##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005
 Commission file number 1-3605 KAISER ALUMINUM & CHEMICAL CORPORATION (Exact name of registrant as specified in its charter)
 Delaware
    
    94-0928288(State of Incorporation)
    
    (I.R.S. EmployerIdentification No.)
 27422 PORTOLA PARKWAY, SUITE 350,
FOOTHILL RANCH, CALIFORNIA 92610-2831(Address of principal executive offices) (Zip Code) (Registrants telephone number, including area code)
(949) 614-1740 Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ As of April 30, 2005, there were 46,171,365 shares of the common stock of the registrant
outstanding, all of which were owned by Kaiser Aluminum Corporation, the parent corporation of
the registrant.




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) PART I  FINANCIAL INFORMATION Item 1.Financial Statements CONSOLIDATED BALANCE SHEETS March 31,
    
    
    December 31,2005
    
    
    2004(In millions of dollars,except share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24.5
    
    
    $
    55.4Receivables:Trade, less allowance for doubtful receivables of $6.5 and $6.9
    
    
    103.0
    
    
    
    97.4Due from affiliate
    
    
    
    
    
    
    8.0Other
    
    
    5.2
    
    
    
    10.9Inventories
    
    
    105.8
    
    
    
    105.3Prepaid expenses and other current assets
    
    
    33.8
    
    
    
    19.6Discontinued operations current assets
    
    
    40.3
    
    
    
    30.6Total current assets
    
    
    312.6
    
    
    
    327.2Investments in and advances to unconsolidated affiliate
    
    
    15.7
    
    
    
    16.7Property, plant, and equipment  net
    
    
    213.4
    
    
    
    214.6Restricted proceeds from sale of commodity interests
    
    
    281.3
    
    
    
    280.8Personal injury-related insurance recoveries receivable
    
    
    967.0
    
    
    
    967.0Other assets
    
    
    43.6
    
    
    
    42.5Discontinued operations long-term assets
    
    
    42.9
    
    
    
    38.9Total
    
    $
    1,876.5
    
    
    $
    1,887.7LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Liabilities not subject to compromise Current liabilities:Accounts payable
    
    $
    43.1
    
    
    $
    50.2Accrued interest
    
    
    .8
    
    
    
    .9Accrued salaries, wages, and related expenses
    
    
    51.8
    
    
    
    48.9Other accrued liabilities
    
    
    74.3
    
    
    
    73.8Payable to affiliate
    
    
    12.6
    
    
    
    14.6Long-term debt  current portion
    
    
    1.2
    
    
    
    1.2Discontinued operations current liabilities
    
    
    53.1
    
    
    
    57.7Total current liabilities
    
    
    236.9
    
    
    
    247.3Long-term liabilities
    
    
    33.4
    
    
    
    32.9Long-term debt
    
    
    2.8
    
    
    
    2.8Discontinued operations long-term liabilities
    
    
    26.4
    
    
    
    26.4299.5
    
    
    
    309.4Liabilities subject to compromise
    
    
    3,952.9
    
    
    
    3,954.9Commitments and contingenciesStockholders equity (deficit):Preference stock
    
    
    .7
    
    
    
    .7Common stock
    
    
    15.4
    
    
    
    15.4Additional capital
    
    
    255.6
    
    
    
    2,452.8Accumulated deficit
    
    
    (2,640.0
    )
    
    
    (2,648.3
    )Accumulated other comprehensive income (loss)
    
    
    (7.6
    )
    
    
    (5.5
    )Note receivable from parent
    
    
    
    
    
    
    (2,191.7
    )Total stockholders equity (deficit)
    
    
    (2,375.9
    )
    
    
    (2,376.6
    )Total
    
    $
    1,876.5
    
    
    $
    1,887.7
 The accompanying notes to consolidated financial statements are an integral part of these statements. 1




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars) Quarter Ended March 31,2005
    
    
    2004Net sales
    
    $
    281.4
    
    
    $
    210.2Costs and expenses:Cost of products sold
    
    
    242.2
    
    
    
    194.2Depreciation and amortization
    
    
    4.9
    
    
    
    5.5Selling, administrative, research and development, and general
    
    
    17.7
    
    
    
    20.7Other operating charges
    
    
    6.2
    
    
    
    Total costs and expenses
    
    
    271.0
    
    
    
    220.4Operating income (loss)
    
    
    10.4
    
    
    
    (10.2
    )Other income (expense):Interest expense (excluding unrecorded contractual interest
expense of $23.7 for both quarters)
    
    
    (2.1
    )
    
    
    (2.0
    )Reorganization items
    
    
    (7.8
    )
    
    
    (8.6
    )Other  net
    
    
    (.4
    )
    
    
    (.2
    )Income (loss) before income taxes and discontinued operations
    
    
    .1
    
    
    
    (21.0
    )Provision for income taxes
    
    
    (2.4
    )
    
    
    (1.5
    )Loss from continuing operations
    
    
    (2.3
    )
    
    
    (22.5
    )Income (loss) from discontinued operations, net of income taxes,
including minority interests
    
    
    10.6
    
    
    
    (41.4
    )Net income (loss)
    
    $
    8.3
    
    
    $
    (63.9
    )
 The accompanying notes to consolidated financial statements are an integral part of these statements. 2




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions of dollars) For the Quarter Ended March 31, 2005 AccumulatedOther
    
    
    NoteComprehensive
    
    
    ReceivablePreference
    
    
    Common
    
    
    Additional
    
    
    Accumulated
    
    
    Income
    
    
    FromStock

    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)
    
    
    Parent
    
    
    TotalBALANCE December 31, 2004
    
    $
    .7
    
    
    $
    15.4
    
    
    $
    2,452.8
    
    
    $
    (2,648.3
    )
    
    $
    (5.5
    )
    
    $
    (2,191.7
    )
    
    $
    (2,376.6
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.3
    
    
    
    
    
    
    
    
    
    
    
    8.3Unrealized net decrease in
value of derivative
instruments arising
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    (2.3
    )Reclassification adjustment
for net realized losses
on derivative instruments
included in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .2
    
    
    
    
    
    
    
    .2Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.2Release of amount due from
parent
    
    
    
    
    
    
    
    
    
    
    (2,197.2
    )
    
    
    
    
    
    
    
    
    
    
    2,191.7
    
    
    
    (5.5
    )BALANCE, March 31, 2005
    
    $
    .7
    
    
    $
    15.4
    
    
    $
    255.6
    
    
    $
    (2,640.0
    )
    
    $
    (7.6
    )
    
    $
    
    
    
    $
    (2,375.9
    )
 For the Quarter Ended March 31, 2004 AccumulatedOther
    
    
    NoteComprehensive
    
    
    ReceivablePreference
    
    
    Common
    
    
    Additional
    
    
    Accumulated
    
    
    Income
    
    
    FromStock
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    

(Loss)
    
    
    Parent
    
    
    TotalBALANCE, December 31, 2003
    
    $
    .7
    
    
    $
    15.4
    
    
    $
    2,454.0
    
    
    $
    (1,901.7
    )
    
    $
    (107.9
    )
    
    $
    (2,191.7
    )
    
    $
    (1,731.2
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63.9
    )
    
    
    
    
    
    
    
    
    
    
    (63.9
    )Unrealized net increase in
value of derivative
instruments arising
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3Reclassification adjustment
for net realized losses
on derivative instruments
included in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .5
    
    
    
    
    
    
    
    .5Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62.1
    )BALANCE, December 31, 2004
    
    $
    .7
    
    
    $
    15.4
    
    
    $
    2,454.0
    
    
    $
    (1,965.6
    )
    
    $
    (106.1
    )
    
    $
    (2,191.7
    )
    
    $
    (1,793.3
    )
 The accompanying notes to consolidated financial statements are an integral part of these statements. 3




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) STATEMENTS OF CONSOLIDATED CASH FLOWS Quarter Ended March 31,2005
    
    
    2004(Unaudited)(In millions of dollars)Cash flows from operating activities:Net income (loss)
    
    $
    8.3
    
    
    $
    (63.9
    )Less net income (loss) from discontinued operations
    
    
    10.6
    
    
    
    (41.4
    )Net loss from continuing operations
    
    
    (2.3
    )
    
    
    (22.5
    )Adjustments to reconcile net loss from continuing operations to net cash
used by continuing operations:Depreciation and amortization (including deferred financing costs of
$1.7 and $1.1, respectively)
    
    
    6.6
    
    
    
    6.6Equity in loss (income) of unconsolidated affiliate, net of distributions
    
    
    1.0
    
    
    
    (2.4
    )Decrease (increase) in trade and other receivables
    
    
    2.8
    
    
    
    (3.2
    )Increase in inventories
    
    
    (.6
    )
    
    
    (16.7
    )Increase in prepaid expenses and other current assets
    
    
    (2.5
    )
    
    
    (2.4
    )(Decrease) increase in accounts payable and accrued interest
    
    
    (7.0
    )
    
    
    10.6Increase in other accrued liabilities
    
    
    4.8
    
    
    
    3.0(Decrease) increase in payable to affiliate
    
    
    (2.1
    )
    
    
    2.1(Decrease) increase in accrued and deferred income taxes
    
    
    (.5
    )
    
    
    .7Net cash impact of changes in long-term assets and liabilities
    
    
    (1.0
    )
    
    
    .3Net cash used by discontinued operations
    
    
    (7.4
    )
    
    
    (2.7
    )Other
    
    
    (.1
    )
    
    
    .1Net cash used by operating activities
    
    
    (8.3
    )
    
    
    (26.5
    )Cash flows from investing activities:Capital expenditures
    
    
    (3.8
    )
    
    
    (1.6
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    6.1Net cash (used) provided by investing activities
    
    
    (3.8
    )
    
    
    4.5Cash flows from financing activities:Financing costs, primarily DIP Facility related
    
    
    (3.3
    )
    
    
    (.2
    )Increase in restricted cash
    
    
    (15.0
    )
    
    
    Net cash used by discontinued operations
    
    
    (.5
    )
    
    
    Net cash used by financing activities
    
    
    (18.8
    )
    
    
    (.2
    )Net decrease in cash and cash equivalents during the period
    
    
    (30.9
    )
    
    
    (22.2
    )Cash and cash equivalents at beginning of period
    
    
    55.4
    
    
    
    35.5Cash and cash equivalents at end of period
    
    $
    24.5
    
    
    $
    13.3Supplemental disclosure of cash flow information:Interest paid, net of capitalized interest of $.1 and $.1
    
    $
    .4
    
    
    $
    .7Less interest paid by discontinued operations
    
    
    
    
    
    
    (.4
    )$
    .4
    
    
    $
    .3Income taxes paid
    
    $
    10.5
    
    
    $
    1.1Less income taxes paid by discontinued operations
    
    
    (8.7
    )
    
    
    (1.1
    )$
    1.8
    
    
    $
    
 The accompanying notes to consolidated financial statements are an integral part of these statements. 4




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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars)
(Unaudited) 1. Reorganization Proceedings Background.Kaiser Aluminum & Chemical Corporation (the Company), its parent company,
Kaiser Aluminum Corporation (Kaiser or KAC), and 24 of the Companys subsidiaries have filed
separate voluntary petitions in the United States Bankruptcy Court for the District of Delaware
(the Court) for reorganization under Chapter 11 of the United States Bankruptcy Code (the
Code); the Company, Kaiser and 15 of the Companys subsidiaries (the Original Debtors) filed in
the first quarter of 2002 and nine additional Company subsidiaries (the Additional Debtors) filed
in the first quarter of 2003. The Original Debtors and Additional Debtors are collectively referred
to herein as the Debtors and the Chapter 11 proceedings of these entities are collectively
referred to herein as the Cases. For purposes of this Report, the term Filing Date means, with
respect to any particular Debtor, the date on which such Debtor filed its Case. None of the
Companys non-U.S. joint ventures were included in the Cases. The Cases are being jointly
administered. The Debtors are managing their businesses in the ordinary course as
debtors-in-possession subject to the control and administration of the Court. During the first quarter of 2002, the Original Debtors filed separate voluntary petitions for
reorganization. The wholly owned subsidiaries of the Company included in such filings were: Kaiser
Bellwood Corporation (Bellwood), Kaiser Aluminium International, Inc. (KAII), Kaiser Aluminum
Technical Services, Inc. (KATSI), Kaiser Alumina Australia Corporation (KAAC) (and its wholly
owned subsidiary, Kaiser Finance Corporation (KFC)) and ten other entities with limited balances
or activities. The Original Debtors found it necessary to file the Cases primarily because of liquidity and
cash flow problems of the Company and its subsidiaries that arose in late 2001 and early 2002. The
Company was facing significant near-term debt maturities at a time of unusually weak aluminum
industry business conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, the Company had become
increasingly burdened by asbestos litigation and growing legacy obligations for retiree medical and
pension costs. The confluence of these factors created the prospect of continuing operating losses
and negative cash flows, resulting in lower credit ratings and an inability to access the capital
markets. On January 14, 2003, the Additional Debtors filed separate voluntary petitions for
reorganization. The wholly owned subsidiaries included in such filings were: Kaiser Bauxite Company
(KBC), Kaiser Jamaica Corporation (KJC), Alpart Jamaica Inc. (AJI), Kaiser Aluminum &
Chemical of Canada Limited (KACOCL) and five other entities with limited balances or activities.
Ancillary proceedings in respect of KACOCL and two Additional Debtors were also commenced in Canada
simultaneously with the January 14, 2003 filings. The Cases filed by the Additional Debtors were commenced, among other reasons, to protect the
assets held by these Debtors against possible statutory liens that might have arisen and been
enforced by the Pension Benefit Guaranty Corporation (PBGC) primarily as a result of the
Companys failure to meet a $17.0 accelerated funding requirement to its salaried employee
retirement plan in January 2003 (see Note 8 for additional information regarding the accelerated
funding requirement). The filing of the Cases by the Additional Debtors had no impact on the
Companys day-to-day operations. The outstanding principal of, and accrued interest on, all debt of the Debtors became
immediately due and payable upon commencement of the Cases. However, the vast majority of the
claims in existence at the Filing Date (including claims for principal and accrued interest and
substantially all legal proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Debtors Cases, the Court, upon motion by the Debtors, authorized
the Debtors to pay or otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business, subject to certain
limitations and to continue using the Companys existing cash management systems. The Debtors also
have the right to assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, assumption means that the
Debtors agree to perform their obligations and cure certain existing defaults under an executory
contract and rejection means that the Debtors are relieved from their obligations to 5




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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) perform further under an executory contract and are subject only to a claim for damages for
the breach thereof. Any claim for damages resulting from the rejection of a pre-Filing Date
executory contract is treated as a general unsecured claim in the Cases. Case Administration.Generally, pre-Filing Date claims, including certain contingent or
unliquidated claims, against the Debtors will fall into two categories: secured and unsecured.
Under the Code, a creditors claim is treated as secured only to the extent of the value of the
collateral securing such claim, with the balance of such claim being treated as unsecured.
Unsecured and partially secured claims do not accrue interest after the Filing Date. A fully
secured claim, however, does accrue interest after the Filing Date until the amount due and owing
to the secured creditor, including interest accrued after the Filing Date, is equal to the value of
the collateral securing such claim. The bar dates (established by the Court) by which holders of
pre-Filing Date claims against the Debtors (other than asbestos-related personal injury claims)
could file their claims have passed. Any holder of a claim that was required to file such claim by
such bar date and did not do so may be barred from asserting such claim against any of the Debtors
and, accordingly, may not be able to participate in any distribution in any of the Cases on account
of such claim. The Company has not yet completed its analysis of all of the proofs of claim to
determine their validity. However, during the course of the Cases, certain matters in respect of
the claims have been resolved. Material provisions in respect of claim settlements are included in
the accompanying financial statements and are fully disclosed elsewhere herein. The bar dates do
not apply to asbestos-related personal injury claims, for which no bar date has been set. Two creditors committees, one representing the unsecured creditors (the UCC) and the other
representing the asbestos claimants (the ACC), have been appointed as official committees in the
Cases and, in accordance with the provisions of the Code, have the right to be heard on all matters
that come before the Court. In August 2003, the Court approved the appointment of a committee of
salaried retirees (the 1114 Committee and, together with the UCC and the ACC, the Committees)
with whom the Debtors have negotiated necessary changes, including the modification or termination,
of certain retiree benefits (such as medical and insurance) under Section 1114 of the Code. The
Committees, together with the Court-appointed legal representatives for (a) potential future
asbestos claimants (the Asbestos Futures Representative) and (b) potential future silica and
coal tar pitch volatile claimants (the Silica/CTPV Futures Representative and, collectively with
the Asbestos Futures Representative, the Futures Representatives), have played and will
continue to play important roles in the Cases and in the negotiation of the terms of any plan or
plans of reorganization. The Debtors are required to bear certain costs and expenses for the
Committees and the Futures Representatives, including those of their counsel and other advisors. As provided by the Code, the Debtors had the exclusive right to propose a plan of
reorganization for 120 days following the initial Filing Date. The Court has subsequently approved
several extensions of the exclusivity period for all Debtors. Most recently, the Court approved an
extension of exclusivity as to all Debtors (other than AJI, KJC, KAAC and KFC) to June 30, 2005.
The most recent exclusivity period for AJI, KJC, KAAC and KFC was set to expire on April 30, 2005.
A motion to extend the exclusivity period for AJI, KJC, KAAC and KFC through June 30, 2005 was
filed by the Debtors on April 29, 2005. By filing the motion to extend the exclusivity period, the
period is automatically extended until the June 2005 Court hearing date. While the Debtors expect
that the motion will be approved by the Court, no assurance can be given as to such approval.
Additional extensions may be sought. However, no assurance can be given that any such future
extension requests will be granted by the Court. If the Debtors fail to file a plan of
reorganization during the exclusivity period, or if such plan is not accepted by the requisite
numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in
the Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. Commodity-related and Inactive Subsidiaries.As previously disclosed, with the sale of its
interests in and related to Queensland Alumina Limited (QAL), which closed on April 1, 2005, the
Company has sold all of its commodity-related interests other than its interests in Anglesey
Aluminium Limited (Anglesey). It is anticipated that, as more fully discussed below, the proceeds
from the sale of these interests will be distributed primarily to the affected subsidiaries
creditors pursuant to certain liquidating plans and other agreements. The primary subsidiaries
affected by this strategy are AJI, KJC, KAAC, KFC and KBC. During November 2004, four of the Companys commodity-related subsidiaries (AJI, KJC, KAAC and
KFC, collectively, the Liquidating Subsidiaries) filed separate joint plans of liquidation and
related disclosure statements with the Court. Such plans, 6




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) together with the disclosure statements and all amendments filed thereto, are separately
referred to as the AJI/KJC Plan and the KAAC/KFC Plan and collectively as the Liquidating
Plans). Under the Liquidating Plans, the assets of those entities, consisting primarily of the net
cash proceeds received (or to be received) by them in connection with the sales of their
commodities interests, will be transferred to liquidating trusts, whereupon the Liquidating
Subsidiaries will be dissolved. The liquidating trusts will then make distributions to the
creditors of the Liquidating Subsidiaries in accordance with the Liquidating Plans. As indicated in
the Liquidating Plans, it is currently anticipated that the Liquidating Subsidiaries will have an
aggregate of approximately $673.8 of cash available for distribution to creditors when the
Liquidating Plans become effective. The Liquidating Plans outline the specific treatment of
creditors and their estimated recoveries in respect of the Liquidating Subsidiaries under several
possible scenarios. The Liquidating Plans indicate that, after payment of priority claims, trust
expenses (initial reserves for which are expected to be established in the range of $37.0 to
$46.0), and payments to the Company under the Intercompany Settlement Agreement (Intercompany
Agreement) (see discussion below) the Liquidating Subsidiaries anticipate ultimately distributing
available cash to the following claimholders in the following amounts: Senior Notes and Senior Subordinated Notes
    
    $
    390.7 to $421.8PBGC
    
    $
    187.6 to $198.5State of Louisiana Solid Waste Revenue Bonds
    
    $0.0 to  $8.0
 The Liquidating Plans as filed with the Court provide that $16.0 of payments were to be made
for the benefit of holders of the Companys 12 3/4% Senior Subordinated Notes (the Sub Notes) if,
and only if, the holders of both (a) the Companys 9 7/8% Senior Notes and 10 7/8% Senior Notes
(collectively, the Senior Notes) and (b) the Sub Notes, approved the plans. If either the holders
of the Senior Notes or the Sub Notes failed to accept the Liquidating Plans, the Court will
determine distributions to such holders. Holders of the Parish of St. James, State of Louisiana,
Solid Waste Disposal Revenue Bonds (the Revenue Bonds) were not allowed a vote on the Liquidating
Plans but will receive up to $8.0 only if the Liquidating Plans are accepted by the Senior Notes
and, unless the holders of the Senior Notes agree, all holders of the Senior Notes receive the
identical treatment under the Liquidating Plans. If the Liquidating Plans were not accepted by the
holders of the Senior Notes then, pursuant to the Liquidating Plans, the Court was to determine the
distributions to the Revenue Bonds. Any amounts paid in respect of the Sub Notes and the Revenue
Bonds will be paid from amounts that otherwise would be distributed to holders of the Senior Notes. As previously disclosed, a group of holders of the Sub Notes (the Sub Note Group) has formed
an unofficial committee to represent all holders of Sub Notes and retained its own legal counsel.
The Sub Note Group is asserting that the Sub Note holders claims against the subsidiary guarantors
(and in particular the Liquidating Subsidiaries) may not, as a technical matter, be contractually
subordinate to the claims of the holders of the Senior Notes against the subsidiary guarantors
(including AJI, KJC, KAAC and KFC). A separate group that holds both Sub Notes and the Companys 9
7/8% Senior Notes has made a similar assertion, but at the same time, maintains that a portion of
the Companys 9 7/8% Senior Notes holders claims against the subsidiary guarantors are
contractually senior to the Sub Notes holders claims against the subsidiary guarantors. The effect
of such positions, if ultimately sustained, would be that the holders of Sub Notes would be on a
par with all or portion of the holders of the Senior Notes in respect of proceeds from sales of the
Companys interests in and related to the Liquidating Subsidiaries. If both the holders of the
Senior Notes and the holders of the Sub Notes do not approve the Liquidating Plans, then the Court
will determine the appropriate allocation to these groups under the Liquidating Plans. While the
Company cannot currently predict how the Court might rule in such an instance, based on the
objections and pleadings filed by the Sub Note Group and the group that holds Sub Notes and the
Companys 9 7/8% Senior Notes, if the Court were to rule in favor of the Sub Notes, the Company
estimates that it is possible that the holders of the Sub Notes could receive between approximately
$67.0 and approximately $215.0 depending on whether the Sub Notes were determined to rank on par
with a portion or all of the Senior Notes. Conversely, if the holders of both the Senior Notes and
the Sub Notes do not approve the Liquidating Plans and the Court were to rule in favor of the
Senior Notes, then it is possible that the holders of the Sub Notes would receive no distributions
under Liquidating Plans. The Company believes that the intent of the indentures in respect of the
Senior Notes and the Sub Notes was to subordinate the claims of the Sub Note holders in respect of
the subsidiary guarantors (including the Liquidating Subsidiaries). The Company cannot predict,
however, the ultimate resolution of the matters raised by the Sub Note Group, or the other group,
when any such resolution will occur, or what impact any such resolution may have on the Company,
the Cases or distributions to affected noteholders. 7




