Novelis Inc. - FORM 10-Q - November 10, 2010

Attached files

file	filename
EX-4.3 - EX-4.3 - Novelis Inc.	g25155exv4w3.htm
EX-4.1 - EX-4.1 - Novelis Inc.	g25155exv4w1.htm
EX-3.1 - EX-3.1 - Novelis Inc.	g25155exv3w1.htm
EX-4.2 - EX-4.2 - Novelis Inc.	g25155exv4w2.htm
EX-4.4 - EX-4.4 - Novelis Inc.	g25155exv4w4.htm
EX-32.1 - EX-32.1 - Novelis Inc.	g25155exv32w1.htm
EX-31.2 - EX-31.2 - Novelis Inc.	g25155exv31w2.htm
EX-32.2 - EX-32.2 - Novelis Inc.	g25155exv32w2.htm
EX-31.1 - EX-31.1 - Novelis Inc.	g25155exv31w1.htm

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

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2010
		Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 001-32312

Novelis Inc.

(Exact name of registrant as specified in its charter)


Canada		98-0442987
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3560 Lenox Road, Suite 2000 Atlanta, Georgia (Address of principal executive offices)		30326 (Zip Code)

Telephone: (404) 760-4000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 o	Accelerated filer o	Non-accelerated filer þ	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

As of October 31, 2010, the registrant had 1,000 shares of common stock, no par value, outstanding. All of the registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the registrant’s parent company.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	2
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2010 and 2009 (unaudited)	2
		Condensed Consolidated Balance Sheets as of September 30, 2010 and March 31, 2010 (unaudited)	3
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2010 and 2009 (unaudited)	4
		Condensed Consolidated Statement of Shareholder’s Equity for the Six Months Ended September 30, 2010 (unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2010 and 2009 (unaudited)	6
		Notes to the Condensed Consolidated Financial Statements (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4.	Controls and Procedures	59

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	61
	Item 1A.	Risk Factors	61
	Item 6.	Exhibits	61
EX-3.1
EX-4.1
EX-4.2
EX-4.3
EX-4.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In millions)


	Three Months						Six Months
	Ended						Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net sales	$	2,524		$	2,181		$	5,057		$	4,141

Cost of goods sold (exclusive of depreciation and amortization)		2,188			1,734			4,396			3,271
Selling, general and administrative expenses		97			77			178			151
Depreciation and amortization		104			92			207			192
Research and development expenses		9			9			18			17
Interest expense and amortization of debt issuance costs		40			44			79			87
Interest income		(3	)		(3	)		(6	)		(6	)
Gain on change in fair value of derivative instruments, net		(34	)		(80	)		(28	)		(152	)
Restructuring charges, net		9			3			15			6
Equity in net loss of non-consolidated affiliates		3			10			6			20
Other (income) expense, net		(18	)		(6	)		(11	)		(19	)

		2,395			1,880			4,854			3,567

Income before income taxes		129			301			203			574
Income tax provision		56			87			71			199

Net income		73			214			132			375
Net income attributable to noncontrolling interests		11			19			20			37

Net income attributable to our common shareholder	$	62		$	195		$	112		$	338

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In millions, except number of shares)


	September 30,			March 31,
	2010			2010

ASSETS
Current assets
Cash and cash equivalents	$	512		$	437
Accounts receivable (net of allowances of $5 and $4 as of September 30, 2010 and March 31, 2010)
— third parties		1,244			1,143
— related parties		12			24
Inventories		1,177			1,083
Prepaid expenses and other current assets		44			39
Fair value of derivative instruments		182			197
Deferred income tax assets		21			12

Total current assets		3,192			2,935
Property, plant and equipment, net		2,526			2,632
Goodwill		611			611
Intangible assets, net		724			749
Investment in and advances to non-consolidated affiliates		707			709
Fair value of derivative instruments, net of current portion		17			7
Long-term deferred income tax assets		14			5
Other long-term assets
— third parties		98			93
— related parties		20			21

Total assets	$	7,909		$	7,762


LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
Current portion of long-term debt	$	117		$	116
Short-term borrowings		23			75
Accounts payable
— third parties		1,045			1,076
— related parties		47			53
Fair value of derivative instruments		145			110
Accrued expenses and other current liabilities		441			436
Deferred income tax liabilities		33			34

Total current liabilities		1,851			1,900
Long-term debt, net of current portion		2,477			2,480
Long-term deferred income tax liabilities		537			497
Accrued postretirement benefits		507			499
Other long-term liabilities		354			376

Total liabilities		5,726			5,752

Commitments and contingencies
Shareholder’s equity
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of September 30, 2010 and March 31, 2010		—			—
Additional paid-in capital		3,530			3,530
Accumulated deficit		(1,446	)		(1,558	)
Accumulated other comprehensive loss		(62	)		(103	)

Total Novelis shareholder’s equity		2,022			1,869
Noncontrolling interests		161			141

Total equity		2,183			2,010

Total liabilities and shareholder’s equity	$	7,909		$	7,762

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In millions)


	Six Months
	Ended
	September 30,
	2010			2009

OPERATING ACTIVITIES
Net income	$	132		$	375
Adjustments to determine net cash provided by (used in) operating activities:
Depreciation and amortization		207			192
Gain on change in fair value of derivative instruments, net		(28	)		(152	)
Deferred income taxes		18			196
Write-off and amortization of fair value adjustments, net		8			(98	)
Equity in net loss of non-consolidated affiliates		6			20
Foreign exchange remeasurement of debt		1			(15	)
Gain on sale of assets		(13	)		(1	)
Other, net		5			6
Changes in assets and liabilities:
Accounts receivable		(91	)		(98	)
Inventories		(84	)		(84	)
Accounts payable		(45	)		97
Other current assets		(4	)		4
Other current liabilities		16			(4	)
Other noncurrent assets		(8	)		(14	)
Other noncurrent liabilities		4			27

Net cash provided by operating activities		124			451

INVESTING ACTIVITIES
Capital expenditures		(71	)		(46	)
Proceeds from sales of assets		18			4
Changes to investment in and advances to non-consolidated affiliates		—			2
Proceeds from related party loans receivable, net		11			14
Net proceeds (outflow) from settlement of derivative instruments		67			(403	)

Net cash provided by (used in) investing activities		25			(429	)

FINANCING ACTIVITIES
Proceeds from issuance of debt, third parties		—			177
Proceeds from issuance of debt, related parties		—			3
Principal payments, third parties		(8	)		(16	)
Principal payments, related parties		—			(94	)
Short-term borrowings, net		(50	)		(96	)
Dividends, noncontrolling interest		(18	)		(13	)

Net cash used in financing activities		(76	)		(39	)

Net increase (decrease) in cash and cash equivalents		73			(17	)
Effect of exchange rate changes on cash balances held in foreign currencies		2			15
Cash and cash equivalents — beginning of period		437			248

Cash and cash equivalents — end of period	$	512		$	246

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)
(In millions, except number of shares)


	Novelis Inc. Shareholder
										Accumulated
										Other
					Additional					Comprehensive			Non-
	Common Stock				Paid-in		Accumulated			Loss			controlling			Total
	Shares		Amount		Capital		Deficit			(AOCI)			Interests			Equity

Balance as of March 31, 2010		1,000	$	—	$	3,530	$	(1,558	)	$	(103	)	$	141		$	2,010
Net income attributable to our common shareholder		—		—		—		112			—			—			112
Net income attributable to noncontrolling interests		—		—		—		—			—			20			20
Currency translation adjustment, net of tax provision of $3 million included in AOCI		—		—		—		—			35			1			36
Change in fair value of effective portion of cash flow hedges, net of tax provision of $3 included in AOCI		—		—		—		—			7			—			7
Postretirement benefit plans:
Change in pension and other benefits, net of tax provision of $1 included in AOCI		—		—		—		—			(1	)		—			(1	)
Noncontrolling interests dividends		—		—		—		—			—			(1	)		(1	)

Balance as of September 30, 2010		1,000	$	—	$	3,530	$	(1,446	)	$	(62	)	$	161		$	2,183

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In millions)


	Three Months Ended						Three Months Ended
	September 30, 2010						September 30, 2009
	Attributable to		Attributable to				Attributable to			Attributable to
	Our Common		Noncontrolling				Our Common			Noncontrolling
	Shareholder		Interests		Total		Shareholder			Interests		Total

Net income	$	62	$	11	$	73	$	195		$	19	$	214

Other comprehensive income (loss):
Currency translation adjustment		154		9		163		74			7		81
Net change in fair value of effective portion of cash flow hedges		1		—		1		(15	)		—		(15	)
Postretirement benefit plans:
Change in pension and other benefits		—		—		—		3			—		3

