UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number 0-52105

KAISER ALUMINUM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State of Incorporation)		94-3030279 (I.R.S. Employer Identification No.)
27422 PORTOLA PARKWAY, SUITE 200, FOOTHILL RANCH, CALIFORNIA (Address of principal executive offices)		92610-2831 (Zip 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o

     As of April 21, 2011, there were 19,268,791 shares of the Common Stock of the registrant outstanding.

 

 

TABLE OF CONTENTS

PART I
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			49
PART II
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults Upon Senior Securities			50
Item 4. [Removed and Reserved]			50
Item 5. Other Information			50
Item 6. Exhibits			50
SIGNATURES			52
INDEX OF EXHIBITS			53
EXHIBITS			55

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2011				2010
	(Unaudited)
		(In millions of dollars, except share and
		per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	55.9			$	135.6
Receivables:
Trade, less allowance for doubtful receivables of $0.6 at March 31, 2011 and $0.6 at December 31, 2010			114.0				83.0
Other			3.3				5.2
Inventories			169.6				167.5
Prepaid expenses and other current assets			90.3				80.1
Total current assets			433.1				471.4
Property, plant, and equipment — net			358.1				354.1
Net asset in respect of VEBAs			208.6				195.7
Deferred tax assets — net			221.0				231.1
Intangible assets — net			38.8				4.0
Goodwill			37.2				3.1
Other assets			74.0				83.0
Total		$	1,370.8			$	1,342.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	63.7			$	50.8
Accrued salaries, wages, and related expenses			29.5				31.1
Other accrued liabilities			42.5				42.0
Payable to affiliate			23.9				17.1
Current portion of secured debt and credit facilities			4.8				1.3
Total current liabilities			164.4				142.3
Long-term liabilities			130.1				134.7
Cash convertible senior notes			143.0				141.4
Long-term secured debt and credit facilities			7.9				11.8
Total liabilities			445.4				430.2
Commitments and contingencies — Note 10
Stockholders’ equity:
Common stock, par value $0.01, 90,000,000 shares authorized at both March 31, 2011 and at December 31, 2010; 19,268,791 shares issued and outstanding at March 31, 2011 and 19,214,451 shares issued and outstanding at December 31, 2010			0.2				0.2
Additional capital			988.8				987.1
Retained earnings			86.7				80.1
Common stock owned by Union VEBA subject to transfer restrictions, at reorganization value, 3,306,938 shares at March 31, 2011 and 3,523,980 shares at December 31, 2010			(79.4	)			(84.6	)
Treasury stock, at cost, 1,724,606 shares at March 31, 2011 and 1,724,606 shares at December 31, 2010			(72.3	)			(72.3	)
Accumulated other comprehensive income			1.4				1.7
Total stockholders’ equity			925.4				912.2
Total		$	1,370.8			$	1,342.4

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED INCOME

		Quarter Ended March 31,
		2011				2010
		(Unaudited)
		(In millions of dollars, except
		share and per share amounts)
Net sales		$	322.6			$	267.5
Costs and expenses:
Cost of products sold:
Cost of products sold, excluding depreciation, amortization and other items			280.9				232.0
Restructuring costs and other benefits			—				(0.6	)
Depreciation and amortization			6.3				4.0
Selling, administrative, research and development, and general			14.9				17.3
Total costs and expenses			302.1				252.7
Operating income			20.5				14.8
Other (expense) income:
Interest expense			(4.5	)			—
Other income, net			1.7				0.2
Income before income taxes			17.7				15.0
Income tax provision			(6.4	)			(6.2	)
Net income		$	11.3			$	8.8
Earnings per share, Basic — Note 1, 13
Net income per share		$	0.59			$	0.44
Earnings per share, Diluted — Note 1, 13
Net income per share		$	0.59			$	0.44
Weighted-average number of common shares outstanding (000):
Basic			18,950				20,020
Diluted			18,950				20,020

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

																		Common
																		Stock
																		Owned by
																		Union
																		VEBA								Accumulated
		Common																Subject to								Other
		Shares				Common				Additional				Retained				Transfer				Treasury				Comprehensive
		Outstanding				Stock				Capital				Earnings				Restriction				Stock				Income (Loss)				Total
		(Unaudited)
		(In millions of dollars, except for shares)
BALANCE, December 31, 2010			19,214,451			$	0.2			$	987.1			$	80.1			$	(84.6	)		$	(72.3	)		$	1.7			$	912.2
Net income			—				—				—				11.3				—				—				—				11.3
Foreign currency translation adjustment, net of tax of $0			—				—				—				—				—				—				(0.3	)			(0.3	)
Comprehensive income							—				—				—				—												11.0
Sale of Union VEBA shares by the Union VEBA, net of tax of $4.0			—				—				1.4				—				5.2				—				—				6.6
Issuance of non-vested shares to employees			63,303				—				—				—				—				—				—				—
Issuance of common shares to employees upon vesting of restricted stock units and performance shares			13,899				—				—				—				—				—				—				—
Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares			(22,862	)			—				(1.1	)			—				—				—				—				(1.1	)
Cash dividends on common stock ($0.24 per share)			—				—				—				(4.7	)			—				—				—				(4.7	)
Amortization of unearned equity compensation			—				—				1.4				—				—				—				—				1.4
BALANCE, March 31, 2011			19,268,791			$	0.2			$	988.8			$	86.7			$	(79.4	)		$	(72.3	)		$	1.4			$	925.4

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENT OF CONSOLIDATED CASH FLOWS

		Quarter Ended March 31,
		2011				2010
		(In millions of dollars)
Cash flows from operating activities:
Net income		$	11.3			$	8.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment			5.7				4.0
Amortization of definite-lived intangible assets			0.6				—
Amortization of debt discount and debt issuance costs			1.9				—
Deferred income taxes			6.1				5.1
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest			—				(0.1	)
Non-cash equity compensation			1.4				1.6
Net non-cash LIFO charges			14.9				9.2
Non-cash unrealized gains on derivative positions			(6.0	)			(0.2	)
Amortization of option premiums (received) / paid, net			(0.3	)			0.2
Losses on disposition of property, plant and equipment			0.1				0.1
Other non-cash changes in assets and liabilities			(2.2	)			0.5
Changes in operating assets and liabilities, net of effect of acquisition:
Trade and other receivables			(25.5	)			(14.1	)
Receivable from affiliate			—				0.2
Inventories (excluding LIFO charges)			(10.4	)			(15.4	)
Prepaid expenses and other current assets			(0.7	)			(0.6	)
Accounts payable			13.6				8.0
Accrued liabilities			(1.1	)			(9.0	)
Payable to affiliate			6.8				7.7
Long-term assets and liabilities, net			(0.4	)			16.5
Net cash provided by operating activities			15.8				22.5
Cash flows from investing activities:
Capital expenditures			(6.2	)			(13.9	)
Purchase of available for sale securities			—				(3.9	)
Cash payment for acquisition of manufacturing facility and related assets (net of $4.9 of cash received in the acquisition)			(83.2	)			—
Net cash used in investing activities			(89.4	)			(17.8	)
Cash flows from financing activities:
Proceeds from issuance of cash convertible senior notes			—				175.0
Cash paid for financing costs in connection with issuance of cash convertible senior notes			—				(5.8	)
Purchase of call option in connection with issuance of cash convertible senior notes			—				(31.4	)
Proceeds from issuance of warrants			—				14.3
Repayment of promissory note — current portion			(0.3	)			—
Cash paid for financing costs in connection with the revolving credit facility			—				(2.6	)
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest			—				0.1
Retirement of common stock			(1.1	)			—
Repurchase of common stock			—				(44.2	)
Cash dividend paid to stockholders			(4.7	)			(4.9	)
Net cash (used in) provided by financing activities			(6.1	)			100.5
Net (decrease) increase in cash and cash equivalents during the period			(79.7	)			105.2
Cash and cash equivalents at beginning of period			135.6				30.3
Cash and cash equivalents at end of period		$	55.9			$	135.5
See Note 16 for supplemental cash flow information.

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share and per share amounts and as otherwise indicated)

1. Summary of Significant Accounting Policies

This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

     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, with its operations consisting of one reportable segment in the aluminum industry, referred to herein as Fabricated Products. The Company also owns a 49% non-controlling interest in Anglesey Aluminium Limited (“Anglesey”), which owns and operates a secondary aluminum remelt and casting facility in Holyhead, Wales. See Note 14 for additional information regarding the Company’s reportable segment and its other business units.

     Recent acquisitions. On August 9, 2010, the Company acquired the manufacturing facility and related assets of Nichols Wire, Incorporated (“Nichols”) in Florence, Alabama (the “Florence, Alabama facility”). The Florence, Alabama facility manufactures bare mechanical alloy wire products, nails and aluminum rod and expands the Company’s offerings of small diameter rod, bar and wire products to the Company’s core end market segments for aerospace, general engineering and automotive applications (see Note 5).