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) The Court approved the disclosure statements related to the Liquidating Plans in February
2005. In April 2005, voting results on the Liquidating Plans were filed with the Court by the
Debtors claims agent. Based on these results, the Court determined that a sufficient volume of creditors (in number and amount) had voted to accept the Liquidating Plans
to permit confirmation proceedings with respect to the Liquidating Plans to go forward even though
the filing by the claims agent also indicated that holders of the Sub Notes, as a group, voted not
to accept the Liquidating Plans. Accordingly, as discussed above, the Court has conducted a series
of evidentiary hearings to determine the allocation of distributions among holders of the Senior
Notes and the Sub Notes. In connection with those proceedings to date, the Court has determined
that the allocation to the Revenue Bonds would be up to $8.0 and has ruled against the position
asserted by the separate group that holds both 9?% Senior Notes and the Sub Notes. The Court has
not ruled in respect of the position asserted by the Sub Note Group. The Court has set a further
briefing schedule that will extend into June 2005, and all rulings in respect of these matters are
subject to appeal. There can be no assurance as to whether or when the Liquidating Plans will be
confirmed by the Court or ultimately consummated or, if confirmed and consummated, as to the amount
of distributions to be made to individual creditors of the Liquidating Subsidiaries or the Company,
or what impact any such resolution may have on the Company and its ongoing reorganization efforts.
The Liquidating Plans relate exclusively to AJI, KJC, KAAC and KFC and will have no impact on the
normal, ongoing operations of the Companys Fabricated products business unit or other continuing
operations. The above amounts are net of payments that are to be made by AJI, KJC and KAAC to the Company
in respect of pre-petition and post-Filing Date intercompany claims pursuant to the Intercompany
Agreement that was approved by the Court in February 2005. The Intercompany Agreement also resolves
substantially all other pre-and post-petition intercompany claims between the Debtors. The
Intercompany Agreement provides, among other things, for payments of cash by AJI, KJC and KAAC from
the sale of their respective interests in and related to Alumina Partners of Jamaica (Alpart) and
QAL to the Company of at least $90.0 in respect of its intercompany claims against AJI, KJC and
KAAC. Under the Intercompany Agreement, such payments would be increased or decreased for (1) any
net cash flows funded by or collected by the Company related to: (a) the Companys interests in and
related to Alpart from January 1, 2004 through July 1, 2004 (estimated to be approximately $21.0
collected by the Company); (b) the Companys interests in and related to QAL from July 1, 2004
through the KAAC emergence from Chapter 11 (estimated to be in the $20.0 range collected by
the Company through March 31, 2005); and (c) third party costs and certain limited overhead of the
Companys activities related to the sale of AJIs, KJCs and KAACs respective interests in and
related to Alpart and QAL and (2) any purchase price adjustments (other than incremental amounts
related to alumina sales contracts to be transferred) pursuant to the Companys sale of its
interests in Alpart. As provided under the Intercompany Agreement, the Company was reimbursed for
approximately $14.5 of payments made in the third quarter of 2004 to retire Alpart-related debt and
$28.0 in November 2004 as a partial payment of Alpart-related sales proceeds. The Intercompany
Agreement calls for the remaining payments to be made in specific increments to the Company upon
the effective dates of the Liquidating Plans. It is anticipated that KBC will be dealt with either separately or in concert with the Company
plan of reorganization as more fully discussed below. Sixteen of the Debtors have no material
ongoing activities or operations and have no material assets or liabilities other than intercompany
claims (which are to be resolved pursuant to the Intercompany Agreement). The Company believes that
it is likely that most of these entities will ultimately be merged out of existence or dissolved in
some manner. Entities Containing the Fabricated Products and Certain Other Operations.Claims of
creditors, other than claims paid by the Liquidating Subsidiaries under the Liquidating Plans, will
have to be satisfied by the assets of the Company, KACOCL, and Bellwood, which generally include
the fabricated products plants and their working capital, the interests in and related to Anglesey
Aluminium Limited (Anglesey) and proceeds to be received under the Intercompany Agreement. The Debtors anticipate that substantially all remaining liabilities of the Debtors as of their
Filing Date will be settled under a single joint plan of reorganization to be proposed and voted on
in accordance with the provisions of the Code. In working toward a plan of reorganization, as more
fully discussed below, the remaining Debtors have reached individual agreements with most of the
significant creditor constituents in the Cases including the Committees, the Futures
Representatives, the PBGC, and the appropriate union representatives. However, the ultimate
treatment of individual groups of creditors in any such plan of 8




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) reorganization cannot be determined definitively at this time as such treatment (and the
specific recoveries of individual creditors) is dependent on, among other things, the total amount
of claims against the Debtors as ultimately determined by the Court, the priority of the applicable
claims, the outcome of ongoing discussions with the key creditor constituencies, the amount of
value available for distribution in respect of claims and the completion of the plan confirmation
process consistent with applicable bankruptcy law. Further, while the Debtors intend to file and
seek confirmation of a plan, there can be no assurance as to when the Debtors will file such a plan
or as to whether any such plan will be confirmed by the Court and consummated. The Debtors objective is to achieve the highest possible recoveries for all stakeholders,
consistent with the Debtors abilities to pay, and to continue the operations of their core
businesses. However, there can be no assurance that the Debtors will be able to attain these
objectives or achieve a successful reorganization. While valuation of the Debtors assets and
estimation of pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is likely that their
liabilities will be found to significantly exceed the fair value of their assets. Therefore, the
Debtors currently believe that, with limited exceptions, it is likely that substantially all
pre-Filing Date claims will be settled at less than 100% of their face value and the equity
interests of the Companys stockholders will be cancelled without consideration. Based on the previously disclosed agreements and understandings reached with key creditor
constituents, the Company anticipates that the disclosure statement and plan of reorganization for
the Company, Kaiser and other Debtors necessary to ongoing operations will reflect the following
principle elements: (a) All post-petition and secured claims are expected to either be assumed by the emerging
entity or paid at emergence (see Exit Cost discussion below); (b) Pursuant to agreements reached with salaried and hourly retirees in early 2004, in
return for cancellation of the retiree medical plan, as more fully discussed in Note 8, the
Company is making certain fixed monthly payments into Voluntary Employee Beneficiary Associations
(VEBAs) until emergence and then has agreed to make certain variable annual VEBA contributions
depending on the emerging entitys operating results and financial liquidity. In addition, upon
emergence the VEBAs are to receive a contribution of 75% of the residual value of the remaining
Debtors in the form of newly issued equity in the emerging entity. Residual value in this context
means the Companys remaining value after taking into account: (i) the contributions to the
personal injury trust described below; (ii) the satisfaction of administrative, priority and
secured claims as per (a) above; (iii) an equity incentive plan; and (iv) the satisfaction of the
PBGCs claim against KACOCL; (c) Pursuant to an agreement reached in early 2005, all pending and future asbestos-related
personal injury claims, all pending and future silica and coal tar pitch volatiles personal
injury claims and all hearing loss claims would be resolved through the formation of one or more
trusts to which all such claims would be directed by channeling injunctions that would
permanently remove all liability for such claims from the Debtors. The trusts would be funded
pursuant to statutory requirements and agreements with representatives of the affected parties,
using (i) the Debtors insurance assets, (ii) $13.0 in cash from the Company, (iii) 100% of the
equity in a Company subsidiary whose sole asset will be a piece of real property that produces
modest rental income, and (iv) a portion of the emerging entitys equity in proportion to
approximately $830.0 of intercompany claims of KFC against the Company that are to be assigned to
the trust (which will be satisfied out of the 25% of equity referred to in (d) below); and (d) Other pre-petition claims will receive 25% of the residual value of the remaining
Debtors in the form of equity in the emerging entity. Claims that are expected to be within this
group include (i) any claims of the Senior Notes, the Sub Notes and PBGC that are not satisfied
under the Liquidating Plans, (ii) the approximate $830.0 of intercompany claims that the Company
has agreed to assign to the personal injury trust(s) referred to in (c) above, and (iii) all
unsecured trade and other claims. Included in this category are approximately $276.0 of
intercompany claims of KFC against the Company. At emergence from Chapter 11, the Company will have to pay or otherwise provide for a material
amount of claims. Such claims include accrued but unpaid professional fees, priority pension, tax
and environmental claims, secured claims, and certain 9




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) post-petition obligations (collectively, Exit Costs). The Company currently estimates that
its Exit Costs will be in the range of $60.0 to $80.0. The Company currently expects to fund such
Exit Costs using the proceeds to be received under the Intercompany Agreement together with
existing cash resources and available borrowing availability under an exit financing facility that
would replace the current Post-Petition Credit Agreement (see Note 6). If payments made to the
Company under the Intercompany Agreement together with existing cash resources and borrowing
availability under an exit financing facility are not sufficient to pay or otherwise provide for
all Exit Costs, the Company and Kaiser will not be able to emerge from Chapter 11 unless and until
sufficient funding can be obtained. Management believes it will be able to successfully resolve any
issues that may arise in respect of an exit financing facility or be able to negotiate a reasonable
alternative. However, no assurances can be given in this regard. The Company believes that it is not likely that it will emerge from the Cases until sometime
in the second half of 2005. However, the Companys ability to do so and to ultimately emerge from
the Cases is subject to a number of factors, including, among others, inherent market-related
risks, Court approval for various matters and the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances can be given as to
whether or when any plan or plans of reorganization will ultimately be filed or confirmed. Financial Statement Presentation.The accompanying consolidated financial statements have
been prepared in accordance with American Institute of Certified Professional Accountants (AICPA)
Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code, and on a going concern basis, which contemplates the realization of assets and
the liquidation of liabilities in the ordinary course of business. However, as a result of the
Cases, such realization of assets and liquidation of liabilities are subject to a significant
number of uncertainties. Upon emergence from the Cases, the Company expects to apply fresh start accounting to its
consolidated financial statements as required by SOP 90-7. Fresh start accounting is required if:
(1) a debtors liabilities are determined to be in excess of its assets and (2) there will be a
greater than 50% change in the equity ownership of the entity. As previously disclosed, the Company
expects both such circumstances to apply. As such, upon emergence, the Company will restate its
balance sheet to equal the reorganization value as determined in its plan(s) of reorganization and
approved by the Court. Additionally, items such as accumulated depreciation, accumulated deficit
and accumulated other comprehensive income (loss) will be reset to zero. The Company will allocate
the reorganization value to its individual assets and liabilities based on their estimated fair
value at the emergence date. Typically such items as current liabilities, accounts receivable, and
cash will be reflected at values similar to those reported prior to emergence. Items such as
inventory, property, plant and equipment, long-term assets and long-term liabilities are more
likely to be significantly adjusted from amounts previously reported. Because fresh start
accounting will be adopted at emergence and because of the significance of liabilities subject to
compromise (that will be relieved upon emergence), comparisons between the current historical
financial statements and the financial statements upon emergence may be difficult to make. Financial Information.Condensed consolidating financial statements of the Debtors and
non-Debtors are set forth below: 10




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Balance Sheets
March 31, 2005 Consolidation/EliminationDebtors
    
    
    Non-Debtors
    
    
    Entries
    
    
    ConsolidatedCurrent assets
    
    $
    270.3
    
    
    $
    2.0
    
    
    $
    
    
    
    $
    272.3Discontinued operations current assets
    
    
    40.3
    
    
    
    
    
    
    
    
    
    
    
    40.3Investments in subsidiaries and affiliate
    
    
    19.7
    
    
    
    
    
    
    
    (4.0
    )
    
    
    15.7Intercompany receivables (payables), net
    
    
    (4.6
    )
    
    
    4.6
    
    
    
    
    
    
    
    Property and equipment, net
    
    
    213.4
    
    
    
    
    
    
    
    
    
    
    
    213.4Restricted proceeds from sale of
commodity interests
    
    
    281.3
    
    
    
    
    
    
    
    
    
    
    
    281.3Personal injury-related insurance recoveries receivable
    
    
    967.0
    
    
    
    
    
    
    
    
    
    
    
    967.0Other assets
    
    
    43.6
    
    
    
    
    
    
    
    
    
    
    
    43.6Discontinued operations long term assets
    
    
    42.9
    
    
    
    
    
    
    
    
    
    
    
    42.9$
    1,873.9
    
    
    $
    6.6
    
    
    $
    (4.0
    )
    
    $
    1,876.5Liabilities not subject to compromise Current liabilities
    
    $
    182.4
    
    
    $
    3.4
    
    
    $
    (2.0
    )
    
    $
    183.8Discontinued operations current liabilities
    
    
    53.1
    
    
    
    
    
    
    
    
    
    
    
    53.1Long-term liabilities
    
    
    35.0
    
    
    
    1.2
    
    
    
    
    
    
    
    36.2Discontinued operations long-term liabilities
    
    
    26.4
    
    
    
    
    
    
    
    
    
    
    
    26.4Liabilities subject to compromise
    
    
    3,952.9
    
    
    
    
    
    
    
    
    
    
    
    3,952.9Stockholders equity (deficit)
    
    
    (2,375.9
    )
    
    
    2.0
    
    
    
    (2.0
    )
    
    
    (2,375.9
    )$
    1,873.9
    
    
    $
    6.6
    
    
    $
    (4.0
    )
    
    $
    1,876.5
 Condensed Consolidating Balance Sheets
December 31, 2004 Consolidation/EliminationDebtors
    
    
    Non-Debtors
    
    
    Entries
    
    
    ConsolidatedCurrent assets
    
    $
    294.5
    
    
    $
    2.1
    
    
    $
    
    
    
    $
    296.6Discontinued operations current assets
    
    
    30.6
    
    
    
    
    
    
    
    
    
    
    
    30.6Investments in subsidiaries and affiliate
    
    
    20.9
    
    
    
    
    
    
    
    (4.2
    )
    
    
    16.7Intercompany receivables (payables), net
    
    
    (4.5
    )
    
    
    4.5
    
    
    
    
    
    
    
    Property and equipment, net
    
    
    214.6
    
    
    
    
    
    
    
    
    
    
    
    214.6Restricted proceeds from sale of
commodity interests
    
    
    280.8
    
    
    
    
    
    
    
    
    
    
    
    280.8Personal injury-related insurance recoveries receivable
    
    
    967.0
    
    
    
    
    
    
    
    
    
    
    
    967.0Other assets
    
    
    42.5
    
    
    
    
    
    
    
    
    
    
    
    42.5Discontinued operations long term assets
    
    
    38.9
    
    
    
    
    
    
    
    
    
    
    
    38.9$
    1,885.3
    
    
    $
    6.6
    
    
    $
    (4.2
    )
    
    $
    1,887.7Liabilities not subject to compromise Current liabilities
    
    $
    188.4
    
    
    $
    3.2
    
    
    $
    (2.0
    )
    
    $
    189.6Discontinued operations current liabilities
    
    
    57.7
    
    
    
    
    
    
    
    
    
    
    
    57.7Long-term liabilities
    
    
    34.5
    
    
    
    1.2
    
    
    
    
    
    
    
    35.7Discontinued operations long-term liabilities
    
    
    26.4
    
    
    
    
    
    
    
    
    
    
    
    26.4Liabilities subject to compromise
    
    
    3,954.9
    
    
    
    
    
    
    
    
    
    
    
    3,954.9Stockholders equity (deficit)
    
    
    (2,376.6
    )
    
    
    2.2
    
    
    
    (2.2
    )
    
    
    (2,376.6
    )$
    1,885.3
    
    
    $
    6.6
    
    
    $
    (4.2
    )
    
    $
    1,887.7
 11




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Statements of Income (Loss)
For the Quarter Ended March 31, 2005 Consolidation/EliminationDebtors
    
    
    Non-Debtors
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    281.4
    
    
    $
    
    
    
    $
    
    
    
    $
    281.4Costs and expenses Operating costs and expenses
    
    
    264.7
    
    
    
    .1
    
    
    
    
    
    
    
    264.8Other operating charges
    
    
    6.2
    
    
    
    
    
    
    
    
    
    
    
    6.2270.9
    
    
    
    .1
    
    
    
    
    
    
    
    271.0Operating income (loss)
    
    
    10.5
    
    
    
    (.1
    )
    
    
    
    
    
    
    10.4Interest expense
    
    
    (2.1
    )
    
    
    
    
    
    
    
    
    
    
    (2.1
    )All other income (expense), net
    
    
    (8.2
    )
    
    
    
    
    
    
    
    
    
    
    (8.2
    )Income tax and minority interests
    
    
    (2.4
    )
    
    
    
    
    
    
    
    
    
    
    (2.4
    )Equity in income of subsidiaries
    
    
    (.1
    )
    
    
    
    
    
    
    .1
    
    
    
    Loss from continuing operations
    
    
    (2.3
    )
    
    
    (.1
    )
    
    
    .1
    
    
    
    (2.3
    )Discontinued operations
    
    
    10.6
    
    
    
    
    
    
    
    
    
    
    
    10.6Net income (loss)
    
    $
    8.3
    
    
    $
    (.1
    )
    
    $
    .1
    
    
    $
    8.3
 Condensed Consolidating Statements of Income (Loss)
For the Quarter Ended March 31, 2004 Consolidation/EliminationDebtors
    
    
    Non-Debtors
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    210.2
    
    
    $
    
    
    
    $
    
    
    
    $
    210.2Costs and expenses Operating costs and expenses
    
    
    220.2
    
    
    
    .2
    
    
    
    
    
    
    
    220.4Other operating charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220.2
    
    
    
    .2
    
    
    
    
    
    
    
    220.4Operating income (loss)
    
    
    (10.0
    )
    
    
    (.2
    )
    
    
    
    
    
    
    (10.2
    )Interest expense
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    (2.0
    )All other income (expense), net
    
    
    (11.7
    )
    
    
    
    
    
    
    2.9
    
    
    
    (8.8
    )Income tax and minority interests
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Equity in income of subsidiaries
    
    
    (35.0
    )
    
    
    
    
    
    
    35.0
    
    
    
    Loss from continuing operations
    
    
    (60.2
    )
    
    
    (.2
    )
    
    
    37.9
    
    
    
    (22.5
    )Discontinued operations
    
    
    (3.7
    )
    
    
    (37.7
    )
    
    
    
    
    
    
    (41.4
    )Net income (loss)
    
    $
    (63.9
    )
    
    $
    (37.9
    )
    
    $
    37.9
    
    
    $
    (63.9
    )
 12




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Statements of Cash Flows
For the Quarter Ended March 31, 2005 Consolidation/EliminationDebtors
    
    
    Non-Debtors
    
    
    Entries
    
    
    ConsolidatedNet cash provided (used) by:Operating activities Continuing operations
    
    $
    (.9
    )
    
    $
    
    
    
    $
    
    
    
    $
    (.9
    )Discontinued operations
    
    
    (7.4
    )
    
    
    
    
    
    
    
    
    
    
    (7.4
    )(8.3
    )
    
    
    
    
    
    
    
    
    
    
    (8.3
    )Investing activities Continuing operations
    
    
    (3.8
    )
    
    
    
    
    
    
    
    
    
    
    (3.8
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.8
    )
    
    
    
    
    
    
    
    
    
    
    (3.8
    )Financing activities Continuing operations
    
    
    (18.3
    )
    
    
    
    
    
    
    
    
    
    
    (18.3
    )Discontinued operations
    
    
    (.5
    )
    
    
    
    
    
    
    
    
    
    
    (.5
    )(18.8
    )
    
    
    
    
    
    
    
    
    
    
    (18.8
    )Net decrease in cash and cash equivalents
    
    
    (30.9
    )
    
    
    
    
    
    
    
    
    
    
    (30.9
    )Cash and cash equivalents, beginning of period
    
    
    55.0
    
    
    
    .4
    
    
    
    
    
    
    
    55.4Cash and cash equivalents, end of period
    
    $
    24.1
    
    
    $
    .4
    
    
    $
    
    
    
    $
    24.5
 Condensed Consolidating Statements of Cash Flows
For the Quarter Ended March 31, 2004 Consolidation/EliminationDebtors
    
    
    Non-Debtors
    
    
    Entries
    
    
    ConsolidatedNet cash provided (used) by:Operating activities Continuing operations
    
    $
    (23.6
    )
    
    $
    (.2
    )
    
    $
    
    
    
    $
    (23.8
    )Discontinued operations
    
    
    (4.2
    )
    
    
    1.5
    
    
    
    
    
    
    
    (2.7
    )(27.8
    )
    
    
    1.3
    
    
    
    
    
    
    
    (26.5
    )Investing activities Continuing operations
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    (1.6
    )Discontinued operations
    
    
    7.3
    
    
    
    (1.2
    )
    
    
    
    
    
    
    6.15.7
    
    
    
    (1.2
    )
    
    
    
    
    
    
    4.5Financing activities Continuing operations
    
    
    (.2
    )
    
    
    
    
    
    
    
    
    
    
    (.2
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.2
    )
    
    
    
    
    
    
    
    
    
    
    (.2
    )Net decrease in cash and cash equivalents
    
    
    (22.3
    )
    
    
    .1
    
    
    
    
    
    
    
    (22.2
    )Cash and cash equivalents, beginning of period
    
    
    35.4
    
    
    
    .1
    
    
    
    
    
    
    
    35.5Cash and cash equivalents, end of period
    
    $
    13.1
    
    
    $
    .2
    
    
    $
    
    
    
    $
    13.3
 Classification of Liabilities as Liabilities Not Subject to Compromise Versus Liabilities
Subject to Compromise.Liabilities not subject to compromise include: (1) liabilities incurred
after the Filing Date of the Cases; (2) pre-Filing Date liabilities that the Debtors expect to pay
in full, including priority tax and employee claims and certain environmental liabilities, 13




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) even though certain of these amounts may not be paid until a plan of reorganization is
approved; and (3) pre-Filing Date liabilities that have been approved for payment by the Court and
that the Debtors expect to pay (in advance of a plan of reorganization) over the next twelve-month
period in the ordinary course of business, including certain employee related items (salaries,
vacation and medical benefits), claims subject to a currently existing collective bargaining
agreement, and certain postretirement medical and other costs associated with retirees. Liabilities subject to compromise refer to all other pre-Filing Date liabilities of the
Debtors. The amounts of the various categories of liabilities that are subject to compromise are
set forth below. These amounts represent the Companys estimates of known or probable pre-Filing
Date claims that are likely to be resolved in connection with the Cases. Such claims remain subject
to future adjustments. Further, the Debtors currently believe that it is likely that substantially
all pre-Filing Date claims will be settled at less than 100% of their face value and the equity
interests of the Companys stockholders will be cancelled without consideration. The amounts subject to compromise at March 31, 2005 and December 31, 2004 consisted of the
following items: March 31,
    
    
    December 31,2005
    
    
    2004Accrued postretirement medical obligation (Note 8)
    
    $
    1,042.1
    
    
    $
    1,042.1Accrued asbestos and certain other personal injury liabilities (Note 9)
    
    
    1,115.0
    
    
    
    1,115.0Debt (Note 6)
    
    
    847.6
    
    
    
    847.6Accrued pension benefits (Note 8)
    
    
    623.6
    
    
    
    625.7Unfair labor practice settlement (Note 9)
    
    
    175.0
    
    
    
    175.0Accounts payable
    
    
    30.0
    
    
    
    29.8Accrued interest
    
    
    47.5
    
    
    
    47.5Accrued environmental liabilities (Note 9)
    
    
    30.6
    
    
    
    30.6Other accrued liabilities
    
    
    41.5
    
    
    
    41.6$
    3,952.9
    
    
    $
    3,954.9
   (1)
    
    Other accrued liabilities include hearing loss claims of $15.8 at March 31, 2005 and
December 31, 2004 (see Note 9).(2)
    
    The above amounts exclude $26.4 at March 31, 2005 and December 31, 2004 related to
discontinued operations. Such amounts were primarily accounts payable. The classification of liabilities not subject to compromise versus liabilities subject to
compromise is based on currently available information and analysis. As the Cases proceed and
additional information and analysis is completed or, as the Court rules on relevant matters, the
classification of amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the Company evaluates the proofs of claim filed in the
Cases, adjustments will be made for those claims that the Company believes will probably be allowed
by the Court. The amount of such claims could be significant. For example, pursuant to the PBGC
settlement agreement, which was approved by the Court in January 2005 (see Note 8), the PBGC will
be allowed a $14.0 administrative claim and the Company paid approximately $5.0 in March 2005 to
certain hourly pension plans which it will continue to sponsor. Since the PBGC settlement agreement
has been approved by the Court, such amounts have been reclassified from liabilities subject to
compromise to liabilities not subject to compromise. Reorganization Items.Reorganization items under the Cases are expense or income items that
are incurred or realized by the Company because it is in reorganization. These items include, but
are not limited to, professional fees and similar types of expenses incurred directly related to
the Cases, loss accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are not paying their
pre-Filing Date liabilities. For the quarters ended March 31, 2005 and 2004, reorganization items
were as follows: 14




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Quarter Ended March 31,2005
    
    
    2004Professional fees
    
    $
    8.0
    
    
    $
    8.3Interest income
    
    
    (.3
    )
    
    
    (.1
    )Other
    
    
    .1
    
    
    
    .4$
    7.8
    
    
    $
    8.6
 2. Summary of Significant Accounting Policies This Quarterly Report on Form 10-Q should be read in conjunction with the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. Going Concern.The interim consolidated financial statements of the Company have been
prepared on a going concern basis which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business; however, as a result of the
commencement of the Cases, such realization of assets and liquidation of liabilities are subject to
a significant number of uncertainties. Specifically, the consolidated financial statements do not
include all of the necessary adjustments to present: (a) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (b) the amount which
will ultimately be paid to settle liabilities and contingencies which may be allowed in the Cases,
or (c) the effect of any changes which may be made in connection with the Debtors capitalizations
or operations as a result of a plan of reorganization. Because of the ongoing nature of the Cases,
the discussions and consolidated financial statements contained herein are subject to material
uncertainties. Additionally, as discussed above (see Financial Statement Presentation in Note 1), the Company
believes that it would, upon emergence, apply fresh start accounting to its consolidated financial
statements which would also adversely impact the comparability of the March 31, 2005 financial
statements to the financial statements of the entity upon emergence. Principles of Consolidation.The Company is a wholly owned subsidiary of Kaiser, which is a
subsidiary of MAXXAM Inc. The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim financial information
and the rules and regulations of the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated financial statements
furnished herein include all adjustments, all of which are of a normal recurring nature unless
otherwise noted, necessary for a fair statement of the results for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting
principles requires the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the
financial statements are published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and assumptions, are inherent in
the preparation of the Companys consolidated financial statements; accordingly, it is possible
that the actual results could differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Companys consolidated financial position and
results of operation. Operating results for the quarter ended March 31, 2005, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2005. Derivative Financial Instruments.Hedging transactions using derivative financial instruments
are primarily designed to mitigate the Companys exposure to changes in prices for certain of the
products which the Company sells and consumes and, to a lesser extent, to mitigate the Companys
exposure to changes in foreign currency exchange rates. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Companys derivative
activities are initiated within 15




