Kaiser restated operating income for first nine months of 2005 shows increase of over $13 million

By Caroline Salls

Pittsburgh, March 30 - Kaiser Aluminum Corp. restated its operating results for the first nine months of 2005, resulting in increase in operating income of more than $13 million, according to a company news release.

According to the restated financials, Kaiser posted $15.1 million of operating income as of March 31, 2005, compared with $10.4 million originally reported, and $10.7 million of operating income at June 30, 2005, compared with an originally reported $6.5 million. The restated operating income at Sept. 30, 2005 was $19.7 million, compared with $15 million originally reported.

The restatement relates to the company's accounting for payments to two voluntary employee benefit associations (VEBAs) previously established for the benefit of retired hourly and salaried employees and the company's accounting for derivative transactions.

According to the release, payments to the VEBAs were previously treated as current operating expenses in the company's financial statements for the first three quarters of 2005.

The company said it concluded that the payments should have been treated as a reduction of prepetition retiree medical obligations.

The change in accounting for the VEBA payments improved operating results by $6.7 million, $5.7 million and $5.7 million in the first, second and third quarters of 2005, respectively.

The change in the company's accounting for derivative contracts relates to the form of the company's documentation on derivatives contracts it enters into to reduce exposures to changes in prices for primary aluminum and energy and on foreign exchange rates.

The company said its hedging documentation did not meet the strict standards established by the Statement of Financial Accounting Standards.

As a result, the company is required to "de-designate" open derivative transactions and reflect fluctuations in the market value of such derivative transactions in its results each period rather than deferring the effects until the forecasted transactions occur.

Marking the derivatives to market each quarter rather than deferring gains or losses resulted in an increased cost of products sold and decreased operating income by $2 million, $1.5 million and $1 million in the first, second and third quarters of 2005, respectively.

Kaiser said it is working to modify its documentation and to re-qualify open and post-2005 hedging transactions for treatment as hedges beginning in the second quarter of 2006.

"While the issue with respect to the derivative transactions will create larger fluctuations in the primary aluminum segment of our business, since our goal is to maintain a balanced metal position, such gains or losses should not be dramatic," president and chief executive officer Jack Hockema said in the release.

"More importantly, the impact of the revised accounting for these transactions does not in any way invalidate the way we are reducing the company's exposure to price and foreign exchange risks and will not have any impacts on the company's strong liquidity and sound financial position upon emergence from Chapter 11."

Kaiser, a Houston-based aluminum company, filed for bankruptcy on Feb. 12, 2002 in the U.S. Bankruptcy Court for the District of Delaware. Its Chapter 11 case number is 02-10429.

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