Financial results for 2010

EBIT for Hydro amounted to NOK 3,184 million, compared with a loss of NOK 1,407 million 2009. EBIT included negative effects of NOK 166 million from unrealized gains and losses relating to LME, power, currency and raw material derivative contracts and metal effects in our Rolled Products business in 2010. Corresponding effects were positive in 2009 amounting to NOK 2,585 million. The magnitude of these recurring effects depends on changes in market values, which have been significant.

Other significant items impacting EBIT include gains and losses and other cost and charges that are typically non-recurring for individual plants or operations. These included rationalization and impairment charges amounting to NOK 317 million and NOK 956 million for 2010 and 2009, respectively, together with divestment gains of NOK 74 million in 2010 and divestment losses of NOK 684 million in 2009. These also included other items amounting to a net positive effect of NOK 242 million in 2010 and NOK 204 million in 2009.

Net financial income for the year amounted to NOK 522 million compared with NOK 2,774 million in 2009. These amounts included net foreign currency gains of NOK 513 million and NOK 2,774 million for 2010 and 2009, respectively. The currency gains related primarily to intercompany balances denominated in Euro. The gains have no cash effect and are offset in equity by translation of the corresponding subsidiaries during consolidation.

Income taxes amounted to a charge of NOK 1,588 million in 2010, compared with a charge of NOK 951 million in 2009. Income tax expense for 2010 was roughly 43 percent of pre-tax income. The tax rate for the year was influenced by the effects of power surtax and results from equity-accounted investments, which are recognized net of tax.

Net income amounted to NOK 2,188 million in 2010, compared with NOK 416 million in 2009.

Underlying operating results

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 net income, 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.

Key financial information

Key operational information ¹)

Underlying EBIT for Primary Metal increased significantly for 2010 from a substantial loss in 2009. The improvement was mainly driven by higher realized aluminium prices and an improved performance for Hydro's alumina and raw materials business. Underlying results for Alunorte increased mainly due to significantly higher LME-linked alumina prices. Underlying results and margins for our alumina commercial activities improved substantially partly influenced by the increase in LME prices. Significantly higher aluminium prices contributed about NOK 2.5 billion to underlying EBIT for Primary aluminium compared to 2009. Higher volumes and product premiums had a positive impact of about NOK 940 million on underlying EBIT. Variable costs increased by about NOK 400 million, mainly due to higher alumina costs. Fixed costs declined due to further cost-improvement measures. Operating losses for Qatalum increased in 2010 due to the ongoing ramp-up of production at the plant and to the negative effects of the power outage.

Underlying EBIT for Metal Markets increased in 2010 compared to 2009, which included substantial net negative currency and ingot inventory valuation effects. Operating results declined, mainly due to lower contribution from resale of third-party metal products and lower trading margins. Total metal product sales improved significantly from 2009, reflecting improved demand for all products and entry into new markets. Our remelt operations again delivered good operating results, however, the positive results were largely offset by higher raw material prices. Operating results from our sourcing and trading activities declined from 2009.

Rolled Products achieved record results for 2010. Continued focus on cost and firm operating margins contributed strongly, together with a significant increase in sales volumes as the market recovered.

Underlying EBIT for Extruded Products increased significantly in 2010, compared with an underlying loss in 2009, driven by higher volumes and cost reductions. Volumes increased for all sectors, excluding building systems, impacted by customer restocking and the general economic recovery. Volumes remain, however, below pre-crisis levels. Cost-improvement programs initiated as a result of the market downturn had a positive impact on all operating units during the year.

Underlying EBIT for Energy increased for the year mainly due to considerably higher spot prices.

Liquidity, financial position, investments

Cash and short-term investments exceeded interest bearing debt by roughly NOK 11.0 billion at the end of 2010.

Hydro's adjusted debt/equity ratio, defined as net interest-bearing debt divided by adjusted equity, was 0.11 at the end of the year (the adjustments are 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).

In 2010, cash provided by operating activities increased significantly to NOK 6.4 billion compared to NOK 4.5 billion in the previous year, including a negative contribution from working capital of NOK 2.0 billion. The improvement was mainly due to increased aluminium prices, higher sales volumes and lower operating costs. Higher volumes and prices also contributed to the increase in working capital. See the "Consolidated statement of cash flows" later in this report for a reconciliation of net cash provided by operating activities to net income. Operating cash was sufficient to cover operating requirements and investment activities of NOK 6.1 billion in 2010. Investments were mainly limited to maintenance activities to safeguard our production assets in addition to NOK 3.5 billion of investments in Qatalum.

Net cash inflow amounted to NOK 8.2 billion for the year, increasing cash, cash equivalents and bank overdraft from NOK 2.5 billion at the end of 2009 to NOK 10.7 billion at the end of 2010. In addition cash provided by operating activities, the main source of cash was net proceeds of NOK 9.9 billion from the rights issue completed in July 2010.

A payout of USD 1.1 billion was made in connection with the acquisition of Vale Aluminium in February 2011.

Hydro's adjusted funds from operation/adjusted net interest-bearing debt ratio was 1.18 for 2010, well above our minimum target of 0.40. Adjusting for the payment made to Vale, the ratio would continue to meet our minimum target.

Hydro expects that cash from continuing operations, together with its liquidity holdings and available credit facilities, will be more than sufficient to cover our planned capital expenditures, operational requirements, and financing activities in 2011.