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, 2015
 
[ ] 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 19, 2015, there were 17,739,189 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 (UNAUDITED)
 
September 30, 2015
 
December 31, 2014
 
(In millions of dollars, except share and per share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
82.6

 
$
177.7

Short-term investments
30.0

 
114.0

Receivables:
 
 
 
Trade receivables – net
131.6

 
129.3

Other
4.4

 
10.9

Inventories
217.3

 
214.7

Prepaid expenses and other current assets
98.6

 
178.6

Total current assets
564.5

 
825.2

Property, plant and equipment – net
472.7

 
454.9

Net assets of Union VEBA
—

 
340.1

Deferred tax assets – net (including deferred tax liability relating to the Union VEBA of $0.0 and $127.0 at September 30, 2015 and December 31, 2014, respectively)
135.7

 
30.9

Intangible assets – net
30.9

 
32.1

Goodwill
37.2

 
37.2

Other assets
22.1

 
23.3

Total
$
1,263.1

 
$
1,743.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
69.3

 
$
81.4

Accrued salaries, wages and related expenses
38.4

 
39.6

Other accrued liabilities
61.4

 
132.8

Current portion of long-term debt
—

 
172.5

Short-term capital leases
0.1

 
0.1

Total current liabilities
169.2

 
426.4

Net liabilities of Salaried VEBA
15.9

 
17.2

Deferred tax liabilities
0.8

 
0.9

Long-term liabilities
86.0

 
58.3

Long-term debt
218.9

 
225.0

Total liabilities
490.8

 
727.8

Commitments and contingencies – Note 7


 


Stockholders’ equity:
 
 
 
Preferred stock, 5,000,000 shares authorized at both September 30, 2015 and December 31, 2014; no shares were issued and outstanding at September 30, 2015 and December 31, 2014
—

 
—

Common stock, par value $0.01, 90,000,000 shares authorized at both September 30, 2015 and at December 31, 2014; 21,793,040 shares issued and 17,603,730 shares outstanding at September 30, 2015; 21,197,164 shares issued and 17,607,251 shares outstanding at December 31, 2014
0.2

 
0.2

Additional paid in capital
1,033.6

 
1,028.5

Retained earnings
9.7

 
280.4

Treasury stock, at cost, 4,189,310 shares at September 30, 2015 and 3,589,913 shares at December 31, 2014, respectively
(242.5
)
 
(197.1
)
Accumulated other comprehensive loss
(28.7
)
 
(96.1
)
Total stockholders’ equity
772.3

 
1,015.9

Total
$
1,263.1

 
$
1,743.7


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 (LOSS) (UNAUDITED)
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions of dollars, except share and per share amounts)
Net sales
$
336.4

 
$
338.9

 
$
1,075.3

 
$
1,018.1

Costs and expenses:
 
 
 
 
 
 
 
Cost of products sold:
 
 
 
 
 
 
 
Cost of products sold, excluding depreciation and amortization and other items
267.3

 
280.4

 
864.4

 
838.8

Unrealized losses on derivative instruments
1.7

 
3.6

 
7.7

 
—

Depreciation and amortization
8.1

 
8.0

 
24.2

 
23.1

Selling, general, administrative, research and development:
 
 
 
 
 
 
 
Selling, general, administrative, research and development
21.1

 
19.0

 
67.4

 
61.3

Net periodic postretirement benefit cost (income) relating to VEBAs – Note 5
0.6

 
(6.0
)
 
1.8

 
(17.7
)
(Gain) loss on removal of Union VEBA net assets – Note 5
(2.9
)
 
—

 
490.9

 
—

Total selling, general, administrative, research and development
18.8

 
13.0

 
560.1

 
43.6

Other operating charges, net
—

 
1.3

 
—

 
1.5

Total costs and expenses
295.9

 
306.3

 
1,456.4

 
907.0

Operating income (loss)
40.5

 
32.6

 
(381.1
)
 
111.1

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(4.9
)
 
(9.7
)
 
(19.9
)
 
(27.7
)
Other (expense) income, net – Note 13
(0.9
)
 
2.2

 
(0.1
)
 
5.9

Income (loss) before income taxes
34.7

 
25.1

 
(401.1
)
 
89.3

Income tax (provision) benefit
(12.6
)
 
(9.2
)
 
151.2

 
(33.1
)
Net income (loss)
$
22.1

 
$
15.9

 
$
(249.9
)
 
$
56.2

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
1.29

 
$
0.90

 
$
(14.55
)
 
$
3.15

Diluted
$
1.21

 
$
0.85

 
$
(14.55
)
 
$
3.02

Weighted-average number of common shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
17,123

 
17,707

 
17,178

 
17,853

Diluted
18,172

 
18,619

 
17,178

 
18,592

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.40

 
$
0.35

 
$
1.20

 
$
1.05


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 (LOSS) (UNAUDITED)
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions of dollars)
Net income (loss)
$
22.1

 
$
15.9

 
$
(249.9
)
 
$
56.2

Other comprehensive income:
 
 
 
 
 
 
 
VEBAs:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of net actuarial loss (gain)
0.3

 
(0.5
)
 
0.8

 
(1.4
)
Amortization of prior service cost
0.7

 
2.6

 
2.2

 
8.0

Removal of obligation relating to Union VEBA
—

 
—

 
106.6

 
—

Other comprehensive income relating to VEBAs
1.0

 
2.1

 
109.6

 
6.6

Available for sale securities:
 
 
 
 
 
 
 
Unrealized (loss) gain on available for sale securities
(0.4
)
 
(0.2
)
 
(0.7
)
 
0.1

Reclassification adjustments:
 
 
 
 
 
 
 
Reclassification of unrealized (gain) loss upon sale of available for sale securities
(0.1
)
 
—

 
0.1

 
(0.2
)
Other comprehensive loss relating to available for sale securities
(0.5
)
 
(0.2
)
 
(0.6
)
 
(0.1
)
Unrealized loss on foreign currency cash flow hedges
—

 
—

 
(0.2
)
 
—

Foreign currency translation (loss) gain
(0.3
)
 
0.1

 
(0.2
)
 
0.2

Other comprehensive income, before tax
0.2

 
2.0

 
108.6

 
6.7

Income tax expense related to items of other comprehensive income
(0.1
)
 
(0.7
)
 
(41.2
)
 
(2.4
)
Other comprehensive income, net of tax
0.1

 
1.3

 
67.4

 
4.3

Comprehensive income (loss)
$
22.2

 
$
17.2

 
$
(182.5
)
 
$
60.5


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 (UNAUDITED)
 
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid in Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
(In millions of dollars, except share and per share amounts)
BALANCE, December 31, 2014
17,607,251

 
$
0.2

 
$
1,028.5

 
$
280.4

 
$
(197.1
)
 
$
(96.1
)
 
$
1,015.9

Net loss
—

 
—

 
—

 
(249.9
)
 
—

 
—

 
(249.9
)
Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
67.4

 
67.4

Issuance of non-vested shares to employees and non-employee directors
62,285

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of common shares to non-employee directors
2,436

 
—

 
0.2

 
—

 
—

 
—

 
0.2

Issuance of common shares to employees upon vesting of restricted stock units and performance shares
50,809

 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of employee non-vested shares
(793
)
 
—

 
—

 
—

 
—

 
—

 
—

Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares
(35,081
)
 
—

 
(3.0
)
 
—

 
—

 
—

 
(3.0
)
Repurchase of common stock
(599,397
)
 