     Effective January 1, 2011, the Company acquired the manufacturing facility and related assets of Alexco, L.L.C. (“Alexco”) in Chandler, Arizona (the “Chandler, Arizona (Extrusion) facility”). The Chandler, Arizona (Extrusion) facility manufactures hard alloy extrusions for the aerospace industry and is a well-established supplier of aerospace extrusions. The acquisition positions the Company in a significant market segment that provides a natural complement to its product offerings for aerospace application (see Note 5).

     Principles of Consolidation and Basis of Presentation. The 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 (“US GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the disclosures required by US GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments (all of which are of a normal recurring nature unless otherwise noted) necessary to present fairly the results for the interim periods presented. Intercompany balances and transactions are eliminated. The consolidated financial statements include the results of companies acquired by the Company from the effective date of each acquisition.

     As disclosed in Note 3 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, the Company suspended the use of the equity method of accounting with respect to its ownership in Anglesey commencing in the quarter ended September 30, 2009. As a result, the Company did not record equity in income from Anglesey for the quarters ended March 31, 2011 and March 31, 2010. The carrying amount of the Company’s investment in Anglesey was zero at both March 31, 2011 and December 31, 2010. The Company does not anticipate resuming the use of the equity method of accounting with respect to its investment in Anglesey during the next 12 months.

     Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in accordance with US 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.

     Recognition of Sales. Sales are generally recognized on a gross basis when title, ownership and risk of loss pass to the buyer and collectability is reasonably assured. A provision for estimated sales returns from, and allowances to, customers is made in the same period as the related revenues are recognized, based on historical experience or the specific identification of an event necessitating a reserve.

     From time to time, in the ordinary course of business, the Company may enter into agreements with customers in which the Company, in return for a fee, agrees to reserve certain amounts of its existing production capacity to the customer, defer an existing customer purchase commitment into future periods and reserve certain amounts of its expected production capacity in those periods to the customer, or cancel or reduce existing commitments under existing contracts. These agreements may have terms or impact periods exceeding one year.

     Certain of the capacity reservation and commitment deferral agreements provide for periodic, such as quarterly or annual, billing for the duration of the contract. For capacity reservation agreements, the Company recognizes revenue ratably over the period of the

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

capacity reservation. Accordingly, the Company may recognize revenue prior to billing reservation fees. Unbilled receivables are included within Trade receivables on the Company’s Consolidated Balance Sheets (See Note 2). For commitment deferral agreements, the Company recognizes revenue upon the earlier occurrence of the related sale of product or the end of the commitment period. In connection with other agreements, the Company may collect funds from customers in advance of the periods for which (i) the production capacity is reserved, (ii) commitments are deferred, (iii) commitments are reduced or (iv) performance is completed, in which event the recognition of revenue is deferred until such time as the fee is earned. Any unearned fees are included within Other accrued liabilities or Long-term liabilities, as appropriate, on the Company’s Consolidated Balance Sheets (see Note 2).

     In connection with Anglesey’s remelt operations, the Company purchases secondary aluminum products from Anglesey in proportion to its ownership interest at prices tied to the market price of primary aluminum. The Company in turn sells the secondary aluminum products to a third party and receives a portion of a premium over normal commodity market prices. The transactions are structured to largely eliminate metal price and currency exchange rate risks with respect to income and cash flow. As the Company, in substance, acts as an agent in connection with sales of secondary aluminum produced by Anglesey, the Company’s sales of such secondary aluminum are presented net of cost of sales. For the quarters ended March 31, 2011 and March 31, 2010, the Company reported no net sales from the sale of secondary aluminum produced by Anglesey. Any amounts payable to Anglesey are reflected on the Company’s Consolidated Balance Sheets as Payable to affiliate.

     Stock-Based Compensation. Stock-based compensation is provided to certain employees, directors and a director emeritus, and is accounted for at fair value. The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award and the number of awards expected to ultimately vest. The fair value of awards provided to the director emeritus is not material. The cost of an award is recognized as an expense over the requisite service period of the award on a straight-line basis. The Company has elected to amortize compensation expense for equity awards with graded vesting using the straight-line method (see Note 9).

     The Company also grants performance shares to executive officers and other key employees. These awards are subject to performance requirements pertaining to the Company’s economic value added (“EVA”) performance, measured over specified three-year performance periods. The EVA is a measure of 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, as defined in the Company’s annual long-term incentive (“LTI”) programs. The number of performance shares, if any, that will ultimately vest and result in the issuance of common shares depends on the average annual EVA achieved for the specified three-year performance periods. The fair value of performance-based awards is measured based on the most probable outcome of the performance condition, which is estimated quarterly using the Company’s forecast and actual results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the specified three-year performance periods on a ratable basis (see Note 9).

     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 Company recorded net non-cash LIFO charges of approximately $14.9 and $9.2 during the quarters ended March 31, 2011 and March 31, 2010, respectively. These amounts are primarily a result of changes in metal prices and changes in inventory volumes. 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 March 31, 2011 and December 31, 2010 were included in the Fabricated Products segment. See Note 2 for the components of inventories at March 31, 2011 and December 31, 2010.

     Property, plant, and equipment — net. Property, plant and equipment are recorded at cost (see Note 2). Construction in progress is included within Property, Plant, and equipment — net in 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 $0.2 and $0.9 during the quarters ended March 31, 2011 and March 31, 2010, respectively.

     Depreciation is computed using the straight-line method at rates based on the estimated useful lives of the various classes of assets. Depreciation expense is not included in Cost of products sold, excluding depreciation, amortization and other items, but is included in Depreciation and amortization on the Statements of Consolidated Income. For the quarters ended March 31, 2011 and March 31, 2010, the Company recorded depreciation expense of $5.6, and $4.0, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. An immaterial amount of depreciation expense was also recorded in the Company’s Corporate and Other for both periods.

     Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or group of assets may not be recoverable. The Company regularly assesses whether events and circumstances with the potential to trigger impairment have occurred and relies on a number of factors, including operating results,

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

business plans, economic projections, and anticipated future cash flow, to make such assessments. The Company uses an estimate of the future undiscounted cash flows of the related asset or asset group over the estimated remaining life of such asset(s) in measuring whether the asset(s) are recoverable. Measurement of the amount of impairment, if any, is based on the difference between the carrying value of the asset(s) and the estimated fair value of such asset(s). Fair value is determined through a series of standard valuation techniques. See Fair Values of Non-Financial Assets and Liabilities section of Note 12 for additional information regarding fair value assessments relating to certain property, plant and equipment.

     Property, plant and equipment held for future development are presented as idled assets. Such assets are evaluated for impairment on a held-and-used basis. Depreciation expense is not adjusted when assets are temporarily idled.

     Available for Sale Securities. Included in Other assets are certain marketable debt and equity securities, classified as available for sale securities (see Note 2). Such securities are invested in various investment funds and managed by a third-party trust in connection with the Company’s deferred compensation program (see Note 8). Such securities are recorded at fair value (see Other section of Note 12,), with net unrealized gains and losses, net of income taxes, reflected in other comprehensive earnings as a component of Stockholders’ equity.

     Goodwill and Intangible Assets. Goodwill is tested for impairment on an annual basis during the third quarter, as well as on an interim basis, as warranted, at the time of relevant events and changes in circumstances. Intangible assets with definite lives are initially recognized at fair value and subsequently amortized over the estimated useful lives to reflect the pattern in which the economic benefits of the intangible assets are consumed. In the event the pattern cannot be reliably determined, the Company uses a straight-line amortization method. Whenever events or changes in circumstances indicate that the carrying amount of the intangible assets may not be recoverable, the intangible assets are reviewed for impairment.

     Derivative Financial Instruments. Hedging transactions using derivative financial instruments are primarily designed to mitigate the Company’s exposure to changes in prices for certain of the products which the Company sells and consumes and, to a lesser extent, to mitigate the Company’s exposure to changes in foreign currency exchange rates. From time-to-time, the Company also enters into hedging arrangements in connection with financing transactions to mitigate financial risks.

     The Company does not utilize derivative financial instruments for trading or other speculative purposes. The Company’s derivative activities are initiated within guidelines established by management and approved by the Company’s Board of Directors. Hedging transactions are executed centrally on behalf of all of the Company’s business units to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors.

     The Company recognizes all derivative instruments as assets or liabilities in its Consolidated Balance Sheets and measures these instruments at fair value by “marking-to-market” all of its hedging positions at each period-end (see Note 12), as the Company does not meet the documentation requirements for hedge (deferral) accounting. Unrealized and realized gains and losses associated with hedges of operational risks are reflected as a reduction or increase in Cost of products sold, excluding depreciation, amortization and other items. Unrealized and realized gains and losses relating to hedges of financing transactions are reflected as a component of Other income (expense) (see Note 17). See Note 11 for additional information about realized and unrealized gains and losses relating to the Company’s derivative financial instruments.

     Environmental Contingencies. With respect to environmental loss contingencies, the Company records a loss contingency whenever a contingency is probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations are generally recognized at no later than the completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Accruals for expected environmental costs are included in Other accrued liabilities or Long-term liabilities, as appropriate (see Note 2). Environmental expense relating to continuing operations is included in Cost of products sold, excluding depreciation, amortization and other items in the Statement of Consolidated Income. Environmental expense relating to discontinued operations is included in Selling, administrative, research and development, and general in the Statement of Consolidated Income.

