Financial results for 2009

EBIT for Hydro amounted to a loss of NOK 1,407 million for the year, compared with positive EBIT of NOK 1,194 million in 2008. EBIT included positive effects of NOK 3,173 million and negative effects of NOK 2,202 million for 2009 and 2008, respectively, from unrealized gains and losses relating to LME, power and currency derivative contracts. Results were also impacted by negative metal effects of NOK 588 million and NOK 235 million for 2009 and 2008, respectively. The magnitude of these recurring effects depends on changes in market values, which have been significant.

Other significant items impacting EBIT include gains/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 956 million and NOK 2,573 million for 2009 and 2008, respectively, together with divestment losses of NOK 684 million in 2009 and divestment gains of NOK 453 million in 2008. These also included other items amounting to a net positive effect of NOK 204 million in 2009, compared to other items amounting to a net negative effect of NOK 257 million in 2008.

Net financial income for the year amounted to NOK 2,774 million, compared with net financial expense of NOK 5,026 million in 2008. These amounts included net foreign currency gains of NOK 2,774 million and net foreign exchange losses of NOK 5,491 million for 2009 and 2008, respectively. All of the gains in 2009 and about 40 percent of the losses in 2008 related to gains/losses on intercompany balances are primarily denominated in Euro. These items have no cash effect and are offset in equity by translation of the corresponding subsidiaries during consolidation. The remaining losses in 2008 were related to US dollars and mainly to Hydro's US dollar hedging program which was terminated. Interest income declined to NOK 233 million, compared to NOK 769 million in 2008, reflecting lower cash balances during 2009.

Income taxes amounted to a charge of NOK 951 million in 2009, compared with a positive amount of NOK 565 million for 2008. For 2009, income tax expense was roughly 70 percent of pre-tax income. The high tax rate resulted mainly from the effects of power surtax and losses from equity-accounted investments, which are recognized net of tax. Income from continuing operations amounted to NOK 416 million in 2009, compared with a loss of NOK 3,267 million in 2008.

RoaCE 1) was negative 3.3 percent for 2009, compared with 0.7 percent in 2008.

1) RoaCE is defined as Earnings after tax divided by average Capital Employed.

Underlying operating results

Key financial information

Key Operational information ¹)

Primary Metal incurred a substantial loss in 2009, declining sharply from positive underlying EBIT in the previous year. Significantly lower realized aluminium prices had a negative impact on underlying results of about NOK 6.3 billion. Writedowns reversed in inventory amounted to NOK 470 million, compared to write-downs of NOK 550 million in 2008. Lower volumes and product premiums had a negative impact on underlying EBIT amounting to about NOK 1.2 billion and NOK 600 million, respectively. Variable costs at our smelters decreased by about NOK 1.7 billion, compared to 2008, mainly due to lower alumina costs, which declined by roughly NOK 1.0 billion. Fixed costs declined by about NOK 900 million due to capacity curtailments and manning reductions that took place mainly in the first half of 2009, in addition to lower maintenance activities.

Underlying income from our equity-accounted smelters declined to about NOK 490 million, mainly due to charges related to the build-up of the operating organization at Qatalum, from roughly NOK 130 million in the previous year. Underlying EBIT for Alunorte, our equity-accounted alumina refinery, amounted to a loss of NOK 10 million, a decrease from positive underlying EBIT of NOK 447 million in the previous year. This decline was mainly due to lower LME linked alumina prices. More than half of the price decline, however, was offset by an increase in sales relating to the third expansion of the plant that was completed in 2008.

Metal Markets incurred an underlying loss for the year, heavily impacted by negative currency effects of roughly NOK 600 million, mainly due to the weakening of the US dollar against Norwegian kroner. Underlying EBIT in 2008 was positively impacted by currency effects of nearly NOK 500 million, but also included inventory write-downs of about NOK 160 million. Excluding currency effects, operating results from our sourcing and trading activities improved from 2008, with significant positive contributions both from our physical standard ingot portfolio and LME trading. Underlying results for our remelters also improved when compared to the 2008 result, which was negatively impacted by inventory write-downs.

