Hydro's net income in the first quarter of 2004 reflects a considerable improvement compared with the equivalent quarter last year. Both principal business areas, Oil & Energy and Aluminium, delivered stronger results.
Hydro's income from continuing operations in the first quarter of 2004 was NOK 3,135 million (NOK 12.30 per share), compared with NOK 1,570 million (NOK 6.10 per share) in the first quarter of 2003.
Hydro’s income before cumulative effect of change in accounting principle including Yara’s activities up to the demerger was NOK 4,218 million (NOK 16.50 per share), compared with NOK 2,201 million (NOK 8.50 per share) in 2003.
"Good operations and start-up of new fields contributes to continued strong production growth, which combined with high oil and gas prices gives excellent results in Oil & Energy. The aluminium markets are improving. Production and sale of aluminium and downstream products increase, and it is satisfactory that the results in Aluminium also reflects the effects of the completed improvement measures," says President and CEO Eivind Reiten.
"We have also carried out a strategic restructuring of the company’s operations, with complete focus on developing the main activities Oil & Energy and Aluminium. The demerger of the Agri operation, and its successful listing on the Oslo Stock Exchange under the name of Yara International were realized, resulting in added value creation for Hydro’s shareholders and a stronger financial platform for Hydro," says Reiten.
Operating income for the first quarter of 2004 amounted to NOK 9,276 million compared with NOK 5,982 million in the first quarter of 2003.
Results in both Oil & Energy and Aluminium have improved significantly. However, operating income in the first quarter of both years was impacted by unrealized effects from changes in the market value of electricity and aluminium futures and forward contracts, gains on disposals and non-recurring effects.
Operating income for the quarter included a positive effect of NOK 154 million in connection with changes to the market value of power supply contracts, and unrealized gains on aluminium futures and forward contracts amounting to NOK 350 million. The first quarter also included the gain from the divestment of the Gjøa discovery on the Norwegian Continental Shelf (NCS) of NOK 285 million. NOK 428 million was charged in the first quarter of 2003 as a result of a lower market value of the contract portfolio due to considerably lower forward prices for electricity at the end of the quarter compared to the unusually high electricity prices at the end of 2002. A non-recurring effect in connection with pensions of around NOK 230 million was also charged to the operating income in the first quarter of 2003.
When adjusted for these effects, the improvement in operating income was about NOK 1.9 billion, including NOK 1.2 billion relating to Oil & Energy and NOK 600 million relating to Aluminium. Petrochemicals has also produced a significant improvement in results.
The higher results in Oil & Energy were mainly due to increased production and higher gas prices. The average price measured in US dollars was at the same level as the year before. Oil and gas production was around 615,000 barrels of oil equivalents (boe) per day in the first quarter, an increase of 63,000 boe per day, compared with the equivalent quarter the year before.
This was mainly due to the start up of production from the Grane, Fram Vest and Mikkel fields in the second half of 2003, in addition to a 15 percent increase in production from operations outside of Norway. Production is targeted at an average of 560,000 boe per day for 2004. Exploration activities have been somewhat lower than in the equivalent quarter of 2003. Electricity production was significantly higher in the first quarter of 2004 than in the equivalent quarter of 2003, but this was partly offset by considerably lower electricity prices.
Market conditions for Aluminium have improved, and the realized metal price in Norwegian kroner increased by seven percent in relation to the first quarter of 2003. Better markets for metal and downstream products together with new production capacity have boosted volumes. Primary metal production increased by 12 percent compared with the same period last year. Higher metal prices in US dollars were somewhat offset by a lower dollar exchange rate. Increased volumes in downstream activities and internal improvement measures have also had a positive effect.
Hydro completed the demerger of its Agri operation transferring the Agri business activities to Yara International ASA on 24 March 2004. Immediately afterwards, Yara repaid its loan from Hydro of NOK 7.1 billion following the establishment of Yara’s independent financing arrangements. Yara was listed on the Oslo Stock Exchange on 25 March. On 15 January, Hydro’s Extraordinary General Meeting resolved to demerge Hydro Agri by issuing one Yara share for each Hydro share held by shareholders on the effective date of the demerger. As of 25 March, Hydro’s shares traded without rights to the demerged operation. As part of the demerger transaction, Hydro retained 20 percent of the Yara shares. These shares were sold in connection with the demerger transaction, through a public offering, that was oversubscribed by around 20 times. The shares sold for NOK 41 per share resulting in a total proceeds of NOK 2.6 billion and a net gain of around NOK 530 million. The gain, together with Agri’s net income from operations for the period ending 25 March are included in Income from discontinued operations for the quarter. Previous periods have been adjusted in order to present the results on a comparable basis.
Tax: 65 percent
Cash flow from operations in the first quarter of 2004 was NOK 8.5 billion, compared with NOK 6.4 billion the year before.
Investments in the first quarter of 2004 amounted to NOK 4.8 billion. The amount included NOK 1.3 billion relating to the effect of implementation of the FASB Interpretation No. 46R requiring the consolidation of one of the Company’s 20 percent owned investees. Excluding this amount, investments in the first quarter amounted to NOK 3.5 billion. Around half of the amount invested related to oil and gas operations.
The provision for current and deferred taxes in the first quarter was NOK 5,786 million, approximately 65 percent of pre-tax income.
Dialogue with SEC
In connection with the presentation of its first-quarter results, Hydro also announced that the company, at its own initiative, has contacted the Securities and Exchange Commission (SEC) to provide information explaining the methodologies, and the technical data derived from such methodologies, that serve as the basis for Hydro’s estimate of the "proved undeveloped reserves"(as that term is defined in SEC rules and regulations) for the Ormen Lange gas field. Hydro is now in the process of assembling additional information to be provided to the SEC in order to further support the company’s estimate of such reserves for the field.
Hydro initiated the dialogue with the SEC after becoming aware of the substantial variation in the estimates of the proved undeveloped reserves for this field among the companies with interest in this field. Hydro expects to have concluded the dialogue with the SEC on this subject in time for the company to file its 2003 annual report on Form 20-F within the June 30 deadline for that filing.
Hydro is the operator for Ormen Lange in the development phase. The partners in the Ormen Lange field are Hydro (18.0728%), Shell (17.0375%), Petoro (36.475%), Statoil (10.8441%), BP (10.342%) and ExxonMobil (7.2286%). The Plan for Development and Operation ( PDO) was submitted to the Norwegian authorities in December 2003 and approved April 2, 2004.