Other comprehensive income before income tax effect		155		9		164		62			7		69
Income tax provision related to items of other comprehensive income (loss)		4		—		4		(2	)		—		(2	)

Other comprehensive income, net of tax		151		9		160		64			7		71

Comprehensive income	$	213	$	20	$	233	$	259		$	26	$	285


	Six Months Ended						Six Months Ended
	September 30, 2010						September 30, 2009
	Attributable to		Attributable to				Attributable to			Attributable to
	Our Common		Noncontrolling				Our Common			Noncontrolling
	Shareholder		Interests		Total		Shareholder			Interests		Total

Net income	$	112	$	20	$	132	$	338		$	37	$	375

Other comprehensive income (loss):
Currency translation adjustment		38		1		39		130			14		144
Net change in fair value of effective portion of cash flow hedges		10		—		10		(4	)		—		(4	)
Postretirement benefit plans:
Change in pension and other benefits		—		—		—		6			—		6

Other comprehensive income before income tax effect		48		1		49		132			14		146
Income tax provision related to items of other comprehensive income (loss)		7		—		7		6			—		6

Other comprehensive income, net of tax		41		1		42		126			14		140

Comprehensive income	$	153	$	21	$	174	$	464		$	51	$	515

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


1.	BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

References herein to “Novelis,” the “Company,” “we,” “our,” or “us” refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to “Hindalco” refer to Hindalco Industries Limited. In October 2007, the Rio Tinto Group purchased all the outstanding shares of Alcan, Inc. and became Rio Tinto Alcan Inc. References herein to “Rio Tinto Alcan” refer to Rio Tinto Alcan Inc.

Description of Business and Basis of Presentation

Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the beverage and food can, transportation, construction and industrial, and foil products markets. As of September 30, 2010, we had operations on four continents: North America, Europe, Asia and South America, through 31 operating plants, one research facility and several market-focused innovation centers in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended March 31, 2010 filed with the United States Securities and Exchange Commission (SEC) on May 27, 2010. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairments of long-lived assets, intangible assets and equity investments; (4) actuarial assumptions related to pension and other postretirement benefit plans; (5) income tax reserves and valuation allowances and (6) assessment of loss contingencies, including environmental, litigation and other tax reserves.

Acquisition of Novelis Common Stock

On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The aggregate purchase price for all of the Company’s common shares was $3.4 billion and Hindalco also assumed $2.8 billion of Novelis’ debt for a total transaction value of $6.2 billion. Subsequent to completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by Hindalco.

Amalgamation of AV Aluminum Inc. and Novelis Inc.

Effective September 29, 2010, in connection with an internal restructuring transaction, pursuant to articles of amalgamation under the Canadian Business Corporations Act, we were amalgamated (the “Amalgamation”) with our direct parent AV Aluminum Inc., a Canadian corporation (AV Aluminum), to form an amalgamated corporation named Novelis Inc., also a Canadian corporation.

As a result of the Amalgamation, we and AV Aluminum continue our corporate existence, and the amalgamated Novelis Inc. remains liable for all of our and AV Aluminum’s obligations and we continue to own all of our respective property. Since AV Aluminum was a holding company whose sole asset was the shares of the pre-amalgamated Novelis, our business, management, board of directors and corporate governance procedures following the Amalgamation are identical to those of Novelis immediately prior to the

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Amalgamation. Novelis Inc., like AV Aluminum, remains an indirect, wholly-owned subsidiary of Hindalco. We have retrospectively recast all periods presented to reflect the amalgamated companies.

As of September 30, 2010, the Amalgamation increased the Company’s previously reported Additional paid-in capital by $32 million, increased Accumulated deficit by $33 million and increased Accrued expenses and other current liabilities by $1 million. As of March 31, 2010, the Amalgamation increased the Company’s previously reported Additional paid-in capital by $33 million, and reduced Accumulated deficit by $33 million. The Amalgamation had no impact on our condensed consolidated statements of operations for the three and six months ended September 30, 2010 and 2009 or our condensed consolidated statements of cash flows for the six months ended September 30, 2010 and 2009.

Consolidation Policy

Our consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate all significant intercompany accounts and transactions from our consolidated financial statements.

Reclassifications and Adjustment

Certain reclassifications of prior period amounts and presentation have been made to conform to the presentation adopted for the current period.

For the three and six months ended September 30, 2009, we reclassified $6 million and $10 million, respectively, from Selling, general and administrative expenses to Costs of goods sold (exclusive of depreciation and amortization) to conform with the current year presentation.

In the condensed consolidated balance sheet as of March 31, 2010, we reclassified $3 million of capitalized software from Property, plant and equipment, net to Intangible assets. The reclassification had no impact on total assets, total liabilities, total equity, net income (loss) or cash flows as previously reported.

In order to present the impact of all customer-directed derivatives and associated trading activities as operating activities on the consolidated statement of cash flows, we corrected our presentation by reclassifying this activity from investing activities to operating activities. This resulted in a reduction to operating cash flow of $13 million and an increase to investing cash flow of $13 million for the six months ended September 30, 2009. This reclassification did not have any impact on total cash or on the balance sheet, statement of operations or related disclosures.

Recently Adopted Accounting Standards

Effective April 1, 2010, we adopted authoritative guidance in the Accounting Standards Update (ASU) No. 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU No. 2009-17 was intended (1) to address the effects on certain provisions of the accounting standard dealing with consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in ASU No. 2009-16, Transfers and Servicing: Accounting for Transfers of Financial Assets, and (2) to clarify questions about the application of certain key provisions related to consolidation of variable interest entities. This standard had no impact on our consolidated financial position, results of operations and cash flow, but did require certain additional footnote disclosures. These disclosures are included in Note 4 — Consolidation of Variable Interest Entities.

Recently Issued Accounting Standards

We have determined that recently issued accounting standards will not have a material impact on our consolidated financial position, results of operations and cash flow.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


2.	RESTRUCTURING PROGRAMS

Restructuring charges, net of $15 million on the condensed consolidated statement of operations for the six months ended September 30, 2010 includes a $1 million non-cash credit as described below. The following table summarizes our restructuring accrual activity by region (in millions).


				North					South				Restructuring
	Europe			America			Asia		America		Corporate		Reserves

Balance as of March 31, 2010	$	28		$	10		$	—	$	—	$	—	$	38
Provisions, net		2			9			—		—		5		16
Cash payments		(5	)		(11	)		—		—		—		(16	)

Balance as of September 30, 2010	$	25		$	8		$	—	$	—	$	5	$	38

Europe

Restructuring charges for the six months ended September 30, 2010 consisted of a net $2 million in additional severance and other environmental costs at three European plants related to restructuring actions initiated in prior years. For the six months ended September 30, 2010, we made $3 million in severance payments and $2 million in payments for environmental remediation.

North America

We recorded $9 million of restructuring expense for the six months ended September 30, 2010, related to the relocation of our North American headquarters from Cleveland to Atlanta, and made $8 million in payments related to this move. We also made $3 million in payments related to previously announced separation programs.

Corporate

We recorded $4 million of restructuring expense for the six months ended September 30, 2010, related to lease termination costs incurred in the relocation of our Corporate headquarters in Atlanta to a new facility, which includes a $1 million deferred credit on the former facility.


3.	INVENTORIES

Inventories consisted of the following (in millions).


	September 30,			March 31,
	2010			2010

Finished goods	$	238		$	270
Work in process		451			431
Raw materials		391			295
Supplies		103			93

		1,183			1,089
Allowances		(6	)		(6	)

Inventories	$	1,177		$	1,083


4.	CONSOLIDATION OF VARIABLE INTEREST ENTITIES (VIE)

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. Prior to March 31, 2010, the primary beneficiary was the entity that would absorb a

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

majority of the economic risks and rewards of the VIE based on an analysis of projected probability-weighted cash flows. In accordance with the new accounting guidance on consolidation of VIEs effective April 1, 2010 (see Note 1), an entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

We have a joint interest in Logan Aluminum Inc. (Logan) with ARCO Aluminum, Inc. (ARCO). Logan processes metal received from Novelis and ARCO and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and ARCO to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other material support to Logan. Logan’s creditors do not have recourse to our general credit.

Novelis has a majority voting right on Logan’s board of directors and has the ability to direct the majority of Logan’s production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify Novelis as Logan’s primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances have been eliminated.

The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated on our condensed consolidated balance sheets (in millions). There are significant other assets used in the operations of Logan that are not part of the joint venture, as they are directly owned and consolidated by Novelis or ARCO.


