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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
At October 31, 2001, the registrant had 80,706,694 shares of Common Stock
outstanding.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
September 30, December 31,
2001 2000
---------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 212.1 $ 23.4
Receivables:
Trade, net 145.5 188.7
Other 151.0 241.1
Inventories 333.1 396.2
Prepaid expenses and other current assets 148.8 162.7
---------------- ---------------
Total current assets 990.5 1,012.1
Investments in and advances to unconsolidated affiliates 59.1 77.8
Property, plant, and equipment - net 1,228.5 1,176.1
Deferred income taxes 385.3 454.2
Other assets 700.9 622.9
---------------- ---------------
Total $ 3,364.3 $ 3,343.1
================ ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 166.2 $ 236.8
Accrued interest 24.3 37.5
Accrued salaries, wages, and related expenses 89.3 110.3
Accrued postretirement medical benefit obligation - current portion 58.0 58.0
Other accrued liabilities 257.0 288.9
Payable to affiliates 59.2 78.3
Long-term debt - current portion 206.4 31.6
---------------- ---------------
Total current liabilities 860.4 841.4
Long-term liabilities 805.1 703.7
Accrued postretirement medical benefit obligation 649.2 656.9
Long-term debt 698.7 957.8
Minority interests 116.0 101.1
Commitments and contingencies
Stockholders' equity:
Common stock .8 .8
Additional capital 538.7 537.5
Accumulated deficit (330.4) (454.3)
Accumulated other comprehensive income (loss) 25.8 (1.8)
---------------- ---------------
Total stockholders' equity 234.9 82.2
---------------- ---------------
Total $ 3,364.3 $ 3,343.1
================ ===============
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars, except share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
2001 2000 2001 2000
----------------------- --------------------
Net sales $ 430.3 $ 545.2 $1,357.4 $ 1,673.7
----------------------- --------------------
Costs and expenses:
Cost of products sold 397.3 469.7 1,260.6 1,429.9
Depreciation and amortization 23.1 19.8 66.6 59.0
Selling, administrative, research and development, and general 24.7 25.3 77.4 77.6
Labor settlement charge - 38.5 - 38.5
Non-recurring operating items 21.3 (10.9) (198.9) (22.5)
----------------------- --------------------
Total costs and expenses 466.4 542.4 1,205.7 1,582.5
----------------------- --------------------
Operating income (loss) (36.1) 2.8 151.7 91.2
Other income (expense):
Interest expense (27.2) (27.0) (82.2) (83.6)
Gain on sale of interest in QAL 163.6 - 163.6 -
Other - net 16.3 (4.9) (28.1) (1.3)
----------------------- --------------------
Income (loss) before income taxes and minority interests 116.6 (29.1) 205.0 6.3
(Provision) benefit for income taxes (49.4) 11.2 (83.9) (2.5)
Minority interests 1.2 1.1 2.8 2.1
----------------------- --------------------
Net income (loss) $ 68.4 $ (16.8) $ 123.9 $ 5.9
======================= ====================
Earnings (loss) per share:
Basic/Diluted $ .85 $ (.21) $ 1.55 $ .07
======================= ====================
Weighted average shares outstanding (000):
Basic 80,839 79,556 80,081 79,502
Diluted 80,840 79,556 80,082 79,505
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions of dollars)
For the Nine Months Ended September 30, 2000
Accumulated
Other
Common Additional Accumulated Comprehensive
Stock Capital Deficit Income (Loss) Total
-------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ .8 $ 536.8 $ (471.1) $ (1.2) $ 65.3
Net income/comprehensive income - - 5.9 - 5.9
Incentive plan accretion - .7 - - .7
-------------- -------------- -------------- ----------------- -----------
BALANCE, SEPTEMBER 30, 2000 $ .8 $ 537.5 $ (465.2) $ (1.2) $ 71.9
============== ============== ============== ================= ===========
For the Nine Months Ended September 30, 2001
Accumulated
Other
Common Additional Accumulated Comprehensive
Stock Capital Deficit Income (Loss) Total
-------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ .8 $ 537.5 $ (454.3) $ (1.8) $ 82.2
Net income - - 123.9 - 123.9
Cumulative effect of accounting
change, net of income tax
provision of $.5 - - - 1.8 1.8
Unrealized net gain on derivative
instruments arising during the
period, net of income tax provision
of $16.8 (including unrealized net
gain of $36.2, net of tax, for the
quarter ended September 30, 2001) - - - 28.8 28.8
Less reclassification adjustment for
realized net gain on derivative
instruments included in net income,
net of income tax provision of $1.0
(including realized net gain of $.3,
net of tax, for the quarter ended
September 30, 2001) - - - (3.0) (3.0)
Comprehensive income - - - - 151.5
Incentive plan and restricted stock
accretion - 1.2 - - 1.2
-------------- -------------- -------------- ----------------- -----------
BALANCE, SEPTEMBER 30, 2001 $ .8 $ 538.7 $ (330.4) $ 25.8 $ 234.9
============== ============== ============== ================= ===========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Nine Months Ended
September 30,
-----------------------
2001 2000
-----------------------
Cash flows from operating activities:
Net income $ 123.9 $ 5.9
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization (including deferred financing costs of $4.3 and $3.3) 70.9 62.3
Non-cash restructuring and impairment charges 20.7 17.4
Gains - sale of QAL interest and real estate (2001); real estate (2000) (169.3) (39.0)
Equity in (income) loss of unconsolidated affiliates, net of distributions 5.4 17.2
Minority interests (2.8) (2.1)
Decrease (increase) in trade and other receivables 135.9 (109.8)
Decrease in inventories 50.2 103.8
Decrease in prepaid expenses and other current assets 10.1 21.6
(Decrease) in accounts payable (associated with operating activities)
and accrued interest (56.1) (29.1)
(Decrease) increase in payable to affiliates and other accrued liabilities (9.6) 29.1
Increase (decrease) in accrued and deferred income taxes 41.3 (8.7)
Net cash impact of changes in long-term assets and liabilities 18.7 (27.2)
Other 6.4 12.6
-----------------------
Net cash provided by operating activities 245.7 54.0
-----------------------
Cash flows from investing activities:
Capital expenditures (including $70.6 and $159.0 related to Gramercy facility) (120.1) (196.5)
(Decrease) increase in accounts payable - Gramercy-related capital expenditures (29.9) 42.9
Gramercy-related property damage insurance recoveries - 73.0
Net proceeds from disposition of QAL interest, real estate and other 170.1 67.8
-----------------------
Net cash provided (used) by investing activities 20.1 (12.8)
-----------------------
Cash flows from financing activities:
Repayments under revolving credit facility, net (30.4) (10.4)
Repayments of other debt (41.2) (2.9)
Redemption of minority interests' preference stock (5.5) (2.6)
-----------------------
Net cash used by financing activities (77.1) (15.9)
-----------------------
Net increase in cash and cash equivalents during the period 188.7 25.3
Cash and cash equivalents at beginning of period 23.4 21.2
-----------------------
Cash and cash equivalents at end of period $ 212.1 $ 46.5
=======================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest of $3.3 and $3.7 $ 91.1 $ 93.2
Income taxes paid 41.6 9.6
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (In millions of dollars, except prices and
per share amounts)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM Inc.
("MAXXAM"). MAXXAM and one of its wholly owned subsidiaries together own
approximately 62% of the Company's Common Stock with the remaining approximately
38% publicly held. The Company operates through its subsidiary, Kaiser Aluminum
& Chemical Corporation ("KACC").
The foregoing unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, these financial statements do not include all
of the disclosures required by generally accepted accounting principles for
complete financial statements. These unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2000. In the opinion of management,
the unaudited interim consolidated financial statements furnished herein include
all adjustments, all of which are of a normal recurring nature, necessary for a
fair statement of the results for the interim periods presented.
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
operations.
Operating results for the quarter and nine-month periods ended September 30,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001.
Liquidity.
Near-Term Debt Maturities. KACC has significant near-term debt maturities,
including $177.4 (remaining principal amount outstanding as of October 31, 2001)
of its 9 7/8% Senior Notes due February 2002 (the "9 7/8% Senior Notes") and
$400.0 of 12 3/4% Senior Subordinated Notes due February 2003 (the "12 3/4%
Senior Subordinated Notes"). KACC's credit agreement, as amended (the "Credit
Agreement"), will expire December 15, 2001 unless it is extended, replaced or
renewed. As of October 31, 2001, KACC had approximately $190.0 of cash and cash
equivalents. See Note 5 for a discussion of the Company's and KACC's plans with
respect to such near-term debt maturities.
Cash Flow, Other than Near-Term Debt Maturities. KACC's ability to make payments
on, retire or refinance its debt depends on its ability to generate cash in the
future. In addition to being impacted by normal operating items, the Company's
and KACC's near-term liquidity and cash flows will be negatively affected by the
restart of the Gramercy facility, until it reaches its full production level and
full efficiency, and net payments for asbestos-related liabilities. For a
discussion of these matters, see Notes 2 and 7.
Absent an improvement in the markets in which KACC operates or faster than
expected improvement in the operating performance of the Gramercy refinery (as a
result of its completion) and other facilities (as a result of the Company's
performance improvement initiative), KACC's operations and working capital and
other commitments (before considering near-term debt maturities), including
interest and expected tax payments, the funding of pension, post- retirement
medical and net asbestos-related liabilities, capital spending and other
previously accrued obligations, may cause near-term cash flows to be negative.
The Company expects KACC's cash flow in mid-2002 to improve substantially over
expected near-term cash flows as a result of the Gramercy alumina refinery
reaching its full operating rate and full efficiency, operating improvements
resulting from KACC's performance improvement initiative and as certain of its
other previously accrued, non-recurring, near-term obligations are satisfied.
However, such changes are subject to prevailing market and economic conditions
and, as such, no assurances can be given in this regard.
Possible Year-End Financial Statement Item. The assets of the KACC sponsored
pension plans, like numerous other companies' plans, are, to a substantial
degree, invested in the capital markets and managed by a third party. Given the
year-to-date performance of the stock market, it is likely that, barring a
material improvement in the stock market during the fourth quarter of 2001, the
Company will be required to reflect a significant additional minimum pension
liability in its year-end financial statements as a result of a decline in the
value of the assets held by KACC's pension plans. Minimum pension liability
adjustments are non-cash adjustments that are reflected as an increase in
pension liability and an offsetting charge to stockholders' equity (net of
income tax) through comprehensive income (rather than net income). The ultimate
amount of such additional adjustment cannot be determined until year-end 2001.
However, based on stock market performance through September 30, 2001, the
Company estimates that such amount could be in the $25.0 to $50.0 range. The
Company also anticipates that the decline in the value of the pension plans'
assets will unfavorably impact pension costs reflected in its 2002 operating
results. However, absent a decision by the Company to increase its contributions
to the pension plans as a result of the recent asset performance, such asset
performance is not expected to have a material impact on the Company's near-
term liquidity as pension funding requirements generally allow for such impacts
to be spread over multiple years. Increases in post-2002 pension funding
requirements could occur, however, if capital market performance in future
periods does not more closely approximate the long-term rate of return assumed
by the Company, and the amount of such increases could be material.
Earnings per Share.
Basic. Earnings per share is computed by dividing net income by the weighted
average number of shares of Common Stock outstanding during the period.
Diluted. The impact of outstanding stock options was excluded from the
computation of Diluted loss per share for the quarter ended September 30, 2000,
as its effect would be antidilutive. Diluted earnings per share for the quarter
ended September 30, 2001 and the nine-month periods ended September 30, 2001 and
2000 include the dilutive effect of outstanding stock options (21,000, 20,000
and 35,000 shares, respectively).
Restricted Common Stock. During June and July 2001, KACC completed an exchange
with certain employees who held stock options to purchase the Company's common
stock whereby a total of approximately 3,617,000 options were exchanged (on a
fair value basis) for approximately 1,086,000 restricted shares of the Company's
common stock. The fair value of the restricted shares issued is being amortized
to expense over the three-year period during which the restrictions lapse.