—

 
—

 
—

 
(45.4
)
 
—

 
(45.4
)
Issuance of stock warrants
516,220

 
—

 
—

 
—

 
—

 
—

 
—

Cash dividends on common stock ($1.20 per share)
—

 
—

 
—

 
(21.0
)
 
—

 
—

 
(21.0
)
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest
—

 
—

 
1.1

 
—

 
—

 
—

 
1.1

Amortization of unearned equity compensation
—

 
—

 
6.8

 
—

 
—

 
—

 
6.8

Dividends on unvested equity awards that were canceled
—

 
—

 
—

 
0.2

 
—

 
—

 
0.2

BALANCE, September 30, 2015
17,603,730

 
$
0.2

 
$
1,033.6

 
$
9.7

 
$
(242.5
)
 
$
(28.7
)
 
$
772.3


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

4


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
 
(In millions of dollars)
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(249.9
)
 
$
56.2

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
23.0

 
21.9

Amortization of definite-lived intangible assets
1.2

 
1.2

Amortization of debt discount and debt issuance costs
4.2

 
8.8

Deferred income taxes – Note 4
(151.0
)
 
29.6

Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest
(1.1
)
 
(0.8
)
Non-cash equity compensation
7.0

 
5.4

Non-cash unrealized losses (gains) on derivative instruments
7.7

 
(3.6
)
Non-cash impairment charges
—

 
1.5

Losses on disposition of property, plant and equipment
0.2

 
0.1

 Non-cash net periodic postretirement benefit cost (income) relating to VEBAs1
1.8

 
(17.7
)
 Non-cash loss on removal of Union VEBA net assets1
446.7

 
—

Other non-cash changes in assets and liabilities
0.4

 
0.5

Changes in operating assets and liabilities:
 
 
 
Trade and other receivables
4.2

 
(9.6
)
Inventories
(2.6
)
 
3.1

Prepaid expenses and other current assets
—

 
(0.9
)
Accounts payable
(15.0
)
 
28.7

Accrued liabilities1
19.7

 
(2.8
)
Annual variable cash contributions to VEBAs1
(13.7
)
 
(16.0
)
Long-term assets and liabilities, net1
26.1

 
(1.9
)
Net cash provided by operating activities
108.9

 
103.7

Cash flows from investing activities:
 
 
 
Capital expenditures
(38.4
)
 
(39.6
)
Purchase of available for sale securities
(0.5
)
 
(53.4
)
Proceeds from disposition of available for sale securities
84.0

 
82.2

Change in restricted cash
—

 
(0.7
)
Net cash provided by (used in) investing activities
45.1

 
(11.5
)

5


 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Repurchase of Senior Notes2
(6.1
)
 
—

Settlement of Convertible Notes2
(175.0
)
 
—

Proceeds from cash-settled call options related to settlement of Convertible Notes2
94.9

 
—

Payment for conversion premium related to settlement of Convertible Notes2
(94.9
)
 
—

Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest
1.1

 
0.8

Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares
(3.0
)
 
(2.4
)
Repurchase of common stock
(45.1
)
 
(28.7
)
Cash dividend paid to stockholders
(21.0
)
 
(19.1
)
Net cash used in financing activities
(249.1
)
 
(49.4
)
Net (decrease) increase in cash and cash equivalents during the period
(95.1
)
 
42.8

Cash and cash equivalents at beginning of period
177.7

 
169.5

Cash and cash equivalents at end of period
$
82.6

 
$
212.3

____________
1 
See Note 5 for the impact of removing the Union VEBA net assets.
2 
See Note 3 for more information relating to the Senior Notes and the Convertible Notes.

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

6


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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, 2014. Unless the context otherwise requires, references in these notes to interim consolidated financial statements - unaudited to "Kaiser Aluminum Corporation," "we," "us," "our," "the Company" and "our Company" refer to Kaiser Aluminum Corporation and its consolidated subsidiaries.
Organization and Nature of Operations. Kaiser Aluminum Corporation 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. Our business is organized into one operating segment, Fabricated Products. See Note 11 for additional information regarding our reportable segment and business unit.
Principles of Consolidation and Basis of Presentation. The accompanying unaudited consolidated financial statements include the accounts of our 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 ("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 our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2015 fiscal year. The financial information as of December 31, 2014 is derived from our audited consolidated financial statements and footnotes for the year ended December 31, 2014 included in our 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 our 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 our 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 (shortfalls) excesses of current cost over the stated LIFO value of inventory at September 30, 2015 and December 31, 2014 was $(13.4) million and $37.6 million, respectively. The net realizable value of our inventory was approximately the stated LIFO value as of September 30, 2015. 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 our inventories at September 30, 2015 and December 31, 2014 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 $0.4 million and $0.3 million during the quarters ended September 30, 2015 and September 30, 2014, respectively. The amount of interest expense capitalized as construction in progress was $1.1 million and $2.2 million during the nine months ended September 30, 2015 and September 30, 2014, respectively.
We recorded impairment charges of $1.3 million and $1.5 million during the quarter and nine months ended September 30, 2014, respectively, to reflect the scrap value of idled assets we 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. Depreciation expense is not included in Cost of products sold, excluding depreciation and amortization and other items, but is included in Depreciation and amortization on the Statements of Consolidated Income. For the quarters ended September 30, 2015 and September 30, 2014, we recorded depreciation expense

7

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

of $7.5 million and $7.4 million, respectively, relating to our operating facilities in the Fabricated Products segment. For the nine months ended September 30, 2015 and September 30, 2014, we recorded depreciation expense of $22.6 million and $21.5 million, respectively, relating to our operating facilities in the Fabricated Products segment. An immaterial amount of depreciation expense was also recorded within All Other for all periods presented in this Report.
We classify assets as held for sale only when an asset is being actively marketed and expected to sell within 12 months. Assets held for sale are initially measured at the lesser of the assets’ carrying amount and the fair value less costs to sell.
Concentration of Labor Subject to Collective Bargaining Agreements. At September 30, 2015, approximately 63% of our employees were covered by collective bargaining agreements and 5% of our employees were covered by collective bargaining agreements with expiration dates occurring within one year from September 30, 2015.
Dividends. When we expect to be in a capital surplus position by the end of a fiscal year, cash dividends and dividend equivalents paid are charged against (Accumulated deficit) retained earnings; otherwise, dividends and dividend equivalents paid are charged against Additional paid in capital.
Foreign Currency Risk Management. From time to time, we enter into foreign currency forward contracts to protect the value of anticipated foreign currency expenses associated with cash commitments for equipment purchases. These derivative instruments are designated and qualify for cash flow hedge accounting and are adjusted to current market values each reporting period. Both realized and unrealized periodic gains and losses of derivative instruments designated as cash flow hedges are deferred in Accumulated other comprehensive loss until depreciation on the underlying equipment commences. Upon commencement, realized gains and losses are recorded in Net income (loss) as an adjustment to depreciation expense in the period in which depreciation is recognized on the underlying equipment. Depending on the time to maturity and asset or liability position, the carrying values of cash flow hedges are included in Prepaid expenses and other current assets, Other assets, Other accrued liabilities or Long-term liabilities.
Our policy requires that derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the instrument contract. Hedge effectiveness is assessed periodically. Any derivative instrument not designated as a hedge, or so designated but ineffective, is adjusted to market value and recognized in net income immediately. If a cash flow hedge ceases to qualify for hedge accounting treatment or is terminated, the derivative instrument would continue to be carried on the balance sheet at fair value until settled and future adjustments to the derivative instrument’s fair value would be recognized in earnings immediately. If a forecasted equipment purchase was no longer probable to occur, amounts previously deferred in accumulated other comprehensive income would be recognized immediately in earnings. See Note 8 for additional information.
We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintained strict counterparty credit guidelines and entered into hedges only with major financial institutions that are investment grade or better. We do not have significant exposure to any one counterparty and management believes the risk of loss is remote and in any event would not be material. Additionally, we do not require collateral under these agreements.
New Accounting Pronouncements. Accounting Standards Update ("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. Our adoption of this ASU in the first quarter of 2015 did not have a material impact on our consolidated financial statements.
ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), was issued in April 2015. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in an entity’s balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of being presented as a deferred charge in the balance sheet. In August 2015, ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ("ASU 2015-15") was issued to address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03 and ASU 2015-15. An entity is required to adopt ASU 2015-03 and ASU 2015-15 for reporting periods beginning on or after December 15, 2015. We do not expect the adoption of these ASUs to have a material impact on our consolidated financial statements.