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) guidelines established by management and approved by the Companys board of directors. Hedging
transactions are executed centrally on behalf of all of the Companys operations to minimize
transaction costs, monitor consolidated net exposures and allow for increased responsiveness to
changes in market factors. See Notes 2 and 12 of Notes to Consolidated Financial Statements in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 for additional information regarding
derivative financial instruments. New Accounting Pronouncement.FASB Interpretation No. 47 (FIN 47), Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143(SFAS No.
143) was issued in March 2005 and is effective for fiscal years ending after December 15, 2005.
FIN 47 provides guidance in the recognition of a liability for an asset retirement obligation when
the timing and (or) method of settlement of the obligation is conditional on a future event that
may or may not be within the control of the entity. The Company has not completed its review of
FIN 47 and, as a result, is unable to determine what impact, if any, the implementation of FIN 47
will have on the Companys financial statements. Reclassifications.Certain prior years amounts in the consolidated financial statements have
been reclassified to conform to the 2005 presentations. The reclassifications had no impact on
prior years reported net loss. 3. Inventories Substantially all product inventories are stated at last-in, first-out (LIFO) cost, not in
excess of market value. Replacement cost is not in excess of LIFO cost. Inventories, after
deducting inventories related to discontinued operations, consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004Fabricated products Finished products
    
    $
    24.4
    
    
    $
    23.3Work in process
    
    
    38.3
    
    
    
    42.2Raw materials
    
    
    31.2
    
    
    
    27.9Operating supplies and repairs and maintenance parts
    
    
    11.8
    
    
    
    11.8105.7
    
    
    
    105.2Commodities  Primary aluminum
    
    
    .1
    
    
    
    .1$
    105.8
    
    
    $
    105.3
 The above table excludes commodities inventories related to discontinued operations of $9.8 in
2005 and $8.8 in 2004. Inventories related to discontinued operations in 2004 were reduced by a
LIFO inventory charge of $1.6 and a net charge of $1.2 to write down certain alumina inventories to
their estimated net realizable value as a result of the Companys sale of its interests in and
related to Volta Aluminium Company Limited (Valco) (Note 5). 4. Discontinued Operations As part of the Companys plan to divest certain of its commodity assets, as more fully
discussed in Notes 1 and 5, the Company completed the sale of its interests in and related to
Alpart, Gramercy, Kaiser Jamaica Bauxite Company (KJBC), Valco, and the Mead facility and certain
related property (the Mead Facility) in 2004 and the sale of its interests in and related to QAL
which closed on April 1, 2005. All of the foregoing commodity assets are collectively referred to
as the Commodity Interests. In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144), the assets,
liabilities, operating results and gains from sale of the Commodity Interests have been reported as
discontinued operations in the accompanying financial statements. 16




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Under SFAS No. 144, only those assets, liabilities and operating results that are being
sold/discontinued are treated as discontinued operations. In the case of the sale of
Gramercy/KJBC and the Mead Facility, the buyers did not assume such items as accrued workers
compensation, pension or postretirement benefit obligations in respect of the former employees of
these facilities. As discussed more fully in Note 1, the Company expects that retained obligations
will generally be resolved in the context of a plan of reorganization. As such, the balances
related to such obligations are still included in the consolidated financial statements. Because
the Company owned a 65% interest in Alpart, Alparts balances and results of operations were fully
consolidated into the Companys consolidated financial statements. Accordingly, the amounts
reflected below for Alpart include the 35% interest in Alpart owned by Hydro Aluminium as.
(Hydro). Hydros share of the net investment in Alpart is reflected as minority interest. The balances and operating results associated with the Companys interests in and related to
Alpart, Gramercy/KJBC and QAL were previously included in the Bauxite and alumina business segment
and the balances and operating results associated with the Companys interests in and related to
Valco and the Mead Facility were previously included in the Primary aluminum business segment. The
Company has also reported as discontinued operations the portion of the Commodity Marketing
external hedging activities that were attributable to the Companys Commodity Interests. The carrying amounts as of March 31, 2005 and December 31, 2004 of the assets and liabilities
in respect of the Companys interest in and related to the sold Commodity Interests included in
discontinued operations were as follows: March 31, 2005
    
    
    December 31, 2004Primary
    
    
    
    
    
    
    
    
    
    
    PrimaryAlumina
    
    
    Aluminum
    
    
    
    
    
    
    Alumina
    
    
    AluminumInterests
    
    
    Interests
    
    
    Total
    
    
    Interests
    
    
    Interests
    
    
    TotalCurrent assets
    
    $
    40.3
    
    
    $
    
    
    
    $
    40.3
    
    
    $
    30.6
    
    
    $
    
    
    
    $
    30.6Investments in affiliates and other
    
    
    42.9
    
    
    
    
    
    
    
    42.9
    
    
    
    38.9
    
    
    
    
    
    
    
    38.9$
    83.2
    
    
    $
    
    
    
    $
    83.2
    
    
    $
    69.5
    
    
    $
    
    
    
    $
    69.5Current liabilities
    
    $
    52.7
    
    
    $
    .4
    
    
    $
    53.1
    
    
    $
    57.3
    
    
    $
    .4
    
    
    $
    57.7Liabilities subject to compromise
    
    
    25.6
    
    
    
    .8
    
    
    
    26.4
    
    
    
    25.6
    
    
    
    .8
    
    
    
    26.4$
    78.3
    
    
    $
    1.2
    
    
    $
    79.5
    
    
    $
    82.9
    
    
    $
    1.2
    
    
    $
    84.1
 Income statement information in respect of the Companys interest in and related to the
sold Commodity Interests for the quarters ended March 31, 2005 and 2004 included in income (loss)
from discontinued operations was as follows: 2005
    
    
    2004Primary
    
    
    
    
    
    
    
    
    
    
    PrimaryAlumina
    
    
    Aluminum
    
    
    
    
    
    
    Alumina
    
    
    AluminumInterests
    
    
    Interests
    
    
    Total
    
    
    Interests
    
    
    Interests
    
    
    TotalNet sales
    
    $
    42.9
    
    
    $
    
    
    
    $
    42.9
    
    
    $
    159.9
    
    
    $
    
    
    
    $
    159.9Operating income (loss)
    
    
    11.4
    
    
    
    
    
    
    
    11.4
    
    
    
    9.7
    
    
    
    (47.5
    )
    
    
    (37.8
    )Income (loss) before income taxes and minority interests 
    
    
    13.2
    
    
    
    
    
    
    
    13.2
    
    
    
    9.4
    
    
    
    (47.4
    )
    
    
    (38.0
    )Net income (loss)
    
    
    10.6
    
    
    
    
    
    
    
    10.6
    
    
    
    5.6
    
    
    
    (47.0
    )
    
    
    (41.4
    )
   (1)
    
    Primary aluminum interests for the quarter ended March 31, 2004 include Valco impairment
charges of $33.0 (Notes 3 and 5). In connection with its investment in QAL, the Company had entered into several financial
commitments consisting of long-term agreements for the purchase and tolling of bauxite into alumina
in Australia by QAL. Under the agreements, the Company was unconditionally obligated to pay its
proportional share (20%) of debt, operating costs, and certain other
costs of QAL. The Companys
share of the aggregate minimum amount of required future principal payments as of March 31, 2005,
was $60.0. The Companys share of payments, including operating costs and certain other expenses
under the agreements, has generally ranged 17




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) between $70.0-$100.0 over the past three years. In connection with the QAL sale, the Companys
obligations in respect of its share of QALs debt were assumed by the buyer. Contributions to foreign pension plans included in discontinued operations were approximately
$2.3 during the quarter ended March 31, 2004. 5. Property, Plant, and Equipment The major classes of property, plant, and equipment are as follows: March 31,
    
    
    December 31,2005
    
    
    2004Land and improvements
    
    $
    8.2
    
    
    $
    8.2Buildings
    
    
    63.8
    
    
    
    63.8Machinery and equipment
    
    
    459.8
    
    
    
    459.8Construction in progress
    
    
    9.8
    
    
    
    6.1541.6
    
    
    
    537.9Accumulated depreciation
    
    
    (328.2
    )
    
    
    (323.3
    )Property, plant, and equipment, net
    
    $
    213.4
    
    
    $
    214.6
 The following discusses the Companys dispositions during the first quarter of 2005 and the
year ended December 31, 2004. 2005   
    In April 2005, the Company completed the sale of its interests in and related to QAL.
Net cash proceeds from the sale total approximately $412.0. The buyer also assumed the
Companys obligations in respect of approximately $60.0 of QAL debt (see Note 4). In
connection with the completion of the sale, the Company also paid a termination fee of
$11.0. After considering transaction costs (including the termination fee and a $7.7
deferred charge associated with a back-up bid fee), the Company expects the transaction will
result in a gain of approximately $360.0  $380.0. As described in Note 1, the Company
expects that a substantial majority of the proceeds from the sale of the Companys interests
in and related to QAL will be held in escrow for the benefit of KAACs creditors until the
KAAC/KFC Plan is confirmed by the Court (see Note 1). In accordance with SFAS No. 144,
balances and results of operations related to the Companys interests in and related to QAL
have been reported as discontinued operations in the accompanying financial statements (see
Note 4). 2004   
    On July 1, 2004, with Court approval, the Company completed the sale of its interests in
and related to Alpart for a base purchase price of $295.0 plus certain adjustments of
approximately $20.0. The transaction resulted in a gross sales price of approximately
$315.0, subject to certain post-closing adjustments, and a pre-tax gain of approximately
$101.6. Offsetting the cash proceeds were approximately $14.5 of payments made by the
Company to fund the prepayment of the Companys share of the Alpart-related debt and $3.3 of
transaction-related costs. The balance of the proceeds are being held in escrow primarily
for the benefit of certain creditors as outlined in the AJC/KJC Plan. In accordance with
SFAS No. 144, balances and results of operations related to the Companys interests in and
related to Alpart have been reported as discontinued operations in the accompanying
financial statements (see Note 4). A net benefit of approximately $1.6 was recorded in
December 2004 in respect of the Alpart-related purchase price adjustments. Such amounts are
expected to be collected during the second quarter of 2005.
    In May 2004, the Company entered into an agreement to sell its interests in and related
to the Gramercy facility and KJBC. The sale closed on October 1, 2004 with Court approval.
Net proceeds from the sale were approximately $23.0, subject to various closing and post
closing adjustments. Such adjustments were insignificant. The transaction was completed at
an 18




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited)  amount approximating its remaining book value (after impairment charges). A substantial
portion of the proceeds were used to satisfy transaction related costs and obligations. As
previously reported, the Company had determined that the fair values of its interests in and
related to Gramercy/KJBC was below the carrying values of the assets because all offers that
had been received for such assets were substantially below the carrying values of the assets.
Accordingly, in the fourth quarter of 2003, the Company adjusted the carrying value of its
interests in and related to Gramercy/KJBC to the estimated fair value, which resulted in a
non-cash impairment charge of approximately $368.0. In accordance with SFAS No. 144, the
Companys interests in and related to the Gramercy facility and KJBC have been reported as
discontinued operations in the accompanying financial statements (see Note 4).
    During 2003, the Company and Valco participated in extensive negotiations with the
Government of Ghana (GoG) and the Volta River Authority (VRA) regarding Valcos power
situation and other matters. Such negotiations did not result in a resolution of such
matters. However, as an outgrowth of such negotiations, the Company and the GoG entered into
a Memorandum of Understanding (MOU) in December 2003 pursuant to which the Company would
sell its 90% interest in and related to Valco to the GoG. The Company collected $5.0
pursuant to the MOU. However, a new financial agreement was reached in May 2004 and the MOU
was amended. Under the revised financial terms, the Company was to retain the $5.0 already
paid by the GoG and $13.0 more was to be paid by the GoG as full and final consideration for
the transaction at closing. The Company also agreed to fund certain end of service benefits
of Valco employees (estimated to be approximately $9.8) which the GoG was to assume under
the original MOU. The agreement was approved by the Court on September 29, 2004. The sale
closed on October 29, 2004. As the revised purchase price under the amended MOU was well
below the Companys recorded value for Valco, the Company recorded a non-cash impairment
charge of $31.8 in its first quarter 2004 financial statements to reduce the carrying value
of its interests in and related to Valco at March 31, 2004 to the amount of the expected
proceeds (which amount was reflected in discontinued operations  see Note 4). As a result,
at closing there was no material gain or loss on disposition. In accordance with SFAS No.
144, balances and results of operations related to the Companys interests in and related to
Valco have been reported as discontinued operations in the accompanying financial statements
(see Note 4).
    In June 2004, with Court approval, the Company completed the sale of the Mead Facility
for approximately $7.4 plus assumption of certain site-related liabilities. The sale
resulted in net proceeds of approximately $6.2 and a pre-tax gain of approximately $23.4.
The pre-tax gain includes the impact from the sale of certain non-operating land in the
first quarter of 2004 that was adjacent to the Mead Facility. The pre-tax gain on the sale
of this property had been deferred pending the finalization of the sale of the Mead Facility
and transfer of the site-related liabilities. Through March 31, 2005, proceeds from the
sale of the Mead Facility totaling $4.0 were being held in escrow as Restricted proceeds
from sale of commodity interests until the value of the secured claim of the holders of the
7.6% solid waste disposal revenue bonds was determined by the Court (see Note 6). In
accordance with SFAS No. 144, the assets, liabilities and operating results of the Mead
Facility have been reported as discontinued operations in the accompanying financial
statements (see Note 4). 19




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) 6. Long-Term Debt Long-term debt consists of the following: March 31,
    
    
    December 31,2005
    
    
    2004Secured:Post-Petition Credit Agreement
    
    $
    
    
    
    $
    7.6% Solid Waste Disposal Revenue Bonds due 2027
    
    
    1.6
    
    
    
    1.6Other borrowings (fixed rate)
    
    
    2.4
    
    
    
    2.4Unsecured or Undersecured:9 7/8% Senior Notes due 2002, net
    
    
    172.8
    
    
    
    172.810 7/8% Senior Notes due 2006, net
    
    
    225.0
    
    
    
    225.012 3/4% Senior Subordinated Notes due 2003
    
    
    400.0
    
    
    
    400.07.6% Solid Waste Disposal Revenue Bonds due 2027
    
    
    17.4
    
    
    
    17.4Other borrowings (fixed and variable rates)
    
    
    32.4
    
    
    
    32.4Total
    
    
    851.6
    
    
    
    851.6Less  Current portion
    
    
    (1.2
    )
    
    
    (1.2
    )Pre-Filing Date claims included in subject to compromise (i.e. unsecured debt) (Note 1)
    
    
    (847.6
    )
    
    
    (847.6
    )Long-term debt
    
    $
    2.8
    
    
    $
    2.8
 On February 11, 2005, the Company and Kaiser entered into a new financing agreement with a
group of lenders under which the Company was provided with a replacement for the existing
post-petition credit facility and a commitment for a multi-year exit financing arrangement upon the
Debtors emergence from the Chapter 11 proceedings. The new financing agreement:  
    Replaced the existing post-petition credit facility with a new $200.0 post-petition
credit facility (the DIP Facility) and
    Included a commitment, upon the Debtors emergence from the Chapter 11 proceedings, for
exit financing in the form of a $200.0 revolving credit facility (the Revolving Credit
Facility) and a fully drawn term loan (the Term Loan) of up to $50.0. The DIP Facility provides for a secured, revolving line of credit through the earlier of
February 11, 2006, the effective date of a plan of reorganization or voluntary termination by the
Company. Under the DIP Facility, the Company, Kaiser and certain subsidiaries of the Company are
able to borrow amounts by means of revolving credit advances and to have issued letters of credit
(up to $60.0) in an aggregate amount equal to the lesser of $200.0 or a borrowing base comprised of
eligible accounts receivable, eligible inventory and certain eligible machinery, equipment and real
estate, reduced by certain reserves, as defined in the DIP Facility agreement. The amount available
under the DIP Facility will be reduced by $20.0 if net borrowing availability falls below $40.0.
Interest on any outstanding borrowings will bear a spread over either a base rate or LIBOR, at the
Companys option. The DIP Facility is secured by substantially all of the assets of the Company, Kaiser and the
Companys subsidiaries other than certain amounts related to AJI, KJC, KAAC, and KFC whose assets
are, subject to the Liquidating Plans (see Note 1), expected to be distributed to the creditors of
those subsidiaries. The DIP Facility is guaranteed by the Company and all of the Companys material
domestic subsidiaries other than AJI, KJC, KAAC, and KFC. Amounts owed under the DIP Facility may be accelerated under various circumstances more fully
described in the DIP Facility agreement, including but not limited to, the failure to make
principal or interest payments due under the DIP Facility, breaches of certain covenants,
representations and warranties set forth in the DIP Facility agreement, and certain events having a
material adverse effect on the business, assets, operations or condition of the Company taken as a
whole. 20




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) The DIP Facility places restrictions on the Companys, Kaisers and the Companys
subsidiaries ability to, among other things, incur debt, create liens, make investments, pay
dividends, sell assets, undertake transactions with affiliates, and enter into unrelated lines of
business. The principal terms of the committed Revolving Credit Facility would be essentially the same
as or more favorable than the DIP Facility, except that, among other things, the Revolving Credit
Facility would close and be available upon the Debtors emergence from the Chapter 11 proceedings
and would be expected to mature on February 11, 2010. The Term Loan commitment would be expected to
close upon the Debtors emergence from the Chapter 11 proceedings and would be expected to mature
on February 11, 2011. The DIP Facility replaced, on February 11, 2005, a post-petition credit facility (the
Replaced Facility) that the Company and Kaiser entered into on February 12, 2002. Originally, the
Replaced Facility provided for revolving credit advances of up to $300.0. This amount was reduced
to $285.0 in August 2003 and to $200.0 in October 2004. The Replaced Facility was amended a number
of times during its term as a result of, among other things, reorganization transactions, including
disposition of the Companys commodity-related assets. The Company has previously disclosed that in connection with the completion of the previously
announced sales of its commodities interests, it expects that the amount of borrowing base
available under the DIP Facility would be adequate to support the Companys liquidity requirements
through the expected remainder of the Cases. This belief is based on the fact that it was the
commodity assets that subjected the Company to the most variability and exposure from both a price
risk basis as well as from an operating perspective. While there can be no assurances, based on
recent primary aluminum prices and recent market conditions for fabricated aluminum products, the
Company currently expects availability under the DIP Facility to remain above the $100.0 range. At March 31, 2005, there
were no outstanding borrowings under the DIP Facility. While there
were only $5.1 of letters of credit outstanding under the DIP Facility at March 31, 2005, there
were approximately $12.6 of outstanding letters of credit that remained outstanding under the
Replaced Facility. The Company had deposited cash of $13.2 as collateral for the Replaced Facility
letters of credit and deposited approximately $2.0 of collateral with the Replaced Facility lenders
until certain other banking arrangements are terminated. These outstanding letters of credit under
the Replaced Facility are expected to be replaced with letters of credit issued under the DIP
Facility, at which time, the applicable cash collateral will be refunded to the Company. During
April 2005, $9.6 of letters of credit under the Replaced Facility were replaced by letters of
credit issued under the DIP Facility and $10.1 of the cash collateral was refunded to the Company. 7.6% Solid Waste Disposal Revenue Bonds.The 7.6% solid waste disposal revenue bonds (the
Solid Waste Bonds) were secured by certain (but not all) of the facilities and equipment at the
Mead Facility which was sold in June 2004 (see Note 5). The Company believes that the value of the
collateral that secured the Solid Waste Bonds was in the $1.0 range and, as a result, has
reclassified $18.0 of the Solid Waste Bonds balance to Liabilities subject to compromise (see Note
1). However, in connection with the sale of the Mead Facility, $4.0 of the proceeds were placed in
escrow for the benefit of the holders of the Solid Waste Bonds until the value of the secured claim
of the bondholders was determined by the Court. The value of the secured claim was ultimately
agreed to be approximately $1.6. As such, the amount of the Solid Waste Bonds considered in
Liabilities subject to compromise has been reduced to $17.4. Court approval for the agreed claim
value is still pending. However, the Court has approved the reduction of the collateral to
approximately $2.3. The Company received the amount in excess of the Court-approved $2.3 amount
from escrow in April 2005. As the Solid Waste Bonds were not a part of the Mead Facility sale
transaction, they were not reported as discontinued operations in the accompanying Consolidated
Balance Sheets. 7. Income Taxes The income tax provision for the quarters ended March 31, 2005 and 2004 relates primarily to
foreign income taxes. For the quarters ended March 31, 2005 and 2004, as a result of the Cases, the
Company did not recognize any U.S. income tax benefit for 21




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) the losses incurred from its domestic operations (including temporary differences) or any U.S.
income tax benefit for foreign income taxes. Instead, the increases in federal and state deferred
tax assets as a result of additional net operating losses and foreign tax credits generated in 2005
and 2004 were fully offset by increases in valuation allowances. See Note 8 of Notes to
Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 for additional information regarding the Deferred Tax Assets and Valuation
Allowances. The reported amounts are net of income tax provision related to discontinued operations of
$2.6 and $5.4 for the quarters ended March 31, 2005 and 2004, respectively. 8. Employee Benefit and Incentive Plans Historical Pension and Other Postretirement Benefit Plans.The Company and its subsidiaries
have historically provided (a) postretirement health care and life insurance benefits to eligible
retired employees and their dependents and (b) pension benefit payments to retirement plans.
Substantially all employees became eligible for health care and life insurance benefits if they
reached retirement age while still working for the Company or its subsidiaries. The Company did not
fund the liability for these benefits, which were expected to be paid out of cash generated by
operations. The Company reserved the right, subject to applicable collective bargaining agreements,
to amend or terminate these benefits. Retirement plans were generally non-contributory for salaried
and hourly employees and generally provided for benefits based on formulas which considered such
items as length of service and earnings during years of service. Reorganization Efforts Affecting Pension and Post Retirement Medical Obligations.The Company
has stated since the inception of its Chapter 11 proceedings that legacy items that included its
pension and post-retirement benefit plans would have to be addressed before the Company could
successfully reorganize. The Company previously disclosed that it did not intend to make any
pension contributions in respect of its domestic pension plans during the pendency of the Cases as
it believes that virtually all amounts are pre-Filing Date obligations. The Company did not make
required accelerated funding payments to its salaried employee retirement plan. As a result, during
2003, the Company engaged in lengthy negotiations with the PBGC, the 1114 Committee and the
appropriate union representatives for the hourly employees subject to collective bargaining
agreements regarding its plans to significantly modify or terminate these benefits. In January 2004, the Company filed motions with the Court to terminate or substantially modify
postretirement medical obligations for both salaried and certain hourly employees and for the
distressed termination of substantially all domestic hourly pension plans. The Company subsequently
concluded agreements with the 1114 Committee and union representatives that represent the vast
majority of the Companys hourly employees. The agreements provide for the termination of existing
salaried and hourly postretirement medical benefit plans, and the termination of existing hourly
pension plans. Under the agreements, salaried and hourly retirees would be provided an opportunity
for continued medical coverage through COBRA or a proposed VEBA and active salaried and hourly
employees would be provided with an opportunity to participate in one or more replacement pension
plans and/or defined contribution plans. The agreements with the 1114 Committee and certain of the
unions have been approved by the Court, but were subject to certain conditions, including Court
approval of the Intercompany Agreement in a form acceptable to the Debtors and the UCC (see Note
1). The ongoing financial impacts of the new and continuing pension plans and the VEBA are
discussed below in Cash Flow. On June 1, 2004, the Court entered an order, subject to certain conditions including final
Court approval for the Intercompany Agreement, authorizing the Company to implement termination of
its postretirement medical plans as of May 31, 2004 and the Companys plan to make advance payments
to one or more VEBAs. As previously disclosed, pending the resolution of all contingencies in
respect of the termination of the existing postretirement medical benefit plan, during the period
June 1, 2004 through December 31, 2004 the Company continued to accrue costs based on the existing
plan and has treated the VEBA contribution as a reduction of its liability under the plan. However,
since the Intercompany Agreement was approved in February 2005 and all other contingencies had
already been met, the Company determined that the existing post retirement medical plan 22




