Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

February 7, 2017

Documents



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, 2016
Or
¨
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  ¨    No  ý
The registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the registrant 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.
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 6, 2017, 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
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 


2


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,
 
2016
 
2015
 
2016
 
2015
Net sales
$
2,313

 
$
2,354

 
$
6,970

 
$
7,470

Cost of goods sold (exclusive of depreciation and amortization)
1,924

 
2,051

 
5,834

 
6,692

Selling, general and administrative expenses
103

 
104

 
303

 
304

Depreciation and amortization
88

 
88

 
267

 
264

Interest expense and amortization of debt issuance costs
67

 
82

 
231

 
244

Loss on extinguishment of debt
—

 
—

 
112

 
13

Research and development expenses
14

 
13

 
41

 
39

Gain on assets held for sale
—

 
—

 
(2
)
 
—

Restructuring and impairment, net
1

 
10

 
4

 
29

Equity in net loss of non-consolidated affiliates
8

 
—

 
8

 
2

Other (income) expense, net
(3
)
 
(16
)
 
63

 
(78
)
 
2,202

 
2,332

 
6,861

 
7,509

Income (loss) before income taxes
111

 
22

 
109

 
(39
)
Income tax provision
47

 
16

 
110

 
28

Net income (loss)
64

 
6

 
(1
)
 
(67
)
Net income attributable to noncontrolling interests
1

 
—

 
1

 
—

Net income (loss) attributable to our common shareholder
$
63

 
$
6

 
$
(2
)
 
$
(67
)
See accompanying notes to the condensed consolidated financial statements.


3


Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
(in millions)
 
 
Three Months Ended December 31,
 
2016
 
2015
Net income
$
64

 
$
6

Other comprehensive loss:
 
 
 
Currency translation adjustment
(140
)
 
(26
)
Net change in fair value of effective portion of cash flow hedges
(24
)
 
10

Net change in pension and other benefits
26

 
12

Other comprehensive loss before income tax effect
(138
)
 
(4
)
Income tax provision related to items of other comprehensive income (loss)
—

 
—

Other comprehensive loss, net of tax
(138
)
 
(4
)
Comprehensive (loss) income
(74
)
 
2

Less: Comprehensive income attributable to noncontrolling interests, net of tax
2

 
1

Comprehensive (loss) income attributable to our common shareholder
$
(76
)
 
$
1


 
Nine Months Ended December 31,
 
2016
 
2015
Net loss
$
(1
)
 
$
(67
)
Other comprehensive loss:
 
 
 
Currency translation adjustment
(129
)
 
(45
)
Net change in fair value of effective portion of cash flow hedges
(22
)
 
—

Net change in pension and other benefits
55

 
12

Other comprehensive loss before income tax effect
(96
)
 
(33
)
Income tax provision related to items of other comprehensive loss
8

 
1

Other comprehensive loss, net of tax
(104
)
 
(34
)
Comprehensive loss
(105
)
 
(101
)
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of tax
3

 
(1
)
Comprehensive loss attributable to our common shareholder
$
(108
)
 
$
(100
)
See accompanying notes to the condensed consolidated financial statements.

4


Novelis Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except number of shares)
 
December 31,
2016
 
March 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
505

 
$
556

Accounts receivable, net

 

— third parties (net of uncollectible accounts of $5 as of December 31, 2016 and $3 as of March 31, 2016)
993

 
956

— related parties
63

 
59

Inventories
1,321

 
1,180

Prepaid expenses and other current assets
101

 
127

Fair value of derivative instruments
84

 
88

Assets held for sale
3

 
5

Total current assets
3,070

 
2,971

Property, plant and equipment, net
3,304

 
3,506

Goodwill
607

 
607

Intangible assets, net
470

 
523

Investment in and advances to non–consolidated affiliate
444

 
488

Deferred income tax assets
81

 
87

Other long–term assets

 

— third parties
86

 
82

— related parties
13

 
16

Total assets
$
8,075

 
$
8,280

LIABILITIES AND SHAREHOLDER’S DEFICIT

 

Current liabilities

 

Current portion of long–term debt
$
90

 
$
47

Short–term borrowings
517

 
579

Accounts payable

 

— third parties
1,496

 
1,506

— related parties
52

 
48

Fair value of derivative instruments
80

 
85

Accrued expenses and other current liabilities
468

 
569

Total current liabilities
2,703

 
2,834

Long–term debt, net of current portion
4,460

 
4,421

Deferred income tax liabilities
113

 
89

Accrued postretirement benefits
795

 
820

Other long–term liabilities
190

 
175

Total liabilities
8,261

 
8,339

Commitments and contingencies

 

Shareholder’s deficit

 

Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of December 31, 2016 and March 31, 2016
—

 
—

Additional paid–in capital
1,404

 
1,404

Accumulated deficit
(965
)
 
(963
)
Accumulated other comprehensive loss
(606
)
 
(500
)
Total deficit of our common shareholder
(167
)
 
(59
)
Noncontrolling interests
(19
)
 
—

Total deficit
(186
)
 
(59
)
Total liabilities and deficit
$
8,075

 
$
8,280

See accompanying notes to the condensed consolidated financial statements.

