Financial and operational results for 2008

EBIT for Hydro amounted to NOK 1,194 million for the year, compared with NOK 9,025 million in 2007. EBIT included charges of roughly NOK 2.5 billion, comprised of impairment losses of NOK 2,150 million due to the deteriorating market conditions and write-downs of roughly NOK 300 million relating to our minority interests in solar businesses reflecting lower market values for solar companies. EBIT also included about NOK 2,200 million and NOK 920 million for 2008 and 2007, respectively, from unrealized derivative effects relating to LME, power contracts and currency contracts. The magnitude of these recurring effects depends on changes in market values which can be significant. The remainder of items excluded from underlying EBIT is comprised mainly of gains/losses on divestments and other cost and charges that are typically non-recurring for individual plants or operations. These items amounted to a net charge NOK 148 million and NOK 62 million for 2008 and 2007, respectively.

Net financial expense for the year amounted to NOK 5,026 million, including a net foreign currency loss of NOK 5,491 million. Approximately 60 percent of the losses related U.S. dollars and mainly to Hydro’s U.S. dollar hedging program. The remainder related primarily to losses on intercompany balances denominated in Euro. The Euro losses have no cash effect and are offset in equity by translation of the corresponding subsidiaries when consolidated into the accounts of the Hydro group. Interest income declined to NOK 769 million compared to NOK 1,228 million in 2007. Earnings in 2007 reflected high amounts of cash and short-term investments during the first nine months of the year prior to the payment of demerger debt to StatoilHydro October 1, 2007.

Income taxes amounted to a positive amount of NOK 565 million in 2008 compared with a charge of NOK 3,075 million for 2007, which was approximately 15 percent and 25 percent of income (loss) from continuing operations before tax, respectively.

Losses from continuing operations amounted to NOK 3,267 million for the year compared to income of NOK 9,158 million in the previous year.

RoaCE (RoaCE is defined as Earnings after tax divided by average Capital Employed.) was 0.7 percent for 2008, compared with 14.5 percent for 2007.

Underlying operating results

Key financial information

Financial and operating statistics ⁴)

Underlying results 1) for our Aluminium Metal business declined for the year, impacted by lower realized prices measured in Norwegian kroner and substantial increases in the cost of power, freight, alloying metals and carbon, in addition to the effect of the inventory write-downs of about NOK 700 million. Production of primary metal was strong and stable during the year and several of our smelters achieved record levels. Volume from our casthouses declined in the second half of the year due to the substantial fall in market demand. Results for our Bauxite and Alumina operations fell compared to the previous year, impacted by losses from our Alpart alumina refinery. Underlying results for Alunorte also declined for the year. Positive effects from the higher volumes and higher alumina prices were more than offset by significantly higher energy prices, currency effects and higher bauxite prices. Volumes increased for Alunorte following the successful start-up of the third expansion of the plant in third quarter of 2008. Alunorte also completed a restructuring of the plants power facilities with the implementation of additional co-generation of electricity following the start-up of new coal-fired boilers toward the end of 2007. The improved energy mix, together with a sharp drop in oil prices, reduced the plant’s energy cost in the final quarter of the year. Underlying results for our Commercial operations decreased for the full year of 2008 compared to 2007, mainly reflecting significantly lower results from our Sourcing and Trading business and lower production due to the market development in second half of the year.

Underlying EBIT declined for our Aluminium Products business for 2008 as a whole compared to 2007. Our Rolled Products business delivered improved underlying results with positive margin developments offsetting volume declines. Our European extruders outperformed a general market decline for the first nine months of 2008, but underlying results declined for the year, heavily impacted by market decline in the final quarter. Underlying results for our U.S. operations also improved from 2007 during the first nine months, driven by significant cost reductions, but the market turbulence in the final quarter of 2008 more than offset the positive developments. Underlying results for our South American operations improved for the year compared to 2007. Significantly lower volumes also impacted underlying results for 2008 in our Automotive operations compared to the previous year. In addition, our Automotive business incurred costs related to start-up of new product lines as well as costs for reducing capacity to meet current market conditions.

Underlying EBIT for Energy improved by 47 percent compared with 2007. The improvement was mainly caused by significantly higher spot prices, higher power production and somewhat lower operating costs.

Hydro’s power production in Norway amounted to nearly 11.4 TWh in 2008, which is the highest recorded volume historically. Due to high reservoir precipitation levels in 2007 and 2008, power production has been significantly higher than the historic average in both years. Direct power production costs, which include operations and maintenance, transmission costs, property taxes and concession fees, decreased slightly from 2007. The decrease primarily reflects lower transmission grid tariffs. Our Solar businesses, which are in a development phase, incurred an underlying loss of NOK 130 million in 2008, compared to an underlying loss of NOK 82 million in 2007.