	September 30,		March 31,
	2010		2010

Assets
Current assets
Cash and cash equivalents	$	1	$	3
Accounts receivable		31		29
Inventories, net		33		31
Prepaid expenses and other current assets		1		1

Total current assets		66		64
Property, plant and equipment, net		9		10
Goodwill		12		12
Deferred income taxes		44		41
Other long-term assets		3		3

Total assets	$	134	$	130

Liabilities
Current liabilities
Accounts payable	$	22	$	23
Accrued expenses and other current liabilities		15		12

Total current liabilities		37		35
Accrued postretirement benefits		99		97
Other long-term liabilities		3		3

Total liabilities	$	139	$	135

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


5.	INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS

The following table summarizes our share of the condensed results of operations of our equity method affiliates. These results include the incremental depreciation and amortization expense that we record in our equity method accounting as a result of fair value adjustments made to our investments in non-consolidated affiliates due to the Arrangement.

Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party transactions and balances. The following table also describes the nature and amounts of significant transactions that we had with our non-consolidated affiliates (in millions).


	Three Months						Six Months
	Ended						Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net sales	$	59		$	64		$	115		$	121
Costs, expenses and provisions for taxes on income		62			74			121			141

Net income (loss)	$	(3	)	$	(10	)	$	(6	)	$	(20	)

Purchase of tolling services from Aluminium Norf GmbH (Norf)	$	59		$	64		$	115		$	120

We earned less than $1 million of interest income on a loan due from Norf during each of the periods presented in the table above.

The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances.


	September 30,		March 31,
	2010		2010

Accounts receivable	$	12	$	24
Other long-term receivables	$	20	$	21
Accounts payable	$	47	$	53

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


6.	DEBT

Debt consists of the following (in millions).


	September 30, 2010												March 31, 2010
							Unamortized									Unamortized
	Interest						Fair Value			Carrying						Fair Value			Carrying
	Rates(A)			Principal			Adjustments(B)			Value			Principal			Adjustments(B)			Value

Third party debt:
Short term borrowings		2.37	%	$	23		$	—		$	23		$	75		$	—		$	75
Novelis Inc.
Floating rate Term Loan Facility, due July 2014		2.27	%(C)		290			—			290			292			—			292
11.5% Senior Notes, due February 2015		11.50	%		185			(3	)		182			185			(3	)		182
7.25% Senior Notes, due February 2015		7.25	%		1,124			37			1,161			1,124			41			1,165
Novelis Corporation
Floating rate Term Loan Facility, due July 2014		2.40	%(C)		855			(41	)		814			859			(46	)		813
Novelis Switzerland S.A.
Capital lease obligation, due December 2019 (Swiss francs (CHF) 46 million)		7.50	%		47			(3	)		44			45			(3	)		42
Capital lease obligation, due August 2011 (CHF 1 million)		2.49	%		1			—			1			1			—			1
Novelis Korea Limited
Bank loan, due October 2010		2.00	%(C)		100			—			100			100			—			100
Other
Other debt, due December 2011 through June 2015		4.12	%		2			—			2			1			—			1

Total debt — third parties					2,627			(10	)		2,617			2,682			(11	)		2,671
Less: Short term borrowings					(23	)		—			(23	)		(75	)		—			(75	)
Current portion of long term debt					(117	)		—			(117	)		(116	)		—			(116	)

Long-term debt, net of current portion — third parties:				$	2,487		$	(10	)	$	2,477		$	2,491		$	(11	)	$	2,480


(A)		Interest rates are as of September 30, 2010 and exclude the effects of accretion/amortization of fair value adjustments as a result of the Arrangement and the debt exchange completed in fiscal 2009.

(B)		Debt existing at the time of the Arrangement was recorded at fair value. Additional floating rate Term Loan with a face value of $220 million issued in March 2009 was recorded at a fair value of $165 million. 11.5% Senior Notes with a face value of $185 million issued in August 2009 were recorded at a fair value of $181 million.

(C)		Excludes the effect of related interest rate swaps and the effect of accretion of fair value.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized fair value adjustments and using rates of exchange as of September 30, 2010 for our debt denominated in foreign currencies) are as follows (in millions).


As of September 30, 2010	Amount

Within one year	$	140
2 years		16
3 years		17
4 years		1,114
5 years		1,314
Thereafter		26

Total	$	2,627

We repaid the $100 million bank loan in Korea included in the table above when it came due on October 25, 2010.

Senior Secured Credit Facilities

Our senior secured credit facilities consist of (1) a $1.15 billion seven year term loan facility maturing July 2014 (Term Loan facility) and (2) an $800 million five-year multi-currency asset-backed revolving credit line and letter of credit facility (ABL Facility). The senior secured credit facilities include certain affirmative and negative covenants. Under the ABL Facility, if our excess availability, as defined under the borrowing, is less than $80 million, we are required to maintain a minimum fixed charge coverage ratio of 1 to 1. Substantially all of our assets are pledged as collateral under the senior secured credit facilities.

Short-Term Borrowings and Lines of Credit

As of September 30, 2010, our short-term borrowings were $23 million consisting of bank overdrafts. As of September 30, 2010, $33 million of the ABL Facility was utilized for letters of credit and we had $694 million in remaining availability under this revolving credit facility. The weighted average interest rate on our total short-term borrowings was 2.37% and 1.71% as of September 30, 2010 and March 31, 2010, respectively.

As of September 30, 2010, we had $101 million of outstanding letters of credit in Korea which are not related to the ABL Facility.

Interest Rate Swaps

As of September 30, 2010, we have interest rate swaps to fix the variable LIBOR interest rate on $520 million of our floating rate Term Loan facility, of which $510 million are designated as cash flow hedges. We are still obligated to pay any applicable margin, as defined in our senior secured credit facilities. Interest rate swaps related to $300 million at an effective weighted average interest rate of 1.49% expire March 31, 2011. Interest rate swaps related to the remaining $220 million at an effective weighted average interest rate of 1.97% expire April 30, 2012.

We have a cross-currency interest rate swap in Korea to convert our $100 million variable rate bank loan to KRW 92 billion at a fixed rate of 5.44%. In October 2010, at maturity, we repaid this loan. The swap expired concurrent with the maturity of the loan.

As of September 30, 2010 approximately 76% of our debt was fixed rate and approximately 24% was variable rate, after the effect of interest rate swaps.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


7.	SHARE-BASED COMPENSATION

The board of directors has authorized three long term incentive plans as follows:


	•	The Novelis Long-Term Incentive Plan FY 2009 — FY 2012 (2009 LTIP) was authorized in June 2008. Under the 2009 LTIP, phantom stock appreciation rights (SARs) were granted to certain of our executive officers and key employees.

	•	The Novelis Long-Term Incentive Plan FY 2010 — FY 2013 (2010 LTIP) was authorized in June 2009. Under the 2010 LTIP, SARs were granted to certain of our executive officers and key employees.

	•	The Novelis Long-Term Incentive Plan FY 2011- FY 2014 (2011 LTIP) was authorized in May 2010. The 2011 LTIP plan provides for SARs and phantom restricted stock units (RSUs).

Under all three plans, SARs vest at the rate of 25% per year, subject to performance criteria and expire seven years from their grant date. Each SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant and the market value on the date of exercise, subject to a maximum payout as defined by the plan. The RSUs under the 2011 LTIP vest in full three years from the grant date and are not subject to performance criteria. The payout on the RSUs is limited to three times the grant price.

Total compensation expense related to the long term incentive plans for the respective periods is presented in the table below (in millions). These amounts are included in Selling, general and administrative expenses in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2012, 2013 and 2014 have not yet been established, measurement periods for SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year SARs has been recorded for the three and six months ended September 30, 2010.


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

2009 LTIP	$	2	$	1	$	3	$	1
2010 LTIP		5		1		6		1
2011 LTIP		1		—		1		—

Total compensation expense	$	8	$	2	$	10	$	2

The tables below show the RSUs activity under our 2011 LTIP and the SARs activity under our 2011 LTIP, 2010 LTIP and 2009 LTIP.


