February 8, 2012 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2011

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

For the transition period from to

Commission file number: 001-32312

Novelis Inc.

(Exact name of registrant as specified in its charter)


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

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

Telephone: (404) 760-4000

(Registrants 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of January 31, 2012, the registrant had 1,000 shares of common stock, no par value, outstanding. All of the registrants outstanding shares were held indirectly by Hindalco Industries Ltd., the registrants parent company.

Novelis Inc.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Statements of Operations for the Three and Nine months ended December 31, 2011 and 2010 (unaudited)	3
	Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2011 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine months ended December 31, 2011 and 2010 (unaudited)	5
	Condensed Consolidated Statement of Shareholders Equity for the Nine months ended December 31, 2011 (unaudited)	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine months ended December 31, 2011 and 2010 (unaudited)	7
	Notes to the Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	59

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 6.	Exhibits	61

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In millions)


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Net sales	$	2,462		$	2,560		$	8,455		$	7,617

Cost of goods sold (exclusive of depreciation and amortization)		2,224			2,232			7,481			6,628
Selling, general and administrative expenses		95			94			281			272
Depreciation and amortization		79			100			249			307
Research and development expenses		10			9			34			27
Interest expense and amortization of debt issuance costs		74			46			228			125
Interest income		(3	)		(4	)		(11	)		(10	)
Loss on early extinguishment of debt					74						74
Restructuring charges, net		1			20			31			35
Equity in net loss of non-consolidated affiliates		4			5			9			11
Other (income) expense, net		(1	)		(14	)		(85	)		(53	)

		2,483			2,562			8,217			7,416

Income (loss) before income taxes		(21	)		(2	)		238			201
Income tax (benefit) provision		(10	)		33			42			104

Net income (loss)		(11	)		(35	)		196			97
Net income attributable to noncontrolling interests		1			11			26			31

Net income (loss) attributable to our common shareholder	$	(12	)	$	(46	)	$	170		$	66

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In millions, except number of shares)


	December 31, 2011			March 31, 2011
ASSETS
Current assets
Cash and cash equivalents	$	436		$	311
Accounts receivable, net
third parties (net of allowances of $4 and $7 as of December 31, 2011 and March 31, 2011, respectively)		1,267			1,480
related parties		35			28
Inventories		1,091			1,338
Prepaid expenses and other current assets		74			50
Fair value of derivative instruments		89			165
Deferred income tax assets		54			39

Total current assets		3,046			3,411
Property, plant and equipment, net		2,646			2,543
Goodwill		611			611
Intangible assets, net		648			707
Investment in and advances to nonconsolidated affiliates		671			743
Fair value of derivative instruments, net of current portion		6			17
Deferred income tax assets		40			52
Other longterm assets
third parties		167			193
related parties		16			19

Total assets	$	7,851		$	8,296


LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Current portion of longterm debt	$	22		$	21
Shortterm borrowings		227			17
Accounts payable
third parties		992			1,378
related parties		52			50
Fair value of derivative instruments		97			82
Accrued expenses and other current liabilities		466			568
Deferred income tax liabilities		30			43

Total current liabilities		1,886			2,159
Longterm debt, net of current portion		4,322			4,065
Deferred income tax liabilities		509			552
Accrued postretirement benefits		507			526
Other longterm liabilities		326			359

Total liabilities		7,550			7,661

Commitments and contingencies
Shareholders equity
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of December 31, 2011 and March 31, 2011
Additional paidin capital		1,660			1,830
Accumulated deficit		(1,272	)		(1,442	)
Accumulated other comprehensive (loss) income		(121	)		57

Total equity of our common shareholder		267			445
Noncontrolling interests		34			190

Total equity		301			635

Total liabilities and equity	$	7,851		$	8,296

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In millions)


	Nine Months Ended December 31,
	2011			2010
OPERATING ACTIVITIES
Net income	$	196		$	97
Adjustments to determine net cash provided by operating activities:
Depreciation and amortization		249			307
Gain on unrealized derivatives and other realized derivatives in investing activities, net		(67	)		(58	)
Loss on extinguishment of debt					74
Deferred income taxes		11			12
Writeoff and amortization of fair value adjustments, net		20			8
Equity in net loss of nonconsolidated affiliates		9			11
(Gain) loss on foreign exchange remeasurement of debt		16
(Gain) loss on sale of assets		1			(11	)
Non-cash impairment charges		14			5
Amortization of debt issuance costs		12			6
Other, net		(9	)		(8	)
Changes in assets and liabilities:
Accounts receivable		152			(37	)
Inventories		193			(220	)
Accounts payable		(426	)		22
Other current assets		(16	)		(7	)
Other current liabilities		(123	)		21
Other noncurrent assets		14			(8	)
Other noncurrent liabilities		(41	)		4

Net cash provided by operating activities		205			218

INVESTING ACTIVITIES
Capital expenditures		(297	)		(132	)
Proceeds from sales of assets		11			28
Proceeds from investment in and advances to nonconsolidated affiliates, net		1			1
(Outflow) proceeds from related party loans receivable, net		(5	)		8
Proceeds from settlement of other undesignated derivative instruments, net		95			81

Net cash (used in) provided by investing activities		(195	)		(14	)

FINANCING ACTIVITIES
Proceeds from issuance of debt		274			3,985
Principal payments		(16	)		(2,486	)
Shortterm borrowings, net		211			49
Return of capital to our common shareholder					(1,700	)
Dividends, noncontrolling interest		(1	)		(18	)
Acquisition of noncontrolling interest in Novelis Korea Ltd.		(343	)
Debt issuance costs		(2	)		(174	)

Net cash provided by (used in) financing activities		123			(344	)

Net (decrease) increase in cash and cash equivalents		133			(140	)
Effect of exchange rate changes on cash balances held in foreign currencies		(8	)
Cash and cash equivalents beginning of period		311			437

Cash and cash equivalents end of period	$	436		$	297

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (unaudited)

(In millions, except number of shares)


	Equity of our Common Shareholder
	Common Stock			Additional Paid-in			Accumulated			Accumulated Other Comprehensive Income (Loss)			Non- controlling			Total
	Shares		Amount	Capital			Deficit			(AOCI)			Interests			Equity
Balance as of March 31, 2011		1,000	$	$	1,830		$	(1,442	)	$	57		$	190		$	635
Net income attributable to our common shareholder								170									170
Net income attributable to noncontrolling interests														26			26
Currency translation adjustment, net of tax provision of $ included in AOCI											(128	)		(9	)		(137	)
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $28 included in AOCI											(52	)		(2	)		(54	)
Change in pension and other benefits, net of tax provision of $1 included in AOCI											5						5
Noncontrolling interest cash dividends														(1	)		(1	)
Acquisition of noncontrolling interest in Novelis Korea Ltd					(170	)					(3	)		(170	)		(343	)

Balance as of December 31, 2011		1,000	$	$	1,660		$	(1,272	)	$	(121	)	$	34		$	301

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(In millions)

		0000000			0000000			0000000			0000000			0000000		0000000
	Three Months Ended December 31, 2011									Three Months Ended December 31, 2010
	Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests			Total			Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests		Total
Net income (loss)	$	(12	)	$	1		$	(11	)	$	(46	)	$	11	$	(35	)
Other comprehensive income (loss):
Currency translation adjustment		(48	)		5			(43	)		(33	)				(33	)
Net change in fair value of effective portion of cash flow hedges		54			(2	)		52			22					22
Net change in pension and other benefits		3						3			(17	)				(17	)

Other comprehensive income (loss) before income tax effect		9			3			12			(28	)				(28	)
Income tax (benefit) provision related to items of other comprehensive income (loss)		18						18			(2	)				(2	)

Other comprehensive income (loss), net of tax		(9	)		3			(6	)		(26	)				(26	)

Comprehensive income (loss)	$	(21	)	$	4		$	(17	)	$	(72	)	$	11	$	(61	)

		0000000			0000000			0000000			0000000			0000000		0000000
	Nine Months Ended December 31, 2011									Nine Months Ended December 31, 2010
	Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests			Total			Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests		Total

Net income	$	170		$	26		$	196		$	66		$	31	$	97
Other comprehensive income (loss):
Currency translation adjustment		(128	)		(9	)		(137	)		5			1		6
Net change in fair value of effective portion of cash flow hedges		(80	)		(2	)		(82	)		32					32
Net change in pension and other benefits		6						6			(17	)				(17	)

Other comprehensive income (loss) before income tax effect		(202	)		(11	)		(213	)		20			1		21
Income tax (benefit) provision related to items of other comprehensive income (loss)		(27	)					(27	)		5					5

Other comprehensive income (loss), net of tax		(175	)		(11	)		(186	)		15			1		16


Comprehensive income (loss)	$	(5	)	$	15		$	10		$	81		$	32	$	113

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Description of Business and Basis of Presentation

Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the worlds leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the beverage and food can, transportation, construction and industrial, and foil products markets. As of December 31, 2011, we had operations in eleven countries on four continents: North America, South America, Asia and Europe, 29 operating plants and seven research and development facilities. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended March 31, 2011 filed with the United States Securities and Exchange Commission (SEC) on May 26, 2011. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.

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

Acquisition of Novelis Common Stock

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

Consolidation Policy

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

Reclassification

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

For the three and nine months ended December 31, 2010, we reclassified $(30) million and $(58) million, respectively, from (Gain) loss on change in fair value of derivative instruments, net to Other (income) expense, net to conform with the current year presentation. This reclassification had no impact on Income (loss) before income taxes, Net income (loss), the condensed consolidated balance sheets or condensed consolidated statements of cash flows. See footnote 12 Other (income) expense, net for details of Other (income) expense, net.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

GAAP and IFRSs. ASU No. 2011-04 develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and International Financial Reporting Standards (IFRSs) and improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with US GAAP and IFRSs. ASU No. 2011-04 will be effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this standard will have no impact on our consolidated financial position, but will require additional disclosure.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders equity and requires all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, in December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. During the deferral period, the existing requirements in US GAAP for the presentation of reclassification adjustments must continue to be followed. These standards are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. We are currently evaluating the potential impact, if any, of the adoption of ASU No. 2011-05 on our consolidated financial statements and disclosures.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which contains changes to the testing of goodwill for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity may also elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative impairment test. ASU No. 2011-08 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, although early adoption is permitted. We plan to early adopt ASU No. 2011-08 for the year ended March 31, 2012 and will elect to perform the qualitative assessment to determine if further analysis is required for any of our reporting units.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The requirements are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. We are currently evaluating the potential impact, if any, of the adoption of ASU No. 2011-11 on our consolidated financial statements and disclosures.

RESTRUCTURING PROGRAMS

Restructuring charges, net for the nine months ended December 31, 2011 is $31 million, which includes $14 million of non-cash asset impairments that were not recorded through the restructuring liability. The following table summarizes our restructuring liability activity by segment (in millions).


	Europe			North America			Asia	South America			Corporate			Total Restructuring Liabilities
Balance as of March 31, 2011	$	37		$	6		$	$	4		$	3		$	50
Provisions, net		13			4										17
Cash payments		(19	)		(5	)			(2	)		(1	)		(27	)
Adjustments other		(3	)												(3	)

Balance as of December 31, 2011	$	28		$	5		$	$	2		$	2		$	37

Europe

Total Restructuring charges, net for the nine months ended December 31, 2011 consisted of $16 million of severance across our European plants, fixed asset impairments related to restructuring actions initiated in prior years and other exit costs. For the nine months ended December 31, 2011, we made $10 million in severance payments, $2 million in payments for environmental remediation, and $7 million in other exit related payments.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

The Company ceased operations associated with the Bridgnorth, UK foil rolling and laminating operations at the end of April 2011. In the nine months ended December 31, 2011, based on negotiations for the sale of the land and buildings on the Bridgnorth site, we recorded an additional $7 million of fixed asset impairment and restructuring charges related to the sale and site closure and made payments of $11 million in severance and other exit payments related to this plan.

In the nine months ended December 31, 2011 we recorded $4 million of severance charges for restructuring programs related to our European general and administrative functions.

As of December 31, 2011, the restructuring liability balance of $28 million was comprised of $20 million of environmental remediation liabilities, $5 million of severance costs and $3 million of other costs.

North America

In the nine months ended December 31, 2011, we recorded an additional $2 million of termination benefits related to the previously announced relocation of our North American headquarters from Cleveland to Atlanta and we made $5 million in payments related to previously announced separation programs. We also recorded $2 million of one-time termination benefits associated with our decision to relocate our primary research and development operations to Kennesaw, Georgia. As of December 31, 2011, the restructuring liability balance of $5 million was comprised of $4 million of severance costs and $1 million of other costs.

South America

Total Restructuring charges, net for the nine months ended December 31, 2011, consisted of $11 million of severance costs, fixed asset impairments related to current period restructuring actions and impairments related to actions initiated in prior years. For the nine months ended December 31, 2011, we made $2 million in severance and other exit related payments.

In the nine months ended December 31, 2011, we announced that we ceased production of converter foil (9 microns thickness or less) for flexible packaging and stopped production of one rolling mill at our Santo André plant in Brazil. The decision was made due to overcapacity in the foil market and increased competition from low-cost countries. Approximately 74 positions were eliminated in the Santo Andre plant related to ceasing these operations. For the nine months ended December 31, 2011, the Company recorded $3 million in asset impairment costs related to the write down of land and building to fair value and $1 million in severance related costs.

As of December 31 2011, the restructuring liability balance of $2 million was comprised of environmental remediation liabilities.

Corporate

As of December 31, 2011, the restructuring liability balance of $2 million was comprised of lease termination costs incurred in the relocation of our corporate headquarters to a new facility in Atlanta and other contract termination fees.

INVENTORIES

Inventories consisted of the following (in millions).


	December 31, 2011		March 31, 2011
Finished goods	$	264	$	293
Work in process		373		529
Raw materials		352		414
Supplies		102		102

Inventories	$	1,091	$	1,338

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

CONSOLIDATION

Purchase of Noncontrolling Interest in Novelis Korea Limited

During the three months ended December 31, 2011, we acquired 31.2% of the shares of Novelis Korea Ltd. for $343 million (KRW 393.9 billion). The transaction resulted in our ownership of 99% of the outstanding shares of Novelis Korea Limited. The acquisition was recorded as a reduction to equity of $343 million.

The following table summarizes the change in ownership interest (in millions).


	Nine months ended December 31, 2011
Net income attributable to our common shareholder	$	170

Decrease in additional paid-in capital for purchase of shares in Novelis Korea Limited		(170	)

Change from net income attributable to our common shareholder and transfers from noncontrolling interest	$

Variable Interest Entities (VIE)

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

We have a joint interest in Logan Aluminum Inc. (Logan) with Tri-Arrows Aluminum Inc. (Tri-Arrows), formerly known as ARCO Aluminum, Inc. (ARCO). Effective August 1, 2011, a consortium of Japanese companies purchased ARCO. The transaction did not impact Novelis interest in Logan. Logan processes metal received from Novelis and Tri-Arrows and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and Tri-Arrows to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other material support to Logan. Logans creditors do not have recourse to our general credit.

