Clouds gather over Maxxam meetings
Kaiser, parent company face myriad difficulties
Karen Dorn Steele and John Stucke - Staff writers
Kaiser Aluminum & Chemical Corp. and its Texas parent head into back-to-back annual meetings in Houston this week still grappling with sinking stock prices, debt woes and expensive legal battles.
Adding to the problems facing directors and shareholders are soaring energy prices that Kaiser claims will bankrupt the aluminum industry in the Pacific Northwest.
The Wednesday meetings of Kaiser and Maxxam Inc. will include far fewer union members from Kaiser's Spokane and Tacoma plants.
The companies' two previous shareholder meetings took place during the bitter Kaiser strike and lockout from September 1998 to September 2000.
During the labor dispute, the United Steelworkers of America paid travel expenses to Houston for hundreds of locked-out workers from the Northwest, Ohio and Louisiana.
They focused personally on Texas billionaire Charles Hurwitz, Maxxam's chief executive officer and board chairman -- branding him a villain for clearcutting California redwoods and union jobs. Maxxam owns 63percent of Kaiser.
Only one Spokane Steelworker, John Goodman of Kaiser Trentwood, is going to Houston this year.
Goodman, president of the labor-green Alliance for Sustainable Jobs and the Environment, supports three resolutions by dissident stockholders to make Maxxam's board more accountable.
"The burden Charles Hurwitz has placed on communities and the environment is just unacceptable," Goodman said. "You have to keep the pressure on."
It's futile to focus so much anger on Hurwitz, Maxxam spokesman Josh Reiss said.
"This notion of too much ownership in one hand is a nonissue," he said.
Critics have accused Hurwitz, who controls about 72 percent of Maxxam through a complex web of holdings, of gutting the once-mighty Kaiser to enrich himself while leaving the company burdened with debt.
Another Maxxam subsidiary, Pacific Lumber, has been targeted by environmentalists for logging ancient California redwoods.
The resolutions call for cumulative voting to increase the power of minority shareholders, annual election of directors and an independent board.
Maxxam's board was slammed last year by Fortune magazine and Business Week for being too small and too cozy with Hurwitz. Fortune ranked the Maxxam board among the six worst in America.
"These six aren't just bad, they are horrible," Fortune wrote.
"This is the third year in a row they've launched this campaign. These three resolutions will fail," Reiss said.
The parade of dissident shareholders returning to Houston includes Rabbi Les Scharnberg of Arcata, Calif., a town 270 miles north of San Francisco in redwood country where Pacific Lumber operates. His call for an ethics office at Maxxam angered Hurwitz at the annual meeting two years ago.
"I'm going back as a voice asking us to take a look at this company as an example of corporate greed gone amok," Scharnberg said.
Hurwitz, who is Jewish, dispatched his lawyer after the last annual meeting to debate Scharnberg over parts of the Torah calling on businessmen to be ethical, Scharnberg said.
The dissidents have formed a committee called Concerned Maxxam Shareholders, led by David Foster, the Steelworkers' regional head in Minneapolis; Nell Minow, editor of The Corporate Library in Washington, D.C.; and John Harrington, president of Harrington Investments Inc. of Napa, Calif.
In a May 15 letter, the committee reminds shareholders that Maxxam stock has lost 50percent of its value for the second year in a row.
The stock was worth about $60 a share two years ago and fell to $28 a share in May 2000. "Today, shares are hovering around $15. We believe insider domination of the company's board is the reason," the letter says.
The dissidents' letter to Maxxam stockholders is full of errors, Reiss said. "This is exactly the thing the Securities and Exchange Commission frowned on last year and forced the committee to correct," he said. The SEC made the committee correct material at last year's meeting.
Stock prices sink
Maxxam's stock has declined because of a general downturn in the economy, Reiss said. "We are not the only company that saw declines over that period, especially in the last six months," he said.
While Maxxam's stock has plummeted, Hurwitz' salary and bonuses have increased.
He made $698,605 in salary and $450,000 in bonuses in 1998; $726,549 in salary and $2million in bonuses in 1999; and $755,612 in salary and $604,490 in bonuses in 2000, plus a stock award of $11.68 million.
A Maxxam board committee has also voted a 4 percent base salary increase for Hurwitz for 2001 due to his "special entrepreneurial talents."
Maxxam depends heavily on Kaiser's performance. About 88 percent of Maxxam's revenues come from Kaiser sales, and the long-term outlook is, at best, cloudy.
In December, Moody's bond rating service downgraded Kaiser's bonds due to its $924million debt.
To reduce debt and improve cash flow, Kaiser is considering selling up to five plants but hasn't said which ones. An announcement will come this summer, Kaiser CEO Raymond Milchovich told analysts this spring.
