KAISER ALUMINUM CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

COMMISSION FILE NUMBER 1-9447

KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer Identification No.)

5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)

(713) 267-3777
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

At April 30, 2004, the registrant had 79,826,028 shares of Common Stock
outstanding.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED INCOME (LOSS)

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
2

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2004

FOR THE QUARTER ENDED MARCH 31, 2003

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
3

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED CASH FLOWS

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
4

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

1. REORGANIZATION PROCEEDINGS

Kaiser Aluminum Corporation ("Kaiser", "KAC" or the "Company"), its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), and 24 of
KACC's subsidiaries have filed separate voluntary petitions in the United States
Bankruptcy Court for the District of Delaware (the "Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company,
KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first
quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" means, with respect
to any particular Debtor, the date on which such Debtor filed its Case. None of
KACC's non-U.S. joint ventures are included in the Cases. The Cases are being
jointly administered. The Debtors are managing their businesses in the ordinary
course as debtors-in-possession subject to the control and administration of the
Court.

Original Debtors. During the first quarter of 2002, the Original Debtors
filed separate voluntary petitions for reorganization. The wholly owned
subsidiaries of KACC included in such filings were: Kaiser Bellwood Corporation
("Bellwood"), Kaiser Aluminium International, Inc. ("KAII"), Kaiser Aluminum
Technical Services, Inc. ("KATSI"), Kaiser Alumina Australia Corporation
("KAAC") (and its wholly owned subsidiary, Kaiser Finance Corporation ("KFC"))
and ten other entities with limited balances or activities.

The necessity for filing the Cases by the Original Debtors was attributable
to the liquidity and cash flow problems of the Company and its subsidiaries
arising in late 2001 and early 2002. The Company was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, the
Company had become increasingly burdened by asbestos litigation and growing
legacy obligations for retiree medical and pension costs. The confluence of
these factors created the prospect of continuing operating losses and negative
cash flows, resulting in lower credit ratings and an inability to access the
capital markets.

The outstanding principal of, and accrued interest on, all debt of the
Original Debtors became immediately due and payable upon commencement of the
Cases. However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal
proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business,
subject to certain limitations. In July 2002, the Court also issued a final
order authorizing the Company to fund the cash requirements of its foreign joint
ventures in the ordinary course of business and to continue using the Company's
existing cash management systems. The Original Debtors also have the right to
assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, "assumption"
means that the Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original Debtors are relieved from their obligations to perform further
under an executory contract and are subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of a
pre-Filing Date executory contract is treated as a general unsecured claim in
the Cases.

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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Generally, pre-Filing Date claims, including certain contingent or
unliquidated claims, against the Original Debtors will fall into two categories:
secured and unsecured. Under the Code, a creditor's claim is treated as secured
only to the extent of the value of the collateral securing such claim, with the
balance of such claim being treated as unsecured. Unsecured and partially
secured claims do not accrue interest after the Filing Date. A fully secured
claim, however, does accrue interest after the Filing Date until the amount due
and owing to the secured creditor, including interest accrued after the Filing
Date, is equal to the value of the collateral securing such claim.

The Court set January 31, 2003 as the last date by which holders of
pre-Filing Date claims against the Original Debtors (other than asbestos-related
personal injury claims and certain hearing loss claims) could file their claims.
Any holder of a claim that was required to file such claim by January 31, 2003
and did not do so may be barred from asserting such claim against any of the
Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. The Company has not
yet completed its analysis of all of the proofs of claim to determine their
validity. However, during the course of the Cases, certain matters in respect of
the claims have been resolved. Material provisions in respect of claim
settlements are included in the accompanying financial statements and are fully
disclosed elsewhere herein. The January 31, 2003 bar date does not apply to
asbestos-related personal injury claims, for which the Original Debtors reserve
the right to establish a separate bar date at a later time. A separate bar date
for certain hearing loss and coal tar pitch volatiles claims was reset to
February 29, 2004.

Additional Debtors. On January 14, 2003, the Additional Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
included in such filings were: Kaiser Bauxite Company ("KBC"), Kaiser Jamaica
Corporation ("KJC"), Alpart Jamaica Inc. ("AJI"), Kaiser Aluminum & Chemical of
Canada Limited ("KACOCL") and five other entities with limited balances or
activities. Ancillary proceedings in respect of KACOCL and two Additional
Debtors were also commenced in Canada simultaneously with the January 14, 2003
filings.

The Cases filed by the Additional Debtors were commenced, among other
reasons, to protect the assets held by these Debtors against possible statutory
liens that might have arisen and been enforced by the Pension Benefit Guaranty
Corporation ("PBGC") primarily as a result of the Company's failure to meet a
$17.0 accelerated funding requirement to its salaried employee retirement plan
in January 2003 (see Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding the accelerated funding requirement). The filing of the
Cases by the Additional Debtors had no impact on the Company's day-to-day
operations.

In connection with the Additional Debtors' filings, the Court authorized
the Additional Debtors to continue to pay or otherwise honor certain pre-Filing
Date claims, including employee wages and benefits, and customer and vendor
claims in the ordinary course of business. The Court also approved the
Additional Debtors' continued participation in the Company's existing cash
management systems and routine intercompany transactions involving, among other
transactions, the transfer of materials and supplies among subsidiaries and
affiliates.

In March 2003, the Court set May 15, 2003 as the last date by which holders
of pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss and coal tar
pitch volatiles claims) could file their claims. Any holder of a claim that was
required to file such claim by May 15, 2003 and did not do so may be barred from
asserting such claim against any of the Additional Debtors and, accordingly, may
not be able to participate in any distribution in any of the Cases on account of
such claim. The Company has not yet completed its analysis of all of the proofs
of claim to determine their validity. However, during the course of the Cases,
certain matters in respect of the claims have
6

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

been resolved. Material provisions in respect of claim settlements are included
in the accompanying financial statements and are fully disclosed elsewhere
herein.

All Debtors. Two creditors' committees, one representing the unsecured
creditors (the "UCC") and the other representing the asbestos claimants (the
"ACC"), have been appointed as official committees in the Cases and, in
accordance with the provisions of the Code, have the right to be heard on all
matters that come before the Court. In August 2003, the Court approved the
appointment of a committee of salaried retirees (the "1114 Committee" and,
together with the UCC and the ACC, the "Committees") with whom the Debtors have
negotiated necessary changes, including the modification or termination, of
certain retiree benefits (such as medical and insurance) under Section 1114 of
the Code. The Committees, together with the legal representative for potential
future asbestos claimants (the "Futures' Representative") that has been
appointed in the Cases, will play important roles in the Cases and in the
negotiation of the terms of any plan or plans of reorganization. The Debtors are
required to bear certain costs and expenses for the Committees and the Futures'
Representative, including those of their counsel and other advisors.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through May 31,
2004 for KAAC, KJC and AJI and June 30, 2004 for the remaining Debtors. By
filing the motion to extend the exclusivity period, the period is automatically
extended until the May 18, 2004 Court hearing date. As the Debtors' motion to
extend the exclusivity period was agreed to by the UCC in advance of the filing,
the Debtors expect the motion to be approved by the Court. Additional extensions
are likely to be sought. However, no assurance can be given that any such future
extension requests will be granted by the Court. If the Debtors fail to file a
plan of reorganization during the exclusivity period, or if such plan is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Cases may be permitted to
propose their own plan(s) of reorganization for the Debtors.

The Debtors anticipate that substantially all liabilities of the Debtors as
of their Filing Date will be settled under one or more plans of reorganization
to be proposed and voted on in accordance with the provisions of the Code.
Although the Debtors intend to file and seek confirmation of such a plan or
plans, there can be no assurance as to when the Debtors will file such a plan or
plans or as to whether such plan or plans will be confirmed by the Court and
consummated.

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the Committees, the Futures' Representative, the PBGC,
and the appropriate union representatives. The treatment of individual groups of
creditors in any such plan of reorganization cannot be determined definitively
at this time. The ultimate treatment of and recoveries to individual creditors
is dependent on, among other things, the total amount of claims against the
Debtors as ultimately determined by the Court, the priority of the applicable
claims, the outcome of ongoing discussions with the key constituencies, the
amount of value available for distribution in respect of claims and the
completion of the plan confirmation process consistent with applicable
bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is
likely that their liabilities will be found to significantly exceed the fair
value of their assets. Therefore, the Debtors currently believe that
7

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

it is likely that substantially all pre-Filing Date claims will be settled at
less than 100% of their face value and the equity interests of the Company's
stockholders will be cancelled without consideration. Further, the Debtors
believe that it is likely that: (a) the claims of pre-petition creditors that
are given certain priorities by statute or have the benefit of guarantees or
other contractual or structural seniority will likely receive substantially
greater recoveries than pre-petition creditors that have no such priorities or
seniority; and (b) all pending and future asbestos-related personal injury
claims are likely to be resolved through the formation, pursuant to a plan of
reorganization, of a statutory trust to which all claims would be directed by a
channeling injunction that would permanently remove all asbestos liability from
the Debtors. A similar trust arrangement is anticipated in respect of pending
and future silica, hearing loss and coal tar pitch volatiles personal injury
claims. The trusts would be funded pursuant to statutory requirements and
agreements with representatives of the affected parties, using the Debtors'
insurance assets and certain other consideration that has yet to be agreed. No
assurances can be provided that the foregoing will ultimately be included in any
plan(s) of reorganization the Debtors may file. Further, while the Debtors
believe it is possible to successfully reorganize their operations and emerge
from Chapter 11 in 2004, their ability to do so is subject to inherent market-
related risks as well as successful negotiation and Court approval for the
treatment of creditors consistent with the applicable bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against KACC. These
include claims in respect of substantially all of the Debtors' debt obligations,
obligations in respect of pension and retiree medical benefits, asbestos-related
and personal injury claims, and known environmental obligations. As such, all of
these claimholders will have claims against KACC that, except as further
described below, will have to be satisfied by KACC's assets, which generally
include the alumina refinery located at Gramercy, Louisiana ("Gramercy"), the
interests in Anglesey Aluminium Limited ("Anglesey"), the interests in Volta
Aluminium Company Limited ("Valco") and the fabricated products plants (other
than the London, Ontario, Canada and Richmond, Virginia extrusion facilities,
which are owned by separate subsidiaries that are also Debtors). KACC's assets
also include certain intercompany receivables from certain of its Debtor
subsidiaries for funding provided to its joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against KACC's other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no material ongoing
activities or operations and have no material assets or liabilities other than
intercompany items. The Company believes that it is likely that most, if not
all, of these entities will ultimately be merged out of existence or dissolved
in some manner. The remaining Debtor subsidiaries (which include AJI, KJC, KAAC,
KAII, KACOCL, KBC, Bellwood, KATSI and KFC) own certain extrusion facilities or
act largely as intermediaries between KACC and certain of its other subsidiaries
and joint venture affiliates or interact with third parties on behalf of KACC
and its joint venture affiliates. As such, the vast majority of the pre-
petition claims against such entities are related to intercompany activities.
However, certain of those entities holding claims against KACC also have claims
against certain KACC subsidiaries that own the Company's interests in joint
venture affiliates and which represent a significant portion of KACC's
consolidated asset value. For example, noteholders have claims against each of
AJI and KJC, which own the Company's interests in Alumina Partners of Jamaica
("Alpart"), and KAAC, which owns the Company's interests in Queensland Alumina
Limited ("QAL"), as a result of AJI, KJC and KAAC having been subsidiary
guarantors of KACC's Senior Notes and Senior Subordinated Notes. Additionally,
the PBGC, pursuant to
8

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

statute, has joint and several claims against KACC and all entities which are
80% or more owned by KACC (referred to as "Controlled Group Members").
Controlled Group Members include each of AJI, KJC and KAAC, as well as all of
the other Debtors. The only other significant claims against AJI, KJC and KAAC
are intercompany claims related to funding provided to these entities by KACC.
As such, it is likely that the vast majority of any value realized in respect of
the Company's interests in Alpart and QAL, either from their disposition or
realized upon emergence from such operations, is likely to be for the benefit of
the noteholders and the PBGC.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of KACC and its claimholders (in respect of KACC's intercompany
claims against such entities), an intercompany settlement agreement is being
negotiated between the UCC and the Company (the "Intercompany Agreement"). The
proposed Intercompany Agreement would also release or resolve substantially all
other pre-and post-petition intercompany claims between the Debtors. The
proposed Intercompany Agreement, if finalized substantially in its current form,
would provide, among other things, for payments of cash by AJI, KJC and KAAC to
KACC of $85.0 in respect of its intercompany claims against AJI, KJC and KAAC
plus any amounts up to $14.3 plus accrued and unpaid interest and fees paid by
KACC to retire Alpart-related debt. Under the proposed Intercompany Agreement,
such amount would be increased or decreased for (1) any net cash flows collected
by or funded by KACC between the effective date of the proposed Intercompany
Agreement and the earlier of (a) AJI's, KJC's and KAAC's emergence from Chapter
11 or (b) the sale of AJI's, KJC's and KAAC's respective interests in and
related to Alpart and QAL and (2) any purchase price adjustments (other than
incremental amounts related to alumina sales contracts to be transferred)
pursuant to KACC's agreement to sell its interests in Alpart, if consummated.
The proposed Intercompany Agreement calls for such payments to be made to KACC
at the earlier of the sale of the Company's interests in Alpart and QAL or the
emergence of AJI, KJC and KAAC from Chapter 11. The Company expects that all
such payments under the proposed Intercompany Agreement, other than $28.0 to be
paid to KACC upon the sale of Alpart and any amounts paid by KACC in respect of
retiring the Alpart-related debt, are likely to be held in escrow for the
benefit of KACC until KACC's emergence from the Cases. In the interim, KACC's
claims against these entities will be secured by liens. There are still a number
of issues with respect to the proposed Intercompany Agreement that must be
satisfactorily resolved. The Intercompany Agreement once finalized will be
subject to Court approval. Discussions are ongoing between the Company, the UCC,
the ACC and the Futures' Representative in an attempt to make the terms of the
proposed Intercompany Agreement acceptable to each of the groups. The Company is
targeting to have the Court consider the proposed Intercompany Agreement at the
regularly scheduled June 2004 omnibus hearing. However, no assurances can be
provided that the issues can be resolved within the time frame necessary to
submit the Intercompany Agreement to the Court under that time frame.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 to $120.0. KACC
currently expects to fund such Exit Costs using the proceeds to be received
under the proposed Intercompany Agreement together with existing cash resources
and available liquidity under an exit financing facility that will replace the
current Post-Petition Credit Agreement (see Note 5). If payments under the
proposed Intercompany Agreement together with liquidity available under an exit
financing facility are not sufficient to pay or otherwise provide for all Exit
Costs, KACC and some or all of its other Debtor subsidiaries will not be able to
emerge from Chapter 11 unless and until sufficient funding can be obtained.
Management believes it will be able to successfully resolve

9

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

any issues that may arise in respect of the proposed Intercompany Agreement or
be able to negotiate a reasonable alternative. However, no assurances can be
given in this regard.

