Hydro Annual Report 2011b

FINANCIAL STATEMENTS
Note 41 - Derivative instruments and hedge accounting F59
Unless used in connection with hedge accounting, changes in the fair value of currency derivatives are included in Financial
expense, net, in the income statement.
Embedded derivatives
Some contracts contain pricing links that affect cash flows in a manner different than the underlying commodity or financial
instrument in the contract. For accounting purposes, these embedded derivatives are in some circumstances separated from the
host contract and recognized at fair value. Hydro has separated and recognized at fair value embedded derivatives related to
aluminium, inflation and coal links, in addition to currency forwards, from the underlying contracts.
Cash flow hedges
Hydro has periodically entered into hedge programs to secure the price of aluminium and alumina to be sold. Aluminium
futures, options and swaps on the London Metal Exchange and with external banks have been used for this purpose. Certain of
these hedge programs have been accounted for as cash flow hedges, where gains and losses on the hedge derivatives are
recognized in Other Comprehensive Income, and accumulated in the hedging reserve in equity and will be reclassified into
operating revenues when the corresponding forecasted sale of aluminium or alumina is recognized.
In anticipation of the Vale transaction, Hydro entered into forward and option instruments in 2010 relating to sales of alumina
and aluminium to be produced in the Vale Aluminium entities Alunorte and Albras acquired February 28, 2011, see note 5
Acquisitions. Hedge accounting was applied for these instruments from July 1, 2011. At the end of 2011, this cash flow hedge
program had expired. No new cash flow hedges were entered into during 2011.
Ineffectiveness amounting to NOK 21 million was recognized in the income statement in 2010. No ineffectiveness was
recognized in 2011 in connection with cash flow hedges.
The table below gives aggregated numbers related to the aluminium cash flow hedges for the period 2010 to 2011.
2012 2011 2010
Aluminium sold forward with hedge accounting (kmt) 1)
­ 1 593
of which open at year­end (kmt) 2)
­ 1 593
Average prices achieved in hedges in USD (per mt) 3)
­ 2 445
Expected to be reclassified to the income statement during the year (NOK million) 5 (54) 4
Reclassified to the income statement from Other components of equity (NOK million) 4)
77 8
1) Remaining volume sold forward at inception of hedge programs. There are no remaining volumes at the end of 2011.
2) Including closed out positions / repurchases of hedge derivatives.
3) Weighted average of remaining volume sold forward at inception of hedge program.
4) Deviates from expected reclassifications due to changes in market prices throughout the year. Negative amounts indicate a loss.
Hydro hedged the foreign currency exposure between US and Canadian dollar in connection with an expansion at the Alouette
plant in Canada over the period March 2003 to March 2006. An annual gain NOK 5 million, corresponding to NOK 3
million after tax, has been reclassified each year, including 2011 and 2010, and is expected to be reclassified in future years
until 2014.
As of December 31, 2010 an asset of NOK 21 million and a liability of NOK 75 million were recognized on the balance sheet
as fair value of hedging instruments. No such hedging instruments were recognized as of December 31, 2011.
Hydro performs trading operations to reduce currency exposures on commodity positions. The effect of such operations is
recognized as a part of Financial expense in the income statement.
For the after tax movement in Hydro equity relating to cash-flow hedges for 2011 and 2010, please see note 34 Shareholders'
equity.