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

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

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)


	December 31, 2011		March 31, 2011
Assets
Current assets
Cash and cash equivalents	$	2	$	1
Accounts receivable		23		27
Inventories		44		36

Total current assets		69		64
Property, plant and equipment, net		16		13
Goodwill		12		12
Deferred income taxes		54		52
Other long-term assets		4		3

Total assets	$	155	$	144


Liabilities
Current liabilities
Accounts payable	$	26	$	26
Accrued expenses and other current liabilities		15		11

Total current liabilities		41		37
Accrued postretirement benefits		124		120
Other long-term liabilities		2		2

Total liabilities	$	167	$	159

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

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


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Net sales	$	61		$	52		$	188		$	167
Costs, expenses and provisions for taxes on income		65			57			197			178

Net loss	$	(4	)	$	(5	)	$	(9	)	$	(11	)

Purchase of tolling services from Aluminium Norf GmbH (Norf)	$	61		$	51		$	188		$	166

Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party transactions and balances. For the three and nine months ended December 31, 2011 and 2010, we earned less than $1 million of interest income on a loan due from Norf.

We have guaranteed the indebtedness for a credit facility and loan on behalf of Norf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million Euros. As of December 31, 2011, our guarantee was $1 million.

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


	December 31, 2011		March 31, 2011
Accounts receivable	$	35	$	28
Other long-term assets	$	16	$	19
Accounts payable	$	52	$	50

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

DEBT

Debt consists of the following (in millions).


	December 31, 2011												March 31, 2011
	Interest Rates(A)			Principal			Unamortized Carrying Value Adjustments			Carrying Value			Principal			Unamortized Carrying Value Adjustments			Carrying Value
Third party debt:
Short term borrowings		4.30	%	$	227		$			$	227		$	17		$			$	17
Novelis Inc.
Floating rate Term Loan Facility, due March 2017		3.75	%		1,709			(39	)(B)		1,670			1,496			(38	)(B)		1,458
8.375% Senior Notes, due December 2017		8.375	%		1,100						1,100			1,100						1,100
8.75% Senior Notes, due December 2020		8.75	%		1,400						1,400			1,400			(1	)		1,399
7.25% Senior Notes, due February 2015		7.25	%		74			2			76			74			3			77
Novelis Korea Limited
Facility Loan, due December 2014		4.63	%		26						26
Term Loan, due December 2014		4.96	%		17						17
Novelis Switzerland S.A.
Capital lease obligation, due December 2019 (Swiss francs (CHF) 41 million)		7.50	%		44			(2	)		42			48			(3	)		45
Novelis Brazil
BNDES loans, due December 2018 through April 2021		5.50	%		15			(4	)		11			5			(2	)		3
Other
Other debt, due December 2011 through November 2015		4.27	%		2						2			4						4

Total debt third parties					4,614			(43	)		4,571			4,144			(41	)		4,103
Less: Short term borrowings					(227	)					(227	)		(17	)					(17	)
Current portion of long term debt					(22	)					(22	)		(21	)					(21	)

Long-term debt, net of current portion third parties:				$	4,365		$	(43	)	$	4,322		$	4,106		$	(41	)	$	4,065

(A)

Interest rates are as of December 31, 2011 and exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of the Arrangement, the debt exchange completed in fiscal 2009, the series of refinancing transactions we completed in fiscal 2011, and the additional borrowing in fiscal 2012.

(B)	Debt existing at the time of the Arrangement was recorded at fair value. In connection with a series of refinancing transactions a portion of the historical fair value adjustments were allocated to the Term Loan Facility. The balance also includes the unamortized discount on the Term Loan Facility.

Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized carrying value adjustments and using exchange rates as of December 31, 2011 for our debt denominated in foreign currencies) are as follows (in millions).


As of December 31, 2011	Amount
Short-term borrowings and Current portion of long term debt due within one year	$	249
2 years		24
3 years		68
4 years		99
5 years		25
Thereafter		4,149

Total	$	4,614

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

Senior Notes

On December 17, 2010, we issued $1.1 billion in aggregate principal amount of 8.375% Senior Notes Due 2017 (the 2017 Notes) and $1.4 billion in aggregate principal amount of 8.75% Senior Notes Due 2020 (the 2020 Notes, and together with the 2017 Notes, the Notes).

Also, on December 17, 2010, we commenced a cash tender offer and consent solicitation for our 7.25% Senior Notes due 2015 (the 7.25% Notes) and our 11.5% Senior Notes due 2015 (the 11.5% Notes). The entire $185 million aggregate outstanding principal amount of the 11.5% Notes was tendered and redeemed. Of the $1.1 billion aggregate principal amount of the 7.25% Notes, $74 million was not redeemed and is expected to remain outstanding through maturity in February 2015. The 7.25% Notes that remain outstanding are no longer subject to substantially all of the restrictive covenants and certain events of default originally included in the indenture for the 7.25% Notes.

Senior Secured Credit Facilities

On December 7, 2011, we borrowed an incremental $225 million through our existing term loan credit facility (Term Loan Facility). The senior secured credit facilities consist of (1) a $1.5 billion six-year secured and an incremental $225 million five-year secured term loan credit facility, due March 2017 (collectively referred to as Term Loan Facility) and (2) an $800 million five-year asset based loan facility (ABL Facility) that may be increased by an additional $200 million. The interest rate on the Term Loan Facility are the higher of LIBOR or a floor of 100 basis points, plus a spread ranging from 2.75% to 3.0% depending on the Companys net leverage ratio, as defined in the Term Loan Facility agreement. The senior secured credit facilities contain various affirmative covenants, including covenants with respect to our financial statements, litigation and other reporting requirements, insurance, payment of taxes, employee benefits and (subject to certain limitations) causing new subsidiaries to pledge collateral and guaranty our obligations. The senior secured credit facilities also contain certain negative covenants as specified in the agreements. Substantially all of our assets are pledged as collateral under the senior secured credit facilities.

Korean Bank Loans

In December 2011, Novelis Korea Limited (Novelis Korea) entered into three separate loan agreements with local banks. The Novelis Korea bank loans consist of the following: (1) a $26 million (KRW 30 billion) loan due December 2014, (2) a $17 million (KRW 20 billion) loan due December 2014, and (3) a short term borrowing of $17 million (KRW 20 billion). All three bank loans have variable interest rates with the base rate tied to Koreas 91-day CD rate plus an applicable spread ranging from 1.08% to 1.41%.

On January 18, 2012 Novelis Korea entered into interest rate swaps for the two 3 year loans maturing December 2014. The rates were fixed at 4.485% for the $26 million (KRW 30 billion) loan and 4.815% for the $17 million (KRW 20 billion) loan.

Short-Term Borrowings and Lines of Credit

As of December 31, 2011, our short-term borrowings were $227 million consisting of $208 million of short-term loans under our ABL Facility, $1 million in bank overdrafts, a $17 million (KRW 20 billion) Novelis Korea bank loan, and $1 million in other short term borrowings. As of December 31, 2011, $23 million of the ABL Facility was utilized for letters of credit, and we had $422 million in remaining availability under the ABL Facility. The weighted average interest rate on our total short-term borrowings was 4.30% and 2.43% as of December 31, 2011 and March 31, 2011, respectively.

As of December 31, 2011, we had $48 million of outstanding letters of credit in Korea which are not related to the ABL Facility.

BNDES Loans

In February 2011 through December 2011, Novelis Brazil entered into eleven new loan agreements (the BNDES loans) with Brazils National Bank for Economic and Social Development (BNDES) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). The agreements provided for a commitment of Brazilian Real (R$) borrowings at a fixed rate of 5.5% up to an aggregate of $18 million (R$34 million). As of December 31, 2011, we had $15 million (R$28 million) outstanding under the BNDES loan agreements with maturity dates of December 2018 through April 2021.

Interest Rate Swaps

We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt. Prior to the completion of the December 17, 2010 refinancing transactions, these swaps were designated as cash flow hedges. Upon completion of the refinancing transactions on December 17, 2010, we ceased hedge accounting for these swaps. No interest rate swaps were designated as of December 31, 2011.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

SHARE-BASED COMPENSATION

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

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

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

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

The Novelis Long-Term Incentive Plan FY 2012 FY 2015 (2012 LTIP) was authorized in May 2011. The 2012 LTIP provides for SARs and RSUs.

Under all four plans, SARs vest at the rate of 25% per year, subject to performance criteria and expire seven years from their grant date. Each SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant and the market value on the date of exercise, subject to a maximum payout as defined by the plan. If the SAR is exercised within one year of vesting, the maximum payout is equal to two and a half times the target. If the SAR is exercised after one year of vesting, the maximum payout is equal to three times the target. The RSUs under the 2011 LTIP and 2012 LTIP vest in full three years from the grant date and are not subject to performance criteria. The payout on the RSUs is limited to three times the grant price.

Total compensation expense related to SARs and RSUs under the long term incentive plans for the respective periods is presented in the table below (in millions). These amounts are included in Selling, general and administrative expenses in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2013, 2014 and 2015 have not yet been established, measurement periods for SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year SARs has been recorded for the three and nine months ended December 31, 2011 and 2010.


	Three Months Ended December 31,					Nine Months Ended December 31,
	2011			2010		2011			2010
Novelis Long-Term Incentive Plan 2009	$			$	1	$	2		$	4
Novelis Long-Term Incentive Plan 2010		(1	)		1		(2	)		7
Novelis Long-Term Incentive Plan 2011					2		(3	)		3
Novelis Long-Term Incentive Plan 2012							1

Total compensation (income) expense	$	(1	)	$	4	$	(2	)	$	14

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

The tables below show the RSUs activity under our 2012 LTIP and 2011 LTIP and the SARs activity under our 2012 LTIP, 2011 LTIP, 2010 LTIP and 2009 LTIP.


2012 LTIP - RSUs	Number of RSUs			Grant Date Fair Value (in Indian Rupees)		Aggregate Intrinsic Value (USD in millions)
RSUs outstanding as of March 31, 2011						$
Granted		923,620			188.20		2
Forfeited/Cancelled		(26,380	)		192.38

RSUs outstanding as of December 31, 2011		897,240			188.07	$	2


2012 LTIP - SARs	Number of SARs			Weighted Average Exercise Price (in Indian Rupees)		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value (USD in millions)
SARs outstanding as of March 31, 2011								$
Granted		7,030,830			186.78
Forfeited/Cancelled		(170,345	)		192.38

SARs outstanding as of December 31, 2011		6,860,485			188.09		6.4	$


2011 LTIP - RSUs	Number of RSUs			Grant Date Fair Value (in Indian Rupees)		Aggregate Intrinsic Value (USD in millions)
RSUs outstanding as of March 31, 2011		906,057			148.79	$	4
Forfeited/Cancelled		(40,388	)		147.10

RSUs outstanding as of December 31, 2011		865,669			148.86	$	2


2011 LTIP - SARs	Number of SARs			Weighted Average Exercise Price (in Indian Rupees)		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value (USD in millions)
SARs outstanding as of March 31, 2011		7,117,652			148.79		6.2	$	10
Exercised		(69,222	)		147.10
Forfeited/Cancelled		(277,433	)		147.10

SARs outstanding as of December 31, 2011		6,770,997			148.87		5.4	$


2010 LTIP - SARs	Number of SARs			Weighted Average Exercise Price (in Indian Rupees)		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value (USD in millions)
SARs outstanding as of March 31, 2011		11,052,491			88.46		5.2	$	25
Exercised		(1,527,246	)		87.33
Forfeited/Cancelled		(253,202	)		88.10

SARs outstanding as of December 31, 2011		9,272,043			88.07		4.5	$	5

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)


2009 LTIP - SARs	Number of SARs			Weighted Average Exercise Price (in Indian Rupees)		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value (USD in millions)
SARs outstanding as of March 31, 2011		8,944,822			60.50		4.2	$	14
Exercised		(3,166,188	)		60.50
Forfeited/Cancelled		(186,685	)		60.50

SARs outstanding as of December 31, 2011		5,591,949			60.50		3.5	$	6

The fair value of each SAR is based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The fair value of each SAR under the 2012 LTIP, 2011 LTIP, 2010 LTIP and 2009 LTIP was estimated as of December 31, 2011 using the following assumptions:


	2012 LTIP			2011 LTIP			2010 LTIP			2009 LTIP
Risk-free interest rate		8.52	%		8.47	%		8.32	%		8.19	%
Dividend yield		1.17	%		1.17	%		1.17	%		1.17	%
Volatility		52	%		54	%		57	%		58	%

The fair value of the SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria. Since the performance criteria for fiscal years 2013, 2014 and 2015 have not yet been established and therefore, measurement periods for SARs relating to those periods have not yet commenced, no compensation expense for those tranches has been recorded for the nine months ended December 31, 2011. As of December 31, 2011, 7,083,354 SARs were exercisable.

Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $13 million which is expected to be realized over a weighted average period of 2.19 years. Unrecognized compensation expense is $1 million related to 2011 RSUs and $1.6 million related to 2012 RSUs, which will be recognized over the remaining vesting period of 1.5 years and 2.5 years, respectively.

POSTRETIREMENT BENEFIT PLANS

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

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

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


	Pension Benefit Plans						Other Benefits
	Three Months Ended December 31,						Three Months Ended December 31,
	2011			2010			2011		2010
Service cost	$	10		$	9		$	2	$	2
Interest cost		17			16			3		2
Expected return on assets		(16	)		(14	)
Amortization losses		2			2

Net periodic benefit cost	$	13		$	13		$	5	$	4


	Pension Benefit Plans						Other Benefits
	Nine Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011		2010
Service cost	$	30		$	27		$	6	$	6
Interest cost		51			48			8		6
Expected return on assets		(47	)		(42	)
Amortization losses		8			8			1
Amortization prior service cost		(1	)

Net periodic benefit cost	$	41		$	41		$	15	$	12

The expected long-term rate of return on plan assets is 6.72% in fiscal 2012.

Employer Contributions to Plans

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


	Three Months Ended December 31,				Nine Months Ended December 31,
	2011		2010		2011		2010
Funded pension plans	$	10	$	15	$	31	$	32
Unfunded pension plans		3		3		10		9
Savings and defined contribution pension plans		5		4		15		13

Total contributions	$	18	$	22	$	56	$	54

During the remainder of fiscal 2012, we expect to contribute an additional $23 million to our funded pension plans, $3 million to our unfunded pension plans and $4 million to our savings and defined contribution plans.

We implemented a new retirement pension plan in South Korea at the end of December 2011, in accordance with the Employee Retirement Benefits Security Act of South Korea, which requires companies to convert from retirement insurance plans to retirement pension plans. Included in our expected contributions for the remainder of our fiscal 2012 is $5 million of contributions we plan to make related to interim settlement elections by employees.

We exited our former defined contribution pension plan in Switzerland and have entered into a new defined contribution pension plan. As a result, we expect to contribute approximately $7 million to the plan over the next ten years to the new defined contribution plan.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

CURRENCY (GAINS) LOSSES

The following currency (gains) losses are included in Other (income) expense, net in the accompanying condensed consolidated statements of operations (in millions).


	Three Months Ended December 31,					Nine Months Ended December 31,
	2011			2010		2011			2010
(Gain) loss on remeasurement of monetary assets and liabilities, net	$	(1	)	$	11	$	15		$	10
Loss released from accumulated other comprehensive income		1					1
Gain recognized on balance sheet remeasurement currency exchange contracts, net		(4	)				(11	)

Currency (gains) losses, net	$	(4	)	$	11	$	5		$	10

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


	Nine Months Ended December 31, 2011
Cumulative currency translation adjustment beginning of period	$	114
Effect of changes in exchange rates		(137	)

Cumulative currency translation adjustment end of period	$	(23	)

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

10.

FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS

The fair values of our financial instruments and commodity contracts as of December 31, 2011 and March 31, 2011 are as follows (in millions).