     Self Insurance of Employee Health and Worker’s Compensation Liabilities. The Company is primarily self-insured for group health insurance and workers compensation benefits provided to employees. The Company purchases stop-loss insurance to protect against annual health insurance claims per individual and at an aggregate level. Self insurance liabilities are estimated for claims incurred-but-not-paid based on judgment, using the Company’s historical claim data and information and analysis provided by actuarial and claim advisors, our insurance carriers and other professionals. The accrued liability for health insurance and worker compensation claims is included in Other accrued liabilities or Long-term liabilities, as appropriate (See Note 2).

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

     Concentration of Credit Risk. Financial arrangements which potentially subject the Company to concentrations of credit risk consist of metal, currency, electricity and natural gas derivative contracts, certain cash-settled call options that the Company purchased in March 2010 (the “Call Options”) (see Note 3), and arrangements related to the Company’s cash equivalents. If the market value of the Company’s net commodity and currency derivative positions with certain counterparties exceeds the applicable threshold, if any, the counterparty is required to transfer cash collateral in excess of the threshold to the Company. Conversely, if the market value of these net derivative positions falls below a specified threshold, the Company is required to transfer cash collateral below the threshold to certain counterparties. At both March 31, 2011 and December 31, 2010, the Company had no margin deposits with or from its counterparties.

     The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative contracts used in hedging activities as well as failure of counterparties to return cash collateral previously transferred to the counterparties. The counterparties to the Company’s derivative contracts are major financial institutions, and the Company does not expect nonperformance by any of its counterparties.

     The Company places its cash in bank deposits and money market funds with high credit quality financial institutions which invest primarily in commercial paper and time deposits of prime quality, short-term repurchase agreements, and U.S. government agency notes. The Company has not experienced losses on its temporary cash investments.

     New Accounting Pronouncements. In December 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-28, Intangibles — Goodwill and Other, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 amends Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption was not permitted. The adoption of ASU 2010-28 in the quarter ending March 31, 2011 did not have an impact on the Company’s consolidated financial statements.

     ASU No. 2010-29, Business Combinations, Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), was issued in December 2010 to provide clarification regarding pro forma revenue and earnings disclosure requirements for business combinations. ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose only revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. This ASU also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption was permitted. The Company adopted ASU 2010-29 during the first interim reporting period of 2011 as it relates to pro forma disclosure of the Company’s acquisition of the Chandler, Arizona (Extrusion) facility, effective January 1, 2011 (see Note 5).

     2. Supplemental Balance Sheet Information

		March 31,				December 31,
		2011				2010
Trade Receivables.
Billed trade receivables		$	111.3			$	82.5
Unbilled trade receivables — Note 1			3.3				1.1
Trade receivables, gross			114.6				83.6
Allowance for doubtful receivables			(0.6	)			(0.6	)
Trade receivables, net		$	114.0			$	83.0
Inventories.
Finished products		$	54.1			$	53.8
Work in process			52.0				49.6
Raw materials			50.2				50.9
Operating supplies and repairs and maintenance parts			13.3				13.2
Total		$	169.6			$	167.5

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

Prepaid Expenses and Other Current Assets.
Current derivative assets — Note 11		$	26.0			$	22.1
Current deferred tax assets			46.8				46.8
Current portion of option premiums paid — Note11			4.3				5.6
Short-term restricted cash			7.8				0.9
Prepaid taxes			1.1				1.3
Prepaid expenses			4.3				3.4
Total		$	90.3			$	80.1
Property, Plant and Equipment
Land and improvements		$	23.3			$	23.3
Buildings			44.8				43.5
Machinery and equipment			344.8				338.0
Construction in progress			9.3				7.7
Active property, plant and equipment, gross			422.2				412.5
Accumulated depreciation			(69.6	)			(63.9	)
Active property, plant and equipment, net			352.6				348.6
Idled equipment			5.5				5.5
Property, plant, and equipment, net		$	358.1			$	354.1
Other Assets.
Derivative assets — Note 11		$	49.1			$	50.8
Option premiums paid — Note 11			0.5				0.6
Restricted cash			9.4				16.3
Long-term income tax receivable			3.0				2.9
Deferred financing costs			7.2				7.7
Available for sale securities			4.7				4.6
Other			0.1				0.1
Total		$	74.0			$	83.0
Other Accrued Liabilities.
Current derivative liabilities — Note 11		$	9.6			$	8.9
Current portion of option premiums received — Note 11			5.3				7.0
Current portion of income tax liabilities			1.2				1.1
Accrued income taxes and taxes payable			2.8				1.8
Accrued annual VEBA contribution			—				2.1
Accrued freight			2.1				1.9
Short-term environmental accrual — Note 10			1.0				1.1
Accrued interest			4.1				2.1
Short-term deferred revenue — Note 1			10.6				10.8
Other			5.8				5.2
Total		$	42.5			$	42.0
Long-term Liabilities.
Derivative liabilities — Note 11		$	57.8			$	62.2
Option premiums received — Note 11			0.2				0.3
Income tax liabilities			13.5				12.9
Workers’ compensation accruals			16.6				15.9
Long-term environmental accrual — Note 10			19.0				19.1
Long-term asset retirement obligations			3.7				3.8
Long-term deferred revenue — Note 1			11.3				13.2
Deferred compensation liability			5.2				4.9
Other long-term liabilities			2.8				2.4
Total		$	130.1			$	134.7

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

3. Cash Convertible Senior Notes and Related Transactions

     Indenture. On March 29, 2010, the Company issued cash convertible senior notes (the “Notes”) in the aggregate principal amount of $175.0 pursuant to an indenture by and between the Company and Wells Fargo Bank, National Association, as trustee (the “Indenture”). Net proceeds from this transaction were approximately $169.2, after deducting the initial purchasers’ discounts and transaction fees and expenses. The Notes bear a stated interest rate of 4.50% per annum. The Company accounts for the cash conversion feature of the Notes (the “Bifurcated Conversion Feature”) as a separate derivative instrument. The fair value of the Bifurcated Conversion Feature on the issuance date of the Notes was recorded as the original issue discount for purposes of accounting for the debt component of the Notes. At issuance, the original issue discount relating to the Notes was $38.1, which will be amortized based on the effective interest method over the term of the Notes. Interest expense greater than the interest rate of 4.50% will be recognized over the term of the Notes, primarily due to the accretion of the discounted carrying value of the Notes to their face amount. The initial purchasers’ discounts and transaction fees and expenses totaling $5.8 were capitalized as deferred financing costs and will be amortized over the term of the Notes using the effective interest method. The effective interest rate of the Notes is approximately 11% per annum. Interest is payable semi-annually in arrears on April 1 and October 1 of each year. The Notes will mature on April 1, 2015, subject to earlier repurchase or conversion upon the occurrence of certain events. Holders may convert their Notes before January 1, 2015, only in certain circumstances determined by (i) the market price of the Company’s common stock, (ii) the trading price of the Notes or (iii) the occurrence of specified corporate events. The Notes can be converted by the holders at any time on or after January 1, 2015 until the close of business on the second scheduled trading date immediately preceding the maturity date of the Notes. The Notes are subject to repurchase by the Company at the option of the holders following a fundamental change, as defined in the Indenture, at a price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Fundamental changes include, but are not limited to, (i) certain ownership changes, (ii) certain recapitalizations, mergers and dispositions, (iii) shareholders’ approval of any plan or proposal for the liquidation, or dissolution of the Company, and (iv) the failure of the Company’s common stock to be listed on the New York Stock Exchange, the NASDAQ Global Select Market or the NASDAQ Global Market. The Notes have an initial conversion rate of 20.6949 shares of common stock per (in whole dollars) $1,000 principal amount of the Notes (equivalent to an initial conversion price of approximately $48.32 per share, representing a 26% conversion premium over the closing price of $38.35 per share of the Company’s common stock on March 23, 2010), subject to adjustment, based on the occurrence of certain events, including, but not limited to, (i) the issuance of certain dividends on the Company’s common stock, (ii) the issuance of certain rights, options or warrants, (iii) the effectuation of share splits or combinations, (iv) certain distributions of property, and (v) certain issuer tender or exchange offers as described in the Indenture, with the amount due on conversion payable in cash. The Notes are not convertible into the Company’s common stock or any other securities under any circumstances, but instead will be settled in cash.

     The following provides additional information regarding the Notes:

		March 31,				December 31,
		2011				2010
Principal amount		$	175.0			$	175.0
Less: unamortized issuance discount			(32.0	)			(33.6	)
Carrying amount, net of discount		$	143.0			$	141.4

		Quarter ended
		March 31,
		2011				2010
Contractual coupon interest		$	2.0			$	0.1
Amortization of discount and deferred financing costs			1.9				—
Total interest expense1		$	3.9			$	0.1

     See Other section of Note 12 for information relating to the estimated fair value of the Notes.

