KALU 9.30.2014 10-Q


 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________________________ to_________________________________________

Commission File Number: 0-52105

KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
  Delaware
 
94-3030279
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
27422 Portola Parkway, Suite 200 Foothill Ranch, California
 
92610-2831
(Address of principal executive offices)
 
(Zip Code)
 
 (949) 614-1740                                                                                            
 
(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, and (2) has been subject to such filing requirements for the past 90 days.                                             Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
 
 
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 21, 2014, there were 17,791,518 shares of common stock of the registrant outstanding.

 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 








































KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
 
(In millions of dollars, except share and per share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
212.3

 
$
169.5

Short-term investments
100.1

 
129.5

Receivables:
 
 
 
Trade, less allowance for doubtful receivables of $0.8 at September 30, 2014 and December 31, 2013
132.4

 
119.8

Other
10.4

 
13.4

Inventories
211.3

 
214.4

Prepaid expenses and other current assets
156.4

 
44.2

Total current assets
822.9

 
690.8

Property, plant, and equipment – net
442.9

 
429.3

Net assets of VEBAs
430.3

 
406.0

Deferred tax assets – net (including deferred tax liability relating to the VEBAs of $161.5 at September 30, 2014 and $152.4 at December 31, 2013)
26.7

 
69.1

Intangible assets – net
32.5

 
33.7

Goodwill
37.2

 
37.2

Other assets
23.8

 
104.8

Total
$
1,816.3

 
$
1,770.9

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
89.3

 
$
62.9

Accrued salaries, wages, and related expenses
37.2

 
42.7

Other accrued liabilities
131.7

 
44.8

Current portion of long-term debt
170.2

 

Short-term capital leases
0.1

 
0.2

Total current liabilities
428.5

 
150.6

Deferred tax liability
1.2

 
1.2

Long-term liabilities
60.9

 
146.4

Long-term debt
225.0

 
388.5

Total liabilities
715.6

 
686.7

Commitments and contingencies – Note 7


 


Stockholders’ equity:
 
 
 
Preferred stock, 5,000,000 shares authorized at both September 30, 2014 and December 31, 2013; no shares were issued and outstanding at September 30, 2014 and December 31, 2013

 

Common stock, par value $0.01, 90,000,000 shares authorized at both September 30, 2014 and at December 31, 2013; 21,196,901 shares issued and 17,829,629 shares outstanding at September 30, 2014; 21,103,700 shares issued and 18,147,017 shares outstanding at December 31, 2013
0.2

 
0.2

Additional paid in capital
1,026.9

 
1,023.1

Retained earnings
271.1

 
233.8

Treasury stock, at cost, 3,367,272 shares at September 30, 2014 and 2,956,683 shares at December 31, 2013, respectively
(181.1
)
 
(152.2
)
Accumulated other comprehensive loss
(16.4
)
 
(20.7
)
Total stockholders’ equity
1,100.7

 
1,084.2

Total
$
1,816.3

 
$
1,770.9


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

1



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(In millions of dollars, except share and per share amounts)
Net sales
$
338.9

 
$
319.9

 
$
1,018.1

 
$
986.2

Costs and expenses:
 
 
 
 
 
 
 
Cost of products sold:
 
 
 
 
 
 
 
Cost of products sold, excluding depreciation and amortization and other items
280.4

 
259.5

 
838.8

 
784.6

Unrealized losses (gains) on derivative instruments
3.6

 
(1.5
)
 

 
3.4

Depreciation and amortization
8.0

 
6.9

 
23.1

 
20.9

Selling, administrative, research and development, and general:
 
 
 
 
 
 
 
   Selling, administrative, research and development, and general
19.0

 
19.0

 
61.3

 
62.5

Net periodic pension benefit income relating to VEBAs (includes accumulated other comprehensive income reclassifications related to VEBA of $2.1 and $1.3 for the quarters ended September 30, 2014 and September 30, 2013, respectively, and $6.6 and $4.1 for the nine months ended September 30, 2014 and September 30, 2013, respectively)
(6.0
)
 
(5.6
)
 
(17.7
)
 
(16.9
)
Total selling, administrative, research and development, and general
13.0

 
13.4

 
43.6

 
45.6

Other operating charges, net
1.3

 

 
1.5

 

Total costs and expenses
306.3

 
278.3

 
907.0

 
854.5

Operating income
32.6

 
41.6

 
111.1

 
131.7

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(9.7
)
 
(8.8
)
 
(27.7
)
 
(27.1
)
Other income, net (includes accumulated other comprehensive income reclassifications for realized gains on available for sale securities of $0.0 and $0.2 for the quarters ended September 30, 2014 and September 30, 2013, respectively, and $0.2 and $0.8 for the nine months ended September 30, 2014 and September 30, 2013, respectively)
2.2

 
2.9

 
5.9

 
3.1

Income before income taxes
25.1

 
35.7

 
89.3

 
107.7

Income tax provision (includes aggregate income tax expense from reclassification items of $(0.8) and $(0.5) for the quarters ended September 30, 2014 and September 30, 2013, respectively, and $(2.4) and $(1.3) for the nine months ended September 30, 2014 and September 30, 2013, respectively)
(9.2
)
 
(10.3
)
 
(33.1
)
 
(30.2
)
Net income
$
15.9

 
$
25.4

 
$
56.2

 
$
77.5

 
 
 
 
 
 
 
 
Earnings per common share, Basic:
 
 
 
 
 
 
 
Net income per share
$
0.90

 
$
1.37

 
$
3.15

 
$
4.09

Earnings per common share, Diluted:
 
 
 
 
 
 
 
Net income per share
$
0.85

 
$
1.34

 
$
3.02

 
$
4.02

Weighted-average number of common shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
17,707

 
18,548

 
17,853

 
18,915

Diluted
18,619

 
19,058

 
18,592

 
19,267


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

2



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(In millions of dollars)
Net income
$
15.9

 
$
25.4

 
$
56.2

 
$
77.5

Other comprehensive income:
 
 
 
 
 
 
 
VEBAs:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of net actuarial (gains) losses
(0.5
)
 
0.3

 
(1.4
)
 
1.0

Amortization of prior service cost
2.6

 
1.0

 
8.0

 
3.1

Other comprehensive income relating to VEBAs
2.1

 
1.3

 
6.6

 
4.1

Available for sale securities:
 
 
 
 
 
 
 
Unrealized (gains) losses on available for sale securities
(0.2
)
 
0.4

 
0.1

 
0.9

Reclassification adjustments:
 
 
 
 
 
 
 
Reclassification of unrealized gains upon sale of available for sale securities

 
(0.2
)
 
(0.2
)
 
(0.8
)
Other comprehensive (loss) income relating to available for sale securities
(0.2
)
 
0.2

 
(0.1
)
 
0.1

Foreign currency translation adjustment
0.1

 
(0.3
)
 
0.2

 
0.5

Other comprehensive income, before tax
2.0

 
1.2

 
6.7

 
4.7

Income tax expense related to items of other comprehensive income
(0.7
)
 
(0.6
)
 
(2.4
)
 
(1.6
)
Other comprehensive income, net of tax
1.3

 
0.6

 
4.3

 
3.1

Comprehensive income
$
17.2

 
$
26.0

 
$
60.5

 
$
80.6


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


3



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED STOCKHOLDERS’ EQUITY
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid in Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
 
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
(In millions of dollars, except for shares)
BALANCE, December 31, 2013
18,147,017

 
$
0.2

 
$
1,023.1

 
$
233.8

 
$
(152.2
)
 
$
(20.7
)
 
$
1,084.2

Net income

 

