Kaiser Aluminum

Kaiser Aluminum's Hockema on Bankruptcy Filing (Transcript)

Houston, Feb. 12, 2002 (Bloomberg) -- Jack Hockema, chief executive officer of Kaiser Aluminum Corp., talks with Bloomberg's Darrell Hassler via telephone about the company's decision to file for Chapter 11 bankruptcy protection after rising production costs, price declines and expenses related to asbestos litigation forced the company to miss debt payments.
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
HASSLER: Hello, and welcome to Bloomberg Forum. I'm Darrell Hassler. Today, I'm with Jack Hockema, the chief executive of Kaiser Aluminum. Kaiser Aluminum said today that it's filing for a Chapter 11 bankruptcy protection. Thanks for joining me today, Jack.
HOCKEMA: Thank you, Darrell.
HASSLER: Jack, let's just start with the obvious question: Why are you doing this?
HOCKEMA: Well, there are a basket of strategic issues that actually precipitated this. One is our debt situation. We're highly leveraged and we have high interest payments on an ongoing basis. But, in addition, we've got $574 million of principal due in '02 and '03, so there was a major cash issue facing us there.
Secondly, we have a number of legacy issues that we're dealing with. First, asbestos litigation costs and, secondly, retiree pension and health care costs, that are escalating rapidly. So it was really the combination of those factors and, in addition, the soft economy, exacerbated by the events of September 11th that precipitated the action. I hasten to add that our core businesses are sound. It's really the strategic issues that are the focus of the filing.
HASSLER: When you talk about your asbestos costs, what are your costs on - net of any insurance payments a year on this?
HOCKEMA: The - it's a matter of public record. The asbestos costs, net of insurance, have been running $20 to $30 million a year.
HASSLER: And can you talk a.
HOCKEMA: Oh.
HASSLER: . go ahead.
HOCKEMA: Excuse me a minute. I'm sorry.
HASSLER: Go ahead. When you talk about some of your pension situations, what are the liabilities there, and why are they increasing?
HOCKEMA: The pension liabilities are increasing for a few reasons, but there are two major reasons. And there's maybe some inside baseball here, but, so I'll try not to get too technical. But one is the lower interest rate on the 30 year Treasury, which is what the PBGC uses as the benchmark to determine liabilities. And as interest rates go down, it makes the obligations - the calculation of obligations a bigger number and, as a consequence, increases filing. And then the second issue is that, on our pension fund assets, given what's happened in the capital markets, we've had a negative return on our pension fund assets for the past two years. So we've had negative returns and an increase in the calculation of those obligations as a consequence of the lower interest rate. And it's really those two factors that drive up those costs.
HASSLER: Are you under-funded in pension? And, if so, how much?
HOCKEMA: Yes. We were under-funded; the last public disclosure we had, we were approximately 90 percent funded on our pensions. We've not disclosed the new numbers, but given the negative return on the assets and the change in calculation with lower interest rates, that funding level has declined, percentage funding.
HASSLER: Now, were you pursuing possibly some asset sales over the last year, just sort of to try to raise some cash?
HOCKEMA: I became the CEO in October of last year. And when I became CEO, the management team and I went into a thorough strategic assessment of the business. And we have these strategic issues that I mentioned that precipitated the filing today. We looked at a number of alternatives, including asset sales, as a solution to the problem. None of those solutions, including asset sales, were a permanent fix. They were more a temporary or a short-term fix. And we ultimately determined that the only appropriate way for us to address these strategic issues was with a filing.
HASSLER: What about in the future, do you think that that's something you're only going to do at a last resort?
HOCKEMA: I wouldn't say that asset sales are a last resort. We'll continue to manage the business as we always would, and that is, we'll be looking at ways to strengthen our portfolio. Having said that, however, as a caveat, at this point, we do not have asset sales as part of our strategic bag of tricks, so to speak, going forward.
HASSLER: Now what about - in an earlier release, Kaiser had mentioned that you were looking to negotiate some of the bonds that's out there. Bondholders generally just weren't interested in what you had to offer?
