UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

KAISER ALUMINUM CORPORATION

Delaware		94-3030279
(State of Incorporation)		(I.R.S. Employer Identification No.)
27422 PORTOLA PARKWAY, SUITE 350,		92610-2831
FOOTHILL RANCH, CALIFORNIA		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:
(949) 614-1740

     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 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 October 31, 2008, there were 20,044,907 shares of the Common Stock of the registrant outstanding.

 

 

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2008				2007
		(Unaudited)
		(In millions of dollars, except
		share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	1.1			$	68.7
Receivables:
Trade, less allowance for doubtful receivables of $0.9 and $1.4 at September 30, 2008 and December 31, 2007, respectively			115.4				96.5
Due from affiliate			—				9.5
Other			8.7				6.3
Inventories			269.2				207.6
Prepaid expenses and other current assets			73.5				66.0
Total current assets			467.9				454.6
Investments in and advances to unconsolidated affiliate			37.6				41.3
Property, plant, and equipment — net			272.8				222.7
Net assets in respect of VEBAs			135.0				134.9
Deferred tax assets — net			246.5				268.6
Other assets			50.5				43.1
Total		$	1,210.3			$	1,165.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	70.2			$	70.1
Accrued salaries, wages, and related expenses			34.5				40.1
Other accrued liabilities			55.3				36.6
Payable to affiliate			10.6				18.6
Total current liabilities			170.6				165.4
Borrowings under Revolving Credit Facility			34.7				—
Long-term liabilities			54.4				57.0
			259.7				222.4
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, par value $.01, 90,000,000 shares authorized at September 30, 2008 and 45,000,000 shares authorized at December 31, 2007; 20,617,607 shares issued and 20,044,907 shares outstanding at September 30, 2008; 20,580,815 shares issued and outstanding at December 31, 2007			.2				.2
Additional capital			957.1				948.9
Retained earnings			142.4				116.1
Common stock owned by Union VEBA subject to transfer restrictions, at reorganization value, 4,845,465 shares at both September 30, 2008 and December 31, 2007			(116.4	)			(116.4	)
Treasury stock, at cost, 572,700 shares at September 30, 2008			(28.1	)			—
Accumulated other comprehensive loss			(4.6	)			(6.0	)
Total stockholders’ equity			950.6				942.8
Total		$	1,210.3			$	1,165.2

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED INCOME (LOSS)

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)
		(In millions of dollars, except share and per share amounts)
Net sales		$	369.2			$	366.7			$	1,181.7			$	1,144.0
Costs and expenses:
Cost of products sold, excluding depreciation			383.7				303.3				1,044.2				954.4
Depreciation and amortization			3.6				3.0				10.8				8.3
Selling, administrative, research and development, and general			19.8				17.8				58.3				56.0
Other operating (benefits) charges, net			(1.4	)			(1.4	)			(1.2	)			(13.7	)
Total costs and expenses			405.7				322.7				1,112.1				1,005.0
Operating income (loss)			(36.5	)			44.0				69.6				139.0
Other income (expense):
Interest expense			(.3	)			(1.0	)			(.8	)			(2.2	)
Other income (expense), net			(.2	)			1.8				1.0				4.1
Income (loss) before income taxes			(37.0	)			44.8				69.8				140.9
Income tax benefit (provision)			14.9				(20.0	)			(30.0	)			(64.3	)
Net income (loss)		$	(22.1	)		$	24.8			$	39.8			$	76.6
Earnings per share — Basic:
Net income (loss) per share		$	(1.11	)		$	1.24			$	1.99			$	3.83
Earnings per share — Diluted :
Net income (loss) per share		$	(1.11	)		$	1.22			$	1.95			$	3.77
Weighted-average number of common shares outstanding (000):
Basic			19,995				20,026				20,032				20,010
Diluted			19,995				20,326				20,377				20,291

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 (LOSS)

																		Common
																		Stock
																		Owned by
																		Union
																		VEBA								Accumulated
		Common																Subject to								Other
		Shares				Common				Additional				Retained				Transfer				Treasury				Comprehensive
		Outstanding				Stock				Capital				Earnings				Restriction				Stock				Loss				Total
				(Unaudited)
						(In millions of dollars, except for shares)
BALANCE, December 31, 2007			20,580,815			$	.2			$	948.9			$	116.1			$	(116.4	)		$	—			$	(6.0	)		$	942.8
Net income			—				—				—				39.8				—				—				—				39.8
Foreign currency translation adjustment, net of tax of $0			—				—				—				—				—				—				1.4				1.4
Comprehensive income																															41.2
Recognition of pre-emergence tax benefits in accordance with fresh start accounting			—				—				1.2				—				—				—				—				1.2
Equity compensation recognized by an unconsolidated affiliate			—				—				.3				—				—				—				—				.3
Capital distribution by unconsolidated affiliate to its parent company			—				—				(1.5	)			—				—				—				—				(1.5	)
Issuance of non-vested shares to employees			52,970				—				—				—				—				—				—				—
Issuance of common shares to directors			3,689				—				.2				—				—				—				—				.2
Issuance of common shares to employees upon vesting of restricted stock units			1,233				—				—				—				—				—				—				—
Cancellation of employee non-vested shares			(9,677	)			—				—				—				—				—				—				—
Cancellation of shares to cover employees’ tax withholdings upon vesting of non-vested shares			(11,423	)			—				(.7	)			—				—				—				—				(.7	)
Cash dividends on common stock			—				—				—				(13.5	)			—				—				—				(13.5	)
Repurchase of common stock			(572,700	)			—				—								—				(28.1	)			—				(28.1	)
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest			—				—				.3				—				—				—				—				.3
Amortization of unearned equity compensation			—				—				8.4				—				—				—				—				8.4
BALANCE, September 30, 2008			20,044,907			$	.2			$	957.1			$	142.4			$	(116.4	)		$	(28.1	)		$	(4.6	)		$	950.6

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

		Nine Months Ended
		September 30,
		2008				2007
		(Unaudited)
		(In millions of dollars)
Cash flows from operating activities:
Net income		$	39.8			$	76.6
Adjustments to reconcile net income to net cash provided by operating activities:
Recognition of pre-emergence tax benefits in accordance with fresh start accounting			1.2				48.1
Depreciation and amortization (including deferred financing costs of $.2 and $.4, respectively)			11.0				8.7
Deferred income taxes			22.4				.1
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest			(.3	)			—
Non-cash equity compensation			8.6				6.8
LIFO charges net of non-cash benefit in Other operating (benefits) charges, net			31.0				(13.1	)
Non-cash unrealized losses (gains) on derivative positions			6.0				(5.2	)
Other non-cash changes in assets and liabilities			.3				.1
Equity loss (income) of unconsolidated affiliate			2.5				(25.1	)
Loss on disposition of property, plant and equipment			.2				—
Changes in assets and liabilities:
Increase in trade and other receivables			(11.8	)			(10.9	)
(Increase) decrease in inventories, excluding LIFO charges			(92.9	)			2.6
Decrease in prepaid expenses and other current assets			.1				7.9
Decrease in accounts payable			—				(8.8	)
Decrease in other accrued liabilities			(5.3	)			(2.0	)
(Decrease) increase in payable to affiliate			(8.0	)			3.6
(Increase) decrease in accrued income taxes			.8				(.5	)
Net cash impact of changes in long-term assets and liabilities			(2.1	)			.4
Other			—				.1
Net cash provided by operating activities			3.5				89.4
Cash flows from investing activities:
Capital expenditures, net of change in accounts payable of $.1 and $.9, respectively			(61.0	)			(43.1	)
(Increase) decrease in restricted cash			(3.9	)			9.4
Net cash used in investing activities			(64.9	)			(33.7	)
Cash flows from financing activities:
Borrowings under the revolver credit facility			55.6				—
Repayment of borrowings under the revolving credit facility			(20.9	)			—
Excess tax benefit upon vesting of non-vested shares and dividend payment on unvested shares expected to vest			.3				—
Cancellation of common stock to cover employee tax withholding upon vesting of equity awards			(.7	)			(.6	)
Repurchase of common stock			(28.1	)			—
Cash dividend paid to stockholders			(12.4	)			(3.7	)
Net cash used in financing activities			(6.2	)			(4.3	)
Net (decrease) increase in cash and cash equivalents during the period			(67.6	)			51.4
Cash and cash equivalents at beginning of period			68.7				50.0
Cash and cash equivalents at end of period		$	1.1			$	101.4

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

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

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, 2007.

