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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, 2005
 
    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)
 
3399 Peachtree Road NE, Suite 1500
Atlanta, Georgia
(Address of principal executive offices)
  30326
(Zip Code)
Telephone: (404) 814-4200
(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 o          No þ
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o          Accelerated filer o          Non-accelerated filer þ
      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 April 30, 2006, there were 74,005,649 common shares outstanding.
 
 


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EXPLANATORY NOTE
      Concurrently with the filing of this quarterly report on Form 10-Q for the period ended September 30, 2005, we are filing amendments on Form 10-Q/ A to our quarterly reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005, to reflect the restatement of our unaudited condensed consolidated and combined financial statements for the quarter ended March 31, 2005 and the quarter and six months ended June 30, 2005, to correct errors for:
  •  the misapplication of GAAP related to liability recognition;
 
  •  income tax accounting;
 
  •  other miscellaneous items; and
 
  •  out-of-period adjustments.
      This quarterly report on Form 10-Q for the period ended September 30, 2005 was delayed pending our completion of the restatements and the related review of our reserves and contingencies, as well as adjustments to arrive at our opening balance sheet as of January 6, 2005.


 

Novelis Inc.
Index
                 
        Page No.
         
 PART I.    FINANCIAL INFORMATION        
 Item 1.    Financial Statements     2  
         Unaudited Condensed Consolidated and Combined Statements of Income Third quarter and nine months ended September 30, 2005 and 2004     2  
         Unaudited Condensed Consolidated and Combined Balance Sheets September 30, 2005 and December 31, 2004     3  
         Unaudited Condensed Consolidated and Combined Statements of Cash Flows Nine months ended September 30, 2005 and 2004     5  
         Unaudited Condensed Consolidated and Combined Statement of Shareholders’/ Invested Equity
Nine months ended September 30, 2005
    6  
         Notes to the Unaudited Condensed Consolidated and Combined Financial Statements     7  
 Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations     52  
 Item 3.    Quantitative and Qualitative Disclosures About Market Risk     72  
 Item 4.    Controls and Procedures     75  
 
 PART II.    OTHER INFORMATION        
 Item 1.    Legal Proceedings     79  
 Item 6.    Exhibits     80  
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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PART I. FINANCIAL INFORMATION
Item 1.      Financial Statements
Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (unaudited)
(in millions of US$, except per share amounts)
                                   
    Third Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Sales and operating revenues
                               
 
— third parties
    2,053       1,893       6,337       5,416  
 
— related parties
    —       107       —       323  
                         
      2,053       2,000       6,337       5,739  
                         
Costs and expenses
                               
Cost of sales and operating expenses, excluding depreciation and amortization noted below
                               
 
— third parties
    1,833       1,661       5,677       4,744  
 
— related parties
    —       96       —       288  
Depreciation and amortization
    56       60       173       178  
Selling, general and administrative expenses
    79       72       243       182  
Research and development expenses
    10       3       29       13  
Research and development expenses — related parties
    —       10       —       28  
Other expenses (income) — net
                               
 
— third parties
    (27 )     —       (38 )     8  
 
— related parties
    —       1       (1 )     (21 )
Interest expense
                               
 
— third parties
    48       10       142       31  
 
— related parties
    —       7       —       24  
                         
      1,999       1,920       6,225       5,475  
                         
Income before income taxes and other items
    54       80       112       264  
Income taxes
    37       45       67       111  
                         
Income before other items
    17       35       45       153  
Equity in net income of non-consolidated affiliates
    2       1       6       4  
Minority interests in earnings of consolidated affiliates
    (9 )     (2 )     (19 )     (9 )
                         
Net income
    10       34       32       148  
                         
Earnings per share
                               
Net income per share — basic
    0.14       0.47       0.43       2.01  
                         
Net income per share — diluted
    0.14       0.47       0.43       2.00  
                         
Dividends per common share
    0.09       —       0.27       —  
                         
Supplemental information for 2005:
                               
Net income attributable to consolidated and combined results of Novelis from January 6 to September 30, 2005 — increase to Retained earnings
    10               61          
Net loss attributable to the combined results of Novelis from January 1 to January 5, 2005 — decrease to Owner’s net investment(A)
    —               (29 )        
                         
Net income
    10               32          
                         
 
(A)  Refer to Note 1 — Background and Basis of Presentation.
The accompanying notes are an integral part of the financial statements.

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Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS (unaudited)
(in millions of US$, except number of shares)
                   
    September 30,   December 31,
As of   2005   2004
         
ASSETS
Current assets
               
Cash and cash equivalents
    124       31  
Trade receivables (net of allowances of $28 in 2005 and $33 in 2004)
               
 
— third parties
    959       710  
 
— related parties
    —       87  
Other receivables
               
 
— third parties
    8       5  
 
— related parties
    30       846  
Prepaid expenses
    52       36  
Inventories
               
 
Aluminum
    941       1,081  
 
Raw materials
    20       20  
 
Other supplies
    126       125  
             
      1,087       1,226  
Other current assets
    181       77  
             
Total current assets
    2,441       3,018  
Deferred charges and other assets
    219       71  
Long-term receivables from related parties
    77       104  
Property, plant and equipment, net
    2,170       2,348  
Investments in non-consolidated affiliates
    100       122  
Intangible assets (net of accumulated amortization of $10 in 2005 and $9 in 2004)
    29       35  
Goodwill
    228       256  
             
Total assets
    5,264       5,954  
             
The accompanying notes are an integral part of the financial statements.

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Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS (unaudited) — (Continued)
(in millions of US$, except number of shares)
                   
    September 30,   December 31,
As of   2005   2004
         
LIABILITIES AND SHAREHOLDERS’/ INVESTED EQUITY
Current liabilities
               
Current portion of long-term debt
               
 
— third parties
    3       1  
 
— related parties
    —       290  
Short-term borrowings
               
 
— third parties
    35       229  
 
— related parties
    —       312  
Accounts payable, trade
               
 
— third parties
    752       496  
 
— related parties
    38       401  
Accrued expenses
    418       339  
Interest payable
    22       2  
Accrued income taxes
    58       1  
Other current liabilities
    14       21  
             
Total current liabilities
    1,340       2,092  
Long-term debt, net of current portion
               
 
— third parties
    2,647       139  
 
— related parties
    —       2,307  
Accrued post-retirement benefits
    307       284  
Deferred credits and other liabilities
    224       188  
Deferred income taxes
    191       249  
Commitments and contingencies
               
Minority interests in equity of consolidated affiliates
    151       140  
Shareholders’/invested equity
               
Preferred shares — unlimited number of first preferred and second preferred shares authorized; none issued
    —       —  
Common shares, no par value — unlimited number of shares authorized; issued and outstanding: 74,005,649 shares as of September 30, 2005
    —       —  
Additional paid-in capital
    433       —  
Retained earnings
    41       —  
Accumulated other comprehensive income (loss)
    (70 )     88  
Owner’s net investment
    —       467  
             
Total shareholders’/invested equity
    404       555  
             
Total liabilities and shareholders’/invested equity
    5,264       5,954  
             
The accompanying notes are an integral part of the financial statements.

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Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (unaudited)
(in millions of US$)
                   
Nine Months Ended September 30   2005   2004
         
OPERATING ACTIVITIES
               
Net cash provided by operating activities
    366       292  
             
INVESTING ACTIVITIES
               
Capital expenditures
    (104 )     (95 )
Proceeds from sales of fixed assets and investments
    9       8  
Proceeds from loans receivable — net
               
 
— third parties
    19       —  
 
— related parties
    373       501  
Premiums paid on purchased derivatives
    (26 )     —  
Net proceeds from settlement of derivatives
    96       —  
             
Net cash provided by investing activities
    367       414  
             
FINANCING ACTIVITIES
               
Proceeds from issuance of new debt — third parties
    2,750       443  
Principal repayments
               
 
— third parties
    (1,742 )     (895 )
 
— related parties
    (1,180 )     —  
Short-term borrowings — net
               
 
— third parties
    (137 )     (133 )
 
— related parties
    (302 )     4  
Dividends — common shareholders
    (20 )     —  
Dividends — minority interest
    (7 )     (4 )
Net receipts from (payments to) Alcan
    72       (121 )
Debt issuance costs paid
    (71 )     —  
             
Net cash used in financing activities
    (637 )     (706 )
             
Net increase in cash and cash equivalents
    96       —  
Effect of exchange rate changes on cash balances held in foreign currencies
    (3 )     —  
Cash and cash equivalents — beginning of period
    31       27  
             
Cash and cash equivalents — end of period
    124       27  
             
Supplemental schedule of 2005 non-cash investing and financing activities:
               
Spin-off transaction and post-closing adjustments
               
 
Other receivables
    433          
 
Short-term borrowings — related parties
    (57 )        
 
Long-term debt — related parties
    32          
 
Capital lease obligation
    52          
 
Additional paid-in capital
    (98 )        
The accompanying notes are an integral part of the financial statements.

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Novelis Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF
SHAREHOLDERS’/INVESTED EQUITY (unaudited)
Nine Months Ended September 30, 2005
(in millions of US$, except number of shares which is in thousands and per share amounts)
                                                         
                    Accumulated        
                Other        
    Common Shares   Additional       Comprehensive        
        Paid-in   Retained   Income   Owner’s Net    
    Shares   Amount   Capital   Earnings   (Loss)   Investment   Total
                             
Balance as of December 31, 2004
    —       —       —       —       88       467       555  
2005 Activity:
                                                       
Net loss — January 1 to January 5
                                            (29 )(A)     (29 )
                                           
Adjusted Invested equity at spin-off date — January 6
    —       —       —       —       88       438 (B)     526  
Issuance of common stock in connection with the spin-off
    73,989       —       438                       (438 )     —  
Spin settlement and post-closing adjustments
                    2 (C)                             2  
Issuance of common stock in connection with stock plans
    17       —                                          
Net income — January 6 to September 30
                            61                       61  
Deferred translation adjustments
                                    (146 )             (146 )
Change in minimum pension liability
                                    (12 )             (12 )
Dividends on common shares ($0.27 per common share)
                            (20 )                     (20 )
Dividends on preferred stock shares of consolidated affiliates
                    (7 )                             (7 )
                                           
Balance as of September 30, 2005
    74,006       —       433       41       (70 )     —       404  
                                           
 
(A)  Refer to Note 1 — Background and Basis of Presentation.
(B)  Represents the amount of Owner’s net investment as of January 6, 2005.
 
(C)  In connection with the spin-off from Alcan, we entered into agreements which provide for various post-transaction adjustments. These adjustments, for the most part, have been and will be reflected as changes to shareholders’ equity and include items such as working capital, pension assets and liabilities, and adjustments to opening balance sheet accounts. This is further discussed in Note 1 — Background and Basis of Presentation.
The accompanying notes are an integral part of the financial statements.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(unaudited)
(in millions of US$, except where indicated)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
      Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s leading aluminum rolled products producer. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the construction and industrial, beverage and food cans, foil products and transportation markets. As of September 30, 2005, we had operations on four continents, North America, South America, Asia and Europe, through 36 operating plants and three research facilities in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, alumina refining and smelting facilities that are integrated with the rolling plants in Brazil. We are the only company of our size and scope focused solely on aluminum rolled products markets and capable of local supply of technically sophisticated products in all of these geographic regions.
      The accompanying unaudited condensed consolidated and combined financial statements should be read in conjunction with our audited combined financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission (SEC) in our Annual Report on Form 10-K for the year ended December 31, 2004. References herein to “Novelis”, the “Company”, “we”, “our”, or “us” refer to Novelis Inc. and its subsidiaries unless the context specifically requires otherwise. The accompanying (a) condensed combined balance sheet as of December 31, 2004, which has been derived from audited financial statements, and (b) unaudited condensed consolidated and combined financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying condensed consolidated and combined financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state our financial position as of September 30, 2005 and December 31, 2004; our results of operations for the three and nine months ended September 30, 2005 and 2004; and our cash flows for the nine months ended September 30, 2005 and 2004.
      On May 18, 2004, Alcan Inc. (Alcan) announced its intention to transfer its rolled products businesses into a separate company and to pursue a spin-off of that company to its shareholders. The rolled products businesses were managed under two separate operating segments within Alcan — Rolled Products Americas and Asia; and Rolled Products Europe. On January 6, 2005, Alcan and its subsidiaries contributed and transferred to us substantially all of the aluminum rolled products businesses operated by Alcan prior to its 2003 acquisition of Pechiney, together with some of Alcan’s alumina and primary metal-related businesses in Brazil, which are fully integrated with the rolled products operations there, as well as four former Pechiney rolling facilities in Europe, as their end-use markets and customers are more similar to ours.
      On January 6, 2005, the spin-off occurred following the approval by Alcan’s board of directors and shareholders, and the receipt of other required legal and regulatory approvals. Alcan shareholders received one Novelis common share for every five Alcan common shares held. Our common shares began trading on a “when issued” basis on the Toronto (TSX) and New York (NYSE) stock exchanges on January 6, 2005, with a distribution record date of January 11, 2005. “Regular Way” trading began on the TSX on January 7, 2005, and on the NYSE on January 19, 2005.
      We have determined that under the rules and regulations promulgated by the SEC, as of February 27, 2006, a majority of our outstanding shares were directly or indirectly held by U.S. residents and,

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
accordingly, we ceased to qualify as a foreign private issuer. We will henceforth assume the status of a domestic issuer for purposes of the Securities Exchange Act of 1934, as amended.
      In 2004 and prior years, Alcan was considered a related party due to its parent-subsidiary relationship with the Novelis entities. However, subsequent to the spin-off, Alcan is no longer a related party as defined in Financial Accounting Standards Board (FASB) Statement No. 57, Related Party Disclosures. Refer to Note 5 — Related Party Transactions.
Restatement
      Concurrently with the filing of this quarterly report on Form 10-Q for the period ended September 30, 2005, we are filing amendments on Form 10-Q/ A to our quarterly reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005, to reflect the restatement of our unaudited condensed consolidated and combined financial statements for the quarter ended March 31, 2005 and the quarter and six months ended June 30, 2005, to correct errors for:
  •  the misapplication of GAAP related to liability recognition;
 
  •  income tax accounting;
 
  •  other miscellaneous items; and
 
  •  out-of-period adjustments.
      Our results of operations for the nine months ended September 30, 2005 were impacted by the out-of-period adjustments noted above. These out-of-period adjustments decreased our Net income by $2, net, for the nine months ended September 30, 2005.
Post-Transaction Adjustments
      The agreements giving effect to the spin-off provide for various post-transaction adjustments and the resolution of outstanding matters, which are expected to be carried out by the parties by mid-2006. These adjustments, for the most part, have been and will be reflected as changes to shareholders’ equity and include items such as working capital, pension assets and liabilities, and adjustments to opening balance sheet accounts.
Agreements between Novelis and Alcan
      We have entered into various agreements with Alcan including the use of transitional and technical services, the supply of Alcan’s metal and alumina, the licensing of certain of Alcan’s patents, trademarks and other intellectual property rights, and the use of certain buildings, machinery and equipment, technology and employees at certain facilities retained by Alcan, but required in our business.
Basis of Presentation
      The unaudited condensed consolidated and combined financial statements for the nine months ended September 30, 2005 include the results for the period from January 1 to January 5, 2005 prior to our spin-off from Alcan, in addition to the results for the period from January 6 to September 30, 2005, as described below. The unaudited condensed combined financial results for the period from January 1 to January 5, 2005 present our operations and cash flows on a carve-out basis. The unaudited condensed consolidated balance sheet as of September 30, 2005 and results for the period from January 6 (the date

