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Q4 2010 influenced by lower prices and higher costs, Vale contract on schedule

Hydro reported adjusted earnings before interest and taxes (EBIT) of NOK 588 million in the fourth quarter, a decrease from NOK 965 million in the third quarter. Lower aluminum prices, higher operating costs and a seasonal decline in sales volumes had a negative impact on earnings.

  • Adjusted EBIT of NOK 588 million

  • Declining earnings in aluminum production due to lower aluminum prices achieved, which were partially offset by insurance benefits for Qatalum.

  • Processing business weaker due to higher costs and seasonal sales decline, margins remain stable

  • Energy earnings improvement thanks to high prices and high production
    Seven percent growth in demand for primary aluminum expected in Hydro's main markets in 2011

  • Qatalum should reach full capacity from June 2011

  • Execution of the contract with Vale probably during the first quarter of 2011

  • Proposed dividend for 2010: NOK 0.75 per share

2010 was a turning point for Hydro and 2011 will mark this change. "I expect Qatalum to start producing in full in June and that the planned takeover of Vale's aluminum business will be completed in the first quarter," says CEO Svein Richard Brandtzæg.
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"The aluminum price is currently at one comfortable level. We saw increasing demand over the course of 2010, which continued in 2011. Significant parts of our downstream area have well-filled order books for the first half of 2011. "Nevertheless, the fourth quarter result shows that we must continue to focus on cost improvements," said Brandtzæg.

Lower aluminum prices achieved

Adjusted primary metal earnings declined in the fourth quarter, mainly due to lower aluminum prices. This was only partially offset by the insurance benefits linked to the power cut in August 2010 at Qatalum. Qatalum is a joint venture between Qatar Petroleum and Hydro. Alumina & amp; Raw materails was stable, benefiting from the good returns from trading in alumina.
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Qatalum's operating loss increased as expected in the fourth quarter. The plant started up again in mid-September. At the end of the fourth quarter, 321 out of 704 cells were fully operational. The delayed commissioning of the steam turbines of the power plant inhibits the final achievement of the full production capacity. Qatalum should start producing in full in June 2011.
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Hydro's midstream and downstream had lower adjusted EBIT than in the third quarter, mainly due to higher operating costs, including scheduled maintenance costs and seasonally lower sales. Margins remained stable. Adjusted earnings for Energy increased significantly compared to the previous quarter, primarily driven by higher spot prices and significantly higher electricity production.
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Hydro's adjusted earnings for 2010 totaled NOK 3,351 million, In 2009, on the other hand, an adjusted loss of NOK 2,555 million was recorded. The notable improvement was caused by the market recovery, which led to rising prices and higher demand, as well as cost savings and job cuts. Sales in the end market rose by 17 percent, compared to a decrease of 18 percent in the previous year, which partly reflects the build-up of inventory by customers. The overall market surplus was reduced during the year, but stocks are still very high.

Priority for cost savings

Adjusted earnings in the upstream area increased significantly in 2010, primarily due to higher aluminum prices and better results in the existing aluminum oxide and raw materials business. Saving costs in Hydro's smelters remains a top priority. By the end of 2010, a cost improvement of $ 50 per ton had been achieved, and the overall improvement program provides for an improvement of $ 300 per ton by the end of 2013.
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The midstream's adjusted EBIT was strongly impacted by negative currency effects in 2010. Downstream posted significantly higher adjusted results as sales almost reached pre-crisis levels. Further measures to reduce costs and good operating margins had a positive impact and Rolled Products achieved a record result this year. Adjusted EBIT for Energy increased in 2010 due to high spot prices and high production.
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Net cash flow from operations was NOK 3.6 billion in the quarter. Investments in the quarter were NOK 1.6 billion, including around 0.6 billion related to Qatalum. Hydro's net liquidity was NOK 11 billion at the end of the quarter.
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Hydro's Board of Directors proposes a dividend of NOK 0.75 per share for 2010. The decision is based on improved earnings and market prospects, as well as Hydro's strong financial position.