     Principles of Consolidation and Basis of Presentation. The consolidated financial statements include the statements of the Company and its wholly owned subsidiaries. Investments in 50%-or-less-owned entities are accounted for by the equity method. The only such entity for the periods covered by this Report was Anglesey Aluminium Limited (“Anglesey”). Intercompany balances and transactions are eliminated.

     The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 for a fair statement of the results for the interim periods presented.

     Use of Estimates and Assumptions. 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 operation.

     Operating results for the nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

     Recognition of Sales. Sales are recognized when title, ownership and risk of loss pass to the buyer and collectability is reasonably assured. From time to time, in the ordinary course of business, the Company may enter into agreements with customers requiring the Company to allocate certain amounts of its annual capacity in return for a fee. Such fees are recognized as revenue ratably over the life of the agreement which may be in excess of one year in length.

     In certain circumstances, based on the terms of certain sales contracts which provide for periodic, such as quarterly or annual, billing throughout the contract, the Company may recognize revenue prior to billing the customer. At September 30, 2008 and December 31, 2007, the Company had $8.0 and $1.9 of unbilled receivables respectively, included within Trade receivables on the Company’s Consolidated Balance Sheets. 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.

     On June 30, 2008, the Company announced a surcharge on new orders and new contracts of fabricated aluminum products in an effort to reduce exposure to rising costs for natural gas, electricity and diesel fuel beginning July 1, 2008. The surcharge is based on a calculation tied to indices provided by the U.S. Department of Energy. The Company records the surcharge as revenue when the revenue recognition criteria are met as stated above.

     Earnings per Share. Basic earnings per share is computed by dividing earnings by the weighted-average number of common shares outstanding during the applicable period. The shares owned by a voluntary employee beneficiary association (“VEBA”) for the benefit of certain union retirees, their surviving spouses and eligible dependents (the “Union VEBA”) that are subject to transfer restrictions, while treated in the Consolidated Balance Sheets as being similar to treasury stock (i.e., as a reduction in Stockholders’ equity), are included in the computation of basic shares outstanding in the Statements of Consolidated Income because such shares were irrevocably issued and have full dividend and voting rights.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Diluted earnings per share is computed by dividing earnings by the sum of (a) the weighted-average number of common shares outstanding during the period and (b) the dilutive effect of potential common share equivalents consisting of non-vested common shares, restricted stock units, performance shares, and stock options (see Note 14).

     Restricted Cash. The Company is required to keep certain amounts on deposit relating to workers’compensation, collateral for certain letters of credit and other agreements totaling $19.8 and $15.9 at September 30, 2008 and December 31, 2007, respectively. Of the restricted cash balance, $1.4 and $1.5 were considered short term and included in Prepaid expenses and other current assets on the Consolidated Balance Sheets at September 30, 2008 and December 31, 2007, respectively; and $18.4 and $14.4 were considered long term and included in Other assets on the Consolidated Balance Sheets at September 30, 2008 and December 31, 2007, respectively (see Note 6).

     Stock-Based Employee Compensation. During the first half of 2008, the Company granted performance shares to executive officers and other key employees under a long term incentive program for 2008 through 2010 (the “2008 — 2010 LTI Program”). These awards are subject to performance requirements pertaining to the Company’s economic value added (“EVA”) performance measured over the three year performance period. The EVA is a measure of the excess of the Company’s pretax operating income for a particular year over a pre-determined percentage of the net assets of the immediately preceding year, as defined in the 2008 — 2010 LTI Program. The number of performance shares, if any, that will ultimately vest and result in the issuance of common shares in 2011 will depend on the average annual EVA achieved for the three year performance period. The Company accounts for these awards at fair value in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-based Payments (“SFAS No. 123R”). The fair value is measured based on the most probable outcome of the performance condition which is estimated quarterly using the Company’s plan and actual results. The Company expenses the fair value, after assuming an estimated forfeiture rate, over the three year performance period on a ratable basis. During the quarter and nine months ended September 30, 2008, $.4 and $1.1 of compensation expense were recognized, respectively, in connection with the performance shares (see Note 10).

     Realization of Excess Tax Benefits. Beginning on January 1, 2008, the Company made an accounting policy election to follow the tax law ordering approach in assessing the realization of excess tax benefits upon vesting of non-vested share awards and performance shares, exercising of stock options and payment of dividends on non-vested share awards and performance shares expected to vest. Under the tax law ordering approach, realization of excess tax benefits is determined based on the ordering provisions of the tax law. Current year deductions, which include the tax benefits from current year equity award activities, are used first before using the Company’s net operating loss (“NOL”) carryforwards from prior years. Under this method, Additional capital would be credited when an excess tax benefit is realized, creating an additional paid in capital pool, to absorb potential future tax deficiencies resulting from vesting of non-vested share awards and performance shares and from the exercising of stock options. During the nine months ended September 30, 2008, the Company recorded $.2 of excess tax benefit relating to the vesting of non-vested shares to Additional capital.

     Adoption of Emerging Issues Task Force Issue(“EITF”) 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, (“EITF 06-11”). Beginning January 1, 2008, the Company adopted EITF 06-11. In accordance with the EITF, the Company records a credit to Additional capital for tax deductions resulting from a dividend and dividend equivalent payment on non-vested share awards the Company expects to vest. During the nine months ended September 30, 2008, the Company recorded $.1 in Additional capital in connection with the tax deductions resulting from dividends and dividend equivalents paid on non-vested share awards the Company expected to vest.

     Adoption of Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115, (“SFAS No. 159”). On January 1, 2008, the Company adopted SFAS No. 159 which permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. The Company already records derivative contracts at fair value in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). The adoption of SFAS No. 159 had no impact on the consolidated financial statements as management did not elect the fair value option for any other financial instruments or any other financial assets and financial liabilities.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Fair Value Measurements. On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with US GAAP, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.

     SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in US GAAP for the definition of fair value, except for the fair value of leased property as defined in Statement of Financial Accounting Standards No. 13, Accounting for Leases. SFAS No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

	•		Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
	•		Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
	•		Level 3 — Inputs that are both significant to the fair value measurement and unobservable.

     The Company’s derivative contracts are valued at fair value using significant other observable and unobservable inputs. Such financial instruments consist of primary aluminum, natural gas, and foreign currency contracts. The fair values of a majority of these derivative contracts are based upon trades in liquid markets, such as aluminum options. Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.

     The Company has some derivative contracts 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.

     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 September 30, 2008:

		Level 1				Level 2				Level 3				Total
Derivative assets:
Aluminum swap contracts		$	—			$	24.4			$	—			$	24.4
Aluminum option contracts			—				16.1				—				16.1
Midwest premium swap contracts			—				—				.1				.1
Total		$	—			$	40.5			$	.1			$	40.6
Derivative liabilities:
Aluminum swap contracts		$	—			$	(12.2	)			—			$	(12.2	)
Aluminum option contracts			—				(.5	)			—				(.5	)
Pound Sterling forward contract			—				(6.7	)			—				(6.7	)
Euro dollar forward contracts							(.9	)			—				(.9	)
Krona forward contract			—				(.8	)			—				(.8	)
Natural gas swap contracts			—				(4.1	)			—				(4.1	)
Midwest premium swap contracts			—				—				(.8	)			(.8	)
Total		$	—			$	(25.2	)		$	(.8	)		$	(26.0	)

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Financial instruments classified as Level 3 in the fair value hierarchy represent derivative contracts in which management has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for such derivative contracts on a net basis:

		Level 3
Balance at January 1, 2008:		$	—
Total realized/unrealized losses included in:
Cost of goods sold excluding depreciation expense			.7
Purchases, sales, issuances and settlements			—
Transfers in and (or) out of Level 3			—
Balance at September 30, 2008		$	.7
Total losses included in earnings attributable to the change in unrealized losses relating to derivative contracts still held at September 30, 2008:		$	.7

     Effective September 30, 2008, the Company adopted Financial Staff Position No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (FSP SFAS 157-3), which was issued on October 10, 2008. FSP SFAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for the financial asset is not active. The adoption of FSP SFAS 157-3 did not have an impact on the Company’s consolidated financial statements.