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
of the spin-off from Alcan) to September 30, 2005 present our results of operations, financial position and cash flows as a stand-alone entity.
      All income earned and cash flows generated by us as well as the risks and rewards of these businesses from January 1 to January 5, 2005 were primarily attributed to us and are included in our unaudited condensed consolidated results for the period from January 6 to September 30, 2005, with the exception of unrealized losses of $43 ($29 after-tax) arising from the change in market value of derivative contracts, primarily with Alcan. These mark-to-market losses for the period from January 1 to January 5, 2005 were recorded in the unaudited condensed consolidated and combined statements of income for the nine months ended September 30, 2005, and are reflected as a decrease in Owner’s net investment.
      The condensed combined balance sheet as of December 31, 2004 and the unaudited condensed combined financial statements for the third quarter and nine months ended September 30, 2004 (the historical combined financial statements) have been derived from the accounting records of Alcan using the historical results of operations and historical basis of assets and liabilities of the businesses subsequently transferred to us. Management believes the assumptions underlying the historical combined financial statements, including the allocations described below, are reasonable. However, the historical combined financial statements included herein may not necessarily reflect our results of operations, financial position and cash flows or what our results of operations, financial position and cash flows would have been had we been a stand-alone company during the periods presented. Alcan’s investment in the Novelis businesses, presented as Owner’s net investment in the condensed consolidated and combined and historical combined financial statements, includes the accumulated earnings of the businesses as well as cash transfers related to cash management functions performed by Alcan.
      As we were not a stand-alone company and operated as a part of Alcan prior to 2005, the historical combined financial statements include allocations of certain Alcan expenses, assets and liabilities, including the items described below.
General Corporate Expenses
      Alcan allocated general corporate expenses to us based on average head count and capital employed. Capital employed represents Total assets less Total current liabilities (excluding debt), Accrued post-retirement benefits, Deferred credits and other liabilities, and Deferred income taxes. These allocations are reflected in Selling, general and administrative expenses in the historical combined financial statements for the third quarter and nine months ended September 30, 2004.
      The general corporate expense allocations are primarily for human resources, legal, treasury, insurance, finance, internal audit, strategy and public affairs and amounted to $6 and $23 for the third quarter and the nine months ended September 30, 2004, respectively. Total corporate office costs, including the amounts allocated, amounted to $11 and $31 for the third quarter and nine months ended September 30, 2004, respectively. The costs allocated are not necessarily indicative of the costs that would have been incurred had we performed these functions as a stand-alone company, nor are they indicative of costs that will be charged or incurred in the future. Subsequent to the spin-off, we perform the majority of these functions using our own resources or purchased services; however, for an interim period, certain services were provided by Alcan. As of March 2006, all but three of the approximately 130 service agreements between us and Alcan have ended. It is not practicable to estimate the amount of expenses we would have incurred for the third quarter and nine months ended September 30, 2004 had we been a stand-alone entity, unaffiliated with Alcan.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Pensions and Post-Retirement Benefits
      Prior to the spin-off, certain of our entities had pension obligations primarily comprised of defined benefit plans in the U.S. and the U.K., unfunded pension benefits in Germany and lump sum indemnities payable upon retirement to employees of businesses in France, Italy, Korea and Malaysia. These pension benefits are managed separately and the related assets, liabilities and costs are included in both the unaudited condensed consolidated and combined and historical combined financial statements.
      Prior to the spin-off, Alcan managed defined benefit plans in Canada, the U.S., the U.K. and Switzerland that include some of our entities. Our share of these plans’ assets and liabilities is not included in the accompanying combined balance sheet as of December 31, 2004. The historical combined financial statements for the third quarter and nine months ended September 30, 2004, however, include an allocation of the costs of the plans. The costs vary depending on whether the entity was a subsidiary or a division of Alcan at that time. Pension costs of divisions of Alcan that were transferred to us were allocated based on the following methods: service costs were allocated based on a percentage of payroll costs; interest costs, the expected return on assets, and amortization of actuarial gains and losses were allocated based on a percentage of the projected benefit obligation (PBO); and prior service costs were allocated based on headcount. The total allocation of such pension costs amounted to $3 and $9 for the third quarter and nine months ended September 30, 2004, respectively. Pension costs of subsidiaries of Alcan that were transferred to us were accounted for on the same basis as a multi-employer pension plan whereby the subsidiaries’ contributions for the period were recognized as net periodic pension cost. There were no contributions by the subsidiaries for the third quarter and nine months ended September 30, 2004.
      Prior to the spin-off, Alcan provided post-retirement benefits in the form of unfunded healthcare and life insurance benefits to retired employees in Canada and the U.S. that include retired employees of some of our businesses. Our share of these plans’ liabilities is included in the historical combined balance sheet as of December 31, 2004 and our share of these plans’ costs is included in the historical combined statements of income for the third quarter and nine months ended September 30, 2004.
      Subsequent to the spin-off, certain changes were made to the Alcan plans covering our employees and we also established new pension plans, as described in Note 6 — Post-Retirement Benefits. Refer to Note 2 — Accounting Policies for our accounting policies related to the new pension plans.
Income Taxes
      Income taxes for 2004 were calculated as if all of our operations had been separate tax paying legal entities, each filing a separate tax return in its local tax jurisdiction. For jurisdictions where there was no tax sharing agreement, amounts currently payable were included in Owner’s net investment.
Cash Management
      Cash and cash equivalents in the combined balance sheet as of December 31, 2004 are comprised of the cash and cash equivalents of our businesses, primarily in South America, Asia and parts of Europe, that perform their own cash management functions.
      Historically, Alcan performed cash management functions on behalf of certain of our businesses primarily in North America, the U.K., and other parts of Europe. Cash deposits from these businesses were transferred to Alcan on a regular basis. As a result, none of Alcan’s cash and cash equivalents was allocated to us in the historical combined financial statements. Transfers to and from Alcan were netted against Owner’s net investment. Subsequent to the spin-off, we are responsible for our own cash management functions.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Interest Expense
      We obtain short and long-term financing from third parties and, prior to the spin-off, from related parties. Interest is charged on all short and long-term debt and is included in Interest expense in the accompanying unaudited condensed consolidated and combined statements of income.
      Historically, Alcan provided certain financing to us and incurred third party debt at the parent level. This financing is reflected in the combined balance sheet as of December 31, 2004 within the amounts due to Alcan and is interest-bearing as described in Note 5 — Related Party Transactions. As a result of this arrangement, the historical combined financial statements for the third quarter and nine months ended September 30, 2004 do not include an allocation of additional interest expense. Our interest expense as a stand-alone company is higher than that recognized in the historical combined financial statements for the third quarter and nine months ended September 30, 2004.
Derivatives
      During 2004, we entered into derivative contracts, primarily with Alcan, to manage some of our foreign currency and commodity price risk. These contracts are reported at their fair value on the balance sheet. Changes in the fair value of these derivatives are recorded in the accompanying unaudited condensed consolidated and combined statements of income in Other expenses (income) — net. The cash flows on the settlement of these derivative contracts are reported as part of net cash provided by operating activities in the condensed combined statement of cash flows for periods prior to the spin-off.
Stock Options
      Stock option expense and other stock-based compensation expense in the condensed combined statements of income for the quarter and nine months ended September 30, 2004 includes the Alcan expenses related to the fair value of awards held by certain employees of Alcan’s Rolled Products businesses during the periods presented as well as an allocation, calculated based on the average of headcount and capital employed, for Alcan’s corporate office employees. These expenses are not necessarily indicative of what our expenses would have been had we been a separate stand-alone entity in 2004.
Earnings Per Share
      Prior to the spin-off, we were not a separate legal entity with common shares outstanding. Earnings per share for the 2004 periods have been presented using our common shares outstanding and common share equivalents immediately after the completion of the spin-off on January 6, 2005.
2. ACCOUNTING POLICIES
      The unaudited condensed consolidated and combined financial statements are based upon accounting policies and methods of their application consistent with those used and described in our annual financial statements as contained in our most recent annual report, except for the accounting policies described below and the recently adopted accounting policies described in Note 3 — Accounting Changes. Certain reclassifications and revisions have been made to prior period amounts to conform to the current period presentation. Operating results for the third quarter and nine months ended September 30, 2005 are not necessarily indicative of the results for the year ended December 31, 2005.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Cash and Cash Equivalents
      Cash and cash equivalents include cash, time deposits, and readily marketable securities with maturities of three months or less at the purchase date.
Principles of Consolidation
      The unaudited condensed consolidated and combined and historical combined financial statements include the accounts of subsidiaries that are controlled by Novelis, all of which are majority owned, as well as a variable interest entity in which we are the primary beneficiary. We use the equity method of accounting for investments in entities over which we have significant influence. Under the equity method of accounting, our investment is increased or decreased by our share of the undistributed net income or loss and deferred translation adjustments since acquisition. Investments in joint ventures over which we have an undivided interest in the assets and liabilities are consolidated to the extent of our ownership or participation in the assets and liabilities. All other investments in joint ventures are accounted for using the equity method. Other investments are accounted for using the cost method. Under the cost method, dividends received are recorded as income. Cost investments for which there is an active market are accounted for as available-for-sale. Intercompany balances and transactions, including profits in inventories, are eliminated in the unaudited condensed consolidated and combined and historical combined financial statements.
Debt Issuance Costs
      Debt issuance costs related to our senior secured credit facilities are recorded in Deferred charges and other assets and amortized over the life of the related borrowing in Interest expense, using the “effective interest amortization” method. Interest expense does not include a commitment fee on an undrawn bridge financing facility, which is included in Other expenses (income) — net.
Dividend Policy
      Declaration of dividends will depend on, among other things, our financial resources, cash flows generated by our business, cash requirements, restrictions under the instruments governing our indebtedness, and other relevant factors. There can be no assurance that we will continue to pay dividends at the current rate or at all.
Pensions and Post-Retirement Benefits
      Using appropriate actuarial methods and assumptions, we account for our defined benefit pension plans in accordance with FASB Statement No. 87, Employers’ Accounting for Pensions. Other post-retirement benefits are accounted for in accordance with FASB Statement No. 106, Employers’ Accounting for Post-Retirement Benefits Other than Pensions. Pension and post-retirement benefit obligations are actuarially calculated using management’s best estimates and are based on expected service period, salary increases and retirement ages of employees. Pension and post-retirement benefit expense includes the actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets based on fair market value and the straight-line amortization of net actuarial gains and losses and adjustments due to plan amendments. All net actuarial gains and losses are amortized over the expected average remaining service lives of the employees.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Recently Issued Accounting Standards
      In December 2004, the FASB issued FASB Statement No. 123(R), Share-Based Payment, (FASB 123(R)), which is a revision to FASB Statement No. 123, Accounting for Stock-Based Compensation (FASB 123). FASB 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We adopted the fair value based method of accounting for share-based payments effective January 1, 2004 using the retroactive restatement method described in FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Currently, we use the Black-Scholes valuation model to estimate the value of stock options granted to employees. We expect to adopt FASB 123(R) on January 1, 2006, and expect to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date based on the requirements of FASB 123(R) for all share-based payments granted after the effective date. All awards granted to employees prior to the effective date of FASB 123(R) that remain unvested at the adoption date will continue to be expensed over the remaining service period in accordance with FASB 123.
      In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143. FIN 47 clarifies that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity the timing or method of settlement of which is conditional on a future event. FIN 47 also clarifies that a conditional asset retirement obligation should be recognized if its fair value is reasonably estimable and provides guidance on when there is sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 should be applied no later than the end of the fiscal year 2005. The adoption of FIN 47 will not have a material impact on our financial position, results of operations or cash flows.
      In May 2005, the FASB issued FASB Staff Position (FSP) No. EITF 00-19-1, Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation. The FSP was issued to clarify the application of EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, to freestanding financial instruments originally issued as employee compensation that can be settled only by delivering registered shares. This FSP clarifies that a requirement to deliver registered shares, in and of itself, will not result in liability classification for freestanding financial instruments originally issued as employee compensation. This clarification is consistent with the FASB’s intent in issuing FASB 123(R). We will apply the guidance in this FSP in accordance with the effective date and transition provisions of FASB 123(R).
      In June 2005, the FASB ratified the consensus reached in EITF Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements) (EITF 05-5). EITF 05-5 addresses the timing of recognition of salaries, bonuses and additional pension contributions associated with certain early retirement arrangements typical in Germany (as well as similar programs). The EITF also specifies the accounting for government subsidies related to these arrangements. EITF 05-5 is effective in fiscal years beginning after December 15, 2005. The adoption of EITF 05-5 is not expected to have a material impact on our financial position, results of operations or cash flows.
      In June 2005, the FASB issued Staff Position (FSP) FAS 143-1, Accounting for Electronic Equipment Waste Obligations. FSP FAS 143-1 addresses the accounting for obligations associated with Directive 2002/96/ EC on Waste Electrical and Electronic Equipment (the Directive) of the European Union (EU) which is subject to transformation into the respective national laws. Under the Directive, the waste management obligation remains with the commercial user until the historical waste equipment (put

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
on the market before August 13, 2005) is replaced. At that time the waste management obligation for the equipment may be transferred to the producer of the replacement equipment depending on the transformation of the Directive into national law by the EU member country. If the commercial user does not replace the equipment, the obligation remains with that user until the equipment is disposed. FSP FAS 143-1 requires the commercial user to apply the provisions of FASB 143, Accounting for Asset Retirement Obligations, to the obligation associated with historical waste equipment. FSP FAS 143-1 will have to be applied in the first reporting period ending after the date the law is adopted by the applicable EU member countries. The adoption of FSP FAS 143-1 did not have a material impact on our financial position, results of operations or cash flows.
      In July 2005, the FASB issued FSP No. APB 18-1, Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence, to provide guidance on how an investor should account for its proportionate share of an investee’s equity adjustments for other comprehensive income (OCI) upon a loss of significant influence. The FSP states that an investor’s proportionate share of an investee’s equity adjustments for OCI should be offset against the carrying value of the investment at the time significant influence is lost. To the extent that the offset results in a carrying value of the investment that is less than zero, an investor should (a) reduce the carrying value of the investment to zero and (b) record the remaining balance in income. The guidance in this FSP is effective for us as of the first reporting period beginning after July 12, 2005. Upon adoption of this FSP, any amount of an investee’s equity adjustments for OCI recorded in the shareholders’ equity of the investor, relating to an investment for which the reporting entity no longer has an ability to exercise significant influence, should be offset against the carrying value of the investment. The amount that is offset should not include any items of accumulated OCI, relating to unrealized gains and losses recorded in accordance with FASB Statement No. 115 (FASB 115), Accounting for Certain Investments in Debt and Equity Securities, that are recorded by an investor for an investment that is accounted for as an available-for-sale security in accordance with FASB 115 upon adoption of this FSP. If comparative financial statements are provided for earlier periods, those financial statements shall be retrospectively adjusted to reflect application of the provisions of this FSP. There is no impact on our consolidated financial position, results of operations or cash flows from this FSP.
      In September 2005, the FASB ratified Emerging Issues Task Force Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty (EITF 04-13). EITF 04-13 discusses whether inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another should be combined and treated as a nonmonetary exchange and addresses (a) under what circumstances should two or more transactions with the same counterparty (counterparties) be viewed as a single nonmonetary transaction within the scope of APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29) and Financial Accounting Standard No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB 29 (FAS 153) and (b) if nonmonetary transactions within the scope of APB 29 and FAS 153 involve inventory, are there any circumstances under which the transactions should be recognized at fair value. The pronouncement is effective for new inventory arrangements entered into, or modifications or renewals of existing inventory arrangements occurring in interim or annual reporting periods beginning after March 15, 2006. We do not expect that this pronouncement will have a material effect on our financial position, results of operations or cash flows.
      We have determined that all other recently issued accounting pronouncements do not apply to us.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
3. ACCOUNTING CHANGES
Stock Options and Other Stock-Based Compensation
      Effective January 1, 2004, Alcan retroactively adopted the fair value recognition provisions of FASB 123 for stock options granted to employees. Both the unaudited condensed consolidated and combined and historical combined financial statements include the compensation cost for options granted to certain of our employees. In addition, the historical combined financial statements include an allocation of expenses for Alcan’s corporate office employees. Beginning January 1, 1999, all periods were restated to reflect compensation cost as if the fair value method had been applied for awards issued to these employees after January 1, 1995. We apply the fair value recognition provisions of FASB 123 to our new stock option plans as described in Note 19 — Stock Options and Other Stock-Based Compensation.
Consolidation of Variable Interest Entities
      Effective January 1, 2004, Alcan adopted the provisions of FASB Interpretation No. 46(R) (FIN 46(R), revised December 2003), Consolidation of Variable Interest Entities. In 2004, Alcan determined it was the primary beneficiary of Logan Aluminum Inc. (Logan), a variable interest entity. As a result, both the unaudited condensed consolidated and combined and condensed combined balance sheets include the assets and liabilities of Logan. Logan is a joint venture that manages a tolling arrangement for us and an unrelated party. At the date of adoption of FIN 46(R), Alcan recorded assets of $38 and liabilities of $38 related to Logan that were previously not recorded on its balance sheet. Prior periods were not restated.
      Our investment plus any unfunded pension liability related to Logan totaled $37 as of December 31, 2004 and represents our maximum exposure to loss. Creditors of Logan do not have recourse to our general credit as a result of including Logan in our unaudited condensed consolidated and combined financial statements.
4. RESTRUCTURING PROGRAMS
2005 Restructuring Activities
      In 2006, we announced an agreement with Atlante Srla for the sale of land in Borgofranco, Italy, that is currently occupied by one of our casting alloy plants. We had previously announced on November 3, 2005, our decision to close the facility by the end of March 2006. Atlante Srla, a new Italian energy company, plans to develop a business on the site and took possession of approximately three-quarters of the land on April 1, 2006, with the balance transferring at a later date. We will retain responsibility for environmental remediation of the site, including the elimination of any remaining salt cake byproduct from the casting alloys operation.
      In the third quarter of 2005, we recorded charges of $12 in connection with the sale of Borgofranco. Approximately $6 is for environmental remediation while the remainder is related to asset write-downs and redundancies. We expect to record additional charges of $2 in the fourth quarter of 2005 for asset write-downs and a further charge of approximately $3 in the first quarter of 2006 for redundancies and decommissioning.
2004 Restructuring Activities
      In line with our objective of value maximization, we undertook various restructuring initiatives in 2004.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Pechiney
      In the fourth quarter of 2004, we recorded liabilities of $23 for restructuring costs in connection with the exit of certain operations of Pechiney and these costs were recorded in the allocation of the purchase price of Pechiney as of December 31, 2004. These costs relate to a plant closure in Flemalle, Belgium (Novelis Europe) and comprise $19 of severance costs and $4 of other charges. No further charges are expected to be incurred in relation to this plant closure.
      In 2005, we recorded recoveries of $4 in connection with the operations of Pechiney. These recoveries were credited against the Goodwill associated with the Pechiney acquisition.
Other 2004 Restructuring Activities
      In the third quarter of 2004, we incurred restructuring charges of $19 relating to the consolidation of our U.K. aluminum sheet-rolling activities in Rogerstone, Wales (Novelis Europe) in order to improve competitiveness through better capacity utilization and economies of scale. Production ceased at the rolling mill in Falkirk, Scotland (Novelis Europe) in December 2004 and the facility was closed in the first quarter of 2005. The charges of $19 include $6 of severance costs, $8 of asset impairment charges, $2 of pension costs, $2 of decommissioning and environmental costs and $1 of other charges, which were recorded in Other expenses (income) — net in the historical combined statement of income.
      In 2004, we incurred restructuring charges of $6 (Q1: nil; Q2: nil; Q3: $1; Q4: $5), relating to the closure and restructuring of corporate offices and a plant in Germany, comprised of $5 (Q1: nil; Q2: nil; Q3: $1; Q4: $4) for severance costs and $1 (Q1: nil; Q2: nil; Q3: nil; Q4: $1) related to costs to consolidate facilities, which were recorded in Other expenses (income) — net in the historical combined statement of income. No further charges are expected to be incurred in relation to these restructuring activities.
      In 2005, we recorded recoveries of $1 in connection with 2004 restructuring program activities in Nachterstedt, Germany (Q1: $1; Q2: nil; Q3: nil).
2001 Restructuring Program
      In 2001, Alcan implemented a restructuring program, resulting in a series of plant sales, closures and divestitures throughout the organization. A detailed business portfolio review was undertaken in 2001 to identify high cost operations, excess capacity and non-core products. Impairment charges were recognized as a result of negative projected cash flows and recurring losses. These charges related principally to buildings, machinery and equipment. This program was essentially completed in 2003.
      In 2004, we recorded recoveries related to the 2001 restructuring program comprised of $7 (Q1: $7; Q2: nil; Q3: nil; Q4: nil) relating to a gain on the sale of assets related to the closure of facilities in Glasgow, U.K. (Novelis Europe) and a recovery of $1 (Q1: nil; Q2: $1; Q3: nil; Q4: nil) relating to a provision in the U.S. (Novelis North America).
      In 2005, we recorded recoveries of $2 in connection with 2001 restructuring program activities in Rogerstone, Wales (Q1: $1; Q2: $1; Q3: nil).

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
      The schedule provided below shows details of the provision balances, related cash payments and recoveries for the significant restructuring activities included in Other expenses (income) — net in the unaudited condensed consolidated and combined statements of income:
                                 
        Asset        
    Severance   Impairment        
    Costs   Provisions   Other   Total
                 
Provision balance as of January 1, 2004
    19       —       15       34  
Year Ended December 31, 2004 activity:
                               
Charges (recoveries) recorded in the statement of income
    10       8       (1 )     17  
Liabilities recorded in the allocation of the Pechiney purchase price
    19       —       4       23  
Cash payments — net
    (14 )     —       (5 )     (19 )
Non-cash charges (recoveries)
    —       (8 )     6       (2 )
                         
Provision balance as of December 31, 2004
    34       —       19       53  
Nine Months Ended September 30, 2005 activity:
                               
Charges (recoveries) recorded in the statement of income
    (4 )     4       8       8  
Recoveries credited against Goodwill
    (4 )     —       —       (4 )
Cash payments — net
    (16 )     —       (6 )     (22 )
Non-cash recoveries
    —       (2 )     —       (2 )
Effect of exchange rate changes on ending provision balances
    (3 )     —       (2 )     (5 )
                         
Provision balance as of September 30, 2005
    7       2       19       28  
                         
Subsequent Events
      In connection with our 2004 restructuring activities, we received $7 in proceeds from the sale of land at the closed rolling mill in Falkirk, Scotland (Novelis Europe) in October 2005 resulting in a gain of $7.
      In March 2006, we announced additional actions in the restructuring of our European operations, with the sale of our aluminum rolling mill in Annecy, France to private equity firm American Industrial Acquisition Corporation and the reorganization of our plants in Ohle and Ludenscheid, Germany, including the closure of two non-core business lines located within those facilities. We will record a pre-tax accounting charge of approximately $14 in connection with the sale of the Annecy plant, and a pre-tax accounting charge in the $10 to $12 range for the restructuring of the Ohle and Ludenscheid operations for the first quarter of 2006. These charges include redundancy costs and the write-off of assets on the balance sheet.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
5. RELATED PARTY TRANSACTIONS
      The following table describes the nature and amounts of transactions that we had with related parties during the quarter and nine months ended September 30, 2005 and 2004. In 2004, Alcan was considered a related party to Novelis. However, subsequent to the spin-off, Alcan is no longer a related party as defined in FASB Statement No. 57, Related Party Disclosures, and accordingly, all transactions between Novelis and Alcan are third party transactions.
                                   
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Sales and operating revenues
                               
Alcan(A)
    —       107       —       323  
                         
Cost of sales and operating expenses
                               
Alcan(A)
    —       96       —       288  
                         
Research and development expenses
                               
Alcan(B)
    —       10       —       28  
                         
Interest expense
                               
Alcan(C)
    —       7       —       24  
                         
Other expenses (income) — net
                               
Service fee income(D)
    —       —       —       (27 )
Service fee expense(E)
    —       (2 )     —       17  
Interest income(F)
    —       (6 )     —       (17 )
Derivatives — realized gains (losses)(G)
    —       10       —       2  
Derivatives — unrealized gains (losses) on change in market value and reclassifications(G)
    —       —       —       —  
Other
    —       (1 )     (1 )     5  
                         
Total other expenses (income) — net arising from transactions with Alcan
    —       1       (1 )     (20 )
Interest income from Aluminium Norf GmbH
    —       —       —       (1 )
                         
Total other expenses (income) — net arising from transactions with all related parties
    —       1       (1 )     (21 )
                         
Purchase of inventory/tolling services
                               
 
Aluminium Norf GmbH
    52       51       154       147  
                         
 
Alcan(H)
    —       502       —       1,485  
                         
 
(A) We purchase from and sell materials to Alcan in the ordinary course of business.
 
(B) These expenses represent an allocation of research and development expenses incurred by Alcan on behalf of Novelis.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
(C) As discussed further below and in Note 11 — Short-Term Borrowings and Note 12 — Long-Term Debt, we had various short-term borrowings and long-term debt payable to Alcan where interest was charged on both a fixed and a floating rate basis.
 
(D) Service fee income arises from sales of research and development and other corporate services to Alcan.
 
(E) Service fee expense arises from the purchase of corporate services from Alcan.
 
(F) Represents interest income earned on outstanding advances and loans to Alcan.
 
(G) Alcan was the counterparty to most of our metal and currency derivatives.
 
(H) Alcan is our primary third party supplier of prime and sheet ingot. Refer to Note 14 — Commitments and Contingencies.
      The table below describes the nature of and the period-end balances that we have with related parties:
                 
    September 30,   December 31,
As of   2005   2004
         
Trade receivables
               
Alcan(A)
    —       87  
             
Other receivables
               
Alcan(B)
    —       801  
Aluminium Norf GmbH(C)
    30       45  
             
      30       846  
             
Long-term receivables
               
Alcan
    —       2  
Aluminium Norf GmbH(C)
    77       102  
             
      77       104  
             
Current portion of long-term debt
               
Alcan(D)
    —       290  
             
Short-term borrowings
               
Alcan(E)
    —       312  
             
Accounts payable, trade
               
Alcan(A)
    —       356  
Aluminium Norf GmbH(A)
    38       45  
             
      38       401  
             
Long-term debt, net of current portion
               
Alcan(D)
    —       2,307  
             
 
(A) We purchase from and sell materials to Alcan and we purchase services from an investee accounted for under the equity method, in the ordinary course of business.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
(B) The balance at December 31, 2004 includes various short-term floating rate notes totaling Euro 266 million and $55 maturing within one year that were settled by Alcan in 2005 as part of our spin-off.
 
(C) The balances represent current and non-current portions of a loan to an investee accounted for under the equity method.
 
(D) We had various loans payable to Alcan as of December 31, 2004 as described in Note 12 — Long-Term Debt that were repaid in the first quarter of 2005.
 
(E) The balance at December 31, 2004 is comprised of loans due to Alcan in various currencies including Euro 193 million and GBP 20 million that were repaid in 2005 as part of our spin-off.
6. POST-RETIREMENT BENEFITS
      Our pension obligations relate to funded defined benefit pension plans we have established in the United States, Canada and the United Kingdom, unfunded pension benefits primarily in Germany, and lump sum indemnities payable upon retirement to employees of businesses in France, Korea, Malaysia and Italy. Pension benefits are generally based on the employee’s service and either on a flat dollar rate or on the highest average eligible compensation before retirement. In addition, some of our entities participate in defined benefit plans managed by Alcan in the U.S., the U.K. and Switzerland.
      In 2005, the following transactions transpired related to existing Alcan pension plans covering our employees:
        a) In the U.S., for our employees previously participating in the Alcancorp Pension Plan and the Alcan Supplemental Executive Retirement Plan, Alcan agreed to recognize up to one year of additional service in its plan as long as such employee worked for us and we paid to Alcan the normal cost (in the case of the Alcancorp Pension Plan) and the current service cost (in the case of the Alcan Supplemental Executive Retirement Plan);
 
        b) In the U.K., the sponsorship of the Alusuisse Holdings U.K. Ltd Pension Plan was transferred from Alcan to us and renamed the Novelis U.K. Pension Plan. No new plan was established. Approximately 400 of our employees who previously participated in the British Alcan RILA Plan remained in that plan for 2005. We are responsible for remitting to Alcan both the employee and employer contributions as agreed with the trustees of the plan for the 2005 year; and
 
        c) In Switzerland, we became a participating employer in the Alcan Swiss Pension Plans and our employees are participating in these plans for up to one year (or longer with Alcan approval) provided we make the required pension contributions.
      For the quarter and nine months ended September 30, 2005, we contributed $4 and $11, respectively, to the Alcan sponsored plans described above.
      The following plans were newly established in 2005 to replace the Alcan pension plans that previously covered our employees (other Alcan pension plans covering our employees were assumed by us):
      Novelis Pension Plan (Canada) — The Novelis Pension Plan (Canada) provides for pensions calculated on service (no cap) and eligible earnings which consist of the average annual salary and the short-term incentive award up to its target during the 36 consecutive months when they were the greatest. The normal form of payment of pensions is a lifetime annuity with either a guaranteed minimum of 60 monthly payments or a 50% lifetime pension to the surviving spouse.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
      Pension Plan for Officers — The Pension Plan for Officers (PPO) provides for pensions calculated on service up to 20 years as an officer of Novelis or of Alcan and eligible earnings which consist of the excess of the average annual salary and target short-term incentive award during the 60 consecutive months when they were the greatest over eligible earnings in the U.S. Plan or the U.K. Plan, as applicable. The normal form of payment of pensions is a lifetime annuity. Pensions will not be subject to any deduction for social security or other offset amounts.
      The board of directors reviewed management’s recommendations with respect to certain modifications of our post-retirement benefit plans. On October 28, 2005, our board of directors approved and adopted the following changes related to post-retirement benefit plans:
        a) New salaried employees (new as of January 1, 2005 in the U.S. and as of January 1, 2006 in Canada and the U.K.) will participate in Defined Contribution (DC) retirement plan arrangements rather than Defined Benefit (DB) plans. The Novelis board of directors also approved the adoption of the Novelis Savings and Retirement Plan effective December 1, 2005 replacing the Alcancorp Employees’ Savings Plan (for U.S. salaried employees) and adding a retirement account feature to the plan;
 
        b) As a result of the spin-off, account balances in the Alcancorp Employees’ Savings Plans (Salaried Plan and Hourly Plan) were transferred to the new Novelis Savings and Retirement Plan (for salaried employees) and the new Novelis Hourly Savings Plan (for hourly “union” employees). To accomplish this transfer, a freeze was placed on all account activity including loan requests, withdrawals, distributions, fund exchanges (transfers), contribution allocation changes and account balance inquiries during the transition period. The freeze began on December 2, 2005 and ended during the week of December 11, 2005; and
 
        c) Pursuant to the Employee Matters Agreement (EMA) between Alcan and Novelis, active Novelis transferred employees continue to participate in the Alcancorp Pension Plan (ACPP) until December 31, 2005. Effective October 28, 2005, the Novelis board of directors approved the adoption of Novelis DB pension arrangements (to be called the Novelis Pension Plan (NPP) in the U.S.) for employees who participated in a DB with Alcan. Under the terms of the EMA and subject to Internal Revenue Service (IRS) requirements, assets and liabilities will be transferred from ACPP to the new NPP. Similar, but not identical, actions will occur in Canada and the U.K. for pensions.
      These transfers of assets and liabilities may have a material impact on our financial statements in 2006. We are unable to determine the amount with certainty at this time, as the relevant employee elections have not been made.
      Alcan provides unfunded health care and life insurance benefits to retired employees in Canada and the United States, which include retired employees of some of our businesses. Our share of these plans’ liabilities and costs are included in the historical combined financial statements. We expect to pay benefits of $6 in 2005 related to these plans from operating cash flows.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
      Components of net periodic benefit cost are shown in the table below:
                                                                 
    Pension Benefits   Other Benefits
         
    Third       Third    
    Quarter   Nine Months   Quarter   Nine Months
                 
Periods ended September 30   2005   2004   2005   2004   2005   2004   2005   2004
                                 
Service cost
    5       4       14       14       1       1       3       2  
Interest cost
    7       7       22       21       (1 )     1       5       4  
Expected return on assets
    (3 )     (5 )     (15 )     (17 )     —       —       —       —  
Amortization
                                                               
— actuarial losses
    —       1       4       3       1       —       1       —  
— prior service cost
    —       1       2       3       —       —       —       —  
Curtailment/ settlement gains
    —       —       —       (19 )     —       —       —       —  
                                                 
Net periodic benefit cost
    9       8       27       5       1       2       9       6  
                                                 
      The expected long-term rate of return on plan assets is 7.5% in 2005.
      In the quarter ended June 30, 2004, we recognized a $19 settlement gain on the wind-up of the Brazilian operations’ defined benefit plan.
Employer Contributions
      Our pension funding policy is to contribute the amount required to provide for contractual benefits attributed to service to date, and to amortize unfunded actuarial liabilities, for the most part over periods of 15 years or less. We previously disclosed in our historical combined financial statements for the year ended December 31, 2004 that we expected to contribute $10 to our funded pension plans in 2005. The contributions are expected to be fully comprised of cash. As of September 30, 2005, $14 has been contributed, and we expect to contribute an additional $2 over the remainder of the year. The additional contributions are necessary to fund pension plan deficits in certain countries as well as new pension plans created subsequent to our spin-off. We also expect to pay $9 of unfunded pension benefits and lump sum indemnities from operating cash flows in 2005.
      We also participate in savings plans in Canada and the U.S. as well as defined contribution pension plans in Malaysia and Brazil. We expect to make contributions of $9 to these plans in 2005 ($8 in 2004).

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
7. OTHER EXPENSES (INCOME) — NET
      The following table presents the components of Other expenses (income) — net:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Restructuring costs (recoveries) — net
    7       10       4       12  
Asset impairment provisions
    4       9       5       9  
Gain on disposals of fixed assets(A)
    —       —       (11 )     (6 )
Interest income
    (3 )     (6 )     (7 )     (19 )
Realized gains on monetization of cross-currency interest rate swaps
    —       —       (45 )     —  
Realized losses (gains) on derivatives(B)
    4       —       (11 )     —  
Exchange losses (gains)
    (4 )     5       1       8  
Unrealized gains on change in market value and reclassification of derivatives(C)
    (43 )     (21 )     —       (36 )
Service fee expense — net
    —       (11 )     —       (10 )
Bridge financing commitment fee
    —       —       11       —  
Provisions for legal and environmental reserves
    7       —       13       —  
Other
    1       15       1       29  
                         
      (27 )     1       (39 )     (13 )
                         
 
(A) Included in the nine months ended September 30, 2005 is a gain on the sale of land in Asia of ($11).
 
(B) Includes metal, natural gas and energy derivatives.
 
(C) Included in the nine months ended September 30, 2005 is $43 in pre-tax unrealized losses ($29 after-tax) on the change in market value of derivative contracts, primarily with Alcan, for the period from January 1 to January 5, 2005, as described in Note 1 — Background and Basis of Presentation.
8. INCOME TAXES
      The provision (benefit) for income taxes is comprised of the following:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Current
    6       38       73       89  
Deferred
    31       7       (6 )     22  
                         
      37       45       67       111  
                         
      The effective tax rates for the nine months ended September 30, 2005 and 2004 were 60% and 42%, respectively, compared to the Canadian statutory rate of 33% for both periods. For the nine months ended

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
September 30, 2005, the reconciliation of income taxes at the Canadian statutory rates to our effective rate is as follows:
                   
    Nine Months
     
        2005
        Tax Rate
Period ended September 30   2005   Component
         
Income before income taxes and other items
    112          
             
Income taxes at statutory rate
    37       33 %
Adjustments to the statutory rate:
               
 
Difference in effective tax rates of foreign subsidiaries
    1       1 %
 
Unrealized benefit on losses
    8       7 %
 
Out-of-period adjustments
    (7 )     (6 )%
 
Exchange translation items
    24       22 %
 
Exchange on revaluation of deferred income taxes
    6       5 %
 
Taxes relating to the spin-off transaction
    (2 )     (2 )%
 
Reduced-rate or tax-exempt items
    (6 )     (5 )%
 
Other — net
    6       5 %
             
Income taxes at effective rate
    67       60 %
             
      The 2004 historical combined financial statements were prepared on a carve-out basis. A comparison of our nine months 2004 effective rate to the statutory rate would not be meaningful.
9. EARNINGS PER SHARE
      We use the treasury stock method to calculate the dilutive effect of stock options and other stock equivalents (dilutive shares). The following table shows the information used in the calculation of basic and diluted earnings per share:
                                   
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Numerator:
                               
 
Net income
    10       34       32       148  
                         
Denominator (number of common shares in millions):
                               
 
Weighted average number of outstanding shares
    74.00       73.99       73.99       73.99  
 
Effect of dilutive shares
    0.38       0.44       0.25       0.44  
                         
 
Adjusted number of outstanding shares
    74.38       74.43       74.24       74.43  
                         
Earnings per share — basic (in US$)
    0.14       0.47       0.43       2.01  
                         
Earnings per share — diluted (in US$)
    0.14       0.47       0.43       2.00  
                         
      Options to purchase an aggregate of 2,707,171 of our common shares were held by our employees as of September 30, 2005. Of these, 2,696,070 options to purchase common shares at an average exercise price of $21.57 per share were dilutive for the third quarter ended September 30, 2005. For the nine months ended September 30, 2005, 1,366,028 options to purchase common shares at an average exercise

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
price of $19.43 per share are dilutive. These dilutive stock options are equivalent to 342,493 of our common shares for the third quarter and 203,052 for the nine months ended September 30, 2005. Additionally, there are 41,652 Director Deferred Share Units (DDSUs) (see Note 19 — Stock Options and Other Stock-Based Compensation) for the third quarter and nine months ended September 30, 2005 that were included as dilutive shares. The number of anti-dilutive Novelis options held by our employees for the third quarter and nine months ended September 30, 2005 was 11,101 and 1,341,143, respectively.
      For both the third quarter and the nine months ended September 30, 2004 under rules applicable to carve-out statements, the effect of dilutive stock options was calculated based on an aggregate of 1,356,735 Alcan common shares held by Novelis employees. Of these, 685,285 options to purchase Alcan common shares at an average exercise price of CAN$38.86 (US$29.96) per share were dilutive for both the third quarter and nine months ended September 30, 2004. These dilutive stock options were equivalent to 443,351 of Novelis common shares for both the third quarter and nine months ended September 30, 2004. The number of anti-dilutive Alcan options held by Novelis employees as of September 30, 2004 was 671,450.
10. SALES, FORFAITING AND FACTORING OF TRADE ACCOUNTS RECEIVABLES
      Prior to the spin-off, we transferred third party trade receivables to Alcan, a related party, which were then subsequently sold to a financial institution under Alcan’s accounts receivable securitization program. Subsequent to the spin-off, we have not securitized any of our third party trade receivables.
      Novelis Korea Limited forfaits trade receivables in the ordinary course of business. These trade receivables are typically outstanding for 60 to 120 days. Forfaiting is a non-recourse method to manage credit and interest rate risks. Under this method, customers contract to pay a financial institution. The institution assumes the risk of non-payment and remits the invoice value (net of a fee) to us after presentation of a proof of delivery of goods to the customer. We do not retain a financial or legal interest in these receivables, and they are not included in the accompanying unaudited condensed consolidated and combined balance sheets.
      The table below summarizes forfaiting activities for the periods presented:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Receivables forfaited during the period
    79       47       203       141  
                         
Expense recognized due to forfaiting activities
    1       —       2       1  
                         
                 
As of   September 30, 2005   December 31, 2004
         
Forfaited receivables outstanding
    57       50  
             
      Our Brazilian operations accelerate their cash collections by factoring, without recourse, trade receivables that are unencumbered by pledge restrictions. Under this method, customers are directed to pay invoices to a financial institution, but are not contractually required to do so. The financial institution pays us any invoices it has approved for payment (net of a fee). We do not retain financial or legal interest in these receivables, and they are not included in the accompanying unaudited condensed

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
consolidated and combined balance sheets. The following table summarizes our factoring activities for the periods presented:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Receivables factored during the period
    43       6       64       24  
                         
Expense recognized due to factoring activities
    1       —       1       —  
                         
                 
As of   September 30, 2005   December 31, 2004
         
Factored receivables outstanding
    23       —  
             
11. SHORT-TERM BORROWINGS
      As of December 31, 2004, our short-term borrowings were $229 due to third parties and $312 due to Alcan. In order to facilitate the separation of Novelis and Alcan, we executed substantial and material debt restructuring and financing transactions in early January and February of 2005, whereby we effectively replaced all of our financing obligations to Alcan and certain other third parties with new third party debt aggregating $2,951 (see Note 12 — Long-Term Debt). Alcan, a related party at December 31, 2004, was repaid in 2005, primarily as a related party, through both cash and non-cash transactions. As of September 30, 2005, short-term borrowings due to third parties totaled $35 consisting of $33 of borrowings in Korea through local banking relationships not under a line of credit, and $2 under a line of credit in Brazil. The carrying amount approximates fair value because this debt has short periods to maturity, and market rates of interest. As of September 30, 2005 the weighted average interest rate on short-term borrowings was 4.15% (2004: 2.5%).
      A contractual short-term line of credit in Brazil totaled $25 at September 30, 2005, of which $23 was available. The senior secured credit facility for $1,800 (see Note 12 — Long-Term Debt) includes a $500 five-year multi-currency revolving credit and letter of credit facility. As of September 30, 2005, $1 of the $500 facility was utilized for letters of credit.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
12. LONG-TERM DEBT
                 
    September 30,   December 31,
As of   2005   2004
         
DUE TO RELATED PARTIES
               
Total related party debt(A)
    —       2,597  
Less: current portion
    —       (290 )
             
Long-term related party debt, net of current portion
    —       2,307  
             
DUE TO THIRD PARTIES
               
Novelis Inc.
               
Floating rate Term Loan B, due 2012(B)
    371       —  
7.25% Senior Notes, due 2015(D)
    1,400       —  
Novelis Corporation
               
Floating rate Term Loan B, due 2012(B)(C)
    644       —  
Novelis Switzerland S.A.
               
Capital lease obligation, due 2020 (Swiss Francs (CHF) 62 million)(E)
    48       —  
Novelis Korea Limited (F)
               
Bank loan, due 2008
    50       —  
Bank loan, due 2007
    70       70  
Bank loan, due 2007 (Korean won (KRW) 40 billion)
    39       39  
Bank loan, due 2007 (KRW 25 billion)
    24       24  
Bank loans, due 2005/2011 (KRW 2 billion)
    2       2  
Other
               
Other debt, due 2009
    2       5  
             
Total third party debt
    2,650       140  
Less: current portion
    (3 )     (1 )
             
Long-term third party debt, net of current portion
    2,647       139  
             
 
(A) All of our related party debt of $2,597 as of December 31, 2004 was payable to Alcan and was fully repaid in the first quarter of 2005. The related party debt was comprised of a combination of fixed and floating rate debt of $1,392 and fixed rate promissory notes (Alcan Notes) obtained in December 2004 of $1,205. The Alcan Notes as of December 31, 2004, plus additional Alcan Notes of $170 issued in January 2005 comprised the $1,375 bridge financing provided by Alcan as a result of the spin-off transaction described in Note 1 — Background and Basis of Presentation. The Alcan Notes were repaid in February 2005 with the net proceeds from the $1,400 10-year Senior Notes issued in February 2005 (note (D) below).
 
(B) In connection with the spin-off transaction described in Note 1 — Background and Basis of Presentation, we entered into senior secured credit facilities providing for aggregate borrowings of up to $1,800. These facilities consist of: (1) a $1,300 seven-year senior secured Term Loan B facility, bearing interest at LIBOR plus 1.75% (the effective rate at September 30, 2005 was 5.46% assuming the selection of 3-month LIBOR as our borrowing choice), all of which was borrowed on January 10, 2005, and (2) a $500 five-year multi-currency revolving credit facility. The Term Loan B facility

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
consists of an $825 Term Loan B in the U.S. and a $475 Term Loan B in Canada. The proceeds of the Term Loan B facility were used in connection with the spin-off transaction to refinance our related party debt with Alcan and to pay related fees and expenses. Debt issuance costs incurred in relation to these facilities have been recorded in Deferred charges and other assets and are being amortized over the life of the related borrowing in Interest using the “effective interest amortization” method.
 
The credit agreement relating to the senior secured credit facilities includes customary affirmative and negative covenants, as well as financial covenants relating to our maximum total leverage ratio, minimum interest coverage ratio, and minimum fixed charge coverage ratio.
 
The credit agreement for the $1,800 facility requires that we deliver quarterly and audited annual financial statements to the lenders within a specified period of time. Due to the restatement of our unaudited condensed consolidated and combined financial statements for the quarter ended March 31, 2005 and the quarter and six months ended June 30, 2005, we sought and obtained the consent from our lenders to extend the financial statement filing and reporting deadlines under the credit agreement to June 15, 2006 for our Form 10-Q for the quarter ended September 30, 2005; to September 29, 2006 for our Form 10-K for the year ended December 31, 2005; to October 31, 2006 for our Form 10-Q for the quarter ended March 31, 2006; to November 30, 2006 for our Form 10-Q for the quarter ending June 30, 2006; and to December 29, 2006 for our Form 10-Q for the quarter ending September 30, 2006.
 
As of March 31, 2006, we had $855 outstanding under the credit agreement.
 
(C) We have entered into interest rate swaps to fix the interest rate on $310 of the Novelis Corporation floating rate Term Loan B debt at an effective weighted average interest rate of 5.5% for periods of up to three years.
 
(D) On February 3, 2005, we issued $1,400 aggregate principal amount of senior unsecured debt securities (Senior Notes). The Senior Notes, which were priced at par, bear interest at 7.25% and will mature on February 15, 2015. The net proceeds of the Senior Notes were used to repay the Alcan Notes.
 
Under the indenture that governs the Senior Notes, we are subject to certain restrictive covenants applicable to incurring additional debt and providing additional guarantees, paying dividends beyond certain amounts and making other restricted payments, sales and transfer of assets, certain consolidations or mergers and certain transactions with affiliates.
 
The indenture governing the Senior Notes provides that we file a registration statement for registered notes to be exchanged for the notes privately placed to the original investors. The registration statement was declared effective by the SEC on September 27, 2005. Under the indenture and the related registration rights agreement, we were required to complete an exchange offer for the Senior Notes by November 11, 2005. We did not complete the exchange offer by that date. As a result, we began to accrue additional special interest at a rate of 0.25% from November 11, 2005. In addition, the indenture and the registration rights agreement provide that the rate of additional special interest increases 0.25% during each subsequent 90-day period until the exchange offer closes, with the maximum amount of additional special interest being 1.00% per year. The rate of additional special interest is currently 0.75%. If we do not complete the exchange offer by August 8, 2006, the rate of additional special interest will increase to 1.00%. We expect to file a post-effective amendment to the registration statement registering the Senior Notes being issued in the exchange offer and complete the exchange as soon as practicable following the date we are current on our reporting requirements. We will cease paying additional special interest once the exchange offer is completed.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Under the indenture, we are also required to deliver to the trustee a copy of our periodic reports filed with the SEC within time periods specified for filing by SEC rules. Our failure to timely file our quarterly report on Form 10-Q for the quarter ended September 30, 2005, our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly report on Form 10-Q for the quarter ended March 31, 2006 gave certain rights to the trustee and the noteholders under the indenture to accelerate maturity of the Senior Notes if they provided us notice and we do not cure the breach within 60 days. However, neither the trustee nor the noteholders have provided us such a notice to date. As a result, we continue to classify the Senior Notes as long-term.
 
(E) In connection with the spin-off, we entered into a fifteen-year capital lease agreement with Alcan for assets in Sierre, Switzerland, which has an implied interest rate of 7.5% and calls for fixed quarterly payments of $1 (1.7 million CHF). The following table presents future minimum payments under this capital lease in US$ as of September 30, 2005:
         
Payments in Year Ended December 31    
     
Remainder of 2005
    1  
2006
    5  
2007
    5  
2008
    5  
2009
    6  
2010
    6  
Thereafter
    51  
       
Total payments
    79  
Less: interest portion
    (31 )
       
Total capital lease obligation included in long-term debt
    48  
       
(F) In 2004, Novelis Korea Limited (Novelis Korea), formerly Alcan Taihan Aluminium Limited, entered into a $70 floating rate long-term loan which was subsequently swapped for a 4.55% fixed rate KRW 73 billion loan and into two long-term floating rate loans of $39 (KRW 40 billion) and $24 (KRW 25 billion), which were then swapped for fixed rate loans of 4.80% and 4.45%, respectively. In 2005, interest on another loan for $2 (KRW 2 billion) ranged from 3.00% to 4.47% (2004: 3.00% to 5.50%). In February 2005, Novelis Korea entered into a $50 million floating rate long-term loan which was subsequently swapped for a 5.30% fixed rate KRW 51 billion loan.
      In 2004, we entered into a loan and corresponding deposit and guarantee agreement for $90 which had a balance of $80 at September 30, 2005. We do not include the amounts in our unaudited condensed consolidated and combined financial statements as the agreements include a legal right of setoff.
      Based on rates of exchange at September 30, 2005, debt repayment requirements for the remainder of fiscal 2005 and over the next five years amount to $1 in 2005; $3 in 2006; $135 in 2007; $53 in 2008; $3 in 2009 and $5 in 2010. We made an optional principal prepayment of $85 on our Term Loan on March 31, 2005 and in the process, satisfied a 1% per annum principal amortization requirement through fiscal year 2010. We made another optional principal prepayment of $90 on our Term Loan B on June 30, 2005 and in the process, satisfied some of our principal amortization requirements for fiscal year 2011. We made an additional optional prepayment of $110 on our Term Loan B on September 30, 2005, and in the process satisfied some additional principal amortization requirements for 2011. The senior secured credit facility (note (B) above) also requires us potentially to prepay an additional portion of our Term Loans

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
annually, based on a defined formula. This amount cannot be determined in advance and has therefore not been included in the future debt payment requirements shown above.
      As of September 30, 2005, we were in compliance with all the financial covenants in our debt agreements, but see the discussion of the restatement effects on our debt agreements above in notes (B) and (D).
13. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
      In conducting our business, we use various derivative and non-derivative instruments, including forward contracts, to manage the risks arising from fluctuations in exchange rates, interest rates, aluminum prices and other commodity prices. Such instruments are used for risk management purposes only. Alcan is the principal counterparty to our aluminum forward contracts and some of our aluminum options. As described in Note 5 — Related Party Transactions, in 2004 and prior years, Alcan was considered a related party to us. However, subsequent to the spin-off, Alcan is no longer a related party, as defined in FASB Statement No. 57, Related Party Disclosures.
      There have been no material changes in financial instruments and commodity contracts during the first nine months of 2005, except as noted below.
      During the first quarter of 2005, we entered into U.S. dollar interest rate swaps totaling $310 with respect to the Term Loan B in the U.S., and $766 of cross-currency interest rate swaps (Euro 475 million, GBP 62 million, CHF 35 million) with respect to intercompany loans to several European subsidiaries.
      During the second quarter of 2005, we monetized the initial cross-currency interest rate swaps and replaced them with new cross-currency interest rate swaps maturing in 2015, totaling $712 at September 30, 2005 (Euro 475 million, GBP 62 million, CHF 35 million). The aggregate fair value of the U.S. dollar interest rate swaps and the new cross-currency interest rate swaps was a liability of $34 as of September 30, 2005.
      During the third quarter of 2005, we entered into cross-currency principal only swaps (Euro 89 million). The U.S. notional amount of these swaps was $108 as of September 30, 2005. These swaps mature within the next year and are designated as cash flow hedging instruments. The aggregate fair value of these swaps was a liability of $0.5 as of September 30, 2005.
Financial Instruments — Fair Value
      On September 30, 2005, the book value of our long-term debt totals $2,650 (2004: $2,737). The 7.25% Senior Notes, due 2015, total $1,400 of this amount and have a fair value of $1,323 based on available market prices. For the remainder of our debt and all other financial assets and liabilities, book value approximates fair value because the variable interest rates on the debt re-set to market rates periodically.
14. COMMITMENTS AND CONTINGENCIES
      As described in Note 5 — Related Party Transactions, Alcan is our primary supplier of prime and sheet ingot. Purchases from Alcan for the third quarter and nine months ended September 30, 2005 represented 49% and 49% of total prime and sheet ingot third party purchases, respectively (2004: 51% and 51%).
      In connection with our separation from Alcan, we assumed a number of liabilities, commitments and contingencies mainly related to our historical rolled products operations, including liabilities in respect of

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
legal claims and environmental matters. As a result, we may be required to indemnify Alcan for claims successfully brought against Alcan or for the defense of, or defend, 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 taxes and social security contributions).
Legal Proceedings
      The Reynolds Boat Case described below is our largest known non-environmental legal claim that is currently active.
      Reynolds Boat Case. We and Alcan are defendants in a case in the United States District Court for the Western District of Washington, in Tacoma, Washington, case number C04-0175RJB. Trial before a jury began on May 1, 2006. Plaintiffs Reynolds Metals Company and Alcoa, Inc. claim, under various warranty, negligence, and contractual theories, that from 1998 to 2001 we and Alcan Inc. sold certain aluminum products that were ultimately used for marine applications and were unsuitable for such applications. Plaintiffs are claiming approximately $75 in damages, including approximately $15 in prejudgment interest. We currently believe we have several defenses that will limit or prevent the imposition of additional monetary liability on us. As of April 2006, we have expended approximately $1 defending this claim under our self-insured retention. The current range of reasonably possible additional loss is $1 to $75. We also currently believe that our remaining uninsured exposure is approximately $1 and that insurance should be responsible for any additional fees, costs or other monetary liability, notwithstanding reservation of rights letters we and Alcan received. While the ultimate resolution of, and liability and costs related to, this case cannot be determined with certainty or reasonably estimated due to the considerable uncertainties that exist, if there is an adverse outcome not covered by insurance, it could have a material impact on our financial position, operating results or cash flows in the quarter in which such liability is determined.
      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. 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 have a material adverse effect on our business, financial condition or liquidity.
Environmental Matters
      The following describes certain environmental matters relating to our business for which we assumed liability as a result of our separation from Alcan. None of the environmental matters include government sanctions of one-hundred thousand dollars or more.
      We are involved in proceedings under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as 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. Such laws typically 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, on those persons who contributed to the release of a hazardous substance into the environment.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
      As described further in the following paragraph, 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 environmental matters will be in the range of $46 to $60. A liability of $53 has been recorded on the unaudited condensed consolidated and combined balance sheets at September 30, 2005, in Deferred credits and other liabilities. Management has reviewed the environmental matters for which we assumed liability as a result of our separation from Alcan. 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, have a material adverse effect on our business, financial condition or liquidity.
      With respect to environmental loss contingencies, we record a loss contingency on a non-discounted basis 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 unless otherwise noted.
      Oswego North Ponds. Oswego North Ponds is currently our largest known single environmental loss contingency. In the late 1960s and early 1970s, Novelis Corporation (a wholly-owned subsidiary of ours and formerly known as Alcan Aluminum Corporation, or Alcancorp.) in Oswego, New York used an oil containing polychlorinated biphenyls (PCBs) in its re-melt operations. At the time, Novelis Corporation utilized a once-through cooling water system that discharged through a series of constructed ponds and wetlands, collectively referred to as the North Ponds. In the early 1980s, low levels of PCBs were detected in the cooling water system discharge and Novelis Corporation performed several subsequent investigations. The PCB-containing hydraulic oil, Pydraul, which was eliminated from use by Novelis Corporation in the early 1970s, was identified as the source of contamination. In the mid-1980s, the Oswego North Ponds site was classified as an “inactive hazardous waste disposal site” and added to the New York State Registry. Novelis Corporation ceased discharge through the North Ponds in mid-2002.
      In cooperation with the New York State Department of Environmental Conservation (NYSDEC) and the New York State Department of Health, Novelis Corporation entered into a consent decree in August 2000 to develop and implement a remedial program to address the PCB contamination at the Oswego North Ponds site. A remedial investigation report was submitted in January 2004. The current estimated cost associated with this remediation is approximately $19. In addition, NYSDEC held a public hearing on the remediation plan on March 13, 2006 and we believe that our estimate of $19 is reasonable and that the remediation plan will be approved and implemented in 2006.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
      Borgofranco. As of September 30, 2005, we had recorded an aggregate reserve of $18 with respect to environmental matters at our Borgofranco, Italy plant. A stockpile of salt cake, a by-product of the production process at our Borgofranco, Italy plant, has accumulated over several years. A reserve of approximately $8 has been provided for its processing and disposal. Further, tests on the soil at the Borgofranco site discovered additional contamination. A reserve of approximately $4 was established to cover the expected remediation required. In the third quarter of 2005, we announced the closure of business. Additional land remediation reserves of $1.5 and additional salt cake reserves of $4.5 were taken following the closure announcement.
Judicial Deposits
      Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of September 30, 2005, we had made cash deposits of $16 (including $7 deposited in 2004) into judicial depository accounts pending finalization of the related cases. These amounts are included in Deferred charges and other assets on our balance sheets. 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.
Guarantees for Trade Payables to Third Parties
      Novelis Inc. issues indirect guarantees for trade payables to third parties. These guarantees are effective over the supply period of the contracts which currently expire between December 31, 2006 and December 31, 2007, but are subject to renewal. Each of these contracts may be terminated 30 days after written notice is provided to the supplier. Under the supply agreements, Novelis Inc. does not have recourse against the third parties based on triggering events or other contractual provisions.
      The estimated fair market values for these guarantees are listed in the table below. These values are derived from the estimated letter of credit fee a major bank would charge to guarantee payment of the associated maximum potential future payments.
      The following table discloses obligations under indirect guarantees of indebtedness as of September 30, 2005:
                                 
    Maximum            
    Potential Future   Liability   Fair Market   Assets Held for
Type of Entity   Payment   Carrying Value   Value   Collateral
                 
Wholly-Owned Subsidiaries
    11       3       —       —  
Aluminium Norf GmbH
    12       —       —       —  
      Although there is a possibility that liabilities may arise in other instances for which no accruals have been made, we do not believe that it is probable that any losses in excess of accrued amounts would have a material adverse effect on our business, financial condition, or liquidity, absent unusual circumstances.
      In addition, see references to income taxes in Note 8 — Income Taxes and debt repayments in Note 12 — Long-Term Debt.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
15. COMPREHENSIVE INCOME (LOSS)
      The following table summarizes the components of Comprehensive income (loss):
                                   
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Net income
    10       34       32       148  
Other comprehensive income (loss):
                               
 
Net change in deferred translation adjustments
    —       (9 )     (146 )     (53 )
 
Net change in minimum pension liability (net of taxes of nil and ($7)), respectively, for the third quarter and nine months ended September 30, 2005 (2004: nil and nil))
    1       —       (12 )     —  
                         
Comprehensive income (loss)
    11       25       (126 )     95  
                         
      The following table summarizes the components of Accumulated other comprehensive income (loss):
                 
As of   September 30, 2005   December 31, 2004
         
Deferred translation adjustments
    (26 )     120  
Minimum pension liability
    (44 )     (32 )
             
Accumulated other comprehensive income (loss)
    (70 )     88  
             
16. INFORMATION BY OPERATING SEGMENTS
      The following presents selected information by operating segment, viewed on a stand-alone basis. The operating management structure is comprised of four operating segments. The four operating segments are Novelis North America, Novelis Europe, Novelis Asia and Novelis South America. Subsequent to our spin-off from Alcan in 2005, we, as a stand-alone entity, measure the profitability of our operating segments based on Regional Income. Prior periods presented have been recast. Regional Income comprises earnings before interest, income taxes, equity income, minority interests, depreciation and amortization and excludes certain items, such as corporate, restructuring costs, impairment and other rationalization charges. These items are managed by our corporate head office, which focuses on strategy development and oversees corporate governance, policy, legal compliance, human resources, and finance matters. The change in market value of derivatives, with the exception of unrealized gains or losses on certain cash flow hedges, is removed from individual Regional Income and is shown on a separate line. We believe that this presentation provides a portrayal of our underlying regional group results that is in line with our portfolio approach to risk management.
      Prior to the spin-off, profitability of the operating segments was measured based on business group profit (BGP). BGP was similar to Regional Income, except for the following:
        a) BGP excluded restructuring costs related only to major corporate-wide acquisitions or initiatives whereas Regional Income excludes all restructuring costs;
 
        b) BGP included pension costs based on the normal current service cost with all actuarial gains, losses and other adjustments being included in Intersegment and other. Regional Income includes all these pension costs in the applicable operating segment; and

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
        c) BGP excluded certain corporate non-operating costs incurred by an operating segment and included such costs in Intersegment and other. Under the current management structure, these costs remain in the operating segment.
      Transactions between operating segments are conducted on an arm’s-length basis and reflect market prices.
      The accounting principles used to prepare the information by operating segment are the same as those used to prepare our unaudited condensed consolidated and combined financial statements, except the operating segments include our proportionate share of joint ventures (including joint ventures accounted for using the equity method) as they are managed within each operating segment, with the adjustments for equity-accounted joint ventures shown on a separate line in the reconciliation to Income before taxes and other items.
      The operating segments are described below:
Novelis North America
      Headquartered in Cleveland, Ohio, this segment manufactures aluminum sheet and light gauge products and operates 12 plants, including two recycling facilities, in two countries.
Novelis Europe
      Headquartered in Zurich, Switzerland, this segment manufactures aluminum sheet and light gauge products and operates 16 plants, including two recycling facilities, in six countries. This segment ceased operations in Falkirk, Scotland in December 2004 and Flemalle, Belgium in May 2005.
Novelis Asia
      Headquartered in Seoul, South Korea, this segment manufactures aluminum sheet and light gauge products and operates three plants in two countries.
Novelis South America
      Headquartered in Sao Paulo, Brazil, this segment comprises bauxite mining, alumina refining, smelting operations, power generation, carbon products, aluminum sheet and light gauge products and operates five plants in Brazil. The Brazilian bauxite, alumina and smelting assets are included in the group because they are integrated with the Brazilian rolling operations.
Corporate
      This classification is not an operating segment; it includes all costs incurred by our corporate offices in Atlanta, Georgia, and Toronto, Ontario, Canada.
Risk Concentration
      All four operating segments recorded revenues from Rexam Plc (Rexam), a third party, during 2005 and 2004. Revenues from Rexam totaled $282 and $792 for the third quarter and nine months ended September 30, 2005, respectively, (2004: $220 and $654) and represented approximately 14% and 12% of total revenues for the third quarter and nine months ended September 30, 2005, respectively (2004: 11% and 11%).

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Selected Segment Operating Information
      The following table presents intersegment Sales and operating revenues by operating segment:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Sales and operating revenues — intersegment
                               
Novelis North America
    1       —       2       5  
Novelis Europe
    2       13       30       26  
Novelis Asia
    1       3       6       7  
Novelis South America
    7       16       37       43  
Eliminations
    (11 )     (32 )     (75 )     (81 )
                         
      —       —       —       —  
                         
      The following table presents total Sales and operating revenues by operating segment:
                                 
    Third Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Sales and operating revenues
                               
Novelis North America
    836       810       2,500       2,229  
Novelis Europe
    737       766       2,376       2,289  
Novelis Asia
    328       292       1,025       858  
Novelis South America
    157       134       448       369  
Equity-accounted joint ventures adjustments
    (5 )     (2 )     (12 )     (6 )
                         
      2,053       2,000       6,337       5,739  
                         

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
      The following table presents Regional Income by operating segment and reconciles Total Regional Income to Income before income taxes and other items as presented in our statements of income:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Regional Income
                               
Novelis North America
    54       67       141       208  
Novelis Europe
    52       64       161       162  
Novelis Asia
    23       19       80       62  
Novelis South America
    24       34       86       106  
                         
Total Regional Income
    153       184       468       538  
Corporate
    (17 )     (11 )     (11 )     (31 )
Depreciation and amortization
    (56 )     (60 )     (173 )     (178 )
Adjustments for equity-accounted joint ventures
    (11 )     (11 )     (33 )     (32 )
Change in market value of derivatives
    43       15       1       37  
Restructuring, rationalization and impairment recoveries (costs)
    (10 )     (20 )     2       (15 )
Interest expense
    (48 )     (17 )     (142 )     (55 )
                         
Income before income taxes and other items
    54       80       112       264  
                         
      The following table presents Total assets by operating segment and other:
                 
    September 30,   December 31,
As of   2005   2004
         
Novelis North America
    1,388       1,406  
Novelis Europe
    2,129       2,885  
Novelis Asia
    971       954  
Novelis South America
    780       779  
Corporate, eliminations and other adjustments
    (4 )     (70 )
             
      5,264       5,954  
             
17. SUPPLEMENTARY INFORMATION
      The following table summarizes selected financial information not presented within the unaudited condensed consolidated and combined financial statements:
                                 
    Third    
    Quarter   Nine Months
         
Periods ended September 30   2005   2004   2005   2004
                 
Interest paid
    76       18       119       56  
Income taxes paid
    7       51       35       87  

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
18. PREFERRED AND COMMON SHARES
Authorized and Outstanding Share Capital
      We may issue an unlimited number of common and preferred shares from time to time upon approval by our board of directors for such consideration as the board of directors decides appropriate, without the need for further shareholder authorization. The terms of any preferred shares, including dividend rates, conversion and voting rights, if any, redemption prices and similar matters will be determined by the board of directors prior to issuance.
      The table below reflects our share capital structure based on the number of outstanding shares, assuming no exercise of outstanding options.
                         
    Outstanding as of
     
    Authorized   September 30, 2005   December 31, 2004
             
Preferred Shares
    Unlimited       None       None  
Common Shares
    Unlimited       74,005,649       None  
Description of Preferred Shares
      Our board of directors may, from time to time, fix the number of shares in, and determine the designation, rights, privileges, restrictions and conditions attaching to, each series of preferred shares subject to the limitations in our articles of incorporation. Holders of preferred shares are not entitled to receive notice of, or to attend, any meeting of shareholders and are not entitled to vote at any such meeting, except to the extent otherwise provided in our articles of incorporation in respect of preferred shares. Holders of our preferred shares are entitled to receive dividends in such amounts and at such intervals as may be determined by the board of directors.
Description of Common Shares
      Our common shares have no nominal or par value and are subject to the rights, privileges, restrictions and conditions attaching to any of our preferred shares and shares of any other class ranking senior to the common shares we may issue in the future.
      Holders of our common shares are entitled to one vote per common share at all meetings of shareholders, to participate ratably in any dividends which may be declared on our common shares by the board of directors and, in the event of our dissolution, to our remaining property. Our common shares have no pre-emptive, redemption or conversion rights.
      The provisions of the Canada Business Corporations Act require that the amendment of certain rights of holders of any class of shares, including the common shares, must be approved by not less than two-thirds of the votes cast by the holders of such shares. A quorum for any meeting of the holders of common shares is 25% of the common shares then outstanding. Therefore, it is possible for the rights of the holders of common shares to be changed other than by the affirmative vote of the holders of the majority of the outstanding common shares. In circumstances where certain rights of holders of common shares may be amended, however, holders of common shares will have the right, under the Canada Business Corporations Act, to dissent from such amendment and require us to pay them the then fair value of their common shares.
      Shareholders are also entitled to rights and privileges under the shareholder rights plan summarized below.