     Convertible Note Hedge Transactions. On March 23 and March 26, 2010, the Company purchased the Call Options from several financial institutions (the “Option Counterparties”). The Call Options have an exercise price equal to the conversion price of the

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

Notes, subject to anti-dilution adjustments substantially similar to the anti-dilution adjustments for the Notes. The Call Options will expire upon the maturity of the Notes. The Company paid an aggregate amount of approximately $31.4 to the Option Counterparties for the Call Options.

     The Call Options are expected to generally reduce the Company’s exposure to potential cash payments in excess of the principal amount of the Notes that it may be required to make upon the conversion of the Notes. If the market price per share of the Company’s common stock at the time of cash conversion of any Notes is above the strike price of the Call Options (which initially equals to the initial conversion price of the Notes of approximately $48.32 per share of the Company’s common stock), the Company is entitled to receive from the Option Counterparties in an aggregate amount equaling the amount of cash that the Company would be required to deliver to the holder of the converted Notes, less the principal amount thereof.

     On March 23 and March 26, 2010, the Company also entered into warrant transactions pursuant to which the Company sold to the Option Counterparties net-share-settled warrants (the “Warrants”) relating to approximately 3.6 million shares of the Company’s common stock. The warrants expire on July 1, 2015. The Option Counterparties paid an aggregate amount of approximately $14.3 to the Company for the Warrants.

     If the market price per share of the Company’s common stock, as measured under the terms of the Warrants, exceeds the strike price of the Warrants, which initially equals $61.36 per share (representing a 60% premium over the closing price of $38.35 per share of the Company’s common stock on March 23, 2010), the Company will be obligated to issue to the Option Counterparties shares of the Company’s common stock having a value equal to such excess, as measured under the terms of the Warrants. The Warrants may not be exercised prior to the expiration date.

     The Warrants meet the definition of derivatives; however, because the Warrants are indexed to the Company’s common stock and have been determined to meet the requirement to be classified as equity instruments, they are not subject to fair value accounting.

     The Call Options and Warrant transactions are separate transactions entered into by the Company with the Option Counterparties, and are not part of the terms of the Notes and do not affect the rights of holders under the Notes.

4. Secured Debt and Credit Facilities

Secured debt and credit facilities consisted of the following:

		March 31,				December 31,
		2011				2010
Revolving credit facility		$	—			$	—
Other notes payable			12.7				13.1
Total			12.7				13.1
Less — current portion of secured debt and credit facilities			(4.8	)			(1.3	)
Long-term secured debt and credit facilities		$	7.9			$	11.8

     Revolving Credit Facility. On March 23, 2010, the Company and certain of its subsidiaries entered into a $200.0 revolving credit facility with a group of lenders (the “Revolving Credit Facility”), of which up to a maximum of $60.0 may be utilized for letters of credit. Under the Revolving Credit Facility, the Company is able to borrow from time to time an aggregate amount equal to the lesser of $200.0 or a borrowing base comprised of approximately 85% of eligible accounts receivable and approximately 65% of eligible inventory, reduced by certain reserves, all as specified in the Revolving Credit Facility. The Revolving Credit Facility matures in March 2014, at which time all amounts outstanding under the Revolving Credit Facility will be due and payable. Borrowings under the Revolving Credit Facility bear interest at a rate equal to either a base prime rate or LIBOR, at the Company’s option, plus, in each case, a specified variable percentage determined by reference to the then-remaining borrowing availability under the Revolving Credit Facility. The Revolving Credit Facility may, subject to certain conditions and the agreement of lenders thereunder, be increased up to $250.0.

     Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of various events of default including, without limitation, the failure to make principal or interest payments when due and breaches of covenants, representations and warranties set forth in the Revolving Credit Facility. The Revolving Credit Facility places limitations on the ability of the Company and certain of its subsidiaries to, among other things, grant liens, engage in mergers, sell assets, incur debt, make investments, undertake transactions with affiliates, pay dividends and repurchase shares. In addition, the Company is required to maintain a fixed

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

charge coverage ratio on a consolidated basis at or above 1.1 to 1.0 if borrowing availability under the Revolving Credit Facility is less than $30.

     The Revolving Credit Facility is secured by a first priority lien on substantially all of the accounts receivable, inventory and certain other related assets and proceeds of the Company and its domestic operating subsidiaries. At March 31, 2011, the Company was in compliance with all covenants contained in the Revolving Credit Facility.

     The Company capitalized $3.4 of financing costs in connection with the Revolving Credit Facility which are amortized over the term of the Revolving Credit Facility on a straight-line basis. At March 31, 2011, $2.5 of deferred financing costs remained on the Consolidated Balance Sheets.

     At March 31, 2011, based on the borrowing base determination in effect as of that date, the Company had under the Revolving Credit Facility borrowing availability of $200.0, of which $9.8 was being used to support outstanding letters of credit, leaving $190.2 of availability. There were no borrowings under the Revolving Credit Facility at March 31, 2011, but the interest rate applicable to any borrowings under the Revolving Credit Facility would have been 5.25% at March 31, 2011 for overnight borrowings.

     Other Notes Payable. In connection with the Company’s acquisition of the Florence, Alabama facility on August 9, 2010 (Note 5), a promissory note in the amount of $6.7 (the “Nichols Promissory Note”) was issued to Nichols as a part of the consideration paid. The Nichols Promissory Note bears interest at a rate of 7.5% per annum. Accrued but unpaid interest is due quarterly through maturity of the Nichols Promissory Note on August 9, 2015. The Company has the option to repay all or a portion of the Nichols Promissory Note at any time prior to the maturity date. Principal payments on the Nichols Promissory Note are due in equal quarterly installments. The Nichols Promissory Note is secured by certain real property and equipment included in the assets acquired from Nichols in the acquisition. At March 31, 2011, the outstanding principal balance under the Nichols Promissory Note was $5.7, of which $1.3 was payable within 12 months. For the quarter ended March 31, 2011, the Company recorded $0.1 of interest expense related to the Nichols Promissory Note.

     As of March 31, 2011, the Company also had a $7.0 outstanding promissory note (the “LA Promissory Note”) in connection with the Company’s purchase of the previously leased land and buildings associated with its Los Angeles, California facility in December 2008. Interest is payable on the unpaid principal balance of the LA Promissory Note monthly in arrears at the prime rate, as defined in the LA Promissory Note, plus 1.5%, in no event exceeding 10% per annum. A principal payment of $3.5 will be due on January 1, 2012, and the remaining $3.5 will be due on January 1, 2013. The LA Promissory Note is secured by a deed of trust on the property. For both quarters ended March 31, 2011 and March 31, 2010, the Company incurred $0.1 of interest expense relating to the LA Promissory Note. The interest rate applicable to the LA Promissory Note was 4.75% at March 31, 2011.

5. Acquisitions

     Alexco. Effective January 1, 2011, the Company completed the acquisition of substantially all of the assets of Alexco, a manufacturer of hard alloy extrusions for the aerospace industry, based in Chandler, Arizona.

     The Company paid net cash consideration of $83.2 (net of $4.9 of cash received in the acquisition) on January 3, 2011, with existing cash on hand, and assumed certain liabilities totaling approximately $1.0. Total acquisition related expenses were $0.5, of which $0.1 was included in the Company’s consolidated results of operations for the quarter ended March 31, 2011. Such expenses are included within Selling, administrative, research and development, and general expenses.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the effective date of the acquisition:

Allocation of purchase price:
Cash		$	4.9
Accounts receivable, net			3.6
Inventories			6.6
Property, plant and equipment			4.5
Definite-lived intangible assets:
Customer relationships			34.7
Order backlog			0.3
Trademark and trade name			0.4
Goodwill			34.1
Accounts payable and other current liabilities			(1.0	)
Cash consideration paid		$	88.1

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

     Goodwill arising from this transaction reflects (i) the expected synergistic benefits to the Company, as the products manufactured by the acquired operation are expected to complement the Company’s other offerings of sheet, plate, cold finish and drawn tube products for aerospace applications and (ii) the calculation of the fair value of the other assets acquired and liabilities assumed in this transaction. Goodwill arising from this transaction is anticipated to be deductible for tax purposes over the next 15 years.

     The following unaudited pro forma financial information for the Company summarizes the results of operations for the periods indicated as if the Alexco acquisition had been completed as of January 1, 2010, the first day of the earliest period presented in the Statements of Consolidated Income included in this Report. This pro forma financial information considers principally (i) the Company’s unaudited financial results, (ii) the unaudited historical financial results of Alexco, as supplied to the Company, and (iii) select pro forma adjustments to the historical financial results of Alexco. Such pro forma adjustments represent principally estimates of (i) cost synergies from integration of the acquired operation into the Company’s existing business, (ii) the impact of the hypothetical amortization of acquired intangible assets and the recognition of fair value adjustments relating to tangible assets in pre-tax income in each period, and (iii) the pro forma impact of the transaction on the Company’s tax provision in each period. These pro forma adjustments did not have a material impact on the pro forma Net income, as presented below. The following pro forma data does not purport to be indicative of the results of future operations or of the results that would have actually occurred had the acquisition taken place at the beginning of 2010:

		Quarter ended
		March 31,
		2011				2010
Net sales (combined)1		$	322.6			$	274.4
Net income (combined)1		$	11.3			$	9.9
Basic and diluted earnings per share (combined)1		$	0.59			$	0.49

The following information presents select financial data relating to the Chandler, Arizona (Extrusion) facility, as included within the Company’s consolidated operating results, for the period presented:

		Quarter ended
		March 31,
		2011
Net sales		$	9.9
Net income before income taxes		$	2.2

     Nichols. On August 9, 2010, the Company acquired the Florence, Alabama facility, which manufactures bare mechanical alloy wire products, nails and aluminum rod for aerospace, general engineering, and automotive applications.