						Aggregate
				Grant Date Fair		Intrinsic
	Number of			Value		Value (USD
2011 LTIP	RSUs			(in Indian Rupees)		in millions)

RSUs outstanding as of March 31, 2010		—			—	$	—
Granted		890,077			147.10		3
Forfeited/Cancelled		(1,755	)		147.10

RSUs outstanding as of September 30, 2010		888,322			147.10	$	4

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


								Aggregate
						Remaining		Intrinsic
	Number of			Exercise Price		Contractual Term		Value (USD
2011 LTIP	SARs			(in Indian Rupees)		(In years)		in millions)

SARs outstanding as of March 31, 2010		—			—		—	$	—
Granted		6,992,123			147.10
Forfeited/Cancelled		(13,784	)		147.10

SARs outstanding as of September 30, 2010		6,978,339			147.10		6.70	$	8


				Weighted		Weighted Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise Price		Contractual Term		Value (USD
2010 LTIP	SARs			(in Indian Rupees)		(In years)		in millions)

SARs outstanding as of March 31, 2010		13,680,431			87.68		6.24	$	29
Exercised		(1,930,290	)		85.88
Forfeited/Cancelled		(433,777	)		85.79

SARs outstanding as of September 30, 2010		11,316,364			88.34		5.70	$	26


								Aggregate
						Remaining		Intrinsic
	Number of			Exercise Price		Contractual Term		Value (USD
2009 LTIP	SARs			(in Indian Rupees)		(In years)		in millions)

SARs outstanding as of March 31, 2010		11,371,399			60.50		5.25	$	18
Exercised		(1,508,527	)		60.50
Forfeited/Cancelled		(459,464	)		60.50

SARs outstanding as of September 30, 2010		9,403,408			60.50		4.70	$	15

The fair value of each SAR is based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The fair value of each SAR under the 2011 LTIP, 2010 LTIP and 2009 LTIP was estimated as of September 30, 2010 using the following assumptions:


	2011 LTIP	2010 LTIP	2009 LTIP

Risk-free interest rate	7.57 — 7.86%	7.52 — 7.81%	7.38% — 7.65%
Dividend yield	0.69%	0.69%	0.69%
Volatility	48.12%	50.05%	53.6%
Time interval (in years)	0.004	0.004	0.004

The fair value of the SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criterion. As of September 30, 2010, 3,729,342 SARs were exercisable.

Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $31 million which is expected to be realized over a weighted average period of 2.19 years.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Unrecognized compensation expense related to the RSU’s is $4 million and will be recognized over the vesting period of three years.


8.	POSTRETIREMENT BENEFIT PLANS

Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K.; unfunded pension plans in Germany; unfunded lump sum indemnities in France, Malaysia and Italy; and partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.

Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).


	Pension Benefit Plans
	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Service cost	$	9		$	8		$	18		$	16
Interest cost		16			14			32			28
Expected return on assets		(14	)		(10	)		(28	)		(20	)
Amortization — losses		3			3			6			6

Net periodic benefit cost	$	14		$	15		$	28		$	30


	Other Benefits
	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Service cost	$	2	$	1	$	4	$	3
Interest cost		2		3		4		6

Net periodic benefit cost	$	4	$	4	$	8	$	9

The expected long-term rate of return on plan assets is 6.8% in fiscal 2011.

Employer Contributions to Plans

For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to-date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Switzerland, Malaysia and Brazil. We contributed the following amounts to all plans, including the Rio Tinto Alcan plans that cover our employees (in millions).


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Funded pension plans	$	8	$	9	$	17	$	12
Unfunded pension plans		3		4		6		8
Savings and defined contribution pension plans		4		4		9		7

Total contributions	$	15	$	17	$	32	$	27

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

During the remainder of fiscal 2011, we expect to contribute an additional $23 million to our funded pension plans, $6 million to our unfunded pension plans and $8 million to our savings and defined contribution plans.


9.	CURRENCY (GAINS) LOSSES

The following currency (gains) losses are included in the accompanying condensed consolidated statements of operations (in millions).


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net (gain) loss on change in fair value of currency derivative instruments(A)	$	13		$	(29	)	$	(11	)	$	(51	)
Net gain on remeasurement and transaction gains or losses(B)		(22	)		(3	)		(1	)		(7	)

Net currency gain	$	(9	)	$	(32	)	$	(12	)	$	(58	)


(A)		Included in (Gain) loss on change in fair value of derivative instruments, net.

(B)		Included in Other (income) expense, net.

The following currency translation gains (losses) are included in Accumulated other comprehensive loss (AOCI), net of tax and Noncontrolling interests (in millions).


	Six Months Ended			Year Ended
	September 30, 2010			March 31, 2010

Cumulative currency translation adjustment — beginning of period	$	(3	)	$	(78	)
Effect of changes in exchange rates		36			75

Cumulative currency translation adjustment — end of period	$	33		$	(3	)

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


10.	FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS

The fair values of our financial instruments and commodity contracts as of September 30, 2010 and March 31, 2010 are as follows (in millions):


	September 30, 2010
	Assets				Liabilities						Net Fair Value
	Current		Noncurrent		Current			Noncurrent(A)			Assets/(Liabilities)

Derivatives designated as hedging instruments:
Currency exchange contracts	$	3	$	4	$	—		$	—		$	7
Interest rate swaps		—		—		(6	)		(2	)		(8	)
Electricity swap		—		—		(7	)		(23	)		(30	)

Total derivatives designated as hedging instruments		3		4		(13	)		(25	)		(31	)

Derivatives not designated as hedging instruments:
Aluminum contracts		124		7		(98	)		—			33
Currency exchange contracts		55		6		(28	)		(2	)		31
Energy contracts		—		—		(6	)		(1	)		(7	)

Total derivatives not designated as hedging instruments		179		13		(132	)		(3	)		57

Total derivative fair value	$	182	$	17	$	(145	)	$	(28	)	$	26


	March 31, 2010
	Assets				Liabilities						Net Fair Value
	Current		Noncurrent		Current			Noncurrent(A)			Assets/(Liabilities)

Derivatives designated as hedging instruments:
Currency exchange contracts	$	—	$	—	$	—		$	(21	)	$	(21	)
Interest rate swaps		—		—		(6	)		(1	)		(7	)
Electricity swap		—		—		(8	)		(27	)		(35	)

Total derivatives designated as hedging instruments		—		—		(14	)		(49	)		(63	)

Derivatives not designated as hedging instruments:
Aluminum contracts		149		6		(80	)		—			75
Currency exchange contracts		48		1		(10	)		(1	)		38
Energy contracts		—		—		(6	)		—			(6	)

Total derivatives not designated as hedging instruments		197		7		(96	)		(1	)		107

Total derivative fair value	$	197	$	7	$	(110	)	$	(50	)	$	44


(A)		The noncurrent portions of derivative liabilities are included in Other long-term liabilities in the accompanying condensed consolidated balance sheets.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Net Investment Hedges

The effective portion of the change in fair value of the derivative is included in Other comprehensive income (loss) (OCI), and will be reclassified to the condensed consolidated statement of operations when the related investment is disposed. The ineffective portion of gain or loss on derivatives is included in (Gain) loss on change in fair value of derivative instruments, net. In May 2010, we terminated these hedges early. Prior to termination, we recognized a gain of $18 million in OCI for the six months ended September 30, 2010. A realized net loss of $3 million remains in OCI. We recognized losses of $5 million and $21 million in OCI for the three and six months ended September 30, 2009, respectively.

Cash Flow Hedges

We use derivatives as cash flow hedges to manage the risk of variability in our cash flows. The effective portion of gain or loss on the derivative is included in OCI and reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the transaction becomes probable of not occurring. We formally assess, at least quarterly, the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. For all derivatives designated as cash flow hedges, gains or losses representing hedge ineffectiveness are recognized in (Gain) loss on change in fair value of derivative instruments, net in our current period earnings. If at any time during the life of a cash flow hedge relationship we determine that the relationship is no longer effective the derivative will no longer be designated as a cash flow hedge and future gains or losses on the derivative will be recognized in (Gain) loss on change in fair value of derivative instruments.

We own an interest in an electricity swap which we designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of September 30, 2010, the outstanding portion of this swap includes a total of 1.5 million megawatt hours through 2017.

We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt. We have designated these as cash flow hedges. We had $510 million of outstanding interest rate swaps designated as cash flow hedges as of September 30, 2010 and March 31, 2010.

We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures, generally not exceeding five years. We had $222 million of outstanding foreign currency forwards designated as cash flow hedges as of September 30, 2010. No foreign currency contracts were designated as cash flow hedges as of March 31, 2010.

During the next twelve months we expect to reclassify $12 million in effective net losses from our cash flow hedges from other comprehensive income (loss) into net income (loss). The maximum period over which we have hedged our exposure to cash flow variability is through 2017.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions).