 

 
56.2

 

 

 
56.2

Other comprehensive income, net of tax

 

 

 

 

 
4.3

 
4.3

Issuance of non-vested shares to employees and non-employee directors
119,536

 

 

 

 

 

 

Issuance of common shares to non-employee directors
2,969

 

 
0.2

 

 

 

 
0.2

Issuance of common shares to employees upon vesting of restricted stock units and performance shares
44,895

 

 

 

 

 

 

Cancellation of employee non-vested shares
(40,503
)
 

 

 

 

 

 

Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares
(33,696
)
 

 
(2.4
)
 

 

 

 
(2.4
)
Repurchase of common stock
(410,589
)
 

 

 

 
(28.9
)
 

 
(28.9
)
Cash dividends on common stock ($1.05 per share)

 

 

 
(19.1
)
 

 

 
(19.1
)
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest

 

 
0.8

 

 

 

 
0.8

Amortization of unearned equity compensation

 

 
5.2

 

 

 

 
5.2

Dividends on unvested equity awards that were canceled

 

 

 
0.2

 

 

 
0.2

BALANCE, September 30, 2014
17,829,629

 
$
0.2

 
$
1,026.9

 
$
271.1

 
$
(181.1
)
 
$
(16.4
)
 
$
1,100.7


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

4



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
(Unaudited)
(In millions of dollars)
Cash flows from operating activities:
 
 
 
Net income
$
56.2

 
$
77.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
21.9

 
19.6

Amortization of definite-lived intangible assets
1.2

 
1.3

Amortization of debt discount and debt issuance costs
8.8

 
8.2

Deferred income taxes
29.6

 
40.9

Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest
(0.8
)
 
(1.0
)
Non-cash equity compensation
5.4

 
6.1

Non-cash unrealized (gains) losses on derivative positions
(3.6
)
 
2.3

Non-cash impairment charges
1.5

 

Losses on disposition of property, plant and equipment
0.1

 
0.2

Gain on disposition of available for sale securities

 
(0.4
)
 Non-cash net periodic pension benefit income relating to VEBAs
(17.7
)
 
(16.9
)
Other non-cash changes in assets and liabilities
0.5

 
(4.6
)
Changes in operating assets and liabilities:
 
 
 
Trade and other receivables
(9.6
)
 
(6.7
)
Inventories
3.1

 
(21.9
)
Prepaid expenses and other current assets1
(0.9
)
 
0.1

Accounts payable
28.7

 
8.7

Accrued liabilities1
(2.8
)
 
7.7

Annual variable cash contributions to VEBAs
(16.0
)
 
(20.0
)
Payable to affiliate

 
(7.9
)
Long-term assets and liabilities, net1
(1.9
)
 
(2.6
)
Net cash provided by operating activities
103.7

 
90.6

Cash flows from investing activities:
 
 
 
Capital expenditures
(39.6
)
 
(47.0
)
Purchase of available for sale securities
(53.4
)
 
(201.8
)
Proceeds from disposition of available for sale securities
82.2

 
170.7

Change in restricted cash
(0.7
)
 
0.7

Net cash used in investing activities
(11.5
)
 
(77.4
)
Cash flows from financing activities:
 
 
 
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest
0.8

 
1.0

Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares
(2.4
)
 
(2.4
)
Repurchase of common stock
(28.7
)
 
(43.9
)
Cash dividend paid to stockholders
(19.1
)
 
(17.3
)
Cash dividend returned to the Company

 
0.6

Net cash used in financing activities
(49.4
)
 
(62.0
)
Net increase (decrease) in cash and cash equivalents during the period
42.8

 
(48.8
)
Cash and cash equivalents at beginning of period
169.5

 
273.4

Cash and cash equivalents at end of period
$
212.3

 
$
224.6

________________
1 
Excludes the reclassification of derivatives relating to the Convertible Notes from long-term to current as the amounts have no impact on cash flow - see Note 3 and Note 9.

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

5



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)
1. Summary of Significant Accounting Policies
This Quarterly Report on Form 10-Q (this "Report") should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
     Organization and Nature of Operations. Kaiser Aluminum Corporation (together with its subsidiaries, unless the context otherwise requires, the “Company”) specializes in the production of semi-fabricated specialty aluminum products, such as aluminum sheet and plate and extruded and drawn products, primarily used in aerospace/high strength, automotive, general engineering, and other industrial end market applications. The Company has one operating segment, Fabricated Products. See Note 11 for additional information regarding the Company’s reportable segment and business unit.
    Principles of Consolidation and Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for interim periods and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In management’s opinion, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the Company’s interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2014 fiscal year. The financial information as of December 31, 2013 is derived from the Company’s audited consolidated financial statements and footnotes for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K.
     Use of Estimates in the Preparation of Financial Statements. 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.
Inventories. Inventories are stated at the lower of cost or market value. Finished products, work-in-process and raw material inventories are stated on the last-in, first-out (“LIFO”) basis. The excess of current cost over the stated LIFO value of inventory at September 30, 2014 and December 31, 2013 was $32.7 and $0.4, respectively. Other inventories, principally operating supplies and repair and maintenance parts, are stated at average cost. Inventory costs consist of material, labor and manufacturing overhead, including depreciation. Abnormal costs, such as idle facility expenses, freight, handling costs and spoilage, are accounted for as current period charges. All of the Company’s inventories at September 30, 2014 and December 31, 2013 were included in the Fabricated Products segment (see Note 2 for the components of inventories).
     Property, Plant, and Equipment – Net. Property, plant and equipment is recorded at cost (see Note 2). Construction in progress is included within Property, plant, and equipment – net on the Consolidated Balance Sheets. Interest related to the construction of qualifying assets is capitalized as part of the construction costs. The aggregate amount of interest capitalized is limited to the interest expense incurred in the period. The amount of interest expense capitalized as construction in progress was $0.3 and $1.0 during the quarters ended September 30, 2014 and September 30, 2013, respectively. The amount of interest expense capitalized as construction in progress was $2.2 and $2.1 for the nine months ended September 30, 2014 and September 30, 2013, respectively.
The Company recorded impairment charges of $1.3 and $1.5 during the quarter and nine months ended September 30, 2014, respectively, to reflect the scrap value of idled assets it determined not to deploy for future use. Asset impairment charges are included in Other operating charges, net, in the Statements of Consolidated Income and are included in the Fabricated Products segment.
Depreciation is computed using the straight-line method at rates based on the estimated useful lives of the various classes of assets. Capital lease assets and leasehold improvements are depreciated on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. For the quarters ended September 30, 2014 and September 30, 2013, the Company recorded depreciation expense of $7.4 and $6.3, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. For the nine months ended September 30, 2014 and September 30, 2013, the Company recorded depreciation expense of $21.5 and $19.3, respectively, relating to the Company’s operating facilities in its Fabricated Products