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders. The Company's advisors have developed a timeline that, assuming
the current pace of the Cases continues, is expected to allow the Company to
file a plan or plans of reorganization by mid-year 2004 and emerge from Chapter
11 as early as late in the third quarter of 2004. However, the Debtors' ability
to do so is subject to the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances
can be given as to whether or when any plan or plans of reorganization will
ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representative, began exploring the possible sale of one or more of
their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) KACC's Gramercy alumina refinery and Kaiser
Jamaica Bauxite Company ("KJBC"). The possible sale of the Debtors' interests in
respect of Gramercy and KJBC was explored jointly given their significant
integration. More recently, the Company also began the process of exploring the
possible sale of its 20% interest in and related to QAL. While the Company
believes that the QAL-related interests are likely to be its most valuable
commodity asset and expects that there are or will be a number of parties
interested in acquiring such interests, no assurances can be given that any such
sale will occur.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their advisors, surveyed the potential market and
initiated discussions with numerous parties believed to have an interest in such
assets. In addition, other parties contacted the Debtors and/or their investment
advisors to express an interest in purchasing the assets. The Debtors provided
(subject to confidentiality agreements) information regarding the applicable
interests to these parties, each of which was asked to submit a non-binding
expression of interest regarding the individual assets. After receiving these
initial expressions of interest from potential purchasers, the Debtors
determined which of the expressions of interest received represented reasonable
indications of value ("Qualified Bids"). Potential bidders ("Qualified Bidders")
that submitted Qualified Bids were then permitted to conduct due diligence in
respect of the assets for which they submitted a Qualified Bid and to submit
definitive proposals.

The Debtors reviewed the definitive proposals submitted and, in
consultation with the UCC, the ACC and the Futures' Representative, and other
key constituencies, determined with which Qualified Bidders the Debtors would
pursue further negotiations. See Note 4 for a discussion of subsequent
developments regarding potential dispositions of Alpart, Valco and
Gramercy/KJBC.

10

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of Alpart, Valco and Gramercy/KJBC were
likely and, therefore, that recoverability should be evaluated differently at
December 31, 2003 and subsequent periods. The change in evaluation methodology
was required because, under generally accepted accounting principles ("GAAP"),
assets to be held and used are evaluated for recoverability differently than
assets to be sold or disposed of. Assets to be held and used are evaluated based
on their expected undiscounted future net cash flows. So long as the Company
reasonably expects that such undiscounted future net cash flows for each asset
will exceed the recorded value of the asset being evaluated, no impairment is
required. However, if plans to sell or dispose of an asset or group of assets
meet a number of specific criteria, then, under GAAP, such assets should be
considered held for sale/disposition and their recoverability should be
evaluated, for each asset, based on expected consideration to be received upon
disposition. Sales or dispositions at a particular time will be affected by,
among other things, the existing industry and general economic circumstances as
well as the Company's own circumstances, including whether or not assets will
(or must) be sold on an accelerated or more extended timetable. Such
circumstances may cause the expected value in a sale or disposition scenario to
differ materially from the realizable value over the normal operating life of
assets, which would likely be evaluated on long-term industry trends.

The Company ultimately concluded that no impairment of its interests in and
related to Alpart was appropriate based on its updated expectation that the sale
of the Company's interests in Alpart would result in a pre-tax gain (see Note
4). By contrast, based on the Company reaching a financial agreement in early
May 2004 with the Government of Ghana ("GoG") in respect of the sale of its
interests in and related to Valco, the Company determined that it should impair
its interests in and related to Valco to the amount of the expected proceeds to
be received from the GoG. As a result, as of March 31, 2004, KACC recorded a
non-cash charge of approximately $33.0 (see Note 4). Additionally, in evaluating
the recoverability of the Company's basis in Gramercy/KJBC, the Company recorded
an impairment charge of approximately $368.0 in the fourth quarter of 2003
because all offers received for such assets were substantially below the
carrying value of the assets (see Note 4). The actual amount of gain or loss if
and when the potential sales of Valco and Gramercy/KJBC are consummated may
differ from these amounts as a result of closing adjustments, changes in
economic circumstances and other matters.

Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with AICPA Statement of Position
90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.

Upon emergence from the Cases, the Company expects to apply "fresh start"
accounting to its consolidated financial statements as required by SOP 90-7.
Fresh start accounting is required if: (1) a debtor's liabilities are determined
to be in excess of its assets and (2) there will be a greater than 50% change in
the equity ownership of the entity. As previously disclosed, the Company expects
both such circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as determined in its
plan(s) of reorganization and approved by the Court. Additionally, items such as
accumulated depreciation, accumulated deficit and accumulated other
comprehensive income (loss) will be reset to zero. The Company will allocate the
reorganization value to its individual assets and liabilities based
11

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

on their estimated fair value at the emergence date. Typically such items as
current liabilities, accounts receivable, and cash will be reflected at values
similar to those reported prior to emergence. Items such as inventory, property,
plant and equipment, long-term assets and long-term liabilities are more likely
to be significantly adjusted from amounts previously reported. Because fresh
start accounting will be adopted at emergence, and because of the significance
of the pending asset sales and liabilities subject to compromise (that will be
relieved upon emergence), meaningful comparisons between the current historical
financial statements and the financial statements upon emergence may be
difficult to make.

Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:

CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004

For condensed consolidating balance sheets of the Debtors and non-Debtors
as of December 31, 2003, see Note 1 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003.

12

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2004

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2003

13

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003

Classification of Liabilities as "Liabilities Not Subject to Compromise"
Versus "Liabilities Subject to Compromise." Liabilities not subject to
compromise include: (1) liabilities incurred after the Filing Date of the Cases;
(2) pre-Filing Date liabilities that the Debtors expect to pay in full,
including priority tax and employee claims and certain environmental
liabilities, even though certain of these amounts may not be paid until a plan
of reorganization is approved; and (3) pre-Filing Date liabilities that have
been approved for payment by the Court and that the Debtors expect to pay (in
advance of a plan of reorganization) over the next twelve-month period in the
ordinary course of business, including certain employee related items (salaries,
vacation and medical benefits), claims subject to a currently existing
collective bargaining agreement, and certain postretirement medical and other
costs associated with retirees (however, see Note (2) to the table below).

Liabilities subject to compromise refer to all other pre-Filing Date
liabilities of the Debtors. The amounts of the various categories of liabilities
that are subject to compromise are set forth below. These amounts represent the
Company's estimates of known or probable pre-Filing Date claims that are likely
to be resolved in connection with the Cases. Such claims remain subject to
future adjustments. Further, the Debtors currently believe that it is likely
that substantially all pre-Filing Date claims will be settled at less than 100%
of

14

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

their face value and the equity interests of the Company's stockholders will be
cancelled without consideration.

The amounts subject to compromise at March 31, 2004 and December 31, 2003
consisted of the following items:

- ---------------

(1) Accrued salaries, wages and related expenses represent estimated minimum
pension contributions that, absent the Cases, would have otherwise been
payable. Amounts as of March 31, 2004 and December 31, 2003 include
approximately $100.0 associated with estimated special liquidity and other
pension contributions that were not made. As previously disclosed, the
Company does not currently expect to make any pension contributions in
respect of its domestic pension plans. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December
31, 2003 for additional information about non-payment of pension
contributions.

(2) In February 2004, the Company concluded an agreement with the 1114 Committee
and union representatives that represent the vast majority of the hourly
employees that provides for the termination of the existing salaried and
hourly postretirement benefit plans, subject to certain conditions. The
Company has included postretirement medical obligations expected to be paid
through May 31, 2004 in the accompanying balance sheets at March 31, 2004
and December 31, 2003, as liabilities not subject to compromise. Such
amounts total $21.7 at March 31, 2004 and $32.5 at December 31, 2003 (see
Note 9 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 for additional information about
termination of postretirement benefit plans).

(3) Long-term liabilities include hearing loss claims of $15.8 at March 31, 2004
and December 31, 2003 (see Note 7), environmental liabilities of $43.0 at
March 31, 2004 and December 31, 2003 (see Note 7) and asbestos liabilities
of $480.1 at March 31, 2004 and December 31, 2003 (see Note 7).

The classification of liabilities "not subject to compromise" versus
liabilities "subject to compromise" is based on currently available information
and analysis. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the

15

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Company evaluates the proofs of claim filed in the Cases, adjustments will be
made for those claims that the Company believes will probably be allowed by the
Court. The amount of such claims could be significant.

Reorganization Items. Reorganization items under the Cases are expense or
income items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-Filing Date liabilities. For the quarters ended March 31,
2004 and 2003, reorganization items were as follows:

2. GENERAL

This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Going Concern. The interim consolidated financial statements of the
Company have been prepared on a "going concern" basis which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business; however, as a result of the commencement of the Cases, such
realization of assets and liquidation of liabilities are subject to a
significant number of uncertainties. Specifically, the interim consolidated
financial statements do not present: (a) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (b)
the amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Cases, or (c) the effect of any changes that may
occur in connection with the Debtors' capitalizations or operations of the
Debtors as a result of a plan of reorganization. Because of the ongoing nature
of the Cases, the discussions and consolidated financial statements contained
herein are subject to material uncertainties.

Additionally, as discussed above (see Financial Statement Presentation),
the Company believes that it would, upon emergence, apply fresh start accounting
to its consolidated financial statements which would also adversely impact the
comparability of the March 31, 2004 financial statements to the financial
statements of the entity upon emergence.

Principles of Consolidation. The Company is a subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly owned subsidiary,
KACC.

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with GAAP for interim financial information and the
rules and regulations of the Securities and Exchange Commission. Accordingly,
these financial statements do not include all of the disclosures required by
GAAP for complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature unless otherwise
noted, necessary for a fair statement of the results for the interim periods
presented.

16

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

The preparation of financial statements in accordance with GAAP requires
the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities known to exist
as of the date the financial statements are published, and the reported amounts
of revenues and expenses during the reporting period. Uncertainties with respect
to such estimates and assumptions are inherent in the preparation of the
Company's consolidated financial statements; accordingly, it is possible that
the actual results could differ from these estimates and assumptions, which
could have a material effect on the reported amounts of the Company's
consolidated financial position and results of operations.

Operating results for the quarter ended March 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.

Earnings per Share. Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of Common
Stock outstanding during the period including the weighted average impact of the
shares of Common Stock issued during the year from the date(s) of issuance.
However, earnings (loss) per share may not be meaningful, because as a part of a
plan of reorganization, it is likely that the equity interests of the Company's
existing stockholders will be cancelled without consideration.

Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate KACC's exposure to
changes in prices for certain of the products which KACC sells and consumes and,
to a lesser extent, to mitigate KACC's exposure to change in foreign currency
exchange rates. KACC does not utilize derivative financial instruments for
trading or other speculative purposes. KACC's derivative activities are
initiated within guidelines established by management and approved by KACC's and
the Company's boards of directors. Hedging transactions are executed centrally
on behalf of all of KACC's business segments to minimize transaction costs,
monitor consolidated net exposure and allow for increased responsiveness to
changes in market factors.

See Notes 2 and 8 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding derivative financial instruments.

17

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

3. INVENTORIES

The classification of inventories is as follows:

Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market. Replacement cost is not in excess of
LIFO cost.

Inventories at March 31, 2004, have been reduced by a net charge of $1.2
(included in Other operating charges (benefits), net -- see Note 9) to
write-down certain alumina inventories to their estimated net realizable value
as a result of the Company's possible sale of its interests in and related to
Valco (see Note 4).

4. PROPERTY, PLANT, AND EQUIPMENT

The major classes of property, plant, and equipment are as follows:

The following discusses the divestiture activities of certain of the
Company's commodity assets during the quarters ended March 31, 2004 and 2003.

18

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

2004 --

- As previously disclosed, the Company entered into an agreement in January
2004 to sell its interest in Alpart. Net proceeds from the sale pursuant
to the agreement would, at a minimum, have been in the range of $160.0 to
$170.0, subject to certain closing and post-closing adjustments. However,
such purchase price could have increased, possibly significantly,
depending on what, if any, alumina sales contracts were transferred to
the buyer as a part of the transaction. In February 2004, another
potential purchaser filed certain objections with the Court in respect of
the January 2004 sales agreement and stated that it was willing to bid
significantly more than the other party for KACC's interests in and
related to Alpart. In March 2004, the Court terminated the January 2004
contract and ordered that an auction be held during April 2004 in respect
of the possible sale of the Company's interests in and related to Alpart.
As a result of the auction and after consultation with the UCC and
others, the Company entered into an agreement with the successful bidder
to sell its interest in Alpart for a base purchase price of $295.0 plus
certain adjustments, which are expected to be in the range of $20.0. The
transaction is expected to result in a gross sales price in the range of
$315.0 and a pre-tax gain of approximately $100.0. The agreement was
approved by the Court in April 2004. As previously disclosed, under
Alpart's existing partnership arrangement, its partner retains the right
for 30 days from date of Court approval to purchase the Company's
interest in Alpart at the price in the agreement approved by the Court.
The Company has targeted a closing date for the transaction near the end
of the second quarter of 2004. The Company currently expects that the
proceeds from the sale will be held in escrow pending the completion and
approval by the Court of a DIP Facility amendment (see Note 5) and the
Intercompany Agreement (see Note 1). However, no assurances can be
provided as to the actual timing of the transaction or whether the sale
will actually be completed on the terms outlined above.

- The Company believes that an agreement to sell its interests in the
Gramercy facility and KJBC will be signed and filed with the Court in the
very near future. Net proceeds from the sale are expected to be in the
$20.0 range, a substantial portion of which may be used to satisfy
transaction related costs and obligations. The Company expects that, if
the agreement is finalized, it would likely be submitted to the Court for
consideration in the second quarter of 2004. While the potential sale of
Gramercy/KJBC has not yet been approved by the Court and, therefore, may
not ultimately occur or may close under different terms and conditions,
the Company determined that the fair value of its interests in
Gramercy/KJBC was below the carrying value of the assets because all
offers received for such assets were substantially below the carrying
value of the assets. Accordingly, KACC adjusted the carrying value of its
interest in Gramercy/KJBC to their estimated fair value, which resulted
in a fourth quarter 2003 non-cash impairment charge of approximately
$368.0. Previously, the Company had evaluated the book value of its
interests of the Gramercy/KJBC assets on a "hold and use" basis assuming
a normal economic life for the facility and more normal market conditions
than have recently existed and such analysis indicated that no impairment
charge was required. Final adjustments to the carrying value of the
Gramercy facility and KJBC assets may cause the actual loss from the sale
of the Company's interest in and related to the Gramercy facility and
KJBC, if consummated, to vary from the impairment charge.

- As more fully discussed in Note 14 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, during 2003, the Company and Valco participated in extensive
negotiations with the GoG and the Volta River Authority ("VRA") regarding
the power situation and other matters. Such negotiations did not result
in a resolution of such matters. However, as an outgrowth of such
negotiations, the Company and the GoG entered into a Memorandum of

19

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Understanding ("MOU") in December 2003 pursuant to which KACC would sell
its 90% interest in and related to Valco to the GoG for consideration of
between $35.0 and $100.0, plus assumption of all of the Company's related
liabilities and obligations. The MOU contemplated that the transaction
would close by April 30, 2004. The consideration was to be paid in 2004
and beyond. During 2004, assuming the $35.0 minimum consideration, the
GoG was to pay $7.0 in cash to the Company and $18.0 in cash to Valco,
thereby reducing the Company's funding to Valco. The remainder of the
consideration (a minimum of $10.0) was to be paid in cash to the Company
over a four-year period from the closing date. The GoG obligation to the
Company was to be guaranteed by the Bank of Ghana. However, as of April
30, 2004, the GoG had only paid $5.0 of the $18.0 that was due to Valco
under the MOU and the $7.0 escrow payment to the Company had not been
funded. The Company met with the GoG in early May 2004 and reached a new
financial agreement. Under the revised financial terms, $13.0 was to be
put into escrow by the GoG by May 14, 2004. As of May 14, 2004, the
Company was informed that $12.0 of the $13.0 had been paid into the
escrow account. The $13.0 amount is to be paid to the Company as full and
final consideration for the transaction at closing. The Company also
agreed to fund certain end of service benefits of Valco employees
(estimated to be approximately $9.0) which the GoG was to assume under
the original MOU. The Company and the GoG are targeting a closing for the
transaction in July 2004, subject to a number of conditions including the
approval by the Ghanaian parliament. No assurance can be made as to when
or if the transaction will close under the revised terms. However, as the
revised purchase price is well below the Company's recorded value for
Valco and given the increased likelihood of a closing and the payment by
the GoG of the escrow amount, the Company determined that it should
impair its interests in and related to Valco at March 31, 2004 to the
amount of the expected proceeds. As such, KACC recorded a non-cash
impairment charge of approximately $33.0 (included in Other operating
charges (benefits), net -- see Note 9). The actual amount of loss if and
when the potential sale of the Company's interests in and related to
Valco is consummated may differ from the above amount as a result of
closing adjustments, changes in economic circumstances and other matters.