																						Amount of Gain or (Loss)
																						Recognized in
	Amount of Gain or (Loss)													Amount of Gain or (Loss)								Income/(Expense) on
	Recognized in OCI on													Reclassified from								Derivative (Ineffective Portion
	Derivative													AOCI into Income/(Expense)								and Amount Excluded from
	(Effective Portion)													(Effective Portion)								Effectiveness Testing)
	Three Months						Six Months						Location of Gain or (Loss)	Three Months				Six Months				Three Months				Six Months
	Ended						Ended						Reclassified from	Ended				Ended				Ended				Ended
Derivatives in Cash Flow	September 30,						September 30,						Accumulated OCI into Earnings	September 30,				September 30,				September 30,				September 30,
Hedging Relationships	2010			2009			2010			2009			(Effective Portion)	2010		2009		2010		2009		2010		2009		2010		2009

Electricity swap	$	(2	)	$	(14	)	$	8		$	(3	)	(Gain) loss on derivative instruments, net	$	2	$	1	$	3	$	2	$	—	$	—	$	—	$	2
Interest rate swaps		(1	)		—			(1	)		1		Interest expense and amortization of debt issuance costs		—		—		—		—		—		—		—		—
Currency exchange contracts		6			—			6			—		Depreciation and amortization		—		—		—		—		—		—		—		—

Total	$	3		$	(14	)	$	13		$	(2	)		$	2	$	1	$	3	$	2	$	—	$	—	$	—	$	2

Derivative Instruments Not Designated as Hedges

While each of these derivatives is intended to be effective in helping us manage risk, they have not been designated as hedging instruments. The change in fair value of these derivative instruments is included in (Gain) loss on change in fair value of derivative instruments, net in the accompanying condensed consolidated statement of operations. This includes both the change in fair value of unrealized derivatives and the change in fair value of derivatives that were realized during the period. We recognize realized gains (losses) in Segment income when derivative instruments settle or when the final cash price is determined by reversing the accumulated unrealized change in fair value that was recorded prior to settlement. See Note 15 Segment, Major Customer and Major Supplier Information for more discussion of Segment income.

We use aluminum forward contracts and options to hedge our exposure to changes in the London Metal Exchange (LME) price of aluminum. These exposures arise from firm commitments to sell aluminum in future periods at fixed prices, the forecasted output of our smelter operations in South America and the forecasted metal price lag associated with firm commitments to sell aluminum in future periods at prices based on the LME. As of September 30, 2010 and March 31, 2010, we had 89 kilotonnes (kt) and 55 kt, respectively, of outstanding aluminum contracts not designated as hedges. We classify cash settlement amounts associated with these derivatives as part of investing activities in the condensed consolidated statements of cash flows.

For certain customers, we enter into contractual relationships that entitle us to pass-through the economic effect of trading positions that we take with other third parties on our customers’ behalf. We recognize a derivative position with both the customer and the third party for these types of contracts and we classify cash settlement amounts associated with these derivatives as part of operating activities in the condensed consolidated statements of cash flows. These derivatives expired in February 2010 with the last cash settlement occurring in October 2010.

We use foreign exchange forward contracts and cross-currency swaps to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments and forecasted cash flows denominated in currencies other than the functional currency of certain operations. As of September 30, 2010 and March 31, 2010, we had outstanding currency exchange contracts with a total notional amount of $1.7 billion and $1.4 billion, respectively, which were not designated as hedges.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

We use interest rate swaps to manage our exposure to fluctuating interest rates associated with variable-rate debt. As of September 30, 2010 and March 31, 2010, we had $10 million of outstanding interest rate swaps that were not designated as hedges in each period.

We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. As of September 30, 2010 and March 31, 2010, we had 6.3 million MMBTUs and 4.2 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.

The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments recognized in earnings (in millions).


	Three Months					Six Months
	Ended					Ended
	September 30,					September 30,
	2010			2009		2010			2009

Derivative Instruments Not Designated as Hedges
Aluminum contracts	$	50		$	49	$	17		$	97
Currency exchange contracts		(13	)		29		11			51
Energy contracts		(5	)		—		(4	)		—

Gain (loss) recognized		32			78		24			148
Derivative Instruments Designated as Cash Flow Hedges
Interest Rate swaps		—			—		—			—
Electricity swap		2			2		4			4

Gain (loss) on change in fair value of derivative instruments, net	$	34		$	80	$	28		$	152

The following table summarizes realized and unrealized gains (losses) associated with the change in fair value of derivative instruments recognized in earnings.


	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2010		2009			2010			2009

Realized gains (losses) included in segment income	$	33	$	(174	)	$	74		$	(402	)
Realized gains (losses) on corporate derivative instruments		—		—			—			1
Unrealized gains (losses)		1		254			(46	)		553

Gain (loss) on change in fair value of derivative instruments, net	$	34	$	80		$	28		$	152


11.	FAIR VALUE MEASUREMENTS

We record certain assets and liabilities, primarily derivative instruments, on our condensed consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent that observable market inputs are not available, our fair value

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

measurements will reflect the assumptions we use. We grade the level of our fair value measures according to a three-tier hierarchy:

Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that we have the ability to access at the measurement date.

Level 2 — Assets and liabilities valued based on inputs other than quoted prices included within Level 1 that are observable for similar instruments, either directly or indirectly.

Level 3 — Assets and liabilities valued based on significant unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing the asset or liability.

The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified:

Derivative Contracts

The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. Valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency forward contracts, aluminum forward contracts and options, and certain energy-related forward contracts (e.g., natural gas).

We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. These derivatives include certain of our energy-related forward contracts (e.g., electricity) and commodity location premium contracts. Models for these fair value measurements include inputs based on estimated future prices for periods beyond the term of the quoted prices.

For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk).

As of September 30, 2010 and March 31, 2010, we did not have any Level 1 derivative contracts.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

The following tables present our derivative assets and liabilities which 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, 2010 and March 31, 2010 (in millions).


	September 30, 2010					March 31, 2010
	Assets		Liabilities			Assets		Liabilities

Level 2
Aluminum contracts	$	127	$	(94	)	$	151	$	(76	)
Currency exchange contracts		68		(30	)		49		(32	)
Energy contracts		—		(7	)		—		(6	)
Interest rate swaps		—		(8	)		—		(7	)

Total Level 2 Instruments		195		(139	)		200		(121	)

Level 3
Aluminum contracts		4		(4	)		4		(4	)
Electricity swap		—		(30	)		—		(35	)

Total Level 3 Instruments		4		(34	)		4		(39	)

Total	$	199	$	(173	)	$	204	$	(160	)

We recognized unrealized losses of $1 million related to Level 3 financial instruments that were still held as of September 30, 2010. These unrealized losses are included in (Gain) loss on change in fair value of derivative instruments, net.

The following table presents a reconciliation of fair value activity for Level 3 derivative contracts on a net basis (in millions).


	Level 3
	Derivative
	Instruments(A)

Balance as of March 31, 2010	$	(35	)
Net realized/unrealized (losses) included in earnings(B)		4
Net realized/unrealized (losses) included in Other comprehensive income (loss)(C)		5
Net purchases, issuances and settlements		(4	)
Net transfers from Level 3 to Level 2		—

Balance as of September 30, 2010	$	(30	)


(A)		Represents derivative assets net of derivative liabilities.

(B)		Included in (Gain) loss on change in fair value of derivative instruments, net.

(C)		Included in Change in fair value of effective portion of hedges, net.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Financial Instruments Not Recorded at Fair Value

The table below presents the estimated fair value of certain financial instruments that are not recorded at fair value on a recurring basis (in millions). The table excludes short-term financial assets and liabilities for which we believe carrying value approximates fair value. We value long-term debt using market and/or broker ask prices when available. When not available, we use a standard credit adjusted discounted cash flow model.


	September 30, 2010				March 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Assets
Long-term receivables from related parties	$	20	$	20	$	21	$	21
Liabilities
Total debt — third parties (excluding short term borrowings)	$	2,594	$	2,525	$	2,596	$	2,432


12.	OTHER (INCOME) EXPENSE, NET

Other (income) expense, net is comprised of the following (in millions).


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net gain on currency remeasurement and transaction gains or losses	$	(22	)	$	(3	)	$	(1	)	$	(7	)
Gain on sale of assets		—			—			(13	)		(1	)
Gain on tax litigation settlement in Brazil		—			—			—			(6	)
Other, net		4			(3	)		3			(5	)

Other (income) expense, net	$	(18	)	$	(6	)	$	(11	)	$	(19	)

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


13.	INCOME TAXES

A reconciliation of the Canadian statutory tax rates to our effective tax rates is as follows (in millions, except percentages).