8

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"), was issued in April 2015. The ASU requires companies to perform the same assessment that vendors currently perform under ASC 985-605; that is, companies must determine whether an arrangement with its vendor contains a software license element. If so, the related fees paid are accounted for as an internal-use software intangible under ASC 350-40; if not, the arrangement is accounted for as a service contract. As a result of the issuance of ASU 2015-05, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. An entity is required to adopt ASU 2015-05 for reporting periods beginning on or after December 15, 2015. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) ("ASU 2015-07"), was issued in May 2015. This ASU removes the requirement to categorize within the fair value hierarchy table investments without readily determinable fair values in entities that elect to measure fair value using net asset value per share ("NAV") or its equivalent. ASU 2015-07 requires that these investments continue to be shown in the fair value disclosure in order to allow the disclosure to reconcile to the investment amount presented in the balance sheet. We expect to early adopt ASU 2015-07 in the quarter ending December 31, 2015 with retrospective application. We expect to modify our presentation of assets valued using NAV in the voluntary employees’ beneficiary association ("VEBA") postretirement benefit plan and Canadian Pension Plan section of our fair value hierarchy table when we adopt ASU 2015-07.
ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ("ASU 2015-14"), was issued in August 2015. ASU 2015-14 defers the effective date of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was issued in May 2014 and 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, by one year for all entities and permits early adoption on a limited basis. We expect to adopt ASU 2014-09 for the fiscal year ending December 31, 2018 and will continue to assess the impact of the adoption on our consolidated financial statements.
2. Supplemental Balance Sheet Information
 
September 30, 2015
 
December 31, 2014
 
(In millions of dollars)
Cash and Cash Equivalents
 
 
 
Cash and money market funds
$
37.1

 
$
29.5

Commercial paper
45.5

 
148.2

Total
$
82.6

 
$
177.7

 
 
 
 
Trade Receivables – Net
 
 
 
Billed trade receivables
$
132.2

 
$
128.7

Unbilled trade receivables
0.2

 
1.4

Trade receivables, gross
132.4

 
130.1

Allowance for doubtful receivables
(0.8
)
 
(0.8
)
Trade receivables – net
$
131.6

 
$
129.3

 
 
 
 
Inventories
 
 
 
Finished products
$
63.1

 
$
73.6

Work-in-process
82.2

 
66.7

Raw materials
49.6

 
54.2

Operating supplies and repair and maintenance parts
22.4

 
20.2

Total
$
217.3

 
$
214.7

 
 
 
 

9

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 
September 30, 2015
 
December 31, 2014
 
(In millions of dollars)
Prepaid Expenses and Other Current Assets
 
 
 
Current derivative assets – Notes 8 and 9
$
0.3

 
$
85.7

Current deferred tax assets
92.2

 
86.4

Short-term restricted cash
0.3

 
0.3

Prepaid taxes
1.1

 
—

Other
4.7

 
6.2

Total
$
98.6

 
$
178.6

 
 
 
 
Property, Plant and Equipment – Net
 
 
 
Land and improvements
$
22.7

 
$
22.9

Buildings and leasehold improvements
68.4

 
63.8

Machinery and equipment
528.1

 
509.8

Construction in progress
42.6

 
25.2

Property, plant and equipment – gross
661.8

 
621.7

Accumulated depreciation
(189.4
)
 
(166.8
)
Assets held for sale
0.3

 
—

Property, plant and equipment – net
$
472.7

 
$
454.9

 
 
 
 
Other Assets
 
 
 
Restricted cash
$
10.6

 
$
10.0

Deferred financing costs
4.5

 
5.9

Deferred compensation plan assets
7.0

 
7.3

Other
—

 
0.1

Total
$
22.1

 
$
23.3

 
 
 
 
Other Accrued Liabilities
 
 
 
Current derivative liabilities – Notes 8 and 9
$
16.5

 
$
94.9

Uncleared cash disbursements
10.1

 
9.1

Accrued income taxes and taxes payable
6.4

 
5.2

Accrued annual contribution to VEBAs
—

 
13.7

Accrued contingent contribution to Union VEBA – Note 5
14.2

 
—

Short-term environmental accruals – Note 7
2.2

 
2.3

Accrued interest
6.2

 
3.7

Short-term deferred revenue
1.5

 
0.2

Other
4.3

 
3.7

Total
$
61.4

 
$
132.8

 
 
 
 

10

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 
September 30, 2015
 
December 31, 2014
 
(In millions of dollars)
Long-Term Liabilities
 
 
 
Derivative liabilities – Notes 8 and 9
$
2.8

 
$
1.9

Income tax liabilities
0.7

 
2.4

Workers’ compensation accruals
20.5

 
21.5

Long-term environmental accruals – Note 7
16.6

 
17.0

Long-term asset retirement obligations
4.5

 
4.4

Deferred compensation liabilities
7.3

 
7.2

Long-term deferred revenue
0.4

 
0.5

Long-term capital leases
0.1

 
0.1

Long-term portion of contingent contribution to Union VEBA – Note 5
29.9

 
—

Other long-term liabilities
3.2

 
3.3

Total
$
86.0

 
$
58.3

3. Debt and Credit Facility
Senior Notes
In May 2012, we issued $225.0 million principal amount of 8.25% unsecured senior notes due June 1, 2020 ("Senior Notes") at 100% of the principal amount. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes was $4.8 million and $14.5 million for the quarter and nine months ended September 30, 2015, respectively. Interest expense, including amortization of deferred financing costs, relating to the Senior Notes were $4.8 million and $14.5 million for the quarter and nine months ended September 30, 2014, respectively. A portion of the interest relating to the Senior Notes was capitalized as construction in progress.
During the quarter ended September 30, 2015, we repurchased $6.1 million aggregate principal amount of our Senior Notes for 107.5% of the face value plus an insignificant amount of accrued interest, resulting in a loss of $0.6 million recognized within Other income, net on our statements of consolidated income (loss). As of September 30, 2015, $218.9 million aggregate principal amount of our Senior Notes remained outstanding. See Note 16 for information regarding additional Senior Notes repurchases made between October 1, 2015 through October 19, 2015.
Cash Convertible Senior Notes
Convertible Notes. In March 2010, we issued $175.0 million principal amount of 4.50% unsecured Cash Convertible Senior Notes due April 1, 2015 ("Convertible Notes"). We accounted for the cash conversion feature of the Convertible Notes as a separate derivative instrument ("Bifurcated Conversion Feature") with the fair value on the issuance date equaling the original issuance discount for purposes of accounting for the debt component of the Convertible Notes. At December 31, 2014, the carrying amount of the Convertible Notes, net of discount, was $172.5 million, of which $2.5 million was unamortized issuance discount.
The following table provides additional information regarding the Convertible Notes (in millions of dollars):
 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Contractual coupon interest
$
—