6


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


segment. An immaterial amount of depreciation expense was also recorded relating to the Company’s All Other business unit for all periods presented in this Report.
New Accounting Pronouncements. Accounting Standards Update ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. (“ASU 2013-11”), was issued in July 2013. ASU 2013-11 requires an entity to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset resulting from a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, when the above situation is not available at the reporting date or the tax law of the applicable jurisdiction does not require the entity to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company’s adoption of ASU 2013-11 in the first quarter of 2014 did not have a material impact on its financial statements.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), was issued in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The Company expects to adopt ASU 2014-09 for the fiscal year ending December 31, 2017 and the Company will continue to assess the impact on its financial statements.
ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period - Consensus of the FASB Emerging Issues Task Force (“ASU 2014-12”), was issued in June 2014. ASU 2014-12 requires an entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Additionally, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered; if the performance target becomes probable of being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. Finally, the total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest, and should be adjusted to reflect those awards that ultimately vest. The Company expects to adopt ASU 2014-12 for the fiscal year ending December 31, 2015 and the Company does not expect the adoption of ASU 2014-12 to have a material impact on its financial statements.
ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), was issued in August 2014 and sets forth guidance regarding management’s responsibility to (1) evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern, and (2) provide related footnote disclosures. ASU 2014-15 requires management to assess the Company’s ability to continue as a going concern by incorporating and expanding upon certain principles that currently exist in U.S. auditing standards. Specifically, this update provided a definition of the term “substantial doubt,” and added new Subtopic 205-40, Presentation of Financial Statements-Going Concern, which (1) requires an evaluation every reporting period, including interim periods, (2) sets forth principles for considering the mitigating effect of management’s plans, (3) mandates certain disclosures when substantial doubt is alleviated as a result of the consideration of management’s plans, (4) mandates an express statement, and other disclosures, when substantial doubt is not alleviated, and (5) requires an assessment for a period of one year after the date that the financial statements are issued, or are available to be issued. The Company expects to adopt ASU 2014-15 for the fiscal year ending December 31, 2016 and the Company does not expect the adoption of ASU 2014-15 to have a material impact on its financial statements.

7


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


2. Supplemental Balance Sheet Information
 
September 30, 2014
 
December 31, 2013
Cash and Cash Equivalents.
 
 
 
Cash and money market funds
$
35.4

 
$
57.7

Commercial paper
176.9

 
111.8

Total
$
212.3

 
$
169.5

Trade Receivables - Net.
 
 
 
Billed trade receivables
$
132.2

 
$
120.2

Unbilled trade receivables
1.0

 
0.4

Trade receivables, gross
133.2

 
120.6

Allowance for doubtful receivables
(0.8
)
 
(0.8
)
Trade receivables - net
$
132.4

 
$
119.8

Inventories.
 
 
 
Finished products
$
64.9

 
$
72.5

Work-in-process
70.5

 
75.9

Raw materials
56.0

 
47.2

Operating supplies and repair and maintenance parts
19.9

 
18.8

Total
$
211.3

 
$
214.4

Prepaid Expenses and Other Current Assets.
 
 
 
Current derivative assets – Notes 8 and 9
$
101.6

 
$
2.0

Current deferred tax assets
47.8

 
36.7

Short-term restricted cash
0.3

 
0.3

Prepaid taxes
1.0

 

Other
5.7

 
5.2

Total
$
156.4

 
$
44.2

Property, Plant and Equipment - Net.
 
 
 
Land and improvements
$
22.8

 
$
22.6

Buildings and leasehold improvements
62.4

 
53.0

Machinery and equipment
500.0

 
425.6

Construction in progress
18.1

 
66.0

Active property, plant and equipment, gross
603.3

 
567.2

Accumulated depreciation
(160.4
)
 
(137.9
)
Property, plant and equipment - net
$
442.9

 
$
429.3


8


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


Other Assets.
 
 
 
Derivative assets – Notes 8 and 9
$
0.2

 
$
79.8

Restricted cash
10.0

 
9.3

Deferred financing costs
6.3

 
8.9

Deferred compensation plan assets
7.2

 
6.5

Other
0.1

 
0.3

Total
$
23.8

 
$
104.8

Other Accrued Liabilities.
 
 
 
Current derivative liabilities – Notes 8 and 9
$
101.9

 
$
1.8

Uncleared cash disbursements
6.6

 
9.6

Accrued income taxes and taxes payable
6.3

 
4.3

Accrued annual VEBA contribution

 
16.0

Short-term environmental accrual – Note 7
3.3

 
2.8

Accrued interest
10.3

 
3.7

Short-term deferred revenue
0.2

 

Other
3.1

 
6.6

Total
$
131.7

 
$
44.8

Long-Term Liabilities.
 
 
 
Derivative liabilities – Notes 8 and 9
$
0.6

 
$
84.3

Income tax liabilities
5.0

 
5.0

Workers’ compensation accruals
23.0

 
23.3

Long-term environmental accrual – Note 7
16.9

 
20.0

Long-term asset retirement obligations
4.3

 
4.0

Deferred compensation liability
7.6

 
7.0

Long-term deferred revenue
0.6

 

Long-term capital leases
0.1

 
0.1

Other long-term liabilities
2.8

 
2.7

Total
$
60.9

 
$
146.4

Long-Term Debt — Note 3.
 
 
 
Senior notes
$
225.0

 
$
225.0

Cash convertible senior notes

 
163.5

Total
$
225.0

 
$
388.5

3. Debt and Credit Facility
Senior Notes
In May 2012, the Company issued $225.0 principal amount of 8.25% unsecured Senior Notes due June 1, 2020 (the “Senior Notes”) at 100% of the principal amount. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes was $4.8 for each of the quarters ended September 30, 2014 and September 30, 2013, and $14.5 for each of the nine months ended September 30, 2014 and September 30, 2013. A portion of the interest relating to the Senior Notes was capitalized as Construction in progress. See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8.

9


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


“Financial Statements and Supplementary Data” in the Company’s Annual Report Form 10-K for the year ended December 31, 2013 for additional information regarding the Senior Notes.
Cash Convertible Senior Notes
Convertible Notes. In March 2010, the Company issued $175.0 principal amount of 4.50% unsecured Cash Convertible Senior Notes due April 1, 2015 (the “Convertible Notes”). The Convertible Notes are not convertible into the Company's common stock or any other securities, but instead will be settled in cash. The Company accounts for the cash conversion feature of the Convertible Notes as a separate derivative instrument (the “Bifurcated Conversion Feature”) with the fair value on the issuance date equaling the original issue discount for purposes of accounting for the debt component of the Convertible Notes. The following tables provide additional information regarding the Convertible Notes:
 
September 30, 2014
 
December 31, 2013
Principal amount
$
175.0

 
$
175.0

Less: unamortized issuance discount
(4.8
)
 
(11.5
)
Carrying amount, net of discount
$
170.2

 
$
163.5

 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Contractual coupon interest
$
2.0