5


Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)(in millions)
 
Nine Months Ended December 31,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net loss
$
(1
)
 
$
(67
)
Adjustments to determine net cash used in operating activities:

 

Depreciation and amortization
267

 
264

Gain on unrealized derivatives and other realized derivatives in investing activities, net
(23
)
 
(25
)
Gain on assets held for sale
(2
)
 
—

Loss on sale of business
27

 
—

Loss on sale of assets
4

 
2

Impairment charges
—

 
8

Loss on extinguishment of debt
112

 
13

Deferred income taxes
15

 
(60
)
Amortization of fair value adjustments, net
7

 
9

Equity in net loss of non-consolidated affiliates
8

 
2

Loss (gain) on foreign exchange remeasurement of debt
41

 
(5
)
Amortization of debt issuance costs and carrying value adjustments
10

 
15

Other, net
1

 
—

Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures):

 

Accounts receivable
(108
)
 
166

Inventories
(200
)
 
146

Accounts payable
59

 
(422
)
Other current assets
18

 
6

Other current liabilities
(117
)
 
(42
)
Other noncurrent assets
(17
)
 
21

Other noncurrent liabilities
50

 
(30
)
Net cash provided by operating activities
151

 
1

INVESTING ACTIVITIES

 

Capital expenditures
(138
)
 
(282
)
Proceeds from sales of assets, third party, net of transaction fees and hedging
2

 
2

Outflows from the sale of a business, net of transaction fees
(2
)
 
—

Proceeds (outflows) from investment in and advances to non-consolidated affiliates, net
12

 
(5
)
Outflows from related party loans receivable, net
(3
)
 
—

Proceeds (outflows) from settlement of other undesignated derivative instruments, net
7

 
(11
)
Net cash used in investing activities
(122
)
 
(296
)
FINANCING ACTIVITIES

 

Proceeds from issuance of long-term and short-term borrowings
2,770

 
151

Principal payments of long-term and short-term borrowings
(2,676
)
 
(194
)
Revolving credit facilities and other, net
(20
)
 
178

Dividends, noncontrolling interest
—

 
(1
)
Debt issuance costs
(139
)
 
(15
)
Net cash (used in) provided by financing activities
(65
)
 
119

Net decrease in cash and cash equivalents
(36
)
 
(176
)
Effect of exchange rate changes on cash
(15
)
 
5

Cash and cash equivalents — beginning of period
556

 
628

Cash and cash equivalents — end of period
$
505

 
$
457

See accompanying notes to the condensed consolidated financial statements.

6


Novelis Inc.
CONDENSED CONSOLIDATED STATEMENT OF DEFICIT (unaudited)
(in millions, except number of shares)
 
 
Deficit of our Common Shareholder
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss (AOCI)
 
Non-
controlling Interests
 
Total Deficit
 
Shares
 
Amount
Balance as of March 31, 2016
1,000

 
$
—

 
$
1,404

 
$
(963
)
 
$
(500
)
 
$
—

 
$
(59
)
Net loss attributable to our common shareholder
—

 
—

 
—

 
(2
)
 
—

 
—

 
(2
)
Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
1

 
1

Currency translation adjustment included in AOCI
—

 
—

 
—

 
—

 
(129
)
 
—

 
(129
)
Change in fair value of effective portion of cash flow hedges, net of tax benefit of $8 million included in AOCI
—

 
—

 
—

 
—

 
(14
)
 
—

 
(14
)
Change in pension and other benefits, net of tax provision of $16 million included in AOCI
—

 
—

 
—

 
—

 
37

 
2

 
39

Sale of subsidiary shares to a third party
—

 
—

 
—

 
—

 
—

 
(22
)
 
(22
)
Balance as of December 31, 2016
1,000

 
$
—

 
$
1,404

 
$
(965
)
 
$
(606
)
 
$
(19
)
 
$
(186
)
See accompanying notes to the condensed consolidated financial statements.


7
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. Hindalco acquired Novelis in May 2007. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited.
Organization and Description of Business
We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food cans and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We have recycling operations in many of our plants to recycle post-consumer aluminum, such as used beverage cans and post-industrial aluminum, such as class scrap. As of December 31, 2016, we had manufacturing operations in ten countries on four continents: North America, South America, Asia and Europe, through 24 operating facilities, including recycling operations in eleven of these plants.
The March 31, 2016 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). 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, 2016 filed with the United States Securities and Exchange Commission (SEC) on May 10, 2016. 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.
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 (loss) 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 condensed consolidated financial statements for consolidated entities, compared to a two-line presentation of "Investment in and advances to non-consolidated affiliates" and "Equity in net loss of non-consolidated affiliates" for equity method investments.
Use of Estimates and Assumptions
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, 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 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 may 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.

8
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






Recently Adopted Accounting Standards
Effective for the first quarter fiscal 2017, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2015-02, Consolidations (Topic 810): Amendments to the Consolidations Analysis. The amendment (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  There was no impact upon adoption.
Effective for the first quarter of fiscal 2017, we adopted FASB ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In August 2015, the FASB issued ASU 2015-15, a clarifying amendment, allowing for debt issuance costs related to lines of credit being presented as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The impact of the adoption was a decrease in “Other long-term assets” and “Long-term debt, net of current portion” in the condensed consolidated balance sheets as of March 31, 2016 of $30 million. We made the policy election to continue to present debt issuance costs related to lines of credit as an asset.
Effective for the first quarter of fiscal 2017, we adopted the FASB ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which removes the requirement to measure inventory at the lower of cost or market whereas market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin, and requires an entity to measure inventory at the lower of cost or net realizable value. There was no impact upon adoption.
We early adopted as of March 31, 2016 and on a prospective basis, ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which required all deferred taxes and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet.
Effective for fiscal year 2017, we adopted ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. We will apply the amendments retrospectively to all periods presented. Early adoption is permitted. Adoption of this standard may impact the presentation of certain pension plan assets in our postretirement benefit plans footnote disclosure on Form 10-K for the year ended March 31, 2017.
Recently Issued Accounting Standards    
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which, when effective, will supersede the guidance in former ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within that year. Early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which provides an optional one-year deferral of the effective date. Subsequent to these amendments, further clarifying amendments have been issued. We are currently evaluating the impact of the standard on our consolidated financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets (e.g., through "leases") to recognize assets and liabilities for the rights and obligations created by the leases on balance sheet. A lessee will be required to recognize assets and liabilities for leases with terms that exceed twelve months. The standard will also require disclosures to help investors and financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations.

9
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The new guidance applies to all entities that are required to present a statement of cash flows under Topic 230 and addresses specific cash flow items to provide clarification and reduce the diversity in presentation of these items. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within that year. Early adoption is permitted. Adoption of this standard is not expected to have any impact on our consolidated financial position and results of operations as our current policies are aligned with this standard.
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets
Other than Inventory. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. The
guidance will require the tax effects of intercompany transactions to be recognized currently and will likely impact reporting
entities’ effective tax rates. The guidance is effective for annual periods beginning after December 15, 2017, and interim
periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard on
our consolidated financial position and results of operations.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard and we believe that the adoption of this standard is expected to have an immaterial impact on our statement of cash flow.




10
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






2.    RESTRUCTURING AND IMPAIRMENT
“Restructuring and impairment, net” for the nine months ended December 31, 2016 and 2015 was $4 million and $29 million, respectively.
The following table summarizes our restructuring liability activity and other impairment charges (in millions). 
 
 
Total restructuring
liabilities
 
Other restructuring charges (A)
 
Total restructuring charges
 
Other impairments (B)
 
Total
restructuring 
and impairments, net
Balance as of March 31, 2016
 
$
27

 
 
 
 
 
 
 
 
Expenses
 
4

 
$
—

 
$
4

 
$
—

 
$
4

Cash payments
 
(10
)
 
 
 
 
 
 
 
 
Foreign currency (C)
 
2

 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
23

 
 
 
 
 
 
 
 
(A)
Other restructuring charges include period expenses that were not recorded through the restructuring liability.
(B)
Other impairment charges not related to a restructuring activity.
(C)
This primarily relates to the remeasurement of Brazilian real denominated restructuring liabilities.
As of December 31, 2016, $15 million of restructuring liabilities was included in "Accrued expenses and other current liabilities" and $8 million was included in "Other long-term liabilities" on our condensed consolidated balance sheet. As of December 31, 2016, there was no restructuring liability for the North America segment, $1 million for the Asia segment, and $2 million for the Corporate office. There was also $1 million in payments for the Asia segment during the nine months ended December 31, 2016. The other regional restructuring activities are described in more detail below.

11
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)







Europe
The following table summarizes our restructuring activity for the Europe segment by plan (in millions).
 
 
Nine Months Ended December 31,
 
Year Ended March 31,
 
Prior to April 1,
 
 
2016
 
2016
 
2015
Restructuring charges - Europe
 
 
 
 
 
 
Corporate Restructuring Program - Severance
$
2

 
$
4

 
$
46

Total restructuring charges - Europe
$
2

 
$
4

 
$
46

 
 
 
 
 
 
Restructuring payments - Europe
 
 
 
 
 
 
Severance
$
(4
)
 
$
(6
)
 
 
Total restructuring payments - Europe
$
(4
)
 
$
(6
)
 
 
The Company implemented a series of restructuring actions at the global headquarters office and in the Europe region which include staff rationalization activities and the shutdown of facilities to improve our operations in Europe.
As of December 31, 2016, the restructuring liability for the Europe segment was $2 million, which relates to severance charges.
South America
The following table summarizes our restructuring activity for the South America segment by plan (in millions).
 
 
Nine Months Ended December 31,
 
Year Ended March 31,
 
Prior to April 1,
 
 
2016
 
2016
 
2015
Restructuring charges - South America
 
 
 
 
 
Ouro Preto closures
 
 
 
 
 
 
Severance
$
—

 
$
2

 
$
19

 
Asset impairments (A)
—

 
—

 
6

 
Environmental charges
—

 
(1
)
 
22

 
Contract termination and other exit related costs
2

 
2

 
11

 
 
 
 
 
 
 
Other past restructuring programs
—

 
—

 
21

Total restructuring charges - South America
$
2

 
$
3

 
$
79

 
 
 
 
 
 
 
Restructuring payments - South America
 
 
 
 
 
 
Severance
$
(1
)
 
$
(2
)
 
 
 
Other
(4
)
 
(3
)
 
 
Total restructuring payments - South America
$
(5
)
 
$
(5
)
 
 
(A)     These charges were not recorded through the restructuring liability.
We ceased our smelter operations in Ouro Preto, Brazil, in December 2014. This decision was made in an effort to further align our global sustainability strategy, and exit non-core operations. Certain charges associated with this closure are reflected within the "Ouro Preto closures" section above, along with our closure of a pot line in Ouro Preto, Brazil, in fiscal 2013.     
As of December 31, 2016, the restructuring liability for the South America segment was $18 million and related to $12 million of environmental charges and $6 million of other contract termination and other exit related costs.
For additional information on environmental charges see Note 16 – Commitments and Contingencies.
    
 
 
 
 
 
 
 


12
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






3.    INVENTORIES
"Inventories" consist of the following (in millions). 
 
December 31,
2016
 
March 31,
2016
Finished goods
$
352

 
$
295

Work in process
524

 
416

Raw materials
291

 
322

Supplies
154

 
147

Inventories
$
1,321

 
$
1,180


    

13
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






4.    ASSETS HELD FOR SALE
We are focused on capturing the global growth we see in our premium product markets of beverage can, automotive and specialty products. We continually analyze our product portfolio to ensure we are focused on growing in attractive market segments. The following transactions relate to exiting certain non-core operations to focus on our growth strategy in the premium product markets.
We made the decision to sell two hydroelectric power generation facilities in South America, with a net book value of $4 million as of March 31, 2016, which were classified as "Assets held for sale" in our condensed consolidated balance sheet. During the nine months ended December 31, 2016, we recorded a $1 million gain from our sale of one hydroelectric power generation facility. The remaining hydroelectric power generation assets have a net book value of $3 million as of December 31, 2016 and continue to be reflected as "Assets held for sale" pending the resolution of certain operating license issues.
In March 2016, we made a decision to sell properties in Ouro Preto, Brazil following the closure of our smelter facility on the property. The properties had a net book value of $1 million, which were classified as "Assets held for sale" in our condensed consolidated balance sheet as of March 31, 2016. "Gain on assets held for sale" during the nine months ended December 31, 2016 includes a $1 million gain from our sale of these assets.
 
 
 
 



14
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 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 the ability to make decisions regarding 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,
2016
 
March 31,
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
4

 
$
3

Accounts receivable
32

 
33

Inventories
65

 
61

Prepaid expenses and other current assets
—

 
2

Total current assets
101

 
99

Property, plant and equipment, net
19

 
21

Goodwill
12

 
12

Deferred income taxes
90

 
84

Other long-term assets
23

 
8

Total assets
$
245

 
$
224

Liabilities
 
 
 
Current liabilities
 
 
 
Accounts payable
$
35

 
$
30

Accrued expenses and other current liabilities
16

 
15

Total current liabilities
51

 
45

Accrued postretirement benefits
221

 
214

Other long-term liabilities
3

 
3

Total liabilities
$
275

 
$
262

 

15
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






6.
INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
    
We have a non-consolidated affiliate, Aluminium Norf GmbH (Alunorf), which serves our Europe region with rolling and remelt tolling services. Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conducted with this non-consolidated affiliate, which we classify as related party transactions and balances. We account for this affiliate using the equity method.     
    
The following table summarizes the results of operations of this equity method affiliate, and the nature and amounts of significant transactions we had with our non-consolidated affiliate (in millions). The amounts in the table below are disclosed at 100% of the operating results of this affiliate.
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
95

 
$
116

 
$
340

 
$
350

Costs and expenses related to net sales
116

 
119

 
358

 
352

Benefit for taxes on income
(7
)
 
(3
)
 
(6
)
 
(1
)
Net loss
$
(14
)
 
$
—

 
$
(12
)
 
$
(1
)
Novelis purchases of tolling services from Alunorf
$
47

 
$
58

 
$
170

 
$
175


Additionally, we earned less than $1 million of interest income on a receivable due from Alunorf for the nine months ended December 31, 2016.

The following table describes the period-end account balances that we had with Alunorf, and a related party loan with Hindalco, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances. 
 
December 31,
2016
 
March 31,
2016
Accounts receivable-related parties
$
63

 
$
59

Other long-term assets-related parties
$
13

 
$
16

Accounts payable-related parties
$
52

 
$
48


We have a receivable due from Alunorf, which is presented in "Other long-term assets-related parties". We believe collection of the full receivable from Alunorf is probable; thus no allowance was recognized as of December 31, 2016 and March 31, 2016.

We have guaranteed the indebtedness for a credit facility on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of December 31, 2016, there were no amounts outstanding under our guarantee with Alunorf as there were no outstanding borrowings. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of December 31, 2016, this guarantee totaled $2 million.


16
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






Transactions with Hindalco
We occasionally have related party transactions with our indirect parent company, Hindalco. During the nine months ended December 31, 2016 and 2015, “Net sales” were less than $1 million between Novelis and Hindalco. As of December 31, 2016 and March 31, 2016, there were less than $1 million in "Accounts receivable, net" outstanding related to transactions with Hindalco.

During the nine months ended December 31, 2016 and 2015, Novelis purchased $3 million in raw materials from Hindalco that were fully paid for during the quarter ended December 31, 2016. Additionally, during the quarter ended December 31, 2016, we loaned $3 million to a subsidiary of our parent which has a maturity date during fourth quarter fiscal year 2017.

    


17
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






7.    DEBT
Debt consisted of the following (in millions).
 
 
 
December 31, 2016
 
March 31, 2016
 
Interest
Rates (A)
 
Principal
 
Unamortized
Carrying  Value
Adjustments
 
 
 
Carrying
Value
 
Principal
 
Unamortized
Carrying  Value
Adjustments
 
 
 
Carrying
Value
Third party debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
2.20
%
 
$
517

 
$
—

 
  
 
$
517

 
$
579

 
$
—

 
  
 
$
579

Novelis Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating rate Term Loan Facility, due through June 2022
4.02
%
 
1,773

 
(25
)
 
(B)
 
1,748

 
1,787

 
(25
)
 
(B)
 
1,762

8.375% Senior Notes, due December 2017
8.375
%
 
—

 
—

 
 
 
—

 
1,100

 
(6
)
 
 
 
1,094

8.75% Senior Notes, due December 2020
8.75
%
 
—

 
—

 
 
 
—

 
1,400

 
(15
)
 
(B)
 
1,385

Capital lease obligations, due through July 2017
3.64
%
 
2

 
—

 
 
 
2

 
5

 
—

 
 
 
5

Novelis Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.875% Senior Notes, due September 2026
5.875
%
 
1,500

 
(24
)
 
(B)
 
1,476

 
—

 
—

 
 
 
—

6.25% Senior Notes, due August 2024
6.25
%
 
1,150

 
(19
)
 
(B)
 
1,131

 
—

 
—

 
 
 
—

Novelis Korea Limited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, due through September 2020 (KRW 205 billion)
2.60
%
 
170

 
—

 
  
 
170

 
195

 
—

 
  
 
195

Novelis Switzerland S.A.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital lease obligation, due through December 2019 (Swiss francs (CHF) 19 million)
7.50
%
 
18

 
(1
)
 
(B)
 
17

 
23

 
(1
)
 
(B)
 
22

Novelis do Brasil Ltda.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BNDES loans, due through April 2021 (BRL 13 million)
5.90
%
 
4

 
—

 
(B)
 
4

 
5

 
(1
)
 
(B)
 
4

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, due through May 2021
4.85
%
 
2

 
—

 
  
 
2

 
1

 
—

 
  
 
1

Total debt
 
 
5,136

 
(69
)
 
 
 
5,067

 
5,095

 
(48
)
 
 
 
5,047

Less: Short-term borrowings
 
 
(517
)
 
—

 
  
 
(517
)
 
(579
)
 
—

 
  
 
(579
)
Current portion of long term debt
 
 
(90
)
 
—

 
  
 
(90
)
 
(47
)
 
—

 
  
 
(47
)
Long-term debt, net of current portion
 
 
$
4,529

 
$
(69
)
 
 
 
$
4,460

 
$
4,469

 
$
(48
)
 
 
 
$
4,421


18
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, 2016, and therefore, exclude the effects of related interest rate swaps, 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 and thereafter. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.
(B)
Amounts include unamortized debt issuance costs and debt discounts.
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, 2016 for our debt denominated in foreign currencies) are as follows (in millions).
As of December 31, 2016
Amount
Short-term borrowings and current portion of long-term debt due within one year
$
607

2 years
122

3 years
37

4 years
21

5 years
18

Thereafter
4,331

Total
$
5,136

Senior Secured Credit Facilities
     As of December 31, 2016, the senior secured credit facilities consisted of (i) a $1.8 billion seven-year secured term loan credit facility (Term Loan Facility) and (ii) a $1.0 billion five-year asset based loan facility (ABL Revolver). As of December 31, 2016, $18 million of the Term Loan Facility is due within one year.
In June 2015, we entered into a $200 million secured lien revolving facility (the Subordinated Lien Revolver) with a maturity date of September 10, 2016. In June 2016, we amended the Subordinated Lien Revolver to downsize the facility to $150 million and extend the maturity date to October 30, 2016. The Subordinated Lien Revolver was subsequently extinguished in July 2016.
In June 2015, we entered into a Refinancing Amendment with respect to our Term Loan Facility. The Amendment increased the principal amount of the Term Loan Facility from $1.7 billion to $1.8 billion and extended the final maturity from December 17, 2017 to June 2, 2022; provided that, in the event that any series of our senior unsecured notes remain outstanding 92 days prior to its maturity date, then the Term Loan Facility will mature on such date, subject to limited exceptions. The loans under the Term Loan Facility accrue interest at the higher of LIBOR and 0.75% plus a 3.25% spread.
In January 2017, we entered into a new Term Loan Credit Agreement. The Agreement provided Novelis with $1.8 billion, and the proceeds were used to extinguish the existing Term Loan agreement originally maturing on June 2, 2022 and fund related transaction expenses. The Term Loan Credit Agreement matures on June 2, 2022, subject to 0.25% quarterly amortization payments. The loans under the Term Loan Credit Agreement accrue interest at LIBOR plus 1.85%. The Term Loan Credit Agreement also requires customary mandatory prepayments with excess cash flow, asset sale and condemnation proceeds and proceeds of prohibited indebtedness, all subject to customary exceptions. The Term Loan may be prepaid, in full or in part, at any time at the Company’s election without penalty or premium; provided that any optional prepayment in connection with a repricing amendment or refinancing through the issuance of lower priced debt made withinsix-months after the earlier of (i) completion of the initial syndication of the Term Loan and (ii) April 13, 2017, will be subject to a 1.00% prepayment premium. The Term Loan Credit Agreement allows for additional term loans to be issued in an amount not to exceed $300 million (or its equivalent in other currencies) plus an unlimited amount if, after giving effect to such incurrence on a pro forma basis, the senior secured net leverage ratio does not exceed 3.00 to 1.00. The lenders under the Term Loan Credit Agreement have not committed to provide any such additional term loans.
 

19
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






In October 2014, we amended and extended our ABL Revolver by entering into a $1.2 billion, five-year, senior secured ABL Revolver. In November 2016, we reduced the total commitment under the ABL Revolver from $1.2 billion to $1.0 billion. The interest rate for a loan under the ABL Revolver is either (i) prime rate plus a spread of 0.50% to 1.00% based on excess availability or (ii) of LIBOR plus a spread of 1.50% to 2.00% based on excess availability. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million. The 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) 12.5% of the lesser of (a) the maximum size of the ABL Revolver and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL Revolver defined Earnings Before Interest, Taxes, Depreciation and Amortization 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 ABL Revolver matures on October 6, 2019; provided that, in the event that any of the Notes, the Term Loan Facility, or certain other indebtedness are outstanding (and not refinanced with a maturity date later than April 6, 2020) 90 days prior to their respective maturity dates, then the ABL Revolver will mature 90 days prior to the maturity date for the Notes, the Term Loan Facility or such other indebtedness, as applicable; 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 charge ratio test of at least 1.25 to 1 is met.
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 guarantee 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 or returns of capital and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. The Term Loan Credit Agreement also contains a financial maintenance covenant, prohibiting the Company’s senior secured net leverage ratio as of the last day of each fiscal quarter period and measured on a rolling four quarter basis from exceeding 3.50 to 1.00, subject to customary equity cure rights. The senior secured credit facilities include a cross-default provision under which lenders could accelerate repayment of the loans if a payment or non-payment default arises under any other indebtedness with an aggregate principal amount of more than $100 million (or, in the case of the Term Loan Facility, under the ABL Revolver regardless of the amount outstanding). Substantially all of our assets are pledged as collateral to secure our obligations under the senior secured credit facilities, certain cash management and bank products, and hedging agreements designated as secured hedging agreements in accordance with the terms of the Term Loan Credit Agreement.
Short-Term Borrowings
As of December 31, 2016, our short-term borrowings were $517 million, consisting of $367 million of loans under our ABL Revolver, $71 million in Novelis Brazil loans, $58 million (CNY 412 million) in Novelis China loans, $11 million (KRW 14 billion) in Novelis Korea loans, and $10 million in other loans.
As of December 31, 2016, $18 million of the ABL Revolver availability was utilized for letters of credit, and we had $298 million in remaining availability under the ABL Revolver.
In fiscal years 2015 and 2016, Novelis Korea has entered into various short-term facilities, including revolving loan facilities and committed credit lines. As of December 31, 2016, we had $195 million (KRW 236 billion) in remaining availability under these facilities.
In fiscal year 2016, Novelis Middle East and Africa entered into various short-term facilities, including revolving facility agreements totaling $40 million. As of December 31, 2016, we had $40 million in remaining availability under these facilities.
In fiscal year 2015, Novelis China entered into a committed facility. As of December 31, 2016, we had $1 million remaining availability under this facility.

20
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






Senior Notes
On August 29, 2016, Novelis Corporation, an indirect wholly owned subsidiary of Novelis Inc., issued $1.15 billion in aggregate principal amount of 6.25% Senior Notes Due 2024 (the 2024 Notes). The 2024 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.

Additionally, on September 14, 2016, Novelis Corporation issued $1.5 billion in aggregate principal amount of 5.875% Senior Notes Due 2026 (the 2026 Notes, and together with the 2024 Notes, the Notes). The 2026 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.

The proceeds from the issuances of the 2024 Notes and the 2026 Notes were used to extinguish our 8.375% 2017 Senior Notes and our 8.75% 2020 Senior Notes, respectively. In addition, we paid combined tender offer premiums and issuance costs of $139 million associated with the refinancing transactions, including fees paid to lenders, arrangers, and outside professionals such as attorneys and rating agencies. We recorded a “Loss on extinguishment of debt” of $112 million in the second quarter of fiscal 2017 related to the refinancing transactions. We incurred debt issuance costs of $45 million on the new Senior Notes which were capitalized and will be amortized as an increase to "Interest expense and amortization of debt issuance costs" over the term of these instruments.
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 or return capital 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 our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. has assigned an investment grade credit rating to the Notes and no default or event of default under the indentures governing the Notes has occurred and is continuing, some of the covenants will be suspended. The Notes include a cross-acceleration event of default triggered if any other indebtedness with an aggregate principal amount of more than $100 million is (1) accelerated prior to its maturity or (2) not repaid at its maturity. As of December 31, 2016, we were in compliance with the covenants in the Notes. The Notes also contain customary call protection provisions for our bond holders that extend through August 2022 for the 2024 Notes and through September 2024 for the 2026 Notes.
Korean Bank Loans
As of December 31, 2016, Novelis Korea had $60 million (KRW 73 billion) of outstanding long-term loans with various banks due within one year. The loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.91% to 1.58%.
Brazil BNDES Loans
Novelis Brazil entered into loan agreements with Brazil’s National Bank for Economic and Social Development (the BNDES long-term loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of December 31, 2016 there are $2 million of BNDES long-term loans due within one year.    
Other Long-term debt
In December 2004, we entered into a 15-year capital lease obligation with Alcan Inc. for assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of CHF 1.7 million (USD $1.8 million).
During fiscal 2013 and 2014, Novelis Inc. entered into various capital lease arrangements to upgrade and expand our information technology infrastructure.
As of December 31, 2016, we had $2 million of other debt, including certain capital lease obligations, with due dates through May 2021.
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.

21
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), phantom restricted stock units (RSUs), and Novelis Performance Units (Novelis PUs) are granted to certain executive officers and key employees. The Hindalco SARs vest at the rate of 25% or 33% per year, subject to the achievement of an annual performance target, and expire seven years from their original grant date. The performance criterion for vesting of the Hindalco SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The RSUs are based on Hindalco's stock price. The RSUs vest either in full three years from the grant date or 33% per year over three years, subject to continued employment with the Company, but are not subject to performance criteria. In May 2016, the Company's board of directors approved the issuance of Novelis PUs which have a fixed $100 value per unit and will vest in full three years from the grant date, subject to specific performance criteria compared to the established target. The Company made a voluntary offer to the participants with outstanding Novelis SARs granted for fiscal years 2012 through 2016 to exchange their Novelis SARs for an equivalently valued number of Novelis PUs. The voluntary exchange resulted in 1,054,662 Novelis SARs being modified into PUs which are not based on Novelis' nor Hindalco's fair values and are accounted for outside the scope of ASC 718, Compensation - Stock Compensation. This exchange was accounted for as a modification. There were 130,360 of Novelis SARs that remain outstanding as of December 31, 2016.
During the nine months ended December 31, 2016, we granted 5,368,180 RSUs, 3,687,728 Hindalco SARs, and no Novelis SARs. Total compensation expense (benefit) related to these plans for the respective periods was $3 million and $3 million for the three months ended December 31, 2016 and 2015, respectively; and $11 million and $(4) million for the nine months ended December 31, 2016 and 2015, respectively. These amounts are included in “Selling, general and administrative expenses” in our condensed consolidated statements of operations. As the performance criteria for fiscal years 2018, 2019 and 2020 have not yet been established, measurement periods for Hindalco SARs and Novelis SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year Hindalco SARs and Novelis SARs has been recorded. As of December 31, 2016, the outstanding liability related to share-based compensation was $15 million.    
The cash payments made to settle SAR liabilities were $3 million and $2 million in the nine months ended December 31, 2016 and 2015, respectively. Total cash payments made to settle Hindalco RSUs were $2 million and $5 million in the nine months ended December 31, 2016 and 2015, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $5 million, which is expected to be recognized over a weighted average period of 1.5 years. Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was less than $1 million, which is expected to be recognized over a weighted average period of 1.4 years. Unrecognized compensation expense related to the RSUs was $11 million, which will be recognized over the remaining weighted average vesting period of 1.2 years.







22
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)







9.    POSTRETIREMENT BENEFIT PLANS
Our pension obligations relate to: (1) funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K.; (2) unfunded defined benefit pension plans in Germany; (3) unfunded lump sum indemnities payable upon retirement to employees in France, Malaysia (through the second quarter of fiscal 2017) and Italy; and (4) partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded health care and life insurance benefits provided to retired employees in the U.S., Canada and Brazil.
Components of net periodic benefit cost (credit) for all of our 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,
 
2016
 
2015
 
2016
 
2015
Service cost
$
11

 
$
12

 
$
2

 
$
2

Interest cost
15

 
15

 
2

 
1

Expected return on assets
(16
)
 
(17
)
 
—

 
—

Amortization — losses, net
10

 
10

 
1

 
1

Amortization — prior service (credit) cost, net
(1
)
 
(1
)
 
—

 
(6
)
Net periodic benefit cost (credit)
$
19

 
$
19

 
$
5

 
$
(2
)

 
Pension Benefit Plans
 
Other Benefit Plans
 
Nine Months Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Service cost
$
34

 
$
36

 
$
5

 
$
4

Interest cost
46

 
44

 
5

 
4

Expected return on assets
(47
)
 
(51
)
 
—

 
—

Amortization — losses, net
30

 
28

 
3

 
3

Amortization — prior service (credit) cost, net
(2
)
 
(2
)
 
1

 
(20
)
Net periodic benefit cost (credit)
$
61

 
$
55

 
$
14

 
$
(9
)

The average expected long-term rate of return on plan assets is 5.4% in fiscal 2017.
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 (in millions).
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Funded pension plans
$
13

 
$
13

 
$
20

 
$
19

Unfunded pension plans
3

 
3

 
9

 
8

Savings and defined contribution pension plans
6

 
5

 
19

 
18

Total contributions
$
22

 
$
21


$
48


$
45

During the remainder of fiscal 2017, we expect to contribute an additional $4 million to our funded pension plans, $4 million to our unfunded pension plans and $4 million to our savings and defined contribution plans.


23
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






10.    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,
 
2016
 
2015
 
2016
 
2015
(Gain) loss on remeasurement of monetary assets and liabilities, net
$
(1
)
 
$
3

 
$
14

 
$
(48
)
Loss released from accumulated other comprehensive loss
—

 
—

 
—

 
1

(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net
(1
)
 
(7
)
 
(15
)
 
42

Currency gains, net
$
(2
)
 
$
(4
)
 
$
(1
)
 
$
(5
)
The following currency losses are included in “Accumulated other comprehensive loss, net of tax” and “Noncontrolling interests” in the accompanying condensed consolidated balance sheets (in millions).
 
Nine Months Ended December 31, 2016
 
Year Ended March 31, 2016
 
Cumulative currency translation adjustment — beginning of period
$
(197
)
 
$
(214
)
Effect of changes in exchange rates
(145
)
 
17

Sale of investment in foreign entities (A)
16

 
—

Cumulative currency translation adjustment — end of period
$
(326
)
 
$
(197
)

(A)
We reclassified $16 million of cumulative currency losses from AOCI to "Other (income) expense, net" in the nine months ended December 31, 2016. Refer to Note 14 - Other (income) expense, net for further details.

24
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






11.    FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The following tables summarize the gross fair values of our financial instruments and commodity contracts as of December 31, 2016 and March 31, 2016 (in millions).
 
December 31, 2016
 
Assets
 
Liabilities
 
Net Fair Value
 
Current
 
Noncurrent (A)
 
Current
 
Noncurrent (A)
 
Assets / (Liabilities)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
6

 
$
—

 
$
(17
)
 
$
—

 
$
(11
)
Currency exchange contracts
13

 
2

 
(4
)
 
(4
)
 
7

Energy contracts
1

 
—

 
—

 
(6
)
 
(5
)
Total derivatives designated as hedging instruments
20

 
2

 
(21
)
 
(10
)
 
(9
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Aluminum contracts
25

 
—

 
(32
)
 
—

 
(7
)
Currency exchange contracts
38

 
1

 
(27
)
 
(1
)
 
11

Energy contracts
1

 
—

 
—

 
—

 
1

Total derivatives not designated as hedging instruments
64

 
1

 
(59
)
 
(1
)
 
5

Total derivative fair value
$
84

 
$
3

 
$
(80
)
 
$
(11
)
 
$
(4
)
 

 
March 31, 2016
 
Assets
 
Liabilities
 
Net Fair Value
 
Current
 
Noncurrent (A)
 
Current
 
Noncurrent(A)
 
Assets / (Liabilities)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
10

 
$
—

 
$
(2
)
 
$
—

 
$
8

Currency exchange contracts
15

 
5

 
(3
)
 
(5
)
 
12

Energy contracts
—

 
—

 
(4
)
 
—

 
(4
)
Interest rate swaps
—

 
—

 
—

 
(1
)
 
(1
)
Net investment hedges
 
 
 
 
 
 
 
 
 
Currency exchange contracts
—

 
—

 
(1
)
 
—

 
(1
)
Total derivatives designated as hedging instruments
25

 
5

 
(10
)
 
(6
)
 
14

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Aluminum contracts
24

 
—

 
(26
)
 
—

 
(2
)
Currency exchange contracts
39

 
—

 
(39
)
 
(1
)
 
(1
)
Energy contracts
—

 
1

 
(10
)
 
—

 
(9
)
Total derivatives not designated as hedging instruments
63

 
1

 
(75
)
 
(1
)
 
(12
)
Total derivative fair value
$
88

 
$
6

 
$
(85
)
 
$
(7
)
 
$
2

 
(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.


25
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






Aluminum
We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag. We use over-the-counter derivatives indexed to the London Metals Exchange (LME) (referred to as our "aluminum derivative 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, which is known as "metal price lag." We also purchase forward LME aluminum contracts simultaneously 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. The volatility in local market premiums also results in metal price lag, although we do not have derivative contracts associated with local market premiums as these are not prevalent in the market.
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. We did not have any outstanding aluminum forward purchase contracts designated as fair value hedges as of December 31, 2016. We had less than 1 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of March 31, 2016. One kilotonne (kt) is 1,000 metric tonnes.
 
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,
 
2016
 
2015
 
2016
 
2015
Fair Value Hedges of Metal Price Risk
 
 
 
 
 
 
 
Derivative Contracts
$
—

 
$
(1
)
 
$
—

 
$
(2
)
Designated Hedged Items
—

 
1

 
—

 
2

Net Ineffectiveness (A)
$
—

 
$
—

 
$
—

 
$
—


(A)
Effective portion is recorded in "Net sales" and net ineffectiveness in "Other (income) expense, net". There was no amount excluded from the assessment of hedge effectiveness related to Fair Value Hedges.
    
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. We did not have any outstanding aluminum forward purchase contracts designated as cash flow hedges as of December 31, 2016. We had 1 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of March 31, 2016.
Price risk exposure arises due to the timing lag between the LME based pricing of raw material aluminum purchases and the LME based pricing of finished product sales. 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. Generally, such exposures do not extend beyond two years in length. We had 396 kt and 301 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of December 31, 2016 and March 31, 2016, respectively.
The remaining aluminum derivative contracts are not designated as accounting hedges. As of December 31, 2016 and March 31, 2016, we had 79 kt and 76 kt, respectively, of outstanding aluminum sales contracts not designated as hedges. Generally, the average duration of undesignated contracts is less than one year.
The following table summarizes our notional amount (in kt). 
 
December 31,
2016
 
March 31,
2016
Hedge Type
 
 
 
Purchase (Sale)
 
 
 
Cash flow purchases
—

 
1

Cash flow sales
(396
)
 
(301
)
Not designated
(79
)
 
(76
)
Total, net
(475
)
 
(376
)

26
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






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 $504 million and $601 million in outstanding foreign currency forwards designated as cash flow hedges as of December 31, 2016 and March 31, 2016, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to our net investment in foreign subsidiaries. We did not have any outstanding foreign currency forwards designated as net investment hedges as of December 31, 2016. We had $36 million of outstanding foreign currency forwards designated as net investment hedges as of March 31, 2016.
As of December 31, 2016 and March 31, 2016, we had outstanding foreign currency exchange contracts with a total notional amount of $677 million and $636 million, respectively, to primarily hedge balance sheet remeasurement risk, which were not designated as hedges. Contracts representing the majority of this notional amount will mature during the fourth quarter of fiscal year 2017 and offset the remeasurement impact.
Energy
We own an interest in an electricity swap that matured January 5, 2017 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. We did not have any outstanding notional megawatt hours remaining as of December 31, 2016. As of March 31, 2016, the fair value of this electricity swap was a liability of $9 million.
On December 31, 2015, we entered into an agreement to extend the electricity swap contract for an additional five years, effective January 6, 2017 and maturing on January 5, 2022. As of December 31, 2016 and March 31, 2016, 1 million of notional megawatt hours was outstanding and the fair value of this swap was a liability of $6 million and an asset of $1 million, respectively. The electricity swap was designated as a cash flow hedge in the first quarter of fiscal year 2017.
We use natural gas forward purchase contracts to manage our exposure to fluctuating energy prices in North America. We had 3 million MMBTUs designated as cash flow hedges as of December 31, 2016, and the fair value was an asset of $1 million. There were 5 million MMBTUs of natural gas forward purchase contracts designated as cash flow hedges as of March 31, 2016 and the fair value was a liability of $4 million. As of December 31, 2016 and March 31, 2016, we had less than 1 million of MMBTUs of natural gas forward purchase contracts that were not designated as hedges. The fair value as of December 31, 2016 and March 31, 2016 was an asset of less than $1 million and a liability of $1 million, respectively, for the forward purchase contracts not designated as hedges. The average duration of undesignated contracts is approximately two years in length. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
We use diesel fuel forward contracts to manage our exposure to fluctuating fuel prices in North America, which are not designated as hedges as of December 31, 2016. As of December 31, 2016 and March 31, 2016, we had 6 million gallons and 4 million gallons, respectively, of diesel fuel forward purchase contracts outstanding, and the fair value was an asset of $1 million and a liability of less than $1 million, respectively. The average duration of undesignated contracts is approximately one year in length.
Interest Rate
As of December 31, 2016, we swapped $110 million (KRW 133 billion) floating rate loans to a weighted average fixed rate of 2.92%. All swaps expire concurrent with the maturity of the related loans. As of December 31, 2016 and March 31, 2016, $110 million (KRW 133 billion) and $115 million (KRW 133 billion), respectively, were designated as cash flow hedges.

27
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






Gain (Loss) Recognition
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) expense, 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,
 
 
2016
 
2015
 
2016
 
2015
Derivative Instruments Not Designated as Hedges
 
 
 
 
 
 
 
 
Aluminum contracts
 
$
(10
)
 
$
8

 
$
(27
)
 
$
48

Currency exchange contracts
 
4

 
7

 
17

 
(47
)
Energy contracts (A)
 
4

 
—

 
9

 
2

(Loss) gain recognized in "Other (income) expense, net"
 
(2
)
 
15

 
(1
)
 
3

Derivative Instruments Designated as Hedges
 
 
 
 
 
 
 
 
Gain (loss) recognized in "Other (income) expense, net" (B)
 
5

 
6

 
(8
)
 
22

Total gain (loss) recognized in "Other (income) expense, net"
 
$
3

 
$
21

 
$
(9
)
 
$
25

Balance sheet remeasurement currency exchange contract gains (losses)
 
$
1

 
$
7

 
$
15

 
$
(43
)
Realized (losses) gains, net
 
(19
)
 
16

 
(42
)
 
50

Unrealized gains (losses) on other derivative instruments, net
 
21

 
(2
)
 
18

 
18

Total gain (loss) recognized in "Other (income) expense, net"
 
$
3

 
$
21

 
$
(9
)
 
$
25

 
(A)
Includes amounts related to de-designated electricity swap, and diesel fuel forward contracts and natural gas swaps not designated as hedges.
(B)
Amount includes: forward market premium/discount excluded from hedging relationship and ineffectiveness on designated aluminum and foreign currency capital expenditure contracts; releases to income from AOCI on balance sheet remeasurement contracts; and ineffectiveness of fair value hedges involving aluminum derivatives.

The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow and net investment hedges (in millions). Within the next twelve months, we expect to reclassify $10 million of losses from AOCI to earnings, before taxes.
 
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 Expense (Income), net” (Ineffective and Excluded Portion)
 
Amount of Gain  (Loss) Recognized in “Other Expense (Income), 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,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Cash flow hedging derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aluminum contracts
$
(22
)
 
$
12

 
$
(52
)
 
$
71

 
$
4

 
$
6

 
$
(9
)
 
$
22

Currency exchange contracts
(14
)
 
11

 
18

 
(32
)
 
—

 
—

 
1

 
—

Energy contracts
1

 
(2
)
 
(3
)
 
(4
)
 
—

 
—

 
(1
)
 
—

Total cash flow hedging derivatives
$
(35
)
 
$
21

 
$
(37
)
 
$
35

 
$
4

 
$
6

 
$
(9
)
 
$
22

Net investment derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
—

 
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

Total
$
(35
)
 
$
21

 
$
(37
)
 
$
34

 
$
4

 
$
6

 
$
(9
)
 
$
22


28
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)






Gain (Loss) Reclassification
 
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
Cash flow hedging derivatives
2016
 
2015