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

     Consideration consisted of (i) $9.0 in cash, (ii) the $6.7 Nichols Promissory Note from the Company to Nichols (Note 4), and (iii) the assumption of certain liabilities totaling approximately $2.1. Total acquisition-related costs were approximately $0.8, all of which were expensed through December 31, 2010 and included in Selling, administrative, research and development, and general in the Statement of Consolidated Income. The acquisition did not have a material impact on the Company’s consolidated financial statements.

     The following table summarizes recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date:

Inventory		$	3.9
Other current assets			2.3
Property, plant and equipment			4.2
Identifiable intangible assets with definite lives			4.3
Goodwill			3.1
Liabilities assumed			(2.1	)
Consideration paid		$	15.7

     The goodwill of $3.1 arising from the acquisition represents the commercial opportunity for the Company to sell small-diameter rod, bar and wire products, as a complement to its other products, to its core markets and end market segment applications and is expected to be deductible for income tax purposes over the next 15 years.

6. Goodwill and Intangible Assets

     A roll-forward of goodwill from December 31, 2010 to March 31, 2011 is as follows (see Note 5 for additional information about the Company’s business acquisitions):

Balance as of December 31, 2010		$	3.1
Goodwill arising from Alexco acquisition			34.1
Balance as of March 31, 2011		$	37.2

All of the Company’s goodwill is included in the Fabricated Products segment.

     Identifiable intangible assets at March 31, 2011 and December 31, 2010 are comprised of the following:

March 31, 2011:

		Weighted
		average estimated								Accumulated
		useful life				Original cost				amortization				Net book value
Customer relationships			25			$	38.5			$	(0.5	)		$	38.0
Backlog			2				0.8				(0.4	)			0.4
Trademark and trade name			3				0.4				—				0.4
Total			24			$	39.7			$	(0.9	)		$	38.8

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

December 31, 2010:

		Weighted
		average estimated								Accumulated
		useful life				Original cost				amortization				Net book value
Customer relationships			20			$	3.8			$	(0.1	)		$	3.7
Backlog			2				0.5				(0.2	)			0.3
Total			18			$	4.3			$	(0.3	)		$	4.0

Amortization expense relating to definite-lived intangible assets is recorded in the Fabricated Products segment. Such expense was $0.6 for the quarter ended March 31, 2011. The expected amortization of intangible assets for the next five calendar years is as follows:

2011		$	1.9
2012			2.0
2013			1.7
2014			1.6
2015			1.6
Total		$	8.8

     7. Income Tax Matters

     Tax Provision. The provision for income taxes for the quarters ended March 31, 2011 and March 31, 2010 consisted of:

		Quarter Ended March 31,
		2011				2010
Domestic		$	6.0			$	5.2
Foreign			0.4				1.0
Total		$	6.4			$	6.2

     The income tax provision for the quarter ended March 31, 2011 was $6.4, or an effective tax rate of 36.3%. The difference between the effective tax rate and the projected blended statutory tax rate was primarily the result of a decrease in the valuation allowance, due to a change in tax law in the State of Illinois of $0.8, resulting in a 4.6% decrease in the effective tax rate, partially offset by (i) an increase in unrecognized tax benefits, including interest and penalties of $0.3, resulting in a 1.7% increase in the effective tax rate and (ii) the impact of a non-deductible compensation expense of $0.2, resulting in a 1.3% increase in the effective tax rate.

     Deferred Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

     At December 31, 2010, the Company had $882.6 of net operating loss (“NOL”) carryforwards available to reduce future cash payments for income taxes in the U.S. Of the $882.6 of NOL carryforwards at December 31, 2010, $1.7 consists of excess tax benefits from employee restricted stock. Equity will be increased by $1.7 if and when such excess tax benefits are ultimately realized. The NOL carryforwards expire periodically through 2030. The Company also had $31.1 of alternative minimum tax (“AMT”) credit carryforwards with an indefinite life, available to offset regular federal income tax requirements.

     To preserve the NOL carryforwards that may be available to the Company, (i) the Company’s certificate of incorporation includes certain restrictions on the transfer of the Company’s common stock and (ii) the Company entered into a stock transfer restriction agreement with the Union VEBA (which remained the Company’s largest stockholder as of March 31, 2011).

     In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable

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

income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. Due to uncertainties surrounding the realization of some of the Company’s deferred tax assets, including state NOLs sustained during the prior years and expiring tax benefits, the Company had a valuation allowance against its deferred tax assets of $19.3 and $20.1 at March 31, 2011 and December 31, 2010, respectively. When recognized, the tax benefits relating to any reversal of this valuation allowance will be recorded as a reduction of income tax expense.

     Other. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Canada Revenue Agency audited the Company’s tax returns for fiscal years 1998 through 2001 and issued assessment notices for which Notices of Objection have been filed. In addition, the Canada Revenue Agency has audited the Company’s tax returns for fiscal years 2002 through 2004 and issued assessment notices, as a result of which $7.9 has been paid to the Canada Revenue Agency against previously accrued tax reserves in the third quarter of 2009. There is an additional Canadian Provincial income tax assessment of $1.2, including interest, resulting from the audit of the Company’s tax returns for fiscal years 2002 through 2004 that is anticipated to be paid against previously accrued tax reserves in next 12 months. The Company’s tax returns for certain past years are still subject to examination by taxing authorities, and the use of NOL carryforwards in future periods could trigger a review of attributes and other tax matters in years that are not otherwise subject to examination.

     No U.S. federal or state liability has been recorded for the undistributed earnings of the Company’s Canadian subsidiary at March 31, 2011. These undistributed earnings are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided on such undistributed earnings. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with such hypothetical calculation.

     The Company has gross unrecognized benefits relating to uncertain tax positions. If and when such gross unrecognized tax benefits are ultimately recognized, it will go through the Company’s income tax provision and affect the effective tax rate in future periods.

     The Company had gross unrecognized tax benefits of $15.5 and $15.0 at March 31, 2011 and December 31, 2010, respectively. The change during the quarter ended March 31, 2011 was primarily due to foreign currency fluctuations and change in tax positions.

     In addition, the Company recognizes interest and penalties related to unrecognized tax benefits in the income tax provision. The Company had $6.9 and $6.6 accrued at March 31, 2011 and December 31, 2010, respectively, for interest and penalties. Of these amounts, $0.4 was recorded as current liabilities and included in Other accrued liabilities on the Consolidated Balance Sheets at March 31, 2011 and December 31, 2010. The Company recognized an increase in interest and penalty of $0.3 and $0.4 in its tax provision in the quarters ended March 31, 2011 and March 31, 2010, respectively.

     In connection with the gross unrecognized tax benefits (including interest and penalty) denominated in foreign currency, we incurred a foreign currency translation adjustment. During the quarter ended March 31, 2011, the foreign currency impact on such liabilities resulted in a $0.4 currency translation adjustment which was recorded within Other comprehensive income.

     The Company expects its gross unrecognized tax benefits to be reduced by $1.7 within the next 12 months.

8. Employee Benefits

     Pension and Similar Plans. Pensions and similar plans include:

	•		Monthly contributions of (in whole dollars) $1.00 per hour worked by each bargaining unit employee to the appropriate multi-employer pension plans sponsored by the United Steel, Paper and Foresting, 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, except that (i) the monthly contributions per hour worked by each bargaining unit employee to a pension plan sponsored by the USW at the Company’s Newark, Ohio and Spokane, Washington facilities increased to (in whole dollars) $1.25 starting July 2010 and will increase to (in whole dollars) $1.50 in July 2015 and (ii) monthly contributions to a pension plan sponsored by the USW at the Company’s newly acquired Florence, Alabama facility are (in whole dollars) $1.25 per hour worked by each bargaining unit employee. The Company currently estimates that contributions will range from $2.0 to $4.0 per year through 2013.
	•		A defined contribution 401(k) savings plan for hourly bargaining unit employees at eight of the Company’s production facilities. For active bargaining unit employees at four of these production facilities, the Company is required to make contributions to this plan ranging

