Kaisers annual report hints at cloudy future
In addition to power woes, possible asset sale, lawsuits, and labor fight raise doubtsApril 20th, 2001
While soaring energy prices have clouded the viability of Kaiser Aluminum & Chemical Corp.s Northwest smelters, other challenges and uncertainties raise questions about the future of Kaisers plants here, its parent companys new annual report suggests.
In the report, filed with the U.S. Securities and Exchange Commission on March 30 by Houston-based Kaiser Aluminum Corp., the company detailed the hardships it faces and the strategies its implementing. One of those strategies is the possible sale of part or all of its interests in certain operating assets, the report says.
Though Kaiser has declined to comment publicly about rumors that a French company was looking at buying its big aluminum rolling mill in Trentwood, which employs about 1,050 people, its annual report makes clear that multiple transactions on its various plant assets are under way, and that it expects that at least one operating asset will be sold.
While the company is mum on which of its plants are being offered for sale, speculation has centered on Trentwood, which has been modernized, is adaptable, and isnt as subject to the volatile power market as Kaisers smelters in Mead and Tacoma. In fact, due to reduced power availability and higher power costs, Kaiser reduced by $33 million the carrying value of those smelters in its fourth quarter last year, putting their combined value now at about $167 million. Energy issues, by far, remain the companys biggest concern, officials say.
Kaiser, which describes itself in the report as being highly leveraged, with total debt of nearly $1 billion as of Dec. 31, says it would use the proceeds of any asset sale for debt reduction, capital spending, or both.
The company faces near-term maturities on a significant amount of that debt, which means it will need to pay some of it off and restructure other portions, and thats going to require cash.
Kaiser is generating large amounts of cash right now, but not in a sustainable way. Last fall, the company took advantage of skyrocketing open-market energy prices by shutting down its Northwest smelters and selling power that had been allotted to them under contract with the Bonneville Power Administration, which markets federal hydropower. As a result, Kaiser posted a $103.2 million net gain from such sales in its fourth quarter, and expects to post $260 million in gross energy-sale gains (before costs) in first quarter 2001. It says it might sell another $20 million to $40 million worth of BPA power allotments before Sept. 30.
Without power to make aluminum, the smelters will remain closed at least through Sept. 30, when a new contract with BPA takes effect that doesnt allow for such sales. Whether the plants reopen after that isnt clear now. Kaisers new contract with BPA provides only about 40 percent of the energy needed to run both smelters at full capacity, and Kaiser says it expects the cost of that power to be 20 percent to 60 percentand perhaps as much as 100 percenthigher than under its current BPA contract.
Depending on what price Kaiser ultimately pays for power after Oct. 1, it may be unable to operate the Mead and Tacoma smelters in the near or long term, the annual report says.
Meanwhile, the BPA now has floated the idea of keeping all Northwest aluminum smelters shuttered until 2003, to prevent massive rate increases for other power users. Further, it has threatened to leave Kaiser out of a plan that might provide money to workers at other Northwest smelters during the curtailments. That threat stems from a disagreement Kaiser and the BPA have had over how much of Kaisers power-sale windfall should go to its idled employees.
Kaisers Trentwood rolling mill, which has shifted its production away from aluminum-can body stock to higher-margin products such as heat-treat sheet and plate and can lid and tab stock, has used molten aluminum from Mead, but can get aluminum from other sources, says Kaiser spokesman Scott Lamb.
There are other storm clouds over Kaiser as well.
Kaiser is a defendant in a number of lawsuits that relate to a refractory brick product a Kaiser division stopped selling 20 years ago. The product included asbestos-laced grout that Kaiser bought from another company and distributed with the bricks. So far, the company has paid about $220.5 million for asbestos-related settlements and defense costs, and has received about $131.3 million in insurance proceeds to offset those expenditures. It expects more such costs, and has included on its balance sheet an expected liability of $492.4 million that it expects to pay over the next decade, and an expected receivable of $406.3 million it anticipates from insurance proceeds.
That leaves about $86 million that Kaiser will have to come up with itself.
Also, two allegations of unfair labor practices remain before the National Labor Relations Board in connection with the 1998 strike and subsequent 1999 lockout of United Steelworkers of America members at the companys five U.S. plants, including the two here.
A trial is under way, and if Kaiser loses, it could be required to provide back pay to union workers, and those amounts could be significant, the company says. It adds, however, that any ruling is likely to be appealed, and the appeals process could take months or years to resolve.
During 2000, Kaiser averaged companywide employment of 7,800 people, compared with an average of 8,600 in 1999 and 9,200 in 1998. It employs about 1,920 in Spokane County.
For 2000, Kaiser posted a $16.8 million profit on sales of about $2.17 billion, compared with a net loss of $54.1 million on sales of $2.08 billion in 1999. The 2000 profit figure included non-recurring gains and losses, without which the company would have had just slightly over a break-even performance.