- In February 2004, the Company entered into an agreement to sell the Mead
facility and certain related property in connection with which it would
receive net cash proceeds of approximately $3.0 and the buyer would
assume certain site-related liabilities. The sale of the Mead property
was subject to an auction to determine if a higher value could be
obtained. The auction bidding procedures were approved by the Court in
March 2004. As a result of the auction and after consultation with the
UCC and others, the Company entered into an agreement with the successful
bidder to sell the Mead facility and certain related property for
approximately $7.4 plus assumption of certain site-related liabilities.
The Company expects that the sale will result in net proceeds in the
range of $5.0 to $6.0 and a pre-tax gain of approximately $20.0. While
the Company expects the sale to be approved by the Court and close during
the second quarter of 2004, certain objections have been filed by third
parties to the proposed sale and it is unclear what impact these
objections may have on the sales process. No assurances can be given that
the sale will be completed under the items outlined above. Additionally,
it is possible that all or some portion of the proceeds from the sale may
need to be held in escrow until emergence from the Chapter 11 proceedings
for the benefit of the holders of the 7.6% solid waste disposal revenue
bonds (see Note 5).

- In March 2004, the Company completed the sale of certain non-operating
land that was adjacent to the Mead facility. Net proceeds from the sale
were approximately $7.4. The pre-tax impact of the sale was deferred at
March 31, 2004 pending the finalization of the sale of the Mead facility
and transfer of the site-related liabilities.

20

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

2003 --

- In January 2003, the Court approved the sale of the Tacoma facility to
the Port of Tacoma (the "Port"). Gross proceeds from the sale, before
considering approximately $4.0 of proceeds being held in escrow pending
the resolution of certain environmental and other issues, were
approximately $12.1. The Port also agreed to assume the on-site
environmental remediation obligations. The sale closed in February 2003.
The sale resulted in a pre-tax gain of approximately $9.5 (which amount
was reflected in Other operating charges (benefits), net -- see Note 9).
The operating results of the Tacoma facility for 2004 and 2003 have not
been reported as discontinued operations in the accompanying Statements
of Consolidated Income (Loss) because such amounts were not material. The
Tacoma facility's operating loss for the quarter ended March 31, 2003
before considering the gain on the sale and any income tax impact was not
material.

- KACC had a long-term liability, net of estimated subleases income, on an
office complex in Oakland, California, in which KACC had not maintained
offices for a number of years, but for which it was responsible for lease
payments as master tenant through 2008 under a sale-and-leaseback
agreement. The Company also held an investment in certain notes issued by
the owners of the building (which were included in Other Assets). In
October 2002, the Company entered into a contract to sell its interests
and obligations in the office complex. As the contract amount was less
than the asset's net carrying value (included in Other assets), the
Company recorded a non-cash impairment charge in 2002 of approximately
$20.0. The sale was approved by the Court in February 2003 and closed in
March 2003. Net cash proceeds were approximately $61.1.

5. LONG-TERM DEBT

Debt consists of the following:

21

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Post-Petition Credit Agreement. On February 12, 2002, the Company and KACC
entered into the DIP Facility with a group of lenders for debtor-in-possession
financing. In March 2003, certain of the Additional Debtors were added as
co-guarantors and the DIP Facility lenders received super-priority status with
respect to certain of the Additional Debtors' assets. The DIP Facility provides
for a secured, revolving line of credit through the earlier of February 13,
2005, the effective date of a plan of reorganization or voluntary termination by
the Company. Under the DIP Facility, KACC is able to borrow amounts by means of
revolving credit advances and to have issued for its benefit letters of credit
(up to $125.0) in an aggregate amount equal to the lesser of $285.0 or a
borrowing base relating to eligible accounts receivable, eligible inventory and
an amortizing fixed asset subcomponent, reduced by certain reserves, as defined
in the DIP Facility agreement. The DIP Facility is guaranteed by the Company and
certain significant subsidiaries of KACC. Interest on any outstanding borrowings
will bear a spread over either a base rate or LIBOR, at KACC's option. As of
March 31, 2004, $132.1 was available to the Company under the DIP Facility (of
which up to $79.5 could be used for additional letters of credit) and no
borrowings were outstanding under the revolving credit facility.

The DIP Facility requires KACC to comply with certain covenants and places
restrictions on the Company's, KACC's and KACC's subsidiaries' ability to, among
other things, incur debt and liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and for all measurement periods through May 31, 2004 and accordingly, the
Company will likely not have to comply with the covenant until June 30, 2004.
The Company is currently working with the DIP Facility lenders to complete an
amendment that is anticipated, among other things, to: (1) reset the financial
covenant based on more recent forecasts; (2) authorize the sale of the Company's
interests in Alpart, QAL, Gramercy/KJBC and Valco within certain parameters and
(3) reduce the availability of the fixed asset subcomponent of the borrowing
base to a level that, by emergence will be based on advances solely in respect
of machinery and equipment at the fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0-$100.0 range and that such amount should be adequate
to support the Company's liquidity requirements through the remainder of the
Cases. This belief is based on the fact that it was the commodities' assets and
operations that subjected the Company to the most variability and exposure both
from a price risk basis as well as from an operating perspective. While the
Company anticipates that it will be successful in completing an amendment to the
DIP Facility along the lines outlined above in time for submission to the Court
in May 2004, no assurances can be given in this regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case completion of the aforementioned amendment is delayed.
The limited consent and waiver would, among other things (1) allow the Company
to complete the sale of its interests in and related to Alpart provided that the
proceeds are escrowed and are subject to the lenders' administrative super
priority claim until the amendment is completed, (2) extend the waiver of the
financial covenant through the June 30, 2004 measurement date and (3) waive the
current DIP Facility requirement that any proceeds from the sale of Alpart
reduce the fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

22

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

8 1/4% Alpart CARIFA Loans. In December 1991, Alpart entered into a loan
agreement with the Caribbean Basin Projects Financing Authority ("CARIFA"). As
of March 31, 2004, Alpart's obligations under the loan agreement were secured by
two letters of credit aggregating $23.5. KACC was a party to one of the two
letters of credit in the amount of $15.3 in respect of its 65% ownership
interest in Alpart. Alpart has also agreed to indemnify bondholders of CARIFA
for certain tax payments that could result from events, as defined, that
adversely affect the tax treatment of the interest income on the bonds.

Pursuant to the CARIFA loan agreement, the Alpart CARIFA financing would
have to be repaid at time of closing of the sale if the Company completes the
previously disclosed sale of its interests in Alpart (see Notes 1 and 4).
However, such repayment would have an essentially neutral effect on the
Company's liquidity as, upon any such payment, the Company's letter of credit
obligation under the DIP Facility securing the loans would be cancelled.

7.6% Solid Waste Disposal Revenue Bonds. The 7.6% solid waste disposal
revenue bonds (the "Solid Waste Bonds") are secured by certain (but not all) of
the facilities and equipment at the curtailed Mead facility (see Note 4 for a
discussion of the pending sale of the Mead facility). The Company currently
believes that it is likely that the value of the collateral securing the Solid
Waste Bonds is insufficient for full recovery of the bondholders' claim. The
Company estimates the value of the collateral to be in the $1.0 range. As a
result, the Company has reclassified $18.0 of the Solid Waste Bonds balance to
Liabilities subject to compromise (see Note 1).

6. INCOME TAXES

The income tax provisions of $6.9 and $4.7 for the quarters ended March 31,
2004 and 2003, respectively, relate primarily to foreign income taxes. For the
quarters ended March 31, 2004 and 2003, as a result of the Cases, the Company
did not recognize any U.S. income tax benefit for the losses incurred from its
domestic operations (including temporary differences) or any U.S. income tax
benefit for foreign income taxes. Instead, the increases in federal and state
deferred tax assets as a result of additional net operating losses and foreign
tax credits generated in 2004 and 2003 were fully offset by increases in
valuation allowances. See Note 8 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding the Deferred Tax Assets and Valuation Allowances.

7. COMMITMENTS AND CONTINGENCIES

Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, claims against a Debtor
arising from actions or omissions prior to its Filing Date will be settled in
connection with its plan of reorganization.

Commitments. KACC has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 8), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share (20%) of debt, operating
costs, and certain other costs of QAL. KACC's share of the aggregate minimum
amount of required future principal payments as of March 31, 2004, was $60.0
which amount matures in varying amounts during the 2005 to 2008 period. KACC's
share of QAL's debt increased by approximately $8.0 during 2003 as additional
drawdowns on QAL financing (KACC's share $40.0) more than offset KACC's share
($32.0) of QAL's debt principal payment. During July 2002, KACC made payments of
approximately $29.5 to QAL to
23

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

fund KACC's share of QAL's scheduled debt maturities. KACC's share of payments,
including operating costs and certain other expenses under the agreements, has
generally ranged between $70-$100 over the past three years. However, as
discussed more fully in Note 1, the Company is considering the possibility of
selling its interests in QAL. If KACC's interest in QAL were to be sold, the
Company believes that KACC's obligations in respect of its share of QAL's debt
would be assumed by the buyer. KACC also has agreements to supply alumina to and
to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 2003, are
as follows: years ending December 31, 2004 -- $7.5; 2005 -- $4.7; 2006 -- $2.1;
2007 - $.3; 2008 -- $.2; thereafter -- $.7. Pursuant to the Code, the Debtors
may elect to reject or assume unexpired pre-petition leases. At this time, no
final decisions have been made as to which significant leases will be accepted
or rejected (see Note 1). Rental expenses were $15.2, $38.3 and $41.0, for the
years ended December 31, 2003, 2002 and 2001, respectively.

Environmental Contingencies. The Company and KACC are subject to a number
of environmental laws, to fines or penalties assessed for alleged breaches of
the environmental laws, and to claims and litigation based upon such laws. KACC
currently is subject to a number of claims under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for remedial costs
at certain third-party sites listed on the National Priorities List under
CERCLA.

Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
March 31, 2004, the balance of such accruals was $82.2 (of which $43.0 was
included in Liabilities subject to compromise -- see Note 1). These
environmental accruals represent the Company's estimate of costs reasonably
expected to be incurred in the ordinary course of business based on presently
enacted laws and regulations, currently available facts, existing technology,
and the Company's assessment of the likely remediation action to be taken. In
the ordinary course, the Company expects that these remediation actions would be
taken over the next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately $25.4 in 2004,
$2.2 to $4.3 per year for the years 2005 through 2008 and an aggregate of
approximately $45.7 thereafter. Approximately $20.2 of the adjustments to the
environmental liabilities in 2003 (see below) that applied to non-owned property
sites has been included in the after 2008 balance because such amounts are
expected to be settled solely in connection with the Debtors' plan or plans of
reorganization.

The March 31, 2004 accrual balance includes approximately $23.2 that was
provided during the third quarter of 2003. Approximately $20.2 of the amount
provided in the third quarter of 2003 relates to the previously disclosed
multi-site settlement agreement with various federal and state governmental
regulatory authorities and other parties in respect of KACC's environmental
exposure at a number of non-owned sites. Under this agreement, among other
things, KACC agreed to claims at such sites totaling $25.6 ($20.2 greater than
amounts that had previously been accrued for these sites) and, in return, the
governmental regulatory authorities have agreed that such claims would be
treated as pre-Filing Date unsecured claims (i.e. liabilities subject to
compromise). The Company recorded in the third quarter of 2003 the portion of
the $20.2 accrual that relates to locations with active operations ($15.7) in
Other operating charges, net. The remainder of the accrual ($4.5), which relates
to locations that have not operated for a number of years was recorded in the
third quarter of 2003 in Other income (expense).

During September 2003, the Company also provided additional accruals
totaling approximately $3.0 associated with certain KACC-owned properties with
no current operations (recorded in the third quarter of
24

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

2003 in Other income (expense)). These additional accruals resulted primarily
from additional cost estimation efforts undertaken by the Company in connection
with its reorganization efforts. The additional accruals were recorded as
liabilities not subject to compromise as they relate to properties owned by the
Company.

As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $15.6 (a majority of which are estimated to
relate to owned sites that are likely not subject to compromise). As the
resolution of these matters is subject to further regulatory review and
approval, no specific assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, the Company is currently working to resolve certain of these matters.

The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries.

Other Environmental Matters. During April 2004, KACC was served with a
subpoena for documents and has been notified by Federal authorities that they
are investigating certain environmental compliance issues with respect of KACC's
Trentwood facility in the State of Washington. KACC is undertaking its own
internal investigation of the matter through specially retained counsel to
ensure that it has all relevant facts regarding Trentwood's compliance with
applicable environmental laws. KACC believes it is in compliance with all
applicable environmental laws and requirements at the Trentwood facility and
intends to defend any claims or charges, if any should result, vigorously. The
Company cannot assess what, if any, impacts this matter may have on the
Company's or KACC's financial statements.

Asbestos Contingencies. KACC has been one of many defendants in a number
of lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced or
sold by KACC. The lawsuits generally relate to products KACC has not sold for
more than 20 years. As of the initial Filing Date, approximately 112,000 claims
were pending. The lawsuits are currently stayed by the Cases.

Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, KACC expects additional
asbestos claims will be filed as part of the claims process. A separate
creditors' committee representing the interests of the asbestos claimants, the
ACC, has been appointed. The Debtors' obligations with respect to present and
future asbestos claims will be resolved pursuant to a plan of reorganization.

The Company has accrued a liability for estimated asbestos-related costs
for claims filed to date and an estimate of claims to be filed through 2011. At
March 31, 2004, the balance of such accrual was $610.1, all of which was
included in Liabilities subject to compromise (see Note 1). The Company's
estimate is based on the Company's view, at March 31, 2004, of the current and
anticipated number of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut & Klein, P.A., with
respect to the current state of the law related to asbestos claims. However,
there are inherent uncertainties involved in estimating asbestos-related costs
and the Company's actual costs could exceed the Company's estimates due to
changes in facts and

25

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

circumstances after the date of each estimate. Further, while the Company does
not presently believe there is a reasonable basis for estimating
asbestos-related costs beyond 2011 and, accordingly, no accrual has been
recorded for any costs which may be incurred beyond 2011, the Company expects
that the plan of reorganization process may require an estimation of KACC's
entire asbestos-related liability, which may go beyond 2011, and that such costs
could be substantial.

The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
carriers exist. The timing and amount of future recoveries from these insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. The Company
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, KACC filed suit in San Francisco
Superior Court against a group of its insurers, which suit was thereafter split
into two related actions. Additional insurers were added to the litigation in
2000 and 2002. During October 2001, June 2003 and February 2004, the court ruled
favorably on a number of policy interpretation issues. Additionally, one of the
favorable October 2001 rulings was affirmed in February 2002 by an intermediate
appellate court in response to a petition from the insurers. The rulings did not
result in any changes to the Company's estimates of its current or future
asbestos-related insurance recoveries. The trial court may hear additional
issues from time to time. Given the expected significance of probable future
asbestos-related payments, the receipt of timely and appropriate payments from
its insurers is critical to a successful plan of reorganization and KACC's
long-term liquidity.

The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:

- ---------------

(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that KACC
will be able to project similar recovery percentages for future
asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed KACC's aggregate insurance coverage.
As of March 31, 2004 and December 31, 2003, $4.3 and $6.1, respectively, of
the receivable amounts relate to costs paid. The remaining receivable
amounts relate to costs that are expected to be paid by KACC in the future.