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) should be treated as terminated as of December 31, 2004. This resulted in the Company
recognizing a non-cash charge of approximately $312.5 in the fourth quarter of 2004. The PBGC has assumed responsibility for the three largest of the Companys pension plans,
which represented the vast majority of the Companys net pension obligation including the Companys
Salaried Employees Retirement Plan (in December 2003), the Inactive Pension Plan (in July 2004) and
the Kaiser Aluminum Pension Plan (in September 2004). The Salaried Employees Retirement Plan, the
Inactive Pension Plan and the Kaiser Aluminum Pension Plan are hereinafter collectively referred to
as the Terminated Plans. The PBGCs assumption of the Terminated Plans resulted in the Company
recognizing non-cash pension charges of approximately $121.2 in the fourth quarter of 2003,
approximately $155.5 in the third quarter of 2004 and approximately $154.5 in the fourth quarter of
2004. The fourth quarter 2003 and third quarter 2004 charges were determined by the Company based
on assumptions that are consistent with the GAAP criteria for valuing ongoing plans. The Company
believed this represented a reasonable interim estimation methodology as there were reasonable
arguments that could have been made that could have resulted in the final allowed claim amounts
being either more or less than that reflected in the financial statements. The fourth quarter of
2004 charge was based on the final agreement with the PBGC which was approved by the Court in
January 2005. Pursuant to the agreement with the PBGC, the Company and the PBGC agreed, among other
things, that: (a) the Company will continue to sponsor the Companys remaining pension plans (which
primarily are in respect of hourly employees at Fabricated products facilities) and paid
approximately $5.0 minimum funding contribution for these plans in March 2005; (b) the PBGC will
have an allowed post-petition administrative claim of $14.0, which is expected to be paid upon the
consummation of a plan of reorganization for the Company or the consummation of the KAAC/KFC Plan,
whichever comes first; and (c) the PBGC will have allowed pre-petition unsecured claims in respect
of the Terminated Plans in the amount of $616.0, which will be resolved in the Companys plan or
plans of reorganization provided that the PBGCs cash recovery from proceeds of the Companys sale
of its interests in and related to Alpart and QAL will be limited to 32% of the net proceeds
distributable to holders of the Companys Senior Notes, Sub Notes and the PBGC. However, certain
contingencies have arisen in respect of the settlement with the PBGC. See Note 9  Contingencies
Regarding Settlement with the PBGC. Components of Net Periodic Benefit Cost The following table presents the components of net periodic benefit cost for the quarters
ended March 31, 2005 and 2004: Pension Benefits
    
    
    Medical/Life Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    .3
    
    
    $
    1.5
    
    
    $
    
    
    
    $
    1.8Interest cost
    
    
    .3
    
    
    
    10.8
    
    
    
    
    
    
    
    14.7Expected return on plan assets
    
    
    (.2
    )
    
    
    (8.1
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    .9
    
    
    
    
    
    
    
    (5.4
    )Amortization of net (gain) loss
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    6.1Net periodic benefit costs
    
    
    .4
    
    
    
    6.9
    
    
    
    
    
    
    
    17.2Less discontinued operations reported separately
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    (5.0
    )Defined benefit plans
    
    
    .4
    
    
    
    4.6
    
    
    
    
    
    
    
    12.2401K (pension)/VEBA (medical)
    
    
    1.7
    
    
    
    
    
    
    
    6.7
    
    
    
    $
    2.1
    
    
    $
    4.6
    
    
    $
    6.7
    
    
    $
    12.2
 The periodic pension costs associated with the Terminated Plans that related to
continuing operations were $4.2 for the quarter ended March 31, 2004. Of the $4.6 amount of 2004
periodic pension cost related to continuing operations, $2.6 related to the Fabricated Products
segment and the balance related to the Corporate segment. Of the $12.2 amount of 2004 net periodic
medical benefit cost related to continuing operations, $6.3 related to the Fabricated products
segment and the balance related to the Corporate segment. 23




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) See Note 9 of Notes to Consolidated Financial Statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 for key assumptions with respect to
Companys pension plans and postretirement benefit plans. Description of Defined Contribution Plans The Company, in March 2005, announced the implementation of the new salaried and hourly
defined contribution savings plans. The salaried plan is being implemented retroactive to January
1, 2004 and the hourly plan is being implemented retroactive to May 31, 2004. Pursuant to the terms of the new defined contribution savings plan, the Company will be
required to make annual contributions into the Steelworkers Pension Trust on the basis of one
dollar per United Steelworkers of America (USWA) employee hour worked at two facilities. The
Company will also be required to make contributions to a defined contribution savings plan for
active USWA employees that will range from eight hundred dollars to twenty-four hundred dollars per
employee per year, depending on the employees age. Similar defined contribution savings plans
have been established for non-USWA hourly employees subject to collective bargaining agreements.
The Company currently estimates that contributions to all such plans will range from $3.0 to $6.0
per year. The new defined contribution savings plan for salaried employees provides for a match of
certain contributions made by such employees plus a contribution of between 2% and 10% of their
salary depending on their age and years of service. The Company recorded charges in respect of these plans (including the retroactive
implementation) of $7.3 in the first quarter of 2005. Of the total amount, $1.5 is included in
Cost of products sold (related to the Fabricated products segment) and $.2 is included in Selling,
administrative, research and development and general expense(SG&A) (related to the Corporate
segment) in respect of the first quarter of 2005 activity. The amount ($5.6) related to the
retroactive implementation (i.e., the 2004 portion) of the plans is reflected in Other operating
charges (see Note 11). Cash Flow Domestic Plans.As previously discussed, the Company, since filing the Chapter 11
proceedings, has not made any further significant contributions to any of its domestic pension
plans. However, as discussed above in connection with the PBGC settlement agreement, which was
approved by the Court in January 2005, the Company paid approximately $5.0 in respect of minimum
funding contributions for retained pension plans in March 2005, and will be required to pay
approximately $14.0 at the earlier of the emergence of the Company or KAAC in respect of
post-petition administrative claims of the PBGC. Any other payments to the PBGC are expected to be
limited to recoveries under the Companys plan(s) of reorganization and the Liquidating Plans. The amount related to the retroactive implementation of the defined contribution savings plans
(see above) is expected to be paid in the second quarter of 2005. As a replacement for the Companys previous postretirement benefit plans, the Company agreed
to contribute certain amounts to one or more VEBAs. Such contributions are to include:  
    An amount not to exceed $36.0 and payable on emergence from the Chapter 11 proceedings so
long as the Companys liquidity (i.e. cash plus borrowing availability) is at least $50.0
after considering such payments. To the extent that less than the full $36.0 is paid and the
Companys interests in Anglesey are subsequently sold, a portion of such sales proceeds, in
certain circumstances, will be used to pay the shortfall. 24




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited)  
    On an annual basis, 10% of the first $20.0 of annual cash flow, as defined, plus 20% of
annual cash flow, as defined, in excess of $20.0. Such annual payments will not exceed $20.0
and will also be limited (with no carryover to future years) to the extent that the payments
do not cause the Companys liquidity to be less than $50.0.
    Advances of $3.1 in June 2004 and $1.9 per month thereafter until the Company emerges
from the Cases. Any advances made pursuant to such agreement will constitute a credit toward
the $36.0 maximum contribution due upon emergence. In October 2004, the Company entered into an amendment to the USWA agreement to satisfy
certain technical requirements for the follow-on hourly pension plans discussed above. The Company
also agreed to pay an additional $1.0 to the VEBA, which amount was paid in March 2005. The
amended agreement was approved by the Court in February 2005. Total charges in 2005 associated with the VEBA were $6.7. Of this amount, approximately $1.2
was recorded in Cost of products sold (related to the Fabricated products segment) and the balance
was recorded in SG&A (related to the Corporate segment). Foreign Plans.Contributions to foreign pension plans (excluding those that are considered
part of discontinued operations  see Note 4) were nominal. 9. Commitments and Contingencies Impact of Reorganization Proceedings.During the pendency of the Cases, substantially all
pending litigation, except certain environmental claims and litigation, against the Debtors is
stayed. Generally, claims against a Debtor arising from actions or omissions prior to its Filing
Date will be settled in connection with a plan of reorganization. Commitments.The Company has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note
10), letters of credit, and guarantees. A significant portion of these commitments relate to the
Companys interests in and related to QAL, which sale closed on April 1, 2005 (see Note 4). The
Company also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 2004, are as follows: years
ending December 31, 2005  $2.1; 2006  $1.7; 2007  $1.3; 2008  $.7; 2009  $.7; thereafter -
$.3. Pursuant to the Code, the Debtors may elect to reject or assume unexpired pre-petition leases.
Rental expenses , after excluding rental expenses of discontinued operations, were $3.1, $8.6 and
$30.9 for the years ended December 31, 2004, 2003 and 2002, respectively. Rental expenses of
discontinued operations were $4.9, $6.6 and $7.4 for the years ended December 31, 2004, 2003 and
2002, respectively. Environmental Contingencies.The Company is subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the environmental laws, and to
claims and litigation based upon such laws and regulations. The Company currently is subject to a
number of claims under the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments Reauthorization Act of 1986 (CERCLA), and, along
with certain other entities, has been named as a potentially responsible party for remedial costs
at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Companys evaluation of these and other environmental matters, the Company has
established environmental accruals, primarily related to potential solid waste disposal and soil
and groundwater remediation matters. At March 31, 2005, the balance of such accruals was $55.7 (of
which $30.6 was included in Liabilities subject to compromise  see Note 1). These environmental accruals represent the Companys estimate of costs reasonably expected to
be incurred based on presently enacted laws and regulations, currently available facts, existing
technology, and the Companys assessment of the likely remediation action to be taken. In the
ordinary course, the Company expects that these remediation actions will be taken over the 25




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) next several years and estimates that annual expenditures to be charged to these environmental
accruals will be approximately $24.3 in 2005, $.3 to $3.2 per year for the years 2006 through 2009
and an aggregate of approximately $29.2 thereafter. Approximately $20.2 of the adjustments to the
environmental liabilities in 2003 (see below) that applied to non-owned property sites has been
included in the after 2009 balance because such amounts are expected to be settled solely in
connection with the Companys plan of reorganization. The March 31, 2005 accrual balance includes approximately $23.2 that was provided during 2003.
Approximately $20.2 of the amount provided in 2003 relates to the previously disclosed multi-site
settlement agreement with various federal and state governmental regulatory authorities and other
parties in respect of the Companys environmental exposure at a number of non-owned sites. Under
this agreement, among other things, the Company agreed to claims at such sites totaling $25.6
($20.2 greater than amounts that had previously been accrued for these sites) and, in return, the
governmental regulatory authorities have agreed that such claims would be treated as pre-Filing
Date unsecured claims (i.e. liabilities subject to compromise). The Company recorded in 2003 the
portion of the $20.2 accrual that relates to locations with operations ($15.7) in Other operating
charges (benefits), net. The remainder of the accrual ($4.5), which relates to locations that have
not operated for a number of years, was recorded in Other income (expense). During the second quarter of 2004 and in 2003, the Company also provided additional accruals
totaling approximately $1.4 and $3.0, respectively, associated with certain Company-owned
properties with no current operations (recorded in Other income (expense). The 2004 accrual
resulted from facts and circumstances determined in the ordinary course of business. The additional
2003 accruals resulted primarily from additional cost estimation efforts undertaken by the Company
in connection with its reorganization efforts. Both the 2004 and 2003 accruals were recorded as
liabilities not subject to compromise as they relate to properties owned by the Company. The Company has previously disclosed that it is possible that its assessment of environmental
accruals could increase because it may be in the interests of all stakeholders to agree to
increased amounts to, among other things, achieve a claim treatment that is favorable and to
expedite the reorganization process. The September 2003 multi-site settlement is one example of
such a situation. In June, 2004, the Company reported that it was close to entering settlement agreements with
various parties pursuant to which a substantial portion of the unresolved environmental claims
could be settled for approximately $25.0  $30.0. In September 2004, agreements with the affected
parties were reached and Court approval for such agreements was received. During October 2004, the
Company paid approximately $27.3 to completely settle these liabilities. The amounts paid
approximated the amount of liabilities recorded and did not result in any material net gain or
loss. As additional facts are 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 (a majority of which are estimated to relate to owned sites
that are likely not subject to compromise). As the resolution of these matters is subject to
further regulatory review and approval, no specific assurance can be given as to when the factors
upon which a substantial portion of this estimate is based can be expected to be resolved. However,
the Company is currently working to resolve certain of these matters. The Company believes that it has insurance coverage available to recover certain incurred and
future environmental costs. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries. Other Environmental Matters.During April 2004, the Company was served with a subpoena for
documents and has been notified by Federal authorities that they are investigating certain
environmental compliance issues with respect to the Companys Trentwood facility in the State of
Washington. The Company is undertaking its own internal investigation of the matter through
specially retained counsel to ensure that it has all relevant facts regarding Trentwoods
compliance with applicable environmental 26




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) laws. The Company believes it is in compliance with all applicable environmental law and
requirements at the Trentwood facility and intends to defend any claims or charges, if any should
result, vigorously. The Company cannot assess what, if any, impact this matter may have on the
Companys or Kaisers financial statements. Asbestos and Certain Other Personal Injury Claims.The Company has been one of many
defendants in a number of lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other things, exposure to
asbestos or exposure to products containing asbestos produced or sold by the Company or as a result
of employment or association with the Company. The lawsuits generally relate to products the
Company has not sold for more than 20 years. As of the initial Filing Date, approximately 112,000
asbestos-related claims were pending. The Company has also previously disclosed that certain other
personal injury claims had been filed in respect of alleged pre-Filing Date exposure to silica and
coal tar pitch volatiles (approximately 3,900 claims and 300 claims, respectively). Due to the Cases, holders of asbestos, silica and coal tar pitch volatile claims are stayed
from continuing to prosecute pending litigation and from commencing new lawsuits against the
Debtors. As a result, the Company does not expect to make any asbestos payments in the near term.
Despite the Cases, the Company continues to pursue insurance collections in respect of
asbestos-related amounts paid prior to its Filing Date and, as described below, to negotiate
insurance settlements and prosecute certain actions to clarify policy interpretations in respect of
such coverage. The following tables present historical information regarding the Companys asbestos, silica
and coal tar pitch volatiles-related balances and cash flows: March 31,
    
    
    December 31,2005
    
    
    2004Liability
    
    $
    1,115.0
    
    
    $
    1,115.0Receivable(1)
    
    
    967.0
    
    
    
    967.0$
    148.0
    
    
    $
    148.0
 Quarter Ended
    
    
    InceptionMarch 31, 2005
    
    
    to DatePayments made, including related legal costs
    
    $
    
    
    
    $
    (355.7
    )Insurance recoveries(2)
    
    
    
    
    
    
    266.2$
    
    
    
    $
    (89.5
    )
   (1)
    
    The asbestos-related receivable was determined on the same basis as the asbestos-related cost
accrual. However, no assurances can be given that the Company will be able to project similar
recovery percentages for future asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed the Companys aggregate insurance coverage. Amounts
are stated in nominal dollars and not discounted to present value as the Company cannot
currently project the actual timing of payments or insurance recoveries particularly in light
of the expected treatment of such items in any plan of reorganization that is ultimately
filed. The Company believes that, as of March 31, 2005, it had received all insurance
recoveries that it is likely to collect in respect of asbestos-related costs paid. See Note 1.(2)
    
    Excludes certain amounts paid by insurers into escrow accounts (in respect of future
settlements) more fully discussed below. As previously disclosed, at the Filing Date, the Company had accrued approximately $610.1 in
respect of asbestos and other similar personal injury claims. As disclosed, such amount represented
the Companys estimate for current claims and claims expected to be filed over a 10 year period
(the longest period the Company believed it could then reasonably estimate) based on, among other
things existing claims, assumptions about the amounts of asbestos-related payments, the status of
ongoing litigation 27




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) and settlement initiatives, and the advice of Wharton Levin Ehrmantraut & Klein, P.A., with
respect to the current state of the law related to asbestos claims. The Company also disclosed that
there were inherent limitations to such estimates and that the Companys actual liabilities in
respect of such claims could significantly exceed the amounts accrued; that, at some point during
the reorganization process, the Company expected that an estimation of the Companys entire
asbestos-related liability would occur; and that, until such process was complete or the Company
had more information, the Company was unlikely to be able to adjust its accruals. Over the last year-plus period, the Company has engaged in periodic negotiations with the
representatives of the asbestos, silica and coal tar pitch claimants and the Companys insurers as
part of its reorganization efforts. As more fully discussed in Note 1, these efforts resulted in an
agreed term sheet in early 2005 between the Company and other key constituents as to the treatment
for such claims in any plan(s) of reorganization the Company files. While a formal estimation
process has not been completed, now that the Company can reasonably predict the path forward for
resolution of these claims and based on the information resulting from the negotiations process,
the Company believes it has sufficient information to project a range of likely costs. The Company
now estimates that its total liability for asbestos, silica and coal tar pitch volatile personal
injury claims is expected to be between approximately $1,100.0 and $2,400.0. However, the Company
does not anticipate that other constituents will necessarily agree with this range and the Company
anticipates that, as a part of any estimation process that may occur in the Cases, other
constituents are expected to disagree with the Companys estimated range of costs. In particular,
the Company is aware that certain informal assertions have been made by representatives for the
asbestos, silica and coal tar pitch volatiles claimants that the actual liability may exceed,
perhaps significantly, the top end of the Companys expected range. While the Company cannot
reasonably predict what the ultimate amount of such claims will be determined to be, the Company
believes that the minimum end of the range is both probable and reasonably estimatable.
Accordingly, in accordance with GAAP, the Company recorded an approximate $500.0 charge in the
fourth quarter of 2004 to increase its accrued liability at December 31, 2004 to the $1,115.0
minimum end of the expected range (included in Liabilities subject to compromise  see Note 1).
Future adjustments to such accruals are possible as the reorganization and/or estimation process
proceeds and it is possible that such adjustments will be material. As previously disclosed, the Company believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs and had accrued for expected recoveries
totaling approximately $463.1 as of September 30, 2004, after considering the approximately $54.4
of asbestos-related insurance receipts received from the Filing Date through September 30, 2004. As
previously disclosed, the Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing insurance policies,
and the advice of Heller Ehrman LLP with respect to applicable insurance coverage law relating to
the terms and conditions of those policies. As a part of the negotiation process described above, the Company has continued its efforts
with insurers to make clear the amount of insurance coverage expected to be available in respect of
asbestos, silica and coal tar pitch personal injury claims. The Company has settled
asbestos-related coverage matters with certain of its insurance carriers. However, other carriers
have not yet agreed to settlements and disputes with carriers exist. During 2000, the Company filed
suit in San Francisco Superior Court against a group of its insurers, which suit was thereafter
split into two related actions. Additional insurers were added to the litigation in 2000 and 2002.
During October 2001, June 2003, February 2004 and April 2004, the court ruled favorably on a number
of policy interpretation issues. Additionally, one of the favorable October 2001 rulings was
affirmed in February 2002 by an intermediate appellate court in response to a petition from the
insurers. The litigation is continuing. The timing and amount of future insurance recoveries continues to be dependent on the
resolution of any disputes regarding coverage under the applicable insurance policies through the
process of negotiations or further litigation. However, the Company believes that substantial
recoveries from the insurance carriers are probable. The Company estimates that at March 31, 2005
its remaining solvent insurance coverage was in the range of $1,400.0  $1,500.0. Further, assuming
that actual asbestos, silica and coal tar pitch volatile costs were to be the $1,115.0 amount now
accrued (as discussed above) the Company believes that it would be able to recover from insurers
amounts totaling approximately $967.0, and, accordingly the Company recorded in the fourth quarter
of 2004 an approximate $500.0 increase in its personal injury-related insurance receivable. The
foregoing estimates are 28




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) based on, among other things, negotiations, the results of the litigation efforts discussed
above and the advice of Heller Ehrman LLP with respect to applicable insurance coverage law
relating to the terms and conditions of those policies. While the Company considers the approximate
$967.0 amount to be probable (based on the factors cited above) it is possible that facts and
circumstances could change and, if such a change were to occur, that a material adjustment to the
amount recorded could occur. Additionally, it should be noted that, if through the estimation
process or negotiation, it was determined that a significantly higher amount of costs were expected
to be paid in respect of asbestos, silica and coal tar pitch volatile claims: (a) any amounts in
excess of $1,400.0  $1,500.0 would likely not be offset by any expected incremental insurance
recoveries and (b) it is presently uncertain to what extent additional insurance recoveries would
be determined under GAAP to be probable in respect of expected costs between the $1,100.0 amount
accrued at March 31, 2005 and total amount of estimated solvent insurance coverage available. Since the start of the Cases, the Company has entered into settlement agreements with several
of the insurers whose asbestos-related obligations are primarily in respect of future asbestos
claims. These settlement agreements were approved by the Court. In accordance with the Court
approval, the insurers have paid certain amounts, pursuant to the terms of the approved escrow
agreements, into funds (the Escrow Funds) in which the Company has no interest, but which amounts
will be available for the ultimate settlement of the Companys asbestos-related claims. Because the
Escrow Funds are under the control of the escrow agents, who will make distributions only pursuant
to a Court order, the Escrow Funds are not included in the accompanying consolidated balance sheet
at March 31, 2005. In addition, since neither the Company nor Kaiser received any economic benefit
or suffered any economic detriment and have not been relieved of any asbestos-related obligation as
a result of the receipt of the Escrow Funds, neither the asbestos-related receivable nor the
asbestos-related liability have been adjusted as a result of these transactions. As of March 31,
2005, the insurers had paid $11.8 into the Escrow Funds. It is possible that settlements with
additional insurers will occur. However, no assurance can be given that such settlements will
occur. Hearing Loss Claims.During February 2004, the Company reached a settlement in principle in
respect of 400 claims, which alleged that certain individuals who were employees of the Company,
principally at a facility previously owned and operated by the Company in Louisiana, suffered
hearing loss in connection with their employment. Under the terms of the settlement, which is still
subject to Court approval, the claimants will be allowed claims totaling $15.8. As such, the
Company recorded a $15.8 charge (in Other operating charges (benefits), net) in 2003 and a
corresponding obligation (included in Liabilities subject to compromise  see Note 1). However, no
cash payments by the Company are required in respect of these amounts. Rather the settlement
agreement contemplates that, at emergence, these claims will be transferred to a separate trust
along with certain rights against certain insurance policies of the Company and that such insurance
policies will be the sole source of recourse to the claimants. While the Company believes that the
insurance policies are of value, no amounts have been reflected in the Companys financial
statements at March 31, 2005 in respect of such policies as the Company could not with the level of
certainty necessary determine the amount of recoveries that were probable. During the Cases, the Company has received approximately 3,200 additional proofs of claim
alleging pre-petition injury due to noise induced hearing loss. It is not known at this time how
many, if any, of such claims have merit or at what level such claims might qualify within the
parameters established by the above-referenced settlement in principle for the 400 claims.
Accordingly, the Company cannot presently determine the impact or value of these claims. However,
the Company currently expects that all such claims will be transferred, along with certain rights
against certain insurance policies, to a separate trust along with the settled hearing loss cases
discussed above, whether or not such claims are settled prior to the Companys emergence from the
Cases. Labor Matters.In connection with the USWA strike and subsequent lock-out by the Company,
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, the
Company responded to all such allegations and believed that they were without merit. Twenty-two of
twenty-four allegations of ULPs previously brought against the Company by the USWA have been
dismissed. A trial before an administrative law judge for the two remaining allegations concluded
in September 2001. In May 2002, the administrative law judge ruled against the Company in respect
of the two remaining ULP allegations and recommended that the NLRB award back wages, plus interest,
less any earnings of the workers during the period of the lockout. The administrative law judges
ruling did not contain any specific amount of proposed award and was not self-executing. 29