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 and
the Company's boards of directors. Hedging transactions are executed centrally
on behalf of all of KACC's business segments to minimize transaction costs,
monitor consolidated net exposures and allow for increased responsiveness to
changes in market factors.
Pre-2001 Accounting. Accounting guidelines in place through December 31, 2000,
provided that any interim fluctuations in option prices prior to the settlement
date were deferred until the settlement date of the underlying hedged
transaction, at which time they were recorded in net sales or cost of products
sold (as applicable) together with the related premium cost. No accounting
recognition was accorded to interim fluctuations in prices of forward sales
contracts. Hedge (deferral) accounting would have been terminated (resulting in
the applicable derivative positions being marked-to- market) if the level of
underlying physical transactions ever fell below the net exposure hedged. This
did not occur in 2000.
Current Accounting. Effective January 1, 2001, the Company began reporting
derivative activities pursuant to Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires companies to recognize all derivative instruments as
assets or liabilities in the balance sheet and to measure those instruments at
fair value by "marking-to-market" all of their hedging positions at each
period-end (see Note 8). This contrasts with pre-2001 accounting principles,
which generally only required certain "non-qualifying" hedging positions to be
marked-to-market. Changes in the market value of the Company's open hedging
positions resulting from the mark-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. Under SFAS No. 133, these changes are recorded as an increase or
reduction in stockholders' equity through either other comprehensive income or
net income, depending on the facts and circumstances with respect to the hedge
and its documentation. To the extent that changes in market values of the
Company's hedging positions are initially recorded in other comprehensive
income, such changes reverse out of other comprehensive income (offset by any
fluctuations in other "open" positions) and are recorded in net income (included
in net sales or cost of products sold, as applicable) when the subsequent
physical transactions occur. Additionally, under SFAS No. 133, 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, the
mark-to-market changes on such excess hedges would be recorded in the income
statement rather than in other comprehensive income. This did not occur in the
first nine months of 2001.
Differences between comprehensive income and net income, which have historically
been small, may become significant in future periods as a result of SFAS No.
133. In general, SFAS No. 133 will result in material fluctuations in
comprehensive income and stockholders' equity 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.
SFAS No. 133 requires that, as of the date of the initial adoption, the
difference between the market value of derivative instruments recorded on the
Company's consolidated balance sheet and the previous carrying amount of those
derivatives be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. Based
on authoritative accounting literature issued during the first quarter of 2001,
it was determined that all of the cumulative impact of adopting SFAS No. 133
should be recorded in other comprehensive income. Based on the applicable prices
and exchange rates in effect at the adoption date, a pre-tax charge of
approximately $1.3 is expected to be reclassified from accumulated other
comprehensive income to net income during 2001.
Future Accounting Requirements. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, Accounting For Asset
Retirement Obligations ("SFAS No. 143"), in 2001. SFAS No. 143 must be adopted
by the Company effective January 1, 2003. The Company does not expect the
adoption of SFAS No. 143 to have a material effect on its financial statements.
2. INCIDENT AT GRAMERCY FACILITY
Initial production at KACC's Gramercy, Louisiana alumina refinery, which had
been curtailed since July 1999 as a result of an explosion in the digestion area
of the plant, commenced during the middle of December 2000. Construction at the
facility was substantially completed during the third quarter of 2001. The plant
operated at approximately 78% of its newly-rated estimated annual capacity of
1,250,000 tons during the third quarter of 2001. Subsequent to September 30,
2001, the plant has regularly operated at a rate equal to or greater than 90% of
its newly-rated estimated capacity. Based on current estimates, the facility is
expected to reach its full operating rate and full efficiency by the end of 2001
or early 2002.
During the quarter and nine-month periods ended September 30, 2001, abnormal
Gramercy-related start-up costs totaled approximately $13.9 and $54.9,
respectively. These abnormal costs resulted from operating the plant in an
interim mode pending the completion of construction. The Company's and KACC's
future operating results will continue to be adversely affected until the
Gramercy plant is operating at its intended production rate and at full
efficiency.
As of September 30, 2001, KACC had collected $304.5 of insurance recoveries
related to the property damage, business interruption and clean-up and site
preparation aspects of the Gramercy incident. During July 2001, KACC and its
insurers reached a global settlement agreement in respect of all of KACC's
business interruption and property damage claims under which KACC: (a) received
an additional $35.0 during the third quarter of 2001 related to losses/costs
incurred prior to June 30, 2001; and (b) will receive an agreed allocation from
any recoveries that may result from joint actions against certain third parties.
As a result of the settlement, KACC recognized $15.2 of additional insurance
benefit (as a reduction of Bauxite and alumina business unit's cost of products
sold) in the second quarter of 2001. In October 2001, settlements were reached
in certain (but not all) of the joint actions by KACC and its insurers. Under
the terms of the joint action agreement, as well as the prior agreement between
KACC and its insurers, KACC will receive an additional approximately $30.0,
during the fourth quarter of 2001, in respect of its share of third quarter 2001
and prior period costs from the Gramercy incident. Accordingly, KACC recorded
$21.4 of additional insurance benefit (as a reduction of Bauxite and alumina
business unit's cost of products sold) during the third quarter of 2001 after
deducting offsetting costs and receivable amounts. Additional recoveries may
result from the remaining joint actions. However, KACC cannot predict the
likelihood or timing of any such incremental recoveries.
The incident at the Gramercy facility resulted in a significant number of
individual and class action lawsuits being filed against KACC and others,
alleging, among other things, property damage, business interruption losses by
other businesses and personal injury. The aggregate amount of damages sought in
the lawsuits and other claims cannot be determined at this time; however, KACC
does not currently believe the damages will exceed the amount of coverage under
its liability policies.
See Note 2 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2000 for additional information regarding
the Gramercy incident.
3. INVENTORIES
The classification of inventories is as follows:
September 30, December 31,
2001 2000
------------------------------
Finished fabricated aluminum products $ 47.3 $ 54.6
Primary aluminum and work in process 87.5 126.9
Bauxite and alumina 93.2 88.6
Operating supplies and repair and maintenance parts 105.1 126.1
------------------------------
Total $ 333.1 $ 396.2
==============================
Substantially all product inventories are stated at last-in, first-out (LIFO)
cost, not in excess of market. Replacement cost is not in excess of LIFO cost.
Inventories at September 30, 2001, have been reduced by (a) a $5.6 charge (in
Other non-recurring operating items - see Note 10) to write-down certain excess
operating supplies and repair and maintenance parts that will be sold, rather
than used in production, as part of the Company's performance improvement
initiative to generate one-time cash and (b) $5.0 LIFO inventory charges (in
cost of products sold) as reductions of inventory volumes were in inventory
layers with higher costs than current market prices. Additional LIFO charges in
future periods are possible.
4. PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL
Power Sales. During the first six months of 2001, KACC, in a series of
transactions, sold a substantial majority of the remaining power available for
its Northwest smelters that it had under contract through September 2001 and
recorded net pre-tax gains of approximately $222.7. The gains were net of
approximately $33.0 of employee-related expenses and other fixed or incremental
costs associated with the continuing curtailment of its Northwest smelters.
During the third quarter of 2001, KACC sold the remaining Northwest power that
it had under contract resulting in net pre-tax gains of approximately $6.5 which
have been recorded in Other non-recurring operating items (see Note 10).
Approximately $321.0 of power proceeds were received during the first nine
months of 2001 ($88.0 related to 2000 power sales and the balance related to
2001 power sales). The balance of the power proceeds from sales of power
(approximately $26.5) will be received during the fourth quarter of 2001.
Future Power Supply and its Impact on Future Operating Rate. During October
2000, KACC signed a new power contract with the Bonneville Power Administration
("BPA") under which the BPA, starting October 1, 2001, is to provide KACC's
operations in the State of Washington with approximately 290 megawatts of power
through September 2006. The contract will provide KACC with sufficient power to
fully operate KACC's Trentwood facility (which requires up to an approximate 40
megawatts) as well as approximately 40% of the combined capacity of KACC's Mead
and Tacoma aluminum smelting operations. The BPA has announced that it currently
intends to set rates under the contract in six month increments. The rate for
the initial period (from October 1, 2001 through March 31, 2002) was announced
by the BPA in June 2001 and is approximately 46% higher than power costs under
the prior contract. KACC cannot predict what rates will be charged in future
periods. Such rates will be dependent on such factors as the availability of and
demand for electrical power, which are largely dependent on weather, the price
for alternative fuels, particularly natural gas, as well as general and regional
economic and ecological factors. The contract also includes a take-or-pay
requirement and clauses under which KACC's power allocation could be curtailed,
or its costs increased, in certain instances. Under the contract, KACC can only
remarket its power allocation to reduce or eliminate take-or-pay requirements.
KACC is not entitled to receive any profits from any such remarketing efforts.
During October 2001, KACC and the BPA reached an agreement whereby: (a) KACC
retained its rights to restart its smelter operations at any time; (b) KACC
would not be obligated to pay for potential take-or-pay obligations in the first
year of the contract; and (c) in return for the foregoing, KACC granted the BPA
certain limited power interruption rights in the first year of the contract if
KACC is operating its Northwest smelters. The BPA and KACC separately agreed
that capital spending in respect of the Gramercy refinery was consistent with
the contractual provisions of the prior contract with respect to the use of
power sale proceeds.
Subject to the limited interruption rights granted to the BPA (described above),
KACC has sufficient power under contract, and retains the ability, to restart up
to 40% (4.75 potlines) of its Northwest smelting capacity. Were KACC to want to
restart additional capacity (in excess of 4.75 potlines), it would have to
purchase additional power from the BPA or other suppliers. For KACC to make such
a decision, it would have to be able to purchase such power at a reasonable
price in relation to current and expected market conditions for a sufficient
term to justify its restart costs. Given recent primary aluminum prices and the
forward price of power in the Northwest, it is unlikely that KACC would operate
more than a portion of its Northwest smelting capacity in the near future. Were
KACC to restart all or a portion of its Northwest smelting capacity, it would
take between three to six months to reach the full operating rate for such
operations, depending upon the number of lines restarted. Even after achieving
the full operating rate, operating only a portion of the Northwest capacity
would result in production/cost inefficiencies such that operating results
would, at best be breakeven to modestly negative at long-term primary aluminum
prices. However, operating at such a reduced rate could, depending on prevailing
economics, result in improved cash flows as opposed to remaining curtailed and
incurring the Company's fixed and continuing labor and other costs. This is
because KACC is contractually liable for certain severance, supplemental
unemployment benefits and early retirement benefits for laid-off workers under
KACC's contract with the United Steelworkers of America ("USWA") during periods
of curtailment. As of September 30, 2001, all such contractual compensation
costs have been accrued for all USWA workers in excess of those expected to be
required to run the Northwest smelters at a rate up to the above stated 40%
smelter operating rate. These costs are expected to be incurred periodically
through September 2002. Costs associated with the USWA workers that KACC
estimates would be required to operate the smelters at an operating rate of up
to 40% have been accrued through December 31, 2001, as KACC does not currently
expect to restart the Northwest smelters prior to that date given recent prices
for primary aluminum. If KACC does not restart and begin operating the smelters
at an operating rate of up to 40% beginning January 2002, it could become liable
for additional supplemental unemployment benefits for these workers.
Additionally, if such workers are not recalled prior to early 2003, KACC could
become liable for additional early retirement costs. Such costs could be
significant and would adversely impact the Company's operating results and
liquidity.
5. DEBT
Current Maturities and Liquidity. The Company and KACC have a Credit Agreement,
which provides a secured, revolving line of credit. In October 2001, the
expiration date of the Credit Agreement was extended from November 2, 2001 to
December 15, 2001. The extension provides KACC with additional flexibility while
it continues its ongoing work on a longer-term solution for near-term debt
maturities.
KACC is able to utilize the Credit Agreement by means of revolving credit
advances or letters of credit (up to $125.0) in an aggregate amount equal to the
lesser of $300.0 or a borrowing base relating to eligible accounts receivable
and eligible inventory. At September 30, 2001, $184.8 (of which $95.4 could have
been used for letters of credit) was available to KACC under the Credit
Agreement and no amounts were outstanding under the revolving credit facility.