26

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

During the pendency of the Cases, all asbestos litigation is stayed. As a
result, the Company does not expect to make any asbestos payments in the near
term. Despite the Cases, the Company continues to pursue insurance collections
in respect of asbestos-related amounts paid prior to its Filing Date.

Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. Additional asbestos-related claims are likely
to be asserted as a part of the Chapter 11 process. Management cannot at this
time reasonably predict the ultimate number of such claims or the amount of the
associated liability. However, it is likely that such amounts could exceed,
perhaps significantly, the liability amounts reflected in the Company's
consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims through 2011. KACC's obligations in respect
of the currently pending and future asbestos-related claims will ultimately be
determined (and resolved) as a part of the overall Chapter 11 proceedings. It is
anticipated that resolution of these matters could be a lengthy process.
Management will continue to periodically reassess its asbestos-related
liabilities and estimated insurance recoveries as the Cases proceed. However,
absent unanticipated developments such as asbestos-related legislation, material
developments in other asbestos-related proceedings or in the Company's or KACC's
Chapter 11 proceedings, it is not anticipated that the Company will have
sufficient information to reevaluate its asbestos-related obligations and
estimated insurance recoveries until later in the Cases. Any adjustments
ultimately deemed to be required as a result of any reevaluation of KACC's
asbestos-related liabilities or estimated insurance recoveries could have a
material impact on the Company's future financial statements.

KACC has entered into settlement agreements with several of the insurers
whose asbestos-related obligations are primarily in respect of future asbestos
claims. These settlement agreements were approved by the Court. In accordance
with the Court approval, the insurers are to pay certain amounts, pursuant to
the terms of an escrow agreement, into a fund (the "Escrow Fund") in which KACC
has no interest, but which amounts will be available for the ultimate settlement
of KACC's asbestos-related claims. Because the Escrow Fund is under the control
of the escrow agent, who will make distributions only pursuant to a Court order,
the Escrow Fund is not included in the accompanying consolidated balance sheet
at March 31, 2004. In addition, since neither the Company nor KACC received any
economic benefit or suffered any economic detriment and have not been relieved
of any asbestos-related obligation as a result of the receipt of the escrow
funds, neither the asbestos-related receivable or the asbestos-related liability
have been adjusted as a result of these transactions. As of March 31, 2004, the
insurers had paid $9.1 into the Escrow Fund. It is possible that settlements
with additional insurers will occur. However, no assurance can be given that
such settlements will occur.

Labor Matters. In connection with the United Steelworkers of America (the
"USWA") strike and subsequent lock-out by KACC, which was settled in September
2000, certain allegations of unfair labor practices ("ULPs") were filed with the
National Labor Relations Board ("NLRB") by the USWA. As previously disclosed,
KACC responded to all such allegations and believed that they were without
merit. Twenty-two of twenty-four allegations of ULPs previously brought against
KACC by the USWA have been dismissed. A trial before an administrative law judge
for the two remaining allegations concluded in September 2001. In May 2002, the
administrative law judge ruled against KACC in respect of the two remaining ULP
allegations and recommended that the NLRB award back wages, plus interest, less
any earnings of the workers during the period of the lockout. The administrative
law judge's ruling did not contain any specific amount of proposed award and was
not self-executing. The USWA filed a proof of claim for $240.0 in the Cases in
respect of this matter.

27

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

In January 2004, as part of its settlement with the USWA with respect to
pension and retiree medical benefits, KACC and the USWA agreed to settle their
case pending before the NLRB, subject to approval of the NLRB General Counsel
and the Court and ratification by union members. The settlement was subsequently
ratified by the union members in February 2004. Further, the settlement with
respect to retiree medical and pension benefits and the NLRB case has been
approved by the Court subject to certain conditions. The agreement may be
terminated by either the USWA or the Company in certain circumstances (see Note
9 of Notes of Consolidated Financial Statements in the Company's Form 10-K for
the year ended December 31, 2003). Under the terms of the agreement, solely for
the purposes of determining distributions in connection with the reorganization,
an unsecured pre-petition claim in the amount of $175.0 will be allowed. The
agreement to settle this matter was contingent on NLRB and Court approval and
ratification by union members. This amount was not reflected in the Company's
consolidated financial statements at March 31, 2004. However, the charge and an
offsetting liability associated with the settlement of this matter will be
reflected in the Company's consolidated financial statements if and when the
agreement with the USWA is ultimately approved by the Court. Also, as part of
the agreement, the Company agreed to adopt a position of neutrality regarding
the unionization of any employees of the reorganized company.

Settled Hearing Loss Claims. During February 2004, the Company reached a
settlement in respect of 400 claims, which alleged that certain individuals who
were employees of the Company, principally at a facility previously owned and
operated by KACC in Louisiana, suffered hearing loss in connection with their
employment. Under the terms of the settlement, which is still subject to Court
approval, the claimants will be allowed claims totaling $15.8. As such, the
Company recorded a $15.8 charge (in Other operating charges (benefits), net) in
the fourth quarter of 2003 and a corresponding obligation (included in
Liabilities subject to compromise -- see Note 1). However, no cash payments by
the Company are required in respect of these amounts. Rather the settlement
agreement contemplates that, at emergence, these claims will be transferred to a
separate trust along with certain rights against certain corresponding insurance
policies of the Company and that such insurance policies will be the sole source
of recourse to the claimants. While the Company believes that the insurance
policies are of value, no amounts have been reflected in the Company's financial
statements at March 31, 2004 in respect of such policies as the Company could
not with the level of certainty necessary determine the amount of recoveries
that were probable.

Other Personal Injury Claims. The Company has received other personal
injury claims related to noise induced hearing loss (approximately 2,900 claims)
and exposure to silica and coal tar pitch volatiles (approximately 3,900 claims
and 300 claims, respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The Company cannot
presently determine the impact or value of these claims. However, the Company
currently expects that all such claims will be transferred, along with certain
rights against certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases discussed above, whether
or not such claims are settled prior to the Company's emergence from the Cases.

Other Contingencies. The Company or KACC is involved in various other
claims, lawsuits, and other proceedings relating to a wide variety of matters
related to past or present operations. While uncertainties are inherent in the
final outcome of such matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes that
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.

28

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

In conducting its business, KACC uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. KACC enters into hedging
transactions from time to time to limit its exposure resulting from (1) its
anticipated sales of alumina, primary aluminum, and fabricated aluminum
products, net of expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices for natural gas, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign subsidiaries and
affiliates. As KACC's hedging activities are generally designed to lock-in a
specified price or range of prices, gains or losses on the derivative contracts
utilized in the hedging activities generally offset at least a portion of any
losses or gains, respectively, on the transactions being hedged.

The following table summarizes KACC's material derivative positions at
March 31, 2004.

- ---------------

* All references to tons in this report refer to metric tons of 2,204.6
pounds.

(a) When the hedges in place as of March 31, 2004 are combined with price limits
in the Company's physical supply agreement, KACC's exposure to increases in
natural gas prices has been substantially limited for April 2004 and May
2004.

The Company anticipates that, subject to prevailing economic conditions, it
may enter into additional hedging transactions with respect to primary aluminum
prices, natural gas and fuel oil prices and foreign currency values to protect
the interests of its constituents. However, no assurance can be given as to when
or if the Company will enter into such additional hedging activities.

As of March 31, 2004, KACC had sold forward a vast majority of the alumina
available to it in excess of its projected internal smelting requirements for
the remainder of 2004 and for 2005 and 2006 at prices indexed to future prices
of primary aluminum.

9. OTHER OPERATING CHARGES (BENEFITS), NET AND OTHER INCOME (EXPENSE)

Other Operating (Charges) Benefits, Net. The income (loss) impact
associated with other operating (charges) benefits, net for the quarter ended
March 31, 2004 related to impairment charges totaling $33.0 associated with the
write-down of KACC's interests in and related to Valco (Property, plant and
equipment of $31.8 and alumina inventories of $1.2 -- see Notes 2 and
8 -- Primary aluminum business unit) offset by the settlement of certain alumina
contract claims that the Company had against a Bauxite and alumina business unit
customer. Total proceeds from the settlement were approximately $1.6 resulting
in a net gain of approximately $1.5 after considering related expenses.

29

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

The income (loss) impact associated with other operating (charges)
benefits, net for the quarter ended March 31, 2003 consisted of (a) a pre-tax
gain of approximately $9.5 from the sale of the Tacoma facility (see Note 4)
offset by (b) restructuring charges of approximately $1.3 which consisted of
employee benefit costs associated with 17 salaried job eliminations during the
first quarter of 2003 resulting from the Mead facility's indefinite curtailment
(see Note 6 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 -- Primary aluminum business unit).

Other Income (Expense). Other income (expense), other than interest
expense, for the quarter ended March 31, 2003 included approximately $1.7 of
adverse foreign currency exchange impacts associated with a foreign tax
settlement.

10. OPERATING SEGMENT INFORMATION

The Company uses a portion of its bauxite and alumina production for
additional processing at its downstream facilities. Transfers between business
units are made at estimated market prices. The accounting policies of the
segments are the same as those described in Note 2 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003. Business unit results are evaluated internally by management before any
allocation of corporate overhead and without any charge for income taxes or
interest expense. See Note 16 of Notes to Consolidated Financial Statements in
the Company's Form 10-K for the year ended December 31, 2003.

During the second quarter of 2003, the Company elected to change its
business segment reporting. Two of the Company's previously reported operating
segments, Flat-rolled products and Engineered products, have been designated as
one business segment, Fabricated products. The previously reported segments were
combined primarily due to a significant integration in the organization and
management of the two segments, as well as the similarity of their economic
characteristics, products, customers and production and distribution processes.
The change in segment reporting is also an outgrowth of the Company's strategic
vision as part of its planning for its ultimate emergence from Chapter 11.

Financial information by operating segment for the quarters ended March 31,
2004 and 2003 is as follows:

30

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

11. NEW ACCOUNTING PRONOUNCEMENT

Statement of Financial Accounting Standards No. 132 (revised), Employers'
Disclosure about Pensions and Other Postretirement Benefits ("SFAS No. 132
(revised)") was issued and was effective in the fourth quarter of 2003. SFAS No.
132 (revised) requires, beginning with the first quarter of 2004, the disclosure
of (1) the amount of the net periodic pension and other postretirement benefits
costs recognized during the quarters ended March 31, 2004 and 2003 and (2) the
total amount of employers' contributions paid, and expected to be paid during
2004.

31

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

COMPONENTS OF NET PERIODIC BENEFIT COSTS --

The following table presents the components of net periodic benefit costs
for the quarters ended March 31, 2004 and 2003:

See Note 9 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 for key assumptions with respect to
the Company's pension plans and other postretirement benefit plans.

CASH FLOW --

Domestic Plans. As previously discussed, the Company since filing the
Chapter 11 proceedings has not made and does not intend to make any further
significant contributions to any of its domestic pension plans.

Upon emergence from Chapter 11 proceedings, the Company anticipates that it
will provide some form of yet to be determined defined contribution pension plan
in respect of its salaried employees. Any such plans ultimately adopted will be
subject to a number of approvals. The Company currently estimates that the total
annual cash cost of such plans would be less than $5.0 and, if approved, would
likely be required to be funded some time in 2005.

Pursuant to the terms of the USWA agreement, the Company will be required
to make annual contributions into the Steelworkers Pension Trust on the basis of
one dollar USWA employee per hour worked. In addition, the Company will
institute a defined contribution pension plan for active USWA employees. Company
contributions to the plan will range from eight hundred dollars to twenty-four
hundred dollars per employee per year, depending on age and years of service.
The Company believes that similar defined contribution pension plans will be
established for non-USWA hourly employees subject to collective bargaining
agreements. The Company currently estimates that contributions to all such plans
will range from $3.0 to $6.0 per year.

As a replacement for the Company's current postretirement benefit plans,
the Company will fund one or more Voluntary Employee Beneficiary Associations
(each a "VEBA") into which the Company will contribute certain amounts on
emergence from Chapter 11 proceedings and on an annual basis through 2012. The
initial contribution will be an amount not to exceed $36.0 and will be payable
on emergence from the Chapter 11 proceedings so long as the Company's liquidity
is at least $50.0 after considering such payments. To the extent that less than
the full $36.0 is paid and the Company's interests in Anglesey are subsequently
sold, a portion of the Anglesey interests' proceeds, in certain circumstances,
will be used to pay the shortfall. In addition to the foregoing, the Company
will, on an annual basis, be required to pay 10% of the first $20.0 of annual
cash flow, as defined, plus 20% of annual cash flow, as defined, above $20.0.
Such annual payments

32

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

shall not exceed $20.0 and will also be limited (with no carryover to future
years) to the extent that the payments do not cause the Company's liquidity to
be less than $50.0.

In May 2004, the Company filed a notice with the Court seeking to make the
agreements regarding pension and postretirement medical benefits effective on
June 1, 2004 notwithstanding that the Intercompany Agreement will not be
effective by that date. The Court will hear the Company's request at a June 1,
2004 hearing. No assurances can be given that the Company's request will be
granted. If the Court does not grant the Company's request, the pension and
postretirement medical benefit agreements will likely not become effective until
the Intercompany Agreement is finalized and modifications to the agreements may
be required (see Note 1 for discussion of the possible timing and status of the
Intercompany Agreement).

The Company has also reached an agreement with the 1114 Committee and the
representatives of the majority of the Company's hourly employees under which
the Company will increase the advances to the VEBA beginning in June 2004.
Pursuant to the agreement, the Company will advance $3.0 to the VEBA in June
2004 and approximately $2.0 to the VEBA each month thereafter until the Company
emerges from the Cases. Any advances made pursuant to such agreement will
constitute a credit toward the $36.0 maximum contribution due upon emergence.
Whether or not the VEBA advances begin in June 2004 will depend on the outcome
of the Company's notice discussed above.

The PBGC has not completed its review of the replacement pension plans or
the defined contribution plans.

Foreign Plans. Contributions to foreign pension plans were approximately
$9.8 and $9.0 during 2003 and 2002, respectively, and primarily related to the
Company's interests in commodity assets being considered for sale. As a result
of the potential sales of the Company's investments in such assets, future
contributions to foreign pension plans could decline to a nominal amount.

33

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This section should be read in conjunction with the response to Part I,
Item 1, of this Report.

This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this section (see, for
example, "Recent Events and Developments," "Results of Operations," and
"Liquidity and Capital Resources"). Such statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements, and changing prices and market conditions. This section
and Part I, Item 1. "Business -- Factors Affecting Future Performance" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003, each
identify other factors that could cause actual results to vary. No assurance can
be given that these are all of the factors that could cause actual results to
vary materially from the forward-looking statements.

REORGANIZATION PROCEEDINGS

Kaiser Aluminum Corporation ("Kaiser", "KAC" or the "Company"), its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), and 24 of
KACC's subsidiaries have filed separate voluntary petitions with United States
Bankruptcy Court for the District of Delaware ("the Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"). The Company,
KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first
quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" shall mean, with
respect to any particular Debtor, the date on which such Debtor filed its Case.
None of KACC's non-U.S. joint ventures are included in the Cases. The Cases are
being jointly administered. The Debtors are managing their businesses in the
ordinary course as debtors-in-possession subject to the control and
administration of the Court.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through May 31,
2004 for Kaiser Aluminum Australia Corporation ("KAAC"), Kaiser Jamaica
Corporation ("KJC") and Alpart Jamaica Inc. ("AJI") and June 30, 2004 for the
remaining Debtors. By filing the motion to extend the exclusivity period, the
period is automatically extended until the May 18, 2004 Court hearing date. As
the Debtors' motion to extend the exclusivity period was agreed to by the
unsecured creditors committee (the "UCC") in advance of the filing, the Debtors
expect the motion to be approved by the Court. Additional extensions are likely
to be sought. However, no assurance can be given that any such future extension
requests will be granted by the Court. If the Debtors fail to file a plan of
reorganization during the exclusivity period, or if such plan is not accepted by
the requisite numbers of creditors and equity holders entitled to vote on the
plan, other parties in interest in the Cases may be permitted to propose their
own plan(s) of reorganization for the Debtors.