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Pre-tax income before equity in net income of non-consolidated affiliates and noncontrolling interests	$	132		$	311		$	209		$	594

Canadian statutory tax rate		29	%		30	%		29	%		30	%

Provision at the Canadian statutory rate		38			93			61			178
Increase (decrease) for taxes on income resulting from:
Exchange translation items		2			8			—			20
Exchange remeasurement of deferred income taxes		13			13			11			36
Change in valuation allowances		12			2			15			3
Expense (income) items not subject to tax		3			(5	)		2			(4	)
Tax rate differences on foreign earnings		(9	)		2			(14	)		(9	)
Uncertain tax positions, net		(4	)		(26	)		(3	)		(25	)
Other — net		1			—			(1	)		—

Income tax provision	$	56		$	87		$	71		$	199

Effective tax rate		42	%		28	%		34	%		34	%

As of September 30, 2010, we had a net deferred tax liability of $535 million. This amount includes gross deferred tax assets of approximately $691 million and a valuation allowance of $236 million.

Our income tax provision for the three months ended September 30, 2010 reflects a reduction in unrecognized tax benefits of $5 million, including accrued interest of $2 million, as the statue of limitations lapsed on a net operating loss issue.


14.	COMMITMENTS AND CONTINGENCIES

In connection with our spin-off from Alcan Inc., we assumed a number of liabilities, commitments and contingencies mainly related to our historical rolled products operations, including liabilities in respect of legal claims and environmental matters. As a result, we may be required to indemnify Rio Tinto Alcan for claims successfully brought against Alcan or for the defense of legal actions that arise from time to time in the normal course of our rolled products business including commercial and contract disputes, employee-related claims and tax disputes (including several disputes with Brazil’s Ministry of Treasury regarding various forms of manufacturing taxes and social security contributions). In addition to these assumed liabilities and contingencies, we may, in the future, be involved in, or subject to, other disputes, claims and proceedings that arise in the ordinary course of our business, including some that we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. Where appropriate, we have established reserves in respect of these matters (or, if required, we have posted cash guarantees). While the ultimate resolution of, and liability and costs related to, these matters cannot be determined with certainty due to the considerable uncertainties that exist, we do not believe that any of these pending actions, individually or in the aggregate, will materially impair our operations or materially affect our financial condition or liquidity. The following describes certain legal proceedings relating to our business, including those for which we assumed liability as a result of our spin-off from Alcan Inc.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Legal Proceedings

Coca-Cola Lawsuit. On July 8, 2010, a Georgia state court granted Novelis Corporation’s motion for summary judgment, effectively dismissing a lawsuit brought by Coca-Cola Bottler’s Sales and Services Company LLC (CCBSS) against Novelis Corporation. In the lawsuit, which was filed on February 15, 2007, CCBSS alleged that Novelis Corporation breached the “most favored nations” provision regarding certain pricing matters under an aluminum can stock supply agreement between the parties, and sought monetary damages and other relief. On August 6, 2010, CCBSS filed a notice of appeal with the court, and on August 20, 2010, we filed a cross notice of appeal. The appellate process could extend for several months. We have concluded that a loss from the litigation is not probable and therefore have not recorded an accrual. In addition, we do not believe there is a reasonable possibility of a loss from the lawsuit.

Environmental Matters

We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future environmental regulations may be expected to impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.

We are involved in proceedings under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, or analogous state provisions regarding liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites in the United States, as well as similar proceedings under the laws and regulations of the other jurisdictions in which we have operations, including Brazil and certain countries in the European Union. Many of these jurisdictions have laws that impose joint and several liability, without regard to fault or the legality of the original conduct, for the costs of environmental remediation, natural resource damages, third party claims, and other expenses. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.

With respect to environmental loss contingencies, we record a loss contingency whenever such contingency is probable and reasonably estimable. The evaluation model includes all asserted and unasserted claims that can be reasonably identified. Under this evaluation model, the liability and the related costs are quantified based upon the best available evidence regarding actual liability loss and cost estimates. Except for those loss contingencies where no estimate can reasonably be made, the evaluation model is fact-driven and attempts to estimate the full costs of each claim. Management reviews the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The estimated costs in respect of such reported liabilities are not offset by amounts related to cost-sharing between parties, insurance, indemnification arrangements or contribution from other potentially responsible parties (PRPs) unless otherwise noted.

We have established procedures for regularly evaluating environmental loss contingencies, including those arising from such environmental reviews and investigations and any other environmental remediation or compliance matters. We believe we have a reasonable basis for evaluating these environmental loss contingencies, and we believe we have made reasonable estimates of the costs that are likely to be borne by us for these environmental loss contingencies. Accordingly, we have established reserves based on our reasonable estimates for the currently anticipated costs associated with these environmental matters. We estimate that the undiscounted remaining clean-up costs related to all of our known environmental matters as of September 30,

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

2010 will be approximately $54 million. Of this amount, $30 million is included in Other long-term liabilities, with the remaining $24 million included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2010. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our spin-off from Alcan Inc. As a result of this review, management has determined that the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impact our operations or materially adversely affect our financial condition, results of operations or liquidity.

Brazil Tax Matters

Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of September 30, 2010 and March 31, 2010, we had cash deposits aggregating approximately $50 million and $45 million, respectively, in judicial depository accounts pending finalization of the related cases. The depository accounts are in the name of the Brazilian government and will be expended towards these legal proceedings or released to us, depending on the outcome of the legal cases. These deposits are included in Other long-term assets — third parties in our accompanying condensed consolidated balance sheets. In addition, we are involved in several disputes with Brazil’s Ministry of Treasury about various forms of manufacturing taxes and social security contributions, for which we have made no judicial deposits but for which we have established reserves ranging from $6 million to $132 million as of September 30, 2010. In total, these reserves approximate $153 million and $149 million as of September 30 and March 31, 2010, respectively, and are included in Other long-term liabilities in our accompanying condensed consolidated balance sheets.

On May 28, 2009, the Brazilian government passed a law allowing taxpayers to settle certain federal tax disputes with the Brazilian tax authorities, including disputes relating to a Brazilian national tax on manufactured products, through an installment program. Under the program, if a company elects to settle a tax dispute and pay the principal amount due over a specified payment period, the company will receive a discount on the interest and penalties owed on the disputed tax amount. Novelis joined the installment program in November of 2009. In August 2010, we identified to the Brazilian government the tax disputes we plan to settle pursuant to the installment program.

Guarantees of Indebtedness

We have issued guarantees on behalf of certain of our wholly-owned subsidiaries. The indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. Neither we nor any of our subsidiaries hold any assets of any third parties as collateral to offset the potential settlement of these guarantees.

Since we consolidate wholly-owned subsidiaries in our consolidated financial statements, all liabilities associated with trade payables for these entities are already included in our consolidated balance sheets.

The following table discloses information about our obligations under guarantees of indebtedness related to our wholly-owned subsidiaries as of September 30, 2010 (in millions).


	Maximum		Liability
	Potential		Carrying
Type of Entity	Future Payment		Value

Wholly-owned subsidiaries	$	141	$	44

We have no retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


15.	SEGMENT, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION

Segment Information

Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical areas and are organized under four operating segments: North America, Europe, Asia and South America.

We measure the profitability and financial performance of our operating segments based on Segment income. Segment income provides a measure of our underlying segment results that is in line with our portfolio approach to risk management. We define Segment income as earnings before (a) depreciation and amortization; (b) interest expense and amortization of debt issuance costs; (c) interest income; (d) unrealized gains (losses) on change in fair value of derivative instruments, net; (e) impairment of goodwill; (f) impairment charges on long-lived assets (other than goodwill); (g) gain on extinguishment of debt; (h) noncontrolling interests’ share; (i) adjustments to reconcile our proportional share of Segment income from non-consolidated affiliates to income as determined on the equity method of accounting; (j) restructuring charges, net; (k) gains or losses on disposals of property, plant and equipment and businesses, net; (l) other costs, net; (m) litigation settlement, net of insurance recoveries; (n) sale transaction fees; (o) provision or benefit for taxes on income (loss); and (p) cumulative effect of accounting change, net of tax.

Adjustment to Eliminate Proportional Consolidation. The financial information for our segments includes the results of our non-consolidated affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. However, under US GAAP, these non-consolidated affiliates are accounted for using the equity method of accounting. Therefore, in order to reconcile the financial information for the segments shown in the tables below to the relevant US GAAP-based measures, we must remove our proportional share of each line item that we included in the segment amounts. See Note 5 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.

The tables below show selected segment financial information (in millions).