 
$
2.0

 
$
2.0

 
$
5.9

Amortization of discount
—

 
2.3

 
2.4

 
6.7

Amortization of deferred financing costs
—

 
0.3

 
0.3

 
0.9

Total interest expense1
$
—

 
$
4.6

 
$
4.7

 
$
13.5

____________
1 
A portion of the interest relating to the Convertible Notes was capitalized as construction in progress.

11

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Substantially all of the Convertible Notes were presented for conversion during the quarter ended March 31, 2015 and were settled in cash on April 1, 2015. The conversion value of 154.261% of par was determined over the final settlement period of 50 consecutive trading days that ended on March 27, 2015, resulting in a total payment amount to settle the Convertible Notes on April 1, 2015 of $273.8 million, comprised of a final coupon payment of $3.9 million, principal of $175.0 million and conversion premium of $94.9 million.
Convertible Notes Hedge Transactions. In connection with the issuance of our Convertible Notes, we entered into privately negotiated transactions whereby we purchased cash-settled call options ("Option Assets") relating to shares of our common stock that settled contemporaneously with the Convertible Notes. On April 1, 2015, we received Option Asset settlement proceeds of $94.9 million, which equaled the aggregate amount of cash that we paid to the holders of the converted Convertible Notes, less the principal amount thereof and interest payable thereon. Accordingly, the net cash outflow to settle our Convertible Notes and Option Assets on April 1, 2015 was $178.9 million.
Contemporaneous with the issuance of the Convertible Notes and our purchase of the Option Assets in 2010, we sold net-share-settled warrants ("Warrants") relating to approximately 3.7 million notional shares of our common stock. Beginning on July 1, 2015, the Warrants commenced settling ratably over the subsequent 120 trading day period. We delivered to the Warrant holders a number of shares for each Warrant according to the formula discussed in Note 10. As of September 30, 2015, after reflecting cumulative anti-dilution adjustments for payment of quarterly dividends paid in excess of $0.24 per share, the exercise price of the Warrants was $60.32 per share. See Note 10 and Note 16 for additional information relating to the settlement of our 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, Convertible Notes, Bifurcated Conversion Feature and Option Assets.
Revolving Credit Facility
Our credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions party thereto ("Revolving Credit Facility") provides us with a $300.0 million funding commitment through September 2016. We had $246.5 million of borrowing availability under the Revolving Credit Facility at September 30, 2015, based on the borrowing base determination then in effect. At September 30, 2015, there were no borrowings under the Revolving Credit Facility and $7.4 million was being used to support outstanding letters of credit, leaving $239.1 million 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, 2015.
4. Income Tax Matters
The provision for (benefit from) incomes taxes for each period presented consisted of the following (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Domestic
$
13.4

 
$
9.2

 
$
(149.0
)
 
$
32.2

Foreign
(0.8
)
 
—

 
(2.2
)
 
0.9

Total
$
12.6

 
$
9.2

 
$
(151.2
)
 
$
33.1

The income tax (benefit) provision for the quarters ended September 30, 2015 and September 30, 2014 was $12.6 million and $9.2 million, reflecting an effective tax rate of 36.3% and 36.7%, respectively. There was no material difference between the effective tax rate and the projected blended statutory tax rate for the quarters ended September 30, 2015 and September 30, 2014.
The income tax (benefit) provision for the nine months ended September 30, 2015 and September 30, 2014 was $(151.2) million and $33.1 million, reflecting an effective tax rate of 37.7% and 37.0%, 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, 2015 and September 30, 2014.
The $(151.2) million income tax benefit for the nine months ended September 30, 2015 included a $184.4 million tax benefit that was recorded as a result of removing the Union VEBA net assets and related deferred tax liabilities from our consolidated financial statements.

12

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

See Note 5 for disclosure regarding employee benefits.
Our gross unrecognized benefits relating to uncertain tax positions were $1.6 million and $2.2 million at September 30, 2015 and December 31, 2014, respectively, of which, $0.5 million and $1.1 million would go through our income tax provision and thus impact the effective tax rate at September 30, 2015 and December 31, 2014, respectively, if the gross unrecognized tax benefits were to be recognized.
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months.
5. Employee Benefits

Pension and Similar Benefit Plans. We provide 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 the International Association of Machinists and certain other unions at certain of our 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 our London, Ontario (Canada) facility; and (iv) a non-qualified, unfunded, unsecured plan of deferred compensation for key employees who would otherwise suffer a loss of benefits under our defined contribution plan.
VEBA Postretirement Medical Obligations. Certain retirees, their surviving spouses and eligible dependents receive medical coverage through participation in a VEBA for the benefit of certain union retirees, their surviving spouses and eligible dependents ("Union VEBA") or a VEBA that provides benefits for certain other eligible retirees, their surviving spouses and eligible dependents ("Salaried VEBA" and, together with the Union VEBA, "VEBAs"). We have no claim to the assets of the VEBAs or 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 our control. Our only financial obligations to the VEBAs are (i) an annual variable cash contribution (described in more detail below) and (ii) reimbursement of annual administrative expenses of the VEBAs up to $0.3 million in the aggregate. Nevertheless, we have historically accounted for each of the VEBAs, and continue to account for the Salaried VEBA, as a defined benefit postretirement plan with the maximum benefits payable capped at the aggregate of the current assets of the VEBAs and the estimated future variable contributions from us and earnings thereon.
Under this accounting treatment, the funding status of the VEBAs resulted in a liability or asset position on our Consolidated Balance Sheets, even though such liability or asset has no impact on our cash flow or liquidity. The only impact that the VEBAs have on our cash flow or liquidity is with respect to our obligations to make annual variable cash contributions and to reimburse a portion of the VEBAs’ administrative expenses. The amount of annual variable cash contribution to be made by us is determined as follows: 10% of the first $20.0 million 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 million. Such payments may not exceed $20.0 million annually, and payments are allocated between the Union VEBA and the Salaried VEBA at 85.5% and 14.5%, respectively. Amounts owing by us to the VEBAs are recorded on our Consolidated Balance Sheets at the end of each year in Other accrued liabilities (until paid in cash), with corresponding adjustments reflecting an increase in Net assets of VEBAs, a decrease in Net liabilities of VEBAs, or a combination thereof. The annual variable contributions with respect to 2014 and 2013 totaled $13.7 million and $16.0 million at December 31, 2014 and December 31, 2013, respectively and these contributions were made during the subsequent first quarters. The variable cash contribution obligation to the Union VEBA expires in September 2017, while the obligation to the Salaried VEBA has no express termination.
In January 2015, members of the USW at our Newark, Ohio ("Newark") and Spokane, Washington ("Trentwood") facilities ratified a new five-year collective bargaining agreement ("CBA"). The CBA did not extend our obligation to make annual variable contributions to the Union VEBA. As a result of our obligation to make annual variable contributions to the Union VEBA expiring for any period after September 2017, we no longer account for the Union VEBA as a defined benefit plan and have removed the Union VEBA net assets and related deferred tax liabilities from our Consolidated Balance Sheets as of January 1, 2015. As of September 30, 2015, the estimated liability for the remaining variable cash contributions through September 2017, of $44.1 million in the aggregate was recorded in Other accrued liabilities and Long-term liabilities (see Note 2). Such amounts will be adjusted quarterly based on our most current cash flow (as previously defined) projections with the changes reflected in our Operating income (loss).