The Debtors anticipate that substantially all liabilities of the Debtors as
of their Filing Date will be settled under one or more plans of reorganization
to be proposed and voted on in accordance with the provisions of the Code.
Although the Debtors intend to file and seek confirmation of such a plan or
plans, there can be no assurance as to when the Debtors will file such a plan or
plans or as to whether such plan or plans will be confirmed by the Court and
consummated.

34

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the UCC, the asbestos claimants committee (the "ACC")
and a committee of salaried retirees (the "1114 Committee" and, together with
the UCC and the ACC, the "Committees"), the legal representative for potential
future asbestos claimants (the "Futures' Representative"), the Pension Benefit
Guaranty Corporation (the "PBGC") and the appropriate union representatives. The
treatment of individual groups of creditors in any such plan of reorganization
cannot be determined definitively at this time. The ultimate treatment of and
recoveries to individual creditors is dependent on, among other things, the
total amount of claims against the Debtors as ultimately determined by the
Court, the priority of the applicable claims, the outcome of ongoing discussions
with the key constituencies, the amount of value available for distribution in
respect of claims and the completion of the plan confirmation process consistent
with applicable bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is
likely that their liabilities will be found to significantly exceed the fair
value of their assets. Therefore, the Debtors currently believe that it is
likely that substantially all pre-Filing Date claims will be settled at less
than 100% of their face value and the equity interests of the Company's
stockholders will be cancelled without consideration. Further, the Debtors
believe that it is likely that: (a) the claims of pre-petition creditors that
are given certain priorities by statute or have the benefit of guarantees or
other contractual or structural seniority will likely receive substantially
greater recoveries than pre-petition creditors that have no such priorities or
seniority; and (b) all pending and future asbestos-related personal injury
claims are likely to be resolved through the formation, pursuant to a plan of
reorganization, of a statutory trust to which all claims would be directed by a
channeling injunction that would permanently remove all asbestos liability from
the Debtors. A similar trust arrangement is anticipated in respect of pending
and future silica, hearing loss and coal tar pitch volatiles personal injury
claims. The trusts would be funded pursuant to statutory requirements and
agreements with representatives of the affected parties, using the Debtors'
insurance assets and certain other consideration that has yet to be agreed. No
assurances can be provided that the foregoing will ultimately be included in any
plan(s) of reorganization the Debtors may file. Further, while the Debtors
believe it is possible to successfully reorganize their operations and emerge
from Chapter 11 in 2004, their ability to do so is subject to inherent market-
related risks as well as successful negotiation and Court approval for the
treatment of creditors consistent with the applicable bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against KACC. These
include claims in respect of substantially all of the Debtors' debt obligations,
obligations in respect of pension and retiree medical benefits, asbestos-related
and personal injury claims, and known environmental obligations. As such, all of
these claimholders will have claims against KACC that, except as further
described below, will have to be satisfied by KACC's assets, which generally
include the alumina refinery located at Gramercy, Louisiana ("Gramercy"), the
interests in Anglesey Aluminium Limited ("Anglesey"), the interests in Volta
Aluminium Company Limited ("Valco") and the fabricated products plants (other
than the London, Ontario, Canada and Richmond, Virginia extrusion facilities,
which are owned by separate subsidiaries that are also Debtors). KACC's assets
also include certain intercompany receivables from certain of its Debtor
subsidiaries for funding provided to its joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against KACC's other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no material ongoing
activities or operations and have no material assets or liabilities other than
intercompany items. The Company believes that it is likely that most, if not
all, of these entities will ultimately be merged
35

out of existence or dissolved in some manner. The remaining Debtor subsidiaries
(which include AJI, KJC, KAAC, Kaiser Aluminium International, Inc., ("KAII"),
Kaiser Aluminum & Chemical of Canada Limited ("KACOCL"), Kaiser Bauxite Company
("KBC"), Kaiser Bellwood Corporation ("Bellwood"), Kaiser Aluminum Technical
Services, Inc. ("KATSI") and Kaiser Financial Corporation ("KFC")) own certain
extrusion facilities or act largely as intermediaries between KACC and certain
of its other subsidiaries and joint venture affiliates or interact with third
parties on behalf of KACC and its joint venture affiliates. As such, the vast
majority of the pre-petition claims against such entities are related to
intercompany activities. However, certain of those entities holding claims
against KACC also have claims against certain KACC subsidiaries that own the
Company's interests in joint venture affiliates and which represent a
significant portion of KACC's consolidated asset value. For example, noteholders
have claims against each of AJI and KJC, which own the Company's interests in
Aluminum Partners of Jamaica ("Alpart"), and KAAC, which owns the Company's
interests in Queensland Alumina Limited ("QAL"), as a result of AJI, KJC and
KAAC having been subsidiary guarantors of KACC's Senior Notes and Senior
Subordinated Notes. Additionally, the PBGC, pursuant to statute, has joint and
several claims against KACC and all entities which are 80% or more owned by KACC
(referred to as "Controlled Group Members"). Controlled Group Members include
each of AJI, KJC and KAAC, as well as all of the other Debtors. The only other
significant claims against AJI, KJC and KAAC are intercompany claims related to
funding provided to these entities. As such, it is likely that the vast majority
of any value realized in respect of the Company's interests in Alpart and QAL,
either from their disposition or realized upon emergence from such operations,
is likely to be for the benefit of the noteholders and the PBGC.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of KACC and its claimholders (in respect of KACC's intercompany
claims against such entities), an intercompany settlement agreement is being
negotiated between the UCC and the Company (the "Intercompany Agreement"). The
proposed Intercompany Agreement would also release or resolve substantially all
other pre-and post-petition intercompany claims between the Debtors. The
proposed Intercompany Agreement, if finalized substantially in its current form,
would provide, among other things, for payments of cash by AJI, KJC and KAAC to
KACC of $85.0 million in respect of its intercompany claims against AJI, KJC and
KAAC plus any amounts up to $14.3 million plus accrued and unpaid interest and
fees paid by KACC to retire Alpart-related debt. Under the proposed Intercompany
Agreement, such amount would be increased or decreased for (1) any net cash
flows collected by or funded by KACC between the effective date of the proposed
Intercompany Agreement and the earlier of (a) AJI's, KJC's and KAAC's emergence
from Chapter 11 or (b) the sale of AJI's, KJC's and KAAC's respective interests
in and related to Alpart and QAL and (2) any purchase price adjustments (other
than incremental amounts related to alumina sales contracts to be transferred)
pursuant to KACC's agreement to sell its interests in Alpart, if consummated.
The proposed Intercompany Agreement calls for such payments to be made to KACC
at the earlier of the sale of the Company's interests in Alpart and QAL or the
emergence of AJI, KJC and KAAC from Chapter 11. The Company expects that all
such payments under the proposed Intercompany Agreement, other than $28.0
million to be paid to KACC upon the sale of Alpart and any amounts paid by KACC
in respect of retiring the Alpart-related debt, are likely to be held in escrow
for the benefit of KACC until KACC's emergence from the Cases. In the interim,
KACC's claims against these entities will be secured by liens. There are still a
number of issues with respect to the proposed Intercompany Agreement that must
be satisfactorily resolved. The Intercompany Agreement once finalized will be
subject to Court approval. Discussions are ongoing between the Company, the UCC,
the ACC and the Futures' Representative in an attempt to make the terms of the
proposed Intercompany Agreement acceptable to each of the groups. The Company
currently is targeting to have the Court consider the proposed Intercompany
Agreement at the regularly scheduled June 2004 omnibus hearing. However, no
assurances can be provided that the issues can be resolved within the time frame
necessary to submit the Intercompany Agreement to the Court under that time
frame.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 million to $120.0
million. KACC currently expects to fund
36

such Exit Costs using the proceeds to be received under the proposed
Intercompany Agreement together with existing cash resources and available
liquidity under an exit financing facility that will replace the current
Post-Petition Credit Agreement (see Note 5 of Notes to Interim Consolidated
Financial Statements). If payments under the proposed Intercompany Agreement
together with liquidity available under an exit financing facility are not
sufficient to pay or otherwise provide for all Exit Costs, KACC and some or all
of its other Debtor subsidiaries will not be able to emerge from Chapter 11
unless and until sufficient funding can be obtained. Management believes it will
be able to successfully resolve any issues that may arise in respect of the
proposed Intercompany Agreement or be able to negotiate a reasonable
alternative. However, no assurances can be given in this regard.

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders. The Company's advisors have developed a timeline that, assuming
the current pace of the Cases continues, is expected to allow the Company to
file a plan or plans of reorganization by mid-year 2004 and emerge from Chapter
11 as early as late in the third quarter of 2004. However, the Debtors' ability
to do so is subject to the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances
can be given as to whether or when any plan or plans of reorganization will
ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representative, began exploring the possible sale of one or more of
their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) KACC's Gramercy Alumina refinery and Kaiser
Jamaican Bauxite Company ("KJBC"). The possible sale of the Debtors' interests
in respect of Gramercy and KJBC was explored jointly given their significant
integration. More recently, the Company also began the process of exploring the
sale of its 20% interest in QAL. While the Company believes that the QAL-related
interests are likely to be its most valuable commodity asset and expects that
there are or will be a number of parties interested in acquiring such interests,
no assurances can be given that any such sale will occur.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their investment advisors, surveyed the potential
market and initiated discussions with numerous parties believed to have an
interest in such assets. In addition, other parties contacted the Debtors and/or
their investment advisors to express an interest in purchasing the assets. The
Debtors provided (subject to confidentiality agreements) information regarding
the applicable interests to these parties, each of which was asked to submit a
non-binding expression of interest regarding the individual assets. After
receiving these initial expressions of interest from potential purchasers, the
Debtors determined which of the expressions of interest received represented
reasonable indications of value ("Qualified Bids"). Potential bidders
("Qualified Bidders") that submitted Qualified Bids were then permitted to
conduct due diligence in respect of the assets for which they submitted a
Qualified Bid and to submit definitive proposals.

The Debtors reviewed the definitive proposals submitted and, in
consultation with the UCC, the ACC and the Futures' Representative, and other
key constituencies, determined with which Qualified Bidders the Debtors would
pursue further negotiations. See Note 4 of Notes to Interim Consolidated
Financial Statements for a discussion of subsequent developments regarding the
potential dispositions of Alpart, Valco and Gramercy/KJBC.
37

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of Alpart, Valco and Gramercy/KJBC were
likely and, therefore, that recoverability should be evaluated differently at
December 31, 2003 and subsequent periods. The change in evaluation methodology
was required because, under GAAP, assets to be held and used are evaluated for
recoverability differently than assets to be sold or disposed of. Assets to be
held and used are evaluated based on their expected undiscounted future net cash
flows. So long as the Company reasonably expects that such undiscounted future
net cash flows for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell or dispose of an
asset or group of assets meet a number of specific criteria, then, under GAAP,
such assets should be considered held for sale/disposition and their
recoverability should be evaluated, for each asset, based on expected
consideration to be received upon disposition. Sales or dispositions at a
particular time will be affected by, among other things, the existing industry
and general economic circumstances as well as the Company's own circumstances,
including whether or not assets will (or must) be sold on an accelerated or more
extended timetable. Such circumstances may cause the expected value in a sale or
disposition scenario to differ materially from the realizable value over the
normal operating life of assets, which would likely be evaluated on long-term
industry trends.

The Company ultimately concluded that no impairment of its interest in and
related to Alpart was appropriate based on its updated expectations that the
sale of the Company's interests in Alpart would result in a pre-tax gain (see
Note 4 of Notes to Interim Consolidated Financial Statements). By contrast,
based on the Company reaching a financial agreement in early May 2004 with the
Government of Ghana ("GoG") in respect of the sale of its interests in and
related to Valco, the Company determined that it should impair its interests in
and related to Valco to the amount of the expected proceeds to be received from
the GoG. As a result, as of March 31, 2004, KACC recorded a non-cash charge of
approximately $33.0 million (see Note 4 of Notes to Interim Consolidated
Financial Statements). Additionally, in evaluating the recoverability of the
Company's basis in Gramercy/KJBC, the Company recorded an impairment charge of
approximately $368.0 million in fourth quarter of 2003 as there were no offers
that were anywhere near the carrying value of the assets (see Note 4 of Notes to
Interim Consolidated Financial Statements for a discussion of the impairment
charge). The actual amount of gain or loss if and when the potential sales of
Valco and Gramercy/KJBC are consummated may differ from the foregoing amounts as
a result of closing adjustments, changes in economic circumstances and other
matters.

RECENT EVENTS AND DEVELOPMENTS

Liquidity/Negative Cash Flow. Cash and cash equivalents decreased by $21.7
million during the first quarter of 2004. The net decrease resulted from cash
used by operating activities ($26.0 million) and financing activities ($.2
million) offset by net cash generated from investing activities of $4.5 million.

The cash used by operating activities during the first quarter of 2004 was
primarily the result of increases in working capital associated with improving
demand for fabricated aluminum products and primary aluminum price increases.
These increases were offset by cash generated from operating results (see
Results of Operations and Liquidity and Capital Resources for further
discussions).

During the first quarter of 2003, cash and cash equivalents increased $11.0
million. The net increase resulted from cash generated from investing activities
of $65.4 million (see Note 4 of Notes to Interim Consolidated Financial
Statements) offset by cash used in operating activities ($54.2 million) and
financing activities ($.2 million). The $54.2 million of cash and cash
equivalents used by operating activities included the following significant
items: (a) asbestos-related insurance recoveries of $7.1 million, (b) a foreign
income tax payment related to prior periods of $22.0 million and (c) end of
service benefit payments totaling approximately $6.9 million in connection with
Valco potline curtailments. The balance of the cash and cash equivalents used in
operating activities in 2003 (approximately $32.4 million) resulted from a
combination of adverse market factors in the business segments in which the
Company operates including (a) primary
38

aluminum prices that were below long term averages, (b) a weak demand for
fabricated metal products, particularly aerospace products, and (c) higher than
average power, fuel oil and natural gas prices.

