Financial results

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.

Underlying results for Bauxite & Alumina declined compared with 2011, mainly due to lower LME-linked alumina prices and higher energy costs. Bauxite production improved throughout the year reaching record volumes for the year as a whole. Alumina production at Alunorte declined slightly. Fuel costs increased for Alunorte due to charges for ICMS value-added taxes in the state of Pará in Brazil for the period from March through September.

Lower realized aluminium prices had a substantial negative impact on underlying EBIT for Primary Metal, partly offset by lower raw material costs. Fixed costs declined further compared to the previous year and were also impacted by the closure of the Kurri Kurri plant in Australia. Higher volumes following the completion of the ramp-up of Qatalum in 2011 had a positive impact on underlying results. However, this was more than offset by lower realized aluminium prices, together with costs relating to a fire in the power plant cooling tower.

Metal Markets underlying EBIT declined in 2012, impacted by significant negative currency and inventory valuation effects compared to the previous year. Excluding these effects, underlying EBIT decreased somewhat mainly due to lower sales volumes from remelters and high purity products.

Underlying EBIT for Rolled Products declined somewhat in 2012 compared to the previous year. Margins improved, impacted by positive currency effects on export sales . This had a significant positive impact on underlying results but was offset by lower sales volumes and higher costs. Operating margins excluding currency effects declined slightly.

Underlying EBIT for Energy decreased in 2012, mainly due to significantly lower prices partly offset by higher production.

Pro forma underlying EBIT for Extruded Products declined compared to 2011, heavily impacted by the weakening European markets. Lower costs resulting from the significant improvement efforts undertaken throughout the year partly offset the negative market effects. Weak demand in Europe is expected to continue in the first quarter of 2013. Efforts to reduce costs and improve operating results will continue.

Reported results

Reported earnings before financial items and tax amounted to NOK 432 million in 2012 including net unrealized derivative gains and negative metal effects of positive NOK 982 million. Reported EBIT also included impairment and rationalization charges of NOK 1,832 million, mainly relating to the closure of production at Kurri Kurri.

In the previous year, reported EBIT amounted to NOK 10,068 million including revaluation and divestment gains of NOK 5,512 million and impairment and rationalization charges of NOK 1,244 million mainly relating to Kurri Kurri. Reported EBIT also included other items of NOK 182 million mainly relating to unrealized derivative losses.

In 2012, Hydro incurred a loss from continuing operations of NOK 718 million including a net foreign exchange loss of NOK 280 million. In the previous year, income from continuing operations amounted to NOK 7,251 million including net foreign exchange losses of NOK 963 million. The net currency loss in 2012 and 2011 related mainly to debt denominated in US dollars.

Net financial expense amounted to NOK 348 million in 2012 compared to NOK 1,248 million in the previous year.

Income taxes amounted to a charge of NOK 803 million in 2012, compared with a charge of NOK 1,569 million in 2011. Adjusted for losses from equity accounted investments, impairment charges and other losses without tax benefits, the tax rate was about 38 percent for 2012. The adjusted tax rate reflects the relatively high share of earnings subject to Norwegian power surtax. For 2011 the adjusted tax rate was about 30 percent. The reported tax rate for 2011 was impacted by significant tax free gains on sales of shares.

Loss from discontinued operations amounted to NOK 528 million in 2012 including impairment and rationalization charges of NOK 372 million and a loss on disposal of Portalex amounting to NOK 144 million. In the prior year, loss from discontinued operations amounted to NOK 502 million, including impairment and rationalization charges of NOK 362 million and about NOK 150 million relating to write-downs of deferred tax assets.

In total, Hydro incurred a net loss of NOK 1,246 million in 2012, compared with net income of NOK 6,749 million in 2011.

Liquidity, financial position, investments

Hydro manages its liquidity at the corporate level, ensuring sufficient funds to cover group operational requirements.

In 2012, cash provided from continuing operating activities of NOK 5.4 billion was sufficient to cover investments of NOK 3.4 billion, as well as dividend payments of NOK 1.7 billion. Net loan proceeds amounted to NOK 2.2 billion, including a new NOK 1.5 billion bond loan maturing in 2019. Sales of non-strategic assets of NOK 0.2 billion represented an additional source of cash. Net cash used in discontinued operations amounted to NOK 0.3 billion.

Net interest bearing assets remained unchanged from the previous year amounting to NOK 1.7 billion. Adjusted net interest bearing debt excluding equity accounted investments declined to NOK 8.3 billion in 2012 from NOK 12.5 billion in the previous year. The reduction resulted from a decline in net pension liabilities, mainly due to discount rate and other changes in the assumptions and lower operating lease commitments. In addition, currency translation effects led to lower foreign currency denominated commitments measured in Norwegian kroner.

Hydro's adjusted net interest bearing debt to adjusted equity ratio was 0.19, well below its targeted maximum ratio of 0.55. Our adjusted funds from operations to adjusted net interest bearing debt ratio was 0.39, close to its targeted minimum of 0.40 over the business cycle.

Investments amounted to NOK 3.4 billion in 2012, compared with NOK 47.5 billion in the previous year. Investments exclude amounts relating to Extruded Products for all periods presented. For 2011, investments included NOK 43.4 billion related to the acquisition of Vale Aluminium.

Hydro expects that cash from continuing operations, together with its liquidity holdings and available credit facilities, will be sufficient to cover planned capital expenditures, operational requirements, and financing activities in 2013.

Rolled Products incurs currency gains and losses on export sales from its Euro based operations mainly denominated in US dollars. These gains and losses impact the value of the margin contribution to underlying EBIT. Offsetting gains and losses on internal hedges are reported as financial items.

The adjustments are mainly comprised of net unfunded pension obligations after tax and the present value of operating lease obligations. From the third quarter 2012, net interest bearing debt in equity accounted investments is excluded from our reported adjusted interest bearing debt following the termination of Hydro's guarantee of Qatalum debt. The corresponding amount for 2011 is presented on the same basis as 2012.