February 10, 2014 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



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

For the quarterly period ended December 31, 2013



¨	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

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 ý 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):



Large accelerated filer	¨		Accelerated filer	¨

Non-accelerated filer	ý	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of February 7, 2014, the registrant had 1,000 shares of common stock, no par value, outstanding. All of the registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the registrant’s parent company.

Novelis Inc.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Statements of Operations (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)	4
	Condensed Consolidated Balance Sheets (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Condensed Consolidated Statement of Equity (unaudited)	7
	Notes to the Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76
Item 4.	Controls and Procedures	79

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	80
Item 1A.	Risk Factors	80
Item 6.	Exhibits	81

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,
	2013			2012			2013			2012
Net sales	$	2,422		$	2,321		$	7,257		$	7,312
Cost of goods sold (exclusive of depreciation and amortization)	2,112			2,036			6,304			6,315
Selling, general and administrative expenses	115			101			344			305
Depreciation and amortization	91			76			247			218
Research and development expenses	12			11			34			36
Interest expense and amortization of debt issuance costs	76			76			227			223
Gain on assets held for sale	(6		)	—			(6		)	(3		)
Restructuring and impairment, net	19			7			46			29
Equity in net loss of non-consolidated affiliates	5			10			12			15
Other income, net	(12		)	(10		)	(27		)	(39		)
	2,412			2,307			7,181			7,099
Income before income taxes	10			14			76			213
Income tax (benefit) provision	(3		)	11			26			69
Net income	13			3			50			144
Net income attributable to noncontrolling interests	—			—			—			1
Net income attributable to our common shareholder	$	13		$	3		$	50		$	143

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

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

(In millions)




	Three Months Ended December 31, 2013								Three Months Ended December 31, 2012
	Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests		Total			Attributable to Our Common Shareholder		Attributable to Noncontrolling Interests		Total
Net income	$	13		$	—	$	13		$	3	$	—	$	3
Other comprehensive income (loss):
Currency translation adjustment	34			—		34			50		—		50
Net change in fair value of effective portion of cash flow hedges	7			—		7			41		—		41
Net change in pension and other benefits	(4		)	—		(4		)	5		—		5
Other comprehensive income (loss) before income tax effect	37			—		37			96		—		96
Income tax provision (benefit) related to items of other comprehensive income (loss)	4			—		4			14		—		14
Other comprehensive income (loss), net of tax	33			—		33			82		—		82
Comprehensive income (loss)	$	46		$	—	$	46		$	85	$	—	$	85




	Nine Months Ended December 31, 2013									Nine Months Ended December 31, 2012
	Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests			Total			Attributable to Our Common Shareholder			Attributable to Noncontrolling Interests		Total
Net income	$	50		$	—		$	50		$	143		$	1	$	144
Other comprehensive income (loss):
Currency translation adjustment	126			(2		)	124			16			—		16
Net change in fair value of effective portion of cash flow hedges	(36		)	—			(36		)	(17		)	—		(17		)
Net change in pension and other benefits	99			—			99			35			—		35
Other comprehensive income (loss) before income tax effect	189			(2		)	187			34			—		34
Income tax provision (benefit) related to items of other comprehensive income (loss)	36			—			36			3			—		3
Other comprehensive income (loss), net of tax	153			(2		)	151			31			—		31
Comprehensive income (loss)	$	203		$	(2	)	$	201		$	174		$	1	$	175

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In millions, except number of shares)



	December 31, 2013			March 31, 2013
ASSETS
Current assets
Cash and cash equivalents	$	527		$	301
Accounts receivable, net
— third parties (net of allowances of $4 as of December 31, 2013 and $3 as of March 31, 2013, respectively)	1,326			1,447
— related parties	50			38
Inventories	1,188			1,168
Prepaid expenses and other current assets	100			93
Fair value of derivative instruments	52			109
Deferred income tax assets	130			112
Assets held for sale	33			9
Total current assets	3,406			3,277
Property, plant and equipment, net	3,443			3,104
Goodwill	611			611
Intangible assets, net	642			649
Investment in and advances to non–consolidated affiliates	657			627
Deferred income tax assets	44			75
Other long–term assets
— third parties	169			166
— related parties	13			13
Total assets	$	8,985		$	8,522
LIABILITIES AND EQUITY
Current liabilities
Current portion of long–term debt	$	93		$	30
Short–term borrowings	886			468
Accounts payable
— third parties	1,198			1,207
— related parties	58			47
Fair value of derivative instruments	75			74
Accrued expenses and other current liabilities	470			497
Deferred income tax liabilities	18			28
Liabilities held for sale	12			1
Total current liabilities	2,810			2,352
Long–term debt, net of current portion	4,365			4,434
Deferred income tax liabilities	459			504
Accrued postretirement benefits	655			731
Other long–term liabilities	256			262
Total liabilities	8,545			8,283
Commitments and contingencies
Shareholder’s equity
Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of December 31, 2013 and March 31, 2013	—			—
Additional paid–in capital	1,654			1,654
Accumulated deficit	(1,127		)	(1,177		)
Accumulated other comprehensive loss	(115		)	(268		)
Total equity of our common shareholder	412			209
Noncontrolling interests	28			30
Total equity	440			239
Total liabilities and equity	$	8,985		$	8,522