At April 30, 2004, the Company had cash and cash equivalents of
approximately $14.8 million and availability under the DIP Facility's borrowing
base of approximately $128.8 million. Borrowings and letters of credit
outstanding at April 30, 2004 under the DIP Facility were $3.3 million and $45.5
million, respectively.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and measurement periods through May 31, 2004 and accordingly, the Company
will likely not have to comply with the covenant until June 30, 2004. In
connection with the waiver, the Company agreed to reduce the available amount of
the borrowing base by $25.0 million. The Company is currently working with the
DIP Facility lenders to complete an amendment that is anticipated, among other
things, to: (1) reset the financial covenant based on more recent forecasts; (2)
authorize the sale of the Company's interests in and related to Alpart, QAL,
Gramercy/KJBC and Valco within certain parameters, and (3) reduce the
availability of the fixed asset subcomponent to a level that, by emergence will
be based on advances solely in respect of machinery and equipment at the
fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0 million -- $100.0 million range and that amount
should be adequate to support the Company's liquidity requirements through the
remainder of the Cases. This belief is based on the fact that it was the
commodities' assets and operations that subjected the Company to the most
variability and exposure both from a price risk basis as well as from an
operating perspective. While the Company anticipates that it will be successful
in completing an amendment to the DIP Facility along the lines outlined above in
time for submission to the Court in May 2004, no assurances can be given in this
regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case the aforementioned amendment is delayed. The limited
consent and waiver would, among other things (1) allow the Company to complete
the sale of its interests in and related to Alpart provided that the proceeds
are escrowed and are subject to the lenders' administrative super priority claim
until the amendment is completed, (2) extend the waiver of the financial
covenant through the June 30, 2004 measurement date and (3) waive the current
DIP Facility requirement that any proceeds from the sale of Alpart reduce the
fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

Valco. In May 2003, Valco's operations were completely curtailed. During
2003, Valco met regularly with the GoG and the Volta River Authority ("VRA") in
respect of the current and future power situation and other matters including
appropriate compensation for power curtailments. The continuation of the
negotiations and arbitration ultimately led to a Memorandum of Understanding
("MOU") in December 2003, whereby the Company agreed to sell its 90% interest in
Valco to the GoG for consideration of between $35.0 million and $100.0 million,
plus assumption of all of the Company's related liabilities and obligations.
During 2004, assuming the $35.0 million minimum consideration, the GoG was to
pay $7.0 million in cash to the Company and $18.0 million in cash to Valco,
thereby reducing the Company's funding to Valco. Through April 30, 2004, the GoG
had paid $5 million of the $18.0 million that was due to Valco under the MOU and
the $7.0 million escrow to the Company had not been funded. The Company met with
the GoG in early May 2004 and reached a new financial agreement. Under the
revised financial terms, $13.0 million was to be put into escrow by the GoG by
May 14, 2004. As of May 14, 2004, the Company was informed that $12.0 million of
the $13.0 million had been paid into the escrow account. The $13.0 million
amount is to be paid to the Company as full and final consideration for the
transaction. The Company also agreed to fund certain end of service benefits of
Valco employees (estimated to be approximately $9.0 million) which the GoG was
to assume under the original MOU. The Company and the GoG are targeting a
closing for the transaction near the end of June 2004, subject to a number of
conditions including the approval by Ghana Parliament. No assurance can be made
as to when or if the transaction will close under the revised terms. However, as
the
39

revised purchase price is well below the Company's recorded value for Valco and
given the increased likelihood of a closing and the payment by the GoG of the
escrow amount, the Company determined that it should impair its interests in and
related to Valco at March 31, 2004 to the amount of the expected proceeds. As
such, KACC recorded a non-cash impairment charge of approximately $33.0 million
(included in Other operating charges (benefits), net -- see Note 9 of Notes to
Interim Consolidated Financial Statements). The actual amount of loss if and
when the potential sale of the Company's interests in and related to Valco is
consummated may differ from the above amount as a result of closing adjustments,
changes in economic circumstances and other matters.

Under the terms of the MOU, upon the execution of the MOU and the payout by
the GoG of the $13.0 million into escrow, the parties will suspend the
arbitration process. Upon the closing of the transaction, the parties will
dismiss the arbitration with prejudice. If the transaction does not close, the
arbitration will resume.

Benefit (Legacy) Cost Matters. The Company has previously disclosed since
the Filing Date that pension and retiree medical obligations were significant
factors that would have to be addressed during the reorganization process.

In December 2003, the Company was notified by the PBGC that the PBGC
intended to assume responsibility for the Salaried Employees Retirement Plan as
of December 17, 2003. After appropriate consultation with its advisors, the UCC,
the ACC and certain other constituents, the Company reluctantly agreed to the
termination of the Salaried Employees Retirement Plan. As a result of the
termination, the Company recorded a non-cash pension charge of $121.2 million in
the fourth quarter of 2003.

In January 2004, the Company filed motions with the Court to terminate or
substantially modify postretirement medical obligations for both salaried and
certain hourly employees and for a distress termination of substantially all
domestic hourly pension plans. The Company subsequently reached agreements with
the 1114 Committee and union representatives that represent the vast majority of
the Company's hourly employees. The agreements provide for the termination of
existing salaried and hourly postretirement benefit plans, such as medical, and
the termination of substantially all existing hourly pension plans. Under the
agreements, salaried and hourly retirees would be provided an opportunity for
continued medical coverage through COBRA or a proposed Voluntary Employee
Beneficiary Association (a "VEBA") and active hourly employees would be provided
with an opportunity to participate in one or more replacement pension plans
and/or defined contribution plans. The agreements with the 1114 Committee and
certain of the unions have been approved by the Court, but are subject to
certain conditions, including Court approval of the Intercompany Agreement in a
form acceptable to the Debtors and the UCC. The PBGC must ultimately approve a
distress termination of the hourly plans. The PBGC has objected to the Company's
distress termination motion and has appealed the Court's ruling that the Company
has met the statutory criteria for a distress termination of the hourly pension
plans. The PBGC has also not completed its review of the replacement pension
plans or defined contribution plans (see Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003 for additional discussions). Negotiations with the PBGC are ongoing.

In May 2004, the Company filed a notice with the Court seeking to make the
agreements regarding pension and postretirement medical benefits effective on
June 1, 2004 notwithstanding that the Intercompany Agreement will not be
effective by that date. The Court will hear the Company's request at a June 1,
2004 hearing. No assurances can be given that the Company's request will be
granted. If the Court does not grant the Company's request, the pension and
postretirement medical benefit agreements will likely not become effective until
the Intercompany Agreement is finalized and modifications to the agreements may
be required (see Note 1 of Notes to Interim Consolidated financial statements
for discussion of the possible timing and status of the Intercompany Agreement).

The Company has also reached an agreement with the 1114 Committee and the
representatives of the majority of the Company's hourly employees under which
the Company will increase the advances to the VEBA beginning in June 2004.
Pursuant to the agreement, the Company will advance $3.0 million to the VEBA in
June 2004 and approximately $2.0 million to the VEBA each month thereafter until
the Company
40

emerges from the Cases. Any advances made pursuant to such agreement will
constitute a credit toward the $36.0 million maximum contribution due upon
emergence. Whether or not the VEBA advances begin in June 2004 will depend on
the outcome of the Company's notice discussed above.

RESULTS OF OPERATIONS

As an integrated aluminum producer, the Company has historically used a
portion of its bauxite, alumina, and primary aluminum production for additional
processing at certain of its downstream facilities. However, as previously
disclosed, as a part of a plan of reorganization, the Company expects that it
will emerge from its Chapter 11 proceedings primarily as a fabricated products
company. Intersegment transfers are valued at estimated market prices. The
following table provides selected operational and financial information on a
consolidated basis with respect to the Company for the quarters ended March 31,
2004 and 2003. The following data should be read in conjunction with the
Company's interim consolidated financial statements and the notes thereto
contained elsewhere herein. See Note 16 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003, for
further information regarding segments.

Interim results are not necessarily indicative of those for a full year.
Average realized prices for the Company's Fabricated products segment are not
presented in the following table as such prices are subject to fluctuations due
to changes in product mix.

41

SELECTED OPERATIONAL AND FINANCIAL INFORMATION

OVERVIEW

The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree on the volume and mix of all products sold and on KACC's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Notes 2 and 8 of Notes to Interim
Consolidated Financial Statements for a discussion of KACC's hedging activities.

Changes in global, regional, or country-specific economic conditions can
have a significant impact on overall demand for aluminum-intensive fabricated
products in the transportation, distribution, packaging, and other markets. Such
changes in demand can directly affect the Company's earnings by impacting the
overall volume and mix of such products sold. To the extent that these end-use
markets weaken, demand can also diminish for what the Company sometimes refers
to as the "upstream" products: alumina and primary aluminum.

During the quarter ended March 31, 2003, the average London Metal Exchange
transaction price ("LME price") per pound of primary aluminum was $.63 per
pound. During the quarter ended March 31, 2004, the average LME price was $.75
per pound. The average LME price for primary aluminum for the week ended April
30, 2004 was $.76 per pound.

QUARTER ENDED MARCH 31, 2004, COMPARED TO QUARTER ENDED MARCH 31, 2003

SUMMARY

The Company reported a net loss of $64.0 million, or $.80 of basic loss per
common share, for the quarter ended March 31, 2004, compared to a net loss of
$65.1 million, or $.81 of basic loss per common share, for the same period in
2003. However, basic loss per common share may not be meaningful, because as a
part of a plan of reorganization, it is likely that the equity interests of the
Company's existing stockholders will be cancelled without consideration.

43

Net sales in the first quarter of 2004 totaled $367.6 million compared to
$339.4 million in the first quarter of 2003.

Fabricated Products. Net sales of fabricated products increased by 21%
during the first quarter 2004 as compared to 2003, primarily due to a 20%
increase in shipments and a 1% increase in average realized prices. Current
period shipments were higher than first quarter 2003 shipments as a result of
improving demand for fabricated aluminum products, particularly rod, bar and
plate for general engineering applications. The increase in the average realized
prices reflects increased product prices due to an increase in primary aluminum
prices offset in part by changes in the mix of products sold as well as
continuing pressure on product margins.

Segment operating results for the quarter ended March 31, 2004, improved
over the comparable period in 2003 primarily due to improved cost performance
offset by modestly increased natural gas prices.

Bauxite and Alumina. Third party net sales of alumina increased modestly
during the quarter 2004, as compared to the same period in 2003, as a 16%
increase in third party average realized prices was offset by a 13% decrease in
third party shipments. The increase in average realized prices was due to an
increase in primary aluminum market prices to which the Company's third-party
alumina sales contracts are linked. Shipments in the quarter ended March 31,
2004 were lower than the comparable prior year period due to normal fluctuations
in the timing of shipments.

Intersegment net sales of alumina for the quarter ended March 31, 2004
decreased 51% as compared to the same period in 2003 primarily as the result of
reduced shipments to the Primary aluminum business unit due to the 2003 Valco
potline curtailment.

Segment operating loss results for the quarter ended March 31, 2004 were
better than the comparable period in 2003. The primary reason for the
period-to-period increase in operating income was the increase in average
realized prices discussed above. Lower fuel oil and natural gas prices in the
first quarter of 2004 had a favorable impact of approximately $4.0 million as
compared to the prior year period. Results for the first quarter of 2004 also
benefited from lower depreciation expense of approximately $5.5 million due to
the year end 2003 impairment charges taken in respect of the Gramercy facility
and the Company's investment in KJBC. The balance of the improvement in
operating results was due to operating performance, primarily at the 65%-owned
Alpart facility and the Gramercy facility. Improved operating performance at the
20%-owned QAL facility was offset by adverse changes in the foreign exchange
rate.

Primary Aluminum. Third party net sales of primary aluminum decreased 5%
for the first quarter of 2004 as compared to the same period in 2003 as a result
of an 18% decrease in third party shipments offset by a 15% increase in third
party average realized prices. The decrease in third party shipments was
primarily due to the curtailment of the 2003 Valco potlines curtailment. The
increase in the average realized prices was primarily due to the increase in
primary aluminum market prices.

Segment operating results (before other operating charges, net) for the
quarter ended March 31, 2004, were better than the comparable period in 2003.
The primary reasons for the increase were (a) the increase in average realized
prices and (b) because operating results for 2003 included approximately $4.3
million of charges for end-of-service benefits at Valco associated with the
potlines curtailments.

Segment operating loss for 2004, discussed above, excludes non-cash charges
of approximately $33.0 million resulting from the write-down of the Company's
interests in and related to Valco (which is included in Operating charges
(benefits), net). Segment operating loss for 2003 excludes a $9.5 million
pre-tax gain on the sale of the Tacoma facility and restructuring charges of
$1.3 million resulting from the Mead facility indefinite curtailment, both which
are included in Other operating charges (benefits), net.

Commodities Marketing. Net sales for this segment represent net
settlements with third-party brokers. Operating income represents the combined
effect of such net settlements and any premium costs associated with maturing
opinions. The minimum and (maximum) price of the hedges in any given period is
primarily the result of the timing of the execution of the hedges contract.

44

Segment operating results for the quarter ended March 31, 2004, were worse
than the comparable period in 2003 primarily due to (a) hedging net gains from
first quarter 2002 that were being amortized over the original hedging periods
as the underlying purchases/sales occurred becoming fully amortized by year end
2003 and (b) hedging premiums related to hedging positions in respect of first
quarter 2004 being higher than net hedging revenues realized.

Eliminations. Eliminations of Intersegment profit vary from period to
period depending on fluctuations in market prices as well as the amount and
timing of the affected segments' production and sales.

Corporate and Other. Corporate operating expenses represent corporate
general and administrative expenses which are not allocated to the Company's
business segments. Corporate operating expenses in the first quarter 2004 were
lower than in the first quarter 2003 primarily due to a reduction in
payroll-related costs and various other overhead costs as a result of cost
reduction initiatives.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the filing of the Cases, claims against the Debtors for
principal and accrued interest on secured and unsecured indebtedness existing on
the Filing Date are stayed while the Debtors continue business operations as
debtors-in-possession, subject to the control and supervision of the Court. See
Note 1 of Notes to Interim Consolidated Financial Statements for additional
discussion of the Cases. At this time, it is not possible to predict the effect
of the Cases on the businesses of the Debtors.

Operating Activities. In the first quarter of 2004, Fabricated products
operating activities used $5.0 million of cash. This amount compares with the
first quarter of 2003 when Fabricated products operating activities provided
$5.8 million of cash. Cash used by Fabricated products in 2004 was primarily due
to increases in working capital associated with improving demand for fabricated
aluminum products offset by improved operating results. Cash provided by
Fabricated products operations in 2003 was largely due to cost cutting
initiatives which offset reduced product prices and shipments. All of the
foregoing exclude consideration of pension and retiree cash payments made by the
Company on behalf of current and former employees of the Fabricated products
facilities. Such amounts are part of the "legacy" costs that the Company
internally categorizes as a corporate cash outflow. As more fully discussed in
Benefit (Legacy) Cost Matters, the Company expects that substantially all such
benefits related to previously existing benefit plans are likely to be cancelled
as part of the reorganization process.

In the first quarter of 2004, Commodities and Corporate operating
activities used $21.0 million of cash. This amount compares with the first
quarter of 2003 when Commodities and Corporate operating activities used $38.2
million of cash, which amount excludes the following significant items: (a)
asbestos-related insurance recoveries of $7.1 million; (b) a foreign income tax
payment related to prior periods of $22.0 million; and (c) end of service
benefits payments totaling approximately $6.9 million in connection with the
Valco potline curtailments. The reduction in net cash used by Commodities and
Corporate operating activities in 2004 over 2003 resulted primarily from
improved results in the Bauxite and alumina segment (approximately $30.0
million) as a result of the operating factors discussed above. This improvement
was partially offset by: (a) less cash generated by the Primary aluminum segment
(approximately $8.0 million), primarily as a result of Valco being fully
curtailed in the first quarter of 2004 versus having had partial operations
during the first quarter of 2003; and (b) increased cash outflow in the
Corporate and other segment of approximately $5.0 million attributable to higher
hedging related costs, reorganization costs and other miscellaneous costs.

Net cash used by Commodities and Corporate operating activities in 2003
resulted from a combination of adverse market factors, primarily in the
commodities business segments, including: (a) primary aluminum prices that were
below long-term averages, (b) higher than average fuel oil and natural gas
prices, and (c) significant expenditures in respect of reorganization costs.

Investing Activities. Total capital expenditures for Fabricated products
during the quarter ended March 31, 2004 were $1.5 million. Total capital
expenditures for Commodities and Corporate during the quarter ended March 31,
2004 were $1.4 million. The capital expenditures during the quarter ended March
31,

45

2004 were made primarily to improve production efficiency, reduce operating
costs and expand capacity at existing facilities.

Total capital expenditures for Fabricated products are currently expected
to be between $7.0 million and $12.0 million per year in each of 2004 and 2005.
The level of capital expenditures may be adjusted from time to time depending on
the Company's price outlook for metal and other products, KACC's ability to
assure future cash flows through the Company's financial position and other
factors.