13

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The projected benefit obligation and fair value of the plan assets of the Union VEBA as of December 31, 2014 were $391.5 million and $731.6 million, respectively. As a result of the termination of defined benefit plan accounting for the Union VEBA, the projected benefit obligation and fair value of the plan assets were removed from our consolidated financial statements, resulting in a non-cash loss of $307.8 million, net of a $184.4 million tax benefit, during the quarter ended March 31, 2015.
Components of Net Periodic Postretirement Benefit (Income) Cost. Our results of operations included the following impacts associated with the VEBAs and the Canadian defined benefit plan: (a) charges for service rendered by employees; (b) a charge for accretion of interest; (c) a benefit for the return on plan assets; and (d) amortization of net gains or losses on assets, prior service costs associated with plan amendments and actuarial differences. Net periodic postretirement benefit cost related to the Canadian defined benefit plan was not material for the quarters and nine months ended September 30, 2015 and September 30, 2014. The following table presents the components of net periodic postretirement benefit cost (income) for the VEBAs and charges relating to all other employee benefit plans for the periods presented (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
VEBAs:
 
 
 
 
 
 
 
Service cost1
$
—

 
$
0.6

 
$
—

 
$
1.7

Interest cost
0.7

 
4.2

 
2.1

 
12.5

Expected return on plan assets
(1.1
)
 
(12.9
)
 
(3.3
)
 
(38.5
)
Amortization of prior service cost
0.7

 
2.6

 
2.2

 
8.0

Amortization of net actuarial loss (gain)
0.3

 
(0.5
)
 
0.8

 
(1.4
)
Total net periodic postretirement benefit cost (income) relating to VEBAs
0.6

 
(6.0
)
 
1.8

 
(17.7
)
(Gain) loss on removal of Union VEBA net assets2
(2.9
)
 
—

 
490.9

 
—

Total VEBAs
(2.3
)
 
(6.0
)
 
492.7

 
(17.7
)
Other employee benefit plans:
 
 
 
 
 
 
 
Deferred compensation plan
(0.4
)
 
—

 
0.1

 
0.6

Defined contribution plans
1.4

 
1.3

 
7.1

 
6.8

Multiemployer pension plans
1.1

 
0.8

 
2.9

 
2.6

Total other employee benefit plans
$
2.1

 
$
2.1

 
$
10.1

 
$
10.0

Total
$
(0.2
)
 
$
(3.9
)
 
$
502.8

 
$
(7.7
)
____________
1 
The service cost related to the Salaried VEBA was insignificant for all periods presented.
2 
Includes a $2.9 million adjustment during the quarter ended September 30, 2015 to decrease our contingent contribution accrual related to the Union VEBA settlement.
The following table presents the allocation of the charges (income) detailed above, by reportable segment and business unit (in millions of dollars – see Note 11):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Fabricated Products
$
2.4

 
$
2.0

 
$
9.4

 
$
8.9

All Other
(2.6
)
 
(5.9
)
 
493.4

 
(16.6
)
Total
$
(0.2
)
 
$
(3.9
)
 
$
502.8

 
$
(7.7
)
For all periods presented, Net periodic postretirement benefit cost (income) relating to VEBAs was included 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, general, administrative, research and development ("SG&A and R&D").

14

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

6. Employee Incentive Plans
Short-Term Incentive Plans ("STI Plans")
We have annual short-term incentive compensation plans for senior management and certain other employees payable at our election in cash, shares of common stock, or a combination of cash and shares of common stock. Amounts earned under STI Plans are based on our 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 are determined based on the economic value added ("EVA") of our Fabricated Products business. Most of our production facilities have similar programs for both hourly and salaried employees.
Total costs relating to STI Plans were recorded as follows for each period presented (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Cost of products sold, excluding depreciation and amortization and other items
$
1.0

 
$
1.3

 
$
3.2

 
$
3.8

SG&A and R&D
1.9

 
1.6

 
7.6

 
6.1

Total costs recorded in connection with STI Plans
$
2.9

 
$
2.9

 
$
10.8

 
$
9.9

The following table presents the allocation of the charges detailed above, by segment (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Fabricated Products
$
2.2

 
$
2.2

 
$
7.7

 
$
7.6

All Other
0.7

 
0.7

 
3.1

 
2.3

Total costs recorded in connection with STI Plans
$
2.9

 
$
2.9

 
$
10.8

 
$
9.9

Long-Term Incentive Programs ("LTI Programs")
General. Executive officers and other key employees of the Company, 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, "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, 2015, 707,090 common shares were available for additional awards under the Equity Incentive Plan.
Non-Vested Common Shares and Restricted Stock Units. We grant non-vested common shares to our non-employee directors, executive officers and other key employees. We also grant restricted stock units to certain employees. The restricted stock units have rights similar to the rights of non-vested common shares and each restricted stock unit that becomes vested entitles the recipient to receive one common share. For both non-vested common shares and restricted stock units, the service period is generally one year for non-employee directors and three years for executive officers and other key employees.
In addition to non-vested common shares and restricted stock units, we grant performance shares to executive officers and other key employees. Each performance share that becomes vested entitles the recipient to receive one common share. Performance shares granted prior to 2014 ("EVA-Based Performance Shares") are subject to performance conditions pertaining to our EVA performance, measured over specified three-year performance periods. The number of EVA-Based Performance Shares that will ultimately vest and result in the issuance of common shares ranges between 0% to 200% of the target number of underlying common shares (constituting approximately one half of the maximum payout) and depends on the average annual EVA achieved for the specified three-year performance period. Performance shares granted after 2013 ("TSR-Based Performance Shares") are subject to performance conditions pertaining to our total shareholder return ("TSR") over specified three-year performance periods compared to the TSR of a specified group of peer companies. The number of TSR-Based Performance Shares that will ultimately vest under both the 2014-2016 and 2015-2017 LTI Programs and result in the issuance

15

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

of common shares ranges between 0% to 200% of the target number of underlying common shares (constituting approximately one-half of the maximum payout) and depends on the percentile ranking of our TSR compared to the group of peer companies.
During the first quarter of 2015, a portion of the EVA-Based Performance shares granted under the 2012-2014 LTI Program vested (see "Summary of Activity" below). The vesting of performance shares resulting in the issuance and delivery of common shares, if any, under the 2013-2015, 2014-2016 and 2015-2017 LTI Programs will occur in 2016, 2017 and 2018, respectively.
Non-Cash Compensation Expense. Compensation expense relating to all awards under the Equity Incentive Plan is included in SG&A and R&D. Non-cash compensation expense by type of award under LTI Programs were as follows for each period presented (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Non-vested common shares and restricted stock units
$
1.1

 
$
0.5

 
$
3.3

 
$
2.8

EVA-Based Performance Shares
0.1

 
—

 
0.8

 
1.0

TSR-Based Performance Shares
1.0

 
0.4

 
2.7

 
1.4

Total non-cash compensation expense
$
2.2

 
$
0.9

 
$
6.8

 
$
5.2

The following table presents the allocation of the charges detailed above, by segment (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Fabricated Products
$
0.8

