severance Plan (effective September 3, 2002) for John Barneson, Jack A. Hockema, Edward F. Houff, Kerry A. Shiba and Daniel D. Maddox and Certain Other Executive Officers (incorporated by reference to Exhibit 10.31 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.17 Form of Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement for John Barneson, Jack A. Hockema and Edward F. Houff (incorporated by reference to Exhibit 10.32 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.18 Form of Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement for Kerry A. Shiba and Daniel D. Maddox and Certain Other Executive Officers (incorporated by reference to Exhibit 10.33 to the Report onForm 10-K for the period ended December 31, 2002, filed by KAC, File No. 1-9447).
     
   
 10.19 Description of KACC Short-Term Incentive Plan (incorporated by reference to Exhibit 10.20 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
     
   
 10.20 Description of KACC Long-Term Incentive Plan (incorporated by reference to Exhibit 10.21 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
     
   
 10.21 Settlement and Release Agreement dated October 5, 2004 by and among the Debtors and the Creditors’ Committee (incorporated by reference to Exhibit 10.2 to the Report onForm 10-Q for the period ended September 30, 2004, filed by KAC, File No. 1-9447).
     


141

     
Exhibit
  
Number
 
Description
 
 10.22 Amendment, dated as of January 27, 2005, to Settlement and Release Agreement dated as of October 5, 2004, by and among the Debtors and the Creditors’ Committee (incorporated by reference to Exhibit 10.23 to the Report onForm 10-K for the period ended December 31, 2004, filed by KAC, File No. 1-9447).
     
   
 10.23 Settlement Agreement dated October 14, 2004, between KACC and the Pension Benefit Guaranty Corporation (incorporated by reference to Exhibit 10.3 to the Report onForm 10-Q for the period ended September 30, 2004, filed by KAC, File No. 1-9447).
     
   
 10.24 Amended and Restated Non Exclusive Consulting Agreement between KACC and Edward F. Houff, dated January 23, 2006 (incorporated by reference to Exhibit 10.1 to the Report onForm 8-K, dated as of February 1, 2006, filed by KAC, File No. 1-9447)
     
   
 10.25 Release Agreement between KACC and Edward F. Houff, dated August 15, 2005 (incorporated by reference to the Report onForm 10-Q for the period ended June 30, 2005, filed by KAC, File No. 1-9447)
     
   
 10.26 Release between KACC and Kerry A. Shiba (incorporated by reference to Exhibit 10.1 to the Report onForm 8-K, dated as of March 14, 2006, filed by KAC, File No. 1-9447)
     
   
 *21  Significant Subsidiaries of KAC.
     
   
 *23.1 Consent of Independent Registered Public Accounting Firm.
     
   
 *23.2 Consent of Wharton Levin Ehrmantraut & Klein, P.A.
     
   
 *23.3 Consent of Heller Ehrman LLP.
     
   
 *31.1 Certification of Jack A. Hockema pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
   
 *31.2 Certification of Daniel D. Maddox pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
   
 *32.1 Confirmation of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
   
 *32.2 Confirmation of Daniel D. Maddox pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit
Number
Description
**10.282007 Form of Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed by the Company on April 5, 2007, FileNo. 000-52105).
**10.292007 Form of Executive Officer Option Rights Award Agreement (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed by the Company on April 5, 2007, File No. 000-52105).
*21Significant Subsidiaries of Kaiser Aluminum Corporation.
*23.1Consent of Independent Registered Public Accounting Firm.
*31.1Certification of Jack A. Hockema pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2Certification of Joseph P. Bellino pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1Certification of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2Certification of Joseph P. Bellino pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
*Filed herewithherewith.
**Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report onForm 10-K.


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