Interest on any outstanding amounts bear a spread (which varies based on the
results of a financial test) over either a base rate or LIBOR, at KACC's option.
KACC typically chooses base rate based borrowings for shorter term Credit
Agreement uses and LIBOR based loans for more extended Credit Agreement uses.
The average interest rate on loans outstanding under the Credit Agreement during
the first nine months of 2001 was approximately 10.0% per annum. As of October
31, 2001, there were no revolving credit borrowings outstanding under the Credit
Agreement. At October 31, 2001, outstanding letters of credit were approximately
$28.4.
The Company and KACC intend to extend, replace or renew the Credit Agreement
prior to its expiration. However, in order for the Credit Agreement to be
extended, on a short-term basis, beyond December 2001, KACC will have to have a
demonstrable way to retire the maturity of the remaining amount of 9 7/8% Senior
Notes ($177.4 principal amount as of October 31, 2001). For the Credit Agreement
to be extended past February 2003, both the 9 7/8% Senior Notes and the $400.0
of 12 3/4% Senior Subordinated Notes will have to be retired and/or refinanced.
It is possible that KACC may use a portion of the availability under the Credit
Agreement (or any extension, replacement or renewal thereof) together with other
cash resources to retire the 9 7/8% Senior Notes. As of September 30, 2001, KACC
had purchased $18.8 of the 9 7/8% Senior Notes. The net gain from the purchase
of the notes was less than $.1 and has been included in Other income (expense).
As of October 31, 2001, KACC had purchased $47.6 of the 9 7/8% Senior Notes at a
modest net gain. As of October 31, 2001, KACC had approval from the Credit
Agreement lenders to spend up to an aggregate of $100.0 to purchase the 9 7/8%
Senior Notes.
As previously announced, the Company is working with financial advisors to
review its options for addressing its near- term debt maturities and its overall
capital structure. The Company expects to provide additional information with
respect to its plan to deal with its near-term maturities before the expiration
of the Credit Agreement term. While the Company believes it will be successful
in addressing its near-term debt maturities and overall capital structure, no
assurances in this regard can be given. While the Company continues to consider
potential asset transactions (beyond the September 2001 sale of an 8.3% interest
in QAL), the Company intends to pursue only those transactions that would create
long-term value through strategic positioning and/or the generation of
acceptable levels of earnings or cash. The Company cannot predict if any such
transactions will materialize.
In connection with the above-mentioned extension of the Credit Agreement, KACC
has agreed to hold half (approximately $79.5) of the proceeds received from the
sale of an 8.3% interest in Queensland Alumina Limited ("QAL") (see Note 9) in a
separate bank account until the earlier of (1) lender approval, (2) December 15,
2001, or (3) renewal or further extension of the Credit Agreement.
Alpart CARIFA Loans. During the first quarter of 2001, Alumina Partners of
Jamaica ("Alpart"; of which KACC owns 65%) redeemed $34.0 principal amount of
the Caribbean Basin Projects Financing Authority loans. KACC and its partner in
Alpart both funded their respective share of the redemption. The redemption had
a modest beneficial effect on the unused availability remaining under the Credit
Agreement as the additional Credit Agreement borrowings of $22.1 required for
KACC's share of the redemption were more than offset by a reduction in the
amount of letters of credit outstanding that supported the loan.
6. CUMULATIVE PREFERENCE STOCK
In connection with the settlement of the labor dispute with the USWA, during
March 2001, KACC redeemed all of its outstanding Cumulative (1985 Series A)
Preference Stock and Cumulative (1985 Series B) Preference Stock ($17.5 at
December 31, 2000). The net cash impact of the redemption on KACC was only
approximately $5.5 because approximately $12.0 of the redemption amount had
previously been funded into redemption funds.
7. CONTINGENCIES
Environmental Contingencies. The Company and KACC are subject to a number of
environmental laws, to fines or penalties assessed for alleged breaches of such
environmental laws, and to claims and litigation based upon such laws. KACC
currently is subject to a number of claims under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for remedial costs
at certain third-party sites listed on the National Priorities List under
CERCLA.
Based on the Company's evaluation of these and other environmental matters, the
Company has established environmental accruals, primarily related to potential
solid waste disposal and soil and groundwater remediation matters. During the
quarter and nine-month periods ended September 30, 2001, KACC's ongoing
assessment process resulted in KACC recording charges of $1.0 and $9.0,
respectively, to increase its environmental accrual. Additionally, KACC's
environmental accruals were increased during the nine-month period ended
September 30, 2001 by approximately $6.0 in connection with the purchase of
certain property. At September 30, 2001, the balance of the Company's accruals
for these and other matters, which are primarily included in Long-term
liabilities, totaled $58.7. 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 actions to be taken. The Company
expects that these remediation actions will be taken over the next several years
and estimates that annual expenditures to be charged to these environmental
accruals will be approximately $4.0 to $13.0 for the years 2001 through 2005 and
an aggregate of approximately $24.0 thereafter.
As additional facts are developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are established or
alternative technologies are developed, changes in these and other factors may
result in actual costs exceeding the current environmental accruals. The Company
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $20.0. As the resolution of these matters
is subject to further regulatory review and approval, no specific assurance can
be given as to when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However, the Company is
currently working to resolve certain of these matters.
The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is actively pursuing claims
in this regard. No assurances can be given that KACC will be successful in its
attempts to recover incurred or future costs from insurers or that the amount of
recoveries received will ultimately be adequate to cover costs incurred.
While uncertainties are inherent in the final outcome of these environmental
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 should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Asbestos Contingencies. KACC is a defendant in a number of lawsuits, some of
which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with 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.
The following table presents the changes in the number of such claims pending
for the nine months ended September 30, 2001 and the year ended December 31,
2000.
Nine Months Year Ended
Ended December 31,
September 30, 2001 2000
-------------------- --------------------
Number of claims at beginning of period 110,800 100,000
Claims received 27,300 30,600
Claims settled or dismissed (25,700) (19,800)
-------------------- --------------------
Number of claims at end of period 112,400 110,800
==================== ====================
Number of claims at end of period (included above)
covered by agreements under which KACC expects
to settle over an extended period 72,900 66,900
==================== ====================
The Company maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through the comparable period in 2011). The Company's estimate is based
on the Company's view, at each balance sheet date, of the current and an
anticipated number of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A.,
with respect to the current state of the law related to asbestos claims.
However, there are inherent uncertainties involved in estimating
asbestos-related costs and the Company's actual costs could exceed the Company's
estimates due to changes in facts and circumstances after the date of each
estimate. Further, while the Company does not presently believe there is a
reasonable basis for estimating asbestos-related costs beyond 2011 and,
accordingly, no accrual has been recorded for any costs which may be incurred
beyond 2011, the Company expects that such costs are likely to continue beyond
2011, and that such costs could be substantial.
The Company believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos- related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
certain carriers exist. The timing and amount of future recoveries from these
and other insurance carriers will depend on the pace of claims review and
processing by such carriers and on the resolution of any disputes regarding
coverage under such policies. The Company believes that substantial recoveries
from the insurance carriers are probable. The Company reached this conclusion
after considering its prior insurance-related recoveries in respect of
asbestos-related claims, existing insurance policies, and the advice of Heller
Ehrman White & McAuliffe LLP with respect to applicable insurance coverage
law relating to the terms and conditions of those policies. During 2000, KACC
filed suit against a group of its insurers, after negotiations with certain of
the insurers regarding an agreement covering both reimbursement amounts and the
timing of reimbursement payments were unsuccessful. During October 2001, the
court ruled favorably on a number of issues. The rulings did not result in any
change to the Company's estimates of its current or future asbestos-related
insurance recoveries. Additional issues may be heard by the court from time to
time. Given the significance of expected asbestos-related payments in 2001 and
2002 based on settlement agreements in place at September 30, 2001, the receipt
of timely and appropriate reimbursements from such insurers is critical to
KACC's liquidity.
The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:
September 30, December
2001 31, 2000
-------------- ----------------
Liability (current portion of $130.0 in both periods) $ 633.1 $ 492.4
Receivable (included in Other assets)(1) 501.1 406.3
-------------- ----------------
$ 132.0 $ 86.1
============== ================
(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. As of September 30, 2001 and December 31,
2000, $25.6 and $36.9, respectively, of the receivable amounts relate to
costs paid by KACC. The remaining receivable amounts relate to costs that
are expected to be paid by KACC in the future. No assurances can be given
that KACC will be able to project similar recovery percentages for
additional asbestos-related liabilities recognized in future periods or
that the amounts related to any such additional asbestos-related
liabilities will not ultimately exceed KACC's aggregate insurance
coverage.
Nine Months
Ended Inception
September 30, 2001 To Date
-------------------- ---------------
Payments made, including related legal costs.............................. $ 86.9 $ 307.4
Insurance recoveries...................................................... 77.3 208.6
-------------------- ---------------
$ 9.6 $ 98.8
==================== ===============
As of September 30, 2001
------------------------------------------------------
2001 and 2003 to
2002 2005 Thereafter
--------------- ------------- ----------
Expected annual payment amounts, before
considering insurance recoveries........................... $125.0 - $150.0 $50.0 - $75.0 $290.0
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. This process resulted in the Company recording
charges of $53.3 (included in Other income (expense) - see Note 10) in the nine-
month period ended September 30, 2001, respectively, for asbestos-related
claims, net of expected insurance recoveries, based on recent cost and other
trends experienced by KACC and other companies. While uncertainties are inherent
in the final outcome of these asbestos matters and it is presently impossible to
determine the actual costs that ultimately may be incurred and insurance
recoveries that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos- related costs net
of related insurance recoveries should not have a material adverse effect on the
Company's consolidated financial position or liquidity. However, as the
Company's estimates are periodically re-evaluated, additional charges may be
necessary and such charges could be material to the results of the period in
which they are recorded.
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
believes 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. Legal briefs must still be filed by all parties. A decision
is not expected until sometime after the first quarter of 2002. Any outcome from
the trial before the administrative law judge would be subject to additional
appeals by the general counsel of the NLRB, the USWA or KACC. This process could
take months or years. If these proceedings eventually result in a final ruling
against KACC with respect to either allegation, it could be obligated to provide
back pay to USWA members at the five plants for an approximate twenty-month
period (plus interest and minus any wages the USWA workers earned during the
twenty-month period). Such amounts could be material. However, the Company
continues to believe that the charges are without merit. While uncertainties are
inherent in matters such as this and it is presently impossible to determine the
actual costs, if any, that may ultimately arise in connection with this matter,
the Company does not believe that the ultimate outcome of this matter will have
a material adverse impact on the Company's liquidity or financial position.
However, amounts paid, if any, in satisfaction of this matter could be
significant to the results of the period in which they are recorded.
Other Contingencies. The Company or KACC is involved in various other claims,
lawsuits, and other proceedings relating to a wide variety of matters. 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.
See Note 12 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2000.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
In conducting its business, KACC uses various instruments to manage the risks
arising from fluctuations in aluminum prices, energy prices and exchange rates.
KACC enters into hedging transactions 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, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments to foreign subsidiaries and
affiliates.
As KACC's hedging activities are generally designed to lock-in a specified price
or range of prices, realized gains or losses on the derivative contracts
utilized in these hedging activities (except the impact of those contracts
discussed below which have been marked-to-market) will generally offset at least
a portion of any losses or gains, respectively, on the transactions being
hedged. See Note 1 for a discussion of the effects of the new accounting
requirements under SFAS No. 133, which is being used for reporting results
beginning with the first quarter of 2001. The following table summarizes KACC's
material derivative hedging positions at September 30, 2001:
Estimated %
Notional of Annual Carrying/
Amount of Sales/Purchases Market
Commodity Period Contracts Hedged Value
- -------------------------------------- ------------------ --------------- ----------------- ---------------
Aluminum (in tons*) -
Option contracts and swaps 10/01 to 12/01 115,000 94% $ 15.0
Option contracts and swaps 2002 333,000 68% 54.7
Option contracts 2003 90,000 17% 15.3
Energy -
Natural gas (in MMBtus per day):
Option contracts and swaps 10/01 to 3/02 23,000 57% (2.8)
Fuel Oil (in barrels per month):
Option contracts and swaps 10/01 to 12/01 150,000 65% .6
Australian dollars (average A$ per
month) -
Forwards and option contracts 10/01 to 12/01 A$ 11.4 100% (.3)
Option contracts 2002 to 2005 A$ 7.5 70% 3.6
- ---------------------------
* All references to tons in this report refer to metric tons of 2,204.6 pounds.