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Key financial information
NOK million, except per share data Fourth
quarter
2010
Third
quarter
2010
% change prior quarter Fourth
quarter
2009
% change prior year quarter Year
2010
Year
2009
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Revenue 19.406 18,424 5% 16,427 18% 75,754 67.409
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Earnings before financial items and tax (EBIT) 768 274 & gt; 100% (938) & gt; 100% 3,184 (1,407)
Items excluded from underlying EBIT 1) (180) 690 & nbsp; 287 & nbsp; 167 (1,148)
Underlying EBIT 588 965 (39)% (651) & gt; 100% 3,351 (2,555)
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Underlying EBIT:
Primary Metal 191 399 (52)% (717) & gt; 100% 1,198 (2,556)
Metal Markets 62 163 (62)% (20) & gt; 100% 321 (83)
Rolled Products 105 227 (54)% 57 84% 864 26
Extruded Products 24 102 (77)% 68 (65)% 444 (67)
Energy 482 169 & gt; 100% 295 63% 1,416 1,240
Other and eliminations (277) (95) & gt; (100)% (334) 17% (893) (1,114)
Underlying EBIT 588 965 (39)% (651) & gt; 100% 3,351 (2,555)
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Net income (loss) 658 (63) & gt; 100% (587) & gt; 100% 2,118 416
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Underlying net income (loss) 376 545 (31)% (791) & gt; 100% 1,852 (3,066)
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Earnings per share 0.39 (0.07) & gt; 100% (0.45) & gt; 100% 1.33 0.24
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Underlying earnings per share 0.21 0.33 (35)% (0.61) & gt; 100% 1.14 (2nd.5)
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Financial data:
Investments 1,613 1,591 1% 2,371 (32)% 6,231 5,947
Adjusted net interest-bearing debt (6,427) (8,280) 22% (15,645) 59% (6,427) (15, 645)
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Key operational information
Primary aluminum production (kmt) 360 355 2% 332 8% 1.415 1,396
Realized aluminum price LME (USD / mt) 2,074 2,179 (5)% 1,804 15% 2,113 1,698
Realized aluminum price LME (NOK / mt) 12,436 13.503 (8)% 10,452 19% 12,674 10,764
Realized NOK / USD exchange rate 6.00 6.20 (3)% 5.80 3% 6.00 6.34
Metal Markets sales volumes to external market (kmt) 417 429 (3)% 375 11% 1,717 1,468
Rolled Products sales volumes to external market (kmt) 234 239 (2)% 211 11% 945 794
Extruded Products sales volumes to external market (kmt) 127 134 (5)% 119 6% 529 463
Power production (GWh) 2,263 1,479 53% 1,929 17% 8,144 7,897

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See "Fourth quarter report 2010" for footnotes.

About Hydro's reporting

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. See "Items excluded from underlying EBIT and net income" for more information on these items.

Reported EBIT and net income

Reported EBIT for Hydro total to NOK 768 million in the fourth quarter including net positive effects of NOK 180 million. These effects were comprised of net unrealized derivative gains of NOK 132 million, positive metal effects of NOK 92 million, insurance proceeds of NOK 90 million relating to the Qatalum power outage and other net negative effects of NOK 134 million including rationalization and closure costs. < br /> & nbsp;
In the previous quarter, reported EBIT for Hydro total to NOK 274 million including net negative effects of NOK 690 million. These effects were comprised of net unrealized derivative losses of NOK 524 million, negative metal effects of NOK 52 million and impairment charges relating to Qatalum amounting to NOK 114 million.
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Net income for the fourth quarter to NOK 658 million including net foreign exchange gains of NOK 232 million. In the third quarter Hydro incurred a net loss amounting to NOK 63 million including net foreign exchange losses of NOK 246 million.

Market developments and outlook

Upstream

LME prices continued to increase in the fourth quarter. Average three month prices starts the quarter at a level of around USD 2,370 per mt and ended around USD 2,470 per mt. Market volatility continued with prices fluctuating within the range of USD 2,250 - 2,500 per mt in the quarter.
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Global demand for primary aluminum excluding China increased 4 percent in the fourth quarter compared to the third quarter partly due to customer restocking. Annualized consumption and production total to 25.3 million mt and 25.7 million mt respectively. Primary aluminum consumption outside China grew 19 percent from 2009. We expect corresponding growth of about 7 percent in 2011 and somewhat slower growth in 2012. The market is expected to be within a manageable surplus in 2011.
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Production in China declined in the fourth quarter by around 10 percent compared to the previous quarter, assumed to be due to the need to meet energy saving targets. Total production total to about 17 million mt for 2010. Demand increased by around 2 percent in the fourth quarter resulting in a decline in inventories.
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LME stocks were relatively stable around 4.3 million mt during the quarter . Global inventories days have been falling as a result of improved demand.
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Demand for metal products, in particular extrusion ingot and sheet ingot was strong and unchanged from the previous quarter. Demand for primary foundry alloys improved in Northern Europe, in particular in Germany and was also stronger in export markets in Asia.