HOCKEMA: We actually - we did not ultimately meet with the bondholders, outside of a filing. As we continued to assess the total picture, we ultimately determined that we had to address issues beyond just the debt issue, and that's the reason for the filing. We now will proceed to meet with the bondholders, under the Chapter 11 provisions and work out mutually acceptable solutions to the situation.
HASSLER: Do you have a date already in mind?
HOCKEMA: No, we do not have dates established. We're just - we're still just teeing up the first day filings and moving from there, but I'm sure that we'll be meeting with those constituencies and others down the road here.
HASSLER: What's the situation right now in the Gramercy plant? Are you going to expand that as normal, or is that pretty much on hold for a while?
HOCKEMA: No. The Gramercy plant, the reconstruction is complete there. The ramp up is progressing extremely well, and they are essentially at the stated capacity levels, as we speak.
HASSLER: And what about your operations that you have now? Are they cash negative overall or.
HOCKEMA: If we exclude - we're cash negative as a company, but when we look at these major issues, the data issues and the legacy issues, those are major cash drains. >From a cash standpoint, I haven't really looked at it, if you strip those away, where we are today, but over the long term, those operations are cash positive, which leads me to the statement that we have a sound core business. That is not the issue. The issue are these other strategic issues that don't have to do with the core business.
HASSLER: So do you think that, in the end, the negotiation or the process that you're going to be going through is negotiating your debt, trying to see what you can do about that, in order to try to recover from this?
HOCKEMA: Yes. It will be working with the debt holders, with the asbestos constituency, and taking a look at those pension and retiree health care costs, that whole basket of issues, to contain those costs. And then that, in conjunction with our sound core business, to emerge as a very solid, thriving business going forward.
HASSLER: Do you feel that you can do anything about the asbestos liability, in terms of negotiate it?
HOCKEMA: We believe that there will be opportunities in the filing to address the asbestos situation, working in conjunction with the various constituencies affected by those liabilities in that litigation.
HASSLER: Are you going to be talking with the union?
HOCKEMA: We may talk to the union, but that's not in our game plan at this point.
HASSLER: OK. Can you give any idea how much cash you have on hand, at this point?
HOCKEMA: The last public disclosure we had on cash was a couple of weeks ago, and that was $130 million and change.
HASSLER: Is that higher or lower than that now?
HOCKEMA: It would be - probably be less than that right now, as a consequence of some of the pre-filing actions that we've taken.
HASSLER: OK. And I guess the last question, I know you've been running this company only for a little bit right now at this point. But do you think that the competitive issues, in terms of you have two very big aluminum companies, Alcoa and Alcan, that are just significantly bigger than Kaiser. Does that play any part in this? Is it difficult to expand or to prosper under those conditions?
HOCKEMA: I would not characterize our issues as being related to two big players, Alcan and Alcoa. I would characterize our issues back to the strategic issues that I mentioned. For too long, we've had too much debt and we have these growing legacy liabilities. Those really are the strategic issues. Our core businesses are sound and, especially in the fabricated product side of the business, we are extremely competitive and perform very well against all competition.
HASSLER: Any improved outlook, in terms of price of the shipment, that kind of thing?
HOCKEMA: Unfortunately, we don't see any movement as we speak, in terms of prices, but if you follow the aluminum business at all, you know that prices are very volatile. And, of course, we're hopeful that they're going to be volatile soon on the upside, but we won't make any predictions, other than, they will go up or down.
HASSLER: And all your operations are going on as normal? You aren't going to be shutting down, as far as you know, anything that's.
HOCKEMA: Yes, yes. It is business as usual in our operations and the filing has absolutely no impact on the operations.
HASSLER: Very good. Thanks for joining me today, Jack.
This is Darrell Hassler for Bloomberg Forum with Jack Hockema, the chief executive officer of Kaiser Aluminum.
HOCKEMA: Thank you, Darrell.
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