During the first quarter of 2001, market value changes in derivative hedging
positions included in the above table resulted in benefits to earnings (included
in Other income (expense)) of $6.8 (see Note 10). Based on new accounting
literature released in April 2001, starting in the second quarter of 2001, the
income statement impact of mark-to-market changes was essentially eliminated as
unrealized gains or losses resulting from changes in the value of these hedges
are now recorded in other comprehensive income (see Note 1).
During late 1999 and early 2000, KACC contracted with a counterparty to receive
certain fixed prices on 4,000 tons of primary aluminum per month over a three
year period commencing October 2001, unless market prices declined below a
stipulated "floor" price, in which case the fixed price sales portion of the
transactions terminate. These transactions do not qualify for treatment as a
"hedge" under previous or current accounting guidelines. During September 2001,
as a result of prevailing primary aluminum prices, approximately 40% of the
volumes attributable to periods after December 2001 terminated. The
mark-to-market impacts of the terminated and continuing portions of these
transactions, together with the $6.8 discussed above, are recorded in Other
income (expense) in the Company's statements of consolidated income (loss) (see
Note 10). In October 2001, KACC reached an agreement with the counterparty
terminating the transaction. This will result in the recognition of
approximately $3.0 of mark-to-market income during the fourth quarter of 2001.
As of September 30, 2001, KACC had sold forward substantially all of the alumina
available to it in excess of its projected internal smelting requirements for
the balance of 2001 and for 2002 and 2003 at prices indexed to future prices of
primary aluminum.
9. SALE OF 8.3% INTEREST IN QAL
In September 2001, KACC sold an approximate 8.3% interest in QAL and recorded a
pre-tax gain of approximately $163.6 (included in Other income/(expense) in the
accompanying condensed consolidated statements of income (loss)). The total
value of the transaction was approximately $189.0, consisting of a cash payment
of approximately $159.0 plus the purchaser's assumption of approximately $30.0
of off-balance sheet QAL indebtedness currently guaranteed by KACC. As a result
of the transaction, KACC now owns a 20% interest in QAL.
QAL, which is located in Queensland, Australia, owns one of the largest and most
competitive alumina refineries in the world. KACC's share of QAL's production
for the first eight months of 2001 and for the year 2000 was approximately
668,000 tons and 1,064,000 tons, respectively. Had the sale of the QAL interest
been effective as of the beginning of 2000, KACC's share of QAL's production for
the first nine months of 2001 and for the year 2000 would have been reduced by
approximately 196,000 tons and 312,000 tons, respectively. Historically, KACC
has sold about half of its share of QAL's production to third parties and has
used the remainder to supply its Northwest smelters, which are temporarily
curtailed (see Note 4). The reduction in KACC's alumina supply associated with
this transaction is expected to be substantially offset by the expected return
of its Gramercy alumina refinery to full operations by the end of 2001 or early
2002 at a higher capacity and, as recently announced, by planned increases in
capacity at its Alpart alumina refinery in Jamaica. The QAL transaction is not
expected to have an adverse impact on KACC's ability to satisfy existing
third-party alumina customer contracts.
10. NON-RECURRING ITEMS
Non-Recurring Operating Items. The income (loss) impact associated with
non-recurring operating items for the quarter and nine-month periods ended
September 30, 2001 and 2000, was as follows (the business segment to which the
item is applicable is indicated):
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2001 2000 2001 2000
----------------------- ----------------------
Net gains from power sales (Primary Aluminum) (Note 4) $ 6.5 $ 40.5 $ 229.2 $ 56.3
Restructuring charges -
Bauxite & Alumina (7.9) - (9.9) -
Primary Aluminum (5.4) (3.1) (5.4) (3.1)
Flat-Rolled Products (10.7) - (10.7) -
Corporate (.5) (2.0) (1.0) (5.5)
Contractual labor costs related to smelter curtailment (Primary
Aluminum) (Note 4) (3.3) - (3.3) -
Incremental maintenance spending (Bauxite & Alumina) - (11.5) - (11.5)
Impairment charge associated with product line exit -
Flat-Rolled Products - (9.0) - (9.0)
Engineered Products - (4.0) - (4.7)
----------- ----------- --------- ----------
$ (21.3) $ 10.9 $ 198.9 $ 22.5
=========== =========== ========= ==========
In May 2001, the Company announced that it had launched a performance
improvement initiative (the "program") designed to increase operating cash flow,
generate benefits and improve the Company's financial flexibility. During the
third quarter of 2001, these initiatives resulted in restructuring charges
totaling $14.1 for employee benefit and related costs for a group of
approximately 125 salaried job eliminations. As of September 30, 2001,
approximately half of the positions had been eliminated. It is anticipated that
the remaining job eliminations will occur during the fourth quarter of 2001 or
the first quarter of 2002. Approximately $4.0 of the costs are cash costs to be
incurred over the next several quarters. The balance are benefit costs that will
be funded over longer periods. The program also resulted in a third quarter 2001
inventory charge of $5.6 (see Note 3). In addition, third party costs of $7.3
(of which $4.8 was recorded in the third quarter) were incurred in connection
with the program. Additional cash and non-cash charges may be required in the
future as the program continues. Such additional charges could be material.
As of September 30, 2001, substantially all of the previous job eliminations
associated with the 2000 Primary aluminum and Corporate segments' efficiency
initiatives have occurred.
See Note 6 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2000 for discussions of incremental
maintenance spending and impairment charges associated with line exits in 2000.
Other Income (Expense). Amounts included in other income (expense), other than
interest expense, for the quarter and nine-month periods ended September 30,
2001 and 2000, included the following pre-tax gains (losses):
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------
Mark-to-market gains (Note 8) $ 13.9 $ .9 $ 32.3 $ 9.6
Asbestos-related charges (Note 7) - (43.0) (53.3) (43.0)
Gains on sale of real estate 5.7 22.0 5.7 22.0
Adjustment to environmental liabilities (1.0) - (9.0) -
MetalSpectrum investment write-off - - (2.8) -
Lease obligation adjustment - 17.0 - 17.0
------------- ------------ ------------ ------------
Special items, net 18.6 (3.1) (27.1) 5.6
All other, net (2.3) (1.8) (1.0) (6.9)
------------- ------------ ------------ ------------
$ 16.3 $ (4.9) $ (28.1) $ (1.3)
============= ============ ============ ============
As part of its ongoing initiatives to generate cash benefits, KACC sold certain
non-operating real estate during the third quarter of 2001 for net proceeds
totaling approximately $6.7, resulting in a gain of $5.7.
During the quarter and nine-month periods ended September 30, 2001, KACC
recorded adjustments to environmental liabilities of $1.0 and $9.0,
respectively, as a result of its ongoing assessment of the estimated costs
reasonably expected to be incurred to remediate non-operating properties. See
Note 7 for additional information regarding environmental contingencies.
In June 2001, the Company wrote-off its investment of $2.8 in MetalSpectrum LLC,
a start-up, e-commerce entity in which the Company was a partner. MetalSpectrum
ceased operations and was dissolved during the second quarter of 2001.
See Note 1 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2000, for discussions of gains on sale of
real estate and the lease obligation adjustment in 2000.
11. INTERIM OPERATING SEGMENT INFORMATION
The Company uses a portion of its bauxite, alumina and primary aluminum
production for additional processing at its downstream facilities. Transfers
between business units are made at estimated market prices. The accounting
policies of the segments are the same as those described in Note 1 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2000. Business unit results are evaluated internally by management
before any allocation of corporate overhead and without any charge for income
taxes or interest expense. See Note 14 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2000.
Financial information by operating segment for the quarter and nine-month
periods ended September 30, 2001 and 2000 is as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
----------------------- -----------------------
Net Sales:
Bauxite and Alumina: (1)
Net sales to unaffiliated customers $ 132.0 $ 108.3 $ 402.3 $ 338.1
Intersegment sales 9.1 29.0 55.0 115.3
----------- ---------- ----------- ----------
141.1 137.3 457.3 453.4
----------- ---------- ----------- ----------
Primary Aluminum:(2)
Net sales to unaffiliated customers 83.0 156.7 282.1 430.0
Intersegment sales .5 56.5 3.8 196.1
----------- ---------- ----------- ----------
83.5 213.2 285.9 626.1
----------- ---------- ----------- ----------
Flat-Rolled Products 75.5 118.5 248.3 401.8
Engineered Products 101.4 137.8 337.9 450.2
Commodities Marketing 9.5 (3.2) 5.9 (23.4)
Minority Interests 28.9 27.1 80.9 77.0
Eliminations (9.6) (85.5) (58.8) (311.4)
----------- ---------- ----------- ----------
$ 430.3 $ 545.2 $ 1,357.4 $ 1,673.7
=========== ========== =========== ==========
Operating income (loss):
Bauxite and Alumina (3) $ .4 $ 9.3 $ (12.4) $ 53.0
Primary Aluminum (.3) 25.9 8.1 90.6
Flat-Rolled Products .2 5.6 6.5 15.9
Engineered Products - 7.3 5.1 33.2
Commodities Marketing 3.2 (7.6) (5.8) (42.0)
Eliminations (.4) 4.1 5.1 1.2
Corporate and Other (17.9) (14.2) (53.8) (44.7)
Labor Settlement Charge(4) - (38.5) - (38.5)
Other Non-Recurring Operating Items (Note 10) (21.3) 10.9 198.9 22.5
----------- ---------- ----------- ----------
$ (36.1) $ 2.8 $ 151.7 $ 91.2
=========== ========== =========== ==========
Depreciation and amortization:
Bauxite and Alumina (3) $ 9.6 $ 6.1 $ 27.2 $ 18.1
Primary Aluminum 5.3 6.2 16.3 18.6
Flat-Rolled Products 4.9 4.1 12.9 12.3
Engineered Products 3.0 3.0 9.3 8.6
Corporate and Other .3 .4 .9 1.4
----------- ---------- ----------- ----------
$ 23.1 $ 19.8 $ 66.6 $ 59.0
=========== ========== =========== ==========
(1) Net sales for the quarter and nine-month periods ended September 30, 2001,
included approximately 25,000 tons and 91,100 tons, respectively, of
alumina purchased from third parties. Net sales for the quarter and
nine-month periods ended September 30, 2000, included approximately 50,000
tons and 249,000 tons, respectively, of alumina purchased from third
parties.
(2) Beginning in the first quarter of 2001, as a result of the continuing
curtailment of KACC's Northwest smelters, the Flat-rolled products business
unit began purchasing its own primary aluminum rather than relying on the
Primary aluminum business unit to supply its aluminum requirements through
production or third party purchases. The Engineered products business unit
was already responsible for purchasing the majority of its primary aluminum
requirements. During the quarter and nine-month periods ended September 30,
2001, the Primary aluminum business unit purchased approximately 2,300 tons
and 27,300 tons, respectively, of primary aluminum from third parties to
meet existing third party commitments.
(3) During the quarter and nine-month periods ended September 30, 2001,
approximately $13.9 and $54.9, respectively, of abnormal Gramercy start-up
costs were incurred. Operating income (loss) for the quarter and nine-month
periods ended September 30, 2001, also included additional accrued business
interruption recoveries related to the Gramercy facility of $21.4 and
$36.6, respectively, based on a July 2001 agreement with KACC's insurers.
Depreciation was suspended for the Gramercy facility during the first nine
months of 2000 as a result of the July 1999 incident. Depreciation expense
for the Gramercy facility for the first six months of 1999 was $6.0. See
Note 2 for additional information.