 
$
0.5

 
$
2.4

 
$
2.6

All Other
1.4

 
0.4

 
4.4

 
2.6

Total non-cash compensation expense
$
2.2

 
$
0.9

 
$
6.8

 
$
5.2

Unrecognized Gross Compensation Cost Data. The following table presents unrecognized gross compensation cost data by type of award as of September 30, 2015:
 
Unrecognized gross compensation costs (in millions of dollars)
 
Expected period (in years) over which the remaining gross compensation costs will be recognized
Non-vested common shares and restricted stock units
$
6.9

 
2.0
EVA-Based Performance Shares
$
0.6

 
0.5
TSR-Based Performance Shares
$
8.8

 
2.1
Summary of Activity. A summary of the activity with respect to non-vested common shares, restricted stock units, EVA-Based Performance Shares and TSR-Based Performance Shares for the nine months ended September 30, 2015 was as follows:

16

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 
Non-Vested
Common Shares
 
Restricted
Stock Units
 
EVA-Based Performance
Shares
 
TSR-Based 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
 
Shares
 
Weighted-Average
Grant-Date Fair
Value per Share
Outstanding at December 31, 2014
158,770

 
$
59.88

 
5,357

 
$
59.71

 
353,576

 
$
50.35

 
150,223

 
$
83.18

Granted1
62,285

 
72.09

 
2,325

 
69.83

 
—

 
—

 
150,424

 
95.68

Vested
(58,241
)
 
52.76

 
(2,161
)
 
52.91

 
(48,648
)
 
44.48

 
—

 
—

Forfeited1
(793
)
 
67.83

 
—

 
—

 
(432
)
 
57.54

 
(770
)
 
89.12

Canceled1
—

 
—

 
—

 
—

 
(146,016
)
 
44.48

 
—

 
—

Outstanding at September 30, 2015
162,021

 
$
67.09

 
5,521

 
$
66.64

 
158,480

 
$
57.75

 
299,877

 
$
89.43

____________
1 
For EVA-Based Performance Shares and TSR-Based Performance Shares, the number of shares granted and forfeited are presented at their maximum payout; and the number of shares canceled includes the number of shares that did not vest due to EVA performance results falling below those required for maximum payout.
Stock Options. We have fully-vested stock options that were granted in 2007. There were 16,645 fully-vested options outstanding as of September 30, 2015 and December 31, 2014, in each case exercisable to purchase common shares at $80.01 per share and having a remaining contractual life of 1.50 and 2.25 years, respectively. The average grant date fair value of the options was $39.90. No options were granted, exercised or forfeited during the nine months ended September 30, 2015.
Vested Stock. From time to time, we issue 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 month period ended September 30, 2015 and September 30, 2014, we recorded $0.2 million 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 us 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. We cancel any such shares withheld 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 we withhold these common shares, we are 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, 2015 and September 30, 2014, 35,081 and 33,696 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. We have a variety of financial commitments, including purchase agreements, forward foreign exchange and forward sales contracts, indebtedness (and related Warrants) and letters of credit (see Note 3 and Note 8).
There were no material changes to our scheduled minimum rental commitments during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, our contractual obligations for 2015 increased by $33.3 million, consisting of $26.2 million in raw material related purchase obligations and $7.1 million in firm commitments for equipment purchases. Additionally, our contractual obligations for 2016 and 2017 increased by $13.4 million and $6.7 million, respectively. The increase for 2016 consists of $6.5 million in raw material related purchase obligations, $5.3 million in firm commitments for equipment purchases and $1.6 million in firm commitments for energy purchases. The increase for 2017 consists of $0.5 million in raw material related purchase obligations, $0.1 million in firm commitments for equipment purchases and $6.1 million in firm commitments for energy purchases.
Environmental Contingencies. We are subject to a number of environmental laws and regulations, to potential fines or penalties assessed for alleged breaches of such laws and regulations and to potential claims based upon such laws and regulations.

17

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

We have established procedures for regularly evaluating environmental loss contingencies. Our environmental accruals represent our undiscounted estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, existing requirements, currently available facts, existing technology and our assessment of the likely remediation actions to be taken.
In 2012, we 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 our Trentwood facility. We also signed an amended work order in 2012 with Washington State Ecology allowing certain remediation activities to begin the initiation of a treatability study in regards to proposed PCB remediation methods. We began implementation of certain approved sections of the work plan in 2013 and throughout 2014, completing a number of these sections in 2014. We continue to work with Washington State Ecology in developing the implementation plans for the remaining remediation activity as well as receiving final approval for the sections of the work plan completed to date. 
During 2013, at the request of the Ohio Environmental Protection Agency ("OEPA"), we initiated an investigational study of the Newark facility related to historical on-site waste disposal. During 2014, we completed a number of preliminary steps in the preparation of completing the final risk assessment and feasibility study, both of which are subject to review and approval by the OEPA. As this work continues and progresses to a risk assessment and feasibility study, we will establish and update the 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 within the next 18 to 24 months.
At September 30, 2015, our environmental accrual of $18.8 million represented our estimate of the incremental remediation cost based on (i) proposed alternatives in the final feasibility study related to our Trentwood facility; (ii) currently available facts with respect to our Newark facility; and (iii) facts related to certain other locations owned or formerly owned by us. In accordance with approved and proposed remediation action plans, we expect 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. We believe 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 $24.7 million over the remediation period. It is reasonably possible that our recorded estimate may change in the next 12 months.
Other Contingencies. We are party to various lawsuits, claims, investigations and administrative proceedings that arise in connection with past and current operations. We evaluate such matters on a case-by-case basis, and our policy is to vigorously contest any such claims we believe are without merit. We accrue for a legal liability when it is both probable that a liability has been incurred and the amount of the loss is material and reasonably estimable. Quarterly, in addition to when changes in facts and circumstances require it, we review and adjust 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, we believe that we have sufficiently accrued for such matters and that the ultimate resolution of pending matters will not have a material impact on our consolidated financial position, operating results, or liquidity.
8. Derivative Financial Instruments and Related Hedging Programs
Overview. In conducting our business, we enter into derivative transactions, including forward contracts and options, to limit our economic (i.e. cash) exposure resulting from (i) metal price risk related to our sale of fabricated aluminum products and the purchase of metal used as raw material for our fabrication operations; (ii) energy price risk relating to fluctuating prices of natural gas and electricity used in our production processes; and (iii) foreign currency requirements with respect to our foreign subsidiaries and cash commitments for equipment purchases denominated in foreign currency.
Our derivative activities are overseen by a hedging committee ("Hedging Committee"), which is composed of our chief executive officer, chief financial officer, chief accounting officer, treasurer and vice president, commodity risk management 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 our Board of Directors on the scope of its activities.
Hedges of Operational Risks
Designated Foreign Currency Cash Flow Hedges. We are exposed to foreign currency exchange risk related to firm price agreements for equipment purchases from foreign manufacturers. Such agreements require that we make payments in foreign currency to the vendor over time based on milestone achievements. We use foreign currency forward contracts in order to mitigate the exposure to currency exchange rate fluctuations related to these purchases. The timing and amounts of the forward contract settlements are designed to line up with the timing and amounts of scheduled payments to the foreign equipment manufacturers and are therefore expected to be highly effective hedges. As of September 30, 2015, we had open forward contracts designated as cash flow hedges to purchase euros with maturity dates between one and 15 months. The notional amounts of these foreign currency forward contracts totaled 7.3 million euros at September 30, 2015 with an average contract exchange rate of 1.14. The effective portion of the changes in fair value on these instruments is recorded within Other comprehensive income (loss) and is reclassified into the Statements of Consolidated Income on the same line item and the same period in which the underlying equipment is depreciated. We had no such reclassifications into earnings during the quarter ended September 30, 2015 and anticipate no such reclassifications for the next 12 months. For the nine months ended September 30, 2015, we recorded an unrealized loss of $0.2 million on the effective portions of our designated foreign currency cash flow hedges. There were no gains or losses recorded on these hedges during the quarter ended September 30, 2015 and no ineffectiveness was incurred on these hedges during the quarter and nine months ended September 30, 2015.
Non-Designated Hedges of Operational Risks. Our 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 our customers. In certain instances, we enter into firm-price arrangements with our customers for stipulated volumes to be delivered in the future. Additionally, for some of our higher value added products sold on a spot basis, the pass through of metal price movements can sometimes lag by as much as several months, with a favorable impact to us when metal prices decline and an adverse impact to us when metal prices increase. Because we generally purchase primary and secondary aluminum on a floating price basis, the volume that we have committed to sell to our customers under a firm-price arrangement and the lag in passing through metal price movements to customers on some of our higher value added products sold on a spot basis create metal price risk for us. We use third-party hedging instruments to limit exposure to metal price risk related to firm-price customer sales contracts and the metal pass through lag on some of our products. See Note 9 for additional information regarding our material derivative positions relating to hedges of operational risk, and their respective fair values.
A majority of our derivative contracts relating to hedges of operational risks contain liquidity based thresholds that could require us to provide additional collateral in the event our liquidity were to fall below specified levels. To minimize the exposure to additional collateral requirements related to our liability hedge positions, we allocate hedging transactions among our counterparties, use options as part of our hedging activities, or both. The aggregate fair value of our derivative instruments that were in a net liability position was $18.5 million and $11.4 million at September 30, 2015 and December 31, 2014, respectively.
We regularly review the creditworthiness of our derivative counterparties and do not expect to incur significant loss from the failure of any counterparties to perform under any agreements.
During the nine months ended September 30, 2015 and September 30, 2014, total Fabricated Products shipments that contained firm-price terms were (in millions of pounds) 148.6 and 109.3, respectively. At September 30, 2015, 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 2015 and 2016, totaling approximately (in millions of pounds) 52.7 and 93.8, respectively.
Hedges Relating to the Convertible Notes
As described in Note 3, we issued $175.0 million principal amount of Convertible Notes due on April 1, 2015, which could only be settled in cash. The conversion feature of the Convertible Notes was required to be bifurcated from the Convertible Notes and treated as a separate derivative instrument. In order to offset the cash flow risk associated with the Bifurcated Conversion Feature, we purchased Option Assets that settled on April 1, 2015. The Option Assets were accounted for as derivative instruments. The cash we received on April 1, 2015 from the settlement of the Option Assets equaled and offset the cash that we paid to the holders of any converted Convertible Notes in excess of the principal amount thereof and interest payable thereon on April 1, 2015. See Note 9 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Option Assets.