 
$
2.0

 
$
5.9

 
$
5.9

Amortization of discount
2.3

 
2.0

 
6.7

 
6.0

Amortization of deferred financing costs
0.3

 
0.3

 
0.9

 
0.9

Total interest expense1
$
4.6

 
$
4.3

 
$
13.5

 
$
12.8

____________
1 
A portion of the interest relating to the Convertible Notes was capitalized as Construction in progress.
The Convertible Notes’ conversion rate is subject to adjustment based on the occurrence of certain events, including, but not limited to, the payment of quarterly cash dividends on the Company’s common stock in excess of $0.24 per share. As of September 30, 2014, the conversion rate was 20.8862 shares per $1,000 principal amount of the Convertible Notes and the equivalent conversion price was approximately $47.88 per share, reflecting cumulative adjustments for quarterly dividends paid in excess of $0.24 per share.
Holders may convert their Convertible Notes at any time on or after January 1, 2015 and, in certain limited circumstances, before January 1, 2015. Pursuant to one of the early conversion provisions, if the Company's closing stock price exceeds 130% of the conversion price for 20 trading days during the final 30 consecutive trading days of a quarter, holders may convert the Convertible Notes during the following quarter. An immaterial amount of Convertible Notes was presented for conversion during the second and third quarters of 2014 pursuant to this provision. Because this provision was also triggered at September 30, 2014, holders may present Convertible Notes for early conversion during the fourth quarter of 2014.
The carrying amount of the Convertible Notes, net of discount, was included in the Consolidated Balance Sheet as Current portion of long-term debt as of September 30, 2014.
Convertible Note Hedge Transactions. In March 2010, the Company purchased cash-settled call options (the “Call Options”) that have an exercise price equal to the conversion price of the Convertible Notes and an expiration date that is the same as the maturity or on the earlier conversion date of the Convertible Notes. If the Company exercises the Call Options, the aggregate amount of cash it would receive from the counterparties to the Call Options would cover the aggregate amount of cash that the Company would be required to pay to the holders of the converted Convertible Notes, less the principal amount thereof. Contemporaneous with the purchase of the Call Options, the Company also sold net-share-settled warrants (the “Warrants”) which are exercisable on a prorated basis for 120 trading days commencing July 1, 2015 relating to approximately 3.7 million shares of the Company’s common stock. The Call Option and the Warrants have anti-dilution provisions substantially similar to the Convertible Notes. At September 30, 2014, the exercise prices were $47.88 per share and $60.80 per share for the Call Options and the Warrants, respectively, reflecting cumulative adjustments for quarterly dividends paid in excess of $0.24 per share.

10


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information regarding the Convertible Notes, the Call Options and the Warrants.
See “Fair Values of Financial Assets and Liabilities - All Other Financial Assets and Liabilities” in Note 9 for information relating to the estimated fair value of the Senior Notes and Convertible Notes.
Revolving Credit Facility
The Company’s credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto (the “Revolving Credit Facility”) provides the Company with a $300.0 funding commitment through September 30, 2016. The Company had $271.0 of borrowing availability under the Revolving Credit Facility at September 30, 2014, based on the borrowing base determination then in effect. At September 30, 2014, there were no borrowings under the Revolving Credit Facility and $7.7 was being used to support outstanding letters of credit, leaving $263.3 of net borrowing availability. The interest rate applicable to any overnight borrowings under the Revolving Credit Facility would have been 4.0% at September 30, 2014.
See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information regarding the Revolving Credit Facility.
4. Income Tax Matters
The provision for incomes taxes, for each period presented, consisted of the following:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Domestic
$
9.2

 
$
14.7

 
$
32.2

 
$
41.1

Foreign

 
(4.4
)
 
0.9

 
(10.9
)
Total
$
9.2

 
$
10.3

 
$
33.1

 
$
30.2

The income tax provision for the quarters ended September 30, 2014 and September 30, 2013 was $9.2 and $10.3, reflecting an effective tax rate of 36.7% and 28.9%, respectively. There was no material difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended September 30, 2014.
The difference between the effective tax rate and the projected blended statutory tax rate for the quarter ended September 30, 2013 was primarily the result of a decrease from a bilateral advance pricing agreement between Canada and the U.S. (the “Advance Pricing Agreement”) of $2.7, resulting in a 7.7% decrease in the effective rate.
The income tax provision for the nine months ended September 30, 2014 and September 30, 2013 was $33.1 and $30.2, reflecting an effective tax rate of 37.0% and 28.1%, respectively. There was no material difference between the effective tax rate and the projected blended statutory tax rate for the nine months ended September 30, 2014.
The difference between the effective tax rate and the projected blended statutory tax rate for the nine months ended September 30, 2013 was primarily the result of (i) a decrease in unrecognized tax benefits, including interest and penalties, of $7.7, resulting in a 7.1% decrease in the effective tax rate due to an audit settlement with the Canada Revenue Agency Competent Authority on February 28, 2013 for the 1998-2004 tax years and (ii) a decrease from the Advance Pricing Agreement of $2.7, resulting in a 2.5% decrease in the effective rate.
The audit settlement and the Advance Pricing Agreement with Canada resulted in a cash tax benefit of $10.6, which represents amounts previously paid against Canadian accrued taxes. As of September 30, 2014, $7.9 has been received by the Company, with the remaining $2.7 expected to be received within the next 12 months.
The Company’s gross unrecognized benefits relating to uncertain tax positions were $3.7 and $3.8 at September 30, 2014 and December 31, 2013, respectively, of which, $2.6 and $2.7 will go through the Company’s income tax provision and thus impact the effective tax rate at September 30, 2014 and December 31, 2013, respectively, if and when the gross unrecognized tax benefits are recognized.

11


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


The Company expects its gross unrecognized tax benefits to be reduced by $1.5 within the next 12 months.
See Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information regarding income taxes.
5. Employee Benefits
Pension and Similar Benefit Plans. The Company has provided contributions to (i) multi-employer pension plans sponsored by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union AFL-CIO, CLC (“USW”) and International Association of Machinists and certain other unions at certain of the Company’s production facilities, (ii) defined contribution 401(k) savings plans for hourly bargaining unit employees and salaried and certain hourly non-bargaining unit employees, (iii) a defined benefit plan for salaried employees at the Company’s London, Ontario facility, and (iv) a non-qualified, unfunded, unsecured plan of deferred compensation for key employees who would otherwise suffer a loss of benefits under the Company’s defined contribution plan. See Note 7 and Note 8 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the Company’s benefit plans.
VEBA Postretirement Medical Obligations. Certain retirees receive medical coverage through participation in a voluntary employees beneficiary association (“VEBA”) for the benefit of certain union retirees, their surviving spouses and eligible dependents (the “Union VEBA”) or a VEBA that provides benefits for certain other eligible retirees, their surviving spouses and eligible dependents (the “Salaried VEBA” and, together with the Union VEBA, the “VEBAs”). The Union VEBA is managed by four trustees, two of which are appointed by the Company and two of which are appointed by the USW. Its assets are managed by an independent fiduciary. The Salaried VEBA is managed by trustees who are independent of the Company.
The Company has no ownership interest in the assets of the VEBAs nor any obligation to fund their liabilities. The benefits paid by the VEBAs to the plan participants are made at the sole discretion of the respective VEBA trustees and are outside the Company's control. The Company’s only financial obligations to the VEBAs are (i) an annual variable cash contribution (described below) and (ii) reimbursement of annual administrative expenses of the VEBAs up to $0.3 in the aggregate. Nevertheless, the Company accounts for the VEBAs as defined benefit postretirement plans with the maximum benefits payable equal to the total of the current VEBA assets and any future variable contributions from the Company and earnings thereon.
Under this accounting treatment, the funding status of the VEBAs is reflected as a net asset or liability on the Company's Consolidated Balance Sheets, but such net asset or liability has no impact on the Company's cash flow or liquidity. The only impact that the VEBAs have on the Company’s cash flow or liquidity is with respect to the Company's obligations to make an annual variable cash contribution and to reimburse a portion of the VEBAs’ administrative expenses. The amount of annual variable cash contribution to be made by the Company is determined as follows: 10% of the first $20.0 of annual cash flow (as defined; in general terms, the principal elements of cash flow are earnings before interest expense, provision for income taxes, and depreciation and amortization less cash payments for, among other things, interest, income taxes, and capital expenditures), plus 20% of annual cash flow (as defined) in excess of $20.0. Such payments may not exceed $20.0 annually, and payments are allocated between the Union VEBA and the Salaried VEBA at 85.5% and 14.5%, respectively. Amounts owing by the Company to the VEBAs are recorded on the Company’s Consolidated Balance Sheets at the end of each year in Other accrued liabilities (until paid in cash), with a corresponding increase in Net assets of VEBAs, a decrease in Net liabilities of VEBAs, or a combination thereof. The annual variable cash contributions with respect to 2013 and 2012 totaled $16.0 and $20.0 at December 31, 2013 and December 31, 2012, respectively, and were paid during the subsequent first quarters.
Components of Net Periodic Pension Benefit (Income) Cost. The Company’s results of operations included the following impacts associated with the VEBAs and the Canadian defined benefit plan: (i) charges for service rendered by employees; (ii) a charge for accretion of interest; (iii) a benefit for the return on plan assets; and (iv) amortization of net gains or losses on assets, prior service costs associated with plan amendments and actuarial differences. Net periodic pension benefit cost related to the Canadian defined benefit plan was not material for the quarter and nine months ended September 30, 2014 and September 30, 2013. The following table presents the components of net periodic pension benefit income for the VEBAs and charges relating to all other employee benefit plans for the quarter and nine months ended September 30, 2014 and September 30, 2013:

