Financial results for 2011

EBIT for Hydro amounted to NOK 9,827 million compared with NOK 3,184 million in 2010. EBIT included negative effects of NOK 211 million from unrealized gains and losses relating to LME, power, currency and raw material derivative contracts, and metal effects in our Rolled Products business area. In 2010, the corresponding effects amounted to a negative NOK 166 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 costs and charges that are typically nonrecurring for individual plants or operations. These included rationalization and impairment charges amounting to NOK 1,607 million and NOK 317 million for 2011 and 2010, respectively, together with divestment gains of NOK 1,184 million in 2011 and NOK 74 million in 2010. These also included effects relating to the Vale Aluminium acquisition amounting to NOK 4,328 million in 2011 and other items amounting to a net positive effect of NOK 242 million in 2010.

Net financial expense for the year amounted to NOK 1,288 million compared with net financial income of NOK 522 million in 2010. These amounts included net foreign currency losses of NOK 971 million in 2011 and net foreign currency gains of NOK 513 million for 2010. The currency gains in 2010 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. Corresponding net currency gains in 2011 amounted to NOK 27 million.

Income taxes amounted to a charge of NOK 1,790 million in 2011, compared with a charge of NOK 1,588 million in 2010. For 2011, income tax expense was 21 percent of pre-tax income. The low tax rate results from tax-free gains on the sales of the shareholding in SKS Produksjon and Alpart, and the tax-free gain from the revaluation of Hydro's previous ownership interests in Alunorte, and CAP recognized in the first quarter. The effect was somewhat offset by impairment charges having no tax effect and the write down of deferred tax assets recognized in the fourth quarter.

Net income amounted to NOK 6,749 million in 2011, compared with NOK 2,188 million in 2010.

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 improved for Bauxite & Alumina mainly due to the inclusion of the acquired bauxite and alumina activities from Vale from March 1, 2011. Pro forma underlying EBIT for Bauxite & Alumina⁷⁾ declined to NOK 969 million in 2011 from NOK 1,225 million in 2010 which included insurance proceeds from the settlement of a claim for business interruption. Bauxite production improved throughout the year. Alumina production at Alunorte increased slightly. Realized alumina prices improved compared to 2010 driven by higher LME prices, but positive effects were mostly offset by increased raw material costs.

Underlying EBIT for Primary Metal improved significantly in 2011 driven by higher realized aluminium prices, higher volumes and improved earnings for Qatalum following completion of ramp-up of the plant. Positive developments were partly offset by substantially higher raw material costs. Inclusion of the Albras smelter from March 1, 2011 also had a positive effect on underlying EBIT. Excluding Albras, higher realized aluminium prices together with higher premiums contributed about NOK 2.5 billion to underlying EBIT compared with 2010. LME linked alumina costs increased together with higher costs for carbon and power. Fixed costs for our smelter portfolio excluding Albras declined somewhat. Underlying EBIT improved in 2011 for Qatalum, which reached full production on September 21. Insurance proceeds relating to the power outage in August 2010 which were included in underlying results for 2011 amounted to NOK 145 million. Proceeds amounted to NOK 300 million in 2010, of which NOK 210 million was included in underlying EBIT.

Developments in underlying EBIT for Metal Markets in 2011 were heavily influenced by net positive currency and inventory valuation effects compared with significant net negative effects for 2010. Underlying EBIT excluding these items declined, impacted by a lower contribution from our sourcing and trading activities. Results for our remelt operations improved somewhat for the year. Total metal product sales improved compared with 2010, mainly due to the inclusion of Albras casthouse volumes from March 1, 2011 and increased volumes from Qatalum. The positive effects were partly offset by lower extrusion ingot and sheet ingot sales volumes in Europe due to weaker markets.

Underlying EBIT for Rolled Products declined in 2011 compared to the record results achieved in the previous year, mainly due to lower sales volumes and somewhat higher operating costs. Volumes declined somewhat in total, reflecting weaker markets in the second half of 2011. Margins improved in the first half of 2011 but were under pressure during the second half, mainly related to the general engineering applications. Operating costs increased, driven by higher energy prices and other production related costs.

Underlying EBIT for Extruded Products declined substantially in 2011, mainly as a result of lower volumes for our higher margin building systems operations and lower margins for our European general extrusion operations. Cost reduction initiatives resulted in lower operating costs, partly offsetting the negative market developments. Our Americas extrusion operations and global precision tubing business delivered improved underlying results for the year. Overall volumes increased compared to the previous year as markets improved during the first half of 2011. However, demand weakened in the second half of the year due to growing economic uncertainty, impacting our European extrusion business in particular. Weak demand and increasing overcapacity in Southern Europe has resulted in significant pressure on margins in Europe. Measures implemented across our European general extrusion operations have reduced our operating cost per mt, partly offsetting margin declines.

Underlying EBIT for Energy increased in 2011, mainly due to higher production and lower area price differences, partly offset by lower prices. In addition, strong results from commercial activities contributed positively to underlying EBIT for 2011. Direct production costs declined in 2011 due to lower transmission costs.

Liquidity, financial position, investments

Cash and short-term investments exceeded interest-bearing debt by roughly NOK 1.7 billion at the end of 2011, down from NOK 11 billion at the end of 2010. The decline was mainly due to a net payment of NOK 5.8 billion and debt assumed of NOK 5.7 billion, both related to the Vale Aluminium acquisition.

Hydro's adjusted debt/equity ratio, defined as net interest-bearing debt divided by adjusted equity, was 0.24 at the end of the year, well below its targeted maximum ratio of 0.55.²⁾

In 2011, cash provided by operating activities of NOK 7.3 billion was more than sufficient to cover operating requirements and investments of NOK 4.3 billion³⁾, as well as dividend payments of NOK 1.8 billion. Sales of non-strategic assets amounted to NOK 1.4 billion, representing an additional source of cash, in addition to net loan proceeds of NOK 0.9 billion. In addition to operating and investment activities, the main use of cash was the net payment of NOK 5.8 billion made in connection with the Vale Aluminium acquisition. Except for the Vale transaction, investments in 2011 were mainly limited to maintenance activities to safeguard our production assets.

Available credit facilities and the commercial paper market were used to cover fluctuations in cash flow during the year.

Net cash outflow amounted to NOK 2.4 billion for the year, decreasing cash, cash equivalents and bank overdraft from NOK 10.7 billion at the end of 2010 to NOK 8.3 billion at the end of 2011.

Hydro's adjusted funds from operation/adjusted net interest-bearing debt ratio was 0.42 for 2011, which was above our minimum target of 0.40.

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 2012.

¹⁾ To provide a presentation of Hydro's performance on a comparable basis, this additional information relating to developments in underlying EBIT for Bauxite & Alumina is presented including the results of the acquired Vale assets for the full calendar quarter when the acquisition was completed in 2011 and for 2010. See note 5 to the consolidated financial statements later in this report for more information on the acquisition.

²⁾ 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.

³⁾ Excluding amounts relating to the Vale Aluminium acquisition.