		000000000		000000000		000000000			000000000			000000000
	December 31, 2011
	Assets				Liabilities						Net Fair Value Assets/(Liabilities)
	Current		Noncurrent		Current			Noncurrent(A)			Net Fair Value Assets/(Liabilities)
Derivatives designated as hedging instruments:
Cash flow hedges
Currency exchange contracts	$	9	$	1	$	(12	)	$	(12	)	$	(14	)
Aluminum contracts		12										12
Net Investment hedges
Currency exchange contracts		2										2
Fair value hedges
Aluminum contracts						(11	)					(11	)

Total derivatives designated as hedging instruments		23		1		(23	)		(12	)		(11	)

Derivatives not designated as hedging instruments
Aluminum contracts		37				(47	)		(1	)		(11	)
Currency exchange contracts		29		5		(9	)		(1	)		24
Interest rate swaps						(1	)					(1	)
Electricity swap						(9	)		(27	)		(36	)
Energy contracts						(8	)		(1	)		(9	)

Total derivatives not designated as hedging instruments		66		5		(74	)		(30	)		(33	)

Total derivative fair value	$	89	$	6	$	(97	)	$	(42	)	$	(44	)

		000000000		000000000		000000000			000000000			000000000
	March 31, 2011
	Assets				Liabilities						Net Fair Value Assets/(Liabilities)
	Current		Noncurrent		Current			Noncurrent(A)			Net Fair Value Assets/(Liabilities)
Derivatives designated as hedging instruments:
Cash flow hedges
Currency exchange contracts	$	43	$	10	$	(1	)	$			$	52
Aluminum contracts		44										44
Fair value hedges
Aluminum contracts		9										9

Total derivatives designated as hedging instruments		96		10		(1	)					105

Derivatives not designated as hedging instruments:
Aluminum contracts		54		5		(49	)					10
Currency exchange contracts		15		2		(19	)		(1	)		(3	)
Interest rate swaps						(4	)					(4	)
Electricity swap						(6	)		(23	)		(29	)
Energy contracts						(3	)					(3	)

Total derivatives not designated as hedging instruments		69		7		(81	)		(24	)		(29	)

Total derivative fair value	$	165	$	17	$	(82	)	$	(24	)	$	76

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

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

Aluminum

We use aluminum forward contracts and options to hedge our exposure to changes in the London Metal Exchange (LME) price of aluminum. These exposures arise from firm commitments to sell aluminum in future periods at fixed prices, the forecasted output of our smelter operation in South America and the forecasted metal price lag associated with sales of aluminum in future periods at prices based on the LME.

We identify and designate certain aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. Such exposures do not extend beyond two years in length. We recognized losses on changes in fair value of derivative contracts of $15 million and gains on changes in the fair value of designated hedged items of $15 million in sales revenue for the nine months ended December 31, 2011, of which less than $1 million relates to firm commitment sales that occurred during the period. We recognized losses on changes in fair value of derivative contracts of $4 million and gains on changes in the fair value of designated hedged items of $4 million in sales revenue for the three months ended December 31, 2011, of which $2 million relates to firm commitment sales that occurred during the period. We had 34 kt and 25 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of December 31, 2011 and March 31, 2011, respectively.

We identify and designate certain aluminum forward purchase contracts as cash flow hedges of the metal price risk associated with our future metal purchases that vary based on changes in the price of aluminum. Price risk exposure arises from commitments to sell aluminum in future periods at fixed price. Such exposures do not extend beyond one year in length. We had 0 kt and 183 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of December 31, 2011 and March 31, 2011, respectively.

We identify and designate certain aluminum forward sales contracts as cash flow hedges of the metal price risk associated with our future metal sales that vary based on changes in the price of aluminum. Price risk exposure arises due to fixed costs associated with our smelter operations in South America. Price risk exposure also arises due to the timing lag between the LME based pricing of raw material metal purchases and the LME based pricing of finished product sales. Such exposures do not extend beyond one year in length. We had 52 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of December 31, 2011. No aluminum forward sales contracts were designated as cash flow hedges as of March 31, 2011.

The remaining balance of our aluminum derivative contracts are not designated as accounting hedges. As of December 31, 2011 and March 31, 2011, we had short positions of 100 kt and 146 kt, respectively, of outstanding aluminum contracts not designated as hedges. The average duration of undesignated contracts is less than four months. The following table summarizes our notional amount (in kt).


	December 31, 2011			March 31, 2011
Hedge Type
Purchase (Sale)
Cash flow purchases					183
Cash flow sales		(52	)
Fair value		34			25
Not designated		(100	)		(146	)

Total		(118	)		62

Foreign Currency

We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures. We had $1 billion and $644 million of outstanding foreign currency forwards designated as cash flow hedges as of December 31, 2011 and March 31, 2011, respectively.

We use foreign currency contracts to hedge our foreign currency exposure to net investment in foreign subsidiaries. We had $42 million of outstanding foreign currency forwards designated as net investment hedges as of December 31, 2011. We had no contracts designated as net investment hedges as of March 31, 2011. We recorded gains of $5 million in OCI for the nine months ended December 31, 2011 related to these hedges.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

As of December 31, 2011 and March 31, 2011, we had outstanding currency exchange contracts with a total notional amount of $1.2 billion and $1.6 billion, respectively, which were not designated as hedges.

Energy

We own an interest in an electricity swap which we designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of March 31, 2011, due to significant credit deterioration of our counterparty, we discontinued hedge accounting for this electricity swap. Approximately 1.2 million of notional megawatt hours remain outstanding as of December 31, 2011.

We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. As of December 31, 2011 and March 31, 2011, we had 8.3 million MMBTUs and 6.7 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.

Interest Rate

We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt.

Prior to the completion of the December 17, 2010 refinancing transactions, these swaps were designated as cash flow hedges. Upon completion of the refinancing transaction, our exposure to changes in the benchmark LIBOR interest rate was limited. We ceased hedge accounting for these swaps and released all AOCI into earnings during the year ended March 31, 2011. No interest rate swaps were designated as cash flow hedges as of December 31, 2011 and March 31, 2011.

We had $220 million of outstanding interest rate swaps that were not designated as hedges as of December 31, 2011 and March 31, 2011.

Other

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

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments recognized in Other (income) expense, net (in millions).


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Derivative Instruments Not Designated as Hedges
Aluminum contracts	$	4		$	(12	)	$	85		$	5
Balance sheet remeasurement currency exchange contracts		4						11
Other currency exchange contracts		11			38			23			49
Energy contracts		(15	)		(1	)		(18	)		(5	)
Interest Rate swaps					(5	)					(5	)

Gain recognized		4			20			101			44
Derivative Instruments Designated as Hedges
Cash flow hedges
Aluminum contracts (C)					4			(3	)		4
Currency exchange contracts (A)		3			4			11			4
Balance Sheet remeasurement currency exchange contracts (B)		(1	)					(1	)		6
Electricity swap (B)					2						6
Fair Value hedges
Aluminum contracts		(4	)					(15	)
Fixed priced firm sales commitments (C)		4						15

Gain recognized		2			10			7			14

Total gain (loss) recognized	$	6		$	30		$	108		$	58

Balance sheet remeasurement currency exchange contracts	$	3		$			$	10		$
Realized gains, net		66			21			136			95
Unrealized gains (losses) on other derivative instruments, net		(63	)		9			(38	)		(37	)

Total gain recognized	$	6		$	30		$	108		$	58

(A)	Amount represents excluded forward market premium/discount and hedging relationship ineffectiveness.

(B)	Amount represents ineffectiveness and amounts released to income from AOCI.

(C)	An immaterial amount of ineffectiveness exists in both cash flow and fair value hedging relationships involving aluminum derivatives.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions). Within the next twelve months, we expect to reclassify $23 million of losses from AOCI to earnings.


	Amount of Gain (Loss) Recognized in OCI (Effective Portion)				Amount of Gain (Loss) Recognized in OCI (Effective Portion)					Amount of Gain (Loss) Recognized in Other (Income) Expense, net (Ineffective and Excluded Portion)					Amount of Gain (Loss) Recognized in Other (Income) Expense, net (Ineffective and Excluded Portion)
	Three Months Ended December 31,				Nine Months Ended December 31,					Three Months Ended December 31,					Nine Months Ended December 31,
Derivatives in Cash Flow	2011		2010		2011			2010		2011		2010			2011			2010
Electricity swap (A)	$		$	2	$			$	10	$		$			$			$
Aluminum contracts		7		15		(41	)		15				4			(3	)		4
Currency exchange contracts		4				(50	)		6		3		4			11			4
Interest rate swaps				2					1				(5	)					(5	)

Total	$	11	$	19	$	(91	)	$	32	$	3	$	3		$	8		$	3


	Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Three Months Ended December 31,						Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Nine Months Ended December 31,						Location of Gain (Loss) Reclassified from AOCI into Earnings
Derivatives in Cash Flow	2011			2010			2011			2010
Electricity swap (A)	$	(1	)	$	2		$	(4	)	$	5		Other (income) expense, net
Aluminum contracts		(43	)					(17	)				Cost of goods sold
Aluminum contracts		4						4					Sales
Currency exchange contracts		(1	)					9					Cost of goods sold and SG&A
Currency exchange contracts		(2	)					(2	)				Sales
Currency exchange contracts								(1	)				Other (income) expense, net and Interest Expense
Interest rate swaps					(5	)					(5	)	Other (income) expense, net and Interest Expense

Total	$	(43	)	$	(3	)	$	(11	)	$

(A)	AOCI related to de-designated electricity swap is amortized to income over the remaining term of the hedged item.

11.

FAIR VALUE MEASUREMENTS

We record certain assets and liabilities, primarily derivative instruments, on our condensed consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent that observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:

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

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

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

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

Derivative Contracts

For certain derivative contracts that have fair values based upon trades in liquid markets, such as aluminum forward contracts and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.

The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices for foreign exchange rates. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency forward contracts and certain energy-related forward contracts (e.g., natural gas).

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

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

As of December 31, 2011 and March 31, 2011, we did not have any Level 1 financial instruments.

The following tables present our derivative assets and liabilities which are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2011 and March 31, 2011 (in millions).


	December 31, 2011					March 31, 2011
	Assets		Liabilities			Assets		Liabilities
Level 2 Instruments
Aluminum contracts	$	49	$	(59	)	$	111	$	(48	)

Currency exchange contracts		46		(34	)		70		(21	)

Energy contracts				(9	)				(3	)

Interest rate swaps				(1	)				(4	)


Total Level 2 Instruments		95		(103	)		181		(76	)


Level 3 Instruments
Aluminum contracts							1		(1	)

Electricity swap				(36	)				(29	)


Total Level 3 Instruments				(36	)		1		(30	)


Total	$	95	$	(139	)	$	182	$	(106	)

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

We recognized unrealized losses of $10 million for the nine months ended December 31, 2011 related to Level 3 financial instruments that were still held as of December 31, 2011. These unrealized losses are included in Other (income) expense, net.

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


	Level 3 Electricity Swap
Balance as of March 31, 2011	$	(29	)
Realized/unrealized gain included in earnings(A)		(3	)
Settlements		(4	)

Balance as of December 31, 2011	$	(36	)

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

Financial Instruments Not Recorded at Fair Value

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


	December 31, 2011				March 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Long-term receivables from related parties	$	16	$	16	$	19	$	19
Liabilities
Total debt third parties (excluding short term borrowings)	$	4,344	$	4,515	$	4,086	$	4,370

12.

OTHER (INCOME) EXPENSE, NET

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


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Foreign currency remeasurement (gains) losses, net (A)	$	(4	)	$	11		$	5		$	10
(Gain) loss on change in fair value of other unrealized derivative instruments, net		63			(9	)		38			37
(Gain) on change in fair value of other realized derivative instruments, net		(66	)		(21	)		(136	)		(95	)
(Gain) loss on sale of assets, net		(1	)		2			1			(11	)
(Gain) on litigation settlement in Brazil (B)								(8	)
Loss on Brazilian tax litigation, net (C)		3			2			10			6
Other, net		4			1			5

Other (income) expense, net	$	(1	)	$	(14	)	$	(85	)	$	(53	)

(A)	Includes Gain recognized on balance sheet remeasurement currency exchange contracts, net.

(B)	We received and recognized a gain of $8 million during the nine months ended December 31, 2011 as settlement related to a lawsuit we filed against a Brazilian vendor.

(C)	See footnote 14 Commitments and Contingencies, Brazil Tax Matters for further details.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

13.

INCOME TAXES

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


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Pre-tax income (loss) before equity in net income (loss) of non-consolidated affiliates and noncontrolling interests	$	(17	)	$	3		$	247		$	212

Canadian statutory tax rate		27	%		29	%		27	%		29	%

Provision at the Canadian statutory rate		(5	)		1			67			62
Increase (decrease) for taxes on income (loss) resulting from:
Exchange translation items								(13	)
Exchange remeasurement of deferred income taxes		(1	)		4			(30	)		15
Change in valuation allowances		22			15			61			30
Expense (income) items not subject to tax		(1	)		2			2			4
Dividends not subject to tax		(10	)					(41	)
Enacted tax rate changes								3
Tax rate differences on foreign earnings		4			9			12			(5	)
Uncertain tax positions, net		(20	)		1			(19	)		(2	)
Other net		1			1

Income tax (benefit) provision	$	(10	)	$	33		$	42		$	104

Effective tax rate		59	%		1,100	%		17	%		49	%

As of December 31, 2011, we had a net deferred tax liability of $445 million. This amount includes gross deferred tax assets of approximately $707 million and a valuation allowance of $291 million.

During the quarter ended December 31, 2011, we agreed to certain findings presented by taxing authorities related to tax audits in certain jurisdictions for the years 2004 through 2008. As a result of these findings, we reduced our unrecognized tax benefits, including interest, by approximately $23 million. Of this amount, approximately $6 million will be settled in cash payments to the tax authorities with the remaining amount recorded as a reduction to the income tax provision. Certain examination findings relate to issues which impact multiple tax jurisdictions. Depending on the proposed resolution of these issues in one jurisdiction, we will pursue competent authority relief from the offsetting tax jurisdiction(s), and therefore have recorded an offsetting deferred tax asset of approximately $4 million in one such jurisdiction in the three months ended December 31, 2011.

Tax authorities continue to examine certain other of our tax filings for fiscal years 2004 through 2009. As a result of further settlement of audits, judicial decisions, the filing of amended tax returns or the expiration of statutes of limitations, our reserves for unrecognized tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months by an amount up to approximately $15 million.

14.

COMMITMENTS AND CONTINGENCIES

We are party to, and may in the future be involved in, or subject to, disputes, claims and proceedings that arise in the ordinary course of our business, including some that we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. We have established a liability with respect to contingencies for which a loss is probable and we are able to reasonably estimate such loss. While the ultimate resolution of and liability and costs related to, these matters cannot be determined with reasonable certainty due to the considerable uncertainties that exist, we do not believe that any of these pending actions, individually or in the aggregate, will materially impair our operations or materially affect our financial condition or liquidity.

For certain matters in which the Company is involved, for which a loss is probable or reasonably possible, we are unable to reasonably estimate a loss. For certain other matters where we have not established a liability for which a loss is reasonably possible and the loss is reasonably estimable, we have estimated the aggregated range of loss as $0 to $50 million. This estimated aggregate range of reasonably possible losses is based upon currently available information. The Companys estimates involve significant judgment, and therefore, the estimate will change from time to time and actual losses may differ from the current estimate.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

The following describes certain contingencies relating to our business, including those for which we assumed liability as a result of our spin-off from Alcan Inc.