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Shareholder Rights Plan
      In 2004, our initial board of directors approved a plan whereby each of our common shares carries one right to purchase additional common shares. The rights expire in 2014, subject to re-confirmation at the annual meetings of shareholders in 2008 and 2011. The rights under the plan are not currently exercisable. The rights may become exercisable upon the acquisition by a person or group of affiliated or associated persons (Acquiring Person) of beneficial ownership of 20% or more of our outstanding voting shares or upon the commencement of a takeover bid. Holders of rights, with the exception of an Acquiring Person or bidding party, in such circumstances will be entitled to purchase from us, upon payment of the exercise price (currently $200.00 U.S. per right), such number of common shares as can be purchased for twice the exercise price, based on the market value of our common shares at the time the rights become exercisable.
      The plan has a permitted bid feature which allows a takeover bid to proceed without the rights becoming exercisable, provided that the bid meets specified minimum standards of fairness and disclosure, even if our board of directors does not support the bid. The rights may be redeemed by our board of directors prior to the expiration or re-authorization of the rights agreement, with the prior consent of the holders of rights or common shares, for $0.01 U.S. per right. In addition, under specified conditions, our board of directors may waive the application of the rights.
19. STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION
Stock Options
      On January 5, 2005, our board of directors adopted the Novelis Conversion Plan of 2005 to allow for all Alcan stock options held by employees of Alcan who became our employees following the spin-off to be replaced with options to purchase our common shares. On January 6, 2005, 1,372,663 Alcan options representing options granted under the Alcan executive stock option plan held by our employees who were Alcan employees immediately prior to the spin-off were replaced with options to purchase our common shares under the Novelis Conversion Plan of 2005. The new options cover 2,723,914 common shares at a weighted average exercise price per share of $21.57. All converted options that were vested on the spin-off date continue to be vested. Any that were unvested will vest in four equal installments on the anniversary of the spin-off date in each of the next four years. As of September 30, 2005, 2,707,171 options were outstanding at a weighted average exercise price of $21.60, of which 296,364 options were exercisable at a weighted average price of $20.11.
      As described in Note 3 — Accounting Changes, we retroactively adopted FASB Statement No. 123, Accounting for Stock-Based Compensation. We use the Black-Scholes valuation model to determine the fair value of the options granted. For the third quarter and nine months ended September 30, 2005 stock-based compensation expense was $1 and $2, respectively (2004: $1 and $2) and is included in Selling, general and administrative expenses. The fair value of each option grant is estimated on the date of grant using the following weighted average assumptions:
                 
    2005   2004
         
Dividend yield(%)
    1.56       1.85  
Expected volatility(%)
    30.30       27.87  
Risk-free interest rate(%)
    3.73       4.56  
Expected life (years)
    5.47       6.00  

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
Compensation To Be Settled in Cash
Stock Price Appreciation Unit Plan
      A small number of Alcan employees held Alcan stock price appreciation units (SPAUs) that entitled them to receive cash in an amount equal to the excess of the market value of an Alcan common share on the date of exercise of a SPAU over the market value of an Alcan common share as of its grant date. On January 6, 2005, 211,035 Alcan SPAUs held by our employees who were Alcan employees immediately prior to the spin-off were replaced with our SPAUs, consisting of 418,777 SPAUs at a weighted average exercise price of $22.04. As of September 30, 2005, 14,315 SPAUs were exercisable at a weighted average price of $16.59.
Total Shareholder Returns Performance Plan
      Certain of our employees were entitled to receive cash awards under the Alcan Total Shareholder Returns Performance Plan (TSR Plan), a cash incentive plan which provides performance awards to eligible employees based on the relative performance of Alcan’s common share price and cumulative dividend yield performance compared to other corporations included in the Standard & Poor’s Industrials Index measured over three-year periods commencing on October 1, 2002 and 2003. On January 6, 2005, our employees who were Alcan employees immediately prior to the spin-off and who were eligible to participate in the Alcan TSR Plan ceased to actively participate in and accrue benefits under the TSR Plan. The current three-year performance periods, namely 2002 to 2005 and 2003 to 2006, were truncated as of the date of the spin-off. The accrued award amounts for each participant in the TSR Plan were converted into 452,667 of our restricted share units (RSUs). At the end of each performance period, each holder of RSUs will receive the net proceeds based on our common share price at that time, including declared dividends. As of September 30, 2005, 338,734 RSUs were vested and an additional 119,191 RSUs and related dividends will vest on September 30, 2006. On October 15, 2005, an aggregate of $7 was paid to employees who held RSUs that had vested on September 30, 2005.
Deferred Share Unit Plan For Non-Executive Directors
      On January 5, 2005, we established the Deferred Share Unit Plan for Non-Executive Directors under which non-executive directors receive 50% of their compensation payable in the form of directors’ deferred share units (DDSUs) and the other 50% in the form of either cash, additional DDSUs or a combination of these two (at the individual election of each non-executive director). The number of DDSUs is determined by dividing the quarterly amount payable, as elected, by the average closing prices of a common share on the TSX and NYSE on the last five trading days of each quarter. Additional DDSUs representing the equivalent of dividends declared on common shares are credited to each holder of DDSUs. The DDSUs are redeemable in cash and/or in shares of our common stock following retirement from the board. The redemption amount is calculated by multiplying the accumulated balance of DDSUs by the average closing price of a common share on the TSX and NYSE on the last five trading days prior to the redemption date. During the third quarter ended September 30, 2005, 12,759 DDSUs were granted and none were redeemed. As of September 30, 2005, 26,836 DDSUs were outstanding. On October 1, 2005, 14,816 additional DDSUs were granted for the quarter ended September 30, 2005, resulting in 41,652 DDSUs outstanding as of October 1, 2005.
Novelis Founders Performance Awards
      In March 2005, we established a plan whereby certain key executives will be eligible to receive an award of Performance Share Units (PSUs) if certain Novelis share price improvement targets are

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Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS (unaudited) — (Continued)
(in millions of US$, except where indicated)
achieved within prescribed time periods. There will be three equal tranches of PSUs and each will have a specific share price improvement target. For the first tranche, the target applies for the period March 24, 2005 to March 23, 2008. For the second tranche, the target applies for the period March 24, 2006 to March 23, 2008. For the third tranche, the target applies for the period March 24, 2007 to March 23, 2008. If awarded, a particular tranche will be paid in cash on the later of six months from the date the specific share price target is reached or twelve months after the start of the performance period and will be based on the average of the daily stock closing prices on the NYSE for the last five trading days prior to the payment date. Upon the occurrence of a termination as a result of retirement, death or disability, all PSUs awarded prior to the termination will be paid at the same time as for active participants. For any other termination, all PSUs will be forfeited. The share price improvement targets for the first tranche have been achieved and 180,350 PSUs were awarded on June 20, 2005. During the quarter ended September 30, 2005, 1,650 PSUs were forfeited and 178,700 remained outstanding as of September 30, 2005. Subsequently, 46,850 PSUs were forfeited in March 2006. The liability for this award was accrued over the term of the first tranche, was valued on March 24, 2006, and was paid in April 2006. For the third quarter and nine months ended September 30, 2005, expense for PSUs that can be settled in cash was ($0.1) and $0.1, respectively (2004: nil and nil).
Deferred Share Agreements
      On January 6, 2005, 33,500 Alcan deferred shares held by one of our executives who was an Alcan employee immediately prior to the spin-off were replaced with the right to receive 66,477 Novelis shares. This obligation was paid in cash in lieu of shares on August 3, 2005.
Compensation Cost
      For the third quarter and nine months ended September 30, 2005, stock-based compensation expense for arrangements that are settled in cash was ($1) and $2, respectively (2004: $5 and $5) including the amounts shown above for the Founders Performance Awards and the portion of non-executive directors’ compensation taken as cash. This was included in Selling, general and administrative expenses.
20. SUPPLEMENTAL GUARANTOR INFORMATION
      In connection with the issuance of our Senior Notes, certain of our wholly-owned subsidiaries provided guarantees of the Senior Notes. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) comprise the majority of our businesses in Canada, the U.S., the U.K., Brazil 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 sets forth condensed consolidating statements of income for the three and nine months ended September 30, 2005 and 2004, condensed consolidating balance sheets as of September 30, 2005 and December 31, 2004, and condensed consolidating statements of cash flows for the nine months ended September 30, 2005 and 2004 of the Parent, the Guarantors, and the Non-Guarantors. Investments include investments in 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. General corporate expenses and stock option and other stock-based compensation expenses allocated by Alcan to us prior to the spin-off have also been included in the Parent’s information.

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NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
                                           
    Third Quarter Ended September 30, 2005
     
        Non-    
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
Sales and operating revenues
                                       
 
 — third parties
    71       1,440       542       —       2,053  
 
 — related parties
    262       257       37       (556 )     —  
                               
      333       1,697       579       (556 )     2,053  
                               
Costs and expenses
                                       
Cost of sales and operating expenses, excluding depreciation and amortization noted below
                                       
 
 — third parties
    59       1,265       509       —       1,833  
 
 — related parties
    262       257       37       (556 )     —  
Depreciation and amortization
    3       39       14       —       56  
Selling, general and administrative expenses
    19       43       17       —       79  
Research and development expenses
    6       4       —       —       10  
Other expenses (income) — net
                                       
 
 — third parties
    9       (39 )     3       —       (27 )
 
 — related parties
    (21 )     (2 )     (2 )     25       —  
Interest
                                       
 
 — third parties
    32       13       3       —       48  
 
 — related parties
    1       19       5       (25 )     —  
                               
      370       1,599       586       (556 )     1,999  
                               
Income (loss) before income taxes and other items
    (37 )     98       (7 )     —       54  
Income taxes (benefit)
    3       43       (9 )     —       37  
                               
Income (loss) before other items
    (40 )     55       2       —       17  
Equity in net income of non-consolidated affiliates
    50       2       —       (50 )     2  
Minority interests in earnings of consolidated affiliates
    —       —       (9 )     —       (9 )
                               
Net income (loss)
    10       57       (7 )     (50 )     10  
                               

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NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
                                           
    Nine Months Ended September 30, 2005
     
        Non-    
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
Sales and operating revenues
                                       
 
 — third parties
    180       4,429       1,728       —       6,337  
 
 — related parties
    780       789       107       (1,676 )     —  
                               
      960       5,218       1,835       (1,676 )     6,337  
                               
Costs and expenses
                                       
Cost of sales and operating expenses, excluding depreciation and amortization noted below
                                       
 
 — third parties
    153       3,928       1,596       —       5,677  
 
 — related parties
    780       789       107       (1,676 )     —  
Depreciation and amortization
    8       119       46       —       173  
Selling, general and administrative expenses
    52       142       49       —       243  
Research and development expenses
    19       9       1       —       29  
Other expenses (income) — net
                                       
 
 — third parties
    (20 )     (24 )     6       —       (38 )
 
 — related parties
    (57 )     (7 )     (5 )     68       (1 )
Interest
                                       
 
 — third parties
    91       41       10       —       142  
 
 — related parties
    1       54       13       (68 )     —  
                               
      1,027       5,051       1,823       (1,676 )     6,225  
                               
Income (loss) before income taxes and other items
    (67 )     167       12       —       112  
Income taxes (benefit)
    (10 )     83       (6 )     —       67  
                               
Income (loss) before other items
    (57 )     84       18       —       45  
Equity in net income of non-consolidated affiliates
    89       6       —       (89 )     6  
Minority interests in earnings of consolidated affiliates
    —       —       (19 )     —       (19 )
                               
Net income (loss)
    32       90       (1 )     (89 )     32  
                               

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THE NOVELIS GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
                                           
    Third Quarter Ended September 30, 2004
     
        Non-    
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
Sales and operating revenues
                                       
 
 — third parties
    45       1,383       465       —       1,893  
 
 — related parties
    263       289       95       (540 )     107  
                               
      308       1,672       560       (540 )     2,000  
                               
Costs and expenses
                                       
Cost of sales and operating expenses, excluding depreciation and amortization noted below
                                       
 
 — third parties
    32       1,195       434       —       1,661  
 
 — related parties
    263       288       85       (540 )     96  
Depreciation and amortization
    3       40       17       —       60  
Selling, general and administrative expenses
    (9 )     65       16       —       72  
Research and development expenses
                                       
 
 — third parties
    —       3       —       —       3  
 
 — related parties
    —       10       —       —       10  
Other expenses (income) — net
                                       
 
 — third parties
    1       (1 )     —       —       —  
 
 — related parties
    10       (9 )     (2 )     2       1  
Interest
                                       
 
 — third parties
    —       6       4       —       10  
 
 — related parties
    —       7       2       (2 )     7  
                               
      300       1,604       556       (540 )     1,920  
                               
Income before income taxes and other items
    8       68       4       —       80  
Income taxes (benefit)
    (2 )     45       2       —       45  
                               
Income before other items
    10       23       2       —       35  
Equity in net income of non-consolidated affiliates
    24       1       —       (24 )     1  
Minority interests in earnings of consolidated affiliates
    —       —       (2 )     —       (2 )
                               
Net income
    34       24       —       (24 )     34  
                               

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THE NOVELIS GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME (unaudited)
(in millions of US$)
                                           
    Nine Months Ended September 30, 2004
     
        Non-    
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
Sales and operating revenues
                                       
 
 — third parties
    131       3,839       1,446       —       5,416  
 
 — related parties
    716       941       161       (1,495 )     323  
                               
      847       4,780       1,607       (1,495 )     5,739  
                               
Costs and expenses
                                       
Cost of sales and operating expenses, excluding depreciation and amortization noted below
                                       
 
 — third parties
    92       3,311       1,341       —       4,744  
 
 — related parties
    717       915       151       (1,495 )     288  
Depreciation and amortization
    8       121       49       —       178  
Selling, general and administrative expenses
    32       110       40       —       182  
Research and development expenses
                                       
 
 — third parties
    —       13       —       —       13  
 
 — related parties
    —       28       —       —       28  
Other expenses (income) — net
                                       
 
 — third parties
    4       4       —       —       8  
 
 — related parties
    (37 )     14       —       2       (21 )
Interest
                                       
 
 — third parties
    —       17       14       —       31  
 
 — related parties
    —       24       2       (2 )     24  
                               
      816       4,557       1,597       (1,495 )     5,475  
                               
Income before income taxes and other items
    31       223       10       —       264  
Income taxes (benefit)
    (6 )     113       4       —       111  
                               
Income before other items
    37       110       6       —       153  
Equity in net income of non-consolidated affiliates
    111       4       —       (111 )     4  
Minority interests in earnings of consolidated affiliates
    —       —       (9 )     —       (9 )
                               
Net income (loss)
    148       114       (3 )     (111 )     148  
                               

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NOVELIS INC.
CONDENSED CONSOLIDATING BALANCE SHEET (unaudited)
As of September 30, 2005
(in millions of US$)
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
ASSETS
Current assets
                                       
Cash and cash equivalents
    2       82       40       —       124  
Trade receivables
                                       
 
 — third parties
    34       638       287       —       959  
 
 — related parties
    5       53       6       (64 )     —  
Other receivables
                                       
 
 — third parties
    2       5       1       —       8  
 
 — related parties
    213       231       123       (537 )     30  
Prepaid expenses
    3       42       7       —       52  
Inventories
                                       
 
Aluminum
    43       609       289       —       941  
 
Raw materials
    —       19       1       —       20  
 
Other supplies
    6       79       41       —       126  
                               
      49       707       331       —       1,087  
Other current assets
    52       91       38       —       181  
                               
Total current assets
    360       1,849       833       (601 )     2,441  
Deferred charges and other assets
    35       139       45       —       219  
Long-term receivables from related parties
    1,114       88       —       (1,125 )     77  
Property, plant and equipment, net
    117       1,284       769       —       2,170  
Investments in non-consolidated affiliates and divisional net assets
    700       146       —       (746 )     100  
Intangible assets
    —       27       2       —       29  
Goodwill
    —       26       202       —       228  
                               
Total assets
    2,326       3,559       1,851       (2,472 )     5,264  
                               

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NOVELIS INC.
CONDENSED CONSOLIDATING BALANCE SHEET (unaudited) — (Continued)
As of September 30, 2005
(in millions of US$)
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
                                       
Current portion of long-term debt
    —       2       1       —       3  
Short-term borrowings
                                       
 
 — third parties
    —       2       33       —       35  
 
 — related parties
    40       434       63       (537 )     —  
Accounts payable, trade
                                       
 
 — third parties
    12       454       286       —       752  
 
 — related parties
    9       54       39       (64 )     38  
Accrued expenses
    27       294       97       —       418  
Interest payable
    16       6       —       —       22  
Accrued income taxes
    1       54       3       —       58  
Other current liabilities
    —       5       9       —       14  
                               
Total current liabilities
    105       1,305       531       (601 )     1,340  
Long-term debt, net of current portion
                                       
 
 — third parties
    1,771       690       186       —       2,647  
 
 — related parties
    —       938       187       (1,125 )     —  
Accrued post-retirement benefits
    8       216       83       —       307  
Deferred credits and other liabilities
    39       156       29       —       224  
Deferred income taxes
    (1 )     181       11       —       191  
Commitments and contingencies
                                       
Minority interests in equity of consolidated affiliates
    —       —       151       —       151  
Shareholders’ equity
                                       
Common shares
    —       —       —       —       —  
Additional paid-in capital
    433       —       —       —       433  
Retained earnings
    41       —       —       —       41  
Other comprehensive income (loss)
    (70 )     115       (23 )     (92 )     (70 )
Owner’s net investment
    —       (42 )     696       (654 )     —  
                               
Total shareholders’ equity
    404       73       673       (746 )     404  
                               
Total liabilities and shareholders’ equity
    2,326       3,559       1,851       (2,472 )     5,264  
                               

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THE NOVELIS GROUP
CONDENSED CONSOLIDATING BALANCE SHEET (unaudited)
As of December 31, 2004
(in millions of US$)
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
ASSETS
Current assets
                                       
Cash and cash equivalents
    —       12       19       —       31  
Trade receivables
                                       
 
 — third parties
    1       399       310       —       710  
 
 — related parties
    84       156       7       (160 )     87  
Other receivables
                                       
 
 — third parties
    —       4       1       —       5  
 
 — related parties
    45       849       30       (78 )     846  
Prepaid expenses
    2       10       24       —       36  
Inventories
                                       
 
Aluminum
    44       705       332       —       1,081  
 
Raw materials
    —       18       2       —       20  
 
Other supplies
    6       78       41       —       125  
                               
      50       801       375       —       1,226  
Other current assets
    —       56       21       —       77  
                               
Total current assets
    182       2,287       787       (238 )     3,018  
Deferred charges and other assets
    —       32       39       —       71  
Long-term receivables from related parties
    210       104       —       (210 )     104  
Property, plant and equipment, net
    112       1,405       831       —       2,348  
Investments in non-consolidated affiliates and divisional net assets
    1,242       168       —       (1,288 )     122  
Intangible assets
    —       31       4       —       35  
Goodwill
    —       28       228       —       256  
                               
Total assets
    1,746       4,055       1,889       (1,736 )     5,954  
                               

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THE NOVELIS GROUP
CONDENSED CONSOLIDATING BALANCE SHEET (unaudited) — (Continued)
As of December 31, 2004
(in millions of US$)
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
LIABILITIES AND INVESTED EQUITY
Current liabilities
                                       
Current portion of long-term debt
                                       
 
 — third parties
    —       —       1       —       1  
 
 — related parties
    290       —       —       —       290  
Short-term borrowings
                                       
 
 — third parties
    —       122       107       —       229  
 
 — related parties
    —       231       152       (71 )     312  
Accounts payable, trade
                                       
 
 — third parties
    6       160       330       —       496  
 
 — related parties
    79       429       60       (167 )     401  
Accrued expenses
    16       213       110       —       339  
Interest payable
    —       1       1       —       2  
Accrued income taxes
    —       —       1       —       1  
Other current liabilities
    —       4       17       —       21  
                               
Total current liabilities
    391       1,160       779       (238 )     2,092  
Long-term debt, net of current portion
                                       
 
 — third parties
    —       —       139       —       139  
 
 — related parties
    749       1,751       17       (210 )     2,307  
Accrued post-retirement benefits
    —       199       85       —       284  
Deferred credits and other liabilities
    8       174       6       —       188  
Deferred income taxes
    43       183       23       —       249  
Commitments and contingencies
                                       
Minority interests in equity of consolidated affiliates
    —       —       140       —       140  
Invested equity
                                       
Owner’s net investment
    467       529       671       (1,200 )     467  
Other comprehensive income
    88       59       29       (88 )     88  
                               
Total invested equity
    555       588       700       (1,288 )     555  
                               
Total liabilities and invested equity
    1,746       4,055       1,889       (1,736 )     5,954  
                               

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NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (unaudited)
Nine Months Ended September 30, 2005
(in millions of US$)
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
    440       262       (208 )     (128 )     366  
                               
INVESTING ACTIVITIES
                                       
Capital expenditures
    (12 )     (67 )     (25 )     —       (104 )
Proceeds from sales of fixed assets and investments
    1       —       8       —       9  
Proceeds from (payments on) loans receivable — net
                                       
 
 — third parties
    —       4       15       —       19  
 
 — related parties
    (1,019 )     (112 )     —       1,504       373  
Premiums paid on purchased derivatives
    —       (26 )     —       —       (26 )
Net proceeds from settlement of derivatives
    —       96       —       —       96  
                               
Net cash provided by (used in) investing activities
    (1,030 )     (105 )     (2 )     1,504       367  
                               
FINANCING ACTIVITIES
                                       
Proceeds from issuance of new debt from third parties
    1,875       2,000       379       (1,504 )     2,750  
Principal repayments
    (1,316 )     (1,512 )     (94 )     —       (2,922 )
Short-term borrowings — net
                                       
 
 — third parties
    2       (68 )     (71 )     —       (137 )
 
 — related parties
    —       (304 )     2       —       (302 )
Proceeds from issuing preference shares
    —       —       32       (32 )     —  
Dividends — common shareholders
    (20 )     (158 )     (2 )     160       (20 )
Dividends — minority interest
    —       —       (7 )     —       (7 )
Net receipts from (payments to) Alcan
    100       (21 )     (7 )     —       72  
Debt issuance costs paid
    (49 )     (22 )     —       —       (71 )
                               
Net cash provided by (used in) financing activities
    592       (85 )     232       (1,376 )     (637 )
                               
Net increase in cash and cash equivalents
    2       72       22       —       96  
Effect of exchange rate changes on cash balances held in foreign currencies
    —       (2 )     (1 )     —       (3 )
Cash and cash equivalents — beginning of period
    —       12       19       —       31  
                               
Cash and cash equivalents — end of period
    2       82       40       —       124  
                               

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THE NOVELIS GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (unaudited)
Nine Months Ended September 30, 2004
(in millions of US$)
                                           
            Non-        
    Parent   Guarantors   Guarantors   Eliminations   Consolidated
                     
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
    (13 )     161       144       —       292  
                               
INVESTING ACTIVITIES
                                       
Capital expenditures
    (3 )     (51 )     (41 )     —       (95 )
Proceeds from sales of fixed assets and investments
    —       8       —       —       8  
Proceeds from (payments on) loans receivable — net
    —       507       (6 )     —       501  
                               
Net cash provided by (used in) investing activities
    (3 )     464       (47 )     —       414  
                               
FINANCING ACTIVITIES
                                       
Proceeds from issuance of new debt from third parties
    —       440       3       —       443  
Principal repayments
    —       (845 )     (50 )     —       (895 )
Short-term borrowings — net
                                       
 
 — third parties
    —       (128 )     (5 )     —       (133 )
 
 — related parties
    —       (19 )     23       —       4  
Dividends — common shareholders
    (23 )     29       (6 )     —       —  
Dividends — minority interest
    —       —       (4 )     —       (4 )
Net receipts from (payments to) Alcan
    39       (100 )     (60 )     —       (121 )
                               
Net cash provided by (used in) financing activities
    16       (623 )     (99 )     —       (706 )
                               
Net increase (decrease) in cash and cash equivalents
    —       2       (2 )     —       —  
Cash and cash equivalents — beginning of period
    —       8       19       —       27  
                               
Cash and cash equivalents — end of period
    —       10       17       —       27  
                               

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
      The following information should be read together with our unaudited condensed consolidated and combined financial statements and accompanying notes included elsewhere in this quarterly report for a more complete understanding of our financial condition and results of operations. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below, particularly in “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA.”
OVERVIEW
      We are the world’s leading aluminum rolled products producer based on shipment volume in 2004. As of September 30, 2005, we had operations on four continents, North America, South America, Asia and Europe through 36 operating plants and three research facilities in 11 countries. We are the only company of our size and scope focused solely on aluminum rolled products markets and capable of the local supply of technically sophisticated products in all of these geographic regions.
      The following table sets forth our key financial and operating data for the three and nine months ended September 30, 2005 and September 30, 2004.
                                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
         
    2005   2004   % Change   2005   2004   % Change
                         
    ($ in millions)
Sales and operating revenues
    2,053       2,000       3 %     6,337       5,739       10 %
Regional Income(A)
    153       184       (17 )%     468       538       (13 )%
Net income
    10       34       (71 )%     32       148       (78 )%
Rolled products shipments (kt)(B)
    725       722       —       2,168       2,114       3 %
Total assets
    5,264       6,084       (13 )%     5,264       6,084       (13 )%
Free cash flow(C)
    84       164       (49 )%     305       193       58 %
 
(A) Regional Income comprises earnings before interest, income taxes, equity income, minority interests, depreciation and amortization and excludes certain items, such as corporate, restructuring costs, impairment and other rationalization charges. These items are managed by our corporate head office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. Regional Income is the measure by which management evaluates the profitability and financial performance of our operating segments. A discussion of Regional Income and a reconciliation of Regional Income to Income before income taxes and other items can be found under the caption “Operating Segment Review — Reconciliation.”
 
Financial information for the regional groups includes the results of certain joint ventures on a proportionately consolidated basis, which is consistent with the way the regional groups are managed. Under GAAP, these joint ventures are accounted for under the equity method. Therefore, in order to reconcile Regional Income to Income before income taxes and other items, the Regional Income attributable to these joint ventures is removed from Regional Income for us and the net after-tax results are reported as equity income.
 
The change in the fair market value of derivatives, with the exception of unrealized gains or losses on certain cash flow hedges, has been removed from individual regional results and is shown on a separate line in the reconciliation between total Regional Income and Income before income taxes and other items. This presentation provides a portrayal of our underlying regional group results that is in line with our portfolio approach to risk management.
 
(B) Rolled product shipments include conversion of customer-owned metal (tolling) and are presented in kilotonnes (kt). One kt is equal to 1,000 metric tonnes. One metric tonne is the equivalent of 2,204.6 pounds.

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(C) Free cash flow (which is a non-GAAP financial measure) consists of cash provided by operating activities plus or minus capital expenditures, premiums paid and net proceeds on derivatives and dividends. Dividends include those paid by our less than wholly-owned subsidiaries to their minority shareholders and dividends paid by us to our common shareholders. Management believes that free cash flow is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, free cash flow does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of free cash flow. Our method of calculating free cash flow may not be consistent with that of other companies. We believe the line on our unaudited condensed consolidated and combined statement of cash flows entitled “Net cash provided by operating activities” is the most directly comparable GAAP measure to free cash flow. A reconciliation of Cash provided by operating activities to free cash flow can be found under the caption “Liquidity and Capital Resources — Operating Activities.”
HIGHLIGHTS
      Net Income. We reported third quarter of 2005 net income of $10 million, or diluted earnings per share of $0.14. Net income in the carve-out statements as a part of Alcan for the three months ended September 30, 2004 was $34 million, or diluted earnings per share of $0.47.
      Shipments. Rolled product shipments of 725 kt for the third quarter were comparable to the three months ended September 30, 2004. This is attributable to strong market demand, largely in South America and Asia as well as improvements in the European beverage can market, which were partially offset by weaker foil markets in Europe and lower sales to industrial markets in North America, particularly the automotive market.
      Regional Income. Regional Income decreased by $31 million, or 17%, for the third quarter of 2005 versus the three months ended September 30, 2004, as increasing conversion prices and continued emphasis on cost containment were more than offset by higher energy and related costs such as freight. The adverse impacts from metal prices on can contracts with a price ceiling in North America limited our ability to fully pass-through the impact of the metal price change, but at the same time we experienced favorable metal timing differences and benefited from the favorable impact of higher London Metal Exchange (LME) prices on production from our South American smelters. Therefore, the net metal impact was favorable by approximately $8 million for the third quarter compared to the three months ended September 30, 2004. Unfavorable foreign currency movements, mainly in South America and Europe, accounted for $15 million of the decrease.
      Financing Activity. At the spin-off, we had $2,951 million of long-term debt and capital lease obligations after repaying various third party obligations that were agreed upon with Alcan, which we reduced by $169 million in the first half of 2005. With the continued strength of our cash flows in the third quarter, we were able to further reduce our total debt by $97 million to $2,685 million as of September 30, 2005, for a total year-to-date debt reduction of $266 million or 9%.
      Restatement. Concurrently with the filing of this quarterly report on Form 10-Q for the period ended September 30, 2005, we are filing amendments on Form 10-Q/ A to our quarterly reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005, to reflect the restatement of our unaudited condensed consolidated and combined financial statements for the quarter ended March 31, 2005 and the quarter and six months ended June 30, 2005, to correct errors for:
  •  the misapplication of GAAP related to liability recognition;
 
  •  income tax accounting;
 
  •  other miscellaneous items; and
 
  •  out-of-period adjustments.

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      As discussed throughout under the caption “Results of Operations for the Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004,” our results of operations for the nine months ended September 30, 2005 were impacted by the out-of-period adjustments noted above. These out-of-period adjustments decreased our Net income by $2 million, net, for the nine months ended September 30, 2005.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004
      The following discussion and analysis is based on our unaudited condensed consolidated and combined statements of income, which reflect our operations for the three month periods ended September 30, 2005 and 2004, as prepared in conformity with GAAP.
Net Income
      The comparison of Net income between the third quarter of 2005 and the third quarter of 2004 was heavily influenced by the following items on an after-tax basis:
  •  Unrealized gains on the change in market value of derivatives of $28 million in 2005, compared to unrealized gains in 2004 of $16 million;
 
  •  Foreign currency balance sheet translation losses of $21 million in 2005, mainly in Canada and South America, compared to a loss of $8 million in 2004;
 
  •  Restructuring, rationalization and impairment charges of $12 million in 2005 relating mainly to the closure of the Borgofranco, Italy, recycling plant, compared to charges in 2004 of $13 million, mainly related to the closure of the Falkirk, U.K. plant; and
 
  •  As a stand-alone company, our interest expense was $20 million higher in 2005 than in the 2004 carve-out allocation of interest expense from Alcan.
      Foreign currency balance sheet translation effects, which are primarily non-cash in nature, arise from translating monetary items (principally deferred income taxes, operating working capital and long-term liabilities) denominated in Canadian dollars and Brazilian Real into U.S. dollars for reporting purposes, as well as the deferred tax impact in local currency, on the translation of U.S. debt in Canada and South America.
Sales and Operating Revenues and Shipments
      Sales and operating revenues increased to $2,053 million for the three months ended September 30, 2005 from $2,000 million for the three months ended September 30, 2004, an increase of $53 million, or 3%. The major contributing factor to increases in both sales and operating revenues and cost of sales was a rise in LME aluminum metal prices, which were up approximately 8% compared to the three months ended September 30, 2004. The higher LME prices were partially offset by a decrease of total shipments from 784 kt for the three months ended September 30, 2004 to 771 kt for the three months ended September 30, 2005, which resulted from reduced ingot product shipments in Europe. During the third quarter of 2005, sales and operating revenues were also impacted by the North American can price ceiling. Sales contracts, currently representing approximately 20% of our annual sales, provide for a ceiling over which metal prices cannot contractually be passed through to our customers. This resulted in the inability to pass through the complete increase in metal prices sold under these contracts. Although we attempt to mitigate this risk through the purchase of metal options, this hedging policy was not economically effective given the relatively high and sustained metal prices since the fourth quarter of 2004. See Risks and Uncertainties for a description of our policy on metal options.

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Costs and Expenses
      Cost of sales and operating expenses increased to $1,833 million for the three months ended September 30, 2005 from $1,757 million for the three months ended September 30, 2004, an increase of $76 million or 4%. Cost of sales and operating expenses represented 89% of Sales and operating revenues for the three months ended September 2005 compared to the comparable 88% for the three months ended September 30, 2004. The increase in Cost of sales and operating expenses during the three months ended September 30, 2005 in large part reflected the impact of higher LME prices on metal input costs. Nearly all of our products have a price structure with two components: (i) a pass-through aluminum price based on the LME and local market premiums, plus (ii) a “margin over metal” price based on the conversion cost to produce the rolled product and the competitive market conditions for that product. In some of our contracts there is a timing difference between the metal prices we pay under our purchase contracts and the metal prices we charge our customers due to the fact that our contracts are structured such that we are not able to pass along increases or decreases in metal prices to our customers as we incur such increases or decreases in our metal purchase costs. As a result, changes in metal prices impact our results, since during such periods we temporarily bear the additional cost or benefit of metal price changes. Over a full economic cycle (the period it takes for metal prices to return to a given level) the impact on our results is expected to be close to nil. However, because a full economic cycle may take years to complete, we may experience such additional costs or benefits for certain periods of time. As previously discussed, as of September 30, 2005, approximately 20% of our volume has a metal price ceiling which we attempt to mitigate through the purchase of call options. This strategy was not economically effective in the third quarter.
      Depreciation and amortization of $56 million in the three months ended September 30, 2005 was $4 million less than the three months ended September 30, 2004 mainly due to the closure of two plants in Europe and the $65 million asset impairment charge taken in December 2004 on certain of our fixed assets in Italy, which resulted in a lower depreciation charge in 2005.
      Selling, general and administrative expenses (SG&A) equaled $79 million in the third quarter of 2005, an increase of $7 million or 10% from $72 million in the third quarter of 2004. During third quarter of 2005, we incurred additional corporate office costs as a new stand-alone company.
      Interest expense of $48 million in the third quarter of 2005 was significantly higher than the $17 million in interest allocated from Alcan in the carve-out financial statements for the third quarter of 2004. A comparison of interest expense is not meaningful as the 2004 amount did not reflect the level of debt, nor the associated interest costs that we would have incurred had we operated on a stand-alone basis in 2004.
      Other expenses (income) — net equaled income of $27 million in the third quarter of 2005 compared to an expense of $1 million in the third quarter of 2004. The third quarter of 2005 included unrealized gains on the change in market value of derivatives of $43 million compared to gains of $21 million in the third quarter of 2004. Additionally, the third quarter of 2005 included restructuring and impairment provisions for the closure of the Borgofranco, Italy, recycling facility amounting to $12 million as compared to a $19 million restructuring and impairment charge for the closure of the Falkirk, U.K. mill in the third quarter of 2004.
Income Taxes
      The effective tax rate for the third quarter of 2005 was 69% compared to the Canadian statutory rate of 33%. The effective and statutory tax rates for the third quarters of 2004 were 56% and 33%, respectively. The largest items causing the 2005 rate difference were: (i) deferred tax liabilities of $19 million on the translation of U.S. dollar indebtedness into local currency for which there is no related income in Canada and South America, in addition to translation of deferred taxes payable; and (ii) the release of a valuation allowance in the amount of $10 million on losses carried forward in Novelis Asia.

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OPERATING SEGMENT REVIEW
      Due in part to the regional nature of supply and demand of aluminum rolled products, our activities are organized under four regional operating segments and are managed on the basis of geographical areas. The regional operating segments are Novelis North America, Novelis Europe, Novelis Asia, and Novelis South America.
      Subsequent to our spin-off from Alcan Inc. in 2005, we measure the profitability of our operating segments based on Regional Income. Prior periods presented have been recast.
      Prior to the spin-off, profitability of the operating segments was measured using business group profit (BGP). BGP was similar to Regional Income, except for the following:
  a) BGP excluded restructuring costs related only to major corporate-wide acquisitions or initiatives whereas Regional Income excludes all restructuring costs;
 
  b) BGP included pension costs based on the normal current service cost with all actuarial gains, losses and other adjustments being included in Intersegment and other. Regional Income includes all these pension costs in the applicable operating segment; and
 
  c) BGP excluded certain corporate non-operating costs incurred by an operating segment and included such costs in Intersegment and other. Under the current management structure, these costs remain in the operating segment.
Reconciliation
      The following table presents our Regional Income by operating segment and reconciles our Regional Income to Income before income taxes and other items:
                           
    Third    
    Quarter    
         
    2005   2004   % Change
             
    ($ in millions)
Regional Income
                       
 
Novelis North America
    54       67       (19 )%
 
Novelis Europe
    52       64       (19 )%
 
Novelis Asia
    23       19       21 %
 
Novelis South America
    24       34       (29 )%
                   
Total Regional Income
    153       184       (17 )%
 
Corporate
    (17 )     (11 )     55 %
 
Depreciation and amortization
    (56 )     (60 )     (7 )%
 
Adjustments for equity-accounted joint ventures(A)
    (11 )     (11 )     —  
 
Change in market value of derivatives
    43       15       187 %
 
Restructuring, rationalization and impairment costs
    (10 )     (20 )     (50 )%
 
Interest expense
    (48 )     (17 )     182 %
                   
Income before income taxes and other items
    54       80       (33 )%
                   
 
(A) Our financial information for our segments includes the results of certain joint ventures on a proportionately consolidated basis, which is consistent with the way the business groups are managed. However, under GAAP, these joint ventures are accounted for under the equity method. Therefore, in order to reconcile to Income before income taxes and other items, the Regional Income of these joint ventures is removed from our Regional Income and the net after-tax results are reported as equity income.

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Novelis North America
      The following table sets forth key financial and operating data for Novelis North America for the three months ended September 30, 2005 and September 30, 2004:
                         
    Third    
    Quarter    
         
North America   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    836       810       3 %
Regional Income
    54       67       (19 )%
Rolled product shipments (kt)
    285       296       (4 )%
Regional Income per tonne ($/tonne)
    189       226       (16 )%
Depreciation
    18       18       —  
Capital expenditures
    14       3       367 %
Total assets
    1,388       1,975       (30 )%
      Sales and operating revenues of Novelis North America were $836 million for the three months ended September 30, 2005, an increase of $26 million, or 3%, compared to the three months ended September 30, 2004. This was due mainly to higher LME metal prices that are largely passed through to customers and, to a lesser degree, increases in conversion prices, partially offset by lower shipments. The pass-through of metal price increases to our customers was limited in cases when metal price ceilings were exceeded or when there was a time lag between metal price increases and the corresponding pass-through to our customers.
      Regional Income of Novelis North America was $54 million for the third quarter of 2005, a decrease of $13 million, or 19%, compared to the third quarter of 2004. This reduction was mainly due to cost increases relating to freight, energy costs and operating expenses partially offset by improved conversion selling prices in most product lines and the release of an environmental reserve. Movements in metal prices adversely impacted Regional Income by $4 million, with the negative effects from the can price ceiling being mostly offset by favorable metal timing differences. In 2004, we earned $4 million of interest income on loans to Alcan that were collected as part of the spin-off transaction.
      Shipments of rolled products by Novelis North America declined 4% in the third quarter of 2005 from the comparable 2004 quarter. Increased sales to the light gauge product sector were offset by our decision to exit the third party semi-fabricated commodity foil market in 2005 and lower distributor and automotive sales.
      Total assets of $1,388 as of September 30, 2005 decreased by 30% compared to September 30, 2004. Alcan related party receivables were repaid as a component of the Novelis spin-off. Most of this decrease occurred during the third and fourth quarters of 2004.

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Novelis Europe
      The following table sets forth key financial and operating data for Novelis Europe for the three months ended September 30, 2005 and September 30, 2004:
                         
    Third    
    Quarter    
         
Europe   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    737       766       (4 )%
Regional Income
    52       64       (19 )%
Rolled product shipments (kt)
    252       251       —  
Regional Income per tonne ($/tonne)
    206       255       (19 )%
Depreciation
    23       27       (15 )%
Capital expenditures
    17       19       (11 )%
Total assets
    2,129       2,458       (13 )%
      Sales and operating revenues of Novelis Europe were $737 million for the three month period ended September 30, 2005, a decrease of $29 million, or 4%, from the comparable 2004 period. Lower ingot product shipments from our Borgofranco casting alloys business and higher tolling of metal as a percentage of rolled product shipments were almost offset by higher LME metal prices.
      Regional Income of Novelis Europe was $52 million for the third quarter of 2005, a decrease of $12 million, or 19%, compared to the third quarter of 2004. This decrease was driven by higher energy costs, lower ingot shipments and adverse exchange impacts of $5 million on the translation of intercompany debt and other net liabilities in currencies other than the functional currencies of the businesses, partially offset by positive metal related effects of $5 million.
      Shipments of rolled products by Novelis Europe for the third quarter of 2005 were comparable to the same quarter of 2004. Higher shipments into the can market were offset by reduced shipments in the foil and packaging markets. The growth in shipments to the can market is attributable, in part, to growth in new aluminum lines in Eastern Europe and line conversions from steel to aluminum lines throughout Western Europe, largely driven by the enactment of packaging waste legislation in the European Union. The new legislation supports aluminum can usage versus other beverage packages.
Novelis Asia
      The following table sets forth key financial and operating data for Novelis Asia for the three months ended September 30, 2005 and September 30, 2004:
                         
    Third    
    Quarter    
         
Asia   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    328       292       12 %
Regional Income
    23       19       21 %
Rolled product shipments (kt)
    119       111       7 %
Regional Income per tonne ($/tonne)
    193       171       13 %
Depreciation and amortization
    12       11       9 %
Capital expenditures
    5       9       (44 )%
Total assets
    971       941       3 %
      Sales and operating revenues of Novelis Asia were $328 million for the three month period ended September 30, 2005, an increase of $36 million, or 12%, over the comparable 2004 period. The increase in sales and operating revenues was mainly due to higher LME metal prices being passed through to customers and higher shipment volumes.

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      Regional Income of Novelis Asia was $23 million for the third quarter of 2005, an increase of $4 million, or 21%, compared to the third quarter of 2004. During the third quarter of 2005, improved costs and increased shipments had positive impacts on results. A $3 million adverse impact of foreign currency exchange, resulting from the 12% strengthening of the Korean Won during the third quarter of 2005 compared to 2004, was partially offset by favorable metal related differences of $2 million.
      The 8 kt or 7% shipment increase of rolled products in Novelis Asia in the third quarter of 2005 compared to the third quarter of 2004 was due in a large part to can stock market share advances in China and Southeast Asia. We were able to participate in this growth through continuous improvement in production quality, service performance and productivity improvements in our production facilities, allowing us to increase capacity and output levels without a corresponding increase in our costs.
Novelis South America
      The following table sets forth key financial and operating data for Novelis South America for the three months ended September 30, 2005 and September 30, 2004:
                         
    Third    
    Quarter    
         
South America   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    157       134       17 %
Regional Income
    24       34       (29 )%
Rolled product shipments (kt)
    68       64       6 %
Regional Income per tonne ($/tonne)
    353       531       (34 )%
Depreciation and amortization
    11       12       (8 )%
Capital expenditures
    5       5       —  
Total assets
    780       804       (3 )%
      Sales and operating revenues of Novelis South America were $157 million for the three months ended September 30, 2005, an increase of $23 million, or 17%, over the comparable 2004 period due mainly to higher LME prices and increased shipments.
      Regional Income of Novelis South America was $24 million for the third quarter of 2005, a decrease of $10 million, or 29%, compared to the third quarter of 2004. The decrease in Regional Income resulted mainly from higher energy and smelter production costs. An $8 million unfavorable impact from the strengthening of the Brazilian Real by 26% during the third quarter of 2005 versus the comparable period in 2004 was largely offset by the favorable metal related impacts of $6 million, largely from higher LME prices on production from our smelters.
      Shipments of rolled products in Novelis South America increased in the third quarter of 2005 from the comparable 2004 quarter, due primarily to the growth in the local can market.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004
      The following discussion and analysis is based on our unaudited condensed consolidated and combined statements of income, which reflect our operations for the nine month periods ended September 30, 2005 and 2004, as prepared in conformity with GAAP.
Net Income
      The comparison of Net income between the first nine month periods of 2005 and 2004 was heavily influenced by the following items on an after-tax basis:
  •  Gain on the monetization of cross-currency interest swaps of intercompany debt amounting to $37 million in 2005;

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  •  Gain on the sale of land in Asia of $11 million in 2005 while there was a gain on the sale of land in Europe of $5 million in 2004;
 
  •  Unrealized losses on the change in market value of derivatives of $1 million in 2005, compared to unrealized gains in 2004 of $24 million;
 
  •  Foreign currency balance sheet translation losses of $42 million in 2005, compared to $3 million in 2004;
 
  •  Start-up and spin-related costs amounting to $13 million in 2005;
 
  •  Restructuring, rationalization and impairment charges of $12 million in 2005 relating mainly to the closure of the Borgofranco, Italy, recycling plant, compared to charges in 2004 of $13 million, mainly related to the closure of the Falkirk, U.K. plant;
 
  •  Gain in 2004 of $13 million on a change in our South American pension plan;
 
  •  As a stand-alone company, our interest expense was $57 million higher in 2005 than the 2004 carve-out allocations from Alcan; and
 
  •  Out-of-period adjustments resulting in an increase to net income of $2 million.
      Foreign currency balance sheet translation effects, which are primarily non-cash in nature, arise from translating monetary items (principally deferred income taxes, operating working capital and long-term liabilities) denominated in Canadian dollars and Brazilian Real into U.S. dollars for reporting purposes, as well as the deferred tax impact, in local currency, on the translation of U.S. debt in Canada and South America.
Sales and Operating Revenues and Shipments
      Our sales and operating revenues increased to $6,337 million for the nine months ended September 30, 2005 from $5,739 million for the comparable 2004 period, an increase of $598 million, or 10%. The increase was primarily the result of a 9% increase in LME metal pricing for the first nine months, a 3% increase in total shipments from 2,275 kt to 2,342 kt and, to a lesser degree, the impact of the stronger Euro on translation of Euro sales to U.S. dollars.
Costs and Expenses
      Cost of sales and operating expenses increased to $5,677 million for the nine months ended September 30, 2005 from $5,032 million in the comparable 2004 period, an increase of $645 million, or 13%. The increase in cost of sales and operating expenses during the first nine months in large part reflected the impact of higher LME prices on metal input costs. Cost of sales and operating expenses represented 90% of Sales and operating revenues for the nine months ended September 2005, compared to 88% for the comparable 2004 period. The increase is mainly due to negative metal related impacts, primarily in North America, foreign currency fluctuations in Brazil and Korea, and higher energy and freight costs.
      Depreciation and amortization of $173 million for the first nine months of 2005 was $5 million less than the prior comparable period due to the closure of two plants in Europe and the $65 million asset impairment charge taken in December 2004 on our Italian fixed assets, which results in a lower depreciation charge in 2005.
      SG&A of $243 million in the first nine months of 2005 increased from $182 million in the first nine months of 2004, an increase of $61 million, or 34%. We incurred additional corporate office costs as a stand-alone company and $11 million in start-up costs. The 2004 nine-month period included a $10 million benefit from the change in the South American pension plan.
      Interest expense in the first nine months of 2005 of $142 million was significantly higher than the $55 million in interest allocated from Alcan in the carve-out financial statements for the first nine months

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of 2004. A comparison of interest expense is not meaningful as the 2004 amount did not reflect the level of debt, nor the associated interest costs, that we would have incurred had we operated on a stand-alone basis in 2004.
      Other expenses (income) — net equaled income of $39 million in the first nine months of 2005 compared to income of $13 million in the first nine months of 2004. Influencing factors included a realized gain of $45 million in 2005 on the monetization of certain cross-currency interest rate swaps that we put in place to hedge intercompany loans denominated in currencies other than the U.S. dollar, an $11 million gain in 2005 on the sale of land in Asia, as well as restructuring and impairment provisions for the closure of the Borgofranco, Italy, recycling facility amounting to $12 million. Unrealized gains on the change in market value of derivatives were nil in the 2005 period compared to $36 million in the first nine months of 2004. In addition, the first nine months of 2005 included foreign currency balance sheet translation losses of $9 million and debt issue costs of $11 million on undrawn credit facilities used to back up the Alcan notes we received in January 2005 as part of our separation from Alcan. The first nine months of 2004 included a gain on asset sales of $6 million and a $19 million restructuring charge for the closure of the Falkirk, U.K. mill.
Income Taxes
      The effective tax rate for the first nine months of 2005 was 60% compared to a Canadian statutory rate of 33%. The effective and statutory tax rates for the first nine months in 2004 were 42% and 33%, respectively. The largest items causing the effective rate difference for 2005 are: (i) $9 million pre-tax exchange loss in 2005 on the translation of net monetary liabilities denominated in local currency, for which there was no related income tax recovery arising mainly in Brazil; (ii) a deferred tax provision of $33 million in 2005 on the translation of U.S. dollar indebtedness and other items into local currency for which there is no related income, arising mainly in Canada and South America, as well as the unfavorable impact of translating deferred income taxes payable; (iii) the release of a valuation allowance in the amount of $10 million on losses carried forward in Novelis Asia; and (iv) favorable out-of-period adjustments of $7 million.
OPERATING SEGMENT REVIEW
      The following table presents our Regional Income by operating segment and reconciles our Total Regional Income to Income before income taxes and other items as presented in our statements of income for each of the nine month periods ended September 30, 2005 and 2004:
                           
    Nine Months    
         
    2005   2004   % Change
             
    ($ in millions)
Regional Income
                       
 
Novelis North America
    141       208       (32 )%
 
Novelis Europe
    161       162       (1 )%
 
Novelis Asia
    80       62       29 %
 
Novelis South America
    86       106       (19 )%
                   
Total Regional Income
    468       538       (13 )%
 
Corporate(A)
    (11 )     (31 )     (65 )%
 
Depreciation and amortization
    (173 )     (178 )     (3 )%
 
Adjustments for equity-accounted joint ventures(B)
    (33 )     (32 )     3 %
 
Change in market value of derivatives
    1       37       (97 )%
 
Restructuring, rationalization and impairment recoveries (costs)
    2       (15 )     (113 )%
 
Interest expense
    (142 )     (55 )     158 %
                   
Income before income taxes and other items
    112       264       (58 )%
                   

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(A) Corporate includes the $45 million gain realized on the monetization of cross-currency interest rate swaps in the second quarter of 2005.
 
(B) Our financial information for our segments includes the results of certain joint ventures on a proportionately consolidated basis, which is consistent with the way the business groups are managed. However, under GAAP, these joint ventures are accounted for under the equity method. Therefore, in order to reconcile to income before income taxes and other items, the Regional Income of these joint ventures is removed from our Regional Income and the net after-tax results are reported as equity income.
Novelis North America
      The following table sets forth key financial and operating data for Novelis North America for the nine months ended September 30, 2005 and September 30, 2004:
                         
    Nine Months    
         
North America   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    2,500       2,229       12 %
Regional Income
    141       208       (32 )%
Rolled product shipments (kt)
    852       859       (1 )%
Regional Income per tonne ($/tonne)
    165       242       (32 )%
Depreciation and amortization
    54       52       4 %
Capital expenditures
    37       20       85 %
Total assets
    1,388       1,975       (30 )%
      Sales and operating revenues of Novelis North America were $2,500 million for the nine month period ended September 30, 2005, an increase of $271 million, or 12%, over the comparable 2004 period. This was due to higher LME metal prices that are passed through to customers, as well as increases in conversion prices. The pass-through of metal price increases to our customers was limited in cases when metal price ceilings were exceeded or when there was a time lag between metal price increases and the corresponding pass-through to our customers.
      Regional Income of Novelis North America was $141 million for the first nine months of 2005, a decrease of $67 million, or 32%, compared to the first nine months of 2004. Within this reduction, $37 million related to the adverse impacts from metal price movements, almost all relating to our inability to fully pass through metal price increases on can contracts with a metal price ceiling. Improved conversion selling prices in many product lines and continued improvements in optimizing our product portfolio were largely offset by cost increases relating to freight and energy costs of $25 million. The first nine months of 2004 included approximately $13 million of interest revenue on loans to Alcan that were collected as part of the spin-off transaction.
      Shipments of rolled products by Novelis North America declined 1% for the nine month period ended September 30, 2005 from the comparable 2004 period, due primarily to lower shipments into the industrial products sector, following our decision to exit the semi-fabricated foil market, and lower automotive shipments.
      Total assets of $1,388 million as of September 30, 2005 decreased by 30% compared to September 30, 2004. Alcan related party receivables were repaid as a component of the Novelis spin-off. Most of this decrease occurred during the third and fourth quarters of 2004.

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Novelis Europe
      The following table sets forth key financial and operating data for Novelis Europe for the nine months ended September 30, 2005 and September 30, 2004:
                         
    Nine Months    
         
Europe   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    2,376       2,289       4 %
Regional Income
    161       162       (1 )%
Rolled product shipments (kt)
    768       756       2 %
Regional Income per tonne ($/tonne)
    210       214       (2 )%
Depreciation
    74       79       (6 )%
Capital expenditures
    39       51       (24 )%
Total assets
    2,129       2,458       (13 )%
      Sales and operating revenues of Novelis Europe were $2,376 million for the nine month period ended September 30, 2005, an increase of $87 million, or 4%, over the comparable 2004 period. The increase was due in large part to higher LME metal prices and the translation of Euro sales into U.S. dollars, up 3% due to a stronger Euro in the first nine months of 2005 versus the comparable 2004 period.
      Regional Income of Novelis Europe was $161 million for the first nine months of 2005 compared to $162 million for the 2004 period. Continuing cost discipline in both operating and SG&A costs as well as the benefits from restructuring initiatives, together with higher rolled products shipments and positive currency impacts of approximately $8 million, due to the stronger Euro, were offset by negative product mix, lower margins and higher energy costs.
      Shipments of rolled products by Novelis Europe increased 2% for the nine month period ended September 30, 2005 from the comparable 2004 period, due primarily to higher shipments into the lithographic and can markets. This was partly counterbalanced by reduced shipments in the global foil and packaging markets.
Novelis Asia
      The following table sets forth key financial and operating data for Novelis Asia for the nine months ended September 30, 2005 and September 30, 2004:
                         
    Nine Months    
         
Asia   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    1,025       858       19 %
Regional Income
    80       62       29 %
Rolled product shipments (kt)
    356       334       7 %
Regional Income per tonne ($/tonne)
    225       186       21 %
Depreciation and amortization
    37       34       9 %
Capital expenditures
    15       17       (12 )%
Total assets
    971       941       3 %
      Sales and operating revenues of Novelis Asia were $1,025 million for the nine month period ended September 30, 2005, an increase of $167 million, or 19%, over the comparable 2004 period. The increase in sales and operating revenues was mainly due to higher LME metal prices being passed through to customers as well as higher shipment volumes.
      Regional Income of Novelis Asia was $80 million for the first nine months of 2005, an increase of $18 million, or 29%, compared to the first nine months of 2004. Higher unit selling prices, improved shipping volumes and lower non-aluminum metal related costs more than offset the unfavorable impact of

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metal related differences of $3 million and negative currency effects of $6 million caused by the 14% strengthening of the Korean Won during the first nine months of 2005 compared to 2004.
      Shipments of rolled products by Novelis Asia increased 7% for the nine month period ended September 30, 2005 from the comparable 2004 period, due in a large part to can stock market share advances in China and Southeast Asia. We believe China experienced an improved per capita gross domestic product which resulted in changes in consumer purchasing behavior. We were able to participate in this growth through continuous improvement in production quality, service performance and output levels.
Novelis South America
      The following table sets forth key financial and operating data for Novelis South America for the nine months ended September 30, 2005 and September 30, 2004:
                         
    Nine Months    
         
South America   2005   2004   % Change
             
    ($ in millions)
Sales and operating revenues
    448       369       21 %
Regional Income
    86       106       (19 )%
Rolled product shipments (kt)
    191       165       16 %
Regional Income per tonne ($/tonne)
    450       642       (30 )%
Depreciation and amortization
    33       36       (8 )%
Capital expenditures
    13       12       8 %
Total assets
    780       804       (3 )%
      Sales and operating revenues of Novelis South America were $448 million for the nine months ended September 30, 2005, an increase of $79 million, or 21%, over the comparable 2004 period due mainly to higher shipment volumes and the pass-through of higher LME metal costs.
      Regional Income of Novelis South America was $86 million for the first nine months of 2005, a decrease of $20 million, or 19%, compared to the first nine months of 2004. The decrease resulted from a $25 million negative impact from the strengthening of the Brazilian Real against the U.S. dollar (20%) during the nine month 2005 period. Just under half of the Brazilian Real foreign currency impact resulted from the effects of foreign currency balance sheet translation, which has no immediate cash impact on the business. The operating results of the business remained sound with Regional Income benefiting from higher shipment volumes and conversion prices, as well as positive metal related impact of $14 million due to higher LME prices on production from our smelters. In the 2004 comparison period, we also recognized a $19 million gain from the conversion to a defined contribution pension plan.
      Shipments of rolled products of Novelis South America increased 16% for the nine months ended September 30, 2005 from the comparable 2004 period, due primarily to the growth in the local can market, as well as growth in our industrial products and export businesses.
LIQUIDITY AND CAPITAL RESOURCES
      Our liquidity and available capital resources are impacted by three components: (1) operating activities, (2) investing activities and (3) financing activities.

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Operating Activities
      The following table sets forth information regarding our cash flow for the nine months ended September 30, 2005 and 2004:
                 
    Nine Months
     
Free Cash Flow   2005   2004
         
    ($ in millions)
Net income
    32       148  
Unrealized losses (gains) on derivatives
    —       (36 )
Other non-cash income items(A)
    87       206  
Increase (decrease) in interest payable
    19       (1 )
Increase (decrease) in accrued income taxes
    59       (18 )
Other changes in assets and liabilities(B)
    169       (7 )
             
Net cash provided by operating activities
    366       292  
Dividends
    (27 )     (4 )
Premiums paid and net proceeds on derivatives
    70       —  
Capital expenditures
    (104 )     (95 )
             
Free cash flow(C)
    305       193  
             
Ending cash balance
    124       27  
             
 
(A) Other non-cash income items comprise: Depreciation and amortization, Deferred income taxes, Write-off and amortization of debt issue costs, Provision for uncollectible accounts, Gains from sale of fixed assets, Equity in net income of non-consolidated affiliates, Provision for asset impairments, Stock option compensation and realized losses (gains) on derivatives.
 
(B) Other changes in assets and liabilities comprise: increases or decreases in Accounts receivable (third and related parties), Prepaid expenses, Inventories, Other current assets, Accounts payable trade (third and related parties), Accrued expenses, Deferred charges and other assets, Deferred credits and other liabilities and other items — net.
 
(C) Free cash flow (which is a non-GAAP measure) consists of cash provided by operating activities plus or minus capital expenditures, premiums paid and net proceeds on derivatives and dividends. Dividends include those paid by our less than wholly-owned subsidiaries to their minority shareholders and dividends to our common shareholders. Management believes that free cash flow is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, free cash flow does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of free cash flow. We believe the line on our unaudited condensed consolidated and combined statement of cash flows entitled “Cash provided by operating activities” is the most directly comparable measure to free cash flow. Our method of calculating free cash flow may not be consistent with that of other companies.
      Our cash flow provided by operating activities was $366 million for the nine months ended September 30, 2005 compared to $292 million in the same period in 2004, a 25% increase. Other changes in assets and liabilities improved in the nine months ended September 30, 2005 largely due to improvements in operating working capital, mainly inventory and accounts receivable, despite rising aluminum prices. Other positive factors impacting cash provided by operating activities included the timing of income tax payments and an increase in interest payable. These factors were more than sufficient to offset lower Regional Income as well as higher interest and corporate costs resulting from our position as a stand-alone company in 2005. Interest on Senior Notes is paid only twice per year on August 15th and February 15th.

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      Dividends include $7 million paid mainly to minority shareholders of Novelis Korea and dividends on our common shares declared only since our spin-off as a separate legal entity on January 6, 2005.
Investing Activities
      The following table sets forth information regarding our capital expenditures and depreciation for the nine months ended September 30, 2005 and September 30, 2004:
                         
    Nine Months    
         
Capital Expenditures and Depreciation   2005   2004   % Change
             
    ($ in millions)
Capital expenditures
    104       95       9 %
Depreciation and amortization expense
    173       178       (3 )%
Capital reinvestment rate(A)
    60 %     53 %        
                   
 
(A) Capital expenditures as a percentage of depreciation and amortization expense.
      In the nine months ended September 30, 2005, our capital expenditures were $104 million, representing a capital reinvestment rate of 60%. During the same period in 2004, our capital expenditures were $95 million, representing a reinvestment rate of 53%. The majority of our capital expenditures for the first nine months of 2005 were spent on projects devoted to product quality, technology and productivity enhancements, and small projects to increase capacity. Typically, our capital expenditures are disproportionately higher in the fourth quarter of the year, as plants plan capital equipment installation and upgrades during periods of planned year-end manufacturing and customer downtime.
Financing Activities
      At the spin-off from Alcan, we had $2,951 million of short-term borrowings, long-term debt, and capital lease obligations which we reduced by $169 million in the first half of 2005. With the strength of our cash flows in the third quarter of 2005, we further reduced our debt position by $97 million to $2,685 million as of September 30, 2005, for a total year-to-date debt reduction of $266 million, or 9%.
      All of our related party debt of $2,597 million as of December 31, 2004 was payable to Alcan and was fully repaid in the first quarter of 2005. The related party debt was comprised of a combination of fixed and floating rate debt of $1,392 million and fixed rate promissory notes (Alcan Notes) obtained in December 2004 of $1,205 million. The Alcan Notes as of December 31, 2004 plus additional Alcan Notes of $170 million issued in January 2005 comprise the $1,375 million bridge financing provided by Alcan to us as a result of the spin-off transaction. The Alcan Notes were repaid with the net proceeds of the $1,400 million 10-year Senior Notes issued in February 2005, discussed below.
      In connection with the spin-off transaction described in Note 1 — Background and Basis of Presentation above to our unaudited condensed consolidated and combined financial statements, we entered into senior secured credit facilities providing for aggregate borrowings of up to $1,800 million. These facilities consist of a $1,300 million seven-year senior secured Term Loan B facility, bearing interest at LIBOR plus 1.75% (the effective rate at September 30, 2005 was 5.46%, assuming the selection of 3-month LIBOR as our borrowing choice), all of which was borrowed on January 10, 2005, and a $500 million five-year multi-currency revolving credit facility. The Term Loan B facility consists of an $825 million Term Loan B in the U.S. and a $475 million Term Loan B in Canada. The proceeds of the Term Loan B facility were used in connection with the spin-off transaction to refinance our related party debt with Alcan and to pay related fees and expenses. Debt issuance costs incurred in relation to these facilities have been recorded in Deferred charges and other assets and are being amortized over the life of the related borrowing in Interest using the “effective interest amortization” method.
      The credit agreement relating to the senior secured credit facilities includes customary affirmative and negative covenants, as well as financial covenants relating to our maximum total leverage ratio, minimum interest coverage ratio, and minimum fixed charge coverage ratio.

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      On February 3, 2005, we issued $1,400 million aggregate principal amount of senior unsecured debt securities. The Senior Notes, which were priced at par, bear interest at 7.25% and will mature on February 15, 2015. The net proceeds of the Senior Notes were used to repay the Alcan Notes.
      Under the indenture that governs the Senior Notes, we are subject to certain restrictive covenants applicable to incurring additional debt and providing additional guarantees, paying dividends beyond certain amounts and making other restricted payments, sales and transfer of assets, certain consolidations or mergers and certain transactions with affiliates.
      We have entered into interest rate swaps to fix the interest rate on $310 million of the floating rate Term Loan B debt at an effective weighted average interest rate of 5.5% for periods of up to three years. As of September 30, 2005, our fixed to variable rate debt ratio was 73:27.
      In 2004, Novelis Korea Limited (Novelis Korea), formerly Alcan Taihan Aluminium Limited, entered into a $70 million floating rate long-term loan which was subsequently swapped for a 4.55% fixed rate KRW 73 billion loan and into two long-term floating rate loans of $39 million (KRW 40 billion) and $24 million (KRW 25 billion), which were then swapped for fixed rate loans of 4.80% and 4.45%, respectively. In 2005, interest on another loan for $2 million (KRW 2 billion) ranged from 3.00% to 4.47% (2004: 3.00% to 5.50%). In February 2005, Novelis Korea entered into a $50 million floating rate long-term loan which was subsequently swapped for a 5.30% fixed rate KRW 51 billion loan.
      In connection with the spin-off, we entered into a fifteen-year Swiss Francs (CHF) 62 million capital lease agreement with Alcan for assets in Sierre, Switzerland, which has an implied interest rate of 7.5% and calls for fixed quarterly payments of CHF 1.7 million.
      As of September 30, 2005, we were in compliance with all the financial covenants in our debt agreements, but see the discussion under the caption “Restatement Effects on Debt Agreements” below.
      Financing activities relating to the separation from Alcan are discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financing Activities.”
Restatement Effects on Debt Agreements
      As a result of the restatement of our unaudited condensed consolidated and combined financial statements for the quarters ended March 31, 2005 and June 30, 2005, we delayed the filing of this quarterly report on Form 10-Q for the quarter ended September 30, 2005, our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly report on Form 10-Q for the quarter ending March 31, 2006. These delays have resulted in us taking a number of remedial steps in connection with our outstanding debt.
      The credit agreement governing our senior secured credit facilities requires that we deliver quarterly and audited annual financial statements to the lenders within a specified period of time. As a result of the restatement process, we sought and obtained the consent from our lenders to extend the financial statement filing and reporting deadlines under the credit agreement to June 15, 2006 for our Form 10-Q for the quarter ended September 30, 2005; to September 29, 2006 for our Form 10-K for the year ended December 31, 2005; to October 31, 2006 for our Form 10-Q for the quarter ended March 31, 2006; to November 30, 2006 for our Form 10-Q for the quarter ending June 30, 2006; and to December 29, 2006 for our Form 10-Q for the quarter ending September 30, 2006.
      As of March 31, 2006, we had $855 million outstanding under the credit agreement.
      The indenture governing the Senior Notes and the related registration rights agreement provided that we were required to file a registration statement for registered notes to be exchanged for the notes privately placed to the original investors. The registration statement was declared effective by the SEC on September 27, 2005. Under the indenture and the related registration rights agreement, we were required to complete an exchange offer for the Senior Notes by November 11, 2005. We did not complete the

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exchange offer by that date. As a result, we began to accrue special interest at a rate of 0.25% from November 11, 2005. In addition, the indenture and the registration rights agreement provide that the rate of special interest increases 0.25% during each subsequent 90-day period until the exchange offer closes, with the maximum amount of additional special interest being 1.00% per year. The rate of special interest is currently 0.75%. If we do not complete the exchange offer by August 8, 2006, the rate of special interest will increase to 1.00%. We expect to file a post-effective amendment to the registration statement registering the Senior Notes being issued in the exchange offer and complete the exchange as soon as practicable following the date we are current on our reporting requirements. We will cease paying additional interest once the exchange offer is completed.
      Under the indenture, we are required to deliver to the trustee a copy of our periodic reports filed with the SEC within time periods specified for filing by SEC rules. Our failure to timely file our quarterly report on Form 10-Q for the quarter ended September 30, 2005, our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly report on Form 10-Q for the quarter ended March 31, 2006 gave certain rights to the trustee and the noteholders under the indenture to accelerate maturity of the Senior Notes if they give us notice and we do not cure the breach within 60 days. However, neither the trustee nor the noteholders have given us such a notice to date. As a result, we continue to classify the Senior Notes as long-term.
COMMODITY PRICE RISKS
      Most aluminum rolled products are priced in two components: (i) an aluminum price component based on the LME quotation and a local market premium, plus (ii) a “margin over metal” or conversion charge based on the competitive market price of the product. As a consequence, the aluminum price risk exposure is largely absorbed by the customer. In situations where we offer customers fixed prices for future delivery of our products, we may enter into hedging contracts for the metal inputs in order to protect the profit on the conversion margin of the product. In addition, sales contracts currently representing approximately 20% of our total annual sales provide for a ceiling over which metal prices cannot contractually be passed through to our customers. We attempt to mitigate the risk of this metal price exposure through the purchase of metal hedging contracts or options.
      For the fourth quarter of 2005, we established metal positions such that our maximum ceiling price metal exposure impacting Regional Income in the fourth quarter is expected to be less than $5 million.
      For the first half of 2006, we managed our metal price ceiling exposure through the purchase of call options positioned to cover the exposure at the ceiling price.
      For the second half of 2006, our metal price ceiling exposure (above our internal hedge position) has now been hedged with call option positions at various strike prices. As a result, our maximum potential metal price ceiling exposure impacting Regional Income (above our internal hedge position) is expected to be approximately $45 million beyond the cost of the options, assuming the effectiveness of our used beverage can and smelter hedges in this unusually high and sustained metal price environment.
CONTRACTUAL OBLIGATIONS
      We have future obligations under various contracts relating to debt payments, capital and operating leases, long-term purchase arrangements, pensions and other post-employment benefits, and guarantees. At September 30, 2005, debt payment requirements were: less than 1 year: $1 million; 1-3 years: $138 million; 3-5 years: $56 million; and greater than 5 years: $2,455 million. Included in the debt payments are capital lease principal payments of approximately $2 million each year with $40 million payable in greater than 5 years. Interest payments of the above debt were: less than 1 year: $58 million; 1-3 years: $505 million; 3-5 years: $332 million; and greater than 5 years: $455 million.
      There were no other material changes in our contractual obligations in the third quarter of 2005 from the amounts reported in our most recent Form 10-K, other than the above-mentioned items.

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ACCOUNTING POLICIES
      As previously discussed, we were formed through a spin-off transaction from Alcan in January 2005. In presenting our unaudited condensed consolidated and combined financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions that we are required to make pertain to matters that are inherently uncertain as they relate to future events. Presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” of our Annual Report on Form 10-K for the year ended December 31, 2004 are accounting policies that we believe require subjective and/or complex judgments that could potentially affect reported results. There were no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2005.
RECENTLY ISSUED ACCOUNTING STANDARDS
      In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R), Share-Based Payment, (FASB 123(R)), which is a revision to FASB Statement No. 123, Accounting for Stock-Based Compensation(FASB 123). FASB 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We adopted the fair value based method of accounting for share-based payments effective January 1, 2004 using the retroactive restatement method described in FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Currently, we use the Black-Scholes valuation model to estimate the value of stock options granted to employees. We expect to adopt FASB 123(R) on January 1, 2006, and expect to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date based on the requirements of FASB 123(R) for all share-based payments granted after the effective date. All awards granted to employees prior to the effective date of FASB 123(R) that remain unvested at the adoption date will continue to be expensed over the remaining service period in accordance with FASB 123.
      In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143. FIN 47 clarifies that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity the timing or method of settlement of which is conditional on a future event. FIN 47 also clarifies that a conditional asset retirement obligation should be recognized if its fair value is reasonably estimable and provides guidance on when there is sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 should be applied no later than the end of the fiscal year 2005. The adoption of FIN 47 will not have a material impact on our financial position, results of operations or cash flows.
      In May 2005, the FASB issued FASB Staff Position (FSP) No. EITF 00-19-1, Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation. The FSP was issued to clarify the application of EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, to freestanding financial instruments originally issued as employee compensation that can be settled only by delivering registered shares. This FSP clarifies that a requirement to deliver registered shares, in and of itself, will not result in liability classification for freestanding financial instruments originally issued as employee compensation. This clarification is consistent with the FASB’s intent in issuing FASB 123(R). We will apply the guidance in this FSP in accordance with the effective date and transition provisions of FASB 123(R).
      In June 2005, the FASB ratified the consensus reached in EITF Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements) (EITF 05-5). EITF 05-5 addresses the timing of recognition of salaries, bonuses and additional pension contributions associated with certain early retirement arrangements typical in Germany (as well as similar programs). The EITF also specifies the accounting for government

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subsidies related to these arrangements. EITF 05-5 is effective in fiscal years beginning after December 15, 2005. The adoption of EITF 05-5 is not expected to have a material impact on our financial position, results of operations or cash flows.
      In June 2005, the FASB issued Staff Position (FSP) FAS 143-1, Accounting for Electronic Equipment Waste Obligations. FSP FAS 143-1 addresses the accounting for obligations associated with Directive 2002/96/ EC on Waste Electrical and Electronic Equipment (the Directive) of the European Union (EU) which is subject to transformation into the respective national laws. Under the Directive, the waste management obligation remains with the commercial user until the historical waste equipment (put on the market before August 13, 2005) is replaced. At that time the waste management obligation for the equipment may be transferred to the producer of the replacement equipment depending on the transformation of the Directive into national law by the EU member country. If the commercial user does not replace the equipment, the obligation remains with that user until the equipment is disposed. FSP FAS 143-1 requires the commercial user to apply the provisions of FASB 143, Accounting for Asset Retirement Obligations, to the obligation associated with historical waste equipment. FSP FAS 143-1 will have to be applied in the first reporting period ending after the date the law is adopted by the applicable EU member countries. The adoption of FSP FAS 143-1 did not have a material impact on our financial position, results of operations or cash flows.
      In July 2005, the FASB issued FSP No. APB 18-1, Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence, to provide guidance on how an investor should account for its proportionate share of an investee’s equity adjustments for other comprehensive income (OCI) upon a loss of significant influence. The FSP states that an investor’s proportionate share of an investee’s equity adjustments for OCI should be offset against the carrying value of the investment at the time significant influence is lost. To the extent that the offset results in a carrying value of the investment that is less than zero, an investor should (a) reduce the carrying value of the investment to zero and (b) record the remaining balance in income. The guidance in this FSP is effective for us as of the first reporting period beginning after July 12, 2005. Upon adoption of this FSP, any amount of an investee’s equity adjustments for OCI recorded in the shareholders’ equity of the investor, relating to an investment for which the reporting entity no longer has an ability to exercise significant influence, should be offset against the carrying value of the investment. The amount that is offset should not include any items of accumulated OCI, relating to unrealized gains and losses recorded in accordance with FASB Statement 115 (FASB 115), Accounting for Certain Investments in Debt and Equity Securities, that are recorded by an investor for an investment that is accounted for as an available-for-sale security in accordance with FASB 115 upon adoption of this FSP. If comparative financial statements are provided for earlier periods, those financial statements shall be retrospectively adjusted to reflect application of the provisions of this FSP. There is no impact on our financial position, results of operations, or cash flows from this FSP.
      In September 2005, the FASB ratified Emerging Issues Task Force Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty (EITF 04-13). EITF 04-13 discusses whether inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another should be combined and treated as a nonmonetary exchange and addresses (a) under what circumstances should two or more transactions with the same counterparty (counterparties) be viewed as a single nonmonetary transaction within the scope of APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29) and Financial Accounting Standard No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB 29 (FAS 153) and (b) if nonmonetary transactions within the scope of APB 29 and FAS 153 involve inventory, are there any circumstances under which the transactions should be recognized at fair value. The pronouncement is effective for new inventory arrangements entered into, or modifications or renewals of existing inventory arrangements occurring in interim or annual reporting periods beginning after March 15, 2006. We do not expect that this pronouncement will have a material effect on our financial position, results of operations or cash flows.
      We have determined that all other recently issued accounting pronouncements do not apply to us.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA
      This quarterly report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry in which we operate and beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, strategies and prospects. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. We do not intend, and we disclaim any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.
      All market position data relating to us is based on information from Commodity Research Unit International Limited, or CRU, and management estimates. This information and these estimates reflect various assumptions and are not independently verified. Therefore, they should be considered in this context. This document also contains information concerning our markets and products generally which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which these markets and product categories will develop. These assumptions have been derived from information currently available to us and to the third party industry analysts quoted herein. This information includes, but is not limited to, data concerning production capacity, product shipments and share of production. Actual market results may differ from those predicted. While we do not know what impact any of these differences may have on our business, our results of operations, or our financial condition, the market price of our securities may be materially adversely affected. Factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements include, among other things:
  •  continuing obligations and other relationships resulting from our spin-off from Alcan;
 
  •  the level of our indebtedness and our ability to generate cash;
 
  •  relationships with, and financial and operating conditions of, our customers and suppliers;
 
  •  changes in the prices and availability of aluminum (or premiums associated with such price) or other raw materials we use;
 
  •  fluctuations in the supply of, and prices for, energy in the areas in which we maintain production facilities;
 
  •  our ability to access financing for future capital requirements;
 
  •  changes in the relative values of various currencies;
 
  •  factors affecting our operations, such as litigation, labor relations and negotiations, breakdown of equipment and other events;
 
  •  economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs;
 
  •  competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials;
 
  •  changes in general economic conditions;
 
  •  changes to and volatility of metal prices;
 
  •  our ability to improve and maintain effective internal control over financial reporting and disclosure controls and procedures in the future;
 
  •  our ability to properly account for adjustments made to arrive at our opening balance sheet as of January 6, 2005;

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  •  changes in market value of derivatives;
 
  •  the effectiveness of our hedging activities, including our internal used beverage can (UBC) and smelter hedges;
 
  •  cyclical demand and pricing within the principal markets for our products as well as seasonality in certain of our customers’ industries; and
 
  •  changes in government regulations, particularly those affecting environmental, health or safety compliance.
      The above list of factors is not exhaustive. Some of these and other factors are discussed in more detail under “Risk Factors” in our registration statement on Form S-4, as amended and filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
(in millions of US$, except foreign currency denominations and LME prices)
      Changes in interest rates, foreign exchange rates and the market price of aluminum are among the factors that can impact our cash flows. See risk factors discussed above in “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA”.
Interest Rates
      We are subject to interest rate risk related to the outstanding balance on the variable rate Term Loan B debt we incurred in connection with the spin-off transaction described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financing Activities” in our Annual Report on Form 10-K for the year ended December 31, 2004. We have entered into interest rate swaps to fix the interest rate on $310 of the variable rate Term Loan B debt at an effective weighted average interest rate of 5.5% for periods of up to three years. For every 12.5 basis point change in the interest rates on the $705 of variable rate Term Loan B debt that has not been swapped into fixed interest rates as of September 30, 2005, our annual net income would be impacted by $0.9. As of September 30, 2005, the fair market value of these swaps was $2.5 million.
      We are also subject to interest rate risk related to the outstanding balance on various variable rate bank loans entered into by Novelis Korea Limited. As of September 30, 2005, Novelis Korea Limited had two variable rate bank loans denominated in U.S. currency totaling $50 and $70, respectively. We entered into agreements to swap these floating rate loans for fixed rate loans denominated in Korean won at rates of 5.30% and 4.55%, respectively. As of September 30, 2005, Novelis Korea Limited had three variable rate loans denominated in Korean won totaling $65. Two of the variable rate loans totaling KRW 40 billion and KRW 25 billion were swapped for fixed rate loans of 4.80% and 4.45%, respectively. Interest on the remaining variable rate loan totaling KRW 2 billion ranged from 3.00% to 4.47% in the nine months of 2005.
      During the first quarter we entered into $766 of cross-currency interest rate swaps (Euro 475 million, GBP 62 million, CHF 35 million) with respect to intercompany loans to several European subsidiaries.
      During the second quarter we monetized the initial cross-currency interest rate swaps and replaced them with new cross-currency interest rate swaps (Euro 475 million, GBP 62 million, CHF 35 million). The aggregate fair value of these derivatives as of September 30, 2005 was ($36), and the notional amount of these swaps was $712.

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      During the third quarter we entered into $108 (Euro 89 million) of cross-currency swaps with respect to intercompany loans from several European subsidiaries. The aggregate fair value of these swaps was a liability of $0.5 as of September 30, 2005.
      For accounting policies for interest rate swaps used to hedge interest costs on certain debt, see Note 3 — Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2004.
      We do not currently intend to refinance our fixed rate debt prior to maturity. Transactions in interest rate financial instruments for which there is no underlying interest rate exposure to us are prohibited by the senior secured credit facilities.

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Foreign Currency Derivatives
      The schedule below presents fair value information about our currency derivatives categorized according to the expected maturity dates of our foreign currency derivatives outstanding as of September 30, 2005. Certain amounts have been restated.
                                                           
                    2009   Total    
                    and   Notional   Fair
    2005   2006   2007   2008   Beyond   Amount   Value
                             
    (Notional amounts in millions of US$)
FORWARD CONTRACTS
                                                       
To purchase USD against the foreign currency
CHF Notional Amount
    5       11       2       2       1       21       (1 )
 
Average contract rate
    1.31       1.35       1.29       1.26       1.24                  
To sell USD against the foreign currency
CHF Notional Amount
    21       —       —       —       —       21       —  
 
Average contract rate
    1.29       —       —       —       —                  
KRW Notional Amount
    58       —       —       —       —       58       —  
 
Average contract rate
    1,029.2       —       —       —       —                  
To purchase EUR against the foreign currency
GBP Notional Amount
    13       5       5       —       33       56       —  
 
Average contract rate
    0.69       0.70       0.71       —       0.74                  
USD Notional Amount
    4       —       —       —       —       4       —  
 
Average contract rate
    1.21       —       —       —       —