12


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
VEBAs:
 
 
 
 
 
 
 
Service cost
$
0.6

 
$
0.6

 
$
1.7

 
$
1.9

Interest cost
4.2

 
3.6

 
12.5

 
10.9

Expected return on plan assets
(12.9
)
 
(11.1
)
 
(38.5
)
 
(33.8
)
Amortization of prior service cost
2.6

 
1.0

 
8.0

 
3.1

Amortization of net actuarial (gain) loss
(0.5
)
 
0.3

 
(1.4
)
 
1.0

Total net periodic pension benefit income relating to VEBAs
(6.0
)
 
(5.6
)
 
(17.7
)
 
(16.9
)
Deferred compensation plan

 
0.4

 
0.6

 
0.8

Defined contribution plans
1.3

 
1.3

 
6.8

 
6.6

Multiemployer pension plans
0.8

 
0.9

 
2.6

 
2.6

Total
$
(3.9
)
 
$
(3.0
)
 
$
(7.7
)
 
$
(6.9
)
The following table presents the allocation of the (income) charges detailed above, by reportable segment and business unit (see Note 11):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Fabricated Products
$
2.0

 
$
2.2

 
$
8.9

 
$
8.8

All Other
(5.9
)
 
(5.2
)
 
(16.6
)
 
(15.7
)
Total
$
(3.9
)
 
$
(3.0
)
 
$
(7.7
)
 
$
(6.9
)
For all periods presented, the net periodic pension benefit income relating to the VEBAs are included as Net periodic pension benefit income relating to VEBAs within All Other. Further, substantially all of the Fabricated Products segment’s employee benefits related charges are in Cost of products sold, excluding depreciation and amortization and other items with the remaining balance in Selling, administrative, research and development, and general.
See Note 7 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the VEBAs and key assumptions used with respect to the Company’s pension plans and key assumptions made in computing the net obligation of each VEBA.
6. Employee Incentive Plans
Short-Term Incentive Plans (“STI Plans”)
The Company has annual short-term incentive compensation plans for senior management and certain other employees payable at the Company’s election in cash, shares of common stock, or a combination of cash and shares of common stock. Amounts earned under the 2013 STI plan were based primarily on the economic value added (“EVA”) of the Company’s Fabricated Products business, adjusted for certain safety and individual performance factors. EVA, as defined by the Company’s STI Plans, is the excess of the Company’s adjusted pre-tax operating income for a particular year over a pre-determined percentage of the adjusted net assets of the immediately preceding year, measured over a one-year period. Amounts, if any, that will be earned under the 2014 STI plan are based on the Company’s adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), modified for certain safety, quality, delivery, cost and individual performance factors. The Adjusted EBITDA targets under the 2014 STI plan were determined based on the EVA of the Company’s Fabricated Products business. Most of the Company’s production facilities have similar programs for both hourly and salaried employees.

13


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


Total costs relating to STI Plans were recorded as follows, for each period presented:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Cost of products sold, excluding depreciation and amortization and other items
$
1.3

 
$
1.0

 
$
3.8

 
$
3.4

Selling, administrative, research and development, and general
1.6

 
2.4

 
6.1

 
8.9

Total costs recorded in connection with STI Plans
$
2.9

 
$
3.4

 
$
9.9

 
$
12.3

The following table presents the allocation of the charges detailed above, by segment:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Fabricated Products
$
2.2

 
$
2.4

 
$
7.6

 
$
8.6

All Other
0.7

 
1.0

 
2.3

 
3.7

Total costs recorded in connection with STI Plans
$
2.9

 
$
3.4

 
$
9.9

 
$
12.3

     Long-Term Incentive Programs (“LTI Programs”)
General. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors of the Company, are eligible to participate in the Kaiser Aluminum Corporation Amended and Restated 2006 Equity and Performance Incentive Plan (as amended, the “Equity Incentive Plan”). Subject to certain adjustments that may be required from time to time to prevent dilution or enlargement of the rights of participants under the Equity Incentive Plan, a total of 2,722,222 common shares have been authorized for issuance under the Equity Incentive Plan. At September 30, 2014, 774,851 common shares were available for additional awards under the Equity Incentive Plan.
Non-vested Common Shares, Restricted Stock Units and Performance Shares. The Company grants non-vested common shares to its non-employee directors, executive officers and other key employees. The Company also grants restricted stock units to certain employees. The restricted stock units have rights similar to the rights of non-vested common shares, and the employee will receive one common share for each restricted stock unit upon the vesting of the restricted stock unit. In addition to non-vested common shares and restricted stock units, the Company also grants performance shares to executive officers and other key employees. Performance shares granted prior to 2014 are subject to performance requirements pertaining to the Company’s EVA as set forth in each year’s LTI Program, measured over a three-year performance period. EVA, as defined in the Company’s LTI Programs, is the excess of the Company’s adjusted pre-tax operating income for a particular year over a pre-determined percentage of the adjusted net assets of the immediately preceding year. The number of performance shares, if any, that will ultimately vest under the prior year programs and result in the issuance of common shares depends on the average annual EVA achieved for the specified three-year performance period. Performance shares granted in 2014 are subject to market-based requirements pertaining to the Company’s total shareholder return (“TSR”) over a three-year performance period compared to the TSR of a specified group of peer companies. The number of performance shares, if any, that will ultimately vest under the 2014-2016 LTI program and result in the issuance of common shares depends on the percentile ranking of the Company’s TSR compared to the group of peer companies.
During the first quarter of 2014, a portion of the performance shares granted under the 2011-2013 LTI program vested (see “Summary of Activity” below). The vesting of performance shares and resulting issuance and delivery of common shares, if any, under the 2012-2014, 2013-2015 and 2014-2016 LTI programs will occur in 2015, 2016 and 2017, respectively. Holders of performance shares do not receive voting rights through the ownership of such shares.
See Note 9 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the Equity Incentive Plan and the detailed vesting requirements for the different types of equity awards described above.