(4) The allocation of the 2000 labor settlement charge to the Company's
business units was as follows: Bauxite and alumina - $2.1, Primary aluminum
- $15.9, Flat-rolled products - $18.2 and Engineered products - $2.3.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section should be read in conjunction with the response to Item 1, Part I,
of this Report.
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see, for example,
"Recent Events and Developments," "Results of Operations," "Possible Fourth
Quarter 2001 Trends as Compared to Actual Third Quarter 2001 Results," and
"Liquidity and Capital Resources"). Such statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward- looking statements as a result of various factors. These factors
include the effectiveness of management's strategies and decisions, general
economic and business conditions, developments in technology, new or modified
statutory or regulatory requirements, and changing prices and market conditions.
This section and Part I, Item 1. "Business - Factors Affecting Future
Performance" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, 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.
RECENT EVENTS AND DEVELOPMENTS
Liquidity.
Near-Term Debt Maturities. KACC has significant near-term debt maturities,
including $177.4 million (remaining principal amount outstanding as of October
31, 2001) of its 9 7/8% Senior Notes due February 2002 (the "9 7/8% Senior
Notes") and $400.0 of 12 3/4% Senior Subordinated Notes due February 2003 (the
"12 3/4% Senior Subordinated Notes"). KACC's credit agreement, as amended (the
"Credit Agreement"), will expire December 15, 2001 unless it is extended,
replaced or renewed. As of October 31, 2001, KACC had approximately $190.0
million of cash and cash equivalents. See Note 5 of Notes to Interim
Consolidated Financial Statements for a discussion of the Company's and KACC's
plans with respect to such near-term debt maturities.
Cash Flow, Other than Near-Term Debt Maturities. KACC's ability to make payments
on, retire or refinance its debt depends on its ability to generate cash in the
future. In addition to being impacted by normal operating items, the Company's
and KACC's near-term liquidity and cash flows will be negatively affected
by the restart of the Gramercy facility, until it reaches its full production
level and full efficiency, and net payments for asbestos-related liabilities.
See "Liquidity and Capital Resources -- Financing Activities and Liquidity" for
a discussion of these matters.
As previously announced, the Company is working with financial advisors to
review its options for addressing its near- term debt maturities and its overall
capital structure. The Company intends to provide additional information with
respect to its plan to deal with its near-term maturities before the expiration
of the Credit Agreement term. While the Company believes it will be successful
in addressing its near-term debt maturities and overall capital structure, as
the Company's operating and non-recurring cash flows are subject to inherent
uncertainties, no assurances in this regard can be given. While the Company
continues to consider potential asset transactions (beyond the September 2001
sale of an 8.3% interest in Queensland Alumina Limited ("QAL") - see Sale of
8.3% Interest in QAL below), the Company intends to pursue only those
transactions that would create long-term value through strategic positioning
and/or the generation of acceptable levels of earnings or cash. The Company
cannot predict if any such transactions will materialize.
Absent an improvement in the markets in which KACC operates or faster than
expected improvement in the operating performance of the Gramercy refinery (as a
result of its completion) and other facilities (as a result of the Company's
performance improvement initiative), KACC's operations and working capital and
other commitments (before considering near-term debt maturities), including
interest and expected tax payments, the funding of pension, post- retirement
medical and net asbestos-related liabilities, capital spending and other
previously accrued obligations, may cause near-term cash flows to be negative.
The Company expects KACC's cash flow in mid-2002 to improve substantially over
expected near-term cash flows as a result of the Gramercy alumina refinery
reaching its full operating rate and full efficiency, operating improvements
resulting from KACC's performance improvement initiative and as certain of its
other previously accrued, non-recurring, near-term obligations are satisfied.
However, such changes are subject to prevailing market and economic conditions
and, as such, no assurances can be given in this regard.
Possible Year-End Financial Statement Item. The assets of the KACC sponsored
pension plans, like numerous other companies' plans, are, to a substantial
degree, invested in the capital markets and managed by a third party. Given the
year-to-date performance of the stock market, it is likely that, barring a
material improvement in the stock market during the fourth quarter of 2001, the
Company will be required to reflect a significant additional minimum pension
liability in its year-end financial statements as a result of a decline in the
value of the assets held by KACC's pension plans. Minimum pension liability
adjustments are non-cash adjustments that are reflected as an increase in
pension liability and an offsetting charge to stockholders' equity (net of
income tax) through comprehensive income (rather than net income). The ultimate
amount of such additional adjustment cannot be determined until year-end 2001.
However, based on stock market performance through September 30, 2001, the
Company estimates that such amount could be in the $25.0 million to $50.0
million range. The Company also anticipates that the decline in the value of the
pension plans' assets will unfavorably impact pension costs reflected in its
2002 operating results. However, absent a decision by the Company to increase
its contributions to the pension plans as a result of the recent asset
performance, such asset performance is not expected to have a material impact on
the Company's near-term liquidity as pension funding requiremnets generally
allow for such impacts to be spread over multiple years. Increases in post-2002
pension funding requirements could occur, however, if capital market performance
in future periods does not more closely approximate the long-term rate of return
assumed by the Company, and the amount of such increases could be material.
Sale of 8.3% Interest in QAL. In September 2001, KACC sold an approximate 8.3%
interest in QAL and recorded a pre- tax gain of approximately $163.6 million
(included in Other income/(expense) in the Condensed Consolidated Statements of
Income (Loss)). As a result of the transaction, KACC now owns a 20% interest in
QAL. See Note 9 of Notes to Interim Consolidated Financial Statements for
additional discussion of the September 2001 sale.
Incident at Gramercy Facility. Initial production at KACC's Gramercy, Louisiana,
alumina refinery, which had been curtailed since July 1999 as a result of an
explosion in the digestion area of the plant, commenced during the middle of
December 2000. Construction of the facility was substantially completed during
the third quarter of 2001. The plant operated at approximately 78% of its
newly-rated estimated capacity of 1,250,000 tons during the third quarter of
2001. Subsequent to September 30, 2001, the plant has regularly operated at a
rate equal to or greater than 90% of its newly- rated capacity. Based on current
estimates, the facility is expected to reach its full operating rate and full
efficiency by the end of 2001 or early 2002.
See Note 2 of Notes to Interim Consolidated Financial Statements for additional
discussion of the incident at the Gramercy facility and the financial statement
impact of Gramercy-related insurance recoveries.
Labor Matters. Although the United Steelworkers of America ("USWA") dispute has
been settled and the workers have returned to the facilities, two allegations of
unfair labor practices ("ULPs") in connection with the USWA strike and
subsequent lock-out by KACC remain to be resolved. The Company believes that the
remaining charges made against KACC by the USWA are without merit. See Note 7 of
Notes to Interim Consolidated Financial Statements for additional discussion on
the ULP charges.
Pacific Northwest Power Sales and Operating Level. During the first nine months
of 2001, KACC kept its Northwest smelters curtailed and sold the remaining power
available that it had under contract through September 2001. KACC has the right
to purchase power under a contract with the Bonneville Power Administration
("BPA") that provides sufficient power to operate KACC's Trentwood facility as
well as approximately 40% of the capacity of its Northwest aluminum smelting
operations. The rate for power for the initial period of the contract (from
October 1, 2001 through March 31, 2002) will be approximately 46% higher than
power costs under the prior contract. KACC cannot predict what rates will be
charged in future periods. There are terms of the contract which are less
favorable than the prior BPA contract, including the fact that KACC is not
entitled to receive any profits from its limited remarketing rights under the
contract.
Given recent primary aluminum prices and the forward price of power in the
Northwest, it is unlikely that KACC would operate more than a portion of its
Northwest smelting capacity in the near future. Operating only a portion of the
Northwest capacity would result in production/cost inefficiencies such that
operating results would, at best be breakeven to modestly negative at long-term
primary aluminum prices. However, operating at such a reduced rate could,
depending on prevailing economics, result in improved cash flows as opposed to
remaining curtailed and incurring the Company's fixed and continuing labor and
other costs. This is because KACC is liable for certain severance, supplemental
unemployment and early retirement benefits for the USWA workers at the curtailed
smelters. A substantial portion of such costs have been accrued through December
31, 2001. However, additional accruals may be required depending on when the
USWA workers are recalled and when the smelting operations are restarted. Such
amounts could be material.
See Note 4 of Notes to Interim Consolidated Financial Statements for additional
information on the power sales, the contract and additional detail regarding
accrued liabilities with respect to the USWA workers.
Strategic Initiatives. KACC's strategy is to improve its financial results by:
increasing the competitiveness of its existing plants; continuing its cost
reduction initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of its non-core businesses; and strengthening its financial
position by divesting of part or all of its interests in certain operating
assets.
In May 2001, the Company announced that it had launched a performance
improvement initiative (the "program") designed to increase operating cash flow,
generate cash from inventory reduction and improve the Company's financial
flexibility. The program aims to generate a sustainable annual operating EBITDA
(operating income plus depreciation) run rate of approximately $225.0 million to
$235.0 million by the first quarter of 2003 assuming similar market conditions
to those experienced at the time the program was initiated. This represents a
substantial improvement compared to the Company's adjusted first quarter 2001
annualized operating EBITDA run rate of approximately $135.0 million.
The program aims to achieve the following five specific objectives:
- Significant and systemic reductions in unit production costs through the
expanded use of lean manufacturing initiatives at Company-managed
facilities. The Company expects to see the biggest incremental
improvements at the 65%-owned Alumina Partners of Jamaica ("Alpart")
alumina refinery in Jamaica and the 90%-owned Volta Aluminium Company
Limited ("Valco") primary aluminum smelter in Ghana;
- Additional efficiencies at the Gramercy facility that are incremental to
those efficiencies already included in the Company's adjusted first
quarter 2001 annual operating cash flow run rate;
- Increased production at the Alpart alumina refinery through improved
efficiency and de-bottlenecking. Alpart's production is expected to reach
an annualized run rate of more than 1.7 million tons by the end of 2002 or
early 2003, up from the facility's current annual rated capacity of 1.45
million tons. As a result, KACC's share of Alpart's annual production
would increase by more than 160,000 tons. This would substantially offset
the impact of the September 2001 sale of an 8.3% interest in QAL on
alumina available to KACC for internal use or third party sales;
- A sustained reduction in annualized overhead-related expenses or related
cash outflows at the Corporate office and in the commodities businesses
through redesign of work and consolidation of functions primarily in the
Corporate office; and
- A one-time cash benefit from reduction in inventories, primarily at the
Company's majority-owned, non-U.S. commodity operations, and through
disposition of non-operating properties and equipment.
In connection with the program, the Company recorded charges of $27.0 million
(see Note 10 of Notes to Interim Consolidated Financial Statements). Additional
cash and non-cash charges may be required in the future as the program
continues. Such additional charges could be material.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview, Strategic Initiatives in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, for additional information
regarding strategic initiatives.
RESULTS OF OPERATIONS
As an integrated aluminum producer, the Company uses a portion of its bauxite,
alumina, and primary aluminum production for additional processing at certain of
its downstream facilities. Intersegment transfers are valued at estimated market
prices. The following table provides selected operational and financial
information on a consolidated basis with respect to the Company for the quarter
and nine-month periods ended September 30, 2001 and 2000. The following data
should be read in conjunction with the Company's interim consolidated financial
statements and the notes thereto, contained elsewhere herein. See Note 14 of
Notes to Consolidated Financial Statements in the Company's Form 10-K for the
year ended December 31, 2000, for further information regarding segments.