Items excluded from underlying EBIT and results

To provide a better understanding of the underlying performance of Hydro’s operating units, the items in the table on the next page have been excluded from EBIT (earnings before financial items and tax) and income from continuing operations.

Unrealized derivative effects on LME and power contracts include unrealized gains and losses on contracts evaluated at market value where hedge accounting is not applied. The magnitude of these recurring effects depends on changes in market values which can be significant. Unrealized derivative effects on currency contracts include unrealized gains and losses on certain foreign denominated contracts relating to our equity accounted investments.

The remainder of items excluded from underlying EBIT comprised mainly of gains/losses on divestments and other cost and charges that are typically non-recurring for individual plants or operations.

Net foreign exchange gains/losses include realized and unrealized gains and losses on all foreign denominated contracts and balances included in our balance sheet for the periods presented. These amounts mainly relate to Hydro’s US-dollar hedging program and losses on intercompany balances denominated in Euro. Calculated income tax effect of items excluded from underlying EBIT is based on Hydro’s effective tax rate adjusted for the tax effect of financial items, while the income tax effect of currency gains/losses is calculated at 28 percent.

Liquidity, financial position, investments

Cash and short-term investments exceeded interest bearing debt by NOK 3.5 billion at the end 2008.

Hydro’s adjusted debt/equity ratio, defined as net interest-bearing debt (mainly comprised of net unfunded pension obligations after tax, the present value of operating lease obligations and Hydro’s portion of interest bearing debt in equity accounted investees) divided by adjusted equity, was 0.30 at the end of the year.

1) To provide a better understanding of Hydro’s underlying performance, the following discussion of operating performance excludes certain items from EBIT (earnings before financial items and tax) and income from continuing operations, such as unrealized gains and losses on derivatives, impairment and rationalization charges, effects of disposals of businesses and operating assets, as well as other items that are of a special nature or are not expected to be incurred on an ongoing basis. See section later in this report “Items excluded from underlying EBIT and income from operations” for more information on these items.

Items excluded from underlying income from continuing operations ¹)

In 2008, net cash provided by operating activities declined significantly from NOK 14.3 billion in 2007 to NOK 2.9 billion in 2008.

Net cash outflows amounted to NOK 6.1 billion for the year. As a result, Hydro’s liquid assets declined by NOK 7.1 billion to NOK 5 billion. The most significant uses of cash in 2008 included substantial investments in property plant and equipment and other long-term investments totaling NOK 9.0 billion, and dividend payments of NOK 6.4 billion. Included in these amounts were NOK 3.1 billion of investments relating to Qatalum and NOK 4.5 billion of extraordinary dividends. The main sources of cash included NOK 2.9 billion from continuing operating activities and NOK 5.2 billion relating to the sale of Hydro’s Polymers activities.

Net cash provided by operations in 2009 will be negatively impacted by very challenging market conditions and continued low expected aluminium prices.

Outlook

Hydro is facing challenging market conditions, with a severely oversupplied aluminium market resulting in substantial downward pressure on aluminium prices. Since the end of the year, LME three-month aluminium prices reached the lowest level in more than seven years of USD 1,289 per tonne on February 24, 2009. Aluminium prices are expected to remain low in the medium term, but there is limited forward visibility and significant uncertainty regarding developments.

The economic downturn has resulted in declining demand for raw materials and smelter input costs are falling. The cost of alumina is normally linked to aluminium prices and therefore price adjustments are relatively quick. Prices for other important raw materials are also declining. Contractual arrangements and time lags in production and logistic processes for some raw materials will result in continued high costs in the early part of 2009 having a negative effect on Hydro’s operating results. There are indications that energy prices in Europe and the U.S., although trending downwards, will remain elevated.

Demand within main aluminium market segments is expected to remain depressed, a situation that could continue throughout the entire year. There is substantial uncertainty regarding the timing of a recovery. Global primary aluminium consumption excluding China could potentially decline by up to 10 to 15 percent in 2009 from a consumption level of 25 million tonnes in 2008. Chinese consumption of primary aluminium may fall slightly from the 2008 level of 12.5 million tonnes.

Market demand for flat rolled products in Europe is expected to continue declining during the coming months, driven by lower demand from most markets. The overall outlook for the European extrusion market is weak with lower demand across most market segments, in particular the automotive and transportation segments. In the U.S., extrusion markets are expected to remain severely depressed, with no signs of recovery.

Nordic power prices have declined during the first weeks of 2009, both in the spot market and for forward contracts traded at the Nord Pool power exchange. High winter consumption of power and lower than normal water reservoir levels in Norway and Sweden are, however, expected to support prices at a fairly high level throughout the first three to four months of 2009.