     New Accounting Pronouncements. Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”) was issued in December 2007. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R also provides guidance on how the acquirer should recognize and measure the goodwill acquired in the business combination and determine what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for the Company in its fiscal year beginning January 1, 2009. Most of the requirements of SFAS No. 141R are only to be applied prospectively to business combinations entered into on or after January 1, 2009.

     Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”) was issued in December 2007. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company in its fiscal year beginning January 1, 2009. The Company does not currently expect SFAS No. 160 to have a material impact on the Company’s consolidated financial statements.

     Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement 133 (‘SFAS No. 161”) was issued in March 2008. SFAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not currently expect SFAS No. 161 to have a material impact on the Company’s consolidated financial statements.

     Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principle (“SFAS No. 162”) was issued in May 2008. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity US GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to Auditing Standards Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company currently does not expect SFAS No. 162 to have a material impact on the Company’s consolidated financial statements.

     Financial Accounting Standards Board Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) was issued in June 2008. FSP EITF 03-06-01 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. FSP EITF 03-6-01 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, the Company is required to retrospectively adjust its earnings per share data to conform with the provisions in this FSP. Early application of FSP EITF 03-6-1 is prohibited. The Company is currently evaluating the impact FSP EITF 03-6-1 will have on its consolidated financial statements.

2. Inventories

     Inventories are stated at the lower of cost or market value. For the Fabricated Products segment, finished products, work in process and raw material inventories are stated on the last-in, first-out (“LIFO”) basis and other inventories, principally operating supplies and repair and maintenance parts, are stated at average cost. All inventories in the Primary Aluminum segment are stated on the first-in, first-out (“FIFO”) basis. 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.

     Inventories consist of the following:

		September 30,				December 31,
		2008				2007
Fabricated Products segment —
Finished products		$	73.6			$	68.6
Work in process			97.1				76.9
Raw materials			72.1				49.5
Operating supplies and repairs and maintenance parts			13.3				12.5
			256.1				207.5
Primary Aluminum segment —
Alumina (1)			11.5				—
Primary aluminum			1.6				.1
		$	269.2			$	207.6

     The Company recorded net non-cash LIFO charges of approximately $.7 and $31.3 during the quarter and nine months ended September 30, 2008, respectively. The Company recorded net non-cash LIFO benefit of approximately $10.2 and $8.2 during the quarter and nine months ended September 30, 2007, respectively. These amounts are primarily a result of changes in metal prices and changes in inventory volumes.

     The Company has a larger volume of raw materials, work in process, and finished products than its long-term historical average, and the price for such goods reflected in the opening inventory balance at the Company’s emergence from chapter 11 bankruptcy on July 6, 2006, given the application of fresh start accounting, is higher than long term historical averages. As such, with the inevitable ebb and flow of business cycles, non-cash LIFO charges will result when inventory levels drop and metal prices decline, and potential lower of cost and market adjustments will result when metal prices decline and margins compress. Such adjustments could be material to results in future periods (See Note 17).

3. Investment In and Advances To Unconsolidated Affiliate

     The Company has a 49% ownership interest in Anglesey, which owns an aluminum smelter at Holyhead, Wales. The Company accounts for its 49% ownership in Anglesey using the equity method. The Company’s equity in income before income taxes of Anglesey is treated as a reduction or increase in cost of products gross of the Company’s share of United Kingdom corporation tax. The income tax effects of the Company’s equity in income are included in the Company’s income tax provision.

     The nuclear plant that supplies power to Anglesey is currently slated for decommissioning in late 2010. For Anglesey to be able to continue its aluminum reduction operations past September 2009, when its current power contract expires, Anglesey will have to secure power at prices that make its aluminum reduction operation viable.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Although Anglesey continues to pursue alternative strategies to address the expiration of its power contract and its ability to continue reduction operations past September 2009, those efforts have become increasingly difficult as a result of recent declines in London Metal Exchange (“LME”) prices, continuing high power prices and Anglesey’s potential exposure to higher pension contributions following recent declines in the value of the assets held by the Rio Tinto pension plan in which Anglesey participates. No assurances can be provided that Anglesey will be successful addressing the expiration of its current power contract and the Company continues to assess the recoverability of its investment in Anglesey as the facts and circumstances facing Anglesey continue to evolve. In addition, given the potential for future shutdown and related costs, Anglesey suspended dividends during the last half of 2006 and the first half of 2007 while it studied future cash requirements. Based on a review of cash anticipated to be available for future cash requirements, Anglesey began paying dividends again in 2007 until July 2008, when dividends were again suspended while Anglesey assessed the impact of the rectifier failure and resulting fire described more fully below and the anticipated timing of Anglesey’s return to full production and recovery of insurance proceeds. In light of the pending expiration of the current power contract, growing uncertainty with respect to the future operation of Anglesey and challenges presented by Anglesey’s potential exposure to higher pension contributions as more fully described above, no assurance can be given that Anglesey will declare dividends at any time in the foreseeable future. Dividends over the past five years have fluctuated substantially depending on various operational and market factors. During the last five years, cash dividends received were as follows: 2007— $14.3, 2006 — $11.8, 2005 — $9.0, 2004 — $4.5, and 2003 — $4.3. Additionally, in April 2008, the Company received a dividend of $3.9 in respect of the Company’s ownership interest resulting in a reduction of Investments in and advances to unconsolidated affiliate.

     The following table shows a summary of Anglesey’s selected operating results for the quarters and nine month periods ended September 30, 2008 and 2007:

		Quarter								Nine months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Net sales		$	66.3			$	108.5			$	244.5			$	314.7
Gross profit (loss)		$	(13.1	)		$	23.7			$	4.6			$	73.9
Net income (loss)		$	(11.2	)		$	17.1			$	.9			$	52.8
Company’s equity income (loss)(1)		$	(6.9	)		$	9.7			$	1.4			$	29.7

     At September 30, 2008 and December 31, 2007, the receivables from Anglesey were zero and $9.5, respectively.

     As a result of fresh start accounting, the Company decreased its investment in Anglesey upon emergence from chapter 11 bankruptcy on July 6, 2006 (see Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007). In accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB No. 18”), the difference of $11.6 between the Company’s share of Anglesey’s equity and the investment amount reflected in the Company’s Consolidated Balance Sheet is being amortized (included in Cost of products sold) over the period from July 2006 to September 2009, the end of the current power contract, and thereby the end of the useful life based on the stated term of that contract. The non-cash amortization included in equity income was approximately $.9 and $2.7 for the quarter and nine months ended September 30, 2008. At September 30, 2008, the remaining unamortized amount was $3.6.

     In the nine months ended September 30, 2008, the Company recorded a $.3 charge for share-based equity compensation for employees of Anglesey who participate in the employee share savings plan of Rio Tinto. This charge has been recognized as a reduction in the equity in earnings of Anglesey for the nine months ended September 30, 2008. In accordance with APB No. 18, this transaction has been accounted for as a capital transaction

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of Anglesey. As a result, the Company increased its Additional capital for the nine months ended September 30, 2008 by $.3 rather than adjusting its Investment in and advances to unconsolidated affiliate.

     In accordance with a separate agreement between Anglesey and Rio Tinto, Anglesey is required to pay to Rio Tinto, in cash, an amount equal to the difference between the share price on the date shares are purchased under the Rio Tinto employee share savings plan and the amount paid by the employees of Anglesey to purchase the shares under the Rio Tinto employee share savings plan. During the first nine months of 2008, Anglesey made payments of $3.1 to Rio Tinto under this agreement. In accordance with APB No. 18, the Company’s ownership share of this payment has been accounted for as a capital distribution resulting in a reduction of $1.5 in both the Company’s Additional capital and the value of its investment in Anglesey on the Consolidated Balance Sheet.