Interim results are not necessarily indicative of those for a full year. Average
realized prices for the Company's Flat- rolled products and Engineered products
segments are not presented in the following table as such prices are subject to
fluctuations due to changes in product mix.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
(In millions of dollars, except shipments and prices)
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
------------------------- -------------------------
Shipments: (000 tons)
Alumina (1)
Third Party 680.2 484.0 2,009.1 1,460.4
Intersegment 51.2 149.8 286.0 584.1
------------ ---------- ------------- -----------
Total Alumina 731.4 633.8 2,295.1 2,044.5
------------ ---------- ------------- -----------
Primary Aluminum(2)
Third Party 59.7 96.3 186.4 261.8
Intersegment .3 34.0 2.3 119.4
------------ ---------- ------------- -----------
Total Primary Aluminum 60.0 130.3 188.7 381.2
------------ ---------- ------------- -----------
Flat-Rolled Products 17.0 34.9 59.8 125.7
------------ ---------- ------------- -----------
Engineered Products 28.0 40.3 92.2 131.9
------------ ---------- ------------- -----------
Average Realized Third Party Sales Price:
Alumina (per ton) $ 183 $ 207 $ 189 $ 211
Primary Aluminum (per pound) $ .63 $ .74 $ .69 $ .75
Net Sales:
Bauxite and Alumina (1)
Third Party (includes net sales of bauxite) $ 132.0 $ 108.3 $ 402.3 $ 338.1
Intersegment 9.1 29.0 55.0 115.3
------------ ---------- ------------- -----------
Total Bauxite and Alumina 141.1 137.3 457.3 453.4
------------ ---------- ------------- -----------
Primary Aluminum(2)
Third Party 83.0 156.7 282.1 430.0
Intersegment .5 56.5 3.8 196.1
------------ ---------- ------------- -----------
Total Primary Aluminum 83.5 213.2 285.9 626.1
------------ ---------- ------------- -----------
Flat-Rolled Products 75.5 118.5 248.3 401.8
Engineered Products 101.4 137.8 337.9 450.2
Commodities Marketing 9.5 (3.2) 5.9 (23.4)
Minority Interests 28.9 27.1 80.9 77.0
Eliminations (9.6) (85.5) (58.8) (311.4)
------------ ---------- ------------- -----------
Total Net Sales $ 430.3 $ 545.2 $ 1,357.4 $ 1,673.7
============ ========== ============= ===========
Operating Income (Loss):
Bauxite and Alumina (3) $ .4 $ 9.3 $ (12.4) $ 53.0
Primary Aluminum (.3) 25.9 8.1 90.6
Flat-Rolled Products .2 5.6 6.5 15.9
Engineered Products - 7.3 5.1 33.2
Commodities Marketing 3.2 (7.6) (5.8) (42.0)
Eliminations (.4) 4.1 5.1 1.2
Corporate and Other (17.9) (14.2) (53.8) (44.7)
Labor Settlement Charge(4) - (38.5) - (38.5)
Other Non-Recurring Operating Items (Note 10) (21.3) 10.9 198.9 22.5
------------ ---------- ------------- -----------
Total Operating Income (Loss) $ (36.1) $ 2.8 $ 151.7 $ 91.2
============ ========== ============= ===========
Net Income (Loss) $ 68.4 $ (16.8) $ 123.9 $ 5.9
============ ========== ============= ===========
Capital Expenditures $ 33.3 $ 110.7 $ 120.1 $ 196.5
============ ========== ============= ===========
(1) Net sales for the quarter and nine-month periods ended September 30, 2001,
included approximately 25,000 tons and 91,100 tons, respectively, of
alumina purchased from third parties. Net sales for the quarter and
nine-month periods ended September 30, 2000, included approximately 50,000
tons and 249,000 tons, respectively, of alumina purchased from third
parties.
(2) Beginning in the first quarter of 2001, as a result of the continuing
curtailment of KACC's Northwest smelters, the Flat-rolled products business
unit began purchasing its own primary aluminum rather than relying on the
Primary aluminum business unit to supply its aluminum requirements through
production or third party purchases. The Engineered products business unit
was already responsible for purchasing the majority of its primary aluminum
requirements. During the quarter and nine-month periods ended September 30,
2001, the Primary aluminum business unit purchased approximately 2,300 tons
and 27,300 tons, respectively, of primary aluminum from third parties to
meet existing third party requirements.
(3) During the quarter and nine-month periods ended September 30, 2001
approximately $13.9 and $54.9, respectively, of abnormal Gramercy start-up
costs were incurred. Operating income (loss) for the quarter and nine-month
periods ended September 30, 2001, also included additional accrued business
interruption recoveries related to the Gramercy facility of $21.4 and
$36.6, respectively, based on a July 2001 agreement with KACC's insurers.
Depreciation was suspended for the Gramercy facility during the first nine
months of 2000 as a result of the July 1999 incident. Depreciation expense
for the Gramercy facility for the first six months of 1999 was $6.0. See
Note 2 of Notes to Interim Consolidated Financial Statements for additional
information.
(4) The allocation of the 2000 labor settlement charge to the Company's
business units was as follows: Bauxite and alumina - $2.1, Primary aluminum
- $15.9, Flat-rolled products - $18.2 and Engineered products - $2.3.
OVERVIEW
The Company's operating results are sensitive to changes in prices of alumina,
primary aluminum, and fabricated aluminum products, and also depend to a
significant degree on the volume and mix of all products sold and on KACC's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Notes 1 and 8 of Notes to Interim
Consolidated Financial Statements for a discussion of KACC's hedging activities.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, packaging, and other markets. Such changes
in demand can directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what the Company sometimes refers to as the
"upstream" products: alumina and primary aluminum.
During the nine months ended September 30, 2000, the Average Midwest United
States transaction price ("AMT price") per pound of primary aluminum was $.76
per pound. During the nine months ended September 30, 2001, the average AMT
price was $.71 per pound. The average AMT price for primary aluminum for the
week ended October 26, 2001 was $.62 per pound.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 2000
SUMMARY
The Company reported net income of $68.4 million, or $.85 of basic income per
common share, for the third quarter of 2001, compared to a net loss of $16.8
million, or $.21 of basic loss per common share, for the same period of 2000.
For the nine months ended September 30, 2001, the Company reported net income of
$123.9 million or $1.55 of basic income per common share, compared to net income
of $5.9 million, or $.07 of basic income per common share, for the nine-month
period ended September 30, 2000. However, results for the quarter and nine-month
periods ended September 30, 2001 and 2000 included material special items as
summarized below:
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
----------- ---------- ----------- ---------
As reported, earnings (loss) per common share $ .85 $ (.21) $ 1.55 $ .07
Less material special (gains) losses:
Gain on sale of QAL interest (1.19) - (1.20) -
Non-recurring operating charges (income), net .16 (.08) (1.52) (.17)
Other (income) expense - special items, net (.14) .02 .21 (.04)
Abnormal Gramercy start-up costs .10 - .42 -
Gramercy business interruption recoveries (.16) - (.28) -
Excess overhead and other fixed costs associated with
curtailed Northwest smelting operations .03 - .11 -
LIFO inventory adjustment .04 - .04 -
Labor settlement charge - .30 - .30
----------- ---------- ----------- ---------
$ (.31) $ .03 $ (.67) $ .16
=========== ========== =========== =========
Net sales in the third quarter of 2001 totaled $430.3 million compared to $545.2
million in the third quarter of 2000. Net sales for the nine-month period ended
September 30, 2001, totaled $1,357.4 million compared to $1,673.7 million for
the nine-month period ended September 30, 2000.
Bauxite and Alumina. Third party net sales of alumina increased 22% for the
quarter ended September 30, 2001, as compared to the same period in 2000. A 41%
increase in third party shipments was partially offset by a 12% decrease in
third party average realized prices. The increase in quarter-over-quarter
shipments resulted primarily from (1) higher third party sales due to the
curtailment of the Company's Washington smelters, (2) the restart of production
at the Gramercy refinery in December 2000 and (3) the timing of shipments. The
decrease in average realized prices was due to a decrease in primary aluminum
market prices to which the Company's third-party alumina sales contracts are
linked.
Intersegment net sales of alumina for the quarter ended September 30, 2001
decreased 69% as compared to the same period in 2000 as the result of a 66%
decrease in intersegment shipments and an 8% decrease in intersegment average
realized prices. The decrease in shipments was primarily due to the potline
curtailments at the Company's Washington smelters. The decrease in the
intersegment average realized prices is the result of a decrease in primary
aluminum prices from period to period as intersegment transfers are made on the
basis of primary aluminum market prices on a lagged basis of one month.
Net sales for the quarters ended September 30, 2001 and 2000 included
approximately 25,000 tons and 50,000 tons, respectively, of alumina purchased
from third parties to satisfy third party sales and transfers to the Company's
Primary aluminum business unit.
For the nine-month period ended September 30, 2001, third party net sales of
alumina were 19% higher than the comparable period in 2000 as a 38% increase in
third party shipments was partially offset by a 10% decrease in third party
average realized prices. The increase in third party shipments and decrease in
average realized prices during the first nine months of 2001 as compared to 2000
was attributable to the same volume and price factors discussed above.
Intersegment net sales for the nine-month period ended September 30, 2001,
decreased 52% as compared to the same period in 2000. The decrease was due to a
51% decrease in the intersegment shipments and a 3% decrease in intersegment
average realized prices. The decreases in intersegment shipments and
intersegment average realized prices were attributable to the same volume and
price factors discussed above.
Net sales for the nine-month periods ended September 30, 2001 and 2000 included
approximately 91,100 tons and 249,000 tons, respectively, of alumina purchased
from third-parties to satisfy third party sales and transfers to the Primary
aluminum business unit.
Segment operating results (excluding non-recurring items) for the quarter and
nine-month periods ended September 30, 2001, were down from the comparable
periods in 2000. Increased net shipments only partially offset the decrease in
the average realized sales prices. Additionally, operating income for 2001 was
adversely affected by abnormal Gramercy related start-up costs during the
quarter and nine-month periods ended September 30, 2001 of approximately $13.9
million and $54.9 million, respectively, less than satisfactory bauxite mining
cost performance at KJBC and a LIFO inventory charge of $2.0 million. These
charges were offset in part in the quarter and nine-month periods by $21.4
million and $36.6 million, respectively, of additional insurance benefits
related to the Gramercy incident.
Segment operating income for the quarter and nine-month periods ended September
30, 2001, discussed above, exclude non-recurring costs of $7.9 million and $9.9
million, respectively, incurred in connection with the Company's performance
improvement program. Segment operating income for both the quarter and
nine-month periods ended September 30, 2000, exclude labor settlement charges of
$2.1 million and incremental maintenance spending of $11.5 million.
Primary Aluminum. Third party net sales of primary aluminum decreased 47% for
the third quarter of 2001 as compared to the same period in 2000 as a result of
a 38% decrease in third party shipments and a 15% decrease in average realized
prices. The decrease in shipments was primarily due to the curtailment of the
Washington smelters during the last half of 2000. The decrease in the average
realized prices was primarily due to the decrease in primary aluminum market
prices.
Intersegment net sales of primary aluminum for the quarter ended September 30,
2001 decreased significantly compared to the same period in 2000 primarily as a
result of a substantial decrease in intersegment shipments. This change resulted
primarily from a change in the Company's methodology for handling aluminum
supply logistics for the Flat-rolled products business unit as a result of the
continuing curtailment of KACC's Northwest smelters. Beginning in the first
quarter of 2001, the Flat-rolled products business unit began purchasing its own
primary aluminum rather than relying on the Primary aluminum business unit to
supply its aluminum requirements through production or third party purchases.
The Engineered products business unit was already responsible for purchasing the
majority of its primary aluminum requirements.
For the nine-month period ended September 30, 2001, third party sales of primary
aluminum decreased approximately 34% from the comparable period in 2000,
reflecting a 29% decrease in third party shipments and an 8% decrease in third-
party average realized prices. The decreases in year-to-date 2001 shipments and
prices compared to 2000 were attributable to the same factors described above.
Intersegment net sales for the first nine months of 2001 decreased significantly
compared to the same period in 2000. This decrease was attributable to the same
factors described above.