Selected Segment Financial Information


	North						South		Corporate
Total Assets	America		Europe		Asia		America		and Other		Eliminations			Total

September 30, 2010	$	2,822	$	2,930	$	946	$	1,370	$	35	$	(194	)	$	7,909
March 31, 2010	$	2,726	$	2,870	$	965	$	1,344	$	49	$	(192	)	$	7,762


Selected Operating Results	North						South		Corporate
Three Months Ended September 30, 2010	America		Europe		Asia		America		and Other		Eliminations			Total

Net sales	$	965	$	874	$	413	$	278	$	—	$	(6	)	$	2,524
Depreciation and amortization		41		36		14		23		2		(12	)		104
Capital expenditures		10		10		7		16		10		(5	)		48


Selected Operating Results	North						South		Corporate
Three Months Ended September 30, 2009	America		Europe		Asia		America		and Other		Eliminations			Total

Net sales	$	822	$	735	$	382	$	252	$	—	$	(10	)	$	2,181
Depreciation and amortization		39		46		12		15		1		(21	)		92
Capital expenditures		7		11		2		5		—		(3	)		22

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


Selected Operating Results	North						South		Corporate
Six Months Ended September 30, 2010	America		Europe		Asia		America		and Other		Eliminations			Total

Net sales	$	1,924	$	1,716	$	870	$	555	$	—	$	(8	)	$	5,057
Depreciation and amortization		83		69		29		46		4		(24	)		207
Capital expenditures		17		18		13		21		13		(11	)		71


Selected Operating Results	North						South		Corporate
Six Months Ended September 30, 2009	America		Europe		Asia		America		and Other		Eliminations			Total

Net sales	$	1,589	$	1,400	$	708	$	456	$	—	$	(12	)	$	4,141
Depreciation and amortization		80		94		23		33		2		(40	)		192
Capital expenditures		13		22		5		12		—		(6	)		46

The following table shows the reconciliation from income from reportable segments to Net income attributable to our common shareholder (in millions).


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

North America	$	116		$	75		$	217		$	132
Europe		102			60			190			93
Asia		67			48			111			86
South America		38			36			87			47
Corporate and other(A)		(33	)		(19	)		(52	)		(34	)
Depreciation and amortization		(104	)		(92	)		(207	)		(192	)
Interest expense and amortization of debt issuance costs		(40	)		(44	)		(79	)		(87	)
Interest income		3			3			6			6
Unrealized gains (losses) on change in fair value of derivative instruments, net(B)		1			254			(46	)		553
Adjustment to eliminate proportional consolidation		(11	)		(17	)		(21	)		(33	)
Restructuring charges, net		(9	)		(3	)		(15	)		(6	)
Other income, net		(1	)		—			12			9

Income before income taxes		129			301			203			574
Income tax provision		56			87			71			199

Net income		73			214			132			375
Net income attributable to noncontrolling interests		11			19			20			37

Net income attributable to our common shareholder	$	62		$	195		$	112		$	338


(A)		Corporate and other includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. These expenses have not been allocated to the regions. It also includes realized gains (losses) on corporate derivative instruments.

(B)		Unrealized gains (losses) on change in fair value of derivative instruments, net represents the portion of gains (losses) that were not settled in cash during the period. Total realized and unrealized gains (losses) are included in the aggregate each period in (Gain) loss on change in fair value of derivative instruments, net on our condensed consolidated statements of operations. See Note 10 — Financial Instruments and Commodity Contracts for additional discussion.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

Information about Major Customers and Primary Supplier

The table below shows our net sales to Rexam Plc (Rexam) and Anheuser-Busch InBev (Anheuser-Busch), our two largest customers, as a percentage of total Net sales.


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Rexam		20	%		16	%		18	%		18	%
Anheuser-Busch		9	%		11	%		11	%		11	%

Rio Tinto Alcan is our primary supplier of metal inputs, including prime and sheet ingot. The table below shows our purchases from Rio Tinto Alcan as a percentage of total combined metal purchases.


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Purchases from Rio Tinto Alcan as a percentage of total		32	%		45	%		33	%		41	%


16.	SUPPLEMENTAL INFORMATION

Accumulated other comprehensive loss consists of the following (in millions).


	September 30,			March 31,
	2010			2010

Currency translation adjustment	$	27		$	(8	)
Fair value of effective portion of cash flow hedges		(20	)		(27	)
Pension and other benefits		(69	)		(68	)

Accumulated other comprehensive loss	$	(62	)	$	(103	)

Supplemental cash flow information (in millions).


	Six Months Ended
	September 30,
	2010		2009

Interest paid	$	70	$	78
Income taxes paid, net	$	36	$	13


17.	SUPPLEMENTAL GUARANTOR INFORMATION

In connection with the issuance of our 7.25% Senior Notes and our 11.5% Senior Notes, certain of our wholly-owned subsidiaries, which are 100% owned within the meaning of Rule 3-10(h)(1) of Regulation S-X, provided guarantees. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S., the U.K., Brazil, Portugal, Luxembourg and Switzerland, as well as certain businesses in Germany. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to Novelis Inc. (the Parent). The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Senior Notes.

The following information presents condensed consolidating statements of operations, balance sheets and statements of cash flows of the Parent, the Guarantors, and the Non-Guarantors. Investments include investment in and advances to non-consolidated affiliates as well as investments in net assets of divisions included in the Parent, and have been presented using the equity method of accounting.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)


	Three Months Ended September 30, 2010
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

Net sales	$	261		$	2,067		$	698		$	(502	)	$	2,524

Cost of goods sold (exclusive of depreciation and amortization)		250			1,809			631			(502	)		2,188
Selling, general and administrative expenses		23			60			14			—			97
Depreciation and amortization		1			80			23			—			104
Research and development expenses		7			2			—			—			9
Interest expense and amortization of debt issuance costs		29			25			1			(15	)		40
Interest income		(15	)		(2	)		(1	)		15			(3	)
Gain on change in fair value of derivative instruments, net		—			(33	)		(1	)		—			(34	)
Restructuring charges, net		5			4			—			—			9
Equity in net (income) loss of non-consolidated affiliates		(97	)		3			—			97			3
Other income, net		(4	)		—			(14	)		—			(18	)

		199			1,948			653			(405	)		2,395

Income before income taxes		62			119			45			(97	)		129
Income tax provision		—			48			8			—			56

Net income		62			71			37			(97	)		73
Net income attributable to noncontrolling interests		—			—			11			—			11

Net income attributable to our common shareholder	$	62		$	71		$	26		$	(97	)	$	62

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


	Three Months Ended September 30, 2009
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

Net sales	$	218		$	1,743		$	606		$	(386	)	$	2,181

Cost of goods sold (exclusive of depreciation and amortization)		193			1,414			513			(386	)		1,734
Selling, general and administrative expenses		9			53			15			—			77
Depreciation and amortization		1			67			24			—			92
Research and development expenses		6			2			1			—			9
Interest expense and amortization of debt issuance costs		29			29			2			(16	)		44
Interest income		(17	)		(2	)		—			16			(3	)
Gain on change in fair value of derivative instruments, net		(1	)		(71	)		(8	)		—			(80	)
Restructuring charges, net		—			1			2			—			3
Equity in net (income) loss of non-consolidated affiliates		(158	)		10			—			158			10
Other (income) expense, net		(8	)		17			(15	)		—			(6	)

		54			1,520			534			(228	)		1,880

Income before income taxes		164			223			72			(158	)		301
Income tax provision (benefit)		(31	)		103			15			—			87

Net income		195			120			57			(158	)		214
Net income attributable to noncontrolling interests		—			—			19			—			19

Net income attributable to our common shareholder	$	195		$	120		$	38		$	(158	)	$	195

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)


	Six Months Ended September 30, 2010
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

Net sales	$	521		$	4,099		$	1,447		$	(1,010	)	$	5,057

Cost of goods sold (exclusive of depreciation and amortization)		492			3,613			1,301			(1,010	)		4,396
Selling, general and administrative expenses		20			129			29			—			178
Depreciation and amortization		3			157			47			—			207
Research and development expenses		13			5			—			—			18
Interest expense and amortization of debt issuance costs		58			48			2			(29	)		79
Interest income		(29	)		(5	)		(1	)		29			(6	)
(Gain) loss on change in fair value of derivative instruments, net		1			(33	)		4			—			(28	)
Restructuring charges, net		5			9			1			—			15
Equity in net (income) loss of non-consolidated affiliates		(144	)		6			—			144			6
Other (income) expense, net		(8	)		—			(3	)		—			(11	)