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

			from (in whole dollars) $800 to $2,400 per employee per year, depending on the employee’s age. For active bargaining unit employees at two other production facilities, the Company provides for (i) a concurrent match of up to 4% of certain contributions made by employees and (ii) an annual contribution of between 2% and 10% of their compensation to employees hired prior to January 1, 2004, depending on their age and years of service, or a fixed 2% annual contribution to employees hired on or after January 1, 2004. The Company currently estimates that contributions to such plans will range from $1.0 to $3.0 per year.
	•		A defined contribution 401(k) savings plan for salaried and certain hourly employees providing for a concurrent match of up to 4% of certain contributions made by employees plus an annual contribution of between 2% and 10% of their compensation depending on their age and years of service. All new hires after January 1, 2004 receive a fixed 2% contribution annually. The Company currently estimates that contributions to such plan will range from $4.0 to $6.0 per year.
	•		A defined benefit plan for salaried employees at the Company’s London, Ontario facility, with annual contributions based on each salaried employee’s age and years of service. At December 31, 2010, approximately 62% of the plan assets were invested in equity securities and 36% of plan assets were invested in debt securities. The remaining plan assets were invested in short-term securities. The Company’s investment committee reviews and evaluates the investment portfolio. The asset mix target allocation on the long-term investments is approximately 60% in equity securities and 36% in debt securities with the remaining assets in short-term securities. See Note 12 for additional information regarding the fair values of the Canadian pension plan assets.
	•		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, as a result of the limitations imposed by the Internal Revenue Code. Despite the plan being an unfunded plan, the Company makes an annual contribution to a rabbi trust to fulfill future funding obligations, as contemplated by the terms of the plan. The assets in the trust are at all times subject to the claims of the Company’s general creditors, and no participant has a claim to any assets of the trust. Plan participants are eligible to receive distributions from the trust subject to vesting and other eligibility requirements. Assets in the rabbi trust relating to the deferred compensation plan are accounted for as available for sale securities and are included as Other assets on the Consolidated Balance Sheets (Note 2). Liabilities relating to the deferred compensation plan are included on the Consolidated Balance Sheets as Long-term liabilities (Note 2).
	•		An employment agreement with the Company’s chief executive officer which extends through July 6, 2015. The Company also provides certain members of senior management, including each of the Company’s named executive officers, with benefits related to terminations of employment in specified circumstances, including in connection with a change in control, by the Company without cause and by the named executive officer with good reason.

     Postretirement Medical Obligations. As a part of the Company’s reorganization, the Company’s postretirement medical plan was terminated in 2004. Participants were given the option of coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) or participation in the applicable voluntary employee’s beneficiary association (“VEBA”), the VEBA that provides benefits for certain union retirees, their surviving spouses and eligible dependents (the “Union VEBA”) or the VEBA that provides benefits for certain other eligible retirees, their surviving spouse and eligible dependents (the “Salaried VEBA”). Qualifying bargaining unit employees who do not, or are not eligible to, elect COBRA coverage are covered by the Union VEBA. The Salaried VEBA covers certain retirees who retired prior to the 2004 termination of the prior plan or who subsequently have retired or will retire with the required age and service requirements so long as their employment commenced prior to February 2002. The benefits paid by the VEBAs are 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 payable to the Union VEBA and the Salaried VEBA and (ii) an obligation to pay one-half of the administrative expenses of the VEBAs, up to $0.3 per year. The obligation to the Union VEBA with respect to the annual variable cash contribution extends through September 30, 2017 (reflecting a five-year extension agreed by the Company in January 2010 in connection with the renewal and ratification of a labor agreement with the members of the USW at the Company’s Newark, Ohio and Spokane, Washington facilities), while the obligation to the Salaried VEBA has no termination date. The amount to be contributed to the VEBAs through September 2017 pursuant to the Company’s obligation is 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 annual payments may not exceed $20.0 and are also limited (with no carryover to future years) to the extent that the payments would cause the Company’s liquidity to be less than $50.0. Such amounts are determined on an annual basis and payable within 120 days following the end of the fiscal year, or within 15 days following the date on which the Company files its Annual Report on Form 10-K with the SEC (or, if no such report is required to be filed, within 15 days of the delivery of the independent auditor’s opinion of the Company’s

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

annual financial statements), whichever is earlier. The Union VEBA is managed by four trustees (two appointed by the Company and two appointed by the USW), and the assets are managed by an independent fiduciary.

     Amounts owing by the Company to the VEBAs are recorded in the Company’s Consolidated Balance Sheets under Other accrued liabilities, with a corresponding increase in Net assets in respect of VEBAs. At December 31, 2010, the Company had preliminarily determined that $2.1 was owed to the VEBAs (comprised of $1.8 to the Union VEBA and $0.3 to the Salaried VEBA). These amounts were paid during the first quarter of 2011, along with an additional payment of $0.1, based on the final computation of the 2010 results.

     For accounting purposes, after discussions with the staff of the SEC, the Company treats the postretirement medical benefits to be paid by the VEBAs and the Company’s related annual variable contribution obligations as defined benefit postretirement plans with the current VEBA assets and future variable contributions described above, and earnings thereon, operating as a cap on the benefits to be paid. While the Company has no control over the plan assets and its only financial obligations to the VEBAs are to pay the annual variable contribution amount and certain administrative fees, the Company nonetheless accounts for net periodic postretirement benefit and records any difference between the assets of each VEBA and its accumulated postretirement benefit obligation in the Company’s financial statements. Information necessary for the valuation of the net funded status of the plans must be obtained from the Salaried VEBA and Union VEBA on an annual basis. It is possible that existing assets may be insufficient to fund the accumulated benefit obligation resulting in a negative net funded position on the Company’s Consolidated Balance Sheets; however, the Company has no obligation to fund either the Salaried VEBA or the Union VEBA beyond the annual variable cash contributions as determined.

     Components of Net Periodic Benefit Cost (Income) — The following table presents the components of net periodic benefit cost (income) for the quarters ended March 31, 2011 and March 31, 2010:

		Quarter Ended
		March 31,
		2011				2010
VEBAs:
Service cost		$	0.7			$	0.7
Interest cost			3.9				4.0
Expected return on plan assets			(7.6	)			(5.2	)
Amortization of prior service cost			1.0				1.0
Amortization of net gain			(0.2	)			(0.1	)
			(2.2	)			0.4
Deferred compensation plans			0.2				0.7
Defined contributions plans			3.4				3.2
Multiemployer pension plans			0.8				0.7
		$	2.2			$	5.0
The following tables present the allocation of these charges:

		Quarter Ended
		March 31,
		2011				2010
Fabricated Products segment		$	4.0			$	3.4
Corporate and Other segment			(1.8	)			1.6
		$	2.2			$	5.0

     For all periods presented, the net periodic benefits relating to the VEBAs are included as a component of Selling, administrative, research and development and general expense within All Other and substantially all of the Fabricated Products segment’s related charges are in Cost of products sold, excluding depreciation, amortization and other items with the balance in Selling, administrative, research and development and general.

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

     As of March 31, 2011, the Union VEBA owned approximately 17% of the Company’s issued and outstanding shares of common stock, or 3,306,938 common shares, all of which have been registered for resale under the Securities Act of 1933, as amended, or may be sold in transactions exempt from securities laws, including under Rule 144. However, a stock transfer restriction agreement between the Union VEBA and the Company restricts the number of shares of the Company’s common stock that generally may be sold by the Union VEBA during any 12-month period without further approval of our Board of Directors to 1,321,485. Shares owned by the Union VEBA that are subject to the stock transfer restriction agreement are treated as being similar to treasury stock (i.e. as a reduction of Stockholders’ equity) in the Company’s Consolidated Balance Sheets. During the quarter ended March 31, 2011, the Union VEBA sold 217,042 shares of the Company’s common stock permitted under the stock transfer restriction agreement. The 217,042 shares sold resulted in (i) an increase of $10.6 in VEBA assets (at a weighted-average price of $49.06 per share realized by the Union VEBA), (ii) a reduction of $5.2 in common stock owned by Union VEBA (at $24.02 per share reorganization value) and (iii) the difference between the two amounts, net of tax adjustment, was credited to Additional capital.

     See Note 11 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 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.

9. Employee Incentive Plans

     Short-term Incentive Plans

     The Company has a short-term incentive compensation plan for senior management and certain corporate 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 plan are based primarily on EVA of the Company’s core Fabricated Products business, adjusted for certain safety and performance factors. Most of the Company’s production facilities have similar programs for both hourly and salaried employees. During the quarters ended March 31, 2011 and March 31, 2010, the Company recorded the following charges:

		Quarter Ended
		March 31,
		2011				2010
Cost of products sold		$	1.1			$	0.6
Selling, administrative, research and development and general			1.1				1.4
Total expense recorded in connection with short-term incentive plans		$	2.2			$	2.0
The following table presents the allocation of these charges:

		2011				2010
Fabricated Products segment		$	1.7			$	1.3
All Other			0.5				0.7
Total expense recorded in connection with short-term incentive plans		$	2.2			$	2.0

     Long- term Incentive Plans

     General. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors and directors emeritus of the Company, are eligible to participate in the Kaiser Aluminum Corporation 2006 Equity and Performance Incentive Plan (as amended, the “Equity Incentive Plan”). The Equity Incentive Plan permits the granting of awards in the form of options to purchase common shares, stock appreciation rights, shares of non-vested and vested stock, restricted stock units, performance shares, performance units and other awards. The Equity Incentive Plan will expire on July 6, 2016, and no grants will be made after that date. The Company’s Board of Directors may, in its discretion, terminate the Equity Incentive Plan at any time. The termination of the Equity Incentive Plan will not affect the rights of participants or their successors under any awards outstanding and not exercised in full on the date of termination, and all grants made on or prior to the date of termination will continue in effect thereafter subject to the terms thereof and of 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

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

authorized for issuance under the Equity Incentive Plan. At March 31, 2011, 851,219 common shares were available for additional awards under the Equity Incentive Plan.