Underlying EBIT for Rolled Products declined significantly in 2009 mainly due to the significant drop in volumes for the year. Margins measured in Euro weakened somewhat compared with 2008, impacted mainly by lower margins within the general engineering market segment. Shipments and order intake both improved in the second half of the year.

Extruded Products incurred an underlying loss for 2009 due to substantial volume declines for all of its operating units and lower margins for most of the businesses. Underlying results improved in the second half of the year as the markets stabilized, supported by customer restocking and significant cost reductions. All of our business sectors, however, incurred underlying losses for the year as a whole, except for our building systems business. Our US extrusion business delivered improved underlying results, although still negative, driven by substantial cost reductions from efforts to align our overall cost structure with the negative market developments experienced over the last several years.

Underlying EBIT for Energy declined for the year mainly due to significantly lower power production and lower spot prices, which were partly offset by lower area costs and lower operating costs.

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 below have been excluded from EBIT (earnings before financial items and tax) and income from continuing operations.

Items excluded from underlying income from continuing operations ¹)

Unrealized derivative effects on LME and power contracts include unrealized gains and losses on contracts measured at market value where hedge accounting is not applied. Unrealized derivative effects on currency contracts include unrealized gains and losses on certain foreign denominated contracts relating to our equity accounted investments. Metal effects relate to changes in the value of inventories due to LME price developments during the period between the order and delivery of rolled products, which normally takes 4-5 months. The remainder of items excluded from underlying EBIT are comprised mainly of cost and charges, as well as income, 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 losses on intercompany balances denominated in Euro and, in 2008, to Hydro's US dollar hedging program which was terminated. 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 2.0 billion at the end 2009.

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 0.32 at the end of the year.

In 2009, net cash provided by operating activities increased significantly from NOK 2.9 billion in 2008 to NOK 4.5 billion in 2009, and was sufficient to cover operating requirements and a major part of investment activities. However, we were not able to meet our targeted funds from operations to adjusted net interest bearing debt ratio of 0.40 for the year.

Net cash outflows amounted to NOK 0.7 billion for the year, reducing cash, cash equivalents and bank overdraft from NOK 3.2 billion at the end of 2008 to NOK 2.5 billion at year-end 2009. Hydro's liquid assets, including cash, cash equivalents, bank overdraft and short-term investments declined by NOK 0.8 billion to NOK 4 billion. The most significant uses of cash in 2009 included investments in property, plant and equipment and other long-term investments, together totaling NOK 5.9 billion. Included in this amount was NOK 2.6 billion of equity injections to Qatalum, Hydro's 50 percent-owned green-field smelter in Qatar. The main sources of cash included NOK 4.5 billion from continuing operating activities and NOK 0.7 billion from continuing financing activities. Out of the NOK 4.5 billion cash provided by continuing operating activities, NOK 5.8 billion were related to working capital reductions.

Hydro expects that cash from continuing operations, together with the liquidity holdings and available credit facilities, will be more than sufficient to cover our planned capital expenditures, operational requirements, and financing activities in 2010.

Outlook

The underlying demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe and North America was weak during the first half of the year, improving during the second half of the year. However, the consumption of metal products in both Europe and North America remains significantly below the levels experienced in 2007 and 2008 and there are no apparent indications of a quick recovery to pre-crisis consumption levels.

Despite improvement, shipments into the European flat rolled products market for 2009 were significantly below 2008 levels. We expect market demand in Europe to grow in the first quarter of 2010 and continue growing moderately into the second quarter. In the US, demand followed similar developments during 2009, but starting from low levels and improving to a lesser extent. Market demand in the US is expected to show some improvements in 2010, compared to 2009.

Total consumption of extruded aluminium products in Europe declined for the year due to the significant fall in demand in the first half of the year. Market developments in North America reflected the continued weak economy while developments in South America continued to be positive, particularly in Brazil. The overall outlook for the European and US extrusion markets continues to be weak. Demand is expected to stabilize across most markets during the first quarter, with construction being the most challenging market segment.

Hydro's water and snow reservoirs were lower than normal in the middle of January and also lower than the corresponding period in 2009. Despite the decreased reservoir levels, Hydro's power production is expected to be at seasonally high levels during the first quarter of 2010, partly due to Suldal I being back in operation.