Power sales help pay down debt
Kaiser's problems continue despite netting a projected $468 million from the resale of its publicly subsidized power allocation. The company idled its Spokane and Tacoma smelters last year and laid off its work force.
The controversial power sales expire in October, the start of a new company contract with the Bonneville Power Administration.
While the power resale proceeds are not "color-coded," Kaiser spokesman Scott Lamb said the money flowed into the general fund and helped retire $53 million in debt.
Much of it repaid loans the company used to rebuild its alumina refinery in Gramercy, La. An accidental explosion leveled the refinery two years ago. By the end of April, the short-term credit line Kaiser tapped to help with the Gramercy rebuild had been repaid.
Unlike the rest of Kaiser's heavily leveraged assets, the Gramercy plant is not pledged as debt, Lamb said.
Power resale revenues also helped pay $62million in employee compensation, along with $57 million earmarked for employee reserve accounts.
Lamb said some of the money will be saved to bankroll a future power supply for its Northwest smelters and the Trentwood rolling mill.
The company spends about $100 million on electricity in a typical year. Those costs will probably increase.
Power fundamentals in the Northwest have changed, and the BPA plans to begin charging much more for the blend of hydro and natural-gas generated electricity.
The changes have sparked an outcry from Kaiser and other companies that claim the rising electricity prices will be ruinous.
In response, the BPA is offering to pay aluminum companies -- except for Kaiser -- to stand down for two years until the power crunch eases. Kaiser won't be offered such a deal unless it shares power profits with the BPA and Steelworkers.
In its long-odds bid for BPA megawatts, Kaiser hasn't mustered much support from its unionized Steelworkers. They are sitting on the sidelines because of lingering bitterness over how Kaiser treated its members when they returned to work last year after the labor dispute.
Steelworkers also are angry with Kaiser's decision last fall to shut down smelters without paying full salaries for laid-off workers.
"It's a tragedy we aren't on the same side on this. But we have no jobs and no future," said Dan Russell, president of Mead Local 329.
Russell is among only 33 union members who still have jobs at the quieted smelter. Some 694 workers are laid off. Depending on their years of experience, Steelworkers are watching their in-house unemployment benefits run out.
Last week, about 170 Steelworkers with less than 10 years of seniority were notified that their May 20 checks would be their last. The rest of the workers will have paychecks for at least a year more.
Threats to bottom line
In financial reports, Kaiser noted threats to its bottom line include:
•Significant near-term debt that must be refinanced, including $225 million of 9.87percent senior notes and $400 million of 12.75percent notes due February 2003. As of April 30, Kaiser had refinanced only $1million of the cheaper notes.
•Asbestos liabilities. Kaiser now faces 114,700 claims for asbestos injuries, up from 100,000 in December 1999. Kaiser has paid out $220.5 million and has received $131.3 million in partial insurance payments.
•Rebuilding the Gramercy plant. Insurance may cover only half the estimated cost of $300 million to $325 million. Kaiser has sued some insurers over reimbursement.
•Gramercy-related liability. Kaiser faces 90 personal injury and property damage lawsuits with 16,000 claimants for the explosion. Kaiser expects to have sufficient liability insurance to cover the costs, which are unspecified in the company's most recent quarterly report.
•Potential costs of locking out its union work force. The National Labor Relations Board has alleged the 20-month lockout was illegal. The unfair labor practice charges could force Kaiser to reimburse 2,900 workers up to $337 million in back pay. Kaiser is fighting the charges before an NLRB administrative law judge in Oakland, Calif.
•Environmental liabilities, including Superfund cleanup at the Mead smelter and groundwater contamination at Trentwood. Kaiser set aside $46 million for cleanup last year and expects to spend millions more in the next decade.
Last year, Kaiser reduced debt by selling its former corporate headquarters in Pleasanton, Calif. ($51.6 million), seeking insurance recoveries for Gramercy ($100 million) and idling its Northwest plants.
Parent company Maxxam also has a mountain of other problems, including battles over its forest products operations in California.
Maxxam faces five lawsuits over its timber harvesting practices, and a lawsuit by employees of the old Pacific Lumber company to recover $60 million in lost pension benefits.
The Office of Thrift Supervision has also charged Hurwitz with illegally driving a Texas savings and S&L into bankruptcy in 1988 -- the year he bought Kaiser for $930 million.
The Federal Deposit Insurance Corporation has filed a $250 million civil case over the failure of the S&L, saying Hurwitz was the controlling shareholder. Last May, Maxxam filed a counterclaim, saying the two federal agencies illegally colluded against Hurwitz and Maxxam.