     On June 12, 2008, Anglesey suffered a significant failure in the rectifier yard that resulted in a localized fire in one of the power transformers. As a result of the fire, Anglesey was operating at one third of its production capacity during the latter half of June and incurred incremental costs, primarily associated with repair and maintenance costs, as well as loss of margin due to the outage. From June 12, 2008 through September 30, 2008, Anglesey incurred $4.0 in repair and maintenance cost, of which $2.0 was reflected in the Company’s equity income (loss). In addition, the Company also incurred approximately $25 loss due to the production outage. Anglesey has property damage and business interruption insurance policies in place and expects to recover (net of applicable deductibles) the incremental costs and any loss of margin (assuming production that has been or will be lost due to the outage sold at primary aluminum prices that would have been applicable on such volume) due to business interruption through its insurance coverage. The timing and the amount of such insurance recovery is uncertain. As such, no expected insurance recovery was recorded during the nine months ended September 30, 2008. Anglesey restarted production on the non-operating portion of the potlines at the smelter in late July, completed restart activities at the end of October with approximately 90% of the pots operating and expects to return the remaining pots to production by mid-December (see additional discussion included in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report).

4. Conditional Asset Retirement Obligations

     The Company has conditional asset retirement obligations (“CAROs”) at several of its fabricated products facilities. The vast majority of such CAROs consist of incremental costs that would be associated with the removal and disposal of asbestos (all of which is believed to be fully contained and encapsulated within walls, floors, ceilings, or piping) at certain of the older plants if such plants were to undergo major renovation or be demolished. No plans currently exist for any such renovation or demolition of such facilities and the Company’s current assessment is that the most probable scenarios are that no material CARO would be triggered for 20 or more years.

     The Company’s estimates and judgments that affect the probability weighted estimated future contingent cost amounts did not change during the nine months ended September 30, 2008. However, there was a revision to the estimated timing for certain future contingent costs during the quarter ended June 30, 2008 that resulted in a $.1 charge to Net income. In addition, the Company’s results for the nine months ended September 30, 2008 and 2007 both included an incremental accretion of the estimated liability of $.2 (recorded in Cost of products sold). The estimated fair value of the CAROs at September 30, 2008 was $3.3.

     Anglesey (see Note 3) also recorded CARO liabilities of approximately $24.0 in its financial statements in prior years. The time period over which the fair value of the CARO is estimated under United Kingdom generally accepted accounting principles (“UK GAAP”) treatment applied by Anglesey is different from the time period over which the fair value of the CARO is estimated under the principles of Statement of Accounting Standards No. 143, Accounting for Asset Retirement Obligations or Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. As such, the resulting accretion expenses are different under UK GAAP and US GAAP. Accordingly, the Company adjusted its equity in earnings for Anglesey for the quarters ended September 30, 2008 and 2007 by $.3 each, and for the nine months ended September 30, 2008 and 2007 by $1.0 each, to reflect the impact of applying US GAAP with respect to the Anglesey CARO liability.

     For purposes of the Company’s fair value estimates with respect to the CARO liabilities, a credit adjusted risk free rate of 7.5% was used.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Property, Plant, and Equipment

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

		September 30,				December 31,
		2008				2007
Land and improvements		$	12.9			$	12.9
Buildings			29.6				25.2
Machinery and equipment			188.8				168.7
Construction in progress			69.3				33.0
			300.6				239.8
Accumulated depreciation			(27.8	)			(17.1	)
Property, plant, and equipment, net		$	272.8			$	222.7

     At September 30, 2008, the major components of Construction in progress were as follows:

		September 30,
		2008
Heat treat expansion project (Spokane, Washington facility)		$	25.2
Rod, bar, and tube value stream investments (including facility in Kalamazoo, Michigan)			21.2
Other			22.9
Total Construction in progress		$	69.3

     At December 31, 2007, the Construction in progress balance was primarily related to the heat treat expansion project at the Company’s Spokane, Washington facility.

     For the quarter and nine months ended September 30, 2008, the Company recorded depreciation expense of $3.6 and $10.8, respectively, relating to the Company’s operating facilities in its Fabricated Products segment. For the quarter and nine months ended September 30, 2007, the Company recorded depreciation expense of $3.0 and $8.2, 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 segment for all periods.

6. Supplemental Balance Sheet Information

     Trade Receivables. Trade receivables were comprised of the following:

		September 30,				December 31,
		2008				2007
Billed trade receivables		$	108.3			$	96.0
Unbilled trade receivables (Note 1)			8.0				1.9
			116.3				97.9
Allowance for doubtful receivables			(.9	)			(1.4	)
		$	115.4			$	96.5

     Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets were comprised of the following:

		September 30,				December 31,
		2008				2007
Current derivative assets (Note 12)		$	9.2			$	1.5
Current deferred tax assets			59.2				59.2
Short term restricted cash			1.4				1.5
Prepaid expenses			3.7				3.8
Total		$	73.5			$	66.0

     Other Assets. Other assets were comprised of the following:

		September 30,				December 31,
		2008				2007
Derivative assets (Note 12)		$	31.4			$	27.6
Restricted cash			18.4				14.4
Other			.7				1.1
Total		$	50.5			$	43.1

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Other Accrued Liabilities. Other accrued liabilities were comprised of the following:

		September 30,				December 31,
		2008				2007
Current derivative liabilities (Note 12)		$	23.8			$	6.6
Accrued income taxes and other taxes payable			3.8				2.2
Accrued book overdraft — see below			7.7				5.4
Dividend payable			4.8				3.7
Accrued annual VEBA contribution			—				8.8
Accrued freight			3.1				2.1
Environmental accrual			4.1				1.7
Other			8.0				6.1
Total		$	55.3			$	36.6

     The accrued book overdraft balance at September 30, 2008 and December 31, 2007 represents uncleared cash disbursements.

     Long-term Liabilities. Long-term liabilities were comprised of the following:

		September 30,				December 31,
		2008				2007
Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”) income tax liabilities		$	25.6			$	26.5
Workers’ compensation accruals			15.7				17.2
Environmental accruals			5.2				6.0
Derivative liabilities (Note 12)			2.2				1.9
Asset retirement obligations			3.3				3.0
Other long term liabilities			2.4				2.4
Total		$	54.4			$	57.0

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Secured Debt and Credit Facilities

     On July 6, 2006, the Company and certain subsidiaries of the Company entered into a Senior Secured Revolving Credit Agreement with a group of lenders providing for a $200.0 revolving credit facility (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 (or obtain letters of credit) from time to time in an aggregate amount equal to the lesser of a stated amount, initially $200.0, and a borrowing base comprised of eligible accounts receivable, eligible inventory, and certain eligible machinery, equipment, and real estate, reduced by certain reserves, all as specified in the Revolving Credit Facility. The Revolving Credit Facility matures in July 2011, at which time all principal amounts outstanding thereunder 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 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 to up to $275.0 at the request of the Company. During the fourth quarter of 2007, the conditions were met and the Company and the lenders amended the Revolving Credit Facility, effective December 10, 2007, to increase the stated amount of the credit facility from $200.0 to $265.0.

     Amounts owed under the Revolving Credit Facility may be accelerated upon the occurrence of various events of default set forth in the agreement, including, without limitation, the failure to make principal or interest payments when due and breaches of covenants, representations, and warranties. The Revolving Credit Facility is secured by a first priority lien on substantially all of the assets of the Company and certain of its U.S. operating subsidiaries that are also borrowers thereunder. The Revolving Credit Facility places restrictions on the ability of the Company and certain of its subsidiaries to, among other things, incur debt, create liens, make investments, pay dividends, sell assets, undertake transactions with affiliates, and enter into unrelated lines of business. At September 30, 2008, the Company was in compliance with all covenants contained in the Revolving Credit Facility.