		411			3,929			1,380			(866	)		4,854

Income before income taxes		110			170			67			(144	)		203
Income tax provision (benefit)		(2	)		61			12			—			71

Net income		112			109			55			(144	)		132
Net income attributable to noncontrolling interests		—			—			20			—			20

Net income attributable to our common shareholder	$	112		$	109		$	35		$	(144	)	$	112

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)


	Six Months Ended September 30, 2009
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

Net sales	$	386		$	3,277		$	1,157		$	(679	)	$	4,141

Cost of goods sold (exclusive of depreciation and amortization)		349			2,632			969			(679	)		3,271
Selling, general and administrative expenses		19			105			27			—			151
Depreciation and amortization		2			145			45			—			192
Research and development expenses		11			5			1			—			17
Interest expense and amortization of debt issuance costs		55			59			5			(32	)		87
Interest income		(32	)		(5	)		(1	)		32			(6	)
Gain on change in fair value of derivative instruments, net		(3	)		(132	)		(17	)		—			(152	)
Restructuring charges, net		—			4			2			—			6
Equity in net (income) loss of non-consolidated affiliates		(305	)		20			—			305			20
Other (income) expense, net		(15	)		24			(28	)		—			(19	)

		81			2,857			1,003			(374	)		3,567

Income before income taxes		305			420			154			(305	)		574
Income tax provision (benefit)		(33	)		204			28			—			199

Net income		338			216			126			(305	)		375
Net income attributable to noncontrolling interests		—			—			37			—			37

Net income attributable to our common shareholder	$	338		$	216		$	89		$	(305	)	$	338

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)


	September 30, 2010
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

ASSETS
Current assets
Cash and cash equivalents	$	7		$	397		$	108		$	—		$	512
Accounts receivable, net of allowances
— third parties		31			829			384			—			1,244
— related parties		710			282			58			(1,038	)		12
Inventories		52			825			300			—			1,177
Prepaid expenses and other current assets		3			33			8			—			44
Fair value of derivative instruments		4			143			46			(11	)		182
Deferred income tax assets		—			20			1			—			21

Total current assets		807			2,529			905			(1,049	)		3,192
Property, plant and equipment, net		140			1,892			494			—			2,526
Goodwill		—			600			11			—			611
Intangible assets, net		5			716			3			—			724
Investments in and advances to non-consolidated affiliates		2,120			706			1			(2,120	)		707
Fair value of derivative instruments, net of current portion		2			15			3			(3	)		17
Deferred income tax assets		1			5			8			—			14
Other long-term assets		977			200			69			(1,128	)		118

Total assets	$	4,052		$	6,663		$	1,494		$	(4,300	)	$	7,909


LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
Current portion of long-term debt	$	3		$	14		$	100		$	—		$	117
Short-term borrowings
— third parties		—			2			21			—			23
— related parties		42			461			20			(523	)		—
Accounts payable
— third parties		61			614			370			—			1,045
— related parties		73			357			130			(513	)		47
Fair value of derivative instruments		6			121			29			(11	)		145
Accrued expenses and other current liabilities		53			298			92			(2	)		441
Deferred income tax liabilities		—			32			1			—			33

Total current liabilities		238			1,899			763			(1,049	)		1,851
Long-term debt, net of current portion
— third parties		1,631			846			—			—			2,477
— related parties		106			935			87			(1,128	)		—
Deferred income tax liabilities		—			525			12			—			537
Accrued postretirement benefits		34			351			122			—			507
Other long-term liabilities		21			329			7			(3	)		354

Total liabilities		2,030			4,885			991			(2,180	)		5,726

Commitments and contingencies
Shareholder’s equity
Common stock		—			—			—			—			—
Additional paid-in capital		3,530			—			—			—			3,530
Retained earnings/(accumulated deficit)/owner’s net investment		(1,446	)		1,884			383			(2,267	)		(1,446	)
Accumulated other comprehensive income (loss)		(62	)		(106	)		(41	)		147			(62	)

Total Novelis shareholder’s equity		2,022			1,778			342			(2,120	)		2,022
Noncontrolling interests		—			—			161			—			161

Total equity		2,022			1,778			503			(2,120	)		2,183

Total liabilities and shareholder’s equity	$	4,052		$	6,663		$	1,494		$	(4,300	)	$	7,909

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)


	As of March 31, 2010
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

ASSETS
Current assets
Cash and cash equivalents	$	22		$	266		$	149		$	—		$	437
Accounts receivable, net of allowances
— third parties		24			747			372			—			1,143
— related parties		695			312			62			(1,045	)		24
Inventories		47			770			266			—			1,083
Prepaid expenses and other current assets		2			28			9			—			39
Fair value of derivative instruments		5			161			43			(12	)		197
Deferred income tax assets		—			7			5			—			12

Total current assets		795			2,291			906			(1,057	)		2,935
Property, plant and equipment, net		138			1,976			518			—			2,632
Goodwill		—			600			11			—			611
Intangible assets, net		6			740			3			—			749
Investments in and advances to non-consolidated affiliates		1,998			708			1			(1,998	)		709
Fair value of derivative instruments, net of current portion		—			7			2			(2	)		7
Deferred income tax assets		1			3			1			—			5
Other long-term assets		976			199			78			(1,139	)		114

Total assets	$	3,914		$	6,524		$	1,520		$	(4,196	)	$	7,762


LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
Current portion of long-term debt	$	3		$	13		$	100		$	—		$	116
Short-term borrowings
— third parties		—			61			14			—			75
— related parties		41			457			21			(519	)		—
Accounts payable
— third parties		58			600			418			—			1,076
— related parties		62			350			166			(525	)		53
Fair value of derivative instruments		7			102			13			(12	)		110
Accrued expenses and other current liabilities		52			279			106			(1	)		436
Deferred income tax liabilities		—			33			1			—			34

Total current liabilities		223			1,895			839			(1,057	)		1,900
Long-term debt, net of current portion
— third parties		1,635			844			1			—			2,480
— related parties		115			929			94			(1,138	)		—
Deferred income tax liabilities		—			485			12			—			497
Accrued postretirement benefits		31			349			119			—			499
Other long-term liabilities		41			333			5			(3	)		376

		2,045			4,835			1,070			(2,198	)		5,752

Commitments and contingencies
Shareholder’s equity
Common stock		—			—			—			—			—
Additional paid-in capital		3,530			—			—			—			3,530
Retained earnings (accumulated deficit)		(1,558	)		1,818			349			(2,167	)		(1,558	)
Accumulated other comprehensive income (loss)		(103	)		(129	)		(40	)		169			(103	)

Total equity of our common shareholder		1,869			1,689			309			(1,998	)		1,869
Noncontrolling interests		—			—			141			—			141

Total equity		1,869			1,689			450			(1,998	)		2,010

Total liabilities and equity	$	3,914		$	6,524		$	1,520		$	(4,196	)	$	7,762

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)


	Six Months Ended September 30, 2010
							Non-
	Parent			Guarantors			Guarantors			Eliminations			Consolidated

OPERATING ACTIVITIES
Net cash provided by (used in) operating activities	$	5		$	133		$	(14	)	$	—		$	124

INVESTING ACTIVITIES
Capital expenditures		(14	)		(41	)		(16	)		—			(71	)
Proceeds from sales of assets		—			17			1			—			18
Proceeds from loans receivable, net — related parties		—			11			—			—			11
Net proceeds from settlement of derivative instruments		(5	)		64			8			—			67

Net cash provided by (used in) investing activities		(19	)		51			(7	)		—			25

FINANCING ACTIVITIES
Principal payments
— third parties		(2	)		(6	)		—			—			(8	)
— related parties		—			8			(11	)		3			—
Short-term borrowings, net
— third parties		—			(57	)		7			—			(50	)
— related parties		1			3			(1	)		(3	)		—
Dividends — noncontrolling interests		—			—			(18	)		—			(18	)

Net cash provided by (used in) financing activities		(1	)		(52	)		(23	)		—			(76	)

Net increase (decrease) in cash and cash equivalents		(15	)		132			(44	)		—			73
Effect of exchange rate changes on cash balances held in foreign currencies		—			(1	)		3			—			2
Cash and cash equivalents — beginning of period		22			266			149			—			437

Cash and cash equivalents — end of period	$	7		$	397		$	108		$	—		$	512

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)


	Six Months Ended September 30, 2009
							Non-
	Parent			Guarantors			Guarantors		Eliminations			Consolidated

OPERATING ACTIVITIES
Net cash provided by (used in) operating activities	$	37		$	340		$	152	$	(78	)	$	451

INVESTING ACTIVITIES
Capital expenditures		(1	)		(34	)

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