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) In January 2004, as part of its settlement with the USWA with respect to pension and retiree
medical benefits, the Company and the USWA agreed to settle their case pending before the NLRB,
subject to approval of the NLRB General Counsel and the Court and ratification by union members.
Under the terms of the agreement, solely for the purposes of determining distributions in
connection with the reorganization, an unsecured pre-petition claim in the amount of $175.0 will be
allowed. Also, as part of the agreement, the Company agreed to adopt a position of neutrality
regarding the unionization of any employees of the reorganized company. The settlement was ratified by the union members in February 2004, amended in October 2004,
and ultimately approved by the Court in February 2005. Until February 2005, the settlement was also
contingent on the Courts approval of the Intercompany Agreement. However, such contingency was
removed when the Court approved the Intercompany Agreement in February 2005. Since all material
contingencies in respect of this settlement have been resolved and, since the ULP claim existed as
of the December 31, 2004 balance sheet date, the Company recorded a $175.0 non-cash charge in the
fourth quarter of 2004. Labor Agreement.The labor agreement covering the USWA workers at the Companys Spokane,
Washington rolling mill and Newark, Ohio extrusion and rod rolling facility is set to expire in
September 2005. The Company and representatives of the USWA have been in discussions regarding a
new labor agreement. However, the Company cannot currently predict if, or when, any such agreement
will be reached or what impacts any such agreement will have on the Companys future operating
results or cash flow. Contingencies Regarding Settlement with the PBGC.As more fully described in Note 8, in
response to the January 2004 Debtors motion to terminate or substantially modify substantially all
of the Debtors defined benefit pension plans, the Court ruled that the Company had met the factual
requirements for distress termination as to all of the plans at issue. The PBGC appealed the
Courts ruling. However, as more fully discussed in Note 8, during the pendency of the PBGCs
appeal, the Company and the PBGC reached a settlement under which the PBGC agreed to assume the
Terminated Plans. The Court approved this settlement in January 2005. The Company believed that,
subject to its plan(s) of reorganization and the Liquidating Plans complying with the terms of the
PBGC settlement, that all issues in respect of such matters were resolved. However, despite the
settlement with the PBGC, the intermediate appellate court proceeded to consider the PBGCs earlier
appeal and issued a ruling dated March 31, 2005 affirming the Courts rulings regarding distress
termination of all such plans. If the current appellate ruling became final, it is possible that
the remaining defined benefit plans would be assumed by the PBGC. Since the Company and the PBGC
became aware of the intermediate appellate court ruling, the Company and the PBGC have conducted
additional discussions. It is possible that the PBGC will appeal the intermediate appellate
courts ruling or that revisions to the previous settlement will occur. However, pending a final
resolution of this matter, the Companys settlement with the PBGC remains in full force and effect.
The Company cannot predict what, if any, impacts may result from any such appeal or negotiations,
except that the Company would expect any outcome to be no less favorable than the terms of the PBGC
settlement. The indenture trustee for the Sub Notes has appealed the Courts order approving the
settlement with the PBGC, and the first level appellate court has established an expedited briefing
schedule. While the Company believes the appeal is without merit, no assurances can be given as to
the outcome of the appeal. Other Contingencies.The Company is involved in various other claims, lawsuits, and other
proceedings relating to a wide variety of matters related to past or present operations. While
uncertainties are inherent in the final outcome of such matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs should not have a material
adverse effect on the Companys consolidated financial position, results of operations, or
liquidity. 30




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) 10. Derivative Financial Instruments and Related Hedging Programs In conducting its business, the Company has historically used various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in aluminum prices,
energy prices and exchange rates. The Company has historically entered into hedging transactions
from time to time to limit its exposure resulting from (1) its anticipated sales of primary
aluminum and fabricated aluminum products, net of expected purchase costs for items that fluctuate
with aluminum prices, (2) the energy price risk from fluctuating prices for natural gas used in its
production process, and (3) foreign currency requirements with respect to its cash commitments with
foreign subsidiaries and affiliates. As the Companys hedging activities are generally designed to
lock-in a specified price or range of prices, gains or losses on the derivative contracts utilized
in the hedging activities (except the impact of those contracts discussed below which have been
marked to market) generally offset at least a portion of any losses or gains, respectively, on the
transactions being hedged. The Companys share of primary aluminum production from Anglesey is approximately 150,000,000
pounds annually. Because the Company purchases alumina for Anglesey at prices linked to primary
aluminum prices, only a portion of the Companys net revenues associated with Anglesey are exposed
to price risk. The Company estimates the net portion of its share of Anglesey production exposed to
primary aluminum price risk to be approximately 100,000,000 pounds annually. As stated above, the Companys pricing of fabricated aluminum products is generally intended
to lock-in a conversion margin (representing the value added from the fabrication process(es)) and
to pass metal price risk on to its customers. However, in certain instances the Company does enter
into firm price arrangements. In such instances, the Company does have price risk on its
anticipated primary aluminum purchase in respect of the customers order. Total fabricated products
shipments during the quarters ended March 31, 2004 and 2005 that contained fixed price terms were
(in millions of pounds) 19.9 and 29.8, respectively. During the last three years the volume of fabricated products shipments with underlying
primary aluminum price risk were roughly the same as the Companys net exposure to primary aluminum
price risk at Anglesey. As such, the Company considers its access to Anglesey production overall to
be a natural hedge against any fabricated products firm metal-price risk. However, since the
volume of fabricated products shipped under firm prices may not match up on a month-to-month basis
with expected Anglesey-related primary aluminum shipments, the Company may use third party hedging
instruments to eliminate any net remaining primary aluminum price exposure existing at any time. At March 31, 2005, the fabricated products business held contracts for the delivery of
fabricated aluminum products that have the effect of creating price risk on anticipated purchases
of primary aluminum during the last three quarters of 2005 and for the period 2006  2009 totaling
approximately (in millions of pounds): 2005: 111.0, 2006: 70.0, 2007: 65.0, 2008: 35.0, and 2009:
25.0. The following table summarizes the Companys material derivative positions at March 31, 2005: NotionalAmount of
    
    
    Carrying/Contracts
    
    
    MarketCommodity
    
    Period
    
    
    (mmlbs)
    
    
    ValueAluminum Option sale contracts
    
    1/06 through 12/06
    
    
    47.6
    
    
    $
    (.6
    )Fixed priced purchase contracts
    
    4/05 through 12/05
    
    
    10.4
    
    
    
    2.3
 The above table excludes option sales contracts whose positions were liquidated prior to their
settlement date during the quarter ended March 31, 2005. A net loss associated with these
liquidated positions was deferred and is being recognized over the period during which the
underlying transactions to which the hedges related are expected to occur. As of March 31, 2005,
the remaining unamortized net loss was approximately $2.4. 31




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Hedging activities in the first quarter of 2005 (all of which were attributable to continuing
operations) resulted in an immaterial net loss. Hedging activities in the first quarter of
2004 resulted in a net loss of approximately $3.0. As discussed more fully in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004, hedging activities in 2004 were deemed to
be fully attributable to the Companys commodity-related operations and are reported in
Discontinued operations. 11. Other Operating Charges The income (loss) impact associated with other operating charges for the quarter ended March
31, 2005, included a charge totaling $5.6 associated with the 2004 portion of the Companys defined
contribution plans, which were implemented in March 2005 (see Note 8  Fabricated products business
unit: $5.2 and Corporate: $.4) and a charge totaling $.6 related to termination of the Houston,
Texas administrative office lease in connection with the combination of the Corporate headquarters
into the existing Fabricated products headquarters. 12. Key Employee Retention Program In June 2002, the Company adopted a key employee retention program (the KERP), which was
approved by the Court in September 2002. The KERP is a comprehensive program that is designed to
provide financial incentives sufficient to retain certain key employees during the Cases. The KERP
includes six key elements: a retention plan, a severance plan, a change in control plan, a
completion incentive plan, the continuation for certain participants of an existing supplemental
employee retirement plan (SERP) and a long-term incentive plan. Under the KERP, retention
payments commenced in September 2002 and were paid every six months through March 31, 2004, except
that 50% of the amounts payable to certain senior officers (totaling approximately $1.7) were
withheld until the Debtors emerge from the Cases or as otherwise agreed pursuant to the KERP.
During 2004, the Company recorded charges of $1.5 (included in Selling, administrative, research
and development, and general) related to the KERP. The severance and change in control plans,
which are similar to the provisions of previous arrangements that existed for certain key
employees, generally provide for severance payments of between six months and three years of salary
and certain benefits, depending on the facts and circumstances and the level of employee involved.
The completion incentive plan generally provided for payments that reduced over time to certain
senior officers depending on the elapsed time until the Debtors emerged from the Cases. Assuming
the Debtors emerge from the Cases in the second half of 2005, the amount of the payments would
range from $0  $.6. The SERP generally provides additional non-qualified pension benefits for
certain active employees at the time that the KERP was approved, who would suffer a loss of
benefits based on Internal Revenue Code limitations, so long as such employees are not subsequently
terminated for cause or voluntarily terminate their employment prior to reaching their retirement
age. The long-term incentive plan generally provides for incentive awards to key employees based on
an annual cost reduction target. Payment of such awards generally will be made: (a) 50% when the
Debtors emerge from the Cases and (b) 50% one year from the date the Debtors emerge from the Cases.
At March 31, 2005, approximately $8.8 was accrued in respect of the KERP long-term incentive plan. 13. Pacific Northwest Power Matters During October 2000, the Company signed an electric power contract with the Bonneville Power
Administration (BPA) under which the BPA, starting October 1, 2001, was to provide the Companys
operations in the State of Washington with approximately 290 megawatts of power through September
2006. The contract provided the Company with sufficient power to fully operate the Companys
Trentwood facility, as well as approximately 40% of the combined capacity of the Companys Mead and
Tacoma aluminum smelting operations which had been curtailed since the last half of 2000. As a part of the reorganization process, the Company concluded that it was in its best
interest to reject the BPA contract as permitted by the Code. As such, with the authorization of
the Court, the Company rejected the BPA contract on September 30, 2002. The contract rejection
gives rise to a pre-petition claim (see Note 1). The BPA has filed a proof of claim for
approximately $75.0 in connection with the Cases in respect of the contract rejection. The claim is
expected to be settled in the overall context of the Companys plan of reorganization. Accordingly,
any payments that may be required as a result of the rejection of the BPA 32




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) contract are expected to only be made pursuant to a plan of reorganization and upon the
Companys emergence from the Cases. The amount of the BPA claim will be determined either through a
negotiated settlement, litigation or a computation of prevailing power prices over the contract
period. As the amount of the BPAs claim in respect of the contract rejection has not been
determined, no provision has been made for the claim in the accompanying financial statements. The
Company has entered into a rolling short-term contract with an alternate supplier to provide the
power necessary to operate its Trentwood facility. 14. Segment and Geographical Area Information The Companys primary line of business is the production of fabricated aluminum products. In
addition, the Company owns a 49% interest in Anglesey, which owns an aluminum smelter in Holyhead,
Wales. Historically, the Company operated in all principal sectors of the aluminum industry
including the production and sale of bauxite, alumina and primary aluminum in domestic and
international markets. However, as previously disclosed, as a part of the Companys reorganization
efforts, the Company has sold substantially all of its commodities operations (including the
Companys interests in and related to QAL which sale closed on April 1, 2005). The balances and
results in respect of such operations are now considered discontinued operations (see Note 4 and
5). The amounts remaining in Primary aluminum relate primarily to the Companys interests in and
related to Anglesey and the Companys primary aluminum hedging-related activities. The Companys operations are organized and managed by product type. The Companys operations,
after the discontinued operations reclassification, include two operating segments of the aluminum
industry and the corporate segment. The two aluminum industry segments are: Fabricated products and
Primary aluminum. The Fabricated products business unit sells value-added products such as heat
treat aluminum sheet and plate which are used in a wide range of industrial applications, including
for the automotive, aerospace and general engineering end-use applications. The Primary aluminum
business unit produces commodity grade products as well as value-added products such as rod and
billet, for which the Company receives a premium over normal commodity market prices and conducts
hedging activities in respect of the Companys exposure to primary aluminum price risk. The
accounting policies of the segments are the same as those described in Note 2 of Notes to
Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004. Business unit results are evaluated internally by management before any
allocation of corporate overhead and without any charge for income taxes, interest expense or Other
operating charges (benefits), net. See Note 15 of Notes to Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the year ended December 31, 2004 for further information
regarding segments. The Company changed its segment presentation in 2004 to eliminate the Eliminations segment
as the primary purpose for such segment was to eliminate intercompany profit on sales by the
Primary aluminum and Bauxite and alumina business units substantially all of which are now
considered Discontinued operations. Eliminations not representing Discontinued operations are now
included in segment results. Given the significance of the Companys exposure to primary aluminum prices and alumina prices
(which typically are linked to primary aluminum prices on a lagged basis) in prior years, the
commodity marketing activities were considered a separate business unit. In the accompanying
financial statements, the Company has reclassified to discontinued operations all of the primary
aluminum hedging results in respect of the commodity-related interests that have been sold
(including the Companys interests in and related to QAL that were sold in April 2005) and that are
also treated as discontinued operations. As stated above, remaining primary aluminum hedging
activities related to the Companys interests in Anglesey and any firm price fabricated product
shipments are considered part of the Primary aluminum business unit. Financial information by operating segment, excluding discontinued operations, at for the
quarters ended March 31, 2005 and 2004, is as follows: 33




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Quarters Ended March 31,2005
    
    
    2004Net Sales:Fabricated Products
    
    $
    244.4
    
    
    $
    178.7Primary Aluminum
    
    
    37.0
    
    
    
    31.5$
    281.4
    
    
    $
    210.2Segment Operating Income (Loss):Fabricated Products
    
    $
    24.2
    
    
    $
    1.3Primary Aluminum
    
    
    4.8
    
    
    
    4.1Corporate and Other
    
    
    (12.4
    )
    
    
    (15.6
    )Other Operating Charges  Note 11
    
    
    (6.2
    )
    
    
    $
    10.4
    
    
    $
    (10.2
    )
 Quarter Ended March 31,2005
    
    
    2004Depreciation and amortization:(1)Fabricated Products
    
    $
    4.9
    
    
    $
    5.4Corporate and Other
    
    
    
    
    
    
    .1$
    4.9
    
    
    $
    5.5
   (1)
    
    Depreciation and amortization expense excludes depreciation and amortization
expense of discontinued operations of $6.1 in 2004. Quarter Ended March 31,2005
    
    
    2004Income taxes paid:(1)Fabricated Products United States
    
    $
    
    
    
    $
    Canada
    
    
    1.8
    
    
    
    $
    1.8
    
    
    $
    
   (1)
    
    Income taxes paid exclude foreign income tax paid by discontinued operations of $8.7 in
2005 and $1.1 in 2004. 15. Parent Company Receivables Under the terms of the Intercompany Agreement (see Note 1), intercompany amounts due from
Kaiser to the Company at February 28, 2005, of $2,197.2, including a note receivable of $2,191.7,
were released. The release has been reflected as a charge to Additional capital for the quarter
ended March 31, 2005. 16. Supplemental Guarantor Information Certain domestic, wholly-owned (direct or indirect) subsidiaries of the Company (hereinafter
collectively referred to as the Subsidiary Guarantors) have provided, joint and several, guarantees
of the 9 7/8% Senor Notes, the 10 7/8% Senior Notes, due 2006 and the 123/4% Senior Subordinated Notes (the
Notes). Such guarantees are full and unconditional. See Note 16 of Notes to 34




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Consolidated Financial Statements in the Companys Form 10-K for the year ended December 31,
2004 for a more complete discussion regarding the Subsidiary Guarantors and their operations. The accompanying financial information presents consolidating balance sheets, statements of
income (loss) and statements of cash flows showing separately the Company, Subsidiary Guarantors,
other subsidiaries and eliminating entries. Other subsidiaries discontinued operations include
Alpart and the related discontinued operations of KAII. Subsidiary Guarantors discontinued
operations include the discontinued operations of AJI, KJC, KBC and Valco. See Note 4 for
additional information with regard to discontinued operations. 35




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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Balance Sheets March 31, 2005 Subsidiary
    
    
    Other
    
    
    EliminatingCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedASSETSCurrent assets
    
    $
    217.1
    
    
    $
    20.8
    
    
    $
    34.4
    
    
    $
    
    
    
    $
    272.3Discontinued operations current assets
    
    
    .3
    
    
    
    20.1
    
    
    
    19.9
    
    
    
    
    
    
    
    40.3Investments in subsidiaries
    
    
    1,035.3
    
    
    
    
    
    
    
    
    
    
    
    (1,035.3
    )
    
    
    Intercompany advances receivable
(payable)
    
    
    (652.8
    )
    
    
    617.9
    
    
    
    34.9
    
    
    
    
    
    
    
    Investments in and advances to
unconsolidated affiliate
    
    
    15.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.7Property and equipment, net
    
    
    174.8
    
    
    
    20.0
    
    
    
    18.6
    
    
    
    
    
    
    
    213.4Deferred income taxes
    
    
    (41.6
    )
    
    
    41.6
    
    
    
    
    
    
    
    
    
    
    
    Restricted proceeds from sale of
commodity interests
    
    
    4.0
    
    
    
    277.3
    
    
    
    
    
    
    
    
    
    
    
    281.3Personal injury-related insurance
recoveries receivable
    
    
    967.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    967.0Other assets
    
    
    43.3
    
    
    
    .2
    
    
    
    .1
    
    
    
    
    
    
    
    43.6Discontinued operations long term assets
    
    
    
    
    
    
    42.9
    
    
    
    
    
    
    
    
    
    
    
    42.9$
    1,763.1
    
    
    $
    1,040.8
    
    
    $
    107.9
    
    
    $
    (1,035.3
    )
    
    $
    1,876.5LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities
    
    $
    155.5
    
    
    $
    6.0
    
    
    $
    22.3
    
    
    $
    
    
    
    $
    183.8Discontinued operations current
liabilities
    
    
    2.0
    
    
    
    50.7
    
    
    
    .4
    
    
    
    
    
    
    
    53.1Other long-term liabilities
    
    
    28.5
    
    
    
    1.0
    
    
    
    3.9
    
    
    
    
    
    
    
    33.4Long-term debt
    
    
    2.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.8Discontinued operations long-term
liabilities
    
    
    26.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.4Liabilities subject to compromise
    
    
    3,923.8
    
    
    
    15.4
    
    
    
    13.7
    
    
    
    
    
    
    
    3,952.9Stockholders equity
    
    
    (2,375.9
    )
    
    
    967.7
    
    
    
    67.6
    
    
    
    (1,035.3
    )
    
    
    (2,375.9
    )$
    1,763.1
    
    
    $
    1,040.8
    
    
    $
    107.9
    
    
    $
    (1,035.3
    )
    
    $
    1,876.5
 36




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Balance Sheets December 31, 2004 Subsidiary
    
    
    Other
    
    
    EliminatingCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedASSETSCurrent assets
    
    $
    234.7
    
    
    $
    18.8
    
    
    $
    43.1
    
    
    $
    
    
    
    $
    296.6Discontinued operations current assets
    
    
    .6
    
    
    
    19.0
    
    
    
    11.0
    
    
    
    
    
    
    
    30.6Investments in subsidiaries
    
    
    2,662.0
    
    
    
    
    
    
    
    
    
    
    
    (2,662.0
    )
    
    
    Intercompany advances receivable (payable)
    
    
    (2,244.3
    )
    
    
    590.4
    
    
    
    1,653.9
    
    
    
    
    
    
    
    Investments in and advances to unconsolidated
affiliate
    
    
    16.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.7Property and equipment, net
    
    
    176.0
    
    
    
    20.1
    
    
    
    18.5
    
    
    
    
    
    
    
    214.6Deferred income taxes
    
    
    (88.4
    )
    
    
    41.5
    
    
    
    46.9
    
    
    
    
    
    
    
    Restricted proceeds from sale of commodity
interests
    
    
    4.0
    
    
    
    271.8
    
    
    
    5.0
    
    
    
    
    
    
    
    280.8Personal injury-related insurance recoveries
receivable
    
    
    967.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    967.0Other assets
    
    
    42.2
    
    
    
    .2
    
    
    
    .1
    
    
    
    
    
    
    
    42.5Discontinued operations long term assets
    
    
    
    
    
    
    38.9
    
    
    
    
    
    
    
    
    
    
    
    38.9$
    1,770.5
    
    
    $
    1,000.7
    
    
    $
    1,778.5
    
    
    $
    (2,662.0
    )
    
    $
    1,887.7LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities
    
    $
    159.9
    
    
    $
    5.2
    
    
    $
    24.5
    
    
    $
    
    
    
    $
    189.6Discontinued operations current liabilities
    
    
    2.1
    
    
    
    55.2
    
    
    
    .4
    
    
    
    
    
    
    
    57.7Other long-term liabilities
    
    
    32.9
    
    
    
    .9
    
    
    
    (.9
    )
    
    
    
    
    
    
    32.9Long-term debt
    
    
    2.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.8Discontinued operations long-term liabilities
    
    
    26.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.4Liabilities subject to compromise
    
    
    3,923.0
    
    
    
    18.2
    
    
    
    13.7
    
    
    
    
    
    
    
    3,954.9Stockholders equity
    
    
    (2,376.6
    )
    
    
    921.2
    
    
    
    1,740.8
    
    
    
    (2,662.0
    )
    
    
    (2,376.6
    )$
    1,770.5
    
    
    $
    1,000.7
    
    
    $
    1,778.5
    
    
    $
    (2,662.0
    )
    
    $
    1,887.7
 37




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Statements of Income (Loss)
For the Quarter Ended March 31, 2005 Subsidiary
    
    
    Other
    
    
    EliminatingCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    230.7
    
    
    $
    11.0
    
    
    $
    84.2
    
    
    $
    (44.5
    )
    
    $
    281.4Costs and expenses:Operating costs and expenses
    
    
    220.9
    
    
    
    13.3
    
    
    
    75.1
    
    
    
    (44.5
    )
    
    
    264.8Other operating charges
    
    
    6.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.2Operating income (loss)
    
    
    3.6
    
    
    
    (2.3
    )
    
    
    9.1
    
    
    
    
    
    
    
    10.4Interest expense
    
    
    (2.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.1
    )Reorganization items
    
    
    (7.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.8
    )Other income (expense), net
    
    
    (.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.4
    )Provision for income taxes
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (2.4
    )Equity in income of subsidiaries
    
    
    18.1
    
    
    
    
    
    
    
    
    
    
    
    (18.1
    )
    
    
    Income (loss) from continuing operations
    
    
    10.3
    
    
    
    (2.3
    )
    
    
    7.8
    
    
    
    (18.1
    )
    
    
    (2.3
    )Income (loss) from discontinued operations
    
    
    (2.0
    )
    
    
    12.7
    
    
    
    (.1
    )
    
    
    
    
    
    
    10.6Net income (loss)
    
    $
    8.3
    
    
    $
    10.4
    
    
    $
    7.7
    
    
    $
    (18.1
    )
    
    $
    8.3
 Condensed Consolidating Statements of Income (Loss)
For the Quarter Ended March 31, 2004 Subsidiary
    
    
    Other
    
    
    EliminatingCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet sales
    
    $
    167.7
    
    
    $
    10.3
    
    
    $
    69.1
    
    
    $
    (36.9
    )
    
    $
    210.2Costs and expenses:Operating costs and expenses
    
    
    180.8
    
    
    
    13.0
    
    
    
    63.5
    
    
    
    (36.9
    )
    
    
    220.4Other operating charges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (13.1
    )
    
    
    (2.7
    )
    
    
    5.6
    
    
    
    
    
    
    
    (10.2
    )Interest expense
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.0
    )Reorganization items
    
    
    (8.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.6
    )Other income (expense), net
    
    
    (.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.2
    )Provision for income taxes
    
    
    (.8
    )
    
    
    
    
    
    
    (.7
    )
    
    
    
    
    
    
    (1.5
    )Equity in income (loss) of subsidiaries
    
    
    (23.2
    )
    
    
    
    
    
    
    
    
    
    
    23.2
    
    
    
    Income (loss) from continuing operations
    
    
    (47.9
    )
    
    
    (2.7
    )
    
    
    4.9
    
    
    
    23.2
    
    
    
    (22.5
    )Income (loss) from discontinued operations
    
    
    (16.0
    )
    
    
    5.8
    
    
    
    (31.2
    )
    
    
    
    
    
    
    (41.4
    )Net income (loss)
    
    $
    (63.9
    )
    
    $
    3.1
    
    
    $
    (26.3
    )
    
    $
    23.2
    
    
    $
    (63.9
    )
 38




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Statements of Cash Flows
For the Quarter Ended March 31, 2005 Subsidiary
    
    
    Other
    
    
    EliminatingCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet cash provided (used) by:Operating activities Continuing operations
    
    $
    (6.0
    )
    
    $
    (5.1
    )
    
    $
    10.2
    
    
    $
    
    
    
    $
    (.9
    )Discontinued operations
    
    
    .1
    
    
    
    1.5
    
    
    
    (9.0
    )
    
    
    
    
    
    
    (7.4
    )(5.9
    )
    
    
    (3.6
    )
    
    
    1.2
    
    
    
    
    
    
    
    (8.3
    )Investing activities Continuing operations
    
    
    (3.0
    )
    
    
    (.3
    )
    
    
    (.5
    )
    
    
    
    
    
    
    (3.8
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.0
    )
    
    
    (.3
    )
    
    
    (.5
    )
    
    
    
    
    
    
    (3.8
    )Financing activities Continued operations
    
    
    (18.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.3
    )Discontinued operations(1)
    
    
    
    
    
    
    (1.5
    )
    
    
    1.0
    
    
    
    
    
    
    
    (.5
    )(18.3
    )
    
    
    (1.5
    )
    
    
    1.0
    
    
    
    
    
    
    
    (18.8
    )Intercompany activity
    
    
    (3.8
    )
    
    
    5.4
    
    
    
    (1.6
    )
    
    
    
    
    
    
    Net (decrease) increase in cash and cash
equivalents during the period
    
    
    (31.0
    )
    
    
    