     During the quarter ended September 30, 2008, the Company began utilizing the credit line under the Revolving Credit Facility. At September 30, 2008, the Company had $265.0 available for borrowing and letters of credit under the Revolving Credit Facility, of which $34.7 of borrowings and $10.0 of letters of credit were outstanding, leaving $220.3 available for additional borrowing and letters of credit.

8. Income Tax Matters

     Tax Benefit (Provision). The benefit (provision) for income taxes for the quarter and nine month periods ended September 30, 2008 and 2007 consisted of:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Domestic		$	13.6			$	(15.0	)		$	(25.2	)		$	(48.5	)
Foreign			1.3				(5.0	)			(4.8	)			(15.8	)
Total		$	14.9			$	(20.0	)		$	(30.0	)		$	(64.3	)

     The income tax provision for the nine months ended September 30, 2008 was $30.0, with an effective tax rate of 43.0%. The effective tax rate of 43.0% was impacted by several factors including:

	•		The Company’s equity in income before income taxes of Anglesey is treated as a reduction or increase in Cost of products sold excluding depreciation. The income tax effects of the Company’s equity in income are included in the tax provision. This resulted in $1.6 being included in the income tax provision, increasing the effective tax rate by approximately 2.3%.
	•		Unrecognized tax benefits, including interest and penalties, increased the income tax provision by $1.8 and the effective tax rate by approximately 2.6%.
	•		The foreign currency impact on unrecognized tax benefits, interest and penalties resulted in a $1.4 currency translation adjustment that was recorded in Accumulated other comprehensive income (loss).

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•

Changes in the United Kingdom and Canadian income tax rates and the geographical distribution of income, which reflected the effects of the Anglesey transformer fire.

     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.

     Although the Company had approximately $981 of tax attributes, including the NOL carryforwards available at December 31, 2006 to offset the impact of future income taxes, the Company did not meet the “more likely than not” criteria for recognition of such attributes primarily because the Company did not have sufficient history of paying taxes. As such, the Company recorded a full valuation allowance against the amount of tax attributes available and no deferred tax asset was recognized. The benefit associated with any reduction of the valuation allowance was first utilized to reduce intangible assets with any excess being recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. As of December 31, 2007, the Company concluded that it had met the “more likely than not” criteria for recognition of its deferred tax assets and thus released the vast majority of the valuation allowance at December 31, 2007. In accordance with fresh start accounting, the release of the valuation allowance was taken as an adjustment to Stockholders’ equity rather than through the income statement. The Company maintains a valuation allowance on deferred tax assets that did not meet the “more likely than not” recognition criteria and these assets are primarily state NOL carryforwards that the Company believes will likely expire unused.

     At December 31, 2007, the Company had $897.5 of NOL carryforwards available to reduce future cash payments for income taxes in the United States. Of the $897.5 of NOL carryforwards, $1.0 reflects the excess tax benefits relating to the vesting of employees’ non-vested share awards. Equity will be increased by $1.0 if and when such excess tax benefits are ultimately realized. Such NOL carryforwards expire periodically through 2027. The Company also had $90.1 of other tax attributes, including $88.4 of gross alternative minimum tax (“AMT”) credit carryforwards with an indefinite life, available to offset regular federal income tax requirements. The remainder consists of general business credits that will expire periodically through 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 income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. As of December 31, 2007, 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 of $24.8 against its deferred tax assets. When recognized, the tax benefits relating to any reversal of the valuation allowance will be recorded as an adjustment to Stockholders’ equity rather than as a reduction of income tax expense. Valuation allowance adjustments related to post emergence events will flow through the tax provision.

     Foreign taxes primarily represent Canadian income taxes in respect of the Company’s facility in London, Ontario and United Kingdom income taxes in respect of the Company’s ownership in Anglesey. The provision for income tax is based on the projected rate for each applicable period.

     Other. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The audit of the Company’s federal income tax return for the 2004 tax year was completed in April of 2008. The results of the audit did not have a material effect on the Company’s financial condition or results of operations. The Canada Revenue Agency audited and issued assessment notices for 1998 through 2001 for which Notices of Objection have been filed. The 2002 to 2004 tax years are currently under audit by the Canada Revenue Agency. The Company does not expect the results of these examinations to have a material effect on its financial condition or results of operations. 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.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     No U.S. federal or state liability has been recorded for the undistributed earnings of the Company’s Canadian subsidiary at September 30, 2008. 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 its hypothetical calculation.

     The Company had gross unrecognized tax benefits of $15.8 and $19.7 at September 30, 2008 and December 31, 2007, respectively. The change during the quarter and nine months ended September 30, 2008 was primarily due to currency fluctuations and a change in tax positions. The Company recognizes interest, and penalties related to these unrecognized tax benefits in the income tax provision. The Company had approximately $11.3 and $10.7 accrued at September 30, 2008 and December 31, 2007, respectively, for interest and penalties which were included in Long-term liabilities in the Consolidated Balance Sheets. During the quarter and nine months ended September 30, 2008, the Company recognized approximately $.3 and $1.6 in interest and penalties, respectively. During the nine months ended September 30, 2008, the foreign currency impact on gross unrecognized tax benefits, interest and penalties resulted in a $1.4 currency translation adjustment that was recorded in Accumulated other comprehensive income (loss), of which $.8 related to gross unrecognized tax benefits and $.6 related to accrued interest and penalties. During the quarter ended September 30,2008, the Company also reduced unrecognized tax benefits and the related interest and penalties by $.8 and $.4, respectively, relating to a Canadian pre-emergence exposure. In accordance with fresh start accounting, the Company recorded the amount in Additional capital rather than in income tax provision. The Company does not expect any material changes in its gross unrecognized tax benefits within the next twelve months.

     A summary of activities with respect to the gross unrecognized tax benefits for the nine months ended September 30, 2008 is as follows:

Gross unrecognized tax benefits at December 31, 2007(1)		$	19.7
Gross decreases for tax positions of prior years			(3.3	)
Gross increases for tax positions of current years			.2
Settlements			—
Foreign currency translation			(.8	)
Gross unrecognized tax benefits at September 30, 2008(2)		$	15.8

9. Employee Benefits

     Pension and Similar Plans. Pensions and similar plans include:

	•		Monthly contributions of one dollar per hour worked by each bargaining unit employee to the appropriate multi-employer pension plans sponsored by the United Steelworkers and International Association of Machinists and certain other unions at six of our production facilities. This obligation came into existence in December 2006 for four of our production facilities upon the termination of four defined benefit plans. The arrangement for the other two locations came into existence during the first quarter of 2005. The Company currently estimates that contributions will range from $1 to $3 per year.
	•		A defined contribution 401(k) savings plan for hourly bargaining unit employees at five of the Company’s production facilities. The Company is required to make contributions to this plan for active bargaining unit employees at these production facilities ranging from (in whole dollars) $800 to $2,400 per employee per year, depending on the employee’s age. This arrangement came into existence in December 2004 for two production facilities upon the termination of one defined benefit plan. The arrangement for the other three locations came into existence in December 2006. The Company currently estimates that contributions to such plans will range from $1 to $3 per year.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	•		A defined benefit plan for our salaried employees at the Company’s facility in London, Ontario with annual contributions based on each salaried employee’s age and years of service.
	•		A defined contribution savings plan for salaried and non-bargaining unit hourly employees providing for a match 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 the contributions to such plan will range from $1 to $3 per year.
	•		A non-qualified defined contribution plan 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.

     Postretirement Medical Obligations. As a part of the Company’s reorganization efforts, 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), with the Company’s filing of its plan of reorganization as the qualifying event, or participation in the applicable VEBA (the Union VEBA or the VEBA that provides benefits for certain other eligible retirees and 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 all other retirees including employees who retired prior to the 2004 termination of the prior plan or who 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.

     Upon the Company’s emergence from chapter 11 bankruptcy on July 6, 2006, both the Salaried VEBA and the Union VEBA had rights to receive shares of the Company’s newly issued common stock (see Note 10 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007). The Salaried VEBA sold all of its shares during 2006. The Union VEBA sold a portion of its shares throughout 2006 and 2007. As of September 30, 2008, the Union VEBA owns approximately 24.2% of the Company’s outstanding common stock.