     Compensation charges, all of which are included in Selling, administrative, research and development and general expenses, related to the Equity Incentive Plan for the quarters ended March 31, 2011 and March 31, 2010 were as follows:

		Quarter Ended
		March 31,
		2011				2010
Service-based vested and non-vested common shares and restricted stock units		$	1.0			$	1.0
Performance shares			0.4				0.5
Service-based stock options			—				0.1
Total expense recorded in connection with the Equity Incentive Plan		$	1.4			$	1.6
The following table presents the allocation of these charges:

		Quarter Ended
		March 31,
		2011				2010
Fabricated Products segment		$	0.4			$	0.5
All Other			1.0				1.1
Total expense recorded in connection with the Equity Incentive Plan		$	1.4			$	1.6

     Non-vested Common Shares, Restricted Stock Units, and Performance Shares. The Company grants non-vested common shares to its non-employee directors, directors emeritus, executive officers and other key employees. The non-vested common shares granted to non-employee directors and a director emeritus are generally subject to a one-year vesting requirement. The non-vested common shares granted to executive officers and senior management are generally subject to a three-year cliff vesting requirement. The non-vested common shares granted to other key employees are generally subject to a three-year graded vesting requirement. In addition to non-vested common shares, 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. With the exception of restricted stock units granted to eligible employees of the Company’s French subsidiary, restricted stock units vest one-third on the first anniversary of the grant date and one-third on each of the second and third anniversaries of the date of issuance. Restricted stock units granted to eligible employees of the Company’s French subsidiary vest two-thirds on the second anniversary of the grant date and one-third on the third anniversary of the grant date.

     The fair value of the non-vested common shares and restricted stock units are based on the grant date market value of the common shares and amortized over the requisite service period on a straight-line basis, after assuming an estimated forfeiture rate. 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. No such shares were granted to non-employee directors for the quarters ended March 31, 2011 and March 31, 2010.

     The Company grants performance shares to executive officers and other key employees under the Company’s long-term incentive (“LTI”) programs. Awards under existing programs are subject to performance requirements pertaining to the Company’s EVA performance, measured over a three-year performance period. EVA is a measure of 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 and result in the issuance of common shares depends on the average annual EVA achieved for the specified three-year performance periods. Under the 2008-2010 LTI program, 10,585 performance shares vested during the quarter ended March 31, 2011. The vesting of performance shares and related issuance and delivery of common shares, if any, under the 2009-2011 LTI program, 2010-2012 LTI program and 2011-2013 LTI program will occur in 2012, 2013 and 2014, respectively. Holders of performance shares do not receive voting rights through the ownership of such performance shares.

     The fair value of performance-based awards is measured based on the most probable outcome of the performance condition, which is estimated quarterly using the Company’s forecast and actual results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the specified three-year performance periods on a ratable basis.

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

     The fair value of the non-vested common shares, restricted stock units, and performance shares was determined based on the closing trading price of the common shares on the grant date. A summary of the activity with respect to non-vested common shares and restricted stock units for the quarter ended March 31, 2011 is as follows:

		Non-Vested								Restricted
		Common Shares								Stock Units
						Weighted-Average								Weighted-Average
						Grant-Date Fair								Grant-Date Fair
		Shares				Value per Share				Units				Value per Unit
Outstanding at December 31, 2010			268,864			$	27.91				7,872			$	21.74
Granted			63,303				46.59				2,182				46.59
Vested			(46,464	)			56.63				(3,314	)			16.83
Forfeited			—				—				—				—
Outstanding at March 31, 2011			285,703			$	27.38				6,740			$	32.20

A summary of the activity with respect to the performance shares for the quarter ended March 31, 2011 is as follows:

		Performance Shares
						Weighted-
						Average
						Grant-Date
						Fair Value
		Shares				per Share
Outstanding at December 31, 2010			686,895			$	26.84
Granted			186,918				46.59
Vested			(10,585	)			74.34
Cancelled			(68,799	)			74.34
Outstanding at March 31, 2011			794,429			$	26.74

     For the quarter ended March 31, 2010, 82,867 non-vested common shares, 2,362 shares of restricted stock units and 205,789 performance shares were granted to employees. Each of the foregoing grants has a weighted-average grant date fair value per share of $34.13, $36.23 and $34.13, respectively. During the quarter ended March 31, 2010, 13,050 non-vested shares and 523 restricted stock units vested. The weighted-average grant date fair value per share of the non-vested shares and restricted stock units that vested during such period were $22.39 and $24.63, respectively. There were no performance shares that vested during the quarter ended March 31, 2010.

     As of March 31, 2011, there was $5.3 of unrecognized gross compensation cost related to the non-vested common shares and the restricted stock units and $5.9 of unrecognized gross compensation cost related to the performance shares. The cost related to the non-vested common shares and the restricted stock units is expected to be recognized over a weighted-average period of 2.2 years, and the cost related to the performance shares is expected to be recognized over a weighted-average period of 2.7 years.

     Under the Equity Incentive Plan, participants may elect to have the Company withhold common shares to satisfy statutory tax withholding obligations arising in connection with non-vested shares, restricted stock units, stock options, and performance shares. When the Company withholds the shares, it is required to remit to the appropriate taxing authorities the fair value of the shares withheld and such shares are cancelled immediately. During quarter ended March 31, 2011, 22,862 common shares were withheld and cancelled for this purpose, and no shares were withheld or cancelled for this purpose during the quarter ended March 31, 2010.

     Stock Options. As of March 31, 2011, the Company had 22,077 fully-vested and exercisable outstanding options for executives and other key employees to purchase its common shares. The options were granted on April 3, 2007 at an exercise price of $80.01 per share and have a remaining contractual life of 6.0 years. The average fair value of the options granted was $39.90. No new options were granted, and no existing options were forfeited or exercised during the quarter ended March 31, 2011.

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

     At March 31, 2011, there was no unrecognized gross compensation expense related to stock options, as all unvested options became fully vested on April 3, 2010.

10. Commitments and Contingencies

     Commitments. The Company and its subsidiaries have 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 (Notes 3, 4 and 11).

     Minimum rental commitments under operating leases at March 31, 2011, are as follows: years ending December 31, 2011 — $7.5; 2012 — $6.9, 2013 — $5.9, 2014 — $3.4 and thereafter — $38.0. There are renewal options in various operating leases subject to certain terms and conditions.

     Environmental Contingencies. The Company and its subsidiaries are subject to a number of environmental laws, fines or penalties assessed for alleged breaches of the environmental laws, and to claims based upon such laws.

     The Company has established procedures for regularly evaluating environmental loss contingencies, including those arising from environmental reviews and investigations and any other environmental remediation or compliance matters. 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.

     During the third quarter of 2010, the Company increased its environmental accruals in connection with the Company’s submission of a draft feasibility study to the Washington State Department of Ecology (“Washington State Ecology”) on September 8, 2010 (the “Feasibility Study”). The draft Feasibility Study included recommendations for a range of remediation alternatives to primarily address the historical use of oils containing polychlorinated biphenyls, or PCBs, at the Company’s Trentwood facility in Spokane, Washington, which may be implemented over the next 30 years. During the first quarter of 2011, the Company continued to work with Washington State Ecology to revise the draft Feasibility Study and to determine viable remedial approaches. As of March 31, 2011, no agreement with the Washington State Ecology has been reached on the final remediation approach. The draft Feasibility Study is still subject to further reviews, public comment and regulatory approvals before the final decree is issued. The Company expects the consent decree to be issued in 2012.

     Based on the recommended remediation alternatives in the draft Feasibility Study and other existing historical environmental matters at the Trentwood facility and certain other locations owned or operated by the Company, the Company’s environmental accrual was $20.0 at March 31, 2011. The Company’s environmental accrual represents the low end of the range of incremental cost estimates based on proposed alternatives in the draft Feasibility Study, investigational studies and other remediation activities occurring at certain locations owned or operated by the Company. The Company expects that these remediation actions will be taken over the next 30 years and estimates that the incremental direct costs attributable to the remediation activities to be charged to these environmental accruals will be approximately $0.8 in 2011, $0.8 in 2012, $2.7 in 2013, $0.7 in 2014, and $15.0 in 2015 and years thereafter through the balance of the 30-year period.

     As additional facts are developed, feasibility studies at various facilities are completed, draft remediation plans are modified, necessary regulatory approval 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 $22.0 over the next 30 years. It is reasonably possible that the Company’s recorded estimate of its obligation may change in the next 12 months.

     Other Contingencies. The Company and its subsidiaries are parties 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 can be reasonably estimated. 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 reserved for such matters and that the ultimate resolution of pending matters will not have a material adverse impact on its consolidated financial position, operating results, or liquidity.