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,
	2013			2012
OPERATING ACTIVITIES
Net income	$	50		$	144
Adjustments to determine net cash provided by operating activities:
Depreciation and amortization	247			218
Loss on unrealized derivatives and other realized derivatives in investing activities, net	9			11
Gain on assets held for sale	(6		)	(3		)
Deferred income taxes	(45		)	3
Amortization of fair value adjustments, net	9			9
Equity in net loss of non–consolidated affiliates	12			15
Gain on foreign exchange remeasurement of debt	(3		)	(5		)
Loss on sale of assets	4			1
Impairment charges	19			3
Amortization of debt issuance costs and carrying value adjustments	19			22
Other, net	(6		)	(5		)
Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures):
Accounts receivable	151			78
Inventories	(30		)	(193		)
Accounts payable	(22		)	(139		)
Other current assets	35			(23		)
Other current liabilities	(89		)	(83		)
Other noncurrent assets	(1		)	(18		)
Other noncurrent liabilities	3			(13		)
Net cash provided by operating activities	356			22
INVESTING ACTIVITIES
Capital expenditures	(522		)	(538		)
Proceeds from sales of assets, third party, net of transaction fees	7			18
Proceeds from sales of assets, related party, net of transaction fees	8			2
(Outflows) proceeds from investment in and advances to non–consolidated affiliates, net	(12		)	3
Proceeds from settlement of other undesignated derivative instruments, net	6			10
Net cash used in investing activities	(513		)	(505		)
FINANCING ACTIVITIES
Proceeds from issuance of debt	138			296
Principal payments	(113		)	(93		)
Short–term borrowings, net	359			304
Dividends, noncontrolling interest	—			(2		)
Acquisition of noncontrolling interest in Novelis Korea Ltd.	—			(9		)
Debt issuance costs	(8		)	(3		)
Net cash provided by financing activities	376			493
Net increase (decrease) in cash and cash equivalents	219			10
Effect of exchange rate changes on cash	7			13
Cash and cash equivalents — beginning of period	301			317
Cash and cash equivalents — end of period	$	527		$	340

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (unaudited)

(In millions, except number of shares)



	Equity of our Common Shareholder
	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss) (AOCI)			Non- controlling Interests			Total Equity
	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss) (AOCI)			Non- controlling Interests			Total Equity
Balance as of March 31, 2013	1,000	$	—	$	1,654	$	(1,177	)	$	(268	)	$	30		$	239
Net income attributable to our common shareholder	—	—		—		50			—			—			50
Net income attributable to noncontrolling interests	—	—		—		—			—			—			—
Currency translation adjustment, net of tax impact of $–million included in AOCI	—	—		—		—			126			(2		)	124
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $1 included in AOCI	—	—		—		—			(35		)	—			(35		)
Change in pension and other benefits, net of tax provision of $37 included in AOCI	—	—		—		—			62			—			62
Balance as of December 31, 2013	1,000	$	—	$	1,654	$	(1,127	)	$	(115	)	$	28		$	440

See accompanying notes to the condensed consolidated financial statements.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

References herein to “Novelis,” the “Company,” “we,” “our,” or “us” refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to “Hindalco” refer to Hindalco Industries Limited, our parent company.

Description of Business and Basis of Presentation

Novelis Inc. was formed in Canada on September 21, 2004. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the transportation, electronics, architectural and industrial product markets. We also have recycling operations in many of our plants to recycle post-consumer aluminum, such as used-beverage cans (UBCs). As of December 31, 2013, we had manufacturing operations in nine countries on four continents: North America, South America, Asia and Europe, through 25 operating plants, including recycling operations in ten of these plants. In addition to aluminum rolled products plants, our South American businesses include 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, 2013 filed with the United States Securities and Exchange Commission (SEC) on May 15, 2013. 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 our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairment of long lived assets and other intangible assets; (4) impairment of and assessment of consolidation of equity investments; (5) actuarial assumptions related to pension and other postretirement benefit plans; (6) tax uncertainties and valuation allowances; and (7) assessment of loss contingencies, including environmental and litigation liabilities. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.

Consolidation Policy

Our condensed 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 condensed consolidated financial statements.

We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. Consolidated “Net income attributable to our common shareholder” includes our share of net income (loss) of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the consolidated financial statements for consolidated entities, compared to a two-line presentation of equity method investments and net losses.

Reclassifications

Certain reclassifications of the prior period amounts and presentation have been made to conform to the presentation adopted in the current period. Impairment charges were previously presented within "Other income, net" and are now included within "Restructuring and impairment, net."

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

Recently Adopted Accounting Standards

Effective for the first quarter of fiscal 2014, we adopted Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, and ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in this update require us to disclose information about offsetting and related arrangements to enable users of our financial statements to understand the effect of those arrangements on our financial position. The adoption of this standard had no impact on our consolidated financial position or results of operations, but required additional disclosure in Note 13 - Fair Value Measurements.

Effective for the first quarter of fiscal 2014, we adopted Financial Accounting Standards Board ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendment requires that we present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, we would instead cross reference to the related footnote for additional information. The adoption of this standard had no impact on our consolidated financial position or results of operations, but required additional disclosure for which we added in Note 12 - Accumulated Other Comprehensive Income (Loss).

Recently Issued Accounting Standards

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendments in this update provide clarification regarding the release of a cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The guidance will be effective for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods. We will adopt this standard prospectively in our first quarter ending June 30, 2015 and therefore this will not impact our historically financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The guidance will be effective for annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods. The guidance will be applied prospectively. We will adopt this standard in our first quarter ending June 30, 2014. We do not expect the standard will have a material impact to our consolidated financial position or results of operations.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

2. RESTRUCTURING AND IMPAIRMENT, NET

“Restructuring and impairment, net” for the nine months ended December 31, 2013 and 2012 was $46 million and $29 million, respectively. Included in the $46 million are asset impairment charges of $17 million on non-core assets in South America and $2 million of other impairments unrelated to restructuring activities.