     As of the date of filing of this Report, the Company’s only obligation to the Union VEBA and the Salaried VEBA is an annual variable cash contribution which, with respect to the Union VEBA terminates for periods beginning after December 31, 2012. The amount to be contributed to the VEBAs through 2012 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 upon the earlier of (a) 120 days following the end of 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 annual financial statements). At December 31, 2007, the Company had preliminarily determined that $8.8 was owed to the VEBAs under this arrangement which was recorded in Other accrued liabilities in the Company’s Consolidated Balance Sheets and a corresponding increase in Net assets in respect of VEBAs. In March 2008, $8.4 was paid to the VEBAs based on the final calculation of the amount owed under the agreement and the remaining $.4 of the accrual at the end of December 31, 2007 was released with a corresponding reduction in Net assets in respect of VEBAs.

     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’s only obligation to the VEBAs is to pay the annual variable contribution amount and the Company has no control over the plan assets, the Company nonetheless accounts for net periodic postretirement benefit costs in accordance with Statement of Financial Accounting Standards No. 106, Employers’ Accounting for Postretirement Benefits other than Pensions and records any difference between the assets of each VEBA and its accumulated postretirement benefit obligation in the Company’s financial statements.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Components of Net Periodic Benefit Cost and Cash Flow and Charges. The following tables present the components of net periodic benefit cost for the quarters and nine month periods ended September 30, 2008 and 2007:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
VEBAs:
Service cost		$	.4			$	.4			$	1.3			$	1.1
Interest cost			4.3				3.8				12.8				11.6
Expected return on plan assets			(5.2	)			(4.8	)			(15.5	)			(14.6	)
Amortization of prior service cost			.2				—				.6				—
Amortization of net loss			.1				—				.3				—
			(.2	)			(.6	)			(.5	)			(1.9	)
Defined contributions plans			2.6				2.3				8.6				7.4
		$	2.4			$	1.7			$	8.1			$	5.5

     The following tables present the allocation of these charges:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Fabricated Products segment		$	2.3			$	2.1			$	7.5			$	6.7
Corporate and Other segment			.1				(.4	)			.6				(1.2	)
		$	2.4			$	1.7			$	8.1			$	5.5

     For all periods presented, substantially all of the Fabricated Products segment’s related charges are in Cost of products sold, excluding depreciation, with the balance being in Selling, administrative, research and development and general expense.

     See Note 10 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 for key assumptions used with respect to the Company’s pension plans and key assumptions made in computing the net obligation of each VEBA.

10. Employee Incentive Plans

     Short term incentive plans

     The Company has a short term incentive compensation plan for senior management and certain salaried employees payable in cash which is based primarily on EVA of our core Fabricated Products business, adjusted for certain safety and performance factors. Most of our production facilities have similar programs for both hourly and salaried employees.

     Long term incentive plans

     General. On July 6, 2006, the 2006 Equity and Performance Incentive Plan (as amended, the “Equity Incentive Plan”) became effective. Officers and other key employees of the Company or one or more of its subsidiaries, as well as directors of the Company, are eligible to participate in the 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. No grants will be made after that date, but all grants made on or prior to that date will continue in effect thereafter subject to the terms thereof and of the Equity Incentive Plan. 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.

     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, upon its effectiveness 2,222,222 common shares were reserved for issuance under the Equity Incentive Plan.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     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 and nine month periods ended September 30, 2008 and 2007 were as follows:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Service-based vested and non-vested common shares and restricted stock units		$	2.3			$	2.2			$	7.3			$	6.6
Performance shares			.4				—				1.1				—
Service-based stock options			.1				.1				.2				.2
Total compensation charge		$	2.8			$	2.3			$	8.6			$	6.8

     At September 30, 2008, 1,471,272 common shares were available for additional awards under the Equity Incentive Plan.

     Non-vested Common Shares, Restricted Stock Units, and Performance Shares. In March 2008, the Company granted 39,354 non-vested common shares, 702 restricted stock units and 96,480 performance shares to executive officers and other key employees under the 2008 — 2010 LTI Program.

     During the quarter ended June 30, 2008, the Company granted 3,629 non-vested common shares to two executive officers and a key employee. In addition, the Company granted 5,106 performance shares to an executive officer and a key employee under the 2008 — 2010 LTI Program. Also in June 2008, the Company granted 8,568 non-vested common shares to its non-employee directors and an additional 3,689 shares of common stock to non-employee directors who elected to receive shares of common stock in lieu of all or a portion of their annual cash retainers.

     During the quarter ended September 30, 2008, the Company granted an additional 1,000 shares of non-vested shares to an executive officer.

     The non-vested common shares granted to executive officers are subject to a vesting requirement that lapses on March 3, 2011. With the exception of the non-vested common shares granted to a key employee in April 2008, the non-vested common shares granted to other key employees vest one-third on each of the first, second and third anniversaries of the grant date. The non-vested common shares granted to a key employee in April 2008 vest one-third on the first anniversary of the grant date and one third on each of March 3, 2010 and March 3, 2011. The non-vested common shares granted to non-employee directors are subject to a one year vesting requirement that lapses on June 4, 2009. The total grant date fair value of the shares issued, after assuming a forfeiture rate, is being amortized to expense over the various vesting period on a ratable basis.

     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. The 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. The grant date fair value of the restricted stock units issued, after assuming a forfeiture rate, is being amortized to expense over the vesting period on a ratable basis.

     The performance shares are subject to performance requirements pertaining to the Company’s average annual EVA measured over a three year performance period, 2008 through 2010. EVA is a measure of the Company’s pretax operating income for a particular year over a pre-determined percentage of net assets of the immediately preceding year, as defined in the 2008 — 2010 LTI Program. The number of performance shares, if any, that will ultimately vest and result in the issuance of common shares in 2011 will depend on the average annual EVA achieved during the three year performance period. The Company accounts for these awards at fair value in accordance with SFAS No. 123R. The total fair value to be recognized as compensation expense has been estimated based on the most probable outcome of the performance condition which is evaluated quarterly using the Company’s plan and actual results. The total fair value, based on the Company’s best estimate as of September 30, 2008, after assuming an estimated forfeiture rate, is being amortized to expense over the requisite service period of three years on a ratable basis.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     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 nine months ended September 30, 2008 is as follows:

		Non-Vested								Restricted
		Common Shares								Stock Units
						Weighted-								Weighed-
						Average								Average
						Grant-Date								Grant-Date
						Fair Value								Fair Value
		Shares				per Share				Units				per Unit
Outstanding at January 1, 2008			549,071			$	46.36				3,727			$	68.09
Granted			52,551				71.79				702				74.82
Vested			(37,249	)			52.40				(1,652	)			66.57
Forfeited			(9,677	)			77.77				(1,808	)			70.16
Outstanding at September 30, 2008			554,696			$	47.81				969			$	71.70

     A summary of the activity with respect to the performance shares for the nine months ended September 30, 2008 is as follows:

		Performance Shares
						Weighted-
						Average
						Grant-Date
						Fair Value
		Shares				per Share
Outstanding at January 1, 2008			—			$	—
Granted			101,586				74.45
Vested			—				—
Forfeited			(11,058	)			74.82
Outstanding at September 30, 2008			90,528			$	74.40

     For the nine months ended September 30, 2007, 61,662 non-vested common shares were granted to employees and non-employee directors and 1,260 shares of restricted stock units were granted to employees at the weighted-average grant date fair value per share of $79.31 and $80.01, respectively. The total grant date fair value of non-vested common shares that vested during the nine months ended September 30, 2007 was $1.2.

     Under the Equity Incentive Plan, the Company allows participants to 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 the nine months ended September 30, 2008, 11,423 of such common shares were cancelled as a result of statutory tax withholding.

     As of September 30, 2008, there was $9.3 of unrecognized compensation cost related to the non-vested common shares and the restricted stock units and $4.8 of unrecognized 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 1.3 years and the cost related to the performance shares is expected to be recognized over a weighted-average period of 2.4 years.

