BPA power contract would hit Kaiser by $45 mln/year

By Carole Vaporean

NEW YORK, Oct 26 (Reuters) - Kaiser Aluminum Corp (NYSE:KLU - news) said a proposed contract it received from the Bonneville Power Administration (BPA) for power to run its aluminum smelters in the Northwest U.S. would hit its bottom line by $40 to $45 million dollars a year.

Addressing analysts in New York, Kaiser Chief Executive Officer Raymond Milchovich said, ``Total economic impact from the new contract is a hit of approximately $40 to $45 million per year. That's assuming the current state of metal prices.''

The contract, which Kaiser received from BPA on October 12, and runs from 2001 to 2006, is due back at the power authority on October 30. Kaiser said it is evaluating the new contract.

Operating capacity would receive the biggest blow. The new BPA power plan allows Kaiser enough power to operate its Trentwood facility fully, but only 40 percent of the combined capacity at the Mead and Tacoma smelting operations.

Due to soaring power costs Kaiser slowed operations in the Northwest earlier this year to current run rates of about 138,000 tonnes a year, versus total capacity at its Tacoma and Mead smelters of 273,000 tonnes.

The company said at the time that its primary aluminum smelters operated at roughly 67 percent of capacity after the curtailment, compared with a 1999 average of about 82 percent.

``Hardest hit is the volume, and unused infrastructure. That's the majority of that ($40 mln) hit, but the price is a hit as well,'' said Milchovich.

Kaiser said the new power rate will be about 20 percent above its current contract, with fixed rates increasing from $22.5 to $26.5 per megawatt hour.

Surcharge Still Being Discussed


On top of that, a surcharge will be levied by BPA, but that issue is still being worked out, according to Kaiser.

Items that are set in the latest proposal are the time period, the base rate, terms for remarketing the power, and the good corporate citizen clause.

Still under negotiation is a variable rate option that would fluctuate with the aluminum price, and a cost recovery feature for BPA, which Kaiser said could take months to work out.

``We're still dealing with BPA on cost recovery, which has to do with their ability to meet financial obligations, as they try to balance whether they will be long or short power, and what their purchase will need to be,'' he said.

``They're trying to leave themselves room. If their financial performance is not what it needs to be, they want the option to come back to us. We're still in the process of negotiating that,'' said Kaiser's CEO.

Moreover, Milchovich said Kaiser does not intend to sit by and watch as its fixed power costs go up.

``The current situation begs additional steps to be taken by us and others to mitigate what otherwise would be a major negative. We're working very aggressively right now on what those steps might be,'' said Milchovich.

``For us, the Northwest is one big work-in-process. To run the Mead smelter at 55 percent at high $20's (per megawatt hour) power, is not something I'm satisfied with longer term. I simply don't intend that to be the steady state for the contractual period,'' he added.

Yet, the assumption Kaiser said it is making near term is to operate those plants according to the latest BPA plan.

``What we've always done is have a mix of BPA contracts purchased from third parties and purchased on the open market. We've always had a portfolio of purchases in the Northwest. The difference for us now is that we will only operate capacity that is supported by the BPA contract. Meaning the purchase of market rate power for aluminum smelting will not be cost effective,'' said the Kaiser chief.

Kaiser Looking at Other Options


Asked about other power sources, Milchovich told Reuters he is looking at a number of options.

``One that we are considering is co-generation of power. That would be thermal-based power that we would blend with the hydro that we get from the Bonneville system,'' he said.

``We have none of that today. It would be natural gas-fired. That's something that's being discussed in the Northwest along with other alternatives. But, that's just in the discussion stages,'' he added.

Problems with that alternative, is that any reasonable natural gas price would drive power costs up in the $33 to $35 megawatt hour range, an even higher rate than BPA's.

``That just doesn't work for these smelters with their technology, their age, and their cost position. At this point we don't see that as the answer,'' Milchovich said.

As for how long he sees the tight energy market, he said he and his BPA contacts think it could last for some time.

``We see this as a gigantic compromise, with most constituencies getting only a portion of what they'd like to have,'' he said.