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

11. Derivative Financial Instruments and Related Hedging Programs

     Overview. In conducting its business, the Company, from time to time, 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 cash commitments for equipment purchases and with respect to its foreign subsidiaries, investment and cash commitments for equipment purchases. In March 2010, in connection with the issuance of the 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 Notes (Note 3). The Company may modify the terms of its derivative contracts based on operational needs or financing objectives. As the Company’s operational hedging activities are generally designed to lock in a specified price or range of prices, realized gains or losses on the derivative contracts utilized in the hedging activities generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged at the time the transactions occur. However, due to mark-to-market accounting, during the term of the derivative contracts, significant unrealized, non-cash gains and losses may be recorded in the income statement.

     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 metal price risk to its customers. However, in certain instances the Company enters into firm price arrangements with its customers and incurs price risk on its anticipated primary aluminum purchases in respect of such customer orders. The Hedging business unit uses third-party hedging instruments to limit exposure to metal-price risks related to firm price customer sales contracts (see Note 12 for additional information regarding the Company’s material derivative positions relating to hedges of operational risks, and their respective fair values).

     During the quarters ended March 31, 2011 and March 31, 2010, total fabricated products shipments that contained fixed price terms were (in millions of pounds) 24.6 and 22.4, respectively. At March 31, 2011, the Fabricated Products segment held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of primary aluminum for the remainder of 2011, 2012 and 2013 and thereafter, totaling approximately (in millions of pounds): 81.1, 14.7 and 0.4, respectively.

     A majority of the Company’s derivative contracts relating to hedges of operational risks contain credit-risk related contingencies, which the Company tries to minimize or offset through the management of counterparty credit lines, the utilization of options as part of the hedging activities, or both. The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur a significant loss from the failure of any counterparties to perform under any agreements.

     Hedges Relating to the Notes. As described in Note 1 and Note 3, the Company issued Notes in the aggregate principal amount of $175.0 in March 2010. The conversion feature of the Notes can only be settled in cash and was required to be bifurcated from the Notes and treated as a separate derivative instrument. 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 the gain or loss from the Call Options to substantially offset the loss or gain associated with changes to the valuation of the Bifurcated Conversion Feature. Accordingly, over time the Company does not expect there to be a material net impact to the Consolidated Statement of Income associated with the Bifurcated Conversion Feature and the Call Options (see Note 12 for additional information regarding the fair values of the Bifurcated Conversion Feature and the Call Options).

     The following table summarizes the Company’s material derivative positions at March 31, 2011:

						Notional
						Amount of
						Contracts
Commodity		Period				(mmlbs)				Fair Value
Aluminum —
Call option purchase contracts		4/11 through 12/11					36.7			$	9.2
Call option sales contracts		4/11 through 12/11					36.7			$	(9.2	)
Put option purchase contracts		4/11 through 12/11					76.7			$	—
Put option sales contracts		4/11 through 12/11					36.7			$	—
Fixed priced purchase contracts		4/11 through 11/13					98.8			$	21.5
Fixed priced sales contracts		4/11 through 12/11					10.5			$	(3.4	)
Midwest premium swap contracts1		4/11 through 12/12					67.8			$	0.6

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

						Notional
						Amount
						of Contracts
Energy		Period				(mmbtu)				Fair Value
Natural gas —2
Call option purchase contracts		4/11 through 12/13					6,120,000			$	0.3
Call option sales contracts		4/11 through 12/11					2,070,000			$	—
Put option purchase contracts		4/11 through 12/11					2,070,000			$	1.7
Put option sales contracts		4/11 through 12/13					6,120,000			$	(3.7	)
Fixed priced purchase contracts		4/11 through 12/11					2,550,000			$	(0.1	)

Notional

Amount

of Contracts

Electricity

Period

(Mwh)

Fair Value

Fixed priced purchase contracts

1/12 through 12/12

87,840

$

—

Notional

Amount

of Contracts

Hedges Relating to the Notes

Period

(Common Shares)

Fair Value

Bifurcated Conversion Feature3

3/10 through 3/15

3,621,608

$

(56.3

)

Call Options3

3/10 through 3/15

3,621,608

$

46.4

The Company reflects the fair value of its derivative contracts on a gross basis in the Consolidated Balance Sheets (Note 2).

     Realized and Unrealized Gain and Losses. The realized and unrealized gains (losses) associated with all derivative contracts for the quarters ended March 31, 2011 and March 31, 2010 were as follows:

		Quarter Ended
		March 31,
		2011				2010
Realized gains (losses):
Aluminum		$	4.5			$	(0.7	)
Natural Gas			(1.4	)			(0.1	)
Total realized gains (losses):		$	3.1			$	(0.8	)
Unrealized gains (losses):
Aluminum		$	3.1			$	3.4
Natural Gas			1.2				(3.2	)
Call Options relating to the Notes			(2.0	)			—
Cash conversion feature of the Notes			3.7				—
Total unrealized gains		$	6.0			$	0.2

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

     12. Fair Value Measurements

     Overview. The Company applies the fair value hierarchy established by US 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 measured on a recurring basis. The Company has elected not to carry any financial assets and liabilities at fair value, other than as required by US GAAP. Financial assets and liabilities that the Company carries at fair value, as required by US GAAP include: (i) its derivative instruments, (ii) the plan assets of the VEBAs and the Company’s Canadian defined benefit pension plan, and (iii) available for sale securities, consisting of investments related to the Company’s deferred compensation plan (see Note 8).

     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 carried at fair value on a recurring basis. However, if certain triggering events occur (or as tested at least annually for goodwill), an evaluation of a non-financial asset or liability may be required, potentially resulting in an adjustment to the carrying amount of such asset or liability. For the quarters ended March 31, 2011 and March 31, 2010, the Company concluded that none of its non-financial assets and liabilities subject to fair value assessments on a non-recurring basis required a material adjustment to the carrying amount of such assets and liabilities.

     Fair Values of Financial Assets and Liabilities. The Company’s derivative contracts are valued at fair value using significant observable and unobservable inputs.

     Commodity, Foreign Currency and Energy Hedges — 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 Company has some derivative contracts, however, that do not have observable market quotes. For these financial instruments, management uses significant other observable inputs (i.e., information concerning regional premiums for swaps). Where appropriate, valuations are adjusted for various factors, such as bid/offer spreads.

     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 Notes and the estimated fair value of the Notes without the cash conversion feature. The Notes were valued based on the trading price of the Notes on March 31, 2011 (see Other below). The fair value of the Notes without the cash conversion feature is the present value of the series of fixed income cash flows under the Notes, with a mandatory redemption in 2015.

     The Call Options are valued using a binomial lattice valuation model. Significant inputs to the model are the Company’s stock price, risk-free interest rate, credit spread, dividend yield, expected volatility of the Company’s stock price, and probability of certain corporate events, all of which are observable inputs by market participants.

     The significant assumptions used in the determining the fair value of the Call Option at March 31, 2011 were as follows:

Stock price at March 31, 20111		$	49.25
Quarterly dividend yield (per share)2		$	0.24
Risk-free interest rate3			1.77	%
Credit spread (basis points)4			419
Expected volatility rate5			29	%

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

     The following table presents the Company’s derivative assets and liabilities, classified under the appropriate level of the fair value hierarchy, as of March 31, 2011:

		Level 1				Level 2				Level 3				Total
Derivative assets:
Aluminum swap contracts		$	—			$	21.6			$	—			$	21.6
Aluminum option contracts			—				9.2				—				9.2
Natural gas swap contracts			—				0.1				—				0.1
Natural gas option contracts			—				2.0				—				2.0
Call Options			—				46.4				—				46.4
Midwest premium swap contracts			—				—				0.6				0.6
Total		$	—			$	79.3			$	0.6			$	79.9
Derivative liabilities:
Aluminum swap contracts		$	—			$	(3.5	)		$	—			$	(3.5	)
Aluminum option contracts			—				(9.2	)			—				(9.2	)
Natural gas swap contracts			—				(0.2	)			—				(0.2	)
Natural gas option contracts			—				(3.7	)			—				(3.7	)
Bifurcated Conversion Feature			—				(56.3	)			—				(56.3	)
Total		$	—			$	(72.9	)		$	—			$	(72.9	)

     The following table presents the Company’s assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2010:

		Level 1				Level 2				Level 3				Total
Derivative assets:
Aluminum swap contracts		$	—			$	18.2			$	—			$	18.2
Aluminum option contracts			—				9.4				—				9.4
Natural gas swap contracts			—				0.1				—				0.1
Natural gas option contracts			—				2.8				—				2.8
Call Options			—				48.4				—				48.4
Midwest premium swap contracts			—				—				0.2				0.2
Total		$	—			$	78.9			$	0.2			$	79.1
Derivative liabilities:
Aluminum swap contracts		$	—			$	(3.8	)		$	—			$	(3.8	)
Aluminum option contracts			—				(9.4	)			—				(9.4	)
Natural gas swap contracts			—				(0.5	)			—				(0.5	)
Natural gas option contracts			—				(4.6	)			—				(4.6	)
Bifurcated Conversion Feature			—				(60.0	)			—				(60.0	)
Midwest premium swap contracts			—				—				(0.1	)			(0.1	)
Total		$	—			$	(78.3	)		$	(0.1	)		$	(78.4	)