    
    
    
    .1
    
    
    
    
    
    
    
    (30.9
    )Cash and cash equivalents at beginning of
period
    
    
    54.0
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    55.4Cash and cash equivalents at end of period
    
    $
    23.0
    
    
    $
    
    
    
    $
    1.5
    
    
    $
    
    
    
    $
    24.5
   (1)
    
    Discontinued operations financing activities relate to (increase)/decrease in restricted cash amounts. 39




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Condensed Consolidating Statements of Cash Flows
For the Quarter Ended March 31, 2004 Subsidiary
    
    
    Other
    
    
    EliminatingCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Entries
    
    
    ConsolidatedNet cash provided (used) by:Operating activities Continuing operations
    
    $
    (41.5
    )
    
    $
    (3.2
    )
    
    $
    20.9
    
    
    $
    
    
    
    $
    (23.8
    )Discontinued operations
    
    
    (1.8
    )
    
    
    2.0
    
    
    
    (2.9
    )
    
    
    
    
    
    
    (2.7
    )(43.3
    )
    
    
    (1.2
    )
    
    
    18.0
    
    
    
    
    
    
    
    (26.5
    )Investing activities Continuing operations
    
    
    (1.3
    )
    
    
    
    
    
    
    (.3
    )
    
    
    
    
    
    
    (1.6
    )Discontinued operations
    
    
    7.3
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    6.16.0
    
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    4.5Financing activities Continued operations
    
    
    (.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.2
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.2
    )Intercompany activity
    
    
    13.4
    
    
    
    1.2
    
    
    
    (14.6
    )
    
    
    
    
    
    
    Net (decrease) increase in cash and cash
equivalents during the period
    
    
    (24.1
    )
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    (22.2
    )Cash and cash equivalents at beginning of
period
    
    
    34.7
    
    
    
    
    
    
    
    .8
    
    
    
    
    
    
    
    35.5Cash and cash equivalents at end of period
    
    $
    10.6
    
    
    $
    
    
    
    $
    2.7
    
    
    $
    
    
    
    $
    13.3
 40




---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In millions of dollars)
(Unaudited) Notes To Condensed Consolidating Financial Information Impact of Cases During the first quarter of 2005, all but a specified few intercompany
amounts between the Company, Kaiser and the Companys Debtor subsidiaries were released as required
by the Intercompany Agreement. Net Intercompany advances receivable at March 31, 2005 of the
Subsidiary Guarantors include approximately $1,100.0 owed by the Company to KFC offset by
approximately $263.0 owed by KAAC to the Company. These amounts were specifically not released by
the Intercompany Agreement. See Notes 1 and 15 for further discussion of the release of the
intercompany amounts and other matters. The release of the intercompany amounts has been reflected
in the accompanying condensed consolidating balance sheet at March 31, 2005 as a capital
transaction (recorded in stockholders equity). Income Taxes The income tax provisions for the quarters ended March 31, 2005 and 2004 relate
primarily to foreign income taxes. As a result of the Cases, the Company did not recognize U.S.
income tax benefits for the losses incurred from domestic operations (including temporary
differences) or any U.S. tax benefit for foreign income taxes. Instead, the increases in federal
and state deferred tax assets as a result of additional net operating losses and foreign tax
credits generated in 2005 and 2004 were offset by equal increases in valuation allowances. Foreign Currency The functional currency of the Company and its subsidiaries is the United
States Dollar. As a result of the sale of the Companys Commodity Interests, pre-tax translation
gains (losses) are included in the Companys and Subsidiary Guarantors Discontinued operations.
Such amounts for the Company totaled $(1.6) and $1.9 for the quarters ended March 31, 2005 and
2004, respectively. Such amounts for the Subsidiary Guarantors totaled $1.9 and $(1.7) for the
quarters ended March 31, 2005 and 2004, respectively. Debt Covenants and Restrictions The Indentures contain restrictions on the ability of the
Companys subsidiaries to transfer funds to the Company in the form of dividends, loans or
advances. 41




---



##### 



Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations This section should be read in conjunction with Part I, Item 1, 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 (for example Recent Events and Developments, Results of
Operations 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, 2004, each identify other factors that could
cause actual results to vary. No assurance can be given that these are all of the factors that
could cause actual results to vary materially from the forward-looking statements. Reorganization Proceedings Background.Kaiser Aluminum & Chemical Corporation (the Company), its parent company,
Kaiser Aluminum Corporation (Kaiser or KAC), and 24 of the Companys subsidiaries have filed
separate voluntary petitions in the United States Bankruptcy Court for the District of Delaware
(the Court) for reorganization under Chapter 11 of the United States Bankruptcy Code (the
Code); the Company, Kaiser and 15 of the Companys subsidiaries (the Original Debtors) filed in
the first quarter of 2002 and nine additional Company subsidiaries (the Additional Debtors) filed
in the first quarter of 2003. The Original Debtors and the Additional Debtors are collectively
referred to herein as the Debtors and the Chapter 11 proceedings of these entities are
collectively referred to herein as the Cases. For purposes of this Report, the term Filing Date
means, with respect to any particular Debtor, the date on which such Debtor filed its Case. None of
the Companys non-U.S. joint ventures were included in the Cases. The Cases are being jointly
administered. The Debtors are managing their businesses in the ordinary course as
debtors-in-possession subject to the control and administration of the Court. In addition to the Company and KAC, the Debtors include the following subsidiaries: Kaiser
Bellwood Corporation (Bellwood), Kaiser Aluminium International, Inc. (KAII), Kaiser Aluminum
Technical Services, Inc. (KATSI), Kaiser Alumina Australia Corporation (KAAC) (and its wholly
owned subsidiary, Kaiser Finance Corporation (KFC)), Kaiser Bauxite Company (KBC), Kaiser
Jamaica Corporation (KJC), Alpart Jamaica Inc. (AJI), Kaiser Aluminum & Chemical of Canada
Limited (KACOCL) and fifteen other entities with limited balances or activities. Case Administration.Two creditors committees, one representing the unsecured creditors (the
UCC) and the other representing the asbestos claimants (the ACC), have been appointed as
official committees in the Cases and, in accordance with the provisions of the Code, have the right
to be heard on all matters that come before the Court. In August 2003, the Court approved the
appointment of a committee of salaried retirees (the 1114 Committee and, together with the UCC
and the ACC, the Committees) with whom the Debtors have negotiated necessary changes, including
the modification or termination, of certain retiree benefits (such as medical and insurance) under
Section 1114 of the Code. The Committees, together with the Court-appointed legal representatives
for (a) potential future asbestos claimants (the Asbestos Futures Representative) and (b)
potential future silica and coal tar pitch volatile claimants (the Silica/ CTPV Futures
Representative and, collectively with the Asbestos Futures Representative, the Futures
Representatives), have played and will continue to play important roles in the Cases and in the
negotiation of the terms of any plan or plans of reorganization. The Debtors are required to bear
certain costs and expenses for the Committees and the Futures Representatives, including those of
their counsel and other advisors. As provided by the Code, the Debtors had the exclusive right to propose a plan of
reorganization for 120 days following the initial Filing Date. The Court has subsequently approved
several extensions of the exclusivity period for all Debtors. Most recently, the Court approved an
extension of exclusivity as to all Debtors (other than AJI, KJC, KAAC and KFC) to June 30, 2005.
The most recent exclusivity period for AJI, KJC, KAAC and KFC was set to expire on April 30, 2005.
A motion to extend the exclusivity period for AJI, KJC, KAAC and KFC through June 30, 2005 was
filed by the Debtors on April 29, 2005. By filing the motion to extend the exclusivity period, the
period is automatically extended until the June 2005 Court hearing date. While the Debtors expect
that the motion will be approved by the Court, no assurance can be given as to such approval.
Additional 42




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extensions may be sought. However, no assurance can be given that any such future extension
requests will be granted by the Court. If the Debtors fail to file a plan of reorganization during
the exclusivity period, or if such plan is not accepted by the requisite numbers of creditors and
equity holders entitled to vote on the plan, other parties in interest in the Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors. Commodity-related and Inactive Subsidiaries.As previously disclosed, with the sale of its
interests in and related to Queensland Alumina Limited (QAL), which closed on April 1, 2005, the
Company has sold all of commodity-related interests other than its interests in Anglesey Aluminium
Limited (Anglesey). It is anticipated that, as more fully discussed below, the proceeds from the
sale of these interests will be distributed primarily to the affected subsidiaries creditors
pursuant to certain liquidating plans and other agreements. The primary subsidiaries affected by
this strategy are AJI, KJC, KAAC, KFC and KBC. During November 2004, four of the Companys commodity-related subsidiaries (AJI, KJC, KAAC and
KFC, collectively, the Liquidating Subsidiaries) filed separate joint plans of liquidation and
related disclosure statements with the Court. Such plans, together with the disclosure statements
and all amendments filed thereto, are separately referred to as the AJI/KJC Plan and the
KAAC/KFC Plan and collectively as the Liquidating Plans). Under the Liquidating Plans, the
assets of those entities, consisting primarily of the net cash proceeds received (or to be
received) by them in connection with the sales of their commodities interests, will be transferred
to liquidating trusts, whereupon the Liquidating Subsidiaries will be dissolved. The liquidating
trusts will then make distributions to the creditors of the Liquidating Subsidiaries in accordance
with the Liquidating Plans. As indicated in the Liquidating Plans, it is currently anticipated that
the Liquidating Subsidiaries will have an aggregate of approximately $673.8 million of cash
available for distribution to creditors when the Liquidating Plans become effective. The
Liquidating Plans outline the specific treatment of creditors and their estimated recoveries in
respect of the Liquidating Subsidiaries under several possible scenarios. The Liquidating Plans
indicate that, after payment of priority claims, trust expenses (initial reserves for which are
expected to be established in the range of $37.0 million to $46.0 million), and payments to the
Company under the Intercompany Settlement Agreement (Intercompany Agreement) (see discussion
below) the Liquidating Subsidiaries anticipate ultimately distributing available cash to the
following claimholders in the following amounts (in millions): Senior Notes and Senior Subordinated Notes
    
    $390.7 to  $421.8PBGC
    
    $
    187.6 to $198.5State of Louisiana Solid Waste Revenue Bonds
    
    $
    0.0 to $8.0
 The Liquidating Plans as filed with the Court provide that $16.0 million of payments were to
be made for the benefit of holders of the Companys 12 3/4% Senior Subordinated Notes (the Sub
Notes) if, and only if, the holders of both (a) the Companys 9 7/8% Senior Notes and 10 7/8%
Senior Notes (collectively, the Senior Notes) and (b) the Sub Notes, approved the plans. If
either the holders of the Senior Notes or the Sub Notes failed to accept the Liquidating Plans, the
Court will determine distributions to such holders. Holders of the Parish of St. James, State of
Louisiana, Solid Waste Disposal Revenue Bonds (the Revenue Bonds) were not allowed a vote on the
Liquidating Plans but will receive up to $8.0 million only if the Liquidating Plans are accepted by
the Senior Notes and, unless the holders of the Senior Notes agree, all holders of Senior Notes
receive the identical treatment under the Liquidating Plans. If the Liquidating Plans were not
accepted by the holders of the Senior Notes then, pursuant to the Liquidating Plans, the Court was
to determine the distributions to the Revenue Bonds. Any amounts paid in respect of the Sub Notes
and the Revenue Bonds will be paid from amounts that otherwise would be distributed to holders of
the Senior Notes. As previously disclosed, a group of holders of the Sub Notes (the Sub Note Group) has formed
an unofficial committee to represent all holders of Sub Notes and retained its own legal counsel.
The Sub Note Group is asserting that the Sub Note holders claims against the subsidiary guarantors
(and in particular the Liquidating Subsidiaries) may not, as a technical matter, be contractually
subordinate to the claims of the holders of the Senior Notes against the subsidiary guarantors
(including AJI, KJC, KAAC and KFC). A separate group that holds both Sub Notes and the Companys 9
7/8% Senior Notes has made a similar assertion, but at the same time, maintains that a portion of
the Companys 9 7/8% Senior Notes holders claims against the subsidiary guarantors are
contractually senior to the Sub Notes holders claims against the subsidiary guarantors. The effect
of such positions, if ultimately sustained, would be that the holders of Sub Notes would be on a
par with all or portion of the holders of the Senior Notes in respect of claims against the
proceeds from sales of the Companys interests in and related to the Liquidating Subsidiaries. If
both the holders of the Senior Notes and the holders of the Sub Notes do not approve the
Liquidating Plans, then the Court will determine the appropriate allocation to these groups under
the Liquidating Plans. While the Company cannot currently predict how the Court might rule in such
an instance, based on the objections and pleadings filed by the Sub Note Group and the group that
holds Sub Notes and the Companys 9 7/8% Senior Notes, if the Court were to rule in favor of the
Sub Notes, the Company estimates that it is possible that the holders of the Sub Notes could
receive between approximately $67.0 43




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million and approximately $215.0 million depending on whether the Sub Notes were determined to
rank on par with a portion or all of the Senior Notes. Conversely, if the holders of both the
Senior Notes and the Sub Notes do not approve the Liquidating Plans and the Court were to rule in
favor of the Senior Notes, then it is possible that the holders of the Sub Notes would receive no
distributions under Liquidating Plans. The Company believes that the intent of the indentures in
respect of the Senior Notes and the Sub Notes was to subordinate the claims of the Sub Note holders
in respect of the Subsidiary Guarantors (including the Liquidating Subsidiaries). The Company
cannot predict, however, the ultimate resolution of the matters raised by the Sub Note Group, or
the other group when any such resolution will occur, or what impact any such resolution may have on
the Company, the Cases or distributions to affected noteholders. The Court approved the disclosure statements related to the Liquidating Plans in February
2005. In April 2005, voting results on the Liquidating Plans were filed with the Court by the
Debtors claims agent. Based on these results, the Court determined that a sufficient volume of
creditors (in number and amount) had voted to accept the Liquidating Plans to permit confirmation
proceedings with respect to the Liquidating Plans to go forward even though the filing by the
claims agent also indicated that holders of the Sub Notes, as a group, voted not to accept the
Liquidating Plans. Accordingly, as discussed above, the Court has conducted a series of
evidentiary hearings to determine the allocation of distributions among holders of the Senior Notes
and the Sub Notes. In connection with those proceedings to date, the Court has determined that the
allocation to the Revenue Bonds would be up to $8.0 million and has ruled against the position
asserted by the separate group that holds both 9?% Senior Notes and the Sub Notes. The Court has
not ruled in respect of the position asserted by the Sub Note Group. The Court has set a further
briefing schedule that will extend into June 2005, and all rulings in respect of these matters are
subject to appeal. There can be no assurance as to whether or when the Liquidating Plans will be
confirmed by the Court or ultimately consummated or, if confirmed and consummated, as to the amount
of distributions to be made to individual creditors of the Liquidating Subsidiaries or the Company,
or what impact any such resolution may have on the Company and its ongoing reorganization efforts.
The Liquidating Plans relate exclusively to AJI, KJC, KAAC and KFC and will have no impact on the
normal, ongoing operations of the Companys Fabricated products business unit or other continuing
operations. The above amounts are net of payments that are to be made by AJI, KJC and KAAC to the Company
in respect of pre-petition and post-Filing Date intercompany claims pursuant to the Intercompany
Agreement that was approved by the Court in February 2005. The Intercompany Agreement also resolves
substantially all other pre-and post-petition intercompany claims between the Debtors. The
Intercompany Agreement provides, among other things, for payments of cash by AJI, KJC and KAAC from
the sale of their respective interests in and related to Alumina Partners of Jamaica (Alpart) and
QAL to the Company of at least $90.0 million in respect of its intercompany claims against AJI, KJC
and KAAC. Under the Intercompany Agreement, such payments would be increased or decreased for (1)
any net cash flows funded by or collected by the Company related to: (a) the Companys interests in
and related to Alpart from January 1, 2004 through July 1, 2004 (estimated to be approximately
$21.0 million collected by the Company); (b) the Companys interests in and related to QAL from
July 1, 2004 through KAACs emergence from Chapter 11 (estimated to be in the $20.0 million range
collected by the Company through March 31, 2005); and (c) third party costs and certain limited
overhead of the Companys activities related to the sale of AJIs, KJCs and KAACs respective
interests in and related to Alpart and QAL and (2) any purchase price adjustments (other than
incremental amounts related to alumina sales contracts to be transferred) pursuant to the Companys
sale of its interests in Alpart. As provided under the Intercompany Agreement, the Company was
reimbursed for approximately $14.5 million of payments made in the third quarter of 2004 to retire
Alpart-related debt and $28.0 million in November 2004 as a partial payment of Alpart-related sales
proceeds. The Intercompany Agreement calls for the remaining payments to be made in specific
increments upon the effective dates of the Liquidating Plans. It is anticipated that KBC will be dealt with either separately or in concert with the Company
plan of reorganization as more fully discussed below. Sixteen of the Debtors have no material
ongoing activities or operations and have no material assets or liabilities other than intercompany
claims (which are to be resolved pursuant to the Intercompany Agreement). The Company believes that
it is likely that most of these entities will ultimately be merged out of existence or dissolved in
some manner. Entities Containing the Fabricated Products and Certain Other Operations.Claims of
creditors, other than claims paid by the Liquidating Subsidiaries under the Liquidating Plans, will
have to be satisfied by the assets of the Company, KACOCL, and Bellwood, which generally include
the fabricated products plants and their working capital, the interests in and related to Anglesey
and proceeds to be received under the Intercompany Agreement. The Debtors anticipate that substantially all remaining liabilities of the Debtors as of their
Filing Date will be settled under a single joint plan of reorganization to be proposed and voted on
in accordance with the provisions of the Code. In working toward a plan of reorganization, as more
fully discussed below, the remaining Debtors have reached individual agreements with most of the 44




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significant creditor constituents in the Cases including the Committees, the Futures
Representatives, the Pension Benefit Guaranty Corporation (PBGC), and the appropriate union
representatives. However, the ultimate treatment of individual groups of creditors in any such plan
of reorganization cannot be determined definitively at this time as such treatment (and the
specific recoveries of individual creditors) is dependent on, among other things, the total amount
of claims against the Debtors as ultimately determined by the Court, the priority of the applicable
claims, the outcome of ongoing discussions with the key creditor constituencies, the amount of
value available for distribution in respect of claims and the completion of the plan confirmation
process consistent with applicable bankruptcy law. Further, while the Debtors intend to file and
seek confirmation of a plan, there can be no assurance as to when the Debtors will file such plan
or as to whether any such plan will be confirmed by the Court and consummated. The Debtors objective is to achieve the highest possible recoveries for all stakeholders,
consistent with the Debtors abilities to pay, and to continue the operations of their core
businesses. However, there can be no assurance that the Debtors will be able to attain these
objectives or achieve a successful reorganization. While valuation of the Debtors assets and
estimation of pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is likely that their
liabilities will be found to significantly exceed the fair value of their assets. Therefore, the
Debtors currently believe that, with limited exceptions, it is likely that substantially all
pre-Filing Date claims will be settled at less than 100% of their face value and the equity
interests of the Companys stockholders will be cancelled without consideration. Based on the previously disclosed agreements and understandings reached with key creditor
constituents, the Company anticipates that the disclosure statement and plan of reorganization for
the Company, Kaiser and other Debtors necessary to ongoing operations will reflect the following
principle elements: (a) All post-petition and secured claims are expected to either be assumed by the emerging
entity or paid at emergence (see Exit Cost discussion below); (b) Pursuant to agreements reached with salaried and hourly retirees in early 2004, in
return for cancellation of the retiree medical plan, as more fully discussed in Note 8 of Notes
to Interim Consolidated Financial Statements, the Company is making certain fixed monthly
payments into Voluntary Employee Beneficiary Associations (VEBAs) until emergence and then has
agreed to make certain variable annual VEBA contributions depending on the emerging entitys
operating results and financial liquidity. In addition, upon emergence the VEBAs are to receive a
contribution of 75% of the residual value of the remaining Debtors in the form of newly issued
equity in the emerging entity. Residual value in this context means the Companys remaining value
after taking into account: (i) the contributions to the personal injury trust described below;
(ii) the satisfaction of administrative, priority and secured claims as per (a) above; (iii) an
equity incentive plan; and (iv) the satisfaction of the PBGCs claim against KACOCL; (c) Pursuant to an agreement reached in early 2005, all pending and future asbestos-related
personal injury claims, all pending and future silica and coal tar pitch volatiles personal
injury claims and all hearing loss claims would be resolved through the formation of one or more
trusts to which all such claims would be directed by channeling injunctions that would
permanently remove all liability for such claims from the Debtors. The trusts would be funded
pursuant to statutory requirements and agreements with representatives of the affected parties,
using (i) the Debtors insurance assets, (ii) $13.0 million in cash from the Company, (iii) 100%
of the equity in a Company subsidiary whose sole asset will be a piece of real property that
produces modest rental income, and (iv) a portion of the emerging entitys equity in proportion
to approximately $830.0 million of intercompany claims of KFC against the Company that are to be
assigned to the trust (which will be satisfied out of the 25% of equity referred to in (d )
below); and (d) Other pre-petition claims will receive 25% of the residual value of the remaining
Debtors in the form of equity in the emerging entity. Claims that are expected to be within this
group include (i) any claims of the Senior Notes, the Sub Notes and PBGC that are not satisfied
under the Liquidating Plans, (ii) the approximate $830.0 million of intercompany claims that the
Company has agreed to assign to the personal injury trust(s) referred to in (c) above, and (iii)
all unsecured trade and other claims. Included in this category are approximately $276.0 million
of intercompany claims of KFC against the Company. At emergence from Chapter 11, the Company will have to pay or otherwise provide for a material
amount of claims. Such claims include accrued but unpaid professional fees, priority pension, tax
and environmental claims, secured claims, and certain post-petition obligations (collectively,
Exit Costs). The Company currently estimates that its Exit Costs will be in the range of $60.0
million to $80.0 million. The Company currently expects to fund such Exit Costs using the proceeds
to be received under 45




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the Intercompany Agreement together with existing cash resources and available borrowing
availability under an exit financing facility that would replace the current Post-Petition Credit
Agreement (see Note 6 of Notes to Interim Consolidated Financial Statements). If payments made to
the Company under the Intercompany Agreement together with existing cash resources and borrowing
availability under an exit financing facility are not sufficient to pay or otherwise provide for
all Exit Costs, the Company and Kaiser will not be able to emerge from Chapter 11 unless and until
sufficient funding can be obtained. Management believes it will be able to successfully resolve any
issues that may arise in respect of an exit financing facility or be able to negotiate a reasonable
alternative. However, no assurances can be given in this regard. The Company believes that it is not likely that it will emerge from the Cases until sometime
in the second half of 2005. However, the Companys ability to do so and to ultimately emerge from
the Cases is subject to a number of factors, including, among others, inherent market-related
risks, Court approval for various matters and the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances can be given as to
whether or when any plan or plans of reorganization will ultimately be filed or confirmed. Recent Events and Developments New Credit Arrangement.On February 11, 2005, the Company and Kaiser entered into a new
financing agreement with a group of lenders under which the Company was provided with a replacement
for the existing post-petition credit facility and a commitment for a multi-year exit financing
arrangement upon the Debtors emergence from the Chapter 11 proceedings. The new financing
agreement:  
    Replaced the existing post-petition credit facility with a new $200.0 million
post-petition credit facility (the DIP Facility) and
    Included a commitment, upon the Debtors emergence from the Chapter 11 proceedings, for
exit financing in the form of a $200.0 million revolving credit facility (the Revolving
Credit Facility) and a fully drawn term loan (the Term Loan) of up to $50.0 million. The DIP Facility provides for a secured, revolving line of credit through the earlier of
February 11, 2006, the effective date of a plan of reorganization or voluntary termination by the
Company. Under the DIP Facility, the Company, Kaiser and certain subsidiaries of the Company are
able to borrow amounts by means of revolving credit advances and to have issued letters of credit
(up to $60.0 million) in an aggregate amount equal to the lesser of $200.0 million or a borrowing
base comprised of eligible accounts receivable, eligible inventory and certain eligible machinery,
equipment and real estate, reduced by certain reserves, as defined in the DIP Facility agreement.
The amount available under the DIP Facility will be reduced by $20.0 million if net borrowing
availability falls below $40.0 million. Interest on any outstanding borrowings will bear a spread
over either a base rate or LIBOR, at the Companys option. Disposition of Commodity-Related Assets.In connection with the previously disclosed plan to
explore and, if appropriate, dispose of the Companys commodity-related interests, the Company has
completed the disposition of its interests in and related to: (a) the Tacoma, Washington smelter in
February, 2003, (b) the Mead, Washington smelter in June 2004, (c) Alpart in July 2004, (d)
Gramercy/KJBC in October 2004, and (e) Valco in October 2004. The sale of the Companys interests
in and related to QAL closed on April 1, 2005. Completion of these transactions represents a
significant step towards the Companys planned emergence from Chapter 11 primarily as a fabricated
products company. See Note 5 of Notes to Interim Consolidated Financial Statements for details
regarding the individual dispositions. Significant Charges Associated with the Reorganization Process.The Company has previously
disclosed that it has made substantial progress in its reorganization efforts and has reached
various agreements with substantially all of the key creditor constituencies as to the value of
their claims and the agreed treatment for such claims in any plans of reorganization that is
ultimately filed by the Debtors. These agreements have however resulted in a number of significant
charges including:  
    Charges related to the sale of commodity interests. These items are classified as
discontinued operations in the accompanying financial statements. See Note 4 of Notes to
Interim Consolidated Financial Statements for additional discussion of these items and
amounts. 46




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
    Significant charges related to the termination of certain of the Companys previous
pension and retiree medical plans and other agreements reached with the PBGC, the United
Steelworkers of America (USWA) and certain other labor unions. These items are discussed
in Note 8 and Note 9 of Notes to Interim Consolidated Financial Statements.
    Certain environmental charges associated with various settlements and transactions. See
Note 9 of Notes to Interim Consolidated Financial Statements. Additionally, while not resulting in a significant net charge, the Company did substantially
increase its recorded liability in respect of asbestos and other personal injury related claims and
expected insurance recoveries in respect of such amounts. See Note 9 of Notes to Interim
Consolidated Financial Statements. Possible Asbestos-Related Legislation.Legislation entitled The Fairness in Asbestos Injury
Resolution Act of 2005 (the FAIR Act) is currently pending before the U.S. Congress. If passed,
the FAIR Act could affect the rights and obligations of certain companies with asserted asbestos
liabilities and their insurers. Because the exact terms of the proposed legislation are still the
subject of negotiation and Congressional debate, it is uncertain how, if at all, such legislation
might impact the Company, holders of asbestos, silica, coal tar pitch volatiles and hearing
loss-related personal injury claims, or other creditors or entities involved in the Cases. Given
such uncertainty, the Company currently plans on proceeding as previously disclosed, but will take
the then current status of this proposed legislation into account when determining how to proceed
with confirmation and consummation of a plan or plans of reorganization. Labor Agreement.The labor agreement covering the USWA workers at the Companys Spokane,
Washington rolling mill and Newark, Ohio extrusion and rod rolling facility is set to expire in
September 2005. The Company and representatives of the USWA have been in discussions regarding a
new labor agreement. However, the Company cannot currently predict if, or when, any such agreement
will be reached or what impacts any such agreement will have on the Companys future operating
results or cash flow. Environmental Matters.The Company has previously disclosed that, during April 2004, it was
served with a subpoena for documents and has been notified by Federal authorities that they are
investigating certain environmental compliance issues with respect to the Companys Trentwood
facility in Spokane, Washington. The Company is undertaking its own internal investigation of the
matter through specially retained counsel to ensure that it has all relevant facts regarding
Trentwoods compliance with applicable environmental laws. The Company believes it is in
compliance with all applicable environmental laws and requirements at the Trentwood facility and
intends to defend any claim or charges, if any should result, vigorously. The Company cannot assess
what, if any, impacts this matter may have on the Companys or Kaisers financial statements. Results of Operations The Companys primary line of business is the production and sale of fabricated aluminum
products. In addition, the Company owns a 49% interest in Anglesey, which owns an aluminum smelter
in Holyhead, Wales. Historically, the Company operated in all principal sectors of the aluminum
industry including the production and sale of bauxite, alumina and primary aluminum in domestic and
international markets. However, as previously disclosed, as a part of the Companys reorganization
efforts, the Company has sold substantially all of its commodities operations other than Anglesey.
The balances and results of operations in respect of the commodities interests sold (including the
Companys interests in and related to QAL sold in April 2005) are now considered discontinued
operations (see Notes 4 and 5 of Notes to Interim Consolidated Financial Statements). The
presentation in the table below restates the segment information for such reclassifications. The
amounts remaining in Primary aluminum relate primarily to the Companys interests in and related to
Anglesey and the Companys primary aluminum hedging-related activities. The table below provides selected operational and financial information on a consolidated
basis with respect to the Company for the quarters ended March 31, 2005 and 2004. The following
data should be read in conjunction with the Companys consolidated financial statements and the
notes thereto contained elsewhere herein. See Note 15 of Notes to Consolidated Financial Statements
in the Companys Annual Report on Form 10-K for the year ended December 31, 2004 for further
information regarding segments. Interim results are not necessarily indicative of those for a full
year. 47




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Quarter Ended March 31,2005
    
    
    2004(In millions of dollars,except shipments and prices)Shipments (mm lbs):Fabricated Products
    
    
    126.4
    
    
    
    108.5Primary Aluminum
    
    
    38.4
    
    
    
    38.8164.8
    
    
    
    147.3Average Realized Third Party Sales Price (per pound):Fabricated Products(1)
    
    $
    1.93
    
    
    $
    1.65Primary Aluminum(2)
    
    $
    .95
    
    
    $
    .81Net Sales:Fabricated Products
    
    $
    244.4
    
    
    $
    178.7Primary Aluminum
    
    
    37.0
    
    
    
    31.5Total Net Sales
    
    $
    281.4
    
    
    $
    210.2Segment Operating Income (Loss):(3)Fabricated Products
    
    $
    24.2
    
    
    $
    1.3Primary Aluminum
    
    
    4.8
    
    
    
    4.1Corporate and Other
    
    
    (12.4
    )
    
    
    (15.6
    )Other Operating Charges(4)
    
    
    (6.2
    )
    
    
    Total Operating Income (Loss)
    
    $
    10.4
    
    
    $
    (10.2
    )Discontinued Operations
    
    $
    10.6
    
    
    $
    (41.4
    )Net Income (Loss)
    
    $
    8.3
    
    
    $
    (63.9
    )Capital Expenditures (excluding discontinued operations)
    
    $
    3.8
    
    
    $
    1.6
   (1)
    
    Average realized prices for the Companys Fabricated products business unit are subject to
fluctuations due to changes in product mix as well as underlying primary aluminum prices and
are not necessarily indicative of changes in underlying profitability. See Part I, Item 1.
Business  Business Operations in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004.(2)
    
    Average realized prices for the Companys Primary aluminum business unit exclude hedging
revenues.(3)
    
    The Company changed its segment presentation in 2004 to eliminate the Eliminations segment
as the primary purpose for such segment was to eliminate intercompany profit on sales by the
Primary aluminum and Bauxite and alumina business units substantially all of which are now
considered Discontinued operations. Eliminations not representing Discontinued operations are
now included in segment results. Operating results for the Primary aluminum business unit in
2004 are after the elimination of $.9. Also, see Part I, Item 1. Business  Business
Operations in the Companys Annual Report on From 10-K for the year ended December 31, 2004
for a discussion of changes to the Primary aluminum business unit.(4)
    
    See Note 11 of Notes to Interim Consolidated Financial Statements for a discussion of the
components of Other operating charges and the business segment to which the items relate. Overview Changes in global, regional, or country-specific economic conditions can have a significant
impact on overall demand for aluminum-intensive fabricated products in the aerospace, automotive,
distribution, and packaging markets. Such changes in demand can directly affect the Companys
earnings by impacting the overall volume and mix of such products sold. Changes in primary aluminum prices also affect the Companys Primary aluminum business unit
and expected earnings under any fixed price fabricated products contracts. However, the impacts of
such changes are generally offset by each other or by primary aluminum hedges. The Companys
operating results are also, albeit to a lesser degree, sensitive to changes in prices for power and
natural gas and changes in certain foreign exchange rates. All of the foregoing have been subject
to significant price fluctuations over recent years. For a discussion of the possible impacts of
the reorganization on the Companys sensitivity to changes in market conditions, see Item 3.
Quantitative and Qualitative Disclosures About Market Risks, Sensitivity. 48




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During the quarter ended March 31, 2004, the average London Metal Exchange transaction price
(LME price) per pound of primary aluminum was $.75 per pound. During the quarter ended March 31,
2005, the average LME price per pound for primary aluminum was $.86. At April 30, 2005, the LME
price was approximately $.82 per pound. Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004 Summary.The Company reported net income of $8.3 million for the quarter ended March 31,
2005, compared to a net loss of $63.9 million for the quarter ended March 31, 2004. Net sales in 2005 totaled $281.4 million compared to $210.2 million in 2004. Fabricated Aluminum Products.Net sales of fabricated products increased by 37% during the
first quarter of 2005 as compared to 2004 primarily due to a 16% increase in shipments and a 17%
increase in average realized prices. Current period shipments were higher than 2004 shipments as a
result of improved demand for most of the Companys fabricated aluminum products, especially
aluminum plate for the general engineering and aerospace markets. The increase in the average
realized price reflects an especially favorable mix of products sold, stronger demand, and higher
underlying metal prices. Realized prices were generally higher in all product categories and
reached near-peak levels for plate products in response to strong near-tem demand. Extrusion prices
are thought to have recovered from the recessionary lows experienced in 2002 and 2003 but are still
below prices experienced during peaks in the business cycle. Segment operating results (before Other operating charges, net) for 2005 improved over 2004
primarily due to the improved mix of products, shipments and pricing noted above offset, in part,
by higher natural gas prices and freight costs. Segment operating results in the first quarter of
2005 were also better than the prior year as a result of lower charges for legacy pension and
retiree medical-related charges (See Note 8 of Notes to Interim Consolidated Financial Statements).
Segment operating results in future periods may not be as strong as those generated in the first
quarter of 2005 as the product mix in future quarters in 2005 may not be as favorable as that
experienced in the first quarter of 2005. Segment operating results for 2005 and 2004 include gains
on intercompany hedging activities with the Primary aluminum business unit totaling $4.0 million
and $1.3 million. These amounts eliminate in consolidation. Segment operating results for 2005, discussed above, exclude defined contribution savings plan
charges of approximately $5.2 million (see Note 11 of Notes to Interim Consolidated Financial
Statements). Primary aluminum.The activities of the Primary aluminum business unit consist of the
Companys interests in and related to Anglesey and primary aluminum hedging-related activities.
Third party net sales of primary aluminum increased 17% for 2005 as compared to the same period in
2004 primarily as a result of a 17% increase in third party average realized prices. The increase
in the average realized prices was primarily due to the increases in primary aluminum market
prices. Segment operating results for 2005 improved over 2004 primarily due to the increase in prices
discussed above. Segment operating results for 2005 and 2004 include losses on intercompany hedging
activities with the Fabricated products business unit totaling $4.0 million and $1.3 million. These
amounts eliminate in consolidation. Corporate and Other.Corporate operating expenses represent corporate general and
administrative expenses that are not allocated to the Companys business segments. In 2005,
Corporate operating costs were comprised of approximately $6.1 million of expenses related to
ongoing operations and approximately $6.3 million of retiree related expenses. In 2004, Corporate
operating costs consisted of expenses related to ongoing operations of approximately $7.5 million
and $8.2 million of retiree related expenses. The decline in expenses related to ongoing operations
from 2004 to 2005 was primarily attributable to the fact that key personnel ceased receiving
retention payments pursuant to the Companys key employee retention program (see Note 12 of Notes
to Interim Consolidated Financial Statements). The decline in retiree related expenses is
primarily attributable to the termination of the Inactive Pension Plan and the Kaiser Aluminum
Pension Plan in third quarter of 2004 (see Note 8 of Notes to Interim Consolidated Financial
Statements). Corporate operating results for 2005, discussed above, exclude defined contribution savings
plan charges of approximately $.4 million and a $.6 million charge related to the Houston, Texas
administrative offices lease (see Note 11 of Notes to Interim Consolidated Financial Statements). 49




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As the Company completes the disposition of the commodities interests and prepares for and
emerges from the Cases, the Company expects there will be a substantial decline in Corporate and
other costs. However, certain of these restructuring activities may have adverse short term cost
consequences. Discontinued Operations.Discontinued operations in 2005 include the operating results of
QAL, which Company interests were sold as of April 1, 2005. Discontinued operations in 2004
include, in addition to the operating results of QAL, the operating results of the commodity
interests (Valco, Mead, Alpart and Gramercy/KJBC) that were sold during 2004. Results for
discontinued operations for 2005 improved approximately $52.0 million over 2004. Approximately
$5.0 million of this improvement was due to improved operating results at QAL, which resulted
primarily from increased average realized alumina prices. The balance of such improvement
(approximately $47.0 million) relates to costs and expenses of commodity interests sold in 2004
that are not recurring: (a) a $33.0 million Valco-related impairment charge, (b) $6.0 million of
Valco operating losses, (c) $5.0 million of Mead operating losses and (d) $3.0 million of hedging
losses related to discontinued operations. Modest favorable operating results in 2004 at Alpart
and Gramercy/KJBC were offset by unfavorable hedging results. Liquidity and Capital Resources As a result of the filing of the Cases, claims against the Debtors for principal and accrued
interest on secured and unsecured indebtedness existing on their Filing Date are stayed while the
Debtors continue business operations as debtors-in-possession, subject to the control and
supervision of the Court. See Note 1 of Notes to Consolidated Financial Statements for additional
discussion of the Cases. At this time, it is not possible to predict the effect of the Cases on the
businesses of the Debtors. Operating Activities.In 2005, Fabricated products operating activities provided
approximately $15.0 million of cash. This amount compares with 2004 when Fabricated products
operating activities used approximately $6.0 million of cash. Cash provided by Fabricated products
in 2005 was primarily due to improved operating results associated with improving demand for
fabricated aluminum products. Working capital change in 2005 was modest. Cash used by Fabricated
products in 2004 was primarily due to increases in working capital associated with improving demand
for fabricated aluminum products offset by improved operating results. The foregoing analysis of
fabricated products cash flow excludes consideration of pension and retiree cash payments made by
the Company on behalf of current and former employees of the Fabricated products facilities. Such
amounts are part of the legacy costs that the Company internally categorizes as a corporate cash
outflow. See Corporate and other operating activities below. Cash flows attributable to the Companys interests in and related to Anglesey provided
approximately $8.0 million and $14.0 million in 2005 and 2004, respectively. The decrease in cash
flows between 2005 and 2004 is primarily attributable to timing of payments and receipts. Corporate and other operating activities (including all of the Companys legacy costs)
utilized approximately $24.0 million and $32.0 million of cash in 2005 and 2004, respectively. Cash
outflows from Corporate and other operating activities in 2005 and 2004 included: (a) approximately
$7.0 million and $16.0 million, respectively, in respect of retiree medical obligations and VEBA
funding for all former and current operating units; (b) payments for reorganization costs of
approximately $9.0 million and $5.0 million, respectively; and (c) payments in respect of General
and Administrative costs totaling approximately $6.0 million and $7.0 million, respectively. In 2005, Discontinued operation activities used $7.0 million of cash. This compares with 2004
when Discontinued operation activities used $3.0 million of cash. The increase in cash used by
Discontinued operations in 2005 over 2004 resulted primarily from foreign tax payments of $8.0
million offset by improved operating results due primarily to the improvement in average realized
alumina prices. Investing Activities.Total capital expenditures for Fabricated products were $3.8 million
and $1.6 million for the quarters ended March 31, 2005 and 2004, respectively. The capital
expenditures were made primarily to improve production efficiency, reduce operating costs and
expand capacity at existing facilities. Total capital expenditures for Fabricated products are
currently expected to be in the $20.0 million  $25.0 million range in 2005 and in the $20.0
million  $40.0 million range in 2006. The level of capital expenditures may be adjusted from time
to time depending on the Companys business plans, price outlook for metal and other products, the
Companys ability to maintain adequate liquidity and other factors. 50




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Total capital expenditures for Discontinued operations were $1.3 million in the quarter ended
March 31, 2004 (of which $.4 million was funded by the minority partners in certain foreign joint
ventures). Financing Activities and Liquidity.On February 11, 2005, the Company and Kaiser entered into
a new financing agreement with a group of lenders under which the Company was provided with a
replacement for the existing post-petition credit facility and a commitment for a multi-year exit
financing arrangement upon the Debtors emergence from the Chapter 11 proceedings. The new
financing agreement:  
    Replaced the existing post-petition credit facility with a new $200.0 million DIP
Facility and
    Included a commitment, upon the Debtors emergence from the Chapter 11 proceedings, for
exit financing in the form of a $200.0 million Revolving Credit Facility and a Term Loan of
up to $50.0 million. The DIP Facility provides for a secured, revolving line of credit through the earlier of
February 11, 2006, the effective date of a plan of reorganization or voluntary termination by the
Company. Under the DIP Facility, the Company, Kaiser and certain subsidiaries of the Company are
able to borrow amounts by means of revolving credit advances and to have issued letters of credit
(up to $60.0 million) in an aggregate amount equal to the lesser of $200.0 million or a borrowing
base comprised of eligible accounts receivable, eligible inventory and certain eligible machinery,
equipment and real estate, reduced by certain reserves, as defined in the DIP Facility agreement.
The amount available under the DIP Facility will be reduced by $20.0 million if net borrowing
availability falls below $40.0 million. Interest on any outstanding borrowings will bear a spread
over either a base rate or LIBOR, at the Companys option. The DIP Facility is secured by substantially all of the assets of the Company, Kaiser and the
Companys domestic subsidiaries other than certain amounts related to AJI, KJC, KAAC, and KFC whose
assets are, subject to their liquidation plans (see Note 1 of Notes to Consolidated Financial
Statements), expected to be distributed to the creditors of those subsidiaries. The DIP Facility is
guaranteed by the Company and all of the Companys material domestic subsidiaries other than AJI,
KJC, KAAC, and KFC. Amounts owed under the DIP Facility may be accelerated under various circumstances more fully
described in the DIP Facility agreement, including but not limited to, the failure to make
principal or interest payments due under the DIP Facility, breaches of certain covenants,
representations and warranties set forth in the DIP Facility agreement, and certain events having a
material adverse effect on the business, assets, operations or condition of the Company taken as a
whole. The DIP Facility places restrictions on the Companys, Kaisers and the Companys
subsidiaries ability to, among other things, incur debt, create liens, make investments, pay
dividends, sell assets, undertake transactions with affiliates, and enter into unrelated lines of
business. The principal terms of the committed Revolving Credit Facility would generally be the same as
or more favorable than the DIP Facility, except that, among other things, the Revolving Credit
Facility would close and be available upon the Debtors emergence from the Chapter 11 proceedings
and would be expected to mature on February 11, 2010. The Term Loan commitment would be expected to
close upon the Debtors emergence from the Chapter 11 proceedings and would be expected to mature
on February 11, 2011. The DIP Facility replaced, on February 11, 2005, a post-petition credit facility (the
Replaced Facility) that the Company and Kaiser entered into on February 12, 2002. Originally, the
Replaced Facility provided for revolving credit advances of up to $300.0 million. This amount was
reduced to $285.0 million in August 2003 and to $200.0 million in October 2004. The Replaced
Facility was amended a number of times during its term as a result of, among other things,
reorganization transactions, including disposition of the Companys commodity-related assets. The Company has previously disclosed that in connection with the completion of the previously
announced sales of its commodities interests, it expects that the amount of borrowing base
available under the DIP Facility would be adequate to support the Companys liquidity requirements
through the remainder of the Cases. This belief is based on the fact that it was the commodity
assets that subjected the Company to the most variability and exposure from both a price risk basis
as well as from an operating perspective. While there can be no assurances, based on recent primary
aluminum prices and recent market conditions for fabricated aluminum products, the Company
currently expects availability under the DIP Facility to remain above the $100.0 million range. 51




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The Company currently believe that the cash and cash equivalents, cash flows from operations,
cash proceeds from the Intercompany Agreement and cash available from the DIP Facility will provide
sufficient working capital to allow the Company to meet its obligations during the expected
pendency of the Cases. At April 30, 2005, there were no outstanding borrowings under the DIP
Facility. While there were only $15.1 million of letters of credit outstanding under the DIP
Facility at April 30, 2005, there were approximately $3.0 million of outstanding letters of credit
that had been issued under the Replaced Facility for which the Company had deposited cash of $3.1
million as collateral. These outstanding letters of credit are expected to be replaced with letters
of credit issued under the DIP Facility, at which time, the applicable cash collateral will be
refunded to the Company. In accordance with the Code and the DIP Facility, the Company is not permitted to purchase any
of its common or preference stock. New Accounting Pronouncement The section New Accounting Pronouncement from Note 2 of Notes to Interim Consolidated
Financial Statements is incorporated herein by reference. Critical Accounting Policies Critical accounting policies are those that are both very important to the portrayal of the
Companys financial condition and results, and require managements most difficult, subjective,
and/or complex judgments. Typically, the circumstances that make these judgments difficult,
subjective and/or complex have to do with the need to make estimates about the effect of matters
that are inherently uncertain. While the Company believes that all aspect of its financial
statements should be studied and understood in assessing its current (and expected future)
financial condition and results, the Company believes that the accounting policies that warrant
additional attention include: 1. The interim consolidated financial statements as of and for the quarter ended March 31,
2005 have been prepared on a going concern basis in accordance with AICPA Statement of Position
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and do not
include possible impacts arising in respect of the Cases. The interim consolidated financial
statements included elsewhere in this Report do not include certain adjustments relating to the
recoverability and classification of recorded asset amounts or the amount and classification of
liabilities or the effect on existing stockholders equity that may result from any plans,
arrangements or other actions arising from the Cases, or the possible inability of the Company to
continue in existence. Adjustments necessitated by such plans, arrangements or other actions could
materially change the consolidated financial statements included elsewhere in this Report. For
example, a. Under generally accepted accounting principles (GAAP), assets to be held and used are
evaluated for recoverability differently than assets to be sold or disposed of. Assets to be held
and used are evaluated based on their expected undiscounted future net cash flows. So long as the
Company reasonably expects that such undiscounted future net cash flows for each asset will
exceed the recorded value of the asset being evaluated, no impairment is required. However, if
plans to sell or dispose of an asset or group of assets meet a number of specific criteria, then,
under GAAP, such assets should be considered held for sale/disposition and their recoverability
should be evaluated, for each asset, based on expected consideration to be received upon
disposition. Sales or dispositions at a particular time will be affected by, among other things,
the existing industry and general economic circumstances as well as the Companys own
circumstances, including whether or not assets will (or must) be sold on an accelerated or more
extended timetable. Such circumstances may cause the expected value in a sale or disposition
scenario to differ materially from the realizable value over the normal operating life of assets,
which would likely be evaluated on long-term industry trends. As previously disclosed, while the Company had stated that it was considering the
possibility of disposing of one or more of its commodities interests, the Company, through the
third quarter of 2003, still considered all of its commodity assets as held for use, as no
definite decisions had been made regarding the disposition of such assets. However, based on
additional negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of its interests in and related to Alpart, Gramercy/KJBC and
Valco were possible and, therefore, that recoverability should be considered differently as of
December 31, 2003 and subsequent periods. As a result of the change in status, the Company
recorded impairment charges of approximately $33.0 million in the first quarter of 2004 and
$368.0 million in the fourth quarter of 2003. 52