Financing Activities and Liquidity. On February 12, 2002, the Company and
KACC entered into the DIP Facility which provides for a secured, revolving line
of credit through the earlier of February 13, 2005, the effective date of a plan
of reorganization or voluntary termination by the Company. In March 2003,
certain of the Additional Debtors were added as co-guarantors and the DIP
Facility lenders received super priority status with respect to certain of the
Additional Debtors' assets. KACC is able to borrow under the DIP Facility by
means of revolving credit advances and to issue letters of credit (up to $125.0
million) in an aggregate amount equal to the lesser of $285.0 million or a
borrowing base relating to eligible accounts receivable, eligible inventory and
eligible fixed assets reduced by certain reserves, as defined in the DIP
Facility agreement. The DIP Facility is guaranteed by the Company and certain
significant subsidiaries of KACC. Interest on any outstanding borrowings will
bear a spread over either a base rate or LIBOR, at KACC's option.

The DIP Facility requires KACC to comply with certain covenants and places
restrictions on the Company's, KACC's and KACC's subsidiaries' ability to, among
other things, incur debt and liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and for all measurement periods through May 31, 2004 and accordingly, the
Company will likely not have to comply with the covenant until June 30, 2004.
The Company is currently working with the DIP Facility lenders to complete an
amendment that is anticipated, among other things, to: (1) reset the financial
covenant based on more recent forecasts; (2) authorize the sale of the Company's
interests in Alpart, QAL, Gramercy/KJBC and Valco within certain parameters, and
(3) reduce the availability of the fixed asset subcomponent of the borrowing
base to a level that, by emergence will be based on advances solely in respect
of machinery and equipment at the fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0 million -- $100.0 million range and that such amount
should be adequate to support the Company's liquidity requirements through the
remainder of the Cases. This belief is based on the fact that it was the
commodities' assets and operations that subjected the Company to the most
variability and exposure both from a price risk basis as well as from an
operating perspective. While the Company anticipates that it will be successful
in completing an amendment to the DIP Facility along the lines outlined above in
time for submission to the Court in May 2004, no assurances can be given in this
regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case completion of the aforementioned amendment is delayed.
The limited consent and waiver would, among other things (1) allow the Company
to complete the sale of its interests in and related to Alpart provided that the
proceeds are escrowed and are subject to the lenders' administrative super
priority claim until the amendment is completed, (2) extend the waiver of the
financial covenant through the June 30, 2004 measurement date and (3) waive the
current DIP Facility requirement that any proceeds from the sale of Alpart
reduce the fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

The Company and KACC currently believe that the cash and cash equivalents
of $14.2 million at March 31, 2004, cash flows from operations, cash proceeds
from the sale of assets that are ultimately determined not to be an important
part of the reorganized entity and availability under the DIP Facility will
46

provide sufficient liquidity to allow the Company to meet its obligations during
the pendency of the Cases. At April 30, 2004, $3.3 million of borrowings were
outstanding under the revolving credit facility. As of April 30, 2004, $128.8
million (of which $79.5 million could be used for additional letters of credit)
was available to the Company under the DIP Facility.

CAPITAL STRUCTURE

MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries
collectively own approximately 63% of the Company's Common Stock, with the
remaining approximately 37% of the Company's Common Stock being publicly held.
At this time, it is not possible to predict the outcome of the Cases, in
general, or the effect of the Cases on the interests of the stockholders.
However, it is likely that MAXXAM's equity interests will be cancelled without
consideration as a part of a plan of reorganization.

In accordance with the Code and the DIP Facility, the Company and KACC are
not permitted to pay any dividends or purchase any of their common or preference
stock.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are both very important to the
portrayal of the Company's financial condition and results, and require
management's most difficult, subjective, and/or complex judgments. Typically,
the circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. While the Company believes that all aspect of its
financial statements should be studied and understood in assessing its current
(and expected future) financial condition and results, the Company believes that
the accounting policies that warrant additional attention include:

1. The consolidated financial statements as of and for the quarter
ended March 31, 2004 have been prepared on a "going concern" basis in
accordance with AICPA Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, and do not include
possible impacts arising in respect of the Cases. The interim consolidated
financial statements included elsewhere in this Report do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities or the effect
on existing stockholders' equity that may result from any plans,
arrangements or other actions arising from the Cases, or the possible
inability of the Company to continue in existence. Adjustments necessitated
by such plans, arrangements or other actions could materially change the
interim consolidated financial statements included elsewhere in this
Report. For example,

a. If the Company were to decide to sell certain assets not deemed
a critical part of a reorganized Kaiser, such asset sales could result
in gains or losses (depending on the asset sold) and such gains or
losses could be significant. This is because, under generally accepted
accounting principles ("GAAP"), assets to be held and used are evaluated
for recoverability differently than assets to be sold or disposed of.
Assets to be held and used are evaluated based on their expected
undiscounted future net cash flows. So long as the Company reasonably
expects that such undiscounted future net cash flows for each asset will
exceed the recorded value of the asset being evaluated, no impairment is
required. However, if plans to sell or dispose of an asset or group of
assets meet a number of specific criteria, then, under GAAP, such assets
should be considered held for sale/disposition and their recoverability
should be evaluated, for each asset, based on expected consideration to
be received upon disposition. Sales or dispositions at a particular time
will be affected by, among other things, the existing industry and
general economic circumstances as well as the Company's own
circumstances, including whether or not assets will (or must) be sold on
an accelerated or more extended timetable. Such circumstances may cause
the expected value in a sale or disposition scenario to differ
materially from the realizable value over the normal operating life of
assets, which would likely be evaluated on long-term industry trends.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, the Company, through the third quarter of 2003,
47

still considered all of its commodity assets as "held for use," as no
definite decisions had been made regarding the disposition of such
assets. However, based on additional negotiations with prospective
buyers and discussions with key constituents, the Company concluded that
dispositions of Gramercy/KJBC and Valco were possible and, therefore,
that recoverability should be considered differently as of December 31,
2003 and subsequent periods. As a result of the change in status, the
Company recorded impairment charges of approximately $33.0 million in
the first quarter of 2004 and $368.0 million in the fourth quarter of
2003. The actual amount of gain or loss if and when the sales are
consummated may differ from these amounts as a result of closing
adjustments and other matters. Management cannot conclude that the sale
of the Company's interests in one or all of the above noted facilities
is "probable" due to numerous uncertainties including that Court
approval is required and has not yet been obtained.

b. Additional pre-Filing Date claims may be identified through the
proof of claim reconciliation process and may arise in connection with
actions taken by the Debtors in the Cases. For example, while the
Debtors consider rejection of the Bonneville Power Administration
("BPA") contract to have been in the Company's best long-term interests,
such rejection may increase the amount of pre-Filing Date claims by
approximately $75.0 million based on the BPA's proof of claim filed in
connection with the Cases in respect of the contract rejection.

c. As more fully discussed below, the amount of pre-Filing Date
claims ultimately allowed by the Court in respect of contingent claims
and benefit obligations may be materially different from the amounts
reflected in the Consolidated Financial Statements.

While valuation of the Company's assets and pre-Filing Date claims at
this stage of the Cases is subject to inherent uncertainties, the
Company currently believes that it is likely that its liabilities will
be found in the Cases to exceed the fair value of its assets. Therefore,
the Company currently believes that it is likely that substantially all
pre-Filing Date claims will be paid at less than 100% of their face
value and the equity interests of the Company's stockholders will be
cancelled without consideration.

Additionally, upon emergence from the Cases, the Company expects to
apply "fresh start" accounting to its consolidated financial statements
as required by SOP 90-7. Fresh start accounting is required if: (1) a
debtor's liabilities are determined to be in excess of its assets and
(2) there will be a greater than 50% change in the equity ownership of
the entity. As previously disclosed, the Company expects both such
circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as
determined in its plan of reorganization and approved by the Court.
Additionally, items such as accumulated depreciation, accumulated
deficit and accumulated other comprehensive income (loss) will be reset
to zero. The Company will allocate the reorganization value to its
individual assets and liabilities based on their estimated fair value at
the emergence date. Typically such items as current liabilities,
accounts receivable, and cash will be reflected at values similar to
those reported prior to emergence. Items such as inventory, property,
plant and equipment, long-term assets and long-term liabilities are more
likely to be significantly adjusted from amounts previously reported.
Because fresh start accounting will be adopted at emergence, and because
of the significance of the pending asset sales and liabilities subject
to compromise (that will be relieved upon emergence), meaningful
comparison between the current historical financial statements and the
financial statements upon emergence may be to difficult to make.

2. The Company's judgments and estimates with respect to commitments
and contingencies, in particular: (a) future asbestos related costs and
obligations as well as estimated insurance recoveries, and (b) possible
liability in respect of claims of unfair labor practices ("ULPs") which
were not resolved as a part of the Company's September 2000 labor
settlement.

Valuation of legal and other contingent claims is subject to a great
deal of judgment and substantial uncertainty. Under GAAP, companies are
required to accrue for contingent matters in their financial statements
only if the amount of any potential loss is both "probable" and the
amount (or a range)
48

of possible loss is "estimatable." In reaching a determination of the
probability of an adverse ruling in respect of a matter, the Company
typically consults outside experts. However, any such judgments reached
regarding probability are subject to significant uncertainty. The
Company may, in fact, obtain an adverse ruling in a matter that it did
not consider a "probable" loss and which, therefore, was not accrued for
in its financial statements. Additionally, facts and circumstances in
respect of a matter can change causing key assumptions that were used in
previous assessments of a matter to change. It is possible that amounts
at risk in respect of one matter may be "traded off" against amounts
under negotiations in a separate matter. Further, in estimating the
amount of any loss, in many instances a single estimation of the loss
may not be possible. Rather, the Company may only be able to estimate a
range for possible losses. In such event, GAAP requires that a liability
be established for at least the minimum end of the range.

The Company has had two potentially material contingent obligations that
are subject to significant uncertainty and variability in their outcome:
(a) the United Steelworkers of America's ("USWA") ULP claim, and (b) the
net obligation in respect of asbestos-related matters. Both of these
matters are discussed in Note 7 of Notes to Interim Consolidated
Financial Statements and it is important that you read this note.

As more fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, we have not accrued any amount in our March 31,
2004 financial statements in respect of the USWA ULP matter. We did not
accrue any amount in the past as we did not consider the loss to be
"probable." Our assessment had been that the possible range of loss in
this matter was anywhere from zero to $250.0 million based on the proof
of claims filed (and other information provided) by the National Labor
Relations Board ("NLRB") and USWA in connection with the Company's and
KACC's reorganization proceedings. While the Company continues to
believe that the ULP charges were without merit, during January 2004,
the Company agreed to allow a claim in favor of the USWA in the amount
of the $175.0 million as a compromise and in return for the USWA
agreeing to substantially reduce and/or eliminate certain benefit
payments as more fully discussed in Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended
December 31, 2003. As the agreement to settle this matter was contingent
on NLRB and Court approval and ratification by union members, this
amount was not reflected in the Company's consolidated financial
statements at March 31, 2004. However, the charge and an offsetting
liability associated with the settlement of this matter will be
reflected in the Company's consolidated financial statements if and when
the agreement with the USWA is ultimately approved by the Court.

Also, as more fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, KACC is one of many defendants in personal injury
claims by large number of persons who assert that their injuries were
caused by, among other things, exposure to asbestos during their
employment or association with KACC or by exposure to products
containing asbestos last produced or sold by KACC more than 20 years
ago. It is difficult to predict the number of claims that will
ultimately be made against KACC or the settlement value of such claims.
As of March 31, 2004, KACC had recorded an obligation for approximately
$610.1 million in respect of pending and an estimate of possible future
asbestos claims through 2011. The Company did not accrue for amounts
past 2011 because the Company believed that significant uncertainty
existed in trying to estimate any such amounts. However, it is possible
that a different number of claims will be made through 2011 and that the
settlement amounts during this period may differ and that this will
cause the actual amounts to differ materially from the Company's
estimate. Further, the Company expects that, during its reorganization
process, an estimate will have to be made in respect of its exposure to
asbestos-related claims after 2011 and that such amounts could be
substantial. Due to the Cases, holders of asbestos claims are stayed
from continuing to prosecute pending litigation and from commencing new
lawsuits against the Debtors. However, during the pendency of the Cases,
KACC expects additional asbestos claims will be asserted as part of the
claims process. A separate creditors' committee representing the
interests of the asbestos claimants, the ACC, has been appointed. The
Debtors'

49

obligations with respect to present and future asbestos claims will be
resolved pursuant to a plan of reorganization.

The Company believes that KACC has insurance coverage in respect of its
asbestos-related exposures and that substantial recoveries in this
regard are probable. At March 31, 2004, KACC had recorded a receivable
for approximately $463.6 million in respect of expected insurance
recoveries related to existing claims and the estimate future claims
through 2011. However, the actual amount of insurance recoveries may
differ from the amount recorded and the amount of such differences could
be material. Further, depending on the amount of asbestos-related claims
ultimately determined to exist (including those in the periods after
2011), it is possible that the amount of such claims could exceed the
amount of additional insurance recoveries available.

See Note 7 of Notes to Interim Consolidated Financial Statements for a
more complete discussion of these matters.

3. The Company's judgments and estimates in respect of its employee
benefit plans.

Pension and post-retirement medical obligations included in the
consolidated balance sheet are based on assumptions that are subject to
variation from year-to-year. Such variations can cause the Company's
estimate of such obligations to vary significantly. Restructuring
actions (such as the indefinite curtailment of the Mead smelter in
January 2003) can also have a significant impact on such amounts.

For pension obligations, the most significant assumptions used in
determining the estimated year-end obligation are the assumed discount
rate and long-term rate of return ("LTRR") on pension assets. Since
recorded pension obligations represent the present value of expected
pension payments over the life of the plans, decreases in the discount
rate (used to compute the present value of the payments) will cause the
estimated obligations to increase. Conversely, an increase in the
discount rate will cause the estimated present value of the obligations
to decline. The LTRR on pension assets reflects the Company's assumption
regarding what the amount of earnings will be on existing plan assets
(before considering any future contributions to the plans). Increases in
the assumed LTRR will cause the projected value of plan assets available
to satisfy pension obligations to increase, yielding a reduced net
pension obligation. A reduction in the LTRR reduces the amount of
projected net assets available to satisfy pension obligations and, thus,
causes the net pension obligation to increase.

For post-retirement obligations, the key assumptions used to estimate
the year-end obligations are the discount rate and the assumptions
regarding future medical costs increases. The discount rate affects the
post-retirement obligations in a similar fashion to that described above
for pension obligations. As the assumed rate of increase in medical
costs goes up, so does the net projected obligation. Conversely, if the
rate of increase is assumed to be smaller, the projected obligation will
decline.

As more fully discussed in Note 9 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, all of the Company's material pension and medical benefit plans
are being (or have been) terminated as a part of the Company's
reorganization efforts, subject to the PBGC's rights, including the
ongoing appeal, as to the termination of the hourly pension plans. If
and when an agreement with the PBGC is reached or the appeal is
otherwise resolved, the Company's obligations with respect to the
existing plans will become fixed. However, at this time it is not
possible to definitely determine the "final" amount of such obligations
as the value of such amounts will be subject to negotiations among and
between the Company and the constituents of the ongoing Cases.

In preparing the Company's financial statements at March 31, 2004, the
Company has reflected its obligations in respect of these plans using
assumptions consistent with those used in accordance with GAAP for
ongoing plans. The Company believes that this represents a reasonable
estimation methodology. The Company currently believes that there are
arguments that it can make that the
50

final allowed claim amounts should be less than that reflected in the
financial statements. The Company also expects that certain constituents
will assert that the value of their obligations is in excess of the
amounts reflected in the financial statements.

See Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003, and Recent
Events and Developments, Benefit (Legacy) Cost Matters above for
information regarding the Company's pension and post-retirement
obligations. Actual results may differ from the assumptions made in
computing the estimated March 31, 2004 obligations and such differences
may be material.