     Stock Options. As of September 30, 2008, the Company had 22,077 outstanding options for executives and other key employees to purchase its common shares. The options were granted on April 3, 2007 and have a contractual life of ten years. The options vested one-third on April 3, 2008 and will vest one third on each of the second and third anniversary of the grant date. The weighted-average fair value of the options granted was $39.90. No new options were granted during the nine months ended September 30, 2008.

     The fair value of each of the Company’s stock option awards was estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the Company’s stock option awards, which are subject to graded vesting, is expensed on a straight line basis over the vesting period of the stock options. Due to the Company’s short trading history for its common shares following emergence from

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

chapter 11 bankruptcy on July 6, 2006, expected volatility could not be reliably calculated based on the historical volatility of the common shares. As such, the Company determined volatility for use in the Black-Sholes option-pricing model using the volatility of the stock of a number of similar public companies over a period equal to the expected option life of nine years. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option is awarded. The Company uses historical data to estimate employee terminations and the simplified method to estimate the expected option life within the valuation model.

     The significant weighted-average assumptions applicable on the date of grant and used in determining the grant date fair value of the option awards granted on April 3, 2007 were as follows:

Dividend yield			—	%
Volatility rate			45	%
Risk-free interest rate			4.59	%
Expected option life (years)			6.0

     A summary of the Company’s stock option activity for the nine months ended September 30, 2008 is as follows:

						Weighted-				Weighted-
						Average				Average
						Exercise				Remaining				Aggregate
		Number of				Price per				Contractual				Intrinsic
		Options				Share				Life				Value
										(In years)				(In millions)
Outstanding at January 1, 2008			25,137			$	80.01
Grants			—				—
Forfeited			(3,060	)			80.01
Exercise			—				—
Outstanding at September 30, 2008			22,077			$	80.01				8.50			$	—
Fully vested and expected to vest at September 30, 2008 (assuming a 5% forfeiture rate)			21,341			$	80.01				8.50			$	—
Exercisable at September 30, 2008			7,356			$	80.01				8.50			$	—

     At September 30, 2008, there was $.4 of unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted-average period of 1.5 years.

11. 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 (see Note 12), letters of credit (see Note 7), and guarantees. The Company and its subsidiaries also have agreements to supply alumina to and to purchase aluminum from Anglesey (see Note 3).

     The Company entered into a lease in Kalamazoo, Michigan on August 29, 2008. Minimum rental commitments under operating leases at September 30, 2008, were as follows: years ending December 31, 2008 — $1.6; 2009 — $5.6; 2010 — $3.6; 2011 — $2.7 and 2012 and thereafter — $39.4.

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

     A substantial portion of the Company’s pre-emergence obligations, primarily in respect of non-owned locations, was resolved by the chapter 11 bankruptcy proceedings. Based on the Company’s evaluation of the remaining environmental matters, the Company had environmental accruals totaling $9.4 at September 30, 2008. Such amounts are primarily related to potential solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent the Company’s estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company’s assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that expenditures to be charged to these environmental accruals will be approximately $1.6 in 2008, $2.9 in 2009, $1.2 in 2010 , $1.0 in 2011, and $2.7 in 2012 and thereafter.

     As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

that could be, in the aggregate, up to an estimated $15.4. As the resolution of these matters is subject to further regulatory review and approval, no specific assurance can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, the Company is currently working to resolve certain of these matters.

     Other Contingencies. The Company and its subsidiaries are party to various lawsuits, claims, investigations, and administrative proceedings that arise in connection with its 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. In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, the Company reserves 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 reserves 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.

12. Derivative Financial Instruments and Related Hedging Programs

     In conducting its business, the Company uses various instruments, including forward contracts and options, to manage the risks arising from fluctuations in aluminum prices, energy prices and exchange rates. The Company has historically entered into derivative transactions from time to time to limit its economic (i.e. cash) exposure resulting from (1) its anticipated sales of primary aluminum and fabricated aluminum products, net of expected purchase costs for items that fluctuate with aluminum prices, (2) the energy price risk from fluctuating prices for natural gas used in its production process, and (3) foreign currency requirements with respect to its cash commitments for equipment purchases and with respect to its foreign subsidiaries and affiliate. As the Company’s 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 (excluding the impact of mark-to-market fluctuations on those contracts discussed below) generally offset at least a portion of any losses or gains, respectively, on the transactions being hedged at the time the transaction occurs. However, due to mark-to-market accounting, during the life of the derivative contract, significant unrealized, non-cash, gains and losses may be recorded in the income statement as a reduction or increase in Cost of products sold, excluding depreciation. From time to time, the Company may modify the terms of the derivative contracts based on operational needs.

     The Company’s share of primary aluminum production from Anglesey, at maximum production capacity, is approximately 150 million pounds annually. Because the Company purchases alumina for Anglesey at prices linked to primary aluminum prices, only a portion of the Company’s net revenues associated with Anglesey are exposed to price risk. The Company estimates the maximum net portion of its share of Anglesey production exposed to primary aluminum price risk to be approximately 100 million pounds annually (before considering income tax effects).

     The Company’s pricing of fabricated aluminum products is generally intended to lock-in a conversion margin (representing the value added from the fabrication process(es)) and to pass metal price risk on to its customers. However, in certain instances the Company does enter into firm price arrangements. In such instances, the Company does have price risk on its anticipated primary aluminum purchase in respect of the customer’s order. Total fabricated products shipments during the nine months ended September 30, 2008 and 2007 that contained fixed price terms were (in millions of pounds) 184.9 and 155.1, respectively.

     During the last three years, the volume of fabricated products shipments with underlying primary aluminum price risk was at least as much as the Company’s net exposure to primary aluminum price risk at Anglesey. As such, the Company considers its access to Anglesey production overall to be a “natural” hedge against fabricated products firm metal-price risks. However, since the volume of fabricated products shipped under firm prices may not match up on a month-to-month basis with expected Anglesey-related primary aluminum shipments and to the extent that firm price contracts from the Company’s Fabricated Products segment exceed the Anglesey related primary aluminum shipments, the Company may use third party hedging instruments to eliminate any net remaining primary aluminum price exposure existing at any time.

     On June 12, 2008, Anglesey suffered a significant failure in the rectifier yard that resulted in a localized fire in one of the power transformers. As a result of the fire, Anglesey was operating at one third of its production capacity

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

during the latter half of June 2008. Anglesey restarted production on the non-operating portion of the potlines at the smelter in late July, completed restart activities at the end of October with approximately 90% of the pots operating and expects to return the remaining pots to production by mid-December. Until such time, Anglesey’s production has been and will be below its maximum capacity. Anglesey has property damage and business interruption insurance policies in place and expects to recover (net of applicable deductibles) the incremental costs and any loss of margin (assuming production that will be lost due to the outage sold at primary aluminum prices that would have been applicable on such volume) due to business interruption through its insurance coverage. The timing and amount of such insurance recovery is uncertain. However, the Company expects to recover, through its equity income in Anglesey, amounts that preserve the “natural” hedge for its firm price Fabricated Products contracts. Accordingly, the Company has not adjusted and does not expect to adjust third party hedging volume for the lower production rate of Anglesey for the latter half of 2008. (See additional discussion included in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report).

     At September 30, 2008, the Fabricated Products business held contracts for the delivery of fabricated aluminum products that have the effect of creating price risk on anticipated purchases of primary aluminum during the last quarter of 2008 and for the period 2009 through 2012 totaling approximately (in millions of pounds): 2008 — 57.5, 2009 — 113.3, 2010 — 90.4, 2011 — 78.4, and 2012 — 8.9.