Segment operating income (excluding non-recurring items) for the quarter and
nine-month periods ended September 30, 2001, decreased significantly versus the
comparable periods in 2000. The primary reasons for the decreases were the
decreases in the average realized prices and shipments discussed above as well
as overhead and other fixed costs associated with the curtailed Northwest
smelting operations, which totaled approximately $9.0 million and $30.0 million
during the quarter and nine-month periods ended September 30, 2001. The Company
believes that approximately half of such costs incurred are "excess" to the run
rate that can be achieved during a prolonged curtailment period. Management is
in the process of determining the appropriate actions to minimize the excess
outflows associated with the curtailed operations. Year-to-date 2001 results
were also unfavorably impacted by higher energy costs at the 49%-owned Anglesey
Aluminium Limited ("Anglesey") aluminum smelter, resulting from a new power
contract entered into by Anglesey at the end of the first quarter of 2000.
Segment operating income for the quarter and the nine-month periods ended
September 30, 2001, discussed above, exclude non-recurring net power sale gains
of $6.5 million and $229.2 million, respectively. These gains were offset in
both periods by costs of $5.4 million incurred in connection with the Company's
performance improvement program and contractual labor costs related to the
Northwest smelter curtailment of $3.3 million. Segment operating income for the
quarter and nine-month periods ended September 30, 2000, exclude net power sale
gains of $40.5 million and $56.3 million, respectively. These gains were offset
in both periods by labor settlement charges of $15.9 million and costs related
to staff reduction initiatives of $3.1 million.
Flat-Rolled Products. Net sales of flat-rolled products decreased approximately
36% during the third quarter 2001 as compared to 2000 as a 51% decrease in
shipments was only partially offset by a 31% increase in average realized
prices. The decrease in shipments was primarily due to reduced shipments of can
body stock, as a part of the planned exit from this product line. Current period
shipments were also adversely affected by reduced general engineering heat-treat
products and reduced can lid and tab stock shipments, due to weak market demand.
These decreases were modestly offset by firm aerospace demand. The increase in
average realized prices primarily reflects the change in product mix from the
can body stock to heat-treat products, particularly aerospace heat-treat (which
have a higher price and operating margin as compared to other products).
For the nine-month period ended September 30, 2001, net sales of flat-rolled
products decreased by approximately 38% as compared to the same period in 2000
as a 52% decrease in shipments was offset by a 30% increase in average realized
prices. The decline in year-to-date 2001 shipments and increase in average
realized prices were primarily attributable to the same factors described above.
Segment operating income (excluding non-recurring items) for the quarter and
nine-month periods ended September 30, 2001, was down from the comparable
periods in 2000. The primary reasons for the decreases were the decreases in
shipments offset in part by the increases in prices described above. Operating
results were also adversely impacted by increased operating costs, mainly due to
product mix, a LIFO inventory charge of $2.0 million and higher metal sourcing
costs.
Segment operating income for both the quarter and nine-month periods ended
September 30, 2001, discussed above, exclude non-recurring costs of $10.7
million incurred in connection with the Company's performance improvement
program. Segment operating income for both the quarter and nine-month periods
ended September 30, 2000, exclude labor settlement charges of $18.2 million and
an impairment charge associated with product line exit of $9.0 million.
Engineered Products. Net sales of engineered products decreased by approximately
26% during the third quarter 2001 as compared to 2000, as a 30% decrease in
product shipments was offset by a 6% increase in average realized prices. The
decrease in product shipments was the result of reduced transportation and
electrical product shipments due to weak market demand. The increase in average
realized prices reflects a shift in product mix to higher value-added products.
For the nine-month period ended September 30, 2001, net sales of engineered
products decreased by approximately 25% as a 30% decrease in product shipments
was offset by a 7% increase in average realized prices. The decrease in
shipments and increase in sales prices is attributable to the same factors
listed above.
Segment operating income (excluding non-recurring items) for the quarter and
nine-month periods ended September 30, 2001, decreased as compared to the
comparable periods in 2000 primarily due to the price and volume factors
described above. The segment's operating results were also adversely impacted by
a LIFO inventory charge of $1.0 million and because cost reductions lagged
volume decline.
Segment operating income for the quarter ended September 30, 2000, discussed
above, excludes non-recurring labor settlement charges of $2.3 million and an
impairment charge associated with product line exit of $4.0 million. In addition
to these items, segment operating income for the nine-month period ended
September 30, 2000 excluded a $.7 million severance-related charge (reflected in
the second quarter of 2000) with respect to the same product line exit.
Commodities Marketing. Net sales for this segment represent net settlements with
third-party brokers for maturing derivative positions. Operating income
represents the combined effect of such net settlements, any net premium costs
associated with maturing options, as well as net results of internal hedging
activities with KACC's fabricated products segments. The minimum (and maximum)
price of the hedges in any given period is primarily the result of the timing of
the execution of the hedging contracts.
Segment operating income for the quarter and nine-month periods ended September
30, 2001 increased compared to the comparable periods in 2000. This is primarily
the result of 2001 hedging positions having higher minimum prices than the
positions in 2000, combined with the fact that 2000 market prices were higher
than those experienced in 2001.
Eliminations. Eliminations of intersegment profit vary from period to period
depending on fluctuations in market prices as well as the amount and timing of
the affected segments' production and sales.
Corporate and Other. Corporate operating expenses (excluding non-recurring
items) represent corporate general and administrative expenses which are not
allocated to the Company's business segments. The increase in corporate
operating expenses in the quarter and nine-month periods ended September 30,
2001, as compared to the comparable periods in 2000 was primarily due to higher
medical and pension cost accruals for active and retired employees.
Corporate operating results for the quarter and nine-month periods ended
September 30, 2001, discussed above, exclude costs of $.5 million and $1.0
million, respectively, incurred in connection with the Company's performance
improvement program. Corporate operating results for the quarter and nine-month
periods ended September 30, 2000, exclude costs related to staff reduction and
efficiency initiatives of $2.0 million and $5.5 million, respectively.
POSSIBLE FOURTH QUARTER 2001 TRENDS AS COMPARED TO ACTUAL THIRD QUARTER 2001
RESULTS
This section contains statements that constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
Company cautions that such forward-looking statements are not guarantees of
future results and involve significant risks and uncertainties, and that actual
results may vary materially from those expressed or implied in the
forward-looking statements as a result of various factors. The Company is under
no obligation to update these forward-looking statements to reflect future
events or circumstances.
Bauxite and Alumina. Total shipment volumes are expected to be flat. Increased
Gramercy volumes, factored into the business unit's routine quarterly
fluctuations in the timing of cargo vessel departures, will largely offset the
impact of the QAL transaction. Third-party price realizations are contractually
linked to LME aluminum prices generally on a one- to-three month lag. As a
result, recent weakness in LME prices would tend to dampen alumina price
realizations in the fourth quarter, although the Company's hedging program will
offset a substantial portion of the impact. Costs are expected to be favorable
as Gramercy's operating rate approaches 100%.
Primary Aluminum. Shipment volumes are likely to be flat, reflecting stable
operating rates. Price realizations are reflective of commodity pricing as
determined by LME and Midwest markets. The Company's hedging program will offset
a substantial portion of the recent weakness in market prices. Costs are
expected to be favorable as a result of a reduction in excess overhead in the
Pacific Northwest.
Flat-Rolled Products. Shipment volumes may be down due to indications of slowing
aerospace orders combined with seasonality and continued weakness in general
engineering and lid and tab stock. Average price realizations may be flat/down
as a result of possible lower aerospace shipments. Costs are likely to be
favorable due to reductions in overhead costs.
Engineered Products. Shipment volumes are likely to be down, reflecting
continued weakness in all markets, combined with seasonality. Average price
realizations are likely to be flat due to a relatively stable product mix. Costs
are expected to be favorable as the unit flexes costs to match lower operating
levels.
Corporate. Corporate expenses are likely to be flat/favorable as the Company
proceeds with implementation of corporate efficiency initiatives.
LIQUIDITY AND CAPITAL RESOURCES
See Note 8 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2000, for a listing of the Company's
indebtedness and information concerning certain restrictive debt covenants.
Operating Activities. At September 30, 2001, KACC had cash and cash equivalents
of $212.1 million as compared to $23.4 million of cash and cash equivalents at
December 31, 2000. At September 30, 2001, excluding the cash and cash
equivalents and the $206.2 million of maturities with respect to the 9 7/8%
Senior Notes, the Company had working capital of $124.4 million, compared with
working capital of $147.3 million at December 31, 2000. In addition to normal
operating changes, the decrease in working capital primarily resulted from:
- - a decrease in other receivables primarily due to receipt of previously
accrued power sales (see Note 4 of Notes to Interim Consolidated Financial
Statements) and the collection of Gramercy-related insurance recoveries
(see Note 2 of Notes to Interim Consolidated Financial Statements).
- - a decrease in the current portion of long-term debt due to KACC's repayment
of $30.4 million of outstanding borrowings under its Credit Agreement.
- - a decrease in accrued salaries, wages and related expenses resulting
primarily from the payment of previously accrued employee-related
compensation applicable to job reductions as a part of the September 2000
labor settlement or associated with workers at the curtailed Northwest
smelters, offset by employee benefits and other costs accrued in the third
quarter of 2001 in connection with the Company's performance improvement
program.
Investing Activities. Capital expenditures during the nine months ended
September 30, 2001, were $120.1 million, including $70.6 million for the
rebuilding of the Gramercy facility. The remainder of the year-to-date 2001
capital expenditures were incurred to improve production efficiency and reduce
operating costs at the Company's other facilities. Total consolidated capital
expenditures, excluding capital expenditures related to the Gramercy facility,
are expected to be between $80.0 and $95.0 million per annum in each of 2001 and
2002 (of which approximately 15% is expected to be funded by the Company's
minority partners in certain foreign joint ventures).
Management continues to evaluate numerous projects all of which would require
substantial capital, both in the United States and overseas. The level of
capital expenditures may be adjusted from time to time depending on the
Company's price outlook for primary aluminum and other products, KACC's ability
to assure future cash flows through hedging or other means, the Company's
financial position and other factors.
Financing Activities and Liquidity: Short-Term. KACC uses its Credit Agreement
to provide short-term liquidity requirements and for letters of credit to
support operations. During the third quarter of 2001, there were no borrowings
under the Credit Agreement. During the first six months of 2001, month-end
borrowing amounts outstanding under the Credit Agreement were as high as
approximately $94.0 million, which occurred in February 2001, primarily as a
result of costs incurred and capital spending related to the Gramercy rebuild,
net of insurance reimbursements. The average amount of borrowings outstanding
under the Credit Agreement during the first six months of 2001 was approximately
$23.8 million. Outstanding letters of credit at September 30, 2001, were
approximately $29.6 million.
In October 2001, the expiration date of the Credit Agreement was extended from
November 2, 2001 to December 15, 2001. The extension provides KACC with
additional flexibility while it continues its ongoing work on a longer-term
solution for near-term debt maturities. The Company and KACC intend to extend,
replace or renew the Credit Agreement prior to its expiration. However, in order
for the Credit Agreement to be extended, on a short-term basis, beyond December
2001, KACC will have to have a demonstrable way to retire the maturity of the
remaining amount of 9 7/8% Senior Notes ($177.4 million principal amount as of
October 31, 2001). For the Credit Agreement to be extended past February 2003,
both the 9 7/8% Senior Notes and the $400.0 million of 12 3/4% Senior
Subordinated Notes, due February 2003, will have to be retired and/or
refinanced.
The Company currently expects limited, if any, borrowings for the balance of the
Credit Agreement term, except it is possible that KACC may use a portion of the
availability under the Credit Agreement (or any extension, replacement or
renewal thereof) together with other cash resources to retire the 9 7/8% Senior
Notes. As of October 31, 2001, KACC had purchased $47.6 million of the 9 7/8%
Senior Notes at a modest gain. As of October 31, 2001, KACC had approval from
the Credit Agreement lenders to spend up to an aggregate of $100.0 million to
purchase the 9 7/8% Senior Notes.
As previously announced, the Company is working with financial advisors to
review its options for addressing its near- term debt maturities and its overall
capital structure. The Company expects to provide additional information with
respect to its plan to deal with its near-term maturities before the expiration
of the Credit Agreement term. While the Company continues to consider potential
asset transactions (beyond the September 2001 sale of an 8.3% interest in QAL),
the Company intends to pursue only those transactions that would create
long-term value through strategic positioning and/or the generation of
acceptable levels of earnings or cash. The Company cannot predict if any such
transactions will materialize.
