Hydro Annual Report 2011b

FINANCIAL STATEMENTS
Note 35 - Capital management F51
Liquidity management and funding
Hydro manages its funding requirements centrally to cover group operating requirements and long-term capital needs. During
2011 net cash provided by operations was sufficient to cover operating requirements and capital expenditures excluding
acquisitions. Funds raised in the Norwegian commercial paper market and from short-term bank facilities were used to cover
short term requirements throughout the year.
Hydro has an ambition to access national and international capital markets as primary sources for external long-term funding.
In 2010, Hydro raised NOK 10 billion in a rights issue in connection with the Vale Aluminium acquisition, contributing to
liquidity holdings sufficient to cover a related cash payment amounting to USD 1.1 billion in February 2011. Hydro also
issued new shares to Vale at closing, representing 22 percent of outstanding shares and assumed US dollar debt as part of the
transaction.
Funding of subsidiaries, associates and jointly controlled entities
Normally the parent company, Norsk Hydro ASA, incurs debt and extends loans or equity to wholly-owned subsidiaries to
fund capital requirements. Hydro's policy is to finance part-owned subsidiaries and investments in associates and jointly
controlled entities according to its ownership share, on equal terms with the other owners. All financing is executed on an
arm's-length basis. Project financing is used for certain funding requirements mainly to mitigate risk while also considering
partnership and other relevant factors.
Shareholder return
Shareholder return consists of dividends and share price development. Hydro aims to provide its shareholders with a
competitive return compared with alternative investments in similar companies. Our policy is to distribute an average of 30
percent of net income in the form of ordinary dividends over the business cycle. Dividends for a particular year are based on
expected future earnings and cash flow, future investment opportunities, the outlook for world markets and Hydro's current
financial position. Share buybacks or extraordinary dividends may be used to supplement ordinary dividends during periods of
strong financial results after considering the status of the business cycle and capital requirements for future growth.
Hydro's capital management measures
Hydro's management uses the Adjusted net interest-bearing debt to Adjusted equity ratio to assess the group's financial
standing and outlook. Net interest-bearing debt is defined as Hydro's short- and long-term interest-bearing debt adjusted for
Hydro's liquidity positions. Adjusted net interest-bearing debt is adjusted for liquidity positions regarded unavailable for
servicing debt; other obligations which are considered debt-like in nature; and adjustments for the indebtedness of Hydro's
equity accounted investments. The adjustments are considered relevant because they affect Hydro's ability to service existing
debt and to incur additional debt. See table below for additional information related to the definition and measurement of this
ratio.
The ability to generate cash compared to financial liabilities is an important measure of risk exposure and financial stability.
Hydro's management uses Adjusted funds from operations and a ratio of Adjusted funds from operations to Adjusted net
interest-bearing debt as capital management measures. Adjusted funds from operations is defined as Net income adjusted for
non-cash items such as depreciation, amortization and impairments, and deferred taxes. Adjustments are also made for Hydro's
share of depreciation, amortization and impairments in its equity accounted investments as well as for unrealized effects on
derivative contracts and certain other non-cash items.
Adjusted net interest-bearing debt, Adjusted equity and Adjusted net interest-bearing debt to Adjusted equity ratio are
presented in the following table.