     The following table summarizes the Company’s material derivative positions at September 30, 2008:

						Notional
						Amount of
						Contracts				Fair
Commodity		Period				(mmlbs)				Value
Aluminum —
Option purchase contracts		1/2011 through 12/2011					48.9			$	15.6
Fixed priced purchase contracts		10/2008 through 12/2012					224.7			$	5.1
Fixed priced sales contracts		10/2008 through 12/2009					123.9			$	7.1
Regional premium swap contracts(a)		10/2008 through 12/2011					269.5			$	(.7	)

						Notional
						Amount of
						Contracts				Fair
Foreign Currency		Period				(mm)				Value
Pound Sterling —
Fixed priced purchase contracts		10/2008 through 9/2009				£	42.0			$	(6.7	)
Euro —
Fixed priced purchase contracts		10/2008 through 3/2010				€	10.3			$	(.9	)
Krona—
Fixed priced purchase contracts		10/2008 through 9/2009				Kr33.4				$	(.8	)

Notional

Amount of

Contracts

Fair

Energy

Period

(mmbtu)

Value

Natural gas —

Fixed priced purchase contracts(b)

10/2008 through 7/2009

1,420,000

$

(4.1

)

     The Company currently reflects changes in the market value of its derivative instruments in Net income (rather than deferring such gains/losses to the date of the underlying transactions to which the related hedges occur). Included in Net income for the quarter and nine months ended September 30, 2008 were realized gains of $1.1 and $11.0, respectively, and unrealized losses of $43.8 and $6.0, respectively. Included in Net income for the quarter and

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

nine months ended September 30, 2007 were realized losses of $2.8 and $1.1, respectively, and unrealized gains of $4.7 and $5.2, respectively.

13. Other Operating (Benefits) Charges, Net

     Other operating charges, net, for the quarters and nine month periods ended September 30, 2008 and 2007, were as follows:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Reimbursement of amounts paid in connection with sale of Company’s interest in and related to Queensland Alumina Limited — Corporate:
AMT (1)		$	—			$	—			$	—			$	(7.2	)
Professional fees			—				—				—				(1.1	)
Bad debt recoveries relating to pre-emergence writeoffs — Corporate			(1.6	)			—				(1.6	)			—
Pension Benefit Guaranty Corporation — Corporate (2)			—				—				—				(1.3	)
Non-cash benefit resulting from settlement of a $5.0 claim by purchaser of the Gramercy, Louisiana alumina refinery and the Company’s interest in Kaiser Jamaica Bauxite Company for payment of $.1 — Corporate			—				—				—				(4.9	)
Post-emergence chapter 11-related items — Corporate (3)			.2				.5				.4				2.5
Resolution of contingencies relating to sale of property prior to emergence — Corporate (4)			—				(1.6	)			—				(1.6	)
Non-cash charge related to additional share based compensation recorded by Anglesey — Primary Aluminum (Note 3)			—				—				—				—
Other			—				(.3	)			—				(.1	)
		$	(1.4	)		$	(1.4	)		$	(1.2	)		$	(13.7	)

14. Earnings Per Share

     Basic and diluted earnings per share for the quarters and nine month periods ended September 30, 2008 and 2007 were calculated as follows:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Numerator:
Net Income (Loss)		$	(22.1	)		$	24.8			$	39.8			$	76.6
Denominator:
Weighted-average common shares outstanding			19,995,073				20,026,236				20,031,802				20,010,249
Effect of dilutive securities:
Non-vested common shares and restricted stock units			—				300,046				345,667				281,203
Weighted-average common shares outstanding, assuming full dilution			19,995,073				20,326,282				20,377,469				20,291,452
Income (Loss) per share:
Basic		$	(1.11	)		$	1.24			$	1.99			$	3.83
Diluted		$	(1.11	)		$	1.22			$	1.95			$	3.77

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Options to purchase 22,077 common shares at an average exercise price per share of $80.01 were outstanding at September 30, 2008. At September 30, 2008 and 2007, 555,665 and 556,193 non-vested common shares and restricted stock units were outstanding, respectively. Performance shares outstanding at September 30, 2008 were 90,528. Diluted income per share reflects the potential dilutive effect of options to purchase common shares, non-vested common shares, restricted stock units, and performance shares using the treasury stock method.

     The following were excluded from the weighted-average diluted shares computation for the quarters and nine month periods ended September 30, 2008 and 2007 as their inclusion would have been anti-dilutive:

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Options to purchase common shares			22,077				25,137				22,077				25,137
Non-vested common shares and restricted stock units			555,665				256,147				209,998				274,990
Total excluded			577,742				281,284				232,075				300,127

     The performance shares were contingently issuable based on the Company’s performance over a three year period ending December 31, 2010. As of September 30, 2008, the contingency was met to issue 21,187 performance shares. However, these shares were excluded from the weighted-average diluted shares computation for the quarters and nine months ended September 30, 2008 as their inclusion would have been anti-dilutive. Also excluded from the weighted-average diluted shares computation for the quarters and nine months ended September 30, 2008 were 69,341 performance shares because these performance shares were not considered issuable as the contingency was not met as of September 30, 2008.

     During the nine months ended September 30, 2008, the Company paid a total of approximately $12.4, or $.60 per common share, in cash dividends to stockholders, and in dividend equivalents to the holders of restricted stock, the holders of restricted stock units and to the holders of performance shares with respect to one half of the performance shares. On September 17, 2008, the Company’s Board of Directors declared a third dividend of $4.8, or $.24 per common share, to stockholders of record at the close of business on October 24, 2008, to be paid on November 14, 2008.

     During the second quarter of 2008, the Company’s Board of Directors authorized the repurchase of up to $75 of the Company’s common shares. Repurchase transactions are expected to occur at such times and prices as management deems appropriate and are funded with the Company’s excess liquidity after giving consideration to internal and external growth opportunities and future cash flows. The length of time over which the authorization would be utilized will depend on the market conditions. Repurchases may be in open-market transactions or in privately negotiated transactions and the program may be modified, extended, or terminated by the Company’s Board of Directors at any time. The Company repurchased 572,700 shares of common stock at a weighted-average price of $49.05 per share during the third quarter of 2008. The total cost of $28.1 is shown on the Consolidated Balance Sheets as Treasury stock. As of September 30, 2008, $46.9 remained available for repurchase under the existing repurchase authorization.

     On June 4, 2008, the Company’s shareholders approved an increase in the number of the Company’s authorized shares of common stock from 45,000,000 shares to 90,000,000 shares. On July 7, 2008, the Company amended its Amended and Restated Certificate of Incorporation to increase the number of its authorized shares of common stock to 90,000,000 shares.

15. Segment and Geographical Area Information

     The Company’s primary line of business is the production of fabricated aluminum products. In addition, the Company owns a 49% interest in Anglesey (see Note 3).

     The Company’s continuing operations are organized and managed by product type and include two operating segments of the aluminum industry and the Corporate segment. The aluminum industry segments consist of: Fabricated Products and Primary Aluminum. The Fabricated Products segment sells value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial applications, including aerospace, defense, automotive and general engineering end-use applications. The Primary Aluminum segment produces, through its investment in Anglesey, commodity grade products as well as value-added products such as ingot and billet, for which the Company receives a premium over normal commodity market prices, and conducts hedging activities in respect of the Company’s exposure to primary aluminum price risk. The accounting policies of the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Segment results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes, interest expense, or Other operating charges, net.

     Financial information by operating segment for the quarters and nine month periods ended September 30, 2008 and 2007 is as follows:

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Quarter								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Net Sales:
Fabricated Products		$	334.9			$	316.2			$	1,043.3			$	985.3
Primary Aluminum			34.3				50.5				138.4				158.7
		$	369.2			$	366.7			$	1,181.7			$	1,144.0
Segment Operating Income(Loss):
Fabricated Products(1)		$	19.5			$	39.8			$	102.4			$	129.3
Primary Aluminum			(44.9	)			13.4				3.8				31.8
Corporate and Other			(12.5	)			(10.6	)			(37.8	)			(35.8	)
Other Operating Benefits (Charges), Net (Note 13)			1.4				1.4				1.2				13.7
		$	(36.5	)		$	44.0			$	69.6			$	139.0
Interest expense			(.3	)			(1.0	)			(.8	)			(2.2	)
Other income (expense), net			(.2	)			1.8				1.0				4.1
Income(loss) before income taxes		$	(37.0	)		$	44.8			$	69.8			$	140.9