In addition to being impacted by normal operating items, the Company's and
KACC's near-term liquidity and cash flow will be affected by the restart of the
Gramercy facility and the amount of net payments for asbestos-related
liabilities.
KACC will continue to incur abnormal start-up costs until full production volume
and efficiency is restored. The Company expects the Gramercy facility to reach
its full production rate and full efficiency by the end of 2001 or early 2002.
During the nine months ended September 30, 2001, KACC paid $86.9 million of
asbestos-related settlement and defense costs and received insurance
reimbursement of $77.3 million for asbestos-related matters. KACC's 2001 and
2002 cash payments, prior to insurance recoveries, for asbestos-related costs
are estimated to be between $125.0 million and $150.0 million per year. The
Company believes that KACC will continue to recover a substantial portion of
asbestos payments from insurance. However, insurance reimbursements have
historically lagged KACC's payments. Delays in receiving future insurance
repayments would have an adverse impact on KACC's liquidity. During 2000, KACC
filed suit against a group of its insurers, after negotiations with certain of
the insurers regarding an agreement covering both reimbursement amounts and the
timing of reimbursement payments were unsuccessful. During October 2001, the
court ruled favorably on a number of issues. The rulings did not result in any
change to the Company's estimates of its current and future asbestos-related
insurance recoveries. Additional issues may be heard by the court from time to
time. Given the significance of expected asbestos-related payments in 2001 and
2002 based on settlement agreements in place at September 30, 2001, the receipt
of timely and appropriate reimbursements from such insurers is critical to
KACC's liquidity.
Absent an improvement in the markets in which KACC operates or faster than
expected improvement in the operating performance of the Gramercy refinery (as a
result of its completion) and other facilities (as a result of the Company's
performance improvement initiative), KACC's operations and working capital and
other commitments (before considering near-term debt maturities), including
interest and expected tax payments, the funding of pension, post-retirement
medical and net asbestos-related liabilities, capital spending and other
previously accrued obligations, may cause near-term cash flows to be negative.
The Company expects KACC's cash flow in mid-2002 to improve substantially over
expected near-term cash flows as a result of the Gramercy alumina refinery
reaching its full operating rate and full efficiency, operating improvements
resulting from KACC's performance improvement initiative and as certain of its
other previously accrued, non-recurring, near-term obligations are satisfied.
However, such changes are subject to prevailing market and economic conditions
and, as such, no assurances can be given in this regard.
Management believes that the Company's existing cash resources, together with
cash flows from operations, as well as borrowings under the Credit Agreement
(which the Company intends to extend, replace or renew as discussed above), will
be sufficient to satisfy its working capital, debt maturities and capital
expenditure requirements for the next year. However, no assurance can be given
that existing and anticipated cash sources will be sufficient to meet the
Company's short-term liquidity requirements or that additional sources of cash
will not be required.
Long-Term. As of September 30, 2001, the Company's total consolidated
indebtedness was $905.1 million. KACC's ability to make payments on and to
refinance its debt on a long-term basis depends on its ability to generate cash
in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond KACC's
control. With respect to long-term liquidity, management believes that operating
cash flow, together with the ability to obtain both short and long-term
financing, should provide sufficient funds to meet KACC's and the Company's
working capital, financing and capital expenditure requirements. However, no
assurance can be given that KACC will be able to refinance its debt on
acceptable terms.
CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries collectively own
approximately 62% of the Company's Common Stock, with the remaining
approximately 38% of the Company's Common Stock being publicly held. Certain of
the shares of the Company's Common Stock beneficially owned by MAXXAM are
subject to a pledge agreement by MAXXAM and its subsidiary.
The Credit Agreement does not permit the Company, and significantly restricts
KACC's ability, to pay any dividends on their common stocks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section contains forward-looking statements that involve risk and
uncertainties. Actual results could differ materially from those projected in
these forward-looking statements.
The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 1 and 8 of Notes to Interim Consolidated Financial
Statements, KACC utilizes hedging transactions to lock-in a specified price or
range of prices for certain products which it sells or consumes in its
production process and to mitigate KACC's exposure to changes in foreign
currency exchange rates. The following sets forth the impact on future earnings
of adverse market changes related to KACC's hedging positions with respect to
commodity, foreign exchange and energy contracts described more fully in Note 8
of Notes to Interim Consolidated Financial Statements.
The hypothetical amounts and impacts discussed below are versus what the
Company's results would have been without the derivative or fixed price customer
contracts. It should be noted however, that, since the hedging positions and
fixed price customer contracts lock-in a specific price, a range of prices or
specific rates, increases or decreases in earnings attributable to KACC's
hedging positions, fixed price customer contracts or hedging instruments would
be significantly offset by a corresponding decrease or increase in the proceeds
to be realized on the underlying physical transactions or in the value of the
hedged commitments.
Alumina and Primary Aluminum. Alumina and primary aluminum production in excess
of internal requirements is sold in domestic and international markets, exposing
the Company to commodity price opportunities and risks. KACC's hedging
transactions are intended to provide price risk management in respect of the net
exposure of earnings resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices
fluctuate with the price of primary aluminum. On average, before consideration
of hedging activities, any fixed price contracts with fabricated aluminum
products customers, variations in production and shipment levels, and timing
issues related to price changes, the Company estimates that each $.01 increase
(decrease) in the market price per price-equivalent pound of primary aluminum
increases (decreases) the Company's annual pre-tax earnings by approximately
$10.0 - $15.0 million, based on recent fluctuations in operating levels.
Based on the average September 2001 London Metal Exchange ("LME") cash price for
primary aluminum of approximately $.61 per pound, the Company estimates that it
would realize approximately $61.0 million of net aggregate pre-tax benefits from
its hedging positions and fixed price customer contracts during the remainder of
2001 and the period 2002 through 2003. The Company estimates that a hypothetical
$.10 increase from the above stated September 2001 price would result in a net
aggregate pre-tax reduction in operating income of approximately $38.0 million
being realized during the remainder of 2001 and the period 2002 through 2003
from KACC's hedging positions and fixed price customer contracts. Conversely,
the Company estimates that a hypothetical $.10 decrease from the above stated
September 2001 price level would result in an aggregate pre-tax increase in
operating income of approximately $192.0 million being realized during the
remainder of 2001 and the period 2002 through 2003 from KACC's hedging positions
and fixed price customer contracts.
As stated in Note 8 of Notes to Interim Consolidated Financial Statements, KACC
has certain hedging positions which do not qualify for treatment as a "hedge"
under current accounting guidelines and thus must be marked-to-market each
period. Fluctuations in forward market prices for primary aluminum would likely
result in additional earnings volatility as a result of these positions. The
Company estimates that a hypothetical $.10 change in spot market prices from the
September 30, 2001, LME cash price of $.60 per pound would, depending on the
shape of the forward curve, result in additional aggregate mark-to-market
impacts of between $5.0 - $20.0 million during any period through 2003.
In addition to having an impact on the Company's earnings, a hypothetical
$.10-per-pound change in primary aluminum prices would also impact the Company's
cash flows and liquidity through changes in possible margin advance
requirements. At September 30, 2001, KACC had received margin advances of $42.7
million. Increases in primary aluminum prices subsequent to September 30, 2001,
could result in KACC having to refund and, depending on the amount of the
increase, make margin advances and such amounts could be significant. If primary
aluminum prices increased by $.10 per pound (from the September 30, 2001 price)
by December 31, 2001 and the forward curve were as described above, it is
estimated that KACC could be required to pay in the range of $40.0 to $60.0
million in respect of both refunds of margin advances from brokers and to make
margin advances to the brokers. Management considers credit risk related to
possible failure of the counterparties to perform their obligations pursuant to
the derivative contracts to be minimal.
Foreign Currency. KACC enters into forward exchange contracts to hedge material
cash commitments for foreign currencies. KACC's primary foreign exchange
exposure is related to KACC's Australian Dollar (A$) commitments in respect of
activities associated with its 20.0%-owned affiliate, Queensland Alumina
Limited. The Company estimates that, before consideration of any hedging
activities, a US $0.01 increase (decrease) in the value of the A$ results in an
approximate $1.0 - $2.0 million (decrease) increase in the Company's annual
pre-tax operating income.
Based on the September 30, 2001 US$ to A$ exchange rate of $.49, KACC's foreign
currency hedges would result in a net aggregate pre-tax reduction of operating
income of approximately $9.7 million for the remainder of 2001 and for the
period 2002 through 2005. The Company estimates that a hypothetical 10% decrease
in the A$ exchange rate would result in the Company recognizing a net aggregate
pre-tax reduction of operating income of approximately $10.4 million for the
remainder of 2001 and for the period 2002 through 2005 from KACC's foreign
currency hedging positions. Conversely, the Company estimates that a
hypothetical 10% increase in the A$ exchange rate (from $.49) would result in
the Company realizing a net pre-tax aggregate reduction of operating income of
approximately $8.7 million during the remainder of 2001 and for the period 2002
through 2005.
Energy. KACC is exposed to energy price risk from fluctuating prices for natural
gas, fuel oil and diesel oil consumed in the production process. The Company
estimates that each $1.00 change in natural gas prices (per mcf) impacts the
Company's pre-tax operating results by approximately $20.0 million. Further, the
Company estimates that each $1.00 change in fuel oil prices (per barrel) impacts
the Company's pre-tax operating results by approximately $3.0 million.
KACC from time to time in the ordinary course of business enters into hedging
transactions with major suppliers of energy and energy related financial
instruments. Based on an average September 2001 price (per mcf) of approximately
$2.53, the Company expects to realize a pre-tax reduction of operating income of
approximately $5.0 million for the period from October 2001 through March 2002
associated with these hedging positions. The Company estimates that a
hypothetical $1.00 decrease from an average September 2001 price would result in
the Company recognizing a net aggregate pre-tax reduction of operating income of
$8.0 million. Conversely, the Company estimates that a hypothetical $1.00
increase from the average September 2001 price would result in the Company
realizing a net pre-tax aggregate reduction of operating income of approximately
$2.0 million during the same period.
Based on the average September 2001 fuel oil price (per barrel) of approximately
$19.79, the Company estimates the hedges would result in a net aggregate pre-tax
increase to its operating income of approximately $1.3 million in the fourth
quarter of 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part I, Item 3. "LEGAL PROCEEDINGS" in the Company's Form
10-K for the year ended December 31, 2000 for information concerning material
legal proceedings with respect to the Company and Part II, Item 3. "LEGAL
PROCEEDINGS" in the Company's Form 10-Q for the quarterly period ended March 31,
2001, for information related to certain legal proceedings with respect to the
Company's Mead, Washington aluminum smelter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
*10.1 Twenty-Second Amendment to Credit Agreement, dated as of
October 16, 2001, amending the Credit Agreement, dated as
of February 15, 1994, as amended, among Kaiser Aluminum
& Chemical Corporation, Kaiser Aluminum Corporation,
the financial institutions party thereto, and Bank of
America, N.A. (successor to BankAmerica Business Credit,
Inc.), as Agent.
*10.2 Twenty-Third Amendment to Credit Agreement, dated as of
October 24, 2001, amending the Credit Agreement, dated as
of February 15, 1994, as amended, among Kaiser Aluminum
& Chemical Corporation, Kaiser Aluminum Corporation,
the financial institutions party thereto, and Bank of
America, N.A. (successor to BankAmerica Business Credit,
Inc.), as Agent.
(b) Reports on Form 8-K.
No Report on Form 8-K was filed by the Company during the quarter ended
September 30, 2001.
- ---------------------------
* Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who have signed this report on behalf of
the registrant as the principal financial officer and principal accounting
officer of the registrant, respectively.
KAISER ALUMINUM CORPORATION
/s/ John T. La Duc
By: __________________________________________
John T. La Duc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
KAISER ALUMINUM CORPORATION
/s/ Daniel D. Maddox
By: __________________________________________
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)
Dated: November 14, 2001