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b. Additional pre-Filing Date claims may be identified through the proof of claim
reconciliation process and may arise in connection with actions taken by the Debtors in the
Cases. For example, while the Debtors consider rejection of the Bonneville Power Administration
(BPA) contract to be in the Companys best long-term interests, such rejection may increase the
amount of pre-Filing Date claims by approximately $75.0 million based on the BPAs proof of claim
filed in connection with the Cases in respect of the contract rejection. c. As more fully discussed below, the amount of pre-Filing Date claims ultimately allowed by
the Court in respect of contingent claims and benefit obligations may be materially different
from the amounts reflected in the Consolidated Financial Statements. While valuation of the Companys assets and pre-Filing Date claims at this stage of the Cases
is subject to inherent uncertainties, the Company currently believes that it is likely that its
liabilities will be found in the Cases to exceed the fair value of its assets. Therefore, the
Company currently believes that it is likely that substantially all pre-Filing Date claims will be
paid at less than 100% of their face value and the equity interests of the Companys stockholders
will be cancelled without consideration. Additionally, upon emergence from the Cases, the Company expects to apply fresh start
accounting to its consolidated financial statements as required by SOP 90-7. Fresh start accounting
is required if: (1) a debtors liabilities are determined to be in excess of its assets and (2)
there will be a greater than 50% change in the equity ownership of the entity. As previously
disclosed, the Company expects both such circumstances to apply. As such, upon emergence, the
Company will restate its balance sheet to equal the reorganization value as determined in its plan
of reorganization and approved by the Court. Additionally, items such as accumulated depreciation,
accumulated deficit and accumulated other comprehensive income (loss) will be reset to zero. The
Company will allocate the reorganization value to its individual assets and liabilities based on
their estimated fair value at the emergence date. Typically such items as current liabilities,
accounts receivable, and cash will be reflected at values similar to those reported prior to
emergence. Items such as inventory, property, plant and equipment, long-term assets and long-term
liabilities are more likely to be significantly adjusted from amounts previously reported. Because
fresh start accounting will be adopted at emergence, and because of the significance of the pending
and completed asset sales and liabilities subject to compromise (that will be relieved upon
emergence), meaningful comparison between the current historical financial statements and the
financial statements upon emergence may be difficult to make. 2. The Companys judgments and estimates with respect to commitments and contingencies, in
particular: (a) future personal injury related costs and obligations as well as estimated insurance
recoveries, and (b) possible liability in respect of claims of unfair labor practices (ULPs)
which were not resolved as a part of the Companys September 2000 labor settlement. Valuation of legal and other contingent claims is subject to a great deal of judgment and
substantial uncertainty. Under GAAP, companies are required to accrue for contingent matters in
their financial statements only if the amount of any potential loss is both probable and the
amount (or a range) of possible loss is estimatable. In reaching a determination of the
probability of an adverse ruling in respect of a matter, the Company typically consults outside
experts. However, any such judgments reached regarding probability are subject to significant
uncertainty. The Company may, in fact, obtain an adverse ruling in a matter that it did not
consider a probable loss and which, therefore, was not accrued for in its financial statements.
Additionally, facts and circumstances in respect of a matter can change causing key assumptions
that were used in previous assessments of a matter to change. It is possible that amounts at risk
in respect of one matter may be traded off against amounts under negotiations in a separate
matter. Further, in estimating the amount of any loss, in many instances a single estimation of the
loss may not be possible. Rather, the Company may only be able to estimate a range for possible
losses. In such event, GAAP requires that a liability be established for at least the minimum end
of the range assuming that there is no other amount which is more likely to occur. During the period 2002-2004, the Company has had two potentially material contingent
obligations that were/are subject to significant uncertainty and variability in their outcome: (a)
the United Steelworkers of Americas (USWA) ULP claim, and (b) the net obligation in respect of
personal injury-related matters. Both of these matters are discussed in Note 9 of Notes to Interim
Consolidated Financial Statements and it is important that you read this note. As more fully discussed in Note 9 of Notes to Interim Consolidated Financial Statements, we
accrued an amount in the fourth quarter of 2004 in respect of the USWA ULP matter. We did not
accrue any amount prior to the fourth quarter of 2004 as we did not consider the loss to be
probable. Our assessment had been that the possible range of loss in this matter was anywhere
from 53




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zero to $250.0 million based on the proof of claims filed (and other information provided) by
the National Labor Relations Board (NLRB) and USWA in connection with the Companys and Kaisers
reorganization proceedings. While the Company continues to believe that the ULP charges were
without merit, during January 2004, the Company agreed to allow a claim in favor of the USWA in the
amount of the $175.0 million as a compromise and in return for the USWA agreeing to substantially
reduce and/or eliminate certain benefit payments as more fully discussed in Note 9 of Notes to
Interim Consolidated Financial Statements. However, this settlement was not recorded at that time
as it was still subject to Court approval. The settlement was ultimately approved by the Court in
February 2005 and, as a result of the contingency being removed with respect to this item (which
arose prior to the December 31, 2004 balance sheet date), a non-cash charge of $175.0 million was
reflected in the Companys consolidated financial statements at December 31, 2004. Also, as more fully discussed in Note 9 of Notes to Interim Consolidated Financial Statements,
the Company is one of many defendants in personal injury claims by large number of persons who
assert that their injuries were caused by, among other things, exposure to asbestos during, or as a
result of, their employment or association with the Company or by exposure to products containing
asbestos last produced or sold by the Company more than 20 years ago. The Company has also
previously disclosed that certain other personal injury claims had been filed in respect of alleged
pre-Filing Date exposure to silica and coal tar pitch volatiles. Due to the Cases, existing
lawsuits in respect of all such personal injury claims are stayed and new lawsuits cannot be
commenced against us or Kaiser. It is difficult to predict the number of claims that will
ultimately be made against the Company or the settlement value of such claims. Our March 31, 2005,
balance sheet includes a liability for estimated asbestos-related costs of $1,115.0 million, which
represents the Companys estimate of the minimum end of a range of costs. The upper end of the
Companys estimate of costs is approximately $2,400.0 million and the Company is aware that certain
constituents have asserted that they believe that actual costs may exceed the top end of the
Companys estimated range, by perhaps a material amount. As a part of any plan of reorganization it
is likely that an estimation of the Companys entire asbestos-related liability may occur. Any such
estimation will likely result from negotiations between the Company and key creditor constituencies
or an estimation process overseen by the Court. It is possible that any resulting estimate of the
Companys asbestos-related liability resulting from either process could exceed, perhaps
significantly, the liability amounts reflected in the Companys consolidated financial statements. We believe the Company has insurance coverage for a substantial portion of such
asbestos-related costs. Accordingly, our March 31, 2005 balance sheet includes a long-term
receivable for estimated insurance recoveries of $967.0 million. We believe that recovery of this
amount is probable and additional amounts may be recoverable in the future if additional liability
is ultimately determined to exist. However, we cannot assure you that all such amounts will be
collected. The timing and amount of future recoveries from the Companys insurance carriers will
depend on the pendency of the Cases and on the resolution of disputes regarding coverage under the
applicable insurance policies. Over the past several years, the Company has received a number of
rulings in respect of insurance related litigation that it believes supports the amount reflected
on the balance sheet. The trial court may hear additional issues from time to time. Further,
depending on the amount of asbestos-related claims ultimately determined to exist, it is possible
that the amount of such claims could exceed the amount of additional insurance recoveries
available. Any adjustments ultimately deemed to be required as a result of the reevaluation of the
Companys asbestos-related liabilities or estimated insurance recoveries could have a material
impact on the Companys future financial statements. However, under an agreed term sheet, all of
the Companys personal injuryrelated obligations together with the benefits of its insurance
policies and certain other consideration are to be transferred into one or more trusts at
emergence. See Note 9 of Notes to Consolidated Financial Statements for a more complete discussion of
these matters. 3. The Companys judgments and estimates in respect of its employee benefit plans. Pension and post-retirement medical obligations included in the consolidated balance sheet are
based on assumptions that are subject to variation from year-to-year. Such variations can cause the
Companys estimate of such obligations to vary significantly. Restructuring actions (such as the
indefinite curtailment of the Mead smelter) can also have a significant impact on such amounts. For pension obligations, the most significant assumptions used in determining the estimated
year-end obligation are the assumed discount rate and long-term rate of return (LTRR) on pension
assets. Since recorded pension obligations represent the present value of expected pension payments
over the life of the plans, decreases in the discount rate (used to compute the present value of
the payments) will cause the estimated obligations to increase. Conversely, an increase in the
discount rate will cause the estimated present value of the obligations to decline. The LTRR on
pension assets reflects the Companys assumption regarding what the amount of earnings will be on
existing plan assets (before considering any future contributions to the plans). Increases in 54




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the assumed LTRR will cause the projected value of plan assets available to satisfy pension
obligations to increase, yielding a reduced net pension obligation. A reduction in the LTRR reduces
the amount of projected net assets available to satisfy pension obligations and, thus, causes the
net pension obligation to increase. For post-retirement obligations, the key assumptions used to estimate the year-end obligations
are the discount rate and the assumptions regarding future medical costs increases. The discount
rate affects the post-retirement obligations in a similar fashion to that described above for
pension obligations. As the assumed rate of increase in medical costs goes up, so does the net
projected obligation. Conversely, if the rate of increase is assumed to be smaller, the projected
obligation will decline. As more fully discussed in Note 8 of Notes to Consolidated Financial Statements, certain
charges have been recorded in 2003 and 2004 in respect of changes in the Companys pension and
post-retirement benefit plans. The PBGC has assumed responsibility for the three largest of the
Companys pension plans. Initially, the Company reflected the effects of these terminations based
on the accounting methodologies for continuing plans. This resulted in charges of approximately
$121.0 million in 2003 and another $155.0 million in 2004. This methodology was used to record
these effects because there were arguments that the ultimate amount of liability could be higher or
lower than that resulting from following GAAP for continuing plans, but the ultimate outcome was
unknown. Ultimately, in order to advance the Cases, our negotiations with the PBGC resulted in the
Company ultimately agreeing to a settlement amount that exceeded the recorded liability by
approximately $154.0 million. The settlement was contingent on Court approval. While Court approval
was received in January 2005, a charge was reflected in the fourth quarter of 2004 for this
settlement as the pension obligations to which the charge related existed at December 31, 2004.
Pursuant to the agreement with the PBGC, the Company will continue to sponsor the Companys
remaining pension plans. In addition, as previously disclosed, the Companys post-retirement
medical plans were terminated during 2004 and were replaced with medical coverage through COBRA or
the VEBAs. However, definitive, final termination of the previous post-retirement benefit plan was
contingent on Court approval of the Intercompany Agreement, which was ultimately received in
February 2005. As a result of the removal of the contingency, the Company reflected an
approximately $312.5 million charge associated with the termination of the plan at December 31,
2004 as the liability for this existed at the balance sheet date. The amount of the charge relates
to amounts previously deferred under GAAP for continuing plans. While the amounts involved with the new/remaining plans are substantially less than the
amounts in respect of the terminated plans (and thus subject to a lesser amount of expected
volatility in amounts) they are, nonetheless, subject to the same sorts of changes and any such
changes could be material to continuing operations. See Note 8 of Notes to Consolidated Financial
Statements regarding the Companys pension and post-retirement obligations. 4. The Companys judgments and estimates in respect to environmental commitments and
contingencies. The Company is subject to a number of environmental laws and regulations, to fines or
penalties assessed for alleged breaches of such laws and regulations, and to claims and litigation
based upon such laws and regulations. The Company 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. These environmental accruals represent the Companys estimate
of costs reasonably expected to be incurred on a going concern basis in the ordinary course of
business based on presently enacted laws and regulations, currently available facts, existing
technology, and the Companys assessment of the likely remediation action to be taken. However,
making estimates of possible environmental remediation costs is subject to inherent uncertainties.
As additional facts are developed and definitive remediation plans and necessary regulatory
approvals for implementation of remediation are established or alternative technologies are
developed, changes in these and other factors may result in actual costs exceeding the current
environmental accruals. An example of how environmental accruals could change is provided by the multi-site agreement
discussed in Note 9 of Notes to Interim Consolidated Financial Statements. Another example
discussed in Note 9 of Notes to Interim Consolidated Financial Statements is the agreements
ultimately reached with the parties and approved by the Court in October 2004 pursuant to which the
Company resolved certain environment obligations in return for cash payments totaling approximately
$27.3 million. As a means of expediting the reorganization process and to assure treatment of the
claims under a plan of reorganization that is favorable to the 55




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Debtors and their stakeholders, it may be in the best interests of the stakeholders for the
Company to agree to claim amounts in excess of previous accruals, which were based on an ordinary
course, going concern basis. Contractual Obligations and Commercial Commitments The following summarizes the Companys significant contractual obligations at March 31, 2005
(dollars in millions): Payments Due inLess than
    
    
    2-3
    
    
    4-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt, including capital lease of $2.4(a)
    
    $
    4.0
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    1.6Operating leases
    
    
    6.8
    
    
    
    2.1
    
    
    
    3.0
    
    
    
    1.4
    
    
    
    .3Total cash contractual obligations
    
    $
    10.8
    
    
    $
    3.3
    
    
    $
    4.2
    
    
    $
    1.4
    
    
    $
    1.9
   (a)
    
    See Note 6 of Notes to Interim Consolidated Financial Statements for information in respect
of long-term debt. Long-term debt obligations exclude debt subject to compromise of
approximately $847.6 million, which amounts will be dealt with in connection with a plan of
reorganization. See Notes 1 and 6 of Notes to Interim Consolidated Financial Statements for
additional information about debt subject to compromise. The following paragraphs summarize the Companys off-balance sheet arrangements. As of March 31, 2005, the Company owned a 20% interest in QAL, which owns one of the largest
and most competitive alumina refineries in the world, located in Queensland, Australia. QAL refines
bauxite into alumina, essentially on a cost basis, for the account of its shareholders under
long-term tolling contracts. The Company sold its share of QALs production to third parties. The
shareholders, including the Company, purchased bauxite from another QAL shareholder under long-term
purchase contracts. Under the agreements, the Company was unconditionally obligated to pay its
proportional share of debt, operating costs and certain other costs of QAL. The Companys share of
the aggregate minimum amount of future principal payments as of March 31, 2005 was $60.0 million.
The Companys share of payments, including operating costs and certain other expenses under the
agreements, has generally ranged between $70.0 million and $100.0 million per year over the past
three years. As discussed more fully in Note 5 of Notes to Interim Consolidated Financial
Statements, the Companys sale of its interests in and related to QAL closed on April 1, 2005. As a
result, the Companys obligations in respect of its share of the QAL debt were assumed by the
buyer. The Company has agreements to supply alumina to and to purchase aluminum from Anglesey, a
49.0%-owned aluminum smelter in Holyhead, Wales. The Company, in March 2005, announced the implementation of the new salaried and hourly
defined contribution savings plans. The salaried plan is being implemented retroactive to January
1, 2004 and the hourly plan is being implemented retroactive to May 31, 2004. Pursuant to the terms of the new defined contribution savings plan, the Company will be
required to make annual contributions into the Steelworkers Pension Trust on the basis of one
dollar per USWA employee hour worked at two facilities. The Company will also be required to make
contributions to a defined contribution savings plan for active USWA employees that will range from
eight hundred dollars to twenty-four hundred dollars per employee per year, depending on the
employees age. Similar defined contribution savings plans have been established for non-USWA
hourly employees subject to collective bargaining agreements. The Company currently estimates that
contributions to all such plans will range from $3.0 million to $6.0 million per year. The new defined contribution savings plan for salaried employees provides for a match of
certain contributions made by such employees plus a contribution of between 2% and 10% of their
salary depending on their age and years of service. The amount related to the retroactive implementation of the defined contribution savings plans
($5.6 million) is expected to be paid in the second quarter of 2005. As a replacement for the Companys current postretirement benefit plans, the Company agreed to
contribute certain amounts to one or more VEBAs. Such contributions are to include: 56




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
    An amount not to exceed $36.0 million and payable on emergence from the Chapter 11
proceedings so long as the Companys liquidity (i.e. cash plus borrowing availability) is at
least $50.0 million after considering such payments. To the extent that less than the full
$36.0 million is paid and the Companys interests in Anglesey are subsequently sold, a
portion of such sales proceeds, in certain circumstances, will be used to pay the shortfall.
    On an annual basis, 10% of the first $20.0 million of annual cash flow, as defined, plus
20% of annual cash flow, as defined, in excess of $20.0 million. Such annual payments will
not exceed $20.0 million and will also be limited (with no carryover to future years) to the
extent that the payments do not cause the Companys liquidity to be less than $50.0 million.
    Advances of $3.1 million in June 2004 and $1.9 million per month thereafter until the
Company emerges from the Cases. Any advances made pursuant to such agreement will constitute
a credit toward the $36.0 million maximum contribution due upon emergence. On June 1, 2004, the Court approved an order making the agreements regarding pension and
postretirement medical benefits effective on June 1, 2004 notwithstanding that the Intercompany
Agreement was not effective as of that date. In October 2004, the Company entered into an amendment
to the USWA agreement, which was approved by the Court in February 2005. As provided in the
amendment, the Company will pay an additional annual contribution of $1.0 million, which amount was
paid in March 2005. In connection with the sale of the Gramercy facility and KJBC, the Company indemnified the
buyer against losses suffered by the buyer that result from any breaches of certain seller
representations and warranties up to $5.0 million which amount has been recorded in long-term
liabilities in the accompanying financial statements. The indemnity expires in October 2006. In November 2004, the Company entered into an agreement to sell its interest in and related to
QAL. The agreement was approved by the Court in November 2004 and the sale closed on April 1,
2005. Net cash proceeds from the sale total approximately $412.0 million. The buyer also assumed
the Companys obligations in respect of approximately $60.0 million of QAL debt. As more fully
discussed in Note 1 of Notes to Interim Consolidated Financial Statements, the vast majority of the
value realized in respect of the Companys interests in and related to QAL is likely to be for the
benefit of holders of the Senior Notes, the Sub Notes and PBGC. At emergence from Chapter 11, the Company will have to pay or otherwise provide for a material
amount of claims. Such claims include accrued but unpaid professional fees, priority pension, tax
and environmental claims, secured claims, and certain post-petition obligations (collectively,
Exit Costs). The Company currently estimates that its Exit Costs will be in the range of $60.0
million to $80.0 million. The Company expects to fund such Exit Costs using the proceeds to be
received under the Intercompany Agreement together with existing cash resources and borrowing
availability under the exit financing facilities that are expected to replace the DIP Facility. Item 3.Quantitative and Qualitative Disclosures About Market Risk 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 2 and 10 of Notes to Interim
Consolidated Financial Statements, the Company historically has utilized 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 the Companys exposure to changes in foreign currency exchange
rates. Sensitivity Primary Aluminum.The Companys share of primary aluminum production from Anglesey is
approximately 150,000,000 pounds annually. Because the Company purchases alumina for Anglesey at
prices linked to primary aluminum prices, only a portion of the Companys net revenues associated
with Anglesey are exposed to price risk. The Company estimates the net portion of its share of
Anglesey production exposed to primary aluminum price risk to be approximately 100,000,000 pounds
annually. As stated above, the Companys pricing of fabricated aluminum products is generally intended
to lock-in a conversion margin (representing the value added from the fabrication process(es)) and
to pass metal price risk on to its customers. However, in certain 57




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instances the Company does enter into firm price arrangements. In such instances, the Company
does have price risk on its anticipated primary aluminum purchase in respect of the customers
order. Total fabricated products shipments during the quarters ended March 31, 2004 and 2005 for
which the Company had price risk were (in millions of pounds) 19.9 and 29.8, respectively. During the last three years the volume of fabricated products shipments with underlying
primary aluminum price risk were roughly the same as the Companys net exposure to primary aluminum
price risk at Anglesey. As such, the Company considers its access to Anglesey production overall to
be a natural hedge against any fabricated products firm metal-price risk. However, since the
volume of fabricated products shipped under firm prices may not match up on a month-to-month basis
with expected Anglesey-related primary aluminum shipments, the Company may use third party hedging
instruments to eliminate any net remaining primary aluminum price exposure existing at any time. At March 31, 2005, the fabricated products business held contracts for the delivery of
fabricated aluminum products that have the effect of creating price risk on anticipated primary
aluminum purchases during the last three quarters of 2005 and for the period 2006  2009 totaling
approximately (in millions of pounds): 2005: 111.0, 2006: 70.0, 2007: 65.0, 2008 35.0 and 2009
25.0. Foreign Currency.The Company from time to time will enter into forward exchange contracts to
hedge material cash commitments for foreign currencies. After considering the completed sales of
the Companys commodity interests, the Companys primary foreign exchange exposure is the
Anglesey-related commitment that the Company funds in Great Britain Pound Sterling (GBP). The
Company estimates that, before consideration of any hedging activities, a US $0.01 increase
(decrease) in the value of the GBP results in an approximate $.5 million (decrease) increase in the
Companys annual pre-tax operating income. Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures.An evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and procedures was performed as of the
end of the period covered by this Report under the supervision and with the participation of the
Companys management, including the Chief Executive Officer and Chief Financial Officer. Based on
that evaluation, the Companys management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Companys disclosure controls and procedures were effective. Changes in Internal Control.There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect internal controls subsequent to the
date of their evaluation. Additionally, no changes in the Companys internal controls over
financial reporting have occurred during the Companys most recently completed quarter that have
materially affected, or are reasonably likely to materially affect, the Companys internal controls
over internal reporting. 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, 2004 for information concerning material legal proceedings with respect to
the Company. Reorganization Proceedings Note 1 of Notes to Interim Consolidated Financial Statements in incorporated herein by
reference. 58




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Other Environmental Matters During April 2004, the Company was served with a subpoena for documents and has been notified
by Federal authorities that they are investigating certain environmental compliance issues with
respect to the Companys Trentwood facility in the State of Washington. The Company is undertaking
its own internal investigation of the matter through specially retained counsel to ensure that it
has all relevant facts regarding Trentwoods compliance with applicable environmental laws. The
Company believes it is in compliance with all applicable environmental law and requirements at the
Trentwood facility and intends to defend any claims or charges, if any should result, vigorously.
The Company cannot assess what, if any, impact this matter may have on the Companys financial
statements. Asbestos and Certain Other Personal Injury Claims The Company has been one of many defendants in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their injuries were
caused by, among other things, exposure to asbestos during, or as a result of, their employment or
association with the Company or exposure to products containing asbestos produced or sold by the
Company. The lawsuits generally relate to products the Company has not sold for more than 20 years.
As of the initial Filing Date, approximately 112,000 asbestos-related claims were pending. The
Company has also previously disclosed that certain other personal injury claims had been filed in
respect of alleged pre-Filing Date exposure to silica and coal tar pitch volatiles (approximately
3,900 claims and 300 claims, respectively). Due to the Cases, holders of asbestos, silica and coal tar pitch volatile claims are stayed
from continuing to prosecute pending litigation and from commencing new lawsuits against the
Debtors. As a result, the Company does not expect to make any asbestos payments in the near term.
Despite the Cases, the Company continues to pursue insurance collections in respect of
asbestos-related amounts paid prior to its Filing Date and, as described below, to negotiate
insurance settlements and prosecute certain actions to clarify policy interpretations in respect of
such coverage. During the fourth quarter of 2004, the Company updated its estimate of costs expected to be
incurred in respect of asbestos, silica and coal tar pitch volatile claims and expected insurance
recoveries. The portion of Note 9 of Notes to Interim Consolidated Financial Statements under the
heading Asbestos and Certain Other Personal Injury Claimsis incorporated herein by reference. Hearing Loss Claims During February 2004, the Company reached a settlement in principle in respect of 400 claims,
which alleged that certain individuals who were employees of the Company, principally at a facility
previously owned and operated by the Company in Louisiana, suffered hearing loss in connection with
their employment. Under the terms of the settlement, which is still subject to Court approval, the
claimants will be allowed claims totaling $15.8 million. During the Cases, the Company has received
approximately 3,200 additional proofs of claim alleging pre-petition injury due to noise induced
hearing loss. It is not known at this time how many, if any, of such claims have merit or at what
level such claims might qualify within the parameters established by the above-referenced
settlement in principle for the 400 claims. Accordingly, the Company cannot presently determine the
impact or value of these claims. However, the Company currently expects that all noise induced
hearing loss claims will be transferred, along with certain rights against certain insurance
policies, to a separate trust along with the settled hearing loss cases discussed above, whether or
not such claims are settled prior to the Companys emergence from the Cases. The portion of Note 9
of Notes to Interim Consolidated Financial Statements under the heading Hearing Loss Claimsis
incorporated herein by reference. Item 6Exhibits ExhibitNumber
    
    Description2.1
    
    Purchase Agreement, dated as of September 22, 2004, between
Kaiser Aluminum & Chemical Corporation (KACC), Kaiser
Alumina Australia Corporation (KAAC) and Comalco Aluminium
Limited (incorporated by reference to Exhibit 2.3 to the
Report on Form 10-Q for the quarterly period ended September
30, 2004, filed by KAC, File No. 1-9447).
 59




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ExhibitNumber
    
    Description2.2
    
    Agreement to Submit Qualified Bid for QAL, dated as of September 22, 2004, between KACC,
KAAC and Glencore AG (incorporated by reference to Exhibit 2.4 to the Report on Form 10-Q
for the quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).2.3
    
    Purchase Agreement, dated as of October 28, 2004, among KACC, KAAC and Alumina & Bauxite
Company Ltd. (incorporated by reference to Exhibit 2.5 to the Report on Form 10-Q for the
quarterly period ended September 30, 2004, filed by KAC, File No. 1-9447).4.1
    
    Secured Super-Priority Debtor-In-Possession Revolving Credit and Guaranty Agreement Among
KAC, KACC and certain of their subsidiaries, as Borrowers, and certain Subsidiaries of KAC
and KACC, as Guarantors, and certain financial institutions and JP Morgan Chase Bank,
National Association, as Administrative Agent, dated as of February 11, 2005 (incorporated
by reference to Exhibit 99.1 to Report on Form 8-K, dated as of February 11, 2005, filed
by KAC, File No. 1-9447).*31.1
    
    Certification of Jack A. Hockema pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Kerry A. Shiba pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Kerry A. Shiba pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *Filed herewith. 60




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SIGNATURES 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 & Chemical Corporation/s/ Kerry A.ShibaKerry A. ShibaVice President and Chief Financial Officer(Principal Financial Officer)/s/ Daniel D. MaddoxDaniel D. MaddoxVice President and Controller(Principal Accounting Officer)
 Date: May 13, 2005 61




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Index to Exhibits *31.1
    
    Certification of Jack A. Hockema pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Kerry A. Shiba pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Kerry A. Shiba pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *Filed herewith.