4. The Company's judgments and estimates in respect to environmental
commitments and contingencies.

The Company and KACC are subject to a number of environmental laws and
regulations ("environmental laws"), to fines or penalties assessed for
alleged breaches of the environmental laws, and to claims and litigation
based upon such laws. KACC currently is subject to a number of claims
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for remedial
costs at certain third-party sites listed on the National Priorities
List under CERCLA.

Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. These environmental accruals represent the
Company's estimate of costs reasonably expected to be incurred on a
going concern basis in the ordinary course of business based on
presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely
remediation action to be taken. However, making estimates of possible
environmental remediation costs is subject to inherent uncertainties. As
additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these
and other factors may result in actual costs exceeding the current
environmental accruals.

An example of how environmental accruals could change is provided by the
multi-site agreement discussed in Note 7 of Notes to Interim
Consolidated Financial Statements. As a means of expediting the
reorganization process and to assure treatment of the claims under a
plan of reorganization that is favorable to the Debtors and their
stakeholders, it may be in the best interests of the stakeholders for
the Company to agree to claim amounts in excess of previous accruals,
which were based on an ordinary course, going concern basis.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes the Company's significant contractual obligations
at March 31, 2004 (dollars in millions):

- ---------------

(a) See Note 5 of Notes to Interim Consolidated Financial Statements for
information in respect of long-term debt. Long-term debt obligations
exclude debt subject to compromise of approximately $848.2 million, which
amounts will be dealt with in connection with a plan of reorganization. See
Notes 1 and 5 of

51

Notes to Interim Consolidated Financial Statements for additional
information about debt subject to compromise.

The following paragraphs summarize the Company's off-balance sheet
arrangements.

KACC owns a 20% interest in QAL, which owns one of the largest and most
competitive alumina refineries in the world, located in Queensland, Australia.
QAL refines bauxite into alumina, essentially on a cost basis, for the account
of its shareholders under long-term tolling contracts. KACC currently sells its
share of QAL's production to third parties. The shareholders, including KACC,
purchase bauxite from another QAL shareholder under long-term purchase
contracts. These tolling and purchase contracts are scheduled to expire in 2008.
Under the agreements, KACC is unconditionally obligated to pay its proportional
share of debt, operating costs and certain other costs of QAL. KACC's share of
the aggregate minimum amount of future principal payments as of March 31, 2004
is $60.0 million, which will mature in varying amounts from 2005 to 2008. KACC's
share of QAL's scheduled debt principal repayment in July 2003 was funded with
additional QAL borrowings. KACC's share of payments, including operating costs
and certain other expenses under the agreements, has generally ranged between
$70 million and $100 million per year over the past three years. However, as
discussed more fully in Note 1 of Notes to Interim Consolidated Financial
Statements, the Company is considering the possibility of selling its interests
in QAL. If KACC's interest in QAL were to be sold, the Company believes that
KACC's obligations in respect of its share of the QAL debt would be assumed by
the buyer. The Company has agreements to supply alumina to and to purchase
aluminum from Anglesey, a 49.0%-owned aluminum smelter in Holyhead, Wales.

As of March 31, 2004, outstanding letters of credit under the DIP Facility
were approximately $45.5 million, substantially all of which expire within the
next twelve months. The letters of credit relate primarily to environmental,
insurance, Alpart-related debt and other activities. Approximately $15.3 million
of the letters of credit are in respect of the Company's 65% share of the $22.0
million Alpart CARIFA financing (see Note 5 of Notes to Interim Consolidated
Financial Statements) which are reflected in the debt maturities table above. As
such, that portion of the letters of credit is duplicative of the obligation
reflected in the table above. In connection with the expected sale of the
Company's interests in Alpart (see Note 4 of Notes to Interim Consolidated
Financial Statements), the Company expects that at closing Alpart will repay the
CARIFA financing and the Company's letter of credit obligation under the DIP
Facility securing the loans will be cancelled.

Upon emergence from Chapter 11 proceedings, the Company anticipates that it
will provide some form of yet to be determined defined contribution pension plan
in respect of its salaried employees. Any such plans ultimately adopted will be
subject to a number of approvals. The Company currently estimates that the total
annual cash cost of such plans would be less than $5.0 million and, if approved,
would likely be required to be funded some time in 2005.

Pursuant to the terms of the USWA agreement, the Company will be required
to make annual contributions into the Steelworkers Pension Trust on the basis of
one dollar per USWA employee per hour worked. In addition, the Company will
institute a defined contribution pension plan for active USWA employees. Company
contributions to the plan will range from eight hundred dollars to twenty-four
hundred dollars per employee per year, depending on age and years of service.
The Company believes that similar defined contribution pension plans will be
established for non-USWA hourly employees subject to collective bargaining
agreements. The Company currently estimates that contributions to all such plans
will range from $3.0 million to $6.0 million per year. However, because the PBGC
is still reviewing these plans, the benefits could change.

As a replacement for the Company's current postretirement benefit plans,
pursuant to agreements with the 1114 Committee and certain of the unions, the
Company will fund one or more VEBAs into which the Company will contribute
certain amounts on emergence from Chapter 11 proceedings and on an annual basis
through 2012. The initial contribution will be an amount not to exceed $36.0
million and will be payable on emergence from the Chapter 11 proceedings so long
as the Company's liquidity is at least $50.0 million after considering such
payments. To the extent that less than the full $36.0 million is paid and the
Company's interests in Anglesey are subsequently sold, a portion of the Anglesey
interests' proceeds, in certain
52

circumstances, will be used to pay the shortfall. In addition to the foregoing,
the Company will, on an annual basis, be required to pay 10% of the first $20.0
million of annual cash flow, as defined, plus 20% of annual cash flow, as
defined, above $20.0 million. Such annual payments shall not exceed $20.0
million and will also be limited (with no carryover to future years) to the
extent that the payments do not cause the Company's liquidity to be less than
$50.0 million. The agreements with the 1114 Committee and unions have been
approved by the Court, subject to certain conditions, including Court approval
of the Intercompany Agreement in a form accepted to the Debtors and the UCC. No
assurances can be given as to if and when final Court approval will be obtained.

In May 2004, the Company filed a notice with the Court seeking to make the
agreements regarding pension and postretirement medical benefits effective on
June 1, 2004 not withstanding that the Intercompany Agreement will not be
effective by that date. The Court will hear the Company's request at a June 1,
2004 hearing. No assurances can be given that the Company's request will be
granted. If the Court does not grant the Company's request, the pension and
postretirement medical benefit agreements will likely not become effective until
the Intercompany Agreement is finalized and modifications to the agreements may
be required (see Note 1 of Notes to Interim Consolidated financial statements
for discussion of the possible timing and status of the Intercompany Agreement).

The Company has also reached an agreement with the 1114 Committee and the
representatives of the majority of the Company's hourly employees under which
the Company will increase the advances to the VEBA beginning in June 2004.
Pursuant to the agreement, the Company will advance $3.0 million to the VEBA in
June 2004 and approximately $2.0 million to the VEBA each month thereafter until
the Company emerges from the Cases. Any advances made pursuant to such agreement
will constitute a credit toward the $36.0 million maximum contribution due upon
emergence. Whether or not the VEBA advances begin in June 2004 will depend on
the outcome of the Company's notice discussed above.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 million to $120.0
million. KACC expects to fund such Exit Costs using the proceeds to be received
under the proposed Intercompany Agreement together with existing cash resources
and available liquidity under an exit financing facility that will replace the
current Post-Petition Credit Agreement (see Note 5 of Notes to Interim
Consolidated Financial Statements). Given the material portion of the Exit Costs
represented by the expected Intercompany Agreement payments, such payments are a
critical element for KACC's successful emergence from the Cases. If the proposed
Intercompany Agreement were not ultimately approved by the Court or otherwise
put into effect or a reasonable alternative were not negotiated, it is unlikely
that KACC or its other debtor subsidiaries will be able to emerge from Chapter
11. Management believes it will be able to successfully resolve any issues that
may arise in respect of the proposed Intercompany Agreement or be able to
negotiate a reasonable alternative. However, no assurances can be given in this
regard. An exit financing facility to replace the current Post-Petition Credit
Agreement is also critical for KACC's successful emergence from the Cases.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 2 and 8 of Notes to Interim Consolidated Financial
Statements, KACC historically has utilized hedging transactions to lock-in a
specified price or range of prices for certain products which it sells or
consumes in its production process and to mitigate KACC's exposure to changes in
foreign currency exchange rates. However, because the agreements underlying
KACC's hedging positions provided that the counterparties to the hedging
contracts could liquidate KACC's hedging positions if KACC filed for
reorganization, KACC chose to liquidate these positions in advance of the
initial Filing Date. KACC has only completed limited hedging activities since
the Filing Date (see below). The Company anticipates that, subject to prevailing
economic conditions, it may enter into additional hedging transactions with
respect to primary aluminum prices, natural gas and fuel oil prices and foreign
currency values to protect
53

the interests of its constituents. However, no assurance can be given as to when
or if the Company will enter into such additional hedging activities.

SENSITIVITY

Alumina and Primary Aluminum. The Company has historically been exposed to
commodity price risks and opportunities in respect of alumina and primary
aluminum production in excess of internal requirements that has been sold in
domestic and international markets. KACC's hedging transactions have been
intended to provide price risk management in respect of the net exposure of
earnings resulting from (i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases of certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with
the price of primary aluminum. On average, before consideration of hedging
activities, variations in production and shipment levels, and timing issues
related to price changes, the Company estimates that during 2004 each $.01
increase (decrease) in the market price per price-equivalent pound of primary
aluminum increases (decreases) the Company's annual pre-tax earnings by
approximately $5.0 million, based on recent operating levels. The lower 2004
impact (as compared to prior periods) on pre-tax earnings linked to primary
aluminum prices was due to the Valco potline curtailments. As of March 31, 2004,
the Company had options covering substantially all of the Company's net
hedgeable volume for the second quarter of 2004 (at a strike price of
approximately $.76 per pound).

Assuming that the Company's interests in Alpart, QAL, Gramercy/KJBC, and
Valco are sold (and that Anglesey remains a part of the emerging entity), the
Company would no longer be a net seller of alumina and aluminum. Rather, net
sales of primary aluminum by Anglesey (reduced by the equivalent primary
aluminum impact of alumina requirements) would offset approximately two-thirds
of the primary aluminum requirements of the fabricated products business (based
on 2004 primary aluminum purchases). As such, the emerging entity would be a net
consumer of primary aluminum. However, the Company's pricing of fabricated
aluminum products is generally intended to lock-in a conversion margin
(representing the value added from the fabrication process(es)) and to pass
metal price risk on to its customers. The fabricated aluminum products business
does, however, from time to time enter into fixed price arrangements (that
include the primary aluminum price component). In such instances, the Company
may use third party hedging instruments to eliminate price exposure or may
consider such fixed price arrangements as a notional (internal) hedge of primary
aluminum to be produced at Anglesey. At March 31, 2004, the fabricated products
business held contracts for the delivery of fabricated aluminum products that
have the effect of fixing or capping the metal price component of the contract
during the period 2004 - 2008 totaling approximately (in 000 pounds of primary
aluminum): 2004: 90,000, 2005: 69,000, 2006: 34,000, 2007: 34,000, and 2008:
10,000.

Foreign Currency. KACC enters into forward exchange contracts to hedge
material cash commitments for foreign currencies. KACC's primary foreign
exchange exposure is related to KACC's Australian Dollar (A$) commitments in
respect of activities associated with QAL. The Company estimates that, before
consideration of any hedging activities, a US $0.01 increase (decrease) in the
value of the A$ results in an approximate $1.5 million (decrease) increase in
the Company's annual pre-tax operating income.

Energy. KACC is exposed to energy price risk from fluctuating prices for
natural gas, fuel oil and diesel oil consumed in the production process. The
Company estimates that each $1.00 change in natural gas prices (per mcf) impacts
the Company's annual pre-tax operating results by approximately $20.0 million.
Approximately two-thirds of such exposure relates to the Gramercy facility with
the remaining one-third primarily relating to the Company's fabricated products
business. Further, the Company estimates that each $1.00 change in fuel oil
prices (per barrel) impacts the Company's annual pre-tax operating results by
approximately $3.0 million. A substantial majority of such price exposure
relates to the operations at Alpart with most of the remaining exposure relating
to KJBC's operations.

KACC from time to time in the ordinary course of business enters into
hedging transactions with major suppliers of energy and energy related financial
instruments. As of March 31, 2004, KACC had option contracts which cap the
average price KACC would pay for natural gas to approximately $5.50 per mcf so

54

that, when combined with price limits in the physical gas supply agreement,
substantially all of KACC's exposure to increases in natural gas prices during
April 2004 and May 2004 was limited.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. An evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was performed as of the end of the period covered by this Report
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Company's disclosure controls and
procedures were effective.

Changes in Internal Control. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation. Additionally, no
changes in the Company's internal controls over financial reporting have
occurred during the Company's most recently completed quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to Part I, Item 3. "LEGAL PROCEEDINGS" in the Company's
Form 10-K for the year ended December 31, 2003 for information concerning
material legal proceedings with respect to the Company.

Other Environmental Matters. During April 2004, KACC was served with a
subpoena for documents and has been notified by Federal authorities that they
are investigating certain environmental compliance issues with respect of KACC's
Trentwood facility in the State of Washington. KACC is undertaking its own
internal investigation of the matter through specially retained counsel to
ensure that it has all relevant facts regarding Trentwood's compliance with
applicable environmental laws. KACC believes it is in compliance with all
applicable environmental laws and requirements at the Trentwood facility and
intends to defend any claims or charges, if any should result, vigorously. The
Company cannot assess what, if any, impacts this matter may have on the
Company's or KACC's financial statements.

Other Personal Injury Claims. The Company has received other personal
injury claims related to noise induced hearing loss (approximately 2,900 claims)
and exposure to silica and coal tar pitch volatiles (approximately 3,900 claims
and 300 claims, respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The Company cannot
presently determine the impact or value of these claims. However, the Company
currently expects that all such claims will be transferred, along with certain
rights against certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases, whether or not such
claims are settled prior to the Company's emergence from the Cases.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

- ---------------

* Filed herewith.

(b) Reports on Form 8-K.

On January 13, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had filed
three related motions with the U.S. Bankruptcy Court to enable it to
substantially reduce or eliminate ongoing/future cash requirements for
pension and post-retirement benefit plans.

On January 21, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had signed an
agreement to sell its interest in Alumina Partners of Jamaica ("Alpart"), a
partnership that owns bauxite mining operations and an alumina refinery in
Jamaica, to Glencore AG.

On February 4, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had reached an
agreement in principle with the United Steelworkers of America with regard
to certain modifications to their labor agreements covering several of the
Company's U.S. facilities and that the U.S. Bankruptcy Court had
conditionally approved the agreement and the recently concluded agreements
with the 1114 Committee and the International Association of Machinists.

On February 27, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had reached an
agreement to sell the Mead facility.

No other Reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2004, however:

On April 23, 2004 under Item 5, "Other Events" of Form 8-K, the Company
filed a Current Report on Form 8-K reporting that RUSAL was the
successful bidder for the Company's interest in and related to Alpart.

56

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who have signed this report on behalf of
the registrant as the principal financial officer and principal accounting
officer of the registrant, respectively.

KAISER ALUMINUM CORPORATION

By: /s/ KERRY A. SHIBA
------------------------------------
Kerry A. Shiba
Vice President and Chief Financial
Officer
(Principal Financial Officer)

KAISER ALUMINUM CORPORATION

By: /s/ DANIEL D. MADDOX
------------------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)

Dated: May 14, 2004

57

EXHIBIT INDEX

- ---------------

* Filed herewith.