The following table summarizes our restructuring liability activity by segment and impairment charges (in millions).



	Restructuring Liability
	North America			Europe			Asia		South America			Corporate			Total Restructuring Liabilities			Other Restructuring Charges (A)		Impairments		Total Restructuring and Impairments, net
Balance as of March 31, 2013	$	7		$	10		$	—	$	14		$	2		$	33
Expenses	2			22			—		2			—			26			$	1	$	19	$	46
Cash payments	(4		)	(12		)	—		(7		)	(1		)	(24		)
Foreign currency translation and other	—			1			—		(1		)	—			—
Balance as of December 31, 2013	$	5		$	21		$	—	$	8		$	1		$	35

(A) Other restructuring charges include period expenses that were not recorded through the restructuring liability.

As of December 31, 2013, $34 million of the restructuring liability was classified as short-term and included in "Accrued expenses and other current liabilities" and $1 million was classified as long-term and included in "Other long-term liabilities" in our condensed consolidated balance sheets.

North America

Restructuring charges for the nine months ended December 31, 2013 were $3 million, which consisted of severance and other costs related to relocation of our research and development operations and $1 million of period expenses that were not recorded through the restructuring liability. For the nine months ended December 31, 2013, we made $3 million in severance payments related to the relocation and $1 million in other payments related to previously announced programs.

As of December 31, 2013, the restructuring liability balance of $5 million was comprised of $4 million of severance and $1 million of other costs.

Europe

Restructuring charges for the nine months ended December 31, 2013 consisted of $22 million of severance charges that reflect continuing efforts to reduce the cost of our business support organization for the European region. For the nine months ended December 31, 2013, we made $12 million in severance payments related to these restructuring actions and previously announced separation programs.

As of December 31, 2013, the restructuring liability balance of $21 million was comprised of $20 million of severance costs and $1 million of environmental remediation liabilities.

South America

Restructuring charges for the nine months ended December 31, 2013 were $2 million which consisted of severance and other exit charges related to the closure of one of our primary aluminum smelter lines. For the nine months ended December 31, 2013, we made $3 million in severance payments and $4 million in other exit related payments for the closure of the primary aluminum smelter line.

As of December 31, 2013, the restructuring liability balance of $8 million was primarily related to exit related liabilities from previously announced programs.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

Corporate

Restructuring payments during the nine months ended December 31, 2013 consisted of $1 million in lease payments related to our previous corporate headquarters. As of December 31, 2013, the restructuring liability balance of $1 million was comprised of future lease payments on our previous corporate headquarters.

3. INVENTORIES

Inventories consisted of the following (in millions).



	December 31, 2013		March 31, 2013
Finished goods	$	254	$	245
Work in process	447		502
Raw materials	382		319
Supplies	105		102
Inventories	$	1,188	$	1,168

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

4. ASSETS HELD FOR SALE

In December 2013, we sold certain land in Brazil for $6 million in cash and recognized a $6 million "Gain on assets held for sale" in the condensed consolidated statement of operations. We have also made a decision to sell certain mining rights related to this property and expect this will occur within the next twelve months. We have recorded the net book value of the mining rights asset of $1 million as "Assets held for sale" as of December 31, 2013. The estimated fair market value of the mining rights is in excess of the net book value.

In September 2013, we made the decision to sell certain non-core assets and liabilities related to our foil operations in North America. The sale is estimated to occur within the next twelve months. The related assets of $32 million and liabilities of $12 million have been classified as "Assets held for sale" and "Liabilities held for sale" in our condensed consolidated balance sheets as of December 31, 2013. The estimated fair market value of the assets and liabilities is in excess of net book value.

In August 2013, we sold our bauxite mining rights and certain alumina assets and related liabilities in Brazil to our parent company, Hindalco, for $8 million in cash. The sales price approximated the net book value of the assets and liabilities sold, therefore we recorded no gain or loss. As of March 31, 2013, these assets and liabilities were classified as “Assets held for sale” and “Liabilities held for sale” in our condensed consolidated balance sheets.

In June 2012, we sold three aluminum foil and packaging plants in our Europe segment to American Industrial Acquisition Corporation (AIAC) for $18 million of cash, net of transaction fees, and we recorded a gain on the disposal of these assets and liabilities of $3 million, which was recorded as “Gain on assets held for sale” in the condensed consolidated statement of operations.

The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale (in millions).



	December 31, 2013		March 31, 2013
Assets held for sale
Accounts receivable	$	13	$	—
Inventories	14		—
Property, plant and equipment, net	6		9
Total assets held for sale	$	33	$	9

Liabilities held for sale
Accounts payable	$	3	$	—
Accrued expenses and other current liabilities	9		—
Other liabilities	—		1
Total liabilities held for sale	$	12	$	1

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

5. CONSOLIDATION

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 VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

We have a joint interest in Logan Aluminum Inc. (Logan) with Tri-Arrows Aluminum Inc. (Tri-Arrows). 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. Logan’s creditors do not have recourse to our general credit.

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

The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated 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.



	December 31, 2013		March 31, 2013
Assets
Current assets
Cash and cash equivalents	$	—	$	1
Accounts receivable	40		35
Inventories	42		38
Prepaid expenses and other current assets	1		1
Total current assets	83		75
Property, plant and equipment, net	9		17
Goodwill	12		12
Deferred income tax assets	72		68
Other long-term assets	3		3
Total assets	$	179	$	175
Liabilities
Current liabilities
Short-term borrowings	$	1	$	—
Accounts payable	24		29
Accrued expenses and other current liabilities	14		14
Total current liabilities	39		43
Accrued postretirement benefits	160		154
Other long-term liabilities	3		3
Total liabilities	$	202	$	200

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)


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

Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with our non-consolidated affiliates, which we classify as related party transactions and balances. We earned less than $1 million of interest income on a loan due from a non-consolidated affiliate, Aluminum Norf GmbH (Alunorf), during each of the periods presented in the table below. We believe collection of the full receivable from Alunorf is probable; thus no allowance for loan loss was provided for this loan as of December 31, 2013 and March 31, 2013.

We have guaranteed the indebtedness for a credit facility and loan on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of December 31, 2013, there were no amounts outstanding under our guarantee with Alunorf.

The following table summarizes the results of operations of our equity method affiliates in aggregate for the three and nine months ended December 31, 2013 and 2012 and the nature and amounts of significant transactions we had with our non-consolidated affiliates (in millions). The current period and prior periods are disclosed at 100% of the operating results of these affiliates.



	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013		2012
Net sales	$	150		$	121		$	411	$	362
Costs and expenses related to net sales	151			134			407		368
Provision (benefit) for taxes on income	2			(1		)	4		1
Net (loss) income	$	(3	)	$	(12	)	$	—	$	(7	)
Purchase of tolling services from Aluminum Norf GmbH (Alunorf)	$	75		$	61		$	205	$	181

The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in our condensed consolidated balance sheets (in millions).



	December 31, 2013		March 31, 2013
Accounts receivable-related parties	$	50	$	38
Other long-term assets-related parties	$	13	$	13
Accounts payable-related parties	$	58	$	47

Transactions with Hindalco

In August 2013, we sold our bauxite mining rights and certain alumina assets and related liabilities in Brazil to Hindalco for $8 million in cash. As of December 31, 2013, we had a receivable from Hindalco related to this transaction of less than $1 million. See Note 4-Assets Held for Sale for further details.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

7. DEBT

Debt consisted of the following (in millions).



	December 31, 2013												March 31, 2013
	Interest Rates (A)		Principal			Unamortized Carrying Value Adjustments				Carrying Value			Principal			Unamortized Carrying Value Adjustments				Carrying Value
Third party debt:
Short term borrowings	3.60	%	$	886		$	—			$	886		$	468		$	—			$	468
Novelis Inc.
Floating rate Term Loan Facility, due March 2017	3.75	%	1,754			(22		)	(B)	1,732			1,767			(27		)	(B)	1,740
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			—				1,400
Capital lease obligations, due through July 2017	3.64	%	11			—				11			12			—				12
Novelis Korea Limited
Loans, due December 2014 through December 2015 (KRW 166 billion)	3.62	%	157			—				157			149			—				149
Novelis Switzerland S.A.
Capital lease obligation, due through December 2019 (Swiss francs (CHF) 33 million)	7.50	%	37			(1		)	(C)	36			38			(1		)	(C)	37
Novelis do Brasil Ltda.
BNDES loans, due March 2014 through April 2021(BRL R$30 million)	6.26	%	13			(2		)	(D)	11			18			(3		)	(D)	15
Other
Other debt, due through December 2020	4.32	%	11			—				11			11			—				11
Total debt — third parties			5,369			(25		)		5,344			4,963			(31		)		4,932
Less: Short-term borrowings			(886		)	—				(886		)	(468		)	—				(468		)
Less: Current portion of long term debt			$	(93	)	—				$	(93	)	$	(30	)	—				$	(30	)
Long-term debt, net of current portion — third parties:			$	4,390		$	(25	)		$	4,365		$	4,465		$	(31	)		$	4,434

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

(A)

Interest rates are the fixed or variable rates as specified in the debt instruments (not the effective interest rate) as of December 31, 2013, and therefore, exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of purchase accounting in connection with Hindalco's purchase of Novelis and accretion/amortization of debt issuance costs related to the debt exchange completed in fiscal 2009 and the series of refinancing transactions and additional borrowings we completed in fiscal 2011, 2012, 2013 and 2014. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.


(B)	Debt existing at the time of Hindalco's purchase of Novelis 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, resulting in carrying value adjustments on this debt obligation. The unamortized carrying value balances also include an issuance discount.


(C)	Debt existing at the time of Hindalco's purchase of Novelis was recorded at fair value resulting in carrying value adjustments to our capital lease obligations in Novelis Switzerland.


(D)	The unamortized carrying value balance includes issuance discount resulting from receiving a below market interest rate on the the BNDES loans.

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, 2013 for our debt denominated in foreign currencies) are as follows (in millions):



As of December 31, 2013	Amount
Short-term borrowings and Current portion of long-term debt due within one year	$	979
2 years	126
3 years	30
4 years	2,812
5 years	10
Thereafter	1,412
Total	$	5,369

Senior Secured Credit Facilities

As of December 31, 2013, we had senior secured credit facilities which consist of (1) a $1.8 billion four-year secured term loan credit facility (Term Loan Facility) and (2) a $1 billion five-year asset based loan facility (ABL Revolver). The Term Loan Facility interest rate is equal to LIBOR (with a floor of 1%) plus a spread of 2.75%, at all times.

In May 2013, we amended and extended our previous five-year asset based loan facility (ABL Facility) by entering into a $1.0 billion, five year ABL Revolver bearing an interest rate of LIBOR plus a spread of 1.75% to 2.25% or prime plus a spread of 0.75% to 1.25% based on excess availability. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million, subject to approval by the lenders of the Term Loan Facility and ABL Revolver. The new ABL Revolver has various customary covenants including maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $110 million and (2) 15% of the lesser of (a) the Credit Facility and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL defined EBITDA less (b) maintenance capital expenditures less (c) cash taxes; to (2) (a) interest expense plus (b) scheduled principal payments plus (c) dividends to the Company's direct holding company to pay certain taxes, operating expenses and management fees and repurchases of equity interests from employees, officers and directors. The facility matures on May 13, 2018; provided that, in the event that any of the Notes or the Term Loan Facility is outstanding (and not refinanced with a maturity date later than November 13, 2018) 90 days prior to their respective maturity dates, then the ABL Revolver will mature 90 days prior to the maturity date for the Notes or the Term Loan Facility, unless excess availability under the ABL Revolver is at least (i) 25% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and a minimum fixed charged ratio test of at least 1.25 to 1 is met.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

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 include various customary negative covenants and events of default, including limitations on our ability to (1) make certain restricted payments, (2) incur additional indebtedness, (3) sell certain assets, (4) enter into sale and leaseback transactions, (5) make investments, loans and advances, (6) pay dividends and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. Substantially all of our assets are pledged as collateral under the senior secured credit facilities. As of December 31, 2013, we were in compliance with the covenants in the Term Loan Facility and ABL Revolver.

Short-Term Borrowings

As of December 31, 2013, our short-term borrowings were $886 million consisting of $697 million of loans under our ABL Revolver, $47 million (KRW 50 billion) in Novelis Korea loans, $123 million in Novelis Brazil loans, $17 million (VND 357 billion) in Novelis Vietnam loans and $2 million of other short-term borrowings. The weighted average interest rate on our total short-term borrowings was 3.60% and 3.30% as of December 31, 2013 and March 31, 2013, respectively.

As of December 31, 2013, $17 million of the ABL Revolver was utilized for letters of credit, and we had $203 million in remaining availability under the ABL Revolver. As of December 31, 2013, we had no outstanding letters of credit in Korea.

In May 2013, Novelis Korea entered into two new revolving loan facilities. As of December 31, 2013, one of the facilities has a borrowing capacity of $28 million (KRW 30 billion) and bears an interest rate of the three month financial rate as published by the Korea Financial Investment Association plus a spread of 1.6%. The second facility has a borrowing capacity of $47 million (KRW 50 billion) and bears an interest rate tied to Korea's three month CD rate plus a spread of 1.25%. Both facilities mature in May 2015. As of December 31, 2013, we had no borrowings outstanding under these revolving loan facilities.

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). On October 12, 2012, we elected to redeem all of our outstanding 7.25% Senior Notes due 2015 (the 7.25% Notes). We made payments to the holders of the outstanding 7.25% Notes of $76 million and retired them during the third quarter of fiscal 2013.

The Notes contain customary covenants and events of default that will limit our ability and, in certain instances, the ability of certain of our subsidiaries to (1) incur additional debt and provide additional guarantees, (2) pay dividends beyond certain amounts and make other restricted payments, (3) create or permit certain liens, (4) make certain asset sales, (5) use the proceeds from the sales of assets and subsidiary stock, (6) create or permit restrictions on the ability of certain of the Company's subsidiaries to pay dividends or make other distributions to the Company, (7) engage in certain transactions with affiliates, (8) enter into sale and leaseback transactions, (9) designate subsidiaries as unrestricted subsidiaries and (10) consolidate, merge or transfer all or substantially all of the our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc., a division of the McGraw-Hill Companies, Inc. or Moody's Investors Service, Inc. have assigned an investment grade credit rating to the Notes and no default or event of default under the Indenture has occurred and is continuing, most of the covenants will be suspended. As of December 31, 2013, we were in compliance with the covenants in the Notes.

Korean Bank Loans

As of December 31, 2013, Novelis Korea had $157 million (KRW 166 billion) of outstanding long-term loans with various banks, of which $47 million is due within one year. One of the loans has a fixed interest rate of 3.61% and a maturity of December 2015 and all other loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.88% to 1.41% with maturity dates ranging from December 2014 to December 2015. The weighted average interest rate is 3.62% as of December 31, 2013.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

Brazil BNDES Loans

From February 2011 through September 2012, Novelis Brazil entered into loan agreements with Brazil’s National Bank for Economic and Social Development (the BNDES loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of December 31, 2013, we had $13 million (BRL 30 million) outstanding under the BNDES loan agreements at a current weighted average rate of 6.26% with maturity dates from March 2014 through April 2021. Less than $3 million of BNDES loans are due within one year.

Other Long-term debt

In December 2004, Novelis Switzerland entered into a fifteen-year capital lease obligation with Alcan for assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of CHF 1.7 million (USD $1.9 million) at the exchange rate as of December 31, 2013. As of December 31, 2013, we had $37 million outstanding under this capital lease.

During fiscal 2013, Novelis Inc. entered into various five-year capital lease arrangements to upgrade and expand our information technology infrastructure. As of December 31, 2013, we had $11 million outstanding under these capital leases.

As of December 31, 2013, we had $11 million of other capital lease obligations and loans in Asia with due dates through December 2020.

Interest Rate Swaps

We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt. See Note 11- Financial Instruments and Commodity Contracts for further information about these interest rate swaps.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

8. SHARE-BASED COMPENSATION

The Company's board of directors has authorized long term incentive plans (LTIPs), under which Hindalco stock appreciation rights (Hindalco SARs), Novelis stock appreciation rights (Novelis SARs), and phantom restricted stock units (RSUs) are granted to certain executive officers and key employees.

The Hindalco and Novelis SARs will each vest at the rate of 25% per year, subject to the achievement of an annual performance target, and expire 7 years from their original grant date. Each Hindalco 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. Each Novelis SAR is to be settled in cash based on the difference between the fair value of one Novelis phantom share on the original date of grant and the fair value of a phantom share on the date of the exercise. The amount of cash paid to settle Hindalco SARs and Novelis SARs are limited to two and a half or three times the target payout, depending on the plan year. The Hindalco and Novelis SARs do not transfer any shareholder rights in Hindalco or Novelis to a participant. The Hindalco and Novelis SARs are classified as liability awards and are remeasured at fair value each reporting period until the SARs are settled.

The performance criterion for vesting of both the Hindalco and Novelis SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target operating EBITDA. Given that the performance criterion is based on an earnings target in a future period for each fiscal year, the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined.

The RSUs vest in full three years from the grant date, subject to continued employment with the Company, but are not subject to performance criteria. Each RSU is to be settled in cash equal to the market value of one Hindalco share. The payout on the RSUs is limited to three times the market value of one Hindalco share measured on the original date of grant. The RSUs are classified as liability awards and expensed over the requisite service period (three years) based on the Hindalco stock price as of each balance sheet date.

On May 13, 2013, the Company's board of directors amended the long-term incentive plans for fiscal years 2010 - 2013 (FY 2010 Plan), fiscal years 2011- 2014 (FY 2011 Plan), fiscal years 2012 - 2015 (FY 2012 Plan) and fiscal years 2013 - 2016 (FY 2013 Plan). The amendment gave each participant the option to cancel a portion of their outstanding Hindalco SARs for a lump-sum cash payment and/or the issuance of new Novelis SARs. The remaining Hindalco SARs and the new Novelis SARs will continue to vest according to the terms and conditions of the original grant. The following tables reflect the activity related to the participants' elections under the amendment.

Total compensation expense related to Hindalco SARs, Novelis SARs, and RSUs under the plans for the respective periods is presented in the table below (in millions). These amounts are included in “Selling, general and administrative expenses” or "Cost of goods sold (exclusive of depreciation and amortization)" in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2015, 2016 and 2017 have not yet been established, measurement periods for Hindalco and Novelis SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year Hindalco and Novelis SARs has been recorded.



	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Total compensation expense	$	4	$	3	$	21	$	4

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

The table below shows the Hindalco SARs activity for the nine months ended December 31, 2013.



	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, 2013	38,971,573		120.40	4.8	$	2
Granted	7,500,061		105.28	6.5	—
Exercised	(881,481	)	78.97	—	—
Forfeited/Canceled	(23,092,102	)	125.46	—	—
SARs outstanding as of December 31, 2013	22,498,051		111.36	4.5	$	7
SARs exercisable as of December 31, 2013	9,351,668		114.01

The table below shows the Novelis SARs activity for the nine months ended December 31, 2013.



	Number of SARs		Weighted Average Exercise Price (in USD)	Weighted Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (USD in millions)
SARs outstanding as of March 31, 2013	—		—	—	$	—
Granted	13,468,436		94.91	5.0	3
Exercised	(19,524	)	75.77	—	—
Forfeited/Canceled	(983,905	)	96.05	—	—
SARs outstanding as of December 31, 2013	12,465,007		94.85	5.0	$	3
SARs exercisable as of December 31, 2013	1,969,930		101.81

The table below shows the RSUs activity for the nine months ended December 31, 2013.



	Number of RSUs		Grant Date Fair Value (in Indian Rupees)	Aggregate Intrinsic Value (USD in millions)
RSUs outstanding as of March 31, 2013	3,591,406		136.22	$	5
Granted	2,119,114		105.10	—
Exercised	(783,734	)	109.43	—
Forfeited/Canceled	(247,543	)	119.87	—
RSUs outstanding as of December 31, 2013	4,679,243		120.57	$	9

The fair value of each unvested Hindalco SAR was estimated using the following assumptions:



	Nine Months Ended December 31,
	2013		2012
Risk-free interest rate in India	8.59% - 8.98%		7.98% - 8.12%
Dividend yield	1.14	%	1.19	%
Volatility	37% - 51%		40% - 54%

The fair value of each unvested Novelis SAR was estimated using the following assumptions:



	Nine Months Ended December 31,
	2013		2012
Risk-free interest rate in the U.S.	.98% - 2.22%		—	%
Dividend yield	—	%	—	%
Volatility	28% - 41%		—	%

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

The fair value of each unvested Hindalco SAR was 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 risk-free interest rate is based on Indian treasury yields interpolated for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures. The dividend yield is estimated to be the annual dividend of the Hindalco stock over the remaining contractual lives of the Hindalco SARs. The value of each vested Hindalco SAR is remeasured at fair value each reporting period based on the excess of the current stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Hindalco SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.

The fair value of each unvested Novelis SAR was 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 the historical volatility of comparable companies to determine expected volatility assumptions. The risk-free interest rate is based on U.S. treasury yields for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures of Hindalco SARs. The value of each vested Novelis SAR is remeasured at fair value each reporting period based on the percentage increase in the current Novelis phantom stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Novelis SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.

The cash payments made to settle Hindalco SAR liabilities were $15 million in the nine months ended December 31, 2013, which primarily relates to payments made to participants that elected to cancel their outstanding Hindalco SARs as part of the amendment discussed above. Total cash payments made to settle Hindalco RSUs were $1 million in the nine months ended December 31, 2013. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $7 million, which is expected to be recognized over a weighted average period of 2.5 years. Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was $12 million, which is expected to be recognized over a weighted average period of 2.2 years. Unrecognized compensation expense related to the RSUs was $6 million, which will be recognized over the remaining weighted average vesting period of 1.7 years.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

9. 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 Benefit Plans, as shown in certain tables below) include unfunded healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.

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



	Pension Benefit Plans						Other Benefit Plans
	Three Months Ended December 31,						Three Months Ended December 31,
	2013			2012			2013			2012
Service cost	$	12		$	11		$	1		$	2
Interest cost	16			16			1			2
Expected return on assets	(17		)	(16		)	—			—
Amortization — losses	7			8			2			1
Amortization — prior service (credit) / cost	—			(1		)	(10		)	—
Net periodic benefit cost	$	18		$	18		$	(6	)	$	5



	Pension Benefit Plans						Other Benefit Plans
	Nine Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Service cost	$	37		$	33		$	6		$	7
Interest cost	48			49			5			7
Expected return on assets	(50		)	(48		)	—			—
Amortization — losses	19			22			4			2
Amortization — prior service (credit) / cost	(1		)	(2		)	(12		)	—
Net periodic benefit cost	$	53		$	54		$	3		$	16

The expected long-term rate of return on plan assets is 6.3% in fiscal 2014.

In August 2013, the Company amended its U.S. non-union retiree medical plan. Beginning January 2014, the retirees' current healthcare benefits provided by the Company will be discontinued and replaced with the retirees' option to participate in a new Retiree Health Access Exchange (RHA). For calendar year 2014 and 2015, the Company will subsidize a portion of the retiree medical premium rates of the RHA. The Company will not provide a subsidy beginning in calendar year 2016. The changes to the plan resulted in a plan remeasurement and negative plan amendment, which reduced our obligation by $97 million. The negative plan amendment, net of unrecognized actuarial losses, recorded in AOCI as of August 31, 2013 is a pre-tax gain balance of $70 million. The $70 million is being amortized as a reduction to periodic benefit cost from September 1, 2013 through December 31, 2015, subject to an annual remeasurement adjustment.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

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, Korea, Malaysia and Brazil. We contributed the following amounts to all plans (in millions).



	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Funded pension plans	$	11	$	15	$	21	$	33
Unfunded pension plans	3		3		8		10
Savings and defined contribution pension plans	5		4		14		14
Total contributions	$	19	$	22	$	43	$	57

During the remainder of fiscal 2014, we expect to contribute an additional $6 million to our funded pension plans, $2 million to our unfunded pension plans and $6 million to our savings and defined contribution plans.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

10. CURRENCY (GAINS) LOSSES

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



	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Gain on remeasurement of monetary assets and liabilities, net	$	(10	)	$	(11	)	$	(32	)	$	(21	)
Loss released from accumulated other comprehensive income	1			—			2			1
Loss recognized on balance sheet remeasurement currency exchange contracts, net	7			9			23			10
Currency gains, net	$	(2	)	$	(2	)	$	(7	)	$	(10	)

The following currency gains (losses) were included in “AOCI,” net of tax and in “Noncontrolling interests” in the accompanying condensed consolidated balance sheets (in millions).



	Nine Months Ended December 31, 2013			Year Ended March 31, 2013
Cumulative currency translation adjustment — beginning of period	$	(30	)	$	23
Effect of changes in exchange rates	124			(42		)
Sale of investment in foreign entities (A)	—			(11		)
Cumulative currency translation adjustment — end of period	$	94		$	(30	)


(A)	We reclassified $11 million of cumulative currency gains from AOCI to "Gain on assets held for sale" in the fiscal year ended March 31, 2013 related to the sale of three aluminum foil and packaging plants in Europe. See Note 4 - Assets Held for Sale.

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

11. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS

The fair values of our financial instruments, energy and commodity contracts as of December 31, 2013 and March 31, 2013 were as follows (in millions).



	December 31, 2013
	Assets				Liabilities						Net Fair Value Assets/(Liabilities)
	Current		Noncurrent(A)		Current			Noncurrent(A)
Derivatives designated as hedging instruments:
Cash flow hedges
Aluminum contracts	$	10	$	—	$	(3	)	$	—		$	7
Currency exchange contracts	13		6		(23		)	(14		)	(18		)
Energy contracts	1		—		—			—			1
Net Investment hedges
Currency exchange contracts	—		—		(1		)	—			(1		)
Fair value hedges
Aluminum contracts	—		—		(1		)	—			(1		)
Total derivatives designated as hedging instruments	24		6		(28		)	(14		)	(12		)
Derivatives not designated as hedging instruments
Aluminum contracts	23		—		(28		)	—			(5		)
Currency exchange contracts	5		—		(11		)	—			(6		)
Energy contracts	—		—		(8		)	(16		)	(24		)
Total derivatives not designated as hedging instruments	28		—		(47		)	(16		)	(35		)
Total derivative fair value	$	52	$	6	$	(75	)	$	(30	)	$	(47	)

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)



	March 31, 2013
	Assets				Liabilities						Net Fair Value Assets/(Liabilities)
	Current		Noncurrent(A)		Current			Noncurrent(A)			Net Fair Value Assets/(Liabilities)
Derivatives designated as hedging instruments:
Cash flow hedges
Aluminum contracts	$	24	$	—	$	—		$	—		$	24
Currency exchange contracts	12		—		(7		)	(8		)	(3		)
Energy contracts	1		—		—			—			1
Interest rate swaps	—		—		(1		)	—			(1		)
Fair value hedges
Aluminum contracts	—		—		(1		)	(1		)	(2		)
Total derivatives designated as hedging instruments	37		—		(9		)	(9		)	19
Derivatives not designated as hedging instruments:
Aluminum contracts	49		—		(46		)	(1		)	2
Currency exchange contracts	21		1		(11		)	—			11
Energy contracts	2		—		(8		)	(19		)	(25		)
Total derivatives not designated as hedging instruments	72		1		(65		)	(20		)	(12		)
Total derivative fair value	$	109	$	1	$	(74	)	$	(29	)	$	7


(A)	The noncurrent portions of derivative assets and liabilities are included in “Other long-term assets-third parties” and in “Other long-term liabilities” respectively, in the accompanying condensed consolidated balance sheets.

Aluminum

We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag. We sell short-term LME and Midwest Transaction Premium 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 pricing of the sale of that inventory to our customers. We also purchase forward LME aluminum contracts simultaneous with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to better match the selling price of the metal with the purchase price of the metal.

Price risk exposure arises from commitments to sell aluminum in future periods at fixed prices. We identify and designate certain LME aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. Such exposures do not extend beyond two years in length. We had 14 kt and 22 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of December 31, 2013 and March 31, 2013, respectively.

The following table summarizes the amount of gain (loss) recognized on fair value hedges of metal price risk:



	Amount of Gain (Loss) Recognized on Changes in Fair Value				Amount of Gain (Loss) Recognized on Changes in Fair Value
	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Fair Value Hedges of Metal Price Risk
Derivative Contracts	(2	)	(1	)	(3	)	(6	)
Designated Hedged Items	2		1		3		4
Net Ineffectiveness (A)	—		—		—		(2	)


(A)	Effective portion is recorded in "Net sales" and net ineffectiveness in "Other income, net"

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. We identify and designate certain LME 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. Such exposures do not extend beyond three years in length. We had 21 kt and 5 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of December 31, 2013 and March 31, 2013, respectively.

Price risk exposure 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. Price risk exposure also arises due to fixed costs associated with our smelter operations in South America. We identify and designate certain LME 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. Such exposures do not extend beyond two years in length. We had 223 kt and 210 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of December 31, 2013 and March 31, 2013, respectively.

The remaining balance of our LME and Midwest Transaction Premium aluminum derivative contracts are not designated as accounting hedges. As of December 31, 2013 and March 31, 2013, we had 101 kt and 36 kt, respectively, of outstanding aluminum sales contracts not designated as hedges. The average duration of undesignated contracts is less than seven months. The following table summarizes our notional amount (in kt).



	December 31, 2013		March 31, 2013
Hedge Type
Cash flow purchases	21		5
Cash flow sales	(223	)	(210	)
Fair value	14		22
Not designated	(101	)	(36	)
Total	(289	)	(219	)

Foreign Currency

We use foreign exchange forward contracts, cross-currency swaps and options 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.

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 total notional amounts of $754 million and $918 million in outstanding foreign currency forwards designated as cash flow hedges as of December 31, 2013 and March 31, 2013, respectively.

We use foreign currency contracts to hedge our foreign currency exposure to net investment in foreign subsidiaries. We had $75 million outstanding foreign currency forwards designated as net investment hedges as of December 31, 2013. As of March 31, 2013, we had no outstanding foreign currency forwards designated as net investment hedges.

As of both December 31, 2013 and March 31, 2013, we had outstanding currency exchange contracts with a total notional amount of $295 million and $620 million, respectively, which were not designated as hedges. Contracts that represent the majority of notional amounts will mature during the fourth quarter of fiscal 2014 and first quarter of fiscal 2015.

Energy

We own an interest in an electricity swap which we formerly 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 million of notional megawatt hours remained outstanding as of December 31, 2013, and the fair value of this swap was a liability of $24 million as of December 31, 2013. As of March 31, 2013, the fair value of this electricity swap was a liability of $27 million.

We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. We had 6 million MMBTUs designated as cash flow hedges as of December 31, 2013, and the fair value of these swaps was an asset of $1 million. There were 2.4 million MMBTUs of natural gas swaps designated as cash flow hedges as of March 31, 2013 and the

Novelis Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -

(Continued)

fair value of these swaps was an asset of $1 million. As of December 31, 2013 and March 31, 2013, we had 1 million MMBTUs and 3.3 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. The fair value as of December 31, 2013 and March 31, 2013 was an asset of less than $1 million and an asset of $2 million, respectively, for the swaps not designated as hedges. The average duration of undesignated contracts is less than one year in length. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.

Interest Rate

As of December 31, 2013, we swapped $129 million (KRW 136 billion) floating rate loans to a weighted average fixed rate of 4.03%. All swaps expire concurrent with the maturity of the related loans. As of December 31, 2013 and March 31, 2013, $129 million (KRW136 billion) and $95 million (KRW106 billion) were designated as cash flow hedges, respectively.

The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments not designated as hedges and the ineffectiveness of designated derivatives recognized in “Other income, net” (in millions). Gains (losses) recognized in other line items in the condensed consolidated statement of operations are separately disclosed within this footnote.



	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Derivative Instruments Not Designated as Hedges
Aluminum contracts	$	2		$	(1	)	$	—		$	(7	)
Currency exchange contracts	(7		)	(10		)	(22		)	(4		)
Energy contracts (A)	3			—			4			7
(Loss) gain recognized in "Other income, net"	(2		)	(11

Form: 10-Q

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