Legal Proceedings

Coca-Cola Lawsuit. On December 30, 2011, Novelis Corporation entered into a settlement agreement with Coca-Cola Bottlers Sales and Services Company LLC (CCBSS), under which Novelis and CCBSS resolved all claims between them and agreed to dismiss the litigation filed in Georgia State Court on February 15, 2007, relating to certain pricing matters under an aluminum can stock supply agreement between the parties. The settlement ended the litigation without the payment of financial consideration by either party.

Environmental Matters

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

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

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

We have established liabilities based on our reasonable estimates for the currently anticipated costs associated with these environmental matters. We estimate that the undiscounted remaining clean-up costs related to all of our known environmental matters as of December 31, 2011 will be approximately $40 million. Of this amount, $20 million is included in Other long-term liabilities, with the remaining $20 million included in Accrued expenses and other current liabilities in our consolidated balance sheet as of December 31, 2011. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our spin-off from Alcan Inc. As a result of this review, management has determined that the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impact our operations or materially adversely affect our financial condition, results of operations or liquidity.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

Brazil Tax Matters

As a result of legal proceedings with Brazils Ministry of Treasury regarding certain taxes, as of December 31, 2011 and March 31, 2011, we had cash deposits aggregating approximately $32 million and $50 million, respectively, with the Brazilian government. These deposits, which are included in Other long-term assets third parties in our accompanying condensed consolidated balance sheets, will be expended toward these legal proceedings.

In addition, under a federal tax dispute settlement program established by the Brazilian government, we have settled several disputes with Brazils Ministry of Treasury regarding various forms of manufacturing taxes and social security contributions. In most cases we are paying the settlement amounts over a period of 180 months, although in some cases we are paying the settlement amounts over a shorter period. We have established liabilities for these settlements as of December 31, 2011. In total, the liabilities approximate $160 million and $179 million as of December 31, 2011 and March 31, 2011, respectively. As of December 31, 2011, $12 million and $148 million of liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in our accompanying condensed consolidated balance sheets. As of March 31, 2011, $5 million and $174 million of liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively. We have recognized net interest expense of $10 million and $6 million as Loss on Brazilian tax litigation, net which is reported in Other (income) expense, net for the nine months ended December 31, 2011 and 2010, respectively.

On January 4, 2012, we received a favorable response concluding a formal consultation we had initiated with the Brazilian tax authorities in 2005 related to charging Value Added Tax (VAT) on certain specific commercial arrangements. The resolution of this matter resulted in no cash payments or liability and had no impact on our financial statements.

15.

SEGMENT, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION

Segment Information

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

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

Adjustment to Eliminate Proportional Consolidation. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. In order to reconcile the financial information for the segments shown in the tables below to the relevant US GAAP-based measures, we must adjust proportional consolidation of each line item. See Note 4 Consolidation and Note 5 Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

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

Selected Segment Financial Information

		000000		000000		000000		000000		000000		000000
Total Assets	North America		Europe		Asia		South America		Other and Eliminations		Total

December 31, 2011	$	2,539	$	2,693	$	1,037	$	1,496	$	86	$	7,851
March 31, 2011	$	2,612	$	3,170	$	1,015	$	1,481	$	18	$	8,296

		000000		000000		000000		000000		000000			000000
Selected Operating Results Three Months Ended December 31, 2011	North America		Europe		Asia		South America		Other and Eliminations			Total

Net sales	$	912	$	804	$	398	$	321	$	27		$	2,462
Depreciation and amortization		34		30		13		15		(13	)		79
Capital expenditures		29		20		24		50					123

		000000		000000		000000		000000		000000			000000
Selected Operating Results Three Months Ended December 31, 2010	North America		Europe		Asia		South America		Other and Eliminations			Total

Net sales	$	901	$	835	$	470	$	321	$	33		$	2,560
Depreciation and amortization		41		36		14		20		(11	)		100
Capital expenditures		15		25		9		25		(13	)		61

		000000		000000		000000		000000		000000			000000
Selected Operating Results Nine months Ended December 31, 2011	North America		Europe		Asia		South America		Other and Eliminations			Total

Net sales	$	3,052	$	2,916	$	1,432	$	942	$	113		$	8,455
Depreciation and amortization		102		97		41		42		(33	)		249
Capital expenditures		75		55		62		107		(2	)		297

		000000		000000		000000		000000		000000			000000
Selected Operating Results Nine Months Ended December 31, 2010	North America		Europe		Asia		South America		Other and Eliminations			Total

Net sales	$	2,743	$	2,551	$	1,340	$	876	$	107		$	7,617
Depreciation and amortization		124		105		43		66		(31	)		307
Capital expenditures		32		43		22		46		(11	)		132

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

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


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
North America	$	94		$	97		$	324		$	298
Europe		24			47			213			217
Asia		43			59			149			162
South America		52			35			134			115
Depreciation and amortization		(79	)		(100	)		(249	)		(307	)
Interest expense and amortization of debt issuance costs		(74	)		(46	)		(228	)		(125	)
Interest income		3			4			11			10
Adjustment to eliminate proportional consolidation		(9	)		(11	)		(34	)		(33	)
Unrealized gains (losses) on change in fair value of derivative instruments, net		(63	)		9			(38	)		(37	)
Realized gains (losses) on derivative instruments not included in segment income		(3	)		4			(1	)		4
Loss on early extinguishment of debt					(74	)					(74	)
Restructuring charges, net		(1	)		(20	)		(31	)		(35	)
Other costs, net		(8	)		(6	)		(12	)		6

Income (loss) before income taxes		(21	)		(2	)		238			201
Income tax (benefit) provision		(10	)		33			42			104

Net income (loss)		(11	)		(35	)		196			97
Net income attributable to noncontrolling interests		1			11			26			31

Net income (loss) attributable to our common shareholder	$	(12	)	$	(46	)	$	170		$	66

Information about Major Customers and Primary Supplier

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


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Rexam		15	%		16	%		13	%		16	%
Affiliates of Ball Corporation		13	%		8	%		10	%		8	%
Anheuser-Busch		11	%		13	%		10	%		13	%

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


	Three Months Ended December 31,						Nine Months Ended December 31,
	2011			2010			2011			2010
Purchases from Rio Tinto Alcan as a percentage of total		29	%		33	%		29	%		33	%

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

16.

SUPPLEMENTAL INFORMATION

Accumulated other comprehensive (loss) income, net of tax, consists of the following (in millions).


	December 31, 2011			March 31, 2011
Currency translation adjustment	$	(27	)	$	102
Fair value of effective portion of cash flow hedges		(32	)		22
Pension and other benefits		(62	)		(67	)

Accumulated other comprehensive (loss) income	$	(121	)	$	57

Supplemental cash flow information (in millions):


	Nine Months Ended December 31,
	2011		2010
Interest paid	$	266	$	112
Income taxes paid	$	74	$	83

As of December 31, 2011, we recorded $88 million of outstanding accounts payable and accrued liabilities related to capital expenditures in which the cash outflows will occur subsequent to December 31, 2011.

17.

SUPPLEMENTAL GUARANTOR INFORMATION

In connection with the issuance of our 7.25% Senior Notes, 2017 Notes and 2020 Notes, certain of our wholly-owned subsidiaries, which are 100% owned within the meaning of Rule 3-10(h)(1) of Regulation S-X, provided guarantees. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S., the U.K., Brazil, Portugal, Luxembourg and Switzerland, as well as certain businesses in Germany and France. 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 Notes.

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

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)


	Three Months Ended December 31, 2011
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	240		$	1,991		$	691		$	(460	)	$	2,462

Cost of goods sold (exclusive of depreciation and amortization)		241			1,808			635			(460	)		2,224
Selling, general and administrative expenses		5			66			24						95
Depreciation and amortization		14			59			21			(15	)		79
Research and development expenses		5			4			1						10
Interest expense and amortization of debt issuance costs		77			12			1			(16	)		74
Interest income		(15	)		(4	)					16			(3	)
Restructuring charges, net		1												1
Equity in net (income) loss of non-consolidated affiliates		(50	)		3			1			50			4
Other (income) expense, net		(22	)					6			15			(1	)

		256			1,948			689			(410	)		2,483

Income (loss) before income taxes		(16	)		43			2			(50	)		(21	)
Income tax provision (benefit)		(4	)		(14	)		8						(10	)

Net income (loss)		(12	)		57			(6	)		(50	)		(11	)
Net income attributable to noncontrolling interests								1						1

Net income (loss) attributable to our common shareholder	$	(12	)	$	57		$	(7	)	$	(50	)	$	(12	)


	Three Months Ended December 31, 2010
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	254		$	2,043		$	751		$	(488	)	$	2,560

Cost of goods sold (exclusive of depreciation and amortization)		246			1,794			680			(488	)		2,232
Selling, general and administrative expenses		2			75			17						94
Depreciation and amortization		1			76			23						100
Research and development expenses		6			2			1						9
Interest expense and amortization of debt issuance costs		38			22			1			(15	)		46
Interest income		(15	)		(4	)					15			(4	)
Loss on the early debt extinguishment		33			41									74
Restructuring charges, net					19			1						20
Equity in net (income) loss of non-consolidated affiliates		(22	)		5						22			5
Other (income) expense, net		(11	)		5			(8	)					(14	)

		278			2,035			715			(466	)		2,562

Income (loss) before taxes		(24	)		8			36			(22	)		(2	)
Income tax provision		22			4			7						33

Net income (loss)		(46	)		4			29			(22	)		(35	)
Net income attributable to noncontrolling interests								11						11

Net income (loss) attributable to our common shareholder	$	(46	)	$	4		$	18		$	(22	)	$	(46	)

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In millions)


	Nine Months Ended December 31, 2011
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	855		$	6,832		$	2,572		$	(1,804	)	$	8,455

Cost of goods sold (exclusive of depreciation and amortization)		833			6,081			2,371			(1,804	)		7,481
Selling, general and administrative expenses		8			215			58						281
Depreciation and amortization		14			185			65			(15	)		249
Research and development expenses		22			10			2						34
Interest expense and amortization of debt issuance costs		231			41			3			(47	)		228
Interest income		(45	)		(12	)		(1	)		47			(11	)
Restructuring charges, net		3			25			3						31
Equity in net (income) loss of non-consolidated affiliates		(350	)		8			1			350			9
Other (income) expense, net		(29	)		(57	)		(14	)		15			(85	)

		687			6,496			2,488			(1,454	)		8,217

Income (loss) before income taxes		168			336			84			(350	)		238
Income tax provision (benefit)		(2	)		14			30						42

Net income (loss)		170			322			54			(350	)		196
Net income attributable to noncontrolling interests								26						26

Net income (loss) attributable to our common shareholder	$	170		$	322		$	28		$	(350	)	$	170


	Nine Months Ended December 31, 2010
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	775		$	6,142		$	2,198		$	(1,498	)	$	7,617

Cost of goods sold (exclusive of depreciation and amortization)		738			5,407			1,981			(1,498	)		6,628
Selling, general and administrative expenses		22			204			46						272
Depreciation and amortization		4			233			70						307
Research and development expenses		19			7			1						27
Interest expense and amortization of debt issuance costs		96			70			3			(44	)		125
Interest income		(44	)		(9	)		(1	)		44			(10	)
Loss on early debt extinguishment		33			41									74
Restructuring charges, net		5			28			2						35
Equity in net (income) loss of non-consolidated affiliates		(166	)		11						166			11
Other (income) expense, net		(18	)		(28	)		(7	)					(53	)

		689			5,964			2,095			(1,332	)		7,416

Income (loss) before income taxes		86			178			103			(166	)		201
Income tax (benefit) provision		20			65			19						104

Net income (loss)		66			113			84			(166	)		97
Net income attributable to noncontrolling interests								31						31

Net income (loss) attributable to our common shareholder	$	66		$	113		$	53		$	(166	)	$	66

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)


	As of December 31, 2011
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	1		$	244		$	191		$			$	436
Accounts receivable, net of allowances
third parties		49			803			416			(1	)		1,267
related parties		641			347			40			(993	)		35
Inventories		61			749			281						1,091
Prepaid expenses and other current assets		5			49			20						74
Fair value of derivative instruments		13			70			18			(12	)		89
Deferred income tax assets					50			4						54


Total current assets		770			2,312			970			(1,006	)		3,046
Property, plant and equipment, net		165			1,944			537						2,646
Goodwill		(2	)		601			12						611
Intangible assets, net		3			643			2						648
Investments in and advances to non-consolidated affiliates		1,155			671						(1,155	)		671
Fair value of derivative instruments, net of current portion		3			2			1						6
Deferred income tax assets					26			14						40
Other long-term assets		2,975			162			45			(2,999	)		183


Total assets	$	5,069		$	6,361		$	1,581		$	(5,160	)	$	7,851


LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Current portion of long-term debt	$	17		$	5		$			$			$	22
Short-term borrowings
third parties		208						19						227
related parties		15			317			27			(359	)
Accounts payable
third parties		46			610			336						992
related parties		73			410			201			(632	)		52
Fair value of derivative instruments		2			77			30			(12	)		97
Accrued expenses and other current liabilities		66			299			104			(3	)		466
Deferred income tax liabilities					30									30


Total current liabilities		427			1,748			717			(1,006	)		1,886
Long-term debt, net of current portion
third parties		4,229			49			44						4,322
related parties		85			2,849			65			(2,999	)
Deferred income tax liabilities					499			10						509
Accrued postretirement benefits		41			330			136						507
Other long-term liabilities		20			293			13						326
Total liabilities		4,802			5,768			985			(4,005	)		7,550


Commitments and contingencies
Shareholders equity
Common stock
Additional paid-in capital		1,660												1,660
Retained earnings (accumulated deficit)		(1,272	)		716			628			(1,344	)		(1,272	)
Accumulated other comprehensive income (loss)		(121	)		(123	)		(66	)		189			(121	)


Total equity of our common shareholder		267			593			562			(1,155	)		267
Noncontrolling interests								34						34
Total equity		267			593			596			(1,155	)		301


Total liabilities and equity	$	5,069		$	6,361		$	1,581		$	(5,160	)	$	7,851

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(In millions)


	As of March 31, 2011
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated

ASSETS
Current assets
Cash and cash equivalents	$	1		$	225		$	85		$			$	311
Accounts receivable, net of allowances
third parties		31			920			529						1,480
related parties		640			319			89			(1,020	)		28
Inventories		60			961			317						1,338
Prepaid expenses and other current assets		2			40			8						50
Fair value of derivative instruments		5			140			30			(10	)		165
Deferred income tax assets					37			2						39


Total current assets		739			2,642			1,060			(1,030	)		3,411
Property, plant and equipment, net		136			1,898			509						2,543
Goodwill					600			11						611
Intangible assets, net		5			699			3						707
Investments in and advances to non-consolidated affiliates		1,273			743						(1,273	)		743
Fair value of derivative instruments, net of current portion					16			3			(2	)		17
Deferred income tax assets					39			13						52
Other long-term assets		2,778			195			58			(2,819	)		212


Total assets	$	4,931		$	6,832		$	1,657		$	(5,124	)	$	8,296


LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Current portion of long-term debt	$	15		$	5		$	1		$			$	21
Short-term borrowings
third parties								17						17
related parties		22			334			20			(376	)
Accounts payable
third parties		73			812			493						1,378
related parties		78			438			175			(641	)		50
Fair value of derivative instruments		4			73			17			(12	)		82
Accrued expenses and other current liabilities		119			332			119			(2	)		568
Deferred income tax liabilities					43									43