14


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


Non-cash Compensation Expense. Compensation expense relating to all awards under the Equity Incentive Plan is included in Selling, administrative, research and development, and general. Non-cash compensation expense by type of award under LTI Programs were as follows, for each period presented:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Service-based non-vested common shares and restricted stock units
$
0.5

 
$
0.9

 
$
2.8

 
$
3.4

Performance shares

 
0.5

 
1.0

 
2.5

Market-based shares
0.4

 

 
1.4

 

Total non-cash compensation expense
$
0.9

 
$
1.4

 
$
5.2

 
$
5.9

The following table presents the allocation of the charges detailed above, by segment:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Fabricated Products
$
0.5

 
$
0.5

 
$
2.6

 
$
1.7

All Other
0.4

 
0.9

 
2.6

 
4.2

Total non-cash compensation expense
$
0.9

 
$
1.4

 
$
5.2

 
$
5.9

Unrecognized Gross Compensation Cost Data. The following table presents unrecognized gross compensation cost data as of September 30, 2014:
 
Unrecognized gross compensation costs, by award type
 
Expected period (in years) over which the remaining gross compensation costs will be recognized, by award type
Service-based non-vested common shares and restricted stock units
$
6.5

 
2.3
Performance shares
$
2.3

 
1.3
Market-based shares
$
5.0

 
2.4
Summary of Activity. A summary of the activity with respect to non-vested common shares, restricted stock units and performance shares for the nine months ended September 30, 2014 is as follows:
 
Non-Vested
Common Shares
 
Restricted
Stock Units
 
Performance
Shares
 
Performance Shares (Market-Based)
 
Shares
 
Weighted-Average
Grant-Date Fair
Value per Share
 
Units
 
Weighted-Average
Grant-Date Fair
Value per Unit
 
Shares
 
Weighted-Average
Grant-Date Fair
Value per Share
 
Shares
 
Weighted-Average
Grant-Date Fair
Value per Share
Outstanding at December 31, 2013
143,967

 
$
51.09

 
5,472

 
$
51.03

 
562,554

 
$
49.26

 

 
$

Granted
119,536

 
66.41

 
2,235

 
67.42

 

 

 
160,868

 
83.18

Vested
(64,493
)
 
52.20

 
(2,350
)
 
46.83

 
(42,545
)
 
47.21

 

 

Forfeited
(40,503
)
 
60.21

 

 

 
(28,613
)
 
51.44

 
(10,645
)
 
83.18

Canceled

 

 

 

 
(137,820
)
 
46.65

 

 

Outstanding at September 30, 2014
158,507

 
$
59.86

 
5,357

 
$
59.71

 
353,576

 
$
50.35

 
150,223

 
$
83.18


15


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


A summary of select activity with respect to non-vested common shares, restricted stock units and performance shares for the nine months ended September 30, 2013 is as follows:
 
Non-Vested
Common Shares
 
Restricted
Stock Units
 
Performance
Shares
 
Shares
 
Weighted-Average
Grant-Date Fair
Value per Share
 
Units
 
Weighted-Average
Grant-Date Fair
Value per Unit
 
Shares
 
Weighted-Average
Grant-Date Fair
Value per Share
Granted
76,336

 
$
58.65

 
2,600

 
$
57.70

 
175,317

 
$
57.75

Vested
(90,233
)
 
$
42.31

 
(2,311
)
 
$
42.74

 
(34,192
)
 
$
34.84

Stock Options. The Company has fully-vested stock options from a one-time issuance in 2007. There were 18,606 and 20,791 fully-vested options outstanding as of September 30, 2014 and December 31, 2013, respectively, in each case exercisable to purchase common shares at $80.01 per share and having a remaining contractual life of 2.50 and 3.25 years, respectively. The average fair value of the options granted was $39.90. No options were granted or exercised and 2,185 options were forfeited during the nine months ended September 30, 2014.
Vested Stock. From time to time, the Company issues common shares to non-employee directors electing to receive common shares in lieu of all or a portion of their annual retainer fees. The fair value of these common shares is based on the fair value of the shares at the date of issuance and is immediately recognized in earnings as a period expense. For each nine months period ended September 30, 2014 and September 30, 2013, the Company recorded $0.2 relating to common shares granted to non-employee directors in lieu of all or a portion of their annual retainer fees.
Under the Equity Incentive Plan, participants may elect to have the Company withhold common shares to satisfy minimum statutory tax withholding obligations arising in connection with the exercise of stock options and vesting of non-vested shares, restricted stock units and performance shares. Any such shares withheld are canceled by the Company on the applicable vesting dates or earlier dates when service requirements are satisfied, which correspond to the times at which income to the employee is recognized. When the Company withholds these common shares, the Company is required to remit to the appropriate taxing authorities the fair value of the shares withheld as of the vesting date. During the nine months ended September 30, 2014 and September 30, 2013, 33,696 and 40,075 common shares, respectively, were withheld and canceled for this purpose. The withholding of common shares by us could be deemed a purchase of the common shares.
7. Commitments and Contingencies
     Commitments. The Company has a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness (and related Call Options and Warrants) and letters of credit (see Note 3 and Note 8).
Refer to Note 10 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for information relating to minimum rental commitments under operating leases and purchase obligations. There were no material changes to such scheduled rental commitments and purchase obligations as of September 30, 2014.
      Environmental Contingencies. The Company is subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to potential claims based upon such laws and regulations.
The Company has established procedures for regularly evaluating environmental loss contingencies. The Company’s environmental accruals represent the Company’s undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, existing requirements, currently available facts, existing technology, and the Company’s assessment of the likely remediation actions to be taken.
In 2012, the Company submitted a final feasibility study to the Washington State Department of Ecology (“Washington State Ecology”) that included recommendations for remediation alternatives primarily to address the historical use of oils containing polychlorinated biphenyls, ("PCBs") at the Company’s Spokane (Trentwood), Washington facility. The Company also signed an amended work order in 2012 with Washington State Ecology allowing certain remediation activities to begin the

16


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


initiation of a treatability study in regards to proposed PCB remediation methods. The Company began implementation of certain approved sections of the work plan during the third quarter of 2013 and continues to work with Washington State Ecology in developing the implementation work plans, which are subject to Washington State Ecology approval. 
During 2013, at the request of the Ohio Environmental Protection Agency (the “OEPA”), the Company initiated an investigational study of its Newark, Ohio facility related to historical on-site waste disposal. As this work continues and progresses to a risk assessment and feasibility study, the Company will establish and update estimates for probable and estimable remediations, if any. The actual and final cost for remediation will not be fully determinable until a final feasibility study is submitted and accepted by the OEPA and work plans are prepared, which is expected to occur in the next 18 to 24 months.
At September 30, 2014, the Company’s environmental accrual of $20.2 represented the Company’s estimate of the incremental remediation cost based on proposed alternatives in the final feasibility study related to the Company’s Spokane (Trentwood), Washington facility and currently available facts with respect to its Newark, Ohio facility and certain other locations owned or formally owned by the Company. In accordance with approved and proposed remediation action plans, the Company expects that the implementation and ongoing monitoring could occur over a period of 30 or more years.
As additional facts are developed, feasibility studies are completed, draft remediation plans are modified, necessary regulatory approvals for the implementation of remediation are obtained, alternative technologies are developed, and/or other factors change, there may be revisions to management’s estimates, and actual costs may exceed the current environmental accruals. The Company believes at this time that it is reasonably possible that undiscounted costs associated with these environmental matters may exceed current accruals by amounts that could be, in the aggregate, up to an estimated $24.9 over the remediation period. It is reasonably possible that the Company’s recorded estimate may change in the next 12 months. Refer to Note 10 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for information relating to environmental contingencies.  
Other Contingencies. The Company is party to various lawsuits, claims, investigations, and administrative proceedings that arise in connection with past and current operations. The Company evaluates such matters on a case-by-case basis, and its policy is to vigorously contest any such claims it believes are without merit. The Company accrues for a legal liability when it is both probable that a liability has been incurred and the amount of the loss is reasonably estimable. Quarterly, in addition to when changes in facts and circumstances require it, the Company reviews and adjusts these accruals to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information, and events pertaining to a particular case. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual cost that may ultimately be incurred, management believes that it has sufficiently accrued for such matters and that the ultimate resolution of pending matters will not have a material impact on the Company’s consolidated financial position, operating results, or liquidity.
8. Derivative Financial Instruments and Related Hedging Programs
Overview. In conducting its business, the Company enters into derivative transactions, including forward contracts and options, to limit its economic (i.e., cash) exposure resulting from (i) metal price risk related to its sale of fabricated aluminum products and the purchase of metal used as raw material for its fabrication operations, (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in its production processes, and (iii) foreign currency requirements with respect to its foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency. Additionally, in connection with the issuance of the Convertible Notes, the Company purchased cash-settled Call Options relating to the Company’s common stock to limit its exposure to the cash conversion feature of the Convertible Notes (see Note 3).
The Company’s derivative activities are overseen by the Hedging Committee, which is composed of the chief executive officer, the chief financial officer, the chief accounting officer, the vice president of metal risk and other officers and employees selected by the chief executive officer. The Hedging Committee meets regularly to review derivative positions and strategy and reports to the Company’s Board of Directors on the scope of its activities.
Hedges of Operational Risks. 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 through metal price fluctuations to its customers. However, in certain instances the Company enters into firm-price arrangements with its customers for stipulated volumes to be delivered in the future. Because the Company generally purchases primary and secondary aluminum

17


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


on a floating price basis, the volume that it has committed to sell to its customers under a firm-price arrangement creates metal price risk for the Company. The Company uses third-party hedging instruments to limit exposure to metal price risk related to firm-price customer sales contracts. See Note 9 for additional information regarding the Company’s material derivative positions relating to hedges of operational risk, and their respective fair values.
A majority of the Company’s derivative contracts relating to hedges of operational risks contain liquidity based thresholds that could require the Company to provide additional collateral in the event the Company’s liquidity were to fall below specified levels. To minimize the exposure to additional collateral requirements related to its liability hedge positions, the Company allocates hedging transactions among its counterparties, uses options as part of its hedging activities, or both. The aggregate fair value of the Company’s derivative instruments that were in a net liability position was $1.7 and $1.6 at September 30, 2014 and December 31, 2013, respectively.
The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur significant loss from the failure of any counterparties to perform under any agreements.
During the nine months ended September 30, 2014 and September 30, 2013, total fabricated products shipments that contained firm-price terms were (in millions of pounds) 109.3 and 87.2, respectively. At September 30, 2014, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that had the effect of creating price risk on anticipated purchases of aluminum for the remainder of 2014 and 2015, totaling approximately (in millions of pounds) 41.1 and 18.3, respectively.
Hedges Relating to the Convertible Notes. As described in Note 3, the Company issued Convertible Notes in the aggregate principal amount of $175.0 in March 2010. The conversion feature of the Convertible Notes can only be settled in cash and must be bifurcated from the Convertible Notes and treated as a separate derivative instrument for financial reporting purposes. In order to offset the cash flow risk associated with the Bifurcated Conversion Feature, the Company purchased Call Options, which are accounted for as derivative instruments. The Company expects that the realized gain, if any, from the Call Options will substantially offset the realized loss, if any, of the Bifurcated Conversion Feature upon maturity of the Convertible Notes. However, because assumptions used to determine the fair values of the Call Option and the Bifurcated Conversion Feature are not identical, net unrealized mark-to-market gains and losses on the two derivatives are recorded from quarter to quarter. See Note 9 for additional information regarding the fair values of the Call Options and the Bifurcated Conversion Feature.
Realized and Unrealized Gains and Losses. Realized and unrealized gains (losses) associated with all derivative contracts consisted of the following, for each period presented:
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Realized gains (losses):
 
 
 
 
 
 
 
Aluminum
$
3.1

 
$
(2.0
)
 
$
5.2

 
$
(3.6
)
Natural Gas
(0.1
)
 
(0.5
)
 
1.1

 
(1.3
)
Electricity
0.1

 
0.3

 
0.1

 
0.2

Foreign Currency

 
(0.1
)
 

 
(0.1
)
Total realized gains (losses)
$
3.1

 
$
(2.3
)
 
$
6.4

 
$
(4.8
)
Unrealized (losses) gains:
 
 
 
 
 
 
 
Hedges of operational risk:
 
 
 
 
 
 
 
Aluminum
$
(1.0
)
 
$
1.7

 
$
1.3

 
$
(4.5
)
Natural Gas
(1.6
)
 

 
(1.0
)
 
0.8

Electricity
(1.0
)
 
(0.3
)
 
(0.3
)
 
0.3

Foreign Currency
0.1

 
0.1

 

 

Total hedges of operational risk
(3.5
)
 
1.5

 

 
(3.4
)
Call Options relating to the Convertible Notes
12.9

 
31.0

 
19.8

 
27.9

Bifurcated Conversion Feature of the Convertible Notes
(10.7
)
 
(29.4
)
 
(16.2
)
 
(26.8
)
Total unrealized (losses) gains
$
(1.3
)
 
$
3.1

 
$
3.6

 
$
(2.3
)

18


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


The following table summarizes the Company’s material derivative positions at September 30, 2014:
Aluminum
 
Maturity Period (month/year)
Notional Amount of contracts (mmlbs)
Fixed price purchase contracts
 
10/14 through 12/15
45.5

Fixed price sales contracts
 
10/14 through 12/14
0.5

Midwest premium swap contracts1
 
10/14 through 12/15
44.8

Natural Gas2
 
Maturity Period (month/year)
Notional Amount of contracts (mmbtu)
Fixed price purchase contracts
 
10/14 through 12/16
6,040,000

Electricity3
 
Maturity Period (month/year)
Notional Amount of contracts (Mwh)
Fixed price purchase contracts
 
10/14 through 12/15
230,425

Hedges Relating to the Convertible Notes
 
Contract Period (month/year)
Notional Amount of contracts (Common Shares)
Bifurcated Conversion Feature4
 
3/10 through 3/15
3,655,085

Call Options4
 
3/10 through 3/15
3,655,085

______________________
1 
Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on the Company’s purchases of primary aluminum.
2 
As of September 30, 2014, the Company had Henry Hub NYMEX-based hedge positions in place to cover exposure to fluctuations in prices for approximately 82%, 81% and 47% of the expected natural gas purchases for the remainder of 2014, 2015 and 2016, respectively.
3 
As of September 30, 2014, the Company had Mid-C International Commodity Exchange-based hedge positions in place to cover exposure to fluctuations in prices for approximately 46% and 45% of the expected electricity purchases for the remainder of 2014 and 2015, respectively.
4 
The Bifurcated Conversion Feature represents the cash conversion feature of the Convertible Notes. The Call Options expire on the maturity or earlier conversion of the Convertible Notes and have an exercise price equal to the conversion price of the Convertible Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Convertible Notes. Although the fair value of the Call Options is derived from a notional number of shares of the Company’s common stock, the Call Options may only be settled in cash.
The Company enters into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. The Company reflects the fair value of its derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2).

19


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of September 30, 2014:
Derivative Assets and Collateral Held by Counterparty
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Counterparty (with Netting Agreements)
$
1.6

 
$

 
$
1.6

 
$
0.9

 
$

 
$
0.7

Counterparty (without Netting Agreements)1
99.8

 

 
99.8

 

 

 
99.8

Counterparty (with partial Netting Agreements)
0.4

 

 
0.4

 
0.4

 

 

Total
$
101.8

 
$

 
$
101.8

 
$
1.3

 
$

 
$
100.5

Derivative Liabilities and Collateral Held by Counterparty
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Counterparty (with Netting Agreements)
$
(2.3
)
 
$

 
$
(2.3
)
 
$
(0.9
)
 
$

 
$
(1.4
)
Counterparty (without Netting Agreements)1
(99.5
)
 

 
(99.5
)
 

 

 
(99.5
)
Counterparty (with partial Netting Agreements)
(0.7
)
 

 
(0.7
)
 
(0.4
)
 

 
(0.3
)
Total
$
(102.5
)
 
$

 
$
(102.5
)
 
$
(1.3
)
 
$

 
$
(101.2
)
_________________
1 
Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at September 30, 2014 (see Note 9).

20


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


The following tables present offsetting information regarding the Company’s derivatives by type of counterparty as of December 31, 2013:
Derivative Assets and Collateral Held by Counterparty
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Counterparty (with Netting Agreements)
$
1.0

 
$

 
$
1.0

 
$
0.8

 
$

 
$
0.2

Counterparty (without Netting Agreements)1
80.4

 

 
80.4

 

 

 
80.4

Counterparty (with partial Netting Agreements)
0.4

 

 
0.4

 
0.4

 

 

Total
$
81.8

 
$

 
$
81.8

 
$
1.2

 
$

 
$
80.6

Derivative Liabilities and Collateral Held by Counterparty
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Counterparty (with Netting Agreements)
$
(1.6
)
 
$

 
$
(1.6
)
 
$
(0.8
)
 
$

 
$
(0.8
)
Counterparty (without Netting Agreements)1
(83.2
)
 

 
(83.2
)
 

 

 
(83.2
)
Counterparty (with partial Netting Agreements)
(1.3
)
 

 
(1.3
)
 
(0.4
)
 

 
(0.9
)
Total
$
(86.1
)
 
$

 
$
(86.1
)
 
$
(1.2
)
 
$

 
$
(84.9
)
_________________
1 
Such amounts include the fair value of the Bifurcated Conversion Feature and Call Options at December 31, 2013 (see Note 9).
9. Fair Value Measurements
     Overview
The Company applies the fair value hierarchy established by GAAP for the recognition and measurement of assets and liabilities. An asset or liability’s fair value classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers counterparty risk in its assessment of fair value.
The fair values of financial assets and liabilities are evaluated and measured on a recurring basis. As part of that evaluation process, the Company reviews the underlying inputs that are significant to the fair value measurement of financial instruments to determine if a transfer among hierarchy levels is appropriate. The Company historically has not had significant transfers into or out of each hierarchy level.

21


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


Financial assets and liabilities that the Company measures at fair value as required by GAAP include: (i) its derivative instruments; (ii) the plan assets of the VEBAs and the Company’s Canadian defined benefit pension plan measured annually at December 31; and (iii) available for sale securities, consisting of debt investment securities and investments related to the Company’s deferred compensation plan (see Note 5). The Company records certain other financial assets and liabilities at carrying value (see the tables below for the fair value disclosure of those assets and liabilities).
The majority of the Company’s non-financial assets and liabilities, which include goodwill, intangible assets, inventories and property, plant, and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill), an evaluation of a non-financial asset or liability is required, potentially resulting in an adjustment to the carrying amount of such asset or liability.
     Fair Values of Financial Assets and Liabilities
     Fair Values of Derivative Assets and Liabilities. The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs.
Commodity, Energy and Foreign Currency Derivatives - The fair values of a majority of these derivative contracts are based upon trades in liquid markets. Valuation model inputs can generally be verified, and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy. The Company, however, has some derivative contracts that do not have observable market quotes. For these financial instruments, management uses significant unobservable inputs (e.g., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads. The fair value of these financial instruments is classified as Level 3 in the fair value hierarchy.
Bifurcated Conversion Feature and Call Options - The fair value of the Bifurcated Conversion Feature is measured as the difference in the estimated fair value of the Convertible Notes and the estimated fair value of the Convertible Notes without the cash conversion feature. The Convertible Notes are valued based on the trading price of the Convertible Notes each period-end (see “All Other Financial Assets and Liabilities” below). The fair value of the Convertible Notes without the cash conversion feature is the present value of the series of the remaining fixed income cash flows under the Convertible Notes, with a maturity of April 1, 2015. The Bifurcated Conversion Feature and the Call Options were designed to offset each other upon their maturity. Due to the short duration before maturity, management concluded that the fair value of the Call Options should equal the fair value of the Bifurcated Conversion Feature as of September 30, 2014.
As of September 30, 2014, the Bifurcated Conversion Feature and Call Options were recorded as current liabilities and assets, respectively, and were included in the Consolidated Balance Sheet as a portion of Other accrued liabilities and Prepaid expenses and other current assets, respectively.
The aggregate fair value of our derivatives, recorded on the Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, was a net liability $0.7 and $4.3, respectively. The decrease in net liability position during the nine months ended September 30, 2014 was primarily due to changes in the underlying commodity and energy prices during such period. Changes in the fair value of our derivative contracts relating to operational hedging activities are reflected in operating income (see Note 8).
VEBA and Canadian Pension Plan Assets. The fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan is measured annually on December 31. In determining the fair value of the plan assets at each annual period end, the Company utilizes primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan. See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8. “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to the fair value of the plan assets of the VEBAs and the Company’s Canadian pension plan.
Available for Sale Securities. The Company holds debt investment securities. The fair value of the debt investment securities, which consist of commercial paper and corporate bonds, is determined based on valuation models that use observable market data. At September 30, 2014, the remaining maturity period with respect to short-term investments ranged from 34 days to approximately eighteen months. In addition to debt investment securities, the Company also holds assets in various investment funds at certain registered investment companies in connection with its deferred compensation program (see Note 5). Such assets are accounted for as available for sale securities and are measured and recorded at fair value based on the net asset value of the investment funds on a recurring basis. The fair value input of the available for sale securities is considered either a Level 1 or Level 2 input depending on whether the debt security or investment fund is traded on a public exchange. The amortized cost for available for sale securities approximates their fair value.

22


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(In millions of dollars, except share and per share amounts and as otherwise indicated)


All Other Financial Assets and Liabilities. The Company believes that the fair value of its cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective carrying values due to their short maturities and nominal credit risk.
The fair value of the Convertible Notes and Senior Notes is based on their trading prices and is considered a Level 1 input in the fair value hierarchy (see Note 3 for the carrying values of the Convertible Notes and the Senior Notes).
The following table presents the Company’s financial instruments, classified under the appropriate level of the fair value hierarchy, as of September 30, 2014:
 
Level 1
 
Level 2
 
Level 3
 
Total
FINANCIAL ASSETS:
 
 
 
 
 
 
 
Derivative Instruments:
 
 
 
 
 
 
 
Aluminum -
 
 
 
 
 
 
 
Fixed price purchase contracts
$

 
$
0.5

 
$

 
$
0.5

Midwest premium swap contracts

 

 
1.5

 
1.5

Natural Gas -
 
 
 
 
 
 
 
Fixed price purchase contracts

 
0.2

 

 
0.2

Electricity -
 
 
 
 
 
 
 
Fixed price purchase contracts

 
0.3

 

 
0.3

Hedges Relating to the Convertible Notes -
 
 
 
 
 
 
 
Call Options

 
99.3

 

 
99.3

 
 
 
 
 
 
 
 
All Other Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
35.4

 
176.9

 

 
212.3

Short-term investments

 
100.1

 

 
100.1

Deferred compensation plan asset

 
7.2

 

 
7.2

Total assets
$
35.4

 
$
384.5

 
$
1.5

 
$
421.4

 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
Derivative Instruments:
 
 
 
 
 
 
 
Aluminum -
 
 
 
 
 
 
 
Fixed price purchase contracts
$

 
$
(1.3
)
 
$

 
$
(1.3
)
Natural Gas -
 
 
 
 
 
 
 
Fixed price purchase contracts

 
(1.4
)