Norsk Hydro ASA is reporting preliminary unaudited pro forma condensed combined financial information for 2010 after completing the acquisition of Vale S.A.’s aluminium business on February 28, 2011. The preliminary pro forma financials are released to provide further details on the acquired businesses ahead of Hydro’s first quarter results 2011 to be released on April 29.
In the transaction Hydro acquired from Vale 60 percent in the Paragominas bauxite mine, 57 percent in the Alunorte alumina refinery, 51 percent in the Albras aluminium smelter and 61 percent in the CAP alumina refinery project. Hydro already had a 34 percent stake in Alunorte and 20 percent in CAP prior to the transaction.
New reporting structure
Effective first quarter 2011 Hydro will have the following reporting segments:
- Bauxite & Alumina
- Primary Metal
- Metal Markets
- Rolled Products
- Extruded Products
- Other and Eliminations
The new Bauxite & Alumina segment will include Paragominas, Alunorte, CAP and related commercial activities. The Primary Metal segment will include Hydro’s current aluminium smelting activities and Albras.
All the acquired assets will be fully consolidated in Hydro’s results starting March 1, 2011. Reported and underlying results for first quarter 2011 will therefore include two months reflecting a 34 percent stake in Alunorte and 20 percent in CAP, both reported as equity accounted investments, and one month where the acquired assets are fully consolidated.
Hydro will provide comparable pro forma financials for first quarter 2011 on April 29.
Preliminary purchase price allocation
Hydro’s preliminary purchase price allocation indicates an annual excess value depreciation of about NOK 1.0 billion pre-tax and NOK 0.6 billion after tax. The pre-tax excess value depreciation has been reduced from NOK 1.5 billion, which was indicated in Hydro’s prospectus published in June 2010 in connection with Hydro’s rights issue.
Hydro’s pre-transaction 34 percent stake in Alunorte and 20 percent stake in CAP will be revalued to the fair value of the stakes in these assets. This is expected to result in a significant revaluation gain, which in the prospectus from June 2010 was estimated to be about NOK 5.2 billion. An updated number for this gain will be recognized in Hydro’s reported results for the first quarter.
The put and call arrangement for the remaining 40 percent interest in Paragominas is considered to transfer the economic risks and rewards of ownership to Hydro also for these shares. Paragominas is therefore accounted for based on the assumption that Hydro is the economic owner of 100 percent of the company, hence without minority interest.
Pro forma adjustments
The pro forma information intends to illustrate how Hydro’s results of operations may have appeared had the transaction been completed prior to January 1, 2010.
Basis for the pro forma information:
Hydro’s previous activities are reflected in Hydro’s historic financial information. The effects of Hydro’s previous ownership interests in Alunorte and CAP accounted for under the equity method are excluded from the pro forma combined figures. For Vale’s aluminium assets, the sources for the pro forma information is partly carve-out information provided by Vale, and partly accounts and records in the entities acquired by Hydro.
Adjustments are made in the pro forma combined financial information to reflect how the fair value adjustments affect the income statement. These adjustments are carried back to prior periods as follows:
- Depreciation of excess values allocated to property, plant and equipment.
- Effect of unfavorable sales contracts for alumina representing a credit to revenue.
- Interest on the cash purchase price as well as calculated interest expense on the deferred payment included in the put/call arrangement reflecting the mix of cash and equity consideration.
This unaudited pro forma condensed combined financial information is preliminary and provided for illustrative purposes only. The information does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Hydro would have been had the business been operated as one combined group for the period, nor is it necessarily indicative of future consolidated results of operations or consolidated financial position. The purchase price allocation and resulting excess value depreciation may be changed until 12 months after the closing of the transaction.
Preliminary pro forma segment financial information and income statements for the quarters in 2010 and full year 2010 are attached in the right-hand column.
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