18

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Realized and Unrealized Gains and Losses. Realized and unrealized (losses) gains associated with all derivative contracts consisted of the following for each period presented (in millions of dollars):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Included in Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Unrealized (losses):
 
 
 
 
 
 
 
Foreign Currency
$
—

 
$
—

 
$
(0.2
)
 
$
—

Included in Statements of Consolidated Income (Loss):
 
 
 
 
 
 
 
Realized (losses) gains1:
 
 
 
 
 
 
 
Aluminum
(9.0
)
 
3.1

 
(18.8
)
 
5.2

Natural Gas
(1.2
)
 
(0.1
)
 
(3.8
)
 
1.1

Electricity
(0.3
)
 
0.1

 
(1.4
)
 
0.1

Total realized (losses) gains
$
(10.5
)
 
$
3.1

 
$
(24.0
)
 
$
6.4

Unrealized (losses)2:
 
 
 
 
 
 
 
Non-designated hedges of operational risk:
 
 
 
 
 
 
 
Aluminum
$
(0.3
)
 
$
(1.0
)
 
$
(8.8
)
 
$
1.3

Natural Gas
(1.0
)
 
(1.6
)
 
(0.2
)
 
(1.0
)
Electricity
(0.4
)
 
(1.0
)
 
1.3

 
(0.3
)
Foreign Currency
—

 
0.1

 
—

 
—

Total non-designated hedges of operational risk
(1.7
)
 
(3.5
)
 
(7.7
)
 
—

Option Assets relating to the Convertible Notes3
—

 
12.9

 
10.2

 
19.8

Bifurcated Conversion Feature of the Convertible Notes3
—

 
(10.7
)
 
(10.2
)
 
(16.2
)
Total unrealized (losses) gains
$
(1.7
)
 
$
(1.3
)
 
$
(7.7
)
 
$
3.6

______________________
1 
Realized (losses) gains on hedges of operational risk are recorded within Cost of products sold, excluding depreciation, amortization and other items.
2 
Unrealized (losses) on hedges of operational risk are recorded within Unrealized losses on derivative instruments.
3 
Unrealized (losses) gains on financial derivatives are recorded within Other income, net.
The following table summarizes our material derivative positions at September 30, 2015:
Aluminum
Maturity Period (month/year)
 
Notional Amount of contracts (mmlbs)
Fixed price purchase contracts
10/15 through 12/16
 
148.9

Fixed price sales contracts
10/15 through 10/16
 
2.4

Midwest premium swap contracts1
10/15 through 12/16
 
87.8

Natural Gas2
Maturity Period (month/year)
 
Notional Amount of contracts (mmbtu)
Fixed price purchase contracts
10/15 through 12/18
 
6,820,000

Electricity3
Maturity Period (month/year)
 
Notional Amount of contracts (Mwh)
Fixed price purchase contracts
10/15 through 12/15
 
44,180

Euro
Maturity Period (month/year)
 
Notional Amount of contracts (euro)
Fixed price purchase contracts
11/15 through 12/16
 
7,315,000



19

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

______________________
1 
Regional premiums represent the premium over the London Metal Exchange price for primary aluminum which is incurred on our purchases of primary aluminum.
2 
As of September 30, 2015, we had Henry Hub NYMEX-based hedge positions in place to cover exposure to fluctuations in prices for approximately 76%, 75%, 57% and 11% of the expected natural gas purchases for the remainder of 2015, 2016, 2017 and 2018, respectively.
3 
As of September 30, 2015, we had Mid-C International Commodity Exchange-based hedge positions, as well as physical delivery commitments with energy companies, in place to cover our exposure to fluctuations in electricity prices for approximately 54% of the expected electricity purchases for the remainder of 2015 and each of 2016 and 2017.
We enter into derivative contracts with counterparties, some of which are subject to enforceable master netting arrangements and some of which are not. We reflect the fair value of our derivative contracts on a gross basis on the Consolidated Balance Sheets (see Note 2).
The following tables present offsetting information regarding our derivatives by type of counterparty as of September 30, 2015 (in millions of dollars):
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)
$
0.3

 
$
—

 
$
0.3

 
$
0.3

 
$
—

 
$
—

Total
$
0.3

 
$
—

 
$
0.3

 
$
0.3

 
$
—

 
$
—

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)
$
(10.9
)
 
