KALU

Business Context and Reporting Period

Company: Kaiser Aluminum Corporation (Debtor-in-Possession)
Reporting Period: Fiscal year ended December 31, 2005
Status: The Company and its subsidiaries are operating under Chapter 11 bankruptcy protection. A plan of reorganization was confirmed by the Bankruptcy Court on February 6, 2006, subject to District Court affirmation and other conditions. The Company anticipates emerging from bankruptcy in the second quarter of 2006.
Operations: The Company has divested substantially all commodity interests (bauxite, alumina, primary aluminum smelters) and now focuses primarily on the production of fabricated aluminum products (rolled, extruded, drawn, and forged). It retains a 49% interest in Anglesey Aluminium Limited, a smelter in Wales.

Key Financial Metrics

Note: The Net Loss in 2005 includes a non-cash reorganization charge of $1,131.5 million related to the assignment of intercompany claims to creditors. Operating income for the Fabricated Products segment was $87.2 million in 2005, compared to $33.0 million in 2004.

Material Changes Versus Prior Period

• Revenue Growth: Net sales increased 16% to $1,089.7 million, driven by a 10% increase in average realized prices and a 6% increase in shipments of fabricated products.
• Operating Performance: Operating income improved significantly from a loss of $817.6 million in 2004 to a profit of $59.8 million in 2005. This improvement is largely due to the absence of massive non-cash charges recorded in 2004 related to pension terminations and retiree medical plan settlements.
• Discontinued Operations: Income from discontinued operations increased to $363.7 million in 2005, primarily due to a $366.2 million gain on the sale of the Company's interest in Queensland Alumina Limited (QAL).
• Reorganization Charges: Reorganization items increased to $1,162.1 million in 2005, dominated by the $1,131.5 million non-cash charge associated with the Liquidating Plans.

Guidance, Outlook, and Risks

Reorganization Plan: The confirmed plan cancels all existing equity interests without consideration. New equity will be distributed to creditors, with Voluntary Employee Beneficiary Associations (VEBAs) receiving 66.9% and the Pension Benefit Guaranty Corporation (PBGC) receiving approximately 16.2%. Unsecured creditors are expected to receive approximately 22.3% of new stock or cash payments of 2.9% of claim value.

Exit Costs: The Company estimates "Exit Costs" (professional fees, priority claims, etc.) at emergence to be between $45.0 million and $60.0 million, to be funded by existing cash and exit financing.

Key Risks and Contingencies:

• Emergence Uncertainty: Emergence is contingent upon District Court affirmation of the confirmation order, completion of exit financing, and formation of tort trusts. No assurance is given that these conditions will be met.
• Asbestos and Tort Claims: The Company has accrued $1,115.0 million for asbestos and other personal injury claims, with an estimated insurance recovery of $965.5 million. The actual liability could range up to $2,400.0 million.
• Environmental Matters: Environmental accruals totaled $46.5 million. The Company estimates it is reasonably possible that costs could exceed accruals by up to $20.0 million. An investigation into the Trentwood facility is ongoing.
• Anglesey Power: The power agreement for the Anglesey smelter expires in September 2009. There is no assurance that adequate power can be secured thereafter.
• Customer Concentration: The top five customers accounted for 33% of third-party net sales in 2005. The largest customer (Reliance Group) and a top-five customer are merging, creating a combined customer representing 19% of sales.

Important Facts for Investor Verification

• Equity Cancellation: Existing common stock and options are expected to be cancelled without consideration upon emergence; current stock price is not meaningful.
• Reorganization Charge: Verify the impact of the $1,131.5 million non-cash reorganization charge on the 2005 Net Loss, which masks underlying operational improvements.
• Exit Financing: Confirm the status of the exit financing facility (revolving credit and term loan) required to fund emergence costs and operations post-bankruptcy.
• Insurance Settlements: Monitor the status of conditional insurance settlements (approx. $375 million agreed in late 2005) which are contingent on the Company's emergence.
• Legal Appeals: Track appeals filed by insurers and the resolution of the "Senior Note-Sub Note Dispute" regarding the distribution of liquidating subsidiary proceeds.