Rolled products

Consumption in the European rolled products market was seasonally lower in the fourth quarter compared with the previous quarter. Demand increased around 17 percent in 2010 compared to 2009, but remained below the peak achieved in 2007. We expect a healthy demand to continue into the first half of 2011.

Extruded products

European demand for extruded aluminum products improved significantly compared to fourth quarter of the previous year, but remained weak within the building and construction sector. In North America demand was seasonally lower compared with the third quarter of 2010, and also lower than the fourth quarter of 2009. Developments in South America continued to be positive, especially in Brazil. Demand for precision tubing remains strong. Overall demand in the European and US extrusion markets is expected to continue to grow into the seasonally stronger first quarter of 2011. Recovery in the building and construction segment is expected to remain slow.

Energy

Nordic electricity spot prices increased during the fourth quarter in parallel with deteriorating hydrological conditions. Water reservoir levels in Norway declined to about 45 percent of full capacity by the end of 2010. Snow accumulation levels were 50 percent below normal. Colder weather beginning in the middle of November lifted spot prices further due to very high demand. Prices declined in January due to milder weather and more stable nuclear output, but reservoir levels remain at historically low levels. Prices are expected to remain fairly high throughout the first quarter of 2011.

Additional factors impacting Hydro

Hydro has sold forward substantially all of its primary aluminum production for the first quarter at a price level of around USD 2,325 per mt, excluding expected Qatalum production.
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Qatalum is expected to produce roughly 500,000 mt of primary metal in 2011
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Hydro's water and snow reservoirs were lower than normal at the end of January and also lower than the corresponding period in 2009. Due to the high spot price levels, Hydro's power production during the first quarter of 2011 is expected to be at same level as for fourth quarter 2010.

Primary Metal

Underlying results for Primary Metal declined during the quarter compared to the third quarter mainly due to lower realized aluminum prices partly offset by insurance proceeds relating to the power outage at Qatalum in the previous quarter.
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Alumina and raw materials underlying results improved slightly in the quarter compared with the third quarter. For Alunorte, positive effects of higher realized alumina prices were partly offset by lower sales, higher bauxite, caustic costs and other operating costs. Underlying earnings for our alumina commercial activities were somewhat higher than the previous quarter driven by higher volumes and good margins on third party sales contracts.
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Lower realized aluminum prices had a negative effect on underlying results for Primary aluminum amounting to about NOK 350 million in the quarter. Our cost improvement program continued according to plan, however, fourth quarter operating costs were somewhat higher than in the third quarter due to seasonal effects.
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Operating losses for Qatalum increased in the fourth quarter due to higher depreciation charges and higher fixed costs including costs relating to restart of the ramp up at the plant. Insurance proceeds amounting to NOK 300 million were recorded in the fourth quarter of which NOK 210 million was included in underlying EBIT. Ramp-up of the plant restarted in the middle of September and at the end of the fourth quarter 321 out of 704 cells were fully operational. Final ramp-up to full production capacity will be hampered by delayed commissioning of the power plant steam turbines. It is expected that the plant will reach full output from June 2011.

Metal Markets

Underlying EBIT for Metal Markets declined in the fourth quarter. Currency and ingot inventory valuation effects were relatively neutral in the fourth quarter compared with substantial net positive effects in the previous quarter.
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Excluding currency and ingot inventory valuation effects, underlying EBIT for Metal Markets also declined in the quarter. Our remelt operations delivered lower underlying results during the quarter mainly due to planned maintenance activities. Lower sales volumes for resale of third party products also had a negative impact on underlying results for the quarter. Underlying results for our metal sourcing and trading activities continued to be firm.
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Total metal product sales excluding ingot trading was slightly lower mainly due to seasonally lower shipments of extrusion ingots in all markets.

Rolled Products

Underlying EBIT for Rolled Products declined compared to the third quarter of 2010 due to higher operating costs, including costs for planned maintenance activities, and somewhat lower sales volume.
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Volume developments varied between our different business sectors. Lithography shipments increased together with a good production performance. General engineering sales were stable while automotive, heat exchanger sales were slightly higher supported by continued firm demand. Volumes for our thin gauge foil, beverage can and other packaging and building products declined mainly due to seasonal maintenance and other capacity constraints. Margins remained firm.

Extruded Products

Underlying EBIT for Extruded Products declined compared with the third quarter of 2010 mainly due to higher operating costs and seasonally lower volumes. The cost increases were due to planned maintenance activities and charges for ongoing improvement programs mainly related to rationalization initiatives, the implementation of a new IT system and increased marketing efforts. In the previous quarter, operating costs were positively impacted by seasonally lower employee related costs. Margins were firm for most business sectors in the fourth quarter.
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Volumes for our European, North American and South American extrusion operations were all seasonally lower in the fourth quarter. Recovery in the building systems markets continued to lag the general extrusion market, in particular in southern Europe, where demand fell in the fourth quarter due to reduced public spending and increased uncertainty concerning economic developments. As a result, we have initiated further rationalization programs to improve the results of this business.

Energy

Underlying EBIT for Energy increased substantially compared to the previous quarter due to higher spot prices and significantly higher production. Cold winter weather, marginal precipitation and outages of nuclear power in Sweden resulted in high spot prices during the period.

Other and eliminations

Underlying EBIT for Other and eliminations total to a charge of NOK 277 million for the fourth quarter compared with a charge of NOK 95 million in the previous quarter and a charge of NOK 334 million in the fourth quarter of 2009. Eliminations included in underlying EBIT total to a charge of NOK 12 million in the fourth quarter compared with a income of NOK 39 million in the previous quarter and a charge of NOK 108 million in the fourth quarter of 2009.
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Underlying results for the fourth quarter included increased costs for integration planning and other transaction costs relating to the Vale aluminum acquisition, as well as year-end adjustments for employee and pension costs.

Items excluded from underlying EBIT and net income

To provide a better understanding of Hydro's underlying performance, the items in the table below have been excluded from EBIT and net income.
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Items excluded from underlying EBIT are comprised mainly of unrealized gains and losses on certain 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.
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Linked to the agreement to acquire the majority of Vale's aluminum businesses in Brazil (Vale Aluminum) it was decided to hedge the majority of the net aluminum price exposure in Vale Aluminum until the end of 2011. The hedges are aimed at mitigating the risk of a weaker aluminum price and will secure a robust cash flow from the acquired assets in the transition phase. The hedges are not conditional upon completion of the transaction. The significant part of the positions expiring after closing of the transaction are subject to hedge accounting and included in other comprehensive income. Recognized unrealized and realized effects of positions not subject to hedge accounting are classified as items excluded from underlying EBIT.

Items excluded from underlying net income
NOK million Fourth
quarter
2010
Third
quarter
2010
Fourth
quarter
2009
Year
2010
Year
2009
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Unrealized derivative effects on LME related contracts (162) 515 (728) 489 (2,630)
Derivative effects on LME related contracts (Vale Aluminum) 55 99 - (166) -
Unrealized derivative effects on power contracts 151 (25) 318 609 (198)
Unrealized derivative effects on currency contracts (20) (65) (19) (50) (345)
Unrealized derivative effects on raw material contracts (156) - - (156) -
Metal effect, Rolled Products (92) 52 (157) (560) 588
Significant rationalization charges and closure costs 131 - 65 130 518
Impairment charges (PP&E and equity accounted investments) 12 114 138 187 438
Pension - - - (151) (52)
Insurance compensation (91) - (13) (91) (152)
(Gains) / losses on divestments (7) - 684 (74) 684
Items excluded from underlying EBIT (180) 690 287 167 (1,148)
Net foreign exchange (gain) / loss (232) 246 (216) (513) (2,774)
Calculated income tax effect 129 (328) (275) 80 441
Items excluded from underlying net income (282) 608 (204) (266) (3,481)

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Finance

Financial income was to NOK 292 million in the fourth quarter compared with Financial expense of NOK 218 million in the previous quarter.
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Financial income was relatively unchanged in the fourth quarter compared with the previous quarter. Interest expense in fourth quarter is lower than previous quarter due to lower interest on tax claims in Germany.
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The net currency gain in the fourth quarter included gains amounting to NOK 274 million relating to intercompany balances denominated in Euro due to a weaker Euro against the Norwegian kroner. 1) Other net currency losses total to NOK 42 million.

Tax

Income tax expense total to a charge of NOK 401 million in the fourth quarter compared with a charge of NOK 119 million in the previous quarter and a credit of NOK 183 million in the fourth quarter of 2009.
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For 2010 income tax expense was roughly 43 percent of pre-tax income. The tax rate for the year was influenced by the effects of power sur-tax and results from equity accounted investments which are recognized net of tax.

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