$
—

 
$
(10.9
)
 
$
(0.3
)
 
$
—

 
$
(10.6
)
Counterparty
(without netting agreements)
(0.5
)
 
—

 
(0.5
)
 
—

 
—

 
(0.5
)
Counterparty
(with partial netting agreements)
(7.9
)
 
—

 
(7.9
)
 
—

 
—

 
(7.9
)
Total
$
(19.3
)
 
$
—

 
$
(19.3
)
 
$
(0.3
)
 
$
—

 
$
(19.0
)

20

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The following tables present offsetting information regarding our derivatives by type of counterparty as of December 31, 2014 (in millions of dollars):
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)
$
0.9

 
$
—

 
$
0.9

 
$
0.8

 
$
—

 
$
0.1

Counterparty
(without netting agreements)1
84.8

 
—

 
84.8

 
—

 
—

 
84.8

Total
$
85.7

 
$
—

 
$
85.7

 
$
0.8

 
$
—

 
$
84.9

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)
$
(8.0
)
 
$
—

 
$
(8.0
)
 
$
(0.8
)
 
$
—

 
$
(7.2
)
Counterparty
(without netting agreements)1
(85.0
)
 
—

 
(85.0
)
 
—

 
—

 
(85.0
)
Counterparty
(with partial netting agreements)
(3.8
)
 
—

 
(3.8
)
 
—

 
—

 
(3.8
)
Total
$
(96.8
)
 
$
—

 
$
(96.8
)
 
$
(0.8
)
 
$
—

 
$
(96.0
)
_________________
1 
Such amounts include the fair value of the Bifurcated Conversion Feature and Option Assets at December 31, 2014 (see Note 9).
9. Fair Value Measurements
Overview
We apply the fair value hierarchy established by GAAP for the recognition and measurement of certain financial 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, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and consider counterparty risk in our 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, we review the underlying inputs that are significant to the fair value measurement of financial instruments to determine if a transfer among hierarchy levels is appropriate. We historically have not had significant transfers into or out of each hierarchy level.
Financial assets and liabilities that we measure at fair value as required by GAAP include: (i) our derivative instruments; (ii) the plan assets of the VEBAs and our 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 our deferred compensation plan (see Note 5). We record certain other financial assets and liabilities at carrying value (see the tables below for the fair value disclosure of those assets and liabilities).

21

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

The majority of our 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
Derivative Assets and Liabilities. Our 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. We, however, have 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 values of these financial instruments are classified as Level 3 in the fair value hierarchy.
Bifurcated Conversion Feature and Option Assets - At December 31, 2014, the fair value of the Bifurcated Conversion Feature was classified as Level 2 in the fair value hierarchy and measured as the difference in the estimated fair value of the Convertible Notes (based on the trading price of the Convertible Notes) and the estimated fair value of the Convertible Notes without the cash conversion feature (present value of the series of the remaining fixed income cash flows under the Convertible Notes, with a maturity of April 1, 2015). Due to the short duration before maturity, management concluded that the fair value of the Option Assets should equal the fair value of the Bifurcated Conversion Feature as of December 31, 2014. As of December 31, 2014, the Bifurcated Conversion Feature and Option Assets were included in the Consolidated Balance Sheet as a portion of Other accrued liabilities and Prepaid expenses and other current assets, respectively. As of September 30, 2015, all balances related to the Convertible Notes, Bifurcated Conversion Feature and Option Assets had been settled.
The aggregate fair value of our derivatives, recorded on the Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, was a net liability of $19.0 million and $11.1 million, respectively. The increase in net liability position during the quarter ended September 30, 2015 was primarily due to changes in the underlying commodity and energy prices, as well as settlements of asset positions during such period. Changes in the fair value of our derivative contracts relating to non-designated hedges of operational activities are reflected in Operating income (loss) (see Note 8).
VEBA and Canadian Pension Plan Assets. The plan assets of the VEBAs and our Canadian pension plan are measured annually on December 31 and reflected in our Consolidated Balance Sheets at fair value. In determining the fair value of the plan assets at each annual period end, we utilize primarily the results of valuations supplied by the investment advisors responsible for managing the assets of each plan, which we independently review for reasonableness. With respect to the VEBAs, the investment advisors providing the valuations are engaged by the VEBA trustees. As previously discussed, in January 2015, members of the USW at our Newark and Trentwood facilities ratified a new five-year CBA, which did not did not extend our obligation to make annual variable contributions to the Union VEBA for any period after September 2017. As a result of the expiration of our obligation to make annual variable contributions to the Union VEBA, we removed the assets of the Union VEBA from our Consolidated Balance Sheets during the quarter ended March 31, 2015 based on the valuation at December 31, 2014 (See Note 5).
Available for Sale Securities. We hold 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, 2015, the remaining maturity period with respect to short-term investments ranged from approximately five to seven months. We review our debt investment portfolio for other-than-temporary impairment at least quarterly or when there are changes in credit risk or other potential valuation concerns exists. At September 30, 2015 and September 30, 2014, the total unrealized loss, net of tax, included in accumulated other comprehensive income was immaterial and was not other-than-temporarily impaired. We believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized losses on these securities were due to changes in normal market fluctuations, and were not due to increased credit risk or other valuation concerns. In addition to debt investment securities, we also hold assets in various investment funds at certain registered investment companies in connection with our 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

22

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

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.
All Other Financial Assets and Liabilities. We believe that the fair value of our 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 values of the Convertible Notes at December 31, 2014 and the Senior Notes at both September 30, 2015 and December 31, 2014 are based on their trading prices at each respective period end date and are considered Level 1 inputs in the fair value hierarchy (see Note 3 for the carrying values of the Convertible Notes and the Senior Notes). The Convertible Notes were settled on April 1, 2015.
The following table presents our financial instruments, classified under the appropriate level of the fair value hierarchy, as of the period presented (in millions of dollars):
 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
FINANCIAL ASSETS:
 
 
 
 
 
 
 
Derivative Instruments (Non-Designated Hedges):
 
 
 
 
 
 
 
Aluminum -
 
 
 
 
 
 
 
     Fixed price sales contracts
$
—

 
$
0.2

 
$
—

 
$
0.2

Midwest premium swap contracts
—

 
—

 
0.1

 
0.1

 
 
 
 
 
 
 
 
All Other Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
37.1

 
45.5

 
—

 
82.6

Short-term investments
—

 
30.0

 
—

 
30.0

Deferred compensation plan asset
—

 
7.0

 
—

 
7.0

Total assets
$
37.1

 
$
82.7

 
$
0.1

 
$
119.9

 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
Derivative Instruments (Non-Designated Hedges):
 
 
 
 
 
 
 
Aluminum -
 
 
 
 
 
 
 
Fixed price purchase contracts
$
—

 
$
(10.3
)
 
$
—

 
$
(10.3
)
Midwest premium swap contracts
—

 
—

 
(2.0
)
 
(2.0
)
Natural Gas - Fixed price purchase contracts
—

 
(6.4
)
 
—

 
(6.4
)
Electricity - Fixed price purchase contracts
—

 
(0.4
)
 
—

 
(0.4
)
 
 
 
 
 
 
 
 
Derivative Instruments (Designated Hedges):
 
 
 
 
 
 
 
Foreign Currency - Euro forward purchase contracts
—

 
(0.2
)
 
—

 
(0.2
)
 
 
 
 
 
 
 
 
All Other Financial Liabilities: