SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2006
 
Commission file number 1-3677
 
ALCAN INC.
(Exact name of registrant as specified in its charter)
 
CANADA
 
Inapplicable
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
1188 Sherbrooke Street West, Montreal, Quebec, Canada H3A 3G2
(Address of Principal Executive Offices and Postal Code)
 
(514) 848-8000
(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  Ö   No        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  Ö     Accelerated filer          Non-accelerated filer        
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes           No  Ö   
 
At November 1, 2006, the registrant had 376,407,559 shares of common stock (without nominal or par value) outstanding.


 
 

 


PART I. FINANCIAL INFORMATION

In this report, all dollar amounts are stated in U.S. dollars and all quantities in metric tons, or tonnes, unless indicated otherwise. A tonne is 1,000 kilograms, or 2,204.6 pounds. The word "Company" refers to Alcan Inc. and, where applicable, one or more of its consolidated subsidiaries.

Item 1. Financial Statements

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF INCOME (unaudited)
   
 
Third Quarter
 
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
(in millions of US$, except per share amounts)
                 
 
Sales and operating revenues
   
5,769
   
4,887
   
17,422
   
15,271
 
                           
Costs and expenses
                         
Cost of sales and operating expenses, excluding depreciation
                         
    and amortization noted below
   
4,454
   
3,921
   
13,228
   
12,141
 
Depreciation and amortization
   
273
   
266
   
782
   
806
 
Selling, administrative and general expenses
   
327
   
331
   
1,057
   
1,056
 
Research and development expenses
   
50
   
66
   
157
   
164
 
Interest
   
63
   
92
   
208
   
267
 
Restructuring charges - net (note 6)
   
22
   
32
   
130
   
142
 
Other expenses (income) - net (note 10)
   
11
   
23
   
(18
)
 
10
 
     
5,200
   
4,731
   
15,544
   
14,586
 
Income from continuing operations before income taxes and
                         
    other items
   
569
   
156
   
1,878
   
685
 
Income taxes (note 9)
   
146
   
101
   
610
   
269
 
Income from continuing operations before other items
   
423
   
55
   
1,268
   
416
 
Equity income
   
41
   
16
   
106
   
73
 
Minority interests
   
(4
)
 
1
   
(6
)
 
(1
)
Income from continuing operations
   
460
   
72
   
1,368
   
488
 
Income (Loss) from discontinued operations (note 4)
   
(4
)
 
9
   
-
   
2
 
Income before cumulative effect of accounting change
   
456
   
81
   
1,368
   
490
 
Cumulative effect of accounting change, net of income
                         
    taxes of $2 (nil in 2005) (note 2)
   
-
   
-
   
(4
)
 
-
 
Net income
   
456
   
81
   
1,364
   
490
 
Dividends on preference shares
   
3
   
2
   
8
   
5
 
Net income attributable to common shareholders
   
453
   
79
   
1,356
   
485
 
Earnings (Loss) per share (note 5)
                         
Basic:
                         
Income from continuing operations
   
1.21
   
0.19
   
3.63
   
1.30
 
Income (Loss) from discontinued operations
   
(0.01
)
 
0.02
   
-
   
0.01
 
Cumulative effect of accounting change
   
-
   
-
   
(0.01
)
 
-
 
Net income per common share - basic
   
1.20
   
0.21
   
3.62
   
1.31
 
Diluted:
                         
Income from continuing operations
   
1.21
   
0.19
   
3.62
   
1.30
 
Income (Loss) from discontinued operations
   
(0.01
)
 
0.02
   
-
   
0.01
 
Cumulative effect of accounting change
   
-
   
-
   
(0.01
)
 
-
 
Net income per common share - diluted
   
1.20
   
0.21
   
3.61
   
1.31
 
Dividends per common share
   
0.20
   
0.15
   
0.50
   
0.60
 

The accompanying notes are an integral part of the interim consolidated financial statements.

 
 -2-

 

ALCAN INC.

INTERIM CONSOLIDATED BALANCE SHEET (unaudited)
           
   
September 30,
2006
 
December 31,
2005
 
(in millions of US$)
         
           
ASSETS
         
           
 
Current assets
         
Cash and time deposits
   
158
   
181
 
Trade receivables (net of allowances of $57 in 2006 and $56 in 2005)
   
2,944
   
2,308
 
Other receivables
   
1,205
   
946
 
Deferred income taxes
   
192
   
150
 
Inventories (note 11)
   
3,104
   
2,734
 
Current assets held for sale (note 4)
   
15
   
119
 
Total current assets
   
7,618
   
6,438
 
               
Deferred charges and other assets
   
1,233
   
1,052
 
Investments
   
1,491
   
1,511
 
Deferred income taxes
   
862
   
863
 
Property, plant and equipment
             

Cost (excluding Construction work in progress)

   
17,529
   
16,990
 

Construction work in progress

   
2,673
   
1,604
 

Accumulated depreciation

   
(8,369
)
 
(7,561
)
     
11,833
   
11,033
 
Intangible assets (net of accumulated amortization of $316 in 2006
             
   and $233 in 2005)
   
976
   
1,013
 
Goodwill
   
4,635
   
4,713
 
Long-term assets held for sale (note 4)
   
2
   
15
 
Total assets
   
28,650
   
26,638
 
               
               
The accompanying notes are an integral part of the interim consolidated financial statements.

 
 -3-

 


ALCAN INC.

INTERIM CONSOLIDATED BALANCE SHEET (cont’d) (unaudited) 
           
   
September 30,
2006
 
December 31,
2005
 
(in millions of US$)
         
           
LIABILITIES AND SHAREHOLDERS' EQUITY
         
           
Current liabilities
         
Payables and accrued liabilities (note 12)
   
4,992
   
4,608
 
Short-term borrowings
   
346
   
348
 
Debt maturing within one year
   
40
   
802
 
Deferred income taxes
   
28
   
25
 
Current liabilities of operations held for sale (note 4)
   
11
   
62
 
Total current liabilities
   
5,417
   
5,845
 
               
Debt not maturing within one year
   
5,399
   
5,265
 
Deferred credits and other liabilities
   
1,753
   
1,608
 
Post-retirement benefits
   
3,224
   
3,037
 
Deferred income taxes
   
1,337
   
1,172
 
Minority interests
   
67
   
67
 
               
Shareholders’ equity
             
Redeemable non-retractable preference shares
   
160
   
160
 
Common shareholders' equity
             

Common shares

   
6,381
   
6,181
 

Additional paid-in capital

   
673
   
683
 

Retained earnings

   
4,208
   
3,048
 

Common shares held by a subsidiary

   
(31
)
 
(31
)

Accumulated other comprehensive income (loss) (note 14)

   
62
   
(397
)
     
11,293
   
9,484
 
     
11,453
   
9,644
 
               
Commitments and contingencies (note 13)
             
               
Total liabilities and shareholders’ equity
   
28,650
   
26,638
 
               
The accompanying notes are an integral part of the interim consolidated financial statements.

 
 -4-

 


ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
   
Third Quarter
 
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
(in millions of US$)
                 
                   
OPERATING ACTIVITIES
     
 
         
                   
Net income
   
456
   
81
   
1,364
   
490
 
Cumulative effect of accounting change
   
-
   
-
   
4
   
-
 
Loss (Income) from discontinued operations
   
4
   
(9
)
 
-
   
(2
)
Income from continuing operations
   
460
   
72
   
1,368
   
488
 
Adjustments to determine cash from operating activities:
                         

Depreciation and amortization

   
273
   
266
   
782
   
806
 

Deferred income taxes

   
73
   
86
   
300
   
128
 

Equity income, net of dividends

   
(17
)
 
(5
)
 
(35
)
 
(29
)

Asset impairment charges

   
12
   
5
   
57
   
40
 

Loss (Gain) on disposal of businesses and investments - net

   
(4
)
 
(5
)
 
(8
)
 
11
 

Stock option compensation

   
3
   
4
   
39
   
14
 

Change in operating working capital

                         

Change in receivables

   
151
   
325
   
(605
)
 
(250
)

Change in inventories

   
(164
)
 
26
   
(273
)
 
(88
)

Change in payables and accrued liabilities

   
(4
)
 
(72
)
 
126
   
(391
)

Change in deferred charges, other assets, deferred credits

                         

    and other liabilities, and post-retirement benefits - net

   
21
   
(13
)
 
188
   
137
 

Other - net

   
(1
)
 
(34
)
 
(3
)
 
(119
)
Cash from operating activities in continuing operations
   
803
   
655
   
1,936
   
747
 
                           
Cash from operating activities in discontinued
                         
    operations
   
1
   
4
   
9
   
54
 
                           
Cash from operating activities
   
804
   
659
   
1,945
   
801
 
                           
FINANCING ACTIVITIES
                         
                           
Proceeds from issuance of new debt - net of issuance costs
   
9
   
21
   
380
   
1,237
 
Debt repayments
   
(250
)
 
(210
)
 
(1,086
)
 
(1,456
)
Short-term borrowings - net
   
(13
)
 
(52
)
 
(13
)
 
(2,045
)
Common shares issued
   
3
   
6
   
152
   
16
 
Dividends  -  Alcan shareholders (including preference)
   
(78
)
 
(58
)
 
(195
)
 
(173
)
                    -  Minority interests
   
(1
)
 
(1
)
 
(2
)
 
(2
)
Cash used for financing activities in continuing operations
   
(330
)
 
(294
)
 
(764
)
 
(2,423
)
                           
Cash used for financing activities in discontinued
                         
    operations
   
-
   
(59
)
 
-
   
(55
)
                           
Cash used for financing activities
   
(330
)
 
(353
)
 
(764
)
 
(2,478
)


The accompanying notes are an integral part of the interim consolidated financial statements.

 
-5-

 

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (cont’d) (unaudited)
   
 
Third Quarter
 
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
(in millions of US$)
                 
                   
INVESTMENT ACTIVITIES
                 
                   
Purchase of property, plant and equipment
   
(576
)
 
(405
)
 
(1,471
)
 
(1,103
)
Business acquisitions and purchase of investments, net of
                         
    cash and time deposits acquired
   
(8
)
 
(31
)
 
(48
)
 
(73
)
Net proceeds from disposal of businesses, investments and
                         
    other assets
   
27
   
141
   
234
   
176
 
Settlement of amounts due from Novelis - net
   
-
   
-
   
-
   
2,535
 
Other
   
58
   
-
   
70
   
-
 
Cash from (used for) investment activities in continuing
                         
    operations
   
(499
)
 
(295
)
 
(1,215
)
 
1,535
 
Cash from (used for) investment activities in discontinued
                         
    operations
   
-
   
(1
)
 
5
   
63
 
                           
Cash from (used for) investment activities
   
(499
)
 
(296
)
 
(1,210
)
 
1,598
 
                           
Effect of exchange rate changes on cash and time deposits
   
1
   
4
   
6
   
(25
)
Increase (Decrease) in cash and time deposits
   
(24
)
 
14
   
(23
)
 
(104
)
Cash and time deposits - beginning of period
   
182
   
222
   
181
   
340
 
Cash and time deposits - end of period
   
158
   
236
   
158
   
236
 

The accompanying notes are an integral part of the interim consolidated financial statements.

 -6-

 

 

ALCAN INC.
 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
September 30, 2006
 
(unaudited)
 
(in millions of US$, except per share amounts)
 
1.    ACCOUNTING POLICIES

Basis of Presentation

The unaudited interim consolidated financial statements are based upon accounting policies and methods of their application consistent with those used and described in the Company's annual financial statements as contained in the most recent annual report. The unaudited interim consolidated financial statements do not include all of the financial statement disclosures included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and therefore should be read in conjunction with the Company's most recent annual report.

In the opinion of management of the Company, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position and the results of operations and cash flows in accordance with U.S. GAAP. The results reported in these unaudited interim consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year.


2.    ACCOUNTING CHANGES

SFAS No. 123(R) - Share-Based Payment

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which is a revision to SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires all share-based payments to employees to be recognized in the financial statements based on their fair values. The fair value of options granted after January 1, 2006 is determined using a lattice model, whereas the fair value of options granted prior to that date was determined using the Black-Scholes valuation model. The Company had previously adopted the fair-value based method of accounting for stock options using the retroactive restatement method described in SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, effective January 1, 2004. This method is accepted under SFAS No. 123(R).

On January 1, 2006, the Company recorded an after-tax charge of $4, using the modified prospective application method, in Cumulative effect of accounting change, to record all outstanding liability awards, previously measured at their intrinsic value, at their fair value. See note 8 - Stock Options and Other Stock-Based Compensation.

SFAS No. 151 - Inventory Costs

On January 1, 2006, the Company adopted the provisions of SFAS No. 151, Inventory Costs, on a prospective basis. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). ARB 43 previously stated that these expenses may be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this standard did not impact the Company’s financial statements.


 
 -7-

 

2.    ACCOUNTING CHANGES (cont’d)

SFAS No. 154 - Accounting Changes and Error Corrections

On January 1, 2006, the Company adopted the provisions of SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting of a change in accounting principle. The statement requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle versus including the cumulative effect of changing to the new accounting principle in net income. SFAS No. 154 carries forward many provisions of APB Opinion No. 20 without change, including the provisions related to the reporting of a change in accounting estimate, a change in the reporting entity, and the correction of an error. The adoption of this standard did not impact the Company’s financial statements.


3.    RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 156 - Accounting for Servicing of Financial Assets

In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, Accounting for Servicing of Financial Assets. The new standard, which is an amendment to SFAS No. 140, requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. If an entity uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities, it can simplify its accounting since SFAS No. 156 permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company does not anticipate that its financial statements will be significantly impacted by this statement.

FIN 48 - Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This interpretation prescribes a more likely than not recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of a tax position, classification of a liability for unrecognized tax benefits, accounting for interest and penalties, accounting in interim periods, and expanded income tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this interpretation on its financial statements.

SAB 108 - Guidance for Quantifying Financial Statement Misstatements

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB 108) in order to address the observed diversity in quantification practices with respect to annual financial statements. In SAB 108, the SEC staff establishes an approach that requires quantification of financial statement errors based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it essentially requires quantification of errors under both the iron-curtain and the roll-over methods. The iron curtain method focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement in the period of correction. The roll-over method focuses primarily on the impact of a misstatement on the income statement, including the reversing effect of prior year misstatements, but can lead to the accumulation of misstatements in the balance sheet. The provisions of SAB 108 are effective for the Company’s December 31, 2006 annual financial statements. The Company does not anticipate that its financial statements will be significantly impacted by this bulletin.


 
 -8-

 

3.    RECENTLY ISSUED ACCOUNTING STANDARDS (cont’d)

SFAS No. 157 - Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to increase consistency and comparability in fair value measurements and to expand their disclosures. The new standard includes a definition of fair value as well as a framework for measuring fair value. The standard is effective for fiscal periods beginning after November 15, 2007 and should be applied prospectively, except for certain financial instruments where it must be applied retrospectively as a cumulative-effect adjustment to the balance of opening retained earnings in the year of adoption. The Company is currently evaluating the impact of this standard on its financial statements.

SFAS No. 158 - Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans

In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R). The standard requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet with an offsetting amount in accumulated other comprehensive income and to recognize changes in that funded status in the year in which the changes occur. SFAS No. 158 also expands the required annual disclosures. SFAS No. 158 is effective for fiscal years ending after December 15, 2006 and must be applied prospectively. Based on the funded status of the Company’s pension and postretirement benefit plans as reported in the December 31, 2005 Annual Report, the adoption of this standard is expected to reduce the Company’s total assets by approximately $470, increase total liabilities by approximately $700, and reduce Shareholders’ equity by approximately $1,170 on a pre-tax basis. The ultimate impact is contingent on plan asset returns and the assumptions that will be used to measure the funded status of each of the Company’s pension and postretirement benefit plans as of December 31, 2006.


4.    DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Bauxite and Alumina and Primary Metal

On December 29, 2004, the Company announced that, following an extensive evaluation of the Company’s operations subsequent to the Pechiney acquisition, it had entered into a binding agreement for the sale of its controlling interest in Aluminium de Grèce S.A. (AdG), as well as the transfer of certain related contracts, to Mytilineos Holdings S.A. of Greece. The Company classified this business in discontinued operations and assets held for sale during the fourth quarter of 2004. The Company owned approximately 13 million shares in AdG, representing a 60.2% equity interest. The transaction was completed on March 15, 2005 at a value of $104. Under the terms of this agreement, Mytilineos Holdings S.A. and certain affiliated companies acquired from the Company a 53% equity position in AdG. On March 31, 2006, the balance of the Company’s interest in AdG of 7.2% was sold by the Company to Mytilineos Holdings S.A. for net proceeds of $13.

Primary Metal

On June 1, 2005, the Company completed the sale of Pechiney Électrométallurgie to Ferroatlántica, S.L. of Spain for net proceeds of $150. The Company classified this business in discontinued operations and assets held for sale during the fourth quarter of 2004. The Company’s decision to sell this business was based on an extensive evaluation of the Company’s operations subsequent to the Pechiney acquisition and is consistent with the Company’s strategy of divesting non-core activities.

Engineered Products

In the first quarter of 2004, the Company committed to a plan to sell certain non-strategic assets that were not part of its core operations. The assets were used to supply castings and components to the automotive industry. On March 31, 2006, the Company sold these assets to AluCast GmbH for net proceeds of approximately nil.

Also in the fourth quarter of 2004, the Company committed to a plan to sell its service centres in France that were not part of its core operations. These assets were classified as held for sale and were included in discontinued operations. On April 20, 2005, the Company completed the sale of these service centres for net proceeds of $4 to Amari Metal France Ltd., which specializes in distributing aluminum, stainless steel and cuprous metal products.


 
 -9-

 

4.    DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (cont’d)

Other

In the fourth quarter of 2005, a decision was taken to close the Company’s copper trading business. The closure was substantially completed by the end of 2005.

Fair values were determined based on either discounted cash flows or expected selling price. Certain financial information has been reclassified in the prior periods to present these businesses as discontinued operations on the statement of income, as assets held for sale and liabilities of operations held for sale on the balance sheet and as cash flows from (used for) discontinued operations on the statement of cash flows.

Selected financial information for the businesses included in discontinued operations is reported below:


   
Third Quarter
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
Sales
   
-
   
37
   
55
   
313
 
Income (Loss) from operations
   
-
   
3
   
(1
)
 
11
 
Gain (Loss) on disposal - net
   
(3
)
 
8
   
(2
)
 
(2
)
Pre-tax income (loss)
   
(3
)
 
11
   
(3
)
 
9
 
Income tax (expense) recovery
   
(1
)
 
(2
)
 
3
   
(7
)
Income (Loss) from discontinued operations
   
(4
)
 
9
   
-
   
2
 
 
The major classes of Assets held for sale and Liabilities of operations held for sale are as follows:

   
September 30,
2006
 
December 31,
2005
 
Current assets held for sale:
         
Trade receivables
   
8
   
30
 
Other receivables
   
4
   
51
 
Deferred income taxes
   
3
   
2
 
Inventories
   
-
   
36
 
     
15
   
119
 
Long-term assets held for sale:
             
Deferred charges and other assets
   
-
   
13
 
Property, plant and equipment - net
   
2
   
2
 
     
2
   
15
 
Current liabilities of operations held for sale:
             
Payables and accrued liabilities
   
11
   
62
 
     
11
   
62
 


 
 -10-

 

5.    EARNINGS PER SHARE - BASIC AND DILUTED

Basic and diluted earnings per share are based on the weighted average number of shares outstanding during the period. The treasury stock method for calculating the dilutive impact of stock options is used. The following table outlines the calculation of basic and diluted earnings per share on income from continuing operations.


   
Third Quarter
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
Numerator:
                 
Income from continuing operations
   
460
   
72
   
1,368
   
488
 
Less: dividends on preference shares
   
(3
)
 
(2
)
 
(8
)
 
(5
)
Income from continuing operations attributable to
                         
    common shareholders
   
457
   
70
   
1,360
   
483
 
Denominator (number of common shares in millions):
                         
Weighted average of outstanding shares - basic
   
376
   
370
   
375
   
370
 
Effect of dilutive stock options
   
1
   
-
   
1
   
1
 
Adjusted weighted average of outstanding shares - diluted
   
377
   
370
   
376
   
371
 
Earnings per common share - basic
   
1.21
   
0.19
   
3.63
   
1.30
 
Earnings per common share - diluted
   
1.21
   
0.19
   
3.62
   
1.30
 
 


In the third quarter and nine months ended September 30, 2006, options to purchase 3,214,739 and 402,561 common shares, respectively (2005: 8,245,958 and 5,065,224) at a weighted average grant price of CAN$51.88 and CAN$56.34 per share, respectively (2005: CAN$46.23 and CAN$49.66) were outstanding during the period but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average price of the common shares.

As at September 30, 2006, there were 376,155,267 (2005: 370,419,460) common shares outstanding.

In the third quarter of 2006, the Company announced a 33% increase in the quarterly dividend from $0.15 to $0.20. The dividend of $0.20 per common share was paid on September 20, 2006 to shareholders of record at the close of business on August 18, 2006.




 
 -11-

 

6.    RESTRUCTURING PROGRAMS

2006 Restructuring Activities

During the third quarter of 2006, the Company incurred charges of $6 relating to early retirement incentives accepted by employees at a research facility in France (Engineered Products). These charges are included in severance costs. In addition, the Engineered Products group incurred other restructuring costs of $1.

During the third quarter of 2006, the Company incurred severance charges of $2 due to the restructuring of a trading operation in Switzerland (Primary Metal). No further charges are expected to be incurred as a result of this activity.

On May 9, 2006, the Company announced the reorganization of its global specialty aluminas business (Bauxite and Alumina), entailing the gradual, yet permanent shut-down of the Company’s Specialty-Calcined Alumina plant (“UPCA”) in Jonquière, Quebec, by year end. In relation to this activity, the Company recorded restructuring charges of $12 comprising $1 of severance costs and $11 of asset impairment charges during the second quarter of 2006. The Company expects to incur additional charges of $2 related to site remediation costs in the first quarter of 2007.

On June 30, 2006, the Company announced that it had signed a new collective labour agreement with its Quebec employees represented by the Canadian Auto Workers (C.A.W.) union. The agreement applies to C.A.W. employees at the Arvida, Beauharnois, Laterrière, Shawinigan and Vaudreuil Works sites, as well as those at Power Operations, Port Facilities, Alma Railway Operations and the Arvida Research and Development Centre (Bauxite and Alumina and Primary Metal). As part of this agreement, the Company has offered early retirement incentives to employees and has recorded severance charges of $3 during the third quarter of 2006 for employees who have accepted. The Company expects to incur additional severance charges of $8 as a result of this offer.

On July 12, 2006, the Company announced that it has begun consultations with unions and employee representatives for a proposed sale of selected assets at the Company’s Affimet aluminum recycling plant in Compiègne, France (Primary Metal). In relation to this activity, the Company recorded restructuring charges of $44 comprising $14 of severance costs, $7 of other costs and $23 of asset impairment charges during the second quarter of 2006, as they met the criteria for recognition during the period. No further charges are expected to be incurred.

Also on July 12, 2006, the Company announced that it has begun consultations with unions and employee representatives for a proposed closure of two U.K. sites. The proposed reorganization would result in the closure of the Workington, U.K. hard alloy extrusion plant (Engineered Products) and the closure of the Midsomer Norton, U.K. food flexibles packaging plant (Packaging).

In relation to the Workington closure, the Company recorded restructuring charges of $9 comprised entirely of severance costs during the second quarter of 2006, as they met the criteria for recognition during the period. Production from Workington would be consolidated at Alcan’s facilities in Issoire and Montreuil-Juigné, France. Workington is expected to cease production by the end of the second quarter of 2007. The Company expects to incur additional charges of $7 in 2007 related to this activity.

In relation to the Midsomer Norton closure, the Company recorded restructuring charges of $17 comprising $16 of severance costs and $1 of asset impairment charges during the second quarter of 2006, as they met the criteria for recognition during the period. The plant has been adversely affected by a declining demand in the U.K. market and high raw material costs. The site is expected to close by the end of 2006. The Company expects to incur additional charges of $3 in the fourth quarter of 2006 related to this activity.

In addition, the Company also recorded severance costs of $2 during the second quarter of 2006 related to the closure of Alcan Packaging Mohammedia’s cookware activity. The Company expects to incur additional charges of $1 in the fourth quarter of 2006 related to this activity.


 
 -12-

 

6.    RESTRUCTURING PROGRAMS (cont’d)

2005 Restructuring Activities

As part of the continuing drive to reshape its portfolio, counter increasing competitive pressures in Western countries and improve margins, the Packaging Group is pursuing plans to restructure certain businesses, notably Global Beauty Packaging and Food Packaging Europe. A restructuring charge of $485 (Q1: $11; Q2: $45; Q3: $23; Q4: $406) was taken in 2005 to reflect the ongoing implementation of this strategy. This charge is comprised of severance costs of $94 (Q1: nil; Q2: $26; Q3: $7; Q4: $61), asset impairment charges of $331 (Q1: $7; Q2: $12; Q3: $3; Q4: $309) and other charges of $60 (Q1: $4; Q2: $7; Q3: $13; Q4: $36). In addition to these restructuring charges, other costs of $2 (Q1: nil; Q2: nil; Q3: nil; Q4: $2) were recorded in Cost of sales and operating expenses. In the first quarter of 2006, the Company incurred an additional $9 of restructuring charges. This charge is comprised of severance costs of $2, asset impairment charges of $5 and other charges of $2. In the second quarter of 2006, the Company incurred an additional $8 of restructuring charges. These charges are comprised of severance costs of $5 and other charges of $3. In the third quarter of 2006, the Company incurred an additional $13 of restructuring charges. These charges are comprised of asset impairment charges of $1 and other charges of $12. The Company expects to incur an additional $19 of charges related to the activities initiated and approved as of December 31, 2005, and these restructurings should be completed during the first half of 2007.

During the first quarter of 2006, the Company closed its Vernon, California, aluminum cast plate facility (Engineered Products) as a result of competitive pressures in a challenging economic environment. In the second quarter of 2006, the Company incurred additional other restructuring charges of $1 related to this activity. No further charges are expected to be incurred in connection with the Vernon closure. In addition to the Vernon closure, Engineered Products underwent continued restructuring in 2005. The Company recorded restructuring charges of $17 related to these activities consisting of severance costs of $13 and asset impairment charges of $4. In addition to these restructuring charges, $14 of additional pension costs related to the Vernon closure, and $4 of additional environmental costs related to other restructurings, were recorded in Cost of sales and operating expenses in the fourth quarter of 2005.

In the fourth quarter of 2005, the Company recorded restructuring charges of $115 related to the closure of its aluminum smelter in Lannemezan, France, and its Steg primary aluminum smelter in Switzerland (Primary Metal) due to escalating energy costs. The closure process for Lannemezan began in June 2006 and is expected to be completed, at the latest, during the course of 2008. The closure of Steg was completed in April 2006. These charges were comprised of severance costs of $43, asset impairment charges of $61, and other charges of $11. No further charges are expected to be incurred in connection with these closures.

On September 14, 2005, the Company announced that its subsidiary, Société Générale de Recherches et d'Exploitations Minières (Sogerem) (Bauxite and Alumina), had begun an information and consultation process with its employee representatives and local partners due to the exhaustion of mining resources in the Tarn region of France. Production at its fluorspar mining operations came to a close during the first half of 2006. In relation to this activity, the Company recorded restructuring charges of $9 comprising $6 of severance costs, $2 of other costs and $1 of asset impairment charges during the third quarter of 2005. In addition to the $9 of restructuring charges, $5 relating principally to additional asset retirement obligations were recorded, as a result of this activity, in Cost of sales and operating expenses. In the first quarter of 2006, the Company incurred additional other restructuring charges of $2. No further charges are expected to be incurred.

In the second quarter of 2005, the Company announced the restructuring of its Engineered Products facilities in Singen, Germany, and Sierre, Switzerland, in order to improve efficiency and ensure their long-term viability. Alcan will integrate its extrusion activities at the Singen and Sierre sites and restructure the automotive structures and composites into its operations at Singen. In 2005, the Company incurred $30 (Q1: $1; Q2: $27; Q3: nil; Q4: $2) of severance charges. During the third quarter of 2006, the Company reversed $4 of severance charges in Singen, Germany as certain affected employees were transferred to other businesses, and certain employees took advantage of voluntary severance and early retirement programs. This restructuring is expected to be completed in the short term.

 
 -13-

 

6.    RESTRUCTURING PROGRAMS (cont’d)

In 2005, the Company incurred $5 (Q1: nil; Q2: $14; Q3: nil; Q4: $(9)), mostly related to severance costs, in connection with the exit from the Mercus and Froges high-purity-metal processing operations in France (Engineered Products), which occurred during the first quarter of 2006. The Company expects to incur additional charges of $1 in the fourth quarter of 2006 related to this activity.

In 2005, the Company recorded other restructuring charges of $9 (Q1: $3; Q2: $2; Q3: $1; Q4: $3) consisting of severance costs of $6 (Q1: $1; Q2: $3; Q3: nil; Q4: $2) relating principally to additional Pechiney involuntary termination costs in Primary Metal and the closure of a balsa composites plant in Guayaquil, Ecuador (Engineered Products), asset impairment charges of $2 (Q1: $2; Q2: nil; Q3: nil; Q4: nil) related to a Pechiney facility in China (Engineered Products) and other costs of $1 (Q1: nil; Q2: nil; Q3: nil; Q4: $1) in Primary Metal. In the first quarter of 2006, the Company incurred additional severance charges of $1 in Primary Metal.

2004 Restructuring Activities

In line with the Company’s objective of value maximization, the Company undertook various restructuring initiatives in 2004.

Pechiney

In 2004, the Company recorded liabilities of $193 for restructuring costs in connection with the exit of certain operations of Pechiney, and these costs were recorded in the allocation of the purchase price. These costs relate principally to severance costs of $121 related to the involuntary termination of Pechiney employees in France (Primary Metal, Engineered Products, Packaging and Other), as well as other severance costs of $54, principally comprising $21 relating to a plant closure in Barcelona, Spain (Packaging), $17 relating to a planned plant closure in Flemalle, Belgium (Entities transferred to Novelis), $5 relating to a plant closure in Garbagnate, Italy (Packaging), and $1 relating to the downsizing of a plant in Kolin, Czech Republic (Packaging). A restructuring provision of $21 related to the plant closure in Flemalle was transferred to Novelis in 2005 following the spin-off.

Other 2004 restructuring activities

In the third quarter of 2004, the Company incurred restructuring charges of $19 relating to the consolidation of its U.K. aluminum sheet rolling activities in Rogerstone, Wales, in order to improve competitiveness through better capacity utilization and economies of scale. Production ceased at the rolling mill in Falkirk, Scotland, in December 2004. The charges include $6 of severance costs, $8 of asset impairment charges, $2 of pension costs, $3 of decommissioning, environmental costs and other charges. These entities and the related restructuring provision of $5 were transferred to Novelis in 2005 following the spin-off.
 
In 2004, the Company incurred restructuring charges of $7 relating to the closure of two corporate offices in the U.K. and Germany (Other). The charges include $4 related to severance costs and $3 related to lease exit costs and costs to consolidate facilities. In 2005, the Company incurred additional severance and exit costs of $2 (Q1: $3; Q2: $(3); Q3: nil; Q4: $2) in relation to the closure of its corporate office in the U.K. The restructuring provision of $3 related to the closure of the corporate office in Germany was transferred to Novelis in 2005 following the spin-off.

In November 2004, the Company announced the downsizing of its Alcan Mass Transportation Systems business unit in Zurich, Switzerland (Engineered Products), as a result of changing market conditions and business realities. In the fourth quarter of 2004, the Company incurred restructuring charges of $5 consisting of $4 of asset impairment charges, and $1 of other charges. In 2005, the Company incurred additional severance charges of $4 (Q1: $2; Q2: $1; Q3: $1; Q4: nil), asset impairment charges of $1 (Q1: $1; Q2: nil; Q3: nil; Q4: nil) and other costs of $3 (Q1: nil; Q2: nil; Q3: nil; Q4: $3) relating to the downsizing of this business. In addition, the Engineered Products Group incurred restructuring charges of $9 in 2004 relating to both the closure of a composites facility in the U.S., and process reengineering at certain facilities in Switzerland and Germany. The 2004 charges consisted of severance costs of $6, asset impairment charges of $2 and other costs of $1.

In 2004, the Company incurred restructuring charges of $39 relating to exit costs incurred in connection with certain non-strategic packaging facilities located in the U.S. and France. These charges consist of severance costs of $23, asset impairment charges of $11 and other charges of $5.


 
 -14-

 

6.    RESTRUCTURING PROGRAMS (cont’d)

In early 2004, the Company permanently halted production at its Jonquière Söderberg primary aluminum facility in Saguenay, Quebec (Primary Metal). As a result, the Company recorded charges of $14 in 2004 comprising $5 of severance costs, $5 of asset impairment charges, and $4 of other costs. In 2005, the Company incurred additional restructuring charges of $5 (Q1: $1; Q2: nil; Q3: nil; Q4: $4) consisting of severance costs of $3 (Q1: nil; Q2: nil; Q3: nil; Q4: $3) and other costs of $2 (Q1: $1; Q2: nil; Q3: nil; Q4: $1). In the first quarter of 2006, the Company incurred additional other restructuring charges of $1. In the third quarter of 2006, the Company incurred additional severance charges of $1.

The schedule provided below shows details of the provision balances and related cash payments for the significant restructuring activities:

   
Severance Costs
 
Asset Impairment Charges*
 
Other
 
Total
 
Provision balance as at January 1, 2005
   
200
   
-
   
46
   
246
 
                           
2005:
                         
Provisions transferred to Novelis
   
(31
)
 
-
   
(14
)
 
(45
)
Charges recorded in the statement of income
   
204
   
400
   
81
   
685
 
Cash payments - net
   
(118
)
 
-
   
(40
)
 
(158
)
Non-cash items
   
(12
)
 
(400
)
 
(16
)
 
(428
)
Provision balance as at December 31, 2005
   
243
   
-
   
57
   
300
 
                           
Nine months, 2006:
                         
Charges recorded in the statement of income
   
60
   
41
   
29
   
130
 
Cash payments - net
   
(117
)
 
-
   
(33
)
 
(150
)
Non-cash items
   
11
   
(41
)
 
5
   
(25
)
Provision balance as at September 30, 2006
   
197
   
-
   
58
   
255
 
 
* Fair value of assets was determined using discounted future cash flows.

 
The schedule below shows details of the charges by operating segment:

Charges recorded in the statement of income in Other expenses (income) - net

 
Quarter ended September 30, 2006
 
Severance Costs
 
Asset Impairment Provisions
 
Other
 
Total
 
Bauxite and Alumina
   
1
   
-
   
-
   
1
 
Primary Metal
   
5
   
-
   
-
   
5
 
Engineered Products
   
2
   
-
   
1
   
3
 
Packaging
   
-
   
1
   
12
   
13
 
Other
   
-
   
-
   
-
   
-
 
Total
   
8
   
1
   
13
   
22
 
Nine months ended September 30, 2006
                         
Bauxite and Alumina
   
2
   
11
   
2
   
15
 
Primary Metal
   
20
   
23
   
8
   
51
 
Engineered Products
   
12
   
-
   
2
   
14
 
Packaging
   
25
   
7
   
17
   
49
 
Other
   
1
   
-
   
-
   
1
 
Total
   
60
   
41
   
29
   
130
 

For the third quarter and nine months ended September 30, 2006, $14 and $77, respectively (2005: $21 and $95) of the restructuring charges above are excluded from the measurement of the profitability of the Company’s operating segments (Business Group Profit), as they relate to major corporate-wide acquisitions or initiatives. See note 7 - Information by Operating Segment.

 
 -15-

 

7.    INFORMATION BY OPERATING SEGMENT

The following presents selected information by operating segment, viewed on a stand-alone basis. The operating management structure is comprised of four operating segments or business groups: Bauxite and Alumina; Primary Metal; Engineered Products; and Packaging. The Company's measure of the profitability of its operating segments is referred to as business group profit (BGP). BGP comprises earnings before interest, income taxes, minority interests, depreciation and amortization and excludes certain items, such as corporate costs, restructuring costs (relating to major corporate-wide acquisitions or initiatives), impairment and other special charges, pension actuarial gains, losses and other adjustments, and unrealized gains and losses on derivatives, that are not under the control of the business groups or are not considered in the measurement of their profitability. These items are generally managed by the Company's corporate head office, which focuses on strategy development and oversees governance, policy, legal, compliance, human resources and finance matters. The unrealized change in fair market value of derivatives is removed from individual BGP and is shown on a separate line in the reconciliation to income from continuing operations. This presentation provides a more accurate portrayal of underlying business group results and is in line with the Company’s portfolio approach to risk management. Transactions between operating segments are conducted on an arm’s-length basis and reflect market prices. Thus, earnings from the Bauxite and Alumina as well as from the Primary Metal groups represent mainly profit on alumina or metal produced by the Company, whether sold to third parties or used in the Company’s fabricating and packaging operations. Earnings from the Engineered Products and Packaging groups represent only the fabricating profit on their respective products.

The accounting principles used to prepare the information by operating segment are the same as those used to prepare the consolidated financial statements of the Company, except for the following two items:

 

(1) The operating segments include the Company’s proportionate share of joint ventures (including joint ventures accounted for using the equity method) and certain other equity-accounted investments as they are managed within each operating segment, with the adjustments for these investments shown on a separate line in the reconciliation to Income from continuing operations; and
   
(2) Pension costs for the operating segments are based on the normal current service cost with all actuarial gains, losses and other adjustments being included in Intersegment and other.

The operating segments are described below.

Bauxite and Alumina

Headquartered in Montreal, Canada, the Bauxite and Alumina group comprises Alcan’s worldwide activities related to bauxite mining and refining into smelter-grade and specialty aluminas. The group owns and/or operates six bauxite mines and deposits in five countries, five smelter-grade alumina plants in four countries and six specialty alumina plants in three countries. The group also comprises technology sales and technical assistance for alumina processing, engineering services, research and development and global trading activities.

Primary Metal

Also headquartered in Montreal, this group comprises smelting operations, power generation, production of primary value-added ingot, manufacturing of smelter anodes and cathodes, as well as aluminum fluoride, smelter technology and equipment sales, engineering services and trading operations for aluminum, operating or having interests in 21 smelters in 10 countries. The Company has relocated the operational headquarters of its European primary aluminum business to Voreppe, France.

Engineered Products

Headquartered in Paris, France, this group produces extruded, rolled and cast aluminum products, engineered shaped products and structures, including cable, wire and rod, as well as composite materials such as aluminum-plastic, fibre reinforced plastic and foam-plastic in 47 plants located in 12 countries. Also included in Engineered Products are 33 service centres in 11 countries offering technical assistance, cutting, shaping, machining and assembling for smaller customers, and 32 offices in 27 countries that sell and source specialty products and materials for industrial applications in 65 countries.


 
 -16-

 

7.    INFORMATION BY OPERATING SEGMENT (cont’d)

Packaging

Also headquartered in Paris, this group consists of the Company’s worldwide food, pharmaceutical and medical, beauty and personal care and tobacco packaging businesses, operating 140 plants in 30 countries. This group produces packaging from a number of different materials, including plastic, aluminum, paper, paperboard, glass and steel.

Intersegment and other

This classification includes the deferral or realization of profits on intersegment sales of aluminum and alumina, corporate office costs as well as other non-operating items.

   
Third Quarter
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
Sales and operating revenues - Intersegment
                 
Bauxite and Alumina
   
534
   
397
   
1,464
   
1,172
 
Primary Metal
   
624
   
466
   
1,851
   
1,460
 
Engineered Products
   
65
   
4
   
159
   
172
 
Packaging
   
2
   
3
   
3
   
5
 
Other
   
(1,225
)
 
(870
)
 
(3,477
)
 
(2,809
)
 
    -    
-
   
-
   
-
 

   
Third Quarter
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
Sales and operating revenues - Third Parties
                 
Bauxite and Alumina
   
495
   
352
   
1,290
   
1,094
 
Primary Metal
   
2,060
   
1,695
   
6,331
   
5,030
 
Engineered Products
   
1,744
   
1,393
   
5,291
   
4,542
 
Packaging
   
1,473
   
1,439
   
4,485
   
4,601
 
Adjustments for equity-accounted joint ventures and
                         
    certain investments
   
(12
)
 
(5
)
 
(1
)
 
(35
)
Other
   
9
   
13
   
26
   
39
 
     
5,769
   
4,887
   
17,422
   
15,271
 

   
Third Quarter
 
Nine Months
 
 
Periods ended September 30
 
 
2006
 
 
2005
 
 
2006
 
 
2005
 
Business Group Profit (BGP)
                 
Bauxite and Alumina
   
198
   
98
   
453
   
306
 
Primary Metal
   
675
   
364
   
2,207
   
1,220
 
Engineered Products
   
101
   
106
   
399
   
322
 
Packaging
   
161
   
157
   
441
   
490
 
Adjustments for equity-accounted joint ventures and
                         
certain investments
   
(87
)
 
(61
)
 
(244
)
 
(212
)
Adjustments for mark-to-market of derivatives
   
16
   
(19
)
 
37
   
11
 
Depreciation and amortization
   
(273
)
 
(266
)
 
(782
)
 
(806
)
Intersegment, corporate offices and other
   
(159
)
 
(131
)
 
(425
)
 
(379
)
Equity income
   
41
   
16
   
106
   
73
 
Interest
   
(63
)
 
(92
)
 
(208
)
 
(267
)
Income taxes
   
(146
)
 
(101
)
 
(610
)
 
(269
)
Minority interests
   
(4
)
 
1
   
(6
)
 
(1
)
Income from continuing operations
   
460
   
72
   
1,368
   
488
 


 
 -17-

 

7.    INFORMATION BY OPERATING SEGMENT (cont’d)

Risk Concentration

The Company's consolidated sales and operating revenues for the third quarter and nine months ended September 30, 2006, include $634 and $1,966, respectively (2005: $399 and $1,544) arising from transactions with one customer. These sales and operating revenues, principally made by the Primary Metal Group, represent 11% and 11% (2005: 8% and 10%) of consolidated sales and operating revenues for the third quarter and nine months ended September 30, 2006, respectively.


8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION

Alcan Executive Share Option Plan

Under the Alcan Executive Share Option Plan, certain key employees may purchase common shares at an exercise price that is based on the market value of the shares on the date of the grant of each option. These common shares are issued from treasury. Options granted beginning in 1998 vest (not less than three months after the grant date) in respect of one-third of the grant when the market value of the share has increased by 20% over the exercise price, two-thirds of the grant when the market value of the share has increased by 40%, and the entire amount of the grant when the market value of the share has increased by 60%. The market value must exceed these thresholds for at least 21 consecutive trading days. All options that do not attain the thresholds above vest nine years after the grant date. All options expire ten years after the grant date. In the event of death or retirement, any remainder of this ten-year period in excess of five years is reduced to five years, and the said thresholds are waived. Options granted before 1998 vest generally over a fixed period of four years from the grant date and expire at various dates during the next ten years. Upon consummation of the combination with Alusuisse Group Ltd. on October 17, 2000, all options granted prior to the consummation were vested. In respect of certain options granted to certain senior executives in 1996, 1997 and 1998, the Company granted further options which become effective upon the exercise of the associated options and upon the executive placing at least one-half of the common shares resulting from the exercise of these options in trust with an agency named by the Company, for a minimum period of five years. The exercise price of these options is based on the market value of the common shares on the exercise date of the associated options. These options are exercisable in the same manner, and will also terminate on the same date, as the associated options. The vesting provisions of these options are identical to those of the associated options.
 
On January 6, 2005, Alcan Executive Share Options to purchase 1,368,686 shares, granted to Novelis employees who were Alcan employees immediately prior to the spin-off, were cancelled.

As a result of the spin-off of Novelis, Alcan Executive Share Options held prior to the spin-off of Novelis were converted to new options, the number and exercise prices of which were based on the trading prices of Alcan shares immediately before and immediately after the effective date of the spin-off to preserve the economic value of the option grants. This amounted to a conversion ratio of one share under the original grants to 1.1404 shares under the new options and the exercise price per option was reduced accordingly.

Changes in the number of shares under options as well as the average exercise price are summarized below:

   
Number of Shares
Under Options
(in thousands)
 
Weighted Average Exercise Price
(CAN$)
 
Outstanding - January 1, 2006
   
11,295
   
43.40
 
Granted
   
167
   
49.59
 
Exercised
   
(2,877
)
 
39.27
 
Forfeited
   
(81
)
 
45.30
 
Outstanding - September 30, 2006
   
8,504
   
44.90
 
Exercisable - September 30, 2006
   
3,532
   
40.84
 


 
 -18-

 

8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)

Shares under Options Outstanding at September 30, 2006

NUMBER OF SHARES UNDER OPTIONS
(IN THOUSANDS)
RANGE OF EXERCISE PRICE
(CAN$)
WEIGHTED AVERAGE EXERCISE PRICE (CAN$)
WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)
 
   509
 
30.43-35.00
 
33.81
 
5.00
2,349
35.01-40.00
38.35
8.41
   983
40.01-45.00
40.93
3.68
1,448
45.01-50.00
46.62
6.94
3,215
50.01-56.34
51.88
6.68
8,504
30.43-56.34
44.90
6.75

Shares under Options Exercisable and Fully Vested at September 30, 2006

NUMBER OF SHARES UNDER OPTIONS
(IN THOUSANDS)
RANGE OF EXERCISE PRICE
(CAN$)
WEIGHTED AVERAGE EXERCISE PRICE (CAN$)
WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)
 
   509
 
30.43-35.00
 
33.81
 
5.00
1,445
35.01-40.00
38.41
8.10
   687
40.01-45.00
40.99
3.30
   489
45.01-50.00
46.34
6.02
   402
50.01-56.34
51.56
4.21
3,532
30.43-56.34
40.84
5.99

At September 30, 2006, the Company had 20,718,619 shares reserved for issue under the Alcan Executive Share Option Plan.

The total intrinsic value of the Alcan Executive Share Options exercised during the third quarter and nine months ended September 30, 2006, was nil and $44, respectively (2005: nil and $1). For the third quarter and nine months ended September 30, 2006, the Company received $1 and $100, respectively, from the exercise of Alcan Executive Share Options (2005: $1 and $8).

The total intrinsic value of Alcan Executive Share Options fully vested at September 30, 2006, is $12 (2005: nil). The total compensation cost related to nonvested Alcan Executive Share Options not yet recognized is $20 at September 30, 2006. The weighted-average period over which this cost is expected to be recognized is two years.

The fair value of options vested during the third quarter and nine months ended September 30, 2006, is $1 and $32, respectively (2005: $1 and $2).

For all Alcan Executive Share Options granted subsequent to December 31, 2005, the fair value is estimated using a Monte Carlo simulation model. As the Alcan Executive Share Options contain a market condition, which should be reflected in the grant date fair value of the options, the Company prospectively changed its valuation technique based on further clarification provided in SFAS No. 123(R). The Monte Carlo simulation model explicitly considers market conditions and in doing so, provides a better estimate of fair value than the Black-Scholes option pricing model used in prior years. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying each market condition stipulated in the award. The valuation model used the following assumptions:

Dividend yield (%)
 
1.66
Expected volatility (%)
 
31.78
Risk-free interest rate (%)
 
4.35-4.86
Original term of awards (years)
 
10

The weighted average grant date fair value for Alcan Executive Share Options issued during the third quarter and nine months ended September 30, 2006 is nil and $13.94, respectively (2005: $8.71 and $8.71).

 
 -19-

 
 
8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)

Derived Service Period
For options granted during the nine months ended September 30, 2006, the requisite service period is derived for the three vesting tranches described above using the same Monte Carlo simulation. The fair values of the options for each of the first, second and third tranches are recognized as compensation expense over a requisite service period of one, two and three years, respectively. For options granted on or after January 1, 2006, the Company changed its method of calculating the requisite service period based on further clarification provided in SFAS No. 123(R), as the Alcan Executive Share Options contain a market condition.

In 2006, the Company reviewed its long-term incentive plan. As a result of this review, beginning in the third quarter of 2006, the Company will grant Restricted Share Units in lieu of Alcan Executive Share Options and Stock Price Appreciation Units. Refer to Restricted Share Unit Plan below.

Pechiney Stock Option Plans

Under the stock option plans of Pechiney, now a wholly-owned subsidiary of Alcan, certain officers and employees were granted options to subscribe to or to purchase Pechiney common shares.

Alcan and Pechiney agreed on the terms of a liquidity agreement which has been made available to beneficiaries of Pechiney subscription and purchase options (“Liquidity Agreement”). The Liquidity Agreement allowed the holders of Pechiney options to either (a) exchange their Pechiney shares resulting from the exercise of the Pechiney options for Alcan common shares on the basis of a ratio equivalent to the consideration offered under Alcan’s public offer for Pechiney or (b) give up their Pechiney options and receive new options to subscribe for Alcan common shares on the basis of a ratio equivalent to the consideration offered under Alcan’s public offer for Pechiney. Upon the clearance by the French Autorité des marchés financiers of Alcan’s initial public offer for Pechiney securities on July 16, 2003, the Pechiney options became fully vested. The Alcan common shares are issued from treasury.

Changes in the number of Alcan shares under Pechiney options as well as the average exercise price are summarized below:

   
 
Number of Shares Under Pechiney Options
(in thousands)
 
 
Weighted Average Exercise Price
()
 
 
Outstanding - January 1, 2006
   
3,670
   
31.63
 
Exercised
   
(921
)
 
29.23
 
Forfeited
   
(26
)
 
28.95
 
Outstanding and Exercisable - September 30, 2006
   
2,723
   
32.46
 





Shares under Pechiney Options Outstanding and Exercisable at September 30, 2006

NUMBER OF SHARES UNDER OPTIONS
(IN THOUSANDS)
 
RANGE OF EXERCISE PRICE (€)
 
WEIGHTED AVERAGE EXERCISE PRICE (€)
WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)
 
   350
 
16.73-19.92
 
19.79
 
6.33
      45
23.50-23.92
23.67
1.96
   922
29.07-31.36
29.95
3.80
1,406
37.53-37.67
37.54
5.43
2,723
16.73-37.67
32.46
4.94

Under the terms of the Liquidity Agreement, a maximum of 3,890,542 Alcan common shares can be issued.


 
 -20-

 
8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)
 

As part of the cost of the acquisition of Pechiney, an amount of $80 was recognized for the fair value of the Pechiney options and credited to Additional paid-in capital. The Black-Scholes valuation model was used to determine the fair value of Pechiney options. The weighted average assumptions used were a dividend yield of 2.19%, an expected volatility of 52.50%, a market risk-free interest rate of 3.99% and an expected life of seven years.


The total intrinsic value of Pechiney options exercised during the third quarter and nine months ended September 30, 2006, was nil and $13, respectively (2005: nil and nil). For the third quarter and nine months ended September 30, 2006, the Company received nil and $33, respectively, from the exercise of Pechiney options (2005: nil and nil).

Other Stock-Based Compensation Plans

Stock Price Appreciation Unit Plan

A small number of employees are entitled to receive Stock Price Appreciation Units (SPAU) instead of Alcan Executive Share Options due to certain local considerations in their countries of residence, whereby they are entitled to receive cash in an amount equal to the excess of the market value of a common share on the date of exercise of a SPAU over the market value of a common share as of the date of grant of such SPAUs. SPAUs vest in the same manner as the Alcan Executive Share Options granted beginning in 1998. On January 6, 2005, 211,035 SPAUs, representing SPAUs held by Novelis employees who were Alcan employees immediately prior to the spin-off, were cancelled. The remaining SPAUs were converted in the same manner as described under the Alcan Executive Share Option Plan.

As described in note 2 - Accounting Changes - Share-Based Payment, the Company began recording all outstanding liability awards at fair value on January 1, 2006. Accordingly, the Company recorded an after-tax charge of $4 using the modified prospective application method in Cumulative effect of accounting change to record all outstanding SPAUs, previously measured at their intrinsic value, at their fair value. Prior periods have not been restated. The fair value of all outstanding SPAUs is estimated using the Monte Carlo simulation model described under the Alcan Executive Share Option Plan.

The change in SPAUs for the nine-month period ended September 30, 2006 is as follows:

   
Number of SPAUs
(in thousands)
 
Weighted Average Exercise Price
(CAN$)
 
 
Outstanding - January 1, 2006
   
1,019
   
42.09
 
Exercised
   
(297
)
 
39.45
 
Forfeited
   
(7
)
 
47.44
 
Outstanding - September 30, 2006
   
715
   
43.13
 
Exercisable - September 30, 2006
   
343
   
39.97
 

SPAUs Outstanding at September 30, 2006

 
NUMBER OF
SPAUs
(IN THOUSANDS)
RANGE OF EXERCISE PRICE
(CAN$)
WEIGHTED AVERAGE EXERCISE PRICE (CAN$)
WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)
 
  83
 
34.04-35.00
 
34.04
 
4.17
158
35.01-40.00
38.26
8.95
132
40.01-45.00
40.86
4.41
179
45.01-50.00
46.16
5.62
163
50.01-50.99
50.99
7.94
715
34.04-50.99
43.13
6.50


 
 -21-

 

8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)
 
SPAUs Exercisable at September 30, 2006

NUMBER OF
SPAUs
(IN THOUSANDS)
RANGE OF EXERCISE PRICE
(CAN$)
WEIGHTED AVERAGE EXERCISE PRICE (CAN$)
WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)
 
   83
 
34.04-35.00
 
34.04
 
4.17
   89
35.01-40.00
38.26
8.94
   81
40.01-45.00
40.86
4.04
   88
45.01-50.00
46.16
4.22
     2
50.01-50.99
50.99
4.83
343
34.04-50.99
39.97
5.39


The total intrinsic value for SPAUs redeemed, which is equal to the amount the Company paid, during the third quarter and nine months ended September 30, 2006, was nil and $4, respectively (2005: nil and nil).

The total intrinsic value of SPAUs fully vested at September 30, 2006 is $1 (2005: nil). The total compensation cost related to nonvested SPAUs not yet recognized is $2 at September 30, 2006. The weighted-average period over which this cost is expected to be recognized is two years.

The fair value of the SPAUs vested during the third quarter and nine months ended September 30, 2006 is nil and $5, respectively.

Total Shareholder Return Performance Plan

A number of employees are entitled to receive cash awards under the Total Shareholder Return (TSR) Performance Plan (TSR Plan), a cash incentive plan that provides performance awards to eligible employees based on the relative performance of the Company’s common share price and cumulative dividend yield compared to other corporations included in the Standard & Poor’s Industrial Composite Index measured over three-year periods commencing on October 1, 2005, 2004 and 2003. Generally, participants are only eligible for payment of cash awards under the TSR Plan if they are employed by the Company over the entire three-year period. If the performance results for the Company’s common shares ranks below the 30th percentile compared to all companies in the Standard & Poor’s Industrial Composite Index (Peer Companies), the employee will not receive an award. At the 30th percentile rank, the employee will be paid an award equal to 60% of the target. At the 50th percentile rank, the employee will earn a payout of 100% of the target, and at or above the 75th percentile rank, the employee will earn the maximum award, which is equal to 300% of the target set for the three-year period. The actual amount of the award (if any) will be prorated between the percentile rankings.
 
Effective September 20, 2006, the TSR Plan was amended. The amendments apply to all awards issued on or after this date. The TSR plan will now provide performance awards to employees based on the relative share price and cumulative dividend yield performance compared to other companies included in the Standard and Poor’s Materials Index, rather than the Standard and Poor’s Industrial Composite Index. Furthermore, if the performance results for the Company’s common shares ranks below the 30th percentile compared to all companies in the Standard & Poor’s Materials Index (New Peer Companies), the employee will not receive an award. At the 30th percentile rank, the employee will be paid an award equal to 60% of the target. At the 50th percentile rank, the employee will earn a payout of 100% of the target, and at or above the 75th percentile rank, the employee will earn the maximum award, which is equal to 250% (rather than 300%) of the target set for the three-year period. The actual amount of the award (if any) will be prorated between the percentile rankings.

As described in note 2 - Accounting Changes - Share-Based Payment, the Company began recording all outstanding liability awards at fair value on January 1, 2006. Accordingly, on this date, the Company began recording all outstanding awards under the TSR Plan at fair value. The fair value of all outstanding TSR awards was estimated by using a Monte Carlo simulation model to simulate the total shareholder return for each of the Peer Companies over the term of the three-year period and to evaluate the Company’s percentile rank among the Peer Companies in order to determine the payout. The adoption of the fair value method did not have a material impact on the outstanding TSR awards on January 1, 2006. Prior to this date, the TSR awards were measured at their intrinsic value and the changes in market value recorded as an increase (or decrease) in compensation expense.
 

 
 -22-

 
 
8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)
 
The valuation model used the following assumptions at September 30, 2006:

 
Alcan expected volatility (%)
   
 
30.56
Alcan expected correlation with market
   
0.48
Risk-free interest rate (%)
   
4.58
Expected market volatility (S&P 500) (%)
   
10.82

The peer group expected volatility and correlation with the market at September 30, 2006, is summarized as follows:

2004 AND 2005 PEER GROUP
VOLATILITY
CORRELATION WITH MARKET
 
Peer group average
 
   27.23%
 
0.45
Peer group high
113.95%
0.69
Peer group low
  12.65%
0.11

The three-year period of the TSR Plan that commenced on October 1, 2003 was completed on September 30, 2006. The final rank for this three-year period was a combination of the percentile rankings for the periods before and after the spin-off of Novelis. As such, the employees participating during this three-year period have earned a payout of 41.74% of the target. During the fourth quarter of 2006, $4 will be paid to these employees.

On January 6, 2005, all Novelis employees who were Alcan employees immediately prior to the spin-off ceased to actively participate in and accrue benefits under this plan. No cash payments were made to these employees as a result of the spin-off nor does Alcan have any liability to make future cash payments to these individuals.

As described below, under the Executive Deferred Share Unit Plan (ESDUP), executive officers based in Canada may elect, at least 12 months prior to the end of the three-year period of the TSR Plan, to receive Executive Deferred Share Units (EDSUs) for their total award earned under the TSR Plan for that period instead of a cash payment. For all TSR awards issued on or after September 20, 2006, and subject to the approval of the Canadian tax authorities, these eligible executive officers, who make this election, and are based in Canada, will also receive from the Company an additional 20% of EDSUs for their TSR payout exchanged as a company incentive to encourage these participants to commit to a long-term investment in the Company. For the third quarter and nine months ended September 30, 2006, 32 and 74 units, respectively, were granted to eligible executive officers. At September 30, 2006, 7,192 units were outstanding.

Restricted Share Unit Plan

The Alcan Restricted Share Unit Plan (RSU Plan) is a new long term incentive plan introduced during the third quarter of 2006 and will be used as a long term incentive plan instead of the Alcan Executive Share Option Plan and the Stock Price Appreciation Unit Plan.

Under the RSU Plan, eligible participants may be granted Restricted Share Units (RSUs). The RSUs will have a vesting period of no longer than three years. The grant price of a RSU shall be the fair market value (defined as the average of the closing prices of the Company's common shares on the New York Stock Exchange over the previous 21 consecutive trading days). The participants will also be credited additional RSUs corresponding to dividends declared on common shares. The RSUs will be redeemed in cash at the end of the vesting period based on the Fair Market Value on that date multiplied by the number of RSUs held by the participant.

Subject to the approval of the Canadian tax authorities and as described below, under the EDSUP, eligible participants based in Canada may elect, at least 12 months prior to the end of the vesting period of the RSU Plan, to receive EDSUs in exchange for their RSU award earned under the RSU Plan for that period instead of a cash payment. These eligible participants, who make this election, will also receive from the Company an additional 20% of EDSUs for the RSUs exchanged as a Company incentive to encourage these participants to commit to a long-term investment in the Company.

For both the third quarter and nine months ended September 30, 2006, 1,075,650 units were granted and nil units were redeemed. At September 30, 2006, 1,075,650 units were outstanding.


 
 -23-

 

8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)
 
The Company is currently reviewing the status of approximately 200,000 units granted to employees in France in order to optimize the benefits for both the Company and its employees.

Executive Deferred Share Unit Plan

Under the EDSUP, eligible executive officers based in Canada may elect, prior to the beginning of any particular year, to receive EDSUs for their Executive Performance Award (EPA) in respect of that year, instead of a cash payment.

Eligible executive officers based in Canada may also elect, at least 12 months prior to the end of the three-year period of the TSR Plan, to receive EDSUs for their TSR payout for that period, instead of a cash payment. For all TSR awards issued on or after September 20, 2006, and subject to the approval of the Canadian tax authorities, these eligible executive officers, who make this election, and are based in Canada, will also receive from the Company an additional 20% of EDSUs for their TSR payout exchanged as a company incentive to encourage these participants to commit to a long-term investment in the Company.

Subject to the approval of the Canadian tax authorities and as described below, under the EDSUP, eligible participants based in Canada may elect, at least 12 months prior to the end of the vesting period of the RSU Plan, to receive EDSUs in exchange for their RSU award earned under the RSU Plan for that period instead of a cash payment. These eligible participants, who make this election, will also receive from the Company an additional 20% of EDSUs for the RSUs exchanged as a Company incentive to encourage these participants to commit to a long-term investment in the Company.

The number of EDSUs is determined by dividing the amount so elected by the average price of a common share on the Toronto and New York stock exchanges (New York Stock Exchange only for RSUs) at the end of the preceding year for the EDSUs related to the EPA, and at the end of the three-year period for the EDSUs related to the TSR Plan and the RSU Plan. Additional EDSUs are credited to each holder thereof corresponding to dividends declared on common shares. The EDSUs are redeemable only upon termination of employment (retirement, resignation or death). The cash amount to be paid by the Company upon redemption is calculated by multiplying the accumulated balance of EDSUs by the average price of a common share on the said exchanges at the time of redemption. Under the terms of this plan, discretionary EDSUs may be granted as determined by the Board of Directors. On January 6, 2005, EDSUs held prior to the spin-off of Novelis were converted in the same manner as described under the Alcan Executive Share Option Plan.

For the third quarter and nine months ended September 30, 2006, 399 and 11,333 units, respectively, were granted and nil and 11,439 units, respectively, were redeemed. At September 30, 2006, 90,846 units were outstanding. The Company paid nil and $1 for the redemption of units for the third quarter and nine months ended September 30, 2006, respectively.

Non-Executive Directors Deferred Share Unit Plan

Under the Non-Executive Directors Deferred Share Unit Plan, non-executive directors receive 50% of compensation payable in the form of Directors’ Deferred Share Units (DDSUs) and 50% in the form of either cash or additional DDSUs at the election of each non-executive director. The number of DDSUs is determined by dividing the quarterly amount payable by the average price of a common share on the Toronto and New York stock exchanges on the last five trading days of each quarter. Additional DDSUs are credited to each holder thereof corresponding to dividends declared on common shares. The DDSUs are redeemable only upon termination (retirement, resignation or death). The cash amount to be paid by the Company upon redemption is calculated by multiplying the accumulated balance of DDSUs by the average price of a common share on the said exchanges at the time of redemption. On January 6, 2005, DDSUs held prior to the spin-off of Novelis were converted in the same manner as described under the Alcan Executive Share Option Plan.

For the third quarter and nine months ended September 30, 2006, 13,024 and 32,944 units, respectively, were granted and nil and 16,216 units, respectively, were redeemed. At September 30, 2006, 149,591 units were outstanding. The Company paid nil and $1 for the redemption of units for the third quarter and nine months ended September 30, 2006, respectively.

 
 -24-

 

8.    STOCK OPTIONS AND OTHER STOCK-BASED COMPENSATION (cont’d)
 
Other Restricted Share Units

Prior to September 2006, and not included in the new long-term incentive plan introduced during the third quarter of 2006, a small number of employees were granted other Restricted Share Units (Other RSUs). Additional Other RSUs are credited to each holder thereof corresponding to dividends declared on common shares. Other RSUs usually vest three years after the grant date. Each Other RSU carries the right to an amount equal to the average price of a common share on the Toronto and New York stock exchanges on the five trading days ending on the vesting date. As a result of the spin-off, Other RSUs held prior to the spin-off of Novelis were converted in the same manner as described under the Alcan Executive Share Option Plan.

For the third quarter and nine months ended September 30, 2006, 7,101 and 15,550 units, respectively, were granted and nil and 7,533 units, respectively, were redeemed. At September 30, 2006, 59,804 units were outstanding. The Company paid approximately nil for the redemption of a portion of the Other RSUs for the nine months ended September 30, 2006. The remaining Other RSU’s redeemed were converted to Alcan common shares.

These Other RSUs are accounted for as liability-classified awards under the provisions of SFAS No. 123(R), as the majority will be settled in cash. These awards are measured at their fair value at grant date, and remeasured at each reporting period, until the Other RSUs are settled. The fair value of the award is amortized over the requisite service period of three years.

Total Stock-Based Compensation Cost

Total stock-based compensation costs (income) for the third quarter and nine months ended September 30, 2006 are ($3) and $58, respectively (2005: $8 and $5). These costs include stock-option expense of $3 and $39 for the third quarter and nine months ended September 30, 2006, respectively (2005: $4 and $14) and other stock-based compensation costs (income) of ($6) and $19 for the third quarter and nine months ended September 30, 2006, respectively (2005: $4 and ($9)). Included in total stock-based compensation expense is $27 for the nine months ended September 30, 2006 due to the recognition of compensation expense related to retired and retirement-eligible employees.

As a result of the adoption of SFAS No. 123(R), the Company recognizes compensation expense immediately for all stock options and other stock-based compensation issued on or after January 1, 2006 to retirement eligible employees. For stock options and other stock-based compensation issued prior to this date, all unrecognized compensation expense is recognized immediately upon the employee’s retirement.


9.    INCOME TAXES

   
Third Quarter
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
Current
   
73
   
15
   
310
   
141
 
Deferred
   
73
   
86
   
300
   
128
 
     
146
   
101
   
610
   
269
 


The composite of the applicable statutory corporate income tax rates in Canada is 33% (2005: 32%).

The Company’s effective tax rate on income from continuing operations was 26% and 32% for the third quarter and nine months ended September 30, 2006, respectively. The effective tax rate was favourably impacted during the third quarter of 2006 as a result of settling a number of open taxation years with various tax authorities.

 
 -25-

 

10.    OTHER EXPENSES (INCOME) - NET

   
Third Quarter
 
Nine Months
 
Periods ended September 30
 
2006
 
2005
 
2006
 
2005
 
Asset impairment charges not included in restructuring
                 
    programs
   
11
   
1
   
16
   
13
 
Loss (Gain) on disposal of businesses and investments -
                         
    net
   
(4
)
 
(5
)
 
(8
)
 
11
 
Provision for (Recoveries of) legal claims
   
1
   
1
   
(53
)
 
12
 
Environmental provisions
   
-
   
-
   
9
   
8
 
Interest revenue
   
(12
)
 
(7