Total current liabilities		311			2,037			842			(1,031	)		2,159
Long-term debt, net of current portion
third parties		4,019			46									4,065
related parties		97			2,644			77			(2,818	)
Deferred income tax liabilities					542			10						552
Accrued postretirement benefits		40			344			142						526
Other long-term liabilities		19			336			6			(2	)		359
		4,486			5,949			1,077			(3,851	)		7,661

Commitments and contingencies
Shareholders equity
Common stock
Additional paid-in capital		1,830												1,830
Retained earnings (accumulated deficit)		(1,442	)		892			434			(1,326	)		(1,442	)
Accumulated other comprehensive income (loss)		57			(9	)		(44	)		53			57


Total equity of our common shareholder		445			883			390			(1,273	)		445
Noncontrolling interests								190						190


Total equity		445			883			580			(1,273	)		635


Total liabilities and equity	$	4,931		$	6,832		$	1,657		$	(5,124	)	$	8,296

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)


	Nine months ended December 31, 2011
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
OPERATING ACTIVITIES
Net cash (used in) provided by operating activities	$	(24	)	$	(114	)	$	111		$	232		$	205

INVESTING ACTIVITIES
Capital expenditures		(32	)		(195	)		(70	)					(297	)
Proceeds from sales of assets					11									11
Proceeds from investment in and advances to non-consolidated affiliates, net					1									1
(Outflow) proceeds from related party loans receivable, net					(5	)								(5	)
(Outflow) proceeds from settlement of undesignated derivative instruments, net		3			75			17						95

Net cash (used in) provided by investing activities		(29	)		(113	)		(53	)					(195	)

FINANCING ACTIVITIES
Proceeds from issuance of debt
third parties		220			11			43						274
related parties					347						(347	)
Principal payments
third parties		(12	)		(4	)								(16	)
related parties		(11	)		(4	)		(11	)		26
Short-term borrowings, net
third parties		208			1			2						211
related parties		(7	)		(93	)		11			89
Dividends noncontrolling interests								(1	)					(1	)
Acquistion of noncontrolling interests		(343	)											(343	)
Debt issuance costs		(2	)											(2	)

Net cash provided by (used in) financing activities		53			258			44			(232	)		123

Net increase (decrease) in cash and cash equivalents					31			102						133
Effect of exchange rate changes on cash balances held in foreign currencies					(12	)		4						(8	)
Cash and cash equivalents beginning of period		1			225			85						311

Cash and cash equivalents end of period	$	1		$	244		$	191		$			$	436

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 

(Continued)

NOVELIS INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In millions)


	Nine Months Ended December 31, 2010
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated

OPERATING ACTIVITIES

Net cash provided by (used in) operating activities	$	(673	)	$	839		$	52		$			$	218

INVESTING ACTIVITIES
Capital expenditures		(15	)		(86	)		(31	)					(132	)
Proceeds from sales of assets
third parties					17			1						18
related parties					10									10
Changes to investment in and advances to non-consolidated affiliates					1									1
Proceeds from loans receivable, net related parties					8									8
Net proceeds from settlement of derivative instruments		(4	)		67			18						81

Net cash provided by (used in) investing activities		(19	)		17			(12	)					(14	)


FINANCING ACTIVITIES
Proceeds from issuance of debt, third parties		3,985												3,985
Principal payments, third parties		(1,527	)		(859	)		(100	)					(2,486	)
Related parties borrowings, net		57			52			(23	)		(86	)
Short-term borrowings, net
third parties		99			(58	)		8						49
related parties		(36	)		(48	)		(2	)		86
Return of capital		(1,700	)											(1,700	)
Dividends noncontrolling interests								(18	)					(18	)
Debt issuance costs		(174	)											(174	)

Net cash provided by (used in) financing activities		704			(913	)		(135	)					(344	)

Net increase (decrease) in cash and cash equivalents		12			(57	)		(95	)					(140	)

Effect of exchange rate changes on cash balances held in foreign currencies					(3	)		3
Cash and cash equivalents beginning of period		22			266			149						437

Cash and cash equivalents end of period	$	34		$	206		$	57		$			$	297

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

The following information should be read together with our unaudited condensed consolidated 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 AND REFERENCES

Novelis is the worlds leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products for the beverage and food can, transportation, electronics, construction and industrial, and foil products markets. As of December 31, 2011, we had operations in eleven countries on four continents: 29 operating plants including three stand-alone recycling facilities, and seven research and development facilities. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities. We are the only company of our size and scope focused solely on aluminum rolled products markets and capable of local supply of technologically sophisticated products in all of these geographic regions.

All tonnages are stated in metric tonnes. One metric tonne is equivalent to 2,204.6 pounds. One kilotonne (kt) is 1,000 metric tonnes. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.

References to our Form 10-K made throughout this document refer to our Annual Report on Form 10-K for the year ended March 31, 2011, filed with the United States Securities and Exchange Commission (SEC) on May 26, 2011.

HIGHLIGHTS

Our focus on the fundamentals of our business in our core markets of can, automotive and specialty products and our agility in reacting to changes in the market have driven solid performance by our business even in a period of economic uncertainty. We reported favorable conversion premiums within all segments in both the third quarter and the first nine months of fiscal 2012 compared to the same periods in fiscal 2011, which was the result of tight market conditions and our focus on our core markets. We continue to see increasing demand for our automotive applications and expect this trend to continue, although unfavorable macroeconomic conditions and customer destocking resulted in lower than expected shipments of our flat rolled products in our other market segments during the third quarter of fiscal 2012. Despite an overall decline in volumes during the quarter, our results for the nine months ended December 31, 2011 continue to outpace the prior year.

Shipments of flat rolled products totaled 648 kt for the third quarter of fiscal 2012, a decrease of 9% compared to the third quarter of the previous year. In the first nine months of fiscal 2012, shipments of flat rolled products totaled 2,135 kt, a decrease of 3% compared to the previous year. These unfavorable declines in volumes were driven from our three largest regions: Asia, Europe and to a lesser extent North America.

Net sales for the third quarter of fiscal 2012 were $2.5 billion, a decrease of 4% compared to the $2.6 billion reported in the same period a year ago. Net sales for the nine months ended December 31, 2011 were $8.5 billion, an increase of 11% compared to $7.6 billion reported in the same period a year ago.

We reported pre-tax losses of $21 million and $2 million in the three months ended December 31, 2011 and 2010, respectively. We reported pre-tax income of $238 million and $201 million for the nine months ended December 31, 2011 and 2010, respectively. Included in our pre-tax income and pre-tax loss are Unrealized gains (losses) on

derivative instruments, net, other than foreign currency remeasurement derivatives, of $(63) million and $9 million, in the three months ended December 31, 2011 and December 31, 2010, respectively. Unrealized gains (losses) on derivative instruments, net, other than foreign currency remeasurement derivatives, were $(38) million and $(37) million, for the nine months ended December 31, 2011 and 2010, respectively.

Cash flow provided by operations of $205 million for the nine months ended December 31, 2011 compares to cash flow provided by operations of $218 million for the nine months ended December 31, 2010. Additionally, as expected, we spent $297 million on capital expenditures for the nine months ended December 31, 2011 as compared to $132 million of capital expenditures for the same period of the prior year.

We completed the acquisition of 31.2 percent of the outstanding shares of our Korean subsidiary for $343 million, raising our ownership to 99 percent. We funded the acquisition through a $225 million secured term loan executed in December 2011, additional borrowings on our asset backed loan facility and other available cash.

We reported strong liquidity of $857 million as of December 31, 2011 as compared to liquidity of $993 million as of September 30, 2011 and $848 million as of December 31, 2010. The decline is attributable to the short-term borrowings made in December 2011 for the acquisition of the outstanding shares of our Korean subsidiary.

BUSINESS AND INDUSTRY CLIMATE

Historically, the third quarter is our seasonally slow quarter in North America, Europe and Asia. Global economic uncertainty led to soft demand during the quarter. Although we experienced some additional customer destocking, we expect recovery in the fourth quarter and to produce strong results for fiscal 2012.

Key Sales and Shipment Trends


(in millions, except shipments which are in kt)	Three Months Ended												Year Ended			Three Months Ended									Nine months ended
	June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011			March 31, 2011			June 30, 2011			September 30, 2011			December 31, 2011			December 31, 2011
Net sales	$	2,533		$	2,524		$	2,560		$	2,960		$	10,577		$	3,113		$	2,880		$	2,462		$	8,455
Percentage increase (decrease) in net sales versus comparable previous year period		29	%		16	%		21	%		22	%		22	%		23	%		14	%		(4	)%		11	%

Rolled product shipments:
North America		278			285			262			280			1,105			288			274			248			810
Europe		232			227			208			240			907			237			227			183			647
Asia		146			134			148			152			580			152			131			117			400
South America		90			91			97			99			377			90			88			100			278

Total		746			737			715			771			2,969			767			720			648			2,135

Beverage and food cans		425			429			424			453			1,731			462			437			404			1,303
All other rolled products		321			308			291			318			1,238			305			283			244			832

Total		746			737			715			771			2,969			767			720			648			2,135


(in millions, except shipments which are in kt)	Three Months Ended												Year Ended			Three Months Ended									Nine months ended
	June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011			March 31, 2011			June 30, 2011			September 30, 2011			December 31, 2011			December 31, 2011
Percentage increase (decrease) in rolled products shipments versus comparable previous year period:

North America		9	%		10	%		8	%		2	%		7	%		4	%		(4	)%		(5	)%		(2	)%
Europe		25	%		12	%		11	%		6	%		13	%		2	%			%		(12	)%		(3	)%
Asia		12	%		(4	)%		10	%		18	%		9	%		4	%		(2	)%		(21	)%		(7	)%
South America		11	%		(2	)%		15	%		15	%		10	%			%		(3	)%		3	%			%

Total		15	%		6	%		10	%		8	%		10	%		3	%		(2	)%		(9	)%		(3	)%

Beverage and food cans		7	%		5	%		14	%		12	%		10	%		9	%		2	%		(5	)%		2	%
All other rolled products		26	%		8	%		5	%		3	%		10	%		(5	)%		(8	)%		(16	)%		(10	)%

Total		15	%		6	%		10	%		8	%		10	%		3	%		(2	)%		(9	)%		(3	)%

Business Model and Key Concepts

Conversion Business Model

Most of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our products have a price structure with two components: (i) a pass-through aluminum price based on the London Metal Exchange (LME) plus local market premiums and (ii) a conversion premium price on the conversion cost to produce the rolled product which reflects, among other factors, the competitive market conditions for that product.

Increases or decreases in the average price of aluminum directly impact net sales, cost of goods sold (exclusive of depreciation and amortization) and working capital, albeit on a lag basis. These impacts are referred to as metal price lag. Metal price lag is caused by inventory and sales price exposure which we actively work to mitigate through our comprehensive risk management practices.

Metal price lag is attributable to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the shipment and pricing of that inventory to our customers. Specifically, a portion of our metal purchases are based on average prices for a period of time prior to the period at which we order the metal. Further, there is a period of time between when we place an order for metal, when we receive it and when we ship finished products to our customers. Additionally, a cost recognition delay occurs due to the flow of metal costs through moving average inventory cost values and cost of goods sold (exclusive of depreciation and amortization). The recognition of these timing differences in sales and metal costs vary based on contractual arrangements with customers and metal suppliers in each region.

We also have exposure to foreign currency risk associated with sales made in currencies that differ from those in which we are paying our conversion costs. For example, sales in Brazil are generally priced in US dollars, but the majority of our conversion costs are paid in Brazilian real. We discuss this foreign currency risk further below.

LME Aluminum Prices

The average (based on the simple average of the monthly averages) and closing prices based upon the LME for aluminum for the three and nine months ended December 31, 2011 and 2010 are as follows:


	Three Months Ended December 31,				Percent			Nine Months Ended December 31,				Percent
	2011		2010		Change			2011		2010		Change
London Metal Exchange Prices
Aluminum (per metric tonne, and presented in U.S. dollars):
Closing cash price as of beginning of period	$	2,207	$	2,314		(5	)%	$	2,600	$	2,288		14	%

Average cash price during the period	$	2,089	$	2,343		(11	)%	$	2,364	$	2,176		9	%

Closing cash price as of end of period	$	1,971	$	2,461		(20	)%	$	1,971	$	2,461		(20	)%

Aluminum prices have declined approximately $200 per ton during the third quarter of fiscal 2012. This resulted in $49 million of unrealized losses on undesignated metal derivatives and deferred gains of $7 million on designated metal hedges. Average aluminum prices were approximately $250 per ton lower in the third quarter of fiscal 2012 compared to the same period in the prior year. Additionally, although average aluminum prices were higher for the nine month period ended December 31, 2011 as compared to the same period in the prior year, prices actually decreased from the beginning of fiscal 2012 through December 31, 2011. Aluminum prices have risen during the first part of our fourth quarter of fiscal 2012.

Metal Derivative Instruments

We use derivative instruments to preserve our conversion margin and manage the timing differences associated with metal price lag. We sell short-term LME aluminum forward contracts to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the shipment and pricing of that inventory to our customers. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations on our inventory to synthetically ensure we sell metal for the same price at which we purchase metal.

Fixed Forward Price Commitments

For some select customers, we enter into fixed forward price commitments. This results in fixed forward price exposure in certain sales contracts that contain fixed metal prices for sales in future periods of time. The impact of fixed priced sales contracts is recognized in revenue during the period in which the sale occurs.

We eliminate any risk by purchasing LME aluminum forward contracts simultaneous with our sales contracts to customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuation attributable to the fixed forward price exposure combined with hedges of metal price lag to synthetically help ensure we purchase metal for the same price at which we agree to sell metal.

The recognition of unrealized gains and losses on undesignated metal derivative positions typically precedes inventory cost recognition, customer delivery and revenue recognition under metal price lag and the related fixed forward priced contracts. The timing difference between the recognition of unrealized gains and losses on undesignated metal derivatives and cost or revenue recognition impacts Income before income taxes and Net income (loss). Gains and losses on metal derivative contracts are not recognized in Segment income until realized.

We settle derivative contracts in advance of billing on the underlying physical inventory and collecting from our customers, which temporarily impacts our liquidity position. The lag between derivative settlement and customer collection typically ranges from 30 to 90 days.

Foreign Exchange

We operate a global business and conduct business in various currencies around the world. Fluctuations in foreign exchange rates impact our operating results. We recognize foreign exchange gains and losses when business transactions are denominated in currencies other than the functional currency of that operation. The following table presents the exchange rate as of the end of each period and the average of the month-end exchange rates for the three and nine months ended December 31, 2011 and 2010:


					Average Exchange Rate				Average Exchange Rate
	Exchange Rate as of				Three Months Ended				Nine Months Ended
	December 31, 2011		March 31, 2011		December 31,				December 31,
	December 31, 2011		March 31, 2011		2011		2010		2011		2010

U.S. dollar per Euro		1.292		1.419		1.340		1.338		1.402		1.304

Brazilian real per U.S. dollar		1.863		1.627		1.784		1.696		1.674		1.739

South Korean won per U.S. dollar		1,153		1,107		1,136		1,141		1,105		1,163

Canadian dollar per U.S. dollar		1.020		0.971		1.018		1.014		0.991		1.033

During the third quarter of fiscal 2012, the U.S. dollar strengthened against the Euro and Brazilian real, was relatively flat against the South Korean won, and weakened against the Canadian dollar. In Europe, the strengthening of the U.S. dollar resulted in foreign exchange losses as these operations are recorded in local currency. In Brazil, where the U.S. dollar is the functional currency due to predominantly U.S. dollar selling prices and local currency operating costs, we incurred foreign exchange gains as real denominated liabilities are remeasured to the U.S. dollar.

We use foreign exchange forward contracts and cross-currency swaps to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments and forecasted cash flows denominated in currencies other than the functional currency of certain operations, which includes capital expenditures. The movement of currency exchange rates during the third quarter of fiscal 2012 resulted in $2 million of unrealized gains on undesignated foreign currency derivatives and deferred gains of $4 million on designated foreign currency hedges. The movement of the U.S. dollar during the third quarter of fiscal 2011 resulted in $13 million of unrealized gains on undesignated foreign currency derivatives.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2011 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2010

Our operational performance remains strong despite the continued global economic uncertainty which negatively impacted our volumes in the quarter. Net sales for the three months ended December 31, 2011 decreased 4% as compared to the three months ended December 31, 2010, primarily driven by an 11% decrease in average aluminum prices and a decline in volumes. These declines were partially offset by higher conversion premiums across all of our segments and continued increases in demand for our automotive products.

Cost of goods sold (exclusive of depreciation and amortization) remained flat at $2.2 billion in the third quarter of fiscal 2012 as compared to the same period in fiscal 2011. Cost of goods sold (exclusive of depreciation and amortization) was impacted by an overall decline in shipments and lower average aluminum prices offset by higher input costs.

Income (loss) before income taxes for the third quarter of fiscal 2012 was a $(21) million loss, which compared to a $(2) million loss reported in the third quarter of fiscal 2011. In addition to the factors noted above, the following items affected Income (loss) before income taxes:

$79 million of Depreciation and amortization for the third quarter of fiscal 2012 as compared to $100 million for the third quarter of fiscal 2011 as a result of groups of our fixed assets reaching their fully depreciated balances since our purchase by Hindalco and reduced depreciation as a result of certain facility shut-downs over the past several years

$74 million of Interest expense and amortization of debt issuance costs for the third quarter of fiscal 2012 as compared to $46 million for the third quarter of fiscal 2011 as a result of our higher debt balances and amortization of debt issuance costs from our refinancing in the third quarter of fiscal 2011

$74 million of Loss on early extinguishment of debt related to a series of refinancing transactions executed and recorded in the third quarter of prior year

$1 million of Restructuring charges, net for the third quarter of fiscal 2012 as compared to $20 million in the same period in the prior year related primarily to the restructuring activities initiated and recognized in the third quarter of fiscal year 2011 with our Bridgenorth, U.K. facility

foreign currency remeasurement gains, net of related derivatives, of $4 million for the third quarter of fiscal 2012 as compared to losses of $11 million in the same period in the prior year

unrealized losses of $63 million for the third quarter of fiscal 2012 comprised of changes in fair value of undesignated derivatives other than foreign currency remeasurement as compared to $9 million of gains for the third quarter of fiscal 2011

realized gains of $66 million for the third quarter of fiscal 2012 comprised of changes in fair value of undesignated derivatives other than foreign currency remeasurement as compared to $21 million of realized gains in prior year.

We reported Net income (loss) attributable to our common shareholder of $(12) million loss for the third quarter of fiscal 2012 as compared to a $(46) million loss for the third quarter of fiscal 2011, primarily as a result of the factors discussed above. Also impacting these results in the third quarter of fiscal 2012 was a $22 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, a $10 million benefit from non-taxable dividends and a $20 million benefit related to decreases in uncertain tax positions.

Segment Review

The tables below show selected segment financial information (in millions, except shipments which are in kt). For additional financial information related to our operating segments, see Note 15 Segment, Major Customer and Major Supplier Information.


Selected Operating Results Three Months Ended December 31, 2011	North America		Europe		Asia		South America		Other and Eliminations		Total
Net sales	$	912	$	804	$	398	$	321	$	27	$	2,462
Shipments
Rolled products		248		183		117		100				648
Ingot products		2		19		6		7				34

Total shipments		250		202		123		107				682


Selected Operating Results Three Months Ended December 31, 2010	North America		Europe		Asia		South America		Other and Eliminations		Total
Net sales	$	901	$	835	$	470	$	321	$	33	$	2,560
Shipments
Rolled products		262		208		148		97				715
Ingot products		5		17				14				36

Total shipments		267		225		148		111				751

The following table reconciles changes in Segment income for the three months ended December 31, 2010 to the three months ended December 31, 2011 (in millions). Variances include the related realized derivative gain or loss and unrealized gains or losses on foreign currency derivatives which hedge our foreign currency balance sheet exposure.


Changes in Segment income	North America			Europe			Asia			South America			Total
Segment income three months ended December 31, 2010	$	97		$	47		$	59		$	35		$	238
Volume		(9	)		(25	)		(18	)		3			(49	)
Conversion premium and product mix		15			27			13			14			69
Conversion costs(A)		(15	)		(26	)		(9	)		(7	)		(57	)
Metal price lag		5			(4	)		12			(5	)		8
Foreign exchange					2			(15	)		13
Primary metal production											2			2
Other changes(B)		1			3			1			(3	)		2

Segment income three months ended December 31, 2011	$	94		$	24		$	43		$	52		$	213

(A)

Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina, melt loss, the incremental benefit of used beverage cans (UBCs) and other metal costs. Fluctuations in this component reflect cost efficiencies (inefficiencies) during the period as well as cost inflation (deflation).

(B)	Other changes include selling, general & administrative costs and research and development for all segments and certain other items which impact one or more regions. Significant fluctuations in these items are discussed below.

North America

As of December 31, 2011, our North American operations manufactured aluminum sheet and light gauge products through 11 operating plants, including two dedicated recycling facilities. Important end-use applications include beverage cans, containers and packaging, automotive and other transportation applications and other industrial applications. Our $200 million expansion project at our Oswego, NY facility is scheduled to be operational in mid calendar year 2013.

Net sales for the third quarter of fiscal 2012 increased $11 million, or 1%, as compared to the third quarter of fiscal 2011 reflecting improved conversion premiums, partially offset by a decrease in the volumes of flat rolled products and a decrease in the average price of aluminum. We experienced lower volumes in can, light gauge and industrial products, partially offset by higher volumes in our automotive products.

Segment income for the third quarter of fiscal 2012 was $94 million, down $3 million as compared to the comparable period in prior year, driven by lower volumes and the lower average price of aluminum discussed above. Additionally, conversion costs were negatively impacted by higher headcount in our plants, decreases in the utilization of UBCs, and higher melt loss. Other changes include lower research and development costs and lower general and administrative costs.

Europe

As of December 31, 2011, our European segment provided European markets with value-added sheet and light gauge products through 12 operating plants, including one dedicated recycling facility. Europe serves a broad range of aluminum rolled product end-use markets in various applications including can, automotive, lithographic, foil products and painted products. During the first quarter of fiscal 2012, we announced that we were investing to increase our recycling capacity at two of our aluminum rolled products facilities in Europe. The recycling furnace at one of the capital expansion projects started in the second quarter and the other is expected to be operational in mid calendar year 2012.

Net sales for the third quarter of fiscal 2012 decreased $31 million, or 4%, as compared to the third quarter of fiscal 2011 driven by a reduction in volumes of our flat rolled products and a decline in the average price of aluminum. Our can stock volumes were down compared to the prior year driven by customer destocking during the quarter. We experienced some softness in demand in our industrial and light gauge flat rolled products due to the financial instability in Europe, while demand for our automotive products increased compared to the same period in the prior year. Partially offsetting these unfavorable variances were higher conversion premiums as a result of a more favorable product mix and higher volumes of other non-FRP metal sales.

Segment income for the third quarter of fiscal 2012 was $24 million, down $23 million compared to the same period of the prior year, driven by the lower volumes noted above and higher conversion costs. Higher prices of scrap metal and UBCs and an increase in contractor costs contributed to the unfavorable results in conversion costs. We also experienced the negative effects of changes in metal price lag. Other changes include lower research and development costs and lower general and administrative costs.

Asia

As of December 31, 2011, Asia operated three operating plants with production balanced between beverage and food can, specialty (including electronics) and foil end-use applications. Our $400 million expansion of our rolling and recycling capacity in South Korea is on schedule and expected to become operational at the end of calendar year 2013.

Net sales for the third quarter of fiscal 2012 decreased $72 million, or 15%, as compared to the third quarter of fiscal 2011 reflecting lower volumes of our flat rolled products and a decline in average aluminum prices. The reduction in our can stock volumes was driven by some of our customers efforts to destock inventory levels during the quarter, which resulted in a decline in demand. We experienced a decrease in our electronics shipments in the third quarter compared to the prior year driven by the continued global economic uncertainty. The declines in our volumes were offset by favorable product mix, which resulted in an increase in our conversion premium in the third quarter, compared to the same period in the prior year.

Segment income of $43 million in the third quarter of fiscal 2012 compared unfavorably to $59 million for the third quarter of fiscal 2011. The unfavorable change in segment income compared to the prior year was driven by declining volumes stated above, the negative impact of foreign currency exchange rates, an increase in labor costs, fuel and electricity, and the price of scrap metal, partially offset by positive metal price lag.

South America

Our operations in South America manufacture various aluminum rolled products for the beverage and food can, construction and industrial and transportation end-use markets. Our South American operations included 3 operating plants in Brazil, including one smelter, power generation facilities and bauxite mines as of December 31, 2011. Our previously announced $300 million expansion of our Pinda facility in Brazil is expected to come online at the end of calendar year 2012. Additionally, we have announced plans to invest $50 million to install a coating line for beverage can end stock and $30 million to expand recycling capacity in the Pinda facility.

Net sales remained relatively flat as compared to the prior year period, despite a decrease in average aluminum prices. Shipments of our flat rolled products increased compared to the same quarter in prior year, driven by higher demand for beverage and food can products, offset by a decrease in non-FRP volumes.

Segment income for South America increased $17 million to $52 million in the third quarter of fiscal year 2012 compared to the prior year period. Improved conversion premiums and the positive effects of changes in foreign currency exchange rates were partially offset by higher UBC prices, higher utility costs and unfavorable metal price lag.

Reconciliation of segment results to Net income (loss)

Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on changes in the fair value of derivatives, except for derivatives to manage our foreign currency balance sheet exposure, are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles income from reportable segments to Net income (loss) attributable to our common shareholder for the three months ended December 31, 2011 and 2010 (in millions).


	Three Months Ended December 31,
	2011			2010
North America	$	94		$	97
Europe		24			47
Asia		43			59
South America		52			35

Total Segment income		213			238
Depreciation and amortization		(79	)		(100	)
Interest expense and amortization of debt issuance costs		(74	)		(46	)
Interest income		3			4
Adjustment to eliminate proportional consolidation		(9	)		(11	)
Unrealized gains (losses) on change in fair value of derivative instruments, net		(63	)		9
Realized gains (losses) on derivative instruments not included in segment income		(3	)		4
Loss on early extinguishment of debt					(74	)
Restructuring charges, net		(1	)		(20	)
Other costs, net		(8	)		(6	)

Income (loss) before income taxes		(21	)		(2	)
Income tax (benefit) provision		(10	)		33

Net income (loss)		(11	)		(35	)
Net income (loss) attributable to noncontrolling interests		1			11

Net income (loss) attributable to our common shareholder	$	(12	)	$	(46	)

Depreciation and amortization decreased $21 million primarily as a result of facilities that have been shut-down and are no longer being depreciated, as well as assets which became fully depreciated as they reached the end of the useful lives assigned at the time of the purchase of Novelis by Hindalco.

Interest expense and amortization of debt issuance costs increased by $28 million primarily due to higher average debt balances and higher capitalized debt issuance costs as a result of refinancing our debt in the third quarter of fiscal 2011.

Adjustment to eliminate proportional consolidation typically relates to depreciation and amortization and income taxes at our Aluminium Norf GmbH (Norf) joint venture. Income taxes related to our equity method investments are reflected in the carrying value of the investment and not in our consolidated Income tax (benefit) provision.

Unrealized gains (losses) on change in fair value of derivative instruments, net is comprised of unrealized gains and losses on undesigned derivatives other than foreign currency remeasurement.

Loss on early extinguishment of debt in the third quarter of fiscal year 2011 related to a series of debt refinancing transactions completed in December 2010.

Restructuring charges, net in the third quarter of fiscal 2011 primarily related restructuring activities initiated with our Bridgnorth, U.K. facility. See Note 2 Restructuring Programs.

For the three months ended December 31, 2011, we recorded a $10 million Income tax benefit on our pre-tax loss before our equity in net income of non-consolidated affiliates of $17 million, which represented an effective tax rate of 59%. Our effective tax rate differs from the benefit at the Canadian statutory rate primarily due to the following factors: (1) a $1 million benefit for exchange remeasurement of deferred income taxes, (2) a $22 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, (3) a $10 million benefit from non-taxable dividends, (4) a $4 million expense from differences between the Canadian and foreign statutory tax rates applied to entities in different jurisdictions, and (5) a $20 million benefit related to decreases in uncertain tax positions.

For the three months ended December 31, 2010, we recorded a $33 million Income tax (benefit) provision on our pre-tax income before our equity in net income of non-consolidated affiliates of $3 million, which represented an effective tax rate of 1,100%. Due to our reduced level of pre-tax book income this quarter, our tax rate is not meaningful, but our presented effective tax rate differs from the expense at the Canadian statutory rate due to the following factors: (1) a $4 million expense for exchange remeasurement of deferred income taxes, (2) a $15 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, (3) a $9 million expense from differences between the Canadian and foreign statutory tax rates applied to entities in different jurisdictions, and (4) a $1 million expense related to an increase in uncertain tax positions.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2011 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2010

We reported strong operating results over the past nine months despite the global market pressures we continue to experience. Our premium product portfolio, long-term customer base and business model enabled us to produce solid results for the nine months ended December 31, 2011 and we expect to produce strong results for fiscal 2012. Net sales for the nine months ended December 31, 2011 increased $838 million, or 11%, as compared to the same period in prior year primarily as a result of improved conversion premiums on our flat rolled products and higher average aluminum prices, partially offset by a slight decline in volumes.

Cost of goods sold (exclusive of depreciation and amortization) for the nine months ended December 31, 2011 increased $853 million, or 13%, as compared to the nine months ended December 31, 2010, which reflects the higher average aluminum prices and increased input cost pressures.

Income before income taxes for the nine months ended December 31, 2011 was $238 million, an increase of $37 million, or 18%, compared to the $201 million reported in the nine months ended December 31, 2010. In addition to the positive effects from operations discussed above, the following items affected Income before income taxes:

$249 million of Depreciation and amortization for the nine months ended December 31, 2011 as compared to $307 million for the same period in fiscal 2011 as a result of groups of our fixed assets reaching their fully depreciated balances since our purchase by Hindalco and reduced depreciation as a result of certain facility shut-downs over the past several years

$228 million of Interest expense and amortization of debt issuance costs for the nine months ended December 31, 2011 as compared to $125 million for the nine months ended December 31, 2010 as a result of our higher debt balances and amortization of debt issuance costs from refinancing our debt in the third quarter of fiscal 2011

$74 million of Loss on early extinguishment of debt related to a series of refinancing transactions executed and recorded in the prior year

foreign currency remeasurement losses, net of related derivatives, of $5 million for first nine months of fiscal 2012 compared to $10 million of losses in the same period in the prior year

unrealized losses of $38 million for the nine months ended December 31, 2011 comprised of changes in fair value of undesignated derivatives other than foreign currency remeasurement as compared to $37 million of losses in the same period of fiscal 2011

realized gains of $136 million for the nine months ended December 31, 2011 comprised of changes in fair value of undesignated derivatives other than foreign currency remeasurement as compared to $95 million of realized gains in prior year

$8 million gain on a litigation settlement in Brazil and $1 million loss on sale of assets in the first nine months of fiscal 2012, compared to an $11 million gain on sale of assets in the same period in the prior year.

We reported Net income (loss) attributable to our common shareholder of $170 million for the nine months ended December 31, 2011 as compared to $66 million for the nine months ended December 31, 2010, primarily as a result of the factors discussed above. Also impacting these results in the nine months ended December 31, 2011 was a $13 million benefit for pre-tax foreign currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect, a $30 million benefit for exchange remeasurement of deferred income taxes, a $61 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, a $41 million benefit from non-taxable dividends, a $12 million expense from differences between the Canadian and foreign statutory tax rates applied to entities in different jurisdictions and a $19 million benefit related to decreases in uncertain tax positions.

Segment Review


Selected Operating Results Nine Months Ended December 31, 2011	North America		Europe		Asia		South America		Other and Eliminations		Total
Net sales	$	3,052	$	2,916	$	1,432	$	942	$	113	$	8,455
Shipments
Rolled products		810		647		400		278				2,135
Ingot products		9		63		12		26				110

Total shipments		819		710		412		304				2,245


Selected Operating Results Nine Months Ended December 31, 2010	North America		Europe		Asia		South America		Other and Eliminations		Total
Net sales	$	2,743	$	2,551	$	1,340	$	876	$	107	$	7,617
Shipments
Rolled products		825		667		428		278				2,198
Ingot products		13		51		1		34				99

Total shipments		838		718		429		312				2,297

The following table reconciles changes in Segment income for the nine months ended December 31, 2010 to nine months ended December 31, 2011 (in millions). Variances include the related realized derivative gain or loss and unrealized gains or losses on foreign currency derivatives which hedge our foreign currency balance sheet exposure.


Changes in Segment income	North America			Europe			Asia			South America			Total
Segment income nine months ended December 31, 2010	$	298		$	217		$	162		$	115		$	792
Volume		(9	)		(20	)		(17	)					(46	)
Conversion premium and product mix		37			49			38			35			159
Conversion costs(A)		(13	)		(25	)		(29	)		(29	)		(96	)
Metal price lag		20			(21	)		2			(2	)		(1	)
Foreign exchange		(6	)		10			(12	)		23			15
Primary metal production											4			4
Other changes(B)		(3	)		3			5			(12	)		(7	)

Segment income nine months ended December 31, 2011	$	324		$	213		$	149		$	134		$	820

(A)	Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina and melt loss. Fluctuations in this component reflect cost efficiencies during the period as well as cost inflation (deflation).

(B)

Other changes include selling, general & administrative costs and research and development for all segments and certain other items which impact one or more regions, including such items as the impact of purchase accounting and metal price ceiling contracts. Significant fluctuations in these items are discussed below.

North America

Our North American operations reported strong operating results in the first nine months of fiscal 2012 compared to the same period in prior year, although we continue to see some softness in our can business due to customer destocking and a decline in demand for our light gauge products. Net sales for the nine months ended December 31, 2011 was $3.1 billion, up 11% as compared to $2.7 billion for the nine months ended December 31, 2010. This reflects higher average aluminum prices and strong conversion premiums as a result of focusing on our core premium products, offset by lower shipments.

Segment income for the nine months ended December 31, 2011 was $324 million, up 9% as compared to the same period in prior year. This increase was primarily due to improved conversion premiums and favorable changes in metal price lag offset by higher conversion costs and the negative effects of changes in foreign currency exchange rates. The higher conversion costs were driven by unfavorable melt loss, higher outbound freight, repairs and maintenance, and labor costs offset by favorable prices of scrap metal and an increase in the usage of lower priced UBCs.

Europe

Our European segment reported strong operating results compared to prior year driven by favorable results from our can and automotive products despite a challenging economic environment. We continue to experience some softness in our industrial, light gauge and foil products, which resulted in a decline of 21kt in our flat rolled product shipments compared to the same period in prior year. Net sales was $2.9 billion, up 14% compared to the nine months ended December 31, 2010, which reflects higher average aluminum prices, improved conversion premiums as a result of continued focus on our premium products and higher volumes of our automotive, can and other non-FRP metal sales.

Segment income for the nine months ended December 31, 2011 was $213 million, down 2% compared to the same period of the prior year. Improved conversion premiums were partially offset by higher conversion costs and the negative effects of metal price lag. Higher conversion costs compared to the same period in prior year were driven by unfavorable scrap and UBC prices and higher subcontractor costs, offset by favorable metal discounts and lower labor costs. Other changes include lower research and development costs, lower general and administrative costs, and the positive impact of foreign exchange rates.

Asia

Our Asia operating results remain positive, although the global macroeconomic uncertainties have had an impact on our shipments. During the nine months ended December 31, 2011, the can market of our Asian business had favorable results despite unseasonably cold and wet weather. We experienced continued softness in the electronics business as a result of economic uncertainty in the U.S. and Europe, but we believe this is a short-term trend and continue to believe in the long-term growth prospects of the electronics end market. Flat rolled product shipments were down as compared to the prior year, driven by the decline in electronics and foil stock volumes. Net sales increased $92 million, or 7%, for the nine months ended December 31, 2011 as compared to the same period in the prior year primarily as a result of higher average aluminum prices and improved conversion premiums.

Segment income for the nine months ended December 31, 2011 was $149 million, down $13 million as compared to the prior year period driven by higher conversion costs, lower volumes, and the negative impact of foreign currency changes, offset by improved conversion premiums. Conversion costs increased due to higher scrap prices, labor costs, fuel and utility costs and negative effects of increased melt loss. Other changes reflect a positive impact from fixed forward price sales contracts.

South America

Our South America operations had positive operating results for the nine months ended December 31, 2011, compared to prior year, despite unseasonably cold and wet weather earlier in our fiscal year and some customer destocking. Net sales increased $66 million, or 8%, as compared to the same period in fiscal 2011 primarily as a result of higher average aluminum prices and improved conversion premiums. Our flat rolled product shipments remained flat as compared to prior year.

Segment income for the nine months ended December 31, 2011 increased $19 million, or 17%, as compared to the prior year period. Improved conversion premiums and the positive effects of changes in foreign currency exchange rates were partially offset by higher UBC and scrap prices, unfavorable melt loss, and higher costs for alloys and hardeners. Other changes include higher general and administrative costs.

Reconciliation of segment results to Net income

Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on changes in the fair value of derivatives, except for derivatives used to manage our foreign currency balance sheet exposure, are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles income from reportable segments to Net income attributable to our common shareholder for the nine months ended December 31, 2011 and 2010 (in millions).


	Nine Months Ended December 31,
	2011			2010
North America	$	324		$	298
Europe		213			217
Asia		149			162
South America		134			115

Total segment income		820			792
Depreciation and amortization		(249	)		(307	)
Interest expense and amortization of debt issuance costs		(228	)		(125	)
Interest income		11			10
Unrealized gains (losses) on change in fair value of derivative instruments, net		(38	)		(37	)
Realized gains (losses) on derivative instruments not included in segment income		(1	)		4
Adjustment to eliminate proportional consolidation		(34	)		(33	)
Loss on early extinguishment of debt					(74	)
Restructuring charges, net		(31	)		(35	)
Other costs, net		(12	)		6

Income before income taxes		238			201
Income tax provision		42			104

Net income		196			97
Net income attributable to noncontrolling interests		26			31

Net income attributable to our common shareholder	$	170		$	66

For the nine months ended December 31, 2011, we recorded a $42 million Income tax provision on our pre-tax income before our equity in net income of non-consolidated affiliates of $247 million, which represented an effective tax rate of 17%. Our effective tax rate differs from the expense at the Canadian statutory rate primarily due to the following factors: (1) a $13 million benefit for pre-tax foreign currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect, (2) a $30 million benefit for exchange remeasurement of deferred income taxes, (3) a $61 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, (4) a $41 million benefit from non-taxable dividends, (5) a $12 million expense from differences between the Canadian and foreign statutory tax rates applied to entities in different jurisdictions, and (6) a $19 million benefit related to decreases in uncertain tax positions.

For the nine months ended December 31, 2010, we recorded a $104 million Income tax provision on our pre-tax income before our equity in net income of non-consolidated affiliates of $212 million, which represented an effective tax rate of 49%. Our effective tax rate differs from the expense at the Canadian statutory rate primarily due to the following factors: (1) a $15 million expense for exchange remeasurement of deferred income taxes, (2) a $30 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, (3) a $5 million benefit from differences between the Canadian and foreign statutory tax rates applied to entities in different jurisdictions, and (4) a $2 million benefit related to decreases in uncertain tax positions.

LIQUIDITY AND CAPITAL RESOURCES

We believe we have adequate liquidity to meet our operational and capital requirements for the foreseeable future. Our primary sources of liquidity are cash and cash equivalents, borrowing availability under our revolving credit facility and cash generated by operating activities.

As of December 31, 2011, we had available liquidity of $857 million, which reflects a decrease of 19% and 14% from March 31, 2011 and September 31, 2011, respectively, driven by higher capital expenditures, higher working capital needs and short-term borrowings used to purchase the noncontrolling interest in the Companys Korean operations in December 2011. We expect to maintain adequate liquidity throughout fiscal 2012 despite the changing economic uncertainty and the significant investments we are making with our expansion projects in Oswego, NY facility, Pinda, Brazil facility and expansion in South Korea.

Available Liquidity

Our available liquidity as of December 31, 2011 and March 31, 2011 is as follows (in millions):


	December 31, 2011			March 31, 2011
Cash and cash equivalents	$	436		$	311
Overdrafts		(1	)		(17	)
Availability under the ABL facility		422			767

Total liquidity	$	857		$	1,061

The cash and cash equivalents balance above includes cash held in foreign countries in which we operate.

Free Cash Flow

We define Free cash flow (which is a non-GAAP measure) as: (a) net cash provided by (used in) operating activities, (b) plus net cash provided by (used in) investing activities and (c) less net proceeds from sales of assets. 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.

The following table shows the Free cash flow for the nine months ended December 31, 2011 and 2010, the change between periods, as well as the ending balances of cash and cash equivalents (in millions).


	Nine Months Ended December 31,
	2011			2010			Change
Net cash provided by operating activities	$	205		$	218		$	(13	)
Net cash (used in) investing activities		(195	)		(14	)		(181	)
Less: Proceeds from sales of assets		(11	)		(28	)		17

Free cash flow	$	(1	)	$	176		$	(177	)

Ending cash and cash equivalents	$	436		$	297		$	139

Free cash flow decreased $177 million in the nine months ended December 31, 2011 as compared to the nine months ended December 31, 2010. The changes in Free cash flow are described in greater detail below.

Operating Activities

Overall operating results were strong for the nine months ended December 31, 2011, reflecting improvements in conversion premiums offset by higher conversion costs, lower volumes and $154 million of higher interest payments. A summary of our operating activities for the nine months ended December 31, 2011 can be found above in Results of operations for the nine months ended December 31, 2011 compared to the nine months ended December 31, 2010.

We exited our former defined contribution plan in Switzerland and have entered into a new defined contribution plan. We plan to contribute approximately $7 million over the next ten years to the new defined contribution plan.

Investing Activities

The following table presents information regarding our Net cash provided by (used in) investing activities (in millions).


	Nine Months Ended December 31,
	2011			2010			Change
Capital expenditures	$	(297	)	$	(132	)	$	(165	)
Proceeds from settlement of other undesignated derivative instruments, net		95			81			14
Proceeds from sales of assets		11			28			(17	)
Proceeds from investment in and advances to non-consolidated affiliates, net		1			1
(Outflow) proceeds from related party loans receivable, net		(5	)		8			(13	)

Net cash (used in) provided by investing activities	$	(195	)	$	(14	)	$	(181	)

The majority of our capital expenditures for the nine months ended December 31, 2011 were attributable to our three major expansion projects in Brazil, South Korea and North America. The majority of our capital expenditures in the first nine months of the prior year were for projects devoted to product quality, technology, productivity enhancement and debottlenecking. We expect to increase our capital expenditures in the fourth quarter of fiscal 2012 as a result of our three major expansions. We expect that our total annual capital expenditures for fiscal 2012 will be between $550 and $600 million.

The settlement of undesignated derivative instruments resulted in an inflow of $95 million in the nine months ended December 31, 2011 as compared to $81 million in cash inflow in the nine months ended December 31, 2010. Based on forward curves for metal, foreign currencies, interest rates and energy as of December 31, 2011, we forecast approximately $28 million of cash inflows related to the settlement of derivative instruments in the fourth quarter.

The majority of proceeds from asset sales in the nine months ended December 31, 2010 relate to asset sales in South America.

(Outflow) proceeds from related party loans receivable, net, during all periods are primarily comprised of additional loans made to our non-consolidated affiliate, Aluminium Norf GmbH (Norf), net of payments we received related to a previous loan due from Norf.

Financing Activities

The following table presents information regarding our Net cash provided by (used in) financing activities (in millions).


	Nine Months Ended December 31,
	2011			2010			Change
Proceeds from issuance of debt, third parties	$	274		$	3,985		$	(3,711	)
Principal payments, third parties		(16	)		(2,486	)		2,470
Short-term borrowings (payments), net		211			49			162
Return of capital to our common shareholder					(1,700	)		1,700
Dividends, noncontrolling interest		(1	)		(18	)		17
Debt issuance costs		(2	)		(174	)		172
Acquisition of noncontrolling interest in Novelis Korea Ltd		(343	)					(343	)

Net cash provided by (used in) financing activities	$	123		$	(344	)	$	467

In December 2011, we acquired an additional 31.2% percent of the outstanding noncontrolling interest shares of Novelis Korea Limited for cash of $343 million. We funded the acquisition with a $225 million secured term loan, which resulted in cash proceeds, net of the debt discount, of $219 million. The remaining purchase price was funded through short-term borrowings and other available cash.

In the third quarter of fiscal 2012, we executed three separate loan agreements with Korean banks, which resulted in $43 million of proceeds from the issuance of long-term debt and additional short-term borrowings of $17 million.

In December 2010, we completed a series of refinancing transactions, which included the issuance of $1.1 billion of notes due 2012, $1.4 billion of notes due 2020 and a $1.5 billion secured term loan. The proceeds from the refinancing were used repay a prior secured loan credit facility, fund tender offers of old notes and pay various financing expenses. Additionally, a portion of the proceeds were used to fund a distribution of $1.7 billion as a return of capital to Hindalco.

As of December 31, 2011, our short-term borrowings were $227 million consisting of $208 million of short-term loans under our senior secured credit facilities (ABL Facility), $1 million in bank overdrafts, $17 million of bank loans in South Korea and $1 million of other short term borrowings. As of December 31, 2011, $23 million of the ABL Facility was utilized for letters of credit and we had $422 million in remaining availability under the ABL Facility. The weighted average interest rate on our total short-term borrowings was 4.30% and 2.43% as of December 30, 2011 and March 31, 2011, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

The following discussion addresses the applicable off-balance sheet items for our Company.

Derivative Instruments

See Note 10 Financial Instruments and Commodity Contracts to our accompanying condensed consolidated financial statements for a full description of derivative instruments.

Guarantees of Indebtedness

We have issued guarantees on behalf of certain of our wholly-owned subsidiaries. The indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. Neither we nor any of our subsidiaries hold any assets of any third parties as collateral to offset the potential settlement of these guarantees. Since we consolidate wholly-owned subsidiaries in our consolidated financial statements, all liabilities associated with trade payables for these entities are already included in our condensed consolidated balance sheets. We have no retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.

Other

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2011 and March 31, 2011, we are not involved in any unconsolidated SPE transactions.

CONTRACTUAL OBLIGATIONS

We have future obligations under various contracts relating to debt and interest payments, capital and operating leases, long-term purchase obligations, postretirement benefit plans and uncertain tax positions. In December 2011, we entered into a $225 million Incremental Term Loan and three banks loans in the amount of $60 million. See Note 6 Debt to our accompanying condensed consolidated financial statements for more details.

RETURN OF CAPITAL

Dividends are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness that would allow us to legally pay dividends and other relevant factors.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

During the nine months ended December 31, 2011, there were no significant changes to our critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended March 31, 2011.

RECENT ACCOUNTING STANDARDS

See Note 1 Business and Summary of Significant Accounting Policies to our accompanying condensed consolidated financial statements for a full description of accounting pronouncements including the respective dates of adoption and expected effects on results of operations, financial condition and liquidity.

NON-GAAP FINANCIAL MEASURES

Total Segment income presents the sum of the results of our four operating segments on a consolidated basis. We believe that total Segment income is an operating performance measure that measures operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. In reviewing our corporate operating results, we also believe it is important to review the aggregate consolidated performance of all of our segments on the same basis that we review the performance of each of our regions and to draw comparisons between periods based on the same measure of consolidated performance.

Management believes that investors understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back items that are not part of normal day-to-day operations of our business. By providing total Segment income, together with reconciliations, we believe we are enhancing investors understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.

However, total Segment income is not a measurement of financial performance under US GAAP, and our total Segment income may not be comparable to similarly titled measures of other companies. Total Segment income has important limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under US GAAP. For example, total Segment income:

does not reflect the companys cash expenditures or requirements for capital expenditures or capital commitments;

does not reflect changes in, or cash requirements for, the companys working capital needs;

does not reflect any costs related to the current or future replacement of assets being depreciated and amortized.

We also use total Segment income:

as a measure of operating performance to assist us in comparing our operating performance on a consistent basis because it removes the impact of items not directly resulting from our core operations;

for planning purposes, including the preparation of our internal annual operating budgets and financial projections;

to evaluate the performance and effectiveness of our operational strategies; and

as a basis to calculate incentive compensation payments for our key employees.

Total Segment income is equivalent to our Adjusted EBITDA, which we refer to in our earnings announcements and other external presentations to analysts and investors.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

This document 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. Examples of forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our expectations with respect to the impact of metal price movements on our financial performance and the effectiveness of our hedging programs and controls. These statements are based on beliefs and assumptions of Novelis management, which in turn are based on currently available information. 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.

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 publicly available third party industry journals. This information includes, but is not limited to, 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, financial condition, cash flow and 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:

relationships with, and financial and operating conditions of, our customers, suppliers and other stakeholders;

changes in the prices and availability of aluminum (or premiums associated with such prices) or other materials and 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;

the level of our indebtedness and our ability to generate cash;

deterioration of our ratings by a credit agency;

changes in the relative values of various currencies and the effectiveness of our currency hedging activities;

union disputes and other employee relations issues;

factors affecting our operations, such as litigation, environmental remediation and clean-up costs, labor relations and negotiations, breakdown of equipment and other events;

changes in general economic conditions including deterioration in the global economy, particularly sectors in which our customers operate;

changes in the fair value of derivative instruments or the failure of counterparties to our derivative instruments to honor their agreements;

the capacity and effectiveness of our metal hedging activities;

availability of production capacity;

impairment of our goodwill and other intangible assets;

continuing obligations and other relationships resulting from our spin-off from Alcan Inc.;

the impact of restructuring efforts in the future;

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;

cyclical demand and pricing within the principal markets for our products as well as seasonality in certain of our customers industries; and

changes in interest rates that have the effect of increasing the amounts we pay under our principal credit agreement and other financing agreements.

The above list of factors is not exhaustive. Some of these and other factors are discussed in more detail under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in commodity prices (primarily aluminum, electricity and natural gas), foreign currency exchange rates and interest rates that could impact our results of operations and financial condition. We manage our exposure to these and other market risks through regular operating and financing activities and derivative financial instruments. We use derivative financial instruments as risk management tools only, and not for speculative purposes. Except where noted, the derivative contracts are marked-to-market and the related gains and losses are included in earnings in the current accounting period.

By their nature, all derivative financial instruments involve risk, including the credit risk of non-performance by counterparties. All derivative contracts are executed with counterparties that, in our judgment, are creditworthy. Our maximum potential loss may exceed the amount recognized in the accompanying December 31, 2011 condensed consolidated balance sheet.

The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions and the relative costs of the instruments. The duration is always linked to the timing of the underlying exposure, with the connection between the two being regularly monitored.

Commodity Price Risks

We have commodity price risk with respect to purchases of certain raw materials including aluminum, electricity, natural gas and transport fuel.

Aluminum

Most of our business is conducted under a conversion model that allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our products have a price structure with two components: (i) a pass through aluminum price based on the LME plus local market premiums and (ii) a conversion premium based on the conversion cost to produce the rolled product and the competitive market conditions for that product.

A key component of our conversion model is the use of derivative instruments on projected aluminum requirements to preserve our conversion margin. We enter into forward metal purchases simultaneously with the sales contracts that contain fixed metal prices. These forward metal purchases directly hedge the economic risk of future metal price fluctuation associated with these contracts. The recognition of unrealized gains and losses on metal derivative positions typically precedes customer delivery and revenue recognition under the related fixed forward priced contracts. The timing difference between the recognition of unrealized gains and losses on metal derivatives and recognition of revenue impacts income (loss) before income taxes and net income (loss). Gains and losses on metal derivative contracts are not recognized in segment income until realized.

Metal price lag associated with inventory and non-fixed priced sales exposes us to potential losses in periods of falling aluminum prices. We sell short-term LME futures contracts to reduce our exposure to this risk. We expect the gain or loss on the settlement of the derivative to offset the effect of changes in aluminum prices on future product sales. These hedges generally generate losses in periods of increasing aluminum prices.

Sensitivities

We estimate that a 10% increase in LME aluminum prices would result in a $25 million pre-tax gain related to the change in fair value of our aluminum contracts as of December 31, 2011.

Energy

We use several sources of energy in the manufacture and delivery of our aluminum rolled products. In the three months ended December 31, 2011, natural gas and electricity represented approximately 88% of our energy consumption by cost. We also use fuel oil and transport fuel. The majority of energy usage occurs at our casting centers, at our smelters in South America and during the hot rolling of aluminum. Our cold rolling facilities require relatively less energy.

We purchase our natural gas on the open market, which subjects us to market pricing fluctuations. We seek to stabilize our future exposure to natural gas prices through the use of forward purchase contracts. Natural gas prices in Europe, Asia and South America have historically been more stable than in the United States. As of December 31, 2011, we have a nominal amount of forward purchases outstanding related to natural gas.

A portion of our electricity requirements are purchased pursuant to long-term contracts in the local regions in which we operate. A number of our facilities are located in regions with regulated prices, which affords relatively stable costs. In South America, we own and operate hydroelectric facilities that meet approximately 56% of our total electricity requirements in that segment. Additionally, we have entered into an electricity swap in North America to fix a portion of the cost of our electricity requirements.

We purchase a nominal amount of heating oil forward contracts to hedge against fluctuations in the price of our transport fuel.

Fluctuating energy costs worldwide, due to the changes in supply and international and geopolitical events, expose us to earnings volatility as such changes in such costs cannot immediately be recovered under existing contracts and sales agreements, and may only be mitigated in future periods under future pricing arrangements.

Sensitivities

The following table presents the estimated potential effect on the fair values of these derivative instruments as of December 31, 2011, given a 10% decline in spot prices for energy contracts ($ in millions).


	Change in Price			Change in Fair Value
Electricity		(10	)%	$
Natural Gas		(10	)%		(3	)

Foreign Currency Exchange Risks

Exchange rate movements, particularly the euro, the Brazilian real and the Korean won against the U.S. dollar, have an impact on our operating results. In Europe, where we have predominantly local currency selling prices and operating costs, we benefit as the euro strengthens, but are adversely affected as the euro weakens. In Korea, where we have local currency selling prices for local sales and U.S. dollar denominated selling prices for exports, we benefit slightly as the won weakens, but are adversely affected as the won strengthens, due to a slightly higher percentage of exports compared to local sales. In Brazil, where we have predominately U.S. dollar selling prices and local currency operating costs, we benefit as the local currency weakens, but are adversely affected as the local currency strengthens. Foreign currency contracts may be used to hedge the economic exposures at our foreign operations.

It is our policy to minimize exposures from non-functional currency denominated transactions within each of our operating segments. As such, the majority of our foreign currency exposures are from either forecasted net sales or forecasted purchase commitments in non-functional currencies. Our most significant non-U.S. dollar functional currency operations have the euro and the Korean won as their functional currencies, respectively. Our Brazilian operations are U.S. dollar functional.

We also face translation risks related to the changes in foreign currency exchange rates which are generally not hedged. Amounts invested in these foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive income (loss) in the Shareholders equity section of the accompanying condensed consolidated balance sheets. Net sales and expenses at these non-U.S. dollar functional currency entities are translated into varying amounts of U.S. dollars depending upon whether the U.S. dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses as expressed in U.S. dollars.

Any negative impact of currency movements on the currency contracts that we have entered into to hedge foreign currency commitments to purchase or sell goods and services would be offset by an equal and opposite favorable exchange impact on the commitments being hedged. For a discussion of accounting policies and other information relating to currency contracts, see Note 1 Business and Summary of Significant Accounting Policies and Note 10 Financial Instruments and Commodity Contracts.

Sensitivities

The following table presents the estimated potential effect on the fair values of these derivative instruments as of December 31, 2011, given a 10% change in rates ($ in millions).


	Change in Exchange Rate			Change in Fair Value
Currency measured against the U.S. dollar
Brazilian real		(10	)%	$	(40	)
Euro		10	%		(30	)
Korean won		(10	)%		(15	)
Canadian dollar		(10	)%		(2	)
British pound		(10	)%		(2	)
Swiss franc		(10	)%		(7	)

Interest Rate Risks

designated as cash flow hedges. Upon completion of the refinancing transaction, our exposure to changes in the benchmark LIBOR interest rate was limited which resulted in de-designation. The Term Loan Facility contains a floor feature of the higher of LIBOR or 100 basis points plus a spread ranging from 2.75% to 3.00%. As of December 31, 2011, this floor feature was in effect, changing our variable rate debt to fixed rate debt. Due to the nature of fixed-rate debt, there would be no significant impact on our interest expense or cash flows from either a 10% increase or decrease in market rates of interest.

Due to the floor feature of our Term Loan Facility mentioned above, a 10 basis point increase in the interest rates on our outstanding variable rate debt as of March 31, 2011, would have no impact on our annual pre-tax income. To be above the 2011 Term Loan Facility floor feature, as of December 31, 2011, interest rates would have to increase by 43 basis points (bp). From time to time, we have used interest rate swaps to manage our debt cost. In Korea, we entered into interest rate swaps to fix the interest rate on various floating rate debt. See Note 6 Debt for further information.

Sensitivities

The following table presents the estimated potential effect on the fair values of these derivative instruments as of December 31, 2011, given a 100 bps negative shift in USD LIBOR ($ in millions).


	Change in Rate			Change in Fair Value
Interest Rate Contracts
North America		(100	)bps	$	(0.5	)

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

We have carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the Companys disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon such evaluation, management has concluded that the Companys disclosure controls and procedures were effective as of December 31, 2011.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to litigation incidental to our business from time to time. For additional information regarding litigation to which we are a party, see Note 14 Commitments and Contingencies to our accompanying condensed consolidated financial statements.

Item 1A. Risk Factors

The recent downgrade of the U.S. credit rating could have a material adverse impact on our financial condition and results of operations.

On August 5, 2011, Standard & Poors downgraded the credit rating for long-term U.S. government debt from AAA to AA+. The long-term impacts of the downgrade are unknown. The downgrade could have a material adverse impact on global financial markets and worldwide economic conditions, which could affect our credit ratings and liquidity and those of our customers and other business partners.

There were no material changes in our risk factors as previously disclosed under Risk Factors in Part I, Item 1A in our Annual Report on Form 10-K for the year ended March 31, 2011 and in Part II, Item 1A in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2011 and September 30, 2011 .

Item 6. Exhibits


Exhibit No.		Description
Exhibit No.		Description

2.1		Arrangement Agreement by and among Hindalco Industries Limited, AV Aluminum Inc. and Novelis Inc., dated as of February 10, 2007 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 13, 2007) (File No. 001-32312))

3.1		Restated Certificate and Articles of Amalgamation of Novelis Inc. (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 8-K filed on November 10, 2010 (File No. 001-32312))

3.2		Novelis Inc. Amended and Restated Bylaws, adopted as of July 24, 2008 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on July 25, 2008 (File No. 001-32312))

4.1		Supplemental Indenture relating to the 8.375% Senior Notes due 2017, dated as of December 7 2011 between Novelis Inc., the guarantor named on the signature page thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee.

4.2		Supplemental Indenture relating to the 8.75% Senior Notes due 2020, dated as of December 7, 2011 between Novelis Inc., the guarantor named on the signature page thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee.

10.1		$225 million Increase Joinder Agreement dated as of December 7, 2011 among Novelis, Inc., AV Metals Inc. The Third Party Security Providers named therein and Bank of America, N.A., as Administrative Agent under the Credit Agreements

31.1		Section 302 Certification of Principal Executive Officer

31.2		Section 302 Certification of Principal Financial Officer

32.1		Section 906 Certification of Principal Executive Officer

32.2		Section 906 Certification of Principal Financial Officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


NOVELIS INC.

By:		/s/ Steven Fisher
		Steven Fisher
		Chief Financial Officer
		(Principal Financial Officer and Authorized Officer)

By		/s/ Robert P. Nelson
		Robert P. Nelson
		Vice President Finance Controller
		(Principal Accounting Officer)

Date: February 8, 2012

EXHIBIT INDEX


Exhibit No.		Description
Exhibit No.		Description

2.1		Arrangement Agreement by and among Hindalco Industries Limited, AV Aluminum Inc. and Novelis Inc., dated as of February 10, 2007 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 13, 2007) (File No. 001-32312))

3.1		Restated Certificate and Articles of Amalgamation of Novelis Inc. (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 8-K filed on November 10, 2010 (File No. 001-32312))

3.2		Novelis Inc. Amended and Restated Bylaws, adopted as of July 24, 2008 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on July 25, 2008 (File No. 001-32312))

4.1		Supplemental Indenture relating to the 8.375% Senior Notes due 2017, dated as of December 7, 2011 between Novelis Inc., the guarantor named on the signature page thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee.

4.2		Supplemental Indenture relating to the 8.75% Senior Notes due 2020, dated as of December 7, 2011 between Novelis Inc., the guarantor named on the signature page thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee.

10.1		$225 million Increase Joinder Agreement dated as of December 7, 2011 among Novelis, Inc., AV Metals Inc. The Third Party Security Providers named therein and Bank of America, N.A., as Administrative Agent under the Credit Agreements

31.1		Section 302 Certification of Principal Executive Officer

31.2		Section 302 Certification of Principal Financial Officer

32.1		Section 906 Certification of Principal Executive Officer

32.2		Section 906 Certification of Principal Financial Officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase